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Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
76 Exemption to specified services provided within a port or
airport — Notification No. 31/2010 — Service Tax, dated 22-6-2010.
W.e.f. 1-7-2010, by this Notification services listed in the
Notification when provided within a port or an airport have been exempted.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
75 Exemption in respect of specified sponsorship services —
Notification No. 30/2010 — Service Tax, dated 22-6-2010.
W.e.f. 1-7-2010, by this Notification exemption has been
provided to tournaments and championships organised by specified sports
authorities and organisations listed in the Notification.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
74 Marginal relief to buyers of residential, commercial or
industrial properties under construction — Notification No. 29/2010 — Service
Tax, dated 22-6-2010
W.e.f. 1-7-2010, this Notification has amended Notification
No. 1/2006-Service Tax dated 1st March, 2006, so as to grant enhanced exemption
from so much of the service tax leviable as is in excess of the 25% (in place of
earlier 33%) of the value of gross amount charged for the services provided in
relation to commercial or industrial construction or construction of complex.
However, this exemption shall not apply where the cost of land has been
recovered separately from the buyer by the builder or his representative.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
73 Exemption to construction of complex services to JNNURM &
RAY — Notification No. 28/2010 — Service Tax, dated 22-6-2010.
W.e.f. 1-7-2010, by this Notification Central Government has
exempted the taxable services of Construction of Complex as defined in Section
65(105)(zzzh) of the Act, provided to Jawaharlal Nehru National Urban Renewal
Mission & Rajiv Awaas Yojana from whole of the Service tax.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
72 Exeption in respect of air travel from and to specified
places — Notification No. 27/2010 — Service Tax, dated 22-6-2010.
W.e.f. 1-7-2010, by this Notification the Central Government
has exempted the taxable service of air transport of passengers from whole of
service tax in respect of passengers embarking on a journey originating or
terminating in an airport located in Arunachal Pradesh, Assam, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, Tripura or at Baghdogra of West Bengal.
71 Exemption in respect of transport of passengers by air
service — Notification No. 26/2010 — Service Tax, dated 22-6-2010.
W.e.f. 1-7-2010 by this Notification services provided by
aircraft operator to any passenger in relation to scheduled or non-scheduled air
transport in India for domestic or international journey have been exempted,
subject to conditions, from so much of service tax as is in excess of :
(a) ten percent of the gross value of the ticket or Rs.100
per journey, whichever is less, for passengers travelling in any class, within
India;(b) ten percent of the gross value of the ticket or rupees
five hundred per journey, whichever is less, for passengers embarking in India
for an international journey in economy class. The expression economy class
has been explained in the Notification.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
70 Architects, chartered engineers & licensed surveyors
authorised to issue completion certificate in construction services — Service
Tax (Removal of difficulty) Order, 2010 No. M.F. (D.R.) Order No. 1/2010, dated
22-6-2010.
W.e.f. 1-7-2010, by this Order architects, chartered
engineers and local licensed surveyors are authorised as competent authorities,
apart from government authorities, to issue completion certificate in relation
to commercial or industrial construction or construction of complex services.
(2009) 118 ITD 133 (Mum.)
Smt. Nasreen Yusuf Dhanani v.
ACITA.Y. : 1-4-1986 to 18-12-1996.
Dated : 5-10-2007
Search and seizure action u/s.132 was conducted at
residential premises where the assessee was staying with her husband — Search
warrant was issued in the name of the assessee’s husband — consequent to
search action, notice u/s.158BC was issued to the assessee, in response to
which she filed her return of income for block period declaring ‘nil’
undisclosed income — subsequently intimated to the AO that since warrant of
authorisation u/s.132 was not issued and served in her name, special procedure
for assessment of search cases was not applicable to her case — AO without
dealing with the objection, made huge additions of undisclosed income — The
CIT(A) upheld the block assessment.On appeal before the Tribunal, it was held :
(1) That a reading of S. 132 makes it clear that the
Section is person-specific and not premise-specific as argued by the
Revenue. The primary target for the search action is the person in
possession of any undisclosed income. Thus, the arguments of the Revenue
that the premises where the search action was carried out belonged to the
assessee, and therefore, the block assessment u/s.158BC was validly passed
did not hold good.(2) Another argument of the Revenue was that in the
course of search action, evidence was found showing undisclosed income in
the name of the assessee and thus, provisions of S. 158BC could be invoked.
In this case, it is provision of S. 158BD which is to be applied in a case
where there is no search warrant and evidence is found showing undisclosed
income in the course of search conducted in respect of any other person. The
proper course of action would therefore be to issue a notice u/s.158BD.(3) In view of the above factual and legal position, the
entire proceedings undertaken by the AO were bad in law, and hence the
assessment was to be quashed.
(2009) 118 ITD 99 (Mum.)
Rajendra C. Singh v.
JCITA.Y. : 1-4-1987 to 15-11-1997
Dated : 27-9-2007
A search was conducted at the assessee’s premises and after
completion thereof, the AO issued notice u/s.158BC to the assessee. In
response thereto, the assessee filed block return offering undisclosed income.
In the meanwhile, the Assistant Director, in the appraisal report recommended
an audit u/s. 142(2A). The AO requested the Commissioner to approve the said
proposal.Accordingly, by a letter dated 5-5-1999, the assessee was
directed to get the accounts audited within 60 days from the receipt of the
letter. Before expiry of such period, the assessee applied for extension of
period of audit by two months, which was also granted. On 26-8-1999, the
assessee asked for a further extension of two months which was also granted on
the same date.During the assessment proceedings, the AO was of the view
that in normal circumstances, the block assessment should have been completed
by 30-11-1999, however, considering the Explanation to S. 158BE, the period
got extended up to 31-5-2000 and hence he passed an assessment order on
31-5-2000.On appeal before the CIT(A), the assessee argued that
assessment order was barred by time and also contended that the AO had passed
the order only on the basis of the appraisal report of the Assistant Director
and that he had not applied his mind to the proceedings carried out before him
as contemplated in S. 142(2A). It was further submitted that the AO had not
passed an order directing the audit, but merely had endorsed the
recommendation of the Assistant Director, who was not competent authority to
direct the audit.The CIT(A) rejected the assessee’s claims and upheld the
order of the AO. On appeal before the Tribunal it was held :
(1) Reading of S. 142(2A) makes it clear that the
recommendation should come from the AO. The AO has to form an opinion having
regard to the nature and complexity of the accounts and also keeping in mind
the interests of the Revenue, that a special audit is required. If he forms
such an opinion, he has to seek prior approval of the Chief Commissioner or
the Commissioner to get the accounts audited.(2) In the instant case, the initiation was done by the
Assistant Director and the AO had only requested the Commissioner to accept
the proposal of the Assistant Director.(3) Therefore, in the above-mentioned case, since
recourse to S. 142(2A) was not valid, the finding of the Commissioner
(Appeals) that the assessment order was passed within time, is devoid of
merit. The order should have been passed by the AO on or before 30-11-1999,
as he himself had held that in the normal circumstances that was the last
date of passing the order. Therefore, the order of the AO was beyond time
contemplated u/s.158BE and accordingly, the appeal of the assessee was
allowed.
(2009) 118 ITD 70 (Delhi)
Nuware India Ltd.
v.
DCIT
A.Y. : 1994-95. Dated : 31-1-2008
Facts :
The AO had found differences in the account balances of
various creditors on comparison of accounts of the assessee and concerned
creditors. Differences were found in the accounts of 20 parties totalling to
Rs.4,20,949. As these differences were not reconciled, the same was added to
assessee’s income. The Commissioner (Appeals) upheld the addition. On appeal
before the Tribunal, it was held :
(1) That neither the assessment order, nor the order of
the CIT(A) gave details of the nature of differences in the accounts, so to
say, whether the credit balances were more or less or both in the books of
the assessee when compared with the confirmed accounts received from the
parties.(2) If it is the case of the AO that these liabilities
ceased to exist, it was for him to prove so by bringing the case within the
four corners of the provisions contained in S. 41(1). Reference was made to
the SC decision in the case of CIT v. Suguali Sugar Works (P) Ltd. in
which it was held that the entries made in the accounts of the debtor,
unilaterally writing off the debt, without any action on the part of the
creditor will not enable the debtor to say that the liability had come to an
end. Therefore, it was held that the amounts written off by the debtor would
not constitute income u/s.41(1).(3) Thus, as the details of the differences were not
given, as also, it is not shown as to how the sum total of these differences
would be income of the assessee, the impugned amount cannot be said to be
income, and the CIT(A) has erred in upholding the additions.
Part A — Reported Decisions
42 (2008) 300 ITR (AT) 310 (Cochin)
C. H. Aboobacker Haji v. ITO
A.Y. 2004-05. Dated : 14-7-2006
S. 44AA, S. 271A —Assessee engaged in contract business —
Provision for compulsory maintenance of books of accounts not applicable —
Survey action after issuing notice — Circumstances that AO unable to compute
income of assessee due to non-maintenance of accounts as required by S. 44AA(2)
does not arise — Held, penalty is not leviable.
Facts :
The assessee, a civil contractor had filed his return of
income for A.Y. 2004-05 showing a turnover of Rs.69,22,579 and he had estimated
the income at the rate of 5% of total contract receipts. For earlier years (A.Y.
2000-01 and 2001-02), the assessee had declared his income at the rate of 8% of
the gross contract receipts. Subsequently, there was a survey action against the
assessee u/s.133A and on finding that the assessee had omitted some contract
receipts, the AO concluded that the assessee had violated the provisions of S.
44AA and issued a notice u/s.274 r.w.s. 271A on 10-1-2005 while the actual
assessment order was passed on 23-6-2006. The assessee challenged the impugned
order of the AO before the CIT (A) but without any success.
On appeal to ITAT, the Tribunal held that the penalty was not
leviable and referred to the following :
(1) On the perusal of the provisions of S. 44AA held that
the assessee’s case was not covered by S. 44AA(1).
(2) At most, S. 44AA(2) may be applicable but for
attracting the said Section the condition that the AO was unable to compute
the income of the assessee was not satisfied, because the AO had passed the
penalty order prior to the completion of the assessment.
(3) It may be worth mentioning that the assessee had
offered Rs.5 lakhs as an additional income from his contract business, which
has been accepted without further comments or observation by the AO.
(4) Further, reliance was also placed on well-settled
principle of law as laid down by the Apex Court in the case of Hindustan Steel
Ltd. (1972) 83 ITR 26 (SC) that penalty proceedings are quasi-criminal in
nature and it must be brought on record by the AO that the assessee has
deliberately acted in defiance of law or was guilty of conduct contumacious or
dishonest, but in the reasoning given by the AO in the assessment order,
nothing has been mentioned. Hence, the penalty levied by the AO u/s.271A was
deleted.
Case referred to :
(i) Hindustan Steel Ltd. v. State of Orissa, (1972) 83 ITR 26 (SC).
Part A — Reported Decisions
41 (2008) 300 ITR (AT) 182 (Mumbai)
Sumaraj Seafoods Pvt. Ltd. v. ITO
A.Y. 2001-02 to 2003-04.
Dated : 26-6-2007
U/s.80-IB — Profit out of processing, selling and exporting
marine products is profit attributable to cold storage and hence entitled to
deduction u/s. 80IB.
The assessee company was engaged in the business of marine
products, storing it in the cold storage and exporting it. The AO denied the
deduction u/s.80-IB on the ground that processing of fish could not be held as
an industrial undertaking. The Appellate Authority denied the deduction on the
ground that separate computation of profit from cold storage was not provided by
the assessee.
On appeal to ITAT, it allowed the deduction u/s.80-IB and
referred to the following :
(1) The only activity conducted by the assessee is to
purchase, process, store (fish and other sea foods) in its cold storage plant
and then export the same.
(2) Thus, the operation of its cold storage plant is a very
essential and critical element in this activity of undertaking.
(3) The operation of a cold storage plant would definitely
result in certain value addition to a product and such value addition should
be considered as profits derived from operation of a cold storage plant.
(4) The profits derived from the industrial undertaking
have a close and proximate nexus with the operation of its cold storage plant.
Cases referred to :
(i) CIT v. Asian Marine Products Pvt. Ltd., (1999)
239 ITR 349 (Mad.)
(ii) CIT v. George Marjo Exports Pvt. Ltd., (2001)
250 ITR 446 (Mad.)
(iii) CIT v. Relish Foods, (1999) 237 ITR 59 (SC)
(iv) CIT v. Sterling Foods, (1999) 237 579 (SC)
(v) National Thermal Power Corporation Ltd. v. Addl.
CIT, (2004) 91 ITD 101 (Delhi)
(vi) Pandian Chemicals Ltd. v. CIT, (2003) 262 ITR
278 (SC)
Part A — Reported Decisions
40 (2008) 300 ITR (AT) 96 (Delhi)
Freightship Consultants P. Ltd. v. ITO
A.Ys. 1996-97 & 1997-98.
Dated : 25-5-2007
S. 234B — Advance tax — Interest on shortfall in payment
of advance tax — Interest is payable up to the date of regular assessment and
not up to the date of order passed by Assessing Officer in consequence of the
order passed by the Tribunal.
Facts :
The Assessing Officer did not allow the claim of the assessee
u/s.80-O of the Income-tax Act, 1961 for A.Ys. 1996-97 and 1997-98. On appeal,
CIT(A) allowed it in totality. However, in second appeal before Tribunal filed
by the Revenue, ITAT directed the AO to allow deduction u/s.80-O of the Act on
net income. As per the order of ITAT, the Assessing Officer determined the
income for both the years and issued demand notices and also charged interest
u/s.234B up to the date of assessment orders. The said demands were paid by the
assessee.
The AO subsequently passed order u/s.154 of the Act as he was
of the opinion that interest charged by him u/s.234B up to the date of
assessment was wrong and it should have been charged up to the date of
reassessment framed u/s.254/143(3) of the Act. This order was upheld by the
CIT(A). On appeal to the Tribunal it was held that :
(1) As per Explanation 1 to S. 234B of the Act, ‘assessed
tax’ means the tax on the total income determined u/s.143(1) or on ‘regular
assessment’ as reduced by amount of tax deducted or collected at source in
accordance with provisions of chapter XVII on any income which is subject to
such deduction or collection.
2. The Supreme Court in Modi Industries Ltd. v. CIT,
(1995) 216 ITR 759 laid down that ‘regular assessment’ has been defined in S.
2(40) to mean the assessment made u/s.143 or u/s.144.
3. Hence, it was the duty of the assessing officer to
charge interest u/s.234B of the Act up to the date of passing the assessment
order and not up to the date of order passed by him in consequence of the
order passed by the Tribunal.
Cases referred to :
(i) CIT v. Anjum Ghaswala, (2001) 252 ITR 1 (SC)
(i) Modi Industries Ltd. v. CIT, (1995) 216 ITR 759
(SC)
Part A — Reported Decisions
39 (2008) 300 ITR (AT) 50 (Pune) (SB)
Dhariwal Industries Ltd. v. ACIT
A.Ys. 1993-94 to 1995-96 and 1997-98 to 2000-01. Dated :
14-8-2007
S. 80I, S. 80IA, S. 143, S. 263, Sch. XI (item 2) —Assessee
manufacturing gutka and pan masala containing tobacco claiming deduction
u/s.80-I and u/s.80-IA — Deduction not allowed stating that the item is covered
under ‘tobacco preparations’, ‘chewing tobacco’ as mentioned in item (2) of Sch.
XI — Held, gutka would fall within the meaning of term ‘tobacco preparations’
and ‘chewing tobacco’.
Facts :
The assessee, a company engaged in the business of
manufacturing gutka and pan masala containing tobacco, had claimed deduction
u/s.80-I/80-IA, which was allowed by the AO. The CIT invoked S. 263 by stating
that gutka manufactured by the assessee is a ‘tobacco preparation’ within the
meaning of item no. 2 in the Sch. XI and thus not eligible for deduction
u/s.80-I/80-IA and the order passed by the AO was erroneous and prejudicial to
the interest of the Revenue.
On appeal to the ITAT, the Special Bench of the Tribunal,
relying on the following grounds, held that the assessee’s business of
manufacturing gutka was not entitled to deduction u/s.80-IB, as the same is
covered by item no. 2 of Sch. XI :
(1) Reliance was placed on the decision of the Allahabad
Tribunal in the case of Kothari Products Ltd., (1991) 37 ITD 285 wherein it
was held that zarda yukt pan masala does not fall under the expression
‘tobacco preparation’. Further, the Allahabad High Court and also the Suprme
Court have declined to interfere with the aforesaid order, thus ruling that
the question under consideration is a question of fact and not a question of
law.
(2) Further, ‘tobacco preparation’ would cover all those
preparations and products which are prepared using tobacco, if the properties
of tobacco are retained in the preparation without undergoing any
metamorphosis as a result of addition of other ingredients. Hence, even 6–7%
content of tobacco in gutka is sufficient to call it ‘tobacco preparation’.
(3) The expression ‘tobacco preparation’ has to be
understood in contradistinction to a ‘tobacco-less preparation’. As a
‘tobacco-less preparation’ cannot become a ‘tobacco preparation’, by the same
logic ‘tobacco preparation’ cannot become ‘tobacco-less preparation’. Hence,
it cannot be said that ‘gutka’ is a ‘tobacco-less preparation’.
(4) Further, the words ‘such as’ used in item 2 of Sch. XI
do not limit the ambit to the specific 7 items in item no. 2. The words ‘such
as’ are illustrative and not exhaustive.
(5) In addition, without prejudice to the above, even if it
is assumed that the words ‘such as’ in item no. 2 of Sch. XI are in the nature
of limitation, gutka and pan masala would fall under ‘chewing tobacco’, an
item mentioned in item no. 2 of Sch. XI.
(6) Further, classification by various provisions of the
Acts dealing with Central Excise and Sales Tax, as relied upon by the
assessee’s authorised representative, is hardly relevant for deciding the
scope of ‘tobacco preparations’ and ‘chewing tobacco’ under the I.T. Act.
(7) Hence, the CIT was correct in invoking the provisions
of S. 263 as the presumptions made by the AO regarding the nature of the
business of the assessee and the profits arising from them were completely
incorrect and the AO had granted deduction without taking note of the most
crucial part of the case i.e., the assessee was manufacturing gutka and
it was held that the assessee was not entitled to deduction u/s.80-IB.
Cases referred to :
(i) Bajaj Tempo Ltd. v. CIT, (1992) 196 ITR 188
(SC);
(ii) Collector of Central Excise v. Parle Exports P.
Ltd., (1990) 183 ITR 624 (SC);
(iii) CIT v. Taj Mahal Hotel, (1971) 82 ITR 44 (SC);
(iv) CIT v. Venkateswara Hatcheries (P.), (1999) 237
174 (SC);
(v) Kothari Products Ltd. v. ACIT, (1991) 37 ITD 285
(All.);
(vi) Malabar Industrial Co. Ltd. v. CIT, (2000) 243
ITR 83 (SC) and many others.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
79 Notification No. 34/2010 — Service Tax, dated 22-6-2010.
By this Notification, the earlier Notification No.
21/2010-Service Tax, dated the 30th March, 2010 is amended to defer the
exemption from levy of service tax on services provided in relation to transport
of goods by rails for specified goods for a further period of 6 months i.e.
exemption shall be effective from 1st January, 2011.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
78 Notification No. 33/2010 — Service Tax, dated 22-6-2010.
By this Notification, the earlier Notification No.
20/2010-Service Tax, dated the 30th March, 2010 is amended to defer the
rescinding of exemption from levy of service tax on services provided by
transportation of goods in container by railway for further period of 6 months
i.e. upto 31st December, 2010.
Part A : Direct Taxes
69 Bonds u/s.80CCF specified — Notification No. 48/2010,
dated 9-7-2010.
The CBDT has mandated IFCI, LIC, IDFC and any NBFC classified as an
infrastructure company by the RBI to issue bonds u/s 80CCF for A.Y. 2011-12. The
nature, yield, tenure and other specifications have been mentioned in this
Notification. Deduction up to Rs.20,000 is available to assessees in addition to
deduction u/s. 80C of the Act on investment in such bonds. The bonds would have
a lock-in period of minimum five years.
Part D : COMPANY LAW
96 List of companies that have applied for striking off their
names under the Easy Exit Scheme (EES), 2010.
For details of the list of companies which have applied for
striking off their names from the Register under the Easy Exit Scheme (EES),
2010 visit http://www.mca.gov.in/MCA21/EES.html.
In case any stakeholder has any objections to the same, he/she may raise such
objection to the concerned RoC Office within 30 days from the date of filing
Form EES, 2010.
Part D : COMPANY LAW
95 Renewal of Certified Filing Centres (CFC).
The Ministry has decided to revive the Scheme of Certified
Filing Centres (CFCs) for a further period of three years from July 01, 2010.
The Ministry had earlier Authorised 965 Certified Filing
Centres (CFCs) across the country for greater outreach and e-filing facilities
across the country. The said Certified Filing Centres are managed by
professionals (Chartered Accountants, Company Secretaries and Costs & Works
Accountants).
However, a large number of CFCs have been inactive for the
last 1 year or so. The Ministry is giving an opportunity to such CFCs to renew
their registration with the MCA for which they should send their application to
the concerned Institute along with a renewal fee of Rs.500 within a period of 60
days.
Fresh applications are also invited from professionals who
are desirous of registering as CFCs with MCA. Applications should be submitted
through the Institute along with registration fee of Rs.1000 within a period of
60 days.
For details visit www.mca.gov.in/MCA21/dca/cfc/CFCCorner.html
Part D : COMPANY LAW
94 Changes relating to Company Law for the period 15th June,
2010 to 15th July 2010.
Stamp duty to be paid electronically in Tripura, Chandigarh
and Puducherry.
With effect from 11th July, 2010, stamp duty payable on Form
No. 1, Memorandum of Association, Articles of Association and Form No. 44 in
respect of State of Tripura and union territories of Chandigarh and Puducherry,
is compulsory to be paid electronically at the time of their e-filing through
MCA portal (www.mca.gov.in)
Part C : RBI/FEMA
(b) To their own warehouses outside exporters in India.
93 A.P. (DIR Series) Circular No. 01, dated 13-7-2010 —
Deferred Payment Protocols dated April 30, 1981 and December 23, 1985 between
Government of India and erstwhile USSR.
The Rupee value of the special currency basket has been fixed
at Rs.60.8816 w.e.f. from June 21, 2010 as against the earlier value of
Rs.63.0402.
RBI has come out with 15 new Master Circulars dated July 1, 2010. They
consolidate the existing instruction on the subjects covered by them.
Part C : RBI/FEMA
92 A.P. (DIR Series) Circular No. 57, dated 29-6-2010 —
Export of goods and software — Realisation and repatriation of export proceeds —
Liberalisation.
Presently, the time period for realisation and repatriation
of the full value of goods or software exported up to June 30, 2010 is 12 months
from the date of export.
This Circular provides that this facility is being extended
up to March 31, 2011 i.e., the time period for realisation and repatriation of
the full value of goods or software exported up to March 31, 2011 is 12 months
from the date of export.
However, there is no change in the provisions with regard to
period of realisation and repatriation of the full value of the goods or
software exported :
(a) By units situated in a Special Economic Zone (SEZ).
(b) To their own warehouses outside exporters in India.
Spotlight
Pinky Shah, Sonalee Godbole, Gaurang Gandhi, Tarun Ghia,
Brijesh Cholera, Pratik Mehta
Chartered Accountants
Sejal Vasa
Company Secretary
Part B : INDIRECT TAXES
MVAT UPDATE
MVAT Notification
90 Notification No. 1510/CR-65/Taxation-1.
By this Notification Composition Scheme of 1% MVAT has been offered as an
option to registered dealers who undertake construction of flats, dwellings or
buildings or premises and transfer them along with land or interest underlying
the land in pursuance of an agreement registered on or after 1-4-2010. Terms and
conditions for availing this scheme are specified in the Notification.
Part C : RBI/FEMA
91 A.P. (DIR Series) Circular No. 56, dated 28-6-2010 —
Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding
Proceedings) Rules, 2000 (the Rules) — Compounding of Contraventions under FEMA,
1999.
This Circular supersedes the earlier directions contained in
A.P. (Dir Series) Circular No. 31, dated February 1, 2005.
This Circular puts in place an updated procedure for
compounding of contraventions under FEMA, 1999 on the basis of observations and
experience of the last few years. The Circular contains detailed guidelines with
regard to compounding of contraventions in the following areas :
(1) Application for compounding.
(2) Scope and manner of compounding.
(3) Issue of compounding order.
(4) Payment of the amount for which contravention is
compounded
(5) Prerequisites for compounding.
Part B : INDIRECT TAXES
MVAT UPDATE
MVAT Circulars
89 Applicability of the Hon. Supreme Court judgment in the
case of M/s. Pee Vee Textiles judgment — Trade Circular No. 20T of 2010, dated
30-6-2010.
With regard to pro rata allowance of benefits under the
Package Scheme of Incentives, the Commissioner had issued one Internal Circular
No. 8A of 2009, dated 31-3-2009. Vide this Circular, instruction is issued to
lower authorities not to follow the said Internal Circular.
Part B : INDIRECT TAXES
MVAT UPDATE
MVAT Circulars
88 Filing of Returns as per the periodicity — Trade Circular
No. 19T of 2010, dated 23-6-2010.
Periodicity of filing of returns for the year 2010-11 is
displayed on the Sales Tax Department’s web-site. If a dealer feels aggrieved by
the periodicity displayed on the website, he may contact Joint Commissioner of
Sales Tax (Returns) before 9th July, 2010. A return which does not conform to
the prescribed periodicity will attract penalty u/s. 29 of the MVAT Act.
Part B : INDIRECT TAXES
SERVICE TAX UPDATE
Notifications :
87 Notification No. 43/2010 — Service Tax, dated 30-6-2010.
This Notification has amended the earlier Notification No.
13/2008, dated 1st March, 2008 so as to include services provided by port
authorities and by airport authorities alongwith services provided by goods
transport agency providing exemption of service tax as is in excess of the
amount of service tax calculated on a value equivalent to 25% of the gross
amount charged.
“There is a sufficiency in the world for man’s needs but not
for man’s greed”
—
Mahatma Gandhi
As human beings, we are blessed with the wonderful priceless
treasure of resources. Internal resources, in the form of intellect, emotions,
mind, senses, thought power along with valuable external resources provided in
nature.
But, do we sincerely appreciate the worth of these valuable
resources bestowed upon us by the Almighty ?
Our present life style of ‘Instant & Disposable’, ‘Use
& Throw’, reflects nothing but disregard and abuse of the resources. Credit
card facilities, consumer finance, free home delivery, exchange offers, etc.
have made life easy, but at the cost of most risky attitude to ‘Take things
for granted’ and hence losing their values. Unless we are conscious about
our intrinsic values we can’t be just and fair to the use of external resources
gifted by nature to nourish us.
Being, a civilised persona, in our pursuit of protecting the
social values we need to ensure about prudent and optimum utilisation of
resources.
We have to first learn to distinguish between ‘need’ & ‘want’
to ensure optimum utilisation of resources. Once we act mindfully with rational
approach, we would be just and fair to ourselves as well as to the society as a
whole.
To share here a conversation of Buddha with his
disciple, which I feel conveys the essence very nicely.
One day, one of the disciples of Buddha approached him
and said humbly “Oh my teacher ! While you are so much concerned about the
world, why don’t you look into the welfare and needs of your own disciples
also ?”
Buddha : “OK. How I can help you ?”
Disciple : “Master ! My attire is worn out and is beyond
decency to wear the same. Can I get a new one, please ?”
Buddha found that the robe indeed was in a bad condition
and needed replacement. He asked the store keeper to give the disciple a new
robe to wear. Then, he asked the disciple, “Is it comfortable ? Do you need
anything more ?”
Disciple : “Thank you. The attire is indeed very
comfortable. I need nothing more.”
Buddha : “Having got the new one, what did you do with
your old attire ?”
Disciple : “I am using it as my bed spread.”
Buddha : “Then . . hope you have disposed of your old bed
spread.”
Disciple : ” No, Master. I am using my old bedspread as
my window curtain.”
Buddha : ” What about your old curtain ?”
Disciple : “Being used to handle hot utensils in the
kitchen.”
Buddha : ” Can you tell me what did they do with the old
cloth they used in kitchen.”
Disciple : “It is being used to wash the floor.”
Buddha : ” Then, the old rug being used to wash the
floor . . .?”
Disciple : “Master, we used it as a twig in the oil lamp
which is right now lit in your study room….”
Buddha smiled in contentment and left for his room.
If not to this extent of implementation, can we at least
start thinking on this direction in our pursuit to achieve the optimum level of
utilisation of our valuable resources ? The depth of spirit reflected in this
dialogue could prove to be of tremendous value from economic, social as well as
spiritual perspective.
Such mindful thought process and conservative approach would
turn out to be most favourable in the present chaotic atmosphere of global
economic recession, lay offs and cut-offs. Cases of depression, violence,
suicides have multiplied in the society. It is time to pause and think
rationally to arrive at a balancing solution. We need to evaluate the resources
at our disposal so as to ensure their optimum utilisation by assigning the real
utility values.
Our religious tradition teaches us that we have been given
dominion over the resources on this earth, but we must be good stewards of them.
Our constant endeavor should be towards developing the value culture to bequeath
in legacy for our generation.
From spiritual perspective, the concept of ‘Aparigrah’
has great significance for the soul seeking liberation. To grow internally and
enrich our inner self, we must create the space by least of accumulation.
Let us worship God by respecting the values of His divine grace showered in
the form of precious resources in our life !
“Let me light my lamp, says the Star and never debate if it
will help to remove the darkness”
— Tagore
We are all good people. We all feel we must help others. Our
intentions are noble. We all agree that we must make a difference. And yet when
it comes to putting our good intention to practice, we hesitate. We are unable
to act. Our good intentions remain in our thoughts only. Why ? I have been
asking this question to myself. Why is it that we do not act ? Two possible
reasons come to my mind. First is the feeling that the problems of the world are
so immense that our little effort will hardly make any significant difference.
It is sheer magnitude of the problem that restrains us from acting.
But this should not be so. Have you heard the story of the
little boy and the starfish ? David McNally writes thus in his book ‘Even Eagles
Need a Push’.
“. . . . . . Loren E. Eiseley talks of the day when he was
walking along a sandy beach where thousands of starfish had been washed up on
the share. He noticed a boy picking up the starfish one by one and throwing them
back into the ocean. Eiseley observed the boy for a few minutes and then asked
what he was doing. The boy replied that he was returning the starfish to the sea
otherwise they would die.
Eiseley then asked how saving a few, when so many were
doomed, would make any difference whatsoever ? The boy picked up a starfish and
as he threw it back said. ‘It’s going to make a lot of difference to this one.’
You will agree that we can certainly make a difference at
least in a few lives in our lifetime.
The second thought which inhibits us from acting is the
belief that making a difference is the preserve and prerogative for saints like
Swami Viveknanand, Mother Teresa or leaders like Mahatma Gandhi. A quotation of
Mahatma Gandhi dispels our doubts :
“The world knows so little of how much my so-called greatness
depends upon the incessant toil and drudgery of silent devoted able and pure
workers, men as well as women.”
We will not be able to reach the heights of Mahatma Gandhi,
but certainly we can do the work done by those countless men and women who
worked for him and brought us our freedom.
In words of Robert F. Kennedy :
“Few will have the greatness to bend history itself, but
each of us can work to change a small portion of events. It is from numberless
acts of courage and belief that human history is shaped.”
But to understand this better you will have to travel with
me. We will go to the deep interior of one of the most backward areas of our
country in Dharampur, to a small village hamlet called ‘Matunia’. We will talk
there with inhabitants of that small village in that godforsaken place and ask
them a question. ‘Did anyone make a difference in your life ?’ We will also go
to some remote villages like Chandvegan and Tamachhadi and ask the same question
to the Adivasi children living and studying in the village schools. We will get
the same answer. ‘Yes, one Hitenbhai came to us and he made a difference in our
lives’. Friends, they are referring to our Hiten Shah whom we lost at a very
young age of only 48 years on 14th June of this year. Since past decade or more
he was regularly going to these and other places and helping the Adivasi
villagers. He was working in the field of building check-dams, getting wells
dug, soil bunding, helping the village schools in getting help for constructing
their schools, getting computers and other equipments necessary for the
students, looking after medical problems particularly of mothers and babies,
arranging mass weddings, improving irrigation and cultivation, getting trees
planted and similar welfare activities. He is a shining example of what a single
person can do and what difference in life one can make. He left behind his
footprints on the sands of time for people like us to follow. We all can make a
difference. I offer our Namaskar to him. Let us all resolve that we all shall
contribute our might and do our best to leave this world a better place than
what we found it to be and follow the path shown by Hitenbhai.
Part C : RBI/FEMA
Given below are the highlights of certain RBI Circulars.
A.P. (DIR Series) Circular No. 70, dated 30-6-2009 : Export
of goods and software : Realisation and repatriation of export proceeds :
Liberalisation.
Presently, exporters are permitted to realise and
repatriate the full export value of the goods or soft-ware exported within
twelve months from the date of export, as against the norm of realising and
repatriation of the full export value of the goods or software exported within
six months from the date of export.This Circular has extended this relaxation for a further
period of one year i.e., up to June 30, 2010. As a result exporters can
repatriate the full export value of the goods or software exported up to June
30, 2010 within twelve months from the date of export.
1. Introduction :
(i) proviso to S. 2(15) — ‘charitable purpose’, and
(ii) S. 272A(2)(e) — Penalty for belated filing of returns.
In the past, I had written about the latter, in the context of trusts enjoying exemption u/s.10(23C) — exclusively educational and exclusively medical.
2. Let me explain the practical difficulties faced in respect of the said two provisions :
2.1 Proviso to S. 2(15) :
2.1.1 S. 2(15) defines the expression ‘charitable purpose’ to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The proviso inserted by Finance Act, 2008 qualifies the last limb — i.e., general public utility. The proviso reads as follows :
‘Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity’.
2.1.2 Basically, this proviso was brought to nullify the effect of the Gujarat High Court and Supreme Court decision in the case of Commissioner of Income-tax v. Gujarat Maritime Board, 289 ITR 139 (Gujarat HC), 295 ITR 561 (SC), respectively, where it was al-leged that under the garb of ‘Charitable Trust’, a clearly commercial activity was carried out. In the process, many small genuine charitable trusts who do something for generating the revenue are unduly hit.
2.1.3 It is interesting to note that the Income-tax Act is not averse to a trust doing business. Ss.(4) and Ss.(4A) of S. 11 expressly make it permissible. The proviso then appears to be somewhat contradictory to this position of law.
2.1.4 Last year, when this proviso was inserted, it was not clear as to its exact import and scope. However, two proposals in Finance Bill, 2009 give a message that the Government is very serious about the said proviso. The two proposals are :
(a) amendment in S. 2(15) to include preservation of environment and preservation of monuments. The memorandum states that this amendment is specifically to protect these two activities from the effect of the proviso.
(b) a clarification in S. 80G that even if a trust has lost 80G due to the proviso, the donor would get deduction u/s.80G if he has given the donation in good faith, on the belief that there is 80G deduction.
2.1.5 Against this background, consider genuine cases like :
(a) Old-age homes or women welfare association selling the products of the inmates.
(b) Associations of physically or mentally challenged people (not necessarily poor) charging for their musical programmes.
(c) Hobby centres.
(d) Library.
2.1.6 The only saving grace — or a limitation inbuilt in the proviso is that such activity should be in relation to ‘trade, commerce or business’. However, it gives good deal of nuisance value to the Administration.
2.2 Penalty u/s.272A(2)(e) :
2.2.1 It prescribes a penalty of Rs.100 per day for a delay in filing the returns U/ss.(4A) or (4C) of S. 139. S. 139(4A) requires any trust claiming exemption u/s.11 to file a return if the income before giving effect to S. 11 and S. 12 exceeds the maximum amount which is not chargeable to tax.
2.2.2 Small trusts having total collection of just marginally exceeding the prescribed limits — and having a meager surplus (or even deficit) are subjected to such penalty.
2.2.3 Interestingly, the penalty u/s.271F for other persons is just Rs.5000 and that too, if the return is filed after the end of the assessment year. Admittedly, the others are required to pay interest u/s.234A. However, by all standards, the penalty of Rs.100 per day is too much of a burden. Further, there is not much leniency in the Department in respect of even these small trusts.
3. Suggestions :
Regarding proviso to S. 2(15), there should be more clarity. There should be a clear distinction between an ‘object’ vis-à-vis an ‘activity’. As regards penalty u/s.272A(2)(e), it should be on par with S. 271F, particularly in respect of small trusts. Small trusts may be defined suitably in a practical manner.
Service failure :
Failure of customer service is a phenomenon widely
encountered in today’s times. The business environment has become so complex and
the points of failure have grown so many, that ‘service failure’ is encountered
at a level much higher than in the past.
However it is important to note here that service failure is
not necessarily a disaster which spells ‘death knell’ for a company, but it
certainly damages ‘goodwill’. If the service recovery — the actions taken in
response to the failure — is handled well, then customer satisfaction, trust and
loyalty in effect actually increases.
What is a matter of greater concern is ‘facing’ a service
recovery failure. In short, failing to redress customer grievances in time and
address service failure is categorised as ‘service recovery failure’.
Dealing with service failure :
‘Service failure’ can be overcome with ‘good service’. Good
service response, in fact represents commitment and builds trust between the
company and the customer. This increases customer satisfaction and loyalty.
Customers are likely to talk positively about the company that redresses their
grievances. This enhances company’s image. Even though it may seem like a
paradox, the whole experience of ‘service failure’ can at times generate more
goodwill than if nothing had gone wrong in the first place.
In contrast, service recovery failure — even for a relatively
small issue — can increase customer dissatisfaction and frustration. This makes
the customer feel greater negativity about the company, damaging its image and
potentially turning other customers away.
Service recovery :
The proactive steps taken by a company to handle customer
complaints, service failure issues, and customer grievances go a long way in
building customer goodwill, and thereby retaining customers. This is the core of
service recovery that addresses service failure. This process rises above mere
complaint handling, which is reactive in nature. Service failure is addressed at
three levels. First by redressal — such as tendering an apology, refund or
product replacement. The second level is to make the recovery process work
smoothly without taxing the customer and repeat call. The third level is the
tone, tenor and manner of the interaction and communication with the customer.
This should neither be apologetic, nor patronising, but should treat the
customer as a valuable associate of the organisation.
Case study of the month :
The CEO of a well-known biscuit manufacturer is surprised to
receive a small envelope in his mail. The envelope contains a biscuit wrapped in
a letterhead. He opens the biscuit to find a piece of thread inside. Curious
about the incident he hands over the letter/packet to you as the risk manager of
the company, rather than to the sales department. You are asked to outline your
line of action and the probable reason of the letter being written to the CEO
for a relatively minor incident.
Solution to the case study :
The first step as a risk manager would be to understand the
scale and magnitude of the problem. It is evident that unless the customer had
felt severely wronged at the point of first contact, either the shopkeeper or
the dealer, he would not have taken the step of posting the biscuit with the
thread in it to the CEO of the company. This is reflective of the seething
discontent of the customer.
The ‘risk manager’ took upon himself to contact the customer
on telephone, apologised and thanked him for bringing the defect to the notice
of the CEO. He followed up the call by sending the customer six packets of
various products of the company.
On telephone he had also enquired about the :
the
date of purchase.
the
name of the store from which the product was purchased.
whether any complaint had been made to the store or the shopkeeper, and
their
response.
The first step of making a telephone call ensured customer
loyalty.
He also carried out a survey of the complaints received by
the sales department regarding ‘product quality’, ‘product delivery’ and
‘product availability’. His survey yielded that there were very few product
quality complaints and those that were received were virtually not attended to.
His suggestions to the CEO were :
(1) to establish a system where ‘product quality’
complaints on a regular basis were reported to the Sales Director along with
redressal measures.
(2) placards at retail level giving toll-free telephone
number where the customer could complain about ‘product availability’ and
‘product quality’.
(3) create a system of quick response to the customer’s
complaint.
His suggestions were accepted and over a period of 6 months
the sales improved as the steps communicated to the customer/consumer the
company’s concern for his (consumer’s) satisfaction.
George is a Director — Analytics, with Control Analytics Inc. Control Analytics Inc. are market leaders in the field of governance, risk management and control analytics for the last decade and pioneers in the implementation of audit process tools. In a short span of time this bell weather firm has managed to establish a footprint in the accounting and finance segment which was the erstwhile arena for large accounting and audit majors. This fast paced growth was fuelled by a group of professionals who delivered consistent value propositions to all their clients by riding on the backbone of contemporary assurance technology.
Control Analytics Inc. leveraged audit technology like general audit softwares, data mining tools, work paper administration tools, reporting applications and enterprise risk management applications to deliver value-added, high-return results to all the clients from retail, to manufacturing, to information technology and healthcare.
Control Analytics Inc. was solely responsible for overseeing all data analytic projects, and applied research projects for the firm.
In a recent banking conclave, George was presenting on the role of ‘Compliance Reviews through CAATs’.
Introduction :
The importance of internal control in banks cannot be over-emphasised. Banks deal primarily with cash and readily encashable documents. It is essential that they take every precaution to guard themselves against errors and frauds committed by their constituents or by its own employees.
The following are the main principles of internal control in a bank :
The Statement on Standard Auditing Practices (SAP) 1, Basic Principles Governing an Audit, issued by the Institute of Chartered Accountants of India, states (paragraphs 19-20) :
“The auditor should gain an understanding of the accounting system and related internal controls and should study and evaluate the operation of those internal controls upon which he wishes to rely in determining the nature, timing and extent of other audit procedures. Where the auditor concludes that he can rely on certain internal controls, his substantive procedures would normally be less extensive than would otherwise be required and may also differ as to their nature and timing.”
Internal control evaluation is a key phase in Compliance Audits. In the case of audit of banks, it assumes even greater importance due to the enormous volume of transactions entered into by banks. Evaluation of the design and operation of internal control system enables the auditor of a bank to perform more effective audits. Therefore, the auditor of a bank should study and evaluate the design and operation of internal controls. This would assist him in determining the nature, timing and extent of substantive procedures in various mainstream bank areas, depending upon whether the internal controls are adequate and observed in practice.
CAATs facilitate the internal control evaluation through deployment of comprehensive analytical routines to detect control failures and missing controls.
Presentation on compliance review of controls in Banks through CAATs :
George wanted to drive home the efficacy of general audit tools to the conclave of banking participants comprising auditors, investigators, risk managers, IT security professionals and more. He decided to help the participants visualise the utility of audit tools (GAS) through a few live banking case studies and discussions. These case studies served as a primer for a general awareness and appreciation amongst the participants.
Banking case studies presented were :
Introduction of current accounts by an account-holder other than current :
Account maintenance procedures require a current account-holder to be introduced by another current account-holder from the same bank.
In this case the ‘Retail Liability Account Master’ file was taken up for scrutiny within the GAS.
Here George juxtaposed the introducer customer number, corresponding account number/s, and product type/s to the primary current account and product type through file join operations.
He then performed an ‘extraction-query’ with the condition ‘Introducer product type is not a current account and the introduced account product type is a current account’.
George was able to cull out a number of current accounts introduced by a savings account holder and also some accounts introduced by staff members from the branch.
Non-resident saving accounts where a resident Indian is a joint-holder :
Account maintenance procedures mandate through statutory regulation that a non-resident savings account-holder cannot have a resident Indian as a joint account holder.
Here George took up the ‘Joint Holder Account Master’ file as the base file for monitoring within the GAS.
He performed a ‘summarisation – consolidation’ on the constituent member product types for the non-resident saving account-holders. Based on the summarisation result George filtered out queried product types containing the sub-string character representation ‘Resident’.
This exercise yielded negative non-compliances.
Incorrect interest application on premature closure of term deposits:
Revenue charge procedures stipulate that in case of premature closure of term deposits, the Core Banking System must apply the Rate of Interest (ROI) for the deposit tenor actually run, less the penalty rate as decided by the Bank. The penalty rate is generally metered as 1% or 2%.
In this control assertion the ‘Term Deposit Account Master File’ was imported into the GAS.
The ROI applicable on the deposit for the contracted tenor is readily available in the master file. ROI applicable on premature withdrawal is a variable/ system computed field which varies from case-to-case depending on the tenor of the deposit run.
This data is normally not available as a ready native field within the database. This field may be computed through Database Query Logic like SQL and provided for further analysis along with the native fields.
Premature deposits are term deposits where the maturity date of the deposit is greater than the system date and account closure date is before the deposit maturity date.
George wrote a ‘Criteria – Query’ within the GAS to identify specific premature instances where the contracted ROI was paid in place of the actual ROI. A few premature withdrawal instances were identified where incorrect interest i.e., contracted ROI was applied and paid. In some of the cases, the term deposit was closed within 15 days of opening and contracted ROI was still paid. Based on George’s representation/findings, the branch accepted the error in interest application which was due to over-sight. The excess interest paid was reversed through a manual interest adjustment entry.
Tax Deducted at Source (TDS) not deducted in respect of interest payments/accruals above Rs. 10,000 per annum:
The Income Tax Rules stipulate that interest accruals/payments on term deposits exceeding Rs. 10,000 This test revealed specific loan and loan collaterals per annum per customer should attract TDS. The which had not been insured.
Rules also lay down that TDS should not be deducted where the deposit holder submits either Form l5G or Form ISH for a given previous year.
Here the ‘Term Deposit Ledger’ File was captured within the GAS.
Then the file was summarised by ‘interest debits’, customer number wise through the ‘Summarisation-consolidation’ function.
From the above summarisation result, all customer numbers having sum of interest debits greater than Rs.10,000 for a given financial year were extracted through ‘Data Extraction – Query’.
The file generated above was joined with the ‘Tax Waiver File’ i.e., File for Form l5G/15H submissions using the ‘Join File’ utility within the tool.
Finally, all term deposits where the tax waiver flag was not enabled (non-waiver cases) were matched with the ‘TDS Ledger File’ using the ‘Join File’ utility within the tool. ‘Records with no Secondary Match’ were selected and specific customers were culled out where interest debits were more than Rs. 10,000 per annum for which TDS had not be deducted at all.
The test revealed certain deviations which were primarily on account of non-updation of the submit-ted Form l5G/Form ISH Certificates within the Core Banking System.
Loans have collateral security where insurance not taken by borrower:
Retail assets are secured through collateral security like stock, plant and machinery, building, etc. These collateral securities need to be insured on an ongoing basis and the details of insurance coverage need to be submitted to the branch for updation within the ‘Collateral Security Insurance Master’ in the Core Banking System.
George imported the ‘Loan Collateral Insurance’ File into the GAS.
He detected missing insurance policy numbers in the ‘Loan Collateral Insurance file’ for specific loans and loan collaterals using the ‘Extraction-Query’ command in the GAS.
This test revealed specific loan and loan collaterals which had not been insured.
This control condition breach presents a clear and present risk for the bank in case of any untoward incident on the secured collateral.
George also concluded that at times the collateral is insured but not in time and not within the grace period for premium payment. He recognised that breaks in insurance coverage could be as perilous as non-insurance coverage.
He set out identifying instances of break in insurance from the ‘Loan Collateral Insurance’ file. George added an additional field to the file upon import. In this field he extracted the date component from the ‘Maturity Date’ for example ’25’ was extracted into a new field from ‘25.06.2009’.
With dates available for the same loan collateral for a period of 5 years, George was able to successfully pull out unique instances of ‘Same Collateral Different Date’. In one such instance a ‘Special Watch Borrower’ having multiple credit facilities had delayed the renewal of insurance on a cache of 5 collaterals. The delay coincided with a natural calamity which fully damaged the collateral. This situation posed a common threat to the Branch leading to material financial exposures.
Conclusion:
George culminated his presentation by reiterating that general audit tools are time-tested, stable, robust, powerful, internationally acclaimed and user-friendly applications designed by auditors for auditors. He added that no tool is a ready substitute for the Auditors’ acumen and judgment, but is a powerful, cost-effective facilitator. He encouraged all the bank auditors present to embrace tools and reap the benefits of an idea whose time has come. He closed his presentation with a parting remark Reserve Bank of India’s Department of Banking Supervision also uses audit tools in their banking supervisory role and we should draw inspiration from the regulator themselves in this matter’.
Background :
An engineering manufacturing company was facing competition
from small and medium-size operations despite its product having impeccable
quality. The margins were under pressure and it was even perceived that the
operations may have to be scaled down or closed. The internal audit was being
conducted by a firm of chartered accountants. The Managing Director of the
company discussed the situation with the partner in charge, who had been there
for the last several years. As a matter of fact the partner in charge had for
the last two years been reporting on increasing costs and loss of market share.
The internal auditor instead of carrying out a detailed
survey himself suggested to the Managing Director to approach the problem by
adopting ‘Control Self Assessment’ approach with the internal auditor acting as
a facilitator. He suggested the creation of teams for different areas and
involving the teams in finding solutions. He identified the following areas for
creating teams :
1. Accounts Receivables
2. Accounts Payables
3. Inventory Management
and he himself acting as facilitator during discussions.
Methodology :
Before we go into the operations and results of the effort
let us briefly understand what is ‘Control Self Assessment’.
‘Control Self Assessment’ is a workshop facilitation
technique where the internal auditor acts as a facilitator. The internal auditor
selects certain objectives to be achieved and then selects participants, of the
area concerning the objectives, from amongst the employees. The internal auditor
also conducts walkthroughs and does some data analysis prior to holding
workshops (usually two to three workshops) for the selected participants, with
the objective of arriving at action points for the selected objective/s. The
internal auditor basically facilitates the discussion focussing on the
objective/s and the employees themselves arrive at the action points for
achieving the objectives.
In the engineering company since Accounts Receivables was
considered to be a problem area, the internal auditor studied this area from the
time the material leaves the organisation to the time the payment come — that is
received. The ‘team for receivables’ comprised representatives from sales
department, accounts department, stores — inventory management, specially for
goods returned and transportation There were number of issues which came up
during the four one-day workshops conducted over three weeks and the action
points for improvements which came up by employees themselves are given below :
Objectives of the Control Self Assessment — CSA workshop are :
à
To reduce duplication.
à
Increase revenue.
à
Avoid control weaknesses in form of likely weak control — leakage points.
Action points decided in the workshop :
1. Cancelled invoices report to be generated from the
software.
2. Manual checking of total value — cross-checking by
accounts department on daily basis for assessable value, excise duty and sales
tax (from customer for receipt of goods) to be strengthened.
3. All acknowledgements to be received for passing of freight
bills within the country — No control over double billing of freight payable
presently and to be brought in by amending software to ensure that each
transporter bill is tagged to each despatch. Further reconciliation required for
all outwards vs. freight bills vs. acknowledgements vs.
service tax paid input credit taken.
4. Proper freight register to be maintained by shipping
department.
Details of register
| Invoice No. | Date |
Transporter Bill No. | Date | Amount | Acknowledge with Tpt | Signature/Initial |
| Freight D. Note No. |
Date |
Amount | Initial |
Date of Submission Document with Bank |
5. Debit Note to be raised on timely basis on the party for
any charges as per purchase order of the party — double-check through outwards
register. Major control which is lacking at present if someone misses out on
raising debit notes.
6. Time taken to submit the documents to the customer to be
tracked by accounts and deviation report to be given to head of department’s
office if delayed beyond 2-3 days.
7. Delay in clearance of documents by customer — to be
tracked by accounts.
8. Details of cheque/DO received from customer – register as well as excel sheet – duplication of efforts – to be done only by Shipping. Recording of reasons for short receipts – tagging of ‘on account’ payments received to be done properly to avoid problems in debtors accounts where credit and debit both are lying untagged. The details of cheque/DO may be entered by shipping on receipt rather than again sending it to accounts for entry purposes.
9. Bank charges to be debited to customer for cheque bounced immediately on cheque getting bounced – management policy for amount to be charged to the customer – presently not followed.
10. Timely clearance of outstation cheques.
a) Whether payment through RTGS possible?
b) To claim interest from bank for delayed clearance of outstation cheques.
c) To get at par cheques from customers.
d)Whether the cheques can be deposited locally by customers in core banking environment.
This will save substantial interest on working capital.
11. Weekly review of debtors – meeting to be held with aging analysis, presently not being held regularly.
12. Weekly reminders to debtors about payments duel overdue – by email.
13. Policy for write-offs – authority levels to be decided.
14. Debtors’ confirmation to be obtained on yearly basis – once the records of accounts and shipping department are reconciled.
15. Details of sales tax forms to be fed in ERP – separate excel records/register to be closed/ stopped – to be reconciled and separate records/ excel sheets to be stopped. Presently 3 registers being maintained – one by shipping, one by accounts and one by sales tax in accounts who compute this again manually invoicewise – waste of manpower efforts.
16. To track commission payment to agents to avoid double payment.
The suggestions when implemented resulted in
1) Reducing receivable from an average of 65 days to 45 days, thus reducing interest costs.
2) Increased customer satisfaction as customers’ complaints were attended to at short notice, as the defect was rectified or equipment replaced.
3) Improvement in transaction costs for receivable area.
4) Improved control over billings by vendors, thereby avoiding duplicate billings and raising of debit notes which were missed out.
Conclusion:
This exercise of facilitating discussion amongst employees from different departments and the employees themselves arriving at action points for improvements was a success and resulted in number of improvements. Since it meant that solution came from employees with internal auditor acting as facilitator, the acceptability and respect for the internal audit function was quite high. The management also commended the excellent work done by internal auditor and requested the partner of the firm to extend this to other important problem areas.
The effort of the internal auditor in creating a multi-disciplinary team to solve the problem by involving the concerned people and by creating a sense of solution ownership was very much appreciated not only by the managing director but also by the Board of Directors.
As we entered into the 21st Century, all government
departments gradually started shifting towards e-compliance of various laws. The
basic ideology of e-compliance is to be taxpayer-friendly and in the long run to
save time, money and effort which would otherwise be required in manual
compliance, during the process of shifting from manual compliance to
e-compliance, certain genuine difficulties are faced by both the taxpayers and
the professional community. This article basically examines some of such
hardships.
1. PAN : We all are aware of the failure of the Income
Tax Department in issuing PAN cards when the system was introduced a decade ago
— several assessees did not receive the PAN cards even after a lapse of a number
of years. In many instances, 2 PAN cards with different numbers were issued to
the same assessees. Ultimately, the Department outsourced the PAN work to UTI &
NSDL.
Though, it has expedited the process of issue of PAN cards,
it has its shortcomings too.
1.1 Recently, NSDL people are insisting that the proof of
assessee’s father’s name be submitted along with assessee’s name.
1.2 If the voter’s identity card of applicant bears his name
as Ashok Jain and in the next row it bears father’s name as Sanjay Jain; and if
the assessee desire his name on the PAN card to be ‘Ashok Sanjay Jain’, the
application is rejected on the ground that father’s name is not appearing along
with assessee’s name on the ‘voter’s identity card’.
1.3 In certain communities, the system of writing surname is
not prevalent. It becomes very difficult to obtain PAN card for taxpayers of
such communities.
1.4 The system accepts only 25 characters in the name of the
assessee. Now, if the name of the assessee is longer than 25 characters, it has
to suitably abbreviate it. For example, if the name of company is :
‘Vishwasaraiya Swaminathan Murlidharan Textile Processing Private Limited’.
The assessee will have no choice but to abbreviate its name
in the PAN application. The consequent problem is that it will have to put the
same abbreviated name in its e-return and e-TDS quarterly statements. Otherwise
those returns will show mismatch of PAN. There would also be a problem as the
full name may appear on TDS certificates.
1.5 In some communities, the name of the grandson is the same
as that of the grandfather. It also creates a problem in PAN application as it
appears like John Abraham (Son) & Abraham John (Father).
1.6 If the ration card is in the name of father and other
family members’ names are included in the list on the last page, then
surprisingly the ration card is not accepted as address proof for the family
members.
Is the Department implying that there should be separate
ration card for every member of the family.
All the above problems in applying for PAN are further
aggravated by the fact that the Department has gone faceless.
2. e-Return : e-Return has been made mandatory for all
company assessees and for Individuals, HUFs & Firms liable for tax audit. Some
of the problems faced are :
2.1 The maximum rate of dividend accepted by ITR -6 is 100%.
Can’t a company declare more than 100% dividend ?
2.2 The ceiling for deduction u/s.80D has been increased to
Rs.15,000 w.e.f. A.Y. 2008-09. But the ITRs still accept only Rs.10,000 as
maximum deduction u/s.80D.
3.1 e-Payment : e-Payment of taxes has also been made
mandatory for all corporate assessees and for non-corporate assesses subjected
to tax audit. In remote and mofussil areas, it may become extremely difficult,
especially for non-corporate assessees to pay taxes electronically. If e-payment
is a facility for taxpayers, what is the need for making it mandatory ? And if
an innocent individual taxpayer subjected to tax-audit makes payment of tax
manually, will he be denied credit for the taxes paid ? (It is learnt that
recently Service Tax Department has started levying penalty of Rs.5,000 on those
tax-payers who are liable to make e- payment but are paying taxes manually). Is
this fair ?
3.2 The dematerialisation of TDS Certificates, which was
first attempted by the government from A.Y. 2005-06. The implementation has been
postponed from time to time and by the Finance Act 2008 has been postponed
directly to A.Y. 2011-12. This postponement is due to lack of technological
infrastructure at Department’s end. The question is : Is it fair to make
technology mandatory for the tax-payer ? The taxpayer has no choice but to bow
down to these dictates. To be fair, the Department should introduce flexibility
in the system and avoid the existing mechanical approach it has.
Conclusion :
There could be many more such issues. Great hardship is faced
by many assessees and tax professionals. Readers are welcome to share their
experience and views so that a meaningful and effective representation can be
made.
The author has always believed that procedures should not be tax-friendly on
paper, but should really — that is in practice — be taxpayer-friendly.
“Thou shall not steal”
The Eighth Commandment of Christianity but the first of the copyright law. It is believed that the moral basis for copyright law derives its source from this Eighth Commandment1.
Copyright law deals with providing rights in respect of certain works which it recognises as being the intellectual creations of their authors and seeks to protect the rights of the authors and/or the owners in respect of such works. The reason why there is a need for the law of copyright has been succinctly explained by Chinappa Reddy J. in Gramophone Co. v. Birender Bahadur Pandey2, wherein he stated that :
“An artistic, literary or musical work is the brainchild of the author, the fruit of his labour and so, considered to be his property. So highly is it prized by all civilised nations that it is thought worthy of protection by national laws and international conventions.”
Copyright is a statutory right and exists only in the works which qualify for protection under the Copyright Act, 1957 (hereinafter referred to as ‘the Act’). Copyright grants to the owner and/or the author of a work a bundle of rights in respect of the work as are enumerated in S. 14 of the Act.
Relevant provisions of the Act :
At the outset, it would be instructive to note what is meant by the term ‘work.’ As defined in S. 2(y) of the Act, a work means either a literary, dramatic, musical or artistic work or a cinematograph film or a sound recording. Thus, these are the works in respect of which copyright may subsist. It may be noted that each of these kinds of works are further defined and explained in the Interpretation Clause of the Act.
However, not all literary or artistic works can claim to have copyright, but only those which comply with the requirement of S. 13 of the Act.
S. 13 of the Act, inter alia, provides as under :
“Works in which copyright subsist.
(1) Subject to the provisions of this Section and other provisions of this Act, copyright shall subsist throughout India in the following classes of works, that is to say —
(a) original literary, dramatic, musical and artistic works;
(b) Cinematograph films; and
(c) Sound recording.”
In light of the above, it may be appreciated that a literary, dramatic, musical or artistic work to qualify for copyright protection must be original. Originality remains the sine qua non of copyright; accordingly, copyright protection may extend only to those components of a work that are original to the author3.
It is in this scenario, that the question arises as to what is the standard of originality required to obtain copyright protection. This has been a vexed question over the years to which the Courts have applied different standards.
At the outset, it may be appreciated that the said question has been recently considered by the Apex Court in Eastern Book Company v. D. B. Modak4 (hereinafter referred to as ‘the Eastern Book case’) wherein the Apex Court was dealing with the issue of copyright in the text of the copy-edited judgments of the Supreme Court as reported in the law report ‘Supreme Court Cases’ and whether the said copy-edited judgments were original literary works entitled to copyright protection. The Apex Court classified the copy-edited judgments as a form of secondary or derivative works, i.e., those literary works which are based on existing subject matter.
It is in this context, that the tests to judge originality are being outlined, as have been applied over the years and as are identified in the Eastern Book Case and what is the test to be applied to judge originality now, has been laid down by the Supreme Court.
Sweat of the brow :
The first test identified before the Supreme Court with respect to identifying which works are capable of copyright protection was the ‘sweat of the brow’ or the ‘industriousness approach’ test. A plethora of judgments were cited in support of this theory by the petitioners, i.e., the Eastern Book Company to support the proposition that copyright does subsist in the copy-edited text of judgments of the Supreme Court. This approach is based on the proposition that a work that has originated from the author, is more than a mere copy of the original work, would be sufficient to generate copyright5. The underlying notion being to reward the hard work that goes into the creation of the work6.
The United States Supreme Court in the Feist Case7 observed that the classic formulation of the sweat of the brow theory is to be found in the following passage from Jeweler’s Circular Publishing Co.
“The right to copyright a book upon which one has expended labour in its preparation does not depend upon whether the materials which he has collected consist or not of matters which are publici juris, or whether such materials show literary skill or originality, either in thought or in language, or anything more than industrious collection.”
Thus, all that was required under this approach was to examine whether any skill, labour and capital had been expended in the creation of the work and that it was not a copy of another work. Once these two criteria were satisfied the work would be entitled to copyright protection.
Creativity standard/non-obviousness:
The other test identified by the Apex Court in the Eastern Book case is the creativity standard or the non-obviousness standard whereby a Court would be called upon to inquire whether the work possesses a certain degree of creativity and non-obviousness and is therefore novel so as to be entitled to copyright protection.8 This approach, however, seems to raise the bar of originality to an extremely high level, which is more befitting of patent law rather than copyright law.
Skill and judgment test:
In light of the said divergent approaches, the Supreme Court in the Eastern Book 9 case, after analysing, inter alia, the United States Supreme Court’s judgment in Feist Publications Inc. v. Rural Telephone Seroices10 and the Canadian Supreme Court’s judgment in CCH Canadian Ltd. v. Law Society of Upper Canada11 has propounded a middle path, consistent with the view of the Canadian Supreme Court, to judging originality which is not as low as the sweat of the brow standard, nor as high as the creativity standard. The Apex Court held that,
“Thus, the Canadian Supreme Court is of the view that to claim copyright in a compilation, the author must produce a material with exercise of his skill and judgment which may not be creativity in the sense that it is not novel or non-obvious, but at the sametime it is not the product of merely labour and capital.12”
Thus, according to the Supreme Court the test for judging originality would be to enquire whether the work has been created by skill and judgment and has the flavour of the minimum requirement of creativity. The work should not be produced merely by labour and capital but by skill and judgment and must have a minimal degree of creativity. Applying this test the Supreme Court in the instant case, held that the copy-edited judgments did not touch the standard of creativity required for copyright.”
Conclusion:
There was a need to reconsider the tests to be applied since, by applying the sweat of the brow test, Courts were recognising copyright in almost every work. Therefore, a slightly higher standard was required, for in essence, copyright being a part of intellectual property laws seeks to protect the intellectual creations and inputs and not every input. Hence, to that extent replacing of the words ‘skill, labour and capital’ with ‘skill and judgment’ seems to denote a paradigm shift from mere physical or mechanical exercise to a more mental exercise.
However, the test raises several new questions such as what is the minimum level of creativity that is now to be found to show that a work is copyrightable? what exactly is meant by the words skill and judgment, etc. ? The Courts will have to evolve further sub-rules or sub-tests to fortify and clarify the ‘skill and judgment’ test laid down by the Apex Court.
To highlight the Apex Court’s own interpretation of this test, it may be noted that the Apex Court held that the copy-edited judgments did not meet the standard of creativity and hence, were not capable of copyright creation. However, the Apex Court also held that the inputs of segregating paragraphs and numbering them as also indicating which judges have concurred and/or dissented were copy-rightable as these changes required the input of skill and judgment and they had a flavour of a minimum amount of creativity.
However, the Apex Court may want to reconsider some of its findings such as, for example, its finding that insertion of details as to consenting and dissenting judges has a minimum amount of creativity and that copyright would subsist in the same. For in such a case, the creativity could at the most be said to lie in the idea to identify and alter the text of the judgment to show where a judge has dissented or concurred, whereas the expression thereof is in terms of phrases commonly used such as ‘concurring’ or ‘partly concurring’, etc. It is well-settled law as has been laid down since 1978, by the Apex Court in R. G. Anand v. Delux Films14 that copyright only exists in the expression and not in the idea. Therefore, my view would be that the phrases used i.e., the expression of the idea are standard phrases used commonly, which subject to other factors such as whether a word or two words can be a literary work in itself or even qualify as a derivative work, cannot be said to possess any level of creativity and cannot be copyrighted by anyone person.
The phrases ‘concurring’ and/or ‘partly concuring’, etc. would not, despite the possibility of a high level of skill and judgment in deciding where to insert these phrases, meet the test of the minimum amount of creativity, as in judging the originality of a work what must be looked at is the expression and not the idea.
Thus, to conclude, I would submit that the test as laid down is a positive step forward and was required to raise the standard beyond the mere sweat of the brow test. However, it is essential that Courts interpret it in the true sense by applying all the factors involved as have been identified by the Canadian Supreme Court and not in the manner as interpreted by our Apex Court primarily identifying only skill and judgment. In order to enable to the new approach to work effectively, the creases will need to be ironed out.
1. Facts :
(i) XYZ is an Italy-based manufacturer and seller of premium quality luxury bathroom fittings and accessories.
(ii) ABC, Spain and an Indian business family have established a joint venture company, namely, ABC (India) Pvt. Ltd. in which ABC, Spain holds 75% equity shares and the balance 25% is held by the Indian promoters. The company has obtained due permission of FIPB in 2003 for import and distribution in India of ceramic tiles and sanitaryware products of ABC, Spain on wholesale cash and carry basis and act as their indenting agents in India.
(iii) It is desired to establish a new JV company in India jointly with XYZ, Italy, ABC Spain and the Indian promoters. The business of the new JV company shall be to import and distribute in India, on wholesale cash and carry basis, various products of XYZ, Italy, whether manufactured in Italy or by XYZ’s subsidiaries, joint ventures and associates worldwide and also to act as XYZ’s indenting agents in India. The new JV company shall also procure and sell, on wholesale cash and carry basis, such other ancillary products from Indian manufacturers/dealers or from other overseas parties as may be permissible in law. The shareholding pattern is subject to negotiations between the parties.
(iv) Alternatively, ABC (India) Pvt. Ltd. may invest in the equity capital of the proposed new JV company. Thus, the existing JV company, namely, ABC (India) Pvt. Ltd. may be a partner in the new JV company along with XYZ, Italy.
2. Issues :
In this connection, the following issues arise for consideration :
(i) Whether FIPB’s permission is required for setting up such a new joint venture company ?
(ii) What are the implications in terms of Press Note No. 1 (2005 series), dated 12-1-2005 ?
(iii) Which is the preferable mode of investment — Whether ABC (India) Pvt. Ltd. should have a stake in the proposed new JV company or ABC, Spain and the Indian promoters should hold direct equity stake in the proposed new JV company ?
(iv) What are the tax implications ?
3. Analysis of legal provisions :
On analysis and consideration of Press Note 1 of 2005, dated 12-1-2005, Press Note 3 of 2005, dated 15-3-2005, Press Note 7 of 2008, dated 16-6-2008, and Press Note 2 (2009 series), dated 13-2-2009 and Press Note 4 (2009 series), dated 25-2-2009, the following conclusions emerge :
3.1 Whether FIPB’s permission required :
(a) Item No. 29 (a) of Press Note 7 of 2008, dated 16-6-2008 clearly states that wholesale trading on cash and carry basis is allowed under automatic route up to 100% foreign equity. In view of the same, the proposed new JV company can engage in wholesale trading on cash and carry basis without FIPB permission.
(b) However, trading of items sourced from ‘Small Scale Sectors’ would require FIPB’s approval. Thus, the proposed JV company cannot procure and sell such items sourced from SSI Units without FIPB’s approval. It appears that this condition is applicable only to those items which are reserved for manufacture by small scale sectors. Therefore, this point needs to be looked into with reference to Industrial Policy for small scale sector. If the product does not fall in the reserved product list of small scale sector, the same can be procured locally without FIPB approval and can be further traded on wholesale cash and carry basis in India.
3.2 Implications in terms of Press Note No. 1 of 2005 :
The next issue arises whether FIPB’s permission is required by the proposed new JV company in view of the fact that ABC, Spain, already has an existing JV company in India, as noted above. The matter has to be examined in light of Press Note # 1 of 2005, dtd. 12-1-2005 r/w Press Note # 3, dtd. 15-3-2005.
3.2.1 The operative part of Press Note 1 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India is reproduced below :
“Guidelines pertaining to approval of foreign/technical collaborations under the automatic route with previous ventures/tie-ups in India.
Press Note No. 1 (2005 Series), dated 12-1-2005
The Government has reviewed the guidelines notified vide Press Note 18 (1998 series) which stipulated approval of the Government for new proposals for foreign investment/technical collaboration where the foreign investor has or had any previous joint venture or technology transfer/trademark agreement in the same or allied field in India.
2. New proposals for foreign investment/technical collaboration would henceforth be allowed under the automatic route, subject to sectoral policies, as per the following guidelines :
(i) Prior approval of the Government would be required only in cases where the foreign investor has an existing joint venture or technology transfer/trademark agreement in the ‘same’ field. The onus to provide requisite justification as also proof to the satisfaction of the Government that the new proposal would or would not in any way jeopardise the interests of the existing joint venture or technology/trademark partner or other stakeholders would lie equally on the foreign investor/technology supplier and the Indian partner.
(ii) Even in cases where the foreign investor has a joint venture or technology transfer/trademark agreement in the ‘same’ field, prior approval of the Government will not be required in the following cases :
(a) Investments to be made by Venture Capital Funds registered with the Securities and Exchange Board of India (SEBI); or
b) Where in the existing joint venture investment by either party is less than 3%; or
c) Where the existing venture/collaboration is defunct or sick.
iii) Insofar as joint ventures to be entered into after the date of this Press Note are concerned, the joint venture agreement may embody a ‘conflict of interest’ clause to safe-guard the interests of joint venture partners in the event of one of the partners desiring to set up another joint venture or a wholly-owned subsidiary in the ‘same’ field of economic activity.”
3.2.2 The term ‘same field’ has been clarified by the Government of India in Press Note No. 3 of 2005 series as under :
“Subject: Clarification regarding guidelines pertaining to approval of foreign/technical collaborations under the automatic route with previous ventures/tie-ups in India.
1. The Government, vide Press Note 1 (2005 Series), dated 12-1-2005, notified fresh guidelines for approval of new proposals for foreign/technical collaboration under the automatic route with previous venture/tie up in India. According to these guidelines, prior approval of the Government would be required for new proposals for foreign investment/ technical collaboration, in cases where the foreign investor has an existing joint venture or technology transfer / trademark agreement in the same field in India.
2. The Government had, earlier vide Press Note (1999 Series) notified the definition of ‘same field’ as the 4-digit National Industriai Classification (NIC) 1987 Code. It is hereby reiterated that for the purposes of Press Note 1 (2005 Series), the definition of ‘same’ field would continue to be 4-digit NIC 1987 Code.
3. It is also clarified that proposals in the information technology sector, investments by multi-national financial institutions and in the mining sector for same area/mineral were exempted from the application of Press Note 18 (1998 series) vide Press Note 8 (2000), Press Note 1 (2001) and Press Note 2 (2000), respectively. Investment proposals in these sectors would continue to be exempt from Press Note 1 (2005 series).
4. From Para 2(i) of guidelines notified vide Press Note 1 (2005 series), it is clear that prior Government approval for new proposals would be required only in cases where foreign investor has an existing joint venture, technology transfer / trademark agreement in ‘same’ field, subject to provisions of Para 2(ii) of Press Note 1 (2005 series).
5. For the purpose of avoiding any ambiguity, it is reiterated that joint ventures, technology transfer / trademark agreements existing on the date of issue of the said Press Note i.e., 12-1-2005 would be treated as existing joint venture, technology transfer / trademark agreement for the purposes of Press Note 1 (2005 Series).”
3.2.3 On reference to National Industrial Classification (NIC), 1987 Code it is found that the products of proposed new JV company have different NIC Code. In other words, the NIC Code allotted to tiles and sanitarywares is completely different from the NIC Code allotted to bathroom and toilet fittings and accessories. In view of the same, the proposed new JV company would not be required to obtain prior approval of FIPB in terms of the said Press Note 1 r /w Press Note 3 of 2005.
3.3 Preferable mode of investment:
To determine the preferable mode of investment we have to understand the applicability of Press Notes – 2 and 4 of 2009.
The opening Para of Press Note # 4 (2009 series), dated 25-2-2009 reads as under:
“The Policy for downstream investment by Indian companies seeks to lay down and clarify about compliance with the foreign investment norms on entry route, conditionalities and sectoral caps. The ‘guiding principle’ is that downstream investment by companies ‘owned’ or ‘controlled’ by non-resident entities would require to follow the same norms as a direct foreign investment i.e., only as much can be done by way of indirect foreign investment through downstream investment in terms of Press Note 2 (2009 series) as can be done through direct foreign investment and what can be done directly can be done indirectly under the same norms.”
3.3.1 While issuing Press Note 2 and Press Note 4 of 2009 series as aforesaid, the Government was aware of Press Note 1 of 2005, dated 12-1-2005 r / w Press Note 3 of 2005, dated 15-3-2005. In spite of that, Press Note 4 allows an operating Indian Company to invest in another downstream Indian Company by way of Indirect Foreign Investment without any reference or requirement to comply with Press Note 1 of 2005. Probably, the understanding is that the existing Indian JV partner also becomes an interested party in the downstream investment and his interest is in no way jeopardised which is the purpose and rationale of aforesaid Press Note 1 of 2005 r /w Press Note 3 of 2005.
3.3.2 Therefore, it appears that it would be in order for ABC (India) Pvt. Ltd. to acquire an Equity Holding in proposed new JV company with XYZ, Italy without attracting aforesaid Press Note 1 of 2005 and thus it would not require FIPB’s prior approval.
3.3.3 In this connection, attention is invited to Para-graphs 4, 5 and 6 of Press Note 4 of 2009 series, dated 25-2-2009 reproduced below:
“4.0 Guidelines for downstream investment by investing Indian companies’ owned or controlled by non-resident entities’ as per Press Note 2 of 2009 : Recognising the need to bring in clarity into the Policy for downstream investment by investing Indian companies, the Govt. of India now proposes to clarify the policy in this regard.
4.1 The Policy on downstream investment comprises policy for (a) only operating companies (b) operating-cum-investing companies (c) only investing companies.
4.2 The Policy in this regard will be as below:
4.2.1 Only operating companies: Foreign investment in such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sectors in which such companies are operating.
4.2.2 Operating-cum-investing companies: Foreign in-vestment into such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps with regard to the sectors in which such companies are operating. Further, the subject Indian companies into which downstream investments are made by such companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps in regard of the sector in which the subject Indian companies are operating.
4.2.3 Investing companies: Foreign investment in investing companies will require prior Government/FIPB approval, regardless of the amount or extent of foreign investment. The Indian companies into which downstream investments are made by such investing companies would have to comply with the relevant sectoral conditions on entry route, conditionalities and caps in regard of the sector in which the subject Indian companies are operating.
5.0 For companies which do not have any operations and also do not have any downstream investments, for infusion of foreign investment into such companies, Government/FIPB approval would be required, regardless of the amount or extent of foreign investment. Further, as and when such company commences business(s) or makes downstream investment it will have to comply with the relevant sectoral conditions on entry route, conditionalities and caps.
6.0 For operating-cum-investing companies and investing companies (Para 4.2.2, 4.2.3) and for companies as per Para 5.0 above, downstream investments can be made subject to the following conditions:
a) Such company is to notify SIA, DIPP and FIPB of its downstream investment within 30 days of such investment even if equity shares/CCPS/ CCD have not been allotted along with the modality of investment in new /existing ventures (with/without expansion programme);
b) downstream investment by way of induction of foreign equity in an existing Indian company to be duly supported by a resolution of the Board of Directors supporting the said induction as also a shareholders agreement if any;
c) issue/transfer/pricing/valuation of shares shall be in accordance with applicable SEBI/RBI guidelines;
d) Investing companies would have to bring in requisite funds from abroad and not leverage funds from domestic market for such investments. This would, however, not preclude downstream operating companies to raise debt in the domestic market.”
3.3.4 Thus, ABC (India) Pvt. Ltd. will have to notify SIA, DIPP and FIPB of its downstream investment within 30 days of such investment in terms of Para 6(a) of the aforesaid Press Note-4.
The issue arises whether ABC (India) Pvt. Ltd. should have an equity stake in the proposed JV company or ABC, Spain and the Indian promoters should hold direct equity stake in the proposed new JV company. As discussed above, in terms of FDI Policy, both options are equally open. In other words, FIPB permission is not required in terms of Press Note 1 and 3 of 2005, whatever may be the mode of investment. However, on tax consideration as discussed below, investment by ABC (India) Pvt. Ltd. would not be advisable.
3.4 Tax considerations:
3.4.1 Under Indian Tax Laws all companies registered in India, whatever be the nature of activities and extent of public participation or foreign share-holding, are liable to tax at the same rate of taxation. Only foreign companies operating in India through a branch are liable to tax in India at a higher rate since they are not liable to pay Dividend Distribution Tax.
3.4.2 When structuring the shareholding pattern, one has to keep in mind the Dividend Distribution Tax levied u/s.115-0. All Indian companies have to pay Dividend Distribution Tax @ 15% +Surcharge thereon + Education Cess (amounting to 16.995%) on the amount of dividend paid in addition to the normal Income-tax liability. If the equity shares in the proposed JV company are held by ABC (India) Pvt. Ltd., it would involve double payment of Dividend Distribution Tax – once when the proposed new JV company declares dividend in future and second time when ABC (India) Pvt. Ltd. declares dividend out of such dividend income.
3.4.3 As ABC (India) Pvt. Ltd. is a subsidiary of ABC, Spain, it would be liable to pay such Dividend Distribution Tax in terms of S. 115-0(lA) reproduced below, which is self explanatory.
“Special provisions relating to tax on distributed profits of domestic companies
Tax on distributed profits of domestic companies.
(1A) The amount referred to in Ss.(l) shall be reduced by the amount of dividend, if any, received by the domestic company during the financial year, if:
a) such dividend is received from its subsidiary;
b) the subsidiary has paid tax under this section on such dividend; and
c) the domestic company is not a subsidiary of any other company:
Provided that the same amount of dividend shall not be taken into account for reduction more than once.
Explanation – For the purposes of this sub-section, a company shall be a subsidiary of another company, if such other company holds more than half in nominal value of the equity share capital of the company.”
3.7 Ancillary issues:
3.7.1 The proposed new JV company will have to comply with Transfer Pricing Regulations in respect of business dealings with XYZ, Italy and ABC, Spain.
3.7.2 The proposed new JV company will have to comply with all the formalities with RBI through the authorised dealer within 30 days of the receipt of remittance and within 30 days of allotment of shares, as the case may be. It may be noted that RBI is levying heavy Compounding Fees for any delay in filing the relevant forms and intimations.
3.7.3 The JV company should ensure to obtain ‘In-ward Remittance Certificate’ from the bankers in respect of such foreign remittances received with correct and clear mention of the sender and purpose of the remittance.
4. Summation:
The above discussion and reply to queries may be summarised as follows:
4.1 The new joint venture company with XYZItaly can engage in import and distribution of XYZ’s products in India on wholesale cash and carry basis without requiring prior permission of FIPB as such activities are permitted under automatic route on wholesale cash and carry basis.
4.2 Press Note 1 of 2005 r /w Press Note 3 of 2005 are not attracted as NIC Code of both the products dealt by ABC (India) Pvt. Ltd. and proposed new JV company are different.
4.3 Both the modes of investment in JV company are permissible in Law. In other words, ABC (India) Pvt. Ltd. can have an equity stake in the JV company or ABC, Spain and the Indian promoters can hold direct equity stake in the proposed JV company. However, direct holding by ABC, Spain and the Indian promoters would be preferable in view of tax considerations.
4.4 In view of possible double taxation of dividends by way of Dividend Distribution Tax, shareholding by ABC (India) Pvt. Ltd. in the proposed new JV company would not be advisable.
5. Concluding remarks:
The FDI regulations in India have been amended from time to time by various Notifications and Circulars issued by RBI and various Press Notes issued by concerned Ministries in New Delhi. As a result, the FDI regulations have become such a maze that a foreign investor or his local business partner cannot find his way through the maze without the help of experts. Recent Press Notes 2, 3 and 4 of 2009 have further complicated the web of regulations. The matter is further complicated for an investor by the differing and contrary interpretations adopted by the RBI and the concerned ministry on some issues. If FDI in India is to be encouraged, it is high time that a single policy document be issued in lieu of all previous Notifications, Circulars and Press Notes.
Part C : RBI/FEMA
Given below are the highlights of certain RBI Circulars.
A.P. (DIR Series) Circular No. 5, dated 22-7-2009 : Issue
of Indian Depository Receipts (IDRs).
This Circular makes operational the rules/guidelines for
issue of Indian Depository Receipts by companies resident outside India
through a Domestic Depository.This Circular also lays down criteria for issue, purchase,
transfer and redemption of IDR. Some of the important points are as under :
IDR must be
denominated in Indian Rupees.Financial/Banking companies having presence in India, either through a
branch or subsidiary, will have to obtain approval of the sectoral
regulator(s) before they can issue IDR.The company
issuing IDR will have to immediately repatriate the proceeds of the issue.IDR can be
purchased, held and transferred by persons resident in India, FII & NRI.
Provisions of FEMA will not be applicable to investment and transfer of IDR
by persons resident in India. FII and NRI will have to comply with the
provisions of Notification No. FEMA 20/2000-RB, dated May 3, 2000, as
amended from time to time. Further, NRI can only invest out of funds held in
their NRE/FCNR(B) accounts.Automatic
fungibility of IDR is not permitted.IDR can be
converted into underlying equity shares after one year from the date of
their issue.Listed
Indian companies and Indian mutual funds, registered with SEBI can sell or
continue to hold the underlying shares, subject to the terms and conditions
as per Regulations 6B & 7 and 6C, respectively, of Notification No. FEMA
120/RB-2004, dated July 7, 2004, as amended from time to time.Other
persons resident in India, including resident individuals, have to sell the
underlying shares within a period of 30 days from the date of conversion of
the IDR into underlying shares.Provisions
of FEMA will not apply to the holding of the underlying shares, on
redemption of IDR by FII, including SEBI approved sub-accounts of the FII,
and NRI.
Part C : RBI/FEMA
Given below are the highlights of certain RBI Circulars.
A.P. (DIR Series) Circular No. 3, dated 17-7-2009 :
Deferred payment protocols dated April 30, 1981 and December 23, 1985 between
Govt. of India and erstwhile USSR.
This Circular provides that, with effect from June 25,
2009, the rupee value of the special currency basket has been fixed at
Rs.66.5719 as against the earlier value of Rs.64.6153.
Part C : RBI/FEMA
Given below are the highlights of certain RBI Circulars.
A.P. (DIR Series) Circular No. 71, dated 30-6-2009 :
External Commercial Borrowings (ECB) Policy.
This Circular modifies certain aspects of the ECB Policy
with immediate effect as under :1. ECB for integrated township :
Presently, corporates engaged in the development of
integrated townships are permitted to avail ECB under the Approval Route up to
June 30, 2009.This Circular has extended this permission up to December
31, 2009 under the Approval Route.2. ECB for NBFC Sector :
Presently, NBFCs which are exclusively involved in
financing of the infrastructure sector, are permitted to avail ECB from
multilateral/regional financial institutions and Government-owned development
financial institutions for on-lending to borrowers in the infrastructure
sector under the Approval Route if, among other conditions, their direct
lending portfolio vis-à-vis their total ECB lending to NBFC at any point of
time is not less than 3 : 1.This Circular has dispensed with this condition that the
direct lending portfolio vis-à-vis their total ECB lending to NBFC at any
point of time is not less than 3 : 1. All other conditions, including availing
ECB under Approval Route, apply as before.3. ECB for Development of Special Economic Zone :
SEZ developers can avail of ECB under the Approval Route
for providing infrastructure facilities, as defined in the ECB Policy, within
the SEZ.4. Corporates under investigation :
Corporates who have violated ECB Policy and are under
investigation by RBI and/or Directorate of Enforcement will not be allowed to
access the Automatic Route. All requests from such corporates will be examined
under the Approval Route.
Foreword :
1. At the outset, we appreciate the initiative taken for
circulation of Revised Discussion Paper (RDP) revealing some of the conceptual
changes to be made in the proposals contained in the Direct Taxes Code, 2009 (DTC),
which is going to replace the current Income-tax Act, 1961 (I.T. Act). This
shows that the Government appears to have an open mind to address the genuine
concerns raised by the taxpayers and others in response to the proposals
contained in the DTC. We also believe that the same approach will continue till
the final DTC gets enacted and becomes the law of the land as the same will
reflect the Direct Taxes Policy of the Nation for a long time to come.
2. In the DTC, many conceptual changes have been proposed
with regard to tax system and its administration as compared to the I.T. Act.
Many of such proposals have been found highly objectionable/debatable. For this,
a detailed representation has been made by the BCAS, in which each chapter, in
most cases, has been divided into two parts, namely, (a) Structural changes
(where the policy/concept itself required reconsideration/change), and (b)
Changes suggested with regard to specific provisions contained in the DTC. The
RDP deals with only some of the conceptual changes to be made in the DTC in
certain areas. However, it is completely silent with regard to the concerns
raised at conceptual level in respect of many other areas of the DTC and for
which no mention is found in the RDP, such as : Taxation of Business Income, Tax
Deduction at Source (TDS), Branch Profit Tax, Wide Powers for Tax
Administration, etc. The taxpayers and the people at large are in dark with
regard to the approach of the Government in respect of the remaining areas which
are also equally of great concern to the taxpayers and others. We only hope that
the rational view will be taken in respect thereof while drafting the final
proposals to be incorporated in the Bill.
3. In the introduction part of the RDP, it is stated that
there are a number of other issues which have been raised in the public
feedback, which, though do not form the part of the RDP, will be considered
while finalising the Bill for introduction in the Parliament. We believe
that the suggestions with regard to the conceptual changes made in the remaining
areas of the DTC as well as the suggestions made with regard to the specific
provisions contained in the DTC in our earlier representation will be seriously
considered and will find positive response in the final proposals contained in
the Bill for introduction in the Parliament. Therefore, those suggestions
have not been reiterated in this representation.
4. We also take this opportunity to recognise some of the
welcome decisions taken by the Government which are stated in the RDP, such as:
continuance of provisions relating to Minimum Alternative Tax (MAT) based on
book profits, continuance of EEE for tax treatment of certain savings,
continuance of the currently available exemption in respect of retirement
benefits of the employees, realignment of house property tax to actual rent
basis, continuance of present system of levying wealth tax, etc. However, some
of the proposals contained in the RDP require reconsideration/modification as
they are likely to create genuine hardships to the taxpayers considering the
ground realities of the tax administration in the country. In this
representation, attempt has been made to point out such cases for
reconsideration of the decisions taken as mentioned in the RDP with the hope
that the same will get serious consideration and positive response before
introducing the Bill in the Parliament for enacting the DTC.
5. It would not be out of place to reiterate that in the
Indian context, proposal for continuance of discretionary and arbitrary General
Anti Avoidance Rules (GAAR) is highly undesirable even with some of the apparent
safeguards mentioned in the RDP. The continuance of such discretionary and
arbitrary powers may create an unmanageable situation in the times to come and
will also keep uncertainty and apprehension in the minds of taxpayers even with
regard to the genuine commercial decisions taken by them. In this context, we
need to recall the experience of provision empowering assessing officers to make
prima facie adjustments and consequent levy of additional tax u/s.143(1A) while
processing the Return of Income introduced from the A.Y. 1989-90 and the havoc
that the provision created for few years. Ultimately, the said provision had to
be withdrawn by the Finance Act, 1999. In the anxiety of catching few smart
assessees who may have abused some of the provisions of the Act, it would be
totally unjustified to introduce such unfettered arbitrary powers.
If at all such provisions are found essential for any reason,
the same should only be applied only to international transactions and that too
after providing substantial higher threshold for the same, so that the common
taxpayers do not suffer with regard to their normal commercial decisions.
In view of the above, it is earnestly requested that each of
the suggestions made in this representation needs serious consideration and
proper debate
with open mind before final decision is taken in the matter.
1. Chapter I — Minimum Alternate Tax — Gross Assets
vis-à-vis Book Profit :
1.1 One of the widely welcomed proposals in the RDP is that
of dropping the levy of a flat 2% tax on assets in favour of the present regime
to levy tax on book profits. We welcome this change and hope that the same
existing MAT provisions will get
reintroduced in DTC.
1.2 MAT is supposed to be collection of tax in advance on the
basis of book profit and not to deny the benefits to the taxpayer. With this
objective MAT credit was introduced. However, MAT credit is allowed to be
carried forward for ten assessment years immediately succeeding the assessment
year in which tax credit becomes allowable.
It is, therefore, suggested that under the DTC, the MAT
credit should be made available for indefinite period.
2. Chapter II — Tax Treatment of Savings — Exempt Exempt
Tax (EET) vis-à-vis Exempt Exempt Exempt (EEE) basis :
2.1 We welcome the continuation of the EEE method of taxation
for Government Provident Fund, Public Provident Fund and Recognised Provident
Funds and pension scheme administered by Pension Fund Regulatory and Development
Authority, Approved Pure Life Insurance Products and Annuity Scheme in the
proposed Direct Tax Code (DTC).
2.2 The Revised
Discussion Paper (RDP) contemplates continuation of the EEE method only for
specified categories of provident funds, pension schemes and pure life
insurance products. Consequently all other investments will fall in the EET
category. Para 3.1 of the RDP already provides that investments made prior to
the commencement of the DTC will continue to enjoy the EEE method for the
tenure of the financial instrument. It is suggested that all investments in
or subscriptions to any scheme made prior to 1st April 2011 (the proposed
commencement date of the DTC) should continue to be governed by the earlier EEE
method of taxation.
2.3 It is an
accepted fact that India is in need of substantial investment in
infrastructure. It is therefore suggested that investment in, or
contribution to, infrastructure schemes/funds (including subscription to
deposit of companies, bank deposits), should continue to enjoy the EEE method
of taxation under the DTC. The funds so collected should be used for meeting
the requirements of the funds for the Government for development of
infrastructure needs of the country.
2.4 The RDP
recognises that our country does not have in place a social security net for
senior citizens. In view thereof it is suggested that even after the DTC
comes into force, a withdrawal from any scheme which is otherwise covered by
the EET method, by a senior citizen should not be taxed i.e., it should enjoy
the EEE method. This will to some extent augment the social security for the
senior citizen.
3. Chapter III — Taxation of Income from
Employment — Retirement Benefits and Perquisites :
Reintroduction
of Standard Deduction :
3.1 A salaried
employee incurs certain expenses wholly and exclusively for the performance of
office duties, which are not reimbursed by the employer. The employee is not
allowed any deduction for such expenses incurred. It is therefore suggested
that a standard deduction, as was provided earlier in the present Act, should
be reintroduced, so that the employee pays tax on his real income.
4. Chapter IV — Taxation of Income from
House Property :
4.1 The policy
decision to tax income from house property only on the basis of actual rent and
not on any notional basis is a step in the right direction. This will avoid
litigation in future with regard to the determination of the amount of gross
rent for the purpose of taxation as currently, litigation is going on in large
number of cases with regard to determination of ‘annual value’ (which is the
current basis of taxation) for the purpose of taxation of income from house
property.
4.2 In the DTC,
it is provided that income from house property shall be the gross rent less
specified deduction. It is also proposed to reduce specified standard deduction
(for repairs, etc.) to 20% from 30% currently available under the I.T. Act.
It may be noted
that even the current deduction of 30% provided under the I.T. Act itself is
not adequate and is having a very adverse effect in large number of cases. This
is on account of the fact that apart from the repairs, in most cases, the
assessee has also to pay lease rent, insurance premium at a higher amount for
various valid reasons. Further, the society charges in the metros and most of
the larger cities, administrative and other statutory expenses incurred in case
of corporate entities, etc. are also very high. Apart from this there is also
no clarity as to deductibility of various taxes and cesses levied by the State
Governments, for which litigation is on under the I.T. Act.
In view of the
above, it is suggested that specified standard deduction should be retained at
least at the current level of 30% and specific provisions should be made for
deduction of all taxes/cesses paid to the State Governments in respect of house
property.
4.3 In the DTC,
it is provided that letting of machinery, plant, furniture or any other
facility, if inseparable from the letting of the house property, then the same
will be taxed under the head ‘Income from House Property’. In such cases, the
standard deduction of even 30% (assuming that the present proposal of 20% will
be increased to 30% as suggested above) will be totally inadequate. Therefore,
in such cases, adequate provisions should be made for allowance of depreciation
in respect of such other assets, which are let out with house property due to
its nature of being inseparable. Alternatively, the income in such cases should
be taxed under the head, ‘Income from Business’ and not under the head ‘Income
from House Property’.
5. Chapter V — Taxation on Capital Gains :
5.1 At the
outset, it must be recognised that the scope of the Chapter relating to Capital
Gains has been substantially narrowed down in the Direct Taxes Code (DTC), as
the same applies only to Investment Assets. In the Income-tax Act, 1961 (I.T.
Act), the Chapter relating to Capital Gains covers every Capital Asset whether
related to business or not. Unfortunately, under the DTC, business-related
Capital Assets are excluded from the scope of this Chapter and hence, the
profit/loss on transfer of Business Capital Asset (BCA) is governed by the
Chapter relating to business income as per the proposal contained in the DTC.
This is totally unfair and unjust. This is the major issue which has not been
addressed and considered in the Revised Discussion Paper (RDP) as the same only
deals with the treatment of Capital Asset, being Investment Asset.
Therefore, it is
suggested that all capital assets including Business Capital Assets should be
governed by the provisions relating to Capital Gains and accordingly, the
Chapter relating to Capital Gains should be made applicable to all Capital
Assets on the lines of similar provisions contained in the present I.T. Act.
5.2 As against
the total exemption presently available to Long-Term Capital Gain arising on
transfer of listed equity shares (Equity Shares) or unit of equity-oriented
fund (Specified Units), it is now proposed to grant deduction at the specified
rates while computing such Capital Gain without any indexation. It is suggested
that in respect of Capital Gain/Loss arising on investments made in such assets
up to 31-3-2011, the present treatment of exemption should continue and
appropriate provision in that respect should be made in the DTC. This will
effectively continue the present position of total exemption with regard to old
Investments and that will also obviate huge transactions in the capital market
before the commencement of the DTC with a view to claim exemption before that
date and/or to increase cost for future. Such large-scale sales in the stock markets
will have a destabilising effect which ought to be avoided.
It is also
noticed that in case of such Equity Shares or Specified Units, there is no
provision for option to substitute cost of acquisition by fair market value as
on 1-4-2000. There is no reason not to make such provision as in the case of
other capital assets. Therefore, alternatively, option to substitute the cost
of acquisition by fair market value as on 1-4-2000 should be provided to the
taxpayer.
5.3 In the RDP,
it is also proposed that in case of such loss, the same also will be scaled
down in the similar manner. It is totally unfair to scale down such long-term
loss in the similar manner as in the case of such capital gain. The deduction
at the prescribed percentage is necessary while computing gains as a large
portion of such gain may be on account of inflation. However, if the assessee
suffers a loss in such investments, then he will be hit twice, firstly on
account of financial loss and secondly, on account of scaling down of loss for
the purpose of taxation.
In view of the
above, it is suggested that in case of such long-term capital loss, the same
should not be scaled down as proposed, but provision should be made to enhance
the cost of acquisition by making appropriate indexation provision.
5.4 It is also
proposed not to introduce any Capital Gain Savings Scheme under the DTC. This
is totally unfair and unjust. The assessee must have an opportunity to claim
exemption from the long-term capital gain by making investment in such scheme,
which may be framed on lines of present S. 54EC of the I.T. Act with one
change, that is, there should not be any limit on the amount of investment
which can be made in the scheme. Till the year 2007, there was no limit for
such investments under the I.T. Act. In fact, the amount available out of such
investments can be used for the purpose of meeting the requirements of funds
for various infrastructure projects.
Therefore, it is
suggested that appropriate provision for the Capital Gain Savings Scheme on the
lines of present S. 54EC (without any ceiling on the amount of investment)
should be introduced in the DTC.
5.5 In the RDP,
it is proposed that the Securities Transaction Tax (STT) will be calibrated
based on the revised taxation regime for capital gain as the STT is a tax on
specified transactions and not on income. This is totally unfair. The STT was
introduced by the Finance (No. 2) Act, 2004 and that was effectively in
consideration for the exemption granted to long-term capital gain and providing
concessional rate of tax for short-term capital gain in such cases at that
time. This is evident from the speech of the Hon. Finance Minister made at that
time while introducing the relevant Finance Bill, in which he has stated as
under (at para 111 of his speech) :
“Capital gains
tax is another vexed issue. When applied to capital market transactions, the
issue becomes more complex. Questions have been raised about the definitions of
long-term and short-term, and the differential tax treatment meted to the two
kinds of gains. There are no easy answers, but I have decided to make a
beginning by revamping taxes on securities transactions. Our founding fathers
had wisely included Entry 90 in the Union List in the Seventh Schedule of the
Constitution of India. Taking a cue from that Entry, I propose to abolish the
tax on long-term capital gains from securities transactions altogether.
Instead, I propose to levy a small tax on transactions in securities on stock
exchanges. . . . . . . ”
In view of the
reintroduction of tax on such capital gain, the STT should be abolished as the
basis on which it was introduced would no longer exist.
6. Chapter VI — Taxation of Non-Profit
Organisations :
6.1 The law
relating to exemption of charitable and religious trust has now got fairly well
settled. It is, therefore, suggested that the existing basic scheme of
exemption of charitable and religious trusts contained in S. 11 to S. 13 of the
Income-tax Act, 1961, should be continued in the DTC.
6.2 The revised
discussion paper on the Direct Taxes Code (DTC) deals with public religious
institutions in para 3(b). If the trust/institution is wholly for public
religious purposes, it will be exempt subject to conditions (A) to (H)
mentioned therein. Sub-paragraph (c) also envisages exemption for partly
religious and partly charitable institution for which conditions are specified
as follows :
6.2.1 the
predetermined ratio between charitable and religious activities required to be
set out in the Trust Deed/Memorandum should not pose much difficulty for
societies or S. 25 companies, which can carry out the amendment through a
resolution. However, for trusts, the procedure for amending a trust deed
involves a long-drawn court procedure, taking more than 6 months. It is,
therefore, suggested that in case of trusts set up prior to 1-4-2011, the
predetermined ratio need not be set out in the trust deed, but can be
determined in a resolution of the Board of Trustees passed within one year of
commencement of the Direct Taxes Code.
6.2.2 The
requirement of separate books of account to be maintained for religious and
charitable activities will be too cumbersome, as most of the religious trusts
may be having limited resources. Further, the common expenses will have to be
split up between the two sets of books where there may be difference of opinion
by the AO. Hence it is better to have one set of books of account and financial
statements with separate ledger accounts for religious and charitable expenses.
If necessary, a requirement of additional statement of Income & Expenditure
Account in respect of charitable activities may be prescribed for such trusts.
6.3 Accumulation
for 3 years is not sufficient. A period of at least 5 years should be allowed
for accumulation. A trust wanting to fund a major project may not be in a
position to do so in 3 years. Further, the restriction on the amount of
accumulation would defeat the very purpose of accumulating funds for large
projects. There should be no limit on the amount of accumulation.
6.4 Permitting
only cash system of accounting on the ground of simplicity and easy
administration is not justified, as the mercantile system being followed by the
trust is not difficult, and trusts are used to the said system. The mercantile
system is the more accurate method of accounting whereas the cash system may
not show the true and correct position of the trust by deferring the income or
expenses. The concept of real income for NPOs is well settled and should not be
disturbed with an artificial concept of income. Both cash and mercantile
methods of accounting should be permitted for NPOs.
6.5 Only
specified outgoings are allowed as deduction. Therefore several outgoings may
not be allowed as a deduction. All outgoings should be allowed as a deduction.
6.6 Taxation of
NPOs on the net worth is extremely harsh and may result in double or even
triple taxation.
6.7 Trusts set
up prior to 1961 should continue to be treated as NPOs, even if they are for
the benefit of a particular caste.
6.8 There should
be provision for setting off deficit of one year against the income of
subsequent year(s).
6.9 Capital
gains on transfer of investment assets, being financial assets, are to be
computed under the head ‘Capital Gains’, and will not be exempt. The present
position of S. 11(1A) for taxation of gains on such asset as income and
exemption of such income as spent for charitable or religious activities if
reinvested, should not be altered. The term ‘Financial Asset’ needs to be
clearly defined.
6.10 Loss of
exemption if any property of the value of exceeding Rs.1,000 is diverted to the
specified persons u/s.13(3), is too harsh. The limit should be raised to at
least Rs. 10,000.
6.11 Limit for
applying for registration should be extended to 6 months from the end of the
relevant financial year. There should be provision for condonation of delay in
filing application for registration in genuine cases.
6.12 Any surplus
resulting from activities in the nature of trade or commerce will result in
denial of exemption for a trust advancing objects of general public utility. If
such activity is meant to feed charitable objects, there is no reason to deny
exemption.
7. Chapter VII — Special Economic Zones —
Taxation of Existing Units :
7.1 It
is laudable that
the provision for
the extension of the profit-linked deduction (for the unexpired period)
to the existing SEZ units has been brought in the revised DTC proposal. This is
certainly a welcome change.
However, it is
suggested that for the purpose of development and growth of exports, the
incentives should be made available for newly set up SEZ units also.
8. Chapter VIII — Concept of residence in
the case of a company incorporated outside India :
Introduction of
the provisions of Controlled Foreign Corporation :
8.1 The
provisions of Controlled Foreign Corporation (CFC) are proposed to be
introduced to avoid deferral of tax of the passive income earned by a foreign
company which is controlled directly or indirectly by a resident in India and
where such income is not distributed to the shareholders.
8.2 Presently,
barring two tax treaties (i.e., Singapore and Mauritius) the underlying tax
credit is not available to the Indian MNCs for the dividends received from the
foreign subsidiaries. Also, India does not have Participation Exemption Regime.
8.3 Introduction
of CFC provisions will reduce international competitiveness of Indian MNCs.
Moreover, when transfer pricing regime is in place and ‘Place of Effective
Management’ is being introduced, it is premature to introduce CFC provisions
and it can be deferred for the time being.
8.4 Therefore,
it is suggested that the introduction of the CFC provisions at this stage seems
untimely and premature. Time may not be ripe for introduction of such
provisions in India as the Indian MNCs are still in their nascent stage of
going outbound.
9. Chapter IX — Double Taxation Avoidance
Agreement (DTAA) vis-à-vis Domestic Law :
DTAA
vis-à-vis Domestic Law :
9.1 The
discussion paper proposes that in case of conflict, the Domestic Law or the
DTAA whichever is more beneficial to the taxpayer shall apply. It is also
proposed that DTAA will not have preferential status over the domestic law in
the following circumstances :
(i) When GAAR is invoked
(ii) When CFC provisions are invoked
(iii) When Branch Profit Tax is levied
9.2 A unilateral
amendment of this nature in the domestic tax law leading to an override of the
existing treaties should be avoided. We suggest that this proposal be applied
in respect of only new treaties signed after the introduction of DTC.
9.3 If domestic
law is to be applied over the treaty, it should be done through the process of
Mutual Agreement Procedure to enable the non-resident to avail tax credit in
the residence country.
10. Chapter X — Wealth Tax :
10.1 For giving
effect to exempted productive assets from wealth tax, the current definition of
assets u/s.2(ea) of the Wealth-tax Act, 1957 should be adopted.
10.2 Exemption
with respect to any one house or part of a house or a plot of land should be
made available irrespective of the date of its acquisition and/or construction.
It should not be restricted to those acquired or constructed before the 1st day
of April, 2000 as is proposed in the Direct Tax Code.
11. Chapter XI — General Anti Avoidance Rule
:
11.1 The
discussion paper clarifies that very arrangement for tax mitigation would not
be classified as an ‘impermissible avoidance arrangement’.
11.2 An
arrangement would have to satisfy any one of the following conditions to
qualify as an ‘impermissible avoidance arrangement’ :
(i) It is not at arm’s length;
(ii) It represents misuse or abuse of the
provisions of the DTC;
(iii) It lacks commercial substance;
(iv) It is carried out in a manner not
normally employed for bona fide business purposes.
11.3 GAAR
creates a high degree of subjectivity in the application of tax laws and unless
it is approached with extreme caution, it may lead to several unintended
consequences. GAAR provisions would continue to allow the tax authorities to
override the tax treaty provisions. GAAR provisions in its current form would
have an impact on several cross-border investments and M&A structures.
11.4 The
Proposed GAAR is so wide in its scope and has far-reaching implications that it
is going to affect ordinary, everyday business transactions. It will introduce
uncertainty in even normal business transactions. Though, the purpose of the
GAAR is to serve as a deterrent to impermissible tax avoidance/ evasion
transactions, but its introduction in the present form will have an adverse
impact on the business of the honest taxpayer. Therefore, in our view, it would
not be appropriate to introduce GAAR in its current form.
11.5 If at all,
GAAR provisions need to be introduced, we suggest as under :
11.5.1 At least,
GAAR provisions should apply only to international transactions and not to the
domestic transactions in any circumstances. Presently, the Department has
enough power to unearth domestic transactions of the resident taxpayer under
domestic law and take penal action.
11.5.2 A
threshold limit of substantially higher transaction value should be set for
which GAAR provisions could be applied.
11.5.3 Whenever
the question involved is of determining the beneficial owner, the GAAR
provisions should provide that the treaty of the country of the beneficial
owner so determined would apply. This is with a view to clarify that the treaty
benefits would not be denied totally.
11.5.4 The Code
should provide for establishment of a GAAR Authority similar to the Authority
of Advance Rulings, comprising experts to invoke these Rules and deal with the
consequences under the Rules. A process such as that prescribed for the AAR
rulings must be prescribed for the administration of GAAR to achieve the stated
objectives of the Code: reduction of litigation, transparency, fairness of
administration of tax, certainty and voluntary compliance.
11.5.5 The
factor of ‘transaction not at an arms length’ is already addressed by the
Transfer Pricing provisions and hence should be deleted vis-à-vis GAAR
provisions.
11.5.6 The term
‘commercial substance’ should be objectively defined to specifically mean as a
transaction which is backed by a reasonably strong commercial reason.
11.5.7 The
factor of ‘misuse or abuse of the provisions of the DTC’ and the term ‘bona
fide business purpose’ is subjective and should be deleted.
Part A : Direct taxes
Clarification for the new procedure prescribed for
furnishing the CA certificate/undertaking while making remittance to
non-residents — Circular No. 4/2009, dated 29-6-2009.
The CBDT vide insertion of Rule 37BB prescribed procedures
for e-filing of the new undertaking in Form 15CA and modified the format of CA
certificate in Form 15CB. A clarificatory Circular has been issued to explain
the modus operandi of the system.
Part A : Direct taxes
New Scheme of TDS/TCS procedures deferred till further
notice : Press Release dated 30-6-2009.
The CBDT has kept the new procedures prescribed under
Notification No. 31/2009 in abeyance till further notice. Accordingly
taxpayers can continue to follow the existing procedures till further
information is received from the Board. Returns can also be filed without
Unique Transaction Number (UTN).
Part A : Direct taxes
CBDT clarification regarding deduction u/s.80IB(10) in
respect of undertakings developing housing projects : Instruction No. 4/2009,
dated 30-6-2009 (reproduced)
U/ss.(10) of S. 80-IB an undertaking developing and
building housing projects is allowed a deduction of 100% of its profits
derived from such projects if it commenced the project on or after 1-10-1998
and completes the construction within four years from the financial year in
which the housing project is approved by the local authority.2. Clarifications have been sought by various CCsIT on the
issue whether the deduction u/s.80-IB(10) would be available on a year-to-year
basis where an assessee is showing profit on partial completion or if it would
be available only in the year of completion of the project u/s.80-IB(10).3. The above issue has been considered by the Board and it
is clarified as under :
(a) The deduction can be claimed on a year-to-year basis
where the assessee is showing profit from partial completion of the project
in every year.(b) In case it is late, and it is found that the
condition of completing the project within the specified time limit of 4
years as started in S. 80-IB(10) has not been satisfied, the deduction
granted to the assessee in the earlier years should be withdrawn.
4. The above Instruction will override earlier
clarification on this issue contained in Member (R)’s D.O. letter No.
58/Misc./2008/CIT(IT&CT), dated 29-4-2008 and Member (IT)’s D.O. letter No.
279/Misc./46/08-ITJ, dated 2-5-2008.5. This may kindly be brought to the notice of the all
Assessing Officers in your charge.F.No.178/32/2009-ITA.I (Raman Chopra)
Director (ITA-I)
Herambh Shastri (name imaginary) a qualified chartered
accountant has a neighbour called Kushabhau. Among many other things, generally
you cannot decide who your neighbour would be. Reason for this statement,
Kushabhau in his fifties is a school drop-out, works in a factory, and who
happens to be a neighbour of CA Herambh Shastri. Kushabhau though illiterate is
an ardent believer in casting his vote in elections, be it Lok Sabha, Vidhan
Sabha, Corporation or housing society elections, I mean any election. On the
contrary Herambh Shastri is very allergic to voting. On the day of voting he
prefers to go on a pleasure trip. In recently concluded Lok Sabha elections
Kushabhau succeeded to persuade Herambh to cast his vote. How did it happen ?
Herambh being a qualified person, Kushabhau used to address him as ‘Sir’.
“What is the use of it, it goes to dogs”, Herambh responded.
“You mean elected representatives are dogs ?” Kushabhau.
“What else are they ? they fight for power to rule like dogs fight for piece of bread”, said Herambh with angry overtone.
“Sir, without elected representatives we cannot have a government”, Kushabhau’s simple point of view.
“Kushabhau, look at the past records of candidates contesting elections, either they are corrupt or criminals”, Herambh.
“I fully agree with you. Out of 540 members of the Parliament, a few of them may have criminal or corrupt records but that does not mean you boycott voting. I firmly believe and you would also agree with me, keeping in view the recent trend in our country that tainted politician gets exposed over a period of time automatically through public protest, print and electronic media and finally judicial system even if he is or was the Prime Minister of this country,” said Kushabhau.
“Okay Kushabhau, I accept your view about individuals but the way the political parties conduct themselves is quite disgusting. They scramble for power. Most of the time they resort to unethical practices of horse-trading, defections, blackmailing, coalitions of political convenience or anything which is beyond the imagination of you and me just to grab the power”.
“Sir, you are right the political parties fight to grab the power to rule this country. But they still believe in ‘democratic elections’ to acquire that power unlike Maoist or Naxalities or militant groups operating in some countries. So we are fortunate enough to have ‘government’ elected by the people for the people and of the people. Further, what else can you expect in this country with ‘diversity’ in electorate in terms of caste, creed, colour, so many states, haves and have-nots, rich and poor, literate and illiterate. Plus so called leaders are mushrooming in every layer of society trying to create their own vote banks. Still we manage to hold elections and get the government since our independence in 1947, three cheers to the Election Commission and Indian democracy ! In recent times this diversity is growing by leaps and bounds. No one gets clear majority. Majority is being hacked by regional parties with regional interest. Thus decision to caste vote to a particular candidate or political party is being influenced by diverse considerations. But unlike you they at least exercise their franchise to vote, whoever may be the candidate, or political party, whatever may be the record of the candidate or party. That’s the essence of democracy. You get the ‘government’ may be of coalition of political parties fighting to grab the power as you said. Sir, think of the country without ‘government’. We will be like Palestine, ‘a state without government’ and struggling for its existence. You know their leader Yassar Arafat was called ‘a statesman without state’. We are fortunate enough to have a government elected by the people. You should say thanks to those electorate who cast their vote and give you and me a government to protect and maintain the sovereignty of this country in the world, though it may not be of your choice.”
Sir, can’t you spare just half an hour to cast your vote and
then go on your pleasure trip ? It is the only thing you and I can do for our
country.”
Herambh Shastri shook his head nervously and put his hand on
the shoulder of Kushabhau and vowed.
“Kushabhau I will cast my vote tomorrow along with you and then both of us
will go on the pleasure trip, OK, Jai Hind”.
That day CA Herambha Shastri (name imaginary) met me not with
‘Income Tax Ready Reckoner’ (Bhagwad Gita or Bible of majority of professionals)
but books on ‘astrology’. I thought Herambha in his fifties unable to cope with
too much ‘technicalities’ in the profession, I mean e-return, e-tds, e-payment,
etc., might be thinking of a diversion. Anyway, we greeted each other.
“How are you Herambha ?” asked I, looking at the ‘books’ in
his armpit.
“Very fine !” replied Herambha.
Before I posed the next question, Herambha began to smile.
” What happened my dear friend ?” asked I.
” I suspect you are going to ask about these books” said
Herambha.
“That’s true” said I.
“Believe me there is very close connection between income-tax
practice and astrology” — Herambha.
“Something amazing, tell me how ?” I exclaimed.
“How ! My dear friend, at times, our clients pose questions
which could be answered only with the help of astrology. I can cite innumerable
questions of that kind. I hope you have time, listen.
“When will I get my refund order ?” most favourite question
of the salaried class.
“Whether search or survey can be conducted on me ?” question
by a person having done everything to dodge taxes.
“Whether my case will be selected for scrutiny ?” question by
a person complying provisions of tax laws partially or wholly, but camouflaging
irregularities.
“Whether in coming budget the threshold limit will be
increased ?” question by a person always showing his income below threshold
limit.
“What if I show bogus income in my wife’s name to take
advantage of the threshold limit for female assessee. Will it be checked or
detected ?” a question by a romantic assessee.
“Will it be detected if I purchase any property out of
Maharashtra ?” question by an assessee having national network.
“What questions the Assessing Officer will raise in
connection with my scrutiny ?” first timer of scrutiny assessment.
“Whether the Assessing Officer will accept our submission ?”
assessee facing scrutiny.
“How much expenditure the Assessing Officer will disallow ?”
“What irregularities the AO will detect in my case ?”
“How much the AO will demand ?”
“Can we win in the appeal ?”
“When will the order be passed ?”
“When will I get PAN number or TAN number ?”
“Can there be amendment as to so and so Section ?”
You see, there are many more questions apart from the ones I
just listed. You may also be facing them in your practice, all hypothetical or
requiring ‘detection’ by the Income-tax Department, and mostly dependent on the
vagaries and exercise of discretionary powers of the AO, at times rubbish, which
our clients pose to us, we have no favorable answers within legal framework at
all; still we somehow answer or avoid them, not up to the mark. Finally the
clients having heard those unsavory answers from you, they open their general
knowledge, obviously about the working of the Income-tax Department :
“So and so person got his refund order within one month;”
“so and so person never caught by the Income-tax Department,
who is a non-filer or stop-filer;”
“so and so person showing his income in his wife’s name but
no enquiry for last twenty years;”
“so and so paper or TV channel says that threshold limit will
be increased;”
“so and so person shows bogus expenses not detected during
the course of scrutiny;”
so on and so forth . . . . . . You are floored flat.
My dear friend, eventually your client wants you to ‘predict’
whether a particular situation will arise in his case or not. So I called those
questions as ‘Star’ questions, since their answers, I mean predictions depend
upon the ‘stars’ of the client himself. Such prediction is possible only with
the help of astrology. I observed most of the clients believe in their destiny.
So my dear friend, I embarked upon studying ‘astrology’. Mind you, for that
matter I am going to ask my clients to furnish horoscopes along with tax
details,” Herambha concluded his long and erudite explanation.
At the spur of the moment, I saluted my dear friend CA Herambha Shastri for
his ingenuity.
1. General :
(a) Central
Excise Officers (CEOs) who are empowered by the Central Government, can issue
summons in terms of S. 14(1) of the Central Excise Act, 1994 (CEA). The said
Section has been made applicable for Service Tax. A text of S. 14 of CEA is
reproduced hereafter for reference :
S. 14 — Power to summon persons to give evidence and
produce documents in inquiries under this Act.
(1) Any Central Excise Officer duly empowered by the
Central Government in this behalf, shall have power to summon any person
whose attendance he considers necessary either to give evidence or to
produce a document or any other thing in any inquiry which such officer is
making for any of the purposes of this Act. A summons to produce documents
or other things may be for the production of certain specified documents or
things or for the production of all documents or things of a certain
description in the possession or under the control of the person summoned.
(2) All persons so summoned shall be bound to attend,
either in person or by an authorised agent, as such officer may direct; and
all persons so summoned shall be bound to state the truth upon any subject
respecting which they are examined or make statements and to produce such
documents and other things as may be required :
Provided that the exemptions u/s.132 and u/s.133 of the
Code of Civil Procedure, 1908 (5 of 1908) shall be applicable to
requisitions for attendance under this Section.
(3) Every such inquiry as aforesaid shall be deemed to be
a ‘judicial proceeding’ within the meaning of S. 193 and S. 228 of the
Indian Penal Code, 1860 (45 of 1860).
(b) CEOs of the rank of Superintendent and above are
empowered to issue summons [Notification 9/99 — CE (NT) dated 10-2-1999.] These
powers of ‘summons’ are different than the powers of Courts to issue summons
under the Code of Civil Procedure/Criminal Procedure Code. The power of
‘summons’ to investigating officer only means ‘demand presence of’ or ‘call upon
a person to appear’. The investigation officer cannot administer oath to the
person being interrogated.
© CEOs issuing summons have powers to call for attendance,
documents/records and record statements. They have absolutely no powers to
demand any tax.
(d) As per S. 174 of the Indian Penal Code, non-attendance in
obedience of an order from public servant, is an offence punishable with
imprisonment up to 6 months and fine up to Rs.1,000. Hence, whenever a summons
is issued to any person, proper attendance should be ensured to avoid penal
consequences.
2. Summons/Inquiry proceedings — Few general judicial pronouncements :
(a) Summons and show-cause notices issued during inquiry are
not challengeable when assessee has responded to summons and show-cause notice [L.M.L.
Limited v. AC, (1997) 90 ELT 43 (All.)]
(b) Duties of the interrogating officer and of the party
summoned — The party should make himself available as directed for interrogation
and should answer the questions put to him — But he cannot be asked not to take
recourse to the plea of failure of memory and to give answers which must be
direct and not evasive — He cannot be directed to compulsorily rake up his
memory and give replies only in negatives or affirmatives — The officer
interrogating him should record faithfully in whatever manner or way the party
responds to the questions and can well make his own observations pertaining to
the demeanor of the party — [Ajit Jain v. Directorate of Revenue
Intelligence, New Delhi, (1998) 102 ELT 521 (SC)]
© Inquiry and investigation — Summons not vitiated by
non-mention of nature of investigation therein (since that may alert the persons
concerned to manipulate their records or abscond), nor does non-striking of the
words ‘and/or’ in the summons show lack of application of mind on the part of
the issuing officer, since preliminary inquiry is usually both for purposes of
submission of specified documents and recording of statement of the person
summoned — Authority not required to come to a finding regarding nexus of the
said documents or involvement of any particular person just at the commencement
of inquiry — [TTV Dinakaran v. Enforcement Officer, Enforcement Directorate,
(1995) 80 ELT 745 (Mad.)]
(d) In the absence of any material indicating arbitrary or
capricious exercise of power by authority, it is not within power of Judicial
review to comment on summons issued on the presumption that summons have been
issued for some ulterior purpose —[Annapurna Impex Pvt. Ltd. V. UOI,
(2006) 198 ELT 25 (P& H)]
(e) Writ jurisdiction — Alternative remedy of appeal is not
applicable to the summons issued u/s.14 of the Central Excise Act, 1944 as they
do not fall in the category of ‘order’ or ‘decision’ — S. 35 of the Central
Excise Act and Article 226 of the Constitution of India — [Hindustan Safety
Glass Works Ltd. V. AC, (1985) 21 ELT 38 (All.)]
3. Summons for documents :
(a) Summons for producing documents should specify which
documents are required. Authority issuing summons should apply their mind with
regard to necessity to obtain and examine documents mentioned in the order. —
[In Barium Chemicals v. AJ Rana — AIR 1972 SC 591, summons was set aside,
on ground of vagueness.]
(b) A person is bound to produce all useful and relevant
documents asked. [In UOI v. Telco, (1997) 96 ELT 209 (SC), it has been
held that the Assistant Commissioner is entitled to call for and examine
whatever documents he considers relevant. [e.g., records of sale prices
at the regional sales offices while determining factory gate prices].
4. Recording of statements during summons proceedings :
a) Statements can be recorded during enquiry in pursuance of summons. It should be recorded be-fore Gazetted Officer. [Superintendent is the lowest rank of Gazetted Officer in Excise Department. Inspector is not a Gazetted Officer]. Such statements can be used against a person during any legal proceedings.
b) Statements should be in writing and signed by the maker as it safeguards interests of the maker as well as the Department, and eliminates the possibsity of making a complaint subsequently that the statement was not correctly recorded by the authorities. [CO Sampath Kumar v. Enforcement Officer, 96 ELT 511 (SC)]
c) CEO cannot compel a person to give incriminating statement without reasonable, fair and just procedure. Statement should be voluntary and not under threat.
In C. Sampath Kumar v. Enforcement Officer, (1998) ELT 511 (SC), it was held that administration of caution to the person summoned that not making – a truthful statement would be an offence cannot by any stretch of imagination be construed as use c pressure to extract the statement. Such a caution has-statutory backing and is in fact in the interest of the person making the statement.
In K. L. Pavunny v. ACCE, (1997) 90 ELT241 (SC) (SC 3-Member Bench), where the accused was informed that law requires him to tell the truth and if he does not tell the truth, he may be prosecuted u/s.193 of IPC for giving false evidence, it was held that the threat comes from the statute and not from the officer.
d) S. 14(2) of CEA specifically provides that all persons summoned shall be bound to state the truth upon any subject respecting which they are examined and to produce such documents and other things as may be required.
e) U/s.164(2) of the Criminal Procedure Code, a caution has to be given to the person making a statement that he is not bound to make the confession and that, if he does so, it may be used as evidence against him. However, S. 164 applies to judicial confession before a Magistrate and is not applicable’ to statements before Central Excise Officer as it is not a ‘confession’. [In ACCE v. Duncan Agro Industries Ltd., (2000) 120 ELT 280 (SC), it was held that S. 164 of the Criminal Procedure Code is not applicable to statement recorded by CEO.]
f) A person whose statement is recorded during the enquiry has no right to have a copy of his statement on the spot. As per the department instructions also, these need not be given on the spot.
In the case under FERA viz. K. T. Advani v. State, (1987) 30 ELT 390 (Del.), it was held that the person has no right to get copies of his statement at the stage of investigation. However, he can keep a note statement that he makes.
However, he is entitled to get a copy of statement at the time of issue of show-cause notice, or otherwise in cases where the statement is proposed to be used against such person.
If the statements are used and orders are passed, without giving notice to the concerned parties, the same vitiates the proceedings, and cannot be used against the person concerned. [Charan Metal Corporation v. CCE, (1998) 98 ELT 588 (All.)]
In a Customs case, authorities had relied upon the statement made by the appellant at the time of ‘.earch and seizure in order to reject his case, but his request for copy of the statement and inspection of records was not granted. It was held that Customs authorities were not justified to rely upon certain alleged discrepancies in that statement to reject the appellant’s contention. [Ambal Lal v. UOI, (1983) 13 ELT 1321 (sq]
g) In Poolpandi v. Superintendent, C Ex, 60 ELT 24 (sq (SC 3-Member Bench) it has been held that person being interrogated is not an accused, nor can he plead that there is a possibility of his being made an accused in future. Hence, he has no right to ask for lawyer’s presence during the enquiry / questionitg.
However, the interrogating officer may permit presence of authorised person.
h) As per S. 14(3) of CEA, proceedings after the summons are ‘judicial proceedings’ within the meaning of S. 193 and S. 228 of the Indian Penal Code. As per S. 193 of IPC, giving false evidence is punishable with imprisonment up to seven years 1ind fine. U / s.228 of IPC, intentional insult or causing interruption to any public servant while such servant is at any stage of judicial proceedings shall be punishable with imprisonment up to six months or with fine up to Rs.l,000or both.
i) Even if duty liability is admitted by officers while making a statement, it does not mean a company cannot challenge duty liability. There cannot be estoppel in matters of taxation. [Dodsal P. Ltd. v. CCE, (2006) 193 ELT 518 (CESTAT) – Mumbai]
5. Confessions made in statements, retractions and related matters:
a) When a confession made in a statement is retracted, the burden is on the person making the statement to prove that confession was made under threat and only if the said person is able to prove that it was not voluntary, then the onus shifts on the Revenue to prove that it was voluntary. [ACC v. Govindasamy Ragupathy, (1998) 98 ELT 50 (Mad.)]
b) Burden is on the person making the statement to prove that the statement was obtained by threat, duress, or promise like any other person. [BFlagwan Singh v. State of Punjab, AIR 1952 SC 214.]
c) Any retracted confessional statement is inadmissible in evidence u/ s.24 of the Indian Evidence Act. The relevant text of Section is reproduced hereafter for ready reference:
“24 Confession caused by inducement, threat or promise, when irrelevant in criminal proceeding. A confession made by an accused person is irrelevant in a criminal proceeding, if the making of the confession appears to the Court to have been caused by any inducement, threat or promise, having reference to the charge against the accused person, proceeding from a person in authority and sufficient, in the opinion of the Court, to give the accused person grounds, which would appear to him reasonable for supposing that by making it he would gain any advantage or avoid any evil of a temporal nature in reference to the proceeding against him.”
d) The Supreme Court has laid down certain general rules about the nature of corroboration needed before accomplice evidence may be accepted. In this regard, reference can be made to Rameshwar v. State of Rajasthan, 1952 SCR 377.
e) It is well-settled law that confessional statement, when retracted at the first available opportunity, leads to the conclusion that it was not true and voluntary. [Shantilal Soni v. CC&CE, (1995) 78 ELT 151 (Delhi – Tribunal)]
f) When a confessional statement was retracted within seven days and the same was the sole basis of the Department’s case, the statement could not be called as having voluntary nature. [Bhagwandas Harjpal v. CC, (1995) 78 ELT 80 (Cal. Trib.)].
g) The fact that retraction was addressed to the same officer who recorded the statement, is no ground to reject the retraction. [Prempreet Textile Industries Ltd. v. CCE, (2001) 47 RLT 746 (T)]
h) The confessional statement retracted the next day cannot be the positive evidence in favour of the Department. [Rahat Hussain v. CC, Prev, (2001) 46 RLT 466 (T)]
i) Retracted confessional statement is not to be relied upon without independent and full corroboration. [State of Maharashtra v. Sayed Mohamed Mashim At Musavi, (1991) 51 ELT 41 (Born.)]
j) Confession is not important if retracted immediately. Retraction affects voluntary nature and truthfulness of confession and is to be considered while deciding a case. [Kali Charan Basant Lal v. CCE, (1989) 41 ELT 162 (Del. – Trib.)]
k) Written statement retraction communicated after five days was held as not very late. [Premier Soaps Detergents v. CCE, (1989) 40 ELT 197 (Del. – Trib.)]
l) When the statements (which are subsequently retracted) are inconsistent with the documentary evidence, the documentary evidence is to be preferred. [Philip Fernandez v. CC, (2002) 146 ELT 180 (Mum. – Trib.)]
m) In Sevantilat Karsondas Modi v. State of Maharashtra, (1999) 109 ELT 41 (SC), the confession consisted of a plea as the result of an assault on him by the Customs Officers, which had been denied by the officers; but because of the circumstances under which the confession was taken, it was held that the confession was hit by S. 24 of the Evidence Act and it was unsafe to treat the confession as voluntary and trustworthy.
6. Precautions required while making a statement:
Statements made before the CEO, in pursuance of summons proceedings, can be used as evidence in subsequent proceedings. Such statements could be valid even if retracted subsequently.
Hence, proper precautions should be taken by person making a statement, as to factual accuracy of information provided and correct legal position on questions asked, which have direct bearing on tax and related liabilities. It would be advisable to seek advice from consultants prior to making such statements by tactfully seeking sufficient time after ascertaining major issues involved in the matter on which specific statement is being sought.
7. Board instructions on issue of summons:
Based on practical experience, it is found that sumomons proceedings are often used as a means by the CEOs to cause undue harassment to the assessees. In this regard, the Ministry of Finance has issued important instructions (F No. 137/39 /2007-CX-4 dated 26-2-2007). Relevant text of the instructions is reproduced hereafter for ready reference:
1. It has come to the notice of the Board that on many occasions, merely for obtaining information or documents pertaining to Service Tax cases/matters, officers of field formations or intelligence agencies resort to issuance of sum-mons (U/s.14 of the Central Excise Act, as is made applicable in Service Tax cases u/s.83 of the Finance Act, 1994) to either Service Tax payers or to persons who are not registered with the Department. From the nature of information/ documents called for, it is clear that many times such information/ documents can easily be obtained by making a telephonic request or writing a simple letter to the person concerned. Instead, summons are issued in a routine manner, under the signature of super intendent or the senior intelligence officers (SIOs). The harsh and legal language of the summons not only causes unnecessary mental stress and embarrassment and instills fear ift the minds of the receiver, but may also become a source of harassment or even unethical practices. The Board has taken a serious note of this practice.
2. The undersigned is, therefore, directed to communicate the following directions of the Board for compliance, :
a) For calling for information/documents, normally the mode of communication should be either in the form of a telephone call or by way of sending a simple letter;
b) Issuance of summons should be resorted to, only when the above-mentioned modes of communications are found to be ineffective or are likely to jeopardise Revenue interest or when it is essential to ensure personal presence of the person concerned to tender evidence or record statement in connection with a Service Tax evasion case;
c) In cases mentioned under (b) above, the summons should be issued after obtaining prior written permission from an officer not below the rank of Deputy Commissioner with reasons for issuance of summons to be recorded in writing;
d) In case, for unavoidable operational reasons it is not possible to obtain such prior written permission, oral! telephonic permission from such officer must be obtained and the same should be reduced to writing and intimated to the officer according such permission at the earliest opportunity;
e) In all cases, where summons are issued, the officer who summons must submit a report on proceeding that took place during the presence of the taxpayer/person summoned, and the officer authorising issuance of summons must satisfy himself that no harassment has been caused during the visit of the person summoned to the office.
The above are self-explanatory.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Notification No. 23/2009-Service Tax, dated 7-7-2009.
By this Notification the Works Contract (Composition Scheme
for Payment of Service Tax) Rules, 2007 have been amended by laying down
procedure for computing the gross amount under the Composition Scheme. The
amendment would not apply where the execution has commenced or any payment
been made on or before 7-7-2009.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Change in rate and conditions for composition scheme of
restaurants, eating house, refreshment room, boarding establishment, factory
canteen, clubs, hotels and caterers : Notification No.
VAT-1509/CR-81-D/Taxation-1, dated 29-6-2009.
By this Notification the Commissioner has amended
Notification No.VAT-1505/CR-105/Taxation-1, dated 1-6-2005 whereby rate of
composition tax has been reduced from 8% to 5% w.e.f. 1-7-2009 and has made
some changes in conditions laid down in the said Notification No. 1505.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Notification No. 22/2009-Service Tax, dated 7-7-2009.
By this Notification clause (e) of Rule (2) of the Taxation
of Services (provided from outside India and received in India) Rules, 2006
has been substituted and extended to services provided at the installations,
structures and vessels in the entire Continental Shelf of India and Exclusive
Economic Zone of India.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Adding entries to Medical Device Notification :
Notification No. VAT-1509/CR-81-C/Taxation-1, dated 29-6-2009.
By this Notification the Commissioner has amended
Notification No. VAT-1505/CR-233/Taxation-1, dated 23-11-2005 by adding
certain entries to medical device list w.e.f. 1-7-2009.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Entry for solar energy devices deleted : Notification No.
VAT-1509/CR-81-B(2)/Taxation-1, dated 29-6-2009.
By this Notification the Commissioner has deleted list of
solar energy devices from Entry C-82 w.e.f. 1-7-2009.
67 Inquiries mount after PwC ‘failed to notice’ mistakes
PricewaterhouseCoopers is facing an inquiry by accounting
regulators into its failure to notice that JP Morgan was paying up to £ 16
billion of clients’ money into the wrong bank accounts.
Last week the Financial Services Authority fined the
investment bank £ 33.3 million — the largest penalty that the City regulator has
imposed — for breaches of client money rules under which customers’ funds became
mixed with the bank’s own cash over a seven-year period.
PwC, JP Morgan’s auditor, is now likely to be drawn into
another inquiry by the two professional bodies that oversee accountants, the
Financial Reporting Council and the Institute of Chartered Accountants in
England and Wales.
In addition to serving as principal auditor, PwC was retained
by JP Morgan to produce an annual client asset returns report — a yearly
certification to prove that customers’ funds were being effectively ring-fenced
and therefore protected in the event of the bank’s collapse. But PwC signed off
the client report even though JP Morgan was in breach of the rules.
It is understood that the FSA plans to pass on the details of
its own investigation to both the FRC and ICAEW, which will then determine
whether any further action is necessary.
The money at risk in this case consisted of funds held by
customers of JP Morgan’s futures and options business — a sum that varied from
£1.3 billion
to £15.7 billion between 2002 and July 2009, when the breach
came to light. PwC did not comment.
(Source : The Times, UK, 7-6-2010)
66 HC ruling on bounced cheques rattles traders
The Bombay High Court judgment that the drawer of a bounced
cheque cannot be prosecuted if the instrument was issued only as a security has
thrown traders into a tizzy.
Suppliers who were used to granting credit for series of
transactions against a single cheque are now unsure of how good this security
is. Debtors on their part while issuing the cheque are making it in the covering
letter that the cheque is being issued as a security and not to meet any debt
obligation.
In the past, lenders have used this Act to initiate criminal
prosecution against borrowers who have found it difficult to pay their
instalments. Now debtors are taking shelter under the judgment on cheques issued
as security.
The Bombay High Court held that the debtor cannot be
prosecuted under the Negotiable Instruments Act if cheques, issued only as
collateral security for loan, bounces. According to news reports, the judgment
was issued by Justice P. R. Borkar on a petition filed by Ahmednagar-based
Ramkrishna Urban Co-operative Credit Society against a debtor.
(Source : The Economic Times, dated 13-3-2010)
65 CAs, CSs told to report all suspicious fund transfers
The Government has asked chartered accountants, cost
accountants and company secretaries to directly report to the Home Ministry
cases of suspicious fund movements in and out of companies, as it looks to crack
down on money laundering and terror funding.
The Home Ministry, through the Ministry of Corporate Affairs,
has asked the Institute of Chartered Accountants of India (ICAI), Institute of
Company Secretaries of India (ICSI) and the Institute of Cost and Works
Accountants of India (ICWAI) to ensure that their members report any instances
of diversion of funds directly without any procedural formalities.
Incidences should be reported directly to a designated e-mail
as also be conveyed through fax to the Home Ministry. Such cases will be handled
by a senior Home Ministry official, whose telephone number has also been shared.
The move is aimed at sensitising professionals of their
responsibilities u/s.51A of the Unlawful Activities (Prevention) Act, which aims
at preventing routing of terror funds through domestic firms.
Suspicious activities include cases where a dubious
individual or entity approaching them for investing into financial instruments
or immovable property or arrange for incorporating a company as a director,
shareholder or partner.
(Source : The Economic Times, dated 24-4-2010)
The Delhi High Court has quashed the Institute of Chartered
Accountants of India (ICAI) decision against auditor P. Ramakrishna in the
Global Trust Bank (GTB) case. The decision comes as a relief for Mr. P.
Ramakrishna, who is a partner in Lovelock & Lewes, a network affiliate of
Price-Waterhouse. ICAI held Ramakrishna guilty of professional misconduct in the
Global Trust Bank probe.
Sources said ICAI proceeded under old disciplinary norms in
the case. The minutes of the case hearing by ICAI was not ready before the Delhi
High Court. Seth Dua & Associates represented P. Ramakrishna in this case. The
Delhi High Court said ICAI’s decision on P. Ramakrishna is not legally tenable.
It wants the case to be handled by Director (Discipline), ICAI.
The High Court wants ICAI to now proceed under amended S. 21
of the CA Act. ICAI had allegedly proceeded under the unamended CA Act. The
Court has asked ICAI to pay costs of Rs.10,000 to Ramakrishna within four weeks.
When contacted Amarjit Chopra, President, ICAI said they will
appeal against today’s decision in the High Court.
(Source : www.moneycontrol.com, dated 20-4-2010)
(Note : Does it tell a tale of the state of affairs in ICAI —
of lack of due diligence and application of mind by our elected representatives
in Central Council ?)
63 CAs turn preferred financial whizkids
While MBAs are being hired for select functions, CAs are
being looked upon as decision-makers. Chartered Accountants, the nuts and bolts
professionals in the world of finance, are scoring brownie points over suave MBA
finance graduates as India Inc gets increasingly risk-averse in a post-slowdown
environment.
Companies are focussing more on risk-compliance than pursuing
ambitious targets as they recover from an 18-month economic downturn, paving the
way for recruitment of more CAs, perceived to have core competence in financial
matters.
Thus, CAs are currently being accepted as business leaders
who could take up roles beyond auditing and financial management. While MBAs are
being hired for purely sales, marketing or international trade functions, CAs
are increasingly being looked upon as decision-makers.
Due to complexities of accountings and prospective taxation
regime like GST and IFRS (International Financial Reporting Standards),
companies need CAs as MBAs don’t study these subjects. CAs are now assuming
advisory roles as well. If CAs have to take a decision about an M&A deal, their
skills are useful during the due diligence process. The CA curriculum too has
seen some specialisation over the past decade with the development of the
financial services sector. However, CAs need to acquire skills in management
planning and strategic thinking.
(Source : The Economic Times, dated 12-4-2010)
62 On road to GST, states okay single truck permit
Transport Ministers agree to national permit of
Rs.15,000/annum per truck. Inter-State transport of goods is set to become
hassle-free and cheaper with the state governments agreeing to give up their
powers to issue separate transport permits.
Transporters would now have to pay an annual fee of Rs.15,000
per truck for moving across the country, according to the new rule agreed to by
the states’ transport ministers. The new national permit regime will strengthen
the efforts to obtain a national market for goods and services through the
proposed goods and services tax or GST that seeks to create a seamless pan-India
market.
(Source : The Economic Times, dated 17-4-2010)
61 CBDT wants jail term for tax evaders
Tax evasion could land you behind bars if the country’s
direct taxes authority has its way. The CBDT wants to prosecute tax evaders
under the tough anti-terror financing law, even as it looks to adopt a more
friendly approach towards honest taxpayers. It has proposed to the Department of
Revenue to bring offences such as concealment of income, not filing income-tax
returns, failure to deposit tax deducted at source and giving false evidence
under the ambit of the Prevention of Money Laundering Act or PMLA. If these
offences become scheduled offences under the anti-money laundering law, they
will invite rigorous imprisonment of three to seven years and a fine of up to
Rs.5 lakh. The trial will be faster in the case of offences under PMLA as these
are tried in special courts and the accused has to prove that he is not guilty.
“The Board has written to the Department of Revenue to include these as
predicate offence under the PMLA,” a Finance Ministry official said.
(Source : The Economic Times, dated 5-4-2010)
60 Trip to tax havens in govt crosshairs
The Income-tax Department is keeping a tight vigil on
Indians, notably the ones suspected of owning bank accounts, visiting tax
paradises, such as Switzerland, Cayman Islands, Mauritius and the Bahamas, as it
amplifies efforts to trace tax evasion and slush funds tucked away abroad.
India is part of a long lineup of countries, including the
US, pursuing tax transparency across the globe. The Government is in talks with
20 tax havens including the Bahamas, Monaco, Panama, Seychelles, St. Kitts &
Nevis and the Maldives for new treaties that promise to exchange information
more openly.
The Government also recently posted two senior Indian Revenue
Service officers as first secretaries at its missions in Singapore and
Mauritius, which are hotbeds of investments into India.
Agents and officials of foreign banks that offer services and
facilitated the opening of bank accounts are also on the Government’s radar.
The Tax Department also plans to create divisions and post
officers at the Indian missions in the US, the UK, the Netherlands, Japan,
Cyprus, Germany, France and the UAE for raising the vigil on evaders and greater
exchange of information.
(Source : The Economic Times, dated 28-4-2010)
(Note : Those who hold black money abroad of such large
magnitude, are smarter than our Revenue officials. They also have friends in
high places who are hand in glove with such persons and accord them full
protection from any action ! ! !)
58 State of Marathi Manoos when Maharashtra turns fifty
Before 1960, a bulk of commercial activity was in the hands
of non-Maharashtrians : Gujaratis, Marwaris, Khojas, Bohras, Sindhis, Parsis and
Punjabis. That is true today as well.
With the exception of the Kirloskars, no Marathi-owned
company figures prominently in the country’s corporate world. The Marathas, who
dominate politics and therefore hold the bureaucracy in a tight grip, have done
pretty well for themselves. Political clout has enabled them to operate in areas
where the resources of the state can be manipulated for personal gain: real
estate, agricultural cooperatives and educational institutions.
In national politics, too, there is no Maharashtrian with an
all-India appeal. That requires a reputation for intellectual rigour, personal
integrity and a steadfast commitment to a set of ideas and principles. The last
politician with such a reputation was Y. B. Chavan. Much the same conspicuous
absence can be found in areas of scientific and artistic endeavour. How many
Marathi-speakers have emerged as national, let alone international, icons? In
some fields notably classical music and cricket you can cite three or four
names. Add to that a couple of scientists and writers. In the upper echelons of
the armed forces and civil services, in think tanks and prestigious
universities, in the national media and in the entertainment business too,
Maharashtrians are few and far between.
Unable or unwilling to accept why things have come to this
pass above all, an aversion to risk and adventure most Maharashtrians prefer to
rail against the world. Those who exploit Marathi grievances for short-term
political gains are content to promote vada-pao, force shop-owners to put up
signs in Marathi and compel taxi drivers from outside the state to speak the
language. Such swagger in an urban, increasingly cosmopolitan India invites
ridicule.
(Source:Extracts from an article by
Shri Dilip Padgaonkar in The Times of India, dated 30-4-2010)
59 201 Technical and Management Institutes are illegal
Many private institutions have been imparting technical and
management courses without the mandatory approval from the All India Council for
Technical Education, HRD Minister Kapil Sibal informed Lok Sabha. There are in
all 201 such institutions across the country.
The big names include Indian School of Business, Hyderabad;
ICFAI Business School, Delhi, Gurgaon and Chandigarh; Ansal Institute of
Technology, Gurgaon; Indian Institute of Planning and Management, Delhi; K. R.
Mangalam Global Institute of Management, New Delhi; J. K. Business School,
Gurgaon; M. B. Birla Institute of Management Bharatiya Vidya Bhavan, Bangalore;
and Sikkim Manipal University, Bangalore.
Maharashtra tops the list with 74 such institutions followed
by 24 in Delhi, 22 in Karnataka, 19 in Tamil Nadu and 13 each in UP and Bengal.
Besides, the UGC has identified 21 fake universities running in violation of
provisions of the UGC Act, he said. The 21 fake universities include eight in UP
and seven in Delhi, Sibal said.
(Source : The Times of India, dated 29-4-2010)
(Note : What penal action has the Govt. taken ? What about
documented rampant corruption in AICTE ?)
57 Changes in Indian Visa Regulations for expats
India has changed the rules concerning work visas for
foreigners to remove the ceiling on the number of foreigners a company can hire
as well as the minimum stipulated salary.
Though the new rules are designed to favour skilled workers
and have an ‘Indians first’ bias, they should please expats who are willing to
work here but were hindered by the cap on the number of foreigners who could
have been hired, as well as the minimum salary requirement. Indian companies had
to limit their foreign recruitments to 1% of their total workforce and pay them
annual salaries of $ 25,000.
The rules are sure to be welcomed by the non-governmental
organisations (NGOs) in India who have been allowed to hire, just like a private
concern, ‘skilled’ foreigners.
In the old regime, NGOs were not allowed to hire foreigners
forcing those who were still willing to work for such organisations to come to
India on tourist visa to work as volunteers for a limited period.
(Source : The Times of India, dated 8-7-2010)
56 Won’t dump US Treasuries : China
China ruled out the ‘nuclear’ option of dumping its vast
holdings of US Treasury securities but called on Washington to be a responsible
guardian of the dollar.
In the third in a series of statements explaining its work to
the Chinese public, the State Administration of Foreign Exchange (SAFE) sought
to allay concerns in the outside world that arise whenever Beijing shifts its
holdings of US government debt.
In a series of questions and answers posted on its website,
www.safe.gov.cn, SAFE asked rhetorically whether China would use its $ 2.45
trillion stockpile of reserves, the world’s largest, as a ‘nuclear weapon’. SAFE
said such concerns were completely unwarranted.
(Source : The Times of India, dated 8-7-2010)
55 Hard-up Italy to sell treasures
Italy is preparing to sell thousands of national treasures,
including islands in the Venice lagoon and on the Emerald coast of Sardinia, to
pay back spiralling debts.
The islands and other landmark properties on a provisional
‘for sale’ list are worth more than £ 2.5 billion. They include palaces and
castles, former convents, lighthouses and aqueducts, as well as leases on
beaches, rivers, lakes and Alpine summits.
(Source : The Times of India, dated 5-7-2010)
54 Why can’t Indian politicians retire if work gets tiring ?
The Union Minister for Food, Civil Supplies and Agriculture,
Sharad Pawar, who also doubled as President of the Board of Control for Cricket
in India (BCCI) and has now become President of the International Cricket
Council (ICC), has reportedly pleaded with Prime Minister Manmohan Singh that
his ministerial burdens be reduced so that he can devote more of his time to his
cricketing responsibilities. The Prime Minister should request Mr. Pawar to
choose between Government and cricket. Mr. Pawar will not be any less popular in
his home state of Maharashtra, or any less respected as an elder statesman or
any less influential in Indian politics if he ceased to be a Union Minister.
Indeed, his popularity may shoot up if he prefers to give up his ministerial
perks and devotes the rest of his life to promoting cricket in India and around
the world. He could make cricket an Olympian sport ! He could get a bigger
audience for Indian Premier League matches compared to World Cup soccer. There
are so many new frontiers to be crossed and Mr. Pawar could become a global
mentor for cricket. Why should he seek to keep his Cabinet berth if he does not
have the time and energy for it ? Mr. Pawar says he needs more hands in his
ministry. There are already too many ministers in India and most junior
ministers complain that they have no work. Indeed, even senior ministers
complain these days of not having much work ! Mr. Pawar has been widely
criticised for keeping one foot in cricket and one eye on Maharashtra even as he
had his other foot in the Union Government and the other eye on the top job in
Delhi. No one can grudge a politician such political ambition. But when a
minister says he wants less work in Government to be able to devote more time to
cricket, then one must ask whether it is not time to force a choice on him. With
just nine members in the Parliament, and some of them willing to return to the
parent Congress party, Mr. Pawar demands too much generosity from the Prime
Minister, who, in fact, has been among his limited circle of well-wishers in the
Congress party. Rather than push the Prime Minister into being even more
generous, Mr. Pawar should think of retiring from Government, asking someone
younger, perhaps his daughter, to take his place. When Mr. Pawar took charge of
agriculture in 2004, the Prime Minister asked him to repeat in the rest of India
the developmental miracle he had wrought in his home constituency of Baramati.
Regretfully, he has failed on that score and Indian agriculture has suffered due
to neglect. The so-called Second Green Revolution is yet to take off, and food
price inflation has hurt. Perhaps a change of hands at the Food and Agriculture
Ministry can help.
(Source : Business Standard, dated 7-7-2010)
53 Quota seats go abegging at IITs
Nearly 700 seats reserved for scheduled castes (SCs),
scheduled tribes (STs) and other backward classes (OBCs) are lying vacant at the
Indian Institutes of Technology (IITs) this year after the first allotment of
seats.
The IITs had set aside 2,570 seats for OBCs, but only 2,023
were filled, according to T. S. Natarajan, Chairman of the Joint Entrance
Examination (JEE) at IIT Madras — the institute which conducted the JEE this
year. Of the 2,570 seats under the OBC category, 78 (around 3%) are reserved for
students with physical disabilities. Of the remaining 2,492 seats, only 2,023
have been filled.
(Source : Business Standard, dated 5-7-2010)
[Will meritocracy ever flourish in our country ? There are no
statistics available as to how many quota candidates fail or drop out of IITs ?
All at the cost of deserving students belonging to so-called upper castes ?]
52 Media companies oppose service tax on copyright services
PVR Pictures, Balaji Telefilms, Yash Raj Films and UTV Motion
Pictures have moved the Delhi High Court against the Government’s recent
decision to levy service tax on copyright services.
The Finance Ministry introduced the tax for the first time on
July 1, 2010. PVR Pictures, in its petition, alleged that copyrights are treated
as goods and the transfer of copyrights are treated as sale of goods, which
falls within the domain of taxation by States under Article 246, and not the
Union.
The company said treating copyright as goods as well as a
service is ultra vires (beyond the powers of) the Constitution of India and
contravenes Articles 14, 19(1)(g), 265 and 300A of the Constitution.
(Source : Business Standard, dated 8-7-2010)
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Circulars
Grant of administrative relief to unregistered dealers :
Trade Circular No. 20T of 2009, dated 23-6-2009.
The powers delegated to all the Additional Commissioners of
Sales Tax in Maharashtra State with respect to granting administrative relief
to unregistered dealers as per Trade Circular No. 14T of 2009 have been
modified by this Circular.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Circulars
Form ‘I’ under Central Sales Tax Act.
Trade Circular No. 19T of 2009, dtd. 20-6-2009.
By this Circular the Commissioner has instructed to allow
declarations in Form ‘I’ issued by Sales Tax authorities of other States. This
will be applicable for a period of one year and the issue will be re-examined
thereafter. Form ‘I’ issued by the Commissioner, SEZ and form issued by Sales
Tax Department was valid only up to 9-9-2004 under Circular No. 8T of 2005,
dated 9-3-2005.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Notification No. 20/2009-Service Tax, dated 7-7-2009 :
w.r.t. sub-clause (n) of clause (105) of S. 65.
By this Notification the services provided to any person by
a tour operator having a contract carriage permit for inter-state or
intrastate transportation of passengers, excluding tourism, conducted tours,
charter or hire service, have been made exempt from levy of service tax.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Notification No. 21/2009-Service Tax, dated 7-7-2009 :
Amendments in Notification No. 1/2002-Service Tax, dated 1-3-2002.
By this Notification, the levy of service tax has been
extended to services provided at the installations, structures and vessels in
the entire Continental Shelf of India and Exclusive Economic Zone of India.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Notification No. 19/2009-Service Tax, dated 7-7-2009 :
w.r.t. sub-clause (zzb) and (zzp) of clause (105) of S. 65.
By this Notification services in relation to transaction of
purchase and sale of foreign currency between scheduled banks have been made
exempt. This exemption is applicable only for banks included in Second
Schedule of the Reserve Bank of India Act, 1934.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Notification No. 18/2009-Service Tax, dated 7-7-2009 :
w.r.t. sub-clause (zzb) and (zzp) of clause (105) of S. 65.
By this Notification the taxable service provided to an
exporter for transport of the goods by road and service provided by a
commission agent located outside India for procuring orders (Exemption is
limited to 1% of the FOB value) has been exempted from service tax subject to
conditions.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Notification No. 17/2009-Service Tax, dated 7-7-2009 :
Services received by exporters exempted.
This Notification supersedes Notification No. 41/2007-
Service Tax, dated the 6th October, 2007. By this Notification taxable
services specified in column (3) of the Table appended to this Notification
received by an exporter of goods and used for export of goods pertaining to
sub-clauses of clause (105) of S. 65 have been exempted from service tax.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Exemption to some clubs and associations : Notification No.
16/2009-Service Tax, dated 7-7-2009 w.r.t. sub-clause (zzze) of clause (105)
of S. 65.
By this Notification, services provided by certain clubs
and associations have been made exempt from the levy of service tax.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Amendment to the Notification No. VAT-1505/CR-237, dated
17-10-2005 regarding mobile phones : Notification No.
VAT-1509/CR-81-E/Taxation-1, dated 29-6-2009.
By this Notification the Commissioner has deleted some
items from Entry C-56 so that some products like mobile phones, digital
camera, etc. are liable at 12.50% w.e.f. 1-7-2009.
Service Tax Update
Notifications :
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Nil rate of tax for solar energy devices : Notification No.
VAT-1509/CR-81-B(1)/Taxation-1, dated 29-6-2009.
By this Notification the Commissioner has notified list of
solar energy devices under Entry A-56 at NIL rate of tax w.e.f. 1-7-2009.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Concessional rate for sales by a registered dealer to the
Department of Space, Government of India of goods used in Satellite Launch
System : Notification No. VAT-1509/CR-81-A/Taxation-1, dated 29-6-2009.
By this Notification the Commissioner has added an entry to
the Schedule appended to Notification No.VAT-1505/C.R.-192/Taxation-1, dated
19-4-2007 so that specified sales by a registered dealer to the Department of
Space, Government of India of goods used in Satellite Launch System can be
made at concessional rate of tax.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Maharashtra Tax Laws (Levy, Amendment and Validation) Act,
2009 : Notification No. VAT-1509/CR-78/Taxation-1, dated 29-6-2009.
By this Notification the Commissioner has notified
Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 2009 to be
effective from 1st July 2009 wherever applicable.By Maharashtra Tax Laws (Levy, Amendment and Validation)
Act, 2009 following Acts are amended :
(a) Amendment to Schedule I appended to the Bombay Stamp
Act, 1958;(b) Amendment to Third Schedule appended to the Bombay
Motor Vehicles Tax Act, 1958;(c) Amendment to Schedule I of the Maharashtra State Tax
on Professions, Trades, Callings And Employments Act, 1975;(d) Amendment to S. 20, S. 29, S. 30, S. 63, S. 85 and
amendment to Schedules A, B, C & D of the Maharashtra Value Added Tax Act,
2002.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Maharashtra Value Added Tax (2nd Amendment) Rules, 2009 :
Notification No. VAT-1509/CR-16/Taxaion, dated 18-6-2009.
By this Notification the Commissioner has amended Rules 17,
17A, 20, 40, 41, 45, & 53.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Circulars
Waiver of penalty in certain cases for non-filing of
returns within prescribed time : Trade Circular No. 21T of 2009, dtd.
4-7-2009.
In pursuance of the announcement made by the Finance
Minister in his Budget Speech, the Commissioner has announced a scheme for
waiver of penalty as follows :
(a) if the dealers, who have not filed one or more
returns for the periods starting on or after 1st April 2005 and ending on
30th June 2009, file all such pending returns electronically along with the
due payment with interest on or before 31st July 2009, then penalty for late
filing of returns will not be levied.(b) In a case where for the period starting on or after
1st April 2005 and ending on 30th June 2009, if penalty is imposed and
recovered, then the dealer will not be entitled for the refund of such
amount.(c) In a case where the penalty has been already levied
for non-filing of returns but the same has not been paid by the dealer, it
will not be recovered if the dealer files all his pending returns
electronically with payment of tax and interest up to 31st July 2009.(d) Where the penalty is already levied and the dealer
has filed an appeal against the said penalty order, then the said penalty or
part of the penalty outstanding shall not be recovered if the dealer files
all his returns up to 31st July 2009 along with payment of tax with
interest. The dealer must however, withdraw the appeal against such order
unconditionally before availing this benefit. The part payment made in
appeal shall not be refunded.
Part B : Indirect taxes
Updates in VAT and Service Tax :
MVAT UPDATE
Mvat Notifications
Amendment to Rule 58 by inserting Sub-Rule (1A) :
Notification No. VAT-1507/CR-53/Taxation-1, dated 1-6-2009.
By this Notification, the Commissioner has amen-ded Rule 58
by inserting Sub-Rule (1A) after Sub-Rule (1) with retrospective effect from
20-6-2006.New Sub-Rule (1A) lays down the method of valuation of
goods transferred in the execution of construction contracts wherein, along
with the immovable property, the land or interest in the land, underlying the
immovable property is to be conveyed. The value of the said goods at the time
of the transfer shall be calculated after making deductions under Sub-Rule (1)
and for the cost of the land from the total agreement value. The cost of the
land shall be determined in accordance with the guidelines appended to the
Annual Statement of Rates prepared under the provisions of the Bombay Stamp
(Determination of True Market Value of Property) Rules, 1995, as applicable on
the 1st January of the year in which the agreement to sell the property is
registered. Deduction towards cost of land under this sub-rule shall not
exceed 70% of the agreement value.
1. Introduction :
1.1 Partnership firms and sole proprietary concerns have been
and continue to be one of the most popular business entities in India. However,
concerns of growth, limited liability, expansion, private equity funding,
foreign investment, etc., have forced even the staunchest supporters of these
business entities to consider a company structure. Some of the biggest benefits
of a corporate structure are limited liability, perpetual existence, a body
corporate, etc.
1.2 In the light of this background, let us examine how a
firm can be converted into a company. Further, what are the issues in this
connection.
1.3 Two routes :
There are two alternative options by which a firm can be
converted into a company :
(a) Conversion under Part IX of the Companies Act, 1956
(b) Sale of the business by the firm to a company and
claiming of exemption u/s.47(xiii) of the Income-tax Act.
2. Conversion under Part IX of Companies Act :
2.1 Steps to be
taken :
(a) One of the options available for converting a firm
into a company, is a conversion under Part IX of the Companies Act. Here the
firm is converted into a limited company by registering it under Part IX of
the Companies Act, 1956.
(b) Some of the important steps to be taken in this
respect, include :
(i) Increasing the number of partners from 3 to a
minimum of 7, since the company to be registered should have a minimum of
7 members
(ii) Restructuring the Partnership Deed keeping in mind
the requirements of Part IX of the Companies Act, 1956
(iii) Applying to the ROC for Registration under Part
IX along with the applicable fees
(iv) Obtaining the Certificate of Registration as a
company from the ROC
(v) Issuing the equity shares to the erstwhile partners
(vi) Intimating the Registrar of Firms
(c) Upon conversion of the firm into a limited company,
the partners of the firm at the time of conversion will become the
shareholders of the company.
2.2 No Stamp Duty :
A conversion under Part IX of the Companies Act, 1956 would
not attract any incidence of Stamp Duty, as under Part IX, there is a
statutory vesting of the assets of the firm in the company and there is no
transfer. This view is supported by the decisions in the case of Vali
Pattabhirama Rao, 60 Comp. Cases 568 (AP) and Rama Sundari Ray v. Syamendra Lal
Ray, ILR (1947) 2 Cal. 1, which state that under Part IX, there is a statutory
vesting of the assets of the firm in the company and there is no transfer.
Therefore, there is no conveyance and hence, no incidence of Stamp Duty.
2.3 No Capital Gains Tax :
A conversion under Part IX of the Companies Act, 1956 would
not attract any incidence of Capital Gains Tax, as under Part IX, there is a
statutory vesting of the assets of the firm in the company and there is no
transfer or distribution of capital asset as envisaged by S. 45(1) or S. 45(4).
This view is supported by the decision in the case of Texspin Engineering and
Manufacturing Works, 263 ITR 345 (Bom.), which states that under Part IX, there
is a statutory vesting of the assets of the firm in the company and there is no
transfer. As per
S. 45(4), transfer should be on account of dissolution of the firm which is not
the case here. Hence, the liability to pay Capital Gains Tax would not arise.
2.4 Sale of shares :
Once the firm is converted into a limited company under Part
IX, the shareholders of that company can sell their shares at any time to anyone
without holding it for a certain minimum period. The condition u/s.47A of the
Income-tax Act, 1961 that 50% of the shareholders must continue to hold the
shares for a minimum period of five years does not apply to a conversion under
Part IX of the Companies Act. This condition only applies to the second mode of
conversion, i.e., a sale of the business by the firm to a company and the
partners claiming exemption u/s.47(xiii) of the Income-tax Act. This proposition
has also been laid down by the AAR’s recent decision in the case of Unicore
Finance Luxembourg, 189 Taxman 250(AAR).
2.5 Tenancies :
An interesting issue arises in the case of conversion of a
partnership firm which is a tenant into a company under Part IX of the Companies
Act, 1956. Various High Court decisions mentioned earlier have held that under
Part IX, there is a statutory vesting of the assets of the firm in the company
and there is no transfer. Thus, a conversion under Part IX of the Companies Act,
1956 would not be treated as a transfer, since there is a statutory vesting of
the assets of the firm in the company. Hence, there is a good case for holding
that there would not be a transfer of tenancy or an illegal subletting of
tenancy.
3. Sale of
business :
3.1
Steps :
The firm would make a slump sale of its business as a going
concern or a lock, stock and barrel sale to the company. In return for the same,
the company would issue shares to the partners of the firm.
3.2 Capital Gains Tax :
The sale by the firm would be taxable u/s.50B of the
Income-tax Act as capital gains. However, S. 47(xiii) of the Income-tax Act
exempts the gains arising from the transfer of any capital asset by a firm to a
company as a result of the succession of the firm by a company in the business
carried on by the firm. The conditions to be satisfied for availing this
exemption are as follows :
(a) all the partners of the firm must become shareholders
in the company in the same proportion as their capital;
(b) the aggregate shareholding of the partners in the
company must be at least 50% and it must so continue for 5 years from the
date of the succession;
(c) the partners do not receive any other consideration
for the sale from the company; and
(d) all the assets and liabilities of the firm become the
assets and liabilities of the company.
If these conditions are satisfied, then the gain on sale would be exempt. However, if any of these conditions are violated, then S. 47A of the Income-tax Act provides that gains which were exempt would become taxable in the company’s hands in the year of violation of conditions.
3.2 Stamp Duty :
Stamp duty as on a conveyance would be levied on the slump sale on the net value of the undertaking after reducing the liabilities from the total assets. For this purpose, it would be necessary to bifurcate the assets into movable and immovable assets. The immovable assets would require an instrument of transfer and would have to be registered. However, the movable assets may be transferred by delivery and possession without an instrument of transfer. If no instrument is executed for the movable assets, then there would not be any Stamp Duty incidence on their transfer.
3.3 Other :
One of the more contentious issues would be under the Rent Act in regard to the change in the tenancies of the firm. On a slump sale, the landlord can contend that there is an illegal subletting or assignment and hence, he can terminate the tenancy. It may be noted that the earlier Bombay Rent Act contained a provision that if the tenancies were transferred along with the sale of the business as a going concern and the goodwill and stock-in-trade of the business, then the transfer was not illegal. However, such a provision is not found under the current Maharashtra Rent Control Act, 1999.
51 Landmark US financial reform Bill passed
The Bill would impose tighter regulations on financial firms
and reduce their profits. It would boost consumer protections, force banks to
reduce risky trading and investing activities and set up a new government
process for liquidating troubled financial firms.
Republicans say the Bill would hurt the economy by burdening
businesses with a thicket of new regulations. They also point out that it ducks
the question of how to handle troubled mortgage finance giants Fannie Mae and
Freddie Mac, which Democrats plan to tackle next year.
Fannie Mae and Freddie Mac, which own or guarantee half of
all US mortgages, have received a total of about $ 145 billion in taxpayer
bailouts since being seized by the government in September 2008. Their regulator
has said he does not know how much more taxpayer support they will need.
(Source : Business Standard, dated 2-7-2010)
It is truly the greatest show on Earth, an ode to a diverse
and democratic ethos, where 700 million + of humanity vote, providing their
small part in directing their ancient civilisation into the future. It is no
less impressive when done in a neighbourhood which includes de-stabilising and
violent Pakistan, China, and Burma.Its challenges are immense, more so probably than anywhere
else, particularly in development and fending off terrorism — but considering
these challenges and its neighbours, it is even more astounding that the most
diverse nation on Earth, with hundreds of languages, all religions and
cultures, is not only surviving, but thriving.The nation where Hinduism, Buddhism, Jainism, and Sikhism
were born, which is the second largest Muslim nation on Earth; where
Christianity has existed for 2000 years; where the oldest Jewish synagogues
and Jewish communities have resided since the Romans burnt their 2nd temple;
where the Dalai Lama and the Tibetan government in exile reside; where the
Zorastrians from Persia have thrived since being thrown out of their ancient
homeland; where Armenians and Syrians and many others have to come live; where
the Paris-based OECD said was the largest economy on Earth 1500 of the last
2000 years, including the 2nd largest only 200 years ago; where 3 Muslim
Presidents have been elected, where a Sikh is Prime Minister and the head of
the ruling party a Catholic Italian woman, where the President is also a
woman, succeeding a Muslim President who as a rocket scientist was a hero in
the nation; where a booming economy is lifting 40 million out of poverty each
year and is expected to have the majority of its population in the middle
class, already equal to the entire US population, by 2025; where its optimism
and vibrancy is manifested in its movies, arts, economic growth, and voting,
despite all the incredible challenges and hardships; where all the great
powers are vying for influence, as it itself finds its place in the world.
Where all of this is happening, is India, and as greater than 1/10 of humanity
gets ready to vote, it is an inspiration to all the World.(Source : Media Reports & Internet, 20-5-2009)
Mobility of international capital coupled with access to
tax havens has facilitated amnesty and global tax holiday for owners of such
capital — said an anonymous tax administrator. To strike at the very root of
what OECD also refers to as harmful tax practices pursued by jurisdictions
encouraging tax evasion, it has done pioneering work in the past few decades
by prescribing standards and directives, including ranking countries on their
transparency and willingness to share information on tax defaulters.The debate has surfaced with last year’ reports that the
German government had in its possession data on possible tax evaders and has
offered to provide such information to countries. What has added fuel is the
US IRS move to overcome the Swiss banking secrecy code to unearth information
on US tax defaulters.Back home, a public interest litigation petition was filed
in the Supreme Court seeking suitable directions to the government to initiate
action against Indians who have illegally siphoned off monies and deposited
unlawfully in Swiss banks. The Apex Court is yet to admit the PIL.
Swiss banking secrecy code :
The Swiss Banking Laws date to the early ’30s and owe its
origin to prevention of Nazi authorities’ attempts to investigate assets held
in Switzerland and belonging to Jews and ‘enemies of the state’. The secrecy
law firstly does not protect private ban-king information; instead, the
protection is similar to confidentiality protection between an attorney and
his client. The Swiss administration views the right to privacy as a
fundamental principle which ought to be protected by all democratic countries.
While secrecy is protected, in practice all bank accounts are linked to an
identified individual, and a Swiss prosecutor or judge may issue a ‘lifting
order’ to grant law enforcement agencies access to information relevant to a
criminal investigation. Swiss law distinguishes between tax evasion and tax
fraud. International legal assistance and cooperation is also granted for
criminal investigations. Banking secrecy may be lifted by a court order in
cases of ‘tax fraud’ or ‘severe cases of tax evasion’. However, information is
not provided if the request constitutes a mere fishing expedition. On part of
Switzerland, no legitimate stance is spared to ensure that the confidence of
the world’s richest is maintained by the Swiss banking community which
constitutes the backbone of the economy.Exchange of information clause under the tax treaty, The
OECD and UN model tax conventions underscore the importance of exchange of
information by earmarking a separate article titled ‘Exchange of information’
which provides a statutory recognition to a process by which treaty partners
share information.The information exchange should be relevant to carrying out
provisions of the convention or domestic laws of the contracting state
concerning only taxes. Generally, the convention cannot impose an obligation
to collect and exchange information where administrative measures are at
variance with the law of the other contracting state.In other words, a contracting state is not bound to
exchange information, which is not obtainable in the normal course of the
administration of its state. For instance, if India views an act as an
exchange control violation or money laundering and such acts are not
considered as an economic offence in the treaty partner jurisdiction,
information clause for such acts cannot be invoked under international
convention.Tax treaties also provide for secrecy of information and
govern its usage. This is based on the premise that reciprocal assistance
between tax administrations is feasible only if each administration is assured
that the other will treat the information with adequate confidentiality. The
UN model specifically stipulates that exchange of information should be ‘in
particular, for the prevention of fraud or evasion of such taxes’. However,
this phrase is not present in the OECD Model convention. Indian tax treaties
are predominantly based on the UN model convention.Is the US IRS action against Swiss banks unilateral ?
Under the US-Swiss 2003 amended treaty, provisions that allow exchange of
information protected by the banking secrecy code is permitted only where the
information is necessary for the prevention of ‘tax fraud or a similar
offence’.What drove the IRS was the administration’s multi-pronged
investigation in 2008 to uncover the identity of US citizens with secret
accounts in a Swiss bank. This was followed by a Federal Grand order in
January 2009 declaring the Swiss banks’ head of wealth management a fugitive
after he failed to surrender on charges of conspiracy for helping Americans to
conceal assets and avoid paying taxes. On threat of prosecution, the Swiss
bank agreed to pay a hefty fine and reveal details of Swiss accounts.The US IRS simultaneously filed another suit against the
bank to reveal its 52,000 American client details by issuing ‘John Doe’
summons. A ‘John Doe’ summons is issued when the prosecution does not know who
might be violating the law. Some US legal experts believe that if it were
intended that the summons power could be used to obtain information, which
could not be obtained under the tax treaty, it is expected that such intent be
discussed in treaty negotiations. Hence, legal experts are circumspect about
IRS overzealous actions. And more recently, the Obama administration endorsed
a legislation to crackdown on offshore tax havens, raising the stakes in a
showdown between the US and bank secrecy nations.What could be India’s challenge ? The Swiss-India tax
treaty provides for a standard exchange of information clause by virtue of
which both countries can exchange information under their respective laws in
the normal course of administration, as is necessary for carrying out the
provisions of treaty in relation to taxes.Attempts made by India in the past suggest that the Swiss
authorities have refused to provide information (with regard to bank deposits)
on the ground that such information was not at the disposal of the tax
competent authorities and that the requisition was only for the enforcement of
Indian domestic law such as FEMA or anti-money laundering.Recognising the policy on ‘banking secrecy law’ and
‘information exchange’ has come under criticism. In March 2009, Switzerland
agreed to renegotiate more effective tax cooperation with the United States to
bolster tax information exchange.
SC pending cases breaches
50,000
In a blow to the concept of ‘speedy justice’, the number of
cases pending at the Supreme Court has gone over 50,000 for the first time in
a decade. With computerisation of the Supreme Court registry and the use of
infotech in docket management, the backlog in the 1990s was brought down from
over one lakh to a manageable 20,000. But as of March 31, 2009, the figure
stood at 50,163, the highest in the last decade.It shows that the rush of litigants, despite an increased
disposal rate, has proved more than a match for the judges, who often hear 80
cases or more every day. The pendency has steadily crept upwards since 2006,
when it stood at 34,649. In January 2007, it rose to 39,780, a jump of over
5,000 cases. Justice K. G. Balakrishnan took over as the Chief Justice of
India at this time and tried to put in place mechanisms to arrest the
spiralling wait-list. Despite quicker clearance, the Court failed to cut down
on the pending list as the number of new cases swelled every year. By January
2008, the figure had registered a steep jump of over 7,000 cases to reach
46,926. Exactly a year later, it was 49,819, and the 50,000 figure was
breached in March. A similar trend was seen at the level of High Courts and
Trial Courts. The 21 High Courts, working with a strength of 635 judges as
against a sanctioned strength of 886, reported a pendency of 38.7 lakh cases
on January 1, 2009. It’s a rise of 1.3 lakh cases from January 2008, when the
figure was 37.4 lakh. The Trial Courts, with a judge strength of 13,556 as
against a sanctioned strength of 16,685, were burdened with an additional ten
lakh cases by January 2009, when the pendency figure was 2.64 crore. It stood
at 2.54 crore cases exactly a year ago.CJI Balakrishnan has been repeatedly requesting state
governments to induct additional 10,000 judges to tackle the huge backlog, but
most of them have brushed aside the only practical solution by citing a funds
crunch.(Source : The Times of India, 28-5-2009)
62 Current account — Judging a book by its cover ?
The branch staff of a PSU bank in Bandra, Mumbai immediately
smelt a rat when a slumdweller deposited a cheque for Rs.75 lakh and sought to
withdraw a couple of lakhs soon thereafter. Although his account was a decade
old and properly introduced, the account holder’s shabby outfit and his
downmarket residential address was enough to set off alarm bells and the matter
was brought to the notice of the regional office. The general manager then
contacted the bank which had issued the cheque, which in turn contacted the
issuer. It turned out that the cheque was indeed in order and the slumdweller
was given Rs.75 lakh by the builder as compensation for his hutment under a slum
redevelopment scheme at Bandra.
(Source : The Economic Times, 18-6-2008)
60 Auditing to be made mandatory for exchanges and depositories
The SEBI has decided to make it mandatory for stock exchanges
and depositories to annually audit their transactions as per new code of conduct
evolved by the market regulator.
Cases of exaggerated IPOs were also being looked into from
all possible ethical practices and those corporates that were found guilty for
insider trading would be dealt with strict provisions of the law and other
statutes, he added.
Providing a major relief to big corporates, market regulator
SEBI on Friday proposed to increase the time period for submitting consolidated
financial statements to stock exchanges at the end of each quarter.
“It is proposed that the existing timeline (within one month
at the end of each quarter) may be extended to two months for those companies
which opt to submit to stock exchanges the consolidated financial results in
addition to standalone financial results,” SEBI said while seeking comments on
the same by July 26.
(Source : Internet newswires, 14-7-2008)
61 Understanding the importance of IFRS
Here are ten questions/points to attain ‘IFRS Nirvana’.
Determine the scope of companies in your group that would need to converge and
assess what you want to achieve by when and agree with the Audit Committee
Chair ? Do you want to merge your internal reporting and IFRS to avoid multiple
financial closures ? Considering that this would be a change in primary GAAP, do
you want to go down the path of systems based conversion ? Identify a team and
treat this as a project — evaluate how you would bridge any gap in technical
skill sets by training or seeking assistance. Evaluate the relevant principles
and arrive at the choices after involving the Audit Committee, CEO and CFO.
Identify issues that may require large amount of data gathering and evaluate the
best method to get it —set separate teams at work on this. Prepare a sample
financials for your company and educate the relevant stakeholders on
differences. Do an impact assessment not just on financials but also people,
processes and IT.
(Source : Internet newswires, 14-7-2008)
59 EU to propose ‘Robin Hood taxes’ to help poor
The European Commission will look at changing taxes to boost
energy efficiency and help poor people hit by high fuel costs but tread
carefully on possibly taxing energy firms’ ‘windfall profits’, spokesman
Johannes Laitenberger said. He added that the European Union executive would
urge member states at a summit next week to take ‘targeted measures to help
citizens that are hardest hit by the current situation’ without giving
inappropriate incentives.
(Source : The Economic Times, 12-6-2008)
57 We need a Power Surge
The key to heading off devastating climate change — and to
sidestepping out-of-sight oil prices along the way — is to improve technology.
We need good alternatives to fossil fuels, not the ersatz variety in which we
convert corn to ethanol and then face soaring food prices. We need to harness
vast amounts of solar power and start storing the carbon dioxide emitted by
coal-fired power plants underground. We need green buildings that demand less
energy for heating and cooling, and automobiles that get vastly more miles per
gallon.
55 China to build 1 million houses for quake survivors in three months
The Chinese government had mobilised state-owned enterprises
to build 1 m prefabricated houses in three months for survivors of last month’s
devastating earthquake.
The government faces the daunting task of providing food and
shelter to at least 5 million people made homeless by the disaster, as well as
rebuilding flattened towns and cities, some of which will have to be relocated.
(Source : Business Standard, 7-6-2008)
56 It is good to be a dog
New York hotelier and real estate magnate Leona Helmsley left
millions to her beloved dog, Trouble, but she has left billions for the care of
dogs in general. Helmsley left instructions that an entire charitable trust
valued at $ 5 billion to $ 8 billion and amounting to virtually all of her
estate be used for the care and welfare of dogs.
(Source : The Economic Times, 3-7-2008)
Subject : Real Estate Development Agreements — Tax
Issues including Deduction u/s.80IB.
Speaker : T. N. Manoharan, Past President,
ICAI
Venue : IMC Hall, Churchgate, Mumbai
Date : 27th June 2008
1. The learned speaker Mr. Manoharan said that the topic of
discussion was not only very wide, involving high financial stakes, but also
involved various legal aspects right from titles to property, tax implications
from the point of owners vis-à-vis developers, year of assessability,
judicial views and decisions, consideration of direct tax laws as well as allied
laws and multiple other issues. He therefore divided the subject by giving
consideration to :
(i) Legal aspects as to title.
(ii) Incidence of levies under direct tax laws as well as
allied laws like Stamp Duty, Registration, Service Tax.
(iii) Impact of Accounting Standards, method of accounting
for developer.
(iv) Tax implications affecting land owners, year of
assessability, exemptions.
(v) Quantification of consideration receivable.
(vi) Determination of year of transfer.
(vii) Case laws & judgments applicable to the owners.
(viii) Deductions u/s.801B (10), conditions precedent for
developers and issues thereunder.
(ix) Inflow of foreign investments in real estate.
(x) Emerging professional opportunities from booming real
estate development trade.
2. After setting out the broad spectrum and coverage, the
speaker moved to deal with each aspect.
3. Legal aspects concerning title to property :
The study of professional begins with examination of
documents conferring perfect and marketable title to property; by examining
antecedents, family tree of owner, whether title is derived by intestate or
testamentary succession, family settlement or by gifts and whether the documents
are properly worded and registered; study of pending litigations affecting clear
title, etc. As per the Supreme Court’s decision in Chandersen case, the son
deriving title from his deceased father in intestate succession succeeds it as
his individual property and not HUF property. The exception is where directions
are given in the Will bestowing the title in HUF capacity. Another exception is
family settlement. Such transaction is not liable to Gift Tax. In any case gift
in kind is outside the purview of S. 56(v) from donee’s point of view.
4. Incidence of levies :
Under the Stamp Act in Maharashtra, the Stamp Duty rate is
concessional i.e., 2% only on market value. In other States also, the
concessional rate is applicable. In Karnataka, the duty on gifts of immovable
properties to relatives is only Rs.1,000, irrespective of value of property. In
Tamil Nadu it is 1% with a ceiling limit of Rs.10,000. Therefore, through gifts
of immovable properties to close relatives, by incurring very reasonable cost,
it is possible to make income-tax and wealth-tax planning within the family.
The speaker then observed that the stigma attached to
transaction in immovable properties, viz. existence of unaccounted money
is gradually vanishing. This is due to increasing foreign investment in real
estate market, exemptions to capital gains through investments in notified bonds
and purchase of new properties, thirdly, reasonable levy of Stamp Duty and
fourthly impact of S. 50C introducing presumptive receipt of consideration.
5. Tax implications as applicable to developer :
The earnings that a developer would be making are governed by
Accounting Standard 7. In 2002, AS-7
got revised. The chance of completed contract method was given a go-by. Now, if
the developer is acting as contractor in charge of development, he has to
quantify profit on percentage completion method. However, if the developer is
acting as builder taking risk and reward on his account, then AS-7 is not
applicable but AS-9 (Revenue Recognition) will apply. Accounting Standards’
interpretation 29 clarifies that revenue should be recognised by considering
factors of risks and rewards, substantial completion of project and other
relevant factors like method of accounting regularly followed.
In transactions of dealing in land, the land becomes
stock-in-trade for the purchaser, attracting S. 40A(3) if any part of payment is
paid otherwise than cheque. For small value constructions, benefit of S. 44AD is
available to contractor.
6. Tax provisions applicable to owner of land :
Generally speaking proper documentation assumes great
importance since terms and conditions will determine the correct year of
assesability, the year of transfer, the claims of exemption under one or more
Sections, quantification of capital gain, opening of capital gain account, dates
for payment of advance tax. More specific issues in this regard are :
d) Following case law on year of Transfer and year of taxability needs very careful consideration.
i) Chaturbhuj Dwarakadas Kapadia, 262 ITR 491 (Bom.)
ii) Jasbir Singh Sarkaria, 294 ITR 196 (AAR holding that execution of general power 6-attorney results in transfer
iii) Receipt of substantial consideration by the landowner. Mumbai Tribunal in Geetadevi Pasari’s case, 104 ITJ 375 (Mum.) has considered ratio of Chatubhuj Dwarkadas Kapadia. It has distinguished the case before it and held that where the transferee has not observed condition of S. S3A of the Transfer of Property Act, the deeming fiction of sub-clause (v) does not get triggered as substantial consideration remained un-paid.
The learned speaker therefore stressed the need of proper documentation. By making specific provisions in development agreement that effective control and possessory rights over the property will remain with owners at least till transferee makes substantial payment of agreed consideration. The owner should also refrain from giving general power of attorney to the builder.
Alternatively, the owner should ensure receipt of money consideration enough to cover investment in securities prescribed u/ s.54EC and tax liability.
7. Exemption from tax is available to developer on compliance of conditions precedent, listed in S. 80IB(10).
After considering the tax issues applicable to owner, an equally important issue applicable to builder is compliance of S. 80lB(10) entitling him to complete tax exemption. Though, it is not applicable to projects approved after the cut-off date of 31-3-2007, still ongoing project can merit exemption if local authorities have approved the project as residential housing project prior to the cut-off date. However for the projects undertaken for slum clearance and notified by the Central Government, the conditions of area of plot and cut-off date are not applicable. The developer of ongoing eligible projects should strictly adhere to and comply with the conditions of area of plot, area (built-up) of flats and obtaining completion certificate from local authorities within 4 years from the date when the building plan is first approved. So also the commercial area should not exceed 5% of total built-up area or 2000 sq.ft., whichever is less. The promoter / developer need not own the land to avail benefit of deduction. Where the project is of merged nature i.e., housing and commercial, the judicial opinion as per reported judgments is divided. Varying from stricter version of total denial to milder version of pro-ration. The following decisions as well as CBDT clarification need careful attention. The citations are:
a) 113 TTJ (Ahd.) 300 – ownership of land by developer is not precondition
b) Case law on housing cum commercial projects:
105 ITD (Mum.) 657
108 ITJ (Che.) 71
109 ITJ (Mum.) 335
ITA No. 1735 (Cal.) – Bengal Ambuja 108 TTJ (Che.) 71
8. Alternative remedies available to landowners to avoid litigations on year of taxability, practical difficulties in availing funds for investments u/s.54EC, The speaker discussed the following alternative modes. If the landowner converts his property as stock-in-trade, there will be capital gain on the date of conversion, but the year of taxability as per S. 45(2) gets postponed to the year in which he realises the consideration. The excess, of course, will be business income. For capital gains, clause (iv) of S. 2(47) will apply and not clause (v). The Jodhpur Bench in 298 ITR 97(AT) has held that S. 53 applies only when the document is registered. Second mode is that the landowner, after conversion of capital asset into stock-in-trade can enter into partnership or joint venture with builder. By this he can reap the benefit of sharing the surplus with the builder. The capital gain element can be invested in prescribed securities within 6 months from the date of realisation. It is also possible to spread over the realisation in more than one year and benefit of investment can be availed, for each such year.
9. Recent development that needs attention is increased flow of funds by foreign investing institutions in real estate trade. As a by product, such development will provide increased and challenging professional opportunities to members of profession.
The meeting ended with a vote of thanks to the learned speaker.
50 India likely to pitch for deeper tax information exchange
at G-20 meet
New Delhi is expected to present a detailed paper on the
issue at the forthcoming Seoul meeting, urging that domestic laws of countries
must support such agreements for effective information exchange.
In some countries, for instance, domestic laws relating to
privacy protection tend to come in the way of sharing information with other
countries, defeating the very purpose of such pacts.
The proposal for a multilateral information exchange comes
even as India has initiated talks with Switzerland for revising its tax treaty
to include tax information exchange agreements, or TIEA, to get details on
likely tax evaders.
New Delhi also wants the current system of peer review under
the global forum to ensure that such agreements are meaningful and have not been
entered into just to get a tax haven struck off from the list of non-compliant
countries of the Organisation for Economic Cooperation and Development. Nearly
500 such bilateral pacts have been signed so far since last April, after the
G-20 pledged to crackdown on tax havens at the London summit.
Immediately after the G-20 pledge, the OECD came out with a
list of non-compliant countries, based on compliance with international tax
standards. Since last April, as many as 28 jurisdictions have joined the list of
countries that have substantially implemented the international tax standards.
Going by the latest OECD list, there are no jurisdictions that have not
committed to international tax standards where there were four countries — Costa
Rica, Malaysia (Labuan), the Philippines and Uruguay — in that category last
April.
(Source : The Economic Times, dated 7-7-2010)
[Does India have the necessary and adequate infrastructure and
trained personnel in the Finance Ministry/CBDT to process the information
received and the political will to take necessary action against the offenders
who receive political patronage ?]
