PAPER – 7: DIRECT TAX LAWS & INTERNATIONAL TAXATION

Part - II
Question Paper comprises of 6 questions. Answer Question No.1 which is compulsory and any
4 out of the remaining 5 questions.
Working notes should form part of the answer
All questions relate to Assessment Year 2020-21, unless stated otherwise in the question.
Question 1
Dinkar Synthetics Ltd. engaged in the business of manufacturing of textile goods of suiting
and shirting and operating since 2010 shows Net Profit of ` 75 lacs as per Profit and Loss
Account for the year ended 31-03-2020.
Net profit has been calculated after debiting/crediting the following items:
(1) The company used to include interest cost while valuing its stock of finished goods up to
the financial year 2018-19. During the financial year 2019-20, the company changed its
accounting policy to adopt AS-2 (Accounting standard on valuation of Inventories) as
issued by the Institute of Chartered Accountants of India and thereby excluded interest
costing while valuation of finished goods. This has resulted in a decrease in the year's
profit by ` 13.50 Lacs. This policy will continue in future also.
(2) The company has made provision for Gratuity based on actuarial valuation of ` 5 lacs.
Actual gratuity paid amounting to ` 1,20,000 during financial year 2019-20 was debited to
provision of Gratuity Account.
(3) The company has debited to Profit and Loss account one time Franchise fees of ` 20
lakh paid to M/s. Robert Inc., a foreign company, for obtaining franchise on 16th August,
2019. The relevant amount of TDS has been deducted and deposited by the company in
time.
(4) The company lost cash of ` 12,00,000 due to theft when it was withdrawn from the bank
and taken to administrative office. It is not insured and hence, fully charged as revenue
expenditure.
(5) On December 1, 2019, the company paid Royalty of ` 3,00,000 to Mr. Rozer (a non-
resident individual) after deducting tax@10% under section 195 read with section 115A.
The tax so deducted by the company is not deposited till November 30, 2020. However,
Mr. Rozer submits his return of income on July 31, 2020 after including ` 3,00,000 in his
income and claiming of refund of ` 20,000.

The Suggested Answers for Paper 7: Direct Tax Laws and International Taxation are based on
the provisions of direct tax laws as amended by the Finance Act, 2019, the Finance (No.2) Act,
2019 and the Taxation Laws (Amendment) Act, 2019, which are relevant for January, 2021
examination. The relevant assessment year is A.Y.2020-21.
2 FINAL (NEW) EXAMINATION: JANUARY 2021

On scrutiny of records, the following further information and details were extracted:
(i) The Company has sold a plot of land to Libra Ltd., a domestic company, for ` 35
lacs on 15-04-2019. The same plot was purchased on 01-05-2017 for ` 26 lacs by
Dinkar Synthetics Ltd. Dinkar Synthetics Ltd. held all the shares of Libra Ltd.
(ii) The company has obtained a loan of ` 5 lakhs from Manu Textiles Private Limited in
which it holds 16% voting rights. The accumulated profits of Manu Textiles Private
Limited on the date of receipt of loan was ` 2 lacs.
(iii) The company has purchased a new motor car during the year for the purpose of
business, on 23-08-20] 9 [to mark the date of incorporation of the company i.e.
being 23rd August] for ` 12,80,000 (including GST of ` 2,80,000). The depreciation
on the above car has not been debited to the Profit and Loss Account.
(iv) The company has the following number of workers employed in the factory (all are
covered in Provident Fund)
Particulars of Employees Number
No. of Employees as at 3]-03-2019 480
Add: Additional Employees employed during the year 120
Less: Retrenchment of Employees in 2019-20 70
No. of employees as on 31-03-2020 530

The new employees have been recruited on mass recruitment basis on 01-07-2019
at a pay scale of ` 15,000 per month per person. Payment of salary is made
through Account Payee Cheques only.
(v) The Gross Turnover of the Company during the financial year 2017-18 is ` 450
crores and the company has not opted for Section 115BAA.
Compute the total income and tax payable of the company for Assessment Year 2020-21
as per the provisions of the Income-tax Act, 1961.
Ignore the provisions of MAT. (14 Marks)
Answer
Computation of total Income and tax payable of Dinkar Synthetics Ltd. for the
A.Y. 2020-21
Particulars Amount in `
I Profits and gains of business and profession
Net profit as per profit and loss account 75,00,000
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 3

Add: Items debited but to be considered separately or

to be disallowed
(i) Decrease in profit due to non-inclusion of -
interest while valuing finished goods
[As per ICDS 2, interest shall not be included in the
cost of inventories, unless they meet the criteria for
recognition of interest as a component of the cost as
specified in ICDS 9 on borrowing costs. ICDS 9
requires capitalization of borrowing costs attributable
to qualifying assets, which include only those
inventories that require a period of twelve months or
more to bring them to a saleable condition, which is
not the case in textile industry. Hence, interest would
not form part of cost for inventory valuation as per
ICDS 2. Accordingly, no adjustment is required, since
interest cost has already excluded while valuing
finished goods]
(ii) Provision for gratuity 3,80,000
[Provision of ` 5 lakhs for gratuity based on the
actuarial valuation is not allowed as deduction as per
section 40A(7). However, actual gratuity of
` 1,20,000 paid is allowable as deduction. Hence,
the difference has to be added back to income
(` 5,00,000 – ` 1,20,000)]
(iii) One time Franchise Fees 15,00,000
[Franchise is an intangible asset eligible 20,00,000
for depreciation as per section 32.
Since one time franchise fees of
` 20 lakhs paid for obtaining franchise
has been debited to profit and loss
account, the same has to be added
back while computing business income]
Less: Franchise [Depreciation @ 25%
on ` 20 lakhs, since it has been used 5,00,000
for more than 180 days during the
year] [20 lakhs – 5 lakhs]
(iv) Loss of cash in transit from bank to -
administrative office on account of theft
[Any loss from theft, dacoity, embezzlement, etc., is
4 FINAL (NEW) EXAMINATION: JANUARY 2021

deductible if it is incidental to the carrying on of the

business.1 Since the loss is due to theft which took
place when cash was withdrawn from bank and taken
to administrative office, it is incidental to business and
thus, allowable as revenue expenditure. Since the
same has already been charged as revenue
expenditure, no further adjustment is required]
(v) Royalty on which tax is deducted but not 3,00,000
deposited till 30.11.2020
[100% of ` 3 lakhs, being royalty paid after
deducting tax would be disallowed under section
40(a)(i) while computing the business income of
A.Y.2020-21, since tax is not paid before due date of
filing return of income.] 21,80,000
96,80,000
Less: Depreciation as per Income-tax Rules, 1962
Motor car [` 12.8 lakh x 30%, since car is purchased 3,84,000
between 23.8.2019 and 31.3.2020 and put to use for
more than 180 days in the P.Y. 2019-20]
92,96,000
Capital Gain Nil
Capital gain on transfer of plot to Libra Ltd., a 100%
subsidiary Indian company [Any transfer of capital asset
by a holding company to its 100% subsidiary Indian
company would not be regarded as transfer u/s 47(iv)]
Income from Other Sources
Deemed dividend u/s 2(22)(e) [Loan of ` 5 lakhs by Manu Nil
Textiles Pvt. Ltd., a company in which the public are not
substantially interested, to Dinkar Synthetics Ltd. who is
holding 16% i.e., 10% or more of the voting power of the
company would be deemed to be dividend to the extent of
` 2 lakhs being the accumulated profits. However, since
Manu Textiles Pvt. Ltd. is liable to pay DDT, such dividend
is exempt u/s 10(34) in the hands of the company.]
Gross Total Income 92,96,000
Less: Deduction under Chapter VI-A
Deduction under section 80JJAA [Since Dinkar Synthetics 48,60,000
Ltd. is subject to tax audit for A.Y.2020-21 and has

1 G.G. Dandekar Machine Works Ltd. v. CIT (1993) 202 ITR 161 (Bom.)
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 5

employed additional employees during the P.Y. 2019-20

[30% of ` 1,62,00,000 (` 15,000 x 9 months x 120)]
[Note– As per clause (ii) of Explanation to section 80JJAA,
“additional employee” means an employee who has been
employed during the previous year and whose
employment has the effect of increasing the total number
of employees employed by the employer as on the last
day of the preceding year. As per this definition, all 120
employees employed during the year would qualify as
“additional employees”, and hence remuneration paid to
them would be eligible for deduction u/s 80JJAA.
Alternatively, it is possible to take a view that 70
employees retrenched by the company during the year
have to be deducted from the figure of 120 to arrive at the
actual number of additional employees. If this view is
taken, deduction u/s 80JJAA would be ` 20,25,000 [30%
of ` 67,50,000 (` 15,000 x 9 months x 50)] and total
income would be ` 72,71,000. Tax payable would be
` 22,68,550 (rounded off).
Total Income 44,36,000
Tax payable on ` 44,36,000@30% [Since the turnover of 13,30,800
the company for the previous year 2017-18 exceeds ` 400
crore]
Add: Health and education cess@4% 53,232
Tax liability 13,84,032
Tax liability (rounded off) 13,84,030
Question 2
(a) RST LLP, a limited liability partnership set up a unit in a Special Economic Zone (SEZ) in
the financial year 2015-16 for production of refrigerators. The unit fulfills all the conditions
of section 10AA of the Income tax Act, 1961. During the financial year 2018-19, it has
also set up a warehousing facility in a district of Tamil Nadu for storage of agricultural
produce. It fulfills all the conditions of section 35AD. Capital expenditure in respect of
warehouse amounted to ` 75 lakhs (including cost of land ` 10 lakhs). The warehouse
become operational with effect from 1st April, 2019 and the expenditure of ` 75 lakhs was
capitalized in the book on that date.
Relevant details for the financial year 2019-20 are as follows:
Particulars `
Profit of unit located in SEZ 50,00,000
6 FINAL (NEW) EXAMINATION: JANUARY 2021

Export sales of above unit 80,00,000

Domestic sales of above unit 20,00,000
Profit from operation of warehouse facility (before 1,05,00,000
considering deduction under section 35AD)
Compute income tax (including AMT under section 115JC) payable by RST LLP for
Assessment Year 2020-21. (8 Marks)
(b) Wioni Inc., a company incorporated in Japan, is engaged in development of infrastructure
and providing consultancy in the same field. During the Financial Year 2019-20, its
shareholders met in India for three times. The first two meetings were held to discuss the
modification of rights attached to various classes of shares and the third meeting was
held to discuss and decide about sale of companies' assets situated in India. It provides
the following additional information pertaining to Financial Year 2019-20 :
(i) Dividend declared by a Miani Inc., a Japan based Company: ` 54,000 [Miani Inc.
holds 70% of its total assets in India].
(ii) Fees for technical services received from Government of India: ` 4,54,000. The
Government of India utilised such technical services for a development project
carried out by it in Nepal.
(iii) Interest received from Ms. O, a unit located in IFSC in respect of monies borrowed
by Ms. O: ` 15,400 (Date of loan 24-12-2019)
(iv) On 26-8-2019, Wioni Inc. sold 5,000 equity shares held by it in
an Indian Company for ` 89 per share. These shares were bought by the Wioni Inc.
on 28th June, 2009 for ` 64 per share. Both the purchase and sale of shares were
effected through a recognized stock exchange in India. Fair Market Value of these
shares on 31-01-2018 was ` 70 per share.
You are required to compute the total income of Wioni Inc. for the assessment year
2020-21 briefly explaining the relevant provisions of the Income-tax Act, 1961. (6 Marks)
Answer
(a) Computation of total income and tax liability of RST LLP for A.Y. 2020-21 (under the
regular provisions of the Act)
Particulars ` `
Profits and gains of business or profession
Profit from unit in SEZ 50,00,000
Less: Deduction under section 10AA 40,00,000
[50,00,000 x 80,00,000/1,00,00,000 x 100%, since it is the 5th
year of manufacturing]
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 7

Business income of SEZ unit chargeable to tax 10,00,000

Profit from operation of warehousing facility for storage of 1,05,00,000
agricultural produce
Less: Deduction u/s 35AD [Deduction@100% in respect of
the expenditure incurred prior to the commencement
of its operations and capitalized in the books of
account on 1.4.2019. Deduction is not available on
expenditure incurred on acquisition of land] [` 75
lakhs – ` 10 lakhs] 65,00,000

Business income of warehousing facility chargeable to tax 40,00,000

Total Income 50,00,000
Computation of tax liability
Tax on ` 50,00,000@30% 15,00,000
Add: Health and Education cess@4% 60,000
Total tax liability 15,60,000
Computation of adjusted total income and AMT of RST LLP for A.Y. 2020-21
Particulars ` `
Total Income (as computed above) 50,00,000
Add: Deduction under section 10AA 40,00,000
90,00,000
Add: Deduction under section 35AD 65,00,000
Less: Depreciation u/s 32[On building@10% of ` 65 lakhs2] 6,50,000 58,50,000
Adjusted Total Income 1,48,50,000
Alternate Minimum [email protected]% 27,47,250
Add:Surcharge@12% (since adjusted total income > ` 1 crore) 3,29,670
30,76,920
Add: Health and Education cess@4% 1,23,077
Total tax liability 31,99,997
Tax Liability (Rounded off) 32,00,000
Since the regular income-tax payable is less than the alternate minimum tax payable, the
adjusted total income shall be deemed to be the total income and tax is leviable @18.5%
thereof plus surcharge@12% and cess@4%. Therefore, the tax liability is ` 32,00,000.

2 Assuming the capital expenditure of ` 65 lakhs is incurred entirely on building

8 FINAL (NEW) EXAMINATION: JANUARY 2021

AMT Credit to be carried forward u/s 115JEE

Particulars `
Tax liability under section 115JC 32,00,000
Less: Tax liability under the regular provisions of the Income-tax Act, 1961 15,60,000
16,40,000
(b) Wioni Inc. is a company incorporated in Japan. It would be resident in India, if its place
of effective management is in India in that year.
As per the POEM guidelines, the decisions made by a shareholder for sale of all or
substantially all of the company’s assets, or the modification of the rights attaching to
various classes of shares or the issue of a new class of shares etc. are decisions typically
affecting the existence of the company itself or the rights of the shareholders as such,
rather than the conduct of the company’s business from a management or commercial
perspective. Therefore, such decisions are not relevant for determination of a company’s
place of effective management. Therefore, the POEM of Wioni Inc. is not in India and
hence, it is a non-resident for A.Y.2020-21.
Taxability of income
As per section 5(2), in case of a non-resident, only income which accrues or arises or
which is deemed to accrue or arise to it in India or which is received or deemed to be
received in India in the relevant previous year is taxable in India.
Computation of total income of Wioni Inc. for A.Y. 2020-21
Particulars Amount
(`)
(i) Dividend declared by Miani Inc., a Japan based company which holds Nil
70% of its total assets in India [As per Circular No. 4/2015, dated 26-03-
2015, dividends declared and paid by Miani Inc., a foreign company,
outside India in respect of shares which derive their value
substantially from assets situated in India would not be deemed to be
income accruing or arising in India]
(ii) Fees for technical services received from Government of India [As per 4,54,000
section 9(1)(vii), any fees for technical services would be deemed to
accrue or arise in India if they are payable by Government of India. Since
FTS is received from Government of India, it is deemed to have accrued
or arisen in India irrespective of that fact that it is utilized for a project
outside India]
(iii) Interest received from Ms. O, a unit located in IFSC for monies borrowed Nil
by it on 24.12.2019 [As per section 10(15)(ix), interest payable to Wioni
Inc., a non-resident, by Ms. O, a unit located in an IFSC, in respect of
monies borrowed by it on or after 1.9.2019 is exempt from income-tax]
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 9

(iv) Long term capital gains

Sale consideration (5,000 x ` 89) ` 4,45,000
Less: Cost of acquisition, being higher of ` 3,50,000 95,000
(a) Actual cost i.e., (5,000 x ` 64) ` 3,20,000
(b) lower of ` 3,50,000
- ` 3,50,000 (5,000 x ` 70), being fair market value on 31.1.2018 and
- ` 4,45,000 (5,000 x ` 89), being full value of consideration
[There would be no tax on long-term capital gains, since only the gain in
excess of ` 1,00,000 is taxable@10% u/s 112A]
Total Income 5,49,000
Question 3
(a) GNK Trust, a charitable trust following accrual system of accounting registered under
Section 12AA of the Income-tax Act, provides services in the field of education. It
furnishes the following particulars to you with respect to previous year 2019-20:
Particulars `
Gross Receipts received from students 24,41,000
Voluntary Contribution (including anonymous donation ` 1,85,000) 5,20,000
Dividend from Indian Companies 5,40,000
Income from mutual funds registered under section 10(23D) 2,85,000
Agricultural income 4,79,000
The following amounts are spent for the purposes of the trust:
Particulars `
Amount set aside during the year to be applied in the next 4 years for 2,54,000
the purposes of the trust.
Payment to Mr. Lohia, one of the trustees, as rent for the building 1,47,000
where the trust carry on its activities. The rent for similar property is
` 2,50,000.
During the year, the trust invited foreign teachers but made the 1,96,000
payment in the next Financial Year
Other expenses for the purposes of the trust 16,79,000
Compute the total income of the trust and also the tax liability in order to avail the
maximum benefits under the provisions of Income-tax Act, 1961. (8 Marks)
10 FINAL (NEW) EXAMINATION: JANUARY 2021

(b) Mr. Ramanuj Tiwari, aged 65 years resident of India derived the following income for the
financial year 2019-20:
(1) Income from business and profession in India 6,00,000
(2) Dividend (gross) from a company in Nigeria 1,50,000
(Tax paid in Nigeria ` 30,000)
(3) Royalty on books from Spain 8,00,000
(` 7,60,000 has been received in India on
30-06-2019. Further ` 40,000 as TDS has been
deducted in Spain on royalty)
(4) Income from Other Sources as follows:
• Saving Interest from Punjab and Sind Bank 15,000
• Interest Income on FDR's 2,15,000
Further, Mr. Ramanuj Tiwari incurred expenses to the tune of ` 1,20,000 on earning the
royalty of ` 8,00,000. He has also deposited ` 1,50,000 in Public Provident Fund
Account of his wife during the year.
Compute the Total Income and Tax Payable by Mr. Ramanuj Tiwari for the Assessment
Year 2020-21, assuming India does not have Double Taxation Avoidance Agreement with
Nigeria and Spain. (6 Marks)
Answer
(a) Computation of total income of GNK Trust for the A.Y.2020-21
Particulars ` `
Gross receipts from students 24,41,000
Add: Voluntary contributions other than anonymous 3,35,000
donation of ` 1,85,000
27,76,000
Add: Dividend from Indian Companies [Exemption u/s 5,40,000
10(34) would not be available, since trust is registered
u/s 12AA]
Income from mutual funds registered u/s 10(23D) 2,85,000
[Exemption u/s 10(35) would not be available, since
trust is registered u/s 12AA]
Agricultural income [Exemption u/s 10(1) would be
available, even though the trust is registered u/s 12AA]] _____Nil 8,25,000
36,01,000
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 11

Add: Anonymous donations [to the extent not chargeable

to tax@30% under section 115BBC(1)(i)] [` 26,000,
being 5% of total donations of ` 5,20,000 or 1,00,000
` 1,00,000, whichever is higher] 3
37,01,000
Less: 15% of income eligible for being set apart without any 5,55,150
condition4
31,45,850
Less: Amount applied for charitable purposes
- Payment of rent for the building to Mr. Lohia 1,47,000
- Amount payable to foreign teachers for services 1,96,000
rendered and utilised in India [though payment
made to the teachers next year, the same is
deductible during the current previous year, since
the trust follows accrual system of accounting]
- Other expenses 16,79,000 20,22,000
11,23,850
Less: Amount set aside during the year to be applied in 2,54,000
the next 4 years
Total income [other than anonymous donation 8,69,850
taxable@30% u/s 115BBC(1)(i)]
Add: Anonymous donation taxable @30% u/s
115BBC(1)(i) [See Note below] 85,000
Total Income of the trust (including anonymous donation 9,54,850
taxable@30%)
Computation of tax liability of the trust for the A.Y. 2020-21
Particulars `
Tax on total income of ` 8,69,850 i.e., total income (excluding 86,470
anonymous donations chargeable to tax@30% u/s 115BBC) [` 3,69,850
x 20% plus `12,500]

3 Alternatively, the plain reading of section 13(7) may give rise to a view that the entire anonymous donations would not
be eligible for benefit of exclusion from total income under sections 11 and 12, in which case ` 1,00,000 should not be
added to ` 36,01,000 for 15% unconditional exemption.
4 As per the Supreme Court ruling in CIT v. Programme for Community Organisation (2001) 116 Taxman 608, 15% of

gross receipts would be eligible for accumulation under section 11(1)(a). Alternatively, as per the plain reading of section
11(1), 15% of income can be set apart without any conditions.
12 FINAL (NEW) EXAMINATION: JANUARY 2021

Tax on anonymous donations taxable@30% [` 85,000 x 30%] 25,500

1,11,970
Add: Health and education cess@4% 4,479
Total tax liability 1,16,449
Total tax liability (rounded off) 1,16,450
Note - To avail the maximum benefit, the amount set aside should be invested in modes
specified under section 11(5) and intimated to the Assessing Officer before the due date
of filing of return.
(b) Computation of total income of Mr. Ramanuj Tiwari for A.Y.2020-21
Since Mr. Ramanuj Tiwari is resident in India for the P.Y.2019-20, his global income
would be subject to tax in India. Therefore, income earned by him in Nigeria and Spain
would be taxable in India. He would, however, be entitled to deduction under section 91,
since India does not have a DTAA with Nigeria and Spain, and all conditions under
section 91 are satisfied.
Particulars ` `
Profits and Gains of Business or Profession
Income from business and profession in India 6,00,000
Royalty on books from Spain 8,00,000
Less: Expenses incurred 1,20,000 6,80,000
Income from Other Sources
Dividend from a company in Nigeria 1,50,000
Interest on saving account with Punjab and Sind Bank 15,000
Interest on fixed deposits 2,15,000
Gross Total Income 16,60,000
Less: Deduction under Chapter VI-A
Under section 80C – Deposits in PPF 1,50,000
Under section 80QQB – Royalty income on books5 3,00,000
allowable to the extent of ` 3,00,000.
Under section 80TTB – Deduction allowable in respect of
interest on fixed deposits, since Mr. Ramanuj Tiwari is a
senior citizen resident in India 50,000 5,00,000
Total Income 11,60,000

5 It is assumed that the royalty earned outside India and received in India on 30.6.2019 is in convertible foreign
exchange.
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 13

Computation of tax liability of Mr. Ramanuj Tiwari for A.Y.2020-21

Particulars `
Tax on total income [30% of ` 1,60,000 + ` 1,10,000, eligible for higher 1,58,000
exemption limit of ` 3,00,000, since he is a senior citizen]
Add: Health and education cess @4% 6,320
1,64,320
Less: Rebate under section 91 (See Working Note below) 40,248
Tax Payable 1,24,072
Tax Payable (rounded off) 1,24,070

Calculation of Rebate under section 91: `

Average rate of tax in India [i.e., ` 1,64,320 / ` 11,60,000 x 100] 14.1655%
Average rate of tax in Nigeria [i.e., ` 30,000 / ` 1,50,000 x 100] 20%
Doubly taxed income pertaining to Nigeria
Dividend from a company in Nigeria ` 1,50,000
Rebate u/s 91 on ` 1,50,000 @ 14.1655% [being the lower of 21,248
average Indian tax rate (14.1655%) and Nigeria tax rate (20%)]
Average rate of tax in Spain [i.e., ` 40,000 / ` 8,00,000 x 100] 5%
Doubly taxed income pertaining to Spain
Royalty (` 8,00,000 – ` 1,20,000 – ` 3,00,000) ` 3,80,000
Rebate u/s 91 on ` 3,80,000 @5% [being the lower of average
Indian tax rate (14.1655%) and Spain tax rate (5%)] 19,000
Total rebate under section 91 40,248
Question 4
(a) Examine the liability to deduct tax at source in respect of the following independent
situations:
(i) M/s Mexil Ltd. is engaged in the business of manufacturing certain article or thing
for which the raw material is imported from Russia. For the purpose of making
payment to the supplier, the assessee entered into a bank guarantee with BDFH
Bank, an Indian Bank against the payment of ` 1,10,000 as bank guarantee
commission for the Financial Year 2019-20.
(ii) StudyKart, an online education provider and a trust registered under section 12AA
of the Income-tax Act, pays ` 98,000 during the Financial Year 2019-20, to
Mr. Monty, a non-resident for providing web based lectures.
14 FINAL (NEW) EXAMINATION: JANUARY 2021

(iii) On 31st December, 2019, Mr. Nitin, a resident individual whose gross turnover was
` 97 lakhs during the preceding previous year, paid ` 65 lakhs to Mr. Basant, a
resident individual, as contract payment for repairing his office building.
(iv) Fly Fly Ltd., an airlines company, paid ` 10 lakhs to Airports Authority of India as
landing and parking charges of its aircrafts. (2 x 4 = 8 Marks)
(b) On 1-4-2019, Vihaan Ltd., an Indian company, advanced a loan of ` 6 crores to Yuvan
Inc., a company resident in Singapore. As on the date of loan, the book value of total
assets in the books of Yuvan Inc. was ` 4 crores. In the Financial Year 2018-19, Yuvan
Inc. had revalued its assets and accordingly the value of assets had increased by ` 2
crores. Yuvan Ltd. paid the entire loan along with interest thereon on 31st August, 2019.
During the Financial Year 2019-20, Vihann Ltd. also entered into an agreement with
Yuvan Inc. to provide 20 thousand medical equipments at a cost of ` 7,400 per unit. The
Assessing Officer treats them as associate enterprise and wants to re-compute the
income of Vihaan Ltd. at arms’ length price. You are required to answer the following
questions in this respect:
(1) Would Vihaan Ltd. and Yuvan Ltd. be treated as associate enterprises for the
purpose of transfer pricing adopted by the Assessing Officer? If yes, why? '.
(2) Calculate the arms length price of Vihaan Ltd. which sells the same equipments at
the rate of ` 9,000 per unit to Y Ltd. and at the rate of ` 9,500 per unit to X LLP
(both of them are unrelated parties in respect of Vihaan Ltd.). Vihaan Ltd. is not a
wholesale dealer.
(3) What are the options available to Yuvan Inc. 6 in respect of such increase in transfer
price by income tax authorities, if Vihaan Ltd. accepts such transfer price? (6 Marks)
Answer
(a) (i) No tax is deductible at source on the payment of inter alia bank guarantee commission
made by a person to a bank.
As per section 197A(1F), no deduction of tax shall be made from specified
payments to notified bodies. Accordingly, the Central Government has notified that no
deduction of tax shall be made from the specified payments, which include bank
guarantee commission, in case such payment is made by a person to a bank listed in
the Second Schedule to the Reserve Bank of India Act, 1934, excluding a foreign bank.
Thus, M/s Mexil Ltd. is not required to deduct tax at source on bank guarantee
commission of ` 1,10,000 paid to BDFH Bank, an Indian bank, in the F.Y.2019-20.
(ii) Any person responsible for paying any sum chargeable to tax to a non-corporate
non-resident is liable to deduct tax at source at the rates in force.

6 To be read as Vihaan Ltd.

 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 15

Since Mr. Monty, a non-resident has provided web based lectures from outside
India, income arsing therefrom is not chargeable to tax in India as no income is
deemed to accrue or arise in India. Thus, no tax is deductible at source on such
payment to him.
Alternatively, it may be possible to take a view that income arising from web lectures
may fall within the meaning of “Fees for technical services”7. If this view is taken,
such income would be deemed to accrue or arise in India, since the services are
utlised in India, even though they are rendered from outside India. Therefore, such
income would be chargeable to tax in India in the hands of Mr. Monty, a non-
resident. Thus, StudyKart, a trust registered u/s 12AA, is required to deduct tax at
source under section 195.
(iii) Since Mr. Nitin is not subject to tax audit in the P.Y. 2018-19, TDS provisions u/s
194C are not attracted in respect of payment made in the P.Y. 2019-20 to Mr.
Basant, a resident individual, for repairing his office building. However, tax is
required to be deducted at source@5% under section 194M, on the payment of
` 65,00,000, since such amount exceeds ` 50 lakhs, and the payment is made after
1.9.2019.
Therefore, tax deducted at source would be ` 3,25,000, being 5% of ` 65,00,000.
(iv) The landing and parking charges which are fixed by the Airports Authority of India
are not merely for the "use of the land". These charges are also for services and
facilities offered in connection with the aircraft operation at the airport which include
providing of air traffic services, ground safety services, aeronautical communication
facilities, installation and maintenance of navigational aids and meteorological
services at the airport 8.
Therefore, tax of ` 20,000 (2% of ` 10 lakh) is deductible at source under section
194C by the airline company, Fly Fly Ltd., on payment of ` 10,00,000 made towards
landing and parking charges to the Airports Authority of India for the previous year
2019-20.
(b) (1) Two enterprises are deemed to be associated enterprises as per section 92A(2)(c), if a
loan advanced by one enterprise to the other enterprise constitutes not less than 51% of
the book value of total assets of the other enterprise. Since Vihaan Ltd., an Indian
company, advanced loan of an amount of ` 6 crores to Yuvan Inc., a Singapore
company, which is 150% of the book value of the total assets of Yuvan Inc. (i.e., 150%
of ` 4 crores), Vihaan Ltd. and Yuvan Inc. are deemed to be associated enterprises.
(2) Vihaan Ltd. sells equipments at the rate of ` 9,000 per unit to Y Ltd. and at ` 9,500
per unit to X LLP, both of them being unrelated parties. Since the transactions can

7 as decided in certain Tribunal rulings

8 Japan Airlines Co. Ltd. v. CIT / CIT v. Singapore Airlines Ltd. (2015) 377 ITR 372 (SC)
16 FINAL (NEW) EXAMINATION: JANUARY 2021

be considered as comparable uncontrolled transactions for the purpose of

determining the arm’s length price, Comparable Uncontrolled Price (CUP) method
would be most appropriate method.
Since two prices are determined by the most appropriate method, and data set
comprises of only two entries, the arm's length price shall be the arithmetical mean
of both the values included in the dataset.
Accordingly, arm’s length price would be ` 9,250 [(` 9,000 + ` 9,500)/2]. Since the
deviation between the arm’s length price and actual sale price of the equipment to
Yuvan Inc. i.e., ` 7,400 per unit is 25%, which exceeds 3% of the price of the
international transaction, the arm’s length price would be ` 9,250 per unit and the
total income would increase by ` 3.7 crores [i.e. ` 1,850 (` 9,250 – ` 7,400)
x 20,000 units]
(3) On account of the primary adjustment of ` 3.7 crores (` 1850 x 20,000 units) made
by the Assessing Officer, in the total income of Vihaan Ltd. for A.Y.2020-21,
secondary adjustment has to be made under section 92CE, since –
(1) The company has accepted the primary adjustment made by the Assessing
Officer;
(2) The primary adjustment is in respect of A.Y.2020-21; and
(3) The primary adjustment exceeds ` 100 lakhs.
Accordingly, the excess money i.e.,3.7 crores available with the Yuvan Inc. has to
be repatriated to India within 90 days of the date of the order of the Assessing
Officer.
Alternatively, Vihaan Ltd. can opt to pay additional income-tax @20.9664% (tax
@18% plus surcharge @12% plus cess@4%) on ` 3.7 crores, which amounts to
` 77,57,568.
Question 5
(a) Answer any two out of the following three:
(i) Ms. Maya, a resident individual, engaged in the jewellery making, filed her return of
income showing income of ` 19,80,000. The Assessing Officer completed the
assessment under section 143(3) as the assessee participated in the assessment.
The Assessing Officer disallowed a sum of ` 3,69,000 as unexplained cash. The
assessee claims that the assessment is void as no notice under section 143(2) was
served to the assessee. You are required to judge the validity of assessee's claim.
(ii) In respect of a civil suit, the Calcutta High Court appointed a receiver in respect of
properties of Ms. Ghosh and Sons HUF. One such property was situated at Delhi
which was sold by the Income Tax Department to Mr. Devang. The karta of the HUF,
Mr. Ghosh, objected to such sale stating that no leave was taken from Calcutta High
Court for such sale. An application was also filed by the department to take the
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 17

permission for such sale. The Calcutta High Court passed an order whereby it
directed a civil suit to be pursued at Delhi. However, it overlooked the provisions of
section 293 of the Income-tax Act, which puts a bar on filing suit in any civil court
against an income-tax authority in respect of any proceedings under the Income-tax
Act. The said order was recalled for review by the High Court and error apparent
was corrected. Discuss the validity of action taken by the Calcutta High Court.
(iii) Ms. RSRZ and Co. Ltd., sold one of its factory building for ` 14 lakhs on 19-4-2019.
The building was acquired on 1-4-2009 and the assessee was using it for
manufacturing activity and accordingly, depreciation was also being claimed. After
sale of the building, the assessee reinvested the amount of capital gain in long-term
specified assets under section 54EC and claimed exemption thereunder. The AO
rejected the claim for exemption by the assessee and regarded that since the asset
sold was depreciable asset, provisions of section 50 will be applicable and
accordingly the assessee is not entitled to exemption under section 54EC. Discuss
the validity of AO's claims. (2 x 4 = 8 Marks)
(b) Meenakshi Urban, is a cooperative society engaged in providing credit facilities to its
members for the previous year 2019-20, it provides you the following information:
Particulars `
Interest received from deposit with other cooperative societies 5,47,000
Interest received from members (including ` 2,63,000 for personal 11,85,000
purposes of a member)
Rent Received (per month) 36,000
Income from Agency business 2,87,500
Interest received from deposit of idle funds of members 2,04,000
Expenses incurred on agency business 1,24,000
Brought forward loss from earlier years (Financial Year 2018-19) 98,000
Compute the total income of the co-operative society after allowing eligible deduction
under section 80-P, if any, and also the tax payable thereon. (6 Marks)
Answer
(a) (i) Section 292BB provides that where the assessee has participated in the proceedings,
any notice which is required to be served upon him shall be deemed to have been duly
served and the assessee would be precluded from taking any objection that the notice
was -
(a) not served upon him; or
(b) not served upon him in time; or
(c) served upon him in an improper manner.
18 FINAL (NEW) EXAMINATION: JANUARY 2021

However, such deeming provision would not apply where the assessee has raised
an objection (regarding non-service of notice or non-service of notice in time or
improper service of notice) before the completion of such assessment or
reassessment.
In the present case, no notice was served upon Ms. Maya under section 143(2) but
Ms. Maya participated in the proceedings and assessment was completed u/s
143(3). Since Ms. Maya has not raised the objection regarding non-service of notice
before the completion of assessment u/s 143(3), it would be deemed that the notice
under section 143(2) has been duly served upon her in time. .
Therefore, the contention of Ms. Maya is not valid and the assessment is valid
Note - As per the facts given in the question, the assessee claims that the
assessment under section 143(3) is void as no notice under section 143(2) was
served upon her. Since the question mentions non-service of notice, the above
answer is based on the assumption that notice has been issued i.e., the same has
been emanated from the Assessing Officer.
Alternatively, since the question is silent about issuance of notice, it is possible to
answer the question on the basis of the assumption that the notice has not been
issued by the Assessing Officer. Issue of notice under section 143(2) is mandatory
for making a regular assessment under section 143(3). Section 292BB is a deeming
provision that seeks to cure defects in any notice issued under any provision of the
Income-tax Act, 1961, if the assessee has participated in the proceedings.
For section 292BB to apply, the notice must have emanated from the Department. I t
is only the infirmities in the manner of service of notice that the section seeks to
cure. The section is not intended to cure complete absence of notice itself.
Accordingly, non-issuance of notice under section 143(2) is not a curable defect
under section 292BB inspite of participation by the assessee in assessment
proceedings.
In the present case, since the assessment of Ms. Maya was completed u/s 143(3)
without issuing notice u/s 143(2), the assessment is bad in law and not a curable
defect u/s 292BB.
Therefore, the contention of Ms. Maya is valid and the assessment is void inspite of
the fact that Ms. Maya participated in the assessment proceedings.
It was so held in CIT v. Laxman Das Khandelwal (2019) 417 ITR 325, wherein the
above issue came up before the Supreme Court.
(ii) The High Court can review its own order, where the grounds for review are:
(i) discovery of new and important matter or evidence which, after the exercise of
due diligence, was not within knowledge of the petitioner or could not be
produced by him;
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 19

(ii) mistake or error apparent on the face of the record;

(iii) any other sufficient reason.
Section 293 puts a complete bar on filing suit in any civil court against the Income-
tax authority. If the civil suit was not maintainable in view of section 293 and this
was the purported defence of the respondents and of the Department, there was no
error committed by the High Court in its judgment rendered in exercise of its review
jurisdiction calling for interference.
In the present case, Calcutta High Court passed an order directing a civil suit by
overlooking the provisions of section 293 and then recalled its own order and
corrected the apparent error. The action taken by the Calcutta High Court is valid as
the High Court has the inherent power to review its own order to correct a mistake
apparent from the record.
Note – The facts of the case are similar to the facts in Sunil Vasudeva & Others v.
Sundar Gupta & Others [2019] 415 ITR 281, wherein the above issue came up
before the Supreme Court.The above answer is based on the rationale of the Apex
Court in the said case.
(iii) As per section 54EC, where the capital gain arising from the transfer of a long-term
capital asset, being land or building or both, is invested in the long-term specified
asset, being the bonds issued by the National Highways Authority of India (NHAI) or
the Rural Electrification Corporation Limited (RECL) or any other bond notified by
the Central Government in this behalf, at any time within a period of six months after
the date of such transfer, the amount of such capital gain shall not be charged to
tax, to the extent of ` 50 lakhs.
Section 50 is a special provision for computation of capital gains in the case of
depreciable asset, and has limited application in the context of computation of
capital gains to the extent that the provisions of sections 48 and 49 would apply with
the modifications stated thereunder. It does not deal with exemption which is
provided in a totally different provision i.e., section 54EC.
Section 54EC does not make any distinction between depreciable and non-depreciable
asset for the purpose of re-investment of capital gains in long term specified assets for
availing the exemption thereunder. Further, section 54EC specifically provides that when
the capital gain arising on the transfer a long-term capital asset, being land or building or
both, is invested or deposited in bonds issued by NHAI or RECL, the assessee shall not
be subject to capital gains to that extent [i.e., lower of capital gains or ` 50 lakhs].
Therefore, the exemption under section 54EC cannot be denied to the assessee on
account of the fiction created in section 50.
Thus, in the present case, the action of the Assessing Officer disallowing the claim
for exemption under section 54EC on the reasoning that capital gain on transfer of
20 FINAL (NEW) EXAMINATION: JANUARY 2021

depreciable asset (building) is a short-term capital gain in respect of which the

provisions of section 50 apply, even if held for more than 24 months, is not valid.
Note – The facts of the case are similar to the facts in CIT v. V.S. Dempo Company
Ltd (2016) 387 ITR 354, wherein the above issue came up before the Apex Court.
The above answer is based on the rationale of the Supreme Court in the said case.
(b) Computation of total income and tax payable by Meenakshi Urban, a Cooperative
Society for the A.Y. 2020-21
Particulars ` `
Income from house property
Rental income (` 36,000 x 12) 4,32,000
Less: Deduction under section 24(a) @30% 1,29,600 3,02,400
Profits and gains from business or profession
Credit facility business
Interest received from deposits with other cooperative society 5,47,000
Interest received from members 11,85,000
Interest received from deposit of idle funds of members [Since
Meenakshi cooperative society is engaged in the business of
providing credit facility to its members, the interest on un-
utilised fund would be taxable under the head “Profits and
2,04,000 19,36,000
gains from business or profession”9]
Agency business
Income from agency business 2,87,500
Less: Expenses incurred 1,24,000
1,63,500
Less: Brought forward loss from F.Y. 2018-19 98,000 65,500
Gross Total Income 23,03,900
Less: Deduction under Chapter VI-A: Section 80P
- Deduction in respect of profits and gains from credit 19,36,000
facility business
- Deduction in respect of agency business allowable to
the extent of 50,000 19,86,000
Total Income 3,17,900

9 Tumkur Merchants Souharda Credit Co-operative Ltd. v. ITO (2015) 230 Taxman 309 (Kar)
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 21

Computation of tax liability

Tax@30% on ` 2,97,900 plus ` 3,000 on income upto ` 20,000 92,370
Add: Health and education cess@4% 3,695
Tax liability 96,065
Tax liability (rounded off) 96,070
Question 6
(a) (i) Mr. Mahesh received the draft order from the Assessing Officer as per section 144C
of the Income-tax Act, 1961 due to variations determined by the Transfer Pricing
Officer in the arm’s length price. But Mr. Mahesh did not prefer to file the objection
against the draft order before the Dispute Resolution Panel; Instead, he preferred to
file appeal before the CIT (Appeals) under section 246A against the final order
received from the Assessing Officer.
You are required to advise Mr. Mahesh, whether his contentions are tenable?
Discuss the issue with reference to provisions of section 144C of the Income-tax
Act, 1961.
(ii) The Assessing Officer has initiated the penalty proceedings under section 270A for
under-reporting of income and launched prosecution proceedings under section
276C for willful evasion of tax at the time of completion of re-assessment of
Mr. Pradeep under section 147 of Income-tax Act, 1961.
Mr. Pradeep filed an application for the immunity from imposition of penalty and
prosecution before the Assessing Officer. Is he entitled to file application for
immunity from penalty and prosecution under section 270A and 276C, respectively,
before the Assessing Officer? (2 x 4 = 8 Marks)
(b) Horizon Ltd., Russia holds 35% shares in Identiqa Ltd., India. Identiqa Ltd. develops
software and does both onsite and offsite consultancy services for the customers.
Identiqa Ltd. during the year billed Horizon Ltd. Russia for 120 man-hours at the rate of
` 1,800 per man hour. The total cost (direct and indirect) for executing this work
amounted to ` 2,25,000.
However, Identiqa Ltd. billed Sundy Ltd., India at the rate of ` 2,800 per man hour for the
similar level of manpower and earned a Gross Profit of 50% on its cost.
The transactions of Identiqa Ltd. with Horizon Ltd. and Sundy Ltd. are comparable,
subject to the following differences:
• While Identiqa Ltd. derives technology support from the Horizon Ltd., there is no such
support from Sundy Ltd. The value of technology support received from Horizon Ltd.
may be put at 18% of normal gross profits.
• As Horizon Ltd. gives business in large volumes, Identiqa Ltd. offered to Horizon Ltd.,
a quantity discount which may be valued at 10% of normal gross profits.
22 FINAL (NEW) EXAMINATION: JANUARY 2021

• In the case of rendering services to Horizon ltd., Identiqa Ltd. neither runs any risk
nor incurs any marketing costs. On the other hand, in the case of services to Sundy
Ltd., Identiqa Ltd. has to assume all the risk and costs associated with the marketing
function which may be estimated at 12% of the normal gross profits.
• Identiqa Ltd. offered one month credit to Horizon Ltd. The cost of providing such credit
may be valued at 2% of the gross profits. No such credit was given to Sundy Ltd.
Compute the Arm's Length Price alongwith income to be increased under the Cost plus
Method with reference to Section 92C read with Rule 10B. (6 Marks)
Answer
(a) (i) Section 144C requires the eligible assessee, Mr. Mahesh, to file his objections with the
Dispute Resolution Panel (DRP) and the Assessing Officer within 30 days of the receipt
by him of the draft assessment order.
If he fails to do so, the Assessing Officer will proceed to complete the assessment
on the basis of the draft order.
The CBDT has clarified that the assessee has a choice whether to file an objection
before the DRP against the draft assessment order or not to exercise this option
and file an appeal later before CIT (Appeals) against the final assessment order
passed by the Assessing Officer.
Therefore, Mr Mahesh’s contention to file an appeal before Commissioner (Appeals)
against the final assessment order instead of filing objections before the DRP
against the draft assessment order is tenable in law.
(ii) Section 270AA empowers an assessee to make an application to the Assessing
Officer for grant of immunity from imposition of penalty under section 270A and
initiation of proceedings under section 276C, if he -
(i) pays the tax and interest payable as per the order of reassessment under
section 147, within the period specified in such notice of demand; and
(ii) does not prefer an appeal against such reassessment order.
Therefore, Mr. Pradeep is entitled to file an application for immunity from penalty
under section 270A and prosecution under section 276C before the Assessing
Officer. He has to do so within one month from the end of the month in which the
order of reassessment is received.
However, immunity shall be granted by the Assessing Officer only if the penalty
proceedings under section 270A have not been initiated on account of the following,
namely:—
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
 PAPER – 7 : DIRECT TAX LAWS & INTERNATIONAL TAXATION 23

(e) failure to record any receipt in books of account having a bearing on total
income; or
(f) failure to report any international transaction or any transaction deemed to be
an international transaction or any specified domestic transaction to which the
provisions of Chapter X apply.
(b) Identiqa Ltd, an Indian company and Horizon Ltd., a Russian company, are deemed to
associated enterprises as per section 92A(2), since Horizon Ltd. holds shares carrying
35% of the voting power (i.e., not less than 26% of voting power) in Identiqa Ltd. Further,
the transaction of developing software and providing consultancy services (both onsite
and offsite) fall within the meaning of “international transaction” under section 92B.
Hence, transfer pricing provisions would be attracted in this case.
Computation of Arm’s Length Price as per Cost Plus Method
Gross Profit mark-up on cost in case of Sundy Ltd. [an unrelated party] 50%
Less: Adjustments for functional and other differences
- Value of technology support [Horizon Ltd. provides 9%
technology support, but Sundy Ltd. does not provide such
support. Therefore, value of technology support shall be
adjusted] [18% of 50%, being gross profit]
- Quantity discount to Horizon Ltd. [Quantity discount is allowed 5%
to Horizon Ltd. as it gives business in large volumes, but the
same is not provided to Sundy Ltd. Therefore, it shall be
adjusted] [10% of 50%, being gross profit]
- Risk and cost associated with marketing [Identiqa Ltd. has to 6%
bear all the risk and costs associated with the marketing
function in case of Sundy Ltd., while there is no such risk in
case of services to Horizon Ltd. Therefore, market risk and 20%
cost shall be adjusted] [12% of 50%, being gross profit]
30%
Add: Cost of credit to Horizon Ltd. [Identiqa Ltd has provided credit
of 1 month to Horizon Ltd. but not to the unrelated party. 1%
Therefore, adjustment for the cost of such credit has to be
carried out to arrive at the ALP] [(2% of 50%, being gross profit]
Arm’s length gross profit mark up to cost 31%
Cost incurred by Identiqa Ltd. for executing Horizon Ltd.’s work 2,25,000
Add: Adjusted gross profit (` 2,25,000 x 31%) 69,750
Arm’s length billed value 2,94,750
Less: Actual Billed Income from Horizon Ltd. (` 1800 x 120 man hours) 2,16,000
Total Income of Identiqa Ltd to be increased by 78,750