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Month: April

A good beginning

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On 19th March, the Finance Minister Mr. Arun Jaitely introduced in the Parliament “The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015”. The Statement of Objects and Reasons records that “Evasion of tax robs the nation of critical resources necessary to undertake programmes for social inclusion and economic development. It also puts a disproportionate burden on the honest taxpayers as they have to bear the brunt of higher taxes to make up for the revenue leakage caused by evasion.” It further states “ The central government is strongly committed to the task of tracking down and bringing back undisclosed foreign assets and income which legitimately belong to the nation. Recognising the limitations of the existing legislation, it is proposed to introduce a new legislation to deal with undisclosed assets and income stashed away abroad”.

The Finance Minister deserves to be congratulated on the introduction of the Bill. The siphoning off of funds and wealth created by evading taxes has been a disease our country suffered from even prior to the independence. In the postindependence era, the menace increased exponentially in a regime where tax rates were astronomically high, there was distrust between the taxpayer and the tax collector, and being wealthy was virtually a sin. By the time tax rates were rationalised, the disease had reached epidemic proportions, so that normal palliative medicine was of no use and a drastic surgery was necessary. The Bill which some view as harsh and irrational must be looked at in this background.

The estimates of illegal or “black” money which was kept in undisclosed accounts with foreign banks varied significantly. The CBI director stated in 2012 that the estimate was US dollars 500 billion. Finally, the judiciary stepped in and ordered the formation of a Special Investigation Team (SIT). It would be appropriate to note the anguish of the judges of the Supreme Court Justice B. Sudershan Reddy and Justice S.S. Nijjar who, while ordering the constitution of the SIT, remarked ”The issue of unaccounted money held by nationals and other legal entities in foreign banks is of primordial importance to the welfare of the citizens. The quantum of such monies may be rough indicators of the weakness of the state, in terms of both crime prevention and also of tax collection”. Finally, the government prodded by the Supreme Court has acted and the Bill has been introduced.

One may wonder as to why, if the source of ill-gotten wealth is in our country, the government should go after only that wealth that is lying in foreign countries. While undoubtedly the war against black money should continue in earnest on the domestic front, if one were to prioritise the efforts of the government in checking or mitigating this problem, beginning the battle against tax evasion with an attack on undisclosed foreign assets is probably justified. The first reason for this is purely economic. If income or assets on which tax has been evaded lie within the country, normally they circulate through distribution channels albeit unofficial. Therefore, if wealth resides in the country, it is more often than not distributed among different people though the distribution may be grossly unequal. Consequently, to an extent, such moneys gives a fillip to economic activity. On the other hand, once money is secreted abroad, it remains in a foreign economy with virtually no benefit to our country.

Secondly, if unaccounted wealth is within India the possibility or probability of it getting converted into disclosed wealth either voluntarily, or through detection is much stronger. Once black money is transported out of the country, the trail goes weak and then turns cold. In an attempt to detect such money, one may face a maze of legal issues and the success rate of such efforts is not encouraging.

Thirdly, such money often enters India, through a facade and is often hot money, leaving Indian shores at the slightest hint of economic turbulence. This affects a developing economy like ours. Finally, such wealth is often used by the underworld or terrorist organisations to wage an undeclared war on India. For all these reasons I believe that the Finance Minister has got his priorities right.
At first blush, the Bill seems to be fairly harsh. Perhaps, that is the intent. It seeks to tax the foreign undisclosed asset at the value in the year in which it comes to the notice of the assessing officer. If one aggregates the tax payable along with the penalty, an assessee would have to shell out 120%. While no one can defend a flagrant violation of the law, taxation on the basis of the value of the asset may result in a number of problems.

Further, there is no provision for stay of recovery of the tax and penalty, even though one may have filed an appeal against a manifestly erroneous demand. There are other glitches as well, which may possibly be ironed out in the course of the passage of the Bill becoming an Act. More importantly what needs to be addressed is the wantonly aggressive stand of the tax authorities in the recent times. While a person who evades taxes must undoubtedly be punished and should suffer, it is essential that an environment is created where compliance is rewarded, honesty is recognised and the treatment of a taxpayer is human. Those of my colleagues that were practising in the field are fully conscious of the tax terrorism that prevails. It is not sufficient only to say that the government wants a fair tax administration, action in that regard is necessary on the ground.

All in all, in its battle against black money, the government has taken the first step. Let us hope that this Bill is followed up with provisions to deter creation of ill-gotten wealth within the country. For the time being we can only say ” well begun is half done!”

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THE PATHWAY TO UNHAPPINESS

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Who would ever want to travel on a path that leads to unhappiness? No one. We all want to be happy at all times. However, one would like to learn the path to unhappiness so that one may avoid it. Our scriptures show this path. One marvels at our scriptures. Our forefathers had studied every aspect of life in great depth and have given to us wisdom to live happily in the Upanishads, Bhagvad Geeta and other scriptures. Many times, the answers are given in simple words in the form of ‘Sutras’. ‘Sutra’ is a statement which is brief; having minimum words which is free from ambiguity, is meaningful, multifaceted, without any superfluous words and is flawless.

The answer to the question as to which is the surest way to unhappiness is given in the following Sutra, which reads as under:

It means – “Ignoring what you have and longing for what you do not have is the surest way to unhappiness.”

How true! So lucidly explained! Simple as these words may sound, they hold the key to human happiness. The root cause of all our unhappiness is that we are never appreciative of what we have, never satisfied with what we have and are therefore never happy. As they say “the grass is always greener on the other side.” We are not thankful to the Almighty for all that He has given us. We have no sense of gratitude. We are always seeking more. Our desires are endless. Our ‘trishna’, our thirst is never ending.

When one’s cup is half full, one only looks at the empty upper half and cribs. “My cup is already half-empty”. Only rarely, a few are happy and rejoice saying “My cup is still half full”. One has to remember that one’s cup is ever full. It is upto us whether to cry about the cup which is half empty or feel happy that our cup is half full.

The desires around us are so strong that once they catch hold of us, it is difficult to escape from their clutches. There is a story of two shepherds. They were grazing their sheep on a bank of a raging river. Suddenly, one of them saw a black shining woolen object floating down the river. Thinking that it was woolen blanket, as it very much looked like one, one of them jumped in the river and swam upto it. When he reached it, to his horror, he discovered that it was not a blanket but a bear which was very much alive. Before he could swim away from it, the bear grabbed him. Both were being pulled by the strong currents. The Shepherd on the shore shouted “Leave the blanket, leave the blanket”. Our friend, whom the bear would not let go, shouted back, “What do I do?” I have left the blanket. But the blanket is not leaving me!” This friend’s plight is the one in which all of us are. When our desires take hold of us even if we want to leave them, they would not let us go. Ultimately, we drown under the burden of our desires.

Our attitude of comparing is one of the reasons for this situation. If I do not get something, it is alright so long as my neighbor does not get it. But if my neighbor gets the latest refrigerator, I must have it too. I would be unhappy till I have one. The media plays havoc with our desires. 24×7 we are bombarded with views of “beautiful things,” without which, we are told, life and living are incomplete. We succumb to this pressure, and go on acquiring objects which may not be of real use to us and forgetting in the process that we acquire an attitude which guarantees lifelong unhappiness.

We have no time to thank God Almighty for all that He has given to us. We have lost the art of ‘counting our blessings’.

Unknowingly, all of us have been treading on this path of unhappiness. What we must now do is clear. Tell ourselves that ‘things’ may bring comfort but not lasting happiness. We must stop in our tracks. Fortunately, a U-Turn on this road to unhappiness is permitted. We must turn around, retrace our steps and be on the right road to happiness. God is always more than willing to help us. I would like to end with the lines of a song of the bye-gone era which conveys the right message.

“Tumko Mubarak ho unche mahaliye
humko hai pyari hamari galiya, hamari galia”
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Capital gain or perquisite- Sections. 45 and 17(2) – A. Ys. 1998-99 and 2002-03 – Amount received by assessee on redemption of Stock Appreciation Rights received under ESOP was to be taxed as capital gain and not as perquisite u/s. 17(2)(iii) –

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CIT vs. Bharat V. Patel; [2015] 54 taxmann.com 170 (Guj):

In the course of assessment, the Assessing Officer made addition to assessee’s income in respect of amount received on redemption of Stock Appreciation Rights received under ESOP as a perquisite u/s. 17(2)(iii). The Tribunal held that stock options were capital assets and gain therefrom was liable to capital gain tax.

On appeal by the Revenue the Gujarat High Court held as under:

“i) In the case of CIT vs. Infosys Technologies Ltd. [2008] 297 ITR 167/166 Taxman 204, it is held by the Supreme Court that the revenue had erred in treating amount being difference in market value of shares on the date of exercise of option and total amount ‘paid’ by employees consequent upon exercise of the said options as perquisite value as during the lock-in period there was no cash inflow to employees to foresee future market value of shares and the benefit if any which arose on date when option stood exercised was only a notional benefit whose value was unascertainable.

ii) In view of the above, the Tribunal was correct in treating the amount received on redemption of Stock Appreciation Rights as capital gain as against treated as perquisite u/s. 17(2)(iii) and in treating the amount received on exercising the option of Employee’s Stock Option Plan (EOSP) as long term capital gains instead of treating the same as short term capital gains.

iii) However, the Tribunal was not justified in holding that capital gain arose to the assessee on redemption of Stock Appreciation Rights which were having no cost of acquisition. Tax Appeals stand disposed of accordingly”

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SEBI to govern commodity contracts too – implications of this Finance Bill proposal

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A long awaited & major change proposed in the Finance Bill 2015, is the merger of law relating to commodity contracts with that of securities contracts. Even the regulatory bodies governing both types of transactions will be merged. Thus, Forward Contracts Regulation Act, 1952 (FCRA) is effectively to be merged with the SEBI Act and Forward Markets Commission to be merged with SEBI. At a first glance, the amendments proposed sound superficial. After all, the definitions of commodity derivatives, commodity contracts, etc. are almost the same under the proposed new scheme, and what is permitted and banned is also similar. So, is it old wine in a new bottle? However, on closer reading, one finds that the changes in law and its implications on commodity trading would be quite significant.

Background
It is interesting to see that SEBI and Securities Laws generally, relatively late-comers to financial markets, saw development in leaps and bounds. Securities Laws developed generally and specifically. Elaborate – perhaps too elaborate in places; law and systems have been put into place. These include regulations, a sophisticated intelligence gathering mechanism, a relatively transparent investigation, adjudicating and enforcement system, etc. In comparison, the law relating to commodity contracts, put into place more than six decades earlier, looked almost ancient. This is despite having huge quantity and volumes in commodity trading.

The turnover on commodity markets is huge, even with the existing relatively rudimentary regulatory structure. The turnover on national commodity exchanges was nearly Rs. 1.80 crore crore during 2013. That is nearly half the turnover on equity markets.

The objective of commodity markets may be different from equity markets. The crop grower, for example, looks up to plan and even hedge his produce, decide what he will produce, what he will sell, when he will sell, what he will store, etc. The buyer too looks at it to decide his output pricing, his product mix, what and how much he will buy and when, how much he will store, etc.

However, perhaps one another reason for the hesitation in making major changes in law was the sensitivity to commodity trading since food crops also happened to be a significant part of commodity trading volumes. Speculation, price manipulation, hoarding, etc, was feared to play havoc to livelihood of farmers and consumers. However, finally, the realisation seems to have sunk in that the answer to that is not keeping hands off, or worse, a relatively poor set of ancient regulations under an ill-equipped regulatory body. The better recourse is to modernise and update the law. Or, as the law makers have chosen, merge it with a body that already has much expertise and infrastructure in a field that is in many ways quite similar to commodity contracts.

The recent massive scam in National Spot Exchange Limited exposed this regulatory gap like never before. What was even more interesting is that many of the players here were also brokers, investors, etc. who operated in the securities markets as well. The practices followed in the spot exchange were also similar. The only difference was that the rules of the game and the regulatory bodies were different. The scam and the subsequent unfolding of facts later showed how inadequate were the law and the systems.

Existing Law
The existing law relating to commodity derivatives was mainly contained in Forward Contracts Regulation Act (FCRA) and rules made thereunder. The governing body is Forward Markets Commission (FMC). FCRA itself has not seen many changes, the last change in 1970 (contrast that with the continuous amendments over the years in SEBI Act). However, significant details are given the Rules, Circulars, Notifications, etc. issued under that Act. Major amendments were sought to be made to give FMC more powers and include several provisions in law that were similar to provisions in Securities Laws. However, the changes could not be finally put in place.

In the existing FCRA, terms like forward contract, ready delivery contract, goods, options, ready delivery contract, etc, are defined. Commodity exchanges regulate the sale and purchase of “goods” and there is a system & criteria for their recognition/registration by the FMC/Central Government. There is a ban/restriction on forward contracts for which the object is to route them through the exchanges. Though drafted in a fairly broad way, there are brief clauses that prohibit making of false statements relating to forward contracts, price manipulation in forward contracts, etc. and provide for their punishment by way of forfeiture, fines and prosecution.

Broadly, the essence and scheme is similar with the Securities Laws such as SEBI Act, Securities Contracts (Regulation) Act (SCRA), and related laws. What is also apparent is the nature of commonality between commodity contracts/derivatives and contracts in securities. The system, the nature of contracts, and even the mathematical sophistication involved in their valuation are quite similar. It makes sense, therefore, that a body having such expertise governs both. The proposal in the 2008/2010 proposed amendments was to create a parallel body and law for commodities that would be quite similar to that under securities laws. Having said that, there are important differences too, warranting special treatment for commodity contracts, which will be discussed later.

Proposals under the Finance Bill, 2015
Part II and III of the Finance Bill, 2015 propose many changes. These are, as will be seen later, merely enabling and do not immediately bring about the change. The changes will come into effect from a date to be notified. The FCRA is sought to be repealed. FMC will be merged with SEBI. The SEBI Act and SCRA will be amended to include certain definitions relating to commodity contracts/ derivatives. Existing commodity markets/associations will become at par with stock exchanges. And so on.

However, it will be a full year before which they will come into effect, and maybe even longer. During this period, SEBI is expected to develop the necessary regulatory base specific to commodity contracts, adapt if needed some of existing law and systems, get the commodity markets/associations change their bye laws and systems to the extent needed similar to existing stock exchanges, etc.

Implications for the law
Clearly, the next one year (and I expect it will be more than a year considering the huge task ahead) would be very busy for SEBI and the commodity regulators/associations. SEBI may appoint one or more Committees to look into the matter and suggest appropriate regulations and/or modification in existing regulations for commodity markets. Model bye laws and similar provisions for commodity markets may be developed and existing commodity associations would be asked to change their bye laws or adapt their existing bye laws, etc. It is possible that considering some specialised aspects of commodity markets, a separate department may be formed.

There are many similarities between commodity contracts and contracts in securities. There are ready delivery contracts for commodities that are treated with less regulations just like spot delivery transactions for securities. The forward contracts and their valuation too have substantial mathematical and structural similarities. Their manipulations too have similarities.

However, there are substantial differences too. Securities are different from commodities in many ways. Commodities are mined, grown, processed, etc. they may have seasonal variation and limited or periodical supplies. they may be renewable or they may be not. they are eventually meant to be usually consumed. Commodities fall into numerous categories and their producers and consumers often fall into very distinct and non-homogenous categories. Many of these differences may eventually need to be reflected into not just the law regulating them but even in the structuring of their contracts. At the same time, considering that most commodities already have a track record of trading and existing well accepted contracts as well as their regulation, the process would not be so much from scratch. In most cases, it may be aligning to a large or small extent the existing contracts and systems into the new scheme. Still the job ahead is large.

The existing regulatory scheme for securities markets are tailor made for capital market operators/intermediaries. there are regulations for companies and listing, intermediaries like brokers/merchant bankers, etc, for mutual funds/alternate investment funds, etc. While there are some lessons to be learnt from these regulations, it is quite clear that commodity market specific regulations would have to be formulated for entities operating there.

Existing regulations for control of malpractices and/or for ensuring fairness are also substantially specific/unique to securities.  The  takeover  regulations  for  example  would have  no  relevance  for  commodity  markets.  the  insider trading regulations too may have very little commonality, if at all, with commodity markets (though curiously the earlier Bills did make provisions for insider trading). Similarly, buyback regulations, corporate governance, etc. would not have relevance. however, the regulations relating to unfair, fraudulent, manipulative practices may be quite relevant though it would need substantial adaptation for commodity markets. perhaps relatively sophisticated and directly applicable  set  of  regulations  would  be  the  regulations relating to adjudication and punishment of violations. The system for investigation, issuing show cause notices, giving a fair hearing, applying certain  well  accepted  principles for levy of penalty or other adverse actions ought to be substantially and directly applied o commodity markets too. So would the regulations relating to settlement by consent orders and compounding.

Implications for Chartered Accountants and other Professionals
This change offers both a new challenge and opportunity for Chartered accountants. Securities laws have welcomed the services offered by Chartered accountants in several ways. Be it audits, advisory, valuation, inspection and investigation, Chartered accountants have the requisite skills and expertise to provide these services. Commodity contracts and markets are likely to become more developed as well as more complex in laws. CAS will have an active role to play in their audits, in valuation, in tax and advisory, in compliance, reporting, and so on.

Conclusion
One might be tempted to argue that SEBI has not wholly removed malpractices in securities markets, even though it has over the years become very powerful. Insider trading  is said to be rampant, price manipulation and scams keep occurring, Satyam happened despite some of the best legal and corporate governance practices in place, etc. So question is while the most recent move will put a very large new market under SEBI it will inevitably make the law very complex. However, clearly, there have been substantial changes  in securities laws whose benefits, tangible or intangible, are  being  seen.  The  number  of  cases  where  violations have been detected and penalties levied is increasing. as perhaps a mark of the sturdiness of the investigation and adjudication process, as all of the law, the decisions of SeBi that are overturned on appeal are also lesser. Thus, in the short term as well as the long term, it would be fair to expect a similar improvement in commodity markets. Eventually, we ought to also see a developed law relating to commodity contracts/markets.

Stamp Duty Ready Reckoner

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Introduction Stamp duty is a significant cost which must be reckoned while entering into an immovable property transaction. Stamp duty is also the second most important source of revenue for the Maharashtra Government. The Maharashtra Government earns a revenue of around Rs. 20,000 crore from stamp duty, second only to VAT . Maharashtra has the distinction of covering maximum instruments within the ambit of the stamp duty net.

Stamp Duty in Maharashtra is leviable on every instrument (not transaction) mentioned in Schedule I to the Maharashtra Stamp Act, 1958 (“the Act”) at the rates mentioned in that Schedule. An Instrument as defined under the Act includes every document by which any right or liability is created, transferred, limited, extended, extinguished or recorded.

Under the Act, stamp duty on instruments relating to immovable property may be levied on any one of the following three basis :

the Fair Market Value of the property;

the Consideration mentioned in the instrument; or

the Area of the property involved.

Duty on certain instruments is on the basis of consideration recorded in the instrument or market value of property, whichever is higher. The term “market value” is defined under the Act to mean the higher of :

the price which the property covered by the instrument would have fetched if sold in an open market on the date of execution of the instrument; or

the consideration as stated in the instrument. The instruments where stamp duty is levied on the higher of the consideration or Fair Market Value are as follows:
Conveyance
Lease Deed
Gift deed
Transfer of lease
Development Rights Agreement
Power of Attorney granted for consideration and authorising to sell an immovable property
Power of Attorney which is for development rights
Trust deed
Partition deed
Release deed
Partnership deed – if the capital contribution is brought in by way of property
Dissolution/retirement deed – if a partner who did not bring in a property takes it on dissolution/retirement
Settlement deed
Instrument of Exchange of property

Section 32A of the Act read with Rule 4 of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 empowers the Joint Director of Town Planning and Valuation to prepare an Annual Statement of Average Rates of market value for different types of immovable properties situated in every tahsil, municipal corporation or local body area. Pursuant to this, the Joint Director of Town Planning and Valuation prepares an Annual Statement of Average Rates of market value for different types of immovable properties situated in every tahsil, municipal corporation or local body area. This Statement is prepared for a Calendar Year, i.e., 1st January to 31st December of every year and it remains in force for the entire year. The Statement is popularly known as the “Ready Reckoner”. While working out the Average Rates of land and buildings for the Ready Reckoner, the concerned officers are required to take into account the established principles of valuation and any other details that they deem necessary.

Hence, the Ready Reckoner is applicable for the valuation of immovable properties in case of certain instruments.

Ready Reckoner
The Ready Reckoner for Mumbai city divides Mumbai City/Suburbs into various `Village’ numbers and Names. Each Village is further sub-divided into Zones & Sub-Zones. Each Sub-Zone has different Cadastral/City Survey Numbers for various properties.

The Reckoner gives the market values for 5 different types of properties, namely:

Shops/Commercial
Offices
Industrial Property
Residential Property
Developed Land

There are 9 steps to using the Ready Reckoner which are as follows :

(i) F ind the Village Number and Village Name in which the property is located
(ii) A scertain the Zone and the Sub-Zone
(iii) F ind out the CTS No. of the property
(iv) D etermine the type of property, e.g., Residential, Office, etc.
(v) Calculate the Built-up Area of the Flat/Office.
(vi) F ind out the Market Value for the type of Property
(vii) A scertain if there are any Special Factors as prescribed in the Reckoner
(viii) M ake the prescribed Adjustments to the Market Value
(ix) T he Market Value of the Property for Stamp Duty purposes = Adjusted Fair Market Value Rate * Builtup Area of the Property

It is essential to note that the fair market values given in the Ready Reckoner are per square metre of Built-up Area. Hence, the area of the flat must also be converted from square feet to square metre and must be expressed in terms of the Built-up Area. The Reckoner calculates the Built-up Area as Carpet Area * 1.20. The Carpet Area in common parlance means the wall-to-wall area of the flat, whereas the Built-up Area also includes the area of the walls. In addition, there is the concept of Super Builtup /Saleable/Loading Area which is very popular amongst the Builders. It means the Built-up Area plus the pro-rata area for common facilities such as lift, lobby, staircase, passage, etc. It is very important to bear in mind that the stamp duty valuation is neither on the basis of the carpet area nor on the basis of the saleable/super builtup area. It is the built-up area alone which is relevant for this purpose. The conversion rate from sq. metre to sq. feet is 1 Sq. Mtr. = 10.764 Sq. Ft. The Maharashtra Flat Ownership Agreement Act, 1963 now makes it mandatory to mention the carpet area in the Agreement. Hence, arriving at the built-up area is a factor of 20% over the carpet area. However, if the built-up area is mentioned in the Agreement, then that alone must be considered. In cases where only saleable area is mentioned, it may be worthwhile to obtain a Certificate of the Carpet Area from a valuer or from the Municipal Tax Bills.

One of the Special Factors on account of which an adjustment is to be made is whether the building in which the property is located has a lift. Depending upon the number of floors in the building and the fact whether or not the building has a lift, an increase or decrease must be made in the value of the property.

Another adjustment is to be made on account of depreciation. The Reckoner prescribes different depreciation rates based on the age of the property. The lowest rate is Nil for a 2 year old structure and the highest depreciation rate is 70% for a structure which is 60 years old or more. Depreciation is calculated on the adjusted fair market value of the property as given in the Reckoner. The stamp authorities insist upon the proof of the age of the building before allowing the claim of depreciation. Some of the proofs relied upon are the Building Occupation Certificate (OC), Municipal Assessment, etc.

The example given below illustrates the method of calculating the fair market value of a residential flat by using the Ready Reckoner. The facts are as follows :

(i) R esidential Flat at Nepean Sea Road
(ii) The Carpet Area of the flat is 1,800 sq. ft.
(iii) T he Building was constructed in 1976 (38 years old) and it has 15 Floors.
(iv) The Agreement Value of the flat is Rs. 10.50 crore and the stamp duty on the basis of the Agreement Value @ 5% comes to Rs. 52.50 lakh.

The  fair  market  value  calculation  would  be  done  as under :
Village name and number : malabar hill & Khambala hill – no. 7
Zone/Sub-zone : 7/61 CTS no. of plot – 1/ 600
Built-up area of flat : carpet area 1,800×1.2  = 2,160 sq.ft
= 2,160/10.764 = 200 sq. mtr.
Built-up area rate/sq. mtr. : Rs. 8,50,100 depreciation as per table : 40%
add for lift : 10%
Basic   rate   +   10%   for   lift   (-)   40%   depreciation   : rs. 5,61,066 area (sq.mtr)    : 200 sq. mtr.
Value as per reckoner : Rs. 11.22  crore agreement Value    : Rs. 10.50 crore
Value for levying duty – higher of two Values:  Rs. 11.22 crore
Stamp duty on reckoner Value    : Rs. 56.10 lakh
Stamp duty on agreement Value    : Rs. 52.50 lakh
higher Stamp duty due to reckoner :Rs. 3.60 lakh

Closed garages or parking spaces under stilts are valued at 25% of the rate applicable to flats in that zone. Open (to sky) parking spaces are valued at a rate equal to 40% of developed land rate in that zone.

The  ready  reckoner  also  lays  down  the  method  of valuation of tenanted property. the accepted method of valuation  is  the  rent  Capitalisation  method.  there  are two methods of valuation depending upon whether the tenanted  area  is  less  than  the  fSi  available  or  equal to  or  more  than  the  FSI available.  Further,  in  case  the tenants are given any alternative accommodation, then an adjustment is required to be made for the same.  For instance, where tenanted area is equal to/more than FSI available, the valuation of the property is 112 times the monthly rent. however, this concessional valuation method is only available in case of those properties where there is documentary evidence of tenancy for 5 years or more  or  at  least  since  30th  march  2000.  The  tenancy proofs  considered  are  ration  Card,  tenancy  receipt, municipal tax Bills in name of tenant, telephone bills, etc.

The  ready  reckoner  Values  may  give  absurd  results in the event there is a fall in the property values in a particular  year.  For  instance,  under  the  current  ready Reckoner the value of all Office premises in a certain area at  nariman  point  is  Rs.  48,120  per  square  foot.  While some buildings may be able to command such prices, not all buildings and within them not all offices can get such an astronomical price!

Of late, there is a new trend in the reckoner. the same CTS  no.  appears  in  two  different  zones  of  the  same village with different rates for the same CTS no. to give an example, in the Colaba division, there is one CTS no. which has a rate of Rs. 6,13,100/square metre and also a rate of Rs. 3,44,700 per square metre, i.e., a variation of more than 170%! there are several such duplications in the reckoner. What does one do in such a scenario – adopt the lower of the two rates? the registrar’s answer is very clear – adopt the higher of the two rates!!

The average increase in the rates in the 2015 reckoner over the 2014 is 10%. thus, while the State Government has brought down the stamp duty rates to a maximum of 5%, it is increasing the reckoner rates every year.

Valuation of Development Agreements
A recent feature in the Ready Reckoner is a specific valuation  mechanism  for  development   agreements  or DAS. under a DA, a land owner grants a right to a developer to enter upon his land and develop the same. the  consideration  for  the  same  may  consist  of  one  or more or a combination of the following modes:

(a)    DA for Money – where the consideration paid by the developer is money. In this case, the valuation for stamp duty is straight forward since it is akin to  a  transfer  of  land  and  the  reckoner  rates  for developed land would be applicable.

(b)    DA for Area Sharing – where the consideration by the developer consists of built up area in the property under development. thus, under this case, the land owner would give a da of certain portion of the land retaining the balance area. on this balance area, the developer would carry out a construction for the owner. In this case, the valuation for stamp duty gets complicated. In cases of da with area Sharing, one question which always arose when working out the land owner’s taxation was that, how should the consideration be valued? Some decisions have held that the cost of construction of the building on the owner’s portion of the land should be treated as  the sale consideration – NS Nagaraj[TS-744- ITAT-2014 (Bang)].

The  Bombay  high  Court,  in  cases  of  Prabha  Laxman Ghate vs. Sub Registrar and Collector of Stamps, AIR 2004 Bom. 267 and Chandrakant B. Nanekar vs. State of Maharashtra, PIL No. 54 of 2011, has held that in a da with Area Sharing where flats are constructed by the developer on the owner’s land area, it is clear that there is no transfer of property or interest in property by the owner in favour of the developer. All that is provided is that the developer shall develop the property and reserve for the owner certain flats on the said property. The owner, therefore, continues to be the owner of the flats, which are reserved for him on his own land. Therefore, there was no question of the owner being called upon to pay stamp duty on such flats. The State Government has issued a Circular dated 1st March 2014 to the same effect.

accordingly, in the case of a da with area Sharing, the reckoner now provides for a valuation mechanism which adopts the higher of the following two values as the valuation:

(i)    Construction cost of land owner’s area; plus monetary consideration, if any, to the owner. in case any deposit is paid to the owner, then interest on the same must be considered @ 10% p.a. or a higher rate, if expressly provided in the DA.

or

(ii)    Area for which da given to developer * rate for developed land under the reckoner

In  working  out  the  above  values,  fungible  FSI  allowed under  the  development  Control  regulations  should  be added and fungible FSI premium payable for the same should be reduced. further, development fees payable by the developer to the BMC should be added in valuing the construction cost of land owner’s area.

Further, if the developer were to retain any flats/offices/ shops for his own personal use under a da, then from the market value of such premises based on the reckoner, the cost of construction  of  the  new  premises  would  be reduced. only the balance would be leviable with stamp duty.

(c)    DA for Revenue Sharing – where the consideration to the owner consists of a share in the revenue earned by the developer from selling the property. Under this case, the land owner would give a DA  for the entire land and receive a share of the gross revenue. In this case, the valuation for stamp duty also gets complicated and is explained below.

In the case of a DA with revenue Sharing, the reckoner provides for a valuation mechanism which adopts the higher of the following two values as the valuation:

(i)    Owner’s share as per allowable use as on date as per today’s selling price * 0.85; and monetary consideration, if any, to the owner.  In case  any deposit is paid to the owner, then interest on the same must be considered @ 10% p.a. or a higher rate, if expressly provided in the DA.

or

(ii)    Full area for which DA given to developer * rate for developed land under the reckoner.

Importance of Stamp Duty valuation
The  Stamp  duty  valuation  of  an  immovable  property  is increasingly becoming important also as a reference point under various other laws:

(a)    Section 50C of the income-tax act states that if the sale consideration  received for transfer of a land  or building or both, held as a capital asset, is less than the value adopted for payment of stamp duty, then the value adopted would be deemed to be   the sale consideration. in this context, the decision of the Kolkata itat in the case of Chandra bhan Agarwal, [2012] 21 taxmann.com 133 (Kol. iTAT) rendered in the context of fair market value u/s. 50C is very appropriate to our case:

“….The expression ‘fair market value’, in relation to any immovable property transferred, means the price the immovable property would ordinarily fetch on sale in the open market on the date of execution of the instrument of transfer of such property. The fair market value is the best price which vendor can reasonably obtain in the circumstances of the particular case and what is required to be done  for the ascertainment of such market value is to ascertain the price which a willing, reasonable and prudent purchaser would pay for the property. In ascertaining that, all factors having any depressing or appreciative effect on the value of the property have to be taken into account ….. The value of    a property cannot be stated in an abstract form and it varies from time to time and can only be stated with reference to so many factors, i.e., the locality, situation, general appearance in the area, availability of shopping and marketing facilities, condition of public ways and transportation, availability of utilities, and many other things. …….
The provisions of section 50C, in the present context, state the  fair  market  value  and  value  is estimation of a probable price of the property, i.e., the deeming fiction. The deemed value is to be ascertained and for that, as discussed above, section 50C has postulated certain conditions. In the instant case, the fair market value estimated by DVO has been challenged as DVO’s report has no basis, because it has not discussed any  of the factors, such as locality, situation, general appearance in the area, availability of shopping and marketing facilities, conditions of public ways and transportation, availability of utilities etc. and etc. The DVO’s report is a cryptic one, and the assessment is based on value as assessed by Registrar and that also on the basis of additional stamp duty asked for. …………..  In this case,  the DVO has not ascertained any market value which a willing, reasonable and prudent purchaser would pay for this property. Even the DVO has not considered the factors having any depressing or appreciative effect on the value of the property.”

Thus,  the  ITAT  has  very  clearly  stated  that  even  the valuation must consider all value depressing factors.

(b)    Similarly, section 43Ca of the income-tax act provides that if the sale consideration received for transfer of a land or building or both, held as stock- in-trade, is less than the value adopted for payment of stamp duty, then the value adopted would be deemed to be the sale consideration.

(c)    If an individual or an huf gets any immovable property without consideration, the stamp duty value of which exceeds Rs. 50,000 then the stamp duty value would be treated as his income u/s. 56(2). Similarly, if he buys any immovable property for a consideration which is lower than the stamp duty valuation by Rs. 50,000 or more, then the difference would be treated as the income of the buyer.

(d)    The  maharashtra  Vat act  levies  Vat  for  builders under the Composition Scheme @ 1% of the value adopted for payment of stamp duty or the agreement value, whichever is higher.

(e)    The property tax is levied based on the Stamp duty ready reckoner Valuation.

(f)    The final nail in the coffin is the Fungible FSI Premium payable to the BMC under the development Control regulations.  It is calculated as a percentage of the reckoner Value of the property.

Thus,  the  reckoner  value  is  becoming  an  increasingly important source of revenue not just for the Stamp Office but also for other revenue departments.  it is one arrow which Kills Six Sparrows!

Conclusion
Several Supreme Court and high Court decisions have held  that  the  ready  reckoner  Valuation  is  not  binding on the assessees and it is at best a prima facie guideline for  valuation.  inspite  of  that  the  registration authorities insist  upon   following  the  reckoner  with  the  result  that the property buyer has no option but to pay or litigate. an added consequence of this is now that the property seller could also end up paying tax on deemed income in respect of the property sold by him. hence, the reckoner is a very dangerous sword in the hands of the State Government which needs to be wielded with great discretion or else   it runs the risk of playing havoc in property transactions. the decision of the allahabad high Court in the case of Praveen Kumar Jain [TS-10-HC-2015(All)] against steep and  arbitrary  increases  in  the  Stamp  duty  reckoner values is an eye opener in this respect:

31.    The steep and mechanical increase or decrease in circle rates makes the life dearer. In a country where more than 35% population is below the poverty line, the power conferred by Stamp Act to provide circle rate for the purpose of minimum evaluation of property to ascertain stamp duty increases the living cost where the citizen    is the ultimate sufferer. In a welfare society, the District Magistrate or the Collector does not have got power to discharge their obligation mechanically without assigning reason, more so where the citizens have to pay from their pocket with regard to sale and purchase of property.

32.    In a welfare State, the Government is supposed to act or work in a just and fair manner and people should not be burdened to pay stamp duty by increase of circle rate every year mechanically. It should not be forgotten that the essential requisite for the levy of stamp duty by the State is the existence of an instrument evidencing a transaction by the citizens. The transaction is convened to the instrument whereby property is transferred. The provision does not seem to confer a power to increase stamp  duty  mechanically  to  generate  revenue   by  the State.

33.    Once a circle rate is provided after making necessary exercise in pursuance to Rules (supra), there appears to be no reason to revise it mechanically, that too without taking note of the ground realities and the poverty ridden society. …………
Life should not be made overburdened by swift change of law/circle rate to generate fund without utilising the available resources honestly with fairness to the last penny. Moreover, the purpose of Stamp Act does not seem to generate revenue as regular source of revenue like tax statutes and other alike enactments.

Decision must be conscious keeping in  view  the ground financial capacity/problem of the commoners or lower and middle class of society who constitute the bulk of the country.

….To sum up, while issuing the circular or order in pursuance to Stamp Act read with 1997 Rules(supra) framed thereunder, it shall be obligatory on the part of the Collector/District Magistrate to assign reason and do necessary exercise in view of Rule 4 read with Rule 5 of the Rules to ascertain necessity to increase or decrease circle rate. Since the impugned order does not contain any reference to the exercise done with reference to Rule 4 read with Rule 5, it does not seem to be sustainable and violative of statutory mandate.

34.    It appears that the Collectors/District Magistrates all over the State changed the circle rates mechanically without taking a note of the legal proposition discussed hereinabove, which does not seem to be justified.  It shall be appropriate that the Chief Secretary/Principal Secretary, Revenue should circulate the present judgment to all the District Magistrates/Collectors for future guidance during the course of revision of circle rates. Henceforth, circle rate shall not be revised except keeping in view the observation made in the body of present judgment.”

In conclusion, we may repeat the words of india’s former prime minister Dr. Manmohan Singh:

“I think as far as black money in real estate is concerned, unfortunately that is a reality and one way out of this would be to lower the stamp duties,…… stamp duties in the country are a big obstacle to cleaning the mess with regard to transactions in real estate…”

Is anybody listening?

Procedure of Enquiry (Continued) – Part III Shrikrishna

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Procedure of Enquiry (Continued) – Part III Shrikrishna

(S) — Oh Arjun. You are coming just now? I was about to leave.

A — Sorry. I was held up in the income tax office. S — So late in the evening? Surprising! Government officers have become so sincere?

A — N o. This is the result of not working sincerely when they should have worked. Now scrutiny assessments are getting timebarred. So they make us dance!

S — But that is upto 31st of March. Isn’t it?

A — Y es. But sometimes some ‘special work’ remains. That needs to be completed in April.

S — A nyway. You wanted to know something about disciplinary proceedings.

A — Y es. That my friend has sent a reply to the Institute. I mean, to Director-Discipline.

S — N ow, as I told you, it will be sent to the complainant. He will write a rejoinder. After that, the disciplinary directorate will decide whether the respondent – that means your friend – is prima facie guilty or not.

A — T hat much you told me last time. I want to know how the enquiry is conducted.

S — See, if you are prima facie guilty, you are again given an opportunity to submit your explanation to the prima facie opinion. Then you are called for enquiry.

A — I s it always at Delhi? S — I t depends. Usually the Disciplinary Committee (‘DC’) or Board of Discipline (‘BOD’) holds a camp of one or two days in all major cities by rotation.

A — Y ou mean, they go to various places with all the records?

S — Y es. Mumbai, Ahmedabad, Chennai, Bengaluru, Kolkata etc. They carry all the records. Their staff members also travel with the members of DC or BOD.

A — O h!

S — T he record they carry is massive! Nothing is left in the regional offices. It is totally centralised.

A — O K. How do they hold an enquiry?

S — See. If it is a First Schedule offence, it is before BOD.

A — Who are on BOD?

S — P resident, another Central Council Member (CCM) and a Government nominee. Two members form a quorum.

A — And DC?

S — D C deals with offences covered under Second Schedule or when there are offences under both the Schedules. I t consists of 5 members. President, 2 CCMs and 2 Government nominees. Quorum is of three. But at least one Government nominee’s presence is a must. That is not so for BOD.

A — Complainant is also present?

S — Yes. He and his counsel also, if any.

A — But what if complainant does not come?

S — Still, the enquiry is conducted.

A — Do they give adjournments?

S — Y es. But only once! You cannot repeatedly seek time unlike your tax proceedings.

A — R espondent also can take a counsel?

S — O f course, yes. He can be a lawyer or a CA or a CS or ICWA member.

A — What do they ask?

S — Firstly, all the parties present are asked to identify themselves. E verything is tape recorded. You have to speak into the mike.

A — O h! Everything is in English?

S — Y es. But sometimes, parties do not know English; or cannot speak in English. Then they can speak in Hindi or another language, which needs to be translated.

A — I see.

S — T hen, Complainant and Respondent are put on oath. The BOD and DC have the powers of a Civil Court. So they can administer oath. The complainant is asked to read out the charges. The Committee asks questions to the complainant to define the charges.

A — A nd what if the complainant is not there?

S — T hen, the Administration does that job.

A — T hen?

S — T hen the Respondent is asked whether he has understood the charges. After that, he is asked whether he pleads guilty or he denies the charges and would like to defend himself.

A — O bviously, he will try to defend himself. S — Sometimes, the guilt is so patent and self-evident that it is pointless to defend. The BOD or DC members appreciate if you candidly accept the guilt. That helps in softening the punishment.

A — T ell me the punishments again. You had told me once, but I forgot.

S — F or First Schedule item, the punishment is one or more of the following three: A reprimand or fine not exceeding Rs. 1 lakh and/or suspension of membership for a maximum period of 3 months.

A — A nd for Second Schedule offence?

S — A gain one or more of the three. A reprimand or maximum fine upto Rs. 5 lakh, and/or suspension of membership for any length of time.

A — O h! My God!

S — A rjun, now I am in a bit of a hurry. I will explain the further part when we meet next.

A — A s you please, Lord!

S — Tathaastu !

NOTE: This dialogue is based on the procedural rules contained in Chartered Accountants (Procedure of Investigations of Professional and other misconduct and conduct of cases) Rules, 2007 published in official Gazette of India dated February 28, 2007 (‘Enquiry Rules’).

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Stay on Recovery – Appeal filed before first Appellate Authority – Stay Application pending – Recovery of the amount by attaching the bank account not justified: Central Excise Act, 1944.

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Patel Engineering Ltd. vs. UOI 2015 (315) ELT 533 (Bom.)

The
Revenue proceeded to recover the entire amount by attaching the bank
account towards demand on account of service tax and penalty even though
the stay application was pending.

The grievance of the
Petitioner is that though an appeal has been filed before the
Commissioner of Central Excise (Appeals) against an order of
adjudication and even the stay application was pending, the Revenue
proceeded to recover the entire amount by attaching the bank account.
This action was purportedly taken in pursuance of a circular dated 1st
January 2013 of the Central Board of Central Excise and Customs.

The
Court observed that the circular has been considered and has been dealt
with in a judgment of this Court in Larsen & Toubro Limited vs.
Union of India (2013) (288) ELT 481 (Bom) wherein the court observed as
under:

“….The impugned circular dated 1 January 2013 mandating
the initiation of recovery proceedings thirty days after the filing of
an appeal, if no stay is granted, cannot be applied to an assessee who
has filed an application for stay, which has remained pending for
reasons beyond the control of the assessee. Where however, an
application for stay has remained pending for more than a reasonable
period, for reasons having a bearing on the default or the improper
conduct of an assessee, recovery proceedings can well be initiated as
explained in the earlier part of the judgment…..”

The court
further observed that there was no reason or justification on the part
of appellate authority to keep the stay application pending and take
recourse to coercive remedies under the law.

The law laid by the
Court on the interpretation of the circular of the Central Board of
Central Excise and Customs would bind all authorities who are subject to
the jurisdiction of this Court. In this case, we are of the view that
the court directed the appeal which has been filed by the Petitioner, to
be disposed of expeditiously by the Commissioner of Central Excise
(Appeals) within a period of four weeks of the date on which an
authenticated copy of this order is produced on the record.

The
Court further directed that henceforth the controlling authority shall
issue a circular to all the authorities within his jurisdiction that the
directions contained in the judgment of this Court in Larsen &
Toubro Limited (supra) shall be duly observed.

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Document not compulsorily registerable– Irrevocable Power of attorney – Relating to transfer of immovable property is liable for compulsory registration- Registration Act, 1908, section 17(1)(g).

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Jai Kumar vs. Hanuman & Ors. AIR 2015 Rajasthan 24 The petitioner plaintiff Jai Kumar through his power of attorney holder brother Yogesh Chandra filed a suit for declaration and permanent injunction against the respondent defendant. When during the course of statement by the power of attorney holder Yogesh Chandra the power of attorney given by the plaintiff – Jai Kumar was sought to be exhibited, an objection was raised that the power of attorney was neither registered nor the same bear requisite stamp duty and therefore, the same was inadmissible in evidence.

In reply, it was contended that the document was not required to be registered and as the power of attorney was executed at Qatar before the Indian Embassy and requisite fee amounting to 75 Qatari Riyals was paid, the same was sufficient in terms of sections 32 and 33 of the Indian Registration Act, 1908 (`the Act’).

The trial court came to the conclusion that the power of attorney was required to be compulsorily registered u/s. 17(1)(g) of the Act and as the same was not registered, u/s. 49 of the Act, the same was inadmissible.

The Hon’ble Court observed that a bare look at the said provision reveals that the power of attorney relating to transfer of immovable property should be `irrevocable’ for the same to be liable for compulsory registration.

The power of attorney nowhere indicates that the same was irrevocable. The requirement of applicability for provision of section 17(1)(g) of the Act, i.e. the power of attorney must be irrevocable, not being present in the document, it cannot be said that the same was compulsorily registerable.

The trial court without considering the said aspect has presumed the power of attorney as irrevocable, which presumption on face of it is incorrect and as such the said finding cannot be sustained.

So far as the objection raised by learned counsel for the respondent regarding deficient stamp duty is concerned, the submission has substance. The document and the receipt alongwith the document, does not indicate payment of any stamp duty on the said power of attorney. The amount of 75 Qatari Riyals said to have been paid by the plaintiff Jai Kumar cannot be said to be a payment of stamp duty.

Even otherwise, under the provisions of section 20 of the Stamp Act, even if a stamp duty has been paid in another State and the document is brought within Rajasthan, the document is chargeable with the difference of duty in case the duty to be paid is higher and the duty should have been already paid on the document `in India’.

In that view of the matter, even if, any payment has been made by the Petitioner at Qatar, which though cannot be termed as payment of stamp duty, and the Power of Attorney is liable to payment of stamp duty under article 44 of the Schedule attached to the Stamp Act.

The document was, therefore, liable to be dealt with by the trial court u/s. 39 read with sections 37 and 42 of the Stamp Act for determination and payment of deficient stamp duty.

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Probate of Will – Will though not probated, that does not prevent vesting of property of deceased in executor-Succession Act, 1925 section 211,213.

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In the case of Subodh Gopal Bose, AIR 2015 Calcutta 27

One Subodh Gopal Bose, was the owner of substantial properties, both movable and immovable. He died on 1st August, 1975 after having made and published his last will and Testament dated 8th July 1975 leaving behind as his only legal heirs, his wife Kamala Bose, and four daughters. Who are the beneficiaries under the said Will and Testament? Kamala Bose expired in 1977. Gita Dutta, one of the daughters, expired in June 2012. The present petition has been filed by Dipak Sarkar in his capacity as the executor of the will and Testament dated 28th April 2012 made and published by Gita Dutta. Application for grant of probate of the said will of Gita Dutta is still pending.

Vesting of property of deceased in executor does not take place as a result of probate. On the executor accepting his office, the property vests in him and the executor derives his title from the Will and becomes the representative of the deceased even without obtaining probate. The grant of probate does not give title to the executor. It just makes his title certain. U/s. 213 of the Indian Succession Act, the grant of probate is not a condition precedent to the filing of a suit in order to claim a right as an executor under the Will. The vesting of right is enough for the executor to represent the estate in a legal proceeding. The right of action in respect of personal property of the testator vests in the executor on the death of the testator. S/s. 211 and 213 of the said Act have different areas of operation. Even if the will is not probated that does not prevent the vesting of the property of the deceased in the executor and consequently, any right of action to represent the estate of the executor can be initiated even before the grant of probate.

The present petitioner has made this application in his capacity as executor of the last will and Testament of Gita Dutta. However, no Court of competent jurisdiction has granted probate of such will as yet although application for such probate may be pending. As such, the present petitioner cannot exercise any right as executor of the will of late Gita Dutta.

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Precedent – Judicial Discipline – Conflicting decisions by CESTAT Benches – Appropriate Course for the second Bench is to refer the matter to the Larger Bench: Central Excise Act, 1944.

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CCE, Mumbai vs. Mahindra and Mahindra Ltd. 2015 (315) ELT 161 (SC)

There is a conflict of opinion between two Benches of the Customs, Excise and Service Tax Appellate Tribunal.

Since two Benches of the same strength of Members have taken two conflicting views, that judicial discipline requires that instead of disagreeing with the view taken by the First Bench, the appropriate course for the second Bench would have been to refer the matter to a Larger Bench. This is the basic requirement of judicial discipline. Since this has not been done, the orders were set aside and remand both the appeals back to the Tribunal and directly the President to constitute a larger bench of three Members to decide the issue.

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Co-operative Societies – Charge on immovable property of Member borrowing loan – Society to get charge recorded in record of rights: Maharashtra Co-op Societies Act, 1961, section 48.

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Gajanan Eknath Sonan Kar vs. Shegaon Shri Agrasen Co-op. Credit Society Ltd. Buldana & Anr. AIR 2015 (NOC) 163 (Bom.)

The appellant plaintiff purchased, admeasuring 2 acres by registered sale deed dated 19-04-2002 from Raju Gopikisan Rathi. Before purchasing the property, he had ascertained, by all known methods, the saleable interest of the vendor. He had verified 7/12 extract when he purchased the land in the year 2001-02 but there was no charge mentioned in the said 7/12 extract. The vendor Raju Gopikisan Rathi on 17-06-2002, i.e. after the execution of sale deed in favour of appellant, mortgaged the said property with respondent No.1 Credit Co-op. Society, which granted him loan by mortgage of the said property without verifying whether he had sold the property to the appellant. Raju Rathi was member of respondent No.1 Credit Co-op. Society since he obtained the loan but the appellant had no concern with the said society. Obviously, because he had purchased it even before it was mortgaged. The appellant plaintiff issued a notice on 27-08-2012 u/s.164 of the MCS Act and filed suit on 10-09-2012, i.e. before the expiry of two months period for perpetual injunction u/s. 38 of the Specific Relief Act against respondent No. 1 Society and claimed injunction against Society for attachment of suit property. Respondent No. 1 Society, i.e. defendant No.1 therein, filed an application with a prayer to dismiss the suit for non compliance of section 164 of the MCS Act. The application was heard and the trial Judge allowed the said application and dismissed the suit.

The Hon’ble Court observed that it is thus clear from the above facts that the mortgage was made two months after the sale deed was executed and actually mutuated on 25- 11-2003 in the revenue records. Therefore, the appellant was not at all aware about the future course of action which Raju Rathi had decided to adopt after execution of sale deed. He is, therefore, at all not concerned with the mortgage made with the respondent No. 1 Credit Society. What is relevant is the entry of charge and the date thereof in the revenue record of the Govt. and not in the office of the society. At any rate, mere filing of application for loan on 14-12-2001 cannot be said to be charge u/s. 48 and Rule 48(5) of the Act and the Rules.

A careful reading of section 48 of the MCS Act and Rule 48 of the Rules framed thereunder, establishes that for knowledge to the people at large about the charge over immovable property or for claiming protection of section 48 of the Act, it would be mandatory for the society to get the charge on immovable property created or recorded in the record of rights maintained by the village officers of the village where the property is situated. Sub-rule 5 clearly says that if such charge is shown in the record of rights the same shall be treated as a reasonable notice of such charge created u/s. 48. Therefore, unless and until there is compliance of these two provisions, namely section 48 and Rule 48(5), the people at large cannot be expected to know about the charge, if any, on immovable property. In other words, if a society wants to claim protection or benefit of section 48 of the MCS Act, the same can be obtained only from the date the charge is actually recorded in the record of rights and not otherwise. I hold that provisions of section 48 and Rule 48(5) are mandatory in nature for a cooperative society if a cooperative society wants to claim benefit/protection of the said provisions.

It is well settled legal position of interpretation that when a similar expression is used in different places in a statute, it carries the same meaning unless contrary intention is disclosed. The institution of the suit claiming perpetual injunction to protect the civil right of the appellant qua the suit property cannot be said to be either an `act’ touching the business of the society even for that matter, `dispute’ touching the business of the society. It must always be construed that the `act’ touching the business of the society means `legal’ act for attracting the provision of section 164 of the Act. The act of the society in mortgaging the suit property which was already sold to the appellant who was not even a member of the society cannot fall in the definition of section 164 of the Act. Therefore, the provisions of section 164 will have no application in addition because the plaintiff wants to exercise his independent civil right.

The Respondent No. 1 Society is unnecessarily harassing the appellant/plaintiff without even bothering to look that the fault clearly lay with the respondent No. 1 Society in not taking the search report in respect of execution of sale deed in favour of the appellant on 19-04-2002 as against the charge being recorded in the revenue records on the suit property on 25-11-2003 for the first time. The respondent No.1 society is not at all justified in harassing the appellant when he has innocently and bona fidely and with all care, caution and circumspection purchased the suit property. Respondent No.1 should be saddled with exemplary costs payable to the appellant in the sum of Rs.10,000/-.

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Audit Documentation – a relevant defense or mere record keeping

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Robert H. Montgomery in his book, ‘Montgomery’s Auditing (1912)’ had
said, “The skills of an accountant can always be ascertained by an
inspection of his working papers.” More than a century has passed, but
this statement has not lost its relevance. On the contrary, over the
years, given the quantum of litigation that the auditors have had to
face the world over, these words have become all the more significant.
‘Work not documented is work not done’ is a maxim that is sworn by most
reviewers from regulatory or audit oversight bodies particularly in
jurisdictions overseas.

SA 230 on Audit Documentation provides
guidance on the nature of documentation that needs to be maintained
which would provide sufficient and appropriate record of the basis on
which audit was concluded and the audit opinion issued. Audit
documentation also serves as an evidence that the audit was planned and
performed in accordance with Standards on Auditing and the applicable
legal and regulatory framework. Audit documentation should be such that
an experienced auditor, having no previous familiarity with the audit,
can independently review and reach similar conclusions as those reached
by the present auditor.

During the course of his audit, the
auditor usually encounters issues where an expert’s opinion has to be
called for, or a reservation is expressed by either the management or
the auditor on the treatment of a particular transaction or a position.
It is imperative for the auditor to design the audit procedures in a
manner that by performing such procedures, all the material and relevant
factors having an impact on the true and fair opinion are brought to
light. While it is imperative that the position taken is based on sound
judgment and in compliance with the applicable accounting/regulatory
framework, it is equally important that such judgment is well
articulated in the audit documentation. The first defense for an auditor
is his documentation which should be robust enough to prove that audit
was conducted in adherence to the standards.

The form and
content of audit documentation should be designed to meet the
circumstances of the particular audit. The extent of documentation is
influenced by various factors such as:

a. Nature of the audit
b. Audit procedures intended to be performed
c. Audit evidence to be collected
d. Significance of such evidences
e. Audit methodology and tools used

Documentation
obtained during the course of audit can be segregated into those
forming part of the PAF (Permanent Audit File) and CAF (Current Audit
File). A PAF contains those documents, the use of which is not
restricted to one time period, and extends to subsequent audits as well.
E.g. Engagement letters, Communication with previous auditor,
Memorandum of Association, Articles of Association, Organization
structure, List of directors/partners/ trustees/ bankers/lawyers, etc.
On the other hand, a CAF contains those documents relevant for the
period of audit.

Typically, audit documentation would cover the following –
– Client evaluation and acceptance
– Risk Assessment
– Audit planning discussions
– Audit programs
–
Working papers relating to all significant areas documenting the
approach, risks and controls to the relevant area tested, substantive
and analytical procedures performed and the conclusions reached
– Evidence supporting the use and reliance on the work of experts, internal audit etc.
– Evidence of review by partner and manager
– Evidence of communication with those charged with governance
– Management representations

Audit
documentation may be in the form of physical papers or in electronic
form. In past years, audit documentation was maintained in physical
paper files complete with links and notations necessary for independent
understanding and review of work performed. The working papers are the
property of the auditors and the auditor is not bound to provide access
to these work papers to the client.

Over the last few years,
audit documentation has witnessed radical refinement in the manner in
which it is maintained. It has taken form of electronic files which are
prepared using software specifically designed for documentation
purposes. Such software coupled with advancements in telecommunications
has enabled teams working across multiple locations/geographies to
remotely access the same electronic audit documentation file and
document the work performed for their respective client location. Such
software also results in significant economies on a year-on-year basis,
as the base documentation relating to IT systems, processes, audit
programs needs to be done only once at the time of set up of the
electronic audit file. These software enable the electronic audit file
to be ‘rolled forward’ for the next accounting period. As such, the base
documentation relating to knowledge of the client, the industry, IT
systems, processes, flow charts, audit programs etc. gets pre-populated
in the next year’s audit file and the team would then need to update
these for current changes. Such documentation software has features such
as restrictive access rights to the audit file, enabling audit trail by
way of sign off of completion of the work performed by the team member
and its review by manager/partner, enabling reminders to owners of the
file for pending documentation, compulsory archiving of files post
expiry of the mandatory close-out period and many more. Electronic
documentation has revolutionised the manner in which audit work is
documented and has resulted in huge savings in terms of avoiding of
documentation that is repetitive, easy access to and reference of work
done in the past, ease in acquainting of new team members with the
client’s background, reduction in storage costs (for physical files) and
many other benefits. Physical files are maintained only for filing
certain essential documents such as engagement letters, confirmations,
representation letters, original signed copies of the financial
statements etc. The auditor would however need to establish an adequate
IT infrastructure to support electronic documentation of work done.

A
pertinent question that an auditor usually faces is whether he is
required to document all the evidences procured during the course of his
audit. It actually depends on the significance as well as the
materiality of the financial statement caption and the inherent risk of
material misstatement related thereto. The regulatory compliances and
disclosures may also impact the level of documentation. For instance,
the level of documentation required for testing of rental deposits
accepted by a real estate company may not be as detailed as that
required for a borrowing made by the same company. The compliance and
disclosure requirements for borrowings are more onerous and detailed as
compared to rental deposit, as such the level of documentation that
would support auditor’s verification would also get influenced by such
factors.

The administrative process of completion of the
assembly of the final audit file after the date of the auditor’s report
does not construe as performance of new audit procedures or the drawing
of new conclusions. Changes may, however, be made to the audit
documentation during the final assembly process if they are
administrative in nature. Examples of such changes include:

i. Deleting or discarding superseded documentation.
ii. Sorting, collating and cross referencing working papers.
iii. Signing off on completion checklists relating to the file assembly process.
iv.    Documenting audit evidence that the auditor has obtained, discussed, and agreed with the relevant members of the engagement team before the date of the auditor’s report.

However, the auditor is expected to complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report.   The Standard on Quality Control (SQC) 1 requires firms to establish policies and procedures for the timely completion of the assembly of audit files. An appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor’s report. The retention period for audit engagements, as per SQC 1, ordinarily is no shorter than seven years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.

If, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new conclusions after the date of the auditor’s report, the auditor is required to document:

–    the circumstances encountered;
–    the new or additional audit procedures performed, audit evidence obtained, and conclusions reached, and their effect on the auditor’s report; and
– When and by whom the resulting changes to audit documentation were made and reviewed.

Examples of exceptional circumstances include facts which become known to the auditor after the date of the auditor’s report but which existed at that date and which, if known at that date, might have caused the financial statements  to be amended or the auditor to modify the opinion in the auditor’s report.

We will now consider some case studies on audit documentation.

Case Study i
Documentation after completion of audit -Key considerations
The  audit  team,  post  completion  of  audit,  receives  a confirmation from the sole debtor of the company confirming NIL balance whereas the balance appearing in the financial statements  was  Rs.  80  million  which  is  material  to  the financial statements. In the absence of the confirmation, alternate audit procedures were performed to obtain evidence on the accuracy of the balance and the same was documented sufficiently and appropriately.

Is there a need to take into consideration the confirmation received post finalisation of the audit and how would that be documented?

Analysis and conclusion
As per SA 230, this situation is an example of an exceptional circumstance. This situation reflect facts which become known to the auditor after the date of the auditor’s report but which existed as at that date and which, if known on that date, might have caused the financial statements to be amended or the auditor to modify his audit opinion. The resulting changes to the audit documentation would need to be reviewed and the engagement partner would need to assume final responsibility for the changes.

In this case, the auditor is required to document:
–    the circumstances encountered;
–    the new or additional audit procedures performed, audit evidence obtained, and conclusions reached, and their effect on the auditor’s report; and
–    When and by whom the resulting changes to audit documentation were made and reviewed.

The above situation will also need to be evaluated in terms of the requirements of the Guidance note on revision of the audit reports as well as SA 560 Subsequent events issued by the Council of the institute of Chartered accountants of india, which states that a revision of the audit report may be warranted in several instances involving reasons such as apparent mistakes, incorrect information about facts, subsequent discovery of facts existing at the date of the audit report, etc.

Case Study ii
Revision in work papers
The audit team, during the finalisation of the audit of a client in the pharmaceutical industry, had several revisions in the financial statements. Consequently, the related working  papers  also  underwent  numerous  changes. the audit manager is of the opinion that the old papers can be destroyed wherever there were revisions and it is enough to preserve the final version. However, the audit team is of the opinion that all revisions need to be filed for traceability. Which opinion is right ?

Analysis and conclusion
As  per  para  A22  of  SA  230,  “the  completion  of  the assembly of the final audit file after the date of the auditor’s report is an administrative process that does not involve the performance of new audit procedures or the drawing of new conclusions. Changes may, however, be made to the audit documentation during the final assembly process if they are administrative in nature. Examples of such changes include: deleting or discarding superseded documentation.”

Hence, old papers which have been revised may be deleted or discarded.

Closing Remarks
An auditor simply cannot get away with documentation or its importance. in fact, audit documentation commences even before the auditor accepts an audit engagement. Given the empowerment to statutory authorities for re-opening  of financial statements as provided by the Companies Act, 2013 coupled with increased regulatory supervision on the functioning of the audit profession, auditors would need to ensure that timely, adequate and robust documentation is maintained to support the basis on which audit opinion has been issued. this will be all the more accentuated where areas of judgment and estimation uncertainty is involved. oral explanations by the auditor on his own do not represent adequate support for the work performed by him but these may be used to clarify or explain audit documentation. On the other hand, too much documentation can be inefficient and may impact the profitability/recovery rates for the auditor. So for most of the firms, the challenge would be to maintain the right balance. SA 230 sets out the guiding  principles in this regard and compliance with SA 230 would result in sufficiency and appropriateness of audit documentation.

Previous GAAP on first-time adoption of Ind AS

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IFRS 1 First-time Adoption of International Financial Reporting Standards and its equivalent Ind AS 101 First-time Adoption of Indian Accounting Standards prescribe several exemptions and exceptions in preparing an opening balance sheet on transition from previous GAAP to IFRS and Ind AS respectively. Without these exemptions and exceptions it would be extremely difficult for companies to transition, as that would entail going back in eternity to prepare opening balance sheet/ financial statements as per IFRS or Ind AS.

Ind AS 101 is modelled on the same lines as IFRS 1; however, there are some critical differences. One of them is with respect to previous GAAP, from which one would transition to IFRS or Ind AS. IFRS 1defines the term “previous GAAP” as a basis of accounting that a first-time adopter used immediately before adopting IFRS. Thus, an entity preparing two complete sets of financial statements, which are publicly available, for example, one set of financial statements as per the Indian GAAP and another set as per the US GAAP, may be able to choose either GAAP as its “previous GAAP.”

Ind-AS 101 defines the term “previous GAAP” as the basis of accounting that a first-time adopter used immediately before adopting Ind-AS for its statutory reporting requirements in India. For instance, companies preparing their financial statements in accordance with section 133 of Companies Act, 2013, will consider those financial statements as previous GAAP financial statements.

The Securities and Exchange Board of India (SEBI) had on 9th November, 2009 issued a press release permitting listed entities having subsidiaries to voluntarily submit the consolidated financial statements as per IASB IFRS. Further, SEBI issued a circular, dated 5th April, 2010, wherein the Listing Agreement was modified to this effect from 31st March, 2010. Consequent to this, many companies voluntarily prepared and published audited consolidated IASB IFRS financial statements. However, Companies Act, 2013 requires all Indian companies to prepare consolidated financial statements under Indian GAAP, with a one year moratorium (see box below).

Companies (Accounts) Rules, 2014

Rule 6
Manner of consolidation of accounts.- The consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards:

Provided that in case of a company covered under subsection (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

Companies (Accounts) Amendment Rules, 2015

In the Companies (Accounts) Rules, 2014,-

(ii) in rule 6, after the third proviso, the following proviso shall be inserted, namely:-

“Provided also that nothing in this rule shall apply in respect of consolidation of financial statement by a company having subsidiary or subsidiaries incorporated outside India only for the financial year commencing on or after 1st April, 2014.”

Consequently, before transiting to Ind AS, most Indian companies will have consolidated financial statements prepared under Indian GAAP. The only exception seem possible is where a company early adopts Ind AS from the financial year beginning 1st April 2015. Therefore, in most cases, both from a separate and consolidated financial statement Indian GAAP will be the previous GAAP for transition to Ind-AS.

The SEBI’s initiative to allow IASB IFRS financial statements was seen by many as a step in the right direction. The option to voluntarily prepare IASB IFRS consolidated financial statements was not only used by companies who were Foreign Private Issuers (FPI) but also other companies that did not have any global listing. Companies that published voluntarily consolidated IASB IFRS financial statements and their investors were able to compare the performance with the global peers. This put the best Indian companies on a very strong footing.

One had hoped that this option would be continued, and companies would be allowed voluntarily to use IASB IFRS for their financial statements instead of Ind AS (that has numerous carve outs from IASB IFRS). However, this option did not come through. Worse still, one hoped that there would be a provision to transition from IASB IFRS to Ind AS. However, that too did not come through. Consequently, all Indian companies will have to mandatorily transition from Indian GAAP (which is their previous GAAP for statutory reporting in India) to Ind AS.

Consider an example. A company transiting from Indian GAAP to Ind-AS, has as options, to retain the book value of fixed assets recorded under previous GAAP (Indian GAAP) or record them at fair value under Ind AS. If the option to use IASB IFRS financial statements as previous GAAP was allowed, companies could have used the book value recorded in IASB IFRS financial statements. This would have reduced the differences between their IASB IFRS financial statements and Ind AS financial statements. Probably these companies would have ended up in a situation where there would be no difference between IASB IFRS and Ind AS financial statements.

However, given that previous GAAP has to be Indian GAAP, these companies may have to deal with a permanent set of differences between Ind AS and IASB IFRS financial statements.

The idea behind having a uniform GAAP (Indian GAAP) for transitioning to Ind AS was probably rooted in the thinking of achieving consistency. However, this thinking is akin to missing the wood for the trees. By wanting to achieve local consistency, the standard setters are giving up on global consistency. Secondly, this is also putting a lot of companies to unnecessary hardship. Lastly, given the numerous options and exemptions within Ind AS on first time adoption, consistency can never be achieved.

Therefore, there is a strong argument to make appropriate amendments to the standards and allow companies to continue with IASB IFRS option or in the least to allow the IASB IFRS financial statements as previous GAAP financial statements.

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Louis Dreyfus Armateures SAS vs. ADIT [2015] 54 taxmann.com 366 (Delhi – Trib.) A.Ys.: 2007-08, Dated: 17.2.2015

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Section 44BB , the Act – rental income earned by non-resident sub-contractor supplying plant and machinery on hire to the main contractor qualifies for taxation in accordance with Section 44BB of the Act since the provision does not distinguish between main contractor and sub-contractor.

Facts:
The taxpayer was a French company having seismic survey vessels. A Foreign Company (“FCo”) had entered into three contracts with ONGC for providing personnel and equipment, plan and execute acquisition of 3D seismic data and basic 3D seismic data processing. The taxpayer provided two seismic survey vessels on hire to FCo for carrying out the seismic operations offshore India. The taxpayer offered the rental income to tax u/s. 44BB of the Act.

As per the AO, the equipment rental received by the taxpayer was in the nature of ‘royalty’ taxable u/s. 9(1)(vi) of the Act and chargeable @ 25% of gross rental receipts.

The DRP, while giving its directions, concluded as follows.

(i) The term ‘used or to be used’ in section 44BB means that the hirer should use plant and machinery for ‘prospecting for, or extraction or production of, mineral oil’. Section 44BB was not applicable to the taxpayer since it was not engaged in the business of prospecting, extraction or production of mineral oils.

(ii) The exception in clause (iva) of Explanation 2 to section 9(1)(vi) of the Act applies only if income is covered u/s. 44BB.

(iii) R entals for leasing of vessels would constitute income by way of royalty u/s. 9(1)(vi) under the Act as well as under Article 13(3) of DTAA between India and France.

(iv) FCO is deemed to have a PE in India. Since the profits of FCO are charged on deemed income basis, and the plant and machinery is to be utilised by the PE, payments also would be deemed to have been deducted from profits of PE. In terms of Article 13(7) of India-France DTAA , royalty received by the taxpayer is taxable in India if FCo has PE in India and the royalty was borne by PE.

(v) Hence, rental receipts of sub-lessor were taxable in India as ‘royalty’ at the rate provided under India- France DTAA (i.e., 10%).

Held:
(i) T he provision clearly envisages that the non-resident should be in the business of hiring of plant and machinery. The only condition is that such plant and machinery should have been used or to be used in the prospecting for, extraction or production of mineral oils.

(ii) Perusal of various terms of the agreements and the purpose of chartering of the vessel clearly indicate that the vessel was hired for the specific purpose of carrying out geophysical prospection. Since the real intention of the parties as per the contract was to provide the vessel for carrying out geophysical prospection and not for any other purpose, agreements cannot be classified as time charter simplicitor.

(iii) Perusal of several judicial precedents1 shows that the conclusion of the AO and DRP is erroneous since section 44BB clearly envisages that the non-resident should be engaged in business of supplying plant and machinery on hire. The section does not distinguish between main contractor and sub-contractor. The fetter assumed by lower authorities is absent in section 44BB and there is nothing in the said provision to disentitle a sub-contractor. A judicial authority cannot read what is not said in the provision and add words to bring in a restricted interpretation since such interpretation will defeat the special provision.

(iv) If the legislative intent was to restrict the benefit only to the main contractor, the words after ‘the assessee engaged in the business of ‘supplying plant and machinery on hire’ or ‘providing services or facilities’ ought to have been omitted.

(v) The taxpayer satisfies the requirements in section 44BB and its income qualifies to be treated and tax accordingly

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Marriott International Inc. vs. DDIT [TS-4 ITAT 2015 (Mum)] A.Ys.: 2006-07 to 2009-10, Dated: 14.1.2015

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Article 12, India-USA DTAA – Payment towards re-imbursement of advertising/marketing expenses by franchisees were “royalty” under Article 12 of India-USA DTAA since the responsibility to maintain the brand is of the brand owner.

Facts:
The taxpayer, an American Company, was part of the Marriott Group which is engaged in operation of hotels worldwide under different brands. The Group also grants licenses to franchisees to operate hotels under its brands. A Group entity had granted licenses to an affiliate Group company to use certain brands. Pursuant to the licenses, the affiliate Group company granted sub-licenses to three Indian companies for use of these brands. The royalty received by the affiliate from the Indian companies was offered for tax in India. Separately, the taxpayer had entered into international sales and marketing agreement with the three Indian companies whereunder, the taxpayer had agreed to provide sales and marketing services outside India. Accordingly, the three Indian companies made payments for (i) international sales and marketing services, (ii) international sales and marketing fees and (iii) reimbursement of expenses. The taxpayer was to apportion the costs of these services on fair and reasonable basis amongst all the entities to which it was providing such services. Accordingly, the three participating Indian companies were required to pay the taxpayer for provision of these services. In the return of its income the taxpayer treated these receipts as taxable but later it revised the return of its income and claimed that since the expenses were in the nature of reimbursement of costs (without any mark-up), they were not taxable.

The issue before the Tribunal was: whether the payments made by Indian companies to the taxpayer towards reimbursement of international sales and marketing expenses were in the nature of royalty/FTS in terms of India-USA DTAA and whether instead of single payment, royalty was artificially separated into more than one component.

Held:
The contention of the taxpayer that the tax authorities were not entitled to take a different view, since the Government of India had accorded necessary permission to remit the payment under the specific heads, was not correct.

The responsibility to maintain the value of the brands is that of the brand owner. Normally it is done by continuous and sustained advertising/marketing activity. Since the taxpayer had collected charges from the hotels towards reimbursement of expenses for marketing/ popularizing the brand name, such receipts should be considered only as “royalty” because such activity is the responsibility of brand owner.

The agreements entered into between the three Indian companies and Marriott group showed that while the three Indian companies were considering them as agreements pertaining to a single transaction, they had agreed to pay the amount to different companies. Thus, it was seen that the Marriott group had planned to dissect the single transaction into more than one transaction and had ensured that each of the components was received by a different Group company.

The claim of the taxpayer that it was undertaking marketing work on cost-to-cost basis without any mark-up defies business logic or prudence since a commercial company will never work without profit. Hence, this fact itself proves that the taxpayer was an extended arm of the brand owner company and can be considered a façade of that company. This is a clear case of tax planning by adopting a colourable device and hence corporate veil should be lifted.

As all payments made by the Indian companies swelled the existing brands owned by the brand owner, the amounts received by the taxpayer should be examined form the point of view of the original brand owner and accordingly, be taxed as royalty in terms of Article 12 of India-USA DTAA .

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Some US Tax Issues concerning NRIs/US Citizens

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Non-resident Indians1 (NRIs) residing in the US, constitute the second largest Asian population in the USA next only to China. Many NRIs have dual sources of income i.e. from US and India. Many questions arise as to the taxability of Indian income in the USA not only in case of NRIs but also in respect of the US Citizens/Green Card holders who may be tax residents in India. 2This article attempts to answer some basic issues pertaining to the the US tax laws which will help not only NRIs, but Indian expatriates working in the US or those who are US Citizens or Green Card holders who are not tax residents of the USA. In order to elucidate issues clearly, they are discussed in a Questions
– Answers format.

Introduction
The USA is a unique county which levies taxes on the basis of both Citizenship and Residential status of a person. A US Citizen is taxed on his worldwide income, irrespective of his residential status. The term used for foreign citizen in the US tax law is “alien”. The first seven questions deal with determination of residential status of a person in the US and scope of taxability based on such status. Thereafter, some questions deal with taxability in the USA of certain Indian incomes which are exempt from taxation in India. Many NRIs holding US Citizenship or Green Card holders prefer to settle in India post retirement or may simply return to India for good during their active life. In any event, any US Citizen or Green Card holder who may be a tax resident of India, needs to disclose his Indian income and assets in his US Tax Return and file regular tax return and disclosure returns in the USA.

Many returning Indians are simply unaware about these requirements and expose themselves to unintended penalties and prosecution. They need to be properly advised to comply with the US Regulations, especially in view of the recent stringent enforcement of Foreign Account Tax Compliance Act (FAT CA). When an Indian tax resident, (Resident and Ordinary Resident), who is also a US Citizen or a Green Card holder is subjected to double taxation, (as both India and US taxes on worldwide basis), he can resort to provisions of India-USA Double Tax Avoidance Agreement (DTAA ) for relieving double taxation.

FATCA and India
The Government of India has concluded an ‘In Substance’ agreement with the Government of USA for entering into an Inter-Governmental Agreement (IGA) for implementation of FAT CA. In view of this, all banks and other financial institutions in India will be required to identify, establish and report information on financial accounts held directly or indirectly by US persons.

The last three questions in this Article deal with two reporting requirements, namely, (i) Report of Foreign Bank and Financial Accounts (FBAR) and (ii) Form 8938. It is interesting to read the comments by Robert W. Wood on the stringent penalty and prosecution provisions of FAT CA in his article in Forbes Magazine, reproduced herein below:

“FATCA—the Foreign Account Tax Compliance Act— is America’s global disclosure law. It penalizes foreign banks if they don’t hand over Americans. Most foreign countries and their banks are getting in line to comply, so don’t count on bank secrecy anywhere.

Besides, on top of FATCA, the U.S. has a treasure trove of data from 40,000 voluntary disclosures, whistleblowers, banks under investigation and cooperative witnesses. So the smart money suggests resolving your issues. You can have money and investments anywhere in the world as long as you disclose them.

You must report worldwide income on your U.S. tax return. If you have a foreign bank account, you must check “yes” on Schedule B. You may also need to file an IRS Form 8938 with your Form 1040 to report foreign accounts and assets. Yet tax return filing alone isn’t enough.

U.S. persons with foreign bank accounts exceeding $10,000 in the aggregate at any time during the year must file an FBAR—now rebranded as a FinCEN Form 114—by each June 30. Tax return and FBAR violations are dealt with harshly. Tax evasion can mean five years in prison and a $250,000 fine. Filing a false return? Three years and a $250,000 fine.

Failing to file FBARs can be criminal too. Fines can be up to $500,000 and prison can be up to ten years. Even civil FBAR cases are scary, with non-wilful violations drawing a $10,000 fine. For willful FBAR violations, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file is a separate violation.”

In light of the severity of penalties under FAT CA, as mentioned above, it is all the more important for NRIs and other US citizens/Green Card holders residing outside US, to understand their tax liability and/or to comply with US tax regulations.

1. When will a person be considered as a resident alien or a non resident alien in the US?

As per US tax law, a foreign citizen4 is considered either as a non resident alien or a resident alien for levy of US taxes. Though in some instances, he/she might be considered as both i.e. Dual Residential Status.

Non Resident Alien:
A foreign citizen is considered as a non resident alien, unless he meets one of the two tests described herein below for Resident Aliens.

Resident Alien:
A foreign citizen is resident alien of the United States for tax purposes if he meets either the green card test or the substantial presence test during a calendar year (January 1–December 31).

2. What is meant by the “Green Card Test”?

A person will be considered as a “resident” for tax purposes if he/she is a lawful permanent resident of the United States at any time during a calendar year. This is known as the “Green Card” test.

A person will be a lawful permanent resident of the United States at any time if he/she has been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. This status is generally received if the U.S. Citizenship and Immigration Services (USCIS) (or its predecessor organisation) has issued to a person an alien registration card, which is also known as a “green card.” Resident status under this test continues unless the status is taken away from or is administratively or judicially determined to have been abandoned.

3. What is meant by the “Substantial Presence Test”?

A person will be considered as a U.S. tax resident if he/ she meets the substantial presence test for the relevant calendar year. To meet this test, one must be physically present in the United States on at least:

1. 31 days during a relevant calendar year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
– All the days he was present in the current year, and
– 1/3 of the days he was present in the first year before the current year, and
– 1/6 of the days he was present in the second year before the current year. (For illustration, please refer answer to the question number 4 below)

4. Mr. A was physically present in the United States on 120 days in each of the years 2012, 2013, and 2014. Will Mr. A be considered as a resident under the substantial presence test for 2014?

To determine whether Mr. A meets the substantial presence test for 2014, full 120 days of presence in 2014, 40 days in 2013 (1/3 of 120), and 20 days in 2012 (1/6 of 120) will be counted. Because the total for the 3-year period is 180 days, Mr. A is not considered as a resident under the substantial presence test for 2014.

Dual Residential Status

5. Who is considered as a dual status alien?

One is considered as a dual status alien when one has been both a uS resident alien and a non-resident alien  in the same tax year. dual status does not refer to one’s citizenship, but it refers only to one’s residential status for tax purposes in the united States. In determining one’s US tax liability for a dual-status tax year, different rules apply for the part of the year when a person is a uS tax resident and the part of the year when he/she is a non- resident. The most common dual-status tax years are the years of arrival and departure.

Residential Status can be presented diagrammatically as shown at the bottom of this page:

6.    What is meant by days of presence in the US? Are there any exemptions to days of presence in the US?

Days of presence of a person is counted on the basis of his physical presence in the united States of america at any time during the day.

The exemption to days of presence is as follows:

?    days on which a resident of Canada or mexico is commuting to the uSa for work on daily basis.
?    days a person is in the united States for less than 24 hours when he is in transit between two places outside the united States.
?    days a person is present in the united States as a crew member of a foreign vessel.
?    days a person is unable to leave the united States because of a medical condition that arose while he was in the united States.
?    days spent by certain exempt individuals (students, teachers/trainees).

7.    What are the specific rules that apply for the days that are exempt from “days of presence”?

Days in transit: – The days on which a person is in the united States for less than 24 hours and he is in transit between two places outside the united States. Suppose, Mr. A travels between airports in the united States to change planes en route to his foreign destination, he will be considered as being in transit.

?    Crew members: – days when a person is temporarily present in the united States as a regular crew member of a foreign vessel (boat or ship) engaged  in transportation between the united States and a foreign country or a u.S. possession, should not be counted as days of presence in the uS. however,   this exception does not apply if a person is otherwise engaged in any trade or business in the united States on those days.

?    Medical Condition
do not count the days where a person intended to leave, but could not leave the united States because of a medical condition or problem that arose while he/ she was in the united States.

?    Taxation of income source from US

8.    how does one compute the income of a person who has worked partly in the uS and partly outside the US for a uS source income?
    US sourced compensation in respect of a job which is partly performed in the uS and partly outside the US, is computed in the proportion of the time spent on such job in the USA.

for example:
Mr. A, resident of india, worked for 240 days for a uS company during the tax year and receives $ 80,000 in compensation (excluding fringe benefits). Mr. A performed services in united States for 60 days and performed services in india for 180  days.  Using  the  time  basis  for determining the source of compensation, $ 20,000 (80000*60/240) is his US income.

Public Provident Fund (PPF)
9.    Whether amount received on maturity of PPF, by a NRI who is US resident Alien, is taxable in US?

amount received on maturity of ppf is not taxable in india but the resident alien will have to pay tax in the US. As per the US tax laws, the interest earned on the amount in PPF account is taxable and the person can choose to pay tax each year or defer it till withdrawal on maturity.

10.    Tax regulations in the uS regarding maturity of life insurance policy for resident aliens?

In India, benefits from a life insurance policy, including earnings, whether on death or maturity are treated as tax-free subject to fulfillment of prescribed conditions, as may be applicable. in the US, for instance, taxation of life insurance proceeds is quite complicated. Death benefits are tax-free to the extent of the sum assured or life cover. Any amount over and above the sum assured, such as bonuses, will be taxed. Similarly, there are certain rules regarding  withdrawals  from  a  policy. The  cash  value  of life insurance is allowed to grow on a tax deferred basis, that is, earnings are taxed only on withdrawal. In certain cases, withdrawals maybe tax free to the extent of premiums paid till the date of withdrawal.

Gifts
11.    Whether gifts received from india by a NRI who is a us resident alien are taxable in us?

as per the indian law, any gift received in cash or kind from a non-resident exceeding Rs. 50,000/- would attract tax except in case of gift from specified close relatives5 which is exempt. however gifts received on the occasion of marriage, and under Will are exempt from taxation.

As per the US law, tax on gifts is levied in the hands of the donor or person making the gift and not the receiver. moreover, this only applies where the person making the gift is a uS taxpayer, that is, a US resident, green card holder or citizen. Where a gift is made by a person resident in india to a uS person, no gift tax is payable as the donor (indian resident) is not a US taxpayer. However, the person receiving the gift, being a uS taxpayer, must report it in form 3520 – ‘annual return to report transactions with foreign trusts and receipt of foreign gifts’.

12.    Types of the uS Source income or income received in the uS by non-resident aliens that may be exempt under income tax treaties?

6 Following types of income or receipts in uSA may be exempt under the us Tax Treaties:

?    Remuneration of professors and teachers who teach in the united States for a limited period of time.
?    Amounts received from abroad for the maintenance, education and training of foreign students and business apprentice who are in the united States for study experience.
?    Wages and salaries and pension received by an alien from employment with a foreign government while in the united States.
?    Certain capital gains from the sale or exchange of certain capital assets by non-resident aliens under certain conditions.
?    Depending upon the facts of each case, the tax payer must study applicability of relevant tax treaty.

13.    What are the exclusion of Foreign Earned income in the hands of a us Citizen or a resident alien?

7 If certain requirements are met, a US citizen or a resident alien may qualify for the exclusions of foreign earned income and foreign housing exclusions and the foreign housing deduction.

If a person is a uS citizen or a resident alien of uS and   is living abroad, he is taxed on his worldwide income. however, he may qualify to exclude from income up to an amount of his foreign earnings that is adjusted annually for inflation ($ 92,900 for 2011, $ 95,100 for 2012, $ 97,600 for 2013, $ 99,200 for 2014 and $ 100,800 for 2015). in addition, he can exclude or deduct certain foreign housing amounts. he may also be entitled to exclude from income the value of meals and lodging provided to him by his employer.

Certain requirements for exclusion of foreign earned income are as follows:

?    A US citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
?    A US resident alien who is a citizen or national of a country with which the united States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
?    A US citizen or a US resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

14.    What is FBAR and who is required to file it?

fBar8   refers  to  report  of  foreign  Bank  and  financial accounts.

“United States persons” are required to file an FBAR if:
1.    The United States person had a financial interest in or signature authority over at least one financial account located outside of the united States; and

2.    The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

“united States person” includes u.S. citizens; u.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the united States or under the laws of the united States; and trusts or estates formed under the laws of the united States.

?    Exceptions To The Reporting Requirement
Exceptions  to  the  fBar  reporting  requirements  can be  found  in  the  FBAR  instructions9.  There  are  filing exceptions for the following united States persons or foreign financial accounts:

?    Certain foreign financial accounts jointly owned by spouses
?    united States persons included in a consolidated fBar
?    Correspondent/nostro accounts
?    Foreign financial accounts owned by a governmental entity
?    Foreign financial accounts owned by an international financial institution
?    Owners and beneficiaries of U.S. IRAs
?    Participants in and beneficiaries of tax-qualified retirement plans
?    Certain individuals with signature authority over, but no financial interest in, a foreign financial account
?    Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
?    Foreign financial accounts maintained on a United States military banking facility.
?    the taxpayer must consult his uS tax Consultant in this regard about the current reporting requirements.

15.    What is Form 8938 and who is required to submit it?

Certain U.S. taxpayers holding financial assets outside the united States must report those assets to the IRS, generally using Form 8938, Statement of Specified foreign   financial  assets.   The   form   8938   must   be attached to the taxpayer’s annual tax return.

16.    What are the specified foreign financial assets that one needs to report on Form 8938?

The person, who is required to file Form 8938, must report his financial accounts maintained by a foreign financial institution. Examples of financial accounts include:

?    Savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer. and, to the extent held for investment and not held in a financial account, he must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterparty that is not   a US person. Examples of these assets that must be reported if not held in an account include:
?    Stock or securities issued by a foreign corporation;
?    A note, bond or debenture issued by a foreign person;
?    An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap or similar agreement with a foreign counterparty;
?    An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer;
?    A partnership interest in a foreign partnership;
?    An interest in a foreign retirement plan or deferred compensation plan;
?    An interest in a foreign estate;
?    Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.

17.    What is the difference between Form 8938 and FinCEN Form 114 (FBAR) i.e. report of Foreign bank and Financial Accounts (FBAR) 10?

a)    Who needs to file
i)    Form 8938 has to be filed by Specified individuals, which include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and  meet  the  reporting  threshold  (total  value  of assets) i.e. $ 50,000 on the last day of the tax year or $ 75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad).

ii)    FBAR has to be filed by U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold i.e. $ 10,000 at any time during the calendar year.

b)    What needs to be reported
i)    Under  form  8938,  an  individual  has  to  report about Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets i.e. interest in foreign partnership firms, foreign stock or securities not held in a financial account, foreign hedge funds and private equity funds etc.
ii)    Under  fBar,  a  person  has  to  report  maximum value of financial accounts maintained by a financial institution physically located in a foreign country which also includes indirect interest in foreign financial assets through an entity. One also has to report the foreign financial account for which one is designated as authorised signatory.

c)    Form 8938 has to be filed along with one’s income tax return, whereas FBAR is to be filed separately and the due date for filing is 30th June.

Epilogue
The US tax law is a complex subject. one cannot possibly cover all aspects in a short write-up. the intention of few FAQs mentioned herein above is to draw one’s attention to the onerous compliances required by US Citizens/ Green Card holders living outside US and also about disclosure requirements under FATCA.

Tax Structuring – Domestic and I nternational – Recent Developments

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Topic : Tax Structuring – Domestic and

International – Recent Developments

Speaker : Dinesh Kanabar, Chartered Accountant

Date : 18th February 2015

Venue : Walchand Hirachand Hall, Indian Merchants Chamber

The
speaker covered the current global scenario and Indian scenario, from
the tax structuring perspective. He mentioned that the revenue from oil
resources are dropping and hence taxes are being looked upon as a means
of revenue for the Government in the global context. Tax Litigation
being very expensive and laden with uncertainty in India, one cannot
disregard the importance of structuring. In this context, he explained
the Vodafone case as well as a decision of the Delhi High Court in Shiv
Kumar Gupta. He explained to the audience that, while tax evasion was
illegal, tax planning was permissible, while the permissibility of
structuring would depend on whether there was any commercial substance
to such structuring.

The speaker pointed out that the debate on
Tax morality continues. In the global context, he mentioned about how
the CEO of Apple was summoned to explain how Apple could keep away
millions of dollars in Ireland and not pay taxes in the US. He briefed
the members that fundamentally tax planning in the US was by deferring
the taxes. Obama, President of the USA, has proposed a bill in the
Senate that all monies kept outside of USA will be brought to USA and
taxed in USA @ 14% (ONE TIME) as against 35%. The US President has also
proposed that since income arises year on year, he will try to reduce
taxes from 35% to 28%. In future, global income of the US companies will
be taxed in the USA @ 19% year on year. In a lighter vein, he pointed
out that tax planning in the USA would come to a standstill, if the bill
became law. He touched upon the case of Starbucks in UK and the Google
tax.

The speaker felt that LLP as a structure was needed to be
given more attention purely from a tax perspective, an LLP had more
advantages compared to a private company. Given that the tax rate is the
same, there is no MAT , DDT or buy back tax for LLPs. From the FDI
perspective, the only disadvantage is that cash infusion is the only
option available to make investments and there is no room for swap or
in-kind infusion.

The speaker also analysed tax provisions with
reference to conversion of existing company to LLP and the consequences
of the conversion – stringent conditions for tax neutralitiy – Rs.60
lakh turnover criteria. He felt that it could be urged that the
conversion was not taxable based on first principles (Azadi Bachao
Andolan), but this could be highly litigative. He also discussed the
impact of structuring with respect to direct and indirect holding
companies.

The speaker discussed the concept of FDI using
holding company, risk of double taxation due to source rule. He
explained that there is increased scrutiny of claims for treaty benefits
in India and hence, one has to be careful in structuring. The claim
should be backed by Substance in the tax jurisdiction of the holding
company, commercial rationale for use of Holding Company, Availability
of tax residency certificates, and Compliance with limitation of
benefits clause, if any. The additional considerations arising due to
the amendment to 9(1) (i) in regard to for use of multi-tier structures
were also discussed..

Since there are significant costs
associated like Dividend Distribution tax, Buy back tax, withholding tax
on interest payments, royalty and fees for technical services etc,
careful planning is required for cash extraction. The speaker also
touched upon conflicting decisions of AAR in respect of the above as
such as Timken Co In Re (326 ITR 193) and Castleton In re (348 ITR 537)
where Special Leave Petition is pending before the Supreme Court. Some
of the other considerations to be looked into while planning the
structure were:

a. Foreign Tax Credit availability in home jurisdiction on income-streams from India to be evaluated

b. Creditability of DDT & Buyback tax could be contentious as:

a. DDT /Buyback tax is levied on the company and not on the shareholder
b. DDT /Buyback tax is not paid on behalf of shareholders
c. U nderlying tax credits may not be always available

c.
N on-availability of credits would affect the tax costs significantly
and applicability of MAT to Capital gains is a litigative issue.

The
speaker discussed in depth about the issues that should be considered
for outbound structuring such as use of SPVs (Special Purpose Vehicles),
IPR regime and thin capitalisation rules. Moving on to BEPS, the
speaker gave an overview of the OECD action plan and focus on key items
such as Transfer pricing, CFC rules, Hybrids, treaty abuse, digital
economy. Some key aspects which will define BEPS is the ‘substantial
activity’ factor, whether a regime “encourages purely tax-driven
operations or arrangements” and are tax payers deriving benefits from
the regime, while engaging in operations that are purely tax-driven and
involve no substantial activities.

The key takeaway from the
lecture was that BEPS is a game changer and there is an urgent need to
focus more on domestic anti-abuse tax legislations in various
jurisdictions.

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Evolving Transfer Pricing Jurisprudence in India

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Transfer Pricing practice in India has evolved a long way. In thirteen years of implementation of the transfer pricing regulations (TPR) and nine rounds of completed audits (assessments), transfer pricing (TP) has depicted a changing landscape, wherein the revenue authorities position on various issues have highlighted the future course that practice of transfer pricing is going to tread, albeit full of controversies.

The buoyant Indian economy and impressive financial performance of Indian companies have guided the revenue authorities’ outlook that multinational enterprises (MNEs) operating in India should have robust transfer pricing between group companies, resulting in healthy margins for the India operations.

Laws were not made in a day. They have evolved over years. Its birth had reasons; growth was a straddle, but existence inevitable. Law today personifies a magic stick which guides the obedient and whips the one who dares to cross it.

Transfer pricing provisions are reflective of such transition. Though seemingly simple, the intricacies in its implementation have caught many unaware. Various amendments have been made post 2001 in Chapter X of the Income-tax Act, 1961 (the Act), dealing with the transfer pricing legislation both in respect of substantive and procedural law. The amendments have far reaching consequences and have nullified some of the decisions of the Income-tax Appellate Tribunal (ITAT )/Courts. Even after a decade, the transfer pricing law is still evolving. It is volatile and unpredictable and its practice demonstrates the contrasting positions taken by the taxpayer and the revenue authorities.

The introduction to transfer pricing provisions and the detailed explanation of the six specified methods for benchmarking the controlled transaction i.e., comparable uncontrolled price (CUP) method, resale price method (RPM), cost plus method (CPM), profit split method (PSM), transactional net margin method (TNMM) and the Other method as prescribed by Rule 10AB were explained earlier in various articles. Further, this article analyses the legal jurisprudence landscape that is slowly emerging, which throws light on the various intricacies of transfer pricing law in India.

Recent important transfer pricing judgments have been analysed to bring out these intricacies.

1. Toll Global Forwarding India Pvt. Ltd.1

Facts of the case:
Toll Global Forwarding India Pvt. Ltd. (the taxpayer) is a joint venture between BALtrans International (BVI) Limited, a company listed in Hong Kong Stock Exchange, holding 74% equity, and KapilDevDutta, holding balance 26% equity. The taxpayer was primarily engaged in the business of freight forwarding through air and ocean transportation which includes rendition of related services outside India as well. In the course of conducting this business, the taxpayer picked up/received freight shipments from its customers, consolidated these shipments of various customers for common destinations, and, at destination, distributed these shipments and effected delivery to the consignees.

The taxpayer entered into two types of international transactions:

a) Arranging import of cargo from other countries to India by air and sea transportation and delivering the same to consignees in India and

b) A rranging export of cargo from India to other countries by air and sea transportation wherein consignments are picked up in India by the taxpayer and are sent to the destination as per instructions of consigners for the purpose of delivering to consignees through its AEs The taxpayer controlled the pricing to the end customers in domestic market and pricing for the end customers in connection with consignment picked up abroad was essentially determined by the AEs. The global practices followed by the similar companies in freight forwarding industry was such that the profits earned after deducting transportation costs, in respect of import and export of cargo, were to be shared equally i.e., 50:50 ratio between the taxpayer and its AEs or independent third party business associates.

In the transfer pricing study report submitted by the taxpayer, for the AY 2006-07, the taxpayer adopted the CUP method for determining the arm’s length price (ALP). However, the Transfer Pricing Officer (TPO) rejected the business model and applied TNMM and proposed an adjustment of Rs. 2.09 crore. The adjustment was confirmed by Dispute Resolution Panel (DRP). Aggrieved, the taxpayer appealed before Delhi bench of ITAT .

Key Observations and decision of the Delhi ITAT: –
ITAT observed that in the taxpayer’s industry it was a standard practice to share profits in 50:50 ratio, even for transactions with unrelated parties, and that the CUP method was the most direct method of ascertaining ALP. The ITAT observed that “the trouble however is that while there is a standard formulae for computing the consideration, the data regarding precise amount charged or received for precisely the same services may not be available for comparison.”

‘Price’ as per Rule 10B – purposive and realistic interpretation

– ITAT proceeded to analyse the definition of ALP determination under Rule 10B of the Income-tax Rules, 1962 (the Rules) which sets out that the CUP method cannot be applied unless the amount charged for similar uncontrolled transaction was the same as international transaction between the AEs. However, the ITAT questioned whether ‘price’ as per Rule 10B(1) (a) covers not only the amount but also the formulae according to which price was quantified.

– ITAT thus relying on the decision of Agility Logistics Pvt Ltd2 and DHL Danzas Lemuir Pvt Ltd3 noted that in both cases, ‘price’ under rule 10B(1)(a) was treated to include even the mechanism in terms of formulae to arrive at the consideration. ITAT also held that this was a very ‘purposive and realistic interpretation’.

Price vs. Amount
– ITAT distinguished the use of the expression ‘amount’ as per US TP Guidelines, with the term ‘price’ in Indian domestic TP regulation, in cases when “agreed price or service rendered to, or received from, an associated enterprise is not stated in terms of an amount but in terms of a formulae which leads to quantification in amount.”

– On a conceptual note, ITAT noted that ‘price’ in economic and business terms, could be interpreted as rewards for functions performed, assets employed and risks assumed (FAR ), while ‘amount’ is a relatively mundane quantification in terms of a currency. Providing various examples, ITAT extended the application of the expression ‘price’ beyond specific ‘amounts’ and held that the stand of revenue authorities that in such cases CUP method cannot be applied, because of non availability of data in terms of comparable amount having been charged for the same service is irrelevant.

Procedural issues
– The ITAT expressed that there could be procedural issues, owing to limitations of methods prescribed under Rule 10B, and stated that “transfer pricing, by itself, is not, and should not be viewed as, a source of revenue; it is an anti –abuse measure in character and all it does is to ensure that the transactions are not so artificially priced with the benefit of inter se relationship between associated enterprises, so as to deprive a tax jurisdiction of its due share of taxes. Our transfer pricing legislation as also transfer pricing jurisprudence duly recognize this fundamental fact and ensure that such pedantic and unresolved procedural issues, as have arisen in this case due to limitations of the prescribed methods of ascertaining arm’s length price, are not allowed to come in the way of substantive justice, particularly when it is beyond reasonable doubt that there is no influence of intra AE relationship on the determination of prices in respect of intra AE transactions.”

–

Combined Application for New Registration under the MVAT, CST and PT Acts

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Trade Circular 4T of 2015 dated 9.3.2015.

To simplify the procedure of registrations, a single application under MVAT /CST & P.T.ACT is made available from 9.3.2015. Procedure for the same has been explained in this Circular. Utility to upload relevant documents for registration may be deployed soon on the website.

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Trade Circular 3T of 2015 dated 9.3.2015

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Detailed procedure to submit physical returns explained in this Circular for Dealers under the Luxury Tax Act & Sugarcane Purchase Tax Act in which taxes are paid electronically through GRAS. Professional Registration Certificate holders (PTRCs) file their returns electronically so for them no change in procedure.

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Circulars :

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Procedure for submission of returns under Profession Tax, Luxury Tax and Sugarcane Purchase Tax Act -after making Payment through GRAS

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Simplification of Registration Procedure

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Order No. 1/2015-Service Tax- dated 28 02 2015

CBEC, vide this order specified the documentation, conditions, time limits and procedure for registration of single premises under service tax and it has also been prescribed that henceforth the registration for single premises shall be granted within 2 days of filing of application. This order will be effective from 1st March, 2015.

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Advance Ruling

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Notification No. 9/2015-Service tax- dated 01 03 2015

The facility of Advance Ruling is being extended to all resident firms by specifying such firms as a class of persons under section 96A (b)(iii) of the Finance Act, 1994.

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Changes in Abatement Notification No. 26/2012- ST

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Notification No. 8/2015-Service Tax- dated 01 03 2015

A uniform abatement of 70% has been prescribed for transport by rail, road and vessel. Service tax shall be payable on 30% of the value of such service subject to a uniform condition of non-availment of Cenvat credit on Inputs, Capital goods and Input services.

The abatement for classes other than economy class (i.e. business/ first class) has been reduced from 60% to 40%. Accordingly, Service tax would be payable on 60% of the value of such higher classes.

Abatement for the services provided in relation to Chit fund stands withdrawn.

This changes in abatement shall come in to effect from 1st April, 2015

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Changes in Mega Exemption list of services

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Notification No. 6/2015- Service tax- dated 01 03 2015 Following new exemptions are included in under notification no. 25/2012-ST :

(1) Hitherto, any service provided by way of transportation of a patient to and from a clinical establishment by a clinical establishment is exempt from Service Tax. The scope of this exemption is being widened to include all ambulance services.
(2) L ife insurance service provided by way of Varishtha Pension Bima Yojna is being exempted.
(3) Service provided by a Common Effluent Treatment Plant operator for treatment of effluent is being exempted.
(4) Service by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labeling of fruits and vegetables is being exempted.
(5) Service provided by way of admission to a museum, zoo, national park, wild life sanctuary and a tiger reserve is being exempted.
(6) Service provided by way of exhibition of movie by the exhibitor (theatre owner) to the distributor or an association of persons consisting of such exhibitor as one of it’s members is being exempted.

(7) Service by way of (i) right to admission to exhibition of film, circus, dance or theatrical performances including drama, or ballet; (ii) recognized sporting event; and (iii) admission to other events where the consideration for admission is up to 500 shall be exempt from the date to be notified in this regard. F ollowing exemptions are withdrawn (or restricted) from Notification No. 25/2012-ST :

(1) Exemption presently available on specified services of construction, repair, maintenance, renovation or alteration service provided to the government, local authority, or governmental authority ( vide S. No. 12 of the Notification No. 25/12-ST ) shall be limited only to,-
(a) a historical monument, archaeological site or remains of national importance, archeological excavation or antiquity;
(b) canal, dam or other irrigation work; and
(c) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal.

Exemption to other services presently covered under S. No. 12 of Notification No. 25/12-ST is being withdrawn.

(2) E xemption to construction, erection, commissioning or installation of original works pertaining to an airport or port is being withdrawn.

(3) E xemption to Services provided by a performing artist in folk or classical art form of (i) music, or (ii) dance, or (iii) theatre, has been restricted only to such cases where amount charged is not exceeding Rs. 1,00,000/- for a performance except performance provided by such artist as a brand ambassador.

(4) E xemption to transportation of food stuff by rail, or vessels or road will be limited to food grains including rice and pulses, flour, milk and salt.

(5) E xemption to Services of carrying out of intermediate production process of alcoholic liquor for human consumption on job work basis is withdrawn.

(6) E xemption is being withdrawn on the following service,-
(a) Departmentally run public telephone;
(b) Guaranteed public telephone operating only local calls;
(c) Service by way of making telephone calls from free telephone at airport and hospital where no bill is issued.

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Changes in Service Tax Rules, 1994 Notification No. 5/2015-Service Tax- dated 01 03 2015

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By this Notification, Service Tax Rules, 1994 have been amended with respect to the following matters :

(1) In respect of any service provided under aggregator model, the aggregator, or any of his representative offices located in India, is being made liable to pay service tax, if the service is so provided using the brand name of the aggregator in any manner. If an aggregator does not have any presence, including that by way of a representative, in such a case any agent appointed by the aggregator shall pay the tax on behalf of the aggregator. In this regard appropriate amendments have been made in Rule 2 of the Service Tax Rules, 1994 and Notification No. 30/2012 dated 20.06.2012. This change comes into effect immediately i.e., w.e.f. 1st March, 2015.

(2) Presently, services provided by Government or a local authority, excluding certain services specified under clause (a) of section 66D, are covered by the Negative List. The term ‘support’ has been omitted from the Clause (E) providing for liability of service receiver to pay Service tax under Reverse Charge in relation to support services provided or agreed to be provided by Government or Local authority.

(3) Exemptions are being withdrawn on the following services:
(a) service provided by a mutual fund agent to a mutual fund or assets management company,
(b) distributor to a mutual fund or AMC,
(c) selling or marketing agent of lottery ticket to a distributor.

Service Tax on these services shall be levied on reverse charge basis.

(4) In respect of certain services like money changing service, service provided by air travel agent, insurance service and service provided by lottery distributor and selling agent, the service provider has been allowed to pay service tax at an alternative rate subject to the conditions as prescribed under rule 6 (7), 6(7A), 6(7B) and 6(7C) of the Service Tax Rules, 1994.

Consequent to the upward revision in Service tax rate, the composition rate is proposed to be revised proportionately on specified services, namely,

Air Travel Agent: From “0.6%” and “1.2 %”, to “0.7 per cent.” and “1.4 per cent of basic fares in the case of domestic bookings and international bookings respectively.

Life insurance service: From “3%” and “1.5%”, to “3.5%” of the premium charged from policy holder in the first year and “1.75% in the subsequent year”.

These amendments shall come into effect as and when the revised Service Tax rate comes into effect.

(5) New Rule 4C has been inserted and Rule 5 has been amended to include provision for issuing digitally signed invoices along with the option of maintenance of records in electronic form and their authentication by means of digital signatures. It is further provided that the conditions and procedure in this regard shall be specified by the CBEC.

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Exemption to service for Transport of Goods by Road to a land customs Notification No. 4/2015-Service Tax- dated 01 03 2015

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Transport agency service provided for transport of export goods by road from the place of removal to an inland container depot, a container freight station, a port or airport is exempt from Service Tax vide notification No. 31/2012-ST dated 20.6.2012. Scope of this exemption is being widened to exempt such services when provided for transport of export goods by road from the place of removal to a land customs station (LCS) with effect from 1st April 2015.

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Notification No. 42/2012-ST dated.29.6.2012 rescinded Notification No. 3/2015- Service Tax- dated 1st March, 2015

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Existing exemption, vide Notification No. 42/2012-ST dated 29.6.2012, to the service provided by a commission agent located outside India to an exporter located in India is being rescinded with immediate effect.

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A few suggestions for your kind consideration in the Maharashtra StateBudget 2015-16 and necessary changes in Sales Tax Laws

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7th March 2015

Shri Sudhir Mungantiwar
Hon’ble Finance Minister,
Government of Maharashtra,
Mantralaya, Mumbai.

Respected Sir,

Subject: A few suggestions for your kind consideration in the Maharashtra State
Budget 2015-16 and necessary changes in Sales Tax Laws

Sir, we the people of Maharashtra are eagerly awaiting to listen to your Budget Speech, which you are ready to deliver in a few days from now. We understand that we are too late to make any suggestions at this stage, but there are a few matters on which we would like to draw your kind attention.

All these matters may be very much petty and sundry but are of great concern to the tax payers. Your kind attention in such matters will certainly provide much needed relief to small and medium level businesses. Some of these suggestions would be helpful in smooth and straight administration of tax collection and at the same time remove undue fear amongst the traders and small tax payers.

We may mention here that as we could not get an opportunity to meet you personally, we have narrowed down our suggestions, in this memorandum, to a bare minimum and only those which are most urgent. For other suggestions and further discussion in these matters, may we request your good selves to kindly grant us an appointment on which day we shall meet you personally and discuss various aspects concerning protection of revenue of the Government and mitigating difficulties faced by small and medium tax payers.

Thanking you.
Yours faithfully
Bombay Charte red Accountants ‘ Societ y
Nitin Shingala
President

Govind G. Goyal
Chairman
Indirect Taxes & Allied Laws Committee

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M/S. Sujata Painters, Appeal No. 18 of 2013, decided on 9th March, 2015 by MSTT.

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VAT- Sale Price- Works Contract-Collection of Service Tax- Does Not Form Part of Sales Price, section 2 (25) of The Maharashtra Value Added Tax, Act, 2002.

Facts
The appellant was engaged in business of execution of works contract of powder coating raised bill to the customer by charging vat on 80% of total contract value by deducting 20% amount prescribed in rule 58 for labour and services and also charged service tax @ 12.36% on 40 % of total contract value. He applied to the Commissioner of Sales Tax for determination of disputed question u/s. 56 of the act whether amount collected by way of service tax forms part of sale price. The Commissioner of Sales Tax held that the amount collected by way of service tax forms part of sales price. The appellant filed appeal, against the said order of Commissioner, before The Maharashtra Sales Tax Tribunal.

Held
Service tax is leviable on service value. It has no relation to the goods. It is independently leviable on value of services under the Finance Act. So on a plain reading of inclusive part of the definition of “sales price” u/s. 2 (25) of the Act, the service tax could not form part of sale price. The service tax and vat are mutually exclusive. Therefore by no stretch of imagination service tax would be a part of sale price. Accordingly, the appeal was allowed and levy of vat on service tax amount was set aside and deleted.

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HP India Sales P. Ltd vs. State of Assam and Others, [2012] 56 VST 472 ( Gauhati)

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VAT- Entry in Schedule-Rate of Tax- Sale of
Inkjet Cartridges and Tonor Cartridges – Falls Under Parts and
Accessories of Computer System and Peripherals –Taxable at 4%, Entry 4
of Part B of Sch. II , The Assam Value Added Tax Act, 2003

Facts
The
petitioner company was engaged in the business of IT products, sold
“inkjet cartridges and toner cartridges” and paid tax @ 4% being covered
by entry 4 of part B of Schedule II of the act relating to parts and
accessories of items listed in serial nos. 1, 2 and 3 which includes
Computer Systems and Peripherals respectively. The vat authority in
three different assessment years levied higher rate of tax of 12.5%
being covered by residual entry which was confirmed by the appellate
authority. The petitioner company filed writ petition before the Gauhati
High Court against the impugned order.

Held
The
items in question are integral part of printer which undisputedly is
covered by entry 3. Principle laid down by SC about interpretation of
“accessory” also lends support to the contention of the assessee.

The
High Court accordingly allowed the writ petition filed by the
petitioner company and allowed the revision of assessment orders
accordingly.

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[2015] 54 taxmann.com 151 (Gujarat) -Commissioner of Central Excise & Customs vs. Panchmahal Steel Ltd.

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CENVAT Credit: Rule 3(4)(e) provides that CENVAT credit may be utilised for payment of service tax on any output service – GTA services received amounts to output services – Service tax payable under reverse charge could be paid by utilising CENVAT credit balance.

Facts:
The assessee was engaged in the business of manufacturing excisable goods. It was also liable to pay service tax for the goods transport agency service. It utilised CENVAT credit pertaining to manufacturing activities for payment of service tax of GTA service. The Revenue’s stand was that such CENVAT credit could not have been utilised for service tax payable on GTA service and such tax ought to have been paid in cash.

Held:
The Hon’ble High Court observed that Rule 3 of the CENVAT Credit Rules, 2004 pertains to CENVAT credit. Sub-rule (1) thereof allows the manufacturer or purchaser of final products or provider of output service to take credit of CENVAT of various duties specified therein.

Sub-rule (4) of Rule 3 of the said Rules provides that the CENVAT credit may be utilised for payment of various duties specified in clauses (a) to (e) thereof; clause (e) pertains to “service tax on any output service”. This would also include the GTA service. Hence, by combined reading of these statutory provisions, the High Court held that the CENVAT credit is admissible for the purpose of paying such duty. It concurred with decisions of Punjab and Haryana High Court in the case of Nahar Industrial Enterprises Ltd.[2012] 35 STT 391 (Punj. & Har.) & Delhi High Court in the case of CST vs. Hero Honda Motors Ltd. [2012] 38 STT 72 (Delhi).

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REFUNDS UNDER MVAT Act, 2002

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Introduction
Under fiscal laws like sales tax, there may be a situation that the party might have paid excess amount than what was due as per law. Therefore, there will be some amount refundable to the dealer. Under BST era, the assessment for each year was mandatory. Therefore, even if any claim of refund has remained to be made in returns, the dealer had an opportunity to claim the same in the course of assessment.

Under the MVAT Act, 2002, the situation has changed. As per policy of sales tax department, under the MVAT Act, 2002, assessment of each year is not compulsory and therefore the department can select assessment as per their own choice. Thus, the dealers may not get opportunity to put their refund claim, which they could have if assessment proceedings were taken up. The dealers are, therefore, required to pursue their refund claims with due care.

Relevant provisions
Under the MVAT Act, 2002, return filed by the dealer is considered as prime document. There are speaking provisions about granting refund as per returns. Section 51 of the MVAT Act, 2002 specifically provides the scheme for grant of refunds arising as per returns.

The important provisions of this section are that the dealer should show refund in the return. In respect of the said return, the dealer should file application in Form 501 and give the details as required in the said application. There is time limit for filing the above application. The normal time limit as on today is 18 months from the end of the relevant year in which refund arises.

If the dealer has filed an application as above, he is entitled to get the same processed and further entitled to refund as per the said proceeding.

Non filing of form 501
The issue is really arising in respect of those dealers, who have failed to file form 501 within the prescribed time. When such application is not filed, the department is of the opinion that the refund though shown in return is not required to be processed. In other words, department was of the opinion that in such cases, there is no responsibility of the department to process the return for granting refund.

Writ Petitions before the Bombay High Court
Dealers and consultants filed representations before the authorities to consider the refunds as per returns and process the same by initiating assessments etc. or by any other way. However, there was no positive response.

Therefore, several dealers started filing writ petitions in the Hon’ble Bombay High Court. Dealers raised several contentions for processing of returns. Important contentions were as under;
i) filing of application is procedural. It cannot be mandatory.
ii) return is the basic document and if the refund is shown in such return then there is already an implied application and it is required to be processed, if the return is within time prescribed for filing application in form 501.
iii) filing form 501 is one of the ways for getting refunds. There is no prohibition of granting refunds through other provisions including assessments, more so, when the dealers are ready to undergo the said process.
iv) If there is no speaking assessment then the return should be considered as self assessment and accordingly also refund should be granted.
v) Non grant of refund will amount to unjust enrichment.

The Hon’ble Bombay High Court, in cases of Jubilee Industries (W.P. No.121 of 2015) Tara Enterprises (W. P. No.122 of 2015), B. L. Trading Company (W.P.123 of 2015) dt.3.2.2015, directed the department to dispose of the applications, without going into merits.

However, in its Judgment in case of Silver Dot Convertors Pvt. Ltd. (W.P.1118 of 2015 DT.3.3.2015), the Hon’ble High Court considered the overall position and opined that the refunds shown in returns are required to be processed by the department and they cannot ignore them. The High Court has not dealt with the legal ground but based, its decisionon the accepted theory that a dealer should be finally assessed as to whether he liable to pay any dues or entitled to a refund, and directed department to process the returns showing refunds and pass the orders. The relevant portion of speaking order of the Hon’ble High Court is as under;

“5) We only desire that none of such applications as are noted by us and in the Petitions are kept pending by the department/ Respondents. If the returns are furnished and submitted, then, they deserve to be scrutinised. If they should be scrutinised expeditiously and early and equally the claims for refund in pursuance thereof, then, the only direction that we issue is that the Respondents process such cases and as expeditiously as possible.

6) Each of these matters were kept back in the morning session to enable Mr. Sharma to seek instructions from the concerned officials.

7) It is stated that pursuant to our oral direction, the Commissioner of Sales Tax is present in Court. He has instructed Mr. Sharma to state that all the returns and which are subject matter of the Petitions on today’s board and equally those pending with the department would be taken up for scrutiny and verification periodically and as far as the Petitioners are concerned, the returns would be processed and the requisite orders would be passed within a period of 4 weeks from the date of receipt of copy of this order. We accept these statements made by Mr. Sharma and in the presence of the Commissioner of Sales Tax as an undertaking given to this Court. We expect the Respondents to abide by the same and take requisite steps.

8) We clarify, in the event of any doubt, as orally expressed, that the direction to pass order and based on the undertaking given to the Court is confined to the Writ Petitions which are on today’s board and insofar as the other pending files are concerned, the same should be processed as expeditiously as possible and in any event within a period of 8 weeks from the date of receipt of copy of this order. The Writ Petitions are accordingly disposed of.”

Based on above, the Department has now started processing the returns in which refunds are shown. As per the Hon’ble High Court’s order, it appears that the responsibility is on the Department to process the returns, involving refund, on their own. However, on the safer side, it may be suggested that the dealer should write a letter to the department for processing his return.

In light of above, the Department has issued instructions by internal circular to process the refunds for the period from 2007-08 onwards. In respect of the years 2005-06 & 2006-07, the department feels that the returns cannot be processed as the time limit for assessments is over.

But, there could be a view that in respect of 2005-06 & 2006-07, as well the department should grant refunds by considering that there is a self assessment as per section 20 i.e. there is a statutory assessment and the refund is required to be granted accordingly.

Conclusion
The above judgment of the Hon’ble Bombay High Court has given great relief to the dealers. As a guardian of public, it is the duty of the Government to give fair treatment to the dealers. The basic structure of the taxation law is also that nobody should be made to suffer a liability, in excess of what is due as per law. Under above circumstances, it was necessary that the refunds shown in returns are dealt with by the department. Even if form 501 is not filed, there is no prohibition to initiate assessment and to see that due refund is granted. The above judgment has, therefore, restored the constitutional obligation of the Department. We hope that the said principle will remain applicable for all the time to come including in the GST era.

TRANSITIONAL ISSUES: AMENDMENT IN REVERSE CHARGE PROVISIONS

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Amendment effective from April 01, 2015
Notification No.7/2015-ST has amended the reverse charge provisions to come into effect from 1st April, 2015. In case of manpower supply services and security agency services, under specified circumstances [viz. when services are provided by any individual, HUF or partnership firm including an AOP to a business entity registered as body corporate] service tax is payable by the service provider on 25% of taxable value and service recipient on the balance 75% of taxable value. However, as per the amended provisions effective from 01-04-2015, service receiver is required to pay under reverse charge on 100% of the taxable value. In such cases, if payment is made after 3 months and there is a rate change as on the date of payment, the tax payment on the same taxable value could exceed the effective tax rate. This is because rule 7 of Point of Taxation Rules, 2011 (“POT Rules”) is applicable in cases where a person required to pay tax is recipient of service. In such cases, if invoices are not paid within 3 months from the date of invoice issued by the service provider, the point of taxation is the date immediately following the said period of 3 months.

For example, assuming that the proposed rate of service tax @ 14% is made effective 01-06-2015 and payment is made to the manpower supply/security service providers after 3 months for the invoices raised prior to 01-04-2015, the increase in aggregate effective tax rate at the time of payment will be higher than the prescribed rate of 14% as illustrated below:

The above clearly shows that, due to provisions under POT Rules, transitional issues would arise. It is felt that appropriate amendment needs to be carried out or CBEC needs to issue a clarification to the effect that, in case of invoices raised prior to 31-03-2015 which are governed under dual reverse charge for manpower supply or security services, the service recipient would be required to make payment only for the balance amount of service tax which cumulatively in no case should exceed the proposed increased rate of 14%.

Proposed increase in rate of service tax from 12.36% to 14%.

Presently the rate of service tax is 12.36% consisting of service tax of 12% and education cess of 2% on service tax and secondary and higher education cess of 1% on service tax. The Finance Bill, 2015 (FB 2015) has proposed to abolish both the cesses and increase the service tax rate to 14%. The increased rate of service tax shall be effective from a date to be notified after the enactment of FB 2015 (“notified date”).

Pursuant to the above stated increase, the rate of tax that would be applicable in certain situations, as per the PoT Rules would be as under:-



The following transitional issues merit attention:

In case of situations stated in (c) & (e) above, in accordance with Rule 2A of POT Rules if the payment is not credited in the bank within 4 working days from the notified date, the new rate of 14% would apply.

In case of situations stated in (d) & (f) above, service tax would have already been paid at the old rate (12.36%) when the invoice was issued or payment received before the change of rate of tax applying Rule 3 of POT Rules. However, due to subsequent increase in rate, there would be a short payment which the assessee may have to deposit. However, no interest would apply if the assessee deposits the differential amount within the due date reckoned from the point of taxation [i.e. date of payment in case of (d) and date of issue of invoice in case of (f) above.]

The above anomalies are inherent in the POT Rules which prescribes multiple points of taxation. This poses practical issues more particularly in respect of certain services (for example annual membership fees, annual maintenance contracts, etc.). It is understood that many service providers have already started collecting Service tax at 14% (though not legally correct) to avoid situations of differential payments and recovery issues from customers subsequent to the increased rate becoming effective.

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ACIT vs. Ajit Ramakant Phatarpekar and Neelam Ajit Phatarpekar ITAT Panaji Bench, Panaji Before P. K. Bansal (A. M.0 and D.T. Garasia (J. M) ITA NO. 145 & 146/PNJ/2014 Assessment Year 2010-11. Decided on 16/03/2015 Counsel for Revenue /Assessee: Jitendra Jain / B. Balakrishna

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Section 40(a)(i) r.w. Explanation to section 9 – Payments made without TDS prior to the amendment came into force is allowable

Facts:
The Assessee had paid a sum of Rs. 28.88 lakh towards sampling charges i.e. consultant/technical charges, to the parties in Hong Kong and Singapore but had not deducted any TDS on the belief that the services were rendered outside India and India is having DTAA with China and Singapore, therefore, these charges are taxable in those countries. According to him, the fee for technical services/ professional services is taxable in the hands of the party who received it outside India. According to the AO, the Finance Act, 2010 amended section 9(1)(vii) retrospectively w.e.f. 1.6.1976 and as per the amended provisions, income of non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of s/s. (1) and shall be included in the total income of the nonresident whether or not the non-resident has a residence or place of business or business connection in India or the non-resident has rendered the services in India. Therefore, according to him the Assessee was liable to deduct TDS as per the provisions of section 195.

Before the CIT(A) the assessee submitted that no income accrued in India. Explanation to section 9 inserted by the Finance Act, 2010 is not applicable as all the payments were made before the Finance Act received assent of the President on 8.5.2010. The CIT(A) allowed the appeal of the assessee.

Held:
The Tribunal noted that the Finance Act, 2010 received the assent of the President on 8.5.2010 and all the payments have been made by the Assessee to the non-resident party prior to receiving of assent of the President making the retrospective amendment by adding Explanation to section 9. At the time when the Assessee made the payment there was no provision u/s. 9 making the technical fees deemed to accrue or arise in India whether or not (a) the non-resident has residence or place of business or business connection in India or (b) the non-resident has rendered services in India. The source of the income in the hands of the non-resident was outside India. Even the place of business which earned the income was also outside India. Since the technical fees was not deemed to accrue or arise in India at the time when the Assessee made the payment as per the law then prevailing, the tribunal held that the payment made was not taxable in India.

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IDBI Capital Market Services Ltd. vs. DCIT ITAT “I” Bench, Mumbai Before N.K. Billaiya, (A. M.) & Amit Shukla (J. M.) I.T.A. No. 618/Mum/2012 Assessment Year: 2008-09. Decided on 18.02.2015 Counsel for Assessee/Revenue: N.C. Jain/Kishan Vyas

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Section 37(1) – Loss arising from valuation of interest rate swap contracts as at the end of the year is allowable as deduction.

Facts:
The assessee is engaged in the business of investment, share broking and dealing in Government securities and it is a member of Bombay Stock Exchange as well as National Stock Exchange. While scrutinising the return of income the AO noticed that as on 31st March 2008 the assessee had valued the outstanding interest swap contracts and the loss of Rs.18.3 crore determined was debited to P&L Account. According to the AO, the assessee had recognised only the loss and not the profit. Further, he observed that the assessee was not consistent and definite in making entries in the account books in respect of losses and gains and accordingly denied the claim of deduction. On appeal, the CIT(A) relied upon the decision of the Bombay High Court in the case of Bharat Ruia in ITA No.1539 of 2010 and treated the loss as speculation loss and confirmed the disallowance.

Held:
The Tribunal noted that it was an undisputed fact that the assessee had made the valuation of interest rate swap contracts as at the end of the year and had incurred losses on such valuation. Further, it also noted that the assessee had made the entries following Accounting Standard AS- 11 of the ICAI. The Tribunal further found the observations of the AO that the assessee had never accounted for the gains on such transactions as totally misplaced and against the facts of the case. Relying on the decision of the Tribunal Special Bench Mumbai in the case of Bank of Bahrain & Kuwait, ITA No.4404 & 1883/Mum/2004 and of the Supreme Court in the case of Woodward Governor India Pvt. Ltd. [2009] 179 Taxman 326 (SC), the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of Rs.18.3 crore.

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2015-TIOL-250-ITAT-MUM Schrader Duncan Ltd. vs. Addl CIT ITA No. 8223/Mum/2010 Assessment Year : 2004-05. Date of Order: 1.1.2015

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Section 271(1)(c) – Penalty u/s. 271(1)(c) is not leviable when the High Court has admitted the substantial question of law on the question of addition.

Facts
The Assessing Officer (AO) passed an order levying penalty of Rs. 66,36,077 u/s. 271(1)(c) of the Act in respect of disallowance of Long Term Capital Loss on repurchase of units of US 64 scheme of Unit Trust of India. The AO held that the assessee had furnished inaccurate details of income with respect to long term capital loss claimed.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where relying on the decision of the Bombay High Court in the case of CIT vs. M/s. Nayan Builders & Developers (ITA No.415/2012) order dated 8th July, 2014. it was contended that since the High Court has admitted substantial question of law, penalty u/s. 271(1)(c) is not leviable.

Held
The Tribunal noted that the substantial question of law “whether on the facts in the circumstances of the case and in law, the Tribunal was justified in holding that the appellant was not entitled to claim the loss of Rs.6. 34 crore arising on conversion of UTI US 64 units in to 6.75% Tax Free Bonds of UTI?” has been admitted by the Hon’ble jurisdictional High Court, vide order dated 19th September, 2014.

It also noted that the Hon’ble jurisdictional High court vide order dated 08-07-2014 in the case of CIT vs. M/s. Nayan Builders & Developers (ITA No.415/2012) held that no penalty is imposable u/s. 271(1)(c) of the Act in a case where substantial question of law has been admitted by the High Court. Likewise, the Tribunal, in the case of M/s. Nayan Builders & Developers Pvt. Ltd. (ITA No.2379/ Mum/2009) order dated 18th March 2011, deleted the penalty. In another case Advaita Estate Development (P.) Ltd. vs. ITO (2013) 40 Taxman.com 142 (Mumbai-Trib.) vide order dated 27/08/2013 deleted the penalty.

The Tribunal following the decision of the jurisdictional High Court allowed the appeal filed by the assessee. The Tribunal, however, observed that if at any stage, the order of the Tribunal on quantum addition is upheld by the Hon’ble High Court, the Department is free to proceed in accordance with law on penalty proceedings.

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2015-TIOL-286-ITAT-MUM Tata Realty and Infrastructure Ltd. vs. DCIT ITA No. 6380/Mum/2011 Assessment Years: 2007-08. Date of Order: 9.1.2015

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Section 28 – For a company providing consultancy
services, the date of opening office can be considered as date of
setting up of business.

Facts :
The assessee
company was incorporated on 2-3-2007 to carry on business of providing
advisory services in the field of real estate and infrastructure
project. During the first previous year the assessee in its return of
income declared a loss of Rs. 61,01,298. The assessee company had not
received any operative income but had incurred various kinds of
expenditure from 2-3-2007 to 31-3-2007 and had earned dividend income of
Rs. 19,121. The assessee could not furnish any evidence to show that it
had rendered services during the previous year. The first MOU was
entered into on 10-8-2007.

Since the first MOU was entered into
by the assessee on 10- 8-2007, the Assessing Officer (AO) was of the
view that the assessee had not set up its business and the entire
expenditure incurred by the assessee was to earn exempt income. He
disallowed the entire expenditure of Rs. 61,01,298.

Aggrieved,
the assessee preferred an appeal to the CIT(A) who upheld the order
passed by the AO. Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held:
The business of the assessee was
providing advisory services in real estate and infrastructure projects.
For a company providing consultancy services, the date of opening of
office can be considered as date of setting up of business.

The
Tribunal noted that the assessee company recruited its employees well
before the date of incorporation, which included, inter alia, a Managing
Director, a Chief Financial Officer, Human Resource personnel,
Secretarial Staff and persons well versed in Strategic Research and
Advisory and Marketing and also persons having expertise in Construction
projects, Architects etc. It also purchased computers, office
equipments, vehicles and also hired its office. The assessee had
undertaken specific projects in the month of March, 2007 for companies
like TCS, Rallis, VSNL. Tata tea (Bangalore), Tata Tea (Munnar), Delhi
Development Authority, Indira Gandhi National Centre for Arts, certain
projects in Tamil Nadu, Mass Rapid Transport System (Phase 2), Special
Economic Zones, Airports etc, which meant that the assessee had started
contacting its prospective customers in the month of March 2007 itself.

As
regards the specific observation of the tax authorities that the
assessee has failed to furnish any evidence in the form of
correspondence etc. to show that it has commenced its business
activities, the Tribunal held that the said fact may not be relevant for
a consultancy company. It held that the assessee should be considered
to have been set up its business on the date of its incorporation and
hence the expenses incurred after that date should be allowed as revenue
expenditure. The view taken by the tax authorities that the first MOU
was entered in the succeeding year should be considered as date of
setting up of business was held to be not in accordance with the settled
principles.

However, since the AO did not have occasion to
examine the expenditure claim put forth by the assessee, the Tribunal
restored the matter of examining claim of expenditure to the file of the
AO.

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[2014] 151 ITD 726 (Del) Himalya International Ltd. vs. DCIT A.Y. 2005-06 Order dated- 14th March, 2014

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Section 37(1) – Where in terms of sales
agreement, assessee pays expenses relating to export sales carried out
on its behalf by consignment agent located abroad, assessee’s claim for
deduction of said expenses cannot be rejected taking a view that same
were in nature of post sales expenses.

FACTS
The
assessee was engaged in the business of manufacturing, food processing
and infotech. The assessee had a consignment agent namely ‘G’ located in
USA. During relevant year, the assessee filed its return claiming ‘USA
office expenses’. The assessee’s case was that said expenses were
incurred by the consignment agent in the course of export sales of goods
on behalf of the assessee.

The AO opined that expenses incurred
by assessee were in the nature of post sales expenses and the same
could not be said to be expenses pertaining to the export business of
the assessee. Accordingly, the AO rejected the assessee’s claim.

The Commissioner (Appeals), however, allowed a major portion of assessee’s claim.

Revenue
filed an appeal on the ground that the said expenses were post sales
and therefore should be disallowed and also on the ground that no TDS
had been deducted by the assessee while making payment of these expenses
and therefore the said expenses should be disallowed.

HELD
As
per terms of the agreement between the assessee and its consignment
agent ‘G’, the expenses in the nature of selling and administrative
expenses were clearly the responsibility of the assessee and the
assessee had to reimburse the same to its consignment agent. It is a
well accepted proposition that in case of a standard consignment, sale
is effected by the consignment agent on behalf of the consignor and the
agent is not responsible for any expenses incurred for such sale and
expenses actually incurred or paid on behalf of the consigner is
reimbursed to the consignment agent.

It was apparent from the
agreement between the assessee and its consignment agent ‘G’ that the
assessee was responsible for all costs, taxes and other tax expenses
relating to the import from India to USA and sale of products made by
‘G’ including custom duty, ocean freight and land freight of USA,
warehousing expenses in USA etc. and other general and administrative
expenses including USA salaries payments, telephone expenses, travelling
expenses, staff education and medical expenses, courier expenses, web
hosting expenses, USA local expenses, membership fees paid to different
associations, legal & professional fees, car expenses etc. The
assessee also fixed the selling and administrative expenses remuneration
and other incidental at the rate of 9.05 % of the sales effected in
USA.

The amount of remittance or reimbursement made to ‘G’ also
contained an element of commission of consignment agent but since the
consignment agent has not rendered any service in India and, therefore,
consignment commission is not taxable in India.

The assessee
raises bills/invoices by estimating net realisable value (i.e. gross
sales value in US less US expenses) and under the relevant custom rules
an ARE-1 was filed by the assessee in respect of all goods leaving
Indian custom boundaries and same detail was duly declared in ARE-I by
the assessee amounting to Rs. 9.65 crore. The authorities below have
also not disputed rather accepted the accounting method of the assessee
that out of the gross sales realised in USA was declared as turnover by
the assessee in the final account and US expenses were also claimed
separately therein.

In view of above, it is opined that the
Assessing Officer concluded the assessment by recording a contradictory
finding because on the one hand, the Assessing Officer has considered
gross sales realised value in USA as sales of the assessee for the
financial year under consideration and on the other hand the Assessing
Officer held that the export sale was completed when the consigned goods
left the Indian Customs Border and all expenses incurred thereafter
were post sale expenses.

As per the above set of facts, all US
expenses incurred by the consignment agent on behalf of the assessee
were the responsibility of the assessee and subsequent agreement, which
was also certified by CPA audit report, when actual export sale was
effected at USA through consignment agent on behalf of the assessee,
then expenses claimed by the assessee for the purpose of business could
not be treated as post sales expenses and observations and findings of
the Assessing Officer are not correct and justified in this regard.

In
the result, the Commissioner (Appeals) has granted relief for the
assessee on reasonable, justified and cogent grounds which were again
followed by Commissioner (Appeals) in assessee’s own case for assessment
year 2003-04. There is no ambiguity, perversity or any other valid
reason to interfere with the same. Accordingly, all grounds of the
revenue being devoid of merits are dismissed.

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[2014] 151 ITD 642 (Mum) ITO vs. Gope M. Rochlani AY 2008-09 Order dated – 24th May, 2013

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Explanation 5A to section 271(1)(c), read with
section 139. In absence of any limitation or restriction relating to
words ‘due date’ as given in clause (b) of Explanation 5A to section
271(1)(c), it cannot be read as ‘due date’ as provided in section 139(1)
alone, rather it can also mean date of filing of return of income u/s.
139(4). Therefore, where pursuant to search proceedings, assessee files
his return before expiry of due date u/s. 139(4) surrendering certain
additional income, he is entitled to claim benefit of clause (b) of
Explanation 5A to section 271(1)(c).

FACTS
The
assessee firm was carrying out business of housing development. A search
and seizure action u/s. 132(1) was carried out in case of assessee on
16th October 2008. In course of said proceedings, one of partners of
firm made statement u/s.132(4) declaring certain undisclosed income and
subsequently, the return was filed by the assessee declaring the amount
surrendered as income.

In the assessment order passed u/s.143(3)
read with section 153A, the assessment was completed on the same income
on which return of income was filed. The Assessing Officer also
initiated a penalty proceedings u/s. 271(1)(c).

The assessee,
before the Assessing Officer, submitted that this additional income was
offered voluntarily which was on estimate basis and the same has been
accepted in the assessment order as such, therefore, provisions of
section 271(1)(c) is not applicable. The Assessing Officer rejecting
assessee’s explanation levied penalty u/s. 271(1)(c).

In
appellate proceedings before Commissioner (Appeals), the assessee also
submitted that in view of clause (b) of Explanation 5A to section
271(1)(c) penalty could not be levied as the assessee filed return of
income on the due date which could also be inferred as return of income
filed u/s.139(4).

The Commissioner (Appeals) did not accept the
assessee’s explanation on Explanation 5A to section 271(1)(c), but
deleted the penalty on the ground that the income which was offered was
only on estimate basis, therefore, additional income offered by the
assessee could neither be held to be concealed income or furnishing of
inaccurate particulars of income.

On appeal by Revenue

HELD
There
is a saving clause in the Explanation 5A to section 271(1)(c) wherein
penalty cannot be held to be leviable u/s. 271(1)(c); according to which
if the assessee is found to be the owner of any asset/income and the
assessee claims that such assets/income represents his income for any
previous year which has ended before the date of search and the due date
for filing the return of income for such previous year has not expired
then the penalty u/s. 271(1)(c) shall not be levied.

The due
date for filing of the return of income u/s. 139(1) for assessment year
2008-09 was 30-9-2008, whereas the assessee has filed the return of
income on 31-10- 2008 i.e., after one month from the date of filing of
the return of income as provided in section 139(1). However the due date
for filing of the return of income u/s. 139(4) for the assessment year
2008-09 was 31-3-2010 and thus, the return of income filed by the
assessee in this case was u/s. 139(4).

The issue however is
whether the return of income filed u/s. 139(4) can be held to be the
‘due date’ for filing the return of income for such previous year as
mentioned in clause (b) of Explanation 5A to section 271(1)(c).

For
the purpose of the instant case, one has to see whether or not the
assessee has shown the income in the return of income filed on the ‘due
date’. Provisions of section 139(1) provides for various types of
assessees to file return of income before the due date and such due date
has been provided in the Explanation 2, which varies from year-to-year.
Whereas, provisions of section 139(4) provide for extension of period
of ‘due date’ in the circumstances mentioned therein and it enlarges the
time-limit provided in section 139(1). The operating line of
sub-section (4) of section 139 provides that ‘any person who has not
furnished the return within the time allowed’, here the time allowed
means u/s. 139(1), then in such a case, the time-limit has been
extended. Wherever the legislature has specified the ‘due date’ or has
specified the date for any compliance, the same has been categorically
specified in the Act.

In the aforesaid Explanation 5A, the
legislature has not specified the due date as provided in section 139(1)
but has merely envisaged the words ‘due date’. This ‘due date’ can be
very well-inferred as due date of the filing of return of income filed
u/s. 139, which includes section 139(4). Where the legislature has
provided the consequences of filing of the return of income u/s. 139(4),
then the same has also been specifically provided.

Once the
legislature has not specified the ‘due date’ as provided in section
139(1) in Explanation 5A, then by implication, it has to be taken as the
date extended u/s. 139(4). In view of the above, it is held that the
assessee gets the benefit /immunity under clause (b) of Explanation to
section 271(1)(c) because the assessee has filed its return of income
within the ‘due date’ and, therefore, the penalty levied by the
Assessing Officer cannot be sustained on this ground.

Thus, even
though the conclusion of the Commissioner (Appeals), is not affirmed,
yet penalty is deleted in view of the interpretation of Explanation 5A
to section 271(1)(c).

In the result, revenue’s appeal is treated as dismissed.

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Search and seizure – Block assessment – B. P. 1/04/1996 to 12/09/2002 – No incriminating material found during search – Survey – Incriminating material found in survey but no evidence that it related to assessee – Amounts based on survey not includible in block assessment –

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CIT vs. Smt. Yashoda Shetty; 371 ITR 75 (Karn):

In September
2002, search proceedings were initiated in the case of YS and were
concluded in November 2002. A statement of KB was recorded. No
incriminating materials were found. On 12th September, 2002, a survey
was conducted in the business premises of the Assessee and incriminating
materials were identified and were impounded. Such material contained
the extract of a savings bank account in the name of B. His statement
was recorded on 12th September, 2002. The bank account contained heavy
deposits and withdrawals. After going through the statement, the
Assessing Officer came to the conclusion that this bank account
contained transactions related to assessee and it contained deposits in
respect of unaccounted sales and withdrawals. Therefore, he estimated
the undisclosed income on the basis of the deposits made in the bank
account and applied a certain rate of profit and computed the
undisclosed income. Therefore, a block assessment order was passed. The
Tribunal held that the income computed in the hands of the assessee as
undisclosed income could not have been taxed under the block assessment
and the income had to be considered for regular assessment.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“On
the basis of the incriminating material found in the course of survey
mainly because the material was put to the assessee and his statement
was recorded subsequent to the search, the material could not be held to
be relatable to the assessee. Therefore, the Appellate Authorities were
justified in holding that the material found in the course of survey
can become the subject matter of regular assessment and it could not
become the subject matter of block assessment.”

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Revision – Jurisdiction of CIT – Sections 153A and 263 – A. Y. 2008-09 – Search and seizure – Once the proceedings u/s. 153A are initiated the Assessing Authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or/and any other income to find out what is the “total income” – By virtue of section 263, the CIT gets no jurisdiction to initiate proceedings under the said provisions –

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Canara Housing Development Company vs. Dy.CIT; 274 CTR 122 (Karn):

For the A. Y. 2008-09 the assessment was made u/s. 143(3) of the Income-tax Act, 1961 on 31/12/2010. Subsequently, search took place in the premises of the assessee and proceedings u/s. 153A of the Act were initiated. In the mean while CIT initiated proceedings u/s. 263 of the Act, on the ground that the order dated 31/12/2010 passed u/s. 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue. The assessee’s objection was rejected and an order u/s. 263 was passed directing the assessing authority to enhance the total income as directed. The Tribunal dismissed the assessee’s appeal.

On appeal by the assessee, the Karnataka High Court reversed the decision of the Tribunal and held as under:

“i) Once the proceedings are initiated u/s. 153A the assessing authority can take note of the income disclosed in the earlier return, any undisclosed income found during search or/and also any other income which is not disclosed in the earlier return or which is not unearthed during the search, in order to find out what is the “total income” of each year and then pass the assessment order.

ii) Therefore, the CIT by virtue of the power u/s. 263 gets no jurisdiction to initiate proceedings under the said provisions.”

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Remuneration from foreign enterprise – Deduction u/s. 80-O – A. Y. 1994-95 – Assessee conducting services for benefit of foreign companies – Services rendered “from India” and “in India” – Distinction – Report of survey submitted by assessee not utilised in India though received by foreign agency in India – Mere submission of report within India does not take assessee out of purview of benefit –

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CIT vs. Peters and Prasad Association; 371 ITR 206 (T&AP):

The assessee was an agency undertaking the activity of conducting services for the benefit of foreign companies or agencies. After conducting a survey on the assigned subject, the reports were submitted to the foreign agencies. For the A. Y. 1994-95, the assessee claimed deduction u/s. 80-O in respect of the remuneration received from the foreign enterprise for such services. The Assessing Officer denied the deduction on the ground that the survey report was submitted in India and thereby section 80-O was not attracted. The Tribunal allowed the assessee’s claim..

On appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) It was not the case of the Revenue that the report of survey submitted by the assessee was utilised within India, though it was received by the foreign agency within India. It is only when it was established that the survey report submitted to the foreign agency was, in fact, used or given effect to, in India, that the assessee becomes ineligible for deduction.

ii) The mere fact that the submission of the report was within India, did not take away the matter from the purview of section 80-O. If that was to be accepted, the very purpose of providing the Explanation becomes redundant.

iii) Thus, the assessee was entitled to deduction u/s. 80-O.”

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Recovery of tax- Garnishee proceedings u/s. 226(3) – Recovery of rent – TRO cannot enhance the rent unilaterally –

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Union Bank of India vs. TRO; 274 CTR 396 (Pat):

Petitioner bank was a tenant of the premises owned by one S. As a part of the tax recovery of S, garnishee notice u/s. 226(3) of the Income-tax Act, 1961 was issued and rent was recovered by the TRO from the petitioner bank. The petitioner was regularly paying the rent to the landlord, and after the premises was taken over by the IT Department by issuing notice u/s. 226(3) of the Act has been paying rent to TRO. TRO unilaterally sought to enhance the rent payable by the petitioner manifold and to recover the same from the account of the petitioner maintained by the RBI.

The Patna High Court allowed the writ petition filed by the petitioner challenging the action and held as under:

“i) TRO has no jurisdiction to unilaterally enhance the rent being paid by the assesses. The contention of the Department that the TRO has been compelled to take action in the matter by applying the provisions of section 23(1)(a) has no force. Provisions of section 23(1)(a) relate to the determination of income from house property for the purpose of filing returns and assessment thereof and the same has no relevance at all so far as the fixation of rent payable by a tenant to the landlord is concerned. Any such fixation of fair rent or higher rent can only be either on the basis of agreement between the parties or by the competent authorities under the Rent Control Act and not unilaterally by the TRO or any other officer of the Income Tax Department.

ii) Any amount which may have been recovered from the account of the petitioner is to be refunded to the petitioner forthwith.”

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The assessee was engaged in the business of manufacturing and selling of abrasives, refractories, grinding wheels etc. For the A. Y. 1992-93 the Assessing Officer allowed deduction u/s. 80-I of the Income-tax Act, 1961. Subsequently he rectified the assessment order u/s. 154 notionally carrying forward the losses of the earlier years and setting of the losses against the profit available during the A. Y. 1992-93 and thereby negative the claim for deduction u/s. 80-I.

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Carborundum Universal Ltd. vs. JCIT; 371 ITR 275 (Mad):

The assessee was engaged in the business of manufacturing and selling of abrasives, refractories, grinding wheels etc. For the A. Y. 1992-93 the Assessing Officer allowed deduction u/s. 80-I of the Income-tax Act, 1961. Subsequently he rectified the assessment order u/s. 154 notionally carrying forward the losses of the earlier years and setting of the losses against the profit available during the A. Y. 1992-93 and thereby negative the claim for deduction u/s. 80-I. Similarly, he also withdrew the deduction for the A. Y. 1993-94. The Tribunal upheld the order of the Assessing Officer:

On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and Held as under:

“i) Once the depreciation allowance and the development rebate for the past assessment years were fully set off against the total income of the assessee for those assessment years, the question of carrying forward of losses does not arise, for the purpose of determining the deduction u/s. 80-I of the Income-tax Act, 1961.

ii) The losses incurred by the industrial undertaking claiming deduction u/s. 80-I, which had been already set off against the profits of the industrial undertaking, should not be notionally carried forward and set off against the profits generated by the industrial undertaking during the relevant assessment year for determining deduction u/s. 80-I.”

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Income or capital receipt – Section 4 – A. Ys. 2006-07 to 2009-10 – Entertainment tax exemption subsidy granted to assessee engaged in business of running of multiplex cinema halls and shopping malls is capital receipts –

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CIT vs. Bougainvillea Multiplex Entertainment Centre (P.) Ltd.; [2015] 55 taxmann.com 26 (Delhi):

The assessee was engaged in the business of running of multiplex cinema halls and shopping malls. It had been the beneficiary of a scheme promulgated by the State Government wherein it had been granted exemption from entertainment tax payment. It claimed deduction to the extent of entertainment tax collected in the corresponding financial years terming the amounts as capital receipts. The Assessing Officer disallowed the said claims. The Tribunal allowed the deduction claimed by the assessee.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The UP Scheme under which the assessee claims exemption to the extent of entertainment tax subsidy, claiming it to be capital receipt, is clearly designed to promote the investors in the cinema industry encouraging establishment of new multiplexes. A subsidy of such nature cannot possibly be granted by the Government directly. Entertainment tax is leviable on the admission tickets to cinema halls only after the facility becomes operational. Since the source of the subsidy is the public at large which is to be attracted as viewers to the cinema halls, the funds to support such an incentive cannot be generated until and unless the cinema halls become functional.

ii) The State Government had offered 100 per cent tax exemptions for the first three years reduced to 75 per cent in the remaining two years. Thus, the amount of subsidy earned would depend on the extent of viewership the cinema hall is able to attract. After all, the collections of entertainment tax would correspond to the number of admission tickets sold. Since the maximum amount of subsidy made available is subject to the ceiling equivalent to the amount invested by the assessee in the construction of the multiplex as also the actual cost incurred in arranging the requisite equipment installed therein, it naturally follows that the purpose is to assist the entrepreneur in meeting the expenditure incurred on such accounts. Given the uncertainties of a business of this nature, it is also possible that a multiplex owner may  not be able to muster enough viewership to recover all his investments in the five year period.

iii) Seen in the above light, it was unreasonable on the part of the Assessing Officer to decline the claim of the assessee about the subsidy being capital receipt. Such a subsidy by its very nature, was bound to come in the hands of the assessee after the cinema hall had become functional and definitely not before the commencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade.

iv) The facts that the subsidy granted through deemed deposit of entertainment tax collected does not require it to be linked to any particular fixed asset or that is accorded ‘year after year’ do not make any difference. The scheme makes it clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors etc. included), even if it were ‘before completion of five years’.

v) For the foregoing reasons, the Tribunal in the impugned orders has taken a correct view of law on the basis of available facts to conclude that the assessee is entitled, in terms of the UP Scheme, to treat the amounts collected towards entertainment tax as capital.

vi) The question of law raised in these appeals is, thus, answered in the negative against the revenue.”

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Depreciation – Rate – Section 32 and R. 9B of I. T. Rules, 1962 – A. Y. 2010-11 – Broadcasting/ exhibition rights and satellite rights in feature films amount to distribution rights – Assessee entitled to 100% depreciation –

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CIT vs. Smt. Achila Sabharwal; 371 ITR 219 (Del):

For the A. Y. 2010-11, the assessee claimed depreciation of Rs. 1.2 crore on cinematographic film at 100%. The Assessing Officer allowed only 25% depreciation observing that the assessee did not purchase any cinematographic films for consumption but what was purchased were broadcasting or exhibition rights and satellite rights. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The Assessing Officer took a very narrow view of the term “distribution rights” and held that exhibition rights, television rights and satellite rights cannot be treated as distribution rights. What was purchased and sold by the assessee were distribution rights.

ii) The right would include and consist of acquisition and transfer of rights to exhibit and broadcast and satellite rights. These rights are integral and form and represent rights of film distributor.

iii) Even otherwise, if Rule 9B of the Income-tax Rules 1962 would not be applicable, purchase and sale of film would result in a business transaction, i.e., sale consideration received less purchase price paid. Appeal is accordingly dismissed.”

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A. P. (DIR Series) Circular No. 80 dated March 3, 2015 External Commercial Borrowings (ECB) Policy — Review of all-in-cost ceiling

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This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till March 31, 2015: –
The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.

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Deemed dividend – Section 2(22)(e) – A. Y. 2007- 08 – Where assessee itself was not shareholder of lending company addition made by AO by invoking provisions of section 2(22)(e) was not sustainable –

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CIT vs. Jignesh P. Shah; [2015] 54 taxmann.com 293 (Bom): 274 CTR 198 (Bom):

The assessee was a 50 % shareholder of ‘L’. ‘L’ had advanced money to one ‘N’ company who in turn advanced money to assessee. The Assessing Officer brought to tax the amount of loan received by the assessee from ‘N’ as deemed dividend u/s. 2(22)(e). On appeal, the Commissioner (Appeals) held that the loan given by ‘N’ to the assessee was not the payment made by it to its shareholder and thus, section 2(22)(e) had no application. The Commissioner (Appeals) deleted the addition. The Tribunal upheld the order of the Commissioner (Appeals).

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) In the present facts, it is an admitted position that assessee is not a shareholder of ‘N’ from whom he has received loan. Therefore, no fault can be found with the decision of the Tribunal in having followed the decision of the High Court in CIT vs. Universal Medicare (P.) Ltd. [2010] 324 ITR 263/190 Taxman 144 (Bom.). This view has been further reiterated by another division bench of this court in CIT vs. Impact Containers (P.) Ltd. [2014] 367 ITR 346/225 Taxman 322/48 taxmann.com 294 (Bom.)

ii) The issue raised by the revenue stands concluded by the order of this court, no sustainable question of law arises. Accordingly, appeal is dismissed.”

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[2015-TIOL-402-CESTAT-AHM] Oil and Natural Gas Corporation Ltd vs. Commissioner of Central Excise & Service Tax, Surat.

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Interest is not payable with respect to duty
required to be debited in the CENVAT Credit Account provided sufficient
balance was available in the CENVAT Account.

Facts
The
Appellant made making cash payment of service tax on a monthly basis,
however part of the tax required to be debited from the CENVAT Account
was paid on a quarterly basis. The department demanded interest for the
delay in debiting the CENVAT credit account.

Held:
The
Tribunal noted that even in cases of clandestine removal or non-payment
of taxes, admissible CENVAT credit during the relevant period of demand
is given abatement from the total duty demanded and interest is charged
only on the balance demand. Since sufficient balance is available in
the CENVAT account, interest is not payable for the delay in debiting
the CENVAT account.

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Wolves of Wall Street

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Bonus payments by Wall Street firm are at their highest levels since before the financial crisis of 2008, according to a report by the New York State Comptroller. The news came on the same day that a trader at Goldman Sachs was fined $825,000 for his role in a bad mortgage deal.

The record bonuses, accompanied by a rising trend of big fines for financial market crimes, should lead to a new round of debate on the role of the finance industry. Every country needs a robust financial sector, but also has to take care that its economy is not eventually sucked into what J.M. Keynes called a whirlpool of speculation.

The key to reform is not just macroprudential regulations but also a hard look at incentives for excess risk-taking by traders. JP Morgan Chase and Co. boss Jamie Dimon has got a $20 million bonus a few months after the firm paid a record $13 billion in a settlement with regulators.

(Source: The Mint Newspaper dated 14-03-2014)

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Why WhatsApp

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For some time, the behemoth social networking website Facebook has been plagued by reports that it is losing its edge with younger users. Given that explosive future growth is the source of its hefty valuation of $173 billion (Facebook trades at 50 times its 2014 earnings) as well as the fact that domination of user networks is how such websites can hope to make money, this has been a matter of concern for investors. Even US President Barack Obama, who relied heavily on Facebook for his insurgent campaign in 2008, has noticed, saying late last year in a chat with children that “it seems they don’t use Facebook any more”. The numbers back up President Obama’s assessment.

The slack has been picked up by other networks. Tumblr, for example, with its small, easy-to-link posts with high graphics content; Snapchat, which deletes posts and photos after a few seconds; Instagram, which allows users to manipulate and share photos; and, of course, Twitter. But Mark Zuckerberg of Facebook has something most of these others don’t: a war chest. And thus the purchase, for $1 billion last year, of Instagram. And now the mammoth $19-billion purchase of the instant messaging service WhatsApp. It’s obvious, really, that Facebook is not paying for extra-special technology in buying WhatsApp. Other such SMS replacement services exist. Viber dominates West Asia, and was recently bought for $900 million by a Japanese online retailer. China uses WeChat. Japan uses Line. Eastern Europe uses Telegram. WhatsApp, however, has the largest user base, and is big in Western Europe, Africa and South and Southeast Asia. And it’s the only one that charges user fees; the others get money from advertising or value-added services. But Facebook probably isn’t interested in the money that WhatsApp makes from its downloads. It is interested in WhatsApp’s users: 450 million mobile users, about half of the number that uses Facebook’s apps. And it’s adding a million users daily.

Facebook wants those users. And so it paid for them – $19 billion, which comes to $42 (about Rs 2,600) a user. This is quite a lot; it’s difficult to see how each WhatsApp user could eventually be worth that much to Facebook or its advertisers. When Viber was sold, its users were valued at $8.50 (about Rs 530) a user. Even if just the $4-billion cash portion of the Facebook-WhatsApp deal is examined, then Facebook paid more than that. And it’s clear why: Facebook is desperate. It can’t afford to fall behind in terms of dominating the market – and demographics are against it. Rather than organically growing its network with younger users, it needs to capture them outright – hence the purchase of WhatsApp. It’s betting that smart integration of the two networks will follow and help it reverse its usage decline in the 13-21 age group. Facebook itself is 10 years old now; and it is spending money like water to stay young.

(Source: Business Standard dated 24-02-2014)

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Lesson We Must Learn From Global Indian CEOS

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The rise of global CEOs who spent their formative years in India is acknowledgement that the country is doing at least some things right. Many would agree some of the qualities these leaders possess — humility, modesty and a strong work ethic — were acquired well before they left the territorial frontiers of India.

The stability of family upbringing is among the most underappreciated advantages Indians have. According to the US Census Bureau, only 61 per cent of children in the US are raised from birth to age 18 in a home where both of their birth parents reside. Contrast this with India, where parents stay together and put the happiness of their children above everything else. Some children may feel their parents aren’t perfect, but most children learn what’s best about their parents and discard the rest.

This advantage can only accrue if families stay under the same roof: the biggest lessons learnt from one’s parents are often unspoken. Scott Haltzman, a renowned US sociologist, has shown that happier families understand who they are, what they value and why. This keeps families balanced in both good and bad times as they understand that only deep contentment can transcend momentary periods of pleasure and pain.

The understated reaction of Satya Nadella’s parents to their son’s success is an embodiment of this approach. What is also noteworthy is how the Hyderabad Public School (HPS) produced four global CEOs from India: Satya Nadella (Microsoft), Shantanu Narayen (Adobe), Prem Watsa (Fairfax) and Ajay Banga (MasterCard).Of course, a first-rate educational system and a plethora of sporting activities were a definitive advantage. But it appears that two things differentiated HPS from other schools. First, there was the sterling leadership of the principal of HPS, MC Watsa. And, second, the NCC training — which involved military exercises — may have helped students develop some of the qualities they possess today.

As we share the pride of global CEOs from India, we should reflect on the gratitude we owe parents and teachers. What the lives of Satya Nadella, Shantanu Narayen, Prem Watsa and Ajay Banga teach us is that most people do not get to where they are all on their own. It’s also a reminder that most people won’t get there in isolation either.

(Source: The Economic Times of India, dated 17-02-2014)

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Controversy: cenvat: Commission Paid to Agents Abroad

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Introduction:
In a landmark decision of Coca Cola India Pvt. Ltd. vs. CCE, Pune-III 2009 (242) ELT 168 (Bom), the Honourable Bombay High Court categorically held that credit was admissible of service tax paid by the concentrate manufacturer on advertising service used for marketing of soft drinks removed by the bottling company. Any activity relating to business could be covered under the definition of input service as per Rule 2(1) of the CENVAT Credit Rules, 2004 (CCR) provided there is a relation between the manufacturer of concentrate and such activity. Service tax paid on advertisements, sales promotion and market research is admissible as credit for payment of excise duty on concentrate especially when such expense forms part of a price of a final product which suffers excise duty. Within a short time frame of this decision, yet in another landmark case viz. CCE, Nagpur vs. Ultratech Cement Ltd. 2010 (20) STR 577 (Bom), the Court held that the scope of the definition of input service is very wide and it covers not only the services used directly or indirectly in or in relation to manufacture of final products, but also various services used in relation to the business of manufacturer whether prior to manufacture or post manufacturing activity, whether having a direct nexus or integrally connected with the business of manufacturing the final product. All services in relation to business of manufacture of the final product are covered. When these two well reasoned decisions were pronounced in quick succession, it largely appeared that many disputes relating to the CENVAT credit of service tax paid on various services used for business purposes would be settled based on the observations in the above cases. In many decisions as a matter of fact, the Tribunals have relied upon or followed the above decisions. Nevertheless, litigation for the CENVAT has been continuing for services such as transportation for employees, mobile phones, group insurance health policies, outward freight, outdoor caterer’s services, travel agent’s services etc., used by a manufacturer since these services and many others are not used directly in relation to the activity of manufacture. The nexus theory is often interpreted very narrowly by the revenue authorities both vis-à-vis manufacturers and service providers.

Nevertheless, the activity directly related to sale of a manufactured final product liable for excise duty or in the course of exports appeared less questionable for admissibility of credit particularly considering the definition of input service provided in CCR at least prior to the amendment made with effect from 01-04-2011 read as follows:

“(l) “input service” means any service, –

(i) used by a provider of taxable service for pro viding an output service; or

(ii) used by the manufacturer, whether directly or indirectly in or in relation to the manufacture of final products and clearance of final products, upto the place of removal, and includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.”

[emphasis supplied].

Controversy:
It can be seen that the above definition specifically includes the expression “sales promotion” in addition to advertisement and market research. Prima facie it hardly appears controversial that when a manufacturer of an excisable product pays commission to agents domestically or abroad, whether it has any nexus with the sale of such products as the services of agents are directly used for effecting or augmenting sale. The service of the commission agents is exigible to service tax as business auxiliary service considering it a service in relation to sale or promotion of client’s goods under the erstwhile section 65(19)(i) of the Finance Act, 1994 (the Act) since 09-07-2004. When a manufacturer pays commission to an overseas agent for executing sales abroad, the manufacturer is liable to pay service tax on such commission under reverse charge mechanism applicable u/s. 66A of the Act since 18-04-2006. Since the commission paid directly is related to the sale of the final product, the CENVAT credit of service tax so paid under reverse charge has been available to such exporter-manufacturer.

When the Commissioner of Central Excise, Ludhiana filed an appeal [reported in CCE, Ludhiana vs. Ambika Overseas 2012 (25) STR 348( P&H)] against ruling of the Tribunal that the assessee was entitled to avail credit of service tax paid to the foreign commission agents for services of procuring orders as these services were input services, the Punjab & Haryana High Court found no reason to interfere with the decision of the Tribunal as revenue failed to establish illegality or perversity in the order of the Tribunal. As against this decision, in a detailed order passed in the case of Commissioner of C. Ex. Ahmedabad vs. Cadilla Healthcare Ltd. 2013 (30) STR 3 (Guj), the question that was raised before the Court for consideration that whether the service of a commission agent for promotion of sale of final products of the assessee which is categorised as business auxiliary service (u/s. 65(19)(i) of the Act) would fall within the purview of “input service”. According to the assessee, the commission agents find buyers for the assessee’s goods and thereby they promote sales of the assessee’s goods. The definition of input service specifically includes services in relation to sales promotion whereas according to the revenue, the commission agent is a person directly concerned with the sale and purchase of goods and is not connected with sales promotion. In view hereof, the meaning of the expression “sales promotion” was examined by the Court in detail and at the end of which, a fine distinction was made between services in relation to ‘sales’ and “sales promotion” to hold that the service of commission agent was observed as one in relation with ‘sale’ and therefore not falling within the purview of the main or the inclusive part of the definition of input service in terms of Rule 2(l) of CCR. Arriving at the above conclusion, reliance was placed on the decision in Commissioner of Income Tax vs. Mohd. Ishaque Gulam 232 ITR 869 wherein the Madhya Pradesh High Court distinguished expenditure made on the sale promotion and commission paid to the agents and held that commission paid to the agents cannot be termed as expenditure on sales promotion. Further, for the contention that in any case, the service provided by the commission agent was in relation to business activity of the assessee and the list of activities in the inclusive part of the definition of input service was illustrative as the words “such as” preceded the said list of services, it was observed that unless the activity was analogous to the business activity, it could not be considered input service. Since the service of the commission agents was found not analogous with accounting, auditing, recruitment, coaching and training, credit rating, quality control, share registry, security services etc., it was held that it did not qualify to be “input service.”

The logical questions to every person studying legal provisions arise are:

• Whether the activity in relation to ‘sale’ is less
akin to being an “input service” in relation to
manufacture than the services of share registry,
security services, credit rating etc.? Is it simply
because such services find specific place in the
definition?

• In the context of definition of input service
whether there exists a material difference between
sales promotion and sale in relation to
manufactured goods? Is sale promotion not
carried out to achieve sale?
• Is the commission agent not helping to execute
sale after identifying the buyers?
• Does the cost of final product sold and subjected
to excise duty not include the cost towards
commission payment and therefore is it not a
cost incurred before the goods are removed
from the place of removal?
Despite knowing the replies to all the above questions,
the decision of the Honourable Gujarat High Court is a reality. However, very importantly, it is
required to note here that the following relevant
facts were not placed before the Honourable Gujarat
High Court in the said case of Cadilla (supra)
while the service of commission agents was not
interpreted as input service.
(a) After the amendment of the definition of “input
service” with effect from 01-04-2011, in response to
some prevailing doubts in the trade, as to availability
of credit in respect of certain items, CBEC
issued Circular No. 943/04/2011 dated 29th April,
2011. In reply to a question that whether the credit
on account of sales commission be disallowed after
the deletion of expression “activities relating to
business”, a clarification was issued at para 5 as,
“the definition of input service allows all credit on
services used for clearance of final products upto
the place of removal. Moreover, activity of sales
promotion is specifically allowed and on many occasions,
the remuneration for the same is linked to
actual sale. Reading the provisions harmoniously it
is clarified that credit is admissible on the services
of sale of dutiable goods on commission basis”.
Thus, it is clear that the credit is available even
in the post-amendment period.
(b) Secondly, in order to provide benefit to exporters
of various goods, the services provided
by commission agents located outside India for
causing sale of goods exported by Indian exporters
are exempted vide Notification No. 42/2012-ST
dated 29-06-2012, of course, subject to fulfillment
of certain conditions laid thereunder. (The said
exemption existed earlier under Notification No.
18/2009-ST dated 07-07-2009. Prior to bringing this
Notification also, vide Notification No. 41/2007-Service
Tax, exemption by way of refund was available
to exporters in respect of this service with
effect from 01-04-2008). Since the commission paid
abroad directly relates to sale of exported goods,
instead of asking assessees to pay service tax and
then allowing the claim of refund, the exemption
is allowed on fulfillment of conditions and following
prescribed procedure. This is clearly indicative of
the fact that the service provided relates to goods
sold in the course of exports and the services are
input services for the said sales.
(c) Thirdly the two benchmark decisions referred
above viz. Coca Cola Pvt. Ltd. (supra) and Ultratech
Cement Ltd. (supra) which broadly laid principles
interpreting the scope of input service were not
considered. The instant decision of the Gujarat
High Court now poses a question mark on these
two widely followed decisions of the Honourable
Bombay High Court.

Conclusion:
Consequent upon the above decision of the
Gujarat High Court in case of Cadilla Healthcare
Ltd. (supra), the authorities at various levels of
litigation in the State of Gujarat would be required
to follow the decision in respect of dispute relating
to the CENVAT credit of service tax paid on commission
to agents. However, the credit as per the
Circular No.943 remains available. The benefit of
Notification No. 42/2012-ST also continues in case
of commission paid in respect of export sales. In
the States of Punjab & Haryana, certainly Ambika
Overseas (supra) would be followed and elsewhere
in the country, the authorities follow either of the
two decisions found convenient. The fact however
remains that the service provided by an agent of
procuring sales order was used before executing
the order by the manufacturer and therefore the
cost of which is already factored into the cost
of the final product on which the excise duty is
levied. Hence, the service should qualify to be
an input service and the CENVAT credit therefore
should be available. However, to put an end to
the controversy and frivolous litigation, if the
CBEC considers issuing a further clarification in the
matter, it would mean a proactive step in larger
interests of law-compliant assessees.

SERVICE TAX IMPLICATIONS OF REDEVELOPMENT OF CO-OPERATIVE SOCIETY ON OR AFTER 01-07-2012

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Synopsis

In this article the author analyses the relevant definitions and typical terms and concepts used in documentation of redevelopment of housing and commercial societies.

He explains the Service Tax implications on existing Society/members and on Developers on construction of Rehab flats/units and also analyses the valuation of rehab construction services and valuation of development rights in light of Circular issued by the Service Tax authorities.

He also dissects the provisions of point of time rules applicable and CENVAT eligibility in respect of input services and capital goods used in redevelopment projects.

1. Preamble:

1.1. Acute shortage of land, rising population, ever increasing demand for housing and its sky rocketing prices has brought about an innovative concept of redevelopment of old properties in Mumbai. Re-development is a unique feature typical to the real estate sector in Mumbai. One rarely finds redevelopment projects in other cities due to availability of ample land and possibility of expansion of city in all directions.

Re-development has become a necessity in Mumbai, as countless buildings have outlived their estimated useful life and such buildings are beyond repair. Most property owners or societies are financially incapable of undertaking extensive repair or restoration. In a redevelopment project, the developer exploits the development potential and existing members get reconstructed flats/units with modern amenities, additional area, corpus and other allowances. Redevelopment is, therefore, a win-win solution for society, members and the developer.

1.2. Redevelopment is a complex economic transaction having far reaching implications under the Income-tax, VAT, Stamp duty, Service tax and other such laws. This article covers only the Service tax implications for the society, its members and the developer in respect of redevelopment of society property on or after 1st July 2012.

1.3. The reference to the following phrases/abbreviations in the article would mean:

• The Act – The Finance Act, 1994
• Valuation Rules – Service tax (Determination
of value ) Rules,2006
• POTR – Point of Taxation Rules, 2011
• CCR – CENVAT Credit Rules, 2004

2. Typical documentation and terms of redevelopment of housing and commercial societies:

2.1. A Developer normally executes following agreements:

• “Development Agreement” with the society.
• “Permanent Alternative Accommodation Agreement” with existing members for allotting flats/units in redeveloped building (“Rehab flats/units”).
• “Agreement to sale” with purchasers of  new flats (“Saleable flats”).

2.2. The society appoints a developer for reconstruction of specified area for its members. In consideration, the society transfers the balance development potential (FSI and rights to load TDR) to the developer for constructing saleable flats/units.

2.3. The usual terms of a redevelopment project are as under:

• Developer pays cash consideration for development potential (popularly known as FSI) to society.

• Developer allots flats/units in a redeveloped building to members.

• Developer may allot flat/unit to some members in his other project.

• Developer may purchase flats from existing members for consideration.

• Developer pays the following to the members

Lump-sum consideration to compensate consequential increase in maintenance and property tax on redeveloped building (popularly known as “Corpus allowance”)

Rent allowance to cover rent for temporary accommodation.

Shifting allowance to cover shifting cost such as transportation etc.

Reimbursement of brokerage for temporary accommodation.

Hardship allowance

• Developer may provide temporary alternative accommodation to members:

In his other project; or
In flats/units taken by him on rent.

2.4. Developer may sell additional area to existing members at concessional or market rate.

2.5. Developer sells saleable flats/units to Purchasers who will be admitted as members by society at later date.

3. Crux of redevelopment transaction:

Redevelopment transaction is a barter trans action between society/members and developer, the particulars whereof are tabulated below:

Question arises whether above-referred transactions are liable to service tax? If yes, when are such transactions taxable and what is the value of such services?

4. Relevant definitions, terms and concepts:

4.1. The relevant extract of definition of “Service” u/s. 65B(44) of the Act:

“‘Service’ means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include

(a) An activity which constitutes merely,-

(i) a transfer to title in goods or immovable property, by way of sale , gift or in any manner; or

(ii) ………
……”

4.2. The relevant extract of section 66E of the Act:

Following shall constitute declared services, namely:-

(a) ……..
(b) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuances of completion certificate by the competent authority
(c) ……
(d) ……
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act
(f) …….
(g) …….
(h) service portion in the execution of a works contract

4.3. “Works contract” is as defined u/s. 65B(54) to mean a contract wherein:

• transfer of property is in goods involved in the execution of such contract; and
• such contract is leviable to tax as sale of goods; and
• such contract is for the purpose of carrying out construction of any movable or immovable property.

4.4. The service tax implications for builder, developer, labour contractor and works contractor differ from each other. It is essential to understand these terms and the meaning of the word “immovable property”. The service tax legislation does not define these terms. One may have to go by the definitions in the General Clauses Act or common parlance meaning of such terms.

4.5. The term “Immovable Property” as defined under Clause (26) of General Clauses Act, 1897 includes land, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth.

4.6. “Builder” should mean a person constructing the building on land owned by him with intention to sell the flats/units.

4.7. “Developer” should mean a person who acquires development rights in the land and constructs the building thereon for sale.

4.8. Contractor constructs building on the land owned by another person. The contractor can further be classified as “labour contractor” or “works contractor”. The labour contractor undertakes a pure “service” contract and uses material provided by the principal. The “works contractor” undertakes composite contract and uses his own material in execution of the contract.

4.9. The issue is whether the developer is a “builder” or a “works contractor” vis-à-vis construction of rehab flats/units for a society and its members. The effective tax rate, date of service tax applicability, valuation and relevant Rules and notifications etc., are different for builders/ developers and for works contractors. In a society redevelopment project, the developer usually does not get title to or rights in land pertaining to rehab portion. The developer gets the development rights or right to construct saleable portion on society’s land.

The contractor or works contractor constructs
the building on the land belonging to its principal.
The construction material (belonging
to and used by the contractor) passes from
contractor to the client by the principle of accretion.
As far as construction for rehab flats/
units in redevelopment project is concerned,
the developer does not have the rights in the
land. He constructs on the land belonging to
the society. One can, therefore, safely conclude
that the developer is a “works contractor” for
construction of rehab flats/units in a redevelopment
project.
The society grants development rights (balance
after utilisation for rehab construction) to the
developer for constructing saleable portion. The
developer gets valuable rights in land pertaining
to saleable portion. The developer acts as a
“builder” selling the flats/units to the purchasers
along with underlying rights in the land.
In most of the redevelopment projects, the
developer acts in a dual capacity i.e., “Works
contractor” for rehab portion and “builder”
for saleable portion. However, it will be advisable
to examine the redevelopment agreement
minutely, to determine the exact scope and
role of the developer for assessing Service tax
implications.
5. Service tax implications for Society and members:
5.1. A Society/members transfer development rights
to developer for reconstructed flats/units and
other consideration in cash.
In the absence of a definition of the term
“Immovable property” in the Service tax legislation,
one may adopt the definition of “Immovable
property” given under Clause 26 of
General Clauses Act, 1897. Development rights
are squarely covered under the above referred definition of immovable property. Transfer of
such immovable property is outside the ambit
of Service tax.
5.2. Members usually get Corpus allowance, rent allowance,
shifting allowance, hardship allowance
etc. Two possible views as to the taxability of
such allowances are as under:
• All the above referred allowances are
consideration for a single deliverable i.e.,
transfer/relinquishment of rights in the
property by the members to the developer.
It is a transaction of immovable property
not liable to Service tax.
• Such allowances are a consideration for
different deliverables by the members. It
is not a consideration for transfer or relinquishment
of members’ rights in immovable
property. Such allowances are received by
the members for having agreed to vacate,
shift and tolerate the hardship associated
with shifting during the reconstruction
of the society’s building. Even lump-sum
compensations received by members (for
compensating them for consequential increase
in maintenance and property tax on
redeveloped buildings-popularly known as
“Corpus allowance”) may be regarded as
consideration for agreeing to tolerate the
financial burden in the future. There are all
chances of the Service tax authority treating
these to be declared service u/s. 66E(e) of
the Act. In such a case, members receiving
such allowances would be liable to Service
tax, if the total value of all services (including
these allowances) provided by them is
above one time threshold exemption limit
of Rs. 10 lakh.
5.3. Sometimes, the developer may provide temporary
alternative accommodation to members in
his other project or in flats/units taken by him
on rent. As the transaction between developer
and members is not in cash, the issue would
arise as to the taxability of these transactions in
the hands of members. It is a barter transaction
and consideration received in kind is liable to
Service tax, if the transaction is that of service is
taxable. The taxability of such service is already
discussed in the preceding paragraph.
6. Service tax implications for developer on construction
of residential flats allotted to existing
members in redevelopment project on or
before 30-06-2012:
Prior to 1st July, 2012, the construction of a
residential complex was taxable either under
“Construction of complex” category u/s. 65 (105)
(zzzh) or under “works contract service” u/s.
65(105)(zzzza) of the Act. The term “Residential
Complex” was defined u/s. 65(91a) of the Act.
The construction of a complex for personal use
was specifically excluded from the definition of
“Residential Complex”. Hence, any construction
of a Residential complex for personal use was
not taxable under any of the above referred
categories.
The Central Board of Excise and Customs (CBEC),
vide their circular 151/2/2012- ST dated 10th February,
2012, clarified that re-construction undertaken
by a building society by directly engaging
a builder/developer will not be chargeable to
Service tax as it is meant for the personal use
of the society/its members. The relevant extract
of the aforesaid circular is reproduced for ready
reference.
“Re – construction undertaken by a building society
by directly engaging a builder/developer will
not be chargeable to service tax as it is meant
for the personal use of the society/its members.”
The developers, therefore, were not liable to
Service tax till 30-06-2012 in respect of residential
flats allotted to existing members of the society
in redevelopment project.
7. Service tax implications on construction of
Rehab flats/units allotted to existing members
of the society in redevelopment project on or
after 01-07-2012:
7.1. The service tax legislation has been revamped
w.e.f 01-07-2012. Section 65 (105) listing out
taxable services and section 65(91a) defining
residential complex is no longer on statue book.
Circular no. 151/2/2012-ST dated 10th February,
2012, being inconsistent with the new Service
tax legislation, is no longer valid and subsisting
after introduction of negative list based levy.
In view of a substantial change in the law, it is necessary to revisit the issue whether developers
are liable to Service tax in respect of rehab
flats/units allotted to members of the society.
7.2. India has adopted the ‘Negative List based
service taxation’ w.e.f. 01-07-2012 wherein any
activity is liable to service tax, if such activity
is:
• Covered under definition of “Service” as
defined u/s. 65B(44) of the Act; and
• Not falling in “Negative List of Services” as
listed u/s. 66D of the Act; and
• Provided within the taxable territory; and
• Not covered under Notification no. 25/2012
dated 20-06-2012 or any other exemption
notification.
7.3. As discussed in para 4.9, the developer is a
“works contractor” for construction of rehab
flats/units in redevelopment project. The service
portion in a works contract is a declared service
u/s. 66E(h) of the Act and is a “service” as
defined u/s. 65B(44) of the Act. Such service is
neither in the negative list of services (as listed
in section 66D of the Act) nor is it exempt under
any of the exemption notification. In view of
this, any such service provided within taxable
territory (whole of India except Jammu and
Kashmir) is liable to Service tax w.e.f. 01-07-2012.
The Maharashtra Chamber of Housing Industry
(MCHI) has sought clarification from the Service
Tax Commissioner, Mumbai-I on the issue whether
Builders/Developers are liable to Service tax in
respect of rehab flats/units allotted to society
members in redevelopment project. The Commissioner,
vide his letter F.No.V/ST-I/Tech-II/463/11
dated 31-08-2012, clarified that Service tax is leviable
on construction of such rehab flats/units.
8.
Valuation of rehab construction service :
8.1. In a redevelopment project, the developer receives
consideration in the form of development
rights for constructing Rehab flats/units. Any
activity carried out by one person for another
person for consideration (whether in cash or in
kind) is a service. Section 67 of the Act requires
a service provider to include the monetary value
of consideration in kind in the value of taxable
services provided by him.
8.2. Section 67 of the Act deals with determination
of value of taxable services:
8.3. Developer receives consideration in the form
of development rights for constructing rehab
flats/units in a redevelopment project.
Section 67(1)(ii) is applicable when value of
consideration received in kind is ascertainable.
Section 67(1)(iii) applies when the value of
consideration is not ascertainable in ordinary
course.
An erroneous notion which prevails is that the
value of development rights is not ascertainable
and hence, the construction service in respect
of Rehab flats/units are to be valued u/s. 67(1)
(iii) read with Rule 3 of Valuation Rules. The Service tax authorities, relying on Circular
No.151/2/2012-ST dated 10-02-2012, value the rehab
flats/units at the rates at which similar flats are
sold by the developer. This is not a correct proposition,
as the Service tax is leviable on the value
of consideration (i.e. development right) received
by the developer and not on the value of flats
which is a consideration received by members/
society for granting development rights to the
developer. The construction of the rehab portion by the developer is a “Works Contract” service.
Such service cannot be valued at the market
value of rehab flat/units arrived at, by applying
the rate of saleable flats as sale rate of saleable
flats includes the land value. In a Redevelopment
Project, the land attributable to rehab flats/units
belongs to the society/members and it is never
transferred by the developer to the members or
the society. Hence, the land value should not
be included while ascertaining the value of the
construction service for rehab flats.
Development rights are liable to stamp duty and
market value of such rights (for the purpose
of stamp duty) is prescribed in the Government
reckoner of majority of the States. The value of
consideration (i.e Development Rights) is, therefore,
ascertainable and hence valuation is to be
done u/s. 67(1)(ii) of the Act. A very strong view
is prevalent that the value of development rights
(consideration received in kind by builder for
construction of rehab flats/units to members)
should be taken at stamp duty valuation.
8.4. The monetary value of development rights is
gross consideration for works contract executed
by the developer for the society. It is a gross
consideration for works contract which comprises
of material and service value. One has
to segregate the service portion from the total
value of the works contract. Section 67(1) of
the Act read with Rule 2A of Valuation Rules
prescribes following two valuation methods for
valuing the service component in the works
contract:
• Specific Valuation Method [Rule 2A (i) of
Valuation Rules]
• Presumptive Valuation Method [Rule 2A (ii)
of Valuation Rules]
Under the Specific Valuation Method, the value
of service portion is worked out by reducing
value of goods (material) used from gross
contract value excluding VAT. The service value
should not be less than specified overheads
relating to the project.
It is practically impossible
to work out the value of service portion
under this method for redevelopment project.
Under Presumptive Valuation Method, the value
of service portion in the works contract for
new construction (original works) is deemed
to be 40% of gross consideration/contract value
excluding VAT. Thus in the redevelopment
project, the effective service tax rate under
presumptive method would be 4.944% of the
value of development rights.
The developer is eligible for Cenvat Credit of
input services and capital goods irrespective
of the valuation method followed by him.
9. Point of Taxation for construction of rehab
portion:
9.1. The question arises when Service tax on rehab
portion is payable by the developer? Point of
Taxation Rules, 2011 determines the point of
taxation (‘POT’) i.e., the point of time when
service shall be deemed to have been provided.
The provisions, rules, notifications and circulars
subsisting on POT should be applied for determining:
• Taxability of transaction
• Applicable tax rate
• Valuation
• Cenvat eligibility
• Due date for tax payment
9.2. Works contract service is a continuous supply of
service. In case of continuous supply of service
where the provision of the whole or part of
the service is determined periodically on the
completion of an event in terms of a contract,
which requires the receiver of service to make
any payment to the service provider, the date
of completion of each such event as specified
in the contract shall be deemed to be the date
of completion of provision of service;
Explanation to Rule 3 of POTR provides that
whenever any advance is received by the service
provider towards the provision of taxable
service, the POT shall be the date of receipt of
such advance.
9.3. The point of taxation arises when service provider
is legally entitled to receive consideration
(development right in land) from service recipient
(society). The point of time when developer
receives irrevocable rights in the land is a point of taxation for rehab construction. The taxable
event occurs at such point and service tax liability
triggers on such date for developer.
One has to examine the development agreement
carefully to determine the point of taxation
and it could be any of the following probable
dates:
• Date of execution of development agreement.
• Date of developer getting vacant possession
free from all encumbrances.
• Date on which developer gets necessary
permissions (IOD, Commencement Certificate
etc) from local authority or government
to commence the construction.
• Date on which developer completes the
construction of area earmarked for original
occupants/members.
• Date on which full consideration for land
rights is paid to the society.
• Any other relevant date, specified in development
agreement, on which the substantial
rights in land are unconditionally and
irrecoverably bestowed on the developer.
The POT is a date on which developer have
received Sale Consideration (in form of development
rights) in advance for flat to be allotted to
the society/members. The liability to discharge
Service Tax arises on such date even if construction
is not started on such date.
The Redevelopment project for residential
complex in respect of which POT has already
arisen before 30-06-2012 is not liable to service
tax even if:
• Construction is started on or after 01-07-
2012.
• Construction is started before 30-06-2012
but completed on or after 01-07-2012.
• Possession of Rehab units given on or after
01-07-2012.

10. Sale of additional area to members and sale of
saleable flats/units:
The developer acts as a builder in respect of
saleable portion of project. Sale of under construction
flats/units are liable to service tax @
3.09% or 3.708%.
11. Cenvat eligibility on or after 01-07-2012:
The developer is liable to Service tax on rehab
and saleable portion. Both are taxable activities
and hence, the developer is entitled to claim
Cenvat in respect of input services and capital
goods used in redevelopment projects subject
to provision of Cenvat Credit Rules, 2004.

12. Conclusion:
It is the duty of the Government to provide
affordable shelter to citizens. Instead of encouraging
redevelopment activities through tax
concessions, Government levies service tax on
redevelopment projects. The levy is harsh and
unjust but it is often said that tax and equity are
strangers. Developers will have to factor tax
incidence in their project cost. In order to avoid
future dispute or litigation, it will be advisable
to incorporate a clear clause in agreement as
to who will bear the service tax incidence on
rehab flats/units.

ITO vs. Yash Developers ITAT Mumbai `G’ Bench Before B. R. Mittal (JM) and N. K. Billaya (AM) ITA No. 809/Mum/2011 and 3644/Mum/2012 A.Y.: 2007-08 and 2008-09. Decided on: 31st January, 2014. Counsel for revenue/assessee: B. P. K. Panda /S. C. Tiwari and Ms. Natasha Mangat.

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S/s. 80AC, 80IB(10), 139 – Amendment made to section 80IB(10) w.e.f. 01-04-2005 whereby as per Clause (d), limit has been imposed on the extent of commercial area which a project can contain, does not apply to projects approved before that date. Claim for deduction made in a return of income filed u/s. 139(4) will be decided on merits even though return of income is not filed within the time prescribed as per section 139(1) of the Act.

Facts:
The assessee, a partnership firm, engaged in the business of developing and construction filed its return of income for assessment year 2007-08 declaring total income of Rs. Nil after claiming deduction u/s. 80IB(10) of Rs. 74,684. For the assessment year 2008-09, the assessee filed return of income on 30-09-2009 by declaring total income at Rs. Nil after claiming deduction of Rs. 24,85,233 u/s. 80IB(10) of the Act.

The Assessing Officer (AO) denied deduction u/s. 80IB(10) of the Act for assessment year 2007-08 on the ground that the assessee had constructed shops with the aggregate built up area of 3,382 sq. ft which constituted commercial area of 6.12% of the total built up area which was in excess of the limit prescribed by Clause (d) of section 80IB(10) as amended by the Finance (No. 2) Act, 2004 w.e.f. 01-04-2005. Since the assessee had not fulfilled one of the conditions, the AO denied deduction u/s. 80IB(10). For assessment year 2008-09, the AO also stated that the assessee did not file the return of income within the stipulated time prescribed u/s. 139(1) of the Act. In view of the provisions of section 80AC of the Act, the AO denied the claim of Rs. 24,85,233 made u/s. 80IB(10) of the Act.

Aggrieved, the assessee filed an appeal to CIT(A) who allowed the appeal filed by the assessee for both the years.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal observed that on similar facts in the assessee’s own case for the same project, the Tribunal by its order dated 29-07-2011 relating to assessment years 2005-06 and 2006-07, the assessment years which also fall after the amendment made by insertion of Clause (d) to section 80IB(10) of the Act, applicable from 1.4.2005 has held that the assessee is eligible to claim deduction u/s. 80IB(10) of the Act in respect of the housing project. As there was no change in the facts and circumstances in the assessment years under consideration, the Tribunal applied the said decision of ITAT to these years as well. It also observed that the similar issue had also come before the Hon’ble Gujarat High Court in the case of Manan Corporation vs. ACIT (214 Taxman 373 (Guj), while considering the appeal for assessment year 2006-07 wherein it was held by their Lordship that the condition of limiting commercial establishment/ shops to 2,000 sq. feet which has come into force w.e.f. 01-04-2005 would be applicable for the project approved on or after 01-04-2005 would be applicable for the project approved on or after 01-04-2005 and where the approval of the project was prior to 31-03-2005, the amended provision would have no application for those projects. The Tribunal observed that the Gujarat High Court placed heavy reliance on the decision of the Bombay High Court in the case of Brahma Associates (333 ITR 289)(Bom). The Tribunal held that the issue is covered not only in the assessee’s own case for assessment years 2005-06 and 2006-07 but also by the decision of the Gujarat High Court in the case of Manan Corporation (supra). The Tribunal rejected the appeal filed by the revenue.

In respect of the return being filed beyond due date prescribed u/s. 139(1) of the Act, the Tribunal observed that the issue is covered in favor of the assessee by the decision of the Bombay High Court in the case of Trustees of Tulsidas Gopalji Charitable & Chaleshwar Temple Trust (207 ITR 368)(Bom) which has been considered by the CIT(A) while deciding the same in favour of the assessee. Following the said decision, the Tribunal held that there is no reason to interfere with the order of the CIT(A). This ground of appeal taken by the department for assessment year 2008- 09 was also rejected.

levitra

DCIT vs. Chetan M. Kakaria ITAT Mumbai `C’ Bench Before N. K. Saini (AM) and Sanjay Garg (JM) ITA No. 4961/Mum/2011 A.Y.: 2006-07. Decided on: 3rd February, 2014. Counsel for revenue/assessee: Ravi Prakash/ Firoz Andhyarujina

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S/s. 269T, 271E – Amount given or taken from the firm by the partners cannot be treated as giving or taken of loan. Therefore, penalty u/s. 271E cannot be levied even if such amounts are given or taken in cash.

Facts:
In the course of assessment proceedings the Assessing Officer noticed that the assessee had repaid loans, aggregating to Rs. 33,26,960 (Rs. 2,00,000 + 31,26,960), in cash, to the two firms where he was a partner. Such repayment of loan in cash was also reflected in the tax audit report. The amounts borrowed from the firm were reflected in the balance sheet as unsecured loans. The AO considered these payments to be in violation of section 269T of the Act and proceedings for levy of penalty u/s. 271E of the Act. He levied penalty of Rs. 33,26,960 u/s. 71E of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the penalty levied by the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The transactions between the firm and the assessee were treated by the AO as repayment of loan in cash. It held that there is no independent legal entity opf the firm apart from the rights and liability of the partners constituting it and if any amount is given or taken from the firm by the partners that cannot be treated as giving or taking of the loan. In the instant case, the assessee being a partner gave the money to the partnership firm when it was in need of business exigencies, later on the amount was received back. If the said amount had been routed through the capital account, there could have been no disallowance by the department because a partner can deposit cash in his capital account and he also has a right to receive it in cash. The Tribunal held that the AO was not justified in levying the penalty and CIT(A) has rightly deleted it.

It noted that on a similar issue, the Madras High Court has in the case of CIT vs. V. Sivakumar (354 ITR 9) (Mad) held as under:

“that there was no separate identity for the firm and the partner is entitled to use the funds of the firm. The assessee acted bona fide and there was a reasonable cause within the meaning of section 273B. Penalty could not be imposed.

It also noted that the Rajasthan High Court has in the case of CIT vs. Lokhpat Film Exchange (Cinema) (304 ITR 172)(Raj) held as under:

“the assessee had acted bona fide and its plea that inter se transactions between the partners and the firm were not governed by the provisions of sections 269SS and 269T was a reasonable explanation. Penalty could not be imposed.”

Considering the facts of the case and also the ratio of the above stated decisions the Tribunal held that the CIT(A) was justified in deleting the penalty levied by the AO u/s. 271E of the Act.

The appeal filed by the revenue was dismissed.

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(2014) 99 DTR 162 (Agra) DCIT vs. Gupta Overseas A.Y.: 2008-09 Dated: 04-02-2014

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Rule 27 of ITAT Rules, 1963: Any ground raised by the assessee if decided against him by the CIT(A) can be pursued by the assessee in his capacity as respondent before the Tribunal even if the CIT(A) has ultimately decided the issue in favour of the assessee.

Facts:
The payments of Rs. 1,05,27,465/- under the head ‘Design and development expenses’ were disallowed by the Assessing Officer by invoking the provisions of section 40(a)(i) by taking a view that they were in the nature of fees for technical services u/s. 9(1)(vii).

Aggrieved, assessee carried the matter in appeal before the learned CIT(A). Before the CIT (A), apart from disputing the disallowance on merits, the assessee also disputed the impugned disallowance on the ground that the provisions of section 40(a) (i) can be invoked only to disallow the expenditure of the nature referred therein which is shown as ‘payable’ as on the date of Balance Sheet and is to be read pari-pasu with section 40(a)(ia). The assessee relied upon the decision of Hon’ble ITAT Special Bench, Vishakapatnam in case of Merilyn Shipping & Transport vs. ACIT [2012] 136 ITD 23. Though this decision was in the context of section 40(a)(ia), the assessee argued that the same principle should even apply in the context of section 40(a)(i) as per the non-discrimination Clause in the Double Taxation Avoidance Agreement (DTAA) between Indian and foreign countries in consideration.

The CIT (A) deleted the impugned disallowance by holding on merits that none of the amounts so paid by the assessee was actually taxable in India. However, the CIT (A) rejected the above alternative plea raised by the assessee on the ground that decision of the Hon’ble ITAT Special Bench, Vishakhapatnam, has been suspended as an interim measure by the Hon’ble Andhra Pradesh High court till final decision and therefore, the CIT (A) did not follow that decision.

The Revenue challenged the correctness of the CIT (A)’s order by filing an appeal. In the course of this appeal, the assessee- respondent raised the same issue by invoking Rule 27 of the Appellate Tribunal Rules, 1963.

Held:
Rule 27 of the Appellate Tribunal Rules, 1963, provides that, “the respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him”. This provision is independent of, and quite distinct from, the statutory right to file cross objection u/s. 253(4) of the Income Tax Act, 1961, which allows the respondent, on being put to notice about the fact of an appeal having been filed against an order, to raise his grievances against the said order by filing the cross objections within stipulated time.

The important distinction between the scope of a cross objection u/s. 253(4) and an objection under Rule 27 is that while former calls into question correctness of a part of the operative order, the latter merely challenges a part of the reasoning adopted in the process of arriving at operating order, i.e. conclusion, even as it does not challenge the conclusion itself. U/s. 253(4), one can challenge the conclusions. Under Rule 27, one cannot challenge the conclusions, even though it can challenge the reasons for arriving at those conclusions, to the limited extent of the pleas which have been decided against the respondent, as it provides that the respondent “may support the order on any of the grounds decided against him”. In effect thus, under Rule 27, those grounds which have been decided against the respondent, even when the assessee does not challenge the same, can be agitated again, and to that extent, reasoning of even a favourable order can be called into question. However, cross objection u/s. 253(4) can call into question the conclusions arrived at in the impugned order, and, therefore, cross objections constitute a remedy against unfavourable portion of the order. It is thus clear that the scope and purpose of cross objections are distinct and mutually exclusive. No doubt that it is a common practice that the cross objections are routinely filed to support the orders appealed against by the other party, but a wrong practice, no matter how prevalent, can affect the correct legal position.

Therefore, while the respondent may indeed raise any of the issues, with regard to the grounds decided against the assessee even though the assessee may not be in appeal or cross objection, the respondent can do so only by way of a written intimation to that effect duly served on the other party reasonable in advance.

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2013-TIOL-119-ITAT-DEL ACIT vs. Lakhani India Ltd. ITA No. 2657/Del/2011 Assessment Year: 2006-07. Date of Order: 31- 12-2013

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Section 36(1)(iii) – In a case where assessee has substantial profits which are deposited in cash credit account and the debit balance in cash credit account is not on account of purchase of assets, interest on funds utilised from such cash credit account for acquiring capital assets cannot be disallowed under proviso to section 36(1)(iii).

Facts :
The assessee made a payment of Rs. 98.98 lakh to SIDCUL from an overdraft account. There was a debit balance in the said account on the date of making the payment. The assessee thereby incurred interest liability. The industrial plot which was allotted to the assessee was not put to use for business purposes by the assessee during the previous year relevant to the assessment year under consideration.

The Assessing Officer (AO) disallowed a sum of Rs. 10,52,537 on account of interest liability by invoking the proviso to section 36(1)(iii).

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed the appeal by observing that the profit generated during the year and recoveries from the debtors, etc. are more than the investment so made in the assets.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held :
The Tribunal noted that a similar addition made by the AO in the assessee’s own case was deleted by CIT(A) for assessment year 2005-06, whose order, has been upheld by ITAT. It noted the conclusion recorded by the ITAT in the said order which was as under – “17. With the assistance of the learned representative, we have gone through the record carefully. The assessee has placed on record copy of CC account and demonstrated that the debit balance was not on account of purchase of assets. It has deposited a sum of Rs. 113.98 lakh in this account before making payment of Rs. 56 lakh. The assessee has a substantial profit which was deposited in this very account. Thus, it has substantial surplus fund which can enable it to acquire the capital assets. Learned CIT(A) has observed that the assessee has declared an income of Rs. 3.55 crore which suggest that it has excess interest free funds, than the investment made in the acquisition of the assets. Considering these aspects, we are of the view that proviso to section 36(1)(iii) is not applicable on the facts of the present case. Hence, this ground of appeal is rejected.”

Following the above mentioned order, the Tribunal dismissed this ground of appeal filed by the Revenue.

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2014-TIOL-110-ITAT-MUM Jagannath K. Bibikar vs. ITO ITA No. 2735/Mum/2012 Assessment Years: 2005-06. Date of Order: 11-12-2013

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S/s. 2(42A), 49(1) – Payment made towards
relocation of hutment dwellers is for the purpose of removing
encumbrances in title of the owners and constitutes expenditure incurred
in connection with transfer and is allowable as deduction even though
there is no specific mention about it in the development agreement.

Facts:
The
assessee was a co-owner of the land. The leasehold rights in respect of
the plot were sold to M/s. Havana Hotels Resorts Pvt. Ltd. and M/s.
Samyam Erectors Pvt. Ltd. The capital gains arising on this transaction
were offered to tax by the assessee in two years i.e., 2005-06 and
2006-07.

While computing capital gains, the assessee claimed
deduction of Rs. 5,00,000 paid towards relocation expenses. This sum of
Rs. 5,00,000 represented the assessee’s 50% share of Rs. 10,00,000. The
assessee claimed that this payment was in terms of Clause 10 of the
development agreement under which it was an obligation of the assessee
to bear any charges or encumbrances in respect of plot of land
transferred to the developer and in case any charge or encumbrance is
found the owner is liable to ward off the same. The payment was for
removal of settled hutments and therefore the assessee to discharge its
liability to remove encumbrances had incurred this expenditure. It was
also contended that the payment was made to consenting party since it
was in occupation of part of the property in question and therefore the
payment was made in connection with transfer of asset in question.

The
Assessing Officer disallowed this sum of Rs. 5,00,000 while passing an
order pursuant to direction of CIT u/s. 263 of the Act.

Aggrieved, the assessee preferred an appeal to Commissioner of Income-tax (Appeals) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the genuineness of the payment was not disputed by
the authorities below and even the purpose of the payment was not
questioned by the AO as well as CIT(A). The disallowance was made only
on the ground that the transfer/development agreement does not speak
about such payment. It noted that as per clause 10 of the development
agreement dated 10-09-2004 it was obligatory on the part of the
owners/transferors of the land to ward off any charges and encumbrances
arising in the property.

The Tribunal did not find any merit in
the argument of the revenue that in the absence of any specific mention
in the agreement such payment is not allowable as deduction. The
Tribunal held that when the payment is undisputedly made towards
relocation of the hutment dwellers then it is certainly for the purpose
of removing the encumbrances in the title of the owners in respect of
land in question. Since the payment was made for removal of encumbrances
in respect of the property in question being relocation of the hutment
dwellers therefore, it was held to fall in the category of expenditure
incurred in connection with the transfer of property.
This ground of appeal filed by the assessee was allowed.

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[2014] 41 taxmann.com 259 (Ahmedabad – CESTAT) Indofil Chemicals Co vs. CCE.

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Refund claim by SEZ Unit – What constitutes sufficient evidence for establishing services received and consumed in SEZ?

Facts:
The Appellant in SEZ received GTA services during the period April to September, 2009 and filed a refund claim. The adjudicating authority as well as the first appellate authority rejected the refund claim only on the ground that the Appellant did not produce documentary evidences in respect of taxable services provided to SEZ and consumed partially or wholly outside the SEZ.

Held:
Tribunal observed that the refund application is supported with the bills of transport companies, which indicate the consignors or beneficiary of the services as the Appellant in a particular Clause which is in SEZ. From the records, the Tribunal also observed that the said transport company is for transportation of the goods into the SEZ unit and also taking up the goods from the SEZ unit. These documents were held as sufficient evidence before the lower authorities to justify his refund claim and accordingly the claim was allowed.

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[2014] 41 taxmann.com 318 (Gujarat) CCE vs. Neel Pigments (P.) Ltd

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The claim of rebate be allowed even if duty-paid goods are not exported ‘directly’ from the factory/ warehouse, provided documentary evidence establishing direct co-relation between duty-paid goods manufactured/cleared by assessee and those exported by assessee is placed on record.

Facts:
The Assessee – a manufacturer from Gujarat, filed different rebate claims in terms of Rule 18 of the Central Excise Rules, 2002 and Notification No.19/2004 dated 06-09-2004. Rebate claims were granted as such claims were found allowable. The department filed appeal before the Appellate Commissioner, which was rejected. Aggrieved by the order, the department preferred writ before the High Court.

The primary objection of the department for not allowing claim was that, manufacturer had breached condition 2(a) of the Notification dated 06-09-2004, by not directly exporting the goods from factory or warehouse at Gujarat, but first by supplying the same to a trader exporter and thereafter, exporting from Maharashtra.

Held:
The High Court observed that the revenue authorities as well as the revisional authority have concurrently come to the conclusion that there was a direct corelation between goods manufactured in the factory with the goods exported and when such fact was established through reliable, undisputed and contemporaneous documentary evidence, there was no infirmity in granting refund.

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[2014] 41 taxmann.com 377 (New Delhi – CESTAT) Delhi Public School Society vs. CST, New Delhi.

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Merely calling an agreement as “Joint Venture Agreement” would not make the parties joint ventures or partners unless there is sharing, both in profit and losses and a community of interest among the parties.

Facts:
The assessee entered into agreements with distinct entities which intended to establish schools in different areas (within India and overseas as well) in collaboration with the assessee. The assessee was experienced in establishing and managing schools that provided quality education and had a brand image in the area. The agreements were named as “Education Joint Venture”. As per the agreement, the schools were to be established, run and managed by Board of Management comprising of nominees of assessee and the other entity in each case. The Assessee provided academic, operational and managerial expertise for establishing and running the school and allowing the use of the name DPS, its motto/ logo, subject to assessee retaining right, interest and title therein and other reasonable restrictions. The obligation of the other party was to provide land, buildings and all infrastructural amenities like furniture, laboratory, library and sports materials etc. for the school including residential accommodation for the principal, teachers and staff including meeting the revenue deficit, budgeted expenditure, to raise loans for all running expenditure and to meet the consequent financial liability. The assessee was specifically indemnified from any claims in this regard. The assessee, under the terms of the agreements was to receive an annual fee from the other entity.

The department contended that, the services provided by the assessee to the other party constitute a franchisee service. The assessee contended that, since the agreements between the assessee and the other parties are “education joint ventures”, the services provided by the assessee thereunder would not constitute taxable services.

Held
The Tribunal held that, on a true and fair analysis of the agreements between the parties, it is clear that the assessee is wholly immune from any losses arising out of the enterprise i.e., the educational institution to be established pursuant to the agreement and also no entitlement to any share in the profits arising therefrom, hence the normative ingredients of a partnership or a joint venture are absent. Hence, in the totality of circumstances neither the indicia of a partnership or a joint venture is discernable from the terms and conditions of the agreements between the parties. The participation of the assessee in the management of the schools is calibrated only for effectuation of the assessees perceived expertise and experience, in establishing and running quality English Medium Schools and is in furtherance of effective execution of the franchise service provided by it for which the assessee receives remuneration as clearly indicated in Clause 3 of the agreement and therefore, would not tantamount to the assessee being a joint venturer. The Tribunal therefore held that, since all the ingredients of ‘franchisee services’ are fulfilled, the service is taxable under the category of franchisee service.

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[2014] 41 taxmann.com 260 (Bangalore – CESTAT) Inox Air Products Ltd. vs. CCE, Hyderabad

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In absence of specific allegation in the SCN for levy of penalty for a specific purpose, no penalty can be levied.

Facts:
The
appellant had one manufacturing unit (Unit-I) and one service providing
unit (Unit-II). During the period from April 2007 to April 2008, Unit-I
took the CENVAT credit on certain input services though it was not
eligible to do so. This credit was, in fact, meant for Unit-II. The
irregular availment of CENVAT credit by Unit-I was noticed by the
department in October 2008, whereupon the credit was reversed forthwith
on 16-10-2008. For this, a Show Cause Notice was issued in April 2009.
The Appellant paid interest in February 2010. In the Show Cause Notice, a
penalty of Rs. 2,000/- was imposed under Rule 15(3) of the CCR, which
was also paid by the Appellant.

Subsequently, order was reviewed
by the department for non-imposition of penalty under sub-rule (4) of
Rule 15 of the CCR, 2004 read with section 78 of the Finance Act, 1994
and accordingly an appeal was filed with the Commissioner (Appeals) who
allowed the same and imposed penalty under 15(4) of CCR.

This
higher penalty was challenged by the Appellant contending that, no
ground for imposing penalty under Rule 15(4) was alleged in the Show
Cause Notice.

The department contended that, such penalty could
not be resisted by the appellant by mere reason of non-mentioning of
sub-rule (4) of Rule 15 or of section 78 of the Finance Act, 1994 in the
Show Cause Notice. Further, the wrong mentioning of section 11AC of the
Central Excise Act is also not fatal to the Revenue. It was further
contended that the demand confirmed against the appellant by the
original authority by invoking the extended period of limitation was not
challenged by it, it was precluded from resisting penalty under Rule
15(4) read with section 78.

Held:
It was held that
Para 5 of the Show Cause Notice contained an allegation to the effect
that the appellant contravened certain rules with intention to evade
payment of duty, but such allegation was made for the specific purpose
of invoking the extended period and not for imposing a penalty under
Rule 15(4). It further observed that irregular availment of the CENVAT
credit as alleged for invoking Rule 15(3) and not for invoking Rule
15(4) and that though the Show Cause Notices invoked Rule 15 of the
CENVAT Credit Rules, 2004, any sub-rule was not specified therein. The
Tribunal held that, since the different sub-rules of Rule 15 covered
different factual situations and, it was incumbent on the department to
specify the particular sub-rule which they wanted to invoke in a
particular Show Cause Notice. Relying upon Amrit Foods vs. CCE 2005
(190) ELT 433 (SC), the penalty under Rule 15(4) was set aside.

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[2014] 41 taxmann.com 254 (Mumbai – CESTAT) Jaika Motors Ltd. vs. CCEST, Nagpur

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Valuation –Cost of spare parts sold by an Authorised Service Station, whether as sale simplicitor or under the composite contract, is not to be included in taxable value, if sale price of sales tax/Vat is separately shown.

Facts:
The Appellant, an authorised service agent for Hyundai Motor cars undertook maintenance/service of motor cars. It also supplied spare parts of these vehicles. During the course of scrutiny of the records, it was noticed that the Appellant was selling spare parts for motor vehicles during the course of providing repair services on which it was paying VAT. However, the value of these spare parts was not included in the consideration received for repair services and Service tax liability was not discharged on the value of such spare parts.

The department demanded Service tax on sales portion on the grounds that, any goods used in the course of providing service has to be treated as inputs used for providing the service and accordingly, the cost of such inputs formed integral part of the value of taxable service. The Appellant contended that the sale figure in the balance sheet included sale of spare parts simplicitor as well as sale of spare parts that may occur in the course of repair of motor vehicles. It also relied upon Circular No. B. 11/1/2001-TRU, dated 09-07-2001, wherein it was clarified that the cost of parts and accessories supplied during the course of repair and servicing of vehicles would not be includable in the taxable value if such cost was shown separately in the bills/ invoices. Further, they discharged Sales tax/VAT liability on the sale of spare parts.

Held:
The Tribunal referring to above circular held that, if a transaction involves only sale of spare parts, the question of levying Service tax would not arise at all. It further held that, even in a case of composite transaction involving sale of goods and rendering of service, if the bill/invoice issued clearly shows payment of Sales tax/VAT on the spare parts, then the value of such spare parts would not be included in the gross consideration for the service.

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2014 (33) STR 372 (Bom) Space Age Associates vs. UOI

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Whether in order to claim deduction for sale/supply of goods under Notification No. 12/2003 –ST dated 20-06-2003, only sale invoices are to be considered? Matter remanded.

Facts:
The Appellant provided services of erection, commissioning and installation of power stations to various electricity boards. The contract entered with customers were composite contracts where supply of goods and services were involved. The Appellant was registered with the Service tax department and discharged Service tax liability. The revenue confirmed the demand on account of mismatch between the figures reflected in the ST-3 Returns and those in the P & L A/c. also invoking longer period of limitation. The plea that supply of goods was part of sale figure was not taken cognizance of.

In the Appeal before the Tribunal, the Tribunal dropped demand beyond the period of limitation but upheld the demand for normal period on account of  non-availability of deduction under Notification No. 12/2003 –ST on account of the Appellant’s failure to produce sale invoices and directed to pre-deposit Rs. 1 crore. The Appellant contended that it had already produced sample copies of running bills, its sales tax returns etc. which were sufficient for claiming deduction under the said Notification.

Held:
Notification No. 12/2003 is a conditional notification which extends the benefit only upon the Appellant producing the documentary proof, indicating the value of goods supplied while rendering the service. The above condition does not mean that the goods have to be necessarily shown separately under the invoices. If the Appellant is able to show from the documents such as running bills, contract copies, returns filed with Sales tax authorities, it would be held that it is complying with the conditions. The Tribunal committed a fundamental error in insisting only upon the production of invoices as evidence of goods sold and ignoring the running bills, sales tax returns, contract terms etc. to arrive at value of goods. The High Court, accordingly, set aside the Order and remanded the matter to consider the petition afresh and pass the appropriate order on merits.

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2014 (33) STR 357 (Kar) United Telecom Limited vs. CCEx, Bangalore –I

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Whether the share broker’s service used by a manufacturer of telecom equipments for sale of its investment in shares of another company is an input service?

Facts:
The Appellant was engaged in the manufacture and sale of telecom equipments and was paying excise duty on the same. In the month of November 2008, the Appellant had availed the services of a Stock Broker for selling its investment in the other company’s shares. The Appellant availed Service tax paid on said stock broker’s service treating the same as input service. The Revenue authorities and Tribunal disallowed the claim of the Appellant by contending that the same was not integrally connected to the business of the Appellant.

Before the High Court, the Appellant contended that the stock broker’s service was used for the purpose covered by the inclusive part of the definition of “input service”.

Held:
The High Court observed that, though the Appellant’s activity of investing in the shares was one of the incidental objects as per its Memorandum of Association, the claim for CENVAT Credit of Service tax paid on stock broker’s service was not against any liability arising out of the business activity of the Appellant and not relatable to the business activity and hence the High Court found no scope for making any interference with the Tribunal’s Order and as such, the appeal was dismissed.

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2014 (33) STR 153 (Guj) Commissioner of Central Excise & Customs vs. Ashish Anand & Co.

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No powers to reduce penalty below minimum prescribed limit by invoking section 80 of the Finance Act, 1994.

Facts:
The short question under consideration was whether penalty u/s. 76 of the Finance Act, 1994 (the Act) be reduced below the minimum limit prescribed by invoking section 80 of the Act. The department argued that the Commissioner (Appeals) and CESTAT had no authority to reduce the penalty as provided in the law.

Held:
Applying the decision of the Gujarat High Court in Port Officer 2010 (19) STR 641 (Guj), it was observed that section 80 of the Finance Act, 1994 had an overriding effect over sections 76, 77, 78 and 79 of the Act (the Act) and no penalty was imposable in case of reasonable cause for failure to comply with laws as provided in respective sections. The authorities, Commissioner (Appeals) and CESTAT however, do not have powers to levy penalty below minimum prescribed limit and therefore, it was held that penalty u/s. 76 could not be reduced below the minimum prescribed limit by invoking section 80 of the Act.

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2014 (33) STR 142 (All) K. Amand Caterers vs. Union of India

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If the assessee was eligible for VCES and had taken benefit of VCES, recovery proceedings cannot be initiated until application under VCES is decided.

Facts:
On 31st May, 2013, a search was conducted wherein it was detected that the petitioners were liable to pay service tax. Consequently, an order was passed on 7th June, 2013 u/s. 87 of the Finance Act, 1994 which was challenged on the ground that they had filed declaration of such tax dues under Service Tax Voluntary Compliance Encouragement Scheme, 2013 (VCES) on 20th June, 2013. Having regard to section 106 of the Finance Act, 1994, it was pleaded that they were eligible for VCES since the date of notice or order of determination was not prior to 1st March, 2013 and therefore, the order was illegal and arbitrary without deciding the application. The department claimed their right to initiate recovery proceedings and argued that unless the application under VCES was found valid and in time, the petitioners were not entitled to any relief in the writ petition.

Held:
The petitioners had prima facie demonstrated that they were eligible to take benefit of VCES u/s. 106 and 107 of the Finance Act, 1994 and unless application under VCES was decided, proceeding u/s. 87 shall not be continued. The object of VCES would be defeated if the recovery was allowed to proceed. An interim order was passed directing Competent Authority to decide the application under VCES within 60 days of passing the Order.

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2014 (33) STR 137 (Mad) Commissioner of S. T., Chennai vs. Sangamitra Services Agency.

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Reimbursable expenses not in the nature of remuneration/ commission cannot form part of gross amount for clearing and forwarding agent’s services.

Facts:
The substantial question put forth before the High Court was whether reimbursable expenses such as freight, labour, electricity, telephone etc. received by the assessee at actuals should not be added to the taxable value related to clearing and forwarding agent’s services in view of Rule 6 (8) of the Service Tax Rules, 1994, providing for service tax levy on gross amount of remuneration.

Held:
In the absence of any material to show the understanding between the principal and the client that the commission was all inclusive, it was difficult to hold that the gross amount/commission would include expenses for providing services and all incidental charges for running of business. Receipts in the nature of reimbursements would not take colour of remuneration or commission. Rule 6(8) of the Service Tax Rules, 1994 referred to gross amount i.e. receipts in nature of remuneration or commission.

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2014 (33) STR 124 (Guj) Commissioner of C. Ex. & Customs vs. Stovec Industries Ltd.

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The Department has to follow prescribed monetary limits for filing appeal in various Courts having regard to the Circulars in place which are binding on the department.

Facts:
The respondents were engaged in the manufacture and export of Rotary Screen Printing Machines and parts thereof. Aggrieved by the order of the CESTAT with respect to rejection of CENVAT Credit of around Rs. 2,02,472/-, the department was in appeal. The appeal was filed on 5th August, 2011. The respondents contested that vide Circular dated 20th October, 2010, the Central Excise department was not allowed to file an appeal if the duty involved was less than or equal to Rs. 2 lakh with equal mandatory penalty and any other penalty. The limit of Rs. 2 lakh was increased to Rs. 10 lakh vide Circular dated 17th August, 2011.

Held:
In view of Circular dated 17th August, 2011 taking effect from 1st September, 2011, the appeal could not be preferred by department in the High Court. The appeal, therefore, was dismissed without going into the substantial question of law since the department was bound by its own Circulars.

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Liability of Builders and Developers vis-à-vis New Rules

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Introduction
Whether builders are liable to tax under MVAT Act, 2002 has been a burning issue since 20th June, 2006. The matter has been ultimately decided by the Hon’ble Supreme Court by way of judgment in case of Larsen & Toubro & others (65 VST 1). In the said judgment, the Hon’ble Supreme Court observed that the tax can be levied from the stage of agreement and thereafter. The Hon’ble Supreme Court also observed that the tax can be levied on the value of the goods only and no tax can be levied on the value of immovable property. So far as Maharashtra is concerned Hon’ble Supreme Court has directed to align the provisions in tune with above observations.

Amendment to MVAT Rules, 2005
As a follow-up to the above Supreme Court judgment, the Government of Maharashtra issued notification dated 29-01-2014 by which certain rules are amended. The short gist of amended rules is as under:

i) In Rule 58(1) an amendment is made so as to provide that the deduction as per the table will be available after the reduction of land value from the contract price.

ii) Rule 58(1A), which is related to the calculation of land value, is amended and a proviso is added. It has now been provided that if a higher value is proved before the Department of Town Planning and Valuation then the dealer can take that higher value instead of ready reckoner value.

iii) Rule 58(1B) is inserted to provide that if the agreement is entered into where some work is already done, then the value of the goods, after taking deduction for labour and land, will be as per the following calculation:

(b) For determining the value of goods as per the above Table, it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying, the date of completion of the stage referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant.

(1C) If the dealer fails to establish the stage during which the agreement with the purchaser is entered into then the entire value of goods as determined after deductions under sub-Rules (1) and (1A) from the value of the entire contract, shall be taxable.

Certain issues

In light of the above new rules and the Supreme Court judgment, various issues arise. Some of them are discussed below:

In the above judgment, the Hon’ble Supreme Court held that the Constitution of amendment bringing works contract in the sales tax net did not prohibit that if in addition to labour and material, if a third element like land is involved, there cannot be a taxable works contract. In other words, the Supreme Court has decided that even if in a contract, a third element like immovable property is involved, it can still be a taxable works contract under Sales Tax Laws. Accordingly, liability in case of builders can be attracted from the date of amendment in constitution, i.e., 1983, though in Maharashtra it will be enforced from 20th June, 2006.

The other fall out is that the contract with the builder is also to be treated as a normal contract. A normal contract can take place even by a mutual understanding and without a written document. Similarly, in the case of builders, a contract may arise by any action for the effecting transaction, though the actual agreement for sale may be registered subsequently. For example, the builder may issue an allotment letter, though agreement may be registered subsequently. In light of the interpretation made by the Hon’ble Supreme Court, the works contract will take place from the date of allotment letter itself.

An issue may also arise about the deduction for cost of land. In addition to the purchase cost, there are other expenditures like registration fees, TDR purchase cost etc. The issue will be whether, in addition to working as per Rule 58 (1A), such additional expenses will also be allowable. It is to be noted that Rule 58(1A) provides for deduction for probable sale value of the land involved in the contract. The value is to be worked out as per the ready reckoner rate.

Therefore, there cannot be further deductions on account of TDR etc. If at all, because of TDR etc., land value is increasing, the builder will be required to get a certificate from the Department of Town Planning and Valuation. Without such certificate, it will be difficult to get the extra deduction.

An issue may also arise for set-off. Although, tax is payable as per slabs given in Rule 58(1B), i.e., as per the completion stage, there is no provision requiring reduction of set-off in any given proportion. Therefore, as per the Rules that are in force today, the set off will be allowable fully, though tax may be payable on given percentage. To avoid litigation it is better that the department clarifies the above issue at the earliest.

It is also be noted that the builder now becomes a normal dealer. Therefore, he can claim set-off as any normal dealer. As per the normal provisions, set-off is allowable on effecting purchase and entering it in the books. The restrictions and negative list will be operative as applicable to a normal dealer. If Rule 53(6) is not applicable to the builder, he can claim set-off on all purchases. If at all ultimately, part of the premises are sold as immovable property, i.e., after completion of the building/unit in the building, there will still not be any adverse effect on the set off already taken.

As per Rule 58(1B), tax is payable according to the completion stage. One of the issues will be that even if the cost of work completed prior to agreement is higher, the tax will still be payable as per the given percentage. In other words, tax will get paid even on the completed portion.

In case of K. Raheja Development Corporation vs. State of Karnataka (141 STC 168)(SC), the Hon. Supreme Court has observed that if the sale agreement is after completion of the premises, then Sales Tax cannot apply. From the new Rule 58(1B) it appears that even if the building is fully complete, but occupation certificate is not received, the builder will be liable to pay tax on 55% value of the goods. This is contrary to the above judgment delivered by the Supreme Court. Thus, there will be a situation where tax will get attracted on sale of immovable property portion also, because of above mentioned Rule.

This will be unconstitutional. It is expected that an alternative scheme to grant higher deduction, as per completion stage, should be framed based on the records of the builder. Further the taxation after completion of building, but before getting occupation certificate, should be revisited by the Government.

Conclusion
There may be many further issues in respect of the taxation of builders. As per the ordinance dated 03-03-2014, the time limit for assessment for the year 2006-07 for the builders is extended to September, 2015. We hope that before such completion date, the above referred issues will be clarified by the department.

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2014-TIOL-150-ITAT-MUM Sudhir Menon HUF vs. ACIT ITA No. 4887/Mum/2012 Assessment Year: 2010-11. Date of Order: 12-03-2014

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Section 56(2)(vii)(c) – Provisions of section 56(2) (vii)(c) do not apply to a bonus issue. The provisions are not attracted in case of an issue of shares by a company to its existing shareholders on a proportionate basis.

Facts:
As on 01-04-2009, the assessee held 15,000 shares in Dorf Ketal Chemicals Pvt. Ltd. which represented 4.98% of the share capital (3,01,316 shares). The assessee was offered 3,13,624 additional shares, on a proportionate basis, at the face value of Rs. 100 per share. The assessee subscribed to and was allotted 1,94,000 shares on 28-01-2010. The other shareholders were allotted shares, on the same terms, not only the shares similarly offered to them on a proportionate basis, but also those not subscribed by the other shareholders as 1,19,624 (3,13,624 minus 1,94,000) shares by the assessee. The shares were received by the assessee on 10-02-2010. The book value of the shares so allotted/ received was Rs. 1,538 as on 31-03-2009.

Since the book value of the shares so received by the assessee was more than the face value thereof, the Assessing Officer held that the shares were received by the assessee for an inadequate consideration. He treated the difference between the fair market value of the shares and their face value as being chargeable to tax u/s. 56(2)(vii)(c) read with applicable rules.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The provision, firstly, would not apply to bonus share Issue of bonus shares is by definition, a capitalisation of its profits by the issuing-company. There is neither any increase nor decrease in the wealth of the shareholder (or of the issuing company) on account of a bonus issue, and his percentage holding therein remains constant. What in effect transpires is that a share gets split (in the same proportion for all the shareholders), as for example by a factor of two in case of a 1:1 bonus issue. There is no receipt of any property by the shareholder, and what stands received by him is the split shares out of his own holding. It would be akin to somebody exchanging a one thousand rupee note for two five hundred or ten hundred rupee notes. There is, accordingly, no question of any gift of or accretion to property; the shareholder getting only the value of his existing shares, which stands reduced to the same extent. The same has the effect of reducing the value per share, increasing its mobility and, thus, liquidity, in the sense that the shares become more accessible for transactions and, thus, trading, i.e., considered from the holders’ point of view.

The premise on which we found the issue of bonus shares as not applicable would, to the extent pari materia, apply in equal measure to the issue of additional shares, i.e., where and to the extent it is proportional to the existing shareholding.

Therefore, as long as there is no disproportionate allotment, i.e., shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing holding over a large number of shares. There is, accordingly, no question of section 56(2)(vii)(c), though per se applicable to the transaction, i.e., of this genre, getting attracted in such a case.

A higher than proportionate or a non-uniform allotment though would, and on the same premise, attract the rigour of the provision. This is only understandable in as much as the same would only be to the extent of the disproportionate allotment and, further, by suitably factoring in the decline in the value of the existing holding. We emphasise equally on a uniform allotment as well. This is as a disproportionate allotment could also result on a proportionate offer, where on a selective basis, i.e., with some shareholders abstaining from exercising their rights (wholly or in part) and, accordingly, transfer of value/property. Take, for example, a case of a shareholding distributed equally over two shareholder groups, i.e., at 50% for each. A 1 : 1 rights issue, abstained by one group would result in the other having a 2/3rd holding. A higher proportion of `rights’ shares (as 2:1, 3:1, etc.) would, it is easy to see, yield a more skewed holding in favour of the resulting dominant group. We observe no absurdity or unintended consequences as flowing from the per se application of the provision of section 56(2)(vii) (c) to right shares, which by factoring in the value of the existing holding operates equitably. It would be noted that the section, as construed, would apply uniformly for all capital assets, i.e., drawing no exception for any particular class or category of the specified assets, as the `right’ shares.

The Tribunal held that no addition u/s. 56(2)(vii)(c) would arise in the facts of the present case.

The appeal filed by assessee was allowed.

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Recovery of tax: PPF account is immune from attachment and sale for recovery of Income-tax dues: Dineshchandra Bhailalbhai Gandhi vs. TRO:

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[2014] 42 taxmann.com 300 (Guj)

The petitioner is an individual assessee. The Tax Recovery Officer issued a notice dated 25-02-2005 u/s. 226(3) attached the assessee’s PPF account and also recovered an amount of Rs. 9,05,000/- from the said account.

The Gujarat High Court allowed the writ petition filed by the assessee challenging the recovery of the said amount from the PPF account and held as under:

“i) Rule 10 of the Second Schedule to the Income- Tax Act, 1961 provides that All such property as is by the Code of Civil Procedure, 1908, exempt from attachment and sale in execution of a decree of a civil court shall be exempt from attachment and sale under this Schedule. Proviso to section 60(1) of Code of Civil Procedure contains list of properties which shall not be liable to attachment or sale which inter alia covers in Clause (ka) “(ka) all deposits and other sums in or derived from any fund to which the Public Provident Fund Act, 1968 (23 of 1968), for the time being applies, in so far as they are declared by the said Act as not to be liable to attachment.”

ii) Therefore, any amount lying in the PPF account of a subscriber is immune from attachment and sale for recovery of the Income-tax dues. As long as an amount remains invested in a PPF account of an individual, the same would be immune from attachment from recovery of the tax dues. The situation may change as and when such amount is withdrawn and paid over to the subscriber.

iii) CBDT circular dated 07-11-1990 clarifying that “Section 9 of the Public Provident Fund applies only to attachment under a decree/order of a Court of Law and not to attachment by the Income-tax Authorities is contrary to the above statutory provisions.”

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Reassessment: S/s. 147, 148 and 149: A. Y. 2003-04: Extended time limit of 6 years u/s. 149(1)(b) requires data for prima facie computation of income escaping assessment at more than Rs. 1,00,000/-:

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BBC World News Ltd. vs. ADIT; (2014) 42 taxman. com 456 (Del):

For the A. Y. 2003-04, the assessment was completed by an assessment order u/s. 143(3) dated 24-03-2006. Subsequently, the assessment was reopened by a notice u/s. 148 dated 30-03-2010. The reasons for reopening are stated to be:

“The assessment order in the case was passed on 24-03-2006 wherein the Assessing Officer has held that the assessee has an agency PE in India in the form of BBC Worldwide (India) Private Limited (BWIPL). And attributed a loss of Rs. 69,42,475 to Indian activities. While perusing the records of the case, it is noticed that during the assessment proceedings the actual expenditure incurred on the activities related to the Indian operations were not submitted by the assessee. In the orders for A.Ys. 2004-05 to 2006-07, in the case of the assessee, it has been held that the global loss, if any, is not on account of activities of the assessee in India and such loss cannot be attributed to the PE of the assessee in India. It is therefore held that the statements furnished by the assessee showing loss from Indian activities do not represent the correct position and the same has been found not reliable.

The office believes that in the absence of such crucial information assessment of the income of the assessee for the A.Y. 2003-04 could not be completed properly….”

The Delhi High Court allowed the writ petition filed by the assessee and quashed the notice issued u/s. 148, inter alia for the reasons as under:

“i) There is a third reason why we think that the petitioner must succeed. Reasons to believe must have nexus and live link with the formation of opinion by the Assessing Officer that taxable income had escaped assessment. We have noted the reasons to believe mentioned above. As per mandate of section 149(1)(b), income escaping assessment should be or likely to exceed Rs. 1 lakh. This required prima facie computation of income escaping assessment. This in turn required examination of data or figures relating to “Indian operations”.

ii) If we accept the stand of the Revenue, then the said data and details were not available in the records for the assessment year 2003-04. It is not the contention of the Revenue that figures for the assessment year in question for the “Indian operation” were available in the records for subsequent or other years and were examined. Figures and data for every assessment will alter and change. This being the position and stand of the Revenue, the Assessing Officer could not have formed any prima facie or tentative opinion that income had escaped assessment as the petitioner had positive income from “Indian operations”, if we take into account “actual expenditure” incurred relating to Indian operations.

iii) In the absence of the said details, the averment made in the reasons to believe will be only a guess work or surmise and not cogent or reliable material to form a prima facie view. We understand that the Assessing Officers may be handicapped in such cases but there are sufficient provisions in the Act to get hold of the said data before proceedings are initiated or reasons are recorded. There is nothing to indicate and show the data and figures of the year in question were ascertained or gathered from records for other assessment years or otherwise.

iv) In view of the aforesaid, we allow the present writ petition and quash the reassessment proceedings initiated by issue of notice u/s. 148 dated 30th March, 2010 relating to assessment year 2003-04.

v) Copy of this order will be sent to the Chairman of Central Board for Direct Taxes for appropriate and necessary action to ensure proper record maintenance and issuance of suitable directions.”

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Industrial undertaking: Deduction u/s. 80-IB: A. Y. 2001-02: Production of article: Bottling of gas into cylinders amounts to production: Assessee entitled to deduction u/s. 80-IB:

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Puttur Petro Products P. Ltd. vs. ACIT; 361 ITR 290 (Karn):

The assessee had claimed deduction u/s. 80-IB contending that bottling of LPG gas in the cylinders amounts to production/manufacturing activity. The Assessing Officer disallowed the claim. The Tribunal upheld the disallowance.

On appeal by the assessee, the High Court reversed the decision of the Tribunal and held as under:

“i) The process of bottling of gas into gas cylinders, which requires a very specialised process and independent plant and machinery, amounts to production of “gas cylinders” containing gas for the purpose of claiming deduction u/s. 80-IB.
ii) In the circumstances, the question framed by us is answered in favour of the assessee and against the Revenue.”

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Exemption: Share of profit of partner from firm: Section 10 (2A): A. Y. 2010-11: Partners are entitled to claim exemption u/s. 10(2A) on the share of profit received from the firm even if it includes that income also which was exempted in the hands of the firm under various provisions of section 10.

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Vidya Investment & Trading Co. (P.) Ltd. vs. UOI; [2014] 43 taxmann.com 1 (Karn)

The assessee, a private ltd. company, was a partner in a partnership firm. In the assessment order u/s. 143(3) of the Income-tax Act, 1961, for the A. Y. 2010-11, the Assessing Officer granted exemption to the assessee u/s. 10(2A) of the Act, in respect of its share of profits from the partnership firm except to the extent of the income which was exempt in the hands of the firm under other provisions of section 10.

The assessee filed a writ petition and challenged the Explanation to section 10(2A) on the ground that it was discriminatory and in violation of Articles 14 and 265 of the Constitution. Further, a declaration was sought by the assessee that it was entitled to claim exemption u/s. 10(2A) in respect of its total share of profit received as partner of the firm which would include the income exempted from tax in the hands of the firm.

The Karnataka High Court allowed the writ petition and held as under:

“i) Although the dividends income and income derived from mutual funds were not includible in the taxable income of the firm yet they were nevertheless part of its profits;

ii) The expression total income of a firm in the Explanation to section 10(2A) would not mean taxable income of the firm but gross total income of a firm which included exempted income as well;

iii) The Assessing Officer had lost sight of this aspect and had held that ‘total income’ for the purpose of Explanation to section 10(2A), as defined in section 2(45), would mean the total amount of income as referred to in section 5, computed in the manner laid down in the Act; Therefore, the Assessing Officer was not right in holding that the income which was excluded from the total income of the firm u/s. 10, would have to be taxed in the hands of the partners on the reasoning that only income which was taxed in the hands of the firm would be exempted from tax in the hands of the partner;

iv) The Explanation to section 10(2A) would not call for any striking down in the hands of this Court. The Explanation could not be given a literal interpretation, so as to defeat the object of the amendment made to the Act. The object of the amendment was to make it clear that the distribution of profits and gains of a firm in the hands of the individual partners shall not be considered to be income of the partners and therefore, not includible while computing the total income of the partner under the Act;

v) Thus, the assessee was entitled to claim exemption u/s. 10(2A), on the share of profit of the firm, inclusive of the income, which is exempted under s/s. (34), (35) and (38) of section 10, as the total income referred to in section 10(2A), includes exempted income of the partnership firm.”

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Charitable purpose: Exemption u/s. 11: A. Y. 2008-09: Accumulation of income: Notice u/s. 11(2)(a) to be furnished in Form 10: Information furnished in form of letter with full detail as required in Form 10: Sufficient compliance: Assessee entitled to exemption u/s. 11:

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CIT vs. Moti Ram Gopi Chand Charitable Trust; 360 ITR 598 (All):

The assessee, a charitable Trust was registered u/s. 12A. For the A. Y. 2008-09, the Assessing Officer disallowed the claim for exemption u/s. 11 of the Act in respect of the accumulated income inter alia on the ground that the notice u/s. 11(2)(a) was not in the specified Form 10 as prescribed by Rule 17. The Tribunal found that the information with full details as required in Form 10 was furnished by the assessee by a letter. The Tribunal held that the assessee had made an investment in the next year amounting to Rs. 1,25,17,086/- and thus the purpose of the provisions of the Act had been achieved. The Tribunal accordingly allowed the claim of the assessee.

On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) We do not find any error of law in the order of the Tribunal. When a request by way of a letter, which complies with the requirement and furnishes all the information required in Form 10 was made available on record and there was sufficient proof before the Assessing Officer that the amount was not only kept apart but was also spent in the next year, the adherence to the form and not substance was not valid exercise of power by the Assessing Officer.

ii) The questions of law are decided in favour of the assessee and against the Department.”

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Capital gain: Cost of acquisition: Market value as on 01-04-1981: Section 55A: Reference to DVO only when value of capital asset shown by assessee less than its FMV:

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CIT vs. Daulal Mohta (HUF); 360 ITR 680 (Bom):

In the relevant year, the assessee had sold a property called Laxmi Niwas which was owned by it since prior to 01-04-1981. For computing the capital gain, the assessee got the value of the property as on 01-04-1981 determined at Rs. 2,13,31,000/- from a Government approved valuer. The Assessing Officer referred the case to the DVO u/s. 55A who determined the value at Rs. 1,35,40,000/-. The Assessing Officer adopted the value determined by the DVO and computed the capital gain. The Tribunal allowed the assessee’s claim and held that the cost of acquisition should be taken at Rs. 2,13,31,000/- as determined by the Government approved valuer.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) Reference to the DVO can only be made in cases where the value of the capital asset shown by the assessee is less than its fair market value as on 01-04-1981. Where the value of the capital asset shown by the assessee on the basis of the approved valuer’s report was more than its fair market value, reference u/s. 55A of the Income-tax Act, was not valid.

ii) The Tribunal was right in law in reversing the decision of the Commissioner (Appeals) on valuation of the property at Rs. 1,35,40,000/- made by the DVO as against the valuation done by the Government approved valuer at Rs. 2,13,31,000/-.”

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Business expenditure: Section 37: A. Y. 2006- 07: Tribunal noticing assessee’s books of account as well as sales tax records of seller and finding purchase genuine transaction: No rejection of books of account: Deletion of addition on account of purchase transactions justified:

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CIT vs. Sunrise Tooling System P. Ltd.; 361 ITR 206 (Del):

For the A. Y. 2006-07, the assessee had claimed deduction of Rs. 43,34,496/- towards the purchases from S. On the basis of the statement of a director of the assessee in the course of survey that the amount represented a non-existent or bogus transaction, the Assessing Officer disallowed the claim for deduction and made the addition. The Tribunal took note of the statement of the director and the retraction of that statement on 21st February, 2008. The Tribunal noticed that the statement was recorded in the course of survey u/s. 133A and did not have any evidentiary value. The Tribunal also took note of the fact that no copy of the statement was given to the assessee to enable it to cross-examine the director and accordingly deleted the addition.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The Tribunal could not be faulted in its approach in rendering the findings of fact. Although the Revenue endeavoured to submit that the Tribunal fell into error in overlooking and discounting the statement of the director on the ground that it was retracted, the discussion in the order of the Tribunal would show that the Tribunal took note of the materials before the Assessing Officer and the Commissioner (Appeals), which included the assessee’s books of account as well as the sales tax records of S. This established firmly and conclusively that the claim of the assessee that it had purchased goods from S were borne out.

ii) The Tribunal also noted that the Income-tax Authorities had not even rejected the books of the assessee even while finding the claim bogus.

iii) The impugned order of the Tribunal does not disclose any error, warranting framing of substantial questions of law.”

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Assessment: S/s. 143 and 144: A. Y. 2002-03: Assessment order passed without serving notice on the assesee is not valid: Burden of Revenue to prove service of notice: No evidence of service by Revenue: Assessment not valid:

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CIT vs. Gita Rani Ghosh; 361 ITR 17 (Gau):

For the A. Y. 2002-03, the Assessing Officer passed best judgment assessment order u/s. 144 claiming that the assessee did not respond to the notices issued u/s. 143(2) and 142(1) of the Act. The assessee challenged the validity of the assessment order on the ground that no such notices were served on the assessee in respect of the assessment proceedings of the assessee for the relevant year. The Tribunal allowed the assessee’s appeal and held that the assessment order was illegal and void ab initio as no notice u/s. 143(2) or section 142(1) was served on the assessee. The Tribunal accordingly cancelled the assessment order.

On appeal by the Revenue, the Gauhati High Court upheld the decision of the Tribunal and held as under:

“i) It is settled law that to establish service of a notice upon the assessee, the initial onus is on the Revenue and unless and until this onus is discharged, the service of a notice simply, on the basis of presumption and assumption, cannot be accepted, so as to justify an ex parte best judgment assessment u/s. 144 of the Act.

ii) When the assessee had denied the receipt of the notices u/s. 142(1) and section 143(2) for the A. Y. 2002-03, it was for the Revenue to prove, by bring ing materials on record including witnesses, if any, that the notices sent to the assessee were for the A. Y. 2002-03. This was, however, not done.

iii) It was not the case that after the Assessing Officer had come to know of having issued notices in the wrong name, he had corrected the same by issuing a second set of notices. Similarly, the fact of service of notice had also not been mentioned in the order-sheet, meaning thereby that there was no evidence with the Revenue to establish its case that it was the second set of notices which were served upon the assessee as per acknowledgment.

iv) The Tribunal is correct in cancelling the best judgment assessment passed u/s. 144.”

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Appeal to CIT(A): Condition precedent to pay admitted tax before filing appeal: Section 249(4)(a): A. Y. 1996-97: Amount belonging to assessee available with Revenue far in excess of admitted tax: Requirement of section 249(4)(a) met: Appeal should be admitted:

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CIT vs. Pramod Kumar Dang; 361 ITR 137 (Del):

The Commissioner (Appeals) dismissed the appeal filed by the asessee relying on the provisions of section 249(4)(a) on the ground that the assessee appellant has failed to pay admitted tax. The Tribunal found that Rs. 4.6 lakh seized from the assessee was lying with the Department. The Tribunal held that the amount of Rs. 4.6 lakh should be treated against the payment of due tax on the returned income and directed the Commissioner (Appeals) to decide the appeal on merits.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The rationale behind section 249(4) is that where an assessee has filed a return, the tax which is admittedly payable by the assessee should be paid prior to the hearing of any appeal filed by the assessee. The rationale is very logical for the reason that no assessee can be heard in an appeal where the tax which is admittedly payable by the assessee is outstanding. It is to enforce payment of tax on the admitted income.

ii) When an assessee files the return of income then at least the tax which is payable on the returned income should be paid by the assessee. But where the assessee either has paid the tax on the returned income or sought adjustment admittedly lying with the Revenue towards the tax payable on the returned income, the assesee cannot be denied a hearing.

iii) The amount of Rs. 4.6 lakh belonging to the assessee which was admittedly available with the Department was far in excess of the amount of tax payable in terms of the returned income and even in excess of the demand of Rs. 2,15,926 created u/s. 143(1)(a). The assessee could not have been denied a hearing merely on the ground of non-payment of tax due on the returned income. Therefore, the requirements of section 249(4)(a) of the Act, were duly complied with.”

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Economic Governance Needs A Lighter Touch

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There is much lamentation in India about the lack of governance in general, and about poor economic governancein particular. It is important to place things in context as we try to evaluate how we have fared in this regard.

Economic governance cannot be disassociated from political governance. In his 1989 essay, Francis Fukuyama argued that while there might be many competing forms of social and political organisation, none could claim to be superior or more durable than the idea of a liberal democracy. He went further to make the case that liberal democracy works better with, and is bolstered by, free markets. Since then the global economy has suffered the Asian financial crises of 1997 and the so-called global financial crisis of 2008. This has reignited the debate about the role of markets, their efficacy, and their contribution to growing inequality. In parallel, the world has seen the spectacular economic success of the Chinese model of state capitalism. Was Fukuyama not premature in declaring the “End of History”?

Turning to India, let us first ask the question: are we a successful democracy? Whether it is life expectancy, health, nutrition, poverty or any other metric, India has not delivered as effectively as China. Does this mean that Indian democracy has failed? If China, without a free political system, can deliver substantially greater economic prosperity than India, does this mean that democracy has not been good for India? This line of reasoning may be logical, but it is troublesome. Our notion of what is good for our society must surely be anchored in some moral and philosophical value system, one in which we as Indians attach value to freedom of choice. In fact, the importance of being able to choose who governs us cannot be measured. The success or failure of governance in India cannot and must not be gauged only in terms of our economic performance. Such an evaluation must also take into account what else we have achieved.

Now let us come to the question of economic governance. Although we started our post- Independence political journey wholeheartedly embracing liberal democracy, we did not start our economic journey with the same enthusiasm for markets. On the economic front, we started with the so-called “mixed economy” model. During the first 45 years after Independence, we created a most elaborate system for managing and administering the economy, one that relied very much on state intervention. Over the years, our bureaucracy and judiciary became conditioned to that way of functioning. As a result since we started the economic reform process in 1991, we have not been very successful in changing the paradigm of state engagement with the private sector from how it was in the era of “command and control” to what it should be in the era of deregulated markets.

Twenty years after “liberalisation” the extent of state participation in the economy remains stubbornly large. In infrastructure, the entire electricity supply chain, with the exception of generation, remains dominated by government companies. In agriculture, the pricing of sugar, the procurement and exports of food grains, the marketing of agricultural commodities, are all still subject to pervasive state controls. The state continues to play an invasive role in land markets and PSU institutions still account for more than three-quarters financial sector assets. This widespread government participation in economic activity has been used to pursue the state’s political agenda in a manner that has distorted markets and undermined economic governance. Directed lending to agriculture from PSU banks, free electricity through state electricity boards, subsidised petroleum products through the oil distribution companies are but some examples.

As elsewhere, economic policy in India is hugely influenced by special interest groups. But in part, because of the widespread footprint of government in economic activity, lobbying has deteriorated into “crony capitalism”. While our politics has become more fiercely contested over time, increasing fragmentation of political power has made the Centre-state dynamic harder to harness in service of economic reforms of national importance, and pressures of coalition politics have contributed to greater populism in economic policy-making.

That economic decision-making in our country is heavily politicised may not be good from an economist’s perspective of delivering optimum economic outcomes. But this is in a sense the price we pay for democracy, the value of which cannot be measured in economic terms. The bottom line is that we cannot improve our economic governance by wishing away its underlying political drivers. To improve the quality of our economic management our bureaucracy particularly, but also our judiciary and other institutions, must evolve to higher levels of sophistication, competence and autonomy such that they facilitate, regulate and adjudicate economic activity, rather than supervise it or participate in it.

(Source: Extract from an article by Rajiv Lall in Business Standard, dated 14-02-2014 – The Writer is Executive chairman in IDFC)

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The Sorry State PSU Banks

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The recent qualified institutional placement issue by State Bank of India (SBI) was unfortunately a flop. The bank raised $1.2 billion as against the target of $1.5 billion. Less than $250 million was taken up by foreign institutional investors (FIIs). The post-issue price action was also dismal, with the stock tanking immediately.

This lack of foreign interest was a surprise, since SBI is undoubtedly the best of the public sector banks. It accounts for about 20 per cent of the banking system and has dominant market shares in government business and foreign exchange as well as strong corporate relationships. Historically, it has had the best management team among state-controlled banks; its chairman was normally appointed from within the bank itself. There was a time when SBI stock always traded at an FII premium, given foreign ownership limits, and was seen as the single best proxy for the Indian economy.

The recent lack of interest has nothing to do with SBI in particular; it reflects a general disenchantment with public sector banks. First of all, investors have by now figured that the public sector banks are seriously under capitalised. Most credible market analysts estimate that the public sector banks will need at least $35 billion to $40 billion of new capital just to fund risk asset growth of 15 to 18 per cent and meet the new tougher capital norms being put in place by the Reserve Bank of India, or RBI (Basel-III, counter-cyclical buffers and systematically important institutions). This capital requirement would rise to almost $80 billion, according to Credit Suisse, if you wanted to repair the balance sheets of these banks and take impaired asset coverage up to 70 per cent. All this capital has to be raised in the coming three or four years.

There is no way the government can fund this; there is simply no fiscal capacity. Nor do investors want to stand in front of this freight train, since the capital needs for most banks are greater than their current market capitalisation. Since these banks are mostly trading below their book value, any capital raise will dilute book value and earnings. The more the capital that is raised, the more book value will get diluted and decline in per share terms – and thus the more expensive these banks will look. Why would an investor want to own these stocks today when they are almost guaranteed to be diluted in the coming years?

However, if this capital is not found, who will fund the Indian economy? The internal capital generation of these banks will not support credit growth of more than 10 per cent – and we are talking about 70 per cent of the Indian banking system. The large Indian companies may access international capital markets and disintermediate the banks, but the small and mid-sized companies will see their credit supply choked. It is precisely these smaller companies that underpin our exports, employment generation and economic growth. Even if animal spirits revive after the elections, we do not seem to have the capacity to fund a revival.

In the last cycle of weak asset quality and capital shortage (1998-2003), a sharp decline in bond yields helped repair balance sheets. Government bond yields fell from 11.7 per cent in 2001 to five per cent in 2004. Sitting on a statutory liquidity ratio book of over 35 per cent of assets, these public sector banks booked bond gains of more than Rs 35,000 crore (70 per cent of the year 2000 system book value, according to Morgan Stanley). This windfall allowed the public sector banks to recapitalise. Such bond gains are very unlikely this time around since yields are lower, bond portfolios are smaller and the duration is truncated. Thus, we will have to raise capital from the market.

Moreover, the public sector banks have serious profitability issues. Their return on assets for this year is unlikely to cross 0.7 per cent, which means return on equity of less than 10 per cent. Given the headwinds on wages, pensions and provisioning requirements, there is no visibility on either return on assets crossing one per cent or return on equity reaching 15 per cent anytime soon. Even the poor numbers being reported today are probably overstated. For instance, about 35 per cent of SBI’s profit before taxes comes from accrued interest on both power loans and restructured loans, according to Morgan Stanley. The numbers for other public sector banks are even higher. This is non-cash earnings and something that may have to be reversed if these loans slip.

Public sector banks in India account for more than 70 per cent of the country’s banking system. We cannot fund our growth without them. They are capital-deficient and do not have the ability to earn their way out of their capital hole. Someone will have to provide them upwards of $30 billion of capital, RBI Governor Raghuram Rajan’s biggest challenge will be to put in place the systemic changes needed to attract this amount of capital.

The purpose of this piece is not to bash India’s public sector banks. They have some very good people, but are being choked by the government in terms of both capital and operational freedom. We have seen across sectors that public sector undertakings ultimately succumb to private sector competition if they are not allowed to compete on a level playing field. This cannot be allowed to happen to public sector banks. They are too important to the economy.

(Source: The Economic Times, dated 14-02-2014)

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Ending the Implementation Paralysis

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Politicians make policy, bureaucrats implement them. Trust and harmony between the two can produce amazing results. If trust and harmony decline, so do decision-making and economic performance.

Bureaucrats can function brilliantly if they get clear signals from their political bosses, and assurance that being decisive (which typically includes shortcuts through a jungle of rules) will further their careers. This explains success in states as varied as Bihar, Gujarat, Madhya Pradesh, and Chhattisgarh. Strong chief ministers with clear policies empower bureaucrats to implement those approaches.

But the same bureaucrats freeze into inaction when they receive mixed signals, as has been the case in New Delhi. The law today makes bureaucrats liable for corrupt outcomes even if there is no evidence of their benefiting personally. If political protection is not guaranteed, they stop moving files. Finance minister Chidambaram says, rightly, that India’s problem is implementation paralysis more than policy paralysis.

The bureaucracy has gone through four phases since 1991. In 1991-2004, bureaucrats got the signal “what do we liberalize next?” In 2004-08, this changed to “don’t liberalize more.” After 2009, the signal was “what do we regulate next?” After the anti-corruption anger in 2012, this changed to “run for cover; nobody can guarantee you safety”. This explains the rise and fall of the economy. A fifth phase is needed to lift the economy again.

When economic reforms began in 1991, bureaucrats questioned its sustainability. Many suspected that the reforms were ploys to satisfy the IMF, and might be reversed soon. Opposition parties swore to reverse the reforms if they came to power. But soon GDP growth took off, averaging a record 7.5% in 1994-97. This made the reforms irreversible. Narasimha Rao was followed by Gowda, Gujral and Vajpayee, but the direction of reform continued. Every civil servant was encouraged to ask, “What do we liberalize next?”

This phase ended in 2004. Sonia Gandhi came to power. Far from viewing liberalization as a major success, she portrayed India as tarnished, not shining, under Vajpayee. Her focus shifted from liberalization to welfarism. Bureaucrats got the signal, “Don’t liberalize more”. Thanks to earlier reforms and global buoyancy, GDP growth soared to a record 8.5%/year, but Sonia de-emphasized this.

Next came the financial crash of 2008-09 widely blamed on excessive deregulation and corporate greed. The world over, an outcry began for stiffer regulation and more controls. This had strong echoes in India too. Liberalization was seen as having gone too far, even though it was half-baked in India compared with the Asian tigers.

Bureaucrats struggling to cope with a plethora of old regulations faced an avalanche of new ones. The most onerous related to the environment, forests, tribal areas, and land acquisition. These were well intentioned, but created a new licence-permit raj. Honest business became impossible in several areas, notably natural resources and land. Dishonest business was still possible through kickbacks. However, this eventually caused popular outrage, led by the CAG, courts and Anna Hazare. The courts went after not only corrupt politicians but also bureaucrats, including those that had retired.

This guaranteed bureaucratic paralysis. The system imposes no penalty on those sitting on files, but penalizes those involved in decisions later denounced by the courts or CAG. Earlier, ministers guaranteed political protection to bureaucrats following their orders. But after the new anti-corruption mood, and activist courts, political guarantees become impossible. The new signal to bureaucrats was, “Run for cover.”

Chidambaram and Manmohan Singh endeavoured mightily to revitalize decision-making since late 2012. They devised the Cabinet Committee on Investment to spread the responsibility for decisions among relevant ministries, reducing risks for any one minister or bureaucrat. But though they cleared a mammoth Rs 6 lakh crore worth of projects, there is still no boom in capital goods or construction. Implementation paralysis continues because bureaucrats still find political signals mixed and political protection inadequate.

(Source: Extract from an article by Swaminathan Anklesaria Aiyar in The Economic Times of India, dated 09-03-2014)

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UPA hurts India as it exits

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The only plausible interpretation of the actions by Congress in the last several months is that it has adopted this scorched earth strategy as it retreats from government. Its recent actions seem to serve one principal purpose: make the restoration of growth and the task of rebuilding the nation as difficult as possible for the successor government.

The greater the failure of the successor government, the better would the outgoing government look by comparison. Ironically, the most pernicious act of the Congress-led United Progressive Alliance (UPA) government is related directly to land: the new land acquisition act.

The latter administers an all-round preemptive blow to efforts of a future government to put India back on its feet. For most public projects, the act makes land acquisition such a long-drawn-out affair and land prices so high that only a handful of projects will remain economically viable and capable of being implemented.

A recent report in this newspaper has this to say about the act: “The new land acquisition law that came into force this January, touted as one of the signal achievements of the UPA government, is turning into a major obstacle in the way of a key infrastructure project being pushed keenly by the Prime Minister’s Office.

The government is now back to the drawing board to figure how the project can be made viable. Even building rural roads under Pradhan Mantri’s Gram Sadak Yojana (PMGSY), a programme expressly meant to aid India’s rural poor, will turn into a nightmare.

And this will be in the name of protecting ‘poor’ landowners, notwithstanding the fact that land reform has had little success in India. Except in a handful of states, much of the land is actually owned by large and wealthy farmers.

The new land acquisition act will also make already hard to implement large-scale private projects yet harder to implement. All the provisions of the new act on compensation apply to all private acquisitions of 50 acres of land in urban and 100 acres in rural areas.

According to some calculations, this would render land an order of magnitude more expensive in almost all locations in India than in any other country on the face of the earth. This is why entrepreneurs looking for land will first look on Mars before doing so in India. Rarely has a democratic government consciously inflicted such damage on the nation at its exit.

(Source: Extract from an article by Arvind Panagariya in the Times of India, Dated 11-03-2014 –The Writer is professor of Indian political economy at Columbia University)

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Competition panel to probe ICAI’s continuing education policy

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The CA Institute’s continuing professional education (CPE) policy is under the scanner of the Competition Commission of India (CCI).The CCI has directed its investigative arm to probe an allegation that the Institute of Chartered Accountants of India (ICAI) was abusing its dominant position by imposing discriminatory conditions on CPE.

The Institute declined to comment on this development even as the CCI probe may affect its revenues from organising seminars and conferences. It is probably for the first time that a nonregulatory function carried out by a regulator (ICAI is the accountancy profession regulator) is under the scanner of another regulator (CCI-competition regulator).

The complainant – Arun Anandagiri – has alleged that the CPE policy was discriminatory as it does not allow any other organisation to provide the service of organising CPE seminars. The CPE policy allowed only the institute’s recognised programme organising unit (POU) to conduct the seminars that carry CPE credits.

There seems to be force in the allegations that the restriction put by the CA institute in not allowing any other organisation to conduct the CPE seminars for CPE credits, the CCI has said in a recent order.

The allegation is that such an approach has created an entry barrier for the other players in the relevant market – “organising recognised CPE seminars/workshops/conferences in India”.

The concept of CPE was introduced by the CA institute for its members to maintain high standards of excellence in the professional activities. According to the CPE policy, chartered accountants (CAs) in practice have to annually attain 20 hours of structured CPE credits and 10 hours of unstructured CPE credits. CAs not holding certificate of practice have to attain 15 hours of unstructured CPE credits annually.

The present case focuses upon the structured CPE credits and organisation of the seminars/conferences/ workshops for obtaining these credits.

(Source: The Hindu dated 12-03-2014)

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A. P. (DIR Series) Circular No. 111 dated 13th March, 2014

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Rupee Drawing Arrangement – Increase in trade related remittance limit

At present, the limit for undertaking permitted transactions under the Rupee Drawing Arrangements (RDA), as mentioned in the Memorandum of Instructions for Opening and Maintenance of Rupee/ Foreign Currency Vostro Accounts of Non-resident Exchange Houses, is Rs. 2,00,000.

This circular has, with immediate effect, increased the said limit for undertaking permitted transactions under the Rupee Drawing Arrangements (RDA) from Rs. 2,00,000 to Rs. 5,00,000. Press Note No. 2 (2014 Series) D/O IPP File No: 12/10/2011-FC.1 dated 4th February, 2014

Policy on Foreign Investment in the Insurance Sector – Amendment of Paragraph 6.2.17.7 of ‘Circular 1 of 2013 – Consolidated FDI Policy’

This Press Note has, with effect from 5th April, 2013, replaced Paragraph 6.2.17.7 with respect to FDI in the Insurance Sector as under:

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A. P. (DIR Series) Circular No. 110 dated 4th March, 2014

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Money Transfer Service Scheme – ‘Direct to Account’ facility

This circular permits recipient banks to credit foreign inward remittances received under MTSS directly to the bank accounts of beneficiaries that are KYC compliant, subject to certain terms and conditions, through electronic mode, such as NEFT, IMPS, etc. The partner bank must clearly mark the direct-toaccount remittances to indicate to the Recipient Bank that it is a foreign inward remittance.

In cases where the bank accounts of the beneficiaries are not KYC compliant, the Recipient Bank has to carry out KYC/CDD before the remittance can be credited the bank account or allowed to be withdrawn.

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A. P. (DIR Series) Circular No. 109 dated 28th February, 2014

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Export of Goods and Services: Export Data Processing and Monitoring System (EDPMS)

This circular states that new EDPMS has been operationalised with effect from 28th February, 2014 and the same will be available to banks from 1st March, 2014. Accordingly, banks must use the web link https://edpms.rbi.org.in/edpms for accessing the system. The user credentials for accessing the system have already been given to the banks.

As a result, entire shipping documents have to be reported in the new system. However, the old shipping documents will continue to be reported in the old system till the completion of the cycle. Both, the old and new systems will run parallel to each other for some time and the date of discontinuance of the old system will be communicated to the banks.

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SAT Discusses the Concept of “Due Diligence” – Decision Relevant to Merchant Bankers, Intermediaries, Directors and Other Professionals

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Background
A recent decision of the Securities Appellate Tribunal (SAT) discusses in detail as to what constitutes “due diligence” (Keynote Corporate Services Ltd. vs. Securities and Exchange Board of India, Appeal No. 84 of 2012, dated 19th February 2014). Intermediaries, including merchant bankers, are required to be diligent in the performance of their duties and this decision is of relevance to them. For Chartered Accountants in general and Auditors in particular too, this decision has relevance for at least two reasons. Firstly, professionals like CAs are required to carry out their duties exercising care of a level higher than the “due diligence” test. Hence, what constitutes “due diligence” should be of use. Secondly, CAs connected with listed companies and the SEBI registered intermediaries, though are not being regulated directly by the SEBI, do find their work reviewed by the SEBI. Hence, generally the standards laid down in this decision have relevance to intermediaries registered with SEBI.

Brief facts
In this case, to summarise the facts as reported, a merchant banker managed a public issue. As the readers would know, the manager to a public issue (“IPO”) has the highest and broadest of responsibilities, not only in managing the issue generally but coordinating with other intermediaries. In particular, it is his prime responsibility as regards the quantity and quality of information of disclosures made in the prospectus. It was found that in an issue managed by it, certain material disclosures were not made. The Company had, immediately before the IPO, borrowed monies from certain entities and used the same for advances for capital assets and other matters. The genuineness of such outgoing/ expenditure was not accepted by Securities and Exchange Board of India. The Company, after the IPO, repaid such loans from the IPO proceeds. The SEBI alleged that this amounted to siphoning off of funds. Further, it seems that the SEBI believed that the fact that the IPO proceeds were really meant to pay off such existing liabilities would have been a material consideration for the investors. Thus, disclosure of such facts would have affected their decision in investing.

The basic facts that the amounts were borrowed, then used for certain purposes and then the IPO proceeds were utilised for repayment of such borrowings do not seem to be in dispute. Also, nondisclosure of such pre-existing borrowings was also not in dispute. The issue in question was whether the merchant banker had carried out his duty with diligence that was expected of him.

Decision and principles laid down

The SAT laid down the law relating to the duties of the merchant banker as regards due diligence. Clause 64 of the SEBI (ICDR) Regulations 2009, reads as under:

“Due diligence.

64. (1) The lead merchant bankers shall exercise due diligence and satisfy himself about all the aspects of the issue including the veracity and adequacy of disclosure in the offer documents…..”

The SAT relied on the decision of the Supreme Court in the matter of Chander Kanta Bansal vs. Rajinder Singh Anand [(2008) 5 SCC 117] where due diligence was explained in the following words:

“The words “due diligence” have not been defined in the Code of Civil Procedure, 1908. According to Oxford Dictionary (Edn. 2006), the word “diligence” means careful and persistent application or effort. “Diligent” means careful and steady in application to one’s work and duties, showing care and effort.”

The SAT then reviewed the Memorandum of Understanding between the merchant banker and the Company and the rights of the merchant banker stated in the following clause was highlighted:

“The BRLM shall have the right to call for any reports, documents or information necessary from the Company to enable them to verify that the statements made in the Draft Red Herring Prospectus or the final Prospectus are true and correct and not misleading, and do not contain any omissions required to make them true and correct and not misleading.”

The statement in the prospectus that was found to be incorrect read as under:

“Bridge Loan: We have not entered into any bridge loan facility that will be repaid from the Net Proceeds.”

The merchant banker raised several pleas in its defence, all of which (except one, which is not relevant for this discussion) were rejected.

Firstly, the merchant banker stated that it was not informed by the company about the borrowings and that such information was indeed withheld from them. The SAT did not accept this as a valid defense. It said that the merchant banker could not expect the company to provide its information on its own with the merchant banker not taking any initiative. The SAT observed, :-

“Appellant’s plea that the information regarding ICDs was withheld from Appellant by ESL cannot be accepted. BRLM, in carrying out its functions is generally expected to act in an independent and professional manner and should not rely only on issuer company to provide them with updates, if any. Due diligence on part of Merchant Banker does not mean passively reporting whatever is reported to it but to find out everything that is worth finding out.”

The merchant banker said that it had obtained undertakings from the directors of the Company that the statements made in the prospectus are true. This too was rejected as being an insufficient defense. The SAT stated that accepting statements from the Company was no substitute for proper due diligence.

Then the merchant banker explained the manner in which he carried out his duties. He said that “when he handles IPO, he carries out random checks to verify authenticity of entities mentioned in the prospectus and has submitted documents in support of same”. In particular, the verification is “with reference to objects of issue and quotations, and in respect of IPO of ESL such checks were made in respect of major quotations submitted by ESL and, in support, Appellant submitted copies of few quotations along with nothings from concerned executive at its end, confirming veracity of offer document.”.

However, the SAT did not accept this and found that the manner in which such checks were carried out was insufficient. The Investigation had revealed that a sum of Rs. 4.75 crore from the IPO proceeds was allegedly siphoned off.

The SAT also explained the manner in which an intermediary such as a merchant banker in the present case should act while carrying out its duties with due diligence:-

“It is about making an active effort to find out material developments that would affect interest of investors. It is on faith that intermediary has conducted due diligence with utmost sincerity that investing public goes forward and decides to invest in a particular company. In present case Appellant had failed to exercise due diligence in carrying out its duties as BRLM in IPO of ESL.”

The SAT observed that the merchant banker had merely relied on certain statements provided by the Company and others. Moreover, even some of such statements were misleading or not in context of the issue before it. In any case, the SAT observed that this approach did not amount to carrying out its duties with due diligence. The SAT observed, :-

“Reliance of such documents, which in effect do not convey anything material or are misleading, infact, strengthens the case of Respondent that Appellant has done nothing to carry out due diligence and has been a passive actor, waiting for documents/information to come to him, whereas he should have been active in looking into various aspects of functioning of ESL, scrutiny of functioning of ESL, scrutiny of all relevant documents- including bank statements and order book position etc., before certifying correctnes of various statements in prospectus and issue of due diligence certificate at various stages of IPO”.


Curiously, the merchant banker pleaded that he had
a wide experience, knowledge and recognition in
the field. It had 35 years of experience in the field
and had managed more than 100 IPOs. He was a
regular speaker at various forums on the field. It
appears that this defence was raised to imply that
the merchant banker was well versed with his duties
and thus he would not have committed any
violation. However, this was actually went against
him. It was held that this past experience actually
raised the benchmark with which he ought to have
performed its duties and the facts did not evidence
‘due care’. The SAT observed,:-

“Appellant’s pleadings in Memorandum of Appeal
that the is highly experienced, and is a regular
speaker on subject of capital markets at various
forums and that he had carried out due diligence at
every stage, of issue of IPO and that he had fulfilled
all requirements of his responsibilities as BRLM/
Merchant Banker and some material disclosures
were not in issue documents, since these were done
at his back and not brought to his notice by ESL,
come to nothing, when he himself is not serious or
vigilant and is awaiting relevant information coming
to him and he then taking action on same, this
Tribunal has no hesitation is stating that Appellant
has failed in his duty to carry out due diligence, at
any stage of IPO of ESL and had failed not only the
investors in this issue but has done considerable
harm to security markets, at large.”

“….a professional person having wide knowledge
and experience in bringing out 125 IPOs during
its existence, is expected to show better professionalism
than was shown by Appellant. In the circumstances,
this Tribunal expects better standards
of performance from professionals, who charge
reasonably good fee from clients and who bring
out documents (prospectus in this case), which are
relied on by investors, at large, to take informed
decisions regarding investments in scrips/IPO and
this standard of professionalism should be higher
than a reasonable man with ordinary prudence will
demonstrate in the matter of due diligence but in
present case no mark of professionalism can be
seen from Appellant, who was merely a certificate
issue machine on dates when it was due, without
undertaking any due diligence whatsoever.”

The SAT, thus upheld the penalty levied on the
merchant banker. 

Other aspects/laws/developments



The original SEBI order, that levied the penalty
on the merchant banker, is also worth reviewing.
The SEBI reviewed several other past cases where
it was alleged that an intermediary did not carry
out its duties with due diligence. A review of such
decisions is useful to understand this concept better.
The Auditors of a listed company, apart from
of course carry out statutory audit, also carries out
limited review of financial results for disclosure. The
manner in which such limited review is carried out
can be considered by the SEBI.

“All the directors of the company
(including
independent directors) shall exercise their duties with
due and reasonable care, skill and diligence;”.

The implications of this decision thus is wide and
the principles laid down by the SAT will be useful
for intermediaries including merchant bankers,
chartered accountants and others associated with

 The SEBI also expects a common and high standard
of diligence from intermediaries generally. Clause 1.3
of the Code of Conduct, which is part of the SEBI
(Intermediaries) Regulations, 2008, reads as under:- 

“1.3 Exercise of Due Diligence and no Collusion
An
intermediary shall at all times render high standards
of service, exercise due skill and diligence over persons
employed or appointed by it, ensure proper care and
exercise independent professional judgment and shall
not at any time act in collusion with other intermediaries
in a manner that is detrimental to the investor(s).” 

Further, while the SEBI (Intermediaries) Regulations
do provide for a common duty of due diligence by
intermediaries generally as stated above, individual
regulations too, provide make specific or general
requirements of performance of duties by the
respective intermediaries with due diligence. The
SEBI (Debenture Trustees) Regulations, for example,
require that the Trustees shall exercise due diligence
to ensure compliance of various laws, the Trust
Deed, etc.
The SEBI (SAST) Regulations 2011 require
that the manager to the open offer “shall exercise
diligence, care and professional judgment to ensure
compliance with these regulations”.

The Companies Act 2013 also provides in section
149(12) that an Independent Director, a non-executive
director or a key managerial personnel would be
held liable only “where he had not acted
diligently”.
Not carrying out his role with diligence would thus
subject him to severe adverse consequences under
the Act. Schedule IV of that Act further lays down
the Code for Independent Directors and a fairly
high standard of performance of duties is expected
from the Independent Directors. The explanation
of the duties in this decision of the SAT would be
of guidance.

Clause 49 of the Listing Agreement which lays
down requirements of corporate governance also prescribes duties of the directors in general and of
the Independent Directors and the members of the
Audit Committee in particular. Here too, though not
stated explicitly, similar standards may be applied.
Indeed, SEBI’s concept paper which proposes to
substantially expand the standards of corporate
governance specifically states as follows:-

“All the directors of the company (including independent directors) shall exercise their duties with due and reasonable care, skill and diligence;”. The implications of this decision thus is wide and the principles laid down by the SAT will be useful for intermediaries including merchant bankers, chartered accountants and others associated with listed companies.

Sexual Harassment Law-I

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Synopsis

The Law for prevention of sexual harassment of women at workplace has now become an Act. Up until now it was in the form of Guidelines laid down by the Apex Court. The Act is very important since it applies to all organisations, public or private, small or big and even applies to houses in certain cases. What constitutes sexual harassment is also very widely worded. Business entities should choose to ignore this Law at their own peril! We will examine this Act through a two-part Feature.

Introduction
A major landmark was achieved when the Indian Government notified, on 9th December, 2013, the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 (“the Act”). The Act’s preamble states that it is to provide protection against sexual harassment of women at the workplace and for the prevention and redressal of complaints relating to sexual harassment. The Constitution of India guarantees every citizen a right to life and dignity and freedom to practice any profession/business. These are fundamental rights which are available equally to men and women. A safe working environment for women is one such fundamental right. Gender equality includes protection from sexual harassment and right to work with dignity. This Act seeks to achieve the same. Recent infamous events in corporate India have highlighted the urgent need for a Legislation such as this.

The roots of this Act may be traced to the pathbreaking judgment of the Supreme Court in Vishaka vs. State of Rajasthan (1997) 6 SCC 241 which was followed up by an equally important decision in Medha Kotwal Lele vs. Union of India, (2013) 1 SCC 297. Inspite of clear directions to the Government by the Apex Court to pass a Law on this subject, the Act saw the light of the day 16 years after Vishaka’s case. Let us examine this important piece of Law which, as we will see, impacts not only workplaces but also some households.

Vishaka’s Case
Vishaka’s judgment, for the first time, dealt with the hitherto untouched subject to women’s safety at work. In an unusual judgment, in the absence of any enacted law, the 3 Member Bench took it upon themselves to frame Guidelines to prevent sexual harassment of women at workplaces. The Court held that these Guidelines should be strictly observed in all working places by treating them as the Law of the land under Article 141 of the Constitution. It further held that the Court’s Guidelines and norms would be binding and enforceable in law until suitable legislation is enacted to occupy the field.

Inspite of the Court’s clear directions, some States were not complying with Vishaka’s Directions. Hence, the Supreme Court in Medha Kotwal Lele’s case, again issued further directions. It held that the Guidelines should be implemented in its true spirit. The Court passed a speaking Order wherein it directed all Government Organisations, Bar Associations, Medical Clinics/Hospitals, Offices of Engineers/Architects, etc., which employed women, to implement the Guidelines. It also instructed the Medical Council, Council of Architecture, our ICAI, ICSI, and other statutory institutes to ensure that organisations, bodies, persons, affiliated with them follow the Vishaka Directions. Further, for any noncompliance with Vishaka’s Guidelines, the aggrieved persons should approach respective High Courts.

It is in the light of this judicial activism that the Act has been passed. Now that this Act has been passed, Vishaka’s Directions would no longer apply. Let us now examine the Act’s salient features.

Application
The Act applies to the whole of India. It applies to every workplace owned by an employer where an employee, who is a lady, is employed and who is sexually harassed. The meaning of each of these four terms is very crucial since it forms the heart of the Act. This Act provides for civil remedy for sexual harassment of a lady.

Section 354 of the Indian Penal Code, 1860 (IPC) provides punishment for a harassment which is criminal in nature, i.e., if it is an assault or criminal force on the woman with intent to outrage her modesty.

Workplace
The Act applies to harassment at the Workplace and hence, it is very important to understand what constitutes a workplace? The term is defined in an inclusive manner and Table-1, given below, enlists the inclusions referred to in the definition:

Employee
Next let us understand who is an employee under the Act. The persons covered under the definition of the term employee are given below in Table-2:

It may be noted that although there is a definition of the term employee, it is not necessary that the complainant lady should be an employee of the workplace where the incident occurred. She could be any lady who was harassed at that workplace as would be evident when we see the definition of the term “aggrieved woman” given below.

Aggrieved Woman
It is important to understand who is an aggrieved woman under the Act. In relation to a workplace, it means any woman of any age, whether employed or not, who alleges to have been sexually harassed by a respondent. A respondent is a person against whom a complaint is lodged. Thus, any lady who comes to a workplace (e.g., a client, a consultant, an auditor, a patient, a student, etc.,) could allege harassment at that workplace by a respondent working there. She need not be an employee of that workplace.

However, there is some disconnect when viewed along with the definition of the term workplace. Considering again the example of the auditor-auditee, in relation to an articled clerk who alleges harassment at the auditee’s workplace by the auditee’s employee, the aggrieved woman definition is wide enough to cover an auditor who has come into an organisation. However, the definition of the auditor’s workplace includes any workplace visited by his employee. The correct forum to complain should be the ICC of the auditee since that is the workplace where the alleged incident occurred. How can the auditor’s ICC have any control over an employee of the auditee? A better clarity on this very important issue is desirable.

Employer
The obligations under the Act are cast upon the Employer. In case of a private/NGO sector, it is defined to mean one responsible for the management, supervision and control of the workplace. The term management includes the person or the Board or the Committee responsible for the formation and administration of policies for such organisation. Thus, the Board of Directors in the case of a Company, Designated Partners in case of an LLP, Partners in case of a Firm, etc., would be treated as Employers.

Sexual Harassment This brings us to the all important question, what constitutes a sexual harassment under the Act? The term “sexual harassment” is defined in a very wide and all-encompassing manner. Several people who may be under an impression that a particular act of theirs cannot constitute harassment would be in for a rude shock. It is defined to include any one or more of the following unwelcome acts or behaviour, whether directly or by implication:

a) Physical contact and advances;
b) Demand or request for sexual favours;
c) Making sexually coloured remarks;
d) Showing pornography;
e) Any other unwelcome physical, verbal or nonverbal conduct of sexual nature.


While, for some of the above acts, it is quite apparent
that they constitute sexual harassment, it
is important to fully understand the meaning of
“making sexually
coloured remarks” and “any
other
unwelcome verbal or non-verbal conduct of sexual
nature”. Circulating
lewd text/WhatsApp messages
to female colleagues,, reading aloud vulgar jokes
to female colleagues, passing abusive remarks in
the presence of women, offensive screensavers on
laptops, commenting on women, staring, stalking,

etc., may all be
covered. Even something like asking
a lady colleague out for a drink may be covered
within this definition. The list cannot be exhaustive
and needs to be considered based on the facts and
circumstances, but one important parameter for an
act/behaviour to constitute harassment is that it
must be unwelcome.


In addition, the Act also states that one or more
of the following circumstances, if they occur or
are present in relation to or connected with any
act of sexual harassment, may amount to sexual
harassment:
• Implied/explicit promise of preferential or detrimental
treatment in her employment
• Implied/explicit threat of her employment status
• Interfering with her work

• Creating a hostile/offensive work environment
for her
• Humiliating treatment likely to affect her health/
safety

(…. to be continued)

PART A: ORDERS OF CIC

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Section 8(1) (j) of the RTI Act 2005:

Information sought-

The certified true copies of the original application filed by Mr. Pradeep Kumar (Director Postal Services, Mumbai Region) at the time of seeking a job at the Department of Post along with all the necessary documents attached to the original application. The information sought was from the date of appointment till date.

Decision notice-
It is fairly obvious that the information which the appellant has sought after in respect of the officer (viz. the application/documents on the basis of which he has been appointed) is in the nature of ‘personal information about third party.’ The employee might have filed these documents before the appointing authority for the purpose of seeking employment, but that is no reason enough for this information to be brought into the public domain to which anybody could have access.

It is also seen that the Hon’ble Supreme Court in its decision dated 13-12-2012 [Civil Appeal No. 9052 of 2012, Bihar Public Service Commission vs. Saiyad Hussain Abbas Rizvi & Anrs, [RTIT IV (2012) 307 (SC)]] has, inter alia, held as under:

“Certain matters, particularly in relation to appointment are required to be dealt with great confidentiality. The information may come to knowledge of the authority as a result of disclosure by others who give that information in confidence and with complete faith, integrity and fidelity. Secrecy of such information shall be maintained, thus, bringing it within the ambit of fiduciary capacity”.

“The appellant has not established any public purpose which the disclosure of this information would serve. Hence, we concur with the submissions of the CPIO that the information is exempt.”

[Pradeep Ambadas Ingole vs. CPIO & Director Postal Services, Mumbai Region, decided on 26-12-2013: RTIR I (2014) 42 (CIC)]

Section 2(f)of the RTI Act,2005 “Information”:

1. Appellant submitted RTI application dated 8th November, 2012 before the CPIO, Govt., Medical College & Hospital, Sector 32, Chandigarh; seeking information relating to break up of the class IV staff (Ward Staff) with each officer and each branch of the GMCH-32 through multiple points.

2. Vide CPIO Order dated 7th December, 2012, CPIO denied the requisite information on the ground that the requisite information is not covered u/s. 2 (f) of the RTI Act, 2005 which provides the definition of information. However, he wrote that the Applicant may get the requisite documents after inspecting the record on any working day.

Decision Notice:
“Both parties have been heard. Commission observes that the CPIO has not applied his mind while disposing the RTI application and in no way it can be construed that the information sought by the appellant is not covered under the definition of information given u/s. 2(f) of the Act. Simultaneously, CPIO has also stated that the appellant can inspect the requisite documents holding the information. Both these statements are contradictory and reflect the intention of the CPIO to avoid providing the requested information to the appellant. At the hearing also, Commission observed the reluctance of the CPIO in imparting the information which is held on record and is squarely disclosable as per the provisions of the Act. Now, CPIO is directed to provide points-wise information to the appellant within two weeks of receipt of order. Through this order, ‘Show Cause Notice’ is issued to the CPIO for attempting to obstruct the disclosure of the requested information. Date for personal hearing will be provided to him through separate notice.”

[Harmeet singh vs. Government Medical College & Hospital, UT Chandigarh: Decided on 11-12-2013: RTIR I (2014) 47(CIC)]

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Release Deed – Chargeability : Stamp Act, 1899:

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M. Suseelamma & Ors vs. The Chief Controlling Revenue Authority Chennai and Anr. AIR 2014 Madras 43.

The Late M. Krishnaiah Chetty had purchased the subject property from one, Sheela Devi. Subsequently, after the demise of M. Krishnaiah Chetty, who died intestate on 16-04-2000, leaving behind the appellants 1 to 7, wife, sons and daughters, as his class I legal heirs, a document, dated 09-10-2003, has been presented and numbered as 50 of 2003, on the file of the sub registrar (District Registrar Cadre), captioned as Deed of Release.

Where the husband of the appellant had purchased the subject property from its original owner by virtue of registered sale deed and husband died intestate leaving behind wife (appellant), sons and daughter as Class I heirs, then the wife, sons and daughter would inherit the property as Class I heirs in terms of the Hindu Succession Act. However, since the parties do not belong to HUF, the grandsons, when their father is alive would have no pre-existing right over property. Therefore, the release deed by appellant alongwith her sons, daughters and grandson in favour of another son was rightly treated as conveyance under Article 23 of Schedule.

In the light of section 8 of the Hindu Succession Act, the releasees 2 to 4 do not have any preexisting right over the subject property. They have not inherited any property, as per section 8 of the Hindu Succession Act. The value of the property shown in the document is Rs. 2 lakh. As per section 5 of the Indian Stamp Act, any instrument comprising, or relating to several distinct matters shall be chargeable with the aggregate amount of the duties, with which separate instruments, each comprising or relating to one of such matters, would be chargeable under the Indian Stamp Act.

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Precedent – Ratio decidendi – Must be understood in the background of the facts of the case – Judgements are not to be read as a statute: Constitution of India.

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Arasmeta Captive Power Company P. Ltd. & Anr vs. Lafarge India Pvt. Ltd. AIR 2014 SC 525

The judgments rendered by a court are not to be read as statutes. In Union of India vs. Amrit Lal Manchanda and another (2004) 3 SCC 75, it has been stated that observations of courts are neither to be read as Euclid’s Theorems nor as provisions of a statute. The observations must be read in the context in which they appear to have been stated. To interpret words, phrases and provisions of a statute, it may become necessary for Judges to embark into lengthy discussions but the discussion is meant to explain and not to define. Judges interpret statutes, they do not interpret judgments. They interpret words of statutes; their words are not to be interpreted as statutes.

Words used in a judgment should be read and understood contextually and are not intended to be read literally. Many a time a judge uses a phrase or expression with the intention of emphasising a point or accentuating a principle or even by way of writing style. Ratio decidendi of a judgment is not to be discerned from a stray word or phrase read in isolation.

In this context the following words of Lord Denning are significant.

“Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches, else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it.”

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Partnership firm – Unregistered – Not be barred from enforcing their rights under Transfer of Property Act: Partnership Act 1932 Section 69(2):

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Sandhya Anthraper & Anr vs. Manju Kathuria & Ors AIR 2014 Karnataka 21

Appellants who are plaintiffs/partners of an unregistered firm of M/s. Windsor Wings Developers, filed a suit against the defendants , for the relief of declaration that the registered Sale deed dated 26.04.2003 executed by defendant No. 1 is invalid, illegal and not binding on the plaintiffs, for cancellation of the sale deed and for permanent injunction restraining the defendants 2 to 5 from selling, leasing, mortgaging or otherwise alienating and interfering with their peaceful possession of the property. It is the case of the plaintiffs that the suit property was purchased in the name of the Firm. The plaintiffs suspected the conduct of the 1st defendant and they made enquiries about the suit property in the Office of the Sub-Registrar and discovered that the 1st defendant, who had no authority to sell the immovable property belonging to the Firm, without their consent had executed a sale deed dated 26-04-2003 on behalf of the Firm, in favour of the 2nd defendant for a consideration of Rs. 16,66,620/- though the property was worth more than Rs. 30,00,000/-. It is contended that the sale deed is invalid, void, fraudulent and the same is executed clandestinely with an intention of cheating the plaintiffs.

The defendants contented that the Suit is barred u/s. 69(2) of the Partnership Act. The trial Court, after hearing on the preliminary issue, answered the same in the affirmative in favour of the defendants and dismissed the Suit as not maintainable u/s. 69(2) of the Act.

Sum and substance of s/s. (1) of section 69 of the Act is that no suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any Court and the person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm.

The defendants have not pleaded that the suit is barred under s/s. (1) of section 69, but it is contended that the suit is not maintainable both under s/s. (1) and (2) of Section 69 of the Act.

The Hon’ble Court observed that the plaintiffs who are partners of the unregistered firm are neither enforcing their right arising from a contract nor the right conferred by the Act. The plaintiffs are enforcing their right under the contract of partnership deed dated 29-12-1995 and specifically Clause 25(d) which says that no partner of the firm shall, without the consent in writing of the other partners, be entitled to transfer immovable property belonging to the Firm, but the defendant No.1, as a partner of the partnership firm, has sold the suit land in favour of defendants 2 to 5. Though it is stated in sub-Clause (d) of Clause 25 of the partnership deed that no partner of the firm shall without the consent in writing of the other partner, be entitled to transfer immovable property belonging to the firm, the appellants/ plaintiffs seek to enforce their right conferred upon them under the Transfer of Property Act. It is well settled principle that a ‘partnership firm’ has ‘no separate legal entity’. It is always understood that ‘firm’ means ‘partners’, ‘partners’ means collectively a ‘firm’. Thus the property belonging to a partnership firm is the property of the partners of the firm.

In view of the above, under the Transfer of Property Act, each of the partner is entitled to claim his right to the immovable property of the firm, as co-owner. Under such circumstances, the contention that the suit filed by the plaintiffs enforcing their right under the contract of partnership deed, holds no water

As regards to s/s. (2) of section 69 no suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the Register of Firms as the partners in the firm. In the instant case, there is no contract between the plaintiffs on one side and defendants 2 to 5 on the other and thus, there is no question of plaintiffs enforcing a right arising from a contract and thus the Suit is not hit under s/s. (2) of section 69 of the Act.

As per section 69(1) of the Act, an unregistered partnership firm or partners are prohibited from enforcing a right arising from a contract or the right conferred by the Partnership Act, 1932, but the provision does not take away the right of the partners of an unregistered firm to enforce their right under other enactments. According to Article 300-A of the Constitution of India, no person shall be deprived of his property save by authority of law. The property of the partnership firm, was purchased under three registered Sale deeds dated 20-01-1996 by the partnership firm, viz., M/s.Windsor Wings Developers, out of the funds of the firm. Thus, the property becomes the property of the partners and they are co-owners. Therefore, the plaintiffs are entitled for the relief sought for. Defendant No.1 has committed breach of trust, which is an offence under the Indian Penal Code. The plaintiffs are enforcing their right as co-owners of the suit property conferred under the Transfer of Property Act and the Partnership Act does not bar the partners of an unregistered firm from enforcing their right conferred under the other enactments. In other words, at the cost of repetition, it must be mentioned that what is prohibited u/s. 69 of the Act is enforcement of contract of partnership, provisions of the Partnership Act, 1932 and enforcement of right arising from a contract (between the firm and third party) and not the rights conferred under the other enactments. Therefore, the trial Court erred in dismissing the suit as barred by s/s. (2) of section 69 of the Partnership Act, 1932.

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Lease – Amount of security deposit – No stamp duty on security deposit. Stamp Act 1899, Article 35(c):

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Moideen Koya vs. K. Girish Kumar & Anr. AIR 2014 Kerala 30

A lease agreement was executed between the landlord and the tenant on 29-09-2010, in which the monthly rent payable was fixed as Rs.3,500/. An amount of Rs. 50,000/- was given by the tenant as security deposit which was refundable on termination of the lease. The Rent Control Court refused to mark the lease agreement for the reason that the same was under stamped and the court ordered payment of the stamp duty alongwith penalty for security and the rent payable as per the lease agreement.

The legal question therefore arose as to whether Article 33(c) will cover a refundable security provided in a lease agreement, even though the same is adjustable towards the rent in arrears.

The Government letter dated 24-02-1983 addressed to the Inspector General of Registration reads as follows:

“In supersession of the instruction issued in Govt. letter No. 18769/E2/75/TD, dated 15-12-1975 and in accordance with the decision of the Delhi High Court in AIR 1980 Delhi 249, the following principles may be observed while classifying lease deeds.

(1) Duty is not chargeable under Article 35(c) of Schedule IA of the Indian Stamp Act, 1899 on the amounts of security/deposit/advance, which is refundable on determination of the lease, in addition to the duty paid on the rent reserved under Article 35(a) of the Schedule.

(2) It will not make any difference in the changeability of duty, if such deposit/advance is adjustable in rent/other charges dues payable under the lease.

(3) The amount of security deposit paid for the due performance of the contract of lease is chargeable under Article 57 of the Schedule read with section 5 of the Act.

Amount of security deposit – cannot be treated as “money advanced” in terms of Article 33(c) – Fact that it is adjustable to – wards unpaid rent – Immaterial – since it paid for due performance of obligations of lease and on termination of lease, it is refundable, such an amount which is refundable will not get character of `money advanced’ – Lessor consequently not bound to pay stamp duty on security deposit.”

A reading of Article 33(a), will show that it covers cases where the rent is fixed and no premium is paid or delivered. Going by Article 33(c), the provision is attracted where the lease is granted for a premium or for money advanced and the same will be in addition to rent reserved. Apparently, the Rent Control Court has treated the security deposit as money advanced for attracting section 33(c) in addition to the rent.

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Circulars – Binding nature – Circulars cannot override statutory provisions: Administrative Law:

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Glaxo Smithkline Pharmaceuticals Ltd vs. UOI & Others, AIR 2014 SC 410

The following principles emante out of this decision of the Supreme Court in relation to the Circulars issued by the Government under the fiscal laws (Income-tax Act and Central Excise Act):

1. Although a circular is not binding on a court or an assessee, it is not open to the Revenue to raise a contention that is contrary to a binding Circular by the Board. While a circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that is not valid nor that it is contrary to the terms of the statute.

2. A show cause notice and demand contrary to the existing Circulars of the Board are ab initio bad.

3. It is not open to the Revenue to advance an argument or file an appeal contrary to the Circulars.

The above legal position is re-emphasised in Commissioner of Customs vs. Indian Oil Corporation (AIR 2004 SC 2799: 2004 AIR SCW 1310) has been followed in UOI vs. Arviva Inds. (I) Ltd.: (2007) 209 ELT 5 (SC)

4. It is well settled that if the departmental Circular provides an interpretation which runs contrary to the provisions of law, such interpretation will not bind the Court.

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Private Companies under the Companies Act, 2013

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Synopsis

The regime of the Companies Act, 1956 has come to an end, with the notification of a majority of the sections of the Companies Act, 2013 . Significant changes have been brought/new concepts have been introduced like withdrawal of several relaxations enjoyed by the private Companies with added compliance burden, introduction of new concepts like OPC (One Person Company), etc. The article discusses in detail the key changes notified/ proposed with respect to Private Limited Companies and will be of relevance to a large number of readers.

Background

The Companies Act, 2013 (‘New Act’) received the assent of the President on 29th August, 2013 and was notified in the Gazette on 30th August, 2013. Of the 470 sections in the New Act, 98 sections or part thereof have been brought into force from 12th September 2013. Further, the Government has clarified that the relevant provisions of the Companies Act, 1956 (‘existing Act’) which correspond to the provisions of those 98 sections of the New Act shall cease to have effect from the said date.

The New Act has made material changes to the provisions under the existing Act. In this article the various privileges and exemptions which are available to a private company under the existing Act and the status thereof, under the New Act are discussed. The said analysis is irrespective of the fact whether all the said provisions have been notified by the Central Government or not.

1. Definition of Private company:
Under the New Act a private company is defined u/s. 2(68) as under:

“private company” means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,-

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred: (emphasis supplied)

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

Provided further that:

(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company; (emphasis supplied)

The following changes in the definition of a private company may be noted:

a) Except in the case of One Person Company: maximum number of members, which a private company can have, is increased to 200 from the existing limit of 50;

b) Under the existing Act, a private company by its Articles is prohibited from inviting the public for subscription of shares and debentures. Under the New Act the prohibition applies to securities as defined u/s. 2(h) of the Securities Contracts (Regulation) Act, 1956 which includes not only the shares and debentures but also other securities prescribed therein;

c) Under the existing Act, in order to form a private company it is essential that its Articles contain a Clause that prohibits a company from accepting deposits from persons other than its members, directors or their relatives. The New Act does not prescribe a similar condition and thus, under the New Act, a private company can be formed without inserting in its Articles, a Clause prohibiting invitation or acceptance of deposits from persons other than its members, directors or their relatives. This however does not imply that a private company can invite or accept deposits from any person since the said restrictions are contained in section 73 (and draft Rules thereon) which deal with the provisions for acceptance of deposits.

2. Restriction on commencement of business:

As per the New Act, a private company cannot commence business or exercise borrowing powers:

• till every subscriber to the memorandum has paid the value of shares taken by him and the directors of the company have filed declaration to that effect; and
• the Company has filed with the Registrar a verification of its registered office.

Under the existing Act, a private company could commence business or exercise borrowing powers immediately on being formed/incorporated.

3. Share Capital:

a) Under the existing Act, a company is prohibited from issuing classes of shares other than equity or preference shares. Further, the Act provides that the shareholder’s voting rights should be in the same proportion to his share of the paid up equity capital of the company. However, these provisions do not apply to a private company which is not a subsidiary of a public company [section 90(2) of the existing Act]. Thus, under the existing Act, a private company not being a subsidiary of a public company is permitted to issue types of shares other than the equity share or the preference share. It can also issue shares with disproportionate rights in regard to dividend, participation in any surplus on liquidation and with disproportionate voting rights.

However under the New Act, similar exemption is not given to a private company.

b) Under the existing Act, a private company can issue further share capital to any person or in any manner as it thinks best in its own interest. Its Articles may or may not provide for pre-emptive rights of the shareholders.

Under the New Act, however, all companies including a private company, are required to offer shares to persons who, on the date of the offer, are holders of equity shares of the Company in proportion, as nearly as circumstances admit, to the paid up share capital on those shares. Thus the current practice in private companies of freely issuing shares to any outsider will be restricted.

4. Providing financial assistance for purchase of its own/holding company’ s shares:

Under the existing Act, a public company or a private company which is a subsidiary of a public company is prohibited from giving a loan, a guarantee, a security or any other kind of financial assistance to any person for the purpose of purchase of shares in the company or in its holding company.

Under the New Act, such prohibition is restricted to public company only. Accordingly, private companies, including those which are subsidiaries of a public company would be able to offer financial assistance to any person for purchase of shares in the company or in its holding company.

5. Appointment of Directors:

a) Where a person other than a retiring director stands for directorship:

U/s. 160 of the New Act, a person who is not a retiring director and desires to stand for directorship is required to give 14 days’ notice in writing and a deposit of Rs. 1 lakh or such higher amount as may be prescribed. The deposit amount would be refunded provided he gets elected or gets at least 25% vote. A private company is not excluded from the applicability of the said provisions.

U/s. 257 of the existing Act, such person was required to deposit a sum of Rs. 500 only. However, it seems that the existing provision was complied more in breach – the same may become more difficult to comply in view of the increase in the amount of deposit to Rs. 1 lakh.

b) Number of directorships:

U/s. 275 of the existing Act, a person cannot become a director in more than 15 companies. For the purpose, a person holding directorship in a private company which is neither a subsidiary nor a holding company of a public company is not considered.


U/s. 165 of the New Act the said limit is increased
to 20 but it further provides that in the
said limit of 20, the number of public companies
cannot exceed 10. Further it is clarified that for
reckoning the limit of public companies, directorship
in a private company which is either a
holding or a subsidiary of a public company is
to be included. Thus under the New Act, since
directorships in private companies will also
need to be considered, it will require several
persons to reduce their number of directorships
in private companies.


c) Appointment of
directors to be voted on individually: 

U/s. 162 of the New Act where a company including
a private company, desires to appoint 2 or more persons
as directors by a single resolution, it is necessary
first to pass a resolution authorising their appointment
in that manner without even one dissentient
vote being cast against such resolution.

Under the existing Act, a private company which is
not a subsidiary of a public company is permitted to
appoint two or more persons as directors even by a
single resolution with no pre-conditions attached to it.


d) Consent to act
as a director: 

U/s. 152 of the New Act where a person is proposed
to be appointed as a director by a company including
a private company, he is required to furnish a declaration
that he is not disqualified to become a director
under the Act. It is further provided that a person
appointed as a director shall not act as a director unless
he gives his consent to hold the office as director
and such consent has been filed with the Registrar.


Similar provisions under the existing Act were not
applicable to a private company (unless it is a subsidiary
of a public company).

6.
Appointment of Managerial Personnel:


a) As per section 269 of the existing Act, every
public company or a private company which
is a subsidiary of a public company, having a
paid up share capital of Rs. 5 crore, is required
to have a managing or whole time director or
manager.


As per section 203 of the New Act, every company
belonging to such class or classes of
companies, as may be prescribed by the Central
Government, is required to have the following
whole-time key managerial personnel:

• Managing director or Chief Executive Officer or
Manager or Whole-time director;


• Company secretary; and

• Chief financial officer.

Thus, if the specified class of companies includes
private companies above the specified threshold,
they will need to comply with the above.

b) Under the New Act, it is further specified that
a person who is the Managing director or Chief
Executive Officer cannot be appointed as the
Chairperson of the company unless Articles
of such company provide for the same or the
company carries on multiple businesses.

c) A whole-time key managerial personnel cannot
hold office in more than one company except
in its subsidiary company, though he can be a
director of any company with the permission
of the Board.

Under the existing Act a person can be appointed
as a managing director in two companies
and for the purpose, managing directorships in
a private company which is not a subsidiary of
public company is not considered;

d) As per section 196(3) of the New Act, which
applies to all types of companies, a person
cannot be appointed to the post of managerial
personnel who is below the age of 21 years or
has attained the age of 70 years.

Under the existing Act, no such age criteria
were prescribed in relation to a private company.
e) Under the existing Act, a private company (not
being a subsidiary of a public company) is not
prohibited from appointing a managing director
or a manager for a term which may exceed 5
years at a time.

Under the New Act, all types of companies, including
a private company, are prohibited from appointing
managing director or whole time director or manager
for a term exceeding 5 years at a time.

7.
Restrictions on Powers of Board: 

As per the New Act, the Board of a company, including
of a private company can exercise the following
powers only with the consent of the company by a
special resolution:


a) Sale, lease or otherwise disposal of the whole
or substantially the whole undertaking. The
term ‘substantial’ means where not less than
20% of the value of the undertaking is being
disposed off;

b) To invest, otherwise in trust securities, the
amount of compensation received by it as a
result of any merger/amalgamation;

c) To borrow money, where the money to be
borrowed, together with the money already
borrowed exceed the aggregate of its paid
up share capital and free reserves;

d) To remit, or give time for the re-payment of,
any debt due from a director;

Under the existing Act, there were no such requirements
or restrictions on a private company which is
not a subsidiary of a public company.

8. Loan to
directors:


As per section 185 of the New Act no company,
including a private company, can advance any loan
to any of its directors or to any other persons in
whom the director is interested or give guarantee
or provide any security in connection with any loan
taken by him or such other person.


The corresponding provisions of section 295 of the
existing Act were not applicable to a private company
(unless it is a subsidiary of a public company).

Section 185 has also become operative since 12th
September, 2013. Hence, in case of any fresh loans
given or renewal of loans after that date, the provisions
of the section would need to be complied with. 

9. Loans and investments by a company:


The New Act provides for the manner in which and
the limits up to which a company, including a private
company can give loan or give guarantee or provide
security in connection with a loan to any other body
corporate or person or acquire any securities of any
other body corporate. As per section 186 of the Act,
unless authorised by a special resolution passed at a
general meeting, such loans, investments,
etc.,
made
by any company cannot exceed 60% of its paid up
share capital, free reserves and securities premium account
or 100% of free reserves and securities premium
account, whichever is lower. It further provides that
the loan cannot be given at a rate of interest lower
than the prevailing yield of 1 year, 3 year, 5 year or
10 year Government security closest to the tenor of
the loan. It also empowers the Central government to
prescribe limits up to which the companies registered
u/s. 12 of the Securities and Exchange Board of India
Act, 1992 can take intercorporate loan or deposit.

Section 372A of the existing Act also restricts loans
and investments by the company. However, the
provisions under the New Act are more stringent and
restrictive. The material differences between the two
provisions are as under:

a) Section 372A is not applicable to a private
company not being a subsidiary of a public
company while section 186 applies to private
companies also;


b) New section not only covers inter-corporate
loans and investment but also to loans and
investment given to non-corporates;

c) As per section 372A, a loan cannot be made at
the rate of interest lower than the prevailing
bank rate made public u/s. 49 of the Reserve
Bank of India Act, 1934 – u/s. 186 of the New
Act, the rate of interest is linked to the prevailing
yield of Government securities;

d) Following transactions not covered (or exempted)
under the provisions of section 372A of the existing
Act gets covered u/s. 186 of the New Act:

• Investments in right issue of shares made in
pursuant of section 81(1)(a);

• Loan by a holding company to its wholly owned subsidiary;

• Guarantee given or security provided by a holding
company in respect of loan to its wholly
owned subsidiary;


• Acquisition of securities by a holding company
of its wholly owned subsidiary;

e) A new provision is inserted to prohibit investment
through more than 2 layers of investment
companies.

10. Interested director not to participate or vote in
Board’s proceedings:

As per section 184 of the New Act, every director
of a company, including of a private company, who
is concerned or interested in a contract or arrangement
entered into or proposed to be entered into
is required to disclose the nature of his concern or
interest at the meeting of the Board and he cannot
participate in proceedings of such meeting.
Similar provisions under the existing Act were not
applicable to a private company.


11. Administration related:

a) Time and Place of the Annual General Meeting:

Under the existing Act, a private company has the
option to fix the time for its annual general meeting
by its Articles or by a resolution passed in one
annual general meeting wherein time for holding
subsequent meeting is fixed/decided. In case of a
private company (unless it is a subsidiary of a public
company), it also has the option of fixing the place
of its annual general meeting in the like manner.

The New Act does not provide for similar options and
as provided in section 96(2), all companies, including
a private company, is required to hold its annual
general meeting between 9 a.m. and 6 p.m. on a day
that is not on a National holiday, at the registered
office of the company or at some other place within
the city, town or village in which the registered office
of the company is situated.


b) Meetings and Proceedings:


By virtue of the provisions of section 170 of the
existing Act, a private company by its Articles can
frame its own Rules as regards the length of notice
for calling meeting, contents and manner of service
of notice and person on whom it is to be served,
Explanatory statement to be annexed to notice,
Quorum for meeting, Chairman of meeting, Proxies
and manner of Voting on resolutions.

The New Act does not grant similar exemptions
hence, a private company is required to follow the
same rules and procedures as are applicable to a
public company.

c) Filing of the Financial Statements with the Registrar:

Proviso to section 220 of the existing Act permits a
private company to file copy of Statement of Profit
and Loss separately with the Registrar and the same
is not available to general public for inspection.

Under the New Act no such exemption is available
to a private company and all Financial Statements
filed u/s. 137 including the Statement of Profit and
Loss, would be available to the general public for
inspection.

d) Register of directors:

Under the existing Act, all companies, other than a
private company, which is not a subsidiary of a public
company are required to enter date of birth of a
director in the Register maintained. The exemption
granted to a private company has been withdrawn
under the New Act, and accordingly, the Register
maintained even by a private company shall contain
information about the date of birth of a director.

12. The following exemptions and privileges available
under the existing Act are also available under the
New Act:

(A) In the case of all types of private companies:

• Filing of statement in lieu of prospectus before
allotment of shares is not required;

• A private company need not have more than
2 directors;

(B) In the case of a private company not being
a subsidiary of a public company:


• The provisions relating to the managerial remuneration
like the extent and manner of payment, fixing of overall maximum remuneration,
limit of minimum managerial remuneration
in the event of no profits or inadequate
profits, etc., are not applicable and such company
can remunerate its managerial personnel
by such higher percentage of profits or in any
manner as it may think fit;
• The provisions relating to the appointment,
retirement, reappointment, etc., of directors
who are to retire by rotation and the procedure
relating thereto, are not applicable and
the company can frame its own Rules for the
purpose in the Articles;
• The provisions relating to the manner of filling
up casual vacancy among the directors are not
applicable and the company can frame its own
Rules for the purpose in the Articles;
• The company can by its Articles, provide for any
disqualification for appointment as a director
in addition to those specified in the Act;
• The company may provide any other ground
for the vacation of the office of a director in
addition to those specified in the Act;

13. One Person Company (OPC):
The concept of One Person Company has been introduced
under the New Act. Section 2(62) of the Act
defines the OPC to mean a company which has only
one person as a member and as per section 3, a company
formed by one person would be a private limited
company. Thus, the OPC would enjoy all the exemptions
and privileges enjoyed by any private company. In addition,
OPC enjoys following exemptions and privileges:
a) It is not mandatory for the OPC to prepare
the cash flow statement;
b) In the absence of company secretary, the Annual
Return filed u/s. 92 can be signed by the
director;
c) The OPC is not required to hold an Annual
general meeting;
d) The provisions of section 100 to 111 which
provides for matter regarding extraordinary
general meeting, the length of notice for
calling general meeting, contents and manner
of service of notice and person on whom it
is to be served, Explanatory statement to be
annexed to notice, Quorum for the meeting,
Chairman of the meeting, Proxies and manner
of Voting on resolutions, etc., do not apply to
the OPC;
e) The financial statement need not be signed
amongst others, by the Chief Financial Officer
and the Company secretary. It is sufficient
compliance if the same is signed by one director;
f) It is sufficient compliance if the OPC has only 1
director instead of minimum 2 required in the
case of a private limited company;
g) In case of the OPC it is sufficient if at least 1 meeting of the Board of
Directors is held in each half of a calendar year.
14. Conclusion
As seen above,
the New Act has brought in many changes in the existing Act and various new
concepts have also been introduced. To some extent, the Clauses in the Articles
of the existing private companies may not be in sync with the provisions of the
New Act. The Articles of the existing private companies are based on Table A of
the existing Act which corresponds to Table F of the New Act. It will be
advisable for all private companies to compare the existing Clauses in its
Articles with Table F of the New Act and making the necessary changes as
required.
In conclusion, it may be said that the Private Limited Company is one
of the most widely used legal forms by many businessmen in India. In fact, many
of the successful business group had begun their first venture by forming a
private company, the reason being it was relatively easy to form and lesser
regulations applicable. As seen above, a number of privileges enjoyed by the
private company under the existing Act have been withdrawn under the New Act.
Due to this, a lot of companies (especially family owned) would need to
expeditiously explore whether they can really cope with the new requirements or
that they need to change to some other form of entity like Limited Liability
Partnership (LLP).

Gaps in GaAp – Core Inventories

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In a certain manufacturing or a distribution process a certain amount of core inventory is required to run the plant, transport the raw material or finished goods. Examples of core inventories are cushion gas in cavern storage facilities, crude oil used as line fill and minimum levels of some materials in non-ferrous metal refining. The essential features of core inventory are:

(a) Use: are necessary to permit a production facility to start operating and to maintain subsequent production;

(b) Physical form: not physically separable from other inventories and interchangeable with them;

(c) Removal: can be removed only when production facilities are abandoned, decommissioned or overhauled or at a considerable financial charge. Sometimes the quality of what can be removed may not be the same as the original inventory, for example, on decommissioning there could be a lot of sludge or waste material.

The issue could be material for some companies, such as in the case of an oil pipeline company where the pipeline runs into several kilometres. In such cases, the impact of the manner in accounting for the initial fill could be very significant.

Query
Whether core inventories should be classified as inventories or fixed assets? How are they subsequently measured?

View 1: Classification under AS-2 Valuation of Inventories

Inventories are defined in AS-2 as (a) held for sale in the ordinary course of business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. Core inventories meet that definition of inventories. The rationale for classification as inventories is that core inventories are ordinarily interchangeable with other inventories, and thus, core inventories held at a particular reporting date will be either consumed or sold in the next period.

On the other hand, AS-10 Accounting for Fixed Assets, defines fixed assets as “Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.” Core inventories do not meet this definition because they are held for sale in the normal course business. On the assumption that the unit of account is the smallest unit of the material concerned (ultimately individual atoms), core inventories are classified as inventories because they represent materials that are consumed in the production process

The two different views on subsequent measurement of core inventories are:

(a) Core inventories are measured collectively with other inventories using FIFO or a weightedaverage cost formula. These methods are supported in AS-2.

(b) Core inventories are measured separately from other inventories. The rationale for this accounting treatment is that the accounting transaction does not take place at the time of each inventory’s swap and therefore their value is not stepped up. Support for this may be found in paragraph 14 of AS-2 which states that “The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by specific identification of their individual costs.” However, a more appropriate view may well be that measuring core inventory separately is similar to applying the base stock method which is prohibited in AS-2.

A matter of concern is that if core inventories are accounted for as inventories, an entity would in many cases, need to recognise an immediate loss on writing off to net realisable value, if the inventory is not expected to be fully recoverable when the plant is ultimately decommissioned. Either full quantity is not recovered or some recovery may be in the form of sludge. Also, the net realisable value would factor the cost incurred for recovering the inventory. At other times, such as the initial fill in the case of an oil pipeline company, the net realisable value on account of price changes could fluctuate significantly, and create volatility in the P&L A/c.

View 2: Classification under AS-10 Accounting for Fixed Assets

The rationale for classification as fixed asset is that core inventories are not held for sale or for consumption; instead, their intended use is to ensure that a production facility is operating. Even though core inventories are commingled with ordinary inventories, the characteristics and intended use of a particular part of the inventories remain the same at each individual reporting date. Thus these core inventories need to be accounted for separately.

Core inventories should be classified as fixed asset because they are necessary to bring a fixed asset to its required operating condition. Paragraph 9.1 of AS-10 states that “The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:

i. site preparation;
ii. initial delivery and handling costs;
iii. installation cost, such as special foundations for plant; and
iv. professional fees, for example fees of architects and engineers.”

If core inventories are carried as inventories, it would not properly reflect the fact that core inventories are necessary to operate another asset over more than one operating cycle. On the assumption that the unit of account is the minimum amount of material as a whole, core inventories are classified as fixed asset because they are neither held for sale nor consumed in the production process.

The classification of core inventories should be based on their intended primary use because:

(a) A part of inventories of the same quantity, characteristics and use for an entity is always in the production facility, whether this part is commingled with other inventories or not. Core inventories need to be accounted for separately from ordinary inventories.

(b) The classification based on the intended primary use, rather than on their physical form, would provide more relevant information for the users of financial statements.

The primary use of core inventories is to be held for use in the production or supply of goods or services (meets the definition of a fixed asset), rather than to be sold or consumed in the production process or in the rendering of services (does not meet the definition of inventories).

The loss of core inventories over-time should be recognised as an expense over the useful life of a fixed asset, based on the following:

(a) economic benefits associated with core inventories are consumed over the entire useful life of the fixed asset.

(b) in the case of a systematic allocation, the costs would match with the associated revenues.

Both the above would meet the spirit of the Conceptual Framework on the basis of which Indian accounting standards are drafted.

Some are of the view that only core inventories that could not be substantially recovered from the production facility form an element of fixed asset cost. Otherwise, they may be carried as inventories. The author believes that assets’ recoverability should not change their classification. The classification of core inventories should not be based on their recoverability, because this guidance is not explicitly stated in Indian GAAP. Instead, the depreciation mechanism described in AS 6 addresses accounting in such cases; i.e., core inventories that can be recovered would be depreciated to the extent of their residual value. However, due to price increases over time in core inventories, the residual value would go up significantly, leading to low or no depreciation.

The historical cost measurement is a common approach for non-current assets. However, if an entity believes that the current cost of core inventories would provide more relevant financial information to the users, a revaluation model in AS-10 may also be applied.
Overall Conclusion
The accounting practice prevalent globally on this matter is mixed. However, the predominant view, globally, is that core inventories are fixed assets. The Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India, have opined that core inventories should be classified as Inventories under AS-2. However, the author believes that there are enough provisions within Indian GAAP, that lend core inventories to be either classified as fixed assets or inventories. This choice can be eliminated only through appropriate amendment of the scoping paragraphs in the standards rather than through an interpretation by the EAC.