I Co, an Indian company is engaged in the business of manufacture of packaging material having its manufacturing facility in India. I Co is a wholly owned subsidiary of Sing Co, a company incorporated in Singapore. Donald and Joe, citizens and residents of the United States of America, each of them hold 50% of the share capital of Sing Co. Donald and Joe, each had invested USD equivalent to INR 100 crores in Sing Co in April 2015. Sing Co is set-up as a holding company for all the investments to be made by Donald and Joe in the region of Asia-Pacific. Sing Co, has following investments: (i) 100% of Share Capital of J Co, a company in Japan. (ii) 76% of Share Capital of T Co, a company in Thailand. Balance share capital of T Co is held by another resident and citizen of Thailand. J Co and T Co are also engaged in the business of manufacture of packaging material. Joe had also set-up an entity in Germany, G Co, in order to provide a loan to I Co. Joe holds 100% shar capital of G Co. At the time the loan was to be provided by G Co, there was some ambiguity under the exchange control laws in India as to whether such loan could be given. Therefore, G Co invested in fully Compulsorily Convertible Debentures (‘CCD') of I Co, which is considered as equity investment under the exchange control laws in India. The amount of investment by G Co in the CCD of I Co in December 2005 is INR 0.50 crores. The terms of the CCD state that the CCDs shall be compulsorily converted into equity shares of I Co in December 2025 at the fair value at that time. Further, the terms of the CCD also state that till such time they are not converted, I Co would be required to pay the holder of the CCDs an interest at the rate of 5.4% p.a., every calendar year. The interest is due and payable on 31st December every year. During FY 2021-22, in order to gain competitive advantage and to capture the global market, I Co had availed the assistance of UK Co to prepare its marketing campaign. UK Co is wholly owned by Rishi, a UK resident. Rishi is not related to Donald or Joe. 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, 2022. As the preparation of the marketing campaign requires the team of UK Co as well as the in house marketing team of I Co to work closely, the marketing service agreement between I Co and UK Co requires employees of UK Co to visit India twice in a financial year, for 20-30 days each. For the said services, UK Co is paid GBP 300,000 for each visit. The number of days spent by the employees of UK Co during FY 2021-22 and FY 2022-23 in India under the marketing service agreement: Month of visitNumber of days of visit April 202127 December 202130 July 202220 March 202325 On 1st June 2022, Donald and Joe, having received an offer which they believe was fair, sold their entire stake in Sing Co to Rishi for USD equivalent to INR 350 crores each. In the same month, G Co sold the CCD of I Co to UK Co for INR 0.6 crores. For the calendar year 2022, I Co in December 2022, paid interest of INR 0.27 crores on the CCDs to UK Co. The accounting period of Sing Co is January to December, the relevant extract of the balance sheet of Sing Co as on 31st December 2021,1st June 2022 and 31st December 2022 are as follows: ParticularsAs on 31st December 2021 (in INR crores)As on 1st June 2022 (in INR crores)As on 31st December 2022 (in crores) Details regarding Sing Co Book value of assets1,0001,3001,500 Liabilities300250350 Fair Market Value of assets800850950 Details regarding investment in I Co Cost of acquisition150150150 Book value of assets in balance sheet of I Co350450480 Liabilities150200250 Fair market value of assets350400600 Notes: 1. Exchange Control laws in India would mean the Foreign Exchange Management Act, 1999 read along with the Rules, Regulations and Master Directions issued thereunder from time to time. 2. Rule 2(k) of the Foreign Exchange Management (Non- debt Instruments) Rules, 2019 defines the turn equity instruments: “equity instruments” means equity shares, convertible debentures, preference shares and share warrants issued by an Indian company. Explanation: (i) Equity shares issued by an Indian Company in accordance with the provisions of the Companies Act,2013 or any other applicable law, shall include equity shares that have been partly paid. “Convertible debentures” means fully and mandatorily convertible debentures which are fully paid. “Preference shares” means- (ii) _________ (iii) _________ 3. Reference to the Act would mean the Income-tax Act, 1961. 4. Reference to the Rule would mean the Income-tax Rules, 1962. 5. Donald has complied with the applicable rules under the Income tax Rules. 6. For the purposes of this case study if required, consider that the concept and meaning of associated enterprises as provided under the Act and that under the Indo – USA DTAA is similar. Reference Material (a) Relevant extracts of India – Germany DTAA ARTICLE 3 GENERAL DEFINITIONS 1. _________ 2. As regards the application of this Agreement by a Contracting Sate any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which this Agreement applies. ARTICLE 11 INTEREST 1. Interest arising in a Contracting Sate and paid to a resident of the other Contracting Sate may be taxed in that other Sate. 2. However, such interest may also be taxed in Contracting Sate in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. ARTICLE 13 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State form alienation of immovable property situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise ) of such fixed base, may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. Gains from the alienation of shares in a company which is a resident of a Contracting State may be taxed in that State. 5. Gains from the alienation of any property other than that referred to in paragraphs 1 to 4 shall be taxable only in the Contracting State of which the alienator is a resident. (b) Relevant extracts of India – USA DTAA ARTICLE 1 PERSONS COVERED 1. This Convention shall apply to persons who are residents of one or both of the Contracting States except as provided in the Convention. 2. _________ 3. _________ 4. _________ ARTICLE 4 RESIDENCE 1. For the purposes of this Convention, the term “resident of a Contracting Sate” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation or any other criterion of a similar nature, provided, however, that (a) this term does not include any person who is liable to tax in that State in respect only of income from source in that State; and (b) _________ 2. Whereby reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, _________ 3. Where, by reason of paragraph 1, a company is a resident of both the Contracting State, such company shall be considered to be outside the scope of this convention except for the purposes of paragraph 2 of Article 10 (Dividends), Article 26 (Non-Discrimination), Article 27 (Mutual Agreement Procedure), Article 28 (Exchange of Information or Administrative Assistance) and Article 30 (Entry into Force). 4. _________ ARTICLE 13 GAINS Except as provided in Article 8 (Shipping and Air Transport) of this convention, each Contracting State may tax capital gains in accordance with the provisions of its domestic law. (c) Relevant extracts of India – Singapore DTAA ARTICLE 11 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting Sate may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company); (b) 15 per cent of the gross amount of the interest in all other cases. 3. _________ 6. _________ ARTICLE 13 CATPTAL GAINS 1. Gains derived by a resident of a Contracting State form the alienation of immovable property, referred to in Article 6, and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State. 3. Gains form the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident. 4A. Gains form the alienation of shares acquired before 1 April,2017 in a company which is a resident of a Contracting State shall be taxable only in the Contracting State in which the alienator is a resident. 4B. Gains form the alienation of shares acquired on or after 1 April,2017 in a company which is a resident of a Contracting State may be taxed in that State. 4C. However, the gains referred to in paragraph 4B of this Article which arise during the period beginning on 1 April,2017 and ending on 31 March,2019 may be taxed in the State of which the company whose shares are being alienated is a resident at a tax rate that shall not exceed 50% of the tax rate applicable on such gains in that State. 5. Gains form the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4A and 4B of this Article shall be taxable only in the Contracting State of which the alienator is a resident. (d) Relevant extracts of India – UK DTAA ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term “permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term “permanent establishment” shall include especially: (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) premises used as a sales outlet or for receiving or soliciting orders; (g) a warehouse in relation to a person providing store facilities for other; (h) a mine, an oil or gas well, quarry on other place of extraction of natural resources; (i) an installation or structure used for the exploration or exploitation of natural resources; (j) a building site or construction, installation or assembly project or supervisory activity in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale or machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment; (k) the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii) services are performed within that State for an enterprise within the meaning of paragraph 1 of Article 10 (Associated enterprises) and continue for a period or periods aggregating more than 30 days within any twelve-month period: Provided that for the purposes of this paragraph an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of, mineral oils in that State. 3. _________ 7. _________ ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. _________ 9. _________ ARTICLE 12 INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises and accordingly to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. 3. _________ 11. _________ Required: Choose the most appropriate option for the following MCQs: