Test Paper CA FINAL MAY/NOV-23
Topic: DTAA/Transfer Pricing
Question: 1
ETI Ltd., the assessee, has sold goods on 12.01.2023 to LP Ltd., located in notified jurisdictional area
(NJA), for ` 9.50 crores. During the current financial year, ETI Ltd. charged ` 10.50 crores from TP
Inc. of Country X and ` 11 crores from MN Inc. of Country Y for sale of identical goods and both of
which are neither associated enterprise of ETI Ltd. nor they are situated in any NJA. While sales to TP
Inc. and MN Inc. were on CIF basis, the sale to LP Ltd., was on FOB basis, which paid ocean freight
and insurance amounting to ` 20 lakhs on purchases from ETI Ltd. If sale to TP Inc. and MN Inc. are
made on FOB basis, the cost of freight, insurance would amount to ` 18 lakhs.
India has a Double Taxation Avoidance Agreement with the Country X and Country Y. The assessee
has a policy of providing after sales support service to the tune of ` 13 lakhs to all customers except LP
Ltd. which procured the same locally at a cost of ` 17 lakhs.
Compute the ALP for the sales made to LP Ltd., and the amount of consequent increase, if any, in the
profit of the assessee-company. [8 Marks]
Question: 2
Ridham Ltd. provides you the Profit and loss A/c for the Financial Year 2021-22 and Financial Year
2022-23:
` in lakhs
Particulars For the F.Y. For the Particulars For the For the
2021-22 F.Y. F.Y. F.Y. 2022-
2022-23 2021-22 23
Employees Benefit Expenses 390 402 Gross Profit 2030 1780
Interest paid to M & T Inc. 562 389
Depreciation 250 254
Income Tax 271 332
Profit transferred to Reserves 557 403
2030 1780 2030 1780
On 23rd June 2021, Ridham Ltd., an Indian Company borrowed ` 120 crores from M & T Inc., a
company incorporated in Country M. The said loan is repayable over a period of 4 years. This loan is
guaranteed by Lite Ltd., a company incorporated in Country Y. Lite Ltd. holds 36% shares in Ridham
Ltd.
Calculate the income under the head Profits and Gains from business and profession of Ridham Ltd.
for the Assessment Year 2023-24, assuming the gross profit is calculated as per the provisions of
Income-tax Act and Depreciation is also as per Income-tax Rules. Give appropriate reasons of your
workings. Assume none of the companies are engaged in the business of banking. [8Marks]
Question: 3
On 1.4.2022, UI Ltd., an Indian company, borrowed ` 50 crores@ 9.5% p.a. from M Inc., a US entity,
thereby increasing its total borrowings to ` 65 crores. The said loan is guaranteed by H Inc., another
US entity. The place of effective management of both M Inc. and H Inc. is in the USA. The total assets
of UI Ltd. is ` 180 crores.
UI Ltd. imported turbo equipment worth ` 30 crores from H Inc. Import duty of ` 4.50 crores on the
same was paid by UI Ltd. The equipment was sold to T Ltd. for ` 40 crores. Normal GP margin of UI
Ltd. in similar uncontrolled transaction is 20%.
Net profit of UI Ltd. of A.Y.2023-24 was ` 8 crores after debiting interest of ` 6 crores (out of which
` 1.25 crores interest pertaining to local borrowings), depreciation of ` 2.5 crores and income tax of `
1.5 crores.
From the information given above, choose the most appropriate answer to the following questions—
3.1 What is the amount of interest to be allowed in the computation of total income of UI Ltd. for A.Y.
2023-24, if for A.Y. 2022-23 there was an interest expenditure disallowed to the extent of ` 4
crores under section 94B?
(a) ` 6,65,00,000
(b) ` 4,75,00,000
(c) ` 6,00,00,000
(d) ` 3,65,00,000
3.2 The transfer pricing adjustment for the arm’s length purchase price to be made in the computation
of total income of UI Ltd. for A.Y. 2023-24 would be—
(a) ` 3,00,00,000
(b) ` 2,50,00,000
(c) ` 2,00,00,000
(d) No adjustment is required, since transfer pricing adjustment cannot result in reduction of
income
3.3 If UI Ltd. repatriated the excess money on 31.03.2024, what will be the interest income that would
be added to its total income of A.Y. 2024-25, if SBI’s one-year marginal of lending rate is 11.25%
on 1.4.2023 and 10.25% on 1.4.2024? Assume that UI Ltd. suo motu made the primary adjustment
in its books of account and filed its return for A.Y.2023-24 on 30.11.2023.
(a) ` 12,01,712
(b) ` 11,18,836
(c) ` 9,32,363
(d) ` 8,49,486
3.4 If UI Ltd. decides not to repatriate the excess money and instead, pay additional income-tax on the
entire excess money, then, what would be the additional income-tax payable?
(a) ` 62,89,920
(b) ` 52,41,600
(c) ` 41,93,280
(d) ` 53,87,200
3.5 If UI Ltd. decides to pay additional income-tax on the entire excess money on 15.03.2024, should
interest be calculated and added to its total income of A.Y.2024-25? If so, what is the amount to
be added? Assume that SBI one-year marginal cost of lending rate is 11.25% on 1.4.2023 and
10.25% on 1.4.2024 -
(a) No, since it has paid additional income-tax on the entire excess money in the P.Y.2023-24
(b) Yes; ` 9,70,890
(c) Yes; ` 10,42,808
(d) Yes; ` 8,09,075
3.6 In addition to the facts given in the case scenario, assuming that -
(i) on 23.08.2022, UI Ltd. has entered into an agreement for sale of turbo equipment with Y Ltd.,
an Indian company not related to UI Ltd;
(ii) Y Ltd. had already entered into an agreement on 21.8.2022 for the sale of the same goods to
K Inc. (unrelated to Y Ltd.), a UK entity whose place of effective management is also in the
UK; and
(iii) UI Ltd. holds shares carrying 28% voting power in K Inc. Which of the following are
associated enterprise/deemed associated enterprise of UI Ltd.?
(a) H Inc. and K Inc.
(b) M Inc. and K Inc.
(c) H Inc., K Inc. and Y Ltd.
(d) M Inc., H Inc. and K Inc. [2 x 6 MCQ’s]
Question: 4
The assessee is a popular Tollywood star Mr. Rohan Babu. He has business interest in few other nations
as well. He is a resident in India for the Assessment Year 2023-24.
Income earned in India by Mr. Rohan Babu during the year ended 31-3-2023:
(` in crores)
Income from house property (Computed) 4.3
Business income:
From being the owner of cricket team Hyderabad Super Players 12.4
Acting in movies 9.415
Mr. Rohan Babu has deposited ` 1.5 lakhs in PPF and paid Life Insurance premium of ` 1 lakh.
The details of income earned by Mr. Rohan Babu from two countries outside India, X and Y, with
which India does not have any DTAA, during the P.Y. 2022-23 are as under:
Type of Income X Y
(` in crores)
Loss from house property (Computed) 1.3 -
Business income:
Own 7.2 2.9
Share income from partnership firm (not evidenced by an instrument in
4.8 -
writing)
Agricultural income - 1.2
In Country X, share income is not exempt and loss from house property is not eligible for being set off
against other income. In Country Y, agricultural income is chargeable to income-tax.
In Country X, Mr. Rohan Babu has paid income-tax of ` 2.16 crores and in Country Y ` 80 lakhs on
the total income earned in those countries.
Compute Mr. Rohan Babu’s income-tax liability for the A.Y.2023-24, assuming that he opt for section
115BAC. [7 Marks]
