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Month: August

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Further, since the assessees were declared to be assessees-in-default u/s. 201 of the Act, the High Court found that despite the fact that the assessees did not deduct the said amount based on a bone fide belief and no dishonest intention could be attributed to any of them, yet the High Court held that levy of interest u/s. 201(1A) would follow, as the payment of simple interest under the said provision was mandatory.

The Supreme Court, on appeal by the assessees, observed that on the facts of the present case, it was clear that there was no vested right in the employee to claim any amount of tips from his employers. Tips being purely voluntary amounts that may or may or may not be paid by customers for services rendered to them would not, therefore, fall within section 15(b) at all. Also, it was clear that salary must be paid or allowed to an employee in the previous year “by or on behalf of” an employer. Even assuming that the expression “allowed” is an expression of width, the salary must be paid by or on behalf of an employer. Section 15(b) necessarily has reference to the contract of employment between employer and employee, and salary paid or allowed must therefore have reference to such contract of employment. On the facts of the present case, it was clear that the amount of tips paid by the employer to the employees had no reference to the contract of employment at all. Tips were received by the employer in a fiduciary capacity as trustee for payment that were received from customer. There was, therefore, no reference to the contract of employment when these amount were paid by the employer to the employee.

The Supreme Court noted that it was nobody’s case that the amount of tips received by the employees in the present cases were not taxable in their hands. The learned counsel for the assessees had stated that they were so taxable as income from other sources. The question that it had to determine was therefore somewhat different, namely whether the person responsible for paying salary income to his employee is liable to deduct the tax of the employee and pay it over on an estimated basis u/s. 192 of the Income-tax Act.

The Supreme Court held that contract of employment in the present cases, not being the proximate cause for the receipt of tips by the employee from a customer, the same would be outside the dragnet of sections 15 and 17 of the Income-tax Act.

The Supreme court further held that interest u/s. 201(1A) could only be levied when a person is declared as an assessee-in-default. Having found that the appellants in the present cases were outside section 192 of the Act, the appellant could not be stated to be assessees-in-default and hence no question of interest therefore arose.

University – Exemption – Conditions Precedent – University must exist solely for education and must be wholly or substantially financed by Government

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Visvesvraya Technological University vs. ACIT (2016) 384 ITR 37 (SC)

The appellant University, namely, Visvesvaraya Technological University (VTU) had been constituted under the Visvesvaraya Technological University Act, 1994. It discharged functions earlier performed by the Department of Technical Education, Government of Karnataka. The University exercised control over all Government and Private Engineering Colleges within Karnataka.

For the assessment year 2004-05 to 2009-10 notices u/s. 148 of the Income-tax Act, 1961 were issued to the appellant-University assessee. Eventually returns were filed for the assessment years in question declaring “nil” income and claiming exemption u/s. 10(23C)(iiiab) of the Act. The aforesaid claim of exemption was negated by the Assessing Officer who proceeded to make the assessments. The same view has been by all the authorities under the Act and also by the High Court.

The question, therefore, that arose before the Supreme Court in the present appeals was the entitlement of the appellant-University-assessee to exemption from payment of tax under the provisions of section 10(23C) (iiiab) of the Act.

The Supreme Court observed that the entitlement for exemption u/s. 10(23C)(iiiab) was subject to two conditions. Firstly the educational institution or the university must be solely for the purpose of education and without any profit motive. Secondly, it must be wholly or substantially financed by the Government. Both conditions would have to be satisfied before exemption could be granted under the aforesaid provision of the Act.

The Supreme Court noted that the relevant principles of law which governed the first issue, i.e., whether an educational institution or a university, as may be, exists only for educational purpose and not for profit was no longer res integra and was decided by it in Queen’s Educational Society vs. CIT(372 ITR 699).

The Supreme Court, in the present case, found that during a short period of a decade, i.e., from the year 1999 to 2010 the appellant University had generated a surplus of about Rs.500 crore. There was no doubt that the huge surplus had been collected/accumulated by realising fees under different heads in consonance with the powers vested in the University u/s. 23 of the VTU Act. The difference between the fees collected and the actual expenditure incurred for the purposes for which fees were collected is significant. In fact the expenditure incurred represented only a minuscule part of the fees collected. No remission, rebate or concession in the amount of fees charged under the different heads for the next academic year(s) had been granted to the students.

As against the above, the amount of direct grant from the Government has been meagre. The University nevertheless had grown and the number of private engineering colleges affiliated to it had increased from about 64 to presently about 194. The infrastructure of the University has also increased offering educational avenues to an increasing number of students in different and varied subjects.

Between 1994 and 2009 the University had actually spent about Rs.504 crore on infrastructure and the available surplus in the year 2010 which was in the range of Rs. 440 crore was also intended to be applied for different infrastructural work.

Even in a situation where direct Government grants had not been forthcoming and allocation against permissible heads like salary, etc. had not been made the University had thrived and prospered. There could, however, be no manner of doubt that the surplus accumulated over the years had been ploughed back for educational purpose. In such a situation, following the principles laid down in Queen’s Educational Society (supra), the Supreme Court  held that the first requirement of section 10(23C)(iiiab), namely, that the appellant University existed “solely for educational purposes and not for purposes of profits” was satisfied.

As to the further question as to whether the appellant University was wholly or substantially financed by the Government which was an additional requirement for claiming benefit u/s. 10(23C)(iiiab) of the Act, it was not in dispute that grants/direct financing by the Governtment during the six (06) assessment years in question, i.e., 2004-05 to 2009-10 had never exceeded 1 per cent of the total receipts of the appellantuniversity assessee.

The argument advanced before the Supreme Court by the University that fees of all kinds collected within the four corners of the provisions of section 23 of the VTU Act must be taken to be receipts from sources of finance provided by the Government. The rates of such fees are fixed by the Fee Committee of the University or by authorized Government Agencies (in case of Common Entrance Test). It was , therefore, contended that such receipts must be understood to be funds made available by the Government as contemplated by the provisions of section 10(23C)(iiiab) of the Act.

The Supreme Court held that receipts by way of fee collection of different kinds continued to be a major source of income for all universities including private universities. Levy and collection of fees was invariably an exercise under the provisions of the statute constituting the University. In such a situation, if collection of fees was to be understood to be amounting to funding by the Government merely because collection of such fees was empowered by the statue, all such receipts by way of fees may become eligible to claim exemption u/s. 10(23C) (iiiab). Such a result would virtually render the provisions of the other two sub-sections, namely, 10(23c)(iiiad) and 10(23c)(vi) nugatory and could not be understood to have been intended by the Legislature and must, therefore, be avoided.

According to the Supreme Court, it would therefore, be more appropriate to hold that funds received from the Government contemplated u/s. 10(23C)(iiiab) of the Act must be direct grants/contributions from government sources and not fees collected under the statute.

Before the Supreme Court , reliance had been placed on the judgment of the High Court of Karnataka in CIT vs. Indian Institute of Management [370 ITR 81], particularly, the view expressed that the expression “wholly or substantially financed by the Government” as appearing in section 10(23C) could not be confined to annual grants and must include the value of the land made available by the Government. The Supreme Court noted that in the present case, the High Court in paragraph 53 of the impugned judgment has recorded that even if the value of the land allotted to the University (114 acres) was taken into account the total funding of the University by the Government would be around 4 per cent to 5 per cent of its total receipt. That apart what was held by the High Court in the above case, while repelling the contention of the Revenue that the exemption u/s. 10(23C)(iiiab) of the Act for a particular assessment year must be judged in the context of receipt of annual grants from the Government in that particular year, is that apart from annual grants the value of the land made available; the investment by the Government in the buildings and other infrastructure and the expenses incurred in running the institution must all be taken together while deciding whether the institution is wholly or substantially financed by the Government. The Supreme Court held that situation before it, on facts, was different leading to the irresistible conclusion that the appellant university did not satisfy the second requirement spelt out by section 10(23C)(iiiab) of the Act. The appellants University was neither directly nor even substantially financed by the Government so as to be entitled to exemption from payment of tax under the Act.

The Supreme Court for the aforesaid reasons dismissed the appeals.

Wealth Tax – Asset – Definition – Urban Land – Exclusions –Land occupied by any building which has been constructed with the approval of the appropriate authority would not include land occupied by any building which is still under construction.

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Girdhar G. Yadalam vs. CWT (2016) 384 ITR 52 (SC)

The assessee, a Hindu undivided family which was the coowner of a land measuring 30,663.04 sq. metres, situated at survey No.67/2, 67/3, 67/4 and 67/5 of Adugodi Village and a portion of survey No.151 of Kornamangala Village of Begur Hobli of Bangalore South Taluq, Bangalore District, bearing City Survey No.CTS/2. The assessee entered into various development agreements with one M/s. Prestige Estates Properties Private Ltd. for construction of residential flats. The assessee claimed that it had retained ownership of the land until flats are fully constructed and possession of the assessee’s share was handed over to it. The development agreement constituted only permissive possession according to the assessee for the limited purpose of construction of flats. The assessee contended that the assessee continued to be the owner of the land for the financial years 1995-96 and subsequent years till the sale of flats. Notice u/s. 17 of the Act was issued to the assessee and he filed return of wealth of Rs.8,48,000 on August 20, 2003. After considering the contention to not to treat the property as urban land, the Assessing Officer brought it to tax under an order dated March 31, 2005. An appeal was filed before the Assistant Commissioner of Income Tax (Appeals), Bangalore. The appeal stood allowed in the light of an earlier order of the Tribunal. The Revenue thereafter filed an appeal to the Tribunal. The Tribunal following its earlier decision dismissed the appeal filed by the Revenue. The Revenue took up the matter in further appeals before the High Court of Karnataka. The High Court upset the order of the Income-tax Appellate Tribunal holding that the assessee was not entitled to the benefit of clause (ii) of Explanation 1(b) to section 2 (ea)(v) of the Act, as the building had not been constructed and was still under construction during the assessment year.

The Supreme Court at the outset noted that in the present case it was concerned with the interpretation that is to be accorded to the provisions of Explanation 1(b) to section 2(ea)(v) of the Wealth-tax Act, 1957. This Explanation defines “urban land”.

The Supreme Court observed that it was not in dispute that “urban land” is to be included to calculate “net wealth” for the purpose of wealth tax under the Act. However, certain lands are not to be treated as “urban land” which are mentioned in Explanation 1(b). But section 2(ea) of the Act was inserted by the Finance Act 1992 (Act No.18 of 1992), with effect from April 1, 1993. The purpose was to exempt some of the lands from wealth-tax with the objective of stimulating investment in productive assets. It is in that context that the land occupied by any building which has been constructed with the approval of the appropriate authority is excluded from the definition of urban land. On a plain reading of the said clause it becomes clear that in order to avail of the benefit, the following conditions have to be satisfied:

(a) The land is occupied by any building;
(b) Such a building has been constructed;
(c) The construction is done with the approval of the appropriate authority.

The Supreme Court noted that notwithstanding the aforesaid plain language; an endeavour of the Counsel for the assessee was to impress upon the Court to read the said clause to include even that land where the construction of building activity has been started. He, thus, wanted that the words “has been constructed” is to be read as “is being constructed”.

The Supreme Court held that on the plain language of the provision in question, the benefit of the said clause would be applicable only in respect of the building “which has been constructed”. The expression “has been constructed” obviously cannot include within its sweep a building which is not fully constructed or in the process of construction. The opening words of clause (ii) also become important in this behalf, where it is stated that “the land occupied by any building”. The land cannot be treated to be occupied by a building where it is still under construction.

No doubt, the purpose and objective of introducing section 2(ea) in the Act was to stimulate productive assets. However, the event when such a provision is to be attracted is also mentioned in Explanation 1(b) itself carving out those situations when the land is not to be treated urban land. The Legislature in its wisdom conferred the benefit of exemption in respect of urban vacant land only when the building is fully constructed and not when the construction activity has merely started.

Taxability of Foreign Salary Credited to NRE Bank Account

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ISSUE FOR CONSIDERATION

Section 5 of the Income Tax Act, 1961 (“the Act”) lays down the scope of total income. Sub-section (2) of that section lays down the scope of the total income of a nonresident. It provides as under:

“(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived, which:
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) which accrues or arises or is deemed to accrue or arise to him in India during such year.”

Explanation 2 to this section clarifies that income, which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him, shall not again be so included on the basis that it is received or deemed to be received by him in India.

It is usual to come across cases where a person, not resident under the Act, receives some money in India, the income whereof has accrued outside India; for example, Indian citizens employed abroad, regarded as non-residents for the purposes of the Act, depositing their salary in India for the services rendered out of India . Similarly, crew of a foreign ship or an Indian ship who leave India on account of their employment on the ship, non-residents under the Act, depositing the salary In India, is another example.

Many such persons, may request their foreign employers to credit their salaries to their Non-Resident (External) bank accounts (“NRE accounts”) maintained with banks in India. An issue has arisen before different benches of the Income Tax Appellate Tribunal regarding the taxability in India of such foreign salaries credited to NRE accounts. While the Agra bench of the tribunal has taken the view that such salaries are not taxable in India, the Kolkata bench of the tribunal has recently taken a contrary view, holding that such salaries are taxable in India.

Arvind Singh Chauhan’s case
The issue first came up before the Agra bench of the tribunal in the case of Arvind Singh Chauhan vs. ITO 147 ITD 509.

In this case, the assessee was a crew member of a ship, who was employed with a Singapore company. His employment letter was issued by the foreign employer’s agent in India. He worked on merchant vessels and tankers plying on international routes. His salary was directly credited by his employer to his NRE account with HSBC Bank in Mumbai.

His stay in India during the relevant previous year was less than 182 days, and hence his residential status was nonresident. In the income tax return filed by the assessee, the salary received from the Singapore company was not offered to tax. However, his income from pension received from Government of India and interest were offered for taxation.

During the course of assessment proceedings, when the assessee was asked to show cause as to why the salaries received from the Singapore company for services rendered as a crew member of a ship should not be taxed in India, the assessee argued that since such salary was accruing and arising outside India, it was outside the scope of section 5(2).

As regards the fact that the salary was directly credited to a bank account in India, the assessee argued that salary income deposited in a bank account in India directly from the bank account of his employer outside India and as such was not taxable in India. Reliance was placed on the decisions in the cases of DIT vs. Prahlad Vijendra Rao 198 Taxmann 551 (Kar), DIT vs. Diglan George Smith 40(1) ITCL 419 and ITO vs. Lohitakshan Nambiar (ITA No 1045/Bang/09 dated 12.4.2010).

The AO did not accept the assessee’s explanation, on the ground that since the assessee’s status for income from pension and interest was that of resident, as a result his status for all sources of income was to be taken as a resident. In addition the AO held that the salary income accrued in India by relying on the Supreme Court decision in the case of CIT vs. Shri Govardhan Ltd 69 ITR 675, for the proposition that if an assessee acquires a right to receive income, the income is said to have accrued to him, even though it may be received later on its being ascertained. According to the AO by receiving the appointment letter in India from the agent of the foreign employer and details of salary to be paid, the assessee got the right to receive the salary. Importantly, the AO relied on the fact that the salary cheques were credited to the assessee’s account with HSBC bank in India and hence the income was received in India.

The Commissioner (Appeals) upheld the order of the AO, holding that the salary income accrued in India as well as was received in India, and was therefore taxable in India.

The Tribunal noted the fact that the AO had himself noted the number of days of the assessee’s stay outside India as per his passport, and categorically found that his status u/s. 6 was that of a non-resident. The tribunal held that the AO was wrong in holding that the assessee was a resident in India on account of the fact that he had offered interest and pension income in his taxable income, given the fact that both the pension and interest accrued and were received in India, the pension being payable by a former employer in India. The mere taxability of such pension and interest in India would not result in the inference that the assessee was a resident of India, since such incomes were taxable in India even in the case of a non-resident.

Examining the scope of total income in the case of a nonresident, the tribunal noted that it was only when one of the 2 conditions – i.e. income was received or was deemed to be received in India by or on behalf of the nonresident or income accrued or arose or was deemed to accrue or arise to the non-resident in India – was fulfilled, that the income of a non-resident could be brought to tax in India. The tribunal held that salary was compensation for services rendered by an employee, and therefore situs of its accrual was the situs of services being rendered, for which salary was paid. It noted that in the case of CIT vs. Avtar Singh Wadhwan 247 ITR 260, the Bombay High Court had held that income from salary, even in the case of crew of an Indian vessel operating in international waters, was to be treated as having accrued outside India. According to the tribunal, it was incorrect to assume that an employee got a right to receive the salary just by getting an appointment letter, because unless services were rendered, no right to receive salary accrued to an employee. Therefore, according to the tribunal, the assessee got the right to receive salary income when he rendered the services, and not when he received the appointment letter.

The tribunal next considered the aspect of whether the income was received in India, since the salary cheques were credited to the assessee’s account with HSBC, Mumbai. According to the tribunal, the law was clear that receipt of income for this purpose referred to the first occasion when the assessee got the money in his own control, real or constructive. What was material was the receipt of income in its character as income, and not what happened subsequently, once the income, in its character as such, was received by the assessee or his agent. An income could not be received twice or on multiple occasions. The bank statement of the assessee clearly revealed that these were US dollar denominated receipts from the foreign employer credited to the NRE account of the assessee with HSBC, Mumbai.

The tribunal noted that the assessee was in lawful right to receive those monies as an employee at the place of employment, i.e. at the location of his foreign employer. It was a matter of convenience that the monies were thereafter transferred to India. According to the tribunal, these monies were at the disposal of the assessee outside India, and it was in exercise of his rights to so dispose of the money, that monies were transferred to India. The tribunal referred to the decision of the Madras High Court in the case of CIT vs. A P Kalyanakrishnan 195 ITR 534, where the assessee’s pension from the Malaysian government was remitted by the Accountant General of Malaysia to the Accountant General, Madras, for onward payment to the assessee. While rejecting the contention of the revenue that the pension was to be regarded as having been received in India, the court in that case had observed that the pension payable to the assessee had accrued in Malaya, and only thereafter by an arrangement embodied in the letter…………, the pension had been remitted to the assessee in India and been made available to him. The Madras High Court had therefore held that the assessee had to be regarded as having received the income outside India and that the pension had been remitted or transmitted to the place where the assessee was living, as a matter of convenience, which would not constitute receipt of pension in India by the assessee.

According to the tribunal, once an income was received outside India, whether in reality or on constructive basis, the mere fact that it had been remitted to India would not be decisive on the question as to whether the income was to be treated as having been received in India. The tribunal observed that the connotation of an income, having been received and an amount having been received were qualitatively different. The salary amount was received in India in this case, but the salary income was received outside India. The tribunal further noted that it was elementary that an income could not be taxed more than once, but, if at each point of receipt, the income was to be taxed, it may have to be taxed on multiple occasions. The tribunal therefore held that in a situation in which the salary had accrued outside India, and thereafter, by an arrangement, salary was remitted to India and made available to the employee, it would not constitute receipt of salary in India by the assessee, so as to trigger taxability under section 5(2)(a). The tribunal therefore deleted the addition of the salary amount credited to the NRE bank account in India.

Tapas Kr Bandopadhyay’s case
The issue again came up recently before the Kolkata bench of the tribunal in the case of Tapas Kr Bandopadhyay vs. DyDIT 70 taxmann.com 50.

In this case, the assessee was a marine engineer, who was a non-resident. During the year, he was engaged with an Indian company and a Singapore company as a marine engineer, working in international waters, and received remuneration from both the companies. His contract of service with the Indian/foreign shipping company was executed in India with an agent, before joining the ship. His residential status was non-resident, on account of the fact that he was outside India for more than 182 days, sailing in international waters. The salary incomes were received by credit to the assessee’s NRE accounts with banks in India.

The assessee claimed that the salary incomes were exempt from tax, being received from outside India in foreign currency. The assessing officer accepted the residential status of the assessee as a non-resident, after verification of the passport and other details. He, however, asked the assessee to show cause as to why the incomes received in India by way of credit to the NRE accounts maintained in India should not be taxable, since the income received in India was taxable in case of nonresidents. The assessee responded by stating that the entire amount was received in foreign currency outside India and were credited to his NRE accounts in India, and that the amounts received in foreign currency could not be deemed to be received in India. It was also pointed out that only foreign currency could be deposited in NRE account, and hence the amounts credited to the NRE account were received outside India. The assessing officer rejected the assessee’s contention that amounts received in foreign currency were not taxable in India, and observed that any income received or deemed to be received in India was taxable in India, irrespective of the currency in which such amounts were received.

The assessing officer observed that income received in India was taxable in all cases (whether accrued in India or elsewhere), irrespective of residential status of the assessee. According to the assessing officer, the meaning of the term “income received in India” was significant. If the place where the recipient got the money on the first occasion under his control was in India, it would be income received in India. In the case before him, since the income was remitted by the employer to the bank accounts of the assessee maintained in India, the assessee got the money under his control for the first time in India. The assessing officer, therefore, taxed the salaries for the services rendered overseas, received by the assessee by credit to his bank accounts from his employers.

Before the Commissioner (Appeals), on behalf of the assessee, it was argued that:

(a) The assessee was a non-resident rendering services outside India.

(b) The payments were being made by a foreign company outside India and the foreign company did not have any permanent establishment in India.

(c) The point of payment was to be taken into consideration for determining the provisions of section 5(2)(a) of the Income Tax Act and the point of payment should be considered as the point of receipt.

(d) It was immaterial that the payment was being transferred by the foreign company or remitted by the foreign company to the NRE accounts in foreign exchange in India, because payments had been made by the foreign company outside India and the point of payment was to be taken as the point of receipt.

(e) The amount which was received by the assessee from the foreign company was in foreign exchange and therefore income could not be said to have been received in India, where payment had been received in foreign currency.

(f) The provisions of section 5(2)(a) had to be interpreted in a manner that it did not render the section meaningless. If interpretation as made out by the Department was adopted, then definitely the section would be otiose and meaningless, because no benefit would be given to non-residents, even if all the conditions had been satisfied.

(g) The true interpretation of the provisions of section 5(2)(a) to be adopted for income received or deemed to be received in India, was that the payments had been made in India in Indian currency and the recipient of the payments had received payments in Indian currency.

The Commissioner (Appeals) rejected the assessee’s arguments, and upheld the order of the assessing officer.

Before the tribunal, on behalf of the assessee, reliance was placed on the decisions of the Karnataka High Court in the case of Prahlad Vijendra Rao (supra) and of the Bombay High Court in the case of Avtar Singh Wadhwan (supra). Reliance was also placed on the decision of the Agra bench of the tribunal in the case of Arvind Singh Chauhan (supra).

On behalf of the revenue, it was argued that income will get included in the total income of a non-resident through any of the four modes prescribed in section 5(2). All the four modes stood on their own legs, or else the enactment would be rendered redundant. There was no specific section in the Act, which dealt with income accruing or arising to any person only in India, though section 5(2) (b) used the term “accrues or arises to him in India”. The context of this term was provided by section 5(1)(c), which mentioned that total income of a person resident in India included all income from whatever source, which accrued or arose to him outside India. This was the reason that the main charging section, section 4, did not make any reference to the words “in India”, as it had to provide a basis of charge for both – income accruing or arising to a person in India as well as income accruing and arising to a person outside India. The charging section did not have a territorial bias. Similarly, section 15(a) also did not reflect any locational preference, as salary could become due to an assessee anywhere in the world. Salary due from an employer was taxable, whether paid or not.

Reliance was placed on the observations of the Supreme Court in the case of CIT vs. L W Russell 53 ITR 91, where the Supreme Court had held as under:

“the expression ‘due’ followed by the qualifying clause ‘whether paid or not’ shows that there shall be an obligation on the part of the employer to pay that amount, and a right on the employee to claim the same.”

Therefore, it was argued that taxation of salary was on the basis of the contractual right of the employee to receive his salary, and nothing else, and it had no relation with location or place of services rendered or to where the amount had become due. The place where it had become due and the place where service was rendered did not form a basis of charge u/s. 15.

It was further argued on behalf of the revenue that though the assessee had rendered services outside India, he had received salary in India by way of fund transfer from the foreign company directly to the NRE account of the assessee in India. It was argued that the receipt contemplated u/s. 5(2)(a) was actual receipt. Hence, such income was actually received in India and was taxable in India. Reliance was placed on the Third Member decision of the Mumbai bench of the tribunal in the case of Capt A L Fernandez vs. ITO 81 ITD 203, which was claimed to be directly on the point. The Bombay and Karnataka High Court decisions relied upon by the assessee were sought to be distinguished by the revenue, on the ground that they were rendered in the context of taxability u/s. 5(2)(b), and not section 5(2)(a), and that they did not frame any question of law.

The tribunal noted that the scheme of the Act was such that the charge of tax was made independent of territoriality, residency and currency. According to the tribunal, the assessee was only trying to introduce one more layer to the entire transaction, that the assessee had the control over his money in the form of salary income in international waters, and for the sake of convenience, he had instructed the foreign employer to send the monies to his NRE account in India. The assessee’s argument was that what was brought into India was not the salary income, but only the salary amount. The tribunal, however, held that there was no evidence brought on record to prove that the assessee had control over his salary income in international waters.

The tribunal further observed that if this argument of the assessee were to be accepted, then the assessee went scot-free, not paying tax anywhere in the world on this salary income. According to the tribunal, the provisions of section 5(2)(a) were probably enacted keeping in mind that income has to suffer tax in some tax jurisdiction. The tribunal observed that it believed that such provisions would exist in tax legislation of all countries.

The tribunal held that if the argument of the assessee were to be accepted, it would make the provisions of section 5(2)(a) redundant. A statutory provision was to be interpreted to make it workable rather than redundant. In case of non-residents, the scope of total income had four modes, one of which was receipt in India from whatever source derived. If this was construed to mean that income from whatever source should first accrue or arise in India, and then it should be received in India to be included u/s. 5(2)(a), then section 5(2)(a) would lose its independence and would become a subset of section 5(2)(b). There would then not be any need for having section 5(2)(a) on the statute.

The tribunal noted that the issue before the Bombay High Court in the case of Avtar Singh Wadhwan (supra) was about the place of accrual of income, and the court held that income accrued in the place where the services were rendered, which in that case, was admittedly outside India. According to the tribunal, the Bombay High Court did not deliberate upon the fact whether the receipt of the income was in India, as the issue was only about the place of accrual of income in the context of section 5(2) (b). This decision was followed by the Karnataka High Court in case of Prahlad Vijendra Rao (supra).

Addressing the argument of the assessee that salary was received on the high seas, and by way of convenient arrangement, was directed to be deposited in the NRE account of the assessee in India, the tribunal raised the question whether a person could receive salary on high seas. According to the tribunal, the only possibility of receiving salary on board a ship on high seas was to receive it in physical currency. The tribunal observed that it was not the assessee’s case that the physical currency got deposited in the NRE account. The money was transferred from the employers account outside India to the assessee’s NRE account in India.

Referring to the decision of the Agra bench of the tribunal in the case of Arvind Singh Chauhan (supra), the Kolkata tribunal observed that this decision was based on the decision of the Madras High Court in the case of Kalyanakrishnan (supra). In that case, the facts were distinguishable from the facts of the case before it, as the income in that case was taxable in Malaysia. In the case before the Kolkata tribunal, the income did not suffer tax in any other jurisdiction nor was it received in any other tax jurisdiction. The receipt in the NRE account in India was the first point of receipt by the assessee, and according to the tribunal, prior to that, it could not be said that the assessee had control over the funds that had been deposited in the NRE account by the employer. Based on the Madras High Court decision, the Agra bench had held that the assessee had a lawful right to receive the salary as an employee at the place of employment, i.e. at the location of his foreign employer, and it was a matter of convenience that the monies were thereafter transfer to India. The Kolkata tribunal observed that in section 5(2) (a), right to receive salary was not the relevant criterion, but the relevant criterion was the receipt of payment, which was admittedly in India. The Kolkata tribunal therefore expressed its doubts as to the applicability of the Madras High Court decision in Kalyanakrishnan’s case to the facts before it.

Finally, the Kolkata tribunal placed reliance on the Third Member decision of the Mumbai tribunal in the case of Capt A L Fernandes (supra), where the Mumbai tribunal held that there was a clear finding and there was no dispute that the salary was received in India. Since the ships were not regarded as part of India, the services were rendered outside India. However, since the salary was received in India, it was held to be taxable in India u/s. 5(2)(a). According to the Kolkatta tribunal, this decision clearly laid down that receipt in India of salary for services rendered on board a ship outside the territorial waters of any country would be sufficient to give the country where it was received, the right to tax the income on a receipt basis. The Kolkatta tribunal also noted that the Third Member decision was not brought to the notice of the Agra tribunal, when it decided the issue.

Since a Third Member decision was equivalent to a Special Bench decision, the Kolkata tribunal followed the Third Member decision, holding that salary was received in India by credit to the NRE account of the employee was taxable in India by virtue of the provisions of section 5(2)(a).

Observations
The issue really is whether the assessee can be said to have obtained control over his salary at the place where his employer is located, and therefore whether the receipt of the salary is outside India. While the Agra bench of the tribunal was of the view that the assessee obtained control over his salary at the place where his employer was located, as he had a right to receive the salary at that location, the Kolkatta bench was of the view that the assessee had not obtained control over his salary at the location of the foreign employer merely on account of the contract of employment.

Interestingly, the Supreme Court in the cases of Raghava Reddi vs. CIT 44 ITR 720 and Standard Triumph Motor Co Ltd v CIT 201 ITR 391, has held that crediting the account of the assessee in the books of the payer Indian company amounted to a receipt by the foreign company in India.

In Raghava Reddi’s case, the Supreme Court observed:
“This leaves over the question which was earnestly argued, namely, whether the amounts in the two account years can be said to be received by the Japanese company in the taxable territories. The argument is that the money was not actually received, but the assessee firm was a debtor in respect of that amount and unless the entry can be deemed to be a payment or receipt, clause (a) cannot apply. We need not consider the fiction, for it is not necessary to go to the fiction at all. The agreement, from which we have quoted the relevant term, provided that the Japanese company desired that the assessee firm should open an account in the name of the Japanese company in their books of account, credit the amounts in that account, and deal with those amounts according to the instructions of the Japanese company. Till the money was so credited, there might be a relation of debtor and creditor; but after the amounts were credited, the money was held by the assessee firm as a depositee. The money then belonged to the Japanese company and was held for and on behalf of the company and was at its disposal. The character of the money changed from a debt to a deposit in much the same way as if it was credited in bank to the account of the company. Thus, the amount must be held, on the terms of the agreement, to have been received by the Japanese company, and this attracts the application of section 4(1)(a). Indeed, the Japanese company did dispose of a part of those amounts by instructing the assessee firm that they be applied in a particular way. In our opinion, the High Court was right in answering the question against the assessee.”

In Standard Triumph Motor Co Ltd’s case, royalty income payable to the assessee was credited by the Indian company to the account of the assessee in its books of account at the end of each year. The Supreme Court observed:

“the credit entry to the account of the assessee in the books of the Indian company does amount to its receipt by the assessee and is accordingly taxable and it is immaterial when did it actually receive it in the UK.”

Therefore, where the foreign employer were to credit the account of the employee in its books of account in respect of the liability to pay salary, and were then to remit the money to India, it would amount to receipt of the salary income outside India in the first place on credit of the salary to the employee’s account.

One of the aspects, which needs to be borne in mind, is the issue of non-taxability of such income in any country, if it is not taxed on a receipt basis in India. Today, one of the major issues which countries are seeking to tackle is the issue of double non-taxation, through amendment of tax treaties. The Kolkata tribunal, in a way, seeks to address this aspect through its decision, though no tax treaties were involved in this case.

In the case of Capt A. L. Fernandes, the other issue which was decided by the Mumbai tribunal was that the salary income actually accrued or arose in India, on account of the contract of employment being signed in India, and all rights flowing from that also being enforceable in India, and therefore the concept of deemed accrual u/s 9(1) was irrelevant for the purpose. Therefore, the corollary of sections 9(1)(ii) and 9(1)(iii) could not be applied for the purpose. Interestingly, the Kolkata tribunal did not refer to or follow this aspect of the decision, when deciding the case before it, though in the facts of the case before it, the contracts of employment were signed in India.

Possibly, this is on account of the fact that the Bombay High Court had clearly held in the case of Avtar Singh Wadhwan (supra) that the relevant test to be applied to decide if income accrued to a non- resident in India or outside India, is where services are rendered, and not where the contract is signed. The Karnataka High Court also, in the case of Prahlad Vijendra Rao (supra), held that u/s. 15 of the Act, even on accrual basis, salary income is taxable i.e., it becomes taxable irrespective of the fact whether it is actually received or not; only when services are rendered in India it becomes taxable by implication. However, if services are rendered outside India, such income would not be taxable in India.

Lastly, while perhaps the view of the Kolkata Tribunal does seem to be the better position based on a strict reading of the provisions, one also needs to consider the fact that in both the cases, the salaries were credited to an NRE account with a bank in India. For all practical purposes, under the Foreign Exchange Management Act, such an account is treated as the equivalent of a foreign bank account of the depositor outside India – transfers from Non-Resident Ordinary accounts (which are nonrepatriable) to such NRE accounts are governed by the procedures applicable to repatriation of funds overseas, transfer of funds from such accounts overseas is freely permissible, interest on such accounts is not taxable, etc. Given this situation, should amounts received in such NRE bank accounts not be regarded as having been received outside India? What purpose would be served by having Indian citizens open overseas bank accounts to receive their foreign salaries in the first instance, just to save on tax on such salaries?

The CDBT has come out with clarifications in the past, regarding the residential status of seafarers operating on ships in international waters, and taxability of their salary. In order to avoid further litigation, and unnecessary reduction of inflows into NRE accounts, it would be better for the CBDT to clarify that such foreign salaries credited to NRE accounts of seafarers or other NRIs would not be regarded as having been received in India.

19 Articles 5, 12 and 22 of India-UAE DTAA – The threshold of nine months for a service PE is to be calculated based on actual period for which services are rendered including the period during which services are rendered virtually and is not to be limited only to period during which the employees are physically present in India.

TS-256-ITAT-2017(BANG)

ABB FZ – LLC vs. DCIT

A.Ys: 2010-11 and 2011-12

Date of Order: 21st June 2017

Facts

The Taxpayer, a company
incorporated in the UAE, was engaged in the business of providing regional
services for the benefit of its group entities in India, the Middle East and
Africa. During F.Y. 2009-10 and 2010-11, Taxpayer entered into a regional
headquarter service agreement with its group entity in India (ICo) to provide
managerial and consultancy services comprising Occupational Health and Safety
(OHS) service, Security Service, Project Risk Management Service and Market
Development Service. These services were rendered by the Taxpayer’s employees
either by visiting India or remotely from outside India through email, phone
calls, video conferencing, etc. During the year, the employees of
Taxpayer were present in India for a period of 25 days.

The Taxpayer claimed income was
not taxable in India on the ground that:

–   in the absence of FTS Article in India-UAE
DTAA, such income would fall under Article 22 – ‘Other Income’;

–   in terms of Article 22 of the India-UAE DTAA,
such income would be taxable in India only if the UAE company had a PE in
India;

–   the UAE company did not have any PE in India
(including a service PE) since the stay of its employees was only for 25 days
in aggregate during the given year which did not cross the 9-month threshold
under Article 5 – ‘Permanent Establishment’; and

–   accordingly, income from such services
agreement was not taxable in India.

Assessing Officer (AO)
contended that the income was taxable in India as “royalty” under the Act as
well as the India-UAE DTAA. Aggrieved by the draft order of AO, Taxpayer
appealed before the DRP, which subsequently upheld order of AO. Aggrieved, the
Taxpayer filed an appeal before the Tribunal.

Held

– In absence of a valid tax residency certificate
for the relevant financial year, it was held that Taxpayer was not eligible to
claim the benefit of India-UAE treaty. Tribunal, however proceeded to decide on
the merits of non-taxability of payments made by ICo to the Taxpayer as
follows:

–   The Taxpayer merely provided access to
industrial, commercial or scientific experience acquired by it to ICo. Such
information was not available in public domain and could not be acquired by ICo
on its own effort.

–   Performing specialised services for a party
is different from transferring of specialised knowledge or skill. The Taxpayer
provided information pertaining to industrial, commercial or scientific
experience and also permitted ICo to use such confidential information. Hence,
the consideration received by Taxpayer from ICo qualifies as ”royalty” under
the Act as well as the DTAA.

–   The requirement under the DTAA for creation
of service PE is that services including consultancy services should be
rendered by an enterprise through its personnel or other employees for a period
exceeding nine months within any 12 month period. It does not require that the
employees should also be present within India for a period exceeding
nine months.

–   Undisputedly, the Taxpayer was providing
“consultancy services” in India “through its employees. Further considering
that the services could easily be provided by the Taxpayer, remotely through
virtual modes like email, internet, video conferencing etc. without
physical presence of employees, the threshold of 9-month was to be treated as
being satisfied on the facts of the case. Thus, the Taxpayer constituted a
service PE in India under the DTAA.

PS: Having decided on the
fact that the payment qualified as royalty and Taxpayer triggered Service PE in
India, the Tribunal did not further rule on the issue whether such payments
would be taxable as royalty income or

business income.

18 Chapter X, Sections 4 and 5 of the Act –– Chapter X provides manner of computation of income from international transaction – Income so computed to be considered for calculating total income u/s. 5 of the Act.

TS-346-ITAT-2017(Bang)-TP

Insilca Semiconductors India Pvt. Ltd vs. ITO

A.Y.: 2007-08, Date of Order: 15th March, 2017

Facts

Taxpayer was an Indian company.
During the course of assessment proceedings, TPO made certain transfer pricing
adjustments in relation to income from software development services. Taxpayer
contended that the charging provisions u/ss. 4 and 5 do not refer to Chapter X
dealing with transfer pricing provisions. Hence, any addition made under
Chapter X cannot be subjected to tax under the Act.

However, AO rejected the contentions of the Taxpayer.
Aggrieved by the order of AO, Taxpayer appealed before the CIT(A) who upheld
the order of AO. Subsequently, Taxpayer appealed before the Tribunal.

Held

–   Section 
4 of the Act levies tax on Total Income. Further, section 5 of the Act
provides that total income includes all income received or deemed to be
received in India or accrues or arises or is deemed to accrue or arise in India
or income accrues or arises to him outside India.

–   Income under consideration is taxable in
India as the same is falling within the scope of sections 4 and  5 of the Act. Moreover, income is to be
computed after deducting various expenses incurred for earning taxable revenue.

–   Chapter X provides the manner of computation
of income from international transaction. No dispute can be raised about
applicability of Chapter X in computing the total income, unless the
international transaction in respect of which addition is made is exempt from
tax.

–   Section 5 provides that total income is to be
computed subject to the provisions of this Act. Hence the total income u/s. 5
is inclusive of various incomes. Chapter X is part of the Act. Therefore, the
same has to be applied wherever applicable. Accordingly, the contention that
income computed under Chapter X is not taxable under the Act is not tenable.

Society News – II

GST Seminar at Ahmedabad
jointly with CA  Association of Ahmedabad
held on 23, June, 2017

BCAS held a one day seminar on GST jointly with Chartered
Accountants’ Association of Ahmedabad (CAA). The object of the conference was
to disseminate the views of eminent faculties who have carried out in depth
study of newly enacted law of GST together with their vide experience in
profession. CA Puloma Dalal, CA Chirag Mehta and CA Dushyant Bhatt, faculties
from our Society spoke on various areas of GST at length at the full day
seminar. The seminar was attended by 85 participants.  

CA. Puloma Dalal

CA. Chirag Mehta

CA. Dhushyant Bhatt
In the first session CA
Puloma Dalal gave the participants an overview of GST law including the concept
of Supply under GST and provisions relating to liability to pay Tax and Time
and Value of Supply

CA Chirag Mehta gave a
detailed presentation on provisions relating to return filing and took the
participants through the process of filing of returns. He also discussed the
statutory provisions relating to Input Tax Credit under the GST Law and the
concept of matching of ITC under the GST Law

CA Dushyant Bhatt
discussed the provisions relating to job work and dealt with various issues to
be addressed by the entity carrying out job work as well as by the entity
sending material for job work, payment of tax, TDS and E-Commerce provisions
including TCS.

A one and half hour long
interactive panel discussion was held where various questions of the
participants were taken up by the three speakers. Participants benefitted a lot
from the meeting.

GST Workshop with IMA Indore held on 24th June,
2017 at Indore

BCAS jointly with Indore Management Association (IMA)
organized Exclusive Workshop on Saturday, June 24, 2017 at Brilliant Convention
Centre, Indore titled “Fasten Your Seat Belt-GST ready for take off”.

Faculty for this workshop
representing BCAS comprised of CA. Rajat Talati, and CA. Deepak Thakkar. CA.
Santosh Muchhal, President, IMA welcomed the delegates and thanked BCAS for
this workshop. President (Elect) of BCAS CA. Narayan Pasari in his welcome
speech introduced BCAS to the gathering. He also mentioned that GST is a
win-win reform for everyone and will have lasting benefits for businessmen,
Government, consumers and professionals.

CA Rajat Talati started the first session by stating that GST
is an Integrated Tax Regime which will reduce Policy Paralysis in Indian
Economy. It will also avoid Double Taxation problem which of late is posed as a
major threat for the Indian Economy.

CA. Talati explained that
Goods and Service Tax (GST) is a destination based tax on consumption of goods
and services. It is proposed to be levied at all stages right from manufacture
up to final consumption with credit of taxes paid at previous stages available
as setoff. In a nutshell, only value addition will be taxed and applicable tax
is to be borne by the final consumer.

CA Deepak Thakkar took the
2nd Session and explained that Goods and Services Tax (GST) will be
levied at multiple rates ranging from 0 per cent to 28 per cent. GST Council
finalized a four-tier GST tax structure of 5%, 12%, 18% and 28%, with Zero to
lower rates for essential items and the highest for luxury and de-merit goods
that would also attract an additional cess. Goods and Service Tax on services
will go up from 15% to 18%. The services being taxed at lower rates, owing to
the provision of abatement, some services such as train tickets etc will fall
in the lower slabs.

It would be a dual GST with the Centre and States
simultaneously levying it on a common tax base. The GST to be levied by the
Centre on intra-State supply of goods and / or services would be called the
Central GST (CGST) and that to be levied by the States would be called the
State GST (SGST). Similarly Integrated GST (IGST) will be levied and
administered by Centre on every inter-state supply of goods and services. The
GST will be shared by the Centre and the respective State equally.

CA. Rajat Talati

CA. Deepak Thakker

He also mentioned that
there are many benefits available to small tax payers under the GST regime. The
two speakers answered the many questions raised by the participants at the end
of their sessions.

The joint workshop was a very enriching experience for the
140 participants.

Two days seminar on GST
for Trade, Industry and Professionals held on 24th& 25th
June 2017 at Ghatkopar

This two day seminar was held at
Zaverben Auditorium, Ghatkopar where 725 participants attended comprising of
chartered accountants and members of trade and industry.


CA. Sunil Gabhawalla


CA.Mandar Telang

 

CA. Shreyas Sangoi

 

CA. Ashit Shah
The Seminar covered almost
all aspects of Final GST law comprising of Integrated Goods and Service Tax
Act, Central Goods and Service Tax Act and State Goods and Service Tax Act
along with the rules enacted by the Government. The eminent Speakers explained
the salient features of the law including the concept of supply, classification
of goods and services, time and place thereof, value of supply, charging
provision, threshold exemption, transition provisions, composition scheme,
registration, maintenance of records, tax invoice, payment of GST including
under reverse charge, returns and other compliances, input tax credit including
Input Service Distribution Mechanism, export and import of goods and services
including SEZ, job work under GST, etc. The learned Speakers from BCAS included
CAs Sunil Gabhawalla, Samir Kapadia, Rajkamal Shah, Naresh Sheth, Jayesh Gogri,
Mandar Telang, Ashit Shah and Shreyas Sangoi. Advocate Shailesh Sheth also gave
his valuable inputs on GST at the Seminar. At the end of the seminar, there was
specific industry wise panel discussion covering, textile and garment
manufacturers, gem and jewellery, stock brokers, mutual fund and insurance
agents, transport and logistics, C & F agents, tour operators and travel
agents, builders & developers, works contractor, co-operative housing
societies, caterers, hotels & restaurants, SMEs, retailers, traders and
small scale manufacturers, leasing and right to use goods, job worker and
service providers. The overview of the new indirect tax law replacing plethora
of numerous laws and detailed discussion on each subject and dissemination of
latest knowledge alongwith industry specific panel discussion generated lot of
interest amongst the participants making the seminar interactive to a large
extent. All participants were fully enriched by the deliberations at the
Seminar.

CA. Naresh Sheth

CA. Rajkamal Shah

CA. Samir Kapadia

Lecture Meeting on GST
& CAs – Impact on Compliance & Practice held on 27th June,
2017

Indirect Taxation
Committee of BCAS organised a lecture meeting on “GST & CAs – Impact on
Compliance & Practice” on 27th June, 2017 at K. C. College Auditorium,
Churchgate which was addressed by CA. Sunil Gabhawalla.


CA. Sunil Gabhawalla

With GST becoming a reality,
there were many issues which were faced by the practising chartered accountants
like the impact on billing under the Service Tax law and receipt under the GST
regime, paying tax on procurements from unregistered vendors, concept of supply
and place of supply with respect to clients being located in other states, a
multi-locational firm etc. CA, Gabhawalla explained about the new GST Law, its
challenges and compliances and how it is going to impact practicing Chartered
Accountants. He also enlightened on the Composition Tax and monthly return
filing process under GST. 

The speaker explained in detail and in candid way the
challenges that a practising chartered accountant would face, He also answered
a few queries raised by the members.

The participants benefitted a lot from the meeting.

‘New Curriculum of CA
Course – Has the bar been raised? organised on 5th July, 2017 at
BCAS.

HDTI Committee had organised a talk on ‘New Curriculum of CA
Course – Has the bar been raised?’ by Member of Central Council of ICAI, CA
Nihar Jambusaria.

The talk was organised for students who are eligible to
appear for CA exams under new syllabus and having their doubts regarding the
same.

CA Nihar Jambusaria meticulously explained each and every
aspect of the new curriculum and also provided a comparative analysis between
the old and new curriculum. The talk was followed by an extensive ‘Q&A’
session wherein students sought clarifications for their doubts and the speaker
positively answered all their queries.

The talk received overwhelming response from the student
fraternity. Further, quite a lot of students also took the benefit of live
streaming of the seminar at their respective places or CA firms.

The talk provided valuable
guidance to all students and was widely appreciated. 

Study Circle Meeting on
Technology Trends: Impacts of Artificial intelligence, Machine learning,
Drones, Big Data held on 5th July, 2017 at BCAS Conference Hall.

At this study circle meeting, Mr. Nikunj Sanghvi, a Mobile /
Digital Professional from USA, shared his insights on the upcoming technology
trends and their probable impact on businesses going forward. He started by
explaining the trend of expectations towards new technologies – how they
initially reach a peak followed on by disillusionment as the technologies are
not as good as expected and later on get slowly accepted by public at large. He
covered many different innovations including drones, augmented reality, digital
twins, big data, artificial intelligence & machine learning, intelligent
apps, autonomous vehicles, speech recognition and voice interfaces, block chain
and crypto currencies.

Mr Sanghvi also explained these innovations and their impact
which are already seen in some business areas. For example, using drones,
auditors are doing a physical check of goods in large warehouses in a day which
otherwise would take them weeks! On giving such other examples, the immediate
query from the group was what will happen to many existing jobs. Mr Nikunj
mentioned that while there may be jobs which are lost as and when these
technologies become mainstream, he was positive that there will be many newer
jobs which people will be able to fill in. His point was that Man’s wants are
unlimited and even if a few wants are met by these new technologies, there will
be many more which will remain unfulfilled. Therefore, there may be no need to
worry unnecessarily for job losses.

The meeting ended on this positive note and participants
benefitted a lot.

69th
Foundation Day Lecture Meeting on “ENERGising India-Changing Paradigm for
Professionals” held on 6th July, 2017 at Garware Club House,
Churchgate, Mumbai

A lecture meeting on “ENERGising India-Changing Paradigm for
Professionals” was held on 6th July, 2017 on the occasion of 69th
Foundation Day of the Society which was addressed by our Hon’ble Union Minister
of State (IC) for Power & Renewable Energy CA. Piyush Goyal.  President CA. Chetan Shah briefly touched
upon the GST regime and also shared the profile of Mr Goyal while welcoming the
Chief Guest and then requested him to address the august audience.

CA. Piyush Goyal – Minister
of State for Power, Coal, New
and Renewable Energy and
Mines (Independent charge)

Mr Goyal started his oration with the past memories of his
BCAS membership and appreciated the caricature of the cover design of GST issue
of July Journal stating that the cover design is very well presented. He then
talked about the GST Bill and explained how GST Council has been empowered to
function without any interference from the Government. Mr Goyal also emphasized
that GST is a great testimony with the culmination of 17 taxes into one tax
“GST” where the Traders, Businessmen, Manufacturers and others will get the
Input Tax Credit when goods move from one place to another. This transformation
would help to curb inflation, bring transparency, eradicate the atmosphere of
uncertainties and corruption, eliminate black money etc. This revolutionary
step has been taken by the Government in the national as well as public
interest without any political opportunism. 

 

BCA Journal – GST Special Issue Release
L to R : CA. Sunil Gabhawalla, CA. Narayan Pasari, Shri Piyush Goyal (Speaker), CA.
Chetan Shah (President), CA. Manish Sampat, CA. Suhas Paranjpe, CA.Abhay Mehta.

On the topic of the Lecture Meeting “ENERGising
India-Changing Paradigm for Professionals”, he cited Mahatma Gandhi Quote
that we are the trustees of the Planet and it is our collective responsibility
to keep the environment clean, abolish pollution and adapt to healthy and
hygienic climate changes for better quality of life for 1.25 billion Indians.
Our inhabitants especially in the rural areas cannot afford to live without
electricity, shelter, transportation, medical facilities etc and Government has
taken strong steps to provide these amenities to majority of the villages and
would reach the zero defect in a phased manner. Mr Goyal also informed the
gathering that at present, India is energy surplus and self-sufficient in Power
Distribution. As per the world standards, we are contributing to clean energy
and reducing pollution levels. He also urged upon the citizens to use LED bulbs
to conserve the energy and contribute in Nation Building. Besides, Mr Goyal
also remembered our armed forces and assured to provide them with the most
modern equipment and technology to fight any internal and/or external threat.

 

Audit Checklist Publication Release
L to R : CA. Raman Jokhakar, CA. Sunil Gabhawalla, CA. Narayan Pasari, Shri
Piyush Goyal (Speaker), CA Chetan Shah (President), CA. Manish Sampat, CA.
Suhas Paranjpe, CA Abhay Mehta

He thereafter appealed to the Chartered Accountants
Fraternity to strengthen and upgrade the audit standards to curb the Tax
evasion/avoidance and further transform the future of India, because CAs are
the force to reckon with in the professional industry.

At the end, he expressed confidence that Chartered
Accountants can do a lot for the public good and make India again.

The audience got mesmerized with Mr Goyal’s presentation
skills and gained a lot from the insights straight from the heart and from his
spellbinding Speech.

Lecture Meeting on “Recent Developments in Taxation of
Capital Gains” held on 11th July, 2017.

Taxation Committee of BCAS organized a Lecture Meeting on
Recent Developments in Taxation of Capital Gains on 11th July, 2017
at IMC, Churchgate, Mumbai. The first meeting of the year at BCAS which
commences from the Founding Day, 6th July, was addressed by CA.
Pinakin Desai wherein he explained about the Notional Taxation w. r. t. Fair
Market Value (FMV) of unlisted equity shares under Sec 50CA, shift of base year
for indexation from 1981 to 2001 to compute the cost of bonus shares and
amendment to Sec 10 (38) with background and notification on 3rd proviso
to Sec 10(38). He also discussed about the Protocol to India – Mauritius Treaty
with emphasis on Mauritius and Multilateral Treaty (MLI) and protocol amending
India-Singapore Treaty. CA. Pinakin Desai further explained about the valuation
of shares under Normative Valuation with draft valuation rule notified u/s. 50
CA and issues under normative valuation. He also deliberated on Sec 195 –
withholding actual or notional consideration for Sec 50 CA. 



CA. Pinakin Desai

Mr Desai also explained the
above topics with case studies on (i) resolving normative valuation of shares
as per draft notification, (ii) valuation of unquoted equity shares, (iii)
acquisition in IPO, (iv) acquisition pursuant to merger, (v) gift of shares,
(vi) Inter-se promoter transfer, (vii) direct transfer vs. indirect transfer,
(viii) impact of dividend distribution and (ix) case study under
India-Mauritius Treaty.

The hall was packed with
the audience and it was a very fulfilling and enriching experience for the
participants to benefit immensely from the meeting.

GST Training Seminar Jointly with NACIN held from 13th
July to 15th July, 2017 at BCAS Hall

With the roll out of GST on
1st July, 2017, the 3rd batch of GST Training Seminar for
Trade, Industry & Profession was organised by Indirect Taxation Committee
of BCAS jointly with the National Academy of Customs, Indirect Tax and
Narcotics (NACIN), to make understand the intricacies and the importance of GST
laws & provisions.

CA. Mandar Telang

CA. Shreyas Sangoi

 

CA. Chirag Mehta

CA. Govind Goyal

The purpose of holding such training workshop
was dual – one to educate the trade and industry about the new legislation and
more importantly, partnering Government in disseminating information about this
landmark “One Nation One Tax”.

 The speakers at the Seminar were BCAS members
accredited by the NACIN as GST Trainers, and a few officials from the GST
department. The faculty from BCAS included CAs Chirag Mehta, Dushyant Bhatt,
Govind Goyal, Mandar Telang, Naresh Sheth, Rajkamal Shah, Shreyas Sangoi and Ms
Vishaka Borse, & Mr, Shrikant Shaligram from the GST Department.

CA. Naresh Sheth

CA. Dushyant Bhatt

 

CA. Shrikant Shaligram


CA. Rajkamal Shah

The participants immensely benefited from the training
programme.

Dharampur Noble Social Cause Visit – on 15th &
16th July, 2017

The visit to Dharampur was
organised for two days by the Human Development and Technology Initiative


Dharampur Noble Social Cause Visit

Committee of BCAS jointly
with BCAS Foundation, for Tree Plantation, Eye Camp project and visit to
various NGOs, at Dharampur. These NGOs are engaged in the various social
welfare activities for Holistic growth of Tribals located in the remote
interiors. A Team of 24 enthusiastic volunteers including students who were
willing to take active participation in this noble mission joined the trip.

Sarvoday Parivar Trust (SPT)

The SPT is a NGO, following
Gandhian philosophy and engaged in various tribal welfare activities in the
field of Education / Health / Agriculture / Water management / Environment,
etc. The BCAS Foundation committed for plantation of 3,000 trees to SPT. The
team also visited the Residential School run by the SPT which is home to more
than 350 children from nearby villages.. This residential school has encouraged
poor labourers and farmers in the tribal areas to send their children for
further studies. It has helped in reducing child labour, child marriage and
other social evils which takes place mainly due to illiteracy and poverty.
Members had good interactions and time with them. The School premises are old
and needs to be renovated and upgraded to provide better amenities to children.
BCAS Foundation has committed its full support for the redevelopment and
upgradation of school/ hostel.

Avalkhandi Kelavani Trust (AKT)

The AKT is an NGO which
carries out various activities in Education & Water Management in the
villages of the most backward forest of Dharampur, running a government School
where approximately 300 students are studying & has one Chhatralaya whereby
180 children are accommodated for stay from other villages who would have
otherwise been deprived of education. The BCAS Foundation committed for
plantation of 2,500 trees to AKT. On behalf of BCAS Foundation, team
distributed kits for outdoor games like cricket / Football/ Badminton  / Flying Dish etc  and many educational games at AKT for their
children. The BCAS Foundation contributed Rs. 30,000/- for setting up a library
in the Chhatralaya.

The team viewed the various
check dams created on mountains in the process of water management.

Dhanvantri Trust (DT)

The trust is founded and
managed by Dr. Kirtikumar Vaidya, from Mumbai who left Mumbai at a young age
& has dedicated his life for socio economic rural development of tribal
villages of South Gujarat. With divine blessings he started an Eye Hospital in
Vansda. Our team member had contributed Rs. 63 lakh for setting up Hospital
with latest Equipment & Technology for treating and curing all types of Eye
Surgeries.

BCAS Foundation sponsored 201 Eye Surgeries for poor Tribals & has
dedicated support for 50 more, thanks to contribution & support of Esteemed
Donors, amounting to Rs.2.01 lakh.

Dr. Vaidya proposed to set up a school in Vansda. BCAS Foundation has
committed their support for the same.

The   trip for Tree plantation
drive and the Eye Camp was truly enriching, enlightening and educational too
for the visiting members and students. The memories treasured from the trip,
would always encourage and motivate them to participate more in such events
which would be beneficial to the society at large.

Direct Tax Study Circle Meeting on ‘Income Computation
Disclosure Standards; ICDS V Tangible Fixed Assets, ICDS IX Borrowing Costs
& ICDS X Provisions, Contingent Liabilities & Contingent Assets’ on 15th
July 2017

The Chairman of the
Meeting, CA. Anil Sathe gave his opening remarks and raised some issues
relating to ICDS which could face litigation in the long run. The Group leader,
CA. Dhaval Desai drew attention to an extract from the Supreme Court decision
in Woodward Governor 312 ITR 254 wherein the Hon’ble Supreme Court observed
that for income tax purposes, profits are to be computed in accordance with the
ordinary principles of commercial accounting unless, such principles stand
superseded or modified by legislative enactments and this is where section
145(2) comes into play.

Thereafter, the group
leader briefly explained the provisions of ICDS IX ‘Borrowing Cost’-
recognition principle, definitions of borrowing cost and qualifying assets. He
explained the provisions of capitalisation in respect of specific borrowings
and general borrowings and the provisions relating to commencement and
cessation of the capitalisation. He mentioned that as per Accounting Standard
16, an asset qualifies to be a Qualifying Asset only if it takes substantial
period of time to get ready for its intended use or sale, however ICDS has done
away with the criteria of ‘substantial period of time’ (except for inventories)
and this would lead to a huge difference between the capitalisation of
borrowing costs as per books and capitalisation as per ICDS.

The group leader further
touched upon the provisions of ICDS X ‘Provisions, Contingent Liabilities and
Contingent Assets’. He mentioned the yardstick for recognition of a provision
‘probable’ as per Accounting Standard 29 has become stricter under ICDS wherein
the term ‘probable’ has been substituted with ‘reasonably certain’. Similarly,
in case of contingent assets, the term ‘virtual certainty’ used for recognition
as per AS 29 has been substituted with ‘reasonably certain’ under ICDS. He
commented that such provisions would certainly lead to preponement of income
and postponement of deduction of expenses. The group leader touched upon
transitional provisions contained in ICDS X.

Subsequently, CA. Dhaval
briefly explained the provisions of ICDS V ‘Tangible Fixed Assets’. He
highlighted one of the differences between existing AS and ICDS with regard to
treatment of expenditure between trial run and commercial production. In this
context, Revised AS 10 mandates such expenditure to be revenue in nature
whereas CBDT clarification on ICDS states that such expenditure should be
treated as capital expenditure.

The participants benefitted a lot from the
meeting.

Society News -I

Full day seminar on
“Income Computation and Disclosure Standards” held on 19th May, 2017

This seminar was held by
the Taxation Committee at Navinbhai Thakkar Hall at Vileparle (East). President
Chetan Shah gave the opening remarks followed by introduction from the Chairman
of the Taxation Committee, Mr. Ameet Patel. The event was attended by 235
participants. Topics taken up and Speakers were as under:

–    Overview of ICDS:- Mr. Pawan Kumar, CIT
(Jalandar)

–    ICDS III & VIII:- Constructions
Contracts & Government Grants :  CA.
Paresh Vakharia

–    ICDS I & ICDS X:- Accounting Policies
& Provisions, Contingent Liabilities & Contingent Assets: CA. Vishesh
Sangoi

–    ICDS IV & IX:- Revenue Recognition &
Borrowing Costs: CA. Vinita Krishnan

–    ICDS VI & VIII:- Foreign Exchange
Fluctuations & Securities: CA. Kushal Jain

–  ICDS II & V:- Valuation of Inventories
& Tangible Fixed Assets: CA. Nihar Jambusaria

Mr. Pawan Kumar, CA.
Vishesh Sangoi and CA. Kushal Jain spoke on the BCAS platform for the very
first time. 

Mr. Pawan Kumar gave an
overview of the ICDS. He also shared with the participants on why ICDS were
needed and how it came into existence. He being one of the members of Expert
Committee for drafting of ICDS shared his experiences with the participants
which was appreciated by all.

CA. Paresh Vakharia gave
his opening remarks on ICDS and explained the purpose of the said legislation.
He dealt with both the ICDS allotted to him in detail and explained nuances and
issues arising from them.

CA. Vishesh Sangoi started
his presentation by explaining the basic issues arising from ICDS I and X. He
explained various changes which would take place while undertaking Tax Audit in
post ICDS scenario compared to earlier ones with the help of various case
studies. He also touched upon disclosure requirements in Form 3CD for both
ICDS. He also responded to queries from various participants.

CA. Vinita Krishnan gave a
detailed presentation on ICDS IV & IX. She explained the basic
considerations arising out of them and also discussed the issues which one may
face while applying them. She discussed ICDS on revenue recognition with
respect to different type of incomes like dividend, royalties, interest etc.
She also answered queries from the participants.

CA. Kushal Jain explained
ICDS on securities with the help of case studies and also examples on how it
would be applied. He also explained various terms which are used in both the
ICDS. He also dealt with how the accounting entries would be affected in case
of ICDS on foreign exchange fluctuations.

CA. Nihar Jambusaria
explained the background and general principles of ICDS. He highlighted the
journey of evolution of ICDS. He also brought out the differences which will be
encountered between Ind AS and ICDS. He compared ICDS of Valuation of
Inventories with AS 2 and brought the changes between them. He also compared AS
10 with ICDS on Tangible Fixed Assets and explained the treatment under ICDS V.
He enlightened the participants with the disclosure requirements under both
ICDS and also addressed various questions from the participants. 

The sessions in the Seminar
were interactive and the speakers shared their insights on the subject and
guided the participants on how to approach the subject of ICDS while performing
a Tax Audit. The participants benefited immensely with the interactive sessions
and detailed analysis of each ICDS by the faculties.

Full day seminar on
“Practical issues in TDS” held on 20th May, 2017 at BCAS

The Full day seminar on
Practical issues in TDS was held by the Taxation Committee at BCAS Conference
Hall on 20th May, 2017. The event was attended by over 80 participants.
President Chetan Shah gave the opening remarks followed by introductory words
from the Chairman of the Taxation Committee, Mr. Ameet Patel.

Various topics were taken
up at the Seminar by the following Speakers:

–    Sections 194C, 194DA, 194EE, 194F and 194J :
CA. Saroj Maniar

–    Sections 195, 206AA, Rules 37BB and 37C :
CA. Ritu Shaktawat

–    Sections 192, 194H, 194LB, 194LBA, 194LBB,
194LBC : CA. Anita Basrur

–    Sections 194A, 194I, 194IA, 194IB, 194IC and
recent case laws on TDS : CA. Nitin Shingala

–    Issues in e-filing of TDS statements,
Sections 200A, 201 and 205 : CA. Avinash Rawani

CA. Ritu Shaktawat and CA.
Anita Basrur spoke on the BCAS platform for the first time.

CA. Saroj Maniar gave an overview of the various sections,
the case laws and circulars applicable and relevant in their context. The
speaker elaborated on the provisions of Sections 194C and 194J and covered some
industry specific issues as well as the interplay of these sections with other
sections of the Act.

CA. Ritu Shaktawat
explained the applicability of section 195. She highlighted the risk arising
out of non-compliance of applicable sections as well and provided insight on
issues surrounding Forms 15CA and 15CB. She also touched upon issues under
Section 206AA, Rules 37BB and 37C. The Speaker elaborated on contractual
remedies that one could pay attention to and should incorporate in the
agreements such as indemnity, representations and warranties, escrow,
insurance. She also explained the provisions and their application through case
studies.

CA. Anita Basrur started
her presentation by explaining the provisions of section 192 and 194H,
practical issues arising thereunder using relevant case laws and recent
circulars. This was followed by in depth discussion on sections governing TDS
on income received by securitisation trusts, business trusts and units of
Investment Funds.

CA. Nitin Shingala gave a
detailed presentation on various aspects governing sections 194A, 194I, 194IA,
194IB and 194IC. He explained the applicable provisions, issues under each of
them, supporting them by relevant case laws and circulars.  The Speaker touched upon a wide number of
judgments during the course of his talk on various sections pertaining to
deduction of tax at source.

CA. Avinash Rawani highlighted
the practical issues that arise in e-filing of various TDS statements such as
returns, correction statements, challan corrections, replies to be filed to
online communication from the TDSCPC amongst others. In addition to
highlighting the issues, the Speaker shared a lot of practical dos and don’ts
in relation to the filing of these statements.

 

CA. Saroj Maniar

 

CA. Ritu Shaktawat

 

CA. Anita Basrur

 

CA. Nitin Shingala

 

CA. Avinash Rawani

The sessions in the Seminar
were very interactive and the Speakers answered a lot of queries that were
received from the participants. The participants benefited immensely with the
interactive sessions and detailed discussions.

Half
day seminar on “Digital Transformation and GST – Opportunities and Challenges
in ERP environment” on 26th May, 2017 at BCAS

A half day seminar on
Digital Transformation and GST was organised by Human Development &
Technology Initiative Committee jointly with Indirect Tax Committee at BCAS
Conference Hall on 26th May 2017. CA. Nikunj Shah, Convenor, HDTI
Committee introduced the speakers to the participants.

The speakers – Mr. Richard
D’Souza (Vice President & Head Business Solutions-Corporate IT Mahindra
& Mahindra Group ) & Mr. Rakesh Pawaskar (General Manager Business
Solutions – Corporate IT Mahindra & Mahindra Group) made an excellent presentation
on the Technology transformation undertaken by them in their organisation. They
also explained and demonstrated through audio visual presentation, the nuances
of GST implementation, the GST implementation process at their group and how
the said group is supporting their vendors for GST implementation using state
of the art technology platform.

The seminar witnessed
excellent participation from members in practice as well as from Industry. The
objective of the seminar was to understand the innovation in technology leading
to change in accountants role from pure accounting to analytics and decision
making & to highlight how GST implementation could be achieved leveraging
technology.

 

Mr. Richard D’Souza

 Mr. Rakesh Pawaskar

The participants were
immensely benefitted from the Seminar.

GST Training for Trade,
Industry & Profession held on 29th, 30th & 31st
May 2017 & 19th, 20th & 21st June
2017 at BCAS

The Government’s decision
to roll out the GST Law on 1st July, 2017 made it all the more
important that BCAS organise more programs so as to educate and train as many
people on the intricacies and the importance of these laws.

BCAS organised two such
programs one in May from 29th to 31st and the other in
June from 19th to 21st at BCAS Conference Hall. The
purpose of holding such training workshops was dual – one to educate the trade
and industry about the new legislation and other, more importantly, being a
partner of the Government in disseminating the information about this One
Nation One Tax One Market.

These programs were conducted jointly with the National
Academy of Customs, Indirect Taxes and Narcotics (NACIN) and the sessions were
taken by members of BCAS who were accredited by the NACIN as GST Trainers and a
few officials from the Sales Tax department and NACIN also. The faculty from
BCAS included CAs Chirag Mehta, Dushyant Bhatt, Govind Goyal, Jayesh Gogri,
Mandar Telang, Naresh Sheth, Rakjamal Shah, Samir Kapadia, Shreyas Sangoi and
Sunil Gabhawalla. 

CA. Rajkamal Shah

CA. Samir Kapadia

CA. Chirag Mehta

 

CA. Shreyas Sangoi

 

CA. Sunil
Gabhawalla

The participants immensely
benefited from both the programmes.

BEPS Study Circle Meeting
held at BCAS Conference Hall on 3rd June 2017

BEPS Action Plan 6 read
with Action Plan 15 (Multilateral Instrument i.e. ‘MLI’): Preventing the
Granting of Treaty Benefits in Inappropriate Circumstances was held on 3rd
June, 2017 at BCAS Conference Hall.

Discussion was led by CA. D
S Sharma, CA Monika Wadhani and CA. Rutvik Sanghvi

This was the third meeting
on Action Plan 6: The group leaders covered overview of Article 6 to 8 of the
MLI and detailed comparison of LOB clause.

In the meeting, the group
leaders had taken up detailed discussion on following Articles of MLI read with
Article X of Action Plan 6 and had concluded discussion with emphasis on the
following:

–  Article 8 of MLI  – Dividend transfer transaction intends
to introduce a minimum shareholding period of 365 days to be entitled to
beneficial rate of taxation on dividend.

–  Article 9 of MLI – Capital Gains from
alienation of shares or interests of entities deriving their value principally
from immovable property intends to give taxing rights to the Contracting State
where immovable property situated, if at any time during the 365 days preceding
the alienation of shares, such shares derived value principally from such
immovable property.

–  Article 7(1) of MLI – Principal Purpose
Test (‘PPT Clause’): It intends to introduce a minimum standard in form of PPT
clause to be adopted by the Contracting States. The group leaders discussed the
meaning and possible interpretations of various words contained in the PPT clause
(like meaning of “benefit”, “one of the principal purposes”, etc.) and
explained each and every example given in the commentary to Action plan 6. The
group leaders also highlighted the difference and the interplay between the
Indian GAAR provisions and the PPT clause. For example, under the Indian GAAR
provisions, requirement is “if main purpose is tax benefit”vis-à-vis the PPT
clause, requirement under the MLI being “one of the principal purposes is tax
benefit”, etc. It was also discussed that PPT clause will be relevant to
consider the applicability of a tax treaty and if PPT clause is invoked then
treaty benefits shall not be available and many transactions could get
impacted. It was also discussed whether GAAR provisions can be invoked where
transaction is covered by a tax treaty.

The meeting got
enthusiastic response and the participants benefitted a lot from the
discussions

10th Jal Erach
Dastur CA Students Annual Day held on 3rd June 2017

The Jal Erach Dastur CA
Students’ Annual Day this year reached a new scale as it celebrated its 10th
Edition captioned under tagline ‘Tarang 2K17 – Tarasho Apne Talent Ke Rang.’ at
Navinbhai Thakkar Auditorium, Vile Parle on 3rd June 2017.

 

Students lining up to witness the most
awaited event of the year

This event was organized by
the Human Development and Technology Initiatives Committee of the BCAS for the
CA students. The event was truly an event ‘OF CA students, FOR CA students and
BY CA students’. It showcased their mesmerizing talents and creativity on
variety of extra-curricular activities such as elocution, debate, sketch and
slogan, photography, short film making and other talents such as singing, music
etc.

Then Vice President CA. Narayan Pasari
felicitating the Chief Guest of Tarang –
Mr. Dhaval Bathia

President Chetan Shah, Vice President
Narayan Pasari along with members of
HDTI Committee witnessing the lighting
of auspicious lamp to commence the
event

The six finalists of the Chandanben Maganlal
Bhatt ‘Elocution Competition’ were the first to witness the stage. The topics
this time were both challenging as well as riveting. This enabled a level
playing field for all participants who gave their impressive performances on
their respective topics.

CA. Nitin Shingala & CA. Meena Shah
presenting the award to the winner of
Elocution Competition ‘Speak Up’ – Miral
Majmundar

Then BCAS President CA. Chetan Shah
presenting the award to the winner of
‘CA’s Got Talent’ – Deevesh Chudasama

Post Elocution, the
winners of Photography Competition ‘Khinch Le’ were announced. This being the
second year of the competition, received unprecedented response from students.
They were given themes on which they had to click creative photographs and
mention an innovative tagline based on the theme selected.

CA Ryan Fernandez moderating the
debate competition – ‘War of Words’

Students Committee performing the flash mob

Chief Guest Mr. Dhaval Bathia giving the
keynote address

As a part of continuous improvement and innovation, this
year, a new event ‘The Screenmasters – Short-film making competition’ was also
introduced. The competition received good response from the students with 9
entries in the very first year itself. The students had to a shoot a short-film
of not more than five minutes on the given theme. The entire audience was
amazed by the professionalism and meticulousness of CA students, even in the
arena of film-making.

Mesmerising display of talent – Spray
Painting

Audience enjoying light hearted games during the break time

BCAS Students Committee, Tarang
Volunteers along with members of HDTI Committee

The final round of the
Debate Competition ‘War of Words’ followed the Photography Competition. The debate
was moderated by CA. Ryan Fernandes with two teams of four students each. The
debate had the undivided attention of the audience as each finalist defended
their case with enthralling wit and vigour. Adding some spice to the event,
this year a fourth round was introduced wherein the teams had to interchange
their erstwhile position vis-à-vis the topic. The participants as well as the
audience enjoyed the debate to the core.

After this, the students presented a 3 minute “flash mob”
which was choreographed by CA Hrishikesh Joshi. This short stint kept the
audience alive and cheering.

After the flash mob, the charged up audience were enchanted
by the Keynote address of the Chief Guest Mr. Dhaval Bathia, a well-known
author and speaker as well as Guinness Record Holder. His speech was both
motivational and thought provoking as he used day-to-day anecdotes and examples
to convey his message. He emphasized on the need to think out-of-the-box and
‘go deep’ into the realm of your work to carve out definite success. He also
touched upon finer aspects of ‘Digital India’ and how it has revolutionized the
style of working, even for the CA fraternity.

Immediately after that,
the stage was set for the flagship and most awaited competition the ‘The Talent
Show’. To kick-start the event, a ‘Students Band’ comprising of Tej Bhatt,
Sridisha De, Aagam Jain and Jigar Jain rocked the stage. These students
volunteered for this special performance to strike the chord for the upcoming
competition.

Finally the guitars were
tuned, the keyboard was ready, the dancers were tapping their feet, and the
stage was then taken over by young and talented CA students who showcased their
talent ranging from dance, singing, instrumental, mimicry and spray painting.
All 9 finalists gave amazing performances and the audience were left spell
bound. The cheering of the crowd with claps and whistles increased with each
performance as the finalists kept on raising the bar. The judges who were
captivated by the charm of the performances had a Himalayan task in choosing
the winners.

With the clock-ticking,
the winners of the competition representing their firms were finally announced as under:

The entire evening was
hosted fabulously by Mr. Pushkar Adhikari, Ms. Tanvi Parekh, Ms. Miral Majumdar,
Ms. Aadhira Dinesh and Mr. Manthan Rawat with their astounding performances,
display of energy and loads of wit and humour. 

Mr. Prathamesh Mhatre
proposed the well-deserved vote of thanks to each and everyone involved in the
success of the event. A total number of 492 students registered for the 10th
Jal Erach Annual Day, setting an overwhelming benchmark.

Essay Writing Competition ‘Awaken the Writer Within’

Prize

Name of Student

Name of Firm

1st Prize Winner

Salonee Kabra

SRBC & Co LLP

2nd Prize Winner

Kanika Mangal

Dinesh & Agarwal

3rd Prize Winner

Anisha Talesara

Kailash Chand & Co

Rotating Trophy
went to Salonee Kabra

Elocution Competition ‘Speak Up’

1st Prize Winner

Miral Majumdar

CNK & Associates LLP

2nd Prize Winner

Tanvi Parekh

Sanjay & Snehal

3rd Prize Winner

Apurva Wani

Aneja & Associates

Rotating Trophy
went to Miral Majumdar

Talent Show ‘CA’s Got Talent’

1st Prize Winner

Deevesh Chudasama

Khandelwal Jain & Co

2nd Prize Winner

Tej Bhatt

CNK & Associates LLP

3rd Prize Winner

Vivek Rajpurohit

Sara & Associates

Rotating Trophy
went to Deevesh Chudasama

Debate Competition ‘War of Words’

Winning Team

Tanvi Parekh (Best Team Member )

Sanjay & Snehal

 

Hardik Adenwala (Best Team Member)

KNAV & Co

 

Sonal Agrawal (Best Team Member )

R M Ajgaonkar & Co

 

Salonee Kabra (Best Team Member )

SRBC & Co LLP

Best Debater

Tanvi Parekh

Sanjay & Snehal

Rotating Trophy
went to Tanvi Parekh.

Sketch & Slogan Competition ‘Leave your Mark’

1st Prize Winner

Chandrika Chaudhari

Khimji Kunverji 
& Co

2nd Prize Winner

Eashan Gokhale

Gokhale & Sathe

3rd Prize Winner

Vishishta Goyal

N P Shah & Associates LLP

Photography Competition ‘Khinch Le’

1st Prize Winner

Deevesh Chudasama

Khandelwal Jain & Co

2nd Prize Winner

 Neel Khimasia

GBCA & Associates.

3rd Prize Winner

Aurobindo Chatterjee

R R Muni & Co

Short Film Making Competition ‘The Screenmasters’

1st Prize Winner

Anirudh Parthasarathy

R T Jain & Co

Hearty Congratulations to all the
winners and their firms.

Judges for the Various
Competitions were as follows:

Competition

Elimination Round

Final Round

Essay Writing

CA Mukesh Trivedi
& CA Gracy Mendes

Elocution Competition

CA Meena Shah & CA Mihir Sheth

CA Mayur Nayak & CA Divya Jokhakar

Talent Show

Devansh Doshi & Kartik Srinivasan

Pallavi Choksi & Neetu Shah

Debate Competition

CA KK Jhunjhunwala & CA Ryan Fernandes

CA Narayan  Pasari
& CA. Shalin Divatia

Sketch & Slogan Competition

CA Chirag Doshi
& CA Divya Jokhakar

Photography Competition

CA Anand Kothari
& CA Nikunj Shah

Short Film Making Competition

CA.  Mihir Sheth & Mr Pratik Palan

The entire evening was
hosted fabulously by Mr. Pushkar Adhikari, Ms. Tanvi Parekh, Ms. Miral
Majumdar, Ms. Aadhira Dinesh and Mr. Manthan Rawat with their astounding
performances, display of energy and loads of wit and humour. 

Mr. Prathamesh Mhatre
proposed the well-deserved vote of thanks to each and everyone involved in the
success of the event. A total number of 492 students registered for the 10th
Jal Erach Annual Day, setting an overwhelming benchmark.

Study Circle Meeting on
“Build Brand U for Professional
Success” at BCAS on 13th June, 2017

Human Development and Technology Initiatives Committee of
BCAS conducted a Study Circle Meeting on “Build Brand U for Professional
Success” (Enhancing your Image as Professional) on June 13, 2017

The meeting was addressed by Mr Sunil Kini, Managing Director
& Principal Trainer; Gurukul Training & Consulting Pvt Ltd. Mr Kini in
his presentation on the subject in a very succinct but effective manner
explained that “Managing one’s image is the key to success in any walk of
life”. Your Image says a lot about you. A right Image can go a long way in your
life.

Each one of us presents an
image on the basis of which people form impressions about us. These impressions
pave the way in our professional growth path.

Whether as a self-employed professional or working with an
organization presenting ones best is an important ingredient for professional
accomplishments

The Workshop deliberated upon the following basic synopsis of
life:

–    Develop Self-Image for Superior Perception
Management

–    4 A model for Professional  Growth

–    Look the part

–    Appearance Management-Gateway to creating an
Impact

–    Importance of Professional Decorum and
Kinesics

–    Build Brand You.

–    Everyone needs image management, only the
intelligent realize in time.

The session ended with a quote: Do not underestimate the
Power of your Appearance, Build your Personal Brand for SUCCESS

The participants felt enriched with request for more such
programmes in future.

FEMA Study Circle Meeting held on 15th June, 2017
at BCAS

FEMA Study Circle Meeting was held on 15th June,
2017 on the topic “External Commercial Borrowing (ECB)”.

The group was led by CA Palav
Shah Parekh.

The depth of the
presentation was excellent with members’ interactions on various case studies
presented. The case studies were very engaging and informative. This gave
participants a 360 degree perspective of the subject.

The speaker covered updates
which were as recent as 8th June.

The participants also
benefited due to the practical exposure of the speaker who shared many insights
about Authorised Dealer’s interaction with the RBI on ECB matters.

Direct Tax Study Circle
Meeting on ‘Income Computation Disclosure Standards; ICDS VI “Effect of changes
in Foreign Exchange rates” on 20th June 2017 at BCAS Conference
Hall.

The group leader, CA.
Abhitan Mehta briefly explained the scope of ICDS VI ‘Effect of changes in
foreign exchange rates’ and the definitions of important terms mentioned in the
standard. He explained the concept of ‘foreign currency transaction’ and the
provisions pertaining to initial recognition of these transactions. The
Chairman of the session, CA Gautam Nayak commented upon the anomalies created
due to introduction of ICDS wherein the law makers have merely picked up the
language of the accounting standards and inserted them in the form of ICDS
without realising the difference between the recognition of items in books of
accounts and computation of income.

Thereafter, CA. Mehta
touched upon the provisions contained in Rule 115 of Income Tax Rules which
talks about the rate of exchange for conversion into rupees, of income
expressed in foreign currency. He also highlighted that in case of difference
between the provisions of ICDS and Income Tax Rules, the Income Tax Rules would
prevail.

CA. Mehta then explained
the difference between monetary and non-monetary items and highlighted a
practical issue which one may face when debentures / preference shares
(optionally convertible) need to be classified either as monetary or
non-monetary assets. Thereafter, he gave an overview of the year end valuation
rules for assets and liabilities and provisions of section 43A of the Income
Tax Act. 

The group leader also
discussed various SC and HC decisions such as Shell Company of China Ltd.
(22 ITR 1) (CA), CIT vs. Tata Locomotive And Engineering Co. Ltd (60 ITR 405
(SC), Sutlej Cotton Mills Ltd. vs. CIT (116 ITR 1)(SC), State Bank of India vs.
CIT, CIT vs. Jagatjit Industries Ltd. (337 ITR 21) (Delhi HC) and CIT
vs. PVP Ventures Ltd (211 Taxman 554) (Madras HC) whereby the Courts in the
context of allowability of foreign gain / loss as expenditure, have held that
nature of gain/loss – capital or revenue needs to be identified.

CA. Mehta also explained
the provisions relating to foreign operations and treatment of opening balance
of foreign currency translation reserve (FCTR) existing on 01.04.2016 as
clarified by CBDT in the FAQ’s. Lastly, he touched upon provisions regarding
forward exchange contract and the differential treatment for premium/discount
under Accounting Standards and ICDS.

The participants were
thoroughly enlightened by the presentation on the subject.

Yoga Day Celebrations held on 21st June, 2017 at
BCAS

Human Development and Technology Initiatives Committee had
organised a yoga session jointly with Indian Spiritual Healing (ISH) Foundation
on Wednesday 21st June 2017 at BCAS Conference Hall, to commemorate
the International Yoga Day.

Mr. Pradeep Thakkar, a Professional Yoga teacher and an
active member of the ISH Foundation guided the participants who attended this
programme.

He demonstrated and guided
participants to perform different asanas with ease and comfort for a healthy
body and mind relaxation.

Participants were also
taught various pranayama to cure diseases. The session ended with positive
affirmations, energy balancing and Omkar Sadhana. Many participants requested
for a regular/long duration yoga course. It was a good learning of Yogasana and
Pranayam for healthy body and peaceful mind.

68th Annual General Meeting on 6th July 2017

The 68th Annual General Meeting of the Society was held
at the Garware Club, Churchgate, Mumbai on Thursday,
6th July 2017.

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

Mr. Suhas Paranjpe, Treasurer announced the results
of the election of the President, Vice President, two
Secretaries, Treasurer and eight members of the
Managing Committee for the year 2017-18. The names
of members as elected unopposed for the year 2017-18
were announced. He also announced the names of the co-opted members for the year 2017-18.

Later, the “Jal Erach Dastur Awards” for best feature and
best article appearing in BCAS Journal during 2016-17
were announced. The winners were: Dr. Anup P. Shah for
the best feature, and CA. Gautam Nayak/ CA. Pradip N.
Kapasi for best article.

The Special GST issue of the Journal of July 2017
exclusively on “GST Features” and BCAS Publication
Audit Checklist- 7th Enlarged Edition-July, 2017 were
released at the hands of Hon’ble Minister of State (IC) for
Power & Renewable Energy Mr Piyush Goyal at the 69th
Foundation day of the Society celebrated after the Annual
General Meeting of the Society.

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

Outgoing President’s Speech

My colleagues on the dais,
Past Presidents, Ladies and
Gentlemen,

Good Evening members!

This is Spencer West.

There aren’t many people in the world like him. At the age of five
he tragically lost both his legs. But
the Canadian-born 31-year-old
defied all the odds and climbed
Mt. Kilimanjaro! This is a story of
determination, courage, focus,
perseverance and hard work. A
story of months of intensive training to overcome extreme
physical pressure.

What caught my eye is the message on his T-Shirt –
“Redefine Possible.” At BCAS, as we gather here on
our Founding Day, I believe we too have lived this motto.
As a group of dedicated volunteers, driven by a vision,
have travelled a long way to reach this … Founding Day.
So many people here, including my colleagues on the
Dias, have overcome situations when we were up against
the wall and we persevered, when there were moments
of frustration and we showed temperance, things often
???????????????????????????????????????????????????????
stayed the course. So many have given their personal
and family time and made these years and particularly the
last one year fruitful for members. As I stand here on my
last day as the President I can say that as we surmount we now have the confidence to DREAM BIGGER!

Having said that I would like to walk you through “The
News this Year,” and to make it a little more interesting I am going to give it a sports flavor.

So, let’s start at the beginning of the 67th Annual
General Meeting in July last year…when I was handed
OVER the torch, I chose to adopt a theme which was
close to my heart to be our guiding light for the year
ahead. The theme was “Today’s Vision, Tomorrow’s
Reality.” The wisdom contained in these four words
where influence by the famous twentieth-century poet,
painter and philosopher Khalil Gibran. He said, “We
are not limited by our abilities, but by our vision.” And I
realized that we need to focus on developing a powerful,
telescopic vision at BCAS, rather than merely looking at
our combined abilities.

To best understand how we proceeded with the task
ahead, let us look at the athlete who throws the javelin.
After scanning the vast sky above and the distant horizon,
he throws the javelin with all his arm and body muscles
working seamlessly.

At BCAS, we embarked on the task of discovering where
we want to go…and identifying what route should we take
to get there. We met on many occasions in managing
committee, other core committees and with past torch
bearers to draw up a suitable game plan. In the process
of planning, we gauged several untapped potentials and
even pinpointed any possible pitfalls. Some of the key
points that emerged at this stage were:

• Harness technology to enhance access to BCAS

• Explore new opportunities for members to learn

• Consolidate presence on national front

• Organize programs at the doorsteps of outstation
members

• Engage with related bodies to multiply reach

• Encourage and Empower students to be future
leaders and

• Make crisp and effective representations to ensure
our voice is heard in the decision makers’ corridors.

With these findings, we moved to the next phase where
we gained insights from the world of basketball. We
needed to proceed ahead dodging several obstacles such
as other commitments and numerous time constraints.
We also practiced more teamwork as we ‘passed’ the
assignment at hand to other members who were also
better ‘positioned’ to take it ahead. At this stage, we
learned how to seize opportunities and move towards
implementation of the plans by getting logistics in place.

We were now perfectly poised to take the LEAP (high
jump) … SPRINT AHEAD (100 meters)…or take the
PLUNGE (swimming)! And that’s what we did, moving
swiftly from one program to another is quick succession
with high-quality deliverables. And as you will shortly
see they were all gold performances…and some
more golden!

Now let’s take a look at the winners in no
particular order!

Quantum Leap – Technology Edge

BCAS took a quantum leap akin to long jump into the digital
arena which was an enabler to provide easy access to all
members. Live streaming technology for live webcast and
posting of our programs on YouTube channel has been
a boon to our outstation and distant suburb members to
view at their convenience. Facebook and LinkedIn are
increasingly used as a face of the society for important
updates. Payments can be made online and our website
has been revamped. An e-learning portal will be launched
shortly to extend training beyond geographic and time
boundaries.

Hitting Bulls’ Eye – Experts Chat

The target questions by the moderators were pointed
as in the game of Archery. Experts Chat was a new
game at the Society but Panelists, were veterans in
their knowledge reservoir, which was evidenced in their
profound replies and it developed into an excellent
knowledge sharing platform. Six Experts Chat sessions
held this year command equal marks as they all drew
increasing attendance and viewership.

BCAS RRCs – Each RRC is like 20-20 Cricket
Tournament where you learn so many subjects in a
short span of time.

The T20 matches was played at various locations domestic
and international. The Seminar Committee played at
Jaipur where the fiftieth edition of the RRC, the flagship
program of the society was conducted. It drew a record
275 participants from across India. The International
Taxation committee played at Sri Lanka. The first time
at an international location was the ITF Conference. The
Indirect Tax committee played it at Pune with more than
330 participants. The Accounting and Auditing committee
played IndAS RSC at Silvassa. The MPR Committee
played the Youth RRC at Alibaug jointly with ICAI. Each game was individually very well played by all
committees

Union Budget Lecture – Marathon Run

The Marathon run this year too was led by Senior Advocate
Shri S.E. Dastur who continued to wow the crowds with his
powerful presentation. His detailed analysis of the “Direct
Tax Provisions of the Finance Bill, 2017” was a remarkable
run witnessed by 3,000 avid listeners at the auditorium,
while over 10,000 watched it live from across India.

Besides the RRC being played at various locations
we chose not to play football within BCAS but jointly
with various other related organisations. Many joint
programs were conducted with other organizations
to reach out to a larger audience in Mumbai. Forum
of Free Enterprise, Chamber of Tax Consultants,
AIFTP, Indo- American, ISME…were some of the
organizations we worked with on these programs. The
game brought in a lot of cohesiveness in the game of
the profession.

The reach of the Olympics was far and wide this year.
Members at various locations invited us to conduct programs for the benefit of local. To be more inclusive

BCAS reached out to its outstation members with
programs in Ahmedabad, Kanpur, Indore, Aurangabad
and Kolkata. Medals were in the form of increased
membership and enrolment for RRCs.

The novel concept of Inter Committee Cricket Tournament
was executed with thorough excitement and fun this year.

To improve skill sets of its members the society took up
new initiatives. These are akin to introducing new games
to the Olympics. CAMBA a dedicated CA-MBA Course
jointly with ISME was launched to sharpen management
skills and call the shots at par with MBAs in the Society.

A Coach acts as a guide for every sportsman (Virat
Kohli may be an exception), anyway in the true spirit
of sportsmanship we continued the Mentorship program.

As the Society succeeded in playing different games
and enhanced its reach, it created its visibility which
made Organisations to join as FRIENDS of BCAS.
A new concept where various benefits are extended to members.

Role in Governance

The interaction by profession with the government is like
a game of tennis. There is always a rally between the
players which is healthy for developing good governance

The society made 16 representations to various
authorities…some were made jointly with other
organizations. IDS, ICDS, Rotation of Audit Firms and
GST were some of the key issues the society took up with
the government.

Welcoming Students

Sprint run by the society was for the benefit of students.
The run involved in mentoring and motivating students
and felicitating newly qualified CAs. The final dash
was 10th Jal Erach Dastur Students Annual Day where
talent bloomed at its best and brought together over 250
students.

BCAS disseminated knowledge to students at the NM
College and HR college.

Useful Publications

BCAS brought out a record number of 17 publications
this year. Referencer was the bestseller with over 5,000
copies. But the blockbuster is the BCAJ July special
issue with a print run off over 16,000 copies which will be
released today. There are two e-publications in Flipbook
format that are free for the members.

Education at BCAS

BCAS imparted knowledge through 40 Lecture Meetings
with a total participation of 9,084 people, 58 Seminars/
Courses/Workshops with a total participation of 7,065
people and a record 110 study circle/study group
meetings with total participation of 2552. These figures
exclude thousands who have seen the videos online.
This enabled to add 943 new members and our social media presence augmented. More statistics are in the
Annual Report.

On attending many of these meetings was itself a learning
curve for me. But the Flip side is that by attending so many
meetings I have formed a habit of eating chocolates and
sweets sitting behind the desk.

BCAS Foundation

The BCAS Foundation is the philanthropic expression
of the society. Thank you, members, for your large
heartedness which enabled BCAS to collect more than Rs.
20 lakhs for the noble cause of improving pediatric cancer
care to Tata Memorial Hospital! With their generosity, we
could contribute to the wellbeing of 120 children suffering
from this dreaded disease. However, we cannot rest on the
past laurels, and there is a lot we can do for such cause.
I again exhort all my fellow professionals to come forward
and contribute each one’s might to such a noble cause.
I now pass the baton to Narayan Pasari, the new President of BCAS and the new core group members and office bearers. I will definitely continue to stand and cheer for
Team BCAS, in fact run along as we keep raising the bar
and setting new records.

It is time to say a big thank you to the entire team that
has worked so tirelessly and painstakingly to make this
year’s performance so eventful and if I might add…
successful too!

Let me begin this ode of gratitude by expressing my
sincere thanks to the Past Presidents a few of whom were
at the helm of our nine sub committees. Their invaluable
insights and vast reservoir of experience are what keeps
driving the committees to push the limits…and excel.
As Chairmen and Co Chairmen of the sub committees
they have been a beacon of inspiration, enabling the
committees to grapple with many challenges; and win!
Let us have a round of applause for our hardworking
though silent Chairmen and their amazing teams.

Next, I must thank you my managing committee and the Office
Bearers who have diligently shared vital expertise and
invested long hours in planning and facilitating the smooth
flow of programs and events of the society. With all my
heart, I thank ……

Narayan who has an eagle’s eye for details that
compliments his exemplary admin skills in ensuring our
numerous programs run flawlessly.

Sunil has demonstrated credentials in the sphere of
IT besides GST and has played a pivotal role in the
Society’s IT initiatives, particularly now he is engaged in
the launching of e-learning platform.

Suhas who as Joint Secretary willingly devoted his time
and eagerly participated with many innovative suggestions.
Manish who as treasurer, kept an eye on the numbers
and helped all of us to stay in balance and perspective.
Please join me in thanking them with a round of applause.

Then there is the incredible BCAS Team comprised
of Jyoti Malkani who was with us until April as GM;
Shreya, Javed, Upendra, Nikhil, Rathi, Kawaljeet,
Bilal, Reema, Sachin, Baboo, Harish, Prakash, Mamta,
Rajaram, yes, the entire team and not to forget my
office boys. A big thank you for your unfailing and
unstinted support in keeping the wheels of BCAS
turning smoothly.

Last but not the least, I would like to thank all my partners
and my firm for backing me in my journey especially
Abhay, whose abundant wisdom and good judgment
helped me to chart new routes in the face of obstacles.
And how I can forget to thank my wife for bearing my
early exit and late entry to our abode, but she was
adequately cautioned by the PPs…

And special thanks to all the conveners, coordinators,
contributors, speakers, our publishers Finesse and
Spenta, sister organisations and asociations and wellwishers
who have together made BCAS shine bright this
year too.

It would be most inappropriate for me to end this
speech by saying goodbye…because goodbye sounds
so final, almost like closing a door… or escaping to
some remote place never to see each other again.
Instead, I would like to say Fare Well, not as in one
word, but as two words – Fare Well! Because I believe
the road for BCAS stretches a long way ahead…Yes,
there will be bumps and curves to navigate, but more
importantly, there will be many milestones to cross and
many mountains to conquer. And so, to everyone at
BCAS, starting with President Narayan, the Chairmen
& the managing committees and members, I wish you
all a heartfelt Fare Well!

Thank You!

Incoming President’s Speech

My President Chetan, Vice
President Sunil, Joint
Secretaries Manish and Abhay,
Treasurer Suhas, Respected
Past Presidents present and
in absentia, Members of the
Managing Committee, Core
Group Members and my dear friends

Let me start my innings by remembering my father
Late CA. R. G. Pasari whom I lost 5 years ago. He
would have been a really happy man today as he
always pushed me into the BCAS activities. This was
because he had worked with the likes of S. P. Mehtaji,
B. L. Kabraji and others who always had the highest
respect for BCAS. He also read the BCA Journal
regularly till his demise.

I recognize the presence of my mother Smt. Parvati
Devi who is the source of my strength after my father
and also other members of my family.

To reach at this prestigious position, I also thank my
principal Late CA. Mangalbhai Vatsaraj under whom I
completed my articleship, CA Pravinbhai Dharia (our
auditor) and CA. B. L. Sardaji under whom I also took
training post my articles. Thanks is also due to the
frms and the partners with whom I worked during the
last 2 and half decades.

As far as BCAS is concerned, a small peep into my
journey so far would be in order today. I became a
LIFE MEMBER in 1990 and started participating in
the activities thanks to two of our Past Presidents
CA Harish Motiwalla and CA Pradip Thanawala. I was
inducted into the Core Group of the Society in 1994-
95 and became a Committee Member in the Seminar
Committee. I was appointed a Convenor of this
Committee in 1996-97 for the ?rst time and have been
an integral part of this Committee for a fairly long time
till I became a Of?ce Bearer under CA. Nitin Shingala.
I served CA. Raman Jokhakar and CA. Chetan Shah
also during their Presidentship.

Before I leap into the future with some of the many
plans I have chalked out, I would like to take time
out to thank Chetan for his sincere and dedicated
service as President during the past year. It has been
a tremendous learning experience for me as I learnt
not to get fettered or limited by a lack of experience or
ability. Instead Chetan always encouraged us all to think
beyond and allow vision to be the defining force in all
our endeavors. In supporting Chetan over the last many
months I got invaluable exposure to multi-tasking and
problem solving.

So once again, let me welcome and thank you all for
coming here in such large numbers, and giving me
this opportunity to serve you as the 69th President
of the BCAS.

We are living in exciting times with considerable change
happening both in India and in the global arena. And
these numerous changes provide an array of challenges
and incredible growth opportunities for all of us.

In analyzing the Indian population we find it is comprised
largely of young people who are getting more and
more literate and educated. They are also earning a lot
more than in earlier years and have greater disposable
incomes. Their buying power and consumption are
playing a vital role in stimulating the markets and growing
the economy.

The indian economy has defied many hurdles to cross growth of over 7%. Stock exchanges have registered
soaring indices and high volumes of trading activity.
Foreign Direct Investment is pouring in…in fact we
are the number one destination for FDI in the world,
beating both united state and china. Confidence in
India’s economy is surging, thanks to the numerous
programs and reforms undertaken by the NDA
Government with Prime Minister Narendra Modi as its
driving force.

Keeping pace with the phenomenal growth in the Indian
market are the vast array of services and products. And
to ensure a level pending field that fair and free, Indian
companies have several new laws and compliances to
meet translating into enhanced business for all of us.
Globalization too is another stepping stone for all Indian
companies keen on getting more lucrative returns and
a package of benefits. Here again as volumes and
diversity of exports grow, we have vast potential to
harness greater business.

As President, I have given myself the task and
responsibility of facilitating BCAS’ growth. I believe that
if all of us put an arm to the wheel, we can make BCAS a
society that’s will be far more recognized and respected
within our profession and in financial circles.

Keeping this in perspective, I have drawn up a plan that
focuses on “Building Bridges”.

A bridge is a structure that is built over an obstacle to
provide connectivity. And building bridges is the underlying
theme of how I plan, with all of you, to take BCAS ahead!
Bridges connect us and help us to understand each
others challenges… they also enable us to figure out how
we can help each other and show that we appreciate one
another. Building bridges also helps to prevent isolation.
Because isolation can breed prejudice, misunderstanding,
mistrust; and impede effectiveness of working together.
I propose four main bridges and hope you will help me
in building them and BCAS!

1. TRANSFORMATION

High on my list of priorities is task of increasing the
resources of BCAS and growing the membership list.
I believe the Society needs to be more visible in order
to attract more members. On the resources front too,
we have to look at all possibilities of capitalizing on
the reputation and goodwill we already have. There is
plenty of knowledge and expertise within, which I think
can be leveraged to enhance the image of BCAS. With
the shrinking of the world to a global village we need to
explore options to benefits from this trend.

Let’s move to a sincere wish I have!

2. YUVA SHAKTI

The youth! They are our future and they can be the catalyst
of evolution in our Society. I look forward to encouraging
new blood to take up key roles. And to ensure that happens
I would like to implement special incentive schemes to get
more youth to join BCAS. Having done that I would also
like to ensure they get more opportunities and platforms
to express their ideas and vision. Recently, I heard about
the concept of “Shadow Committees” and I would like to
set up Yuva Shadow Committees. These groups of young
minds will think aloud fresh ideas and approaches on the
same challenges faced by the managing committee…and
I hope it will lead to some positive change.

3. DIGITIZATION

Digitization is not a fad or a passing trend that
some companies or individuals flaunt. Digitization
is essential…it has become the need of the hour!
With digitization we will be better empowered to
manage our resources and conduct our business.
I look forward to digitizing as much as I can of
BCAS’ operations and resources. A good start has
already been made in this direction and I would
like to add momentum to the entire process. In
addition to being able to disseminate knowledge,
we would be able to translate information into action
more effectively.

Finally I would like to tackle a relatively ignored activity of
our Society…

4. NETWORKING

Networking is a mantra that is much advocated by
many of the management gurus. At BCAS, I feel we
should work harder in this area. Be it the government,
corporate or fraternity level, we need to step up our
efforts. I hope we will be able to take some giant strides
in this area by organizing some events to reflect the
“Start Up India and Digital India” initiatives undertaken
by the government. We could even re-look at some
of events and tweak the format to include moments
of interaction and networking. Using our digitized
resources and media, we could reach out to a wider
audience and serve the members better. BCAS
could provide more platforms in the form of events
for networking among accountings firms. Networking
Power Summit is one format which could be organized
more frequently and modified to pave the way for
greater networking.

These are just some of my ideas that I have put
together to set the ball rolling. While I and my
colleagues remain open to various suggestions and
infact welcome it, I would like to call upon each one
of you to join us in this process of transformation
of society to the needs of the present times by
mobilizing the power of yuva-shakti & digitization
to build bridges for expansion by creating robust
networks. I am sure I will continue to receive the
same love and affection from you in this very important
journey of life.

Thank You

Growing Your Practice – “Making Time To Think..”

Today professionals spend
their time on what is urgent, what seems necessary on immediate basis. This
includes client meetings, attending to assignments, amongst many others. Most
of the time is taken away by ‘pressing’ needs of such day to day activities.
Professionals generally complain that they don’t have time, especially time for
thinking about their own practices; leave alone, management of their practices.

How can one grow if one cannot think adequately about one’s
own practices? For this to happen, it is never going to be automatic. It will
always be by a concerted effort on part of the professional and with support
from the professional service firm.

Practice management is largely accomplished by setting aside
quality time to think about the firm’s strategic direction, focus of practice,
people and their motivation, clients and services to clients, processes and
systems, and above all, strategic alignment for the firm. This would mean
taking out a “chunk of time”. And taking out a chunk of time to do real
practice management implementation needs commitment and focus. And it also
needs certain techniques and strategies which can make it easier for the
professional service firm to execute and not have practice area/s suffer due to
lack of time.

Some of these strategies are time tested and it is important
that professionals learn to implement them. The theme of this article is about
‘Making time to think for growth’. This presupposes that most professionals are
otherwise not able to easily do that. Here are some best practices that have
worked across professional service firms:

1. Taking out time

One of the most effective
strategies used by Partners of successful professional service firms is taking
out a day in the week or taking out half-days twice a week or reserving a
Saturday exclusively for issues concerning practice management. This chunk of
time that is devoted would lead to wonderful results.

Taking out a mid-week day such as Wednesday normally turns
out to be very effective because the Professional has a Monday & Tuesday
before and a Thursday & Friday after to cover up on pending work. Also,
generally mid weeks are less pressured for engagement deliveries or from a
client expectation for exclusive time to talk or meet.

Some professionals find that an end of the week day like a Friday or
Saturday works much better as end of the week generally are clearing days.

Which day of the week
works is a personal decision; it is important for the Professional to be
committed to pick up any a slot that works the best. Again, there is no one
size that fits all. What may work for one, may not work for the other. And
therefore, each professional can choose a day or two half days based on his or
her preference and commitments.

2. Why is it important to dedicate a full day in a week?

This could be a typical question being asked by most
Professionals. Well, simply because in the day to day grind and never ending
client expectations, it is only dedicated time that works.

What normally happens is that unless a Professional is
mentally free to think i.e. he does not have to attend to client calls, emails
or meetings; nor does he need to interact with staff or fellow partners – which
generally never happens when one is in office, he will never be able to think
through the nuances and arrive at the much required set of propositions, ideas,
postulations, probable range of solutions and conclusions. It is not so easy
for a professional to get up one day and start this dedicated approach to
taking critical decisions for one’s own practice. And therefore, Professionals worldwide have
practiced this art over time and over a number of months to finally reach the
stage where they dedicate 1/7th of the week to thinking about growth.

3. Action orientation

A dedicated day out means
a lot of commitment and it leads the professional to action. One will not like
to idle around, as there would be others in the firm who would be burning the
oil; and morally, a professional would be compelled to justify his absence from
work, by showing some productive and constructive outcome beneficial to the
firm.

This
situation is normally quite challenging when it begins. The partner taking out
the time can face a situation where he is not sure of the outcome or its
effectiveness. Thus, expectations have to be clearly set by those tasked with
“governance” of the firm, so that there is action bias and lesser chance of
fatigue setting in. This day out could also mean meeting partners of other
professional service firms, meeting entrepreneurs and seeking their inputs
about growth, meeting regulators/bankers/colleagues from other
professions/professors and academia and catching up with friends who have been
there and done that. If well planned, it is found that most people would want
to meet up with professionals and exchange ideas and thoughts in the hope that
“He is a good guy to converse with and I will certainly learn something”.

4. Make a start

If one thinks of it, even
taking out 25-30 days in a year and increasing it over time to 35-40 days in the
52 weeks that all of us have to our disposal would be a good start.

Successful practitioners take out a good 40 days a year for practice
management. Research shows that it is these firms that are normally successful
in ensuring continuous alignment of each facet of one’s practice and are set on
a path to growth. Each partner in a professional service firm may not be able
to take out so much time. Some may be at 10-20% of this benchmark whereas
others would be at 25-35% of this benchmark. That’s low; but is better than not
spending any time. So, make a start!

5. Partner retreat

One other strategy that
always works in such cases is a policy of having annual partner retreats of 3-5
days and quarterly meetings of 1-2 days. These 10-12 days are themselves invaluable
to firms that grow and grow fast.

When the partners meet in an environment of uncluttered,
uninterrupted, strategic mind frame – wonderful outcomes are a foregone
conclusion.

Partner retreats are not meant for discussing operational
issues but the focus normally has to be on strategic issues concerning the firm
and firm growth. These would include looking at the strategic direction the
firm is taking, looking at innovation in the market place, breaking ice in
relaxed environments and just getting to know each other better.

How invaluable all of these
could be if done in a manner that is consistent, thought through, and
sustained? The best of firms have used partner retreats to keep the firm on a
high growth trajectory without having to worry about missed opportunities or
absence from work or offices. To the contrary, when partners are not around the
teams or in the offices andif the practices are still working smoothly, it is a
clear reflection of a well-oiled machinery in terms of maturity of processes
that a practice area has been able to develop. It’s also a lot to do with the
way partners think about succession and growth.

Firms after firms have reported that partners in professional
services firms, being the unique breed that they are, come into their own in a
relaxed retreat environment.

Here are some suggested agenda questions for a typical partner retreat:

1)   What are
the challenges facing your practice area?

2)   How can
the firm help you address those challenges?

3)   What are
the emerging areas that the firm may want to expand their practice into?

4)   What are
some of the issues that you are facing at a personal level impacting your work,
if any, that the firm can help resolve?

5)   What
ideas do you have for innovation in the firm?

6)   What are
the challenges that you see facing the firm and its growth?

7)   What are
the three big ideas you have for growing the firm and for growing your practice
area?

8)   How do
you assess systems and processes, policies and procedures in the firm? What can
be done better? What role can you play in any of them? What could we outsource
to team members – internally or externally?

9)   What are
clients telling you in your practice area? How can we be more relevant to our
clients?

10)  How can
we be a better firm for our team members?

11)  How
should the firm think about some strategic aspects for the future:

a)    Expansion
organically

i)   Branches,
new locations

ii)  New
practice areas

b)    Inorganic
expansion

i)   Networking
with like-minded firms

ii)  Joining
an international network

iii)  Starting
one’s own network

iv) Merging
other firms into ours

v)  Merging
our firm into another firm

6. Strategic outcomes

Writing on a new change in
the law, say, a tax development, comes naturally to a tax partner. The question
to ask is: What is the strategic outcome of this tax alert that is being
produced for the clients of the firm? Doing this repeatedly is time spent by
various people in the tax team. So, what are we achieving:

1)    Client
outreach?

2)    A
message going out to clients that “we exist”?

3)    We are
on top of our game in tax developments.

4)    We can
help you navigate the law.

5)    Come to
us with questions and get the best response possible.

6)    Does
this all add up to “development” of the tax practice? Technical development,
client awareness, new business development, knowledge repository enhancement,
developing a reputation in the market place that here is a firm that knows the
subject well.

Is this the desired
strategic outcome that the firm seeks? If it is, then well – you are doing
well. Keep building on it. If the firm has not thought through this, then its
important that before serious time is spent, the outcome is thought through
before embarking on any recurring project.

7. Partner alignment

Often taking out time to
think and execute strategies to grow the firm means that partners need to
interact more and more. It forces a convergence of thought process, even if it
is not there to start with. This turns into a process where partners start
ideating, giving creative inputs, debating alternatives and outcomes, and
finally coming into alignment.

Imagine, if no real time is taken out for meaningful
conversations about growing the practice, where would it leave the firm? The
routine continues, drudgery sets in and the best people leave. Human capital of
the firm is often taken for granted. Partners have to be in complete alignment
about the fact that team members need to be handled well at all levels. And
partners taking out time to think about growing the firm should devote a good
portion of time to thinking about their team’s development, career path and
roadmap for growth. In their success and upward mobility, lies the firm’s
growth and success.

All said and done:

Partners in alignment is
always a wonderful sign of a firm’s integrated level of working, measured
growth and consistent delivery across all practice areas. One of the most
sought after outcome for a firm is growth of reputation and goodwill. A visible
brand creates a perception which ultimately turns into a sterling reputation
for consistent and solid advice and delivery.

Thus, making time to think
across the partner group, can create strong ripples, leading to actionable
ideas and strategies, which can ultimately change the fortunes of the
professional service firm and lead it to a strong growth trajectory. Partners
should make the time to think. It is in their interest, the team’s interest and
the firm’s interest in the perennial quest for growth.

What Type Of SEBI Orders Are Appealable? Supreme Court Decides

The Supreme Court has laid to rest
a controversial and important issue. That is on the issue as to what orders
passed by the Securities and Exchange Board of India securities laws are
appealable. SEBI has both general and specific powers. SEBI passes orders on
several issues. SEBI also issues circulars, directions, etc. which have
significant impact on persons connected with market operations. Since it is an
expert body dealing with a field which is complex, courts give a lot of freedom
to SEBI. If one reads the powers of SEBI, SEBI has almost been given a carte
blanche on how it can deal with the operation of the securities markets.

SEBI has powers
:

–   to make rules and regulations, that too,
except for some administrative and parliament overseeing, are largely
self-determined.

–   to give directions to stock exchanges, listed
entities, intermediaries, etc.

–   to punish and levy penalties,

–   to disgorge wrongfully made profits,

–   to make parties buy shares or sell shares etc
and

–   to debar entities to approach the financial
markets for a specified period.

The question before the Supreme
Court was : whether all orders passed by SEBI are appealable or are there any
exceptions – that is – some orders are not appealable?

The right to appeal is important.
The first appeal is to the Securities Appellate Tribunal (“SAT”). SAT has a
great record of disposing appeals fast with not many of its rulings being
overturned by the Supreme Court (the next appellate body). SAT is an expert
body well versed with the functioning of the securities market and hence
aggrieved parties can expect a quick relief from an authority which has an
indepth grasp of finer issues of this complex field. The Supreme Court in the
case of Clariant (Clariant International Limited vs. SEBI (2004) 54 SCL 519
(SC)) has observed, “The Board is indisputably an expert body. But when it
exercises its quasi-judicial functions, its decisions are subject to appeal. The
Appellate Tribunal is also an expert Tribunal.” (emphasis supplied).

In the past, appeals have been
liberally admitted. Even letters of SEBI, if they affected rights of a party,
have been held to be appealable. However, when a Chartered Accountant appealed
to SAT on the ground that SEBI should not have referred his name to ICAI, it
was rejected since it was merely a reference.

However it was felt that clarity
was lacking as to what orders were appealable as the same was not clearly
defined. Another issue which required clarification was: whether circulars
which affected a group of parties adversely were appealable. The decision in
the case of NSDL vs. SEBI ((2017) 79 taxmann.com 247 (SC) deals with
such issues.

Facts of the case

The
facts of the case are fairly simple. SEBI had issued a circular to depositories
directing them to restrict their charges in the manner and to the extent
prescribed in the circular. Obviously, the depositories were aggrieved as the
circular directly affected their finances. NSDL, a depository, appealed against
the circular/direction to SAT. Preliminary issue raised before SAT was whether
such a circular/direction is appealable. SAT on merits, rejected the appeal and
held the circular/directions to be valid. In other words, circulars /
directions issued by SEBI were appealable. Both parties appealed against the
order of SAT to the Supreme Court. SEBI appealed against the part where SAT had
held that such a circular/direction was appealable. The depositories appealed
against the part where on merits its appeal was rejected.

The Supreme Court decided to deal
first with the part of the SAT order where it was held that such a circular was
appealable. Obviously, if the Court found that such a circular was not
appealable, then the part relating to merits would not require consideration.

Analysis of orders passed by SEBI
into categories

To decide whether the circular
issued by SEBI was appealable or not, the Supreme Court divided various types
of circulars, orders, directions, etc. that SEBI was empowered to issue into
three categories:-

1. Orders that are in
exercise of administrative functions

2. Orders that are in
exercise of its legislative functions

3. Orders that are in
exercise of its quasi-judicial functions.

The Supreme Court held that it was
only the third category, i.e. orders that are issued in exercise of its quasi-judicial
functions, were the ones that were appealable.

The Court then, firstly, gave
reasons why it held that only such category or orders were appealable.
Secondly, it explained meticulously how to determine whether an order falls
under which category. The decision even pointed out the provisions in the SEBI
Act that dealt with powers relating to each category of functions. On facts, it
held that the circular was issued in exercise of administrative functions and
hence it was not appealable. 

Why are only orders issued by
SEBI in exercise of quasi-judicial functions appealable under the SEBI Act?

The Court meticulously analysed
the provisions of the Act to show that the Act provided and intended to allow
appeal only against quasi-judicial orders.

Firstly, it highlighted the
constitution of SAT. It noted that the Presiding Officer has to be a retired
judge. That showed that only quasi-judicial orders were intended to be
appealable.

Secondly, it noted that in case of
appeals against orders passed by an adjudication order, appeal could be made by
an aggrieved party within 45 days of the day when such order is “received by
him”. The Court observed that “Generally administrative orders and legislative
regulations made by the Board are never received personally by ‘the person
aggrieved’”. Hence, once again, it was only quasi-judicial orders that were
intended to be appealed.

The Court then observed that, as
held in its earlier decision in Clariant’s case that the powers of SAT were
co-extensive with that of SEBI while reviewing in appeal SEBI’s orders. Hence,
once again, such orders can only be quasi-judicial in nature.

Even the procedure relating to
appeal pointed towards this. The order passed by SAT on appeal had to be sent
to the parties to the appeal (i.e. the aggrieved party) and the adjudicating
officer. Once again, this shows, the Court held, that the scheme of the Act was
to allow appeal only against quasi judicial orders.

The fact that appeals against
orders of SAT to the Supreme Court are allowed only on questions of law was
held to be yet another pointer in this direction.

Hence, the Court concluded that :

1.  appeals are allowable only
against quasi-judicial orders of SEBI. Appeals against orders in exercise of
legislative functions is obviously beyond the appellate function of SAT which
itself is a creature of the Act.

2.  Orders in exercise of
administrative functions too cannot be appealed against before SAT but petition
for judicial review may be filed in Court.

How to determine whether an
order is in exercise of administrative/legislative/quasi-judicial functions?

The above analysis brings us to
the important point of how to determine whether a particular order is in
exercise of quasi-judicial functions and thus appealable or whether it is in
exercise of administrative or legislative functions and hence not appealable.
Here again, the Court meticulously analysed the issue on first principles.

It cited the classic case of The
King vs. Electricity Commissioners [(1924) 1 KB 171] where Lord Justice
Atkin defined a quasi-judicial order as:-

“Whenever
any body of persons having legal authority to determine questions affecting
rights of subjects, and having the duty to act judicially, act in excess of
their legal authority, they are subject to the controlling jurisdiction of the
King’s Bench Division exercised in these writs.”

The
Court further observed that the above decision was applied in another decision,
and the following guidelines were given to decide whether an order of an
administrative body is a quasi-judicial one:-

“(i) There must be legal
authority; ?

(ii) This authority must
be to determine questions affecting the rights of subjects; and

(iii) There must be a
duty to act judicially.”

The Court further qualified and
explained the principle that a mere absence of a lis between the parties
does not make the order one that is not quasi-judicial. So long as the
aforesaid 3 conditions are satisfied, the order is a quasi judicial one. It
observed, “..the absence of a lis between the parties would not
necessarily lead to the conclusion that the power conferred on an
administrative body would not be quasi-judicial – so long as the aforesaid
three tests are followed, the power is quasi-judicial.”

What also matters is the nature of
the final order. Thus, if the order does not determine the rights of parties
and, for example, makes a report after giving the parties a hearing, the order
is not a quasi-judicial one.

What are the specific
provisions in the SEBI Act, orders under which can be appealed against?

To make its order even more
comprehensive and thus be helpful to be applied in specific provisions without
ambiguity, the Court then listed the various provisions of the SEBI Act under
which SEBI can pass orders. Of these, it then analysed which of such orders are
quasi-judicial and hence appealable. It also specified which of them provide
for administrative powers or legislative powers and hence not appealable to the
SAT. It observed as follows:-

“It may be stated that both Rules made u/s. 29 as
well as Regulations made u/s. 30 have to be placed before Parliament u/s. 31 of
the Act. It is clear on a conspectus of the
authorities that it is orders referable to sections 11(4), 11(b), 11(d), 12(3)
and 15-I of the Act, being quasi-judicial orders, and quasi judicial orders
made under the Rules and Regulations that are the subject matter of appeal u/s.
15T. Administrative orders such as circulars issued under the present case
referable to section 11(1) of the Act are obviously outside the appellate
jurisdiction of the Tribunal for the reasons given by us above.” (emphasis supplied).

Accordingly, the Court set aside the
order of SAT and held that the circular was issued in exercise of
administrative functions by SEBI and hence not appealable to SAT. It,
however, clarified that the parties were free to challenge the circular and
seek judicial review.

Conclusion

Thus, an important matter has been set to rest
and that too in a comprehensive way. It will help parties and SAT decipher
which orders are appealable. Further, parties will also know how to deal with
powers of SEBI that are classified as law making powers or administrative
powers. The decision aims to lend clarity, avoid litigation and ensure speedier
decisions.

RERA: An Overview

Introduction

On
1st May 2017, the Government of India, notified the operative
portion of the Real Estate (Regulation and Development) Act, 2016 (“the
Act”) as coming into effect.   This
Act is touted as a game changer for the real estate industry of India. For the
first time, the sector would have a regulator in each state which would address
all the infamous malpractices of the real estate sector. The Act introduces a Real
Estate Regulatory Authority (RERA) which would regulate, control and
promote planned and healthy development and construction, sale, transfer and
management of residential properties. It aims to protect the public interest vis-à-vis
real estate developers and also to facilitate the smooth and timely
construction and maintenance of residential properties. Thus, just as the
capital markets have a regulator in the form of SEBI, the banking industry has
RBI, the real estate sector now has an authority. Although this is a Central
Act, each State would have its own RERA and the same is empowered to come out
with its Rules. This Article aims to give a bird’s eye overview of the Act. The
next month’s column would cover some issues under the Act.    

RERA

A
Real Estate Regulatory Authority has been constituted for each State /
Union Territory under the Act. It will consist of a Chairman and minimum of two
whole-time Members. Accordingly, the Maharashtra State Government has
constituted the Maharashtra Real Estate Regulatory Authority. The RERA would
have various powers and rights. The Act also empowers the State Government to
constitute a Real Estate Appellate Tribunal to adjudicate any dispute
and hear and dispose of appeal against any direction, decision or order of the
RERA under the Act. The Tribunal will consist of a Chairman and minimum of two
whole time Members, one a Judicial Member and the other an Administrative /
Technical Member. 

Application of the Act

Section
3 of the Act requires every Promoter of a real estate
project to register the same with the RERA before he can advertise,
market, book, sell, offer for sale or invite persons to purchase any plot,
apartment or building in the real estate project. Ongoing projects in the State
of Maharashtra for which the Occupation Certificate has not been received on 1st
May 2017 are also required to be registered with the RERA. The time frame for
registering ongoing projects is by 31st July 2017.

Registration
is not required for the following type of projects:

(a)    Where land to be
developed is less than 500 square meters or the number of apartments to be
developed are 8 or lower.

(b)    Where only
renovation or repair or re-development is to be done which does not involve any
marketing, advertising, selling or new allotment under the real estate
project.   

The
term Promoter of a real estate project is very important since it
determines who is required to register under the Act and who would be subject
to the various obligations and liabilities. The Act defines a Promoter in an
exhaustive manner by giving a very far reaching definition. It covers a person
who constructs or causes to be constructed an independent building consisting
of apartments, or converts an existing building into apartments, for the
purpose of selling the apartments. It also covers a person who develops land
into a project, whether or not the person also constructs structures on any of
the plots, for the purpose of selling to other persons. Further, it covers any
person who acts himself as a builder, coloniser, contractor, developer, estate
developer or who claims to be acting as the holder of a power of attorney from
the owner of the land on which the building or apartment is constructed or plot
is developed for sale. The definition also states that where the person who
constructs or converts a building into apartments or develops a plot for sale
and the person who sells apartments or plots are different persons, both of
them are deemed to be the Promoters and both are jointly liable for the
functions and responsibilities specified, under the Act. 

The
term real estate project is also very relevant since what needs to be
registered is a real estate project. The Act defines it to mean the development
of a building or a building consisting of apartments, or converting an existing
building into apartments, or the development of land into plots or apartment,
for the purpose of selling all or some of the said apartments or plots or
building and includes the common areas, the development works, all improvements
and structures thereon, and all easement, rights belonging to the same. The
Maharashtra Rules even define the term phase of a real estate project since
even a phase-wise registration of the real estate project can be done instead
of registration for the entire project. It may consist of a building or a wing
of the building or defined number of floors of a multi-storeyed building /
wing. E.g., Wing A of a Project could be treated as a phase of a project and
only the same may be registered.

Registration of Project

The
Act requires a Promoter to register a real estate project with the RERA. It is
important to note that the registration is required qua a project and
not qua a developer. The FAQs issued by the Maharashtra RERA also state
that developers are not registered but projects are registered. Thus, one
developer would need to register each and every project to be undertaken by
him. Similarly, if there are multiple developers for one project then all of
them would be shown as promoters in the single registration of that one
project. For registration of a project, the Promoter needs to make an online
application on RERA’s website, in the prescribed form, submit a long list of
documents and pay the prescribed fees. One of the important documents to be
submitted is a copy of the approval and sanction from the Competent Authority,
obtained in accordance with the building regulations. This means that the
application can only be made after the developer receives the Intimation of
Disapproval/Commencement Certificate (IOD/CC) for the project and not before
that. Some of the other key documents to be submitted include the following:

a)     Proforma of the
allotment letter/Agreement For Sale /Conveyance Deed to be executed.

b)     Affidavit that the
Promoter has clear title to the land and the details of encumbrances, if any,
the time period he estimates for completion and most importantly, a declaration
that 70% of realisations would be deposited in a separate bank account and used
in the manner prescribed.

c)     3 years’ Annual
Accounts Reports of the Promoter.

d)     Copy of the
Development Agreement/Joint Development Agreement/Joint venture Agreement
executed in respect of the real estate project.

e)     Details of
FSI/TDR, proposed FSI, sanctioned FSI, number of buildings/wings/floors to be
constructed along with aggregate area of open spaces and parking spaces.

f)     One of the key
disclosures to be made is of the land cost, cost of construction and the
estimated total cost of the real estate project.

If
the RERA does not take any action on the application within 30 days, then it is
deemed to have granted its approval. In case the RERA refuses to grant
registration, then it must first give a hearing to the applicant.

Each
registration is valid for a period declared by the Promoter as the period
within which he undertakes to complete the project. The registration can be
renewed if the project completion time has been extended for force majeure reasons.
A total renewal of up to one year each can be granted. The Promoter is also
required to make an application for allotment of a password on the RERA’s
website. 

The
registration can be revoked by the RERA if the Promoter has defaulted in any of
his obligations under the Act or he violates the terms/conditions of the
approval by the RERA or is guilty of any unfair trade practices.

Promoter’s Role and Responsibilities

Like
the various State Flat Ownership Acts, e.g., the Maharashtra Ownership Flats
Act, 1963, the RERA casts various responsibilities upon the Promoter. The Act
specifies a host of functions and duties for a Promoter, and some of the
important duties include the following:

(1)    The Promoter must provide all details of
registration  with the RERA and update his inventory
position on a quarterly basis.

(2)    The advertisement
issued by the Promoter shall mention all particulars of registration with the
RERA.

(3)    The Promoter at
the time of the booking and issue of allotment letter shall be responsible to
make available to the allottee, all sanctioned plans / layout, the stage-wise
completion schedule, etc.

(4)    The Promoter shall
be responsible to obtain the completion certificate or the occupancy
certificate and to make it available to the allottees/co-operative society. He
shall be responsible to obtain the lease certificate, where the real estate
project is developed on a leasehold land, specifying the period of lease, and
certifying that all dues and charges in regard to the leasehold land have been
paid, and to make the lease certificate available to the association of
allottees.

(5)    The Promoter is
also responsible for providing and maintaining the essential services, on
reasonable charges, till the taking over of the maintenance of the project by a
co-operative society of the allottees.

(6)    The Promoter must execute a registered conveyance deed of the
building along with the proportionate title in the common areas to the
society/company/association of the allottees and pay all outgoings until he
transfers the physical possession of the real estate project to the society.
The Maharashtra Rules require that the application for forming a society/
entity for a single building should be submitted to the Registrar of
Co-operative Societies by the Promoter within 3 months from the date on which
51% of the total number of allottees in such a building or wing have booked
their apartments. In the absence of any local law, the Act specifies that the
conveyance deed in favour of the allottee or the association/society of the
allottees must be made within 3 months from date of issue of the occupancy
certificate or in Maharashtra within 1 month from the date on which the
Society/Company is registered, whichever is earlier.

(7)    Once an agreement
for sale is executed for any apartment, he cannot mortgage or create a charge
on the apartment/building and if he does create a mortgage/charge, then it
shall not affect the right and interest of the allottee who has taken or agreed
to take such apartment, plot or building.

(8)    The Promoter may
cancel the allotment only in terms of the agreement for sale. Thus, arbitrary
cancellation of allotment is no longer possible.

(9)    If any allottee suffers a damage due to any false information
contained in an advertisement issued by the Promoter, then he must be
compensated by the Promoter. He may also decide to withdraw from the project,
and he shall be returned his entire investment along with interest @ 2% over State
Bank of India’s highest Marginal Cost of Lending Rate (SBI’s MCLR).

(10)  The Promoter cannot
accept a sum more than 10% of the cost of the apartment as an advance payment
or an application fee without first executing a written and registered
Agreement For Sale with such person. The Agreement must be as per the Model
Prescribed Form specified under the Act.

(11)  Once the sanctioned plans as approved by the RERA are disclosed to
prospective allottees, the Promoter cannot make any additions and alterations
to the same without their previous consent. He may make such minor additions or
alterations as may be required by the allottee/as may be necessary due to
architectural and structural reasons certified by an Architect/Engineer and
that too after proper intimation to the allottee. In case any defect in
structure/workmanship/quality/provision of services /other obligations of the
Promoter is brought to his notice within a period of 5 years by the allottee
from the date of handing over the possession, then the Promoter must rectify
the defect without further charge, within 30 days. If he fails to do so, the
allottees would receive appropriate compensation.

(12)  The Promoter cannot
transfer or assign his majority rights and liabilities in the real estate project
to a 3rd party without prior written consent from 2/3rd
of the allottees and prior written approval of the RERA.

(13)  Promoter must
obtain title insurance of the land and building and separate insurance of the
construction of the real estate project.

(14)  If the Promoter
fails to complete or is unable to give possession of an apartment, plot or
building:

(a)    in accordance with
the Agreement for Sale; or

(b)    due to discontinuance of his business as a developer on account of
suspension or revocation of the registration under the Act or for any other
reason, then he must, if the allottee wishes to withdraw from the project,
without prejudice to any other remedy available, return the amount received by
him with interest at the rate of SBI’s MCLR plus 2%. However, if an allottee
does not intend to withdraw from the project, he shall be paid, by the
Promoter, interest for every month of delay, till the handing over of the
possession at SBI’s MCLR plus 2%.

(15)  He must comply with
the Act and Rules /Regulations /terms and conditions of approval granted by the
RERA.

(16)  The Promoter must
sell a flat only on carpet area pricing basis and must mention the carpet area
in the Agreement for sale. The Act defines carpet area to mean the net usable
floor area of an apartment, excluding the area covered by the external walls,
areas under services shafts, exclusive balcony or verandah area and exclusive
open terrace area, but includes the area covered by the internal partition
walls of the apartment. All walls which are constructed on the external face of
an apartment would be treated as external wall while those walls/ columns
constructed within an apartment would be internal walls. Walls would include
columns within or adjoining or attached to the wall. 

The Promoter must
also confirm the final carpet area allotted to the allottee once the OC has
been obtained. A variation of up to 3% of the carpet area is permissible. If
there is an upward variation then the allottee must pay for the same and if
there is a reduction then the Promoter must refund the excess money paid by the
allottee within 45 days with interest at SBI’s MCLR plus 2%.

(17)  The total price
quoted to the allottee must clearly mention the taxes and must be escalation
free except for increases due to development charges payable to the Municipal
and similar authorities.

(18)  If the promoter fails to complete or is unable to give possession
of an apartment, plot or building in accordance with the terms of the Agreement
For Sale, then the allottees may ask for refund of the sum paid with interest.
The time for refund of such amount payable by the Promoter to the allottees
with interest and compensation is within 30 days from the date on which the
same becomes due and payable. 

Designated bank Account to be
maintained

One of the most unique features of
the Act is that the Promoter must maintain a separate designated bank account.
70% of all realisations from flat allottees must be deposited in this account,
to cover the cost of construction and the land cost and must be utilised for
that purpose only. This provision has been enacted to curb the earlier practice
of developers withdrawing the proceeds of one project and using it to start
another project, thereby risking the completion schedule of the 1st project.
Now, the substantial proceeds of one project must be used for that project
alone. Only a leeway of 30% is available to the Promoter. When the Bill for
passing this Act was moved in the Lok Sabha, the Union Minister had stated that
Promoters can use the remaining 30% for other expenses incurred or for any
other business purposes. It would act as a little cushion. This 30% cushion
would enable the Promoter to purchase some other land by giving an advance for
the same. The limit of 30% is to ensure that the project’s funds were not
diverted and that the project was completed on time.

Even the withdrawal for the cost
of project must be in proportion to the percentage of completion of the
project. For this purpose, the withdrawals must be certified by three entities
– an architect, an engineer and a practicing CA. It is necessary that the CA
certifying must not be the auditor of the Promoter. Further, every Promoter
must get his accounts audited by 30th September in which his Auditor
must certify that during the year, the amounts collected qua a
particular project have been used for that purpose and that the withdrawal was
in compliance with percentage completion of the project. Other than the
certification from these 3 entities, there is no requirement of obtaining any
approval from the RERA for the withdrawal.

For
ongoing projects which have not received OC/CC before 1st May, 2017,
70% of the amount realised from flat allottees is required to be deposited in
the separate bank account. However, in this case, if the estimated receivables
of such ongoing project is less than the estimated cost of completion of the
project, then the 100% of the amount to be realised is required to be deposited
in the said account. For instance, a project costs Rs. 25 crore. It has been
completed up to a certain level and certain flats of this project have been
sold. The total realisations from the flats sold are Rs. 10 crore and the
balance receivable from these flats is Rs. 6 crore. The balance cost of
construction to be incurred for the project is Rs. 7 crore. In this case, the
estimated balance receivables of Rs. 6 crore are less than the estimated cost
of completion of Rs. 7 crore, and hence, the entire Rs. 6 crore (100%) would be
deposited in the separate bank account. Here, the 30% cushion would not be
available. This is quite a stringent provision for the Promoter, but in the
interest of the flat allottees.

(Part II on Issues under
the Act would be covered as a part of Next month’s Laws and Business)

Disclosures in Standalone Ind As Financial Statements For The Year Ended 31st March 2017 Regarding Current Tax And Reconciliation Of Tax Expense

TATA CONSULTANCY SERVICES LTD

The income tax expense consists of the following:

(Rs. crores)

 

2017

2016

Current tax:

 

 

Current
tax expense for current year

6,762

6,344

Current
tax expense/(benefit) pertaining to prior years

(119)

32

 

6,643

6,376

Deferred
tax benefit

(230)

(112)

Total income tax expense recognised in the current year

6,413

6,264

The reconciliation of estimated income tax
expense at statutory income tax rate to income tax expense reported in
statement of profit and loss is as follows:

 

Year ended March 31, 2017

Year ended March 31,
2016

Profit
before income taxes

30,066

29,339

Indian
statutory income tax rate

34.61%

34.61%

Expected
income tax expense

10,406

10,154

Tax effect of adjustments to reconcile expected income tax
expense to reported income tax expense:

 

 

Tax
holidays

(4,134)

(4,468)

Income
exempt from tax

(27)

(34)

Undistributed
earnings in branches and subsidiaries

(60)

90

Tax
on income at different rates

166

285

Tax
pertaining to prior years

(218)

32

Others
(net)

280

205

Total income tax expense

6,413

6,264

The Company benefits from the tax holiday available for units
set up under the Special Economic Zone Act, 2005. These tax holidays are
available for a period of fifteen years from the date of commencement of
operations. Under the SEZ scheme, the unit which begins providing services on
or after April 1, 2005 will be eligible for deductions of 100% of profits or
gains derived from export of services for the first five years, 50% of such
profits or gains for a further period of five years and 50% of such profits or
gains for the balance period of five years subject to fulfilment of certain
conditions. From April 1, 2011 units set up under SEZ scheme are subject to
Minimum Alternate Tax (MAT).

Significant components of net deferred tax assets and
liabilities for the year ended March 31, 2017 are as follows:

 

Opening
balance

Recognised /reversed through profit and loss

Recognised in/
reclassified from other comprehensive income

Closing
balance

Deferred tax assets / (liabilities) in relation to:

 

 

 

 

Property,
plant and equipment and Intangible assets

(22)

(62)

–

(84)

Provision
for employee benefits

238

58

–

296

Cash
flow hedges

(7)

–

(5)

(12)

Receivables,
loans and advances

183

22

–

205

MAT
credit entitlement

1,960

102

–

2,062

Branch
profit tax

(346)

60

–

(286)

Unrealised
gain/loss on securities carried at fair value through statement of profit and
loss/OCI

(27)

(2)

(256)

(285)

Others

185

52

–

237

Net deferred tax assets / (liabilities)

2,164

230

(261)

2,133

Gross deferred tax assets and liabilities are as follows:

 

(Rs. crores)

As at March 31, 2017

Assets

Liabilities

Net

Deferred tax assets/
(liabilities) in relation to:

 

 

 

Property,
plant and equipment and Intangible assets

(56)

(28)

(84)

Provision
for employee benefits

296

–

296

Cash
flow hedges

(12)

–

(12)

Receivables,
loans and advances

205

–

205

MAT
credit entitlement

2,062

–

2,062

Branch
profit tax

–

(286)

(286)

Unrealised
gain/loss on securities carried at fair value through statement of profit and
loss/OCI

(285)

–

(285)

Others

237

–

237

Net deferred tax assets/
(liabilities)

2,447

(314)

2,133

Significant components of net deferred tax assets and
liabilities for the year ended March 31, 2016 are as follows: (not
reproduced as similar to 31-3-2017)

Under
the Indian Income Tax Act, 1961, the Company is liable to pay Minimum Alternate
Tax in the tax holiday period. MAT paid can be carried forward for a period of
15 years and can be set off against the future tax liabilities. MAT is
recognised as a deferred tax asset only when the asset can be measured reliably
and it is probable that the future economic benefit associated with the asset
will be realised. Accordingly, the Company has recognised a deferred tax asset
of Rs. 2,062 crores and has not recognised a deferred tax asset of Rs. 1,108
crores as at March 31, 2017.

The
Company has ongoing disputes with Income Tax authorities relating to tax
treatment of certain items. These mainly include disallowed expenses, tax
treatment of certain expenses claimed by the Company as deductions, and
computation of, or eligibility of, certain tax incentives or allowances. As at
March 31, 2017, the Company has contingent liability in respect of demands from
direct tax authorities in India, which are being contested by the Company on
appeal amounting Rs. 2,688 crores. In respect of tax contingencies of Rs. 318
crores, not included above, the Company is entitled to an indemnification from
the seller of TCS e-Serve Limited.

The
Company periodically receives notices and inquiries from income tax authorities
related to the Company’s operations in the jurisdictions it operates in. The
Company has evaluated these notices and inquiries and has concluded that any
consequent income tax claims or demands by the income tax authorities will not
succeed on ultimate resolution.

The
number of years that are subject to tax assessments varies depending on tax
jurisdiction. The major tax jurisdictions of Tata Consultancy Services Limited
include India, United States of America and United Kingdom.  In India, tax filings from fiscal 2014 are
generally subject to examination by the tax authorities. In United States of
America, the federal statute of limitation applies to fiscals 2013 and earlier
and applicable state statutes of limitation vary by state. In United Kingdom,
the statute of limitation generally applies to fiscal 2014 and earlier.

RELIANCE INDUSTRIES LTD

The income tax expense consists of the following:

(Rs. crores)

 

Year Ended31st March, 2017

Year Ended 31st
March, 2016

TAXATION

 

 

Income tax recognised in Statement of Profit and Loss

 

 

Current
tax

8,333

7,801

Deferred
tax

1,019

831

Total income tax expenses recognised in the current year

9,352

8,632

 

The
income tax expenses for the year can be reconciled to the accounting profit
as follows:

Profit
before tax

40,777

36,016

Applicable
Tax Rate

34.608%

34.608%

Computed
Tax Expense

14,112

12,464

Tax
effect of :

 

 

Exempted
income

(2,707)

(5,306)

Expenses
disallowed

3,044

3,378

Additional
allowances net of MAT Credit

(6,116)

(2,735)

Current Tax Provision (A)

8,333

7,801

Incremental
Deferred Tax Liability on account of Tangible and Intangible Assets

1,229

824

Incremental
Deferred Tax Asset on account of Financial Assets and Other Items

(210)

7

Deferred tax Provision (B)

1,019

831

Tax Expenses recognised in Statement of Profit and Loss (A+B)

9,352

8,632

Effective
Tax Rate

22.93%

23.97%

STERLITE TECHNOLOGIES LTD

The major components of income tax expense for the years
ended 31 March 2017 and 31 March 2016 are:

 

31 March 2017

31 March 2016

(Rs. in crores)

(Rs. in crores)

Profit or loss section

 

 

Current Income Tax

 

 

Current income tax charge

51.55

52.77

Adjustment of tax relating to earlier
periods

3.22

(5.93)

Deferred Tax

 

 

Relating to origination and reversal of
temporary differences

2.47

19.35

Income tax expenses reported in the
statement of profit or loss

57.24

66.19

OCI Section

 

 

Deferred tax related to items recognised
in OCI during in the year:

 

 

Net (gain)/loss on revaluation of cash
flow hedges

0.29

(0.69)

Re-measurement loss defined benefit
plans

0.28

1.16

Income tax credit through OCI

0.57

0.47

Reconciliation of tax expense and the accounting profit
multiplied by India’s domestic tax rate for 31 March 2017 and 31 March 2016:

 

31 March 2017

31 March 2016

(Rs. in  crores)

(Rs. in crores)

Accounting profit before income tax

197.98

247.61

At India’s statutory income tax rate of
34.61% (31 March 2016: 34.61%)

68.52

85.70

Adjustments in respect of current income
tax of previous years

3.22

(5.93)

Tax benefits under various sections of
Income tax Act

(16.84)

(15.98)

Others

2.35

2.41

At the effective income tax rate of
28.91% (31 March 2016: 26.73%)

57.24

66.19

Income tax expense reported in the
statement of profit and loss

57.24

66.19

RAYMONDs LIMITED

Tax expense recognized in the Statement of Profit and Loss

(Rs. in lakhs)

Particulars

Year ended

31st March, 2017

Year ended

31st March, 2016

Current tax

 

 

Current Tax on taxable income for the
year

945.42

2,704.59

Total current tax expense

945.42

2,704.59

 

 

 

Deferred tax

 

 

Deferred tax charge/(credit)

(559.87)

3,121.19

MAT Credit (taken)/utilized

925.89

(1,961.21)

 

 

 

Total deferred income tax
expense/(benefit)

366.02

1,159.98

 

 

 

Tax in respect of earlier years

15.20

–

Total income tax expense

1,326.64

3,864.57

Reconciliation of the income tax expenses to the amount
computed by applying the statutory income tax rate to the profit before income
taxes is summarized below:

(Rs in lakhs)

Particulars

Year ended

31st March, 2017

Year ended

31st March, 2016

Enacted income tax rate in India
applicable to the Company

34.608%

34.608%

Profit before tax

4,709.47

11,239.84

Current
tax expenses on Profit before tax expenses at the enacted income tax rate in
India

1,629.85

3,889.88

 

 

 

Tax effect of the amounts which are not
deductible/(taxable) in calculating taxable income

 

 

Permanent Disallowances

167.85

363.38

Deduction under section 24 of the Income
Tax Act

(42.62)

(52.14)

Interest income from Joint Venture on
liability element of compound financial instrument

(233.06)

(210.00)

Tax in respect of earlier years

15.20

–

Income exempted from income taxes

(273.04)

(91.24)

Other items

62.46

(35.31)

Total income tax expense/(credit)

1,326.64

3,864.57

Consequent to reconciliation items shown above, the
effective tax rate is 28.17% (2015-16: 34.38%).

Significant Estimates: In calculation of tax expense
for the current year and earlier years, the group has disallowed certain
expenditure pertaining to exempt income based on previous tax assessments,
matter is pending before various tax authorities.

IDEA CELLULAR LTD

Tax Reconciliation

(a) Income Tax Expense

Rs.
Mn

Particulars

For the year

ended

March 31, 2017

For the year

ended

March 31, 2016

Current
Tax

 

 

Current
Tax on profits for the year

–

8,621.82

Total Current Tax Expense (A)

–

8,621.82

Deferred
Tax

 

 

Relating
to addition & reversal of temporary differences

(4,825.95)

5,623.81

Relating
to effect of previously unrecognised tax credits, no recorded

(1,053.33)

–

Total Deferred Tax Expense (B)

(5,879.28)

5,623.81

Income Tax Expense (A+B)

(5,879.28)

14,245.63

Income tax impact of re-measurement gains/losses on defined
benefit plans taken to other comprehensive income

(17.13)

(71.11)

(b) Reconciliation of average effective tax rate
and applicable tax rate

Rs. Mn

Particulars

For the year ended

March 31, 2017

For the year

ended

March 31, 2016

Profit
/ (Loss) from continuing operation before Income tax expense

(14,190.03)

40,708.51

Applicable Tax Rate

34.61%

34.61%

Increase
/ reduction in taxes on account of:

 

 

Effect
of unrecognised deductible temporary differences

–

0.25%

Effect
of previously unrecognised tax credits, now recorded

7.42%

–

Effects
of expenses that are not deductible in determining the taxable profits

(0.64)%

0.24%

Other
Items

0.04%

(0.11)%

Effective Tax Rate

41.43%

34.99%

(c) Deferred tax assets are recognised to the
extent that it is probable that taxable profit will be against which the
deductible temporary differences, carry forward of unabsorbed depreciation and
tax losses can be utilised.  Accordingly,
in view of uncertainty the Company has not recognized deferred tax assets in
respect of temporary differences arising out of effects of assessments and
unused tax losses/credits of Rs. 4,612.09 Mn, Rs. 3,738.82 Mn, and Rs. 3,442.47
Mn.  as of March 31, 2017, March 31, 2016
and April 1, 2015 respectively.

ASIAN PAINTS LTD

( Rs. in Crores)

NOTE
18: INCOME TAXES

Year 2016-17

Year 2015-16

A.

The
major components of income tax expense for the year are as under:

 

 

(i)

Income
tax recognised in the Statement of Profit and Loss

Current
tax

 

 

 

In
respect of current year

817.22

743.74

 

Adjustments
in respect of previous year

(3.60)

(3.33)

 

Deferred
tax:

 

 

 

In
respect of current year

41.33

39.88

 

Income
tax expense recognised in the Statement of Profit and Loss

854.95

780.29

(ii)

Income
tax expense recognised in OCI

 

 

 

Deferred
tax:

 

 

 

Deferred
tax benefit on fair value gain on investments in debt instruments through OCI

0.17

0.34

 

Deferred
tax expense on re-measurements of defined benefit plans

(2.84)

(0.91)

 

Income
tax expense recognised in OCI

(2.67)

(0.57)

B

Reconciliation
of tax expense and the accounting profit for the year is as under:

 

 

Profit
before tax

2,658.05

2,403.10

Income
tax expense calculated at 34.608%

919.90

831.67

Tax
effect on non-deductible expenses

22.62

38.81

Incentive
tax credits

(34.70)

(46.23)

Effect
of Income which is taxed at special rates

(19.70)

(14.12)

Effect
of Income that is exempted from tax

(26.66)

(24.26)

Others

(2.91)

(2.25)

Total

858.55

783.62

Adjustments
in respect of current income tax of previous year

(3.60)

(3.33)

Tax
expense as per
Statement of Profit and Loss

854.95

780.29

The Company has the following unused tax losses which arose
on incurrence of capital losses under the Income Tax Act, 1961, for which no
deferred tax asset has been recognized in the Balance Sheet.

(Rs.
in Crores)

Financial Year

As at 31.03.2017

Expiry Date

As at 31.03.2016

Expiry Date

2009-10

–

–

3.73

31st March, 2019

2011-12

1.07

31st March, 2021

9.93

31st March, 2021

2013-14

2.03

31st March, 2023

2.03

31st March, 2023

2014-15

8.64

31st March, 2024

8.64

31st March, 2024

TOTAL

11.74

 

24.33

 

Business Combinations of Entities under Common Control

Background

Appendix C, Business
Combinations of Entities under Common Control of Ind AS 103, Business
Combinations, deals with accounting of common control business
combinations. The assets and liabilities of the combining entities in a common
control business transaction are reflected at their carrying amounts. This is
commonly known as “The pooling of interest method”.  Paragraph 9 of Appendix C is reproduced
below.

“9 The pooling of interest method is considered to involve
the following:

(i) The assets and liabilities of the combining entities
are reflected at their carrying amounts.

(ii) No adjustments are made to reflect fair values, or
recognise any new assets or liabilities. The only adjustments that are made are
to harmonise accounting policies.

(iii) ………… “

Issue

An interesting question arises on
the application of the pooling of interest method. The question is whether
the carrying amount of assets and liabilities of the combining entities should
be reflected as per the books of the entities transferred/merged or the
ultimate parent. The standard requires reflecting the business combination
under common control at carrying value of the combining entities. However the
standard is silent about whether the carrying amounts should be those as
reflected in the standalone financial statements of the combining entities or
those as reflected in the consolidated financial statements (CFS) of the parent
or the ultimate parent.

Consider a basic fact pattern. A Ltd. is the parent company
of two subsidiaries, viz., B Ltd. & C Ltd. Consider the following two
Scenarios.

Scenario 1: B Ltd. merges with C Ltd.

Scenario 2: B Ltd. merges with A Ltd.

The question is raised from the perspective of how C Ltd. in
Scenario 1 and A Ltd in Scenario 2 will prepare their post combination
standalone financial statements. 

It
may be noted that as far as A Ltd / parent’s CFS is concerned; the merger will
have absolutely no effect. This is because all intra-group transactions should
be eliminated in preparing CFS in accordance with Ind AS 110. The legal merger
of a subsidiary with the parent or legal merger of fellow subsidiaries is an
intra-group transaction and accordingly, will have to be eliminated in the CFS
of the parent or the ultimate parent.

Response

A similar question was raised to
the Ind AS Transition Facilitation Group (ITFG). In responding to the query,
the ITFG made a distinction between Scenario 1 and Scenario 2. The ITFG’s view
is given below.

Scenario 1

Assets and liabilities of
the combining entities are reflected at their carrying amounts. Accordingly, in
the separate financial statements of C Ltd., the carrying values of the assets
and liabilities as appearing in the standalone financial statements of the
entities being combined i.e B Ltd. & C Ltd. shall be recognised.

Scenario 2

In this case, since B Ltd. is merging with A Ltd.
(i.e. parent) nothing has changed and the transaction only means that the
assets, liabilities and reserves of B Ltd. which were appearing in the CFS of
Group A immediately before the merger would now be a part of the separate
financial statements of A Ltd. Accordingly, it would be appropriate to
recognise the carrying value of the assets, liabilities and reserves pertaining
to B Ltd. as appearing in the CFS of A Ltd. Separate financial statements to
the extent of this common control transaction shall be considered as a
continuation of the consolidated group.

Author’s View

The
ITFG has made a distinction between Scenario 1 and Scenario 2. In Scenario 1,
since the parent is not a party to the combination, the standalone financial
statements of C will combine carrying value of assets and liabilities of B and
C as appearing in their standalone financial statements. In Scenario 2, since
the parent is a party to the combination, A Ltd./ the parent’s post combination
financial statements will combine carrying values of A and carrying value of B
as appearing in A’s CFS. In other words, in Scenario 2, the accounting for the
combination is accounted as if, A had acquired B, and merged it with itself
from the very inception.

The logic of two different
approaches for accounting common control business combination based on whether
the parent is a party to the business combination is not absolutely clear.
Further, the logic does not emanate from a reading of the standard. In both
Scenario’s, business under common control are merging. Since the standard is
not clear on which carrying values to be used, the author believes that in both
Scenarios, there should be a clear accounting policy choice of either using
standalone carrying values or those that are reflected in the CFS of the parent
or ultimate parent.

The continuation of the
consolidation group approach should be an accounting policy choice and should
not be made conditional to the parent being a party to the business
combination. Globally under IFRS too,
either methods are acceptable, irrespective of whether a parent is party to the
business combination. Giving up the shares for the underlying assets is
essentially a change in perspective of the parent of its investment, from a
‘direct equity interest’ to ‘the reported results and net assets.’ Hence, the
values recognised in the CFS becomes the cost of these assets for the parent.

If the author’s approach is
considered, other relevant questions as detailed below, and not addressed by
ITFG, may not need any further clarification:

–   In Scenario 2, B Ltd does not merge with A
Ltd, but A Ltd. merges with B Ltd.

–   In Scenario 2, it is not absolutely clear
whether it is mandatory to use the carrying values of B Ltd as appearing in the
CFS of A or there is a choice to use the carrying values of B Ltd. as appearing
in the standalone financial statements of B Ltd.

The ITFG may provide appropriate clarification.

17 Section 5(2)(a) of the Act – Benefit of Circular 13/2017 regarding non-taxability of remuneration received by non-resident in NRE account available also where such income was received for the first time in India; hence, such income was not taxable under the Act.

TS-219-ITAT-2017(Kol)

Shyamal Gopal Chattopadhyay vs. DDIT

A.Y.: 2011-12, Date of Order: 2nd June, 2017

Facts

Taxpayer, a non-resident individual, was a marine engineer
employed by a Hongkong shipping company (HCo). During the year under
consideration, Taxpayer was a non-resident. Taxpayer received remuneration in
foreign currency from HCo which was directly remitted to the NRE account in
India of the Taxpayer.

Taxpayer argued that salary income for services rendered
outside India is not taxable under the Act. Furthe, since salary was received
outside India in foreign currency and remitted to NRE account, it was not
taxable in India u/s.5 of the Act on receipt basis.

Relying on the decision of the Mumbai Tribunal in the case of
Capt. A. L. Fernandes vs. ITO [81 ITD 203], AO observed that if the
place where the recipient gets the money (on first occasion) under his control,
is in India, such income is to be considered as received in India. According to
AO, since the income was remitted by the employer of the Taxpayer to his bank
account in India, the Taxpayer had control over the money for the first time in
India. Therefore, AO held that such income was received in India.

Taxpayer appealed before CIT(A), who upheld the order of AO.
Aggrieved by the order of CIT(A), Taxpayer appealed before the Tribunal.

Held

–   In terms of Circular 13/2017 dated
11.04.2017, salary accrued to a non-resident seafarer for services rendered
outside India on a foreign going ship (with Indian flag or foreign flag) is not
to be included in the total income merely because such salary is credited in
the Non-resident rupee (NRE) account maintained with an Indian bank by the
seafarer.

–   Remittances of salary into NRE Account
maintained with an Indian Bank by a seafarer could be of two types:

–   Situation 1: employer directly crediting
salary to the NRE Account maintained with an Indian Bank by the seafarer;

–   Situation 2: employer directly crediting
salary to the account maintained outside India by the seafarer and the seafarer
transferring such money to NRE account maintained by him in India.

–   Credit to account outside India and
subsequent transfer to NRE account would be outside the purview of provisions
of section 5(2)(a) of the Act, as what is remitted is not “salary
income” but mere transfer of Taxpayer’s own funds from one bank account to
another which does not give rise to “Income”.

–   In the present case, the employer has
directly credited the salary, for services rendered outside India, into NRE
bank account of the seafarer in India.

–   Circular 13/2017 is vague. It is not clear
whether the expression “merely because” used in the Circular refers
to direct credit to NRE account or transfer of funds to the NRE account and
whether or not it covers both types of credits to NRE account.

–   Accordingly, benefit of doubt should be given
to the Taxpayer by interpreting the Circular as covering both the situations.

–   Though such an interpretation of the Circular
would make provisions of section 5(2)(a) of the Act redundant, such
interpretation is binding on the revenue. Reliance in this regard was placed on
SC decision in the case of Indian Oil Corporation, wherein it was held that
when a circular is in operation then the revenue will be bound by it. Revenue
then cannot plead that the circular is not valid or contrary to the provisions
of the statute.

–   Thus salary income received in NRE account
was not taxable in India.

16 Section 92E of the Act – Allotment of shares is an international transaction; Taxpayer is required to furnish Form 3CEB for reporting such transaction.

TS-319-ITAT-2017(Mum)-TP

BNT Global Pvt. Ltd. vs. ITO

A.Y.: 2011-12, Date of Order: 25th April, 2017

Facts

Taxpayer was an Indian
company. During the course of assessment proceedings, AO observed that the
Taxpayer had received foreign inward remittance on account of share capital and
premium from one of its existing shareholder who was also a director of the
Taxpayer Company. Though no adjustments were made, AO held that the allotment
of shares was an international transaction and levied penalty of INR 1 lakh
u/s. 271BA the Act as the Taxpayer did not file Form 3CEB.

The Taxpayer contended that share allotment transaction is
not an international transaction and in absence of any other international
transaction entered into by the Taxpayer, it was not required to file form
3CEB. Taxpayer appealed before CIT(A), who upheld the levy of penalty.
Aggrieved by the order of CIT(A), the Taxpayer appealed before the Tribunal.

Held

–   It is mandatory for a person entering into
international transactions to furnish Form 3CEB setting forth the particulars
of international transactions.

–   Transaction of share investment, clearly
falls within the ambit of section 92E of the Act and hence it has to be
reported in Form 3CEB. 

–   In IL&FS Maritime Infrastructure Co. Ltd.
(ITA No. 4177/Mum/2002 dated 23.07.2013), co-ordinate bench of the Tribunal has
held that share investment transactions fall within the purview of section 92E
of the Act. Hence, Taxpayer is required to file form 3CEB for such transactions
before the due date. In case of default, penalty u/s. 271BA would be attracted.

–   Thus, Taxpayer’s contentions that it was not
required to file Form 3CEB, since the provisions of section 92E of the Act were
not applicable to allotment of shares does not hold good.

–   Taxpayer’s reliance on Vodafone India
Services Pvt. Ltd. vs. ACIT (2014) 368 ITR 1 (Bom) is not applicable to the
present case, since in the aforesaid case Form 3CEB was filed by the Taxpayer
and issue considered therein was validity of arm’s length price adjustment made
by Transfer Pricing Officer (TPO) to issue of equity shares at a premium.

–   Failure on the part of the Taxpayer to
furnish the audit report in Form 3CEB is a violation of the provisions of
section 92E of the Act. Accordingly, penalty under the Act was leviable u/s.
271BA.

15 Sections 9 of the Act; Article 13 of India-Germany DTAA – Payment made for use of standard operating procedures amounts to sharing of information concerning industrial, commercial or scientific experience and taxable as royalty under India-Germany DTAA.

TS-209-ITAT-2017(Ahd)

Oncology Services India Pvt.Ltd. vs. ADIT

A.Y.: 2009-10, Date of Order: 1st June, 2017

Facts

Taxpayer, an Indian company, had
entered into an agreement for use of standard operating procedures (SOPs)
developed by a German group entity (GCo) in order to harmonise all required
software systems, policy and processes. The Taxpayer was also granted access to
the database, email server and hardware and software of GCo for the aforesaid
purpose. During the year under consideration, the Taxpayer had made payments to
GCo as per the agreement, however, no tax was deducted at source on such
payments by the Taxpayer.

During the course of assessment
proceedings, the Assessing Officer (AO) observed that the payments were made
for “using the name, goodwill and market reputation” of GCo and held that
income from such payment is taxable in India as royalties u/s. 9(1)(vi) of the
Act.

Taxpayer argued that payments were in the nature of business
income and in absence of PE of GCo in India, not taxable in India. Further, GCo
had permitted it to use the brand name, logo and website without any cost or
financial obligation. Hence, no part of the payment may be attributed to such
use.

Aggrieved by the order of AO,
Taxpayer appealed before the CIT(A) who upheld the order of AO. Subsequently,
Taxpayer appealed before the Tribunal.

Held

–   The use of name, brand, logo and website was
without any cost or financial liability. Hence, no part of the payment made to
GCo could be attributed to such use.

–   SOPs granted were “matured validated standard
procedures” which were developed by GCo over a period of time and approved by
the regulatory bodies. The access to database, and allied activities like
harmonisation of software systems, policy and process, were only incidental to
this main object of sharing the SOPs and thus cannot be viewed in isolation.

–   Sharing of SOPs was in effect
sharing of the information about the scientific experiences by GCo. Sharing of
such information was covered within the limb of “use of or right to use
information concerning industrial, commercial or scientific” in Article 13(3)
of India-Germany DTAA. Thus, the payment for sharing of the SOPs was taxable as
‘royalties’ under the India-German DTAA.

New Safe Harbour Provisions in Indian Transfer Pricing Regime

“Safe Harbour Rules”
were notified by the CBDT in the year 20131, which were applicable
to certain select International Transactions, prominent among them were
transactions relating to software, KPO, R&D, manufacturing of auto
components and intra-group loans and guarantees. These Rules aimed at reducing
litigation in the arena of Transfer Pricing. However, these Rules failed to
attract taxpayers due to prescription of high thresholds. A Committee was set
up to look into various aspects of safe harbor regime and based on its report
new safe harbor rules are notified by the CBDT on 7th June 2017. This
article analyses various provisions, their impact and potential issues that may
arise there from.

1.0   Introduction

Safe Harbour Rules (SHR) were first introduced in India vide CBDT
Notification No. SO 2810 (E) dated 18th September 2013. These Rules were
applicable only to international transactions for the Assessment Year (AY)
2013-14 and four AYs immediately following that, i.e. for and up to AY 2017-18.
A new set of SHR have been introduced with effect from 1st April 2017 which
shall apply with effect from the AY 2017-18 and two AYs immediately thereafter
i.e. for and up to AY 2019-20. Thus, new SHR will be effective for three years
only as oppose to five years in case of erstwhile SHR. These Rules are
discussed in the subsequent paragraphs.

It is provided that where a tax
payer is eligible for both the Rules (i.e. Old and New) (the same is possible
for the AY 2017-18, being an overlapping year), then he has an option to choose
the one which is most beneficial to him.

Explanation to section 92CB
of the Income-tax Act, 1961 (the Act) defines safe harbour to mean
circumstances in which the Income-tax authorities shall accept the transfer
price declared by the assessee.

The United Nation’s Practical Manual on Transfer Pricing for Developing
Nations released in the year 2013 defines “Safe harbour rules as rules whereby
if a taxpayer’s reported profits are below a threshold amount, be it as a
percentage or in absolute terms, a simpler mechanism to establish tax
obligations can be relied upon by a taxpayer as an alternative to a more
complex and burdensome rule, such as applying the transfer pricing
methodologies”.

OECD Transfer Pricing Guidelines defines a safe harbour as “a provision
that applies to a defined category of the taxpayers or transactions and that
relieves eligible taxpayers from certain obligations otherwise imposed by a
country’s general transfer pricing rules.”

2.0   New SHR effective from 1st April 2017

A new category of
transactions being “Receipts of Low Value-Adding Intra-Group Services” has been
introduced. The peak rates of safe harbour margins have been reduced in many
categories. In respect of knowledge process outsourcing, (KPO) safe harbour margins
are slashed and divided in to three rates of 18%, 21% and 24% instead of single
rate of 25% in the earlier regime. Moreover, the new rates are linked to
employee cost to operating cost ratio. These and other changes are elaborated
in more detail in the table, which also carries comparison of the old and new provisions.

Comparative
Provisions of the Old and New SHR

 

 

Comparative
Provisions of the Old and New SHR

Sr. No

Eligible
International Transactions

Safe Harbour Margin –

New Provisions

Safe Harbour Margin –
Old Provisions

1

Provision of Software Development Services

[Rule 10TA(m)] read with

[Rule 10TC(i)]

 

Operating Profit Margin (OPM) in relation to Operating
Expenses (OE):

 

For Software Development Services

(i) 17% or more, where the value of international
transaction does not exceed Rs. 100 crore;

 

(ii) 18% or more, where the value of international
transaction exceed Rs. 100 crore but does not exceed Rs. 200 crore;

 

For ITES

(i) 17% or more where aggregate value of such
transactions during the previous year does not exceed Rs. 100
crore; or

 

(ii) 18% or more where aggregate
value of such transactions during the previous year exceeds Rs. 100 crore
but less than Rs. 200 crore.

 

[As the limit of Rs. 500 crore stands reduced, the
companies with high value transactions will have to per force opt for
unilateral or bilateral Advance Pricing Agreements (APAs) to have certainty
of arm’s length pricing]

Operating Profit Margin (OPM) in relation to Operating
Expenses (OE):

 

(i)         20% or
more where total value of such transactions during the previous year does not
exceed Rs. 500 crore; or

 

(ii)         22% or
more where total value of such transactions during the previous year exceeds
Rs. 500 crore.

 

 

Provision of Information Technology Enabled Services (ITES)

[Rule 10TA(e)]

read with

[Rule 10TC(ii)]

 

Remarks:

(i)   “OPM” in relation to “OE” means the ratio
of operating profit, being the operating revenue in excess of operating
expense, to the operating expense expressed in terms of percentage.

(ii)  Rule 10TA defines “Software Development
Services” as well as ITES. In both cases it is clarified that any research
& development (R&D) services will not be included in the definition
whether or not such R&D services are in the nature of contract R&D
services.

(iii)   It may be noted that for applying the
threshold of Rs. 100 crore or two crore, as the case may be, to the Software
Development Services, one need to consider the value of international
transaction (could be read as “single transaction”); whereas for ITES, one
need to consider the aggregate value of all transactions during the relevant
previous year. Earlier this distinction was not there and for both types of
services, the thresholds were computed by to the aggregate value of all
transactions during the previous year.

2

Provision of Knowledge Process Outsourcing Services (KPO)

[Rule 10TA(g)]

 

Value of the International Transaction should not exceed
Rs. 200 crore and the OPM to OE shall be as follows:

(i) 24% or more if Employee Cost (EC) to Operating Expense
(OE) is at least 60%;

 

(ii) 21% or more if EC to OE is 40% or more but less than
60%;

 

(iii) 18% or more if EC to OE is less than 40%.

 

OPM to OE shall be 25% or more.

Remarks:

(i)    Employee Cost (EC) has been defined in
Rule 10TA by insertion of clause (ca). OE has already been defined in clause
(j) of Rule 10TA.

       (Refer paragraph 3.1 below for further
details)

(ii)   Looking at the nature of highly skilled
employees in KPO industries, taxpayers are likely to fall in the higher
brackets of 21% or 24% as EC is higher for KPO services.

3

Provision of Contract R&D Services wholly or partly
relating to Software Development.

[Rule 10TA (aa)] read with

[Rule 10TC(vi)]

 

Value of the International Transaction should not exceed
Rs. 200 crore and the OPM to OE shall be 24% or more

OPM to OE shall be 30% or more.

Remark:

Though there is a reduction in SHR margin, the
applicability is restricted to small transactions and therefore tax payers
with large amount of transaction will have to opt for APA.

4

Provision of Contract R&D Services wholly or partly
relating to Generic Pharmaceutical Drugs.

[Rule 10TA(d)] read with

[Rule 10TC(vii)]

Value of the International Transaction should not exceed
Rs. 200 crore and the OPM to OE shall be 24% or more

OPM to OE shall be 29% or more.

Remarks:

(i)   Contract R&D services in relation to
Generic Pharmaceutical Drugs (GPD) is not defined. However, GPD is defined to
mean a drug that is comparable to a drug already approved by the regulatory
authority in dosage form, strength, route of administration, quality and
performance characteristics and intended use.

(ii)   Other comment relating to large
transactions as mentioned above at point no. 3 applies here also.

5

Manufacture and Export of Core Auto Components

[Rule 10TA(b)] read with

[Rule 10TC(viii)]

 

No change.

 

OPM to OE shall be 12% or more.

 

OPM to OE shall be 12% or more.

Remark:

Core Auto Components are
defined in Clause (b) of Rule 10TA.

6

Manufacture and Export of Non- Core Auto Components

[Rule 10TA(h)] read with

[Rule 10TC(ix)]

 

No change.

 

OPM to OE shall be 8.5% or more.

 

OPM to OE shall be 8.5% or more.

Remark:

Rule 10TA (h) defines non-core auto components as the ones
which are other than core auto components.

7

Advancing of intra-group loans in Indian Rupees

 

[Rule 10TA(f)] read with

[Rule 10TC (iv)]

 

Interest rate should not be less than the one-year marginal
cost of funds lending rate of SBI as on the 1st April of the relevant
previous year plus:

 

* 175 BPS where CRISIL rating of Associated Enterprise (AE)
is between AAA to A or its equivalent;

 

* 325 BPS where CRISIL rating of AE is BBB-, BBB or BBB+ or
its equivalent;

 

* 475 BPS where CRISIL rating of AE is between BB to B or
its equivalent;

 

* 625 BPS where CRISIL rating of AE is between C to D or
its equivalent;

 

* 425 BPS where CRISIL rating of AE is not available and
the amount of loan advanced to the AE including loans to all AEs does not
exceed Rs.100 crore as on 31st March of the relevant previous year (PY);

Interest rate should not be less than the base rate of SBI
as on 30th June of the relevant previous year plus 150 basis points (BPS)
where the loan amount is less than or equal to Rs. 50 crore and

 

300 BPS where the loan amount is exceeding Rs. 50 crore

 

Remarks:

(i)    Intra-group loan is defined in clause (f)
of the Rule 10TA. It covers loans advanced to Wholly Owned Subsidiary (WOS)
in Indian rupees. Banking and Financial Institutions are excluded.

(ii)   In Rule 10TA (f) ironically, the definition
of Intra-group loan is not amended which refers to only WOS whereas, the SHR
makes a reference of AE.

(iii)  It is good that the rate of interest is to
be determined based on the credit rating of the borrower. However, provision
of obtaining CRISIL rating for all borrowers may put them in undue hardships.

8

Advancing of intra-group loans in Foreign Currency (FC)

 

[Rule 10TA(f)] read with

[Rule 10TC (iv)]

 

Interest rate is not less than 6 months LIBOR of the relevant foreign
currency as on 30th September of the relevant PY plus:

* 150 BPS where CRISIL rating of AE is
between AAA to A or its equivalent;

* 300 BPS where CRISIL rating of AE is
BBB-, BBB or BBB+ or its equivalent;

* 450 BPS where CRISIL rating of AE is
between BB to B or its equivalent;

* 600 BPS where CRISIL rating of AE is
between C to D or its equivalent;

* 400 BPS
where CRISIL rating of AE is not available and the amount of loan advanced to
the AE including loans to all AEs does not exceed Rs. 100 crore as on 31st
March of the relevant previous year (PY);

No such distinction between intra-group loans in INR or FC.

 

The rates prescribed above were applicable for all types of
intra-group loans.

 

Remarks:

(i)   
The determination of lending rate based on the currency of a loan is a
best international practice. However, the tenure of the loan and other terms
are not considered in determining the rate of interest.

(ii)   Requirement to obtain CRISIL rating for
all borrowers may put them into undue hardships.

9

Providing corporate guarantee

 

[Rule 10TA (c)] read with

[Rule 10TC (v) (a) (b)]

 

Guarantee commission or the fee charged should be minimum
1% per annum on the amount guaranteed.

Guarantee commission or the
fee charged should be minimum

(i) 2% per annum of the amount
guaranteed where the amount guaranteed does not exceed Rs. 100 crore.

(ii) 1.75% per annum where the amount guaranteed exceeds
Rs. 100 crore.

Remarks:

(i)    The reduction of guarantee commission up
to 1% is a welcome change.

(ii)    However, in number of decisions2  Tribunals have upheld 0.5% as the arm’s
length guarantee commission.

(iii)  Corporate Guarantee is defined to mean
explicit corporate guarantee extended by a company to its WOS being a
non-resident in respect of any short-term or long term borrowing.

(iv)  Unlike SHR for intra-group loans, which are
now extended to AEs and not just WOS, corporate guarantee continues to apply
only in respect of WOS.

10

Receipt of Low value-adding intra-group services

[Rule 10TA (ga)] read with

[Rule 10TC (x)]

The entire value of the
International Transaction, including a mark-up not exceeding 5%, should be
less than or equal to Rs. 10 crore.

Not There.

Remarks:

(i)   
A new Clause (ga) is inserted in Rule 10TA to define the meaning of
“Low Value-Adding Intra-group Services”. (Refer paragraph 3.4 below for
further details)

(ii)  
It is also provided that SHR provisions would apply only if the method
of cost pooling, the exclusion of Shareholder costs and duplicate costs from
the cost pool and the reasonableness of the allocation keys used for
allocation of costs to the assessee by the overseas AE, is certified by an
accountant. A new clause (a) has been added to Rule 10TA to define the
meaning of “accountant”.

3.0        Other
Important Changes in the new regime

       3.1 Employee Cost in relation to KPO
Services

       Employee
cost has been defined in the newly inserted clause (ca) of Rule 10TA which
besides normal employee expenses also includes expenses incurred on contractual
employment of person performing tasks similar to those performed by the regular
employees. Outsourcing expenses, to the extent of employee cost, wherever
ascertainable, which are embedded in the total outsourcing expenses should also
be considered as a part of the total employee cost. Wherever, the extent of
employee costs is not so ascertainable, they will be deemed to be 80 per cent
of the total outsourcing expenses.

       3.2 The
definition of Operating Expenses in clause (j) of Rule 10TA is amended to
include costs relating to Employee Stock Option Plan (ESOP) or similar
stock-based compensation provided by the AE of the assessee to the employees of
the assessee.

       3.3 Reimbursement of expenses to the AE
shall be considered at cost.

       3.4 Low Value-Adding Intra-group Services

       A new
service, namely, Low Value-Adding Intra-Group Services (LVA-IGS) has included
in the SHR. It is defined in the clause (ga) of Rule 10TA. The salient features
of this definition are as follows:

       LVA-IGS refers to services which are:

(i)    in the nature of support services;

(ii)    not part of the core business of the
multinational enterprise group;

(iii)   are not in the nature of shareholder services
or duplicate services;

(iv)   do not require use of unique intangibles nor
lead to creation of unique and valuable intangibles;

(v)   do not involve assumption or control of
significant risk by the service provider nor give rise to creation of
significant risk for the service provider; and

(vi)   do not
have reliable external comparable services that can be used for determining
their arm’s length price.

       However, it is specifically provided
LVA-IGS does not include the following services:

(i)    research and development services; (ii)
manufacturing and production services; (iii) information technology (software
development) services; (iv) knowledge process outsourcing services; (v)
business process outsourcing services; (vi) purchasing activities of raw
materials or other materials that are used in the manufacturing or production
process; (vii) sales, marketing and distribution activities; (viii) financial
transactions; (ix) extraction, exploration, or processing of natural resources;
and (x) insurance and reinsurance;”

       The
definition of LVA-IGS as mentioned above is by and large in sync with the
definition at the paragraphs 7.46. 7.47 and 7.48 of the Base Erosion and Profit
Shifting (BEPS) Action Plan 10 promulgated by the OECD. However, BPO/KPO
services and purchase activities of raw materials or other materials that are
used in the manufacturing or production process are excluded from the
definition of the Indian SHR pertaining to LVA-IGS, which is not so in case of
BEPS Action Plan. It may be noted that BEPS Action Plan excludes “Services of
corporate senior management” from the definition of LVA-IGS, which is not so in
case of Indian regulations.

4.0   SHR on Domestic Transactions

       In
2015, SHR 10TH to 10THD were introduced covering to following domestic
transactions:

_______________________________________________________________________________________________

In Bharti
Airtel Ltd (ITA No 5816/Del/201Z) dated 11 March 2014; Reliance Industries Ltd
(I.T.A. No. 4475/Mum/2007) and Four Soft Ltd. vs. DCIT [(Hyd. ITAT) – 62 DTR
308] respective honorable Tribunals upheld non-charging of guarantee
commission/fees.

 

S. No.

Eligible specified domestic Transaction

Circumstances

1.

Supply of electricity, transmission of electricity,
wheeling of electricity referred to in item (i), (ii) or (iii) of rule 10THB,
as the case may be.

The tariff in respect of supply of electricity,
transmission of electricity, wheeling of electricity, as the case may be, is
determined by the Appropriate Commission in accordance with the provisions of
the Electricity Act, 2003 (36 of 2003).

2.

Purchase of milk or milk products referred to in clause
(iv) of rule 10THB. [i.e. Purchase of milk or milk products by a co-operative
society from its members]

The price of milk or milk products is determined at a rate
which is fixed on the basis of the quality of milk, namely, fat content and
Solid Not FAT (SNF) content of milk; and—

(a) the said rate is irrespective of,—

(i)    the quantity of milk procured;

(ii)   the percentage of shares held by the
members in the co-operative society;

(iii)   the voting power held by the members in the
society; and

(b) such prices are routinely
declared by the co-operative society in a transparent manner and are
available in public domain.

 

Rule 10THC further
provides that no comparability adjustment and allowance under the second
proviso to sub-section (2) of section 92C shall be made to the transfer price
declared by the eligible assessee and accepted under sub-rule (1) and the
provisions of sections 92D (relating to Maintenance and keeping of information
and documents) and 92E (submission of Audit Report) in respect of a specified
domestic transaction shall apply irrespective of the fact that the assessee
exercises his option for safe harbour in respect of such transaction.

5.0   Summation/Way
Forward

       The
erstwhile SHR did not attract many taxpayers due to high rates. Lowering of
rates in some cases would definitely induce more taxpayers to opt for the same
and avoid litigation.

     The significant changes in intra-group
loans will attract many taxpayers. Inclusion of LVA-IGS is a welcome step and
in line with global trends. The acceptable threshold for the Corporate
Guarantee could have further been lowered. Manufacturers and exporters of core
and non-core auto components may continue to avoid SHR due to prescription of
high margins.

All
in all, it is a positive move on the part of Government in the direction of
reduction in litigation, though reduction in the value of the eligible
international transactions will push away many taxpayers out of the ambit of
Safe Harbour Regulations.

Works Contract Vis-À-Vis Consumables

Introduction

Under VAT era (period prior to 30.6.2017) one of the burning
issues is whether the transaction is a ‘works contract’ or ‘service contract’.
If it is works contract then it can be liable to VAT/CST, otherwise not.

There are boundary line cases where nature of transaction is
known on final decision of higher courts like the High Court.

One such transaction is a contract requiring use of
consumables. There are conflicting judgments on this issue. A brief reference
to such judgments can be tracked as under.

Pest Control India Ltd. (75 STC 188)(Pat)

“There can be no transfer of property in goods unless the
goods themselves exist. In the execution of a contract for eradication of
pests, rodents, termites, although chemicals are used, the chemicals are
sprayed through machines so that when the process ends, the chemicals are
consumed and nothing tangible remains in which property is transferred. Such a
transaction does not involve transfer of any goods as understood in sub-clause
(b) of clause (29-A) of article 366 of the Constitution, or under the
provisions of the Bihar Finance Act, 1981. Such a contract is a pure service
contract, and no sales tax is leviable in relation thereto under the provisions
of the Bihar Finance Act, 1981.”

Enviro Chemicals vs. State of Kerala (39 VST 434)(Ker)

“The petitioner had developed a chemical product by name
“envirofloc” used as a chemical for effluent treatment. The
petitioner carried out pollution control treatment for M, a company engaged in
manufacture of yarn. In the course of effluent treatment entrusted to the
petitioner, the petitioner applied the chemical “envirofloc” and it treated
effluent water probably by neutralising colour, odour, etc.. The
petitioner claimed that no transfer or sale took place in the execution of
works contract. The Department took the view that the material was consumed in
the process of effluent treatment and it got transferred in the course of such
treatment and there was sale of goods involved in the execution of works
contract. The petitioner was therefore assessed to tax under the Kerala General
Sales Tax Act, 1963 on the sale of materials involved in the execution of works
contract of effluent treatment at the premises of M, a manufacturer of yarn:

Held, per majority, that admittedly the chemical in question
was goods and the petitioner was the owner of the goods in question, namely,
the chemical. The intention of the parties was that the petitioner must use the
chemical in the effluent treatment process and the petitioner actually used it.
By using the chemical, the petitioner rendered the effluent compliant with the
standards. The moment the petitioner poured the chemicals into the effluent, it
ceased to be the owner and at that point of time M must be deemed to have taken
delivery thereof. The fact that upon its being poured into the effluent, it
lost its identity and that it was consumed would not detract from the fact that
there was delivery thereof to M. The effluent and the treated effluent both
belonged to M. It was, therefore, into the property of M, namely the effluent,
that the petitioner supplied the chemical. The property in the chemicals passed
to M the moment they were put into the effluent by the petitioner and their
subsequent consumption was consumption after sale and did not detract from the
factum of sale and consequently exigibility to tax. There was a sale of
chemical involved in the execution of the works contract as there was delivery
of it to the awarder by virtue of the chemical being poured into the effluent.”

It can be seen that there is apparent conflict between views
of the authorities.

In case of Enviro Chemicals  vs. State of Kerala (39 VST 434)(Ker),
the Larger Bench of Kerala High Court has taken an extreme view that once goods
are used for customer there is transfer of property, though customer may not be
getting any tangible property.

Recent judgment in case of VPSSR Facilities vs.
Commissioner of Value Added Tax and ans (99 VST 1)(Del).

This judgment is latest in series. The brief facts as stated
by the Hon. Delhi High Court are as under:

“The petitioner is engaged in the business of providing
services of maintenance, cleaning, washing, housekeeping, waste management, etc.

The petitioner was awarded a contract by the Northern
Railways (hereinafter referred to as the contractee) in relation to the
management, cleaning, washing, housekeeping, waste management, etc., at
Diesel Shed Shakurbasti and at Training School Shakurbasti.

It is contended by the
petitioner that the contract was for cleaning of sites of Northern Railways
(contractee) and was a pure service contract and no transfer of property from
the petitioner (contractor) to Northern Railways (contractee) was involved. It
is contended that the activities undertaken by the petitioner did not
constitute a sale within the meaning of Delhi Value Added Tax Act, 2004
(hereinafter referred to as “the DVAT Act”).

It is contended that being a service contract, the petitioner
is paying service tax at 12.36 % on the entire consideration received by it
from the contractee. There is no separate payment made for the use of
consumables. It is contended that as the payment made by the contractee to the
petitioner was not because of transfer of property in goods, no tax was
required to be deducted at source u/s. 36A of the DVAT Act. It is contended
that the contractee (railways) to be on safe side insisted on deduction of tax
at source.

It is contended that for the purposes of providing the
service of cleaning, the petitioner was required to use soap/detergent/chemical
of a very minimal quantity and a very nominal value. The
soap/detergent/chemical was used for removing the muck/grime and the same got
completely “consumed” in the process and were not transferred to the
railways. It is contended that the contract involved pure labour and service
and was a mere works contract.”

There were arguments on both sides. Judgment of the Hon.
Kerala High Court in Enviro Chemicals is also considered.

To further consider facts, the High Court referred to para in
agreement, which reads as under:

“For the execution of the above work of maintenance, cleaning
washing of locomotives, etc., the petitioner is required to use
chemicals/solvents.

Clause 38 of the special conditions of contract reads as
under:

“38. Chemical/solvents and machines chemical/solvents
used should be eco-friendly, bio degradable pH value 7-8. Chemical/solvent can
be tested by railway from the independent lab at the contractor’s cost.
Chemical/solvents used should be of reputed brand. Contractor after having gone
through the scope of work will calculate the requirement of chemical/solvent
required per month/year. Chemical will be supplied by the contractor and shall
be kept in the custody of railway. These chemicals will be issued to the
contractor on daily basis as per requirement submitted by the contractor and
empty bottles/cans are required to submit back to issuing authority after
completion of daily work. Railway will not pay any amount separately to
contractor for purchase of chemical or machine. Cost of chemicals and machines
should be inclusive in activities mentioned in the schedule of unit
rates.”

Referring to the above clause 38, the respondent/Revenue has
held that the property in the chemicals/solvents used by the petitioner in the
execution of the work has transferred to the contractee.”

Distinguishing judgments including Enviro Chemicals, the
Delhi High Court observed as under:

“In both Enviro Chemicals [2011] 39 VST 434 (Ker) [FB]
and Xerox Modicorp Ltd. [2005] 142 STC 209 (SC); [2005] 7 SCC 380, the
courts were not dealing with the goods which were integral to the service
contract and which were completely consumed during the execution of the service
contract. The goods were consumed for the purposes of the final output, i.e.,
chemical treatment of effluent water (Enviro Chemicals) and spare parts and
Toners and Developers (Xerox Modicorp Ltd.). The courts were not concerned with
goods (soaps/detergent/chemical/solvent) as in the present case, which are
consumed in the process of cleaning. In the present case the contract, inter
alia, requires the petitioner to perform the task of mechanised scrubbing
of shed floor to keep it free from muck/grime arising due to dropping of
oil/grease/effluents and industrial.

Here italicized waste by using biodegradable floor
chemicals/solvent. Mechanised scrubbing by floor scrubbing/scarifying machine,
removal of industrial waste along with muck, unwanted/useless and dumping the
same at the nominated place within the shed complex. Cleaning of floor of main
shed, SMM store, lab and administrative block to keep it free from dropping of
oil/ grease/grime/effluent including removal of cobwebs from covered area.
Cleaning of DEMU Care Centre, DEMU Block and Diesel Training Centre SSB to keep
it free from dropping of oil/grease/grime/effluent including removal of cobwebs
from covered area. Cleaning of rooms, veranda, etc., of lab,
administrative block and offices of Sr. Subordinate Supervisors with wiping by
wet and dry moppers. Cleaning of rooms, veranda, etc., of DEMU Block and
Diesel Training Centre SSB with wiping by wet and dry moppers. To keep floor,
side walls of inspection pits free from muck/grime/ arises due to dropping of
oil/grease/effluents and industrial waste by using high-pressure cold/hot jet
cleaner. Removal of unwanted industrial waste and dumping the same at the
nominated place within the shed complex. To keep floor, side walls of DEMU Care
Centre pits free from muck/grime/ arises due to dropping of
oil/grease/effluents and industrial waste by using high-pressure cold/hot jet
cleaner. Cleaning of toilets by high-pressure water jet cleaner, removal of silt
and muck from urinals. Loco washing/ cleaning of pit wheel lathe machine
complex to keep it free from dropping of oil/grease/grime/effluent/waste metal
chips including removal of cob-webs from covered area.

The soaps, detergent, chemicals and solvent used purely for
the purposes of cleaning and which are completely consumed, in the process of
the execution of the above referred tasks, cannot by any stretch of imagination
be said to be goods in which property could pass to the contractee. Similarly,
water is also used in the above referred process of cleaning and execution of
the contract. Can it be said, that even property in water, that is used and
consumed in the said process of cleaning and execution of the contract, is also
transferred to the contractee and the value of the water consumed should be
exigible to tax?

The mere fact that soaps, detergent, chemicals and solvents
are deposited in the store of the contractee would not make any difference to
the exigibility, as is sought to be contended by the Revenue/respondents,
because, admittedly, by mere deposit in the store, the property in them is not
stated to pass. It is contended by the Revenue/respondent, that the property
passes when they are actually used. The petitioners and the railways have contended
that the said soaps/detergent/chemical/solvent are deposited with the railways
and issued from their store to ensure that adequate quantity is used by the
petitioner for the execution of the awarded work.

In view of the above, we hold that, the property in the
consumable chemicals used in the process of cleaning does not transfer to the
contractee/railways and accordingly the said goods are not exigible to tax.
Since the said goods are not exigible to tax, the contractee/railways is not
liable to deduct tax at source and the Commissioner, VAT is liable to grant a
certificate for Nil deduction of tax deducted at source.”

Thus the transaction is held as not a works contract on
ground that there is no transfer of property.

Conclusion

The margin in works contract and service transaction is very
thin. It is again the perspective of the authorities which will decide the
nature of transaction.

It is expected that similar issue will not arise
under GST.

Decoding GST – GST – First Principles on Reverse Charge Mechanism

Introduction

Goods and Services Tax (“GST”), being an indirect tax levy, places the
incidence of the tax on the supplier (i.e. seller/ service provider).  The supplier being the taxable person under
the law is required to discharge the tax liability on the transaction of
supply.  Although GST is said to be a
consumption tax, legislatures the world over choose to collect the tax from the
suppliers rather than the consumers, with an authority to the supplier to
collect the tax in turn from the consumer. 
In the entire scheme, the supplier/ taxable person acts as a tax
collecting agency and deposits the taxes into the Government exchequer after
charging it from recipient/consumer under a contractual arrangement. 

This practice has been
largely imbibed into the Indian GST system. 
However, the legislature has in special cases shifted the burden of
discharging the tax from the supplier to the recipient, commonly known as a
‘reverse charge mechanism’ (RCM).  Under
this mechanism, the legislature places the incidence directly on the recipient
of the supply and in some sense, by-passes the tax collecting agency principle
by opting to collect its taxes directly from the recipient. These are cases
where the scale of administrative convenience tilts towards the recipient
rather than the supplier  (such as
transporters of unorganised sector, small traders/service providers below the
turnover threshold, suppliers located outside India in cross border
transactions, etc.). This system existed even under the erstwhile VAT
regime in the form of purchase tax/URD tax and also in the service tax regime
in the form of full/partial reverse charge tax. 

RCM Mechanism

The RCM mechanism under GST law
can be placed in two broad baskets:

A)Notified transactions [section  9(3)]:

     The
respective Governments under the CGST/SGST law have notified certain
goods/service transactions and the corresponding suppliers/recipients that are
covered under RCM.

     Notification
4/2017-CT (Rate) dated 28.06.2017 provides for reverse charge mechanism in case
of procurement of certain goods. The notification covers specified procurement
of goods like cashew nuts, bidi/tobacco leaves from agriculturists, silk yarn
from manufacturer and lottery tickets from the Government/local authority.

     On a perusal of the above notification, it
can be observed that the reverse charge mechanism is triggered only on the
first point of the supply chain. For example, cashew nuts supplied by an
agriculturist will attract reverse charge. However, subsequent transactions will
not be governed by reverse charge but by normal provisions of the law.

     Similarly,
Notification 13/2017-CT (Rate) provides for reverse charge mechanism in case of
procurement of certain intrastate supply of services whereas Notification
10/2017-IT (Rate) provides for reverse charge mechanism in case of certain
inter-state supply of services. The following table summarises the provisions
in this regard:

Sr. No.

Category of Service

100% to be paid by

Rate

SAC Code

1

Import of Service

Any person located in the taxable territory other than
non-assessee online recipient (Business Recipient)

Rate applicable to the service

As per category of services

2

Goods Transport Agency Service

Any Registered Person, Factory, Society, Body Corporate,
Partnership Firm, Casual Taxable Person

5%

99679

 

 

 

 

 

3

Legal Service

Any business entity

18%

99821

 

 

 

 

 

4

Arbitral Tribunal Service

Any business entity

18%

99821

 

 

 

 

 

5

Sponsorship Service

Anybody corporate or partnership firm

18%

99839

 

 

 

 

 

6

Services provided by Government
(Excluding exempt categories)

Any business entity

18%

99911

 

 

 

 

 

7

Service provided by Director

A company or a body corporate

18%

99839

 

 

 

 

 

8

Service provided by Insurance Agent

Any person carrying on insurance business

18%

99716

 

 

 

 

 

9

Service provided by Recovery Agent

A banking company or a financial institution or a
non-banking financial company

18%

99859

 

 

 

 

 

10

Transportation of Goods by Vessel where
freight is pre-paid

 

 

 

 

(a) Where freight is identified

Importer as defined under clause (26) of section 2 of the
Customs Act,

5% GST on the Freight value

 

 

99652

 

(b) Where freight is not identified (On
CIF Value)

Importer as defined under clause (26) of section 2 of the
Customs Act,

5% GST on 10% of CIF Value

 

 

 

 

 

11

Transfer of copyright relating to
original literary, dramatic, musical or artistic works

Publisher, Music company, Producer

12%

99733

 

 

 

 

 

12

Rent-A-Cab Service (e-commerce operator
only)

 

 

 

 

(a) Where fuel cost is borne by
recipient

Electronic commerce operator

18%

99660

 

(b) Others

Electronic commerce operator

5%

B) URD transactions [section 9(4)]:

     The legislature has mandated RCM mechanism
also on transactions where the supplier is an unregistered person (URD).   On a plain reading of the provisions of
section 9(4), it is evident that the cumulative conditions for trigger of this
provision are as follows: (i) supplier is unregistered; (ii) recipient is
registered; (iii) supply is taxable. 
Accordingly, the applicability of RCM on URD activities can be tabulated
as follows:

Registration Status of Recipient

Registration Status of the Supplier

Nature of Taxable Supply

Applicability of RCM u/s. 9(4)

General Applicability
of GST

Registered

Registered

Taxable

Not Applicable

Supplier will pay GST either under normal or composition
option.

Registered

Registered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Registered

Unregistered

Taxable

Applicable

Recipient will discharge the GST under RCM.

Registered

Unregistered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Unregistered

Registered

Taxable

Not Applicable

Supplier will pay GST either under normal or composition
option and will treat this as B2C transaction.

Unregistered

Registered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted

Unregistered

Unregistered

Taxable

Not Applicable

The provisions of section 9(4) do not trigger a
registration requirement. This is analysed later.

Unregistered

Unregistered

Non Taxable

Not Applicable

Supply itself is not taxable or exempted.

Applicability of registration 
under rcm transactions

The primary question that
arises is whether RCM provisions by itself trigger a registration requirement
under the GST law. This has to be answered by examining RCM baskets
individually. As regards the notified transactions, the provisions apply to the
‘recipient’ in contradistinction to ‘registered person’. It implies that any
recipient whether registered or not is obligated to comply with the RCM
provisions.  Therefore, in case an
unregistered recipient avails any of the specified services attracting RCM (like
legal services from an advocate), the said recipient would have to necessarily
seek registered (if not already registered) and comply with the RCM
provisions.  The provisions of section 24
of the GST law give effect to the registration requirement on the recipient in
this case.  Respite has been provided
under the corresponding notification where the specified recipients for this
RCM category are either body corporates/ business entity, etc.  The notification therefore consciously
excludes individual consumers or unregistered persons (not engaged in any
business activity) from the rigours of RCM. For example, a citizen seeking the
services of a lawyer would not be subject to RCM and the registration
requirements.

As regards URD transactions, the provisions specify that the recipient
should be a registered person under the GST law, implying that persons who are
not registered may not be subject to RCM provisions.  A contradictory view can come up in view of
the non-obstante provisions of section 24(iii) which makes persons
liable for registration if they are covered by reverse charge provisions.  This can be countered by contending that said
section 24 is non-obstante only with reference to the threshold limit
(of Rs. 20 lakh) and places a registration requirement on business entities
under RCM where they are otherwise engaged in taxable supply but operating at
lower turnover levels.  Further, unlike
the definition of taxable person which includes person ‘liable to be
registered’, the URD provisions restricts its scope only to ‘registered
persons’.  Importantly, the said section
does not override section 23 of the law which specifically waives any
registration requirement in case of a person not liable to tax or engaged in
wholly exempted goods/ services. The law cannot be interpreted to give a
benefit on one hand and take away the benefit by the other hand.  Therefore, in the view of the author, URD
transactions cannot by itself trigger a registration requirement.  The URD transactions will trigger registration
only where the supplier is in business activity and making a taxable supply but
operating below the minimum turnover threshold.   As an example, an agriculturist appointing
contract labour for the tilling of the land under his supervision cannot be expected
to discharge RCM and/ or seek registration under the provisions of section 24
merely on account of section 9(4) of GST law, when he has been specifically
excluded from registration u/s. 23 of the said law. Similarly, a retailer
operating at turnover levels below 20 lakh would also not be required to seek
the registration under RCM in case of a liability u/s. 9(4) of the GST law.
However, if the retailer is already registered under GST (either under normal
or composition option), all procurements from URD will become liable for RCM.

Treatment of rcm transactions

The RCM provisions fixes the specified recipient as the person liable to
pay tax and seeks compliance of all the provisions of the GST law on the
transaction of supply.  As a consequence,
all aspects of a transaction (listed below) have to be determined by the
recipient by placing himself into the shoes of the supplier.  This would result in many challenges at the
recipient’s end. 

Nature of Supply 

A recipient would be
required to ascertain whether supply being made by the notified supplier or
unregistered supplier is in the nature of a composite supply or a mixed
supply.  A simple example may be whether
a company providing end-to-end logistic solutions with or without warehousing
solutions under a single work order qualifies as a ‘goods transport agency’
service.  A recipient cannot merely rely
upon the classification of the supplier as either a GTA or a logistic service
provider.  The recipient would have to
resort to the concept of composite supply or mixed supply and ascertain
whether the RCM provisions apply itself. 
If and only if the supply is a composite supply with the principal
supply being categorised as a GTA service would the RCM provisions be
applicable.

Place of
Supply 

The qualifying recipient is
also required to ascertain the place of supply in determining the nature of tax
payable under the RCM scheme i.e. identify the location of the supplier and
also the place of supply and discharge the respective tax.  RCM may be a local supply or an inter-state
supply depending upon the said parameters. 
This would create anomalies as cited in an example – say a company
registered in State A books a hotel in state B for the stay of its sales employees
which has a declared tariff of more than Rs. 1,000 but is unregistered in
GST.  Going by Place of supply rules, the
supplier (i.e. hotel) and the place of supply (immovable property) are in State
B and it amounts to a local supply in State B. 
Now the company is unregistered insofar as State B is concerned. Going
by the view taken on registration above, the company does not come within the
ambit of section 9(4) of the GST law and the company should not be asked to
register as a non-resident taxable person in State B merely on account of the
RCM provisions.

An issue also arises in
case of inter-state supplies by an unregistered person, say a job worker.  In case the said company send goods to an
unregistered job worker in State C for a job work and receive a job work bill
for the services rendered.  Under the
Place of supply rules, the transaction amounts to an inter-state supply and
provisions of section 5(4) of the IGST law require the recipient to pay tax
under RCM provisions.  However, if one
views section 24 of the CGST law, every person making an inter-state supply is
required to seek registration irrespective of the turnover threshold.  Section 122(3) and 132(i) of the GST law
treats a person receiving services in violation of the GST law as an offender
and imposes a penalty/ imprisonment on such person for such offences.  This seems contradictory since the law
recognises inter-state supplies by unregistered persons but on the other hand
treats inter-state supplies by an unregistered person as a violation of section
24 of the GST law. Until the law is settled on this issue, it may be
challenging to engage in inter-state transactions with URDs.

Rate of Tax/ HSN/ SAC 

GST law expects that a
recipient of supply determines the rate of tax on each supply of goods/
services made from URDs and discharge the applicable rate of tax as if the
recipient is the supplier of goods.  This
is going to place a herculean task on companies to fix the HSN on innumerable
items purchased.  For example, a company
purchasing stationery/groceries from local vendors which are unregistered would
be required to undertake a HSN classification of every item purchased and
discharge the applicable rate of tax. 
This would be a highly onerous obligation on the recipient to comply
with. 

Time of Supply 

In case of supply of goods, the time of supply would be earliest of the
receipt of goods or payment or thirty days from the date of issue of the
supplier’s document.  Similarly in case
of supply of services, the time of supply would be earliest of the payment or
sixty days from the date of issue of the supplier’s document.  The recipient is required to ensure that the
relevant documents are issued by the notified supplier/ unregistered supplier
in order to meet the tax liability requirements within the specified timelimits.

Invoicing and Reporting requirements 

The recipient covered under RCM is required to raise a self-purchase
invoice on the date of receipt of the goods or services or both. The law also
requires the RCM recipient to raise a payment voucher at the time of making
paying to the specified supplier.  The
format and contents of the invoice include, inter-alia, HSN, description
of goods/ services, quantity, etc. 
The proviso to the said rule permits raising a consolidated monthly
invoice for URD transactions under the RCM scheme.  The said invoices are required to be reported
in Part-3 of GSTR-2 and eligible for credit in the same month if the goods/
services have been  received and other
ITC conditions have been complied with. 

specific transactions

RCM mechanism poses significant hurdles in specific transactions which
have been discussed below:

Employee reimbursements 

Employees incur various
expenses during the course of their official duties (such as travel, local
conveyance, food, etc.) and claim reimbursements from the Company for
such expenses. The key challenge which arises is whether such reimbursements
are subject to RCM under the provisions of section 9(3) or 9(4) of the GST
law.  A simple example could be where an
employee avails the facility of an Air-Conditioned Bus travel for official
purposes and claims a reimbursement from the Company.  In this transaction, it is important to
understand whether there are two supplies (ie., between the transporter to the
employee and then from the employee to the Company or just one supply directly
between the Transporter and the Company). 
Another viewpoint could be whether the transportation service ends at
the level of employee or does it percolate through the employee and end at the
Company level.  It is a well-accepted
fact that in these transactions, the privity of contract is usually between
Transporter and the employee and the company merely reimburses the travel costs
at a subsequent stage. Going by a strict reading definition of ‘recipient’, the
person liable for payment of consideration in such a transaction is the
employee and it is the employee to whom the service is rendered.  In such transactions, the company cannot be
strictly termed as a ‘recipient’ (liable for payment for consideration) of the
supply and one may be tempted to conclude that supply ends with the
employee.  The immediate next question
would be to identify whether the transaction between the employee and the
company is a supply of goods/ services in terms of section 7 of the GST
law.  While this point appears prima-facie
taxable as a supply of service, one should also note that the said supply
(whether in terms of section 7(1)(a) or 7(1)(d) r/w entry 2 of Schedule I)
should be in the course or furtherance of business of the supplier
concerned.  Evidently, the employees
cannot be considered to be engaged in any trade, commerce, etc while recovering
the reimbursement from the company. 
Hence, the said transaction cannot be termed as a supply of either
goods/services by the employee to the Company. Another contention on
non-taxability of the transaction under RCM would be based on Entry 1 of
Schedule III of the said law which excludes any service by an employee to the
employer ‘in the course or in relation to’ employment as neither supply of
goods/ services under the GST law.

It would also be pertinent to state that the scenario changes
entirely if the supply is contractually agreed between the Company and the
supplier but the payment takes place by the employee and reimbursed by the Company
(say hotel bookings made by the company but settled partially/wholly by the
employee).  In such a scenario, the
company would be party to the contract of service but the consideration for the
service is being routed through the employee on account of administrative
convenience.  While there is only one
single supply from the supplier directly to the company, the rendition of
service may be to the employee concerned. 
In such cases, the Company being the recipient would be obligated to
comply with the RCM provision on such transactions.

Accordingly, it is
important in such transaction to identify the ‘contractual flow’ as well as the
‘actual flow’ of the transaction. In case of transactions bearing a
consideration, the contractual flow rather than the actual flow of supply
assumes significance. Principles can also be drawn from the Australian GSTR
ruling (GSTR 2006/9) which cites the example of a therapist and the above two
variants to explain the taxability of the transactions by employees:

“……………… Example 5:
occupational therapist

161. A, an occupational
therapist, is engaged by B, a company, to assess the needs of C, its employee.
C suffers from multiple sclerosis and needs to use a wheelchair. A and B enter
into an agreement which requires A to undertake an assessment of C’s condition,
to give recommendations in a report to B and for B to pay for the service.

162. A’s supply of services is made to B. Although C may benefit from
these services, it is B who contracts for the supply of these services and is
the recipient of the supply.

163. This supply is not
GST-free under subsection 38-10(1). This is because paragraph 38-10(1)(c)
requires the supply to be generally accepted in the relevant profession as
being necessary for the appropriate treatment of the recipient of the supply. B
is the recipient of the supply. The supply is not for the treatment of B.
Paragraph 38-10(1)(c) is not satisfied.51F

164. If C engages the
occupational therapist to supply its services and B merely pays the therapist
on behalf of C, the recipient of the occupational therapist’s services is C.
This supply will be GST-free if all of the requirements of subsection 38-10(1) are satisfied.

The above ruling places
significance on identification of the contractual flow of the transaction
rather than the actual flow of consumption and directs that the law should
follow the contracting parties rather than the parties who actually pay for the
transaction or bear the cost of the transaction.   

Custom house/Clearing house
agents (CHAs)

CHAs typically incur significant charges on behalf of the
importer of goods in order to render their services of custom clearance since
it engages with multiple agencies on behalf of the importer. Some of the many
line items which the CHAs recover (with or without a visible margin) are (a)
custom duty and statutory levies, (b) port charges, (c) delivery order charges,
(d) demurrage charges, (e) liner charges, (f) inland freight, etc. While
the statutory levies qualify as pure agent items and are excluded from the
valuation mechanisms, other recoveries by a CHA which purport to be
reimbursements may not be in-fact be reimbursements and amount to a taxable
supply at the supplier’s end. Where the CHA is a registered person, the
obligation to ascertain the appropriate value would vest on the CHA himself.
However, once the CHA is a URD, it gives rise to significant challenges to the
recipient for identification of the taxable line items and exclusions without
having any knowledge of the trade practices prevalent therein. As an example,
liner reimbursements though corroborated with liner documents have an element
of incentive camouflaged therein which is not disclosed to the importer. The
importer would be of the view that such payments would be reimbursements when
in fact they are not reimbursements but also contain an incentive to the CHA
which is includible in the transaction value in terms of section 15 of the GST
law.  It is impossible for the recipient
to ascertain this incentive and determine the appropriate value on which RCM
would be leviable.

Job workers 

Job workers of the textile
and jewellery industry are in the unorganised trade.  A job worker in the jewellery trade is
compensated in terms of the difference in net weight of the precious metal
jewellery before and after the job work. The jeweller orders the manufacture of
jewellery of a particular net weight to the job worker and performs a reverse
calculation of the gross weight required for the said activity. The
differential takes into consideration the wastage and also compensates the job
worker for the services rendered. However, this is not documented in such a
trade and the recipient will not have any document to evidence recoveries of
precious metal by the job worker, in order to discharge the RCM liability.

Notification No.
8/2017-Central Tax (Rate) – De Minimus Exemption

The Central Government and
corresponding State Governments have issued a notification exempting the
applicability of RCM on transactions below five thousand in aggregate in one
day. The said notification categorically states that the limit of five thousand
should be aggregated by each recipient from all the unregistered suppliers on a
daily basis.  Where the aggregate value crosses
the threshold, the entire transaction would be subject to RCM. The said
exemption applies only to intra-state supplies and such a notification under
the IGST law is absent. The said exemption would apply registration-wise and
not entity-wise. 

The law also does not
permit the recipient to assess the threshold based on the statement of accounts
or the recording of ledger entries in its books of accounts.  The law expects that each service is
individually identified with reference to its date of ‘receipt of such service’
and its ‘value’ and only then the said limit be tested at the recipient’s end.
This not only makes it administratively inconvenient but also practically
unviable for any entity to implement with accuracy. 

It should also be noted
that the following transactions would be excluded from the ambit of the
calculation of Rs. 5000/ day – non-taxable supplies, exempt supplies, RCM
supplies covered u/s. 9(3), pure agent reimbursements (say RoC fees), supplies
of the same registrant but received/ consumed (place of supply) in a non-resident
state.

Conclusion

In conclusion, the authors
view RCM as a significant hurdle in complying with the GST law.  The legislature in an effort to reduce its
administrative involvement has placed unmanageable administrative burden on the
business community. RCM breaks the input tax credit chain and consequently, the
entire purpose of solving the cascading effect of taxes seems to have taken a
back seat in this RCM scheme, only to gather a minor percentage of tax from
business enterprises.

15 Section 54 – Investment made in purchase of residential property outside India – Exemption can be claimed till 31.03.2015.

Income-tax Officer vs.
Nishant Lalit Jadhav

G.S.Pannu (A. M.) and
Pawan Singh (J. M.)

ITA No.: 6883/MUM/2014

A. Y.: 2011-12.    Date
of Order: 26th April, 2017

Counsel for Revenue / Assessee:  Suman Kumar / Hari S. Raheja

FACTS 

The assessee is a
Non-resident Indian (NRI) and during the year under consideration he, inter-alia,
earned a long term capital gain of Rs.67.07 lakh from sale of residential
property located at Mumbai. He claimed exemption u/s. 54 on the ground that the
capital gain arising on the sale of property was utilised in the purchase of a
residential property at New York, USA. The Assessing Officer denied the claim
of exemption as the property  was
acquired outside India. For the purpose he relied upon the decision of the Ahmedabad
Tribunal in the case of Smt. Leena J. Shah, (6 SOT 721). According to the
CIT(A), the requirement of making the investment in a property in India was
inserted by the Finance (No.2) Act, 2014 w.e.f. 01./04./2015 and, therefore, in
the instant assessment year the claim of exemption u/s. 54 could not be denied.
In coming to such conclusion, the CIT(A) also relied upon the decision of the
Mumbai Tribunal in the case of  Mrs.
Prema P. Shah & Sanjiv P. Shah vs. ITO (100 ITD 60), ITO vs. Girish
M. Shah in ITA No.3582/Mum/2009 and Vinay Mishra vs. CIT, in ITA
No.895/(Bang) of 2012.

Before the Tribunal, the revenue contended that even prior to amendment
by Finance (No.2) Act, 2014, it was to be implicitly understood that the
requirement of section 54 was to make investments in a new residential house
within India only.  The assessee pointed
out that the decision of the Ahmedabad Tribunal in the case of Smt. Leena J.
Shah, which was relied upon by the Assessing Officer has since been reversed by
the Gujarat High Court in its judgment in ITA No. 483 of 2006 dated
14./06./2016.

HELD

According to the Tribunal,
prior to the amendment made by Finance (Nos.2) Act, 2014 w.e.f. 01./04./2015,
the language of section 54 required the assessee to invest the capital gain in
a residential property.  It is only
subsequent to the amendment, which has come into effect from 01.04.2015, that
such investment is required to be made in a residential property in India.  Since the appeal was pertaining to the
assessment year which is prior to 01.04.2015, the amendment would not be
applicable. The Tribunal also relied on the decision of the Gujarat High Court
in the case of Smt. Leena J. Shah (supra).The Tribunal set aside the
finding of the CIT(A) and directed the AO to consider the allotment letter
dated 30.3.205 to determine the long term/short term capital gain and
accordingly the entitlement of exemption u/s. 54 of the Act.

14 Section 153A – Factum of gift which was already disclosed in the returns of income which was filed before the search took place cannot be assessed as income u/s. 153A

Nenshi L. Shah and 10
others  vs.
Dy. Commissioner of Income TaxIT

Mahavir Singh  (J. M.) and N.K. Pradhan (A.M)

ITA Nos.: 3735 to
3737,3575 to 3577, 3580 to 3584 /Mum/2011 and 7382 to 7385, 7387 to
7390/Mum/2013

A. Y: 2003-04.  Date of Order: 24th May, 2017

Counsel for Assessee /
Revenue:  Jignesh R. Shah and Haresh
Kenia / H.N. Singh

FACTS  

All these eleven assessees
had filed their returns of income on even date 11-08-2003 for the AY 2003-04.
All the assessees’ had received gift of Rs. 10 lakh each from one Gayanchand
Jain. This gift was declared in the original returns filed by the respective
assessees’ on 11.08.2003 in the form of capital accounts filed, wherein each of
the assessee had declared this gift. The assessment / processing of return of
income for the year under consideration was concluded much before the search,
which took place on 03-08-2006 and could not therefore abate as the returns
were filed by the respective assessees’ on 11-08-2003 and therefore, the last
date for issuing notices u/s. 143(2) of the Act were on 31-08-2004. The AO
during the course of assessment proceedings in consequence to search u/s.153A
read with section 143(2) of the Act noticed the factum of gift was already
disclosed in the capital accounts filed along with the returns of income by the
respective assessees’ and this is not the income discovered or unearthed during
the course of search by the department u/s.132 of the Act. But the AO assessed
the gifts as income from undisclosed sources of the assessees and CIT(A) also
confirmed the same. Aggrieved, all the assessees came in second appeal before
Tribunal.

Before the Tribunal, the
assessee contended that the assumption of jurisdiction by the AO and making
addition while framing assessment u/s.153A read with section 143(3) was without
jurisdiction in respect to assessment of gifts already disclosed.

HELD  

The Tribunal noticed that
notice u/s. 143(2) had become time barred on 31.08.2004 while the search took
place on 03.08.2006. As on the date of search, the assessments or processing of
return of income of the assessee u/s. 143(1) were completed. The A.O. brought
to tax a sum of Rs. 10 lakh, being the amount of gift, without any
incriminating material found during the course of search. Therefore, relying
on  the decision of the Bombay High Court
in the case of Continental Warehousing Corporation (Nhava Sheva) Ltd. (374 ITR
645), the Tribunal held that the gift of Rs. 10 lakh received by each of the
eleven assesses and disclosed in the return of income and which has not been
abated, the same cannot be added. Accordingly, the Tribunal reversed the orders
of the CIT(A) as well as that of the AO and deleted the addition in all the
eleven appeals of the assessee.

13 Section 272A(2)(k) – Delay in filing of e-TDS return on account of requirement to mention PAN – No loss to the Revenue attributable to the delay in filing of the e-TDS returns – No penalty can be imposed.

Argus Golden  Trades vs. JCIT

Kul Bharat (J. M.)  and Vikram
Singh Yadav
(A. M.)

ITA No.: 522/JP/16

A. Y. : 2011-12.                  

Date of Order: 24th May, 2017

Counsel for Assessee / Revenue: 
Rajeev Sogani / Rajendra Jha

FACTS  

The AO imposed penalty u/s.
272A(2)(k)   holding that the assessee
has delayed  in filing  quarterly 
e-TDS return within the stipulated time frame.  The CIT(A) upheld the order of the AO as
according to him  the provisions of
section 272A(2)(k) uses the word “shall” indicating that if there is violation
of these provisions, the imposition of penalty is mandatory.  Also, the assessee was not having any genuine
ground or the compelling circumstances for not filing of TDS return in
time.  Before the Tribunal, the revenue
justified the order of the CIT(A).

HELD  

The Tribunal 
noted that the AO hads levied penalty u/s. 272A(2)(k)  which talks about the failure to deliver a
copy of the statement within the time specified in section 200(3) or proviso to
section 206C (3).  In the instant case, there
is a delay in filing of quarterly e-TDS returns which is covered under the
provisions of section 272A(2)(c). On this ground itself, the Tribunal held that
the levy of penalty cannot be sustained. 
On merit also, the Tribunal noted that during the financial year 2010-11
which is under consideration, a change was brought about in filing of e-TDS
returns and it was necessary to mention Permanent Account Numbers of all the
payee in the e-TDS return and thereafter only the e-TDS return could be
validated and uploaded. In assessee’s case, there were large numbers of
deductees scattered throughout India. 
The taxes were deducted and deposited at the prescribed rate with delay
of few days.  Thus, there was no loss to
the Revenue which could be attributed to the delay in filing of the e-TDS
returns.  Relying on the decision of the
Cuttack bench of Tribunal in the case of CIT Branch Manager (TDS), UCO Bank
vs. ACIT  (35 taxmann.com 45), the
Tribunal held that the assessee had a reasonable cause for delayed filing of
its e-TDS returns in terms of section 273B and hence, the penalty u/s. 272(A)(k)
was deleted.

15 Section 12A(2) : Proceeding pending in appeal before the CIT (A) should be deemed to be assessment proceedings pending before the AO for the purposes of first proviso to section 12A(2)

(2017) 152 DTR (Coch) (Trib) 137

SNDP Yogam vs. ADIT (Exemption)

A.Ys.: 2006-07 to 2009-10 & 2011-12                         

Date of Order: 1st
March, 2016

Section 12A(2) :
Proceeding pending in appeal before the CIT (A) should be deemed to be
assessment proceedings pending before the AO for the purposes of first proviso
to section  12A(2)

Facts

The assessee was not
registered under section/s 12AA for the AYs under dispute. Accordingly, the AO
invoked the provisions of section 167B thereby taxing the whole income at the
maximum marginal rate for all the AYs under dispute. The assessments for the
AYs 2006-07 to 2009-10 were completed on 19th March 2013.

The assessee had applied
for registration u/s.12AA vide letter dated 30th January 2013 and
the registration was granted vide order dated 29th July 2013.

The CIT(A) held that since
the registration was granted on 29th July 2013, it can be treated as
applicable only from the AY 2013-14. It was not applicable to the assessee for
AYs under dispute and, therefore, it could not be taken that this institution
was registered u/s. 12AA. Accordingly, the order of the Assessing Officer was
confirmed.

On appeal before the ITAT, the assessee submitted that section 12A was
amended recently by the Finance Act 2014 by introducing new provisos to
sub-section (2) of section 12A with .effect .from 1st October 2014.
As per the first proviso to section 12A(2), once a registration u/s. 12AA is
granted to a charitable organisation in a financial year, then the provisions
of sections 11 and 12 shall apply even for the assessment proceedings which
were pending before the AO on the date of registration. As per the amendment,
no action shall be taken u/s. 47. Following the said amendment, the entire income
of the trust is eligible for exemption u/s. 11 for the AYs under dispute.

However, on the date on which the assessee was
granted registration u/s. 12AA, the proceedings were pending before the CIT(A)
and not the AO.

Held

The first proviso to section 12A(2) was brought in
the statute only as a retrospective effect, with a view not to affect genuine
charitable trusts and societies carrying on genuine charitable objects in the
earlier years and substantive conditions stipulated in section 11 to 13 have
been duly fulfilled by the said trust. The benefit of retrospective application
alone could be the intention of the legislature and this point is further
strengthened by the Explanatory Notes to Finance (No.2) Act, 2014 issued by the
Central Board of Direct Taxes vide its Circular No. 01/2015 dated
21.1.2015

When section 12A of the Act
was amended by introducing new provisos to sub-section (2) of section 12A by
Finance Act, 2014 with effect from 01.10.2014, the assessment orders passed by
the assessing officer in respect of the present assessee were pending in appeal
before the first appellate authority. During such pendency, the assessee was
granted registration u/s. 12AA of the Act on 29.07.2013 with effect from the
assessment yearAY 2013-14. Those appeals were the continuation of the original
proceedings and that the power of the Commissioner of Income-tax was
co-terminus with that of the assessing officer were two well established
principles of law. In view of the above and going by the principle of purposive
interpretation of statues, an assessment proceeding which is pending in appeal
before the appellate authority should be deemed to be ‘assessment proceedings
pending before the assessing officer’ within the meaning of that term as
envisaged under the proviso;. it follows there-from that the assessee
whoich obtained registration u/s. 12AA of the Act during the pendency of appeal
was entitled for exemption claimed

u/s. 11 of the Act.

14 Section 37(1) – Licence fee paid by assessee, a partnership law firm; to a private limited company for use of goodwill, which was gifted to private limited by an individual for perpetuity, is an allowable deduction u/s. 37(1) and cannot be disallowed on the grounds that the gift of goodwill by individual, of his profession of law, to a company would possibly be violating the Advocates Act, 1961 or the Bar Council Rules.

([2017)] 162 ITD 324 (Delhi – Trib.)

Remfry & Sagar vs. JCIT

A.Y.s:  2003-04 &
2010-11                                                              

Date
of Order :– 6th September, 2016

FACTS

The assessee, is a
partnership law firm, specializing in intellectual property and corporate laws.

Dr. ‘V’, a practicing
attorney, was the sole and absolute proprietor of the business of a famous law
firm ‘Remfry & Son’ along with the goodwill attached to it. With an
intention of segregating the goodwill in ‘Remfry & Sagar’ from the
attorney’s, and for institutionalising the goodwill in perpetuity by way of
corporatisation, a gift deed was executed by Dr. ‘V’ in favour of ‘RSCPL’, a
private limited entity, whereby the goodwill in “Remfry & Sagar”
was gifted to a newly incorporated juridical/legal entity  “RSCPL”.

Thereafter, Dr. V. entered into a partnership with four other partners.
This partnership firm (the assessee) entered into an agreement with RSCPL for
grant of license for the use of goodwill of “Remfry & Sagar”
subject to payment of license fee @ 25% of the amount of bills raised. The
agreement was valid for the term of 5 years. This agreement was later on
renewed and under as per the renewal, license fee was payable @ 28% of the
amount of bills raised.

The assessee claimed
deduction of the aforesaid license fee paid u/s. 37(1).

The
AO disallowed license fee paid by the assessee to RSCPL for the use of goodwill
on the ground that the entire transaction was colourable device adopted to
transfer profits of the assessee-firm to the family members of V, who held
majority shares in RSCPL and to evade tax. The CIT-(A) upheld order of the AO.

On appeal by the assessee
before ITAT-

HELD

It has been demonstrated by
the assessee that the revenue has accepted that both the entities, i.e., the
assessee as well as RSCPL, pay taxes, at the maximum rate and that there is no
loss of revenue on account of this arrangement. Thus, the disallowance made by
the revenue on the ground of diversion of profits is devoid of merit.

Though the revenue has
argued that goodwill of a profession cannot be sold to a company which does not
have a right to carry on practice, no specific law or section is pointed out in
support of the argument. Only several submissions have been made. Certain
judgments of Foreign Courts are cited, which are based on “ethical
considerations” and not legal prohibition. In any event, the Tribunal has
no power or authority to adjudicate the issue as to, whether; the gift of
goodwill by Dr. V, of his profession of law, to a company is violating the Advocates
Act, 1961 or the Bar Council Rules. No authority has held that this arrangement
violates any Act or law of the land, though the assessee firm has been carrying
on its profession of Attorneys at law under this arrangement for the last many
years.

Another important fact that
has to be considered is that, Dr. V had the sole and exclusive rights to the
said goodwill. The goodwill was held by him. Without legal authorisation from
him, the assessee firm could not use the name and style of “Remfry &
Sagar” along with its goodwill and other assets and rights. The
assessee-firm had to seek permissions and licences to continue and carry on
this profession under this name as it is run. Hence obtaining a license is a
must for assessee firm to continue and carry on its profession as the goodwill
is not owned by it. The payment made in pursuance of an agreement which enables
the assessee firm to carry on its profession, in the manner in which it is now
doing, is definitely an expenditure laid down wholly and exclusively for the
purpose of business or profession. The argument of the Special Counsel that the
purpose test contemplated u/s. 37 is not satisfied is devoid of merit.
Irrespective of whether the gift of Dr. V to RSCPL is ethical or not and
irrespective of the fact whether the gift is legally valid or not, from the
view point of the assessee firm, as it could not have continued and carried on
the profession of Attorneys-at-Law in the name of “Remfry &
Sagar” and use its goodwill and all its associated rights without the
impugned agreement with RSCPL. Hence the payment has to be held as that which
is incurred wholly and exclusively for the purpose of business or profession.

For all the aforesaid
reasons the deduction claimed by the assessee, of license fee paid by it to
RSCPL, has to be allowed u/s. 37.

13 Section 45 – Where conduct of an assessee reveals that he was into the business of real estate, merely because the books of account did not record conversion of capital asset to stock-in-trade or that such a conversion was not mentioned in the tax audit report will not change the characteristics of the income arising from the transactions in question.

[2017] 83 taxmann.com 97
(Visakhapatnam – Trib.)

DCIT  vs. Chennupati
Kutumbavathi

ITA No.  45 (Vizag) of
2013

A. Y.: 2007-08                                                    

Date of Order: 9th June, 2017

FACTS  

The assessee purchased agricultural land in the year 1980. He
claimed that the said land was converted into stock-in-trade in the year 2006
with an intention to commercially exploit the same.  The assessee divided the said land into plots
of different sizes and sold them to a large number of buyers.  In the return of income filed, the profit
arising from sale of such plots was shown u/s. 45(2) and under the head
`Profits and gains of business or profession’. 

The Assessing Officer (AO) observed that the assessee had
never traded in land and that in the accounts and financial statements of the
assessee for the financial year 2005-06, there was no conversion recorded and
the tax auditor had clearly mentioned that during the year under consideration
(financial year 2005-06), there was no conversion of capital asset into
stock-in-trade.  The AO, therefore, held
that the activity carried on by the assessee was not in the nature of adventure
in the nature of trade or commerce.  The
AO, accordingly, charged to tax profit arising on sale of plots as Long Term
Capital Gains and while computing long term capital gains he applied the
provisions of section 50C of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
allowed the appeal filed by the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal
where it claimed that merely because the books of account did not disclose the
conversion of capital asset into stock-in-trade, the characteristics of the
transaction would not change.

HELD 

The
Tribunal observed that the only question that needs to be examined is whether
on the facts and circumstances of the case the profit from sale of land is
assessable as capital gains or as business income.  It held that in order to find whether a
transaction of purchase and subsequent sale amounts to an adventure in the
nature of trade, the initial intention is an important factor, but not a
conclusive one. The subsequent events and the assessee’s conduct are also
important factors and the facts to be considered are firstly whether the
transaction was in the line of the assessee’s business and secondly whether it
was an isolated transaction or there was a series of similar transactions. It
is not necessary that in order to constitute trade, there should be a series of
transactions, both of purchase and of sale. Even a single and isolated
transaction can be held to be capable of falling within the definition of
business. The activity or the transaction said to be an adventure in the nature
of trade must be with the object of earning profit.

The
Tribunal noted that the assessee purchased an agricultural land in the year
1980. The assessee has sold the impugned land in the financial year relevant to
assessment years 2007-08. The assessee claimed to have converted said
investment into stock-in-trade as on 31-3-2006, developed the said land into
various plots before it was sold.  On
these facts, the Tribunal held that it is very clear that the intention of the
assessee was to purchase the land, divide them into plots and sell the plots
within the period established. Therefore, it clearly indicates that the
intention of the assessee was to carry out adventure in the nature of trade to
commercially exploit the said land. The assessee was involved in the business
of real estate which is evident from the fact that the assessee has computed
resultant profit from sale of impugned land by applying the provisions of
section 45(2) of the Act.

Insofar as application of
the provisions of section 50C since the activity carried out by the assessee
was held to be in the nature of adventure in the nature of trade or commerce
and the resultant profit assessable under the head ‘income from business’, the
Tribunal held that the provisions of section 50C have no application, when the
income is computed under the head ‘income from business or profession’.

The Tribunal dismissed the
appeal filed bythe revenue.

Section 271AAA – Penalty u/s. 271AAA cannot be levied in a case where the revenue had not asked the assessee the manner of earning undisclosed income.

12   [2017] 83 taxmann.com 231 (Ahmedabad – Trib.)

ACIT  vs. Shreenarayan Sitaram Mundra

ITA No. : 2878 (Ahd) of
2013

A. Y. : 2010-11                                                   

Date of Order:  18th May, 2017

FACTS  

In the course of search,
the assessee, an individual engaged in the business of manufacturing and
trading of textiles admitted an unaccounted income of Rs. 2 crore and included
the said amount of Rs. 2 crore in the total income of Rs. 2.21 crore declared
in the return of income filed in response to notice issued u/s. 153A.  The returned income was assessed to be total
income. 

The Assessing Officer (AO)
imposed a penalty u/s. 271AAA on the ground that the assessee had not specified
the manner in which income declared was earned which is one of the conditions
u/s. 271AAA for being exonerated from penalty. 

Aggrieved, the assessee
preferred an appeal to the CIT(A) who noted that the assessee had in his
statement mentioned that the said sum of Rs. 2 crore was earned by him from taxable
business and moreover, it was also substantiated by the assessee in his
statement and the  declaration of the
said undisclosed income earned was based on entries as mentioned in the
impounded documents inventorised in the form of `receivables’ and due taxes had
been paid on the said declared income while filing return of income.  The CIT(A) held that the conditions required
to be satisfied for non-imposition of penalty had been satisfied by the
assessee.  He allowed the appeal filed by
the assessee.

Aggrieved, the revenue
preferred an appeal to the Tribunal.

HELD  

The Tribunal noted that the
Revenue is aggrieved by non-compliance of the section 271AAA(2)(i) of the
Act.  As per section 271AAA(2)(i), one of
the conditions for obtaining relief from the imposition of penalty u/s.271AAA
is that the assessee in the statement recorded u/s.132(4) of the Act admits the
undisclosed income and ‘specifies the manner’ in which such income has been
derived. Section 271AAA(2)(ii) casts obligation on the part of the assessee to
‘substantiate the manner’ in which the undisclosed income was derived. The
Tribunal held that s/s.(2)(ii) finds its genesis from s/s. 2(i) of the Act. It
noted that admittedly, the Revenue is not aggrieved by the condition stipulated
in s/s. 2(ii) of the Act. Impliedly, the Revenue admits that the assessee has
not failed to substantiate the manner in which the undisclosed income derived.
This being so, it follows by necessary implication that the assessee has not
failed to specify the manner at the first place when substantiation thereof has
not been called into question by the Revenue. Thus, the case of the Revenue
requires to be summarily dismissed on this ground alone. Notwithstanding, the
assessee has replied to the query raised while recording the statement as
called for. The revenue does not appear to have quizzed the assessee for
satisfying the manner in which the purported undisclosed income has been
derived. The income considered as an undisclosed income in the statement u/s.
132(4) has been duly incorporated in the return filed pursuant to search.
Therefore, the revenue in our view now cannot plead deficiency on the part of
the assessee to specify the manner which has not been called into question at
the time of search. The Tribunal noted that no where in the assessment order or
in the penalty order, the revenue has made out a case that the manner of
earning undisclosed income was enquired into post search stage either.  It stated that the revenue has not pointed
out any query which remained unreplied or evaded in the course of search or
post search investigation. The Tribunal held that looking from any angle, it is
difficult to hold in favor of the revenue. The Tribunal upheld the order passed
by CIT(A).

The Tribunal dismissed the appeal filed by the assessee.

9 Brought forward business losses – can be set off against the gains arising from any business or profession – though chargeable to tax under any other head of income : Set off of brought forward unabsorbed depreciation against the short term capital gain

Commissioner of Income
Tax, vs. M/s. Hickson & Dadajee Pvt. Ltd. [ Income tax Appeal no 1493 of
2014 dt : 28/02/2017 (Bombay High Court)].

[M/s.
Hickson & Dadajee Pvt. Ltd, VS ACIT [ ITA No: 5882/M/2012 dated 28/02/2014
; A Y: 2009-10 .
Mum.  ITAT ]

The assessee
company, carrying on the business of manufacturing of dyes and dyes
international, harmless food colours as well as construction business, filed
its return of income for the year under consideration on 28-9-2011 declaring
total income of Rs. 1,23,70,170/-. In the said year, the assessee had derived
income from sale of plant & machinery and building which was offered to tax
as deemed short term capital gain u/s. 50 of the Act, 1961. Against the said
income, brought forward business losses of the earlier year and unabsorbed
depreciation were set off by the assessee. The A.O., however, did not allow the
claim of the assessee for such set off on the ground that the income from sale
of plant & machinery and building was chargeable to tax as short term capital
gain u/s. 50 of the Act.

 

On appeal,
the ld. CIT(A) upheld the order of the A.O. on this issue relying on the
decision of the Mumbai Bench of the Tribunal in the case of Dura Foam
Industries Pvt. Ltd. vs. JCIT (ITA No. 4917 & 4918/Mum/2008).

 

Aggrieved by
the order of the ld. CIT(A), the assessee has preferred this appeal before the
Tribunal. Tribunal find that assessee’s appeal is squarely covered by the
decision of the co-ordinate Bench of this Tribunal in the case of Digital
Electronics Ltd. vs. Addl. CIT reported in 49 SOT 65 wherein the claim of
the assessee for set off of brought forward business losses against the short
term capital gain on sale of factory building, plant and machinery was
disallowed by the A.O. on the ground that as per section 72 of the Act, the
brought forward business losses could be set off only against profits and gains
of business or profession. Tribunal allowed the claim of the assessee for set
off of brought forward business losses against short term capital gain.

 

The Tribunal
respectfully follow the decision of the co-ordinate Bench of the  Tribunal in the said case and direct the A.O.
to allow the claim of the assessee for set off of brought forward business
losses against the deemed short term capital gain arising from sale of plant
& machinery and building.

Being aggrieved, the Revenue carried the issue in
appeal to the High Court. The Hon.  High
Court observed  that the Revenue has
accepted  the decision of the Tribunal in
Digital Electronics Ltd. (supra). Further no distinguishing features in
the present facts had been shown to the court, which would warrant taking of a
different view from that taken by the Tribunal in Digital Electronics Ltd. (supra)
and accepted by the Revenue. In the above view, appeal of revenue was  dismissed.

As regards
the issue involved relating to the assessee’s claim for set off of brought
forward unabsorbed depreciation against the short term capital gain the Court
observed that same was  also covered in
favour of the assessee by the decision of CIT vs. Hindustan Unilever Ltd. (2016)
72 taxman.com 325 wherein this Court upheld the view of the Tribunal in
following the decision of Gujarat High Court in General Motors India
(P.)Ltd. vs. Dy. CIT (Special Civil Application No. 1773 of 2012 dated
23-8-2012) wherein a similar issue was decided in favour of the assessee.

Accordingly, appeal
dismissed.

8 Charitable Purpose – The activity of sale of milk being incidental to its Panjrapole activity – does not amount to carrying on of any business activity – it is not in contravention to the proviso to section 2(15) of the Act

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole. [ Income tax Appeal no 1695 of
2014, dt : 20/03/2017 (Bombay High Court)].

Director of Income Tax
(E) vs. M/s. Shree Nashik Panchvati Panjrapole.] [ITA NO. 1198/Mum/2012;  Bench : J ; dated 26/03/2014 ; A Y: 2009-10 .
Mum.  ITAT ]

The assessee trust is over 130 years old and
registered with the Charity Commissioner since 1953. The assessee was granted
Certificate of Registration under Section 12A of the Act. By Finance (No.2)
Act, 2009, the definition of “Charitable Purpose” u/s. 2(15) of the Act was
amended w.e.f. 12th April, 2009. Therefore, in view of the newly
added proviso, charitable purpose would not include advancement of any other
object of general purpose utility, if it involves carrying out activities in
the nature of trade, commerce or business, with receipts in excess of Rs.10
lakhs. In view of the above amendment, the DIT (Exemption) issued a show cause
notice that the income and expenditure account of the assessee, revealed income
on account of sale of milk at Rs.1.57 crore and income from interest and
dividend at Rs.58.34 lakh. Thus, indicating that the activities carried out by
the assessee of selling milk was in the nature of trade, commerce or business.

In its
reply, the assessee pointed out that it is running a Panjrapole i.e. for
protection of cows and oxen for over last 130 years. The activity of selling
milk was incidental to its Panjrapole activity and in any case did not involve
any trade, commerce or business, so as to be hit by the newly added proviso to
section 2(15) of the Act.

The DIT(E)
cancelled the respondent’s registration under the Act by invoking section
12AA(3) of the Act. The basis for cancellation of the registration was that in
view of the newly added proviso to section 2(15) of the Act, its income by way
of sale of milk, interest and dividend being in excess of Rs.10 lakhs the
assessee would cease to be a trust for charitable purpose. The DIT (E) further
records in his order the fact that the assessee was earning only Rs.3.76 lakhs
from its aforesaid activity of selling milk would not detract from the
application of the newly added proviso to section 2(15) of the Act. This for
the reason that the proviso as applicable is receipt based and not profit /
income based.

Being
aggrieved, the assessee filed an appeal to the Tribunal. The Tribunal records
the following facts : ( a) the fundamental / dominant function of the Trust is
to provide asylum to old, maimed, sick, weak, disabled and stray animals and
birds particularly cows; (b) that only 25% of the cows being looked after yield
milk and it is these milk yielding cows which support the balance 75% of the
cows which are non milk yielding; (c) that the milk needs to be procured from
the cows otherwise it will be detrimental to the health of the cows, if not
fatal; (d) the milk so procured is distributed free of charge to children,
schools, hospitals etc. and the balance amount of milk remaining after such free
distribution is sold to the general public at nominal rate; (e) the assessee is
selling milk at subsidized rates; and (f) nothing has been brought on record to
suggest that the Trust conducted its affairs solely on commercial basis.

The Tribunal 
after recording the above facts inter alia placed reliance on a decision
of the Tribunal in the case of Sabarmati Ashram Gaushala Trust vs. ADIT (Exem)
25 ITR 701 on an identical facts situation wherein it has been held that
the activities of selling milk by a Panjrapole will not by itself make the
newly added proviso to section 2(15) of the Act applicable. Further, reliance
was also placed in the impugned order upon the decision of the Delhi High Court
in ICAI vs. Director General of Income Tax (Exemption) 347 ITR 99 to
hold that the activities of selling milk by the assessee would be incidental in
running a Panjrapole in view of the proviso to section 2(15) of the Act. Thus,
the appeal of the assessee was allowed. 

On appeal by the Revenue the Hon. High Court observed
that  there is no bar in law to a Trust
selling its produce at market price as held 
by the Gujarat High Court   in
Sabarmati Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 dated 15th
January, 2014. In fact, the above factor alone will not make it an activity of
trade, commerce or business or even in its nature.

The Court also referred to another decision of the
Delhi High Court in Institute of Chartered Accountants of India & Anr.
(ICAI) vs. Director General of Income Tax (Exemption) & Ors. 358 ITR
91, where the Court held that the expression “business”, “trade” or “commerce”
as used in the first proviso must, thus, be interpreted restrictively and where
the dominant object of an organisation is charitable any incidental activity
for furtherance of the object would not fall within the expressions “business”,
“trade” or “commerce”.” (emphasis supplied).

The Court observed
that  the Revenue has not been able to
show that the view taken by the Apex Court in Surat Art Silk Cloth
Manufacturers’ Association (supra), Gujarat High Court in Sabarmati
Ashram Gaushala Trust in Tax Appeal No.1162 of 2013 (supra) and the
Delhi High Court in ICAI 347 ITR 99 (supra) and ICAI and Anr. 358 ITR 91
(supra) laying down the dominant activity test should not be followed.
Therefore, it was held that the question as proposed does not give rise to any
substantial question of law. Thus, appeal was dismissed.

7 Assessee entitled to raise claims not made in ROI before appellate authorities – which not made in ROI Expenses incurred for issuance of FCCBs is revenue in nature – even if the FCCB are convertible into equity at a later date

CIT vs. M/s. Faze Three Ltd. [ Income tax Appeal no 1761
of 2014, dt : 16/03/2017 (Bombay High Court)].

[M/s. Faze Three Ltd
vs. ACIT. [ITA No.5449/MUM/2011 ;  Bench
: F ; date:16/08/2013 ; A Y: 2007- 2008. MUM. 
ITAT ]

In the course of assessment the assessee filed
a letter claiming deduction of Rs. 2.24 crore towards expenses incurred on
issue of FCCBs. It was claimed that the assessee missed to lodge claim for
deduction in the computation of total income. The AO refused the claim by
relying on the decision of the Hon’ble Supreme Court in Goetz India vs. CIT [284
ITR 323] by assigning the reason that since revised return was not filed, this
claim was not entertainable. The learned CIT(A) upheld the assessment order on
this issue.

The Tribunal held that
there is no bar on the appellate authorities in considering a claim made by the
assessee otherwise than by filing a revised return. Thus, the question arose
for consideration was as to whether the expenses on issue of FCCBs can be
allowed as deduction or not.

The Tribunal relied on
the decision of Hon’ble Rajasthan High Court in CIT vs. Secure Meters Ltd. [(2010)
321 ITR 611 (Raj.)] wherein it has been 
held that the debentures when issued are only a loan. Any expenses
incurred on issuing debenture, whether convertible or non-convertible is
allowable deduction. Similarly, the Hon’ble Punjab & Haryana High Court in CIT
vs. Sukhjit Starch & Chemicals Ltd. [(2010) 326 ITR 29 (P&H)] has
also held that the expenditure on the issue of convertible debentures is
admissible. The Tribunal observed  that
there is no qualitative difference between the issuance of debentures or bonds.
Both fall in the realm of loan. Thus the Tribunal  held 
that the assessee was entitled to 
deduction for this amount.

Being aggrieved, the
Revenue filed an appeal to the High Court. The Court observed  that the preliminary  issue arising herein stands concluded against
the Revenue and in favour of the Assessee by the decision of this Court in CIT
vs. Pruthvi Brokers and Shareholders Pvt. Ltd., 349 ITR 336 .

As regards, the expenditure incurred on the
issue of FCCBs should be considered as capital expenditure and not be allowed
as revenue expenditure. The Hon Court 
relied on the decision of the Delhi High Court in CIT vs. Havells
India Ltd., 352 ITR 376 – wherein on an identical fact situation, the
appeal of the Revenue was dismissed. The Revenue was  not able to show any reason which would
require the court to take a view different from that taken by the various High
Courts in the country on an identical issue. In the above circumstances, the
revenue, Appeal was  dismissed.

31 Transfer pricing – Computation of arm’s length price – Section 92C, r.w.s. 144C – A. Ys. 2007-08 and 2008-09 – Failure of Assessing Officer to adhere to mandatory requirement of section 144C(1) and first pass a draft assessment order would result in invalidation of final assessment order and consequent demand notices and penalty proceedings

Turner International India (P.) Ltd. vs. ACIT; [2017] 82
taxmann.com 125 (Delhi):

For the A. Y. 2007-08, the assessee petitioner filed its
return on 31st October 2007, declaring its income at Rs.
10,69,43,491/-. This was later revised on 31st March, 2009 to claim
a higher TDS. As far as A. Y. 2008-09 is concerned, the Petitioner filed a
return of income on 30th September, 2008 declaring its income at Rs.
35,04,23,465/-. In respect of both the returns, since there were international
transactions involving the Assessee, a reference was made by the AO to the
Transfer Pricing Officer (‘TPO’). In respect of both the A.Ys., two separate
orders were passed by the TPO on 29th October, 2010 (in respect of
AY 2007-08) and 17th October, 2011 (in respect of AY 2008-09), in
respect of the Distribution Activity segment. On the basis of the above orders
of the TPO, draft Assessment Orders were passed by the AO. These were objected
to by the Petitioner before the Dispute Resolution Panel (‘DRP’). After the DRP
concurred with the TPO, final assessment orders were passed by the AO. These
were appealed against by the Petitioner before the ITAT. By a common order
dated 14th January 2013, in both the appeals pertaining to the two
A. Ys., the ITAT observed that neither the Petitioner nor the TPO had taken
into consideration appropriate comparables and, therefore, the determination of
arms length price (‘ALP’) was not justifiable. While setting aside the order of
the DRP, the ITAT remanded the matters to the AO for undertaking a transfer
pricing study afresh and framing an assessment in accordance with law.

Following the above order of the ITAT, fresh notices were
sent on 2nd August, 2013 by the TPO to the Petitioner u/s. 92CA(2)
of the Act, 1961. Two separate orders were passed by the TPO on 30th
January, 2015 proposing an upward adjustment to the total income of the
Petitioner for each of the A. Ys. Pursuant to the above order, the AO on 31st
March, 2015 passed final Assessment Orders in respect of both A.Ys. u/ss.
254/143(3)/144C(13)r.w.s. 92CA(4) of the Act confirming the additions as
proposed by the TPO. Accompanying the aforementioned final Assessment Orders
were notices of demand u/s. 156 of the Act and notices u/s. 271(1)(c) of the
Act initiating penalty proceedings.

The assessee filed writ petitions challenging the said orders
and the penalty proceedings. The Delhi High Court allowed the writ petition and
held as under:

“i)   The short ground on
which the aforementioned final assessment orders and the consequent demand
notices have been challenged is that there was non-compliance with the
mandatory provision contained in section 144C(1) of the Act requiring the AO to
first frame draft assessment orders. The question whether the final assessment
order stands vitiated for failure to adhere to the mandatory requirements of
first passing draft assessment order in terms of Section 144C(1) of the Act is
no longer res intregra. There is a long series of decisions to which reference
would be made presently. In Zuari Cement Ltd. vs. ACIT (decision dated
21st February, 2013 in WP(C) No.5557/2012), the Division Bench (DB)
of the Andhra Pradesh High Court categorically held that the failure to pass a
draft assessment order u/s. 144C (1) of the Act would result in rendering the
final assessment order “without jurisdiction, null and void and
unenforceable.” In that case, the consequent demand notice was also set
aside. The decision of the Andhra Pradesh High Court was affirmed by the
Supreme Court by the dismissal of the Revenue’s SLP (C) [CC No. 16694/2013] on
27th September, 2013.

ii)   In Vijay
Television (P) Ltd. vs. Dispute Resolution Panel [2014] 369 ITR 113/225 Taxman
35/46 taxmann.com 100 (Mad.), a similar question arose. There, the Revenue
sought to rectify a mistake by issuing a corrigendum after the final assessment
order was passed. Consequently, not only the final assessment order but also
the corrigendum issued thereafter was challenged. Following the decision of the
Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra) and a
number of other decisions, the Madras High Court in Vijay Television (P) Ltd.
case(supra) quashed the final order of the AO and the demand notice.
Interestingly, even as regards the corrigendum issued, the Madras High Court
held that it was beyond the time permissible for issuance of such corrigendum
and, therefore, it could not be sustained in law.

iii)   Recently, this
Court in ESPN Star Sports Mauritius S.N.C. ET Compagnie vs. Union of India
[2016] 388 ITR 383/241 Taxman 38/68 taxmann.com 377, following the decision
of the Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra),
the Madras High Court in Vijay Television (P) Ltd. (supra) as well as
the Bombay High Court in International Air Transport Association vs. Dy. CIT
[2016] 241 Taxman 249/68 taxmann.com 246, came to the same conclusion.

iv)  Mr. Dileep Shivpuri,
learned counsel for the Revenue sought to contend that the failure to adhere to
the mandatory requirement of issuing a draft assessment order u/s. 144C (1) of
the Act would, at best, be a curable defect. According to him, the matter must
be restored to the AO to pass a draft assessment order and for the Petitioner,
thereafter, to pursue the matter before the DRP. The Court is unable to accept
the above submission. The legal position as explained in the above decisions is
unambiguous. The failure by the AO to adhere to the mandatory requirement of
section 144C (1) of the Act and first pass a draft assessment order would
result in invalidation of the final assessment order and the consequent demand
notices and penalty proceedings.

v)  For
the aforementioned reasons, the final assessment orders dated 31st
March, 2015 passed by the AO for AYs 2007-08 and 2008-09, the consequential
demand notices issued by the AO and the initiation of penalty proceedings are
hereby set aside.”

30 Speculation business – Loss – Section 73, Explanation – Penalty u/s. 271(1)(c) – A. Y. 2001-02 – Allotment of shares – No purchase of shares- Loss on sale of shares – Not from speculation business – Question of penalty u/s. 271(1)(c) also would not arise

AMP Spinning and Weaving Mills P. Ltd. vs. ITO; 393 ITR
349 (Guj):

The assessee was a dealer in chemicals and in shares. In the
public issues of certain companies, the assessee applied for and also allotted
shares which it eventually sold and in the process suffered losses. The
assessee claimed set off of the loss as business loss. The Assessing Officer
rejected the claim and contention of the assessee that the application for
shares from the primary market and loss incurred on sale of such shares did not
fall within the purview of speculation loss under the provisions of the
Explanation to section 73 of the Act. This was upheld by the Tribunal. However,
the Tribunal cancelled the consequent penalty imposed by the Assessing Officer
u/s. 271(1)(c) of the Act.

The Gujarat High Court allowed the assessee’s appeal and
dismissed the appeal filed by the Department and held as under:

“i)   Section 73 of the
Income-tax Act, 1961 deals with carry forward and set off of losses from
speculation business. The Explanation to section 73 is a deeming provision
whereunder if the specified conditions are satisfied, purchase and sale of
shares are deemed speculation activities. There is a vital difference between
“creation” and “transfer” of shares. The words “allotment of shares” have been
used to indicate the creation of shares by appropriation out of the
unappropriated share capital to a particular person. A share is a chose in
action. A chose in action implies existence of some person entitled to the
rights in action in contradistinction from rights in possession. There is a
difference between issue of a share to a subscriber and the purchase of a share
from an existing shareholder. The first case is that of creation whereas the
second case is that of transfer of a chose in action.

ii)   Getting the shares
on allotment did not amount to purchase of the shares. The loss incurred on the
sale of the shares was not a loss in speculation business.

iii)   Accordingly, the
question of levy of penalty u/s. 271(1)(c) would not arise.”

29 Income Declaration Scheme 2016 – Assessee not filing returns for A. Y. 2010-11 onwards owing to internal problems – Declaration under Scheme for A. Y. 2010-11 onwards – Advance tax paid and tax deducted at source for those years – Assessee entitled to credit of advance tax and TDS

Kumudam Publications Pvt. Ltd. vs. CBDT; 393 ITR 599
(Del):

For the A. Y. 2010-11 onwards, the assessee company did not
file returns due to non-appointment of statutory auditor and certain internal
disputes in the company which led to litigations. It deposited the advance tax
and the tax deducted at source and Rs. 16,49,23,433 had been paid towards tax
liability by or on behalf of it. Anticipating that proceedings might be
initiated by the Department for its failure to file returns u/s. 139, the
assessee applied u/s. 119(2)(b) and sought permission to file returns ”based on
the unaudited accounts or in any other manner”. Pending disposal of the
application, the assessee also made a declaration under the Income Disclosure
Scheme, 2016 for all the assessment years on the basis of its unaudited
accounts. The details of the total tax payable including the interest and
penalty under the Scheme was Rs. 19.60 crore against which the advance tax paid
and the tax deducted at source to its benefit was Rs. 16.49 crore and the net
due of Rs. 3.11 crore, after giving credit to the sums paid, were disclosed by
the assessee in its declaration. In response to the declaration, the assessee
received an order from the Principal Commissioner demanding tax of Rs. 19.60
crore. The assesee’s representation and reminder letters to the Department and
e-mails to the Chairman CBDT requesting clarification that the net tax payable
was Rs. 3.11 crore only, were not responded to.

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

“i)   There was no bar,
express or implied which precluded the reckoning or taking into account of
previously paid amounts which has nexus with the period sought to be covered by
the Income Declaration Scheme, 2016. There should be something which provides a
clear insight that Parliament wished that past amounts were not to be reckoned
at all for purpose of payments. All that the words of the statute enjoined were
that the tax and surcharge amounts under the Scheme “shall be paid on or before
a date to be notified”. Those words necessarily referred to all payments and
were not limited in their meaning to what was paid immediately before, or, in
the proximity of the declaration filed.

ii)   The provisions of
section 182 of the Finance Act, 2016 stated that for the purposes of the Income
Declaration Scheme, 2016, the undefined terms and expressions should be
understood in terms of the Income-tax Act, 1961, by incorporating those into
the 2016 Act and the Scheme.

iii)   “Undisclosed
income” which was the foundational provision to be invoked by the declarant,
thus, was based on the definition in section 132(1)(c) of the 1961 Act. The
only bar discernible under the scheme as evident from section 189 of the 2016
Act was that “a declarant under the Scheme shall not be entitled, in respect of
undisclosed income declared or any amount of tax and surcharge paid thereon, to
reopen any assessment or reassessment made under the Income-tax Act, 1961 or
the Wealth-tax Act, 1957, or claim any setoff or relief in any appeal, reference
or any other proceeding in relation to any such assessment”. Therefore, there
was no bar for an assessee or declarant to claim credit of advance tax amounts
paid previously which pertained to the assessment years or periods for which it
sought benefits under the Scheme, 2016.

iv)  The respondents were
directed to process the assessee’s application under the 2016 Scheme giving
adjustment or credit to the amounts paid as advance tax and tax deducted at
source to its account.”

28 Depreciation – Additional depreciation – Section 32(1)(iia) – A. Y. 2006-07 – Acquisition of machinery in previous year and installation during A. Y. – Assessee entitled to additional depreciation at 20%

Princ. CIT vs. IDMC Ltd.; 393 ITR 441 (Guj):

The assessee was in the business of fabrication and
manufacture. For the A. Y. 2006-07, in assessment u/s. 143(3), its total income
was assessed at Nil after the Assessing Officer allowed its claim on additional
depreciation of 20% u/s. 32(1)(iia) of the Act, 1961, on account of its newly
purchased machinery. The machinery was purchased in the preceding year, but was
installed in the relevant year (A. Y. 2006-07). The Department audit party
raised the objection that as the machinery was purchased before March 31, 2005,
the claim of additional depreciation was not allowable to the assessee.
Therefore, in reassessment proceedings, the Assessing Officer disallowed the
assessee’s claim for additional depreciation. The Appellate Tribunal allowed
the assessee’s claim.

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

“i)   The purpose and
object of section 32(1)(iia) of the  Act,
1961 is to encourage the manufacturing sector by allowing the deduction of a
further sum equal to 20% of the actual cost of machinery or plant acquired and
installed. Therefore, the underlying object and purpose is to encourage the
industries by permitting the assessee in setting up the new undertaking or
installing a new plant and machinery to claim the benefit of additional
depreciation.

ii)   No error had been
committed by the Appellate Tribunal in allowing the additional depreciation at
the rate of 20% u/s. 32(1)(iia) of the Act on the plant and machinery installed
by the assessee after March 31, 2005, the year in question. The purpose and
object of granting additional depreciation u/s. 32(1)(iia) was to encourage
industries and to give a boost to the manufacturing sector by permitting the
assessees setting up new undertakings or installation of new plant and
machinery an additional depreciation allowance.

iii)  Thus
the provisions of section 32(1)(iia) was required to be interpreted reasonably
and purposively as the strict and literal reading of section 32(1)(iia) would
lead to an absurd result denying the additional depreciation to the assessee
though the assessee had installed new plant and machinery. The question of law
is answered against the revenue and in favour of the assessee.”

27 Charitable purpose – Exemption u/s. 10(23C)(via) – A. Y. 2011-12 – Application for approval cannot be rejected on ground assessee charges fees for educational courses or it entered into arrangements with other institutions to set up satellite centers to give medical treatment or its treatment involved layered subsidisation programme – Rejection of application not justified

Venu Charitable Society vs. DGIT; 393 ITR 63 (Del):

The assessee was registered u/s. 12A of the Act,1961 and also
obtained approval u/s. 80G of the Act. It was also notified for exemption u/s.
35AC of the Act by the National Committee for Promotion of Social and Economic
Welfare. The assessee was notified u/s.10(23C)(via) of the Act for the A. Ys.
2005-06 to 2007-08. But it did not file application for renewal of exemption
for the A. Ys. 2008-09 to 2010-11. In the return of income filed for those
years, the assessee claimed exemption u/s. 11 of the Act in respect of income
earned and applied for charitable purposes, the Assessing Officer while
completing the assessment for the A. Ys. 2005-06 to 2009-10 held that the
activities of the society fell within the ambit of section 2(15) of the Act,
i.e. charitable purpose. The assessee thereafter applied through Form 56D for
grant of exemption u/s. 10(23C)(via) of the Act for the A. Ys. 2011-12 onwards.
The Department rejected the exemption application inter alia on the
ground that (a) the assessee did not exist solely for philanthropic purposes
but for purpose of profit; (b) it had entered into collaboration agreements
with other hospitals and trusts for running satellite hospitals with profit
motive; (c) it provided educational courses such as medical training
programmes, long term super speciality medical programmes in ophthalmology and
was earning profit from those activities; (d) the memorandum of the assessee
society contained objects other than health care; and lastly, that it had made
no application for renewal of exemption u/s. 10(23C)(via) for the A. Ys.
2007-08 to 2010-11.

The Delhi High Court allowed the writ petition filed by the
assessee challenging the order and held as under:

“i)   The objects of the assessee
society were solely for the purpose of education and medical care and not for
purposes of profit. Only if it was found that the assessee was carrying on its
activities for the purpose of profit, contrary to its objects, would the
prescribed authority be justified in rejecting the application for approval
u/s. 10(23C)(via) of the Act.

ii)   Merely because it
charges fees for educational courses or that it enters into arrangements with
other institutions to set up satellite centres, to give medical treatment, or
that its treatment involved a layered subsidisation programme, that would not
justify rejection of its application. Therefore, denial of exemption u/s. 10
23C)(via) was not justified and the order was to be quashed.

iii)  The
Revenue is directed to consider the petitioners application, process it and
pass necessary orders in accordance with law within four weeks from today.”

26 Capital gains – Transfer – Joint development agreement (JDA) – Section 2(47), r.w.s. 53A of the Transfer of Property Act, 1882 – A. Y. 2008-09 – Assessee was member of cooperative housing society which owned certain land – Society entered into tripartite JDA with developers but the JDA was not registered – Assessee was entitled to receive monetary consideration partly in money and balance as a part of built up property – During relevant assessment year, assessee actually received proportionate amount – Unregistered JDA does not fall u/s. 53A of Transfer of Property Act; does not amount to transfer – Tribunal was justified in holding that assessee was not liable to capital gain tax

Princ. CIT vs. Dr. Amrik Singh Basra; [2017] 82
taxmann.com 186 (P & H):

The assessee was a member of a cooperative housing building
society. The society entered into a tripartite ‘JDA’ with developers, viz.,
‘HASH’ and ‘THDC’ under which it was agreed that HASH and THDC would undertake
development of land owned and registered in the name of the society. The agreed
consideration to be paid by the developers was to be disbursed to each individual
member of the society partly in monetary and balance in terms of built up
property. The assessee was entitled to receive proportionate amount.

The Assessing Officer held that impugned transaction involved
allowing the possession of the immovable property to be taken or retained in
part performance of contract of the nature referred to in section 53A of 1882
Act; and thus, it would be treated as transfer for purposes of Income-tax Act.
The Assessing Officer concluded that the assessee was liable to tax during
current assessment year under consideration on the entire amount
received/receivable in future under the head ‘capital gains’. Commissioner
(Appeals) and the Tribunal deleted the addition.

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

“i)   The High Court in
the case of C. S. Atwal vs. CIT [2015] 378 ITR 244/234 Taxman 69/59
taxmann.com 359 (P&H) had arrived at the conclusion that:

–     The parties had
agreed for pro-rata transfer of land.

–     No possession had
been given by the transferor to the transferee of the entire land in part
performance in JDA so as to fall within the domain of section 53A of 1882 Act.

–     The possession
delivered, if at all, was as a licencee for the development of the property and
not in the capacity of a transferee.

–     Further section 53A
of 1882 Act, by incorporation, stood embodied in section 2(47)(v) and all the
essential ingredients of section 53A of 1882 Act were required to be fulfilled.
In the absence of registration of JDA, the agreement does not fall u/s. 53A of
the 1982 Act and consequently s. 2(47)(v) does not apply.

ii)   The
appellant-revenue has not been able to controvert the applicability of the
decision rendered in C.S. Atwal’s case (supra). The substantial
questions of law claimed in these appeals are answered accordingly.
Consequently, both the appeals stand dismissed.”

25 Business expenditure – Capital or revenue – Section 37 – A. Y. 2005-06 – Lease rent paid for plot allotted for period of 10 years by Gujarat Maritime Board – Allowable as revenue expenditure

CIT vs. Mahavir Inductomelt P. Ltd.; 394 ITR 50(Guj):

For the A. Y. 2005-06, the assessee claimed deduction of a
sum of Rs. 18,66,450 as premium paid on plot allotted by the Gujarat Maritime
Board as expenditure in its business of ship breaking. The assessee paid this
amount as premium on leasehold property. According to the Assessing Officer,
the assessee acquired this plot from the Board under lease and the lease
agreement was for 10 years and accordingly, this was a capital asset and
payment made for acquiring capital asset was capital expenditure. The Assessing
Officer allowed deduction only of one tenth of the expenditure. The
Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i)   The amount paid by
the assessee with respect to plot allotted by the Board was allowable as
revenue expenditure.

ii)   The
appeal is dismissed.“

24 Business expenditure – Accrued or contingent liability- A. Y.s. 2001-02 and 2002-03 – Award of damages with interest in arbitration made rule of court – Assessee disputing award of damages and interest and dispute pending before Division Bench – Grant of stay by Division Bench does not relieve assessee from liability of interest – Entitled to deduction on interest

National Agricultural Co-operative Marketing Federation of
India Ltd. vs. CIT; 393 ITR 666 (Del):

For the A.Y.s 2001-02 to 2003-04, the assessee claimed
deduction of interest payable to A, on account of an arbitration award on the
outstanding amount of the award. The Court made the award rule of the Court in
proceedings initiated by A  u/s.5 of the
Foreign Awards (Recognition and Enforcement) Act, 1961 and held that  A was entitled to interest. On appeal by the
assessee against such award, the Court granted stay of the execution of the
decree. The Assessing Officer disallowed the claim for deduction by the
assessee for the A. Y. 2001-02 and 2003-04 and held that the liability of the
assessee was contingent and that it had not been entered in the books of account.
The Appellate Tribunal allowed deduction of interest for the A. Y. 2003-04.

The members of the Appellate Tribunal who heard the appeals
for the A. Y.s. 2001-02 and 2002-03 disagreed with the earlier order for the A.
Y. 2003-04. A reference was made to the Special Bench of the Appellate Tribunal
which held that the assessee had not incurred the liability for the payment of
the interest at the end of the assessment years in question and that under the
mercantile system of accounting, deduction could be granted only where the
incurring of the liability was a certainty. It held that there was no legally
enforceable liability of interest that existed against the assessee. It further
held that where the claim to damages and interest thereon was disputed by the
assessee in a Court, the deduction could not be allowed for the interest on such
damages. It concluded that as a result of the stay order granted by the
Division Bench of the Court, the liability of the assessee to pay interest
remained suspended from the date of stay.

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

“i)   With the award
being made rule of the Court by a single judge, the mere fact that the judgment
and decree was stayed by the Division Bench would not relieve the assessee of
its obligation to pay in terms thereof to A. Such liability had commenced in
the previous year in which the judgment and decree was passed by the single
judge. The order of the Special Bench of the Appellate Tribunal confirming the
disallowance of interest was unsustainable.

ii)   Appeal
is allowed.”

23 Appeal to High Court – Limitation – Appeal by Department – Receipt of copy of order of Tribunal by any of officers in Department including Commissioner (Judicial) will trigger period of limitation – Internal arrangements by Department changing jurisdiction of its officers will not alter period of limitation – Administrative instructions for administrative convenience of Department do not override statute particularly section 260A(2)(a)

CIT vs. Odeon Builders P. Ltd.; 393 ITR 27 (Del)(FB):

On 29/10/2014, the Tribunal had passed a common order in a
batch of 115 cases. A certified copy thereof was received in the office of the
CIT, Ghaziabad on 19/12/2014 and in the office of the Principal Commissioner
Delhi on 28/04/2015. The Department filed an appeal before the High Court on
25/08/2015. Assessee contended that the appeal was filed beyond the limitation
period. The Department explained that at the time the appeals were heard by the
Tribunal, the Commissioner, Ghaziabad was the concerned Commissioner and pursuant
to certain administrative orders issued by the Department, the jurisdiction
relating to the assessee was transferred to the Commissioner, Delhi. The
certified copy was received by the Commissioner, Delhi on 28/04/2015 and the
Commissioner, Delhi thereafter took a decision regarding filing of appeals.
Another appeal against the order of the Tribunal dated 16/05/2014 was filed by
the Department in the High Court on 14/01/2015. The assessee contended that in
accordance with the stamp borne on the certified copy of the order, the Copy of
the order was available with the Commissioner (Judicial) on July 23, 2014 and
with the Commissioner (Central) on July 25, 2014 and therefore, the appeal
which was filed on January 14, 2015 was beyond 120 days from the date of
receipt of the certified copy. The Department contended that limitation would
start to run only from the date of service of the order of the Tribunal on the
concerned Commissioner having jurisdiction over the assessee.

The Full Bench of the Delhi High Court held as under:

“i)   The word “received”
occurring in section 260A(2)(a) of the Income-tax Act, (hereinafter for the
sake of brevity referred to as the “Act”) 1961 would mean received by
any of the named officers of the Department, including the Commissioner
(Judicial). The provision names four particular officers, i.e., the Principal
Commissioner, Commissioner, Principal Chief Commissioner, and Chief
Commissioner of Income Tax. These were the only designated officers who could
receive a copy of the order. In the absence of a qualifying prefix “concerned”,
the receipt of a copy of the order of the Tribunal by any of those officers in
the Department including the Commissioner (Judicial), would trigger the period
of limitation.

ii)   The statute was not
concerned with the internal arrangements that the Department might make by
changing the jurisdiction of its officers. It was for the officer of the
Department who first received a copy of the Tribunal’s order to reach in time
to the officer who was to take a decision regarding the filing of an appeal.

iii)   Where there was a
common order of the Tribunal covering the several appeals, limitation would
begin to run when a certified copy was received first by either the
Commissioner (Judicial) or one of the officers of the Department and not only
when the Commissioner “concerned” receives it. When the same Commissioner had
jurisdiction for more than one assessee, the limitation would begin to run for
all from earliest of the dates when the Departmental representative of the
Commissioner (Judicial) or any Commissioner first receives the order in any of
the cases forming part of the batch disposed by the common order.

iv)  If there were four
separate orders passed, the limitation would begin to run when such separate
orders are received first by any officer of the Department.

v)   Instructions issued
by the Department for its administrative convenience could not alter the time
when limitation would begin to run u/s.260A(2)(a) of the Act. Administrative
instructions are for the administrative convenience of the Department and would
not override the statute, in particular section 260A(2)(a) of the Act.”

Allowability of Expenditure towards Corporate Social Responsibility

Issue for Consideration

Explanation 2 to Section
37(1) declares that, for the removal of doubts, any expenditure incurred by an
assessee on the activities relating to corporate social responsibility referred
to in section 135 of the Companies Act, 2013 shall not be deemed to be an
expenditure incurred by the assessee for the purposes of business or
profession.

Companies Act, 2013 has made it mandatory for certain
companies to spend at least 2% of the average net profits towards Corporate
Social Responsibility (‘CSR’) as per the policy formulated by the CSR committee
of the company in this regard. While this is the first time a statutory
obligation has been cast upon companies to incur expenditure in the social or
charitable sphere, it is not uncommon for corporate as well as non-corporate
assessees to voluntarily incur charitable expenditure, which may or may not
have a direct nexus to their business operations.

Where such expenditure is expected to benefit the business in
some manner, either by benefitting its employees or by creating goodwill within
the community at large, it is usually claimed as business expenditure under
section 37(1). The issue has arisen on the allowability of such expenditure, on
account of conflicting decisions of the Tribunal. While the Raipur Tribunal has
upheld the claim in the specific facts of the case, the Bengaluru Tribunal has
taken a contrary view, disallowing the claim in respect of charitable expenses.

Jindal Power Limited’s case

The issue came up before
the Raipur Tribunal in the case of ACIT vs. Jindal Power Ltd. 179 TTJ 736.

In the said case, during
assessment year 2008-09, the company had claimed deduction in respect of
expenditure incurred on construction of school building, devasthan/temple,
drainage, barbed wire fencing, educational schemes and distributions of clothes
etc. voluntarily. Without much of a discussion on the factual aspects, the AO
observed that no material had been placed to substantiate the claim or in
support of existence of the facts of development activities. The AO also placed
reliance on the decision of the Patna Tribunal in the case of Central
Coalfields Ltd. for assessment years 1983-84 to 1986-87, wherein it was held
that the expenses were in the nature of charity and though laudable, they could
not be said to have been incurred for the purpose of business.

The CIT(A) made detailed observations on CSR stating that
“CSR policy functions as a built-in, self-regulating mechanism whereby a
business monitors and ensures its active compliance with the spirit of the law,
ethical standards, and international norms. The goal of CSR is to embrace
responsibility for the company’s actions and encourage a positive impact
through its activities on the environment, consumers, employees, communities,
stakeholders and all other members of the public sphere who may also be
considered as stakeholders. CSR is titled to aid an organization’s mission as
well as a guide to what the company stands for and will uphold to its
consumers.” Further, the CIT(A) noted the CSR policy of the assessee company
and that the expenses incurred on water supply for perennial availability of
portable water, roads and culverts, toilets and others, water tanks, other
community works, temple renovation, school building renovation etc. in the
villages for up-gradation as well as expenses for the welfare of the employees
were a part of implementation of CSR policies of the company. The assessee
relied upon various decisions including the decisions in the case of SECL 85
ITD 608 (Nag.) and Madras Refineries Ltd. 266 ITR 170 (Mad.).
Applying the ratio of the said decisions, the CIT(A) held that the expenditure
under the above heads incurred by the appellant company as a good corporate
citizen and as measure of gaining goodwill of the people living in and around
its industries through the aforesaid activities were admissible expenditures.
Only those expenses, which were neither substantiated with proper evidences nor
had any nexus with the CSR policies of the appellant company, were disallowed.

In the appeal before the Tribunal, the fundamental objection
of the AO was that the expenses were voluntary, not mandatory and not for
business purposes. In respect of the contention that expenses, which were
voluntary in nature and not mandatory, were not admissible as deduction, the
Tribunal referred to the judgment of House of Lords in the case of Atherton
v. British Insulated & Helsbey Cables Ltd. 10 Tax Cases 155 (HL), which
has been approved by the Supreme Court in the case of Chandulal Keshavlal &
Co. 38 ITR 601, wherein it was held that a sum of money expended not with a
necessity and with a view to direct immediate benefit to the trade, but
voluntarily and on the grounds of commercial expediency and in order to
indirectly facilitate carrying on of business, may yet be expended wholly and
exclusively for the purpose of the trade and hence be admissible. The Tribunal
also considered the decision of the Supreme Court in the case of Sassoon J
David & Co. (P) Ltd. 118 ITR 261, which laid down the principle that
the fact that somebody other than the assessee also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction if it otherwise satisfied the tests laid down by law.

Further, on the contention of whether such expenses were for
the purpose of business or not, the Tribunal referred to the decision in the
case of Hindustan Petroleum Corporation Ltd 96 ITD 186 (Mum.) which held
that there could be certain amounts, though in the nature of donations, which may
be deductible under section 37(1) as well and merely because an expenditure was
in the nature of donation, or ‘promoted by altruistic motives’, it did not
cease to be an expenditure deductible under section 37(1). It also took into
consideration the decision in the case of Madras Refineries Ltd. (supra),
wherein it was observed that monies spent by the assessee as a good corporate
citizen and to earn the goodwill of the society help creating an atmosphere in
which the business can succeed in a greater measure with the help of such
goodwill, and therefore, were required to be treated as business expenditure
eligible for deduction under section 37(1) of the Act.

The Tribunal noted that Explanation 2 to Section 37(1) was
introduced with effect from 1st April 2015 and observed that it
could not be construed to the disadvantage of the assessee in the period prior
to this amendment. It further noted that this disabling provision referred only
to such CSR expenses incurred under Section 135 of the Companies Act, 2013,
and, as such, it could not have any application for the period not covered by
this statutory provision, which itself came into existence in 2013. It also
placed reliance on the principle of lex prospicit non respicit (law looks
forward not backward) laid down in the Supreme Court’s five judge
constitutional bench’s landmark judgment, in the case of Vatika Townships
Pvt Ltd 367 ITR 466 (SC), that unless a contrary intention appeared,
legislation was presumed not to be intended to have a retrospective operation
and that law passed today could not apply to the events of the past. The
Tribunal also reiterated the well settled legal position that when a
legislation conferred a benefit on the taxpayer by relaxing the rigour of
pre-amendment law, and when such a benefit appeared to have been the objective
pursued by the legislature, it would be a purposive interpretation giving it a
retrospective effect, but when a tax legislation imposed a liability or a
burden, the effect of such a legislative provision could only be prospective.

Interestingly, the
Tribunal observed that the disallowance was restricted to the expenses incurred
by the assessee under a statutory obligation under section 135 of Companies Act
2013, and thus, there was now a line of demarcation between the expenses
incurred by the assessee on discharging CSR under such a statutory obligation
and under a voluntary assumption of responsibility. The Tribunal further held
that for the former, the disallowance under Explanation 2 to Section 37(1) came
into play, but, as for the latter, there was no such disabling provision as
long as the expenses, even in discharge of corporate social responsibility on
voluntary basis, could be said to be “wholly and exclusively for the
purposes of business”.

Thus, based on all the
aforesaid arguments, since the expenses in question were not incurred under the
statutory obligation, as also for the basic reason that Explanation 2 to
Section 37(1) came into play with effect from 1st April 2015, the Tribunal
concluded that the disabling provision of the said Explanation did not apply to
the facts of this case.

Kanhaiyalal Dudheria’s case

The issue once again came
up for consideration before the Bengaluru Tribunal in the case of Kanhaiyalal
Dudheria v. JCIT 165 ITD 14 

In this case, during assessment year 2011-12, the assessee
firm claimed deduction in respect of expenditure incurred on construction of
houses under an MOU with the Government of Karnataka, that were later handed
over to the Government for helping the people affected by floods. The assessee
claimed that the said expenditure was incurred to yield benefit in the form of
goodwill and therefore, the same was allowable as business expenditure. The AO,
after referring to the MOU, came to the conclusion that the said expenditure
was not incurred wholly and exclusively for the purpose of business and
therefore held that the same was not allowable as deduction u/s 37(1) of the
Act. The CIT(A) upheld the order of the AO.

In the appeal before the Tribunal, the assessee firm relied
on the decisions in the case of Jindal Power Ltd. (supra) and Infosys
Technologies Ltd. 360 ITR 714 (Kar.) stating that on account of incurrence
of expenditure, goodwill was created in the people in the surrounding villages,
which would help in carrying out business and thus,
the expenditure should be allowed as a deduction. On behalf of the revenue, it
was argued that the said expenditure was towards charity and it was nothing but
application of income. The revenue drew support from the decision in the case
of Badrinarayan Shrinarayan Akodiya 101 ITR 817 (MP).

The Tribunal, relying on the decision in the case of Sassoon
J. David & Co. (P.) Ltd. (supra), emphasized that although for claiming
deduction u/s 37(1), it was not required to establish the necessity of
incurring of such expenditure, the onus lay on the assessee to prove that the
expenditure was incurred for the purpose of business. Since in the facts of the
case, the assessee did not establish that the expenditure was incurred for business
purpose, the Tribunal held that the expenditure amounted to application of
income voluntarily towards charity which could not be allowed as a deduction.

The Tribunal also noted that it cannot be said that the
appellant had incurred this expenditure wholly and exclusively for the purpose
of business since there was no nexus between the expenditure incurred and the
benefit derived by the business of the assessee.

Observations

Prior to insertion of
Explanation 2, section 37(1) along with Explanation 1 laid down a four-fold
test for any expenditure to be allowable in computing the income under the head
“Profits and gains of business or profession” –

–    it must
not be of the nature described in sections 30 to 36;

–    it must
not be capital or personal in nature;

–    it must
be laid out or expended wholly and exclusively for the purposes of business or
profession; and

–    it must
not be incurred for a purpose which is an offence or which is prohibited by
law.

There was no requirement,
however, to prove the necessity of incurring such expenditure. In other words,
whether the expenditure was incurred on account of a statutory obligation or
otherwise, did not have a bearing on the allowability of the expenditure.
Expenses in the nature of CSR were considered to be allowable or not allowable
as a deduction in light of the above tests.

It is common for many
taxpayers to contribute to the betterment of their employees and their
families, or the community or society, or the locality where their business
operations are based, etc. in a variety of ways. In most of the cases, there is
some perceived benefit to the business operations, either in the form of better
morale and productivity of employees or through generation of goodwill and
reputation for the business. As a result, in all such cases, the expenditure is
considered to have been spent for the purposes of the business and claimed as
deduction against the business profits. However, in cases where the spending is
not connected with the business of the assessee in any manner whatsoever, it
partakes the character of donation or charity and is not an allowable
expenditure under section 37(1).

At the same time, the mere
fact that a particular expenditure is in the form of donation, more
particularly eligible for deduction under section 80G, would not by itself
imply that it is not deductible under section 37(1). In the case of Mysore
Kirloskar Ltd. v. CIT 166 ITR 836 (Kar.), which was referred to in the case
of Infosys Technologies Ltd. (supra), it was held that if the contribution
by an assessee was in the form of donations of the category specified under
section 80G, but if it could also be termed as an expenditure of the category
falling under section 37(1), then the right of the assessee to claim the whole
of it as allowance under section 37(1) could not be denied if it was “laid
out or expended wholly and exclusively for the purpose of business”.

The debate on the
voluntary nature of the expenses and the necessity of incurring such
expenditure has been definitively settled in the case of Sassoon J. David
and Co. (P.) Ltd. (supra), where the issue arose on deductibility
under section 10(2)(xv) of the Income-tax Act, 1922 (corresponding to section
37(1) of the Income-tax Act, 1961) of expenditure on retrenchment compensation
incurred voluntarily. The Apex Court in the said case has observed as under –

“It has to be observed here that the expression “wholly and
exclusively” used in section 10(2)(xv) of the Act does not mean
“necessarily”. Ordinarily it is for the assessee to decide whether
any expenditure should be incurred in the course of his or its business. Such
expenditure may be incurred voluntarily and without any necessity and if it is
incurred for promoting the business and to earn profits, the assessee can claim
deduction under section 10(2)(xv) of the Act even though there was no
compelling necessity to incur such expenditure. It is relevant to refer at this
stage to the legislative history of section 37 of the Income-tax Act, 1961
which corresponds to section 10(2)(xv) of the Act. An attempt was made in the
Income-tax Bill of 1961 to lay down the “necessity” of the
expenditure as a condition for claiming deduction under section 37. Section
37(1) in the Bill read “any expenditure. . . . laid out or expended wholly,
necessarily and exclusively for the purposes of the business or profession
shall be allowed” The introduction of the word “necessarily” in
the above section resulted in public protest. Consequently when section 37 was
finally enacted into law, the word “necessarily” came to be dropped.
The fact that somebody other than the assessee is also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the
tests laid down by law.”

Although the facts in the
above case were different and the issue under examination was in respect of
retrenchment compensation, the ratio laid down by the Supreme Court in respect
of allowability of voluntary expenditure under section 10(2)(xv) of the 1922
Act and section 37(1) of the 1961 Act would be applicable even in case of CSR
expenditure incurred by taxpayers without any statutory requirement or any
other compulsion.

The issue that remains
disputed then is, in which cases or under what circumstances, will the
expenditure be considered to be “wholly and exclusively for the purposes of the
business or profession”? Here again, the courts have agreed that the words
“for the purpose of business” used in section 37(1) should not be
limited to the meaning of “earning profit alone” and that business
expediency or commercial expediency may require providing facilities like
school, hospital, etc., for the employees or their families. It has also been
held that any expenditure laid out or expended for their benefit, if it
satisfied the other requirements, must be allowed as deduction under section
37(1) of the Act. However, the onus of establishing the nexus between the
expenditure incurred and the business and proving that the expenditure
“satisfies the other requirements” must be discharged by the assessee. The
Supreme Court in the case of Chandulal Keshavlal & Co. (supra) has laid
down certain tests in this regard as under –

“Another fact that
emerges from these cases is that if the expense is incurred for fostering the
business of another only or was made by way of distribution of profits or was
wholly gratuitous or for some improper or oblique purpose outside the course of
business then the expense is not deductible. In deciding whether a payment of
money is a deductible expenditure one has to take into consideration questions
of commercial expediency and the principles of ordinary commercial trading. If
the payment or expenditure is incurred for the purpose of the trade of the
assessee it does not matter that the payment may inure to the benefit of a
third party—Usher’s Wiltshire Brewery v. Bruce 6 TC 399 (HL). Another test is
whether the transaction is properly entered into as a part of the assessee’s
legitimate commercial undertaking in order to facilitate the carrying on of its
business ; and it is immaterial that a third party also benefits thereby —
[Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is
a question of fact whether the expenditure was expended wholly and exclusively
for the purpose of trade or business of the assessee.”

[Emphasis supplied]

The above principle
emerges in both the cases discussed in this article. In the case of Jindal
Power Limited (supra), even though CSR expenses were allowed based on an
understanding of the need for CSR by businesses and that these expenses were a
part of the implementation of the CSR policy of the company, the Tribunal
disallowed those expenses which were not substantiated with evidence and were not
in line with the company’s CSR policy. Similarly, in the case of Kanhaiyalal
Dudheria (supra), deduction of expenses was not allowed on account of failure
on part of the assessee to establish that the expenditure was incurred for
business purpose.

The introduction of
statutory provisions for CSR in Companies Act, 2013 and a corresponding
amendment in the Income-tax Act, 1961 has added another dimension to the
existing controversy.

Section 135 of the
Companies Act, 2013 mandates that every company having –

–    net
worth of Rs. 500 crores or more, or

–    turnover
of Rs. 1,000 crores or more, or

–    net
profit of Rs. 5 crores or more

during any financial year,
shall spend, in every financial year, at least 2% of its average net profits
towards CSR activities as per the CSR policy of the company. It further states
that the company shall give preference to the local area and areas around where
it operates for the CSR spending.

On the one hand, the above
provisions make it mandatory for certain Companies to undertake charitable
spending, while, on the other hand, Finance (No. 2) Act, 2014 introduced
Explanation 2 to section 37(1) with effect from 1st April 2015, to read as
under –

“For the removal of doubts, it is hereby declared that for the purposes
of sub-section (1), any expenditure incurred by an assessee on the activities
relating to corporate social responsibility referred to in section 135 of the
Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or profession.”

The above explanation
states that CSR expenditure shall not be deemed to have been incurred for the
purposes of business. Consequently, such expenditure is not allowable as a
deduction. The Explanatory Memorandum to the Finance Bill states that the
objective of CSR is to share the burden of the Government in providing social
services by companies having net worth/turnover/profit above a threshold and if
such expenses are allowed as tax deduction, this would result in subsidising of
around one-third of such expenses by the Government by way of tax expenditure.
However, it also states that the CSR expenditure which is of the nature
described in section 30 to section 36 of the Act shall be allowed as a
deduction under those sections subject to fulfillment of conditions, if any,
specified therein.

By declaring that
statutory CSR expenditure is not deemed to have been incurred for the purpose
of business, rather than clarifying that such expenditure is not an allowable
expense, Explanation 2 to section 37(1) may end up adding another angle to the
issue. It may be possible to take a view that Explanation 2 to section 37(1)
merely clarifies that the statutory CSR expenditure is not automatically deemed
to have been incurred for the purpose of business on account of the legislative
obligation (as was the presupposition in the arguments against allowability of
voluntary CSR expenses). In other words, statutory CSR expenditure would also
be considered to be incurred for the purposes of business and therefore be
deductible, so long as it satisfies the other tests and requirements discussed
earlier. The fact that the legislature intends to allow CSR expenditure of the
nature described in sections 30 to 36 would imply that the expenditure ought to
be allowed as a deduction if it is otherwise deductible.

Nevertheless, it is
pertinent to note that the explanation only makes a reference to the
expenditure incurred on CSR activities referred to in section 135 of the
Companies Act, 2013 and not to all expenditure in the nature of CSR. Further,
the explanation has been prospectively inserted with effect from 1st April
2015. Interestingly, the case of Jindal Power Limited (supra) pertains
to the period prior to the amendment. The Raipur Tribunal had rightly held that
since Explanation 2 was inserted prospectively and as it was a disabling
provision, it did not apply in that case to the expenditure incurred prior to
the amendment. This clearly implies that CSR expenditure, whether statutory or
voluntary, incurred prior to assessment year 2015-16 would be allowable,
provided it meets the other requirements of section 37(1). Additionally, the
Tribunal observed that there was now a clear distinction between statutory and
voluntary CSR expenditure and that the restriction placed in Explanation 2 to
section 37(1) would at best apply to the CSR expenditure incurred under the
statutory requirements. In other words, if any assessee – company or other than
company – voluntarily spends on CSR activities, whether prior to or after the
Companies Act, 2013 became applicable, the said expenditure would be allowable,
as long as it can be demonstrated to be incurred “wholly and exclusively for
the purposes of business or profession”.

Also noteworthy is the
fact that the CSR expenditure is mandated in the Companies Act, 2013 only for
companies and any expenditure of similar nature by non-corporates will always
be of a voluntary character, as in the case of Kanhaiyalal Dudheria (supra). As
the explanation makes a specific reference to section 135 of the Companies Act,
2013, the question of invoking the same for CSR expenditure incurred by
non-corporate entities does not arise. Quite aptly, therefore, Explanation 2
has not been considered in Kanhaiyalal Dudheria’s case and the allowability of
the CSR expenditure has been decided on the basis of settled principles in
respect of section 37(1) prior to the amendment.

Last but not the least, a
question may arise regarding the validity of the restriction imposed by
Explanation 2 to section 37(1). Where an expenditure is required to be
statutorily incurred and failure to comply with such statutory requirements
could attract penalties, it has a direct nexus to the business of the taxpayer.
In our view, deeming such an expenditure to not be for the purpose of business
or profession is inappropriate. In fact, if similar expenses incurred before
the imposition of the statutory obligation have been held to be deductible, the
deeming fiction was not desired in view of the existing safeguards in place in
section 37(1). Ironically, even after the amendment, the following category of
expenditures will still be allowable as a deduction –

–    CSR
expenses incurred by non-corporate entities, which are demonstrated to be laid
out for the purposes of business or profession;

–    CSR
expenses incurred voluntarily by companies; and

–    CSR expenses incurred by companies in
discharge of the obligation under section 135 of the Companies Act, 2013, which
are covered under section 30 to 36 of the Income-Tax Act, 1961.

This disparity between the deductibility of the
CSR expenses is uncalled for. It is therefore a possibility that the
restriction of Explanation 2 to Section 37(1) may be read down by the Courts.

TDS U/s. 194-Ib on Payment of Rent by Certain Individuals or Hindu Undivided Family

Background

Section 194-I of the
Income-tax Act, 1961 (“the Act”) interalia requires an individual or a
Hindu Undivided Family (HUF) carrying on business or profession of which
turnover or gross receipts in the immediately preceding previous year exceed
the monetary limits mentioned in section 44AB of the Act to deduct tax at source
while making payment of rent, to a resident. Under section 194-I, liability to
deduct tax arises if the amount of rent exceeds Rs. 1,80,000 in a year. Under
section 194-I tax is required to be deducted @ 10%.  

Therefore, an individual or a Hindu undivided family not
carrying on a business or a profession or carrying on a business or profession
the turnover or gross receipts of which did not exceed the monetary limit
mentioned in section 44AB of the Act in the immediately preceding previous year
is not required to deduct tax at source from payment by way of rent.

With a view to widen the scope of tax deduction at source,
the Finance Act, 2017 has, with effect from 1.6.2017, inserted section 194-IB
in the Act. This article attempts to analyse the provisions of section 194-IB
of the Act.

Provision of section 194-IB in brief 

An individual or an HUF (other than those covered by s.
194-I) responsible for paying to a resident, any income by way of rent
exceeding Rs. 50,000 for a month or part of a month during the previous year,
shall deduct an amount equal to five per cent of such income as income-tax
thereon.  The deduction is required to be
made at the time of credit of rent for the last month of the previous year or
the last month of tenancy if the property is vacated during the year, to the
account of the payee or at the time of payment thereof whichever is
earlier.  The deductor is not required to
obtain TAN.  In case the payee does not
have PAN and the provisions of section 206AA apply, the amount of deduction
shall not exceed the amount of rent payable for the last month of the previous
year or the last month of tenancy, as the case may be.

Cumulative Conditions for application of Section 194-IB

i)   the payer is an individual or a Hindu
undivided family;

ii)  in the immediately preceding previous year the
turnover or gross receipts of the business / profession carried on by such
individual or HUF, if any, did not exceed the monetary limits mentioned in
section 44AB;

iii)  the payer is responsible for paying income by
way of rent for use of any land or building or both.  For the purpose of this section, rent is
defined in an Explanation to section 194-IB;

iv) the amount of rent exceeds Rs. 50,000 for a
month or part of a month during the previous year;

v)  the payee is a resident. 

Consequences

If the above mentioned
conditions are cumulatively satisfied, the payer is required to deduct tax @ 5%
of such income as income-tax.

time of deduction 

Tax is required to be deducted on earlier of the following two
dates –

i)   credit to the account of the payee of rent
for the last month of the previous year or the last month of tenancy, if the
property is vacated during the year;  OR

ii)  at
the time of payment thereof in cash or by issue of a cheque or draft of by any
other mode.  It needs to be noted that
the word `thereof’ signifies the payment of rent for last month of the
previous year or the last month of tenancy, if the property is vacated during
the year.

Other points 

i)   The payer is not required to obtain TAN;

ii)  In case the provisions of section 206AA apply
(i.e. the payee does not have PAN) the amount of deduction shall not exceed the
amount of rent payable for last month of the previous year or the last month of
the tenancy, as the case may be. 

Who should be the payer / To whom is the section applicable?

Section 194-IB applies to a payer of rent who is an
individual or an HUF (other than those referred to in the second proviso to
section 194-I). The amount of rent should be in excess of the amount mentioned
in the section (given in subsequent paragraphs).

Therefore, the section will apply to a salaried employee, a
farmer, a retired person, an individual or an HUF carrying on business or
profession whose total turnover or gross receipts in the immediately preceding
previous year does not exceed the monetary limits mentioned in section 44AB of
the Act, an individual not carrying on business and whose total income is less
than the maximum amount not chargeable to tax.

Since the term `individual’ has been held to also include
group of individuals, the section may apply to trustees of a trust [DIT vs.
Sharadaben Bhagubhai Mafatlal Public Charitable Trust (2001) 247 ITR 1 (Bom)].
It may also apply to Executors of the estate of a deceased person [see CIT
vs. G B J Seth 6 Taxman 318 (MP)].

Who should be the payee?

The payee of rent should be a
resident.  If the payee is a
non-resident, then tax may be deductible u/s.195 of the Act but not under this
section.  The legal status of the payee is
not relevant. The payee could be a listed company, a private limited company, a
firm, a trust, LLP, individual, HUF, etc.

Threshold for deduction of tax

Tax is required to be
deducted only if the amount of rent exceeds Rs. 50,000 for a month or a part of
a month during the previous year. Once the rent for a month or part of a month
exceeds Rs. 50,000, tax is deductible on the entire amount of rent. Unlike the
other provisions of TDS, the payments made during the previous year are not
required to be aggregated for deduction of tax at source.  To illustrate, if the amount of rent paid in
first 3 months is at the rate of  Rs.
45,000 per month and for next 6 months @ Rs. 55,000 per month and for last 3
months at Rs. 40,000 per month, tax is required to be deducted only from
rent of those months where the amount of rent exceeds Rs. 50,000 for a month or
part of a month.  Therefore, amount
of tax to be deducted at source will be Rs. 16,500 [5% of Rs. 3,30,000 (55,000
x 6)].

It needs to be noted that
in case of rent for part of a month, the monthly rate of rent is not relevant
but what is relevant is that the amount paid / payable for a part of the month
should be in excess of Rs. 50,000.  To
illustrate, if amount of rent paid for 15 days is Rs. 40,000 tax will not be
required to be deducted (though rent per month is Rs. 80,000) but if the amount
of rent paid for 3 weeks is Rs. 60,000 then tax is required to be deducted
under this section.

Is the limit of Rs. 50,000 per month or part of a month qua each property or qua the payee?

A
question arises as to whether the limit of Rs. 50,000 per month or part of a
month is qua each property or qua each payee. To illustrate if Mr. T has
taken on rent from Mr. L a residential house on a monthly rent of Rs. 15,000
and also a factory for a monthly rent of Rs. 40,000, if the limit of Rs. 50,000
is qua each property, Mr. T is not required to deduct tax at source u/s.
194-IB whereas if the limit of Rs. 50,000 is qua the payee, Mr. T is
required to deduct tax in accordance with the provisions of section
194-IB.  It appears that the limit of Rs.
50,000 per month or part of a month is not qua the property, but qua
the aggregate of all the rents which an individual or a HUF may pay to a payee.
The threshold of Rs. 50,000 per month or part of a month will have to be
examined qua each payee and not qua each property. Therefore, Mr.
T will be required to deduct tax in accordance with the provisions of section
194-IB.

Meaning of `rent’

The section requires deduction of tax from payment of “rent”.  The word “rent” is defined in Explanation to
section 194-IB as follows –

     “Rent means any payment, by whatever
name called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any land or building or both.”

The definition of ‘rent’ is
similar to the definition in section 194-I. Considering the definition of rent,
it is clear that payment for use of any land or building or both constitutes
rent. However, payment for use of furniture will not be covered by this section. 

Whether payment for use of a part of a building is covered?

A  question arises as to whether payment for use
of a part of the building is covered by the tax deduction obligation imposed by
this section?  It is relevant to note
that the legislature has in sections 27, 194IA, 194LA, 194LAA, 269AB
specifically mentioned part of a building. 
However, in the context of section 194-I, CBDT has in Circular number
718, dated 22.08.1995 (for section 194-I) clarified as under:

     “Query No. 5 : Whether section 194-I
is applicable to rent paid for the use of only a part or a portion of any land
or building?

     Answer : Yes, the definition of the
term “any land” or “any building” would include a part or a
portion of such land or building.”

Further, in view of the legal maxim OmneMajuscontinet in
se minus which means “the greater contains the less” Atma Ram
vs. State of Punjab, AIR 1959 SC 519; ICI India Ltd. vs DCIT, (2004) 90 ITD 258
(Kol)] ], it is possible to argue that rent for part of a building would
also be covered by the provisions of this section.

Therefore, it appears that the
payment for use of a part of a building, say a flat or an office in a building
or an industrial gala in an industrial estate would constitute rent and would
be subject to TDS if other conditions of this section are satisfied.

Composite rent

Where rent is a composite amount
comprising of payment for use of land or building or both as also for other
facilities and amenities and the amount for use of land or building is known
separately then tax is required to be deducted only on the payment for use of
land or building or both.  However, if
the amount of payment for use of land or building or both is not known
separately, can one contend that the section will not apply and no deduction need
be made? One really needs to look at the substance of the arrangement – if it
is primarily for use of land or building, then provisions of section 194-IB
would apply. It is relevant to note that in the context of section 194-I, CBDT,
vide Circular No. 715 dated 8.8.1995, has clarified that tax would be
deductible on the entire amount.  The
relevant portion of the said Circular reads as follows -.

     “Question 24: Whether in a case
of a composite arrangement for user of premises and provision of manpower for
which consideration is paid as a specified percentage of turnover, section
194-I of the Act would be attracted ?

     Answer If the composite arrangement
is in essence the agreement for taking premises on rent, the tax will be
deducted u/s. 194-I from payments thereof.”

Payment to hotel 

A question arises as to
whether payment to a hotel for rooms hired would be covered by the provisions
of this section.  In the context of
section 194-I, the CBDT vide Circular No. 715, dated, 8-8-1995 clarified
that payments made by persons for hotel accommodation taken on regular basis
will be in the nature of rent subject to TDS u/s.194-I (see question 20 of the
Circular).The CBDT further clarified the above, vide Circular No. 5,
dated 30-7-2002 which reads as under:

     “Furthermore,
for purposes of section 194-I, the meaning of ‘rent’ has also been considered.
“‘Rent’ means any payment, by whatever name called, under any lease . . .
or any other agreement or arrangement for the use of any land. . .”
[Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its
ambit and scope. For this reason, payment made to hotels for hotel
accommodation, whether in the nature of lease or licence agreements are
covered, so long as such accommodation has been taken on ‘regular basis’. Where
earmarked rooms are let out for a specified rate and specified period, they
would be construed to be accommodation made available on ‘regular basis’.
Similar would be the case, where a room or set of rooms are not earmarked, but
the hotel has a legal obligation to provide such types of rooms during the
currency of the agreement.”

Further, Andhra Pradesh High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709] held that amount paid to the hotels
for use and occupation of hotel rooms squarely falls within the meaning of
rent.

In view of the above, it appears
that if payment is made to the hotels on a regular basis, it will constitute
rent.  However, for payment to hotels for
occasional use see the discussion hereafter.

Lease premium  

For the following reasons, payment of lease premium would not
require deduction of tax at source under this section –

i)   Lease premium is a capital receipt;

ii)  In the context of section. 194-I, courts have,
considering the facts of the case, held that payment of lease premium does not
require deduction of tax at source. Reference may be made to the following
decisions –

(a) Rajesh Projects (India) (P.) Ltd. vs. CIT
[2017] 78 taxmann.com 263 (Delhi)

(b) ITO vs. Navi Mumbai SEZ Pvt. Ltd. [2013]
38 taxmann.com 218 (Mum. – Trib.)

(c) Earnest Towers (P.) Ltd. [2015] 155 ITD
372 (Kol. – Trib.)

(d) ITO vs. Wadhwa& Associates Realtors (P.)
Ltd. [2013] 36 taxmann.com 526 (Mum. – Trib.)

iii)  The CBDT vide Circular No. 35, dated
13-10-2016 has also clarified that TDS under section 194-I is not
required in case of lump sum lease payment or one time upfront lease payment.

License fee paid under a leave and license agreement for use
of a flat/office/industrial gala

 A question arises as
to whether the payment for use of land or building or both made under a leave
and license agreement will qualify as `rent’. 
The definition of rent interaliacovers payment by whatever name called
under “any other agreement or arrangement for the use of land or building or
both”. 

The expression “any other agreement or arrangement” is not
defined in the section. Considering the context in which the expression has been
used, it appears that income-tax would require to be deducted on payment of
rent made under a leave and license agreement.

In
the context of section 194-I, the meaning of the expression “any other
agreement or arrangement” is explained by High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709 (AP)] as under :

     “9. The expressions ‘any payment, by
whatever name called’, and ‘any other agreement or arrangement’ occurring in
the definition of the term ‘rent’ in Explanation to section 194-I have
widest import. According to Black’s Law Dictionary, the word ‘any’ is
often synonymous with either ‘every’ or ‘all’. Its generality may be restricted
by the context in which that word occurs in a statute. The Supreme Court in Lucknow
Development Authority vs. M.K. Gupta AIR 1984 SC 787 dealing with the use
of the word ‘service’, in the context it has been used in the definition of the
term in Clause (o) of section 2 of the Consumer Protection Act, has opined that
the word ‘any’ indicates that it has been used in wider sense extending from
‘one to all’. In G. Narsingh Das Agarwal vs. Union of India [1967] 1 MLJ
197, the Court opined that the word ‘any’ means ‘all’ except where such a wide
construction is limited by the subject-matter and context of the statute. The
Patna High Court in Ashiq Hassan Khan vs. Sub-Divisional Officer, AIR
1965 Pat.446 (DB) and Chandi Prasad vs. Rameshwar Prasad Agarwal AIR
1967 Pat. 41 has held that the word ‘any’ excludes ‘limitation or
qualification’. In State of Kerala vs. Shaju[1985] Ker. LJ 33, the Court
held that the word ‘any’ is expressive. It indicates in the context ‘one or
another’ or ‘one or more’, ‘all or every’, ‘in the given category’; it has no
reference to any particular or definite individual, but to a positive but
undetermined number in that category without restriction or limitation of
choice. Thus, having regard to the context in which the expressions ‘any
payment’ and “any other agreement or arrangement” occurring in the
definition of the term “rent” (have been used) it only means each and
every payment (that has been) made to the petitioner-hotel under each and every
agreement or arrangement with the customers for the use and occupation of the hotel rooms.”

Warehousing charges  

In the context of section 194-I, the CBDT vide
Circular No. 718, dated 22-8-1995 clarified that TDS is required to be deducted
on warehousing charges. The relevant para of the said Circular reads as under:

    ” Query No. 3 : Whether the tax
is to be deducted at source from warehousing charges ?

     Answer : The term ‘rent’ as defined
in Explanation (i) below section 194-I means any payment by whatever name
called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any building or land. Therefore, the warehousing
charges will be subject to deduction of tax u/s.194-I.”

Is the section applicable to occasional renting?

 A question arises as to whether tax deduction
obligation under this section arises even in a case where an individual takes
on rent say a land or building occasionally for a period of one day/few days,
say for a wedding in the family and the amount of rent exceeds Rs. 50,000 for a
day, or where a person stays in a hotel for a few days and the aggregate room
rent exceeds Rs. 50,000.  Considering the
language of the section, it appears that the section envisages letting for a
continuous period, e.g., s/s.(2) requires deduction at the time of credit of
rent for the last month of the previous year or last month of tenancy. Similar
is the language in s/s.(4) which deals with the amount of tax to be deducted in
a case where provisions of s. 206AA are applicable. Also, if one looks at the
particulars to be filled in Statement-cum-Challan in Form No. 26QC through
which tax deducted has to be paid to the credit of Central Government one finds
that it requires details of “Period of tenancy” and the notes in the said Form
26QC state that Period of tenancy will be the period (i.e. months) for which
tenant is paying the rent.  Also, “Total
value of rent payable” is required to be mentioned. It is stated that Total
value of rent payable is equal to number of months for which rent is payable
multiplied by value of rent per month. These particulars and notes could be
indicative of the position that the section does not contemplate deduction of
rent in respect of occasional letting. 
However, the matter is not free from doubt and it can also be argued
that a day is also a part of a month and if the amount of rent for the period
the land or building is taken on rent is more than Rs. 50,000 the tax deduction
obligation under this section is triggered if the payer is covered by this
section.  In view of the penal
consequences which arise due to non-deduction, a safer view would be to deduct
tax even in such cases.  Though, in a
case where one has for some reason failed to deduct tax in some genuine case
one may be able to contend that the section requires letting for some
continuous period.

Rate at which tax is required to be deducted

Tax is required to be deducted @
5%. 

Rate at which tax is required to be deducted where payee does
not have PAN

In
a case where payee does not have PAN, section 206AA requires the deductor to
deduct tax at highest of the three rates mentioned in section 206AA. Therefore,
in a case where the payee does not have PAN, by virtue of provisions of section
206AA, deduction of tax could be @ 20%. However, sub-section (4) of section
194-IB clearly states that in a case where provisions of section 206AA apply,
deduction shall not exceed the amount of rent payable for the last month of the
previous year or the last month  of the
tenancy, as the case may be. To illustrate, if rent has been paid @ Rs.60,000
per month from 1.6.2017 to a person who does not have PAN, the amount of tax
required to be deducted at source would be Rs. 1,20,000  [20% of rent paid i.e. 20% (Rs. 60,000 x
10)].  However, by virtue of s/s. (4),
the deduction shall not exceed the amount of rent payable for last month of the
previous year. Therefore, deduction in this case will be restricted to Rs.
60,000.

Payment of rent by deducting tax at a rate lower than 5% or
without deduction of tax at source 

Section
197 which enables an assessee to obtain from the AO a certificate authorising
the payer to deduct tax at a lower rate has not been amended to incorporate a
reference to this section.  Therefore, an
assessee will not be able to obtain a certificate from the AO authorising the
payer to deduct tax at a rate lower than the one mentioned in section 194-IB
i.e. 5%.  Also, the payee may be having
brought forward losses or may not be liable to pay tax on the income by way of
rent being received by him since his total income may be likely to be less than
the maximum amount chargeable to tax. 
However, since the provisions of section 197A have not been amended, the
payee will not be able to issue a declaration in Form No. 15G / 15H authorising
the payer to deduct tax at a lower rate.

Does section require deduction of tax only once during the
previous year?

While it appears that the section requires deduction of tax only once
during the previous year, it may not necessarily be so in all cases. As has
been mentioned above, deduction is at the time of credit of rent of the last
month of the previous year or rent of the last month of tenancy, as the case
may be, to the account of the payee or at the time of payment thereof whichever
is earlier.  To illustrate, in a case
where an individual, living throughout the financial year 2017-18 in a rented
flat changes the flat rented by him (assuming rent is more than Rs. 50,000 per
month) say on September 30, 2017 and also on December 31, 2017, he will be
required to deduct tax thrice during the financial year 2017-18 on September
30, 2017 and December 31, 2017 (being last month of tenancy) and on March 31,
2018 (being last month of the previous year) assuming of course, that he has
credited rent to the account of the payee or has paid the rent on these dates
or thereafter.

If the rent for last month
of the previous year or last month of tenancy is not credited by the payer to
the account of the payee, the tax deduction obligation will arise at the time
of payment of such rent. In such a case, if the two dates fall in different
financial years, there will be difficulty on account of mismatch of TDS as
well.  To illustrate if assuming that in
the illustration referred to in the above para, if the individual assessee did
not credit rent to the account of any of the 3 landlords but paid rent to all 3
landlords on June 30, 2018, he will be required to deduct tax at the time of
payment i.e. on June 30, 2018 and therefore the credit for TDS will be
reflected in Form 26AS of the landlords in the AY 2019-20 whereas they may be
required to offer rental income for taxation in AY 2018-19.

Is the deductor required to obtain TAN?

Sub-section
(3) of section 194-IB clearly provides that the provisions of section 203A
shall not apply to a person required to deduct tax in accordance with
provisions of section194-IB. Therefore, an individual or a HUF deducting tax in
accordance with section194-IB is not required to obtain TAN. 

Time of payment of tax deducted to the credit of Central
Government

Rule 30(2B) requires that the tax
deducted shall be paid within 30 days from the end of the month in which
deduction is made.  The payment shall be
accompanied by a Challan-cum-statement in Form 26QC. This procedure is similar
to the procedure as that for tax deducted at source on payments for purchase of
an immovable property  u/s. 194-IA.

Certificate of deduction 

The payer of rent is
required to furnish to the payee a certificate of deduction of tax at source in
Form No. 16C within a period of 15 days form the due date for furnishing the
challan-cum-statement in Form 26QC.  The
certificate is to be generated and downloaded from the web portal specified by
the Principal Director General of Income-tax (Systems) or the Director General
of Income-tax (Systems) or the person authorised by him.

Payer to have PAN

Payment of tax at source
can be made only if the payer has PAN. Therefore, persons deducting tax at
source under this section, will have to obtain PAN, though they may otherwise
not be required to do so.

Rent for the period prior
to 1.6.2017 

Section 194-IB has been
inserted with effect from 1.6.2017. Therefore, in a case where the time of
deduction was before 1.6.2017, the provisions of this section will not apply.
However, if the time of deduction is on or after 1.6.2017, then the provisions
of this section will apply, and tax will have to be deducted at source even
though the rent pertains to a period prior to 1.6.2017. To illustrate, if rent
for April 2017 and May 2017 was paid prior to 1.6.2017, then tax is not required
to be deducted at source under this section, but if the rent for the month of
May 2017 is paid on 10th June, 2017, then tax will be required to be
deducted at source under this section (ofcourse, if all the other conditions
are satisfied).  Also, if an individual
has not paid rent for financial year 2016-17 but pays it after 1.6.2017, then
tax will be required to be deducted at source in accordance with the provisions
of this section.

Consequences of non-deduction

In a case where an individual of a HUF, required to deduct
tax in accordance with the provisions of s. 194-IB fails to do so or having
deducted the amount fails to pay the whole or part of the tax, such individual
or HUF will be deemed to be an assessee-in-default u/s. 201 of the Act.  This shall be in addition to his obligation
to pay interest/penalty under other provisions of the Act.

Conclusion

Salaried employees paying
rent whether or not claiming exemption u/s.10(13A); individuals/HUFs paying
rent on occasional basis such as individuals going for a vacation and paying
rent for a bungalow/group of bungalows, rent for ground taken on occasion of
marriage in the family, etc.; small businessmen who are not covered by
tax audit, etc. would be required to consider the applicability of the
provisions of this section.

Tax Issues in Computation of Taxable Income for Companies Adopting Ind-AS

The Challenge:

Tax Practioners would need to have knowledge of both
standards i.e. Indian Accounting Standards (Ind-AS) and Income Computation and
Disclosure Standards (ICDS) to assist the companies adopting Ind-AS in
finalising their tax returns

One
of the challenges that tax practitioners will face while finalising tax returns
for assessment year (AY) 2017-18, is in computation of the taxable income of
companies, which have adopted Ind-AS for the first time in the financial year
(FY) 2016-17.  It is normally the profits
as per the profit and loss account which is the starting point for computation
of taxable income. So far, only adjustments required to be made under the
Income-tax Act (the Act) were being made to the computation of taxable income.
However, with the advent of Ind-AS and the corresponding introduction of ICDS,
which is also applicable for the first time from AY 2017-18, a significant
number of adjustments would have to be made to the profit as per the profit and
loss account, to arrive at the taxable income. This requires a proper
understanding not only of ICDS, but also of the differences between accounts
prepared under Ind-AS and those prepared under the earlier accounting standards
(existing AS).

In this article, an attempt has
been made to analyse and list out some significant adjustments which are likely
to be made to the profit and loss account, to arrive at the taxable income of
the companies’ whose accounts are prepared adopting Ind-AS.

Indian Accounting Standards (Ind-AS)

The MCA had notified
IFRS-converged Ind-AS as Companies (Indian Accounting Standards) Rules, 2015
vide Notification dated 16th February 2015. The said Notification
also laid down the roadmap for the applicability of Ind-AS for certain class of
companies as under:

Roadmap for implementation of Ind-AS

Sr. No.

Companies covered

Voluntary
phase

Under Phase I, any company had the
option to adopt Ind-AS on voluntary basis for FY 2015-16.

Mandatory
phase 1

Adoption
of Ind-AS is mandatory for the FY 2016-17 for:

(a) Companies
listed/in process of listing on Stock Exchanges in India or Outside India
having net worth > INR 500 crores,

(b) Unlisted
Companies having net worth > INR 500 crore, and

(c)   Parent,
Subsidiary, Associate and JV of companies listed at (a) and (b).

Mandatory
phase 2

Ind-AS
from FY 2017-18 would be mandatory for:

(a) Companies
which are listed/or in process of listing inside or outside India on Stock
Exchanges not covered in Phase I (other than companies listed on SME
Exchanges),

(b) Unlisted
companies having net worth INR 500 crore> INR 250 crore, and

(c)   Parent,
Subsidiary, Associate and JV of companies listed at (a) and (b).

Mandatory
phase 3

Banks
and NBFCs would be required to adopt Ind-AS from FY 2018-19. Insurance
companies would be required to adopt
Ind-AS from FY 2020-21.

All companies adopting
Ind-AS are required to present comparative information for earlier FY, as per Ind-AS. Accordingly, they will have to apply Ind-AS for preparation of
standalone as well as consolidated Balance sheet and consolidated Statement of
Profit and Loss for FY 2015-16. Once Ind-AS is applicable to the entity for one
year, it has to be mandatorily followed for all subsequent FYs.

Companies listed on SME exchange are not required to apply
Ind-AS. Companies not covered by the above roadmap shall continue to apply
existing Accounting Standards notified in Companies (Accounting Standards)
Rules, 2006 issued by the ICAI as revised vide notification dated 30th March
2016 (“existing AS”).

Income Computation and Disclosure Standards (ICDS)

The Central Government vide Notification No. SO 892(E) dated
31st March 2015 notified 10 ICDS. These ICDS were applicable from FY
2015-16 (AY 2016-17). Subsequent to notification of the ICDS, a number of
representations were received for postponement/cancellation of ICDS. The
implementation of ICDS was kept on hold by the CBDT in July 2016.

In September 2016, the CBDT rescinded the earlier notified
ICDS, and notified revised ICDS (I to X) applicable from FY 2016-17 (AY
2017-18).

Adjustments required to the Profit as per Statement of Profit
& Loss for Companies adopting Ind-AS

1. Revenue recognition from sale
of goods on deferred payment basis

Revenue recognition as 
per Ind-As

As per Ind-AS 18 which deals with Revenue recognition,
revenue shall be measured at the fair value of
the consideration received or receivable. Paragraph 11 of Ind-AS 18 provides as
under:

“11. In most cases, the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents
received or receivable. However, when the inflow of cash or cash equivalents is
deferred, the fair value of the consideration may be less than the nominal
amount of cash received or receivable. For example, an entity may provide
interest-free credit to the buyer or accept a note receivable bearing a
below-market interest rate from the buyer as consideration for the sale of
goods. When the arrangement effectively constitutes a financing transaction,
the fair value of the consideration is determined by discounting all future
receipts using an imputed rate of interest. The imputed rate of interest is the
more clearly determinable of either:

(a)    the prevailing rate
for a similar instrument of an issuer with a similar credit rating; or

(b)    a rate of
interest that discounts the nominal amount of the instrument to the current
cash sales price of the goods or services.”

In such arrangements of deferred receipt of consideration,
the fair value of the consideration is measured by discounting all future
receivables using an imputed rate of interest i.e. a rate of interest that
discounts the nominal amount of the instrument to the current cash sales price
of the goods or services.

The difference between the
fair value and the nominal amount of the consideration would be considered as
interest. Such interest would be recognised as revenue using the effective
interest rate (EIR) method as per Ind-AS 109. EIR is a method of calculating
the amortised cost of a financial asset or a financial liability and allocating the interest income or interest expense
over the relevant period.

Revenue
recognition as per ICDS

As per ICDS IV which deals with basis
of revenue recognition, the revenue from sale of goods is to be recognised when
the seller of goods has transferred to the buyer the property in the goods for
a price or all significant risks and rewards of ownership have been transferred
to the buyer and the seller retains no effective control of the goods
transferred to a degree usually associated with ownership.

As per ICDS IV, the term “Revenue” has been defined to mean
gross inflow of cash, receivables or other consideration arising in the course
of the ordinary activities of a person from the sale of goods.

Difference
between Ind-AS and ICDS

There is a significant difference in the basis of revenue
recognition as per Ind-AS 18 and ICDS IV in respect of sale of goods on
deferred payment basis. As per Ind-AS 18, the seller has to bifurcate the total
sales into fair value of consideration and interest. Fair value of
consideration would be recognised as revenue straightaway in the year of sale,
whereas interest income would have to be recognised as revenue over the
relevant credit period.

The concept of bifurcation of sale consideration in respect
of sale of goods on deferred payment basis is not present in ICDS. As per ICDS,
entire income from sale of goods will be recognised as revenue in the year of
sale, without any bifurcation of total sales consideration into fair value of
consideration and interest.

An Example

An example would explain the above
difference between the treatment under Ind-AS 18 and ICDS IV. A company which
has adopted Ind-AS has sold goods for Rs. 22 lakh on 1st March 2017
to a customer with 10 months credit period. The same goods are sold to other
customers on cash basis at Rs. 20 lakh. Accordingly, as per Ind-AS 18, the
company would have to recognise revenue from sale of goods at Rs. 20 lakh. Rs.
2 lakh would be considered as interest, which would be recognised as revenue in
terms of Ind-AS 109.

Accordingly, a credit
period of 10 months starts from 1 March 2017, Rs. 20,000, being 1/10th of interest
of Rs. 2,00,000, would be recognised as revenue in the FY 2016-17. Balance
interest of Rs. 1,80,000 would be recognized as revenue in the FY 2017-18.
Hence, what would be recognized as revenue in the FY 2016-17 would be Rs. 20
lakh of sales and Rs. 20,000 of interest. Rs. 1,80,000 of interest would be
recognized as revenue in the FY 2017-18. However, as per ICDS IV, entire sale
consideration of Rs. 22 lakh would be recognised as revenue in FY 2016-17.

Impact of
the above differences

CBDT vide Notification No. 10/2017
dated 23 March 2017, in response to question no. 5 has clarified that “ICDS
shall apply for computation of taxable income under the head ” Profit and gains
of business or profession” or “Income from other sources” under the Income Tax Act.
This is irrespective of the accounting
standards adopted by companies i.e. either Accounting Standards or Ind-AS.”

In view of the above
clarification of the CBDT, the company would have to recognise entire sale
consideration of Rs. 22 lakh as revenue in its computation of income for AY
2017-18, even though what has been recognized as revenue in Ind-AS compliant
financials is only Rs. 20.02 lakh.

The company, while preparing computation of taxable income
would have to give effect to such differences which arise as per Ind-AS as well
as the Act/ ICDS. The company would also have to maintain details of such
income streams which gets recognised as revenue in different FYs on account of
different basis of revenue recognition as per Ind-AS and ICDS.

2.    Revenue recognition from composite/bundles transactions

Impact
Revenue Recognition as per Ind-AS

As per paragraph 13 of
Ind-AS 18, the revenue recognition criteria are usually required to be applied
separately for each transaction. However, where the transaction is a composite/
bundled transaction, the revenue recognition criteria has to be applied
separately for each identifiable component of a single transaction, in order to
reflect the substance of the transaction. As per the example given in Ind-AS
18, when the selling price of a product includes an identifiable amount for
subsequent servicing, that amount relatable to subsequent servicing is deferred
and recognised as revenue over the period during which the service would be
performed.

As per paragraph 19 of
Ind-AS 18, “revenue and expenses that relate to the same transaction or
other event are to be recognised simultaneously, as the matching concept of
revenues and expenses. As per the example given in Ind-AS 18, all expenses
including future warranties and other costs to be incurred after the shipment
of the goods, can normally be measured reliably. Such expenses which are to be
incurred in future, directly relatable to sale of goods should be recognised as
expenses in the year of sale, when the other conditions for the recognition of
revenue are satisfied. However, when the expenses to be incurred in future
cannot be measured reliably, any consideration already received for the sale of
the goods should be recognised as a liability”.

Accordingly, where sale of goods comprises of composite/
bundled transaction, the company would have to identify each individual
transaction forming part of composite/ bundled transaction. The company would
have to apply revenue recognition criteria to each transaction. Any expenses to
be incurred on such composite/ bundled transaction have to be measured reliably
and provided for as a liability. Where such expenses to be incurred cannot be
measured reliably, any consideration already received for the sale of the goods
has to be recognised as a liability.

Revenue recognition as per ICDS

As per ICDS IV, there is no provision for splitting up of the
sale consideration in respect of a composite/bundled transaction. The revenue
would be the gross inflow arising from sale of goods, and shall be recognised
when the seller of goods has transferred to the buyer, the property in the
goods for a price or all significant risks and rewards of ownership have been
transferred to the buyer and the seller retains no effective control over the
goods transferred. Therefore, where no separate charge is levied for the
servicing, the entire sales proceeds would be treated as revenue from the sale
of goods.

As per ICDS X, a present obligation arising from past events,
the settlement of which is expected to result in an outflow from the person of
resources embodying economic benefits should be provided for as a liability.
Therefore, a provision for warranty expenses to be incurred on sales effected,
made on a scientific or actuarial basis, would be allowable as a deduction
[which is also in accordance with the Supreme Court decision in the case of Rotork
Controls India (P) Ltd vs. CIT (2009) 314 ITR 62(SC)].

Difference between  Ind-AS and ICDS

Ind-AS, in respect of transaction involving composite/
bundled transactions requires the revenue recognition criteria to be applied
separately for each identifiable component of a single transaction. Revenue and
expenses relating to the same transaction or other event should be recognised simultaneously.
Where such expenses to be incurred in future cannot be measured reliably, any
consideration already received for the sale of the goods should be recognised
as a liability.

ICDS IV however does not give any
guiding principles on bifurcation of consideration for each identifiable
component of a single transaction, forming part of composite/ bundled
transaction. ICDS IV does not allow treatment of consideration already received
for the sale of goods as a liability, where expenses to be incurred cannot be
measured reliably.

An example

An
example on the above would explain the difference between the Ind-AS 18 and
ICDS IV. A company which has adopted Ind-AS, is in the business of
manufacturing and sale of cars. It sold a car to a customer at Rs. 5 lakh on 1st
January 2017. The sale of car also includes free after sale service for a
period of 2 years and free warranty for 1 year. The standard price of after
sale service for 2 years, included in sale price of Rs. 5 lakh, would be Rs.
50,000.

As per Ind-AS 18, the company would have to separately
identify each component of single transaction of sale of car i.e. it has to
bifurcate composite/ bundled transaction of sale of car into separate
identifiable transaction viz. sale of car, rendering of after sale services and
providing warranty.

Accordingly, Rs. 4,50,000 (i.e. sale consideration of Rs. 5
lakh less Rs. 50,000 towards 2 years after sale services) would be recognised
as revenue in the FY 2016-17. Revenue recognition in respect of after sales services
of Rs. 50,000 has to be spread over the 2 years period. Rs. 6,250 for January
to March 2017 has to be recognized as revenue in the FY 2016-17 and balance Rs.
43,750 would be recognised as revenue in the FY 2017-18 and FY 2018-19.

The company would have to estimate the expenditure it would
incur in future over the free warranty, which can be recognised as expenses,
based on principle of matching concept in the year of sale of car. If it is not
in a position to estimate expenses to be incurred as per Ind-AS 18, sale
consideration relatable to free warranty should be recognised as liability in
FY 2016-17 and should be recognised as revenue in subsequent years.

ICDS IV, however is silent on bifurcation of consideration
for each identifiable component of a single transaction, forming part of
composite/ bundled transaction. Further, ICDS does not allow treatment of
consideration already received for the sale of goods as liability, where
expenses to be incurred in future cannot be measured reliably.

Impact of the above differences

Taxation of after-sales
services

In view of the fact that ICDS
does not give any guiding principles on bifurcation of each identifiable
component of composite/bundled transaction, the company may not be able to
bifurcate the consideration of Rs. 50,000 for after sale services of 2 years from
the sales price of cars. Therefore, the gross sales price may have to be
considered as revenue in the year of sale. The question arises whether the
company can claim deduction for the estimated future expenditure that it may
incur on after sales service.

Based on the provisions of
paragraph 5 of ICDS X, if such expenditure is estimated on a scientific basis,
such future liability may be recognised as a provision under the ICDS, which is
a liability. This is on account of the fact that there is a present obligation
as a result of a past event, it is reasonably certain that an outflow of
resources embodying economic benefits will be required to settle the
obligation, and a reliable estimate can be made of the amount of obligation.
Therefore, one can take a view that the estimated liability for after sales
service is an allowable deduction u/s. 37 read with ICDS X.

Warranty expenses

It is a common practice for car manufacturers to make
provision for warranty expenses in the books, based on past experience,
historical data of actual warranty expenses incurred or some ad-hoc estimate
and claim deduction thereof u/s. 37 of the Act.

The issue on allowability
of warranty provision has been settled by the Supreme Court. The Supreme Court
in the case of Rotork Controls vs. CIT (314 ITR 62) (SC) has allowed the
assessee’s claim for deduction of warranty provision as expense on the ground
that “warranty became integral part of the sale price of the product and a
reliable estimate of the expenditure towards such warranty was allowable.”
In this case, the Supreme Court held that all the conditions for recognising a
liability were fulfilled – arising out of obligating events, involving outflow
of resources and involving reliable estimation of obligation.

However, in the tax return, where the company is not in a
position to estimate expenditure to be incurred on warranty on some
scientific/reliable basis, it would not be in a position to postpone revenue
recognition from the sale consideration of car. Such treatment is permitted as
per Ind-AS, but has no specific permission in ICDS. However, where such
warranty provision is made on a scientific basis, under paragraph 5 of ICDS X,
the liability for warranty would be regarded as a provision, which is defined
as a liability which can be measured only by using a substantial degree of
estimation, and would therefore be an allowable deduction.

The company would have to maintain details of such different
basis of revenue recognition as per Ind-AS and ICDS i.e. after sales services
in the above example, to arrive at correct taxable income.

3.    Revenue
recognition in case of rendering of services

Revenue recognition as per Ind-AS

As per Ind-AS 18, the recognition of revenue from rendering
of services is measured by reference to the stage of completion of a
transaction i.e. the percentage of completion method. Under this method,
revenue is recognised in the accounting periods in which the services are
rendered. As per paragraph 20 of Ind-AS 18, “percentage of completion method has
to be followed where the outcome of a transaction can be measured reliably.
Such reliable measurement of outcome requires fulfilment of the following
conditions:

(a) the amount of revenue can be measured reliably;

(b) it is
probable that the economic benefits associated with the transaction will flow
to the entity;

(c) the
stage of completion of the transaction at the end of the reporting period can
be measured reliably; and

(d) the
costs incurred for the transaction and the costs to complete the transaction
can be measured reliably”.

As per paragraph 26 of Ind-AS 18, “when the outcome of the
transaction involving the rendering of services cannot be estimated reliably,
revenue shall be recognised only to the extent of the expenses incurred and are
recoverable”.

As per paragraph 27 of this Ind-AS, “where execution of
the transaction has just started or has only reached preliminary stage
(referred to as early stage of a transaction), it may not be possible to
estimate outcome of the transaction involving the rendering of services. In
such situation, it is permissible for the entity to recognise revenue only to
the extent of costs incurred that are expected to be recoverable”.

Paragraph 28 states “when the outcome of a transaction
cannot be estimated reliably and it is not probable that the costs incurred
will be recovered, revenue is not recognised and the costs incurred are
recognised as an expense”.

Revenue recognition as per ICDS

As per ICDS IV dealing with
Revenue Recognition, revenue from service transactions shall be recognised by
the percentage of completion method. It is expressly provided that ICDS III on
Construction contracts shall apply to the recognition of revenue and associated
expenses, for a service transaction. In view of the express applicability of
ICDS III to a service transaction, where service transactions are at an early
stage, it would be possible for the entity to recognise revenue only to the
extent of the expenses incurred (as under Ind AS). However, ICDS IV provides
that the early stage of a contract cannot extend beyond 25% of the stage of
completion. Therefore, under ICDS IV, recognition of revenue by percentage of
completion method is compulsory beyond 25% of the stage of completion.

When services are provided by an indeterminate number of acts
over a specific period of time, revenue may be recognised on a straight line
basis over the specific period.

ICDS, however provides a
concession to certain service contracts with duration of less than 90 days. In
respect of such service contracts with duration less than 90 days, the assessee
has an option to treat revenue from such contracts to be recognised when the
rendering of services under that contract is completed or substantially
completed.

Difference between the Ind-AS
and ICDS

Ind-AS as well as ICDS requires recognition of revenue from
rendering of services as per the percentage of completion method for all
services. Under Ind-AS, percentage of completion method is to be adopted only
once reliable measurement of outcome is possible, which is possible only when
revenues and expenses can be measured reliably, and stage of percentage of
completion can also be measured reliably. There is no specific stage specified
in the Ind-AS from when the percentage of completion method becomes applicable,
but it would depend upon the conditions being satisfied in each case. However,
under ICDS IV, percentage of completion method would have to be followed once
the 25% stage of completion is reached, irrespective of whether the outcome can
be measured reliably.

Similarly, under Ind-AS, it is possible that when the outcome
of a transaction cannot be estimated reliably and it is not probable that the
costs incurred will be recovered, revenue is not recognised and the costs
incurred are recognised as an expense, resulting in a loss. However, under ICDS
IV read with ICDS III, if 25% threshold has been crossed, only the
proportionate loss based on the percentage of completion can be recognised.
ICDS is silent as to what happens in the early stages when outcome cannot be
reliably measures and the costs will not be recovered.

Further, ICDS additionally
grants an option to the assessee to recognize revenue from the contract with
project duration less than 90 days only on completion of contract or when it is
substantially completed. There is no such provision in Ind-AS 18.

An example

An example on the above would explain the difference between
Ind-AS 18 and ICDS IV. The company is engaged in the logistic business, whereby
it arranges inbound/ outbound transportation of goods. The company has huge
volume of transactions. In all cases of inbound/outbound transportation of
goods, the completion of transport of goods does not take more than 90 days period.

As on the last day of reporting period, the said company has
various pending logistic contracts, which have not reached 100% completion. The
company accordingly has to measure contract revenue from such contracts in
progress, only to the extent of percentage of logistics work complete. The said
estimation requires information of percentage of logistics work completed for
all contracts in progress, and the shipments in many of the contracts may be
mid-road/mid-sea/mid-air on the last day of the reporting period.

For Ind-AS purposes, the
company has to work out revenue from rendering of services by following
percentage of completion method, where the outcome of the contract (including
the stage of completion) can be reliably measured. Accordingly, it would have
to work out the percentage of contract completed for each contract in progress,
and the proportionate revenue and expenditure of each contract in progress, as
on the last day of the reporting period, where the outcome (including stage of
completion) can be reliably measured. However, as per ICDS, while filing the
tax return, the company can opt to offer the entire income from logistics
contracts only on completion of the entire work.

In many cases of logistics contracts, it may not be possible to
reasonably estimate the stage of completion. In that situation, under Ind AS,
the revenue from the contract would be recognised only to the extent of costs
incurred, and the profit would effectively be accounted for on completion of
the contract, as is the case under ICDS.

Impact of the above differences

The company, for commercial
reasons, may want to offer income from logistics contracts, with duration less
than 90 days, to income tax by following ICDS, only on completion of the
contract, where completion of services falls in a different FY. Such a company
would have the option to recognise revenue from contracts with duration of less
than 90 days, only on completion of the
contract. This would be irrespective of the fact that as per Ind-AS, it has recognised contract revenue by reference to the stage of
completion of the contract activity, at the reporting date. In normal
circumstances, where any contract commences as well as is completed in the same
year, revenue recognition as per Ind-AS 18 and ICDS IV would be the same.
However, where any contract with duration of less than 90 days commences and is
completed in a different FY, the company would have to maintain detailed
records, both for Ind-AS purposes as well as ICDS, where it opts for
recognising income on completion basis.

4.    Revenue recognition
in case of Construction contracts

Revenue recognition as per Ind-AS

As per Ind-AS 11
‘Construction Contracts’, the recognition of revenue and expenses is required
to be made by reference to the stage of completion of a contract i.e.
percentage of completion method. Under this method, contract revenue is matched
with the contract costs incurred in reaching the stage of completion, resulting
in the reporting of revenue, expenses and profit which can be attributed to the
proportion of work completed.

As per paragraph 32 of Ind-AS 11, when the outcome of a
construction contract cannot be estimated reliably (a) revenue shall be
recognised only to the extent of contract costs incurred that probably will be
recoverable, and (b) contract costs shall be recognised as an expense in the
period in which they are incurred.

Paragraph 33 of Ind-AS 11 explains a situation, where it
would be necessary for the entity to recognise contract revenue only to the
extent of contract costs. As per the said paragraph, “where the Construction
contract is at the early stages of a contract, it is often the case that the
outcome of the contract cannot be estimated reliably. In such a situation,
contract revenue can be recognized only to the extent of contract costs
incurred that are expected to be recoverable”. Ind-AS 11 also requires
recognition of expected loss, when it is probable that total contract costs
will exceed total contract revenue. This amount of expected loss is allowed to
be recognised as an expense immediately, irrespective of whether work has
commenced on the contract and the stage of completion of contract activity.

Revenue recognition as per ICDS

As per ICDS III dealing with Construction contracts, contract
revenue and contract costs associated with the construction contract should be
recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity, at the reporting date.

The said ICDS however gives concessional treatment to
contracts in the early stage of execution i.e. contracts which have not
completed a percentage of up to 25% of the total construction. During the early
stages of a contract, where the outcome of the contract cannot be estimated
reliably, contract revenue can be recognized only to the extent of costs incurred.

Difference between the Ind-AS
and ICDS

Ind-AS 11 as well as ICDS III, both permit recognition of
revenue only to the extent of expenses incurred, where the project is at an
early stage of execution and outcome cannot be estimated reliably. Ind-AS
however does not give any specific percentage of the construction activity to
be completed for the construction project to be categorised as ‘early stage of
execution’. Accordingly, for the construction activity where even 30% of the
total construction has been completed, revenue may be recognized only to the
extent of cost incurred, if based on the facts of the particular construction
contract it is established that the outcome cannot be estimated reliably.

The Institute of Chartered Accountants of India (ICAI) has
issued ‘The Guidance Note on Accounting of Real Estate Transactions (revised
2016)’ (GN) which is applicable to entities to which Ind-AS is applicable. As
per the said GN, a reasonable level of development is not achieved if the
expenditure incurred on construction and development costs is less than 25% of
the construction and development costs. As per the GN, a reasonable level of
development is measured with reference to ‘construction and development cost’
and excludes ‘Cost of land and cost of development rights’ as well as
‘Borrowing cost’. Though the GN applies only to real estate transactions and
not to construction contracts, it may be possible to apply this level of 25%
for construction contracts.

ICDS III, however expressly provides that the early stage of
a contract shall not extend beyond 25% of the stage of completion.

Further, Ind-AS requires a company to recognize the entire
expected loss, when total contract costs is likely to exceed total contract
revenue. However, ICDS does not specifically provide for recognition of
expected loss. The expected loss can be recognised only on percentage of
completion method, i.e. proportionately.

Impact of the above differences

 The stage of profit
recognition by following percentage of completion method under Ind-AS and ICDS
may differ on account of the differing concepts of early stage of contract
where outcome cannot be reasonably estimated. While, as per accounts, profits
may not be recognized, it is possible that, under ICDS, profits have to be
recognised.

Where such company has recognised the entire loss on the
contract in the profit and loss account on the ground that total contract costs
is likely to exceed total contract revenue, it would not have the benefit of
the entire expected loss as per ICDS. In the tax return, irrespective of that
fact that there would be a loss at the end of the project, it would have to
recogniswe contract revenue (and therefore estimated total loss) by following
the percentage of completion method, at the year-end.

5.    Purchases of goods
on deferred payment terms

Cost of purchase as per Ind-AS
2

As per Ind-AS 2, the cost of inventories shall comprise all
costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Further, where the inventory
is purchased on deferred payment terms, and the purchase price is higher than
the purchase price for such inventory on normal credit terms basis, the
arrangement effectively contains a financing element. In such a situation, the
difference between the actual purchase price and the purchase price of goods
with normal credit terms, is recognized as financing cost.. The said financing
cost has to be charged to the statement of profit and loss, over the period of
the financing.

Cost of purchase as per ICDS
II As per ICDS II which deals with valuation of inventories, the costs of
purchase shall consist of purchase price including duties and taxes, freight
inwards and other expenditure directly attributable to the acquisition.
However, interest and other borrowing costs shall not be included in the cost
of inventories.

Difference between the Ind-AS
and ICDS

There is a difference in the cost of purchase as per Ind-AS 2
and ICDS II. As per Ind-AS 2, where goods are purchased on deferred payment
terms, the difference between the purchase price with normal credit terms and
the amount paid with deferred payment term, is considered as interest expense
and would have to be excluded from the purchase price of goods. However, as per
ICDS II, entire purchase price paid, irrespective of outright purchase price or
purchase on deferred payment terms, is considered as cost of purchase. This
would result in difference in the valuation of stock, as well as timing
difference on account of charge of the financing cost to the Profit & Loss
Account over the finance period in accordance with Ind AS, as against treatment
as purchase as per ICDS.

An example

An example on the above would explain the difference between
the Ind-AS 2 and ICDS II. The company has purchased goods from the seller at
Rs. 75,000 on 1st January 2017 with 12 months credit period. The
same goods could be purchased at Rs. 65,000 with normal credit period of 3
months generally allowed in the Industry. As per Ind-AS 2, difference of Rs.
10,000 would be considered as interest expense, which can be charged to profit
and loss account over the period of financing. Accordingly, interest expense of
Rs. 10,000 beyond normal credit period of up to 31st March 2017,
would be considered as interest expense only in FY 2017-18. Where the company
has purchased such inventory out of borrowed funds, any interest paid would
have to be expensed out to the profit and loss account and would not be
considered as ‘cost of inventory’.

However, as per ICDS II, entire purchase cost of Rs. 75,000,
irrespective of deferred payment terms, would be treated as cost of purchases,
and would be included in the cost of inventory, if the said goods are lying in
stock as on 31st March 2017.

Impact of the above differences

Accordingly, there would be
difference between the cost of purchases as per Ind-AS and ICDS. The company
would have to maintain records of such interest expense arising because of
deferred payment basis and which has been charged to profit and loss account in
subsequent FY. Such interest which has been charged to the profit and loss
account both in current FY as well as in subsequent FY would, under ICDS, have
to be treated as part of purchase cost/ inventory valuation in the current FY.

The company would also have to maintain details of all such
differences which arise because of difference in Ind-AS and ICDS.

6.    Initial cost of
fixed assets purchased on deferred settlement terms

Initial cost of fixed assets as per Ind-AS 16

As per Ind-AS 16, an item of Property, Plant and Equipment
(PPE) that qualifies for recognition as an asset shall be measured at its cost.
The cost of such asset is the cash price
equivalent at the recognition date. If payment is deferred beyond normal
credit terms, difference between the cash price equivalent and the total
payment towards purchase of assets, is recognized as interest over the period
of credit, unless such interest is capitalised in accordance with Ind-AS 23
which deals with borrowing cost. Ind-AS 23 lays down conditions as to when
borrowing cost can be added to the cost of
assets purchased.

Actual cost as per ICDS V

As per ICDS V dealing with tangible fixed assets, the actual
cost of an acquired tangible fixed asset shall comprise of its purchase price,
import duties and other taxes, excluding those subsequently recoverable, and
any directly attributable expenditure on making the asset ready for its
intended use.

Difference between the Ind-AS
and ICDS

There is a material difference in the cost of fixed assets as
per Ind-AS 16 and ICDS V. As per Ind-AS 16, cash price equivalent at the
recognition date would be regarded as initial cost of fixed assets. However, as
per ICDS V, entire purchase price of the fixed assets, irrespective of deferred
payment terms, would be considered as actual cost of fixed assets. Accordingly,
any financing cost arising because of bifurcation of payment towards purchase
of assets into cash price equivalent and the financing element, would have to
be added to written down value of the respective ‘block of assets’ in the year
of purchase, irrespective of its treatment as per Ind-AS.

An example

An example on the above would explain the difference between
the Ind-AS 16 and ICDS V. The company has purchased a machine for Rs. 5,00,000
on 31st March 2017 with 12 months credit period. The said machine
had cash price of Rs. 4,50,000. As per Ind-AS 16, difference of Rs. 50,000
would be considered as finance cost over the period of financing. Accordingly,
Rs. 50,000 would be considered as finance cost in FY 2017-18, as the same
pertains to period after 31st March 2017.

Impact of the above differences

Accordingly, there would be difference between the cost of
PPE as per Ind-AS and ICDS. The company would have to maintain records of such
finance cost arising because of difference between the cash price equivalent
and the total payment towards purchase of PPE. Such cost, which would be
charged to the statement of profit and loss in subsequent FYs, would have to be
added to the cost of the respective ‘block of assets’, in order to comply with
ICDS provisions. The company would be entitled to depreciation on such cost in
the current year itself and would increase its block of assets by the said
amount, even though the same would be charged to the statement of profit and
loss in the next FY.

7.    Interest free loan
to subsidiary or to employee (for long term)

Recognition of
interest free loan given as  per Ind-As 109

Ind-AS 109 requires that financial assets and liabilities
should be recognised on initial recognition at fair value, as adjusted for the
transaction cost. In accordance with Ind-AS 109 ‘Financial Instruments’, in
case the loan is for a period exceeding one year (i.e. long term) the lender
would recognise the loan at its fair value as per the EIR method. Accordingly, interest
free loan exceeding one year given by the parent company to its subsidiary or
by an employer to its employee would be recorded at fair value, which would be
less than the amount of loan given. In spite of the fact that the said loan was
interest free, notional interest on fair value of the loan would be credited as
interest income in the profit and loss.

Recognition of interest free loan given to subsidiary/employee
as per ICDS

Under ICDS, there is no concept of recognition of financial
assets at fair value. There is also no concept of recognition of notional
interest as income in the statement of profit and loss. For income tax
purposes, the said interest free loan given would be recorded at the nominal
amount of the loan. No interest would be regarded as accruing on the loan,
since it is contractually an interest-free loan.

Difference between the Ind-AS
and ICDS

As per Ind-AS, every year the imputed interest income will be
provided in the statement of profit and loss for the year, with the corresponding
debit to the value of loan reflected as an asset. Over the years, loan amount
will finally be reinstated to what would be the repayable amount (the amount
that was received originally). Simultaneously, an appropriate amount will be
transferred from equity to the statement of profit and loss account, which will
have the effect of negating the interest income in the statement of profit and
loss. .

Impact of the above differences

Such notional interest which has been credited to the
statement of profit and loss of the parent company/employer would not be
“income” as per the Act. Accordingly, the same would have to be reduced from
the total income of the parent company/employer to arrive at taxable income.

8.    Borrowing cost

Borrowing cost as per Ind-AS
23

As per Ind-AS 23 dealing with borrowing costs, the borrowing
costs includes interest expense calculated using the effective interest method,
finance charges in respect of finance leases recognised in accordance with
leases and exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

Ind AS 23 defines a qualifying asset as an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale. As per paragraph 7 of Ind-AS 23, the following types of assets may
be qualifying assets: (a) inventories, (b) manufacturing plants, (c) power
generation facilities, (d) intangible assets, (e) investment properties and (f)
bearer plants. Financial assets and inventories that are manufactured or
otherwise produced, over a short period of time are not qualifying assets.
Further, assets that are ready for their intended use or sale when acquired are
not qualifying assets.

As per paragraph 12 of Ind-AS 23, “the amount of borrowing
costs eligible for capitalization is the actual borrowing costs incurred during
the period less any investment income on the
temporary investment of those borrowings.”

Further, as per paragraph 14 of Ind-AS 23, “where the
entity has borrowed funds generally (and not for specific purpose of acquiring
qualifying assets) but used such borrowed funds for acquisition of a qualifying
asset, borrowing costs eligible for capitalisation are to be determined, by
applying a capitalisation rate to the expenditures on that asset”.

As per paragraph 22 of Ind-AS 23, “an entity shall cease
capitalising borrowing costs, when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete”.

Borrowing costs as per ICDS IX read with section 36(1)(iii)

Section 36(1)(iii) provides for deduction of interest in
respect of capital borrowed for the purposes of business. The proviso to
section 36(1)(iii) requires that interest in respect of capital borrowed for
acquisition of an asset from the date of borrowing till the date the asset is
put to use, is not allowable as a deduction.

As per ICDS IX, borrowing costs are interest and other costs
incurred by a person in connection with the borrowing of funds and include (i)
commitment charges on borrowings, (ii) amortised amount of discounts or
premiums relating to borrowings, (iii) amortised  amount 
of  ancillary  costs 
incurred  in  connection 
with  the arrangement of
borrowings and (iv) finance charges in respect of assets acquired under finance
leases or under other similar arrangements.

As per ICDS IX, the term
“Qualifying asset” for the purposes of capitalisation of specific borrowing
costs means: (i) land, building, machinery, plant or furniture, being tangible
assets, (ii) know-how, patents, copyrights, trade-marks, licenses, franchises
or any other business or commercial rights of similar nature, being intangible
assets and (iii) inventories that require a period of twelve months or more to
bring them to a saleable condition.

As per ICDS IX, general borrowing costs are capitalized to
the qualifying assets based on a particular formula. For the purpose of
capitalisation of general borrowing costs, the term “Qualifying Asset” means
any asset which necessarily requires a period of 12 months or more for its
acquisition, construction or production. Further, an entity shall cease
capitalizing borrowing costs, when such asset is first put to use or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Difference between the Ind-AS
and ICDS

A major difference between Ind AS 23 and ICDS IX is in
respect of capitalisation of costs of borrowings taken specifically for
acquisition of an asset. Under ICDS IX read with the proviso to section
36(1)(iii), cost of borrowings taken for acquisition of all fixed assets, up to
the date of put to use, is to be capitalised. However, under Ind AS 23, qualifying
assets, where such borrowing costs are to be capitalised, are only those assets
which necessarily take a substantial period of time to get ready for their
intended use or sale, and not all fixed assets. This requires judgement to be
applied and can be subjective – the period for qualifying assets under Ind-AS
23 can be even 6 months or even 24 months.

There is also a material difference in the concept of
borrowing costs as per Ind-AS 23 and ICDS IX.As per Ind-AS 23, borrowing cost
is calculated using the effective interest method, whereas as per ICDS, it is
calculated at actual interest and other costs incurred.

Exchange differences arising in respect of foreign currency
borrowing, forms part of borrowing costs as per Ind-AS, whereas the same does
not form part of borrowing cost as per ICDS.

As per Ind-AS, any income from temporary investment of
borrowed funds is to be reduced from the borrowing cost required to be
capitalised, whereas such reduction is not permissible in ICDS.

There is also a material difference in the formula for
capitalising general borrowing cost, in that under ICDS, the cost of general
borrowing is apportioned in the ratio of the qualifying assets to the total
assets based on the opening and closing values of such assets, without
considering the amount of or movement in borrowings during the year Under Ind
AS, the weighted average cost of general borrowing is applied to the value of
qualifying assets for the relevant period.

As per Ind-AS 23, inventories that do not necessarily take a
substantial period of time for getting ready for sale will not qualify as
qualifying assets. The term “substantial period of time” is not defined, and
hence could be even less than 12 months. However, as per ICDS, the period of
time is defined as 12 months, and hence inventories that require less than 12
months to bring them to a saleable condition are not qualifying assets.

As per Ind-AS, an entity shall cease capitalizing borrowing
costs to assets, when substantially all the activities necessary to prepare
such asset for its intended use or sale are complete. However, as per ICDS, the
capitalization would cease where fixed assets are put to use, or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Impact of the above differences.

There are various differences between Ind-AS and ICDS on
definition of borrowing cost and qualifying assets, treatment of income arising
from temporary investment of borrowed fund, formula for capitalising borrowing
cost in case of general borrowings and finally, on the time of cessation of
capitalisation. These would result in different capitalisation of borrowing
costs as per accounts, and in computation of income as per ICDS. Accordingly,
the interest debited to Statement of Profit and Loss and that allowable as a
deduction would also differ. These differences would also impact the
depreciation.

9.    Financial assets

Financial assets as per Ind-AS
109

As per Ind-AS 109, all financial asset are required to be
subsequently measured at fair value through profit & loss (FVTPL), fair
value through other comprehensive income (FVOCI) or at amortised cost (normally
for debt instruments), at each balance sheet date, depending upon their initial
classification by the entity.

Investments

Investments are not covered by ICDS, but any gain or loss is
to be considered as capital gains on transfer of such investments. Therefore,
any item in statement of profit or loss or other comprehensive income, on
account of remeasurement of financial assets, is to be ignored for computation
of taxable income.

Any security on acquisition as stock in trade shall be
recognised at actual cost. At the end of any previous year, securities held as
stock-in-trade shall be valued at actual cost initially recognised or net
realizable value at the end of that previous year, whichever is lower.
Securities not listed on a recognized stock exchange or listed but not quoted
on a recognised stock exchange with regularity from time to time, shall be
valued at actual cost initially recognized.

For the purpose of applying the above principles, the
comparison of actual cost initially recognised and net realisable value shall
be done category-wise and not for each individual security. For this purpose,
securities shall be classified into the following categories, namely:-

(a) shares,

(b) debt securities,

(c) convertible securities, and

(d) any other securities, not covered above.

The value of securities held as stock-in-trade of a business
as on the beginning of the previous year shall be:

(a) the cost
of securities available, if any, on the day of the commencement of the business
when the business has commenced during the previous year; and

(b) the
value of the securities of the business as on the close of the immediately
preceding previous year, in any other case.

Difference between the Ind-AS
and ICDS

There is material difference in the valuation of securities
held as stock in trade as per Ind-AS 109 and ICDS IX. As per Ind-AS, the
valuation of securities are required to be made at fair value. However, as per
ICDS, the listed securities, held for trading shall be valued at actual cost
initially recognised or net realisable value at the end of that previous year,
whichever is lower, Further, ICDS requires valuation on securities to be made
category-wise., and not on individual investment basis as per Ind-AS.

Impact of the above differences

In view of the above difference, there would be differences
in gain or loss recognised by the company in its profit and loss account vis-à-vis
as per tax return. The company would have to maintain detailed records of
transactions of securities traded as well as held as inventory, by applying
principles laid down in Ind-AS as well as ICDS.

10.  Actual cost of assets
– Cost of Dismantling and restoration

Cost of an asset as per Ind-AS
16

As per Ind-AS 16, an item of property, plant and equipment
that qualifies for recognition as an asset shall be measured at its cost. Cost
for this purpose also includes “the initial estimate of the costs of
dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs.”

Actual cost of asset as per ICDS IV

As per ICDS IV, the actual cost of an acquired tangible fixed
asset shall comprise its purchase price, import duties and other taxes,
excluding those subsequently recoverable, and any directly attributable
expenditure on making the asset ready for its intended use. Any initial
estimate of the costs of dismantling, removing the item and restoring the site
on which it is located, is not treated as actual cost.

Difference between the Ind-AS
and ICDS

Actual cost of assets as per Ind-AS includes cost of the
initial estimate of the costs of dismantling, removing the item and restoring
the site on which it is located. However, the same has to be ignored as per the
ICDS.

Impact of the above differences

Accordingly, any increase in actual cost of the assets
because of cost of dismantling being included as per Ind-AS has to be ignored
while computing actual cost of assets as per ICDS V.

Impact on Book Profits under Minimum Alternative Tax

In the above article, the impact on book profits under
section 115JB has not been considered, since the starting point for that
purpose is the profit as per statement of profit and loss account, and the
further adjustments required to be made are listed out in sub-sections (2A),
(2B) and (2C) of section 115JB.

Conclusion

These are only some of the significant differences which one
may come across, while computing the income chargeable to tax under the
Income-tax Act, 1961, where the accounts have been prepared by adopting Ind AS.

There are many more differences which one may
come across during the course of review of the accounts. Being aware of such
differences is essential for a tax auditor or tax advisor, and hence it is
essential to understand the differing accounting treatment being necessitated
on account of adoption of Ind AS.

Satyamev Jayate @15.August.2017

15th August is an
extraordinary day for India as a culture and as a civilization. We became a
nation with a constitution. 15th August is also the day we
collectively took a pledge to unite, to rediscover ourselves and take a
‘pledge to the service of India’1. We will complete seventy
years this month. Shall we take a minute and look at how far we have come in
meeting that commitment to ourselves?

Freedom

Life derives meaning from freedom. Freedom is coveted by every human. All that we do, all that we seek is
for freedom, to feel and enhance the sense of freedom. We seek joy to feel free
from pain, we work to get free from emptiness and find meaning, we acquire
wealth to free ourselves from a sense of lack and insecurity; we serve and give
to free ourselves from petty self centeredness. At the core of all human
values is Freedom, whatever be its shade.

Political
freedom finally brought our people that opportunity to actualise these freedoms
at their individual level. Today we are blessed to live in a country that is
not under a feudal ruler, that is not run by war lords or bigots, that is not
steered by outsiders with vested interests. As we complete 70 years, there is
nothing more important than recognising the value of freedom by recommitting to
its preservation and proliferation in every dimension of our lives.

Substratum of Freedom

Our freedom struggle was steered
by Truth in the form of non violence, and like our timeless culture was made
the substratum of modern Indian State. “Satyameva Jayate” is our national motto
and adorns our national emblem.

Truth alone triumphs;
not falsehood;

Through truth the divine path is spread out;

the wise, whose desires have been completely fulfilled,

reach where that supreme treasure of Truth resides.

Manifestation of Satya

Rule of Law and Freedom are
intertwined bedrocks of our constitution. Legislations are meant to enhance
individual and collective freedoms and guarantee rule of law for all people. In
the context of our culture, Satya shapes laws:

While
Satya sounds abstract, it is the substratum of all virtues and lasting
peace, be it collective or individual. It takes shape as Dharma, which
stands for principles of goodness, virtue, and ethics and allows people to
connect and live in harmony. Niti (Policy) should stem from Dharma and
it stands for a stance or approach on how people will live together to achieve
their respective individual and collective goals. However, Niti is
influenced by Niyat (political will) of those governing and finally
results in formulation and administration of Niyam (laws).

The High and Low of Law making

Supremacy
of Rule of Law is what we got along with independence. Plato wrote: “If law
is the master of the government and the government is its slave, then the
situation is full of promise”. However, over the seventy years, the
divergence from the essential spirit of law making has drifted in so many
cases, that it ‘seems’ like a new normal. The 13th President had
this gentle yet alarming comment in his farewell speech to the parliament: “It
is unfortunate that the parliamentary time devoted to legislation has been
declining. With the heightened complexity of administration, legislation must
be preceded by scrutiny and adequate discussion. Scrutiny in committees is no
substitute to open discussion on the floor of the House. When the Parliament
fails to discharge its law-making role or enacts laws without discussion, I
feel it breaches the trust reposed in it by the people of this great country.”3

Laws are meant to serve people
by being fair, clear, stable, and enabling. People must get confidence that
legislation is for them and not only to be used against them by an
administrator. Functionally, laws should be necessary, clear, coherent,
effective, and accessible.

However, over the seventy years
we know that laws are often twisted, coloured by outrageous complexity that
they are out of reach of the common man, rolled back and amended way too often,
arbitrarily applied in disregard to people’s rights, crafted for ease of use by
the administrator, and often have conflict of interest/vested interest in their
very design. While there are severe legal barriers when there is conflict of
interest for business transactions, I wonder about a much stronger application
against ‘conflict of interest’ in law making. If the law makers turn a blind
eye, look the other way or wink selectively, then rule of law gets diminished.
Trust in administering of laws whether it will be fair, fast enough, and
effective remains doubtful.

Do Niyam
affect Niyat
of citizens?

India
was recently labelled as a ‘largely tax non compliant society.’ Even if one
were to accept that, we cannot change that situation till we find out why did
it become so? During the freedom struggle, millions made extraordinary
sacrifices. Each of us knows someone who made sacrifices in achieving azadi.
Has the texture of that society drifted so far from that pledge to ‘serve the
nation’ to serving themselves in disregard to the nation? If so, then why?

Could it be that many of those
entrusted with lawmaking and administering, who took that same oath to serve
the nation and guarantee liberty, equality and justice did not pay sufficient
heed to that promise? Could it be that the framework of law is not
comprehensive to address the current reality? Can there be an effect without a
cause? Where does this circle start and where will it end?

Niti and Niyam
affect the Niyat (intention) of the people. In other words, Niyat of
people is only a reflection
–  (as the rulers, so are the people).
The formulation and administration of Niyam does shape the Niyat
of people. At the same time, laws get formed to deal with breaches. And the
circle goes on.

Till
the spirit of rule of law is active and not selective, enabling and not
disproportionately bothersome, till laws exists for people and not to dissipate
their spirit in coping with them, and till laws make people feel optimistic and
not hopeless; the rule of law is yet to ripen4. Till we reach a
point when rule of law is working in spirit and in its splendour for the vast
majority, the Triumph of Truth remains in abeyance.

Many professionals feel helpless
to deal with something that is beyond control. However, we are trained to think,
ask questions and are capable to understand laws. As professionals we can look
through the fine line between form and substance. Can we undertake to refine
our law making and administration within our circle of influence? Can we be
proponents of adherence to laws in ‘spirit’? As we build our nation, we can
once again question and clear our own Niyat, and steer the Niyat
of taxpayer and the administrator towards the essential spirit of law5.
In our professional endeavours, can we ask ourselves – Will this action/advice
be coherent with the essential spirit of the law? Will my action/advice be
right for India that I wish to see? Because, India does not belong only to the
few who speak from high pedestals, but to YOU! Freedom is not only a
personal right, but also our individual obligation!

BCA Journal

A galaxy of contributors, editors, members and wise men and
women have shaped the BCA Journal in the last fifty years. I grew up reading
the fine features and well researched, thought provoking and useful articles of
this Journal. BCAJ has and will continue to present its content in an
objective, bold, and circumspect manner. I feel humbled to write to you as its
editor from this month onwards. I will strive to keep the balance between
continuity and change, and present the content that reflects those virtues in
light of our current reality. I request your observations and counsel freely
and frequently.

Raman
Jokhakar

Editor

Friend / Friendship

‘Love demands infinitely less than friendship’

George Jean Nathan

Agreeing with the quote, I
believe it is a relationship sandwiched between `man – woman relationship’ and
`man – God relationship’. However, there is a good old saying ‘a friend in
need in a friend indeed’. I don’t subscribe to this thought because I believe
friendship is not barter – it is a relationship devoid of expectations. We know
and have experienced that expectations spoil relationships. Friendship is a
relationship to be enjoyed and cherished. In friendship one accepts
differences. This doesn’t mean that one can’t criticise a friend – the answer
is : as a friend one can and should criticise to one’s face but never at one’s
back. Francis Bacon rightly advises ?to keep the mind in good health accept
the admonition of a friend – this is because  there is no personal gain that a friend seeks
– it is based on the desire to correct a wrong. I believe that if a friend
seeks an opinion, give it unbiased and unaffected whether accepted or not.

The recent loss of a friend
kindled in me the urge to pen my thoughts on friendship. I believe it is
relationship in which :

–   one accepts each other’s foibles and faults

–   one senses each other’s ease and unease

–   one shares each other’s pain and pleasure

–   one sees the other through in bad times

–   one shares oneself

The precept is : ‘be a
friend to have a friend‘.

Henry Adam says ?one friend in lifetime is much, two are many, three
are hardly possible’. Whilst I agree with him that friends are rare and are
a gift from God – I must admit that He has been benevolent to me – I
have been blessed with more than three – I have had my uncle as a friend, I
have and had my peers in profession as friends; I have and had the boon of
having some clients as friends and above all, I have enjoyed friends from school days.

However, as most of them are with the Lord – I at times feel lonely but
have memories to cherish. It is said : ?that marriage is a contract and in
contract there can be no friendship’ – I was blessed to have my spouse as a
friend – it took time to develop this relationship, where we were not afraid of
being judged and were never shy of accepting, appreciating and bridging
differences.

To have a happy and
rewarding life one needs friends or a friend and above all to develop
friendship with God – let us talk to Him and hear Him for He
is a friend who will never leave us.

I would conclude by quoting Lord Halifax :

‘It is a misfortune for a
man not to have a friend’

Allentis Pharmaceuticals Pvt. Ltd. vs. State of M. P. and Others, [2013] 59 VST 241(MP)

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VAT- Agency – Supply of Goods to Agent – Thereafter by Agent to Buyer or Authorised Dealer of Principal For Commission – No Two Independent Sales-Supply of Goods to Agent – Not a Sale-Not Taxable, Section 2(4), Explanation (c ), of The Madhya Pradesh Value Added Tax Act, 2002.

FACTS
The Petitioner Company entered into an agreement with M/s. Rahul Pharma and appointed him as carry forward agent to supply the goods to the authorised distributors or dealers appointed by the Company. While assessing the petitioner company the assessing authority relying on Explanation (c ) to section 2(4) of the Act, treated supply of goods by the petitioner to its agent as first sale liable to VAT and thereafter when the selling agent further sold or transfers the goods to buyers, then also it was treated as sales taxable under the Act. The petitioner company objected to it as it amounted to double taxation. The petitioner company filed writ petition before the Madhya Pradesh High Court against the aforesaid action of the assessing officer.

HELD
Under clause ( c) of Explanation to section 2(4) of the MP VAT Act, for the purpose of Act, two independent sales or purchases are deemed to have taken place when the goods are transferred from principal to his selling agent and from the selling agent to the purchaser or when the goods are transferred from the seller to buying agent and from the buying agent to his principal. This, clause (c) applied only when there is transfer of property in goods. M/s. Rahul Pharma was an agent of the petitioner, company which was evident from the agreement. It only supplied the goods to the authorised dealer of the petitioner company for a commission not as his own property but as the property of the principal, who continued to be the owner of the goods. The supply of goods by the petitioner company to the agent was not a sale as per the interpretation of clause (c) of Explanation to section 2(4) of the Act therefore not liable to tax. When the agent supplied goods to the buyer of the petitioner company or to its authorised distributor on behalf of the petitioner, the petitioner company was liable to pay the tax. Consequently, the petition was disposed by the court with the direction that the delivery of goods to the agent of the petitioner for delivery of goods to the buyer or to the authorised distributer shall not be taxed under the provisions of VAT Act by treating it as an independent sale.

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M/S. Milk Food Ltd. vs. Commissioner, VAT and Others, [2003] 59 VST 1 (Delhi).

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Sales Tax – Deduction Claimed Based on Declaration Furnished By Purchasing Dealer – Whether Form Genuine or Conditions Complied With- Burden of Proof – Not on Selling Dealer. Sections 4(3)(a)(v), 50 (1)(a), 56(2) of The Delhi Sales Tax Act, 1975.

FACTS
The appellant engaged in business of manufacture of ghee and milk powder of different kinds in its factory at Patiala and having its offices all over India. The appellant had sold goods against form ST-1, in Delhi, and claimed deduction from payment of tax u/s. 4(2) (a)(v) of the Delhi Sales Tax Act. In assessment the claim of deduction was disallowed and confirmed by the Tribunal. The appellant filed appeal before The Delhi High Court against the impugned order of the Tribunal.

HELD
The Tribunal appeared to have placed the burden wrongly upon the appellant dealer. It is not the burden of the selling dealer to show that the declarations in form No ST-1 were not spurious or were genuine or that the conditions to which the forms were issued to the purchasing dealer by the department were complied with. The burden will shift to the selling dealer only if it is shown that the selling dealer and the purchasing dealer had acted in collusion and connived with each other to evade tax by obtaining spurious forms of deduction. The claim was disallowed in assessment due to certain discrepancies between form ST-1 and the accounts given by the purchasing dealers in form ST-2 or colour of form was different. This was not for the selling dealer to explain. The fact of different colour of form gave rise to the suspicion that the forms are not genuine could be a starting point for further inquiry but by itself does not establish any guilt on the part of the selling dealer. There appears to have no further query conducted by the sales tax authorities to show that the forms are spurious; neither is there evidence to show that the appellant was in any was connected with the alleged fraud committed by the purchasing dealer. Accordingly, the High Court allowed the appeal filed by the appellant.

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2015 (38) STR 1220 (Tri.-Mum.) Deloitte Haskins & Sells vs. CCE, Thane-I.

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Unlike Central Excise laws, there is no compulsion to avail benefit of exemption compulsorily under service tax laws. Further, CENVAT credit cannot be denied in case of procedural lapse of wrongly addressed invoices.

Facts:
Availment of CENVAT credit was under dispute as firstly invoices were addressed to the registered unit and the credit was taken in another unit. Further the Appellants had provided taxable as well as exempted services and thus the department contended that CENVAT credit could be utilised only to the extent not exceeding 20% of service tax payable vide Rule 6 of CENVAT Credit Rules, 2004 in the absence of maintenance of separate records. It was argued that though invoices were raised at another unit, the input services were received and consumed and a CA certificate was produced to this effect. Accordingly, it was merely a procedural defect. On the second issue, it was stated that in absence of a specific column in the service tax return, amount received for exempted services of prior period was shown under “exempted services” and actually, no services were claimed to be exempted during the period under consideration. Therefore, restriction on utilisation of CENVAT credit was not warranted. Moreover, it was argued that exemptions available were conditional and they had billed a consolidated sum including representational services without taking benefit of exemption and in respect of services provided to SEZ it was difficult to ensure fulfillment of conditions by service receiver and thus the said exemption was also not claimed. The department argued that firstly in view of separate registrations cross availment was not possible and secondly since unconditional exemption with respect to representational services and services provided to SEZ were available, service tax cannot be paid on such exempted services on their own volition. Accordingly, restriction of CENVAT credit was applicable. The Appellants argued that unlike section 5A of Central Excise Act, 1944, under service tax laws, availment of benefit of unconditional exemption is not mandatory.

Held:
Relying on the decisions of the Ahmedabad Tribunal in the case of DNH Spinners [2009 (16) STR 418] and Modern Petrofils [2010 (20) STR (627)], it was held that CENVAT credit cannot be denied on the grounds of procedural lapse as long as the services are eligible input services. Thus, CENVAT credit on principle was allowed subject to verification of the fact by the adjudicating authority that the input services were actually used. On the second issue, it was held that in absence of specific breakup of total amount for each job undertaken in the invoice, it cannot be concluded that the Appellants availed exemption regarding representational services. Revenue authorities cannot demand service tax on a composite amount, and it did not attempt to do any segregation, if at all it was possible, in consolidated invoices. Further, notification granting exemption to services provided to SEZs was conditional and the Appellants had opted to pay service tax. Relying on various decisions, it was held that under service tax laws, there is no compulsion to avail exemptions. Therefore, since this was not a case of provision of taxable as well as exempted services, restriction on CENVAT credit was not applicable.

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2015 (38) STR 1191 (Tri.-Mum.) Automotive Manufacturers P. Ltd. vs. CCE, Nagpur.

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No service tax can be levied on handling charges forming part of sale of goods especially when VAT/sales tax is levied.

Facts:
The Appellants were authorised dealers and a service station of Maruti Udyog Ltd. For the purpose of servicing the cars, spare parts were used which were procured from the depot or warehouse of the manufacturer. Appellants incurred octroi, freight, loading and unloading charges for procurement of these parts which was termed as handling charges. Service tax was demanded on these handling charges considering the activity of servicing as a composite activity of sale and service. It was argued that the handling charges were part of value of goods sold and VAT /sales tax was paid on them and such expenses had no relation with servicing and repairs. Board’s Circular No. 96/7/2007 clarifying that service tax would not be levied on transactions treated as sale of goods, subject to VAT / sales tax, by service station was also referred to.

Held:
The Tribunal held that the invoice clearly stated the value of goods and services rendered. Handling charges will not be subject to service tax, especially when VAT /sales tax had been paid on it. Such charges were incurred for procurement and bringing the goods to Appellants and hence, it was included in value of goods. Section 67 of the Finance Act 1994, levied service tax on consideration received for rendering services and not for supply of goods. Hence, it was held that no service tax was payable.

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2015 (38) STR 1162 (Tri.-Del.) Piramal Healthcare Ltd. vs. CCE & ST, Indore.

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Penalty imposed was exorbitant as compared to service tax demand and was unjustified in view of revenue neutrality and interest burden already suffered on account of non-payment. Non-filing of ST-3 returns does not attract penalty u/s. 77.

Facts:
After adjudication, to buy peace of mind, the Appellants paid service tax along with interest. However, penalty u/s. 77 of the Finance Act, 1994 levied for non-filing of service tax returns was appealed against. It was argued that the amount of penalty was exorbitant compared to service tax demand and penalty cannot be levied u/s. 77 for nonfiling of returns. Further, service tax was not paid due to improper knowledge of law and it was a revenue neutral case since the amount was available to them as CENVAT credit. Department contested that penalty u/s. 77 of the Finance Act, 1994 was leviable in absence of registration.

Held:
In view of revenue neutrality and interest burden already suffered on account of non-payment, penalties were dropped. The Tribunal observed that there was nonapplication of mind by the original adjudicating authorities since penalty could be levied u/s. 77 of the Finance Act, 1994 for failure to file service tax return.

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2015 (38) STR 980 (Tri.-Del.) Mohan Poddar vs. CCE, Raipur

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In absence of any evidence proving mala fide intention, penalties cannot be levied.

Facts:
The appellants were providing construction services, and were unaware of their service tax liability. On being pointed out by DGCEI, service tax liability was discharged. Accordingly, it was contended that in absence of any evidence proving mala fide intention, willful suppression or misstatement, penalties should be waived off u/s. 80 of the Finance Act, 1994.

Held:
There were no observation at all regarding sustainability of allegation of suppression of facts in “discussion and finding” portion of the order and the adjudicating authority had jumped to the conclusion of suppression of facts. Further, since section 80 was invoked for waiving off penalty u/s. 76, the said section should apply mutatis mutandis to section 78 of the Finance Act, 1994 as well. Furthermore, in any case, in absence of malafides, penalty u/s. 78 could not be imposed.

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[2015] 58 taxmann.com 343 (New Delhi – CESTAT) – Suzuki Motorcycle (I) (P) Ltd. vs. Commissioner of Central Excise, Delhi-III.

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CENVAT credit of service tax paid by the assessee cannot be denied merely because part of cost of input services is reimbursed by parent company – Financial arrangement between subsidiary and parent company has no connection or relevance for legality of CENVAT credit.

Facts:
The assessee procured the service of advertising agency for purpose of advertising their final product. Entire value of service of advertising agency along with service tax was paid thereby making them eligible for CENVAT credit. A part of the advertising expenditure incurred by the assessee was reimbursed to it by its parent company located abroad. Department denied credit on ground that the assessee’s foreign holding/parent company had reimbursed part of such advertisement expenses.

Held:
The Tribunal observed that the Commissioner had not given a finding that advertising cost was not incurred by the appellants. Therefore, it was held that merely because the appellants’ parent company reimbursed part cost of the advertising expenses, it did not mean that the appellants would become disentitled to the service tax actually paid by them. The financial arrangement between the subsidiary company and the parent company had no connection for the purpose of availability of credit of service tax paid by the assessee. Procurement of finances for running any business was the subject matter between two individuals. Thus, credit is allowed.

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[2015] 58 taxmann.com 94 (Ahmedabad – CESTAT) Cema Electric Lighting Products India (P.) Ltd. vs. Commissioner of Central Excise, Ahmedabad-III

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CENVAT credit – Outdoor catering service in factory canteen – Proportionate credit to the extent service tax portion is embedded in recoveries made from employee is not admissible – burden of proof is on assessee to show that incidence of service tax is not passed.

Facts:
The assessee availed of an outdoor catering services for its employees and took CENVAT credit. Department denied credit of service tax proportionate to amount recovered from employees/beneficiaries. The assessee argued that no element of service tax was recovered.

Held:
Relying upon the decision of the Hon’ble High Court of Bombay in the case of Ultratech Cement Ltd. [2010] 29 STT 244, the Tribunal held that once proportionate service tax is borne by the ultimate consumer of the service, namely the worker/beneficiary, the manufacturer cannot take credit of that part of the service tax which is borne by the consumer. Hence, proportionate credit, to the extent it is embedded in the cost of food recovered from the employee/beneficiary, is not admissible to the appellant. It further held that like a concept of unjust enrichment for refunds u/s. 11B of the Central Excise Act, 1944, the onus is on the appellant to establish with documentary evidence that the element of service tax paid by the appellant is not recovered from the beneficiary/employees of the appellant.

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2015] 58 taxmann.com 189 (Mumbai – CESTAT) – CST, Mumbai vs. Reliance Capital Asset Management Ltd

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Position prior to 01/04/2011 – CENVAT credit of outdoor catering service provided to its employees by provider of output service is allowed.

Facts:
The appellant is a service provider under the category of “Banking and Other Financial Services” and also “Business Auxiliary Services”. Show Cause Notice was issued alleging therein that the appellant was wrongly availing CENVAT credit in respect of outdoor catering service. The adjudicating authority held that the appellant had incurred expenditure by providing “canteen facility services” for its employees. As the appellant was not in a business which required “24 x 7 operations” like BPO service, the claim was not allowable as input service. At best, the “outdoor catering service” was in the nature of fringe benefits to the employees and had no relationship with the output services rendered. Accordingly, demand was confirmed. Before the Tribunal, assessee relied upon ruling of the Hon’ble Bombay High Court in the case of CCE vs. Ultratech Cement Ltd. [2010] 29 STT 244. The revenue relying upon the decision of IFB Industries Ltd. vs. CCE 45 taxmann.com 28 (Bang. – CESTAT) distinguished the judgment of Bombay High Court, emphasising that it was rendered having regard to mandatory requirements under the Factories Act, 1948.

Held:
Relying upon Ultratech Cement (supra), the Tribunal held that, legislation (i.e. the Factories Act) appreciates the need of canteen service for the workers at the place of work. Only to avoid the hardship for an essential need, the legislation has provided, that factories having employees more than 250, should provide a canteen service. That did not mean that the service was not required for any industrial service or organisation having less than 250 workers. Even the employees of a smaller organisation having less than 250 workers would be hungry and required to be provided with canteen facility. Therefore, the ruling in the case of IFB Industries Ltd. (supra) is per incuriam, as the provisions of the Factories Act have been wrongly interpreted, with respect to the provisions of input service. Accordingly CENVAT credit was allowed.

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[2015] 58 taxmann.com 8 (New Delhi – CESTAT) – Binani Cement Ltd vs. Commissioner of Central Excise & Service Tax, Jaipur-II.

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CENVAT – Manpower supply services availed for maintaining a health centre in compliance with Rajasthan Factory Rules eligible for input service as directly in relation to manufacture

Facts:
The Assessee was a manufacturer of cement and clinker chargeable to excise duty. It sourced trained persons from manpower supply agents for maintaining medical/ health centre at its factory. Department denied CENVAT credit on the grounds that services had no nexus with manufacture.

Held:
The Tribunal observed that appellant in terms of Rule 65T of the Rajasthan Factories Rules was required to maintain an occupational health centre as its employees were more than 500 and they carried out hazardous operations. Unless the appellant complied with this provision of the Rajasthan Factories Rules, they would not be allowed to carry on their manufacturing activity. Accordingly, it was held that the service of receiving trained medical personnel through manpower supply agency for maintaining the occupational health centre has to be treated as in or in relation to manufacture of final product and would be eligible for CENVAT credit as input service.

Note: Readers may also note a similar decision in the case of Commissioner of Central Excise vs. M/s Lucas TVS Ltd. [2015-TIOL-1466-CESTAT-MAD} wherein it has been held that manpower supply to a canteen in the factory which is an obligation under the Factories Act is an eligible input service.

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[2015-TIOL-1471-CESTAT-MUM] M/s. Gateway Terminals (I) Pvt. Ltd. vs. Commissioner of Central Excise, Raigad

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Garden Maintenance, Event Management, Brokerage, Telephone and
Outdoor Catering services being essential for business are eligible
input services

Facts:
The Appellant was engaged
in the business of providing “port services” and has availed CENVAT
credit of service tax paid on garden maintenance, event management,
telephone charges and of brokerage paid for arranging the residential
accommodation for their employees for the period before April 2011. They
had also availed services of outdoor catering pre and post April 2011.
CENVAT credit was denied on the ground that there was no nexus between
the input services and the output services provided and that these
expenses were in the nature of a welfare activity.

Held:
For
the period before April 2011, it was argued that the definition of
input service comprising of two parts ‘means’ and ‘inclusive’ should be
read harmoniously as it enhances the scope of the definition. Further
the term “such as” signifies that any activity related to the
functioning of a business and not confined merely to the provision of
output service or manufacture of the final product should be considered
an input service. Accordingly, garden maintenance which is a requirement
cast by the Maharashtra State Pollution Central Board upon the Port,
event management services incurred at ceremonial occasions, brokerage
services, being essential for ensuring the availability of staff,
telephone and outdoor catering services being essential services to run
the business are allowable as input services. Further, for the period
post April 2011, it was argued that the Appellant was regulated by the
dock workers (safety, health & welfare) Act, 1990 and the employees
being more than 250, it was a statutory obligation to maintain adequate
canteen facilities. Thus, catering services being a part of the business
need and obligation to the employees who are essential hands of the
business had a direct bearing on the output services and were eligible
input services even post April 2011.

Note. Readers may
also note the decision in the case of Hindustan Coca Cola Beverages P.
Ltd vs. CCE, Nashik [2014]-TIOL-2460-CESTAT-MUM reported in the
BCAJFebruary 2015 issue wherein it has been observed that outdoor
catering services forming a part of cost of manufacture of final product
is allowable as CENVAT credit post 01/04/2011.

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Inflated Grades, Deflated Education

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College cutoffs are going up but our standing in innovation is going down.

There was a time when scoring 65% meant you were brilliant, and if you touched 70% then Einstein had better watch out! But today anything short of 100% in Higher Secondary does not guarantee admission to a department of choice in Delhi’s top colleges.

In economics, the GDP deflator is used to assess the imdipankapact of inflation on the pricing of goods and services. But what kind of deflator do we need to make sense of grade inflation in high school results?

Scoring 99% in English, once considered impossible, is not uncommon today. The question, therefore, is whether our kids are getting more skilled and more competitive, or whether awarding high marks is a clever way of concealing poor education.

It is comforting to imagine that India is intellectually rising because our school grades are getting better every year. However, all indications show that the reverse is actually true. While at one end, college cut offs keep going up, our international standing in science, technology and innovation keeps going down. In other words, scoring high marks does not necessarily mean learning well, at least in India.

Over the years our students are getting better and better grades on paper, but have these brilliant performances helped to push up our knowledge levels? According to the 2014 Global Innovation Index, 81% of patent applications are from China, the US, Japan, South Korea and the EU. While America leads in computer systems, South Korea has emerged as the new kid on the block. It has overwhelmed all of Europe and ranks second to the US in this very high-tech sphere.

But where is India? In terms of patent applications we cannot match up to any of the world leaders in the field. Curiously enough, patents submitted by Indians abroad are more in number than those that originate in our country. Once again, education here seems to have contributed little.

Worse, our school children fare very poorly when it comes to skills in reading, writing, mathematics and science. Globally we now stand 62nd on this measure, well behind even Jordan and Armenia.

It is bad manners to go on and on, but our famed IITs do not figure among the top 300 institutions of higher education in the world. There is so much pressure in India to win a place in these engineering colleges, so much envy against those who make the grade, yet globally these institutions are minor players.

It is not as if western universities are always on top. Peking University occupies the 48th position, Tsinghua the 49th and even lowly Fudan University, at rank number 193, is way above our best.

The reason why a grade deflator does not work like a GDP deflator does is because the quality of the product that is being accounted for is not the same. True, more and more students are getting higher and higher marks, but the standard of education is going in the opposite direction. There was a time when a first class meant something and one wore that distinction like a badge of honour. But today, those with 60% would happily throw a party if a lowly vocational school lets them in.

The principal reason for grade inflation in school results is the way teachers have traded in their sense of responsibility for comfort. Consequently, question papers have become more and more objective and the right answers are actually screaming in your face. At times it comes down to the presence of a certain word, or sentence, in an answer for a student to max the question.

On the other hand, if you try and be creative, your grades could slide all the way down. Examiners, in the main, do not want to be bothered by reading something new in the answer scripts. Listen up, people; tick the right boxes, say the right thing, take your marks and run.

It is not as if everybody is happy about this outcome; some teachers are actually chafing at the bit. Yet, the educational system is structured such that taking responsibility for quality teaching and marking can become job threatening. All of this suits mediocre instructors excellently; as long as the grades are good, there is little scrutiny and everybody is happy. The more generous the system of marking, the less pressure there is on teachers to perform.

It is not as if such an affliction only attacks schools. Even universities and institutions of higher education happily inflate grades. This is one of the reasons why good school teachers and professors are driven out by bad ones.

In some post graduate departments, it is hard for a student to score below a B plus. This depresses the urge to learn for high grades are like low hanging fruit. Is it surprising then that good marks at home are accompanied by poor performance on the world stage? So when our Higher Secondary grades climb even higher next year, and in every subsequent year, be prepared for a proportionate fall in educational standards.

But how high can these marks go? If 100% is not such a big deal any longer then will we see 105% soon? Or, perhaps even 110% before long?

(Source: Article by Mr. Dipankar Gupta in The Times Of India dated 22-06-2015. The writer is a social scientist.)

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Digital India – Wanted: A CTO for GoI.

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Digital India can be the prime mover to making a reality of this government’s promise of minimum government, maximum governance. Such a transformation requires technology to be firmly embedded into government, something that the Digital India project lists as one of its foremost objectives.

Embedding technology into governance processes will do three things: one, transform government and make it more transparent and efficient; two, transform the lives of citizens, especially those at the bottom of proverbial pyramid; three, make our economy more efficient and competitive. A 2014 McKinsey Global Institute report predicts that the large-scale adaptation of technology through Digital India positions India with the biggest opportunity yet to accelerate economic growth.

E-governance and technology in government is not a new idea. This has evolved over years from replacing typewriters with PCs and the process of ‘computerisation’ to a more complex, multi-functional, department-wide application of the concept. However, despite thousands of crores of rupees spent in the last decade in the name of e-governance and efficiency, there has been little change in government as a consequence of these investments.

This is because the process of embedding technology in government has been a bottom-up process. Individual departments and offices are undertaking this independent of each other. Thus, crores are being spent in systems and projects that are incompatible and don’t work with each other, defeating the purpose of e-governance.

Take the huge data collection exercises and databases. The Aadhaar database on biometrics has a different architecture and hardware from other similar large databases overseen by the finance and home ministries. Or the case of data servers and networks ” which have different security and architecture specifications in different departments ” leaving government agencies with differing levels of vulnerability to cyberattacks.

Further, embedding technology into limited silos makes data-driven, real-time analysis of governance and policy action impossible or, at best, inaccurate. This approach is also expensive and inefficient in terms of costs associated with procurement, obsolescence and administration. This silo-based or bottom-up approach to embedding tech also has another big failing: it doesn’t create the process reforms and efficiencies at the top-most levels of government decision-making where it is most required.

More mature democracies such as the US have beaten India in recognising the need for a chief technology officer (CTO ). President Barack Obama made this appointment a centre-point of his 2007 electoral campaign. Obama conceptualised the role of the CTO to be someone that would “focus on transparency” and ensure “that each arm of the federal government makes its records open and accessible as the e-Government Act requires”. India needs to take a similar approach and use this as a precedent while rolling out Digital India.

Government is a sum of various parts. Currently, some of these parts are efficient and technology-enabled while others are sub-optimally enabled or technologically bereft. So government’s efficiency as a whole is measured by its least efficient or least responsive departments, just as governments are known by their worst ministers and not their best.

A good CTO is essential to make the government function as a unified machinery that operates with consistent standards of efficiency, transparency and responsiveness. That is key to realising maximum governance, minimum government.

The focus of the CTO should be to design an architecture that achieves three broad goals: 1) enable easy, transparent access for citizens and business to and from government, 2) enable government departments to operate transparently and efficiently, 3) connect various departments to ensure that government and policymakers operate in a seamless, transparent, responsive and data-driven manner.

For this, the CTO should re-wire the government’s existing technology investment, connectivity and access mechanisms. The CTO can then help embed layers of applications, including security measures into the ecosystem that ensures that the government applies the same standards of responsiveness, transparency and access regardless of department, hierarchy or region. Creating such a standardised architecture will also save thousands of crores in procurement and administering efficiencies.

Digital India promises to ‘transform India into a digitallyempowered society and knowledge economy’. A CTO in the Modi government’s team can help the latter achieve its stated goals of minimum government, maximum governance.

(Source: Article by Mr. Rajeev Chandrasekhar, Rajya Sabha MP, in The Economic Times dated 03/07/2015.)

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Isn’t corruption everywhere?

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Auto union to protest against ‘test-track corruption’ on July 13
The auto union has alleged that there is large-scale corruption on the recalibration test tracks and has threatened a morcha to the legal metrology office in Bandra on 13th July in this connection.

Union leader Shashank Rao alleged that there were unscrupulous agents at the test tracks in the western suburbs, and they charged anywhere between Rs. 200 and Rs. 300 per driver to get the meters recalibrated. “We demand that such corrupt practices be nipped in the bud and the metrology controller should crack a whip on officials under whose connivance this is happening,” he said.

Legal metrology controller Sanjay Pandey said the allegations will be probed into and if he came across any unscrupulous agents, they will be handed over to the police.

Shobhaa De’s answer to question reported:
In the Times of India dated 05.07.2015

Q: Are all female political leaders in India corrupt?

We have been reading about four ladies who seem to have bent the rules recently.

A: No. No. No. Please don’t discriminate against Indian men! Gender equality is a matter of great national interest. Men cannot be left behind. We give equal opportunities to indulge in corruption to all politicians, on the basis of merit, not gender. Remember, we are a democracy.

Disproportionate Assets Cases:
Maharashtra ACB led by DG Praveen Dixit has found assets worth Rs. 7.97 crore till May this year in cases related to disproportionate assets.

The FIFA :
The FIFA corruption scandal escalated as one suspect told of World Cup bribes and another promised to reveal an ‘avalanche’ of secrets, including some about FIFA president Sepp Blatter. The storm went around the globe with South African police commencing an investigation into claims that money was paid to secure the 2010 World Cup.

Despite the best attempts of FIFA , the global governing body of soccer, to conduct its business without any real accountability, it has long been an open secret that the world’s most popular sport is also the most corrupt. On 27th May, the U.S. government charged 14 people, including nine current or former FIFA officials, with money laundering, racketeering and wire fraud.

Youth and Corruption:
The young are up against corruption. And they’re voicing it through social networking sites. This widespread anger at corruption finds a vent on the newly launched Facebook page of the state Anti-Corruption Bureau (ACB). Within six months of its launch, it has got 22,000 ‘likes’ and 68 people have come up with complaints of corruption on Facebook.

“Most importantly, among those who have commented and ‘liked’ are youngsters. While 30% of these are in the 18-24 age group, 44% are in the age group of 24-34 and only 13% of them are in the age group of 35-44 which shows that the young generation is more against corruption,” said director general of police (ACB) Praveen Dixit.

Dixit said that one can analyse the anger of the GenNext against corruption considering the number of people who have ‘liked’ and commented. He added that this is just the beginning and the number is expected to swell by the end of this year. Through Facebook, many members of the public are posting information of corruption in various departments. “Until now, 68 people have given information and complaints of corruption and one complaint on Facebook has turned into a FIR.” Added Dixit.

CALL to COMPLAIN:
To check corruption and embarrass offenders, ACB has launched a page on Facebook where it uploaded pictures of public servants accepting bribes. The page received 22,122 people likes.

If you wish to complain against corruption, call 24921212 or call ACB helpline numbers 1064 or 1800222021.

MANTRA against Corruption:
To check corruption, which threatens to affect the state’s Make-in-Maharashtra plans, government employees will be counseled to manage expenses within their salaries and not succumb to temptation.

The programme, which will cover all categories of state government employees, right from the Mantralaya officer to the taluka clerk and peon, will start in Nagpur this month and eventually spread across the state. The initiative is by the Maharashtra State Gazetted Officer’s Federation, an apex body of 70 government employee unions, which, despite the nomenclature, includes non-gazetted staff as well.

To ensure a graft-free state, government employees will be exhorted to:

  • Learn to meet expenses within salary
  • Work towards improving image by acting against redtapism, corruption and inefficiency
  • Not fall prey to ‘quick money and corrupt elements as they are damaging to one’s own, one’s family’s and the government’s reputation
  • Learn to do a good, legal side business involving family members if in need of money

Survey on bribery:
As many as 66% of businesses in the country believe that some form of bribery is acceptable, in spite of increased regulatory actions and public outcry against corruption, according to survey.

Around 80% believe that corruption is still wide-spread, with 52% saying offering gifts to win businesses is “justified to help a business survive”, 27% of the respondents justify cash payments, the survey on fraud and corruption by Ernst & Young said.

Interestingly, 35% of respondents also believe that “conformity to their organisation’s anti-bribery and anticorruption policies would harm their competitiveness in the market”.

Further, 57% said increased regulation “is augmenting challenges for the growth or success of their business”.

The survey team interviewed 3,800 people from 38 countries across Europe, the Middle East, India and Africa.

The findings revealed that 60% of Indian respondents agree that regulatory activity in their sector had a positive impact on ethical standards.

“The spurt of change being driven by regulators has undoubtedly made a positive impact on business environment,” said the survey.

P. Chidambaram writes:
Narendra Modi was most eloquent when he spoke on corruption and he warmed up to the subject, like no other, when it concerned the alleged corruption during the 10 years of the UPA government. The Prime Minister was the white knight on a silver steed who had come to Delhi to slay the demon of corruption. In his dictionary, “corruption” was a catch-all word that took within its fold impropriety, abuse of authority, conflict of interest, black money, bribes, disproportionate assets and virtually anything that carried a whiff of suspicion. In his book, anyone accused by the BJP of corruption was “presumed guilty until proven otherwise”.

Union Minister Venkaiah Naidu on the Lalit Modi controversy
Nobody is involved in corruption. No law has been flouted. No immoral activities have been undertaken by anyone in this government.

Power does not corrupt. Fear corrupts…..perhaps the fear of a loss of power.

—John Steinbeck
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DIPP – undated

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Clarification on FDI Policy on Single Brand Retail Trading

This clarification issued in respect of FDI in Single Brand Retail Trade – para 6.2.16.3 of Consolidated FDI Policy Circular of 2015, states as under: –


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A. P. (DIR Series) Circular No. 6 dated 16th July, 2015

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Foreign Investment in India by Foreign Portfolio Investors

This circular clarifies that in the case of investment by FPI in security receipts (SR) issued by the Asset Reconstruction Companies (ARC): –

1. Restriction on investments with less than three years residual maturity will not be applicable.
2. Investment in SR must be within the overall limit prescribed for corporate debt from time to time.

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[2015] 58 taxmann.com 93 (Rajasthan High Court) – Bansal Classes vs. Commissioner of Central Excise and Service Tax, Jaipur-I

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CENVAT –Period Prior to 01-04-2011- A commercial training or coaching centre cannot take CENVAT credit of input services availed for celebration meant for successful candidates

Facts:
The assessee was providing commercial training and coaching services to students. The issue before the Court was whether assessee is entitled to CENVAT credit on input services of catering, photography, tent (mandap keeper), maintenance & repairs (motor vehicles), rent for hiring examination hall and travelling expenses. Tribunal denied the CENVAT credit except on the rent for hiring examination hall.

Held:
The High Court held that, celebrations are organized during academic sessions to encourage existing students and motivate new students. These services are used only after students pass commercial training or coaching classes/examination. Therefore, since these celebrations are held only after commercial training or coaching classes are over, said activities cannot be said to have been used to provide output service. Further, credit of repairs & maintenance expenses in motor car and travelling expenses incurred for the business tours was not allowed treating the same as not related to provision for commercial training or coaching service.

Note: There is no discussion in the order as to why services availed for student’s celebration shall not be entitled to CENVAT credit as “activity relating to business”.

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A. P. (DIR Series) Circular No. 5 dated 16th July, 2015

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Export factoring on non-recourse basis

This circular now permits banks to factor export receivables on a “non-recourse” basis (as against the present practice of factoring of export receivables on “with recourse” basis), subject to certain terms and conditions. The following is the gist of the terms and conditions: –

a) Banks must ensure that their client is not over financed and the invoices purchased must be genuine trade invoices.

b) Where export financing has not been done by the Export Factor, the Export Factor must pass on the net value to the financing bank/Institution after realising the export proceeds.

c) The bank that is the Export Factor, must have an arrangement with the Import Factor for credit evaluation & collection of payment.

d) Notation must be made on the invoice to the effect that the importer must make payment to the Import Factor.

e) After factoring, the Export Factor must close the export bills and report the same in the EDPMS to RBI.

f) When an Import Factor overseas is not involved, the Export Factor must obtain credit evaluation details from the correspondent bank abroad.

g) E xport Factor must conduct due diligence of the exporter.

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A. P. (DIR Series) Circular No. 4 dated 16th July, 2015

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Issue of shares under Employees Stock Options Scheme and/or sweat equity shares to persons resident outside India

Presently, an Indian Company can issue shares to its employees or employees of its joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, directly or through a Trust under Employees’ Stock Option (ESOP) Scheme, if: –

1. The scheme is drawn under the SEBI Act, 1992; and

2. The face value of the shares to be allotted under the scheme to non-resident employees did not exceed 5% of the paid up capital of the issuing company.

This circular now provides that an Indian company can issue “employees’ stock option” and/or “sweat equity shares” to its employees/directors or employees/directors of its holding company or joint venture or wholly owned overseas subsidiary/subsidiaries who are resident outside India, if: –

1. The scheme has been drawn either under: – (a) The Securities Exchange Board of India Act, 1992; or (b) The Companies (Share Capital and Debentures) Rules, 2014.

2. The “employee’s stock option”/“sweat equity shares” are in compliance with the sectoral cap applicable to the said company.

3. Issue of “employee’s stock option”/“sweat equity shares” in a company where foreign investment is under the approval route will require prior approval of FIPB.

4. Issue of “employee’s stock option”/“sweat equity shares” under the applicable rules/regulations to an employee/director who is a citizen of Bangladesh/ Pakistan will require prior approval of FIPB.

5. The issuing company must furnish a return as per the Form-ESOP (Annexed to this circular) to the concerned Regional Office of RBI within 30 days from the date of issue of employees’ stock option or sweat equity shares.

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A. P. (DIR Series) Circular No. 2 dated 3rd July, 2015

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Investment in companies engaged in tobacco related activities

This circular clarifies that prohibition with respect to Foreign Direct Investment (FDI) applies only in case of manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. In case of other activities viz. wholesale cash and carry, retail trading, etc., concerning cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes, FDI will be governed by the sectoral restrictions laid down in the FDI policy as amended from time to time.

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A. P. (DIR Series) Circular No. 1 dated 2nd July, 2015

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Re-export of unsold rough diamonds from Special Notified Zone of Customs without Export Declaration Form (EDF) formality

This circular clarifies that: –
a. Unsold rough diamonds which were imported on free of cost basis at SNZ, when re-exported from the SNZ (being an area within the Customs) without entering the Domestic Tariff Area (DTA ), do not require compliance with any EDF formality.

b. In case of lot/lots cleared at the Precious Cargo Customs Clearance Centre, Mumbai, Bill of Entry must be filed by the buyer and banks can permit import payments after being satisfied with the bona-fides of the transaction.

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Master Circulars dated 1st July, 2015

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RBI has issued 15 Master Circulars on 1st July, 2015. These Master circulars are a compilation of the regulatory framework and instructions issued by RBI and are for general guidance.

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A. P. (DIR Series) Circular No. 112 dated 25th June, 2015

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Overseas Foreign Currency Borrowings by Authorised Dealer Banks

This circular grants general permission banks to borrow from international/multilateral financial institutions (including International/Multilateral Financial Institutions of which Government of India is a shareholding member or which have been established by more than one government or have shareholding by more than one government and other international organisations) for general banking business. The borrowings are subject to applicable prudential conditions and cannot be used for capital augmentation purposes.

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SEBI’s jurisdiction over entities/transactions/GDRs outside India – Supreme court decides

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Background
Does SEBI have jurisdiction over (i) persons/advisors abroad? (ii) transactions under taken abroad? (iii) more specifically, over Global Depository Receipts (GDRs) issued abroad? If a non-resident person commits a securities related fraud abroad, can SEBI act against such persons? If yes, what are the conditions under which SEBI has jurisdiction? Some of these and certain related questions have been answered by the Supreme Court in the case of SEBI vs. Pan Asia Advisors Ltd. (Dated 6th July 2015, unreported).

Securities markets of India have significant connection with non-residents and foreign countries. Numerous nonresident investors invest in Indian securities. Indian companies regularly issue various forms of securities abroad. There are certain securities like GDRs that are issued, traded and redeemed/cancelled abroad. There are nonresident advisors who advise Indian companies. There are also non-residents who invest/trade in securities outside India or in India. Thus, there are numerous cases in which entities located out of India carry out transactions in India or in securities issued by Indian companies or advise Indian companies, etc. The question is does SEBI have jurisdiction over such foreign entities and/or foreign transactions in respect of such matters? And thus, can SEBI take action against such persons including lead managers even if they are not registered with SEBI? The Supreme Court has dealt with some of these issues.

The case is important for other reasons too. The matter related almost wholly to GDRs that are governed by the Reserve Bank of India through the Foreign Exchange (Management) Act, 2000 (FEMA) and Regulations issued thereunder. Thus, the submission made was that RBI should have sole jurisdiction over it. The decision of the Supreme Court in Vodafone International Holdings BV vs. Union of India and Another ((2012) 6 SCC 613) in respect of transactions abroad and their implications under tax was also discussed. Whether the principles laid down in that case would apply here was also considered.

Facts of the case
In the present case, the dispute before the Securities Appellate Tribunal (SAT ) as well as the Supreme Court was jurisdiction of SEBI. Though the minority dissenting decision of SAT had ruled also on the facts, the majority decision of SAT as also of the Supreme Court was purely on jurisdiction. Thus, neither had examined the findings of facts as also other allegations made by SEBI. However, it will still be necessary to understand what is SEBI’s contention in this regard.

SEBI alleged that a conspiracy was hatched to create a charade that GDRs were issued and duly subscribed by foreign institutional investors. Such a charade would eventually help the issuing company to raise funds and that too at a higher price. Investors in India would be impressed that foreign institutional investors had invested at a certain price in the GDRs issued by the company. Certain parties allegedly acting together took a loan from a bank for investment in the GDRs of the Indian company. The GDR proceeds were required by the loan agreement to be deposited with the same bank and were pledged for the purpose of the repayment of such loan. The company itself was alleged to be a party/signatory to such agreements. The GDRs were then converted into equity shares of the company by cancellation and such shares sold on stock exchanges in India to outside investors. This modus operandi was employed by the same persons in six companies. Such persons including the lead manager were located abroad. The net result was that investors in India were deceived by such conspiracy. SEBI thus took action under the SEBI Act as well as the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003 and debarred the lead manager and another person alleged to be primary persons behind the conspiracy from accessing the securities markets in India, rendering services in respect of securites in India, etc.

These parties appealed to SAT and raised the preliminary issue of jurisdiction of SEBI. The SAT by a majority decision held that SEBI had no jurisdiction in such a case. On appeal by SEBI, the Supreme Court reversed the order of SAT and restored the matter back to SAT holding that SEBI does have jurisdiction.

To arrive at its answer to this issue, the Supreme Court gave several reasons for its decision and interpretation of the law in this regard. These are discussed in the following paragraphs

Connection of GDRs with India
The submission made was that GDRs are created, traded and cancelled outside India – i.e., from “cradle-to-grave”, they are outside India. In that case, what is the connection with India which is required for an Indian regulator to exercise jurisdiction?

The Supreme Court identified the link as follows (emphasis supplied here and in later extracts):-

“Though it may appear that on the one hand underlying ordinary shares would be governed by the laws prevailing in India and the GDRs would be governed by the laws of the country in which such receipts are issued, the most relevant fact which is to be borne in mind is that the existence of GDRs is always dependent upon the extent of underlying ordinary shares lying with the Domestic Custodian Bank.”

GDRs could not be issued but for underlying shares in India. The issue of GDRs thus has close linkages with India and frauds, etc. in relation to GDRs and connected transactions in India would thus have concern with India.

Implications of a company being able to successfully issue GDRs
The Supreme Court highlighted the intangible aspect that investors associate with a company being able to issue GDRs. This of course goes to the core of the allegations. That the charade of issuing GDRs was made to give such recognition to the issuing company so that its shares will be bought and that too at higher prices. This aspect was recognized by the SAT as well in its minority decision.

GDRs are securities
For SEBI to have jurisdiction, an important issue is whether GDRs are “securities”. The other hurdle is that GDRs are issued abroad. The Supreme Court, considering the relevant definition of securities under the Securities Contracts (Regulation) Act, 1956 held that GDRs were securities. It observed that, “..even if GDR as such is not specifically referred to under the definition of `securities’ under Section 2(h) by virtue of sub-clause (iii) of the said section, any rights or interests in securities would also fall within the definition of securities.”.

Role of SEBI vis-à-vis protection of investors
GDRs have a base in and close connection with India. If there is a fraud, merely because the transactions were carried out outside India is not reason to disarm SEBI. In any event, the transactions that were entered into abroad were part of a total chain of transactions starting with issue of shares in India and culminating with transactions of securities in India. The Court observed:-

“Therefore, if there is going to be a false pretext or misleading information circulated with a view to lure both the foreign investors as well as Indian investors and in that process the very purpose of creation and trading in GDRs are found to be not true or bona fide, it cannot be said that simply because creation of such GDRs and its trading is in global market, SEBI should keep its mouth shut on the ground that it cannot extend its long statutory arm beyond Indian territory to control any such misdeeds deliberately committed with a view to defraud the Indian investors and thereby their interest in the investment of securities and its protection is at great stake.”

Applicability of FEMA does not prevent SEBI from exercising jurisdiction
A point strongly made was that GDRs are governed by the Foreign Exchange (Management) Act, 2000 and Regula-tions issued thereunder. It was even contended that this not only resulted in GDRs being solely governed by this law but it also gave the Reserve Bank of India exclusive jurisdiciton. Thus, SEBI has no jurisdiction, except purely in matters specifically stated in such law. The Supreme Court pointed out that these were two different issues. In particular, as far as frauds and the like were committed in respect of securities markets in India, SEBI did have juris-diction. The two regulators operate under different laws for different purposes and can thus act to further the objects of the respective laws they deal with.

Circumstances under which SEBI can exercise “extra-territorial” jurisdiction

It was claimed that SEBI was seeking to extend its powers beyond India. The transactions took place, and the parties were located, outside India. The question was whether action by SEBI in respect of such transactions/parties was extra-territorial and thus prohibited by law. Further, under what circumstances can SEBI exercise such powers.

Firstly, the decision in the case of GVK Industries Limited and another vs. Income Tax Officer and another – (2011) 4 SCC 36 was applied here. The following observations of the Supreme Court in that case were relied on:-

“…the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, – events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like — that occur, arise or exist or may be expected to do so, natu-rally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropri-ate cases, eliminate or engender such extraterritorial as-pects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well being of, or security of inhabitants of India, and Indians.”

The “effects doctrine” was also applied. In other words, applying this doctrine, even if the transactions took place abroad, if the effect was that certain things prohibited by Indian law took place in India, the Indian regulator could have jurisdiction.The following observations in the case of Haridas Exports vs. All India Float Glass Manufacturers’ Assn. and Others – (2002) 6 SCC 600 were relied on and applied (emphasis supplied):-

“46. It is possible that persons outside India indulge in such trade practices, not necessarily restricted to the effectuation of prices within India, which have the effect of preventing, distorting or restrict-ing competition in India or gives rise to a restrictive trade practice within India then in respect of that re-strictive trade practice, the MRTP Commission will have jurisdiction. The counsel for the respondents is right in submitting that if the effect of restrictive trade practices came to be felt in India because of a part of the trade practice being implemented here the MRTP Commission would have jurisdiction. This “effects doctrine” will clothe the MRTP Commission with jurisdiction to pass an appropriate or-der even though a transaction, for example, which results in exporting goods to India at predatory price, which was in effect a restrictive trade practice, had been carried out outside the territory of India if the effect of that had resulted in a restrictive trade practice in India. If power is not given to the MRTP Commission to have jurisdiction with regard to hat part of trade practice in India which is restrictive in nature then it will mean that persons outside India can continue to indulge in such practices whose adverse effect is felt in India with impunity. A competition law like the MRTP Act is a mechanism to counter cross border economic terrorism. Therefore, even though such an agreement may entered into outside the territorial jurisdiction of the Commission but if it results in a restrictive trade practice in India then the Commission will have jurisdiction under Section 37 to pass appropriate orders in re-spect of such restrictive trade practice.”

The decision of Vodafone was cited to support the argument that without specific powers in the law, transactions could not be “looked through” to determine the alleged underlying transactions. The Supreme Court rejected this argument stating that SEBI had specific and adequate powers in law to examine such transactions of alleged frauds.

Conclusion

The ruling of the Supreme Court will surely have larger ramifications. Transactions/persons abroad will not be beyond SEBI’s long hand solely on the ground that SEBI cannot have extra-territorial jurisdiction. This would have implications not just for GDRs, but also for almost any type of transaction/person connected with securities markets in India directly or indirectly. However, the limits are also ob-vious and clear as per the decision. There will have to be connection to and implications in India of such transac-tions. The decision also would have to viewed in light of the special fact in this case – that the GDRs could not have been issued without underlying shares in India. The issue cycle of GDRs – even if cradle-to-grave as argued

– did have direct implications to the underlying shares as well as other shares in India. The fact that shares arising out of cancelled GDRs were sold in India was also a relevant factor.

Wife’s Share in an HUF, Et tu, Gender Equality?

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Introduction
In recent times, there has been an effort at gender equality in India across various legislations, such as, amending the Hindu Succession Act to give rights to daughters and sisters in their father’s Hindu Undivided Family (HUF), women’s representation on the board of directors of listed and large public companies, etc. However, surprisingly one of the most basic rights of women – share of a wife in her husband’s HUF has yet not undergone a change. This position has remained constant right from the times of Manusmriti, the father of the Hindu Law. Let us examine the position in this respect.

Concept of an HUF
Just to set the background and to jog our memory, an HUF is a joint family belonging to a male ancestor, e.g., a grandfather, father, etc., and consists of male coparceners and other members. Thus, the sons and grandsons of the person who started the HUF would automatically become coparceners by virtue of being born in that family. The wife of a coparcener is a member of the HUF. A unique feature of an HUF is that the share of a member is fluctuating and ambulatory which increases on the death of a member and reduces on the birth of a member. The share can be crystallised only on the partition of an HUF. A partition refers to the breaking up of the joint family and giving separate identifiable shares to all or some of the coparcerners/members of the HUF. Thus, the HUF as an entity ceases to exist and its constituents become the owners of the property which was earlier owned by the HUF. The crux of the issue is which female member of an HUF has a right to demand a partition of an HUF?

Share of a Daughter
After the Amendment on 9th September 2005 to the Hindu Succession Act, 1956, even daughters would have an equal right as sons and hence, now, even they would become coparceners in their father’s HUF. The Bombay High Court has held daughters have a right to claim partition in their father’s HUF and this applies even to daughters born before 9th September 2005 – Babu Dagadau Awari vs. Baby AIR 2015 (NOC) 446 (Bom). Thus, this has been a major relaxation in women’s rights. Grand-daughters would also become coparceners in the respective HUFs of their paternal and maternal grandfathers.

Share of a Wife
However, when it comes to the share of a wife in her husband’s HUF, the position is the opposite. Under the Hindu law, a wife does not have a right to demand a partition of her husband’s HUF. She cannot demand a partition. Her only right is to get a share in her husband’s HUF equal to her son’s share in the event of a partition of such HUF. The decision of the Bombay High Court in Anand Krishna Tate vs. Draupadibai Krishna Tate, 2010(4) All MR 834 is on this point.

The Karnataka High Court in Thabagouda Satteppa Umarani by LRs vs. Satteppa 2015(1) KCRR 1022, held that it was to be noted that the term coparcener of an HUF referred to a male issue i.e., a father or a son. The wives of coparceners did not get any interest by virtue of their marriage. A wife had no share, right title or interest in the Hindu Undivided Family in which her husband was a coparcener with his brothers, father or sons and after the amendment of section 6 of the Hindu Succession Act,1956, with his sisters and daughters also. The wife, may be a member of a joint Hindu Family, but by virtue of being a member in the joint Hindu Family she could not get any share, right, title or interest in the joint Hindu Family property which that family owned. A wife could not demand a partition unlike a daughter. She would get a share only if partition was demanded by her husband or sons and the property was actually partitioned. The claim by a wife during lifetime of the husband in the share and interest which he had as a coparcener in his HUF was wholly premature and completely misconceived. Thus, though the wife was entitled for an interest i.e., share, it was only along with her husband.

Share of a Widow
Is the position of a widow different from that of a wife whose husband is alive? Things start getting murkier now. Prior to the Hindu Succession Act, 1956, the position was different. Section 3 of the Hindu Women’s Right to Property Act, 1937 provided that when a Hindu male died intestate having behind his share in an HUF, then his widow had the same interest in the HUF as he himself had. Further, any such interest devolving on his Hindu widow was a limited interest known as a Hindu woman’s estate, and she had the same right of claiming partition as a male owner. Interestingly, this Act was repealed by the Hindu Succession Act, 1956. So an earlier law gave better protection to a widow as compared to the latter law! A Single Judge of the Bombay High Court in Anand Krishna Tate vs. Draupadibai Krishna Tate, 2010(4) All MR 834 has analysed the impact of this repeal and held that post-repeal, the 1937 Act affords no protection to widows. The Bombay High Court held that section 3, no doubt, gave a right to women to seek partition. However, this Act was repealed by Hindu Succession Act, 1956. Therefore, it was no longer possible to take advantage of section 3 of the Hindu Women’s Right to Property Act. If the provisions of Hindu Succession Act, 1956 are read, it would be clear that there is no provision similar to section 3 of the Hindu Women’s Right to Property Act. The legislature in its wisdom had not thought it fit to continue this right in a woman. However, another Single Judge of the Bombay High Court in the case of Smt. Kalawati Balasaheb Karne vs. Smt. Chandra Hanmant Karne, SA 405/2013, Order dated September 15, 2014, has considered this decision and held that in the wake of the revolution for emancipation of women and for recognising their rights as human beings equal to the males in respect of the properties in a Hindu family, depriving a widow simply because no other coparcerners demand partition would clearly be destructive of the movement. It must be noted that both the decisions are of Single Judges of the same High Court and hence, one cannot be said to have dominance over the other. However, both of these decisions have not considered a very old Full Bench judgment of the Bombay High Court in Sushilabai Ramchandra Kulkarni vs. Narayanrao Gopalrao Deshpande, AIR 1975 Bom 257 (FB). Although this decision dealt with the share which a widow would receive in a partition of her deceased husband’s HUF, it also held that a widow’s heir is entitled to have a partition of the HUF and separate possession thereof secured to her.

Several Courts have expressly held that a widow can claim a partition of her husband’s HUF. The Gujarat High Court in Vidyaben vs. JN Bhatt AIR 1974 Guj 23 states that she can claim a partition. It analysed section 6 of the Hindu Succession Act, 1956, which states that when a male Hindu dies leaving behind Class I female relatives (such as, wife, mother, daughter), then his interest in the HUF property shall devolve by testamentary (i.e., by Will) or intestate – succession (i.e., by law), as the case may be, under this Act and not by survivorship. It further provides that the interest of a Hindu male coparcener shall be deemed to be the share in the HUF property that would have been allotted to him if a partition of the property had taken place immediately before his death, irrespective of whether he was entitled to claim partition or not. The Court held that section 6 itself by implication gives a right to the female heir mentioned therein to claim partition of the joint family property and the moment the deceased coparcener left behind him his heirs who included a female relative specified in Class I of the Schedule the law governing coparcenary property with regard to devolution of interest would no longer be applicable and the testamentary or intestate succession as provided by this Act would govern the case. It held that the moment the interest of the deceased in the joint family, property is severed, the joint family status would come to an end and it would be open to the widow to claim partition therein. it observed that it was difficult    to    envisage    a    position    that    even    though    the    share of the deceased has to be ascertained on the footing that the wife would get the share if there was partition of the huf property just prior to the death of her husband, she would not get any share after his death and that her son would take the remaining property by survivorship. the gujarat high Court also cited with approval a very old decision of the Bombay high Court in Ranubai vs. Laxman Lalji Patil, AIR 1966 Bom 169 which was on somewhat similar lines. a similar view has been expressed by the gauhati high Court in CIT vs. Mulchand Sukmal Jain, 200 ITR 528 (Gau.) where it held that the rule of pristine Mitakshara law that when, in a family consisting of father, mother and son , partition takes place between the male members, the mother may be entitled to a share equal to that the son in lieu of her claim for maintenance, but she herself cannot demand partition, cannot apply to a state of affairs reached on the death of her husband. the widow as an heir of her husband would certainly be entitled to claim the share inherited by her and, for that purpose, compel a partition. even the Karnataka high Court in Thabagouda Satteppa Umarani by LRs vs. Satteppa 2015(1) KCRR 1022 has held that a widow can demand partition of the interest in an huf which her deceased husband would have been entitled to.

It is respectfully submitted that the decisions   upholding right of a widow to demand partition appear   more reasonable.

The supreme Court in Gurupad Khandappa Magdum Vs. Hirabai Khandappa Magdum, 129 ITR 440 (SC) dealt with what would be share of a widow in a partition of    her    deceased    husband’s    HUF?    The    Court    held     that    a widow would not only be entitled to share in the portion coming to her husband but she will also have to be allotted her own share in the coparcenary property along with son upon death of husband, i.e., she would get her own share equal to her son and also a part in her husband’s share.   

Position of Different Female Relatives

Based on the above discussion, it would be interesting to note that the law provides for a different treatment as to whether a female can ask for a partition in an huf depending upon her relationship. this is better explained by the following table:

So we have a situation where a married daughter can partition    her     father’s    HUF    even     if    she    got    married    years several moons ago but she cannot ask for partition of her    husband’s    HUF    with    whom    she     is     living?    Moreover,     she    can    demand    partition    after    her    husband’s    death    but not during his lifetime!  is this not a singularly unique   proposition?

Conclusion
One wonders in these times of talk about women empowerment and so many recently launched initiatives for the girl child, why has this legal right of a married lady has not been changed? is it not high time that the Legislature walks the talk and focuses on ironing out such creases from our archaic laws? the law relating to hufs especially is one which is fraught with confusion and complexity. Would it not be desirable to have one consolidated law relating to all aspects concerning an huf instead of having    some    portions    codified    and    some    uncodified?    Ease    of doing business should also be coupled with     the    ease    of    exercising    one’s    personal rights. only then can we say that India    is    a    fair    and    equal    rights’    democracy!

Attitude – Professional Skepticism

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Attitude – Professional Skepticism

Arjun (A) — He Bhagwan, in the last few meetings, you have been explaining to me our Institute’s disciplinary mechanism and its procedures.

Shrikrishna (S) —Yes, dear. It is governed by Chartered Accountants (Procedure of Investigations of Professional and other Misconduct and Conduct of Cases) Rules, 2007 published in the official Gazette of India dated February 28, 2007 (‘Enquiry Rules’).

A — Quite a longish name! Difficult to remember. We have discussed so many disciplinary cases so far. But frankly, I have lost track of what you had told me in the beginning – a couple of years ago.

S — H a! Ha! Ha! It does happen. Actually, the principles should be hammered every day.

A — I agree. We are so much engrossed with our dayto- day worries of the practice that we tend to forget the basic things. Please give me some tips that we should always keep in mind.

S — I was also thinking on the same lines. See I explained the Bhagwad Geeta to you thousands of years ago. Many people are still reading and trying to understand it. But very rarely any one practices it. Same is with your ethics.

A — That is precisely the trouble. In school also, we are taught so many good things. But when we grow old, we compromise on everything under the fond excuse of ‘practical approach’.

S — I don’t preach idealism. Even in the Mahabharata war, I had advised you a few loopholes in the rules of war. So one has to be practical. But one has to be careful in balancing the rules of ethics and practical life.

A — True. Thanks to your advice, I could get rid of Karna, Jayadratha and others. Otherwise, it would have been a tough time for all of us.

S — Anyway! There are a few guiding principles which you CAs should constantly keep in mind.

A — What are they?

S — First and foremost, you should never do anything in ‘good faith’. It is very dangerous. We are now in kaliyug. Total faith in anything and anyone is bound to invite trouble.

A — Yes, I remember the case where the CA wife filed a complaint against her CA husband when their relations got strained. And another incidence of a CA, who signed the balance sheet in good faith that the director would sign subsequently!

S — There are hundreds of such cases where there was a breach of trust. In difficult times, clients conveniently forget all the good things done by their CA for them. At times, he even risks his certificate of practice to accommodate them.

A — But you had told me a few High Court decisions – where it was held that for holding anyone guilty of gross negligence, there has to be some dishonesty or ill-motive on his part that is established. You said, even a blunder is not negligence and every negligence is not gross negligence.

S — Arjun, you are very smart ! You remember only what is convenient to you. Firstly, the law and court decisions are at their own place. Facts and circumstances are more important. And with due respect to the courts, you must note that now clause (7) of Part I of 2nd schedule is amended.

A — In what way?

S — Apart from ‘gross negligence’, even ‘lack of due diligence’ is added. This is a very wide expression.

A — Oh!

S — And moreover, if someone brings his financial statements, and you sign without much verification, can you say you are not negligent? You may not be dishonest or your motives may not be bad !

A — I see your point!

S — Again, you may not be dishonest to any person. But then, are you not dishonest to yourself? Are you not failing in your duty?

A — Yes; if we were just to sign in good faith, the audit profession has no meaning! It is abuse of our signature. It is not audit at all!

S — Moreover, if you simply endorse what client says – without verification, without asking any questions, then why is audit required at all? How can others trust the correctness of the balance-sheet?

A — But what about the principle of ‘watch-dog’ as opposed to ‘blood-hound’?

S — Now that principle is diluted. Remember, now the society and regulators expect you to be blood-hounds only. You cannot and should not accept anything at its face value. That is professional skepticism.

A — You mean, should we not trust anybody? Everything we should see with suspicion?

S — Not exactly that! But doing your duty truthfully and religiously does not mean distrust or suspicion. The question is your credibility. You are the financial police! Can you have police who do not suspect anybody? Or security personnel who does not check you. Does it mean, they suspect you? After all, the duty should be performed strictly – without fail.

A — I agree. But I would like to know more such principles when we meet next.

S — Om Shanti !

Note: This dialogue is based on the same simple but basic principles which we professionals should religiously follow.

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Limitation – Settlement of Accounts on dissolution of partnership firm – After 3 years right to sue would become time barred: Limitation Act Article 5:

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Smt. Shanti Bai Agrawal & Ors vs. Smt. Uma Bai Agarwal & Ors AIR 2015 Chhattisgarh 80

The undisputed facts were that a house was recorded in name of M/s. Gajadhar Prasad Kashi Prasad, a partnership firm. The firm had four partners including the plaintiff. The said property was in name of the firm M/s. Gajadhar Prasad Kashi Prasad and the plaintiff was residing in the said property from the year 1943. The partnership firm was dissolved on 02.11.1956. After dissolution of the firm, the plaintiff, who was a partner continued to reside in the house and was in possession thereof . The house also had also a shop in a portion thereof. It was case of the plaintiff that he was/in exclusive possession of the suit property for last 12 years after the dissolution, as the suit was filed in the month of September, 1994. The plaintiff/appellant pleaded that by ouster of the title of the defendants after dissolution, the plaintiff was in possession and therefore had acquired the right and title over the suit property by way of adverse possession. It was therefore for such reason, the title of the plaintiff was denied as the plaintiff had acquired the title over the suit land by way of adverse possession. Consequently, the suit for declaration and permanent injunction was filed.

The substantial question of law was thus framed as under: “Whether, the immovable property brought into partnership by partners, on dissolution, remained to continue to be immovable property in the hands of the partners ?”

The Hon’ble Court observed that on reading of section 46 it was clear that on dissolution of a firm, first the property of the firm was to be applied for payment of debts and liabilities of the firm and the surplus to be distributed among the partners according to their rights. Section 47 provides that the authority of the partners will continue only so far “as it may be necessary to wind up” the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution, “but not otherwise”.

The Supreme Court in (AIR 1996 1300) Addanki Narayanappa & Another vs. Bhaskara Krishnappa & Others, had an occasion to interpret the share of the partner and the nature thereof. It is stated that the share of a partner is nothing more than his proportion of the partnership assets after they have been turned into money and applied in liquidation of the partnership, whether its property consists of land or not. Further, on dissolution the debts and liabilities should first be met out of the firm property and thereafter assets should be applied in rateable payment to each partner of what is due to him firstly on account of advances as distinguished from capital and, secondly on amount of capital, the residue, if any, being divided rateably among all the partners. It is obvious that the Act contemplates complete liquidation of the assets of the partnership as a preliminary to the settlement of accounts between partners upon dissolution of the firm.

The Court further observed that it is well settled that the firm is not a legal entity, it has no legal existence, it is merely a compendious name and hence the partnership property would vest in all the partners of the firm. Accordingly, each and every partner of the firm would have an interest in the property or asset of the firm but during its subsistence no partner can deal with any portion of the property as belonging to him, nor can he assign his interest in any specific item thereof to anyone.

Therefore, according to section 47 of the Indian Partnership Act, 1932, after the dissolution of a firm, the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners continue notwithstanding the dissolution, “so far as may be necessary to wind up the affair of the firm” and further to complete transactions begun but unfinished at the time of the dissolution, “but not otherwise”. In this case the dissolution is not in dispute, therefore, the partners had only inter se right between them in terms of section 47 and 48(b)(iv) of the Indian Partnership Act to claim for the right as per the provisions of the said section.

Therefore, in view of the aforesaid discussion, it is held that after dissolution of the property, the immovable property i.e. the subject suit land which was of a partnership firm became “a movable assets” in the hand of the partners inter se of M/s. Gajadhar Prasad Kashi Prasad. The partners have their inter se right in terms of section 48 of the Indian Partnership Act which could have been enforced by filing a suit to claim a share of dissolved partnership firm. Further, as per Article 5 of the Indian Limitation Act, the suit could have been filed by either of the partners within three years of the dissolution.

Admittedly the dissolution happened on 02.11.1956, therefore, by application of (Article 106 of the Limitation Act, 1908) Article 5 of the Limitation Act, 1963, the defendants having not claimed any right for settlement of account and share in the partnership, it would be barred as the period of three years has lapsed. Taking into consideration the totality of the facts, the immovable property of firm M/s. Gajadhar Prasad Kashi Prasad, was a property of the firm and the firm having been dissolved on 02.11.1956 as per the Partnership Act, it fell into shares of the partners as a movable assets for which the partners could have sued for their part of share after the discharge of dues and other settlement within a period of three years from the date of dissolution. Having not done so, the right to sue for account and the share in the partnership property became barred by limitation

The Court dismissed the suit on ground that a suit is not maintainable on the basis of adverse possession, it can be used as a shield/defence.

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Coparcenary property -Right given to daughters to claim partition – Constitutionally valid-Hindu Succession Act 1956 section 6:

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Dr. G. Krishnamurthy vs. The UOI & Anr. AIR 2015 Madras 114

On 20th day of December, 2004, the Hindu Succession Amendment Bill 2004 was introduced, inter alia, seeking to amend the erstwhile section 6 and to omit sections 23 and 24 of the Hindu Succession Act, 1956. Ultimately, the Amendment Act, 2005 was passed as Act 39 of 2005 on 09.09.2005. This Act was introduced pursuant to the recommendation made by the Law Commission to alleviate the gender bias caused by the then existing Act.

By the Amendment Act, not only section 6 was amended apart from omission of sections 23 and 24, but consequent thereon, an insertion was made by way of Amendment to Schedule in Clause-I.

The petitioner submitted that by the amendment made to section 6, the entire concept governing the Hindu Law was sought to be overturned in one stroke. The principle governing “Sapinda” and ”coparcener” as existed in the Shastric and Customary Law has been obliterated . Upon deletion of section 23, it is likely that a Hindu woman after remarriage would continue in the dwelling house wholly occupied by the members of a family of a Hindu intestate. There is also a possibility of a non Hindu residing therein in view of the possible remarriage of the widow. The Petitioner filed a Petition seeking to declare the aforesaid Amendment Act, 2005 as Ultra Vires.

The Court observed that the enactment has been made on the recommendation made by the Law Commission to remove the discrimination meted out to women. Therefore, in order to uphold the protection given under Articles 14, 15 (2) and (3) and 16 of the Constitution of India, the amendment was brought forth. It is trite law that the provisions of the Act would prevail over the old Hindu Law. Though the conferment of the rights to a Hindu woman is belated, it is also gradual through different enactments.

By the Hindu Law of Inheritance Act 1929, inheritance right to three family heirs-son’s daughter, daughter’s daughter and sister was conferred on them

The next legislation “A Hindu Woman’s Right to Property Act , 1937” provided for the right of the Hindu widow to succeed along with the son of the deceased in equal share to the property of a deceased husband. Though the Hindu Succession Act, 1956, (hereinafter referred to as “the Act”) came into being, u/s. 6 the rights of women were restricted. Thus, the new amendment Act was introduced to bring forth an element of equality between a Hindu man and woman. The enactment has been made to implement the fundamental rights enshrined in the Constitution of India.

Coming to section 23 of the Act, it has been omitted to remove the disability to female heirs. The said decision was made keeping the larger public purpose in mind. By virtue of the amendment section 6, the difference between the son and daughter has been removed, and consequently section 23 of the Act has been rightly taken away from the statute book.

Section 24 of the Act also created a statutory discrimination against widows remarrying qua inheritance. This was rightly removed as a woman cannot be deprived of her right to get a property on her remarriage. In other words, by such a remarriage, the entitlement of the widow cannot be extinguished. Accordingly, section 24 was rightly removed from the text.

The petitioner had sought to challenge sections 23 and 24 of the Act on mere presumption and conjunctures. The petitioner had also submitted that a discrimination is sought to be made with respect to Class-II. He had also submitted that Class-I by the inclusion of certain categories of heirs has to be declared as unlawful. The court held that there was no merit in the said submission. In fact, the petitioner had admitted that the laudable object in treating a Hindu man and woman on par had to be appreciated. If that is so, there cannot be any challenge to Class-I of the schedule. Class-I of the Schedule is only consequent upon the amendment made to section 6. It only qualifies the heirs, who are entitled to a property as in Class-I in consonance with section 6. Class-I has never been amended and there is no challenge to it. Therefore, the challenge to the said inclusion made to Class-I of schedule is also rejected.

The Court further observed that a challenge to the constitutionality of an enactment is to be made on the touchstone of the Constitution. It cannot be done based upon mere presumptions. Equally, a mere hardship cannot be a ground to declare a valid legislation to be ultra vires. The court therefore declined to declare the Amendment of 2005 as unconstitutional.

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Consumer – Builder –Agreements are prepared in a one-sided-Delay in handing over of possession – Liable to pay interest and compensation: Consumer Protection Act, 1986.

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Shri Satish Kumar Pandy & Anr. vs. M/s. Unitech Ltd.; Consumer Case No. 427 of 2014 alongwith others (NCDRC, New Delhi) dated 8/6/2015

The complainants group of matters, booked apartments with the opposite party in a complex known as ‘vistas’ which was being developed in sector 70 of Gurgaon, and they entered into individual “Buyers Agreement” with the opposite party. The possession of the apartments was agreed to be delivered to them within 36 months from the date of their respective agreements. The grievance of the complainants was that neither the possession of the apartments has been given to them nor was the construction complete though the last date stipulated in the Buyer’s Agreement for delivery of the possession to them had already expired more than 2 years ago. The complainants therefore, approached the Commission seeking delivery of the possession of the flats agreed to be sold to them or in the alternative payment of current market value of such houses. They were also seeking payment of compensation on account of loss of rental income to them with effect from the stipulated date of possession and compound interest @18% p.a. with effect from the stipulated date of possession. The complainants were also seeking compensation on account of their mental torture, agony etc.

The Commission observed that the learned counsel for the complainants stated, on instructions, that the complainants were not interested in taking refund of the money paid by them to the opposite party and they wanted to have possession of their respective flats even if the said possession was to be delivered in terms of the revised date of possession indicated in the abovereferred letter of opposite party. Thus the only question which survived for consideration in these complaints was as to what interest/compensation was to be paid to the complainants by the opposite party, till the date the possession being delivered to them.

The Hon’ble Commission observed that for the exceptional circumstances mentioned in Clause 4 of the agreement the opposite party was required to hand over the possession of the apartment to the flat buyers within 36 months from the date of signing the agreement with them. The exceptional circumstances which could justify delay in hand over the possession of the apartments were:-

(a) Lock-out
(b) Strike
(c) Slow-down
(d) Civil Commotion
(e) War, enemy action, terrorist action, earthquake or act of God and
(f) any reason or circumstance beyond the control of the developer.

The delay in handing over the possession of the apartments would also be justified if there was to be a new legislation, regulation or order suspending, stopping or delaying the construction of the complex and the apartments.

The Commission observed that neither any new legislation was enacted nor an existing rule, regulation or order was amended stopping suspending or delaying the construction of the complex in which apartments were agreed to be sold to the complainants. There was no allegation of any lock-out or strike by the labour at the site of the project. There was no allegation of any slow-down having been resorted to by the labourers of the opposite party or the contractors engaged by it at the site of the project. There was no civil commotion, war, enemy action, terrorist action, earthquake or any act of God which could have delayed the completion of the project within the time stipulated in the Buyers Agreement.

The word ‘slow down’ having been used along with the words lock-out and strike, it has to be read ejusdem generis with the words lock-out and strike and therefore, can mean only a slow down if resorted by the labourers engaged in construction of the project.

Therefore, the plea of the opposite party that the completion of the project was delayed due to non-availability of water, sand and bricks in adequate quantity was rejected.

Since the delay in construction of the apartments could not be justified by the opposite party, it was required to pay compensation to the flat buyers. The contention of the learned counsel for the opposite party was that such compensation had to be calculated @ Rs. 5/- per sq. ft. of the super built area of the apartment for the period of delay in offering the possession beyond the period indicated in clause 4 of the Buyers Agreement, the complainants having agreed to the aforesaid term while agreeing to purchase the apartments. This was also the contention of the learned counsel for the opposite party that the terms of the contract are binding on the parties and cannot be altered by a consumer forum.

The Hon’ble Commission observed that a person who, for one reason or the other, either cannot or does not want to buy a plot and raise construction of his own, has to necessarily go in for purchase of the built up flat. It is only natural and logical for him to look for an apartment in a project being developed by a big builder such as the opposite party in these complaints. Since the contracts of all the big builders contain a term for payment of a specified sum as compensation in the event of default on the part of the builder in handing over possession of the flat to the buyer and the flat compensation offered by all big builders is almost a nominal compensation being less than 0.25% of the estimated cost of construction per month, the flat buyer is left with no option but to sign the Buyer’s Agreement in the format provided by the builder. No sensible person would volunteer to accept compensation constituting about 2-3% of his investment in case of delay on the part of the contractor, when he is made to pay 18% compound interest if there is delay on his part in making payment.

Thus the commission held that a term of this nature is wholly one sided, unfair and unreasonable. The builder charges compound interest @ 18% per annum in the event of the delay on the part of the buyer in making payment to him but seeks to pay less than 3% per annum of the capital investment, in case he does not honour his part of the contract by defaulting in giving timely possession of the flat to the buyer. Such a term in the Buyer’s Agreement also encourages the builder to divert the funds collected by him for one project, to another project being undertaken by him. He thus, is able to finance a new project at the cost of the buyers of the existing project and that too at a very low cost of finance.

The complainants have specifically alleged that some of the clauses in the Buyer’s Agreement were one sided and they were made to sign already prepared documents. It is also alleged that some of the clauses contained in the Buyer’s Agreement are totally unreasonable and in favour of the opposite party only. It is further alleged that the clause providing for compensation at the nominal rate at Rs.5/- per sq. ft. of the super built up area is unjust and exploits the complainants. It is also alleged that the opposite party has been utilising the money of the complainants for its own purposes. Therefore, the commission held that the opposite party should pay adequate compensation to the complainants which would not only take care of the additional financial burden on them on account of the delay in construction of the flat but would also give some compensation to them for the harassment and mental agony which they have suffered all along and were likely to suffer atleast for some more time on account of the opposite party having not delivered the possession of the flat to them by the date stipulated in the Buyer’s Agreement.

The cost of
the borrowing for individual home buyers was about 10% per annum though it had
gone upto 11.5% in last few years. Accordinfg to the commission, if the
opposite party, paid simple interest @ 12% per annum to the complainants, that
would not only take care of the additional financial burden on them but also
give some monetary compensation to them for their sufferings on account of the
delay in handing over possession of the flat purchased by them.

It transpired
during the course of arguments that the service tax has increased with effect
from 01.06.2015. Had the opposite party delivered possession in time, the
complainants would have paid service tax at the pre-revised rate. Therefore,
held that the increase in service tax with effect from 01.6.2015 should be
borne by the opposite party.

The
commission also directed a rate higher than 12% per annum should be paid by the
opposite party, if the revised date of delivery of possession is not honoured
by the opposite party.

CALCULATING TURNOVER – CHALLENGES & AMBIGUITIES

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Introduction
Accountants are often the most trusted advisers of businesses. It is therefore essential that accountants also understand when key disclosures need to be made to regulators. Among other things, the Competition Act, 2002 (‘the Competition Act’), regulates merger and acquisitions (combinations) of large enterprises. Combinations that satisfy the relevant asset/turnover thresholds prescribed in Section 5 of the Competition Act require mandatory prior notification to, and approval from, the Competition Commission of India (‘CCI’). While the Act provides a relatively detailed guidance on calculating the value of assets, the definition of ‘turnover’ is very wide. ‘Turnover’ is defined to include the value of sale of goods or services, excluding indirect taxes1. Beyond this skeletal definition, there is no other statutory guidance parties can rely on. To ensure compliance with the law, accountants should remain vigilant and work with lawyers to determine when notification to the CCI is required.

Importance of turnover
Turnover calculation is critical from a merger control perspective as the very requirement to notify a transaction often hinges on the turnover of the parties involved. Transactions where the parties fail to meet the asset and turnover thresholds under Section 5 of the Competition Act need not be notified. Further, to assess whether a transaction qualifies for the exemption under the Government of India notification S.O. 482(E) dated March 4, 2011 (‘Target Based Exemption’), parties need to assess if the target’s turnover in India is below INR 750 crores (or if target’s assets in India are below INR 250 crores). Computation of turnover by the parties will guide their decision on whether to notify transaction or not. Absent clarity on how to actually compute turnover for the purposes of the Act, businesses and their advisors face substantial uncertainty while deciding whether a transaction requires notifying to the CCI or not. Given the potentially substantial penalties that may be attracted for not notifying a transaction to the CCI, businesses and their advisors require clarity on how to calculate turnover so they can make the decision to notify or not notify with reasonable confidence.

The implications of getting it wrong are significant. A combination is void until it is cleared by the CCI as not being likely to cause an appreciable adverse effect on competition in India. In addition, substantial penalties of up to 1% of the turnover of the combination apply for failing to give the CCI notice of a notifiable combination.

Issues in turnover calculation

Here we examine 2 (two) questions which often surface in calculation of turnover while determining whether a transaction needs to be notified to CCI:

How to calculate turnover of enterprises which generate their revenue from commissions (i.e. enterprises which receive a gross amount which they subsequently transfer to another enterprise while retaining a percentage as their commission)? – It is possible that considering only the commissions earned while calculating turnover could lead to a decision not to notify a transaction to CCI whereas a turnover calculation based on gross receipts would require that a notification be made.

What constitutes turnover ‘in India’ for the purposes of the Competition Act? – Determining turnover ‘in India’ of an enterprise is crucial as both the turnover thresholds under Section 5 of the Competition Act as well as the de minimis thresholds under the Target Based Exemption have an India nexus requirement (i.e. a certain amount of turnover should be ‘in India’). Despite the critical importance of determining the residency of an enterprise’s turnover, when it comes to determining what constitutes turnover ‘in India’, there are no statutory guidelines at all.

Calculation of turnover for enterprises which generate their revenue from commissions
To determine the turnover of an enterprise, in practice, in most cases, the CCI looks at the audited books of accounts of an enterprise. However, in certain cases a simple reading of the books of accounts does not suffice and the CCI can and, in some cases, has gone beyond the books of accounts to determine the turnover.

In Fair Bridge/Thomas Cook2 , the CCI refused to consider the turnover figures for Thomas Cook (India) Limited (‘Thomas Cook’), as reflected in its books of accounts, as the ‘turnover’ for the purposes of the Competition Act. Considering the nature of Thomas Cook’s package tour operating business wherein Thomas Cook charges a consolidated amount for a packaged tour (which includes transportation, boarding, lodging, sightseeing and similar services). The CCI held that Thomas Cook’s turnover would include the gross amount charged to customers and not merely the commissions earned. In interpreting turnover to include gross receipts instead of commissions, the CCI relied on mainly two grounds – (i) Lack of a principal-agent relationship between Thomas Cook and the vendors who actually provided the lodging, boarding, sightseeing and similar services; and (ii) Provisions in Accounting Standards and Guidance Notes issued by the Institute of Chartered Accounts of India (‘ICAI’) as well as internationally accepted accounting practices followed by leading tour operators worldwide.

While Fairbridge/Thomas Cook decision does clarify the CCI’s stance on turnover calculation to a certain extent, the situation is still not completely clear. The CCI has considered commissions and not gross receipts to be the correct measurement of turnover of an enterprise acting as an agent for another entity, which is in line with the Indian Accounting Standards issued by the ICAI3. However, can this be interpreted to mean that in all situations where there is no principal-agent relationship, gross receipts are the correct measure of revenue? The answer is far from clear.

Thus, it appears that a mere lack of a principal-agent relationship need not necessarily imply taking the gross amounts which flow through an intermediary (such as an online retailer) as the turnover for the purposes of the Competition Act. However, absent any statutory clarification or definitive decisional observations by the CCI, calculation of turnover continues to remain an area of interpretive ambiguity.

We would suggest that accountants work closely with lawyers to determine whether the CCI is likely to treat commissions or gross receipts as the relevant turnover as the measure of revenue.

What constitutes turnover ‘in India’?
There are no statutory guidelines on determining what constitutes turnover ‘in India’. Calculating turnover ‘in India’ for an enterprise is crucial as: (i) parties involved in a transaction need to satisfy the asset/turnover thresholds u/s. 5 of the Competition Act to be considered ‘combinations’ and these thresholds have an India-nexus requirement, i.e. a certain amount of assets/turnover must be ‘in India’; and (ii) the applicability of the Target Based Exemption depends upon the target’s turnover ‘in India’.

Two issues which arise in determining an enterprise’s turnover ‘in India’ are: (i) whether the value of sales in the Indian market by a foreign company (i.e. a company not incorporated in India) cwonstitute turnover in India; and (ii) whether sales in non-Indian markets by Indian companies (i.e. companies incorporated in India) constitute turnover in India.

From the CCI’s decisional practice the following also constitute turnover in India:

  • revenue from sales in the Indian market by a foreign enterprise; and
  • revenue from export sales by an Indian enterprise.

Again, it is not always clear what the CCI would consider constitutes turnover ‘in India’.

Conclusion
While
the CCI is continually clarifying the rules, ambiguities in calculating the
turnover for certain enterprises which work on a commission based business
model remain. Further uncertainty also exists when it comes to determining what
constitutes turnover ‘in India’. Given these ambiguities, it is important that
accountants and lawyers use each others’ expertise to ensure that compliance
with the law is achieved.

IND AS – TOO MANY UNANSWERED QUESTIONS

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The first phase for Ind AS implementation will soon roll out with quarterly reporting from the first quarter of financial year 2016-17 along with comparative numbers for 2015-16. Despite being so close to the deadline, there are quite a few areas where there is lack of clarity or/and lack of legislation. This article discusses these issues at a very broad level.

Roadmap
One of the key issues with the roadmap is the alignment of implementation dates between NBFC companies and non-NBFC companies. This issue will apply to a consolidated group that has an NBFC company and a non-NBFC company. When a NBFC is below a non- NBFC company, there are several approaches on how the regulators may deal with the issue:

1. Allow the NBFC’s statutory accounts prepared under Indian GAAP to be consolidated without converting to Ind AS

2. The NBFC company prepares separate statutory financial statements under Indian GAAP, but will have to prepare Ind AS numbers for consolidation purposes

3. The NBFC is allowed early conversion to Ind AS, and hence for standalone statutory financial statements as well as consolidation purposes it applies Ind AS

4. The implementation dates for non-NBFC companies are postponed, to align them with the dates when NBFC have to apply Ind AS

When the NBFC is on the top of the structure, the problem is more serious. In this case, the non NBFC companies below the NBFC company may have prepared their financial statements as per Ind AS. For purposes of consolidation by the NBFC the non-NBFC companies beneath will have to continue preparing their accounts under Indian GAAP as well. This problem can be avoided if the NBFC company is exempted from preparing consolidated financial statements, till such time the NBFC is required to prepare Ind AS financial statements.

As can be seen each of the above approaches have their own merits/demerits. The regulators will have to take an appropriate decision after consultations with the affected groups.

The other major challenge with the roadmap is the mandatory application of Ind AS 115 Revenue from Contracts with Customers and Ind AS 109 Financial Instruments. Though the rest of the world will apply these standards much later, Indian companies will have to apply them immediately on Ind AS transition without any fall back to their predecessor standards.

A TRG (Transition Resource Group) has been set up by IASB and FASB to specifically deal with implementation and interpretation issues around IFRS 15 (Ind AS 115). Due to significant implementation issues, the IASB and FAS B are deferring the applicability of IFRS 15 by one year. India is probably the only country that applies Ind AS 115 mandatorily. It is unfortunate that India has to apply Ind AS 115 when the rest of world is still debating on several issues under Ind AS 115. In the authors opinion IAS 18 Revenue/IAS 11 Construction Contracts should apply with a choice to an early adoption Ind AS 115.

In a group that amongst other companies also has an NBFC and a foreign listing; the following situation may develop with respect to Ind AS 109:

1. The NBFC prepares its stand alone accounts under Indian GAAP

2. For India consolidation purposes the NBFC applies Ind AS 109

3. For its global listing purposes the NBFC does not use the option to early apply IFRS 9, but instead applies IAS 39.

NACAS and the ICAI will have to apply their minds on the subject and immediately come out with proper amendments after consulting the affected groups.

Minimum Alternate Tax
MAT is an unfinished legislation vis-a-vis Ind AS. Consider the following:

1. An infrastructure company has to recognise construction revenue upfront, as it is deemed to have exchanged its construction services for an intangible asset, viz., right to collect toll revenue from the public. This will result in recognition of margin and therefore will expose infrastructure companies to a potential MAT liability. This may further impair the ease of doing business in India for infrastructure companies.

2. There is no clarity on what line in the P&L, MAT will apply. This is important under Ind AS because the P&L comprises of two integral parts. The first part is the P&L before comprehensive income. The second part includes other comprehensive income, for example, gain on fair valuation of equity shares, when that option is used.

3. The first time adoption of Ind AS will result in a large number of adjustments which will be recognised in retained earnings. There is no clarity on whether and how MAT will apply to these items.

SEBI regulations
SEBI will have to provide appropriate format under clause 41 for reporting quarterly numbers under Ind AS. In the case of five year restatement for IPO purposes, it should be ideally reduced to three years and those numbers need not be restated to Ind AS, if the roadmap did not apply to the company for the earlier years.

Companies Act
Section 52 of the Companies Act prohibits a specified class of companies from using securities premium account for specified purposes, for example, applying the securities premium to adjust redemption premium on debentures or bonds. It was presumed that when Ind AS is rolled out, the specified class of companies will be notified to be companies that have applied Ind AS. There is no notification yet, from the Ministry of Corporate Affairs.

There is neither clarity nor a change in legislation with respect to distributable profits. Consider an Infrastructure company that recognises huge revenue and margins upfront, thought the cash is received in the form of toll revenue over the next several years. A prudent policy would be not to distribute the accounting profits that will realise over several future years. However, in the absence of legislation this may be difficult to enforce. It is not clear how the first time adoption changes and other comprehensive income (some of which are recycled and others are not recycled to the P&L), will impact distributable profits.

Conclusion
There is very little time, and the government and NACAS should act swiftly to provide the necessary clarifications and make appropriate changes to the legislations. This is imperative for the smooth implementation of Ind AS.

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[2015-TIOL-1592-HC-MAD-ST] Fifth Avenue Sourcing (P) Ltd vs. Commissioner of Service Tax.

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The amendment to section 35F of the Central Excise Act, 1944 with effect from 06/08/2014 regarding mandatory pre-deposit is prospective in nature and shall not apply to assessment proceedings initiated prior to the said date.

Facts:
The Petitioner was seeking permission to file an appeal without mandatory deposit as the dispute pertains to the period prior to amendment of section 35F.

Held:
The Hon’ble High Court relying on the decision of the Kerala High Court in the case of Muthoot Finance Limited [2015-TIOL-632-HC-KERALA-ST] (refer BCAJ-April’s issue) held that the amended provisions of section 35F of the Central Excise Act, 1944 are not given retrospective effect. Since the proceedings were initiated prior to 06/08/2014, the Appeal and stay application could be filed before the CESTAT without making a pre-deposit. The High Court also noted the decision in the case of Deputy Commercial Tax Officer, Tirupur vs. Cameo Exports and others [2006 (147) STC 218 (Mad)] rendered in the matter of Tamil Nadu General Sales Tax Act, 1959 wherein it has been held that the right of appeal is vested in the assessee the moment he files his return which commences the assessment proceedings. Therefore since the amendment is not retrospective, appeals deserved to be entertained without insisting on pre deposit.

Note: A contrary decision of the Mumbai CESTAT in the case of Maneesh Export(EOU), Satish J. Khalap, Vinay R. Sapte vs. Commissioner of Central Excise, Belapur[2015-TIOL-1093- CESTAT-MUM] reported in the BCAJ-July 2015 issue holding that the amendment to section 35F of the Central Excise Act, 1944 is retrospective in nature.

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[2015-TIOL-1596-HC-KAR-ST] Mrs. Prashanthi vs. The Union of India

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Notices of recovery initiated u/s. 87 of the Finance Act, 1994 before the show cause notices are adjudicated is illegal and are required to be squashed.

Facts:
A writ petition was filed against the action of recovery initiated by the department u/s. 87 of the Finance Act, 1994 even before the show cause notices were adjudicated.

Held:
The Hon’ble High Court held that the words “amount payable by a person” used in section 87 of the Finance Act, 1994 will have to be considered in the background of section 73 of the Finance Act, 1994 inasmuch as, show cause notice issued u/s. 73(1) of the Finance Act, 1994 is required to be adjudicated after considering representation of the person if filed and thereafter determine the amount payable. Any deviation in this regard would be in violation of principles of natural justice – doctrine of Audi Alteram Partem would be attracted. Until and unless there is determination and adjudication either u/s. 72 or u/s. 73 of the Finance Act. 1994, section 87 of the Finance Act, 1994 cannot be invoked. Thus, the notices are illegal and require to be squashed.

Note: Readers may also note a similar decision of the Bombay High Court in the case of ICICI Bank Ltd vs. Union of India [2015-TIOL-1164-HC-MUM-ST] holding that law enforcers cannot be permitted to do what is not permitted within the four corners of law. Without there being adjudication, coercive steps cannot be taken for recovery of service tax, penalty or interest.

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[2015-TIOL-1602-HC-KERALA-ST] M/s Geojit BNP Paribas Financial Services Ltd vs. Commissioner of Central Excise, Customs and Service Tax, Deputy Commissioner of Central Excise

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The provisions of section 11B of the Central Excise Act, 1944 are not applicable for refund of service tax paid erroneously

Facts
The Appellant wrongly paid service tax on services qualified as export of services and hence claimed a refund. The claim was rejected since it was filed beyond one year from the relevant date as provided u/s. 11B of the Central Excise Act. Hence, a writ petition was filed.

Held:
The Hon’ble High Court relying on the decision of the Karnataka High Court in the case of KVR Construction [2012 (26) STR 195(Kar)] noted that once there is no compulsion or duty cast to pay service tax, there was no authority for the department to retain such amount and the refund is not relatable to section 11B of the Central Excise Act, 1994. Further, the decision of the Apex Court in the case of Mafatlal Industries Ltd. [(1997) 5 SCC 536] holding that refund can only be processed in terms of section 11B was also distinguished by holding that the mistake in the present case is on account of fact and not on account of law. Section 11B is attracted only when the levy has a colour of validity when it was paid and only consequent upon interpretation of law or adjudication, the levy is liable to be ordered as refund. Thus, refund is granted and writ petition is allowed.

Note: Readers may also note a similar decision in the case of M/s. Vasudha Agencies vs. Commissioner of Service Tax- Mumbai-I [2015-TIOL-1470-CESTAT-MUM] and the digest of C.K.P. Mandal vs. Commissioner of Service Tax, Mumbai- II [2015 (38) STR 73 (Tri.-Mumbai) which was reported in the BCAJ-June 2015 issue and the decision of Commissioner of Central Excise and Service Tax, Bhavnagar vs. M/s. Madhvi Procon Pvt. Ltd. [2015-TIOL-87-CESTAT-AHM] also referred in the BCAJ-February 2015 issue.

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Rectification vis-à-vis Recall of the order

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Introduction
Under fiscal laws, assessment proceedings are final, subject to an appeal, revision or rectification. In other words, normally the fiscal enactments provide for rectification as one of the remedial measures, after the order is passed.

Under Bombay Sales Tax Act (BST Act) also, there was a provision for rectification by way of section 62 of the BST Act. As usual, the section provided for correction of mistakes which are apparent from record. In almost all fiscal enactments the provisions are similar, i.e. mistakes apparent from record are rectifiable.

Scope of Mistake apparent on record
The real controversy starts as to whether mistake can be said to be apparent from record. If the mistake is categorized as apparent on record, only then it will be rectifiable. There are number of judicial pronouncements under both, direct and indirect taxes, deliberating upon the scope of rectification.

Recent judgment of the Hon. Bombay High Court
Recently, the Hon. Bombay High Court had an occasion to decide such an issue. Reference is to the judgment in case of D. S. Solanki vs. The Maharashtra Sales Tax Tribunal & Ors. (W. P. No. 2779 of 2014 dt.28.4.2015). The facts in the above case, as noted by the Hon. Bombay High Court, are as under:

“3. In the present case, we are concerned with the assessment for the years 1993-94, 1994-95 and 1995-96. It is the contention of the petitioner that in the year 1999, the Revenue Authorities had initiated reassessment proceedings in respect of resale claim in respect of purchases from the vendors of the petitioner. Vide order dated 30.3.1999, re-sale claim allowed in respect of purchases from vendors was disallowed.

Similarly, vide orders dated 31.3.1999 and 29.11.1999, re-sale claim in respect of the assessment period 1994- 95 and 1995-96 was also disallowed.

Being aggrieved by the said orders, three appeals were preferred. Vide order dated 9.3.2001, the Appellate Authority dismissed the appeals and confirmed the orders passed by the first Appellate Authority. Being aggrieved thereby, three appeals were preferred before the learned Appellate Tribunal. The learned Tribunal vide order dated 29.1.2005, allowed the appeals and set aside the order passed by the Original Authority as well as the first Appellate Authority. The Revenue thereafter preferred the rectification applications, as aforesaid, which were allowed by the impugned order. Being aggrieved by the order, the present petition was filed”.

By allowing the rectification, the Tribunal recalled the original orders for fresh hearing.

Based on the zabove facts and the contentions of the parties, the Hon. Bombay High Court made observations about scope of rectification citing the judgment of the Hon. Supreme Court. The said observations are as under:

“6. Their Lordships of the Apex Court in the case of Deva Metal Powders Pvt. Ltd. (10 VST 751) (SC) (cited supra) had an occasion to consider a pari material provisions in U.P. Trade Tax Act. The Apex Court while considering the said provisions has observed thus :-

“This Court in M/s. Thungabhadra Industries Ltd. (in all the Appeals) vs. The Government of Andhra Pradesh represented by the Deputy Commissioner of Commercial Taxes, Anantapur, [AIR 1964 SC 1372] held as follows:

“There is a distinction which is real, though it might not always be capable of exposition, between a mere erroneous decision and a decision which could be characterized as vitiated by” error apparent”. A review is by no means an appeal in disguise whereby an erroneous decision is reheard and corrected, but lies only for patent error.

Where without any elaborate argument one could point to the error and say here is a substantial point of law which states one in the face and there could reasonably be no two opinions entertained about it, a clear case of error apparent on the face of the record would be made out.”

An error apparent on the face of the record for acquiring jurisdiction to effect rectification must be such an error which may strike one on a mere looking at the record and would not require any long drawn process of reasoning. The following observations in connection with an error apparent on the face of the record in the case of Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tiruymale [ AIR 1960 SC 137] need to be noted:

“An error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions can hardly be said to be an error apparent on the face of the record. Where an alleged error is far from self-evident and if it can be established, it has to be established, by lengthy and complicated arguments, such an error cannot be cured by a writ of certiorari according to the rule governing the powers of the superior Court to issue such a writ.”

“A bare look at Section 22 of the Act makes it clear that a mistake apparent from the record is rectifiable. In order to attract the application of Section 22, the mistake must exist and the same must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. “Mistake” means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception. “Apparent” means visible; capable of being seen, obvious; plain. It means “open to view, visible, evident, appears, appearing as real and true, conspicuous, manifest, obvious, seeming.” A mistake which can be rectified under Section 22 is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration. In our view rectification of an order does not mean obliteration of the order originally passed and its substitution by a new order.

What the Revenue intends to do in the present case is precisely the substitution of the order which according to us is not permissible under the provisions of Section 22 and, therefore, the High Court was not justified in holding that there was mistake apparent on the face of the record. In order to bring an application under Section 22, the mistake must be “apparent” from the record. Section 22 does not enable an order to be reversed by revision or by review, but permits only some error which is apparent on the face of the record to be corrected. Where an error is far from self-evident, it ceases to be an apparent error. It is, no doubt, true that a mistake capable of being rectified under Section 22 is not confined to clerical or arithmetical mistake. On the other hand, it does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. As observed by this Court in Master Construction Co. (P) Ltd. v. State of Orissa [1966] 17 STC 360, an error which is apparent from record should be one which is not an error which depends for its discovery on elaborate arguments on questions of fact or law.

“Mistake” is an ordinary word but in taxation laws, it has a special significance. It is not an arithmetical error which, after a judicious probe into the record from which it is supposed to emanate is discerned. The word “mistake” is inherently indefinite in scope, as to what may be a mistake for one may not be one for another. It is mostly subjective and the dividing line in border areas is thin and indiscernible. It is something which a duly and judiciously instructed mind can find out from the record. In order to attract the power to rectify under Section 22, it is not sufficient if there is merely a mistake in the order sought to be rectified. The mistake to be rectified must be one apparent from the record. A decision on a debatable point of law or a disputed question of fact is not a mistake apparent from the record. The plain meaning of the word “apparent” is that it must be something which appears to be so ex facie and it is incapable of argument or debate. It, therefore, follows that a decision on a debatable point of law or fact or failure to apply the law to a set of facts which remains to be investigated cannot be corrected by way of rectifications.”

“In the said case, initially, the assessee was assessed for the aluminum powder treating the same as a metal and as such holding him liable to pay tax at 2.2 %. In the rectification proceedings, it was held that the relevant entry would not include aluminum powder and as such the same was assessed treating the same to be an unclassified item. In this background, the aforesaid observation is made by the Apex Court. It has been held by the Hon’ble Apex Court that in order to attract the provisions of the Act, the mistake must exist and the same must be apparent from the record. It has been held that “Mistake” “means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception; to make an error in interpreting. It has been further held that a mistake which can be rectified u/s. 22 is one which is patent, obvious and whose discovery is not dependent on argument or elaboration. However, the Apex Court itself has held that the power u/s. 22 of the said Act is not confined to clerical or arithmetical mistake. It is further held that it does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. The Apex Court thus held that there cannot be hard and fast rule as to whether mistake is apparent or not and the same would be mostly subjective and the dividing line in border areas is thin and indiscernible. It has been further held that a decision on debatable point of law or fact or failure to apply the law to a set of facts which remain to be investigated, cannot be corrected by way of rectifications.”

After analysing the scope of rectification as above, the Hon. Bombay High Court in the case of the Petitioner observed as under :

“8. It would thus be seen that the learned Tribunal while deciding the Second Appeal proceeds on a footing that the assessment in question was made u/s. 33(3) of the said Act. However, the assessments were made in fact u/s. 33(2) of the said Act. It could further be seen that even the lawyer who was representing the petitioner before the learned Tribunal in the rectification application, himself admitted that the original assessments were made u/s. 33(2) and not u/s. 33(3) of the said Act. The learned counsel further admitted that the period for 1995-96 does not involve reassessment and the said matter had arisen from the assessment itself. The learned counsel fairly stated that the inaccuracies have crept in the order passed by the learned Tribunal, since the inaccuracies are in the first appeal itself. It could thus be seen that in the facts of the present case, though the assessments were made u/s. 33(2) and not u/s. 33(3), the Second Appeals were decided on an assumption that the assessments were done u/s. 33(3). It can thus be seen that the error which has been committed is on an erroneous assumption of fact. It is further to be noted that it is not even disputed by any of the parties that the error committed by the learned Tribunal is on an erroneous assumption of fact. These errors are such which can be seen with a naked eye. The errors are not of such a nature which would require detailed arguments to be advanced or a complicated process of investigation to be gone into, so as to unearth them. Any person with some understanding of law, can easily make out these errors. Not only that, but the learned counsel appearing on behalf of the assesesee in the rectification proceedings has also admitted that these errors have occurred in the order of which rectification is sought. In that view of the matter, we find that it cannot be said that the jurisdiction exercised by the learned Tribunal was exercised beyond the scope available to it u/s. 62.”

Thus, the Hon. High Court has confirmed that the mistakes which are of fact and the judgment is based on such mistaken facts then the judgment can be recalled for fresh decision.

Conclusion

There are a number of judgments about the above issue. Each case depends upon its own facts. However, the guidelines available are that if the issue is debatable, then rectification will not be permissible. If the mistake is clear as seen, then the rectification is possible and the effect can be either to modify the order or even recall the same.

CONTROVERSY : DIVISIBILITY OF WORKS CONTRACT

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Introduction
There has been long drawn controversy over the issue of taxability of works contract prior to the introduction of works contract service (WCS) in sub-clause (zzzza) in section 65(105) of the Finance Act, 1994 (the Act) with effect from 01/06/2007. The dispute dates back to the pronouncement of decision in Daelim Industrial Co. vs. CCE 2003 (155) ELT 457 (T). The controversy primarily relates to whether or not works contracts were taxable under the taxable services defined under the service tax law as commercial or industrial construction service (CICS)–with effect from 10/09/2004), construction of complex service (COCS) (w.e.f. 16/06/2005) or erection, commissioning or installation service (ECIS) (w.e.f. 01/07/2003). The decision in Daelim (supra) was doubted and referred to a Three Member Bench which was answered in CCE vs. BSBK Pvt. Ltd. 2010 (18) STR 555 (T) wherein it was ruled that turnkey contracts could be vivisected and service element therein could be subjected to service tax if the service was a taxable service under the Act. A contrary ruling by the Three Member Bench was however pronounced in Jyoti Ltd. vs. CCE 2008 (9) STR 373 and also in CCE vs. Indian Oil Tanking Ltd. 2010 (18) STR 577 (T). The Larger Bench in BSBK (supra) did not analyse or disagree with the operative ratio in the earlier decision of co-ordinate Benches. Therefore, BSBK (supra) could not have overruled or decided contrary to the decision by co-ordinate Benches. In this background, Larsen & Toubro while challenging an adjudication order confirming service tax demand somewhere in 2013 for execution of a turnkey contract prior to 01/06/2007, holding it as commercial or industrial service, also filed an application to refer the matter to Larger Bench in view of the above two conflicting decisions of Larger Benches. In the interim, Hon. Delhi High Court in G. D. Builders vs. Union of India 2013 (32) STR 673 (Del) ruled that after 46th Amendment to the Constitution, service portion of a composite contract could be vivisected for subjecting it to service tax by applying aspect doctrine for bifurcation of a composite contract. However, prior to this in CST vs. Turbotech Precision Engineering Pvt. Ltd. 2010 (18) STR 545 (Kar) and Strategic Engineering Pvt. Ltd. vs. CCE 2011 (24) STR 387 (Mad), it was decided that works contracts were not liable for service tax prior to 01/06/2007. Consequent upon CESTAT order referring the matter to Larger Bench, the revenue had appealed to Delhi High Court that since the issue stood resolved and decided in G. D. Builders & Others (supra) vide order dated 24/11/2013, for setting aside the order. The Delhi High Court disposed of the appeal in November, 2014 wherein consensus emerged that Five Member Bench can examine a preliminary issue whether the question raised was covered by the decision in G. D. Builders’ case (supra) and also that appropriate directions/orders could be passed after examining contrary view expressed by the Karnataka High Court and the Madras High Court in Turbotech Precision Engineering (supra) and Strategic Engineering (supra) respectively. Accordingly, the Larger Bench of five members headed by the Hon. President was constituted to look into the above limited angle. Although the reference was made for a limited purpose and applicability is confined to the period between 2004 and 2007, since the controversy over the issue is discussed at great length in approx. 220 pages interim order, the decision has assumed academic value. Various judicial precedents on the subject of works contract, taxability of sale of goods involved therein and adequacy of service tax provisions vis-à-vis works contracts vide a catena of judicial precedents have been analysed from various angles since the decision was reached in terms of majority. Discussed below are some of the key observations and views of both majority and minority members of the Hon. Larger Bench.

 Facts of The Case in Brief:
On behalf of  appellant Company, Larsen & toubro, it was pleaded that  g. d. Builders (supra) was per incuriam as it did not consider and explain several operative, relevant and binding precedents in the area and evolutionary history leading to enactment of distinct category of works contract from 01/06/2007 as several of its seminal reasons were passed sub silentio as the Appellants therein conceded that service component in a composite contract can be taxed but not as works contract per se and such other merits concerning taxability of works contract were not examined. Had the several facts of constitution limits and relevant legislative provisions, the enacting history of sub-clause (zzzza) and binding rationes been brought to the notice of the High Court, the conclusion drawn by the High Court could have been different and therefore G. D. Builders decision was based on concession by petitioners therein and did not have precedential vitality. Also, contrary decisions of Karnataka High Court in CIT vs. Turbotech Precision (supra) and Madras High Court in Strategic Engineering (supra) also need to be looked into. Revenue however contended that ruling in G. D. Builders is a binding precedent and not travelling beyond the scope of deliberations fixed by the Delhi High Court vide its order of 11th November, 2014 as contended by the Appellant. In view hereof, the facts and decision of G. D. Builders’ case (supra) as well as those of Turbotech Precision (supra) and Strategic Engineering (supra) were examined in addition to analysing the core issue of taxability of works contract prior to 01/06/2007 in terms of various judicial precedents and all the relevant provisions of service tax

Minority order: Brief Overview:
The minority order contains detailed analysis of scope of charging and valuation provision including the evolutionary history thereof and analysis and examination of a host of judicial precedents which interalia included Gannon Dunkerley & Co. and Others vs. State of Rajasthan & Others (1993) 88 STC 204 (the second Gannon Dunkerley), Larsen & Toubro vs. State of Orissa (2008) 12 VST 0031, Larsen & Toubro vs. State of Karnataka 2014 (34) STR 481 (SC) (a constitution Bench decision), K. Raheja Development Corporation vs. State of Karnataka 2006 (3) STR 337 (SC), Nagarjuna Construction P. Ltd. vs. UOI 2010 (19) STR 321 (AP). Mahim Patram (P) Ltd. vs. Union of India 2007 (7) STR 110 (SC), Bharat Sanchar Nigam Ltd. vs. UOI 2006 (2) STR 161 (SC), Kone Elevators India P. Ltd. 2014 (34) STR 641 (ST) etc. The glimpse of various inferences drawn is provided below:

In addition to examining the definitions CICS, COES and ECIS in section 65(105) and charging section 66, the scope of section 67 dealing with valuation of a service both prior to its amendment on 18/04/2006 and the amended provisions were examined and it was observed that section 67 read with the relevant clauses in section 65(105) and the charging provision leads to infer that “the gross amount charged by the service provider for providing CICS, COCS or ECIS shall be taxable value of such service.” Prior to the amendment of section 67, no exclusion was provided in section 67 on the lines of exclusion provided in Explanation 1 to section 67 that value of goods sold or deemed to have been sold in execution of works contract is excluded from the scope of taxable value referred to in section 67 as provided in clause (vii) to the said explanation for ECIS in respect of CICS or COCS.

  •    Exemption  Notifications  Nos.12/2003-ST,  15/2004-ST and 1/2006-ST attest to the fact that the Central Government was clearly of the view that value of goods sold by a service provider to the recipient thereof is included in the taxable value u/s. 67. It cannot be believed that pure sale transaction simplicitor were sought to be excluded as these were anyway beyond the scope of the Union’s residuary power. Further, these exemption notifications indicate no methodology for valuation of goods sold during execution of works contract. The 2nd Gannon Dunkerley (supra) categorically ordained to exclude value of goods at the time of incorporation, the profit margin on goods, the cost of storage, transportation etc. No Board circular also was issued hinting such exclusion. Actually, Rule 2A inserted in Valuation Rules when works contract service was brought from 01/06/2007 expressly stipulates the value of taxable service to be determined with reference to WCS provided in (zzzza) of section 65(105). Thus, on its terms, Rule 2A has no application to CICS, COCS or ECIS even after 01/06/2007 whereas after 01/06/2007, CICS, COCS and ECIS continue to be taxable services and there is neither repeal nor omission of these services.

  •     The definition of CICS, COCS and ECIS do not signal to cover works contract.

  •     The Hon. Finance Minister in the Budget 2007-08 speech categorically stated that new levy is proposed to impose service tax on works contract.
  •     Works contracts are distinct contractual arrangements and following a series of binding precedents and explicitly provided in Central and State legislations for bringing interalia works contracts within the scope of Union levy by expanding the scope of sale, defining works contracts in the Central Sales Tax Act and incorporating a specific power to make rules for computation/valuation of “deemed sale” in sales tax legislations and also introducing works contract category in the Finance Act, 1994 by expressly defining it together with complementary valuation Rules (Rule 2A) issued u/s. 94 of the Act to ensure proper valuation and confinement of levy strictly to service components also with effect from 01/06/2007. This integrated legislative and statutory landscape of the Act to the extent of works contract service in strict confirmation with constitutional limits on States and the Union taxation in this area as spelt out in second Gannon Dunkerley (supra) and all subsequent rulings including the latest Kone Elevator India Ltd. of 2014 (supra).

  •     In view of the exclusivity and insularity ordained in terms of legislative powers pertaining to taxation, both the federal partners (the Union or the States) are forbidden to trench upon the exclusive domain allocated to each by the constitution. Therefore a vague/overboard definition coupled with ambiguous charging and indeterminate valuation provision could not suffice in terms of First Builders Associations of India (S.C.1989), Second Gannon Dunkerley (supra) and L&T Ltd. (Orissa 2008) (supra). When the charging and/or valuation provisions on a true and fair classification fall short of this specific requirement, collection of sales tax on works contract would fall aside as per the above precedents among various others.

  •     In view thereof, Union’s intention to levy tax only on labour or service element must therefore be categorically expressed in charging provisions read with relevant taxable service and the valuation provisions. Such intention was explicated only by section 65(105)(zzzza) and not collectively through charging section, definition and valuation provisions so far as they related to CICS, COCS and ECIS.

  •     It is an established interpretation principle that where two constructions are fairly possible, the construction sustaining the legislation should be adopted instead of one which renders it invalid.

  •     In terms of revenue contentions, should it mean that insertion of WCS from 01/06/2007 and introduction of Rule 2A in the Valuation Rules were wholly unnecessary amendments in the existing legislative provisions?
  •     Neither the provision of the Act,any rule made there under or exemption notification issued under section 93 indicate how and at what point of time during execution of works contract, the value of goods and material used in execution thereof are to be valued for applying reductions. Although Notification No.12/2003-ST provides deduction towards value of goods sold on furnishing proof of such sales does not provide for computation of profits booked by builders on the goods incorporated in the contract.

  •    There  was  observation  in  Tamil  Nadu  Kalyana Mandapam Association’s case [2004 (167) ELT 3 (SC)] that it is well settled that the measure of taxation cannot affect the nature of taxation and therefore service tax levied as a percentage of the gross charge for catering cannot alter legislative competence of Parliament. This cannot be interpreted as propounding universal norm. This may be appropriate in the facts and circumstances of that case. The nexus and legislative competence tests are established by a long catena of binding authority including Constitution Benches including the second Gannon Dunkerley (supra) and K. Damodarasamy Naidu & Bros. AIR 1999 SC 3909, Tamil Nadu Kalyana Mandapam’s decision (supra) cannot be considered as having dissented or overruled entrenched principles consistently impounded and implicitly followed in a host of decisions including in to another legislation and tax such elements under the pretext of overreaching merely the measure of tax.

  •     Since binding expositions of relevant principles qua binding precedents were not brought to the notice of the Hon. High Court, G. D. Builders (supra) decision is incuriam and sub silentio.

  •     The analysis and the view concluded as: “28.  The decisions of the Karnataka and Madras High Courts, in Turbotech Precision Engineering Pvt. Ltd. and in Strategic Engineering Pvt. Ltd. have clearly concluded that a works contract is not leviable to Service Tax prior to 1-6-2007. Though, with respect there is not discernible a holistic analyses of the relevant statutory framework involved nor of the several precedents which support the conclusion recorded (in Turbotech and Strategic), as is found in the painstaking effort apparent in G.D. Builders, in our respectful view the conclusion that a works contract is defined, charged and is subject to the levy of Service Tax only w.e.f 1-6-2007 (on insertion of sub-clause (zzzza) in Section 65(105) of the Act), is consistent with the overwhelming catena of binding precedents considered and analyzed by us.”
  •    Consequently, the decision in BSBK Ltd. (supra) to the extent it rules that a works contract is a taxable service prior to 01/06/2007 was respectfully an error and stood overruled.
Majority view: Per Shri J. P. R. Chandrasekharan,

Member (T): Brief overview:

Not agreeing with the above, Hon. Member (Technical) proceeded with recording apprehension at the outset over the instant reference in view of the revenue’s pending appeals before the Supreme Court after admission in 2008 and 2010 respectively in Jyoti Ltd. (supra) and Indian Oil Tanking Ltd.’s case (supra) in the same matter. Further, the Delhi High Court having taken a view on this very issue in G. D. Builders’ case (supra) as well as in YFC Projects P. Ltd.’s case (2014) 44 GST 334/43 Taxman.com 219 (Delhi) that works contracts could be vivisected and discernible taxable services could be taxed prior to 01/06/2007 it was noted that the Tribunal being subordinate to High Court and Supreme Court would be bound by these decisions and the matter did not recur post 01/06/2007 as the dispute essentially related to the period 2004 to 2007. Besides this reservation, it was also noted that the ratio of G. D. Builders was consistently followed by the Tribunal in many cases including by Hon. President in CCE vs. Gopal Enterprises 2014 (36) STR 674, Kalpik Interiors vs. CST 2014 (36) STR 1283 and in Hindustan Aeronautics Ltd. vs. CST 2013 (32) STR783 (Tri.-LB).

    In the said case of G. D. Builders (supra), after examining at great length various decisions which among others included Gannon Dunkerley vs. State of Rajasthan [2002-TIOL-103-SC-CT], K. Raheja [2005-TIOL-77-SC-CT], Larsen & Toubro vs. State of Karnataka 2010 (34) STR 481 (SC)], Nagarjuna Construction Co. Ltd. vs. UOI 2012-TIOL-107-SC-ST, State of Kerala vs. Builders Association of India [2002-TIOL-602-SC-CT, Tamilnadu Kalyana Mandapan Association 2004 (167) ELT 3 (SC) etc. whereby the following issues in brief among others were examined:

a. Service tax is levied on taxable services as defined in section 65(105) read with definition clauses and applicable only on the service element as the Central Government does not have power to impose tax on entries under List-II of Seventh Schedule to the constitution. It cannot levy tax on goods and material used in works contract as central sales tax is levied on material used in “works contract” with effect from 11/05/2002 vide amendment of Central Sales Tax Act.

b. Composite or works contracts are not included in 65(105)(zzq) viz. CICS and (zzzh) viz. COCS as they apply to only service contracts. Therefore, the exemption of 67% under notification cannot be considered a part of main statutory provision as in terms of section 93 of the Finance Act, 1994, the exemption granted cannot relate to works contracts as they are not covered by clauses (zzq) and (zzzh) of section 65(105). Such tax is imposed only from 01/06/2007 under 65(105) (zzzza). There is conflict between these clauses and what is covered by (zzzza) cannot be covered by (zzq) and (zzzh) of section 65(105). The two cannot co-exist. Subsequent legislation shows that the earlier only did not cover composite or works contracts.

c.    Section 66 is charging section and section 67 relates to valuation. Tax can be levied on the value of service and not beyond. There is provision for notional value to substract the value of material or goods.

d.Vagueness or uncertainty makes levy invalid and illegal.

e.    Exemption Notification has to be read while keeping its objective and purpose in forefront. It may provide a convenient formula for computing the value of service in a composite contract. The Notification however is optional and an alternative. It meets the tests laid down u/s. 93 and 94 and it has not been shown that the value prescribed therein is absurd or irrational.

f.    On the strength of factual and legal analysis undertaken, conclusion summarised in para 36 in a nutshell that post 46th Amendment to the Constitution, composite contracts can be bifurcated to compute value of goods sold/ supplied in construction contracts with labour and material and the service portion of the composite contracts can be subjected to service tax by applying aspect doctrine for vivisection of the contract.

  The above decision on an identical issue was followed before another Bench of the Delhi High Court in YFC Projects P. Ltd. vs. UOI (supra). In view of the foregoing, the above decisions are binding on the Tribunal.

    In furtherance of the above and analyzing one of the main points of difference that conflicting decisions of
Karnataka and Madras High Courts as against the Delhi High Court’s decision in G. D. Builders (supra) on the same/similar issue are available, it was observed that facts of these decisions were completely different. In CST vs. Turbotech Precision (supra), the activity of development, design, installation and commissioning and technology transfer was sought to be taxed as consulting engineering service by the department.

Similarly, in Strategic Engineering’s case (supra), the contract involved erection of pipes and also connecting the laid pipes and subjecting them to carry fluids. This activity was sought to be taxed as erection commissioning and installation service wherein the Hon. High Court held that the services provided under works contract were not liable prior to 01/06/2007. However, the question whether works contract could be vivisected and subjected to service tax was not the issue for consideration before the Hon. High Court. Therefore, the said decision has no relevance to the issue considered in G. D. Builders’ case (supra). In support of this contention, the Hon. Member interalia relied upon Alnoori Tobacco Products (2004 170 ELT 135 (S.C.)]. The relevant extract read as follows:

“11. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid’s theorems nor as provisions of the statute and that too taken out of their context.”

  Accordingly, it was concluded that ratio of G. D. Builders stands uncontroverted and thus binding on all subordinate Courts including the Tribunal (irrespective of the strength of the Bench).

    Next examination pertained to the main issue of DIVISIBILITY of works contract prior to 01/06/2007 including analysing section 67 dealing with measure or valuation. The proposition of lack of adequate machinery provision was found without merits on the ground that four important elements of tax law viz. taxable event, the rate of tax, measure of tax and precision liable to tax were found existing in service tax law in section 65(105), sections 66, 67 and 68 of the Act and therefore the challenge was found not sustainable. As regards the primary issue relating to exclusion of value of goods, based on judicial pronouncements including in the case of K. P. Varghese vs. ITO 1981 AIR 1922 (SC), it was found that section 67 of the Act provided measure of the levy adequately and optional exemption notifications 12/2003-ST, 15/2004-

ST and 1/2006-ST as well as CENVAT Credit Rules, 2004 provided credit mechanism to capture value of services of goods. Therefore, at practical level of implementation, there is no difficulty to determine value of service rendered.

  At the end, the concept of works contracts was analysed in detail to distinguish it from the contracts for sale. It was observed that the Apex Court in Builders Association of India vs. UOI (supra) held that “by fiction, an indivisible contract has been made a divisible contract and the values of the goods involved in the execution of contract have been subjected to tax”. Further, it is restricted to the value of goods used and not the building as a whole. The law was further elaborated by the constitution Bench of Supreme Court in the second Gannon Dunkerley & Co. (supra). The Bench noted that contract of work is inherently a contract of service. The legal fiction created by Article 366(29A) of the Constitution to hold certain types of works contracts as deemed sale of goods in order that States could levy sales tax on the value of goods supplied as part of the works contract. Similarly, the 92nd amendment to the constitution provided for a specific entry for taxes on services in the Union list under entry 92C. Prior to this, entry 97 covered taxes on services. Thus, the power of Parliament to levy tax on services was never in dispute. Reliance was placed on Tamil Nadu Kalyana Mandap Association vs. UOI 2004 (167) ELT 73 (SC) which interalia held as follows:

“45. The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a Service Tax cannot be levied on the service aspect of catering….

46. It is well settled that the measure of taxation cannot affect the nature of taxation and, therefore, the fact that Service Tax is levied as a percentage of the gross charges for catering cannot alter or affect the legislative competence of Parliament in the matter…..

58. A tax on services rendered by mandap-keepers and outdoor caterers is in pith and substance, a tax on services and not a tax on sale of goods or on hire purchase activities.”

Similar reliance was placed on Association of Leasing and Financial Services Companies vs. UOI 2010 (20) STR 417 (SC) which interalia held:

“Merely because for valuation purposes inter alia “finance/interest charges” are taken into account and merely because Service Tax is imposed on financial services with reference to “hiring/interest” charges, the impugned tax does not cease to be Service Tax and nor does it become tax on hire-purchase/leasing transactions under Article 366(29A).”

Based on the above two decisions in respect of two transactions relating to catering services and hire purchase, it was found that since service tax could be levied on these services on the value attributable to the service component of composite transactions, the issue of divisibility of an indivisible contract for the levy of service tax was confirmed. It was observed that many services entail supply of goods and many examples were cited including those of photography services, cleaning services, banking services (entailing supply of cheque books, plastic cards for ATM transactions etc.) sound recording services (entailing supply of recording medium) etc. Further citing a recent decision of Apex Court in State of Karnataka vs. Pro Lab and Others 2015-TIOL-08-SC-LB which considered the issue of levy of sales tax on processing and supply of photographs, it was observed that if by virtue of clause 29A of Article 366 of the Constitution, the State legislature is empowered to segregate goods part of works contract to levy sales tax, the same logic would apply to the Central legislation for imposing service tax and Parliament is empowered to segregate service component of the works contract to levy service tax. Precisely, this was done by the Finance Act, 1994, when service tax was levied vide CICS, COCS and ECIS. It was further observed that statutory provision should be interpreted in the manner not to create discrimination among classes of service providers by taxing supplying services alone and another set providing both supply of goods and service not liable to tax. In effect, it was concluded with, “the issue referred to the Larger Bench is fully and squarely covered by the G. D. Builders case decided by the Hon. Delhi High Court”. Consequently, it has to be held that composite works contract can be vivisected and discernible service element could be subjected to service tax even prior to 01/06/2007.

Majority view: Per R. K. Singh, Member (T): Some key observations:

  •     Concurring with the order of per Hon. Shri P. R. Chandrasekharan, it was observed that the judgments of the Karnataka and Madras High Courts did not infringe upon the ratio of the Delhi High Court in G. D. Builders as regards the subject matter covered by the latter and that the subject matter referred to the Five Member Bench was squarely covered by the decision of the Delhi High Court in G. D. Builders’ case (supra).

  •     Section 67 adequately provided machinery provisions for measure of value of taxable service and which was not arbitrary by any standard whether post its amendment from 18/04/2006 or prior thereto. Since it refers to the value of service would imply that value of goods sold in a composite contract was not to be a part of the value for the purpose of this section.

  •     Notification No.12/2003 needs to be viewed as a measure of abundant caution and care on part of the Government.

Majority view: Per Rakesh Kumar, Member (T): Some key observations:

  •    “47.3 When indivisible works contracts are those contracts involving provision of service, in which there is transfer of property in goods from the service provider to the service receiver through accretion, and this transfer of property in goods is not sale, such contracts have to be treated as service contracts as in such contracts, there is absolutely no intention of transfer of property in and delivery of the possession of, a chattel as a chattel to the service receiver. A service contract will not cease to be a service contract just because the provision of service involves use of goods, the property in which gets transferred to the service recipient through accretion. Even the Law Commission’s Reports (Chapter IA para 7) refers to the works contract as “a contract for work (of service)”.

  •     It is a well settled law that legal fiction has to be given effect to only for a limited purpose for which it was created and therefore Article 366(29A) can be employed only to enable State Governments to levy sales tax on certain contracts including specified contracts. Since works contracts are service contracts, the same would attract service tax even during period prior to 01/06/2007.
  •    Just because State Governments have the power to levy sales tax on the transfer of property in goods involved in execution of works contract by invoking Article 366(29A), the power of Central Government to levy service tax on such works contract does not get restricted so as to confine the levy only to service portion of the works contract excluding the value of goods for providing the service. An inadmissible works contract is one single service contract whose value would include value of all goods and services which contribute to emergence of the service product.

  •   Exemption Notification issued under section 93 of the Act to provide abatement of the taxable value of specified services (including ECIS, COCS and CICS) are sufficient to avoid tax on goods subjected to tax by the State Government and no machinery provision is necessary.
  •     In commercial world, transactions of sale of goods and sale of services are intermixed and therefore some overlap is inevitable which has to be ignored in the interests of smooth functioning of laws governing the levy of tax on sale of goods and service tax.

  •    Separate and specific constitutional provision together with the machinery for determining the measure is required only when State Government wants to tax goods portion in a service transaction or the Central Government wants to tax service portion of a sale transaction. However, for levying service tax on a service transaction including works contract, no machinery for exclusion of value of goods is required and for the lack of the said machinery, the levy cannot be held invalid.

Conclusion:

Since the revenue is already before Supreme Court against the order of Turbotech Precision Engineering (supra) and Strategic Engineering (supra), whether the above intellectual exercise would impact any litigation process is a question which is posed by many. Nevertheless, a threadbare analysis of technical and judicial aspects on the subject of works contract would be a worth read for a large number of professionals and other stakeholders.

Welcome GST

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Introduction
After a long wait of more than 15 years, the time has now come to welcome the most awaited reform in the taxation history of India. The introduction of Goods & Services Tax (GST) is expected to become a reality just within a few months from now. The Government of India has conveyed from time to time its intention to introduce this much awaited reform in the system of indirect taxes at central as well as at State level. Readers may recall that a committee called “Empowered Committee of State Finance Ministers” was constituted on 17th July 2000, under the directions of the then Prime Minister of India, Shri Atal Bihari Vajpayee. It was given the task of replacing the existing system of sales tax prevailing in various states all over the country, designing the GST model and overseeing the IT back-end preparedness for its rollout. The committee, under the leadership of Dr. Asim Dasgupta, the then Finance Minister of West Bengal, who was the first chairman of this committee, did wonders in bringing together all the States and the Centre to discuss and resolve their issues and concerns. Many important decisions such as Introduction of VAT at state level, setting up Tax Information Exchange System (TINXSYS) and release of First Discussion Paper on GST (on 10th November 2009), etc., were taken on the basis of recommendations of this Committee and various groups and sub-groups working under its directions. After Dr. Gupta, the Committee was headed by Shri Sushil Modi, the then Finance Minister and Dy. Chief Minister of Bihar, thereafter Abdul Rahim Rather, the then Finance Minister of Jammu & Kashmir. And at present Shri K.M. Mani, the Finance Minister of Kerala is the chairman of Empowered Committee.

Successive Union Finance Ministers, starting from Shri Yaswant Sinha, Jaswant Singh, P. Chidambaram, Pranab Mukherjee and now Arun Jaitley have given their inputs from time to time. Dr. Manmohan Singh, as Finance Minister of India, has played an important role in the overall exercise of reforms.

Evolution of the concept of VA T and its journey to India
“Added Value Tax (AVT, in the American Tax nomenclature), tax on value added (TVA, as the French and German refer to it) and value added tax (VAT , the popular English usage) is a concept which originated during the first quarter of 20th century. Dr. Wilhelm Von Siemens, a German industrialist, propounded the concept in the year 1918 as a substitute to the then newly established German Turnover Tax. However, Maurice Lauré, Joint Director of the French Tax Authority, was the first to introduce VAT, in France, on April 10, 1954.

The VAT as a system of tax, conceptually, has been of great interest among the early writers on public finance. It became a topic of public debate after European Economic Community’s (EEC) acceptance of it as an instrument of tax harmonisation. In fact, the introduction of VAT in France largely paved the way for its being accepted as a common market tax. And it became the most popular system of indirect taxes after its adoption by England in the year 1971. The European and Australian countries have contributed a lot in its transformation, improvement and continuous development. At present, the system is prevalent in more than 140 countries all over the world. Malaysia is the latest addition where the system of VAT (GST) has been adopted with effect from 1st April 2015 in place of the earlier system of sales tax and services tax. The general rate of GST adopted in Malaysia is 6%.

The VAT , in common parlance, may be described as a tax levied on the value added to a product or service each time it changes hands. The growing popularity of VAT is due to its simple tax structure, transparency and neutrality. With the widening of tax base, the rate of taxes are lower. Whether it is sale/supply of goods or rending of services, most of the commodities as well as services are taxed at one single revenue neutral rate with exception only for a few commodities and services, which may be taxed at special rates. Tax exempt commodities are listed at minimum and zero rate of tax is provided on exports and inter-branch transfers. It enhances competitiveness and removes the cascading effect of taxes and levies by providing full setoff of taxes paid on inputs. As the levy covers each stage of value chain, the impact of tax is not concentrated on one level, which in turn reduces inducement for evasion considerably.

By virtue of method of computation, the incidence of tax, under VAT, can be seen readily from the tax paid on final point of sale. This is not possible when taxes are levied on inputs or intermediate stage of sale and purchase without any relief at subsequent stages. Because of transparency under VAT , it is possible to quantify, at any stage, precisely the tax borne at the earlier stages.

Neutrality is another attribute of VAT that is non-interference with the choices of decisions of economic agents and equal treatment of products, producers and consumers. In this system, other things remain the same, the tax liability does not vary as between different classes of dealers, or between integrated or specialised units. The allocation of resources is left to be decided by the free play of market forces and competition.

Main characteristics of VAT

  • A destination based multi-point system of taxation
  • Covers goods and services both
  • Collected at each stage of supply and distribution
  • Input Tax Credit
  • Ultimate burden passed on to the consumer

Looking into various advantages of the system of VAT , most of the countries all over the world have adopted the concept in their system of taxing goods and services. Thus it is being called as Goods & Services Tax (GST).

Although most of the developed and developing countries have adopted the system of VAT , the most notable exception is USA, where still the system of sales tax – General Sales Tax or Retail Sales Tax (RST) is prevailing. The manner of levying taxes in USA varies from State to State. In general, it may be described as a single point last stage taxation wbut there are exceptions depending upon the policy of a particular State.

As far as India is concerned, being a federal country, the taxation structure is governed by its Constitution. The Centre and the States levy tax on commodities at various stages of production and distribution, utilising their powers generated from the Constitution of India, which was prepared in the year 1949-50 for adoption by all the erstwhile provinces, which were merged, converted and united as States and a Government at Central level as to have one Independent India. The Constitution provides for separate independent powers as well as combined powers of the Centre and the States and also provides for collection, distribution and sharing of taxes.

In the present setup, Central Government levies taxes such as Custom Duty, Countervailing Duty, Excise Duty, Service Tax, etc. While the States have power to levy Sales Tax (State VAT ), Entertainment Tax, Entry Tax, Luxury Tax, State Excise, Profession Tax, etc. The Central Sales Tax, under an enactment of the Centre, is also being collected by the States.

A bare look at the history of indirect taxation in our country shows that many of the taxes which were levied before independence have continued either as it is or with minor modifications from time to time, and, a few more new taxes have been introduced in the free India. Although, abolition of some of the pre-independence taxes could have been considered by Governments at both the levels, but somehow it remained a major point of debate that whether the taxation structure should continue as it is or it needs a thorough overhaul? This fact is evident from the process of setting up of various committees, groups and task forces and their reports since 1969 till date.

Some of the committees which suggested, long ago, a major overhaul of the existing system of taxation include S. Bhootlingam Committee (1969), Indirect Taxation Enquiry Committee (1976) and Jha Committee on Indirect Taxes (1977). The Jha Committee, in the year 1978, strongly recommended adoption of the system of VAT. It said:”VAT in its comprehensive form extends from mining and manufacture stages to the retails stage. It can replace all other forms of internal indirect taxes such as excise, sales tax and octroi.”

Other notable committees, which gave important suggestions on redesigning of indirect taxation system include; “Tax Reforms Committee (1991-92)” chaired by Dr. Raja J. Chelliah, “Advisory Group on Tax Policy and Tax Administration (2001)”, chaired by Dr. Parthasarathi Shome and “Task Forces on Direct and Indirect Taxes (2002)”, chaired by Dr. Vijay Kelkar. Dr. Parthasarathi Shome also led the Tax Administration Reform Commission (TARC), which submitted its report to the present Finance Minister on 30th May 2014.

It may be worthwhile to note that adoption of a comprehensive system of value added tax is being consistently suggested by various committees constituted by the Government of India since 1977. The first positive step in this direction was taken in 1986 when modified value added tax (MODVAT) was introduced in Central Excise, which was later converted to CENVAT in the year 2000. However, real credit for a committed approach to reforms goes to Dr. Manmohan Singh, as Union Finance Minister (1991-96), who took up the challenge of reforms. In his Budget speech, in 1993, Dr. Manmohan Singh, indicated that high on his agenda of economic reforms was the replacement of historical sales tax systems by a Value Added Tax system. He entrusted this issue to the National Institute of Public Finance and Policy (NIPFP) for examination and recommendations. The NIPFP set up a high-level study team, under the leadership of Dr. Amaresh Bagchi, to go into the details of the issue. The report of the Committee, published in April 1994, is the pioneering work in this field and it has identified the basic themes for the subsequent discussions and action programs relating to reform of sales tax and other forms of indirect taxes. Its comments on the prevailing system of indirect taxes are also worth noting –

“The system (of domestic trade taxes) that is operating at present is archaic, irrational and complex. According to knowledgeable experts, the most complex in the world. It interferes with the free play of market forces and competition, causes economic distortions and entails high costs of compliance and administration.”

After the introduction of MODVAT, the next step towards comprehensive VAT was introduction of Service Tax in the year 1994. The concept, started with the coverage of just 3 services, now covers almost all services, except a privileged few. The Service Tax mechanism was modified from time to time with continuous expansion of its base and the facilities like input tax credit. The integration of Excise and Service Tax ITC was another step in the same direction.

Meanwhile, after a lot of discussion and persuasion, the States agreed to replace the age old sales tax with a transparent and vibrant system of value added tax. At present, all the States as well as Union Territories of India have adopted VAT in place of sales tax and trade tax, etc.

With these developments so far, we have reached a stage of fragmented VAT, which is working either independently or jointly with one or more taxes. Both the Centre and the States continue to levy tax at various stages of production and distribution utilising their powers generated from the Constitution of India (as described in the earlier paragraphs).

It is now time to consolidate all these indirect taxes into one, whether it is a tax on sale of goods, purchase of goods, on production, movement, entry or on consumption, rendering of services, receiving of services, entertainment or enjoying the luxuries, whatever needs to be taxed must be combined together into one tax. Thereafter, it does not make any difference whether it is called comprehensive VAT or Goods &    Services Tax (GST). The administration of such a tax, whether done by the Centre or the States, has to be in such a manner so as to avoid unnecessary hassles, unwanted complications and undue favours. The system must ensure that the Government gets what is due to it, neither more nor less. The consumer must know exactly the burden of tax on him. And the dealers (traders, manufacturers, service providers, etc.), who are responsible to collect tax from the ultimate consumer and deposit the same into the Government Treasury, must be ensured that there is no burden of tax on them while performing this pious duty.


 Indian Goods and Services Tax (GST)

Introduction of a Goods and Services Tax (GST) to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment. Increasingly, services are used or consumed in production and distribution of goods and vice versa. Separate taxation of goods and services often requires splitting of transaction value into value of goods and services for taxation, which leads to greater complexities, administration and compliances costs. Integration of various Central and State taxes into a GST system would make it possible to give full credit for input taxes collected. GST, being a destination-based consumption tax, based on VAT principle, would also greatly help in removing economic distortions caused by the present complex tax structure and will help in the development of a common national market.

All of us are well aware through various press reports and the budget speeches of respective finance ministers since 2004, that the Government of India is committed to introduce GST in place of existing indirect taxes which are being levied by Central and State Governments. Somehow, the process got delayed, first on account of the late introduction of state level VAT and thereafter, due to various other factors. The real work on designing a suitable GST model, for India, could start from May 2007, when the Empowered Committee of State Finance Ministers (EC) appointed a Joint Working Group (JWG) to give its recommendations regarding detailed framework to be adopted for GST. The working group studied various models and their suitability in Indian conditions. Based upon JWG Report, the EC announced in November 2007 that Indian GST shall be dual GST to be levied concurrently by both levels of Government,

The original target date for introduction of GST was set as 1st April 2010. P. Chidambram, the then Finance Minister in his budget speech 2007-08 stated “I wish to record my deep appreciation of the spirit of cooperative federalism displayed by State Governments and especially their Finance Ministers. At my request, the Empowered Committee of State Finance Ministers has agreed to work with the Central Government to prepare a roadmap for introducing a national level Goods and Services Tax (GST) with effect from 1st April, 2010.” Shri Pranab Mukherjee, as Finance Minister, in his budget speech 2009-10 stated, “I have been informed that the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise. I am glad to inform the House that, through their collaborative efforts, they have reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all stakeholders.”

While the Empowered Committee released its ‘First Discussion Paper on Goods and Services Tax’ on 10th November 2009, the Economic Division in the Department of Economic Affairs (Ministry of Finance, Government of India) initiated a working paper series with the objective of improving economic analysis and promoting evidence based policy formulation in its mandated areas of work. Several such well-researched Working Papers were released, which were written by well known economists such as Dr. M. Govinda Rao, Satya Poddar, Ehtisham Ahmad, R. Kavita Rao and others. Kavita Rao, in her paper released in November 2008, has raised certain issues with reference to dual GST, and, Satya Poddar & Ehtisham Ahmad, in their paper released in March 2009, have discussed in detail various aspects of GST model for India based upon their studies of implementation of VAT/GST in various other countries.

However, public debate on GST started only after release of ‘First Discussion Paper’ by the Empowered Committee. Considering various aspects of points covered by the said Discussion Paper, it was felt by almost all stake holders that it would need detailed discussion and the target date of 1st April 2010 cannot be met. Various institutions and associations of trade, industries and professionals, including ICAI, FICCI and others, submitted their views and queries. It may be worth noting that immediately after the release of the First Discussion Paper, the Task Force, appointed by the 13th Finance Commission headed by Dr. Vijay Kelkar, released its own Report on ‘Goods and Service Tax’ on 15th December, 2009. The recommendations of the Task Force are significant, and, the same are at variance with the recommendations of EC on certain key issues.

Apart from EC, and Task Force, etc, the Ministry of Finance (Government of India) also appointed a Joint Working Group of Central and State Government Officers, on 30th September 2009, for identifying issues concerning amendment to the Constitution and essential features of Central and State legislation for implementation of dual GST. It also constituted three sub working groups, on 1st June 2010, to work on specific issues, such as;

(1)    To work on and propose registration, returns, payments, refunds, audit and dispute resolution mechanism for GST regime.

(2)    To work on and draft legislation on Central GST and Model State GST
(3)    To work on and finalise basic design of IT system required for GST in general and IGST in particular.

Further, to have an appropriate IT infrastructure, an ‘Empowered Group on IT Infrastructure for GST’, was constituted, on 26th July 2010, under the chairmanship of Nandan Nilekani. On the basis of the recommendations of this committee, the EC set up a company known as Goods and Services Tax Network (GSTN), incorporated on 28th March 2013, u/s. 25 of the Companies Act, 1956.

Recently, two more committees have been formed for facilitating implementation of GST from 01/04/2016. While one committee called ‘Steering Committee’ will monitor the progress of IT preparedness of GSTN/CBEC/Tax Authorities, finalisation of reports of all the Sub-Committees constituted on different aspects relating to the mechanics of GST and drafting of CGST, IGST and SGST laws/rules. This Committee shall also monitor the progress on consultations with various stakeholders like trade and industry, and training of officers. The other committee has been assigned the job of recommendation possible tax rates under GST that would be consistent with the present level of revenue collection of Centre and States. While making its recommendations, this Committee will take into account expected levels of growth of economy, different levels of compliance and broadening of tax base under GST. The Committee would also analyse the Sector-wise impact of GST on the economy.

While all these committees, sub-committees, working groups, etc, are working on their respective assignments, the parliament is ready to pass the Constitution Amendment Bill, the States will follow soon, so as to empower the Centre and the States to levy tax on goods and services concurrently, the question which is of prime importance is, what would be the final design of Indian Goods and Services Tax?

Once the final design of Indian GST is known, then only it is possible to understand the real impact thereof. How it will affect the manner of tax collection and administration thereof? Whether the trade and industry will have relief from multi-tax authorities, and, whether the ultimate tax payer i.e. the consumer, will have any tangible benefit? Several advantages, which are being publicised, whether these are real or illusionary? Several such questions are coming to mind, some of them have been discussed at various seminars, workshops and study circles and some are yet to be discussed, and, the people are anxiously waiting for the answers.

Some basic questions, being asked by people in general, are noted here as follows:-

1.    Which commodities and services will remain out of the GST network? Although some indication has been given in the Constitution Amendment Bill, but one has to wait for the final outcome.

2.    Which taxes will be subsumed in GST? Various authorities from time to time have said that all indirect taxes levied by Central and State Governments will be subsumed in GST. But there are variances in various reports circulated so far. One important question is whether Octroi, LBT, Electricity Duty, etc. will form part of GST or will continue to be levied separately? Ideally, all such taxes which are being levied at present by all Government authorities (whether Central, State or local) on any kind of transaction related to goods and services should get covered by the GST. But, whether there is consensus on this issue?

3.    Which are the commodities and services to remain tax free (zero rated) within GST? At present there is a long list of exempt commodities under the Excise law. There are separate list of items exempt under VAT laws of each State. Whether it will be a common list of exempted (tax free) goods and services for CGST and SGST or it will differ from State to State? Further, can there be a situation where an item is exempt from SGST in a particular State but liable to tax for CGST or vice versa?

4.    What will be the rate of tax on sale/supply of taxable goods and/or services? Whether it will be one single rate of GST applicable to all such goods and services or there will be a Schedule specifying different rates of tax applicable to different types of taxable supplies?

5.    Further, how the proportion of CGST and SGST will be worked out? Whether it is rate of GST which will divided in two parts i.e. CGST and SGST, or the GST rate is sum total of CGST rate and SGST rate? Thus, whether effective rate of GST may be different State to State?

6.    Whether the rate of SGST on a particular kind of goods or services can be different from one State to another?

7.    What will be the threshold limit of turnover, below which GST is not applicable to a dealer/assessee? The First Discussion paper has indicated that there will be a common threshold of Rs. 10 lakh for SGST, and, there will be a higher threshold for CGST (Rs. 1.5 crore). It also suggested that there may be appropriate higher threshold for services. As thereafter there is no official communication, the issue needs to be clarified appropriately. How these separate thresholds will work? And, if a common figure of threshold is considered for CGST and SGST, then whether it is qua each State or combined figure of annual turnover in all the States together? At present, a small dealer having both the activities i.e. selling of goods as well as providing services is not liable to any tax (whether VAT or service tax) if his annual turnover of rendering services is below Rs. 10 lakh and further, if his annual turnover of sale of goods in each State is less than Rs. 10 lakh.

8.    A related question is that, at present small manufacturing units, cottage industries, village industries, etc., are not liable for Excise Duty, how they will get necessary exemption under the GST Law? Or all such units will be treated like other big industries, and therefore liable for the same treatment? There are a large number of dealers falling under this category all over the country.

9.    Regarding registration of dealers, the First Discussion Paper has indicated that each tax payer would be allotted a PAN-linked taxpayer identification number.Whether there will be two separate such numbers i.e. one for CGST and another for SGST? The question is pertinent with reference to multi-state operations.

10.    Answer to the above question would play an important role in deciding whether a dealer would be required to file one common return or two separate returns (may be in the same format). We understand that in case of dealers having multi-state activities, for each State, there may be a separate return for SGST qua each State but what about CGST returns in such cases.

11.    Similarly, for payment of taxes, whether it will be through one common challan or two separate payments i.e. one for CGST and another for SGST and may be third for IGST?

12.    As the credit for input SGST has to be used only against SGST payable on sales i.e. output SGST, how the CGST credit has to be utilised – whether qua each State or credit in one State can be utilised for payment of CGST in any other State. Most of the large scale service providers will have such a situation. How the mechanism will work if there is one common return and if there are separate returns?

13.    Regarding administration of GST, we have been given to understand that, the Centre as well as States will have concurrent jurisdiction. The Central Government authorities will assess the amount of CGST and the State Government authorities will assess the amount of SGST. Would that mean that the same dealer/assessee will be liable to be assessed by two different authorities in respect of the same transaction? Thus, the same invoices, same set of books of account and documents will have to be produced before two different authorities. And how the situation should be tackled if the Central authority takes a different view than that of the State authority, or vice versa, on any such point of assessment, whether it is value of transaction, classification, rate of tax or the amount of input tax credit, etc.?

14.    Whether a registered dealer under GST will be eligible for full input tax credit of respective components of GST for all purchases of goods and services (including capital goods) or there will be artificial restrictions and reductions?

15.    Whether the practice of disallowing input tax credit (as being prevalent in some of the States at present) will continue in GST regime, if a duly registered supplier has not paid due taxes to the Government or has delayed the payment of taxes?

16.    Will there be any kind of ‘composition schemes’ for dealers (whether supplying goods or services) having turnover below certain limit, say Rs. 1 crore? And those dealers who are in the business of retail trade like kirana merchants, who deal in various kinds of goods but not in a position to maintain commodity wise or tax rate wise accounts. Similarly, in case of hotels, restaurants and cooked food vendors.
17.    Whether the present definition of goods (as given under the local sales tax laws) will continue as it is or will be modified for the purposes of “GST”?

18.    What would be the definition of ‘services’ and how the place of supply in case of services will be determined?

19.    What about the taxation of transactions, which are falling at present in the deemed sale category? Whether such transactions of ‘works contract’, etc., will be categorised as ‘sale of goods’ or of rendering of services? The question is pertinent when there are different rates of taxes on various kinds of goods and services.

20.    How the process of transition will take place, particularly with reference to accumulated credits, etc., as on the date immediately prior to the date of implementing the new regime?

There are several such questions, which needs to be addressed, before taking a final decision, and their appropriate solutions need to be incorporated in the final draft of the new legislation.

Note from the indirect tax committee of BCAS: It is said by renowned tax experts that GST would free India from the shackles of archaic indirect tax laws and usher in a new era of growth and prosperity. GST may affect all industries, irrespective of the sector. It will impact the entire value chain of operations namely procurement, manufacturing, warehousing, distribution and sale. Some of the business models may need appropriate changes. The Indirect Taxes Committee of BCAS has taken an initiative to maintain a question bank on the proposed design of GST. We feel that the readers of BCAJ. They may have many questions to ask, particularly with reference to specific sector/s with which they are associated. And there may be general questions and suggestions which may be of immense importance. The BCAS is also preparing for providing a platform for dialogue amongst its readers on various issues of concern. All pertinent questions and suggestions are proposed to be submitted to the respective authorities who are responsible for drafting and finalising the Act and Rules concerning implementation of Goods and Services Tax. We would, therefore, like to invite all our readers to send their queries on GST, via e-mail to (to be informed), marking the subject as “GST Question Bank”. Our intention is to let our readers to take an active part in the framing of the law itself. We also propose to publish articles on best practices followed in some of the selected countries where GST has already been implemented successfully. Please look forward for the next issue of BCAJ.

Income Tax Officer vs. Late Som Nath Malhotra (through Raj Rani Malhotra) ITAT Bench ‘G’, New Delhi Before D. Manmohan, (V.P) and N. K. Saini, (A.M.) ITA No. 519/Del/2013 Assessment Year : 2003-04. Decided on 02.07.2015 Counsel for Revenue / Assessee: J. S. Minhas / Piyush Kaushik

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Section 148 & 292BB – Assessment made on the basis of notice issued in the name of the deceased is null and void despite the fact that the legal heir attended the proceeding.

Facts:
The AO on the basis of information received from DIT (Investigation), New Delhi that one Deepak Changia had given an accommodation entry of Rs. 2.01 lakh to the deceased assessee, issued notice dated 31.03.2010 u/s 148. In response to the said notice the legal heir, the wife of the deceased assessee, informed the AO that the assessee had expired on 06.12.2002 and she also furnished the death certificate and copy of Income Tax Return filed on 29.08.2003. The AO however framed the assessment in the name of the deceased assessee at an income of Rs. 23 lakh by making the addition of Rs. 19.94 lakh.

On appeal, the CIT(A) held that since the legal heir of the deceased assessee had informed the AO at the very beginning of assessment proceedings that the assessee had expired, the entire reassessment proceeding made in the name of the deceased was null and void. Against the order of the CIT(A), the revenue appealed before the Tribunal and contended that the CIT(A) erred in ignoring the provisions of section 292BB and holding the assessment not valid when the legal heir of the assessee had duly attended the proceedings and not objected to the same.

Held:
The Tribunal noted that in the present case the AO recorded the reasons for issuing the notice u/s. 148 of the Act in the name of the deceased assessee and got the approval of the Addl. CIT also in the same name. The AO issued notice dated 31.03.2010 u/s. 148 of the Act also in the name of the deceased assessee. In response when the legal heir informed him about the death of assessee, then also the AO did not issue any notice u/s. 148 of the Act or 143(2) of the Act in the name of the legal heir. Thus, according to the Tribunal, the entire assessment proceeding by the AO was on the basis of the notice which was invalid under the Act. Therefore, relying on the decision of the Allahabad High Court in the case of CIT vs. Suresh Chand Jaiswal (325 ITR 563), it was held that the assessment framed on the basis of the invalid notice was void ab initio.

levitra

U.P. Electronics Corporation Ltd. vs. DCIT (TDS) ITAT Lucknow “A” Bench Before Sunil Kumar Yadav (J. M.) and A. K. Garodia (A. M.) ITA No.538/LKW/2012 Assessment Year:2009-10. Decided on 23.01.2015 Counsel for Assessee / Revenue: R. C. Jain / K. C. Meena

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Section 14A – Investments in wholly owned subsidiaries (WOS) – Before any disallowance can be made the AO must record objectively his satisfaction as regards the expenditure incurred by the assessee – With respect to investment in WOS no expenditure is generally incurred to earn dividend hence no disallowance u/s. 14A

Facts:
The assessee had made investment of Rs. 60.9 crore in the share capital of three wholly owned subsidiary companies. During the year under appeal, the assessee earned dividend income of Rs. 7.52 lakh. Applying the provisions of section 14A read with Rule 8D(2)(iii), the AO disallowed the sum of Rs. 40.31 lakh.

On appeal, the CIT(A) confirmed the order of the AO. Before the Tribunal, the assessee submitted that before applying the provisions of section 14A the Assessing Officer had failed to record objective satisfaction as regards the claims made by the assessee and secondly, the investment made is of long term and of strategic in nature, in the wholly owned subsidiaries. According to it, no decision is required in making the investment or disinvestment on regular basis and, therefore, there cannot be any direct or indirect expenditure.

Held:
The Tribunal agreed with the assessee that recording of objective satisfaction by the AO with regard to the correctness of the claim of the assessee is mandatorily required in terms of section 14A(2) of the Act. It also noted that in the instant case, the AO had simply recorded that the contention of the assessee is not acceptable. Further, it also noted that the entire investment by the assessee was made in the subsidiary companies, therefore, in those cases disallowance u/s. 14A(2) of the Act cannot be worked out unless and until it is established that certain expenditures are incurred by the assessee in these investments. Further, relying on the decisions of the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT (I.T.A. No. 1733/PN/2012), of the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT (328 ITR 81) and of the Mumbai Bench of the Tribunal in the case of M/s. JM Financial Limited vs. Addl. CIT, I.T.A. No. 4521/Mum/2012, the Tribunal accepted the submission of the assesse and allowed its appeal.

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[2015] 68 SOT 550(Mumbai) Archana Parasrampuria vs. ITO ITA No. 1196 (Mum) of 2009 Assessment Year: 2005-06. Date of Order: 26.11.2014

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Section 54F – Acquisition of “transferable tenancy rights” which constitute substantial rights over the property and were almost identical to ownership of property qualify for exemption u/s. 54F.

Facts:
The assessee earned long term capital gains on transfer of shares. She claimed the capital gain so arising to be exempt u/s. 54F on the ground that she had purchased a residential flat.

In the course of assessment proceedings, on examination of the transfer deed, the Assessing Officer (AO) noted that the assessee had acquired “transferable tenancy rights” and not “ownership” of the flat. He, disallowed the claim made by the assessee u/s. 54F of the Act.

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

Held: The Tribunal noted that the assessee had purchased rights in one of the flats from the developer, which under the agreement were allotted to him (developer) for selling to the intended purchasers. The assessee had paid a sum of Rs. 78,10,001 as consideration/premium to the developer for obtaining the tenancy rights in the flat in question. Though under the agreement in question, the assessee was liable to pay a monthly rent of Rs. 4,000 to the owner, the Tribunal was of the view that considering the overall facts and circumstances of the case and amount of rent being a meager amount when compared to the amount of rent otherwise payable on such a property in the area, it is apparent that the assessee is not the mere tenant in the house. The Tribunal concluded that she has purchased substantial rights in the flat in question. It observed that a perusal of clause 7 of the agreement reveals that the assessee is entitled to carry out repairs and renovation in the said flat except the changes which could be detrimental to the basic structure of the building. The owner was not entitled to terminate the tenancy of the assessee on any ground, whatsoever, except for nonpayment of rent. In the event of destruction of the said building or construction of a new building, the assessee/ tenant was entitled to obtain tenancy in respect to the new flat having the same carpet area on the same floor without any payment or consideration or premium to the owner under the agreement. The assessee had absolute rights to transfer or assign the tenancy rights in respect of the flat in favor of any person of her choice and to charge such consideration/premium for such transfer/assignment and the tenant/assessee would not be required to obtain any permission from the owner and will not be required to pay any premium for consideration to the owner for such transfer/assignment of tenancy rights. The tenant is also entitled to create mortgage in respect of the tenancy rights in the said flat and also bequeath the tenancy rights in respect of any person.

The Tribunal held that the rights of the assessee in the flat were not the mere tenancy rights but were substantial rights giving the asseseee dominion, possession and control over the property in question with transferable rights, which were almost identical to that of an owner of the property. There was no denial that the assessee has purchased the rights in the said flat for residential purposes.

The provisions of s. 54F having regard to its beneficial objects are required to be interpreted liberally. The coordinate Bench of the Tribunal, in somewhat similar circumstances, in the case of Smt. Meena S. Raheja vs. Dy. CIT (ITA No.3941(Mum) of 2009), dated 22.9.2010 in a case of 99 year leasehold rights has held that the assessee is entitled to the benefit of deduction u/s. 54F of the Act.

The Tribunal held that the assessee qualified for deduction u/s. 54F of the Act. The appeal filed by the assessee was allowed.

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[2015] 171 TTJ 145 (Asr) Sibia Healthcare (P) Ltd. vs. DCIT ITA No. 90/Asr/2015 Assessment Year: 2013-14. Date of Order: 9.6.2015

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Sections 200A, 234E – Prior to 1.6.2015 there was no enabling
provision for raising a demand in respect of levy of fees u/s. 234E.

Facts:
The
assessee company delayed the filing of TDS statements. In the course of
processing of TDS statements, the AO(TDS) raised a demand, by way of an
intimation dated 9th September, 2013 issued u/s. 200A of the Act, for
levy of fees u/s. 234E for delayed filing of the TDS statement.

Aggrieved
by the levy of fees in the intimation issued, the assessee preferred an
appeal to the CIT(A). The CIT(A) upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal noted the statutory provisions of section 234E as introduced
by the Finance Act, 2012 w.e.f. 1.7.2012 and also of section 200A as
inserted by the Finance Act, 2009 w.e.f. 1.4.2010. It also noted that
the provisions of section 200A were amended by Finance Act, 2015 w.e.f.
1.6.2015 to provide that in the course of processing of a TDS statement
and issuance of intimation u/s. 200A in respect thereof an adjustment
could also be made in respect of the “fee, if any, shall be computed in
accordance with the provisions of section 234E.”

The Tribunal
held that there was no enabling provision for raising a demand in
respect of levy of fees u/s. 234E. While examining the correctness of
intimation u/s. 200A, it had to be guided by the limited mandate of
section 200A, which, at the relevant point of time, permitted
computation of amount recoverable from or payable to, the tax deductor
after making adjustments specified therein which did not include fees
levied u/s. 234E.

The adjustment in respect of levy of fees u/s.
234E was beyond the scope of permissible adjustments contemplated u/s.
200A. This intimation is appealable order u/s. 246A(a), and, therefore,
the CIT(A) ought to have examined legality of the adjustment made under
this intimation in the light of the scope of section 200A. It also
observed that there is no other provision enabling a demand in respect
of this levy and in the absence of the enabling provisions u/s. 200A, no
such levy could be effected.

The appeal filed by the assessee was allowed.

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Settlement of cases – Interest – Section 245D(2C) – B. P. 01/04/1995 to 05/10/2001 – Assessee depositing tax on admitting additional income: Required amount deposited within time when application admitted – Further tax liability determined final order satisfied – Interest on further tax for the period during the pendency of application before Settlement Commission is unwarranted

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CIT vs. Vishandas and ors; 374 ITR 591 (Del):

The assessee and two others disclosed Rs. 10,00,000/- in the hands of each of the three assesses. The Settlement Commission directed to accept the offer of additional income of Rs. 1,48,16,160/- and rejected the waiver of interest. While computing the amount payable, the Assessing Officer made an addition of Rs. 13,03,211/- as interest recoverable for the period between 01/01/2004 and 26/03/2010 u/s. 245D(2C) of the Income-tax Act, 1961. The Commissioner (Appeals) held that section 245D(2C) could be invoked only if the assessee did not deposit the tax payable on income disclosed and admitted u/s. 245D(1). In the instant case, the assessee deposited Rs. 6,12,000/- within the time prescribed u/s. 245D(2C) on the income of Rs. 10,00,000/- in terms of order u/s. 245D(1) and deleted the addition. This was confirmed by the Tribunal.

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

“i) When the application was filed before the Settlement Commission, the assessee deposited the admitted tax liability. Soon, thereafter, when the application was admitted, the amount required was deposited within the time stipulated u/s. 245D(6A). The further tax liability determined was payable after the final decision. The records and the materials examined by the Commissioner (Appeals) and upheld by the Tribunal disclosed that even the tax liability finally determined was satisfied. In these circumstances, the addition of interest for the period during the pendency of the application before the Settlement was entirely unwarranted.

ii) We do not see any reason to disturb the concurrent findings of fact. The appeals do not raise any substantial question of law and are, consequently, dismissed.”

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ITAT: Power to grant stay beyond 365 days: Section 254(2A) – Section 254(2A) third proviso cannot be interpreted to mean that extension of stay of demand should be denied beyond 365 days even when the assesseee is not at fault. ITAT may extend stay of demand beyond 365 days if delay in disposing appeal is not attributable to assessee: ITAT should make efforts to decide stay granted appeals expeditiously

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DCIT vs. Vodafone Essar Gujarat Ltd. (Guj);SCA No. 5014 of 2015; dated 12/06/2015; www.itatonline.org: [2015] 58 taxmann.com 374 (Guj)

The Tribunal passed an order extending stay of recovery of demand beyond the period of 365 days. The department filed a Writ Petition to challenge the said order on the ground that in view of the third proviso to section 254(2A) of the Act, the Tribunal has no jurisdiction to extend the stay of demand beyond 365 days.

The Gujarat High Court dismissed the Petition and held as under:

“(i) It is true that as per third proviso to section 254(2A) of the Act, if such appeal is not so disposed of within the period allowed under the first proviso i.e. within 180 days from the date of the stay order or the period or periods extended or allowed under the second proviso, which shall not, in any case, exceed three hundred and sixty-five days, the order of stay shall stand vacated after the expiry of such period or periods, even if the delay in disposing of the appeal is not attributable to the assessee. Therefore, as such, legislative intent seems to be very clear. However, the purpose and object of providing such time limit is required to be considered. The purpose and object of providing time limit as provided in section 254(2A) of the Act seems to be that after obtaining stay order, the assessee may not indulge into delay tactics and may not proceed further with the hearing of the appeal and may not misuse the grant of stay of demand. At the same time, duty is also cast upon the learned Tribunal to decide and dispose of such appeals in which there is a stay of demand, as early as possible and within the period prescribed under first proviso and second proviso to section 254(2A) of the Act i.e. within maximum period of 365 days.

ii) However, one cannot lost sight of the fact that there may be number of reasons due to which the learned Tribunal is not in a position to decide and dispose of the appeals within the maximum period of 365 days despite their best efforts. There cannot be a legislative intent to punish a person/ assessee though there is no fault of the assessee and/or appellant. The purpose and object of section 254(2A) of the Act is stated herein above and more particularly with a view to see that in the cases where there is a stay of demand, appeals are heard at the earliest by the learned Tribunal and within stipulated time mentioned in section 254(2A) of the Act and the assessee in whose favour there is stay of demand may not take undue advantage of the same and may not adopt delay tactics and avoid hearing of the appeals. However, at the same time, all efforts shall be made by the learned Tribunal to see that in the cases where there is stay of demand, such appeals are heard, decided and disposed of at the earliest and periodically the position/ situation is monitored by the learned Tribunal and the stay is not extended mechanically.

(iii) By section 254(2A) of the Act, it cannot be inferred a legislative intent to curtail/withdraw powers of the Appellate Tribunal to extend stay of demand beyond the period of 365 days. However, the aforesaid extension of stay beyond the period of total 365 days from the date of grant of initial stay would always be subject to the subjective satisfaction by the Tribunal and on an application made by the assessee / appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay is not attributable to the appellant / assessee.

iv) As observed hereinabove, the Tribunal can extend the stay granted earlier beyond the period of 365 days from the date of grant of initial stay, however, on being subjectively satisfied by the Tribunal and on an application made by the assessee/appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay, is not attributable to the appellant / assessee and that the assessee is not at fault and therefore, while considering each application for extension of stay, the Tribunal is required to consider the facts of each case and arrive at subjective satisfaction in each case whether the delay in not disposing of the appeal within the period of 365 days from the date of initial grant of stay is attributable to the appellant – assessee or not and/or whether the assessee / appellant in whose favour stay has been granted, has cooperated in early disposal of the appeal or not and/or whether there is any delay tactics by such appellant / assessee in whose favour stay has been granted and/or whether such appellant is trying to get any undue advantage of stay in his favour or not. Therefore, while passing such order of extension of stay, Tribunal is required to pass a speaking order on each application and after giving an opportunity to the representative of the revenue – Department and record its satisfaction as stated hereinabove. Therefore, ultimately if the revenue – department is aggrieved by such extension in a particular case having of the view that in a particular case the assessee has not cooperated and/or has tried to take undue advantage of stay and despite the same the Tribunal has extended stay order, revenue can challenge the same before the higher forum/High Court. (Commissioner of Customs and Central Exercise, Ahmedabad vs. Kumar Cotton Mills Pvt. Ltd (2005) 180 ELT 434(SC) & Commissioner vs. Small Industries Development Bank of India in Tax Appeal No.341 of 2014 followed; Commissioner of Income Tax vs. Maruti Suzuki (India) Limited decided on 2.1.2014 in Writ Petition (Civil) No.5086 of 2013 not followed)”

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Capital gain – Agricultural land – Section 2(14)(iii) (b) – A. Y. 2009-10 – Land situated within prescribed distance from municipal limit – Measurement of distance – Amendment in 2014 providing that distance should be measured aerially is prospective and not to apply to earlier years

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CIT vs. Nitish Rameshchandra Chordia; 374 ITR 531 (Bom):

On 10/04/2007, the assessee purchased agricultural land and sold it on 15/04/2008. The assessee claimed the profit as exempt on the ground that the land sold was agricultural land and not a capital asset according to section 2(14) of the Income-tax Act, 1961, urging that the land was situated beyond 8 kms. of the municipal limits. The Assessing Officer rejected the claim holding that the distance must be measured by the shortest distance as the crow flies or the straight line method and not by the road distance. The Tribunal allowed the assesses claim.

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

“i) The amendment in the taxing statute, unless a different legislative intention is clearly expressed, shall operate prospectively. If the assessee has earned business income and not the agricultural income, section 11 of General Clauses Act, 1897, will prevail unless a different intention appears to the contrary. The relevant amendment prescribing that the distance to be counted must be aerial came into force w.e.f. 01/04/2014. The need for the amendment itself showed that in order to avoid any confusion, the exercise became necessary. This exercise to clear the confusion, therefore, showed that the benefit thereof must be given to the assessee.

ii) In such matters, when there is any doubt or confusion, the view in favour of the assessee needs to be adopted. Circular No. 3 of 2014, dated 24/01/2014, dealing with applicability expressly stipulates that it takes effect from 01/04/2014, and, therefore, prospectively applies in relation to the A. Y. 2014-15 and subsequent assessment years. Hence, the question whether prior to the A. Y. 2014-15 the authorities erred in computing the distance by road did not arise at all.”

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Business expenditure – Disallowance u/s. 40(a) (ia) -: Section 40(a)(ia) – Argument that the disallowance for want of TDS can be made only for amounts “payable” as of 31st March and not for those already “paid” is not correct. In Liminie dismissal of SLP in Vector Shipping does not mean Supreme Court has confirmed the view of the HC

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P. M. S. Diesel vs. CIT (P&H); ITA No. 716 of 2009 dated 29/04/2015:www.itatonline.org: 277 CTR 491(P&H):

Dealing with the scope of section 40(a)(ia) of the Income Tax Act, 1961, the Punjab and Haryana High Court held as under:

“(i) The introduction of Section 40(a)(ia) had achieved the objective of augmenting the TDS to a substantial extent. When the provisions and procedures relating to TDS are scrupulously applied, it also ensured the identification of the payees thereby confirming the network of assessees and that once the assessees are identified it would enable the tax collection machinery to bring within its fold all such persons who are liable to come within the network of tax payers. These objects also indicate the legislative intent that the requirement of deducting tax at source is mandatory.

(ii) The argument that section 40(a)(ia) relates only to assessees who follow the mercantile system and does not pertain to the assessees who follow the cash system is not acceptable. The purpose of the section is to ensure the recovery of tax. We see no indication in the section that this object was confined to the recovery of tax from a particular type of assessee following a particular accounting practice.

(iii) The argument that section 40(a)(ia) applies only to amounts which are “payable” and not to amounts that are already “paid” is also not acceptable (Commissioner of Income Tax vs. Crescent Export Syndicate (2013) 216 Taxman 258 (Cal) and Commissioner of Income Tax vs. Sikandar Khan N. Tunwar (2013) 357 ITR 312 (Guj) followed)

(iv) Though in Commissioner of Income Tax vs. M/s Vector Shipping Services (P) Ltd (2013)262 CTR (All) 545, 357 ITR 642, it was held that no disallowance could be made u/s 40(a)(ia) as no amount remained payable at the year end and the Special Bench decision of the Tribunal in Merilyn Shipping & Transports, 136 ITD 23 (SB) (Vishakhapatnam) was noted, this cannot be agreed with as there is no reasoning for the finding. The dismissal of the department’s petition for special leave to appeal (SLP) was in limine. The dismissal of the SLP, therefore, does not confirm the view of the Allahabad High Court.”

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Business expenditure – Disallowance of payment to directors – Section 40(c) – A. Y. 1981-82 – Film production – Amounts paid as professional charges to directors for directing and producing film – Amounts not paid in their capacity as members of Board of Directors – No disallowance can be made u/s. 40(c)

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CIT vs. Rupam Pictures Pvt. Ltd.; 374 ITR 450 (Bom)

The assessee was in the business of production of films. In the A. Y. 1981-82, two directors of the assessee company were paid Rs. 3 lakh and Rs. 1.5 lakh, respectively for directing and producing a film. The Assessing Officer applied section 40(c) of the Income-tax Act, 1961 and disallowed the payment in excess of Rs. 72,000/- in respect of each of them. The Tribunal deleted the addition.

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

“i) The disallowance made by the Income-tax Officer u/s. 40(c) was not justified. The amounts paid to the two individuals were not paid in their capacity as members of the Board of Directors but as professional charges for directing and producing a film.

ii) The Revenue was, therefore, not justified in disallowing the claim, the character of remuneration mode being different.”

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The Annual General Meeting

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The Annual General Meeting of the Society was held at the Walchand Hirachand Hall, Indian Merchant Chambers, Churchgate, Mumbai on Monday, 6th July 2015.

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

Mr. Narayan R. Pasari, Hon. Joint Secretary, announced the results of the election of the President, the Vice President, two Secretaries, the Treasurer and eight members of the Managing Committee for the year 2015-16. The names of members as elected unopposed for the year 2015-16 were announced.

The “Jal Erach Dastur Awards” for best feature and best article appearing in BCAS Journal during 2014-15 were announced. The winners were: C. N. Vaze, YogeshThar and Anjali Agrawal.

The Special Edition of the Journal dated July 2015 on “Ethics” was released at the hands of The Editor, Mr. Anil J. Sathe. He mentioned about the special issue articles on Ethics;Fundamental and Operational Ethics, Morality of a Lawyer’s Ethics, “Ethics” isn’t music for the entertainment world, “Ethics” in Architectural Professional Practice and Ethics in Media: A Depressing Scenario.

Thereafter, Ms. Purnima Sharma and Ms. Manju Joshi were felicitated with a plaque by Mr. Narayan Varma. Ms. Purnima Sharma was felicitated for her courage and outstanding efforts to become a Chartered Accountant and be an active citizen, inspite of having hearing and speaking challenges. Ms. Manju Joshi was felicitated for providing untiring assistance to Ms. Purnima Sharma and for motivating her to be an active citizen and helping her to become a Chartered Accountant.

New Publications were released at the Annual Day. Mr. Mihir Sheth spoke about the new book on “Thought Mailers- A Compendium” released in the hands of Mr. Narayan Varma.

“Namaskar Ki Bhet” was released in the hands of Mr. Pradeep Shah.

Three Lucky Winners of the Learn Share Grow, a contest conducted by Bombay Chartered Accountant Society were announced by Incoming President Mr. Raman Jokhakar.

Outgoing President Speech

Incoming President Raman, my colleagues – Mukesh, Narayan, Sunil, incoming VP Chetan, incoming Office bearer B. Manish, Respected Past Presidents, Seniors and Friends.

At the end of such a profound experience, I stand before you today with a mix of emotions:

  • gratitude for learning so much over the past many years that will stay with me forever
  • disappointment that some of the targeted accomplishments could not be achieved
  • sadness that the routine I have come to enjoy will now change
  • relief that the responsibilities come to an end.

I am humbled by the affection and honour bestowed upon me.

Let me begin by sharing my perspective of what’s happening around us. It is said that one cannot begin to comprehend the Future without understanding the Past. When it comes to dealing with the Present, we need to grasp the exponential rate of change that continues to accelerate. Rapid changes are sweeping not only the field of technology but also the areas of business, law and regulations and the human life itself.

Alvin Toffler, the celebrated author, in his book “Revolutionary Wealth” has given a magnificent metaphor for the rate of changes witnessed in various institutions in American society, in the chapter titled “Clash of Speeds”.

First at 100 mph, the fastest change agents are companies and business who drive many of the transformations of the rest of the society. They use technology to blast ahead and force suppliers and distributors to make parallel changes, all due to intense competition.

At 60 mph is the family that has morphed in the face of industrialisation where it shrank and abandoned the old values and inter-dependence.

Clocking at 30 mph is the labour movement slowed by the change of muscle work to mind work, from interchangeable skills to non-interchangeable skills and from blindly repetitional to innovational tasks.

Sputtering along in the slow lane are government bureaucracies and regulatory agencies running at 25 mph. Coming along at 10 mph are the school systems. Toffler bemoans the lack of competition and prevailing culture at the educational institutions that was designed to serve an outmoded factory-style industrial age.

At 3mph, Toffler tags political structures that are the American Congress, the White House and the political parties themselves.

Lastly, the tortoise speed of 1 mph is captured by the slowest changing institution, today’s legal system.

The above metaphor, I believe, would be equally applicable to the Indian landscape.

Toffler’s observations came about a decade ago. Today we find that even the laggard institutions are accelerating. Speaking last week, Mr. Mukesh Ambani commented that with Digital India, the government has moved faster, as an exception, than the industry. The Prime Minister’s vision of Digital India has the potential to transform fundamentally the lives of 1.2 billion Indians using the power of digital technology.

What do such external challenges arising from rapidly changing landscape mean for voluntary associations? I believe their importance will increase. Voluntary organisations will continue to act as a catalyst for intellectual synthesis, provide people to people connect and fill the void created by the technology. But it will require such organisations to innovate continuously to stay relevant and to adapt quickly.

I recall a discussion Raman and I had with Mr T. N. Manoharan during the ITF Conference in Chennai last year. He believes that to stay relevant and make an impact, we will require to build excellent research capabilities to bring value to the members and support recommendations and representations to the authorities with data and statistics.

Apart from external challenges, we also need to deal with the internal challenges which come from growing scale of operations as well as expectations. As I stated in my acceptance speech last year, the annual hours of education increased multi-fold over last two decades. We clocked 132,000 hours in 2013-14 as well as in 2014-15. At the same time, the volunteers, pressurised by professional and personal commitment,are unable to devote as much time as in the past.

To effectively face these challenges, we must transform the organisation radically by enhancing our infrastructure and services and by attracting and retaining quality staff.

I am glad to report that we have made some progress on these fronts. After several years of efforts, we have acquired additional office premises, under leave and licence, effectively from 1st July. I must express immense gratitude to Kishorbhai, Pranaybhai, Pradipbhai Kapasi, Shariq, Sanjeev and Naushad for guiding the OBs through this process. Now, Raman and team are working tirelessly to reorganise the two offices.

We have also brought on board new staff in key office management roles that will strengthen the administration. The process of evaluating their performance is being aligned to increase their quality and help reduce the burden on the volunteers.

Voice of Customer (VoC) has emerged as an important tool in the modern management. We have begun a process to seek structured feedback from our members and the participants through online surveys. I am sure this will provide valuable guidance to the office bearers, the staff and the organisers in improving our services.

The office admin management software – we call it OMS that was custom developed about 12 years ago is falling short of our growing needs. It was developed without any provision for imprest tracking and service tax and the numerous changes and patchworks have made it unstable. The work is already in progress to revamp or replace the outdated OMS.

On the academic front, we attempted several new programmes and innovative ideas. While the Annual Report and the Quarterly Core Group Newsletters provide these details, I am glad to report that our Committees continued to organise outstanding learning programmes and activities in keeping with our finest tradition. I thank all Chairmen, Co-Chairmen and Convenors for their tireless efforts. I must acknowledge the maiden work done by the newly set up Corporate and Securities Laws Committee. My thanks and compliments to Kanubhai for accepting my request to Chair this new Committee and giving us a strong opening in this field of growing importance.

Today is also the occasion to express my sincere gratitude and thanks to everyone for helping me sail through a satisfying year.

Our Past Presidents remain the pivots of our Society. I am grateful to each one of them for having guided me throughout,and gently nudging me back on track whenever I drifted.

The Managing Committee members have been a source of constant support and guidance. I am thankful to each one of them.

The Core Group has been and will always remain our heart. We opened an additional channel of communication on WhatsApp group for instant communication but of course we need to be disciplined in use of this channel. I am grateful to each and every Core Group Member for their dedication and sincerity.

My office bearer colleagues have supported me like solid rocks. Raman, Mukesh, Narayan and Sunil have worked round the clock and shared my burden in equal measure.

Ever young and zestful Raman with his forthright and quick action oriented approach moved shoulder to shoulder with me through the year. With the United Nations declaring India as having the world’s largest youth population, I am happy we have entrusted our leadership to an ever young leader.

My heartfelt thanks to everyone in our staff,including the office boys,for their hard work and wholehearted support! And also for coping up with the challenges brought by various changes during the year. During the year, Raman held several innovative sessions to coach them. We continued to push them to perform better. A major challenge for our staff remains in dealing with multiple bosses. I must compliment them for doing a super job and look forward to them keeping up the momentum.

We continued to receive excellent support from our sister organisations and organise various joint programmes. I am confident this tradition will continue and strengthen further. My sincere thanks the office bearers of the AIFTP, CTC,STPAM and WIRC of ICAI for their valuable co-operation.
My journey at the BCAS has enriched me tremendously:

  • made close friendship with my OB colleagues and other

    Core Group Members

  • acquired rich experience from leading many activities
  • learnt from the wisdom of the elders
  • learnt to remain objective and unbiased
  • found excellent motivation, guidance and support for upholding professional ethics and values
  • caught contagious passion and energy from Raman and various members of the youth group – including the  youngest member Narayanbhai.

One singular activity I relished the most throughout the year is writing the monthly column, “From the President’s Page”. It pushed me to research issues, stretch my thinking and articulate. I found this exercise greatly educative. In his keynote message to the advanced professional writing workshop, Bansibhai quoted a couplet from Manoj Khanderia’s poem. I find this stanza aptly expresses my sentiments. It reads:

The journey through the BCAS gives us opportunities tointeract, learn and get a feedback from a large body that includes seniors, peers and the youth. With mentoring and moulding from stalwarts, one grows from a member to an active volunteer, and finally rises as a leader. It is an amazingly enriching experience.

The challenge for us is to make such an awesome experience visible, specifically to the younger members. All of us have an obligation to encourage and push these younger members, to activey involve themselves and reap the tremendous benefits and contribute to the Society as well. I am sure Raman, Chetan and other successors will work ceaselessly to ensure that BCAS continues to fulfil this objective and thereby thrive to the eternity. Let me assure you Raman and Chetan, I will be around any time you need me. And don’t worry, I will not behave like a mother-in-law! My wife Trupti, daughter Parnasi, son Mohak and my parents have been the pillars of my strength. I could not have achieved this without their wholehearted support. It is not possible for me to express my gratitude to them in words.

At the end, I would like to quote Dr. Joseph Murray’s motto that is close to my heart. “Service to society is the rent we pay for living on this planet”. I see many stalwarts in our fraternity whose lives echo this motto. I hope to emulate their examples, at least to some degree.

Thank you.

Incoming President’s Speech

                
My story                
In  1998,  when  I  became  a member  of  the  BCAS  after passing the CA  examination, I never imagined that I will stand before you, at an AGM to carry on the torch of our Society as its 67th President.
                
As  a  proud  third  generation member of the Society, this is an important milestone for me and a moment of honour to carry on 66 years of legacy of LEARNING, SHARING and GROWING. When I passed my CA exams, the first instruction from my father, who is also a CA, was to become a BCAS life member. Since then, whenever I had to look for professional education, I turned to BCAS. So, I can say that I have GROWN UP in BCAS and therefore here I stand, humbled, grateful for your trust, and mindful of my responsibility!
                
The last year was an epic journey of learning and stepping up to serve the BCAS under Nitin’s leadership. He looked both outward for new initiatives and inward for strengthening the people, infrastructure and processes. We took decisions that had to be taken. As the VP works closely with the President, I was a witness to Nitin’s approach – quiet, firm, courageous and decisive. We shared a wonderful chemistry that I will relish for years to come.
                
BCAS credo                
BCAS is driven by its VOLUNTEERS – their spirit and generosity. Over the last several decades, so many people have GIVEN so freely – their time, knowledge, resources, connections, capabilities and much more. There are so many silent workers, behind the scenes volunteers, who matter to the Society. I cannot thank them enough, for all they have done and all they will do. BCAS Volunteers truly epitomises what Martin Luther King said: EVERYBODY CAN BE GREAT BECAUSE EVERYBODY CAN SERVE. I believe, that as a Society we just don’t print a Journal and Referencer, we don’t just create learning events, we help transform CAs to what they can be! We enable them to achieve their dreams through LEARNING, SHARING AND GROWING. We are not just an organisation from a legal – functional sense. We are a movement of partners, committed to the pursuit of knowledge that improves the profession, strives to make our laws and governance more humane and sensible, make our individuals shine with cutting edge knowledge and virtuosity and in that sense every BCAS volunteer makes our nation more wholesome.

Over the decades, the Society has set A STANDARD in professional education. When we went to Udaipur for the last RRC, members from outstation said – when BCAS says something, we derive a new meaning to what we already knew. People look up to our Exactitude and Care. This ecosystem of beliefs and actions is the soul of our existence and as volunteers we are delighted to live by it, in every possible way.

Another facet of the BCAS is – as CAs so many of us are competitors, yet we are sitting together, learning from one another, sharing our experience and knowledge and supporting one another! A number of lawyers who have come to our events have told me that, they do not have anything like this. Some are fascinated by the level of discussions at our events. One very eminent advocate, who spoke at one of the residential courses, shared that on his visits to Mumbai, he checks with BCAS to see if there is any event happening where he can participate and join the discussion. This spirit to LEARN, SHARE and GROW is precious and unique. This spirit had brought about the genesis of BCAS and is what we are committed to nurture.

The strength of the BCAS lies in its leadership, its committees which are decentralised DECISION CENTRES and the space it gives to individuals to express their creativity. This freedom results in a vibrant buzz that makes our events and initiatives so unique that many others emulate.

Lastly, a special mention is a must for the string of 66 Presidents, the enablers who made BCAS bigger than the sum of individual ambitions. I have seen and worked with a number of them. They are like Lighthouses – No matter what time it is, they have guided, supported and delivered always. I salute them all.

The challenge

Having said that, the landscape around us has changed and is changing faster than ever, since the early days of BCAS. – Professionals, whether participants to our events or faculty, have tremendous time pressures and other pressing exigencies. The freshly qualified have varying and different needs.

–    Add to that, the information overload. From numerous seminars, portals, organisations, study sessions, fast and frequent changes in laws and regulations and decisions. The quantum and complexity of all this is unprecedented.

Where does BCAS stand amidst all of this?

I have seen that BCAS continues to work with the same sense of purpose and passion it is known for. We just had the largest ever 9th Residential Study Course on Service Tax and VAT in June and we are looking at the largest ever International Tax and Finance Conference next month. Nearly 700 participants attend the 4 Flagship Residential Courses each year. In spite of challenges, the Committees have given their best.

How do we get to the next

Still, a great institution always faces greater challenges for it to become even greater. The most difficult part of success is that one is expected to succeed all the time. Also, once anything becomes large and notable, expectations rise.

WHERE DO WE GO FROM HERE?

HOW DO WE GET TO THE NEXT LEVEL?

As a Society, as the managing committee, as sub committees – we need to ponder on these questions!

I wish to share some of my thoughts and vision for BCAS:

1.    At a very fundamental level, we need to question all that we do. We will need to return to the WHY we continue to do what we do. Are we ALIGNED and RELEVANT to those who we seek to serve? Every committee will have to CHALLENGE THE STATUS QUO to see if there is another way? Do we stay the course or change the course?

Traditions have their place. Yet the traditions can also bind us, if not REFRESHED regularly. Let me tell you a story.

A Guru and his disciples meditated early morning in their ashram. The ashram cat started to come by and disturb them. The Guru said – “when you meditate, tie the cat to the pole”. So that’s what they did each morning. A few years later, the Guru passed away. Some years later the cat died too. Now, the disciples began to wonder, the Guru had told us “WHEN YOU MEDITATE, TIE THE CAT TO THE POLE”, so they went out and brought another cat and tied it to the pole for their morning meditations.

The story is symbolic. However, innovation is killed because of the cats like

“WE ALWAYS DO IT THIS WAY” “IT CAN’T BE DONE”

“WE DID IT LAST TIME AND IT DOESN’T WORK”.

As an organisation we will need to question

–    ARE WE REALLY DOING WHAT IS NEEDED?

–    ARE THERE OTHER WAYS TO DO WHAT WE NEED TO DO TO HAVE A BETTER OUTCOME?

–    ARE WE CHALLENGING THE STATUS QUO ENOUGH!
I have learnt this from my teacher, NO MATTER HOW GOOD IT GETS, IT CAN ALWAYS GET BETTER! ITS LIKE GOING FROM PEAK TO PEAK!

1.    GOING DIGITAL– we need to reach the members –“TO MAKE AVAILABLE” what we have to offer. We started E Learning when the CA profession did not know about it. We launched the E Journal with 12+ years of material available with search features, a WEB TV that enables members to look at our events at their convenience. We will have to reach where the member is more and more. We aim to create a DIGITAL repository of knowledge. I am sure the Committees will think this way for each of their events.

2.    Thought Leadership – on crucial laws we need to build thought leadership. Can we go a step beyond representations, and say this is how it ideally should be? Collaborative thought leadership of the best minds around will make all the difference. As GST is on the Drawing Board, the Indirect Taxation Committee has been putting together material to see how we can do this. We have high expectation from this group.

3.    Another area I feel we can change is the way the Representations are done – with more economics, statistics, data and quantification, giving ranking to our reasoning and also correlate them with larger public policies. We will need to find a way to close the chain of getting our recommendations; grievances and representations reach the decision-makers and ensure they are considered. The technical committees, I am sure, will consider this afresh.

4.    To carry out ADVANCE WORKSHOPS that lead to improved technical skills and eventual revenue generation for our members. Some of our long duration courses are in vogue and well acclaimed and yet we need the NEXT LEVEL, something of a higher order, beyond the preliminary, more issue based and utterly current.

5.    One area that we tested was to have customised trainings for corporate members. I did try this a year ago and with a barrage of new changes coming, we will have more opportunities to do this again this year with the support of the technical committees.

6.    Work with Students – we touch the future when we work with students. There is a lot that BCAS can offer to the Students. The Students Day event was greatly successful. The DREAM TEAM has started to plan for the next year immediately. They are filled with enthusiasm and aspiration to learn. Just the last week, they contacted the RBI and we are having an interactive session at the RBI in the next week.

7.    Build Publications Rack – we would like to have shorter, easy to read and easy to publish books out. They can be short, deal with a topic and not the whole SUBJECT. Often there are incredible issues that come up at study circles, if we can capture them and build upon them we can have a crisp, short, pithy and useful publication quickly. Certain publications are perennial ones, but we run out of them. Say a Mandatory Accounting Standards book or Exploring FEMA or a book on DTAAs or Service Tax that was released in June. Each sub-committee will need to rank their publications into two – ones that are perennial – and others that are CURRENT and having a shelf life. We need to build this strategy clearly and keep it in our focus. We are exploring ways where this can be done and we will see a number of publications from a few committees.

8.    Like Nitin mentioned, we are going for a makeover of the current premises into a LEARNING CENTRE where members – CAs and Students – can come and study, learn, collaborate, and contribute. We got qualified staff, but we needed a better infrastructure for them to perform, more space, better space.

9.    Data driven – we have started surveys since last 6 months. I have always wanted this since my early days in the Journal Committee, to find out what do people really want? To know the preferences and expectations, and interact with the audience, we are using technology to get some solid data.

In all this, we do remember that we will always keep the vision of the BCAS at the forefront. In the words of Thomas Jefferson “IN MATTERS OF STYLE, SWIM WITH THE CURRENT, IN MATTERS OF PRINCIPLE, STAND LIKE A ROCK”. This credo has and will keep BCAS relevant and useful in times to come.

The next 5-10 years will be most exciting and transforming for our country. The government is refreshing, wanting to do something, the demographics are favourable to our nation, technology and innovation are peaking. We have to play our part.

Over the years, the President is expected to be the Chief Innovation Officer. He must innovate, enable, collaborate, invigorate, be the chief products officer and support the committees to run with speed and precision, engaging all the talents of our people, irrespective of title. I will do my best and with the blessings of the seniors, and cooperation of my colleagues in the MC, the Core Group and the BCAS staff.

However, I believe, one year is too short. Looking at the tasks ahead, I am reminded of 2 quotes:

One, that I read recently – THE MATH OF TIME IS SIMPLE: YOU HAVE LESS THAN YOU THINK AND NEED MORE THAN YOU KNOW.

And the other, my choir teacher told us – YOU GOT TO DO WHAT YOU NEED TO DO IN THE TIME YOU HAVE GOT.

We will strive to converge these two divergent looking set of words as we start.

THANK YOU!

67th Founding Day Lecture Meeting by Shri S. Gurumurthy, Chartered Accountant on 6th July, 2015: Shri S. Gurumurthy on India Transformation-Challenges & Opportunities

The 67th Founding Day lecture meeting was held at the Walchand Hirachand Hall, Indian Merchant Chambers, Churchgate, Mumbai. Shri S. Gurumurthy, Chartered Accountant addressed the gathering on India’s Transformation – Opportunities and Challenges.

Mr. Nitin P. Shingala commenced the event remembering Late Mr. Shailesh G. Kapadia, informing the audience about the Memorial Fund under whose auspices the new book “Securities Law – Relevant for Chartered Accountants” was launched. The book is authored by CA.Jayant Thakur. The book was inaugurated by the speaker Shri S. Gurumurthy.

Mr. Nitin Shingala, outgoing President, introduced the speaker as having an immense knowledge on the subject and that the speaker is an economist, a lawyer, professor and a columnist of great renown, over and above a Chartered Accountant.

Mr. Raman Jokhakar, Incoming President felicitated the speaker with a memento on behalf of the Society.

The speaker appreciated that Bombay Chartered Accountants’ Society has kept the flame of ethical and moral values burning and is continuously working towards maintaining it.

He commenced his address with the words of Swami Vivekanand, stating how he won the hearts of so many Americans in Chicago at that time with just 470 words. Shri Gurumurthy moved the audience by stating his limitation in covering the vast subject in such a short time. He mentioned that accidents in life make a person and so is the case for him. In his discourse, he shared his journey of life and how various situations made him what he is today.


Brief synopsis of his speech:

India is very vast with diverse cultural aspects and unless we understand the various aspects of this culture, we will not be in a position to understand India and its economic diversity. We cannot compare India to countries like US and UK. India should be looked at, keeping aside our own personal opinions, qualifications and perceptions about this country.

In the pre-globalization era, Indians were told to go into retailing and not manufacturing. The policy makers at that time encouraged Indians to be avid consumers, and promoted retailing and advertisements to a larger extent. However, these policy makers could not bring about any change in the savings habits of the individuals in this country.

The speaker shared his experience of the visits to various different clusters in India. He gave glimpses of various parts of the country where he had travelled to places like Tirupur, Ludhiana, Morbi in Gujarat and various other different clusters that he visited. He observed that the Indian society is a family based society. This Society operates on becoming self-sufficient through its savings patterns.

Through these small stretches of these small states where the level of education is not that high, people are self-sufficient and also doing large businesses of export and manufacturing goods. Our policy makers, journalists and media are unaware of this reality.

Analysis of GDP and the SENSEX numbers suggest that only 20% of corporates contribute to India’s GDP of which listed Corporates are only 5%. Our opinions are formed by the movement of the SENSEX which only shows the picture of these 20% contributors to the GDP. Morbi in Gujarat has the highest per capita income which is nowhere linked to these corporates contributing to the SENSEX. Morbi is a manufacturing hub of wall clocks, tiles, ceramics and out of the 2 lakh population, 1.5 lakh is employed. With this wide disparity of thought, Shri Gurumurthy made the audience to think, what we perceive of this country and what is told to us by the newspapers, media and the policy makers is way too different than what it actually is.

The Speaker through various statistical data and information, mesmerised the audience and sought to change the image they carry about India. He articulated the savings based pattern in our country and added that irrespective of our economic structure forcing to spend, Indians still encourage the savings pattern. He compared the Indian economy to China, Japan, Germany and other Asian countries whose economies are similar to ours unlike that of the US, UK or the western parts of the world.

Shri Gurumurthy shared his study of various economies. He articulated the thin line distinguishing an intellectual from an intelligent person. He stated that the former thinks for the country while the latter thinks only for himself. An intellectual transcends his thoughts for the benefit of the country and not only for himself.

Lawyers in India led the freedom movement in India because they were great intellectuals. They could do this as they understood the law, the constitution and the state society relationship. Chartered Accountants did not do so, at that time, because they were hooked to their clients and the traditional ways of doing things. Today’s economy has enhanced the scope of Chartered Accountants and they deal with a lot more than just numbers. India obtained its Political Independence from the western forces which was led by lawyers. India will now get its Economic Independence from the western forces which will be led by Chartered Accountants.

Indias’ transformation – Opportunities and Challenges, means setting the role of India vis-à-vis the whole world. The Speaker questioned the audience whether India is going to be rule acceptor or rule setters.He stated that India is not a rule acceptor and this is because it has started to question the world on various laws and policies. It was only after the nuclear blast in 1998 that the world started accepting India as a super power and all doors of economic investments opened to a larger extent. Indians believe in non-violence and our Army and Navy are the largest in the world. This clarity of thought of the speaker and his immense knowledge held the audience spellbound.

Finally, Shri Gurumurthy left the audience with a duty, a sense of responsibility to bring about a transformation which we all wished for and wanted to see. His perspective about India changed the thinking of many. He bestowed the Bombay Chartered Accountants’ Society with a task to bring about a change in the financial and economic study in this country. A study which is much needed in today’s scenario to change the thought process and opinion making process in this country. Till we do not make this change in our views, we cannot make changes in the policies and policy makers’ views at Delhi.

The lecture meeting concluded with Mr. Chetan Shah, Incoming Vice President proposing a vote of thanks to such a thoughtful and knowledgeable speaker, which was appreciated and received a loud applause.

27th June 2015 To Shri Eknath Kadse Minister for Revenue Government of Maharashtra, Mantralaya Mumbai-400032 Respected Sir,

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27th June 2015

To

Shri Eknath Kadse
Minister for Revenue
Government of Maharashtra,
Mantralaya
Mumbai-400032

Respected Sir,

Subject: Representation for Stamp Duty

This representation is with reference to the increase in stamp duty by the Maharashtra Stamp Act, by virtue of which a Power of Attorney for representation before the Tax authorities needs to be executed on Rs.500 stamp paper.

This increase would cause undue hardship to professionals and the clients as there could be several proceedings pending before the authorities each of which warrant a separate POA execution. Attached is a copy of our representation listing the issues and some suggestions for your kind attention.

We hope that our representation will receive due consideration.

Thanking you.

Bombay Chartered Accountants’ Society

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Furnishing of Information for Payments to Non-Residents & Rule 37BB

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28th May 2015

To

The Chairperson,
Central Board of Direct Taxes,
Ministry of Finance,
North Block,
New Delhi 110001.

Furnishing of Information for Payments to Non-Residents & Rule 37BB

Prior to the amendments made vide Finance Act, 2015, Section 195(6) required that a person responsible for paying any sum chargeable to tax under the Income Tax Act, 1961, to a non-resident should furnish the information relating to such payment vide form 15CA and 15CB to the Central Board of Direct Taxes.

After the amendment made vide the Finance Act, 2015, with effect from 1st June, 2015, “a person responsible for paying to a non-resident, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information ….”.

Thus, with effect from 1st June, 2015, every payment to a non-resident, including items such as a simple import of a commodity, will be required to be supported by Form 15CA and 15CB.

Further, simultaneously with the amendment to Section 195(6), a new Section 271-I has been inserted, providing for penalty of Rs. 1 lakh for failure to furnish such information or furnishing inaccurate information.

These amendments will considerably increase the number of certificates that would be required to be issued across the country many fold. A large number of such certificates would not result in any additional tax / revenue generation.

Professionals and accountants across the country would get engaged in unproductive work of repetitive nature, and resources of companies in terms of time and money would get deployed in such unproductive work, thereby draining valuable resources of the nation. This would certainly act as a deterrent to the “Make in India” concept, as well as to the ease of doing business.

The penalty prescribed causes further hardship and compulsion on the assessee.

On behalf of the thousands of affected persons across the country, and on behalf of our members who represent and advise such affected persons, we request that the following remittances be excluded from the purview of the amended requirements. For this purpose, a suitable amendment may be made to Rule 37BB, by adding the following items to the list of exclusions contained in explanation 2 to rule 37BB:

  • Payments for import of goods or machinery
  • Payments under Liberalised Remittance Scheme (LRS)
  • Payments by residents for maintenance of relatives abroad
  • Remittance of balances in NRE & FCNR(B) Accounts
  • Payments by residents for education expenses of their relatives
  • Payments for participating in exhibitions, fairs & events overseas [since such income is in any case exempt under domestic tax law under explanation 2 to section 9(1)(i)]
  • Repayment of principal of loans from overseas
  • Payments by credit card by individuals for personal purposes
  • Remittances to self outside India
Since the amended provisions come into effect from 1st June, 2015, considering the urgency of the matter, we request you to bring about the abovementioned amendments immediately so that genuine personal and business transactions which do not give rise to income chargeable to tax in India, are not adversely impacted.

Thanking you.
For Bombay Chartered Accountants’ Society

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Greece – A Tragedy is Averted, But Heed its Lessons

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Jean Paul Getty, in the 1950s the wealthiest person on the planet, said, “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Shorn of jargon, that is the deal Europe made with Greece. Europe will pump in another €86 billion over time into Greece, in return for promises to reform. How exactly Greece will reform is unknown. It has a culture of high tax avoidance, low retirement age, lavish pensions and an oligarchy that controls much of its economy and media. It also has little or no industry and relies largely on tourism and farm exports to earn foreign exchange. Have you read a manufacturing label that says ‘Made in Greece’? Yet, for many reasons, it cannot be ejected from the eurozone. Greeks feel they have been dealt a bad hand by Europe and global capital. So they voted for a Left government led by Alexis Tsipras, who vowed an end of five years of ‘austerity’. Tsipras now has the tough task of selling ‘reform’ to his voters. Europe is hostage to Greece, whose economy is tiny but heritage is immense. Aristotle, Socrates and Plato taught it civilisation. Euclid is the father of geometry. Athens was the seat of culture; Sparta the nursery of warriors.

Yet, Greek culture cannot be a financial band-aid. The idea of a eurozone, where states have no monetary policy but only fiscal and other policy widgets, has been challenged. This time, Greece has stared down its bankers by Getty’s logic. The next time might be different. And policymakers in India, where the economy is slowing, consumption and investment lacklustre and banks are saddled with bad debt, should take note: Greek tragedies might overwhelm Kalidasa’s epic tales of love.

(Source: Editorial in The Economic Times dated 14-07-2015.)

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Black Money Law – I-T Professionals vs. IT Professionals – Software industry isn’t a laundering haven

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It appears that the taxman has turned his steely gaze towards Indian software professionals with retirement savings in the US. Stiff penalties under the ‘black money law’ are reportedly in the offing if investments are not disclosed. That is unfair. These professionals are not scheming cheats stashing their cash overseas. They pay taxes on their global income in India. Mobility is extremely high in India’s export-driven software industry. These professionals have foreign bank accounts, make social security contributions or contribute to US retirement savings such as the 401K plan, where the contribution is made out of pre-tax dollars and taxed only at the time of withdrawals. For this lot, to keep track of each and every deposit made in the bank account since it was opened is tough. Any inadvertent error in disclosure can lead to needless harassment. This will hold equally for those who have worked abroad on short stints.

True, government has now offered a voluntary compliance scheme that allows Indians with hidden assets overseas to come clean. However, once the compliance window is shut, anyone charged of wilful attempt to evade taxes will have to pay a stiff penalty and face prosecution. Should IT professionals also use the compliance window, especially since information on undisclosed assets of Indian taxpayers will be available later this year under the Foreign Account Tax Compliance Act? The US had passed the law in 2010 that requires US taxpayers and foreign financial institutions to report information on foreign accounts of US taxpayers. With the Indo-US accord, our tax authorities will secure details of financial accounts held by Indian taxpayers in the US. So, a clarification is in order.

Applying the draconian provisions of India’s black money law to Indian IT professionals is simply unjust. Instead, the government should go after the big fish who dodge the tax net. India certainly needs an IT-empowered, big data-crunching department that can tell a person how much tax she should have paid, instead of the taxpayer saying how much she earns.

(Source: Editorial in The Economic Times dated 14-07-2015.)

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Political Burden in the Banking System – Bad loans have their roots in rotten politics

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The Reserve Bank of India’s (RBI) financial stability report, released last Thursday, offers much scope for discomfort. It says, roughly, that bad bank loans — however or whatever you designate them — are growing and stateowned banks, with large exposures to lousy projects, are most vulnerable. Since the bulk of banking and project finance is done by state-owned banks, this is a grim picture.

Most private banks lend short-term, for working capital, leaving the public sector banks (PSBs) to do the heavy-lifting for large projects, including investment for infrastructure, which India sorely lacks. But here is a problem: key appointments at state-owned banks and their lending decisions tend to be stained by the illicit manner in which Indian politics funds itself — by the proceeds of corruption.

Given the political-bureaucratic connections at play, PSBs lend heavily to politically favoured promoters for their inflated investment proposals, and when these turn sour, are more than willing to ‘restructure’ their borrowings by taking haircuts on the money lent. The power sector is crippled by the bad politics that deems power an ideal giveaway. The end result, as the RBI points out succinctly, is to double the amount of bad debt that the banking system carries: from under 5% of total lending to over 11% today. Yet, these warnings from the central bank cannot solve the bigger problem that eats away at the heart of the economy: the rot in political funding.

In India, this is opaque and driven by illicit cash, stashed away by companies and paid in return for political favours, including bank credit, for dodgy projects ranging from infrastructure to mining. Equity investors have burned their fingers and have become risk averse; the RBI can help by deepening and widening the market for corporate bonds. But the most important reform, that should start at the top, is to clean up political funding: once that system becomes clean and transparent, much of the chain of graft leading from parties to babus, crony capitalists, bank officials and bad loans, will be broken.

(Source: Editorial in The Economic Times dated 30-06-2015.)

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By converting Professional Relationships into ‘Family’ ties, we create Conflict of Interest at all levels of Society

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From Donald Trump to Richard Branson, from Vijay Mallya to Lalit Modi, buccaneering, system-gaming, high living billionaires are the stuff of urban legend. The righteous scream for Modi’s head and secret admiration combusts with shrill jealous moralism that Modi is brazenly rich, boasts about his many connections and is seen partying with Paris Hilton and Naomi Campbell.

While thousands of Indians live in almost similar glass houses, dream of gaming the system and well-networked mini Modis proliferate across India, we are content that a public stoning of Prime Time’s Public Enemy No 1 is going to solve the deep-rooted problem. We hypocritically cling to the adage that to be rich and create fantastically successful cricket tournaments are criminal acts, yet we conveniently overlook the fact that conflict of interest at all levels of society is hardwired into our cultural and institutional DNA.

Extraditing Modi or securing the resignations of Sushma Swaraj and Vasundhara Raje may make for a neat end to the TV drama but unless we understand the institutional nature of the problem, the malaise will only grow. And the malaise is that as a cultural trait we Indians convert professional relationships into family bonds and thus create conflict of interest at all levels of society. How many times have you heard the phrase: Mr. VIP is like my own brother?

Modi has the whacky chutzpah needed to create a massively successful private sector property like the IPL. All the moralistic handwringing about cheerleaders being anti-Indian culture and pure cricket being replaced by casino cricket has been buried under the tidal wave of public enthusiasm for the inter-city tournament.

There is hardly anything morally wrong about big money coming into cricket, provided of course that the money is clean. Modi had the audacity to thumb his nose at UPA when he shifted the IPL to South Africa in 2009. He also has the audacity to openly declare his close relations with various politicians.

And here is where the problem lies. In our culture we too quickly transform public relationships into private ones and professional relationships into family bonds. For us anyone with whom we should have a close professional relationship is instead a feudal attachment of either ‘didi’ or ‘dada’ or ‘tau’ or ‘chacha’. Seeking to make public institutional relationships into private family relationships is the bane of our social life. The dada-didi, chacha-tau syndrome means that loyalty is always to the ‘family’ relationship and not to institutions.

Prurient moralists scream that Swaraj and Modi’s dinner at a London hotel is a criminal act when it emphatically is not. Where the conflict of interest comes is that Swaraj clearly acted on the belief that her ‘family’ ties with Modi and her loyalty to an old close relationship over-rode her institutional public responsibility as minister.

The same goes for Vasundhara Raje. There again a close ‘family’ relationship was seen as more important than her public and institutional role. In fact the dada-didi, chachatau syndrome proliferates across our public life; it is so widespread that we don’t even recognise this serious conflict of interest which is so culturally ingrained. After all, aren’t VIPs duty bound to look after their families well?

Politicians have meddled in the BCCI down the decades, realising the enormous wealth and influence at its command and have sought to enter the IPL, attracted not only by the big money but also because of their so-called penchant for cricket. But do Republican and Democrat politicians in the US also hold important positions on baseball leagues or soccer clubs? Are Labour and Tory politicians office bearers of the MCC?

In India businessmen and politicians are united in a boys club of big money and big power, all of it legitimised in the name of cricket. And if it’s not cricket, it’s real estate, it’s educational institutes, coal allotments and telecom licences where largesse is handed out. In this dance of cronies, the state itself becomes a family enterprise, the Il Familia of Don Corleone, where only individuals matter, not institutions.

There is thus hardly any incentive to clean up the system, hardly any incentive to bring in professional managers or enforce regulations or ensure that black money pitfalls are cleaned up, because all deals are in any case done on a personal basis. Louis XIV’s declaration, ‘I am the state’, echoes eerily with Indian democracy of the 21st century where many Sun Kings and Sun Queens have converted the public realm into their private families.

The privatisation of the public realm means that institutions that belong to the people to ensure the public good simply become the family property of individual politicians or businessmen and the state itself is parcelled out between gangs of politician-tycoons. In an odd twist, in the economic sphere, while massive public sector white elephants urgently await privatisation, it is public life instead which is being busily privatised by the netas. Swaraj and Vasundhara Raje see nothing wrong in extending favours to Modi in their official capacity, because after all he may either be their bhatija or bhaiya or chacha.

As a society we’re trapped in creating honorary brothers, sisters, uncles and aunts instead of establishing modern relationships on the basis of professional responsibility and merit. In western societies, strangers on the street are hardly called chacha or dada. While this may be a heart-warming desi trait for some, it creates a feudal mindset by which private bonds must be honoured at the cost of professional duty. Until we find systemic ways to stop the privatisation of the public realm, a syndrome in which Modi, Swaraj and Raje are all participants, conflict of interest will constantly occur. The Great Indian Parivar is a blessing but also a curse.

(Source: Extracts from an Article by Ms. Sagarika Ghose in The Times OF India dated 24-06-2015.)

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