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Month: August

19. TS-302-AAR-2018 Saudi Arabian Oil Company v. DCIT AAR No 25 of 2016 Dated: 31st May, 2018

Article 5 of
India-Saudi Arabia DTAA – setting up Indian subsidiary for providing business
support services and marketing support services does not create permanent
establishment in India


Facts

The Applicant, a tax
resident of Saudi Arabia, is a state owned Oil Company in the business of oil
exploration, production, refining, chemicals, distribution and marketing.
Applicant is the world’s largest crude oil exporter and is making offshore
crude oil sales to Indian refineries on Free on Board (FOB) basis such that the
title passes outside India and payment is also made outside India.

 

To expand its India
operations and for having a long term presence in India, Applicant established
a subsidiary company in India (I Co) and entered into a service agreement with
I Co to provide procurement support services. Directors of I Co are also
employees and part of high management team of the Applicant.

 

During the year under
consideration, an Addendum was proposed to the Service Agreement (Proposed
Addendum) under which I Co proposed to provide business support and marketing
support functions to the Applicant at an arm’s length price (ALP). Broadly, the
services agreed to be provided by I Co under the Proposed Addendum included
procurement, sourcing and Logistic Support, Quality Inspection Support,
Business support/marketing support function, plant audits for identified
manufacturers and suppliers, market research, ascertaining quality of crude
oil, promoting awareness etc.

 

Based on the nature of
activities proposed to be undertaken by I Co, AAR ruling was sought on the
issue whether I Co would create a PE of the Applicant under the India-Saudi
Arabia Tax Treaty.

 

Held

AAR relied on the
decisions in Formula One (394 ITR 80) and eFunds (86 taxmann.com 240) to state
that I Co, would not create a PE for the Applicant.

 

Subsidiary PE:

–   I Co, as a subsidiary of Applicant, does not
automatically become PE of Applicant, unless specific tests of PE are
satisfied. I Co has its own board of directors and is/will carry out its own
business in India. As held in case of Vodafone Holdings International BV (2012)
341 ITR 1 (SC) and AB Holdings Mauritius II (AAR/ 1129 of 2011), companies are
separate legal and economic entities for tax purposes and therefore parent and
subsidiary are distinct taxpayers.

 

–  It is unlikely that parent would not at all
be involved in the decision making of its subsidiary whose activities have to
be in consonance with the overall goals of the holding company. Similarly, it
cannot be expected that directors of subsidiary would act with such
independence that the overall objective of holding company gets compromised.

 

Fixed Place PE:

–  I Co is utilising its establishment to carry
out its own business in India, i.e., to provide support services to the
Applicant.  Applicant’s business is
carried on in and from Saudi Arabia and is monitored by the Saudi Arabian
Ministry of Petroleum and Mineral resources together with Supreme Council of
Petroleum and Minerals. Hence, the question of any main or core business
activities of Applicant being carried on at I Co’s establishment does not
arise.

 

–   I Co’s establishment is not placed at
disposal of the Applicant. There is no material on record to indicate that the
I Co is or will be manned by employees or personnel of the Applicant.

 

–   Services provided by I Co are support
services for which it is remunerated at ALP and such services do not constitute
main business of the Applicant which is exploration, production, refining, and
distribution of crude oil.

 

–   Accordingly, I Co’s premises does not
constitute a fixed place PE for the Applicant in India. The fact that I Co is
remunerated at ALP does not have a bearing on evaluation of fixed PE.

 

Service PE

–  Applicant is not rendering any services to
any customer in India, either directly or through I Co. It is I Co which is
providing support services, that too to Applicant and not to the customers of
Applicant.

 

–  It is incorrect to say that entire control
and management of I Co is under the Applicant by virtue of its employees who
are also directors of I Co.  Also period
of their stay in India is irrelevant since they would be discharging their
duties as directors of I Co and not for the Applicant. Further, the
relationship of such directors with Applicant in past years is also not
relevant.

 

–  Applicant, therefore, does not have any Service
PE in India.

 

Agency PE

–   Service Agreement requires the parties to
perform as an independent contractor and not as an agent. The Proposed Addendum
expressly prohibits I Co from representing itself as agent of Applicant or
negotiating any business terms or conditions on behalf of Applicant.

 

–   Activities like allocations, claims,
communication of customers’ concerns, and maintaining business relationships
does not mean concluding contracts or habitually obtaining orders on behalf of
the foreign enterprise. Even as per the agreements, I Co cannot enter into any
agreement of a binding nature on behalf of the Applicant.

 

–   Furthermore, Agency PE provision of the
treaty, relating to ‘obtaining orders’ covers obtaining orders for sales and
not for procurement/purchase[1]  as in this case.

 

–   Thus, I Co does not create any Agency PE for
Applicant.

 

Preparatory or auxiliary exemption

 

–   PE exemption for preparatory or auxiliary
functions is irrelevant since there is no PE created in the first place.

 

–   Nevertheless, I Co’s Services such as market
research, identifying new customers, etc. would be ‘preparatory’ in nature and
hence eligible for PE exclusion.


[1] It was contended by Applicant that
Agency PE provisions relate to sales contracts/orders. It excludes any activities
in relation to purchase orders

10. ACIT vs. Sameer Sudhakar Dighe Members : Mahavir Singh, JM and G. Manjunatha, AM ITA No. 1327/Mum/2016 Assessment Year: 2011-12. Decided on: 13th April, 2018. Counsel for revenue / assessee: V. Rajguru / None Section 56(2)(vii), CBDT circular no. 477 [F. No. 199/86-IT(A-1)], dated 22.1.1986 – Award received by a non-professional sportsman will not be chargeable to tax in his hands.

Section 56(2)(vii), CBDT circular no. 477
[F. No. 199/86-IT(A-1)], dated 22.1.1986 – Award received by a non-professional
sportsman will not be chargeable to tax in his hands.

FACTS

The assessee, retired from international cricket in the year
2002, was appointed as a cricket coach by BCCI to train the players at national
level.  During the year under consideration,
a benefit match was arranged by BCCI for assessee. The assessee received net
proceeds of Rs. 50.44 lakh, which he treated as capital receipt. In the course
of assessment proceedings, the Assessing Officer (AO) asked the assessee to
explain why the amount under consideration should be treated as a capital
receipt.  The assessee explained that the
benefit match is a game played for retired sportsmen to appreciate personal
talent and skill in sports and accordingly funds collected on behalf of benefit
match is a capital receipt.  He placed
reliance on CBDT circular no. 477 [F. No. 199/86-IT(A-1)], dated
22.1.1986.  The AO, treated the amount
received from benefit match as a revenue receipt and taxed it u/s. 56(2)(vii)
of the Act.

 

Aggrieved, the assessee preferred an appeal to CIT(A) who
considering the submissions made by the assessee and also the Board Circular
No. 477 (supra) decided the appeal in favour of the assessee.

 

Aggrieved, the revenue preferred an appeal to the Tribunal.

 

HELD

The assessee is a full time employee of Air India.  The benefit match was conducted by BCCI,
which is a regulatory body for cricket in India to appreciate the personal
talent and skill in this sport because the assessee is a retired sportsman and
the proceeds arising out of this benefit match are in the nature of award.  The Tribunal relying on the decision of the
Bangalore Bench of Tribunal in the case of G. R. Viswanath vs. ITO [(1989)
29 ITD 142 (Bang.)] held that there is no direct nexus between the payment
and assessee’s profession and these receipts being capital in nature cannot be
brought to tax. 

 

The Tribunal also noted that the Delhi Bench of the Tribunal
has in the case of Abhinav Bindra vs. DCIT [(2013) 28 ITR (Trib.) 376 (Delhi)]
has considered the identical issue and also the provisions of section 56(2)(v)
and has held that if a sportsman who is not a professional sportsman has been
given awards/rewards/prizes then a liberal construction of Circular No. 447 is
required and amount of awards/rewards/prizes are held to be capital in nature.

 

The Tribunal held that the amount represents the gratitude
from the fans and followers by attending the benefit match conducted in honour
of the assessee who is a retired cricketer of international repute.  This type of receipts are specifically
exempted by CBDT Circular No. 477 which states that the amount paid to amateur
sportsman who is not a professional will not be liable to tax in his hands as
it would not be in the nature of income. 
The assessee was an amateur cricketer and his profession is employment
with Air India from where he is getting salary. 
He played the game of cricket for India as his passion and the receipts
of the net proceeds from the benefit match was only in the nature of
appreciation of his personal achievements and talent and thus, cannot be
brought to tax by invoking the provisions of section 56(2)(vii)(a) of the
Act.  These proceeds from the benefit
match received by the assessee are in appreciation of his past achievements in
International Cricket arena and such type of receipt cannot be taxed.  The Tribunal upheld the order of the CIT(A).

 

The appeal filed by the Revenue was dismissed

9. DCIT vs. Saleem Mohd. Nazir Sheikh Members : Shamim Yahya, AM and Ram Lal Negi, JM ITA No. 5576/Mum/2015 Assessment Year: 2009-10. Decided on: 13th April, 2018. Counsel for revenue / assessee: Pooja Swarup / None

Section 271AAA
– If the search party does not put any question to the assessee about the
source of income, any adverse inference for the levy of penalty u/s. 271AAA
cannot be drawn.

FACTS

The assessee, in the course of search and seizure action on
Hitcons & Pranay group of cases, voluntarily declared amounts aggregating
to Rs. 70,03,525 as his undisclosed income. 
In the return of income filed, he declared total income of Rs.
90,65,390.  The Assessing Officer (AO)
passed order u/s. 143(3) assessing the total income of the assessee to be Rs.
1,11,28,815.  Penalty proceedings under
section 271AAA were initiated for disclosure of Rs. 70,03,525.

 

The AO levied penalty under section 271AAA on the ground that
though the assessee had admitted undisclosed income of Rs. 70,03,525 in his
statement recorded u/s. 132(4) of the Act, he failed to specify as well as
substantiate the manner in which undisclosed income was derived.

 

Aggrieved, the assessee preferred an appeal to CIT(A) who
relying upon the judgment of the Allahabad High Court in the case of CIT vs.
Radha Kishan Goel [2005] 278 ITR 454 (Allahabad) and the decision of the
Gujarat High Court in the case of CIT vs. Mahendra C. Shah [2008] 299 ITR
305 (Guj.) as also the decision of the Nagpur Bench of the Tribunal in the
case of Concrete Developers v. ACIT [2013] 34 taxmann.com 62 (Nagpur-Trib.) allowed
the appeal filed by the assessee.

 

Aggrieved, revenue preferred an appeal to the Tribunal where it,
interalia, contended that the decision of Nagpur Bench of Tribunal,
relied upon by the CIT(A), has not been accepted by the Revenue and appeal has
been filed and admitted against the said decision of Nagpur Bench of Tribunal.

 

HELD

The Tribunal observed that the assessee has made a disclosure
of undisclosed income in the course of search and has shown such undisclosed
income in the return of income and has paid taxes thereon and the AO has
accepted the income returned and the source of the same.  However, the AO has levied penalty u/s.
271AAA of the Act.  The Tribunal observed
that CIT(A) relying on the ratio laid down in the decision of the Allahabad
High Court and the Gujarat High Court has elaborately considered the issue and
has passed an order deleting the levy of penalty.  It observed that the ratio emanating out of
these two High Court decisions is that if the search party doesn’t put any
question to the assessee about the source of income, any adverse inference for
levy of penalty u/s. 271AAA cannot be drawn. The Tribunal also noticed that the
revenue has in the grounds mentioned about a decision of Nagpur Bench of the
Tribunal in favor of the assessee which has not been accepted by the revenue
but the department is in appeal before the High Court.  The Tribunal observed that since no contrary
decision was pointed out by the Revenue, the Tribunal upheld the order passed
by CIT(A).

 

The appeal filed by the Revenue was dismissed.

17. [2018] 193 TTJ (Mumbai) 214 Asia Investments (P.) Ltd. vs. ACIT ITA NO. : 7539/MUM/2013 & 4779/Mum/2014 A. Y.: 2003-04 Dated: 23rd February, 2018

Section 271(1)(c) read with section 275
–  Where once addition on which penalty
has been levied is set aside to Assessing Officer for fresh consideration, it
is as good as there is no addition for levy of penalty u/s. 271(1)(c)

FACTS

The assessee company filed return of income and the
assessment was completed u/s. 143(3) making certain additions. The assessee
carried the matter in appeal before the CIT(A) wherein the partial relief was
allowed by the CIT(A). The assessee filed appeal before Tribunal for the
additions sustained by the CIT(A). The Tribunal set aside the issue to the file
of the AO with a direction to examine the entire facts of the case.

 

The AO had initiated penalty proceedings u/s. 271(1)(c) and
after considering the submissions of the assesse, he passed order levying penalty
u/s. 271(1)(c).

 

Aggrieved by the penalty order, the assessee preferred an
appeal before the Ld. CIT(A) wherein the penalty was confirmed by the CIT(A).

 

HELD

The Tribunal stated that once the addition on which penalty
had been levied was set aside to the AO for fresh consideration, it was as good
as there was no addition for levy of penalty u/s. 271(1)(c) of the Act.

 

In present case, the AO had finalised penalty proceedings
before the Tribunal had set aside the issue of additions in the quantum appeal
to the file of the AO. The case was covered under the provisions of sub section
(1A) to section 275 of the Act where it is categorically stated that in a case
where the relevant assessment or the order is the subject matter of an appeal
before the appellate authorities or High Court and an order imposing or
enhancing or reducing or cancelling penalty or dropping the proceedings for the
imposition of penalty is passed before the order of the appellate authority is
received by the Commissioner then the order imposing or enhancing or reducing
or cancelling penalty or dropping the proceedings for the imposition of penalty
may be passed on the basis of assessment as revised by giving effect to such
order of the appellate authorities.

 

Therefore, the Tribunal set aside the issue to the file of
the AO directing him to reconsider the issue as per the provisions of section
275(1A) of the Act.

16. [2018] 193 TTJ (Mumbai)(UO) 36 ACIT vs. Zee Media Corporation Ltd ITA NO. : 2166/MUM/2016 A. Y. : 2011-12 Dated: 16th April, 2018

Section 4 read with section 133(6) – In the
absence of any material on record to show that the assessee has received amount
more than the income which had been declared by it in the P&L a/c, addition
cannot be made solely based on AIR information, especially when the assessee
requested the AO to examine the parties by issuing notice u/s. 133(6) but AO
failed to make any enquiry.  

FACTS

The AO in the course of the assessment proceedings, on
perusal of the AIR data found that there was a discrepancy in income to the
extent of Rs.14,13,908 in Form 26AS and the books of account.

 

The assessee submitted that the transactions in respect of
the discrepancy did not happen and were not related to the assessee. The
assesse also filed before the AO a rectification application under section- 154
requesting for withdrawal of corresponding TDS credit.

 

It was submitted before the AO that these transactions did
not appear in the books of account of the assessee and the bank account also
did not reflect any receipts from these parties. The assessee requested the AO
to verify the books of account and also to examine the parties by issuing the
notices under section 133(6).

 

However, the AO treated the said amount as income of the
assessee for the reason that assessee claimed TDS on such transactions but
denied owning up of the said transactions.

 

Aggrieved by the assessment order, the assessee filed appeal
before CIT(A) but the addition was sustained by the CIT(A).

     

HELD

The Tribunal stated that in the absence of any material
brought by the revenue authorities that the assessee had received amount more
than the professional fees which had been declared by him in the P&L
account and when the professional income declared by the assessee far exceeded
the professional fees shown in the AIR information, the additions solely based
on the AIR information were not sustainable.

 

The AO also failed to make any enquiries with the parties as
requested by the assesse when the assessee had denied any transactions with
them. When the assessee had denied any transactions with the parties, the onus
was on the AO to verify the transactions with the parties and to establish that
the assesse indeed entered into any transactions with the said parties and had
received income from them. No such enquiries or effort was made by the AO.

 

The addition was made solely based on the AIR information
without bringing any cogent evidence on record to suggest that the assessee
received income from the said parties.

 

In the result, the Tribunal reversed the order of the CIT(A)
and directed the AO to delete the addition made on account of alleged
difference in income.

15. [2018] 194 TTJ (Mumbai) 122 All India Federation of Tax Practitioners vs. ITO ITA NO. : 7134/MUM/2017 A. Y.: 2013-14 Dated: 04th May, 2018

Section 249(1) read with rule 45 – Assessee
having filed the appeal in paper form, CIT(A) ought not to have dismissed the
same solely on the ground that the assessee has not filed the appeal
electronically as per the mandate of rule 45.

FACTS

The assessee was a trust and had filed its return of income
for A.Y.2013-14. Thereafter, assessment for the said year was completed by
order u/s. 143(3) on 17-2-2016.

 

Aggrieved by the order of the AO, the assessee preferred
appeal before CIT(A). The assessee filed appeal before CIT(A) in paper form as
prescribed under the provisions of IT Act, 1961 within the prescribed period of
limitation.

 

But the same was dismissed by CIT(A) by holding that the
assessee had not filed appeal through electronic form, which was mandatory as
per IT Rules, 1962. The CIT(A) passed the order without allowing hearing to
assessee merely on the basis of alleged default of not having appeal filed
electronically .

     

HELD

The Tribunal observed that the assessee had already filed the
appeal in paper form, however, only the e-filing of appeal had not been done by
the assessee which was only a technical consideration.

 

The Tribunal followed the ratio of the Hon’ble Supreme Court
decision in the case of State of Punjab vs. Shyamalal Murari & Ors. AIR
1976 SC 1177 wherein it was held that courts should not go strictly by the
rulebook to deny justice to the deserving litigant as it would lead to
miscarriage of justice and no party should ordinarily be denied the opportunity
of participating in the process of justice dispensation.      

 

The Tribunal relying upon the judgement of Hon’ble Supreme
Court, held that the alleged compliances defaults were of a technical nature
and the same could not be a reason to deny an opportunity of appeal and
opportunity of justice in the deserving case.

 

In the result, the Tribunal set aside the CIT(A) order and
allowed the appeal. The Tribunal directed the assessee to file the appeal
electronically within 10 days from the date of receipt of ITAT order and
further directed the CIT(A) to consider the appeal filed by the assessee on
merits by passing a speaking order.

15. CIT(Exemption) vs. Indian Institute of Banking and Finance. [ITA No. 1368 of 2015 Dated: 28th March, 2018 (Bombay High Court)]. [ Affirmed ACIT vs. Indian Institute of Banking and Finance, dated 11/02/2015 ; Mum. ITAT ] Section 11 : Educational Institution – purpose of development of banking personnel for/in the banking industry – by holding courses and also disbursing knowledge by lectures, discussions, books, correspondence with public bodies and individuals or otherwise etc – Trust entitle to exemption.[Section 2(15)]

[ Affirmed ACIT vs. Indian
Institute of Banking and Finance, dated 11/02/2015 ; Mum. ITAT ]

 

Section 11 : Educational
Institution – purpose of development of banking personnel for/in the banking
industry – by holding courses and also disbursing knowledge by lectures,
discussions, books, correspondence with public bodies and individuals or
otherwise etc – Trust entitle to exemption.[Section 2(15)]


The assessee is a Company
registered u/s. 26 of the Indian Companies Act, 1913 as a non-profit making
Company. The principal objects of the assessee as per the Memorandum of
Association is to inter-alia conduct educational activities in respect
of the banking and finance subjects by holding courses and also disbursing
knowledge by lectures, discussions, books, correspondence with public bodies
and individuals or otherwise etc. It is an undisputed position that, assessee
is registered u/s. 12A of the Act.

 

During the course of assessment
proceedings, the assessee sought benefit of exemption u/s. 11 of the Act. The
A.O denied the same on the ground that the claim for exemption u/s. 10(22) of
the Act for the A.Y 1996-97 to 1998-99 which had been granted by the Tribunal was
pending in Appeal filed by the Revenue in High Court, as well as, application
u/s. 10(23C)(vi) of the Act was pending before the CIT. It was on the aforesaid
basis that the A.O held that the benefit u/s. 11 cannot be granted to the
petitioners. This without dealing with the petitioner’s primary contention that
they are entitled to exemption as they satisfy the definition of charitable
purpose as they are an educational institution.

 

On further Appeal, the Tribunal
allowed the assessee’s appeal. The Tribunal after examining the object clause
as given in the Memorandum of Association gave a finding that the assessee has
been created for the purpose of development of banking personnel for/in the
banking industry. The assessee company imparts education to the candidates who
are connected with the banking industry. It has library facility, organises
lectures, seminars and undertake examinations for promoting bank officers. In
the aforesaid context, the Tribunal concluded on facts which were before the
Revenue Authorities that it exists for advancement of learning in the field of
banking. Besides, on facts it found the fee structure of the institute for
these courses was not on the higher side. Further, the assessee company
reliance upon the decision of this Court in Director of Income-tax
(Exemption), Mumbai vs. Samudra Institute of Maritime Studies Trust, reported
in [2014] 49 taxmann.com 510 (Bombay) to inter-alia hold that the
activity which is carried out by the assessee company is educational in nature.
This is for the reason that it imparts education to the members of the banking
industry and prepares them to discharge their duties as bankers more
efficiently.

 

Further, with regard to the
objection of the A.O that as the benefit of the assessee company is restricted
only to the persons working in the banking industry, it is not available to the
public at large was negatived by placing reliance upon the decision of the Apex
Court in Ahmedabad Rana Caste Association vs. Commissioner of Income-Tax,
reported in 82 ITR 704. In the above case, it has been held that the object
beneficial to a section of the public is an object of general public utility
and to serve a charitable purpose it is not necessary that the object should be
to benefit the whole of mankind or all persons in a country or State. In the
above view, it was, held that the petitioners were an institute for a
charitable purpose as defined in section 2(15) of the Act.

 

Being aggrieved, Revenue filed
appeal before the High Court. The Revenue contented  that the activity carried out by the assessee
is in the nature of running Coaching Classes or Center and therefore the
benefit of section 11 of the Act cannot be extended to the assessee company.

 

The Court observed that there is no
such objection taken before the authorities by the Revenue. Besides, nothing
has been shown to us why it should be considered as a coaching class. Further,
the Court found that the impugned order of the Tribunal has only applied the
decision of this Court in Samudra Institute of Maritime Studies Trust (supra)
to conclude that the activities which are run by the institute is an
educational activity and not in the nature of running a Coaching Center or a
Class. The grant or refusal to grant exemption u/s.  10(22) and/or (23C) of the Act cannot govern
the application of section 11 of the Act. In the above view, the Appeal was
dismissed.  

14. CIT vs. Shankardas B. Pahajani [ITA No. 1432 of 2007 Dated : 24th April, 2018 (Bombay High Court)]. [Affirmed DCIT vs. Shankardas B. Pahajani [dated 13/09/2004 ; AY 1994-95 , Mum. ITAT] Section 147 : Reassessment – Audit objection- Reopening on basis of same set of facts available at time of original assessment – change of opinion – reassessment was held to be invalid

[Affirmed DCIT vs.
Shankardas B. Pahajani [dated 13/09/2004 ; AY 1994-95 , Mum. ITAT]

 

Section 147 : Reassessment
– Audit objection- Reopening on basis of same set of facts available at time of
original assessment – change of opinion – reassessment was held to be invalid

 

During the
course of assessment, detailed letters were filed by the assessee giving
complete details of the transactions relating to the purchase and sale of flats
in a building known as ‘Tanhee Heights’ resulting in capital gains. Thus, the
same was subject of consideration leading to assessment order u/s. 143(3) of
the Act. On 15th May, 1998 a notice u/s. 148 of the Act was issued by the A.O seeking to reopen the assessment for
AY: 1994-95. The assessee objected to the re-opening of Assessment but the same
was not accepted. This resulted in assessment order passed u/s. 143(3) r/w section 147 of the Act and made addition.

 

On appeal, the CIT (A), allowed the
assessee’s appeal, holding that re-opening notice dated 15th May,
1998 is without jurisdiction.

 

Being aggrieved, Revenue preferred
appeal before ITAT. The Tribunal held that the exercise of re-opening the
assessment is without jurisdiction. This on the ground that, the entire issue
of capital gains on which the reopening notice was issued was the subject
matter of consideration during the regular assessment proceedings u/s. 143(3)
of the Act. This is evident from the letters of the assessee disclosing all
facts during the regular assessment proceedings. Therefore, it held it to be a
case of change of opinion on the part of the A.O and therefore, absence of any
reason to believe that income chargeable to tax has escaped assessment.

 

The Tribunal concluded that there
was absence of application of mind by the A.O and the reopening notice was
issued on borrowed satisfaction i.e. on the basis of audit objection. Therefore
re-opening notice to be without jurisdiction. 

 

The Revenue contended that the
reopening notice dated 15th May, 1998 has been issued on account of
a recent decision of the Bombay High Court in Commissioner of Income-Tax vs.
Smt. Beena K. Jain, [1996] 217 ITR 363 (rendered on 23rd November,
1993). Thus, it is submitted that the reopening notice is valid in law and
the appeal deserves to be admitted.

 

The High Court held that, the
assessee had furnished all information in respect of the issue of capital gains
by letters during assessment proceedings. Therefore, the A.O had applied his
mind to the facts and the law while passing the order of regular assessment.
The decision in the case of Beena K. Jain (supra) being relied
upon in support of the re-opening notice was available at the time when the regular
assessment order dated 12th September, 1996 u/s 143 of the Act was
passed. The reasons recorded in support of the impugned notice was merely on
the basis of borrowed satisfaction of the audit party. This also makes the
impugned notice bad. For the aforesaid reasons, the appeal was dismissed.

13. Jaison S. Panakkal vs. Pr. CIT. [ W.P no. 1122 of 2018, Dated : 26th April, 2018 (Bombay High Court)]. Section 179(1): Liability of director – Private company – show cause notice issued u/s. 179(1) did not indicate or give any particulars in respect of steps taken by department to recover tax dues from defaulting private company – Order set aside.

Section 179(1): Liability
of director – Private company – show cause notice issued u/s. 179(1) did not indicate or give any particulars in respect of steps taken
by department to recover tax dues from defaulting private company – Order set
aside.


The Assessing Officer vide order
dated 15/2/2018 passed u/s. 179(1) of the Act, held that the Petitioner was
liable to pay the tax dues of Rs.38.34 crores of M/s. Damasy Retail Jewellery
Pvt. Ltd. The Petitioner was a former Director of M/s. Damasy Retail Jewellery
Pvt. Ltd., having been a director during the period 29th December,
2007 to 11th November, 2009.

 

It was the case of the assessee
that the impugned order was not preceded by service of any show cause notice
upon him. Consequently, Petitioner had no opportunity to put forth his case
before passing of the impugned order.



The Revenue contended that the show
cause notice dated 26th July, 2017 was attempted to be served by
Registered Post. However, same was received back with the postal remark “not
known”.

 

The Petitioner contended that the
show cause notice dated 26th July, 2017 does not make any mentioning
of the Revenue’s attempt to recover the tax dues of M/s. Damasy Retail
Jewellery Pvt. Ltd. from it and the result thereof. In this circumstances, it is
submitted that the impugned proceedings, are completely, without jurisdiction.

 

The Hon’ble Court relied on the
decision in case of  Madhavi Kerkar
vs. Asst CIT (Writ Petition No.567 of 2016) dt 5th January, 2018 and
Mehul Jadavji Shah vs. Deputy CIT (Writ Petition No. 291 of 2018) dt : 5th
April, 2018, wherein the High Court held that the jurisdiction to commence
proceedings against the Director of a delinquent company for a recovery of the
tax dues of the delinquent company, would require the notice to the Directors/
former Directors, itself, indicating what steps had been taken to recover the
dues from the delinquent company and the failure thereof. The show cause notice
should indicate to have satisfied the condition precedent for commencing
proceedings u/s. 179(1) of the Act.

 

As
the condition precedent for commencing proceedings u/s. 179(1) of the Act were
not satisfied the impugned order dated 15th February, 2018 was
quashed and set aside.

44 Sections 9(1)vii), Expln 2 and 194J – TDS – Fees for technical services – Transmission of electricity – Payment made only for facility to use and maintenance of transmission lines – Not technical services – Mere involvement of technology does not bring something within ambit of technical services – Provisions of section 194J not applicable

The assessee was a licensee for
distribution and sale of electricity under the provisions of the Electricity
Act, 2003, by the Uttar Pradesh Electricity Regulatory Commission. The assessee
purchased power from Uttar Pradesh Power Corporation. For the A. Y. 2008-09,
the assessee made payments in terms of tariff issued by the Commission which
was bifurcated in two parts: (a) power supply tariff and (b) power transmission
tariff. The transmission charges were paid to the Uttar Pradesh Power
Transmission Company Ltd. (UPPTCL) and power supply charges were payable to the
Corporation. The Assessing Officer observed that payment made to the company
was not a payment of purchase or supply of power but payment of technical
charges for rendering “technical service” on monthly basis and consequently
held that the assessee was liable to deduct tax at source on charges paid for
transmission to the company and since it failed to do so, the amount of Rs.
1,65,32,88,040 was to be disallowed u/s. 40(a)(ia) of the Act.

 

The Commissioner (Appeals) and the
Tribunal accepted the assessee’s claim and cancelled the disallowance.

 

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

 

“i)  Since
electricity was a commodity which could not be carried from one place to
another like other commodities, it had to flow through metal conductors which
were called “transmission lines” and therefore, transmission lines constituted
a facility for travelling of electricity from the point of generation to the
point of distribution. This flow of electricity in a conductor could not be
said to be any specialized, exclusive individual service rendered by the
company to the assessee because the grid was common and transmission lines were
used in general by respective distributor licensees. Only for the purpose of
facility to use and maintenance of transmission lines, charges were paid and
there was no “technical service”, as such, rendered by the company to the
assessee.

 

ii)   Mere
involvement of technology would not bring something within the ambit of
“technical services” as defined in Explanation 2 to section 9(1)(vii) because
under the Act, the term “technical services” was defined in a different manner,
i.e., along with terms “managerial and consultancy services”. “Managerial and
consultancy services” by themselves did not include any technology but still
would be covered by the definition of “fees for technical services” in the Act.
Therefore, the term “technical services” was not dependent solely on whether or
not use of technology was involved.

 

iii)  Moreover, the term “technical” had to be read applying the principle
of noscitur a sociis in the term “managerial and consultancy”. That
takes away normal and common meaning of “technical services” as was known in
common parlance and makes it totally different. Therefore, in transmission of
electricity, there was no human touch or effort and if the term “technical was
read applying the principle of noscitur a sociis with the term
“managerial or consultancy”, the provisions of section 194J were not
applicable.

 

iv)  The
questions formulated are answered against the Revenue and in favour of the
assessee.”

43 Sections 10(38), 45 and 271(1)(c) – Penalty – Concealment of income – Capital gain – Exemption – Assessee claiming exemption u/s. 10(38) with a note that it reserved its right to carry forward loss – Bona fide belief of assessee that loss not required to be considered u/s. 10(38) – Penalty rightly cancelled by Tribunal

DIT
(International Taxation) vs. Nomura India Investment Fund Mother Fund.; 404 ITR
636 (Bom); Date of order : 15th June, 2017 A. Y.: 2008-09

 

The
assessee earned long-term capital gain as well as long-term capital loss on
purchase and sale of shares. For the A. Y. 2008-09, while computing the total
income, it did not set off the long-term capital loss of Rs. 80.64 crores
against the long-term capital gain of Rs. 697.70 crores, which was exempted
u/s. 10(38) of the Act and in its return had put a note reserving the right to
carry forward the long-term capital loss. The Assessing Officer rejected the
claim of the assessee to carry forward the long-term capital loss and held that
it was not admissible and also levied penalty u/s. 271(1)(c) for concealment of income.

 

The
Tribunal cancelled the penalty.

 

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

 

“i)  The provisions of section 271(1)(c) could only
be invoked upon satisfaction of the conditions laid down therein. The assessee
had claimed exemption u/s. 10(38) with a note that it reserved its right to
carry forward the loss of Rs. 80.64 crores, under the bona fide belief
that u/s. 10(38) the loss was not required to be considered. It could not be
stated that the act of the assessee in giving the note was with some ulterior
intention or concealment of income or giving inaccurate particulars.

 

ii)   Therefore, the penalty was rightly cancelled
by the Tribunal. No question of law arose.”

42 Section 4 – Income – revenue or capital receipt – Where Government gave grant-in-aid to a company wholly-owned by Government, facing acute cash crunch, to keep company floating, even though large part of funds were applied by company for salary and provident funds, grant received was capital receipt

Pr.
CIT vs. State Fisheries Development Corporation Ltd.; [2018] 94 taxmann.com 466
(Cal); Date of order : 14th May, 2018A. Y.: 2006-07:

 

The
assessee was a company wholly-owned by the State Government. The assessee was
engaged in business of pisciculture. The assessee received an amount as
grants-in-aid. Out of that, certain sum was received for payment of salary to
its employees, certain sum for payment of Provident Fund dues and certain sum
for the purpose of flood relief. The assessee claimed deduction of said sum
from its income on plea that same constituted capital receipt. The Assessing
Officer found that the fund was applied for items which were revenue in nature.
He recorded that such receipts were consistently treated in the past by the
assessee as revenue receipt. Thus, same could not be allowed for deduction as
capital receipt.

 

The
Tribunal did not solely rely on the nature of application of the funds received
through grant-in-aid. The Tribunal examined the character of the assessee as a
Government company as well as the character of grantor, being the State
Government itself, the financial status of the assessee and certain other
factors. The Tribunal accepted the assessee’s claim that grant-in-aid towards
provident fund dues constituted capital receipts.

 

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

 

“i)  The fundamental principle for distinguishing
capital receipt from revenue receipt in relation to Government grant has been
laid down by the Supreme Court in the case of Sahney Steel & Press Works
Ltd. vs. CIT [1997] 94 Taxman 368/228 ITR 253. That was a case involving
government subsidy in the form of certain time bound incentives and facilities.
These incentives and facilities included refund of sales tax on raw materials,
machineries and finished goods. The Supreme Court found that the incentives and
facilities under a subsidy scheme to enable the assessee to acquire new plant
or machinery for expansion of manufacturing capacity or set up new industrial
undertaking could constitute capital receipt. In that case, however, the scheme
contemplated for refund of sales tax on purchase of machinery and raw
materials, subsidy or power consumption and certain other exemptions on
utilities consumed. The Supreme Court rejected the plea of the assessee for
treating such facilities and incentives as capital receipt on the reasoning
that such subsidy could only be treated as assistance given for the purpose of
carrying on the business of the assessee.

 

ii)   So far as assessee’s case in this appeal is
concerned, Rs. 3.60 crores was received as grant-in-aid in the relevant
previous year towards salary and provident fund dues. On surface test, receipt
under these heads no doubt has the attributes of revenue receipt. But there are
two factors which distinguish the character of the grant-in-aid which the
assessee wants to be treated as capital receipt. Said sum was not on account of
any general subsidy scheme. Secondly, the sum was given by the State to a
wholly-owned company which was facing acute cash crunch. Financial status of
the company appears from the submission of the assessee’s representative
recorded in the order of the first Appellate Authority and there is no denial
of this fact in any of the materials placed.

 

iii)  In the case of the assessee, though it is not
a grant from a parent company to a subsidiary company, the grant is from the
State Government, which was in effect, hundred per cent shareholder of the
assessee. Rs. 3.60 crores was meant for payment of staff salaries and provident
fund dues. As already observed, these item heads may bear the label of revenue
receipt on the surface, it is apparent that the actual intention of the State
was to keep the company, facing acute cash crunch, floating and protecting
employment in a public sector organization. There is no separate business
consideration on record between the grantor, that is the State Government and
the recipient thereof being the assessee. The principle of law as laid down in
the case of Siemens Public Communication Network (P.) Ltd. vs. CIT [2017] 77
taxmann.com 22/244 Taxman 188/390 ITR 1 (SC) is that voluntary payments
made by the parent company to its loss making Indian subsidiary can also be
understood to be payments made in order to protect the capital investment of
the assessee-company. Though the grant-in-aid in this case was received from
public funds, the State Government being 100 per cent shareholder, its position
would be similar to that of, or at par with a parent company making voluntary
payments to its loss making undertaking. No other specific business
consideration on the part of the State has been demonstrated in this appeal.
The assistance extended appears to be measures to keep the assessee-company
floating, the assessee being, for all practical purposes an extended arm of the
State. Though large part of the funds were applied for salary and provident
fund dues, the object of extension of assistance, to ensure survival of the
company.

 

iv)  As regards the funds extended for flood
relief, the same cannot constitute revenue receipt. Flood relief does not
constitute part of business of the assessee.

 

v)  Accordingly, the question is answered in
favour of the assessee and confirm the finding of the Tribunal.”

41 Section 4 – Income – Capital or revenue receipt – Real estate business – Seller of land not performing commitment under agreement to sell – Purpose of ultimate use of assessee’s land when acquired rendered irrelevant – Compensation received under arbitration award considered as capital receipt

Pr.
CIT vs. Aeren R Infrastructure Ltd.; 404 ITR 318 (Del): Date of Order : 25th
April, 2018

The
assessee, engaged in the business of real estate, entered into a consortium
agreement with its associates which defined the role, rights and
responsibilities of the parties thereto. This consortium entered into an
agreement to sell with JMA, the seller, for purchase of 10 acres of land for a
consideration of Rs. 15 crores. The seller, JMA, defaulted in its commitment
within the prescribed and extended time limit. Ultimately, upon the parties
resorting to the arbitration, a settlement was arrived at and an award was made
based upon the parties eventual settlement. The amount received by the assessee
as a part of its entitlement as consortium was credited in its books of account
as a capital receipt. The Assessing Officer held that the amounts were revenue
in nature as the land would have been part of the stock-in-trade.

 

The
Tribunal held that the amount which was intended to be ultimately used as
stock-in-trade purposes was immobile and sterilized, rendered non-offerable and
therefore when received as part of the arbitration award, fell into the capital
stream. The Tribunal held that the only inference that can be drawn is that the
compensation received by way of reward due to non-supply of land by JMA under
the agreement was capital receipt.

 

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

 

“The
purpose of the ultimate use of the assessee’s land when acquired was rendered
irrelevant on account of the seller defaulting in its commitment. This rendered
the amount expended by the assessee immobile. The eventual receipt of the
amounts determined as compensation or damages, therefore, fell into the capital
stream and not revenue as was contended by the Revenue/appellant in this case.”

40 Section 43A – Foreign exchange fluctuation – Where assessee constructed a residential house and rental income earned therefrom was offered to tax as income from house property and not as business income, provisions of section 43A would not apply to apparent gain made by assessee as a consequence of foreign exchange fluctuation in respect of lift imported from abroad

CIT
vs. Bengal Intelligent Parks (P.) Ltd.; [2018] 94 taxmann.com 399 (Cal);

Date
of order: 10th May, 2018

The
assessee was engaged in construction of houses for the purpose of letting them
out. The rental income was claimed as income from house property without the
expenses for constructing the house being claimed by way of deduction or the
individual items therefore being subjected to depreciation. In respect of a
particular elevator imported by the assessee for installation at one of its
buildings, the rise of the rupee compared to the relevant foreign currency
resulted in the cost of the equipment being effectively lowered by a sum in
excess of Rs. 6 lakh. The Assessing Officer added said amount to assessee’s
income.

 

The
assessee filed appeal contending that since the elevator was not used for the
purpose of its business and no deduction or depreciation or the like had been
claimed in respect thereof, the perceived additional income on account of
foreign exchange fluctuation could not be added back as an income in the hands
of the assessee. The Tribunal having accepted assessee’s contention, deleted
the addition made by the Assessing Officer.

 

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

 

“i)  Section 43A deals with the variation of
expenses on account of the change in the rate of exchange of currency. Such
provision takes into account the additional expenses that may be incurred by an
assessee as a result of the fluctuation of foreign exchange rates or the gain
that may be made by an assessee on such account. However, such provision is
confined to assets acquired from a country outside India for the purpose of the
assessee’s business or profession. The Tribunal held in this case that since
the construction of the relevant house was not a part of the business of the
assessee, section 43A would not apply to the apparent gain made by the assessee
as a consequence of the foreign exchange fluctuation.

 

ii)   On a plain reading of section 43A and the
fact that the assessee had not claimed any deduction or depreciation on account
of the lift or other construction material, it cannot be said that the Tribunal
committed any error or that there is any significant question of law that needs
to be looked into. In the result, revenue’s appeal is dismissed.”

39 Section 10B – Export oriented undertaking – Exemption u/s. 10B – Export from specified area of Iron ore excavated from specified area – Processing done outside specified area – Not relevant – Assessee entitled to exemption

Pr.
CIT(Appeals) vs. Lakshminarayan Mining Company.; 404 ITR 522 (Karn);

Date
of Order : 6th April, 2018

A.
Ys.: 2009-10 to 2011-12


The
assessee was a firm in the business of mining and export of iron ore and was
granted a mining lease for an area of 105.2 hectors in Siddapura Village in
Bellary district. The assessee had entered into an operation and maintenance
agreement with NAPC, which operated the plant and machinery installed in the
export oriented unit and non-export oriented unit both belonging to the
assessee firm. The export oriented unit had started production on 23/09/2006
and accordingly the assessee claimed deduction u/s. 10B of the Act on the
profits derived from the production of iron ore from the export oriented unit
for the A. Ys. 2009-10 to 2011-12. The Assessing Officer disallowed the claim
with respect to production of iron ore said to have been outsourced by the
export oriented unit to the non-export oriented unit and restricted the claim
to the profits derived by the export oriented unit from its production.

 

The
Tribunal allowed the assessee’s claim.

 

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

 

“i)  The processing of the iron ore
in a plant belonging to the assessee being in the nature of job work was not
prohibited and formed an integral part of the activity of the export oriented
unit; the mere fact that the plant was situated outside the bonded area was of
no legal significance as the benefit of customs bonding is only for the limited
purpose of granting benefit as regards customs and excise duty.

 

ii)   The entitlement to deduction under the Act is
to be looked into independently and the benefit would stand or fall on the
applicability of section 10B. Hence the mere location of the plant outside the
export oriented unit and customs bonded area was not a disqualification to
claim deduction u/s. 10B. The assessee was entitled to exemption u/s. 10B.”

 

8. ACIT vs. Jatin P. Mistry Members : C. N. Prasad, JM and Ramit Kochar, AM ITA No. 3404/Mum/2016 Assessment Year: 2008-09. Decided on: 13th April, 2018. Counsel for revenue / assessee: Abhijit Patankar / Fenil A. Bhatt

Section 40(a)(ia) – Amendment to section
40(a)(ia) made by the Finance Act, 2010 w.e.f. 1.4.2010 is retrospective in
operation  and consequently disallowance
u/s. 40(a)(ia) is not called for in a case where there is late deposit of TDS
in Government Account when such delayed deposit is within the due date of
filing return of income.

FACTS 

The Assessing Officer (AO) while passing order u/s. 143(3)
r.w.s. 263 of the Act noticed that amounts deducted by the assessee towards TDS
during the period from August 2007 to February 2008 were deposited in
Government Treasury after 30.4.2008 when these amounts should have been
deposited between 7.9.2007 to 7.3.2008. 
Accordingly, the AO disallowed the payments by invoking provisions of
section 40(a)(ia) of the Act.  He
rejected the contention of the assessee that the amounts were deposited before
due date of filing return of income and since the amendment of section
40(a)(ia) is retrospective, the disallowance should not be made.

 

Aggrieved, the assessee preferred an appeal to CIT(A) who
following the decision of the co-ordinate Bench in assessee’s own case and also
the decision of Delhi High Court in the case of CIT vs. Naresh Kumar
[262 CTR 389] and co-ordinate Bench of Mumbai Tribunal in Huda Construction
vs. ITO [ITA No. 816/Mum/2011 dated 15.4.2015] allowed the appeal.

 

Aggrieved, the revenue preferred an appeal to the Tribunal.

 

HELD:

The Tribunal noticed that the issue to be addressed is
whether there should be any disallowance u/s. 40(a)(ia) on account of late
remittance of TDS into government account when the assessee deposited such TDS
within due date for filing the return of income.  Admittedly, there was a delay in deposit of
TDS by the assessee but the deposit was made before due date of filing return
of income. 

 

The Tribunal noted that the issue is covered in favor of the
assessee, in its own case, by the decision of the co-ordinate Bench of the
Tribunal for assessment year 2009-2010. 
The Tribunal also noted that the jurisdictional High Court has in the
case of CIT-II vs. Shraddha & S. S. Kale [ITA No. 1712 of 2014 dated
27.3.2017] decided the similar issue in favor of the assessee holding that the
amendment to section 40(a)(ia) by the Finance Act, 2010 w.e.f. 1.4.2010 is
retrospective. Following the decision of the jurisdictional High Court, the
Tribunal upheld the order of CIT(A) and rejected the ground of revenue.

 

The appeal filed by the revenue was dismissed.

A. P. (DIR Series) Circular No. 78 dated June 23, 2016

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Notification No. FEMA 365/2016-RB dated June 01, 2016

Permitting writing of options against contracted exposures by Indian Residents

This circular permits resident exporters and importers of goods and services to write (sell) standalone plain vanilla European call and put option contracts against their contracted exposure, i.e. covered call and covered put respectively, with any bank in India subject to operational guidelines, terms and conditions annexed in Annex I to this circular.

A. P. (DIR Series) Circular No. 77[2]/10[R] dated June 23, 2016

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Given below are the highlights of certain RBI Circulars & Notifications

Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015

This circular permits as under: –

1. An Indian start-up (as defined vide Notification No. GSR 180(E) dated February 17, 2016 issued by DIPP) having an overseas subsidiary can: –

a) Open a foreign currency account with a bank outside India for the purpose of crediting to the account the foreign exchange earnings out of exports / sales made by it or its overseas subsidiary. The balances held in such accounts, to the extent they represent exports from India, shall be repatriated to India within the period prescribed for realization of exports.

b) Credit payments received by it in foreign exchange against sales / exports made by it or its overseas subsidiaries to its EEFC account maintained in India.

2. Any insurance / reinsurance company registered with the Insurance Regulatory and Development Authority of India (IRDA) can open a foreign currency account with a bank outside India to carry out insurance / reinsurance business.

Infrastructure Facility – Deduction u/s 80-IA(4) whether admissible to inland container depots and inland freight stations – SLP Granted-

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CIT. vs. Continental Warehousing Corporation (Nhava Sheva) Ltd, (2016) 380 ITR (St) 80 ; (Affirmed CIT vs. Continental Warehousing Corporation (Nhava Sheva) Ltd [2013] 374 ITR 645(Bom))

The assessee company is engaged in the operation of a Container Freight Station (CFS) and claimed that the activities therein qualify as a port. That is one of the infrastructure facilities for the purpose of section 80- IA(4) of the IT Act. The assessee produced a certificate dated 13th July, 2006, from the Jawaharlal Nehru Port Trust (JNPT) Nhava Sheva declaring that the assessee is considered as an extended arm of port related services. However, on enquiry u/s. 133(6) of the IT Act, it was revealed that this certificate was withdrawn by JNPT on 5th October, 2007. That is how the deduction claimed came to be disallowed.

Being aggrieved by this order of the Assessing Officer, the assessee preferred an appeal before the First Appellate Authority. He dismissed the assessee’s appeal and confirmed the view of the Assessing Officer.

Being aggrieved by the order passed by the CIT(A) , the assessee approached the Tribunal, the Tribunal allowed its appeal. On the issue of deduction under section 80- IA(4) it was concluded that the CFS is a inland port and its income is entitled to deduction under section 80-IA(4) of the IT Act.

Aggrieved by the ITAT order, Revenue filed an appeal before High Court.

The other appeal being Income Tax Appeal No.1969 of 2013 (All Cargo Global Logistics Ltd.), was also heard alongwith the present appeal before High Court. A special Bench of the Tribunal was constituted to hear the this appeal and the same was proposed for purposes of deciding two questions, namely, what is the scope of assessment u/s. 153A of the IT Act. Whether that encompasses additions not based on any incriminating material found during the search and whether the Commissioner of Income-tax (Appeals) was justified in upholding the disallowance of deduction under section 80-IA(4) of the IT Act, 1961.

The High Court held that an ICD is not a port but it is an inland port. The case of CFS is similar situated in the sense that both carry out similar functions, i.e. ware housing, customs clearance, and transport of goods from its location to the seaports and vice-versa by railway or by trucks in containers. Thus, the issue is no longer res-integra. Respectfully following this decision, it is held that a CFS is an inland port whose income is entitled to deduction u/s 80IA(4).Therefore, dismiss the Revenue appeals and answer the substantial questions of law against the Revenue and in favour of the assessee.

The Revenue filed SLP before Supreme Court which was granted

Techinical services – transmission of electricity – Without any human intervention – No TDS u/s 194J – SLP Dismissed

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SLP CIT (TDS). vs. Delhi Transco Ltd,(2016) 380 ITR (St) 79 ; (Affirmed CIT vs. Delhi Transco Ltd [2015] 380 ITR 398(Del))

The assessee Delhi Transco Ltd. (DTL) entered into Bulk Power Transmission Agreement (BPTA ) with the Power Grid Corporation India Ltd. (PGCIL). In one of the preamble clauses of the BPTA , it was recorded that DTL “is desirous of receiving energy through power grid transmission system on mutually agreed terms and conditions”. The BPTA defined several terms including the term wheeling as under: “The operation whereby the distribution system and associated facilities of a transmission licensee or distribution licensee, as the case may be, are used by another person for the conveyance of electricity on payment of charges to be determined under Section of Section 62 (sic) of the Electricity Act, 2003 and its subsequent amendments.” Under Clause 8 of the BPTA , it was agreed that the transmission charges would be paid to PGCIL by DTL for transmitting private sector power through PGCIL lines as per the guidelines of the Central Electricity Regulatory Commission (CERC). Clause 10 stated that the transmission tariff and terms and conditions for the power to be transferred by PGCIL would be in terms of the notification to be issued by CERC from time to time. On the commissioning of the new transmission system DTL was to pay “the provisional transmission tariff in line with the tariff norms issued by CERC”. The tariff was subject to adjustment in terms of CERC notification. The wheeling for the transmission power was to be in terms of the CERC guidelines.

A survey was carried out in the business premises of DTL under Section 133-A of the Act. It was noticed that DTL had deducted tax at source (TDS) at 2% under Section 194C of the Act on the wheeling charges paid to PGCIL. The AO held that DTL was not only using the transmission system set up of PGCIL but also availing of other services from PGCIL “such as maintaining the delivery voltage, economic transmission, minimum loss of electricity in transmission of regular and uninterrupted supply etc., which are technical services”. According to the AO, “the value of these services cannot be bifurcated from the total value paid by the assessee to PGCIL for transmission services in the name of wheeling charges. The transmission lines could not be of any use in isolation and without other associated services the transmission of electricity could not have been possible”. Accordingly, the AO held that wheeling charges paid by DTL were fees for technical services liable for TDS u/s. 194J of the Act. The AO held that in terms of the CBDT circular the demand u/s. 201(1) would not be enforced but that would not affect the liability of DTL regarding interest under Section 201(1A) of the Act

Aggrieved by the AO’s order, DTL filed an appeal before CIT(A). The CIT (A), confirmed the said order of the AO. DTL then carried the matter further in appeal to the ITAT . The ITAT agreed with the DTL that what had been availed by it from PGCIL was not a technical service. It was held that DTL was not liable to be saddled with higher liability of TDS. The appeal was accordingly allowed. The ITAT based its opinion on the decision of this Court in CIT vs. Bharti Cellular Ltd. (2008) 220 CTR (Del) 258 and of the Madras High Court in Skycell Communications Ltd. vs. DCIT (2001) 251 ITR 53 (Mad). The ITAT noted that both the decisions laid emphasis on the involvement of a ‘human element’ for rendering technical services and imparting of technical knowledge. The ITAT held that none of those conditions were satisfied in the present case. While there might be supervision of transmission work by the technical personnel of the payee “there is no human intervention in so far as the assessee is concerned regarding the transmission”. It was further held that even if technical knowledge could be upgraded without “presence of human beings by way of handing over drawings and designs or a technical service can be rendered by robot (machines) without intervention of human element, the classification of the services rendered by the assessee as technical service is not free from doubt”.

The Hon’ble High Court observed that by virtue of the BPTA agreement between DTL and PGCIL there is transportation of the electricity from PGCIL to DTL, through the equipment and network required statutorily to be maintained by PGCIL through its technical personnel using technical expertise. This, however, does not result in PGCIL providing technical services to DTL. Therefore the wheeling charges paid by DTL to PGCIL for such transportation of electricity cannot be characterized as fee for technical service. The ultimate conclusion of the ITAT is therefore not erroneous. Accordingly the question framed by the Court was answered in the negative i.e., against the Revenue and in favour of the Assessee. The appeals were dismissed affirming the order of the ITAT.

The Revenue filed SLP before Supreme Court which was dismissed.

Additional Evidence – Sub-rule (3) of Rule 46AOpportunity of hearing should be provided, to the Assessing Officer to examine the additional documents – SLP Dismissed

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Trimline Vyapaar Pvt. Ltd. vs. CIT (2015) 378 ITR ( St) 34 ; [Affirmed CIT, Kolkata-III. vs. Trimline Vyapaar Pvt. Ltd.[2013] 370 ITR 373(Cal)]

The Assessing Officer completed the assessment u/s. 147/143(3) of the Act, principally, on the basis of information received about cash deposit. The AO had issued notice u/s. 133(6) of the Act to various parties however the same were returned with postal remark “ Not known”.

The assessee challenged the aforesaid orders, and preferred an appeal. The assessee contented that all the parties to whom notices u/s 133(6) were issued complied to the same and confirmed the transactions with the appellant company. The inspector also verified the transactions with their books of accounts. Thereafter, again the ITO issued notices u/s. 131 asking for the same details as were asked for in the notices issued u/s. 133(6) of the Act. Once again all the companies furnished replies giving full details of the transactions with the Assessee company.

The assessee in support of his aforesaid contention raised before the CIT (A) and the learned Tribunal filed various documents in order to show that each of the parties to whom notices under section 133(6) of the Act were issued by the Assessing Officer had duly replied to his queries and had also confirmed that they had purchased shares from the assessee and paid for the same in cash and also contended that these documents were also before the Assessing Officer.

The Revenue submitted before High Court that these documents were not before the Assessing Officer. They were documents relied upon and adduced by way of additional evidence by the assessee before the CIT (A) which he allowed to be taken on record without affording any opportunity, far less a reasonable opportunity, to the Assessing Officer to examine them and thereby violated sub-rule (3) of Rule 46A of the Income Tax Rules.

The assessee submitted that there is no question of any violation of sub-rule (3) because his client did not adduce any additional evidence. He added that, in any event, alleged violation of sub-rule (3) can only be made provided any additional evidence has been adduced. Additional evidence, according to him, cannot be adduced unless subrule (1) of Rule 46A of the Income Tax Rules is complied.

The High Court observed that the documents relied upon by the assessee before the appellate authority are not documents of the assessee. The findings recorded by the Assessing Officer could not have been upset by the CIT (A) without giving an opportunity to the former to explain, merely because the assessee took the stand that “all the parties to whom notices under section 133 (6) were issued complied to the same and confirmed the transaction”. The submission that there could be no violation of sub-rule (3) except in a case covered by sub-rule (1) of Rule 46A would make the situation worse. Sub-rule (1) of Rule 46A contemplates a case where the assessee himself wants to adduce evidence at the appellate stage. The assessee in the case before us wanted to rely, at the appellate stage, upon documents allegedly submitted by the noticees under sections 133(6) and 131 of the Act. All these noticees were third parties who according to the Assessing Officer did not respond and could not also be served. The alleged replies allegedly made by the third parties are not and could not have been in the possession or control of the assessee.

The High court held that the finding of the Tribunal was based on the inadmissible additional evidence adduced by the assessee before the CIT (A) and was perverse .

The appeal was thus allowed by the High Court. The Assessee filed SLP before Supreme Court which was dismissed.

Trust – forfeiture of exemption for breach of section 13(1)(d) – proviso to section 164(2) – levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption – It does not refer to the entire income being subjected to maximum marginal rate of tax – SLP Dismissed

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DIT. vs. Working Women’s Forum (2015) 378 ITR (St) 35 ; [Affirmed CIT vs. Working Women’s Forum [2014] 365 ITR 353(Madras)]

The assessee is a trust registered under section 12AA of the Income -tax Act, 1961, and is providing employment to poor women, assisting weaker sections of the society for personal development, maintaining destitute homes, rehabilitation of victim of national calamities, etc. Evidently, the assessee had invested a sum of Rs. 20,000 in the share of MIOT Hospitals Ltd. Since section 13(1)(d) recognises investment only in specified assets. Failure to invest in such specified business would disentitle the assessee for exemption. Consequently, the Assessing Officer passed an order denying the exemption under sections 11 and 12 of the Act. Aggrieved by this, the assessee went on appeal before the CIT(A) , who followed the decision of the Tribunal and decision of CIT vs. Tuluva Vellala Association in T.C. No. 477 of 1989, dated March 16, 1999, that only such part of the income which was violative of section 13(1)(d) could be brought to tax at the maximum marginal rate. Thus, the first appellate authority allowed the assessee’s appeals that the entirety of the income of the assessee could not be denied of exemption.

Aggrieved by this, the Revenue went on appeal before the Tribunal. The Tribunal rejected the Revenue’s appeals.

The Hon’ble High Court held that violation of section 11(5) read with section 13(1)(d) by the assessee would result in the maximum marginal rate of tax only on the dividend income on shares, which was not the recognised mode of investment and that the assessee would not be vested with marginal rate of tax on the entire income. Therefore, the income other than dividend income has to be taxed only to the extent to which the violation was found by the Assessing Officer. Under section 161(1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, then tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases show that the Legislature has clearly indicated its mind in the proviso to section 164(2) when it categorically refers to forfeiture of exemption for breach of section 13(1)(d), resulting in levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. The High court followed the decision of Bombay High Court in DIT (Exemptions) vs. Sheth Mafatlal Gagalbhai Foundation Trust : [2001] 249 ITR 533 (Bom.) and confirmed the order of the Tribunal, thereby rejected the Revenue’s appeals.

The Revenue filed SLP before Supreme Court which was dismissed.

Krupa D. Doshi vs. ACIT ITAT Mumbai `A’ Bench Before R. C. Sharma (AM) and Amarjit Singh (JM) ITA No. 2983/Mum/2013 A.Y.: 2009-10. Date of order: 10 May, 2016. Counsel for assessee / revenue: Vijay Mehta / Ms. Arju Goradia

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Section 22 – Charges for amenities which flow from the rental rent agreement itself and which amenities are an integral part of the property rented are to be charged under the head `Income from House Property’ and not `Income from Other Sources’.

FACTS
The assessee had let out office premises. He had entered into two separate agreements i.e. one for license fee and other for amenities. Rent was Rs. 50,25,000 and amenities charges as per amenities agreement dated 5.6.2006 were Rs. 36,00,000.

The amenities provided as per Annexure `A’ to the amenities agreement were – (1) to help in obtaining all the necessary licenses and the premises from BMC and other Government authorities; (2) liaison with local government authorities, BMC for smooth running of business of user; (3) liaison with electrical and water authorities for uninterrupted and smooth supply of water and electricity; (4) perform and carry out all the above listed work in a good workmanlike manner and to the best of amenities provider’s abilities; (5) separate entrance gate; and (6) open parking provision”.

The total of rent plus amenities charges i.e. Rs. 86,25,000 was offered by the assessee for taxation under the head `Income from House Property.

The Assessing Officer (AO) asked the assessee to show cause why receipts as per the amenities agreement should not be charged to tax under the head `Income from Other Sources’. The assessee submitted that since the premises could not be let without the amenities and therefore, the receipts under amenities agreement also are chargeable to tax under the head `income from house property’. The AO held that since the receipts under the amenities agreement were for specifically providing certain services to the tenant but not for letting out the premises, the same were taxable under the head `Income from Other Sources’. The AO taxed the sum of Rs. 36,00,000 under the head `Income from Other Sources’. Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal found that the nature of amenities provided flew out of the rent agreement itself. All the amenities were integral part of the property rented. It is not uncommon to provide these amenities along with the rented premises and it is not the case that these are provided as per the specific requirements of the tenants business. The Tribunal observed that keeping in view the nature of the rent agreement, the amenities provided by the assessee were to exploit the property in most profitable manner, and as the agreement itself states that they were provided for smooth running of the business of the user. The amenities provided were very basic and without which it would be impossible to use the premises, which are, supply of continuous water and electrical supply, parking, entrance and liasoning of the same. The fact that amenities were provided under a separate agreement would not make a difference. The Tribunal noted the ratio of the decision of co-ordinate Bench in the case of Narendra Gupta (ITA No. 3269/Mum/2013, order dated 3.2.2016). It also noted that the Bombay High Court has in the case of J K Investors (Bom) Ltd., 25 taxmann.com 12 held that where service charges are found to be profit under service agreement in respect of staircase of building, lift, common entrance and where these services were not separately provided but went along with occupation of the property, the amount received as service charges was a part of rent received and subjected to tax under the head `Income from House Property’. Since the amenities, in the present case, were an integral part of the rent, the Tribunal following the order of the co-ordinate bench and the Hon’ble jurisdictional High Court, held that the receipts under the amenities agreement are to be charged under the head `Income from House Property’.

The Tribunal allowed the appeal filed by the assessee.

Subhi Construction Pvt. Ltd. vs. ACIT ITAT Mumbai `E’ Bench Before B. R. Baskaran (AM) and Amit Shukla (JM) ITA No. 2318/Mum/2014 A.Y.: 2010-11. Date of order: 4 May, 2016. Counsel for assessee / revenue: Vimal Punmiya / A. K. Nayak

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Section 23 – While computing annual value of the property, municipal taxes of the property are to be deducted even though a part of the property has been let out.

FACTS
The assessee was owner of a commercial tower known as “Blue Wave”. The said property consisted of 8 floors of which 3 were let out to three different persons under different leave and license agreements. The assessee had shown rental income of Rs. 3,22,73,900 on letting of these floors. The municipal tax levied by the local authority in respect of the building was Rs. 1,10,30,098 which was paid by the assessee during the previous year. The assessee had recovered from tenants Rs. 55,77,635 towards municipal taxes. While computing the annual value the assessee deducted Rs. 54,22,365 (Rs. 1,10,30,098 minus Rs. 55,77,635 recovered from tenants and Rs. 30,098 being municipal tax not paid during the year).

The Assessing Officer (AO) observed that while only 3 floors were let out, property tax in respect of the entire building was claimed as a deduction. The AO asked the assessee to show cause why proportionate property tax attributable to the portion not let out should not be disallowed. The assessee submitted that all the floors of the building collectively constituted one single building and hence theory of slicing or proportion is not at all warranted and requested that the deduction claimed be allowed. The assessee, without prejudice to its contention that property tax of the entire building is allowable, submitted working showing property tax attributable to each floor in the building.

The AO noted that the assessee has entered into 3 different agreements with 3 different parties and the license fees is different in respect of each of the floors let out and also because assessee has rented the office premises by slicing it into different floors to different parties, property tax in respect of floors lying vacant cannot be claimed against floors let out. He held that the working filed by the assessee was not proper. Therefore, he held property tax allowable to be 3/8th of the property tax of the entire building. He disallowed the claim of property tax to the extent of Rs. 33,88,879.

Aggrieved, the assessee preferred an appeal to the CIT(A) who held that the proportionate disallowance has to be worked out as per details of municipal tax actually levied in respect of each of the floors. He directed the AO to restrict the disallowance to Rs. 10,12,604 in place of Rs. 33,88,979.

Aggrieved by the order of CIT(A), both the parties preferred an appeal to the Tribunal.

HELD
The Tribunal observed that a perusal of provisions of section 23 show that while determining the annual letting value of the property, the fact as to whether it is wholly let or partially let is to be considered. However, proviso to section 23 of the Act provides for deduction of taxes levied by any local authority “in respect of the property” shall be deducted in determining the annual value of the property of that previous year in which taxes are “actually paid”. It noted that the reference is to “the property” and not to “whole or any part of the property”. It also noticed that the municipal taxes have to be deducted in the year of payment, even though, it may relate to any of the years. Thus, the importance is given to the “year of payment”, whether or not it pertains to the year in which the property income is assessed.It observed that even though the provisions of section 23(b) and 23(c) make a reference to “any part of property”, yet what is relevant is whether the amount of actual rent received or receivable by the owner is in excess of the sum referred to in section 23(a) of the Act.

The Tribunal held that the question of apportionment of rent / municipal taxes may arise only if it is shown that each floor of the property is a distinct and separate property which it observed was not the case in the facts before it. The copies of municipal tax receipts showed that BMC had given a single number to the impugned property and hence BMC also was considering the entire building as a single property. The Tribunal found merit in the contention of the assessee and held that the authorities were not justified in making proportionate disallowance of municipal taxes actually paid by the assessee.

The Tribunal allowed the appeal filed by the assessee and dismissed the appeal filed by the Revenue.

Shyam Mandir Committee, Khatushyamji vs. ACIT ITAT Jaipur Bench Before T. R. Meena (AM) and Lalit Kumar (JM) ITA No. 651/Jp/2013 A.Y.: 2007-08. Date of order: 2 June, 2016. Counsel for assessee / revenue: Mahendra Gargieya / S. K. Jain

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Section 12A – The proviso to section 12A(2) has retrospective application and has been inserted in the Act to remove the hardship of the charitable trusts / institutions.

FACTS
On 4.3.1986, the assessee trust was registered and started doing its activities. The primary activity of the trust was to look after, manage and admister the affairs of the famous temple of Lord Shyamji at Khatushyamji. Various gulaks/hundies were kept in the temple for collecting the donations, etc. The Trust applied for exemption under section 12AA vide its application dated 16.3.2009. Vide order dated 28.1.2010, the Tribunal in ITA No. 789/ Jp/2009 directed grant of registration to the assessee trust w.e.f. 1.4.2008.

For AY 2007-08, the assessee filed its return of income on 28.1.2008, in response to notice u/s. 148. The return was processed on 12.3.2010 and assessment was completed under section 143(3) r.w.s. 147 on 26.12.2011. The AO taxed a sum of Rs. 2,08,00,000 and rejected the contention of the assessee that it was a capital receipt not chargeable to tax since it was an unregistered trust.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that the receipts of Rs. 2,08,00,000 represented income of the assessee trust u/s. 2(24) and 115BBC of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal where it took an additional ground viz. that the action taken under section 147/148 is bad in law and without jurisdiction and being void ab-initio the assessment be quashed which was admitted by the Tribunal.

HELD
The Tribunal noted that the Finance Act No. 2 of 2014 has inserted the proviso to sub-section (2) of section 12A w.e.f. 1.10.2014. A reading of the said proviso provides that if at the time of grant of registration u/s. 12A, the assessment proceedings are pending before the AO and the object and activities of the trust remain the same for such preceding years, then the benefit of registration for sections 11 & 12 are required to be given to the trust on the income derived from the property held in the trust.

The Tribunal noted that the assessee had filed application for grant of registration on 16.3.2009 and registration was directed to be granted by the order of the Tribunal w.e.f. 1.4.2008. The return of income was processed u/s. 143(1) on 13.3.2010 and the assessment order was passed on 26.12.2011 u/s. 143(3) read with section 147 of the Act. Thus, when the order was passed by the Tribunal on 28.1.2010 the assessment proceedings were pending before the AO. Therefore, it held that the benefit of registration is required to be given for the preceding assessment year i.e. AY 2007-08.

The Tribunal held that the proviso to sub-section (2) of section 12A has retrospective application and has been inserted in the Act to remove the hardship of charitable trusts / institutions. It held that in the present case when registration was granted on 5.3.2010 w.e.f. 1.4.2008, the assessment proceedings for AY 2007-08 were pending before the AO. Therefore, the assessee cannot be treated as an AOP and was required to be treated as a registered trust under section 12A of the Act. The Tribunal concurred with the decision of the co-ordinate bench in the case of SNDP Yogam vs. ADIT(Exemption) in ITO NO. 503 to 506 & 569/Coch/2014 where the co-ordinate Bench had given benefit of registration of trust for AY 2006-07 though the application for registration was granted on 29.7.2013. Following the said judgment it held that the assessee was to be treated as a registered trust for AY 2007-08 dehors the direction issued by the Tribunal to grant the registration w.e.f. 1.4.2008, in the light of the new amendment.

The Tribunal observed that since it has held that the assessee is required to be treated as registered trust w.e.f. 1.4.2007, the second proviso to section 12A(2) applies and the reopening u/s. 147/148 is not permissible. The Tribunal held that reopening made was ill founded and not in accordance with law. It decided the ground in favor of the assessee.

The appeal filed by the assessee was allowed.

J M Financial & Investment Consultants Pvt. Ltd. vs. DCIT ITAT Mumbai `J’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No.: 92/Mum/2012 A.Y.: 2008-09. Date of order: 11 May, 2016. Counsel for assessee / revenue : Dr. K. Shivram / Shabana Parveen

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Section 14A, Rule 8D – While computing amount of
average investment as per rule 8D, strategic investment is not to be
taken into account.

Section 48 – Interest on borrowings
utilized for application of shares is allowable as deduction while
computing capital gains if the same has not been claimed as revenue
expenditure.

FACTS I
The assessee in its return
of income had offered a sum of Rs. 40,000 as disallowance in respect of
expenditure incurred for earning tax free income. In the course of
assessment proceedings, on being asked by the Assessing Officer (AO) to
furnish a computation, the assessee furnished working of disallowance as
per rule 8D. The AO did not reject the amount of disallowance offered
by the assessee. The AO while computing the amount of disallowance under
section 14A did not exclude investment of Rs. 46,86,46,983 in the group
concerns being strategic investments since the said concerns were
subsidiaries or group concerns of the assessee.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD I
The
Tribunal noted that while computing the disallowance under Rule 8D, the
AO has not excluded amount of strategic investment while computing
average investment as per Rule 8D. It observed that as per the ratio of
the decision of Delhi Bench of ITAT in the case of Interglobe
Enterprises Ltd. (ITA NO. 1362 & 1032/Del/2013, order dated
4.4.2014) and the decision of Mumbai Bench of the Tribunal in the case
of Garware Wall Ropes Ltd., strategic investment is not to be taken into
account. Following the ratio of these decisions, the Tribunal restored
the matter to the file of the AO and directed the AO to recompute the
disallowance under rule 8D after excluding strategic investment out of
average investment so made by the assessee.

The Tribunal allowed this ground of appeal filed by the assessee.

FACTS II
The
assessee applied for allotment of shares of Cairn India Ltd by
utilizing monies raised by way of borrowings from DSP Mutual Fund. It
paid interest of Rs. 2,57,97,463 on the borrowings utilized for the
purpose of allotment of shares of Cairn India Ltd. Upon allotment, the
shares were sold and short term capital gain was computed. While
computing the short term capital gain the assessee claimed interest as
part of cost of shares sold and therefore, reduced it from sale
consideration to arrive at capital gains. In the tax audit report, the
auditor had classified this expenditure as capital expenditure. This
expenditure was not claimed by the assessee either as business
expenditure or u/s. 57 but was added to the cost of shares allotted.

The
AO rejected the claim of the assessee by holding that the said
expenditure can be claimed only u/s. 57 but it is disallowable since
dividend income is exempt. He held that the said expenditure is not
allowable while computing short term capital gain.

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

Aggrieved,
the assessee preferred an appeal to the Tribunal. Before the Tribunal,
the assessee relied upon the ratio of the following decisions –

a) DCIT vs. Finav Securities Pvt. Ltd. (ITA No. 1010/ Mum/2011; Bench `F’, Order dated 3rd April, 2013);

b) ITO vs. Global Assets Holding Corporation Ltd. (ITA No. 4738/Mum/2010; Bench `G’, order dated 27th July, 2011);

c) Pratibha Paliwal vs. ACIT 11 ITR (Trib) 586 (Del);

d) S. Balan alias Shanmugam vs. DCIT (2009) 120 ITD 469 (Pune);

e)
DCIT vs. KRA Holding & Trading (P.) Ltd. 54 SOT 493 (Pune) –
Portfolio management fees paid by the assessee was to be allowed as
deduction while computing capital gains arising from sale of shares;

f) CIT vs. Sri Hariram Hotels P. Ltd. (2010) 325 ITR 136 (Karn);

g) Smt. Neera Jain vs. ACIT (ITA No. 1861/Mum/2009; decided on 22.2.2010).

HELD II
The
Tribunal upon consideration of the facts and having deliberated on the
judicial pronouncements relied upon by the assessee found that the
assessee has not claimed interest as revenue expenditure but the same
has been capitalized. It held that in view of the judicial
pronouncements relied upon by the assessee, interest expenditure is to
be considered as cost of acquisition of shares / cost of improvement,
therefore, allowable while computing capital gain under section 48 of
the Act. The Tribunal directed the AO to allow assessee’s claim of
interest u/s. 48 of the Act.

The Tribunal allowed this ground of appeal filed by the assessee.

[2016] 158 ITD 480 (Mumbai Trib.) Siemens Nixdorf Informationssysteme GmbH vs. DDIT (International Taxation) A.Y.: 2002-03 Date of order: 31 March, 2016

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Section 2(14) – a non-resident company, gavea loan to its wholly owned subsidiary which constituted property – in sense it is was an assetwhich a person could hold and enjoyand not covered by exclusion clauses set out in section 2(14), it was required to be treated as a ‘capital asset’ and consequently any loss arising on sale of said asset, would be treated as short term capital loss.

FACTS
The assessee, a non-resident company, had given loan to its wholly owned subsidiary in India as its subsidiary had run into serious financial troubles and there was also a proposal to wind up the said subsidiary. The assessee sold the debt, that it had given to its subsidiary, Siemens AG, for a less consideration and claimed the short term capital loss on this transaction of sale of book debt.

The AO disallowed the deduction of capital loss on the basis of the reasoning that

a. the assessee’s right to recover the loan of Euro 90,00,000 from its subsidiary was not a capital asset u/s. 2(14);

b. the assignment of this debt, or the right to recover the money from subsidiary, was not a transfer u/s. 2(47);

c. even going by the valuation report, what was recoverable was part of said sum i.e. Euro 7,31,000 only and what was not recoverable could not be transferred either; and

d. it was a sham transaction only with the tax motives since the advance to the subsidiary was in the capital field and a capital loss was not allowed as deduction.

The CIT-(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
The advance given by the assessee to its subsidiary was a property, in the sense it was an interest which a person could hold and enjoy. Section 2(14) defines a ‘capital asset’ as ‘property of any kind held by an assessee, whether or not connected with his business or profession’ except as specifically excluded in the said section. So far as business assets are concerned, the exclusion is only for ‘(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession’.

Thus the said advance was required to be treated as a ‘capital asset’.

Unless the amount due is treated as a capital asset, there was obviously no question of the short term capital loss. As a matter of fact, it was not even the case of the revenue, and rightly so, that the debt was not a capital asset. As regards CIT-(A)’s observation to the effect that ‘a loan is a current asset and not a capital asset’, it was pointed out that the concept of ‘current asset’ is alien to the law on taxation of capital gains, or, for that purpose, to the law on taxation of income. The expression ‘capital asset’ is a defined expression u/s. 2(14) and, even though it may be more appropriate to describe an advance, a debt or a recoverable amount as a ‘current asset’ from an accountant’s perspective or from any other perspective, as long as such an advance, debt or recoverable amount satisfies the requirements of section 2(14), it will have to be treated as a ‘capital asset’ for the purposes of computation of capital gains.

As regards the CIT-(A)’s observations that the assessee did not have a PE in India, that the assessee was not carrying out any business in India and that the assessee was not required to file a return of income in India, there is no relevance or basis in these observations. The capital asset was the money recoverable from an Indian entity which was thus essentially required to be treated as in India, and, as was mandate of section 9(1)(i) any income, inter alia, ‘through the capital asset situated in India’ is deemed to accrue or arise in India. As a corollary to this taxability of income, the loss through the capital asset situated in India is also required to be taken into account. The authorities below were, in determining whether or not the amount recoverable from an Indian entity was a capital asset u/s. (14), swayed by the considerations which were not germane in this context

Section 2(47)(i) provides that ‘transfer, in relation to a capital asset, includes: sale, exchange or relinquishment of the asset’. Therewas no dispute that all the rights to recover the money from the Indian entity, which was what the capital asset was in this case, was sold to Siemens AG for a consideration of Euro 7,31,000. The sale of trade debts, or even loans, is a part of day to day trade and commerce. The CIT-(A) has not even raised any issues on this aspect of the matter.

As for the vague allegations about the tax evasion motive, nothing cogent has been brought on record at all. The authorities below were in error in fighting shy of the tax corollaries of a legally valid commercial transaction, without bringing on record any material to disprove its bona fides or to show that it’s a sham transaction, just because of their apprehensions about tax motives of the transaction. Just because a transaction results in a tax benefit, unless it is a sham transaction, it cannot be ignored.

There is also no dispute that if the capital loss was to be allowed, the loss had to be short-term capital loss.

In view of the above discussions, as also bearing in mind entirety of the case, the AO was directed to allow the shortterm capital loss.

[2016] 70 taxmann.com 265 (Chandigarh – Trib.) Sanjeev Aggarwal vs. DCIT A.Y.: 2011-12 Date of order: 25 May, 2016

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Sub-section 143(2), 147, 292BB – Failure to
issue notice u/s. 143(2) could not be cured by resorting to deeming
fiction under section 292BB.

FACTS
The assessee had
filed its return of income on 14.8.2011 declaring total income of Rs.
30,10,400 which was processed u/s. 143(1) on 12.10.2011 and subsequently
the case was reopened after recording reasons on 18.3.2014 and notice
u/s. 148 was issued and duly served on the assessee on 25.3.2014. In
response, the assessee vide his letter dated 25.6.2014 submitted that
the original return of income filed by him may be treated as a return
filed in response to notice issued u/s. 148 and requested for reasons
recorded for reopening the assessment which were provided to the
assessee vide letter dated 27.6.2014. Notice dated 25.9.2014 was issued
u/s. 142(1) of the Act along with detailed questionnaire. After a
detailed discussion the Assessing Officer (AO) passed an order dated
31.12.2014 u/s. 147 r.w.s. 143(3) of the Act assessing the total income
to be Rs. 1,42,64,299.

Aggrieved, the assessee preferred an
appeal to the CIT(A) where it took a legal ground that assessment
completed by the AO needs to be quashed and declared to be null and void
since no notice u/s. 143(2) of the Act was issued. The CIT(A) held that
since the assessee had appeared in the assessment proceedings, by
virtue of provisions of section 292BB it is deemed that the notice
required to be served on the assessee was duly served on him in time.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The
Tribunal noted that it is undisputed that the notice under section
143(2) of the Act was not issued by the AO. Therefore, the only issue
before it was whether in the absence of issue of notice under section
143(2) of the Act, the assessment framed u/s.147 r.w.s. 143(2) of the
Act is valid in the background of provisions of section 292BB of the
Act.

The Tribunal on perusal of section 292BB concluded that
section 292BB talks about only the situation where the assessee raises
the issue of non-service of a notice and still co-operates with the
Department. Otherwise also, it stated that the issuance of statutory
notice cannot be dispensed with by the co-operation of the assessee. It
concurred with the assessee that the judgment of Punjab & Haryana
High Court has in the case of CIT vs. Cebon India Ltd. (2012) 347 ITR
583 (Punj. & Har.) has held that the absence of a statutory notice
cannot be cured u/s. 292BB of the Act.

As regards the contention
of the revenue that the provisions of section 148 constitute a complete
code by itself, the Tribunal held that the provisions of section 148 of
the Act itself negate the view taken by the revenue. It observed that
once the assessee files return in pursuance of notice u/s. 148 of the
Act, which is deemed to be filed u/s. 139 of the Act and in case the AO
wants to proceed with the return filed by the assessee, he has to issue a
notice u/s. 143(2) of the Act. Any assessment framed without issue of
notice u/s. 143(2) of the Act, suffers from jurisdictional error. This
position of law has also been clarified by the Delhi High Court in the
case of Alpine Electronics Asia Pte Ltd. vs. DGIT (2012) 341 ITR 247
(Delhi).

In view of the above, the Tribunal quashed the order of
the AO since it was made without issue of notice u/s. 143(2) of the
Act.

This ground of appeal filed by the assessee was allowed.

[2016] 70 taxmann.com 261 (Pune- Trib.) S. R. Thorat Milk Products (P.) Ltd. vs. ACIT A.Ys.: 2004-05, 2005-06, 2007-08 to 2009-10 Date of order: 20 May, 2016

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Sub-section 36(1)(iii), 37 – Interest paid on share application money pending allotment would be allowable as a revenue expenditure. Share application money per se cannot be characterized and equated with share capital. Obligation to return the money is always implicit in the event of non-allotment of shares in lieu of share application money received.

FACTS
The assessee, a closely held company, engaged in the business of processing of milk and manufacturing of milk products, had in its return of income for assessment year 2004-05 claimed interest expense of Rs. 23,04,273 on account of interest paid on share application money received from existing shareholders pending allotment. Similar expense was claimed in other assessment years.

The Assessing Officer (AO) was of the view that the expenditure cannot be allowed under section 37 since it is a capital expenditure and it cannot be allowed u/s. 36(1) (iii) since the ingredients of borrowing by the assessee as also a positive act of lending by one and expense thereof by the other, coupled with an obligation of refund or repayment thereof were not present when the interest is paid on receipts in the nature of share application money. The AO disallowed the interest claimed to have been paid at the rate of 12% per annum.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the issue is squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Rohit Exhaust Systems (P.) Ltd. in ITA No. 686/PN/2011 and others, order dated 5.10.2012. In view of the decision of the co-ordinate bench, the Tribunal held that the share application money per se cannot be characterized and equated with share capital. The obligation to return the money is always implicit in the event of non-allotment of shares in lieu of the share application money received. Allotment of a share is subject to certain regulations and restrictions as provided under the Companies Act. Therefore, receipt by way of share application money is not receipt held towards share capital before its conversion (sic allotment). Therefore, payment of interest on share application money cannot be treated differently in the Income-tax Act. Once the contention of the assessee that the money has been utilized for the purpose of business remains uncontroverted, there is no justification to hold the issue against the assessee. The Tribunal directed the AO to delete the addition on merits.

The Tribunal allowed the appeals filed by the assessee.

[2016] 70 taxmann.com 389 (Raipur) ACIT vs. Jindal Power Ltd. A.Y.: 2008-09 Date of order: 23 June, 2016

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Section 37, Explanation 2 to section 37 – Voluntary expenses incurred, prior to 1.4.2015, on corporate social responsibility are deductible. Explanation 2 to section 37(1) inserted with effect from 1.4.2015 providing that expenditure incurred on corporate social responsibility referred to in Companies Act, 2013 shall not be deemed to be an expenditure incurred for purpose of business or profession does not have retrospective effect.

FACTS
The assessee had in its return of income claimed a sum of Rs. 24,45,435 on account of expenses incurred on discharging corporate social responsibility. This expenditure mainly related to expenses incurred on construction of school building, devasthan / temple, drainage, barbed wire fencing, educational schemes and distribution of clothes, etc voluntarily. The Assessing Officer (AO) disallowed this expenditure on the ground that it was incurred voluntarily, and was not for business purpose.

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.

HELD
As regards the contention of the AO that the expenditure is voluntary and not mandatory, the Tribunal held that as long as the expenses are incurred wholly and exclusively for the purposes of earning the income from business or profession, merely because some of these expenses are incurred voluntarily, i.e. without there being any legal or contractual obligation to incur the same, those expenses do not cease to be deductible in nature.

As regards the contention on behalf of the revenue that the provisions of Explanation 2 to Section 37(1) be regarded as clarificatary in nature, the Tribunal held that the Explanation refers only to such corporate social responsibility expenses which fall under section 135 of the Companies Act, 2013, and as such, it cannot have any application for the period not covered by this statutory provision which itself came into existence in 2013. Explanation 2 to section 37(1) was held to be inherently incapable of retrospective application any further. The Tribunal also noted that the amendment in the scheme of section 37(1) is not specifically stated to be retrospective and the said Explanation is inserted only with effect from 1.4.2015 and in this view of the matter also, there is no reason to hold this provision to be retrospective in application.

The Tribunal observed that the amendment in law, which was accompanied by the statutory requirement with regard to discharging the corporate social responsibility, is a disabling provision which puts an additional tax burden on the assessee in the sense that the expenses that the assessee is required to incur, under a statutory obligation, in the course of his business are not allowed as deduction in computation of income. This disallowance is restricted to the expenses incurred by the assessee under a statutory obligation under section 135 of the Companies Act, 2013 and there is thus now a line of demarcation between the expenses incurred by the assessee on discharging corporate social responsibility under such a statutory obligation and under a voluntary assumption of responsibility. As for the former, the disallowance under Explanation 2 to section 37(1) comes into play, but, as for latter, there is no such disabling provision as long as the expenses, even in discharge of corporate social responsibility on voluntary basis, can be said to be “wholly and exclusively for the purposes of business”. The Tribunal observed that there is no dispute that the expenses in question are not incurred under the aforesaid statutory obligation. For this reason also, as also the basic reason that the Explanation 2 to section 37(1) comes into play with effect from 1st April, 2015, the Tribunal held that the disabling provision of Explanation 2 to section 37(1) does not apply to the facts of the case.

This ground of appeal of the revenue was dismissed.

Deduction u/s. 10A- Export turnover – Allowable Expenditure- telecommunication and insurance expenses have been incurred in local currency in India and not with regard to providing software services outside India: Explanation (2) to Section 10A

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CIT vs. 3D PLM Software Solutions Ltd. [ Income tax Appeal no 46 of 2014, 110 of 2014 & 112 of 2014 dt : 09/06/2016 (Bombay High Court)].

[3D PLM Software Solutions Ltd vs. ITO, Range-10(2) (1). [ITA Nos. 4538/MUM/2010, 5839/MUM/2010, 123/ MUM/2011, 178/MUM/2012 ; Bench : D; dated 03/07/2013; A Y: 2005- 2006, 2006-2007, 2007-2008. Mum. ITAT ]

The assessee was engaged in the business of software development and filed the return of income declaring the total income of Rs. 18,65,361/-. As a result of scrutiny assessment assessed income of the assessee was determined at Rs.39,05,180/-.

The AO invoked the provisions of Explanation (2) to section 10A of the Act and proposed to adjust the Export Turnover (ETO ) qua the insurance and telecommunication expenses for the purpose of computing the deduction u/s 10A of the Act. The AO held that the insurance expenses of Rs. 14,37,288/- and communication expenses of Rs. 41,96,206/- were not to be reduced from the Export Turnover for computing the deduction u/s 10A of the Act.

The assessee submitted that for downward revision of the ETO , the expenses are in the nature of freight telecommunication charges or insurance must be attributable to the export of computer software and only then such expenditure can be reduced from the export turnover.

Further, he explained that no such expenditure is required to be reduced in this case for the reason that expense on telecommunication and insurance expenses incurred for software development were not incurred in foreign exchange attributable to the delivery of stocks outside India. Assessee also explained that the said expenditure was incurred in local currency for carrying on day-to-day software development work from the locations within India. As per the assessee, these expenses are not attributable to export of computer software outside India. Therefore, the export turnover need not be adjusted qua telecommunication expenses.

On considering the submissions of the assessee, CIT(A) appreciated that the impugned expenses were not incurred outside India and they are attributable to the delivery of articles within India. He also appreciated the fact that while making disallowance, AO should have come to a clear finding as to why the telecommunication and insurance expenses were attributable to the said computer software outside India. On the above said facts, CIT (A) granted relief to the assessee.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal . The Tribunal observed that the issue for adjudication relates to the applicability of the provisions of clause-(iv) to the Explanation-2 to section 10A of the Act. Clause (iv) provides for definition of “export turnover”.

The Tribunal held that the export turnover means consideration in respect of the export received by the assessee in convertible foreign exchange. But it does not include freight telecommunication charges or insurance attributable to the delivery of the stocks outside India or expenses incurred in foreign exchange in providing technical services outside India. Thus, the expenses incurred in local currency in India on account of telecommunications and insurance are outside the scope of the above said definition given in clause-(iv). . Therefore, grounds raised by the Revenue was dismissed.

The Revenue filed an appeal before High Court. The Hon. High court found that the Assessing Officer has in the order not given any finding with regard to assessee’s contention that this expenditure had been incurred only in India and not with regard to export of software outside India. The CIT (A) as well as the Tribunal have rendered finding of fact that this telecommunication and insurance expenses have been incurred in local currency in India and not with regard to providing software services outside India. This concurrent finding of fact has not been shown to be perverse in any manner. On the above finding of fact, it is evident that exclusion part of Explanation 2(iv) of section 10A of the Act will not apply to the present facts. Therefore , the question raised by revenue does not give rise to any substantial question of law. Accordingly appeal was dismissed.

Res – judicata – Not apply in tax matter – Each assessment year gives rise to a separate cause of action: Capital Gain or business income – Sale of Shares

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Veena S. Kalra vs. The Assistant Commissioner of Income tax & anr. [ Income tax Appeal no 2437 of 2013 dt : 07/06/2016 (Bombay High Court)].[ACIT- Circle 16(1) vs. Veena S. Kalra. [ITA No. 2403/MUM/2012 ; Bench : F ; dated 10/07/2013 ; A Y: 2008- 2009. Mum. ITAT ]

The assessee is an individual and filed the return declaring the total income of Rs. 3.16 crore. Assessee is engaged in the business of dealing in derivatives and F&O. The return was revised u/s 139(5) of the Act making downward revisions of his income to Rs. 2,78,55,600/-. In the revised return of income, assessee made a significant revision qua the STCG from Rs. 2,54,92,016/- to Rs 2,17,24,104/-. Thus, as per the revised return of income, STCG was Rs.2,17,24,104/-; income from other sources is Rs.1,70,071/-; business income was Rs. 60,03,269/-. The dividend income declared was Rs. 9,68,732/- and the LTCG was Rs. 8,65,373/-. During the assessment proceedings, AO raised the issue of treating the STCG as business income of the assessee. Assessee submitted the following reply which is as under:

(a) All investments had been made from own funds, and there were borrowed funds

(b) She had earned dividend as well as LTCG, which show the intent

(c) In the AY 2006-07 & 2007-08, the assessee had returned STCG as well as LTCG and classified her share holdings as “investment” and not as “Stock in Trade”. An investment register was maintained on FIFO basis.

(d) The total number of scrips were 31, number of purchase transactions were 70 and sale were transactions 104. Number of days on which transactions took place are less than 150. Therefore, the activity could not be termed as trading.

AO reasoned that the assessee, who wasalready in the business of dealing in shares, derivatives, Futures & Options and dealt with the common scrips qua the capital gains transactions, is only segregated certain shares/ business profits as short term Capital Gains for the benefits of the tax rate. Further, he distinguished the decision relied upon by the assessee. Finally, relying on the decision of the Tribunal in the case of Smt. Harsha N Mehta vs. DCIT in ITA No.1859/Mum/2009, dated 17.7.2010 and also keeping in view the contents of Circular No.4/2007 of the CBDT, dated 15.6.2007, AO treated the impugned STCG of Rs. 2,17,24,104/- as business income of the assessee.

In appeal, the CIT(A) sustained the order of the Assessing Officer to the extent of Rs.21.50 lakh holding that the same was assessable as business income in respect of 11 scrips as the assessee had re-entered the same after selling it. However, the balance amount of Rs.1.96 crore was held to be as short term capital gain.

The Revenue carried the issue in appeal to the Tribunal. The Tribunal on a detailed analysis of the transactions which were carried out by the assessee concluded that for the subject AY , the entire amount of Rs.1.96 crore is also to be brought to tax under the head ‘business income’. Thus, the entire amount of Rs.2.17 crore i.e. Rs.21.50 lakh + Rs.1.96 crore was to be brought to tax as business income. The Tribunal held that the intention of the assessee while doing business in shares was to make quick profit and not hold the shares as investment. It was observed that during the subject AY the assessee had purchased shares valued at Rs.25.37 crore and sold shares valued at Rs.28.92 crore. Thus indicating that what was purchased during the year had been sold in its entirety during the same year. The stock turnover ratio and capital turnover ratio is recorded in the order at 1:16 and 1:10 during the subject AY . On these facts, the Tribunal allowed the Revenue’s appeal treating the entire amount of Rs.2.17 crore as income from trading in shares i.e. business income.

Being aggrieved , the assessee filed a appeal before High Court. The contended that for the earlier and subsequent AY ’s the Revenue has accepted the assessee’s claim of trading in shares as being an action of investment resulting in short term capital gains. Thus, invoking the decision of this Court in CIT vs. Gopal Purohit 336 ITR 287 it was submitted that consistency has to be followed and in this year also the profits made on account of purchase and sale of shares should be taxed under the head ‘short term capital gain’.

The Hon. High Court held that the order of the Tribunal has elaborately dealt with the contention of the assessee that as for the earlier and subsequent AYs profits arising on account of purchase and sale of shares has been classified as short term capital gains, the same should be done in the subject AY . The Tribunal on analysis of the facts noticed that the facts in the subject AY are different from the facts in the earlier and subsequent AY ’s. Particularly the number of transactions in shares were in single or double digits in the years sought to be compared while transactions of purchase and sale of shares is of the magnitude of 346 transactions in the subject AY . Further differences in facts was also brought out in a chart in the impugned order on 13 parameters between the subject AY and the earlier and subsequent AY ’s. In these circumstances the order was upheld . It was further held that the rule of consistency would not apply in the present case as there was a change in facts existing in the subject AY . In fact the decision in the case of Gopal Purohit (supra) relied upon by the assessee itself proceeds on the basis of no change in facts and circumstances in the two years. It is a settled principle of law that res judicata does not apply in tax matters However, as held by the Apex Court in BSNL vs. Union of India 282 ITR 273 the orders passed in the earlier AY s are generally accepted and followed not on the basis of principle of res judicata but on the doctrine of precedence so as to ensure that on identical facts in the absence of change in law the Revenue is bound to follow the view taken earlier.

Thus, the Appeal of assessee was dismissed.

Search and seizure- Limitation for assessment- Period reckoned from date of conclusion of search- Restraint order not extended and no action taken pursuant to search after three months- Search to be taken to have been concluded on expiry of restraint order- Visit of officers to assessee’s premises two years later to record conclusion of search not material- Period of limitation to pass assessment order not to be reckoned from such date- Assessment barred by limitation

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CIT vs. Ritika Ltd.; 284 ITR 434 (Cal):

Pursuant to a search and seizure in the premises of the assessee, a restraint order was issued on October 15, 1998 for a period of sixty days which was later extended for another thirty days upto January 15, 1999. Thereafter it was not extended. On November 21 2000, the Department called on the assessee at his premises for the purpose of recording that the search was at an end. Thereafter assessment order was passed after January 2001. The Department took the view that the period of limitation of two years commenced from November 21, 2000 and therefore the assessment order is passed within the period of limitation. The Tribunal held that the period of limitation of two years for passing assessment order was to be reckoned from 15th January 1999 and not from 21st November 2000 and accordingly the assessment order was passed beyond the period of limitation.

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

“i) The Tribunal’s order was unimpeachable. The restraint order was not extended by the Department after January 15, 1999, which meant that the search was also abandoned and had ended. The search did not stand revived when the officers of the Department called at the house of the assessee merely for the purpose of recording that the search was at an end almost after two years.

ii) The order of assessment was passed beyond the limitation period of two years after conclusion of the search and hence was invalid.”

Return of loss- Section 139(1), (3) of I. T. Act, 1961- A. Y. 2010-11- Delay of one day in filing return satisfactorily explained by assessee- Assessee not to be denied carry forward of loss- direction to CBDT to accept return of assessee-

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Regen Infrastructure and Services Pvt. Ltd. vs. CBDT; 384 ITR 407 (Mad):

For the A. Y. 2010-11, the last date for filing returns was extended to October 15, 2010.The assessee filed return of loss on the last day i.e. October 15, 2010. The uploading was delayed by a few hours due to a technical snag. The Assessing Officer took the date of filing as October 16, 2010 but did not treat it as a belated return and passed an assessment order u/s. 143(3) of the Income-tax Act, 1961, allowing the claim to carry forward loss. The Commissioner issued a show cause notice u/s. 263 of the Act stating that the benefit of carry forward of losses allowed to the assessee was erroneous and prejudicial to the Revenue due to the assessee’s delay in filing the return. The assessee filed an application to the CBDT for condonation of delay of two hours due to which the date of filing was reckoned as October 16, 2010. CBDT rejected the application on the ground that there was no justifiable reason to condone the delay.

The Madras High Court allowed the writ petition filed by the assessee and held as under:

“i) When the assesee was entitled to claim the carry forward of loss u/s. 139(3) of the Act, it could not have been stated that the delay in filing the return had occurred deliberately on account of culpable negligence or on account of mala fides. Mere delay ought not to have defeated the claim of the assessee. When the delay was satisfactorily explained by the assessee, the approach of the CBDT should have been justice oriented so as to have advanced the cause of justice and the delay should have been condoned.

ii) The CBDT is directed to accept the return filed by the petitioner company for the A. Y. 2010-11 u/s. 139(1) of the Act.”

Disgorgement of profits – profits made in violati on of SEBI directions vs. profits made in violation of law

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SEBI has passed an order dated 16 June 2016 in the case of Beejay Investment & Financial Consultants Private Limited and others that has interesting implications. SEBI now has power to forfeit profits made through illegitimate transactions in securities markets. Generally, SEBI directs that such illegitimate profits made by parties through price manipulation, insider trading, etc. should be forfeited.

In the present case, however, there is an interesting twist. To put it simply , in this case, the profits were made in the ordinary course of business. Hence, the profit made can be said to be legitimate. However, the transactions were carried on during a time when SEBI had debarred the parties from carrying on such transactions. SEBI ordered forfeiture of such profits.

Background of case
The rationale behind forfeiting (i.e., disgorging) of illegitimate profits needs discussion. SEBI often finds manipulations and other illegalities in the securities market. Profits made are illegitimate or losses are avoided. Such profits are usually made at the cost of persons such as investing public, the company, etc. The credibility of markets also suffers. SEBI has considerable powers to penalise and prosecute such persons. It also has powers to issue directions such as ordering such persons not to access the capital markets, not to trade in such markets, suspend/cancel registration of intermediaries, etc. The monetary penalty can be a multiple of such profits.

However, a question arises about the profits made by such persons through such wrong doings. Clearly, allowing them to retain such profits would be allowing them to keep the rewards of their wrongful acts. Thus, irrespective of other actions taken, it is in fitness of things that such profits are taken away from the wrong doers. Such forfeiture is called disgorgement. At one time, there were two views whether SEBI had power to disgorge such profits. However, a recent amendment has clarified that SEBI has and did have the power to disgorge profits and issue directions restricting their operations.

For example, a person may buy shares of a company at a low price, manipulate the share price of the company by various means to a higher level, and then sell the shares to unsuspecting investor. Such profits are clearly illegitimate. SEBI thus requires power to disgorge these profits. This is of course apart from other adverse action SEBI would take. For example, one such other adverse action is debarring such a person from dealing in securities markets for a specified period.

If a person, who has been so directed not to deal in securities for a specified period, yet violates it and deals in securities, there are obviously consequences under law. Such a person can be, as will be seen, penalised under law and even prosecuted.

However, there can be an interesting situation. A person has been held to have carried out price manipulation in the capital market. He has then been directed not to deal in the capital market for a specified period of time. He yet carries out such dealings by buying and selling shares. The dealings are, however, in the ordinary course of business and no manipulation is alleged or even suspected. In such a case, still, there is violation of SEBI’s directions. The issue is whether profits made out of such trades be disgorged? Even if the person has not committed any violation while carrying out such trades?

Facts of the case
In this case, SEBI had passed orders against certain persons whereby it had “prohibited them from buying, selling or dealing in the securities market, directly or indirectly.”. While such directions were in force, such parties allegedly dealt in shares in the securities markets indirectly and earned profit of nearly Rs. 19 crore. SEBI alleged that these parties carried out such trades by transferring funds to other parties to enable them to carry out trades and earn / make profits.

However, in dealings carried out during this prohibition period, SEBI had not alleged, nor even suspected that such persons had carried out any price manipulation or committed any other wrong act. Since the dealings were carried out despite of such prohibitions, SEBI passed an order impounding such profit and levying interest of Rs. 8.45 crore, viz., in all seeking payment of Rs. 27.44 crore. To give effect to such impounding, it asked such parties to deposit the amount in an escrow account with a lien in favor of SEBI. Till the amount was deposited, SEBI directed that they shall not alienate any of their assets. Their bank/demat accounts were frozen, in the sense that the banks/depositories were ordered not to allow debits except for purposes of creation of the escrow account. They were also directed to submit a list of their assets to SEBI presumably so that SEBI can keep track of their assets and perhaps freeze them too.

This order is an interim and ex-parte order pending completion of investigation after which SEBI may pass final orders for disgorgement of such profits. If the finding of such investigation is that the allegations are true, then the profits would be disgorged and interest will be charged i.e., effectively forfeiting the gain made through a third party.

The question thus to be examined is whether SEBI can in law can pass such orders forfeiting profits made through legitimate deals, albeit in violation of orders not to deal in securities.

Are prohibitory orders preventive or penal?
In this context, it would be relevant to examine whether prohibitory orders are preventive or penal. A person is found to have committed price manipulation in capital markets. He should obviously be punished. However, it may also be in the interest of market that such person be prevented from carrying out trades. Thus, the order prohibiting him from dealing may be prevention, though in practice it works as a penalty / punishment.

The distinction is important because a penal order requires specific powers. A similar question arose before the Supreme Court in SEBI vs. Ajay Agarwal ((2010) 3 SCC 765) albeit in the context of whether power to issue such directions given by an amendment can have a retrospective effect. If it was a penal power, then obviously SEBI could not have issued preventive directions. However, the Court held that it was not a penal power.

The relevance here is that if the parties were issued prohibitory directions not to trade as a preventive measure to avoid repetitive manipulation. That does not make the wrong of disobeying such directions right, but at least the spirit of the original direction was not seriously violated since there was no manipulation that the direction intended to prevent.

Can and should such profits be disgorged?
Having considered the above, the question is whether SEBI can order disgorgement in such a situation and whether it should order such disgorgement? In the first instance, the question is whether SEBI has powers in law to order such disgorgement. In the second instance, the question is whether it would be right to do so.

Can SEBI order such disgorgement?
As mentioned earlier, the power of SEBI to disgorge profits made in violation of the law was contentious. The SEBI Act, 1992, however, was amended in 2014 by way of adding an Explanation. This Explanation to section 11B of the SEBI Act clarifies that SEBI has power to order disgorgement of “wrongful gains” (or loss averted) made “by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder”. Thus, it can be seen that the requirements for disgorging profits are as follows:-

a. There have to be wrongful gains.

b. Such gains should be by indulging in any transaction or activity.

c. Such transaction or activity should be in contravention of the provision of the Act or Regulations made thereunder.

Thus, there have to be specific provisions in the Act/ Regulations and the profits made should be arising out of transactions/activity in contravention of such provisions. For example, the SEBI Prohibition of Insider Trading Regulations prohibit dealing in shares by insiders while in possession of unpublished price sensitive information. If a person still carries out such insider trading, such trading would be in contravention of the Regulations. Such profits are thus liable for disgorgement.

However, what if, as in the present case, the profits are made in violation of the directions of SEBI and not directly in violation of the Act/Regulations? Can SEBI thus disgorge profits made in violation of its directions? On one hand, it is arguable that provisions granting powers to disgorge money should be interpreted strictly. Thus, if the law does not expressly provide for forfeiture of profits made in violation of directions, such forfeiture cannot be made. On other hand, the question may be whether the law could be purposively and broadly interpreted. Thus, if powers to give such directions are given under the Act, then violation can of such directions be treated as violation of the Act?

It is also noteworthy that SEBI does have power to levy penalty where any person does not comply with directions of SEBI. Section 15HB provides for a penalty of upto Rs. 1 crore on persons “fails to comply with any provision of this Act, the rules or the regulations made or directions issued by the Board”.

Should SEBI disgorge such profits?
Whether SEBI should disgorge such profits is an interesting question! Needless to clarify, this is not to say that what is right is necessarily legal. However, it is seen that a person who violates directions not to trade can suffer a penalty of a maximum amount of Rs. 1 crore. He can also be prosecuted. However, in the meantime, as is alleged in the present case, he could make a profit of several times the maximum penalty leviable. Thus, it is submitted that SEBI should have power to disgorge such profits or, alternatively, levy a penalty that is related to the profits made. Such power to levy penalty that is related to the profits already exists in cases where there is price manipulation, insider trading, etc.

Conclusion
One looks forward to the final order in this case. The issues, as explained earlier, are not just of law but also of power of SEBI to effectively prevent blatant disregard of its directions. Hopefully, if SEBI does order disgorgement, it will give detailed reasoning and legal basis for disgorgement.

SREI Equipment Finance Pvt. Ltd. vs. Assistant Commissioner, Hyderabad, [2013] 66 VST 68 (AP).

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Entry Tax –Person Liable- Who Caused entry of Goods In to The State- Need Not Be Owner- Dispatch Of Motor Vehicles – By Lessor to Lessee- Entry Tax Payable By Lessee- And Not By Owner (Lessor), s/s. 2(1)(g) and 3(4) of The Andhra Pradesh Tax on Entry of Motor Vehicles Into Local Areas Act, 1996.

Facts
The petitioner a company registered under the Companies Act incorporated in to carry on the business of financing and leasing for purchase of equipment and other infrastructure, machinery tohis customers. In the regular course of its business it had entered into an agreement dated May 8, 2008 with one M/s. V.P.R. Mining Infrastructure Private Limited for giving equipment and operating on lease to the said mining industries private limited whose registered office is based at Calcutta. Under the agreement, the petitioner provided the dumper trucks on lease, from its registered office at Calcutta to Andhra Pradesh. The department passed assessment order under the Andhra Pradesh Tax on Entry of Motor Vehicles into Local Areas Act, 1996 (for short, “the Act”) and demanded entry tax on entry of dumpers inside the State.The contention of the petitioner was that though they were the owners of the three dumpers they are not exigible to tax under the Act. Inasmuch as it was their customer who had brought the said dumpers into the State ofAndhra Pradesh and merely because they continued to be the owners on account of the financial arrangement and contract entered into between their company and the customer they cannot be visited with the liability under the Act. The department did not accept the contentions of the Company and levied tax. The company filed writ petition before the Andhra Pradesh High Court against the said assessment order levying entry tax.

Held
Under section 3(2) of the Act, the tax is payable by the importer and it is the duty of the court to discover who is the importer for the purpose of section 3 of the Act. Section 3(3) of the Act elucidates that aperson who causes the entry of the vehicle into the local area for use or sale specially deemed to be the importer who is liable to pay the tax. In other words merely because an owner of the vehicle satisfied the definition as importer in the context of section 3 of the Act the word “importer” need not necessarily be the owner and in the context the importer has to be considered to be the person who is responsible or who causes the entry of the motor vehicle into any local area for useor sale.

The argument of the learned counsel for the respondent supporting the assessment to the effect that the petitioner being the owner and satisfying the definition of “importer” is the one who is liable to pay the tax was not accepted by the Court in view of the interpretation placed on section 3 of the Act which is the charging section.

The Court further held that the purpose of definition is limited and only to illustrate what is being defined. The definition by itself does not fasten the liability especially in the taxing statute. The expression which is used occurring in the main text of the statute in the context of the section has to be interpreted to find the true meaning. it was the lessee of the petitioner, viz., M/s. VPR Mining Infrastructure Private Limited who had brought the dumpers in question into the local area situated within the State for use and utilization. Applying section 3(3) of the Act to the facts of the case though the petitioner being the owner of the dumpers may satisfy the definition of “importer” yet for the purpose ofsection 3(3) of the Act, the liability to pay tax arises on the entry of the dumpers into the State and the liability gets fastened on the person who brings the same for use or sale into the State. In this case, the customer of the petitioner, M/s. VPR Mining Infrastructure Private Limited, has satisfied the definition of “importer” inasmuch as the customer is the one who cause the entry of goods inside the State and liable to tax. The High Court accordingly allowed the writ petition filed by the Company and set aside the impugned assessment order.

[2016] 70 taxmann.com 276 (Mumbai – CESTAT) Global Networking Recourses vs. Principal Commissioner, Service Tax, Pune

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There is no provision in the VCES to condone the delay in payment of tax dues beyond the prescribed time limit. Hence, non-compliance as regards the conditions of payment would lead to rejection of declaration and no show cause notice would be required to be given in such case.

Facts
The Appellant filed VCES declaration, however failed to pay 50% of the declared liability before 31/12/2013 and a small portion was paid on 02/01/2014. The designated authority issued show cause notice proposing rejection of VCES declaration on the ground of non-payment of requisite 50% amount before due date. The Appellant contended that due to system error this balance amount could not be deposited and also produced snap shot, bank website as a token of proof of their attempt to make payment on 31/12/2013 and prayed that since it is beyond the control of the Appellant, delay if any, occurred should be condoned.

He further contended that no show cause notice within one month of the filing of declaration as clarified by Circular No. 170/05/2013-ST dated 08/08/2013 was issued.

Held
Hon’ble Tribunal noted that the Appellant had admittedly not paid entire 50% of the total dues declared by them on or before 31/12/2013 and have also shown reason for non-payment of part of the said amount before that date. However it held that even if the reason given is accepted, there is no provision in the scheme to condone the delay in payment and therefore time line prescribed under the scheme cannot be extended in absence of any provision for condoning the delay. As regards issue of show cause notice, the Tribunal observed that issuance of show cause notice referred to in the circular is with reference to section 106(2) which provides that if any deficiency or error is found in the declaration filed under the said section, notice is required to be issued, whereas in case of failure to deposit of an amount as provided under 107 there is no provision for issuance of any notice. Therefore, even the notice given to the Appellant was also not required for rejecting declaration. Accordingly, appeal was dismissed.

(Note: Readers may note a contrary decision of the same bench in the case of Commissioner of Customs & Central Excise Vs. Cityland Associates [2016] 69 taxmann.com 176 (Mumbai- CESTAT ) reported in the BCAJ July 2016 issue wherein the same bench held that delay in payment due to system fault cannot be attributed to assessee and the declaration was held as valid.

[2016] 70 taxmann.com 303 (Mumbai-CESTAT) – Giriraj Construction vs. Commissioner of Central Excise & Customs, Service Tax, Nasik.

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Refund cannot be granted if the claim is filed beyond time limit set out in section 11B, irrespective of whether such refund claim pertains to amount mistakenly paid as duty/ tax or amount correctly paid as duty/tax.

Facts
The Appellant mistakenly paid service tax in respect of certain services provided by it but which were not liable to service tax. A refund claim in respect of such mistaken services was filed after one year from relevant date. When revenue rejected refund claim as unsustainable being time barred, Appellant contended that since the service to which the refund claim relates as not liable for service tax, service tax paid by them was without authority of law and hence, time limit of one year as prescribed u/s. 11B of the Central Excise Act, 1994 would not be applicable to refund claim filed by the Appellant. Revenue submitted that in various judicial pronouncements, it has been categorically held that refund of any amount is governed by the provisions of section 11B in absence of any other provision dealing with refund claims.

Held
The Tribunal held that it would not be correct to state that section 11B is not applicable in cases, where the applicant has paid service tax although there was no levy. In every case of refund, the refundable amounts are neither service tax nor excise duty and such amount becomes refundable only where it is not payable as per law and therefore, every such amount shall be treated as payment without authority of law. At the time of payment the assessee pays the amount under a particular head such as service tax, excise duty etc. and when subsequently it is found that this amount is not payable, the same amount stand refundable to the assessee and such refund is treated as refund of service tax/duty only. Therefore, for the purpose of claiming refund of such amount of service tax, section 11B of the Central Excise Act read with section 83 of the Finance Act 1994 is the only provision and the amount claimed for refund by the Appellant can be refunded only under that section, the limitation provided therein also would apply. Any other interpretation would make section 11B redundant. Relying upon the various decisions of Supreme Court and Hon’ble Bombay High Court, the Tribunal disallowed the claim.

(Note: Readers may note a similar decision in the case of Benzy Tours & Travels (P) Ltd vs. CST [2016-TIOL-1104-CESTAT – MUM] reported in the June 2016 issue of BCAJ.

[2016] 70 taxmann.com 59 (Mumbai CESTAT) – Sanjay Automobiles Engineers (P) Ltd. vs. Commissioner of Central Excise, Pune-III.

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Demand cannot be raised by invoking extended period when EA-2000 audit is already conducted by the department and no objections were raised in the audit report on a particular point, in respect of which appropriate disclosure is contained in financial statements.

Facts
During the period July 2003 to March 2007, Appellant earned commission income and provided infrastructural support services but did not pay service tax on it. The Revenue alleged that such receipts were liable to service tax under “business support services”/”business auxiliary services”. Appellant challenged the adjudication order by contending that the demand is barred by limitation as no point regarding taxability of commission was raised by the audit party of the department during EA-2000 audit conducted for period July 2001 to March 2006. Appellant’s contention was rebutted by the department by submitting that the mandate for the audit party of the Commissionerate was very limited and audit party was not required to look into entire records in detail to conclude that all angles are covered.

Held
The Tribunal held that the commission received by the assessee from the financial institutions and the insurance companies would be taxable pursuant to decision of Larger Bench in the case of Pagariya Auto Centre vs. CCE [2014] 44 GST 23/42 taxmann.com 371 (Mum). However, as regards the question of limitation, the Hon’ble Tribunal observed that Audit Party conducted detailed audit of the records of the assessee on various days and except for one small amount of interest not paid on the incentives, no objections were raised in the Audit report. It therefore held that the Revenue authorities were aware of the amount received as commission by the Appellant and recorded in the balance sheet. Tribunal further stated that, is a common knowledge that the EA-2000 audit is an extensive audit of the records of the assessee. Accordingly, relying upon the ratio laid down by Hon’ble Karnataka High Court in case of CCE vs. MTR Foods Ltd. 2012 (282) ELT 196 the Tribunal held that since no objection was raised regarding particular issue during the audit of records, the demand raised by issuing extended period is barred by limitation.

2016 (42) STR 290 (Tri.- Mum) Tata Technologies Ltd. vs. Commissioner of Central Excise, Pune – I

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CENVAT credit cannot be denied on belated filing of declaration under Rule 6(3A)

Facts
The Appellant is engaged in providing taxable as well as exempt service. It had made a declaration as provided by Rule 6(3A) of the CENVAT Credit Rules, 2004 but the declaration was filed belatedly. Delay in filing declaration was considered as non-filing of declaration by the department and credit was denied.

Held
Condition of filing declaration is only directory and not mandatory. Intention of the legislation is that assessee should not get any undue benefit in the form of CENVAT credit which is attributable to the exempt services. Substantial benefit cannot be denied due to minor procedural lapse. Rule 6 of CENVAT Credit Rules, 2004 cannot be used as a tool of oppression to extract the amount which is much beyond remedial measure and what cannot be connected directly cannot be collected indirectly as well. Accordingly appeal was allowed.

2016(41) STR 236(Tri.-Del) Travel Inn India Pvt. Ltd. vs. Commissioner of Service Tax, Delhi

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Payment of CENVAT credit availed along with interest at a later stage shall be considered as non-availment of CENVAT credit.

Facts
The Appellants are providing Tour Operator Service and were availing CENVAT credit on input services for providing output services. Notification No. 01/2006-ST had been issued granting exemption to the above services stating that exemption will not apply if CENVAT credit has been taken. On realizing the exemption and its condition, the credit taken was immediately paid along with applicable interest. However, department disallowed the exemption since they had not only availed the credit but had also utilized it for payment of service tax and therefore the conditions of the exemption were not satisfied.

Held
The Tribunal relied upon the decision of Khyati Tours and Travels [2011 (24) STR 456 (Tri.-Ahmd)] wherein it was held that reversing CENVAT credit with interest shall amount to non-availment of CENVAT credit. Paying the CENVAT amount along with interest amounts to non-availment of CENVAT credit and therefore exemption is available.

2016 (41) STR 213 ((Tri.-Del) Charanjeet Singh Khanuja vs. CST, Indore/Lucknow/Jaipur/ Ludhiana

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Buying of branded goods at lower price by Distributors and selling at MRP and getting of commission on the bulk purchases is not considered as a service

Facts
The Appellants are distributors of Amway India Enterprises Pvt. Ltd who are engaged and are remunerated for acquiring goods from Amway at Distributor’s acquisition price and selling them at Retail Selling Price. Commission/ Bonus is provided by Amway depending on their monthly purchases. Commission is also paid on monthly purchases done by sub-distributors enrolled through the Appellants. The revenue confirmed demand of service tax on the commission income. It was contended that they are not engaged in promoting the sale of products and moreover the substantial portion of the commission is based on volume of purchases. Further till 30th April, 2004 definition of Business Auxiliary Service included the word “provided by Commercial Concern” and since they all are individuals they cannot be termed as a Commercial Concern.

Held
Business Auxiliary Service would include promotion of sale of goods which are produced or provided by or belonging to a third person. In the present case the goods are procured at Distributor’s acquisition price and subsequently sold at MRP which is a sale of goods and cannot be termed as any service provided. When the goods are purchased by the Distributors, they cease to be owned by Amway and the ownership transfers from Amway to the Distributors. Similarly, commission received by the Distributors for buying certain quantum of goods are in a nature of bulk discount and cannot be termed as promotion of sale of goods. However, the activity wherein Distributor appoints another distributor and gets remunerated based on the purchases made by the elected distributor comes within the definition of Business Auxiliary Service and is taxable. Further since branded goods are involved, the benefit of small scale exemption will be available. It was further noted that commercial concerns can be of a proprietary nature and therefore the appellants even though individuals can be considered as commercial concerns. It was also held that only on the reason that registration was not applied and returns were not filed, period of limitation cannot be invoked. Since there was an ambiguity amongst the department on the taxability of the service itself, longer period of limitation cannot be invoked.

2016 (42) STR 1009 (Tri.-Del.) Ashoka Industries vs. CCE, Jaipur-I

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CENVAT credit on outward transportation and insurance of goods from factory to buyer’s premises shall be eligible if the terms of the contract are “FOR at buyer’s premises”.

Facts
The appellants had availed CENVAT credit on transportation and transit insurance on finished goods from factory to buyer’s premises on the basis that the place of removal was buyer’s premises where the goods were delivered since the terms of the contract were “FOR at buyer’s premises” and the transportation is included in assessable value of finished goods. CENVAT credit was disallowed since as per definition of “input services” transportation “upto the place of removal” was only allowed.

Held :
Since ownership and responsibility of goods were transferred by way of sale to the buyer on delivery at the destination, place of removal was buyer’s premises and therefore, CENVAT credit was allowed.

[2016-TIOL-1507-CESTAT-MAD] M/s JAKG Communications Pvt. Ltd vs. Commissioner of Central Excise, Chennai-III

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There is no provision for reversal of CENVAT credit availed in respect of output services for which the amount to be realized is written off as bad debt.

Facts
In the course of provision of service certain amount receivable from the recipient of service could not be realized by the Appellant. Revenue contended that on the amount not realized CENVAT credit is to be reversed.

Held
The Tribunal noted that there is no mandate in the statute for reversal of the CENVAT credit already availed in respect of the output service provided and the consideration thereof not realized for which such receivable amount is written off as bad debt, thus the Appellant cannot be directed to reverse proportionate CENVAT credit. Law is well settled that where tax paid has gone into the treasury, credit thereof should be available unless there is a fraud involved. Thus the appeal is allowed.

[2016-TIOL-1571-CESTAT-MUM] Nirlon Ltd vs. Commissioner of Central Excise, Mumbai

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Renting of Property not possible unless it comes into existence – input credit of Service tax on services used during construction Available against renting services.

Facts
Appellant availed CENVAT credit of service tax paid on input services, goods used in construction services against their service tax liability under the category of Renting of Immovable Property Service. Relying on Circular No. 96/7/2007-ST amended by Circular No. 98/1/2008-ST the department contended that such credit is ineligible and a show cause notice was issued. The adjudicating authority confirmed the demands and therefore the present appeal is filed.

Held
The Tribunal noted that due service tax is discharged under the category of “Renting of Immovable Property Service”. Such service tax payment is not possible unless the immovable property comes into existence. Thus without its construction the same cannot be rented out. Relying on the decision of the Andhra Pradesh High Court in the case Sai Samhita Storages [2011-TIOL-863- HC-AP-CX] and the decision in the case of Navaratna S.G. Highway [2012-TIOL-1245-CESTAT -AHM] the credit was allowed.

Note: Readers may note a similar decision in the case of Maharashtra Cricket Association vs. Commissioner of Central Excise, Pune-III [2015-TIOL-2418-CESTAT -MUM] refer digest in the BCAJ December 2015 issue and Vamona Developers P. Ltd [2015-TIOL-2705-CESTAT -MUM] refer digest in the BCAJ January 2016 issue. Further w.e.f. 01.04.2011 only services used in respect of modernization, renovation, repairs of premises from where service is provided are admissible for CENVAT credit and ‘setting’ up of the premises has been omitted.

[2016-TIOL-1572-CESTAT-MUM] United Phosphorous Ltd vs. Commissioner of Service Tax, Mumbai

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When the CENVAT credit of service tax paid under reverse charge mechanism is available to the assessee itself, the situation being revenue neutral the demand of interest and penalties on the said tax is liable to be set aside.

Facts
The Appellant raised an amount as External Commercial Borrowing (ECB) in the form of convertible bond and paid amounts to various entities abroad for services rendered. Revenue contended that the amount paid abroad is liable to service tax under reverse charge mechanism. The service tax liability was discharged and the matter was contested. The demand for the period prior to 18/04/2006 was dropped by following the decision of the Apex Court in the case of Indian National Ship Owners Association [2010 (17) STR J-57]. However the demand for the post period was confirmed along with interest and penalties. CENVAT credit was availed of the service tax paid and therefore the present Appeal is filed contesting the interest and penalties only.

Held
The Tribunal relied on the decision in the case of Jain Irrigation Systems Ltd [2015-TIOL-1674-CESTAT-MUM] wherein it was held that since the duty stands paid and the credit of the duty paid is admissible to the Assessee itself, the interest and penalties are set aside. Accordingly the demand of interest and penalty is set aside.

Note: Readers may also note the decision in the case of Lime Chemicals Ltd [2016-TIOL-1567-CESTAT-MUM] wherein the Tribunal held that when the situation is revenue neutral, the assessee would naturally not get any benefit by not paying such tax therefore the extended period could not be invoked and the penalties were set aside.

[2016-TIOL-1536-CESTAT-HYD] M/s Ramboll Imisoft Pvt Ltd vs. CC,CE & ST, Hyderabad-II

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II Tribunal

Service tax paid on common input services used for providing services in the State of Jammu and Kashmir and other parts of India is fully available as CENVAT credit. Further for the period prior to April 2011 group insurance services availed for the benefit of employees is an eligible input service.

Facts
The Appellant availed CENVAT credit on input services used for providing output services in the State of Jammu and Kashmir and other parts of India. The department observed that since the Finance Act, 1994 is not applicable to Jammu and Kashmir the services rendered in that state are exempted services and therefore since separate accounts are not maintained as per Rule 6(2) of the CENVAT Credit Rules 2004 for providing taxable and exempted services, credit reversal is required on the common input services in terms of Rule 6(3)(ii) read with Rule 6(3A)(b)(iii) of the said rules. Further reversal is also sought for the service tax paid on the insurance premium paid for the family members of the employees for the period prior to April 2011.

Held
The Tribunal noted that undisputedly common input services have been used for providing services to Jammu and Kashmir and other parts of India. As per Rule 2(e) of the CENVAT Credit Rules, 2004 a service becomes exempted when it is exempted by notification or law. Since the services provided in Jammu and Kashmir are not liable to service tax u/s. 64 of Chapter V of the Finance Act, 1994, these services are neither taxable nor exempted. Further the proviso to sub-clause (2) of Rule 1 of the CENVAT Credit Rules, 2004 clearly states “nothing contained in these rules relating to availment and utilization of credit of service tax shall apply to the State of Jammu and Kashmir”. Thus reversal of credit on input services used for providing service in State of Jammu and Kashmir is justified. However in respect of common input services the Tribunal observed that though it is doubtful as to whether such services can be construed as “output services” in any case the service cannot be construed as an exempted service. It is a non-taxable service. Rule 6(2) does not apply to a situation where the service provider renders both taxable and non-taxable services and the law is silent in this regard. Therefore it was held that reversal of credit on common input services is unsustainable. With regard to credit of service tax paid on insurance premium it was noted that the premium is uniform to all employees and has no regard to the number of dependents and therefore service availed for the benefit of employees qualifies as input service.

2016(42) STR 3(Bom) Commissioner of Central Excise, Pune-I vs. S. S. Engineers

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Cross utilization of credit of excise duty and service tax is allowed.

Facts
Assessee is engaged in manufacture and is also providing services for which they have taken separate registration with the respective authorities. During scrutiny, it was observed that credit of service tax paid on services which were required in connection with erection and commissioning service were utilized for payment of excise duty on manufacture which the departmental authorities disputed. The adjudicating authority confirmed the demand. Therefore an appeal was filed before the Tribunal wherein it was held that CENVAT Credit Rules, 2004 provides restrictions on utilisation of CENVAT credit but such restrictions do not cover cross utilization of credit of excise and service tax, as a general proposition and the intention appears to be to permit cross utilization of excise duty and service tax.

Held
The Court observed that Rule 3(1) of the CENVAT Credit Rules, 2004 provides that a manufacturer or a service provider shall be allowed to take credit on various duties which includes excise duty, service tax etc. and that is a substantive provision in the rules. Therefore Tribunal has rightly come to the conclusion that cross-utilization is permitted. It was further noted that department has issued a circular dated 30/03/2010 on the issue of cross utilization guiding the departmental officers on the accounting aspects and on verification of the credits in both the excise and service tax returns. The Appeal is accordingly dismissed.

2016 (42) STR 948 (Bom.) Cleartrip Private Ltd. vs. Union of India

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Unless investigation is completed and prosecution is launched, coercive measures including arrest cannot be taken by Department.

Facts
Petitioners were engaged in facilitating provision of services of hotel accommodation and travel. The hoteliers collect and discharge appropriate service tax and the Petitioner does not collect any service tax on room bookings through their portal. Department had arrested officials of Make-My-Trip since they had collected and failed to deposit service tax. Since the Petitioner is in similar line of business, assuming similar case under service tax, department officials demanded service tax. On the apprehension that the department may take coercive actions including arrest without issuance of Show Cause Notice or adjudication, Writ Petition is filed. Department contested that on the facts of the case, service tax was collected more than what was permissible under service tax Laws. Further, department assured that due process of law would be followed for adjudication and prosecution.

Held
When investigation is underway, it does not mean that arrest would be effected. Arrest under Finance Act, 1994 could arise only when investigation is completed and prosecution is launched. Further, there is no question of recovery by coercive means unless SCN is issued, opportunity of being heard is given and reasoned adjudication order is passed. Therefore, in view of facts and circumstances of the case it was held that any recovery by coercive measures is not permissible straightway without following the due process of law.

[2016-TIOL-1061-HC-DEL-ST] Mega Cabs Pvt. Ltd vs. Union of India and ORS

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I. High Court

Rule 5A(2) of the Service Tax Rules, 1994 and the Circulars issued by the CBEC exceed the scope of the Finance Act, 1994 and are therefore ultra vires.

Facts
In this petition, Rule 5A(2) of the Service Tax Rules, 1994 empowering deputation of officers from the Comptroller and Auditor General of India to demand documents was challenged. Further validity of section 94(2)(k) of the Finance Act, 1994 was also challenged which gives uncontrolled delegated powers to the Central Government to frame rules. Lastly a letter issued by the Commissioner of Service Tax informing that the records of the petitioner would be verified by a team of officers was challenged. Pursuant to the decision in the case of Travelite (India) vs. Union of India [2014 (35) STR 653 (Delhi)] wherein a division bench of this Court struck down Rule 5A(2) as being ultra vires section 72A read with section 94(2) of the Act, an amendment was made to the said rule and section 94(2)(k) was inserted in the Act. Circular No. 181/7/2014- ST dated 10/12/2014 clarified that the department officers could now proceed with the Audit as before and thereafter norms for conducting audit were issued vide circular no. 995/2/2015-CX dated 27/02/2015 followed by an Audit Manual 2015. It was contended that the amendment continues to be ultra vires section 72A of the Act which contemplates only a special audit by a cost accountant or a chartered accountant whereas Rule 5A(2) permits any officer of the Government to ask for production of books on demand and without observing any safeguards spelt out in section 72A of the Act.

Held
The Court noted the provisions of section 72 of the Finance Act and observed that for invocation of the said section it has to be established that the return filed is not in accordance with the law without which the records cannot be called for mechanically. Further section 72A also requires the Commissioner to record the “reasons to believe” that any of the three contingencies as required in the said section exists. Only after such ascertainment the records can be audited only by a chartered accountant or a cost accountant nominated by the Commissioner. Section 73 also requires the issuance of a show cause notice to the person who has short paid or not paid the service tax. Even the powers to search the premises under section 82 are not without any guidelines or restrictions.

Thus the Court was of the view that before the records is called for, the assessee should be provided with a predecisional hearing to explain his case. Further Rule 5A(2) of the Rules require production of records in addition to those mentioned in Rule 5(2) of Rules which is not envisaged under any provisions of the Act and itself is beyond the Finance Act. Further it was noted that there is no authorization under the Finance Act provided to the officers of the department or the CAG to examine the books of accounts of the assessee and if any such officer is deputed it will result in harassment of the assessees. It was noted that the term ‘verify’ in section 94(2)(k) is not wide enough to include the audit of accounts of an assessee.

Further the Circular issued by the CBEC appears to be without any reference to the applicable provisions in the Act or the Rules and thus the lacuna pointed out in Travelite India (supra) has not been set right. It was held that audit is a special function which has to be carried out by duly qualified persons like a cost accountant or a chartered accountant and cannot be undertaken by any officer of the department. Thus Rule 5A(2) and the circulars exceeds the scope of the Act tested vis-à-vis sections 72, 72A,73 and 82 and is therefore ultra vires.

Fate of ‘Hoarding’, hanging !

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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.

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

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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.

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

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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;

(c) temporary transfer or permitting the use or enjoyment of any intellectual property right;

(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.

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-

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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.

TRIBUTE TO MR. NARAYAN VARMA, RTI ACTIVIST

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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.

Part D REMEMBERING NARAYAN VARMA

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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.

Adoption and Inheritance

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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.

(Balanced behaviour)

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(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.

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

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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.

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

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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.

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 ]

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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.

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].

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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.

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

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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.

CHANGING PARADIGMS OF CORPORATE SOCIAL RESPONSIBILITY

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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.

Can a Company have two functional currencies?

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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.

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

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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.

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

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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.

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

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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.

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

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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.

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

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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.

Foreign Tax Credit Rules 2016 – An Analysis

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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.

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]

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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.

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

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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.

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

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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.

FAQs on Settlement of Arrears in Dispute Act, 2016.

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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.

67th Annual General Meeting on 7th july 2016

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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…

Payments Bank – A reality check

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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)

Europe’s dog days

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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)

Ending tax terrorism

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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)

Commodity price risk

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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)

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

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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)

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

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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)

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

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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)

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

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“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)

Agricultural Reforms – APMC drama

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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)

Jumbo cabinet

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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)

Corruption and India Inc – Clarity Begins at Home

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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)

Representation Made by 4 Organisations on IDS 2016

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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

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

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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.

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

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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.

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

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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.

GENERAL ANTI-AVOI DANCE RULE (GAAR)

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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.

Silver Jubilee of Economic Liberalisation

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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!

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

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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.

REMEMBERING A FRIEND

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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.

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-

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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.”

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-

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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.”

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-

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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.”

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-

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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.”

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-

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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.”