CASE STUDY - 4 Style You (India) Ms. Saroj is the promoter and the Chief Executive Officer of Style You (India) Private Limited (also referred as "Style You" or the "Company"). Saroj currently holds 32% equity shares of the Company. Origami Finance, a company based out of Country "A", holds 30%, Fashionista Ltd, company based out of Country "B" holds 29% of the equity. The rest of the equity is held by certain key managerial personnel of the company. In FY 21-22, Style You has raised the following loans/borrowings: (a) On 01 May 2021, raised a loan of INR 15 crores from Bank of Tokyo. India branch, at an interest rate of 7.6%. The loan is guaranteed by Origami Finance. (b) On 01 June 2021, borrowed INR 65 crores from Fashionista Ltd at 7.9%. The loan is repayable over a period of 5 years. The net profit of Style You for FY 2021-22 was INR 6.5 crores after debiting the interest on loans as mentioned above, depreciation of INR 1 crores and tax of 2.1 crores. Holiday Home in Dubai Ms. Saroj has been a frequent traveller to many places outside India to meet clients and participate in trade shows etc. In FY 2011-12, during one of her visits to Dubai, Saroj acquired time share interest in a Holiday Home. She paid AED 1.0 million as an upfront payment and AED 375,000 every year for the next 5 years to complete her acquisition of 25% share in the vacation property. She uses the same sparingly as she has been quite busy and taking very few personal days off. Given the availability of the holiday home and very little personal use of the same, in the recent years, Saroj allowed a real estate leasing company to use the holiday home to be rented off to vacationers and earn rental income from the same. The rental income was usually deposited by the real estate leasing company in a bank account maintained by Saroj locally in Dubai. As on 01 April 2021, the bank account had a total balance AED 1.01 million. During a recent assessment proceeding for AY 20-21, the Assessing officer came to know about the foreign assets and foreign bank account of Ms. Saroj as certain rental income from Holiday home was credited in her Indian bank account. Based thereon, a notice under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 was issued to her on 30 December 2021. The market value of the timeshare in holiday home was AED 2.8 million as on 01.04.2021 and worth AED 2.7 million on 30.12.2021. The exchange rates of Indian currency per 1 AED on various dates were - 01-04-2021 =INR 20.86 30-12-2021 =INR 20.29 When enquired, Saroj could not provide any reasonable explanation on the sources of money she used to purchase her timeshare interest in the property. Further, she could not show any other rental income from the holiday home being offered in the Income Tax Return in India in any of the previous years. Style You, Bangladesh Style You (India) has set-up a wholly owned subsidiary in Bangladesh, with a key objective of procuring fabric and other raw material. During FY 21-22, the company derived all its income from procuring fabric and other raw material from third-party vendors locally in Bangladesh and selling the same to its parent Company in India, having gross receipts of INR 45 crores during the year. It had 10 local employees (based out of Bangladesh) on its payroll, and two Indian residents (quality assurance manager and Chief Operating Officer). Out of total payroll expenditure of 20 million, the total payroll expenditure for the QA Manager and the COO is 12 million. It has assets in the form of computer equipment, software, leasehold improvements, and furniture, all of which is located in its company's office in Bangladesh. Fashionista Ltd.'s employees visit to India During the FY 21-22, Fashionista Ltd sent its employees Frieda and Sylvia to India to render production efficiency and quality assurance related training to Style You India's employees, Frieda and Sylvia, both arrived in India on 01 May 2021 for the first time ever and left on 25 May 2021. After that Sylvia had to visit India again to oversee the quality assurance functions as several of Style You India's export consignment were getting rejected due to quality issues. She arrived on 25 Sept 2021 and left on 20 March 2022. For the services rendered by Frieda and Sylvia, Fashionista Ltd charged a lumpsum fee of INR 2.35 crores from Style You Ltd. Frieda received a per day additional allowance of INR 12,000 per day in addition to her salary of GBP 78,000 from Fashionista Ltd. Sylvia received a per day additional allowance of INR 10,000 per day in addition to her salary of GBP 65,000 from Fashionista Ltd. Sub Part (a)- Multiple Choice Questions: Choose the correct alternative for the following MCQs: (5 x 2 = 10 Marks)
Sub-questions (8)
With respect to the Holiday home and its rental income detected during the FY 21-22, which of the following statements is correct? (i) Undisclosed foreign asset would be liable to tax in the previous year in which such asset comes to the notice of the Assessing officer. (ii) The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 does not apply to a non-resident person unless such person was resident in the year in which undisclosed asset located outside India was acquired. (iii) No deduction is allowed from value of undisclosed asset located outside India unless the assessee can furnish evidence to the satisfaction of AO that asset has been acquired from the income which has been assessed or assessable to tax under the Act. (iv) The undisclosed foreign income and asset of any previous year included under the Black Money and Imposition of Tax Act would also need to be included in the computation of total income under the Income-tax Act, 1961 for the same previous year. The most appropriate answer is-
(A) (i), (iii) and (iv) above
(B) (ii), (iii) and (iv) above
(C) (i), (ii) and (iii) above
(D) All statements are correct
With respect to loans and borrowings made by Style You and deduction of Interest claimed in computation of taxable income during FY 21-22, which of the following would not be considered correct regarding Base Erosion Profit Shifting (BEPS) Action Item related to Interest Deduction and Other Financial Payment? (i) The Action plan calls for development of recommendation for the design of rules to be incorporated in DTAAS (Double Taxation Avoidance Agreements) to prevent tax base erosion through use of interest expenses and other financial payments. (ii) The OECD is concerned that MNC groups may locate third party debts in high tax countries so as to erode the tax base by way of interest expenses. (iii) The BEPS Action Item report recommend a common approach to be adopted by countries that links an entity's net interest deduction to its EBIT (Earnings Before Interest and Tax). (iv) The Common approach recommended by BEPS Action Item report includes three elements a fixed ratio rule, a Group ratio rule and Targeted rules. The most appropriate answer is-
(A) (i) and (ii) above
(B) (ii) and (iii) above
(C) (ii) and (iv) above
(D) (i) and (iii) above
What is the residential status of Frieda and Sylvia for AY 22-23?
(A) Frieda and Sylvia both are Resident
(B) Frieda and Sylvia both are Non-Resident
(C) Frieda is Resident, and Sylvia is Resident but not ordinarily resident
(D) Frieda is Non-resident, and Sylvia is Resident but not ordinarily resident
Which of the following is correct regarding taxability of the incomes of Frieda and Sylvia, in India, for FY 21-22? (i) The remuneration received by Frieda for the services she rendered in India would be exempt from tax if (a) Fashionista Ltd is not engaged in any business or trade in India, and (b) her remuneration is not liable to be deducted from the income of Fashionista Ltd chargeable under the Income-tax Act, 1961 (ii) The remuneration received by Sylvia would be taxable proportionately for the time she spent in India. (iii) The remuneration received by Sylvia will not be taxable in India if she chooses to offer her entire salary for taxation in her home country. (iv) The remuneration received by Frieda for the services she rendered in India would not be exempt from tax in India if Fashionista Ltd has a Permanent Establishment in India. The most appropriate answer is-
(A) (i) and (iv) are correct
(B) (ii) and (iii) are correct
(C) (i) and (iii) are correct
(D) All statements are incorrect
Assuming that the payment made by Style You India is neither characterised as royalty nor as fee for technical services under the DTAA between India and Country B. In such a case, which of the following statement would be considered as correct?
(A) Style You India needs to withhold tax @ 40% if Fashionista Ltd. has a Permanent Establishment in India
(B) Style You India does not need to withhold any tax given that Fashionista Ltd. is a non-resident
(C) Style You India does not need to withhold taxes as the payment is neither royalty nor FTS
(D) Style You India need not withhold taxes unless BFAR orders for withholding taxes
Discuss the applicability of the provisions of limitation of interest deduction to various borrowings of Style You India. Based on the same, determine the total interest deduction allowable to the Company for AY 2022-23.
Compute the value of undisclosed asset chargeable to tax in the hands of Saroj under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
Examine whether Style You Bangladesh meets the ABOI (Active Business Outside India) test. What additional facts need to be examined to determine whether Style You Bangladesh has a Place of Effective Management in India?