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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 ?]
48 SC wants a break from frivolous pleas
The Supreme Court has called for effective laws to stop
frivolous litigants. It asked the Legislature and Law Commission to revisit laws
relating to imposition of cost meant to curb the menace of frivolous litigation.
There are more than 3 crore cases pending in the country. The Apex Court,
however, set aside an innovative order of the Delhi High Court, which directed
the litigant to give an undertaking to pay a huge sum to the other party in
event of rejection of the case. “The lack of appropriate provisions relating to
costs has resulted in a steady increase in malicious, vexatious, false,
frivolous and speculative suits, apart from rendering S. 89 of the Code (Civil
Procedure Code) ineffective. Any attempt to reduce the pendency or encourage
alternative dispute resolution processes or to streamline the civil justice
system will fail in the absence of appropriate provisions relating to costs.
There is therefore an urgent need for the Legislature and the Law Commission of
India to re-visit the provisions relating to costs and compensatory costs
contained in S. 35 and S. 35A of the Code,” said a bench comprising Justice R.
V. Raveendran and Justice R. M. Lodha.
(Source : The Economic Times, dated 8-7-2010)
49 State of our Mumbai University — 130 teaching posts lie
vacant
The faculty of Mumbai University are always complaining that
they are short-staffed. Now, positions sanctioned by the University Grants
Commission (UGC) are lying vacant.
Around 30 teaching positions were sanctioned under the 11th
Five-year Plan. Three years of the plan period have already gone by, but the
varsity has not started the appointment process. Burdened faculty members blame
red tape and also the fact that ever since the university has been headless, no
major decision has been made.
Around 100 additional teaching positions, recommended by the
Joint Director of Higher Education, have been pending with the Government since
2009.
(Source : The Times of India, dated 5-7-2010)
[Note : Can we hope that it will ever regain its premier
position in the academic world ?]
47 US tax crackdown extends to residents with Indian ties
In a crackdown on offshore tax evasion, American authorities
have begun a criminal probe into HSBC individual account holders, who may not
have disclosed their accounts in India. Indian Finance Ministry officials
admitted that authorities in New Delhi “must have passed on the information to
their US counterparts as part of bilateral or multilateral agreements”. It was
reported that the US Justice Department has initiated a criminal investigation
of HSBC Holdings’ clients who may have failed to disclose their accounts in
India or Singapore to the US Internal Revenue Service (IRS). “The information
about the accounts is unlikely to have come from the HSBC Bank and is also very
unlikely that US authorities or its agencies would have gone fishing for the
individual accounts which are outside their country,” he said. In India, the
financial information is gathered by different authorities such as Reserve Bank
of India, various banks, Financial Intelligence Unit and the Income-tax
Department. “It is possible that one of these authorities passed on the
information about the bank accounts of foreigners in India to the US IRS under
an exchange of information programme,” the official said. In the US, it is
obligatory for any citizen to provide details regarding any financial
transaction he or she may have carried out overseas.
(Source : The Economic Times, dated 7-7-2010)
46 Govt. gets ball rolling on FDI in retail
The Union Government has initiated a move to open the
country’s multi-brand retail segment to foreign investment, without revealing
its mind on details such as how much investment will be permitted.
In a 21-page discussion paper, it has sought comments from
stakeholders on a dozen issues, ranging from allowing retail chains with foreign
capital to open stores in select cities to government approval for opening each
store, mandatory hiring of rural population and sourcing from small and medium
enterprises.
(Source : The Economic Times, dated 7-7-2010)
Even a few months ago, businessmen and corporate honchos
shuddered to visit Mint Street whenever they found themselves on the wrong side
of foreign currency regulations. Frosty conversations with hard-nosed officials
of RBI inevitably ended with grim penalties — at times stiff enough to cripple
business for some time. Not any longer.
The same officials are more willing to listen and quick to
forgive the violations as ‘technical’ errors. What’s more interesting is the
drop in the amount of fines. Earlier, these could be anything from Rs.20 lakh to
as high as Rs.3 crore, today the figures have plummeted to Rs.25,000-40,000.
(Source : The Economic Times, dated 6-7-2010)
The Income-tax Department is set to start an online
‘judicial reference system’ in order to streamline thousands of Departmental
cases being fought in various Courts and I-T Tribunals across the country. The
facility, to be used by I-T Department officials initially, will put in place
all the cases, petitions and Special Leave Petitions (SLPs) in an online
server which will be developed by private vendors, a senior I-T official said
today.Taxpayers can also avail the facility to check the orders
and judgments given by the various I-T Tribunals like the Income Tax Appellate
Tribunal (ITAT) and Courts after the successful implementation of the system.“The Tax Department handles volumes of cases with a long
time span at present being heard at various courts in the country. With this
maiden service all the Assessing Officers and Regional Commissioners will be
able to know the exact status of the cases and take references from older
cases,” the official said.However, the status of cases, replies filed by the
Department and other specific information can be accessed by the Department
officials only, the official said.(Source : Media Reports & Internet, 9-6-2009)
The Income-tax Department is probing tax evasion to the
tune of Rs.800 crore by some stockbrokers who are believed to be diverting
profits earned on trading in NSE, BSE and commodity markets, to
‘non-deserving’ clients through manipulation of client-specific codes.Sources said profits earned or losses suffered by
individual market players are being diverted to ‘non-deserving’ clients who
have allowed his trading code to be used by a stockbroker. The Department has
estimated that around Rs.800 crore has been siphoned off this way.“The losses suffered or profit earned by an individual or a
company in a day are being diverted to such an entity who is not monitoring
his trade regularly and has given his proprietary code to a broker for playing
in the market,” sources said.Brokers and other players who receive these benefits are
evading huge taxes and are manipulating their genuine capital earned in a
day’s trade, they said.Sources said the Income-tax Department will now communicate
the probe report to market regulator SEBI to gain access to the suspicious
codes and other details from the stock exchanges for further action.(Source : Media Reports & Internet, 9-6-2009)
54 Citings
Go green, live rich
If I have learned one thing in my nearly twenty years as a
financial advisor, it is this : it’s not what you earn that makes you rich or
poor; it is what you spend. We burn up money every day while squandering the
planet’s non-renewable resources and polluting the environment in ways that lead
to global warning and climate change. We buy a car because we like the way it
looks and handles. We build a house with as many square feet as the bank’s
mortgage officer will allow.
When you change your mindset to a green way of thinking, you
will change your actions, and those actions will put money back in your pocket.
And over time, the money you save will make your rich — while helping to protect
the Earth. Go Green, Just Do One “Green Thing Today.’ It will lead to more. See
how it all adds up. Calculate your savings from breaking the bottled water
habit. The best solution is to carry your own water in a reusable container.
Small changes such as not buying coffee in a disposable cup or water in a
plastic bottle not only are good for your wallet, they actually better the
planet in the same way that ‘little things’ add up to drain your wealth, ‘small
changes’ add up to make a big difference for the Earth.
(Source : The Economic Times, 4-7-2008)
In Part I of the article published in July, 2008 issue of the
Journal, we discussed the facts of the case, the position in law as per the Tax
Treaty and OECD Model Convention and the evidence of 3 International Tax
Experts. In this part, we shall discuss the analysis, observations and
conclusions of the Canadian Tax Court.
4. Analysis and observations by the Court :
(i) The term ‘beneficial owner’ is not unique to the Tax
Treaty; it is found in 85 of Canada’s 86 tax treaties. Only Canada’s treaty with
Australia uses the term ‘beneficially entitled’.
(ii) The evidence of Professor van Weeghel is that the
Netherlands recognises PHB.V. as beneficial owner of Prévost’s dividends.
Professor Raas suggests the same. The Revenue contends that Volvo and Henlys,
the shareholders, are the beneficial owners of the dividends.
(iii) The terms ‘beneficial owner’, ‘beneficially owned’ and
‘beneficial ownership’ are found in the English version of the Canadian
Income-tax Act. As the judge mentioned earlier, these terms are not defined in
the Canadian Income-tax Act.
The Revenue maintains that there is no meaning of the terms
‘beneficial ownership’ and ‘bénéficiaire effectif’ for the purposes of the Act
which can be invoked for the purpose of Article 3(2) of the Tax Treaty. First of
all, according to the respondent, the words used in the Act have multiple and
often irreconciliable meanings. The appellant’s counsel referred to a study by
Professor Catherine Brown who concluded that the term ‘beneficial owner’ has
different meanings under the Act depending on the provision. [Symposium :
Beneficial ownership and the Income-tax Act (2003) 51 Canadian Tax Journal, No.
1, pp. 424-427.] For example, she identified at least four categories of meaning
for the expression ‘beneficial ownership’, ‘beneficial owner’ and ‘beneficially
owned’ when used in a trust context :
(a) the owner is the beneficial owner;
(b) the beneficiary is considered to be the beneficial
owner as a result of tax decisions and the operation of the Act;
(c) the beneficiary is the beneficial owner of trust
property on the basis of private law principles; and
(d) the trust is the owner of trust property, for example,
the Act deems the trust to be the owner of the trust property. Also, the term
‘beneficial owner’ is not used in any provision of the Act concerned with
withholding tax on Canadian sourced dividends, interest or royalties.
(iv) The Revenue’s counsel, citing an article by Mr. Mark D.
Brender, submits that there is no settled definition of ‘beneficial ownership’
even under common law, let alone for the purposes of the Act. [Symposium :
Beneficial ownership and the Income-tax Act, supra, at pp. 315-318].
Indeed, Mr. Brender suggests that words or concepts neutral as between the civil
and common laws be used in place of ‘beneficial owner’ or ‘beneficial
ownership’.
(v) The counsel for the Revenue referred to the VCLT, the Tax
Treaty, Model Conventions as well as the Act to suggest how the terms
‘beneficial owner’ and ‘bénéficiaire effectif’ should be interpreted, bearing in
mind that these terms are not defined in the Tax Treaty, Model Conventions and
the Act and have no legal meaning in Quebec civil law jurisdiction. The
respondent’s submission was that these words should not have a technical or
legal meaning, but an interpretation recognised internationally.
(vi) The terms ‘beneficial owner’ and ‘bénéficiaire effectif’,
together with the Dutch term uiteindelijk gerechtigde, appear in the Tax
Treaty and must be given meaning. The words ‘bénéficiaire effectif’ appear
nowhere in the French version of the Act. This may, it is suggested, limit the
scope of Article 3(2) of the Tax Treaty. The term ‘bénéficiaire effectif’ also
does not appear in the Quebec Civil Code. The Revenue’s counsel submits that the
use of the words ‘bénéficiaire effectif’ in the Tax Treaty rather than
‘propriétaire effectif’, which are used in the Act, suggests that Parliament
intended to use the private law of the provinces to complement the Act and the
words are not to be determined by reference to the common law.
(vii) The Revenue also states that while the Tax Treaty
refers to the ‘beneficial owner of the dividends’, the Act never uses such a
phrase. The Act refers to a taxpayer who has income from property, for example,
a dividend received by a taxpayer, and this income is included in the taxpayer’s
income for the year. The phrase is never used in conjunction with the income
which is derived from the property. The Revenue’s counsel submits that the term
‘beneficial owner’ or a similar expression is never used in the Act in the same
context as it is used in the Tax Treaty and Model Convention.
(viii) The Revenue’s counsel declared that when determining
the meaning of an undefined treaty term, Canadian courts have relied on the
meaning relevant to the specific tax provision in respect of which the treaty
applies. Thus, in A.G. of Canada v. Kubicek Estate, the word ‘gain’,
which was not defined in the Canada U.S. Tax Treaty, was given the meaning found
in Ss.40(1) of the Act. The Hoge Raad could not find the meaning of the word
‘present’ in the domestic laws of the Netherlands and therefore held that the
word appearing in tax treaties between the Netherlands and Brazil and the
Netherlands and Nigeria be interpreted in accordance with Articles 31 and 32 of
the VCLT and not the equivalent provisions of Article 3(2) of the Model
Convention.
(ix) The Revenue’s counsel therefore concluded that the terms
‘beneficial owner’ and similar terms in the Act are based on legalistic trust
meanings originating under the laws of equity and ought not to apply to the Tax
Treaty. The words ‘beneficial owner’ and ‘bénéficiaire effectif’ have no meaning
in the Act.
x) The Revenue’s counsel submitted that the phrase ‘beneficial owner’ does not appear in English dictionaries. The words do appear separately, of course. The word ‘beneficial’ in the Canadian Diciionary of the English Language is defined primarily as ‘producing or promoting a favourable result’ or ‘receiving or having the right to receive proceeds or other advantages’. The word ‘beneficial’, counsel states, connotes both a factual (‘receiving’) and legal (‘right to’) meaning. The Shorter Oxford Dictionary (1973) defines ‘beneficial’ as ‘of or pertaining to the usufruct of property; enjoying the usufruct’, usufruct being a civil law concept. In The New Shorter Oxford Dictionary ‘beneficial’ is defined as ‘Of, pertaining to, or having the use of benefit of property, etc.
xi) The Canadian Dictionary defines ‘owner’ as ‘of or belonging to oneself’, ‘to have or possess as. property’, and ‘to have control over’. The word ‘owner’ it states also connotes both a factual (possess, control) and legal (‘belonging’) meaning. The Shorter Oxford defines ‘own’ as one’s own . . . to have or hold as own’s own”. The word ‘owner’ is ‘one who owns or holds something; one who has a rightful claim or title to a thing’.
xii) In the Jodrey Estate, the Supreme Court approved of the meaning given by Hart J., in MacKeen Nova Scotia, who wrote:
It seems to me that the plain ordinary meaning of the expression ‘beneficial owner’ is the real or true owner of the property. The property may be registered in another name or held in trust for the real owner, but the ‘beneficial owner’ is the one who can ultimately exercise the rights of owner-ship in the property. [Covert v. Nova Scotia (Minister of Finance), [1980] S.c.J. No. 101 (Q.L.), [1980] 2 S.c.R. 774, at p. 784, citing MacKeen Estate v. Nova Scotia, [1977] C.T.C. 230 (NSSC), para. 46].
xiii) The Revenue’s counsel submitted that from a textual reading of the term ‘beneficial owner’, its meaning can be distilled as applying to the person who can exercise the normal incidents of ownership (possession, use, risk, control) and as such ultimately benefits from the income. The ordinary meaning of ‘beneficiaire effectif’ in the French text and uiteindelijk gerechtigde in Dutch share common features with the ordinary meaning of ‘beneficial owner’, but have a significant difference.
xiv) ‘Beneficiaire’ is defined, the counsel submits, consistently as the person who enjoys or takes ad-vantage of a benefit of any kind, including a right or a privilege. Therefore, he submits that ‘beneficiaire’ is clearly not a technical term and does not per se connote a legal right, such as that of ownership.
xv) Therefore, the Revenue’s counsel concluded, the term ‘beneficiaire effectif’ means the person or group that actually and truly enjoys or benefits from an advantage of any kind. Authors have translated the words ‘beneficiaire effectif’ to ‘real beneficiary’, which is a fairly accurate translation as long as the word beneficiary is not understood in a legal sense.
xvi) The Dutch version of the Convention uses the term uiteindelijk gerechtigde for ‘beneficial owner’. This term, translated back to English, means ‘he who is ultimately entitled’. Professor van Weeghel, notes in his text The Improper Use of Tax Treaties that:
It is unclear why this translation (uiteindelijk gerechtigde) was chosen. The term ‘beneficial owner’ (One who does not have title to property but has rights in the property which are the normal incidents of owning the property’, Black’s Law Dictionary, Fifth Edition) has a closer equivalent in Dutch language and this would be ‘economiscn eigenaar’ a term which has a well understood meaning also in Dutch law.
xvii) However, as the Revenue’s counsel contends, the government of the Kingdom of the Netherlands opted in the Tax Treaty to use a term for ‘beneficial owner’, whose English translation of ‘ultimately entitled’ connotes a factual inquiry, meaning ‘final’ or ‘in the end’. Just as in the French text, there is no reference to ownership in the Dutch text. Uiteindelijk gerechtigde is also consistent with the ordinary meaning given to the term by the Royal Dutch case, supra, in which the uiteindelijk gerechtigde of a dividend is one who can ‘freely avail of the distribution’; being the person ultimately entitled to the benefit of the income.
xviii) The Revenue’s counsel submitted that the plain and ordinary meaning of the terms ‘beneficial owner’, ‘beneficiaire effectif’ and uiteindelijk gerechtigde in the three languages of the text of the Tax Treaty does not suggest that an exclusively legal meaning should be given to the terms. The counsel is of the view that the term ‘beneficiaire effectif’ points strongly to a determination of the true relationship and is inconsistent with a narrow legalistic meaning. The respondent insists that the meaning of each term used in all three versions accommodates only a non-legal meaning. It is this commonality between the three versions which must form the basis for defining the term, he suggests.
(xix) The respondent’s view is that a reconciliation of the three language versions of the Tax Treaty results in a meaning that requires a search behind the legal relationships in order to identify the person who, as a matter of fact, can ultimately benefit from the dividends. The respondent seeks support from a non-tax case before the England and Wales Court of Appeal that was called upon to interpret the term ‘beneficial ownership’ within the context of the civil law of Indonesia: Indofood International Ltd. v. JP Morgan Chase Bank N.A. London Branch. [2006] E.W.C.A. Civ. 158, S.T.L. 1195. The judge also noted that the Court of Appeal had regard to substance over form, as required by the law of Indonesia (paras. 18 and 24).
xx) The decision in Indofood conflicts somewhat with the opinion the Dutch government and the Hoge Raad in the Royal Dutch case, supra, that a recipient is not the beneficial owner of income only if it is contractually obligated to pay the largest part of the income to a third party. In Indofood, the Court of Appeal did not base its reasoning on contractual obligation to forward the interest, but rather whether the recipient enjoyed the ‘full privilege’ of the interest or if it was simply an ‘administrator of income’.
xxi) The parties agree that PHB.V. was not an agent, trustee or nominee for Volvo and Henlys. Rather, it is the Revenue’s view that PHB.V. was acting as a mere conduit or funnel in favour of Volvo and Henlys upon receiving dividends from Prevost.
xxii) One has to determine what the words ‘beneficial owner’ and ‘beneficiate effectif’ (and the Dutch equivalent) mean in Article 10(2) of the Tax Treaty. Article 3(2) of the Tax Treaty requires one to look to a domestic solution in interpreting ‘beneficial owner’. The OECD Commentaries on the 1977 Model Convention with respect to Article 10(2) are also relevant.
xxiii) The Commentary for Article 10(2) of the Model Convention explains that one should look behind ‘agents and nominees’ to determine who is the beneficial owner. Also, a ‘conduit’ company is not a beneficial owner. In these three examples, the person ‘the agent, nominee and conduit company’ never has any attribute of ownership of the dividend. The ‘beneficial owner’ is another person.
xxiv) In common law, a trustee, for example, holds property for the benefit of someone else. The trustee is the legal owner, but does not personally enjoy the attributes of ownership, possession, use, risk and control. The trustee is holding the property for someone else and that, ultimately, it is that someone else who has the use, risk and control of the property. Also, in common law, one person may have a life interest in property and another may have a remainder interest in the same property. The owner of the life interest receives income from the property and owns the income; the owner of the remainder interest owns the capital of the property. There is no division of property in common law as there is in civil law. The word ‘beneficial’ distinguishes the real or economic owner of the property from the owner who is merely a legal owner, owning the property for someone else’s benefit, i.e., the beneficial owner.
xxv) In both the common law and the civil law, the persons who ultimately receive the income are the owners of the income property. It may well be, as the respondent’s counsel argues, that when the terms ‘beneficial owner’, ‘beneficially owned’ or ‘beneficial ownership’ are used in the Act, it is either used in conjunction with property, such as shares or some other property, but is never used in conjunction with the income which is derived from the property. i.e., dividends from shares. However, dividends, whether coin or something else, are in and by themselves also property and are owned by someone. S. 12 of the Act includes in computing income of a taxpayer for a taxation year income from property, including amounts of dividends received in the year. The taxpayer required to.include the amount of dividends in income is usually the person who is the owner ‘the beneficial owner’ of the dividends, except, for example, when the Act deems another person to have received the dividend or requires a trust to include the dividend in its income. The words ‘beneficial owner’ in plain ordinary language used in conjunction with dividends is not something alien.
5. Court’s decision:
i) The ‘beneficial owner’ of dividends is the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received. The person who is beneficial owner of the dividend is the person who enjoys and assumes all the attributes of ownership In short, the dividend is for the owner’s own benefit and this person is not accountable to anyone for how he or she deals with the dividend income. When the Supreme Court in Jodrey stated that the ‘beneficial owner’ is one who can ‘ultimately’ exer-cise the rights of ownership in the property, the Court did not mean, in using the word ‘ultimately’, to strip away the corporate veil so that the shareholders of a corporation are the beneficial owners of its assets, including income earned by the corporation [Radwell Securities Ltd. v. Inland Revenue Commissions, (1968) 1 All E.R. 257]. The word ‘ultimately’ refers to the recipient of the dividend who is the true owner of the dividend, a person who could do with the dividend what he or she desires. It is the tru owner of property who is the beneficial owner of Hie property. Where an agency or mandate exists or the property is in the name of a nominee, one looks to find on whose behalf the agent or mandatary is acting or for whom the nominee has lent his or her name. When corporate entities are concerned, one does not pierce the corporate veil unless the corporation is a conduit for another person and has absolutely no discretion as to the use or application of funds put through it as conduit, or has agreed to ad on someone else’s behalf pursuant to that person’s instructions without any right to do other than what that person instructs it, for example, a stockbroker who is the registered owner of the shares it hold’s for clients. This is not the relationship between PHB.V. and its shareholders.
ii) There is no evidence that PHB.V.was a conduit for Volvo and Henlys. It is true that PHB.V. had no physical office or employees in the Netherland or elsewhere. It also mandated to TIM the transaction of its business as well for TIM to pay interim dividends on its behalf to Volvo and Henlys. However there is no evidence that the dividends from Prevost were ab initio destined for Volvo and Henlys with PHB.Y. as a funnel of flowing dividends from Prevost. For Volvo and Henlys to obtain dividends, the directors of PHB.V. had to declare interim dividends and subsequently shareholders had to approve the dividend. There was no predetermined or automatic flow of funds to Volvo and Henlys even though Henlys’ representatives were trying to expedite the process.
iii) PHB.Y. was a statutory entity carrying on business operations and corporate activity in accordance with the Dutch law under which it was constituted. PHB.V. was not party to the Shareholders’ Agreement; neither Henlys nor Volvo could take action against PHB.V. for failure to follow the dividend policy described in the Shareholders’ Agreement. Henlys may have a cause of action against Volvo and Volvo a cause of action against Henlys under the Shareholders’ Agreement if the dividend policy was not carried out. But neither would have a bona fide action in law under the Shareholders’ Agreement against a person not a party to that agreement, that is, PHB.V. Volvo and Henlys, of course, may have action against PHB.V. if PHB.V. did not repay “monies advanced as loans by them, but such action would be taken as creditors of PHB.Y., not shareholders.
iv) Article 24 of PHB.Y.’s Deed of Incorporation does not obligate it to pay any dividend to its shareholders. The directors of PHB.V. are to duly observe what has been agreed to in the Shareholders’ Agreement concerning reserving part of its accrued profits. Article 24, paragraph 2 of the Deed provides that any profits remaining after the reservation of part of the accrued profits shall be at the disposal of the general meeting. The judge could not find any obligation in law requiring PHB.Y. to pay dividends to its shareholders on a basis determined by the Shareholders’ Agreement. When PHB.Y. decides to pay dividends it must pay the dividends in accordance with Dutch law.
v) PHB.V. was the registered owner of Prevost shares. It paid for the shares. It owned the shares for itself. When dividends are received by PHB.V. in respect of shares it owns, the dividends are the property of PHB.Y. Until such time as the management board declares an interim dividend and the dividend is approved by the shareholders, the monies represented by the dividend continue to be property of, and is owned solely by, PHB.V. The dividends are an asset of PHB.V. and are available to its creditors, if any. No person other than PHB.V. has an interest in the dividends received from Prevost. PHB.V. can use the dividends as it wishes and is not accountable to its shareholders except by virtue of the laws of the Netherlands. Volvo and Henlys only obtain a right to dividends that are properly declared and paid by PHB.V. itself, not-withstanding that the payment of the dividend has been mandated to TIM. Any amount paid by PHB.V. to Henlys and Volvo before a dividend was properly declared and paid, as I see it, was a loan from PHB.V. to its shareholders. This, too, is not uncommon. There is a practice in Canada of corporations advancing funds to its shareholders without a declaration of dividend. At the end of the fiscal year, the corporation’s directors determine whether the funds are to remain a loan or be ‘adjusted’ to a dividend, with the proper directors’ resolutions.
vi) Accordingly, the Canadian Tax Court held that Volvo and Henlys were not the beneficial owners of the dividends paid by Prevost. There is no evidence satisfying that PHB.Y. was a conduit for Volvo and Henlys. The appeals were allowed, with costs.
Author’s Note:
In the aforesaid Canadian Tax Court decision, the court has discussed in detail the concept of the ‘beneficial owner’ in the context of interpretation of tax treaties. In arriving at its conclusion, the Court has referred to and considered various foreign Court cases, academic articles and the testimony of experts, on the subject.
In our view, this decision should serve as an important guide in cases of disputes relating to ‘beneficial owner’ issues. Though the ratio of the decision is not binding on the Indian Courts, it should serve as a good guide and have strong persuasive value in related cases.
Ombudsman
Orders
Government of India
Office of the Chief Commissioner of Income Tax
3rd floor, Aayakar Bhavan,
Maharshi Karve Road, Mumbai-400020.
No. CCIT/MUM/Grie./2007-08 Date 29-8-2007
To
The Chief Commissioners of Income Tax —
I to VII, XI to XII, (C)-I & II,
Mumbai.
Sub. : Redressal of grievances — Reg.
Please find enclosed letter dated 28th August 2007 wherein
the Ombudsman, Income-tax Department had issued certain instructions in order to
reduce the grievances in these areas. Kindly ensure such instructions are
adhered to and take suitable remedial action. Progress made in this regard may
please be noted to the Ombudsman, Income-tax Department with a copy endorsed to
Chief Commissioner of Income-tax, Mumbai.
(Mala Ramakrishnan)
Chief Commissioner of Income-tax,
Mumbai.
D.O.F. No. Dir.(Hqrs.)/Ch.(DT)2007/
N. B. Singh
Member
Tel. : 23093621
Date : 18-9-2007
Smt. Mala Ramakrishnan,
Chief Commissioner of Income Tax (CCA),
Mumbai.
Dear Ramakrishnanji,
Income-tax Ombudsman, Mumbai has brought to my notice certain
irritants faced by the taxpayers. These are of recurring nature. A copy of the
relevant portion of the letter of Income-tax Ombudsman is enclosed for your
perusal.
I would request you to take action on the matters pointed out
by Ombudsman, Mumbai so that the number of grievances can be considerably
reduced.
With regards, Yours sincerely,
(N. B. Singh)
20th August, 2007
Ms. Mala Ramakrishnan,
Chief Commissioner of Income Tax,
3rd floor, Aaykar Bhavan,
M. K. Road, Mumbai-400020.
Dear
During my meetings with the tax-paying public at various
forums, the following systemic deficiencies have been brought to my notice. I am
informed that these continue to be irritants for the taxpaying public. It is
suggested that immediate action should be taken to redress the same.
(a) Refunds :
Many instances have come to light where there has been an
inordinate delay between the date of issue of the intimation and the date of
issue of refund. In one instance, the date of intimation is dated 31-7-2006, the
refund however is dated 27-7-2007.
(b) Interest u/s.244A :
(i) Interest is invariably not allowed on the delay between
the date of the assessment order/intimation and the date of issue of refund.
(ii) Sometimes the refunds are delayed on account of prior
administrative sanction sought by the Assessing Officer from the Jt. CIT/Add.
CIT/CIT/Chief CITs. No interest is allowed on such delays.
(c) Scrutiny assessments :
(i) In many cases, a standard questionnaire is sent
whenever a case is picked up for scrutiny. The details sought are either not
applicable or are available on the records of the case itself. Wherever
required, the officers should be urged to draw a specific questionnaire after
perusing the records of the relevant year and earlier assessment years.
(ii) Sufficient time is not given to taxpayers where they
have to seek information from a third party. It has been suggested that the
period of up to two weeks should normally be granted to comply with such
requirements.
(iii) In verification of cash credits, copies of returns of
income of lenders are sometimes called for. This appears to be a recent trend.
Taxpayers have complained that it impossible for them to get copies of returns
of lenders. Requirements of the law should ordinarily be treated as having
been adequately met once a taxpayer provides details of the lender’s PAN, AO,
etc.
(d) Rectification and appeal effects :
It has been brought to my notice and it is my own experience
as well that rectification applications and appeal effects are not being
attended to on time. Considerable delays are being reported to me on a daily
basis.
2. The above analysis may be brought to the notice of all the
assessing officers and their supervisory authorities – namely, Jt. CIT/Adl. CITs/administrative
CITs/Chief Commissioners for necessary action.
3. When supervisory officers take up cases for
review/inspection, they may specifically keep an eye for the defects indicated
above. If they notice lapses, they should specifically comment upon the same.
4. You will appreciate that the instructions issued by you as
well as your colleagues may help in reducing grievances in these areas. I shall
therefore be grateful if a copy of the same is endorsed to me.
Yours
(Hardayal Singh)
Income Tax Ombudsman,
Mumbai.
Copy to :
The Chairman,
C.B.D.T., North Block,
New Delhi-110001.
Government of India
Office of the Ombudsman
Income Tax Department
11th floor, Mittal Tower, ‘B’ Wing,
Nariman Point, Mumbai-21.
Tel. : 22829930
Ref. No. : Ombudsman/352/2007-08
Name & Address of the assessee : Mrs. Xxxx
PA No. :
A.Y. : 1994-95
Date of hearing : 04-02-2008
Date of order : 7th February, 2008
Award under clause 13 of the Income Tax Ombudsman Guidelines, 2006
The complainant’s grievance dated 5-12-2007relates to her failure to obtain credit for advance-tax of Rs.40,000 for the A.Y. 1994-95. In her letter to the Ombudsman, she has pointed out that the cheque in question of Indian Overseas Bank, Nariman Point Branch, Mumbai was cleared on 30-3-1994. Her accountant however did not show this payment while filing her return for the relevant assessment year. It is only in April, 2001 that she discovered that al-though she had made the payment of Rs.40,OOO,she had not claimed the same in her return of income and hence had failed to receive the credit for the same. In her complaint, the assessee has produced all the necessary proof for this payment including a certificate from India Overseas Bank. A copy of the challan for the payment made has also been enclosed.
2. On obtaining the report from the ITO dated 2-1-2008, received in this office on 23-1-2008, this case was fixed for hearing on 4-2-2008. 5hri ….. , Addl. CIT.Rg.20(1) and 5hri ….. , ITO. 20(1)(1), Mumbai were present on behalf of the Department. Mrs……….. the assessee herself was also present for the hearing.
3. The fact of this case falls within a very narrow compass and have .been narrated above. From the Department’s point of view, it has been pointed out by the Assessing Officer in his report dated 2-1-2008 that the assessee’s application for rectification dated 4-7-2002 was initially rejected by the Department on the ground that the claim had been made beyond four years from the passing of the assessment order dated 29-1-1997. The assessee applied for condonation of delay to CIT-20, who rejected her claim vide his letter dated 11-3-2004. The assessee then petitioned the CCIT- XI, Mumbai. Her application did not find favour with him also and her request was rejected on 3-6-2004. The assessee then petitioned the Board on 18-6-2004 which again ruled that there was no mistake apparent from the record. The assessee reapplied to the Board on 13-2-2006 under the Right to Information Act. In reply, the Board asked her to file a revised return and move an application for the condonation of delay in filing her return, u/s.119 of the Act.
4. The assessee complied with this direction. No action was however taken between 7-3-2006 and 11-4-2007 i.e., for more than a year. After waiting for so much time, the C.LT. quoted Board’s instruction No.13/2006, issued in December, 2006, and pointed out to the assessee that no fresh application for claim . of refund was to be entertained six years beyond the end of the assessment year for which the application was made. Under this instruction, according to the CIT, the limitation set in on 31-3-2001.
5. The assessee is aggrieved against the aforesaid direction. According to her, she has complied with Board’s directions and her revised return deserves to be considered as it was filed much before the instruction No. 13/2006 dated 2-12-2006 was issued.
6. I have applied my mind to the facts of this case. First of all, it is not equitable that one year should have been allowed to lapse before giving effect to the Board’s directions for reconsidering the assessee’s revised return. Understandably, filing of a revised return, on the directions of the Board, was never meant to be an idle formality.
The Board’s subsequent instructions cannot be construed to deprive the assessee of her vested right to have her revised return considered for the purpose of obtaining the credit for the advance-tax payment of Rs.40,000.
7. Secondly and much more importantly, I find that the instruction itself clearly says that no fresh application for claim of refund will be entertained beyond six years from the end of the relevant assessment year. This instruction can only apply to new cases, where a claim is filed after the issue of this instruction. In the assessee’s case, her claim precedes the Board’s instruction by more than four years. The assessee’s claim for payment of advance tax under her revised return was in pursuance of the directions of the Board and has therefore necessarily to be considered. The assessee’s claim for giving credit/ refund should therefore be re-examined in accordance with law.
8. The assessee will indicate within 15 days of the receipt of this order as to whether she accepts this award in full and final settlement of her claim. On her acceptance, the Assessing Officer will thereafter re-examine the assessee’s case in accordance with the Board’s instructions on the subject and if any refund results, the same will be issued to the asses-see within one month of the date of receipt of this award. The Assessing Officer’s report clearly indicates that the regular assessment in this case was completed on 29-1-1997 u/s.143(3). Issues other than the credit for Rs.40,000 towards advance-tax thus appear to have been fully examined.
9. There will be no order as to compensation. The assessee will not also be entitled to claim interest on any delayed refund, that might result from this award.
(Hardayal Singh)
Income Tax Ombudsman,
Mumbai.
Part-IV
Conducting a financial due diligence — A well-planned
approach
This is the fourth part of the article on ‘Financial and
accounting due diligence — Some aspects’. The first three parts highlighted the
various forms of due diligence, the process of carrying out an FDD exercise and
some of the key focus areas in an FDD exercise. This part continues and
concludes the discussion on the key focus areas.
Loans & Net Debt :
Analysis of the debt position is important and significantly
depends upon the transaction structure and valuation mechanism. As mentioned
earlier, the transactions are generally valued based on a debt-free, cash-free
mechanism. In view of the same, it is critical to define the components of debt
and quantify the same. The elements of trapped cash (i.e., cash that is not
freely usable, such as deposits with government authorities, margin monies,
etc.) need to be highlighted to allow for computation of equity value.
In most situations, particularly in the case of distressed
assets, the analysis of debt and related covenants assumes the most important
aspect of the transaction. Typically, the loan documents, including the
documents approving the restructuring, provide for conditions attached to the
loan including repayment terms, interest rates, stipulation of minimum financial
ratios, security mechanism and prepayment terms and each such provision would
need to be carefully assessed to identify its impact on the transaction.
Key elements to be analysed while reviewing loans are :
• Compliance with terms of debt restructuring schemes : with a need to assess the level of promoter contribution required as per the scheme approved.
• Debt-like items (pension underfunding, severance and other non-operating liabilities) to be considered in valuation : identification of non-operating liabilities (capital creditors, etc.) reported as part of current liabilities under working capital that should be identified as debt-like items.
Potential liabilities and commitments :
This area is particularly important in the case of a complete
acquisition of a target with no future involvement of the existing promoters.
The extent of availability of representations and warranties and indemnities in
this area, although considered as a must in any transaction, should at best
provide only limited comfort. This is primarily considering the ability of the
acquirer to enforce such claims in the courts of law in India and the time value
of such claims. The identification/estimation of such liabilities therefore has
a direct valuation impact.
It is equally difficult to analyse this area since the
procedures are expected to identify liabilities that are not accounted for in
the books of account and may or may not have come to the notice of the existing
management and they may not have a basis to provide reasonable estimates.
The areas to be covered in the analysis and identification of
liabilities are summarised below :
• Contingent liabilities and off balance sheet items : (where aggressive tax opinions enable a target not to provide against matters in litigation); assessing guarantees/off balance sheet obligations in respect of related parties;
• Change of control matters : potential payments arising out of change of control/additional costs; severance/retention pay upon the occurrence of transaction;
• Pension and related obligations : assessing the provisioning and funding of liabilities; this is particularly important in cross-border transactions — there is a need to take the help from specialised local resources to assess the liabilities;
• Earn-outs/contingent consideration from prior business combinations : for e.g., an acquisition in the past that may have contingent payments to be taken into consideration or where receivables are securitised with a bank with recourse i.e., the target has an obligation to buy back delinquent receivables.
Separation, structuring and integration issues :
Typically, these issues are relevant for a strategic investor
engaged in a similar line of activity. The FDD exercise would focus on
identifying areas that may result in changes in the cost structure post
transaction, requirement of additional infrastructure to be created by the
client or potential utilisation of the existing infrastructure of the client or
additional cost of integration.
The areas that may be covered from a financial viewpoint
would typically cover :
• Accounting policy conformity : extent of differences between the accounting policies of the buyer and the seller and its impact post the transaction. This assumes significant importance particularly in the case of a transaction where the buyer and the seller are from different countries — foreign buyer following a local GAAP — IFRS, USGAAP, etc. and the Indian seller following Indian GAAP. The differences in accounting may have a significant impact on the reported profitability/value of assets post the transaction. This may also create significant challenges in upgrading the existing systems and procedures of the target to be able to support the reporting requirements of the buyer.
• Transition services agreement : the target may have dependencies on the parent entity (the seller) and would thus require an agreement for continuity in the availability of goods or services in future (utilisation of common utilities, distribution network, etc.).
• Stand-alone considerations (impact of economies of scale, support functions) : it is essential to understand the dependencies on the parent entity and enter into the transition services agreement as mentioned above. However, it is also important to understand the impact on costs on a go-forward basis considering potential stand-alone operations.
Other matters :
During an FDD exercise, apart from the aforesaid broad areas that are directly linked to accounting matters, there are other aspects relating to the business that may have an impact on the financial position of the business and are thus important to consider during an FDD exercise. These are discussed below.
Related-party transactions :
Related-party transactions could have a significant impact on the reported historical earnings/margins of the business. Further, these transactions may also create significant dependencies and have a material impact on the continuity of the operations on the business. In such situations, it is important to identify the nature of transactions, the level of existing charges recovered from the target business, the availability of such services/facilities in future and the charges thereof. The arrangements that would need to be agreed during the transition period should be identified and provided for in the transaction documents. Further, any impact on the valuation model would also need to be considered for any revisions in the current costs.
Generally, ‘related parties’ are defined by law and the transactions are required to be reported in the financial statements. However, it is important to identify the related parties that are not covered by the definition as per law, but that are de facto related parties in common business parlance. This identification is generally achieved based on discussions with the management of the target and analysis of the key transactions in respect of purchase and sales relating to the terms and conditions.
Key aspects while reviewing related party transactions would involve an assessment of :
• Financial appropriateness of transactions within family-run businesses (arm’s-length pricing);
• Level of dependency of the target operating within a ‘group’ (assets used by the target entity but that are actually owned by a related party; e.g., office premises, the IT infrastructure or even the title to the corporate/product brand);
• Extent of sharing of resources and the allocation of common costs;
• Details of financing arrangements with related parties;
• Arrangements that are based on oral under-standings and/or are on a ‘no-cost’ basis.
Human resources :
Analysis of human resources is a multifaceted task and is generally covered by the legal due diligence, HR due diligence with defined inputs from the FDD exercise. The key focus areas of the FDD exercise in relation to human resource matters are to establish the total cost to the company (CTC) of all human resources, to assess the extent of accumulated unprovided/unfunded for liabilities in relation to employee benefits and to also understand the level of current charge of such costs and any underprovisioning thereof.
Identification of the total employee strength and total CTC of the target company may become an issue where there is a high level of contracted employees (like in the media advertising sector) or when there is high level of casual labour that is ‘permanently temporary’ !
In certain instances such as relocation of facilities post acquisition, the analysis may need to be extended to understand the implication of severance of employees not willing to transfer to the proposed new location and also additional facilities/ benefits that may need to be incurred to ensure transfer of necessary employees to the new location besides addressing the issues relating to availability of skilled resources in the new location.
It is important to analyse the movements in the level of staff in the recent period with specific emphasis on understanding if there have been attrition in respect of key staff. Particularly, in a distress situation, the current staff may not be adequate and may not represent the true requirement for the business and would need to be replenished. The costs relating to such optimum level of requirements of the staff would need to be assessed and considered in the valuation model.
In case of a strategic acquisition, matters relating to integrating the two businesses assume importance. The compensation levels and structure may be significantly different across the buyer and the seller and may have material implications for the buyer post acquisition. Thus a careful analysis is required in relation to the current staff cost of the target and potential changes post the transaction.
Conclusion :
In today’s environment, as a key input during the decision-making process and also as a part of general corporate governance, financial due diligence is considered as a must. It is not just checking of facts and summarising them, but it is about evaluation, interpretation and communication that require a proficient understanding of the business and of the transaction besides exercising strong financial and accounting skills.
Companies making acquisitions typically look for answers to four basic questions :
• What is being acquired ? (customers, competition, costs, capabilities)
• What is the target’s stand-alone value ?
• Where are the synergies and skeletons ?
• What is the walk-away price ?
It is vital that the FDD team remembers the above and exercises a degree of prudence and professional skepticism when carrying out the assignment — deal making is glamorous, due diligence is not. The FDD team may focus on negative information and on identifying the risks and problems surrounding the transaction, but as a professional service provider, the FDD team must devise solutions to problems or mechanisms to reduce or manage the risks involved in the transaction. For every man-made problem there is a man-made solution — the skill is to find it !
1. Introduction :
1.1 In India, we are surrounded by a plethora of laws and
regulations. Being in business is not easy and there is a multitude of legal
obligations and reporting requirements. It is in this backdrop that a business
must consider and study the relevance of several laws which could turn out to be
decisive to the success of a business. Non-compliance with certain laws may
affect the very substratum of the business or the going concern concept of an
entity.
1.2 A company is an inanimate body and it functions through
its Board of Directors. The Directors are the brain and the heart of the
company. The Directors have been vested with wide powers under the Companies
Act, 1956. However, as powers and responsibilities are two sides of the same
coin, the Directors also have several and vicarious responsibilities. It is well
known that Directors owe a fiduciary responsibility to the company and its
shareholders as they are Trustees and Agents of the company.
1.3 The Companies Act contains several express provisions
dealing with the responsibility of Directors — the Act prescribes that in case
of certain offences by the company, the Directors are personally liable. For
instance, in several Sections, the Companies Act provides that the company and
every ‘officer in default’ shall be liable for punishment and/or
prosecution. S. 5 of the Act defines the term ‘officer in default’ to mean the
Managing Director and any Director so specified, and failing both, all the
Directors of the Board. However, if the Director can demonstrate that he had
entrusted responsibility of overseeing the compliance to a competent and
reliable person, then he would be able to use this as a defence. S. 211 of the
Act is one such Section which expressly makes such a provision. Thus, it all
boils down to a question of fact as to whether the Director was negligent in his
duties and hence, punishable for the offence.
2. Are Directors responsible under laws other than the Companies Act ?
2.1 The Companies Act is only one of the several laws which
impact a company. A company is also liable for complying with several other laws
which directly or indirectly impact its operations. Directors being the organ
through which a company functions they are also responsible for ensuring that
the company complies with the responsibilities and obligations mandated by the
relevant enactments. The important laws concerning a company in addition to the
all-important Companies Act, 1956, can be classified as under :
2.2 Some of the important laws under each of the above
include :
(A)
Commercial Laws :
2.3 Immovable and Intellectual Property Laws :
2.4 Financial & Capital Market Laws:
2.5 Labour Laws:
2.6 Taxation Laws:
2.7 Others:
3. There can be no quarrel against the proposition that a company can be proceeded against in criminal proceedings even where the imposition of sentence is provided for. That law is laid down in Standard Chartered Bank & Others v. Directorate of Enforcement & Ors., [(2005) 4 SCC 530]. However, that case does not state that the company alone should be prosecuted. Hence, in the case of a company not only the company, but also the Directors can be personally proceeded against and punished. We are all familiar with the Directors’ responsibility u/s.138 of the Negotiable Instruments Act dealing with dishonouring of a cheque. The consequence u/ s.138 is imprisonment and there is no provision even for exempting professional and independent Directors of the company, who are in no way connected with the day-to-day management of a company. However, there are judicial decisions whiCn have taken a reasonable interpretation on this enactment but harassment continues. Thus, Director’s responsibilities are extremely onerous and it is often said that being a company’s Director is like wearing the proverbial ‘Crown of Thorns’.
4. Many laws provide that where the person committing any offence is a company, then every person who at the time of the offence was responsible for the conduct of the business of the company would be liable to be punished. Further, any director with whose connivance, neglect or active con-sent any offence has been committed by the cornpany, shall also be deemed to be guilty of the offence and shall be liable to be directly proceeded against and punished. It is important to understand the meaning of the terms, such as connivance, neglect and consent.
(….To be continued)
53 Development — Oriented Tax Policy for India
According to the recent publication by the World Bank,
‘Paying Taxes 2008 : The Global Picture,’ the Indian tax system is one of the
most unfriendly to businesses in the world. India ranks at 165 among the 178
countries and among the South Asian countries, it is the lowest. The real
question is whether the Indian tax system is really that bad or is it another
advocacy by businesses or simply a sensational finding which merely deserves to
be ignored.
(Source : Business Standard, 6-5-2008)
52 Skills
India cannot forget that its human capital development is
coming from Wall Street and the audacious entrepreneur mode has led to an
acquisition spree. “We cannot afford to stretch our human capital. There is a
glaring and keenly felt starvation of leadership at the top. There are 900
listed skills the world over, China has 600 but India has only 90.” Further, the
benefits of India’s growth have not led to competitiveness of the workforce and
the fruits of growth are not reaching those who are outside the ken of this
development.
(Source : Business India, 23-3-2008)
50 Order in the jungle
Economists became fascinated by the rule of law after the
crumbling of the ‘Washington consensus’. This consensus, which was economic
orthodoxy in the 1980s, held that the best way for countries to grow was to ‘get
the policies right’ — on, for example, budgets and exchange rates. But the Asian
crisis of 1997-98 shook economists’ confidence that they knew which policies
were, in fact, right. This drove them to re-examine what had gone wrong. The
answer, they concluded, was the institutional setting of policy-making,
especially the rule of law. If the rules of the game were a mess, they reasoned,
no amount of tinkering with macroeconomic policy would produce the desired
results.
Pretty quickly, ‘governance’-political accountability and the
quality of bureaucracy as well as the rule of law — became all the rage.
Economists got busy calculating what it was, how well countries were doing it
and what a difference it made. Mr. Kaufmann and his colleague Aart Kraay worked
out the ‘300% dividend’ : in the long run, a country’s income per head rises by
roughly 300% if it improves its governance by one standard deviation. One
standard deviation is roughly the gap between India’s and Chile’s rule-of-law
scores, measured by the bank. As it happens, Chile is about 300% richer than
India in purchasing-power terms. Economists have repeatedly found that the
better the rule of law, the richer the nation.
A report by a new research group, the Hague Institute for the
Internationalisation of Law, argues that people routinely use two quite
different definitions, which they call ‘thick’ and ‘thin’.
Thick definitions treat the rule of law as the core of a just
society. In this version, the concept is inextricably linked to liberty and
democracy.
Thin definitions are more formal. The important things, on
this account, are not democracy and morality but property rights and the
efficient administration of justice. Laws must provide stability.
(Source : The Economist, 15-3-2008)
48 Ten Commandments
The UPA Government may have been liberated from the clutches
of the Communist Parties and managed to cross the metaphorical Red Sea. But
before entering the Nuclear land of Canaan, the coalition has been handed over a
rule book cast in stone by its new-found saviour.
The Ten Commandments will replace the CMP (Common Mad
Programme) that has been hanging like the Sword of Damocles above UPA’s head.
(i) I and my rustic boss are the Lords of the ring who
brought you out of the land of the Communists; thou shall not owe allegiance
to any other gods (especially those that may seem like Maya).
(ii) Thou shall not let the names of thy Lords be taken in
vain (even by the so-called Central Bureau of Investigation).
(iii) Thou shall declare a minimum support level of 20,000
for the Sensex just as thou provideth support price for various commodities.
Thou shall create a mechanism by which thy government would ensure that the
index remains above that level. To help thy cause, thou shall replicate the
tactics used by some honourable corporate houses, like buybacks, bonus, et al.
(iv) Fix the value of thy currency at 40 versus that of thy
new-found nuclear partner. Thou shall not let the so-called market forces
determine the rupee value. (A fluctuating rupee disturbs our personal foreign
exchange earnings arithmetic, you see).
(v) Thou shall not let thy Reserve Bank chief lord over
that alluring pile of $ 300 billion-plus forex earnings. Why should a
bureaucrat get to manage such enormous wealth which ought to be kept at the
disposal of jet-setting politicians. It is criminal to accumulate a large pool
of dollars, especially when the rest of the pariwar aren’t allowed to raise
deposits.
(vi) Thou shall not adulterate the gas flowing from the KG
Basin, especially that’s supposed to flow into the plants of similar sounding
corporate biggies.
(vii) Thou shall not steal in public, but we shall not
condemn if thou doth it through innovative schemes like windfall tax, envy
tax, export tax, fast-growing conglomerate tax or any other which your
lawyer-finance minister and his cronies can come up with.
(viii) Honour the first family of Bollywood, that thy days
may be long upon the land which thy Lords have given thee. The fortunes of all
the members of this family being susceptible to the vagaries of Box Office,
thou shall frame a policy that would ensure that all the members of this
family are employed throughout their lifetime. Thou shall delight us to no end
if thy FM declares tax concessions for all movie productions where at least
one member of this family has a role.
(ix) Thou shall not covet your neighbour’s (we mean
corporates) goods. (All coveting shall be done by us).
(x) To celebrate the Passover from the clutches of your
erstwhile masters and to atone for thy past sins, thou shall throw a party
where thou shall raise a toast to our extended pariwar and the gates shall
remain closed for your estranged partner.
(Source : The Economic Times, 12-7-2008)
49 Postcard : Liechtenstein
Berlin is vilifying the principality for letting tax evaders
hide their cash there.
Berlin is keen to claim an estimated $ 6 billion in unpaid
taxes on funds that German citizens are thought to have spirited away to
Liechtenstein. Germany’s Federal Intelligence Service, the BND, paid as much as
$ 7 million to a former employee of a trust controlled by the LGT Group, a bank
owned by the principality’s royal family. In return, the BND received stolen
computer discs containing names of people with funds in Liechtenstein. The U.S.
and U.K. have made their own deals, and Germany has offered its information to
other interested governments.
In 1995, the nation’s banks managed assets of around $ 52
billion, by 2006 that figure had surged to more than $ 150 billion. Clearly
there aren’t enough Liechtensteiners to pile up that much cash.
(Source : Time, 10-3-2008)
(1) A recent decision of the Supreme Court throws light on
important issues relating to the SEBI Takeover Regulations. Some core concepts
of the Regulations such as ‘persons acting in concert’ and ‘persons deemed to be
acting in concert’ are interpreted. It is important to note the reliance placed
by the Supreme Court on the reports of Expert Committees for interpretation. The
decision is in the case of Daiichi Sankyo Company Limited v. Jayaram
Chigurupati & Others, C.A. No. 7148 of 2009, dated July 8, 2010.
(2) Of course, the real issue that was in dispute before the
Court, though interesting, has application in rare cases. It concerns a
situation where a listed company was acquired by another listed company and the
latter company, within a short time, got itself acquired by another company. The
question before the Court related to the pricing for the open offer of the
shares of the first company and the interpretation of the legal provisions
applicable to such a situation. Such quick and sequential takeovers do not
happen often and hence that part of the decision may have limited application.
But the other aspects have wider importance.
(3) Let us then broadly understand the facts, the relevant
provision of law and the issue, and then know what the Supreme Court held.
(4) The facts are quite simple. Ranbaxy Laboratories Limited
(‘Ranbaxy’), a listed company, agreed to acquire a significant stake in Zenotech
Laboratories Limited (‘Zenotech’), another listed company paying a price of
Rs.160 per share. As required under the Regulations, it made an open offer @
Rs.160 which was also the price as per the formula under the Regulations.
However, within six months, the Promoters of Ranbaxy agreed to sell more than
15% shares in Ranbaxy to Daiichi @ Rs.114 (rounded off) per share. Eventually,
Daiichi got more than 51% stake in Ranbaxy, thereby making Ranbaxy its
subsidiary. Daiichi thereby acquired indirectly more than 15% stake in Zenotech.
Hence, as required by law, Daiichi made an open offer for shares of Zenotech at
a price Rs.114. Shareholders of Zenotech, including its erstwhile Promoters,
complained to SEBI that the open offer should have been @ Rs.160 and not Rs.114.
As will be seen later on, particularly after considering the decision of the
Securities Appellate Tribunal (‘SAT’), the point at issue was that since the law
deems holding-subsidiary companies to be deemed to be acting in concert with
each other and since the law requires that price paid by a person acting in
concert to be taken into account, the open offer should be Rs.160 as paid by
Ranbaxy.
(5) The law relating to open offer pricing of such ‘indirect’
acquisitions, i.e., acquisition of shares of a listed company which in
turn controls another listed company, is as follows.
(6) Shredded of irrelevant complexities, it can be said that
when a listed company acquires another listed company indirectly, then it has to
make an open offer for the shares of the company in which such indirect
acquisition has been made. For the purposes of pricing of the open offer, the
law requires that, inter alia, the price paid by the acquirer or any
persons acting in concert with it during the preceding 26 weeks has to be taken
account of and if such price is higher, then such higher price shall be the open
offer price.
(7) In the present case, Daiichi acquired Ranbaxy. However,
it was during the preceding six months to this that Ranbaxy had acquired the
shares of Zenotech @ Rs.160. The law deems a holding and its subsidiary to be
acting in concert with each other. The issue thus was that since Daiichi and
Ranbaxy were deemed to be acting in concert and since Ranbaxy had acquired
shares of Zenotech @ Rs.160 during the preceding six months, whether such higher
price of Rs.160 should be the open offer price by Daiichi ?
(8) SEBI rejected the complaint by the shareholders of
Zenotech that such higher price should have been the open offer price. Such
shareholders appealed to the SAT, who held that the open offer should have been
at Rs.160. It held, in essence, that one has to consider the situation on the
date with reference to which the price formula of preceding 26 weeks was to be
applied. As on this date, Ranbaxy was a subsidiary of Daiichi. Thus, they were
deemed to be acting in concert. Since the law requires that acquisition by
persons acting in concert be taken into account, the SAT held that the higher
price of Rs.160 paid by Ranbaxy should be the open offer price.
(9) The matter reached the Supreme Court. The Supreme Court
considered, inter alia, the history of the provisions and numerous
provisions not just relating to indirect acquisitions, but even related and
incidental provisions.
(10) It held that, firstly, the persons acting in concert
have to actually come together to acquire the shares of a target company. There
has to be an agreement (or understanding, etc.) to acquire shares and such
shares should be of the target company.
(11) Further, the provisions deeming certain connected
persons (such as holding-subsidiary companies in this case) as persons acting in
concert does only that — i.e., it deems that they are acting in concert.
It does not deem that they have been acting in concert for acquiring shares of a
listed company and this would have to be established. Importantly, even the
provision that deems certain related persons as acting in concert has a
clarification that this deeming provision is subject to the contrary being
established.
(12) The Court gave its understanding of the term ‘person
acting in concert’ as follows :
“. . . . the concept of ‘person acting in concert’ under
Regulation 2(e)(1) is based on a target company on the one side, and on the
other side two or more persons coming together with the shared common objective
or purpose of substantial acquisition of shares, etc. of the target company.
Unless there is a target company, substantial acquisition of whose shares, etc.
is the common objective or purpose of two or more persons coming together, there
can be no “persons acting in concert“. For, de hors the target
company the idea of ‘persons acting in concert’ is as irrelevant as a cheat with
no one as victim of his deception. Two or more persons may join hands together
with the shared common objective or purpose of any kind, but so long as the
common object and purpose is not of substantial acquisition of shares of a
target company, they would not comprise ‘persons acting in concert’.” (emphasis
supplied)
(13) The other condition it laid down for the term persons
acting in concert to apply in the context of the Regulations is, in the Court’s
words :
“The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares, etc. of a certain target company. There can be no ‘persons acting in concert’ unless there is a shared common objective or purpose between two or more persons of substantial acquisition of shares, etc. of the target company. For, de hors the element of the shared common objective or purpose, the idea of ‘person acting in concert’ is as meaningless as criminal conspiracy without any agreement to commit a criminal offence. The idea of ‘persons acting in concert’ is not about a fortuitous relationship coming into existence by accident or chance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares, etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares, etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of shares, etc. or they may agree to cooperate in such acquisition. Nonetheless, the element of the shared common objective or purpose is the sine qua non for the relationship of “persons acting in concert” to come into being.”
(14) Thus, it noted that “. . . . mere fact that two companies are in the relationship of a holding company and a subsidiary company, without anything else, is not sufficient to comprise ‘persons acting in concert’. . . . . There may be hundreds of instances of a company having a subsidiary company, but to dub them as ‘persons acting in concert’ would be quite ridiculous unless another company is identified as the target company and either the holding company or the subsidiary make some positive move or show some definite inclination for substantial acquisition of shares, etc. of the target company.”
(15) In the light of this explanation of the terms ‘persons acting in concert’ and ‘persons deemed to be acting in concert’ that the words ‘unless the contrary is established’ are to be understood.
(16) The Supreme Court finally reversed the view of the SAT that the deeming fiction could apply retrospectively and thus, if a person was deemed to be acting in concert on a later date, such connection would apply to an earlier date too. It held, “…..the deeming fiction under sub-regulation (2) can only operate prospectively and not retrospectively. That is to say the deeming provision would give rise to the presumption, as explained above, only from the date two or more persons come together in one of the specified relationships and not from any earlier date. Thus, in the case in hand, the deeming provision under sub-regulation (2) would give rise to the presumption that Daiichi and Ranbaxy were ‘persons acting in concert’, provided of course the other conditions as explained above were also satisfied, only from October 20, 2008, the date on which Ranbaxy became a subsidiary of Daiichi and not before that. Hence, the purchase of Zenotech shares by Ranbaxy in January 2008 cannot be said to be by a ‘person acting in concert’ with Daiichi.”
(17) The Supreme Court thus held that the Daiichi and Ranbaxy were not acting in concert when the shares of Zenotech were acquired by Ranbaxy. The latter development of the holding-subsidiary position cannot alter, factually or in law, the earlier unconnected position. The provision relating to determination of price did not apply retrospectively so as to change the status as on the date of acquisition. Thus, the price paid by Ranbaxy on a date when there was no relation with Daiichi was not to be applied for the open offer by Daiichi of Zenotech.
(18) Importantly, the Supreme Court relied considerably on the background of these provisions as put forth in the Bhagwati Committee Report to understand the rationale of this provision as well as for its interpretation generally. The Court also recommended that delegated legislations such as the Takeover Regulations should have the ‘objects and purposes’ clause that Acts have.
The following is what the Court said:
“Before parting with the records of the case we would like to say that in arriving at the correct meaning of the provisions of the Takeover Code specially regulation 14(4) and 20(12), we were greatly helped by the reports of the two Committees headed by Justice Bhagwati. We mention the fact especially because as per the legislative practice in this country, unlike an Act, a regulation or any amendments introduced in it are not preceded by the “Object and Purpose” clause. The absence of the object and purpose in the regulation or the later amendments introduced in it only adds to the difficulties of the Court in properly construing the provisions of regulations dealing with complex issues. The Court, so to say, has to work in complete darkness without so much as a glimpse into the mind of the maker of the regulation. In this case, it was quite apparent that the 1997 Takeover Code and the later amendments introduced in it were intended to give effect to the recommendations of the two Committees headed by Justice Bhagwati. We were, thus, in a position to refer to the relevant portions of the two reports that provided us with the raison d’etre for the amendment(s) or the introduction of a new provision and thus helped us in understanding the correct import of certain provisions. But this is not the case with many other regulations framed under different Acts. Regulations are brought in and later subjected to amendments without being preceded by any reports of any expert committees. Now that we have more and more of the regulatory regime where highly important and complex and specialised spheres of human activity are governed by regulatory mechanisms framed under delegated legislation, it is high time to change the old practice and to add at the beginning the ‘object and purpose’ clause to the delegated legislations as in the case of the primary legislations.”
(19) In conclusion, the decision is welcome as it clarifies and gives the final word on important concepts in Takeover Regulations. The considerable reliance of the Court on the Expert Committee Reports, albeit in the absence of ‘objects and purpose’ clause, increases the value of such reports generally for the student in securities laws. Of course, the irony is that this only increases the complexity of the law for such students. Now, they will have to read and know the recorded history of such law, in addition to the very voluminous bare text of the Act, Regulations, etc.
(20) P.S.: As this article goes to press, SEBI has released the report on revising the Takeover Regulations and has recommended changes in, inter alia, the subject matter of this article. More on this in the next issue.
(1) Is levy of penalty for violation of securities laws
mandatory ? Is there no discretion to the Adjudicating Officer on whether or not
to levy penalty ? Are adjudication proceedings a mere formality ? Is intention
to commit the violation a totally irrelevant factor in determining penalty ?
And, finally, are all the preceding questions answered in the affirmative
by the Supreme Court ?
(2) In the past couple of years, SEBI has repeatedly levied
stiff penalties citing certain sentences mainly from a decision of the Supreme
Court. It is claimed that the Supreme Court has held that if one does not comply
with securities laws, levy of penalty is mandatory. Good intentions and other
mitigating factors are irrelevant. And that the Supreme Court had mandated SEBI
only to find whether a particular provision is violated or not and their job
ends there. They are then left with the only choice of levying a penalty —
usually a stiff one.
(3) One of the following sentences from two Supreme Court
decisions is invariably cited :
“The Board does not have any discretion in the matter and,
thus, the adjudication proceeding is a mere formality. Imposition of penalty
upon the appellant would, thus, be a foregone conclusion.”
And, from another decision, :
“Once the violation of statutory regulations is
established, imposition of penalty becomes sine qua non of violation
and the intention of parties committing such violation becomes totally
irrelevant. Once the contravention is established, then the penalty is to
follow.”
(4) Amongst the numerous SEBI orders levying penalty citing
the above and, very often, doing nothing more, are Platinum Finvest Private
Limited – AO No. SD/AO/-46/2009, dated April 20, 2009 in which a penalty of
Rs.10 lakhs was levied for non-filing of certain reports regarding their
holdings, the order in Jayesh Waghela’s case dated June 23, 2009 where a penalty
of Rs.15 lakhs was levied and the order in Santosh Narvekar’s case levying a
penalty of Rs.25 lakhs.
(5) These Supreme Court decisions are also cited in ongoing
penalty proceedings and parties are sought to be persuaded that their
intentions, whether good or bad, are now irrelevant and adjudication proceedings
are a mere formality now. Penalty is a foregone conclusion. Considering that
typically SEBI has power to levy penalty of Rs.25 crores or even more and Rs.1
lakh per day of delay, parties find settling through consent orders a better
option rather than fight a battle that is lost to begin with since it amounts to
payment of penalty where otherwise penalty may not be warranted. Of course,
settling through consent order means that one is forced to accept a stiff
penalty.
(6) However, is it true that the above mentioned statements
are really what the Supreme Court has decided ? What was the
context in which it has said that ? What are the qualifications to such
statements ? What are the related observations ? What were the facts of these
decisions that led the Supreme Court to make these statements ? And, thus,
finally, what conclusions should one draw regarding the state of law on levy of
penalty for violation of securities laws ?
(7) To begin with, the Supreme Court has said exactly what
the SEBI orders say and what has been cited above. The Supreme Court has made
the above statements in Swedish Match AB v. SEBI, (122 Comp. Cas. 83 (SC)
(2004)) and SEBI v. Shriram Mutual Fund, [68 SCL 216 (SC)], respectively
(let us refer these decisions as Swedish Match & Shriram).
(8) It is worth reviewing these decisions briefly. However,
before we do that, let us consider the background of the issue.
(9) Violations under securities laws could be broadly and
loosely bifurcated between what are non-compliances of civil obligations and
what amounts to criminal violations. The former would typically involve civil
proceedings to levy penalty, etc., while the latter may result in prosecution.
Secu-rities Laws have numerous provisions that amount to civil obligations such
as requirements of filing of information and documents. When faced with penalty
proceedings for such non-filings, parties often argue that levy of penalty
requires that SEBI should prove that there was mens rea — i.e.,
guilty mind or intention. In other words, the argument was that a guilty state
of mind has to be proved and, further, the onus to prove it was on SEBI. If SEBI
could not establish mens rea, no penalty could be levied. As we will see
further, the decisions of Shriram and Swedish Match have settled the law by
holding that establishing of mens rea by SEBI is not a pre-condition for
levy of penalty.
(10) However, this is what the Supreme Court has said and
nothing further, if one reads the decisions as a whole, reads the same into
context and reads the qualifying and incidental statements.
(11) Since Shriram is the decision consistently cited, let us
review this decision. In that case, Shriram Mutual Fund was alleged (all
statements made in this article are allegations of SEBI and not necessarily
established to be true) to have repeatedly exceeded the trading limits placed on
mutual funds for dealings through associated brokers. Penalties were levied on
the mutual fund and the matter went finally to the Supreme Court. The Supreme
Court observed (incidentally the decision was ex parte) that this
violation was conclusively established. The question then was, when such
violation is conclusively established, does “imposition of penalty becomes a
sine qua non of the violation” ?
(12) The Supreme Court described the scheme of the Act and
particularly the framework for levy of penalty. It pointed out that various
factors were specifically laid down as relevant for consideration for
determination of the quantum of penalty, and that “The Legislature in its wisdom
had not included mens rea or deliberate or wilful nature of default as a
factor to be considered by the Adjudicating Officer in determining the quantum
of liability to be imposed on the defaulter”.
(13) It also pointed out that the provisions relating to
penalty contained in S. 15A to S. 15H, etc. provide that the violator ‘shall be
liable’ to penalty and therefore, it held that penalty is mandatory.
Incidentally, it was not brought before the Court that S. 15I which provides for
levy of penalty by the Adjudicating Officer specifically uses the words ‘he
may impose such penalty’ as he deems fit.
14) It further held that the provisions relating to penalty under the aforesaid Sections were ‘neither criminal nor quasi-criminal’ and were actually breaches of civil obligations. Thus, it held that “Therefore, there is no question of proof of intention or any mens rea by the appellants and it is not essential element for imposing penalty under SEBI Act and the Regulations.” This issue is thus well settled now.
15) The issue, however, is not whether mens rea has to be proved by SEBI or not. The issue is whether mens rea is wholly irrelevant as SEBI claims. Or that even absence of mens rea is irrelevant. Or that mens rea does not appear into the picture at all.
16) I repeat and submit that the only thing the Supreme Court has laid down is that there is no onus on SEBI to prove mens rea as a pre-condition to levy penalty. Violation is by itself sufficient to attract penalty. However, mens rea is certainly a factor to determine the quantum of penalty, when the penalty provided is within a range of amount. Further, I would even submit that absence of mens rea and presence of other mitigating factors should actually mean that SEBI should use its discretion not to levy any penalty at all. As one reads the decision further, this is actually what the Supreme Court has laid down.
17) One should also note the peculiar facts of the case which the Supreme Court specifically listed. Firstly, the offender was a mutual fund which is expected to know the law. Secondly, the facts showed that the mutual fund had repeatedly violated the law – as many as 12 times. The nature of the violation that was violated is also of interest. The mutual violated the restriction on not dealing through associated brokers beyond 5% – the intention of the restriction is obvious – the mutual fund should not farm out business of brokerage to group concerns beyond a specified limit. In fact, the mutual fund farmed out business even to the extent of 91% and 52% in a couple of cases.
18) It was also felt that when a knowledgeable mutual fund violates the limit, then ex facie, the violation was intentional.
19) Importantly, the Supreme Court emphasised that the discretion of the Adjudicating Officer in levy of penalty and held that “the quantum of penalty is discretionary”.
20) It also held that “the respondents have wil-fully violated statutory provisions with impunity and hence the imposition of penalty was fully justified”. In other words, far from holding that intention or mens rea is irrelevant, it has actually given weight to the fact that the violation was wilful, made with impunity and this factor made the levy of penalty justified.
21) The Supreme Court further observed, “it has been established by the Adjudicating Officer as well as admitted by the respondents that there has been a conscious disregard of the obligation inas-much as the respondents were aware that they were acting in violation of the provisions of Regulations.”. In other words, while, to begin with, there was no onus on SEBI to establish mens rea as a pre-condition to levy penalty, the Court itself gave full weight to the fact that the violation was a conscious one, that the mutual fund was aware that they were acting in violation and, finally, the mutual fund itself admitted that they were so conscious and aware. Thus, mens rea was given its full and due weight as regards the quantum of the penalty and also as regards whether the discretion to waive penalty should be exercised or not. In the face of such words, it does not at all lie on SEBI to contend that mens rea is irrelevant.
22) I submit that discretion to levy penalty is actually discretion not to levy any penalty and the Supreme Court made observations confirming this position of law. The Supreme Court observed,” The facts and circumstances of the present case in no way indicate the existence of special circumstances so as to waive the penalty imposed by the Adjudicating Officer.” In other words, it, firstly, recognized that penalty can be waived, and that under special circumstances, it, should be waived. It then proceeded to discuss the various factors in that case that, on one hand justified a lesser penalty and on the other hand justified a higher penalty. An important adverse factor was whether the violation was made for benefit by the mutual fund.
23) The summary and essence of the decision – which strangely none of the SEBI decisions ever cite is beautifully and succinctly laid down in the following observation – “On particular facts and circumstances of the case, proper exercise or judicial discretion is a must, but not on a foundation that mens rea is an essential to impose penalty in each and every breach of provisions of the SEBI Act.”
24) It is in the above light, then, the words of the Supreme Court cited at the start of this article need to be reread. To repeat, the Supreme Court observed, “In our considered opinion, penalty is attracted as soon as the contravention of the statutory obligation as contemplated by the Act and the Regulation is established and hence the intention of the parties committing such violation becomes wholly irrelevant.” Thus, it is only for deciding the question whether penalty is to be levied or not that the intention is wholly irrelevant. However, for determining the quantum of penalty – from zero to Rs.25 crores – indeed for even waiving the penalty intention and mens rea are very much relevant. Indeed, the Supreme Court itself, in this very decision, repeatedly relied on the intention and mens rea.
25) Then let us consider the apparently even more drastic words of the Supreme Court that in Swedish Match’s case that, “The Board does not have any discretion in the matter and, thus, the adjudication proceeding is a mere formality. Imposition of penalty upon the appellant would, thus, be a forgone conclusion.”
26) Let us first consider the facts of this second case. To summarise them very briefly, in this case, the appellant was held to have violated the requirements of open offer and thus was required to make an open offer and also pay interest for the period of delay. The appellant, however, expressed concern that SEBI may levy penalty on them. The Supreme Court noted that the appellant was by the decision required to comply with all its obligations and, in fact, taking into account also the interest, the appellant was being made to pay a large amount. The Supreme Court had already decided the dispute of law before it as to whether the open offer was required to be made or not. The issue of penalty was not at all a matter of appeal. There was no order or even Notice of SEBI relating to penalty.
27) However, the concern arose on whether, after the appellant makes the open offer, SEBI may initiate penalty proceedings and even levy a penalty of Rs.25 crores. The appellant argued that SEBI cannot initiate such proceedings. SEBI rightly pointed out that this matter was not at all the subject matter of proceedings before the Supreme Court and therefore should not be discussed or decided.
28) It is in this light that the Supreme Court raised the concern that since the appellant is complying with its obligations and also even paying interest, should it also face penalty the levy of which is a matter of course. It also apparently referred to a peculiar wording of the law where the penalty leviable is exactly Rs.25 crores and not upto Rs.25 crores. It observed that in such a case, levy of penalty of Rs.25 crores would be ‘a foregone conclusion’ and the adjudication proceedings being reduced to a mere formality.
29) The Supreme Court thus directed that SEBI should not initiate penalty proceedings. It gave this direction by exercising its jurisdiction under Article 142 of the Constitution of India. In fact, it even stated specifically that “This may not, however, be treated to be a precedent”.
30) I submit that the issue as to whether levy of maximum penalty is automatic or not, and whether adjudication proceedings are required or not were not matters for consideration before the Supreme Court. Hence, at best, these were mere obiter dicta and not a considered decision on issues raised. With great respect, I would also state that the view that adjudication proceedings are now a mere formality is not correct. In any case, this decision was followed by Shriram which in fact laid down the objective factors for levy of penalty.
32) To conclude, unfortunately for SEBI, the Supreme Court has not made its job easy so that it needs only to establish the default to levy the maximum penalty. Adjudication proceedings are not a formality – at least not in the manner which SEBI would like us to believe. Far from ignoring the intentions of parties, SEBI will have to consider them. If it wants to levy very high penalties, it may even have to establish mens rea. It will have to consider other factors such as disproportionate gain, loss caused to investors and repetitive nature of the default. It will have to consider mitigating factors. Of course, all these will have to be put forth by the party – obviously SEBI may not go out of its way to help the party. And, in the right and special facts, SEBI will even have to exercise its judicious discretion to waive the penalty.
32) In other words, the presumption that has been invalidated is ‘no mens rea, no penalty’. But, there is no new rule that ‘mere violation = maximum penalty’.
1. It was a long-standing vision of SEBI that there should be
common regulations relating to all intermediaries not only as regards procedures
for registration but also for continuing matters such as restrictions and
punishment. That dream is finally achieved, though partly (and perhaps
anomalously) by the Notification of the SEBI (Intermediaries) Regulations, 2008,
on 26th May 2008.
2. SEBI had issued a consultative paper in July 2007 giving
the Draft Regulations for discussion. These Draft Regulations have now been
given the status of law.
3. To recap, we see today a multitude of regulations
providing for matters relating to registration, regulation and finally
reprimands and retributions. We have separate regulations for stockbrokers,
merchant bankers, bankers, registrars, etc. Each of these regulations provide
for substantially similar requirements. Such a multitude of regulations does not
merely make the law complex, but also results in conflicting provisions. Later,
amendments or innovations are often not updated at all places. Further, because
of separate regulations for each type of intermediary there also arises a need
for having common regulations for dealing with some aspects or provisions that
apply to all intermediaries. A good example of this is ‘enquiry and punishment’
for violations of law. A separate set of regulations for this purpose applicable
to all intermediaries was required. Yet another example is of certain
eligibility requirements for registration that are common to all intermediaries.
These too were required to be put into yet another set of regulations (the ‘Fit
and Proper’ regulations) since otherwise these provisions would have had to be
inserted in regulations for each category of intermediaries. Thus, the existing
multiple regulations became more complex and voluminous.
4. There was a need for having a common set of regulations
which deal with all common matters relating to all
categories of intermediaries. The common regulations would deal with :
à
registration of all intermediaries.
à
monitoring
à
in case of wrongdoing, they should deal with enquiry, action for violation and
penalisation.
The recently notified regulations do just that. In effect,
these regulations do not provide for anything new except for consolidation and
reduction of complexity and volume. However, the process goes beyond the effort
of mere compilation, as attempt has been made to remove inconsistency as well as
provide for common approach.
5. It is also worth reviewing the background of these
regulations in terms of what SEBI stated in its Consultative Paper in July 2007
as to the intention of the regulations :
“2. In the past 15 years SEBI has notified more than a
dozen regulations, each with the objective of regulating a different category
of intermediary/entity. As each of these regulations was drafted in order to
provide a framework which would enable SEBI to better regulate and monitor
intermediaries/entities, the broad framework of such regulations is very
similar to one another.
3. It has been observed that every regulation seeking to
regulate an intermediary incorporates some basic provisions regarding
registration, general obligations, inspection and investigation, default, etc.
In addition to the above, the general requirements of the Code of Conduct
provided in almost all the regulations are also similar in nature. Except for
the clauses relating to the specific requirements of, and particular concerns
in, each category, the content of all the regulations is common either in
language or in spirit, if not in both.
4. Given the overlap in content and the fact that many
requirements and obligations of most intermediaries are common, SEBI now
proposes to consolidate the common requirements under these regulations and
put in place a comprehensive regulation which will apply to all intermediaries
and prescribe the obligations, procedure, limitations, etc. insofar as the
common requirements are concerned.”
6. Having said that, one must quickly dispel an illusion that
we would now have ‘Master Regulations’ dealing with all aspects of all
intermediaries. It needs to be noted that the intention is to have only ‘common’
provisions relating to intermediaries to be placed in these regulations. Thus,
though a little anomalous, there would exist separate set of regulations for
each category of intermediaries in addition to the common regulations.
7. It would be thus worth reviewing these new regulations
from at least two angles. Firstly, an overview of the scheme of the regulations
is worth since it will refresh our memory of the manner in which intermediaries
have been always regulated in some aspects and in any case would now be
regulated. Secondly, it is worth seeing how the new regulations have common and
uniform provisions applicable to all intermediaries in place of differently
drafted, if not inconsistent, regulations applicable to different
intermediaries.
8. It is important to note here that the new regulations are only partially applicable with immediate effect. As of now, only the provisions relating to enquiry and taking of action for violation contained in these new regulations have been brought into effect. Other provisions, for example, those relating to application and registration common to all intenmediaries, are not yet effective. Thus, the provisions in the existing regulations for each category continue to be in force. The regulations provide that SEBI will notify from time to time the categories of intermediaries to whom these regulations will apply. The intention appears to be that the regulations will be notified for one or more categories at a time, with the corresponding existing regulations relating to those intermediaries being repealed. However, since the provisions relating to enquiry and taking of action for violation have been brought into effect immediately, the corresponding common regulations of 2002 have been repealed. Further, the provisions relating to ‘fit and proper’ requirements for intermediaries have been also brought into effect – though they are a slimmer version of the separate regulations – and such separate regulations have also been repealed.
9. Let us now consider some special features of these regulations.
10. A common application form for registration as an intermediary has been prescribed. Thus, all intermediaries would have to use this form when they seek registration. However, this common form will not be enough as the intermediary would also ha e to provide information that is required by the applicable specific regulations. In other words, for example, if the applicant is a stockbroker, he will have to provide the additional information sought by the ‘Regulations’ applicable to the stockbrokers.
11.1 It may appear that this requirement applies only to new applicants seeking registration for the first time. However, there is a strange requirement which will result in all intermediaries having to register themselves all over again and that too by a specified deadline. It has been provided that every intermediary will have to make a fresh application within 21 months (actually 24 months less 3 months advance period specified) of the commensment of the regulations for that intermediary. If the intermediary does not apply, it will have to stop continuing its activities. If the term for which the intermediary has been granted registration expires earlier than the specified date for making fresh application, the expiry date would be relevant for seeking registration in the ‘common form’. For those intermediaries who have been given ‘permanent’ registrations, the corresponding deadline is 24 months.
11.2 To repeat, as this requirement is not yet made effective, the existing provisions will continue to apply.
12. ‘Fit and Proper’ criteria:
Readers may recollect that the intermediaries have to pass the so-called ‘fit and proper’ criteria for registration. These have been contained in a separate set of regulations. The existing regulations have been repealed and the, simplified requirements have been incorporated in these ‘Common Regulations’.
13. Change of status or constitution:
Change of status or the constitution of the intermediary would require prior approval of SEBI. What is change of status or constitution has been very broadly defined in the ‘Common Regulations’ and hence before carrying out any form of such change, the intermediary needs to carefully study the ‘definition’.
14. Registration to be permanent:
The registration under these new regulations will be permanent subject of course to continuing compliance of the conditions of registration. However, the intermediary will have to provide a certificate from its Compliance Officer annually that these regulations as well as the eligibility criteria continue to be complied with.
Q. : Has any form for compliance certificate been prescribed? If so please mention the fact.
15. Code of Conduct :
A comprehensive Code of Conduct has been provided for in the ‘Common Regulations’ to be complied with by the intermediaries. However, though this Code seems to be elaborate, it appears that the Code of Conduct under the respective Regulations applicable to each category of intermediaries will also apply. Possibly, SEBI may from time to time, remove the common requirements that have been inserted in these regulations. Until this happens, the intermediaries would have to look at and comply with two Codes of Conduct.
16. Enquiry and punishment:
16.1 A separate Chapter has been brought into force with immediate effect, which provides for enquiry with regard to violations and punishment in the form of suspension or cancellation of the certificate of registration, or other action.
16.2 The structure and procedure remains quite similar to the existing procedures. Having said that, if one goes in detail, there are important differences with regard to the type of punishment, with regard to procedural aspects of hearing, etc.
16.3 Appeal to the Securities Appellate Tribunal can be made against orders under this Chapter.
16.4 In a future article, I may analyse the changes in the procedure and punishment.
17. Conclusion:
Clearly, the ‘Common Regulations’ are a step that has been taken towards simplification of the law, though it is equally clear that it is only a partial step. The expectation of having a common and exhaustive set of regulations dealing with all aspects relating all categories of intermediaries has not been realised. In fact, it can be seen that while the volume may decrease, the complexity remains and has even increased, since instead of repealing multiple regulations, yet another set of regulations has been created.
Part A : Direct taxes
Procedure for representation before BIFR and AAIFR :
Circular No. 5/2009, dated 2-7-2009.
For granting income-tax reliefs/concessions to be given to
sick companies for their rehabilitation under the Sick Industrial Companies (SICA)
Act, 1985 the CBDT has issued a Circular superseding all earlier ones issued on
this account — prescribing method to be followed before the Board for Industrial
and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial
and Financial Reconstruction (AAIFR).
The Director General Income Tax
(Administration), [DGIT (Admn.)] has been nominated as a nodal agency for co-ordinating
between BIFR, AAIFR and CBDT.
Every scheme where financial
assistance is sought u/s.19(2) of SICA, the consent would be granted by the
DGIT (Admn.) by considering each case on merits. Where the tax relief has been
quantified, the DGIT (Admn.) would communicate the consent/denial after
getting it approved from the CBDT. In case of incomplete information, after
calling for requisite information, the file would be put up to the CBDT and
the decision be conveyed to BIFR.
Since all the above relief
decisions are vetted by the CBDT, they would be binding on all Assessing
Officers and relief would be granted to the assessees accordingly.
In case BIFR/AAIFR takes a
different view from CBDT, the DGIT (Admn.) would be responsible for filing an
appeal before AAIFR/Delhi High Court as the case may be. Where the case is
filed by sick companies, the CCIT (Admn.) would be responsible to represent
the Department before the Appellate Authority.
Part C — Tribunal & International Tax Decisions
Authority for Advance Ruling
224 CTR 329 (AAR)
Dated : 17-6-2009
Facts :
The applicant, a company incorporated in Korea, is engaged
in the business of setting up of power stations. The applicant successfully
bid for the contract awarded by Power Grid Corporation of India Ltd. (PGCIL)
for execution of works related to 800KV/400KV Tehri Pooling Station Package
associated with Koteshwar Transmission System (Project).According to the terms and conditions of the bid and with
PGCIL’s approval, the applicant assigned a part of the contract related to
onshore supply/ services to Larsen & Toubro (L&T). The overall responsibility
for successful performance of the project continued to be on the applicant.
The applicant gave guarantee to PGCIL for successful completion of the project
and in turn, the applicant obtained a counter-guarantee from L&T for the part
assigned to L&T.PGCIL entered into 3 separate contracts in the following
manner :
Contract no. 1 : Offshore supply contract with the applicant for design,
engineering, manufacture, testing at manufacturer’s works, Free-On-Board
(FOB) dispatch, shipment, marine transportation and insurance and CIF supply
of all offshore equipment and materials, including mandatory spares from
countries outside India and testing and training to be conducted outside
India.
Contract no. 2 : Onshore supply contract with L&T for supply of certain
equipment and materials in India.
Contract no. 3 : Onshore service contract with L&T for inland
transportation, insurance, storage, erection including associated civil
works, testing and commissioning of all equipment and materials, including
offshore equipments.
On the aspect of taxation of offshore supply, the applicant
argued that the title to the equipment and material was passed outside India
and the payment for offshore supply was also received in foreign currency
outside India. Therefore, no income accrued or arose to the applicant in India
in respect of the offshore supply contract.The tax authorities argued that as the applicant had to
bear the overall responsibility of commissioning the project, the transfer of
property in goods and sale can be regarded completed in India. Accordingly,
part of the profits from supply of equipment was taxable in India.In the background aforesaid, the following issues were
raised before the AAR :
Whether
the applicant, along with L&T, can be said to constitute an AOP and,
accordingly, be assessed as an AOP in relation to all the 3 components of
the contract of the project.
Whether
the consideration for offshore supply of equipment, materials, etc., is
taxable in India under the provisions of the domestic law and the applicable
Treaty between India-Korea (Treaty).
Ruling of AAR :
On the point of AOP emergence :
Based on the Memorandum of Understanding (MOU) entered into
between the parties, the Tax Department contended that the arrangement between
the applicant and L&T constituted an AOP. For this, the Tax Department relied
on the recitals of the MOU which stated that the parties desired to co-operate
with each other for the purpose of submitting a single bid for the project and
in the event of the bid being accepted, the parties would be jointly and
severally responsible for execution of the contract. The Tax Department also
referred to other clauses dealing with joint and several responsibility,
possibility of applicant paying liquidated damages for the fault of L&T, etc.The AAR held that on the facts of the case, the
relationship did not give rise to AOP. The AAR noted that separate contracts
were entered into by PGCIL with the applicant and L&T. The assignment of
onshore supply/services by the applicant was as permitted in the bid and there
was a separate contract directly between L&T with PGCIL. L&T had worked as an
independent contractor and was entitled to separately raise and realise the
bills for the work L&T carried out for PGCIL. The individual identity of each
party, in doing the part of the work entrusted to it was preserved despite the
co-ordination between them and the overall responsibility of the applicant.The AAR concluded that :
(a) Mere collaborative effort and the overall
responsibility assumed by the applicant for the successful performance of
the project was not sufficient to constitute an AOP.(b) The requirement for the applicant to provide
performance guarantees for all the 3 contracts was not in furtherance of a
joint venture or a common design to produce income, but it was a special
stipulation insisted by PGCIL in the overall interest of the project. The
requisite cohesion, unity of action and the common objective of sharing the
revenue or profit were lacking and hence there was no PE.
The facts in the case of Geoconsult (304 ITR 283), wherein
the parties had entered into an arrangement as a ’consortium’ which was held
by the AAR to meet the requisites of an AOP, was held distinguishable from the
facts in the present case.
Part C —
International Tax Decisions
17 Guardian Industries Corporation v. ADIT
(2008) (Unreported)
S. 5, IT Act
A.Y. : 2002-2003. Dated : 31-3-2008
Issue :
Point of time for accrual of royalty income where payment is
subject to fulfilment of certain conditions.
Facts :
The assessee was an American company (‘USCo’). USCo had
entered into a technical licence agreement with an Indian company (‘IndCo’). In
terms of the agreement, IndCo was required to pay certain royalty to USCo for a
period of 8 years.
IndCo had obtained loans for its project from IDBI. Under the
loan agreement, IDBI had stipulated a condition that IndCo shall not pay royalty
to USCo till such time payments of instalments of principal, interest and any
other monies to IDBI were outstanding. USCo had also agreed to the said
condition.
IndCo defaulted in making payments to IDBI. Hence, it could
not pay any royalty to USCo between the periods 1st March 1993 to 31st March
1999. Thereafter, vide its letter dated 26th November 1999, IDBI allowed payment
of royalty for the period 1st April 1999 to 28th February 2001. Subsequently,
vide its letter dated 26th April 2001, IDBI gave its approval for payment of
past royalty (i.e., up to 31st March 1999). This was subject to two
conditions, namely, IndCo had adequate cash flows and it had no overdues to any
financial institutions or bank at the time of payment of each installment The
past royalty was permitted to be paid in 6 half-yearly installments during the
period 1st October 2001 to 1st April 2004.
On the basis that the royalty income had accrued at the time
when IDBI issued its letter of approval, the AO brought to tax the entire
royalty in the relevant previous year. In appeal, the CIT(A) confirmed the order
of the AO.
The Tribunal observed that notwithstanding that an assessee
was following mercantile or cash system of accounting, such income cannot be
brought to tax if the assessee does not have the right to receive such income
due to non-fulfilment of certain terms and conditions. The Tribunal referred to
AS-9 issued by the Institute of Chartered Accountants of India, which mentions
that revenue is to be recognised only at the time when it would be reasonable to
expect the ultimate collection; and, revenue recognition needs to be postponed
if there is uncertainty as to ultimate collection. The Tribunal observed that
the right to receive income from IndCo arose to USCo as per IDBI’s letter of
26th April 2001 and therefore, applying the ratio of E D Sassoon & Company
Ltd. v. CIT, (1954) 26 ITR 27 (SC), it held that only that portion of income
for which IndCo had complied with the terms and conditions of the said letter
can be said to have accrued.
Accordingly, only the instalments actually remitted during
the year upon fulfilment of attached conditions were held to be chargeable to
tax.
Held :
Notwithstanding the mercantile system of accounting followed
by USCo, the royalty income accrued in its favour only when both conditions
stipulated by IDBI were complied.
Part C —
International Tax Decisions
16 ADIT (IT) v. Zimmer AG
(2008) 22 SOT 297 (Kol.)
S. 9(1)(i), (vi), IT Act; Article 12,
India-Germany DTAA
A.Y. : 2001-2002. Dated : 19-12-2007
Issue :
(i) Outright sale of documentation pertaining to the
plant supplied does not constitute royalty, either u/s.9(1)(vi) or under
Article12.
(ii)
Mere shareholding by a foreign
supplier of plant in the purchaser Indian company does not result in business
connection.
Facts :
The assessee was a German company engaged in manufacture of
plant and machineries. It had entered into three separate agreements — Equipment
Supply Agreement, Engineering and Know-how Supply Agreement and Technical
Assistance Agreement — with an Indian company, which proposed to set up a plant
for manufacture of certain petrochemicals products. Under the Engineering and
Know-how Supply Agreement, the German company had undertaken to supply a fully
integrated plant. Under Engineering and Know-how Supply Agreement, the German
company agreed to sell engineering information, drawings and designs to Indian
company on outright basis. The transfer of ownership and title in the
documentation took place in Germany. The payment was also made by remittance to
Germany. Thereafter, the Indian company imported these in physical form into
India. These were required for installation and commissioning of the plant.
The Indian company’s contention was that: the import of the
documentation was similar to the import of plant; it was purchase on outright
basis of a capital asset on which depreciation was permissible and not a case of
mere right to use of engineering information and know-how; the technical
documentation formed integral part of the plant since in its absence, the Indian
company could not have set up, operated or maintained the plant; and as such the
consideration payable under the Engineering and Know-how Supply Agreement did
not constitute royalty and therefore it was not taxable either u/s. 9(1)(vi) of
the Income-tax Act or under Article 12 of the India-Germany DTAA.
The Department’s representative contended that under the
Engineering and Know-how Supply Agreement, the Indian company paid lump sum
consideration for transfer of technical know-how, design and secret process and
therefore, the payment was taxable in India (which was the country of source of
income) as royalty, not only u/s.9(1)(vi) of the Income-tax Act, but also under
Article 12(3) of the India-Germany DTAA. He also referred to the secrecy clause
in the said agreement which prohibited the Indian company from disclosing the
confidential information to any person and submitted that this made it apparent
that the German company had not sold these on outright basis, but allowed mere
use and hence, the payment was royalty u/s.9(1)(vi) of the Income-tax Act as
well as under Article 12(3) of the India-Germany DTAA. He, then, referred to the
order of the AO and argued that the German company was one of the promoters of
Indian company and therefore, there was a business connection between the German
company and the Indian company and hence, the income should be taxable
u/s.9(1)(i) itself. He also referred to the decisions in N. V. Philips’
Gloeilempenfabrieken v. CIT, (1988) 172 ITR 541(Cal.) and N. V. Philips
v. CIT, (1988) 172 ITR 521 (Cal.) to substantiate that even lump sum
payments were taxable in India as royalty.
The Tribunal referred to various relevant clauses of the
Engineering and Know-how Supply Agreement and found that : ownership, title and
risk in documentation was transferred in Germany; consideration was also paid
outside India; documentation was imported into India; the engineering supplied
by the German company was limited to designs of plant supplied by it; and supply
of engineering, drawings and designs was incidental to sale of plant which was
tailor-made to suit specific requirements of the Indian company. Considering
these factors, the Tribunal observed that supply of engineering, drawings and
designs was integral part of supply of plant and it could not be viewed in
isolation and therefore, the payment was not for acquiring mere right to use,
which would constitute royalty. The Tribunal found that even under Article 12(3)
of the India-Germany DTAA, it could not be considered as royalty. It then
referred to the decision in Scientific Engineering House P. Ltd. (1986) 157 ITR
86 (SC) wherein the Supreme Court had held that lump sum payment made to acquire
technical know-how to facilitate operations and process amounted to acquisition
of capital asset and technical drawings, designs, charts, processing data and
other literature fell within the definitions of ‘plant’. In light of that it
agreed with the German company’s contention that what was acquired was ‘plant’,
it was acquired outside India and therefore, the payment could not be taxed as
royalty in India. The Tribunal, thereafter, referred to and discussed the
following decisions and observed that these decisions squarely supported the
contention that the consideration received by the German company under the
Engineering and Know-how Supply Agreement was not in the nature of royalty,
either u/s.9(1)(vi) of Income-tax Act or under Article12 of India-Germany DTAA.
(a) DCIT v. Finolex Pipes Ltd., (2007) 106 TTJ 741 (Pune)
(b) Skoda Export Co. Ltd. v. DCIT, (2003) 81 TTJ 633
(Visakha.)
(c) ACIT v. King Taudevin & Gregson Ltd., (2002) 80
ITD 281 (Bang.)
(d) CIT v. Klayman Porcelains Ltd., (1998) 229 ITR
735 (AP)
(e) CIT v. Neyveli Lignite Corporation Ltd., (2000)
243 ITR 459 (Mad.)
(f) CIT v. Davy Ashmore India Ltd., (1991) 190 ITR
626 (Cal.)
Held :
(i) Where both the plant as well as the engineering documentation were delivered outside India, payments for them were made outside India, supply of plant alongwith documentation represented a composite supply and hence, the payment for documentation cannot be considered separately as royalty, either u/s.9(1)(vi) of the Income-tax Act or under Article 12 of the India-Germany DTAA.
(ii) Merely because the German company is one of the shareholders of Indian company, payments made by the Indian company to the German company for supply of plant cannot be brought to tax as income in India on the ground of existence of business connection of German Company in India.
Part C —
International Tax Decisions
15 ACIT v. Pride Foramer France Sas (2008) 116
TTJ 369 (Del.)
S. 44BB, IT Act; Article 12,
India-France DTAA
A.Y. : 2002-2003. Dated : 22-2-2008
Issue :
(i) Actual reimbursements cannot be considered as income
for the purpose of S. 44BB.
(ii)
Interest on income-tax refund is
subject to Article 12(2) of DTAA and not under Article 12(5).
Facts :
(i) The assessee was a French company operating in India in
oil drilling operations and related services under several contracts with ONGC.
Under one of the contracts, the assessee had charter-hired its drilling rig and
received gross fee for drilling operations and had offered the income for
taxation in accordance with S. 44BB of Income-tax Act. While working out the
receipts, the assessee had not taken into computation gross sum of Rs.34.73
lakhs, which was received by it from ONGC by way of reimbursements. Relying on
the Delhi Tribunal’s decision in Sedco Forex International Drilling Inc v.
Deputy CIT, (2000) 67 TTJ 670 (Del.), the assessee claimed that
reimbursements of actual cost of supply should not be included for the purpose
of computing receipts in terms of S. 44BB of Income-tax Act. The AO observed
that the reimbursements were part of contractual receipts and hence were
includible while computing profit u/s.44BB of Income-tax Act.
The assessee’s contention was that the reimbursements were
wholly unrelated to the project. For instance, these pertained to loss of
equipment, use of satellite communication and supply of dry fruits. After
considering that the AO had found that there was no element of profit in
reimbursements, CIT(A) found that supply of material was obligation of ONGC and
assessee had merely provided these services to ONGC. Relying on the Delhi
Tribunal’s decision in Sedco forex International Inc (supra),
CIT(A) held that the reimbursed expenses were not taxable u/s.44BB.
The Tribunal noted that S. 44BB is a code in itself, which
excludes application of normal business income computation provisions and to
assess any income u/s.44BB, the activity should be the one described in S.
44BB(2). The reimbursements made by ONGC had nothing to do with activity of
prospecting for, or extraction, or production of, mineral oils. Also, the
reimbursements were based on actual expenditure and there was no element of
profit. Hence, reimbursements were rightly held to be excludible by CIT(A).
(ii) The assessee had received interest on income-tax refund.
The assessee claimed that such interest should be taxed at the rate applicable
in terms of Article 12(2) of India-France DTAA (which restricts the tax rate to
15%). According to AO, the interest should be considered in terms of Article
12(5) (which applies in case the recipient of interest carries on business
through a PE) read with Article 7 of DTAA, since interest had accrued to the
assessee through its PE in India. The assessee’s contention was that the
interest received by it was not in respect of debt which was effectively
connected with PE, which is one of the conditions under Article 12(5) and
therefore, Article 12(5) could not be applied. The AO, however, considered
interest as chargeable to tax under Article 12(5) at the rate of tax applicable
to a foreign company. In appeal, the CIT(A) upheld the order of the AO.
The Tribunal noted that similar issue was considered in
Application No P 17 of 1998, In re (1999) 236 ITR 637 (AAR) wherein the
AAR had held that such case was covered under Article 12(2) of DTAA. The
Tribunal observed that although the order of AAR would not have a binding force,
it would have persuasive value. Further, the tax authorities did not bring any
contrary decision to the effect that the interest should be considered under
Article 12(5) of DTAA to the notice of the Tribunal. The Tribunal also noted
that in the assessee’s own case in earlier year, the Tribunal had observed that
the assessee was not in the business of obtaining income-tax refunds and earning
interest thereon and therefore, the interest was neither derived from, nor
attributable to the business activity of the assessee. Considering both the
abovementioned reasons, the Tribunal held that the interest cannot be taxed
under Article 12(5) of DTAA.
Held :
(i) If reimbursements were based on actual expenditure, had
no element of profit and had no relation to activity described in S. 44BB(2),
provisions of S. 44BB cannot be applied.
(ii) Interest received on delayed issue of income-tax
refunds would be chargeable to tax under Article 12(2) of DTAA and not under
Article 12(5) even though the assessee had PE in India, since the interest was
neither derived from, nor attributable to the business activity of the
assessee.
14 ACIT v.
Unger Booke David (2008)
(Unreported)
S. 9(1)(ii), IT Act
A.Y. : 2001-2002. Dated : 15-2-2008
Issue :
Taxability u/s.9(1)(ii) of salary relatable to visits outside
India in respect of expatriate deputed to India being R but NOR.
Facts :
The assessee was deputed to India as South East Asia Bureau
Chief of The Economist, UK for collection of news and views. He was having his
permanent base in India, controlling the operations from India and staying in
India with his family. During relevant year, the assessee visited Pakistan for 7
days, Sri Lanka for 14 days and the UK for 38 days, aggregating to a stay of 59
days outside India. Since his residential status during the relevant year was
resident but not ordinarily resident, he claimed that the remuneration received
for 59 days did not relate to services rendered to India and hence, it was not
taxable in India.
To examine the claim, the AO asked the assessee to furnish
copy of appointment/deputation letter, which the assessee did not furnish. Since
the assessee was responsible for South East Asian countries and the salary was
received because of his assignment in India, the AO held that the visits outside
India were incidental to the assignment in India and hence the salary for 59
days outside India was also taxable in India.
In appeal before CIT(A), the assessee furnished several
documents including the deputation letter and news stories/articles collected
from Pakistan, Sri Lanka, discussion with London editors on SEA Region
activities. After reviewing the documents, the CIT(A) held that the assessee’s
visits to Pakistan and Sri Lanka were for work done in those countries and hence
the remuneration relatable to stay in those countries was not taxable in India.
In respect of the assessee’s stay of 38 days in the UK at a stretch, the CIT(A)
held that entire period of 38 days cannot be considered as towards briefing
London editors about developments in SEA Region. The CIT(A) concluded that
period of 18 days could be considered for briefing and hence, remuneration
relatable to that period was not taxable in India but remuneration of balance
days was held taxable in India.
The Tribunal found that: the assessee was appointed as South
East Asia Bureau Chief for collection of news, views and information on various
aspects pertaining to that region; he was staying in India with his family; he
had no establishment in Pakistan and Sri Lanka; there was no material on record
to indicate that the terms of his appointment varied when he visited those
countries; and during visits to countries outside India he had not shifted his
family to those countries. The Tribunal observed that the assignment terms
contained provision for gathering news from neighbouring countries and
therefore, short visits to Pakistan and Sri Lanka for collection of news and to
London Head Quarters to brief the editors were also in connection with the
employment in India. The Tribunal, then, observed that the issue in question was
squarely covered by the decision in CIT v. Halliburton Offshore Services Inc,
(2004) 271 ITR 395 (Uttaranchal), wherein the Court had observed that S.
9(1)(ii) read with the Explanation provides for an artificial place of accrual
for income taxable under the head ‘Salaries’ and in such case, the place of
receipt or accrual of salary is immaterial. The Tribunal also referred to the
decision in the case of Hiromi Hirose in ITA No. 4506/Del./2003 for A.Y. 2003-04
and observed that the facts in that case were identical to those of the
assessee’s case.
Held :
Following the precedent in case of Hiromi Hirose, the
Tribunal held that the CIT(A) was not justified in treating that the salary
relatable to Pakistan, Sri Lanka and UK was for performance of duties outside
India and held that such salary was taxable in India.
Editorial Note : The abovementioned decision of the Delhi
Tribunal appears to be taking a position different than that taken by the Delhi
Tribunal in its two decisions in DCIT v. Mr. Erick Moroux C/o. Air France and
Others, (BCAJ July 2008 Page 455) and DCIT v. Vivek Paul, [82 TTJ
(Del.) 699], wherein it had held that Salary income of an expatriate who partly
rendered services in India and partly outside India would not be chargeable to
tax in India in respect of proportionate period for which services are performed
outside India.
As costs of repayment and interest soar, exchequers can be wiped out. The most important reason why India was relatively insulated from the global meltdown of 2008-09 was because our capital controls restricted the amounts which the government and companies could have borrowed globally; this insulated us from the devastating downgrades and bond market movements that damaged European economies.
Dump Surplus Grain, dump the minister
It is scandalous that inflation in cereals remains above 17 per cent even as food grain stocks with the Centre are close to 80 million tonnes. The Committee on Agricultural Costs and Prices (CACP) paper estimates that the buffer stocking requirement would go up, thanks to the Food Security law, but not higher than 41.5 million as of July 1. The rest is excess.
The government must sell off excess stocks at a price recommended by the CACP, Rs 13,500 a tonne in the case of wheat. The food minister and his secretary must explain to the people why they are hoarding one-third the annual output of grain, a criminal activity that pushes up prices in the market, and locks up huge government funds: Rs 70,000-92,000 crore, or nearly 1 per cent of GDP. The CACP notes this infusion of “excess” money into the economy without corresponding flow of goods has led to the paradox of rising prices of rice and wheat, ‘amidst overflowing stocks in government godowns.’
Blame it on incompetence, not the Food Security law. The paper says that buffer stocks can be limited to 10-15 MT and still ensure food security, with innovative, state-specific local solutions, including direct income transfers.
You want people who are self-confident and not afraid to express their views, but if the talk-tolisten ratio is anything north of 60%, you want to ask why. Is it because this person is self-important and not interested in learning from others — or just because he is nervous and rambling? Some people carry with them and spread a negative energy.
Some carry and share a positivity and optimism towards life. Energy-givers are compassionate, generous and the type of people you immediately want to spend time with…. Then, there is reading. Reading gives depth.
By striking down as unconstitutional a particular provision of the Representation of the People Act, which allows convicted parliamentarians and legislators three months to file their appeal with the objective of getting stayed their conviction and the sentence, the apex court has made it clear that its ruling will be with prospective effect. MPs and MLAs who have already moved appeals against criminal charges will be exempt from the action prescribed by the court. But those convicted by trial courts in the future will no longer be able to invoke Section 8(4) of the RP Act. The decision, therefore, is a scathing comment on Parliament, which the court described as having exceeded its powers in providing immunity to politicians with dubious records.
Over the years, there have been an increasing number of cases in which serious allegations ranging from criminal misuse of public office, corruption, impropriety and other noxious activities have been levelled against politicians of all hues. An estimated 76 of the 543 MPs elected in 2009 face serious criminal charges such as murder, rape and dacoity. Several of these cases do not reach their logical conclusion for a variety of reasons, including attempts to circumvent the law, witnesses turning hostile, untrustworthy law enforcement and, sometimes, undue pressure on the judiciary.
Both judgments may indeed keep some criminals out of elections. But they carry grave risks of keeping honourable people out too. Many crooks have won election while in jail, but so have honourable persons (such as those jailed by Indira Gandhi during the Emergency).
Worse, the new judgment could set off an avalanche of political vendettas. Politicians often launch false cases against opponents, sometimes in connivance with partisan judges. This deplorable ploy may be strengthened by the latest judgement. We desperately need to cleanse Indian politics, but not in this manner.
The key problem is not that Indian politicians are inherently crooked or criminal. Rather, the moribund justice system gives a huge incentive for criminals to contest and win elections. Judicial processes are so dismally slow that hardly any resourceful person gets convicted quickly, and many die of old age before exhausting appeals. So, nobody knows for sure who is a criminal and who is an innocent victim of false accusations.
Besides, every party in power misuses the police to harass opponents while protecting its own goons. Instead of justice and clean politics, we have rising criminalization and rising mud-slinging, without accountability for either the criminals or mud-slingers.
The Supreme Court’s two judgments look like attempts to bypass the pernicious impact of unending legal delays. But while such short cuts have their attractions, they carry grave risks too. The right way forward is surely for the Supreme Court to devise procedures that ensure quick, time-bound justice. Judges are fond of saying that justice delayed is justice denied, yet they have failed dismally to end this injustice.
We cannot truly reform politics until we reform the justice system. A land without justice in a reasonable period will necessarily be a land in which lawbreakers will beat law-abiders. This will be true not only in politics but in business, the professions, and everything else.
This is also a very effective approach in getting the most out of knowledge workers. Describe the outcome you are trying to achieve, be clear on the requirements, and preserve the worker’s autonomy.
If the worker needs help, she will ask for it. There is a scientific reason why employees are less effective when tasks are dictated. Amy Arnsten, a neuroscience professor at Yale University, studies the importance of feeling in control.
In an interview at her Yale Laboratory, Arnsten explained that when people lose their sense of control, such as when tasks are dictated to them, the brain’s emotional response center can actually cause a decrease in cognitive functioning. This would presumably lead to a drop in productivity.
If a manager describes the long-term outcome he wants, rather than dictating specific actions, the employee can then decide how to arrive there and preserve his perceived sense of control, cognitive function, and so ultimately improve his productivity. Both practical experience and now scientific evidence tell us often a better approach is to protect the autonomy of the worker and provide highlevel direction.
Imposing fines is an effective penalty for causing delays in justice delivery that every citizen can expect. It is also a measure of accountability that the government is belatedly trying to enforce through the higher judiciary.While it is easy to hold the lower courts guilty for slowing the justice delivery mechanism,the Supreme Court and the high courts too contribute to delays and arrears.Across the board,others suffer from the inexplicable weakness of sitting on judgments.
(Comment: As the Government is the largest litigant in Revenue Matters, it need to retrospect as to what is the role of its officials in seeking repeated adjournments? Also make them accountable!!!)
The new food law comes at a gigantic cost to a nation that cannot afford it. It will not solve the problem, which is malnutrition and not hunger. But it will undoubtedly result in a colossal scam when a large part of the grain mountain is diverted into the black market. Instead of improving delivery of the current PDS system, we have burdened a weak, corrupt institution with a massive new mandate. When institutions cannot implement existing laws, it is madness to create new ones. It only widens the gap between aspiration and performance, damages the nation’s moral character, and undermines the trust between rulers and the ruled.
What inhibits decent people from entering politics in India is black money and political dynasties. A talented, high minded person will not join a party without inner democracy where merit is not rewarded. Fortunately, a new generation of political leaders has begun to realize that a young India is waking up politically and it will not tolerate the old sycophantic politics of ‘rishwat’ and ‘sifarish’. Political parties will have to learn to value talent the way India’s companies’ do, and a party with inner democracy and meritocracy is bound to gain competitive advantage in the end. Dynasties are thus warned.
All of us struggle to give meaning to our lives. The standard Indian solution is to turn inwards and seek liberation from human bondage through meditation. But there also exists in our tradition the path of action, karma yoga, which means to leave the world a little better than we found it. The answer to our democratic discontent is thus to dive into one’s neighbourhood and assume the duties of a citizen. Don’t worry about the corruption of 2G, Commonwealth Games, or Coalgate. Act instead against the sleaze in our locality. Just one hour a week in the neighbourhood is the best way to reciprocate the compliment that our founding fathers paid us.
Can you? Even after a few moments to reflect and consider, most people can’t name a single one. Obama? Bernanke? Cameron ? Blankfein? They’re hardly Churchill, Roosevelt, Lincoln , or even J P Morgan.
I’d like to advance a simple thesis: today’s leaders are failing on a grand, epic, global, historic scale — at precisely a time when leadership is sorely needed most. They’re failing me, everyone under the age of 35, and everyone worth less than about $50 million.
I can excuse leaders who are boring , mean, stingy, greedy, uninteresting , self-obsessed , vacuous and generally lame. I can even excuse lying, cheating and stealing. But I can’t excuse the fact that they’ve failed.
If I had five seconds with today’s so-called leaders, I’d simply , firmly, gently say (and I bet you would, too): you’ve failed to provide us opportunity.
You’ve failed to provide us security . You’ve failed to provide us liberty. You’ve failed to provide us dignity. You’ve failed to provide us prosperity. So: resign . Quit. Step aside…
While there are nuances and complications, it’s also true that today’s leaders can act, right now, right this second, in greater degree, with fiercer conviction, to make things not just marginally better — but dramatically so.
The issue in India has come up because no longer can mere foreign shareholding of a company be used to determine the extent and control of an Indian company. Control has two aspects: de facto control and de jure control. Merely using a shareholding threshold of 25 per cent or 50 per cent foreign ownership to define an Indian company as a foreign-controlled company is looking at it purely from a de jure control perspective – a narrow legal view that doesn’t take into account the other aspects and rights accorded to shareholders.
On the contrary, de facto control looks at whether the foreign owner has any direct or indirect influence on strategic decisions taken at the shareholder or the board level, and in the operating day-to-day management. For a proper determination of control, one needs to go beyond the form and look at substance, which translates to recognising de facto control, and not merely restricting the evaluation to de jure control. The concept of de facto control is not just about influencing the composition of the board of directors, but also influencing other powers of the board and management. Positive and negative consents, veto rights, contingent control, put and call options, among others are all examples of control features incorporated into the shareholders’ agreement that goes beyond the current shareholding.
The RBI has taken a step in the right direction to raise the issue of de facto control and notify it in the foreign direct investment policies. Other regulations – the Companies Bill, 2012 and the Securities and Exchange Board of India (Sebi) takeover code – seem to recognise the de facto control aspect. The Companies Bill, 2012, pending in Parliament, says: “‘Control’ shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner”. The Sebi takeover code paraphrases the same definition of control as that of the Companies Bill.
Many countries such as the US, Canada and Australia recognise the de facto control feature. In legislation where national security or public interest is involved, de facto control is considered. Increasingly, court rulings are looking into de facto control. In India, as sectors such as retail, aviation, defence and nuclear power are opened up to foreign ownership, it is de facto control that needs to be considered.
At the end, the true test of control is whether majority shareholders of the Indian company have strategic and operational freedom to take decisions independent of the foreign shareholder.
(Source: Extracts from an Article by Mr. Shriram Subramanian in Business Standard dated 29-06-2013.)
Series 3
Arjun (A) – Last time you told me about gross negligence. It was a great relief that every negligence is not necessarily a gross negligence!
Shrikrishna (S)–No my dear! Don’t take it so lightly. It is not a licence to commit any blunder.
A – But you only said mere error or even a blunder is not negligence and every negligence is not a gross negligence.
S – It is true. The Council itself has taken that view. But don’t stretch it too far. The line between the two is very thin.
A – But how can one be so perfect? In every audit, there may be some flaw or the other. It is impossible to do any audit so ideally perfect.
S – Agreed. But what is important is your approach and attitude. Moreover, I also mentioned to you that now the amended clause also talks of ‘lack of due diligence’. This is a very wide concept.
A – But how does one judge a member’s attitude? How can one prove that there was no negligence; but only an inadvertent error?
S – Remember, work should not only be done but it should be seen that it is done. You need to maintain working papers.
A – Our clients don’t have a good accountant. There is always a mess in the records. Some how, we manage to draw up the balance sheet ourselves. If there are errors, we get them set right there and then. Who will keep all those queries? We don’t have time nor space to keep so many papers.
S – Understand this difficulty. But you have a double jeopardy. On one hand, clients do not realise how much work you have done. So they don’t pay your fees, let alone increase. On the other hand, your position is vulnerable before the Council.
A – But Council should understand the difficulties of the common practioners. They don’t have so much resources.
S – That is where your attitude comes into play. You have technology at your disposal. You can always email your queries, store them in your computers.
A – But clients can’t understand the queries. They want us only to reply our own queries!
S – But this will at least make him aware of the extent of discrepancies.
A – Now take our accounting standards. They just don’t care. They are not interested even in knowing the implications.
S – You need to use your persuasion skills. Sooner or later, they will realise it.
A – But what to do till then?
S – You need to be assertive. If you tolerate or cover up the flaws, you will be taken for granted.
A – That is already happening. What is the solution?
S – See, my dear. If you compromise once, you invite a great risk. First and foremost, you lose your respect. The value of the profession also goes down.
A – We become helpless.
S – Secondly, if there are flaws in the accounts, you may suffer scrutiny from Revenue Authorities.
A – Yes. We need to ‘manage’ the things over there.
S – And client says, it is your own mistake. So he does not pay for your efforts in taxdepartments.
A – I am told, now-a-days, tax authorities are routinely writing to the Institute about the shortcomings in audited accounts.
S – That’s what I am saying. And even if the client does not pay or hike the audit fees, you have to continue the audit. You are always worried that if some new auditor comes in your place, your mistakes will get exposed! Hence, you perpetuate your mistakes.
A – What you say is true. In a way, we blackmail ourselves and are afraid of deviating from wrong path.
S – Your compromising attitude leads to negligence – or lack of due diligence. Negligence is a very wide term. It covers many things. You can not define it. There can not be an exhaustive list.
A – You mean it is as endless as your manifestations that you described in ‘Vishwa Roop Darshan’!
S – Yes. That I told you the 11th Chapter of ‘Geeta’.
A – Still, you please tell me at least a few illustrations of negligence.
S – It starts right from your appointment. See that it is properly made with reference to applicable laws, that organisation’s bylaws, and so on. You must take an appointment letter. Then, maintain working papers, preserve the queries raised by you and their replies.
A – Yes. I will be careful.
S – Then take Management Representation Letter – MRL. I don’t think you have ever taken it!
A – I have recently started taking. But not in all cases.
S – Prepare a proper audit program covering all aspect of audit. This you studied in exam but never followed.
A – I have seen some CAs who spend lot of time on all these things. They compile heap of files of working papers. This report and that opinion! I wonder whether they really do any audit!
S – It is easy to criticise others. But try to understand the spirit behind it. Then you need to know not only the applicable laws – like tax, company law, FEMA; but also your Institute’s pronouncements like accounting standards, auditing standards, guidance notes, statements, resolutions – and so on.
A – Wait wait! I cannot digest and remember all these things. We will meet again after this July returns, when I will focus on audits.
S – Yes. I don’t mind meeting again. But don’t be under an impression that negligence is invoked only in audits. It also covers tax practice. In fact, it encompasses each and every aspect of your professional functioning. I will explain next time.
Om Shanti !
The above dialogue between Shri Krishna and Arjuna is a continuation of earlier dialogues published in BCA Journals of May 2013 and June 2013. It deals with the terminologies ‘gross negligence’ and ‘lack of due diligence’ used in Clause (7) of Part I of Second Schedule. This is the most important and serious charge of misconduct. Discussion on this clause will continue.
Presently, Indian companies in the manufacturing, infrastructure sector and hotel sector, which are consistent foreign exchange earners, can avail of ECB for repayment of their outstanding Rupee loan(s) availed of from the domestic banking system and / or for fresh Rupee capital expenditure under the Approval Route.
This circular permits the above (i.e. Indian companies in the manufacturing, infrastructure sector and hotel sector) which have established Joint Venture (JV) / Wholly Owned Subsidiary (WOS) / have acquired assets overseas to avail of ECB under the $ 10 billion scheme for repayment of all term loans having average residual maturity of 5 years and above / credit facilities availed of by Indian companies from domestic banks for investment in JV / WOS overseas, in addition to ‘Capital Expenditure’. Some of the important terms and conditions are: –
1. ECB that can be availed of is the higher of 75% of the average foreign exchange earnings realised during the past three financial years and / or 75% of the average of foreign exchange earnings potential for the next three financial years of the Indian companies from the JV / WOS / assets abroad. These projections have to be certified by the Statutory Auditors / Chartered Accountant / Certified Public Accountant / Category I Merchant Banker registered with SEBI / an Investment Banker outside India registered with the appropriate regulatory authority in the host country.
2. ECB availed of under the scheme has to be repaid out of foreign exchange earnings from the overseas JV / WOS / assets.
3. Past earnings in the form of dividend / repatriated profit / other foreign exchange inflows like royalty, technical know-how, fee, etc. from overseas JV / WOS / assets will be reckoned as foreign exchange earnings for the purpose of $ 10 billion scheme.
External Commercial Borrowings (ECB) Policy – Review of all-in-cost ceiling
This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till 31st March, 2013: –
|
Sr. |
Average Maturity Period |
All-in-cost over 6 month |
|
1 |
Three years and up to |
350 bps |
|
2. |
More than five years |
500 bps |
This circular permits borrowers to refinance under the Approval Route, upto 30th September, 2013, an existing ECB by raising fresh ECB at a higher all-in-cost / reschedule an existing ECB at a higher all-in-cost. However, the enhanced all-in-cost must not exceed the current all-in-cost ceiling.
Trade Credits for Imports into India – Review of all-in-cost ceiling
This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till 30th September, 2013: –
|
Maturity period |
All-in-cost ceilings over |
|
Up to 1 year |
350 basis points |
|
More than 1 year and up to |
Notification No. FEMA.271/RB-2013 dated March 19, 2013
Presently, banks resident in India require specific approval of RBI to acquire shares of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), Belgium.
This circular grants general permission to a bank in India which has been permitted by RBI to become a member of the ‘SWIFT User’s Group in India’ to acquire the shares of SWIFT.
This circular prohibits banks from banks from carrying out any proprietary trading in the currency futures / exchange traded currency options markets. Thus, banks can undertake transactions in these markets only on behalf of their clients.
This circular permits NBFC – AFC to avail ECB (including outstanding ECB) up to 75% of their owned funds, subject to a maximum of $ 200 million or its equivalent per financial year under the Automatic Route to finance the import of infrastructure equipment for leasing to infrastructure projects. ECB in excess of the above limit can be availed of under the Approval Route. The minimum average maturity period of the ECB must be five years. Where ECB is availed of in the form of Foreign Currency Bonds from international capital markets, than such ECB must be raised only from those international capital markets that are subject to regulations prescribed by regulator in the host country which is a member of the Financial Action Task Force (FATF) and is compliant with FATF guidelines. Foreign currency risk in respect of ECB will have to be hedged in full.
Presently, resident entities who have hedged their foreign exchange risks are required to submit to their Banks a Quarterly certificate signed by their statutory auditors stating that the contracts outstanding at any point of time with all banks during the quarter did not exceed the value of the underlying exposures.
This circular provides that resident entities now have to submit an annual certificate from their statutory auditors stating that the contracts outstanding with all banks at any time during the year did not exceed the value of the underlying exposures at that time.
Resident entities will have to continue to give an undertaking to the Banks stating that the contracted exposure against which the derivative transaction is being booked has not been used for any derivative transaction with any other bank.
PRESS NOTE 3 (2013 Series) – D/o IPP F. No. 5/3/2005- FC.I Dated June 03, 2013
Review of the policy on foreign direct investment in the Multi Brand Trading Sector – amendement of paragraph 6.2.16.5(2) of ‘Circular 1 of 2013 – Consolidated FDI Policy’
This Press Note has amended the List of States / Union Territories has mentioned in paragraph 6.2.16.5(1)(viii) by adding the name of Karnataka as the State which has given its consent to implent the policy on Multi Brand Retail Trading. With this the name of States / Union Territories that have given their consent has increased to 12. The revised list is as under: –
|
S. No |
Sector/Activity |
% of FDI Cap/ |
Entry route |
|
6.2.16.5 |
Multi Brand Retail |
51% |
Government |
|
|
(1) FDI in…. |
||
Foreign Investment in India – Guidelines for calculation of total foreign investment in Indian companies, transfer of ownership and control of Indian companies and downstream investment by Indian companies
Vide the above Notification a new Schedule – Schedule 14 – has been added in Notification No. FEMA 20/2000-RB dated 3rd May 2000 (Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000). This Notification has come into effect, retrospectively, from 13th February, 2009.
Annexed to this circular are guidelines for calculation of total foreign investment, i.e., direct and indirect foreign investment in Indian companies and for establishment of Indian companies/ transfer of ownership or control of Indian companies from resident Indian citizens to non-resident entities, in sectors with caps. Since these guidelines are to be applied retrospectively, this circular provides that: –
1. Any foreign investment already made in accordance with the guidelines in existence prior to 13th February, 2009 would not require any modification to conform to these guidelines.
2. All other investments, after the said date (i.e. 13th February, 2009), would come under the ambit of these new guidelines. Hence, in case of investments made between 13th February, 2009 and the date of publication of the FEMA notification (notified vide G.S.R. 393(E) dated 21st June, 2013), Indian companies have to intimate the concerned Regional Office of RBI, within 90 days from the date of this circular, through their bank, detailed position with regard to the issue / transfer of shares or downstream investment which is not in conformity with the regulatory framework. They have to then comply with the guidelines within 6 months or such extended time as considered appropriate by RBI in consultation with Government of India.
Presently,
a. Import of gold on consignment basis by banks, nominated agencies / premier / star trading houses is permitted only to meet the genuine needs of the exporters of gold jewellery.
b. All Letters of Credit (LC) to be opened by Nominated Banks / Agencies for import of gold under all categories can only be on 100% cash margin basis and imports of gold will necessarily have to be on Documents against Payment (DP) basis. Thus, import of gold on Documents against Acceptance (DA) basis is not permitted.
This circular clarifies that Banks are required to ensure that credit in any form or name is not enabled for import of gold by the nominated agencies, etc. Import of gold on loan basis by banks & nominated agencies is permitted only for on-lending to exporters of jewellery as the restrictions of non-availing of credit for import of gold is not applicable to them.
Master Circulars dated July 1, 2013
RBI has issued 15 Master Circulars. These Master Circulars consolidate the existing instructions on the subject at one place. These Master Circulars are being issued with a sunset clause of one year. They will stand withdrawn on 1st July, 2014 and be replaced with an updated Master Circular on the subject.
Presently, a Foreign Institutional Investor (FII) is permitted to hedge the currency risk on the market value of their entire investment in equity and/ or debt in India.
This circular clarifies that if a FII wants to hedge the exposure of one of its sub-account holders it must produce a clear mandate from the sub-account holder indicating the latter’s (sub-account holders) intention to enter into the derivative transaction. Banks must also verify the mandate as well as the eligibility of the contract with respect to the market value of the securities held in the concerned sub-account.
Presently, credit enhancement can be provided by multilateral/regional financial institutions, Government owned development financial institutions, direct/indirect foreign equity holder(s), under the automatic route, for domestic debt raised through issue of capital market instruments, such as, Rupee denominated bonds and debentures, by Indian companies engaged exclusively in the development of infrastructure and by Infrastructure Finance Companies (IFC).
This circular states that credit enhancement can be also be provided by eligible non-resident entities to the domestic debt raised through issue of INR bonds /debentures by all borrowers eligible to raise ECB under the automatic route, subject to the following: –
1. The minimum average maturity of the underlying debt instruments must be three years.
2. Prepayment and call / put options will not be permissible for these capital market instruments with an average maturity period of up to 3 years.
Presently, eligible borrowers can avail of ECB for import of capital goods for new projects/modernisation/ expansion of existing production units in the real sector, infrastructure sector and service sector. This circular permits eligible borrowers to avail ECB (under the Automatic Route/Approval Route, as the case may be) for import of services, technical knowhow and payment of license fees as part of import of capital goods by the companies for use in the manufacturing and infrastructure sectors as permissible end uses of ECB, subject to the following: –
(i) There must be a duly signed agreement between the service provider and the borrower company.
(ii) The original invoice raised by the service provider as per the payment schedule in the agreement must be duly certified by the borrower company.
(iii) The importer must give a declaration to the effect that the entire expenditure on import of services will be capitalised.
(iv) The importer must give a declaration to the effect that the entire expenditure on import of services forms part of project cost.
(v) Bank has to ensure the bonafides of the transaction.
