Extegrity Exam4 > 18.3.19.0 Section All Page 1 of 11 Answer-to-Question-_1_ Ans. to Question 1(1) Indian tax consequences from sale by BPL of Webmatic. As per Section 45 of the Income-tax Act,1961 ('the Act'), transfer of shares in Indian company shall be taxable in India on any capital gains derived from the same. Further, as per India-Mauritius Double taxation avoidance agreement ('IM DTAA'), any capital gains derived by the resident of Mauritius from sale of asset situated in India, shall be taxable in Mauritius only. As per section 90 of the Act, provisions of DTAA will prevail over the provisions of the Act. In the instant case of sale by BPL of Webmatic Pvt Ltd to US investor, any gains derived from the said transaction on 01 January, 2017 would be taxable only in Mauritius and no Indian tax implications would emerge. However, it is pertinent for BPL to show that it is resident of Mauritius. Since BPL has a valid Tax Residency Certificate (TRC) issued by Mauritius Financial Services Commission, BPL can claim the benefit of IM DTAA and pay no capital gain tax in India. Decision in case of Aazadi Bachao Andolan by Hon. Supreme Court supports this argument. However, the fact that there is no office place and no employees in Mauritius for BPL, it fact can probably lead the Indian courts to decide against allowing it the benefit of IM DTAA. There are enough decisions by Indian courts in the past where the courts have denied the benefit of the IM DTAA by taking look through approach rather than look at approach if there is no substance in the Mauritius entity.
Extegrity Exam4 > 18.3.19.0 Section All Page 2 of 11 Recently in case of AB holdings, Mauritius (Authority for Advance Rulings) where it was found that the Board of the Mauritius entity was not empowered and all the decisions were taken by the parent Company, the benefits of IM DTAA was not allowed to the applicant. Hence, the fact that Board meetings are being held in Mauritius and 2 out of 4 board members are Mauritius resident may be of little help in the instant case (considering the fact that there is no Office space / employees in Mauritius). Hence, it is advisable for the US investor to apply to Authority for Advance Rulings and seek the clarity as far as Indian tax implications on sale of Webmatics Pvt Ltd. This will mitigate the Tax / interest / penalty exposure for BPL. b. Indian tax implications on sale of UAE co. As per the explanation 5 to Section 9(1)(i) of the Act, transfer of any share in a company outside India deriving directly or indirectly, its value substantially from the assets located in India shall be deemed to be situated in India. Explanation 6 to section 9 (1)(i) of the Act clarifies that share in a company referred in explanation 5 above shall be deemed to derive its value from the assets located in India, if the value of such assets - (i) exceeds the amount of Rs. 10 Crore; and (ii) represents 50% or more of the value of all the assets owned by the company. In the instant case BPL has decided to sell all of its shareholding in Webmatics and UAE company to US investor for USD 1 mn i.e. INR 6.7 crore (assuming USD 1 = INR 67). Hence, it is very clear that the consideration for UAE company does not exceed the threshold of INR 10 Cr. mentioned in the explanation 6 to section 9(1)(i) of the Act. Hence, there are no Indian tax implications as far as sale of UAE company to US acquirer is concerned.
Extegrity Exam4 > 18.3.19.0 Section All Page 3 of 11 Ans. to Question 1(2) a. Sale of Webmatics Recently, IM DTAA was amended and it came into affect from 01 April, 2017. Through this amendment, capital gains earned by Mauritius entity on sale of asset located in India would attract 10% capital gains tax in India. However, any income from sale of investments made prior to 01 April, 2017 was grandfathered by the Indian revenue authorities. Hence, in the instant case even if on 01 March, 2017 or 01 April, 2017, the same would not have been subject to India taxation due to Grand fathering of investments made before 01 April, 2017. However, this is subject to look through approach taken by Indian courts. Further, if the transfer was on 01 April, 2017, Indian GAAR provisions would also have been applicable and hence, it would be very difficult to obtain benefit of IM DTAA without showing substance in BPL. Hence, it would have been taxable as per the Indian tax laws. b. Sale of UAE company No impact from Indian tax perspective. Ans. to Question 1(3) As mentioned in Ans. to 1(1), it is not very clear whether sale of Webmatics Pvt Ltd would attract capital gains tax in India or not due to the fact that there are no employees and office space for BPL. Accordingly, it would be advisable to US Acquirer Co. to apply for a tax withholding certificate under section 195 (2) of the Act or apply to Authority for Advance Rulings to get clarity on withholding tax implications. [For detailed analysis on tax implications please refer Ans. to 1(1)] As far as sale of UAE company is concerned there are no Indian tax implications and hence, US Acquirer co. may not withhold tax at the time of payment to BPL.
Extegrity Exam4 > 18.3.19.0 Section All Page 4 of 11 Ans. to Question 1(4) a. Sale of Webmatics Pvt Ltd shares Assuming the general partnerships are transparent entity in Mauritius, BPL would not have been eligible for the benefit of IM DTAA (since it would not fall in any category of definition of " Person"). Hence, DTAA between India and USA would apply in the instant case of sale of Webmatics Pvt Ltd (since the partners XYZ / ABC who are tax resident of USA). As per the DTAA between India and USA, the transaction would be taxable in both the countries as per their local income tax laws. However, the tax payer may get the credit for taxes paid in India in USA. b. Sale of UAE Co. shares No tax implications for UAE co. from Indian Income tax perspective. ---------DO-NOT-EDIT-THIS-DIVIDER---------- Answer-to-Question- 2 Ans. to Question 2(1)(a) As per the explanation 5 to Section 9(1)(i) of the Act, transfer of any share in a company outside India deriving directly or indirectly, its value substantially from the assets located in India shall be deemed to be situated in India. Explanation 6 to section 9 (1)(i) of the Act clarifies that share in a company referred in explanation 5 above shall be deemed to derive its value from the assets located in India, if the value of such assets -
Extegrity Exam4 > 18.3.19.0 Section All Page 5 of 11 (i) exceeds the amount of Rs. 10 Crore; and (ii) represents 50% or more of the value of all the assets owned by the company. In instant case, Vector UK is planning to transfer all shares in Vector Jersey to Ashoka UK. Assuming Vector Jersey only has made investments in 4 Indian companies and the amount of consideration at which the shares of Vector Jersey will be transferred to Ashoka UK exceeds INR 10 Crore, then only the, the Indirect Transfer Provisions (ITP) would be applicable. As per the facts provided the Indian companies are not expected to make profits for couple of years, the share valuation would have taken this into consideration. Ans. to question 2(1)(b) There will be no impact of Article 14 on the transaction. Ans. to question 2(1)(c) The gains would be calculated as difference between the full value of consideration and the cost of acquisition to Vector UK in proportion to the value of Indian assets to all the assets of Vector Jersey. For ex. if Vector Jersey has assets worth USD 200 mn, out of which Fair Market Value (FMV) of Indian shares is USD 140 mn as on the specified date, Vector UK will have to split the consideration and cost of acquisition for Vector Jersey's shares in 70:30 ratio. Further as per explanation 6 to Section 9(1)(i) of the Act, the specified date means the date on which the accounting period of the Company (Vector Jersey) ends preceding the transfer of the share. Further, the "accounting period" means the period of 12 months ending with 31st March. "date of transfer" means date of which the transfer was recorded in the books of accounts. Ans. to question 2(2)
Extegrity Exam4 > 18.3.19.0 Section All Page 6 of 11 As per Section 195(1) of the Act any person responsible for paying to a Non-resident is required to withhold tax on any sum chargeable to tax under the provisions of the Act. In the instant case, if the ITP are applicable to the sale of Vector Jersey's shares, then Ashoka UK is required to comply with the section 195(1) of the Act and withhold tax at source at the time of credit / payment to Vector UK and deposit the same with the Indian exchequer. It will be advisable to Ashoka UK to approach the Income-tax Officer under section 195(2) of the Act to determine the rate at which the tax needs to be deducted at the time of payment / credit to Vector UK. Ans. to question 2(3) Capital infusion by Vector Jersey into the Indian subsidiaries will need to be compliant with the Indian Transfer Pricing (TP) provisions. Hence, appropriate reporting in Form 3CEB would need to be done by the Indian companies for the capital infusion along with the necessary TP documentation as mandated by the TP provisions. Further, Indian tax authorities may allege that the capital infusion by Vector Jersey is taxable in India. However, in recent decision by Authority of Advance Rulings in case of Supermax India Pvt Ltd, it has been held that the capital infusion by the parent company does not amount to income of the subsidiary company. This argument was also upheld by the Bombay High Court in case of Vodafone International Services Pvt. Ltd. Ans. to question 2(4) Interest received from the bank by the Indian subsidiaries will not be exempt from Income-tax under section 10AA of the Act. The said section seeks to provide exemption to the business income earned by the assessee from its operations in SEZ etc. Hence, interest income from the banks would be taxable in the hands of the Indian subsidiaries.
Extegrity Exam4 > 18.3.19.0 Section All Page 7 of 11 ---------DO-NOT-EDIT-THIS-DIVIDER---------- Answer-to-Question-8 As per the provisions of the Indian Transfer Pricing (TP), any international transaction between the Associated Enterprise needs to be having regard to the Arms' length price. Section 92A defines the meaning of Associated Enterprise. As per the section (1) to section 92A AE means an enterprise which participates directly or indirectly in the management, control or capital of other enterprise. Further, section 92A(2) lists down the conditions under which two enterprises shall be deemed to be AE for section 92A(1). As per the facts of the case in case any of the following conditions are satisfied then the Indian TP provisions would get triggered. 1. Loan advanced by Loha Ltd is more than 51% of the book value of the total assets of Hercules Ltd. 2. More than half of the board members of Loha Ltd are appointed by Arthemis Ltd. 3. 90% of the raw materials required by Arthemis Ltd are sourced from Loha Ltd. 4. There exists between Arthemis Ltd and Loha Ltd any relationship of mutual interest. Ans. to Question 8(1) Assuming that any of the condition mentioned above are correct, The loan provided by Loha Ltd to Hercules Ltd (UK) will subject to Indian TP provisions. Loha Ltd will have to report the transaction in Form 3CEB and benchmark the same. Further, it will have keep maintain the documentation as mentioned in Rule 10 of the Income-tax Rules, 1962.
Extegrity Exam4 > 18.3.19.0 Section All Page 8 of 11 Ans. to Question 8(2) As per section 195 of the Act any payment made by a person to non-resident will be subject to withholding on the income chargeable to tax in India. Hence, the payment made by Arthemis Ltd of interest to the bank in UK for loan taken for the Indian subsidiary may be subject to the tax in India. Arthemis may consider approaching an income-tax officer under section 195(2) of the Act or approaching Authority for Advance Rulings. Ans. to Question 8(3) There are enough court decisions stating that the subsidy received from the Government for capital expenditure are capital receipt in nature. Hence, the loan waiver of 40% in November, 2017 will not be taxable. However, as per the recent amendments w.e.f. 01 April, 2017 to the Act by Finance Act, 2018, the taxability of the income is to be determined following the Income Computation Disclosure Standards (ICDS). As per ICDS dealing with the government grants, such receipt would be taxable in the hands of the assessee. Hence, the loan waiver would be taxable for Loha Ltd. ---------DO-NOT-EDIT-THIS-DIVIDER---------- Answer-to-Question-4 Ans. to Question 4(1) Supply of Machinery As far as supply of machinery is concerned, the said would be taxable in India in the hands of BE UK only as Business profits. The same would be taxable only if it has a
Extegrity Exam4 > 18.3.19.0 Section All Page 9 of 11 Permanent Establishment in India. As per the facts of the case, there does not seem to be any PE of BE UK in India. Hence, the same will not be taxable in India. Installation of Machinery Though the installation is being done by Indian company (Integrity Contractors), BE UK is ultimately responsible to SHEL for the installation of the machinery. Hence, payment made by SHEL to BE UK for installation would be taxable if it constitutes payment for Fees for technical services under Indian Income-tax Act, 1961, subject to provisions of India-UK DTAA (IU DTAA). As per the Section 9(1)(vii) any services which are managerial, Technical, or consulting in nature would be considered as fees for technical services in India. As per the IU DTAA any services which are managerial, technical or consulting in nature which makes available the know-how to the recipient of the services, would be considered as FTS. Hence, the payment for installation would not be taxable in India as per Article 12 of IU DTAA. Ans. to Question 4(2) If the employees of one enterprise carry on business from any fixed place at their disposal in India a Fixed place PE may get constituted for the enterprise. As per the IU DTAA in case the employees' stay exceeds 30 days for provision of services to a related person, Service PE of enterprise will be constituted. In the instant case, the Employees of BE UK will have access to the office of BE India (on a permission which is routinely available to them) and their stay would be 2 months (more than 30 days) in India, there are high chances that BE UK will form a Fixed place PE and Service PE as well in India. Ans. to Question 4(3)
Extegrity Exam4 > 18.3.19.0 Section All Page 10 of 11 The shares of BE India are proposed to be transferred to BE Singapore (somewhere in 2019) at no consideration. As per the GAAR provisions, the tax officer may allege that the transfer of Indian Company's share to Singapore Company is Impermissible Avoidance Arrangement and he may disregard the transfer. Further, by 2019, it is expected that Multilateral Instrument (MLI) signed by India, UK and Singapore may also be in effect. If that is the case then the tax officer may disregard the DTAA benefits by sighting the Principal Purposes Test on subsequent sale of BE India's share by BE Singapore to another entity. Ans. to Question 4(4) As per the recent amendments through Finance Act, 2018 w.e.f. 01 April, 2017, while determining certain incomes the Income Computation Disclosure Standards (ICDS) needs to be followed. As per ICDS dealing with the government grants, such receipt would be taxable in the hands of the assessee. Hence, the subsidy would be taxable in the hands of BE India. ---------DO-NOT-EDIT-THIS-DIVIDER---------- Answer-to-Question-6 Ans. to Question 6(1) As per Section 6(4) of the Act, a person (other than Company and Individual) is said to be resident of India except where during the year the control and management of its affairs is situated wholly outside India.
Extegrity Exam4 > 18.3.19.0 Section All Page 11 of 11 In the instant case the trustee (who actually manages and controls the trust) is an Indian resident. Hence, the Control and management of the trust would be said to be in India and the trust would be considered as resident in India. Ans. to Question 6(2) As per section 2(22)(c), any distribution made pursuant to liquidation of the company to the shareholder will be treated as income. Further, as per section 115O of the Income-tax Act, the company is supposed to pay Dividend Distribution Tax on the same. The said distribution will not be taxable in the hands of the shareholder as per section 10(34) of the Act. Hence, the distribution done by ABC pvt ltd in the hands of KFT trust will not be taxable as per section 10(34). Ans. to Question 6(3) As per Section 115QA of the Act, domestic company is supposed to pay tax at the rate of 20% on distributed income to shareholders through buy back. The said income will not be taxable in the hands of the shareholder as per section 10(34A) of the Act. Hence, in the instant case KFT trust will not have to pay tax on the consideration received from XYZ private limited company by virtue of Section 10(34A).