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CS Professional Guideline Answers for ADVANCED TAX LAWS

CS Professional Guideline Answers for ADVANCED TAX LAWS

PART– I

Question 1

  • Parikh is a practising Company Secretary at His gross fee receipts for the financial year 2018-19 was `28 lakhs. He estimated his gross receipts at

`32 lakhs for the financial year 2019-20. He wants to avail composition scheme for the financial year 2020-21. Briefly narrate whether he can avail composition scheme for the financial year 2020-21 with attendant conditions. Will he be eligible to avail input tax credit ? Can he issue tax invoice ?                                                                                                    (5 marks)

  • Amit Ltd., a registered supplier, is engaged in manufacturing activity. It also gives job work to other It purchased raw materials on 5th June, 2018 for

`2 lakhs (+GST @ 12%). It dispatched 50% of the raw material to job worker on 10th July, 2018. How much can the company claim as input tax credit in respect of those goods ?

What is the time limit for receiving the goods after completion of job work by the job worker ? What would be your answer in case 50% of the raw material is directly sent to job worker by the original seller of goods ? Will your answer be different in case it is capital good, instead of raw material ?                                                                                                    (5 marks)

  • Determine (with brief reason) the time of supply of goods in the following cases, where the supply involves movement of goods (in one lot) :

Case       Date of removal      Date of              Date of Payment No.         of goods            Invoice

  1. 10-06-2018 12-06-2018        20-05-2018
  2. 10-11-2018 20-10-2018        29-11-2018
  3. 07-09-2018 02-10-2019        06-12-2017
  4. 10-12-2018 20-11-2018        Bank credit 22-09-2018/in the

books of account 24-09-2018

  1. 27-12-2018 29-12-2018        Bank credit 24-12-2018/in the

books of account 22-12-2018

(5 marks)

26

 

  • State with reasons, whether the following statements are true or false under GST law :
    • Rectification of Advance Ruling must be made within 3 months of the date of
    • Supply of newspaper in trains shall be taxed at ‘nil’ rate of
    • While doing repair of furniture of a company, GST was paid on wood, board, mica, paint etc.; the amounts so paid are eligible for input tax
    • A person aggrieved by the order passed by the adjudicating authority must file appeal to the appellate authority within 30 days from the date of the impugned
    • Expenditure incurred on construction of factory building is `18,40,000 including GST of `2,80,000. The GST amount is not eligible for input tax credit. (5 marks)

Answer 1(a)

Applicability of Composition Scheme

The new composition scheme, introduced vide Notification No.2/2019 dated 7.03.2019, provides for concessional rate of tax particularly to the suppliers of services. It is applicable to suppliers of services who have to pay tax at a rate of 6% (3% CGST and 3% SGST / 6% IGST). The basic condition for its applicability is that the annual turnover of the person in preceding financial year must not have exceeded Rs.50 lakhs. In the present case, since Mr. Parikh has estimated turnover of Rs. 32 lakhs in the year 2019-20 which is below the minimum threshold of Rs.50 lakhs, he can avail the new composition scheme for supply of service in the F.Y. 2020-21.

The registered person opting for new composition scheme is not eligible to avail input tax credit nor shall he be eligible to charge output tax from its recipients of supply. The registered person shall issue bill of supply instead of tax invoice.

Answer 1(b)

ITC on raw materials/capital goods sent to job worker

Amit Ltd paid GST @ 12% on the goods which works out to Rs.24,000. As per Section 19(1) of the CGST Act, 2017, it can claim input tax credit in entirety regardless of the fact that it has wholly or partially sent such goods to a job worker. It dispatched 50% of the raw materials on 10.07.2018 to the job worker.

The time limit is that the job worker must return the raw material as such or as processed goods within 1 year from the date of dispatch by Amit Ltd. In the case of delay, the raw material so sent to job worker would be treated as supply from the date when the goods where originally sent out Amit Ltd would be required to pay tax along with interest.

Where the raw material is dispatched directly to the job worker i.e. on 05.06.2018, the time limit of one year would be counted from that date of receipt of raw material by the job worker. Thus, in case 50% of the raw material is directly sent to the job worker, the time limit for return of such raw material as such or as processed goods would be

 

one year from the date of receipt of such raw material by the job worker. In the case of capital goods, the time limit for return is 3 years instead of 1 year. If the goods are not returned by the job worker within 3 years then such capital goods would be deemed to have been supplied to the job worker on the date when the same were originally sent and therefore Amit Limit would be required to pay tax on such capital goods along with interest.

Answer 1(c) Time of supply

As per Section 12(1) of CGST Act,2017, the time of supply of goods shall be the earlier of the following dates, namely :—

  • the date of issue of invoice by the supplier or the last date on which he is required to issue invoice under section 31; or
  • the date on which the supplier receives the payment with respect to the

However, advance received in respect of supply of goods is not liable to be taxed at the time of receipt vide Notification No. 66/2017 CT dated 15.11.2017. Therefore, the date of payment in respect of supply of goods shall not be relevant for determining the time of supply.

Further, Section 31 of the CGST Act provides that a registered person supplying taxable goods shall issue a tax invoice, before or at the time of, —

  • removal of goods for supply to the recipient, where the supply involves movement of goods; or
  • delivery of goods or making available thereof to the recipient, in any other

In view of the above stated legal position, the time of supply of goods in each of the independent cases shall be as tabulated below

Case 1 : In this the earliest date is the date of removal of goods [ as date of payment is not relevant] Hence, the time of supply is 10.6.2018.

Case 2 : In this case, the earliest is the date of invoice and whereas the removal of goods is much later. The time of supply hence is 20.10.2018.

Case 3 : In this case, the date of removal of goods is much before date of invoice and therefore the time of supply is 07.09.2018.

Case 4 : Since the date of payment is not relevant for supply of goods and the date of invoice is earlier than the date of removal, the time of supply is 20.11.2018.

Answer 1(d)

  • False. As per Section 102 of the CGST Act,2017, the Authority or the Appellate Authority may amend any order passed by it, so as to rectify any error apparent on the face of the record, within a period of six months from the date of the
  • True. Supply of newspaper invoiced separately shall be taxed at ‘nil’ rate of GST. (Notification dated 28th June, 2017)

 

  • True. As per Section 16 of the CGST Act, the tax charged in respect of goods which are used or intended to be used in the course or furtherance of his business shall be eligible for input tax credit. Thus, materials purchased for repairs of existing furniture is eligible for
  • False. As per Section 107 of the CGST Act, a person aggrieved by the order of the adjudicating authority must file appeal before the appellate authority within the time limit of 3 months from the date on which the said decision or order is communicated to such person
  • True. As per clause (c) and (d) of Section 17(5) of the CGST Act, tax charged on works contract service or goods or services used for construction of immovable property on its own account shall not be eligible for input tax credit.

 

Attempt all parts of either Q. No. 2 or Q. No. 2A

 

Question 2

  • Gopal Das & , Kolkata is a manufacturer and is a registered supplier (under regular scheme). It furnishes the following details for the tax period ended on 31st March, 2019 :
    • Intra-State supply of goods (includes GST @ 18%) `70,80,000
    • Goods exported (GST Nil) `32,00,000
    • Inward supplies liable for reverse charge `6,00,000
    • Transfer of goods to Branch at Delhi (without GST) `50,00,000 Complete the ‘aggregate turnover’ under section 2(6) of the CGST Act,

(5 marks)

  • Jogiram (P) Ltd. claimed ITC of `2,50,000 with an intention to defraud the Revenue. What is the rate of interest at which the liability could be discharged voluntarily ? Can the Revenue levy penalty, if so, how much ? Can the tax, interest, penalty and any payment due under reverse charge, be adjusted against ITC of a registered person ? (5 marks)
  • State whether the following are supply of goods/services, as per GST law, with brief reasons :
    • X availed the architectural services of his son living in France (free of cost) for designing his residential building and factory layout.
    • Scrap of machinery destroyed by fire handed over to insurance company for settlement of
    • Lease of land for two wheeler parking
    • Permitting use of registered patent for annual
    • Transfer of tenancy right by executing and registering a

(5 marks)

 

  • Bharat Ltd., a registered supplier under the regular scheme, is engaged in manufacture of electronic items. The following details for the month of March, 2019 are available :

Item                                                                                    GST Paid (`)

Machines acquired for manufacture (capital goods)                    10,00,000 Electronic items utilized in manufacture                                                             25,00,000

Trucks used for transporting materials                                         1,00,000

Food and beverages consumed within the factory                           25,000 Advise the ITC eligibility for the company.

 

 

 

 

Question 2A

OR (Alternate question to Q. No. 2)

(5 marks)

 

  • Decide the following transactions in the context of GST law :
    • When would a discount be excluded from the value of supply ? Will secondary discount issued for goods supplied be reduced in determining the value of supply ?
    • Determination of value of supply when TCS under Income-tax Act, 1961 is charged separately in the (5 marks)
  • Ganga Ltd. commenced business on 01-07-2018. It applied for registration on 05-08-2018. The registration was granted on 07-08-2018. What is the effective date of registration ? Instead of 01-07-2018, if it had commenced business on 20-07-2018, what would be your answer ?

Ganga Co. Ltd. is an authorized dealer of two-wheeler vehicles. Its sales turnover was `125 lakhs for the year ended 31-03-2019. It also provided after sales service to customers for `7 lakhs. Is it eligible for composition levy for the financial year 2018-19 ?             (5 marks)

  • State which of the following is composite supply or mixed supply under the GST law :
  • Sale of car with warranty
  • Gift pack with chocolates and
  • Sale of Refrigerator with power
  • Hotel accommodation with complimentary
  • Doctor providing consultancy and dispensing (5 marks)

(iv) Tex Mark Inc. of USA, established a liaison office in Mumbai for the purpose of liaisoning with the suppliers for purchase of raw materials. The purchase orders or contracts were entered into with the suppliers directly by the head office.

 

Liaison office did not enter into any contract with any of the suppliers. Payments were also made by the head office directly to the suppliers. The expenses incurred by the liaison office are reimbursed by the HO. There is no amount excessively charged by the liaison office to the HO. Is the amount received by the liaison office liable for GST as supply of service ? Is the liaison office required to get registered under GST law ?                                                       (5 marks)

Answer 2(a)

Section 2(6) of the CGST Act, 2017 defines the term “aggregate turnover” so as to mean the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess

In the light of the above definition, the computation of aggregate turnover in the instant case is as below:

Particulars                                                                                 Turnover (Rs.)

Intra-State supply of goods Rs.70,80,000 x 100 /118

Excludes CGST, SGST, IGST                                                         60,00,000

Export Supplies [to be included as per section 2(6)]                           32,00,000 Inward supplies under reverse charge [not to be included]                                                    Nil Transfer of goods to branch / distinct person is categorized

as supply under section 7 of the CGST Act.

[No adjustment needed as GST is already excluded]                         50,00,000

Aggregate turnover                                                                         1,42,0000

Answer 2(b) Utilisation of ITC

Section 74 of the CGST Act, 2017 says that when a registered person has not paid tax or short paid or received erroneously refund or claimed input tax credit by reason of fraud or any willful mis-statement or suppression of facts, he shall be liable to pay such tax along with interest payable under section 50 of the Act. Presently, the rate of interest notified under Section 50 is 18%. Where the registered person pays such tax along with interest voluntarily before the service of notice under Section 74, it shall be liable to pay penalty at the rate of 15% of such tax in terms of Section 74(5) of the Act.

Section 49(4) of the CGST Act provides that the amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.

Section 2(82) of the CGST Act defines the term “output tax” in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services

 

or both made by him or by his agent but excludes tax payable by him on reverse charge basis;

Thus, the amount available in the electronic credit ledger i.e. input tax credit can be used only towards payment of output tax and the definition of output tax includes only tax chargeable on taxable supplies and excludes tax chargeable under reverse charge.

In light of above, input tax credit can be used only for the payment of tax and cannot be used for payment of interest, penalty and tax under reverse charge.

Answer 2(c)

Issues on supply of service

  • In terms of Section 7 of the CGST Act,2017, import of service for a consideration whether or not in the course of or furtherance of business is a

Here, the services received by Mr X is without consideration, thus not a supply. It is not subject to GST.

  • As per Clause 2 of Schedule I of the CGST Act, Permanent transfer or disposal of business assets where input tax credit has been availed on such assets is considered as

When the machinery destroyed by fire is handed over to insurance company in return for insurance compensation, it is a supply of goods.

  • As per Clause 2(a) of Schedule II of the CGST Act, any lease, tenancy, easement, licence to occupy land is a supply of

Thus, lease of land for two wheeler parking is a supply of service.

  • As per Clause 5(c) of Schedule II of the CGST Act provides that Temporary transfer or permitting the use or enjoyment of any intellectual property right is supply of service.

Hence, permitting use of registered patent/ trade mark shall amount to supply of service.

  • The activity of transfer of tenancy rights is squarely covered under the scope of supply of service in terms of Section

However, renting of residential dwelling unit for use as a residence is exempt.

Answer 2(d)

Computation of ITC available

Amount (`)

  1. Machineries acquired for manufacture of electronic items is eligible for ITC. However, depreciation has to be claimed on the net value excluding the GST. It is assumed that the GST amount has not been considered for the purpose of depreciation

under section 32 of the Income-tax Act, 1961.                             10,00,000

 

  1. Electronic items utilized in The ITC would be fully available as these are used in the course of business /

furtherance of business. [Section 16 CGST Act]                          25,00,000

  • Trucks used for transporting materials. ITC on motor vehicles for transportation of goods has not been blocked under Section 17(5) of the CGST

Hence, it is eligible for input tax credit.                                          1,00,000

  1. Under Section  17(5)  of  the  CGST  Act,  ITC  on food and            Nil beverages is a blocked credit unless they are consumed to

make outward taxable supplies in the same category or as part of mixed supply or composite supply or it is obligatory on the part of the employer to provide such service to its employees under any law.

However, in the present case, food and beverage have been consumed within the factory. Hence, not eligible.

Total ITC available                                                                     36,00,000

Answer 2A(i)

Determination of the value of supply

  • The value of supply shall not include any discount which is given before or at the time of supply if such discount has been duly recorded in the invoice issued in respect of such supply [Section 15(3)(a)].

The value of supply shall also not include any discount issued after the supply if such discount is established in terms of an agreement entered into at or before the time of supply and specifically linked to relevant invoice and input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of supply. [Section 15(3) (b)].

As such GST law does not distinguish between secondary discount and primary discount. In the present case, if the secondary discount is issued after the supply is completed and does not fulfil the conditions laid down under Section 15(3)(b), it shall not be excluded while determining the value of supply. In other words, the value of supply shall not include any discount by way of issuance of credit notes except where it is covered by section 15(3)(b).

  • Vide B.I. & C. Corrigendum F.No. 20/16/04/2018-GST, dated 7-3-2019, this aspect has been clarified as under;

Section 15(2) of the CGST Act says that the value of supply shall include ‘any taxes, duties, cesses, fees and charges levied under any law for time being in force other than under CGST, SGST and UTGST, if charged separately by the supplier.

For the purpose of determination of value under GST, Tax collection at source under the provisions of the Income-tax Act is deductible as it is an interim relief not having the character of tax.

 

Hence TCS charged under Income Tax Act is not includible in determination of the value of supply.

Answer 2A(ii)

Eligibility for composition levy

As per rule 10(3) of CGST Rules, 2017 if the applicant has submitted an application for registration after the expiry of 30 days from the date of his becoming liable to registration, the effective date of registration shall be the date of the grant of registration.

Ganga Co Ltd commenced business on 01.07.2018 but applied on 05.08.2018 and it was granted on 07.08.2018. Since, the application for registration has been made after the expiry of 30 days from the date when it was liable to obtain registration, the effective date of registration would be the date of grant of registration i.e. 07.08.2018.

If it had commenced business on 20.07.2018, the application for registration submitted within 30 days i.e. 07.08.2018, hence the effective date of registration would be 20.07.2018.

Under section 10 of the CGST Act, a registered person opting to pay tax under composition levy can apart from manufacture / supply of goods, provide service not exceeding 10% of total turnover or Rs.5 lakhs whichever is higher.

In this case the annual turnover is Rs.125 lakhs and hence the higher of the two limits is Rs. 12.5 lakhs; the amount received by way of supply of service is Rs.7 lakhs which is less than 10% of the total turnover.

Hence, Ganga Co Ltd is eligible for composition levy.

Answer 2A(iii)

Composite Supply or Mixed Supply

  • Composite Supply : Sale of car with warranty coverage is a composite supply as both supplies are naturally bundled and sale of car is a principal
  • Mixed Supply : Gift pack with chocolates and books are not bundled due to natural necessities and hence they are mixed
  • Mixed Supply : Refrigerator and power stabilizer are not inseparable and are not bundled due to natural They are mixed supply.
  • Composite Supply : Hotel accommodation with complimentary breakfast is a composite supply as the principal supply is supply of service e. accommodation.
  • Composite Supply : Doctor providing consultancy and dispensing medicine is a composite supply as the principal supply of service is medical

Answer 2A(iv)

Liaison office : Whether liable for registration

The liaison office does not undertake any activity of trading, commercial or industrial nature. It does not enter into any business contracts. It does not charge any commission,

 

fee or remuneration for the liaison activities / services rendered by it either from the suppliers or from the head office.

The head office merely reimburses the expenses incurred by the liaison office on actual expenditure basis without any mark up. There is no source of income for the liaison office and it is solely dependent on the head office for all expenses incurred by it and therefore the head office and liaison office cannot be treated as separate persons.

The liaison office does not render any consultancy services directly or indirectly with or without consideration and does not have significant commitment powers. The amount received by liaison office hence cannot be treated as amount received towards supply of service.

Since it is not in furtherance of business of the liaison office, it is not required to get registered under GST.

Case law reference : Habufo Meubelan B.V. 2018(14) G.S.T.L 596 (A.A.R- GST)

Question 3

  • Briefly explain about apportionment of credit and blocked credits under section 17 of the CGST (5 marks)
  • State with brief reasons whether the following are true or false; as per GST law:
    • When the refund is issued beyond 60 days from the date of application, interest is payable @ 8% per
    • Final return has to be furnished within 3 months of the date of order of cancellation of registration of
    • Commissioner can grant time for payment of GST liability in maximum of 20 instalments for the self assessed tax shown in the GST return, as per section 80.
    • Under section 10, the ‘due date for’ filing return by a registered person is 20 days after the end of each
    • Rendering service by way of fumigation in a warehouse of agricultural produce is exempted (5 marks)
  • With brief reasons, state whether the following will attract GST levy :
    • Lodging accommodation with room tariff @ `900 per
    • SKT & Co. transporting textile goods thro ESSEM Transport Agency by paying `700 per bundle and sending 10 bundles on 31st March,
    • Kaziranga National Park collecting `200 per person as entrance
    • Muthu Lab is a pathological lab owned by He is a post-graduate in Microbiology. He collects fees for services rendered.
    • Samy Transports carried agricultural produce e. turmeric from villages to town (markets) by charging `2,000 per day per person. (5 marks)

 

  • Badrinath Filters , a registered supplier of industrial air filters, is required to send from Mumbai (Maharashtra), a consignment of parts of air filters to be replaced under warranty at various client locations in Ahmedabad, Gujarat. The value of consignment declared in delivery challan accompanying the goods is

`52,000.

Badrinath Filters Ltd. is of the view that since movement of goods to Gujarat is caused due to reasons other than supply, e-way bill is not mandatorily required to be generated in this case.

You are required to examine whether the aforesaid view is correct. (5 marks)

Answer 3(a)

Apportionment of credit and blocked credits

Section 17 of the CGST Act deals with apportionment of credit and blocked credits.

Where the goods or services or both are used by the registered person partly for the purpose of business and partly for other purposes the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

Where the goods or services or both are used by the registered person partly for taxable supplies including zero rated supplies and partly for exempt supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero rated supplies.

The value of exempt supply shall be such amount as may be prescribed and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and subject to clause (b) of paragraph 5 of Schedule II, sale of building.

A banking company or financial institution engaged in supplying services by way of accepting the deposits, extending loans or advances shall have the option to either comply with the provisions of section 17(2) viz. proportionate input tax credit or avail of every month 50% of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse.

Provided that once the option is exercised by a banking company or financial institution, it shall not be withdrawn during the remaining part of the financial year. This restriction of 50% also shall not apply to the tax paid on supplies made by one registered person to another registered person having the same PAN.

Answer 3(b)

  • False. As per section 56 of the CGST Act, where any tax ordered to be refunded is not refunded to the applicant within 2 months from the date of the application, the applicant shall be paid interest at such rate not exceeding 6%. as may be prescribed by

Vide Notification No. 13/2017-C.T., dated 28-6-2017, the Government has notified the rate of interest for the purpose of Section 56 @ 6%.

  • True. As per section 45 when a registration is cancelled such person shall

 

furnish a final return within 3 months of the date of cancellation or date of order of cancellation – whichever is later.

  • False. As per Section 80 of the CGST Act, the Commissioner cannot grant payment of tax in instalments in respect of self assessed tax. However, In respect of any amount due other than self assessed tax the Commissioner can provide monthly instalments not exceeding 24 for the purpose of payment of tax.
  • False. As per section 39(2) the due date for filing return by the composition person is 18 days after the end of each
  • True. As the services by way of fumigation in a warehouse of agricultural produce is an exempted service by Notification 12 of 2017.

Answer 3(c)

Exemption for certain services

Service exemption is to be considered in the light of Notification No.12/2017-C.T (Rate) dated 28.6.2017

  • Lodging accommodation with tariff below 1,000 is not liable for GST.
  • Services provided by the goods transport agency where the consideration for the transportation of goods for a single consignee does not exceed Rs.750 is not liable for GST. However, in the present case, the consideration for 10 bundles [being single consignment] is 7000. Hence, GST is attracted.
  • As per No. 79 of Notification No.12/2017-C.T (Rate) dated 28.6.2017, Entrance/ admission fee received by national park from visitors is not liable for GST.
  • Services by way of health care including paramedical service are not liable for GST.
  • As per No. 20 of the referred notification, Transportation of agricultural produce by rail or vessel from one place in India to another place is not liable for GST.

Answer 3(d) E-way bills

The goods to be moved to another State for replacement under warranty is not a ‘supply’. However, Rule 138(1) of the CGST Act, 2017, inter alia, stipulates that every registered person who causes movement of goods of consignment value exceeding Rs. 50,000 :

  • in relation to a supply; or
  • for reasons other than supply; or
  • due to inward supply from an unregistered person,

shall, generate an electronic way bill (E-way Bill) before commencement of such movement.

 

CBIC vide Q 9. of FAQs on E-way Bill has also clarified that even if the movement of goods is caused due to reasons others than supply [including replacement of goods under warranty], e-way bill is required to be issued.

Thus, in the given case, since the consignment value exceeds Rs. 50,000, e-way bill is required to be mandatorily generated.

Therefore, the contention of Badrinath Filters Ltd. that e-way bill is not mandatorily required to be generated as the movement of goods is caused due to reasons other than supply, is not correct.

Question 4

  • Poorvisha has exported some goods to Sydney, Australia. She provides the following details to you :
    • CIF value of the goods = AUD 210,000.
    • FOB price of goods : (Australian $) AUD 200,000.
    • Shipping bill presented electronically on 29th April,
    • Proper officer passed an order permitting clearance and loading of goods for export (Let Export Order) on 2nd May,
    • During the interval between presentation of the shipping bill and clearance of goods, there were changes in the rate of export duty as well as rate of exchange.

Rate of export duty and rate of exchange details are as follows : Date           Rate of exchange          Rate of Export duty 29-04-2019   1 AUD = `70                                  11%

02-05-2019        1 AUD = `70.50                         10%

You are required to calculate the export duty payable by the exporter.

  • ABC Ltd., an exporter whose export turnover for the year ended 31st March, 2019 is `00 Lakhs, approaches you to discuss the conditions to be complied to become a Status Holder and to know about the privileges available to Status Holder, if any.

Advise the exporter suitably.                                                  (5 marks each)

Answer 4(a)

Computation of export Duty Payable

Particulars                                                                                       Amount

FOB price of goods [Note 1] AUD                                                      200,000 Value in Indian currency (AUD 200,000 x Rs. 70) [Note 2]                              Rs. 1,40,00,000

Export duty @ 10% [Note 3]                                                   Rs. 14,00,000

 

Notes:

  1. As per section 14(1) of the Customs Act, 1962, assessable value of the export goods is the transaction value of such goods which is the price actually paid or payable for the goods when sold for export from India for delivery at the time and place of
  2. As per third proviso to section 14(1) of the Customs Act, 1962, assessable value has to be calculated with reference to the rate of exchange notified by the CBIC on the date of presentation of shipping bill of export.
  3. As per section 16(l)(a) of the Customs Act, 1962, in case of goods entered for export, the rate of duty prevalent on the date on which the proper officer makes an order permitting clearance and loading of the goods for exportation, is

Answer 4(b) Status holders

With regard to the conditions to be complied to become status holder, M/s ABC Ltd

is advised as below:

  • Status recognition will depend on export
  • An applicant shall be categorized as status holder on achieving export performance during the current and previous three financial years (for Gems& Jewellery Sector the performance during the current and previous two financial years)
  • The export performance will be counted on the basis of FOB of export earning in freely convertible foreign currencies
  • For granting status, export performance is necessary in at least two out of four years.

Export Performance shall be as per table below:

Status Category                                           Export Performance FOB / FOR (as converted) Value

(in US $ million)

One Star Export House                                                        3

Two Star Export House                                                       25

Three Star Export House                                                   100

Four Star Export House                                                     500

Five Star Export House                                                     2000

Grant of Double Weightage

  • The exports by IEC holders under the following categories shall be granted double weightage for calculation of export performance for grant of
    • Micro, Small & Medium Enterprises (MSME) as defined in Micro, Small & Medium Enterprises Development (MSMED) Act

 

  • Manufacturing units having ISO/BIS.
  • Units located in North Eastern States including Sikkim and Jammu & Kashmir.
  • Units located in Agri Export
  • Double Weightage shall be available for grant of One Star Export House Status category
  • A shipment can get double weightage only once in any one of above

Other conditions for grant of status

  • Export performance of one IEC holder shall not be permitted to be transferred to another IEC holder. Hence, calculation of exports performance based on disclaimer shall not be
  • Exports made on re-export basis shall not be counted for
  • Export of items under Authorisation, including SCOMET items, would be included for calculation of export

Accordingly, M/ABC Ltd is advised to go through the above stated conditions and determine its eligibility to become status holder.

PART– II

Question 5

  • Discuss in brief some distinguishing features of General Anti-Avoidance Rules (GAAR) and Specific Anti-Avoidance Rules (SAAR).
  • Under what circumstances can Unilateral Relief be granted to avoid Double Taxation under section 91 of Income Tax Act 1961 ?
  • Discuss in brief a few benefits derived from the Safe Harbour Rules, relating to the transfer pricing
  • XYZ , a foreign company, has its head office at USA. The Board of Directors (BOD) meetings are held in USA. However, the Board of Directors has delegated major powers to a committee in Kolkata and the members of this committee are based in Kolkata. The Board of Directors ratified the decisions of the said committee.

In the light of above,

  • Discuss the place of effective management (POEM) of XYZ
  • Discuss the guiding factors of POEM for Board of Directors delegating authorities to
  • Discuss the factors to be considered by the Assessing Officer while selecting the appropriate transfer pricing (3 marks each)

Answer 5(a)

Distinguishing features of General Anti Avoidance Rules (GAAR)

  1. These involve necessarily granting the discretion to the tax authorities to invalidate the arrangements as impermissible tax

 

  1. They have a far broader application and hence interpreted in a more extensive
  2. GAAR has the potential to counter more effectively and outsmart the tax payers in their “out of box thinking” and their approach in devising new means of tax avoidance.

Distinguishing features of Specific Anti Avoidance Rules (SAAR)

  1. These are specific and help reduce to time and cost involved in tax
  2. These provide certainty to any taxpayer while formalising specific
  3. These don’t provide any discretion to the tax
  4. There is always a possibility that the tax payer may find loopholes and circumvent the limited applications of specific

Answer 5(b)

Under the following circumstances, the Indian Government can grant Unilateral Relief from double taxation u/s 91 of the Income Tax Act, 1961, if:

  1. The person or company has been resident of India in the previous
  2. The Income must have accrued to and received by the tax payer outside India in the previous
  3. The Income should have been taxed in India and in another country with which there is no tax
  4. The person or company had paid tax under the laws of the foreign country in question.

On a similar note, the unilateral relief can be granted to

  • any person who is resident in India in any previous year
  • proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural

Similarly, unilateral relief can be granted to

  • any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so

Answer 5(c)

Benefits derived from Safe Harbour Rules are as under

  1. Compliance Simplicity : Safe Harbour Rules tends to substitute requirements in place of existing regulations, thereby reducing compliance burden and associated

 

costs for eligible taxpayers, who would otherwise be obligated to dedicate resources and time to collect, analyze and maintain extensive data to support their inter-company transactions.

  1. Certainty and Reduce litigation : Electing Safe Harbours may grant a greater sense of assurance to taxpayers regarding acceptability of their transfer price by the authorities without onerous audits. This conserves administrative and monetary resources for both the taxpayer and tax
  2. Administrative Simplicity : Since Tax administration would be required to carry out only a minimal examination in respect of taxpayers opting for safe harbours, they can channelize their efforts to examine more complex and high – risk transactions and high- risk transactions and

Answer 5(d)

The location where company’s Board of Directors (BOD) regularly meets and makes decisions may be the company’s Place of Effective Management (POEM) provided the Board:

  1. Retain and exercises its authority to govern the company: and
  2. Does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a

In given case the board meetings are held in USA, but the same formalise the decisions taken by the committee at Kolkata. Hence Place of Board meeting held at USA cannot be POEM, as power is delegated to committee which is based at Kolkata.

Guiding factors when Board Delegating Authorities to Committee are as under:

If Board of Director had delegated some or all of its major authorities to one or more committees consisting senior management, then POEM shall be at the place where:

  1. Members of executive committee are based and
  2. Where committee develops and formulate key decisions for formal approval by

Hence in given case, POEM of XYZ Ltd. will be Kolkata, as discussed above.

Answer 5(e)

Factors to be considered by the Assessing Officer while selecting an appropriate transfer pricing method are as under:

  1. The nature and class of the International or Specified Domestic
  2. The class or classes of Associated Enterprises entering into the transactions and the functions performed by them taking into account assets employed or to be employed and risk assumed by each
  3. The availability, coverage and reliability of data necessary for application of the
  4. The degree of comparability existing between the International transaction or

 

Specified Domestic Transaction and the uncontrolled transaction, and between the enterprises entering into such transaction

  1. The extent to which reliable and accurate adjustments can be made to account for differences, if any, between the International or Specified Domestic Transaction and the comparable uncontrolled transactions or between the enterprises entering into such
  2. The nature, extent and reliability of assumptions required to be made in the application of the

Attempt all parts of either Q. No. 6 or Q. No. 6A

Question 6

  • ABC & Co. is a partnership firm consisting of four partners. The partnership deed provides for remuneration of `4,00,000 to partners and interest to partners at 12%.

Profit for the year ended 31st March, 2019 is `1,00,000 after arriving the following adjustments :

 

ParticularsAmount `
Remuneration to partners4,00,000
Interest to partners on capital account @ 12%20,000
Municipal tax of house property5,000
Rent received on house property50,000

Compute the book profit and remuneration deductible under section 40(b) of the Income tax Act, 1961.                                                                                            (5 marks)

  • Define Tax Treaty. Discuss the principal objectives of Indian Tax

(5 marks)

  • ABC Ltd. proposes to sell one unit XYZ which was set up in 2010 (out of 10 units) and is not related to company’s main line of Total consideration for sale of XYZ unit as a going concern by way of slump sale is `3,50,000. The summarized financial position of XYZ unit as on 31st Jan., 2019 (Date of Sale) is as under :

 

Liabilities

Paid up capital

Amount `

50,000

Assets

Fixed assets

Amount `

70,000

General Reserve40,000Debtors40,000
Revaluation Reserve30,000Inventories40,000
Current liabilities30,000
1,50,0001,50,000

 

Additional information as under :

Fixed assets includes Land purchased at ` 5,000 in May, 2012 revalued at

`50,000.

For the remaining fixed assets, their written down value as per the Income-tax Act, 1961 is `10,000.

Cost inflation indices are as under :

FY 2012-13-200, FY 2018-19-289.

Compute the capital gain arising on sale of XYZ unit of ABC Ltd.      (5 marks)

OR (Alternate question to Q. No. 6)

Question 6A

  • ABC is a foreign subsidiary company of XYZ Ltd. XYZ Ltd. sells refregirators to ABC Ltd. at a price of `10,000 each for sale to its dealers in Singapore. In other States, XYZ Ltd. is directly selling to their dealers at `12,000 with a warranty of one year (`500 for each fridge). ABC Ltd. does not offer such warranty. Quantity sold to ABC Ltd. is 8000 units and to dealers of XYZ Ltd. is 3000 units.

Discuss the method to be applied to arrive at the arm’s length price and compute the ALP.

How is the assessment of XYZ Ltd. going to be affected ?               (5 marks)

  • X Ltd. is a resident company engaged in garment manufacturing at Kolkata. The Profit & Loss Account has been prepared in accordance with Schedule III of the Companies Act,

Net profit for the year ended 31st March, 2019 is `99,000 arrived at after the following adjustments :

 

ParticularsAmount `
Depreciation (includes Revaluation of assets `1,000)4,000
Provision for Income Tax3,000
Proposed dividend5,000
Loss of subsidiary A Ltd.2,000
Interest on term loan from nationalised bank (Not yet paid)1,20,000
Income
Dividend received from C Ltd.1,000

Compute the Book profit u/s 115JB and the Minimum Alternate Tax (MAT) liability.          (5 marks)

  • ABC Ltd. is a public limited company but shares are not listed in any stock exchange in India as on 31st Dec., 2018. On 1st Jan., 2019, the company issued 10 lakh shares of face value of ` 10 per share, the fair market value of which is ` 130, at issue price of ` 150 per

 

Discuss the applicability of section 56 of the Income-tax Act, 1961 where shares are issued to :

  • Resident Indians;
  • Non-resident Indians;
  • Venture Capital (5 marks)

Answer 6(a)

Computation of book profit for AY 2019-20 and remuneration allowed under section 40(b) of Income -Tax Act, 1961

Particulars                                                         Amount (Rs.)      Amount (Rs.)

 

Net Profit as per Profit and Loss Account

Add : Remuneration to Partners

 

4,00,000

1,00,000
Add : Municipal Tax of House Property5,0004,05,000
Total5,05,000
Less : Rent received on House Property(50,000)
Book Profit as per section 40(b)4,55,000

Remuneration allowed is lower of the amount as per partnership deed (Rs. 4,00,000) or amount actually paid (Rs. 4,00,000) or the amount computed as under:

Maximum amount deductible on account of payment of remuneration to partners

 

ParticularsAmount
First Rs. 300000 @ 90%2,70,000
Balance of Rs.155000@ 60%93,000
Total3,63,000

Lower of above i.e. Rs. 363000 is the maximum remuneration permissible u/s 40(b).

Answer 6(b)

Tax Treaty : A Tax treaty is a bilateral agreement made by two countries to resolve issues involving double taxation of passive as well as active income Tax treaties generally determine the amount of tax that a country can levy on a taxpayer’s income/capital. It is also called a Double Taxation Avoidance Agreement.

Principal objective of India Tax Treaties are as under:

  • For granting relief in respect of
    1. Income on which tax have been paid both under the Income Tax Act, 1961 and Income Tax Act prevailing in the other country ; or

 

  1. Income -tax chargeable under the Income Tax Act, 1961 and under law in force in that country to promote mutual economic relations, trade and investment; or
  • For the avoidance of double taxation of on income under the Income Tax Act, 1961 and under the corresponding law in force in that country; or
  • For exchange of information for the prevention of evasion or avoidance of Income Tax chargeable under the Incomes Tax Act, 1961 or under corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or
  • For recovery of income tax under Income Tax Act, 1961 and under the corresponding law in force in that

Answer 6(c)

Computation of long term capital gain on slump sale of XYZ Unit of ABC Ltd.

 

ParticularsAmountAmount
Fixed assets at W.D.V.10,000
Land at cost price5,000
Debtors40,000
Inventories40,00095,000
Less Current liabilities(30,000)
Net worth of XYZ Unit Full65,000
Value of Consideration3,50,000
Long Term Capital Gain2,85,000

Note:

  1. In slump sale, benefit of indexation is not
  2. Revaluation Reserve is not to be

Answer 6A(i)

ABC Ltd. and XYZ Ltd. are associated enterprise as ABC Ltd is subsidiary of XYZ Ltd. Comparable product (fridge) is sold to dealers (Uncontrolled transactions). Hence in given circumstances Comparable Uncontrolled Price (CUP) Method for determining arm’s length price can be applied.

Particulars                                                                        Amount

Sale price charged to Dealers of XYZ Ltd.                          12,000

Less cost of warranty included in price                                 (5,00)

Arm length price                                                               11,500

Actual price paid by ABC Ltd. to XYZ Ltd.                          10,000

Difference per unit                                                              1,500

Addition required to be made in the computations

of the total Income of XYZ Ltd. (1500 x 8000 units)       12,00,0000

No deduction under chapter VI-A would be available in respect of the enhanced Income.

 

Answer 6A(ii)

Computation of Book Profit u/s 115JB of X Ltd. a Resident Company

 

ParticularsAmount
Net profit for the year ended on 31st March 201999,000
Add:
Depreciation (includes Revaluation of Assets Rs. 1000)4,000
Provision for Income Tax3,000
Proposed Dividend5,000
Loss of Subsidiary A Ltd.2,000
Total1,13,000
Less:
Dividend received from C Ltd.(1,000)
Depreciation excluding revaluation (Rs. 4000 – Rs. 1000)(3,000)
Book Profit1,09,000
Computation of MAT Liability
18.5% of Book Profit20,165
Add : Health and Education Cess 4%8,07
Total Minimum Alternate Tax (MAT) Liability20,972
Round-off20,970

Note : Delayed or non remittance of interest to bank attracts disallowance u/s 43B only. No adjustments required u/s 115JB.

Answer 6(A)(iii)

Issue of shares at excessive share premium

Since, the Shares of ABC Ltd. are not listed in any recognized stock exchange in India, it is a Company in which public are not substantially interested.

When such company issues shares at a price in excess of the Fair Market Value, share premium so charged in excess, will be taxable under Section 56 of the Income Tax Act, 1961.

Excess premium is (Rs. 150 – Rs. 130) Rs. 20 per share. Hence where 10 lakh shares are issued, excess share premium charged is Rs. 200 lakhs.

Such liability will arise only when shares are issued to residents. Rs. 200 lakhs will be treated as Income from other sources.

Where the shares are issued to non-residents or Venture Capital undertakings, there is no applicability of section 56 of the Income Tax Act, 1961 and hence there will be no tax effect.

 

 

 

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