CASE STUDY 5 Consult Ltd. Consult Limited, a privately-held Indian company, provides business consulting services to small business owners worldwide. The company has also developed a technology platform that help clients onboard freelance local consultants directly based on their needs ("Direct Consult" business). Most of the employees of the Company work in India and provide consulting services to their clients in India as well as outside India. Certain employees are deployed outside India to oversee the Direct Consult business. In the Direct Consult business, the freelance consultants get paid directly by their clients and in-turn pay Consult Limited a 10% commission in lieu of the right to use the technology platform owned by Consult Ltd. The Company avails technical services from PQR Inc. regarding regular upkeep and development of the Direct Consult software. Maushmi, deployed outside India Ms. Maushmi has been a long-standing employee of Consult Ltd. She has been deployed at various places outside India over the last 12 years. These past years, Maushmi has been visiting India on leave once every year from 20 Dec to 30 Jan to meet her parents. For the last many years including FY 21-22, she is liable to pay tax in Country A, where she is domiciled. • Maushmi owned a flat at Mumbai (acquired by her on 10.10.2011 for INR 35 lakhs). She sold it off for INR 95 lakhs on 18.10.2021 to Dinesh, an Indian resident. The stamp duty valuation of the same is INR 90 lakhs as on the date of the sale. Maushmi paid a brokerage of 95,000 to an Indian local real estate agent towards the same. • During FY 21-22, a total interest of INR 150,000 was credited to her Non-resident (External) bank account. • Maushmi owns certain shares in listed stocks, which she sold off in FY 21-22 for INR 18 lacs. These shares were acquired in FY 2009-10 for INR 550,000 and earned a dividend income of INR 21,000 during FY 21-22. The fair market value of the shares on 31st January 2018 is INR 18.10 lacs. • Maushimi currently owns an apartment in Detroit, USA. Because she is currently not staying in Detroit, she has let out the same at rent of USD 900 per month in Detroit. (TTBR INR 58/1 USD as on 31 March 2022 and TTSR INR 62/1 USD on 31 March 2022). • The cost inflation index for FY 2009-10 is 148, for FY 11-12 is 184, for FY 2021-22 is 317. Permanent Establishment in Country "B" For FY 16-17 and FY 17-18, Consult Ltd had earned certain income from Direct Consult business from freelances in Country B. Further, Maushmi has travelled to Country B twice for 10 business days each in the 2 years to interview the freelancers as well as to meet the clients. The tax authorities in Country B have alleged that Consult Ltd has a Fixed Place PE in that country as Maushmi has routinely used the office of the clients for her disposal. The tax authorities have got the Company to pay INR 58 lakhs as the tax due on profit attributed by them on the PE. Consult Ltd. is considering invoking Mutual Agreement Procedure on this issue. Sub Part (a) Multiple Choice Questions Choose the correct alternative for the following MCQs: (5 x 2 = 10 Marks)
Sub-questions (7)
What does the tax paid by Consult Ltd in Country B related to the Permanent Establishment issue indicates?
(A) Juridical Double Taxation.
(B) Economic Double Taxation.
(C) No double taxation as Consult Ltd can claim Foreign Tax Credit of the taxes it paid in Country B against the PE allegations.
(D) No double taxation as Consult Ltd can claim relief in a MAP proceeding.
Which of the following statement regarding taxability of interest income earned by Maushmi is correct?
(A) Interest earned on credit balance maintained in a Non-resident (Ordinary) Account is exempt
(B) Interest earned on credit balance maintained in a Non-resident (External) Account is exempt
(C) Interest earned on credit balance maintained in a Foreign Currency Non-resident Account is exempt
(D) Interest from any type of bank account maintained by a Non-resident individual with any bank in India is taxable
What is the nature of payment made by freelance consultants to Consult Ltd (assume applicable DTAA between India and respective Country is in line with the OECD Model Tax Convention)?
(A) Fee for Technical Services
(B) Sales commission
(C) Royalty
(D) Other Income
Dinesh wants to understand whether he needs to deduct tax at source on payment to be made to Maushmi for purchase of the apartment. Which of the following is incorrect in this regard?
(A) There is a requirement to deduct tax at source before making payment to a non-resident
(B) Requirement to deduct tax at source would not have been if Dinesh was a non-resident himself
(C) Persons responsible for paying any sums to non-resident are required to furnish information related to payment of such sums in prescribed form as per Rule 37BB
(D) The tax is to be deducted at source at the time of credit of such income to the account of payee or at the time of payment, whichever is earlier
Mutual Agreement Procedure (MAP) helps dispute resolution through bilateral negotiation. Which of the following does not work towards facilitating MAP/making MAP more effective?
(A) Section 90/90A of the Income Tax Act, 1961
(B) TIEA (Tax Information Exchange Agreement)
(C) Article 25 of the applicable DTAA
(D) BEPS Action Plan 14
What is the residential status of Maushmi for FY 21-22 from India tax perspective? Which all income would be taxable given her residential status? Compute her taxable income and tax liability for AY 22-23.
If Consult Ltd. were to file for a Mutual Agreement Procedure (MAP), would it need to file application with Competent Authority (CA) of India or CA of Country B? Explain legal provision supporting your answer. Under which situations can the access of MAP be denied to Consult Ltd?