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Month: August

(2011) 22 STR 517 (Kar.) — Commissioner of Service Tax, Bangalore v. Vee Aar Secure

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Penalty — Non-payment of service tax in respect of security services — Bona fide belief that head office was paying service tax — separate registration obtained and entire tax paid with interest before issue of SCN when pointed out by Department — No intention to evade — Case for waiver of penalty made out.

Facts:
The appeal was preferred by the Revenue against the order of the Appellate Tribunal cancelling the order passed by Revisional Authority levying penalty. The assessee, a security agency, was operating in India at more than one place. The assessee was under the impression that their head office at Delhi paid the service tax on a demand issued to the assessee. On realising that the head office had not paid the service tax, the assessee got themselves registered at Bangalore and paid the service tax and interest thereon for the delayed payment.

Held:
It was held that there was no intention on part of the assessee to avoid payment of service tax and no substantial question of law was involved in the appeal for consideration and accordingly a case of waiver being made out, the appeal was dismissed.

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Integration of Director’s Identification Number (DIN) issued under Companies Act, 1956 with Designated Partnership Identification Number (DPIN) issued under Limited Liability Partnership (LLP) Act, 2008.

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The Ministry vide General Circular No. 44/2011, dated 8th July 2011, has decided to avoid the duplication of issuing DIN and DPIN by integrating them with effect from 9th July 2011. Further, now no fresh DPIN will be issued and the DIN allotted shall be used as DPIN for all purposes under the Limited Liability Partnership Act, 2008 and vice versa. If a person has been allotted both DIN and DPIN, his DPIN will stand cancelled and his DIN will be used as DPIN.

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Doctrine of merger — If for any reason an appeal is dismissed on the grounds of limitation and not on merits, that order would not merge with the orders passed by the Appellate Authority.

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[Raja Mechanical Co. (P) Ltd. v. CCE, (2012) 345 ITR 356 (SC)]

The Supreme Court noted that the facts were not in dispute and could not be disputed that there was a delay in filing the prescribed forms before the assessing authority. Therefore, the assessing authority had rejected the claim of the assessee and accordingly, had directed him for payment of the excise duty credit availed of by the assessee. Aggrieved by that order, the assessee had belatedly filed an appeal before the proper Appellate Authority. Since there was delay in filing the appeal and since the same was not within the time that the Appellate Authority dismissed the same. It is that order which was questioned before the Tribunal. Before the Tribunal, the assessee had requested the Tribunal to first condone the delay and next to decide the appeal on the merits, i.e., to decide whether the adjudicating authority was justified in disallowing the benefit of the MODVAT credit that was availed of by the assessee. The Tribunal had not conceded to the second request Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings made by the assessee and only accepted the findings and conclusions reached by the Commissioner of Appeals, who had rejected the appeal.

The question that fell for the consideration and decision of the Supreme Court was whether the Tribunal was justified in not considering the case of the assessee on merits. The assessee’s stand before the Tribunal and before the Supreme Court was that the orders passed by the adjudicating authority would merge with the orders passed by the first Appellate Authority and the Tribunal ought to have considered the appeal filed by the assessee on merits also. According to the Supreme Court such a stand of the assessee could not be accepted in view of the plethora of decisions of the Supreme Court, wherein it has been categorically observed that if for any reason an appeal is dismissed on the ground of limitation and not on merits, that order would not merge with the orders passed by the first Appellate Authority. In that view of the matter, the Supreme Court was of the opinion that the High Court was justified in rejecting the request made by the assessee for directing the Revenue to state the case and also the question of law for its consideration and decision. According to the Supreme Court there was no merit in the appeal.

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C.A. rendering legal services

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It has been reported in a leading newspaper that the Supreme Court has recently held that both litigation and non-litigation matters are covered by the Advocates Act, 1961. Therefore, only persons qualified as Advocates can render services in the legal field. Accordingly, the Society of Indian Law Firms has intimated to ICAI that Chartered Accountants and Firms of Chartered Accountants should not advice their clients on legal matters which are exclusively reserved for Advocates under the Advocates Act, 1961. Let us hope the Council of ICAI issues a clarification on this issue and advises our members as to which type of legal work cannot be undertaken by our members (H.T. 9-7-2012).

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EAC Opinion Treatment and disclosure of interest on fixed deposits in the financial statements of a financial enterprise.

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Facts

The entire equity capital of a public limited company registered under the Companies Act is held by the Government of India. The company was set up as a special purpose vehicle to provide long-term infrastructure finance as per scheme for Financing Viable Infrastructure Projects (‘the financing scheme’).

The company provides infrastructure finance through direct lending, refinancing and take-out finance as per the financing scheme. The company has raised long-term debt by way of loans from Life Insurance Corporation of India, National Small Saving Fund (NSSF), bonds listed in India and foreign currency loans from bilateral and multilateral institutions. Borrowings of the company are backed by sovereign guarantee.

The resources raised by the company are utilised for providing infrastructure finance through direct lending, refinancing and take-out finance as per the financing scheme. Pending disbursement, the resources of the company are held in the form of bank deposits and investments, such as Central/ State Government (PSUs), Certificate of Deposits with scheduled banks, etc. as per investment policy approved by the board of directors of the company.

The company has stated that as the nature of its business is that of an NBFC, the company has been treating interest on bank deposits as income from operations in its books of account and, accordingly, discloses interest on bank deposits as income from operations in the financial statements as well as in the cash flow statements. The Comptroller and Auditor General of India (CAG), while conducting audit of accounts of the company for the year ended 31st March, 2010 and subsequently for the year ended 31st March, 2011 inter alia, however, commented that interest on fixed deposits with banks has been included under income from operational activities instead of disclosing the same as other income. This has resulted in the overstatement of income from operations and understatement of other income by Rs.56,516.94 lakh.

Query:

In view of the above, the company sought the opinion of the Expert Advisory Committee (EAC) as to whether it is appropriate for the company to treat interest on bank deposits as income from operations in its books of account and accordingly, to consider the disclosure interest on bank deposits as income from operations in the preparation of financial statements, including cash flow statement.

Opinion:

 As far as the disclosure of such interest income in the financial statements including cash flow statement is concerned, the Committee after considering the definition of the term ‘operating activities’ as provided in paragraphs 5, 12 and 30 of AS-3, is of the view that operating activities are the principal revenue producing activities of the enterprise. The main business of the company is to provide longterm infrastructure loans and financial assistance while optimally managing and utilising its funds. Thus, the company is in the business of earning income by managing its funds which also includes the management of surplus funds between the date of receipt of funds to the date when the funds are finally disbursed. Accordingly, the Committee is of the view that interest earned on investment of surplus funds of the enterprise arises from its principal revenue producing activities and therefore, it should be treated and classified as income from operating activities. Further, in the context of cash flow statement, the Committee notes that paragraph 30 of AS-3 specifically states that cash flows arising from interest and dividends received in case of financial enterprise should be classified as ‘cash flow from operating activity’. Therefore, according to EAC, the treatment given by the company in the books of account is appropriate.

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Some historical facts about ICAI

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(i) First Indian to become Member of ICAE W: Shri A. E. Cama was the first Indian to become a member of the Institute of Chartered Accountants of England and Wales in 1908.

(ii) Accountancy got statutory recognition in India in 1913: When the Indian Companies Act, 1882, was replaced by the Indian Companies Act, 1913, it was for the first time that statutory provision was made for audit of accounts of companies.

(iii) First Accountancy Board: The first Accountancy Board was appointed under the Auditors’ Certificate Rules, 1932, in 1932. Its members were appointed by the Governor General in Council. Later on, in 1939, elective element was brought into the constitution of the Board.

(iv) GDA and Unrestricted Certificate: Scheme for Government Diploma in Accountancy along with apprenticeship under an approved Accountant for 3 years was introduced in 1918. This Diploma was abolished in 1943. Unrestricted Auditors Certificates were granted under the Companies Act, 1913.

(v) C.A. Act, 1949: Chartered Accountants Bill, 1948, was introduced in Constituent Assembly and C.A. Act, 1949 was passed on 1-5-1949.

 The C.A. Act was brought into force on 1-7-1949. Late Shri G. P. Kapadia was elected as the First President and held this position for first three years. (vi) Women Power:

 (a) First lady to qualify as GDA in 1930 was Ms. Shirin K. Engineer. After completion of Articles she was enrolled as R.A. in 1933 and thereafter as CA in 1949.

(b) First lady who topped CA Final Examination in 1984 was Ms. Nandita Shah (Now Nandita Parekh).

(c) First lady elected to the Central Council of ICAI in 1995 was Ms. Priya Bhansali (D/o late President Ashok Kumbhat).

(d) Incidentally, no lady has occupied the position as President of ICAI.

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Filing fees on Form 23B.

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The Ministry vide Circular No. 14/2012, dated 21-6-
2012 had imposed fees on Form 23B (Information by auditor to Registrar)
w.e.f. 22-7-2012. The last date for filing the Form 23B without fee has
been extended for two weeks. Fee shall be charged on any eForm 23B
filed on or after 5th August, 2012.

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Section 40(b) and Interest to partners

The present section 40(b) of the Income-tax Act has
been introduced by the Finance Act, 1992 w.e.f. 1-4-1993 to coincide
with the introduction of the new scheme of taxation of the firm and the
partners. The section provides for the conditions, on compliance of
which the remuneration and the interest to partners, by the firm, shall
not be disallowed in the hands of the firm. In other words the claim of
the firm, for deduction of remuneration and interest to partners, shall
be allowed where it satisfies the conditions stipulated in section
40(b).

For allowance of an interest to the partner, it is
essential that the payment is authorised by and is in accordance with
the terms of the partnership deed and relates to a period falling after
the date of partnership deed and the amount does not exceed the amount
calculated at the rate of 12% simple interest per annum.

It is
usual that the interest is paid to a partner on the capital introduced
by him as increased by the deposits made by him and the share of profits
credited to his account and as reduced by the amounts withdrawn by him
and the share of losses debited to his account. At times, the account is
credited with the share of notional profits arising on revaluation or
is debited with the transfer to reserves created to meet certain
contingencies.

Section 40(b) is silent about the ‘base amount’,
with reference to which the interest of 12% is to be calculated. It also
does not specify the manner in which such base amount is to be
calculated. In the circumstances, issues regularly arise about the
determination of the base amount, with reference to which the interest
payable to a partner is to be ascertained so as to face no disallowance.
Unlike section 115JB, it does not provide for the manner of preparation
of the profit & loss account, nor does it lay down any guidelines
for ascertaining the book profit of the firm, the share of which is to
be credited to the partner’s account.

A controversy has arisen
about the need and necessity to provide depreciation by the firm in its
books of account, while ascertaining the amount of the profit or loss of
the year, to be shared amongst the partners and credited to their
respective accounts. Providing no depreciation or a lower depreciation
results in higher profits being credited to partners’ accounts which in
turn helps in payment of higher interest to them. Is this practice of
not providing depreciation in the books in accordance with the
provisions of the Act, for allowance of interest in the hands of the
firm, is a question that has been addressed by the different benches of
the Tribunal to arrive at the different and conflicting views.

The relevant part of section 40(b), pertaining to interest to partners, reads as under:

“Amounts not deductible.

40.
Notwithstanding anything to the contrary in sections 30 to 38, the
following amounts shall not be deducted in computing the income
chargeable under the head ‘Profits and gains of business or profession’,
—

(b) in the case of any firm assessable as such:

(i) ……………..

(ii)
any payment ………….., or of interest to any partner, which, in
either case, is not authorised by, or is not in accordance with, the
terms of the partnership deed; or

(iii) any payment
……………. , or of interest to any partner, which, in either case,
is authorised by, and is in accordance with, the terms of the
partnership deed, but which relates to any period (falling prior to the
date of such partnership deed) for which such payment was not authorised
by, or is not in accordance with, any earlier partnership deed, so,
however, that the period of authorisation for such payment by any
earlier partnership deed does not cover any period prior to the date of
such earlier partnership deed; or

(iv) any payment of interest
to any partner which is authorised by, and is in accordance with, the
terms of the partnership deed and relates to any period falling after
the date of such partnership deed insofar as such amount exceeds the
amount calculated at the rate of twelve per cent simple interest per
annum; or………………”

The Visakhapatnam Bench of the
Tribunal had an occasion to deal with the issue, wherein the Tribunal
held that the Assessing Officer (‘AO’) was not entitled to recompute the
balance of capital account of the partners, so determined by the
assessee firm. In deciding the said issue, the Bench did not follow the
findings to the contrary of another Bench of the Visakhapatnam Tribunal
on the subject.

Arthi Nursing Home’s case

The
issue under consideration was examined by the Visakhapatnam Tribunal in
the case of Arthi Nursing Home v. ITO, 119 TTJ 415 (Visakha).

 In
that case, Arthi Nursing Home, a partnership firm, had claimed
deduction of interest paid to partners on their respective capital
accounts. Consequent to the findings in the course of the survey
operations conducted on the firm and during the course of assessment
proceedings, it was noticed by the AO that the firm was not providing
for depreciation in the books of account, but was claiming depreciation
in computation of taxable income. The AO was of the view that the firm
by following the practice of not providing the depreciation was
inflating the capital accounts of the partners on which higher interest
was paid. He observed that the said practice was for the purposes of
claiming higher deduction, towards payment of interest, in the hands of
the firm. He was of the view that the firm was required to draw its
profit & loss account by debiting the depreciation. The AO
recomputed the balances in capital accounts of the partners after
charging depreciation. Consequently, the claim for deduction of interest
to partners was disallowed u/s.40(b) as the balance in the capital
accounts of the partners had turned negative after apportioning the
recomputed profits and losses.

 On appeal before the CIT(A), the
action of the AO in disallowing the deduction of interest to partners
u/s.40(b) was confirmed for the following reasons:

  • The
    assessee claimed benefit of depreciation in computing the total income,
    but did not provide the same in computing the profit of the firm to be
    shared amongst the partners. The said practice led to showing higher
    amount of profits in the books of account which inflated the capital
    balances of the partners and the consequent interest to partners;
  • Depreciation,
    like any other head of expenditure, was required to be debited to the
    profit and loss account to arrive at the real profits of the business;
  •  Debiting of depreciation was a cardinal principle of mercantile system of accounting; and
  •  The
    figures of accretion to the capital balances, were exaggerated and
    fictitious, not in accordance with any principles of accountancy.

The
assessee firm’s contention that the AO could not have rewritten books
of account of the firm based on the decisions in the cases of Ambica
Chemical Products v. Dy. CIT, (ITA No. 612/Vizag./1999, dated 31st May,
2005 and 9/Vizag./1999) dated 9th January, 2009, respectively; and ACIT
v. Sant Shoe Store, 88 ITD 524, (Chd.) (SMC) was negatived by the CIT(A)
by holding that the AO had only undertaken an exercise of discovery of
correctness of accounts which was not an exercise of rewriting the books
of account.

Aggrieved with the order of the CIT(A), on appeal
before the Tribunal, the following additional arguments were made by the
firm:

  • Section 40(b) did not provide for the manner of
    computing the profit of the firm for the year and did not have any
    relevance to the claims made in computing the total income; and
  •   
    The firm had been consistently over the years not charging depreciation
    in the books of account, but had claimed depreciation in computing the
    taxable income, which had been accepted by the Revenue authorities.

Likewise, the following additional contentions were raised by the Revenue:

  •    
    Explanation 5 to section 32 of the Act and the Accounting Standards
    prescribed by ICAI required charging of depreciation in the books of
    account; and

  •     The Apex Court in the case of CIT
    v. British Paints India Ltd., (188 ITR 44) held that the books disclosed
    the true state of accounts and the correct income.

The Tribunal after considering the rival submissions upheld the contention of the Revenue authorities for the following reasons:

  •    
    In light of the Apex Court decision in the case of British Paints Ltd.
    (supra), the AO was duty bound to recompute the profit/accretion to the
    capital account of the partners after charging depreciation to the
    profit and loss account;

  •     Explanation 5 to
    section 32 and the Accounting Standards prescribed by the ICAI required
    mandatory charging of depreciation to determine profit and loss of the
    firm for the year; and

  •     The profit and loss
    account prepared without charging depreciation did not reflect the true
    and correct state of affairs of the partnership firm.

The
Tribunal concluded that the AO was justified in correcting the aforesaid
error, thereby disallowing the interest claimed by the assessee firm
u/s.40(b).

Swaraj Enterprises case

The issue under consideration subsequently came up before the Division Bench of the Visakhapatnam

Tribunal in the case of Swaraj Enterprises v. ITO, 132 ITD 488.

In
this case, the assessee firm, like in the case of Arthi Nursing Home
(supra), did not charge depre-ciation in the books of account, but
claimed depre-ciation in computing the total income. As a result the
partners’ accounts were credited with higher share of profits on which
interest was paid to the partners. The AO, by relying on the several
decisions of the High Courts, held that the depreciation was a charge on
profits of the firm and the same should be provided for in computing
the profit that was distributed amongst the partners. He recomputed the
capital account balances of the partners and interest thereof.

On
appeal the CIT(A) relying on the decision in the case of Arthi Nursing
Home (supra) upheld the action of the AO of recomputing the interest to
partners for the purposes of section 40(b).

Aggrieved with the order of the CIT(A), the assessee firm filed an appeal before the Tribunal and contended that:

  •    
    There was no provision under the Act that allowed an AO to rework the
    capital balances of the partners and to recompute the interest to
    partners u/s.40(b);

  •     There was no statutory compulsion for partnership firms to provide for depreciation under the Indian Partnership Act, 1932;

  •    
    The determination of profit for the purposes of the books of account
    and the computation of total income for income tax were two different
    exercises and hence the allowance or disallowance made in computing the
    total income under the Act did not in any way affected the balances in
    the capital accounts of the partners disclosed in the books of account;
    and

  •     Without prejudice, the firm in any case had
    the discretion to select the method of charging depreciation and also
    the rates at which such depreciation was charged, which discretion was
    not vested in the AO.

The Revenue contended that the
depreciation was a charge on the profits of the year and it was a must
for the firm to provide for depreciation to arrive at the true profits
of the firm; that the AO following the British Paints’ case was duty
bound to rework the profit; that action of the firm was not in
accordance with the Accounting Standards and principles and that the
Explanation 5 to section 32 required that the depreciation was charged
to the accounts.

After considering the rival submissions and the decision in the case of Arthi Nursing Home (supra), the Tribunal held as under:

  •    
    The findings of the Apex Court in the case of British Paints Ltd.
    (supra) for reworking the profits were in context of determination of
    taxable income and could not be employed for recomputing the capital
    account of the partners;

  •     The total taxable
    income of the firm remained the same, since the depreciation was already
    claimed in computing the taxable income;

  •    
    Under, the Partnership Act, 1932, there was no statutory compulsion to
    provide for depreciation in the books of account or to follow the
    Accounting Standards prescribed by ICAI;

  •     The
    Companies Act that required an enterprise to follow the mercantile
    method of accounting and employ the Accounting Standards did not apply
    to a partnership firm;

  •     Explanation 5 to section
    32 provided for compulsory depreciation for the purpose of computation
    of taxable income under the Act and nowhere it was provided that it was
    to be applied even in preparing the books of account;

  •    
    U/s.40(b), the AO was allowed only to verify whether the payment of
    interest to any partner was authorised by and was in accordance with the
    terms of partnership deed and whether the period of interest so paid
    fell after the date of partnership deed. The AO could not have reworked
    or redetermined the balance in the capital accounts of the partners; and

  •    
    Even if the depreciation was required to be charged in the books of
    account, the choice to determine the method and the rate of depreciation
    would be at the discretion of the assessee firm and not of the AO.

Based
on the aforesaid findings, the Tribunal ignored its own findings in the
case of Arthi Nursing Home (supra) and upheld the claim of deduction of
inter-est to partners.

Observations

Section 40(b)
is silent as to the amount on which the interest to partners is to be
calculated. As noted, the ‘base amount’ remains to be defined by the
provision. In the context of interest, it has no reference to the books
of account, nor to the book profit unlike the provisions of section
115JB or even those within the section that provide for calculating the
quantum of remuneration payable to the partners. It may not be incorrect
to state that the claim of interest, in the context, is independent of
the books of account.

Unlike section 115JB, this section does not
provide for the method of accounting to be followed, the method of
depreciation to be employed and the rates at which the assets are
required to be de-preciated.

Section 40(b) provides that no
disallowance shall take place where the interest to partners is;
authorised by the partnership deed; in accordance therewith; for the
period falling after the date of partnership deed and the rate of
interest does not exceed 12%. In the circumstances, what is of paramount
importance is that the interest to partners should be authorised by the
deed and if it is so what remains to be seen is that such interest is
paid in the manner provided by the said deed which of course should be
in conformity with the other stipulations stated above. Nothing, beyond
these simple rules, is required to be read in to the provision.

The
computation of total income, under the Act, is largely independent of
the books of account. A debit or credit does not decide the taxability
or allowance of an income or an expenditure. Unless otherwise expressly
stated, the books of account do not determine the taxability or
otherwise under the Act. The allowance or a deduction and the taxability
of an income is governed by the provisions of the Income-tax Act and
not the books of account.

Explanation 5 to section 32 has a very
limited relevance and its application is mainly restricted to the
provisions of section 32(1) and section 43(6) which provide for
determination of the written down value of an asset or a block of
assets. The said provision, at the most, has the effect of altering the
total income that is computed under the Act and does not travel beyond,
to the computation of the book profit, not even for the purposes of
section 115JB.

The Partnership Act, 1932 does not prescribe the
manner in which the books of account are to be maintained, nor do they
provide for the method of accounting to be followed by the firm for
determining its profit or loss. They also do not prescribe for
compulsory depreciation and the rate thereof.

The Companies Act
has no application to the partnership firms and the provisions therein
for mercantile system of accounting, true and fair profit and the
mandatory application of the Accounting Standards do not apply to the
partnership firms.

The Chandigarh Bench of the Tribunal in Sant
Shoe Store’s case was concerned with the allowance of interest on the
capital account of the partners which included credits on revaluation of
the assets, not involving any inflow of funds. The Tribunal even in
such a case approved of the claim of interest made by the firm. Again,
the Tribunal in Ambica Chemical Products approved of the claim of
interest in circumstances where the firm had not provided for
depreciation in the books of account; the claim was allowed to the firm
in two different appeals vide orders passed after a gap of four years
and one of it was passed after the decision in the case of Aarthi
Nursing Home was rendered. A useful reference may be made to the
decision of the Pune Bench in the case of Deval Utensils Factory, 98 TTJ
501 wherein the action of the AO in reworking the capital account
balance, on the basis of which interest was paid to partner was
disapproved.

The rewriting of the books by either side should
be discouraged. If permitted, it may invite the tax-payers to indulge
in creative accounting, for example; by adding back the provision for
taxation where debited to the profit & loss account so as to enhance
the amount of share of profit that is credited to the capital accounts
by holding out that the tax is not an allowable deduction in computing
the total income. The example amplifies the need to stick to the books
of account and the need to avoid importing the computation provisions in
calculation of interest.

The interest to the partners, where
allowed in the hands of the firm, is taxable in the hands of the
partners as business income by virtue of section 28(v). The one that is
disallowed in the hands of the firm, is not taxable in the hands of the
partners by virtue of the proviso to the said section 28(v) of the Act.
The disallowance largely does not result in any loss or gain of revenue
for either side.

This essentially leaves us with the conclusion
that no disallowance shall take place under the provisions of section
40(b) in cases where the interest to partners is authorised by the
partnership deed and the same is calculated as per the terms of the
partnership deed. The case of the firm gets forti-fied where the deed
does not make it mandatory for the firm to charge depreciation in
computing the profit for the year.

Why income from sale of computer soft ware not taxable as royalty?

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While best efforts were made from world over to persuade the then Finance Minister of India to have second thoughts on the retrospective proposals introduced in the Finance Bill, 2012, nothing seems to have appealed. The retrospective amendments as were proposed in the Finance Bill, 2012 have received the President’s assent. In this backdrop, an effort is made to consider whether the Income-tax Department under the so retrospectively amended section 9(1)(vi) of the Act would be able to tax, income from sale of computer software as royalty under the Income-tax Act, 1961 (‘the Act’) and/or Double Taxation Avoidance Agreements (‘DTAAs’) entered in by India with other countries?

From the following three Circulars issued by the Central Board of Direct Taxes at different points in time, one understands that the intention of the Legislature was very clear to tax any income from ‘right for use’ or ‘right to use’ any copyright (viz., computer program) as royalty under the Act:

  • Circular No. 152, dated 27th November 1974;
  • Circular No. 588, dated 2nd January 1991; and
  • Circular No. 621, dated 19th December 1991.

However, the controversy whether income from sale of computer software is taxable as royalty under the Act or not, developed only from the year 2005, with the judgment of the Special Bench of Delhi Tribunal in the case of Motorola Inc. v. DCIT, (95 ITD 269). The decision pertained to A.Ys. 1997-98 and 1998-99, though the first Circular justifying the taxability of income as royalty under the Act was issued in 1974.

Such an unusual scenario could be the result of imperfect drafting of section 9(1)(vi) to support the taxability of sale of computer software as royalty. This article examines whether the retrospective introduction of Explanation 4 to section 9(1)(vi), achieves the object of the Legislature to tax the income from sale of computer software as royalty under the Act. The said retrospective amendment in section 9(1)(vi) reads as under:

“Explanation 4 — For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of licence) irrespective of the medium through which such right is transferred.”

  • Section 9(1)(vi) provides that any income payable by way of royalty in respect of any right, property or information is deemed to accrue or arise in India. So, to determine the taxability of income u/s.9(1)(vi), an income needs to satisfy the following twin conditions, apart from the principle of ‘source rule of taxation’ in section 9(1)(vi): The income should be covered under the definition of ‘royalty’ i.e., under Explanation 2 to section 9(1) (vi); and
  •  l It has to be in respect of any right, property or information.

The expression ‘any right, property or information’ is explained in the definition of ‘royalty’ viz., intellectual properties, equipments, know-how, experience or skills, etc. In other words, the definition of ‘royalty’ gives colour to or limits the scope of, the expression, which is otherwise very wide in scope.

Explanation 4 retrospectively includes, ‘right for use or right to use computer software’ under the expression ‘any right, property or information’. The text of Explanation 4, however, does not include the said rights of a computer software under the definition of ‘royalty’, which is specifically required as discussed, for applicability of section 9(1)(vi). Even though, the Memorandum explaining the amendments relating to Direct Taxes in the Finance Bill, 2012 mentions that ‘transfer of all or any right in respect of any right, property or information’ used in Explanation 4 defines the rights, property or information referred to in Explanation 2 to section 9(1)(vi), the text of Explanation 4 does not refer to Explanation 2. Therefore, one may argue that until the language of Explanation 4 is amended to include the aforesaid rights of computer software under Explanation 2, section 9(1)(vi) may not apply to the said rights of computer software.

 The said argument also draws support from the Karnataka High Court judgment in the case of Jindal Thermal Power Company Ltd. v. DCIT, (321 ITR 31). The High Court while considering the retrospective amendment in context of Explanation to section 9(2) r.w.s. 9(1)(vii) held that since the purport of Explanation 2 is plain in its meaning, it is unnecessary and impermissible to refer to the Memorandum Explaining the provisions. Apart from the above or assuming that the Legislature amends Explanation 4 on the lines as suggested above or the Courts hold otherwise, the question that arises is, what is the meaning of the expression ‘right for use’ or ‘right to use’ a computer software? The provisions of the Act do not define ‘right for use’ or ‘right to use’.

Broadly, there are two schools of thought emerging for interpretation of the aforesaid rights of computer software. One school of thought suggests that the said expression should be construed in its general sense. Whereas, the other school of thought suggests the said expression should be construed in the light of the meaning as given in 2010 OECD Commentary on Model Tax Convention on Income and on Capital.

First school of thought

The Memorandum justifies the retrospective insertion, so as to restate the intention of the Legislature to tax the income from use or right to use computer software as royalty under the Act, which was interpreted otherwise by some judicial authorities. The judicial authorities1 in India have given conflicting findings on different questions relating to taxability of income from sale of computer software as royalty. Out of these questions, the Legislature has by Finance Act, 2012 sought to address only the question whether the expression ‘transfer of all or any rights’ includes ‘right for use’ or ‘right to use’?

The Memorandum does not refer to the conflicting judgements. The findings of these conflicting judgements were summarised in a Table in the feature Direct Tax Controversy in the BCAS Journal for the month of December 2011, (page no. 54).

In such a scenario, it would be relevant to understand the meaning of the expression ‘right for use’ or ‘right to use’ a computer software in the light of the findings of Heydon’s case (1584) (3 Co Rep 7a, 7b), better known as Mischief Rule. The Heydon’s case requires that to construe a provision of a statute, it would be just and proper to see what was the position before an amendment and find out what was ‘the mischief’ sought to be remedied and then discover the true rationale for such remedy. The aforesaid rule which is more than four hundred years old requires the following four questions to be answered in order to construe the provisions of section 9(1)(vi):

1. What was the common law before making the amendment in section 9(1)(vi)?

Judicial authorities were divided as regard the taxability of the subject. Some of the findings of the said decisions are:

— Passing on the right to use and facilitating the use of a product for which the owner has a copyright is not the same thing as transferring or assigning rights in relation to copyright and therefore, consideration to authorise the end-user to have an access to and make use of the licensed computer software, does not amount to royalty under the Act.

— On the other hand, some judicial authorities, held that payments made by end-users or distributors for granting of licence to use copyright i.e., computer program in respect of sale of computer software is royalty under the Act. Right of user of computer software involves right to use the computer program. When the right for user is given, right to use copyright is also given and therefore, consideration amounts to royalty under the Act.

2.    What was the mischief and defect for which the Act did not provide?

The mischief and the defect for which the Act did not provide and which seems to be the intent of the Legislature was to tax ‘right for use’ or ‘right to use’ computer program [involved in a sale of/ licence to use computer software] as royalty under the Act.

3.    What remedy the Legislature/Parliament has resolved and appointed to cure the defect?

The remedy effected by the Legislature to cure the aforesaid defect is retrospective insertion of Explanation 4.

4.    What is the true reason for the remedy?

The true reason for the remedy seems that the Legislature wanted to subject ‘right for use’ or ‘right to use’ computer program involved in sale of computer software as royalty under the Act. The Legislature instead of using the expression to achieve its remedy to tax “right for use or right to use computer program embedded in a computer software” has chosen to use the expression “right for use or right to use computer software”, in a way suggesting that words ‘computer software’ and ‘computer program’ are used interchangeably.

In other words, the true expression ‘right for use or right to use a computer software’ is referred to as having a general meaning of act of using the property i.e., computer program embedded in a computer software and right to transfer such usage, respectively. Therefore, if one agrees with the conclusion of first school of thought, then purchase of any computer software viz., either shrinkwrap, bundled, canned or customised software, would be taxable as ‘royalty’ under the Act.

Second school of thought

The second school of thought suggests that the impugned expression should be construed in the light of the meaning as given in 2010 OECD Commentary on Model Tax Convention on Income and on Capital. The Para 2 of Article 12 of 2010 OECD Model defines ‘royalty’ as under:

The term ‘royalties’ as used in this Article means payments of any kind received as a consideration for the use of, or the right to use any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.

The expressions ‘right for use’ or ‘right to use’ as referred in Explanation 4 to section 9(1)(vi) is also found in Article 12(2). Paras 12 to 17 of the OECD Model Commentary on Article 12 cover the various facets of taxability of computer software as royalty. Para 13.1 of the Commentary explains the meaning of the expression ‘right for use’ or ‘right to use’ any copyright in the context of a computer software. This is similar to rights referred to in section 14 of the Copyright Act, 1957 (‘the Copyright Act’) and India has not raised any reservations or disagreements to such construction. The rights referred in section 14 of the Copyright Act for computer program are reproduced below:

  •     to reproduce the work in any material form including the storing of it in any medium by electronic means;

  •    to issue copies of the work to the public not being copies already in circulation;

  •     to perform the work in public, or communicate it to the public;

  •     to make any cinematograph film or sound recording in respect of the work;

  •     to make any translation of the work;

  •     to make any adaptation of the work;

  •     to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in any of the points mentioned above; and

  •     to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer program.

So, it is the transfer or granting of licence of rights in section 14 of the Copyright Act which refers to use or right to use the copyright in context of computer software.

Further, there is a case to presume that the expression ‘right for use’ and ‘right to use’ in the context of taxability of computer software as royalty, has acquired a particular meaning, when India has accepted the meaning of that expression as explained in the 2010 OECD Model Commentary. Therefore, it is worth arguing that when India has accepted the meaning of the expression in a particular sense, then the use of the said expression subsequently should also be given similar meaning. The Courts also have in a catena of decisions2 held that internationally accepted meaning and interpretation placed on identical or similar terms employed in various DTAAs should be followed when construing similar terms occurring in the Act. However, the said reference/is subject to certain limitations, and for better understanding of the subject, one may refer to the Article ‘Legitimacy of References to OECD Commentary for interpretation of provisions under the Act and DTAAs’ published in BCAJ, February 2012, (page no. 9).

Therefore, if one agrees with the conclusion of the second school of thought, then it is only the income from the transfer or granting of licence of rights in section 14 of the Copyright Act which means use or right to use copyright in the context of computer soft-ware and accordingly will be taxable as royalty under the Act. In other words, purchase of any computer software viz., either shrinkwrap, bundled, canned or customised software would still continue to remain non-taxable as ‘royalty’ under the Act.

Analysis

Based on the above discussion, if the text of the Explanation 4 to section 9(1)(vi) is brought to test then one feels that the Legislature may still fail to pass the muster to tax the income from sale of computer software as royalty under the Act for want of the following broad reasons:

In Explanation 4, the Legislature has used the words ‘all or any’ which are prefixed to expression ‘right for use’ or ‘rights to use’ computer software. The expression ‘transfer of all or any right for use or right to use a computer software (including granting of licence)’ gives an impression of there being many ‘rights for use’ or ‘rights to use’ a computer software, which can either be transferred or licensed. However, as concluded under the first school of thought, ‘right for use’ or ‘right to use’ computer software in its general sense refers to only a simple case of ‘usage’ of property. One fails to determine the various rights ‘for use’ or rights ‘to use’ involved in context of a computer software and is forced to doubt whether the Explanation 4 supports the construction of the expression as sought under the first school of thought. On the contrary, considering the multiple rights referred in section 14 of the Copyright Act, one may agree that the expression ‘all or any’ could be construed as referring to those multiple rights u/s.14 of the Copyright Act, thereby supporting the meaning as drawn under the second school of thought.

Further, Explanation 3 to section 9(1)(vi) of the Act defines ‘computer software’ to mean computer program recorded on any medium. In a sense, suggesting that even though the Copyright Act distinguishes between ‘original copyrighted computer program’ and ‘copy of said computer program embedded in computer software’, the Income-tax Act, 1961 does not recognise such a distinction for the purpose of taxation and the words ‘computer software’ and ‘computer program’ may be used interchangeably. The same conclusion is also drawn under question no. 4 – What is the true reason for remedy, while discussing the findings of Heydon’s case in the context of computer software, under the first school of thought? So, the expression ‘right for use or right to use a computer software’ may be read as ‘right for use or right to use a computer program’ in respect of computer software.

Conclusion

Considering the above, one may conclude that Explanation 4 to section 9(1)(vi) of the Act, in its present form, may fail to achieve its object for want of the following broad reasons:

  •     Expressions viz., ‘transfer of all or any rights in respect of any right, property or information’, ‘all or any’, ‘rights for use’ or ‘right to use’ are neither defined nor properly referenced in section 9(1)(vi) of the Act;

  •     Expression ‘right for use’ or ‘right to use’ referred to in Explanation 4 to section 9(1)(vi) may suggest a meaning different than meaning in general sense of usage of property and transfer thereof; and

  •     Explanation 4 to section 9(1)(vi) supports the construction of the expressions ‘right for use’ or ‘right to use’ to cover the rights referred to in section 14 of the Copyright Act.

Apart from the above, it would be possible for non-resident taxpayers to take recourse to the beneficial provisions of DTAAs entered in by India with other countries. The Article on taxability of ‘royalty income’ generally defines “royalty as payment of any kind from ‘use or right to use’ any copyright”. It thus restricts the scope of royalty income and one may rely on the 2010 OECD Model Commentary and India’s position thereof for non-taxability of computer software as royalty.

Further, the Central Government has recently issued a Notification giving relief from multiple level of tax deduction at source (‘TDS’) u/s.194J in the context of computer software. The said Notification No. 21 of 2012, dated 13rd June 2012 is issued u/s.197A(1F) effective from 1st July 2012 and provides as under:

  •     The transferee has been defined to be a person who acquires the software. He may be a resident or a non-resident of India and the transferor is defined to be a person from whom the software is acquired, but he has to be a resident of India (as a precursor for applicability of section 194J of the Act).

  •     Acquisition of the software has to be in the course of transfer of software (referred to as ‘subsequent transfers’) and tax should have been deducted at source either u/s.194J or section 195 of the Act, as the case may be, in any of the previous transfers;

  •     The software so acquired under subsequent transfer should not have been modified; and

  •     The transferee should obtain a declaration from the transferor that the tax has been deducted in any of the previous transfers along with PAN of the transferor.

This Notification has a narrow scope and has several limitations, which are as under:

  •     The exemption from multiple level of deduction of tax has only been provided to payments subject to tax deduction as royalty u/s.194J of the Act and not u/s.195 of the Act; and

  •     The acquisition of software under subsequent transfers should be without modification. One generally finds that in a direct arrangement between a copyright owner and end-user, the standard End-User Licence Agreement (‘EULA’) specifically prevents the end-user for resale of acquired software and therefore, the question of multiple level of deduction of tax will not arise in such a scenario. However, in case of copyright owner-distributor- end -user chain, it may be possible to undertake the benefit of the said Notification.

A fact pattern which is generally involved in the case of copyright owner-distributor-end user chain of transfer of software and its TDS implications thereof are explained in the Diagram for ease of understanding and ready reference:

Generally, the copyright owner of a computer program assigns/licenses rights to commercially exploit the copyright to the distributor. The rights to commercially exploit copyright provide for making multiple copies of software along with rights to sell and/or rent computer software qua a geographical location i.e., in the given example could be India. Pursuant to aforesaid rights, the end-user in India acquires the software copy from the distributor, subject to terms and conditions as provided in a EULA.

(Note: It is assumed that under the Scenario 1 and 2, the income from sale of computer software is taxable as ‘royalty’ under the Act and respective DTAAs between India and other countries. The analysis has been limited with respect to TDS implications, which arise in the light of aforesaid notification.)

The important question which is relevant to determine the TDS implications in context of non-residents transferors that is discussed here is ‘Can a non-resident transferor take recourse to Article on ‘Non-discrimination’ under the DTAAs as regard the discriminatory treatment sought by the Notification by limiting the benefit to only resident transferors u/s.194J of the Act?’

Section 40a(ia) r.w.s. 194J and Notification No. 21 of 2012 provides for deduction of royalty expenses for payment to resident transferor for acquisition of software without any deduction of tax. On the other hand, for similar payment to non-resident transferor, if the transferee has not deducted tax u/s.195, then the said expense will not be allowed as deduction u/s.40a(i). Such discrimination is addressed in an indirect manner by Article 24(3) of the respective DTAAs entered in between India and other countries. Article 24(3), generally reads as under:

“Except where the provisions of para 1 of Article 19, para 7 of Article 11, or para 8 of Article 12 apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State, shall for the purposes of determining the taxable profits of the first mentioned person, be deductible under the same conditions as if they had been paid to a resident of the first mentioned State.”

Article 24(3) deals with the treatment of the enterprises of Contracting State under the tax laws of that State. The said Article provides that interest, royalties and other disbursements paid to a resident of the other contracting State should be deductible to the same extent as would be deductible if paid to a resident of the same State. The said para of the Article is designed to end a particular form of discrimination resulting from a fact that in certain countries the deduction of interest, royalties and other disbursements is allowed without restriction when the recipient is a resident, but is restricted or prohibited when the recipient is non-resident4.

A similar discriminatory treatment is sought by Notification No. 21 of 2012. Therefore, by taking recourse to Article 24(3) of DTAAs read with Notification No. 21 of 2012, similar exemption from multiple level of TDS may be claimed on payment to non-resident transferors.

Given the aforesaid situation, one is reminded of the proverb, ‘Once burnt is twice shy.’ But the hard lesson of consequences from imperfect drafting do not seem to have learnt and therefore, the Income-tax Department may still fail to tax income from sale of computer software as ‘royalty’ under the Act and may also fail to simultaneously impose onerous and discriminatory treatment of multiple level of TDS u/s.195 of the Act.

Inspire a generation

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When this issue of the journal reaches you, the Olympic Games would have begun in London. Sportsmen, athletes from all over the world would be putting their best foot forward, competing fiercely but fairly to win laurels wearing national pride on their sleeve.

The Olympics held every four years is a mega event. It is a celebration of various qualities of human beings, grit, determination, endurance and many others. When an athlete climbs onto the victory stand a medal adorning his chest swelled with pride, and the national anthem is played, a dream is fulfilled.

While achieving success in sporting events is undoubtedly important, the games mean much more. It is a time that athletes representing different countries mingle with each other and respect for others is built. One of our fellow countrymen who is facing criminal action for alleged corruption in sport wanted to remain present at the games. He had been “invited”, by the organisers. For once, our judicial system acted swiftly and he was prevented from representing our country at the game’s opening ceremony. The person may be disappointed but the Institution he once headed, maintained its track record, with our sportsmen complaining about their substandard equipment and shabby attire just before the games.

Each of the Olympic Games has a motto and this time it is” inspire a generation”. The motto set me thinking. I attempted to list down living individuals, particularly Indians who would fit into the class that would inspire an entire generation, and the difficulty in finding such people was a cause for concern.

In every area – culture, art, sports, professions, science, social service and of course politics if one is to identify titans one has to travel back for at least three to four decades if not more.

Every Maharashtra leader worth his salt praises Shivaji an icon, but one cannot forget that the Maratha warrior breathed his last more than 300 years ago. What has gone wrong? The answer lies within us. Leaders who inspire, those who will be lighthouses for a generation do not fall from heaven. They arise from amongst us. There are a number of individuals whose deeds should inspire their kith and kin, friends and associates may be not a generation. I still recall those images of a Bollywood celebrity being splashed across the front page pointing a finger at a security guard who stood his ground and blew the whistle. In the glare of the media that person and his adherence to the call of duty was quickly forgotten. From that humble security guard to the jawan who stands in biting icy weather at the peak of the Himalayas, there are many such inspiring individuals.

We need to appreciate those who show intrinsic human qualities like honesty, determination and courage albeit in a small measure. For too long have we permitted society to use materialistic parameters to judge the success of a person. If you look at the news which is displayed among all forms of media be it print or electronic, there is great adulation about those who achieve economic success. To borrow a phrase from my last editorial, most of us are concerned at how much wealth a person has earned but we do not bother to question how.

It is true, that it is not easy to find persons whom we can all look up to. But let us look around amongst us and we will find a number of such examples. Let us give them the recognition, respect and the social status they deserve. Once that is done their breed will grow. Man is a social animal. If society starts rewarding those who show some courage in upholding human values however small the deed may be the numbers will swell. Great leaders swim against the tide. But if such leaders are not in sight, let us build small dams so that the tide can be stemmed, the current diverted.

It is because we have drifted from the emphasis on basic human values and embraced materialistic goals that we find a dearth of role models. To conclude, there is no point in sitting back and lamenting that there are no leaders who can inspire. We may not be able to find shining stars but will definitely be able to locate small lights which will show us the path. A candle cannot dispel darkness but it is enough to show the next step. If we sit back waiting for someone to inspire us we will get nowhere. Yes the goal can be quickly reached if we run behind torch bearer, but if there is none, even a small step at a time will also lead us to the destination. When your house is on fire, it is better to use the stairs rather than the elevator. I am sure those working in Mumbai’s Mantralaya will agree. Let us inspire those around us and if we all do so, the future generation will definitely be inspired!

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ANXIETY

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‘Anxiety’ itself is neither helpful not hurtful. It is our response to anxiety that is helpful or hurtful. – Winston Churchill
Anxiety is normal and is part of our existence. The base of ‘anxiety’ is insecurity and possessiveness – hence, fear of loss is the cause of anxiety. ‘Anxiety’ and its twin sister ‘worry’ are killers. It is rightly said that worry over the past, anxiety over the future and frenzy in the present kill energy – energy which is essential for action. ‘Anxiety’ impacts our performance. According to Thomas J. Delong, ‘anxiety is possibly the single largest inhibitor of growth’. The normal response to ‘anxiety’ is flight or fight. However, I believe, anxiety can be a powerful stimulant arousing the senses to function at their sharpest.

We are normally anxious about our family, economic activity, social and professional status, living up to expectations, ours and others, and lastly we are also anxious about our health – though health should take priority over other concerns, because no action can happen without being healthy, both in body and mind. Let us consider a few examples of ‘anxiety’:

  • a doctor is anxious before a major surgery.
  •  a lawyer is anxious before a major case.
  •  an actor is anxious about forgetting his/her lines or success of his or her performance.
  •  a student is anxious about results.
  •  a lover is anxious about relationship.
  •  a sick person is worried about getting well.
  •  a housewife is anxious about her family.
  •  a business person is worried about ‘topline’ and ‘bottomline’.
  •  a chartered accountant is worried about his client.

Unexpected events and contingencies also create and cause anxiety. Hence, I reiterate anxiety is normal and is part and parcel of our existence. All these anxieties are genuine and the answer to anxiety is one and only one and that is possession of a cool mind. With a cool mind and with proper preparation we can face ‘anxiety’. If we are adequately prepared, all anxiety giving issues would look small and there is a good old saying: ‘The art of living is: ‘don’t fret over small things’. The fear of failure is the biggest cause of ‘anxiety’. The response to ‘anxiety’ should also be acceptance of failure, because failure is nothing but a stepping stone to success.

Personally, in recent times I experienced a traumatic experience – I was anxious – about the outcome – anxious to the extent of losing sleep – what brought me out was faith in my god, my guru, my family, my friends and faith in myself and above all proper preparation. I am grateful to Him for both the ‘anxiety’ and the ‘faith’. We forget, anxiety is all about future which robs us of the pleasures of the present.

We have to learn to befriend ‘anxiety’ and use it as a stepping stone and never to yield to ‘anxiety’. I repeat, use ‘anxiety’ to improve ourselves, our environment and our life. Use this emotion as a tool of success and success will be ours.

The answer to ‘anxiety’ is:

 Faith Faith in the concept that from bad emerges good, Faith in the fact that every problem has a solution, Faith that with help and guidance from Him one can overcome every obstacle, Faith in oneself that one will win,

Above all we must learn to bond with people instead of possessing them. If we do this there will be no ‘anxiety of loss’.
Anxiety to achieve our objective actually dilutes our efforts. So stop being anxious. Success in life, I repeat, can be achieved only through clarity, courage and commitment.

 I would conclude by quoting George Bernard Shaw:

‘In this world, there is always danger for those who are anxious (afraid) of it’.

So to have a happy successful life let us hang our anxieties – fears – on the tree and leave them to Him and work with, nay for Him.

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Sections 200(3), 272(2)(k), Rule 31A — When assessee derives no benefit from failure to file e-TDS return, no penalty is called for. In a case where assessee has deposited TDS on time but failed to file e-TDS return because of delay in collecting PANs from landowners, such breach is only technical in nature and no penalty is warranted.

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38. (2012) TIOL 399 ITAT-Mum.
The Collector, Land Acquisition Department of Industries and Commerce v. Addl. CIT (TDS)
A.Ys.: 2007-08 to 2010-11. Dated: 9-3-2012

Sections 200(3), 272(2)(k), Rule 31A — When assessee derives no benefit from failure to file e-TDS return, no penalty is called for. In a case where assessee has deposited TDS on time but failed to file e-TDS return because of delay in collecting PANs from landowners, such breach is only technical in nature and no penalty is warranted.


Facts:

The Person Responsible (PR) in respect of Collector, Land Acquisition, Department of Industries & Commerce, Punjab Chandigarh (PR) had not filed e-TDS quarterly returns on respective due dates and so had defaulted u/s.200(3) of the Act. In response to the show-cause notice issued by the Assessing Officer, the PR submitted that the delay was due to landowners not having submitted their PAN numbers and therefore the delay was for a reasonable cause and no penalty could be levied. The AO rejected this explanation and held PR to be an assessee in default and levied penalty u/s.272A(2) (k) of Rs.6,11,600.

Aggrieved, the PR filed an appeal to the CIT(A) and contended that the interest on compensation was disbursed to landowners not directly but was deposited in the District/High Courts and as per guidelines issued for submission of e-TDS quarterly returns Form No. 26Q with less than 70% PAN data was not accepted for quarter ended 30-9-2007. Since PAN data was not available with PR, the quarterly returns could not be filed. The CIT(A) upheld the order passed by the AO. Aggrieved, the assessee preferred an appeal to the Tribunal

Held:

The Tribunal noted that the Collector, Land Acquisition, Department of Industries is a government organisation acquiring land on behalf of Punjab Government. The land compensation is paid by the organisation to the landowners through the District/High Courts. The tax is deducted at source on the interest payment to the landowners, but the compensation and interest is deposited in the Court and not paid directly to the landowners. The landowners/agriculturists do not have PAN numbers. The Department was not able to find PAN numbers of these landowners.

Letters written to the landowners to furnish their PAN Numbers, at the available address, but no response was received due to improper addresses. The amount of tax was deducted at source and paid to the credit of the Government on time. The Tribunal held that the assessee was prevented by sufficient cause from filing the returns within the statutory period. Nonfiling of quarterly returns was only a technical and venial breach to the provisions contained in Rule 31A(2). Even otherwise also, the assessee did not derive any benefit whatsoever by not filing the e-TDS returns in time, as the amount of TDS was duly deposited in the Government Treasury within prescribed time. Such delay has not caused any loss to the Revenue/ Income-tax Department. The Tribunal cancelled the penalty levied by the AO. The appeals filed by the assessee were allowed.

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Sections 143(3), 147, 254 — In an assessment completed u/s.143(3) r.w.s. 254, the AO should confine himself to the directions issued by the Tribunal. He does not have jurisdiction to go beyond the directions given by the Tribunal.

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37. (2012) TIOL 383 ITAT-Mum.
Ambattur Flats Ltd. v. ITO
A.Y.: 2001-02. Dated: 22-5-2012

Sections 143(3), 147, 254 — In an assessment completed u/s.143(3) r.w.s. 254, the AO should confine himself to the directions issued by the Tribunal. He does not have jurisdiction to go beyond the directions given by the Tribunal.


Facts:

For A.Y. 2001-02, the original assessment of the assessee-firm, engaged in the business as builder and developer, was completed by estimating the income at 8% of the total contract receipts of Rs.94,57,500.

The assessment was subsequently reopened and in an order passed u/s.143(3) r.w.s. 147 of the Act, the total income was determined at Rs.28,11,700. This income was determined by the AO by adopting a profit rate of 20% of the gross profit. Aggrieved by the order passed u/s.147, the assessee preferred an appeal to the CIT(A) who gave a deduction of Rs.20,00,000 towards cost of land. The total income was modified at Rs.16,12,679. The assessee accepted the order of the CIT(A) but the Revenue preferred an appeal to the Tribunal.

The Tribunal found that the issue about cost of land was never raised before the AO and there was no discussion in the order of the AO on this issue. The Tribunal remitted the issue of deducting the cost of land to the AO and directed him to make necessary adjustments in accordance with law. In proceedings initiated u/s.254 and completed u/s.143(3), the AO collected evidences from sellers and accepted the contention of the assessee that it has incurred Rs.20 lakh towards purchase of land. However, he went further and reworked the profit and ultimately determined the income of the assessee at Rs.32,69,228.

Aggrieved by the order passed u/s.143(3) r.w.s. 254, the assessee preferred an appeal to the CIT(A) who held that the AO was justified in estimating the profit at 12%, which was also the rate adopted by the CIT(A) earlier.

Aggrieved the assessee preferred an appeal to the Tribunal.

 Held:

The Tribunal noted that the single issue was remitted back by the Tribunal to the file of the AO. Having examined the issue remitted and having concluded that the assessee’s contention on the issue remitted was to be accepted the AO should have stopped there. The Tribunal observed that the action of the AO in going further and reworking the profit was against law. It held that in an order passed u/s.143(3) r.w.s. 254, the AO should confine himself to the directions issued by the ITAT. He does not have jurisidction to go beyond the direction given by the Tribunal.

Since the AO had gone beyond the direction of the Tribunal and had redetermined the income, the Tribunal held the order passed by the AO to be contrary to law and set aside the same. The order of the CIT(A) was vacated. The Tribunal remitted the matter to the AO to determine the income at Rs.16,12,679 as detemined by the CIT(A) and to close the file. The Tribunal allowed the appeal filed by the assessee.

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Section 194C — Where the arrangement was more of a sharing of fees under contract, provisions of section 194C cannot be applied. Section 36(1)(ii) — Bonus paid to directors could not have been otherwise paid as dividend. Hence provisions of section 36(1)(ii) cannot be applied. Income v. receipt — Only that part of the receipt as has accrued during the year should be taxed as income.

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36. (2011) 131 ITD 414 (Delhi)
Career Launcher (India) Ltd. v. ACIT,
Circle 3(1), New Delhi
A.Ys.: 2005-06 & 2006-07. Dated: 27-12-2010

Section 194C — Where the arrangement was more of a sharing of fees under contract, provisions of section 194C cannot be applied.

Section 36(1)(ii) — Bonus paid to directors could not have been otherwise paid as dividend. Hence provisions of section 36(1)(ii) cannot be applied.


Facts:

The assessee was into the business of running coaching classes. The assessee had entered into standardised agreements with various persons willing to run similar coaching classes in form of franchisees. The franchisees were allowed to use the trademark, tradename and course material belonging to the assessee, in lieu of which assessee received an amount equal to 25% of the net value earned from the operations. The assessee showed ‘Franchisee payments’ under the head ‘administrative and other expenses’. The Revenue held that payment made by the assessee to the franchisees was in nature of payment to contractor/sub-contractor and hence provisions of section 194C were applicable. Resultantly, the expenses were disallowed u/s.40(a) (ia). The CIT(A) upheld the order.

Held:

As per the agreement, the franchisees make payment to the assessee and not the other way round. However, the accounts of the assessee have been drawn in a manner which shows that the assessee pays to franchisees. This anomaly between the agreement and the accounts has not been explained by either party. This matter has also not been dealt with by the lower authorities. At this juncture, the matter has to be decided as per law and not merely as per entries in the books of account, which may only be indicative in nature, but not conclusive of the matter.

The franchisees set up the premises, equipment and infrastructure at their own cost as per specifications of the assessee. The assessee was to provide entire study material, upgradation thereof, technical knowhow and product details. The franchisee collected fees from students and taxes/duties leviable were borne by them. They retained 75% of the profit from operations and handed over 25% to assessee. Hence, from the facts of the terms, it clearly emerges that the franchisee is not doing work for the assessee and it is a case of running a study centre and apportionment of profits thereof between the assessee and the franchisee. The agreement is not regarding work done on behalf of the assessee rather it is a case of sharing fees under the contract.

Though the term ‘work’ in explanation of section 194C is wide enough, it does not cover the case of the assessee. Thus, the ground was allowed in favour of the assessee. Facts: The assessee paid bonus to directors who were also the shareholders of the assessee-company. The AO held that bonus was paid instead of dividends so as to avoid payment of dividend distribution tax. Hence, by invoking provisions of section 36(1)(ii) bonus was disallowed. The CIT(A) also upheld action of the AO. Held: Section 36(1)(ii) provides that any sum paid to an employee as bonus or commission for services rendered is to be deducted in computing the total income, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission.

Taking the example of director A, it is clear that if the amount of Rs.7,02,231 had not been paid to him as bonus, the same amount would not have been paid to him as dividend, because he would have got 40.93% as dividend from the total dividend declared. In other words, he would have received higher dividend than the bonus. The position in case of S would be opposite. He was paid bonus of Rs.4,13,077 although his sharehold-ing is only 1.09%. Relevant facts are similar in case of other directors. Thus, it can be said that none of the directors would have received the bonus as dividend in case bonus was not paid. Also the bonus was paid as per resolution of Board of Directors. Therefore, the provision of 36(1)(ii) was not applicable. Facts: Being a coaching class, the assessee received nonrefundable fees in a year. However, the coaching was to be rendered in current year and subsequent year. Hence, the obligation was to be discharged in two accounting years. The assessee booked part fees in this year and part in the subsequent year. However, the AO added the entire amount to income.

The CIT(A) also upheld AO’s observation. Held: The decision as held in case of K. K Khullar v. Dy. CIT, (2008) 304 ITR (AT) 295 was considered. It was held that a distinction has to be made between the terms ‘receipt’ and ‘income’. Income is liable to be taxed and not receipt. Hence, only that part of receipt was taxable to assessee which accrued as income. Thus, the accounting policy followed by the assessee was correct. The CIT(A) erred in treating the nonrefundable deposit as income.

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Section 80-IB(10) — There is no precondition that the assessee should be the owner of the land for claiming deduction — Terrace in front of penthouse should not be considered while measuring built-up area.

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35. (2011) 131 ITD 142
Amaltas Associates v. ITO
A.Y.: 2006-07. Dated: 21-1-2011

Section 80-IB(10) — There is no precondition that the assessee should be the owner of the land for claiming deduction — Terrace in front of pent-house should not be considered while measuring built-up area.


Facts:

The assessee was a builder and developer of housing projects and claimed deduction u/s.80-IB. During the relevant year under consideration, it constructed a housing project and claimed deduction u/s.80-IB. The AO disallowed the deduction u/s.80-IB on the ground that the builder was not the owner of the land and various permissions and approvals were granted in the name of the co-operative society. Further, based on the DVO report, the AO observed that, out of 110 flats, the penthouses on the top floor of each building had a built-up area of more than 1500 sq.ft.

Held:

The contention of the Revenue authorities that the assessee must be the owner of the land to claim deduction u/s.80-IB has no force. There is no such condition for claiming deduction u/s.80- IB. Further, the agreement to sell showed that assessee purchased the property in question for a consideration of Rs.3 lakh. All the responsibilities for carrying out the construction, permission and development of the project lie with the assessee. The dominant control over the land was with assessee. The real owner was only to co-operate with the assessee. Also the assessee was only entitled to enrol members for selling the units within its own rights. Further, the deduction u/s.80-IB is not exclusively to an assessee but to an undertaking developing and building housing project, be it by a contractor or by an owner. Hence, the assessee cannot be denied deduction u/s.80-IB on this ground.

The next issue was of ‘built-up area’ exceeding the prescribed limits of 1500 sq.ft. in case of some of the flats. The AO, based on DVO’s report, had included the area of open terrace in front of the penthouses on the top floor of each building in the total builtup area, thereby increasing the maximum limits. The contention of assessee was that the definition of built-up area means inner measurement of residential unit at floor level including projections and balconies. But open terrace in front of penthouse, not being a covered area and open to sky, should not be considered as a part of built-up area. This contention was accepted by the Tribunal and hence the assessee’s appeal was allowed.

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Section 254(2) and Rules 23 and 25 of Income Tax (Appellate Tribunal) Rules, 1963 — Assessee’s chartered accountant having filed an affidavit stating that he did not appear at the time of hearing as he had wrongly recorded the date of hearing in his diary and also furnished a photocopy of the diary showing the wrong noting, it has to be accepted that there was sufficient cause for his non-appearance on the date of hearing.

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34. (2012) 145 TTJ 537 (Delhi) (TM)
Five Star Health Care (P.) Ltd. v. ITO A.Y.: 2006-07. Dated: 2-3-2012

Section 254(2) and Rules 23 and 25 of Income Tax (Appellate Tribunal) Rules, 1963 — Assessee’s chartered accountant having filed an affidavit stating that he did not appear at the time of hearing as he had wrongly recorded the date of hearing in his diary and also furnished a photocopy of the diary showing the wrong noting, it has to be accepted that there was sufficient cause for his non-appearance on the date of hearing.

The assessee filed a miscellaneous application for recalling the said order against the exparte order passed by the Tribunal. The only ground taken by the assessee in its miscellaneous application was that there was a bona fide reason for non-appearance on the part of the assessee on the fixed date of hearing. There was a difference of opinion between the members of the Tribunal and, therefore, the matter was referred to the Third Member u/s.255 (4). The agreed point of difference was

“Whether on facts and in the circumstances of the case, it will be appropriate in law to recall order dated 8th Oct., 2010 passed in ITA No. 1063/Del./2010”. The Third Member held that it would be appropriate to recall the ex-parte order of the Tribunal. It noted as under:

(1) Though in the miscellaneous application there is neither the mention of Rule 25, nor section 254(2), but, from the contents of the application, it is evident that it was under Rule 25 only because u/s.254(2) the assessee can request the rectification of an apparent mistake while under Rule 25, the assessee can request for the recalling of the order of the Tribunal which has been passed ex-parte due to non-appearance of the assessee.

(2) A perusal of Rule 25 shows that, as per proviso, where an appeal has been disposed of as provided in the rule and the respondent appears afterwards and satisfies the Tribunal that there was sufficient cause for his non-appearance on the date of hearing, the Tribunal is at liberty to recall the ex-parte order passed by it and restore the appeal.

(3) In the present case, the chartered accountant has given an affidavit. In support of the affidavit, he has also furnished the photocopy of his diary in which the hearing of the assessee’s appeal was wrongly noted as 9th September, 2010, instead of 7th September, 2010.

(4) Therefore, there was sufficient cause for nonappearance by the assessee on the date of hearing i.e., 7th September, 2010. Proviso to Rule 25 was squarely applicable and the Tribunal was justified in recalling the order of the Tribunal.

(5) Rule 23 provides the procedure to be adopted at the time of hearing the appeal. Tribunal having effectively decided the matter against the respondent-assessee by setting aside the order of the CIT(A) and restoring the matter back to the Assessing Officer without hearing the assessee, the ex-parte order of the Tribunal must be recalled as required by Rule 23 of ITAT Rules.

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Section 40(a)(ia) — Disallowance can be made only in respect of an amount which is sought to be deducted u/ss.30 to 38 and not in respect of reimbursement simplicitor which is profit neutral and not routed through the P & L a/c.

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33. (2012) 145 TTJ 1 (Kol)
Sharma Kajaria & Co. v. Dy. CIT
A.Y.: 2006-07. Dated: 17-2-2012

Section 40(a)(ia) — Disallowance can be made only in respect of an amount which is sought to be deducted u/ss.30 to 38 and not in respect of reimbursement simplicitor which is profit neutral and not routed through the P & L a/c.

In the re-assessment proceedings, the Assessing Officer noted that the assessee had made payments to various lawyers for their professional services but had not deducted tax at source u/s. 194J from the same. The Assessing Officer was of the view that the assessee was under statutory obligation to deduct tax at source u/s.194J and, since the assessee had failed to perform this obligation, such payments were disallowed u/s. 40(a)(ia).

The CIT(A) rejected the assessee’s contention that expenditure which is not claimed in and did not appear in the Return and the P & L a/c should not be disallowed by application of section 40(a)(ia). The CIT(A) upheld the Assessing Officer’s order. The Tribunal, setting aside the orders of the lower authorities, noted as under:

(1) Unless a deduction is claimed in respect of the said amounts u/ss.30 to 38, the disallowance u/s.40(a)(ia) cannot come into play at all. The question of disallowance u/s.40(a)(ia) can arise only when something is claimed as a deduction in computation of business income; reimbursements simplicitor, being profit neutral, are not routed through the P & L a/c.

(2) Whether the assessee had claimed the fees paid to outside lawyers as a reimbursement from its clients or not was simply a matter of fact which will be evident from the bills raised on the clients and there was no need for making any inferences in respect of the same.

(3) If in the bills raised on its clients, the assessee had separately itemised the payments made to the outside counsel and claimed reimbursements in respect of the same, then these expenses cannot be of such a nature as to seek deduction in respect of the same. When the expenses are being reimbursed by the clients, these expenses cease to be expenses of the assessee and, therefore, there is no question of deduction in respect of the same.

(4) However, if the assessee has raised composite bills for professional services, on gross basis and without giving details of payouts to outside lawyers on behalf of his clients, the payments to outside lawyers will be in the nature of deduction to be claimed by the assessee.

(5) Without there being any categorical finding to the effect that the payments to outside lawyers were claimed as deductions in computation of profits, the disallowance u/s.40(a)(ia) in respect of such payments is not legally sustainable.

The matter was remanded back to the Assessing Officer for adjudication de novo in light of the above observations.

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Sections 2(47) and 45 — Purchase and sale of land and flat necessary parts of business of construction. Loss arising on sale of these properties is business loss.

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32. (2012) 144 TTJ 1 (Chennai) (TM)
Vijaya Productions (P) Ltd. v. Addl. CIT
A.Y.: 2007-08. Dated: 25-11-2011

Sections 2(47) and 45 — Purchase and sale of land and flat being necessary parts of the regular business of construction carried on by the assessee, the losses arising on sale of these properties have to be considered as loss incurred in the course of carrying on its regular business.

For the relevant assessment year, the Assessing Officer disallowed the assessee’s claim for loss on sale of one flat and land as business loss.

The Assessing Officer was of the opinion that such loss was not proved to have been incurred in the course of the assessee’s business of civil construction but, on the other hand, incurred due to purchase and sale of land. Further, according to him, the purchase and sale were effected in close proximity of time and land value could not have depreciated to such a large extent in a prime location of the city. The CIT(A) allowed the assessee’s claim. The Tribunal held in favour of the assessee. The Tribunal noted as under:

(1) Both the assertions of the Assessing Officer were misplaced.

(2) The assessee was engaged in the business of promoting commercial and residential flats and was authorised by the partnership deed to carry on any line or lines of business.

(3) Even if one considers the authorisation given in the partnership deed ‘to carry on any other line or lines of business’, to be ejusdem generis with the earlier terms of ‘promoting commercial and residential flats’, sale and purchase of land would still come within the ambit of the ‘business’ of the assessee.

(4) In a business of promoting commercial and residential flats and other lines of business, it cannot be said that purchase and sale of land would be alien and not a part of the business.

(5) Further, the land was treated as stock-in-trade and this has not been disputed by the learned Department representative. When stock-intrade is sold result can only be business profit or business loss. The assessee might have been forced to sell it at a loss for a myriad of reasons. It is not for the Revenue to sit on the armchair of a businessman and to decide appropriate point of time in which a sale or purchase has to be effected in the course of his business.

(6) Neither the sale deed, nor the purchase deed had been doubted. Neither books of account have been rejected, nor the seller or purchaser were called up by the Revenue for any verification. Without doubting the purchase and sale deed, the loss could not have been disallowed.

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Archives and archaism.

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The Government of India has a curious habit. It spares no effort on buying documents and personal effects of Gandhiji and storing them in its lightless archives. At the same time, it is most reluctant to grant access to scholars to any papers it remotely considers ‘sensitive’.

The latest example is its purchase of the Gandhi- Hermann Kallenbach papers. Kallenbach, an architect, was a close collaborator of Gandhiji in South Africa. The two issues may appear distinct, but they are not. The history of a country can’t be divided into what is acceptable to the government and what is not: that is not history, it is hagiography.

No Indian scholar has access to papers on vital post-1947 events such as the 1962 war with China, let alone recent matters such as our involvement in Sri Lanka after 1987. India’s archives access policy is perhaps one of the most illiberal anywhere in the world. It should be discarded fast.

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Taxation of Royalties and FTS as Business Profits (Interplay of Sections 44BB, 44D and 44DA)

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1.0 Background

Income in the nature of Royalties and Fees for Technical Services (FTS) in the hands of nonresidents are generally taxed on gross basis as per Article 12 of the applicable Treaty or u/s.115A read with section 9(1)(vi) and (vii) of the Income-tax Act, 1961 (the ‘Act’). Essentially both kinds of income are subset of Business Income. Therefore, ideally they should be taxed on a net basis. However, even under tax treaties these incomes are taxed on gross basis in the State of Source, albeit at a concessional rate. Prior to the enactment of section 44DA on Statue, section 44D was in operation (Applicable to agreements entered into by non-residents up to 31st March 2003) which specifically disallowed deduction of any expenditure in computing Foreign Company’s Income by way of Royalties and FTS. Thus, it resulted in taxation of royalties/FTS on gross basis even in a case where there existed a Permanent Establishment in India. However, the silver lining was applicability of section 44BB which covered payments in connection with supplying of Plant and Machinery on hire which is used or to be used for prospecting for, extraction or production of mineral oils including natural gas. Section 44BB provides for presumptive basis of taxation whereby 10% of the gross amount is deemed to be taxable profits.

2.0 Royalty and FTS

— Sections 9(1)(vi) and (vii) of the Act In this Article, we shall discuss the provisions of Royalty and FTS in the context of sections 44BB, 44D and 44DA only. We shall not go into the other aspects or controversies in respect of Royalty and FTS.

2.1 Royalty

Clause (iva) of the Explanation 2 of the section 9(1)(vi) provides that “the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB” would constitute royalty. This exception is significant in that it substantially reduces tax liability in the hands of the recipient of royalty income. Section 115A provides that royalties referred to in section 9(1)(vi) are taxed at the rate of 10% on gross basis (other than royalty referred to in section 44DA), whereas if the income is taxed u/s.44BB, then the incidence of tax would be @ 4% on gross basis (excluding applicable Surcharge and Education Cess).

2.2 Fees for Technical services (FTS)

Explanation 2 of section 9(1)(vii) excludes consideration for any construction, assembly, mining or like project undertaken by the recipient from the purview of FTS. The CBDT has issued an Instruction No. 1862, dated October 22, 1990 based on the opinion of the then Attorney General of India Shri Soli J. Sorabjee in the context of interpretation and coverage of section 9(1)(vii) in respect of contract between ONGC and M/s. Scan Drilling Co. Ltd. Accordingly “the expressions ‘mining project’ or ‘like project’ occurring in Explanation 2 to section 9(1)(vii) of the Income-tax Act would cover rendering of services like imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas . . . .” Based on the above CBDT Instruction in ONGC v. ACIT, (2007) 12 SOT 584 (Delhi) it was held that imparting training for carrying out of drilling for exploration of oil and natural gas was held to be covered by the exception referred to in Expl. 2 to section 9(1)(vii) and can be taxed on presumptive basis u/s.44BB of the Act. Supervisory services In Income-tax Officer v. SMS Schloemann Siemag Aktiengesellshaft Dusseldorf, (57 ITD 254) it was held that mere ‘supervisory services’ undertaken by the assessee would not amount to undertaking of the construction or assembly of the plant for exclusion from FTS under Expl. 2 to section 9(1)(vii) of the Act.

3.0 Section 44D of the Act

Section 44D of the Act dealt with computation of royalty or FTS received by a foreign company from Government or an Indian concern in pursuance of an agreement entered into before 1st April 2003. Up to 31st March 1976 it provided for a flat deduction of 20% from the gross amount of royalty or FTS. From 1st April 1976 to 31st March 2003 it did not provide for deduction of any expenditure. In other words royalty or FTS (not covered 44BB) earned by a foreign company during this period was taxed on gross basis @ 30/20% (plus applicable Surcharge and Education Cess). Thus, the incidence of taxation was quite high even though the foreign company would have a permanent establishment in India.

4.0 Section 44DA of the Act

Section 44DA was introduced vide the Finance Act, 2003 to replace section 44D of the Act. It also covers income by way of royalty and FTS. The distinguishing features of both the sections are as follows:

Abbreviations :
(i) NR = Non-resident * Plus applicable Surcharge and Education Cess
(ii) FTS = Fees For Technical Services
(iii) PE = Permanent Establishment as defined Clause (iiia) of section 92F

5.0 Interplay of sections

44BB, 44D and 44DA Royalty and FTS are essentially covered by section 9 r.w.s. 115A as well as sections 44BB and 44D and 44DA. The impact of taxation in each of the case differs depending upon the applicability of provisions and existence or otherwise of a PE. The overall implications under various provisions of the Act can be summarised as follows: If Royalty & FTS as per

  •  section 115A tax section 9(1)(vi)/(vii) @10% on gross basis and No PE If No Royalty and ? If income is covered No PE by section 44BB — Presumptive Profit @10% of gross receipts. Effective rate of tax 4% [With an option to tax on net basis u/s.44BB(3)] If Royalty & FTS as per
  • Section 44DA on net section 9(1)(vi)/(vii) basis @ 40% and PE (Rates are quoted without Surcharge and Education Cess) In Geofizyka Torun Sp. zo. o. (2010) 320 ITR 0268 — the AAR explained the relationship between section 44BB and 44DA as under: “If the business is of the specific nature envisaged under 44BB, the computation provision therein would prevail over the computation provision in section 44DA.”

Abbreviations : (i) NR = Non-resident
(ii) P&M = Plant & Machinery
(iii) FTS = Fees For Technical Services
(Rates are quoted without Surcharge and Education Cess)

6.0 Taxability under DTAA

By and large all tax treaties which contain Articles on Royalty and FTS provide for their taxation in the State of Source (SS) on gross basis, albeit, at reduced rates. However, wherever the recipient has a PE in the ‘SS’, and such incomes are effectively connected with that PE, then they are taxed as ‘Business Profits’ [DDIT v. Pipeline Engineering GMBH, (2009) 318 ITR (A.T.) 0210]. Article 7 of DTAAs provides that profits attributable to a PE in ‘SS’ are taxed therein. Article 7 further provides for computation of profits where by deduction of expenses are allowed in accordance with the provisions of and subject to limitations of the taxation laws of SS. In some treaties specific deductions are mentioned, whereas in most treaties they are left to domestic tax laws.

Business Profits, thus taxable in India would be subject to provisions of section 28 to 44C of the Act. However, section 44D contained non-obstante clause which provided that “notwithstanding anything to the contrary contained in section 28 to 44C……” income derived by a foreign company in the nature of royalty and FTS to be taxed on gross basis. This resulted in severe difficulties as despite treaty provisions, Royalty and FTS even though attributable to a PE used to be taxed on gross basis. In DDIT v. Pipeline Engineering GMBH, [(2009) 318 ITR (A.T.) 0210] the Mumbai Tribunal held that “the combined reading of the treaty and the act leads to only one conclusion that no deduction is to be allowed against the receipts by way of royalties or fees for technical services in case of non-resident company, even if the business profits in respect of such income are to be computed under Article 7 of the DTAA”.

In order to avoid this anomaly, section 44DA was introduced w.e.f. 1st April 2004, which provided for net basis of taxation where royalty and FTS are effectively connected to a PE and incurred wholly and exclusively for the business carried on by that PE.

7.0 Judicial precedence

Majority of the decisions are in respect of characterisation of income between royalty as defined u/s.9(1)(vi) and business income covered by section 44BB of the Act.

7.1  Choice to opt for presumptive taxation

In DSD INDUSTRIEANLAGEN GmbH v. DDIT, (2009 TII 67 ITAT-Del.-Intl), the Tribunal held that the option to compute the income either on a presumptive basis or under normal provisions of the Act lies with the assessee and that he may exercise this option annually. “The Assessing Officer cannot force the system, which has been followed in the earlier year as per the option by the provision of law itself.”

7.2 Cases pertaining to section 44BB

7.2.1  Mobilisation expenses

In WesternGeco International Limited (2011) 338 ITR 0161 it was held that mobilisation and demobilisation revenues whether in respect of vessels moving into India or moving outside India are taxable in aggregate u/s.44BB on presumptive basis and that “there is no scope for splitting up the amount payable to the assessee.” The assessee however can opt for net basis of taxation u/s.44BB(3).

However, in case of R&B Falcon v. ACIT, (2007) 14 SOT 281 (Delhi) it was held that mobilisation revenue attributable to activities carried out in India are only liable to be included for the purposes of section 44BB.

7.2.2 In the undernoted cases the services of seismic data acquisition and processing were held to be covered under the provisions of section 44BB of the Act:

(i)    WesternGeco International Limited. (2011) 338 ITR 0161

(ii)    Geofizyka Torun SP. ZO.O. (2010) 320 ITR 0268

(iii)    Seabird Exploration FZ LLC (2010) 320 ITR 0286

7.2.3 Time charter

In the undernoted cases the income derived by provision of time charter of seismic vessel were held to be covered by section 44BB of the Act:

(i)    Wavefield Inesis ASA, (2010) 322 ITR 0645

(ii)    Bourbon Offshore Asia Pte. Ltd., (2011) 337 ITR 0122

7.2.4 General applicability of section 44BB

In the undernoted cases section 44BB was held to be applicable:

(i)    DIT v. Jindal Drilling and Industries Ltd., (2010) 320 ITR 0104 (Delhi)

(ii)    ONGC as agent of Foramer France (1999) 70 ITD 468 (Delhi)

(iii)    Paradigm Geophysical Pvt. Ltd. (2008 TIOL 362 ITAT-Del.)

(iv)    Dresser Mineral International Inc., 50 TTJ 273 (Del.)

(v)    Scan Drilling Co. (Delhi ITAT)

(vi)    Lloyd Helicopters International (2001) 249 ITR 162 (AAR)

7.2.5 Some Specific inclusions while considering Gross Receipts u/s.44BB:

(i)    Services tax : Technip Offshore Contracting bv (2009 TIOL 54 ITAT-Del.)

(ii)    Taxes paid on behalf of NR contractor: Compagnie General (48 ITD 424)

8.0 Conclusion

The cases discussed here are not exhaustive. It is neither possible nor intended to cover all case laws on the subject in one article. The object here is to analyse the impact and interplay of sections 9(1)(vi) and (vii), 44BB, 44D and 44DA and 115A and to assess the taxability of Royalty and FTS both on gross as well as net basis.

As India is aggressively exploring its oil and gas resources, more and more foreign companies are setting up their operations in India in the field of prospecting, exploring and production of oil and natural gas and therefore study of these sections of the Act will gain importance in coming days.

Limited Liability Partnership (Winding up and Dissolution) Rules, 2012.

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Limited Liability Partnership (Winding up and Dissolution) Rules, 2012 have been notified in supersession of the Limited Liability Partnership (Winding Up and Dissolution) Rules, 2010 and the same will come into force on the date of publication in the official Gazette.

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Composite contract involving offshore supply of equipment and onshore supply and services should be looked at as an integrated one only when the allocation of profits between the offshore and onshore components is unreasonable and artificially split up. ? Overall position of the entire contract needs to be considered and if no profits are earned by the taxpayer on an overall basis, no income from composite contracts can be taxed in India.

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21. Dongfang Electric Corporation v. DDIT (2012) 23 taxmann.com 170 (Kolkata-Trib.)
Articles 5 and 7 of India-China DTAA A.Y.: 2007-08. Dated: 22-6-2012
Present for the appellant: G. C. Srivastava
Present for the respondent: Sanjay Kumar

Composite contract involving offshore supply of equipment and onshore supply and services should be looked at as an integrated one only when the allocation of profits between the offshore and onshore components is unreasonable and artificially split up.

Overall position of the entire contract needs to be considered and if no profits are earned by the taxpayer on an overall basis, no income from composite contracts can be taxed in India.


Facts:

  • Taxpayer, a Chinese company (FCO), had entered into various contracts with Indian entities for setting up of turnkey thermal power projects. Each of these contracts were divided into two parts — one for supply of equipment and materials of thermal power plant and second for erection and services of units of main plant along with some common facilities.
  • FCO had a project office in India which constituted a permanent establishment (PE) of FCO in India.
  • In terms of the contract, consideration receivable by FCO was separately provided in respect of offshore supply and onshore activities.
  • FCO contented that consideration for offshore supply of equipment was not taxable in India under the Income-tax Act as well as the DTAA. As regards onshore activities, FCO incurred substantial losses which were reported and claimed in return of its income filed in India.
  • The Tax Department treated the entire project as an integrated one and held that contract was manipulated and artificially split up in such a way that FCO’s onshore activities will always result in losses. Further, FCO’s PE had a role in the overall execution of the project and hence, income in India should be computed by attributing profits to the PE under the DTAA as well as transfer pricing provisions under the Income-tax Act.
  •  The matter was referred to transfer pricing officer who attributed profits in India on both offshore and onshore components resulting in taxable income of FCO in India.

 ITAT Ruling:

  •  Reference was made by the ITAT to the AAR ruling in the case of Alstom Transport SA1 where the AAR held that a composite contract for installation and commissioning cannot be split up into separate parts and the contract has to be read as a whole having regard to its object and the purpose it sought to be achieved. This was held by applying the ‘look at’ principle adopted by Supreme Court (SC) in the case of Vodafone2. The prior decisions of SC3 where a dissecting approach in respect of such contracts was adopted are overruled as the decision in the case of Vodafone will have greater precedence as the same is rendered by a Larger Bench of the SC.
  • There may be legitimate issues regarding whether the ‘look at’ approach can be applied in all cases in which separate contracts are entered into for offshore supplies and onshore services. The ratio of the AAR ruling in the case of Alstom Transport can be made applicable in cases where values assigned to onshore services are prima facie unreasonable vis-a-vis values assigned to offshore supplies, which make no economic sense when viewed in isolation with offshore supplies contract. The ratio can be accepted where transactions are to be essentially looked at as a whole and not on a stand-alone basis, when the overall transaction is split in an unfair and unreasonable manner with a view to evade taxes.
  • Presence of ‘cross-fall breach clause’ (ensuring that performance of entire project was treated as single-point responsibility and non-performance of any part would be treated as a breach of whole contract) indicates that the contract could be viewed as an integrated one. However, this fact by itself does not mean that consideration for onshore activities is understated to avoid taxes in India.
  • In FCO’s case, losses were incurred not only in respect of onshore activities, but also on offshore supplies executed from China. If losses are incurred on the entire project, the mere fact that losses were incurred on onshore activities cannot be a sufficient reason to indicate that the arrangement was tax avoidant.
  • Even if the contracts are taken together as an integrated whole and if there are no profits earned under the contracts, there can be no occasion to tax income from such contracts in India.
  • The Tax Department needs to examine the matter in light of the fact that FCO has incurred losses on the entire project on an overall basis. The transfer pricing provisions under the Incometax Act would apply only if the basic position of FCO for claiming overall losses is rejected.
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Gains arising from sale of shares of an Indian company held by Mauritius Tax Resident are not taxable in India under the India-Mauritius DTAA. ? Provisions of General Anti-Avoidance Rules (GAAR), introduced by the Finance Act 2012, are effective from 1st April 2013 and will apply as and when they come in force, notwithstanding the current ruling, to the proposed transaction.

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20. Dynamic India Fund-I, in re
(2012) 23 taxmann.com
266 (AAR-New Delhi)
Article 13 of India-Mauritius DTAA Dated: 18-7-2012
Justice P. K. Balasubramanyan (Chairman) Present for the appellant: P. J. Pardiwalla, Advocate
V. B. Patel, Kalpesh Maroo, Abhishek Goenka, CA Present for the Department: Somanath S. Ukkali, Bangalore

Gains arising from sale of shares of an Indian company held by Mauritius Tax Resident are not taxable in India under the India-Mauritius DTAA.

Provisions of General Anti-Avoidance Rules (GAAR), introduced by the Finance Act 2012, are effective from 1st April 2013 and will apply as and when they come in force, notwithstanding the current ruling, to the proposed transaction.


Facts:

  • The applicant is a company incorporated in Mauritius (FCO) and holds a valid Tax Residency Certificate (TRC) issued by the Mauritius Tax Authority. FCO is a wholly-owned subsidiary of another Mauritius company (FCO1).
  • FCO was set up to invest in growing sectors in India. The funds were pooled from various individual and institutional investors from different parts of the world by FCO1 and invested in the share capital of FCO. The capital was invested by FCO in units and shares of various Indian companies with the sole intention of generating long-term capital appreciation. FCO was registered as a Foreign Venture Capital Investor and had a licence from the Securities Exchange Board of India.
  • Out of its investments, FCO proposed to sell shares of an Indian company. The issue before the AAR was whether such gains were exempt in view of the India-Mauritius treaty.
  • It was the Tax Department’s contention that FCO’s primary motive was to route investments through Mauritius in order to evade tax in India. Further, treaty benefit would be available only if capital gains were taxable in Mauritius, which was not so in the given fact pattern.

AAR ruling:

  • The argument of the Tax Department that it is a case of routing investments through Mauritius to evade capital gains tax in India is not acceptable in light of the SC decision in Azadi Bachao Andolan, where SC held that even if it is a case of treaty shopping, no further inquiry is warranted or justified on the aspect of eligibility of the beneficial capital gains provisions under the Mauritius DTAA provided the Mauritius investor holds a valid TRC.
  • The argument that unless capital gain is taxable in Mauritius, the Mauritius DTAA is not acceptable by virtue of the binding decision of the SC in Azadi Bachao Andolan, which had rejected this contention while granting treaty benefits to the taxpayer.
  • The Finance Act, 2012 introduced Chapter X-A i.e., GAAR provisions and TRC requirement in the Income-tax Act with effective from 1st April 2013. As the same is not effective till date, it cannot be made applicable at this stage in the current case. However, once GAAR provisions become effective, it will be open to the Tax Department to consider applicability of GAAR provisions, notwithstanding the ruling.
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‘Education cess’ is an ‘additional surcharge’ and is included in ‘tax’ under the DTAA, where the language of the DTAA includes ‘surcharge’ as ‘tax’. ? Where the DTAA caps the rate of ‘tax’ payable, cess is not separately payable by taxpayer.

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    19. DIC Asia Pacific Pte Ltd. v. ADIT
    (2012) 22 taxmann.com 310 (Kolkata-Trib.)
    Articles 2, 11 and 12 of India-Singapore DTAA
    Section 2(11) of Income-tax Act
    A.Y.: 2009-10. Dated: 20-6-2012
    Present for the appellant:    Akkal Dudhewewala
    Present for the respondent:     P. K. Chakraborty
    
‘Education cess’ is an ‘additional surcharge’ and is included in ‘tax’ under the DTAA, where the language of the DTAA includes ‘surcharge’ as ‘tax’.

Where the DTAA caps the rate of ‘tax’ payable, cess is not separately payable by taxpayer.


Facts:

  • The taxpayer, a Singapore company (FCO), eligible for India-Singapore treaty benefits, filed a return of income disclosing interest and royalty income. FCO claimed that the said incomes were taxable at flat rate of 15% and 10% under Articles 11 and 12, respectively.
  • The Tax Department rejected the taxpayer’s contentions and levied surcharge and education cess in addition to the rates applicable to respective incomes.

 ITAT Ruling:

  • The expression ‘tax’ is defined in Article 2(1) of the India-Singapore DTAA, in the context of India, to include ‘income tax’ and ‘surcharge’ thereon.
  • Article 2(2) of the DTAA covers within its ambit “any identical or substantially similar taxes which are imposed by either contracting state after the date of signature of the present agreement in addition to, or in place of, the taxes referred to in paragraph 1”. Therefore, though education cess was introduced much after the signing of the India-Singapore DTAA on 24th January, 1994, it is covered under the expression ‘tax’.
  • Education cess, introduced in India in 2004, is nothing but an additional surcharge and is covered by scope of Article 2 of the DTAA. Accordingly, provisions of Article 11 and 12 will find precedence over provisions of Incometax Act and taxability will be restricted to the specific flat rates provided in the respective income Articles of the treaty.
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Where consultancy charges were paid by ICO to non-resident consultants rendering services on ICO’s offshore projects, source rule exclusion carved out u/s.9(1)(vii)(b) is applicable even though the payments are made from India.

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18. M/s. Ajappa Integrated Project v. ACIT (ITA No. 349/Mds./2012)
Section 9(1)(viib), section 40(a)(ia) and section 195 of Income-tax Act A.Y.: 2008-09. Dated: 25-6-2012 Present for the appellant: V. S. Jayakumar, Advocate
Present for the respondent: Shaji P. Jacob

Where consultancy charges were paid by ICO to non-resident consultants rendering services on ICO’s offshore projects, source rule exclusion carved out u/s.9(1)(vii)(b) is applicable even though the payments are made from India.


Facts:

  • The taxpayer an Indian company (ICO) is engaged in the business of rendering technical consultancy services for oil exploration industries in India and abroad. For the purposes of carrying out an oil and gas exploration project in Nigeria, ICO paid fees for technical services to non-residents working for ICO in Nigeria.
  •  ICO did not deduct tax at source while making payments to consultants on the basis of specific exclusion in section 9(1)(vii)(b) of the Incometax Act viz. amount paid for FTS which is utilised for ICO’s business outside India could not be considered as income accruing or arising in India.
  • Rejecting the claim, the Tax Department had disallowed the claim for deduction of FTS by holding that there was non-deduction of tax at source.
  • The CIT(A) held that though ICO had shown that payments were directly related to the Nigerian project, the fact that the payments were made from India and not from Nigeria left some ambiguity in determining whether the exception provided u/s.9(1)(vii)(b) directly applied to the said consultants and whether the income can be regarded as accrued in India.

ITAT Ruling:

  •  Technical fees paid to non-resident consultants on ICO’s projects in Nigeria have to be considered as fees paid for services utilised in the business of the taxpayer outside India. This proposition prevails even though the payment is made from India and not from Nigeria. The exclusion u/s.9(1) (vii)(b) is clearly applicable and income earned by non-residents is not taxable in India.
  •  ICO is justified in holding a bona fide belief that no part of payment had any element of income which was chargeable to tax in India. ICO cannot therefore be fastened with any liability associated with non-deduction of tax at source and consequently the payments cannot be disallowed u/s.40(a)(i) of the Income-tax Act.
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Consultancy services that are not taxable under the narrow definition of FTS article of the DTAA, since the conditions laid down therein are not satisfied, cannot be taxed under the other income article of the DTAA. ? Taxation under residuary article of the DTAA is possible only in cases of income which are not covered under any other articles of the DTAA or when the income is taxable within scope of the residuary article itself.

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17. DCIT v. Andaman Sea Food Pvt. Ltd. (2012) 22 taxmann.com 400 (Kolkata-Trib.) Articles 12 and 23 of India-Singapore DTAA, Section 9(1)(vii) of Income-tax Act A.Y.: 2008-09. Dated: 19-6-2012
Present for the appellant: D. J. Mehta and Sanjay Kumar
Present for the respondent: D. S. Damle

Consultancy services that are not taxable under the narrow definition of FTS article of the DTAA, since the conditions laid down therein are not satisfied, cannot be taxed under the other income article of the DTAA.

Taxation under residuary article of the DTAA is possible only in cases of income which are not covered under any other articles of the DTAA or when the income is taxable within scope of the residuary article itself.


Facts:

  • Taxpayer, an Indian Company (ICO), is engaged in the business of trading and export of sea- food. ICO availed consultancy services in relation to certain foreign exchange derivative transactions from a Singapore company (FCO).
  • ICO was of the view that the consultancy services were rendered outside India and hence the same was not taxable in India under the Incometax Act. In any case, the amount was not taxable under the DTAA, as FCO had not ‘made available’ any services to ICO. ICO made payments to FCO without deducting tax at source.
  • The Tax Department regarded the amount as taxable under the Income-tax Act as the services were utilised by ICO in India. While it accepted that the payments were not taxable under the FTS article of the DTAA as services did not meet make available test, it was contended that as taxability failed under specific articles of the DTAA, its taxability automatically arises under the residuary article i.e., ‘Other Income’ article of the DTAA.

ITAT Ruling:

The ITAT rejected the Tax Department’s contentions and held:

  • Taxing rights for various types of income are assigned to the source state upon fulfilment of conditions laid down in respective clauses of the DTAA. When those conditions are not satisfied, the source state does not have the taxing right in respect of the said income.
  • When a DTAA does not assign taxability rights of a particular income to the source state under the respective article, such taxability cannot be invoked under the other income article. The other income article covers only income which is either covered under specific scope of that article itself or such income which is not covered within the scope of any other article of the DTAA.
  • Under the DTAA, FTS is taxable under Article 12 if the services enable the person acquiring the services to apply technology contained therein. FCO had rendered consultancy services and it did not involve any transfer of technology, nor did it enable ICO to apply technology contained therein. The payments were in the nature of business profits and as FCO did not have a PE in India, the same was not liable to tax in India.
  • In the facts of the case, the income could potentially be covered by the FTS article or business profits article or independent personal services article. However, the fees may not be taxed as the conditions prescribed in the respective articles are not satisfied. If income is covered by one or more specific articles, the residuary (other income) article does not apply.

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Notification No. 25/2012, S.O. 1453(E) dated 2-7-2012 — Income-tax (Seventh Amendment) Rules, 2012 — Amendment in Rule 12 and substitution of forms ITR 5 and ITR 6.

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Rule 12 provided that the prescribed ITR Form SAHAJ — ITR 1 and SUGAM — ITR 4S could not be used by a resident individual or a HUF to file his return of income, if he had:

(a) assets (including financial interest in any entity) located outside India; or

(b) signing authority in any account located outside India. The Rule is amended to provide that not ordinary residents can use SAHAJ — ITR 1 and SUGAM — ITR 4S though they have assests located outside India and have signi

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Instructions to AOs to rectify/reconcile disputed arrears in demand irrespective of limitation of four years u/s.154(7) — Circular No. 4, dated 20-6-2012.

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Instructions to AOs to rectify/reconcile disputed arrears in demand irrespective of limitation of four years u/s.154(7) — Circular No. 4, dated 20-6-2012.

In certain cases, assessees have disputed the figures of arrear demands shown as outstanding against them in the records of the Assessing Officers. The Assessing Officers have expressed their inability to correct/reconcile such disputed arrear demand on the ground that the period of limitation of four years as provided u/ss.(7) of section 154 of the Act has expired. Further, in some cases, the Assessing Officers have uploaded such disputed arrear demand on the Financial Accounting System (FAS) portal of Centralised Processing Center (CPC), which has resulted in adjustment of refund arising out of processing of returns against such arrear demand which has been disputed by such assessees on the grounds that either such demand has already been paid or has been reduced/eliminated in the appeals, etc. The arrear demands, in these cases also were not corrected/reconciled for the reason that the period of limitation of four years has elapsed. The CBDT has now authorised the Assessing Officers to make appropriate corrections in the figures of such disputed arrear demands after due verification/reconciliation and after examining the same on merits, whether by way of rectification or otherwise, irrespective of the fact that the period of limitation of four years as provided u/s.154(7) of the Act has elapsed.

Notification No. 25/2012, S.O. 1453(E) dated 2-7-2012 — Income-tax (Seventh Amendment) Rules, 2012 — Amendment in Rule 12 and substitution of forms ITR 5 and ITR 6.

Rule 12 provided that the prescribed ITR Form SAHAJ — ITR 1 and SUGAM — ITR 4S could not be used by a resident individual or a HUF to file his return of income, if he had:

(a) assets (including financial interest in any entity) located outside India; or

(b) signing authority in any account located outside India.

The Rule is amended to provide that not ordinary residents can use SAHAJ — ITR 1 and SUGAM — ITR 4S though they have assests located outside India and have signing authority in any account located outside India.

Agreement for exchange of information for collection of taxes between India and Jersey — Notification No. 26/2012, dated 10-7-2012. DTAA between India and Norway notified — Notification No. 24/2012, dated 19-7-2012.

Direct Tax Press Release No. 402/92/2006-MC (15 of 2012), dated 20-7-2012.

The CBDT vide its Notification No. 9/2012, dated 17th February, 2012 has exempted salaried employees from the requirement of filing the returns for A.Y. 2012-13.

The exemption is applicable only if all the following conditions are fulfilled:

  • Employee has earned only salary income and income from savings bank account and the annual interest earned from savings bank account is less than Rs.10 thousand.
  •  The total income of the employee does not exceed Rs.5 lakh (Total income means gross total income less deductions under Chapter VIA).
  • The employee has reported his PAN to the employer.

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Section 14A, Rule 8D — Exercising jurisdiction in the larger interest of justice, ITAT directed the AO to compute disallowance u/s.14A @ 2% of the exempt income instead of 4.06% as computed by the AO.

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18. JNJ Holdings P. Ltd. v. ACIT
ITAT ‘J’ Bench, Mumbai
Before B. Ramakotaiah (AM) and S. S. Godara (JM)
ITA No. 3411/M/2009
A.Y.: 2005-06. Decided on: 8-6-2012
Counsel  for  assessee/revenue:  Hiro  Rai/Rupinder Brar
       
Section 14A, Rule 8D — Exercising jurisdiction in the larger interest of justice, ITAT directed the AO to compute disallowance u/s.14A @ 2% of the exempt income instead of 4.06% as computed by the AO.

Facts:

The assessee involved in business of investments and dealing in shares, securities, filed its return declaring total income of Rs.14,60,52,720. In the said return it had shown dividend income of Rs. 76,49,289 as exempt income. In response to the show-cause notice issued by the AO as to why expenses in relation to earning of dividend income should not be disallowed, the assessee explained that it had not incurred any direct expenditure. The AO rejected this contention and computed the disallownce to be Rs.4,36,027 i.e., 4.06% of dividend income.

Aggrieved the assessee preferred an appeal to the CIT(A) who directed the AO to recompute the disallowance by following Rule 8D of the Incometax Rules, 1963.

 Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was contended that for the assessment year under consideration, Rule 8D is not applicable and that the Tribunal by exercising jursidiction u/s.254(1) of the Act, should determine the reasonable expenditure in peculiar circumstances of the case.

Held:

The Tribunal held that the CIT(A) was not correct in directing the AO to recalculate the disallowance by following Rule 8D. Keeping in view the fair statement of the AR as well as exercising jurisdiction in the larger interest of justice, the Tribunal directed the AO to compute the disallowance @ 2% of the exempt income instead of 4.06% which the Tribunal felt should meet the ends of justice.

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Section 54G — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking to non-urban area — Investment by assessee in land and building for its business in non-urban area — Whether is it necessary that the investment in land and building in non-urban area is for the purposes of the business of the industrial undertaking transferred — Held, No.

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17. Dy. CIT v. Enpro Finance Ltd.
ITAT ‘J’ Bench, Mumbai
Before B. Ramakotaiah (AM) and S. S. Godara (JM)
ITA No. 4428/Mum./2008
A.Y.: 2004-05. Decided on: 27-6-2012 Counsel for revenue/assessee: Rupinder Brar/Mayur Kisnadwala

Section 54G — Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking to non-urban area — Investment by assessee in land and building for its business in non-urban area — Whether is it necessary that the investment in land and building in non-urban area is for the purposes of the business of the industrial undertaking transferred — Held, No.


Facts:

The assessee-company was carrying on its business of manufacturing activity at its leased premises in Mumbai for more than 45 years. Due to severe competition and high operational overheads in Mumbai, the assessee incurred losses and the activity was commercially not feasible. During the financial year 1999-2000, it decided to shift its undertaking to a non-urban area. As the plant and machinery was very old, the assessee sold them immediately, but for surrendering the tenancy rights it took some time and after protracted negotiations with the lessor, the leased premises on which the industrial undertaking operated was finally surrendered on 1-10-2003 and compensation of Rs.4.12 crore was received. It earned capital gain of an equivalent amount as the cost of acquisition of the leased premise was nil. Out of this amount the assessee invested Rs.1.4 crore in Capital Gain Account Scheme and Rs.1.14 crore in purchase of land and building in non-urban area. The assessee claimed deduction u/s.54G of the amount of Rs.2.54 crore and offered the balance amount as taxable income.

According to AO, the assessee sold its entire plant and machinery in the financial year 1999-2000 and since there was no existence of an undertaking, having sold the entire plant & machinery, the claim u/s.54G, which provides for exemption for shifting of industrial undertaking from urban area to non-urban area is not eligible to the assessee. However, the CIT(A) on appeal allowed the claim of the assessee.

Held:

On closer reading of the provisions of section 54G the Tribunal noted that whereas u/s.54G(1)(a), the requirement is that the new machinery or plant has to be purchased for the purposes of the business of the industrial undertaking, section 54G(1)(b) merely requires that the acquisition of building or land or construction of a building should be for the purposes of its business in such non-urban area. In other words, the phrase ‘of the industrial undertaking’, which is there in clause 1(a) is conspicuously missing in clause 1(b). It further compared the provisions of section 54G with section 54D and noted that while section 54D mandates that, for the capital gains to exempt, the new land or building, have to be used only for either shifting or re-establishing or establishing an industrial undertaking (and no other purpose), the provisions of section 54G of the Act permits the use of capital gains for acquiring land or building or constructing building for the purposes of (any) business in the non-urban area. Thus, according to the Tribunal, the provisions of section 54G can be interpreted that assessee should carry on any business in non-urban area. If the amounts are utilised for acquisition of assets for the purpose of its business, this should qualify for the purpose of exemption u/s.54G as there is no requirement that the land and building should be used for the purpose of the business of industrial undertaking.

The Tribunal also did not agree with argument of the AO that the assessee’s industrial undertaking ceased to exist in 1999-2000. According to it, the assessee was in the process of shifting and even the section itself provides that shifting was ‘in course of or in consequence of’ of such industrial undertaking.

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Section 80IB(10) — If conditions prescribed u/s.80IB(10) are satisfied, claim cannot be denied merely because the assessee had not carried on construction activity itself.

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39. (2012) 23 taxmann.com 176 (Bangalore-Trib.)
Abdul Khader v. ACIT
A.Y.: 2006-07. Dated: 30-4-2012

Section 80IB(10) — If conditions prescribed u/s.80IB(10) are satisfied, claim cannot be denied merely because the assessee had not carried on construction activity itself.


Facts:

The assessee, a builder and developer, was owner of an agricultural land which was converted into stock-in-trade and put the same for development by entering into a joint development agreement. Under the joint development agreement, the assessee contributed land and incurred expenses for statutory approvals. The assessee did not carry on construction activity. The assessee was entitled to 24% share in the said project. The assessee sold 49 flats which it got as its share and claimed as deduction u/s.80IB(10).

The Assessing Officer denied the claim on the ground that the assessee had not carried on the construction activity. This was confirmed by CIT (A). The assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the assessee contributed land as its contribution of capital and incurred initial expenses for development and building of housing project like sanction of plan, getting the electricity and water connection by making the payments to BWSSB and KEB, etc. It also noted that it is not the case of the Department that the project was not approved or developed and built by the assessee. The only reason for denying the deduction u/s.80IB(10) was that the assessee had not carried out construction activity himself.

The Tribunal also noted that on a joint reading of s.s (10) of section 80IB and Explanation thereto it is clear that deduction is allowable to an undertaking developing and building housing project approved, it is nowhere mentioned that, construction has to be carried out by the undertaking. Moreover, the Explanation clarified that any undertaking which has executed housing project as a works contract awarded by any person is not eligible for claiming this deduction, which clearly shows that even if any undertaking is constructing the housing project under a works contract entered by a person is not eligible for deduction. The only condition for claiming deduction u/s.80IB(10) is that the undertaking is developing and building housing projects approved by a local authority.

It observed that in such type of cases, getting the approval and plan sanction is the first and initial stage which was to be taken by the assessee and for that purose the assessee was required to make investments. So, it cannot be said that assessee did not make any investment for the project under consideration.

The Tribunal held that the deduction u/s.80IB(10) cannot be denied merely on the basis that the assssee did not construct himself. Considering the totality of the facts and the ratio of the decision of Jurisdictional High Court in the case of CIT v. Shravanee Constructions, (2012) 22 taxmann. com 250 (Kar.), the Tribunal set aside the order passed by the CIT(A) and directed the AO to allow deduction u/s.80IB(10) of the Act.

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Exemption to small service providers — Notification No. 33/2012-ST, dated 20-6-2012.

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By this Notification, earlier Notification No. 6/2005-ST has been rescinded and exemption has been granted in relation to taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of service tax leviable thereon.

Further, the definition of ‘aggregate value’ is amended to mean the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year, but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under any other notification.

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Penalty — For not furnishing Vat Audit Report within prescribed time — Discretionary and not automatic — Failure to consider dealer’s explanation — Order set aside — Section 61(2) of The Maharashtra Value Added tax Act, 2002.

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Facts

The dealer could not file Vat Audit Report in time as such the penalty u/s.61(2) of the Act was levied by the Deputy Commissioner of Sales Tax without considering the explanation offered by the dealer for delay in filing the report and held that the penalty u/s.61 of the Act is automatic. Both the Tribunal and the Joint Commissioner of Sales Tax upheld the penalty order. The dealer filed appeal before the Bombay High Court against the order of the Tribunal.

Held

The Deputy Commissioner of Sales Tax had not furnished any reasons for rejecting explanation offered by the dealer while levying penalty and the Joint Commissioner of Sales Tax in appeals had proceeded on the wrong premise that the levy of penalty is automatic and that the reasons furnished by the dealer need not be considered at all. The Tribunal also seems to proceed on that basis. U/s.61(2) of the act penalty is attracted as soon as the wrongful act was committed, but that does not conclude the exercise of the discretion by the assessing authority. The levy of penalty is not automatic. The assessing authority is duty bound to consider the reasons which are furnished by the dealer and to inquire in to whether those reasons are genuine and bona fide. The Tribunal also dealt with reasons, but its order is based on conjecture. The High Court accordingly set aside the order of the Tribunal and remanded back to the assessing authority to pass fresh order and to consider the reasons furnished by the dealer while passing the order.

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Installation charges not recovered separately in case of sale and installation of solar systems — The Department levied service tax on notional basis — 33% of the total consideration — Held, Service tax applicable on installation portion even if not charged separately — Matter remanded back to ascertain the correct amount of the installation service based on the data sheet submitted by the assessee.

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Facts:

The appellant a manufacturer of solar water heater systems sold the same and the value also included the installation of such system at the site of the buyer. Central excise duty was not charged on the same in view of the exemption to solar systems. No separate consideration was charged in the invoice for installation. Simultaneously, the appellant was selling solar systems to distributors also who were charging for installation separately from the end-customers. The Revenue levied service tax on notional value of activity pertaining to installation on the basis of 33% of the invoice amount. The appellant argued that no service tax should be levied. Alternatively, the service tax if at all levied must be on actual service element pertaining to installation activity based on cost data provided by the appellant.

Held:

In view of the collection of installation charges separately by the distributors in case of sales through such distributors, it was held that service tax is applicable on the installation portion even if charges for the same have not been collected separately. The matter was remanded back to the adjudicating authority to quantify the amount of installation charges on which service tax can be levied, based on the data provided by the appellant.

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CENVAT credit — Courier services for sending documents, cheques, demand drafts and business enquiries — Held, eligible for CENVAT credit.

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Facts:

CENVAT credit of service tax taken on courier services was denied and penalty was imposed.

Held:

The lower authorities had not considered the wide gamut of the definition of input service. In view of the wide gamut of the definition and the decisions of the Tribunal in cases of Cadila Healthcare, (2010) 17 STR 134 as well as Meghachem Industries, (2011) 23 STR 472, the Tribunal allowed the appeal of the assessee.

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Activity of retrofitting of CNG/LPG kits as authorised by Regional Transport Authority considered liable for service tax by Revenue — Paid service tax on receiving intimation through sales tax on same amount charged for kits fitted by them —Penalties set aside.

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Facts:

The appellant authorised by Regional Transport Authority retrofitted CNG/LPG engine kits. The Revenue took a view that this was liable for service tax as erection, commissioning and installation service. On being pointed out in August, 2008, the appellant obtained registration and paid the same in September 2008. This was done despite the fact that sales tax in the full value of kits was paid by the assessee and invoice did not show fitting charges separately. Four months later, a show-cause notice was issued proposing to levy penalty u/s.76, 77 and 78 of the Finance Act, 1994.

Held:

Considering the facts and circumstances wherein the assessee promptly paid service tax without contesting the liability on the ground of payment of VAT on full value established their bona fides. The case was considered fit one for which section 73(3) was applicable whereby no show-cause notice was required to be issued or section 80 could have been extended. Penalties were set aside.

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Obtained visa and passport for individuals — Matter covered under CBEC Circular — Appeal was allowed.

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Facts:

The appellant being a travel agent provided services of obtaining visa and passports for a fee/ service charge to individuals. The appellant pleaded that the matter was covered later by CBEC Circular No. 137/6/2011, dated 20-1-2011 which had clarified that these services do not fall under any category of taxable services.

Held:

The service was not taxable and the order was set aside.

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? Refund — Accumulated CENVAT credit — Not pertaining to the month of exports — Held, refund of credits pertaining to past periods can be allowed in subsequent months. ? Eligible documents — Input service invoices raised on head office — Held, credit can be allowed if the services received by the assessee. ? Ineligible documents — Photocopies of invoices, invoices not containing name of the assessee — Credit cannot be allowed. ? Eligible documents — Documents in the name of another entity but o<

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Facts:

The respondent was a 100% EOU engaged in the exports of silk fabrics. Most of their production was exported and therefore, the respondent was not able to utilise the accumulated credits and they filed refund claim for such credits under Rule 5 of the CENVAT Credit Rules, 2004 (CCR). The Department rejected the claim since the claim pertained to credits for the input services which had not been used in goods actually exported, while relying on certain Tribunal decisions in Ace Techniks v. Commissioner, (2009) ELT 92 (T). Moreover, certain credit was denied on input service invoices which were raised on head office or where only photocopies of invoices were available or where the invoices were not in the name of the respondent. The respondent argued that in view of CBEC Circular dated 19-1-2010 and the respondent’s own case reported in (2010) 20 STR 219 (Tri.-Bang.), the credit pertaining to a period can be claimed in the subsequent period.

Held:

Quoting Para 3.3 of CBEC Circular dated 19-1-2010, the Tribunal held that there is no bar on refund for the credits pertaining to the input services availed in the previous period. It was also observed that the case of Ace Techniks cited by the Revenue was in relation to inputs and not input services and therefore, not applicable to this case. Regarding eligible documents the Tribunal held as under:

  • Input service invoices raised on head office — held, credit can be allowed if the services are received by the respondent and the respondent can satisfy the authorities that the services have been received by them.
  •  Photocopies of invoices, invoices not containing name of the assessee — held, such documents are not eligible documents.
  •  Documents in the name of another entity but on account of the assessee — held, credit cannot be denied on such invoices in view of the Tribunal’s decision in the case of the respondent’s own case reported in (2010) 20 STR 219 (Tri.-Bang.).

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Refund — Service tax paid subsequently found not payable due to threshold exemption — Refund denied on the ground that nothing was indicated about service tax exemption in the invoice — Held, refund cannot be denied.

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Facts:

In the given case, service tax was demanded from the appellant on the ground that the appellant had exceeded the limit provided for exemption. The appellant immediately paid service tax along with interest. Subsequently, it was discovered that the appellant was within the limits of threshold exemption and therefore the tax was not payable. Consequently, the appellant claimed refund. The claim was rejected by the Dept. on the ground that the fact of exemption was not mentioned in the invoice, and therefore, the value indicated in the invoice was inclusive of service tax element. The Department in support of its claim also stated that since service tax paid had been debited to Profit and Loss account, therefore it had to be held that service tax liability had been included in the value of services charged in the invoice.

 Held:

The Tribunal held that the view taken by the Department is not appropriate. How can the appellant mention the amount of tax when the appellant was exempt? Moreover, mere non-mention of service tax exemption on the invoice does not mean that the appellant has collected any amount of service tax. Also, the fact that service tax paid was booked as expenditure does not mean the appellant was in fault. The order rejecting the refund claim of the appellant was held to be non-sustainable.

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CENVAT credit availed on capital goods — Goods destroyed by fire after availment and utilisation of such credit — Insurance claim paid by the insurance authority covered central excise duty — Revenue sought to recover the CENVAT — Held, Reversal can be sought only if the availment irregular — Appeal dismissed.

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Facts:

The respondent bought certain capital goods on payment of excise duty on the same. The duty portion was claimed as CENVAT credit and thereafter, the same was utilised for the discharge of duty liability on goods cleared. Five years thereafter, the goods got destroyed in fire. The respondent purchased new capital goods and put forward claim to the insurance company in terms of the insurance policy subscribed by them. The insurance company reimbursed the cost of goods including the excise duty element on the same. The Revenue directed the assessee to reverse the CENVAT credit on the ground that the assessee had double benefit. The substantial questions of law were

(a) whether the assessee was eligible to claim credit on goods which were claimed to be destroyed in fire and for which the insurance company had compensated equivalent value of goods along with duty, and

 (b) whether the Tribunal’s order encouraged unjust enrichment.

Held:

Citing the judgment in case of CCE, Pune v. Dai Ichi Karkaria Ltd. reported in (1999) 112 ELT 353 (SC), the Court held that there is no provision in the rules which provides for the reversal of the credit by the Excise Authorities except where it has been irregularly taken. Merely because the insurance company paid the assessee the value of goods including the excise duty paid, that would not render the availment of the CENVAT credit wrong or irregular. The appeal of the Department was dismissed.

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Allowance of input tax credit — Stand of the Department and related procedural aspects — Trade Circular No. 8T of 2012, dated 21-6-2012.

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This is a clarificatory Circular in nature in view of the Bombay High Court decision in case of M/s. Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur in writ petition No. 33/2012. This Circular states in detail the stand of the Department regarding allowing/disallowing of Input Tax credit and related procedural aspects.

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Professional tax payment electronically — PFT.1012/C.R.29/Taxation 3, dated 14-6-2012.

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By this Notification every PTRC holder has to make payment electronically of tax, interest, penalty or any amount under the law with effect from 1-7-2012.

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Clarification on service tax on remittance from abroad to India — Circular No. 163/14/2012-ST, dated 10-7-2012.

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This Circular has clarified that no service tax will be leviable on the amount of foreign currency remitted to India from abroad as the service has been defined u/s.65B(44) and the definition specifically excludes a transaction in money or actionable claim.

As the remittance of foreign currency from abroad is a transaction in money, therefore, it will fall outside the ambit of service. It is further clarified that even the Indian counterpart bank or financial institution who charges the foreign bank or any other entity for the services provided at the receiving end, is not liable to service tax as the place of provision of such service shall be the location of the recipient of the service, i.e., outside India, in terms of Rule 3 of the Place of Provision of Services Rules, 2012.

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Clarification on point of taxation rules — Circular No. 162/13/2012-ST, dated 6-7-2012.

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This Circular has been issued to clarify issues relating to point of taxation in (i) continuous supply of service — dealing with the transition by way of changes in the Rules w.e.f. 1st April 2012; (ii) works contracts — the transition by way of changes in tax treatment w.e.f. 1st July 2012; and (iii) introduction of partial reverse charge in certain services w.e.f. 1st July 2012. Accordingly,

(i) In the case of continuous supply, where the invoice had been issued or payment received before or on 31st March 2012, the point of taxation is governed by Rule 6 of the Point of Taxation Rules, 2011 as it stood at that point of time.

(ii) In the case of works contracts, which have been subjected to certain changes in service tax treatment effective from 1st July, if there has been a change in the effective rate of tax, the point of taxation will be determined under Rule 4, and if not, it will be determined under Rule 3. Introduction of service tax for a service that was not exempted by Notification, but was outside the scope of taxable service, does not constitute a change in the effective rate of taxation, and will be dealt with under Rule 3. (iii) For services where partial reverse charge has been introduced from 1st July, it will apply only when the point of taxation is on or after 1st July.

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Clarification regarding cess — Circular No. 161/12/2012-ST, dated 6-7-2012.

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The CBEC has circulated the new single accounting code for all taxable services, which is 00441089 for service tax, 00441090 for other receipts, and 00441093 for penalties. The code for ‘deduct refunds’ is 00441094. These codes are effective from 1st July 2012. The old codes will continue to be operative for payment pertaining to the period prior to 1st July 2012.

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Clarification regarding cess — Circular No. 160/11/2012-ST, dated 29-6-2012 and Order N0. 2/2012, dated 29-6-2012.

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There has been some doubt regarding the applicability of provisions of the Finance Act, 2004 relating to education cess and the Finance Act, 2007 relating to secondary and higher education cess as the concerned Acts make reference to section 66 of the Finance Act, 1994, which shall cease to have effect from 1st July, 2012. In this connection, reference to the s.s (1) of section 8 of the General Clauses Act, 1897 is made for interpretation of statutes and thus any reference to section 66 of the Finance Act, 1994 shall be construed as reference to the newly re-enacted provision i.e., section 66B of the same Act. Despite the stated position of law, the matter has been settled by the issue of Removal of Difficulties Order No. 2/2012, dated 29-6-2012.

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Transport of passengers and goods by rail exempted from service tax — Notification No. 43/2012-ST, dated 2-7-2012.

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Vide this Notification, exemption has been granted from whole of service tax leviable on two kinds of services provided by Indian Railways, namely,

(a) Service of transportation of passengers (with or without accompanied belongings) in 1st class or in air-conditioned coach and

(b) Services by way of transportation of goods. The exemption would be effective up to 30th September 2012.

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Service of foreign commission agent utilised for export of goods exempted — Notification No. 42/2012-ST, dated 29-6-2012.

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By this Notification, the service of a commission agent located outside India and used for the export of goods is exempted from service tax up to a value of 10% of the FOB value of the goods exported. However, the exemption is not available for the export of canalised item, project export, export financed under lines of credit extended by the Government of India or by EXIM Bank.

It is also not available for export by the Indian partner with equity participation in an overseas joint venture or wholly-owned subsidiary. The said Notification also contains the procedure in detail and the forms in which the exporter is required to inform Dy. Commissioner/ Assistant Commissioner of Central Excise regarding before claiming exemption.

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Exemption of service provided to SEZ, etc. — Notification No. 40/2012-ST, dated 20-6-2012.

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Vide this Notification, exemption granted to services provided to an unit located in a Special Economic Zone or Developer of SEZ and used for the authorised operations, from the whole of the service tax, education cess and secondary and higher education cess leviable thereon, subject to complying with conditions and procedures.

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Rebate of service tax to exporter — Notification No. 41/2012-ST, dated 29-6-2012.

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This Notification deals with provision and procedure for rebate given in the form of refund of service tax paid on services utilised for goods exported. The rebate is available for export of both excisable and non-excisable goods.

For excisable goods, it applies to services used beyond the place of removal, for export of the goods. For non-excisable goods, it applies to services used for the export of the goods. Rebate is given as per the schedule of rates in the Notification; however if actuals are over twenty per cent more than the notified rate, the rebate can be claimed on the actuals as supported by documents.

The exclusions under definition of ‘input services’ in the Cenvat Credit Rules, as contained in clauses A, B, BA and C of Rule 2(l) apply to rebate also. Rebate is not available if Cenvat credit of service tax paid on specified service used for export of goods has been taken.

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Transplantation of human organs — Donor and recipient near relatives, hence approval of authorisation committee is not necessary.

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[Sonia Ajit Vayklip (Miss.) & Anr v. Hospital Committee, Lilavati Hospital & Research Centre & Ors., AIR 2012 Bombay 93.]

A tribal lady from Chhattisgarh, had challenged the decision of the respondents herein refusing to grant approval for transplantation of her kidney to the body of her younger brother Deepak Ajeet Vayklip. By their report dated 4th January 2012, the Authorisation Committee and the Chairman of the Authorisation Committee and Director of Medical Education and Research, Mumbai have not granted permission to the petitioner No. 1 for donating her kidney to her brother Deepak Ajeet on the ground of mental status of the petitioner No. 1 and also on the ground that the petitioner donor is suffering from right kidney stones and ureteric stones.

The Court observed that as the preamble indicates, the Transplantation of Human Organs and Tissues Act, 1994 is enacted to provide for regulation of removal, storage and transplantation of human organs and tissues for therapeutic purposes and for prevention of commercial dealings in human organs and matters connected or incidental thereto. Section 3 of the Act provides that any donor may, in such manner and subject to such conditions as may be prescribed, authorise the removal, before his death, of any human organ or tissue or both of his body for therapeutic purposes in such a manner and subject to such conditions as may be prescribed.

The legislative scheme therefore, is that two types of cases are contemplated:

(i) donor to stranger

(ii) from donor to near relative

No such approval is required from the Authorisation Committee for donation of a human organ or tissue to a near relative, because there would be no commercial element for such donations. Even in the donation to a near relative, there are three restrictions:

(A) where either the donor or the recipient is a foreign national, prior approval of the Authorisation Committee is required.

(B) in case of a minor, no organ or tissue can be removed from the body of the minor before his death for the purpose of transplantation except in the manner as prescribed;

(C) in case of mentally challenged person, no organ or tissue can be removed from the body of the mentally challenged person before his death for the purpose of transplantation. Mentally challenged person is defined as having mental illness or mental retardation.

The Court observed that in cases where donor and recipient are near relatives as defined by the Act, there need be no enquiry by Authorisation Committee to ascertain whether there is any commercial element. Such enquiry is therefore, not at all required to be held in the case of near relatives. Approval of Authorisation Committee would not be necessary in such cases. Having regard to the facts and circumstances of the case and the urgency involved and also having regard to the fact that the State of Chhattisgarh has also released a grant of Rs.2 lac in favour of the proposed kidney transplantation of the petitioner No. 2, the Court allowed the petition.

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Time limit for issuing of notice : Sections 148 and 149 of Income-tax Act, 1961: A.Y. 1998-99: Assessment order u/s.143(3) passed on 28-2- 2001: Notice u/s.148 issued on 30-3-2009: Not valid: Section 149 amended by Finance Act, 2001, w.e.f. 1-6-2001 reducing the time limit from 10 years to 6 years is applicable.

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[C. B. Richards Ellis Mauritius Ltd. v. ADIT, 21 Taxman. com 535 (Del.)]

For the A.Y. 1998-99 the assessment was completed u/s.143(3) on 28-2-2001. Subsequently, on 30-3-2009, a notice u/s.148 was issued for reopening the assessment. The assessee’s objections were rejected by the Assessing Officer. The Delhi High Court allowed the writ petition filed by the assessee and held as under: “

(i) The issue in dispute gained importance because the time limit for issuance of notice u/s.148 as stipulated and stated in section 149 underwent substitution by the Finance Act, 2001 with effect from 1-6-2001. By the Finance Act, 2001, the period was restricted to six years from the end of the relevant assessment year. Before the said substitution, till 31-5-2001 reassessment proceedings could be initiated for up to 10 years from the end of the relevant assessment year.

(ii) It is an accepted and admitted position that the re-assessment notice dated 30-3-2009 would be barred and beyond time, in case, the period stipulated in substituted section 149 with effect from 1-6-2001 is applied.

However, the contention of the Revenue is that the substituted section is not applicable and section 149 before its substitution by the Finance Act, 2001 would apply. It is stated that the return in question was filed on 20-11-1998 and the law/limitation period prescribed/applicable on the first day of the assessment year determines and decides the time period for issue of notice u/s.147/148. The question raised is whether the amendment substitution of the period with effect from 1-6-2001 in section 149, is procedural or substantive.

(iii) Law of limitation is a procedural law and the provision or the limitation period stipulated on the date when the suit is filed applies. Law of limitation, therefore, being procedural law has to be applied to the proceedings on the date of institution/ filing. No person can have a vested right in the procedure. Therefore, the procedural law on the date when it was enforced is applied.

(iv) Law of limitation does not create any right in favour of a person or define or create any cause of action, but simply prescribes that the remedy can be exercised or availed of by or within the period stated and not thereafter. Subsequently, the right continues to exist but cannot be enforced. The liability to tax under the Act is created by the charging section read with the computation provisions. The assessment proceedings crystallise the said liability so that it can be enforced and the tax if short-paid or unpaid can be collected. If this difference between liability to tax and the procedure prescribed under the Act for computation of the liability (i.e., the procedure of assessment), is kept in mind, there would be no difficulty in understanding and appreciating the fallacy and the error in the primary argument raised by the Revenue.

(v) It is a settled position that liability to tax as a levy is normally determined as per statute as it exists on the first day of the assessment year, but this is not the issue or question in the present case. The issue or question in the present case relates to assessment, i.e., initiation of re-assessment proceedings and whether the time/limitation for initiation of the re-assessment proceedings specified by the Finance Act, 2001 is applicable. The Court is not determining/deciding the liability to tax but has to adjudicate and decide whether the re-assessment notice is beyond the time period stipulated. This is a matter/issue of procedure, i.e., the time period in which the assessment or re-assessment proceedings can be initiated. Thus, the time period/limitation period prescribed on the date of issue of notice will apply.

(vi) In view of the aforesaid reasoning, writ petition is allowed and the re-assessment notice dated 30-3-2009 and the order passed by the Assessing Officer and Assistant Commissioner dismissing the objections of the assessee are quashed.”

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Speculation business: Speculation loss: Section 73, r/w section 28(i)-: A.Ys. 1996-97 and 1998-99: Assessee-company in business of dealing in shares and also earning interest income by granting loans and advances: Incurred loss in purchase and sale of shares: Claimed set-off of above loss against interest income: AO denied set-off relying on Explanation to section 73: Tribunal held that principal business of assessee was granting of loans and advances: Allowed set-off: Tribunal is right.

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[CIT v. Narayan Properties Ltd., 21 Taxman.com 547 (All.)]

The assessee-company was in the business of purchase and sale of shares and was also earning interest income by granting loans and advances. During the previous years relevant to the A.Ys. 1996-97 and 1998-99, the assessee incurred loss in the purchase and sale of shares and earned interest income from loans and advances. It claimed set-off of the above loss against the interest income. The Assessing Officer assessed the interest income as business income. He further treated the business of purchase and sale of shares as speculation business as per Explanation to section 73 of the Income-tax Act, 1961. He, therefore, considered the aforesaid loss as speculation loss and held that it would only be set off against the speculation profit in the subsequent years. The Tribunal allowed the assessee’s claim.

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

(i) Section 73(1) provides that any loss, computed in respect of speculation business carried on by the assessee, shall not be set off except against profits and gains, if any of another speculation business. Section 73(1) uses the words ‘business carried on’. The Explanation to section 73 also uses the phrase ‘where any part of the business of the company . . . . . consists in the purchase and sale of shares of other companies’. Section 28(1) provides for charging of income-tax on profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. Section 28(1) r/w section 73(1) which also uses the words ‘business carried on’ clearly indicate that what is chargeable to the income-tax is the business actually carried on and profits and gains of the said business.

The Explanation to section 73 contains an exclusionary clause, according to which the following companies are excluded from the operation of the deeming clause

(i) a company whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on securities’, ‘Income from house property’, ‘Capital gains’ and ‘Income from other sources’, or (ii) a company the principal business of which is the business of banking or granting of loans and advances’.

(ii) The question to be considered is as to whether a company, which fulfils the conditions as mentioned in the exclusionary categories, can be denied the benefit, if the income consists mainly of income as used in first category and the principal business of which as used in the second category from the activities and business which are not the part of the memorandum of association of the company. Section 28(1), section 73(1) and the Explanation to section 73 indicate that the income which is chargeable is the income in the relevant year arising from business or profession carried on by the company. The words ‘carried on’ mean actual carrying of the activity. The words ‘carried on has to be read in context of what actually was done by the company in the relevant year, rather than what was main object in the memorandum of association of the company. Thus, the submission of the Revenue that since in the memorandum of association the activity or business, which is shown to have been carried on by the assessee, is not included, it is not entitled to be considered in exclusionary clause, has to be rejected.

(iii) For qualifying the exclusionary categories as mentioned in the Explanation to section 73, the condition to be fulfilled is that gross total income consists mainly of income which is chargeable under the heads

 (a) ‘Interest on securities’,

(b) ‘Income from house property’,

(c) ‘Capital gains’ and

(d) ‘Income from other sources’.

The said provision uses the words ‘mainly of income’. The words ‘mainly of income’ and similarly in the second category the words ‘principal business of which’ mean substantially or primarily.

(iv) In the instant case, the total gross income of the assessee, which has been shown in the assessment order, is interest income. The assessment order does not refer to any other income. Hence, the condition that income consists ‘mainly of income’ is completely fulfilled. One of the heads of the income for exclusionary category is income from other sources.

 (v) The second category consists of the phrase ‘a company the principal business of which is granting of loans and advances’. The income, which has been treated to be gross income, is income from interest of the assessee from granting loans and advances. Thus, the assessee was covered by exclusionary clause of Explanation to section 73.

(vi) Therefore, the assessee was clearly covered by the exclusionary clause of Explanation to section 73 and the Tribunal rightly set off of the aforesaid loss against the income of the assessee from loans and advances.”

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Settlement of case: Abatement: Sections 245C, 245D and 245HA : A.Ys. 1989-90 to 1993-94: Effect and scope of section 245HA: Where there was no fault of the applicant and he himself is not responsible for delay in getting decision on the settlement application, the application shall not abate.

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[Md. Sanaul Haque & Ors. v. UOI, 250 CTR 218 (Jharkhand)]

Dealing with the effect and scope of section 245HA of the Income-tax Act, 1961, the Jharkhand High Court followed the judgment of the Bombay High Court in Star Television News Ltd. v. UOI, 317 ITR 66 (Bom.) and held as under: “In a case where there was no fault of the applicant and he himself is not responsible for delay in getting decision on the settlement application, in that situation, the application shall not abate. The Settlement Commission has to decide the application following the principles laid down in Star Television News Ltd.”

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Penalty: Delay in filing declaration in Form No. 15H: Section 272A(2)(f): A.Ys. 1991-93, 1992-93 and 1994-95: No obligation to file declaration prior to 1-6-1992: Penalty not imposable for that period: Further the penalty to be restricted to the tax amount as per subsequent clarificatory amendment to proviso.

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[CIT v. Krishna Cold Storage, 250 CTR 134 (Guj.)]

For the A.Ys. 1991-92, 1992-93 and 1994-95 penalty u/s.272A(2)(f) of the Income-tax Act, 1961 was imposed for delay in filing declaration in Form 15H. The Tribunal held that no penalty was imposable for the period prior to 1-6-1992 because there was no statutory obligation to file the prescribed form u/s.197A. The Tribunal also held that the penalty should be restricted to the amount of tax deductible by giving retrospective effect to the proviso which is clarificatory.

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

(i) Failure to file the declaration in Form No. 15H prior to 1-6-1992 not being a default u/s. 272A(2) (f), no penalty could be levied for delay up to 1-6-1992.

(ii) In view of proviso, which is remedial in nature and consequently retrospective in operation, penalty could not exceed the tax deductible.”

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PAN: TDS: Section 206AA, r.w.s. 139A: Constitutional validity; Article 14 of the Constitution of India, 1950: Requirement to furnish PAN: Section 206AA is unconstitutional and has to be read down from statute and made inapplicable to persons whose income is less than taxable limit: Therefore, banking and financial institution shall not invariably insist upon PAN from small investors as well as persons who intend to open an account in bank or financial institution.

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[Smt. A. Kowsalya Bai v. UOI, 22 Taxman.com 157 (Kar.)]

Considering the constitutional validity of section 206AA of the Income-tax Act, 1961, the Karnataka High Court held as under: “

(i) The very intent of section 206AA is to make it conditional for every person who wish to have a transaction in the bank or financial institution including small investors/depositors, invariably to have a PAN. This runs contrary to what has been contemplated u/s.139A which was introduced by the Legislature in its wisdom. What is not in dispute is, persons whose income is below the taxable limit need not have a PAN and also they need not furnish income tax declaration/ returns. Of course, under the Finance Act, it is made clear that a person whose income is less than the taxable limit is not taxable.

(ii) Such of the small investors who come forward to invest their savings from earnings as security for their future, by virtue of the present section 206AA necessarily have to give their PAN. The poor and illiterate/uneducated persons are finding it difficult rather to approach the various Government departments, particularly the Income-tax Department to get their PAN.

(iii) It is, therefore, held that it may not be necessary for such persons whose income is below the taxable limit to obtain PAN. Such investments/ savings from their earnings or by way of agriculture or any other source, in banking and financial institutions would also further the financial position from the point of the country’s economy.

(iv) But imposing condition to invariably go for a PAN on such small depositors would cause hindrance and discourage such small investors to come forward to invest their money for secured returns and as security for their future.

(v) The difficulty expressed by the petitioners and similarly placed persons is, imposing condition to invariably go for PAN as per section 206AA would run contrary to section 139A. It is also their grievance that filing of Form 15G to seek exemption from deduction of income tax at source, also is not accepted by the 3rd and 4th respondents and acted upon unless the PAN is produced.

(vi) Section 139A which is introduced way back in April 1991 is in vogue and this provision stands the scrutiny of Article 14 of the Constitution for reasonableness. But, section 206AA which is contrary to section 139A appears to be discriminatory as if it is overriding section 139A introduced earlier.

Though the intention of the Legislature is to bring the maximum persons under the net of income tax, when necessarily it provides for exemption up to taxable limit, it may not insist such persons whose income is below the taxable limit to compulsorily go for PAN. If any mischief of avoiding of tax or any other act of concealing the income is detected, that could be taken care of by penal provisions.

vii) In that view of the matter, in view of the specific provision of section 139A, section 206AA is made inapplicable to persons and read down from the statute for those whose income is less than the taxable limit as per the Finance Act, 1991. However, it is made clear that section 206AA would of course be made applicable to persons whose income is above the taxable limit.

(viii) The banking and financial institutions shall not invariably insist upon PAN from such small investors like the petitioners as well as from persons who intend to open an account in the bank or financial institution.”

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Income: Deemed to accrue or arise in India: Sections 5, 6 and 9 : A.Y. 2001-02: Assessee was an employee of an American company and non-resident from year 1991 to 1999: On termination of employment in 1999, he received certain amount from previous employer as retirement benefit/severance/ vacation engagement: Assessee not ordinary resident in relevant assessment year: Amount received by assessee had not accrued/ deemed to be accrued/paid in India in terms of section 6 and section 9(1)(ii): Amou<

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[CIT v. Anant Jain, 207 Taxman 117 (Del.), 21 Taxman. com 19 (Del.)]

The assessee was an employee of an American company from 1991 till November, 1999 and during this period he was a non-resident Indian. The employment was terminated in the year 1999. In the relevant year, i.e., A.Y. 2001-02 the assessee was ‘not ordinarily resident’. In the relevant year the assessee received certain amount as leave encashment according to the number of years of service, which was subsequently described as severance and vacation encashment paid by the erstwhile employer of the assessee in the USA for services rendered outside India.

The assessee claimed that this amount was not taxable in India under provisions of section 5(1)(c) read with section 9(1)(ii). The Assessing Officer held that the said amount was received by the assessee as his profit in lieu of salary which was payable by the employer under the employer-employee relationship and, therefore, was taxable u/s.17(3)(ii). The CIT(A) held that the receipt of the impugned amount was on account of the past services rendered by the assessee to his previous foreign employer outside India at a time when he was a non-resident and this could not be deemed to have accrued or arisen in India and would not come under the purview of section 9(1)(ii).

The Tribunal upheld the order of the CIT(A). On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “

(i) It is clear from the factual findings recorded by both the Commissioner (Appeals) and the Tribunal, that the payment in question was received towards retirement benefit/severance/vacation encashment from the erstwhile employer on termination of employment in November, 1999. The erstwhile employer was based in the USA and services were rendered to the erstwhile employer in the USA.

(ii) In view of the aforesaid factual position, elucidated and accepted by both, the Commissioner (Appeals) and the Tribunal, the said amount cannot be taxed in India, as the status of the assessee during the year in question was that of ‘not ordinary resident’. The said income did not accrue or arise in India.

(iii) The Tribunal has rightly held that in terms of section 6 and section 9(1)(ii), the amount/income had not accrued/deemed to be accrued/ paid in India.”

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Depreciation: Intangible assets: Section 32(1) (ii): A.Ys. 2002-03 and 2005-06: Know-how, business contracts, business information, etc., described as goodwill are intangible assets eligible for depreciation u/s.32(1)(ii) as ‘business or commercial rights of similar nature’ specified in section 32(1)(ii).

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[Areva T&D India Ltd. v. Dy. CIT, 250 CTR 151 (Del.)]

The assessee had acquired know-how, business contracts, business information, etc., as part of the slump sale described as goodwill. The assessee’s claim for depreciation u/s.32(1)(ii) of the Income-tax Act, 1961 on such intangible assets was disallowed for the A.Ys. 2002-03 and 2005-06, for the reason that the same were described as goodwill. The Tribunal upheld the disallowance.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under: “Intangible assets viz., business claims, business information, business records, contracts, employees and know-how acquired by the assessee under slump sale of running business are in the nature of ‘business or commercial rights of similar nature’ specified in section 32(1)(ii) and therefore, the same are eligible for depreciation.”

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Capital gains: Sections 2(47) and 48: A.Y. 2002-03: Redemption of preference shares amounts to transfer u/s.2(47): Computation: Redeemable preference shares are not bonds or debentures: At time of redemption of preference shares, assessee would be entitled to benefit of indexation u/s.48.

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[CIT v. Enam Securities (P.) Ltd., 345 ITR 64 (Bom.); 208 Taxman 54 (Bom.); 21 Taxman.com 267 (Bom.)]

In the A.Y. 2001-02, the assessee redeemed three lakh preference shares (held for 10 years) at par and claimed long-term capital loss after availing benefit of indexation and claimed the set-off of the same against the long-term capital gain on sale of other shares. The Assessing Officer disallowed the claim on the grounds that —

(i) both the assessee and the company in which the assessee held the preference shares, were managed by the same group of persons;

(ii) that there was no transfer; and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. The CIT(A) allowed the claim of the assessee. The Tribunal affirmed the view of the CIT(A).

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

(i) There is a finding of fact that the transaction was not questioned by the Revenue for over ten years: that both the assessee and the company of which the assessee held redeemable preference shares were juridical entities and the mere fact that both were under common management would not necessarily indicate that the transaction was not genuine. There is no reason for this Court to differ with the finding of the Tribunal.

(ii) The judgment of the Supreme Court in Anarkali Sarabhai v. CIT, (1997) 224 ITR 422/90 Taxman 502 concludes the issue that a redemption of preference shares by a company squarely comes within the ambit of section 2(47), since it amounts to a transfer.

(iii) The second proviso to section 48 provides for indexation where long-term capital gain arises from the transfer of a long-term capital asset. The third proviso, however, stipulates that nothing contained in the second proviso shall apply to long-term capital gain arising from the transfer of a long-term capital asset being bonds or debentures other than capital indexed bonds issued by the Government.

The Assessing Officer was of the view that the principal characteristic of a bond is a fixed holding period and a fixed rate of return. According to him, the four per cent non-cumulative redeemable preference shares which the assessee redeemed also had a fixed holding period and a fixed rate of return and on this basis denied the benefit of cost indexation to the assessee. The entire basis on which the Assessing Officer denied the benefit of cost indexation was flawed and was justifiably set right in the order of the Tribunal.

(iv) There is a clear distinction between bonds and share capital, because a bond does not represent ownership of equity capital. Bonds are in essence interest-bearing instruments which represent a loan. This distinction has been accepted by the Supreme Court in R. D. Goyal v. Reliance Industries Ltd., (2002) 40 SCL 503.

(v) Section 48 denies the benefit of indexation to bonds and debentures other than capital indexed bonds issued by the Government. The four percent non-cumulative redeemable preference shares were not bonds or debentures within the meaning of that expression in section 48. In these circumstances, the Tribunal was correct in its decision to that effect.”

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Capital gain: Sections 48 and 55(2): A.Y. 1999- 00: Transfer of self acquired trademark and design: No cost of acquisition: Capital gain not chargeable to tax.

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[CIT v. M/s. Fernhill Laboratories and Industrial Establishment (Bom.); ITA No. 5615 of 2010, dated 12-6-2012]

In the previous year relevant to the A.Y. 1999-00, the assessee transferred self acquired trademark and designs for the considerations of Rs.15 crore and Rs.20 lakh, respectively. The assessee claimed that the capital gain on such transfer is not chargeable to tax in view of the judgment of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty, 128 ITR 249 (SC). The Assessing Officer rejected the assessee’s claim and held that the capital gain is chargeable to tax. The CIT(A) and the Tribunal accepted the assessee’s claim.

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

(i) Prior to the amendment made to section 55(2) by the Finance Act, 2001 effective from 1-4-2002 by adding the words ‘trademark or brand name associated with the business’ self-generated assets such as trademark did not have any cost of acquisition. Therefore, for the period under consideration the computation u/s.48 fails resulting in such transfer of trademarks not being chargeable to capital gains tax.

 (ii) Consequent to amendment made to section 55(2) w.e.f. 1-4-2002 by which the words trademark or brand name associated with the business was introduced into it, the computation provision becomes workable and the consideration for the sale of trademark would be subject to capital gains tax.

(iii) In fact, when the amendment was made to section 55 by the Finance Act, 2001 the CBDT had issued Circular bearing No. 14-2001 explaining the provisions of the Finance Act, 2001. From the said Circular it would be clear that the amendment bringing self-generated intangible assets such as trademarks to capital gains tax only w.e.f. A.Y. 2002-03 onwards. In this case we are concerned with the A.Y. 1999-00 and therefore, the amendment would not have any effect. Consequently, the sale of self-generated trademarks during the A.Y. 1999-00 are not chargeable to capital gains tax.

(iv) So far as the sale of self-generated designs (i.e., not acquired) the same is also not chargeable to capital gains tax not only for the reasons applicable to trademarks, but for the fact that even till this date, no amendment has been made to section 55(2) of the said Act, defining cost of acquisition of design as in the case of trademark, goodwill, etc.”

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Capital gain: Indexed cost: Sections 2(42A), 48 and 49 : A.Y. 2005-06: Acquisition of asset by inheritance: Indexation to be made w.r.t. the holding of asset by previous owner.

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[CIT v. Ms. Janhavi S. Desai (Bom.); ITA No. 126 of 2011 with CO(L) No. 2 of 2012, dated 5-7-2012]

In or about the year 1942, the assessee’s father acquired the immovable property from his father. The assessee’s father expired on 21-8-1988, leaving behind a will bequeathing the property to his wife (assessee’s mother) and the assessee in equal shares. The assessee’s mother expired on 21-2-2000 and her 50% share was inherited by the assessee. In the previous year corresponding to the A.Y. 2005-06, the assessee sold the property for a consideration of Rs.9.5 crore and declared a long-term capital gain of Rs.38,44,247. While computing the capital gain the assessee considered the date of acquisition of the property to be prior to 1-4-1981 and took the cost of acquisition and indexed the same w.r.t. 1-4-1981. The AO held that for the purpose of indexation, the actual date of acquisition by the assessee must be taken. Accordingly, he indexed the cost in respect of 50% w.r.t. 21-8-1988 (date of death of father) and the balance 50% w.r.t. 21-2-2000 (date of death of mother). The CIT(A) allowed the assessee’s appeal and held that the indexation should be w.r.t. 1-4- 1981. The Tribunal upheld the order of the CIT(A) w.r.t. 50% of the property acquired from the father. In respect of the balance 50% acquired from mother, the Tribunal held that the indexation should be w.r.t. 21-8-1988 when the mother acquired the property from the father. The Tribunal held that for the purpose of indexation, the period of holding of the asset by the previous owner should be taken into account.

The Revenue filed appeal in respect of the 50% decided in favour of the assessee and the assessee filed cross-objection in respect of the balance 50%. The Bombay High Court dismissed the appeal and allowed the cross-objection and held as: “

(i) The Explanation to section 49(1) defines the expression ‘previous owner of the property’ to be the last previous owner thereof, who acquired it by a mode of acquisition ‘other than that referred to in clauses (i) to (iv) of s.s (1)’. The last previous owner of the property, who acquired the property by a mode of acquisition other than those referred to in clauses (i) to (iv), was the assessee’s grand-father. The assessee’s father admittedly acquired the property in 1942 from his father.

 (ii) As far as the 50% portion of the property acquired by the assessee from his father is concerned, the cost of acquisition must be determined to be the cost at which the assessee’s grandfather, in any event the assessee’s father acquired the property and not the date on which the assessee acquired it. The Tribunal does not hold otherwise either.

(iii) The Tribunal however held that in respect of 50% of the property inherited by the assessee from her mother, the period of holding would start from 21-8-1988, as she became owner of her 50% share in the property only from that date. This requires consideration. The last previous owner of the assessee’s mother’s 50% share was her husband’s father and at the highest her husband. Thus the assessee must be deemed to have held this 50% share in the property also from 1-4-1981.

(iv) In the circumstances, the questions are answered in favour of the assessee. The period of holding shall be from 1-4-1981 in respect of the entire property.”

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Insertion of Rule 4BBB to Companies (Central Government’s) General Rules and Forms.

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The Ministry of Corporate Affairs has inserted Rule 4BBB in the Companies (Central Government) General Rules and Forms, 1956, for filing of petition under

(a) Section 17 — Special resolution and confirmation by Central Govt. required for Alteration of Memorandum for change of Registered Office from one state to another and alteration of objects clause.

b) Section 141 — For Rectification by Central Government of Register of Charges.

(c) Section 188 — Circulation of Members Resolutions. A new Form 24AAA for filing petitions to the Central Government/Regional Director under these sections is prescribed. The rules come into effect from 12th August 2012.

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Filing of Cost Audit Report (Form I) and Compliance Report (Form A) in the XBRL mode.

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Further to the order dated 10th May 2012, the Ministry has decided that filing of Cost Audit Reports and Compliance Reports will be allowed after 31st July 2012.

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Extension of time in filing Annual Return by Limited Liability Partnerships.

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In continuation of the Ministry’s Circular No. 13/2012, dated 6-6-2012, the Form 11 being the form for filing Annual return by LLPs has been extended to 31st July 2012 i.e., instead of the limit of 60 days it shall be within 122 days for the year ended 31-3-2012.

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Filing of Balance Sheet and Profit and Loss Account in Extensible Business Reporting Language (XBRL) — Mode for financial year commencing on or after 1-4-2011.

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Vide Companies (Filing of documents and forms in Extensible Business Reporting Language) Rules, 2011, notified vide GSR No. 748E, dated 5-10-2011, select class of companies are required to file their Balance Sheet and Profit & Loss Account and other documents as required u/s.220 of Companies Act, 1956 with the Registrar of Companies for the financial year ending on or after 31st March, 2011.

It has now been decided by the Ministry to mandate the following select class of companies to file their Balance Sheet and Profit & Loss Account in XBRL mode for the financial year commencing on or after 1-4-2011:

(i) all companies listed with any stock ex-change(s) in India and their Indian subsidiaries; or

(ii) all companies having paid-up capital of Rupees five crore and above; or

(iii) all companies having turnover of Rupees one hundred crore and above; or

(iv) all companies who were required to file their financial statements for F.Y. 2010-11, using XBRL mode.

However, banking companies, insurance companies, power companies and Non-Banking Financial Companies (NBFCs) are exempted from XBRL filing till further orders.

The applicable taxonomy as per Schedule VI of the Companies Act, 1956 has already been placed on the Ministry’s website www.mca.gov.in. The Business Rules, validation tools, etc. required for preparing the financial statements in XBRL format, as per the revised Schedule-VI and Accounting Standards, are under preparation and would soon be made available by the Ministry. The actual date for enabling XBRL filing will be intimated separately.

All companies referred to above, will be allowed to file their financial statements in XBRL mode without any additional fee/penalty up to 15th November, 2012 or within 30 days from the date of their AGM, whichever is later.

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SEBI’s amended Consent Order Guidelines-2 — the Determination of Settlement Amount

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As discussed in immediately preceding article, SEBI rehauled the Guidelines for Consent Order and Compounding for settlement of violations of specified securities laws. An important aspect of the revised Guidelines is that SEBI has attempted to quantify the settlement amount for most types of violations. The objective is not only let the parties know what the indicative settlement amount would be, but more importantly, to also remove a lot of the discretion and discrimination involved in settlement. Thus, SEBI has laid down a very elaborate formula and quantification process which, though not inflexible, gives a good benchmark amount at which a party may expect that the settlement may take place.

The formula, parameters, etc. are quite complex, but since now these would be the very basis of the settlement process, an introduction to the process is worth considering.

The quantification process, formula, parameters, etc. are aimed at making the settlement and perhaps even the penal process rational rather than subjective and discretionary. An attempt has been made by SEBI to find out what are the losses that the investors/public/markets face, what are the gains made by the parties, etc. and then relate the settlement amount to such amounts rather than an arbitrary figure arrived on a caseto- case basis. However, the qualitative aspect has also been considered by providing for a varying base settlement amount depending upon who is the person accused. For example, promoters of a company face a higher base penalty as compared to others and so do asset management companies, etc. Thus, on the one hand, the losses/ gains are taken into account duly quantified, and on the other hand higher punishment is ensured on those who should know the law better.

Under the earlier Guidelines, there was no basis for an applicant to even arrive at a preliminary amount, much less know at what amount the final settlement could take place. Other orders of similar facts often showed a wide variance in the settlement amount and the rationale for such different settlement terms were not known. To worsen this, SEBI often took a stand that other consent orders were not relevant and are not to be taken as a benchmark which an applicant could use. However, now, SEBI has provided a fairly detailed and complex method of determining the indicative settlement amount. Unless the facts are special or serious, it would appear that the settlement would be at or nearabout this amount arrived as per the prescribed formula.

However, as stated, the formula and parameters are fairly complex to determine. There are other concerns too, but first, a broad description of how the settlement amount is arrived is made. Thereafter, a specific type of violation is taken and the formula and parameters applied.

Let us first understand the broad sequence of steps to arrive at the final settlement amount.

The basic objective is to determine the Indicative Amount. This is the basic amount that is arrived at without negotiation and purely as a result of applying quantitative parameters to the particular set of violations.

Included in Indicative Amount are the legal costs that appear to be on actuals and hence do not require further consideration here.

 Indicative amount is arrived at by taking into account various parameters, weights, etc. There is a Proceeding Conversion Factor (PCF) and the Regulatory Action Factor (PCF) and there is a Benchmark Amount. The Benchmark Amount is an absolute rupee amount that is worked out by applying certain factors depending upon the nature of the violation. The PCF and RAF are then applied to this Benchmark Amount as qualitative weights to increase or decrease it.

Thus, for example the PCF applies weights ranging from 0.75 to 1.20 depending upon when the initiative is taken for coming forward to settle the proceedings. Thus, if a party comes forward for settlement even earlier to the issuance of the showcause notice, then, the settlement amount would be just 0.75 times the Benchmark Amount. However, if he delays the matter to passing of the order by the SAT or the Court, then the settlement amount actually increases by 20% by it being multiplied by a factor of 1.20.

To the above factor, PCF, the Regulatory Action Factor is added. The objective is to further give due weight to earlier adverse actions taken by SEBI against the party in the past. For each such action, a certain weight, depending upon the nature of adverse direction given, is added. For example, if a warning was given, then 0.015 is added. In certain cases of suspension order, the factor can be as high as 0.3.

 Next comes the ‘Benchmark Amount’. This can be viewed as the basic settlement amount. This amount varies depending upon the nature of violations alleged. It would be different for, say, non-disclosure of certain information or non-filing of information, for price manipulation, etc.

For price manipulation, it is arrived at by taking into account several factors involved in each case, such as volumes traded, price change during the relevant period, adding a time value for money for the illegal gains, the profits made/losses avoided and even a reputation risk.

Where parties have aided/abetted the price manipulation including intermediaries, promoters, etc. a separate formula is provided.

For non-disclosure of information as for example under the Takeover Regulations, the Benchmark Amount is calculated as the product of a Base Value and a Base Amount. The Base Value is a weight that takes into account qualitative factors such as multiplicity of violations, size of company, etc. The ‘Base Amount’ is calculated as the higher of a certain fixed amount depending on factors such as percentage of holding not disclosed and period of delay.

Similarly, for other types of violations, certain factors are laid down to help calculate the Benchmark Amount.

It is provided that the minimum Indicative Amount shall be Rs.2 lakh for persons seeking consent application for the first time and Rs.5 lakh for others. Arguably, such a large minimum amount is unfair. Irrespective of the seriousness of the offence, the smallness of the amounts involved, etc. this minimum amount is paid and would obviously affect only small violators. Further, increasing the minimum settlement to Rs.5 lakh for those who are not firsttime applicants is also unfair since the applicant may be coming for a wholly different violation. Securities laws are fairly voluminous and complex and routine violations may happen for which no purpose may be served to either carry out costly adjudication proceedings or levy a heavy penalty.
For residuary cases, where none of the specified parameters apply, the amount would be decided on the facts and circumstances of the case by HPAC/SEBI.
The Guidelines, however, still provide a lot of leeway for SEBI to go away from the quantified parameters. Firstly, in case of serious violations, it can fall back on the maximum penalty that can be levied. Further, there is another provision that says that the settlement amount can be increased or decreased since the amount worked out as above is only the Indicative Amount. Even after this, the final amount so worked out can be reduced, increased or even the proposal rejected outright by SEBI’s Panel of WTM.
The orders are required to be a little more detailed giving the facts and circumstances of the case, the allegations, etc. However, one is not clear how much detailed would the actual orders be till we see a few orders.

There is a fair concern that even now, substantial discretion still remains and is possibly even further entrenched. However, considering that very specific parameters have been laid down, SEBI may need to apply its mind why it accepted a higher or lower settlement amount in a particular case.

Interestingly, now, a host of non-monetary adverse directions can be made part of the settlement including voluntary debarment, sale of shares, dis-gorgement, voluntary surrender of certificate of registration. Thus, the settlement need not be purely on monetary terms, but non-monetary terms may also be added to the settlement amount.

An interesting thing to watch for as the new settlement scheme is applied in various cases is – will SEBI levy penalty that is higher than the amount as per formula under the Consent Guidelines? There are two ways to view this issue. One way is that SEBI should levy higher penalty than the minimum amount as per the Consent formula. The party who makes SEBI go through the whole adjudication process makes it incur additional costs and efforts. Further, in such a case, the charges were proved by SEBI while in case of consent, there is no proof or admission of proof of the violation. The other way to look at it is that the minimum settlement amount as per Consent formula takes into account the fact that the party goes free from stigma. There should be a cost to this. Further, while SEBI saves time, the party also saves time and efforts.

However, there is also a case for delinking the two processes. Settlement is under a different principle and, further, it takes into account only the allegations. However, the adjudication process should not be burdened with this formula. It should examine the exact nature of the facts and circumstances that are found to be proved and the other surrounding circumstances including those statutorily prescribed (such as repetitive nature of violation, gains made, losses caused to public, etc.) and then levy appropriate penalty. If, for example, the violation is proved to be serious and intentional, a high penalty may be levied. If, however, it is technical without any gains to the person or losses to the public, and there are mitigating circumstances, then the penalty may be lower or none.

In the end, the issue that arises is, should a person opt for settlement or not? While obviously the answer will vary from case to case, some general thoughts can be shared. Some parties may not want any stigma of contravention of law on the record and for them, settlement is the only choice except of course where the violation is not permitted under the Guidelines to be settled or where they are fairly confident that they will eventually win, even if appeal is required. For some others, if the violation is technical in nature, it can be explained to concerned parties such as shareholders, etc. and thus they may not opt for settlement if it entails a higher penalty. For most people, it would have to be a careful evaluation of the settlement amount that can be worked out from the formula and the facts of the case. It would also be a matter of principle for parties to clear its name when the allegation is misconceived.

PART D: Read , understand & take some action please

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Corruption is worse than prostitution

 We have to sham this attitude of ‘Sab Chalta Hai’ and the attitude that nothing can move without Corruption.

— Kanwaljeet Arora, CBI judge

We need to keep up the fight against corruption which stifles innovation and is one of the biggest barriers to job creation and economic growth around the world.

— US President, Barack Obama

Please respond and let us do something to contain cancerous corruption which prevents happiness to be reality for large number of citizens.

 RTI Clinic in August 2012: 2nd, 3rd and 4th Saturdays, i.e., 11th, 18th, and 25th, 11.00 a.m. to 13.00 p.m. at BCAS premises.

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PART A : DECISIONS OF THE COURTS

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Section 5(3), (4) to (5) of the RTI Act

A very interesting and unusual matter came before the High Court of Delhi. The same is summarised as under:

  •  “The petitioner challenged the order dated 16th January, 2009 of the Central Information Commission (CIC) imposing penalty u/s.20 of the Right to Information Act, 2005 on the petitioner of Rs. 12,500 deductible in two instalments of Rs.6,250 each from the salary of the petitioner, starting from 3rd March 2009. The petition came up before the Court first on 2nd March, 2009, but no stay was granted. The petitioner on 14th December, 2009 informed that the penalty amount had been paid to the CIC and further submitted that the fault leading to the imposition of penalty was not in his functioning as the Public Information Officer (PIO) of the DDA, but of Shri S. C. Gupta, the then Dy. Director (Housing) of the DDA. It may be noticed that the CIC has vide the impugned order, while levying penalty of Rs.12,500 on the petitioner, levied penalty of Rs.12,500 on the said S. C. Gupta also, deductible from his salary. On the said contention of the petitioner, the said Shri S. C. Gupta was impleaded as respondent No. 4 to the petition and in fact he alone has been served with the notice of petition.”

  •  “It is the case of the petitioner that he, as PIO of DDA had acted with promptitude and has on the very next day of receiving the RTI application, sought information from the respondent No. 4 and the delay in providing information was of the respondent No. 4. It is further the case of petitioner that in pursuance to the directions of the First Appellate Authority to provide further information also, the delay in providing the same was of the said Shri S. C. Gupta.”

  • The CIC however has in the order dated 16th January, 2009 impugned in this petition held that it had in the earlier order dated 26th September, 2008 (which is not before the Court) held that it is the not the delay in response for which the petitioner had been held liable, but the petitioner had failed to provide the information sought and had simply forwarded a report to the information seeker without caring to examine whether the report even addressed the information sought. It was thus held that the petitioner had abdicated his responsibility as PIO. It was further held that the petitioner as the PIO of the DDA was responsible for providing the information and what was being passed on. The said conduct of the petitioner was held to be amounting to deemed refusal of information.

The Court stated:

  •  “It is not in dispute that the petitioner was the designated PIO u/s.5 of the Act of the DDA. U/s.5(3) of the Act it was for the petitioner to deal with the request and render reasonable assistance to the information seeker. The PIO u/s.5(4) is authorised to seek the assistance of any other officer as may be considered necessary for the purpose of providing information and section 5(5) mandates such officers to render all assistance to the PIO. Section 5(5) also deems such officers from whom information is sought, as the PIO for the purpose of any contravention of the provisions of the Act.”

 

  •  “The contention of the petitioner appears to be that he as PIO was merely required to forward the application for information to the officer concerned and/or in possession of the said information and upon receipt of such information from the concerned officer furnish the same to the information seeker. He would thus contend that as long as he as PIO has acted with promptitude and forwarded the application to the officer in possession of the information and furnished the same to the information seeker immediately on receipt of such information, he cannot be faulted with and liability for penalty if any has to be of such other officer from whom he had sought the information and cannot be his.” “The argument aforesaid reduces the office of the PIO to that of a Post Office, to receive the RTI query, forward the same to the other officers in the department/administrative unit in possession of the information, and upon receipt thereof furnish the same to the information seeker. It has to be thus seen from a perusal of the Act, whether the Act envisages the role of a PIO to be that of a mere Post Office.”

  •  The Court then provided definition of ‘dealt with’. In Karen Lambert v. London Borough of Southwark, (2003) EWHC 2121 (Admin) it was held to include everything right from receipt of the application till the issue of decision thereon. U/s. 6(1) and 7(1) of the RTI Act, it is the PIO to whom the application is submitted and it is he who is responsible for ensuring that the information as sought is provided to the applicant within the statutory requirements of the Act. Section 5(4) is simply to strengthen the authority of the PIO within the department; if the PIO finds a default by those from whom he has sought information, the PIO is expected to recommend a remedial action to be taken. The RTI Act makes the PIO the pivot for enforcing the implementation of the Act.

 The Court further noted

  •  “This Court in Mujibur Rehman v. Central Information Commission held that information seekers are to be furnished what they ask for and are not to be driven away through filibustering tactics and it is to ensure a culture of information disclosure that penalty provisions have been provided in the RTI Act. The Act has conferred the duty to ensure compliance on the PIO. He cannot escape his obligations and duties by stating that persons appointed under him had failed to collect documents and information; that the Act as framed casts obligation upon the PIO to ensure that the provisions of the Act are fully complied. Even otherwise, the settled position in law is that an officer entrusted with the duty is not to act mechanically. The Supreme Court as far back as 1995 in Secretary, Haila Kandi Bar Association v. State of Assam, [1995 supp. (3) SCC 736] reminded the high-ranking officers generally, not to mechanically forward the information collected through subordinates. The RTI Act has placed confidence in the objectivity of a person appointed as the PIO and when the PIO mechanically forwards the report of his subordinates, he betrays a casual approach shaking the confidence placed in him and duties the probative values of his position and the report.”
 The Court finally held
 “Thus no fault can be found with order of the CIC apportioning the penalty of Rs.25,000 equally between the petitioner and the respondent no. 4. There is thus no merit in the petition; the same is dismissed.”
[J. P. Agrawal v. Union of India and Ors., W.P. (C) 7232/2009, decided on 4-8-2011. Reported in Right to Information Reporter — RTI RI (2012) 353 (Delhi)]

Section 8(1)(d)&(a) of the RTI Act
  • Two writ petitions were heard together, since common arguments were canvassed and common questions are involved, they were disposed of by this judgment.

  •     The petitioner functions as service provider to the Government of Maharashtra. It provides the facility of Smart Card-based Registration Certificate. It is stated that considering the need for computerisation, the Government switched over to the latest technology in its various departments. In the transport sector, the Government aimed at modernising the Regional Transport Offices which was aimed at streamlining the entire process undertaken at these offices and obviously to make functions of these Regional Transport Offices efficient, prompt and easy. In this backdrop, the Central Government took a policy decision to introduce ‘Smart Card’ with micro processor chip and it was decided to permit the use of Smart Cards for issuing registration certificates in electronic form. It is stated that this micro processor chip-based Smart Card obviously has various advantages over the regular paper-based registration books. A reference is made to the Central Government’s guidelines issued on 17-10-2001. The implementation of this policy required amendments to the Motor Vehicles Act and Rules and therefore, the amendments were made on 31-5-2002 and Rule 2(s) was added to define the term ‘Smart Card’. It is stated that the registration certificate is now issued to the motor vehicle owners in the form of Smart Cards and thereafter, several provisions of the Motor Vehicles Act have been referred to. It was submitted that the Government of Maharashtra floated a PAN India tender for appointing a service provider to comply with requirement of issuance of ‘Smart Cards’. The petitioner participated in the tender process and was declared successful. A contract dated 30-11-2002 came to be executed. It is stated it is not an ordinary contract, but it is an outcome of exhaustive statutory project. The project which the petitioner is implementing must be seen in the backdrop of the policy decision of the Government to provide a more standardised and tamper-proof registration of the vehicles. The policy of the Government is to adopt a technology which will prevent tampering of registration books by the anti-social elements. It is stated that this contract is confidential in nature. The project has been undertaken by the petitioner, but attempts are made to exploit the petitioner for personal gains by various unscrupulous elements. The RTI Act, according to the petitioner, does not give an absolute right to a person to obtain any informa-tion and it is therefore, contended that Shri Sanjay Bhole, the respondent No. 4’s attempt to obtain the information must be seen in this light.

  • SCIC in its order had directed the Transport Commission to furnish the information requested for. The same is challenged in this writ petition. While the Court agreed that clause (a) of section 8(1) is in no way applicable. However, as to clause (d), order notes:

  •    “Clause (d) provides that the information can be disclosed if the competent authority is satisfied that larger public interest warrants such disclosure. Therefore, that clause as admitted by (Advocate of the appellant) Mr. Manohar is not absolute. It does not say that information including commercial confidence, trade secrets or intel-lectual property, the disclosure of which, would harm the competitive position of a third party; cannot be demanded or if demanded, cannot be disclosed even if larger public interest warrants the same. The State Information Commissioner has held that the disclosure of both agreements would not result in disclosure of trade secret or intellectual property. His conclusion is that the tenders were for an important work which affects large number of vehicle owners and drivers of vehicles. The agreements have to be entered into for providing a service in the form of making of Smart Cards for registration of motor vehicles and driving licences at enhanced fees. Further, the conclusion is that the disclosure of information would enable public scrutiny of the process and contracts and therefore, it is desirable in larger public interest that the information is provided.”

Final Order

“In the light of this conclusion, both writ petitions fail. Rule is discharged, but without any order as to costs. At this stage, it is prayed that the ad interim orders passed by this Court be continued so as to enable the petitioners to challenge this judgment in higher court. This request is opposed by the respondent No. 4. In such circumstances, the request made to continue the ad interim orders is rejected and particularly, when the information as directed to be given under the impugned orders is as early as on 23-3-2011.”

[Writ petitions No. 2912 & 3137 of 2011, Shonkh Technology Ltd. & United Telecom Ltd. v. Shri Sanjay Bhole & State IC, Joint Transport Commissioner & PIO decided on 1-7-2011: (‘Information Decisions’ 2012 (1) ID 268) Bombay High Court]

Leases

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Introduction

A lease is one of the
oldest modes of enjoying immovable property. When one speaks about
leases, one often comes across terms, such as tenancy, licence, etc.
Some of these are synonyms while some have different meaning. Although
leases have been around since numerous years, there is yet a fair deal
of confusion surrounding them. Let us try and clear some of the myths
about leases.

Meaning

Section 105 of the Transfer
of Property Act, 1882 (‘the Act’) has defined the term ‘lease’ in
relation to an immovable property to mean:

(a) a transfer of a
right to enjoy such property — the person transferring the property is
called a lessor and the transferee is known as a lessee;

(b) made for a certain time. Expressly or impliedly or made in perpetuity;

(c)
in consideration of a price paid or promised or of money/share in
crops/service or any other thing of value to be rendered periodically or
on specified occasions to the transferor by the transferee who accepts
such terms. The price paid is known as premium and the money, share,
service or other thing to be rendered periodically or occasionally is
known as rent. The premium is also known as pagadi or salami.

As
opposed to a conveyance in which there is an absolute transfer of
ownership of immovable property, in the case of a lease there is only a
limited transfer of a right to enjoy the immovable property.

Once
the lessor grants a lease, he is left with two rights — right to
receive rent and a reversionary right. A reversionary right is the right
of the lessor to receive back the property once the tenure of the lease
expires. The lessor can transfer the reversionary rights. In an
interesting decision, the Supreme Court in the case of R. Kempraj v.
Barton Son & Co., (1969) 2 SCC 594 has held that even in the case of
a perpetual lease, the lessor has a reversionary right.

The
Supreme Court in A. R. Krishnamurthy, 176 ITR 417 (SC) has held that a
lease of land is a transfer of interest in the land and creates a right
in rem and there is a transfer of title in favour of the lessee though
the lessor has right of reversion after the period of the lease
terminates. The grant of a lease is a transfer of an asset. The Supreme
Court in the case of B. Arvind Kumar v. GOI, (2007) 5 SCC 745 has laid
down the essential elements of a lease of immovable property:

(a) There should be a transfer of a right to enjoy an immovable property;

(b) Such transfer may be for a certain term or in perpetuity;

 (c) The transfer should be in consideration of a premium or rent; and

(d)
The transfer should be a bilateral transaction, the transferee
accepting the terms of transfer. A lease agreement is like any other
agreement and can be oral also.

However, this would be subject to the provisions of section 107 of the Act explained later.

Tenure of lease

Unless
the lease provides otherwise a lease of immovable property, for any
purpose other than agricultural or manufacturing, shall be deemed to be a
lease from month to month, which is terminable on the part of either
the lessor or the lessee, by 15 days’ notice expiring within the end of a
month of the tenancy. Some leases contain a clause for renewal of the
lease on the same terms and conditions as the current lease except with
an increase in the rent. It should be noted that the renewal of a lease
is not automatic and it must be expressly so stated in the lease deed.

In
India, a perpetual lease is also valid — R. Kempraj v. Barton Son &
Co., (1969) 2 SCC 594. Whether a lease is a lease in perpetuity or a
monthto- month lease has been the subject-matter of great debate and is
relevant from a stamp duty perspective also (as explained below). Where
the lease deed does not specify any duration, but permits the lessee to
hold the land forever, subject to the right of the lessor to resume the
land by giving one month’s notice, there is no grant in perpetuity — B.
Arvind Kumar v. GOI, (2007) 5 SCC 745. Hence, it is important that the
lease deed clearly specifies the lease period.

Making of a lease

 U/s.107
of the Act, a lease of a period for more than one year or a lease from
year to year must be made only by way of a registered instrument. Any
other lease can be made by way of a registered instrument or by an oral
instrument accompanied by delivery of possession. In cases where a
registered instrument is executed, both the lessor and the lessee must
execute the same.

Thus, section 107 makes it mandatory for any
lease of more than one year to be in the form of a written, registered
instrument. A corollary of a registered instrument is stamping. Failure
to create a lease of more than one year by way of a registered
instrument makes the lease deed inoperative and the Courts are disabled
from using the instrument as evidence — Anthony v. KC Ittoop & Sons,
(2000) 6 SCC 394/Bajaj Auto v. Behari Lal Kohli, (1989) (4 SCC
39/Shantabai v. State of Bombay, AIR 1958 SC 532. However, the Supreme
Court also laid down an important principle in the case of Anthony v. KC
Ittoop & Sons, (2000) 6 SCC 394 in the context of leases made by
non-registered instruments:

“. . . . . . What is mentioned in
the three paragraphs of the first part of section 107 of the TP Act are
only the different modes of how leases are created. The first paragraph
has been extracted above and it deals with the mode of creating the
particular kinds of leases mentioned therein. The third paragraph can be
read along with the above as it contains a condition to be complied
with if the parties choose to create a lease as per a registered
instrument mentioned therein. All other leases, if created, necessarily
fall within the ambit of the second paragraph. . . . . . . . . . . . .

Since
the lease could not fall within the first paragraph of section 107, it
could not have been for a period exceeding one year. The further
presumption is that the lease would fall within the ambit of residuary
second paragraph of section 107 of the TP Act. . . . . . .
Non-registration of the document had caused only two consequences. One
is that no lease exceeding one year was created. Second is that the
instrument became useless so far as creation of the lease is concerned.
Nonetheless the presumption that a lease not exceeding one year stood
created by conduct of parties remains un-rebutted. . . . . .”

Thus, even in cases where leases of more than one year are not registered, a lease of one year is created.

Stamp Duty

Article 36 of Schedule I to the Bombay Stamp Act provides for the stamp duty on a lease deed, sub-lease deed.

The
rate of duty is as shown in Table 1: Hence, whether or not a lease is a
perpetual lease becomes very important from a stamp duty perspective.
In the case of perpetual leases, the duty incidence would be at 4.5% of
the market value of the property based on the Stamp Duty Ready Reckoner.

Even a monthly tenancy would be treated as a perpetual lease
because no definite period is specified. In that case, stamp duty as on a
perpetual lease would be applicable — Collector of Stamps v. Laxmibai
Saheb, AIR 1948 Bom. 336; Santosh Pundalik Madankar v. Ramdas, 1985 Mah.
LJ 973.

If no definite term for lease is fixed and it is terminable by notice, it is a perpetual lease. Though a tenancy may be described as a monthly tenancy within the purview of the Transfer of Property Act, it does not follow that the document evidences a lease for any definite period for the purposes of stamp duty — Hidayat Mohindin v. Karamullah, AIR 1961 AP 1. Similar views have also been taken in the cases of Skinner v. Arunachalam, AIR 1939 Mad. (FB) 356, Mangal Puri v. Baldeo Puri, AIR 1938 All. 304.

Lease v. Licence
A leave and licence of an immovable property is different from a lease as a lease creates an interest in the property which the licence does not since it is only a personal non-transferable right. However, in many cases, a question may arise as to whether a transaction is one of a leave and licence or one of lease. This issue has witnessed a plethora of cases and controversies as the distinction between the two is very fine. Over a period of time the Supreme Court and various High Courts have laid down several tests for distinguishing a licence from a lease, but none of them are conclusive. Some of the important judgments on this issue are Qudrat Ullah v. Municipal Board, (1974) 1 SCC 202, Konchadda Ramamurthy v. Gopinath, (1968) 2 SCR 559, Associated Hotels of India Ltd. v. R.N. Kapoor, (1960) 1 SCR 368, Dunlop Rubber Co., AIR 1968 SC 175, Behari Lal v. Chotte, AIR 1963 All. 911, Mohan Sons & Co., 78 Bom. LR 195; Delta International v. Shyam Sunder Ganeriwalla, (1999) 4 SCC 545; ICICI, (1999) 5 SCC 708 (SC). A few tests laid down by these and several other cases are the intention of the parties, their conduct and circumstances surrounding the agreements, substance of the transaction, exclusive possession in case of a lease, creation of interest in the property in case of a lease, etc. Thus, this is an issue on which there is a lot of confusion and arbitariness and there is no litmus test to differentiate one from the other. It may also be noted that there is a thin distinction between lease and leave and licence, which has led to the wide-scale misconception among many people that a leave and licence can only be for 11 months. A lease which is of more than one year is to be compulsorily registered u/s.17(1)(d) of the Registration Act, 1908 and section 107 of the Transfer of Property Act, 1882. In the event that a licence was held to be a lease, people started making licences of 11 months so that registration would not be compulsory. This led to a general impression that leave and licence agreements can only be for a term of 11 months. In a leave and licence agreement, normally, there is no right given to the licencee to assign his or her rights, whereas in a lease agreement, the licencee subject to the approval of the licensor can assign and or transfer his or her rights.

Lease v. Tenancy

The terms lease and tenancy are synonyms and are often interchangeably used. However, quite often, it is believed that the two terms are different. In fact, even the Bombay Stamp Act, 1958, till some years ago (incorrectly) believed the two to be different and provided two separate Articles under Schedule I — one for transfer of tenancy and one for transfer of a lease. The definition of a lease u/s.105 of the Act would encompass a tenancy also. Generally, tenancy refers to a duration of a month-to-month lease while a lease refers to a longer duration. However, this is only a commercial distinction and has no legal basis.

The Bombay Stamp Act has now removed the distinction between a tenancy and a lease. The stamp duty in the case of a transfer of tenancy and transfer of a lease is now the same, i.e., the same as rate specified for a conveyance under Article 25 ~ 3, 4 or 5% depending upon the location of the immovable property. The duty is leviable on the fair market value of the property as computed under the Stamp Duty Ready Reckoner.

Transfer of reversionary rights

If the landlord/lessor transfers the reversionary rights to the tenant/lessee who has taken the property on lease, then the lessee becomes the full owner of the property. The stamp duty on a transfer of a lease is the same rate as on a conveyance on the fair market value of the property computed as per the Stamp Duty Ready Reckoner. However, in case of a transfer of reversionary rights of a property by the lessor to the lessee, there is a concessional basis of valuation of the property. The value is computed at 112 times the monthly lease rent paid by the tenant and not as per the Ready Reckoner. Thus, the duty in an urban area would be @ 5% of 112 times the monthly rent of the property. This benefit is available only if the tenant is able to prove that he has been in occupation of the property for at least five years. Further, this benefit is not available in case of properties taken on leave and licence.

Doctrine of merger

When a lessee of a property acquires the reversionary rights from the lessor, the Doctrine of Merger applies and the lesser estate (the lease) merges into the larger estate (reversionary rights) — Dr. D. A. Irani, 234 ITR 850 (Bom.). The Court held that once a lessee purchases the leased property from the lessor, the lease is extinguished as the same person cannot be both the landlord and tenant at the same time. There is a drowning or sinking of the inferior right into the superior right. This principle is also recognised under the Transfer of Property Act which specifically provides for the determination of the lease in case the interests of the lessor and the lessee vest in the same person at the same time. In such a case, the period of holding of the asset would be counted from the date on which the reversionary rights were acquired. The fact that the assessee was a lessee earlier for several years would be of no consequence in determining whether or not the gain was a short-term capital gain.

Transfer of lease and section 50C

Decisions of the Income-tax Tribunal have held that a transfer of a tenancy does not attract the provisions of section 50C of the Income-tax Act — Kishori Sharad Gaitonde, AIT 2010 200 ITAT (Mum.); Atul G. Puranik, 132 ITD 499 (Mum.); Munsons Textiles, ITA No. 6320/M/2010; Tejinder Singh (2012) 19 taxmann.
com 4 (Kol.).

Auditor’s duty

The Auditor should enquire of the auditee whether it has complied with the aforesaid provisions in respect of any lease agreements executed into by it. In case the Auditor comes across a lease transaction which does not comply with any provisions of the above Acts, then he will have to consider whether appropriate disclosures should be made in the Notes to Accounts or whether the non-compliance is so material so as to warrant a qualification in his report. He may insist upon a legal opinion to support any claim which the auditee is making. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that an audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’ and ‘diligence’.

Tenancy rights — Property in possession of tenant — SARFAESI Act has overriding effect over local Rent Control Act.

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[Vikas Book Ltd. v. Bank of Baroda, Jaipur & Ors., AIR 2012 Rajasthan 93.]

The petition had been filed by the petitioner Vikas Book Ltd. against the respondent No.1 Bank of Baroda and respondent No. 2 Shri Umraomal Chordia, seeking issuance of order or direction against the respondent No. 1 Bank to the effect that the Bank may proceed under the said Act without disturbing the tenancy rights of the petitioner and that the petitioner should not be evicted from the property in question without following the due process of law. It has been averred inter alia in the petition that the petitioner was in occupation as tenant of the residential premises by virtue of the rent note dated 10-5- 2006 executed by the landlord i.e., respondent No. 2 in favour of the petitioner. According to the petitioner, on 7-2-2011, the offices of the respondent No. 1 along with some police personnel came to the said premises and asked the petitioner to vacate the premises.

It has been contended by the respondent Bank that the property in question was mortgaged by the respondent No. 2 towards the security for the repayment of loan advanced to the borrower Vipul Gems along with other properties. Since the said Vipul Gems did not pay the dues of the bank, action was initiated against borrower/ mortgagor u/s.13(4) of the said Act. It has also been contended in the said reply that the petition was filed by the petitioner in collusion with the respondent No. 2 so as to create obstructions in the way of the respondent Bank from taking possession of the disputed property and to frustrate the dues of the bank. The Court held that if the lease was created in contravention of section 65A of the Transfer of Property Act, by the mortgagor in favour of the lessee, neither the mortgagor, nor the lessee can claim any protection to defeat the right of the mortgagee.

The Court observed that in the instant case, there is nothing on record to suggest that the respondent Bank had the knowledge about any tenancy rights created in favour of the petitioners in respect of the mortgaged property in question, while granting credit facilities to the borrower Vipul Gems P. Ltd. The third party interest created before or after the mortgage in question could not frustrate the provisions of the said Act having effect of overriding the other laws for the time being in force.

The Court observed that the petitions had been filed as a collusive and manoeuvred exercise between the petitioners and the respondent No. 2 Umraomal, so as to create the inroads and obstructions in the way of the respondent Bank to take the actual possession of the disputed premises, consequent upon the measures taken by the respondent Bank u/s.13(4) of the said Act. The petitions having been filed by the petitioners as proxy and frivolous litigation at the instance of the respondent mortgagors, the Court held that SARFAESI Act has overriding effect over local Rent Control Act, accordingly the petition of the tenant was dismissed.

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Refund through ECS — Trade Circular No. 11T of 2012, dated 17-7-2012.

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With effect from 1-10-2012 refund through Electronic Clearing Service facility will be optional to the dealers in Mumbai only. The scheme has been explained in this Circular.

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Administrative relief in respect of importexport licences covered in Schedule Entry C-39 — Trade Circular No. 10T of 2012, dated 2-7-2012.

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The Circular explains the scheme as contained in State Government Resolution providing administrative relief for the period 1st April, 2005 to 31st December, 2010 to the dealers who have collected and paid tax in respect of duty paid scrips which were tax-free prior to 1st January, 2011 under the MVAT Act, 2002.

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Amendments to the Schedule entries — Trade Circular No. 9T of 2012, dated 30-6- 2012

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Changes in the various Schedule entries under the Maharashtra Value Added Tax Act, 2002 are briefly explained in this Circular.

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Not textbook stuff — The NCERT cartoon issue is more about degeneration of political debate.

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At its root, the whole controversy on cartoons in NCERT textbooks underlines the malaise afflicting political debate in the country: passions whipped up in aid of divisive political ambitions. Here, rage and slanging matches trump reasoned debate. One of the stated reasons for the order of the six-member panel constituted to review cartoons — that politicians and bureaucrats can’t be shown in an ‘incorrect’ way — amply reveals that undemocratic spirit. Some of the suggestions of the panel, say, about changing the captions of cartoons that have appeared years ago border on the Orwellian. This is not just tantamount to changing history, it is indicative of school textbooks and curriculum being tinkered with according to ideological inclinations in India. Often, it is one political party or the other raising a furore over such issues, citing the oft-invoked ‘hurt sentiments’ theory.

Which is just another means of reinforcing the social and political faultlines the entire political class thrives on, given that it envisages politics as a competitive identity management project. Just as people’s representatives cannot amend, just because they have a majority, say, the theory of relativity, they cannot decide the school syllabus. There is a National Curriculum Framework, meant to further a consultative approach to framing school textbooks, but that fact is drowned in the cacophony of contesting, and largely manufactured, rage.

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Putting integrity into finance.

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Behaviour that lacks integrity leads to value destruction. This paper analyses some common beliefs, actions, and activities in finance that are inconsistent with being a person or a firm of integrity. Each of these beliefs leads to a system that lacks integrity, i.e., one that is not whole and complete and therefore creates unworkability and destroys value.

Focussing on these phenomena from the integrity viewpoint, makes it possible for managers to focus on the value that can be created by putting the system back in integrity and correcting the non-value maximising equilibrium that exists in capital markets. In effect, integrity is a factor of production just like knowledge, technology, labour, and capital, but it is undistinguished — and its affect (by its presence or absence) is huge. We summarise our new positive theory of integrity that has no normative content, and argue that there are large gains from putting integrity into finance — into both the theory and practice of finance. We define integrity as being whole and complete and unbroken. We argue that if finance scholars, teachers and practitioners take this approach to applications in finance, there are huge gains to be achieved.

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The Big Stick — The time for soft words is over, we need concrete action.

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It is all very well for the Prime Minister to say that he will cut red tape, reassure investors and keep the India growth story intact. He can hardly say the opposite. The whole point is to act, rather than talk or set up yet more committees to produce yet another report on a subject on which an endless number of committees have already produced an equal number of reports. Of the 40,000 MW of power generation capacity added over the last two years, only 6,000 MW of capacity generates power, the rest idles for want of coal or want of regulatory permission to pass on the higher cost of imported coal to willing consumers. Scrap the anti-national Coal Mines Nationalisation Act.

This will not only ensure that the country’s coal sector transforms from a dark realm of loot and thuggery to an efficient supplier of the country’s most abundant fuel, but also reassure potential inves- 36 37 38 Tarunkumar Singhal Raman Jokhakar Chartered Accountants Miscellanea tors that India is serious about economic growth. Muster courage to implement a Cabinet decision to decontrol diesel, and institute competition, including from independent operators, in the retailing of petro-fuels. This will slash the fiscal deficit, reduce inefficiency at India’s oil companies and increase energy efficiency across the spectrum. By reducing the fiscal deficit, the reform would also reduce the current account deficit, thereby easing pressure on the rupee. This move, too, would go a long way in restoring investor confidence.

Make progress on the ground on implementing the goods and services tax, getting the IT infrastructure and procedural framework for seamless integration of the tax ready. This will put pressure on the BJP-led states holding out against the transition. Concrete action of this kind is what we need, to restore investor confidence and get the economy vrooming. Kind words of good intent spoken with sincerity are always welcome. But the big stick that needs to back up soft talk is what has been missing and needs to be found.

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Procedure for rebate of duty on export of services — Notification No. 39/2012-ST, dated 20-6-2012.

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Vide this Notification, rebate has been granted of whole of duty paid on excisable inputs or service tax and cess paid on all input services used in providing services exported in terms of Rule 6A of the Service Tax Rules, subject to complying with conditions and procedures.

The said Notification also contains conditions and limitations of such rebate along with procedures and forms of application for rebate claims.

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Amendment in provisions of continuous supply of services Notification No. 38/2012-ST, dated 20-6-2012.

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Vide this Notification provision of (a) taxable services of telecommunication service, and (b) service portion in execution of a works contract will be treated as continuous supply of service, for the purpose of Rule 2(c) of the Point of Taxation Rules, 2011.

The other three services which were also notified as continuous supply of service vide Notification No. 28/2011-ST, but now removed are

 (i) Commercial or industrial construction;

(ii) Construction of complex and

(iii) Internet telecommunication.

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Amendment in Point of Taxation Rules, 2011 Notification No. 37/2012-ST, dated 20- 6-2012.

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By this Notification, the Point of Taxation Rules, 2011 are amended by

(i) omitting the definition of associated enterprises and taxable services as given in sub-rule 2(b) and 2(f), respectively, from the said rules and

(ii) substituting the words ‘provided or to be provided’ wherever they occur in the said rules, with the words ‘provided or agreed to be provided’.

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Amendment in Service Tax Rules, 1994 — Notification No. 36/2012-ST, dated 20-6-2012.

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Vide this Notification, Service Tax Rules, 1994 have been amended in light of introduction of negative list of services and to facilitate various changes made by the Finance Act, 2012. The new amended rules shall be known as Service Tax (Second Amendment) Rules, 2012. The gist of changes made in the said rules is given below:

(i) Various definitions of the terms used in Rules are inserted in Rule 2.

(ii) Changes brought in Rule 2(1)(d) for effecting the revised reverse charge mechanism.

(iii) Substitution of the word and figures ‘Section 66B’ for the word and figure ‘Section 66’ wherever used in the said rules.

(iv) Insertion of new Rule 6A for determining whether the service is exported or not.

(v) Omission of Rule 5B-Date for determination
of rate.

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Rescinding of certain Notifications — Notification No. 34/2012-ST, dated 20-6-2012.

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In order to switch over to the negative list-based new service tax regime, it was necessary to do away with certain existing provisions which conflict with the new provisions of service tax applicable from 1st July, 2012. Accordingly, vide this Notification, a total of eighty one Notifications have been rescinded

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CENVAT credit — Landscaping of factory garden — Held, it is social responsibility and statutory obligation of employer to maintain eco-friendly environment — Activities related to business and falls within the concept of ‘modernisation, renovation, repair, etc. of premises’ — Service tax paid on such services form cost of final products — Definition of input service wide enough to cover — Credit allowable. Medical and personal accident policy, catering services — Held, activities relating to bu<

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Facts:

 The respondent a manufacturer of excisable goods claimed credit of service tax paid on various services availed like: medical and personal accident insurances, personal vehicle services, landscaping of factory garden, etc. Revenue denied the credit and the order was also upheld by the CCE — Appeals. The Tribunal held that the aforesaid services fall within the phrase ‘activities relating to business’ and therefore, the assessee was eligible to claim the credit. Against such order, the Revenue preferred appeal before the High Court.

Held:

Affirming the order of the Tribunal the Court held that in view of CAS-4, the above services are taken into consideration while fixing the costs of the final products and in such a case, the assessee would be entitled to the CENVAT credit of the tax paid on such services. The Court also observed that the definition of the input service is very broad. What is contained in the definition is illustrative in nature. Landscaping of factory garden falls within the concept of ‘modernisation, renovation, repair, etc. of premises’. It is social responsibility and statutory obligation of employer to maintain eco-friendly environment. Moreover, medical and personal accident premium, vehicle insurance, etc. form part of salaries of employees and are activities relating to business. Therefore, the Tribunal’s order was upheld allowing credit of such items.

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Certain Important Amendments in MVAT Act and Rules

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Introduction

Amendments are effected in the MVAT Act, 2002 and the MVAT Rules, 2005 as a consequence to budget proposals for the year 2012-13. Though there are a number of amendments, few important amendments, having a wide effect are noted below.


Amendments in MVAT Act, 2002

(a) Levy of purchase tax and consequential changes
Under the MVAT Act, 2002, up till today there was no scheme for levy of purchase tax. However, now the same has been introduced by inserting section 6A, and section 6B in the MVAT Act, 2002. As per section 6A purchase tax is provided on cotton, purchased from unregistered dealer and which is branch-transferred out side the state or used in manufacture of tax-free goods or taxable goods, where such manufactured goods are branch-transferred out side the state. As per section 6B, purchase tax is provided on oil seeds in the same circumstances, as discussed in relation to cotton as above.
The rate of purchase tax will be the same as mentioned in the schedule i.e., as applicable on the sale of above goods from time to time. The purchase tax provision of section 6B has come into effect from 1-5-2012 and the provision of section 6A will come into force as and when a date is notified for the said purpose.
The purchase tax so levied will be eligible for set-off as per the scheme of set-off.
Consequential amendments have also been made in section 3(2), 3(4) and s.s 3(5A) has been newly inserted. This is to provide liability for registration based on purchase turnover, which is liable to purchase tax as per the above sections 6A and 6B.

(b) Late fee for delayed filing of return

S.s (6) has been inserted in section 20 of the MVAT Act, 2002, whereby late fee of Rs.5000 is prescribed in case of delayed filing of return. It may be remembered that at present, there is section 29(8) providing for levy of penalty in case of delayed filing of return. However, in case of Vasu Enterprises (Writ petition No. 1451 of 2011, dated 8-9-2011) Bombay High Court held that penalty u/s.29(8) cannot be levied without hearing opportunity. This would require the Sales Tax Department to issue show-cause notice in each case and to pass a speaking order. It appears that, to avoid above exercise, this concept of late fee has been introduced. The said late fee amount will be required to be paid before the delayed return is uploaded. The provision has not come into effect till today, but will be brought into operation by issue of Notification. The penalty provision of section 29(8) will also become inoperative from such date.
The above provision shows harsh approach of the Department towards dealers. There can be several reasons for delay. Some of them will be beyond the control of the dealer. Under the above circumstances, levying mandatory late fee of Rs.5000 is not justified. Further, a dealer may not be liable to pay tax but will be liable to pay late fee, simply because the return is delayed. The constitutional validity of such levy is also debatable as there cannot be said to be ‘quid pro quo’ for providing such a fees.

(c) Mandatory part payment
As per present appeal provisions, in section 26 of the MVAT Act, 2002, the litigant dealer is entitled to get stay order upon filing appeal. The Appellate Authority has discretionary power to fix suitable amount of part payment as a condition for grant of stay. Now a new proviso has been added in section 26(6). By this proviso, it is provided that if the matter has been adjourned on 3 occasions on the request of the appellant or the appellant has failed to attend on 3 occasions, then the part payment should become 15% of the disputed dues or Rs.15 crore, whichever is less. Thus, the appellant will be required to make good the difference between earlier part payment and amount calculated as above. If such payment is not made, then the stay will come to an end and the disputed demand will be open for recovery. Thus, one more strict provision has been introduced.
The above provision will not apply to appeals under the BST Act, 1959. However, for VAT appeals the dealers will be required to be more attentive. It can also be noted that when the appeal is being adjourned, it should be carefully seen whether the adjournment is on behest of the appellant or on account of the Department. The factual position should get recorded accordingly in proceeding sheet, to avoid unnecessary counting of number of adjournments.

(d) Appeals to High Court

As per section 27, appeals can be filed before the Bombay High Court out of order passed by the MST Tribunal. Now, by insertion of section 26A, it is provided that the Commissioner will have power to notify monetary limit for filing appeals before the Bombay High Court. The provision is similar to such provision under the Income-tax Act. It is clarified that such non-filing of appeals due to monetary limits, will not prejudice subsequent cases. This provision is effective from 1-5-2012.

(e) Penalty for remaining unregistered

Section 29(2A) has been inserted in the MVAT Act, 2002 from 1-5-2012, by which penalty is provided for remaining unregistered dealer. The said penalty can apply for unregistered period after the date of coming into effect of above section i.e., 1-5-2012. The said penalty is 100% of the amount of tax payable during unregistered period. However, it will be discretionary qua levy as well as qua quantum in view of judgment of the Bombay High Court in case of Ankit International (46 VST 1).

(f) Tax collection at source (TCS)
A novel concept of TCS has been introduced in the MVAT Act, 2002 by insertion of section 31A.

TCS has been provided in the following two eventualities:

(i) When right for excavation of sand is auctioned. The notified person, auctioning the right will be liable to collect TCS.

(ii) The other eventuality is that the notified person having temporary possession or control over the goods, will be required to collect TCS.

Though, the provision has come into effect, the actual Notification notifying the persons and rate of TCS has still not been issued, therefore the provision is practically still not effective.
It can be seen that there is no provision for lesser collection or no collection, etc. Therefore, even if the buyer, from whom TCS is to be effected, is not liable to pay tax, still will be required to pay the TCS. Therefore, the provision can be claimed to be unconstitutional.

 Certain important changes in MVAT Rules, 2005 Important changes have been effected by Notification dated 1-6-2012.

(a) Returns for unregistered period


As per section 20(1) registered dealers are liable to file returns i.e., returns are required to be filed from effective date of registration. However, now for unregistered period also returns are provided. For this purpose Rule 18(1) has been substituted. As per the said sub-rule, quarterly returns are prescribed for unregistered period and the last return from start of the quarter till date of registration. Thereafter the returns will be as a registered dealer. Of course, the returns for unregistered period can be filed only after getting registration.
The above provision appears to be not in consonance with provisions of section 20(1). However, for the sake of compliance, dealers will be required to file the returns for unregistered period also. It is expected that no late fee will be applicable in such case.

(b) Set-off on natural gas

In Rule 53, sub-rule (1A) has been inserted. By this new sub-rule 3% reduction is provided in respect of calculation of set-off on purchase of natural gas. This reduction will apply in the specified circumstances given in the rule. The language of the rule is not very clear. It appears that except where the natural gas is resold, the reduction will apply.

(c)    Reduction in respect of branch transfer [Rule 53(3)]

Vide Notification dated 31-3-2012 the rate of reduction in case of branch transfer [rule 53(3)] has been enhanced from 2% to 4%. This is effective from 1-4-2012.

(d)    Due date for submission of audit report in Form 704 (Rule 66)
Rule 66 has been amended so as to provide that audit report (Form 704) shall be submitted within eight months from the end of financial year. Earlier the due date for submission was within 10 months. (Thus the audit report for financial year 2011-12 will be required to be submitted by 30th November 2012.)

(e)    Preservation of books of account, registers, etc. (Rule 68)

The books of account and other records, as required to be preserved u/r 68, will have to be preserved now for eight years from the expiry of financial year to which they relate. (Earlier these records were required to be preserved for a period of six years.)

Conclusion

There are many other amendments like changes in rate of tax, rules regarding forms for TCS, etc. However, for sake of brevity all these are not discussed here.

VAT on Builders and Developers in the State of Maharashtra

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Although the title given above is very wide, the scope of this quick write up is limited to liability to pay tax on agreements for sale of flats or units in a building under construction by builders and developers in the State of Maharashtra, keeping in view the likely impact of recent decision of Bombay High Court in the matter of Maharashtra Chamber of Housing Industry and others (51 VST 168).

The controversy regarding liability to pay VAT on agreements for sale flats and units by builders and developers has been looming around for over six years. While the Sales tax Department has been contending that through such agreements the builder enters into a contract to construct building for and on behalf of the purchasers, therefore, such contracts fall under the category of ‘Works Contract’, the builders say these agreements are for sale of immovable property, thus liability to pay VAT does not arise.

It may be noted that in a case where a builder sells readymade flat i.e. after the flat is constructed, there is no controversy, it is considered as a sale of immovable property and there is no question of VAT liability. The debatable issue arises only in those cases where builder enters into an agreement for sale of flat with prospective buyer when the construction is yet to commence or is under progress. Such agreements are normally referred to as “Under Construction Contracts/Agreements”. Till the judgment of Hon’ble Supreme Court in case of K. Raheja Development Corporation vs. State of Karnataka 141 STC 298 (SC), such contracts were considered to be for sale of immovable property and the Sales Tax Department did not contemplate any levy on the same. However, after the above judgment a debatable position arose.

The Sales Tax Department of Maharashtra holds a view that the judgment is applicable in all cases, hence, will cover all “under construction agreements” for flats/premises. On the basis of this view the Commissioner of Sales Tax issued a Trade Circular, viz. Circular No.12T of 2007 dated 7th February, 2007. Similarly, a new definition of “Works Contract” was introduced by amending section 2(24) of Maharashtra Value Added Tax Act. 2002 (MVAT Act), w.e.f. 20th June 2006, so as to bring the position of the said definition at par with the definition as was under consideration before the Supreme Court in the case of K Raheja. Changes were also made to the Maharashtra Value Added Tax Rules, 2005, vide notification dated 1st June, 2009 (with retrospective effect from 20th June, 2006), in respect of determination of value in case of works contracts involving such agreements.

However, inspite of the above mentioned changes and the judgment of the Supreme Court, the builders as well as the purchasers of such flats and units held a strong view that in most of the cases, it was possible to contend that such agreements (“under construction contracts”) were not covered under the Sales Tax Laws and they were not liable to tax under MVAT Act as a Works Contract.

Amongst others, the facts of K. Raheja’s case were cited vis-à-vis agreement for sale of flats and units as being generally entered into in the State of Maharashtra. The facts of K. Raheja’s case were such that there the value for undivided share in land was shown separately and the cost of construction was shown separately. However, when such is not the position i.e. when the cost of land and construction are not shown separately, then such contracts cannot be made liable to tax. There is no enabling power with the State Government to bifurcate the composite value into land and construction. Hence, if such construction agreements are considered to be for sale of immoveable property and they cannot be taxed as works contracts under Sales Tax Laws.

With this view in mind, the association of builders and developers i.e. Maharashtra Chamber of Housing Industry (MCHI) and others preferred a writ petition before the Bombay High Court challenging the constitutional validity of the amendment to section 2(24) of MVAT Act, consequentially challenging the insertion of Rule 58(IA) of MVAT Rules, 2005 and the Circular dated 7th February, 2007. A few others also filed similar writ petitions, including challenging the notification dated 9th July, 2010. The Bombay High Court recently disposed of this group of writ petitions vide its order dated 10th April, 2012.

Among several arguments, on behalf of petitioners, main arguments were on the ground that the agreement for sale entered into between a builder/ developer and the purchaser of a flat is basically agreement to sale an immovable property. Such an agreement cannot be considered as a ‘works contract’.

A contract which involves sale of immovable property cannot be split by the State Legislature, even if there is an element of a works contract. In other words the State Legislature cannot locate a sale of immovable property and then attempt to trace out what are the goods involved in the execution of the contract; It was also argued that a works contract involves only two elements viz.

(i) the transfer of property in goods; and

(ii) supply of labour and services. If a third element is involved in the contract viz. the sale of immovable property it does not constitute a works contract and hence to such a contract, the legal fiction created by Article 366(29A) does not apply.

The amendment to Section 2(24) has the effect of expanding the definition of the expression sale of goods under Article 366(29A) and is, therefore, beyond the legislative competence of the State Legislature. The Trade Circular dated 17th February, 2007, the amendment to Rule 58 and the Notification dated 9th July, 2010 indicate the agreements which are contemplated to be brought within the purview of Section 2(24). Those agreements are agreements simplicitor for the sale of immovable property; A contract which is governed by the Maharashtra Ownership Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) cannot be regarded as a works contract. Such a contract is an agreement for the purchase of immovable property in its complete sense.

In a works contract property gets transferred as a result of accretion during the course of the execution of the contract and there is no transfer of immovable property simplicitor. The essence of a works contract is the transfer of property by accretion. Consequently, where a contract involves sale of immovable property, it can never be regarded as involving a works contract.

When a promoter appoints a sub contractor and gets a building constructed, that contract is a works contract under Article 366(29A) and a transfer of the property in the goods involved in the execution of the works contract takes place to the developer. That would be the first deemed sale. When the developer enters into an agreement with a purchaser under the MOFA thereafter, this does not involve a sale of goods since that would amount to a second deemed sale of the same goods which cannot be brought to tax.

On the other hand, the learned Advocate General, appearing on behalf of the State Government, submitted that:

(a) The provisions of Section 2(24) which defines the expression “sale” fall within the compass of Article 366(29A);

(b) A works contract is a contract to execute works and encompasses a wide range of contracts. The expression works contract is not restricted to building contracts having only two elements viz. the sale of material and goods and the supply of labour and services;

(c) The well settled connotation of the expression works contract is that a building contract may also involve in certain situations a sale of land;

(d)    An unduly restrictive or contrived meaning should not be given to the provisions of Article 366(29A) of the Constitution otherwise the object underlying the constitutional amendment would be defeated;

(e)    The purpose underlying the enactment of the deeming fiction in Article 366(29A) was to override the limited definition of the expression sale in the Sale of Goods Act, 1930 and to isolate the sale of goods element involved, inter alia, in a contract which is a works contract;
(f)    A works contract is one where there is a con-tract to do works and it does not cease to be such merely because any other obligation exists.
(g)    In an agreement which is governed by the MOFA, a conveyance of the interest in the flat or at any rate an interest therein is created at the stage of the execution of an agreement under Section 4.

(h)    The Trade Circular and the amendment to Rule 58(1A) are only clarificatory in nature.

The Hon’ble High Court, after considering rival sub-missions, referred to many judgments. The Hon’ble High Court, in its order, also went through the 61st Report of Law Commission, 46th Amendment to the Constitution of India, section 2(24) of MVAT Act, Rule 58(1) & 58(1A) of MVAT Rules, relevant circulars and notifications. Notable amongst others, the High Court referred to a publication i.e. ‘Hud-son’s Building and Engineering Contracts’ (Eleventh edition, page 3). The High Court, at para 22 of its order, noted as follows:

“Hudson’s Building and Engineering Contracts contains an instructive elucidation of a building or engineering contract:

‘A building or engineering contract may be defined, for the purposes of this book, as an agreement under which a person, in this book called variously the builder or contractor, undertakes for reward to carry out for another person, variously referred to as the building owner or employer, works of a building or civil engineering character. In the typical case, the work will be carried out upon the land of the employer or building owner, though in some special cases obligations to build may arise by contract where this is not so, for example, under building leases, and contracts for the sale of land with a house in the course of erection upon it.’

The extract from Hudson is indicative of the fact that in a typical case work will be carried out upon the land of the employer or building owner though in some special cases an obligation to build may arise by contract where this is not so. The author cites the illustration of building leases and contracts for the sale of land with a house in the course of erection upon it. The elaboration of the concept in Hudson is indeed on the same lines as the judgment of the Supreme Court in Builders’ Association which notes the variations implicit in the notion of works contracts.

Therefore, as a matter of first principle, it cannot be postulated that a contract would cease to be a works contract if any more than only two elements are involved in its execution viz. (i) a supply of goods and materials; and (ii) performance of labour and services. In the modern context and having regard to the complexity of work, it would be simplistic to reduce the connotation of works contracts to contracts only involving the aforesaid two elements. When the Forty Sixth Amendment was enacted, no decided case had reduced the substratum of a works contract only to contracts involving the aforesaid two elements. As a matter of principle it would not be permissible to constrict or restrict the scope of works contracts and to exclude from their purview contracts involving situational modifications. Indeed, as Hudson’s treatise notes, a works contract may even involve a factual situation of a building lease or a contract for the sale of land with house in the course of erection upon it.”

The High Court further noted at para 24:

“Works contracts have varying connotations. The scale and complexity of commercial transactions in modern times has increased on a scale that has been unprecedented before.

The modern complexity of business is as much a product of as it is a cause for the complexity of regulatory mechanisms. Traditional forms of contract undergo a change as business seeks to meet new requirements and expectations from service providers in an increasingly competitive market environment. Increasing competition, following the opening up of the Indian economy to increased private investment has had consequences for the land market and the business of building and construction. The nature and complexity of building contracts has changed over time. The obligations which business promoters assume under works contracts may vary from situation to situation and contractual clauses are drafted to meet the demands of the trade, the needs of consumers of services and the requirements of regulatory compliance. So long as a contract provides obligations of a contract for works, and meets the basic description of a works contract, it must be described as such. The assumption of additional obligations under the contract will not detract from the situation or the legal consequences of the obligations assumed.”

While dealing with various provisions of the MOFA, the High Court referred to various decisions under MOFA and under Bombay Stamp Act, 1958, and, noted as follows:-
“The Act imposes restrictions upon a developer in carrying out alterations or additions once plans are disclosed, without the consent of the flat pur-chaser. Once an agreement for sale is executed, the promoter is restrained from creating a mortgage or charge upon the flat or in the land, without the consent of the purchaser. The Act contains a specific stipulation that if a mortgage or charge is created without consent of purchasers, it shall not affect the right and interest of such persons. There is hence a statutory recognition of the right and interest created in favour of the purchaser upon the execution of a MOFA agreement. Having regard to this statutory scheme, it is not possible to accept the submission that a contract involving an agreement to sell a flat within the purview of the MOFA is an agreement for sale of immovable property simplicitor. The agreement is impressed with obligations which are cast upon the promoter by the legislature and with the rights which the law confers upon flat purchasers.

Agreements governed and regulated by the MOFA are not agreements to sell simpiciter, as construed in common law. The legislature has intervened to impose statutory obligations upon promoters; obligations of a nature and kind that are not traceable to the ordinary law of contract.”

The Hon’ble Court, at para 30 of the order, also referred to certain provisions of Maharashtra Apartment Ownership Act, 1970, and noted:

“The provisions of the Apartment Ownership Act, 1970 hence recognise an interest of the purchaser of an apartment, not only in respect of the apartment which forms the subject matter of the purchase, but an undivided interest, described as a percentage in the common areas and facilities.”

In conclusion, while upholding the constitutional validity to of section 2(24) of MVAT Act, the High Court noted that “The submission which has been urged on behalf of the petitioners proceeds on the foundation that a works contract is a contract for the purpose of work which involves only two elements viz. a supply of goods and material and a supply of labour and services. Works contracts have numerous variations and it is not possible to accept the contention either as a matter of first principle or as a matter of interpretation that a contract for work in the course of which title is transferred to the flat purchaser would cease to be a works contract. As the Supreme Court noted in its judgment in Builders’ Association of India vs. Union of India (1989) 2 scc 645, the doctrine of accretion is itself subject to a contract to the contrary. The provisions of the MOFA, enacted in the State of Maharashtra, evince a legislative intent to protect the interest of flat purchasers by creating an interest in the property which is agreed to be acquired, in terms of the statutory provisions.”

The challenge to Rule 58(1A) was rejected on the ground that the legislature had acted within the field of its legislative powers in devising a measure for the tax by rightly excluding cost of land from the value liable to tax.

Circular, dated 7th February, 2007, was held to be clarificatory in nature, and, the notification dated 9th July, 2010 was upheld on the basis that the composition scheme is made available at the option of a registered dealer. There is no compulsion or obligation upon a registered dealer to settle or opt for a composition scheme.

Although, Bombay High Court has dismissed the writ petitions upholding the constitutional validity of the amendments to section 2(24), certain aspects still remain to be answered, one of them may be the basic route of amendment i.e. the K. Raheja’s case, which is pending for consideration before a larger bench of the Supreme Court. A similar issue is also involved in the matter of Larsen & Toubro. Thus, whether an agreement for sale of flats (under construction agreement) can be included in the definition of works contract (and, therefore, can be dissected into three elements i.e. land, labour and goods) or it is to be considered as an agreement for sale of immovable property only (as that is the substance as well as the intention of the parties), the final answer can be provided now only by the Supreme Court.

However, till the Supreme Court provides us guidance in the matter, the sales tax authorities in Maharashtra can enforce the levy of tax on all such transactions of agreements to sale flats (under construction contracts), entered into on or after 20th June, 2006.

The question, therefore, arises how to calculate the quantum of tax which a builder/developer may be liable to pay and whether the same can be passed on to the ultimate purchasers of such flats and units.

Let us now consider the relevant provisions of MVAT in this regard. It may be noted that once it is accepted that such “under construction agreements” are covered by the concept of ‘works contract’ it follows that the builder has to be considered as a contractor and the purchaser of flat as the principal. Thus, all such provisions as are applicable to a normal contractor will apply to the builder also. The following important aspects may be noted in this regard:

1.    The liability to pay tax under the MVAT Act is on the dealer (as defined). A dealer having turnover of sales more than the prescribed limits is liable to take registration.

2.    A registered dealer shall pay tax on his turnover of sales of ‘goods’ at the rates prescribed in the Schedule. Before making payment of tax as above he is entitled to deduct the amount of input tax credit (setoff of taxes paid on purchases) as may be available to him in accordance with the Rules.

3.    An unregistered dealer, although liable to pay tax on his turnover of sales, is not entitled to collect tax from the purchasers and also not entitled to claim input tax credit.

4.    In case of works contract, tax is levied under the concept of ‘deemed sale’ of goods. Thus, the rate of tax applicable has to be considered with reference to the nature of goods involved, the property in which passes from the contractor to the principal in the course of execution of works contract.

5.    As the agreements for sale of flats have one composite value of the transaction, there is no price mentioned separately for land, services and goods, the value of goods involved has to be determined in accordance with the provisions of Rule 58 of MVAT Rules.

6.    Rule 58(1) provides for deduction of various charges in relation to services and Rule 58(1A) provides for deduction in respect of value of land.

7.    In case of construction of building done through sub-contractor/s, deduction is also available for amounts paid to sub-contractor/s.

8.    In case of difficulty in arriving at the value of various services involved in the execution of works contract for the purposes of deduction u/r 58(1) a table is appended to the Rule, listing various types of contracts and a lumpsum percentage of deduction from the total contract value. (In case of construction of building contract, rate of deduction on account of services is provided at 30%.)

9.    For agreements, registered on or after 1st April, 2010, there is a specific composition scheme, designed for these kinds of agreements, whereby a registered dealer (builder) may opt to discharge his tax liability by paying composition money @ 1% of total agreement value. Although the composition scheme contains certain conditions and restrictions such as no deduction u/r 58 and no setoff etc., many may find it easy to follow.

10.    There is another composition scheme, known as 5% Composition Scheme, applicable to construction contracts (as defined). However, the said scheme was designed in the year 2006 with reference to normal construction contracts. (i.e. contracts having basically two elements supply of goods and labour). The Rule to provide deduction for value of land was introduced in the year 2009 and thereafter the composition scheme of 1% was notified, which has a specific reference to agreements entered into by builders and developers including value for transfer of interest in land.

11.    For agreements, registered before 1st April, 2010, till a specific scheme is designed by the Government, the builders may have to go through the exercise of determining value u/r 58, calculate setoff of taxes paid on input and discharge their tax liability.

Natural justice — Officer involved in audit — Officer not competent to assess the dealer — VAT Act, 2004.

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The petitioner dealer filed writ petitions challenging the assessment orders passed by the Joint Commissioner u/s.42 of the Orissa Value Added Tax Act, 2004 as a result of audit prescribed under Rule 49(1) of the Orissa Value Added Tax Rules, 2005, inter alia, contending that the orders of assessment were passed by the Joint Commissioner who was not competent to assess the petitioner, that they were passed violating the principles of natural justice and that the orders were time-barred as they were passed beyond the time stipulated u/ss. (6) and (7) of section 42 of the Act i.e., one year from January 18, 2010, when the audit visit report was approved and given by the Jt. Commissioner.

The High Court held that it was stated by the Department that the audit was directed by the Jt. Commissioner, Sales Tax of the Range and that he was required to constitute an audit team and monitor the progress of the audits assigned to the team. In view of this, it could not be said that the Jt. Commissioner was not involved in the audit process. In order to maintain transparency, any officer who was involved in any manner or had acted in the process of audit and preparation of the audit report in respect of the dealer should not be the Assessing Officer of that dealer. Otherwise, there would be violation of cardinal principles of natural justice. Therefore the orders passed by the Jt. Commissioner were to be set aside.

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Authority for Advance Ruling Jurisdiction — Application for Ruling — Discretionary — Holding and subsidiary.

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[ GSPL India Transco Ltd. & Anr. In re (2012) 49 VST 310 (AAR)]

The applicant, a subsidiary of a subsidiary of a Dr. K. Shivaram Ajay R. Singh Advocates Allied laws Govt. company, filed an application seeking a ruling by the Authority for Advance Rulings on its proposed transactions. The maintainability of the application was challenged by the Dept. contending that since a question identical to the one sought to be raised by the applicant was pending before the Customs, Excise and Service Tax Appellate Tribunal at the instance of the company of which the applicant was a subsidiary, the application by the applicant raising the identical question was barred by the proviso to s.s (2) of section 96D of the Finance Act, 1994. The AAR on the stated facts held that the question sought to be raised was pending before the Tribunal, though at the instance of the holding company of the applicant. If the argument of the applicant was accepted, the ruling to be given by the Authority would only bind the applicant and the authorities under the Act would be bound to implement that ruling only in the case of the applicant.

That would mean that in the appeal filed by the holding company of the applicant involving the identical question, the Tribunal was free to render a ruling ignoring what was being ruled by the Authority. That could lead to incompatible decisions concerning the same question, being rendered by two different authorities on an identical transaction. Therefore, in the facts and circumstances of the case, such a situation should be avoided. This would be in furtherance of the spirit of enacting the bar to the jurisdiction of this Authority to entertain an application for advance ruling, when the identical question was pending before an authority under the Act, the Tribunal or Court. Therefore the application was to be rejected exercising the discretion of the Authority not to allow the application u/s.96D(2) of the Act for the purpose of giving a ruling u/s.96D(4) of the Act.

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Appeal — Tribunal — Adjournment — Medical certificate not necessary while seeking adjournment on medical ground.

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[Megh Raj Bansal v. Customs Excise and Service Tax Appellate Tribunal & Anr., (2012) 13 GSTR 75 (P&H)]

The petitioner, a sub-contractor, was served with a show-cause notice u/s.73 of the Finance Act, 1994, stating that the petitioner had evaded payment of service tax during the relevant period. The stand of the petitioner was that service tax stood paid by the main contractor on the total amount inclusive of the service part, which was allotted to the petitioner by the main contractor. The adjudicating authority, raised demand of certain amount towards tax, interest u/s.75 and penalties u/s.76 and 78. In appeal by the petitioner before the Tribunal, a request for adjournment on medical ground was sought by the petitioner but the same was rejected, as the medical certificate had not been attached. The said order of the Tribunal was challenged in writ before the High Court.

The Court held that while seeking adjournment on medical ground that medical certificate was not expected to be produced. It was the statement made by the counsel, which was expected to be accepted unless the circumstances were brought to the notice of the Court or the Tribunal to decline the request for adjournment sought on medical ground. As no reason could be found to decline the request for adjournment by the counsel for the petitioner, the Tribunal was not justified in not accepting the request for adjournment for the reason that the medical certificate was not attached.

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Microsoft Office 2013

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About this write-up
MS Office is a popular application software and enjoys wide usage across the world. Recently Microsoft released the Customer Preview of the latest version of its Office suite i.e., Microsoft Office 2013 (a.k.a Office 15). This write-up briefly discusses some of the new features proposed to be introduced in the new software, product enhancements to existing features, and some pros & cons associated therewith.

In my last write-up I had mentioned that developments and product announcements/launches were happening in such quick succession, that hardly a day passes by and a new product is launched. As a consequence, products are becoming out of fashion (in relative terms) almost immediately after launch.

When I was penning my previous write-up, I chose to write about the Flamer worm instead of writing about Samsung Galaxy S-III, iOS 6 and Microsoft Surface) . . . . don’t ask me why. Anyhow, I had ended the write up with the note that the next write-up would be about Samsung Galaxy S-III. In all honesty, I was all set to keep this commitment and suddenly out of the blue I read about Microsoft’s latest. All of a sudden it felt like Galaxy S-III had already become ‘old news’ and I had to write about the latest offering (announcement for now) from Microsoft. And so . . . . here we are . . . .

Background

Microsoft Office 2013 (a.k.a Office 15) is a productivity suite from Microsoft Windows and is likely to succeed the hugely popular Microsoft Office 2010. A developmental version (build 2703.1000) was leaked in May 2011. Subsequently, in January 2012, Microsoft released a technical preview of Office 15 (build 3612.1010). Almost six months later, on 16 July 2012 (to be precise) Microsoft unveiled the Customer Preview.

In this write-up, I have tried to highlight some of the new features proposed to be introduced in the new software, product enhancements to existing features, and some pros & cons associated therewith.

Whats new in Office 15

 While there are several features that one can describe, here are a few features that I found exciting:

  • Cloud integration
  • Will respond to touch, Stylus and the good ol’ keyboard
  • The new ‘Metro’ look
  •  Edit PDFs in Word 2013
  •  Will support Open Document Format (‘ODF’) 1.2
  •  Sharing, embedding web elements like YouTube videos
  •  Social media integration — skype, flicker
  •  Enhancements in Excel, Word, Outlook, One Note.

Some of the things that might not excite a few people:

  • Will have to upgrade from Windows XP/Vista
  • Get used to SkyDrive cloud storage.

Cloud integration

Cloud integration is now becoming a de facto ‘must have feature’. Cloud storage has been around for a quite some time (X drive types). Without getting into ‘who started it all’, Google’s chrome OS was a serious attempt to move towards cloud integration. If you recall, the Chrome OS was touted as one of slimmest OS because it required very little time to boot and Google had famously said that there was no need for providing any apps within the OS because everything was on the internet and that most people only boot their PCs and log on to the net — hence all the apps would be on the net. Last year when Apple unveiled its latest offering, it also announced a new service iCloud (5 GB storage). Gone were those days when you need to synchronise your PCs at different locations, no need to carry data in a portable drive or disc. With Office 15, Microsoft too has joined the gang. SkyDrive is default storage location for all your files (effectively SkyDrive is expected local C drive). Subscribers will be given 20GB storage space.

With this version, the Microsoft is moving to a subscription-based model wherein your Office files are tied to your Microsoft ID. Once you sign up, you can download the various desktop apps to a certain number of devices and, as with Windows 8, your settings, SkyDrive files and even the place where you left off in a document will follow you from device to device. Office 365, which is currently being sold to businesses, will be available to home-users as well.

 In addition to receiving future Office upgrades automatically, subscribers will get additional Sky- Drive storage, multiple installs for several users, and added perks such as international calls via Skype. You’ll also be able to stream Office apps to an Internet-connected Windows PC.

Responds to touch, stylus also

The preview page says “Office 15 will take you beyond the mouse and keyboard — to embrace touch and pen input” (one can hope for a much better experience while using One note). While multi-touch laptops aren’t — and probably won’t be — a mainstream choice for business and homeusers anytime soon, touch is an essential component of smartphones and tablets, obviously. The pen may be making a comeback too, judging by the popularity of Samsung’s stylus-equipped Galaxy Note. Office 2013 will allow you to swipe a finger across the screen to turn a page; pinch and zoom to read documents; and write with a finger or stylus — just like you do on your smart phone or tab. Additionally, when you write an email by hand, Office 2013 will automatically convert it to text. The user interface has been modified (especially the Ribbon feature — its flattened up or as Microsoft likes to call it ‘Metrified’). While this may seem a bit odd when you see it on a desktop, but you may appreciate it more when you try using it on a tablet PC or on your smart phone.

The new ‘Metro’ look

Microsoft loves Metro user interface, which was first introduced in Windows Phone 7 around two years ago. Since then Metro has become the user interface of future for Microsoft and the company is putting it in all its products. Office 2013 too has been given a Metro makeover. It is a slick interface, with clean lines, lots of empty space and looks modern.

For the uninitiated

Metro is an internal code name for a typographybased design language created by Microsoft. Originally meant for use in Windows Phone 7. Early uses of the Metro principles began as early as Microsoft Encarta 95 and MSN 2.0. Later on, these principles evolved into Windows Media Center and Zune. Now they are included in Windows Phone, Microsoft’s website, the Xbox 360 dashboard update, and Windows 8. A key design principle of Metro is better focus on the content of applications, relying more on typography and less on graphics (‘content before chrome’). WinJS is a JavaScript library by Microsoft for developing Metro applications with HTML.

There are two aspects to the design changes introduced in Office 2013 — visual changes and usability changes. Microsoft thinks that there is no need for any faux chrome or aero fluff around windows. Hence, the interface has been ‘Metrified’ (that’s how Microsoft likes to say it). The icons have been flattened, things have been cleaned up (i.e., the heavy boundaries, bevelled edges, shadows, etc. . . . . all gone.

 In fact, icons are likely to be a thing of the past. Under Metro there will be hardly any need for icons. While some argue that icons were simple (graphic, easy to remember) indicators for tools like copy, paste, etc., they kinda spruced things up. Microsoft argues that when you have as many as 4000 of such icons it eats away most of your display area.

Microsoft justifies the Metrification by saying that Office 15 is likely to used and seen on screens of different shapes and sizes, consider the screen of a typical smart phone…… would you rather see the screen or the numerous icons. Duh!!! It’s about getting the content front and centre and trying to get the application content out of the way — there when you need it, but out of the way when you don’t. On tablets and smart phones, you want to put the application stuff to one side.

Microsoft thinks that once you get the hang of it, you will appreciate the thought process.

Edit PDF documents in Word 2013

Until now you could only ‘save’ office files in PDF format. To edit these files or other PDF files, either you would have to edit the original office file and then (again) save as PDF or you had to buy third-party software/utilities. Going forward, you will be able to open PDF files and edit them in MS Word 2013 and then save them as word files or as PDF.

Word 2013 will maintain the formatting such as headers, columns, and footnotes and elements such as tables and graphics, of the PDF and permit you to edit them as though they were created in Office 2013 itself.

Users feedback suggests that Office 2013 handled simpler PDF files with ease. But it was not so graceful with the complex ones that had many images and elements.

Will support Open Document Format (‘ODF’) 1.2

Microsoft fought ODF1 as it became an open international standard (ISO/IEC 26300) by creat-ing its own standard OOXML (ISO/IEC 29500) and pushing it through standards organisations. But Microsoft has now apparently accepted that ODF has widespread support with other vendors, governments and organisations.

Microsoft already supports ODF 1.1 in Office 2007 SP1, Office 365, SharePoint and SkyDrive WebApps. Now Office 2013 will support ODF 1.2.

ODF 1.2 has already been widely adopted and is supported by, along with others such as Gnumeric, Google Docs, Zoho Office and AbiWord.

Sharing, embedding web elements like YouTube videos & social media integration — Skype, flicker

Office 2013 uses Sky Drive to enable better sharing of documents. You can invite people to work on to the document or use PowerPoint to give a presentation on the web. Word files can also be published as blogs on several popular blogging services directly from Office 2013.

YouTube videos can be now embedded into the documents directly and users don’t have to save these clips to the local computer. Office 2013 also includes Flickr integration that allows users to search for photographs on the popular photo sharing websites and embed pictures using Office 2013.

Microsoft acquired Skype last year, and Office 2013 will be the first suite to incorporate the popular VoIP service. You can integrate Skype contacts with Microsoft’s enterprise-oriented Lync communications platform for calling and instant messaging. Office subscribers get 60 minutes of Skype international calls each month.

User feedback suggests that there’s room for improvement, though.

Changes in ownership — Approach under Ind AS

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Currently under Indian GAAP, presenting consolidated financial statements is not mandatory for all entities. Only listed entities are required to present consolidated financial statements as per SEBI regulations. Ind AS requires mandatory preparation of consolidated financial statements by all companies, which have subsidiaries. In this article, we aim to understand the accounting for changes in stake held in subsidiaries and associates in the consolidated financial statements of a parent entity.

A. Changes in stake held in a subsidiary without loss of control

When there is a change (increase or decrease) in parent’s ownership in a subsidiary without loss of control, such change is accounted for as a transaction with owners in their own capacity i.e., any acquisition of minority interest is recorded as a capital transaction.

As a result, no gain or loss on such changes is recognised in the income statement. Also, no change in the carrying amounts of assets (including goodwill) or liabilities is recognised as a result of such transactions. Any difference between the consideration paid and the acquired minority interest is adjusted against reserves.

Example 1

Acquisition by parent of Non-Controlling Interest (NCI) of a subsidiary that has other comprehensive income Company P owns 80% of the shares in Company S. On 1st January 2011, P acquires an additional 10% of S for cash of INR 350. The carrying amount of the NCI in S before the acquisition is INR 500, which includes 100 in respect of the NCI’s portion of gains recognised in other comprehensive income in relation to foreign exchange movements.

In P’s consolidated financial statements the decrease in NCI in S is recorded as follows:

The amounts are based on the following calculation:

Example 2

Disposal of shares in an existing subsidiary without losing control

Company P owns 100% of the shares in Company S. On 1st January 2011, P sells 10% of S for cash of INR 350, thereby reducing its interest to 90%. The carrying amount of the net assets of S (including goodwill) in the consolidated financial statements of P on 1st January 2011 before the sale is INR 3,000. S has no other comprehensive income.

 In P’s consolidated financial statements the sale of the 10% interest in S is recorded as follows:

The amounts are based on the following calculation:

P recognises the difference between the adjustment to the carrying amount of NCI and the fair value of the consideration received directly in equity. No adjustments are made to the recognised amounts of assets, including goodwill, and liabilities.

Example 3

Subsidiary issues new shares — Control retained but ownership interest changes

Company S has 100 ordinary shares outstanding and the carrying amount of its equity (net assets) is INR 400. Company P owns 90% of S, i.e., 90 shares. S has no other comprehensive income. S issues 20 new ordinary shares to a third party for INR 150 in cash, as a result of which:

  •  S’s net assets increase to INR 550.
  • P’s ownership interest in S reduces from 90% to 75% (P now owns 90 shares out of 120 issued).
  •  NCI in S increases from INR 40 (400 x 10%) to INR 137.5 (550 x 25%). In P’s consolidated financial statements the increase in NCI in S arising from the issue of shares is recorded as follows:

P recognises the difference between the adjustment to the carrying amount of NCI and the fair value of the consideration received directly in equity. No adjustments are made to the recognised amounts of assets and liabilities or to goodwill.

One of the common situations under which a subsidiary issues new shares which affect the parent’s percentage holding is when employees exercise share options granted to them under Employee Stock Option Plan (ESOP) schemes. Similar to example 3 above, there is a change in ownership interest but control is retained. Therefore, the accounting treatment in the consolidated financial statements to record the change in shareholding is similar to example 3 above.

B. Control acquired by purchasing additional stake in an existing equity method investment

Sometimes controlling stake in an entity is obtained in stages, for example Entity A acquires 20% of interest in entity B on 1st January 2009 and thereafter on 1st January 2010, entity A acquires another 40%.

In such cases, the fair value of any non-controlling equity interest in the acquiree that is held immediately prior to obtaining control is used in the determination of goodwill, i.e., it is re-measured to fair value at the acquisition date with any resulting gain or loss recognised in profit or loss. The basis of fair valuing the original interest is that the economic nature of the investment changes and hence this is akin to disposing of the original investment and recording a new investment in the books.

In such step acquisitions

  • the previously-held non-controlling equity interest is re-measured to its fair value at the acquisition date, with any resulting gain or loss recognised in profit or loss;
  •  the acquirer de-recognises the previouslyheld non-controlling equity interest and recognises 100% of the acquiree’s identifiable assets acquired and liabilities assumed; and
  • any amounts recognised in other comprehensive income relating to the previously-held equity interest are recognised on the same basis as would be required if the acquirer had disposed of the previously-held equity interest.

 Example 4:

Associate becomes subsidiary

 On 1st January 2011, Company P acquired 30% of the voting ordinary shares of Company S for INR 50,000. P accounts its investment in S under Ind AS-28 Investments in Associates.

At 31st December 2011, P recognised equity accounted earnings of INR 8,500 in profit or loss. The carrying amount of the investment in the associate on 31st December 2011 was therefore INR 58,500 (50,000 + 8,500). On 1st January 2011, P acquires the remaining 70% of S for cash of INR 200,000. At this date the fair value of the 30% interest owned already is INR 70,000 and the fair value of S’s identifiable assets and liabilities is INR 250,000.

The transaction would be accounted for as follows:

Note 1

Calculation of goodwill


Note 2

Calculation of gain on previously held interest in S recognised in profit and loss

Another example where similar accounting treatment as above would be followed is when control is obtained through the acquiree repurchasing its own shares. For example, an investor holds a non-controlling equity investment in an investee. If the investee buys back enough of its own shares such that the investor obtains control of the investee, then the investor company needs to adopt consolidation procedures and account the investee company as a subsidiary i.e., Entity A owns 40% interest in entity B. On 1st January 2011, B repurchases a number of its shares such that A’s ownership interest increases to 65%. The repurchase transaction results in A obtaining control of B.

C.    Dilution of ownership interest by disposal of shares resulting in loss of control

Under Ind AS, when a change in controlling interest results in loss of control (e.g., due to sale of investment in the subsidiary), such a change is accounted for in two parts.

  •     Firstly de-recognise the net assets and good-will of the subsidiary and recognise the relating gain or loss in income statement (by comparing it to the fair value of consideration received).

  •     Secondly, recognise any balance investment in the former subsidiary at fair value.

Example 5

Subsidiary becomes associate

Entity A owns 60% of the shares in Entity B. On 1st January 2011, Entity A disposes of a 30% interest in Entity B and loses control over Entity B. The consideration received for the sale of shares of Entity B is INR 700. At the date that Entity A disposes of a 30% interest in Entity B, the carrying amount of the net assets of Entity B is INR 2000. The amount of non-controlling interest in the consolidated financial statements of Entity A on 1st January 2011 is INR 800. The fair value of the remaining 30% investment is determined to be INR 700.

Entity A would record the following entry to reflect its disposal of a 30% interest in Entity B at 1st January 2011:

 

Debit

Credit

 

 

 

Cash
(fair value of consideration

 

 

received)

700

 

Equity
(non-controlling interest)

800

 

Investment
in Entity B

 

 

(at
fair value)

700

 

Net
assets of Entity B

 

 

(including
goodwill)

 

2000

Gain
on disposal

 

200

 

 

 

The gain represents the increase in the fair value of the retained 30% investment of INR 100 [700 — (30% x 2,000)], plus the gain on the sale of the 30% interest disposed of INR 100 [700 — (30% x INR 2,000)].

The remaining interest of 30% represents an associate, the fair value of INR 700 represents the cost on initial recognition and Ind AS 28 — Account

Section A : Disclosure in Notes to Accounts under Revised Schedule VI for Long Term Borowings and details thereof

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3.1 Non-convertible Debentures referred above to the extent of:
(a) Rs.1,593 crore are secured by way of first mortgage/charge on the immovable properties situated at Hazira Complex and at Jamnagar Complex (other than SEZ unit) of the Company.
(b) Rs.5,000 crore are secured by way of first mortgage/charge on the immovable properties situated at Jamnagar Complex (other than SEZ unit) of the Company.
 (c) Rs.1,720 crore are secured by way of first mortgage/charge on all the properties situated at Hazira Complex and at Patalganga Complex of the Company.
(d) Rs.110 crore are secured by way of first mortgage/charge on certain properties situated at village Mouje Dhanot, District Kalol in the State of Gujarat and on fixed assets situated at Hoshiarpur Complex of the Company.
(e) Rs.50 crore are secured by way of first mortgage/charge on certain properties situated at Ahmedabad in the State of Gujarat and on fixed assets situated at Nagpur Complex of the Company.
(f) Rs.44 crore are secured by way of first mortgage/ charge on certain properties situated at Surat in the State of Gujarat and on fixed assets situated at Allahabad Complex of the Company.
(g) Rs.51 crore are secured by way of first mortgage/ charge on movable and immovable properties situated at Thane in the State of Maharashtra and on movable properties situated at Baulpur Complex of the Company.
(h) Rs.500 crore are secured by way of first mortgage/charge on the immovable properties situated at Jamnagar Complex (SEZ unit) of the Company.

3.2 Maturity profile and rate of interest of Non-convertible Debentures are as set out below:

3.3 Finance Lease obligations are secured against leased assets

3.4 Maturity profile and rate of interest of bonds are as set out below:

3.5 Maturity profile of Unsecured Term Loans are as set out below:

Bajaj Electricals Ltd. (31-3-2012)

Long-term Borrowings

4.2 Sales Tax Deferral
Terms of repayment: Sales Tax deferral liability/loan is repayable free of interest over predefined instalments from the initial date of deferment of liability, as per respective schemes of incentive.

Petronet LNG Ltd. (31-3-2012)
Long-term Borrowings

Note:

1. Secured by first ranking mortgage and first charge on pari-passu basis on all movable and immovable properties, both present and future including current assets except on trade receivables on which second charge is created on pari-passu basis.

2. Term of repayment and interest are as follows:

3. In respect of external commercial borrowings of INRNaN million from International Finance Corporation Washington D.C., USA and INRNaN million from Proparco, France, outstanding as on 31st March, 2012, the Company has entered into derivative contracts to hedge the loan including interest. This has the effect of freezing the rupee equivalent of this liability as reflected under the Borrowings. Thus there is no impact of in the Profit & Loss, arising out of exchange fluctuations for the duration of the loan. Consequently, there is no restatement of the loan taken in foreign currency. The interest payable in Indian Rupees on the derivative contracts is accounted for in the Statement of Profit & Loss.

Uttam Galva Steels Ltd. (31-3-2012)
Note 3 long-term borrowing (Rs. in crores)

(i) Details of terms of repayment for the Secured Non-convertible Redeemable Debentures issued by the Company and security provided in respect thereof:

(ii) Details of terms of repayment for the Secured Long-term Borrowings and security provided in respect thereof:

(1) 11.25% Non-convertible Redeemable Debentures are secured by first pari-passu mortgage of all immovable property and hypothecation of all movable properties including movable machineries, machinery spares, tools and accessories both present and future except packing machine supplied by PESMEL Finland.

(2) Term loans from Banks and Financial Institutions namely, Axis Bank, Bank of Baroda, Dena Bank, Exim Bank of India, Oriental Bank of Commerce, Punjab National Bank, State Bank of India, Syndicate Bank, State Bank of Hyderabad, IDFC and ICICI Bank Limited are secured by mortgage and the lenders have paripassu charge on all the present and future movable and immovable assets of the Company except packing machine supplied by PESMEL Finland, but not limited to plant and machinery, machinery spares, tools and accessories in possession or not, stored, or to be brought in companies premises or lying at any other place of the companies representative affiliates and all the intangible assets of the Company. The above security will rank pari-passu amongst the lenders.

(3) ECB loans from ICICI Bank Limited are secured by mortgage of all immovable property and hypothecation of all movable properties including movable machineries, machineries spares, tools and accessories both present and future except packing machine supplied by PESMEL Finland.

(4) ECA from Nordea Bank is secured by hypothecation of packing machine supplied by PESMEL Finland.

(5)    Term loan from ICICI Bank Limited, IFCI, LIC, GIC, and UII ranking pari-passu are secured by mortgage of all immovable property and hy-pothecation of all movable properties including movable machineries, machineries spares, tools and accessories both present and future except packing machine supplied by PESMEL Finland. 25,02,500 Equity shares (previous year 25,02,500 equity shares) held by Promoters are pledged against term loan of Rs.9.55 crore availed from ICICI Bank Limited.

15 Ramco Industries Ltd. (31-3-2012)


Long-term
Borrowings

Term
Loan from

 

 

Banks
Secured

11,409.37

9,056.18

 

 

 

Deposits
from Public

9.85

11.58

 

 

 

Total

11,419.22

9,067.76

 

 

 

(1)Long-term Loans of Rs.11409.37 lac borrowed from banks for expansion of Textile and Wind Mill Division under TUF Scheme are secured by pari-passu first charge on the fixed assets and pari-passu second charge on the current assets of the company.

 

 

 

 

 

 

 

In
lacs

 

 

 

 

 

 

 

 

 

 

Rate of

Outstanding

Repayment schedule

 

 

 

 

interest

as on

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31-3-2012

 

2013-14

2014-15

2015-16

2016-17

 

 

 

 

 

 

 

 

 

 

13.25%

164.20

 

131.20

33.00

0.00

0.00

 

 

 

 

 

 

 

 

 

 

13.25%

768.69

 

400.00

368.69

0.00

0.00

 

 

 

 

 

 

 

 

 

 

12.25%

5000.00

 

2500.00

2500.00

0.00

0.00

 

 

 

 

 

 

 

 

 

 

4.77%

3052.50

 

2416.56

635.94

0.00

0.00

 

 

 

 

 

 

 

 

 

 

12.25%

68.92

 

45.84

23.08

0.00

0.00

 

 

 

 

 

 

 

 

 

 

12.50%

245.10

 

89.13

89.13

66.84

0.00

 

 

 

 

 

 

 

 

 

 

11.75%

2109.96

 

529.40

529.40

529.40

521.76

 

 

 

 

 

 

 

 

 

 

Total

11409.37

 

6112.13

4179.24

596.24

521.76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)    External Commercial Borrowing Loan of USD 6.00 million amounting to Rs.3052.50 lac borrowed from DBS Bank Ltd., Singapore is secured by pari-passu first charge on fixed assets and pari-passu second charge on current assets in favourof Security Trustee DBS Bank Ltd., Chennai.

As per requirements of Accounting Standard 11, ECB Loan has been valued at 50.875 per USD, at the closing rate on 31-3-2012.

This has resulted in a notional loss of Rs.375.50 lac which has been accounted as per Notification dated 31-3-2009 and 11th May, 2011 amending the Accounting Standard AS-11 relating to the Effects of Foreign Exchange Rates as 79.85 lac towards interest and 295.65 lac towards fixed assets.

(3)    The Working Capital Borrowings of the Company are secured by hypothecation of stocks of raw materials, work-in progress, stores, spares and finished goods and book debts and second charge on fixed assets.

GAPS in GAAP — Account ing for Government Grant

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Government Grants are common in India and therefore accounting for Government Grant could have a significant impact on financial statements. Firstly, whether there is a grant or not; and if there is a grant whether the same is a fixed asset-related grant, revenue grant or promoters contribution will have to be decided. If the grant is a revenue grant, then its immediate impact is recorded in the P&L account, if the grant is a fixed asset grant, the grant income is released systematically to the P&L account in proportion to the depreciation on the related fixed asset. Alternatively, the grant is reduced from the amount of fixed asset capitalised, which will have the same P&L effect. Government grant in the nature of promoter’s contribution is treated as equivalent of shareholders fund and credited to the capital reserve. Needless, to say, the accounting will not only have a significant impact on the financial statements, but will also have a significant incometax impact, including MAT computation. Therefore the manner in which the government grant is accounted for becomes critical.

 In this article the author discusses an EAC opinion on the issue of whether a sales tax exemption under a scheme of the government is a grant or not. This article does not discuss the issue on the nature of the grant, whether fixed asset-related or revenue grant or promoters contribution. The issue of whether sales tax exemption scheme is a grant came to the Expert Advisory Committee (EAC) of the ICAI for an opinion (EAO-VOL-20-05). In the said fact pattern, the company was entitled to sales tax exemption over a period of three years, subject to an upper monetary limit. The upper limit was computed based on the additional investment in plant, machinery and building required for expansion. The EAC considered the definition of government grant in AS-12 Accounting for Government Grants.

As per paragraph 3.2 ‘government grant’ is defined as “Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government, which cannot be distinguished from the normal trading transactions of the enterprise”. The EAC felt that sales tax exemption is not assistance in cash or kind and is therefore not a government grant within the meaning of this term under AS-12.

 As such AS-12 is not applicable to sales tax exemption. However, there was no further elaboration on this point. The EAC further noted the definition of Revenue in AS-9 Revenue Recognition and was of the view that the entire sales proceed of the company constitutes revenue. It is immaterial whether the sale proceeds result from sales at normal prices or at higher than normal prices that the unit is able to charge due to sales tax exemption.

 In the author’s view, sales tax exemption is a government grant for the following reasons:

(1) It is a sacrifice by the government for achieving a particular social objective (e.g., dispersion of industry). The upper limit on the grant is clearly quantified. It may not be possible to quantify the sales tax exemption for the entire period of grant upfront; nonetheless, it is possible to quantify the amount of exemption included in each sales transaction. The grant is provided subject to fulfilment of certain conditions.

(2) The manner in which a grant is received does not affect the accounting method to be adopted in regard to the grant. Thus a grant is accounted for in the same manner, whether it is received in cash or as a reduction of a liability to the government.

(3) Government grants exclude assistance provided by the government which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity. Examples of these assistance are free technical or marketing advice and the provision of guarantees, etc. Sales tax exemption is a scheme granted by the government, subject to fulfilment of conditions relating to investment and operation in underdeveloped areas. Sales tax foregone by the government is in substance a transfer of resources by the government to the company.

In accordance with the EAC opinion, the grant will be included in the revenue amount. Going by the author’s view, the grant would be included in other income if it is concluded that it is a revenue-related grant. If the grant is concluded to be a fixed assetrelated grant it would be presented as deferred income and released over time in proportion to the depreciation of the relevant asset. Alternatively it would be reduced from the fixed asset, which would have the same impact.

As can be seen the accounting and presentation of the grant will not only have a significant impact on the financial statements, but also on the tax and MAT computation. This is therefore an issue, the ICAI would need to reconsider.

levitra

Avoiding Common Errors in XBRL Financial Statements

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“Tagging” of financial information by using eXtensible Business Reporting Language, an accounting specific mark-up language creates XBRL financial statements which can be stored in a financial database such as MCA-21. XBRL tagging process converts the financial information contained in document in PDF, Word or Excel format to a document or file with electronic codes which makes the document computer readable as well as searchable. Once the tagged financial statements are stored in a financial database like MCA-21, not only the financial data in those XBRL financial statements can be compared or analysed by use of computer systems but investors, investment analysts or other users can also download it and carry out comparison and analysis more quickly and efficiently than with data stored in traditional formats such as PDF.

Many people have a misconception that tagging of financial information/data in XBRL is similar to converting a Word document into PDF format and that tagged financial information/data is as accurate as the underlying information/data in the source documents. This is an inappropriate analogy, because the process of tagging financial information involves judgment of the person creating XBRL financial statements and there is a potential for intentional or unintentional errors in the XBRL documents which could result in inaccurate, incomplete or misleading information. This is a problem because it is the XBRL tagged data which not only will be used by the regulators e.g. Ministry of Corporate Affairs, for comparison & analysis purpose but will also be used by investors, investment analysts etc. Therefore, completeness, accuracy and consistency of XBRL tagged data is of paramount importance.

As with any new technology, XBRL, a new financial reporting technology also brings new risks. XBRL can’t be read by the human eye. The data in XBRL is filtered through rendering applications or viewers to visually present tagged data. Companies can easily underestimate the challenges posed by XBRL and make mistakes along the way. This article describes common errors appearing in XBRL financial statements filed at MCA-21 and how these can be prevented. Practitioners can use this information to get an insight into the challenges of XBRL Instance creation and providing assurance over XBRL financial statements being filed at MCA-21. To gain a better insight into the challenges faced by the companies in XBRL filings, we examined the XBRL financial statements of a few listed Companies on a test check basis. As a part of this initiative, we downloaded Form 23AC-XBRL & Form 23ACA-XBRL of the Companies from MCA-21 and detached XBRL financial statements attached to these forms and then compared XBRL financial statements rendered by MCA Validation Tool with the financial statements in traditional format, tracing the errors to the XBRL documents containing the computer code.

Completeness Errors

The Company’s XBRL financial statements are required to fairly present the audited financial statements in traditional format. Therefore, all information and data that is contained in the audited financial statements or additional information required to be reported under the scope of tagging defined by Ministry of Corporate Affairs needs to be formatted in XBRL financial statements.

Examples

Some examples of lack of completeness are: (i) Financial information/data of all subsidiaries not formatted in XBRL financial statements. (ii) Financial information/ data of all related party transactions not formatted in XBRL financial statements. (iii) Parenthetical information, for example tax deducted at source on rent, not tagged in XBRL financial statements. (iv) Detailed Tagging of Notes to Accounts wherever required, if not done also falls under completeness error. (v) Not tagging complete “Cash Flow Statement.” (vi) Not tagging the “Foot notes” in financial statements. “Foot Notes” in financial statements provide additional information which helps in having a better understanding of financial information. The absence of “Foot Notes” in financial statements can not only make the task of understanding the financial information difficult, but user could also reach erroneous conclusions.

Solution

A careful tracing of all financial information/data from source documents to rendered XBRL financial statements can detect many such errors. However, this cannot detect all completeness errors because there is some information/data which is required to be formatted in XBRL financial statements, but the same is not reported in traditional financial statements.

Accuracy Errors

Accuracy of numerical data including amounts, signs, reporting periods and units of measurements is critical for the reliability of data in XBRL financial statements. Accuracy errors, though less common than other type of errors, are more serious in nature because the erroneous data not only distorts the financial statements but is also not suitable for downloading in software for comparison and analysis purpose. In a closed taxonomy environment, XBRL Instance documents cannot truly present the audited financial statements, because many times reporting entity may be required to tag a line item in the financial statements with the residuary tag or club two or more line items together. Although, this doesn’t affect the mathematical accuracy of the financial statements, the data may not be suitable for comparison and analysis purposes.

Example

Data entry errors in reporting amount of Profit & Loss Account under the group heading “Reserves & Surplus” and “Loans & Advances” in the Balance Sheet. Duty Drawback”, “Export Incentive” “Other Claim Receivable” all clubbed together and tagged with “Other Receivables”.

Solution

A careful tracing of all financial statement data to the rendered XBRL financial statements can detect errors in values. However, attribute accuracy needs to be checked by verifying all contextual information. A foot note can be added in XBRL financial statements which can provide a break-up of all line items clubbed and mapped with one taxonomy element or with the residuary tag.

Mapping Errors

Mapping is the process of selecting the right element in Indian GAAP Taxonomy for each line item in the financial statement. Mapping errors can result in misleading information and the user of data could reach to an erroneous conclusion.

Examples

“Loss on Sale of Fixed Assets” tagged with “Loss on Sale of Long Term Investments” although a tag “Loss on Sale of Fixed Assets” is available in the taxonomy. “Interest Accrued but not due on Fixed Deposit” tagged with “Other Cash Bank Balance”. Another example of mapping error is “Deferred Tax Liability (Net)” tagged with “Net Deferred Tax Assets” with a negative sign or vice versa. Although, it doesn’t create any mismatch in the assets & liabilities, it distorts the view of the Balance Sheet.

Solution

Although good XBRL Tools have an in-built feature for searching taxonomy element which can assist in mapping, the importance of judgment involved in the process can’t be undermined. A precise understanding of the Company’s financial statements and of Indian GAAP Taxonomy is required to ensure the correct mapping of line items in financial statements with taxonomy elements.

Validation Errors

The final step in preparing XBRL financial statements for submission to MCA-21 involves:-

(i) Validation Test and

(ii) Pre-scrutiny Test

MCA Validation Tool checks and identifies most, but not all, errors. For example, it does not check the financial information/data in ‘Block Tagging’. It verifies the mathematical accuracy and mandatory information/data in XBRL financial statements.

Pre-scrutiny Test conducts server side validation of the data in XBRL financial statements. An XBRL financial statement must pass the “Validation Test” before the “Pre-scrutiny Test” can be conducted.

Examples

Corporate Identity Number (CIN) of an Associate entity not provided in XBRL financial statements. Another example of validation error is “Basis of Presentation of Accounts” not tagged.

Solution

Validation Test on XBRL financial statements should be conducted on the latest available MCA Validation Tool. In case the validation test throws any errors, the same should be removed before uploading at MCA-21. After the XBRL Instance passes the validation test, Pre-scrutiny Test should be conducted and if there are any errors, the same should be removed before uploading of XBRL financial statements at MCA-21.

Rendering Errors

`Rendering’ is a necessary evil. Tagged data needs to be rendered in order to see it. This puts undue focus on presentation vis-à-vis MCA compliant XBRL and use for financial analysis. This is contrary to the original purpose of XBRL. Many filers have noticed during the last filing year that XBRL rendering has not been as accurate as they would prefer it to be. We tend to think of financial reporting in a visual way – in a way we can view it. That is the old way of thinking about financial reporting. “Tagging” of financial statements provide a choice to the users to grab the entire financial statement or individual values in isolation.

Examples

Financial information/data in “Block Tagging” is not properly rendered making the information illegible e.g. information/ data in foreign currency transactions in Notes to Accounts. Another example of rendering error is of certain foot notes attached to the values which are visible in XBRL Viewer but not rendered in the PDF file.

Solution

Rendering errors are mainly related to XBRL software used in generating XBRL financial statements and vendors of software need to look into this aspect. Rendering engine also needs improvement to properly render the information in XBRL Viewer as well as in PDF files. However, the preparer can also improve the formatting of information/data in XBRL financial statements.

Conclusion

It is of prime importance for companies to be aware of these potential errors, whether their XBRL financial statements are prepared in-house or prepared by a third party service provider. There is a legal liability attached to XBRL mandate for companies and its officers in default for submission of inaccurate or false data in XBRL financial statements. There is also a provision for disciplinary complaint against the practitioners to the professional bodies for deficiency in certification of XBRL financial statements. The deficiency in XBRL financial statements could invite avoidable litigation and adversely affect company’s goodwill.

Ind AS: Functional Currency and Consequential Impact on Deferred Tax

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Executive summary

This
article covers the ‘Functional Currency’ aspect differentiating with
‘Presentation Currency’ as laid in Ind AS 21, which will be a new
concept when India converges to IFRS.

It also highlights the
consequential impact of having two sets of functional currencies (one
for GAAP reporting and other Tax submissions) on deferred tax
computation under Ind AS 12, which again is based on a new approach
i.e., ‘Temporary difference’ as against ‘Timing difference’ under
existing AS-22.
Temporary difference is essentially arrived at by
comparing the balance sheet under tax books with financial books. This
approach is also known as ‘Balance Sheet approach’ and the approach in
AS-22 is termed as ‘P&L approach’.

Introduction

India
has laid down the convergence plan of ‘Indian Accounting Standards’
(AS) with ‘International Financial Reporting Standards’ i.e., IFRS in a
phased manner. The first phase implementation was expected to begin from
April 1, 2011 but due to practical challenges, the implementation is
delayed. ICAI, as part of convergence approach, has come out with 35 Ind
AS which are the same as IFRS except for the carve-outs. The Ministry
of Corporate Affairs (MCA) has notified 35 Ind ASs on February 25, 2011.

Amongst these standards, there is one standard that has the potential
to entirely turn the Indian financial statements topsy turvy and that is
IAS 21 i.e., Ind AS 21. The consequential impact of this standard on
deferred taxes, is not part of the carve-outs and hence would need due
care while the standard is implemented in India.

Currency for accounting and presentation

While
all Indian entities prepare books of accounts in Indian Rupees, we have
never thought of preparing our books in any other currency. There may
be some who did wish of using currency other than Indian Rupee (INR) on
account of huge foreign exchange exposures, but they did not have any
guidance or literature to support them. The spot will now be addressed
in ‘Ind AS 21 — The Effects of Changes in Foreign Exchange Rates’.

Once
India starts converging to Ind AS, we will have this standard on
effects of exchange fluctuations, which has considered the aspect of
huge volatility and exposures to operations due foreign currency (i.e.,
other than INR). It requires the managements of companies to adopt a
suitable currency for maintaining their accounts. Since the entities may
vary their exposures to currency in different years, the standard has
mandated the assessment of such book-keeping currency every year.

If any
other currency, say, USD is considered as the currency that influences
the primary economic environment, managements will have to prepare
themselves to consider INR as foreign currency exposure and mark to
market all INR monetary assets and liability at each balance sheet date.
Ind AS 21 — ‘The Effects of Changes in Foreign Exchange Rates’ is a
standard that brings a new dimension to the financial statements
prepared in India. Now, the book-keeping currency i.e., Functional
currency will no more be optional or default INR, it will be governed by
specific principles laid down under the standard and functional
currency can be different than the presentation currency.

Functional currency

Let
us appreciate the governing principles of functional currency under Ind
AS 21:

“Functional currency is the currency of the primary economic
environment in which the entity operates.” (para 7)
“The primary
economic environment in which an entity operates is normally the one in
which it primarily generates and expends cash. An entity considers the
following factors in determining its functional currency:
(a) the
currency:

(i) that mainly influences sales prices for goods and
services (this will often be the currency in which sales prices for its
goods and services are denominated and settled); and

(ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.

(b)
the currency that mainly influences labour, material and other costs of
providing goods or services (this will often be the currency in which
such costs are denominated and settled).” (para 8) Ind AS 21 defines the
functional currency and differentiates it from the presentation
currency. The primary factor that drives the choice of currency is
influenced by stream of revenue and operating costs. Additional factors
that the standard requires to examine are the currency of loan
obligations.

 “Many reporting entities comprise a number of
individual entities (e.g., A group is made up of a parent and one or
more subsidiaries). Various types of entities, whether members of a
group or otherwise, may have investments in associates or joint
ventures. They may also have branches. It is necessary for the results
and financial position of each individual entity included in the
reporting entity to be translated into the currency in which the
reporting entity presents its financial statements. This Standard
permits the presentation currency of a reporting entity to be any
currency (or currencies). The results and financial position of any
individual entity within the reporting entity whose functional currency
differs from the presentation currency are translated in accordance with
paragraphs 38- 50.” (para 10)

Under existing AS-11 definitions, foreign
currency is a currency other than the reporting currency, and reporting
currency is the currency used for reporting financial statements.
The
rules of translating the subsidiary accounts into reporting currency
are similar to those under Ind AS 21, which prescribes using closing
rate for balance sheet items and transaction rate or average rate for
income statement items (para 38-50).
Point of difference
Under Indian
GAAP, a currency used for preparing as well as reporting i.e.,
presenting financial statements to regulatory authorities, lenders,
investors, etc. is foreign currency is no other than INR. There is no
concept of having the currency to report financial statements
(presentation currency) different from the currency in which books of
accounts are to be maintained (functional currency).

Functional currency: Industry perspective

Under Indian GAAP there is no concept of functional currency identification. It however has reference to ‘Reporting Currency’, which is expected to be the same currency of the country in which it is domiciled.

The definition of functional currency in Ind AS will encompass all the companies whose primary economic environment is not the Indian economy.

The impact of this standard will be more evident on commodity market-linked companies engaged in mining, refining, and trading products, whose primary revenue is governed by international commodity prices prevail-ing on London Metal Exchange in US Dollars. Another industry that may be impacted by the implementation of Ind AS will be Business Process Outsourcing Companies and Software Companies whose primary revenue is again governed in terms of Dollars and Euros. Oil and Gas companies are also prone to get functional currency assessment and application in India since the oil prices are quoted in USD per barrel globally.

It will also be impacting the bullion companies that are listed on Indian stock exchanges and others that are planning to list soon on Indian and international bourses. The revenues of these companies are always traded in USD in India and internationally.

Domestic prices for sales within India, of these companies though in INR, are arrived at by first considering the respective International prices in USD and then making certain adjustments such as duty differentials, domestic market premium, freight differentials, competitive discounts, etc. which in industry terms is called as ‘Shadow Gap’ pricing.

Each company will have to apply its own judgment and access all the criteria of primary environment and other additional factors that influence the choice of its functional currency.

Challenges on adoption of functional currency other than INR in India:

(1)    If the accounting records of these Indian companies are to be prepared under Ind AS, then the financial statements will altogether give a different picture. Since currency fluctuation on, say, USD may now sit in transaction amounts and change company’s profitability.

(2)    Change in mindset and budgets required.

(3)    Will lead to difficulty in decision-making processes by Indian managements specifically in assessing its foreign exchange exposure which so far was on currencies other than INR.

(4)    Continuing a parallel accounting system for Income Tax submission since Direct Tax Code does not provide for similar changes.

(5)    Updation/modification to ERP solutions. It is also worth noting that accounting softwares such as SAP have a functionality to address the dual currency accounting which can take care of both tax reporting using INR as functional currency and IFRS reporting using any other currency.

(6)    Accounting for deferred tax and unwanted volatility in income statement.

Indian Industry including managements, lenders, investors, analysts of financial statements will have to prepare for seeing a currency different than INR as accounting currency in annual financial statements. Many companies internationally have adopted this standard which aligned their accounting currency i.e., functional currency in line with their respective primary economic environments.

In the international markets most of the transactions happen in US Dollars and India is now a part of a global economic platform and thus is very much influenced by USD in its financial statements. The impact is more evident in industries that are primarily dependent on USD and whose profitability is affected by any change in USD: INR exchange rate such as Mining & Metals, Oil & Gas, Software exports and Business Processing Operations among others.

Let us now appreciate the challenge in point 6 above, on how deferred tax is impacted by change in functional currency from INR

Ind AS 12: Income Taxes

A deferred tax asset or liability shall be recognised for all taxable temporary differences.

‘Temporary differences’ are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. The ‘tax base’ of an asset or liability is the amount attributed to that asset or liability for tax purposes.

The primary approach of accounting of deferred tax under Ind AS is using the balance sheet approach. For example, revaluation of fixed assets under Indian the GAAP with no corresponding revaluation in tax books i.e., tax base has no impact on deferred tax computation under AS-22 since the revaluation impact is only a balance sheet adjustment with corresponding impact directly in reserves.

Under Ind AS 12, even though the revaluation does not impact the income statement, there is a requirement to adjust the deferred tax and post the net impact in revaluation reserve. This is because this originates a temporary difference on comparison between the balance sheet value of asset and tax base for that particular asset. This is true for all such differences between the balance sheet value and tax base, that have a potential of reversal either in tax books such as 43B items or financial books itself such as revaluation adjustments.

While comparing the balance sheet values and tax base, the following paragraph of Ind AS 12 brings out the impact of functional currency on deferred tax computation.

“The non-monetary assets and liabilities of an entity are measured in its functional currency (see Ind AS 21 The Effects of Changes in Foreign Exchange Rates). If the entity’s taxable profit or tax loss (and, hence, the tax base of its non -monetary assets and liabilities) is determined in a different currency, changes in the exchange rate give rise to temporary differences that result in a recognised deferred tax liability or (subject to paragraph 24) asset. The resulting deferred tax is charged or credited to profit or loss.” (Para 41)

The application of this paragraph will not trigger if the currency in which the company maintains its books of accounts i.e., functional currency and the ones used for calculating taxable profit under tax laws is the same i.e., INR for India. It is pertinent to note that choosing a different currency for presentation of financial statements to stock market, lender, investors, etc., will not attract application of paragraph 41 of Ind AS 12.

However, with the change in accounting standard wherein the accounting records may have to be made under, say, USD (considering primary economic environment criteria under Ind AS 21) and taxable profit or loss is to be calculated under INR, this may cause the temporary difference if the USD:INR exchange rates changes at every balance sheet date.

We will take an example to understand the implications of functional currency on deferred tax.

(1)    Entity A has INR as tax currency and USD as functional currency.
(2)    The value of non-monetary assets as maintained for tax books in INR is Rs.3,150 and as maintained with USD as functional currency stood at $77.73.

The transactions under both sets of books were accounted at respective historical exchange rates and thus the INR numbers of tax books when divided by USD numbers of financial books, will give historical transaction rates, thus different from the closing rate.

(3)    The original and subsequent cost under tax base for the assets are the same as that in financials books, with the exception to the difference that originates due to application of para 41 of Ind AS 12.

(4)    Example considers only non-monetary assets assuming monetary assets are valued at closing rate and thus would not lead to any difference while comparing the tax base using translation rate.

(5)    The exchange rate at March 31 is 1 USD = Rs. 50 and tax rate is 33.99%

Closing deferred tax status of deferred tax liability as on March 31, XXXX of Entity A is as shown in Table 1:


Deferred tax under Ind AS will be calculated as follows:

Under Ind AS, the deferred taxes are measured in the functional currency

As can be seen from the above calculation, the translation of tax base using closing rate has led to a difference of $14.73. It is pertinent to note that this difference is only for deferred tax computation and not for accounting in the financial books.

The notional comparison has reduced the tax base in USD by 14.73 and this leads to creation of a deferred tax liability with a corresponding deferred tax expense in the income statement. The impact of $ 5.01 over net assets of $ 63 will be a material impact on the profits of the company. It will vary depending upon the value of non monetary assets as on the reporting date and movement of exchange rates during the period.

There would not have been any temporary difference in the above example if the functional currency was INR, since tax base and book base would have been the same.

Impact of accounting of deferred tax such functional currency difference

(1)    The accounting for deferred tax on account of such notional differences creates high volatility in the income statement.

(2)    The gain/loss on account of such treatment has no corresponding charge/income in the income statement. It is accounted based on pure out of books comparison of exchange rates on non-monetary items. ($14.05 is notional only for comparison but tax of $ 5.01 is real for accounting.)

(3)    This item has no bearing to operations or profit; instead it pulls down/up financial results from operations due to tax provision and thus calls for suitable disclosures in financial statements to explain the earnings per share to investors, analysts, etc.


It is pertinent to note that i.e. US GAAP, Financial Accounting Standard (FAS) 109 prohibits recognition of a deferred tax liability or asset for differences related to assets and liabilities that, under FASB Statement No. 52, Foreign Currency Translation, are re-measured from the local currency into the functional currency using historical exchange rates and that result from (a) changes in exchange rates or (b) indexing for tax purposes.

On the one hand Ind AS 21 aims to reduce the volatility in results on account of currency exposure and on the other hand Ind AS 12 brings in volatility in income taxes on account of notional difference created on account of comparing the balance sheet value and tax base in functional currency at the closing date.

Thus, choice of functional currency other than that used for tax reporting will lead to such temporary differences and will continue to exist until book currency and tax currency are aligned.

Change in functional currency
“When there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.”

The entity will have to assess the criteria for deciding the functional currency year and apply the accounting impacts for change prospectively. Here the country’s policies also would influence the decision such as restrictions on holding foreign currency and INR being the only legal tender in India.

The entity will also have to explain in notes to financial statement as to why it considers such change in its functional currency.

Presentation currency
Ind AS 21 allows the entity to present its financial statements in any currency and does not restrict any one currency. However, considering the Indian requirements for ROC filing, tax submission, stock exchange filings, etc. the presentation currency will be preferred to be INR.

INR as the presentation currency in Indian market will also be preferred currency for reporting to facilitate easy comparability with its peer group. This can be achieved by either following the rules of translation (using average rate for income statement and closing rate of balance sheet) which will give rise to translation reserve or convenient translation using a single rate for all the items in the balance sheet and income statement.

International precedence
In order to relate to the new concept, financial statements of some international companies who have gone through the change in functional currency may be referred. Following relevant excerpts are for reference:

“StatoilHydro (OSE:STL; NYSE:STO) changed the company structure as per 1st January 2009. The parent company, StatoilHydro ASA, and two subsidiaries, consequently changed their functional currencies to USD from the same date.

The accounts for these companies are therefore now recorded in USD, while the presentation currency for the Group remains NOK. The changes in functional currencies have no cash impact.

The companies changing functional currency will no longer have currency exchange effects, deriving from USD denominated monetary assets and liabilities, related to the ‘Net financial items’. Conversely, monetary assets and liabilities, denominated in other currencies than USD, may now generate such currency effects.”

Radiance Electronics Limited, Singapore
“Certain subsidiaries of the Group have changed their functional currency from SGD and RMB to USD in FY2008A. Revenue for these subsidiaries is mainly denominated in USD while purchases are mostly made in USD. Administrative expenses are denominated based on their country of domicile and are mainly in SGD and RMB.

While the factors used to determine its functional currencies are mixed, the Company is of the opinion that USD best reflects the economic substance of the underlying transactions and circumstances relevant to the foregoing subsidiaries. Accordingly, the subsidiaries adopt USD as its functional currency with effect from the current financial year ended 31st December 2008. This change shall be applied retrospectively to the prior years.

The Company and the Group continues to present its financial statements in SGD consistent with prior years.”

For deferred tax implications under IFRS Tenaris S.A.’s annual financial statements may be referred. It carries a note in its financial statements under ‘Tax reconciliation note’ to explain the investors and readers on the volatility caused due to tax accounting.

Tax note from Tenaris S.A. 2008 financial statements

“Tenaris applies the liability method to recognise deferred income tax expense on temporary differences between the tax bases of assets and their carrying amounts in the financial statements. By application of this method, Tenaris recognises gains and losses on deferred income tax due to the effect of the change in the value of the Argentine Peso on the tax bases of the fixed assets of its Argentine subsidiaries, which have the U.S. Dollar as their functional currency. These gains and losses are required by IFRS even though the devalued tax basis of the relevant assets will result in a reduced Dollar value of amortisation deductions for tax purposes in future periods throughout the useful life of those assets. As a result, the resulting deferred income tax charge does not represent a separate obligation of Tenaris that is due and payable in any of the relevant periods.”

Internationally it was easier for companies to adopt a change in currency of accounting since these are fully convertible economies i.e., they can operate bank accounts in foreign currency. Thus the change in mindset was comparatively easier, however the common challenge was again ERP which had to be equipped with dual currency reporting for tax purposes.

With respect to deferred taxes, we can see that note in financial statements was given to explain notional volatility to guide the analysts and readers of financial statements.

Forward path
It will be a challenging journey for Indian corporates who will adopt Converged IFRS i.e., ‘Ind AS’ and will have to consider the implications of these standards on its accounting and reporting requirements.

From stability of profitability and ultimately EPS perspective, the companies may avoid the volatility of currency exposure, but may not escape the volatility created by foreign exchange rates in computing deferred taxes. In order to explain the volatility on deferred tax front, companies may prefer to give note disclosures as given by international peers.

Alternative approach: Ind AS 12 ‘Income Taxes’
Considering the amount of volatility of foreign exchange rates with INR and its notional impact on financial statements, the Institute of Chartered Accountants of India can consider a ‘Carve-out’ while converging to IAS 12 or represent to International Accounting Standards Board for granting an exemption under IAS 12 which will flow in Ind AS 12. This is keeping in mind the deferment of Ind AS implementation in India and practical hardships that will be faced by Indian multinational congloromates.

Comprehensive Commentaries on FCRA 2010

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Title : Comprehensive Commentaries on FCRA 2010

Author : Manoj Fogla

Pages : 444

Price : Rs.895

Foreign Contribution Regulation Act is a complex piece of legislation, often not fully understood by trustees as well as practising Chartered Accountants. There is very little literature available on this subject and there is hardly any book that deals with the subject in depth. Therefore, this book fills a void and is a welcome attempt to provide information and interpretation on FCRA for the benefit of all persons affected by this Act and in particular, voluntary organisations receiving foreign funding and contribution.

The book seeks to address the need, particularly of grassroot level organisations, which are doing yeoman work but struggle to understand the nuances of this legislation where the consequences of non-compliance can be severe. The book also discusses applicability of FCRA to unregistered ‘Self-help Groups’ and ‘Communitybased Organisations’.
The first chapter of the book is appropriately ‘Frequently Asked Questions (FAQs) on FCRA’. The book is comprehensive in its coverage and is divided into 46 chapters. Though the book does not have an index it has detailed contents, facilitating the search for the relevant information.
The book covers all the controversies under FCRA ranging from opening of multiple bank accounts, deposits from commercial transactions, applicability of the law to liaison offices, operation of revolving funds, anonymous donations, admission of foreigners on the Governing Board, etc. It also covers various procedural aspects, including procedure for obtaining and renewal of registration, prior permission for accepting foreign contribution, change in bank account, etc. It also has a chapter on online filing of application for registration giving a step-by-step process to be followed along with the screen shots at every stage.
It has 30 Annexures, including a useful Annexure tabulating the relevant provisions under the old FCRA, 1976 and under the current FCRA, 2010. An interesting Annexure reproduces the Charter issued by the Ministry of Home Affairs providing guidelines for Chartered Accountants auditing organisations covered by FCRA.
Though, the book is comprehensive in its coverage, the analysis and commentary is very often of a basic skeleton nature. One would have hoped for a more indepth analysis and discussion on topics, (and there are several of those in FCRA) where there could be more than one interpretation.
Perhaps that is done intentionally in favour of simplicity and to provide in an easy-to-read language all relevant information to persons covered by this enactment.
The book is published jointly by Financial Management Service Foundation (fmsf) and Voluntary Action Network India (VANI). The author and the publishers need to be complimented for spreading awareness on this opaque subject and fulfilling a crying need.
levitra

Recent Controversies in Cross Border Taxation

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Subject : Recent Controversies in Cross Border Taxation

Speaker : Pinakin Desai, Chartered Accountant

Date : 11-7-2012

Venue : Indian Merchant Chambers, Mumbai

 The first Lecture Meeting of BCAS for the year 2012- 13 was addressed by Pinakin Desai on the topic ‘Issues in Cross-Border Taxation’ on 11th July 2012. Deepak Shah, Society’s newly elected President, welcomed everyone on behalf of BCAS. He shared with the august gathering the focus areas of BCAS for the upcoming year — to expand and enrich membership experience, to enhance and strengthen relationships and to provide mentorship — and invited whole-hearted involvement and participation of all BCAS members.

After an overwhelming introduction by the President, Mr. Desai took the stage to do full justice to it. Given the recent upheaval in the tax world, many new controversies have added themselves to an already long list. Mr. Desai, in his talk, discussed some of the most controversial ones. These are briefly discussed below:

1. Overview of General Anti-Avoidance Rules (‘GAAR’)

As per the current GAAR provisions, an arrangement would be termed as ‘impermissible avoidance agreement’ if its main purpose is obtaining tax benefit and it satisfies any of the four conditions specified in section 96(1) of the Income-tax Act, 1961 (‘Act’). The speaker opined that the condition that the main purpose be obtaining tax benefit was necessary to be provided and is provided by most countries globally. However, presently, the term tax benefit is very loosely worded and could lead to unreasonable conclusions.

Section 96(2) provides that while the objective of an arrangement as a whole may not be to obtain tax benefit, if a step in or a part of the arrangement has been inserted only to obtain tax benefit, the entire arrangement shall be presumed to obtain tax benefit.

GAAR can be used in addition to or in conjunction with other specified anti-avoidance rules already forming part of the Act. Benefit of the tax treaties would be subject to GAAR applicability.

2. Consequences of GAAR

Consequences of invoking GAAR have been laid down in section 98. Draft guidelines on GAAR have been released on 28th June 2012 giving examples of cases where GAAR is invoked. The speaker opined that there appeared to be no co-relation between the transactions and the consequences that followed. There were no principles laid down in the draft guidelines for reading the transactions and applying the appropriate consequence to it.

Further, the consequences per section 98 are not exhaustive; the Assessing Officers have been given wide powers to take appropriate actions where GAAR gets invoked. This is a dangerous tool in the hands of the officers as there is no saying as to how it will be used.
Lastly, it is not clear as to who will GAAR apply to — would it be limited to the parties carrying out the impermissible arrangement or could it be extended to a person who may be only liable to deduct tax at source?

3. Draft GAAR Guidelines:

 Examples The draft guidelines on GAAR have been released for public consultation. The speaker urged all present to actively contribute to the same.

The guidelines would have the same force as the statute to the extent that they are not inconsistent with the statute. The guidelines lay down monetary thresholds for invoking GAAR. GAAR is made effective to income accruing or arising on or after 1st April 2013, which is in sync with international practices. However, there are no grandfathering provisions for existing structures/transactions which may result in income accruing or arising post GAAR becoming applicable.
Key take-away of guidelines:
  •  GAAR provisions codify substance over form doctrine.
  •  Onus of proof is on tax authority.
  •  Special Anti-Avoidance Rules (‘SAAR’) usually override GAAR; exception being abusive behaviour that defeats a SAAR.
  •  If arrangement is only partly impermissible, GAAR is applicable to the part, not the whole.
The speaker, thereafter, briefly dealt with examples in the guidelines which seek to clarify the applicability of GAAR.
He observed that while the guidelines explained tax evasion and tax planning, they failed to bring out the distinction between tax evasion and tax mitigation, thereby leaving ambiguity for borderline cases. Thus, the guidelines still leave ambiguity on what qualifies as tax avoidance. Further, the examples are not exhaustive in any case and do not address the various peculiar transactions.
With respect to FIIs, the guidelines clarify that GAAR will not be applicable to FIIs if the FII opts not to claim treaty benefits. GAAR would also not extend to non-resident investors in FIIs. However, presently, there is no legal provision for this, but only the guidelines.
While SAAR overrides GAAR, one of the questions left open by the guidelines was whether the limitation of benefit clause in a double tax avoidance treaty would qualify as SAAR? Likewise, while guidelines gave examples demonstrating that treaty shopping is impermissible if without commercial substance, they also opened a Pandora’s Box of unaddressed challenges. Some of these issues were discussed by the learned speaker.
The guidelines have recognised the ‘choice principle’ in some examples, i.e., if a person undertakes a transaction purely as a matter of commercial choice, without the motive of tax evasion, GAAR would not apply. However, the speaker opined, that a number of other examples in the guidelines are inconsistent with this principle.
The guidelines should further clarify the following:
  •  GAAR is not a revenue earning measure; GAAR deals with abuse. l Respect business decisions and choice principle.
  •  Notional taxation is not permitted. l Claim of expenses to be evaluated on tax provisions. GAAR covers only artificial claims; not real expenditure.
  •  Co-relative adjustment: a natural hedge to protect reasonable business choice?
  •  Citing of a counterfactual (alternative/nonabusive) arrangement by the tax officer should be required.


4. Indirect transfer of assets in India — Section 9

Transfer outside India of shares of a company set up outside India by a non-resident of India to another non-resident have been made taxable in India of the company whose shares are being transferred derives its value substantially from Indian assets.

Meaning of the term ‘deriving value substantially’ used in the statute is not clear. This has thrown up a variety of issues. For example, say, A holds shares of Company X listed on the New York Stock Exchange (‘NYSE’). Company X holds Company Y which is located outside India and has operations in India and China. In this case, would sale of shares of Company X by A on the NYSE attract capital gains tax in India?
Some of the effects, perhaps intended, of these provisions are:
  • Merger of a foreign company having operations in India with its sister concern located outside India could now lead to capital gains tax in India for the holding company of the merging entities. Such transactions were till date outside the scope of Indian tax laws.
  •  Issues with respect to what would be the cost of acquisition and what would be the period of holding of the ‘deemed Indian assets’ in some situations are as yet unanswered.
  •  Indirect transfers may get treaty protection if the actual asset being transferred is located in a beneficial treaty country.
Reassessment of income for foreign assets
Whether the extended time limit of 16 years for assessees having undisclosed foreign assets would apply to cases of indirect transfer of Indian assets? Likewise, the time limit for reassessment of representative assessees has been extended to 6 years. While ideally, these limits should not apply to indirect transfers; it is difficult to be confident of this under the reigns of the Indian Tax Department.

5.    Other provisions

(i)    Software payments: The purpose of amendment to section 9(1)(vi) appears to bring into tax net ‘shrinkwrapped software’. However, there is no change in treaty position and hence, if treaty provisions made a transaction non-taxable, it will continue to be not taxable. The amendment will, however, apply to non-treaty and domestic transactions.

(ii)    Domestic transfer pricing: While international transfer pricing applies to foreign company holding more than 26% shares of Indian company, domestic transfer pricing may apply to foreign company holding more than 20% shares of Indian company. Disconnect in domestic transfer pricing provision could capture director’s fees, managerial remuneration allocated to Indian PE of a foreign company and paid by the foreign company.

(iii)    Taxation of foreign dividends at concessional rate (section 115BBD): This section does not cover deemed dividend u/s.2(22)(e). Further, section 115BBD does not allow deduction of expenses incurred. In many cases, the expenditure incurred, which is disallowed by section 115BBD, may be higher than the benefit offered by the concessional tax rate of section 115BBD. Further, MAT provisions still apply to this income.

(iv)    Foreign currency borrowings (section 115A r.w.s. 194LC): If loan agreement is executed prior to 1st July 2012 but monies are actually borrowed after that date, section 115A benefits would apply. While section 115A requires approval of Central Government, External Commercial Borrowing (‘ECB’) is permitted under general FEMA approval and does not require a specific Central Government approval. Clarifications/instructions clarifying this issue may be expected.

(v)    Issues arising out of amendments to section 195(7), concessional tax rate on LTCG from sale of unlisted securities by non-residents, requirement of tax residency certificate, section 90(3), annual statement requirement in respect of Liaison Offices were also lightly touched upon.

London risks losing its status as world’s top financial centre.

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London risks losing its status as the world’s top financial centre as the INRNaN-trillion interest-rate fixing probe follows a series of market abuses by banks that eroded trust in a city already shrinking faster than rivals. JPMorgan Chase & Co’s trading loss of at least INRNaN billion, the alleged INRNaN billion fraud at UBS and the investigation of at least a dozen banks including Barclays for rigging global interest rates all happened in London in the last year. The effect is taking a toll on the capital of a country enduring its first double-dip recession since the 1970s, which fired more financial-services workers than any other country in 2011 and again this year.

“My heart sinks every time there is a scandal and the perpetrators are in London, even if it is not always the UK’s responsibility, it is under our noses,”

Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee, said in an interview.

“There is an effect on the UK’s reputation, and it reinforces the view that even after all the apologies there is much to do.”

London, ranked as the world’s number one financial centre by research firm Z/Yen Group, was where American International Group and Lehman Brothers Holdings booked transactions that helped lead to their downfall. This week saw Bank of England and UK government officials tied to the interest-rate fixing scandal that cost Robert Diamond, London’s best-known banker, his job at Barclays. With the European debt crisis on its doorstep, London now faces calls to cull its bonus culture, rein in risk-taking and beef up a light-touch regulatory system that fuelled a decade long boom.

The danger for London is that Europe is preparing to set up its own regulator for banks, which may exclude the UK or disadvantage firms based in the city. Domestically, the industry is losing longstanding political support from both Conservative and Labour parties — as well as the public. Home to about 250 foreign banks, London is the world’s biggest centre for foreign-exchange trading and cross-border bank lending and trades INRNaN trillion of interest derivatives daily, according to the Bank for International Settlements.

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Liebor? — Determination of the LIBOR must be above suspicion.

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The scandal involving the London Interbank Offered Rate (Libor) — which serves as a benchmark for determining the rate of interest on a great many financial transactions — has already cost Barclays, the UK’s third-biggest bank, dear. It has been fined nearly half-a-billion dollars and lost three powerful men at the top, including CEO Bob Diamond. But the damage to date may be only the tip of the iceberg. If a 2008 internal memo published by Barclays is to be believed, manipulation and subterfuge are not the exclusive preserve of banks. The rot goes much deeper. Barclays, so it would seem, was only taking its cue from the Bank of England and the government. Both wanted to keep interest rates low to stimulate economic activity in the aftermath of the 2008 crisis.

What better way to do that than have friendly banks deliberately under-report the actual rate of interest in order to depress Libor, the market benchmark used to price financial contracts, globally? If true, the implications are much more serious and go well beyond the UK. Allegations of Libor rigging are not new.

For now, Barclays’ claim that it had official sanction to manipulate the rate and report it lower during the crisis has not found many takers. But there is no denying that after the collapse of Lehman Brothers when banks’ borrowing costs increased dramatically, managers and governments were keen to shore up confidence, tempting banks to present a rosier-than-actual picture by reporting lower-than-actual interest rates. There is also no denying the nexus between Western governments and banks.

Most US Treasury Secretaries have cut their teeth on Wall Street. But the Barclays scandal shows the nexus could potentially be wider and far more damaging than suspected so far. Libor determines the interest rate on transactions to the tune of close to INRNaN trillion globally. Like Caesar’s wife, it must be above suspicion.

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Exemption of Services provided by TBI/ STEP — Notification No. 32/2012-ST, dated 20-6-2012.

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Services provided by Technology Business Incubator (TBI) or Science and Technology Entrepreneurship Park (STEP) recognised by the National Science and Technology Entrepreneurship Development Board (NSTEDB) of the Department of Science and Technology, were exempted from whole of service tax vide Notification No. 9/2007-ST w.e.f. 1-4-2007.

Further the services provided by an entrepreneur located within the premises of so recognised TBI/ STEP were also exempted vide Notification No. 10/2007-ST. In the new service tax regime, the benefits of exemption given to entrepreneurs under Notification No. 10/2007-ST is totally rescinded but TBI/STEP are provided with similar benefits as they were enjoying before, vide this Notification No. 32/2012-ST. The new Notification also contains revised formats for information to be furnished in this regard.

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Exemption to specified services received by exporter of goods — Notification No. 31/2012-ST, dated 20-6-2012.

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By this Notification, benefit for promotion of exports has been given which includes exemption of certain specified taxable services received by an exporter of goods and used for export of good, from the whole of service tax. As per the said notification, the exporter shall register himself u/s.69 of the Act, should be holding Import Export Code Number, should be registered with the export promotion council sponsored by the Ministry of Commerce or Ministry of Textile as the case may be and shall comply with procedural aspects specified in this Notification.

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Partial reverse charge mechanism — Notification No. 30/2012-ST, dated 20-6-2012.

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Notification No. 30/2012-ST, dated 20-6-2012 widens the coverage of situations wherein service tax is payable under reverse charge mechanism by including following additional services/situations:

In respect of services specified at Sl. No. 7, 8 & 9, this reverse charge mechanism shall be applicable only where service provider is a non-corporate entity and the service recipient is a corporate entity.

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