ANSWERS OF MODEL TEST PAPER 1

FINAL COURSE: GROUP – II

PAPER – 4: DIRECT TAX LAWS & INTERNATIONAL TAXATION
SOLUTIONS
Division A – Multiple Choice Questions
MCQ No. Most MCQ Most Appropriate Answer
Appropriate No.
Answer
1. (b) 9. (b)
2. (d) 10. (c)
3. (a) 11. (d)
4. (b) 12. (a)
5. (a) 13. (a)
6. (c) 14. (d)
7. (d) 15. (b)
8. (d)

Division B – Descriptive Questions

1. (a) Computation of Total Income of SJ Industries Ltd. for the A.Y.
2025-26
Particulars Amount (₹)
I Income from house property
Unrealised rent [Taxable
under section 25A, even if SJ
3,80,000
Industries Ltd. is no longer the
owner of commercial property]
Less: 30% of above 1,14,000 2,66,000
II Profits and gains of
business and profession
Net profit as per the statement 72,00,000
of profit and loss

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 Add: Items debited but to be
considered separately
or to be disallowed
(i) Depreciation as per the 24,00,000
Companies Act, 2013
(ii) Interest under section 60,000
234B for short payment
of advance tax
[Any interest payable for
default committed by
assessee for discharging
his statutory obligations
under the Income-tax Act,
1961 which is calculated
with reference to the tax
on income is not allowable
as deduction under
section 40(a)(ii). Since the
same has been debited to
statement of profit and loss,
it has to be added back] 1
(iii) Interest and borrowing 2,50,000
cost included in
Opening and Closing
inventory
[As per ICDS II, Interest
and borrowing cost which
does not meet the criteria
for recognition as a
component of the cost,
cannot be included in the
cost of inventory. Since
the same have been
included in the opening
and closing inventory, the
difference between
₹ 9,50,000, being interest
included in opening
inventory – ₹ 7,00,000,
being interest included in

1Bharat Commerce and Industries Ltd. v. CIT [1998] 230 ITR 733 (SC)

214
 closing inventory, has to
be added back]
(iv) Cash payment in excess 19,000
of ₹ 10,000
[Disallowance u/s 40A(3) is
attracted in respect of
expenditure, for which
payment exceeding
₹ 10,000 in a day has been
made in cash. Since
expenditure of ₹ 19,000
towards printing and
stationery items is debited
to the statement of profit
and loss, the same has to
be added back.
However, payment of
₹ 22,000 to producer for
dairy farming products is
not disallowed since it is
covered under the
exceptions specified in
Rule 6DD]
(v) Repair work paid to 1,05,000
contractor without
deduction of tax at
source
[Disallowance of 30% of the
amount of ₹ 3,50,000 paid
for carrying out repair work
to a contractor without
deduction of tax at source
would be attracted u/s
40(a)(ia)]
(vi) Expenditure for transfer 35,000
of carbon credits
[Income by way of transfer
of Carbon Credits is
chargeable to tax under
section 115BBG at a flat
rate. No deduction is
allowed under any

215
 provision of the Act in
respect of any expenditure
or allowance in relation
thereto. Since such
expenditure is debited to
the statement of profit and
loss, the same has to be
added back]
(vii) Contribution to electoral 3,00,000
trust
[Contribution to electoral
trust is not allowable as
deduction from business
profits of the company.
Since the expenditure has
been debited to statement
of profit and loss, the same
has to be added back while
computing business
income]
(viii) Advertisement in 40,000
brochure of a
political party
[Advertisement charges
paid in respect of brochure
published by a political
party is not allowable as
deduction from business
profits of the company as
per section 37(2B). Since
the expenditure has been
debited to statement of
profit and loss, the same
has to be added back
while computing business
income]
(ix) Interest to co-operative 2,60,000
bank not paid on or
before the due date
[Disallowance under
section 43B would be
attracted for A.Y.2025-26,

216
 since the interest was not
paid on or before the due
date of filing of return]
(x) Contribution towards 50,000
pension scheme of
employees
[Contribution towards
pension scheme, referred
to in section 80CCD, of
employees is allowed only
to the extent of 14% of
salary of the employee in
the P.Y. i.e., ₹ 1,40,000
being 14% of ₹ 10,00,000. 35,19,000
Therefore, the excess
contribution of ₹ 50,000
[i.e., ₹ 1,90,000 –
₹ 1,40,000] is disallowed
u/s 36(1)(iva).
1,07,19,000
Add: Amount taxable but not
credited to statement of
profit and loss
A(2) Expenditure pertaining 35,000
to previous financial
year
[Cash payment in excess of
₹ 10,000 made in the
current year in respect of
expenditure allowed on
mercantile basis in the
previous financial year,
would be deemed as
income in the current year
as per section 40A(3A)]
1,07,54,000
Less: Items credited to
statement of profit and
loss, but not includible
in business income /
permissible

217
 expenditure and
allowances
(i) Unrealised rent 3,80,000
[Unrealised rent in respect
of commercial property is
taxable under the head
“Income for house
property”. Since the said
rent has been credited to
the statement of profit and
loss, the same has to be
deducted while computing
business income]
(ii) Dividend received from 1,60,000
specified foreign
company
[Dividend received from
specified foreign company
is taxable under the head
“Income from other
sources”. Since the said
dividend has been credited
to the statement of profit
and loss, the same has to
be deducted while
computing business
income]
(iii) Profit from hedging 3,00,000
contract
[Hedging contract is
entered into for
safeguarding against any
loss that may arise due to
currency fluctuation. The
profit from such contract
entered into for meeting
loss in foreign currency
payments towards
imported printing
machinery has to be
adjusted against the cost of
machinery. Since the said

218
 profit has been credited to
the statement of profit and
loss, the same has to be
deducted while computing
business income]
(iv) Interest from bank fixed 1,35,000
deposit
[Interest on fixed deposit is
taxable under “Income from
Other Sources”. Since the
said interest has been
credited to the statement of
profit and loss, the same has
to be deducted while
computing business income]
A(3) Audit fees of P.Y. 22,500
2023-24
[30% of ₹ 75,000, being
the audit fees disallowed in
the P.Y. 2023-24 for non-
remittance of TDS on or
before due date of filing
return of income for P.Y.
2023-24 would be allowed
in the year of payment of
TDS i.e., P.Y. 2024-25]
A(4) Transfer of Carbon
Credits chargeable to tax Nil
under section 115BBG
[Income by way of
transfer of Carbon Credits
chargeable under section
115BBG can be treated as
business income or
income from other 9,97,500
sources, depending upon
the facts of the case. In this
case, since the question
mentions that SJ
Industries Ltd. is engaged
in production and
marketing of diversified

219
 products, it is logical to
assume that the same is in
the nature of business
income. Since the amount
of ₹ 4 lakh has already
been credited to statement
of profit and loss, no
further adjustment is
necessary]
97,56,500
Less: Depreciation as per
Income tax Rules
A(1) Depreciation under 28,00,000
section 32
Add: Depreciation @7.5% on 6,90,000
₹ 92 lakhs [₹ 95 lakhs, being
imported printing machinery -
₹ 3 lakhs, being profit from
hedging contract] since,
machinery is put to use for less
than 180 days].
Add: Additional depreciation 9,20,000
@10% on ₹ 92 lakhs, since
machinery is put to use for less
than 180 days assuming the
conditions for claim of additional
depreciation are satisfied 2. 44,10,000
Profits and gains from 53,46,500
business or profession
III Income from Other Sources
Dividend from specified foreign 1,60,000
company
Interest from banks on fixed 1,50,000
deposits (Gross) [Interest on
banks on fixed deposits is 3,10,000
taxable as “Income from other
sources”] [₹1,35,000 x 100/90]
Gross Total Income 59,22,500

2Balance additional depreciation can be claimed in the A.Y.2026-27

220
 Less: Deduction under
Chapter VI-A
Under section 80GGB 3,40,000
[Contribution by a company to
an electoral trust or registered
political party is allowable as
deduction, since payment is
made otherwise than by cash.
Expenditure incurred by an
Indian company on
advertisement in brochure
published by political party
tantamount to contribution to
such political party]
[₹ 3,00,000 + ₹ 40,000]
Total income 55,82,500

2. (a) Computation of “Book Profit” for levy of MAT under section

115JB for A.Y.2025-26
Particulars ₹ ₹
Net Profit as per Statement of Profit and Loss 20,00,000
Add: Net profit to be increased by the following
amounts as per Explanation 1 to section
115JB(2):
- Provision for the loss of subsidiary 1,70,000
- Provision for doubtful debts, being 1,75,000
the amount set aside as provision for
diminution in the value of any asset
- Provision for income-tax 2,05,000
[As per Explanation 2 to section 115JB,
income-tax shall include, inter alia, any
interest charged under the Act,
therefore, whole of the amount of
provision for income-tax including
₹ 55,000 towards interest payable has
to be added back]
- Depreciation 4,60,000 10,10,000
30,10,000

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Less: Net profit to be decreased by the
following amounts as per Explanation 1 to
section 115JB:
- Share in income of an AOP as a 2,00,000
member
[In a case, where AOP has paid tax on
its total income at maximum marginal
rate, no income-tax is payable by the
company, being a member of AOP, in
accordance with the provisions of
section 86. Therefore, share in income
of an AOP on which no income-tax is
payable in accordance with the
provisions of section 86, would be
reduced while computing book profit,
since the same has been credited to
profit and loss account]
- Income from units in UTI -
[Income from units in UTI not to be
reduced while computing the book
profits, since the same is taxable in the
hands of unitholders]
- Depreciation other than depreciation
on revaluation of assets (₹ 4,60,000 – 2,10,000
₹ 2,50,000)
- Unabsorbed depreciation or 5,00,000
brought forward business loss,
whichever is less, as per the books of
account.
Lower of unabsorbed depreciation
₹ 5,00,000 and brought forward 9,10,000
business loss ₹ 6,00,000 as per books
of accounts has to be reduced while
computing the book profit]
Book Profit 21,00,000

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 Computation of MAT liability under section 115JB
Particulars ₹
15% of book profit 3,15,000
Add: Health & education cess@4% 12,600
Minimum Alternate Tax liability 3,27,600

Notes:
(1) It is only the specific items mentioned under Explanation 1 to
section 115JB, which can be adjusted from the net profit as
per the Statement of Profit and Loss prepared as per the
Companies Act for computing book profit for levy of MAT.
Since the following items are not specified thereunder, the
same cannot be adjusted for computing book profit:
• Interest to financial institution (unpaid before filing of
return) and
• Penalty for infraction of law
(2) Provision for gratuity based on actuarial valuation is an
ascertained liability [CIT v. Echjay Forgings (P) Ltd. (2001)
251 ITR 15 (Bom.)]. Hence, the same should not be added
back to compute book profit.
(3) As per proviso to section 115JB(6), the profits from unit
established in special economic zone cannot be excluded
while computing the book profit, and hence, such income
would be liable for MAT.
(b) Computation of total income of Mr. Nitin for A.Y.2025-26
Particulars ₹ ₹
Income from House Property
Rental income from property in Country 3,60,000
X3
Less: Municipal taxes paid 12,000
3,48,000

3 In the absence of any information relating to fair rent, municipal value and standard rent,

rental income assumed to be gross annual value.

223
 Less: Deduction u/s 24(a) @30% 1,04,400
2,43,600
Profits and gains from business or
profession
Royalty 4 from Country X for writing article 13,60,000
in journals [only the amount which is
received during the previous year is
includible, since he maintains cash
system of accounting]
Income from Other Sources
Dividend from M Ltd. an Indian company 5,50,000
Gross Total Income 21,53,600
Less: Deduction under Chapter VI-A
U/s 80E – deduction in respect of
interest on educational loan for his 36,000
son
U/s 80QQB – No deduction is
allowable since royalty income is for -
writing articles in journals and 36,000
newspapers and not for writing
books
Total Income 21,17,600

Computation of net tax liability of Mr. Nitin for A.Y.2025-26

Particulars ₹
Tax on total income [30% of ₹ 11,17,600 + 4,47,780
₹ 1,12,500]
Add: Health and education cess @4% 17,911
4,65,691
Less: Relief under section 91 -
Average rate of tax in India [[i.e., 21.991%
₹ 4,65,691/21,17,600 x 100]
Average rate of tax in Country X 15%
Doubly Taxed income [Rental income of 16,03,600

4Royalty can also be shown under the head “Income from other sources” instead of “Profits
and gains from business or profession.

224
 ₹ 2,43,600 + royalty income of
₹ 13,60,000]
Deduction under section 91 on ₹ 16,03,600 @15%,
being lower average Indian tax rate and foreign tax 2,40,540
rate.
Net tax liability 2,25,151
Net tax liability (rounded off) 2,25,150

3. (a) As per section 115TD, the accreted income of “M/s SN Charitable

Trust”, registered under section 12AB would be chargeable to tax at
maximum marginal rate @ 34.944% [30% plus surcharge @12% plus
cess@4%] for the reason of cancellation of registration.
Computation of exit tax payable by M/s SN Charitable Trust
Particulars Amount (₹)
Aggregate FMV of total assets as on 31.1.2025, 12,85,00,000
being the specified date (date of order of
cancellation of the registration) [See Working
Note 1]
Less: Total liability computed in accordance with
the prescribed method of valuation [See Working 3,05,00,000
Note 2]
Accreted Income 9,80,00,000
Tax Liability @ 34.944% of ₹ 9,80,00,000 3,42,45,120
Working Note 1:
Aggregate fair market value of total assets on
the date of cancellation of the registration
Valuation of Land, being an immovable -
property purchased in the year 2009
[Value of land purchased in the year 2009 not
includible in the aggregate fair market value, since
the exemption provisions under section 11 and 12
would apply from P.Y.2012-13, being the previous
year in which application for registration of trust is
made]
Valuation of Land and building, being an 10,50,00,000
immovable property, purchased in 2015
[The fair market value of land and building would
be higher of ₹ 1,000 lakhs i.e., price that the land

225
 and building would ordinarily fetch if sold in the
open market as per registered valuer’s certificate
and ₹ 1,050 lakhs, being stamp duty value as on
the specified date i.e., 31.1.2025]
Valuation of Quoted equity shares in M/s XP 21,50,000
Ltd. [2,000 x ₹ 1,075 per share]
[The fair market value of quoted shares would be
₹ 1,075 per share, being the average of the lowest
(₹ 1,051) and highest price (₹ 1,099) of such
shares on the specified date i.e., 31.1.2025]
Balance in current account of a nationalized 10,00,000
bank
Balance in fixed deposits with scheduled 2,00,00,000
banks
Cash in hand 3,50,000
12,85,00,000
Working Note 2 - Total liability
Book value of liabilities in the balance sheet on 11,35,00,000
specified date
Less: Capital fund 8,00,00,000
Less: Contingent liability on estimated basis to 30,00,000
contractor for which no bills are received
Total liability of M/s SN Charitable Trust 3,05,00,000
The latest day on which such tax has to be paid is 14 April, 2025,
th

being 14 days from 31.3.3025, the date on which the order

confirming the cancellation is received.

(b) (1) STP Ltd. and Fix Ltd. of Canada are deemed to be associated
enterprises, since Fix Ltd., a Canadian company provides
guarantee for loan of ₹ 9 crores taken by STP Ltd., which is
15% of the total borrowings (i.e., not less than 10%) of STP
Ltd. i.e., ₹ 60 crores.
As per section 92B, the transactions entered into between
STP Ltd. and Fix Ltd., two associate enterprises, for sale of
bedsheets falls within the meaning of “international
transaction”.
As STP Ltd. has sold similar bedsheets to other dealers, being
unrelated entity, at ₹ 2,300 per unit, the transactions between

226
 STP Ltd. and such unrelated party can be considered as a
comparable uncontrolled transaction for the purpose of
determining the arm’s length price of the transactions between
STP Ltd. and Fix Ltd. However, such figure needs to be
adjusted by the functional adjustments.
Computation of ALP of transaction between STP Ltd. and
Fix Ltd.
Particulars Amount (in
₹)
Selling price of each bedsheets to unrelated 2,300
dealers in Canada
Add: Adjustment of cost of credit [STP Ltd. 46
provides credit for 1 month to unrelated
entity whereas it provided credit period
of 3 months to Fix Ltd. Therefore,
adjustment for the cost of such credit
has to be carried out to arrive at arm’s
length price. (12% x 2,300 x 2/12)]
Arm’s length price of 1 unit of bedsheets 2,346
Arm’s length price of 4 lakh units of 93,84,00,000
bedsheets (A)
Sale price of 4 lakh units of bedsheets by 88,00,00,000
STP Ltd. to Fix Ltd. (associated enterprise)
(B) [2,200 x 4,00,000]
Amount to be added to STP Ltd.’s total
5,84,00,000
income by way of ALP adjustment
(2) Where the primary adjustment to transfer price has been
made suo moto by STP Ltd. in its return of income, the time
limit for the repatriation of such excess money (i.e., ₹ 584
lakhs) available with the associated enterprise (i.e., STP Ltd.)
is within 90 days from 30.11.2025, being the due date of filing
of return u/s 139(1) i.e., 28.2.2026.
(3) The excess money (i.e., ₹ 584 lakhs) available with the
associated enterprise (i.e., Fix Ltd.) not repatriated to India
within 90 days from the due date of filing return of income u/s
139(1) would be deemed as an advance made by the STP Ltd.
to its associated enterprise, Fix Ltd.

227
 Interest would be calculated on such advance at the rate of
one year marginal cost of fund lending rate of SBI as on 1st
April of the relevant previous year i.e., 1.4.2025 + 3.25%,
since the international transaction is denominated in Indian
rupee.
Option to pay additional income-tax, if the excess money
not repatriated
STP Ltd. has the option to pay additional income-tax
@20.9664% (tax @18% plus surcharge @12% plus
cess@4%) on excess money (i.e., ₹ 584 lakhs), in lieu of
repatriation of such excess money.
Where additional income-tax is so paid by STP Ltd., it will not
be required to make secondary adjustment and compute
interest from the date of payment of such tax.
The additional income-tax so paid by STP Ltd. would be
treated as the final payment of tax in respect of excess money
not repatriated and no further credit would be allowed to STP
Ltd. or to any other person in respect of the amount of
additional income-tax so paid.
4. (a) (i) Section 194N, provides that every person, including, inter alia,
a banking company, who is responsible for paying, in cash,
any sum or aggregate of sums exceeding ₹ 1 crore during the
previous year to any person from one or more accounts
maintained by such recipient-person with it, shall deduct tax
at source @2% of sum exceeding ₹ 1 crore.
In the present case, M/s Kite & Co. LLP has withdrawn ₹ 1.26
crores in cash in aggregate during the previous year 2024-25.
Since aggregate amount of cash withdrawals exceed ₹ 1
crore, bank is required to deduct tax at source on the amount
exceeding ₹ 1 crore i.e., ₹ 26 lakhs though he withdraws ₹ 68
lakhs for buying agricultural produce from farmers,
agriculturists, being raw material required for manufacturing
of finished products by it.
(ii) Any person responsible for paying interest (other than interest
referred to in section 194LB or section 194LC or section
194LD) or any other sum chargeable to tax (other than

228
 salaries) to a non-corporate non-resident or to a foreign
company is liable to deduct tax at source at the rates in force.
Since interest of ₹ 98,000 on Capital Gains Bond issued by
Power Finance Corporation Ltd. is taxable in the hands of Mr.
Ajay, being a non-resident, the provisions for tax deduction at
source under section 195 are attracted in this case.
(b) When an assessee is in default or is deemed to be in default in
making a payment of tax, the TRO may draw up under his signature
a statement in the prescribed form specifying the amount of arrears
due from the assessee and shall proceed to recover from such
assessee the amount specified in the certificate by inter alia
attachment and sale of the assessee’s movable or immovable
property.
The assessee’s movable or immovable property shall include any
property which has been transferred, directly or indirectly by the
assessee to his spouse or minor child or son’s wife or son’s minor
child, otherwise than for adequate consideration, and which is held
by, or stands in the name of any of the persons aforesaid.
In the present case, Mr. Pramod had transferred his land 5 years
ago to his son who was 30 years old at that time. He also gifted a
diamond necklace to his son’s wife on 5.10.2021. He also has bank
fixed deposits, receivables from T & Co. Ltd.
The Tax Recovery Officer can proceed to recover the tax by
attaching -
(i) bank fixed deposits,
(ii) receivables from T & Co. Ltd.;
He can also proceed to recover the tax by attaching the diamond
necklace gifted to his son’s wife.
However, he cannot proceed to recover the tax by attaching the land
which he transferred to his son, since at the time of transfer, his son
was major.
(c) If an Indian company, being the borrower, incurs any expenditure
by way of interest in respect of any debt issued by its non-resident
associated enterprise and such interest exceeds ₹ 1 crore, then, the
interest paid or payable by such Indian company in excess of 30%

229
of its earnings before interest, taxes, depreciation and amortization
(EBITDA) or interest paid or payable to associated enterprise,
whichever is lower, shall not be allowed as deduction as per section
94B.
Further, where the debt is issued by lender which is not associated
enterprise but an associated enterprise provides an implicit or
explicit guarantee to such lender, such debt shall be deemed to
have been issued by an associated enterprise and limitation of
interest deduction would be applicable.
In the present case, since SAM Ltd., a Country Y company, holds
36% share in XYZ Ltd., an Indian company, i.e., more than 26% of
voting power, SAM Ltd. and XYZ Ltd. are deemed to be associated
enterprise.
Since loan of ₹ 120 crores taken by XYZ Ltd., an Indian company
from L & T Inc., Country R company, is guaranteed by SAM Ltd., an
associated enterprise, such debt shall be deemed to have been
issued by an associated enterprise and interest paid or payable to
L & T Inc. shall be considered for the purpose of limitation of interest
deduction under section 94B.
Computation of income under the head profits and gains of
business or profession of XYZ Ltd
Particulars Amount
(in lakhs)
Interest allowable u/s 94B for A.Y. 2024-25
Gross Profit 2,030
Less: Employee benefits expenses 390
EBITDA 1,640
Interest paid or payable to L & T Inc. 562
Lower of the following would be disallowed
- Total interest paid or payable in ₹ 70 lakhs
excess of 30% of EBITDA [₹ 562
lakhs – ₹ 492 lakhs (i.e., 30% of
₹ 1,640 lakhs)]
- Interest paid or payable to L & T ₹ 562 lakhs
Inc.

230
Interest to be disallowed as deduction for A.Y. 70
2024-25, which can be carried forward up to 8
assessment years
Interest allowable u/s 94B for A.Y. 2025-26
Gross Profit 1,780
Less: Employee benefits expenses 402
EBITDA 1,378
Interest paid or payable to L & T Inc. 389
Lower of the following would be disallowed
- Total interest paid or payable in Nil
excess of 30% of EBITDA [₹ 389
lakhs – ₹ 413.40 lakhs (30% of
₹ 1378 lakhs)]
- Interest paid or payable to L & T ₹ 389 lakhs
Inc.
Interest to be disallowed as deduction for A.Y. Nil
2025-26
Brought forward interest of A.Y. 2024-25 allowed as
deduction against profits and gains of A.Y. 2025-26
to the extent of maximum allowable interest
expenditure u/s 94B i.e., ₹ 24.4 lakhs [₹ 413.40
lakhs – ₹ 389 lakhs]
Total interest allowed in A.Y. 2025-26 [₹ 389 lakhs 413.40
+ ₹ 24.40 lakhs)
Balance of amount of interest relating to A.Y. 2024-
25 is eligible for carried forward i.e., ₹ 45.60 lakhs
(₹ 70 lakhs minus ₹ 24.40 lakhs) to 7 more
subsequent assessment years.
Income under the head profit and gains of
business or profession of XYZ Ltd. for A.Y.
2025-26
EBITDA 1,378.00
Less: Interest (maximum interest allowable as 413.40
deduction u/s 94B)
Depreciation (As per the Income-tax Act, 1961) 254.00
710.60

231
5. (a) (i) Issue Involved: The issue under consideration is whether the
arm’s length price (ALP) determined by the Tribunal, which is the
final fact-finding authority, is final and cannot be the subject
matter of scrutiny by the High Court as it does not give rise to a
substantial question of law.
Relevant provision of law: As per section 260A(1), an
appeal shall lie to the High Court from every order passed in
appeal by the Appellate Tribunal, if the High Court is satisfied
that the case involves a substantial question of law.
Analysis & Conclusion: The High Court have the powers to
consider the substantial question of law involving
determination of arm’s length price (ALP):
- While determining the ALP, the Tribunal has to follow
the guidelines stipulated under Chapter X of the Income-
tax Act, 1961, namely, sections 92 to 92F of the Act and
Rules 10A to 10E of the Income-tax Rules, 1962. Any
determination of the ALP under Chapter X not in
accordance with the relevant provisions of the Income-
tax Act, 1961 and Rules can be considered as perverse
and it may be considered as a substantial question of
law as perversity itself can be said to be a substantial
question of law. Therefore, there cannot be any absolute
proposition of law that in all cases where the Tribunal
has determined the ALP, the same is final and cannot
be the subject matter of scrutiny by the High Court in an
appeal under section 260A.
When the determination of the ALP is challenged before
the High Court, it is always open for the High Court to
consider and examine whether the ALP has been
determined while taking into consideration the relevant
guidelines under the Act and the Rules.
- The High Court can examine the question of
comparability of two companies or selection of filters
and examine whether the same is done judiciously and
on the basis of the relevant material/evidence on record.
The High Court can also examine whether the
comparable transactions have been taken into

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 consideration properly or not, i.e., to the extent as to
whether non-comparable transactions are considered
as comparable transactions or not.
Therefore, in an appeal challenging the determination of the
arm's length price, it is always open for the High Court to
examine in each case, within the parameters of section 260A,
whether while determining the ALP, the guidelines laid down
under the Income-tax Act, 1961 and the Income-tax Rules,
1962 are followed or not and whether the determination of the
ALP and the findings recorded by the Tribunal while
determining the ALP are perverse or not.
The statement is, therefore, not correct.
Note – The facts given in the question are similar to the facts
in SAP Labs India Pvt. Ltd. v. ITO [2023] 454 ITR 121 wherein
the issue came up before the Supreme Court. The above
answer is based on the rationale of the Supreme Court in the
said case.
(ii) Issue Involved: The issue under consideration is whether the
powers under section 254(2) can be exercised by the Tribunal
to recall an order and rehear the entire appeal on merits.
Relevant provision of law: Section 254(1) empowers the
Appellate Tribunal to pass such order thereon as it thinks fit,
after giving both the parties to the appeal an opportunity of
being heard.
Under section 254(2), the Appellate Tribunal, may amend an
order passed by it u/s 254(1) with a view to rectifying any
mistake apparent from the record.
Analysis & Conclusion: The power u/s 254(2) is limited to
rectification of a mistake apparent on record and therefore,
the Tribunal must restrict itself within those parameters.
A detailed order was passed by the Tribunal upholding the
order passed by the Assessing Officer. While allowing the
application u/s 254(2) and recalling its earlier order, the

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 Tribunal had reheard the entire appeal on the merits as if the
Tribunal was deciding the appeal against the order passed by
the Commissioner (Appeals). The subsequent order passed
by the Tribunal recalling its earlier order was beyond the
scope and ambit of the powers u/s 254(2) and is not tenable
in law.
Note – The facts given in the question are similar to the facts
in Reliance Telecom Ltd./Reliance Communications Ltd.
(2022) 440 ITR 1 wherein the issue came up before the
Supreme Court. The above answer is based on the rationale
of the Supreme Court in the said case.
(iii) Issue Involved: The issue involved in this case is whether Mr.
Yatin’s application, for adjustment of tax liability on income
surrendered during search by sale of seized gold bars, can be
entertained where assessment has not been completed.
Relevant provision of law: The provision contained in
section 132B(1) lays down the manner in which the assets
seized under section 132 may be dealt with. An assessee is
entitled to make an application to the Assessing Officer for
adjustment of seized assets towards existing tax liability.
Analysis & Conclusion: Here, the application by the
assessee is not for adjustment of any existing liability, but
towards the tax liability. In the said provision, the expression
used is “the amount of the liability determined”. “A liability is
determined” only on completion of the assessment. Until the
assessment is complete, it cannot be postulated that a liability
has been crystallized.
Accordingly, the action of the Assessing Officer rejecting the
application on the ground that such action can be taken only
after the assessment is completed and a demand has been
quantified, is justified.
Note - The facts given in the question are similar to the facts
in Hemant Kumar Sindhi & Another v. CIT (2014) 364 ITR 555
wherein the issue came up before the Allahabad High Court.

234
 The above answer is based on the rationale of the Allahabad
High Court in the said case.
(b) BEPS Action Plan 13 contains a three-tier standardized approach
to transfer pricing documentation which consists of:
(i) Master file: Master file requires MNEs to provide tax
administrations with high-level information regarding their
global business operations and transfer pricing policies. The
master file is to be delivered by MNEs directly to local tax
administrations.
(ii) Local file: Local file requires maintaining of transactional
information specific to each country in detail covering related-
party transactions and the amounts involved in those
transactions. In addition, relevant financial information
regarding specific transactions, a comparability analysis and
analysis of the selection and application of the most
appropriate transfer pricing method should also be captured.
The local file is to be delivered by MNEs directly to local tax
administrations.
(iii) Country-by-country (CBC) report: CBC report requires
MNEs to provide an annual report of economic indicators viz.
the amount of revenue, profit before income tax, income tax
paid and accrued in relation to the tax jurisdiction in which they
do business. CBC reports are required to be filed in the
jurisdiction of tax residence of the ultimate parent entity, being
subsequently shared between other jurisdictions through
automatic exchange of information mechanism.
A specific reporting regime in respect of CbC reporting and also the
master file has been incorporated in the Income-tax Act, 1961. The
essential elements have been incorporated in the Income-tax Act,
1961 while remaining aspects would be dealt with in detail in the
Income-tax Rules, 1962.
(i) Section 286 of the Income-tax Act, 1961 contains the
provisions relating to CbC reporting requirement and related
matters.

235
 (ii) Section 92D of the Income-tax Act, 1961 contains the
provisions relating to maintenance and furnishing of Master
file.
6. (a) In clause 34(a) of Form 3CD, the tax auditor is required to report
whether the assessee is required to deduct or collect tax as per the
provisions of Chapter XVII-B or Chapter XVII-BB, and if yes, to
furnish the details mentioned thereunder. While answering the issue
of applicability of the provisions of Chapter XVII-B and/or XVII-BB,
a number of debatable issues may arise before the assessee as
well as the tax auditor. The tax auditor may have a difference of
opinion with regard to the applicability of the provisions of TDS/TCS
on a particular payment. In such a case, the tax auditor has to report
the difference of opinion appropriately as an observation in para 3
of Form 3CA. This requirement is contained in the Guidance Note
on Tax Audit.
Also, in clause 21(b)(ii) of Form 3CD, the amount inadmissible
under section 40(a)(ia) has to be mentioned.
In case the tax auditor does not comply with the reporting
requirements under these clauses and fails to mention the
difference of opinion appropriately as an observation in para 3 of
Form 3CA, clause (7) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949 for not exercising due diligence
may be invoked.
(b) Computation of tax liability of SD Ltd. for A.Y. 2025-26 under
regular provisions of the Act
Particulars ₹
Total Income before allowing additional 22,00,000
depreciation
Less: Additional Depreciation u/s section 2,40,000
32(1)(iia)[ ₹ 12 lakh x 20%]
Total Income 19,60,000
Applicable Tax Rate (since turnover of P.Y. 25%
2022-23 < ₹ 400 crores)
Tax payable 4,90,000

236
 Add: Health & Education cess@4% 19,600
Tax Liability 5,09,600

Computation of tax liability of SD Ltd. for A.Y. 2025-26

under section 115BAA
Particulars ₹
Total Income before allowing additional 22,00,000
depreciation
Less: Additional Depreciation u/s section 32(1)(iia) -
[not allowable as deduction while computing income
u/s 115BAA]
Total Income 22,00,000
Applicable Tax Rate 22%
Tax payable 4,84,000
Add: Surcharge@10% 48,400
5,32,400
Add: Health & Education cess@4% 21,296
Tax Liability 5,53,696
Tax Liability (rounded off) 5,53,700

Since tax payable as per the regular provisions of the Act is lower
than the tax payable under the provisions of section 115BAA, it
would be beneficial for SD Ltd. not to opt for section 115BAA.
(c) Computation of total income and tax liability of Strawberry Ltd.,
a non-resident German company, for the A.Y. 2025-26
Particulars ₹
Profits and gains from business or profession
Business Income from a unit established at 8,00,000
Mumbai
Income from other sources
- Dividend income from XY Ltd. an Indian 12,50,000
company
- Fees for technical services [would be 20,00,000
equivalent to the amount of debentures of
₹ 20,00,000 received from an Indian

237
 company, issued in consideration of
providing technical knowhow]
- Interest on Debentures [₹ 20,00,000 x 8% x 80,000
6/12]
- Dividend on Global Depository Receipts 5,50,000
(GDRs) of Y Ltd. an Indian company, issued
under a scheme of Central Government
against the initial issue of Y Ltd. and
purchased in foreign currency by Strawberry
Ltd.
- Royalty income received from Z Ltd. an
Indian company in pursuance of an
agreement approved by Central 10,00,000
Government
Gross Total Income/ Total income 56,80,000
Computation of tax liability
Dividend income of ₹ 12,50,000, taxable @20% 2,50,000
u/s 115A
Dividend on GDRs of ₹ 5,50,000, taxable @10% 55,000
u/s 115AC
Royalty income of ₹ 10,00,000, taxable @20% 2,00,000
u/s 115A, since it is in pursuance of an agreement
approved by the Central Government
FTS of ₹ 20,00,000, taxable @35%, since it is not 7,00,000
in pursuance of an agreement approved by the
Central Government
Interest on debentures of ₹ 80,000, taxable 28,000
@35%, since debt is incurred in Indian currency,
it is not eligible for concessional rate of 20% u/s
115A
Business income of ₹8,00,000 [taxable @35%] 2,80,000
15,13,000
Add: Health and education cess@4% 60,520
Tax liability 15,73,520

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