ASSIGNMENT

Centre for Distance and Online Education

NAME MANIK KHARB

Roll No 2314503397

Program MASTER OF BUSINESS

ADMINISTRATION (MBA)
Semester III

Course Name DFIN303-TAXATION

MANAGEMENT
Code DFIN303

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Q . Assignment Set – 1 Mark T o t a l
No Questions s Marks

1 What is the meaning of business connection as explained in 5+5 10

section 9 of the Income tax Act? Provide a few suitable
examples for the same?
2 What is double taxation avoidance agreement (DTAA) ? 5+5 10
Explain the importance of DTAA with suitable examples.
Further, explain the taxability of fee for technical services
(FTS) and royalty as compared to the provisions in Income
tax Act with comparative table.
3 What is a slump sale? Explain the various provisions 10 10
relating to slump sale with an example? Further, explain the
difference between slump sale and a demerger?

Q . Assignment Set – 2 Mar To t a l

No Questions ks Marks

1 Explain the concept of input tax credit in GST Act in detail 10 10

with examples
2 Explain the concept of transfer pricing and its importance. 5+5 10
What are the different methods used for calculating the arm’s
length price? Which is the popularly used method and why?
3 What are the procedures to be followed by a startup to claim 5+5 10
the deduction under income tax Act? Further, explain the
provisions under Chapter VIA which provides deduction for
a startup Company in India?

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ASSIGNMENT SET – 1

Question – 1 What is the meaning of business connection as explained in section 9 of the

Income tax Act? Provide a few suitable examples for the same?

Answer – 1: Business Connection as per Section 9 of the Income Tax Act

Section 9 of the Income Tax Act, 1961, governs cases where income is deemed to arise in
India for non-residents. The term "business connection" broadly refers to a commercial
relationship between a non-resident entity and operations carried out within India, which
result in income generation.

Key Features of Business Connection:

1. Close Relationship: It involves a sustained and significant interaction between the

non-resident's business and activities within India.
2. Partial Operations in India: The income must arise from operations conducted either
entirely or partly within the country.
3. Agents and Representatives: If the non-resident conducts activities in India via an
agent or intermediary, it can qualify as a business connection.
4. Attributable Income: Only the portion of the income that can be linked to activities in
India is taxable under this provision.

Examples of Business Connection:

1. Representation by an Agent: A foreign company appoints an Indian agent to solicit

orders or assist in contract finalizations with customers in India. The income earned from
such dealings could be attributed to the operations in India.
2. Dependent Representative: If a person or entity in India regularly concludes
contracts on behalf of a foreign company, it establishes a business connection. For
instance, a foreign car manufacturer authorizes an Indian firm to finalize sales
agreements.
3. Processing and Manufacturing: A non-resident entity sends raw materials to an
Indian company for conversion into finished goods. If the foreign entity benefits from
this activity in India, it constitutes a business connection.
4. Service or Consultancy Engagements: A foreign consultancy firm dispatches its
employees to provide services or advice to Indian businesses. The earnings from these
services are linked to operations in India.
5. Subsidiary Performing Exclusive Work: A subsidiary company in India working
solely for its parent company abroad, helping them find clients, arrange contracts, or
perform marketing activities, establishes a business connection.
6. Digital Platforms or E-Commerce: An online platform operated by a foreign
company caters to Indian customers, enabling sales of goods or services. The income
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 derived from these transactions is attributable to activities conducted in India.

Exceptions to Business Connection:

Certain activities may not be considered as creating a business connection, such as:

• Purchasing goods for export.

• Operations conducted entirely outside India, protected under relevant Double
Taxation Avoidance Agreements (DTAAs).

This explanation ensures originality while summarizing the concept effectively. Let me know
if you’d like further elaboration or assistance!

Question – 2 What is double taxation avoidance agreement (DTAA) ? Explain the

importance of DTAA with suitable examples. Further, explain the taxability of fee for
technical services (FTS) and royalty as compared to the provisions in Income tax Act with
comparative table.

Answer – 2: Double Taxation Avoidance Agreement (DTAA)

DTAA refers to a bilateral agreement between two countries designed to prevent individuals
or businesses from paying taxes on the same income in both countries. It ensures that
taxpayers, especially those involved in cross-border transactions or investments, are not
unfairly taxed twice for the same income.

Importance of DTAA

1. Eliminates Double Taxation: It provides clarity on which country has the right to tax
specific income streams.
2. Encourages Global Trade and Investment: By reducing tax liabilities, DTAAs make
cross-border investments more attractive.
3. Improves Compliance: It provides a framework for fair taxation, reducing disputes
between tax authorities.
4. Facilitates Information Exchange: DTAAs often include provisions for exchanging
tax-related information, preventing tax evasion.

Examples of DTAA in Action

1. Freelancer Scenario: An Indian consultant earns income from a US client. If both

countries have a DTAA, the consultant might be taxed only in India, or in both
countries but with a credit for the tax paid in the US.
2. Royalty Payment: A German company licenses its technology to an Indian firm.
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 Under their DTAA, the royalty might attract a lower withholding tax rate compared to
what the Indian tax laws prescribe.

Taxability of Fee for Technical Services (FTS) and Royalty

1. Fee for Technical Services (FTS): This includes payments for specialized services
like technical, managerial, or consultancy support.
2. Royalty: Refers to payments made for the use of intellectual property, patents, designs,
or trademarks.

Comparison of FTS and Royalty under Income Tax Act and DTAA

Aspect Income Tax Act DTAA Provisions

Definition of FTS Covers managerial, technical, or May provide a more restrictive or
consultancy services used in India. specific definition.
Definition Broadly includes payments for Often excludes certain payments,
of Royalty intellectual property usage. such as for outright purchase.
Wi t h h o l d i n g 10% + surcharge and cess for non- Usually a reduced rate, like 10%
Tax for FTS residents. or 15%, as per treaty.
Wi t h h o l d i n g 10% + surcharge and cess for non- Often lower under DTAA (e.g.,
Ta x for residents. 10% or 12%).
Royalty
Applicability Taxable if the service or usage Depends on residency and source
benefits Indian operations. rules outlined in DTAA.
Ta x C r e d i t Not directly covered; domestic Allows a tax credit for the taxes
Mechanism relief provisions apply. paid in the source country.

Examples

1. FTS:

1. An Indian company hires a foreign consultant for advice.

2. Indian law applies a 10% tax.
3. Under DTAA, if the treaty rate is 10%, no additional surcharge applies,
benefiting the consultant.

2. Royalty:

1. An Indian company pays a US firm for using patented software.

2. Under domestic law, a 10% tax is withheld.
3. Under the India-US DTAA, if the rate is 15%, the Indian firm applies this

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 preferential rate.

Question – 3 What is a slump sale? Explain the various provisions relating to slump sale
with an example? Further, explain the difference between slump sale and a demerger?

Answer – 3: What is a Slump Sale?

A slump sale is the transfer of a business undertaking as a whole, including all its assets and
liabilities, for a fixed, lump sum price. Importantly, no individual valuation is assigned to the
specific components (assets or liabilities) of the undertaking. The definition is provided under
Section 2(42C) of the Income Tax Act, 1961.

In simpler terms, a slump sale means selling an entire business unit as an ongoing concern,
rather than itemizing and selling its individual components. It is often used for organizational
restructuring or monetizing non-core business segments.

Provisions Relating to Slump Sale

1. Definition (Section 2(42C)):

A slump sale occurs when a business undertaking is sold for a lump sum price without
assigning values to individual components like machinery, inventory, or receivables.
2. Capital Gains Taxation (Section 50B):

● A slump sale is treated as the transfer of a capital asset, and the resulting gains
are taxable as capital gains.
● Long-Term or Short-Term Capital Gains:

1. If the undertaking has been held for more than 36 months, the gains are
treated as long-term capital gains (LTCG).
2. Otherwise, they are classified as short-term capital gains (STCG).

● Cost of Acquisition: The net worth of the undertaking is considered the cost of
acquisition.

3. Net Worth Calculation:

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 ● Net worth = Total book value of assets – Total book value of liabilities.
● Revaluation of assets is ignored during this calculation.

4. Lump Sum Consideration:

● No breakup or valuation is provided for individual assets or liabilities in a slump

sale.

Example of a Slump Sale

Scenario:
A company, ABC Ltd., operates in two sectors: textiles and electronics. It decides to sell its
textiles business to XYZ Ltd. as a going concern for ₹40 crores.

• This lump sum includes all the assets, liabilities, employees, and contracts of the
textile business.
• ABC Ltd. does not assign individual values to assets like land, machinery, or
inventory in this sale.

Here, the transaction qualifies as a slump sale, and ABC Ltd. must calculate the net worth of
the textile business and compute the capital gains tax under Section 50B.

Difference Between Slump Sale and Demerger

Aspect Slump Sale Demerger

Nature Entire undertaking sold as a A segment of the company is separated
o f going concern for a lump sum. into a new entity.
Transfe
r
Consideration Buyer pays a fixed lump sum to Shareholders of the original company
the seller. receive shares of the new entity.
T a x Capital gains tax is applicable as Tax-neutral if conditions under Section
Implications per Section 50B. 2(19AA) are fulfilled.
Valuation No individual valuation of assets Assets and liabilities are transferred at
or liabilities is done. book values.
Ownership Ownership of the business shifts Ownership of both entities remains with
to the buyer. the shareholders.
Objective Often executed to monetize or Usually done to restructure and separate
sell a non-core business. core business activities.

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Example of Demerger

Scenario:
XYZ Ltd. operates in pharmaceuticals and FMCG. To focus on its pharmaceutical division, it
transfers its FMCG division to a newly created company, PQR Ltd.

• Shareholders of XYZ Ltd. receive proportionate shares in PQR Ltd.

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 • The transaction qualifies as a demerger if it fulfills conditions under Section 2(19AA),
making it tax-neutral.

ASSIGNMENT SET – 2

Question – 4 Explain the concept of input tax credit in GST Act in detail with examples

Answer – 4: Input Tax Credit (ITC) in GST

Input Tax Credit (ITC) is a fundamental feature of the Goods and Services Tax (GST)
framework, designed to prevent the cascading effect of taxes. It allows a taxpayer to offset
the tax paid on purchases (inputs) against the tax payable on sales (output).

ITC ensures that tax is levied only on the value addition at each stage of the supply chain,
promoting efficiency and reducing the overall tax burden for businesses.

Key Features and Eligibility for ITC

1. Eligible Taxpayers: Only registered GST taxpayers can claim ITC.

2. Purpose of Usage: ITC can be availed only if the goods or services are used for
business purposes. ITC is not allowed for goods or services used for personal
consumption or for exempt supplies.
3. Conditions to Claim ITC:

1. The claimant must have a valid tax invoice or debit note from a registered
supplier.
2. The supplier must have filed their GST returns, ensuring that the input tax
details are reflected in the recipient's GST records (GSTR-2B).
3. Payment for the supply must be made within 180 days of the invoice date.
4. The supplier must have deposited the tax with the government.

4. Exclusions: ITC cannot be claimed on certain items, such as motor vehicles (unless

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specifically allowed), goods used for personal consumption, and works contract services
(unless further supplied). These restrictions are detailed under Section 17(5) of the GST
Act.

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Steps to Avail ITC

1. Verify that the supplier has filed their GST returns, and the relevant input tax appears
in GSTR-2B.
2. Match the invoice details with your purchase records.
3. Claim the eligible ITC in your GST return (GSTR-3B).

Example of ITC Utilization

Scenario:
ABC Pvt. Ltd. manufactures household appliances.

● Purchases:

o Raw materials worth ₹2,00,000 + GST @18% = ₹2,36,000.

o Packaging materials worth ₹50,000 + GST @18% = ₹59,000.

● Sales:

o Finished goods worth ₹3,50,000 + GST @18% = ₹4,13,000.

ITC and Tax Liability Calculation:

Particulars Amount (₹) GST (₹)

GST Paid on Purchases:

- Raw Materials 2,00,000 36,000
- Packaging Materials 50,000 9,000
Total ITC Available 45,000
GST Collected on Sales: 3,50,000 63,000
Net Tax Payable 18,000

• ABC Pvt. Ltd. uses the ITC of ₹45,000 to offset its GST liability and pays only
₹18,000 to the government.

Benefits of ITC

1. Eliminates Double Taxation: ITC avoids the cascading tax effect by ensuring that tax
is charged only on the incremental value added at each stage.
2. Reduces Costs: Businesses save on tax expenses, which improves profitability.
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 3. Encourages Compliance: ITC promotes adherence to GST regulations, as it depends
on both suppliers and recipients being compliant.

Reversal of ITC

ITC claimed must be reversed in specific situations, such as:

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 • Failure to pay suppliers within 180 days.
• Use of goods or services for non-business purposes.
• Supply of exempt or non-GST goods or services.

Conclusion

Input Tax Credit under GST is an effective tool for reducing the tax burden on businesses,
ensuring compliance, and promoting a seamless tax regime. By allowing businesses to claim
credit for taxes paid on inputs, it strengthens transparency and efficiency in the indirect tax
system.

Question – 5 Explain the concept of transfer pricing and its importance. What are the
different methods used for calculating the arm’s length price? Which is the popularly used
method and why?

Answer – 5: Transfer Pricing: Concept and Importance

Transfer pricing refers to the pricing of goods, services, or intangible assets transferred
between related entities within a multinational enterprise (MNE). These transactions could
occur between a parent company and its subsidiary or among subsidiaries under common
control.

Since related entities may operate in different countries with varying tax rates, transfer
pricing has a significant impact on the allocation of taxable income across jurisdictions. This
raises concerns about tax avoidance, as businesses might set prices to minimize their global
tax liability.

To counteract this, tax authorities mandate that such transactions adhere to the arm's length
principle—ensuring that the terms and pricing of intercompany transactions are comparable
to those between independent entities in similar circumstances.

Importance of Transfer Pricing

1. Compliance with Regulations: Ensures adherence to tax laws and avoids penalties or
litigation.
2. Prevention of Tax Base Erosion: Stops MNEs from shifting profits to low-tax
jurisdictions, preserving the tax base of high-tax countries.
3. Transparency and Accountability: Promotes fair reporting of profits across
jurisdictions.
4. Fair Revenue Allocation: Equitably distributes tax revenues among countries where
the MNE operates.

Methods for Calculating Arm's Length Price (ALP)

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The Income Tax Act and OECD guidelines specify the following methods to determine ALP:

1. Comparable Uncontrolled Price (CUP) Method

1. Compares the price of goods/services in a related party transaction with the
price in a similar transaction between independent entities.
2. Best suited for standard goods or services with market benchmarks.

Example: A company sells a widget to its subsidiary for ₹100 and to an unrelated
third party for ₹120. The price should ideally align with ₹120.

2. Resale Price Method (RPM)

1. Focuses on the resale margin of the product sold to an unrelated party after
being purchased from a related party.
2. Used when the distributor adds minimal value to the goods.

Example: A distributor buys a product from a related party for ₹80 and sells it to a
third party for ₹100, keeping a gross margin of ₹20. This margin is compared with
industry standards to assess compliance.

3. Cost Plus Method (CPM)

1. Adds a standard markup to the costs incurred by the supplier in a related party
transaction.
2. Suitable for manufacturing or service contracts.

Example: A company incurs ₹50 in production costs and applies a 20% markup,
selling to its subsidiary for ₹60. This markup is compared to market norms.

4. Profit Split Method (PSM)

1. Divides combined profits from a transaction among related entities based on

their relative contributions.
2. Applied when transactions involve unique intangibles or joint operations.

Example: Two subsidiaries jointly develop software and share revenues based on
R&D costs incurred.

5. Transactional Net Margin Method (TNMM)

1. Compares the net profit margin of a related party transaction with that of
comparable independent transactions.
2. Most commonly used due to its flexibility and broader applicability.

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 Example: A company analyzes its net profit margin of 10% on related transactions
and compares it with industry averages to determine ALP.

6. Other Methods

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 1. Any other method prescribed by tax authorities, considering the facts and
circumstances of the transaction.

Popularly Used Method and Reasons

The Transactional Net Margin Method (TNMM) is the most widely used because:

1. It is applicable across industries and transaction types.

2. It allows for broader comparability when direct benchmarks (as required in CUP or
RPM) are unavailable.
3. Financial data for net margin comparisons is more readily available.
4. It is less sensitive to functional differences than CUP or RPM, making it versatile for
complex transactions.

Example of Transfer Pricing

An MNE's parent company in Country A (high-tax jurisdiction) sells software to its

subsidiary in Country B (low-tax jurisdiction) for ₹10,000. An unrelated company in Country
B purchases similar software for ₹15,000.

Using the CUP method, the tax authority might argue that the price should be ₹15,000
instead of ₹10,000, ensuring that profits are not artificially shifted to Country B.

Question – 6 What are the procedures to be followed by a startup to claim the deduction
under income tax Act? Further, explain the provisions under Chapter VIA which provides
deduction for a startup Company in India?

Answer – 6: Procedures to Claim Deductions for Startups under the Income Tax Act

Startups in India are eligible for various tax deductions and benefits under the Income Tax
Act to encourage growth and innovation. These incentives can be claimed by a startup under
different sections of the Act, particularly under Section 80-IAC, which provides for
deductions for eligible startups.

Here is the step-by-step procedure a startup should follow to claim deductions under the
Income Tax Act:

1) Eligibility for Startup:

1. The company must be recognized as a Startup by the Department for

Promotion of Industry and Internal Trade (DPIIT).
2. It should be registered as a private limited company or a limited liability
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 partnership (LLP).
3. The company should be in operation for less than 10 years from the date of its
incorporation.

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 4. It should not have been formed by splitting or reconstructing an existing
business.

2) Application for DPIIT Recognition:

1. The first step is for the startup to apply for recognition as a Startup to DPIIT.
2. The application can be made online through the Startup India portal, and the
company must fulfill the conditions laid down by DPIIT.
3. Once recognized, the startup will receive a certificate of recognition.

3) Claiming Tax Deduction Under Section 80-IAC:

1. Section 80-IAC provides a 100% tax deduction for eligible startups for a
period of 3 consecutive years within the initial 10 years of incorporation.
2. The startup must be a DPIIT-recognized startup to avail of this benefit.
3. The turnover of the startup in any financial year should not exceed ₹100 crore.
4. The startup must have applied for the deduction before filing the tax return
and received approval from the income tax department.

4) Filing Income Tax Return:

1. Once the startup meets the eligibility criteria, it must file its income tax return
(ITR) with the Income Tax Department.
2. The startup should claim the tax deduction under Section 80-IAC while filing
the return.
3. The return should be filed before the due date to avail of the deduction.

Provisions Under Chapter VIA for Startup Deductions

Chapter VIA of the Income Tax Act outlines several provisions under which businesses,
including startups, can claim deductions. Here are the key provisions related to startups:

1. Section 80-IAC – Deduction for Startup Companies

• Deduction: A startup company, which is recognized by DPIIT, can claim 100% tax
deduction on profits for 3 consecutive years out of the first 7 years from the date of
incorporation.
• Eligibility:

o The startup must be a private limited company or an LLP.

o The company must be in the business of innovation, development, or
improvement of products or services, and must not be involved in activities
such as real estate or financial services.
o The turnover of the company should not exceed ₹100 crore.

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 o The startup must not have been formed by splitting or reconstructing an
existing business.

2. Section 80G – Donations to Approved Charitable Institutions

• A startup can also claim deductions under Section 80G for donations made to
charitable institutions or funds approved by the government. This is beneficial for
social entrepreneurship startups that contribute to charitable causes.

3. Section 80E – Deduction for Interest on Loans for Higher Education

• Startups that fund higher education or skill development programs for employees can
benefit from deductions under Section 80E, related to interest payments on loans
taken for educational purposes.

4. Section 35 – Deduction for Expenditure on Scientific Research

• Startups involved in scientific research and development activities can claim

deductions under Section 35 for expenditures incurred on in-house research and
development (R&D).
• Research and Development Expenditure: The startup can claim a 100% deduction on
revenue expenditure and a 200% deduction on capital expenditure incurred for R&D
activities.

5. Section 80CCG – Deduction for Investment in Rajiv Gandhi Equity Savings Scheme

• If a startup is investing in the Rajiv Gandhi Equity Savings Scheme (RGESS), it can
avail of a tax deduction of 50% on the amount invested (up to ₹50,000).

Tax Deduction Example for a Startup

Scenario:
ABC Pvt. Ltd. is a startup that has been operating for 3 years. Its total turnover for the current
year is ₹90 crore, and it qualifies for the deduction under Section 80-IAC. The startup made a
profit of ₹50,00,000 in the financial year.

• The startup can claim 100% deduction on ₹50,00,000 under Section 80-IAC.
• As a result, the startup will not pay income tax on its profit of ₹50,00,000 for the year.

Key Points to Remember

1. Time Limit: The startup can claim the 100% deduction for 3 consecutive years within
the first 7 years from incorporation.
2. DPIIT Recognition: The startup must be recognized by DPIIT to avail of the tax

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 deduction under Section 80-IAC.
3. Turnover Limit: The turnover of the startup should not exceed ₹100 crore to avail of
the deduction.
4. Business Type: The startup should be in the field of innovation, development, or
improvement of products or services.

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