CASE STUDY 1 IndoAm Ltd., a wholly-owned subsidiary of AmeriCo Inc. AmeriCo Inc., a USA-headquartered company, is engaged in the business of manufacture and sale of printer inks. It has set up a wholly-owned subsidiary in India namely, IndoAm Ltd, primarily to import a standardized printer ink product (Product A) from its parent company and resale in the India market. The products are being sold by Indo Am Ltd. through a wholesale distribution network in India, and products are sold in the same form as imported without any customization or value-addition. For F.Y.2021-22, the Product A (with an MRP of INR 1,500 each) is sold by IndoAm Ltd to third party distributors at an average resale discount of 20%. Based on a TP benchmarking conducted by the Company, three independent comparable companies earn resale margin (gross profit over sales) of 14%, 22% and 19%, respectively from distribution/ resale of similar products in India. Transfer pricing litigations and APA for IndoAm Ltd. During transfer pricing audit for F.Y. 2018-19, IndoAm Ltd failed to furnish mandatory transfer pricing documents as required by TPO. For AY 2014-15, the TPO made an adjustment of INR 1,10,00,000. The Company preferred an appeal with the Commissioner of Income Tax (Appeal) and recently received a favourable order that completely deletes the adjustment. Considering the uncertainty and exposure from TP litigations, the Company applied and obtained an Advance Pricing Agreement (APA). After signing the APA on 1 June 2022, the Company filed an income tax return for AY 2022-23, wherein an adjustment of INR 2,36,00,000 was computed in accordance with the APA terms, and the same was offered for tax (due date for ITR was 30 Nov 2022). SingInk Co., a Singapore-based Company SingInk Co is a Singapore based company and is engaged in supplying a specialty printing ink to customers in different geographies. AmeriCo Inc. has entered into a Master Agreement with SingInk Co. and supplies to all affiliates of AmeriCo Inc. is being made by Singink as per terms of this Master Agreement. Neither AmeriCo nor any of its affiliates, or SingInk participate directly or indirectly, in the management, control or capital of each other. IndoAm also imports comparable product (Product B) from SingInk Co. for resale in India. IndoAm makes a gross margin of 18% from resale of Product B. The Suggested Answers for Final Paper 6C: International Taxation, in so far as they relate to questions involving application of the provisions of Indian tax laws, are based on the provisions of direct tax laws as amended by the Finance Act, 2021. AmeriCo Inc's India branch AmeriCo Inc, also has a branch office in India. The branch office is engaged in procurement of raw material from Indian suppliers. Apart from the procurement activities, the branch has also developed an online platform which facilitates online sale of various material and products related to ink, colour pigments and printer accessories. During FY 21-22, the India branch charged a fee amounting to INR 65,00,000 from IndoAm Ltd for the use of the online platform. The India branch also charged fee from various other AmeriCo affiliates (non-resident in India) aggregating to INR 52,00,000 for the use of platform. During FY 21-22, AmeriCo has allocated INR 67,00,000 to the branch office as the expenditure (pertaining to centralized general and administrative functions) incurred outside India. The branch has computed its adjusted total income for AY 2022-23 at INR 9,55,00,000. Further, its average adjusted total income for 3 assessment years prior to AY 2022-23 is computed as INR 8,90,00,000. Sub Part (a) - Multiple Choice Questions: Choose the correct alternative for the following MCQs: (5 x 2 = 10 Marks)
Sub-questions (8)
Whether IndoAm's import of Product B from Singink shall be subject to determination of an Arm's Length Price (ALP) under the relevant provisions of the Income-tax Act, 1961?
(A) Yes, as the transaction is an International Transaction between Associated Enterprises
(B) No, as IndoAm and SingInk are not associated enterprises
(C) Yes, as the transaction is a Deemed International Transaction
(D) No, as the price agreed between the two enterprises, is a price agreed between two independent parties.
What is the quantum of head office expenditure that AmeriCo Inc's India branch can claim in its income tax return for A.Y. 2022-23?
(A) INR 67,00,000
(B) INR 47,75,000
(C) INR 44,50,000
(D) INR 3,25,000
What is the quantum of penalty that the TPO can levy for Indo Am's failure to furnish the transfer pricing documentation?
(A) INR 5,00,000
(B) 2% of the value of international transaction
(C) INR 5,000 per day for every day of continuing failure
(D) 200% of the tax payable on under-reported income
What is the amount of Equalization levy that IndoAm Ltd. should deduct/ pay in relation to payment to be made to AmeriCo Inc's India branch for the use of the online platform?
(A) 3,90,000
(B) 1,30,000
(C) NIL
(D) 6,50,000
In case the online platform was rather provided directly by AmeriCo Inc. without any involvement of its India branch in such activities (other facts being same), who would be required to ensure payment of equalization levy before making the payment to AmeriCo Inc?
(A) All payers to Deduct Equalisation Levy @6%-
(B) All payers to Deduct Equalisation Levy @2%
(C) No action required as Equalisation levy is not applicable
(D) AmeriCo Inc to pay 2% equalization levy
Based on the details provided, which method would be the most appropriate method for determination of the Arm's Length Price (ALP) for IndoAm's import of Product A from AmeriCo and why? Also, compute the ALP per unit of Product A applying the most appropriate method.
Based on the details provided, whether the Primary adjustment of INR 2,36,00,000 offered by the Company in its income tax return require a "Secondary Adjustment"? In case the excess money is not repatriated into India, compute the secondary adjustment under the possible options as relevant for PY 22-23 (assume that international transaction is denominated in INR, and the SBI MCLR on 1 April 2022 is 4.2%).
What is the tax effect of the adjustment made by the TPO for AY 2014-15? Considering the tax effect, can the tax department file an appeal against the CIT(Appeal) order with the Income Tax Appellate Tribunal? Explain.