August Archives

Fate of ‘Hoarding’, hanging !

Introduction
The issue about levy of VAT on transactions of ‘transfer of right to use goods’ (lease transaction), has become highly debatable. On one hand dealers are paying service tax, whereas the sales tax departments are levying VAT considering the same as transactions of ‘lease’, therefore, ‘deemed sale of goods’.

Particularly, the controversy relating to levy of tax on charges for advertisement hoardings, has become more complex due to conflicting judgments of various.

Hoarding – the concept
The hoardings are normally put up on strategic locations like on the roads, buildings, flyovers etc. Normally these properties belong to government authorities or may belong to private parties. Such authorities or parties, as the case may be, grant licenses for putting up hoardings by accepting proposals through tender etc. On getting such permission, the advertising agencies create necessary infrastructure on the given premises. Normally, hoardings are fixed on a metal frame, which are again fixed into the walls/land etc., and sometimes may require civil work also. The actual customer, desiring to put advertisement, will stick their printed material on paper/flex or other such material on such hoarding. The period of display is normally pre-agreed. Against such advertisements the advertising agency gets charges. Considering such activity as of rendering services either advertisement services or leasing of immovable property etc., service tax is paid.

Whether hoarding charges liable under VAT?
There are different judgments on the above issue.

Selvel Advertising Private Ltd. vs. Commercial Tax Officer (89 STC 1) (WBTT)
In this judgment, the West Bengal Taxation Tribunal, by majority, held that the receipts towards hoardings are liable to Sales Tax as lease sales. The structure/hoarding was held as movable property.

The State of Tamil Nadu vs. Tvl. Jayalakshmi Enterprises 2011-12 (17) TNCT-J P. 92.(Mad)

Held, structure is immovable property and hoardings are not liable to VAT /Sales Tax.

M/s.TIM Delhi Airport Advertising Pvt. Ltd. vs. Special Comm.-II, Dept. of Trade and Taxes (W.P.(C)1625/2014 & CM 3374/2014 dt.2.5.2016) (Delhi)

The hoardings were situated in Airports, a restricted area. High Court held that, there is no possibility of advertiser giving control of hoarding and hence not liable to VAT .

Recent Judgment
Recently Hon. Kerala High Court had an occasion to deal with above issue in case of Delta Communications vs. The State of Kerala (90 VST 438)(Ker). The facts, as noted by Hon. High Court, are as under:

“2. Brief facts relevant for the disposal of the revision are stated hereunder:

The revision petitioner is a partnership firm engaged in the business of outdoor marketing media at Kottayam. The advertisements are displayed in hoardings for the above purpose. The appellant acquires land on lease in various places in the State of Kerala, and structures are erected on the property taken on lease. Thereafter, hoardings are fixed on this structure and it is let out to various companies for advertising their products. The revision petitioner receives rental charges for letting out the hoardings. During the year 2007-2008, the revision petitioner received rental charges amounting to Rs.36,70,983/-. “

The prime argument of dealer was that it is immovable property, hence, cannot liable to VAT . There was also argument based on ground that there is no passing of effective control, to consider the transaction as lease transaction.

Hon. Kerala High Court referred to various judgments cited on both sides about meaning of nature of immovable property. Hon. High Court rejected the contention of dealer about immovable nature of hoarding in following words;

“14. It is clear that so far as the structures involved in this case are concerned, same are constructed using tempered steel/thick steel poles by attaching the same to a concrete structure embedded on earth and erected using nuts and bolts. The Assessing Authority had evaluated the factual circumstances and came to the finding that the structure erected is ‘goods’ as defined under the Act and therefore is exigible to tax. This finding was confirmed by the First Appellate Authority as well as the Tribunal after taking into account the principles laid down in various judgments of the Apex Court and other Courts and Tribunals. According to us, so far as the structure involved in this case is concerned, taking into account of the explanations of the learned counsel for the petitioner, it is fastened to earth and is detachable easily and therefore, is not an immovable property. Further the structure so erected is never a complicated installation unlike a heavy machinery fitted in a factory premises by assembling various components and then attached to earth, which becomes a complicated procedure, whereas a hoarding is fastened to a concrete structure on earth using nuts and bolts, the removal of which is a simple procedure which makes it a movable article under the Act. In this connection counsel for the petitioner has brought to our attention the judgment in ‘State of Tamilnadu vs. TVL Jayalakshmi Enterprises’ [T.C. (Review) No.430/2006 dated 7.7.2011] and contended that in the said case also the issue related to the leasing out of hoardings for the purpose of advertisement and that the Madras High Court has held that since the hoardings erected on the concrete foundation, not capable of removal without causing any damage to the structure, is part of the immovable property and ceased to be goods for the purpose of attracting levy of tax u/s. 3A of the Act. But, according to us, the Madras High Court has considered the said case on appreciation of the covenants contained in the agreement between the parties and thereupon found that the entire responsibilities were carried out by the assessee and that therefore there is no transfer of right to use goods.”

Regarding contention of effective control also Hon. High Court held in the negative observing as under:

“17. But, according to us, so far as leasing out of hoardings in this case are concerned, once it is let out by entering into an agreement or work order, the owner of the goods ceases to have any control over the same for the reason that the advertisements are affixed on the hoarding by putting up and displaying necessary materials in accordance with the directions of the lessee and he has the effective control of the hoardings throughout the contract period entered into by him with the revision petitioner. The revision petitioner is unable to interfere with the nature of the advertisement carried out by the lessee in the hoardings since as per Annexure-D work order, it is his absolute right to finalise the nature of advertisement that is put up on the hoardings. Therefore, according to us, the absolute control of the hoardings is transferred to the lessee by virtue of Annexure-D work order. Therefore, we are of the definite opinion that the control of the hoardings once it is passed for erecting advertising materials is left with the lessee absolutely for the period specified and therefore there is transfer of right to use as provided u/s. 6(1)(c) of the Act. Therefore the second question raised by the assessee is also answered in the negative and in favour of the Revenue.”

Ultimate argument of payment of Service Tax
Dealer in this case also tried to argue that it has paid service tax on very same receipts. It was canvassed that service tax and VAT are mutually exclusive and hence when service tax is levied and paid, no VAT should apply. This contention was also rejected by Hon. High Court observing as under:

“20. In the second cited decision also, a Division Bench of this Court was considering the question whether the Parliament is competent to authorise levy of service tax on banking and other financial services including equipments leasing and hire purchase. It was concluded that Article 366 (29A) empowers the authorities to impose levy of tax on deemed sale and purchase of goods and the same is not mutually exclusive with the liability for Service Tax. Therefore, according to us, the above two judgments are an authority for the proposition that the service tax and Value Added Tax are not mutually exclusive and if there is liability, both are to be paid by the concerned assessee. Viewed in that background, the contention raised by the revision petitioner that since it is paying service tax, is not liable to pay Value Added Tax can never be sustained.” Thus rejecting all contentions, Hon. High Court upheld taxation under VAT .

Conclusion
It can be seen that there are conflicting judgments on the given issue. It clearly appears that the matter is not decided by any common principle but based on facts/terms of agreements in each transaction and it’s appreciation by the concerned court. In such a situation Dealers will have hard time to visualise their liability. The tragedy is that such a dealer will be liable to pay both Service Tax and VAT on the same transaction. This will be a hard blow to financial viability of dealer. It is felt that not only fate of taxation of hoarding is hanging but the financial existence of dealer itself will be in jeopardy Let there be clarity by law makers on the issue at the earliest to save the plight of the dealers.

shailesh.kwebmaker

Valuation of constructed units given to landowners in lieu of Development Rights – A Burning Issue

Relevant Statutory Provisions

Section 65B (44) of the Finance Act, 1994 (‘Act’)

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

a) an activity which constitutes merely, –

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

ii) a transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or
b) a provision of service by an employee to the employer in the course of or in relation to his employment;
c) fees taken in any Court or Tribunal established under any law for the time being in force.
………………..

Section 66E of the Act – Declared Services

The following shall constitute declared services, namely: – …………

(b) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority.

Explanation. – for the purposes of this clause, –
……………….

(1) The expression ‘construction’ includes additions, alterations, replacements or remodeling of any existing civil structure;
……………..
Service portion in the execution of a works contract.

Section 67 of Act – Valuation of taxable services for charging service tax

(1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,
–

i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;

iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

Service Tax (Determination of Value) Rules, 2006 (“Valuation Rules”)

Rule 3 – Manner of determination of value

Subject to the provisions of section 67, the value of taxable service, where such value is not ascertainable, shall be determined by the service provider in the following manner –

a) the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;

b) where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

Background
In Larsen & Toubro Ltd vs. State of Karnataka [2014] 34 STR 481 (SC) the Supreme Court held that building / construction contract is a ‘works contract as well as transfer of immovable property. In a building / construction contract, goods like cement, concrete, steel, bricks etc. are intended to be incorporated in structure and fact that they lost their identity as goods, does not prevent them from being goods.

However, the activity of construction undertaken by developer would be works contract only from the stage the developer enters into a contract with flat purchaser. If a contract with flat purchaser is entered only after construction is completed, goods used in construction cannot be deemed to have been sold for the fact that it is the building which is intended for sale ultimately.

Taxability of Joint Development Agreements usually involves three parties viz.

Landowner;

Builder and

Buyers of constructed units.

The same has been subject to several interpretations from time to time by CBEC and various High Courts and Tribunals. One of the burning issues in such agreements has been taxability of flats given by a builder to landowner in consideration of the grant of land development rights.

The Burning Issue is whether such flats given to landowner are to be valued:

at the price of land / land development rights given by landowner to the builder / developer or

at the price charged for similar flats from other buyers

To examine this, it is relevant to refer to the following circulars issued by the Government.

Clarification vide CBEC Circular No. 151/2/2012 – ST dated 10/02/2012 (Relevant Extracts)

Para 2.1

In case of Tripartite Business Model, the parties involved are:

i) landowner;

ii) builder or developer; and

iii) contractor who undertakes construction. Here two important transactions are identifiable viz.

Sale of land by the landowner which is not a taxable service; and

Construction service provided by the builder / developer.

The builder / developer receive consideration for the construction service provided by him, from two categories of service receivers:
a) From landowner: in the form of land / development rights; and
b) From other buyers: normally in cash.

For the period prior to 01/07/2010, construction service provided by the builder / development rights of the land was received by the builder / developer will not be taxable in terms of CBEC Circular No. 108/2/2009 – ST dated 21/01/2009.

For the period after 01/07/2010, construction services provided by the builder / developer is taxable in case any part of the payment / development rights of the land was received before the issuance of completion certificate and the service tax would be required to be paid by builder / developers even for the flats given to the landowner.

Value, in the case of flats given to landowner, is determinable in terms of section 67(1) (iii) read with Rule 3(a) of Service Tax (Determination of Value) Rules, 2006, as the consideration for these flats i.e., value of land / development rights in the land may not be ascertainable ordinarily. Accordingly, the value of these flats would be equal to the value of similar flats charged by the builder / developer from the second category of service receivers. In case the prices of flats / houses undergo a change over the period of sale (from the first sale of flat / house in the residential complex to the last sale of the flat / house) the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid by the builder / developer on the “construction service” involved in the flats to be given to the landowner, at the time when the possession or right in the property of the said flats are transferred to the landowner by entering into a conveyance deed or similar instrument (e.g. allotment letter).

Clarification vide Education Guide dated 20/06/2012

Para 6.2.1

In case of flats / houses agreed to be given by builder / developer to the land owner towards the land / development rights and to other buyers, two important transactions are identifiable:

Sale of land by the landowner which is not a taxable service; and

Construction service provided by the builder / developer.

The builder / developer receive consideration for the construction service provided by him from two categories of service receivers: (a) from landowner: in the form of land / development rights; and (b) from other buyers; normally in cash. Construction service provided by the builder / developer is taxable in case any part of the payment / development rights of the land was received by the builder / developer before the issuance of completion certificate and the service tax would be required to be paid by builder / developers even for the flats given to the landowner. ………….

Value, in the case of flats given to first category of service receiver will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.

Clarification vide CBEC Circular F. No. 354 /311/ 2015 TRU dated 20/01/2016 which supersedes Education Guide dated 20/06/2012 and revives Circular dated 10/02/2012.

Para 4

The Circular dated 10/02/2012 is in accordance with the provisions relating to valuation as laid down in the Finance Act, 1994 and the Service tax (Determination of Value ) Rules, 2006. As regards the Education Guide, it has been clearly stated in the Education Guide, 2012 that it is merely an educational aid based on a broad understanding of a team of officers on the issues. It is neither a “Departmental Circular” nor a manual of instructions issued by the Central Board of Excise and Customs. To that extent it does not command the required legal backing to be binding on either side in any manner. The guide was released purely as a measure of facilitation so that all stakeholders could obtain some preliminary understanding of the new issues for smooth transition to the new regime. Hence, Circulars such as the present one would prevail over the Education Guide, 2012. Hence, in valuing the service of construction provided by a builder / developer to a landowner who transfers his land / development rights to builder for getting in return constructed flats / dwellings from builder / developer, the service tax assessing authorities should be guided by the said Board Circular dated 20/02/2012 and not the Education Guide.

Ruling of Madras High Court in Southern Properties & Promoters vs. CCE (2015) 52 GST 413 (MAD)

In this case the appellant was providing taxable service under the category of “Construction of Residential Complex Service”. They entered into a joint venture agreement with a land owner for construction of 72 flats in three blocks, (viz. 24 flats in each block). The appellant, by virtue of the joint venture agreement, owned 48 flats and the land owner owned the remaining 24 flats as his share equivalent to the land. That the appellant paid service tax on the sale of 48 flats to independent third parties after claiming the benefit of abatement. But they failed to pay service tax on the cost of 24 flats alleged to be the share of the land owner and the reason stated by the appellant was that they had not received any amount from the landowner for the construction of the flats allotted to them. Hence, show cause notice was issued demanding service tax. The appellant filed a reply stating that since they did not pay any amount to the land owner towards the land cost, they had not paid service tax for the flats held by the land owner.

The Adjudicating Authority adjudicated the case and came to hold that the classification of the service provided by them was not in dispute. In so holding the Adjudicating Authority further held as under:

“I observe that it is the ‘appellant’ who provided the service of construction of flats by virtue of entering into a ‘JV’. As per section 65 (105)(zzzh) of the Act, taxable service means “any service provided or to be provided to any person in relation to construction of complex”. The phrase “any service” in relation to construction of residential complex service is wide enough to cover all services including construction service.” ………………………

(f) Further, in the Finance Act, 2010 communicated vide Board’s DOF No. 334/1/2010 – TRU, dated 26/02/2010, in order to achieve the legislative intent and bring in parity in tax treatment, an explanation to sub-clause to section 65(105)(zzzh) of the Act had been inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after completion of construction (including its certification by local authorities), the activity of construction would be deemed to be a taxable service provided by the builder or promoter or developer to be the prospective buyer and the service tax would be charged accordingly. The above explanation to sub-clause to section 65(105) (zzzh) of the Act has applicability from the date of existence of the section and hence is having retrospective effect from 16/06/2005. Therefore, I observe that all the earlier Board’s Circulars are to be read with the above explanation.”

Accordingly, the Adjudicating Authority confirmed the demand.

The contention of appellant before the Tribunal was that the appellant had not received any consideration in the form of money in respect of 24 flats handed over to the landowner and therefore tax should be demanded on the basis of the cost of land. The plea of the department before the Tribunal was that the value of taxable service should be equivalent to the gross amount charged by the appellant to provide construction of the similar 48 flats. The contention of the department before the Tribunal is reproduced, hereafter:

“3…… He drew the attention of the Bench to Rule 3 of the Service Tax (Determination of Value) Rules, 2006. He submits that the value of such taxable service shall be equivalent to the gross amount charged by the applicant to provide construction of the similar 48 flats. He relied upon the decision of the Tribunal in the case of Prince Foundation Ltd. vs. CST (2014) 33 STR 448 (Tri. – Chen.), where stay was granted partially.”

After hearing both sides, the Tribunal on a consideration of Rule 3 of the Valuation Rules, which provides the manner of determination of value in respect of taxable service, namely the service defined u/s. 65(105)(zzzh) of the Act, came to hold that the value of taxable service should be equivalent to the gross amount charged by the service provider to provide similar service to any other person, that is to say, the value of taxable service rendered in relation to the flats sold to independent persons. Accordingly, the Tribunal held that the appellant has failed to make out a prima facie case for waiver of pre-deposit.

Aggrieved by the Tribunal’s order of pre-deposit, the appellant approached the Court. The observations of the High Court are as under:

“From a reading of the above said provisions, it is clear that section 65(105)(zzzh) of the Finance Act, 1994 relates to construction of complex, whereas section 65(105)(zzzza) of the Finance Act, 1994 relates to works contract. It is not in dispute that the appellant is engaged in the promotion and construction of residential complexes and not engaged in works contract. It is relevant to note that the plea now taken by the learned counsel appearing for the appellant that the appellant is entitled to the benefit of Notification No. 29 dated 22nd May, 2007 has not been taken by the appellant either before the Adjudicating Authority or before the Commissioner (Appeals) (Para 18).

Prima facie, we are not inclined to entertain this appeal, in view of the specific admission by the appellant before the Adjudicating Authority that the services rendered by the appellant would fall u/s. 65(105)(zzzh) of the Finance Act, 1994. Even otherwise, the language of section 65(105)(zzzh) and the nature of the services provided by the appellant is for construction of flats provided to the land owner and the transfer of land is only for the purpose of providing such taxable service, we fail to understand as to how the appellant would say that there is no liability to pay service tax in respect of 24 flats handed over to the land owner after rendering taxable service as defined u/s. 65(105)(zzzh) of the Finance Act, 1994. If there is no monetary consideration in the transaction, then section 65 of the Finance Act, 1994 provides for various methods for valuation. Hence, it is for the appellant to establish that his plea that the value of the land should be taken into consideration is a matter for the Tribunal to decide on merits at the time of hearing of the appeal (Para 19)..

At the first blush, we are not inclined to accept the plea of the department that the case in respect of valuation, it may fall under Rule 2 or 3 of Valuation Rules and the amendment made in the year 2012. We are not inclined to go into the effect of amendment as pleaded by the standing counsel and we are not inclined to make any observation as that would influence the mind of the Tribunal as to the applicability of such Rule on the merits of the case…… (Para 20).

The Tribunal is justified in ordering pre–deposit of Rs.12 lakh as against demand of Rs. 27 lakh.

Relevant overseas judgment on the Issue

In Direktor na Direktsia ‘Obzhalvane I upravlenie na izpalnenieto’ – grad Burgas pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite vs. Orfey Balgaria EOOD [2013] 38 STT 289 (ECJ), assessee acquired building right over land owned by various owners and agreed to provide certain portions of constructed property in consideration thereof. Department argued that assessee had agreed to provide construction services and received consideration thereof on date of establishment of building right. It was also argued that value of consideration received by assessee was open market value of construction services provided.

The European Court of Justice ruled that:

When building right was established in favour of assessee as a consideration for construction services agreed to be provided, such establishment of building right amounted to receipt of consideration and such construction services became chargeable on date of establishment of building right.

Such charge will arise only if, at time when right is established, all relevant information concerning that future supply of services is already known and value of that right may be expressed in monetary terms.

Moreover, value of such building right cannot be based on open market value of construction services to be provided; it must be based on value of building rights received.

Mere possibility that building right may get extinguished by assessee not exercising such right does not bar charge of service tax, as on such extinguishment, assessee may seek refund / credit of tax paid earlier.

Conclusion
The ruling of Madras High Court, though in the context of law prevalent prior to 01/07/2012 is relevant despite the fact that the matter has been remanded to Tribunal for final determination of valuation, the Court has observed in para 20 that they are not inclined to accept the plea of the department that the case in respect of valuation may fall under Rule 2 or 3 of the Valuation Rules.

Based on the judgment of ECJ referred in para 7 above and considering the principle of reciprocal consideration, a view could be adopted that the value of construction services by builder to landowner should be based on the value of land development rights received in return from the landowner by the builder. The value of land development rights is clearly discernible in the form of prorata value of land given up by the landowner and such value of land should be determined at the time of entering into the contract.

The value of land is always available at the time of execution of development contract. In the State of Maharashtra, development rights are liable for stamp duty and market value of such rights is prescribed vide the Government Ready Reckoner. Hence, as a reasonable view in terms of provisions of section 67(1)(i) & (ii) of the Act, the prorata value of land rights given up by the landowner can only be taken as basis for determining the value of construction services provided by builder because that is what the builder gets in return. It appears that Education Guide dated 20/06/2012 represents the correct position of law. If the value however, is not ascertainable, only then resort can be made to section 67(1)(iii) of the Act read with Rule 3(a) of Valuation Rules.

However, caution is advised while adopting the view stated in paras (a) to (c) above inasmuch as, more particularly post issue of CBEC circular dated 20/01/2016, the service tax department has issued show cause notices in large number to demand service tax on the basis of market value of similar flats in terms of Rule 3(a) of the Valuation Rules. Hence, this issue is likely to witness an extensive round of litigations and finality thereon could take a very long time. Considering far reaching implications of the matter on the real estate sector, it is suggested that CBEC needs to understand these transactions and then clarify the matter vide a detailed order u/s. 37 B of the Central Excise Act, 1944 which is also applicable to service tax.

The entire discussion above is however subject to the basic ‘fact’ which requires to be understood by all concerned that when a landowner is given constructed units or flats by the developer, it is part of the ‘cost’ of the developer. The consideration payable to the landowner towards land or purchase of development rights comprises of constructed premises with/without consideration in monetary terms. The consideration for the service that the developer provides both to the landowner and other purchasers of units, comes only from the other purchasers and on which the service tax is already paid / payable. No other consideration for the ‘service’ provided by the developer is received by him. Therefore without the receipt of any additional consideration, fastening liability on the value other than that is attributable to service would be beyond the scope of section 67. Secondly, the market value of the newly constructed units is attributable to the “land value” and not towards construction service. Therefore, the whole exercise initiated by the department is capable of being challenged.

shailesh.kwebmaker

Welcome GST – “Supply” under proposed Indian GST – ‘Model GST Law’

1. Proposed taxable event – ‘supply’

Any event or transaction or occurrence that results in a tax consequence / liability can be said to be a taxable event. Under the current Indian indirect tax regime such event /transaction /occurrence include manufacturing, sale, provision of service, import of goods into India, export of goods from India, entry of goods into a specified area for sale /use / consumption, admission to an entertainment etc. Under the proposed Indian Goods and Services Tax (GST) regime majority of these taxable events would be subsumed into a single taxable event – “supply”. The GST Constitution Amendment Bill1 defines2 GST as – “goods and services tax means any tax on supply of goods, or services or both except taxes on supply of the alcoholic liquor for human consumption”. The term ‘supply’ has not been defined therein.

2. ‘Supply’, a taxable event under different jurisdictions

Under the Directive3 issued by the Council of the European Union, the ‘chargeable event’ is defined as – “chargeable event shall mean the occurrence by virtue of which the legal conditions necessary for VAT to become chargeable are fulfilled”. Under the Directives, “the chargeable event shall occur and VAT shall become chargeable when the goods or the services are supplied”. Following are further defined –
– ‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.
– ‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.

In Canada, for levy of Goods and Services Tax4, ‘taxable supply means a supply that is made in the course of a commercial activity’. Further, ‘supply means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental, lease, gift or disposition’.

In United Kingdom, scope of Valued Added Tax is specified5 as – (1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. (2)A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply. In turn, ‘supply is defined as “supply” in this Act includes all forms of supply, but not anything done otherwise than for a consideration. Further, anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.

In Singapore, for levy of Goods and Services Tax6, ‘A taxable supply is a supply of goods or services made in Singapore other than an exempt supply’.. In turn, ‘supply is defined as “supply” in this Act includes all forms of supply, but not anything done otherwise than for a consideration. Further, anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.

In Malaysia, for levy of Goods and Services Tax7 , ‘supply means all forms of supply, including supply of imported services, done for a consideration and anything which is not a supply of goods but is done for a consideration is a supply of services’.

In Australia, ‘taxable supplies’8 is defined as follows:

You make a taxable supply if:
(a) youmake the supplyfor consideration; and
(b) the supply is made in the course or furtherance of an enterprise that you carry on; and
(c) the supply is connected with the indirect tax zone; and
(d) you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST free or input taxed.

Meaning of supply , in turn, in Australia, is as follows:

(1) A supply is any form of supply whatsoever.
(2) Without limiting subsection (1), supply includes any of these:
(a) a supply of goods;
(b) a supply of services;
(c) a provision of advice or information;
(d) a grant, assignment or surrender of real property;
(e) a creation, grant, transfer, assignment or surrender of any right;
(f) a financial supply;
(g) an entry into, or release from, an obligation:
(i) to do anything; or
(ii) to refrain from an act; or
(iii) to tolerate an act or situation;
(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

(3) It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.

(3A) For the avoidance of doubt, the delivery of:
(a) livestock for slaughtering or processing into food; or

(b) game for processing into food;

under an arrangement under which the entity making the delivery only relinquishes title after food has been produced, is the supply of the livestock or game (regardless of when the entity relinquishes title). The supply does not take place on or after the subsequent relinquishment of title.

(4) However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

In majority of these jurisdictions, the term ‘supply’ has been stated to be – ‘supply’ in all forms or in any form or in any manner.

3. Meaning of the term ‘supply’

The word “supply” is defined in the Standard Dictionary as ‘that which is or can be supplied; available aggregate of things needed or demanded; an amount sufficient for a given use or purpose”. In the Imperial Dictionary, ‘that which is supplied; sufficiency of things for use or want; a quantity of something furnished or on hand”10.

Apex Court while dealing11 with the words ‘duty on supply of electricity’ employed in charging section 3 of the Kerala Electricity Surcharge (Levy and Collection) Act, 1989, in light of Entry 53 of State List of Seventh Schedule to the Constitution of India viz., ‘Taxes on the consumption or sale of electricity’; held that the word `supply’ used in the charging section 3 should, receive liberal interpretation to include sale or consumption of electricity as envisaged in Entry 53 of the State List.

From the sub-station, electricity is connected to the industrial units through the meter put up in the factory. Continuity of supply and consumption starts from the moment the electrical energy passes through the meters and sale simultaneously takes place as soon as meter reading is recorded. It is true that from the place of generating electricity, the electricity is supplied to the sub-station installed at the units of the consumers through electrical hightension transformers and from there electricity is supplied to the meter. But the moment electricity is supplied through the meter, consumption and sale simultaneously take place. It is true that in the definitions given in the New Encyclopaedia Britanica, Vol. 4, p.842 cited before us, distinction between supply and consumption is stated but adopting a pragmatic and realistic approach, we are of the considered view that as soon as the electrical energy is supplied to the consumers and is transmitted through the meter, consumption takes place simultaneously with the supply.

Under Section 9A of the Representation of the People Act, 1951, a person is disqualified if, and for so long as, there subsists a contract entered into by him in the course of his trade or business with the appropriate Government for the supply of goods to, or for the execution of any works undertaken by that Government. The Orissa High Court, held12 that in the context of its use in the provision, the word ‘supply’ has to be construed as a form of sale and despatch.

The word “supply” means “to give”, or “to provide or to afford something that is necessary”. In the context of its use in the provision, it has to be construed as a form of sale and despatch. The conception of supply of goods must be interpreted in the conception of sale. For the purpose of Section 9A, there can be no supply of goods unless there is a sale to the State. As observed in West Survey Water Co. vs. Chertsey, (1894) 3 Ch 519: “To ‘supply’ anything –e.g., water — means passing it from one who has it to those who want it; you may ‘provide’ a thing for yourself, but that is not ‘supplying it’”.

In the context of definition of ‘supply’ in Australia, it has been clarified13 that –

The words ‘A supply is any form of supply whatsoever’ in s/s. 9-10(1) cover all supplies regardless of whether they concern goods or services. This is defined broadly and is intended to encompass supplies as widely as possible. The intended scope of s/s. 9-10(1) is more fully illustrated in s/s. 9-10(2), which provides a list of things that are included as supplies. It is not an exhaustive list. It does not limit the possible breadth of the definition of supply in s/s. 9-10(1).Something that is not listed in s/s. 9-10(2) but falls within s/s. 9-10(1) will be a supply.

For the purpose of GST / VAT , the word ‘supply’ is not only likely to be defined broadly but would encompass supplies as widely as possible. It appears that the word ‘supply’ for a tax consequence would not have a restrictive meaning.

4. “Supply” – meaning as assigned in Indian Model GST Law14

It, prima facie, appears that the Model GST Law has not been reviewed by the legal eye of draftsmen. Assuming this, the observations discussed herein are on conceptual basis only.

The term ‘supply’ has been assigned meaning in section 3 of the Model GST Law as: “3. Meaning and scope of supply

(1) Supply includes
(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and
(c) a supply specified in Schedule I, made or agreed to be made without a consideration.

(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

(2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

(3) Subject to s/s. (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as—

(i) a supply of goods and not as a supply of services; or

(ii) a supply of services and not as a supply of goods; or

(iii) neither a supply of goods nor a supply of services.

(4) Notwithstanding anything contained in s/s. (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.”

In a UK case, of British Airways15, it had an arrangement where food outlets provided food to passengers of delayed flights. When there was a flight delay, an announcement was made to passengers that vouchers of a specified amount were available for passengers’ use at food outlets. Passengers could use their boarding pass when a voucher was not available. For British Airways to succeed in claiming input tax credit for the VAT included in the charge to it for the refreshments provided to delayed passengers there must have been a ‘supply’ of something by the outlets to British Airways. The issue was did British Airways obtain ‘anything – anything at all?’ The VAT Tribunal held that – Yes, British Airways obtained the right to have its delayed passengers fed at its expense – and that was clearly for the purpose of its business. The Tribunal held that there was a supply of services made to British Airways. British Airways had earlier also disputed the VAT treatment of this arrangement. Earlier British Airways had argued there was a supply of goods rather than services to it. The definition of supply of goods under the UK VAT Law required a transfer of dispositive power. As British Airways never had dispositive power over the supply of food, it was earlier held that a supply of goods had not been made to British Airways.

For every supply there ought to be a ‘supplier’ and a ‘recipient’. The terms ‘supplier’ and ‘recipient’ are defined in the Model GST Law. Also, for claiming input tax credit, it would be essential to identify the ‘supplier’, the ‘recipient’, the ‘supply’ made and the nature (goods or services or anything else) of supply.

In the definition, ‘supply includes all forms of supply ….. made….’. The Australian law uses the word ‘make’; in this context it was held16 that GST only applies where the ‘supplier’ makes a voluntary supply and not where a supply occurs without any action by the entity (‘supplier’) had there been a supply.

Only those supplies made for a consideration would be regarded as ‘supply’. Term ‘consideration’ is defined in Model GST Law. A restaurant accepts tips from its customers, including tips on bills paid by credit card. These tips are unsolicited and are in addition to the price stipulated by the restaurant in the bills presented to the customers. The restaurant does not pass these tips on to the restaurant’s employees. The tips are voluntary payments made in connection with the restaurant supplies made by the restaurant to its customers. Although there is no obligation on the customers to make these payments, the question that would arise is should the tips retained by the restaurant form part of the consideration for the restaurant supplies by the restaurant to its customers. If the restaurant passes the tips on to the restaurant’s employees, the payments are not for the restaurant supplies by the restaurant. The tips constitute income of the restaurant employees and would such payments be subject to GST as the employees are not carrying on an enterprise for GST purposes.

The following transactions / occurrences has been / could be evaluated for being treated as ‘supply’ or not:

Penalty

Under the New Zealand GST Act ‘services’ means ‘anything which is not goods or money’. In Case S6517 the Court warned that there are limits to this definition. In this case a costs order was made against a solicitor who was struck off the roll by the New Zealand Law Practitioners Disciplinary Tribunal. The costs order required the solicitor to pay amounts to the New Zealand Law Society and the District Law Society for their costs and expenses relating to the disciplinary proceedings. The Court held that these payments were not consideration for a supply of services by the Law Societies to the solicitor. The Court ruled that the ordinary meaning of the word ‘supply’ limited the breadth of the phrase ‘supply of services’, which was only so wide as to include activities where the provider has done something for, not against, the recipient. To rule otherwise would lead to absurdity because it would allow the concept of a supply to encompass situations where a person sues for recovery of property, or steals something from someone else.

Out-of-court settlement

Matters in dispute may be resolved either by the judgment of a court, or (at a time prior to the court delivering its judgment) by agreement between the parties. Such an agreement between parties is generally referred as an out-of-court settlement. Out-of-court settlements could include any form of dispute resolution in which the terms of the resolution are agreed between the parties, rather than imposed by the court. These terms of the resolution may create supplies for GST purposes, which may be characterised as:

(i) surrendering a right to pursue further legal action; or

(ii) entering into an obligation to refrain from further legal action; or

(iii) releasing another party from further obligations in relation to the dispute.

Financial Assistance / Grant

A Government Agency, say, offers manufacturers a rebate / incentive of an amount when they purchase and install a new machine in their factory. The new machine can be purchased from anywhere. To be eligible for the rebate / incentive the new machine must be installed in new factory and the new machine must meet a specified energy efficiency rating. To obtain the rebate / incentive the manufacturer must submit an application form with copies of their purchase and installation invoices. The manufacturer does not enter into any obligations, other than providing further evidence to support their claim in accordance with the eligibility criteria. The rebate / incentive granted by the Government Agency, in fulfilment of specified conditions and against the application submitted by the manufacturer and the agreement to provide further evidence in support of their claim may be treated as a supply or may not be regarded as a ‘ supply’.

4.2 “Supply” in Indian Model GST Law – Section 3(1)(b)

Import of service, whether or not for a consideration and whether or not in the course or furtherance of business is included in the definition of ‘supply’. An import of services by an individual, not in the course of furtherance of business, would be ‘supply’. The inclusion of supplies not for a consideration raises certain doubts as to what types of transactions are intended to be covered therein, which should be clarified / specified.

In the context of cross-border supplies and the growth of the digital economy where consumption is of a private/ domestic nature, currently, indirect tax / service tax do not apply / is exempted to such supplies made by nonresidents to consumers in India. This treatment causes disadvantage to local suppliers. Sub-section (1)(b) of the Model GST Law will result in supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services, receiving similar GST treatment whether they are supplied by a local or foreign supplier. However, clarity would be required in respect of such supplies received by non-residents (tourists) when they are temporarily in India.

Action 1 of the Action Plans on Base Erosion and Profit Shifting issued by Organisation for Economic Cooperation and Development (OECD)– ‘Address the tax challenges of the digital economy’ – requires to identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Action 1 also requires examination as to how to ensure the effective collection of VAT /GST with respect to the cross-border supply of digital goods and services. It is recognised that non-resident suppliers should register and account for VAT in as many foreign jurisdictions as they have consumers of remotely delivered services. This may impose compliance burdens on these suppliers and countries should therefore consider the use of simplified registration regimes and registration thresholds to minimise the potential compliance burden on businesses.

Australian GST Law is proposed18 to be amended to ensure that digital products and other imported services supplied to Australian consumers by foreign entities are subject to GST in a similar way to equivalent supplies made by Australian entities. It is also proposed that in some circumstances, responsibility for GST liability may be shifted from the supplier to the operator of an electronic distribution platform, where the supply is made through such a platform, and the operator controls any of the key elements of the supply such as price, terms and conditions or delivery arrangements. Under the current Australian GST Law, non-resident suppliers are required to register for GST if their projected or current turnover is greater than the registration turnover threshold.

Norway was the first country to have implemented such mechanism for taxation of e-services / digital services effective from July 2011.

A combined reading of section 4(3) of Model IGST Law read with section 9(3)(c) and Para 5(iii) of Schedule III of the Model CGST/SGST Law suggests that such an individual may be required to register and pay GST. Alternatively, combined reading of section 4(3) of Model IGST Law read with Para 5(iv) of Schedule III of the Model CGST/SGST Law may be interpreted that non-resident taxable person may be required to register and pay GST.

4.3 “Supply” in Indian Model GST Law – Section 3(1)(c)
Certain specified supplies made or agreed to be made without a consideration are included in the definition of ‘supply’. Such supplies specified in Schedule I to Model GST Law, are as follows:

1. Permanent transfer/disposal of business assets.
2. Temporary application of business assets to a private or non-business use.
3. Services put to a private or non-business use.
4. Assets retained after deregistration.

5. Supply of goods and / or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business.

Provided that the supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as supply of goods.

In the earlier unofficial draft of Model GST Law released in October 2015, there was an entry – ‘self supply of goods and/or services’, which is not appearing in this Schedule. Entry 5 was not there in the earlier Schedule. One view being propagated is that Entry 5 deals with ‘self-supply’. Entry 5 deals with supply of goods and/or services by a taxable person to another taxable person. As far as number of laws is concerned there would one CGST Law, one IGST Law and different State GST Laws. This Schedule I would appear in all such laws. For a State, say Maharashtra GST Law, the Entry 5 would have to be considered in the context of Maharashtra GST Law alone. For interpreting Entry 5 as appearing in Maharashtra GST Law, one would not / cannot read Schedule / Entry in other Laws (CGST Law, IGST Law, Other State GST Law).Supply without a consideration should be by a taxable person (as understood under Maharashtra GST Law) to another taxable person (also as understood under Maharashtra GST Law). If a supply is not by one taxable person to another under the Maharashtra GST Law, then Entry 5 would not apply. Similar would be the position under CGST Law & IGST Law. Under CGST Law, even if one is registered in different States, one would be regarded as a single ‘taxable person’ under the CGST Law, having different registrations or being regarded as more than one ‘registered person’19. Hence, it appears that Entry 5 does not deal with ‘self-supply’ .Entry 5 appears to be dealing with free supplies.

Other Entries of the Schedule should also trigger GST liability and input tax credit, accordingly, would not be impacted.

Currently, treatment of goods that are lost, stolen, damaged or destroyed is not provided in the Model GST Law.

It is further provided that supply of goods by a registered taxable person (principal) to a job worker, where such principal takes responsibility of payment of GST on goods after completion of job work (terms of Section 43A of the Model GST Law), shall not be treated as supply of goods. In that case, the work done by the job-worker of treatment or process to principal’s goods is a supply of services. Incidentally, if the terms of section 43A are not satisfied by the principal and supply of goods by principal to a job worker is treated as ‘supply’ and return of the goods by job-worker is also treated, consequentially, ‘supply of goods’; then the work done by the job-worker of treatment or process to principal’s goods ought not to be treated as a ‘supply of services’ – this provision is currently not there in the Model GST Law.

4.4 “Supply” in Indian Model GST Law – Section 3(2) and Section 3(3)

Sub-section (2) of Section 3 of the Model GST Law, as such does not limit or expand ‘supply’, but specifies – in Schedule II to the Model GST Law – asto what is or is to be treated as ‘supply of goods’ or a ‘supply of services’.

Sub-section (3) of Section 3 of the Model GST Law provides for the power with the Government of specifying as to what is not to be treated as ‘supply of goods’ or a ‘supply of services’ or both. Schedule II is given as Annexure herein. What is being treated as goods or services is not being discussed herein.

Goods is defined as ‘ “goods’’ means every kind of movable property other than actionable claim and money but includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract ofsupply; Explanation.– For the purpose of this clause, the term ‘moveable property’ shall not include any intangible property’.

Services is defined as ‘ “services’’ means anything other than goods;

Explanation: Services include intangible property and actionable claim but does not include money’.

A significant outcome of specifying what is or is to be treated as ‘supply of goods’ and ‘supply of services’, is the possible elimination of the applicability of dual taxes.

4.5 “Supply” in Indian Model GST Law – Section 3(2A)
Sub-section (2A) of Section 3 provides that an agent who either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

Agent is defined as ‘ “agent” means a person who carries on the business of supply or receipt of goods and/or services on behalf of another, whether disclosed or not and includes a factor, broker, commission agent, arhatia, del credere agent, intermediary or an auctioneer or any other mercantile agent, by whatever name called, and whether of the same description as hereinbefore mentioned or not’.

Principal is defined as ‘ “principal” means a person on whose behalf an agent carries on the business of supply or receipt of goods and/or services”.

As agent, generally, will be involved in at least two separate supplies at any one time:

– the supply made between the principal and the third party
– the supply of agent’s own services to the principal

An agent, who on behalf the principal carries on the business of supply or receipt of goods would, generally, (i) receive or deliver goods; (ii) hold stock of goods for principal; and (iii) make or receive payment.

What has been deemed to be a supply is the “transaction” between the principal and agent. Only those transactions where the agent carries on the business of supply or receipt of goods and/or services is intended to be covered by section 3(2A).

Accordingly –
– the transaction between the agent and the third party is also to be deemed to be a supply; and
– in such cases, supply of agent’s own services to the principal should be deemed as not a supply.

These provisionare currently not there in the Model GST Law.

The proposed provision in Model GST Law would have the following impact, as far as tax related disclosures are concerned –

Hence, for the basis threshold limit for registration, where agent was considering 10 in the current regime (for service tax purposes), for the same transaction, it would now have to consider 100 (for GST purposes); the threshold limit (Rs. 10 lakhs), however, is likely to remain same.

Where the agent is not carrying on the business of supply or receipt of goods and/or services viz. factor, delcredere agent, estate agent etc. would not be covered for determining such deemed supply.

Incidentally, a clearing and forwarding agent might get covered by such deemed supply provision, which appears to be un-intended. A travel agent would also be covered under such provision of deemed supply.

The Directive issued by the Council of the European Union, in this regards provides as follows:

Where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself.

Under the said Directive, special scheme has been laid out for travel agents, including tour operators. For goods, similar provisions as in Model GST Law are provided for undisclosed agent only.

Redrow case
In a UK House of Lords case of Redrow26, a builder, Redrow, constructed new houses for sale. Most prospective Redrow purchasers could not purchase a Redrow home unless they had a buyer for their existing home. To expedite sales of its homes Redrow instructed an estate agent to value the prospective purchaser’s existing home and to handle the sale. Redrow monitored progress in the marketing of the property, maintaining pressure on the agent to achieve a sale. Redrow entered into an agreement with both the agent and the prospective purchaser that it would pay the estate agent’s fee plus VAT if the prospective purchaser bought a Redrow home. Redrow was not liable to pay the agent’s fee if the prospective purchaser did not purchase a Redrow home.

Redrow advised the agent to enter into a separate agreement in the normal terms with the prospective purchaser, to provide cover in the event that Redrow was not liable to pay the fee if the prospective purchaser bought elsewhere. The instructions to the agent could not be changed without Redrow’s agreement. The agent made a supply of services on which it was obliged under the UK VAT Law to charge VAT .

The issue was whether Redrow’s expenditure was consideration for services supplied by the agent to Redrow. Redrow was only entitled to input tax credit of the tax it paid if the estate agent supplied services to Redrow. The UK Commissioners contended that the estate agent was only supplying services to the prospective purchaser. The House of Lords held that estate agent services were supplied to Redrow:

The service is that which is done in return for the consideration…Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are more likely to differ according to the interest which various people have in the transaction… The fact that someone else – in this case, the prospective purchaser – also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction. … Everything which the agents did was done at the taxpayer’s request and in accordance with its instructions and, in the events which happened, at its expense. The doing of those acts constituted a supply of services to the taxpayer.

Redrow is unusual because both Redrow and the prospective purchaser contracted for a supply of services from the agent. Usually when an entity arranges for a supply to be provided to another entity, it is only the first entity that contracts for the supply.

4.6 “Supply” in Indian Model GST Law – Section 3(4)

Sub-section (4) of Section 3 provides that the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.

What was probably intended to be said here was ‘any service which is branded by an aggregator’ instead of “any branded service by an aggregator”.

Branded services is defined27 as – ‘branded services’ means services which are supplied by an electronic commerce operator under its own brand name or trade name, whether registered or not”. ‘Electronic commerce operator’, in turn, is defined separately, which has a different meaning as that of the ‘aggregator’.

Aggregator is defined as – ‘aggregator’ means a person, who owns and manages an electronic platform, and by means of the application and a communication device, enables a potential customer to connect with the persons providing service of a particular kind under the brand name or trade name of the said aggregator”.

Here also, what is missing is that the supply by persons providing service of particular kind needs to be deemed to be a supply to the aggregator.

5. “Supply” – parting remarks

Hope, this article is not treated as ‘supply’ by the Member (author) to the Bombay Chartered Accountants’ Society (BCAS) or by BCAS to the Member, in any manner so as to result in a GST liability?

Annexure

Schedule II – Matters to be treated as supply of goods or services

1. Transfer
(1) Any transfer of the title in goods is a supply of goods.
(2) Any transfer of goods or of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services.
(3) Any transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed, is a supply of goods.

2. Land and Building
(1) Any lease, tenancy, easement, licence to occupy land is a supply of services.
(2) Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

3. Treatment or process
Any treatment or process which is being applied to another person’s goods is a supply of services.

4. Transfer of business assets
(1) Where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.
(2) Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services.
(3) Where any goods, forming part of the business assets of a taxable person, are sold by any other person who has the power to do so to recover any debt owed by the taxable person, the goods shall be deemed to be supplied by the taxable person in the course or furtherance of his business.
(4) Where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—
(a) the business is transferred as a going concern to another person; or
(b) the business is carried on by a personal representative who is deemed to be a taxable person.

5. The following shall be treated as “supply of service”
(a) renting of immovable property;
(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier.

Explanation.- For the purposes of this clause-
(1) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:–

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

(d) development,design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

(f) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(g) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; and

(h) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

6. The following shall be treated as supply of goods (a) supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

shailesh.kwebmaker

Interpolation of seized material – There are no other materials – Notings recorded on the seized material found with the searched person other than the assessee- SLP Dismissed-

CIT. vs. Kumar Co, (2016) 383 ITR (St) 7 ; (Affirmed CIT vs. Kumar Co ITA. No. 912/2011 dt 9/4/2014 (Bom))

The assessee is a partnership firm. There was a search and seizure operation under section 132 on 1st September 2004 in the case of Raut Group of Cases (Rauts) and one Shri Sandeep S Deo. Pertinently, there is no search on the assessee. The search of Raut and Deo resulted in seizure of various documents from their premises. The statements of both were recorded. The discovery and the seizure of page 82 of loose paper bundle no.1 from the premises of Deo and seizure of page 42 to 46 from the premises of Rauts is claimed to be an important one. The issue in the Appeals is in relation to additions by way of estimation of sale of TDRs

The assessee had sold a total of 2,16,507.10 sq.ft of Transferable Development Rights (“TDR”). Out of this, sale of 4133 sq.mt of TDR is mentioned at page 82 of the document. On the facts of the case, the Tribunal directed that as against the rate of Rs.225/applied by the Assessing Officer, the rate of Rs.220/should apply to work out unaccounted receipts. However, the Tribunal directed that this rate should be applied only in respect of TDR of 4133 against the entire sale of 21,650 sq.mt.

The Tribunal held that apart from the loose sheet page 82 and page 42 containing an unsigned copy of the Agreement indirectly confirming the contents of page 82, there are no other materials. Therefore, there is no material to estimate the sale of other TDR’s. The above documents at best would enable estimation of those TDR’s mentioned at page 82. The page 42 is also not conclusive evidence and merely relying on certain notings recorded on the seized material found with the searched person other than the assessee. It also refers to the second limb about failure to take cognizance of direct evidence such as confirmation letter by the respective purchasers of TDR. The Tribunal dismissed the revenue’s Appeals.

Aggrieved by the ITAT order, Revenue filed an appeal before High Court. The Hon. High Court dismissed the appeals affirming the order of the ITAT. The High Court observed that there is no material to estimate the sale of other TDR’s.

The Revenue filed SLP before Supreme Court which was dismissed.

shailesh.kwebmaker

TRIBUTE TO MR. NARAYAN VARMA, RTI ACTIVIST

August 20, 2016, 85th birth anniversary of our beloved Narayan Sir.
Can’t express in words what you mean to us, Sir, only thing we wish to tell you is
THANK YOU!

As we look back over time
We find ourselves wondering …..
Did we remember to thank you enough
For all you have done for us?
For all the times you were by our sides
To help and support us …..
To celebrate our successes
To understand our problems
And accept our defeats?
Or for teaching us by your example,
The value of hard work, good judgement,
Courage and integrity?
We wonder if we ever thanked you
For the sacrifices you made.
To let us have the very best?
And for the simple things
Like laughter, smiles and times we shared?
If we have forgotten to show our
Gratitude enough for all the things you did,
We’re thanking you now.
And we are hoping you knew all along,
How much you meant to us.

THANK YOU SIR. WE MISS YOU A LOT.

shailesh.kwebmaker

Part D REMEMBERING NARAYAN VARMA

I first met Narayanbhai Varma in 2006 when we were organizing a big RTI drive in about 40 places across India. We needed volunteers and had decided to get different organizations to take up the responsibility of paying for different requirements so that there was no need for any fund collection. Narayanbhai asked what I expected from BCAS. I requested him to either agree to pay the rent for the fortnight for the hall at Government Law college, or get some volunteers. He first asked me a few questions and then with a twinkle in his eye said he would do both. He agreed to pay for the hall from BCAS and also helped to get about a dozen very good volunteers. He came up with a small booklet on RTI which was distributed during the camp. After the event was over with over 3000 RTI applications being filed, he showed his appreciation by saying that BCAS would happily give us place for RTI meetings. We held many meetings at BCAS since there was no need to worry about payments.

He had a good commitment and grasp for law, having been a successful Chartered Accountant. This came through very well when we discussed some finer points of the RTI Act. Despite his age and failing health in the last few years, he happily came to RTI meetings for discussions, planning strategy or holding a RTI convention. I am aware that he was instrumental in getting RTI clinics at BCAS, IMC, Giants and PCGT.

He wrote an article on RTI for every issue of BCA journal, which was provided guidance to many users and practitioners of RTI . I am sure BCAS will continue this commitment to RTI . For many years if a RTI event was to be held Narayanbhai would contribute his time, wisdom and money without any hesitation, or seeking any specific recognition.

When I became a Central Information Commissioner he was very joyous and informed many people. When I met him, he embraced me with such warmth and love, I felt I was being embraced by my father who was no more. Narayanbhai always displayed his love for me and would forgive any mistakes very generously. After I went to Delhi he would often praise my work before others who told me of the pride he displayed when referring to my decisions and work.

There is one incident which I will always remember because it showed Narayanbhai’s unique humility and intellectual greatness. When the 97th Constitutional amendment was passed, he and many other activists thought one implication was that it would have the implication of covering Cooperative Societies in the domain of RTI . He called me and said he wanted to hold a meeting to discuss this issue and would call for a meeting at the IMC. I had not read the amendment but agreed to his request that I should be the main speaker on this subject. On the day before the meeting I carefully read the amendment and the arguments advanced by other RTI activists. I came to the conclusion that this amendment would not mean that Cooperative societies had come in the ambit of RTI . I called up Narayanbhai and explained the position to him and suggested that there could be some other person as the main speaker. Without any hesitation he said I would be the main speaker and should give my views, even if they did not agree with his. This was a man who readily accepted a different opinion and respected it. He had internalized the fundamentals of freedom of speech and information.

Narayanbhai wrote consistently on RTI and was very keen to empower citizens with it. He had understood the power and potential of this law to bring better governance for India. His demise was a personal loss for me, which I have felt very deeply. Narayanbhai’s contribution is an inspiration for all of us, and we owe it to his memory to bring greater life and vigour to its implementation. RTI is great tool for our democracy and better governance and Narayanbhai’s contribution to it has been very significant.

shailesh.kwebmaker

Adoption and Inheritance

Introduction
Adoption of children is becoming a common feature in modern India with several people either not capable of having or not willing to have biological children. In a country such as India where there are a large number of orphans this is a welcome phenomenon. However, adoption too comes with its unique share of problems. As always the root cause of most disputes relates to inheritance. However, in the case of adoption there can be not one but two inheritance disputes – one relating to the adopted child’s adopted parents and the other relating to those of his biological parents. Recently, the Supreme Court has cleared the air on one such issue. Let us analyse some of the facets of inheritance in the context of an adopted child!

Law
The Hindu Adoptions and Maintenance Act, 1956 (“the Act”) is a codified law which overrules any text, custom, usage of Hindu Law in the context of adoption by a Hindu. All adoptions by a Hindu male or female must be in accordance with the provisions of the Act or else the shall be void. The consequences of a void adoption are:

(a) it does not create any rights in the adoptive family in favour of the adopted child; and
(b) his rights in the family of his natural birth also subsist and continue.

Thus, it naturally follows that in a case of a void adoption, the adopted child would not be entitled to any inheritance or succession benefits in his adopted family.

On the other hand, the effect of a valid adoption is that from the date of adoption the adopted child will be considered to be the natural child of the adoptive family and all his ties with the original family are severed. However, section 12 provides an important exception that the adopted child is not deprived of the estate vested in him or her prior to his/ her adoption when he/she lived in his/her natural family.

The Supreme Court in Chandan Bilasini vs. Aftabuddin Khan, (1996) 7 SCC 13, has held as follows:

“Section 12 of the Hindu Adoptions and Maintenance Act clearly provides that an adopted child shall be deemed to be the child of his adoptive father or mother for all purposes with effect from the date of the adoption and from such date all ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family.”

Inheritance in Adopted Father’s Property
The wordings of section 12 make it clear that an adopted child shall become the child of the adopted parent for all purposes. Hence, it stands to reason that he would also become entitled to inherit the properties of his adopted parents. The Supreme Court had an occasion to consider this issue in Pawan Kumar Pathak vs. Mohan Prasad, CA 4456/2016. The brief facts of this case are interesting. There was a succession dispute after the death of a person between his brother and the deceased’s adopted son. The adopted son claimed he was the natural heir and hence entitled to property of his father. This plea was contested by the uncle. Thereafter the son tried amending his plaint to add that he was the adopted son of the deceased and even tried producing an adoption deed to prove the same. However, all the lower courts until the High Court refused to take this document on record stating it was nowhere pleaded initially that he was the adopted son and hence, now the plea could not be amended to include the same. Thus, the issue travelled up to the Supreme Court.

The Supreme Court set aside the ruling of the High Court. It held that the appellant had in no uncertain terms claimed that he was the only son and the only legal heir who was alive after the demise of his parents. The only controversy according to the Court was that the appellant has never claimed that he was the adopted son, which claim was now sought to be made by amending the plaint.

The Court opined that once the plaintiff had mentioned in the plaint that he was the only son of the deceased, it was not necessary for him to specifically plead that he was an adopted son. For this it relied upon section 3(57) of the General Clauses Act, 1897 which defined a ‘son’ as under:

“’son’ in the case of any one whose personal law permits adoption, shall include an adopted son;”

The Apex Court further observed that once the law recognised an adopted son to be known as a son, it failed to understand why it was necessary for him to specifically plead that he was the adopted son. His averment to the effect that he was the only son, according to the Court, was sufficient to lay the claim of his inheritance on that basis. In fact, it was not even necessary for the appellant to move an application with an attempt to take a specific plea that he was the adopted son as, his plea to the effect that he was the son of the deceased was an adequate plea and to prove that he was the son. Thus, the Supreme Court set aside the lower Court rulings. An important ruling that the Court gave was that an adopted son can claim inheritance of his parents’ property.

This decision, would assist one in taking a stand that an adopted son would be a son even for the purposes of the definition of a relative u/s. 56(2)(vii) of the Income-tax Act or even concessional stamp duty of Rs. 200 in case of gift of residential property under Art. 34 of Schedule-I to the Maharashtra Stamp Act, 1958.

Inheritance in Natural Father’s Property
Section 12 of the Act provides that the adopted child is not deprived of the estate vested in him or her prior to his/her adoption when he/she lived in his/her natural family. Thus, any property of his natural family vested in the adopted child prior to adoption would continue to be available to him even after adoption. This would be so even though he is deemed to have severed all ties with his biological family and becomes a part of the adopted family. Thus, the Act makes it perfectly clear that a person even after adoption, takes the property along with him which was earlier vested in that person.

Inheritance in Natural Family’s Coparcenary Property
While the law is well settled on inheritance in the vested property belonging to the adopted child’s natural family, there is a judicial controversy over whether he can claim inheritance in the coparcenary property belonging to his natural family. The moot question is whether he can claim to have a vested interest in HUF property or is his share ambulatory and fluctuating and hence, not vested? There are decisions of the High Courts both for and against this question.

The Division Bench of the Andhra Pradesh High Court in Yarlagadda Nayudamma vs. Government of Andhra Pradesh, 1981 AIR(A.P.) 19 has held that an adopted son continues to have a right in coparcenary property belonging to his natural family. It opined that the property vests in a coparcener by birth and hence he gets a vested right in that property by virtue of inheritance. All property vested in the son in his natural family whether self-acquired, obtained by will or inherited from his father or other ancestor or collateral (which is not coparcenary property held along with other coparcener or coparceners) including property held by him as the sole surviving coparcener would not be divested on adoption but would continue to be vested and to belong to the son even after adoption. The Court considered whether it be denied that the interest of a coparcener in the joint family property, though fluctuating, is a vested interest, whatever may be the extent of that interest? It observed that the interest of a deceased coparcener can devolve upon his heirs mentioned in the proviso to section 6 of the Hindu Succession Act and not by survivorship. Similarly, then why can it not be said that by virtue of the provision of Clause (b) of section 12 of the Act, the undivided interest of a person in a Mitakshara coparcenary property will not, on his adoption, be divested but will continue to vest in him even after adoption? It further held that property in the HUF estate is by birth. The coparcener had got every right u/s. 30 of the Hindu Succession Act to will away his property or to dispose of or alienate in whichever way he desired, which he is entitled by birth. It ultimately concluded that a person in Mitakshara family had a vested right even in the undivided property of his natural family and even on adoption he continued to have a right over it.

This decision was followed by a Single Judge of the Bombay High Court in the case of Shivaji Anantrao Deshmukh vs. Anantrao Deshmukh, 1990 (1) Mh. LJ 598. It further held that it was clear that so far as the coparcener is concerned, his right accrued on his birth. For this it relied upon a Supreme Court decision in Controller of Estate Duty, Madras vs. Alladi Kuppuswamy, A.I.R. 1977 S.C. 2069. In every coparcenary, therefore, the son, the grandson or great grandson obtained an interest by birth in the coparcenary property so as to be able to control and restrain improper dealings with the property by another coparcener. Section 30 of the Hindu Succession Act, 1956 clearly showed that undivided share of coparcener can be disposed of by testamentary disposition and this was one of the aspects leading to the conclusion that the right of the coparcener in the undivided share is a right of the owner. This legal sanction had thus strengthened the concept of the undivided share of a coparcener being vested in him as the full owner on birth. Such vesting was not divorced or deferred by any contingency or event. Birth and vesting were simultaneous processes and integrally connected, and nothing could intervene in that process so as to indicate that vesting had been postponed. The Court therefore, concluded that the undivided interest in the coparcenary property continued to vest in the adopted son even after the adoption. Section 12 read along with proviso (b) also clearly laid down that on adoption, there was virtually a severance of the adopted child from the coparcenary. There was thus a partition between the adopted son and other members.

However, a Single Judge of the Bombay High Court in a latter decision in the case of Devgonda Raygonda Patil vs. Shamgonda Raygonda Patil, 1991 (3) Bom. CR 165 has held that on adoption an adopted son ceases to lose his right in the family property of his natural family. It considered and dissented from the decision of the Division Bench of the Andhra Pradesh High Court discussed above. It observed that a coparcener got a right by birth in coparcenary property. However, the said right or interest of coparcener was liable to fluctuation, increasing by the death of a coparcener and decreasing by birth of a new coparcener. A coparcener had right to partition of the coparcenary property. On such partition, the shares of coparceners were defined and then specific property was vested in him. Till partition took place, he was having a right of joint possession and enjoyment. There was community of interest between all members of the joint family and every coparcener was entitled to joint possession and enjoyment of coparcenary property and to be maintained. It was well established that the essence of coparcenary under Mitakshara Law was unity of ownership. The ownership of the coparcenary property vested in the whole body of coparceners. According to the true notion of an undivided family governed by the Mitakshara law, no individual member of that family, whilst it remained undivided could predicate that he had a definite share in the joint and undivided property. His interest was a fluctuating interest, capable of being enlarged by deaths in the family and liable to be diminished by births in the family. It was only on a partition that he became entitled to a definite share. Considering this, according to the Court, there was no vested property in a coparcener and therefore proviso (b) to section 12 could not be attracted. It was only those properties which were already vested in the adoptee prior to adoption by inheritance or by partition in the natural family or as sole surviving coparcener which could pass on to him after the adoption. Therefore the properties which had already become vested in him before adoption as absolute owner were not forfeited by the adoption and the adoptee continued to hold them in the new family. But in the case of coparcenary property it cannot be said that a coparcener had a right to a particular part of it so as to get it vested. It held that section 30 of the Hindu Succession Act supported the view that coparcenary property was not vested in the coparcener. The legislature therefore included section 30 with a view to enable a coparcener to dispose of his interest in the coparcenary property by Will or other testamentary disposition. Ultimately, the Single Judge concluded that if there was coparcenary or joint family in existence in the family of birth on date of adoption, then the adoptee could not be said to have any vested properly. The property did not vest and therefore provision of section 12(b) were not attracted. Vested property meant where indefeasible right was created i.e., on no contingency it can be defeated in respect of particular property. In other words where full ownership were conferred in respect of a particular property. But this was not the position in case of coparcenary properly. The coparcenary property was not owned by a coparcener and never any particular property. All the properties vested in the joint family and were held by it.

Subsequently, another Single Judge of the Bombay High Court in the case of Somanath Radhakrishna More vs. Ujjawala Sudhakar Pawar, 2013 (6) Bom. C.R. 397 has also taken a view that on adoption an adopted son ceases to lose his right in the family property of his natural family. This decision has not considered any of the decisions explained above. It held that on adoption a son’s rights in ancestral property were extinguished. He would no longer be a coparcener in law. He did not have any legal right in the joint property of his natural family. Due to adoption those rights ceased. Even if he continued to stay with his natural family and look after their property his rights could not be rejuvenated.

It is humbly submitted that the two decisions of the Bombay High Court in Devgonda (supra) and Radhakrishna (supra) require a reconsideration for they suffer from judicial impropriety. They have both been issued without notice of an earlier favourable decision of a Single Judge of the Bombay High Court in Shivaji’s case on the same issue and hence, they are rendered per incuriam. It is a settled principle of law that a Single Judge of a High Court cannot give a decision contrary to an earlier judgment of a Single Judge of the same High Court – Food Corporation of India vs. Yadav Engineer and Contractor AIR 1982 SC 1302. Moreover, these contrary Single Judge decisions have even gone against the Division Bench ruling of the Andhra Pradesh High Court. This is against a second principle of law that a Single Judge Ruling of one High Court cannot go against the Division Bench Ruling of another High Court. The correct procedure for the Single Judge in both these adverse rulings, If he did not find himself in agreement with the earlier favourable Rulings, was to refer the binding decision and direct the papers to be placed before the Chief Justice of the Bombay High Court to enable him to constitute a Division Bench to examine the question. This approach finds favour in the Rulings of CIT vs. BR Constructions, 202 ITR 222 (AP FB) and CIT vs. Thana Electricity Supply Ltd, 202 ITR 727 (Bom).

On a separate note, notwithstanding the judicial impropriety, it is submitted that the decisions of the Andhra Pradesh Division Bench and the Bombay High Court in Shivaji appear to be more correct.

Conclusion
The Supreme Court’s decision has helped clear a major issue in inheritance of adopted children. One only wishes that the other issue relating to inheritance in HUF property of the natural family is also settled quickly. This would go a long way in reducing several succession disputes.

shailesh.kwebmaker

(Balanced behaviour)

(Balanced behaviour)

Arjun (A) — Bhagwan, in last so many meetings, you have been telling me about our professional ethics. I am rather fed up with your stories. Tell me something new.

Shrikrishna (S) — Arjun, Ethics is an all-pervasive concept. Your profession is your mission. People look upon a professional with certain expectations. Any deviation from ideal behaviour on your part is not acceptable.

A — But why? We are human beings. And today, whole world is behaving in whatever way they like.

S — True. But you can’t do that!

A — Let everyone mend his ways; then we will also change ourselves.

S — Oh! It is like standing on the bank of a river and saying – ‘Let the entire water flow away; then only I will cross it!’

A — Let me tell you one thing. By and large, we are ethical

S — That’s the problem! In ethics, one can be either ethical or unethical. There is no in between stage!

A — But why we alone are subjected to this burden?

S — Because you are intellectuals. You are expected to lead the society. You can’t follow the common lot who don’t think. They follow you. It is not a burden; it is your shield.

A — Our clients always dictate their terms. We can’t resist beyond a certain limit

S — Unfortunately, you people not only succumb to the pressures, but at times, you yourselves initiate unethical tricks!

A — Yes. Agreed. There are a few of us who indulge in this instances like that.

S — Remember these few spoil the image of the entire profession.

A — One cannot generalise. There are quacks in every profession.

S — Agreed. Still, even the basic professionalism is often lacking. You study lot of academics; but not learn the communication skills. Courtesy, etiquettes – all these are very important.

A — But that is lacking even in other professionals – like lawyers!

S — True. Do you think that justifies the lack in your profession!

A — See, many times, some disgruntled members of a company call us directly for some information. This is irritating that we don’t feel like talking to such persons.

S — Avoid taking their calls or meeting them! Right? And if they write to you, you feel you are not obliged to reply. Is it not?

A — You said it!

S — That precisely is the problem. If you feel that they should seek information from the management and not from you, why don’t you write to them firmly but politely?

A — Who has time to do that?

S — Dear Arjun, you don’t understand that their ego is hurt. They feel that you don’t have even the basic courtesy to reply to them. They approach the Institute with a complaint. Most of the complaints are made out of `ego’ problems

A — There is a point in what you say.

S — This behaviour is unbecoming of a professional. It creates a very bad impression about the profession, just as you blamed the lawyers a while ago.

A — How can this be a misconduct attracting disciplinary proceedings?

S — I agree. But then these people find out some loophole or the other in your work. In fact, your own professional brothers help them in doing that!

A — Yes. I have also noticed this. It gives them sadistic pleasure or sometimes, they act out of jealousy.

S — It takes at least 3 to 4 years to establish your innocence! This mental agony is more severe than the actual punishment, if at all you are held guilty! Please remember that in these proceedings, small things like lack of courtesy, lack of professional behaviour count a lot

A — I am realising that ethics is a very wide concept. It is not purely a legalistic idea. It travels beyond that. Even insignificant actions or inactions are a part of Ethics! Thank you Lord!

S — Bless you!

Om Shanti.
The purpose of the above dialogue is to bring forth the importance of certain simple courtesies the professional practice. Very often, it is seen that the disciplinary proceedings are initiated out of ego clashes. Such ego clashes can be minimised to a very large extent by following certain simple professional courtesies like timely and proper communication.

shailesh.kwebmaker

Right to Information Act – Information pertaining to development plan cannot be withheld by Municipal Corporation. [Right to Information Act, 2005, Section 6,8]

Ferani Hotels Pvt. Ltd. vs. State Information Commissioner AIR 2016 (NOC) 384 (Bom.).

The Sole administrator of the estate and effects of one late E.F. Dinshaw

[3rd respondent] submitted an application under section 6(1) of the Act, to the Public Information Officer of the Municipal Corporation of Greater Bombay on December 10, 2012 demanding information pertaining to certain lands. The information as applied was for the certified copies of the property card, certified copies of plans and amendments to the plans as submitted by Ferani Hotels Pvt. Ltd. [Petitioner] or its architects, certified copies of all layouts, sub division plans and amendments, certified copies of development plans and amendments thereon and certified copies of all reports submitted to the Municipal Commissioner and his approval thereto. It was the petitioner’s case that the 3rd respondent was a competitor of the petitioner and disclosure of the information would cause harm and injury to the business of the petitioner company as also would violate the intellectual property rights.

The information as sought by the 3rd respondent was also trade secret and thus would be detrimental to the business of petitioner interest as also in the pending suit and proceedings in various Courts.

The High Court held that information sought was regarding development proposal of land and development plan submitted to and in custody of Municipal Corporation. Municipal Corporation had granted approval to development proposal. Larger public interest requires that said information should be supplied. It was neither trade secret nor disclosure involving infringement of copyright. Such information cannot be withheld.

shailesh.kwebmaker

Precedent – High Court should be very slow in taking a view different than the view of other High Court. [Customs Act, 1962]

Dharmesh Devchand Pansuriya vs. UOI 2016 (336) E.L.T 402 (Guj.)

The settlement commission under the Customs Act, 1962 had held that it had no jurisdiction. Hence, Special Civil Application was filed by the Petitioner in Gujarat High Court. It was pointed out by the revenue that view of settlement commission was supported by decision of Additional Commissioner of Customs vs. Ram Niwas Verma, reported in 2015 (323) ELT (Del) (HC) and C.S. India vs. Additional Director General, DCEI, Bangalore, 2015 (325) ELT (Karn) (HC).

It was held by the Gujarat High Court that Customs Act, 1962 being a central statute bearing tax implications, we would, even otherwise, be slow in taking different view from two reasoned judgments of other High Courts. Even if, therefore, another view was possible, for the sake of consistency, we would have respectfully followed the view of other High Courts.

shailesh.kwebmaker

Hindu Widow’s Remarriage – On remarriage of Hindu widow, she gets divested of right, title and interest in deceased husband’s property. [Hindu Widows Remarriage Act, 1856 Section 2 ]

Balak Ram (By LR’s) & Ors vs. Rukhi & Ors. AIR 2016 Chhattisgarh 68.

The Chhattisgarh High Court held that a perusal of section 2 of Hindu Widows Remarriage Act, 1856 reveals that upon remarriage, all rights and interests of the widow in her deceased husband’s property by way of maintenance, or by inheritance to her husband or to his lineal successors, or by virtue of any Will or testamentary disposition conferring upon her, without express permission to remarry, only a limited interest in such property, with no power of alienating the same, shall, upon her remarriage, cease and determine. The legislative intention of a total disassociation of widow upon remarriage is clearly manifested by providing that upon remarriage, all interests and rights would cease and determine as if she had then died. This provision of strong import of civil death of the widow upon remarriage is sufficiently indicative of legislative intention that remarriage shall lead to determination and cessation of all rights and interests of widow in the property of the deceased. The provision is comprehensive in nature and every possible rights and interests which a widow might have in the property of the deceased including limited estate of maintenance have been brought within the ambit of the provision.

The High Court further held that at the time of commencement of the Hindu Succession Act, 1956 with effect from 17-6-1956 respondent Sukhmen had no subsisting interest or estate in the property of her husband. For that reason, there is no occasion of application of section 14 of the Hindu Succession Act, 1956 in the present case to the aid of the defendant Sukhmen because section 14 of the Hindu Succession Act, 1956 provides that limited estate shall become absolute in favour of a female survivor. The provision by itself does not create any new right or estate which the widow or the female relative did not have at the time of coming into force of the said Act.

shailesh.kwebmaker

Hindu Succession – Property inherited by female Hindu widow from her husband would devolve upon heirs of husband in absence of any son and daughter. [Hindu Succession Act, 1956 Section 15, 16].

Mahadev S. More vs. Sukhdev S More AIR 2016 BOM 151.

The Bombay High Court held as per section 15(2) of the Hindu Succession Act, 1956 any property inherited by a female Hindu from husband or father in law will devolve upon heirs of husband in the absence of any son or daughter of the deceased. Further, as per section16 of the said Act the property of intestate shall devolve as if the property had been the fathers or mothers or husbands as the case may be.

shailesh.kwebmaker

Hindu Marriage Act – Recording of statement of witness through video conferencing is permissible. [Hindu Marriage Act, Section 13B]

Shilpa Chaudhary (Smt.) vs. Principal Judge & Anr. AIR 2016 ALL 122.

The lower court noted in the impugned order that merely on the basis of an affidavit, the marriage cannot be dissolved in proceedings u/s. 13B of Hindu Marriage Act, 1955 (the Act). The presence of the parties is mandatory. Further, the electronic facility available in the court cannot be used, as there being no device for interacting with a party who is residing outside the country.

The Allahabad High Court held that the word “after hearing the parties” used in subsection (2) of section 13B of the Act, however, does not necessarily mean that both parties have to be examined. The word “hearing” is often used in a broad sense which need not always mean personal hearing. When there are no suspicious circumstances or any particular reason to think that the averments in the affidavit may not be true, there is absolutely no reason why the Court should not act on the affidavit filed by one of the parties. The family courts are entitled to ascertain the views of the parties, but however, if one of the parties, appears before the family court and expresses no objection to an affidavit of the other party to be taken on record and is not desirous of cross-examining the deponent of the affidavit, the family court can entertain, unhesitatingly any such application. Increasingly family courts have been noticing that one of the parties is stationed abroad. It may not be always possible for such parties to undertake trip to India, for variety of good reasons. On the intended day of examination of a particular party, the proceedings may not go on, or even get completed, possibly, sometimes due to pre-occupation with any other more pressing work in the Court. However, technology, particularly, in the Information sector has improved by leaps and bounds. Courts in India are also making efforts to put to use the technologies available. Skype is one such facility, which is easily available. Therefore, the Family Courts are justified in seeking the assistance of any practicing lawyer to provide the necessary skype facility in any particular case. For that purpose, the parties can be permitted to be represented by a legal practitioner, who can bring a mobile device. By using the skype technology, parties who are staying abroad can not only be identified by the Family Court, but also enquired about the free will and consent of such party. This will enable the litigation costs to be reduced greatly and will also save precious time of the Court. Further, the other party available in the Court can also help the Court in not only identifying the other party, but would be able to ascertain the required information.

shailesh.kwebmaker

CHANGING PARADIGMS OF CORPORATE SOCIAL RESPONSIBILITY

Not a New Issue
The concept of “Corporate Social Responsibility” (CSR) is not a new concept for business organisations. In fact, many organisations , both in the private and public sector, have pioneered the concept of CSR in India as part of their business responsibilities in different forms. Whilst the most common form of CSR has been the various employee welfare measures undertaken, quite a few companies / business groups have also been involved in charitable causes of different types either through their own “Not for Profit” entities or by tying up with NGOs or simply by making donations to avail of tax benefits.

Recent Developments
The concept of CSR has recently been in the limelight due to it being made mandatory under the Companies Act, 2013 (“the Act”) and the rules framed thereunder for certain classes of companies. It has been widely discussed that such mandatory provisions are not part of any other country’s corporate law provisions and in that sense it could be considered as an innovative provision. The provisions governing CSR are laid down in section 135 of the Act and the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“the Rules”) and are applicable with effect from 1st April, 2014. The provisions broadly cover the following:

Companies having a net worth (Rs. 500 crore or more), turnover (Rs. 1,000 crore or more) or net profits (Rs. 5 crore or more) are required to mandatorily spend in every financial year starting from 1st April, 2014, atleast two percent of their “average net profits” of the three immediately preceding financial years calculated as per section 198 of the Act (for determining the managerial remuneration limits), on prescribed CSR activities.

The Rules define net profit of a company to mean the net profit as per its financial statements prepared in accordance with the Act, but excludes any profit arising from any overseas branch or branches of the company, whether or not operated as a separate company and any dividend received from other companies in India that are covered under and complying with CSR provisions. Net profit in respect of a financial year for which financial statements have been prepared as per the Companies Act, 1956 is not required to be re-calculated as per the 2013 Act.

Constitution of a CSR Committee of the Board of Directors having atleast one Independent Director (as defined in the Act). However, the Rules have clarified that in the following cases, the committee need not have an Independent Director:

• Unlisted public and private companies who are not required to appoint an Independent Director under the Act.

• Private Companies having only two directors may constitute the committee with the said directors.

• In case of foreign companies, the committee shall comprise of its authorized representative in India and any other nominated person.

The above CSR Committee shall formulate and recommend to the Board of Directors, a CSR Policy which shall specify the activities to be undertaken by the Company as prescribed in Schedule VII of the Act (discussed below) and no other activities even if they are in the nature of social activities would be eligible.

The Rules specify various procedural activities to be undertaken by the above committee and the management like specifying the amount which can be spent on the prescribed activities and the monitoring thereof, displaying the policy on the web site, format for disclosures in the Annual Report, clarifying that expenses incurred for the benefit of only employees and their families would not be considered for inclusion in the prescribed limits, political contributions not covered, etc.

The following are some of the eligible CSR spending which have been prescribed in Schedule VII of the Act:

a) Promoting preventive health care and sanitation and making available safe drinking water;

b) Setting up homes, hostels for women and orphans; old age homes, day care centres and other related activities;

c) E nsuring ecological balance, and other related matters;

d) Livelihood enhancement projects;

e) Protection of national heritage, art and related activities;

f) Measures for the benefit of armed forces veterans, war widows and their dependents;

g) Training to promote rural sports, nationally recognised sports, Olympic sports etc;

h) Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

i) Promoting education and employment enhancing vocational skills;

j) Rural development projects;

k) Contribution to Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and welfare of scheduled castes, scheduled tribes, minorities and women.

Changing Paradigms
As with any new concept, the above legislative changes are expected to bring about a paradigm shift; both positive and negative in how corporates in particular and society in general could view CSR activities; the important ones amongst them are briefly discussed hereunder:

Commercialisation
Experience indicates that any new idea or concept which is mandated and thrust upon society drives its commercialisation, which is nothing but a formalised and systematic approach at launching the same. CSR which was hitherto largely seen as a voluntary concept is now mandatory, which would require companies, through the CSR Committee, to formalise various processes and formulate policies on various matters which are laid down in the Rules. The policies and procedures should cover various aspects like when, where, what and how to launch such activities within ethical and legal boundaries and keeping in mind the overall social responsibilities which are expected to take care of the interest of various stakeholders. These questions would need to be kept in mind by the CSR Committee and the Management whilst framing the CSR policy.

Certain specific aspects laid down in the Rules which would need to be kept in mind whilst framing the CSR policies and procedures are as under:

• The expenditure is required to be incurred only in respect of activities which are prescribed. This would require companies which are already undertaking CSR activities to reassess whether the same meet the criteria of eligible CSR spend. Also, any activities undertaken in the normal course of business though they may be in the nature of CSR activities need to be excluded. e.g a bank which lends money towards Clean Development Mechanism (CDM) projects and provides project and advisory services towards trading in Certified Emission Reductions (CER) even though it may facilitate in maintaining ecological balance and protecting the environment.

• CSR projects / programs / activities are required to be undertaken in India only.

• CSR projects / programs / activities benefitting only the employees of the Company and their families will not be considered as CSR activities.

• Contribution of any amount directly or indirectly to any political party will not be considered as CSR activity.

• The policy shall specify that any surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the Company.

Further, the Rules provide that the CSR programmes / activities which are approved can be implemented through either of the following:

• registered trust, or
• a registered society, or
• a company

established by the company or its holding or subsidiary or associate company whether as a “not for profit” company or otherwise.

If any of the above entities is not established by the company or its holding or subsidiary or associate company, it must have an established track record of 3 years in undertaking similar programs or projects. The company must also specify the projects or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

The Rules also provide that the companies may build CSR capacities of their own personnel as well as those of their implementing agencies through institutions with established track record of at least three financial years. However, such expenditure is capped at 5% of total CSR expenditure of the company in a particular financial year. Also, collaboration with other companies for undertaking CSR activities is permissible provided that the CSR Committees of respective companies are in a position to report separately.

The above provisions if implemented in the right spirit would lead to a significant amount of funds getting channelized for the poorer and disadvantaged sections resulting in sustainable and all-round development. However, for companies which are already incurring expenses towards the benefit of their employees and families or in respect of other social causes which are not specifically within the purview of CSR activities prescribed in the Rules would have to incur additional expenses which may lead to a reduction of the distributable profits and consequentially lower returns to the shareholders. Hence, it is imperative that companies engage in a dialogue with the various stakeholders when formulating the CSR policy.

Professionalism
Professionalism is inevitable when commercialisation creeps in and the same is bound to happen also in the case of CSR. Professionalism encompasses taking the help of specialists and consultants. It is expected that many companies would take the help of professionals in formulation of customised CSR strategies aligned with the company’s core values as well as on various types of activities to be undertaken and the effective implementation thereof within the boundaries imposed by regulations so as not to fail on the legal front and be exposed to penalties. This would also open up opportunities for professionals at the same time increasing the cost for companies in the form of fees. Professionalism would also creep in internally through setting up of specialised departments by companies staffed by experienced professionals with the desired competencies to enable companies to navigate through the CSR regulatory maze.

Transparency
Commercialisation and professionalism make transparency inevitable. Further, the Act and the Rules contain various provisions / requirements which would bring about transparency, some of which are as follows:

• Displaying the CSR policy duly approved by the Board of Directors on the company’s web site.

• Detailed disclosures in the Board Report regarding the policy developed and implemented by the Company and the specific initiatives undertaken by the Company on the CSR front.

Many companies have already been disclosing in their Annual Reports on a voluntary basis their CSR initiatives. Further, SEBI through an amendment to the Listing Agreement, mandated the top 100 companies in terms of market capitalisation to include a Business Responsibility Report containing prescribed particulars dealing with various aspects of the company’s contribution towards various sustainability initiatives which amongst others would also include its CSR initiatives, including the amount spent towards the same. This could lead to some amount of duplication and information overload between the disclosures under the Act and the Listing Agreement for the large companies.

Whilst greater transparency is always desirable, it could also have negative connotations since competing recipients / donors of services could demand greater benefits for themselves thereby putting undue pressure on companies.

Employee Benefits
Presently most of the companies equate CSR with providing benefits to their employees and their families in the form of housing, education and medical benefits. However, these activities that benefit only the employees of the company and their families are not considered as CSR activities in the revised guidelines. Hence, most of the companies would have to go much beyond their employees to fulfill their CSR obligations. Further, any social service activities undertaken by the employees of the company not represented by actual spending by the company on the prescribed activities would not be considered to fall within the purview of CSR.

Political Overtones
Though donations to political parties and political contributions are not covered as eligible CSR spend, the CSR mandate could lead to certain forms of indirect contributions to political parties under which companies could be forced to incur CSR spend through organisations which have some form of political patronage or in areas of specific interest to the local political parties. However, it may be noted that contribution to the Prime Ministers’ National Relief is one of the permissible avenues for CSR spend.

Conclusion
Whilst the objectives and intentions of the above innovative provisions are laudable and a step in the right direction for a developing country like ours, it needs to be seen as to how India Incorporated navigates through its various positives and pitfalls.

shailesh.kwebmaker

Can a Company have two functional currencies?

Query
Can a Company have two functional currencies for its two autonomous divisions? Travel & Logistics Ltd (TL or the Company) an Indian registered company has two independent business divisions, namely, hotel division which runs hotels in India and shipping division which runs global shipping operations. TL assessed the functional currency of the hotel division as rupee (INR) and shipping division as US $. It may be noted that substantial income and expense of the shipping division is in US $. If the shipping division was housed in a separate company, its functional currency would be US $.

In which currency, TL will prepare its Ind AS financial statements? Will it be (a) INR (b) US $ or (c) INR for hotel division and US $ for shipping division?

Response
A similar issue was discussed by the Ind AS Transition Facilitation Group (ITFG). The view of the ITFG and the Author’s view are expressed below.

View of ITFG
As per paragraph 8 of Ind AS 21, The Effects of Changes in Foreign Exchange Rates, functional currency is the currency of the primary economic environment in which the entity operates.

Further, paragraph 17 of Ind AS 21 states that: “In preparing financial statements, each entity – whether a stand-alone entity, an entity with foreign operations (such as a parent) or a foreign operation (such as a subsidiary or branch)—determines its functional currency in accordance with paragraphs 9–14 of Ind AS 21.”

Paragraphs 9-14 of Ind AS 21, elaborate the factors that need to be considered by an entity while determining its functional currency.

In view of the above, it is concluded that functional currency needs to be identified at the entity level, considering the economic environment in which the entity operates, and not at the level of a business or a division. Accordingly, if after applying paragraphs 9-14 of Ind AS 21, the Company concludes that its functional currency is USD at the entity level, then it shall prepare its financial statements as per USD.

Though not stated, the obvious extension of this interpretation is that if the Company concludes that its functional currency is INR at the entity level, then it shall prepare its financial statements as per INR.

Authors view
Under Ind AS 21, foreign operations are defined as “Foreign operation is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.”

It is interesting to note that the activities of the branch may be conducted in a different country or in the same country but in a different currency. Ind AS 21 uses the term ‘branch’ to describe an operation within a legal entity that may have a different functional currency from the entity itself. It does not describe a branch, in the classical sense, such as a Company in Mumbai has a branch in Chennai.

An entity may have an operation, eg a division that operates in a different currency environment from the rest of the entity. Though this may not be a branch in a classical sense, it would be a branch for the purposes of Ind AS 21, provided the operation of that division represents a sufficiently autonomous business unit.

Therefore in the given fact pattern, the entity will apply functional currency US $ for shipping division and INR for hotel division. This interpretation would not be challenged if the shipping division was registered as a separate company in India or as a separate branch abroad. Therefore it does not make any logical sense to challenge this view just because it is housed in one entity and is called a ‘division’ rather than a ‘branch’. Besides given the way the term branch is used in the Ind AS 21 context, the shipping division and hotel division should be evaluated separately for the purposes of determining the functional currency.

To state the entity’s Ind AS financial statements in the presentation currency, the results and financial position of its operations having different functional currencies will be included using the translation method set out in paragraph 38-43 of Ind AS 21. The entity shall translate: (a) assets and liabilities at the closing rate; (b) income and expenses at period average exchange rates; and all resulting exchange differences shall be recognised in other comprehensive income.

Conclusion
In view of the discussion and arguments provided above, the ITFG may reconsider its view on the above matter. In any case, the ITFG views are only recommendatory and are not binding.

shailesh.kwebmaker

[2015] 63 taxmann.com 124 (Bangalore) DCIT vs. Subex Technology Ltd A.Y.:2009-10, Date of order: 1 October, 2015

Section 90 of the Act –In absence of any specific provision in the Act denial of grant of foreign tax credit against MAT liability is invalid

Facts
The Taxpayer was an Indian company. During the relevant assessment year, the income of Taxpayer was subject to Minimum Alternate Tax (“MAT ”) under the provisions of section 115JB of the Act. Since, the Taxpayer had paid taxes in foreign countries, it claimed credit in terms of section 90 of the Act for taxes paid abroad against its MAT liability u/s. 115JB.

During assessment proceedings, the AO disallowed the claim of foreign tax credit on the ground that provisions of section 115JB stood on a different footing than the normal provisions of the Act.

Held
The income on which tax was paid abroad was included in ‘book profit’ computed for the purpose of section 115JB. Once taxable income was determined either under the normal provisions or u/s. 115JB, the computation of tax was to be governed by the normal provisions of the Act1 .

As there was no provision in the Act for restricting the grant of foreign tax credit, such credit should be allowed against MAT liability.

shailesh.kwebmaker

[2016] 70 taxmann.com 1 (Delhi) ZTE Corporation vs. ADIT Date of order: 30 May, 2016

Articles 5, 7, 12 of India-China DTAA; section 9 of the Act, Rule 10 of I T Rules – (i) level of participation of PE in economic life of source country should determine attribution of profit to PE (ii) If supply of software is integrally connected to supply of hardware, receipts from supply of software could not be taxed as royalty.

Facts – 1
The Taxpayer was resident of China. It was engaged in the business of supplying telecom equipment and mobile handsets to Indian customers. It did not furnish return of its income in India on the ground that it did not have PE in India in terms of Article 5 of India-China DTAA .

According to the AO, since the Taxpayer was carrying on business in India through fixed base for long period, it had fixed place PE, installation PE and dependent agency PE in India. Therefore, the AO proceeded to determine the profits from supply of telecom equipment and mobile handsets that were attributable to the PE in India. Moreover, since the Taxpayer had not maintained separate books of account for its Indian operations, the AO invoked Rule 10(ii) of I T Rules and attributed 20% of net global profits arising out of revenues realized from India.

Facts – 2
In terms of consolidated offshore supply contract executed by the Taxpayer, the Taxpayer also supplied software. The Taxpayer contended that such software was integral and essential part of telecom equipment and hence, payment towards such software should not be treated as royalty. However, the AO concluded that the payments made for use of software were royalty in terms of Article 12(3) of India-China DTAA as well as section 9(1) of the Act.

Held – 1
As regards attribution of profits to PE
Since the Taxpayer had not maintained books of account pertaining to PE in India, indirect method of attribution as per rule 10 should be resorted to.

Primarily, taxable income arises to Taxpayer from nexus between source country and activities of PE. Hence, level of participation of PE in economic life of source country is the most important aspect.

The order of the AO and that of CIT(A) gives clear picture of level of operations of the PE. The level of operations carried out by the Taxpayer through its PE in India was considerable enough to conclude that almost entire sales function was carried out in India.

Since in the present case the hardware and software supplied to Indian customers involved supply, installation, commissioning etc.,, 35% of net global profits of the Taxpayer from its transactions with India were to be attributed to PE in India.

Held – 2
As regards integrally connected supply of software

Since supply of software was integrally connected to supply of hardware, receipts from supply of software could not be taxed as royalty.

shailesh.kwebmaker

TS-365-ITAT-2016 (CHNY) Intelsat Global Sales and Marketing Ltd A.Ys.: 2002-03 to 2012-13, Date of order: 1 July, 2016

Article 5 of India-UK DTAA – Since maintenance of satellite signal quality was obligation of the taxpayer, equipment installed in India for signal testing and monitoring would result in rendering of service in India.

Facts
The Taxpayer, a company incorporated in UK, was providing satellite capacity and related services to telecasting/telecom companies in India (“Indian customers”). Indian customers uplinked data/signals to satellite of the Taxpayer. These were processed through the transponder in the satellite and retransmitted to earth stations, which were owned by Indian customers. A group company of the Taxpayer in India had installed testing and monitoring equipment in India to ascertain quality of the signals received in India.

According to the taxpayer, the function of equipment was only to monitor the signals and since the earth stations were owned by the Indian customers, it had not rendered any service or carried on any business in India. Further, as per Article 5 of India-UK DTAA , it did not have a Permanent Establishment (PE) in India. It also contended that tax authority could tax only such portion of income which could be attributable to operations carried out in India. Also, the fact that a UK company controls a group company in India would not, by itself, constitute PE of the UK Company in India. The Taxpayer relied on various decisions to contend that the payments received by it were not royalties and since the services provided were standard services, they were also not Fee for Technical Service (FTS).

Held
If Taxpayer was maintaining a satellite in orbit and Indian customers were uploading data/signals, which were retransmitted to India to earth stations owned by Indian customers, the Taxpayer may not be rendering any service in India.

However, the Taxpayer was also maintaining testing equipment in India because the Taxpayer was under obligation to maintain the quality of the signals.

Even though the equipment was maintained by group company of the Taxpayer, it was for testing the signal transmitted by the Taxpayer. Hence, the Taxpayer should be construed as rendering services in India.

As the Taxpayer claims to have dismantled the equipment, and since it was under obligation to maintain quality of signals, it should be examined how taxpayer tested and maintained quality of signals after dismantling the equipment and also certain other technical aspects. Therefore, the assessment was set aside and matter remanded to AO.

shailesh.kwebmaker

[2016] 71 taxmann.com 120 (Mumbai) Mrs Shalini Seekond vs. ITO A.Y.: 2007-08, Date of order: 7 July, 2016

Article 4, 6 and 24 of India-Sri Lanka DTAA; section 90(3) of the Act – (i) on applying tiebreaker test, Taxpayer was resident in India as habitual abode and center of vital interests was in India (ii) Notification issued under section 90(3) being clarificatory in nature, has retrospective applicability (iii) having regard to Notification under section 90(3), capital gain on sale of immovable property in Sri Lanka is chargeable to tax in India.

Facts
The Taxpayer was a Sri Lankan national married to an Indian national. Post-marriage she was living in India. During the relevant year, she was resident of India in terms of the Act and, based on her fiscal domicile, was also a resident of Sri Lanka in terms of Sri Lankan domestic law. The Taxpayer owned immovable property in Sri Lanka, which she had sold during the year. She invested the sale proceeds in mutual funds and a property in India.

According to the Taxpayer, based on tie-breaker rule in India-Sri Lanka DTAA , she was resident of Sri Lanka. Based on certain decisions of Supreme Court, it was argued that the capital gains on sale of immovable property situated in Sri Lanka were to be taxed only in Sri Lanka.

According to the AO, the Taxpayer was resident in India and hence her global income was taxable in India. Since the Taxpayer had not paid any tax in Sri Lanka, no relief could be granted and capital gain arising in Sri Lanka was fully taxable in India. The AO relied on Notification No 91 of 2008 dated 28-08-2008 clarifying that where a DTAA uses the expression “may be taxed in the other country”, the income should be included in total income chargeable to tax in India and relief should be granted in accordance with the method for elimination or avoidance of double taxation provided in DTAA .

The issue before the Tribunal was whether the gains derived from sale of immovable property was taxable in India.

Held
(i) As regards applying tie-breaker rule for resolving dual residency

It is undisputed that the Taxpayer was a resident in India as per the Act, which was further confirmed by the Taxpayer who declared her status as being “resident in India” in the return of income.

Under the tie-breaker rule of India-Sri Lanka DTAA , the Taxpayer qualified as resident of India since:
• Post-marriage Taxpayer had a permanent home (home of her husband) available to her in India. The availability of a permanent home has nothing to do with ownership of a home in the country of residence, but refers to a place of abode or dwelling in the country of residence and an abode available to her at all times continuously and not occasionally for a short duration.
• The word “habitual abode” requires actual living habitually, consistently and regularly in a country. Mere ownership of an immovable property or living of parents of a married woman in Sri Lanka does not make Sri Lanka her habitual abode, unless it is demonstrated with cogent evidences that the Taxpayer was living both in India and in Sri Lanka permanently, regularly and consistently.
• Post-marriage with an Indian national, the Taxpayer’s economic and personal relations have close proximity to India. She has retained her centre of vital interest in India after her marriage by moving to India to stay with the Indian national permanently.
• The Taxpayer held lifelong, valid multiple visa issued by GoI to enable her to stay in India indefinitely with her husband. This also reflected her intention to stay or settle permanently in India.
• By utilizing the sale proceeds of Sri Lankan property for buying assets in India, the Taxpayer clearly reflected the strategic shift of vital economic interest to India from Sri Lanka.
• Accordingly, the Taxpayer was a treaty resident of India

(ii) As regards connotation of “may be taxed”

Under section 90(3) of the Act, GoI can assign meaning to any undefined term in the Act or DTAA provided the assigned meaning is not inconsistent with their provisions, or unless the context otherwise requires. Accordingly, GoI issued the Notification assigning meaning to the expression “may be taxed”.

Since the meaning assigned is with intent and objective as understood during the negotiations of DTAA , it should be read from the date when India– Sri Lanka DTAA came into force.

Plain language used in the Notification shows that it is merely procedural in nature and no additional liability is sought to be fastened on the Taxpayer. Hence, its retrospective applicability cannot be questioned.

(iii) As regards taxability of capital gains under DTAA

Right to tax capital gains from the sale of the immovable property situated in Sri Lanka is allocated to Sri Lanka under the DTAA . The fact that the tax liability on such gains is nil or zero does not impact the right of taxation allocated in terms of the DTAA .

However, having regard to the Notification, such capital gain should be included in the income of the Taxpayer chargeable to tax in India under the provisions of the Act. Double taxation relief may be granted as per the provisions of the DTAA which in the present case is Nil as no taxes were paid in Sri Lanka.

shailesh.kwebmaker

[2016] 67 taxmann.com 68 (Bangalore) e4e Business Solutions India (P) Ltd vs. DCIT A.Y.: 2009-10, Date of order: 10 November, 2015

Section 92C of the Act – Foreign exchange gain which has direct nexus with international transactions, is to be considered as part of operating profit of Taxpayer.

Facts
The Taxpayer was engaged in the business of end-to-end BPO Services. It had entered into service agreement with its Associated Enterprise (“AE”) based in USA, which was its holding company. For computing its operating profit margin for transfer pricing purpose, the taxpayer had included foreign exchange gains.

However, TPO recomputed the operating profit margin by excluding foreign exchange gain for benchmarking the international transaction. The DRP did not accept the objections of the Taxpayer and confirmed the proposed adjustment.

Held
It was undisputed that the foreign exchange gain pertained to income from service provided to the AE. Therefore, it had direct nexus with international transactions and service provided by the Taxpayer to its AE.

The tax authority had contended that the economic and other factors affected foreign exchange gains and such gain was not dependent on operations of the Taxpayer. However, such factors also affected the business transactions and price determination between the parties. Since foreign exchange gain had arisen only because of international transactions, it had direct nexus with international transactions. Therefore, such gain was part of operating revenue, and consequently part of operating profit of the Taxpayer for the purpose of determining the ALP in respect of the international transaction.

However, while comparing the margins of the comparable, foreign exchange gain should also be included for computing operating profit margin.

shailesh.kwebmaker

Foreign Tax Credit Rules 2016 – An Analysis

1 Background
Most of the countries follow a mix of source and residence based concept of taxation i.e. a country seeks to tax the global income of a person who is a resident in that country as well as tax all the income which arises to a person (whether resident or nonresident) in its territory.

This leads to dual taxation of the same income, firstly in the country of source of income and secondly in the country of residence of the person earning income. Countries enter into Double Taxation Avoidance Agreements (‘DTAA ’), inter-alia, to eliminate this double taxation of the same income. Further, the tax which is paid in the source country by the person receiving income is either allowed as a credit by the country of residence while computing the tax payable therein or exempts such income from taxation. Additionally, most countries also provide for unilateral relief under their domestic law, which would aid in eliminating tax cascading where no DTAA exists.

Sections 90 and 90A of the Income-tax Act, 1961 (“the Act” or “ITA ”) provides for relief from double taxation of income in India if there exists a DTAA between India and a foreign country/specified territory. Typically, DTAA s entered into by India provide for availability of credits of foreign taxes with a view to afford relief from double taxation.

Similarly, section 91(1) of the Act provides for unilateral relief in respect of taxes paid on the income arising in a country with which India has not concluded a DTAA . This section provides for a credit on doubly taxed income, at the Indian rate of tax or the rate of tax of the other country, whichever is lower.

However, the Act did not specify any guidelines or rules outlining the manner and mechanism for computing the eligible tax credit as in line with Countries like USA, UK etc., resulting in avoidable litigation on various issues connected with claim for Foreign Tax Credit (FTC). In August 2013, Indian Government constituted Tax Administration Reform Commission (‘TAR C’) headed by Dr. Parthasarathi Shome, where one of the key recommendation by TAR C in its report was that Central Board of Direct Taxes (‘CBDT’) should come out with clear FTC (i.e., credit for the income tax paid by the taxpayer in another Country) guidelines in order to simplify the tax administration in India. This lead to the insertion of section 295(2)(ha) by the Finance Act, 2015 which empowered the CBDT to prescribe rules for granting relief under the Act in respect of foreign taxes paid.

Apart from the above, there are no provisions in the Act or the Rules that deal with the detailed aspects of the availability and claims for foreign tax credits. The First Report of the TAR C had recommended that the CBDT come out with clear guidelines in respect of availing FTC. Accordingly, the CBDT issued the draft FTC rules on 18 April 2016 and comments from stakeholders and general public were invited by 2nd May 2016.

2 Foreign Tax Credit Rules, 2016

After considering the comments received from the public, the CBDT has issued a Notification dated June 27th 2016 which amend the Income tax Rules 1962 to provide for a separate segment on Foreign Tax Credit Rules, 2016 (“Rules”). These rules clarify the nature and conditions for the availability of the FTC to the tax payers and provide guidance to claim FTC in India. The Rule 128(10) specifies reporting of carry backward of losses of the Current Year whereby it results in a refund of Foreign Tax for which credit had been claimed in any earlier previous year or years. The rules also provide guidelines for granting tax credit if and when the tax dispute in the foreign country is settled against the tax payer. The rules also provide that where income on which foreign taxes are paid is reflected in multiple years, the credit for FTC shall be allowed proportionately. The rules also provide for relaxation in documentation requirements and self certification supported by proof of payment of foreign taxes.

2.2 Analysis of the Rule

Salient features of Rule 128 are as follows:

2.2.1 Grant of FTC to residents:
FTC shall be allowed to a resident of India for the amount of any foreign tax paid by him, by way of deduction or otherwise.

2.2.2 Grant of FTC in the year of assessment of income:

i) FTC shall be allowed in the year in which the income (corresponding to the foreign tax paid) is offered to tax or assessed to tax in India.

ii) However, if the income (corresponding to the foreign tax paid) has been offered to tax in India in more than one year, FTC shall be allowed proportionate to the income offered in each of the years.

2.2.3 Meaning of foreign tax:
Foreign tax would mean the taxes covered under the applicable DTAA and, in other cases, the taxes covered under the double tax relief provisions of the ITA . As per Explanation (iv) to section 91 of the ITA (which grants unilateral FTC), income tax includes any excess profits tax or business profits tax charged on the profits.

2.2.4 Indian taxes for providing FTC:

i) FTC would be allowed against the amount of Indian income tax, as well as surcharge and cess payable under the ITA .

ii) No credit shall be allowed against any sum payable by way of interest, fee or penalty.

iii) In a case where minimum alternate tax (MAT ) or alternate minimum tax (AMT) is payable under the ITA , FTC shall be allowed against such MAT /AMT in the same manner as is allowable against normal tax payable under the ITA . However, where the amount of FTC available against MAT / AMT is in excess of FTC credit available against normal tax, MAT /AMT credit would be reduced to the extent of such excess [Refer Rule 128(7)].

2.2.5 Disputed foreign tax:

i) Where the foreign tax paid or any part thereof has been disputed in any manner by the taxpayer, such foreign tax would not qualify for FTC.

ii) However, FTC of such disputed foreign tax shall be allowed for the year in which such income is offered or assessed to tax in India if the taxpayer submits the following details within a period of six months from the end of the month in which the dispute is finally settled:

• Proof of settlement of dispute
• Proof of discharge of liability of such foreign tax
• Undertaking that no refund has been/shall be claimed by the taxpayer, directly or indirectly

2.2.6 Mechanism to compute FTC

i) Currency conversion rate: Foreign tax paid in foreign currency shall be converted into Indian currency by applying “telegraphic transfer buying rate” on the last day of the month immediately preceding the month in which such foreign tax was paid or deducted.

ii) Maximum credit: FTC shall be restricted to the lower of tax payable under the ITA on such income or the foreign tax paid on such income. Further, if the foreign tax paid exceeds the amount of tax payable under the DTAA , such excess shall be ignored.

iii) Source-by-source approach: FTC shall be computed separately for each source of income arising from a particular jurisdiction.

2.2.7 Documents to be furnished to claim FTC:

Mandatory documents to be furnished by a taxpayer to be eligible to claim FTC are as follows:

i) S tatement providing details of the foreign income, offered for tax for the tax year, and foreign tax paid or deducted thereon in prescribed form and

ii) Certificate or statement specifying the nature of income and the amount of tax deducted or paid thereon:

• From the tax authority of the concerned foreign jurisdiction or

• From the person responsible for with holding tax or

• Self-declaration from taxpayer, along with:

a) acknowledgement of online payment or bank counter foil or challan where for eign tax has been paid by the taxpayer

b) proof of deduction where tax been de ducted

Documents as prescribed need to be furnished on or before the due date of filing of return of income in India.

2.2.8 Details to be provided in the prescribed statement in Form No. 67 :
i) Name of the taxpayer
ii) PAN
iii) Address
iv) Assessment Year
v) Details of foreign income and FTC claimed which includes:
• Name of the country
• Source of income
• Foreign income and tax paid outside India
• Tax payable on such income in India
• Credit claimed under DTAA
• Credit claimed under double tax relief provisions of the ITA

vi) Refund of foreign tax claimed, if any, as a result of carry backward of losses providing details of the accounting year to which such loss pertains and the year in which the set off of such loss has been undertaken.
vii) If any foreign tax is in dispute, the nature and the amount of income in respect of which the tax is disputed and the amount of such disputed tax.

2.2.9. Carry backward of losses: Further, prescribed statement should also be furnished in case where there is carry backward of loss resulting in refund of foreign tax for which FTC was claimed in any of the earlier previous year(s) [Refer Rule 128(10)].

3 Open Issues :

Some of the issues which have not been dealt with in the FTC Rules are as under:

3.1 Underlying Tax Credit
The rule is silent on underlying tax credit on dividend income received by the Indian Companies from their overseas subsidiary/ associate company. It is to be noted that India have such beneficial clause in DTAA with USA, UK, Cyprus, Australia, Japan, Mauritius and Singapore subject to conditions. However, the Indian taxpayer may still claim such underlying tax credit based on Section 90(2) of the Act which allows the taxpayer to take benefit of provisions made in the DTAA to the extent such provision is beneficial to the tax payer.

3.2 Tax Sparing
Tax Sparing is a credit mechanism by which resident country allows credit for such taxes which would have been payable by the taxpayer in the source country but for such tax exemptions. In other words, credit for taxes spared by the country of source is given by the country of residence on deemed basis. DTAA s with many countries such as Mauritius, Israel, Bangladesh, Singapore, Spain etc., provides for tax sparing benefit in respect of tax holidays covered under the respective tax treaties. However, the FTC Rules are silent in respect of Tax Sparing Credit.

ecently Delhi ITAT bench in the case of Krishak Bharati Cooperative Ltd. [TS-117-ITAT-2016(DEL)] allowed FTC to the taxpayer (a co-operative society registered in India) under section 90 of the Act read with Article 25(4) of India-Oman DTAA in respect of dividend received from its Joint Venture company in Oman which was specifally tax exempt in Oman.

3.3 Carry Forward of FTC

Countries such as USA, Canada, Singapore, UK, Japan etc., allows carry forward of excess FTC for a limited period. Excess FTC can arise mainly on account of following two reasons:

• Effective tax rate in the foreign country on such income is higher than effective tax rate in the home country; or

• Ratio of high-tax income or the ratio of income earned from a high-tax rate country during a financial year is high.

However, Indian FTC Rules do not contain any provision for carry forward of such excess FTC. In absence of any mechanism to carry forward the FTC, it may lead to litigation between taxpayer and revenue.

3.4 Branch Profit Tax
Many Countries such as USA, Canada, France, Philippines, Indonesia etc., have additional branch profit tax where branches of foreign companies are taxed on profit after tax on repatriation of earning from the branch at the time of closure or termination of such branch in the foreign country. In some of the Countries, branch profit tax is as high as 30%.

As per the Act, any business profit of the branch of Indian Company is taxed under the head business income in the year of accrual, and no further tax is payable on receipt of such income from branch. Hence, in most cases where branch profit tax is paid by the taxpayer in the foreign country upon repatriation. is not eligible for FTC.

4 Concluding Remarks:

In the wake of significantly increased cross border transactions by Indian Companies, the FTC Rules were much awaited in India. The FTC Rules are expected to provide a uniform mechanism to grant FTC in India. It is also the intention of the present Government to provide certainty in taxation and reduce litigation. The FTC Rules aim to provide clear guidance in respect of some of the persisting issues in the computation of FTC Credit viz. Credit qua each source of Income, year of credit, availability of FTC against MAT etc.

The easing of documentation requirements for claiming FTC, allowance of FTC in respect of disputed tax settled subsequently and to some extent taking care of timing mismatches, is welcome and reflects an open-minded approach of the Government.

Though the claim of FTC in respect of disputed tax subsequently settled has been allowed, further clarity is required on the procedural aspects for claiming such credit, especially when the dispute is settled after the expiry of time limit for filing revised return of income under the Act.

The FTC rules as finalized also need to provide further clarity on certain other aspects e.g. calculation of underlying tax credits and tax sparing credits as envisaged by certain Indian DTAA s, eligibility to claim FTC in case of hybrid entities and in cases of mismatch in characterization of income.

Further, the FTC rules fall short of industry expectation that consistent with global practice, the taxpayer may be provided an option to claim credit on an aggregate basis by pooling all overseas tax payments, rather than adopt the source-by-source approach which typically results in increased compliance burden and leads to sub-optimal availability of credit. There are also expectations that the taxpayers are permitted grant of underlying tax credit, an option to carry forward or carry back excess FTC, ability or an option to claim deduction as an expenditure in respect of foreign tax which is not creditable against Indian tax etc.

Further, clarity has been provided on the availability of tax credit for State taxes paid in a foreign jurisdiction. It would also be interesting to see whether the restriction on MAT/AMT credit will come in conflict with the provisions of the Act or application of the relevant Tax Treaty.

The notified Rules require statement in Form 67 to be filed on or before the due date of filing return of income prescribed u/s. 139(1) of the Act, as a condition precedent for claiming FTC. The prima facie implication is that FTC will not be available if Form 67 is filed later at any stage, including with a revised return. This is likely to lead to disputes and litigation. Not only this appears to be unreasonable but also may be ultra vires the Act and the tax treaties which have no such condition envisaged for grant of FTC. The notified Rules will come into effect from April 1, 2017. Given that the notified Rules contain not only the procedure for claiming FTC, but also impacts the amount of credit, they may not apply to years prior to AY 2017-18.

Thus while some aspects have not been dealt with by the notified Rules, some clarity has been achieved and may lead to reduction in disputes and litigation surrounding FTC.

shailesh.kwebmaker

Assistant Commissioner (CT), T. Nagar (South) and Joint Commissioner (CT), Chennai V. M/s. Pamban Oil Mills (P) Ltd. 2013 66 VST (Madras) [W.A. NO.2044 OF 2013 & M.P.NO.1 of 2013]

Sales Tax – Settlement of Arrears- Order Passed for Refund Prior to Act- Refund Can Not Be Denied, s/s. 8, 9 and 10 of The Tamil Nadu Sales Tax (Settlement of Arrears) Act, 2008.

Facts
The best judgment assessment order was passed on November 30, 1998, which was subsequently revised on March 28, 2002. The respondent filed an appeal in A.P. No. 207/07, and with the sole objective of giving an opportunity to the respondent. The Appellate Assistant Commissioner set aside the assessment order and remanded back the matter to the assessing authority. As directed, after verification of the accounts, the first appellant passed orders of assessment on October 3, 2008 whereby the turnover was revised and it was declared that the respondent had in fact made excess payment of tax of Rs. 9,75,447 and found eligible for refund. Form C confirming the entitlement to refund was also issued on October 3, 2008 itself. The only formality that remained was the issuance of refund voucher and the respondent sent representations for the same. Earlier a notice dated June 27, 2007 was issued by the first appellant to the respondent demanding penal interest u/s. 24(3) of the Act for delayed payment of amount due under the deferral scheme and the same was still pending. Before further action could be taken, the Tamil Nadu Government had promulgated Tamil Nadu Ordinance No. 7 of 2008 and floated the Samadhan Scheme. The Rules commemorating the Ordinance was published in the gazette on October 31, 2008. The respondent approached the second appellant under section 5 of the Scheme for settlement of interest for the assessment year 1996-97 on October 30, 2009. Parallely, since the representations seeking refund did not yield any results, the respondent approached the Madras High Court in W.P. No. 18508 of 2010 and the same was disposed of with a direction to consider the representation dated December 21, 2009 and pass orders, within four weeks from the date ofreceipt of copy of the order. By an order dated September 23, 2010, the claim of refund was rejected on the grounds that any order passed by the assessing authority subsequent to the application for settlement under Samadhan Scheme could not be reopened and the claim was not admissible under sections 9 and 10 of the Tamil Nadu Sales Tax (Settlement of Arrears) Act, 2008. Aggrieved by the same, once again, the writ petition was filed by the respondent alleging, inter alia, that the payment of interest under the Samadhan Scheme will not affect the refund claim, which was alreadydecided by the department and therefore the same will not come within the purview of Samadhan Scheme. Even though, no claim of interest for belated refund was made earlier, the respondent company also claimed interest. The writ petition was partly allowed by single judge with regard to refund. However, therespondent’s claim of interest was not allowed but liberty was given to work out his remedy. The respondent has not preferred any appeal against the portion of the order wherein his claim of interest was negated. The department filed writ before the Division Bench of Madras High Court against the judgment of single judge allowing refund to the respondent company. ‘

Held
Admittedly, the respondent was entitled for refund of Rs. 9,75,447 and the issue to be decided is whether after approaching the department under the Samadhan Scheme, without reference to the referred claim, the right of refund continues or not. Section 9 of the Ordinance or Tamil Nadu Act No. 60 of 2008 providing bar to reopen any proceedings is applicable only in respect of the certificate issued under section 8 of the said act. Section 10 providing for withdrawal of appeal or revision is applicable to the issue pending before the authority must be with the certificate issued u/s. 8 of the Act and that the order of refund must have been made after the application for settlement u/s. 5. In the case before High Court the certificate was issued only with respect to the application of settlement of interest. The bar emphasized under sections 9 and 10 of the Act applicable only if the dealer wants to claim refund of the amount paid under the Samadhan Scheme and not the refund which was ordered before floating of the scheme.

The refund order was passed on October 3, 2008 i.e. even before the date of publication of ordinance. Therefore, no reliance can be placed upon sections 9 and 10 of the Settlement of Arrears Act. Accordingly the High Court dismissed the petition filed by the department and confirmed the order of single Judge allowing refund to the company.

shailesh.kwebmaker

No Service Tax on Goods Transportation by by Vessel upto 31 05 2016

Notification No. 36/2016 dated 23 05 2016

CBEC vide this Notification has exempted the taxable services by way of transportation of goods by a vessel from outside India upto the customs station in India with respect to which the invoice for the service has been issued on or before the 31st May, 2016, from the whole of service tax leviable thereon, subject to the condition that the import manifest or import report required to be delivered under section 30 of the the Customs Act, 1962 has been delivered on or before the 31st May, 2016 and the service provider or recipient produces Customs certified copy of such import manifest or import report.

shailesh.kwebmaker

Krishi Kalyan Cess not leviable if POT of service fall on or before 31 05 2016

SERVICE TAX UPDATES

Notification No. 35/2016 dated 23 06 2016

CBEC vide this notification has clarified that Krishi Kalyan Cess shall not leviable if the invoice with respect to taxable services has been issued on or before 31st May, 2016 and the provision of service has also been completed before 31st May, 2016.

shailesh.kwebmaker

FAQs on Settlement of Arrears in Dispute Act, 2016.

VAT Updates

Trade Circular No.19T of 2016 dated 30.6.2016 & 20T of 2016 dated 19.7.2016

To clarify the points raised through representation from Trade & Associations regarding the Maharashtra Settlement of Arrears in Disputes Act, 2016, Commissioner of Sales Tax has issued this Circular in the form of questions and answers.

shailesh.kwebmaker

67th Annual General Meeting on 7th july 2016

The 67th Annual General Meeting of the Society was
held at the Walchand Hirachand Hall, Indian Merchant Chambers,
Churchgate, Mumbai on Thursday, 7th July 2016.

Mr. Raman H
Jokhakar, President of the Society, took the Chair. Since the required
quorum was present, he called the meeting in order. All businesses as
per the agenda given in the notice were conducted, including adoption of
accounts and appointment of auditors.

Mr. Sunil B Gabhawalla,
Hon. Joint Secretary, announced the results of the election of the
President, Vice President, two Secretaries, Treasurer and eight members
of the Managing Committee for the year 2016-17. The names of members as
elected unopposed for the year 2016-17 were announced.

The
“Jal Erach Dastur Awards” for best feature and best article appearing
in BCAS Journal during 2015-16 were announced. The winners were: Keshav
Bhujle, Advocate and Aditya Thakkar, Advocate. The Special issue of the
Journal of July 2016 on “Expectations” was released by the hands of Mr
Arvind H. Dalal, Past President and Mr Anil J. Sathe, Editor.

New
Publications Internal Audit-Practical Case Studies and Non-Banking
Financial Companies-A Treatise were released at the Foundation Day by
the hands of Mr Harsh Mariwala, Chairman-Marico Limited.

At the
end, guests including Past Presidents of BCAS were invited on the dais
to share their views and experiences about the Society.

Outgoing President Speech

Good Evening members!

Welcome!

As
I stand on the last day of my term, a very familiar Hall and a familiar
podium, I extend very warm greetings to you and thank you for being
present today.

All throughout the last year, I had to start off
numerous events. Generally one had to start by addressing those on the
dais first and give an impression that things flowed from this direction
to that, and often rightly so. This final program, the AGM however is
different – everyone here is a member, everyone here is a fellow member and everyone here counts equally, bringing meaning and significance to the Society.

So once again WELCOME EVERYONE to this 67th Annual General Meeting.

In the schedule, this speech is titled as OUTGOING PRESIDENT’S Speech.
Although the AGM is meant to be serious business and ending of
someone’s term should normally add to that seriousness. Yet, I do feel,
that although the title of the talk is functionally accurate, it falls
short on the creative count. So maybe this year we rather give it a more
contemporary title – PREXIT.

You will appreciate
that someone, whose title will get the Prefix – PAST – after about 7
hours from now, would tend to be reflective and sentimental on his last
day as the President.

Well, it is a long program, and Chetan (in
lighter vain) has told me that his talk is going to be really LOOOONG,
so I will be SHORT and LIGHT.

Friends, the year began with the theme LEARN SHARE GROW. Let me share a few highlights of the year that went by.

Last
year we noticed that if we wanted to give better member service, we
will have to do a bunch of things. One of them was to align our
infrastructure to our activities and future plans. So today after nearly
2 years, we have a fine-looking and functional LEARNING CENTRE at Jolly
Bhavan, and moved non member facing BACKEND STAFF out to another larger
office space – a space that is roomier and more functional.

With
this, we have a 100 seater hall with a pre event area outside so that
our committees can have in house events that are more comfortable, cost
effective and smooth.

This idea was extended further, by
adding to our Digital capability, to reach members WHERE THEY ARE – so
we have set up a web cast Facility. With this, BCAS events can reach a
member where he is, and he will be able to partake of an event from his
desk top or mobile device. We did the first live webcast 2 weeks back,
of course with some glitches and we hope to do many more.

Another
dream that we had, was to make the premises available to members for
their EDUCATIONA L TRAINING PURPOSES at a small cost. This should help
the startups, medium and smaller practice units to arrange their in
house trainings at BCAS premises. I am glad to inform you all that today
members can book BCAS Hall along with all its facilities for this
purpose and make the most of their membership.

At times READING
takes too long for the POINT TO COME ACROSS. In this DIGITA L AGE, we
need the POINT to come through sooner and in shorter capsules. So we
placed before committees the idea of making SHORT VIDEOS of about 2
minutes, covering a topic within a subject, in a manner that makes the
content easier to grasp. We did make a start and I hope we do more of
those.

Last year on 6th July, I had mentioned about making
available BCAS events to outstation members. We could do a few events
this year on a STAND ALONE BASIS in Chennai and Coimbatore, which
were house full. Although there were more offers, we couldn’t spend
more time as one would have liked, but I hope the committees will
explore it further.

BCAS Publications – Although there is
a feeling that markets are flooded with Publications, I believe that
BCAS books are special in both content and context. BCAS books are low
on reproduction and trivia and deep and hard hitting on the main topic.
They give a balanced view and have practical utility. After the AGM we
will we have two AMAZING PUBLICATIONS released – one of them after a
long wait of 18 years. Few more are in the pipeline and they will come
out in next few months.

Since LEARN SHARE GROW was the theme, I wish to SHARE a few things I learnt.

First
– about the YOKE of TRADITION. It is pandemic in our country. Not that
tradition is not useful, but they have a place and TRADITIONS as
CONCLUSIONS should not fill the entire space by themselves. In various
meetings one would hear – We have always done it this way, we have
debated this before and concluded it thus, this cannot be done because
we did it in the past and it did not work. Since conclusions are
only PAST, and the PRESENT has obviously changed since then – we tried
to look at some of them afresh and question the issues all over again.
Like Thomas Jefferson said “IN MATTERS OF STYLE, SWIM WITH THE CURRENT,
IN MATTERS OF PRINCIPLE, STAND LIKE A ROCK” I am sure the OB on the dais
will carry, the spirit in those words, further.

On a LIGHTER NOTE, there is something interesting about being a PRESIDENT.

While
a lot of people wonder – being a President of an organisation must be
such fun, to open events, to write every month in the Journal, to be
welcoming speakers and guests and being under the spot light. I want to
tell you that there are two presidents – the one you SEE and one that
works behind the scenes in addition to his practice and family life.
President is an intertwined mixture of numerous functions – Let me share
a few:

Secretary and draftsman – He has to correct,
correct and correct – from the Spelling of Walchand Hall to making sure
the person’s name should have the salutation Mr or Mrs before it.

Benign Bulldozer – following
up, pushing – did that announcement go? Did you make sure he received
the email? The event you talked about – have you got a YES from the
speakers?

Creative director – He is designing. He has to
think, does that announcement seem aesthetically in line with the
Society’s image OR responding to someone who tells you – we have been
making the announcement like this since last 10-20 years – well Sir for
that very reason can we think of a different way.

Driver – Drive change. Change although CONSTANT, one learns that change is also the least ACCEPTABLE.

Traffic POLICE –
In the meetings, there are always some people who are VOCAL to the
extent all other voices JUST STOP coming out from every other throat in
the room. And then people look at you – WILL YOU PLEASE STOP the flow of
traffic from THAT SIDE and have other side’s traffic start.

EXECUTIVE ASSISTANT –
I remember people calling – Sir Today’s LM is at IMC, can you tell us
the address. Well some member really making sure that only the President
can give the CORRECT Address;

Friends, there are so many
wonderful stories and anecdotes that adorn this ride, but let me stop
here as a short video is waiting for you all. HIGHLIGHTS of what
happened through the year, a few glimpse out of the 100,000 hours of
education in 7 minutes.

VIDEO

From what I saw in 5 years
as being an office bearer – BCAS is still being imitated – people from
outstation come to understand the format of events – organizations do
look up to BCAS for ideas and benchmark of quality. We had the largest
ITF till date with 260 participants, we had the largest Ind AS RSC till
date, the largest Service Tax RSC till date, the largest annual student
day event till date, crossing 500 for the first time.

But
numbers are really NOT that big a deal, it has never been HOW MANY but
HOW WE DO THINGS and WHY WE DO what we do. I can say with confidence
that the WHY and HOW of everything we do is clear and solid and you only
learn that fully when you stand here on the last day of your term.

Here
are two Testaments to that – A first time participant at the RSC on
Service Tax in Lavasa, shared this. He worked as a partner in one of the
largest professional services firms. He said even at 9.30 pm, as Mr A R
Krishnan was giving his presentation, not a single person got up to
leave although everyone had reached the venue that same afternoon after
travelling between 5-8 hours. He said when I went to the room, my
roommate wanted to discuss the next day’s paper till past mid night with
few others. The next morning everyone was in their groups by 8.30 am
after eating breakfast. He said in our firm we tried numerous ways, and
they haven’t worked – if instead of ending a fully sponsored offsite
event at 6 pm ended half hour late people would complain to HR that the
event finished late. Whereas here people pay to come and still are so
deeply involved in learning.

The next day I was talking to the
Chairman Govind ji, who has been running the committee for 6 years now
and one of the things he said was – since last 6 years, he had done all
he could to keep the fees for the RSC at the SAME LEVEL.

When I put these two stories together, I realized that till we have these two ATTRIBUTES in our ORGANISATIONAL DNA –

CULTURE and PASSION to LEARN and

TO SHARE with GENEROSITY,

WE ARE GOOD.

THANK YOUs
In
a divided world, where POLITICAL UNION split, states split (Telangana),
firms split, the Society’s 9 committees worked cohesively and with
common purpose. I want to thank every committee member, every convenor,
every coordinator of events every Chairman and anyone I missed?

In this list, I also wish to include those who could easily fit the category of NPA – NON PERFORMING ASSETS,
those committee members who’s INTEREST did not come for the entire
year. Well unlike the Reserve Bank of India, one would like to see this
only as a temporary phenomena and wish that their INTEREST will flow in and they will make up next year.

I am grateful to the Past Presidents,
the pillars of the Society and light houses for the OBs. Although all
of them were 5-10-20-30-40 years senior than I, they were friendly,
approachable, helpful, and generous with their time.

A special
bow to Late Narayan Varma, who would have MADE ALL EFFORTS TO BE here at
the AGM – we miss his radiant presence today. Although we don’t see
him, I am sure he must be watching the BCAS AGM from wherever he is.

Of course a big Thank you to the Office Bearers team. Well meaning and hard working individuals who have BCAS inscribed on their hearts.

Chetan – for being a great team mate, he ran the renovation part with Deepak and Pranaybhai with speed and precision.

Narayan – a very hard working man, a super go getter, you tell him something and it will be done.

Sunil – a silent worker, he lead the implementation of the new ERP at the Society in spite of running his practice single handedly.

And Manish, the youngest OB who picked up the accounts and helped in our deep cleaning effort and in turn lost all his blacks.

I wish the team on the dais a rich and rewarding year. They all deserve a big round of applause.

The
BCAS Team led by GM Jyoti Malkani, and the HODs Amit Singh, Shreya,
Javed, Upendra ….. and all the rest. Special mention of Rajaram – like
we have lalbaug cha Raja – he is BCAS cha Raja – he completed 25 years
earlier – and we did honor him earlier, but since some of you may have
known him for years and may not be present at that event please give him
a round of applause.

I want to thank my late Grandfather who
was a founding member of BCAS and introduced the whole family to BCAS,
my Father and Mother – Haren and Asha, both part of BCAS family for more
nearly 40 years, my wife Rashmi for taking care of me and taking care
of herself in my absence, and little Sangeeta with whom I can’t wait to
spend more time.

Friends – What unites us is far bigger and
compelling than what separates us. I want to thank all the volunteers –
contributors, writers, speakers, donors, well-wishers for their
self-less work for making a contribution to a larger good.

In
the end, I wish I had more time, I wish I had few more hands, I wish I
could be at more than one place at the same time. Perhaps the best
journeys remain unfinished, because they have no destination. And a
journey to LEARN SHARE GROW is certainly one of a lifetime.

Thank you

Incoming President’s Speech

Good Evening everyone.

My
colleagues on the dais Raman, Incoming Vice President Narayan,
Treasurer Manish, Joint Secretary Sunil & Incoming Joint Secretary
Suhas. My Managing Committee Members, Chairmen and Co-chairmen of
various subcommittees, the galaxy of past presidents present here,
Office bearers of sister organisations, Seniors in the Profession,
Ladies & Gentlemen. May I thank the Members for electing me as the
68th President of this elite Bombay Chartered Accountants’ Society. I’m
incredibly conscious of the duties and tasks ahead and the honour you’ve
bestowed upon me. It’s with anxiety mingled with an excitement that I
look ahead to the coming year. Mahatma Gandhi once said, “Live as if you
were to die tomorrow. Learn as if you were to live forever.” I welcome
you all to this AGM of BCAS, an organisation which has been an ocean of
learning for me.

But first, I simply must thank Raman Jokhakar
for his service as President over the last 12 months. It’s been a
pleasure to support Raman with his official engagements, and the
experience has been truly amazing. Under your dynamic leadership, we all
had the opportunity to be innovative. I am sure my colleagues will
agree that the motto for the year of learn-share-grow, geared the
Society to enhance its pace of imparting learning and acquiring
knowledge, sharing the same with its members and society at large,
thereby enabling growth of the professional colleagues.

The
theme Learn-Share-Grow was very well implemented. We did many different
things this year. The innovativeness was visible in novel ways of
applying technology to our events, especially during the budget season
when short videos of renowned professionals were made to capture views
of the budget both pre and post. The year was also marked with various
representations being made to the Central Government and also before
other regulatory bodies. The highlight for representation was BCAS being
invited for Samvad with Hon’ble Minister Smt. Sushma Swaraj, which
enabled us to be a part of the change agents by providing our views on
the tax structure of the country.

Raman, the journey along with
you has been a learning curve. As you once said that one term and one
year is too short to accomplish what one desires, but I assure you to
take your unfinished agenda further and shall strive to achieve the set
benchmarks of excellence and try to take the BCAS flag to newer heights.

Thanks, Raman, and I am sure you shall continue to provide your valuable inputs in the years to come as well.

As
I take the baton from Raman, my mind takes me to the days when I began
my journey with BCAS almost 22 years ago. The journey has been very
exciting, challenging and rewarding. BCAS as an organisation has also
transformed itself and grew substantially under various leaders’ year
after year, all leaving a mark of their functioning which has made BCAS
much more vibrant that too without compromising on its ethos, vision and
ideals which had been set by the founding torch bearers of the society.
I do pledge that the progress of BCAS shall gather more pace under our
new team and shall strive to achieve the objectives laid through the
Annual Plan for the year. We have circulated the proposed Annual Plan
for the year, and I would like to deal with the same briefly during my
address.

My father Mahendra Shah, also a CA, mentored me during
my articleship days, and he introduced me to BCAS on my qualifying as
Chartered Accountant. BCAS membership in the year 1994 opened up new
vistas of professional opportunities and the concept of learning and
knowledge sharing, which I feel were stepping stones of my professional
advancement. My father used to be regular with the RRCs till his health
permitted and used to travel to the then- exotic locations of Goa,
Mahabaleshwar, Matheran. I often wondered what they were actually doing
at the RRCs. My wife and children still doubt whether we seriously study
at the RRCs or just chill out??

When we are on the topic of
RRC, well, I had never dreamt that I would be at the helm of BCAS when
50th RRC of the Society is being announced. What better locale to
celebrate the Golden Jubilee of the prime event of BCAS than at Jaipur!
Memories of Golden Jubilee to be held in January 2017, I am sure would
be cherished much more amidst the Royal city of Maharajas. Amazing isn’t
it? I invite you all to come and be part of the celebration and great
learning. The International Tax Conference further doubles my joy by
spreading its wings beyond Indian waters. As you all are aware that this
year the ITF – Conference planned in August 2016 is in Sri Lanka, and
the bookings are already closed due to overwhelming response. So this
year we shall have a round of knowledge sharing beyond Indian
boundaries.

My honing of skills of learning and administrative
capabilities got a shot in the arm on my admission to the Core Group in
the year 2004, by my selection in the International Taxation Committee.
This is when I realised the importance of sharing and imparting
knowledge. During the years in Core Group I had occasions to closely
observe the functioning of illustrious Past Presidents as well as other
senior professionals. They were working selflessly for the profession
and always had the passion for taking knowledge sharing to a level where
it becomes part of their daily routine. They were bubbling with ideas
and had great clarity and dedication to execute their ideas for the
benefit of the Profession and Society at large.

If anybody wants
to learn and understand, how to run a voluntary organisation, create
effective leadership, develop and mentor professional with cutting edge
knowledge and partner in Nation Building, BCAS is the prefect role model
to follow. The Goodwill that this organisation commands is truly
incredible. BCAS has been a pioneer of many ideas which have been
emulated by other professional bodies including our parent organisation.
It is a matter of great pride when someone compliments you regarding
the quality and contents of various seminars and workshops and the
Journal, especially when that someone is none other than the President
of the Institute of Chartered Accountants of India.

Before I
continue, I will like to offer my homage to the indomitable spirit of
Narayanbhai. Who is not amongst us today! He was a pillar of not only
BCAS but of the profession, society at large and in particular of the
RTI Movement. Passion at work was something one can imbibe from him. We
will miss him forever. On 19th Aug in memory of his birthday, three
organisations namely PCGT, DBM & BCAS have come together for a
lecture by Ms Aruna Roy, a co-creator of the RTI Act and a wellknown
Social worker.

Since RTI Act was formed, Narayanbhai has been
the key supporter to this and made the BCAS well known in the field of
RTI. The RTI Clinic still actively operates through its activists on
Saturdays at the BCAS Office.

The Society will continue to support and work for the RTI clinic.

In
the past few years we have observed that the professional opportunities
have grown many fold especially with the growing economy and
globalisation and the vision of the Government. With opportunities comes
challenges. Challenges to keep pace with new regulations, new laws and
technology. The pace has picked up so much that it may no longer be
possible to function as a proprietary concern or a 2/3-member
partnership firm. It is no longer possible for one CA to know so much,
and do effective compliance. It is time for collective wisdom. The
visionaries at BCAS saw this coming and started programmes on networking
and practice management and making their seminars more relevant. The
technology has also got shot in the arm with projects like live
streaming and online payment facility.

Still a great institution like BCAS faces greater challenges for it to become even greater.

Mahatma
Gandhi correctly said “The future depends on what we do in the
present”. The Society is not short of visionaries and time has come for
taking a quantum leap. Time is just ripe to reach out far and wide
throughout India to the professionals, in practise and in industry. To
take BCAS at their door steps, if not physically then through
technology. To be more effective and relevant as the voice of the
professionals in the policy making. To be thought leaders and active
collaborators to the cause of Professional Excellence and Good
Governance. To collaborate with sister organisations, commerce
associations and Government. Accentuating ‘out of the box’ thinking and
taking a path yet untapped. Let’s all join in this movement of:

“Today’s VISION, Tomorrows’ REALITY”.

As articulated in the words of Khalil Gibran: “we are limited not by our abilities, but by our Vision.”

Let me share a short story:

Once
upon a time there lived 3 fishes in a pond. One was named “Plan Ahead”,
another was “Think Fast”, and the third was named “Wait and See”. One
day they heard a fisherman say that he was going to cast his net in the
pond the next day. Plan ahead said, “I’m swimming down the river
tonight!” and so he did. Think Fast said, “I’m sure I’ll come up with a
plan.” Wait and See lazily said, “I just can’t think about it now!’ When
the fisherman cast his nets, Plan Ahead was long gone and safe. But
“Think Fast” and “Wait and See” were caught! Think Fast quickly rolled
his belly up and pretended to be dead. “Oh, this fish is no good!” said
the fisherman, and threw him safely back into the water. But, Wait and
See ended up in the fish market. That is why they say, “In times of
danger, when the net is cast, plan ahead or plan to think fast!”

It
is perfectly said that “Ideas are a dime a dozen; Execution is the
key”. For any VISION to be set into motion, there has to be the
development of Executional Capabilities.

These capabilities come from the 3 C approach of developing Competence, Commitment, and Character.

When
we talk about VISION and working towards making it a reality it’s not
about oneself; it’s a part of a team at BCAS. At one hand, I can say the
office bearers and managing committee are the heart of this function.
However, the core group acts as the backbone to achieving all this. As I
start my term, I look forward to immense focused support from my entire
team in making things possible.

The brief of our VISION for the year can be summarized as follows:

Imparting Values thereby creating Value of Brand BCAS;

Inspire Professionals to excel as Professionals and to contribute towards Citizens’ Empowerment;

Enabler of Sharing Knowledge through engaging CAs in Profession & Industry as well as Young CAs and Students;

Innovate the ways of imparting knowledge and its dissemination to masses;

Organizational
capabilities of BCAS to be enhanced through efficient and robust
processes & controls for events and meetings thereby improving
members’ experience; and

Nurturing & building confidence
amongst Young Professionals through improved learning methodologies and
thereby creating talent pool of Future Leaders.

At this
juncture, I would like to mention that a lot of effort has been put in
by the BCAS Office Staff in implementing the processes and controls as
per the suggestions of the Internal Auditors and Office Bearers.

We
know the Society well; now it’s time to share with the rest of the
world and involve them too in the process of knowledge sharing. Get
engaging and reaching out to as many corporates and members, influencing
them in becoming a Complete CA is what I visualize.

When we look
at the upcoming generation, we realise today that they know so much
more. Technology has given the students and youth so vast exposure to
knowledge that it’s great to learn and know from them. Last month the
9th Jal Erach Dastur Student’s Annual Day was one such great event. The
pool of talent was so large and each one so outstanding. Then there are
the youth, the younger generation who have so much potential to do
things and contribute to the Society.

This year I will also like to look into “Empowering the younger generation for future leadership”.

We
have seen the Modi Government bring about various changes in the
economy. We must continue to participate in reaching out to the
Government through various representations and meetings to bring about a
clean and democratic structure. Already the Model GST law is out, and
suggestions are in the process of being sent to the government. In this
area, I expect more dynamism and more presence at BCAS. As rightly put
by the Institute President Devaraja Reddy that BCAS is the younger
brother, thus we must encourage more support in nation building just
like the ICAI -our elder brother.

The Technological drive
started by my peers Ameetbhai, Naushad, Nitin, and Raman will continue
to be as dynamic as it is with the ever changing environment. My Vision
is to look for automation and digitization in every delivery be it
membership related, events or any publications. The Society has already
started with the Live Streaming of events from BCAS conference hall and I
intend to use this technology to its optimum.

The journal also
now carries an article on Twitter which has received a great response.
The Referencer this time is also available on the app. The online
payment is in the pipeline and gradually all services will be available
online on the BCAS portal. The Society is now having tremendous Social
media presence, and I look forward to making it more interactive and
live. The E-journal is being revamped and gradually will be more
user-friendly.

The Society is all about people and as I move
ahead this year I wish to continue taking people along, both young and
experienced. Looking for more people joining the VISION by becoming
members contributing to the society and making a difference in their
lives. I am also confident that the Managing Committee as well as the
various Sub-committees will contribute to fulfil the goals and targets
set for the year by giving constructive and innovative suggestions.

The pitch is ready, and so are the players, the match needs to be won…And the Victory is for all.

Brian Herbert said that:
The Capacity to learn is a Gift
The Ability to learn is a Skill
But the willingness to learn is a Choice.

I have made my choice, and as I conclude, I wish to say “I have learnt, but have still lots to Learn.”

I
welcome your suggestions and look forward to your interaction with the
Office Bearers. Your engagement, participation and involvement is
critical. I Thank you all and look forward to working together in
turning the VISION into REALITY.

THANK YOU…

shailesh.kwebmaker

Payments Bank – A reality check

The sudden decision by several companies to give up their licences to set up specialist payments banks is puzzling. There was a lot of bullish talk in recent months about how payments banks would offer a pot of gold at the unbanked bottom of the pyramid. It is safe to assume that the companies do not find the prospect to be as profitable as they thought. But it also makes us wonder what sort of strategic planning is done by Indian companies when they identify a new venture for capital allocation.

It would also be peevish of the Reserve Bank of India to impose fines on companies that are giving up their licences. Gatekeepers should not fine people who turn away at the last minute. They should ask why this is so. It is thus more important to understand whether the licensing procedure can be improved so that similar withdrawals are avoided in the future.

Meanwhile, see this as a setback to the ambitious race towards a cashless society

(Source: Quick Edit in Mint newspaper dated 25.05.2016)

shailesh.kwebmaker

Europe’s dog days

The Austrian presidential election has ended with both mainstream centrist parties knocked out and the far right candidate losing by just 0.6% of the vote. Greece’s creditors have reached a deal—but only by kicking the can on a decision about a debt write-off further down the road. The International Monetary Fund, for all its bluster about the existing debt situation being unsustainable, has had to back down. Across the English Channel, the Brexit vote looms next month.

Since the European debt crisis kicked in at the tail end of 2009, the European Union has remained stuck in a quagmire. Every hopeful prognosis has proved fleeting. Its economic situation remains precarious, Russia is flexing its muscles to the east and terrorism and the refugee crisis have made for a combustible mix. Little wonder the far right is in ascendance across the union. The question is: Is this perpetual state of semi-crisis the EU’s new normal?

(Source: Quick Edit in Mint Newspaper dated 26.05.2016)

shailesh.kwebmaker

Ending tax terrorism

Tax terrorism has been a potent issue in India for many years. It even made its way into the 2014 election manifesto of the Bharatiya Janata Party. Prime Minister Narendra Modi has done well to tell tax officials this week that they should remove the fear of harassment most Indian taxpayers live with. This is useful, but the true answer to the problem lies elsewhere.

The Indian tax code is numbingly complex. It came to be so because of the high tax rates that India lived with before the 1991 reforms, with powerful interest groups seeking an escape through a web of exemptions. High tax rates, too many exemptions and a deeply ingrained culture of suspicion has victimized honest taxpayers even while millions sit outside the tax net.

The solution is a simple one. Modi must push ahead with the direct taxes code as it was originally designed. A simple tax system, with stable rates and minimal exemptions, is the best long-term antidote to tax terrorism.

(Source: Quick Edit in Mint Newspaper dated 17.06.2016)

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Commodity price risk

Traditionally, higher oil and commodity prices were seen as negatives for global equity markets, but the relation has been more positive in recent times. One reason for this could be that movement in commodity prices— particularly of crude oil—is now seen as an indication of demand in a world that is struggling with feeble economic growth.

It will be interesting to see how things pan out from here as commodity prices are said to have bottomed out and have rebounded considerably from their recent lows.

Since India benefited significantly from lower oil and other commodity prices, investors will be keenly watching the movement as some of the gains could come under pressure. The Reserve Bank of India’s latest monetary policy statement flagged the risk of firming commodity prices. Further increase in prices could not only affect possibilities of monetary accommodation, but also impact margins and earnings in the corporate sector.

(Source: Quick Edit in Mint Newspaper dated 10.06.2016)

shailesh.kwebmaker

India’s Perfect Storm: Environmental and demographic stresses are building up, add to this mess populist leaders

There is a perfect storm brewing for India and South Asia. To weather it will take extraordinary good governance. Unfortunately for us, the Modi government does not seem to be up to the challenge. It may not even have perceived the massive, darkening clouds.

As the storm gathers speed, the government is busy settling scores – with the Congress party or with students at various campuses. Or it is fighting banal electoral battles. Our environment minister reports that western cities are badly polluted – apparently this should console us. Niti Aayog breathlessly assures us that growth and reforms are in full swing and ‘achhe din’ are already here.

Meanwhile, India’s water crisis is a clear sign that a storm of epic proportions is on its way. India’s per capita water availability is now below the threshold level of 1,400 cubic metres per person. If so, India is heading from ‘water stress’ to ‘water scarcity’ and the possibility of internal water wars. In 1951, water availability was 5,000 cubic metres per person; in 2050, it could be just over 1,000 cubic metres.

Even if we get a good monsoon next year, the longterm prospects are dire because water scarcity is driven by excessive groundwater use. Interconnecting India’s rivers, another hopelessly dangerous scheme, will only add to the problem: providing more (free) water will not encourage people to conserve water.

Compounding our misery is global warming which will likely increase water demand and could reduce supply. Higher temperatures will damage agriculture. So will the scarcity of water. If sea levels rise, we will lose coastal land, and millions of people will become refugees and be driven inland. Expect social conflict to increase as a result. Temperature rise could cause glacier melt in the Himalayas. That means floods. Hotter weather will also unleash extreme weather events such as cyclones.

Consider India’s demography. In 30 years, we will have 1.7 billion people. China will have 400 million people fewer than us. Population density in India is about 360 people per square kilometre; it will be 500 by 2050. India is already 4 times as crowded as East Asia.

We celebrate our demographic dividend, but note that in 2050 we will have 1 billion working-age people (15-64 years) as against 0.86 billion today. Note too that in 2015, India created the lowest number of jobs in 6 years: in 8 labour-intensive sectors, it added 1,35,000 jobs.

India will grow old before it grows rich – like China. Or perhaps worse than China since it is unlikely we can match China’s spectacular economic growth. By 2050, 34% of Indians will be over 50, and 19% or 323 million will be over 65. Many young people will be supporting many old people because old people in India don’t have pensions. Some Indian states already have an ageing problem.

What is the quality of our people in physical terms? Per capita calorie consumption is probably below the povertyline measure of 2,400 calories. It is falling with economic growth, not increasing. Low-calorie diets are exacerbated by some of the worst sanitation levels in the world (worse than Bangladesh or Pakistan), leaving hundreds of millions of Indians underweight and stunted. Insufficient calories affect mental capacity as well. Speaking of mental capacity, it is estimated that 50% of rural kids in the 5th standard can’t read a 2nd standard storybook, 75% of these 3rd standard children cannot do two-digit subtraction, and 20% cannot recognise numbers up to 9.

All this might be managed if governance capacity were high. It isn’t. India has 4,000 IAS officers for 1.2 billion souls. The policemen-to-population ratio is one of the lowest in the world. We have 1 judge for 1,00,000 people, and 31 million cases are pending in the courts. We also have 1 MP for 2 million people; in Sri Lanka, the ratio is 1:89,000. Only 3% of Indians are persuaded to pay taxes, so the government has no financial sinews either.

Stir into this mess populist leaders, widening economic inequality, increasing religious polarisation, ethnoreligious extremism and a hyperventilating media – and you have not a strong, progressive India but rather a wobbling Pakistan ready to explode.

(Source: Article by Shri Kanti Bajpai in The Times of India dated 21.05.2016)

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Courts should not encroach into executive domain, governance must improve too

A sharp speech in Parliament by finance minister Arun Jaitley has once again foregrounded simmering tension between different organs of the state. According to Jaitley the judiciary was overreaching into legislative and executive domains, a sentiment which other parliamentarians – not necessarily from BJP – share. This bodes ill as the Constitution provides for a separation of powers between legislature, executive and judiciary. Democracy functions smoothly when each branch stays within established boundaries. The legislature’s anxiety is not unfounded as there have been instances when judicial verdicts have pushed the boundaries. It is imperative for the judiciary to be restrained.

In India, it is the Constitution which is supreme. It empowers legislature to make laws and judiciary to interpret them in the event of disputes and litigation. The Constitution’s architects envisaged the judiciary as a counter-majoritarian institution which would uphold it in case of deviations. The judiciary has not been passive in this role. For example, in order to enhance access it has been willing to consider even a postcard mailed to it as material enough to act. But apart from ruling on constitutional issues, judicial restraint is essential if harmonious balance between different branches of government is to be preserved.

The equilibrium can be upset when the broad-based nature of a verdict encroaches on the domain of the legislature or executive. Verdicts such as the recent one in Delhi’s air pollution case have asked for an increase in specific environmental tax. Another instance was when Supreme Court recently set a short deadline for government to create a drought mitigation fund. There are two immediate dangers of overstepping. It upsets the balance of power and triggers friction between different branches of government.

It needs to be pointed out, however, that other branches of government have not been blameless in this regard. The executive’s failures and lack of accountability have often led people to approach the judiciary to get existing laws implemented. In a similar manner, legislature has often been unresponsive to changes in society. To illustrate, the first step to provide formal protection against sexual harassment at the workplace was the outcome of judiciary stepping into a vacuum left by legislature.

If democracy is to function smoothly, other branches of government too must raise their game while the judiciary exhibits restraint, keeping in mind that its job is to interpret laws not make them.

(Source: Editorial in The Times of India dated 18.05.2016)

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How to tax with love: Ten ways the income tax department can reform itself to get taxpayer buy-in

There are constant reports of genuine taxpayers claiming harassment and persecution by tax officials. The tax department, many income earners say, starts with the assumption that the taxpayer is in the wrong, deliberately complicates rules, comes after you only because you decided to pay taxes (while ignoring or remaining blissfully unaware of the real tax evaders) and doesn’t seem to be getting any better.

As the Indian economy gets bigger, we invite more foreign investment, and try to expand our tax base, some reforms are needed in the way the tax department does its job. It is one of the few government departments that are in constant touch with citizens. If it continues to operate in an archaic and hostile manner, much of the benefits of policy reforms will never accrue to the economy. Here are ten concrete, doable ideas on what the tax department can do to tax, but with love.

First, treat the taxpayer as a customer. The current tax department mentality is to act like the police and approach the taxpayer as a criminal, unless proved otherwise. It is tough to make people part with their money in any case. The last thing you should do is not be gracious about it. Without the taxpayer, the government can’t function. Seeing the taxpayer as a customer means taking constant feedback, having service benchmarks (eg, turnaround times) and not presuming guilt.

Second, simplify forms. The government has tried but sadly failed to do this. The tax department should download some forms from the Hong Kong or Singapore tax department websites. These are some of the simplest and best forms in the world. Please emulate them.

Third, a good, robust and modern website. India is the land of IT companies. Hire a good company to revamp the customer interface. Again, if you see the taxpayer as a customer, you will approach the website differently. The layout, downloads, language used should all change. Yes, we need an app too.

Fourth, good quality paper. Current tax department communication seems from the 1980s, with cheap quality super thin sheets and envelopes, and poor quality black and white printing. Come on. We are one of the world’s top economies.

Fifth, simpler nomenclature. Names like ITR4 and 26AS intimidate people. Sit down one day and rename and reorganise all the forms that have been amended and become complicated in nomenclature over the years. It’s scary enough to pay taxes. Don’t make it scarier.

Sixth, say thanks and mean it. People who pay taxes are nation builders. Seeing rich people as thieves is a throwback to evil landlord and poor peasant movies of the 1970s. You don’t only become rich by stealing from the poor. You also become rich from creativity, innovation, hard work and enterprise. How can you punish people for that? Not just the top taxpayer, but the top 10% of taxpayers should get a nice letter and memento (not cheap quality please) to thank them.

Seventh, don’t send scary letters. The department officials are under pressure to increase revenue. However, you cannot scare taxpayers. For instance, the department sends letters saying we believe the way things are going you should make 20% more money this year so we hope you will (and better) pay that much more tax. Really? Do we need to be so intimidating?

Eighth, have tax guidance centres. People should be able to go somewhere and figure out how to do their taxes, which doesn’t require a private advisor. Have taxpayer training, inquiry and guidance centres that run well. Again, make them nice. They should not be like a sarkari torture chamber with endless waits and creaky fans. This is the last department that can claim it doesn’t have money.

Ninth, share macro data. Without giving individual details, macro data should be shared with the public to enable us to understand how tax collections are going.

Tenth, share where the tax money was used. Of course, funds are amalgamated at the top. However, it would be nice to hear that your tax last year helped make this road. As Veda Vyasa said in the Mahabharata, a king should collect taxes like a bee collects nectar from flowers, painlessly. It is about time we behaved like a modern, world-class economy when it came to tax collection and learned to tax with love.

(Source: Extracts from Article by Chetan Bhagat in the Times of India dated 11.06.2016)

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In debt to dynasty? Rule by the Gandhis has repeatedly pushed the country towards indebtedness

“The Dynasty” is ready to roll its last throw of the dice with Priyanka Gandhi being drafted to play a leading role in Congress’s UP campaign. Given her husband Robert Vadra’s shenanigans during the UPA regime, UP voters must ask: Should we foster a local Benazir Bhutto with Robert Vadra playing the “Mr 10 percent” equivalent of Asif Ali Zardari? However, because this move is an attempt by The Dynasty to perpetuate itself, we need to ask an even more fundamental question: What does loyalty to The Dynasty get the nation? What is the legacy of umpteen years of rule by The Dynasty?

We examine this question here using economic indicators and conclude that the legacy is an unflattering one. It’s a legacy of retaining power through reckless populism. The numbers depict a key narrative: Building a mountain of subsidies without worrying about its disastrous economic consequences.

We collated data on various economic indicators from the World Bank database. We then separated them by the averages obtained during governments ruled or controlled by The Dynasty and governments ruled by non-dynasts. Thus, the UPA-I and UPA-II governments led by Manmohan Singh are classified as part of the legacy of The Dynasty because we all know Sonia Gandhi controlled the levers of that government through the National Advisory Council. In contrast, the government led by P V Narasimha Rao, whom Congress has banished from its collective memory despite his government heralding economic liberalisation in this country, is categorised under governments not controlled by The Dynasty.

The government led by Rajiv Gandhi, who took several steps towards economic liberalisation and heralded the telecom revolution under Sam Pitroda, belongs to The Dynasty. Of course, the government led by Indira Gandhi, under whom poverty increased significantly despite her vote-catching rhetoric of “garibi hatao”, belongs to The Dynasty as well.

After analysing a plethora of economic indicators, we discovered that the elephant in the room relates to subsidies. Governments run by The Dynasty doled out subsidies and other transfers to the tune of Rs 689,600 crore every year, as opposed to Rs 183,300 crore by nondynastic governments. These figures are in real terms deflated to 2011 levels.

And this is not because there was necessarily more money to dole out during the time of the governments run by The Dynasty. Subsidies doled out by them amounted to 9.2% of GDP, almost double that doled out by nondynastic governments (5.3%). Crucially, subsidies under the governments run by The Dynasty increased at almost 13% year-on-year while this growth was about 4% yearon- year under governments run by non-dynasts.

There were other important ways in which governments run by The Dynasty indulged in bad economics though the differences were not as stark as they are for subsidies. First, governments run by The Dynasty spent more indiscriminately when compared to the governments run by non-dynasts. Expenses amounted to 15.6% of GDP on average under governments run by The Dynasty. This ratio was 14.8% for the governments run by non-dynasts. Moreover, expense grew at 9.1% under governments run by The Dynasty and at 5.6% under the governments run by non-dynasts.

Second, governments run by The Dynasty indebted the economy more than governments run by non-dynasts. Total central government debt and the cash deficit was at least twice as much under governments run by The Dynasty as that under the governments run by nondynasts. While the cash deficit does not account for future revenues that would accrue from current capital investments, it has the key benefit of revealing the deficit by eliminating accounting subterfuge.

As the fixed capital formation under governments run by The Dynasty was not very different from that under governments run by non-dynasts, future revenue accrual would not be very different. So the cash deficit does not certainly overstate the profligacy of governments run by The Dynasty. Also, governments run by The Dynasty reduced the servicing of debt (1.6% of gross national income) when compared to 2.6% of gross national income under governments run by the non-dynasts. Thus, governments run by The Dynasty doled out largesse and spent wastefully while indebting future generations of this country.

However, the outstanding difference pertains to the use of subsidies. The conduit between a government and the intended recipient of a subsidy resembles an open sluice with plenty of opportunities for others to dip into the stream before it reaches its final destination. Furthermore, subsidies create significant distortions in asset use. Subsidies also dampen individual incentives.

Thus, the unabashed use of doles despite their pernicious effects stands out as the key economic legacy of governments ruled by The Dynasty. UP voters would be well served by remembering this important fact as charismatic rhetoric is not going to get them “naukri, paisa aur makan”. Recall that “garibi hatao” by Priyanka’s grandmother was little more than charismatically delivered rhetoric.

(Source: The Times of India dated 07.06.2016)

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Agricultural Reforms – APMC drama

The battle of wits between farmers, traders and the Maharashtra government is a case study on the political challenge reformers face. The Devendra Fadnavis government recently decided to exclude fruits and vegetables from the list of farm items that have to be mandatorily sold through the Agricultural Produce Market Committees (APMCs). The cartels that control these APMCs have gone on strike. Food prices have climbed in cities such as Mumbai. Farmers have responded by bringing their produce in trucks to sell directly to consumers in some cities.

Any reform involves unsettling rent-seeking groups, often backed by political interests, that benefit from the existing system. Reform beneficiaries are often not as wellorganized. But this is a battle worth fighting. Free markets should benefit both farmers and urban consumers, as the late farmers’ leader Sharad Joshi argued. Let us hope Fadnavis does not blink.

(Source: Quick Edit in Mint Newspaper dated 14-07-2016)

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Jumbo cabinet

There are now 78 members in the Narendra Modi cabinet. This means that almost one in four parliamentarians elected on the National Democratic Alliance ticket in 2014 has a ministerial berth. The cabinet’s size is just three short of the constitutional limit imposed by the 91st amendment. Minimum government, anyone?

This newspaper had once hoped that Modi would streamline his cabinet by merging ministries and shutting down irrelevant ones. Those hopes have been belied. Modi said in a recent interview that the expansion is to help the government pursue the February budget’s goals.

The jumbo cabinet headed by Manmohan Singh was an example of spreading political patronage across an unwieldy coalition. In contrast, Modi has a strong political mandate to cut bureaucratic flab rather than add bulk. Jumbo cabinets are not exactly the optimal solution to governance challenges.

(Source: Quick Edit in Mint Newspaper dated 06.07.2016)

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Corruption and India Inc – Clarity Begins at Home

India needs to address perceptions of widespread corruption that impact the ease of doing business. It ranks 76 in the International Corruption Perceptions Index 2015, and 130 in the World Bank’s Ease of Doing Business Index 2015.These statistics matter.

IMF research shows that investment in corrupt countries is almost 5% less than in relatively corruption-free countries. India needs to generate employment for over 12 million youth every year. And jobs need investment.

Increasingly , the party political system is recognising that jobs are a priority . It is more responsive to the call of corporate institutions for increased levels of transparency and ease of doing business. So, it is timely for corporate India to evaluate how it can contribute to the debate on rooting out corruption in public life.

India Inc needs to first demonstrate its commitment to putting its own house in order. A good place to start is with the adoption of a Code of Conduct by each corporate entity .

A Code guides the behaviour of the people within the corporate house. Its coverage can also be extended to value chain partners, thus increasing its impact. And it sets in motion industry dynamics that create a kind of competition to do good, reflected, for instance, in the integrity pacts that corporate entities have entered into in some overseas markets.

Once a baseline is set with a Code, it also creates sustained pressure on the institutition to keep improving on its own standards.

A key element in ensuring a Code is taken seriously is to encourage employees to speak up when they observe its violations. Such whistleblowing is all too often received badly within organisations. This has to change.

One of the principal reasons for corruption in India is the need to gene corruption in India is the need to generate funds to fight elections. The legislated limits on spending per constituency by candidates Rs.70 lakh in bigger states for general elections are widely acknowledged to be breached by most parties. Corporate houses now have more transparent alternatives to fund political parties in the form of electoral trusts that enjoy the sanction of the law.

The operations of these trusts can be scrutinised by stakeholders. By defining predetermined formulae for allocation of the trust funds, corporate entities can put in place transparent, non-discriminatory and nondiscretionary mechanisms that can significantly insulate them from political pressure. With increased public vigil, including demands to open the books of political parties to public scrutiny , electoral trusts may eventually lead the way to state funding of elections.

A wide cross section of India Inc is not fully aware of the reach and extraterritorial jurisdiction of legislation covering bribery and corruption across countries, including the Foreign Corrupt Practices Act (FCPA) in the US and the UK Bribery Act.

Indian companies are being increasingly questioned on the adequacy of their internal anti-bribery and anti corruption frameworks by potential or actual business partners, particularly from the US and Britain. The actions of Indian companies could expose the foreign partner to unwanted litigation, scrutiny and reputational risk. We are already seeing a rising trend in FCPA enforcements and actions involving the Indian operations of US companies.

The old adage of `what gets measured, gets improved’ holds just as true in the field of ethics and values. At the recent B20 Anti-Corruption Forum meeting in Shanghai, it was clear that the agenda of the most-powerful industrial economies is increasingly focusing on two key areas: identification of beneficial ownership of legal entities and making government procurement more transparent through the use of technology .

At the Brisbane Summit in November 2014, the G20 leaders adopted high-level principles on beneficial ownership transparency , describing financial transparency as a `high priority’ issue.This question has acquired greater urgency following the leak of the Panama Papers.

With the advent of new technological tools, the calls are increasing for automating government procurement and public services. E-custom clearance programmes and e-procurement processes for public procurement are helping to simplify policies, procedures and rules and removing discretion in these areas. Some countries are pushing for adoption of the HLRM (High Level Reporting Mechanism) ¬ a channel for companies to report corrupt behaviour in public procurement. The idea is then to identify and rate companies based on a `corruption index’.

Corruption increases uncertainty and leads to wastage of public resources and fundamentally undermines the rule of law. It is time for corporate India to play a leadership role by engaging in advocacy around the key issues to be resolved. This may be one of the greatest contributions an Indian corporate entity could make towards nationbuilding.

(Source: Article by Mukund Rajan in the Economic Times dated 06.07.2016)

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Representation Made by 4 Organisations on IDS 2016

11th July, 2016
Mr Hasmukh Adhia
Hon. Revenue Secretary
Ministry of Finance
New Delhi

Dear Sir

Subject:- Controversy regarding effective tax rate under IDS 2016

We write to you on behalf of members of our respective organisations and also on behalf of the citizens of India at large.

There is a raging controversy surrounding the effective rate of tax payable under the Income Declaration Scheme, 2016 [IDS]. This has arisen on account of different interpretations of the reply given to FAQ No. 5 in Circular No. 25/2016 dated 30th June, 2016. The same is reproduced below:

“Question No. 5: Where a valid declaration is made after making valuation as per the provisions of the Scheme, read with IDS Rules and tax, surcharge & penalty as specified in the Scheme have been paid, whether the department will make any enquiry in respect of sources of income, payment of tax, surcharge and penalty?

Answer: No.”

As a result of this FAQ and the reply provided, at various forums, an interpretation has been discussed that the effective rate of tax in such cases could work out to 31% instead of 45%. An illustration will explain this:

Even the senior officers of the Income-tax department are not clear and are giving differing replies. The problem that is caused on account of this confusion is that different people are providing differing advice to potential declarants.

Considering the fact this is an extremely important issue and goes to the very heart of the IDS, there is an urgent need to clarify whether the view that is being advocated by some as illustrated above is correct. The reply to FAQ No. 5 in Circular No. 25 mentioned above needs to be either modified or further clarified with the help of an example.

In the interest of the tax paying community and in the larger interest of the nation, we earnestly request you to kindly issue a clarification on this issue at the earliest. Upon receipt of the same, we shall give it extensive publicity amongst our members as well as amongst the tax paying community.

Assuring you and the Government of India our fullest support in the massive nation building exercise that is in progress,
We remain

Yours sincerely

sd/-
Chetan M. Shah
President
Bombay Chartered Accountants’ Society

sd/-
Hitesh Shah
President
Chamber of Tax Consultants

sd/-
Raju C Shah
President,
Ahmedabad Chartered Accountants’ Association

sd/-
Raghavendra Puranik
President,
Karnataka State Chartered Accountants’ Association

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A. P. (DIR Series) Circular No. 1 dated July 7, 2016

Discontinuation of Reporting of Bank Guarantee on behalf of service importers

Presently, banks are required to furnish to the CGM-in- Charge, FED, Foreign Investments Division (EPD), RBI, Central Office, Mumbai-400 001 details of invocation of bank guarantee issued by them, on behalf of their resident customers, to non-resident service provider against service imports.

This circular states that, with immediate effect, banks are not required to submit details of invocation of bank guarantee issued by them, on behalf of their resident customers, to non-resident service provider against service imports. They are however required to maintain records of such invocations and furnish the required details to RBI whenever sought.

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A. P. (DIR Series) Circular No. 81 dated June 30, 2016

Settlement System under Asian Clearing Union (ACU)

This circular states that from July 01, 2016, until further notice, all eligible current account transactions including trade transactions in ‘Euro’ can be settled outside the ACU mechanism.

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A. P. (DIR Series) Circular No. 80 dated June 30, 2016

External Commercial Borrowings (ECB) – Approval Route cases

This circular states that all proposal received under the Approval route and exceeding a particular threshold limit will be placed before an Empowered Committee. Final decision will be taken by RBI after considering the recommendations of the Empowered Committee.

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GENERAL ANTI-AVOI DANCE RULE (GAAR)

1. Background:

1.1 General Anti-Avoidance Rule (GAAR) was first introduced in sections 95 to 102 and 144BA of the Income tax Act by the Finance Act, 2012, w.e.f. A.Y. 2014-15. In view of large scale opposition by Trade and Industry Associations, these provisions were replaced by new sections 95 to 102 and 144BA by the Finance Act, 2013, w.e.f. AY . 2016-17.

1.2 In Para 150 of the Budget Speech while introducing the Finance Bill, 2013, the Finance Minister has stated as follows:

“150. Hon’ble Members are aware that the Finance Act, 2012 introduced the General Anti Avoidance Rules, for short, GAAR. A number of representations were received against the new provisions. An expert committee was constituted to consult stakeholders and finalise the GAAR guidelines. After careful consideration of the report, Government announced certain decisions on 14-1-2013 which were widely welcomed. I propose to incorporate those decisions in the Income tax Act. The modified provisions preserve the basic thrust and purpose of GAAR. Impermissible tax avoidance arrangements will be subjected to tax after a determination is made through a well laid out procedure involving an assessing officer and an Approving Panel headed by the judge. I propose to bring the modified provisions into effect from 1-4-2016.”

1.3 In the Explanatory Statement presented with the Finance Bill, 2013, the reasons for introducing the new provisions are explained as under:

“The General Anti Avoidance Rule (GAAR) was introduced in the Income tax Act by the Finance Act, 2012. The substantive provisions relating to GAAR are contained in Chapter X-A (consisting of sections 95 to 102) of the Income tax Act. The procedural provisions relating to mechanism for invocation of GAAR and passing of the assessment order in consequence thereof are contained to section 144 BA. The provisions of Chapter X-A as well as section 144BA would have come into force with effect from 1st April, 2014.

A number of representations were received against the provisions relating to GAAR. An Expert Committee was constituted by the Government with broad terms of reference including consultation with stakeholders and finalising the GAAR guidelines and a road map for implementation. The Expert Committee’s recommendations included suggestions for legislative amendments, formulation of rules and prescribing guidelines for implementations of GAAR. The major recommendations of the Expert Committee have been accepted by the Government, with some modifications. Some of the recommendations accepted by the Government require amendment in the provisions of Chapter X-A and section 144BA”.

1.4 In 2015 the Finance Minister, in Para 109 of his Budget Speech, stated as under:

“109 Implementation of the General Anti- Avoidance Rule (GAAR) has been a matter of public debate. The investment sentiment in the country has now turned positive and we need to accelerate this momentum. There are also certain issues relating to GAAR which need to be resolved. It has therefore been decided to defer the applicability of GAAR by two more years. Further, it has also been decided that when implemented GAAR would apply prospectively to investments made on or after 1-4-2017”

Accordingly, section 95 was amended to provide that the GAAR provisions contained in sections 95 to 102 will apply from A. Y. 2018-19 ( i.e. accounting year 1-4-2017 to 31.03.2018) and onwards.

1.5 Since the provisions relating to GAAR will come into form on 1.4.2017, the tax provisions which will affect some economic decisions by tax payers are discussed in this Article

2. GAAR Provisions:

2.1 Section 95: This section provides that an arrangement entered into by an assesse may be declared to be an impermissible avoidance arrangement. The tax arising from such declaration by the tax authorities will be determined subject to provisions of sections 96 to 102. It is also stated in this section that the provisions of sections 96 to 102 may be applied to any step or a part of the arrangement as they are applicable to the entire arrangement. Section 95(2) provides that Sections 95 to 102 shall apply from A/Y:2018-19 and onwards. Rule 10U of the Income tax Rules provides that Sections 95 to 102 shall not apply to an arrangement where the tax benefit in the relevant assessment year, to all parties to the arrangement, does not exceed Rs.3 Crore.

2.2 Impermissible Avoidance Arrangement (Section 96):

i) Section 96 explains the meaning of Impermissible Avoidance Arrangement to mean an arrangement, the main purpose of which is to obtain a tax benefit and it –

a) Creates rights or obligations which would not ordinarily be created between persons dealing at arm’s length.

b) Results, directly or indirectly, in misuse or abuse of the provisions of the Income tax Act.

c) Lacks commercial substance, or is deemed to lack commercial substance u/s. 97, in whole or in part, or

d) is entered into or carried out, by means, or in a manner, which are not ordinarily employed for bonafide purposes.

ii) An arrangement whereby there is any tax benefit to the assesse shall be presumed to have been entered into or carried out for the main purpose of obtaining tax benefits, unless the assesse proves otherwise. It will be noticed that this is a very heavy burden cast on the assesse. The Finance Minister has, however, declared on 7/5/2012 that the onus of proof will be on the department who has to establish that the arrangement is to avoid tax before initiating the proceedings under these provisions.

2.3 Lack of Commercial Substance (Section 97):

(i) Section 97 explains the concept of Lack of Commercial Substance in an arrangement entered into by the assesse. It states that an arrangement shall be deemed to lack commercial substance if :

a) The substance or effect of the arrangement, as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part of such steps.

b) It involves or includes

• Round Trip Financing
• An accommodating party.
• Elements that have the effect of offsetting Or canceling each other or A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction.

c) It involves the location of an asset or a transaction or the place of residence of any party which is without any substantial commercial purpose. In other words, the particular location is disclosed only to obtain tax benefit for a party, or

d) It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.

ii) For the above purpose, it is provided that round trip financing includes any arrangement in which through a series of transactions :

a) Funds are transferred among the parties to the arrangement, and,

b) Such transactions do not have any substantial commercial purpose other than obtaining tax benefit.

iii) It is further stated that the above view will be taken by the tax authorities without having regard to the following:

a) Whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement.

b) The time or sequence in which the funds involved in the round trip financing are transferred or received, or

c) The means by, manner in, or mode through which funds involved in the round trip financing are transferred or received.

iv) The party to such an arrangement shall be treated as “Accommodating Party” whether or not such party is connected with the other parties to the arrangement, if the main purpose of, direct or indirect, tax benefit under the Income tax Act.

v) It is clarified in the section that the following factors may be relevant but shall not be sufficient for determining whether the arrangement Lacks commercial substance.

a) The period or time for which the arrangement exists

b) The fact of payment of taxes, directly or indirectly, under the arrangement.

c) The fact that exit route, including transfer of any activity, business or operations, is provided by the arrangement.

3. Consequence of Impermissible Avoidance Arrangement (Section 98):

3.1 Under section 144 BA, the Commissioner has been empowered to declare any arrangement as an impermissible arrangement. Section 98 states that if an arrangement is declared as impermissible, then the consequences, in relation to tax or the arrangement shall be determined in such manner as is deemed appropriate in the circumstances of the case. This will include denial of tax benefit or any benefit under applicable Tax Treaty. The following is the illustrative list of consequences and it is provided that the same will not be limited to this list.

i) Disregarding, combining or re-characterising any step in, or part or whole of the impermissible avoidance arrangement.

ii) Treating, the impermissible avoidance arrangement as if it had not been entered into or carried out;

iii) Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

iv) Deeming persons who are connected persons in relation to each other to be one and the same person;

v) Re-allocating between the parties to the arrangement, (a) any accrual or receipt of a capital or revenue nature or (b) any expenditure, deduction, relief or rebate;

vi) Treating (a) the place of residence of any party to the arrangement or (b) situs of an asset or of a transaction at a place other than the place or location of the transaction stated under the arrangement.

vii) Considering or looking through any arrangement by disregarding any corporate structure.

viii) It is also clarified that for the above purpose the tax authorities may re-characterise (a) any equity into debt or any debt into equity, (b) any accrual or receipt of Capital nature may be treated as of revenue nature or vice versa or (c) any expenditure, deduction, relief or rebate may be re-characterised.

3.2 It may be noted that if only a part of the arrangement is declared to be impermissible under this section, Rule 10UA provides that the consequences in relation to tax shall be determined with reference to such part only.

4. Section 99: This section provides for treatment of connected persons and accommodating party. The section provides that for the purposes of sections 95 to 102, for determining whether a tax benefit exists –

i) The parties who are connected persons, in relation to each other, may be treated as one and same person.

ii) Any accommodating party may be disregarded.

iii) Such accommodating party and any other party may be treated as one and the same person.

iv) The arrangement may be considered or looked through be disregarding any corporate structure.

5. Section 102 : Some Definitions

i) “Arrangement” means any step in, a part or whole of any transaction, operations, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding.

ii) “Benefit” includes a payment of any kind whether in tangible or intangible form.

iii) “Connected Person”, in relation to a person who is an Individual, Company, HUF, Firm, LLP, AOP or BOI is defined in more or less the same manner as the term “Related Person” is defined in Section 40A(2). It may be noted that, for this purpose, the definition of the word “Relative” is wider in as much as the definition of “Relative” given in Explanation to Section 56(2) (vi) is adopted, whereas in section 40A(2) the narrower definition of “Relative” given in Section 2(41) is adopted.

iv) “Fund” includes (a) any cash, (b) cash equivalents and (c ) any right or obligation to receive or pay in cash or cash equivalent.

v) “Party” means any person, including Permanent Establishment which participates or takes part in an arrangement.

vi) “Relative” has the same meaning as given in section 56(2) (vi) – Explanation. It may be noted that this definition is very wide as compared to the definition given in section 2 (41) which is adopted for the purpose of explaining related person in section 40A (2).

vii) The definition of a person having substantial interest in the company and other non- corporate body is the same as given in section 40A(2).

viii) “Step” includes a measure or an action, particularly one of a series taken in order to deal with or achieve a particular thing or object in the arrangement.

ix) “Tax Benefit” includes (a) a reduction, avoidance or deferral of tax or other amount payable under the Income tax Act, (b) an increase in a refund of tax or other amount under the Act, (c) a reduction, avoidance or deferral of tax or other amount that would be payable under the Act, as a result of tax treaty, (d) an increase in a refund of tax or other amounts under the Act as a result of tax treaty, (e) a reduction in total income or (f) increase in loss in the relevant accounting year or any other accounting year.

x) “Tax Treaty” means Agreements entered into by the Government with any foreign county, territory or Association u/s 90 or 90A.

6. Section 144 BA: Procedure for declaring an arrangement as impressible under sections 95 to 102 is given in this section. This section will come into force from A.Y. 2018-19

i) The Assessing Officer can, at any stage of assessment or reassessment, make a reference to the Commissioner for invoking GAAR. On receipt of reference the Commissioner has to issue a notice to the assesse to make his submissions and give a hearing within such period not exceeding 60 days. If he is not satisfied by the submissions of taxpayer and is of the opinion that GAAR provisions are to be invoked, he has to refer the matter to an “Approving Panel”. In case the assesse does not object or reply, the Commissioner can issue such directions as he deems fit in respect of declaration as to whether the arrangement is an impermissible avoidance arrangement or not. Under Rule 10UC (1)(i) no such direction can be issued after expiry of one month from the end of the month in which the date of compliance of the notice to the assesse u/s 144BA(2) is given.

ii) The Approving Panel has to dispose of the reference within a period of six months from the end of the month in which the reference was received from the Commissioner.

iii) The Approving Panel can either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry made. It can issue such directions as it thanks fit. It can also decide the year or years for which such an arrangement will be considered as impermissible. It has to give hearing to the assesse before taking any decision in the matter.

iv) The Assessing Officer (AO) can determine consequences of such a declaration of arrangement as impermissible avoidance arrangement.

v) The final order, in case any consequence of GAAR is determined, shall be passed by the AO only after approval by Commissioner.

vi) The period taken by the proceedings before Commissioner and the Approving Panel shall be excluded from time limitation for completion of assessment.

vii) The Central Government has to constitute one or more Approving Panels. Each Panel shall consist of 3 members, including a chairperson. The constitution of the Panel shall be as under.

a) Chairperson – He shall be a sitting or retired judge of a High Court

b) Members – One member shall be IRS of the rank of CCIT or above. One member shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices.

The term of the Panel shall ordinarily be for one year and may be extended from time to time upto 3 years. The Panel shall have power similar to those vested in AAR u/s 245U. CBDT has to provide office infrastructure, manpower and other facilities to the Approving Panel’s members. The remuneration payable to Panel members shall be decided by the Central Government.

viii) In addition to the above, it is provided that the CBDT has to prescribe a scheme for efficient functioning of the Approving Panel and expeditious disposal of the reference made to it. No such scheme has been prescribed by CBDT so far.

ix) Appeal against the order of assessment passed under the GAAR provisions, is to be filed directly with the ITA Tribunal and not before CIT (A). Section 144 C relating to reference before DRT does not apply to this assessment order and, therefore, no reference can be made to DRT when GAAR provisions are invoked. No appeal can be filed by the AO against the directions given by the Approving Panel.

7. Procedure (Rules 10U to 10UC)

7.1 It is provided in section 100 that the provisions of sections 95 to 102 shall apply in addition to, or in lieu of, any other basis of determination of tax liability. Section 101 gives power to CBDT to prescribe the guidelines and lay down conditions for application of sections 95 to 102 relating to General Anti- Avoidance Rule (GAAR). It may be noted that for this purpose Rules 10U to 10UC and Forms 3CEG to 3CEI have been inserted in the Income tax Rules.

7.2 Rule 10U provides that the GAAR provisions of chapter X-A (Sections 95 to 102) shall not apply in respect of the following:

a) To an arrangement where the tax benefit in the relevant assessment year arising to all the parties to the arrangement does not exceed, in the aggregate, Rs. 3 Crore.

b) To a Foreign Institutional Investor (FII) who is assesse under the Income tax Act and has not taken benefit of DTTA u/s 90 or 90A. Further, such FII should have made investment in listed or un-listed securities with prior permission of SEBI under the applicable Regulations.

c) To a Non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly in a FII.

d) To any income accruing, arising or received by any person from transfer of Investments made before 1-4-2017 by such person.

e) Without prejudice to (d) above, it is clarified in the Rule that GAAR Provisions will apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after 1-4-2017. This will mean that if any impermissible arrangement is entered into prior to 1/4/2017, GAAR provisions will apply to the tax benefit obtained after 1/4/2017.

f) The term (a) FII, (b) offshore derivative instrument, (c) SEBI and (d) tax benefit are defined in the Rule.

7.3 Rule 10 UB provides for Forms and Notice for reference u/s. 144BA. If the Assessing Office is of the view that GAAR provisions are to be invoked to a particular arrangement or transaction he has to issue a notice to the assesse seeking his objections, if any, to the applicability of the provisions of Chapter X-A (i.e. Sections 95 to 102). In this notice A.O. has to state

a) Details of the arrangement to which provisions of Chapter X-A are proposed to be applied.

b) The tax benefit arising under the arrangement

c) The basis and reasons for considering that the main purpose of the arrangement is to obtain tax benefit.

d) The basis and reasons as to why conditions provided in Section 96(1) are satisfied.

e) The A.O. has to give a list of the documents and evidence relied upon by him supporting his reasons stated under (c ) and (d) above.

7.4 After receiving the objections from the assesse, the A.O., if not satisfied with the objections, can make a reference to the CIT u/s 144BA (1) in Form No. 3 CEG. If the CIT, after considering the reference by the A.O. and the objections filed by the assesse is satisfied that provisions of chapter X-A are not applicable to the facts of the case, he shall issue directions to A.O. in Form No. 3CEH. Such directions are to be given within a period of 2 months from the end of the month in which the final submissions of the assesse in response to notice issued u/s 144BA (2) are made.

7.5 If the commissioner decides to refer the matter to the Approving panel u/s 144BA(4), he shall record his satisfaction regarding the applicability of the provisions of Chapter X-A in Form No.3CEI and enclose the same with the reference. Rule 10UC provides that no reference shall be made to the Approving panel u/s 144 BA (4) after the expiry of 2 months from the end of the month in which final submissions of the assesse in response to notice u/s 144BA(2) is received.

8. To Sum Up:

8.1 The above GAAR provisions will have far reaching consequences for assesses engaged in the business with Indian or Foreign parties. GAAR is not restricted to only business transactions. Therefore, all assesses who are engaged in business or profession or who have no income from business or profession but have income from some source will be affected by these provisions. It appears that any assesse having any arrangement, agreement, or transaction with a connected person will have to take care that the same is at Arm’s Length Consideration. In particular, an assesse will have to consider the implications of GAAR while (a) executing a WILL or Trust, (b) entering into partnership or forming LLP, (c) taking controlling interest in a company, (f) entering into amalgamation of two or more companies, (c ) effecting demerger of a company, (f) entering into a consortium or joint venture, (g) entering into foreign collaboration, (h) acquiring an Indian or Foreign company or (i) making a Gift. It may be noted that this is only an illustrative list and there may be other transactions which may attract GAAR provisions.

8.2 From the wording of the above provisions of sections 95 to 102, 144BA and Rules it appears that the provisions of GAAR can be invoked even in respect of an arrangement made prior to 1-4- 2017. The CIT or the Approving Panel can hold any such arrangement entered into prior to 1-4- 2017 as impermissible and direct the AO to make adjustments in the computation of income or tax in the assessment year 2018-19 or any year thereafter. As suggested in Para 15.15 of the report of the Standing Committee on Finance on DTC Bill, 2010 GAAR provisions should have been applied prospectively so that they are not made applicable to existing arrangements / transactions. Even in the Press Note issued by the Central Government on 14-1-2013 it was stated that transactions entered into prior to 30-8-2010 will not be made subject to GAAR provisions. This has not been provided in the above sections and, therefore, the above GAAR provisions may have retroactive effect. The only exception made in Rule 10U is with reference to income from transfer of certain investments made prior to 1-4-2017.

8.3 The Government has not yet issued notification for constitution of Approving Panel u/s 144BA. Moreover, the CBDT has not yet issued the scheme for efficient functioning of the Approving Panel and expeditious disposal of the reference made to it.

8.4 The provisions in Rule 10U that GAAR Provisions will not apply where the aggregate tax benefit does not exceed Rs.3 crore, is welcome. Let us hope that in other cases the tax department will take a reasonable view while dealing with commercial arrangements made by tax payers while conducting their economic activities.

8.5 The Concept of GAAR is new in our Country. Therefore, it is necessary to educate the tax payers about the nature of arrangements and transactions which will be considered by the tax department as impermissible arrangements. For this purpose the CBDT should issue detailed guidelines giving illustrations of different types of arrangements which may be considered as impermissible. This can be given in question answer form. Such guidelines will enable tax payers to take care while entering into any arrangement or transaction. This will also reduce litigation.

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Silver Jubilee of Economic Liberalisation

Twenty-five years ago Dr. Manmohan Singh presented, what is now described as a path breaking budget unleashing a spate of economic reforms. He opened the doors of our country to the world and India began its transformation from a third world country to a significant player in the global economy. It is said that the government of the day was left no choice but to embark on these reforms such was the state of the economy then. However, credit for taking the plunge must also be given to the then Prime Minister – Mr. P.V.Narasimha Rao. A mention of the Long Term Fiscal Policy presented by Mr. V.P. Singh as the Finance Minister is also not out of place.

Since then, there have been changes of those who have enjoyed power, and India has been ruled by different political parties or political combinations. By and large, there has been a consensus on the direction of economic reform, though on account of political compulsions the parties in power and opposition have made different noises for public consumption. There has certainly been a difference in the pace in which the liberalisation process has moved and at times there has been a derailment on account of reservations of the left parties, whenever they have had a say in policy making.

There is no point in dealing with numbers as each set of statistics, published or relied on by one group of experts would be doubted and challenged by another group. On the ground, the reality is that GDP has grown consistently, purchasing power in the hands of a large majority of the population has increased and the number of those below the poverty line has decreased.

In certain areas there has been a sea change. Communication is one such area. From the time that we applied for a telephone connection and waited for the Black beauty to enter our homes, we are now in a situation where even in the remotest of rural areas a person uses a cell phone. He may not be literate but is a user of this technology. This one single development has been an absolute game changer.

Inbound and outbound foreign investment has increased manifold. 25 years ago, foreign investors were wary of investment in India. Apart from the bureaucratic hurdles, they were not certain about the soundness of the Indian economy. Today, possibly on account of the fact that the investment options in the other parts of the globe have reduced, every investor looks at India with keen interest. In those days the flow was one-way with foreign entities investing in India. Today Indian corporations have also become multinational. Large Indian houses today acquire companies across the globe, going in for mergers and amalgamations even in developed countries.

The movement of skilled labour has also become easier. Till a few years ago IT professionals found lucrative jobs abroad either on account of their own employers in India setting up businesses across the world or even foreign companies hiring these talented individuals. The pace may have reduced somewhat, on account of economic slowdown in those countries, but even today there are job opportunities to be seized. Along with the movement of human resources, the flow of trade has also become smoother. On account of increasing e-commerce, Indian consumers have access to commodities and services from all across the globe and the same is true of consumers of the world who are now able to enjoy Indian goods and services.

There are certainly certain weaknesses and hurdles. Lack of infrastructure remains one serious cause of concern. The quality of road, rail and air transport is a far cry from those in developed countries. The lack of infrastructure seriously hampers India’s economic growth. While successive governments have tried to give a fillip to the sector, both by way of investment and tax reliefs, this sector needs substantial improvement.

The second area that needs attention is the bureaucratic stranglehold on policy-making. Apart from the fact that the speed of decision-making is still extremely slow, what is worrying is the mind-set. More than six decades after independence, the overhang of the”Raj” still remains. While an independent bureaucracy is certainly strength, one with the mind-set that prevails today is certainly an impediment.

The third problem area is that of distribution. The fruits of economic growth have not reached a large part of the population. While successive governments have undoubtedly announced a large number of schemes to help the poor, their implementation is slow and tardy. The uneven distribution is creating economic disparity leading to political unrest which in turn will reduce or halt economic progress.

Our profession has also undoubtedly benefited from economic liberalisation. Apart from the traditional areas of tax, accounting and audit, we now deliver a range of services. There are many chartered accountants who now act as strategic consultants in mergers acquisitions and other forms of business reorganisation. Even in the traditional areas of taxation, international tax has gained importance. Since business has become global, the language of business that is accounting has also attained an international perspective. Ind As, that is IFRS with Indian flavour have become applicable to certain entities with effect from 1st April 2016 and thereafter there will be a gradual adoption by others. The implementation thereof provides an opportunity and a challenge at the same time.

In the balance, this silver jubilee of economic liberalisation deserves celebration. India has undoubtedly come a long way, though the distance to be travelled is also significant. Let us hope that with the passing of the much awaited GST bill, a milestone in India’s economic progress will be reached. We will then take a giant step in the transformation from being a developing country to a world leader!

shailesh.kwebmaker

A. P. (DIR Series) Circular No. 79 dated June 30, 2016

Deferred Payment Protocols dated April 30, 1981 and December 23, 1985 between Government of India and erstwhile USSR

With effect from June 20, 2016 the Rupee value of the Special Currency Basket has been fixed at Rs. 83.5796140 as against the earlier value of Rs. 80.9604520.

shailesh.kwebmaker

REMEMBERING A FRIEND

Poet Mareez is searching for a person with a truly noble heart; a person who helps one readily but does not make one feel helpless. I do not know about Mareez whether he found one, but I found such a friend in Narayan Varma. He was always ready and willing to help. He helped without making one feel helpless.

I have known him for 65 years. My very first memory of Narayan goes back to the year 1950. In our Sydenham College, on the landing between the ground floor and the first floor, I saw a poster in bold colourful letters. It said “Vote for Narayan Varma”. That was my first “acquaintance” with him. Even in those days he was a leader and a public figure! I did not know him well as he was a couple of years senior and we rarely had an occasion to meet.

Years rolled by. Both of us did our C.A. from different firms. It was BCA Society which brought us closer, particularly the Residential Refresher Courses of Bombay Chartered Accountants’ Society where we all studied together and also enjoyed the warmth of true companionship. We shared truly happy times together. Narayan was very active participant and was always congenial and helpful.

Thinking of Narayan a quotation comes to my mind:

“Many people will walk in and out of your life. But only true friends will leave footprints on your heart.”

How very true! Only a few friends leave their footprints on one’s heart. Narayan was one such person, who left his footprints on the hearts of so many of us. He also left footprints on the sands of time. I am reminded of the lines from “A psalm of Life” by Poet Longfellow:

“Lives of great men all remind us
We can make our lives sublime,
And departing, leave behind us
Footprints on the sands of time”

Narayan was like an elder brother to me, and I benefitted from his words of advice. In early 1970’s, the tax laws in our country were becoming from bad to worse, the tax rates were back breaking. We have so many taxes to deal with; income tax, wealth tax, gift tax, estate duty etc and the combined burden of all these taxes was killing. People thought of migrating. Some even migrated. Though more tax meant more work to us as professionals the atmosphere was becoming stiffing. Imagine a marginal tax rate of 97.75%, with the burden of wealth tax on top. Though I was not in such a tax bracket, it was indeed very depressing. I too started thinking of settling abroad. In desperation I talked with Narayan. I asked, “With a German wife, you can easily migrate, why are you still here?” His spontaneous reply was “Pradeep, somebody’s child may be more beautiful than my child. But still I will love my child more. India is my country; my motherland.” This put an end to my negative thinking. I am indebted to him for this valuable and timely advice.

After the tragic passing away of our daughter Amita in 1987 in the prime of her life (she was just 26 year at that time) we were lost. We wanted to do something in her memory, but did not know what to do. Narayan came up with the suggestion asking us to do something for leadership training of CAs and articles student. We accepted the suggestion. That was the starting point of leadership training courses at our Bombay Chartered Accountants’ Society. We today have Study Circle Meetings, Public Speaking Courses, Workshops on Management Books like and Annual Leadership Camps. All these came about because of the vision of Narayan Varma.

Varma passed away on 25th December 2015 after a long illness. His ailments did not deter him from action. Just a few months before he left us he received an email when in Breach Candy Hospital about someone in Ludhiana providing meals to poor people charging only Re.1/-. This galvanized him into action. From the hospital bed in ICU, he called up our co-workers of Dharm Bharathi Mission, asking them to do something on similar lines! This has resulted in a scheme to provide nutritious rich food packets to children suffering from cancer and undergoing treatment at Tata Memorial Cancer Hospital. This scheme was largely financed by Narayan. Narayan was a true Karma Yogi and toiled till the very end. Inspite of failing health, he came personally to Ghadge Maharaj Sanatorium when the first distribution of food packets was made to the children. Narayan was a person with indomitable spirit. He lived a noble life and is an inspiration to us. We cherish his memory and Endeavour to fulfill his dreams.

shailesh.kwebmaker

Non-compete fees- Income or capital- Discontinuation of business pursuant to noncompete agreement- A. Y. 2000-01- Section 28(va) inserted w.e.f. 01/04/2003 is not retrospective- Amount received pursuant to negative covenant is capital receipt-

CIT vs. TTK Healthcare Ltd.; 385 ITR 326 (Mad):

The assessee was manufacturing condoms and gloves and the LI group was in the business of manufacturing rubber contraceptives all over the world on its own and through its subsidiaries. Assessee entered into a non compete agreement with the LI group for discontinuing its condom business. LI group paid 4,99,000 pounds as noncompete fees to assessee. The assessee claimed the noncompete fees to be capital receipt. The Assessing Officer treated the amount as revenue receipt. The Tribunal held that the amount was capital receipt.

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

“i) The litmus test whether a compensation received by the assessee towards a negative covenant of noncompete clause is whether or not the impairment is one of the assessee’s sources of income and if the answer is that the injury has been caused to one of its sources of income, then it is enough to render the compensation received in that process a capital receipt. At any rate, w.e.f. April 1, 2003, by virtue of introduction of section 28(va) in the Income-tax Act, 1961 all monies received pursuant to a negative covenant become liable for the incidence of taxation, thus obliterating the distinction between the two that was available till then.

ii) The amount of 4,99,000 pounds paid by LI group was liable to be treated as a measure of compensation towards the negative covenant between the assessee and the LI group. It was not necessary that the assessee shelves all its other sources of income as well, for the receipt of compensation to amount to capital receipt.”

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Charitable purpose- Cancellation of registration- Section 2(15) and 12AA(3) of I. T. Act, 1961- A. Y. 2009-10- Disqualification for exemption where receipts from commercial activities exceed Rs. 25 lakhs- No change in nature of activities- Assessee entitled to continued registration-

DIT(Exem) vs. Khar Gymkhana; 385 ITR 162 (Bom):

The assessee is a charitable trust covered by the last limb in the definition u/s. 2(15) of the Income-tax Act, 1961 “general public utility”. In the A. Y. 2009-10, the assessee was not eligible for the exemption in view of the fact that receipts from commercial activities exceeded Rs. 25 lakh. There was no change in the nature of activities. DIT(Exemption) cancelled the registration on this ground. The Tribunal restored the registration.

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

“i) CBDT circular No. 21 of 2016 dated 27/05/2016 clarified that it shall not be mandatory to cancel the registration already granted u/s. 12AA to a charitable institution merely on the ground that the cut off specified in proviso to section 2(15) is exceeded in a particular year without there being any change in the nature of activities of the institution.

ii) The Tribunal was right in law in holding that the assessee was entitled to continued registration u/s. 12A of the Act and in setting aside the cancellation of its registration on the ground that its receipts from commercial activities exceeded Rs. 25 lakh in the year.”

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Business expenditure: Section 37(1) of I. T. Act, 1961- A. Y. 2003-04- Assessee paid stamp duty for a contract executed with State Road Transport corporation in course of business- Since stamp duty paid by appellant during year under consideration was a compulsory statutory levy and it would not restrict profits of future years and was incurred wholly and exclusively for purpose of business- It must be allowed in its entirety in year in which it was incurred and it could not be spread over a number of years-

Prithvi Associates vs. ACIT; [2016] 71 taxmann.com 163 (Guj):

The assessee paid stamp duty in relation to contract executed with Maharashtra State Road Transport corporation. The Assessing Officer disallowed the claim for deduction of the said expenditure. CIT(A) allowed the claim but the Tribunal upheld the order of the Assessing Officer.

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

“i) The payment of stamp duty is not for business expediency but it is in the nature of a compulsory levy under the Bombay Stamp Act. It is legally settled that accounting practice cannot over ride the provisions of the Income-tax Act, 1961. Stamp duty paid by the appellant during the year under consideration is a compulsory statutory levy and would not restrict the profits of the future years and ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years.

ii) If any statutory expense is required to be paid, in view of decision of the Apex Court in India Cements Ltd. vs. CIT [1966] 60 ITR 52, such expense is required to be allowed in the same year. The Apex Court in the case of Taparia Tools Ltd. vs. Jt. CIT [2015] 372 ITR 605/231 Taxman 5/55 taxmann.com 361 also observed that as per the ordinary rule revenue expenditure incurred in a particular year is to be allowed in that year.

iii) Thus, if the assessee claims that expenditure in that year, the department cannot deny it. However, in a case where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of ‘matching concept’ is satisfied, which upto now has been restricted to cases of debentures. Therefore, it is rightly observed by the Commissioner (Appeals) that the expense is required to be allowed in the same year.

iv) In view of above, the Tribunal has committed an error in law in confirming the disallowance of Rs. 12,28,560 towards stamp duty expenses actually incurred by the appellant for executing contract with Maharashtra State Road Transport Corporation. Accordingly, this appeal is allowed.”

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Cash credit- Section 68 of I. T. Act, 1961- A. Y. 1983-84- The assessee is bound to be provided with the material used against him apart from being permitted to cross examine the deponents- The denial of such opportunity goes to root of the matter and strikes at the very foundation of the assessment order and renders it vulnerable-

H. R. Mehta vs. ACIT(Bom); ITA No. 58 of 2001 dated 30/06/2016 (www.itatonline.org)

In the A. Y. 1983-84, the assessee had taken loan of Rs. 1,45,000/- which the Assessing Officer treated as non genuine and made addition of the amount as unexplained cash credit u/s. 68 of the Income-tax Act, 1961. The Tribunal upheld the addition.

On appeal by the assessee, the Bombay High Court held as under:

“i) On a very fundamental aspect, the revenue was not justified in making addition at the time of reassessment without having first given the assessee an opportunity to cross examine the deponent on the statements relied upon by the ACIT. Quite apart from denial of an opportunity of cross examination, the revenue did not even provide the material on the basis of which the department sought to conclude that the loan was a bogus transaction.

ii) In the light of the fact that the monies were advanced apparently by the account payee cheque and was repaid vide account payee cheque the least that the revenue should have done was to grant an opportunity to the assessee to meet the case against him by providing the material sought to be used against assessee in arriving before passing the order of reassessment. This not having been done, the denial of such opportunity goes to root of the matter and strikes at the very foundation of the reassessment and therefore renders the orders passed by the CIT (A) and the Tribunal vulnerable.

iii) In our view the assessee was bound to be provided with the material used against him apart from being permitting him to cross examine the deponents. Despite the request dated 15th February, 1996 seeking an opportunity to cross examine the deponent and furnish the assessee with copies of statement and disclose material, these were denied to him. In this view of the matter we are inclined to allow the appeal.”

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Book profits- Section 115JB of I. T. Act, 1961- A. Y. 2008-09- Mesne profits (amount received from a person in wrongful possession of property) is a capital receipt and not chargeable to tax either as income or as “book profits” u/s 115JB- As the department has implicitly accepted Narang Overseas vs. ACIT 100 ITD (Mum) (SB), it cannot file an appeal on the issue in the case of other assesses-

CIT vs. Goodwill Theatres Pvt. Ltd. (Bom); ITA No. 2356 of 2013 dated 06/06/2016 (www.itatonline.org)

The Bombay High Court had to consider two questions in an appeal filed by the Department:

(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that mesne profits are capital receipts in the hands of the assessee and not revenue receipts chargeable to tax?

(b) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that mesne profits, can not be part of book profit u/s. 115JB, as it was held as capital assets?”.

The High Court upheld the decision of the Tribunal and held as under:

“(i) The Tribunal has held that the mesne profits received by the Assessee for the unauthorized occupation of its premises from Central Bank of India is a receipt of capital nature and thus not taxable. To reach the above conclusion, the impugned order placed reliance upon the decision of Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., vs. ACIT 100 ITD (Mum) S.B. The issue before the Special Bench in Narang Overseas Pvt. Ltd. (supra) was whether the mesne profits received by an assessee is revenue or capital in nature. The Special Bench, in its order placed reliance upon the definition of mesne profits in Section 2(12) of the Code of Civil Procedure, 1908 which reads as under: “Mesne profits of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.”

ii) On the basis of above, it held that any amount received from a person in wrongful possession of its property, would be mesne profits and it is capital in nature.

iii) We find that the issue before the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd was to determine the character of mesne profits being either capital or revenue in nature. The Special Bench of the Tribunal in Narang Overseas Pvt. Ltd held that the same is capital in nature. There is no doubt that the issue arising herein is also with regard to the character of mesne profits received by the Assessee. In this case also, the amounts are received by the Assessee from a person in wrongful possession of its property i.e. after the relationship of landlord and tenant has come to an end. Once the Special Bench order of the Tribunal in Narang Overseas Pvt. Ltd has taken a view on the character of mesne profits, then unless the Revenue challenges the order of the Special Bench of the Tribunal it would be unfair of the Revenue to pick and choose assessees where it would follow the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. The least that is expected of the State which prides itself on Rule of Law is that it would equally apply the law to all assessees’s.

(iv) We make it clear that we have not examined the merits of the question raised for our consideration. We are not entertaining the present appeal on the limited ground that the Revenue must adopt an uniform stand in respect of all assessees. This is more so as the issue of law is settled by the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra). The fact that even after the dismissal of its Appeal (L) No.1791 of 2008 for non-removal of office objections on 25th June, 2009, no steps have been taken by the Revenue to have the appeal restored, is evidence enough of the Revenue having accepted the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. Thus, the question as framed in the present facts does not give rise to any substantial question of law.”

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Business Expenditure- Capital or revenue- A. Y. 1997-98- Test of enduring benefit not to be mechanically applied- Expenses incurred for software development- Rapid advancement and changes in software industry- Difficult to attribute endurability- Expenditure to be treated as revenue

Indian Aluminium Co. Ltd. vs. CIT; 384 ITR 386 (Cal):

The assessee was engaged in the manufacture and production of aluminium and related products. Bauxite was a basic raw material for manufacturing aluminium. The assessee claimed deduction of expenditure incurred on development of application software to help the assessee in planning the production and bauxite grade control in mines treating it as differed revenue expenditure and amortised a part of it debiting it to the profit and loss account. The Assessing Officer disallowed the deduction on the ground that the expenditure was capital in nature incurred with a view to obtain an asset or advantage of a permanent nature. The Tribunal upheld the disallowance.

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

“The software industry was one such field where advancements and changes happened at a lightening pace and it was difficult to attribute any degree of endurability. The software used by the assesee was a application software which needed to be updated due to the rapid advancements in technology and increasing complexity of the features. Disallowance of the expenditure incurred on software development was erroneous.”

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Advance ruling- Application for advance ruling- A. Y. 2012-13- Bar of application where matter is pending consideration before Income-tax Authorities- Mere notice u/s. 143(2) without any specific queries would not mean matter was pending before Income-tax Authorities- Such notice would not bar an application for advance ruling-

LS Cable and System Ltd vs. CIT; 385 ITR 99 (Del):

Assessee’s application for advance Ruling for the A. Y. 2012-13, was rejected on the ground that the matter was pending before the Assessing Officer at the time of application in view of the fact that the notice u/s. 143(2)(ii) was issued by the Assessing Officer.

The Delhi High Court allowed the assessee’s writ petition and held as under:

“i) Mere issuance of a notice u/s. 143(2) of the Act, by merely stating that “there are certain points in connection with the return of income on which I would like some other information” did not amount to the issues raised in the application filed by the assessee before the Authority for Advance Ruling being already pending before the Assessing Officer.

ii) There was no statutory bar to the Authority for Advance Rulings considering the application.”

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Appeal to High Court- Section 260A of I. T. Act, 1961- A. Y. 1996-97- Plea urged for first time in appeal before High Court- Not permissible- Capital vs. revenue receipt- Income from other sources- Casual and non-recurring receipts- Auction sale of property mortgaged with bank set aside by Supreme Court- Auction purchasers and judgment debtors compromising in execution proceedings- Amount received by auction purchaser not casual and non-recurring receipt but capital receipt not taxable-

Girish Bansal vs. UOI; 284 ITR 161 (Del):

Auction sale of property mortgaged with bank was set side by the Supreme Court. Auction purchaser(assessee) and judgment debtors compromised the execution proceedings wherein the assessee purchaser received Rs. 10 lakhs as a settlement amount. For the A. Y. 1996-97, the assessee claimed the amount as the non-taxable capital receipt. The Assessing Officer treated the amount as the casual and non-recurring receipt u/s. 10(3) of the Income-tax Act, 1961 and assessed it as income. The Tribunal upheld the order of the Assessing Officer.

On appeal by the assessee before the Delhi High Court the Department sought consideration of the amount received by the assessee as revenue receipt. The High Court reversed the decision of the Tribunal and held as under:

“i) The Department could not be permitted to shift its stand from one forum to another. The consistent case of the Department was to be tested at various levels for its correctness. It was possible that in the interregnum there might be decisions of the Supreme Court which might support or negate the case of the Department. That would then have to be taken to its logical end. Under these circumstances the Court was not prepared to permit the Department to urge a new plea for the first time in the High Court.

ii) The Assessing Officer was in error in proceeding on the basis that a sum of Rs. 10 lakhs received by the assessee was in the nature of a casual and nonrecurring receipt which could be brought to tax u/s. 10(3) of the Act. The Assessing Officer having held that it could not be in the nature of capital gains it was not open to the Department to seek to bring it to tax under the heading revenue receipt. What was in the nature of a capital receipt could not be sought to be brought to tax resorting to section 10(3) read with section 56 of the Act.

iii) The question is accordingly answered in favour of the assessee and against the Revenue.”

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Deduction of tax at source- The contract of employment not being the proximate cause for the receipt of tips by the employee from a customer, the same would be outside the dragnet of sections 15 and 17 of the Income-tax Act and hence outside section 192.

ITC Ltd. vs. CIT. (2016) 384 ITR 14 (SC) The assessees are engaged in the business of owning, operating, and managing hotels. Surveys conducted at the business premises of the assesses allegedly revealed that the assessees had been paying tips to its employees but not deducting taxes thereon. The Assessing Officer treated the receipt of the tips as income under the head “Salary” in the hands of the various employees and held that the assessees were liable to deduct tax at source from such payment u/s. 192 of the Income tax Act, 1961. The assessees were treated by the Assessing Officer as assessees-in-default under section 201(1) of the Act. The Assessing Officers in various assessment orders worked out the different amounts of tax to be paid by all the aforesaid assessees u/s. 201(1), as also interest u/s. 201(1A) of the said Act for the assessment years 2003-04, 2004-05 and 2005-06.

The Commissioner of Income –tax (Appeals) vide his common order dated November 28, 2008 allowed the various appeals of the assessees holding that the assessees could not be treated as assesses-in-default u/s. 201(1) of the Act for non-deduction of tax on tips collected by them and distributed to their employees. Appeals filed by the Revenue to the Income-tax Appellate Tribunal came to be dismissed by the Tribunal by relying upon its own order for the assessment year 1986-87 in the case of ITC and the case of Nehru Palace Hotels Limited. Against the said orders of the Tribunal, appeals were preferred by the Revenue to the High Court.

The High Court held, after considering sections 15, 17 and 192 of the Income-Tax Act, that tips would amount to “ profit in addition to salary or wages” and would fall u/s. 15(b) read with section 17(1)(iv) and 17(3)(ii). Even so, the High Court held that when tips are received by employee directly in cash, the employer has no role to play and would therefore be outside the purview of section 192 of the Act. However, the moment a tip is included and paid by way of a credit card by a customer, since such tip goes into the account of the employer after which it is distributed to the employees, the receipt of such money from the employer would, according to the High Court, amount to “salary” within the extended definition contained in section 17 of the Act. The High Court concluded that the receipt of the tips constituted income at the hands of the recipients and were chargeable to the income-tax under the head “Salary” u/s. 15 of the Act. That being so it was obligatory upon the assessees to deduct taxes at source from such payment u/s. 192 of the Act.

Further, since the assessees were declared to be assessees-in-default u/s. 201 of the Act, the High Court found that despite the fact that the assessees did not deduct the said amount based on a bone fide belief and no dishonest intention could be attributed to any of them, yet the High Court held that levy of interest u/s. 201(1A) would follow, as the payment of simple interest under the said provision was mandatory.

The Supreme Court, on appeal by the assessees, observed that on the facts of the present case, it was clear that there was no vested right in the employee to claim any amount of tips from his employers. Tips being purely voluntary amounts that may or may or may not be paid by customers for services rendered to them would not, therefore, fall within section 15(b) at all. Also, it was clear that salary must be paid or allowed to an employee in the previous year “by or on behalf of” an employer. Even assuming that the expression “allowed” is an expression of width, the salary must be paid by or on behalf of an employer. Section 15(b) necessarily has reference to the contract of employment between employer and employee, and salary paid or allowed must therefore have reference to such contract of employment. On the facts of the present case, it was clear that the amount of tips paid by the employer to the employees had no reference to the contract of employment at all. Tips were received by the employer in a fiduciary capacity as trustee for payment that were received from customer. There was, therefore, no reference to the contract of employment when these amount were paid by the employer to the employee.

The Supreme Court noted that it was nobody’s case that the amount of tips received by the employees in the present cases were not taxable in their hands. The learned counsel for the assessees had stated that they were so taxable as income from other sources. The question that it had to determine was therefore somewhat different, namely whether the person responsible for paying salary income to his employee is liable to deduct the tax of the employee and pay it over on an estimated basis u/s. 192 of the Income-tax Act.

The Supreme Court held that contract of employment in the present cases, not being the proximate cause for the receipt of tips by the employee from a customer, the same would be outside the dragnet of sections 15 and 17 of the Income-tax Act.

The Supreme court further held that interest u/s. 201(1A) could only be levied when a person is declared as an assessee-in-default. Having found that the appellants in the present cases were outside section 192 of the Act, the appellant could not be stated to be assessees-in-default and hence no question of interest therefore arose.

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University – Exemption – Conditions Precedent – University must exist solely for education and must be wholly or substantially financed by Government

Visvesvraya Technological University vs. ACIT (2016) 384 ITR 37 (SC)

The appellant University, namely, Visvesvaraya Technological University (VTU) had been constituted under the Visvesvaraya Technological University Act, 1994. It discharged functions earlier performed by the Department of Technical Education, Government of Karnataka. The University exercised control over all Government and Private Engineering Colleges within Karnataka.

For the assessment year 2004-05 to 2009-10 notices u/s. 148 of the Income-tax Act, 1961 were issued to the appellant-University assessee. Eventually returns were filed for the assessment years in question declaring “nil” income and claiming exemption u/s. 10(23C)(iiiab) of the Act. The aforesaid claim of exemption was negated by the Assessing Officer who proceeded to make the assessments. The same view has been by all the authorities under the Act and also by the High Court.

The question, therefore, that arose before the Supreme Court in the present appeals was the entitlement of the appellant-University-assessee to exemption from payment of tax under the provisions of section 10(23C) (iiiab) of the Act.

The Supreme Court observed that the entitlement for exemption u/s. 10(23C)(iiiab) was subject to two conditions. Firstly the educational institution or the university must be solely for the purpose of education and without any profit motive. Secondly, it must be wholly or substantially financed by the Government. Both conditions would have to be satisfied before exemption could be granted under the aforesaid provision of the Act.

The Supreme Court noted that the relevant principles of law which governed the first issue, i.e., whether an educational institution or a university, as may be, exists only for educational purpose and not for profit was no longer res integra and was decided by it in Queen’s Educational Society vs. CIT(372 ITR 699).

The Supreme Court, in the present case, found that during a short period of a decade, i.e., from the year 1999 to 2010 the appellant University had generated a surplus of about Rs.500 crore. There was no doubt that the huge surplus had been collected/accumulated by realising fees under different heads in consonance with the powers vested in the University u/s. 23 of the VTU Act. The difference between the fees collected and the actual expenditure incurred for the purposes for which fees were collected is significant. In fact the expenditure incurred represented only a minuscule part of the fees collected. No remission, rebate or concession in the amount of fees charged under the different heads for the next academic year(s) had been granted to the students.

As against the above, the amount of direct grant from the Government has been meagre. The University nevertheless had grown and the number of private engineering colleges affiliated to it had increased from about 64 to presently about 194. The infrastructure of the University has also increased offering educational avenues to an increasing number of students in different and varied subjects.

Between 1994 and 2009 the University had actually spent about Rs.504 crore on infrastructure and the available surplus in the year 2010 which was in the range of Rs. 440 crore was also intended to be applied for different infrastructural work.

Even in a situation where direct Government grants had not been forthcoming and allocation against permissible heads like salary, etc. had not been made the University had thrived and prospered. There could, however, be no manner of doubt that the surplus accumulated over the years had been ploughed back for educational purpose. In such a situation, following the principles laid down in Queen’s Educational Society (supra), the Supreme Court held that the first requirement of section 10(23C)(iiiab), namely, that the appellant University existed “solely for educational purposes and not for purposes of profits” was satisfied.

As to the further question as to whether the appellant University was wholly or substantially financed by the Government which was an additional requirement for claiming benefit u/s. 10(23C)(iiiab) of the Act, it was not in dispute that grants/direct financing by the Governtment during the six (06) assessment years in question, i.e., 2004-05 to 2009-10 had never exceeded 1 per cent of the total receipts of the appellantuniversity assessee.

The argument advanced before the Supreme Court by the University that fees of all kinds collected within the four corners of the provisions of section 23 of the VTU Act must be taken to be receipts from sources of finance provided by the Government. The rates of such fees are fixed by the Fee Committee of the University or by authorized Government Agencies (in case of Common Entrance Test). It was , therefore, contended that such receipts must be understood to be funds made available by the Government as contemplated by the provisions of section 10(23C)(iiiab) of the Act.

The Supreme Court held that receipts by way of fee collection of different kinds continued to be a major source of income for all universities including private universities. Levy and collection of fees was invariably an exercise under the provisions of the statute constituting the University. In such a situation, if collection of fees was to be understood to be amounting to funding by the Government merely because collection of such fees was empowered by the statue, all such receipts by way of fees may become eligible to claim exemption u/s. 10(23C) (iiiab). Such a result would virtually render the provisions of the other two sub-sections, namely, 10(23c)(iiiad) and 10(23c)(vi) nugatory and could not be understood to have been intended by the Legislature and must, therefore, be avoided.

According to the Supreme Court, it would therefore, be more appropriate to hold that funds received from the Government contemplated u/s. 10(23C)(iiiab) of the Act must be direct grants/contributions from government sources and not fees collected under the statute.

Before the Supreme Court , reliance had been placed on the judgment of the High Court of Karnataka in CIT vs. Indian Institute of Management [370 ITR 81], particularly, the view expressed that the expression “wholly or substantially financed by the Government” as appearing in section 10(23C) could not be confined to annual grants and must include the value of the land made available by the Government. The Supreme Court noted that in the present case, the High Court in paragraph 53 of the impugned judgment has recorded that even if the value of the land allotted to the University (114 acres) was taken into account the total funding of the University by the Government would be around 4 per cent to 5 per cent of its total receipt. That apart what was held by the High Court in the above case, while repelling the contention of the Revenue that the exemption u/s. 10(23C)(iiiab) of the Act for a particular assessment year must be judged in the context of receipt of annual grants from the Government in that particular year, is that apart from annual grants the value of the land made available; the investment by the Government in the buildings and other infrastructure and the expenses incurred in running the institution must all be taken together while deciding whether the institution is wholly or substantially financed by the Government. The Supreme Court held that situation before it, on facts, was different leading to the irresistible conclusion that the appellant university did not satisfy the second requirement spelt out by section 10(23C)(iiiab) of the Act. The appellants University was neither directly nor even substantially financed by the Government so as to be entitled to exemption from payment of tax under the Act.

The Supreme Court for the aforesaid reasons dismissed the appeals.

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Wealth Tax – Asset – Definition – Urban Land – Exclusions –Land occupied by any building which has been constructed with the approval of the appropriate authority would not include land occupied by any building which is still under construction.

Girdhar G. Yadalam vs. CWT (2016) 384 ITR 52 (SC)

The assessee, a Hindu undivided family which was the coowner of a land measuring 30,663.04 sq. metres, situated at survey No.67/2, 67/3, 67/4 and 67/5 of Adugodi Village and a portion of survey No.151 of Kornamangala Village of Begur Hobli of Bangalore South Taluq, Bangalore District, bearing City Survey No.CTS/2. The assessee entered into various development agreements with one M/s. Prestige Estates Properties Private Ltd. for construction of residential flats. The assessee claimed that it had retained ownership of the land until flats are fully constructed and possession of the assessee’s share was handed over to it. The development agreement constituted only permissive possession according to the assessee for the limited purpose of construction of flats. The assessee contended that the assessee continued to be the owner of the land for the financial years 1995-96 and subsequent years till the sale of flats. Notice u/s. 17 of the Act was issued to the assessee and he filed return of wealth of Rs.8,48,000 on August 20, 2003. After considering the contention to not to treat the property as urban land, the Assessing Officer brought it to tax under an order dated March 31, 2005. An appeal was filed before the Assistant Commissioner of Income Tax (Appeals), Bangalore. The appeal stood allowed in the light of an earlier order of the Tribunal. The Revenue thereafter filed an appeal to the Tribunal. The Tribunal following its earlier decision dismissed the appeal filed by the Revenue. The Revenue took up the matter in further appeals before the High Court of Karnataka. The High Court upset the order of the Income-tax Appellate Tribunal holding that the assessee was not entitled to the benefit of clause (ii) of Explanation 1(b) to section 2 (ea)(v) of the Act, as the building had not been constructed and was still under construction during the assessment year.

The Supreme Court at the outset noted that in the present case it was concerned with the interpretation that is to be accorded to the provisions of Explanation 1(b) to section 2(ea)(v) of the Wealth-tax Act, 1957. This Explanation defines “urban land”.

The Supreme Court observed that it was not in dispute that “urban land” is to be included to calculate “net wealth” for the purpose of wealth tax under the Act. However, certain lands are not to be treated as “urban land” which are mentioned in Explanation 1(b). But section 2(ea) of the Act was inserted by the Finance Act 1992 (Act No.18 of 1992), with effect from April 1, 1993. The purpose was to exempt some of the lands from wealth-tax with the objective of stimulating investment in productive assets. It is in that context that the land occupied by any building which has been constructed with the approval of the appropriate authority is excluded from the definition of urban land. On a plain reading of the said clause it becomes clear that in order to avail of the benefit, the following conditions have to be satisfied:

(a) The land is occupied by any building;
(b) Such a building has been constructed;
(c) The construction is done with the approval of the appropriate authority.

The Supreme Court noted that notwithstanding the aforesaid plain language; an endeavour of the Counsel for the assessee was to impress upon the Court to read the said clause to include even that land where the construction of building activity has been started. He, thus, wanted that the words “has been constructed” is to be read as “is being constructed”.

The Supreme Court held that on the plain language of the provision in question, the benefit of the said clause would be applicable only in respect of the building “which has been constructed”. The expression “has been constructed” obviously cannot include within its sweep a building which is not fully constructed or in the process of construction. The opening words of clause (ii) also become important in this behalf, where it is stated that “the land occupied by any building”. The land cannot be treated to be occupied by a building where it is still under construction.

No doubt, the purpose and objective of introducing section 2(ea) in the Act was to stimulate productive assets. However, the event when such a provision is to be attracted is also mentioned in Explanation 1(b) itself carving out those situations when the land is not to be treated urban land. The Legislature in its wisdom conferred the benefit of exemption in respect of urban vacant land only when the building is fully constructed and not when the construction activity has merely started.

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Taxability of Foreign Salary Credited to NRE Bank Account

ISSUE FOR CONSIDERATION

Section 5 of the Income Tax Act, 1961 (“the Act”) lays down the scope of total income. Sub-section (2) of that section lays down the scope of the total income of a nonresident. It provides as under:

“(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived, which:
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) which accrues or arises or is deemed to accrue or arise to him in India during such year.”

Explanation 2 to this section clarifies that income, which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him, shall not again be so included on the basis that it is received or deemed to be received by him in India.

It is usual to come across cases where a person, not resident under the Act, receives some money in India, the income whereof has accrued outside India; for example, Indian citizens employed abroad, regarded as non-residents for the purposes of the Act, depositing their salary in India for the services rendered out of India . Similarly, crew of a foreign ship or an Indian ship who leave India on account of their employment on the ship, non-residents under the Act, depositing the salary In India, is another example.

Many such persons, may request their foreign employers to credit their salaries to their Non-Resident (External) bank accounts (“NRE accounts”) maintained with banks in India. An issue has arisen before different benches of the Income Tax Appellate Tribunal regarding the taxability in India of such foreign salaries credited to NRE accounts. While the Agra bench of the tribunal has taken the view that such salaries are not taxable in India, the Kolkata bench of the tribunal has recently taken a contrary view, holding that such salaries are taxable in India.

Arvind Singh Chauhan’s case
The issue first came up before the Agra bench of the tribunal in the case of Arvind Singh Chauhan vs. ITO 147 ITD 509.

In this case, the assessee was a crew member of a ship, who was employed with a Singapore company. His employment letter was issued by the foreign employer’s agent in India. He worked on merchant vessels and tankers plying on international routes. His salary was directly credited by his employer to his NRE account with HSBC Bank in Mumbai.

His stay in India during the relevant previous year was less than 182 days, and hence his residential status was nonresident. In the income tax return filed by the assessee, the salary received from the Singapore company was not offered to tax. However, his income from pension received from Government of India and interest were offered for taxation.

During the course of assessment proceedings, when the assessee was asked to show cause as to why the salaries received from the Singapore company for services rendered as a crew member of a ship should not be taxed in India, the assessee argued that since such salary was accruing and arising outside India, it was outside the scope of section 5(2).

As regards the fact that the salary was directly credited to a bank account in India, the assessee argued that salary income deposited in a bank account in India directly from the bank account of his employer outside India and as such was not taxable in India. Reliance was placed on the decisions in the cases of DIT vs. Prahlad Vijendra Rao 198 Taxmann 551 (Kar), DIT vs. Diglan George Smith 40(1) ITCL 419 and ITO vs. Lohitakshan Nambiar (ITA No 1045/Bang/09 dated 12.4.2010).

The AO did not accept the assessee’s explanation, on the ground that since the assessee’s status for income from pension and interest was that of resident, as a result his status for all sources of income was to be taken as a resident. In addition the AO held that the salary income accrued in India by relying on the Supreme Court decision in the case of CIT vs. Shri Govardhan Ltd 69 ITR 675, for the proposition that if an assessee acquires a right to receive income, the income is said to have accrued to him, even though it may be received later on its being ascertained. According to the AO by receiving the appointment letter in India from the agent of the foreign employer and details of salary to be paid, the assessee got the right to receive the salary. Importantly, the AO relied on the fact that the salary cheques were credited to the assessee’s account with HSBC bank in India and hence the income was received in India.

The Commissioner (Appeals) upheld the order of the AO, holding that the salary income accrued in India as well as was received in India, and was therefore taxable in India.

The Tribunal noted the fact that the AO had himself noted the number of days of the assessee’s stay outside India as per his passport, and categorically found that his status u/s. 6 was that of a non-resident. The tribunal held that the AO was wrong in holding that the assessee was a resident in India on account of the fact that he had offered interest and pension income in his taxable income, given the fact that both the pension and interest accrued and were received in India, the pension being payable by a former employer in India. The mere taxability of such pension and interest in India would not result in the inference that the assessee was a resident of India, since such incomes were taxable in India even in the case of a non-resident.

Examining the scope of total income in the case of a nonresident, the tribunal noted that it was only when one of the 2 conditions – i.e. income was received or was deemed to be received in India by or on behalf of the nonresident or income accrued or arose or was deemed to accrue or arise to the non-resident in India – was fulfilled, that the income of a non-resident could be brought to tax in India. The tribunal held that salary was compensation for services rendered by an employee, and therefore situs of its accrual was the situs of services being rendered, for which salary was paid. It noted that in the case of CIT vs. Avtar Singh Wadhwan 247 ITR 260, the Bombay High Court had held that income from salary, even in the case of crew of an Indian vessel operating in international waters, was to be treated as having accrued outside India. According to the tribunal, it was incorrect to assume that an employee got a right to receive the salary just by getting an appointment letter, because unless services were rendered, no right to receive salary accrued to an employee. Therefore, according to the tribunal, the assessee got the right to receive salary income when he rendered the services, and not when he received the appointment letter.

The tribunal next considered the aspect of whether the income was received in India, since the salary cheques were credited to the assessee’s account with HSBC, Mumbai. According to the tribunal, the law was clear that receipt of income for this purpose referred to the first occasion when the assessee got the money in his own control, real or constructive. What was material was the receipt of income in its character as income, and not what happened subsequently, once the income, in its character as such, was received by the assessee or his agent. An income could not be received twice or on multiple occasions. The bank statement of the assessee clearly revealed that these were US dollar denominated receipts from the foreign employer credited to the NRE account of the assessee with HSBC, Mumbai.

The tribunal noted that the assessee was in lawful right to receive those monies as an employee at the place of employment, i.e. at the location of his foreign employer. It was a matter of convenience that the monies were thereafter transferred to India. According to the tribunal, these monies were at the disposal of the assessee outside India, and it was in exercise of his rights to so dispose of the money, that monies were transferred to India. The tribunal referred to the decision of the Madras High Court in the case of CIT vs. A P Kalyanakrishnan 195 ITR 534, where the assessee’s pension from the Malaysian government was remitted by the Accountant General of Malaysia to the Accountant General, Madras, for onward payment to the assessee. While rejecting the contention of the revenue that the pension was to be regarded as having been received in India, the court in that case had observed that the pension payable to the assessee had accrued in Malaya, and only thereafter by an arrangement embodied in the letter…………, the pension had been remitted to the assessee in India and been made available to him. The Madras High Court had therefore held that the assessee had to be regarded as having received the income outside India and that the pension had been remitted or transmitted to the place where the assessee was living, as a matter of convenience, which would not constitute receipt of pension in India by the assessee.

According to the tribunal, once an income was received outside India, whether in reality or on constructive basis, the mere fact that it had been remitted to India would not be decisive on the question as to whether the income was to be treated as having been received in India. The tribunal observed that the connotation of an income, having been received and an amount having been received were qualitatively different. The salary amount was received in India in this case, but the salary income was received outside India. The tribunal further noted that it was elementary that an income could not be taxed more than once, but, if at each point of receipt, the income was to be taxed, it may have to be taxed on multiple occasions. The tribunal therefore held that in a situation in which the salary had accrued outside India, and thereafter, by an arrangement, salary was remitted to India and made available to the employee, it would not constitute receipt of salary in India by the assessee, so as to trigger taxability under section 5(2)(a). The tribunal therefore deleted the addition of the salary amount credited to the NRE bank account in India.

Tapas Kr Bandopadhyay’s case
The issue again came up recently before the Kolkata bench of the tribunal in the case of Tapas Kr Bandopadhyay vs. DyDIT 70 taxmann.com 50.

In this case, the assessee was a marine engineer, who was a non-resident. During the year, he was engaged with an Indian company and a Singapore company as a marine engineer, working in international waters, and received remuneration from both the companies. His contract of service with the Indian/foreign shipping company was executed in India with an agent, before joining the ship. His residential status was non-resident, on account of the fact that he was outside India for more than 182 days, sailing in international waters. The salary incomes were received by credit to the assessee’s NRE accounts with banks in India.

The assessee claimed that the salary incomes were exempt from tax, being received from outside India in foreign currency. The assessing officer accepted the residential status of the assessee as a non-resident, after verification of the passport and other details. He, however, asked the assessee to show cause as to why the incomes received in India by way of credit to the NRE accounts maintained in India should not be taxable, since the income received in India was taxable in case of nonresidents. The assessee responded by stating that the entire amount was received in foreign currency outside India and were credited to his NRE accounts in India, and that the amounts received in foreign currency could not be deemed to be received in India. It was also pointed out that only foreign currency could be deposited in NRE account, and hence the amounts credited to the NRE account were received outside India. The assessing officer rejected the assessee’s contention that amounts received in foreign currency were not taxable in India, and observed that any income received or deemed to be received in India was taxable in India, irrespective of the currency in which such amounts were received.

The assessing officer observed that income received in India was taxable in all cases (whether accrued in India or elsewhere), irrespective of residential status of the assessee. According to the assessing officer, the meaning of the term “income received in India” was significant. If the place where the recipient got the money on the first occasion under his control was in India, it would be income received in India. In the case before him, since the income was remitted by the employer to the bank accounts of the assessee maintained in India, the assessee got the money under his control for the first time in India. The assessing officer, therefore, taxed the salaries for the services rendered overseas, received by the assessee by credit to his bank accounts from his employers.

Before the Commissioner (Appeals), on behalf of the assessee, it was argued that:

(a) The assessee was a non-resident rendering services outside India.

(b) The payments were being made by a foreign company outside India and the foreign company did not have any permanent establishment in India.

(c) The point of payment was to be taken into consideration for determining the provisions of section 5(2)(a) of the Income Tax Act and the point of payment should be considered as the point of receipt.

(d) It was immaterial that the payment was being transferred by the foreign company or remitted by the foreign company to the NRE accounts in foreign exchange in India, because payments had been made by the foreign company outside India and the point of payment was to be taken as the point of receipt.

(e) The amount which was received by the assessee from the foreign company was in foreign exchange and therefore income could not be said to have been received in India, where payment had been received in foreign currency.

(f) The provisions of section 5(2)(a) had to be interpreted in a manner that it did not render the section meaningless. If interpretation as made out by the Department was adopted, then definitely the section would be otiose and meaningless, because no benefit would be given to non-residents, even if all the conditions had been satisfied.

(g) The true interpretation of the provisions of section 5(2)(a) to be adopted for income received or deemed to be received in India, was that the payments had been made in India in Indian currency and the recipient of the payments had received payments in Indian currency.

The Commissioner (Appeals) rejected the assessee’s arguments, and upheld the order of the assessing officer.

Before the tribunal, on behalf of the assessee, reliance was placed on the decisions of the Karnataka High Court in the case of Prahlad Vijendra Rao (supra) and of the Bombay High Court in the case of Avtar Singh Wadhwan (supra). Reliance was also placed on the decision of the Agra bench of the tribunal in the case of Arvind Singh Chauhan (supra).

On behalf of the revenue, it was argued that income will get included in the total income of a non-resident through any of the four modes prescribed in section 5(2). All the four modes stood on their own legs, or else the enactment would be rendered redundant. There was no specific section in the Act, which dealt with income accruing or arising to any person only in India, though section 5(2) (b) used the term “accrues or arises to him in India”. The context of this term was provided by section 5(1)(c), which mentioned that total income of a person resident in India included all income from whatever source, which accrued or arose to him outside India. This was the reason that the main charging section, section 4, did not make any reference to the words “in India”, as it had to provide a basis of charge for both – income accruing or arising to a person in India as well as income accruing and arising to a person outside India. The charging section did not have a territorial bias. Similarly, section 15(a) also did not reflect any locational preference, as salary could become due to an assessee anywhere in the world. Salary due from an employer was taxable, whether paid or not.

Reliance was placed on the observations of the Supreme Court in the case of CIT vs. L W Russell 53 ITR 91, where the Supreme Court had held as under:

“the expression ‘due’ followed by the qualifying clause ‘whether paid or not’ shows that there shall be an obligation on the part of the employer to pay that amount, and a right on the employee to claim the same.”

Therefore, it was argued that taxation of salary was on the basis of the contractual right of the employee to receive his salary, and nothing else, and it had no relation with location or place of services rendered or to where the amount had become due. The place where it had become due and the place where service was rendered did not form a basis of charge u/s. 15.

It was further argued on behalf of the revenue that though the assessee had rendered services outside India, he had received salary in India by way of fund transfer from the foreign company directly to the NRE account of the assessee in India. It was argued that the receipt contemplated u/s. 5(2)(a) was actual receipt. Hence, such income was actually received in India and was taxable in India. Reliance was placed on the Third Member decision of the Mumbai bench of the tribunal in the case of Capt A L Fernandez vs. ITO 81 ITD 203, which was claimed to be directly on the point. The Bombay and Karnataka High Court decisions relied upon by the assessee were sought to be distinguished by the revenue, on the ground that they were rendered in the context of taxability u/s. 5(2)(b), and not section 5(2)(a), and that they did not frame any question of law.

The tribunal noted that the scheme of the Act was such that the charge of tax was made independent of territoriality, residency and currency. According to the tribunal, the assessee was only trying to introduce one more layer to the entire transaction, that the assessee had the control over his money in the form of salary income in international waters, and for the sake of convenience, he had instructed the foreign employer to send the monies to his NRE account in India. The assessee’s argument was that what was brought into India was not the salary income, but only the salary amount. The tribunal, however, held that there was no evidence brought on record to prove that the assessee had control over his salary income in international waters.

The tribunal further observed that if this argument of the assessee were to be accepted, then the assessee went scot-free, not paying tax anywhere in the world on this salary income. According to the tribunal, the provisions of section 5(2)(a) were probably enacted keeping in mind that income has to suffer tax in some tax jurisdiction. The tribunal observed that it believed that such provisions would exist in tax legislation of all countries.

The tribunal held that if the argument of the assessee were to be accepted, it would make the provisions of section 5(2)(a) redundant. A statutory provision was to be interpreted to make it workable rather than redundant. In case of non-residents, the scope of total income had four modes, one of which was receipt in India from whatever source derived. If this was construed to mean that income from whatever source should first accrue or arise in India, and then it should be received in India to be included u/s. 5(2)(a), then section 5(2)(a) would lose its independence and would become a subset of section 5(2)(b). There would then not be any need for having section 5(2)(a) on the statute.

The tribunal noted that the issue before the Bombay High Court in the case of Avtar Singh Wadhwan (supra) was about the place of accrual of income, and the court held that income accrued in the place where the services were rendered, which in that case, was admittedly outside India. According to the tribunal, the Bombay High Court did not deliberate upon the fact whether the receipt of the income was in India, as the issue was only about the place of accrual of income in the context of section 5(2) (b). This decision was followed by the Karnataka High Court in case of Prahlad Vijendra Rao (supra).

Addressing the argument of the assessee that salary was received on the high seas, and by way of convenient arrangement, was directed to be deposited in the NRE account of the assessee in India, the tribunal raised the question whether a person could receive salary on high seas. According to the tribunal, the only possibility of receiving salary on board a ship on high seas was to receive it in physical currency. The tribunal observed that it was not the assessee’s case that the physical currency got deposited in the NRE account. The money was transferred from the employers account outside India to the assessee’s NRE account in India.

Referring to the decision of the Agra bench of the tribunal in the case of Arvind Singh Chauhan (supra), the Kolkata tribunal observed that this decision was based on the decision of the Madras High Court in the case of Kalyanakrishnan (supra). In that case, the facts were distinguishable from the facts of the case before it, as the income in that case was taxable in Malaysia. In the case before the Kolkata tribunal, the income did not suffer tax in any other jurisdiction nor was it received in any other tax jurisdiction. The receipt in the NRE account in India was the first point of receipt by the assessee, and according to the tribunal, prior to that, it could not be said that the assessee had control over the funds that had been deposited in the NRE account by the employer. Based on the Madras High Court decision, the Agra bench had held that the assessee had a lawful right to receive the salary as an employee at the place of employment, i.e. at the location of his foreign employer, and it was a matter of convenience that the monies were thereafter transfer to India. The Kolkata tribunal observed that in section 5(2) (a), right to receive salary was not the relevant criterion, but the relevant criterion was the receipt of payment, which was admittedly in India. The Kolkata tribunal therefore expressed its doubts as to the applicability of the Madras High Court decision in Kalyanakrishnan’s case to the facts before it.

Finally, the Kolkata tribunal placed reliance on the Third Member decision of the Mumbai tribunal in the case of Capt A L Fernandes (supra), where the Mumbai tribunal held that there was a clear finding and there was no dispute that the salary was received in India. Since the ships were not regarded as part of India, the services were rendered outside India. However, since the salary was received in India, it was held to be taxable in India u/s. 5(2)(a). According to the Kolkatta tribunal, this decision clearly laid down that receipt in India of salary for services rendered on board a ship outside the territorial waters of any country would be sufficient to give the country where it was received, the right to tax the income on a receipt basis. The Kolkatta tribunal also noted that the Third Member decision was not brought to the notice of the Agra tribunal, when it decided the issue.

Since a Third Member decision was equivalent to a Special Bench decision, the Kolkata tribunal followed the Third Member decision, holding that salary was received in India by credit to the NRE account of the employee was taxable in India by virtue of the provisions of section 5(2)(a).

Observations
The issue really is whether the assessee can be said to have obtained control over his salary at the place where his employer is located, and therefore whether the receipt of the salary is outside India. While the Agra bench of the tribunal was of the view that the assessee obtained control over his salary at the place where his employer was located, as he had a right to receive the salary at that location, the Kolkatta bench was of the view that the assessee had not obtained control over his salary at the location of the foreign employer merely on account of the contract of employment.

Interestingly, the Supreme Court in the cases of Raghava Reddi vs. CIT 44 ITR 720 and Standard Triumph Motor Co Ltd v CIT 201 ITR 391, has held that crediting the account of the assessee in the books of the payer Indian company amounted to a receipt by the foreign company in India.

In Raghava Reddi’s case, the Supreme Court observed:
“This leaves over the question which was earnestly argued, namely, whether the amounts in the two account years can be said to be received by the Japanese company in the taxable territories. The argument is that the money was not actually received, but the assessee firm was a debtor in respect of that amount and unless the entry can be deemed to be a payment or receipt, clause (a) cannot apply. We need not consider the fiction, for it is not necessary to go to the fiction at all. The agreement, from which we have quoted the relevant term, provided that the Japanese company desired that the assessee firm should open an account in the name of the Japanese company in their books of account, credit the amounts in that account, and deal with those amounts according to the instructions of the Japanese company. Till the money was so credited, there might be a relation of debtor and creditor; but after the amounts were credited, the money was held by the assessee firm as a depositee. The money then belonged to the Japanese company and was held for and on behalf of the company and was at its disposal. The character of the money changed from a debt to a deposit in much the same way as if it was credited in bank to the account of the company. Thus, the amount must be held, on the terms of the agreement, to have been received by the Japanese company, and this attracts the application of section 4(1)(a). Indeed, the Japanese company did dispose of a part of those amounts by instructing the assessee firm that they be applied in a particular way. In our opinion, the High Court was right in answering the question against the assessee.”

In Standard Triumph Motor Co Ltd’s case, royalty income payable to the assessee was credited by the Indian company to the account of the assessee in its books of account at the end of each year. The Supreme Court observed:

“the credit entry to the account of the assessee in the books of the Indian company does amount to its receipt by the assessee and is accordingly taxable and it is immaterial when did it actually receive it in the UK.”

Therefore, where the foreign employer were to credit the account of the employee in its books of account in respect of the liability to pay salary, and were then to remit the money to India, it would amount to receipt of the salary income outside India in the first place on credit of the salary to the employee’s account.

One of the aspects, which needs to be borne in mind, is the issue of non-taxability of such income in any country, if it is not taxed on a receipt basis in India. Today, one of the major issues which countries are seeking to tackle is the issue of double non-taxation, through amendment of tax treaties. The Kolkata tribunal, in a way, seeks to address this aspect through its decision, though no tax treaties were involved in this case.

In the case of Capt A. L. Fernandes, the other issue which was decided by the Mumbai tribunal was that the salary income actually accrued or arose in India, on account of the contract of employment being signed in India, and all rights flowing from that also being enforceable in India, and therefore the concept of deemed accrual u/s 9(1) was irrelevant for the purpose. Therefore, the corollary of sections 9(1)(ii) and 9(1)(iii) could not be applied for the purpose. Interestingly, the Kolkata tribunal did not refer to or follow this aspect of the decision, when deciding the case before it, though in the facts of the case before it, the contracts of employment were signed in India.

Possibly, this is on account of the fact that the Bombay High Court had clearly held in the case of Avtar Singh Wadhwan (supra) that the relevant test to be applied to decide if income accrued to a non- resident in India or outside India, is where services are rendered, and not where the contract is signed. The Karnataka High Court also, in the case of Prahlad Vijendra Rao (supra), held that u/s. 15 of the Act, even on accrual basis, salary income is taxable i.e., it becomes taxable irrespective of the fact whether it is actually received or not; only when services are rendered in India it becomes taxable by implication. However, if services are rendered outside India, such income would not be taxable in India.

Lastly, while perhaps the view of the Kolkata Tribunal does seem to be the better position based on a strict reading of the provisions, one also needs to consider the fact that in both the cases, the salaries were credited to an NRE account with a bank in India. For all practical purposes, under the Foreign Exchange Management Act, such an account is treated as the equivalent of a foreign bank account of the depositor outside India – transfers from Non-Resident Ordinary accounts (which are nonrepatriable) to such NRE accounts are governed by the procedures applicable to repatriation of funds overseas, transfer of funds from such accounts overseas is freely permissible, interest on such accounts is not taxable, etc. Given this situation, should amounts received in such NRE bank accounts not be regarded as having been received outside India? What purpose would be served by having Indian citizens open overseas bank accounts to receive their foreign salaries in the first instance, just to save on tax on such salaries?

The CDBT has come out with clarifications in the past, regarding the residential status of seafarers operating on ships in international waters, and taxability of their salary. In order to avoid further litigation, and unnecessary reduction of inflows into NRE accounts, it would be better for the CBDT to clarify that such foreign salaries credited to NRE accounts of seafarers or other NRIs would not be regarded as having been received in India.

shailesh.kwebmaker

19 Articles 5, 12 and 22 of India-UAE DTAA – The threshold of nine months for a service PE is to be calculated based on actual period for which services are rendered including the period during which services are rendered virtually and is not to be limited only to period during which the employees are physically present in India.

TS-256-ITAT-2017(BANG)

ABB FZ – LLC vs. DCIT

A.Ys: 2010-11 and 2011-12

Date of Order: 21^stJune 2017

Facts

The Taxpayer, a company
incorporated in the UAE, was engaged in the business of providing regional
services for the benefit of its group entities in India, the Middle East and
Africa. During F.Y. 2009-10 and 2010-11, Taxpayer entered into a regional
headquarter service agreement with its group entity in India (ICo) to provide
managerial and consultancy services comprising Occupational Health and Safety
(OHS) service, Security Service, Project Risk Management Service and Market
Development Service. These services were rendered by the Taxpayer’s employees
either by visiting India or remotely from outside India through email, phone
calls, video conferencing, etc. During the year, the employees of
Taxpayer were present in India for a period of 25 days.

The Taxpayer claimed income was
not taxable in India on the ground that:

– in the absence of FTS Article in India-UAE
DTAA, such income would fall under Article 22 – ‘Other Income’;

– in terms of Article 22 of the India-UAE DTAA,
such income would be taxable in India only if the UAE company had a PE in
India;

– the UAE company did not have any PE in India
(including a service PE) since the stay of its employees was only for 25 days
in aggregate during the given year which did not cross the 9-month threshold
under Article 5 – ‘Permanent Establishment’; and

– accordingly, income from such services
agreement was not taxable in India.

Assessing Officer (AO)
contended that the income was taxable in India as “royalty” under the Act as
well as the India-UAE DTAA. Aggrieved by the draft order of AO, Taxpayer
appealed before the DRP, which subsequently upheld order of AO. Aggrieved, the
Taxpayer filed an appeal before the Tribunal.

Held

– In absence of a valid tax residency certificate
for the relevant financial year, it was held that Taxpayer was not eligible to
claim the benefit of India-UAE treaty. Tribunal, however proceeded to decide on
the merits of non-taxability of payments made by ICo to the Taxpayer as
follows:

– The Taxpayer merely provided access to
industrial, commercial or scientific experience acquired by it to ICo. Such
information was not available in public domain and could not be acquired by ICo
on its own effort.

– Performing specialised services for a party
is different from transferring of specialised knowledge or skill. The Taxpayer
provided information pertaining to industrial, commercial or scientific
experience and also permitted ICo to use such confidential information. Hence,
the consideration received by Taxpayer from ICo qualifies as ”royalty” under
the Act as well as the DTAA.

– The requirement under the DTAA for creation
of service PE is that services including consultancy services should be
rendered by an enterprise through its personnel or other employees for a period
exceeding nine months within any 12 month period. It does not require that the
employees should also be present within India for a period exceeding
nine months.

– Undisputedly, the Taxpayer was providing
“consultancy services” in India “through its employees. Further considering
that the services could easily be provided by the Taxpayer, remotely through
virtual modes like email, internet, video conferencing etc. without
physical presence of employees, the threshold of 9-month was to be treated as
being satisfied on the facts of the case. Thus, the Taxpayer constituted a
service PE in India under the DTAA.

PS: Having decided on the
fact that the payment qualified as royalty and Taxpayer triggered Service PE in
India, the Tribunal did not further rule on the issue whether such payments
would be taxable as royalty income or

business income.

shailesh.kwebmaker

18 Chapter X, Sections 4 and 5 of the Act –– Chapter X provides manner of computation of income from international transaction – Income so computed to be considered for calculating total income u/s. 5 of the Act.

TS-346-ITAT-2017(Bang)-TP

Insilca Semiconductors India Pvt. Ltd vs. ITO

A.Y.: 2007-08, Date of Order: 15^th March, 2017

Facts

Taxpayer was an Indian company.
During the course of assessment proceedings, TPO made certain transfer pricing
adjustments in relation to income from software development services. Taxpayer
contended that the charging provisions u/ss. 4 and 5 do not refer to Chapter X
dealing with transfer pricing provisions. Hence, any addition made under
Chapter X cannot be subjected to tax under the Act.

However, AO rejected the contentions of the Taxpayer.
Aggrieved by the order of AO, Taxpayer appealed before the CIT(A) who upheld
the order of AO. Subsequently, Taxpayer appealed before the Tribunal.

Held

– Section
4 of the Act levies tax on Total Income. Further, section 5 of the Act
provides that total income includes all income received or deemed to be
received in India or accrues or arises or is deemed to accrue or arise in India
or income accrues or arises to him outside India.

– Income under consideration is taxable in
India as the same is falling within the scope of sections 4 and 5 of the Act. Moreover, income is to be
computed after deducting various expenses incurred for earning taxable revenue.

– Chapter X provides the manner of computation
of income from international transaction. No dispute can be raised about
applicability of Chapter X in computing the total income, unless the
international transaction in respect of which addition is made is exempt from
tax.

– Section 5 provides that total income is to be
computed subject to the provisions of this Act. Hence the total income u/s. 5
is inclusive of various incomes. Chapter X is part of the Act. Therefore, the
same has to be applied wherever applicable. Accordingly, the contention that
income computed under Chapter X is not taxable under the Act is not tenable.

shailesh.kwebmaker

Society News – II

GST Seminar at Ahmedabad
jointly with CA Association of Ahmedabad
held on 23, June, 2017

BCAS held a one day seminar on GST jointly with Chartered
Accountants’ Association of Ahmedabad (CAA). The object of the conference was
to disseminate the views of eminent faculties who have carried out in depth
study of newly enacted law of GST together with their vide experience in
profession. CA Puloma Dalal, CA Chirag Mehta and CA Dushyant Bhatt, faculties
from our Society spoke on various areas of GST at length at the full day
seminar. The seminar was attended by 85 participants.

CA. Puloma Dalal

CA. Chirag Mehta

CA. Dhushyant Bhatt

In the first session CA
Puloma Dalal gave the participants an overview of GST law including the concept
of Supply under GST and provisions relating to liability to pay Tax and Time
and Value of Supply

CA Chirag Mehta gave a
detailed presentation on provisions relating to return filing and took the
participants through the process of filing of returns. He also discussed the
statutory provisions relating to Input Tax Credit under the GST Law and the
concept of matching of ITC under the GST Law

CA Dushyant Bhatt
discussed the provisions relating to job work and dealt with various issues to
be addressed by the entity carrying out job work as well as by the entity
sending material for job work, payment of tax, TDS and E-Commerce provisions
including TCS.

A one and half hour long
interactive panel discussion was held where various questions of the
participants were taken up by the three speakers. Participants benefitted a lot
from the meeting.

GST Workshop with IMA Indore held on 24^thJune,
2017 at Indore

BCAS jointly with Indore Management Association (IMA)
organized Exclusive Workshop on Saturday, June 24, 2017 at Brilliant Convention
Centre, Indore titled “Fasten Your Seat Belt-GST ready for take off”.

Faculty for this workshop
representing BCAS comprised of CA. Rajat Talati, and CA. Deepak Thakkar. CA.
Santosh Muchhal, President, IMA welcomed the delegates and thanked BCAS for
this workshop. President (Elect) of BCAS CA. Narayan Pasari in his welcome
speech introduced BCAS to the gathering. He also mentioned that GST is a
win-win reform for everyone and will have lasting benefits for businessmen,
Government, consumers and professionals.

CA Rajat Talati started the first session by stating that GST
is an Integrated Tax Regime which will reduce Policy Paralysis in Indian
Economy. It will also avoid Double Taxation problem which of late is posed as a
major threat for the Indian Economy.

CA. Talati explained that
Goods and Service Tax (GST) is a destination based tax on consumption of goods
and services. It is proposed to be levied at all stages right from manufacture
up to final consumption with credit of taxes paid at previous stages available
as setoff. In a nutshell, only value addition will be taxed and applicable tax
is to be borne by the final consumer.

CA Deepak Thakkar took the
2^nd Session and explained that Goods and Services Tax (GST) will be
levied at multiple rates ranging from 0 per cent to 28 per cent. GST Council
finalized a four-tier GST tax structure of 5%, 12%, 18% and 28%, with Zero to
lower rates for essential items and the highest for luxury and de-merit goods
that would also attract an additional cess. Goods and Service Tax on services
will go up from 15% to 18%. The services being taxed at lower rates, owing to
the provision of abatement, some services such as train tickets etc will fall
in the lower slabs.

It would be a dual GST with the Centre and States
simultaneously levying it on a common tax base. The GST to be levied by the
Centre on intra-State supply of goods and / or services would be called the
Central GST (CGST) and that to be levied by the States would be called the
State GST (SGST). Similarly Integrated GST (IGST) will be levied and
administered by Centre on every inter-state supply of goods and services. The
GST will be shared by the Centre and the respective State equally.

CA. Rajat Talati

CA. Deepak Thakker

He also mentioned that
there are many benefits available to small tax payers under the GST regime. The
two speakers answered the many questions raised by the participants at the end
of their sessions.

The joint workshop was a very enriching experience for the
140 participants.

Two days seminar on GST
for Trade, Industry and Professionals held on 24^th& 25^th
June 2017 at Ghatkopar

This two day seminar was held at
Zaverben Auditorium, Ghatkopar where 725 participants attended comprising of
chartered accountants and members of trade and industry.

CA. Sunil Gabhawalla

CA.Mandar Telang

CA. Shreyas Sangoi

CA. Ashit Shah

The Seminar covered almost
all aspects of Final GST law comprising of Integrated Goods and Service Tax
Act, Central Goods and Service Tax Act and State Goods and Service Tax Act
along with the rules enacted by the Government. The eminent Speakers explained
the salient features of the law including the concept of supply, classification
of goods and services, time and place thereof, value of supply, charging
provision, threshold exemption, transition provisions, composition scheme,
registration, maintenance of records, tax invoice, payment of GST including
under reverse charge, returns and other compliances, input tax credit including
Input Service Distribution Mechanism, export and import of goods and services
including SEZ, job work under GST, etc. The learned Speakers from BCAS included
CAs Sunil Gabhawalla, Samir Kapadia, Rajkamal Shah, Naresh Sheth, Jayesh Gogri,
Mandar Telang, Ashit Shah and Shreyas Sangoi. Advocate Shailesh Sheth also gave
his valuable inputs on GST at the Seminar. At the end of the seminar, there was
specific industry wise panel discussion covering, textile and garment
manufacturers, gem and jewellery, stock brokers, mutual fund and insurance
agents, transport and logistics, C & F agents, tour operators and travel
agents, builders & developers, works contractor, co-operative housing
societies, caterers, hotels & restaurants, SMEs, retailers, traders and
small scale manufacturers, leasing and right to use goods, job worker and
service providers. The overview of the new indirect tax law replacing plethora
of numerous laws and detailed discussion on each subject and dissemination of
latest knowledge alongwith industry specific panel discussion generated lot of
interest amongst the participants making the seminar interactive to a large
extent. All participants were fully enriched by the deliberations at the
Seminar.

CA. Naresh Sheth

CA. Rajkamal Shah

CA. Samir Kapadia

Lecture Meeting on GST
& CAs – Impact on Compliance & Practice held on 27^thJune,
2017

Indirect Taxation
Committee of BCAS organised a lecture meeting on “GST & CAs – Impact on
Compliance & Practice” on 27th June, 2017 at K. C. College Auditorium,
Churchgate which was addressed by CA. Sunil Gabhawalla.

CA. Sunil Gabhawalla

With GST becoming a reality,
there were many issues which were faced by the practising chartered accountants
like the impact on billing under the Service Tax law and receipt under the GST
regime, paying tax on procurements from unregistered vendors, concept of supply
and place of supply with respect to clients being located in other states, a
multi-locational firm etc. CA, Gabhawalla explained about the new GST Law, its
challenges and compliances and how it is going to impact practicing Chartered
Accountants. He also enlightened on the Composition Tax and monthly return
filing process under GST.

The speaker explained in detail and in candid way the
challenges that a practising chartered accountant would face, He also answered
a few queries raised by the members.

The participants benefitted a lot from the meeting.

‘New Curriculum of CA
Course – Has the bar been raised? organised on 5^th July, 2017 at
BCAS.

HDTI Committee had organised a talk on ‘New Curriculum of CA
Course – Has the bar been raised?’ by Member of Central Council of ICAI, CA
Nihar Jambusaria.

The talk was organised for students who are eligible to
appear for CA exams under new syllabus and having their doubts regarding the
same.

CA Nihar Jambusaria meticulously explained each and every
aspect of the new curriculum and also provided a comparative analysis between
the old and new curriculum. The talk was followed by an extensive ‘Q&A’
session wherein students sought clarifications for their doubts and the speaker
positively answered all their queries.

The talk received overwhelming response from the student
fraternity. Further, quite a lot of students also took the benefit of live
streaming of the seminar at their respective places or CA firms.

The talk provided valuable
guidance to all students and was widely appreciated.

Study Circle Meeting on
Technology Trends: Impacts of Artificial intelligence, Machine learning,
Drones, Big Data held on 5^thJuly, 2017 at BCAS Conference Hall.

At this study circle meeting, Mr. Nikunj Sanghvi, a Mobile /
Digital Professional from USA, shared his insights on the upcoming technology
trends and their probable impact on businesses going forward. He started by
explaining the trend of expectations towards new technologies – how they
initially reach a peak followed on by disillusionment as the technologies are
not as good as expected and later on get slowly accepted by public at large. He
covered many different innovations including drones, augmented reality, digital
twins, big data, artificial intelligence & machine learning, intelligent
apps, autonomous vehicles, speech recognition and voice interfaces, block chain
and crypto currencies.

Mr Sanghvi also explained these innovations and their impact
which are already seen in some business areas. For example, using drones,
auditors are doing a physical check of goods in large warehouses in a day which
otherwise would take them weeks! On giving such other examples, the immediate
query from the group was what will happen to many existing jobs. Mr Nikunj
mentioned that while there may be jobs which are lost as and when these
technologies become mainstream, he was positive that there will be many newer
jobs which people will be able to fill in. His point was that Man’s wants are
unlimited and even if a few wants are met by these new technologies, there will
be many more which will remain unfulfilled. Therefore, there may be no need to
worry unnecessarily for job losses.

The meeting ended on this positive note and participants
benefitted a lot.

69^th
Foundation Day Lecture Meeting on “ENERGising India-Changing Paradigm for
Professionals” held on 6^th July, 2017 at Garware Club House,
Churchgate, Mumbai

A lecture meeting on “ENERGising India-Changing Paradigm for
Professionals” was held on 6^th July, 2017 on the occasion of 69^th
Foundation Day of the Society which was addressed by our Hon’ble Union Minister
of State (IC) for Power & Renewable Energy CA. Piyush Goyal. President CA. Chetan Shah briefly touched
upon the GST regime and also shared the profile of Mr Goyal while welcoming the
Chief Guest and then requested him to address the august audience.

CA. Piyush Goyal – Minister
of State for Power, Coal, New
and Renewable Energy and
Mines (Independent charge)

Mr Goyal started his oration with the past memories of his
BCAS membership and appreciated the caricature of the cover design of GST issue
of July Journal stating that the cover design is very well presented. He then
talked about the GST Bill and explained how GST Council has been empowered to
function without any interference from the Government. Mr Goyal also emphasized
that GST is a great testimony with the culmination of 17 taxes into one tax
“GST” where the Traders, Businessmen, Manufacturers and others will get the
Input Tax Credit when goods move from one place to another. This transformation
would help to curb inflation, bring transparency, eradicate the atmosphere of
uncertainties and corruption, eliminate black money etc. This revolutionary
step has been taken by the Government in the national as well as public
interest without any political opportunism.

BCA Journal – GST Special Issue Release
L to R : CA. Sunil Gabhawalla, CA. Narayan Pasari, Shri Piyush Goyal (Speaker), CA.
Chetan Shah (President), CA. Manish Sampat, CA. Suhas Paranjpe, CA.Abhay Mehta.

On the topic of the Lecture Meeting “ENERGising
India-Changing Paradigm for Professionals”, he cited Mahatma Gandhi Quote
that we are the trustees of the Planet and it is our collective responsibility
to keep the environment clean, abolish pollution and adapt to healthy and
hygienic climate changes for better quality of life for 1.25 billion Indians.
Our inhabitants especially in the rural areas cannot afford to live without
electricity, shelter, transportation, medical facilities etc and Government has
taken strong steps to provide these amenities to majority of the villages and
would reach the zero defect in a phased manner. Mr Goyal also informed the
gathering that at present, India is energy surplus and self-sufficient in Power
Distribution. As per the world standards, we are contributing to clean energy
and reducing pollution levels. He also urged upon the citizens to use LED bulbs
to conserve the energy and contribute in Nation Building. Besides, Mr Goyal
also remembered our armed forces and assured to provide them with the most
modern equipment and technology to fight any internal and/or external threat.

Audit Checklist Publication Release
L to R : CA. Raman Jokhakar, CA. Sunil Gabhawalla, CA. Narayan Pasari, Shri
Piyush Goyal (Speaker), CA Chetan Shah (President), CA. Manish Sampat, CA.
Suhas Paranjpe, CA Abhay Mehta

He thereafter appealed to the Chartered Accountants
Fraternity to strengthen and upgrade the audit standards to curb the Tax
evasion/avoidance and further transform the future of India, because CAs are
the force to reckon with in the professional industry.

At the end, he expressed confidence that Chartered
Accountants can do a lot for the public good and make India again.

The audience got mesmerized with Mr Goyal’s presentation
skills and gained a lot from the insights straight from the heart and from his
spellbinding Speech.

Lecture Meeting on “Recent Developments in Taxation of
Capital Gains” held on 11^th July, 2017.

Taxation Committee of BCAS organized a Lecture Meeting on
Recent Developments in Taxation of Capital Gains on 11^th July, 2017
at IMC, Churchgate, Mumbai. The first meeting of the year at BCAS which
commences from the Founding Day, 6^thJuly, was addressed by CA.
Pinakin Desai wherein he explained about the Notional Taxation w. r. t. Fair
Market Value (FMV) of unlisted equity shares under Sec 50CA, shift of base year
for indexation from 1981 to 2001 to compute the cost of bonus shares and
amendment to Sec 10 (38) with background and notification on 3^rd proviso
to Sec 10(38). He also discussed about the Protocol to India – Mauritius Treaty
with emphasis on Mauritius and Multilateral Treaty (MLI) and protocol amending
India-Singapore Treaty. CA. Pinakin Desai further explained about the valuation
of shares under Normative Valuation with draft valuation rule notified u/s. 50
CA and issues under normative valuation. He also deliberated on Sec 195 –
withholding actual or notional consideration for Sec 50 CA.

CA. Pinakin Desai

Mr Desai also explained the
above topics with case studies on (i) resolving normative valuation of shares
as per draft notification, (ii) valuation of unquoted equity shares, (iii)
acquisition in IPO, (iv) acquisition pursuant to merger, (v) gift of shares,
(vi) Inter-se promoter transfer, (vii) direct transfer vs. indirect transfer,
(viii) impact of dividend distribution and (ix) case study under
India-Mauritius Treaty.

The hall was packed with
the audience and it was a very fulfilling and enriching experience for the
participants to benefit immensely from the meeting.

GST Training Seminar Jointly with NACIN held from 13^th
July to 15^th July, 2017 at BCAS Hall

With the roll out of GST on
1^stJuly, 2017, the 3^rd batch of GST Training Seminar for
Trade, Industry & Profession was organised by Indirect Taxation Committee
of BCAS jointly with the National Academy of Customs, Indirect Tax and
Narcotics (NACIN), to make understand the intricacies and the importance of GST
laws & provisions.

CA. Mandar Telang

CA. Shreyas Sangoi

CA. Chirag Mehta

CA. Govind Goyal

The purpose of holding such training workshop
was dual – one to educate the trade and industry about the new legislation and
more importantly, partnering Government in disseminating information about this
landmark “One Nation One Tax”.

The speakers at the Seminar were BCAS members
accredited by the NACIN as GST Trainers, and a few officials from the GST
department. The faculty from BCAS included CAs Chirag Mehta, Dushyant Bhatt,
Govind Goyal, Mandar Telang, Naresh Sheth, Rajkamal Shah, Shreyas Sangoi and Ms
Vishaka Borse, & Mr, Shrikant Shaligram from the GST Department.

CA. Naresh Sheth

CA. Dushyant Bhatt

CA. Shrikant Shaligram

CA. Rajkamal Shah

The participants immensely benefited from the training
programme.

Dharampur Noble Social Cause Visit – on 15^th&
16^th July, 2017

The visit to Dharampur was
organised for two days by the Human Development and Technology Initiative

Dharampur Noble Social Cause Visit

Committee of BCAS jointly
with BCAS Foundation, for Tree Plantation, Eye Camp project and visit to
various NGOs, at Dharampur. These NGOs are engaged in the various social
welfare activities for Holistic growth of Tribals located in the remote
interiors. A Team of 24 enthusiastic volunteers including students who were
willing to take active participation in this noble mission joined the trip.

Sarvoday Parivar Trust (SPT)

The SPT is a NGO, following
Gandhian philosophy and engaged in various tribal welfare activities in the
field of Education / Health / Agriculture / Water management / Environment,
etc. The BCAS Foundation committed for plantation of 3,000 trees to SPT. The
team also visited the Residential School run by the SPT which is home to more
than 350 children from nearby villages.. This residential school has encouraged
poor labourers and farmers in the tribal areas to send their children for
further studies. It has helped in reducing child labour, child marriage and
other social evils which takes place mainly due to illiteracy and poverty.
Members had good interactions and time with them. The School premises are old
and needs to be renovated and upgraded to provide better amenities to children.
BCAS Foundation has committed its full support for the redevelopment and
upgradation of school/ hostel.

Avalkhandi Kelavani Trust (AKT)

The AKT is an NGO which
carries out various activities in Education & Water Management in the
villages of the most backward forest of Dharampur, running a government School
where approximately 300 students are studying & has one Chhatralaya whereby
180 children are accommodated for stay from other villages who would have
otherwise been deprived of education. The BCAS Foundation committed for
plantation of 2,500 trees to AKT. On behalf of BCAS Foundation, team
distributed kits for outdoor games like cricket / Football/ Badminton / Flying Dish etc and many educational games at AKT for their
children. The BCAS Foundation contributed Rs. 30,000/- for setting up a library
in the Chhatralaya.

The team viewed the various
check dams created on mountains in the process of water management.

Dhanvantri Trust (DT)

The trust is founded and
managed by Dr. Kirtikumar Vaidya, from Mumbai who left Mumbai at a young age
& has dedicated his life for socio economic rural development of tribal
villages of South Gujarat. With divine blessings he started an Eye Hospital in
Vansda. Our team member had contributed Rs. 63 lakh for setting up Hospital
with latest Equipment & Technology for treating and curing all types of Eye
Surgeries.

BCAS Foundation sponsored 201 Eye Surgeries for poor Tribals & has
dedicated support for 50 more, thanks to contribution & support of Esteemed
Donors, amounting to Rs.2.01 lakh.

Dr. Vaidya proposed to set up a school in Vansda. BCAS Foundation has
committed their support for the same.

The trip for Tree plantation
drive and the Eye Camp was truly enriching, enlightening and educational too
for the visiting members and students. The memories treasured from the trip,
would always encourage and motivate them to participate more in such events
which would be beneficial to the society at large.

Direct Tax Study Circle Meeting on ‘Income Computation
Disclosure Standards; ICDS V Tangible Fixed Assets, ICDS IX Borrowing Costs
& ICDS X Provisions, Contingent Liabilities & Contingent Assets’ on 15^th
July 2017

The Chairman of the
Meeting, CA. Anil Sathe gave his opening remarks and raised some issues
relating to ICDS which could face litigation in the long run. The Group leader,
CA. Dhaval Desai drew attention to an extract from the Supreme Court decision
in Woodward Governor 312 ITR 254 wherein the Hon’ble Supreme Court observed
that for income tax purposes, profits are to be computed in accordance with the
ordinary principles of commercial accounting unless, such principles stand
superseded or modified by legislative enactments and this is where section
145(2) comes into play.

Thereafter, the group
leader briefly explained the provisions of ICDS IX ‘Borrowing Cost’-
recognition principle, definitions of borrowing cost and qualifying assets. He
explained the provisions of capitalisation in respect of specific borrowings
and general borrowings and the provisions relating to commencement and
cessation of the capitalisation. He mentioned that as per Accounting Standard
16, an asset qualifies to be a Qualifying Asset only if it takes substantial
period of time to get ready for its intended use or sale, however ICDS has done
away with the criteria of ‘substantial period of time’ (except for inventories)
and this would lead to a huge difference between the capitalisation of
borrowing costs as per books and capitalisation as per ICDS.

The group leader further
touched upon the provisions of ICDS X ‘Provisions, Contingent Liabilities and
Contingent Assets’. He mentioned the yardstick for recognition of a provision
‘probable’ as per Accounting Standard 29 has become stricter under ICDS wherein
the term ‘probable’ has been substituted with ‘reasonably certain’. Similarly,
in case of contingent assets, the term ‘virtual certainty’ used for recognition
as per AS 29 has been substituted with ‘reasonably certain’ under ICDS. He
commented that such provisions would certainly lead to preponement of income
and postponement of deduction of expenses. The group leader touched upon
transitional provisions contained in ICDS X.

Subsequently, CA. Dhaval
briefly explained the provisions of ICDS V ‘Tangible Fixed Assets’. He
highlighted one of the differences between existing AS and ICDS with regard to
treatment of expenditure between trial run and commercial production. In this
context, Revised AS 10 mandates such expenditure to be revenue in nature
whereas CBDT clarification on ICDS states that such expenditure should be
treated as capital expenditure.

The participants benefitted a lot from the
meeting.

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Society News -I

Full day seminar on
“Income Computation and Disclosure Standards” held on 19^th May, 2017

This seminar was held by
the Taxation Committee at Navinbhai Thakkar Hall at Vileparle (East). President
Chetan Shah gave the opening remarks followed by introduction from the Chairman
of the Taxation Committee, Mr. Ameet Patel. The event was attended by 235
participants. Topics taken up and Speakers were as under:

– Overview of ICDS:- Mr. Pawan Kumar, CIT
(Jalandar)

– ICDS III & VIII:- Constructions
Contracts & Government Grants : CA.
Paresh Vakharia

– ICDS I & ICDS X:- Accounting Policies
& Provisions, Contingent Liabilities & Contingent Assets: CA. Vishesh
Sangoi

– ICDS IV & IX:- Revenue Recognition &
Borrowing Costs: CA. Vinita Krishnan

– ICDS VI & VIII:- Foreign Exchange
Fluctuations & Securities: CA. Kushal Jain

– ICDS II & V:- Valuation of Inventories
& Tangible Fixed Assets: CA. Nihar Jambusaria

Mr. Pawan Kumar, CA.
Vishesh Sangoi and CA. Kushal Jain spoke on the BCAS platform for the very
first time.

Mr. Pawan Kumar gave an
overview of the ICDS. He also shared with the participants on why ICDS were
needed and how it came into existence. He being one of the members of Expert
Committee for drafting of ICDS shared his experiences with the participants
which was appreciated by all.

CA. Paresh Vakharia gave
his opening remarks on ICDS and explained the purpose of the said legislation.
He dealt with both the ICDS allotted to him in detail and explained nuances and
issues arising from them.

CA. Vishesh Sangoi started
his presentation by explaining the basic issues arising from ICDS I and X. He
explained various changes which would take place while undertaking Tax Audit in
post ICDS scenario compared to earlier ones with the help of various case
studies. He also touched upon disclosure requirements in Form 3CD for both
ICDS. He also responded to queries from various participants.

CA. Vinita Krishnan gave a
detailed presentation on ICDS IV & IX. She explained the basic
considerations arising out of them and also discussed the issues which one may
face while applying them. She discussed ICDS on revenue recognition with
respect to different type of incomes like dividend, royalties, interest etc.
She also answered queries from the participants.

CA. Kushal Jain explained
ICDS on securities with the help of case studies and also examples on how it
would be applied. He also explained various terms which are used in both the
ICDS. He also dealt with how the accounting entries would be affected in case
of ICDS on foreign exchange fluctuations.

CA. Nihar Jambusaria
explained the background and general principles of ICDS. He highlighted the
journey of evolution of ICDS. He also brought out the differences which will be
encountered between Ind AS and ICDS. He compared ICDS of Valuation of
Inventories with AS 2 and brought the changes between them. He also compared AS
10 with ICDS on Tangible Fixed Assets and explained the treatment under ICDS V.
He enlightened the participants with the disclosure requirements under both
ICDS and also addressed various questions from the participants.

The sessions in the Seminar
were interactive and the speakers shared their insights on the subject and
guided the participants on how to approach the subject of ICDS while performing
a Tax Audit. The participants benefited immensely with the interactive sessions
and detailed analysis of each ICDS by the faculties.

Full day seminar on
“Practical issues in TDS” held on 20th May, 2017 at BCAS

The Full day seminar on
Practical issues in TDS was held by the Taxation Committee at BCAS Conference
Hall on 20th May, 2017. The event was attended by over 80 participants.
President Chetan Shah gave the opening remarks followed by introductory words
from the Chairman of the Taxation Committee, Mr. Ameet Patel.

Various topics were taken
up at the Seminar by the following Speakers:

– Sections 194C, 194DA, 194EE, 194F and 194J :
CA. Saroj Maniar

– Sections 195, 206AA, Rules 37BB and 37C :
CA. Ritu Shaktawat

– Sections 192, 194H, 194LB, 194LBA, 194LBB,
194LBC : CA. Anita Basrur

– Sections 194A, 194I, 194IA, 194IB, 194IC and
recent case laws on TDS : CA. Nitin Shingala

– Issues in e-filing of TDS statements,
Sections 200A, 201 and 205 : CA. Avinash Rawani

CA. Ritu Shaktawat and CA.
Anita Basrur spoke on the BCAS platform for the first time.

CA. Saroj Maniar gave an overview of the various sections,
the case laws and circulars applicable and relevant in their context. The
speaker elaborated on the provisions of Sections 194C and 194J and covered some
industry specific issues as well as the interplay of these sections with other
sections of the Act.

CA. Ritu Shaktawat
explained the applicability of section 195. She highlighted the risk arising
out of non-compliance of applicable sections as well and provided insight on
issues surrounding Forms 15CA and 15CB. She also touched upon issues under
Section 206AA, Rules 37BB and 37C. The Speaker elaborated on contractual
remedies that one could pay attention to and should incorporate in the
agreements such as indemnity, representations and warranties, escrow,
insurance. She also explained the provisions and their application through case
studies.

CA. Anita Basrur started
her presentation by explaining the provisions of section 192 and 194H,
practical issues arising thereunder using relevant case laws and recent
circulars. This was followed by in depth discussion on sections governing TDS
on income received by securitisation trusts, business trusts and units of
Investment Funds.

CA. Nitin Shingala gave a
detailed presentation on various aspects governing sections 194A, 194I, 194IA,
194IB and 194IC. He explained the applicable provisions, issues under each of
them, supporting them by relevant case laws and circulars. The Speaker touched upon a wide number of
judgments during the course of his talk on various sections pertaining to
deduction of tax at source.

CA. Avinash Rawani highlighted
the practical issues that arise in e-filing of various TDS statements such as
returns, correction statements, challan corrections, replies to be filed to
online communication from the TDSCPC amongst others. In addition to
highlighting the issues, the Speaker shared a lot of practical dos and don’ts
in relation to the filing of these statements.

CA. Saroj Maniar

CA. Ritu Shaktawat

CA. Anita Basrur

CA. Nitin Shingala

CA. Avinash Rawani

The sessions in the Seminar
were very interactive and the Speakers answered a lot of queries that were
received from the participants. The participants benefited immensely with the
interactive sessions and detailed discussions.

Half
day seminar on “Digital Transformation and GST – Opportunities and Challenges
in ERP environment” on 26^th May, 2017 at BCAS

A half day seminar on
Digital Transformation and GST was organised by Human Development &
Technology Initiative Committee jointly with Indirect Tax Committee at BCAS
Conference Hall on 26^th May 2017. CA. Nikunj Shah, Convenor, HDTI
Committee introduced the speakers to the participants.

The speakers – Mr. Richard
D’Souza (Vice President & Head Business Solutions-Corporate IT Mahindra
& Mahindra Group ) & Mr. Rakesh Pawaskar (General Manager Business
Solutions – Corporate IT Mahindra & Mahindra Group) made an excellent presentation
on the Technology transformation undertaken by them in their organisation. They
also explained and demonstrated through audio visual presentation, the nuances
of GST implementation, the GST implementation process at their group and how
the said group is supporting their vendors for GST implementation using state
of the art technology platform.

The seminar witnessed
excellent participation from members in practice as well as from Industry. The
objective of the seminar was to understand the innovation in technology leading
to change in accountants role from pure accounting to analytics and decision
making & to highlight how GST implementation could be achieved leveraging
technology.

Mr. Richard D’Souza

Mr. Rakesh Pawaskar

The participants were
immensely benefitted from the Seminar.

GST Training for Trade,
Industry & Profession held on 29^th, 30^th & 31^stMay 2017 & 19^th, 20^th & 21^stJune
2017 at BCAS

The Government’s decision
to roll out the GST Law on 1^st July, 2017 made it all the more
important that BCAS organise more programs so as to educate and train as many
people on the intricacies and the importance of these laws.

BCAS organised two such
programs one in May from 29^th to 31^stand the other in
June from 19^th to 21^stat BCAS Conference Hall. The
purpose of holding such training workshops was dual – one to educate the trade
and industry about the new legislation and other, more importantly, being a
partner of the Government in disseminating the information about this One
Nation One Tax One Market.

These programs were conducted jointly with the National
Academy of Customs, Indirect Taxes and Narcotics (NACIN) and the sessions were
taken by members of BCAS who were accredited by the NACIN as GST Trainers and a
few officials from the Sales Tax department and NACIN also. The faculty from
BCAS included CAs Chirag Mehta, Dushyant Bhatt, Govind Goyal, Jayesh Gogri,
Mandar Telang, Naresh Sheth, Rakjamal Shah, Samir Kapadia, Shreyas Sangoi and
Sunil Gabhawalla.

CA. Rajkamal Shah

CA. Samir Kapadia

CA. Chirag Mehta

CA. Shreyas Sangoi

CA. Sunil
Gabhawalla

The participants immensely
benefited from both the programmes.

BEPS Study Circle Meeting
held at BCAS Conference Hall on 3^rd June 2017

BEPS Action Plan 6 read
with Action Plan 15 (Multilateral Instrument i.e. ‘MLI’): Preventing the
Granting of Treaty Benefits in Inappropriate Circumstances was held on 3^rd
June, 2017 at BCAS Conference Hall.

Discussion was led by CA. D
S Sharma, CA Monika Wadhani and CA. Rutvik Sanghvi

This was the third meeting
on Action Plan 6: The group leaders covered overview of Article 6 to 8 of the
MLI and detailed comparison of LOB clause.

In the meeting, the group
leaders had taken up detailed discussion on following Articles of MLI read with
Article X of Action Plan 6 and had concluded discussion with emphasis on the
following:

– Article 8 of MLI – Dividend transfer transaction intends
to introduce a minimum shareholding period of 365 days to be entitled to
beneficial rate of taxation on dividend.

– Article 9 of MLI – Capital Gains from
alienation of shares or interests of entities deriving their value principally
from immovable property intends to give taxing rights to the Contracting State
where immovable property situated, if at any time during the 365 days preceding
the alienation of shares, such shares derived value principally from such
immovable property.

– Article 7(1) of MLI – Principal Purpose
Test (‘PPT Clause’): It intends to introduce a minimum standard in form of PPT
clause to be adopted by the Contracting States. The group leaders discussed the
meaning and possible interpretations of various words contained in the PPT clause
(like meaning of “benefit”, “one of the principal purposes”, etc.) and
explained each and every example given in the commentary to Action plan 6. The
group leaders also highlighted the difference and the interplay between the
Indian GAAR provisions and the PPT clause. For example, under the Indian GAAR
provisions, requirement is “if main purpose is tax benefit”vis-à-vis the PPT
clause, requirement under the MLI being “one of the principal purposes is tax
benefit”, etc. It was also discussed that PPT clause will be relevant to
consider the applicability of a tax treaty and if PPT clause is invoked then
treaty benefits shall not be available and many transactions could get
impacted. It was also discussed whether GAAR provisions can be invoked where
transaction is covered by a tax treaty.

The meeting got
enthusiastic response and the participants benefitted a lot from the
discussions

10^th Jal Erach
Dastur CA Students Annual Day held on 3^rd June 2017

The Jal Erach Dastur CA
Students’ Annual Day this year reached a new scale as it celebrated its 10^th
Edition captioned under tagline ‘Tarang 2K17 – Tarasho Apne Talent Ke Rang.’ at
Navinbhai Thakkar Auditorium, Vile Parle on 3^rd June 2017.

Students lining up to witness the most
awaited event of the year

This event was organized by
the Human Development and Technology Initiatives Committee of the BCAS for the
CA students. The event was truly an event ‘OF CA students, FOR CA students and
BY CA students’. It showcased their mesmerizing talents and creativity on
variety of extra-curricular activities such as elocution, debate, sketch and
slogan, photography, short film making and other talents such as singing, music
etc.

Then Vice President CA. Narayan Pasari
felicitating the Chief Guest of Tarang –
Mr. Dhaval Bathia

President Chetan Shah, Vice President
Narayan Pasari along with members of
HDTI Committee witnessing the lighting
of auspicious lamp to commence the
event

The six finalists of the Chandanben Maganlal
Bhatt ‘Elocution Competition’ were the first to witness the stage. The topics
this time were both challenging as well as riveting. This enabled a level
playing field for all participants who gave their impressive performances on
their respective topics.

CA. Nitin Shingala & CA. Meena Shah
presenting the award to the winner of
Elocution Competition ‘Speak Up’ – Miral
Majmundar

Then BCAS President CA. Chetan Shah
presenting the award to the winner of
‘CA’s Got Talent’ – Deevesh Chudasama

Post Elocution, the
winners of Photography Competition ‘Khinch Le’ were announced. This being the
second year of the competition, received unprecedented response from students.
They were given themes on which they had to click creative photographs and
mention an innovative tagline based on the theme selected.

CA Ryan Fernandez moderating the
debate competition – ‘War of Words’

Students Committee performing the flash mob

Chief Guest Mr. Dhaval Bathia giving the
keynote address

As a part of continuous improvement and innovation, this
year, a new event ‘The Screenmasters – Short-film making competition’ was also
introduced. The competition received good response from the students with 9
entries in the very first year itself. The students had to a shoot a short-film
of not more than five minutes on the given theme. The entire audience was
amazed by the professionalism and meticulousness of CA students, even in the
arena of film-making.

Mesmerising display of talent – Spray
Painting

Audience enjoying light hearted games during the break time

BCAS Students Committee, Tarang
Volunteers along with members of HDTI Committee

The final round of the
Debate Competition ‘War of Words’ followed the Photography Competition. The debate
was moderated by CA. Ryan Fernandes with two teams of four students each. The
debate had the undivided attention of the audience as each finalist defended
their case with enthralling wit and vigour. Adding some spice to the event,
this year a fourth round was introduced wherein the teams had to interchange
their erstwhile position vis-à-vis the topic. The participants as well as the
audience enjoyed the debate to the core.

After this, the students presented a 3 minute “flash mob”
which was choreographed by CA Hrishikesh Joshi. This short stint kept the
audience alive and cheering.

After the flash mob, the charged up audience were enchanted
by the Keynote address of the Chief Guest Mr. Dhaval Bathia, a well-known
author and speaker as well as Guinness Record Holder. His speech was both
motivational and thought provoking as he used day-to-day anecdotes and examples
to convey his message. He emphasized on the need to think out-of-the-box and
‘go deep’ into the realm of your work to carve out definite success. He also
touched upon finer aspects of ‘Digital India’ and how it has revolutionized the
style of working, even for the CA fraternity.

Immediately after that,
the stage was set for the flagship and most awaited competition the ‘The Talent
Show’. To kick-start the event, a ‘Students Band’ comprising of Tej Bhatt,
Sridisha De, Aagam Jain and Jigar Jain rocked the stage. These students
volunteered for this special performance to strike the chord for the upcoming
competition.

Finally the guitars were
tuned, the keyboard was ready, the dancers were tapping their feet, and the
stage was then taken over by young and talented CA students who showcased their
talent ranging from dance, singing, instrumental, mimicry and spray painting.
All 9 finalists gave amazing performances and the audience were left spell
bound. The cheering of the crowd with claps and whistles increased with each
performance as the finalists kept on raising the bar. The judges who were
captivated by the charm of the performances had a Himalayan task in choosing
the winners.

With the clock-ticking,
the winners of the competition representing their firms were finally announced as under:

The entire evening was
hosted fabulously by Mr. Pushkar Adhikari, Ms. Tanvi Parekh, Ms. Miral Majumdar,
Ms. Aadhira Dinesh and Mr. Manthan Rawat with their astounding performances,
display of energy and loads of wit and humour.

Mr. Prathamesh Mhatre
proposed the well-deserved vote of thanks to each and everyone involved in the
success of the event. A total number of 492 students registered for the 10^th
Jal Erach Annual Day, setting an overwhelming benchmark.

Essay Writing Competition ‘Awaken the Writer Within’

Prize

Name of Student

Name of Firm

1st Prize Winner

Salonee Kabra

SRBC & Co LLP

2nd Prize Winner

Kanika Mangal

Dinesh & Agarwal

3rd Prize Winner

Anisha Talesara

Kailash Chand & Co

Rotating Trophy
went to Salonee Kabra

Elocution Competition ‘Speak Up’

1st Prize Winner

Miral Majumdar

CNK & Associates LLP

2nd Prize Winner

Tanvi Parekh

Sanjay & Snehal

3rd Prize Winner

Apurva Wani

Aneja & Associates

Rotating Trophy
went to Miral Majumdar

Talent Show ‘CA’s Got Talent’

1st Prize Winner

Deevesh Chudasama

Khandelwal Jain & Co

2nd Prize Winner

Tej Bhatt

CNK & Associates LLP

3rd Prize Winner

Vivek Rajpurohit

Sara & Associates

Rotating Trophy
went to Deevesh Chudasama

Debate Competition ‘War of Words’

Winning Team

Tanvi Parekh (Best Team Member )

Sanjay & Snehal

Hardik Adenwala (Best Team Member)

KNAV & Co

Sonal Agrawal (Best Team Member )

R M Ajgaonkar & Co

Salonee Kabra (Best Team Member )

SRBC & Co LLP

Best Debater

Tanvi Parekh

Sanjay & Snehal

Rotating Trophy
went to Tanvi Parekh.

Sketch & Slogan Competition ‘Leave your Mark’

1st Prize Winner

Chandrika Chaudhari

Khimji Kunverji
& Co

2nd Prize Winner

Eashan Gokhale

Gokhale & Sathe

3rd Prize Winner

Vishishta Goyal

N P Shah & Associates LLP

Photography Competition ‘Khinch Le’

1st Prize Winner

Deevesh Chudasama

Khandelwal Jain & Co

2nd Prize Winner

Neel Khimasia

GBCA & Associates.

3rd Prize Winner

Aurobindo Chatterjee

R R Muni & Co

Short Film Making Competition ‘The Screenmasters’

1st Prize Winner

Anirudh Parthasarathy

R T Jain & Co

Hearty Congratulations to all the
winners and their firms.

Judges for the Various
Competitions were as follows:

Competition

Elimination Round

Final Round

Essay Writing

CA Mukesh Trivedi
& CA Gracy Mendes

Elocution Competition

CA Meena Shah & CA Mihir Sheth

CA Mayur Nayak & CA Divya Jokhakar

Talent Show

Devansh Doshi & Kartik Srinivasan

Pallavi Choksi & Neetu Shah

Debate Competition

CA KK Jhunjhunwala & CA Ryan Fernandes

CA Narayan Pasari
& CA. Shalin Divatia

Sketch & Slogan Competition

CA Chirag Doshi
& CA Divya Jokhakar

Photography Competition

CA Anand Kothari
& CA Nikunj Shah

Short Film Making Competition

CA. Mihir Sheth & Mr Pratik Palan

The entire evening was
hosted fabulously by Mr. Pushkar Adhikari, Ms. Tanvi Parekh, Ms. Miral
Majumdar, Ms. Aadhira Dinesh and Mr. Manthan Rawat with their astounding
performances, display of energy and loads of wit and humour.

Study Circle Meeting on
“Build Brand U for Professional
Success” at BCAS on 13^thJune, 2017

Human Development and Technology Initiatives Committee of
BCAS conducted a Study Circle Meeting on “Build Brand U for Professional
Success” (Enhancing your Image as Professional) on June 13, 2017

The meeting was addressed by Mr Sunil Kini, Managing Director
& Principal Trainer; Gurukul Training & Consulting Pvt Ltd. Mr Kini in
his presentation on the subject in a very succinct but effective manner
explained that “Managing one’s image is the key to success in any walk of
life”. Your Image says a lot about you. A right Image can go a long way in your
life.

Each one of us presents an
image on the basis of which people form impressions about us. These impressions
pave the way in our professional growth path.

Whether as a self-employed professional or working with an
organization presenting ones best is an important ingredient for professional
accomplishments

The Workshop deliberated upon the following basic synopsis of
life:

– Develop Self-Image for Superior Perception
Management

– 4 A model for Professional Growth

– Look the part

– Appearance Management-Gateway to creating an
Impact

– Importance of Professional Decorum and
Kinesics

– Build Brand You.

– Everyone needs image management, only the
intelligent realize in time.

The session ended with a quote: Do not underestimate the
Power of your Appearance, Build your Personal Brand for SUCCESS

The participants felt enriched with request for more such
programmes in future.

FEMA Study Circle Meeting held on 15^th June, 2017
at BCAS

FEMA Study Circle Meeting was held on 15^th June,
2017 on the topic “External Commercial Borrowing (ECB)”.

The group was led by CA Palav
Shah Parekh.

The depth of the
presentation was excellent with members’ interactions on various case studies
presented. The case studies were very engaging and informative. This gave
participants a 360 degree perspective of the subject.

The speaker covered updates
which were as recent as 8^th June.

The participants also
benefited due to the practical exposure of the speaker who shared many insights
about Authorised Dealer’s interaction with the RBI on ECB matters.

Direct Tax Study Circle
Meeting on ‘Income Computation Disclosure Standards; ICDS VI “Effect of changes
in Foreign Exchange rates” on 20^thJune 2017 at BCAS Conference
Hall.

The group leader, CA.
Abhitan Mehta briefly explained the scope of ICDS VI ‘Effect of changes in
foreign exchange rates’ and the definitions of important terms mentioned in the
standard. He explained the concept of ‘foreign currency transaction’ and the
provisions pertaining to initial recognition of these transactions. The
Chairman of the session, CA Gautam Nayak commented upon the anomalies created
due to introduction of ICDS wherein the law makers have merely picked up the
language of the accounting standards and inserted them in the form of ICDS
without realising the difference between the recognition of items in books of
accounts and computation of income.

Thereafter, CA. Mehta
touched upon the provisions contained in Rule 115 of Income Tax Rules which
talks about the rate of exchange for conversion into rupees, of income
expressed in foreign currency. He also highlighted that in case of difference
between the provisions of ICDS and Income Tax Rules, the Income Tax Rules would
prevail.

CA. Mehta then explained
the difference between monetary and non-monetary items and highlighted a
practical issue which one may face when debentures / preference shares
(optionally convertible) need to be classified either as monetary or
non-monetary assets. Thereafter, he gave an overview of the year end valuation
rules for assets and liabilities and provisions of section 43A of the Income
Tax Act.

The group leader also
discussed various SC and HC decisions such as Shell Company of China Ltd.
(22 ITR 1) (CA), CIT vs. Tata Locomotive And Engineering Co. Ltd (60 ITR 405
(SC), Sutlej Cotton Mills Ltd. vs. CIT (116 ITR 1)(SC), State Bank of India vs.
CIT, CIT vs. Jagatjit Industries Ltd. (337 ITR 21) (Delhi HC) and CIT
vs. PVP Ventures Ltd (211 Taxman 554) (Madras HC) whereby the Courts in the
context of allowability of foreign gain / loss as expenditure, have held that
nature of gain/loss – capital or revenue needs to be identified.

CA. Mehta also explained
the provisions relating to foreign operations and treatment of opening balance
of foreign currency translation reserve (FCTR) existing on 01.04.2016 as
clarified by CBDT in the FAQ’s. Lastly, he touched upon provisions regarding
forward exchange contract and the differential treatment for premium/discount
under Accounting Standards and ICDS.

The participants were
thoroughly enlightened by the presentation on the subject.

Yoga Day Celebrations held on 21^st June, 2017 at
BCAS

Human Development and Technology Initiatives Committee had
organised a yoga session jointly with Indian Spiritual Healing (ISH) Foundation
on Wednesday 21^st June 2017 at BCAS Conference Hall, to commemorate
the International Yoga Day.

Mr. Pradeep Thakkar, a Professional Yoga teacher and an
active member of the ISH Foundation guided the participants who attended this
programme.

He demonstrated and guided
participants to perform different asanas with ease and comfort for a healthy
body and mind relaxation.

Participants were also
taught various pranayama to cure diseases. The session ended with positive
affirmations, energy balancing and Omkar Sadhana. Many participants requested
for a regular/long duration yoga course. It was a good learning of Yogasana and
Pranayam for healthy body and peaceful mind.

shailesh.kwebmaker

68th Annual General Meeting on 6th July 2017

The 68th Annual General Meeting of the Society was held
at the Garware Club, Churchgate, Mumbai on Thursday,
6th July 2017.

CA. Chetan Shah, President of the Society, took the
Chair. Since the required quorum was present, he called
the meeting in order. All businesses as per the agenda
given in the notice were conducted, including adoption of
accounts and appointment of auditors.

Mr. Suhas Paranjpe, Treasurer announced the results
of the election of the President, Vice President, two
Secretaries, Treasurer and eight members of the
Managing Committee for the year 2017-18. The names
of members as elected unopposed for the year 2017-18
were announced. He also announced the names of the co-opted members for the year 2017-18.

Later, the “Jal Erach Dastur Awards” for best feature and
best article appearing in BCAS Journal during 2016-17
were announced. The winners were: Dr. Anup P. Shah for
the best feature, and CA. Gautam Nayak/ CA. Pradip N.
Kapasi for best article.

The Special GST issue of the Journal of July 2017
exclusively on “GST Features” and BCAS Publication
Audit Checklist- 7th Enlarged Edition-July, 2017 were
released at the hands of Hon’ble Minister of State (IC) for
Power & Renewable Energy Mr Piyush Goyal at the 69th
Foundation day of the Society celebrated after the Annual
General Meeting of the Society.

At the end, guests including Past Presidents of BCAS were
invited on the dais to share their views and experiences
about the Society.

Outgoing President’s Speech

My colleagues on the dais,
Past Presidents, Ladies and
Gentlemen,

Good Evening members!

This is Spencer West.

There aren’t many people in the world like him. At the age of five
he tragically lost both his legs. But
the Canadian-born 31-year-old
defied all the odds and climbed
Mt. Kilimanjaro! This is a story of
determination, courage, focus,
perseverance and hard work. A
story of months of intensive training to overcome extreme
physical pressure.

What caught my eye is the message on his T-Shirt –
“Redefine Possible.” At BCAS, as we gather here on
our Founding Day, I believe we too have lived this motto.
As a group of dedicated volunteers, driven by a vision,
have travelled a long way to reach this … Founding Day.
So many people here, including my colleagues on the
Dias, have overcome situations when we were up against
the wall and we persevered, when there were moments
of frustration and we showed temperance, things often
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stayed the course. So many have given their personal
and family time and made these years and particularly the
last one year fruitful for members. As I stand here on my
last day as the President I can say that as we surmount we now have the confidence to DREAM BIGGER!

Having said that I would like to walk you through “The
News this Year,” and to make it a little more interesting I am going to give it a sports flavor.

So, let’s start at the beginning of the 67th Annual
General Meeting in July last year…when I was handed
OVER the torch, I chose to adopt a theme which was
close to my heart to be our guiding light for the year
ahead. The theme was “Today’s Vision, Tomorrow’s
Reality.” The wisdom contained in these four words
where influence by the famous twentieth-century poet,
painter and philosopher Khalil Gibran. He said, “We
are not limited by our abilities, but by our vision.” And I
realized that we need to focus on developing a powerful,
telescopic vision at BCAS, rather than merely looking at
our combined abilities.

To best understand how we proceeded with the task
ahead, let us look at the athlete who throws the javelin.
After scanning the vast sky above and the distant horizon,
he throws the javelin with all his arm and body muscles
working seamlessly.

At BCAS, we embarked on the task of discovering where
we want to go…and identifying what route should we take
to get there. We met on many occasions in managing
committee, other core committees and with past torch
bearers to draw up a suitable game plan. In the process
of planning, we gauged several untapped potentials and
even pinpointed any possible pitfalls. Some of the key
points that emerged at this stage were:

• Harness technology to enhance access to BCAS

• Explore new opportunities for members to learn

• Consolidate presence on national front

• Organize programs at the doorsteps of outstation
members

• Engage with related bodies to multiply reach

• Encourage and Empower students to be future
leaders and

• Make crisp and effective representations to ensure
our voice is heard in the decision makers’ corridors.

With these findings, we moved to the next phase where
we gained insights from the world of basketball. We
needed to proceed ahead dodging several obstacles such
as other commitments and numerous time constraints.
We also practiced more teamwork as we ‘passed’ the
assignment at hand to other members who were also
better ‘positioned’ to take it ahead. At this stage, we
learned how to seize opportunities and move towards
implementation of the plans by getting logistics in place.

We were now perfectly poised to take the LEAP (high
jump) … SPRINT AHEAD (100 meters)…or take the
PLUNGE (swimming)! And that’s what we did, moving
swiftly from one program to another is quick succession
with high-quality deliverables. And as you will shortly
see they were all gold performances…and some
more golden!

Now let’s take a look at the winners in no
particular order!

Quantum Leap – Technology Edge

BCAS took a quantum leap akin to long jump into the digital
arena which was an enabler to provide easy access to all
members. Live streaming technology for live webcast and
posting of our programs on YouTube channel has been
a boon to our outstation and distant suburb members to
view at their convenience. Facebook and LinkedIn are
increasingly used as a face of the society for important
updates. Payments can be made online and our website
has been revamped. An e-learning portal will be launched
shortly to extend training beyond geographic and time
boundaries.

Hitting Bulls’ Eye – Experts Chat

The target questions by the moderators were pointed
as in the game of Archery. Experts Chat was a new
game at the Society but Panelists, were veterans in
their knowledge reservoir, which was evidenced in their
profound replies and it developed into an excellent
knowledge sharing platform. Six Experts Chat sessions
held this year command equal marks as they all drew
increasing attendance and viewership.

BCAS RRCs – Each RRC is like 20-20 Cricket
Tournament where you learn so many subjects in a
short span of time.

The T20 matches was played at various locations domestic
and international. The Seminar Committee played at
Jaipur where the fiftieth edition of the RRC, the flagship
program of the society was conducted. It drew a record
275 participants from across India. The International
Taxation committee played at Sri Lanka. The first time
at an international location was the ITF Conference. The
Indirect Tax committee played it at Pune with more than
330 participants. The Accounting and Auditing committee
played IndAS RSC at Silvassa. The MPR Committee
played the Youth RRC at Alibaug jointly with ICAI. Each game was individually very well played by all
committees

Union Budget Lecture – Marathon Run

The Marathon run this year too was led by Senior Advocate
Shri S.E. Dastur who continued to wow the crowds with his
powerful presentation. His detailed analysis of the “Direct
Tax Provisions of the Finance Bill, 2017” was a remarkable
run witnessed by 3,000 avid listeners at the auditorium,
while over 10,000 watched it live from across India.

Besides the RRC being played at various locations
we chose not to play football within BCAS but jointly
with various other related organisations. Many joint
programs were conducted with other organizations
to reach out to a larger audience in Mumbai. Forum
of Free Enterprise, Chamber of Tax Consultants,
AIFTP, Indo- American, ISME…were some of the
organizations we worked with on these programs. The
game brought in a lot of cohesiveness in the game of
the profession.

The reach of the Olympics was far and wide this year.
Members at various locations invited us to conduct programs for the benefit of local. To be more inclusive

BCAS reached out to its outstation members with
programs in Ahmedabad, Kanpur, Indore, Aurangabad
and Kolkata. Medals were in the form of increased
membership and enrolment for RRCs.

The novel concept of Inter Committee Cricket Tournament
was executed with thorough excitement and fun this year.

To improve skill sets of its members the society took up
new initiatives. These are akin to introducing new games
to the Olympics. CAMBA a dedicated CA-MBA Course
jointly with ISME was launched to sharpen management
skills and call the shots at par with MBAs in the Society.

A Coach acts as a guide for every sportsman (Virat
Kohli may be an exception), anyway in the true spirit
of sportsmanship we continued the Mentorship program.

As the Society succeeded in playing different games
and enhanced its reach, it created its visibility which
made Organisations to join as FRIENDS of BCAS.
A new concept where various benefits are extended to members.

Role in Governance

The interaction by profession with the government is like
a game of tennis. There is always a rally between the
players which is healthy for developing good governance

The society made 16 representations to various
authorities…some were made jointly with other
organizations. IDS, ICDS, Rotation of Audit Firms and
GST were some of the key issues the society took up with
the government.

Welcoming Students

Sprint run by the society was for the benefit of students.
The run involved in mentoring and motivating students
and felicitating newly qualified CAs. The final dash
was 10th Jal Erach Dastur Students Annual Day where
talent bloomed at its best and brought together over 250
students.

BCAS disseminated knowledge to students at the NM
College and HR college.

Useful Publications

BCAS brought out a record number of 17 publications
this year. Referencer was the bestseller with over 5,000
copies. But the blockbuster is the BCAJ July special
issue with a print run off over 16,000 copies which will be
released today. There are two e-publications in Flipbook
format that are free for the members.

Education at BCAS

BCAS imparted knowledge through 40 Lecture Meetings
with a total participation of 9,084 people, 58 Seminars/
Courses/Workshops with a total participation of 7,065
people and a record 110 study circle/study group
meetings with total participation of 2552. These figures
exclude thousands who have seen the videos online.
This enabled to add 943 new members and our social media presence augmented. More statistics are in the
Annual Report.

On attending many of these meetings was itself a learning
curve for me. But the Flip side is that by attending so many
meetings I have formed a habit of eating chocolates and
sweets sitting behind the desk.

BCAS Foundation

The BCAS Foundation is the philanthropic expression
of the society. Thank you, members, for your large
heartedness which enabled BCAS to collect more than Rs.
20 lakhs for the noble cause of improving pediatric cancer
care to Tata Memorial Hospital! With their generosity, we
could contribute to the wellbeing of 120 children suffering
from this dreaded disease. However, we cannot rest on the
past laurels, and there is a lot we can do for such cause.
I again exhort all my fellow professionals to come forward
and contribute each one’s might to such a noble cause.
I now pass the baton to Narayan Pasari, the new President of BCAS and the new core group members and office bearers. I will definitely continue to stand and cheer for
Team BCAS, in fact run along as we keep raising the bar
and setting new records.

It is time to say a big thank you to the entire team that
has worked so tirelessly and painstakingly to make this
year’s performance so eventful and if I might add…
successful too!

Let me begin this ode of gratitude by expressing my
sincere thanks to the Past Presidents a few of whom were
at the helm of our nine sub committees. Their invaluable
insights and vast reservoir of experience are what keeps
driving the committees to push the limits…and excel.
As Chairmen and Co Chairmen of the sub committees
they have been a beacon of inspiration, enabling the
committees to grapple with many challenges; and win!
Let us have a round of applause for our hardworking
though silent Chairmen and their amazing teams.

Next, I must thank you my managing committee and the Office
Bearers who have diligently shared vital expertise and
invested long hours in planning and facilitating the smooth
flow of programs and events of the society. With all my
heart, I thank ……

Narayan who has an eagle’s eye for details that
compliments his exemplary admin skills in ensuring our
numerous programs run flawlessly.

Sunil has demonstrated credentials in the sphere of
IT besides GST and has played a pivotal role in the
Society’s IT initiatives, particularly now he is engaged in
the launching of e-learning platform.

Suhas who as Joint Secretary willingly devoted his time
and eagerly participated with many innovative suggestions.
Manish who as treasurer, kept an eye on the numbers
and helped all of us to stay in balance and perspective.
Please join me in thanking them with a round of applause.

Then there is the incredible BCAS Team comprised
of Jyoti Malkani who was with us until April as GM;
Shreya, Javed, Upendra, Nikhil, Rathi, Kawaljeet,
Bilal, Reema, Sachin, Baboo, Harish, Prakash, Mamta,
Rajaram, yes, the entire team and not to forget my
office boys. A big thank you for your unfailing and
unstinted support in keeping the wheels of BCAS
turning smoothly.

Last but not the least, I would like to thank all my partners
and my firm for backing me in my journey especially
Abhay, whose abundant wisdom and good judgment
helped me to chart new routes in the face of obstacles.
And how I can forget to thank my wife for bearing my
early exit and late entry to our abode, but she was
adequately cautioned by the PPs…

And special thanks to all the conveners, coordinators,
contributors, speakers, our publishers Finesse and
Spenta, sister organisations and asociations and wellwishers
who have together made BCAS shine bright this
year too.

It would be most inappropriate for me to end this
speech by saying goodbye…because goodbye sounds
so final, almost like closing a door… or escaping to
some remote place never to see each other again.
Instead, I would like to say Fare Well, not as in one
word, but as two words – Fare Well! Because I believe
the road for BCAS stretches a long way ahead…Yes,
there will be bumps and curves to navigate, but more
importantly, there will be many milestones to cross and
many mountains to conquer. And so, to everyone at
BCAS, starting with President Narayan, the Chairmen
& the managing committees and members, I wish you
all a heartfelt Fare Well!

Thank You!

Incoming President’s Speech

My President Chetan, Vice
President Sunil, Joint
Secretaries Manish and Abhay,
Treasurer Suhas, Respected
Past Presidents present and
in absentia, Members of the
Managing Committee, Core
Group Members and my dear friends

Let me start my innings by remembering my father
Late CA. R. G. Pasari whom I lost 5 years ago. He
would have been a really happy man today as he
always pushed me into the BCAS activities. This was
because he had worked with the likes of S. P. Mehtaji,
B. L. Kabraji and others who always had the highest
respect for BCAS. He also read the BCA Journal
regularly till his demise.

I recognize the presence of my mother Smt. Parvati
Devi who is the source of my strength after my father
and also other members of my family.

To reach at this prestigious position, I also thank my
principal Late CA. Mangalbhai Vatsaraj under whom I
completed my articleship, CA Pravinbhai Dharia (our
auditor) and CA. B. L. Sardaji under whom I also took
training post my articles. Thanks is also due to the
frms and the partners with whom I worked during the
last 2 and half decades.

As far as BCAS is concerned, a small peep into my
journey so far would be in order today. I became a
LIFE MEMBER in 1990 and started participating in
the activities thanks to two of our Past Presidents
CA Harish Motiwalla and CA Pradip Thanawala. I was
inducted into the Core Group of the Society in 1994-
95 and became a Committee Member in the Seminar
Committee. I was appointed a Convenor of this
Committee in 1996-97 for the ?rst time and have been
an integral part of this Committee for a fairly long time
till I became a Of?ce Bearer under CA. Nitin Shingala.
I served CA. Raman Jokhakar and CA. Chetan Shah
also during their Presidentship.

Before I leap into the future with some of the many
plans I have chalked out, I would like to take time
out to thank Chetan for his sincere and dedicated
service as President during the past year. It has been
a tremendous learning experience for me as I learnt
not to get fettered or limited by a lack of experience or
ability. Instead Chetan always encouraged us all to think
beyond and allow vision to be the defining force in all
our endeavors. In supporting Chetan over the last many
months I got invaluable exposure to multi-tasking and
problem solving.

So once again, let me welcome and thank you all for
coming here in such large numbers, and giving me
this opportunity to serve you as the 69th President
of the BCAS.

We are living in exciting times with considerable change
happening both in India and in the global arena. And
these numerous changes provide an array of challenges
and incredible growth opportunities for all of us.

In analyzing the Indian population we find it is comprised
largely of young people who are getting more and
more literate and educated. They are also earning a lot
more than in earlier years and have greater disposable
incomes. Their buying power and consumption are
playing a vital role in stimulating the markets and growing
the economy.

The indian economy has defied many hurdles to cross growth of over 7%. Stock exchanges have registered
soaring indices and high volumes of trading activity.
Foreign Direct Investment is pouring in…in fact we
are the number one destination for FDI in the world,
beating both united state and china. Confidence in
India’s economy is surging, thanks to the numerous
programs and reforms undertaken by the NDA
Government with Prime Minister Narendra Modi as its
driving force.

Keeping pace with the phenomenal growth in the Indian
market are the vast array of services and products. And
to ensure a level pending field that fair and free, Indian
companies have several new laws and compliances to
meet translating into enhanced business for all of us.
Globalization too is another stepping stone for all Indian
companies keen on getting more lucrative returns and
a package of benefits. Here again as volumes and
diversity of exports grow, we have vast potential to
harness greater business.

As President, I have given myself the task and
responsibility of facilitating BCAS’ growth. I believe that
if all of us put an arm to the wheel, we can make BCAS a
society that’s will be far more recognized and respected
within our profession and in financial circles.

Keeping this in perspective, I have drawn up a plan that
focuses on “Building Bridges”.

A bridge is a structure that is built over an obstacle to
provide connectivity. And building bridges is the underlying
theme of how I plan, with all of you, to take BCAS ahead!
Bridges connect us and help us to understand each
others challenges… they also enable us to figure out how
we can help each other and show that we appreciate one
another. Building bridges also helps to prevent isolation.
Because isolation can breed prejudice, misunderstanding,
mistrust; and impede effectiveness of working together.
I propose four main bridges and hope you will help me
in building them and BCAS!

1. TRANSFORMATION

High on my list of priorities is task of increasing the
resources of BCAS and growing the membership list.
I believe the Society needs to be more visible in order
to attract more members. On the resources front too,
we have to look at all possibilities of capitalizing on
the reputation and goodwill we already have. There is
plenty of knowledge and expertise within, which I think
can be leveraged to enhance the image of BCAS. With
the shrinking of the world to a global village we need to
explore options to benefits from this trend.

Let’s move to a sincere wish I have!

2. YUVA SHAKTI

The youth! They are our future and they can be the catalyst
of evolution in our Society. I look forward to encouraging
new blood to take up key roles. And to ensure that happens
I would like to implement special incentive schemes to get
more youth to join BCAS. Having done that I would also
like to ensure they get more opportunities and platforms
to express their ideas and vision. Recently, I heard about
the concept of “Shadow Committees” and I would like to
set up Yuva Shadow Committees. These groups of young
minds will think aloud fresh ideas and approaches on the
same challenges faced by the managing committee…and
I hope it will lead to some positive change.

3. DIGITIZATION

Digitization is not a fad or a passing trend that
some companies or individuals flaunt. Digitization
is essential…it has become the need of the hour!
With digitization we will be better empowered to
manage our resources and conduct our business.
I look forward to digitizing as much as I can of
BCAS’ operations and resources. A good start has
already been made in this direction and I would
like to add momentum to the entire process. In
addition to being able to disseminate knowledge,
we would be able to translate information into action
more effectively.

Finally I would like to tackle a relatively ignored activity of
our Society…

4. NETWORKING

Networking is a mantra that is much advocated by
many of the management gurus. At BCAS, I feel we
should work harder in this area. Be it the government,
corporate or fraternity level, we need to step up our
efforts. I hope we will be able to take some giant strides
in this area by organizing some events to reflect the
“Start Up India and Digital India” initiatives undertaken
by the government. We could even re-look at some
of events and tweak the format to include moments
of interaction and networking. Using our digitized
resources and media, we could reach out to a wider
audience and serve the members better. BCAS
could provide more platforms in the form of events
for networking among accountings firms. Networking
Power Summit is one format which could be organized
more frequently and modified to pave the way for
greater networking.

These are just some of my ideas that I have put
together to set the ball rolling. While I and my
colleagues remain open to various suggestions and
infact welcome it, I would like to call upon each one
of you to join us in this process of transformation
of society to the needs of the present times by
mobilizing the power of yuva-shakti & digitization
to build bridges for expansion by creating robust
networks. I am sure I will continue to receive the
same love and affection from you in this very important
journey of life.

Thank You

shailesh.kwebmaker

Growing Your Practice – “Making Time To Think..”

Today professionals spend
their time on what is urgent, what seems necessary on immediate basis. This
includes client meetings, attending to assignments, amongst many others. Most
of the time is taken away by ‘pressing’ needs of such day to day activities.
Professionals generally complain that they don’t have time, especially time for
thinking about their own practices; leave alone, management of their practices.

How can one grow if one cannot think adequately about one’s
own practices? For this to happen, it is never going to be automatic. It will
always be by a concerted effort on part of the professional and with support
from the professional service firm.

Practice management is largely accomplished by setting aside
quality time to think about the firm’s strategic direction, focus of practice,
people and their motivation, clients and services to clients, processes and
systems, and above all, strategic alignment for the firm. This would mean
taking out a “chunk of time”. And taking out a chunk of time to do real
practice management implementation needs commitment and focus. And it also
needs certain techniques and strategies which can make it easier for the
professional service firm to execute and not have practice area/s suffer due to
lack of time.

Some of these strategies are time tested and it is important
that professionals learn to implement them. The theme of this article is about
‘Making time to think for growth’. This presupposes that most professionals are
otherwise not able to easily do that. Here are some best practices that have
worked across professional service firms:

1. Taking out time

One of the most effective
strategies used by Partners of successful professional service firms is taking
out a day in the week or taking out half-days twice a week or reserving a
Saturday exclusively for issues concerning practice management. This chunk of
time that is devoted would lead to wonderful results.

Taking out a mid-week day such as Wednesday normally turns
out to be very effective because the Professional has a Monday & Tuesday
before and a Thursday & Friday after to cover up on pending work. Also,
generally mid weeks are less pressured for engagement deliveries or from a
client expectation for exclusive time to talk or meet.

Some professionals find that an end of the week day like a Friday or
Saturday works much better as end of the week generally are clearing days.

Which day of the week
works is a personal decision; it is important for the Professional to be
committed to pick up any a slot that works the best. Again, there is no one
size that fits all. What may work for one, may not work for the other. And
therefore, each professional can choose a day or two half days based on his or
her preference and commitments.

2. Why is it important to dedicate a full day in a week?

This could be a typical question being asked by most
Professionals. Well, simply because in the day to day grind and never ending
client expectations, it is only dedicated time that works.

What normally happens is that unless a Professional is
mentally free to think i.e. he does not have to attend to client calls, emails
or meetings; nor does he need to interact with staff or fellow partners – which
generally never happens when one is in office, he will never be able to think
through the nuances and arrive at the much required set of propositions, ideas,
postulations, probable range of solutions and conclusions. It is not so easy
for a professional to get up one day and start this dedicated approach to
taking critical decisions for one’s own practice. And therefore, Professionals worldwide have
practiced this art over time and over a number of months to finally reach the
stage where they dedicate 1/7th of the week to thinking about growth.

3. Action orientation

A dedicated day out means
a lot of commitment and it leads the professional to action. One will not like
to idle around, as there would be others in the firm who would be burning the
oil; and morally, a professional would be compelled to justify his absence from
work, by showing some productive and constructive outcome beneficial to the
firm.

This
situation is normally quite challenging when it begins. The partner taking out
the time can face a situation where he is not sure of the outcome or its
effectiveness. Thus, expectations have to be clearly set by those tasked with
“governance” of the firm, so that there is action bias and lesser chance of
fatigue setting in. This day out could also mean meeting partners of other
professional service firms, meeting entrepreneurs and seeking their inputs
about growth, meeting regulators/bankers/colleagues from other
professions/professors and academia and catching up with friends who have been
there and done that. If well planned, it is found that most people would want
to meet up with professionals and exchange ideas and thoughts in the hope that
“He is a good guy to converse with and I will certainly learn something”.

4. Make a start

If one thinks of it, even
taking out 25-30 days in a year and increasing it over time to 35-40 days in the
52 weeks that all of us have to our disposal would be a good start.

Successful practitioners take out a good 40 days a year for practice
management. Research shows that it is these firms that are normally successful
in ensuring continuous alignment of each facet of one’s practice and are set on
a path to growth. Each partner in a professional service firm may not be able
to take out so much time. Some may be at 10-20% of this benchmark whereas
others would be at 25-35% of this benchmark. That’s low; but is better than not
spending any time. So, make a start!

5. Partner retreat

One other strategy that
always works in such cases is a policy of having annual partner retreats of 3-5
days and quarterly meetings of 1-2 days. These 10-12 days are themselves invaluable
to firms that grow and grow fast.

When the partners meet in an environment of uncluttered,
uninterrupted, strategic mind frame – wonderful outcomes are a foregone
conclusion.

Partner retreats are not meant for discussing operational
issues but the focus normally has to be on strategic issues concerning the firm
and firm growth. These would include looking at the strategic direction the
firm is taking, looking at innovation in the market place, breaking ice in
relaxed environments and just getting to know each other better.

How invaluable all of these
could be if done in a manner that is consistent, thought through, and
sustained? The best of firms have used partner retreats to keep the firm on a
high growth trajectory without having to worry about missed opportunities or
absence from work or offices. To the contrary, when partners are not around the
teams or in the offices andif the practices are still working smoothly, it is a
clear reflection of a well-oiled machinery in terms of maturity of processes
that a practice area has been able to develop. It’s also a lot to do with the
way partners think about succession and growth.

Firms after firms have reported that partners in professional
services firms, being the unique breed that they are, come into their own in a
relaxed retreat environment.

Here are some suggested agenda questions for a typical partner retreat:

1) What are
the challenges facing your practice area?

2) How can
the firm help you address those challenges?

3) What are
the emerging areas that the firm may want to expand their practice into?

4) What are
some of the issues that you are facing at a personal level impacting your work,
if any, that the firm can help resolve?

5) What
ideas do you have for innovation in the firm?

6) What are
the challenges that you see facing the firm and its growth?

7) What are
the three big ideas you have for growing the firm and for growing your practice
area?

8) How do
you assess systems and processes, policies and procedures in the firm? What can
be done better? What role can you play in any of them? What could we outsource
to team members – internally or externally?

9) What are
clients telling you in your practice area? How can we be more relevant to our
clients?

10) How can
we be a better firm for our team members?

11) How
should the firm think about some strategic aspects for the future:

a) Expansion
organically

i) Branches,
new locations

ii) New
practice areas

b) Inorganic
expansion

i) Networking
with like-minded firms

ii) Joining
an international network

iii) Starting
one’s own network

iv) Merging
other firms into ours

v) Merging
our firm into another firm

6. Strategic outcomes

Writing on a new change in
the law, say, a tax development, comes naturally to a tax partner. The question
to ask is: What is the strategic outcome of this tax alert that is being
produced for the clients of the firm? Doing this repeatedly is time spent by
various people in the tax team. So, what are we achieving:

1) Client
outreach?

2) A
message going out to clients that “we exist”?

3) We are
on top of our game in tax developments.

4) We can
help you navigate the law.

5) Come to
us with questions and get the best response possible.

6) Does
this all add up to “development” of the tax practice? Technical development,
client awareness, new business development, knowledge repository enhancement,
developing a reputation in the market place that here is a firm that knows the
subject well.

Is this the desired
strategic outcome that the firm seeks? If it is, then well – you are doing
well. Keep building on it. If the firm has not thought through this, then its
important that before serious time is spent, the outcome is thought through
before embarking on any recurring project.

7. Partner alignment

Often taking out time to
think and execute strategies to grow the firm means that partners need to
interact more and more. It forces a convergence of thought process, even if it
is not there to start with. This turns into a process where partners start
ideating, giving creative inputs, debating alternatives and outcomes, and
finally coming into alignment.

Imagine, if no real time is taken out for meaningful
conversations about growing the practice, where would it leave the firm? The
routine continues, drudgery sets in and the best people leave. Human capital of
the firm is often taken for granted. Partners have to be in complete alignment
about the fact that team members need to be handled well at all levels. And
partners taking out time to think about growing the firm should devote a good
portion of time to thinking about their team’s development, career path and
roadmap for growth. In their success and upward mobility, lies the firm’s
growth and success.

All said and done:

Partners in alignment is
always a wonderful sign of a firm’s integrated level of working, measured
growth and consistent delivery across all practice areas. One of the most
sought after outcome for a firm is growth of reputation and goodwill. A visible
brand creates a perception which ultimately turns into a sterling reputation
for consistent and solid advice and delivery.

Thus, making time to think
across the partner group, can create strong ripples, leading to actionable
ideas and strategies, which can ultimately change the fortunes of the
professional service firm and lead it to a strong growth trajectory. Partners
should make the time to think. It is in their interest, the team’s interest and
the firm’s interest in the perennial quest for growth.

shailesh.kwebmaker

What Type Of SEBI Orders Are Appealable? Supreme Court Decides

The Supreme Court has laid to rest
a controversial and important issue. That is on the issue as to what orders
passed by the Securities and Exchange Board of India securities laws are
appealable. SEBI has both general and specific powers. SEBI passes orders on
several issues. SEBI also issues circulars, directions, etc. which have
significant impact on persons connected with market operations. Since it is an
expert body dealing with a field which is complex, courts give a lot of freedom
to SEBI. If one reads the powers of SEBI, SEBI has almost been given a carte
blanche on how it can deal with the operation of the securities markets.

SEBI has powers
:

– to make rules and regulations, that too,
except for some administrative and parliament overseeing, are largely
self-determined.

– to give directions to stock exchanges, listed
entities, intermediaries, etc.

– to punish and levy penalties,

– to disgorge wrongfully made profits,

– to make parties buy shares or sell shares etc
and

– to debar entities to approach the financial
markets for a specified period.

The question before the Supreme
Court was : whether all orders passed by SEBI are appealable or are there any
exceptions – that is – some orders are not appealable?

The right to appeal is important.
The first appeal is to the Securities Appellate Tribunal (“SAT”). SAT has a
great record of disposing appeals fast with not many of its rulings being
overturned by the Supreme Court (the next appellate body). SAT is an expert
body well versed with the functioning of the securities market and hence
aggrieved parties can expect a quick relief from an authority which has an
indepth grasp of finer issues of this complex field. The Supreme Court in the
case of Clariant (Clariant International Limited vs. SEBI (2004) 54 SCL 519
(SC)) has observed, “The Board is indisputably an expert body. But when it
exercises its quasi-judicial functions, its decisions are subject to appeal. The
Appellate Tribunal is also an expert Tribunal.” (emphasis supplied).

In the past, appeals have been
liberally admitted. Even letters of SEBI, if they affected rights of a party,
have been held to be appealable. However, when a Chartered Accountant appealed
to SAT on the ground that SEBI should not have referred his name to ICAI, it
was rejected since it was merely a reference.

However it was felt that clarity
was lacking as to what orders were appealable as the same was not clearly
defined. Another issue which required clarification was: whether circulars
which affected a group of parties adversely were appealable. The decision in
the case of NSDL vs. SEBI ((2017) 79 taxmann.com 247 (SC) deals with
such issues.

Facts of the case

The
facts of the case are fairly simple. SEBI had issued a circular to depositories
directing them to restrict their charges in the manner and to the extent
prescribed in the circular. Obviously, the depositories were aggrieved as the
circular directly affected their finances. NSDL, a depository, appealed against
the circular/direction to SAT. Preliminary issue raised before SAT was whether
such a circular/direction is appealable. SAT on merits, rejected the appeal and
held the circular/directions to be valid. In other words, circulars /
directions issued by SEBI were appealable. Both parties appealed against the
order of SAT to the Supreme Court. SEBI appealed against the part where SAT had
held that such a circular/direction was appealable. The depositories appealed
against the part where on merits its appeal was rejected.

The Supreme Court decided to deal
first with the part of the SAT order where it was held that such a circular was
appealable. Obviously, if the Court found that such a circular was not
appealable, then the part relating to merits would not require consideration.

Analysis of orders passed by SEBI
into categories

To decide whether the circular
issued by SEBI was appealable or not, the Supreme Court divided various types
of circulars, orders, directions, etc. that SEBI was empowered to issue into
three categories:-

1. Orders that are in
exercise of administrative functions

2. Orders that are in
exercise of its legislative functions

3. Orders that are in
exercise of its quasi-judicial functions.

The Supreme Court held that it was
only the third category, i.e. orders that are issued in exercise of its quasi-judicial
functions, were the ones that were appealable.

The Court then, firstly, gave
reasons why it held that only such category or orders were appealable.
Secondly, it explained meticulously how to determine whether an order falls
under which category. The decision even pointed out the provisions in the SEBI
Act that dealt with powers relating to each category of functions. On facts, it
held that the circular was issued in exercise of administrative functions and
hence it was not appealable.

Why are only orders issued by
SEBI in exercise of quasi-judicial functions appealable under the SEBI Act?

The Court meticulously analysed
the provisions of the Act to show that the Act provided and intended to allow
appeal only against quasi-judicial orders.

Firstly, it highlighted the
constitution of SAT. It noted that the Presiding Officer has to be a retired
judge. That showed that only quasi-judicial orders were intended to be
appealable.

Secondly, it noted that in case of
appeals against orders passed by an adjudication order, appeal could be made by
an aggrieved party within 45 days of the day when such order is “received by
him”. The Court observed that “Generally administrative orders and legislative
regulations made by the Board are never received personally by ‘the person
aggrieved’”. Hence, once again, it was only quasi-judicial orders that were
intended to be appealed.

The Court then observed that, as
held in its earlier decision in Clariant’s case that the powers of SAT were
co-extensive with that of SEBI while reviewing in appeal SEBI’s orders. Hence,
once again, such orders can only be quasi-judicial in nature.

Even the procedure relating to
appeal pointed towards this. The order passed by SAT on appeal had to be sent
to the parties to the appeal (i.e. the aggrieved party) and the adjudicating
officer. Once again, this shows, the Court held, that the scheme of the Act was
to allow appeal only against quasi judicial orders.

The fact that appeals against
orders of SAT to the Supreme Court are allowed only on questions of law was
held to be yet another pointer in this direction.

Hence, the Court concluded that :

1. appeals are allowable only
against quasi-judicial orders of SEBI. Appeals against orders in exercise of
legislative functions is obviously beyond the appellate function of SAT which
itself is a creature of the Act.

2. Orders in exercise of
administrative functions too cannot be appealed against before SAT but petition
for judicial review may be filed in Court.

How to determine whether an
order is in exercise of administrative/legislative/quasi-judicial functions?

The above analysis brings us to
the important point of how to determine whether a particular order is in
exercise of quasi-judicial functions and thus appealable or whether it is in
exercise of administrative or legislative functions and hence not appealable.
Here again, the Court meticulously analysed the issue on first principles.

It cited the classic case of The
King vs. Electricity Commissioners [(1924) 1 KB 171] where Lord Justice
Atkin defined a quasi-judicial order as:-

“Whenever
any body of persons having legal authority to determine questions affecting
rights of subjects, and having the duty to act judicially, act in excess of
their legal authority, they are subject to the controlling jurisdiction of the
King’s Bench Division exercised in these writs.”

The
Court further observed that the above decision was applied in another decision,
and the following guidelines were given to decide whether an order of an
administrative body is a quasi-judicial one:-

“(i) There must be legal
authority; ?

(ii) This authority must
be to determine questions affecting the rights of subjects; and

(iii) There must be a
duty to act judicially.”

The Court further qualified and
explained the principle that a mere absence of a lis between the parties
does not make the order one that is not quasi-judicial. So long as the
aforesaid 3 conditions are satisfied, the order is a quasi judicial one. It
observed, “..the absence of a lis between the parties would not
necessarily lead to the conclusion that the power conferred on an
administrative body would not be quasi-judicial – so long as the aforesaid
three tests are followed, the power is quasi-judicial.”

What also matters is the nature of
the final order. Thus, if the order does not determine the rights of parties
and, for example, makes a report after giving the parties a hearing, the order
is not a quasi-judicial one.

What are the specific
provisions in the SEBI Act, orders under which can be appealed against?

To make its order even more
comprehensive and thus be helpful to be applied in specific provisions without
ambiguity, the Court then listed the various provisions of the SEBI Act under
which SEBI can pass orders. Of these, it then analysed which of such orders are
quasi-judicial and hence appealable. It also specified which of them provide
for administrative powers or legislative powers and hence not appealable to the
SAT. It observed as follows:-

“It may be stated that both Rules made u/s. 29 as
well as Regulations made u/s. 30 have to be placed before Parliament u/s. 31 of
the Act. It is clear on a conspectus of the
authorities that it is orders referable to sections 11(4), 11(b), 11(d), 12(3)
and 15-I of the Act, being quasi-judicial orders, and quasi judicial orders
made under the Rules and Regulations that are the subject matter of appeal u/s.
15T. Administrative orders such as circulars issued under the present case
referable to section 11(1) of the Act are obviously outside the appellate
jurisdiction of the Tribunal for the reasons given by us above.” (emphasis supplied).

Accordingly, the Court set aside the
order of SAT and held that the circular was issued in exercise of
administrative functions by SEBI and hence not appealable to SAT. It,
however, clarified that the parties were free to challenge the circular and
seek judicial review.

Conclusion

Thus, an important matter has been set to rest
and that too in a comprehensive way. It will help parties and SAT decipher
which orders are appealable. Further, parties will also know how to deal with
powers of SEBI that are classified as law making powers or administrative
powers. The decision aims to lend clarity, avoid litigation and ensure speedier
decisions.

shailesh.kwebmaker

RERA: An Overview

Introduction

On
1^stMay 2017, the Government of India, notified the operative
portion of the Real Estate (Regulation and Development) Act, 2016 (“the
Act”) as coming into effect. This
Act is touted as a game changer for the real estate industry of India. For the
first time, the sector would have a regulator in each state which would address
all the infamous malpractices of the real estate sector. The Act introduces a Real
Estate Regulatory Authority (RERA) which would regulate, control and
promote planned and healthy development and construction, sale, transfer and
management of residential properties. It aims to protect the public interest vis-à-vis
real estate developers and also to facilitate the smooth and timely
construction and maintenance of residential properties. Thus, just as the
capital markets have a regulator in the form of SEBI, the banking industry has
RBI, the real estate sector now has an authority. Although this is a Central
Act, each State would have its own RERA and the same is empowered to come out
with its Rules. This Article aims to give a bird’s eye overview of the Act. The
next month’s column would cover some issues under the Act.

RERA

A
Real Estate Regulatory Authority has been constituted for each State /
Union Territory under the Act. It will consist of a Chairman and minimum of two
whole-time Members. Accordingly, the Maharashtra State Government has
constituted the Maharashtra Real Estate Regulatory Authority. The RERA would
have various powers and rights. The Act also empowers the State Government to
constitute a Real Estate Appellate Tribunal to adjudicate any dispute
and hear and dispose of appeal against any direction, decision or order of the
RERA under the Act. The Tribunal will consist of a Chairman and minimum of two
whole time Members, one a Judicial Member and the other an Administrative /
Technical Member.

Application of the Act

Section
3 of the Act requires every Promoter of a real estate
project to register the same with the RERA before he can advertise,
market, book, sell, offer for sale or invite persons to purchase any plot,
apartment or building in the real estate project. Ongoing projects in the State
of Maharashtra for which the Occupation Certificate has not been received on 1^st
May 2017 are also required to be registered with the RERA. The time frame for
registering ongoing projects is by 31^stJuly 2017.

Registration
is not required for the following type of projects:

(a) Where land to be
developed is less than 500 square meters or the number of apartments to be
developed are 8 or lower.

(b) Where only
renovation or repair or re-development is to be done which does not involve any
marketing, advertising, selling or new allotment under the real estate
project.

The
term Promoter of a real estate project is very important since it
determines who is required to register under the Act and who would be subject
to the various obligations and liabilities. The Act defines a Promoter in an
exhaustive manner by giving a very far reaching definition. It covers a person
who constructs or causes to be constructed an independent building consisting
of apartments, or converts an existing building into apartments, for the
purpose of selling the apartments. It also covers a person who develops land
into a project, whether or not the person also constructs structures on any of
the plots, for the purpose of selling to other persons. Further, it covers any
person who acts himself as a builder, coloniser, contractor, developer, estate
developer or who claims to be acting as the holder of a power of attorney from
the owner of the land on which the building or apartment is constructed or plot
is developed for sale. The definition also states that where the person who
constructs or converts a building into apartments or develops a plot for sale
and the person who sells apartments or plots are different persons, both of
them are deemed to be the Promoters and both are jointly liable for the
functions and responsibilities specified, under the Act.

The
term real estate project is also very relevant since what needs to be
registered is a real estate project. The Act defines it to mean the development
of a building or a building consisting of apartments, or converting an existing
building into apartments, or the development of land into plots or apartment,
for the purpose of selling all or some of the said apartments or plots or
building and includes the common areas, the development works, all improvements
and structures thereon, and all easement, rights belonging to the same. The
Maharashtra Rules even define the term phase of a real estate project since
even a phase-wise registration of the real estate project can be done instead
of registration for the entire project. It may consist of a building or a wing
of the building or defined number of floors of a multi-storeyed building /
wing. E.g., Wing A of a Project could be treated as a phase of a project and
only the same may be registered.

Registration of Project

The
Act requires a Promoter to register a real estate project with the RERA. It is
important to note that the registration is required qua a project and
not qua a developer. The FAQs issued by the Maharashtra RERA also state
that developers are not registered but projects are registered. Thus, one
developer would need to register each and every project to be undertaken by
him. Similarly, if there are multiple developers for one project then all of
them would be shown as promoters in the single registration of that one
project. For registration of a project, the Promoter needs to make an online
application on RERA’s website, in the prescribed form, submit a long list of
documents and pay the prescribed fees. One of the important documents to be
submitted is a copy of the approval and sanction from the Competent Authority,
obtained in accordance with the building regulations. This means that the
application can only be made after the developer receives the Intimation of
Disapproval/Commencement Certificate (IOD/CC) for the project and not before
that. Some of the other key documents to be submitted include the following:

a) Proforma of the
allotment letter/Agreement For Sale /Conveyance Deed to be executed.

b) Affidavit that the
Promoter has clear title to the land and the details of encumbrances, if any,
the time period he estimates for completion and most importantly, a declaration
that 70% of realisations would be deposited in a separate bank account and used
in the manner prescribed.

c) 3 years’ Annual
Accounts Reports of the Promoter.

d) Copy of the
Development Agreement/Joint Development Agreement/Joint venture Agreement
executed in respect of the real estate project.

e) Details of
FSI/TDR, proposed FSI, sanctioned FSI, number of buildings/wings/floors to be
constructed along with aggregate area of open spaces and parking spaces.

f) One of the key
disclosures to be made is of the land cost, cost of construction and the
estimated total cost of the real estate project.

If
the RERA does not take any action on the application within 30 days, then it is
deemed to have granted its approval. In case the RERA refuses to grant
registration, then it must first give a hearing to the applicant.

Each
registration is valid for a period declared by the Promoter as the period
within which he undertakes to complete the project. The registration can be
renewed if the project completion time has been extended for force majeure reasons.
A total renewal of up to one year each can be granted. The Promoter is also
required to make an application for allotment of a password on the RERA’s
website.

The
registration can be revoked by the RERA if the Promoter has defaulted in any of
his obligations under the Act or he violates the terms/conditions of the
approval by the RERA or is guilty of any unfair trade practices.

Promoter’s Role and Responsibilities

Like
the various State Flat Ownership Acts, e.g., the Maharashtra Ownership Flats
Act, 1963, the RERA casts various responsibilities upon the Promoter. The Act
specifies a host of functions and duties for a Promoter, and some of the
important duties include the following:

(1) The Promoter must provide all details of
registration with the RERA and update his inventory
position on a quarterly basis.

(2) The advertisement
issued by the Promoter shall mention all particulars of registration with the
RERA.

(3) The Promoter at
the time of the booking and issue of allotment letter shall be responsible to
make available to the allottee, all sanctioned plans / layout, the stage-wise
completion schedule, etc.

(4) The Promoter shall
be responsible to obtain the completion certificate or the occupancy
certificate and to make it available to the allottees/co-operative society. He
shall be responsible to obtain the lease certificate, where the real estate
project is developed on a leasehold land, specifying the period of lease, and
certifying that all dues and charges in regard to the leasehold land have been
paid, and to make the lease certificate available to the association of
allottees.

(5) The Promoter is
also responsible for providing and maintaining the essential services, on
reasonable charges, till the taking over of the maintenance of the project by a
co-operative society of the allottees.

(6) The Promoter must execute a registered conveyance deed of the
building along with the proportionate title in the common areas to the
society/company/association of the allottees and pay all outgoings until he
transfers the physical possession of the real estate project to the society.
The Maharashtra Rules require that the application for forming a society/
entity for a single building should be submitted to the Registrar of
Co-operative Societies by the Promoter within 3 months from the date on which
51% of the total number of allottees in such a building or wing have booked
their apartments. In the absence of any local law, the Act specifies that the
conveyance deed in favour of the allottee or the association/society of the
allottees must be made within 3 months from date of issue of the occupancy
certificate or in Maharashtra within 1 month from the date on which the
Society/Company is registered, whichever is earlier.

(7) Once an agreement
for sale is executed for any apartment, he cannot mortgage or create a charge
on the apartment/building and if he does create a mortgage/charge, then it
shall not affect the right and interest of the allottee who has taken or agreed
to take such apartment, plot or building.

(8) The Promoter may
cancel the allotment only in terms of the agreement for sale. Thus, arbitrary
cancellation of allotment is no longer possible.

(9) If any allottee suffers a damage due to any false information
contained in an advertisement issued by the Promoter, then he must be
compensated by the Promoter. He may also decide to withdraw from the project,
and he shall be returned his entire investment along with interest @ 2% over State
Bank of India’s highest Marginal Cost of Lending Rate (SBI’s MCLR).

(10) The Promoter cannot
accept a sum more than 10% of the cost of the apartment as an advance payment
or an application fee without first executing a written and registered
Agreement For Sale with such person. The Agreement must be as per the Model
Prescribed Form specified under the Act.

(11) Once the sanctioned plans as approved by the RERA are disclosed to
prospective allottees, the Promoter cannot make any additions and alterations
to the same without their previous consent. He may make such minor additions or
alterations as may be required by the allottee/as may be necessary due to
architectural and structural reasons certified by an Architect/Engineer and
that too after proper intimation to the allottee. In case any defect in
structure/workmanship/quality/provision of services /other obligations of the
Promoter is brought to his notice within a period of 5 years by the allottee
from the date of handing over the possession, then the Promoter must rectify
the defect without further charge, within 30 days. If he fails to do so, the
allottees would receive appropriate compensation.

(12) The Promoter cannot
transfer or assign his majority rights and liabilities in the real estate project
to a 3^rdparty without prior written consent from 2/3^rd
of the allottees and prior written approval of the RERA.

(13) Promoter must
obtain title insurance of the land and building and separate insurance of the
construction of the real estate project.

(14) If the Promoter
fails to complete or is unable to give possession of an apartment, plot or
building:

(a) in accordance with
the Agreement for Sale; or

(b) due to discontinuance of his business as a developer on account of
suspension or revocation of the registration under the Act or for any other
reason, then he must, if the allottee wishes to withdraw from the project,
without prejudice to any other remedy available, return the amount received by
him with interest at the rate of SBI’s MCLR plus 2%. However, if an allottee
does not intend to withdraw from the project, he shall be paid, by the
Promoter, interest for every month of delay, till the handing over of the
possession at SBI’s MCLR plus 2%.

(15) He must comply with
the Act and Rules /Regulations /terms and conditions of approval granted by the
RERA.

(16) The Promoter must
sell a flat only on carpet area pricing basis and must mention the carpet area
in the Agreement for sale. The Act defines carpet area to mean the net usable
floor area of an apartment, excluding the area covered by the external walls,
areas under services shafts, exclusive balcony or verandah area and exclusive
open terrace area, but includes the area covered by the internal partition
walls of the apartment. All walls which are constructed on the external face of
an apartment would be treated as external wall while those walls/ columns
constructed within an apartment would be internal walls. Walls would include
columns within or adjoining or attached to the wall.

The Promoter must
also confirm the final carpet area allotted to the allottee once the OC has
been obtained. A variation of up to 3% of the carpet area is permissible. If
there is an upward variation then the allottee must pay for the same and if
there is a reduction then the Promoter must refund the excess money paid by the
allottee within 45 days with interest at SBI’s MCLR plus 2%.

(17) The total price
quoted to the allottee must clearly mention the taxes and must be escalation
free except for increases due to development charges payable to the Municipal
and similar authorities.

(18) If the promoter fails to complete or is unable to give possession
of an apartment, plot or building in accordance with the terms of the Agreement
For Sale, then the allottees may ask for refund of the sum paid with interest.
The time for refund of such amount payable by the Promoter to the allottees
with interest and compensation is within 30 days from the date on which the
same becomes due and payable.

Designated bank Account to be
maintained

One of the most unique features of
the Act is that the Promoter must maintain a separate designated bank account.
70% of all realisations from flat allottees must be deposited in this account,
to cover the cost of construction and the land cost and must be utilised for
that purpose only. This provision has been enacted to curb the earlier practice
of developers withdrawing the proceeds of one project and using it to start
another project, thereby risking the completion schedule of the 1^stproject.
Now, the substantial proceeds of one project must be used for that project
alone. Only a leeway of 30% is available to the Promoter. When the Bill for
passing this Act was moved in the Lok Sabha, the Union Minister had stated that
Promoters can use the remaining 30% for other expenses incurred or for any
other business purposes. It would act as a little cushion. This 30% cushion
would enable the Promoter to purchase some other land by giving an advance for
the same. The limit of 30% is to ensure that the project’s funds were not
diverted and that the project was completed on time.

Even the withdrawal for the cost
of project must be in proportion to the percentage of completion of the
project. For this purpose, the withdrawals must be certified by three entities
– an architect, an engineer and a practicing CA. It is necessary that the CA
certifying must not be the auditor of the Promoter. Further, every Promoter
must get his accounts audited by 30^th September in which his Auditor
must certify that during the year, the amounts collected qua a
particular project have been used for that purpose and that the withdrawal was
in compliance with percentage completion of the project. Other than the
certification from these 3 entities, there is no requirement of obtaining any
approval from the RERA for the withdrawal.

For
ongoing projects which have not received OC/CC before 1^st May, 2017,
70% of the amount realised from flat allottees is required to be deposited in
the separate bank account. However, in this case, if the estimated receivables
of such ongoing project is less than the estimated cost of completion of the
project, then the 100% of the amount to be realised is required to be deposited
in the said account. For instance, a project costs Rs. 25 crore. It has been
completed up to a certain level and certain flats of this project have been
sold. The total realisations from the flats sold are Rs. 10 crore and the
balance receivable from these flats is Rs. 6 crore. The balance cost of
construction to be incurred for the project is Rs. 7 crore. In this case, the
estimated balance receivables of Rs. 6 crore are less than the estimated cost
of completion of Rs. 7 crore, and hence, the entire Rs. 6 crore (100%) would be
deposited in the separate bank account. Here, the 30% cushion would not be
available. This is quite a stringent provision for the Promoter, but in the
interest of the flat allottees.

(Part II on Issues under
the Act would be covered as a part of Next month’s Laws and Business)

shailesh.kwebmaker

Disclosures in Standalone Ind As Financial Statements For The Year Ended 31st March 2017 Regarding Current Tax And Reconciliation Of Tax Expense

TATA CONSULTANCY SERVICES LTD

The income tax expense consists of the following:

(Rs. crores)

2017

2016

Current tax:

Current
tax expense for current year

6,762

6,344

Current
tax expense/(benefit) pertaining to prior years

(119)

6,643

6,376

Deferred
tax benefit

(230)

(112)

Total income tax expense recognised in the current year

6,413

6,264

The reconciliation of estimated income tax
expense at statutory income tax rate to income tax expense reported in
statement of profit and loss is as follows:

Year ended March 31, 2017

Year ended March 31,
2016

Profit
before income taxes

30,066

29,339

Indian
statutory income tax rate

34.61%

Expected
income tax expense

10,406

10,154

Tax effect of adjustments to reconcile expected income tax
expense to reported income tax expense:

Tax
holidays

(4,134)

(4,468)

Income
exempt from tax

(27)

(34)

Undistributed
earnings in branches and subsidiaries

(60)

Tax
on income at different rates

166

285

Tax
pertaining to prior years

(218)

Others
(net)

280

205

Total income tax expense

6,413

6,264

The Company benefits from the tax holiday available for units
set up under the Special Economic Zone Act, 2005. These tax holidays are
available for a period of fifteen years from the date of commencement of
operations. Under the SEZ scheme, the unit which begins providing services on
or after April 1, 2005 will be eligible for deductions of 100% of profits or
gains derived from export of services for the first five years, 50% of such
profits or gains for a further period of five years and 50% of such profits or
gains for the balance period of five years subject to fulfilment of certain
conditions. From April 1, 2011 units set up under SEZ scheme are subject to
Minimum Alternate Tax (MAT).

Significant components of net deferred tax assets and
liabilities for the year ended March 31, 2017 are as follows:

	Opening balance	Recognised /reversed through profit and loss	Recognised in/ reclassified from other comprehensive income	Closing balance
Deferred tax assets / (liabilities) in relation to:
Property, plant and equipment and Intangible assets	(22)	(62)	–	(84)
Provision for employee benefits	238	58	–	296
Cash flow hedges	(7)	–	(5)	(12)
Receivables, loans and advances	183	22	–	205
MAT credit entitlement	1,960	102	–	2,062
Branch profit tax	(346)	60	–	(286)
Unrealised gain/loss on securities carried at fair value through statement of profit and loss/OCI	(27)	(2)	(256)	(285)
Others	185	52	–	237
Net deferred tax assets / (liabilities)	2,164	230	(261)	2,133

Opening
balance

Recognised /reversed through profit and loss

Recognised in/
reclassified from other comprehensive income

Closing
balance

Deferred tax assets / (liabilities) in relation to:

Property,
plant and equipment and Intangible assets

(22)

(62)

–

(84)

Provision
for employee benefits

238

–

296

Cash
flow hedges

(7)

–

(5)

(12)

Receivables,
loans and advances

183

–

205

MAT
credit entitlement

1,960

102

–

2,062

Branch
profit tax

(346)

–

(286)

Unrealised
gain/loss on securities carried at fair value through statement of profit and
loss/OCI

(27)

(2)

(256)

(285)

Others

185

–

237

Net deferred tax assets / (liabilities)

2,164

230

(261)

2,133

Gross deferred tax assets and liabilities are as follows:

(Rs. crores)

As at March 31, 2017

Assets

Liabilities

Net

Deferred tax assets/
(liabilities) in relation to:

Property,
plant and equipment and Intangible assets

(56)

(28)

(84)

Provision
for employee benefits

296

–

296

Cash
flow hedges

(12)

–

(12)

Receivables,
loans and advances

205

–

205

MAT
credit entitlement

2,062

–

2,062

Branch
profit tax

–

(286)

Unrealised
gain/loss on securities carried at fair value through statement of profit and
loss/OCI

(285)

–

(285)

Others

237

–

237

Net deferred tax assets/
(liabilities)

2,447

(314)

2,133

Significant components of net deferred tax assets and
liabilities for the year ended March 31, 2016 are as follows: (not
reproduced as similar to 31-3-2017)

Under
the Indian Income Tax Act, 1961, the Company is liable to pay Minimum Alternate
Tax in the tax holiday period. MAT paid can be carried forward for a period of
15 years and can be set off against the future tax liabilities. MAT is
recognised as a deferred tax asset only when the asset can be measured reliably
and it is probable that the future economic benefit associated with the asset
will be realised. Accordingly, the Company has recognised a deferred tax asset
of Rs. 2,062 crores and has not recognised a deferred tax asset of Rs. 1,108
crores as at March 31, 2017.

The
Company has ongoing disputes with Income Tax authorities relating to tax
treatment of certain items. These mainly include disallowed expenses, tax
treatment of certain expenses claimed by the Company as deductions, and
computation of, or eligibility of, certain tax incentives or allowances. As at
March 31, 2017, the Company has contingent liability in respect of demands from
direct tax authorities in India, which are being contested by the Company on
appeal amounting Rs. 2,688 crores. In respect of tax contingencies of Rs. 318
crores, not included above, the Company is entitled to an indemnification from
the seller of TCS e-Serve Limited.

The
Company periodically receives notices and inquiries from income tax authorities
related to the Company’s operations in the jurisdictions it operates in. The
Company has evaluated these notices and inquiries and has concluded that any
consequent income tax claims or demands by the income tax authorities will not
succeed on ultimate resolution.

The
number of years that are subject to tax assessments varies depending on tax
jurisdiction. The major tax jurisdictions of Tata Consultancy Services Limited
include India, United States of America and United Kingdom. In India, tax filings from fiscal 2014 are
generally subject to examination by the tax authorities. In United States of
America, the federal statute of limitation applies to fiscals 2013 and earlier
and applicable state statutes of limitation vary by state. In United Kingdom,
the statute of limitation generally applies to fiscal 2014 and earlier.

RELIANCE INDUSTRIES LTD

The income tax expense consists of the following:

(Rs. crores)

Year Ended31^st March, 2017

Year Ended 31^st
March, 2016

TAXATION

Income tax recognised in Statement of Profit and Loss

Current
tax

8,333

7,801

Deferred
tax

1,019

831

Total income tax expenses recognised in the current year

9,352

8,632

The
income tax expenses for the year can be reconciled to the accounting profit
as follows:

Profit
before tax

40,777

36,016

Applicable
Tax Rate

34.608%

Computed
Tax Expense

14,112

12,464

Tax
effect of :

Exempted
income

(2,707)

(5,306)

Expenses
disallowed

3,044

3,378

Additional
allowances net of MAT Credit

(6,116)

(2,735)

Current Tax Provision (A)

8,333

7,801

Incremental
Deferred Tax Liability on account of Tangible and Intangible Assets

1,229

824

Incremental
Deferred Tax Asset on account of Financial Assets and Other Items

(210)

Deferred tax Provision (B)

1,019

831

Tax Expenses recognised in Statement of Profit and Loss (A+B)

9,352

8,632

Effective
Tax Rate

22.93%

23.97%

STERLITE TECHNOLOGIES LTD

The major components of income tax expense for the years
ended 31 March 2017 and 31 March 2016 are:

	31 March 2017	31 March 2016
Profit or loss section
Current Income Tax
Current income tax charge	51.55	52.77
Adjustment of tax relating to earlier periods	3.22	(5.93)
Deferred Tax
Relating to origination and reversal of temporary differences	2.47	19.35
Income tax expenses reported in the statement of profit or loss	57.24	66.19
OCI Section
Deferred tax related to items recognised in OCI during in the year:
Net (gain)/loss on revaluation of cash flow hedges	0.29	(0.69)
Re-measurement loss defined benefit plans	0.28	1.16
Income tax credit through OCI	0.57	0.47

31 March 2017

31 March 2016

(Rs. in crores)

Profit or loss section

Current Income Tax

Current income tax charge

51.55

52.77

Adjustment of tax relating to earlier
periods

3.22

(5.93)

Deferred Tax

Relating to origination and reversal of
temporary differences

2.47

19.35

Income tax expenses reported in the
statement of profit or loss

57.24

66.19

OCI Section

Deferred tax related to items recognised
in OCI during in the year:

Net (gain)/loss on revaluation of cash
flow hedges

0.29

(0.69)

Re-measurement loss defined benefit
plans

0.28

1.16

Income tax credit through OCI

0.57

0.47

Reconciliation of tax expense and the accounting profit
multiplied by India’s domestic tax rate for 31 March 2017 and 31 March 2016:

31 March 2017

31 March 2016

(Rs. in crores)

Accounting profit before income tax

197.98

247.61

At India’s statutory income tax rate of
34.61% (31 March 2016: 34.61%)

68.52

85.70

Adjustments in respect of current income
tax of previous years

3.22

(5.93)

Tax benefits under various sections of
Income tax Act

(16.84)

(15.98)

Others

2.35

2.41

At the effective income tax rate of
28.91% (31 March 2016: 26.73%)

57.24

66.19

Income tax expense reported in the
statement of profit and loss

57.24

66.19

RAYMONDs LIMITED

Tax expense recognized in the Statement of Profit and Loss

(Rs. in lakhs)

Particulars	Year ended 31st March, 2017	Year ended 31st March, 2016
Current tax
Current Tax on taxable income for the year	945.42	2,704.59
Total current tax expense	945.42	2,704.59

Deferred tax
Deferred tax charge/(credit)	(559.87)	3,121.19
MAT Credit (taken)/utilized	925.89	(1,961.21)

Total deferred income tax expense/(benefit)	366.02	1,159.98

Tax in respect of earlier years	15.20	–
Total income tax expense	1,326.64	3,864.57

Particulars

Year ended

31st March, 2017

Year ended

31st March, 2016

Current tax

Current Tax on taxable income for the
year

945.42

2,704.59

Total current tax expense

945.42

2,704.59

Deferred tax

Deferred tax charge/(credit)

(559.87)

3,121.19

MAT Credit (taken)/utilized

925.89

(1,961.21)

Total deferred income tax
expense/(benefit)

366.02

1,159.98

Tax in respect of earlier years

15.20

–

Total income tax expense

1,326.64

3,864.57

Reconciliation of the income tax expenses to the amount
computed by applying the statutory income tax rate to the profit before income
taxes is summarized below:

(Rs in lakhs)

Particulars	Year ended 31^st March, 2017	Year ended 31^st March, 2016
Enacted income tax rate in India applicable to the Company	34.608%	34.608%
Profit before tax	4,709.47	11,239.84
Current tax expenses on Profit before tax expenses at the enacted income tax rate in India	1,629.85	3,889.88

Tax effect of the amounts which are not deductible/(taxable) in calculating taxable income
Permanent Disallowances	167.85	363.38
Deduction under section 24 of the Income Tax Act	(42.62)	(52.14)
Interest income from Joint Venture on liability element of compound financial instrument	(233.06)	(210.00)
Tax in respect of earlier years	15.20	–
Income exempted from income taxes	(273.04)	(91.24)
Other items	62.46	(35.31)
Total income tax expense/(credit)	1,326.64	3,864.57

Particulars

Year ended

31^st March, 2017

Year ended

31^st March, 2016

Enacted income tax rate in India
applicable to the Company

34.608%

Profit before tax

4,709.47

11,239.84

Current
tax expenses on Profit before tax expenses at the enacted income tax rate in
India

1,629.85

3,889.88

Tax effect of the amounts which are not
deductible/(taxable) in calculating taxable income

Permanent Disallowances

167.85

363.38

Deduction under section 24 of the Income
Tax Act

(42.62)

(52.14)

Interest income from Joint Venture on
liability element of compound financial instrument

(233.06)

(210.00)

Tax in respect of earlier years

15.20

–

Income exempted from income taxes

(273.04)

(91.24)

Other items

62.46

(35.31)

Total income tax expense/(credit)

1,326.64

3,864.57

Consequent to reconciliation items shown above, the
effective tax rate is 28.17% (2015-16: 34.38%).

Significant Estimates: In calculation of tax expense
for the current year and earlier years, the group has disallowed certain
expenditure pertaining to exempt income based on previous tax assessments,
matter is pending before various tax authorities.

IDEA CELLULAR LTD

Tax Reconciliation

(a) Income Tax Expense

Rs.
Mn

Particulars

For the year

ended

March 31, 2017

For the year

ended

March 31, 2016

Current
Tax

Current
Tax on profits for the year

–

8,621.82

Total Current Tax Expense (A)

–

8,621.82

Deferred
Tax

Relating
to addition & reversal of temporary differences

(4,825.95)

5,623.81

Relating
to effect of previously unrecognised tax credits, no recorded

(1,053.33)

–

Total Deferred Tax Expense (B)

(5,879.28)

5,623.81

Income Tax Expense (A+B)

(5,879.28)

14,245.63

Income tax impact of re-measurement gains/losses on defined
benefit plans taken to other comprehensive income

(17.13)

(71.11)

(b) Reconciliation of average effective tax rate
and applicable tax rate

Rs. Mn

Particulars

For the year ended

March 31, 2017

For the year

ended

March 31, 2016

Profit
/ (Loss) from continuing operation before Income tax expense

(14,190.03)

40,708.51

Applicable Tax Rate

34.61%

Increase
/ reduction in taxes on account of:

Effect
of unrecognised deductible temporary differences

–

0.25%

Effect
of previously unrecognised tax credits, now recorded

7.42%

–

Effects
of expenses that are not deductible in determining the taxable profits

(0.64)%

0.24%

Other
Items

0.04%

(0.11)%

Effective Tax Rate

41.43%

34.99%

(c) Deferred tax assets are recognised to the
extent that it is probable that taxable profit will be against which the
deductible temporary differences, carry forward of unabsorbed depreciation and
tax losses can be utilised. Accordingly,
in view of uncertainty the Company has not recognized deferred tax assets in
respect of temporary differences arising out of effects of assessments and
unused tax losses/credits of Rs. 4,612.09 Mn, Rs. 3,738.82 Mn, and Rs. 3,442.47
Mn. as of March 31, 2017, March 31, 2016
and April 1, 2015 respectively.

ASIAN PAINTS LTD

( Rs. in Crores)
NOTE 18: INCOME TAXES	Year 2016-17	Year 2015-16
A.	The major components of income tax expense for the year are as under:
(i)	Income tax recognised in the Statement of Profit and Loss Current tax
	In respect of current year	817.22	743.74
	Adjustments in respect of previous year	(3.60)	(3.33)
	Deferred tax:
	In respect of current year	41.33	39.88
	Income tax expense recognised in the Statement of Profit and Loss	854.95	780.29
(ii)	Income tax expense recognised in OCI
	Deferred tax:
	Deferred tax benefit on fair value gain on investments in debt instruments through OCI	0.17	0.34
	Deferred tax expense on re-measurements of defined benefit plans	(2.84)	(0.91)
	Income tax expense recognised in OCI	(2.67)	(0.57)
B	Reconciliation of tax expense and the accounting profit for the year is as under:
Profit before tax	2,658.05	2,403.10
Income tax expense calculated at 34.608%	919.90	831.67
Tax effect on non-deductible expenses	22.62	38.81
Incentive tax credits	(34.70)	(46.23)
Effect of Income which is taxed at special rates	(19.70)	(14.12)
Effect of Income that is exempted from tax	(26.66)	(24.26)
Others	(2.91)	(2.25)
Total	858.55	783.62
Adjustments in respect of current income tax of previous year	(3.60)	(3.33)
Tax expense as per Statement of Profit and Loss	854.95	780.29

( Rs. in Crores)

NOTE
18: INCOME TAXES

Year 2016-17

Year 2015-16

The
major components of income tax expense for the year are as under:

(i)

Income
tax recognised in the Statement of Profit and Loss

Current
tax

In
respect of current year

817.22

743.74

Adjustments
in respect of previous year

(3.60)

(3.33)

Deferred
tax:

In
respect of current year

41.33

39.88

Income
tax expense recognised in the Statement of Profit and Loss

854.95

780.29

(ii)

Income
tax expense recognised in OCI

Deferred
tax:

Deferred
tax benefit on fair value gain on investments in debt instruments through OCI

0.17

0.34

Deferred
tax expense on re-measurements of defined benefit plans

(2.84)

(0.91)

Income
tax expense recognised in OCI

(2.67)

(0.57)

Reconciliation
of tax expense and the accounting profit for the year is as under:

Profit
before tax

2,658.05

2,403.10

Income
tax expense calculated at 34.608%

919.90

831.67

Tax
effect on non-deductible expenses

22.62

38.81

Incentive
tax credits

(34.70)

(46.23)

Effect
of Income which is taxed at special rates

(19.70)

(14.12)

Effect
of Income that is exempted from tax

(26.66)

(24.26)

Others

(2.91)

(2.25)

Total

858.55

783.62

Adjustments
in respect of current income tax of previous year

(3.60)

(3.33)

Tax
expense as per
Statement of Profit and Loss

854.95

780.29

The Company has the following unused tax losses which arose
on incurrence of capital losses under the Income Tax Act, 1961, for which no
deferred tax asset has been recognized in the Balance Sheet.

(Rs.
in Crores)

Financial Year

As at 31.03.2017

Expiry Date

As at 31.03.2016

Expiry Date

2009-10

–

3.73

31^st March, 2019

2011-12

1.07

31st March, 2021

9.93

31^st March, 2021

2013-14

2.03

31st March, 2023

2.03

31^st March, 2023

2014-15

8.64

31st March, 2024

8.64

³¹st March, 2024

TOTAL

11.74

24.33

shailesh.kwebmaker

Business Combinations of Entities under Common Control

Background

Appendix C, Business
Combinations of Entities under Common Control of Ind AS 103, Business
Combinations, deals with accounting of common control business
combinations. The assets and liabilities of the combining entities in a common
control business transaction are reflected at their carrying amounts. This is
commonly known as “The pooling of interest method”. Paragraph 9 of Appendix C is reproduced
below.

“9 The pooling of interest method is considered to involve
the following:

(i) The assets and liabilities of the combining entities
are reflected at their carrying amounts.

(ii) No adjustments are made to reflect fair values, or
recognise any new assets or liabilities. The only adjustments that are made are
to harmonise accounting policies.

(iii) ………… “

Issue

An interesting question arises on
the application of the pooling of interest method. The question is whether
the carrying amount of assets and liabilities of the combining entities should
be reflected as per the books of the entities transferred/merged or the
ultimate parent. The standard requires reflecting the business combination
under common control at carrying value of the combining entities. However the
standard is silent about whether the carrying amounts should be those as
reflected in the standalone financial statements of the combining entities or
those as reflected in the consolidated financial statements (CFS) of the parent
or the ultimate parent.

Consider a basic fact pattern. A Ltd. is the parent company
of two subsidiaries, viz., B Ltd. & C Ltd. Consider the following two
Scenarios.

Scenario 1: B Ltd. merges with C Ltd.

Scenario 2: B Ltd. merges with A Ltd.

The question is raised from the perspective of how C Ltd. in
Scenario 1 and A Ltd in Scenario 2 will prepare their post combination
standalone financial statements.

It
may be noted that as far as A Ltd / parent’s CFS is concerned; the merger will
have absolutely no effect. This is because all intra-group transactions should
be eliminated in preparing CFS in accordance with Ind AS 110. The legal merger
of a subsidiary with the parent or legal merger of fellow subsidiaries is an
intra-group transaction and accordingly, will have to be eliminated in the CFS
of the parent or the ultimate parent.

Response

A similar question was raised to
the Ind AS Transition Facilitation Group (ITFG). In responding to the query,
the ITFG made a distinction between Scenario 1 and Scenario 2. The ITFG’s view
is given below.

Scenario 1

Assets and liabilities of
the combining entities are reflected at their carrying amounts. Accordingly, in
the separate financial statements of C Ltd., the carrying values of the assets
and liabilities as appearing in the standalone financial statements of the
entities being combined i.e B Ltd. & C Ltd. shall be recognised.

Scenario 2

In this case, since B Ltd. is merging with A Ltd.
(i.e. parent) nothing has changed and the transaction only means that the
assets, liabilities and reserves of B Ltd. which were appearing in the CFS of
Group A immediately before the merger would now be a part of the separate
financial statements of A Ltd. Accordingly, it would be appropriate to
recognise the carrying value of the assets, liabilities and reserves pertaining
to B Ltd. as appearing in the CFS of A Ltd. Separate financial statements to
the extent of this common control transaction shall be considered as a
continuation of the consolidated group.

Author’s View

The
ITFG has made a distinction between Scenario 1 and Scenario 2. In Scenario 1,
since the parent is not a party to the combination, the standalone financial
statements of C will combine carrying value of assets and liabilities of B and
C as appearing in their standalone financial statements. In Scenario 2, since
the parent is a party to the combination, A Ltd./ the parent’s post combination
financial statements will combine carrying values of A and carrying value of B
as appearing in A’s CFS. In other words, in Scenario 2, the accounting for the
combination is accounted as if, A had acquired B, and merged it with itself
from the very inception.

The logic of two different
approaches for accounting common control business combination based on whether
the parent is a party to the business combination is not absolutely clear.
Further, the logic does not emanate from a reading of the standard. In both
Scenario’s, business under common control are merging. Since the standard is
not clear on which carrying values to be used, the author believes that in both
Scenarios, there should be a clear accounting policy choice of either using
standalone carrying values or those that are reflected in the CFS of the parent
or ultimate parent.

The continuation of the
consolidation group approach should be an accounting policy choice and should
not be made conditional to the parent being a party to the business
combination. Globally under IFRS too,
either methods are acceptable, irrespective of whether a parent is party to the
business combination. Giving up the shares for the underlying assets is
essentially a change in perspective of the parent of its investment, from a
‘direct equity interest’ to ‘the reported results and net assets.’ Hence, the
values recognised in the CFS becomes the cost of these assets for the parent.

If the author’s approach is
considered, other relevant questions as detailed below, and not addressed by
ITFG, may not need any further clarification:

– In Scenario 2, B Ltd does not merge with A
Ltd, but A Ltd. merges with B Ltd.

– In Scenario 2, it is not absolutely clear
whether it is mandatory to use the carrying values of B Ltd as appearing in the
CFS of A or there is a choice to use the carrying values of B Ltd. as appearing
in the standalone financial statements of B Ltd.

The ITFG may provide appropriate clarification.

shailesh.kwebmaker

17 Section 5(2)(a) of the Act – Benefit of Circular 13/2017 regarding non-taxability of remuneration received by non-resident in NRE account available also where such income was received for the first time in India; hence, such income was not taxable under the Act.

TS-219-ITAT-2017(Kol)

Shyamal Gopal Chattopadhyay vs. DDIT

A.Y.: 2011-12, Date of Order: 2^nd June, 2017

Facts

Taxpayer, a non-resident individual, was a marine engineer
employed by a Hongkong shipping company (HCo). During the year under
consideration, Taxpayer was a non-resident. Taxpayer received remuneration in
foreign currency from HCo which was directly remitted to the NRE account in
India of the Taxpayer.

Taxpayer argued that salary income for services rendered
outside India is not taxable under the Act. Furthe, since salary was received
outside India in foreign currency and remitted to NRE account, it was not
taxable in India u/s.5 of the Act on receipt basis.

Relying on the decision of the Mumbai Tribunal in the case of
Capt. A. L. Fernandes vs. ITO [81 ITD 203], AO observed that if the
place where the recipient gets the money (on first occasion) under his control,
is in India, such income is to be considered as received in India. According to
AO, since the income was remitted by the employer of the Taxpayer to his bank
account in India, the Taxpayer had control over the money for the first time in
India. Therefore, AO held that such income was received in India.

Taxpayer appealed before CIT(A), who upheld the order of AO.
Aggrieved by the order of CIT(A), Taxpayer appealed before the Tribunal.

Held

– In terms of Circular 13/2017 dated
11.04.2017, salary accrued to a non-resident seafarer for services rendered
outside India on a foreign going ship (with Indian flag or foreign flag) is not
to be included in the total income merely because such salary is credited in
the Non-resident rupee (NRE) account maintained with an Indian bank by the
seafarer.

– Remittances of salary into NRE Account
maintained with an Indian Bank by a seafarer could be of two types:

– Situation 1: employer directly crediting
salary to the NRE Account maintained with an Indian Bank by the seafarer;

– Situation 2: employer directly crediting
salary to the account maintained outside India by the seafarer and the seafarer
transferring such money to NRE account maintained by him in India.

– Credit to account outside India and
subsequent transfer to NRE account would be outside the purview of provisions
of section 5(2)(a) of the Act, as what is remitted is not “salary
income” but mere transfer of Taxpayer’s own funds from one bank account to
another which does not give rise to “Income”.

– In the present case, the employer has
directly credited the salary, for services rendered outside India, into NRE
bank account of the seafarer in India.

– Circular 13/2017 is vague. It is not clear
whether the expression “merely because” used in the Circular refers
to direct credit to NRE account or transfer of funds to the NRE account and
whether or not it covers both types of credits to NRE account.

– Accordingly, benefit of doubt should be given
to the Taxpayer by interpreting the Circular as covering both the situations.

– Though such an interpretation of the Circular
would make provisions of section 5(2)(a) of the Act redundant, such
interpretation is binding on the revenue. Reliance in this regard was placed on
SC decision in the case of Indian Oil Corporation, wherein it was held that
when a circular is in operation then the revenue will be bound by it. Revenue
then cannot plead that the circular is not valid or contrary to the provisions
of the statute.

– Thus salary income received in NRE account
was not taxable in India.

shailesh.kwebmaker

16 Section 92E of the Act – Allotment of shares is an international transaction; Taxpayer is required to furnish Form 3CEB for reporting such transaction.

TS-319-ITAT-2017(Mum)-TP

BNT Global Pvt. Ltd. vs. ITO

A.Y.: 2011-12, Date of Order: 25^th April, 2017

Facts

Taxpayer was an Indian
company. During the course of assessment proceedings, AO observed that the
Taxpayer had received foreign inward remittance on account of share capital and
premium from one of its existing shareholder who was also a director of the
Taxpayer Company. Though no adjustments were made, AO held that the allotment
of shares was an international transaction and levied penalty of INR 1 lakh
u/s. 271BA the Act as the Taxpayer did not file Form 3CEB.

The Taxpayer contended that share allotment transaction is
not an international transaction and in absence of any other international
transaction entered into by the Taxpayer, it was not required to file form
3CEB. Taxpayer appealed before CIT(A), who upheld the levy of penalty.
Aggrieved by the order of CIT(A), the Taxpayer appealed before the Tribunal.

Held

– It is mandatory for a person entering into
international transactions to furnish Form 3CEB setting forth the particulars
of international transactions.

– Transaction of share investment, clearly
falls within the ambit of section 92E of the Act and hence it has to be
reported in Form 3CEB.

– In IL&FS Maritime Infrastructure Co. Ltd.
(ITA No. 4177/Mum/2002 dated 23.07.2013), co-ordinate bench of the Tribunal has
held that share investment transactions fall within the purview of section 92E
of the Act. Hence, Taxpayer is required to file form 3CEB for such transactions
before the due date. In case of default, penalty u/s. 271BA would be attracted.

– Thus, Taxpayer’s contentions that it was not
required to file Form 3CEB, since the provisions of section 92E of the Act were
not applicable to allotment of shares does not hold good.

– Taxpayer’s reliance on Vodafone India
Services Pvt. Ltd. vs. ACIT (2014) 368 ITR 1 (Bom) is not applicable to the
present case, since in the aforesaid case Form 3CEB was filed by the Taxpayer
and issue considered therein was validity of arm’s length price adjustment made
by Transfer Pricing Officer (TPO) to issue of equity shares at a premium.

– Failure on the part of the Taxpayer to
furnish the audit report in Form 3CEB is a violation of the provisions of
section 92E of the Act. Accordingly, penalty under the Act was leviable u/s.
271BA.

shailesh.kwebmaker

15 Sections 9 of the Act; Article 13 of India-Germany DTAA – Payment made for use of standard operating procedures amounts to sharing of information concerning industrial, commercial or scientific experience and taxable as royalty under India-Germany DTAA.

TS-209-ITAT-2017(Ahd)

Oncology Services India Pvt.Ltd. vs. ADIT

A.Y.: 2009-10, Date of Order: 1^stJune, 2017

Facts

Taxpayer, an Indian company, had
entered into an agreement for use of standard operating procedures (SOPs)
developed by a German group entity (GCo) in order to harmonise all required
software systems, policy and processes. The Taxpayer was also granted access to
the database, email server and hardware and software of GCo for the aforesaid
purpose. During the year under consideration, the Taxpayer had made payments to
GCo as per the agreement, however, no tax was deducted at source on such
payments by the Taxpayer.

During the course of assessment
proceedings, the Assessing Officer (AO) observed that the payments were made
for “using the name, goodwill and market reputation” of GCo and held that
income from such payment is taxable in India as royalties u/s. 9(1)(vi) of the
Act.

Taxpayer argued that payments were in the nature of business
income and in absence of PE of GCo in India, not taxable in India. Further, GCo
had permitted it to use the brand name, logo and website without any cost or
financial obligation. Hence, no part of the payment may be attributed to such
use.

Aggrieved by the order of AO,
Taxpayer appealed before the CIT(A) who upheld the order of AO. Subsequently,
Taxpayer appealed before the Tribunal.

Held

– The use of name, brand, logo and website was
without any cost or financial liability. Hence, no part of the payment made to
GCo could be attributed to such use.

– SOPs granted were “matured validated standard
procedures” which were developed by GCo over a period of time and approved by
the regulatory bodies. The access to database, and allied activities like
harmonisation of software systems, policy and process, were only incidental to
this main object of sharing the SOPs and thus cannot be viewed in isolation.

– Sharing of SOPs was in effect
sharing of the information about the scientific experiences by GCo. Sharing of
such information was covered within the limb of “use of or right to use
information concerning industrial, commercial or scientific” in Article 13(3)
of India-Germany DTAA. Thus, the payment for sharing of the SOPs was taxable as
‘royalties’ under the India-German DTAA.

shailesh.kwebmaker

New Safe Harbour Provisions in Indian Transfer Pricing Regime

“Safe Harbour Rules”
were notified by the CBDT in the year 2013¹, which were applicable
to certain select International Transactions, prominent among them were
transactions relating to software, KPO, R&D, manufacturing of auto
components and intra-group loans and guarantees. These Rules aimed at reducing
litigation in the arena of Transfer Pricing. However, these Rules failed to
attract taxpayers due to prescription of high thresholds. A Committee was set
up to look into various aspects of safe harbor regime and based on its report
new safe harbor rules are notified by the CBDT on 7^thJune 2017. This
article analyses various provisions, their impact and potential issues that may
arise there from.

1.0 Introduction

Safe Harbour Rules (SHR) were first introduced in India vide CBDT
Notification No. SO 2810 (E) dated 18th September 2013. These Rules were
applicable only to international transactions for the Assessment Year (AY)
2013-14 and four AYs immediately following that, i.e. for and up to AY 2017-18.
A new set of SHR have been introduced with effect from 1st April 2017 which
shall apply with effect from the AY 2017-18 and two AYs immediately thereafter
i.e. for and up to AY 2019-20. Thus, new SHR will be effective for three years
only as oppose to five years in case of erstwhile SHR. These Rules are
discussed in the subsequent paragraphs.

It is provided that where a tax
payer is eligible for both the Rules (i.e. Old and New) (the same is possible
for the AY 2017-18, being an overlapping year), then he has an option to choose
the one which is most beneficial to him.

Explanation to section 92CB
of the Income-tax Act, 1961 (the Act) defines safe harbour to mean
circumstances in which the Income-tax authorities shall accept the transfer
price declared by the assessee.

The United Nation’s Practical Manual on Transfer Pricing for Developing
Nations released in the year 2013 defines “Safe harbour rules as rules whereby
if a taxpayer’s reported profits are below a threshold amount, be it as a
percentage or in absolute terms, a simpler mechanism to establish tax
obligations can be relied upon by a taxpayer as an alternative to a more
complex and burdensome rule, such as applying the transfer pricing
methodologies”.

OECD Transfer Pricing Guidelines defines a safe harbour as “a provision
that applies to a defined category of the taxpayers or transactions and that
relieves eligible taxpayers from certain obligations otherwise imposed by a
country’s general transfer pricing rules.”

2.0 New SHR effective from 1^st April 2017

A new category of
transactions being “Receipts of Low Value-Adding Intra-Group Services” has been
introduced. The peak rates of safe harbour margins have been reduced in many
categories. In respect of knowledge process outsourcing, (KPO) safe harbour margins
are slashed and divided in to three rates of 18%, 21% and 24% instead of single
rate of 25% in the earlier regime. Moreover, the new rates are linked to
employee cost to operating cost ratio. These and other changes are elaborated
in more detail in the table, which also carries comparison of the old and new provisions.

Comparative
Provisions of the Old and New SHR

Sr. No

Eligible
International Transactions

Safe Harbour Margin –

New Provisions

Safe Harbour Margin –
Old Provisions

Provision of Software Development Services

[Rule 10TA(m)] read with

[Rule 10TC(i)]

Operating Profit Margin (OPM) in relation to Operating
Expenses (OE):

For Software Development Services

(i) 17% or more, where the value of international
transaction does not exceed Rs. 100 crore;

(ii) 18% or more, where the value of international
transaction exceed Rs. 100 crore but does not exceed Rs. 200 crore;

For ITES

(i) 17% or more where aggregate value of such
transactions during the previous year does not exceed Rs. 100
crore; or

(ii) 18% or more where aggregate
value of such transactions during the previous year exceeds Rs. 100 crore
but less than Rs. 200 crore.

[As the limit of Rs. 500 crore stands reduced, the
companies with high value transactions will have to per force opt for
unilateral or bilateral Advance Pricing Agreements (APAs) to have certainty
of arm’s length pricing]

Operating Profit Margin (OPM) in relation to Operating
Expenses (OE):

(i) 20% or
more where total value of such transactions during the previous year does not
exceed Rs. 500 crore; or

(ii) 22% or
more where total value of such transactions during the previous year exceeds
Rs. 500 crore.

Provision of Information Technology Enabled Services (ITES)

[Rule 10TA(e)]

read with

[Rule 10TC(ii)]

Remarks:

(i) “OPM” in relation to “OE” means the ratio
of operating profit, being the operating revenue in excess of operating
expense, to the operating expense expressed in terms of percentage.

(ii) Rule 10TA defines “Software Development
Services” as well as ITES. In both cases it is clarified that any research
& development (R&D) services will not be included in the definition
whether or not such R&D services are in the nature of contract R&D
services.

(iii) It may be noted that for applying the
threshold of Rs. 100 crore or two crore, as the case may be, to the Software
Development Services, one need to consider the value of international
transaction (could be read as “single transaction”); whereas for ITES, one
need to consider the aggregate value of all transactions during the relevant
previous year. Earlier this distinction was not there and for both types of
services, the thresholds were computed by to the aggregate value of all
transactions during the previous year.

Provision of Knowledge Process Outsourcing Services (KPO)

[Rule 10TA(g)]

Value of the International Transaction should not exceed
Rs. 200 crore and the OPM to OE shall be as follows:

(i) 24% or more if Employee Cost (EC) to Operating Expense
(OE) is at least 60%;

(ii) 21% or more if EC to OE is 40% or more but less than
60%;

(iii) 18% or more if EC to OE is less than 40%.

OPM to OE shall be 25% or more.

Remarks:

(i) Employee Cost (EC) has been defined in
Rule 10TA by insertion of clause (ca). OE has already been defined in clause
(j) of Rule 10TA.

(Refer paragraph 3.1 below for further
details)

(ii) Looking at the nature of highly skilled
employees in KPO industries, taxpayers are likely to fall in the higher
brackets of 21% or 24% as EC is higher for KPO services.

Provision of Contract R&D Services wholly or partly
relating to Software Development.

[Rule 10TA (aa)] read with

[Rule 10TC(vi)]

Value of the International Transaction should not exceed
Rs. 200 crore and the OPM to OE shall be 24% or more

OPM to OE shall be 30% or more.

Remark:

Though there is a reduction in SHR margin, the
applicability is restricted to small transactions and therefore tax payers
with large amount of transaction will have to opt for APA.

Provision of Contract R&D Services wholly or partly
relating to Generic Pharmaceutical Drugs.

[Rule 10TA(d)] read with

[Rule 10TC(vii)]

Value of the International Transaction should not exceed
Rs. 200 crore and the OPM to OE shall be 24% or more

OPM to OE shall be 29% or more.

Remarks:

(i) Contract R&D services in relation to
Generic Pharmaceutical Drugs (GPD) is not defined. However, GPD is defined to
mean a drug that is comparable to a drug already approved by the regulatory
authority in dosage form, strength, route of administration, quality and
performance characteristics and intended use.

(ii) Other comment relating to large
transactions as mentioned above at point no. 3 applies here also.

Manufacture and Export of Core Auto Components

[Rule 10TA(b)] read with

[Rule 10TC(viii)]

No change.

OPM to OE shall be 12% or more.

Remark:

Core Auto Components are
defined in Clause (b) of Rule 10TA.

Manufacture and Export of Non- Core Auto Components

[Rule 10TA(h)] read with

[Rule 10TC(ix)]

No change.

OPM to OE shall be 8.5% or more.

Remark:

Rule 10TA (h) defines non-core auto components as the ones
which are other than core auto components.

Advancing of intra-group loans in Indian Rupees

[Rule 10TA(f)] read with

[Rule 10TC (iv)]

Interest rate should not be less than the one-year marginal
cost of funds lending rate of SBI as on the 1st April of the relevant
previous year plus:

* 175 BPS where CRISIL rating of Associated Enterprise (AE)
is between AAA to A or its equivalent;

* 325 BPS where CRISIL rating of AE is BBB-, BBB or BBB+ or
its equivalent;

* 475 BPS where CRISIL rating of AE is between BB to B or
its equivalent;

* 625 BPS where CRISIL rating of AE is between C to D or
its equivalent;

* 425 BPS where CRISIL rating of AE is not available and
the amount of loan advanced to the AE including loans to all AEs does not
exceed Rs.100 crore as on 31st March of the relevant previous year (PY);

Interest rate should not be less than the base rate of SBI
as on 30th June of the relevant previous year plus 150 basis points (BPS)
where the loan amount is less than or equal to Rs. 50 crore and

300 BPS where the loan amount is exceeding Rs. 50 crore

Remarks:

(i) Intra-group loan is defined in clause (f)
of the Rule 10TA. It covers loans advanced to Wholly Owned Subsidiary (WOS)
in Indian rupees. Banking and Financial Institutions are excluded.

(ii) In Rule 10TA (f) ironically, the definition
of Intra-group loan is not amended which refers to only WOS whereas, the SHR
makes a reference of AE.

(iii) It is good that the rate of interest is to
be determined based on the credit rating of the borrower. However, provision
of obtaining CRISIL rating for all borrowers may put them in undue hardships.

Advancing of intra-group loans in Foreign Currency (FC)

[Rule 10TA(f)] read with

[Rule 10TC (iv)]

Interest rate is not less than 6 months LIBOR of the relevant foreign
currency as on 30th September of the relevant PY plus:

* 150 BPS where CRISIL rating of AE is
between AAA to A or its equivalent;

* 300 BPS where CRISIL rating of AE is
BBB-, BBB or BBB+ or its equivalent;

* 450 BPS where CRISIL rating of AE is
between BB to B or its equivalent;

* 600 BPS where CRISIL rating of AE is
between C to D or its equivalent;

* 400 BPS
where CRISIL rating of AE is not available and the amount of loan advanced to
the AE including loans to all AEs does not exceed Rs. 100 crore as on 31st
March of the relevant previous year (PY);

No such distinction between intra-group loans in INR or FC.

The rates prescribed above were applicable for all types of
intra-group loans.

Remarks:

(i)
The determination of lending rate based on the currency of a loan is a
best international practice. However, the tenure of the loan and other terms
are not considered in determining the rate of interest.

(ii) Requirement to obtain CRISIL rating for
all borrowers may put them into undue hardships.

Providing corporate guarantee

[Rule 10TA (c)] read with

[Rule 10TC (v) (a) (b)]

Guarantee commission or the fee charged should be minimum
1% per annum on the amount guaranteed.

Guarantee commission or the
fee charged should be minimum

(i) 2% per annum of the amount
guaranteed where the amount guaranteed does not exceed Rs. 100 crore.

(ii) 1.75% per annum where the amount guaranteed exceeds
Rs. 100 crore.

Remarks:

(i) The reduction of guarantee commission up
to 1% is a welcome change.

(ii) However, in number of decisions² Tribunals have upheld 0.5% as the arm’s
length guarantee commission.

(iii) Corporate Guarantee is defined to mean
explicit corporate guarantee extended by a company to its WOS being a
non-resident in respect of any short-term or long term borrowing.

(iv) Unlike SHR for intra-group loans, which are
now extended to AEs and not just WOS, corporate guarantee continues to apply
only in respect of WOS.

Receipt of Low value-adding intra-group services

[Rule 10TA (ga)] read with

[Rule 10TC (x)]

The entire value of the
International Transaction, including a mark-up not exceeding 5%, should be
less than or equal to Rs. 10 crore.

Not There.

Remarks:

(i)
A new Clause (ga) is inserted in Rule 10TA to define the meaning of
“Low Value-Adding Intra-group Services”. (Refer paragraph 3.4 below for
further details)

(ii)
It is also provided that SHR provisions would apply only if the method
of cost pooling, the exclusion of Shareholder costs and duplicate costs from
the cost pool and the reasonableness of the allocation keys used for
allocation of costs to the assessee by the overseas AE, is certified by an
accountant. A new clause (a) has been added to Rule 10TA to define the
meaning of “accountant”.

3.0 Other
Important Changes in the new regime

3.1 Employee Cost in relation to KPO
Services

Employee
cost has been defined in the newly inserted clause (ca) of Rule 10TA which
besides normal employee expenses also includes expenses incurred on contractual
employment of person performing tasks similar to those performed by the regular
employees. Outsourcing expenses, to the extent of employee cost, wherever
ascertainable, which are embedded in the total outsourcing expenses should also
be considered as a part of the total employee cost. Wherever, the extent of
employee costs is not so ascertainable, they will be deemed to be 80 per cent
of the total outsourcing expenses.

3.2 The
definition of Operating Expenses in clause (j) of Rule 10TA is amended to
include costs relating to Employee Stock Option Plan (ESOP) or similar
stock-based compensation provided by the AE of the assessee to the employees of
the assessee.

3.3 Reimbursement of expenses to the AE
shall be considered at cost.

3.4 Low Value-Adding Intra-group Services

A new
service, namely, Low Value-Adding Intra-Group Services (LVA-IGS) has included
in the SHR. It is defined in the clause (ga) of Rule 10TA. The salient features
of this definition are as follows:

LVA-IGS refers to services which are:

(i) in the nature of support services;

(ii) not part of the core business of the
multinational enterprise group;

(iii) are not in the nature of shareholder services
or duplicate services;

(iv) do not require use of unique intangibles nor
lead to creation of unique and valuable intangibles;

(v) do not involve assumption or control of
significant risk by the service provider nor give rise to creation of
significant risk for the service provider; and

(vi) do not
have reliable external comparable services that can be used for determining
their arm’s length price.

However, it is specifically provided
LVA-IGS does not include the following services:

(i) research and development services; (ii)
manufacturing and production services; (iii) information technology (software
development) services; (iv) knowledge process outsourcing services; (v)
business process outsourcing services; (vi) purchasing activities of raw
materials or other materials that are used in the manufacturing or production
process; (vii) sales, marketing and distribution activities; (viii) financial
transactions; (ix) extraction, exploration, or processing of natural resources;
and (x) insurance and reinsurance;”

The
definition of LVA-IGS as mentioned above is by and large in sync with the
definition at the paragraphs 7.46. 7.47 and 7.48 of the Base Erosion and Profit
Shifting (BEPS) Action Plan 10 promulgated by the OECD. However, BPO/KPO
services and purchase activities of raw materials or other materials that are
used in the manufacturing or production process are excluded from the
definition of the Indian SHR pertaining to LVA-IGS, which is not so in case of
BEPS Action Plan. It may be noted that BEPS Action Plan excludes “Services of
corporate senior management” from the definition of LVA-IGS, which is not so in
case of Indian regulations.

4.0 SHR on Domestic Transactions

In
2015, SHR 10TH to 10THD were introduced covering to following domestic
transactions:

_______________________________________________________________________________________________

In Bharti
Airtel Ltd (ITA No 5816/Del/201Z) dated 11 March 2014; Reliance Industries Ltd
(I.T.A. No. 4475/Mum/2007) and Four Soft Ltd. vs. DCIT [(Hyd. ITAT) – 62 DTR
308] respective honorable Tribunals upheld non-charging of guarantee
commission/fees.

S. No.

Eligible specified domestic Transaction

Circumstances

Supply of electricity, transmission of electricity,
wheeling of electricity referred to in item (i), (ii) or (iii) of rule 10THB,
as the case may be.

The tariff in respect of supply of electricity,
transmission of electricity, wheeling of electricity, as the case may be, is
determined by the Appropriate Commission in accordance with the provisions of
the Electricity Act, 2003 (36 of 2003).

Purchase of milk or milk products referred to in clause
(iv) of rule 10THB. [i.e. Purchase of milk or milk products by a co-operative
society from its members]

The price of milk or milk products is determined at a rate
which is fixed on the basis of the quality of milk, namely, fat content and
Solid Not FAT (SNF) content of milk; and—

(a) the said rate is irrespective of,—

(i) the quantity of milk procured;

(ii) the percentage of shares held by the
members in the co-operative society;

(iii) the voting power held by the members in the
society; and

(b) such prices are routinely
declared by the co-operative society in a transparent manner and are
available in public domain.

Rule 10THC further
provides that no comparability adjustment and allowance under the second
proviso to sub-section (2) of section 92C shall be made to the transfer price
declared by the eligible assessee and accepted under sub-rule (1) and the
provisions of sections 92D (relating to Maintenance and keeping of information
and documents) and 92E (submission of Audit Report) in respect of a specified
domestic transaction shall apply irrespective of the fact that the assessee
exercises his option for safe harbour in respect of such transaction.

5.0 Summation/Way
Forward

The
erstwhile SHR did not attract many taxpayers due to high rates. Lowering of
rates in some cases would definitely induce more taxpayers to opt for the same
and avoid litigation.

The significant changes in intra-group
loans will attract many taxpayers. Inclusion of LVA-IGS is a welcome step and
in line with global trends. The acceptable threshold for the Corporate
Guarantee could have further been lowered. Manufacturers and exporters of core
and non-core auto components may continue to avoid SHR due to prescription of
high margins.

All
in all, it is a positive move on the part of Government in the direction of
reduction in litigation, though reduction in the value of the eligible
international transactions will push away many taxpayers out of the ambit of
Safe Harbour Regulations.

shailesh.kwebmaker

Works Contract Vis-À-Vis Consumables

Introduction

Under VAT era (period prior to 30.6.2017) one of the burning
issues is whether the transaction is a ‘works contract’ or ‘service contract’.
If it is works contract then it can be liable to VAT/CST, otherwise not.

There are boundary line cases where nature of transaction is
known on final decision of higher courts like the High Court.

One such transaction is a contract requiring use of
consumables. There are conflicting judgments on this issue. A brief reference
to such judgments can be tracked as under.

Pest Control India Ltd. (75 STC 188)(Pat)

“There can be no transfer of property in goods unless the
goods themselves exist. In the execution of a contract for eradication of
pests, rodents, termites, although chemicals are used, the chemicals are
sprayed through machines so that when the process ends, the chemicals are
consumed and nothing tangible remains in which property is transferred. Such a
transaction does not involve transfer of any goods as understood in sub-clause
(b) of clause (29-A) of article 366 of the Constitution, or under the
provisions of the Bihar Finance Act, 1981. Such a contract is a pure service
contract, and no sales tax is leviable in relation thereto under the provisions
of the Bihar Finance Act, 1981.”

Enviro Chemicals vs. State of Kerala (39 VST 434)(Ker)

“The petitioner had developed a chemical product by name
“envirofloc” used as a chemical for effluent treatment. The
petitioner carried out pollution control treatment for M, a company engaged in
manufacture of yarn. In the course of effluent treatment entrusted to the
petitioner, the petitioner applied the chemical “envirofloc” and it treated
effluent water probably by neutralising colour, odour, etc.. The
petitioner claimed that no transfer or sale took place in the execution of
works contract. The Department took the view that the material was consumed in
the process of effluent treatment and it got transferred in the course of such
treatment and there was sale of goods involved in the execution of works
contract. The petitioner was therefore assessed to tax under the Kerala General
Sales Tax Act, 1963 on the sale of materials involved in the execution of works
contract of effluent treatment at the premises of M, a manufacturer of yarn:

Held, per majority, that admittedly the chemical in question
was goods and the petitioner was the owner of the goods in question, namely,
the chemical. The intention of the parties was that the petitioner must use the
chemical in the effluent treatment process and the petitioner actually used it.
By using the chemical, the petitioner rendered the effluent compliant with the
standards. The moment the petitioner poured the chemicals into the effluent, it
ceased to be the owner and at that point of time M must be deemed to have taken
delivery thereof. The fact that upon its being poured into the effluent, it
lost its identity and that it was consumed would not detract from the fact that
there was delivery thereof to M. The effluent and the treated effluent both
belonged to M. It was, therefore, into the property of M, namely the effluent,
that the petitioner supplied the chemical. The property in the chemicals passed
to M the moment they were put into the effluent by the petitioner and their
subsequent consumption was consumption after sale and did not detract from the
factum of sale and consequently exigibility to tax. There was a sale of
chemical involved in the execution of the works contract as there was delivery
of it to the awarder by virtue of the chemical being poured into the effluent.”

It can be seen that there is apparent conflict between views
of the authorities.

In case of Enviro Chemicals vs. State of Kerala (39 VST 434)(Ker),
the Larger Bench of Kerala High Court has taken an extreme view that once goods
are used for customer there is transfer of property, though customer may not be
getting any tangible property.

Recent judgment in case of VPSSR Facilities vs.
Commissioner of Value Added Tax and ans (99 VST 1)(Del).

This judgment is latest in series. The brief facts as stated
by the Hon. Delhi High Court are as under:

“The petitioner is engaged in the business of providing
services of maintenance, cleaning, washing, housekeeping, waste management, etc.

The petitioner was awarded a contract by the Northern
Railways (hereinafter referred to as the contractee) in relation to the
management, cleaning, washing, housekeeping, waste management, etc., at
Diesel Shed Shakurbasti and at Training School Shakurbasti.

It is contended by the
petitioner that the contract was for cleaning of sites of Northern Railways
(contractee) and was a pure service contract and no transfer of property from
the petitioner (contractor) to Northern Railways (contractee) was involved. It
is contended that the activities undertaken by the petitioner did not
constitute a sale within the meaning of Delhi Value Added Tax Act, 2004
(hereinafter referred to as “the DVAT Act”).

It is contended that being a service contract, the petitioner
is paying service tax at 12.36 % on the entire consideration received by it
from the contractee. There is no separate payment made for the use of
consumables. It is contended that as the payment made by the contractee to the
petitioner was not because of transfer of property in goods, no tax was
required to be deducted at source u/s. 36A of the DVAT Act. It is contended
that the contractee (railways) to be on safe side insisted on deduction of tax
at source.

It is contended that for the purposes of providing the
service of cleaning, the petitioner was required to use soap/detergent/chemical
of a very minimal quantity and a very nominal value. The
soap/detergent/chemical was used for removing the muck/grime and the same got
completely “consumed” in the process and were not transferred to the
railways. It is contended that the contract involved pure labour and service
and was a mere works contract.”

There were arguments on both sides. Judgment of the Hon.
Kerala High Court in Enviro Chemicals is also considered.

To further consider facts, the High Court referred to para in
agreement, which reads as under:

“For the execution of the above work of maintenance, cleaning
washing of locomotives, etc., the petitioner is required to use
chemicals/solvents.

Clause 38 of the special conditions of contract reads as
under:

“38. Chemical/solvents and machines chemical/solvents
used should be eco-friendly, bio degradable pH value 7-8. Chemical/solvent can
be tested by railway from the independent lab at the contractor’s cost.
Chemical/solvents used should be of reputed brand. Contractor after having gone
through the scope of work will calculate the requirement of chemical/solvent
required per month/year. Chemical will be supplied by the contractor and shall
be kept in the custody of railway. These chemicals will be issued to the
contractor on daily basis as per requirement submitted by the contractor and
empty bottles/cans are required to submit back to issuing authority after
completion of daily work. Railway will not pay any amount separately to
contractor for purchase of chemical or machine. Cost of chemicals and machines
should be inclusive in activities mentioned in the schedule of unit
rates.”

Referring to the above clause 38, the respondent/Revenue has
held that the property in the chemicals/solvents used by the petitioner in the
execution of the work has transferred to the contractee.”

Distinguishing judgments including Enviro Chemicals, the
Delhi High Court observed as under:

“In both Enviro Chemicals [2011] 39 VST 434 (Ker) [FB]
and Xerox Modicorp Ltd. [2005] 142 STC 209 (SC); [2005] 7 SCC 380, the
courts were not dealing with the goods which were integral to the service
contract and which were completely consumed during the execution of the service
contract. The goods were consumed for the purposes of the final output, i.e.,
chemical treatment of effluent water (Enviro Chemicals) and spare parts and
Toners and Developers (Xerox Modicorp Ltd.). The courts were not concerned with
goods (soaps/detergent/chemical/solvent) as in the present case, which are
consumed in the process of cleaning. In the present case the contract, inter
alia, requires the petitioner to perform the task of mechanised scrubbing
of shed floor to keep it free from muck/grime arising due to dropping of
oil/grease/effluents and industrial.

Here italicized waste by using biodegradable floor
chemicals/solvent. Mechanised scrubbing by floor scrubbing/scarifying machine,
removal of industrial waste along with muck, unwanted/useless and dumping the
same at the nominated place within the shed complex. Cleaning of floor of main
shed, SMM store, lab and administrative block to keep it free from dropping of
oil/ grease/grime/effluent including removal of cobwebs from covered area.
Cleaning of DEMU Care Centre, DEMU Block and Diesel Training Centre SSB to keep
it free from dropping of oil/grease/grime/effluent including removal of cobwebs
from covered area. Cleaning of rooms, veranda, etc., of lab,
administrative block and offices of Sr. Subordinate Supervisors with wiping by
wet and dry moppers. Cleaning of rooms, veranda, etc., of DEMU Block and
Diesel Training Centre SSB with wiping by wet and dry moppers. To keep floor,
side walls of inspection pits free from muck/grime/ arises due to dropping of
oil/grease/effluents and industrial waste by using high-pressure cold/hot jet
cleaner. Removal of unwanted industrial waste and dumping the same at the
nominated place within the shed complex. To keep floor, side walls of DEMU Care
Centre pits free from muck/grime/ arises due to dropping of
oil/grease/effluents and industrial waste by using high-pressure cold/hot jet
cleaner. Cleaning of toilets by high-pressure water jet cleaner, removal of silt
and muck from urinals. Loco washing/ cleaning of pit wheel lathe machine
complex to keep it free from dropping of oil/grease/grime/effluent/waste metal
chips including removal of cob-webs from covered area.

The soaps, detergent, chemicals and solvent used purely for
the purposes of cleaning and which are completely consumed, in the process of
the execution of the above referred tasks, cannot by any stretch of imagination
be said to be goods in which property could pass to the contractee. Similarly,
water is also used in the above referred process of cleaning and execution of
the contract. Can it be said, that even property in water, that is used and
consumed in the said process of cleaning and execution of the contract, is also
transferred to the contractee and the value of the water consumed should be
exigible to tax?

The mere fact that soaps, detergent, chemicals and solvents
are deposited in the store of the contractee would not make any difference to
the exigibility, as is sought to be contended by the Revenue/respondents,
because, admittedly, by mere deposit in the store, the property in them is not
stated to pass. It is contended by the Revenue/respondent, that the property
passes when they are actually used. The petitioners and the railways have contended
that the said soaps/detergent/chemical/solvent are deposited with the railways
and issued from their store to ensure that adequate quantity is used by the
petitioner for the execution of the awarded work.

In view of the above, we hold that, the property in the
consumable chemicals used in the process of cleaning does not transfer to the
contractee/railways and accordingly the said goods are not exigible to tax.
Since the said goods are not exigible to tax, the contractee/railways is not
liable to deduct tax at source and the Commissioner, VAT is liable to grant a
certificate for Nil deduction of tax deducted at source.”

Thus the transaction is held as not a works contract on
ground that there is no transfer of property.

Conclusion

The margin in works contract and service transaction is very
thin. It is again the perspective of the authorities which will decide the
nature of transaction.

It is expected that similar issue will not arise
under GST.

shailesh.kwebmaker

Decoding GST – GST – First Principles on Reverse Charge Mechanism

Introduction

Goods and Services Tax (“GST”), being an indirect tax levy, places the
incidence of the tax on the supplier (i.e. seller/ service provider). The supplier being the taxable person under
the law is required to discharge the tax liability on the transaction of
supply. Although GST is said to be a
consumption tax, legislatures the world over choose to collect the tax from the
suppliers rather than the consumers, with an authority to the supplier to
collect the tax in turn from the consumer.
In the entire scheme, the supplier/ taxable person acts as a tax
collecting agency and deposits the taxes into the Government exchequer after
charging it from recipient/consumer under a contractual arrangement.

This practice has been
largely imbibed into the Indian GST system.
However, the legislature has in special cases shifted the burden of
discharging the tax from the supplier to the recipient, commonly known as a
‘reverse charge mechanism’ (RCM). Under
this mechanism, the legislature places the incidence directly on the recipient
of the supply and in some sense, by-passes the tax collecting agency principle
by opting to collect its taxes directly from the recipient. These are cases
where the scale of administrative convenience tilts towards the recipient
rather than the supplier (such as
transporters of unorganised sector, small traders/service providers below the
turnover threshold, suppliers located outside India in cross border
transactions, etc.). This system existed even under the erstwhile VAT
regime in the form of purchase tax/URD tax and also in the service tax regime
in the form of full/partial reverse charge tax.

RCM Mechanism

The RCM mechanism under GST law
can be placed in two broad baskets:

A)Notified transactions [section 9(3)]:

The
respective Governments under the CGST/SGST law have notified certain
goods/service transactions and the corresponding suppliers/recipients that are
covered under RCM.

Notification
4/2017-CT (Rate) dated 28.06.2017 provides for reverse charge mechanism in case
of procurement of certain goods. The notification covers specified procurement
of goods like cashew nuts, bidi/tobacco leaves from agriculturists, silk yarn
from manufacturer and lottery tickets from the Government/local authority.

On a perusal of the above notification, it
can be observed that the reverse charge mechanism is triggered only on the
first point of the supply chain. For example, cashew nuts supplied by an
agriculturist will attract reverse charge. However, subsequent transactions will
not be governed by reverse charge but by normal provisions of the law.

Similarly,
Notification 13/2017-CT (Rate) provides for reverse charge mechanism in case of
procurement of certain intrastate supply of services whereas Notification
10/2017-IT (Rate) provides for reverse charge mechanism in case of certain
inter-state supply of services. The following table summarises the provisions
in this regard:

Sr. No.

Category of Service

100% to be paid by

Rate

SAC Code

Import of Service

Any person located in the taxable territory other than
non-assessee online recipient (Business Recipient)

Rate applicable to the service

As per category of services

Goods Transport Agency Service

Any Registered Person, Factory, Society, Body Corporate,
Partnership Firm, Casual Taxable Person

99679

Legal Service

Any business entity

18%

99821

Arbitral Tribunal Service

Any business entity

18%

99821

Sponsorship Service

Anybody corporate or partnership firm

18%

99839

Services provided by Government
(Excluding exempt categories)

Any business entity

18%

99911

Service provided by Director

A company or a body corporate

18%

99839

Service provided by Insurance Agent

Any person carrying on insurance business

18%

99716

Service provided by Recovery Agent

A banking company or a financial institution or a
non-banking financial company

18%

99859

Transportation of Goods by Vessel where
freight is pre-paid

(a) Where freight is identified

Importer as defined under clause (26) of section 2 of the
Customs Act,

5% GST on the Freight value

99652

(b) Where freight is not identified (On
CIF Value)

Importer as defined under clause (26) of section 2 of the
Customs Act,

5% GST on 10% of CIF Value

Transfer of copyright relating to
original literary, dramatic, musical or artistic works

Publisher, Music company, Producer

12%

99733

Rent-A-Cab Service (e-commerce operator
only)

(a) Where fuel cost is borne by
recipient

Electronic commerce operator

18%

99660

(b) Others

Electronic commerce operator

B) URD transactions [section 9(4)]:

The legislature has mandated RCM mechanism
also on transactions where the supplier is an unregistered person (URD). On a plain reading of the provisions of
section 9(4), it is evident that the cumulative conditions for trigger of this
provision are as follows: (i) supplier is unregistered; (ii) recipient is
registered; (iii) supply is taxable.
Accordingly, the applicability of RCM on URD activities can be tabulated
as follows:

Registration Status of Recipient

Registration Status of the Supplier

Nature of Taxable Supply

Applicability of RCM u/s. 9(4)

General Applicability
of GST

Registered

Taxable

Not Applicable

Supplier will pay GST either under normal or composition
option.

Registered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Registered

Unregistered

Taxable

Applicable

Recipient will discharge the GST under RCM.

Registered

Unregistered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Unregistered

Registered

Taxable

Not Applicable

Supplier will pay GST either under normal or composition
option and will treat this as B2C transaction.

Unregistered

Registered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted

Unregistered

Taxable

Not Applicable

The provisions of section 9(4) do not trigger a
registration requirement. This is analysed later.

Unregistered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Applicability of registration
under rcm transactions

The primary question that
arises is whether RCM provisions by itself trigger a registration requirement
under the GST law. This has to be answered by examining RCM baskets
individually. As regards the notified transactions, the provisions apply to the
‘recipient’ in contradistinction to ‘registered person’. It implies that any
recipient whether registered or not is obligated to comply with the RCM
provisions. Therefore, in case an
unregistered recipient avails any of the specified services attracting RCM (like
legal services from an advocate), the said recipient would have to necessarily
seek registered (if not already registered) and comply with the RCM
provisions. The provisions of section 24
of the GST law give effect to the registration requirement on the recipient in
this case. Respite has been provided
under the corresponding notification where the specified recipients for this
RCM category are either body corporates/ business entity, etc. The notification therefore consciously
excludes individual consumers or unregistered persons (not engaged in any
business activity) from the rigours of RCM. For example, a citizen seeking the
services of a lawyer would not be subject to RCM and the registration
requirements.

As regards URD transactions, the provisions specify that the recipient
should be a registered person under the GST law, implying that persons who are
not registered may not be subject to RCM provisions. A contradictory view can come up in view of
the non-obstante provisions of section 24(iii) which makes persons
liable for registration if they are covered by reverse charge provisions. This can be countered by contending that said
section 24 is non-obstante only with reference to the threshold limit
(of Rs. 20 lakh) and places a registration requirement on business entities
under RCM where they are otherwise engaged in taxable supply but operating at
lower turnover levels. Further, unlike
the definition of taxable person which includes person ‘liable to be
registered’, the URD provisions restricts its scope only to ‘registered
persons’. Importantly, the said section
does not override section 23 of the law which specifically waives any
registration requirement in case of a person not liable to tax or engaged in
wholly exempted goods/ services. The law cannot be interpreted to give a
benefit on one hand and take away the benefit by the other hand. Therefore, in the view of the author, URD
transactions cannot by itself trigger a registration requirement. The URD transactions will trigger registration
only where the supplier is in business activity and making a taxable supply but
operating below the minimum turnover threshold. As an example, an agriculturist appointing
contract labour for the tilling of the land under his supervision cannot be expected
to discharge RCM and/ or seek registration under the provisions of section 24
merely on account of section 9(4) of GST law, when he has been specifically
excluded from registration u/s. 23 of the said law. Similarly, a retailer
operating at turnover levels below 20 lakh would also not be required to seek
the registration under RCM in case of a liability u/s. 9(4) of the GST law.
However, if the retailer is already registered under GST (either under normal
or composition option), all procurements from URD will become liable for RCM.

Treatment of rcm transactions

The RCM provisions fixes the specified recipient as the person liable to
pay tax and seeks compliance of all the provisions of the GST law on the
transaction of supply. As a consequence,
all aspects of a transaction (listed below) have to be determined by the
recipient by placing himself into the shoes of the supplier. This would result in many challenges at the
recipient’s end.

Nature of Supply

A recipient would be
required to ascertain whether supply being made by the notified supplier or
unregistered supplier is in the nature of a composite supply or a mixed
supply. A simple example may be whether
a company providing end-to-end logistic solutions with or without warehousing
solutions under a single work order qualifies as a ‘goods transport agency’
service. A recipient cannot merely rely
upon the classification of the supplier as either a GTA or a logistic service
provider. The recipient would have to
resort to the concept of composite supply or mixed supply and ascertain
whether the RCM provisions apply itself.
If and only if the supply is a composite supply with the principal
supply being categorised as a GTA service would the RCM provisions be
applicable.

Place of
Supply

The qualifying recipient is
also required to ascertain the place of supply in determining the nature of tax
payable under the RCM scheme i.e. identify the location of the supplier and
also the place of supply and discharge the respective tax. RCM may be a local supply or an inter-state
supply depending upon the said parameters.
This would create anomalies as cited in an example – say a company
registered in State A books a hotel in state B for the stay of its sales employees
which has a declared tariff of more than Rs. 1,000 but is unregistered in
GST. Going by Place of supply rules, the
supplier (i.e. hotel) and the place of supply (immovable property) are in State
B and it amounts to a local supply in State B.
Now the company is unregistered insofar as State B is concerned. Going
by the view taken on registration above, the company does not come within the
ambit of section 9(4) of the GST law and the company should not be asked to
register as a non-resident taxable person in State B merely on account of the
RCM provisions.

An issue also arises in
case of inter-state supplies by an unregistered person, say a job worker. In case the said company send goods to an
unregistered job worker in State C for a job work and receive a job work bill
for the services rendered. Under the
Place of supply rules, the transaction amounts to an inter-state supply and
provisions of section 5(4) of the IGST law require the recipient to pay tax
under RCM provisions. However, if one
views section 24 of the CGST law, every person making an inter-state supply is
required to seek registration irrespective of the turnover threshold. Section 122(3) and 132(i) of the GST law
treats a person receiving services in violation of the GST law as an offender
and imposes a penalty/ imprisonment on such person for such offences. This seems contradictory since the law
recognises inter-state supplies by unregistered persons but on the other hand
treats inter-state supplies by an unregistered person as a violation of section
24 of the GST law. Until the law is settled on this issue, it may be
challenging to engage in inter-state transactions with URDs.

Rate of Tax/ HSN/ SAC

GST law expects that a
recipient of supply determines the rate of tax on each supply of goods/
services made from URDs and discharge the applicable rate of tax as if the
recipient is the supplier of goods. This
is going to place a herculean task on companies to fix the HSN on innumerable
items purchased. For example, a company
purchasing stationery/groceries from local vendors which are unregistered would
be required to undertake a HSN classification of every item purchased and
discharge the applicable rate of tax.
This would be a highly onerous obligation on the recipient to comply
with.

Time of Supply

In case of supply of goods, the time of supply would be earliest of the
receipt of goods or payment or thirty days from the date of issue of the
supplier’s document. Similarly in case
of supply of services, the time of supply would be earliest of the payment or
sixty days from the date of issue of the supplier’s document. The recipient is required to ensure that the
relevant documents are issued by the notified supplier/ unregistered supplier
in order to meet the tax liability requirements within the specified timelimits.

Invoicing and Reporting requirements

The recipient covered under RCM is required to raise a self-purchase
invoice on the date of receipt of the goods or services or both. The law also
requires the RCM recipient to raise a payment voucher at the time of making
paying to the specified supplier. The
format and contents of the invoice include, inter-alia, HSN, description
of goods/ services, quantity, etc.
The proviso to the said rule permits raising a consolidated monthly
invoice for URD transactions under the RCM scheme. The said invoices are required to be reported
in Part-3 of GSTR-2 and eligible for credit in the same month if the goods/
services have been received and other
ITC conditions have been complied with.

specific transactions

RCM mechanism poses significant hurdles in specific transactions which
have been discussed below:

Employee reimbursements

Employees incur various
expenses during the course of their official duties (such as travel, local
conveyance, food, etc.) and claim reimbursements from the Company for
such expenses. The key challenge which arises is whether such reimbursements
are subject to RCM under the provisions of section 9(3) or 9(4) of the GST
law. A simple example could be where an
employee avails the facility of an Air-Conditioned Bus travel for official
purposes and claims a reimbursement from the Company. In this transaction, it is important to
understand whether there are two supplies (ie., between the transporter to the
employee and then from the employee to the Company or just one supply directly
between the Transporter and the Company).
Another viewpoint could be whether the transportation service ends at
the level of employee or does it percolate through the employee and end at the
Company level. It is a well-accepted
fact that in these transactions, the privity of contract is usually between
Transporter and the employee and the company merely reimburses the travel costs
at a subsequent stage. Going by a strict reading definition of ‘recipient’, the
person liable for payment of consideration in such a transaction is the
employee and it is the employee to whom the service is rendered. In such transactions, the company cannot be
strictly termed as a ‘recipient’ (liable for payment for consideration) of the
supply and one may be tempted to conclude that supply ends with the
employee. The immediate next question
would be to identify whether the transaction between the employee and the
company is a supply of goods/ services in terms of section 7 of the GST
law. While this point appears prima-facie
taxable as a supply of service, one should also note that the said supply
(whether in terms of section 7(1)(a) or 7(1)(d) r/w entry 2 of Schedule I)
should be in the course or furtherance of business of the supplier
concerned. Evidently, the employees
cannot be considered to be engaged in any trade, commerce, etc while recovering
the reimbursement from the company.
Hence, the said transaction cannot be termed as a supply of either
goods/services by the employee to the Company. Another contention on
non-taxability of the transaction under RCM would be based on Entry 1 of
Schedule III of the said law which excludes any service by an employee to the
employer ‘in the course or in relation to’ employment as neither supply of
goods/ services under the GST law.

It would also be pertinent to state that the scenario changes
entirely if the supply is contractually agreed between the Company and the
supplier but the payment takes place by the employee and reimbursed by the Company
(say hotel bookings made by the company but settled partially/wholly by the
employee). In such a scenario, the
company would be party to the contract of service but the consideration for the
service is being routed through the employee on account of administrative
convenience. While there is only one
single supply from the supplier directly to the company, the rendition of
service may be to the employee concerned.
In such cases, the Company being the recipient would be obligated to
comply with the RCM provision on such transactions.

Accordingly, it is
important in such transaction to identify the ‘contractual flow’ as well as the
‘actual flow’ of the transaction. In case of transactions bearing a
consideration, the contractual flow rather than the actual flow of supply
assumes significance. Principles can also be drawn from the Australian GSTR
ruling (GSTR 2006/9) which cites the example of a therapist and the above two
variants to explain the taxability of the transactions by employees:

“……………… Example 5:
occupational therapist

161. A, an occupational
therapist, is engaged by B, a company, to assess the needs of C, its employee.
C suffers from multiple sclerosis and needs to use a wheelchair. A and B enter
into an agreement which requires A to undertake an assessment of C’s condition,
to give recommendations in a report to B and for B to pay for the service.

162. A’s supply of services is made to B. Although C may benefit from
these services, it is B who contracts for the supply of these services and is
the recipient of the supply.

163. This supply is not
GST-free under subsection 38-10(1). This is because paragraph 38-10(1)(c)
requires the supply to be generally accepted in the relevant profession as
being necessary for the appropriate treatment of the recipient of the supply. B
is the recipient of the supply. The supply is not for the treatment of B.
Paragraph 38-10(1)(c) is not satisfied.51F

164. If C engages the
occupational therapist to supply its services and B merely pays the therapist
on behalf of C, the recipient of the occupational therapist’s services is C.
This supply will be GST-free if all of the requirements of subsection 38-10(1) are satisfied.

The above ruling places
significance on identification of the contractual flow of the transaction
rather than the actual flow of consumption and directs that the law should
follow the contracting parties rather than the parties who actually pay for the
transaction or bear the cost of the transaction.

Custom house/Clearing house
agents (CHAs)

CHAs typically incur significant charges on behalf of the
importer of goods in order to render their services of custom clearance since
it engages with multiple agencies on behalf of the importer. Some of the many
line items which the CHAs recover (with or without a visible margin) are (a)
custom duty and statutory levies, (b) port charges, (c) delivery order charges,
(d) demurrage charges, (e) liner charges, (f) inland freight, etc. While
the statutory levies qualify as pure agent items and are excluded from the
valuation mechanisms, other recoveries by a CHA which purport to be
reimbursements may not be in-fact be reimbursements and amount to a taxable
supply at the supplier’s end. Where the CHA is a registered person, the
obligation to ascertain the appropriate value would vest on the CHA himself.
However, once the CHA is a URD, it gives rise to significant challenges to the
recipient for identification of the taxable line items and exclusions without
having any knowledge of the trade practices prevalent therein. As an example,
liner reimbursements though corroborated with liner documents have an element
of incentive camouflaged therein which is not disclosed to the importer. The
importer would be of the view that such payments would be reimbursements when
in fact they are not reimbursements but also contain an incentive to the CHA
which is includible in the transaction value in terms of section 15 of the GST
law. It is impossible for the recipient
to ascertain this incentive and determine the appropriate value on which RCM
would be leviable.

Job workers

Job workers of the textile
and jewellery industry are in the unorganised trade. A job worker in the jewellery trade is
compensated in terms of the difference in net weight of the precious metal
jewellery before and after the job work. The jeweller orders the manufacture of
jewellery of a particular net weight to the job worker and performs a reverse
calculation of the gross weight required for the said activity. The
differential takes into consideration the wastage and also compensates the job
worker for the services rendered. However, this is not documented in such a
trade and the recipient will not have any document to evidence recoveries of
precious metal by the job worker, in order to discharge the RCM liability.

Notification No.
8/2017-Central Tax (Rate) – De Minimus Exemption

The Central Government and
corresponding State Governments have issued a notification exempting the
applicability of RCM on transactions below five thousand in aggregate in one
day. The said notification categorically states that the limit of five thousand
should be aggregated by each recipient from all the unregistered suppliers on a
daily basis. Where the aggregate value crosses
the threshold, the entire transaction would be subject to RCM. The said
exemption applies only to intra-state supplies and such a notification under
the IGST law is absent. The said exemption would apply registration-wise and
not entity-wise.

The law also does not
permit the recipient to assess the threshold based on the statement of accounts
or the recording of ledger entries in its books of accounts. The law expects that each service is
individually identified with reference to its date of ‘receipt of such service’
and its ‘value’ and only then the said limit be tested at the recipient’s end.
This not only makes it administratively inconvenient but also practically
unviable for any entity to implement with accuracy.

It should also be noted
that the following transactions would be excluded from the ambit of the
calculation of Rs. 5000/ day – non-taxable supplies, exempt supplies, RCM
supplies covered u/s. 9(3), pure agent reimbursements (say RoC fees), supplies
of the same registrant but received/ consumed (place of supply) in a non-resident
state.

Conclusion

In conclusion, the authors
view RCM as a significant hurdle in complying with the GST law. The legislature in an effort to reduce its
administrative involvement has placed unmanageable administrative burden on the
business community. RCM breaks the input tax credit chain and consequently, the
entire purpose of solving the cascading effect of taxes seems to have taken a
back seat in this RCM scheme, only to gather a minor percentage of tax from
business enterprises.

shailesh.kwebmaker

15 Section 54 – Investment made in purchase of residential property outside India – Exemption can be claimed till 31.03.2015.

Income-tax Officer vs.
Nishant Lalit Jadhav

G.S.Pannu (A. M.) and
Pawan Singh (J. M.)

ITA No.: 6883/MUM/2014

A. Y.: 2011-12. Date
of Order: 26^th April, 2017

Counsel for Revenue / Assessee: Suman Kumar / Hari S. Raheja

FACTS

The assessee is a
Non-resident Indian (NRI) and during the year under consideration he, inter-alia,
earned a long term capital gain of Rs.67.07 lakh from sale of residential
property located at Mumbai. He claimed exemption u/s. 54 on the ground that the
capital gain arising on the sale of property was utilised in the purchase of a
residential property at New York, USA. The Assessing Officer denied the claim
of exemption as the property was
acquired outside India. For the purpose he relied upon the decision of the Ahmedabad
Tribunal in the case of Smt. Leena J. Shah, (6 SOT 721). According to the
CIT(A), the requirement of making the investment in a property in India was
inserted by the Finance (No.2) Act, 2014 w.e.f. 01./04./2015 and, therefore, in
the instant assessment year the claim of exemption u/s. 54 could not be denied.
In coming to such conclusion, the CIT(A) also relied upon the decision of the
Mumbai Tribunal in the case of Mrs.
Prema P. Shah & Sanjiv P. Shah vs. ITO (100 ITD 60), ITO vs. Girish
M. Shah in ITA No.3582/Mum/2009 and Vinay Mishra vs. CIT, in ITA
No.895/(Bang) of 2012.

Before the Tribunal, the revenue contended that even prior to amendment
by Finance (No.2) Act, 2014, it was to be implicitly understood that the
requirement of section 54 was to make investments in a new residential house
within India only. The assessee pointed
out that the decision of the Ahmedabad Tribunal in the case of Smt. Leena J.
Shah, which was relied upon by the Assessing Officer has since been reversed by
the Gujarat High Court in its judgment in ITA No. 483 of 2006 dated
14./06./2016.

HELD

According to the Tribunal,
prior to the amendment made by Finance (Nos.2) Act, 2014 w.e.f. 01./04./2015,
the language of section 54 required the assessee to invest the capital gain in
a residential property. It is only
subsequent to the amendment, which has come into effect from 01.04.2015, that
such investment is required to be made in a residential property in India. Since the appeal was pertaining to the
assessment year which is prior to 01.04.2015, the amendment would not be
applicable. The Tribunal also relied on the decision of the Gujarat High Court
in the case of Smt. Leena J. Shah (supra).The Tribunal set aside the
finding of the CIT(A) and directed the AO to consider the allotment letter
dated 30.3.205 to determine the long term/short term capital gain and
accordingly the entitlement of exemption u/s. 54 of the Act.

shailesh.kwebmaker

14 Section 153A – Factum of gift which was already disclosed in the returns of income which was filed before the search took place cannot be assessed as income u/s. 153A

Nenshi L. Shah and 10
others vs.
Dy. Commissioner of Income TaxIT

Mahavir Singh (J. M.) and N.K. Pradhan (A.M)

ITA Nos.: 3735 to
3737,3575 to 3577, 3580 to 3584 /Mum/2011 and 7382 to 7385, 7387 to
7390/Mum/2013

A. Y: 2003-04. Date of Order: 24^th May, 2017

Counsel for Assessee /
Revenue: Jignesh R. Shah and Haresh
Kenia / H.N. Singh

FACTS

All these eleven assessees
had filed their returns of income on even date 11-08-2003 for the AY 2003-04.
All the assessees’ had received gift of Rs. 10 lakh each from one Gayanchand
Jain. This gift was declared in the original returns filed by the respective
assessees’ on 11.08.2003 in the form of capital accounts filed, wherein each of
the assessee had declared this gift. The assessment / processing of return of
income for the year under consideration was concluded much before the search,
which took place on 03-08-2006 and could not therefore abate as the returns
were filed by the respective assessees’ on 11-08-2003 and therefore, the last
date for issuing notices u/s. 143(2) of the Act were on 31-08-2004. The AO
during the course of assessment proceedings in consequence to search u/s.153A
read with section 143(2) of the Act noticed the factum of gift was already
disclosed in the capital accounts filed along with the returns of income by the
respective assessees’ and this is not the income discovered or unearthed during
the course of search by the department u/s.132 of the Act. But the AO assessed
the gifts as income from undisclosed sources of the assessees and CIT(A) also
confirmed the same. Aggrieved, all the assessees came in second appeal before
Tribunal.

Before the Tribunal, the
assessee contended that the assumption of jurisdiction by the AO and making
addition while framing assessment u/s.153A read with section 143(3) was without
jurisdiction in respect to assessment of gifts already disclosed.

HELD

The Tribunal noticed that
notice u/s. 143(2) had become time barred on 31.08.2004 while the search took
place on 03.08.2006. As on the date of search, the assessments or processing of
return of income of the assessee u/s. 143(1) were completed. The A.O. brought
to tax a sum of Rs. 10 lakh, being the amount of gift, without any
incriminating material found during the course of search. Therefore, relying
on the decision of the Bombay High Court
in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd. (374 ITR
645), the Tribunal held that the gift of Rs. 10 lakh received by each of the
eleven assesses and disclosed in the return of income and which has not been
abated, the same cannot be added. Accordingly, the Tribunal reversed the orders
of the CIT(A) as well as that of the AO and deleted the addition in all the
eleven appeals of the assessee.

shailesh.kwebmaker

13 Section 272A(2)(k) – Delay in filing of e-TDS return on account of requirement to mention PAN – No loss to the Revenue attributable to the delay in filing of the e-TDS returns – No penalty can be imposed.

Argus Golden Trades vs. JCIT

Kul Bharat (J. M.) and Vikram
Singh Yadav
(A. M.)

ITA No.: 522/JP/16

A. Y. : 2011-12.

Date of Order: 24^th May, 2017

Counsel for Assessee / Revenue:
Rajeev Sogani / Rajendra Jha

FACTS

The AO imposed penalty u/s.
272A(2)(k) holding that the assessee
has delayed in filing quarterly
e-TDS return within the stipulated time frame. The CIT(A) upheld the order of the AO as
according to him the provisions of
section 272A(2)(k) uses the word “shall” indicating that if there is violation
of these provisions, the imposition of penalty is mandatory. Also, the assessee was not having any genuine
ground or the compelling circumstances for not filing of TDS return in
time. Before the Tribunal, the revenue
justified the order of the CIT(A).

HELD

The Tribunal
noted that the AO hads levied penalty u/s. 272A(2)(k) which talks about the failure to deliver a
copy of the statement within the time specified in section 200(3) or proviso to
section 206C (3). In the instant case, there
is a delay in filing of quarterly e-TDS returns which is covered under the
provisions of section 272A(2)(c). On this ground itself, the Tribunal held that
the levy of penalty cannot be sustained.
On merit also, the Tribunal noted that during the financial year 2010-11
which is under consideration, a change was brought about in filing of e-TDS
returns and it was necessary to mention Permanent Account Numbers of all the
payee in the e-TDS return and thereafter only the e-TDS return could be
validated and uploaded. In assessee’s case, there were large numbers of
deductees scattered throughout India.
The taxes were deducted and deposited at the prescribed rate with delay
of few days. Thus, there was no loss to
the Revenue which could be attributed to the delay in filing of the e-TDS
returns. Relying on the decision of the
Cuttack bench of Tribunal in the case of CIT Branch Manager (TDS), UCO Bank
vs. ACIT (35 taxmann.com 45), the
Tribunal held that the assessee had a reasonable cause for delayed filing of
its e-TDS returns in terms of section 273B and hence, the penalty u/s. 272(A)(k)
was deleted.

shailesh.kwebmaker

15 Section 12A(2) : Proceeding pending in appeal before the CIT (A) should be deemed to be assessment proceedings pending before the AO for the purposes of first proviso to section 12A(2)

(2017) 152 DTR (Coch) (Trib) 137

SNDP Yogam vs. ADIT (Exemption)

A.Ys.: 2006-07 to 2009-10 & 2011-12

Date of Order: 1^st
March, 2016

Section 12A(2) :
Proceeding pending in appeal before the CIT (A) should be deemed to be
assessment proceedings pending before the AO for the purposes of first proviso
to section 12A(2)

Facts

The assessee was not
registered under section/s 12AA for the AYs under dispute. Accordingly, the AO
invoked the provisions of section 167B thereby taxing the whole income at the
maximum marginal rate for all the AYs under dispute. The assessments for the
AYs 2006-07 to 2009-10 were completed on 19^th March 2013.

The assessee had applied
for registration u/s.12AA vide letter dated 30^th January 2013 and
the registration was granted vide order dated 29^th July 2013.

The CIT(A) held that since
the registration was granted on 29^th July 2013, it can be treated as
applicable only from the AY 2013-14. It was not applicable to the assessee for
AYs under dispute and, therefore, it could not be taken that this institution
was registered u/s. 12AA. Accordingly, the order of the Assessing Officer was
confirmed.

On appeal before the ITAT, the assessee submitted that section 12A was
amended recently by the Finance Act 2014 by introducing new provisos to
sub-section (2) of section 12A with .effect .from 1^st October 2014.
As per the first proviso to section 12A(2), once a registration u/s. 12AA is
granted to a charitable organisation in a financial year, then the provisions
of sections 11 and 12 shall apply even for the assessment proceedings which
were pending before the AO on the date of registration. As per the amendment,
no action shall be taken u/s. 47. Following the said amendment, the entire income
of the trust is eligible for exemption u/s. 11 for the AYs under dispute.

However, on the date on which the assessee was
granted registration u/s. 12AA, the proceedings were pending before the CIT(A)
and not the AO.

Held

The first proviso to section 12A(2) was brought in
the statute only as a retrospective effect, with a view not to affect genuine
charitable trusts and societies carrying on genuine charitable objects in the
earlier years and substantive conditions stipulated in section 11 to 13 have
been duly fulfilled by the said trust. The benefit of retrospective application
alone could be the intention of the legislature and this point is further
strengthened by the Explanatory Notes to Finance (No.2) Act, 2014 issued by the
Central Board of Direct Taxes vide its Circular No. 01/2015 dated
21.1.2015

When section 12A of the Act
was amended by introducing new provisos to sub-section (2) of section 12A by
Finance Act, 2014 with effect from 01.10.2014, the assessment orders passed by
the assessing officer in respect of the present assessee were pending in appeal
before the first appellate authority. During such pendency, the assessee was
granted registration u/s. 12AA of the Act on 29.07.2013 with effect from the
assessment yearAY 2013-14. Those appeals were the continuation of the original
proceedings and that the power of the Commissioner of Income-tax was
co-terminus with that of the assessing officer were two well established
principles of law. In view of the above and going by the principle of purposive
interpretation of statues, an assessment proceeding which is pending in appeal
before the appellate authority should be deemed to be ‘assessment proceedings
pending before the assessing officer’ within the meaning of that term as
envisaged under the proviso;. it follows there-from that the assessee
whoich obtained registration u/s. 12AA of the Act during the pendency of appeal
was entitled for exemption claimed

u/s. 11 of the Act.

shailesh.kwebmaker

14 Section 37(1) – Licence fee paid by assessee, a partnership law firm; to a private limited company for use of goodwill, which was gifted to private limited by an individual for perpetuity, is an allowable deduction u/s. 37(1) and cannot be disallowed on the grounds that the gift of goodwill by individual, of his profession of law, to a company would possibly be violating the Advocates Act, 1961 or the Bar Council Rules.

([2017)] 162 ITD 324 (Delhi – Trib.)

Remfry & Sagar vs. JCIT

A.Y.s: 2003-04 &
2010-11

Date
of Order :– 6^th September, 2016

FACTS

The assessee, is a
partnership law firm, specializing in intellectual property and corporate laws.

Dr. ‘V’, a practicing
attorney, was the sole and absolute proprietor of the business of a famous law
firm ‘Remfry & Son’ along with the goodwill attached to it. With an
intention of segregating the goodwill in ‘Remfry & Sagar’ from the
attorney’s, and for institutionalising the goodwill in perpetuity by way of
corporatisation, a gift deed was executed by Dr. ‘V’ in favour of ‘RSCPL’, a
private limited entity, whereby the goodwill in “Remfry & Sagar”
was gifted to a newly incorporated juridical/legal entity “RSCPL”.

Thereafter, Dr. V. entered into a partnership with four other partners.
This partnership firm (the assessee) entered into an agreement with RSCPL for
grant of license for the use of goodwill of “Remfry & Sagar”
subject to payment of license fee @ 25% of the amount of bills raised. The
agreement was valid for the term of 5 years. This agreement was later on
renewed and under as per the renewal, license fee was payable @ 28% of the
amount of bills raised.

The assessee claimed
deduction of the aforesaid license fee paid u/s. 37(1).

The
AO disallowed license fee paid by the assessee to RSCPL for the use of goodwill
on the ground that the entire transaction was colourable device adopted to
transfer profits of the assessee-firm to the family members of V, who held
majority shares in RSCPL and to evade tax. The CIT-(A) upheld order of the AO.

On appeal by the assessee
before ITAT-

HELD

It has been demonstrated by
the assessee that the revenue has accepted that both the entities, i.e., the
assessee as well as RSCPL, pay taxes, at the maximum rate and that there is no
loss of revenue on account of this arrangement. Thus, the disallowance made by
the revenue on the ground of diversion of profits is devoid of merit.

Though the revenue has
argued that goodwill of a profession cannot be sold to a company which does not
have a right to carry on practice, no specific law or section is pointed out in
support of the argument. Only several submissions have been made. Certain
judgments of Foreign Courts are cited, which are based on “ethical
considerations” and not legal prohibition. In any event, the Tribunal has
no power or authority to adjudicate the issue as to, whether; the gift of
goodwill by Dr. V, of his profession of law, to a company is violating the Advocates
Act, 1961 or the Bar Council Rules. No authority has held that this arrangement
violates any Act or law of the land, though the assessee firm has been carrying
on its profession of Attorneys at law under this arrangement for the last many
years.

Another important fact that
has to be considered is that, Dr. V had the sole and exclusive rights to the
said goodwill. The goodwill was held by him. Without legal authorisation from
him, the assessee firm could not use the name and style of “Remfry &
Sagar” along with its goodwill and other assets and rights. The
assessee-firm had to seek permissions and licences to continue and carry on
this profession under this name as it is run. Hence obtaining a license is a
must for assessee firm to continue and carry on its profession as the goodwill
is not owned by it. The payment made in pursuance of an agreement which enables
the assessee firm to carry on its profession, in the manner in which it is now
doing, is definitely an expenditure laid down wholly and exclusively for the
purpose of business or profession. The argument of the Special Counsel that the
purpose test contemplated u/s. 37 is not satisfied is devoid of merit.
Irrespective of whether the gift of Dr. V to RSCPL is ethical or not and
irrespective of the fact whether the gift is legally valid or not, from the
view point of the assessee firm, as it could not have continued and carried on
the profession of Attorneys-at-Law in the name of “Remfry &
Sagar” and use its goodwill and all its associated rights without the
impugned agreement with RSCPL. Hence the payment has to be held as that which
is incurred wholly and exclusively for the purpose of business or profession.

For all the aforesaid
reasons the deduction claimed by the assessee, of license fee paid by it to
RSCPL, has to be allowed u/s. 37.

shailesh.kwebmaker

13 Section 45 – Where conduct of an assessee reveals that he was into the business of real estate, merely because the books of account did not record conversion of capital asset to stock-in-trade or that such a conversion was not mentioned in the tax audit report will not change the characteristics of the income arising from the transactions in question.

[2017] 83 taxmann.com 97
(Visakhapatnam – Trib.)

DCIT vs. Chennupati
Kutumbavathi

ITA No. 45 (Vizag) of
2013

A. Y.: 2007-08

Date of Order: 9^th June, 2017

FACTS

The assessee purchased agricultural land in the year 1980. He
claimed that the said land was converted into stock-in-trade in the year 2006
with an intention to commercially exploit the same. The assessee divided the said land into plots
of different sizes and sold them to a large number of buyers. In the return of income filed, the profit
arising from sale of such plots was shown u/s. 45(2) and under the head
`Profits and gains of business or profession’.

The Assessing Officer (AO) observed that the assessee had
never traded in land and that in the accounts and financial statements of the
assessee for the financial year 2005-06, there was no conversion recorded and
the tax auditor had clearly mentioned that during the year under consideration
(financial year 2005-06), there was no conversion of capital asset into
stock-in-trade. The AO, therefore, held
that the activity carried on by the assessee was not in the nature of adventure
in the nature of trade or commerce. The
AO, accordingly, charged to tax profit arising on sale of plots as Long Term
Capital Gains and while computing long term capital gains he applied the
provisions of section 50C of the Act.

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

Aggrieved, the revenue preferred an appeal to the Tribunal
where it claimed that merely because the books of account did not disclose the
conversion of capital asset into stock-in-trade, the characteristics of the
transaction would not change.

HELD

The
Tribunal observed that the only question that needs to be examined is whether
on the facts and circumstances of the case the profit from sale of land is
assessable as capital gains or as business income. It held that in order to find whether a
transaction of purchase and subsequent sale amounts to an adventure in the
nature of trade, the initial intention is an important factor, but not a
conclusive one. The subsequent events and the assessee’s conduct are also
important factors and the facts to be considered are firstly whether the
transaction was in the line of the assessee’s business and secondly whether it
was an isolated transaction or there was a series of similar transactions. It
is not necessary that in order to constitute trade, there should be a series of
transactions, both of purchase and of sale. Even a single and isolated
transaction can be held to be capable of falling within the definition of
business. The activity or the transaction said to be an adventure in the nature
of trade must be with the object of earning profit.

The
Tribunal noted that the assessee purchased an agricultural land in the year
1980. The assessee has sold the impugned land in the financial year relevant to
assessment years 2007-08. The assessee claimed to have converted said
investment into stock-in-trade as on 31-3-2006, developed the said land into
various plots before it was sold. On
these facts, the Tribunal held that it is very clear that the intention of the
assessee was to purchase the land, divide them into plots and sell the plots
within the period established. Therefore, it clearly indicates that the
intention of the assessee was to carry out adventure in the nature of trade to
commercially exploit the said land. The assessee was involved in the business
of real estate which is evident from the fact that the assessee has computed
resultant profit from sale of impugned land by applying the provisions of
section 45(2) of the Act.

Insofar as application of
the provisions of section 50C since the activity carried out by the assessee
was held to be in the nature of adventure in the nature of trade or commerce
and the resultant profit assessable under the head ‘income from business’, the
Tribunal held that the provisions of section 50C have no application, when the
income is computed under the head ‘income from business or profession’.

The Tribunal dismissed the
appeal filed bythe revenue.

shailesh.kwebmaker

Section 271AAA – Penalty u/s. 271AAA cannot be levied in a case where the revenue had not asked the assessee the manner of earning undisclosed income.

12 [2017] 83 taxmann.com 231 (Ahmedabad – Trib.)

ACIT vs. Shreenarayan Sitaram Mundra

ITA No. : 2878 (Ahd) of
2013

A. Y. : 2010-11

Date of Order: 18^th May, 2017

FACTS

In the course of search,
the assessee, an individual engaged in the business of manufacturing and
trading of textiles admitted an unaccounted income of Rs. 2 crore and included
the said amount of Rs. 2 crore in the total income of Rs. 2.21 crore declared
in the return of income filed in response to notice issued u/s. 153A. The returned income was assessed to be total
income.

The Assessing Officer (AO)
imposed a penalty u/s. 271AAA on the ground that the assessee had not specified
the manner in which income declared was earned which is one of the conditions
u/s. 271AAA for being exonerated from penalty.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who noted that the assessee had in his
statement mentioned that the said sum of Rs. 2 crore was earned by him from taxable
business and moreover, it was also substantiated by the assessee in his
statement and the declaration of the
said undisclosed income earned was based on entries as mentioned in the
impounded documents inventorised in the form of `receivables’ and due taxes had
been paid on the said declared income while filing return of income. The CIT(A) held that the conditions required
to be satisfied for non-imposition of penalty had been satisfied by the
assessee. He allowed the appeal filed by
the assessee.

Aggrieved, the revenue
preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the
Revenue is aggrieved by non-compliance of the section 271AAA(2)(i) of the
Act. As per section 271AAA(2)(i), one of
the conditions for obtaining relief from the imposition of penalty u/s.271AAA
is that the assessee in the statement recorded u/s.132(4) of the Act admits the
undisclosed income and ‘specifies the manner’ in which such income has been
derived. Section 271AAA(2)(ii) casts obligation on the part of the assessee to
‘substantiate the manner’ in which the undisclosed income was derived. The
Tribunal held that s/s.(2)(ii) finds its genesis from s/s. 2(i) of the Act. It
noted that admittedly, the Revenue is not aggrieved by the condition stipulated
in s/s. 2(ii) of the Act. Impliedly, the Revenue admits that the assessee has
not failed to substantiate the manner in which the undisclosed income derived.
This being so, it follows by necessary implication that the assessee has not
failed to specify the manner at the first place when substantiation thereof has
not been called into question by the Revenue. Thus, the case of the Revenue
requires to be summarily dismissed on this ground alone. Notwithstanding, the
assessee has replied to the query raised while recording the statement as
called for. The revenue does not appear to have quizzed the assessee for
satisfying the manner in which the purported undisclosed income has been
derived. The income considered as an undisclosed income in the statement u/s.
132(4) has been duly incorporated in the return filed pursuant to search.
Therefore, the revenue in our view now cannot plead deficiency on the part of
the assessee to specify the manner which has not been called into question at
the time of search. The Tribunal noted that no where in the assessment order or
in the penalty order, the revenue has made out a case that the manner of
earning undisclosed income was enquired into post search stage either. It stated that the revenue has not pointed
out any query which remained unreplied or evaded in the course of search or
post search investigation. The Tribunal held that looking from any angle, it is
difficult to hold in favor of the revenue. The Tribunal upheld the order passed
by CIT(A).

The Tribunal dismissed the appeal filed by the assessee.

shailesh.kwebmaker

9 Brought forward business losses – can be set off against the gains arising from any business or profession – though chargeable to tax under any other head of income : Set off of brought forward unabsorbed depreciation against the short term capital gain

Commissioner of Income
Tax, vs. M/s. Hickson & Dadajee Pvt. Ltd. [ Income tax Appeal no 1493 of
2014 dt : 28/02/2017 (Bombay High Court)].

[M/s.
Hickson & Dadajee Pvt. Ltd, VS ACIT [ ITA No: 5882/M/2012 dated 28/02/2014
; A Y: 2009-10 .
Mum. ITAT ]

The assessee
company, carrying on the business of manufacturing of dyes and dyes
international, harmless food colours as well as construction business, filed
its return of income for the year under consideration on 28-9-2011 declaring
total income of Rs. 1,23,70,170/-. In the said year, the assessee had derived
income from sale of plant & machinery and building which was offered to tax
as deemed short term capital gain u/s. 50 of the Act, 1961. Against the said
income, brought forward business losses of the earlier year and unabsorbed
depreciation were set off by the assessee. The A.O., however, did not allow the
claim of the assessee for such set off on the ground that the income from sale
of plant & machinery and building was chargeable to tax as short term capital
gain u/s. 50 of the Act.

On appeal,
the ld. CIT(A) upheld the order of the A.O. on this issue relying on the
decision of the Mumbai Bench of the Tribunal in the case of Dura Foam
Industries Pvt. Ltd. vs. JCIT (ITA No. 4917 & 4918/Mum/2008).

Aggrieved by
the order of the ld. CIT(A), the assessee has preferred this appeal before the
Tribunal. Tribunal find that assessee’s appeal is squarely covered by the
decision of the co-ordinate Bench of this Tribunal in the case of Digital
Electronics Ltd. vs. Addl. CIT reported in 49 SOT 65 wherein the claim of
the assessee for set off of brought forward business losses against the short
term capital gain on sale of factory building, plant and machinery was
disallowed by the A.O. on the ground that as per section 72 of the Act, the
brought forward business losses could be set off only against profits and gains
of business or profession. Tribunal allowed the claim of the assessee for set
off of brought forward business losses against short term capital gain.

The Tribunal
respectfully follow the decision of the co-ordinate Bench of the Tribunal in the said case and direct the A.O.
to allow the claim of the assessee for set off of brought forward business
losses against the deemed short term capital gain arising from sale of plant
& machinery and building.

Being aggrieved, the Revenue carried the issue in
appeal to the High Court. The Hon. High
Court observed that the Revenue has
accepted the decision of the Tribunal in
Digital Electronics Ltd. (supra). Further no distinguishing features in
the present facts had been shown to the court, which would warrant taking of a
different view from that taken by the Tribunal in Digital Electronics Ltd. (supra)
and accepted by the Revenue. In the above view, appeal of revenue was dismissed.

As regards
the issue involved relating to the assessee’s claim for set off of brought
forward unabsorbed depreciation against the short term capital gain the Court
observed that same was also covered in
favour of the assessee by the decision of CIT vs. Hindustan Unilever Ltd. (2016)
72 taxman.com 325 wherein this Court upheld the view of the Tribunal in
following the decision of Gujarat High Court in General Motors India
(P.)Ltd. vs. Dy. CIT (Special Civil Application No. 1773 of 2012 dated
23-8-2012) wherein a similar issue was decided in favour of the assessee.

Accordingly, appeal
dismissed.

shailesh.kwebmaker

8 Charitable Purpose – The activity of sale of milk being incidental to its Panjrapole activity – does not amount to carrying on of any business activity – it is not in contravention to the proviso to section 2(15) of the Act

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole. [ Income tax Appeal no 1695 of
2014, dt : 20/03/2017 (Bombay High Court)].

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole.] [ITA NO. 1198/Mum/2012; Bench : J ; dated 26/03/2014 ; A Y: 2009-10 .
Mum. ITAT ]

The assessee trust is over 130 years old and
registered with the Charity Commissioner since 1953. The assessee was granted
Certificate of Registration under Section 12A of the Act. By Finance (No.2)
Act, 2009, the definition of “Charitable Purpose” u/s. 2(15) of the Act was
amended w.e.f. 12^th April, 2009. Therefore, in view of the newly
added proviso, charitable purpose would not include advancement of any other
object of general purpose utility, if it involves carrying out activities in
the nature of trade, commerce or business, with receipts in excess of Rs.10
lakhs. In view of the above amendment, the DIT (Exemption) issued a show cause
notice that the income and expenditure account of the assessee, revealed income
on account of sale of milk at Rs.1.57 crore and income from interest and
dividend at Rs.58.34 lakh. Thus, indicating that the activities carried out by
the assessee of selling milk was in the nature of trade, commerce or business.

In its
reply, the assessee pointed out that it is running a Panjrapole i.e. for
protection of cows and oxen for over last 130 years. The activity of selling
milk was incidental to its Panjrapole activity and in any case did not involve
any trade, commerce or business, so as to be hit by the newly added proviso to
section 2(15) of the Act.

The DIT(E)
cancelled the respondent’s registration under the Act by invoking section
12AA(3) of the Act. The basis for cancellation of the registration was that in
view of the newly added proviso to section 2(15) of the Act, its income by way
of sale of milk, interest and dividend being in excess of Rs.10 lakhs the
assessee would cease to be a trust for charitable purpose. The DIT (E) further
records in his order the fact that the assessee was earning only Rs.3.76 lakhs
from its aforesaid activity of selling milk would not detract from the
application of the newly added proviso to section 2(15) of the Act. This for
the reason that the proviso as applicable is receipt based and not profit /
income based.

Being
aggrieved, the assessee filed an appeal to the Tribunal. The Tribunal records
the following facts : ( a) the fundamental / dominant function of the Trust is
to provide asylum to old, maimed, sick, weak, disabled and stray animals and
birds particularly cows; (b) that only 25% of the cows being looked after yield
milk and it is these milk yielding cows which support the balance 75% of the
cows which are non milk yielding; (c) that the milk needs to be procured from
the cows otherwise it will be detrimental to the health of the cows, if not
fatal; (d) the milk so procured is distributed free of charge to children,
schools, hospitals etc. and the balance amount of milk remaining after such free
distribution is sold to the general public at nominal rate; (e) the assessee is
selling milk at subsidized rates; and (f) nothing has been brought on record to
suggest that the Trust conducted its affairs solely on commercial basis.

The Tribunal
after recording the above facts inter alia placed reliance on a decision
of the Tribunal in the case of Sabarmati Ashram Gaushala Trust vs. ADIT (Exem)
25 ITR 701 on an identical facts situation wherein it has been held that
the activities of selling milk by a Panjrapole will not by itself make the
newly added proviso to section 2(15) of the Act applicable. Further, reliance
was also placed in the impugned order upon the decision of the Delhi High Court
in ICAI vs. Director General of Income Tax (Exemption) 347 ITR 99 to
hold that the activities of selling milk by the assessee would be incidental in
running a Panjrapole in view of the proviso to section 2(15) of the Act. Thus,
the appeal of the assessee was allowed.

On appeal by the Revenue the Hon. High Court observed
that there is no bar in law to a Trust
selling its produce at market price as held
by the Gujarat High Court in
Sabarmati Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 dated 15^th
January, 2014. In fact, the above factor alone will not make it an activity of
trade, commerce or business or even in its nature.

The Court also referred to another decision of the
Delhi High Court in Institute of Chartered Accountants of India & Anr.
(ICAI) vs. Director General of Income Tax (Exemption) & Ors. 358 ITR
91, where the Court held that the expression “business”, “trade” or “commerce”
as used in the first proviso must, thus, be interpreted restrictively and where
the dominant object of an organisation is charitable any incidental activity
for furtherance of the object would not fall within the expressions “business”,
“trade” or “commerce”.” (emphasis supplied).

The Court observed
that the Revenue has not been able to
show that the view taken by the Apex Court in Surat Art Silk Cloth
Manufacturers’ Association (supra), Gujarat High Court in Sabarmati
Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 (supra) and the
Delhi High Court in ICAI 347 ITR 99 (supra) and ICAI and Anr. 358 ITR 91
(supra) laying down the dominant activity test should not be followed.
Therefore, it was held that the question as proposed does not give rise to any
substantial question of law. Thus, appeal was dismissed.

shailesh.kwebmaker

7 Assessee entitled to raise claims not made in ROI before appellate authorities – which not made in ROI Expenses incurred for issuance of FCCBs is revenue in nature – even if the FCCB are convertible into equity at a later date

CIT vs. M/s. Faze Three Ltd. [ Income tax Appeal no 1761
of 2014, dt : 16/03/2017 (Bombay High Court)].

[M/s. Faze Three Ltd
vs. ACIT. [ITA No.5449/MUM/2011 ; Bench
: F ; date:16/08/2013 ; A Y: 2007- 2008. MUM.
ITAT ]

In the course of assessment the assessee filed
a letter claiming deduction of Rs. 2.24 crore towards expenses incurred on
issue of FCCBs. It was claimed that the assessee missed to lodge claim for
deduction in the computation of total income. The AO refused the claim by
relying on the decision of the Hon’ble Supreme Court in Goetz India vs. CIT [284
ITR 323] by assigning the reason that since revised return was not filed, this
claim was not entertainable. The learned CIT(A) upheld the assessment order on
this issue.

The Tribunal held that
there is no bar on the appellate authorities in considering a claim made by the
assessee otherwise than by filing a revised return. Thus, the question arose
for consideration was as to whether the expenses on issue of FCCBs can be
allowed as deduction or not.

The Tribunal relied on
the decision of Hon’ble Rajasthan High Court in CIT vs. Secure Meters Ltd. [(2010)
321 ITR 611 (Raj.)] wherein it has been
held that the debentures when issued are only a loan. Any expenses
incurred on issuing debenture, whether convertible or non-convertible is
allowable deduction. Similarly, the Hon’ble Punjab & Haryana High Court in CIT
vs. Sukhjit Starch & Chemicals Ltd. [(2010) 326 ITR 29 (P&H)] has
also held that the expenditure on the issue of convertible debentures is
admissible. The Tribunal observed that
there is no qualitative difference between the issuance of debentures or bonds.
Both fall in the realm of loan. Thus the Tribunal held
that the assessee was entitled to
deduction for this amount.

Being aggrieved, the
Revenue filed an appeal to the High Court. The Court observed that the preliminary issue arising herein stands concluded against
the Revenue and in favour of the Assessee by the decision of this Court in CIT
vs. Pruthvi Brokers and Shareholders Pvt. Ltd., 349 ITR 336 .

As regards, the expenditure incurred on the
issue of FCCBs should be considered as capital expenditure and not be allowed
as revenue expenditure. The Hon Court
relied on the decision of the Delhi High Court in CIT vs. Havells
India Ltd., 352 ITR 376 – wherein on an identical fact situation, the
appeal of the Revenue was dismissed. The Revenue was not able to show any reason which would
require the court to take a view different from that taken by the various High
Courts in the country on an identical issue. In the above circumstances, the
revenue, Appeal was dismissed.

shailesh.kwebmaker

31 Transfer pricing – Computation of arm’s length price – Section 92C, r.w.s. 144C – A. Ys. 2007-08 and 2008-09 – Failure of Assessing Officer to adhere to mandatory requirement of section 144C(1) and first pass a draft assessment order would result in invalidation of final assessment order and consequent demand notices and penalty proceedings

Turner International India (P.) Ltd. vs. ACIT; [2017] 82
taxmann.com 125 (Delhi):

For the A. Y. 2007-08, the assessee petitioner filed its
return on 31^stOctober 2007, declaring its income at Rs.
10,69,43,491/-. This was later revised on 31^st March, 2009 to claim
a higher TDS. As far as A. Y. 2008-09 is concerned, the Petitioner filed a
return of income on 30^th September, 2008 declaring its income at Rs.
35,04,23,465/-. In respect of both the returns, since there were international
transactions involving the Assessee, a reference was made by the AO to the
Transfer Pricing Officer (‘TPO’). In respect of both the A.Ys., two separate
orders were passed by the TPO on 29^th October, 2010 (in respect of
AY 2007-08) and 17^th October, 2011 (in respect of AY 2008-09), in
respect of the Distribution Activity segment. On the basis of the above orders
of the TPO, draft Assessment Orders were passed by the AO. These were objected
to by the Petitioner before the Dispute Resolution Panel (‘DRP’). After the DRP
concurred with the TPO, final assessment orders were passed by the AO. These
were appealed against by the Petitioner before the ITAT. By a common order
dated 14^th January 2013, in both the appeals pertaining to the two
A. Ys., the ITAT observed that neither the Petitioner nor the TPO had taken
into consideration appropriate comparables and, therefore, the determination of
arms length price (‘ALP’) was not justifiable. While setting aside the order of
the DRP, the ITAT remanded the matters to the AO for undertaking a transfer
pricing study afresh and framing an assessment in accordance with law.

Following the above order of the ITAT, fresh notices were
sent on 2^nd August, 2013 by the TPO to the Petitioner u/s. 92CA(2)
of the Act, 1961. Two separate orders were passed by the TPO on 30^th
January, 2015 proposing an upward adjustment to the total income of the
Petitioner for each of the A. Ys. Pursuant to the above order, the AO on 31^stMarch, 2015 passed final Assessment Orders in respect of both A.Ys. u/ss.
254/143(3)/144C(13)r.w.s. 92CA(4) of the Act confirming the additions as
proposed by the TPO. Accompanying the aforementioned final Assessment Orders
were notices of demand u/s. 156 of the Act and notices u/s. 271(1)(c) of the
Act initiating penalty proceedings.

The assessee filed writ petitions challenging the said orders
and the penalty proceedings. The Delhi High Court allowed the writ petition and
held as under:

“i) The short ground on
which the aforementioned final assessment orders and the consequent demand
notices have been challenged is that there was non-compliance with the
mandatory provision contained in section 144C(1) of the Act requiring the AO to
first frame draft assessment orders. The question whether the final assessment
order stands vitiated for failure to adhere to the mandatory requirements of
first passing draft assessment order in terms of Section 144C(1) of the Act is
no longer res intregra. There is a long series of decisions to which reference
would be made presently. In Zuari Cement Ltd. vs. ACIT (decision dated
21^stFebruary, 2013 in WP(C) No.5557/2012), the Division Bench (DB)
of the Andhra Pradesh High Court categorically held that the failure to pass a
draft assessment order u/s. 144C (1) of the Act would result in rendering the
final assessment order “without jurisdiction, null and void and
unenforceable.” In that case, the consequent demand notice was also set
aside. The decision of the Andhra Pradesh High Court was affirmed by the
Supreme Court by the dismissal of the Revenue’s SLP (C) [CC No. 16694/2013] on
27^th September, 2013.

ii) In Vijay
Television (P) Ltd. vs. Dispute Resolution Panel [2014] 369 ITR 113/225 Taxman
35/46 taxmann.com 100 (Mad.), a similar question arose. There, the Revenue
sought to rectify a mistake by issuing a corrigendum after the final assessment
order was passed. Consequently, not only the final assessment order but also
the corrigendum issued thereafter was challenged. Following the decision of the
Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra) and a
number of other decisions, the Madras High Court in Vijay Television (P) Ltd.
case(supra) quashed the final order of the AO and the demand notice.
Interestingly, even as regards the corrigendum issued, the Madras High Court
held that it was beyond the time permissible for issuance of such corrigendum
and, therefore, it could not be sustained in law.

iii) Recently, this
Court in ESPN Star Sports Mauritius S.N.C. ET Compagnie vs. Union of India
[2016] 388 ITR 383/241 Taxman 38/68 taxmann.com 377, following the decision
of the Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra),
the Madras High Court in Vijay Television (P) Ltd. (supra) as well as
the Bombay High Court in International Air Transport Association vs. Dy. CIT
[2016] 241 Taxman 249/68 taxmann.com 246, came to the same conclusion.

iv) Mr. Dileep Shivpuri,
learned counsel for the Revenue sought to contend that the failure to adhere to
the mandatory requirement of issuing a draft assessment order u/s. 144C (1) of
the Act would, at best, be a curable defect. According to him, the matter must
be restored to the AO to pass a draft assessment order and for the Petitioner,
thereafter, to pursue the matter before the DRP. The Court is unable to accept
the above submission. The legal position as explained in the above decisions is
unambiguous. The failure by the AO to adhere to the mandatory requirement of
section 144C (1) of the Act and first pass a draft assessment order would
result in invalidation of the final assessment order and the consequent demand
notices and penalty proceedings.

v) For
the aforementioned reasons, the final assessment orders dated 31^st
March, 2015 passed by the AO for AYs 2007-08 and 2008-09, the consequential
demand notices issued by the AO and the initiation of penalty proceedings are
hereby set aside.”

shailesh.kwebmaker

30 Speculation business – Loss – Section 73, Explanation – Penalty u/s. 271(1)(c) – A. Y. 2001-02 – Allotment of shares – No purchase of shares- Loss on sale of shares – Not from speculation business – Question of penalty u/s. 271(1)(c) also would not arise

AMP Spinning and Weaving Mills P. Ltd. vs. ITO; 393 ITR
349 (Guj):

The assessee was a dealer in chemicals and in shares. In the
public issues of certain companies, the assessee applied for and also allotted
shares which it eventually sold and in the process suffered losses. The
assessee claimed set off of the loss as business loss. The Assessing Officer
rejected the claim and contention of the assessee that the application for
shares from the primary market and loss incurred on sale of such shares did not
fall within the purview of speculation loss under the provisions of the
Explanation to section 73 of the Act. This was upheld by the Tribunal. However,
the Tribunal cancelled the consequent penalty imposed by the Assessing Officer
u/s. 271(1)(c) of the Act.

The Gujarat High Court allowed the assessee’s appeal and
dismissed the appeal filed by the Department and held as under:

“i) Section 73 of the
Income-tax Act, 1961 deals with carry forward and set off of losses from
speculation business. The Explanation to section 73 is a deeming provision
whereunder if the specified conditions are satisfied, purchase and sale of
shares are deemed speculation activities. There is a vital difference between
“creation” and “transfer” of shares. The words “allotment of shares” have been
used to indicate the creation of shares by appropriation out of the
unappropriated share capital to a particular person. A share is a chose in
action. A chose in action implies existence of some person entitled to the
rights in action in contradistinction from rights in possession. There is a
difference between issue of a share to a subscriber and the purchase of a share
from an existing shareholder. The first case is that of creation whereas the
second case is that of transfer of a chose in action.

ii) Getting the shares
on allotment did not amount to purchase of the shares. The loss incurred on the
sale of the shares was not a loss in speculation business.

iii) Accordingly, the
question of levy of penalty u/s. 271(1)(c) would not arise.”

shailesh.kwebmaker

29 Income Declaration Scheme 2016 – Assessee not filing returns for A. Y. 2010-11 onwards owing to internal problems – Declaration under Scheme for A. Y. 2010-11 onwards – Advance tax paid and tax deducted at source for those years – Assessee entitled to credit of advance tax and TDS

Kumudam Publications Pvt. Ltd. vs. CBDT; 393 ITR 599
(Del):

For the A. Y. 2010-11 onwards, the assessee company did not
file returns due to non-appointment of statutory auditor and certain internal
disputes in the company which led to litigations. It deposited the advance tax
and the tax deducted at source and Rs. 16,49,23,433 had been paid towards tax
liability by or on behalf of it. Anticipating that proceedings might be
initiated by the Department for its failure to file returns u/s. 139, the
assessee applied u/s. 119(2)(b) and sought permission to file returns ”based on
the unaudited accounts or in any other manner”. Pending disposal of the
application, the assessee also made a declaration under the Income Disclosure
Scheme, 2016 for all the assessment years on the basis of its unaudited
accounts. The details of the total tax payable including the interest and
penalty under the Scheme was Rs. 19.60 crore against which the advance tax paid
and the tax deducted at source to its benefit was Rs. 16.49 crore and the net
due of Rs. 3.11 crore, after giving credit to the sums paid, were disclosed by
the assessee in its declaration. In response to the declaration, the assessee
received an order from the Principal Commissioner demanding tax of Rs. 19.60
crore. The assesee’s representation and reminder letters to the Department and
e-mails to the Chairman CBDT requesting clarification that the net tax payable
was Rs. 3.11 crore only, were not responded to.

The Delhi High Court allowed the writ petition filed by the
assessee and held as under:

“i) There was no bar,
express or implied which precluded the reckoning or taking into account of
previously paid amounts which has nexus with the period sought to be covered by
the Income Declaration Scheme, 2016. There should be something which provides a
clear insight that Parliament wished that past amounts were not to be reckoned
at all for purpose of payments. All that the words of the statute enjoined were
that the tax and surcharge amounts under the Scheme “shall be paid on or before
a date to be notified”. Those words necessarily referred to all payments and
were not limited in their meaning to what was paid immediately before, or, in
the proximity of the declaration filed.

ii) The provisions of
section 182 of the Finance Act, 2016 stated that for the purposes of the Income
Declaration Scheme, 2016, the undefined terms and expressions should be
understood in terms of the Income-tax Act, 1961, by incorporating those into
the 2016 Act and the Scheme.

iii) “Undisclosed
income” which was the foundational provision to be invoked by the declarant,
thus, was based on the definition in section 132(1)(c) of the 1961 Act. The
only bar discernible under the scheme as evident from section 189 of the 2016
Act was that “a declarant under the Scheme shall not be entitled, in respect of
undisclosed income declared or any amount of tax and surcharge paid thereon, to
reopen any assessment or reassessment made under the Income-tax Act, 1961 or
the Wealth-tax Act, 1957, or claim any setoff or relief in any appeal, reference
or any other proceeding in relation to any such assessment”. Therefore, there
was no bar for an assessee or declarant to claim credit of advance tax amounts
paid previously which pertained to the assessment years or periods for which it
sought benefits under the Scheme, 2016.

iv) The respondents were
directed to process the assessee’s application under the 2016 Scheme giving
adjustment or credit to the amounts paid as advance tax and tax deducted at
source to its account.”

shailesh.kwebmaker

28 Depreciation – Additional depreciation – Section 32(1)(iia) – A. Y. 2006-07 – Acquisition of machinery in previous year and installation during A. Y. – Assessee entitled to additional depreciation at 20%

Princ. CIT vs. IDMC Ltd.; 393 ITR 441 (Guj):

The assessee was in the business of fabrication and
manufacture. For the A. Y. 2006-07, in assessment u/s. 143(3), its total income
was assessed at Nil after the Assessing Officer allowed its claim on additional
depreciation of 20% u/s. 32(1)(iia) of the Act, 1961, on account of its newly
purchased machinery. The machinery was purchased in the preceding year, but was
installed in the relevant year (A. Y. 2006-07). The Department audit party
raised the objection that as the machinery was purchased before March 31, 2005,
the claim of additional depreciation was not allowable to the assessee.
Therefore, in reassessment proceedings, the Assessing Officer disallowed the
assessee’s claim for additional depreciation. The Appellate Tribunal allowed
the assessee’s claim.

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

“i) The purpose and
object of section 32(1)(iia) of the Act,
1961 is to encourage the manufacturing sector by allowing the deduction of a
further sum equal to 20% of the actual cost of machinery or plant acquired and
installed. Therefore, the underlying object and purpose is to encourage the
industries by permitting the assessee in setting up the new undertaking or
installing a new plant and machinery to claim the benefit of additional
depreciation.

ii) No error had been
committed by the Appellate Tribunal in allowing the additional depreciation at
the rate of 20% u/s. 32(1)(iia) of the Act on the plant and machinery installed
by the assessee after March 31, 2005, the year in question. The purpose and
object of granting additional depreciation u/s. 32(1)(iia) was to encourage
industries and to give a boost to the manufacturing sector by permitting the
assessees setting up new undertakings or installation of new plant and
machinery an additional depreciation allowance.

iii) Thus
the provisions of section 32(1)(iia) was required to be interpreted reasonably
and purposively as the strict and literal reading of section 32(1)(iia) would
lead to an absurd result denying the additional depreciation to the assessee
though the assessee had installed new plant and machinery. The question of law
is answered against the revenue and in favour of the assessee.”

shailesh.kwebmaker

27 Charitable purpose – Exemption u/s. 10(23C)(via) – A. Y. 2011-12 – Application for approval cannot be rejected on ground assessee charges fees for educational courses or it entered into arrangements with other institutions to set up satellite centers to give medical treatment or its treatment involved layered subsidisation programme – Rejection of application not justified

Venu Charitable Society vs. DGIT; 393 ITR 63 (Del):

The assessee was registered u/s. 12A of the Act,1961 and also
obtained approval u/s. 80G of the Act. It was also notified for exemption u/s.
35AC of the Act by the National Committee for Promotion of Social and Economic
Welfare. The assessee was notified u/s.10(23C)(via) of the Act for the A. Ys.
2005-06 to 2007-08. But it did not file application for renewal of exemption
for the A. Ys. 2008-09 to 2010-11. In the return of income filed for those
years, the assessee claimed exemption u/s. 11 of the Act in respect of income
earned and applied for charitable purposes, the Assessing Officer while
completing the assessment for the A. Ys. 2005-06 to 2009-10 held that the
activities of the society fell within the ambit of section 2(15) of the Act,
i.e. charitable purpose. The assessee thereafter applied through Form 56D for
grant of exemption u/s. 10(23C)(via) of the Act for the A. Ys. 2011-12 onwards.
The Department rejected the exemption application inter alia on the
ground that (a) the assessee did not exist solely for philanthropic purposes
but for purpose of profit; (b) it had entered into collaboration agreements
with other hospitals and trusts for running satellite hospitals with profit
motive; (c) it provided educational courses such as medical training
programmes, long term super speciality medical programmes in ophthalmology and
was earning profit from those activities; (d) the memorandum of the assessee
society contained objects other than health care; and lastly, that it had made
no application for renewal of exemption u/s. 10(23C)(via) for the A. Ys.
2007-08 to 2010-11.

The Delhi High Court allowed the writ petition filed by the
assessee challenging the order and held as under:

“i) The objects of the assessee
society were solely for the purpose of education and medical care and not for
purposes of profit. Only if it was found that the assessee was carrying on its
activities for the purpose of profit, contrary to its objects, would the
prescribed authority be justified in rejecting the application for approval
u/s. 10(23C)(via) of the Act.

ii) Merely because it
charges fees for educational courses or that it enters into arrangements with
other institutions to set up satellite centres, to give medical treatment, or
that its treatment involved a layered subsidisation programme, that would not
justify rejection of its application. Therefore, denial of exemption u/s. 10
23C)(via) was not justified and the order was to be quashed.

iii) The
Revenue is directed to consider the petitioners application, process it and
pass necessary orders in accordance with law within four weeks from today.”

shailesh.kwebmaker

26 Capital gains – Transfer – Joint development agreement (JDA) – Section 2(47), r.w.s. 53A of the Transfer of Property Act, 1882 – A. Y. 2008-09 – Assessee was member of cooperative housing society which owned certain land – Society entered into tripartite JDA with developers but the JDA was not registered – Assessee was entitled to receive monetary consideration partly in money and balance as a part of built up property – During relevant assessment year, assessee actually received proportionate amount – Unregistered JDA does not fall u/s. 53A of Transfer of Property Act; does not amount to transfer – Tribunal was justified in holding that assessee was not liable to capital gain tax

Princ. CIT vs. Dr. Amrik Singh Basra; [2017] 82
taxmann.com 186 (P & H):

The assessee was a member of a cooperative housing building
society. The society entered into a tripartite ‘JDA’ with developers, viz.,
‘HASH’ and ‘THDC’ under which it was agreed that HASH and THDC would undertake
development of land owned and registered in the name of the society. The agreed
consideration to be paid by the developers was to be disbursed to each individual
member of the society partly in monetary and balance in terms of built up
property. The assessee was entitled to receive proportionate amount.

The Assessing Officer held that impugned transaction involved
allowing the possession of the immovable property to be taken or retained in
part performance of contract of the nature referred to in section 53A of 1882
Act; and thus, it would be treated as transfer for purposes of Income-tax Act.
The Assessing Officer concluded that the assessee was liable to tax during
current assessment year under consideration on the entire amount
received/receivable in future under the head ‘capital gains’. Commissioner
(Appeals) and the Tribunal deleted the addition.

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

“i) The High Court in
the case of C. S. Atwal vs. CIT [2015] 378 ITR 244/234 Taxman 69/59
taxmann.com 359 (P&H) had arrived at the conclusion that:

– The parties had
agreed for pro-rata transfer of land.

– No possession had
been given by the transferor to the transferee of the entire land in part
performance in JDA so as to fall within the domain of section 53A of 1882 Act.

– The possession
delivered, if at all, was as a licencee for the development of the property and
not in the capacity of a transferee.

– Further section 53A
of 1882 Act, by incorporation, stood embodied in section 2(47)(v) and all the
essential ingredients of section 53A of 1882 Act were required to be fulfilled.
In the absence of registration of JDA, the agreement does not fall u/s. 53A of
the 1982 Act and consequently s. 2(47)(v) does not apply.

ii) The
appellant-revenue has not been able to controvert the applicability of the
decision rendered in C.S. Atwal’s case (supra). The substantial
questions of law claimed in these appeals are answered accordingly.
Consequently, both the appeals stand dismissed.”

shailesh.kwebmaker

25 Business expenditure – Capital or revenue – Section 37 – A. Y. 2005-06 – Lease rent paid for plot allotted for period of 10 years by Gujarat Maritime Board – Allowable as revenue expenditure

CIT vs. Mahavir Inductomelt P. Ltd.; 394 ITR 50(Guj):

For the A. Y. 2005-06, the assessee claimed deduction of a
sum of Rs. 18,66,450 as premium paid on plot allotted by the Gujarat Maritime
Board as expenditure in its business of ship breaking. The assessee paid this
amount as premium on leasehold property. According to the Assessing Officer,
the assessee acquired this plot from the Board under lease and the lease
agreement was for 10 years and accordingly, this was a capital asset and
payment made for acquiring capital asset was capital expenditure. The Assessing
Officer allowed deduction only of one tenth of the expenditure. The
Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i) The amount paid by
the assessee with respect to plot allotted by the Board was allowable as
revenue expenditure.

ii) The
appeal is dismissed.“

shailesh.kwebmaker

24 Business expenditure – Accrued or contingent liability- A. Y.s. 2001-02 and 2002-03 – Award of damages with interest in arbitration made rule of court – Assessee disputing award of damages and interest and dispute pending before Division Bench – Grant of stay by Division Bench does not relieve assessee from liability of interest – Entitled to deduction on interest

National Agricultural Co-operative Marketing Federation of
India Ltd. vs. CIT; 393 ITR 666 (Del):

For the A.Y.s 2001-02 to 2003-04, the assessee claimed
deduction of interest payable to A, on account of an arbitration award on the
outstanding amount of the award. The Court made the award rule of the Court in
proceedings initiated by A u/s.5 of the
Foreign Awards (Recognition and Enforcement) Act, 1961 and held that A was entitled to interest. On appeal by the
assessee against such award, the Court granted stay of the execution of the
decree. The Assessing Officer disallowed the claim for deduction by the
assessee for the A. Y. 2001-02 and 2003-04 and held that the liability of the
assessee was contingent and that it had not been entered in the books of account.
The Appellate Tribunal allowed deduction of interest for the A. Y. 2003-04.

The members of the Appellate Tribunal who heard the appeals
for the A. Y.s. 2001-02 and 2002-03 disagreed with the earlier order for the A.
Y. 2003-04. A reference was made to the Special Bench of the Appellate Tribunal
which held that the assessee had not incurred the liability for the payment of
the interest at the end of the assessment years in question and that under the
mercantile system of accounting, deduction could be granted only where the
incurring of the liability was a certainty. It held that there was no legally
enforceable liability of interest that existed against the assessee. It further
held that where the claim to damages and interest thereon was disputed by the
assessee in a Court, the deduction could not be allowed for the interest on such
damages. It concluded that as a result of the stay order granted by the
Division Bench of the Court, the liability of the assessee to pay interest
remained suspended from the date of stay.

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

“i) With the award
being made rule of the Court by a single judge, the mere fact that the judgment
and decree was stayed by the Division Bench would not relieve the assessee of
its obligation to pay in terms thereof to A. Such liability had commenced in
the previous year in which the judgment and decree was passed by the single
judge. The order of the Special Bench of the Appellate Tribunal confirming the
disallowance of interest was unsustainable.

ii) Appeal
is allowed.”

shailesh.kwebmaker

23 Appeal to High Court – Limitation – Appeal by Department – Receipt of copy of order of Tribunal by any of officers in Department including Commissioner (Judicial) will trigger period of limitation – Internal arrangements by Department changing jurisdiction of its officers will not alter period of limitation – Administrative instructions for administrative convenience of Department do not override statute particularly section 260A(2)(a)

CIT vs. Odeon Builders P. Ltd.; 393 ITR 27 (Del)(FB):

On 29/10/2014, the Tribunal had passed a common order in a
batch of 115 cases. A certified copy thereof was received in the office of the
CIT, Ghaziabad on 19/12/2014 and in the office of the Principal Commissioner
Delhi on 28/04/2015. The Department filed an appeal before the High Court on
25/08/2015. Assessee contended that the appeal was filed beyond the limitation
period. The Department explained that at the time the appeals were heard by the
Tribunal, the Commissioner, Ghaziabad was the concerned Commissioner and pursuant
to certain administrative orders issued by the Department, the jurisdiction
relating to the assessee was transferred to the Commissioner, Delhi. The
certified copy was received by the Commissioner, Delhi on 28/04/2015 and the
Commissioner, Delhi thereafter took a decision regarding filing of appeals.
Another appeal against the order of the Tribunal dated 16/05/2014 was filed by
the Department in the High Court on 14/01/2015. The assessee contended that in
accordance with the stamp borne on the certified copy of the order, the Copy of
the order was available with the Commissioner (Judicial) on July 23, 2014 and
with the Commissioner (Central) on July 25, 2014 and therefore, the appeal
which was filed on January 14, 2015 was beyond 120 days from the date of
receipt of the certified copy. The Department contended that limitation would
start to run only from the date of service of the order of the Tribunal on the
concerned Commissioner having jurisdiction over the assessee.

The Full Bench of the Delhi High Court held as under:

“i) The word “received”
occurring in section 260A(2)(a) of the Income-tax Act, (hereinafter for the
sake of brevity referred to as the “Act”) 1961 would mean received by
any of the named officers of the Department, including the Commissioner
(Judicial). The provision names four particular officers, i.e., the Principal
Commissioner, Commissioner, Principal Chief Commissioner, and Chief
Commissioner of Income Tax. These were the only designated officers who could
receive a copy of the order. In the absence of a qualifying prefix “concerned”,
the receipt of a copy of the order of the Tribunal by any of those officers in
the Department including the Commissioner (Judicial), would trigger the period
of limitation.

ii) The statute was not
concerned with the internal arrangements that the Department might make by
changing the jurisdiction of its officers. It was for the officer of the
Department who first received a copy of the Tribunal’s order to reach in time
to the officer who was to take a decision regarding the filing of an appeal.

iii) Where there was a
common order of the Tribunal covering the several appeals, limitation would
begin to run when a certified copy was received first by either the
Commissioner (Judicial) or one of the officers of the Department and not only
when the Commissioner “concerned” receives it. When the same Commissioner had
jurisdiction for more than one assessee, the limitation would begin to run for
all from earliest of the dates when the Departmental representative of the
Commissioner (Judicial) or any Commissioner first receives the order in any of
the cases forming part of the batch disposed by the common order.

iv) If there were four
separate orders passed, the limitation would begin to run when such separate
orders are received first by any officer of the Department.

v) Instructions issued
by the Department for its administrative convenience could not alter the time
when limitation would begin to run u/s.260A(2)(a) of the Act. Administrative
instructions are for the administrative convenience of the Department and would
not override the statute, in particular section 260A(2)(a) of the Act.”

shailesh.kwebmaker

Allowability of Expenditure towards Corporate Social Responsibility

Issue for Consideration

Explanation 2 to Section
37(1) declares that, for the removal of doubts, any expenditure incurred by an
assessee on the activities relating to corporate social responsibility referred
to in section 135 of the Companies Act, 2013 shall not be deemed to be an
expenditure incurred by the assessee for the purposes of business or
profession.

Companies Act, 2013 has made it mandatory for certain
companies to spend at least 2% of the average net profits towards Corporate
Social Responsibility (‘CSR’) as per the policy formulated by the CSR committee
of the company in this regard. While this is the first time a statutory
obligation has been cast upon companies to incur expenditure in the social or
charitable sphere, it is not uncommon for corporate as well as non-corporate
assessees to voluntarily incur charitable expenditure, which may or may not
have a direct nexus to their business operations.

Where such expenditure is expected to benefit the business in
some manner, either by benefitting its employees or by creating goodwill within
the community at large, it is usually claimed as business expenditure under
section 37(1). The issue has arisen on the allowability of such expenditure, on
account of conflicting decisions of the Tribunal. While the Raipur Tribunal has
upheld the claim in the specific facts of the case, the Bengaluru Tribunal has
taken a contrary view, disallowing the claim in respect of charitable expenses.

Jindal Power Limited’s case

The issue came up before
the Raipur Tribunal in the case of ACIT vs. Jindal Power Ltd. 179 TTJ 736.

In the said case, during
assessment year 2008-09, the company had claimed deduction in respect of
expenditure incurred on construction of school building, devasthan/temple,
drainage, barbed wire fencing, educational schemes and distributions of clothes
etc. voluntarily. Without much of a discussion on the factual aspects, the AO
observed that no material had been placed to substantiate the claim or in
support of existence of the facts of development activities. The AO also placed
reliance on the decision of the Patna Tribunal in the case of Central
Coalfields Ltd. for assessment years 1983-84 to 1986-87, wherein it was held
that the expenses were in the nature of charity and though laudable, they could
not be said to have been incurred for the purpose of business.

The CIT(A) made detailed observations on CSR stating that
“CSR policy functions as a built-in, self-regulating mechanism whereby a
business monitors and ensures its active compliance with the spirit of the law,
ethical standards, and international norms. The goal of CSR is to embrace
responsibility for the company’s actions and encourage a positive impact
through its activities on the environment, consumers, employees, communities,
stakeholders and all other members of the public sphere who may also be
considered as stakeholders. CSR is titled to aid an organization’s mission as
well as a guide to what the company stands for and will uphold to its
consumers.” Further, the CIT(A) noted the CSR policy of the assessee company
and that the expenses incurred on water supply for perennial availability of
portable water, roads and culverts, toilets and others, water tanks, other
community works, temple renovation, school building renovation etc. in the
villages for up-gradation as well as expenses for the welfare of the employees
were a part of implementation of CSR policies of the company. The assessee
relied upon various decisions including the decisions in the case of SECL 85
ITD 608 (Nag.) and Madras Refineries Ltd. 266 ITR 170 (Mad.).
Applying the ratio of the said decisions, the CIT(A) held that the expenditure
under the above heads incurred by the appellant company as a good corporate
citizen and as measure of gaining goodwill of the people living in and around
its industries through the aforesaid activities were admissible expenditures.
Only those expenses, which were neither substantiated with proper evidences nor
had any nexus with the CSR policies of the appellant company, were disallowed.

In the appeal before the Tribunal, the fundamental objection
of the AO was that the expenses were voluntary, not mandatory and not for
business purposes. In respect of the contention that expenses, which were
voluntary in nature and not mandatory, were not admissible as deduction, the
Tribunal referred to the judgment of House of Lords in the case of Atherton
v. British Insulated & Helsbey Cables Ltd. 10 Tax Cases 155 (HL), which
has been approved by the Supreme Court in the case of Chandulal Keshavlal &
Co. 38 ITR 601, wherein it was held that a sum of money expended not with a
necessity and with a view to direct immediate benefit to the trade, but
voluntarily and on the grounds of commercial expediency and in order to
indirectly facilitate carrying on of business, may yet be expended wholly and
exclusively for the purpose of the trade and hence be admissible. The Tribunal
also considered the decision of the Supreme Court in the case of Sassoon J
David & Co. (P) Ltd. 118 ITR 261, which laid down the principle that
the fact that somebody other than the assessee also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction if it otherwise satisfied the tests laid down by law.

Further, on the contention of whether such expenses were for
the purpose of business or not, the Tribunal referred to the decision in the
case of Hindustan Petroleum Corporation Ltd 96 ITD 186 (Mum.) which held
that there could be certain amounts, though in the nature of donations, which may
be deductible under section 37(1) as well and merely because an expenditure was
in the nature of donation, or ‘promoted by altruistic motives’, it did not
cease to be an expenditure deductible under section 37(1). It also took into
consideration the decision in the case of Madras Refineries Ltd. (supra),
wherein it was observed that monies spent by the assessee as a good corporate
citizen and to earn the goodwill of the society help creating an atmosphere in
which the business can succeed in a greater measure with the help of such
goodwill, and therefore, were required to be treated as business expenditure
eligible for deduction under section 37(1) of the Act.

The Tribunal noted that Explanation 2 to Section 37(1) was
introduced with effect from 1^st April 2015 and observed that it
could not be construed to the disadvantage of the assessee in the period prior
to this amendment. It further noted that this disabling provision referred only
to such CSR expenses incurred under Section 135 of the Companies Act, 2013,
and, as such, it could not have any application for the period not covered by
this statutory provision, which itself came into existence in 2013. It also
placed reliance on the principle of lex prospicit non respicit (law looks
forward not backward) laid down in the Supreme Court’s five judge
constitutional bench’s landmark judgment, in the case of Vatika Townships
Pvt Ltd 367 ITR 466 (SC), that unless a contrary intention appeared,
legislation was presumed not to be intended to have a retrospective operation
and that law passed today could not apply to the events of the past. The
Tribunal also reiterated the well settled legal position that when a
legislation conferred a benefit on the taxpayer by relaxing the rigour of
pre-amendment law, and when such a benefit appeared to have been the objective
pursued by the legislature, it would be a purposive interpretation giving it a
retrospective effect, but when a tax legislation imposed a liability or a
burden, the effect of such a legislative provision could only be prospective.

Interestingly, the
Tribunal observed that the disallowance was restricted to the expenses incurred
by the assessee under a statutory obligation under section 135 of Companies Act
2013, and thus, there was now a line of demarcation between the expenses
incurred by the assessee on discharging CSR under such a statutory obligation
and under a voluntary assumption of responsibility. The Tribunal further held
that for the former, the disallowance under Explanation 2 to Section 37(1) came
into play, but, as for the latter, there was no such disabling provision as
long as the expenses, even in discharge of corporate social responsibility on
voluntary basis, could be said to be “wholly and exclusively for the
purposes of business”.

Thus, based on all the
aforesaid arguments, since the expenses in question were not incurred under the
statutory obligation, as also for the basic reason that Explanation 2 to
Section 37(1) came into play with effect from 1st April 2015, the Tribunal
concluded that the disabling provision of the said Explanation did not apply to
the facts of this case.

Kanhaiyalal Dudheria’s case

The issue once again came
up for consideration before the Bengaluru Tribunal in the case of Kanhaiyalal
Dudheria v. JCIT 165 ITD 14

In this case, during assessment year 2011-12, the assessee
firm claimed deduction in respect of expenditure incurred on construction of
houses under an MOU with the Government of Karnataka, that were later handed
over to the Government for helping the people affected by floods. The assessee
claimed that the said expenditure was incurred to yield benefit in the form of
goodwill and therefore, the same was allowable as business expenditure. The AO,
after referring to the MOU, came to the conclusion that the said expenditure
was not incurred wholly and exclusively for the purpose of business and
therefore held that the same was not allowable as deduction u/s 37(1) of the
Act. The CIT(A) upheld the order of the AO.

In the appeal before the Tribunal, the assessee firm relied
on the decisions in the case of Jindal Power Ltd. (supra) and Infosys
Technologies Ltd. 360 ITR 714 (Kar.) stating that on account of incurrence
of expenditure, goodwill was created in the people in the surrounding villages,
which would help in carrying out business and thus,
the expenditure should be allowed as a deduction. On behalf of the revenue, it
was argued that the said expenditure was towards charity and it was nothing but
application of income. The revenue drew support from the decision in the case
of Badrinarayan Shrinarayan Akodiya 101 ITR 817 (MP).

The Tribunal, relying on the decision in the case of Sassoon
J. David & Co. (P.) Ltd. (supra), emphasized that although for claiming
deduction u/s 37(1), it was not required to establish the necessity of
incurring of such expenditure, the onus lay on the assessee to prove that the
expenditure was incurred for the purpose of business. Since in the facts of the
case, the assessee did not establish that the expenditure was incurred for business
purpose, the Tribunal held that the expenditure amounted to application of
income voluntarily towards charity which could not be allowed as a deduction.

The Tribunal also noted that it cannot be said that the
appellant had incurred this expenditure wholly and exclusively for the purpose
of business since there was no nexus between the expenditure incurred and the
benefit derived by the business of the assessee.

Observations

Prior to insertion of
Explanation 2, section 37(1) along with Explanation 1 laid down a four-fold
test for any expenditure to be allowable in computing the income under the head
“Profits and gains of business or profession” –

– it must
not be of the nature described in sections 30 to 36;

– it must
not be capital or personal in nature;

– it must
be laid out or expended wholly and exclusively for the purposes of business or
profession; and

– it must
not be incurred for a purpose which is an offence or which is prohibited by
law.

There was no requirement,
however, to prove the necessity of incurring such expenditure. In other words,
whether the expenditure was incurred on account of a statutory obligation or
otherwise, did not have a bearing on the allowability of the expenditure.
Expenses in the nature of CSR were considered to be allowable or not allowable
as a deduction in light of the above tests.

It is common for many
taxpayers to contribute to the betterment of their employees and their
families, or the community or society, or the locality where their business
operations are based, etc. in a variety of ways. In most of the cases, there is
some perceived benefit to the business operations, either in the form of better
morale and productivity of employees or through generation of goodwill and
reputation for the business. As a result, in all such cases, the expenditure is
considered to have been spent for the purposes of the business and claimed as
deduction against the business profits. However, in cases where the spending is
not connected with the business of the assessee in any manner whatsoever, it
partakes the character of donation or charity and is not an allowable
expenditure under section 37(1).

At the same time, the mere
fact that a particular expenditure is in the form of donation, more
particularly eligible for deduction under section 80G, would not by itself
imply that it is not deductible under section 37(1). In the case of Mysore
Kirloskar Ltd. v. CIT 166 ITR 836 (Kar.), which was referred to in the case
of Infosys Technologies Ltd. (supra), it was held that if the contribution
by an assessee was in the form of donations of the category specified under
section 80G, but if it could also be termed as an expenditure of the category
falling under section 37(1), then the right of the assessee to claim the whole
of it as allowance under section 37(1) could not be denied if it was “laid
out or expended wholly and exclusively for the purpose of business”.

The debate on the
voluntary nature of the expenses and the necessity of incurring such
expenditure has been definitively settled in the case of Sassoon J. David
and Co. (P.) Ltd. (supra), where the issue arose on deductibility
under section 10(2)(xv) of the Income-tax Act, 1922 (corresponding to section
37(1) of the Income-tax Act, 1961) of expenditure on retrenchment compensation
incurred voluntarily. The Apex Court in the said case has observed as under –

“It has to be observed here that the expression “wholly and
exclusively” used in section 10(2)(xv) of the Act does not mean
“necessarily”. Ordinarily it is for the assessee to decide whether
any expenditure should be incurred in the course of his or its business. Such
expenditure may be incurred voluntarily and without any necessity and if it is
incurred for promoting the business and to earn profits, the assessee can claim
deduction under section 10(2)(xv) of the Act even though there was no
compelling necessity to incur such expenditure. It is relevant to refer at this
stage to the legislative history of section 37 of the Income-tax Act, 1961
which corresponds to section 10(2)(xv) of the Act. An attempt was made in the
Income-tax Bill of 1961 to lay down the “necessity” of the
expenditure as a condition for claiming deduction under section 37. Section
37(1) in the Bill read “any expenditure. . . . laid out or expended wholly,
necessarily and exclusively for the purposes of the business or profession
shall be allowed” The introduction of the word “necessarily” in
the above section resulted in public protest. Consequently when section 37 was
finally enacted into law, the word “necessarily” came to be dropped.
The fact that somebody other than the assessee is also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the
tests laid down by law.”

Although the facts in the
above case were different and the issue under examination was in respect of
retrenchment compensation, the ratio laid down by the Supreme Court in respect
of allowability of voluntary expenditure under section 10(2)(xv) of the 1922
Act and section 37(1) of the 1961 Act would be applicable even in case of CSR
expenditure incurred by taxpayers without any statutory requirement or any
other compulsion.

The issue that remains
disputed then is, in which cases or under what circumstances, will the
expenditure be considered to be “wholly and exclusively for the purposes of the
business or profession”? Here again, the courts have agreed that the words
“for the purpose of business” used in section 37(1) should not be
limited to the meaning of “earning profit alone” and that business
expediency or commercial expediency may require providing facilities like
school, hospital, etc., for the employees or their families. It has also been
held that any expenditure laid out or expended for their benefit, if it
satisfied the other requirements, must be allowed as deduction under section
37(1) of the Act. However, the onus of establishing the nexus between the
expenditure incurred and the business and proving that the expenditure
“satisfies the other requirements” must be discharged by the assessee. The
Supreme Court in the case of Chandulal Keshavlal & Co. (supra) has laid
down certain tests in this regard as under –

“Another fact that
emerges from these cases is that if the expense is incurred for fostering the
business of another only or was made by way of distribution of profits or was
wholly gratuitous or for some improper or oblique purpose outside the course of
business then the expense is not deductible. In deciding whether a payment of
money is a deductible expenditure one has to take into consideration questions
of commercial expediency and the principles of ordinary commercial trading. If
the payment or expenditure is incurred for the purpose of the trade of the
assessee it does not matter that the payment may inure to the benefit of a
third party—Usher’s Wiltshire Brewery v. Bruce 6 TC 399 (HL). Another test is
whether the transaction is properly entered into as a part of the assessee’s
legitimate commercial undertaking in order to facilitate the carrying on of its
business ; and it is immaterial that a third party also benefits thereby —
[Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is
a question of fact whether the expenditure was expended wholly and exclusively
for the purpose of trade or business of the assessee.”

[Emphasis supplied]

The above principle
emerges in both the cases discussed in this article. In the case of Jindal
Power Limited (supra), even though CSR expenses were allowed based on an
understanding of the need for CSR by businesses and that these expenses were a
part of the implementation of the CSR policy of the company, the Tribunal
disallowed those expenses which were not substantiated with evidence and were not
in line with the company’s CSR policy. Similarly, in the case of Kanhaiyalal
Dudheria (supra), deduction of expenses was not allowed on account of failure
on part of the assessee to establish that the expenditure was incurred for
business purpose.

The introduction of
statutory provisions for CSR in Companies Act, 2013 and a corresponding
amendment in the Income-tax Act, 1961 has added another dimension to the
existing controversy.

Section 135 of the
Companies Act, 2013 mandates that every company having –

– net
worth of Rs. 500 crores or more, or

– turnover
of Rs. 1,000 crores or more, or

– net
profit of Rs. 5 crores or more

during any financial year,
shall spend, in every financial year, at least 2% of its average net profits
towards CSR activities as per the CSR policy of the company. It further states
that the company shall give preference to the local area and areas around where
it operates for the CSR spending.

On the one hand, the above
provisions make it mandatory for certain Companies to undertake charitable
spending, while, on the other hand, Finance (No. 2) Act, 2014 introduced
Explanation 2 to section 37(1) with effect from 1st April 2015, to read as
under –

“For the removal of doubts, it is hereby declared that for the purposes
of sub-section (1), any expenditure incurred by an assessee on the activities
relating to corporate social responsibility referred to in section 135 of the
Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or profession.”

The above explanation
states that CSR expenditure shall not be deemed to have been incurred for the
purposes of business. Consequently, such expenditure is not allowable as a
deduction. The Explanatory Memorandum to the Finance Bill states that the
objective of CSR is to share the burden of the Government in providing social
services by companies having net worth/turnover/profit above a threshold and if
such expenses are allowed as tax deduction, this would result in subsidising of
around one-third of such expenses by the Government by way of tax expenditure.
However, it also states that the CSR expenditure which is of the nature
described in section 30 to section 36 of the Act shall be allowed as a
deduction under those sections subject to fulfillment of conditions, if any,
specified therein.

By declaring that
statutory CSR expenditure is not deemed to have been incurred for the purpose
of business, rather than clarifying that such expenditure is not an allowable
expense, Explanation 2 to section 37(1) may end up adding another angle to the
issue. It may be possible to take a view that Explanation 2 to section 37(1)
merely clarifies that the statutory CSR expenditure is not automatically deemed
to have been incurred for the purpose of business on account of the legislative
obligation (as was the presupposition in the arguments against allowability of
voluntary CSR expenses). In other words, statutory CSR expenditure would also
be considered to be incurred for the purposes of business and therefore be
deductible, so long as it satisfies the other tests and requirements discussed
earlier. The fact that the legislature intends to allow CSR expenditure of the
nature described in sections 30 to 36 would imply that the expenditure ought to
be allowed as a deduction if it is otherwise deductible.

Nevertheless, it is
pertinent to note that the explanation only makes a reference to the
expenditure incurred on CSR activities referred to in section 135 of the
Companies Act, 2013 and not to all expenditure in the nature of CSR. Further,
the explanation has been prospectively inserted with effect from 1^stApril
2015. Interestingly, the case of Jindal Power Limited (supra) pertains
to the period prior to the amendment. The Raipur Tribunal had rightly held that
since Explanation 2 was inserted prospectively and as it was a disabling
provision, it did not apply in that case to the expenditure incurred prior to
the amendment. This clearly implies that CSR expenditure, whether statutory or
voluntary, incurred prior to assessment year 2015-16 would be allowable,
provided it meets the other requirements of section 37(1). Additionally, the
Tribunal observed that there was now a clear distinction between statutory and
voluntary CSR expenditure and that the restriction placed in Explanation 2 to
section 37(1) would at best apply to the CSR expenditure incurred under the
statutory requirements. In other words, if any assessee – company or other than
company – voluntarily spends on CSR activities, whether prior to or after the
Companies Act, 2013 became applicable, the said expenditure would be allowable,
as long as it can be demonstrated to be incurred “wholly and exclusively for
the purposes of business or profession”.

Also noteworthy is the
fact that the CSR expenditure is mandated in the Companies Act, 2013 only for
companies and any expenditure of similar nature by non-corporates will always
be of a voluntary character, as in the case of Kanhaiyalal Dudheria (supra). As
the explanation makes a specific reference to section 135 of the Companies Act,
2013, the question of invoking the same for CSR expenditure incurred by
non-corporate entities does not arise. Quite aptly, therefore, Explanation 2
has not been considered in Kanhaiyalal Dudheria’s case and the allowability of
the CSR expenditure has been decided on the basis of settled principles in
respect of section 37(1) prior to the amendment.

Last but not the least, a
question may arise regarding the validity of the restriction imposed by
Explanation 2 to section 37(1). Where an expenditure is required to be
statutorily incurred and failure to comply with such statutory requirements
could attract penalties, it has a direct nexus to the business of the taxpayer.
In our view, deeming such an expenditure to not be for the purpose of business
or profession is inappropriate. In fact, if similar expenses incurred before
the imposition of the statutory obligation have been held to be deductible, the
deeming fiction was not desired in view of the existing safeguards in place in
section 37(1). Ironically, even after the amendment, the following category of
expenditures will still be allowable as a deduction –

– CSR
expenses incurred by non-corporate entities, which are demonstrated to be laid
out for the purposes of business or profession;

– CSR
expenses incurred voluntarily by companies; and

– CSR expenses incurred by companies in
discharge of the obligation under section 135 of the Companies Act, 2013, which
are covered under section 30 to 36 of the Income-Tax Act, 1961.

This disparity between the deductibility of the
CSR expenses is uncalled for. It is therefore a possibility that the
restriction of Explanation 2 to Section 37(1) may be read down by the Courts.

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TDS U/s. 194-Ib on Payment of Rent by Certain Individuals or Hindu Undivided Family

Background

Section 194-I of the
Income-tax Act, 1961 (“the Act”) interalia requires an individual or a
Hindu Undivided Family (HUF) carrying on business or profession of which
turnover or gross receipts in the immediately preceding previous year exceed
the monetary limits mentioned in section 44AB of the Act to deduct tax at source
while making payment of rent, to a resident. Under section 194-I, liability to
deduct tax arises if the amount of rent exceeds Rs. 1,80,000 in a year. Under
section 194-I tax is required to be deducted @ 10%.

Therefore, an individual or a Hindu undivided family not
carrying on a business or a profession or carrying on a business or profession
the turnover or gross receipts of which did not exceed the monetary limit
mentioned in section 44AB of the Act in the immediately preceding previous year
is not required to deduct tax at source from payment by way of rent.

With a view to widen the scope of tax deduction at source,
the Finance Act, 2017 has, with effect from 1.6.2017, inserted section 194-IB
in the Act. This article attempts to analyse the provisions of section 194-IB
of the Act.

Provision of section 194-IB in brief

An individual or an HUF (other than those covered by s.
194-I) responsible for paying to a resident, any income by way of rent
exceeding Rs. 50,000 for a month or part of a month during the previous year,
shall deduct an amount equal to five per cent of such income as income-tax
thereon. The deduction is required to be
made at the time of credit of rent for the last month of the previous year or
the last month of tenancy if the property is vacated during the year, to the
account of the payee or at the time of payment thereof whichever is
earlier. The deductor is not required to
obtain TAN. In case the payee does not
have PAN and the provisions of section 206AA apply, the amount of deduction
shall not exceed the amount of rent payable for the last month of the previous
year or the last month of tenancy, as the case may be.

Cumulative Conditions for application of Section 194-IB

i) the payer is an individual or a Hindu
undivided family;

ii) in the immediately preceding previous year the
turnover or gross receipts of the business / profession carried on by such
individual or HUF, if any, did not exceed the monetary limits mentioned in
section 44AB;

iii) the payer is responsible for paying income by
way of rent for use of any land or building or both. For the purpose of this section, rent is
defined in an Explanation to section 194-IB;

iv) the amount of rent exceeds Rs. 50,000 for a
month or part of a month during the previous year;

v) the payee is a resident.

Consequences

If the above mentioned
conditions are cumulatively satisfied, the payer is required to deduct tax @ 5%
of such income as income-tax.

time of deduction

Tax is required to be deducted on earlier of the following two
dates –

i) credit to the account of the payee of rent
for the last month of the previous year or the last month of tenancy, if the
property is vacated during the year; OR

ii) at
the time of payment thereof in cash or by issue of a cheque or draft of by any
other mode. It needs to be noted that
the word `thereof’ signifies the payment of rent for last month of the
previous year or the last month of tenancy, if the property is vacated during
the year.

Other points

i) The payer is not required to obtain TAN;

ii) In case the provisions of section 206AA apply
(i.e. the payee does not have PAN) the amount of deduction shall not exceed the
amount of rent payable for last month of the previous year or the last month of
the tenancy, as the case may be.

Who should be the payer / To whom is the section applicable?

Section 194-IB applies to a payer of rent who is an
individual or an HUF (other than those referred to in the second proviso to
section 194-I). The amount of rent should be in excess of the amount mentioned
in the section (given in subsequent paragraphs).

Therefore, the section will apply to a salaried employee, a
farmer, a retired person, an individual or an HUF carrying on business or
profession whose total turnover or gross receipts in the immediately preceding
previous year does not exceed the monetary limits mentioned in section 44AB of
the Act, an individual not carrying on business and whose total income is less
than the maximum amount not chargeable to tax.

Since the term `individual’ has been held to also include
group of individuals, the section may apply to trustees of a trust [DIT vs.
Sharadaben Bhagubhai Mafatlal Public Charitable Trust (2001) 247 ITR 1 (Bom)].
It may also apply to Executors of the estate of a deceased person [see CIT
vs. G B J Seth 6 Taxman 318 (MP)].

Who should be the payee?

The payee of rent should be a
resident. If the payee is a
non-resident, then tax may be deductible u/s.195 of the Act but not under this
section. The legal status of the payee is
not relevant. The payee could be a listed company, a private limited company, a
firm, a trust, LLP, individual, HUF, etc.

Threshold for deduction of tax

Tax is required to be
deducted only if the amount of rent exceeds Rs. 50,000 for a month or a part of
a month during the previous year. Once the rent for a month or part of a month
exceeds Rs. 50,000, tax is deductible on the entire amount of rent. Unlike the
other provisions of TDS, the payments made during the previous year are not
required to be aggregated for deduction of tax at source. To illustrate, if the amount of rent paid in
first 3 months is at the rate of Rs.
45,000 per month and for next 6 months @ Rs. 55,000 per month and for last 3
months at Rs. 40,000 per month, tax is required to be deducted only from
rent of those months where the amount of rent exceeds Rs. 50,000 for a month or
part of a month. Therefore, amount
of tax to be deducted at source will be Rs. 16,500 [5% of Rs. 3,30,000 (55,000
x 6)].

It needs to be noted that
in case of rent for part of a month, the monthly rate of rent is not relevant
but what is relevant is that the amount paid / payable for a part of the month
should be in excess of Rs. 50,000. To
illustrate, if amount of rent paid for 15 days is Rs. 40,000 tax will not be
required to be deducted (though rent per month is Rs. 80,000) but if the amount
of rent paid for 3 weeks is Rs. 60,000 then tax is required to be deducted
under this section.

Is the limit of Rs. 50,000 per month or part of a month qua each property or qua the payee?

A
question arises as to whether the limit of Rs. 50,000 per month or part of a
month is qua each property or qua each payee. To illustrate if Mr. T has
taken on rent from Mr. L a residential house on a monthly rent of Rs. 15,000
and also a factory for a monthly rent of Rs. 40,000, if the limit of Rs. 50,000
is qua each property, Mr. T is not required to deduct tax at source u/s.
194-IB whereas if the limit of Rs. 50,000 is qua the payee, Mr. T is
required to deduct tax in accordance with the provisions of section
194-IB. It appears that the limit of Rs.
50,000 per month or part of a month is not qua the property, but qua
the aggregate of all the rents which an individual or a HUF may pay to a payee.
The threshold of Rs. 50,000 per month or part of a month will have to be
examined qua each payee and not qua each property. Therefore, Mr.
T will be required to deduct tax in accordance with the provisions of section
194-IB.

Meaning of `rent’

The section requires deduction of tax from payment of “rent”. The word “rent” is defined in Explanation to
section 194-IB as follows –

“Rent means any payment, by whatever
name called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any land or building or both.”

The definition of ‘rent’ is
similar to the definition in section 194-I. Considering the definition of rent,
it is clear that payment for use of any land or building or both constitutes
rent. However, payment for use of furniture will not be covered by this section.

Whether payment for use of a part of a building is covered?

A question arises as to whether payment for use
of a part of the building is covered by the tax deduction obligation imposed by
this section? It is relevant to note
that the legislature has in sections 27, 194IA, 194LA, 194LAA, 269AB
specifically mentioned part of a building.
However, in the context of section 194-I, CBDT has in Circular number
718, dated 22.08.1995 (for section 194-I) clarified as under:

“Query No. 5 : Whether section 194-I
is applicable to rent paid for the use of only a part or a portion of any land
or building?

Answer : Yes, the definition of the
term “any land” or “any building” would include a part or a
portion of such land or building.”

Further, in view of the legal maxim OmneMajuscontinet in
se minus which means “the greater contains the less” Atma Ram
vs. State of Punjab, AIR 1959 SC 519; ICI India Ltd. vs DCIT, (2004) 90 ITD 258
(Kol)] ], it is possible to argue that rent for part of a building would
also be covered by the provisions of this section.

Therefore, it appears that the
payment for use of a part of a building, say a flat or an office in a building
or an industrial gala in an industrial estate would constitute rent and would
be subject to TDS if other conditions of this section are satisfied.

Composite rent

Where rent is a composite amount
comprising of payment for use of land or building or both as also for other
facilities and amenities and the amount for use of land or building is known
separately then tax is required to be deducted only on the payment for use of
land or building or both. However, if
the amount of payment for use of land or building or both is not known
separately, can one contend that the section will not apply and no deduction need
be made? One really needs to look at the substance of the arrangement – if it
is primarily for use of land or building, then provisions of section 194-IB
would apply. It is relevant to note that in the context of section 194-I, CBDT,
vide Circular No. 715 dated 8.8.1995, has clarified that tax would be
deductible on the entire amount. The
relevant portion of the said Circular reads as follows -.

“Question 24: Whether in a case
of a composite arrangement for user of premises and provision of manpower for
which consideration is paid as a specified percentage of turnover, section
194-I of the Act would be attracted ?

Answer If the composite arrangement
is in essence the agreement for taking premises on rent, the tax will be
deducted u/s. 194-I from payments thereof.”

Payment to hotel

A question arises as to
whether payment to a hotel for rooms hired would be covered by the provisions
of this section. In the context of
section 194-I, the CBDT vide Circular No. 715, dated, 8-8-1995 clarified
that payments made by persons for hotel accommodation taken on regular basis
will be in the nature of rent subject to TDS u/s.194-I (see question 20 of the
Circular).The CBDT further clarified the above, vide Circular No. 5,
dated 30-7-2002 which reads as under:

“Furthermore,
for purposes of section 194-I, the meaning of ‘rent’ has also been considered.
“‘Rent’ means any payment, by whatever name called, under any lease . . .
or any other agreement or arrangement for the use of any land. . .”
[Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its
ambit and scope. For this reason, payment made to hotels for hotel
accommodation, whether in the nature of lease or licence agreements are
covered, so long as such accommodation has been taken on ‘regular basis’. Where
earmarked rooms are let out for a specified rate and specified period, they
would be construed to be accommodation made available on ‘regular basis’.
Similar would be the case, where a room or set of rooms are not earmarked, but
the hotel has a legal obligation to provide such types of rooms during the
currency of the agreement.”

Further, Andhra Pradesh High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709] held that amount paid to the hotels
for use and occupation of hotel rooms squarely falls within the meaning of
rent.

In view of the above, it appears
that if payment is made to the hotels on a regular basis, it will constitute
rent. However, for payment to hotels for
occasional use see the discussion hereafter.

Lease premium

For the following reasons, payment of lease premium would not
require deduction of tax at source under this section –

i) Lease premium is a capital receipt;

ii) In the context of section. 194-I, courts have,
considering the facts of the case, held that payment of lease premium does not
require deduction of tax at source. Reference may be made to the following
decisions –

(a) Rajesh Projects (India) (P.) Ltd. vs. CIT
[2017] 78 taxmann.com 263 (Delhi)

(b) ITO vs. Navi Mumbai SEZ Pvt. Ltd. [2013]
38 taxmann.com 218 (Mum. – Trib.)

(d) ITO vs. Wadhwa& Associates Realtors (P.)
Ltd. [2013] 36 taxmann.com 526 (Mum. – Trib.)

iii) The CBDT vide Circular No. 35, dated
13-10-2016 has also clarified that TDS under section 194-I is not
required in case of lump sum lease payment or one time upfront lease payment.

License fee paid under a leave and license agreement for use
of a flat/office/industrial gala

A question arises as
to whether the payment for use of land or building or both made under a leave
and license agreement will qualify as `rent’.
The definition of rent interaliacovers payment by whatever name called
under “any other agreement or arrangement for the use of land or building or
both”.

The expression “any other agreement or arrangement” is not
defined in the section. Considering the context in which the expression has been
used, it appears that income-tax would require to be deducted on payment of
rent made under a leave and license agreement.

In
the context of section 194-I, the meaning of the expression “any other
agreement or arrangement” is explained by High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709 (AP)] as under :

“9. The expressions ‘any payment, by
whatever name called’, and ‘any other agreement or arrangement’ occurring in
the definition of the term ‘rent’ in Explanation to section 194-I have
widest import. According to Black’s Law Dictionary, the word ‘any’ is
often synonymous with either ‘every’ or ‘all’. Its generality may be restricted
by the context in which that word occurs in a statute. The Supreme Court in Lucknow
Development Authority vs. M.K. Gupta AIR 1984 SC 787 dealing with the use
of the word ‘service’, in the context it has been used in the definition of the
term in Clause (o) of section 2 of the Consumer Protection Act, has opined that
the word ‘any’ indicates that it has been used in wider sense extending from
‘one to all’. In G. Narsingh Das Agarwal vs. Union of India [1967] 1 MLJ
197, the Court opined that the word ‘any’ means ‘all’ except where such a wide
construction is limited by the subject-matter and context of the statute. The
Patna High Court in Ashiq Hassan Khan vs. Sub-Divisional Officer, AIR
1965 Pat.446 (DB) and Chandi Prasad vs. Rameshwar Prasad Agarwal AIR
1967 Pat. 41 has held that the word ‘any’ excludes ‘limitation or
qualification’. In State of Kerala vs. Shaju[1985] Ker. LJ 33, the Court
held that the word ‘any’ is expressive. It indicates in the context ‘one or
another’ or ‘one or more’, ‘all or every’, ‘in the given category’; it has no
reference to any particular or definite individual, but to a positive but
undetermined number in that category without restriction or limitation of
choice. Thus, having regard to the context in which the expressions ‘any
payment’ and “any other agreement or arrangement” occurring in the
definition of the term “rent” (have been used) it only means each and
every payment (that has been) made to the petitioner-hotel under each and every
agreement or arrangement with the customers for the use and occupation of the hotel rooms.”

Warehousing charges

In the context of section 194-I, the CBDT vide
Circular No. 718, dated 22-8-1995 clarified that TDS is required to be deducted
on warehousing charges. The relevant para of the said Circular reads as under:

” Query No. 3 : Whether the tax
is to be deducted at source from warehousing charges ?

Answer : The term ‘rent’ as defined
in Explanation (i) below section 194-I means any payment by whatever name
called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any building or land. Therefore, the warehousing
charges will be subject to deduction of tax u/s.194-I.”

Is the section applicable to occasional renting?

A question arises as to whether tax deduction
obligation under this section arises even in a case where an individual takes
on rent say a land or building occasionally for a period of one day/few days,
say for a wedding in the family and the amount of rent exceeds Rs. 50,000 for a
day, or where a person stays in a hotel for a few days and the aggregate room
rent exceeds Rs. 50,000. Considering the
language of the section, it appears that the section envisages letting for a
continuous period, e.g., s/s.(2) requires deduction at the time of credit of
rent for the last month of the previous year or last month of tenancy. Similar
is the language in s/s.(4) which deals with the amount of tax to be deducted in
a case where provisions of s. 206AA are applicable. Also, if one looks at the
particulars to be filled in Statement-cum-Challan in Form No. 26QC through
which tax deducted has to be paid to the credit of Central Government one finds
that it requires details of “Period of tenancy” and the notes in the said Form
26QC state that Period of tenancy will be the period (i.e. months) for which
tenant is paying the rent. Also, “Total
value of rent payable” is required to be mentioned. It is stated that Total
value of rent payable is equal to number of months for which rent is payable
multiplied by value of rent per month. These particulars and notes could be
indicative of the position that the section does not contemplate deduction of
rent in respect of occasional letting.
However, the matter is not free from doubt and it can also be argued
that a day is also a part of a month and if the amount of rent for the period
the land or building is taken on rent is more than Rs. 50,000 the tax deduction
obligation under this section is triggered if the payer is covered by this
section. In view of the penal
consequences which arise due to non-deduction, a safer view would be to deduct
tax even in such cases. Though, in a
case where one has for some reason failed to deduct tax in some genuine case
one may be able to contend that the section requires letting for some
continuous period.

Rate at which tax is required to be deducted

Tax is required to be deducted @
5%.

Rate at which tax is required to be deducted where payee does
not have PAN

In
a case where payee does not have PAN, section 206AA requires the deductor to
deduct tax at highest of the three rates mentioned in section 206AA. Therefore,
in a case where the payee does not have PAN, by virtue of provisions of section
206AA, deduction of tax could be @ 20%. However, sub-section (4) of section
194-IB clearly states that in a case where provisions of section 206AA apply,
deduction shall not exceed the amount of rent payable for the last month of the
previous year or the last month of the
tenancy, as the case may be. To illustrate, if rent has been paid @ Rs.60,000
per month from 1.6.2017 to a person who does not have PAN, the amount of tax
required to be deducted at source would be Rs. 1,20,000 [20% of rent paid i.e. 20% (Rs. 60,000 x
10)]. However, by virtue of s/s. (4),
the deduction shall not exceed the amount of rent payable for last month of the
previous year. Therefore, deduction in this case will be restricted to Rs.
60,000.

Payment of rent by deducting tax at a rate lower than 5% or
without deduction of tax at source

Section
197 which enables an assessee to obtain from the AO a certificate authorising
the payer to deduct tax at a lower rate has not been amended to incorporate a
reference to this section. Therefore, an
assessee will not be able to obtain a certificate from the AO authorising the
payer to deduct tax at a rate lower than the one mentioned in section 194-IB
i.e. 5%. Also, the payee may be having
brought forward losses or may not be liable to pay tax on the income by way of
rent being received by him since his total income may be likely to be less than
the maximum amount chargeable to tax.
However, since the provisions of section 197A have not been amended, the
payee will not be able to issue a declaration in Form No. 15G / 15H authorising
the payer to deduct tax at a lower rate.

Does section require deduction of tax only once during the
previous year?

While it appears that the section requires deduction of tax only once
during the previous year, it may not necessarily be so in all cases. As has
been mentioned above, deduction is at the time of credit of rent of the last
month of the previous year or rent of the last month of tenancy, as the case
may be, to the account of the payee or at the time of payment thereof whichever
is earlier. To illustrate, in a case
where an individual, living throughout the financial year 2017-18 in a rented
flat changes the flat rented by him (assuming rent is more than Rs. 50,000 per
month) say on September 30, 2017 and also on December 31, 2017, he will be
required to deduct tax thrice during the financial year 2017-18 on September
30, 2017 and December 31, 2017 (being last month of tenancy) and on March 31,
2018 (being last month of the previous year) assuming of course, that he has
credited rent to the account of the payee or has paid the rent on these dates
or thereafter.

If the rent for last month
of the previous year or last month of tenancy is not credited by the payer to
the account of the payee, the tax deduction obligation will arise at the time
of payment of such rent. In such a case, if the two dates fall in different
financial years, there will be difficulty on account of mismatch of TDS as
well. To illustrate if assuming that in
the illustration referred to in the above para, if the individual assessee did
not credit rent to the account of any of the 3 landlords but paid rent to all 3
landlords on June 30, 2018, he will be required to deduct tax at the time of
payment i.e. on June 30, 2018 and therefore the credit for TDS will be
reflected in Form 26AS of the landlords in the AY 2019-20 whereas they may be
required to offer rental income for taxation in AY 2018-19.

Is the deductor required to obtain TAN?

Sub-section
(3) of section 194-IB clearly provides that the provisions of section 203A
shall not apply to a person required to deduct tax in accordance with
provisions of section194-IB. Therefore, an individual or a HUF deducting tax in
accordance with section194-IB is not required to obtain TAN.

Time of payment of tax deducted to the credit of Central
Government

Rule 30(2B) requires that the tax
deducted shall be paid within 30 days from the end of the month in which
deduction is made. The payment shall be
accompanied by a Challan-cum-statement in Form 26QC. This procedure is similar
to the procedure as that for tax deducted at source on payments for purchase of
an immovable property u/s. 194-IA.

Certificate of deduction

The payer of rent is
required to furnish to the payee a certificate of deduction of tax at source in
Form No. 16C within a period of 15 days form the due date for furnishing the
challan-cum-statement in Form 26QC. The
certificate is to be generated and downloaded from the web portal specified by
the Principal Director General of Income-tax (Systems) or the Director General
of Income-tax (Systems) or the person authorised by him.

Payer to have PAN

Payment of tax at source
can be made only if the payer has PAN. Therefore, persons deducting tax at
source under this section, will have to obtain PAN, though they may otherwise
not be required to do so.

Rent for the period prior
to 1.6.2017

Section 194-IB has been
inserted with effect from 1.6.2017. Therefore, in a case where the time of
deduction was before 1.6.2017, the provisions of this section will not apply.
However, if the time of deduction is on or after 1.6.2017, then the provisions
of this section will apply, and tax will have to be deducted at source even
though the rent pertains to a period prior to 1.6.2017. To illustrate, if rent
for April 2017 and May 2017 was paid prior to 1.6.2017, then tax is not required
to be deducted at source under this section, but if the rent for the month of
May 2017 is paid on 10^th June, 2017, then tax will be required to be
deducted at source under this section (ofcourse, if all the other conditions
are satisfied). Also, if an individual
has not paid rent for financial year 2016-17 but pays it after 1.6.2017, then
tax will be required to be deducted at source in accordance with the provisions
of this section.

Consequences of non-deduction

In a case where an individual of a HUF, required to deduct
tax in accordance with the provisions of s. 194-IB fails to do so or having
deducted the amount fails to pay the whole or part of the tax, such individual
or HUF will be deemed to be an assessee-in-default u/s. 201 of the Act. This shall be in addition to his obligation
to pay interest/penalty under other provisions of the Act.

Conclusion

Salaried employees paying
rent whether or not claiming exemption u/s.10(13A); individuals/HUFs paying
rent on occasional basis such as individuals going for a vacation and paying
rent for a bungalow/group of bungalows, rent for ground taken on occasion of
marriage in the family, etc.; small businessmen who are not covered by
tax audit, etc. would be required to consider the applicability of the
provisions of this section.

shailesh.kwebmaker

Tax Issues in Computation of Taxable Income for Companies Adopting Ind-AS

The Challenge:

Tax Practioners would need to have knowledge of both
standards i.e. Indian Accounting Standards (Ind-AS) and Income Computation and
Disclosure Standards (ICDS) to assist the companies adopting Ind-AS in
finalising their tax returns

One
of the challenges that tax practitioners will face while finalising tax returns
for assessment year (AY) 2017-18, is in computation of the taxable income of
companies, which have adopted Ind-AS for the first time in the financial year
(FY) 2016-17. It is normally the profits
as per the profit and loss account which is the starting point for computation
of taxable income. So far, only adjustments required to be made under the
Income-tax Act (the Act) were being made to the computation of taxable income.
However, with the advent of Ind-AS and the corresponding introduction of ICDS,
which is also applicable for the first time from AY 2017-18, a significant
number of adjustments would have to be made to the profit as per the profit and
loss account, to arrive at the taxable income. This requires a proper
understanding not only of ICDS, but also of the differences between accounts
prepared under Ind-AS and those prepared under the earlier accounting standards
(existing AS).

In this article, an attempt has
been made to analyse and list out some significant adjustments which are likely
to be made to the profit and loss account, to arrive at the taxable income of
the companies’ whose accounts are prepared adopting Ind-AS.

Indian Accounting Standards (Ind-AS)

The MCA had notified
IFRS-converged Ind-AS as Companies (Indian Accounting Standards) Rules, 2015
vide Notification dated 16^th February 2015. The said Notification
also laid down the roadmap for the applicability of Ind-AS for certain class of
companies as under:

Roadmap for implementation of Ind-AS

Sr. No.

Companies covered

Voluntary
phase

Under Phase I, any company had the
option to adopt Ind-AS on voluntary basis for FY 2015-16.

Mandatory
phase 1

Adoption
of Ind-AS is mandatory for the FY 2016-17 for:

(a) Companies
listed/in process of listing on Stock Exchanges in India or Outside India
having net worth > INR 500 crores,

(b) Unlisted
Companies having net worth > INR 500 crore, and

Mandatory
phase 2

Ind-AS
from FY 2017-18 would be mandatory for:

(a) Companies
which are listed/or in process of listing inside or outside India on Stock
Exchanges not covered in Phase I (other than companies listed on SME
Exchanges),

(b) Unlisted
companies having net worth INR 500 crore> INR 250 crore, and

Mandatory
phase 3

Banks
and NBFCs would be required to adopt Ind-AS from FY 2018-19. Insurance
companies would be required to adopt
Ind-AS from FY 2020-21.

All companies adopting
Ind-AS are required to present comparative information for earlier FY, as per Ind-AS. Accordingly, they will have to apply Ind-AS for preparation of
standalone as well as consolidated Balance sheet and consolidated Statement of
Profit and Loss for FY 2015-16. Once Ind-AS is applicable to the entity for one
year, it has to be mandatorily followed for all subsequent FYs.

Companies listed on SME exchange are not required to apply
Ind-AS. Companies not covered by the above roadmap shall continue to apply
existing Accounting Standards notified in Companies (Accounting Standards)
Rules, 2006 issued by the ICAI as revised vide notification dated 30^thMarch
2016 (“existing AS”).

Income Computation and Disclosure Standards (ICDS)

The Central Government vide Notification No. SO 892(E) dated
31^stMarch 2015 notified 10 ICDS. These ICDS were applicable from FY
2015-16 (AY 2016-17). Subsequent to notification of the ICDS, a number of
representations were received for postponement/cancellation of ICDS. The
implementation of ICDS was kept on hold by the CBDT in July 2016.

In September 2016, the CBDT rescinded the earlier notified
ICDS, and notified revised ICDS (I to X) applicable from FY 2016-17 (AY
2017-18).

Adjustments required to the Profit as per Statement of Profit
& Loss for Companies adopting Ind-AS

1. Revenue recognition from sale
of goods on deferred payment basis

Revenue recognition as
per Ind-As

As per Ind-AS 18 which deals with Revenue recognition,
revenue shall be measured at the fair value of
the consideration received or receivable. Paragraph 11 of Ind-AS 18 provides as
under:

“11. In most cases, the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents
received or receivable. However, when the inflow of cash or cash equivalents is
deferred, the fair value of the consideration may be less than the nominal
amount of cash received or receivable. For example, an entity may provide
interest-free credit to the buyer or accept a note receivable bearing a
below-market interest rate from the buyer as consideration for the sale of
goods. When the arrangement effectively constitutes a financing transaction,
the fair value of the consideration is determined by discounting all future
receipts using an imputed rate of interest. The imputed rate of interest is the
more clearly determinable of either:

(a) the prevailing rate
for a similar instrument of an issuer with a similar credit rating; or

(b) a rate of
interest that discounts the nominal amount of the instrument to the current
cash sales price of the goods or services.”

In such arrangements of deferred receipt of consideration,
the fair value of the consideration is measured by discounting all future
receivables using an imputed rate of interest i.e. a rate of interest that
discounts the nominal amount of the instrument to the current cash sales price
of the goods or services.

The difference between the
fair value and the nominal amount of the consideration would be considered as
interest. Such interest would be recognised as revenue using the effective
interest rate (EIR) method as per Ind-AS 109. EIR is a method of calculating
the amortised cost of a financial asset or a financial liability and allocating the interest income or interest expense
over the relevant period.

Revenue
recognition as per ICDS

As per ICDS IV which deals with basis
of revenue recognition, the revenue from sale of goods is to be recognised when
the seller of goods has transferred to the buyer the property in the goods for
a price or all significant risks and rewards of ownership have been transferred
to the buyer and the seller retains no effective control of the goods
transferred to a degree usually associated with ownership.

As per ICDS IV, the term “Revenue” has been defined to mean
gross inflow of cash, receivables or other consideration arising in the course
of the ordinary activities of a person from the sale of goods.

Difference
between Ind-AS and ICDS

There is a significant difference in the basis of revenue
recognition as per Ind-AS 18 and ICDS IV in respect of sale of goods on
deferred payment basis. As per Ind-AS 18, the seller has to bifurcate the total
sales into fair value of consideration and interest. Fair value of
consideration would be recognised as revenue straightaway in the year of sale,
whereas interest income would have to be recognised as revenue over the
relevant credit period.

The concept of bifurcation of sale consideration in respect
of sale of goods on deferred payment basis is not present in ICDS. As per ICDS,
entire income from sale of goods will be recognised as revenue in the year of
sale, without any bifurcation of total sales consideration into fair value of
consideration and interest.

An Example

An example would explain the above
difference between the treatment under Ind-AS 18 and ICDS IV. A company which
has adopted Ind-AS has sold goods for Rs. 22 lakh on 1^stMarch 2017
to a customer with 10 months credit period. The same goods are sold to other
customers on cash basis at Rs. 20 lakh. Accordingly, as per Ind-AS 18, the
company would have to recognise revenue from sale of goods at Rs. 20 lakh. Rs.
2 lakh would be considered as interest, which would be recognised as revenue in
terms of Ind-AS 109.

Accordingly, a credit
period of 10 months starts from 1 March 2017, Rs. 20,000, being 1/10th of interest
of Rs. 2,00,000, would be recognised as revenue in the FY 2016-17. Balance
interest of Rs. 1,80,000 would be recognized as revenue in the FY 2017-18.
Hence, what would be recognized as revenue in the FY 2016-17 would be Rs. 20
lakh of sales and Rs. 20,000 of interest. Rs. 1,80,000 of interest would be
recognized as revenue in the FY 2017-18. However, as per ICDS IV, entire sale
consideration of Rs. 22 lakh would be recognised as revenue in FY 2016-17.

Impact of
the above differences

CBDT vide Notification No. 10/2017
dated 23 March 2017, in response to question no. 5 has clarified that “ICDS
shall apply for computation of taxable income under the head ” Profit and gains
of business or profession” or “Income from other sources” under the Income Tax Act.
This is irrespective of the accounting
standards adopted by companies i.e. either Accounting Standards or Ind-AS.”

In view of the above
clarification of the CBDT, the company would have to recognise entire sale
consideration of Rs. 22 lakh as revenue in its computation of income for AY
2017-18, even though what has been recognized as revenue in Ind-AS compliant
financials is only Rs. 20.02 lakh.

The company, while preparing computation of taxable income
would have to give effect to such differences which arise as per Ind-AS as well
as the Act/ ICDS. The company would also have to maintain details of such
income streams which gets recognised as revenue in different FYs on account of
different basis of revenue recognition as per Ind-AS and ICDS.

2. Revenue recognition from composite/bundles transactions

Impact
Revenue Recognition as per Ind-AS

As per paragraph 13 of
Ind-AS 18, the revenue recognition criteria are usually required to be applied
separately for each transaction. However, where the transaction is a composite/
bundled transaction, the revenue recognition criteria has to be applied
separately for each identifiable component of a single transaction, in order to
reflect the substance of the transaction. As per the example given in Ind-AS
18, when the selling price of a product includes an identifiable amount for
subsequent servicing, that amount relatable to subsequent servicing is deferred
and recognised as revenue over the period during which the service would be
performed.

As per paragraph 19 of
Ind-AS 18, “revenue and expenses that relate to the same transaction or
other event are to be recognised simultaneously, as the matching concept of
revenues and expenses. As per the example given in Ind-AS 18, all expenses
including future warranties and other costs to be incurred after the shipment
of the goods, can normally be measured reliably. Such expenses which are to be
incurred in future, directly relatable to sale of goods should be recognised as
expenses in the year of sale, when the other conditions for the recognition of
revenue are satisfied. However, when the expenses to be incurred in future
cannot be measured reliably, any consideration already received for the sale of
the goods should be recognised as a liability”.

Accordingly, where sale of goods comprises of composite/
bundled transaction, the company would have to identify each individual
transaction forming part of composite/ bundled transaction. The company would
have to apply revenue recognition criteria to each transaction. Any expenses to
be incurred on such composite/ bundled transaction have to be measured reliably
and provided for as a liability. Where such expenses to be incurred cannot be
measured reliably, any consideration already received for the sale of the goods
has to be recognised as a liability.

Revenue recognition as per ICDS

As per ICDS IV, there is no provision for splitting up of the
sale consideration in respect of a composite/bundled transaction. The revenue
would be the gross inflow arising from sale of goods, and shall be recognised
when the seller of goods has transferred to the buyer, the property in the
goods for a price or all significant risks and rewards of ownership have been
transferred to the buyer and the seller retains no effective control over the
goods transferred. Therefore, where no separate charge is levied for the
servicing, the entire sales proceeds would be treated as revenue from the sale
of goods.

As per ICDS X, a present obligation arising from past events,
the settlement of which is expected to result in an outflow from the person of
resources embodying economic benefits should be provided for as a liability.
Therefore, a provision for warranty expenses to be incurred on sales effected,
made on a scientific or actuarial basis, would be allowable as a deduction
[which is also in accordance with the Supreme Court decision in the case of Rotork
Controls India (P) Ltd vs. CIT (2009) 314 ITR 62(SC)].

Difference between Ind-AS and ICDS

Ind-AS, in respect of transaction involving composite/
bundled transactions requires the revenue recognition criteria to be applied
separately for each identifiable component of a single transaction. Revenue and
expenses relating to the same transaction or other event should be recognised simultaneously.
Where such expenses to be incurred in future cannot be measured reliably, any
consideration already received for the sale of the goods should be recognised
as a liability.

ICDS IV however does not give any
guiding principles on bifurcation of consideration for each identifiable
component of a single transaction, forming part of composite/ bundled
transaction. ICDS IV does not allow treatment of consideration already received
for the sale of goods as a liability, where expenses to be incurred cannot be
measured reliably.

An example

An
example on the above would explain the difference between the Ind-AS 18 and
ICDS IV. A company which has adopted Ind-AS, is in the business of
manufacturing and sale of cars. It sold a car to a customer at Rs. 5 lakh on 1^stJanuary 2017. The sale of car also includes free after sale service for a
period of 2 years and free warranty for 1 year. The standard price of after
sale service for 2 years, included in sale price of Rs. 5 lakh, would be Rs.
50,000.

As per Ind-AS 18, the company would have to separately
identify each component of single transaction of sale of car i.e. it has to
bifurcate composite/ bundled transaction of sale of car into separate
identifiable transaction viz. sale of car, rendering of after sale services and
providing warranty.

Accordingly, Rs. 4,50,000 (i.e. sale consideration of Rs. 5
lakh less Rs. 50,000 towards 2 years after sale services) would be recognised
as revenue in the FY 2016-17. Revenue recognition in respect of after sales services
of Rs. 50,000 has to be spread over the 2 years period. Rs. 6,250 for January
to March 2017 has to be recognized as revenue in the FY 2016-17 and balance Rs.
43,750 would be recognised as revenue in the FY 2017-18 and FY 2018-19.

The company would have to estimate the expenditure it would
incur in future over the free warranty, which can be recognised as expenses,
based on principle of matching concept in the year of sale of car. If it is not
in a position to estimate expenses to be incurred as per Ind-AS 18, sale
consideration relatable to free warranty should be recognised as liability in
FY 2016-17 and should be recognised as revenue in subsequent years.

ICDS IV, however is silent on bifurcation of consideration
for each identifiable component of a single transaction, forming part of
composite/ bundled transaction. Further, ICDS does not allow treatment of
consideration already received for the sale of goods as liability, where
expenses to be incurred in future cannot be measured reliably.

Impact of the above differences

Taxation of after-sales
services

In view of the fact that ICDS
does not give any guiding principles on bifurcation of each identifiable
component of composite/bundled transaction, the company may not be able to
bifurcate the consideration of Rs. 50,000 for after sale services of 2 years from
the sales price of cars. Therefore, the gross sales price may have to be
considered as revenue in the year of sale. The question arises whether the
company can claim deduction for the estimated future expenditure that it may
incur on after sales service.

Based on the provisions of
paragraph 5 of ICDS X, if such expenditure is estimated on a scientific basis,
such future liability may be recognised as a provision under the ICDS, which is
a liability. This is on account of the fact that there is a present obligation
as a result of a past event, it is reasonably certain that an outflow of
resources embodying economic benefits will be required to settle the
obligation, and a reliable estimate can be made of the amount of obligation.
Therefore, one can take a view that the estimated liability for after sales
service is an allowable deduction u/s. 37 read with ICDS X.

Warranty expenses

It is a common practice for car manufacturers to make
provision for warranty expenses in the books, based on past experience,
historical data of actual warranty expenses incurred or some ad-hoc estimate
and claim deduction thereof u/s. 37 of the Act.

The issue on allowability
of warranty provision has been settled by the Supreme Court. The Supreme Court
in the case of Rotork Controls vs. CIT (314 ITR 62) (SC) has allowed the
assessee’s claim for deduction of warranty provision as expense on the ground
that “warranty became integral part of the sale price of the product and a
reliable estimate of the expenditure towards such warranty was allowable.”
In this case, the Supreme Court held that all the conditions for recognising a
liability were fulfilled – arising out of obligating events, involving outflow
of resources and involving reliable estimation of obligation.

However, in the tax return, where the company is not in a
position to estimate expenditure to be incurred on warranty on some
scientific/reliable basis, it would not be in a position to postpone revenue
recognition from the sale consideration of car. Such treatment is permitted as
per Ind-AS, but has no specific permission in ICDS. However, where such
warranty provision is made on a scientific basis, under paragraph 5 of ICDS X,
the liability for warranty would be regarded as a provision, which is defined
as a liability which can be measured only by using a substantial degree of
estimation, and would therefore be an allowable deduction.

The company would have to maintain details of such different
basis of revenue recognition as per Ind-AS and ICDS i.e. after sales services
in the above example, to arrive at correct taxable income.

3. Revenue
recognition in case of rendering of services

Revenue recognition as per Ind-AS

As per Ind-AS 18, the recognition of revenue from rendering
of services is measured by reference to the stage of completion of a
transaction i.e. the percentage of completion method. Under this method,
revenue is recognised in the accounting periods in which the services are
rendered. As per paragraph 20 of Ind-AS 18, “percentage of completion method has
to be followed where the outcome of a transaction can be measured reliably.
Such reliable measurement of outcome requires fulfilment of the following
conditions:

(a) the amount of revenue can be measured reliably;

(b) it is
probable that the economic benefits associated with the transaction will flow
to the entity;

(d) the
costs incurred for the transaction and the costs to complete the transaction
can be measured reliably”.

As per paragraph 26 of Ind-AS 18, “when the outcome of the
transaction involving the rendering of services cannot be estimated reliably,
revenue shall be recognised only to the extent of the expenses incurred and are
recoverable”.

As per paragraph 27 of this Ind-AS, “where execution of
the transaction has just started or has only reached preliminary stage
(referred to as early stage of a transaction), it may not be possible to
estimate outcome of the transaction involving the rendering of services. In
such situation, it is permissible for the entity to recognise revenue only to
the extent of costs incurred that are expected to be recoverable”.

Paragraph 28 states “when the outcome of a transaction
cannot be estimated reliably and it is not probable that the costs incurred
will be recovered, revenue is not recognised and the costs incurred are
recognised as an expense”.

Revenue recognition as per ICDS

As per ICDS IV dealing with
Revenue Recognition, revenue from service transactions shall be recognised by
the percentage of completion method. It is expressly provided that ICDS III on
Construction contracts shall apply to the recognition of revenue and associated
expenses, for a service transaction. In view of the express applicability of
ICDS III to a service transaction, where service transactions are at an early
stage, it would be possible for the entity to recognise revenue only to the
extent of the expenses incurred (as under Ind AS). However, ICDS IV provides
that the early stage of a contract cannot extend beyond 25% of the stage of
completion. Therefore, under ICDS IV, recognition of revenue by percentage of
completion method is compulsory beyond 25% of the stage of completion.

When services are provided by an indeterminate number of acts
over a specific period of time, revenue may be recognised on a straight line
basis over the specific period.

ICDS, however provides a
concession to certain service contracts with duration of less than 90 days. In
respect of such service contracts with duration less than 90 days, the assessee
has an option to treat revenue from such contracts to be recognised when the
rendering of services under that contract is completed or substantially
completed.

Difference between the Ind-AS
and ICDS

Ind-AS as well as ICDS requires recognition of revenue from
rendering of services as per the percentage of completion method for all
services. Under Ind-AS, percentage of completion method is to be adopted only
once reliable measurement of outcome is possible, which is possible only when
revenues and expenses can be measured reliably, and stage of percentage of
completion can also be measured reliably. There is no specific stage specified
in the Ind-AS from when the percentage of completion method becomes applicable,
but it would depend upon the conditions being satisfied in each case. However,
under ICDS IV, percentage of completion method would have to be followed once
the 25% stage of completion is reached, irrespective of whether the outcome can
be measured reliably.

Similarly, under Ind-AS, it is possible that when the outcome
of a transaction cannot be estimated reliably and it is not probable that the
costs incurred will be recovered, revenue is not recognised and the costs
incurred are recognised as an expense, resulting in a loss. However, under ICDS
IV read with ICDS III, if 25% threshold has been crossed, only the
proportionate loss based on the percentage of completion can be recognised.
ICDS is silent as to what happens in the early stages when outcome cannot be
reliably measures and the costs will not be recovered.

Further, ICDS additionally
grants an option to the assessee to recognize revenue from the contract with
project duration less than 90 days only on completion of contract or when it is
substantially completed. There is no such provision in Ind-AS 18.

An example

An example on the above would explain the difference between
Ind-AS 18 and ICDS IV. The company is engaged in the logistic business, whereby
it arranges inbound/ outbound transportation of goods. The company has huge
volume of transactions. In all cases of inbound/outbound transportation of
goods, the completion of transport of goods does not take more than 90 days period.

As on the last day of reporting period, the said company has
various pending logistic contracts, which have not reached 100% completion. The
company accordingly has to measure contract revenue from such contracts in
progress, only to the extent of percentage of logistics work complete. The said
estimation requires information of percentage of logistics work completed for
all contracts in progress, and the shipments in many of the contracts may be
mid-road/mid-sea/mid-air on the last day of the reporting period.

For Ind-AS purposes, the
company has to work out revenue from rendering of services by following
percentage of completion method, where the outcome of the contract (including
the stage of completion) can be reliably measured. Accordingly, it would have
to work out the percentage of contract completed for each contract in progress,
and the proportionate revenue and expenditure of each contract in progress, as
on the last day of the reporting period, where the outcome (including stage of
completion) can be reliably measured. However, as per ICDS, while filing the
tax return, the company can opt to offer the entire income from logistics
contracts only on completion of the entire work.

In many cases of logistics contracts, it may not be possible to
reasonably estimate the stage of completion. In that situation, under Ind AS,
the revenue from the contract would be recognised only to the extent of costs
incurred, and the profit would effectively be accounted for on completion of
the contract, as is the case under ICDS.

Impact of the above differences

The company, for commercial
reasons, may want to offer income from logistics contracts, with duration less
than 90 days, to income tax by following ICDS, only on completion of the
contract, where completion of services falls in a different FY. Such a company
would have the option to recognise revenue from contracts with duration of less
than 90 days, only on completion of the
contract. This would be irrespective of the fact that as per Ind-AS, it has recognised contract revenue by reference to the stage of
completion of the contract activity, at the reporting date. In normal
circumstances, where any contract commences as well as is completed in the same
year, revenue recognition as per Ind-AS 18 and ICDS IV would be the same.
However, where any contract with duration of less than 90 days commences and is
completed in a different FY, the company would have to maintain detailed
records, both for Ind-AS purposes as well as ICDS, where it opts for
recognising income on completion basis.

4. Revenue recognition
in case of Construction contracts

Revenue recognition as per Ind-AS

As per Ind-AS 11
‘Construction Contracts’, the recognition of revenue and expenses is required
to be made by reference to the stage of completion of a contract i.e.
percentage of completion method. Under this method, contract revenue is matched
with the contract costs incurred in reaching the stage of completion, resulting
in the reporting of revenue, expenses and profit which can be attributed to the
proportion of work completed.

As per paragraph 32 of Ind-AS 11, when the outcome of a
construction contract cannot be estimated reliably (a) revenue shall be
recognised only to the extent of contract costs incurred that probably will be
recoverable, and (b) contract costs shall be recognised as an expense in the
period in which they are incurred.

Paragraph 33 of Ind-AS 11 explains a situation, where it
would be necessary for the entity to recognise contract revenue only to the
extent of contract costs. As per the said paragraph, “where the Construction
contract is at the early stages of a contract, it is often the case that the
outcome of the contract cannot be estimated reliably. In such a situation,
contract revenue can be recognized only to the extent of contract costs
incurred that are expected to be recoverable”. Ind-AS 11 also requires
recognition of expected loss, when it is probable that total contract costs
will exceed total contract revenue. This amount of expected loss is allowed to
be recognised as an expense immediately, irrespective of whether work has
commenced on the contract and the stage of completion of contract activity.

Revenue recognition as per ICDS

As per ICDS III dealing with Construction contracts, contract
revenue and contract costs associated with the construction contract should be
recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity, at the reporting date.

The said ICDS however gives concessional treatment to
contracts in the early stage of execution i.e. contracts which have not
completed a percentage of up to 25% of the total construction. During the early
stages of a contract, where the outcome of the contract cannot be estimated
reliably, contract revenue can be recognized only to the extent of costs incurred.

Difference between the Ind-AS
and ICDS

Ind-AS 11 as well as ICDS III, both permit recognition of
revenue only to the extent of expenses incurred, where the project is at an
early stage of execution and outcome cannot be estimated reliably. Ind-AS
however does not give any specific percentage of the construction activity to
be completed for the construction project to be categorised as ‘early stage of
execution’. Accordingly, for the construction activity where even 30% of the
total construction has been completed, revenue may be recognized only to the
extent of cost incurred, if based on the facts of the particular construction
contract it is established that the outcome cannot be estimated reliably.

The Institute of Chartered Accountants of India (ICAI) has
issued ‘The Guidance Note on Accounting of Real Estate Transactions (revised
2016)’ (GN) which is applicable to entities to which Ind-AS is applicable. As
per the said GN, a reasonable level of development is not achieved if the
expenditure incurred on construction and development costs is less than 25% of
the construction and development costs. As per the GN, a reasonable level of
development is measured with reference to ‘construction and development cost’
and excludes ‘Cost of land and cost of development rights’ as well as
‘Borrowing cost’. Though the GN applies only to real estate transactions and
not to construction contracts, it may be possible to apply this level of 25%
for construction contracts.

ICDS III, however expressly provides that the early stage of
a contract shall not extend beyond 25% of the stage of completion.

Further, Ind-AS requires a company to recognize the entire
expected loss, when total contract costs is likely to exceed total contract
revenue. However, ICDS does not specifically provide for recognition of
expected loss. The expected loss can be recognised only on percentage of
completion method, i.e. proportionately.

Impact of the above differences

The stage of profit
recognition by following percentage of completion method under Ind-AS and ICDS
may differ on account of the differing concepts of early stage of contract
where outcome cannot be reasonably estimated. While, as per accounts, profits
may not be recognized, it is possible that, under ICDS, profits have to be
recognised.

Where such company has recognised the entire loss on the
contract in the profit and loss account on the ground that total contract costs
is likely to exceed total contract revenue, it would not have the benefit of
the entire expected loss as per ICDS. In the tax return, irrespective of that
fact that there would be a loss at the end of the project, it would have to
recogniswe contract revenue (and therefore estimated total loss) by following
the percentage of completion method, at the year-end.

5. Purchases of goods
on deferred payment terms

Cost of purchase as per Ind-AS
2

As per Ind-AS 2, the cost of inventories shall comprise all
costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Further, where the inventory
is purchased on deferred payment terms, and the purchase price is higher than
the purchase price for such inventory on normal credit terms basis, the
arrangement effectively contains a financing element. In such a situation, the
difference between the actual purchase price and the purchase price of goods
with normal credit terms, is recognized as financing cost.. The said financing
cost has to be charged to the statement of profit and loss, over the period of
the financing.

Cost of purchase as per ICDS
II As per ICDS II which deals with valuation of inventories, the costs of
purchase shall consist of purchase price including duties and taxes, freight
inwards and other expenditure directly attributable to the acquisition.
However, interest and other borrowing costs shall not be included in the cost
of inventories.

Difference between the Ind-AS
and ICDS

There is a difference in the cost of purchase as per Ind-AS 2
and ICDS II. As per Ind-AS 2, where goods are purchased on deferred payment
terms, the difference between the purchase price with normal credit terms and
the amount paid with deferred payment term, is considered as interest expense
and would have to be excluded from the purchase price of goods. However, as per
ICDS II, entire purchase price paid, irrespective of outright purchase price or
purchase on deferred payment terms, is considered as cost of purchase. This
would result in difference in the valuation of stock, as well as timing
difference on account of charge of the financing cost to the Profit & Loss
Account over the finance period in accordance with Ind AS, as against treatment
as purchase as per ICDS.

An example

An example on the above would explain the difference between
the Ind-AS 2 and ICDS II. The company has purchased goods from the seller at
Rs. 75,000 on 1^stJanuary 2017 with 12 months credit period. The
same goods could be purchased at Rs. 65,000 with normal credit period of 3
months generally allowed in the Industry. As per Ind-AS 2, difference of Rs.
10,000 would be considered as interest expense, which can be charged to profit
and loss account over the period of financing. Accordingly, interest expense of
Rs. 10,000 beyond normal credit period of up to 31^stMarch 2017,
would be considered as interest expense only in FY 2017-18. Where the company
has purchased such inventory out of borrowed funds, any interest paid would
have to be expensed out to the profit and loss account and would not be
considered as ‘cost of inventory’.

However, as per ICDS II, entire purchase cost of Rs. 75,000,
irrespective of deferred payment terms, would be treated as cost of purchases,
and would be included in the cost of inventory, if the said goods are lying in
stock as on 31^st March 2017.

Impact of the above differences

Accordingly, there would be
difference between the cost of purchases as per Ind-AS and ICDS. The company
would have to maintain records of such interest expense arising because of
deferred payment basis and which has been charged to profit and loss account in
subsequent FY. Such interest which has been charged to the profit and loss
account both in current FY as well as in subsequent FY would, under ICDS, have
to be treated as part of purchase cost/ inventory valuation in the current FY.

The company would also have to maintain details of all such
differences which arise because of difference in Ind-AS and ICDS.

6. Initial cost of
fixed assets purchased on deferred settlement terms

Initial cost of fixed assets as per Ind-AS 16

As per Ind-AS 16, an item of Property, Plant and Equipment
(PPE) that qualifies for recognition as an asset shall be measured at its cost.
The cost of such asset is the cash price
equivalent at the recognition date. If payment is deferred beyond normal
credit terms, difference between the cash price equivalent and the total
payment towards purchase of assets, is recognized as interest over the period
of credit, unless such interest is capitalised in accordance with Ind-AS 23
which deals with borrowing cost. Ind-AS 23 lays down conditions as to when
borrowing cost can be added to the cost of
assets purchased.

Actual cost as per ICDS V

As per ICDS V dealing with tangible fixed assets, the actual
cost of an acquired tangible fixed asset shall comprise of its purchase price,
import duties and other taxes, excluding those subsequently recoverable, and
any directly attributable expenditure on making the asset ready for its
intended use.

Difference between the Ind-AS
and ICDS

There is a material difference in the cost of fixed assets as
per Ind-AS 16 and ICDS V. As per Ind-AS 16, cash price equivalent at the
recognition date would be regarded as initial cost of fixed assets. However, as
per ICDS V, entire purchase price of the fixed assets, irrespective of deferred
payment terms, would be considered as actual cost of fixed assets. Accordingly,
any financing cost arising because of bifurcation of payment towards purchase
of assets into cash price equivalent and the financing element, would have to
be added to written down value of the respective ‘block of assets’ in the year
of purchase, irrespective of its treatment as per Ind-AS.

An example

An example on the above would explain the difference between
the Ind-AS 16 and ICDS V. The company has purchased a machine for Rs. 5,00,000
on 31^stMarch 2017 with 12 months credit period. The said machine
had cash price of Rs. 4,50,000. As per Ind-AS 16, difference of Rs. 50,000
would be considered as finance cost over the period of financing. Accordingly,
Rs. 50,000 would be considered as finance cost in FY 2017-18, as the same
pertains to period after 31^stMarch 2017.

Impact of the above differences

Accordingly, there would be difference between the cost of
PPE as per Ind-AS and ICDS. The company would have to maintain records of such
finance cost arising because of difference between the cash price equivalent
and the total payment towards purchase of PPE. Such cost, which would be
charged to the statement of profit and loss in subsequent FYs, would have to be
added to the cost of the respective ‘block of assets’, in order to comply with
ICDS provisions. The company would be entitled to depreciation on such cost in
the current year itself and would increase its block of assets by the said
amount, even though the same would be charged to the statement of profit and
loss in the next FY.

7. Interest free loan
to subsidiary or to employee (for long term)

Recognition of
interest free loan given as per Ind-As 109

Ind-AS 109 requires that financial assets and liabilities
should be recognised on initial recognition at fair value, as adjusted for the
transaction cost. In accordance with Ind-AS 109 ‘Financial Instruments’, in
case the loan is for a period exceeding one year (i.e. long term) the lender
would recognise the loan at its fair value as per the EIR method. Accordingly, interest
free loan exceeding one year given by the parent company to its subsidiary or
by an employer to its employee would be recorded at fair value, which would be
less than the amount of loan given. In spite of the fact that the said loan was
interest free, notional interest on fair value of the loan would be credited as
interest income in the profit and loss.

Recognition of interest free loan given to subsidiary/employee
as per ICDS

Under ICDS, there is no concept of recognition of financial
assets at fair value. There is also no concept of recognition of notional
interest as income in the statement of profit and loss. For income tax
purposes, the said interest free loan given would be recorded at the nominal
amount of the loan. No interest would be regarded as accruing on the loan,
since it is contractually an interest-free loan.

Difference between the Ind-AS
and ICDS

As per Ind-AS, every year the imputed interest income will be
provided in the statement of profit and loss for the year, with the corresponding
debit to the value of loan reflected as an asset. Over the years, loan amount
will finally be reinstated to what would be the repayable amount (the amount
that was received originally). Simultaneously, an appropriate amount will be
transferred from equity to the statement of profit and loss account, which will
have the effect of negating the interest income in the statement of profit and
loss. .

Impact of the above differences

Such notional interest which has been credited to the
statement of profit and loss of the parent company/employer would not be
“income” as per the Act. Accordingly, the same would have to be reduced from
the total income of the parent company/employer to arrive at taxable income.

8. Borrowing cost

Borrowing cost as per Ind-AS
23

As per Ind-AS 23 dealing with borrowing costs, the borrowing
costs includes interest expense calculated using the effective interest method,
finance charges in respect of finance leases recognised in accordance with
leases and exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

Ind AS 23 defines a qualifying asset as an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale. As per paragraph 7 of Ind-AS 23, the following types of assets may
be qualifying assets: (a) inventories, (b) manufacturing plants, (c) power
generation facilities, (d) intangible assets, (e) investment properties and (f)
bearer plants. Financial assets and inventories that are manufactured or
otherwise produced, over a short period of time are not qualifying assets.
Further, assets that are ready for their intended use or sale when acquired are
not qualifying assets.

As per paragraph 12 of Ind-AS 23, “the amount of borrowing
costs eligible for capitalization is the actual borrowing costs incurred during
the period less any investment income on the
temporary investment of those borrowings.”

Further, as per paragraph 14 of Ind-AS 23, “where the
entity has borrowed funds generally (and not for specific purpose of acquiring
qualifying assets) but used such borrowed funds for acquisition of a qualifying
asset, borrowing costs eligible for capitalisation are to be determined, by
applying a capitalisation rate to the expenditures on that asset”.

As per paragraph 22 of Ind-AS 23, “an entity shall cease
capitalising borrowing costs, when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete”.

Borrowing costs as per ICDS IX read with section 36(1)(iii)

Section 36(1)(iii) provides for deduction of interest in
respect of capital borrowed for the purposes of business. The proviso to
section 36(1)(iii) requires that interest in respect of capital borrowed for
acquisition of an asset from the date of borrowing till the date the asset is
put to use, is not allowable as a deduction.

As per ICDS IX, borrowing costs are interest and other costs
incurred by a person in connection with the borrowing of funds and include (i)
commitment charges on borrowings, (ii) amortised amount of discounts or
premiums relating to borrowings, (iii) amortised amount
of ancillary costs
incurred in connection
with the arrangement of
borrowings and (iv) finance charges in respect of assets acquired under finance
leases or under other similar arrangements.

As per ICDS IX, the term
“Qualifying asset” for the purposes of capitalisation of specific borrowing
costs means: (i) land, building, machinery, plant or furniture, being tangible
assets, (ii) know-how, patents, copyrights, trade-marks, licenses, franchises
or any other business or commercial rights of similar nature, being intangible
assets and (iii) inventories that require a period of twelve months or more to
bring them to a saleable condition.

As per ICDS IX, general borrowing costs are capitalized to
the qualifying assets based on a particular formula. For the purpose of
capitalisation of general borrowing costs, the term “Qualifying Asset” means
any asset which necessarily requires a period of 12 months or more for its
acquisition, construction or production. Further, an entity shall cease
capitalizing borrowing costs, when such asset is first put to use or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Difference between the Ind-AS
and ICDS

A major difference between Ind AS 23 and ICDS IX is in
respect of capitalisation of costs of borrowings taken specifically for
acquisition of an asset. Under ICDS IX read with the proviso to section
36(1)(iii), cost of borrowings taken for acquisition of all fixed assets, up to
the date of put to use, is to be capitalised. However, under Ind AS 23, qualifying
assets, where such borrowing costs are to be capitalised, are only those assets
which necessarily take a substantial period of time to get ready for their
intended use or sale, and not all fixed assets. This requires judgement to be
applied and can be subjective – the period for qualifying assets under Ind-AS
23 can be even 6 months or even 24 months.

There is also a material difference in the concept of
borrowing costs as per Ind-AS 23 and ICDS IX.As per Ind-AS 23, borrowing cost
is calculated using the effective interest method, whereas as per ICDS, it is
calculated at actual interest and other costs incurred.

Exchange differences arising in respect of foreign currency
borrowing, forms part of borrowing costs as per Ind-AS, whereas the same does
not form part of borrowing cost as per ICDS.

As per Ind-AS, any income from temporary investment of
borrowed funds is to be reduced from the borrowing cost required to be
capitalised, whereas such reduction is not permissible in ICDS.

There is also a material difference in the formula for
capitalising general borrowing cost, in that under ICDS, the cost of general
borrowing is apportioned in the ratio of the qualifying assets to the total
assets based on the opening and closing values of such assets, without
considering the amount of or movement in borrowings during the year Under Ind
AS, the weighted average cost of general borrowing is applied to the value of
qualifying assets for the relevant period.

As per Ind-AS 23, inventories that do not necessarily take a
substantial period of time for getting ready for sale will not qualify as
qualifying assets. The term “substantial period of time” is not defined, and
hence could be even less than 12 months. However, as per ICDS, the period of
time is defined as 12 months, and hence inventories that require less than 12
months to bring them to a saleable condition are not qualifying assets.

As per Ind-AS, an entity shall cease capitalizing borrowing
costs to assets, when substantially all the activities necessary to prepare
such asset for its intended use or sale are complete. However, as per ICDS, the
capitalization would cease where fixed assets are put to use, or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Impact of the above differences.

There are various differences between Ind-AS and ICDS on
definition of borrowing cost and qualifying assets, treatment of income arising
from temporary investment of borrowed fund, formula for capitalising borrowing
cost in case of general borrowings and finally, on the time of cessation of
capitalisation. These would result in different capitalisation of borrowing
costs as per accounts, and in computation of income as per ICDS. Accordingly,
the interest debited to Statement of Profit and Loss and that allowable as a
deduction would also differ. These differences would also impact the
depreciation.

9. Financial assets

Financial assets as per Ind-AS
109

As per Ind-AS 109, all financial asset are required to be
subsequently measured at fair value through profit & loss (FVTPL), fair
value through other comprehensive income (FVOCI) or at amortised cost (normally
for debt instruments), at each balance sheet date, depending upon their initial
classification by the entity.

Investments

Investments are not covered by ICDS, but any gain or loss is
to be considered as capital gains on transfer of such investments. Therefore,
any item in statement of profit or loss or other comprehensive income, on
account of remeasurement of financial assets, is to be ignored for computation
of taxable income.

Any security on acquisition as stock in trade shall be
recognised at actual cost. At the end of any previous year, securities held as
stock-in-trade shall be valued at actual cost initially recognised or net
realizable value at the end of that previous year, whichever is lower.
Securities not listed on a recognized stock exchange or listed but not quoted
on a recognised stock exchange with regularity from time to time, shall be
valued at actual cost initially recognized.

For the purpose of applying the above principles, the
comparison of actual cost initially recognised and net realisable value shall
be done category-wise and not for each individual security. For this purpose,
securities shall be classified into the following categories, namely:-

(a) shares,

(b) debt securities,

(d) any other securities, not covered above.

The value of securities held as stock-in-trade of a business
as on the beginning of the previous year shall be:

(a) the cost
of securities available, if any, on the day of the commencement of the business
when the business has commenced during the previous year; and

(b) the
value of the securities of the business as on the close of the immediately
preceding previous year, in any other case.

Difference between the Ind-AS
and ICDS

There is material difference in the valuation of securities
held as stock in trade as per Ind-AS 109 and ICDS IX. As per Ind-AS, the
valuation of securities are required to be made at fair value. However, as per
ICDS, the listed securities, held for trading shall be valued at actual cost
initially recognised or net realisable value at the end of that previous year,
whichever is lower, Further, ICDS requires valuation on securities to be made
category-wise., and not on individual investment basis as per Ind-AS.

Impact of the above differences

In view of the above difference, there would be differences
in gain or loss recognised by the company in its profit and loss account vis-à-vis
as per tax return. The company would have to maintain detailed records of
transactions of securities traded as well as held as inventory, by applying
principles laid down in Ind-AS as well as ICDS.

10. Actual cost of assets
– Cost of Dismantling and restoration

Cost of an asset as per Ind-AS
16

As per Ind-AS 16, an item of property, plant and equipment
that qualifies for recognition as an asset shall be measured at its cost. Cost
for this purpose also includes “the initial estimate of the costs of
dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs.”

Actual cost of asset as per ICDS IV

As per ICDS IV, the actual cost of an acquired tangible fixed
asset shall comprise its purchase price, import duties and other taxes,
excluding those subsequently recoverable, and any directly attributable
expenditure on making the asset ready for its intended use. Any initial
estimate of the costs of dismantling, removing the item and restoring the site
on which it is located, is not treated as actual cost.

Difference between the Ind-AS
and ICDS

Actual cost of assets as per Ind-AS includes cost of the
initial estimate of the costs of dismantling, removing the item and restoring
the site on which it is located. However, the same has to be ignored as per the
ICDS.

Impact of the above differences

Accordingly, any increase in actual cost of the assets
because of cost of dismantling being included as per Ind-AS has to be ignored
while computing actual cost of assets as per ICDS V.

Impact on Book Profits under Minimum Alternative Tax

In the above article, the impact on book profits under
section 115JB has not been considered, since the starting point for that
purpose is the profit as per statement of profit and loss account, and the
further adjustments required to be made are listed out in sub-sections (2A),
(2B) and (2C) of section 115JB.

Conclusion

These are only some of the significant differences which one
may come across, while computing the income chargeable to tax under the
Income-tax Act, 1961, where the accounts have been prepared by adopting Ind AS.

There are many more differences which one may
come across during the course of review of the accounts. Being aware of such
differences is essential for a tax auditor or tax advisor, and hence it is
essential to understand the differing accounting treatment being necessitated
on account of adoption of Ind AS.

shailesh.kwebmaker

Satyamev Jayate @15.August.2017

15^th August is an
extraordinary day for India as a culture and as a civilization. We became a
nation with a constitution. 15^th August is also the day we
collectively took a pledge to unite, to rediscover ourselves and take a
‘pledge to the service of India’¹. We will complete seventy
years this month. Shall we take a minute and look at how far we have come in
meeting that commitment to ourselves?

Freedom

Life derives meaning from freedom. Freedom is coveted by every human. All that we do, all that we seek is
for freedom, to feel and enhance the sense of freedom. We seek joy to feel free
from pain, we work to get free from emptiness and find meaning, we acquire
wealth to free ourselves from a sense of lack and insecurity; we serve and give
to free ourselves from petty self centeredness. At the core of all human
values is Freedom, whatever be its shade.

Political
freedom finally brought our people that opportunity to actualise these freedoms
at their individual level. Today we are blessed to live in a country that is
not under a feudal ruler, that is not run by war lords or bigots, that is not
steered by outsiders with vested interests. As we complete 70 years, there is
nothing more important than recognising the value of freedom by recommitting to
its preservation and proliferation in every dimension of our lives.

Substratum of Freedom

Our freedom struggle was steered
by Truth in the form of non violence, and like our timeless culture was made
the substratum of modern Indian State. “Satyameva Jayate” is our national motto
and adorns our national emblem.

Truth alone triumphs;
not falsehood;

Through truth the divine path is spread out;

the wise, whose desires have been completely fulfilled,

reach where that supreme treasure of Truth resides.

Manifestation of Satya

Rule of Law and Freedom are
intertwined bedrocks of our constitution. Legislations are meant to enhance
individual and collective freedoms and guarantee rule of law for all people. In
the context of our culture, Satya shapes laws:

While
Satya sounds abstract, it is the substratum of all virtues and lasting
peace, be it collective or individual. It takes shape as Dharma, which
stands for principles of goodness, virtue, and ethics and allows people to
connect and live in harmony. Niti (Policy) should stem from Dharma and
it stands for a stance or approach on how people will live together to achieve
their respective individual and collective goals. However, Niti is
influenced by Niyat (political will) of those governing and finally
results in formulation and administration of Niyam (laws).

The High and Low of Law making

Supremacy
of Rule of Law is what we got along with independence. Plato wrote: “If law
is the master of the government and the government is its slave, then the
situation is full of promise”. However, over the seventy years, the
divergence from the essential spirit of law making has drifted in so many
cases, that it ‘seems’ like a new normal. The 13^th President had
this gentle yet alarming comment in his farewell speech to the parliament: “It
is unfortunate that the parliamentary time devoted to legislation has been
declining. With the heightened complexity of administration, legislation must
be preceded by scrutiny and adequate discussion. Scrutiny in committees is no
substitute to open discussion on the floor of the House. When the Parliament
fails to discharge its law-making role or enacts laws without discussion, I
feel it breaches the trust reposed in it by the people of this great country.”³

Laws are meant to serve people
by being fair, clear, stable, and enabling. People must get confidence that
legislation is for them and not only to be used against them by an
administrator. Functionally, laws should be necessary, clear, coherent,
effective, and accessible.

However, over the seventy years
we know that laws are often twisted, coloured by outrageous complexity that
they are out of reach of the common man, rolled back and amended way too often,
arbitrarily applied in disregard to people’s rights, crafted for ease of use by
the administrator, and often have conflict of interest/vested interest in their
very design. While there are severe legal barriers when there is conflict of
interest for business transactions, I wonder about a much stronger application
against ‘conflict of interest’ in law making. If the law makers turn a blind
eye, look the other way or wink selectively, then rule of law gets diminished.
Trust in administering of laws whether it will be fair, fast enough, and
effective remains doubtful.

Do Niyam
affect Niyat
of citizens?

India
was recently labelled as a ‘largely tax non compliant society.’ Even if one
were to accept that, we cannot change that situation till we find out why did
it become so? During the freedom struggle, millions made extraordinary
sacrifices. Each of us knows someone who made sacrifices in achieving azadi.
Has the texture of that society drifted so far from that pledge to ‘serve the
nation’ to serving themselves in disregard to the nation? If so, then why?

Could it be that many of those
entrusted with lawmaking and administering, who took that same oath to serve
the nation and guarantee liberty, equality and justice did not pay sufficient
heed to that promise? Could it be that the framework of law is not
comprehensive to address the current reality? Can there be an effect without a
cause? Where does this circle start and where will it end?

Niti and Niyam
affect the Niyat (intention) of the people. In other words, Niyat of
people is only a reflection
– (as the rulers, so are the people).
The formulation and administration of Niyam does shape the Niyat
of people. At the same time, laws get formed to deal with breaches. And the
circle goes on.

Till
the spirit of rule of law is active and not selective, enabling and not
disproportionately bothersome, till laws exists for people and not to dissipate
their spirit in coping with them, and till laws make people feel optimistic and
not hopeless; the rule of law is yet to ripen⁴. Till we reach a
point when rule of law is working in spirit and in its splendour for the vast
majority, the Triumph of Truth remains in abeyance.

Many professionals feel helpless
to deal with something that is beyond control. However, we are trained to think,
ask questions and are capable to understand laws. As professionals we can look
through the fine line between form and substance. Can we undertake to refine
our law making and administration within our circle of influence? Can we be
proponents of adherence to laws in ‘spirit’? As we build our nation, we can
once again question and clear our own Niyat, and steer the Niyat
of taxpayer and the administrator towards the essential spirit of law⁵.
In our professional endeavours, can we ask ourselves – Will this action/advice
be coherent with the essential spirit of the law? Will my action/advice be
right for India that I wish to see? Because, India does not belong only to the
few who speak from high pedestals, but to YOU! Freedom is not only a
personal right, but also our individual obligation!

BCA Journal

A galaxy of contributors, editors, members and wise men and
women have shaped the BCA Journal in the last fifty years. I grew up reading
the fine features and well researched, thought provoking and useful articles of
this Journal. BCAJ has and will continue to present its content in an
objective, bold, and circumspect manner. I feel humbled to write to you as its
editor from this month onwards. I will strive to keep the balance between
continuity and change, and present the content that reflects those virtues in
light of our current reality. I request your observations and counsel freely
and frequently.

Raman
Jokhakar

Editor

shailesh.kwebmaker

Friend / Friendship

‘Love demands infinitely less than friendship’

George Jean Nathan

Agreeing with the quote, I
believe it is a relationship sandwiched between `man – woman relationship’ and
`man – God relationship’. However, there is a good old saying ‘a friend in
need in a friend indeed’. I don’t subscribe to this thought because I believe
friendship is not barter – it is a relationship devoid of expectations. We know
and have experienced that expectations spoil relationships. Friendship is a
relationship to be enjoyed and cherished. In friendship one accepts
differences. This doesn’t mean that one can’t criticise a friend – the answer
is : as a friend one can and should criticise to one’s face but never at one’s
back. Francis Bacon rightly advises ?to keep the mind in good health accept
the admonition of a friend – this is because there is no personal gain that a friend seeks
– it is based on the desire to correct a wrong. I believe that if a friend
seeks an opinion, give it unbiased and unaffected whether accepted or not.

The recent loss of a friend
kindled in me the urge to pen my thoughts on friendship. I believe it is
relationship in which :

– one accepts each other’s foibles and faults

– one senses each other’s ease and unease

– one shares each other’s pain and pleasure

– one sees the other through in bad times

– one shares oneself

The precept is : ‘be a
friend to have a friend‘.

Henry Adam says ?one friend in lifetime is much, two are many, three
are hardly possible’. Whilst I agree with him that friends are rare and are
a gift from God – I must admit that He has been benevolent to me – I
have been blessed with more than three – I have had my uncle as a friend, I
have and had my peers in profession as friends; I have and had the boon of
having some clients as friends and above all, I have enjoyed friends from school days.

However, as most of them are with the Lord – I at times feel lonely but
have memories to cherish. It is said : ?that marriage is a contract and in
contract there can be no friendship’ – I was blessed to have my spouse as a
friend – it took time to develop this relationship, where we were not afraid of
being judged and were never shy of accepting, appreciating and bridging
differences.

To have a happy and
rewarding life one needs friends or a friend and above all to develop
friendship with God – let us talk to Him and hear Him for He
is a friend who will never leave us.

I would conclude by quoting Lord Halifax :

‘It is a misfortune for a
man not to have a friend’

shailesh.kwebmaker

Allentis Pharmaceuticals Pvt. Ltd. vs. State of M. P. and Others, [2013] 59 VST 241(MP)

VAT- Agency – Supply of Goods to Agent – Thereafter by Agent to Buyer or Authorised Dealer of Principal For Commission – No Two Independent Sales-Supply of Goods to Agent – Not a Sale-Not Taxable, Section 2(4), Explanation (c ), of The Madhya Pradesh Value Added Tax Act, 2002.

FACTS
The Petitioner Company entered into an agreement with M/s. Rahul Pharma and appointed him as carry forward agent to supply the goods to the authorised distributors or dealers appointed by the Company. While assessing the petitioner company the assessing authority relying on Explanation (c ) to section 2(4) of the Act, treated supply of goods by the petitioner to its agent as first sale liable to VAT and thereafter when the selling agent further sold or transfers the goods to buyers, then also it was treated as sales taxable under the Act. The petitioner company objected to it as it amounted to double taxation. The petitioner company filed writ petition before the Madhya Pradesh High Court against the aforesaid action of the assessing officer.

HELD
Under clause ( c) of Explanation to section 2(4) of the MP VAT Act, for the purpose of Act, two independent sales or purchases are deemed to have taken place when the goods are transferred from principal to his selling agent and from the selling agent to the purchaser or when the goods are transferred from the seller to buying agent and from the buying agent to his principal. This, clause (c) applied only when there is transfer of property in goods. M/s. Rahul Pharma was an agent of the petitioner, company which was evident from the agreement. It only supplied the goods to the authorised dealer of the petitioner company for a commission not as his own property but as the property of the principal, who continued to be the owner of the goods. The supply of goods by the petitioner company to the agent was not a sale as per the interpretation of clause (c) of Explanation to section 2(4) of the Act therefore not liable to tax. When the agent supplied goods to the buyer of the petitioner company or to its authorised distributor on behalf of the petitioner, the petitioner company was liable to pay the tax. Consequently, the petition was disposed by the court with the direction that the delivery of goods to the agent of the petitioner for delivery of goods to the buyer or to the authorised distributer shall not be taxed under the provisions of VAT Act by treating it as an independent sale.

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M/S. Milk Food Ltd. vs. Commissioner, VAT and Others, [2003] 59 VST 1 (Delhi).

Sales Tax – Deduction Claimed Based on Declaration Furnished By Purchasing Dealer – Whether Form Genuine or Conditions Complied With- Burden of Proof – Not on Selling Dealer. Sections 4(3)(a)(v), 50 (1)(a), 56(2) of The Delhi Sales Tax Act, 1975.

FACTS
The appellant engaged in business of manufacture of ghee and milk powder of different kinds in its factory at Patiala and having its offices all over India. The appellant had sold goods against form ST-1, in Delhi, and claimed deduction from payment of tax u/s. 4(2) (a)(v) of the Delhi Sales Tax Act. In assessment the claim of deduction was disallowed and confirmed by the Tribunal. The appellant filed appeal before The Delhi High Court against the impugned order of the Tribunal.

HELD
The Tribunal appeared to have placed the burden wrongly upon the appellant dealer. It is not the burden of the selling dealer to show that the declarations in form No ST-1 were not spurious or were genuine or that the conditions to which the forms were issued to the purchasing dealer by the department were complied with. The burden will shift to the selling dealer only if it is shown that the selling dealer and the purchasing dealer had acted in collusion and connived with each other to evade tax by obtaining spurious forms of deduction. The claim was disallowed in assessment due to certain discrepancies between form ST-1 and the accounts given by the purchasing dealers in form ST-2 or colour of form was different. This was not for the selling dealer to explain. The fact of different colour of form gave rise to the suspicion that the forms are not genuine could be a starting point for further inquiry but by itself does not establish any guilt on the part of the selling dealer. There appears to have no further query conducted by the sales tax authorities to show that the forms are spurious; neither is there evidence to show that the appellant was in any was connected with the alleged fraud committed by the purchasing dealer. Accordingly, the High Court allowed the appeal filed by the appellant.

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2015 (38) STR 1220 (Tri.-Mum.) Deloitte Haskins & Sells vs. CCE, Thane-I.

Unlike Central Excise laws, there is no compulsion to avail benefit of exemption compulsorily under service tax laws. Further, CENVAT credit cannot be denied in case of procedural lapse of wrongly addressed invoices.

Facts:
Availment of CENVAT credit was under dispute as firstly invoices were addressed to the registered unit and the credit was taken in another unit. Further the Appellants had provided taxable as well as exempted services and thus the department contended that CENVAT credit could be utilised only to the extent not exceeding 20% of service tax payable vide Rule 6 of CENVAT Credit Rules, 2004 in the absence of maintenance of separate records. It was argued that though invoices were raised at another unit, the input services were received and consumed and a CA certificate was produced to this effect. Accordingly, it was merely a procedural defect. On the second issue, it was stated that in absence of a specific column in the service tax return, amount received for exempted services of prior period was shown under “exempted services” and actually, no services were claimed to be exempted during the period under consideration. Therefore, restriction on utilisation of CENVAT credit was not warranted. Moreover, it was argued that exemptions available were conditional and they had billed a consolidated sum including representational services without taking benefit of exemption and in respect of services provided to SEZ it was difficult to ensure fulfillment of conditions by service receiver and thus the said exemption was also not claimed. The department argued that firstly in view of separate registrations cross availment was not possible and secondly since unconditional exemption with respect to representational services and services provided to SEZ were available, service tax cannot be paid on such exempted services on their own volition. Accordingly, restriction of CENVAT credit was applicable. The Appellants argued that unlike section 5A of Central Excise Act, 1944, under service tax laws, availment of benefit of unconditional exemption is not mandatory.

Held:
Relying on the decisions of the Ahmedabad Tribunal in the case of DNH Spinners [2009 (16) STR 418] and Modern Petrofils [2010 (20) STR (627)], it was held that CENVAT credit cannot be denied on the grounds of procedural lapse as long as the services are eligible input services. Thus, CENVAT credit on principle was allowed subject to verification of the fact by the adjudicating authority that the input services were actually used. On the second issue, it was held that in absence of specific breakup of total amount for each job undertaken in the invoice, it cannot be concluded that the Appellants availed exemption regarding representational services. Revenue authorities cannot demand service tax on a composite amount, and it did not attempt to do any segregation, if at all it was possible, in consolidated invoices. Further, notification granting exemption to services provided to SEZs was conditional and the Appellants had opted to pay service tax. Relying on various decisions, it was held that under service tax laws, there is no compulsion to avail exemptions. Therefore, since this was not a case of provision of taxable as well as exempted services, restriction on CENVAT credit was not applicable.

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