**Case Study 2** Autofit Limited Resident of Country X, Autofit Limited ("Autofit") is engaged in the business of manufacture and sale of automotive emission test equipment. The Company has established a wholly-owned subsidiary in India, AFL India; to help identify customers and carry out market research, as well as play a coordination role between the Parent company and the customers in India. It has an office in Pune India, which maintains stock of goods for storage, display as well as delivery to third party customers in India. The company considers this activity as preparatory in nature because all sales order and contracts are negotiated and executed by Autofit in Country X. The DTAA between India and Country X is in line with the OECD Model Convention **AFL India** For the F.Y.2022-23, AFL India has reported revenue of INR 12,50,00,000 which entirely comprises of service revenue from Autofit Limited. APL India has reported a net profit of INR 1,12,00,000 after debiting interest on various loans as detailed below, depreciation and amortization of INR 23,00,000 and tax of INR 52,00,000. Further, APL India had a disallowed excess interest of INR 34,00,000 in the Assessment Year 2022-23, as per the EBITDA norms. * Interest on a loan of INR 8 crores availed from AFL UK on 01 Sept. 2022 at an interest rate of 6.6%. Autofit Limited holds 25% voting power in AFL UK and the rest being held by a unrelated joint venture partner. AFL India has no. direct or indirect participation in the management, control or capital of AFL UK; * Interest on a working capital loan of INR 10 crores availed from the India branch of MNC Bank of the UK, at an interest rate of 7.9%. The loan was provided by the Bank on 1 May 2022 against a corporate guarantee provided by Autofit; * Interest on a loan of USD 2 million @5% issued by the New York branch of the Bank of USA, based on a back-to-back deposit made by Autofit of the same amount. For the FY 2022-23, AFL India paid an interest to the tune of INR 1,05,00,000 on this loan; * Interest on delayed payments @7% made to AFL China, amounting to INR 1,07,00,000 for the FY 2022-23. Autofit holds 25% voting power in AFL China. Autofit appoints more than half of the directors on the board of AFL China; **Mr. Bernard, an employee of Autofit Limited** During the FY 2022-23, Autofit Limited deputed one of its employees, Mr. Bernard, to India, to assist with installation of Auto fit's products at one of its customers' premises. He came to India for the first time on 24th April 2022 and left India on 30th November 2022. **New manufacturing unit** Autofit Limited is setting up a new manufacturing unit under a new subsidiary in India - AFL Precision. It is intended that AFL Precision would avail new beneficial tax rate of 18% under section 115BAB of the Income-tax Act, 1961. For the set-up of the manufacturing facility, AFL Precision has awarded a composite contract to AFL Sweden, another wholly-owned subsidiary of Autofit Limited. The entire consideration of the contract is split between (i) design consultancy, (ii) offshore supply of equipment and (iii) local supplies and installation.
Sub-questions (8)
Which of the following statement is correct regarding Mr. Bernard's presence in India during the F.Y. 2022-23? Assume that at present, Autofit does not have a fixed place PE in India and DTAA between India and country X is in line with OECD convention-
(A) Mr. Bernard's presence in India, being less than 12 months, would not create Autofit's Permanent Establishment ('PE') in India
(B) Mr. Bernard's presence in India, being more than 183 days, would create Autofit's PE in India
(C) Mr. Bernard will be eligible for short stay exemption because his stay in India did not exceed 300 days
(D) Mr. Bernard will be eligible for short stay exemption only if Autofit declares that it has a PE and claims the salary expense as a deduction from the income offered for tax
Given the facts regarding Mr. Bernard and assuming that Autofit Limited does not have a Fixed place PE in India, how many minimum number of days of Mr. Bernard's presence in India during the previous year would constitute a PE, if the DTAA between India and Country X is in line with the UN Model Convention 2017?
(A) 1 day
(B) 182 days
(C) 183 days
(D) 184 days
Which of the following measures proposed under the Base Erosion and Profit Shifting (BEPS) initiative of the OECD may restrict Autofit in claiming exemption from Permanent Establishment as activities being preparatory or auxiliary in nature?
(A) Limitation of Benefit (LoB) rule
(B) Anti-fragmentation rules
(C) Controlled Foreign Company (CFC) rules
(D) Principal Purpose Test (PPT) rule
In which of the following circumstance, in cases AFL India is constituent entity of 'Autofit' International Group, the provision of furnishing of report in respect of international group shall apply if the total consolidated group revenue
(A) In the accounting year exceeds ₹5,500 crores.
(B) In the preceding accounting year exceeds ₹5,500 crores.
(C) In the preceding accounting year exceeds ₹6,400 crores.
(D) In the accounting year exceeds ₹6,400 crores.
Autofit is considering obtaining an Advance Ruling in respect of some transactions it proposes to undertake in India and for seeking clarity on the aspect of PE in India. Which of the following statement is incorrect in regard to Advance Rulings?
(A) Autofit, if aggrieved by the ruling pronounced by the Board of Advance Ruling may appeal to the High Court within 60 days from the date of communication of that ruling
(B) Autofit can withdraw the application within 30 days from the date of the application
(C) Autofit can file application only in relation to Eligible transactions it has undertaken and not in relation to those it proposes to undertake
(D) The ruling is binding on the Principal Commissioner and authorities subordinate to him.
Please advise Autofit Limited on whether maintenance of stock of goods solely for storage, display and delivery by AFL India would constitute Permanent Establishment in India. Would your answer be different, if India's DTAA with Country X was in line with the UN Model Convention, 2017?
Based on the details provided in respect of interest paid by AFL India during the FY 2022-23, determine the amount of interest permissible as deduction while computing income under the head "Profits and gains of business or profession", as per the EBITDA norms. Provide brief reason for the treatment of each item of interest regarding the limitation of interest deduction computation.
Examine whether the Assessing Officer (AO) can challenge the allocation of composite price paid by AFL Precision to AFL Sweden, between various components (supply of designs, offshore supply of equipment and onsite supply and installation) under the GAAR provisions. Enumerate the conditions to be satisfied for the GAAR provisions to be invoked. Can the AO examine the arrangement under any Specific Anti-avoidance Rules instead of GAAR?