**Case Study 3** Manish Ltd., Delhi Manish Ltd., Delhi is engaged in manufacturing of Men's apparel. It is a subsidiary of Skylark Inc. of Country N, which has 28% shareholding in it. For the year ended 31st March, 2022, Manish Ltd. declared dividend and the quantum of dividend eligible for its holding company Skylark Inc. of Country N was ₹2.10 crore. The DTAA between India and Country N provides for taxation of dividend @15%. Country N is an OECD Country since 1st April, 2012. The DTAA between India and Country N came in to force w.e.f. 1st January, 2017. Later on, India entered in to a DTAA with Country T which came into force w.e.f. 25th April, 2019 which provided for taxation of dividend @ 5%. Country T was a member of OECD since 1st January, 2018. On 25th October, 2022, Manish Ltd. celebrated its golden Jubilee and to add colour to the occasion, invited Allan Wilson of Italy, a famous football player and Richie Rich a famous cricket umpire from Australia. The company paid ₹20 lakhs to Allan Wilson and ₹10 lakhs to Richie Rich. It was agreed that the company would bear their income-tax liability in respect of those incomes. Manish Ltd. has a subsidiary company in a low tax jurisdiction with 90% shareholding. It has made its investment in the subsidiary by way of share capital of ₹45 crores, The normal profit of the subsidiary company is 20% of capital employed. Manish Ltd. on 20th August, 2022 received 90% of the post-tax profits of the subsidiary company of the year ended 31st March, 2022 being ₹8.10 crore by way of interest-free loan. **Availing service from foreign companies** Donald, the Production Manager of Dolly GmbH of Germany, was sent to Manish Ltd. for doing some supervisory activities for quality control of goods manufactured in India by Manish Ltd. He was paid salary of ₹4,50,000 per month by Dolly GmbH. He stayed in India for 2 months during the financial year 2022-23. Donald had no other income in India except the said salary income. Dolly GmbH has no business activity in India and has sent Donald only for short stay in India. Eagle Ltd. of Country S rendered some technical services to Manish Ltd. during the previous year 2022-23. The amount payable to Eagle Ltd. towards fee for technical services (FTS) amounts to ₹200 lakhs. The treaty between India and Country S provides for 10% as tax withholding rate on FTS. The agreement is not covered by any approval from Indian Government. The services were rendered for Manish Ltd. in India by the personnel deputed by Eagle Ltd. (who are regular employees of Eagle Ltd.). The period of stay of employees was from 1.7.2022 to 30.11.2022. Salary of those employees for the period of stay aggregating to ₹60 lakhs was paid directly in India by Manish Ltd. However, the original employer of those employees viz; Eagle Ltd. paid them special allowance into their bank account in Country S aggregating to ₹15 lakhs (converted in INR). **Jagdish, CEO of Manish Ltd.** Jagdish was Chief Executive Officer of Manish Ltd. for about 30 years and up to 31.07.2018. He had acquired an apartment in the financial year 2017-18 for ₹40 lakhs of which only 50% was disclosed in his ITR filed for assessment year 2018-19. Based on the information from the Enforcement Directorate vide its report dated 05.06.2021 it came to light that the apartment was acquired outside India by earning income in India which was not disclosed for income-tax purposes. Notice under section 10 of the Black Money Act was issued on 30th June, 2022. The fair market value of the apartment as on 01.04.2021 was ₹80 lakhs and as on 01.04.2022 ₹100 lakhs. **Ramesh, Director of Manish Ltd.** Ramesh is a director of Manish Ltd. who joined on 01.10.2022. His income in India for the previous year 2022-23 consisted of (i) salary income without deduction under section 16(ia) ₹21 lakhs (computed); (ii) received as unit holder of Real Estate Investment Trust (REIT) ₹2,84,400 being interest component received from Hyper Ltd. a special purpose vehicle which has opted for section 115BAA. His income outside India for the year ended 31.03.2023 consisted of (a) Gross rent from a property in Country X ₹5 lakhs; (ii) loss from rubber business in Country Y ₹3 lakhs; and (iii) agricultural income in Country Z ₹2 lakhs. The rate of tax in Country X, Country Y and Country Z are 25%, 15% and 20% respectively. The DTAA between India and Country Z provides for income from agriculture being taxed in the Source State and not taxable in the Resident State. There is no agreement between India and Country X and between India and Country Y. Assume there is no basic exemption limit in foreign countries where he has earned income and that he has opted for section 115BAC of the Income-tax Act, 1961.
Sub-questions (8)
What is the income tax payable by Manish Ltd. for the payments made to Allan Wilson and Richie Rich, respectively?
(A) ₹5.25 lakhs / ₹4.29 lakhs
(B) ₹4.53 lakhs / ₹4.29 lakhs
(C) ₹5.25 lakhs / ₹4.53 lakhs
(D) ₹5 lakhs / ₹4.53 lakhs
How much is the optimal tax liability of Donald in respect of his salary income in India for the assessment year 2023-24?
(A) ₹85,800
(B) ₹62,400
(C) ₹54,600
(D) Nil
What is the scope of section 192 for Manish Ltd. in respect of the salary paid by it to the employees of Eagle Ltd. in India and special allowance paid to them in USA by Eagle Ltd.?
(A) TDS u/s 192 would apply only in respect of salary paid to them in India by Manish Ltd.
(B) TDS at the rate applicable for fee for technical services as per DTAA between India and USA or at the rate prescribed, whichever is lower, is deductible.
(C) TDS u/s 192 would apply both for salary paid to them in India by Manish Ltd. and allowance paid by Eagle Ltd. in USA to those employees.
(D) TDS at the rate applicable for fee for technical services as per DTAA between India and USA or at the rate prescribed, whichever is higher.
Which of the BEPS action plan is intended to curb the act of Manish Ltd. obtaining its share of dividend in the guise of loan from the subsidiary company located in low tax jurisdiction?
(A) Action Plan 5 - Counter harmful tax practices
(B) Action Plan 4 - Interest deductions and other financial payments
(C) Action Plan 3 - Strengthen Controlled Foreign Company Rules
(D) Action Plan 2-Neutralise the effects of hybrid mismatch arrangements
How much would be the undisclosed foreign asset liable to tax under the Black Money (Undisclosed Foreign income and Assets) and Imposition of Tax Act, 2015 in the hands of Jagdish?
(A) ₹40 lakhs
(B) ₹50 lakhs
(C) ₹80 lakhs
(D) ₹100 lakhs
(i) Examine whether as per UN Model Convention, Eagle Ltd. had PE in India in the previous year 2022-23? (ii) State the documents to be furnished by Eagle Ltd. to obtain treaty benefit in respect of its income by way of FTS. (iii) Would your answer be different, if the employees of Eagle Ltd. stay up to 10.01.2023, as per the OECD Model Convention?
Compute the total income and tax liability of Ramesh for the assessment year 2023-24. [Tax rates may be calculated upto 2 decimal places]
Explain briefly what is meant by the 'Most Favoured Nation' clause in treaties and examine whether Skylark Inc. can seek concessional rate of tax in respect of its dividend income by invoking the said clause based on the DTAA between India and Country T. Assume that the protocol annexed to India's DTAAs with all the OECD member countries contain the tax parity clause.