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Month: December

S. 50C in the event of the assessee contending that valuation as done by Stamp Valuation Authority is not acceptable to him and asking the Assessing Officer to make a reference to the Valuation Officer, it is mandatory on the part of the Assessing Officer

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  1. Kalpataru Industries v. ITO



ITAT ‘H’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

P. Madhavi Devi (JM)

ITA No. 5540/Mum/2007

A.Y. : 2005-06. Decided on : 24-8-2009

Counsel for assessee/revenue : K. Shivram/

Pradip Hedaoo

S. 50C in the event of the assessee contending that
valuation as done by Stamp Valuation Authority is not acceptable to him and
asking the Assessing Officer to make a reference to the Valuation Officer, it
is mandatory on the part of the Assessing Officer to make such a reference
notwithstanding that the assessee has not filed an appeal against such
valuation.

Per P. Madhavi Devi :

Facts :

The assessee, a partnership firm, filed its return of
income declaring total income of Rs.1,75,108. The assessee had sold its
factory premises for a consideration of Rs.15,05,000 and had shown profit on
sale of factory premises amounting to Rs.10,94,721. The market value of the
factory premises as per stamp valuation authorities was Rs.43,98,500. The
assessee drew the attention of the AO to the observations of the Bombay High
Court while admitting the petition filed by Practicing Valuers Association
and Others v. State of Maharashtra, (Writ Petition No. 2027 of 2001) and
contended that the valuation given in the stamp duty ready reckoner cannot be
universally accepted. It was also submitted that it had not preferred an
appeal against the valuation as done by Stamp Valuation Authorities since the
purchaser had already paid stamp duty. However, the assessee requested the AO
to make a reference to the valuation cell of the Department as per the
provisions of S. 50C. The AO held that the reference to the valuation officer
is optional and since the assessee had not objected to the value adopted by
the stamp valuation authority there was no need to refer the matter to the
valuation officer. He, accordingly, adopted the value of the property at
Rs.43,98,500 and computed short term capital gain at Rs.35,89,503.

The CIT(A) confirmed the order passed by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it mainly argued that the matter be sent back to the file of the AO with
a direction to refer the same to the valuation officer for valuing the
property at market rate. It was also pointed out that the assessee was not the
owner of the land but was only a lessee and capital gain has arisen on
transfer of leasehold rights. It was also contended that in the case of
assignment of rights after obtaining necessary permission, S. 50C is not
applicable.

Held :

The assessee had transferred leasehold rights and had
itself offered capital gain on the same. S. 50C is a special provision for
determining full value of consideration in certain cases. The assessee while
making the claim before the AO has to satisfy him that the valuation adopted
by the stamp valuation authority is not based on sound criteria. In such a
case, the AO is bound to refer the matter to the DVO for arriving at the fair
market value of the property. The assessee had vide its letter filed with the
AO relied upon two decisions to the effect that the valuation given in the
stamp duty ready reckoner cannot be universally adopted. In such cases, it is
necessary for the AO to refer the matter to the DVO. The Tribunal has in
ITO v. Smt. Manju Rani Jain, 24 SOT 24 (Del.) and Mehraj Baid v. ITO,
(2008) 23 SOT 25 (Jodh.) held that the word ‘may’ used in S. 50C should be
read as ‘should’ and the AO has no discretion but to refer the matter to the
DVO for the valuation of the property. The Tribunal remanded the issue to the
file of the AO with a direction to refer the valuation of the property to the
DVO and determine the value in accordance with law.

The assessee’s appeal was allowed.


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S. 271(1)(c) — Penalty for concealment of income — Additions/disallowances sustained by the appellate authority — Whether sufficient ground for levy of penalty — Since full disclosure of particulars of transactions were made and additions were on ac-count

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  1. ACIT v. Enpack Motors Pvt. Ltd.




ITAT ‘E’ Bench, Mumbai

Before D. Manoharan (VP) and

R. K. Panda (AM)

ITA No. 914/Mum./2008

A.Y. : 2004-05. Decided on : 23-10-2009

Counsel for revenue/assessee : S. K. Singh/

Arvind Dalal

S. 271(1)(c) — Penalty for concealment of income —
Additions/disallowances sustained by the appellate authority — Whether
sufficient ground for levy of penalty — Since full disclosure of particulars
of transactions were made and additions were on ac-count of different view
adopted, penalty cannot be imposed.

Per R. K. Panda :

Facts :

The assessee was a company incorporated in 1983. During the
year it had not carried on the business and it had returned a loss of Rs.1.41
crore. On account of the flood which took place on 26/27 July in Mumbai, all
its records and documents got destroyed and it was not able to produce
documents asked for by the AO. However, a copy of the police complaint and the
certificate issued by the Chartered Engineer evaluating the bad impact of the
flood and loss of material were furnished by the assessee. The AO however,
completed the assessment u/s.144 determining income at Nil after setting off
carried forward loss of Rs.11.15 lacs. The major disallowances made were as
under :


à
Stock valuation : A plot of land of Rs.6.56 crore, held as stock in
trade, was mortgaged to a bank. In order to recover its dues, the bank had
initiated the process of the sale of plot and the sale price mentioned was
Rs.5.2 crore. In view of the same, the assessee had valued the plot of land
at the said price thereby resulting into a loss of Rs.1.35 crore. The AO was
not satisfied with the explanation and disregarded the downward valuation of
stock;


à
Depreciation : Since the Company was defunct, according to the AO, it
cannot be allowed depreciation of Rs.9.74 lacs.


The assessee did not prefer any appeal when the AO’s order
was upheld by the CIT(A). The AO initiated penalty proceedings and after
hearing, held that the assessee was in default u/s.271(1)(c) read with
Explanation 4(a). He accordingly, levied penalty of Rs.54.46 lacs being the
minimum penalty @100% of tax sought to be evaded.

The CIT(A) on appeal cancelled the penalty levied as
according to him, no inaccurate particulars were furnished by the assessee and
the disallowance was not based on any independent evidence brought on record
by the AO.

Before the Tribunal the Revenue submitted that the
non-filing of any appeal against the assessment order amounted to the
acceptance by the assessee that it had furnished inaccurate particulars.
Further, relying on the decision of the Supreme Court in the case of
Dharmendra Textiles Processors & Others, it contended that mens rea was not an
essential condition for levying of penalty.

Held :

The Tribunal noted that the assessee had made full
disclosure of all the particulars relating to the transactions in its accounts
filed with the Income-tax Department. The additions were made merely because
the AO did not share the views of the assessee. It was not disputed that the
plot of land was treated as stock in trade and was sold at a loss. As regards
claim for depreciation, it was noted that there were diverse decisions, both
for and against the assessee when the business was discontinued. As regards
the other expenses disallowed, it agreed with the assessee that in order to
maintain the corporate entity, certain expenses need to be incurred. Thus,
according to it, the decision of the Supreme Court in the case of Dharmendra
Textiles was not applicable to the facts of the case of the assessee. Further,
according to it there was sufficient force in the assessee’s submission that,
in view of the huge amount of brought forward losses, no appeal was filed
against the CIT(A)’s order. For the reasons stated as above, it was held that
the CIT(A) was justified in cancelling the penalty.

Case referred to :

Dharmendra Textiles Processors & Others, 306 ITR 277 (SC).



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S. 70 read with S. 10A — Exemption u/s.10A was of income earned without setting off of loss of non-STPI unit — Loss of the non-STPI unit is allowed to be carried forward.

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  1. ACIT v. Honeywell Technology Solutions Lab
    Pvt. Ltd.




ITAT ‘A’ Bench, Bangalore

Before Shailendra Kumar Yadav (JM) and

A. Mohan Alankamony (AM)

ITA Nos. 344 & 345/Bang./2009

A.Ys. : 2003-04 & 2004-05. Decided on : 4-8-2009

Counsel for revenue/assessee :

Vishweshwar Mudigonda/Preeti Garg

S. 70 read with S. 10A — Exemption u/s.10A was of income
earned without setting off of loss of non-STPI unit — Loss of the non-STPI
unit is allowed to be carried forward.

Per Shailendra Kumar Yadav :

Facts :

The assessee, a wholly owned subsidiary of Honeywell, USA,
was engaged in the business of performing high quality software development,
offer testing and support services to other units of the Honeywell group. One
of its units was a 100% software development export oriented undertaking under
the Software Technology Parks Scheme of Government of India. One of the issues
before the tribunal was whether the exemption u/s.10A was of the income earned
without setting off of loss of the non-STPI unit.

Held :

Analysing the provisions of S. 10A, the tribunal noted
that :


à
The provisions of S. 10A were placed under Chapter III which only relates to
‘Incomes which do not form part of total income’;


à
The word ‘such’ refers to the profits and gains of the undertaking which is
engaged in the export of articles or things or computer software; and


à
The word ‘an’ which qualifies the word ‘undertaking’ means that it refers to
a single undertaking.


Referring to the provisions governing computation of
business income, it was noted that as per S. 29, profits and gains of business
are to be computed in accordance with the provisions contained u/s.30 to
u/s.43D. Thus, the provisions of S. 10A do not form part of the sections
mentioned in S. 29. It further noted that the provisions of S. 70 govern
setting off of a loss from one source against income from another source under
the same head of income. Therefore, it observed that since S. 10A was not
forming part of the sections mentioned in S. 29, business losses of the
undertaking whose income was not exempt u/s.10A cannot be set off against the
profits of the undertaking whose income is exempt u/s.10A. Further, relying on
the decisions of the Bangalore tribunal in the cases of Yokogawa India Ltd.
and in the case of Nous Infosystems Pvt. Ltd., the tribunal upheld the
decision of the CIT(A) directing the AO to allow exemption u/s.10A without
setting off of loss of non-STPI unit and consequently, allowing the carry
forward of such losses of non-STPI unit.

Cases referred to :



1. ACIT v. Yokogawa India Ltd., 111 TTJ 548/13 SOT
470 (Bang.);

2. Nous Infosystems Pvt. Ltd. v. ITO, (ITA No.
1042/ Bang./2007 dated 3-6-2008)



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S. 145 r.w. S. 35E — Change in method of accounting — Assessee engaged in prospecting and exploring minerals changed its method of capitalising expenditure incurred to charging same to P/L A/c. — Change bona fide.

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16 DCIT v. ACC Rio Tinto Exploration Ltd.


ITAT ‘C’ Bench, New Delhi

Before R. K. Gupta (JM) and

K. G. Bansal (AM)

ITA Nos. 4908 /Del./2005

A.Y. : 2001-02. Decided on : 26-9-2008

Counsel for revenue/assessee : Suresh K. Jain/

Salil Kapoor


S. 145 read with S. 35E of the Income-tax Act, 1961 — Change
in method of accounting — Assessee engaged in the business of prospecting and
exploring ores and minerals changed its earlier method of accounting of
capitalising the expenditure incurred to charging the same to profit and loss
account — Whether the change was bona fide — Held, Yes.


Per K. G. Bansal :

Facts :

The assessee was engaged in the business of prospecting and
exploring ores and minerals. As per its method of accounting, expenditure
incurred on such activities was capitalised. During the year under appeal the
assessee changed its accounting policy in respect of the same and the
expenditure incurred on such activities was charged to profit and loss account.
The AO did not accept the change for the following reasons :



  • Change was not bona fide and it was made only to get over the provisions of S.
    35E;



  • New method of accounting led to mismatch of the expenditure with the receipts;



  •  Business of the assessee i.e., mining minerals and ores, had not commenced;



  • To
    align its accounting policy with its parent company was not a good ground to
    justify the change.



The CIT(A) on appeal came to the conclusion that the assessee
was in the business of exploration, and not mining as held by the AO. Further,
being satisfied that the change made in accounting policy was bona fide, the
CIT(A) allowed the assessee’s appeal.

Before the Tribunal the Revenue contended that the assessee
had changed its policy only to frustrate the provisions contained in S. 35E of
the Act and submitted that the order of the AO be restored.

Held :

Referring to the main objects as per the Memorandum of
Association of the assessee company, the Tribunal noted that the assessee
company was formed to carry on the business of prospecting or exploring the ores
and minerals. According to it, the conclusion got further strength from the FIPB
approval received by the assessee, which was only for carrying out exploration
activity. Thus, the Tribunal held that the mainstay of AO that the business of
the assessee had not commenced and therefore, the expenses cannot be charged to
profit and loss account failed. Further, the Tribunal held that to align the
accounting policy with that of one’s parent, could be a valid ground and it did
not agree with the AO that it was not a good ground to permit the change.
According to it, the change would lead to more appropriate preparation and
presentation of the financial statement for the reason that the losses will not
unnecessarily be carried forward as work-in-progress, when there was none.


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India and Norway have signed a social security treaty on 29 October 2010

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Spotlight




Pinky Shah,
Sonalee Godbole, Gaurang Gandhi, Tarun Ghia, Brijesh Cholera, Pratik Mehta

Sejal Vasa

Chartered
Accountants

Company
Secretary

Part E : Miscellaneous

1. India and Norway have signed a social security treaty
on 29 October 2010


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S. 254 — When pendency of Department’s appeal not pointed out at hearing of appeal, no error in hearing only assessee’s appeal.

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15 ACIT v. Changepond Technologies Pvt. Ltd.


ITAT ‘A’ Bench, Chennai

Before T. R. Sood (AM) and Vijay Pal Rao (JM)

M.P. No. 137/Mds/08 in ITA No. 731/Mds/07

A.Y. : 2003-04. Decided on : 14-8-2008

Counsel for revenue/assessee : Shaji P. Jacob/

H. Padamchand Khincha

S. 254 of the Income-tax Act, 1961 (‘the Act’) — When the
fact of pendency of Department’s appeal was not pointed out at the time of
hearing of the appeal of the assessee, can it be said that the Tribunal has
committed an error while hearing only the assessee’s appeal — Held, No.

Per Vijay Pal Rao :

Facts :

The Tribunal in ITA No. 731/Mds./2007 passed an order on
15-2-2008 in an appeal filed by the assessee, whereas the appeal filed by the
Department was not disposed of together. The assessee had made a petition with
the registry of the Tribunal for clubbing of both the appeals and being heard
together. Since the appeal of the Department was not heard along with the
assessee’s appeal, the Revenue filed this miscellaneous petition contending that
there was an error in the order of the Tribunal dated 15-2-2008. The Revenue
pointed out that the Apex Court in the case of Vijai Int. Udyog has held that
cross appeals of the assessee and the department should be heard together and if
the Departmental appeal is not heard along with the assessee’s appeal, then the
order passed in the assessee’s appeal is clearly erroneous. Thus, it was
contended that the appeal was disposed of by overlooking the mandatory direction
of the Apex Court and the order dated 15-2-2008 of the Tribunal may be recalled
and heard along with the appeal of the Department.

Held :

The Tribunal noted that admittedly, the fact of pendency of
Department’s appeal was not pointed out at the time of hearing of the appeal of
the assessee. The Tribunal observed that the appeal of the Department was
allowed by the Apex Court in the case of Vijai Int. Udyog, because both the
parties consented to the rehearing of the case. It also noted that the Apex
Court has in para 13 of the decision in the case of Vasant Manganlal Chokshi
held that unless and until the Department had pointed out to the Tribunal that
its appeal was also pending, the Tribunal cannot be said to have committed an
error by adjudicating only the assessee’s appeal. The Tribunal also noted that
though the order of the Apex Court in the case of Vasant Manganlal Chokshi was
by way of dismissal of SLP, it was a case of dismissal with reasons. As the Apex
Court had in the case of Kunhayammed & Others held that when the Apex Court
passes an order in SLP and also gives reasons, then such order would also
constitute binding precedent on the lower Courts. Accordingly, the Tribunal held
that it has not committed an error while hearing only the assessee’s appeal. The
Tribunal found that there was no error apparent from the order of the Tribunal.
The miscellaneous petition was rejected.

Cases referred to :



1. Commissioner of Sales Tax v. Vijai Int. Udyog, (152 ITR
111)(SC)

2. Commissioner of Customs v. Vasant Manganlal Chokshi,
(204 ELT 5) (SC)

3. Kunhayammed & Others v. State of Kerala & Another, (245
ITR 360) (SC)

4. V. M. Salgaocar & Bros. (P) Ltd. v. CIT, 243 ITR 383
(SC)

5. CIT v. Balwant Singh Arora, (180 ITR 400) (Punjab &
Haryana)

6. DCIT v. Smt. P. Shanti, (MP No. 266/Mds./2005) (ITAT —
Chennai)


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S. 22 and S. 28 — Income earned by company from leasing infotech park constructed by it on land (initially taken on lease and later acquired), construction financed by borrowings from banks secured on immovable property, providing various amenities charge

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14 Global Tech Park Pvt. Ltd. v. ACIT


ITAT ‘A’ Bench, Bangalore

Before P. Mohanarajan (JM) and

K. K. Gupta (AM)

ITA No. 1021/Bang./2007

A.Y. : 2003-04. Decided on : 30-6-2008

Counsel for assessee/revenue: H. N. Khincha/

Etwa Munda

S. 22 and S. 28 of the Income-tax Act, 1961 (‘the Act’) —
Whether income earned by a company from leasing information technology park,
constructed by it on land belonging to the company (which land was initially
taken on lease and was later on acquired) which construction was financed by
borrowings from banks secured on immovable property of the company, and
providing various amenities and services is chargeable to tax under the head
‘Income from Business’ and not ‘Income from House Property’ as assessed by the
AO — Held, Yes.

Per K. K. Gupta :

Facts :

The assessee developed the land allotted to it by Karnataka
Industrial Areas Development Board and constructed an information technology
park thereon. The information technology park consisted of two large blocks of
buildings with four floors in each block, service block, cafeteria, library,
gymnasium, utilities for staff, rest rooms, security, ATM, and Geodesic Dome.
The assessee provided/installed in the said information technology park
landscaping and construction of steel reinforced cement roads and high-security
compound wall fitted with motorised gate, huge water tank fitted with high
pressure-pumps, reservoir and sump, borewell, sewage treatment plant, lifts,
rainwater harvesting system, high-standard electrical installation including
transformer and generators, air conditioning, fire fighting and smoke detector
equipments, etc. Various amenities and services were provided in the nature of
maintenance of staff, monitoring of the generator room, water supply, etc. Land
and infrastructure were provided by the assessee by obtaining loan from a bank
which had mortgaged the immovable property and had also taken personal
guarantees of the Directors. The assessee received rental income from persons
with whom it entered into an agreement for leasing the information technology
park. The assessee considered rental income to be chargeable under the head
‘Income from Business’. The Assessing Officer was of the view that the lease
deed has been entered into by the assessee as absolute owner of the property
with the tenant and therefore placing reliance upon the decisions of Podar
Cement P. Ltd., East India Housing and Land Development Trust Ltd. and Bhoopalam
Enterprises, he assessed rental income under the head ‘Income from House
Property’. The Commissioner of Income-tax (Appeals) upheld the action of the
Assessing Officer. The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal observed that the assessee was incorporated with
the sole intention of developing technology park for which it obtained leasehold
land from the Karnataka Industrial Areas Development Board and also obtained
loan from Union Bank of India for constructing super structure thereon. Such
conduct according to the Tribunal could not be considered as investment in a
property for earning rental income only. The Tribunal noted that since the lease
of the property was shown as part of the business activity, the income received
therefrom cannot be said as income received as a land owner but as a trader.
According to the Tribunal, if the property is taken on lease and thereafter
developed and leased it, is part of the business activity of the assessee as an
owner, and the income has to be treated as business income. The Tribunal found
that the activity was done by the assessee as a business venture and was in
accordance with the main object of the company. It observed that the intention
of any prudent businessman is to earn profit at a maximum level and investment
made in the business never lost its main intention for which the assessee was
incorporated. Since the entire cost of construction was met by way of obtaining
loan, it was found to be a risk as adventure in the nature of trade. According
to the Tribunal, the conversion from leasehold to ownership leads to a pure
commercial proposition resulting in a business venture carried out by the
assessee company. The Tribunal was of the view that the assessee’s providing
amenities, such as ward and watch, maintenance of common area, maintenance of
light in the common area, supply of water, providing lift, installation of
electric transformer, power to the lessees, providing generator, overhead water
tanks, maintenance of drainage, etc. clearly establish that the entire activity
is carried on in an organised manner to earn profit out of investment made by
the assessee as a commercial venture. The Tribunal noted that the case law cited
by the jurisdictional High Court in the case of Balaji Enterprises had
considered the Apex Court decision in the case of S. G. Mercantile Corporation.
It found the case law relied upon by the learned CIT(A) (Bhoopalan Commercial
Complex & Industries Pvt. Ltd.) to be distinguishable on facts. It found force
in the submission of learned counsel that the term ‘business’, as defined in the
provision of infrastructure facility as provided in sub-clause (iv) of S. 80IA
clearly explains the development and operation of the technology park, has not
been controverted by the authorities below. It noted that in the assessee’s case
the main intention was to exploit the immovable property by way of commercial
application and there was no room for doubting that the intention of the
assessee was in providing software development facility in the Electronic City
in the industrial area within the limits of Bangalore South District, Bangalore.
According to the Tribunal, any activity undertaken with a profit motive would
amount to business and not a mere return on investment when it is exploited. It
found the facts of the assessee’s case to be similar to those of Balaji
Enterprises and also S. G. Mercantile Corporation. In view thereof, the Tribunal
directed the AO to assess the rental income as from business.

Cases referred to :




1. East India Housing and Land Development Trust Ltd. v.
CIT, 42 ITR 49

2. S. G. Mercantile Corporation (83 ITR 700) (SC)

3. CIT v. Podar Cement P. Ltd., 226 ITR 625 (SC)

Companies Bill, 2008 introduced in Lok Sabha.

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New Page 1Part D :
Miscellaneous

12 Companies Bill, 2008 introduced in Lok
Sabha.

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Limited Liability Partnership Bill, 2008 passed by Rajya Sabha.

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New Page 1Part D :
Miscellaneous

11 Limited Liability Partnership Bill, 2008
passed by Rajya Sabha.

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DTAA signed between India and Tajikistan : Press Release dated 20-11-2008.

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10 DTAA signed between India and
Tajikistan : Press Release dated 20-11-2008.

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Article 11 of India Japan modified : Notification No. 96/2008 dated 8-10-2008.

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9 Article 11 of India Japan modified :
Notification No. 96/2008 dated 8-10-2008.


Article 11 deals with interest clause in the tax treaty. It
has been modified to alter the definition of Central Bank and financial
institution wholly owned by the Government to replace Japan Bank for
International Co-operation with International business unit of Japan Finance
Corporation.

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Clarifications on TDS from salary for the financial year 2008-09 : CBDT Circular no. 9/2008 dated 29-9-2008.

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8 Clarifications on TDS from salary for the
financial year 2008-09 : CBDT Circular no. 9/2008 dated 29-9-2008.


The CBDT has issued a detailed annual Circular on tax
deduction at source from salaries, which outlines estimations to be made while
computing salary income, the deductions available, the procedural aspects,
calculation of TDS on arrears of salary, etc.

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Reverse Mortgage Scheme, 2008 — Notification No. 93/2008, dated 30-9-2008.

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7 Reverse Mortgage Scheme, 2008 —
Notification No. 93/2008, dated 30-9-2008.


This scheme has been notified with effect from 1 April 2008.
The highlights of the scheme are as under :



  •  National Housing Board, scheduled bank and a registered housing company are
    defined as approved lending institutions.


  • Either a single individual or a couple of whom one of them is of sixty years
    of age or more can mortgage their residential house property located in India,
    with the approved lending institutions to obtain a loan, provided the house is
    owned and free from any encumbrance.


  • The approved lending institution would enter into a loan agreement with the
    person mortgaging his property.


  • The loan would be given either as periodic payments to be mutually decided or
    a lumpsum payment limited to 50% of the loan amount sanctioned.


  • The loan under reverse mortgage shall not be granted for more than 20 years
    from the date of the loan agreement.


  • In case of foreclosure of loan, the person or his legal heirs would be liable
    for repayment of principle amount of loan along with interest to the approved
    lending institution.


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Procedure for filing TDS returns with insufficient deductee PAN

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6 Procedure for filing TDS returns with
insufficient deductee PAN


The CBDT has made it mandatory for deductors to file TDS/TCS
statements with a threshold limit of PAN of deductees. To facilitate deductors
who face problem in filing TDS returns because of insufficiency of PAN of the
deductees and also to accommodate the deductees who have intimated their PAN,
the Department has suggested that a deductor can file a return containing
deductee details, who have provided valid PAN. It can subsequently file a
correction return with details of remaining deductees. The challan amount of TDS
needs however to be of the complete amount.

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S. 80IB — Production of masala varieties, is manufacture of goods

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13 ACIT v. Empire Spices & Foods Mumbai Ltd.


ITAT ‘G’ Bench, Mumbai

Before Sunil Kumar Yadav (JM) and

Rajendra Singh (AM)

ITA No. 4477/M/06

A.Y. : 2003-04. Decided on : 18-9-2008

Counsel for revenue/assessee : D. Songate/

B. V. Jhaveri

S. 80IB of the Income-tax Act, 1961 (‘the Act’) — Whether
business of the assessee, which is producing masala of different varieties, is
manufacture of goods or is only processing of goods — Held, it is manufacture of
goods.

Per Rajendra Singh :

Facts :

The assessee, engaged in business of masala, claimed for the
relevant assessment year, deduction u/s.80IB of the Act by treating the business
as industrial undertaking for manufacture and sale of masala. The Assessing
Officer (AO) noted that the assessee was only purchasing raw material in the
form of different spices which were grinded and mixed and filled in pouches and
then sold. The AO placed reliance on the judgments of the Supreme Court
(sic-Calcutta High Court) in the case of Apeejay Plantation and also in the case
of Indian Hotels and on the judgment of Madras High Court in the case of Sacs
Eagles Chicory and held that the activity of the assessee amounts to processing
and not manufacture and accordingly he disallowed the claim of deduction
u/s.80IB. Before the CIT(A) it was contended by the assessee that it was
manufacturing various types of masala, such as chivda masala, pickle masala,
etc. which involved different formulas and process; the raw material i.e., raw
spices underwent changes and the final product was masala which was sold in the
market as a distinct and different commercial product; each type of masala was
different in taste and uses; the manufacturing process involved various
activities such as cleaning of various raw spices, roasting, frying, polishing,
mixing, boiling, pulping, grinding, etc. which are done with the help of
machinery. Reliance was placed by the assessee on the judgment of the Supreme
Court in the case of Aspinwall & Co. Reference was also made to the decision of
the Mumbai Tribunal in the cases of Pankaj Jain and Comet Foods & Metals Ltd.
The CIT(A) being satisfied with the explanation, held that the end product in
this case was completely different from the raw material and therefore the
activity carried on by the assessee was manufacture and not processing. He also
observed that the Department had allowed the
claim of manufacture in earlier years. Accordingly, he allowed the claim for
deduction u/s.80IB treating the business as manufacture of masala. Aggrieved,
the Revenue preferred an appeal to the Tribunal.

Held :

It is settled legal position that producing articles whether
by any labour or by machine will amount to manufacture if the final product is
different from the input and is known as a commercially different product in the
business parlance. The assessee is producing different variety of masala, such
as chiwda masala, pickle masala, etc. which are commercially known products in
the market and these products are different from the different spices used in
the process. In case of the assessee, different raw spices which are inputs are
combined in different proportions and undergo different processes to produce the
final product which is masala and which is different from the input raw
material. The assessee is producing different types of masala using different
formula with the help of input spices and these products are commercially known
products, such as garam masala, mutton masala, pav bhaji masala and have
different uses. The Tribunal noted that the judgment of the Supreme Court in
Aspinwall & Co. supports the case of the assessee and that the decision of the
Tribunal in the case of Tirupathi Microtech Pvt. Ltd. is in favour of the
assessee. The judgments relied upon by the AO viz. Appejay Plantation, Indian
Hotels and Sacs Eagles Chicory were found to be distinguishable. Accordingly,
the Tribunal held that the assessee is a manufacturing concern entitled to
deduction u/s.80IB.

Cases referred to :



1. Indian Hotels Co. Ltd. & Ors. v. Income Tax Officer &
Ors., (245 ITR 538) (SC)

2. Aspinwall and Co. Ltd. v. Commissioner of Income-tax,
(251 ITR 323) (SC)

3. Apeejay Plantation (206 ITR 367) (Cal.)

4. Commissioner of Income-tax v. Sacs Eagles Chicory, (241
ITR 319) (Mad.)

5. Comet Foods & Metals Ltd. v. ITO, (95 TTJ 440) (Mum.)

6. Pankaj Jain v. ITO, (97 TTJ 28) (Asr.)

7. ACIT v. Tirupathi Microtech Pvt. Ltd., (111 TTJ 149) (Jodh.)

8. ACIT v. Panachayil Industries, (7 SOT 96) (Coch.)




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S. 14A — Disallowance of expenditure incurred to earn exempt income — Where no nexus between expenditure & income, expenditure not disallowed.

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12 Indo German International Pvt. Ltd. v. DCIT


ITAT ‘C’ Bench, New Delhi

Before I. P. Bansal (JM) and Deepak R. Shah (AM)

ITA Nos. 4971/Del./2007

A.Y. : 2004-05. Decided on : 9-5-2008

Counsel for assessee/revenue : Ramo Jain/

M. P. Singh

S. 14A of the Income-tax Act, 1961 — Disallowance of
expenditure incurred to earn exempt income — Where no nexus is established
between the expenditure and the income earned, can the expenditure be disallowed
— Held, No.

Per Deepak R. Shah :

Facts :

The assessee was engaged in the business of export and import
of iron, steel and allied products and as commission agent. During the year it
earned dividend income of Rs.78.05 lacs which was claimed as exempt u/s.10(33).
According to the AO, the provisions of S. 14A were applicable and as the
assessee had not furnished any evidence to establish that no expenses had been
incurred in earning the dividend income, it was held that 5% of dividend income
was incurred for earning dividend income.

The CIT(A) on appeal held that the AO had rightly applied the
provisions of S. 14A, as incurring of expenditure had to be inferred from the
accounts. According to it, if no expenses were debited against the exempt
income, the AO was justified in estimating the same.

Before the Tribunal, the Revenue relied on the Mumbai Bench
Tribunal decision in the case of Citicorp Finance (India) Ltd. and contended
that the orders of the lower authorities be upheld.

Held :

According to the Tribunal, the pre-requisite for disallowance
u/s.14A is that the expenditure should have been incurred in relation to exempt
income. In the given case, the assessee had all along claimed that it had not
incurred any expenditure. It further noted that the AO had not been able to
correlate any expenditure, which could be said to have been incurred for earning
exempt income. According to it, the decision in the case of Citicorp Finance
(India) Ltd. relied on by the Revenue was based on the provisions in Ss.(2) and
(3) which were inserted by the Finance Act, 2006 w.e.f. 1-4-2007. According to
it, the insertion of the said provisions was not retrospective in nature. Hence,
the ratio as laid down in the said Tribunal decision cannot be applied to the
case of the assessee. Further, relying on the decision of the Delhi Tribunal in
the case of Wimco Seedling Ltd., the Tribunal allowed the appeal of the assessee.

Cases referred to :



1. ACIT v. Citicorp Finance (India) Ltd., 12 SOT 248 (Mum.)

2. Wimco Seedling Ltd. v. DCIT, 107 TTJ 267 (Del)


Note :

Attention of the readers is drawn to the insertion of Ss.(2)
and (3) to S. 14A by the Finance Act, 2006 w.e.f. 1-4-2007 and the Rule 8D which
prescribes the method in which expenditure incurred to earn exempt income could
be determined.

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S. 79 and S. 115JB — In computing book profit u/s.115JB, lower of brought forward loss or unabsorbed depreciation to be reduced, irrespective of whether allowable u/s.79

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10 (2008) 117 TTJ 891 (Ahd.)

Fascel Ltd. v. ITO

ITA No. 1195 (Ahd.) of 2007

A.Y. : 2003-04. Dated : 17-8-2007

S. 79 and S. 115JB of the Income-tax Act, 1961 — In arriving
at the book profit u/s.115JB, the lower of the amount of brought forward loss or
unabsorbed depreciation as appearing in the books of account of the assessee has
to be reduced, irrespective of the fact whether the same is allowable u/s.79 or
not.

 


While computing the book profit u/s.115JB for A.Y. 2003-04,
the Assessing Officer held that since there was a substantial change in
shareholding in A.Y. 2000-01, the provisions of S. 79 were attracted. Therefore,
the brought forward loss/depreciation up to A.Y. 2000-01 is not to be carried
forward for computing the business income as well as for the purposes of S.
115JB. The Assessing Officer also held that there is no direct case law on the
subject, but logic demands that prohibition u/s.79 shall apply both to normal
computation u/s.28 to u/s.43C as well as u/s.115JB. The CIT(A) upheld the
Assessing Officer’s order.


 

The Tribunal held in favour of the assessee. The Tribunal
noted as under :

(a) Clause (iii) of the Explanation to S. 115JB(2)
specifically provides that the amount of loss brought forward or unabsorbed
depreciation as per the books of account is to be reduced from the book profit
and it is lower of the two amounts that is to be reduced. It is the amount
which is as per the books of accounts that is to be reduced and not as per the
income-tax records which has been computed under the provisions of the Act.


(b) The admissibility of loss as per other provisions of
the Act has nothing to do with the computation of book profit and that is made
clear by the provisions of clause (iii) of the Explanation. If it is appearing
in the books of accounts and not set off in the subsequent year’s profit, the
effect is to be given in the impugned year of profit while computing the book
profit of the assessee.




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S. 67A — Share of loss of company in AOP could be set-off against other income.

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9 (2008) 117 TTJ 721 (Mum.) (TM)

Mahindra Holdings & Finance Ltd. v. ITO

ITA Nos. 5319 & 6074 (Mum.) of 2004

A.Ys. : 2000-01 and 2001-02. Dated : 23-6-2008

S. 67A of the Income-tax Act, 1961 — Share of loss of company
in an AOP could be set off against other income of the company.

For the relevant year, the assessee-company, which was a
member of an AOP, set off its share of loss from the AOP against its other
income. The claim of the assessee was rejected by the Assessing Officer on the
following grounds :



  • that S. 67A is not applicable in the assessee’s case.

  •  the provisions of S. 67A can only be applied in those cases where a member of
    an AOP or a BOI is not a company or a co-operative society or a society
    registered under the Societies Registration Act.



  • since the assessee is a company, its total income cannot be computed as per
    provisions of S. 67A and as such, the loss booked by the assessee cannot be
    allowed to be set off against the other income of the assessee.


The CIT(A) also disallowed the assessee’s claim.

Since there was a difference of opinion between the members,
the matter was referred to the Third Member u/s.255(4).

The Third Member, relying on the decision in the case of
CIT v. Salem District Urban Bank Ltd., (1940) 8 ITR 269 (Mad.), held in
favour of the assessee. The Third Member noted as under :

(a) The purpose of S. 67A is to compute the share of
income/loss in the AOP/BOI. If all the provisions are read together, the
entities specified in the parenthesis in S. 67A would qualify the AOP/BOI and
not the member of such AOP/BOI.


(b) Reference to S. 2(17) indicates that the expression
‘AOP’ includes a company or a cooperative society or a society mentioned in
parenthesis in S. 67A.


(c) The purpose of S. 67A is to determine the share of
income/loss in the profits/losses of the AOP since share is to be included in
the income of the member of AOP for rate purpose as per the provisions of S.
86. However, in the case of a company, cooperative society or society, the
income is not apportioned amongst the members constituting these entities.
Such entities may have income, but may not declare dividend and thus nothing
would be includible in the income of the members of such entities. On the
other hand, these entities may not have income, still they may declare
dividend out of their accumulated profits. Therefore, despite there being no
income in the hands of such entities, the dividend declared by them would be
assessable as income in the hands of members. Therefore, considering the
different schemes of taxation in respect of income received by members from
such entities, the Legislature has excluded these entities from the ambit of
the expression ‘AOP/BOI’.


(d) Had the Legislature not excluded the entities specified
in the parenthesis, it would have resulted in double taxation — once as per
share determined u/s.67A read with S. 86, and again when dividend income is
distributed by such entities to its members.


(e) If the contention of the Revenue is accepted, then it
will lead to absurd result not intended by the Legislature and also will be
detrimental to the interest of the Revenue itself. If it is held that the
words in the parenthesis qualify the word ‘member’ and not the AOP/BOI, then
the company or a cooperative society or a society or other entities in the
parenthesis would not be liable to pay any tax in respect of their share of
income in the AOP/BOI as per the provisions of S. 86, even though such share
of income is includible in the total income. In such cases, the companies or
societies by themselves may not carry on any business and may form various
AOPs/BOIs and may get away by paying lesser rate of tax on such AOP/BOI, since
AOP/BOI (having members whose shares are determinate or known) would be
chargeable to normal rate of tax applicable to individuals. The interpretation
put forth by the Revenue would give birth to legal device for evading the tax
by the entities specified in the parenthesis. Such absurd result could never
have been intended by the Legislature.


(f) It is a well-settled rule of interpretation that
provisions of a statute should be interpreted in a manner which augments the
object behind the legislation and not in a manner which frustrates the object.




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S. 10BA — DEPB/DDB credit part of profits of business for S. 10BA(4) and will not enter into total or export turnover for calculating profits derived from business.

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8 (2008) 117 TTJ 672 (Jd.)


ITO v. Bothra International

ITA Nos. 607 & 608 (Jd.) of 2007

A.Ys. : 2004-05 and 2005-06. Dated : 27-6-2008

S. 10BA of the Income-tax Act, 1961 — Amount of credit on
account of DEPB/Duty Drawback (DDB) has to be included as profits of the
business of the undertaking for the purpose of S. 10BA(4) and the said amount of
credit of DEPB or DDB will not enter into the total turnover or export turnover
of the undertaking for the purpose of calculating profits derived from the
business of the undertaking of the assessee within the meaning of Ss.(4).

 

For the relevant assessment year, the Assessing Officer
rejected the assessee’s claim for deduction of DEPB and DDB u/s.10BA. The
CIT(A), however, allowed the claim for deduction.

 

The Tribunal upheld the CIT(A)’s order and allowed the
deduction u/s.10BA. In arriving at this decision the Tribunal relied upon the
decisions in the case of B. Desraj v. CIT, (2008) 7 DTR (SC) 54 and
Kerala State Co-op. Marketing Federation Ltd. & Ors. v. CIT, (1998) 147 CTR
(SC) 29/231 ITR 814 (SC).

 

The Tribunal noted as under :

(a) By the use of expression ‘subject to’ in Ss.(1) of S.
10BA, it is clear that the provision contained U/ss.(4) shall override the
provisions of Ss.(1) of S. 10BA.

(b) Once the assessing authority has found the assessee
eligible for deduction u/s.10BA(1), then the only scope available to the
assessing authority was to find out the quantum of the deduction as per
prescription of Ss.(4) of S. 10BA and no other method or manner could be used,
as the answer is available from the scheme contained in the special provision
of S. 10BA itself, where allowability of deduction was by mandate subjected to
such provisions contained therein.

(c) When the profits are derived from manufacture and
export of eligible articles, the solitary business activity of the
undertaking, then the incentive such as DEPB/DDB irrespective of its real
character or source has to be taken into account and has to be included as
profits of the business of the undertaking, in particular when the expression
used in Ss.(4) of S. 10BA is the ‘profits of the business of undertaking’.

(d) The Legislature in its wisdom did not use the
expression ‘profit’ in singular, but used it as ‘profits’ in plural. Thus,
there can be profits not only by exporting the eligible articles or things,
but also can be those profits which are related to export of such articles or
things, which in the present case are DEPB and DDB determined with relation to
export sales effected by these assessees.


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S. 234D has no retrospective effect — Applicable only from A.Y. 2004-05.

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7 ITO v. Ekta Promoters (P) Ltd.

ITA Nos. 2551 to 2553 (Del.) of 2006

A.Ys. : 1998-99 to 2000-01. Dated : 11-7-2008

S. 234D of the Income-tax Act, 1961 — S. 234D, inserted
w.e.f. 1-6-2003, being substantive in nature has no retrospective effect — It is
applicable only from A.Y. 2004-05 and cannot be charged for earlier assessment
years even though assessments are pending as on 1-6-2003.

 

A Special Bench was constituted to answer the following
question :

“Whether, in the facts and circumstances of the case,
interest u/s.234D should be charged from A.Y. 2004-05 or with reference to
regular assessment framed after 1-6-2003, irrespective of the assessment years
involved or irrespective of the date when refund was granted ?”

 


The Special Bench, relying on the decisions in the following
cases, held that the provisions of S. 234D are substantive and they cannot be
retrospective :

(a) J. K. Synthetics Ltd. v. CTO, (1994) 119 CTR
(SC) 222

(b) Padmasundara Rao (Decd.) & Ors. v. State of Tamil
Nadu & Ors., (2002) 176 CTR (SC) 104; (2002) 255 ITR 147 (SC)

(c) Reliance Jute & Industries Ltd. v. CIT, (1979)
13 CTR (SC) 186; (1979) 120 ITR 921 (SC)


The Special Bench noted as under :

(a) The argument that Legislature has brought this
provision just to fill the lacuna in the law and, therefore, these provisions
should be construed retrospective cannot be accepted, more particularly when
these provisions have been inserted on the statute w.e.f. 1-6-2003 and not
with retrospective effect.

(b) The Legislature has specifically mentioned the date of
applicability i.e., 1-6-2003 and the Legislature was not incompetent to
make retrospective provision, if it was so intended.

(c) In a fiscal legislation, if a provision is brought for
imposing any liability, the normal presumption will be that it has no
retrospective operation and it is a cardinal principle of tax law that law to
be applied is the law which is in force in the assessment year, unless
otherwise provided expressly or by necessary implication.

(d) The provisions regarding levy and collection of
interest even if construed as forming part of the machinery provisions are
substantive law for the simple reason that in the absence of contract or
usage, interest can be levied under law and it cannot be recovered by way of
damages for wrongful detention of amount.

(e) Thus, the contention of the Revenue that the provision
of S. 234D being under Chapter XVII under the head ‘Collection and recovery’
should be construed to be a procedural or machinery section and, therefore,
should be applied retrospectively has to be rejected.

(f) If the provisions of S. 234D are substantive, then the
same cannot be held to be retrospective, unless specifically provided in the
statute itself.

(g) While applying Heydon’s Rule, (mischief rule of
purposive construction) a word of caution is necessary that text of statute is
not to be sacrificed and the Court cannot rewrite the statute on the
assumption that whatever furthers the purpose of the Act must have been
sanctioned and, therefore, the Court cannot add to the means enacted by the
Legislature for achieving the object of the Act. Moreover, the application of
Heydon’s Rule itself does not confirm retrospective operation of a provision
brought under that rule. This is irrespective of the fact that for application
of that rule it is a condition precedent to find out that there existed a
mischief. Mere fact that earlier there was no provision to charge interest on
the refund issued on processing of return cannot by itself be described as
‘mischief’ or ‘defect’.



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S. 120, S. 124(3) and S. 148 — Reassessment initiated by AO not having jurisdiction, completed by AO having jurisdiction — Reassessment invalid.

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6 (2008) 117 TTJ 42 (Lucknow)


M. I. Builders (P.) Ltd. v. ITO

ITA No. 111 (Lucknow) of 2006

A.Y.  : 1997-98. Dated : 7-9-2007

S. 120, S. 124(3) and S. 148 of the Income-tax Act, 1961 —
Reassessment proceedings initiated by AO not having jurisdiction — Reassessment
completed in continuation of such initiation by AO having jurisdiction —
Reassessment was invalid.

For the relevant assessment year, notice u/s.148(1) was
issued by an Assessing Officer having no jurisdiction over the assessee. On
protest by the assessee within one month of such notice, the case was
transferred to the Assessing Officer having jurisdiction over the assessee and
this Assessing Officer finally passed the reassessment order. The assessee
contended before the CIT(A), inter alia, that the notice u/s.148(1) was
devoid of proper jurisdiction and, therefore, void ab initio.

The CIT(A), however, upheld the reassessment order.

The Tribunal, relying on the decisions in the following
cases, held that the reassessment was invalid :

(a) Lt. Col. Paramjit Singh v. CIT, (1996) 135 CTR
(P&H) 8; (1996) 220 ITR 446 (P&H)

(b) Naginimara Veneer & Saw Mills (P) Ltd. v. Dy. CIT,
(1996) 136 CTR (Gau.) 134; (1996) 219 ITR 527 (Gau.)

(c) Anant Mills Ltd. (In Liquidation) v. CIT, (1993)
109 CTR (Guj.) 231; (1994) 206 ITR 582 (Guj.)

(d) P. A. Ahammed v. Chief CIT, (2006) 200 CTR
(Ker.) 378; (2006) 282 ITR 334 (Ker.)

(e) CIT v. Metal Goods Manufacturing Co. (P) Ltd.,
(1992) 197 ITR 230 (All)

(f) K. V. Kader Haji (Decd.) through LR v. CIT,
(2004) 189 CTR (Ker.) 313; (2004) 268 ITR 465 (Ker.)

(g) ITO v. Ashoke Glass Works, (1980) 125 ITR 491
(Cal.)

The Tribunal noted that the issuance of notice u/s. 148(1) by
the first Assessing Officer was without jurisdiction and, therefore, invalid.
The assessment framed on that basis by the jurisdictional Assessing Officer was
also invalid and, therefore, cancelled.

The Revenue’s stand for protection u/s.124 was also not
allowed by the Tribunal. It noted as follows :

(a) Invoking of S. 124(2) would arise if there was any
chance of validation of proceedings by virtue of S. 124(3) which is not
available to the Assessing Officer in the present case, either under clause
(a) or under clause (b) of S. 124(3).

(b) Protection of the proceedings and assessment thereafter
on account of failure of the assessee to object within the time allowed
u/s.124(3) is available to specific proceedings and not to every proceeding.
Erroneous assumption of jurisdiction cannot, in general, be validated. Such
validation is specific in S. 124(3).

 

(2008) 117 TTJ 289 (Delhi) (SB)


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S. 40A(3) — Cash payment exceeding prescribed limits — S. 40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in business of processing and export of meat and meat products — Allowable under clause (l) of Rule 6DD — Also as per claus

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  1. (


  1. (2009) 120 itd 89 (Delhi)


Dy. CIT v.
Hind Industries Ltd.

A.Y. : 2003-04. Dated : 26-9-2008

 

S. 40A(3) — Cash payment exceeding prescribed limits — S.
40A(3) read with Rule 6DD — Purchases in cash towards supplies of carcass in
business of processing and export of meat and meat products — Allowable under
clause (l) of Rule 6DD — Also as per clause (f) of Rule 6DD and, therefore, no
disallowance could be made u/s.40A(3).

The assessee-company was engaged in the business of
processing and export of meat and meat products. The assessee had made all the
purchases in cash and had regularly withdrawn huge cash from bank and
ostensibly made payments for supplies of carcass. The Assessing Officer was of
the view that the payments made in cash would be hit by provisions of S.
40A(3). On appeal, the Commissioner (Appeals) opined that since the payments
had been made to agents in respect of purchases of carcass, there was no room
to interpret clause (f) of Rule 6DD in favour of the assessee. However, so far
as the assessee’s claim for exclusion under clause (l) of Rule 6DD was
concerned, the Commissioner (Appeals) held that payments in cash to agents for
purchases of products of animal husbandry could not be disallowed u/s.40A(3).

 

On the Revenue’s appeal, the ITAT held that :

(1) The AO had disallowed the claim of the assessee in
view of the decision of the Allahabad High Court in the case of CIT v.
Pehlaj Raj Daryanmal, (1991) 190 ITR 242. The decision by the Allahabad
High Court was rendered in 1991 whereas clause (l) was inserted by the IT
Amendment Rules in the year 1995. Therefore, the ratio of the decision of
the Allahabad High Court would not be applicable to the facts of the instant
case.

(2) The contention of the department, that there was no
agent, did not sound good because the AO himself had disallowed the payments
for the reason that they were not made directly to producers/cultivators but
through intermediaries or agents.

(3) Though the Commissioner (Appeals) had rejected the
claim under clause (f), yet, in view of Rule 27 of the Income-tax (Appellate
Tribunal) Rules, 1963, the claim of the assessee was allowable as per clause
(f) of Rule 6DD.

Accordingly, the order of the Commissioner (Appeals) was to
be confirmed.


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S. 32 — Whether road is eligible for depreciation in category of ‘building’ at rate applicable to buildings — Held, Yes.

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  1. (2009) 120 ITD 20 (Chennai)


Tamil Nadu Road Development Co. Ltd. v. ACIT/ITO

A.Ys. : 2003-04 and 2004-05

Dated : 24-10-2008

S. 32 — Whether road is eligible for depreciation in
category of ‘building’ at rate applicable to buildings — Held, Yes.

The assessee-company was incorporated for construction,
development and maintenance of roads at various places in Tamil Nadu as per
the agreement entered into with the Government of Tamil Nadu. Its claim for
depreciation on roads at the rate of 25% (as plant and machinery), was
rejected by the Assessing Officer as road did not figure in the depreciation
schedule. He further observed that roads were not buildings, entitled to
depreciation. On appeal, the Commissioner (Appeals) upheld the Assessing
Officer’s view.

On second appeal by the assessee, the Tribunal held that :

(1) Merely because some optical fibre lines or connection
lines had been laid, the road could not get converted into a plant.

(2) The assessee-company was entitled to collect fixed
amount of toll per vehicle for which it could have created any kind of
barrier for collection of such toll. If the assessee had chosen to install
automated toll plaza, then mere construction of one toll plaza would not
change the nature of the asset which remained the road.

(3) After the A.Y. 1988-89, all the appendices,
prescribing the table of rates of depreciation had the note that building
would include road. Therefore, the assessee would become entitled to
depreciation on the road in the category of ‘building’.

 


In these circumstances, the order of the Commissioner
(Appeals) was set aside and the Assessing Officer was directed to allow
depreciation on the road at the rate applicable to the buildings.


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Collection of tax at source u/s.206C — Collection of octroi under Bombay Provincial Municipal Corporation Act, 1949 was neither for parking lot nor at toll plaza nor for mining or quarrying nor it was for purpose of business, and, therefore, collection of

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  1. (2009) 120 ITD 7 (Nag.)


Akola Municipal Corporation v. ITO

A.Ys. : 2005-06 to 2007-08

Dated : 21-5-2008

 

Collection of tax at source u/s.206C — Collection of octroi
under Bombay Provincial Municipal Corporation Act, 1949 was neither for
parking lot nor at toll plaza nor for mining or quarrying nor it was for
purpose of business, and, therefore, collection of octroi by agent appointed
by assessee would not fall in S. 206C(1C).

 

The assessee-corporation had appointed an agent for
collection of octroi, as levied by the assessee under the Bombay Provincial
Municipal Corporation Act, 1949. The assessing authority held that the
assessee was to collect tax at source on the octroi which was in the nature of
‘Toll Plaza’ within meaning of S. 206C(1C). On appeal, the Commissioner
(Appeals) confirmed the order of the assessing authority.

 

On second appeal by the assessee :

(1) On a close reading of the legislation like the Bombay
Provincial Municipal Corporation Act, 1949, the Constitution, the Tolls Act,
1851 and the Supreme Court and the High Courts’ decisions and various
dictionary meanings, it could be said that ‘toll’ is a different thing than
‘octroi’. Octroi is normally a tax levied on entry of goods into local
areas, whereas ‘toll’ is a tax levied as compensation for the purpose of
temporary use of land or allowing passage of vehicles through the land.

(2) In the instant case, the contract of the
assessee-corporation with the agent for collecting octroi, was different
from clause (e) of the said section dealing with ‘toll’.

 


Accordingly, the orders of the Commissioner (Appeals) as
well as the Assessing Officer were to be vacated and the appeal of the
assessee was to be allowed.


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Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S. 80-IB are to be fulfilled only if eligible assessee is an industrial undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where assessee was engaged in business of carrying out scient

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  1. (2009) 119 itd 427 (Mum.)


Enem Nostrum Remedies (P.) Ltd. v. ACIT

A.Ys. : 2003-04 and 2004-05

Dated : 28-8-2008

Deductions u/s.80-IB — Conditions stipulated U/ss.(2) of S.
80-IB are to be fulfilled only if eligible assessee is an industrial
undertaking within meaning of Ss.(3) to Ss.(5) of said section — Where
assessee was engaged in business of carrying out scientific research and
development and was not an industrial undertaking and had been approved by
Government of India, for claiming benefit of deduction u/s.80-IB(8A),
conditions of Ss.(2) of S. 80-IB were not required to be fulfilled by it.

 

The assessee-company had been approved as an R&D company by
the department of scientific and industrial research. It claimed deduction
u/s.80-IB(8A). The Assessing Officer denied the deduction u/s.80-IB(8A) by
observing that :

(1) The assessee had not claimed deduction u/s.80-IB(8A)
in the initial year,

(2) Subsequent claim made by it in the relevant
assessment years could only lead to the surmise that its business was formed
by splitting up, or the reconstruction of a business already in existence;

(3) The certificate by the Chartered Accountant in Form
10CCB was not produced.

 


On appeal, the Commissioner (Appeals) held that the
assessee did not fulfill the conditions of S. 80-IB(2)(iii) as it was not
manufacturing or producing any article or thing, and, accordingly, upheld the
view of the Assessing Officer on a different count.

On second appeal by the assessee, the Tribunal held that :

(1) The four conditions stipulated U/ss.(2) of S. 80-IB
are to be fulfilled only if the eligible assessee is an industrial
undertaking within the meaning of S. (3) to S. (5) of said Section, as the
case may be.

(2) If the assessee is not an ‘industrial undertaking’
but is otherwise eligible for deduction under any of other sub-sections of
S. 80-IB, then there is no requirement for importing the conditions
stipulated in Ss.(2) of S. 80-IB which are applicable to industrial
undertakings.

(3) Since in the instant case, the assessee was engaged
in the business of carrying out scientific research and development and had
been approved by the Government of India, for claiming the benefit of
deduction u/s.80-IB(8A), the conditions of Ss.(2) of S. 80-IB were not
required to be fulfilled by it.

Based on the above observations, the Tribunal directed the
Assessing Officer to allow deduction as claimed by the assessee.


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S. 263 — Assessing Officer adopted one of the permissible view — Such order cannot be said to be erroneous.

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Part A: Reported Decisions


(2010) 126 ITD 141 (Bang.)

Siemens Public Communication Networks Ltd. v. CIT

A.Y. : 2003-04. Dated : 16-1-2009

20. Provision of warranty created on accrual basis
is an allowable expenditure.

S. 263 — Assessing Officer adopted one of the
permissible view — Such order cannot be said to be erroneous.

Notional income cannot be considered for deduction
u/s.10B as the assessee is the same.

Facts:

The assessee created provision for warranty on
accrual basis on the last day of each quarter. The actual warranty-related
expenses were adjusted against the provision. The assessee claimed the provision
for warranty as expenditure in its computation of income. The Assessing Officer
allowed the assessee’s claim. The CIT invoked S. 263 and disallowed the
provision for warranty.

The main contention of the assessee was that
provision for warranty was made on the basis of past experience. It placed
reliance on the decision of Wipro-GE Medical Systems Ltd. v. DCIT, (81 TTJ 455)
(Bang.).

Held:

Following the decision of CIT v. Wipro GE Medical
Systems, (supra), the provision for warranty was held to be an allowable
expenditure.

The Tribunal further held that the Assessing
Officer had adopted one of the permissible views. An order is not erroneous or
prejudicial to the interest of Revenue, unless the view taken by the AO is
unsustainable in law.

Facts:

The assessee company had two units — SCS & TCM. SCS
unit’s income was exempt u/s.10B. The company maintains a common bank account
where the amounts received by both the units are deposited. As such no separate
balance sheets for both the units were prepared. The amounts received were
identified by the invoices in the name of respective units and necessary entries
passed in accounts maintained in SAP. Hence it was natural that the funds earned
by S. 10B unit were also utilised by non-10B unit. Based on the fund
utilisation, a monthly cross-charge interest at a suitable rate of interest was
made. Hence, the surplus funds which were available from the EOU have been used
by the other unit. The assessee booked a notional interest income in the account
of EOU unit and claimed expenditure u/s.10B for the said interest income.

Held:

The interest income booked by the assessee is only
a cross entry. As such the assessee has not earned any interest income. The
assessee is the same. There is no relationship of borrower or lender. Such
interest derived on notional basis cannot be considered for the purpose of
deduction u/s.10B.

Note : Though the judgment as regards second issue is
against the assessee, it discusses an important aspect of notional income which
cannot be taxed as the assessee remains the same.


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Deeming fiction in S. 50C in respect of the words ‘full value of consideration’ applicable only to S. 48 — Meaning of full value of consideration in Explanation to S. 54F(1) not governed by S. 50C — For S. 54F, sale deed value is the full value of conside

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Part A: Reported Decisions



(2010) 45 DTR (JP) (Trib) 41

Gyan Chand Batra v. ITO

A.Y. : 2006-07. Dated : 13-8-2010

 

19. Deeming fiction in S. 50C in respect of the
words ‘full value of consideration’ applicable only to S. 48 — Meaning of full
value of consideration in Explanation to S. 54F(1) not governed by S. 50C — For
S. 54F, sale deed value is the full value of consideration.

Facts :

The assessee had sold a plot of land for sale
consideration of Rs.10.81 lac and declared a long-term capital gain of Rs.5,558.
The AO invoked provisions of S. 50C and the full consideration was taken as
Rs.19,24,987 and reworked capital gain accordingly.

The assessee has purchased a flat within a period
of two years from the date of transfer of the plot. The assessee has made total
investment of Rs.21,14,986, out of which Rs.16.74 lac was paid before the date
of filing of return for concerned assessment year. Therefore, before the learned
CIT(A), the assessee contended that the assessee may be allowed relief u/s.54F
by considering the full value of the consideration as shown by the assessee in
the sale deed as compared to the full value of consideration adopted by the AO
in view of S. 50C of the Act. The learned CIT(A) rejected the claim of the
assessee by observing that the assessee had not claimed S. 54F deduction at the
time of filing of return of income or during the course of assessment
proceedings. Further, the learned CIT(A) held that the availability of deduction
u/s.54F is subject to fulfilment of various conditions and those conditions were
not fulfilled by the assessee.

Held :

The deeming fiction as provided in S. 50C in
respect of the words, ‘full value of consideration’ is to be applied only for S.
48 of the Income-tax Act. The words ‘full value of consideration’ as mentioned
in other provisions of the Act are not governed by the meaning as provided in S.
50C. For the meaning of full value of consideration as mentioned in different
provisions of the Act except in S. 48, one will have to consider the full value
of consideration as specified in the sale deed.

For claiming exemption u/s.54F, net consideration
received upon transfer of original asset is compared with the cost of the new
asset. In Explanation to S. 54F(1), it is mentioned that net consideration means
the full value of consideration received or accruing as a result of the transfer
of the capital asset as reduced by any expenditure incurred wholly and
exclusively in connection with such transfer. The meaning of full value of
consideration in Explanation to S. 54F(1) will not be governed by meaning of
words ‘full value of consideration’ as mentioned in S. 50C. In the instant case,
the cost of new asset is not less than the net consideration as per sale deed,
thus the whole of the capital gains will not be charged even if the capital
gains have been computed by adopting the value adopted by the stamp registration
authority.

The decision of Goetze (India) Ltd. v. CIT, (2006)
204 CTR (SC) 182 restricts the power of the AO to entertain the claim for
deduction otherwise than by revised return and did not impinge on the power of
the Tribunal u/s.254 of the Act. In the instant case, the assessee has claimed
the deduction u/s.54F before the learned CIT(A) and the learned CIT(A) has
entertained such claim. Therefore, the issue of claim can be considered.

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Security deposit received from the licensee with a view to secure due performance of its obligations under the leave-and-licence agreement is in the nature of loan and is in the capital field — Forfeiture of such security deposit upon premature terminatio

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Part A: Reported Decisions



(2010) 44 DTR (Mumbai) (Trib.) 124

ACIT v. Das & Co.

A.Y. : 2003-04. Dated : 27-8-2009

 

18. Security deposit received from the licensee
with a view to secure due performance of its obligations under the
leave-and-licence agreement is in the nature of loan and is in the capital field
— Forfeiture of such security deposit upon premature termination of lease does
not partake the character of income as a capital receipt cannot be said to have
converted itself into a trading receipt on signing of the termination agreement.

Facts :

The assessee was into the business of warehousing,
property leasing, trading in chemical and textile auxiliaries. The assessee
entered into a leave-and-licence agreement with Concord Motors Ltd., a
subsidiary of Tata Motors Ltd. for a period of two terms of three years each. A
lock-in period of five years and six months was provided in the agreement. The
lease rent was treated as business income. During the assessment year under
consideration, the agreement was terminated prematurely by the licensee when 16
months were still remaining out of the lock-in period. On termination of the
lease, the assessee forfeited the interest-free security deposit received by it
from the licensee which was for an amount of Rs.1.50 crore under a separate
security deposit agreement and Rs.5 lakh under a leave-and-licence agreement.
Further, the assessee had received an amount of Rs.24,37,500 as damages for
premature termination from the licensee. This amount was paid on account of
hardship and inconvenience suffered by the assessee as damages. The assessee
treated entire receipt as capital receipt. The AO treated it as revenue receipts
and as taxable income. Upon further appeal, the CIT(A) upheld the order of the
AO.

Held :

A perusal of the terms of agreements clearly shows
that the security deposit is a capital receipt. The deposit is not in the nature
of advance for goods or services, nor could it be qualified as in relation to
the rental component. It is in the nature of loan and is in the capital field.
On a perusal of the termination agreement, it is clear that the forfeiture of
security deposit in question is not in lieu of rental payments and the assessee
is not in default. The forfeiture of security deposit does not partake the
character of income, because a capital receipt cannot be said to have converted
itself into a trading receipt on signing the agreement.

In a decision of Morely (Inspector of Taxes) v.
Tattersall, (1939) 7 ITR 316 (CA), it is clearly laid down that the quality and
nature of receipt for income-tax purpose are fixed once and for all when it is
received and that it does not change its character subsequently. This decision
has been followed in the case of K.M.S. Lakshmanier & Sons v. CIT, (1953) 23 ITR
202 (SC) and it has been observed that one of the conditions is that it is to be
adjusted against a claim arising out of a possible default of a depositor,
cannot alter the character of the transaction or the fact that the purpose for
which the deposit is made is to provide a security for the due performance of a
collateral contract, cannot invest the deposit with a different character. It
remains a loan of which the repayment in full is conditioned by the due
fulfilment of obligations under the collateral contract.

In a subsequent decision of CIT v. T.V. Sundaram
Iyengar & Sons Ltd., (1996) 222 ITR 344 (SC), the above decision of Morely
(Inspector of Taxes) v. Tattersall was considered and held that if an amount is
received in the course of trading transaction, even though it is not taxable in
the year of receipt as being of revenue character, the amount changes its
character when the amount becomes the assessee’s own money because of limitation
or by any other statutory or contractual right. In the case on hand, the
original receipt was in the nature of a loan and never had a revenue character
as it was not at any time a trading receipt as in the case of T.V. Sundaram
Iyengar & Sons.

Further, in the case of Mahindra & Mahindra Ltd. v.
CIT, (2003) 261 ITR 501 (Bom.), it is held that subsequent waiver of principal
amount of loan was not assessable u/s.28(iv) of the Act.

Therefore, the forfeiture of security deposit
amounting to Rs.1.55 crore is not taxable. However, the payment of lump sum
consideration of Rs.24.37 lac is in lieu of the rents and is in the revenue
field unlike the remission of a loan liability. Therefore the same was rightly
taxed as such.

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S. 80IB(10) — Merely because some flats are larger than 1500 sq. feet, the assessee will not lose the benefit in its entirety — Only with reference to the flats which have area more than the prescribed area the assessee will lose the benefit — While compu

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Part A: Reported Decisions



(2010) TIOL 619 ITAT-Bang.

SJR Builders v. ACIT

ITA No. 1192/Bang./2008

A.Y. : 2005-06. Dated : 21-8-2009

 

17. S. 80IB(10) — Merely because some flats are
larger than 1500 sq. feet, the assessee will not lose the benefit in its
entirety — Only with reference to the flats which have area more than the
prescribed area the assessee will lose the benefit — While computing the
built-up area of 1500 sq. feet for the purpose of deduction u/s.80IB(10), the
mezzanine floor and common areas are to be excluded.

Facts :

The assessee firm was engaged in the construction
and real estate business. In the return of income filed, the assessee claimed
deduction u/s.80IB(10) in respect of the projects developed and built by it. The
Assessing Officer (AO) in a survey action found that some of the flats in the
project undertaken by the assessee, in respect of which deduction u/s.80IB(10)
was claimed were more than 1500 sq. feet. He held that the assessee was not
entitled to the benefit of S. 80IB(10).

Aggrieved, the assessee preferred an appeal to
CIT(A) who confirmed the disallowance made by the AO.

Aggrieved, the assessee preferred an appeal to the
Tribunal.

Held :

The Tribunal held that the assessee is entitled to
deduction u/s.80IB(10) to the extent of flats the built-up area of which is not
more than 1500 sq. feet. In respect of penthouses, the built-up area of which
was more than 1500 sq. feet, the Tribunal held that they may be excluded for
exemption. The Tribunal held that in the light of the decision of the Special
Bench in the case of Brahma Associates, merely because some flats are larger
than 1500 sq. feet the assessee will not lose the benefit in its entirety. It
held that the assessee will lose the benefit only with reference to the flats
which have area more than the prescribed area. It also held that while
considering the built-up area of 1500 sq. feet for the purpose of exemption
u/s.80IB(10), the mezzanine floor and common areas are to be excluded. It
directed the AO accordingly.

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S. 194C and S. 194I — Payment made by an assessee for hiring vehicles for transportation of its employees qualifies for TDS u/s.194C.

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Part A: Reported Decisions


(2010) TIOL 618 ITAT-Mum.

ACIT v. Accenture Services P. Ltd.

ITA No. 5920, 5921 and 5922/Mum./2009

A.Ys. : 2007-08, 2008-09 and 2009-10

Dated : 20-10-2010

 


16. S. 194C and S. 194I — Payment made by an
assessee for hiring vehicles for transportation of its employees qualifies for
TDS u/s.194C.

Facts :

The assessee entered into agreements with various
transport service providers. Under the agreements entered into, the service
provider was to provide transport service at particular locations for
transportation of the assessee’s employees to different destinations and
locations mentioned in the agreement. The transport service provider had to
provide vehicles along with the requisite staff and relevant facilities, full
maintenance and repairs of vehicles, etc.

The assessee deducted income-tax u/s.194C on
payments made under the above-referred agreements. The Assessing Officer was of
the view that the payments under the above-referred agreements were covered by
provisions of S. 194I. The AO held the assessee to be in default as per
provisions of S. 201(1) and also charged interest u/s.201(1A) for all the
assessment years.

Aggrieved, the assessee preferred an appeal to
CIT(A) who held the contract entered by the assessee with the transport service
provider to be covered by Explanation 3 to S. 194C. He held the assessee should
not be treated as an assessee in default u/s.201(1) as well as also not liable
for levy of interest u/s.201(1A).

Aggrieved, the Revenue preferred an appeal to the
Tribunal.

Held :

The Tribunal upon going through the agreements
entered by the assessee noted that the assessee was not required to provide
anything, but was availing the services of the transport for picking up and
dropping of its employees from its offices at different locations to the places
of its clients. It observed that though as per the agreements, the vehicles
provided for the requirements of the assessee were dedicated but it is not a
case of hiring of vehicles only without other facilities. It observed that in
the case of the assessee, all the facilities along with the vehicles were to be
provided by the transport service provider and he was under the obligation to
replace the vehicles as well as the driver and other staff after running certain
hours. It also noted that each vehicle was provided appropriate number of
drivers and time directives to enable the vehicle to be operated 24 hours a day
and 7 days per week. The service provider was responsible for ensuring all legal
and operational obligations. Thus, it was a kind of wet lease, wherein the
assessee was utilising the transport services provided by the service provider
without making any arrangement of its own, but all the arrangements were the
responsibility and obligation of the service provider.

The Tribunal noted that the CBDT has in para 8(ii)
of Circular No. 681, dated 8-3-1994 clarified that transport contract would be
in addition to contract for transportation of loading and unloading of goods;
also covers contracts for plying buses, ferried, etc. along with the staff. It
noted that the Board has also considered this issue in Circular No. 558, dated
28-3-1990 in paragraph 3. It also noted that in Circular No. 715, dated 8-8-1992
the CBDT has in answer to question no. 6 clarified that the provisions of S.
194C shall apply when a plane or a bus or any other mode of transport is
chartered by one of the entities mentioned in S. 194C of the Act. It held that
the classification of vehicles as Plant for the purposes of claiming
depreciation cannot be stretched to determine the nature of services provided
which is otherwise clear from the agreement between the parties. It noted the
observations of the Bombay High Court in the case of Indian National Ship Owners
Association and Others v CIT, (TDS).

Upon going through paragraphs 56.2 and 56.3 of
Circular No. 3 of 2008, dated 12-3-2007 dealing with Explanatory notes on
provisions of the Finance Act, 2007, it held that the provisions of S. 194I are
confined to payment for rent on hiring of land or building including factory
building, furniture or fittings, but not for transport vehicle and other mode of
transportation, particularly when the same is in the nature of providing and
availing transport services. It also held that the expression plant and
machinery used in explanation to S. 194I refers to only plant and machinery used
by the assessee in the business of hiring them, but not the hiring of transport
service.

The appeal filed by the Revenue was dismissed.

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Reassessment u/s.147 — When the assessee has made full and true disclosure of all the facts to the AO, the assessment cannot be reopened on the same ground of failure to disclose all the material facts. Further, once the assessee has disclosed all the mat

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  1. (2009) 120 ITD 374 (Delhi)

Moonbeam Finvest Lease Ltd. v. ITO, Ward-5(4), New
Delhi

A.Y. : 1998-99. Dated : 31-1-2008

Reassessment u/s.147 — When the assessee has made full and
true disclosure of all the facts to the AO, the assessment cannot be reopened
on the same ground of failure to disclose all the material facts. Further,
once the assessee has disclosed all the material facts, the proviso to S. 147
cannot be applied and hence reopening is invalid beyond 4 years from the
relevant assessment year.

Facts :

The assessee’s return for A.Y. 1998-99 was processed
u/s.143(1)(a). In the course of assessment proceedings, the details of ‘Lease
Equalisation Account’ charges were asked for by the AO The assessee submitted
his reply and assessment was completed u/s.143(3). On 7-3-2005 the AO reopened
the assessment by issuing notice u/s.148 on the ground of failure on the part
of the assessee to disclose fully and truly all the material facts. The
assessee challenged the reopening of the assessment on the ground of mere
change of opinion as well as on the ground that it was barred by limitation as
notice was issued after 4 years from the end of relevant A.Y. The CIT(A)
confirmed the action of AO. On appeal to Tribunal, it held that the duty of
the assessee was to make full and true disclosure of all material facts and
the AO had to decide what inference can be drawn therefrom. If assessee had
disclosed all the material facts, reopening could not be justified as it would
amount to mere change of opinion on the part of the AO. Since, in the instant
case the AO was satisfied with the explanation of the assessee at the time of
original assessment, it was not allowed to him to reopen the assessment on the
same ground. Further, as there was no failure on the part of the assessee to
disclose all the facts, proviso to S. 147 could not be applied and notice
u/s.148 could not be validly issued beyond 4 years from the end of relevant
assessment year.



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S. 50C — When the stamp valuation authority has accepted the consideration declared by the assessee in the sale deed, there is no question of once again referring the matter to Departmental Valuation Officer (DVO) u/s.50C.

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  1. (2009) 120 ITD 233 (ASR)


Punjab Poly Jute Corpn. v. ACIT, Cir.-1,
Bhatinda

A.Y. : 2005-06. Dated : 11-4-2008

S. 50C — When the stamp valuation authority has accepted
the consideration declared by the assessee in the sale deed, there is no
question of once again referring the matter to Departmental Valuation Officer
(DVO) u/s.50C.

Facts :

The assessee had sold certain land at the rate of Rs.
220.81 per sq.yd. (total consideration Rs.16.34 lakhs) which rate was accepted
by stamp valuation authority. However, according to AO the value applicable to
the land as per Punjab State Rules, was at the rate of Rs.500 per sq.yd.
Hence, he referred the matter to DVO thus determining full value of
consideration at Rs.72 lakhs and capital gains at Rs.62.40 lakhs. On appeal to
CIT (A), it confirmed the order of the AO.

On appeal to Tribunal, it held that S. 50C comes into play
only when there is valuation at a higher value for stamp valuation purposes by
the State Authority than declared by assessee in sale deed. When there is such
difference noticed, valuation adopted by stamp valuation authority has to be
substituted with the sale consideration of such property mentioned in the sale
deed. In the instant case, the value of sale consideration was accepted by the
stamp valuation authority as the property was registered with the rate of
Rs.220.81 i.e. rate at which sale of land was made. When the stamp
valuation authority has accepted the consideration declared by the assessee in
the sale deed, there can not be any question of once again referring the
matter to Departmental Valuation Officer (DVO) u/s.50C.

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Penalty u/s.271(1)(c) — When the explanation offered by the assessee was bona fide but assessee could not establish its case for deduction in quantum proceedings that would not automatically become a case for levy of penalty for concealment or furnishing

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  1. (


  1. (2009) 120 ITD 151 (Luck.)


Ashok Grih Udyog Kendra (P.) Ltd. v. ACIT-VI,
Kanpur

A.Y. : 2000-01. Dated : 11-4-2008

Penalty u/s.271(1)(c) — When the explanation offered by the
assessee was bona fide but assessee could not establish its case for deduction
in quantum proceedings that would not automatically become a case for levy of
penalty for concealment or furnishing of inaccurate particulars of income.

Facts :

The assessee company filed its return of income for A.Y.
2000-01 claiming an expenditure of Rs.2.37 lakhs as LTC paid to an employee
under the head travelling expenses. The AO disallowed the expenditure on the
ground that the expenditure had not been incurred for the purposes of
business. Further, it was also contended by the Department that if expenses
were incurred on account of travelling of the employee, no TDS had been
deducted and also that the employee was closely related to the director of the
company and hence the expenditure was disallowable u/s.40A(2)(b) as well. The
AO also imposed penalty u/s.271(1)(c) for claiming wrong deduction. The CIT(A)
confirmed the action of AO. On appeal to Tribunal regarding the allowability
of the expenditure, it confirmed the action of AO. Thereafter the assessee
preferred appeal for imposition of penalty u/s.271(1)(c). The Tribunal held
that there was only difference of opinion regarding the allowablility of
expenditure between assessee and department. Although, the disallowance of
expenditure has been upheld by the Tribunal, the department has never
challenged the genuineness of expenditure. It is well settled law that
findings in the assessment proceedings are relevant but not conclusive in
penalty proceedings because the considerations that arise in penalty
proceedings are different from those that arise in the assessment proceedings.
In the instant case, the assessee had disclosed all the material facts
necessary for assessment. Consequently, although the expenditure is
disallowed, the penalty u/s. 271(1)(c) for concealment or furnishing of
inaccurate particulars of income cannot be imposed.

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S. 80-I r/w S. 80-IA — Where old business is carried on and on growth of business, new units established, benefit of S. 80-I/80-IA available to new unit, if said unit is ‘undertaking’ — A unit qualifies as industrial undertaking when it produces articles

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11 114 ITD 189 (Mum.)


Jt. Commissioner of Income-tax v.


Associated Capsules (P) Ltd.

A.Ys. : 1994-95 to 1997-98. Dated : 5-2-2008

S. 80-I r/w S. 80-IA — Whether where an old business is
carried on by the assessee and commensurate with the growth of the business, new
units are established, benefit of S. 80-I/80-IA will be available to a unit or
new unit, if said unit is in the nature of ‘undertaking’ — Held, Yes; Whether a
unit qualifies to be called an industrial undertaking when it undertakes
production or manufacture of articles or things in its own right and produces
such articles or things by itself as a separate and independent unit — Held,
Yes.

 

Facts :

The assessee had been engaged in the business of production
of empty hard gelatine capsules and their sale to pharmaceutical companies. The
manufacturing activities were carried out by the assessee with the help of
capsule manufacturing machines. In the relevant assessment year, the assessee
had seventeen capsule manufacturing machines installed in four separate
undertakings. It claimed deduction u/s.80-I and u/s.80-IA in respect of its
undertakings.

The AO noticed that the departmental authorities in a survey
u/s.133A at the factory premises of the assessee-company had found that all the
four undertakings were located in the same premises of the factory and all of
them were involved in the production of capsules; that the source of power for
all the units was one, inasmuch as there was one electricity bill for the
factory; that air-conditioning plant for all the units was common; and that
certain ancillary activities, pre and post-manufacturing were common. He held
that all the four undertakings, which were claimed by the assessee to be
separate and independent of each other were essentially one undertaking. He
therefore concluded that undertakings in question could not be regarded as
separate and independent for the purpose of deduction u/s.80-I and u/s.80-IA
and, accordingly, denied the deduction claimed by the assessee.

On appeal, the CIT(A) held that though all the machines and
undertakings involved in the manufacturing of the same article, i.e.,
capsules, were located in the same premises, yet the area of each of the four
undertakings was clearly demarcated and separated from each other; that though
the main source of power in the entire factory was common, yet the power
consumed by each machine was clearly and separately recorded; that though
centralised air-conditioning was provided to all the undertakings, it could be
shutoff for any undertaking without affecting the others; the supply of raw
materials was monitored machinewise and under-takingwise; in a nutshell, each of
the undertaking was working independently of the others. He, therefore, held
each of the undertaking to be separate and independent, and to be producing
capsules in its own right. He, therefore, allowed assessee’s claim for deduction
u/s.80-I and u/s.80-IA.

On Revenue’s appeal, the Tribunal made the following
observations :

1. A perusal of S. 80-I and S. 80-IA establishes that the
notion of ‘undertaking’ is a core jurisdictional element for the application
of S. 80-I and S. 80-IA. The other conditions stipulated can be satisfied only
when there is an ‘undertaking’. The undertaking should be new, in the sense
that it should have begun to manufacture or produce specified articles or
things after the prescribed time schedule.

2. Application of S. 80-I/S. 80-IA to new industrial
undertakings started for the first time by the assessee is usually devoid of
any difficulties. Controversies arise where the old business is being carried
out by the assessee and the new activity is launched by him establishing new
plants and machinery by investing substantial funds to produce the articles or
things which are the same as those from of the old business or to produce some
distinct marketable products
which may feed the old business. It is the general contention of the Revenue
in these cases that establishment of a new undertaking manufacturing the same
product is not a new undertaking eligible for tax incentives. Benefit under
the said Sections is available to a unit or a new unit only if it is in the
nature of an ‘undertaking’.

3. The term ‘undertaking’ has not been statutorily defined
in the Income-tax Act, and the crucial question of whether a unit is to be
considered as an undertaking is left to be decided by the Tribunals/Courts.
The Tribunal further observed that a unit qualifies to be an undertaking when
it undertakes production or manufacture of articles or things in its own right
and produces such articles or things by itself as a separate or independent
unit.

4. The CIT(A) on examination of the material on record had
held that the units in question were well-integrated units producing capsules
on their own, and had a separate and distinct identity of their own, which had
not been shown to be incorrect or based on no material. The Department had
also not rebutted the assessee’s claim that it had treated each undertaking as
separate and independent in its accounts. It was also not the case of the
Department that any of the negative tests laid down in S. 80I(2) was attracted
in this case. Therefore, the CIT(A) had decided the issue correctly.
Therefore, the appeal filed by the Revenue was liable to be dismissed.

 


Cases referred to :



(i) Textile Machinery Corpn. Ltd. v. CIT, (1997) 107
ITR 195 (SC) (para 7)

(ii) Periyar Chemicals Ltd. v. CIT, (1997) 226 ITR
467 (Ker.) (para 9)

Retail Analytics using Computer-Assisted Audit Tools and Techniques

Internal Audit

Introduction :

Retail Performance Management enables decision-making for
retailers of all sizes and segments, by empowering them with comprehensive
relevant Enterprise Business Intelligence, across technology platforms.

With Computer Assisted Audit Tools (CAATs), users can
jumpstart their analytic journey, and enjoy improved margins, better customer retention, inventory efficiency, promotion
effectiveness with fewer markdowns.

CAATs help accelerate your retail organisation’s analytic
maturity, taking you one step closer to achieving excellence. CAATs creates such
business benefits by delivering enhanced usability, speaking and thinking
retail, anticipating the evolving
needs of decision-makers, and ensuring a faster adoption rate.

Through simple screen guided analytics, CAATs empowers every
decision-maker in every role in your retail organisation. And it takes the load
off the IT Group, by being easily extendable and maintainable.

By implementing CAATs, you avoid the latency, cost and
project management challenges associated with a traditional BI deployment, and
enjoy unparalleled speed to benefits.

CAATs transform business intelligence from being a ‘Decision
Support System’ to a ‘Decision-Making System’. CAATs make business intelligence
pervasive across the retail business by impacting the top line and bottom line
performance of the business.

CAATs take on a whole new revolutionary role in retail
analytics where the tool is used for continuous monitoring by process owners
rather than the erstwhile traditional continuous auditing by Internal Auditors.
The significance of the CAAT is greatly accentuated by the understanding of the
underlying business process by the process owner.

Retail analytics can deliver immeasurable business benefits :

Merchandising & Assortment :

It’s a well known fact that shoppers prefer to visit places
that offer them the maximum options, deals and not to forget a good shopping
experience.

As a retailer, one does everything to retain their customers
— providing excellent customer service, providing variety, running regular
promotions, ensuring products have been priced appropriately and not to forget
ensuring customers are satisfied. While one aims at providing a range of
products, it is not possible to offer everything.

Here is where merchandise and assortment planning comes in.
CAATs provide merchandisers an analytic framework to plan and analyse business
activities related to merchandise and assortment planning.



  •  Compare historical, planned or forecasted data against actual data to define
    and optimise merchandise plans



  •  Analyse merchandise hierarchy across departments, categories, product lines
    and Stock Keeping Units (SKUs)



  •  Increase customer loyalty by providing merchandise that caters to their
    requirements



  •  Provide a range of optimally priced products, including private labels



  •  Analyse performance of new products and their impact on similar products in
    the same category



  • Determine seasonal and store-specific product assortments.



Loss prevention :

In the retail industry, it is well known that losses due to
fraudulent transactions, theft, pilferage, excessive stocking, wastage,
shoplifting, internal theft, refunds, exchanges and excessive discounting are
inevitable. While one can’t do away with these problems, retailers are always on
the look-out for ways to minimise losses while keeping costs minimum.

Loss prevention analytics help you diagnose the root cause of
the problem, identify exceptions, take corrective measures. CAATs substantiate
its analyses with historical, geographic, and demographic trends.



  •  Incorrect or fraudulent refunds



  •  Spoilage, damage and write-offs



  • Price overrides and improper discounting



  •  Supplier or warehouse issues



  •  Administrative errors



  • Fraudulent sales to customers with dubious shopping records



  •  Erroneous entries for product returns.



Supplier performance :

Being able to forecast optimal levels of inventory, optimise
lead time, manage orders, improve fill rates, negotiate trade promotions, manage
risks and improve supply chain efficiency — these are just a few challenges
faced by retailers when it comes to managing supplier performance.

While supplier performance management is an area that tends
to get neglected, focussing on this area can help you bring down operation costs
drastically.

CAATs provide a decision-making framework that enables you to
identify new areas of synergy and avenues for bringing about operational
excellence.

  • Optimally manage inventory by tracking slow and fast moving goods, measuring loss due to out of stock situations and optimising lead time for a product

  •     Manage vendors more effectively by tracking lead time, fill rate, service levels, customer satisfaction levels and product returns per vendor

  •     Reward performing vendors, improve performance of, or replace non-performing vendors

  •     Negotiate trade promotions to get better deals, longer credit periods and shorter delivery cycles

    Fraudulent sales to customers with dubious shopping records

  •    Identify ways and opportunities to streamline operations, reducing operation costs

  •     Manage supply-related risks and take corrective measures proactively.

Store productivity and benchmarking?:

To survive in today’s ever-changing retail world, it is essential for retailers to understand their business, know their customers, recognise their edge over competition, identify potential for growth, and realise their weaknesses. In an endeavor to stay ahead, retailers are proactively gathering data about how they are performing vis-à-vis market trends and analysing ways to improve and optimise store productivity.

CAATs provide retail operation managers a framework to analyse store performance and productivity.

  •     Reclassify stores by local demographics, competitive density, store locations, size and age

  •     Reclassify merchandising categories based on the relationship between the customer, product and store

  •    Analyse group peer and merchandising assortment

  •     Measure contribution and competence of store employees by monitoring their contribution to total sales

  •     Benchmark, compare and rank peer groups based on metrics like yield per square area and average price per item sold.

Customers?:

Customer data has long been touted as a key determinant in better merchandising decisions; however it is an asset most retailers have struggled to use to its maximum potential. CAATs provide you with the critical platform you need to leverage customer loyalty data, sales transaction data, and store data to improve merchandise planning and tactics.

CAATs unveil hidden relationships between your customer, product and store data sets. These deep and significant insights help you implement key emerging practices such as consumer-centric merchandising, store-specific assortments and micro-merchandising.

Promotion performance :
Analyses plan v. achievement across key metrics in pre-promotion, during and post-promotion periods.

Campaign effectiveness :
Once a campaign is launched, then its effectiveness can be studied across different media and in terms of costs and benefits.

Loyalty analysis :
Provides insights on retention, churn and acquisition of trends across segments.

RFM scoring :
Identifies your company’s best customers based on recency, frequency and monetary value.

Product affinity and market basket :
Product affinity and market basket analysis involves leveraging point -of-sale data to improve business strategies and uncover hidden relationships between products. Point- of-sale data provides insight into the types of products customers typically buy together, the time of year sales for a combination of products go up, destination items that pull customers to the store, and reasons for boost in product sales.

CAATs provide an analytic framework for identifying patterns in customer product purchases and store visits, improving the effectiveness of marketing, sales and merchandising strategies, and understanding links between tactical initiatives like allocation, shelf presentation, promotions, price changes and purchase determinants.

  •     Understand product affinity i.e., identifying products that are likely purchased together

  •     Identify and manage destination items i.e., items that cause a customer to visit your store

  •     Identify seasonal sales trends for items i.e., time of the year when sales for a particular item go up or down

  •     Analyse customer purchase behaviour to understand the role a product plays in a basket i.e., an impulse item or a destination item

  •     Analyse trips by purchase patterns and classifying shopping trips into categories like weekly grocery trips or special occasions

  •     Analyse the impact of promoted products on the overall basket with emphasis on parameters like cross-selling and cannibalisation

  •   Analyse brand affinity, penetration, switching and private label impact

  •     Define baskets that allow you to up-sell and cross-sell

  •     Correlate store performance with overall market performance.

Conclusion :
CAATs create an environment where the process owners can make informed decisions real-time on :

  • Which customer segments are the most profitable ?

  • Which prospects should my campaign target ? When should I communicate with a customer, and how ?

  • Which customers should I spend money on retaining ?

  • To which customers should I cross-sell, and what products ?

We are at the dawn of mature retail analytics for the discerning retail customer.
    

Computer-Assisted Audit Tools (CAATs) — Effective use of CAATs by Audit Firms

Internal Audit

Preface :


Dhruva is a Practice Director — Data Analytics with M/s.
Assurance & Associates. M/s. Assurance & Associates are Practice leaders in the
field of governance, risk management and control analytics for the last 5 years.
In a short span of 5 years this dynamic firm had managed to establish a
footprint in the accounting and finance segment which was the erstwhile arena
for large accounting and audit majors. This fast-paced growth was fuelled by a
small group of ‘razor sharp’ smart professionals who delivered consistent value
propositions to all their clients by riding on the backbone of contemporary
audit technology.

M/s. Assurance & Associates leveraged audit technology like
general audit softwares, audit administration tools and enterprise risk
management applications to deliver above-the-board, high-return results to all
the clients from retail to manufacturing, to logistics and healthcare.

Dhruva was solely responsible for overseeing all data
analytic projects, assignments and academic ventures for the firm.

In a recent meet of mid-rung audit firms, Dhruva was
presenting on the role of ‘The Power of Analytics’ and ‘Analytics made Simple’.
Dhruva spoke firmly, confidently and charismatically about his association with
general audit tools and the outstanding benefits which accrued to him and the
firm over the last 5 years through the power of analytics. There was a twinkle
in his eye as he drew a colorful picture about his journey with general audit
softwares. His oration captivated the audience and laid the foundations for
prolific use of CAATs by all audit firms in the days to come.

Dhruva presented on general audit softwares and their lineage with
manufacturing entities :

Manufacturing companies have many of the standard ledgers;
purchasing and payroll can be key concerns. However, the main business area is
inventories.

Inventories (stocks) and work-in-progress :

There is normally a master or balances file that contains
details of inventory holdings at a particular date. Costs may be held in a
separate file. Transaction history can be particularly useful although file
sizes are often quite large. Selling prices normally have to be picked up from a
separate file.


Tests conducted included, but were not limited to :


Analysis :


  • Age stock by date of receipt



  • Compute the number of month’s stock of each item held, based on either sales
    or purchases. Produce a summary of this information



  • Stratify balances by value bands



  • Statistically analyse usage and ordering to improve turnover



  • Summarise products by group, location, type, etc.



  • Report of products in order of profitability



  • Reconcile physical counts to computed amounts




Calculations :


  • Total the file, providing sub-totals of the categories of inventory



  • Re-perform any calculations involved in arriving at the final stock quantities
    and values

  •  Re-perform material and labour cost calculations on assembled items




Exception tests :


  • Identify and total stock held in excess of maximum and minimum stock levels



  •  Identify and total obsolete or damaged stock



  • Identify any items with excessive or negligible selling or cost prices



  • Identify differences arising from physical stock counts



  •  Test for movements with dates or reference numbers not in the correct period
    (cut-off)



  • Identify balances which include unusual items (e.g., adjustments)



  • Identify work in progress which has been open for an unreasonable period

  •  Identify stocks acquired from group companies



  • Isolate products with cost greater than retail price, with zero quantities or
    with zero prices


Gaps  and duplicates:

  • Test for missing stock ticket numbers
  • Test for missing transaction numbers
  • Identify duplicate stock items


Matching and comparing:

  • Compare files at two dates to identify new or deleted stock lines or to identify significant fluctuations in cost or selling price
  • Compare cost and selling price and identify items where cost exceeds net realisable value
  • Compare value of physical counts to generate ledger amounts
  • Check work orders for accuracy against original sales orders


Other typical areas of tests include:

Cash disbursements:

  • Reconcile intercompany transfers
  • Summarise cash disbursements by account, bank, group, vendor, etc.
  • Generate vendor cash activity summary for contract negotiations


Purchase orders  :

  • Extract pricing and receipt quantity variations by vendor and purchase order
  • Track scheduled receipt dates versus actual receipt dates
  • Identify duplicate purchase orders or receipts without purchase orders
  • Reduce inventory by comparing projected receipts to available stock
  • Analyse late shipments for impact on jobs, projects or sales orders due
  • Reconcile receipts by comparing accrued payable to received items


Work-in  progress:

  • Use net demand  analysis against inventory  and purchase orders to generate a quick material requirement planning report
  • Check work orders, by size, priority, for lease to shop floor
  • Produce  shop floor activity report by any item
  • Generate comparison of planned versus actual labour, materials and time
  • Reconcile job tickets or time cards to work order line items


Dhruva glorified general audit software and its power in working analysis with retail entities:

Retailers often have point-of-sale systems which collect large volumes of useful data which audit tools can analyse. The main tests on inventories are similar to manufacturing companies with perhaps more emphasis on movement, margins and shrink-age.

Additional  tests include:

  • Gross profit  analyses
  • Items past  their shelf life
  • Comparisons between stores on holdings and inventory turnover per product line
  • Price adjustment transactions


Other typical areas of tests include:

Cash  disbursements:

  • Monitor  cash disbursements for stores
  • Track cash disbursements for contractor and vendor services
  •  Summarise cash disbursements by account, bank, group, vendor, etc.


Loss prevention:

  • Compare ‘No Sale’ transactions to cash voided transactions by associate
  • Identify stores with significant allowances
  • Isolate duplicate return transactions
  • Identify  incomplete exchange  transactions
  • Look for check purchases and refunds within 15 days
  • Find credit card purchases and refunds to different credit cards (same day)
  • Identify potential fraudulent or improper transactions through selling price differences between stores


Purchase order management:

  • Reconcile order received to purchase order to identify shipments not ordered
  • Extract pricing receipt quantity variations by vendor and purchase order
  • Track scheduled receipt dates versus actual receipt dates
  • Compare vendor performance by summarising item delivery and quality


Compare accrued payable to received items to reconcile to general ledger

Distribution and  Service:

Typical areas of tests include:

Sales  analysis:

  • Generate sales/profitability reports by sales representative, product, customer
  • Recap product sales by region, customer, category, etc.
  • Identify high volumes by region, customer, category, etc.
  •  Extract all sales data for audit by customer, product, region, etc.
  • Compare ratios of current sales to open receivable (high-low; low-high)
  • Summarise shipments by warehouse for product distribution analysis


Sales order  control:

  • Report on correlation between items shipped and items ordered
  • Analyse open orders and open invoices by customer for credit control
  • Isolate detail and average backlog by customer, item, location, etc.
  • Reconcile booked items to inventory reserved (on hold) items
  • Control profits by calculating line item margins before shipment
  • Analyse product demand by summarising products ordered by due date


Service  management:

  • Create real-time service tracking reports in any format to manage fieldwork
  • Co-ordinate multiple service personnel to maxi-mise performance in real time
  • Quickly recap routes and times of service calls by employee, area, etc.
  • Compare arrival and service times for field service representatives
  • Calculate cost of service by call for labour, materials and transportation
  • Compare service report time to time-sheet hours from payroll


Dhruva exemplified general audit software and their relevance to the healthcare segment:

Typical areas of tests include:

Accounts receivable, Patient billing and Managed care:

  • Calculate average days from discharge to bill, bill to payment, by payer or department
  • Determine appropriate level of contractual allowance and doubtful accounts reserves
  • Age receivables on date of service rather than invoice date to recalculate cash flow
  • Analyse rejected payments by financial class, procedure code, cost centre
  • Evaluate  managed care payer  performance
  • Identify  underpaid  managed  care accounts
  • Determine profit margin by physician, financial class, etc.


Charges:

  • Identify late charges by department, by month, etc.
  • Look for invalid, high dollar or duplicate charges on patient bills
  • Look for lost charges by matching supplies used to supplies billed
  • Check procedure codes and billed charges to identify inappropriately billed charges
  • Clinical subsystems:
  • Compare patient visit data on clinical sub-systems to patient master
  • Identify  interface  failures
  • Identify pricing discrepancies between sub-systems and master


Marketing:

  • Develop patient statistics by post codes or other demographic data
  • Look for incomplete or miscoded patient demographic information
  • Identify profitable segments of patient population

Materials  management:

  • Analyse usage and ordering to improve inventory reordering
  • Report on stock and high-value balances using any selection criteria
  • Identify obsolete inventory by turnover analysis
  • Compare speed and accuracy of delivery by product and vendor
  • Profile supply usage by month, by department, etc.

Medical claims :

  • Analyse timeliness of claims payments by comparing claim date, date claim received, and date claim paid
  • Look for duplicate billings and claim payments based on patient, provider, date of service and amount


Medical records  :

  • Identify duplicate medical records for same patient
  • Track diagnosis coding deficiencies, incomplete records, etc.
  • List incomplete records and incompatible coding
  • Report on procedure codes by physician, department or patient


Specialists:

  • Determine specialist! doctor contract compliance
  • Evaluate specialist! doctor practice history by patient type, payer, etc.
  • Report on incomplete specialist! doctor profiling information


Purchase    order  management:

  • Report on purchasing performance by location
  • Identify pricing and receipt quantity variations by vendor and purchase order
  • Identify duplicate purchase orders and receipts without purchase orders
  • Reconcile receipts by comparing accrued payables to received items


Compare vendor performance by summarising item delivery and quality

Brilliant ending:

Dhruva received a standing ovation from the group. He ended his presentation in all humility by citing that General Audit Tools are time-tested, stable, robust, powerful, internationally acclaimed and user-friendly applications. He added that no Tool is a ready substitute for the auditor’s acumen and judgment, but is a powerful, cost-effective facilitator. He encouraged all the members present to embrace Tools and reap the benefits of an idea whose time has come.

Agricultural Land Laws – I : MLRC, 1966

Laws and Business

1. Introduction :


Land laws are a species in themselves. Even within land laws,
laws relating to agricultural land can be classified as a separate class. One
comes across numerous terms and concepts while dealing with agricultural land,
e.g., NA Land, Land Ceiling, Land used for bona fide industrial use, etc. It is
quite common for agricultural land to be converted into non-agricultural land
and being used for industrial purposes or being used for real estate
development. However, it is very important that the correct process is followed
while dealing with agricultural land or else there is a risk of land being
acquired by the Government. Several real estate developers have suffered because
the correct process was not followed. Through a series of articles over the next
few months, I propose to explain the important concepts under some of the key
laws relating to agricultural land.

Agricultural land in Maharashtra is governed by several Acts,
the prominent amongst them being the following :

(a) Maharashtra Land Revenue Code, 1966 applicable to the
State of Maharashtra.

(b) Bombay Tenancy and Agricultural Lands Act, 1948 —
applicable to the Bombay Area of the State of Maharashtra and State of
Gujarat, i.e., the whole of Maharashtra and Gujarat except Marathwada (Latur,
Nanded, Aurangabad) and Vidarbha (Nagpur, Akola, etc.) regions.

(c) Maharashtra Agricultural Lands (Ceiling on Holdings)
Act, 1961.





In this Article, we will look at the Maharashtra Land
Revenue Code, 1966 (‘Code’) which deals with the law relating to
agricultural land and land revenue in the State. Land revenue is an important
source of revenue for State Governments.

2. Revenue areas and officers :


2.1 For ease of administration, the Government has u/s.4 of
the Code divided the State into various revenue areas.

2.2 Under the Act, the State is divided into divisions,
e.g., the city of Mumbai along with its suburbs constitutes one division.
Similarly, there is the Aurangabad Division, Pune Division, Nagpur Division,
etc.

Each division consists of one or more districts,
including the City of Mumbai. Each district may consist of one or more
sub-divisions.

Each sub-division may consist of one or more
talukas.


Each taluka consists of certain villages. A
village includes a town or city and all land belonging to a village, town or a
city.

A group of villages in a taluka constitutes a saza.
The saza may consist of up to eight and in some cases 15 villages. It is a
function of administrative convenience, population, etc.

2.3 Accordingly, the Government has created the following
revenue areas :

(a) Divisions

(b) Districts

(c) Sub-Divisions

(d) Talukas

(e) Sazas

(f) Revenue Circles

2.4 Based on the revenue areas, the Government has created a
hierarchy of various revenue officers for the administration of various matters,
for the assessment and collection of land revenue, for conducting surveys,
maintaining accounts, records, etc. The hierarchy of officers is as follows :

  •  Divisional Commissioner/Additional/Assistant Divisional Commissioner.


  •  District Collector/Additional/Deputy Collector which are appointed for
    each district and who is in charge of the revenue administration of a
    district.


  •  Taluka Tahsildar/Naib-Tahsildar/Additional Tahsildar in charge of each
    taluka and who is the chief officer entrusted with the revenue administration
    of a taluka.


  • Circle Officers/Inspectors for each Circle


  •  Talathis for each saza


  • Kotwals for each village or group of villages


The Code lays down the powers and functions of each type of
revenue officer.

3. Title of lands :


3.1 U/s.20, all public property, e.g., roads, bridges, etc.,
and land which is not the property of persons legally capable of holding
property is declared to be the property of the State Government and
vests in it. Hence, any land which, under law, is not owned by any person, who
under law can own such property, would be the subject-matter of this Section.
The Collector is empowered to deal with and dispose of all such land in any
manner as he deems fit, subject to the Commissioner’s orders. Thus, any land
held by a person who, by virtue of any statute is capable of holding property in
its own name, e.g., by companies, major individuals, etc., would be excluded
from the operation of this Section. Thus, any land which is not the property of
others would vest in the State Government.

3.2 The Collector may by issuing a notice and following the
due process claim any property by or on behalf of the Government. This order is
subject to one appeal and revision under the Code.



4. Types of land and holders :



4.1 Land can be classified into two types :


(a) Alienated — means that which is revenue-free and
is owned by any person. Thus, no revenue is payable to the Government. This
would include land such as imans and watans.

(b) Unalienated — land other than alienated land.
This is the regular land which is subject to land revenue assessment.

4.2 The land holders can be classified as given in Table
below.

5.    Land records:
5.1 One of the important provisions dealt with by the Code is the maintenance of the Land Records in respect of various lands.

Table 1: Types of land holders

Type

Govt. Lessee

Tenant

Holder

Occupant

 

 

 

 

 

 

 

Meaning

Unalienated
land leased by

Lessee
of land includes

Person
holding

Person
holding

 

 

the Collector to any person

a mortgagee of tenant’s

alienated land

unalienated land and

 

 

on such terms as deemed fit

rights with possession,

 

excludes a tenant or

 

 

by the Collector

but not a lessee holding

 

a Government lessee

 

 

 

directly under the State

 

 

 

 

 

Government

 

 

 

 

 

 

 

 

 

Classes

Could
be classified

—

—

Occupants
are

 

 

as Class III

 

 

further divided into

 

 

 

 

 

Class I and Class

 

 

 

 

 

II depending upon

 

 

 

 

 

since when they are

 

 

 

 

 

holding the land

 

 

 

 

 

or the restrictions

 

 

 

 

 

placed upon their

 

 

 

 

 

holding

 

 

 

 

 

 

 

Whether-

Under
general law, a lease

No
express provision.

Yes,
since he is an

Yes,
S. 36 of the

 

Heritable

is inheritable. However, if

However, in Shriman-

absolute holder

Code provides for

 

 

the terms and conditions

tibai Nargude v. Bhimrao

 

the same

 

 

provide otherwise, then

Nargude, 2009 (1) Bom

 

 

 

 

the same would prevail

CR 265 it was held that it

 

 

 

 

 

is inheritable

 

 

 

 

 

 

 

 

 

5.2    Record of rights:

For every village a record of rights would be maintained which would contain the following particulars:
(a)    Names of all persons who are holders, occupants, owners, tenants, owners, mortagees of the land or assignees of the rent or revenue from it
(b)    Names of all Government lessees or tenants
(c)    Nature and extent of respective interest of such persons and the conditions or liabilities, if any
(d)    Revenue or rent payable by such persons

Thus, all rights, interests and liabilities qua a piece of land are recorded in one document. These records are maintained by the Talathi of each village.

5.3 If any person acquires any right by virtue of succession, survivorship, inheritance, purchase, partition, mortgage, gift, lease, etc., in any land, then he must give a notice of the same to the Talathi within three months of such event.

The Talathi would then enter such changes in a Register of Mutations which would alter the original record of rights.

5.4 Any person buying land especially in a rural or semi-urban area would be well advised to do a thorough title search by checking the Record of Rights, Register of Mutations, etc., which would show whether or not the land in question is an agricultural land, who is the owner, what important developments have taken place in respect of the land, etc.

5.5 In the next Article we shall look at the process for converting an agricultural land into a non-agricultural land.



Accounting for life

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Namaskaar

‘If I am not for myself, who will for me’

— Anon

We as accountants always deal with ‘accounting for business’.
In other words, we act as book-keepers of economic activity and at the end of a
given period draw up a ‘profit and loss’ account which exhibits the operational
results for a given period and a balance sheet on a given date — which exhibits
the assets and liabilities of the entity.

The questions which I have for all of us and
myself are :




– Do we apply the same principles to our own life ?



– Do we prepare a profit and loss account and a balance sheet of our life ?



In other words, do we do ‘accounting for life’ ? It
means do we pause to introspect. I believe that for the purposes of preparing a
profit and loss account and the balance sheet of our life, we need a generous
use of ‘introspection’. To go through our memory lane with ‘truthfulness’ to
give a ‘true and fair’ view of ourselves to ourselves.

What is required to do this ? I think and believe we need to
:

1. take stock of our relationships. How have we handled our
relationship with our parents, spouse, children, friends, acquaintances and
clients. We have to ask ourselves :




– have we discharged our duties simply or with care.



– have we ignored our obligations.



– have we treated every relationship as a transaction.



– do we feel obligated.



2. take stock of our response to the needs of society. How
have we responded to our social obligations. It is a debt we owe.

Let us remember that :




– Our relationships, whether at home, at our work place or otherwise, are
both our capital and assets and need constant care.



– What we take and receive is a debt we incur which has to be repaid : for
example,



– the love we receive from our parents, children and friends.



–  the support we receive from our clients, and



– the resources of society we use.



Friends, let us take out time to prepare our own profit and
loss account and balance sheet. Let us do this ‘accounting for life’. This
accounting like all accounting will enlighten us. It will help us to forget and
forgive and at the same time remind us to be grateful and enable us to live our
life in a sense of ‘gratitude’. It is an exercise to improve ‘myself’.

The question is : have I done this ‘accounting for
life’ ? Yes, I have attempted it and the result is that I am in ‘deficit’.
Despite being in ‘deficit’ the one account that I have settled is seek
forgiveness of those who have felt hurt by my words or actions, by forgiving
those by whose words or actions I have felt hurt. I accept I have received more
than I have given. I have been singularly fortunate in most of my relationships
— my god, guru, relatives, friends and clients. I am grateful to my
‘preceptor’. In short, I owe a huge debt of gratitude. I conclude by quoting
‘Mereez’

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Learning to pray

Mayur Nayak in two excellent articles taught us that ‘Prayer Makes One Complete’. I would like to share a few thoughts on the subject of Praying.

What is a prayer ?

    Let us understand what a ‘prayer’ really is and what it is not. Prayer is conversation with God. It is when we open our heart and talk. It is not raising a charter of demands or submitting a list of wishes to God. In a prayer one does not go to God with a begging bowl. Prayer is essentially an expression of our gratitude to God Almighty.

When does one pray ?

    In my younger days, I came across this couplet which has left a lasting impression on my mind :

    How true ! Only when we face difficulties in our lives we look up to God and remember Him. Never when we are happy.

    Personally I have remembered Him in my happy days, and that has really rewarded me with ‘mental peace’.

    Kahlil Gibran says,

    “You pray in your distress and your need,

    would that there might pray also in the fullness of your joy and in your days of abundance.”

    The right time to pray then is now, whether you be happy or unhappy.

When to start praying ?

    A question may arise as to what is the age when one starts praying. Is it only meant for old and aged people ?

    Adi Shankaracharya laments in ‘Bhaj Govindam’ that,

    “In the boyhood one is attached to play; in youth to sense objects, in old age one is obsessed with anxiety. At no age one is attached to the Supreme.”

    Hence I believe : the right time to pray is now, whether one be happy or unhappy, young or old. Whatever be our age we must pray. Tomorrow might be too late.

How should one pray ?

    Our prayer must be with faith, trust, and confidence in God that He will look after us. He will do what is best for us. There is a bhajan, a favourite of Mahatma Gandhi, which very lucidly express this :

    We must give over the reins of our lives in the hands of God, and know that He will do what is best for us. We must pray with full faith in Him. We must understand what faith means.

    In words of St. Augustine

    “Faith is to believe what you do not yet see; the reward for that faith is to see what you believe.”

    As Wayne Dyer puts it “You will see it when you believe it.”

Where does one pray ?

    And where does one pray to God ? Where does one find Him ? We confine our prayers to temples and mosques, churches and gurudwaras, as if God stays only there ! Gurudev Tagore answers it beautifully as under :

    “Leave this chanting and singing and telling of beads! Whom dost thou worship in this lonely dark corner of a temple with doors all shut ? Open thine eyes and see thy God is not before thee !

    He is there where the tiller is tilling the hard ground and where the path maker is breaking stones. He is with them in sun and in shower, and his garment is covered with dust.”

    The lines of the song from Yatrik come to my mind :

    So let us look for Him within and find Him in our hearts. He is very much there within all of us.

    Let us then start praying right now in the right manner and at the right place. We must always continue to pray and thereby attain eternal peace.

Realising our dreams

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Namaskaar

The end of man is an action and not a thought.


— Thomas Carlyle

All of us have wonderful thoughts and grand dreams of what we
wish to do. The sad part is that we are somehow unable to put our thoughts into
action and our dreams remain unfulfilled. We are unable to translate our ideas,
our pious intentions, our noble plans into action. Hence, wishes remain only
wishes, they just remain unfulfilled dreams. While there could be justification
in case of people who die young and who did not get time to act on their
thoughts, for most of us who live up to ripe old age there is no justification
whatsoever.

Some of the possible reasons for our not taking action are :

  • we always believe that there is ‘a tomorrow’ which unfortunately never comes. We
    procrastinate.


  • we are shy of stepping out from our comfort zone.


  • we are scared of the unknown.




It is true that when we act we may fail, but fear of failure
should never be the reason not to act. There are two kinds of failures — those
who thought and never acted — and those who acted but failed. One would rather
be the second type of failure than the first. I am reminded of what Shakespeare
said :

“It is better to have loved and lost rather than not to
have loved at all.”


When one looks back at life, one finds that most of our
regrets are for actions not taken. Brilliant thought, noble intentions, grand
plans and magnificent goals all remain within us, like buds which never
blossomed into flowers. It takes a lifetime for us to understand that the
smallest of action is always better than the noblest of intentions. We have to
make a start, convert our dreams into goals, and take action to fulfil our goals. Without action,
dreams are useless. Nothing can be achieved by merely having wishes and good
thoughts. There is a well-known subhashit which is as under :

“Goals can only be achieved by action, not merely by
having grand ambition. Even the deer do not enter the mouth of a sleeping lion.“

There is a story of a person who every day went to the temple
of Hanuman, and asked for rupees ten lakhs. This went on for quite some time,
till Hanuman lost his patience. He appeared and gave the devotee a hard
resounding slap and said :

“If you want ten lakhs, at least buy a lottery ticket ! Do
not expect me to do that for you !”


We have to wake up and be bold, learn to take risks and act
to realise our dreams and achieve our goals. We have to act. A ship would be
very safe in the harbour, but that is not what it is meant for. As Andre Gide
has expressed it :

“Man cannot discover new oceans unless he has the courage
to lose sight of the shore.”


Putting it in a language we accountants can easily relate to,
there is a wide gap between what we are capable of and what we actually attain.
I have always felt that in our case our actual ’production’ is far less than our
installed capacity. I would dare say that our actual production seldom exceeds
20% of our installed capacity. If we take the right action and raise this even
to 30%, our world would be a much better place to live in than it is today. By
taking action on our dreams we have the capacity to bring heaven on earth. Hence
let us act. I would conclude by quoting Vivekananda :

“Arise ! Awake ! And stop not till the goal is reached.”

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Is it fair to give a discriminatory treatment to co-operative banks in respect of losses in amalgation ?

1. Introduction :

    Co-operative societies and co-operative banks have made invaluable contribution to the socio-economic development of our country, particularly in rural area. This form of organisation is typically suited for the not-so-educated masses of our country. Agriculture, sugar, dairy and even in the credit sector, the co-operative societies have performed well. These co-operative credit societies and banks are indispensable since commercial banks may not afford to cater to the tiny borrower. Admittedly, there are problems of lack of professionalism, political interventions, mismanagement and so on. But then the so-called urban corporate sector is also not immune to such menaces. Pandit Nehru had rightly said “Co-operation has failed, but co-operation must succeed.”

    In the economy, losses and sickness are quite common. S. 72A was inserted in the Income-tax Act, 1961 way back in the year 1977. It was welcomed and since then it has encouraged amalgamations by protecting unabsorbed losses and depreciation. Further, S. 72AA was inserted in the year 2005 to make special provision for banking companies in ‘certain cases’, although the banking companies had been very much covered in S. 72A. Against this background, I wish to highlight the provision of S. 72AB introduced in the year 2008 in respect of co-operative banks.

2. The unfairness :

    2.1 S. 72A provides that in the event of amalgamation of companies, the losses and unabsorbed depreciation of amalgamating company shall be treated as the losses and depreciation of the amalgamated company as if the same were the losses of the previous year in which the amalgamation took place. There is similar provision for banking companies in S. 72AA. The fresh carry forward begins from the year of amalgamation.

    2.2 However, S. 72AB grants a restrictive benefit. Here, the carry forward of losses and depreciation of the predecessor bank is allowed as if amalgamation had not taken place. Thus, unlike in the case of companies, the carry forward would get restricted only to the unexpired period out of the eight years permitted u/s.72.

    2.3 Further, Ss.(5) of S. 72AB states that the period commencing from the previous year and ending on the date immediately preceding date of business re-organisation and period from the date of business re-organisation to the end of previous year are to be considered as two previous years for the purpose of carry forward and set-off of loss and unabsorbed depreciation. No such provision appears in S. 72A or S. 72AA. The implication of this provision is that current year’s business loss up to the date of reorganisation cannot be set off by successor co-operative bank against income under other heads u/s.71. As against this, S. 72A and S. 72AA provide that the accumulated loss of predecessor is considered as current year’s loss of successor and hence benefit of S. 71 is available to successor in the year of succession even for the loss of the years prior to the year of succession. Thus, S. 72A and S. 72AA confer the benefit of S. 71 even to prior year’s loss, whereas S. 72 AB is taking away such benefit even for current year’s loss till the date of succession ! ! !

    2.4 It needs to be appreciated that by taking over the liabilities of the loss-making bank, the successor co-operative bank renders a great social service by giving comfort to thousands of small depositors. If commercial banks and companies get the benefits of merger, co-operative banks deserve it all the more.

    2.5 Hence, the law needs to be amended to bring the provisions for carry forwarded of loss and depreciation on par.

Is It Fair to deny exemption u/s.54/54F merely because the new house is in joint names ?

Is It Fair

Introduction :


It is an admitted fact that
after the disintegration of joint families, we are becoming more and more
individualistic. Nevertheless, even today, although in a nuclear form, the
family system is still surviving. The social and legal systems still recognise
the concepts of family members, close relatives and particularly, the sanctity
of relationship between husband
and wife.

Even today, the family and
especially men feel a psychological comfort by having a residential house in
their wife’s name or at least, add her as a joint holder. It is a different
matter that such holding by the wife is often used for so-called tax-planning,
in a crude manner.

Even the provisions of the
Benami Transactions (Prohibition) Act, 1988, protect the holding of property in
a spouse’s name [refer S. 3(2)]. The Income-tax Act also expressly protects
certain transactions from taxability (e.g., S. 56 — gift from relative) or
indirectly recognises the importance of close relations (in a negative way) in
terms of S. 64, S. 27, S. 40A(2), etc. Needless to state that in
‘jurisprudence’, ‘custom’ is regarded as a primary source of law.

Against this background, it
is a matter of grave concern that the Income Tax Department is now denying
exemption u/s.54/54F merely on grounds that the new house is purchased in joint
name with the spouse !

The unfairness :

In a typical case, the asset
sold is in the single name of the husband. He invests the sale proceeds in a
residential house and in the agreement to purchase, he adds his wife’s name as a
joint-purchaser.

The money flow of sale
proceeds and purchase price can easily be traced and established. The husband
shows the house in his balance sheet as his asset. He declares income from house
property, in his return of income only. No part of the house or income is
included in the return of wealth or income of the wife. Yet, the Income Tax
Department raises an objection that since a joint interest is created, the
condition that the ‘assessee should purchase a residential house’ is not
satisfied!

Not only this, but the
exemption is denied even for the purchase of a part of the house.

The relevant cases are
discussed in the succeeding paragraphs.

Case Law :

Readers may be aware that in
the past, the judiciary was very much favourable to assessees in this regard.
There are decisions that not only the joint name, but even purchase in the
exclusive name of the wife would also be eligible for exemption u/s.54 or
u/s.54F.

At the same time, the
extreme view that the purchase even in a stranger’s name would also be eligible
is difficult to digest. It is too legalistic an interpretation that the Section
merely says ‘purchases or constructs’; and is silent about the name in which it
should be acquired.

The Mumbai Tribunal has held
it against the assessee (case of ITO v. Shri Niranjan Singh Bajaj, ITA
No. 2040/Mum./2006). The Members have placed reliance on a Bombay High Court
decision in the case of Prakash s/o Timaji Dhanjode v. ITO, 312 ITR 40.

However, the facts in the
Bombay High Court decisions were materially different. There, an 86-year-old man
purchased the house in his major stepson’s name with an express intention of
giving the house to the son. This cannot be equated with a purchase of a house
in the joint name with wife. The reasons are obvious :

(i) In terms of S. 27(i),
the assessee (husband) alone is deemed to be the owner of the house.

(ii) The Department’s
objection that at the time of sale, wife’s signature will be required and she
will be entitled to a half share is also taken care of by S. 64. The capital
gains will be taxed in the hands of the husband only.

(iii) There are many other
judicial decisions granting exemption and approbating purchase in joint names.
And with respect, it can be seen that even the Bombay High Court decision (312
ITR 40) is also based on the particular facts of that case.

It would be unjust and
unfair to generalise the decision.

The Punjab & Haryana High
Court in the case of CIT v. Gurnam Singh, 327 ITR 278 has also taken a
favourable view recently.

In the following decisions
also, exemption has been allowed to the assessee for investment in the
sole/joint name with wife :

(1) CIT v. V. Natrajan,
287 ITR 271 (Mad.)

(2) ITO v. Smt. Saraswati
Ramanathan, 116 ITD 234 (Del.)

(3) JCIT v. Smt. Armeda K.
Bhaya, 95 ITD 313 (Mum.)

Suggestions :

In the context of S. 27, S.
64 and having regard to the social custom, and also considering the fact that
the Bombay High Court gave the decision in a different context, the exemption
u/s.54/54F should not be denied merely because the purchase is in joint name
with spouse. Law should be clarified or the CBDT should issue a Circular to
avoid unnecessary and avoidable litigation.

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Is it fair for the draftsmen to draft provisions that lack clarity and assertion ?

Is It fair

1. Introduction :


Our legislative process involves various stages — viz.
introduction of the Bill, deliberations (if any) in the Parliament and then the
Bill with amendments, if any, which is passed is assented to by the Hon’ble
President. It is our experience that the Bill, on its introduction, is heatedly
debated upon among tax practitioners. How many of the suggestions resulting from
the debate reach the Finance Minister, and thereafter how much time the
Parliamentarians spend on it, are in the realm of conjecture. And finally, what
comes out as the ‘Act’ may be altogether at times contrary to what the FM states
on the floor of the House. Therefore, it is questionable as to what
extent the legislative intent really gets reflected in the provisions that
become law. In this article, I propose to draw the readers’ attention to some of
the provisions which become almost ineffective since they are worded in a vague
and un-assertive language.

2. Instances of vague wordings :


2.1 S. 50C Ss.(2) :


Without prejudice to the provisions of Ss.(1), where :

(a) the assessee claims before any AO that the value
adopted or assessed by the stamp valuation authority U/ss.(1) exceeds the fair
market value of the property as on the date of transfer;

(b) the value so adopted or assessed by the stamp valuation
authority U/ss.(1) has not been disputed in any appeal or revision or no
reference has been made before any other authority, Court or the High Court,

the Assessing Officer may refer the valuation of the
capital asset to a Valuation Officer and where any such reference is made, the
provisions of Ss.(2), (3), (4), (5) and (6) of S. 16A, clause (i) of Ss.(1)
and Ss.(6) and Ss.(7) of S. 23A, Ss.(5) of S. 24, S. 34AA, S. 35 and S. 37 of
the Wealth Tax Act, 1957 (27 of 1957), shall, with necessary modifications,
apply in relation to such reference as they apply in relation to a reference
made by the Assessing Officer under Ss.(1) of S. 16A of that Act.

Now, the ambiguities are :



  • The word used is ‘may’. That means there is no obligation on the AO ?



  • The apparent meaning is that AO can refer to DVO only at the instance of the
    assessee. But it is not so stated categorically; and the I.T. Department is
    referring the cases to DVO in an arbitrary manner.



2.2 S. 154(8) Rectification :



Ss.(8) of S. 154 provides that the authority shall pass an
order within a period of six months from the end of the month in which the
application is received by it :

(a) Making the amendment; or

(b) Refusing to allow the claim.


Now, it is not clear as to what happens if the authority does
not pass any order. And in almost all the cases this is the reality !

2.3 Ss.(2) of S. 12AA. It reads as follows :


Every order granting or refusing registration
under clause (b) of Ss.(1) shall be passed before the expiry of six months from
the end of the month in which the application was received under clause (a).

But it is silent as to the consequences of failure to pass
the order. However, the Bangalore Tribunal in Karnataka Golf Association v.
Deputy Director of Income Tax, (2004) 91 ITD 1 has held that if no order is
passed within the stipulated time, registration is deemed to have been granted.

2.4 Ss.(6A) of S. 250 :


It is reproduced below :

(6A) In every appeal, the Commissioner (Appeals), where it
is possible, may hear and decide such appeal within a period of one year from
the end of the financial year in which such appeal is filed before him under
Ss.(1) of S. 246A.


Conclusion :

It is not enough that an obligation is created on the
authorities. It should be coupled with a remedy in the hands of the assessee for
non-observance of the provisions on the part of the authorities.

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Completion of ‘Four years of Right to Information Act’

Lecture Meeting

Subject : Completion of ‘Four years of Right to
Information Act’ — A meeting organised by BCAS jointly with IMC and P.C.
Governance Trust

Venue : I.M.C. Hall, Churchgate, Mumbai.

Date : 12th October, 2009


Part-A :

A brief report on proceedings of the meeting.

On 12th October, 2009 the BCA Society, Indian Merchants’
Chamber and P. C. Governance Trust jointly organised the above meeting in
which many august institutions and NGOs in the city participated in
celebrating the Fourth Anniversary of Right to Information Act introduced on
12th October, 2005.

(1) The meeting started with opening speech of Julio
Rebeiro representing, Indian Merchants’ Chamber. The speaker outlined the
objective and purpose of the Act and gave valuable suggestions on strategy to
be adopted for effective implementation. He expressed his satisfaction that
not only masses in cities but also in villages are becoming aware of the
utility of the Act, which will help in checking corruption and will make Govt.
authorities accountable and answerable.

(2) Narayan Varma representing BCAS Foundation said that
his Foundation has started RTI Clinic and is attending through telephone
service the complaints and grievances of the members of public. The Foundation
publishes articles in newspapers, writes books, articles and publications
which are widely appreciated. He stressed the need to make public movement
more effective.

(3) Anand Castolino of Bombay Catholic Sabha, informed that
his institution organises many meetings in various parts of city of schools
and college students, senior citizens and many others. The persons attending
the meetings participate actively. Every week, clinic is held in the Mahim
office to help persons suffering in hands of corrupt and irresponsible Govt.
authorities.

(4) Paramjeet Singh explained work done by his Dharma RTI
Mission. His concern has established Help Centres aided with computer and
other equipments. The RTI Help Centre is focussing on collecting information
from schools, colleges about non-receipt of Govt. grants and provides
assistance in filing applications. The slum areas in Govandi are also visited
where meetings are held of residents to register their grievances. These are
then forwarded to concerned offices and are followed up thereafter.

(5) Ashok Ravat represented Forum of Free Enterprise, M. R.
Pai Foundation and N. A. Palkhiwala Memorial Trust. He complained about the
road blocks created by administrative persons in replying the applications
filed. The authorities invariably try to take shelter u/s.8 of the RTI Act to
avoid giving answers to questions raised and to furnish details. He informed
that Books, Guides and Information materials are published explaining various
provisions of the Act and Rules. The forum of free Enterprise is also keeping
in touch with Bank Depositors Association. Instances of frauds on depositors
by private banks and co-op. banks have become rampant. Unfortunately a
favourite plea is put forth by those Banks that they are outside the scope of
the Act. He stressed the need to remedy this unfortunate position. Another
road block put in by Govt. authorities is the common plea that the question
does not fit in definition of information. To overcome this, his organisations
are advising those applicants to approach State Information Commission since
S. 81 empowers the Commission to investigate into complaints.

(6) Mr. Rasikbhai representing Tarun Mitra Mandal, reported
that his organisation is conducting various seminars, programmes in Mumbai,
Thane and Navi Mumbai to train public on use of RTI Act effectively. His RTI
centre assists public in drafting applications, appeals and other procedural
matters for better implementation.

(7) The above representations were followed by short
lectures of a few students of law college.

In concluding remarks, the Chairman expressed satisfaction
that the movement is gathering momentum. He hoped that there will be proper
reciprocation from authorities in Govt. and public sector undertakings to make
the legislation meaningful and will bring transparency and will reduce
corruption. Hon. Justice Dhananjay Chandrachud was then requested to enlighten
the audience on this occasion.

Part-B :


Speech of Hon. Justice Dhananjay Chandrachud, Mumbai High
Court

The Hon. speaker said that the society should look to the
legislation not as a tool to raise issues but should consider it as a
movements and as an effective tool to achieve goal of transparency, efficiency
and should inculcate a spirit of social commitment amongst Public servants. It
should become a new way of life, an awakening in the society. It should
replace the apathy, the indifference in the heart of a citizen and should
encourage him to raise his voice against malpractices, which will improve
radically the functioning of Public bodies. The act will replace scepticism
with optimism, will replace apathy with active interest, will replace feeling
of absence of power with sense of actual power. It will encourage involvement,
by shedding indifference and alienation. It will replace the governance from
the hands of administrators into the hands of subjects who are the
beneficiaries. The reports that are published about the issue of non-receipt
of pensions, non- receipt of ration cards, distribution of lands to landless,
issues concerning Aanganwadi, Balwadi and variety of issue concerning
millions.

The Hon. speaker shared his experience on many of those
issues coming before the judiciary, where the judiciary could realise the hard
reality about the injustice done to the subject, by administrators.

Hon. Justice Chandrachud stressed, that there can be no
development without empowerment. Both are interwoven providing information
about governance is a sure way to empower the citizen in quest for
development.

‘At basic level, the right to information provides access to information. It is a means to an end and not an end in itself. There is a much deeper meaning in right to information. It means governance, which makes administrators realise their accountability to society. Though today we are at the threshold, the efforts should be in the direction of attaining the goal at availing access freely without barriers. Dealing with issues concerning judiary, Hon. Chandrachud said that de-regulation is becoming a Mantra of the day, in process of greater involvement of private sector. Impact of liberalisation or deregulation. Right to know is a constitutional right and the same cannot be abrogated confining the scope of the Act only to Govt. administration or public bodies.

Definition of Information given in the Act, covers information relating to any private body which can be accessed by a Public authority under any other law for the time being in force. Therefore, according to Hon. speaker, what can be accessed by Public authority can be accessed by any individual citizen also. Therefore, though the implementation is presently focussed on Public governance or Public officials, it has to be extended to private governance in course of time.

The implementation will have to be carried out at two different levels. Firstly, creating awareness of right in all stratas of society in Urban and Rural areas. It should be institutionalised by going beyond individuals. Their experiences should be shared. For easy and quick access the speaker said that the judicial Dept. has developed a software to have quick reference to pendancies of cases before the Court. Taking it as sample, softwares can be developed to have an access to statistics about issues regarding disposal of pending applications, subjectwise areawise, the information as to whether Appeals are disposed of expeditiously or not and other administrative issues. Mechanisation of operations in every part of functioning will greatly help attaining process of transparency and administrative efficiency. S. 8 of the Act is misused by authorities to deny access to information. But unless the information is of commercial confidence or related to national security, the access can not be denied. We need an era, where disclosure must be the norm and suppression of information should be an exception. It is only then the goal of having a free society with informed citizens can be attained.

The meeting terminated with a vote of thanks to Hon. Justice Chandrachud and to all dignitaries representing activist organisations for actively participating in the meeting.

Foreign Investments in Real Estate

Lecture Meeting

Subject : Foreign Investments in Real Estate



Speaker : Rajesh Kapadia, Chartered Accountant,


Past President, BCAS


Venue : I.M.C. Hall, Churchgate, Mumbai.



Date :
16th July 2008








(1) While reviewing the trend of prices of real estate over
the past three decades and while identifying the reasons for spurt in real
estate prices year after year, the speaker Mr. Kapadia candidly observed that
apart from other economic factors the main cause is the utter failure of the
Urban Land Ceiling Act, 1973 in attaining the declared objective for which it
was enacted. The objective of controlling the rising prices and bringing rates
of residential flats within reach of common man failed miserably. During the
period of emergency in the country and a few years thereafter, the prices of
residential flats were in the range of Rs.70 to Rs.80 per sq.ft. in South
Mumbai. Between 1986 to 1993 the prices remained fairly stable.

(2) After 1995 there is unprecedented rise in real estate
prices year after year. Now a new trend has emerged amongst the class of
developers of specialising in different categories, such as construction
projects for residential complexes, commercial spaces, hospitality i.e.,
hotels, industrial parks, malls and similar projects.

(3) To regulate the development projects, the regulating
authorities issued two Press Notes. But even these Press Notes excluded certain
categories from its purview e.g., Press Note 2 does not deal with
industrial park developments, which comes under automatic route. Similar
position exists in cases of development of warehousing, hotels, etc.

(4) As regards regulating the provisions applicable to
foreign investment in real estate developments, the speaker said that there are
four or five segments available to foreign investors who are either NRIs or
foreign venture capital investors or foreign institutional investors. For each
of these categories there are different norms.

(5) Regulations prohibit participation of foreigners in real
estate business as traders per se. However, real estate business does not
include development of townships, construction of residential and commercial
premises, roads, etc.

(6) On following two dates viz. 6th July 1991 and 3rd
March 2005, drastic changes were introduced in regulations which have made the
real estate business an attractive proportion to foreign investors. From 12th
January 2005 the permission of Govt. hitherto required for foreign investors was
done away with. As per Press Note No. 2, hundred percent investment in
development projects of townships, hotels and roads was allowed to non-resident
investors subject to the following conditions :

(a) For development of housing project, investment in land
acquisition of minimum 10 hectares which is equal to 25 acres, will be the
precondition. The question that needs consideration is whether a 100% subsidiary
Co. of a foreign company can acquire agricultural land for development. The
answer is that if the law of the State in which such agricultural land is
situated, permits such acquisition, then such company can purchase agricultural
land provided it takes steps to convert agricultural land into non-agricultural
land and uses it for development of building and not for purposes of
agriculture.

(b) Capitalisation norms and restrictions :


A foreigner making investment through a subsidiary in India
will be obliged to invest at least 10 million dollars. If investment is made
with Indian joint venture partner, then capital contribution will be 5 million
dollars. The investment should be within 6 months from commencement with lock-in
period of 3 years from date of investment.

(c) What constitutes joint venture :


The ratio of investment in such joint venture need not be
equal. The foreign investors can have dominating percentage. As regards period
of six months from commencement, Press Note No. 2 provides that the date should
be counted from the date when agreement to subscribe shares is entered into
between co-venturers. The minimum prescribed amount of 5 million is to be
brought in within six months. The condition of lock-in period of 3 years applies
to minimum investment and not to additional investment over and above minimum
investment.

(d) Time period for completion of project :


At least 50% of the project has to be completed within five
years from the date from which all the clearances are obtained. The investor
will not be permitted to sell undeveloped plot. It means that before effecting
any sale, he must have completed development of plot by carrying out
construction of roads, water supply lines, drainage, water storage and related
facilities. It means, the investor must develop 10 hectares of project plot
before effecting sale.

(7) The speaker then observed that the boom in real estate
trade is attributable to excess liquidity in the economy. Many foreign investors
find that they are suffering cash crunch though the lock-in period is yet not
over. For making the development project viable, they have already invested
funds over, say, 25 crores plus Stamp Duty @ 1% and if at that stage any
disputes or difficult situation arises, then to meet the liquidity challenges
the only way is to dispose of their surplus investment over minimum by
transferring their shares or to liquidate holdings through buy back of shares or
to liquidate the company. In another situation if construction has already
started but if constructed area cannot be disposed of profitably, the investor
will face serious difficulty. Where development of land, say, of 10,000 sq.
meters is undertaken, then built-up area of 50,000 sq.mtrs. will be available
assuming FSI of 5. In the event response to constructed area is very poor, then
the loss may be much higher. The foreign investor has to keep in mind all such
situations.

8) The speaker then clarified that in the event the project fetches good profit, then dividend can be declared, subject to transfer of required percentage to reserves.

9) As regards companies in real estate, with huge capital investment of, say, 100 crores, the foreign borrowing for purchase of land is not permitted. Such borrowing’s are permitted only for financing construction work. As issue of shares at premium is possible, in such a case the capital base can propor-tionately be kept smaller. However, it is necessary to look into Reserve Bank guidelines. The amount of premium can be considered, for satisfying the condition of minimum capitalisation. External Commercial Borrowings (ECB) is not permitted. On
1-6-2008 the Government has put a bar on issue of non-convertible preference shares or non-convertible debentures. Debentures must be convertible and time frame for conversion has to be observed. But, if the company has committed to issue non-convertible debentures prior to 1st June 2008, then such company can continue with its commitment. In another situation if company wants to change over to convertible debentures, then Reserve Bank should be approached before taking such step.

10) Another aspect is satisfying valuation norms prescribed by the Controller of Capital Issues, pre-vailing up to 1992. Though this order was abolished, valuation rules prescribed by CCI regulations still continue.

11) As regards conversion of preference shares in equity shares, such conversion is treated as transfer for ascertaining capital gains liability of shareholder.

12) As regards conversion of debentures into shares, S. 47(10) of the Income-tax Act provides that the same will not be regarded as transfer. Transfer of shares by one foreign Co. to another foreign Co. requires no permission, nor is it governed by transfer pricing rules, nor by pricing guidelines. The same principle applies to transfer by one NRI to another NRI. Where transfer of shares is from person resident in India to non-resident, no approval is required. This however is subject to compliance of guidelines, set out in circular of RBI of October 2004 and pricing guidelines.

13) Any gift by a resident to a resident outside India needs RBI approval. Where there is a transfer by a person outside India to a resident in India, the repatriation of price realised above fair value will not be permitted to such non-resident.

14) Mr. Kapadia then stressed the need on the part of non-resident investor to give serious thought to structuring aspects of joint venture investment, by planning of route to be adopted, by studying the provisions of DTAA, and FEMA, whereby the tax effect can be minimised and his investment will be ideally tax effective and cost effective.

15) The speaker thereafter touched upon the various segments of real estate trade. It cannot just be restricted to conventional form of construction of buildings, but also takes into consideration other forms. The capital investment requirement and form of organisational set-up vary from each other. The few illustrations are:

a) Real estate management company needs to have minimum net worth of 5 crores.

b) There was one more category of O.CB., where 60% of holdings were owned by non-residents. Now, 50% of Directors of such real estate management company should be financing directors. The unit should invest in real estate projects of which 80% should be in completed projects and maximum up to 20% in incomplete project. Investment in vacant land is not permitted. These provisions at present are in a draft form till guidelines are notified.

c) The other avenues in real estate are development of service plots, residential or commercial premises, development of townships, investment in manufacture of building materials, investment in joint ventures, and similar other forms of organisation. In respect of many of the avenues there are no limiting or restrictive conditions like minimum capitalisation or lock-in period. The only requirement is the investor should be an NRI, a person of Indian origin. All these investments will be on repatriable basis.

d) As regards foreign venture capital investors fund, clause 5(5) of Foreign Venture Capital Fund Regulations of 1998 plays an important role. The constitution of a venture capital undertaking has to be a company whose shares are not listed on a recognised stock exchange in India and which should not be engaged in an indus-try specified in negative list. The advantage is lock-in restriction and pricing restriction are done away with.

16. Regulations  Re : Real  Estate  Mutual  Fund:

The only requirement is that management of such mutual fund shall have at least 5 years expertise in real estate trade. The investment should be in a specified real estate asset and not in incomplete projects or projects under construction. It must be located in India and in such city as may be specified. The property should not be subject matter of any litigation. At least 35% of net assets of the fund will have to be invested directly into real estate asset and therefore such mutual fund will not be equity-oriented mutual fund. Distribution made by mutual fund will be subject to dividend distribution tax. The investment can also be made in shares, debentures, mortgage-backed securities. The investment in these can be 75% and balance 25% in any securities. No real estate mutual fund can invest more than 25% of its capital in unlisted shares. The NAV of the real estate mutual fund shall be published every 90 days.

17. While concluding his talk, the speaker narrated a quotable quote of Pandit Jawaharlal Nehru on the eve of Independence in 1947. Hon. Panditji said, “The achievement which we celebrate today is a step of opening as an opportunity to the greatest triumph. We should be wise enough to grab this opportunity and accept the challenge of future”. This statement applies even today in current economic scenario.

The meeting terminated with a vote of thanks to the speaker.

Business/Employment visa

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Part D : Miscellaneous

  1. Business/Employment visa

The Ministry of Home Affairs has issued Frequently Asked Questions on
work-related visas issued by India, clarifying the purpose, duration and
various scenarios under which Business Visa/Employment Visa may be granted to
foreign nationals. These FAQ’s are available on www.mha.nic.in

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Royalties and fees for technology transfer

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Part D : Miscellaneous

  1. Royalties and fees for technology transfer

The Union cabinet has approved a proposal of the Department
of Industrial Policy & Promotion, Ministry of Commerce & Industry to permit
all payment for royalty, lump sum fee for transfer of technology, payment for
use of trademark/brand name on the automatic route without any restrictions,
and subject to FEMA(Current Account Transaction) Rules, 2000. To get the
information about the nature/details of technology and the amount paid for it,
a suitable post reporting requirement would be devised within three months in
consultation with the Department of Economic Affairs and Reserve Bank of
India.

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Social Security Agreement with Netherlands

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Part D : Miscellaneous

  1. Social Security Agreement with Netherlands

The Government of India has signed a Social Security
Agreement with the Government of Netherlands on 22-10-2009.

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Dispute Resolution Panel Rules, 2009 — Notification No. 84/2009 [F. No. 142/22/2009-TPL], dated 20-11-2009.

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  1. Dispute Resolution Panel Rules, 2009 — Notification No.
    84/2009 [F. No. 142/22/2009-TPL], dated 20-11-2009.

Alternate Dispute Resolution Mechanism was introduced by
Finance (No. 2 )Act, 2009 and consequently Section 144C is introduced w.e.f.
1st April, 2009.

Dispute Resolution Panel Rules, 2009 are introduced and the
rules shall come into force on the date of their publication in the Official
Gazette. The said Rules provide for the procedure for filing objection,
procedure for the hearing by the panel, passing of the assessment order by the
panel and rectification thereof and appeal before the ITAT, etc. The Rules
also prescribe formats of Form Nos. 35A and 36B.

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Income-tax Department’s website has offered a facility to enable the assessees to ascertain whether the Income-tax Department has received ITR V at Bangalore. The procedure is as follows :

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  1. Income-tax Department’s website has offered a facility to
    enable the assessees to ascertain whether the Income-tax Department has
    received ITR V at Bangalore. The procedure is as follows :



(i) Log-in at the Department’s website using the e-filing
log-in ID and Password.

(ii) After the log-in is successful, click on the ‘My
Account’ tab at the top of the window.

(iii) Select the last option ‘E-filing processing status’.

(iv) Provide the assessment year.

(v) The next screen will provide information whether ITR V
is received and the date of receipt.

(vi) There is a hyperlink to obtain the confirmation
receipt.


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Part A — Taxability of sovereign activities

Health check-up and treatment services

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Service TaxRenting of Immovable Property
Retrospective
Validation :

Background :


W.e.f 1-6-2007 the Central Government included within the
definition of taxable service a service provided or to be provided to any
person, by any other person in relation to renting of immovable property for use
in the course or furtherance of business or commerce. Renting included
letting, leasing, licensing or other similar arrangement. The phrase ‘for use in
the course or furtherance of business or commerce’ was said to include use of
immovable property as factories, office buildings, warehouses, theatres,
exhibition halls and multiple-use building. Some residential and other
properties were excluded from the scope of this service.

The levy of service tax on renting of immovable property was
challenged through writ petitions before High Courts in different parts of the
country. Many property owners began paying self-assessed tax on the rent amount
and passed on the said liability to the tenants. At the same time, many property
owners did not charge service tax pending disposal of writ petitions.

Implications of the levy on renting of immovable property and
issues arising therefrom have been discussed in detail in the August 2007 and
September 2007 issues of BCAJ.

The Delhi High Court in Home Solution Retail India Ltd. v.
Union of India & Others, (2009) 14 STR 433 (Del.) held that service tax is a
tax on value addition provided by a service provider. It is obvious that it must
have connection with a service and there must be some value addition by that
service. If there is no value addition, then there is no service. Applying the
same to renting of immovable property service, the High Court observed as
under :

“There is no dispute that any service connected with the
renting of such immovable property would fall within the ambit of S.
65(105)(zzzz) and would be exigible to service tax. The question is whether
renting of such immovable property by itself constitutes a service and,
thereby, a taxable service. Service tax is a value added tax. It is a tax
on the value addition provided by some service providers. Insofar as renting
of immovable property for use in the course or furtherance of business or
commerce is concerned, any value addition could not be discerned.
Consequently, the renting of immovable property for use in the course or
furtherance of business or commerce by itself does not entail any value
addition and, therefore, cannot be regarded as a service.“

In arriving at the aforesaid finding, the Delhi High Court
relied on the decision of the Supreme Court in Tamil Nadu (T.N.) Kalyana
Mandapam Association v. UOI, (2006) 3 STR 260 (SC) which, interestingly was
relied upon both by the appellants who had challenged the legality of the levy,
as well as by the respondents i.e., the Government of India. Based on a
detailed consideration of the aforesaid judgment, the Delhi High Court held that
the decision of the Supreme Court supported the argument of the appellants
before it and not the Government of India. With regard to the nature of the
service tax itself, the High Court held that it is a value added tax on value
addition done by the service provider and it must have a connection with the
service. Consequently, since mere renting of immovable property does not entail
any value addition, it could not be regarded as a service for that reason as
well.

The Delhi High Court observed in para 37 as :

. . . . We have not examined the alternative plea taken
by the petitioners with regard to legislative competence of the Parliament in
the context of Entry 49 of List II of the Constitution of India.



The Govt. filed an SLP against the said ruling which has been
admitted, but no stay has been granted against the Delhi HC Ruling. The same is
pending disposal.

Implications arising from the Delhi High Court Ruling have
been discussed in detail in the July 2009 issue of BCAJ.

Amendment by Finance Act, 2010 (‘Act’) :

Prior to the amendment, S. 65(105)(zzzz) of the Act defined
‘taxable service’ in the context of ‘renting of immovable property’ as under :

“(105) ‘taxable service’ means any service provided or to
be provided :

(a) to (zzzy) . . . . . .

(zzzz) to any person, by any other person in relation to
renting of immovable property for use in the course or furtherance of business
or commerce.

Explanation 1. . . . . . .

The Finance Act, 2010 has nullified the Delhi High Court
Ruling by redefining ‘taxable service’ with retrospective effect from 1-6-2007
as under :

“(105) ‘taxable service’ means any service provided or to
be provided :

(a) to (zzzy)

(zzzz) to any person, by any other person, by renting of
immovable property or any other service in relation to such renting for use in
the course or furtherance of business or commerce.“

Thus, henceforth a service provided by renting of immovable
property or a service ‘in relation to’ such renting of immovable property, is
now covered in the definition of taxable service. TRU Circular No. 334/1/2010 —
TRU (Annexure B), dated 26-2-2-10 clarifies as under :


Para 9.2

“In order to clarify the legislative intent and also bring
in certainty in tax liability the relevant definition of taxable service is
being amended to clarify that the activity of renting of immovable property
per se would also constitute a taxable service under the relevant clause.
This amendment is being given retrospective effect from 1-6-2007.“

Thus, renting of immovable property by itself is now
considered to be a taxable service. In the Finance Act 2010, it has been
declared as under :

“No act or omission on the part of any person shall be
punishable as an offence which would not have been so punishable had this
amendment not come into force.



Implications of the amendment :

The amendment in the definition of taxable services seeks to bring within the service tax net the activity or renting of immovable property per se nullifying the position held in the Home Solutions case. It further seeks to overturn the said position w.e.f. 1-6-2007. Therefore any levy, demand, recovery or action in relation thereto taken by the authorities will be validated and no action against the same will be maintainable in a Court of law. Further, all refunds made consequent to the Delhi High Court Ruling in Home Solutions case, are liable to be overturned by virtue of this amendment.

Legality and constitutional validity of the amendment:
An important issue that arises for consideration is whether the amendment will withstand the test of constitutionality. Though the answer can only come by way of a final decision by the Courts of law, it becomes important to prima facie examine the same.

In the light of the Delhi High Court ruling in Home Solutions case, the amended provisions will be subject to judicial scrutiny. Questions which arose before the Delhi High Court would once again arise. Is the bare renting of immovable property a taxable service? Is there a continuous flow of service between the property owner and the tenant in such a scenario? Is there any value addition involved?

In addition, constitutional validity was not examined by the Delhi High Court in Home Solutions case. Hence, there would be fresh round of litigations on this ground too.

According to one school of thought, the amended provisions can be challenged for transgression of the constitutional line of control which divides the powers of the Union and the State Governments. In terms of Article 246(3) of the Constitution, the Legislature of any State has the exclusive power to make laws with respect to matters listed in List II to the Seventh Schedule. Taxation on transactions relating to immovable property is not within the legislative competency of the Central Government inasmuch as these matters fall under Entry 49 of List II of the Seventh Schedule to the Constitution of India.

S. 66 of the Act, which is the charging section for the purpose of levy of service tax, provides, for the levy of tax on the taxable services covered by S. 65(105) thereof. From a reading of the charging section, it is clear that service tax is a charge of tax on taxable services. The Supreme Court in Laghu Udyog Bharati v. Union of India, (1999) 112 ELT 365 (SC) has also held that service tax is a tax on services and is leviable on the service provider. The levy of service tax on the leasing or letting or rent-ing of immovable property may be illegal and ultra vires Article 246 of the Constitution of India.

According to another school of thought, in terms of the Supreme Court Ruling in TN Kalyana Manda-pam (supra), levy of service tax on renting of immovable property is constitutionally valid.

In the light of the foregoing, a fresh round of litigations is likely as regards legality and Constitutional validity as well of the retrospective amendment made in regard to renting of immovable property.

Some issues:

Implications on property owners:

The retrospective amendment in renting of im-movable property has been challenged through writ petitions in various courts of the country and interim stay has been granted in some cases. The benefit of the same would be available to a property owner who is a petitioner/member of the petitioner association. However, it would be advisable for the petitioners, to make appropriate disclosures before service tax authorities by filing letters/through notes in service tax returns. In cases where, property owners charge service tax but the tenants refuse to pay, the detailed analysis and discussions in July, 2009 of BCAJ can be referred as to the various options that can be exercised by property owners and implications in regard to each option.

Interest implications:

In Pratibha Processors v. UOI, (1996) 88 ELT 12 (SC), it was observed by the Supreme Court as under:
“in fiscal statutes, the import of the words, — ‘tax’, ‘interest’, ‘penalty’, etc. are well known. They are different concepts. Tax is the amount payable as a result of the charging provision. It is a compulsory exaction of money by a public authority for public purpose, the payment of which is enforced by law. Penalty is ordinarily levied on an assessee for some contumacious conduct or a deliberate violation of the provisions of the particular statute. Interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. The levy of interest is geared to actual amount of tax withheld and the extent of delay in paying the tax on due date. Essentially, it is compensatory and different from penalty — which is penal in character.” (p. 20).

Thus, interest is not a penalty, but is essentially compensatory in nature.

In the context of stay matters, it is a reasonably settled position to the effect that if a petitioner loses he would have to pay tax along with interest inasmuch as interest is compensatory as discussed above. However, in the context of retrospective amendment, whether this principle would apply is an issue.

In this connection, attention is invited to the Supreme Court Ruling in Star India Pvt. Ltd. v. CCE, (2006) 1 STR 73 (SC), wherein the following was observed in regard to liability to interest in cases of retrospective validation of levy on broadcasting services.

Para 7
“In any event, it is clear from the language of the validation clause, as quoted by us earlier, that the liability was extended not by way of clarification but by way of amendment to the Finance Act with retrospective effect. It is well established that while it is permissible for the Legislature to retrospectively legislate, such retrospective legislation is normally not per-missible to create an offence retrospectively.

There were clearly judgments, decrees or orders of Courts and Tribunals or other authorities, which were required to be neutralized by the validation clause. We can only assume that the judgments, decree or orders, etc. had, in fact, held that persons like the appellants were not liable as service providers. This is also clear from the Explanation to the validation Section, which says that no act or acts on the part of any person shall be punishable as an offence which would have been so punishable if the Section had not come into force.”

On the basis of Star India ruling, a view can be taken to the effect that there may be no interest liability for the past period. However, this view is likely to be disputed by the tax authorities, resulting in litigations.

Penalty implications:

It is a very well-settled position that in cases where matters involved are of controversial nature, no penalty can be imposed. Based on the same, it would appear that there may be no liability to penalties, provided appropriate disclosures are made before service tax authorities.

Vacant land leased for construction of building?: Under the unamended provisions, ‘vacant land’, whether or not having facilities clearly incidental to the use of such vacant land was excluded from the definition of ‘immovable property’. Thus, renting of such vacant land was not liable for service tax.

The Finance Act, 2010 has curtailed the above exclusion by bringing within the ambit of the immovable property ‘vacant land, given on lease or licence for construction of building or temporary structure at a later stage to be used for further-ance of business or commerce’. Thus, renting of vacant land on long-term lease for construction of commercial building or structure thereon in future would be liable for service tax.

Leases executed prior to the amendment:

An important issue that arises for consideration in case of leases executed prior to the amendment (in some cases such leases would have been ex-ecuted before the introduction of service tax).

It is pertinent to note that advances received in respect of all newly inserted taxable services (as well on those services the scope of which has been expanded) in the Finance Act, 2010, have been exempted by virtue of Notification No. 36/2010-ST, dated 28-6-2010. However, services falling under sub-clause (zzc) (Commercial Training or Coaching Service) and (zzzz) (Renting of Im-movable Property Service) of S. 65(105), [which have been given retrospective effect] have been kept out of this Notification.

No such retrospective effect has been given to renting of vacant land (on which some construction is to be made subsequently). Therefore, it would appear that advances received in respect of this renting of vacant land ought to be exempted on the same ground on which exemption to advances in respect of other newly inserted services and amended services has been given. The scope of Notification No. 36/2010-ST, dated 28-6-2010 needs to be clarified accordingly.

The issue involved has ramifications for a large number of assessees most of which are PSUs and local industrial corporations which are renting vacant land on a long-term lease with a explicit condition that the lessee would construct a factory or commercial building on such land.

This can also be seen from a perspective that the moment advance is received and lease agreement is signed, the taxable event of provision of service is completed. Thus, as per settled position, if the taxable event happened at the time when service tax was not leviable on that service, then service tax cannot be demanded later, on a pro rata basis or otherwise even if the service becomes taxable during the tenure of the lease. The Draft Point of Taxation Rules seems to support this position.

From the Service Tax Department’s perspective, they could argue that service is in the nature of continuous service. Hence, service tax needs to be discharged on a pro rata basis for the period post amendment.

In case of long -term leases, whether the same can be covered within the ambit of ‘renting’ at all, may have to be examined vis-à-vis provisions under principal laws governing transfer of property and related regulations.

Editor’s Note:

Recently, Hon. Punjab and Harayana High Court in the case of Shubh Timb Steels Ltd has upheld the consitutional validity of levy of service tax on renting of immovable property as also its retrospective application.

America’s wars

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23. America’s wars


The book raises a troubling thought : What is it that,
generation after generation, impels America’s best and the brightest to lead
their country into war, with little clarity regarding national interests and war
aims, but pursued with an extraordinary passion and firepower that destroy the
lives of thousands of its soldiers and leave behind a horrendous debris of
devastated nations and cities, wrecked societies and broken peoples that take
decades to repair and heal ?

(Source: Extracts from Book Review by Talmiz Ahmad, a Diplomat,
of “Obama’s Wars” by Bob Woodward in
 

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Girl power puts Gujarati lexicon at your fingertips

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  1. Girl power puts Gujarati lexicon at your fingertips

If the online Gujarati lexicon has proved a boon for
translators or writers, this bunch of five 20-something girls ought to take
the credit. Their love for their mother tongue is phenomenal and so is their
passion for language. Hence, with the help of technology they have made words
available at your fingertips.

Sumaiya Vohra, Padma Javad, Maitri Shah, Shruti Amin and
Deval Vyas run an IT firm which handles jobs of researching and compiling
Gujarati words. After digitizing ‘Bhagwadgomandal’ — a major dictionary of
Gujarati language — their recent achievement was to put ‘lokkosh’, a Gujarati
lexicon, online.

(Source : The Times of India, 29-10-2009)

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Virtual hub for books

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  1. Virtual hub for books

Vishal Information Technologies, a BSE/NSE-listed digital
content solution company, recently unveiled www.coralhub.com, an online book
market place that offers facility to buy and sell books on the Net. Booklovers
can browse mote than 3 million titles using a customer-friendly, simple-to-use
interface that displays the book title with brief synopsis, author, discounted
price, and ISBN number. The ‘Sell Books’ section of the site allows users to
sell old books to those looking for a specific title at an affordable price.
The customers are not charged any shipping cost for delivery across India.

(Source : Business India Magazine, 1-11-2009)

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Dormant bank accounts : RBI issues vital clarification

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  1. Dormant bank accounts : RBI issues vital clarification

A couple of months back the RBI had issued detailed
guidelines on inoperative or dormant bank accounts — savings as well as
current account. It had stated that if there are no transactions in the
account for a period over two years, it is to be treated as dormant. Further,
for the purpose of classifying an account as inoperative, both the types of
transactions i.e., debit as well as credit transactions induced at the
instance of customers as well as third party should be considered.

RBI now states that there may be instances where the
customer has given a mandate for crediting the interest on Fixed Deposit
account to the Savings Bank account and there are no other operations in the
Savings Bank account. Some doubts have arisen whether such an account is to be
treated as inoperative account after two years.

In this connection, the Banker of the Banks has clarified
that since the interest on Fixed Deposit account is credited to the Savings
Bank accounts as per the mandate of the customer, the same should be treated
as a customer induced transaction. As such, the account should be treated as
operative account as long as the interest on Fixed Deposit account is credited
to the Savings Bank account. The Savings Bank account can be treated as
inoperative account only after two years from the date of the last credit
entry of the interest on Fixed Deposit account.

(Source : Internet & Media Reports, 4-11-2009)

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News you can use ACES online

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  1. News you can use ACES online

Recently, the excise and service tax department unveiled
the Automation of Central Excise and Service Tax (ACES), a workflow-based
application software available at www.aces.gov.in. An application-based
facility, ACES would be installed at all the Central excise centres in
Bangalore and Hyderabad initially and throughout the country by end-2009,
enabling the assessees to do all transactions with the department through the
Net. ACES would completely replace the current mode of manual filing of
returns, payment of taxes, seeking of refund and rebate on duties, helping
assessees obtain registration under Central excise/service tax and also view
and track status of their document online. Some of the services offered online
include registration, filing and tracking of documents, e-mails of
business-related issues, payment of Central excise and service tax and a help
line.

(Source : Business India Magazine, 1-11-2009)

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Prolonged use of cellphones causes cancer

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  1. Prolonged use of cellphones causes cancer

Heavy mobile phone users face a higher risk of developing
cancers, according to a landmark international study overseen by the WHO.

Even though the conclusion of the research will be revealed
only later this year, a preliminary breakdown of the results found a
‘significantly increased risk’ of some brain tumours ‘related to use of mobile
phones for a period of 10 years or more’ in some studies.

The conclusion of the £ 20 million study, while not
definitive, will undermine assurances that the devices are safe. Several
countries, notably France, have started strengthening warnings in this regard
and American politicians are urgently investigating the risks.

The Interphone inquiry has been probing the link between
exposure to mobile phones and three types of brain tumour and a tumour of the
salivary gland. The landmark international project carried out research in 13
countries, interviewing tumour sufferers and people in good health to see
whether their mobile phone use differed. It questioned about 12,800 people
between 2000 and 2004, the report said.

However, a breakdown of the latest findings shows that six
of eight Interphone studies found some rise in the risk of glioma (the most
common brain tumour), with one finding a 39% increase.

(Source : The Times of India, 25-10-2009)

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HC dismisses IT Dept. appeals due to delay

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17. HC dismisses IT Dept. appeals due to delay


The Bombay High Court recently dismissed 40 appeals filed by
the Income-tax (IT) Department challenging 40 orders of the IT Tribunal, for not
filing its papers in time. The IT Department cited shortage of stamp papers as
reason for the delay. The Court dismissed the applications which were filed
after a delay of over one year.

The Court, however, held that a delay of one year in filing
an appeal was not inordinate in case of a department like IT that undertakes
‘large-scale litigation.’

The Court however allowed those applications seeking
condonation of delay between six days to 345 days, on the ground that they
provided a ‘reasonable explanation’ for the delay in filing appeal.

IT Department contended that every time the Department
receives an order from the IT Tribunal, a scrutiny report is prepared and sent
to the higher officials for approval.

(Source : Internet, 7-10-2008)

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Barack Obama, the President-elect of USA delivered one of the finest speeches (extempore) on November 5, on winning the Presidential election. It moved many with its sheer poetry. Hereunder are some extracts of the speech, which readers would cherish to r

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16. Barack Obama, the President-elect of USA delivered one of the
finest speeches (extempore) on November 5, on winning the Presidential election.
It moved many with its sheer poetry. Hereunder are some extracts of the speech,
which readers would cherish to read.


Hello, Chicago ! If there is anyone out there who still
doubts that America is a place where all things are possible, who still wonders
if the dream of our founders is alive in our time, who still questions the power
of our democracy, tonight is your answer. It’s the answer told by lines that
stretched around schools and churches in numbers this nation has never seen, by
people who waited three hours and four hours, many for the first time in their
lives, because they believed that this time must be different, that their voices
could be that difference.

It’s the answer spoken by young and old, rich and poor,
Democrat and Republican, black, white, Hispanic, Asian, Native American, gay,
straight, disabled and not disabled. Americans who sent a message to the world
that we have never been just a collection of individuals or a collection of red
States and blue States.

We are, and always will be, the United States of America.
It’s the answer that led those who’ve been told for so long by so many to be
cynical and fearful and doubtful about what we can achieve to put their hands on
the arc of history and bend it once toward the hope of a better day.

It’s been a long time coming, but tonight, because of what we
did on this date in this election at this defining moment change has come to
America.

I was never the likeliest candidate for this office. We
didn’t start with much money or many endorsements. It was built by working men
and women who dug into what little savings they had to give $ 5 and $ 10 and
$ 20 to the cause.

It drew strength from the not-so-young people who braved the
bitter cold and scorching heat to knock on doors of strangers, and from the
millions of Americans who volunteered and organised and proved that more than
two centuries later a government of the people, by the people, and for the
people has not perished from the Earth. This is your victory.

And I know you didn’t do this just to win an election. And I
know you didn’t do it for me. You did it because you understand the enormity of
the task that lies ahead. For even as we celebrate tonight, we know the
challenges that tomorrow will bring are the greatest of our life-time — two
wars, a planet in peril, the worst financial crisis in a century.

The road ahead will be long. Our climb will be steep. We may
not get there in one year or even in one term. But, America, I have never been
more hopeful than I am tonight that we will get there.

But I will always be honest with you about the challenges we
face. I will listen to you, especially when we disagree. And, above all, I will
ask you to join in the work of remaking this nation, the only way it’s been done
in America for 221 years — block by block, brick by brick, calloused hand by
calloused hand.

What began 21 months ago in the depths of winter cannot end
on this autumn night. This victory alone is not the change we seek. It is only
the chance for us to make the change. And that cannot happen if we go back to
the way things were. It can’t happen without you, without a new spirit of
service, a new spirit of sacrifice.

Tonight we proved once more that the true strength of our
nation comes not from the might of our arms or the scale of our wealth, but from
the enduring power of our ideals : democracy, liberty, opportunity and
unyielding hope. That’s the true genius of America.

Yes we can change. America, we have come so far. We have seen
so much. But there is so much more to do. So tonight, let us ask ourselves — if
our children should live to see the next century; if my daughters should be so
lucky to live as long as Ann Nixon Cooper,* what change will they see ? What
progress will we have made ?

This is our chance to answer that call. This is our moment.
This is our time, to put our people back to work and open doors of opportunity
for our kids; to restore prosperity and promote the cause of peace; to reclaim
the American dream and reaffirm that fundamental truth, that, out of many, we
are one; that while we breathe, we hope. And where we are met with cynicism and
doubts and those who tell us that we can’t, we will respond with that timeless
creed that sums up the spirit of a people : Yes, we can.



* Ann Nixon Cooper is 106 years old. In this election, she
touched her finger to a screen, and cast her vote, because after 106 years in
America, through the best of times and the darkest of hours, she knows how
America can change.

(Source : Livenint, 6-11-2008)

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Penalties and prosecution under the Companies Act – Part 2

Laws and Business

1. Compounding of Offences :


1.1 In the last Issue we examined the penalties and
prosecution prescribed under the Companies Act, 1956. One of the remedies
against prosecution prescribed in the Act is ‘compounding of offences’.
For certain offences, compounding is possible, whereas for some other offences,
compounding is not possible. Compounding refers to a process whereby for an
offence in respect of which prosecution is launched against the
directors/officers, the authority only levies a monetary penalty. ‘Compounding’
is also known as ‘composition of offences’. ‘Composition’ means a compromise and
means condonation of an offence in exchange for money. In other words,
punishment and prosecution/imprisonment is converted into a fine. The Act
expressly deals with compounding in S. 621A.

1.2 S. 621A overrides anything contained in the Code of
Criminal Procedure. It applies to offences committed by a company or its
officers. In Usha (India) Ltd., In re, 85 Comp. Cases, 581 (CLB),
it was held that the presence of a non-obstante clause in S. 621A
overrides the Cr.PC. Thus, the jurisdiction granted to the CLB in regard to
compounding is independent of any provision in the Cr.PC. Even if a matter lay
before the High Court for quashing the criminal proceedings, it had nothing to
do with compounding. Compounding proceedings are independent of any criminal
proceedings for the same alleged offence.

However, two types of offences are not compoundable.
These are :

(a) For which the punishment is imprisonment only; and

(b) For which the punishment is imprisonment and
fine.

Thus, the Act deems these two types of offences as serious
and hence, no compounding is prescribed. In addition to the above two
categories, compounding cannot be done for a subsequent same offence committed
within 3 years. In other words, a repeat offence committed after 3 years of
compounding of the offence is treated as a new offence.

1.3 The sum payable for compounding cannot exceed the maximum
fine imposable.

2. Procedure :


2.1 The procedure for compounding is as follows :

(a) It can be done at any stage — before or after launch of
proceedings. There are several cases when after being issued ‘Show Cause’
notice companies voluntarily go in for compounding out of abundant caution to
buy peace and avoid litigation. Thus, like anticipatory bail, anticipatory
compounding is possible. Compounding of offences acts as a bar against
prosecution if it is done before the institution of the prosecution —
Reliance Industries Ltd., In re, 89 Comp. Cases 465 (CLB). It should
however, be borne in mind that the power to compound offences vested in the
CLB is a discretionary power — Ritesh Polyesters Ltd., 123 Comp. Cases
348 (CLB). Thus, it is not an automatic privilege granted by merely applying
for compounding. If a prosecution has
ended in a conviction and if the accused has ap-pealed against the punishment,
he may yet file a compounding application while the appeal is pending and if
he is successful, he would not have to suffer the sentence awarded —
Chottey Singh v. State of UP, 1980 Cr. LJ 583 (All).

(b) The appropriate authority for compounding is the
Company Law Board. However, in cases where the maximum fine does not exceed Rs.
50,000, the Regional Director is also empowered to compound. Thus, the RD can
only compound those offences where the punishment is only by way of a fine.
The Companies Amendment Act, 2002 proposes to substitute the appropriate
authority with the Central Government. However, the official date for this
change has not yet been notified.

(c) The application for compounding should be made to the
ROC who would then forward the same to the CLB/RD along with his comments. As
per Rule 20B of the Companies (Central Government’s General Rules and Forms,
1956) the application to the ROC should be made in e-Form 61.


The Company Law Board Regulations, 1991 state that an
application to CLB should be filed in Form No. 3 of the said Regulations. The
detailed application as per these Regulations should be attached to the e-Form
61. However, no such Form has been prescribed for an application to the RD.
The Company Law Board Regulations, 1991 do not state whether the Form should
be filed separately for each of the notices and hence, it is possible to file
a consolidated Form No. 3 for a company and all its directors/officers.

(d) Further, the Section also empowers the Court to
compound any offence which is compoundable by the CLB/RD. Further, while
allowing a compounding application, the Court has to follow the procedure laid
down under the Cr.PC. Thus, there is a concurrent jurisdiction for compounding
with the CLB and the Court. However, the procedure under Cr.PC laid down
u/s.621A(7) is not applicable when the compounding application is made before
the CLB. The CLB is not bound to follow any procedure, nor does it have to
obtain the permission of the Court at any stage. An appeal lies against its
order to the High Court. Thus, there is an option to a party to get
compounding done by the Criminal Court with the prior sanction of the Court or
get it done by the CLB without any prior permission and without following any
procedure — Hoffland Finance Ltd., In re, 90 Comp. Cases, 38 (CLB).
This view was also upheld by the Delhi High Court in the case of VLS
Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.) wherein it held the
compounding powers of the CLB u/s.621A(1) and of the Court u/s.621(7) are
parallel and one power is not dependent upon the other. The CLB can compound
even if the prosecution is pending in a Criminal Court.

(e) The compounding application should be in detail and
should lay down for each allegation — the facts, allegation and submissions.
Chartered Accountants are familiar with filing paper books before the ITAT and
they may use similar formats before the CLB.

2.2 In addition, the following guidelines issued by the DCA
are also relevant :


(a) The CLB/RD may ask for any officer to file a return or other documents within a specified time and non-compliance of this order is a punishable offence with fine of up to Rs.50,000 and/or a term of up to 6 months.

(b) More than one offence under one charging Section can be compounded at a time.

(c) In the case of a company, the composition fee shall be paid from its own funds while in the case of directors it shall be paid from director’s personal funds.

2.3 In the case of offences committed by a company fits directors when the company is under Court-approved liquidation, the DCA’s views as regards compounding applications are as follows:

a) There is no bar to any compounding application by the directors merely because the company is in winding-up.

b) Such compounding application for the directors does not require the prior approval of the Company Court.

c) However, compounding of proceedings against a company will not be permissible in view of S.446.

3. CLB’s order:

3.1 If the CLBdeems the case as fit for compounding, then it would pass an order to that effect. Some of the factors considered by the CLB include:

a) While compounding offences, it would consider the nature of the offence and the financial position of the company as well as the continuance of the default while determining the composition fee. It would ensure that having compounded the offence the same violation does not continue. It would also consider whether the application is an anticipatory one or in response to a prosecution being launched. In the case of Otto Burlingtons Mail Order P. Ltd., In re., 96 Comp. Cases, 525(CLB),the CLB considered all these factors while dealing with a compounding application for failure to obtain the Central Government’s approval u/s. 297. It observed that since the default was for several days, the penalty was large. Further, the offence was not a continuing one. Lastly,it was a voluntary application without fear of a prosecution. Hence, the CLB allowed the compounding application.

d) Similarly,in the case of First Leasing Co. of India Ltd., 42 SCL 65 (CLB), the application was allowed since the company had rectified the defaults u/s.211, u/s.217 and u/s.295, and had inadvertently committed the offences.

c) In a case where the company did not attach the balance sheet of the subsidiary along with the holding company due to non-finalisation of the subsidiary’s accounts and there was no willful omission, the CLB compounded the offence – Shaw Wallace and Co. Ltd., (2000) CLC 2008 (CLB).

d) However, in the case of General Produce Company Ltd. In re, 81 Comp. Cases 570 (CLB), since the accounts were not filed, delay was not rectified, company’s registered address was incorrect, directors stated that they were not directors and yet they signed compounding applications, the CLB rejected the compounding applications.

e) In a violation u/s.297, the quantity of goods involved in contracts with interested directors was negligible and hence, compounding was allowed with going into the merits of the case – Dintex Dyechem Lid., 104 Comp. Cases 735 (CLB).

3.2 If the CLB does not pass a speaking and reasoned order, but merely permits the composition on payment of a fee, the question which arises is whether such an order can be challenged before the High Court as being bad in law. The Delhi High Court had an occasion to deal with such a matter in the case of VLS Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.) wherein it held the if the order indicates that the provisions of S. 621A were followed and if after being satisfied with the facts and circumstances, the CLB exercises the power vested in it by S. 621A, then merely because they have not given reasons for their conclusion, cannot be a ground for challenging the order.

3.3 Once compounding is done, either the prosecution cannot be launched or if it has been launched, it cannot be continued further and the accused is discharged. There is an automatic vacation of prosecution.

3.4 An appeal lies against the CLB’s order to the High Court. A shareholder is also entitled to file an appeal against the CLB’s order and it is not correct to say that he has no locus standi in such an order. He can file a complaint before a Court u/ s.621 regarding the offence and hence, he is also entitled to appeal against the CLB’s Order – VLS Finance Ltd. v. UOI, 123 Comp. Cases 433 (Del.).

4. Role of CAs:

4.1 Compounding is an avenue which companies should pursue to avoid litigation and prosecution. Chartered Accountants can play a very active role in guiding  their clients on the process and benefits of compounding.

Suggestions on Discussion Paper on ‘Issue of Shares for Concideration other than Cash’

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Representation


Bombay Chartered Accountants’ Society


Discussion Paper issued by DIPP on

‘ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH’

Representation by

BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY

1. Background :


1.1 FEMA classifies transactions into two kinds — Current
Account Transactions and Capital Account Transactions.

1.2 Issue of shares by an Indian company to a non-resident is
classified as a Capital Account Transaction.

1.3 At present, FEMA permits non-cash consideration for issue
of shares by way of :


(i) a permissible Current Account Transaction (e.g., in
lieu of ‘royalty’); or

(ii) a permissible Capital Account Transaction (e.g.,
conversion of shares/securities, ECB, etc.).


2. Non-cash consideration — need of the
hour :


2.1 Two-way cash remittances involve the following financial
and non-financial costs :




v Transaction charges levied by the bank.



v With increased volatility in exchange rates, hedging costs are required to
be borne to mitigate the exchange fluctuation risk.


v Opportunity cost and
period cost arising from time delay in two-way remittance of the same
amount.




2.2 Hence, non-cash consideration is the need of the hour.

3. Premise of Representation :


This representation is based on the following premise.

3.1 No discrimination :


No discrimination should arise merely because the shares are
issued for non-cash consideration.

For instance, generally, a Current Account Transaction is not
required to be valued. Hence, such requirement should not be stipulated merely
because shares are issued for non-cash consideration.

3.2 Intangibles/Extraordinary Payments :


Proper valuation of intangibles/extraordinary payments may
pose substantial challenge, particularly at the regulatory end. Hence, non-cash
consideration by way of intangibles/extraordinary payments may be deferred till
acceptable norms for valuation of intangibles/extraordinary payments are
evolved.

3.3 Checks and Balances :


Proper system of adequate checks and balances should be
instituted to ensure against misuse. The system should ensure that where :




v income tax, customs duty, R & D Cess, etc. are payable, they are duly paid
before the shares are issued; and


v KYC norms or any such
compliances that are required to be done to protect against money laundering
possibilities, are properly done and supervised/recorded by the relevant
regulatory authorise.




4. Representation on Issues posed by DIPP :


4.1 S. 4.1(a) :


Does the issue of shares for considerations other than cash
represent a valid and unaddressed business need ? Should the Government amend
the FDI policy to address this need ? Will adoption of such an approach dilute
the objective of FDI policy by decelerating the flow of physical capital into
the country ?

Issue of shares for non-cash consideration is a business need
particularly because two-way cash remittances involve avoidable transaction
costs. Hence, FDI policy may be appropriately amended.

The objective of FDI policy should be to encourage
investments but not necessarily only by inflow of physical capital. The total
FDI can always be ascertained with proper reporting mechanism and adequate
checks and balances.

4.2 S. 4.1(b) :


Should the Government consider categories not covered under
extant policy for the issue of shares against considerations other than cash ?
Should such consideration be limited to the cases mentioned in S. 3 above or
should other categories also be added ? What regulatory safeguards should be
prescribed for each such case/category ?

To begin with, the categories mentioned in S. 3 should be
considered, and based on the experience as well as the perceived need, other
categories may be added.

The regulatory safeguard should ensure that the statutory
obligations (income tax, customs duty, R & D Cess, etc.) are fulfilled.

4.3 S. 4.1(c) :


Where allotment of shares for considerations other than cash
is permitted, should the Government be concerned with the valuation of shares ?
Should objective valuation of services/goods received as consideration for the
issue of shares be the prime concern in such cases and should it form the basis
for amendments to the FDI policy ? What are the guidelines that should be
adopted for listed/non-listed companies in such cases ? Can concerns relating to
valuation be effectively addressed elsewhere ?

Valuation norms as regards the shares should be the same,
irrespective of whether the shares are being issued for cash consideration or
for non-cash consideration.

Objective valuation of services/goods should be the concern
of the regulatory authority that normally deals with it. For instance, valuation
of imported goods is dealt with by Customs. Hence, that should be the authority
and FDI policy should provide for reliance on the valuation accepted by Customs.
As regards services, presently, no valuation norms are stipulated for
remittance. Hence, similarly, in case of issue of shares in lieu of services, no
norms for valuation of services should be applied.

Similarly, valuation norms for shares should be uniformly
followed, irrespective of whether the shares are issued for cash consideration
or for non-cash consideration.

4.4 S. 4.1(d) :


Should issue of shares to set off payment in the current
account/intangibles/one-time extraordinary payments be permitted ? Should the
broad
principle be adopted that whenever money has been received in India or value has
been received in India in lieu of money and valuation protocols are in place,
issue of shares may be permitted, with prior Government approval ?

As proper valuation of intangibles/extraordinary payments could pose challenge, non-cash consideration by way of intangibles/extraordinary payments may be deferred till acceptable norms for valuation of intangibles/extraordinary payments are evolved.

4.5 S. 4.1(e):
Is there a possibility that the issue of shares for non-cash considerations listed in S. 3 above could be misused, especially in the context of money laundering? If so, what steps should be taken to address such a contingency?

Proper system of adequate checks and balances should be instituted to ensure that where:

  • income tax, customs duty, R & D Cess, etc. are payable, they are duly paid before the shares are issued; and

  • KYC norms or any such compliances are required to be done to protect against money laundering possibilities, these are properly done and supervised/recorded by the relevant regulatory authorise.

India and China — A comparison

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  1. India and China — A comparison

The government simply has to find a way to deliver the
basics. That is what will defeat the Maoists and hold off China.

Tensions with China and the challenge posed by Maoists have
had their share of headlines these past few weeks. They are seemingly
unconnected issues, but they come into focus together when one looks at key
statistics on economic growth and human development. Take China first, for it
has acquired massive strategic advantage in terms of global economic impact,
diplomatic reach, military might and a hold on the world’s imagination because
it has performed spectacularly over three decades. Its economy has grown
10-fold since 1978, while its foreign trade has multiplied 70-fold in the last
decade alone; its exports are now more than India’s GDP. By way of comparison,
India’s GDP has multiplied about six-fold in the same period. It will take
India a full decade to reach China’s current level of per capita income. By
then, China will have overtaken the United States as the world’s largest
economy (calculated on the basis of purchasing power parity).

When it comes to human development indicators, the gap is
even greater. China’s human development index (calculated by the UNDP on the
basis of three factors — income, life expectancy and education) was 0.772 in
2007; India’s was 0.612, which was the level China had reached in 1990 ! At
the present rate of progress on the index (1.3% a year for India, about the
same as China’s), it will take two decades for India to get to where China is
today. As for economic development, China creates 10 times the power
generation capacity that India does in a year. Whichever indicator you choose,
China is one to two decades ahead of India, and on a rapid ascendancy curve.
Naturally, it will flex its muscles.

All this is history, and explains power disparities between
the two countries today. What of the future ? Some answers come in the World
Competitiveness Report, put out by the International Institute of Management
Development (IMD). Among 57 countries, China ranks 20th, India comes in 30th.
What is revealing is why India ranks so low. Of four primary factors, the
country does very well on economic performance (12th) and business efficiency
(11th). But on government efficiency it ranks 35th, and on infrastructure 57th
(i.e., last !). Go into the details and the rankings become even more
instructive : the last rank is on account of education, and health and
environment, while on business legislation India comes in 42nd. In other
words, the primary challenges are in areas where action is required most of
all from the government.

(Source : T. N. Ninan in Business Standard,
24-10-2009)

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Stop consuming these medicines — Popular cold, pain drugs face ban

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  1. Stop consuming these medicines — Popular cold, pain drugs
    face ban

Popular and widely-used medicines like phenylpropanolamine
or PPA (found in cough and cold remedies like Vicks Action-500, Solvin,
Wincold), gastrointestinal tegaserod (marketed as Ibsinorm, Tegod, Tegibs),
anti-bacterial gatifloxacin (Gaity) and painkiller nimesulide (Nice and
Nimulid) are under government scanner on concerns raised about their adverse
reactions. The drug technical advisory board (DTAB) will take a decision next
month to ban or restrict the usage of these and other drugs whose combined
market sales are pegged close to Rs.400-500 crore a year.

Other ‘controversial’ drugs, letrozole (used for
infertility treatment in women; letroz), emergency contraceptive drug
levonorgestrel (I-pill and Unwanted 72), and human placenta extract (Placentrex
lotion and gel sold by Albert David) will also be examined by the health
ministry. Besides taking a decision on banning certain drugs or restricting
the use of some, DTAB will examine next month whether emergency contraceptive
pills should be available over-the-counter (OTC) as reports of their misuse
are frequent. It will also take a decision on whether letrozole, approved for
use in breast cancer, should be used for infertility treatment or not, a
health ministry official told TOI.

Earlier this year, the DTAB banned anti-obesity drug,
rimonabant, on account of its serious side effects.

(Pending a formal ban, doctors should stop prescribing and
we should stop using these medicines)

(Source : The Times of India, 1-11-2009)

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Security body sniffs at PN path to havens — Measures to Trace origin of funds thru PNs — NSC

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  1. Security body sniffs at PN path to havens — Measures to
    Trace origin of funds thru PNs — NSC

The National Security Council Secretariat has called for
measures to trace the origin of inflows through participatory notes (PNs) and
entities registered in tax havens like Mauritius, Cyprus and Cayman Islands, a
move that can impact both portfolio flows and foreign direct investment (FDI).

Unchecked flow of funds through these routes could result
in country-specific restrictions being rendered useless, the council has
informed top guns in the government. If the traceability condition does not
materialise, the government should make prior government approval mandatory
for investment from all known tax havens, the Council has suggested.

This means that investment in sectors where 100% FDI is
allowed through the automatic route would also need approval from the Foreign
Investment Promotion Board (FIPB) if the government accepts the Council’s
suggestion.

In the case of PNs, the Council has called for more
disclosures since actual source of funds remains unknown even after extensive
investigation. There is also a need to distinguish investment by private funds
as compared to sovereign funds, the Council has said in a note, recommending
measures to step in security screening of FDI in view of increase in
cross-border terror attacks and escalation in money laundering.

PNs are used by overseas investors, who are not registered
with SEBI, to invest in the Indian market through registered foreign
institutional investors (FIIs). Despite recent efforts to discourage
investments through PNs, flows through this route continue.

Almost 44% of the equity FDI inflows into the country
originate from Mauritius while Cyprus accounts for nearly 2.93% of the FDI
flowing into India. Cayman Islands is the 12th largest source of FDI flows
into India, accounting for nearly 0.71% of the foreign investment into India.

The revenue department has also been objecting to FDI from
tax havens on grounds of ‘treaty shopping’ or use of these destinations to
route funds flows with the objective of gaining a tax advantage.

(Source : The Economic Times, 23-10-2009)

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CVC for major penalty against 4 from CBEC and 3 from CBDT in August

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  1. CVC for major penalty against 4 from CBEC and 3 from CBDT
    in August

The Central Vigilance Commission disposed of 536 cases
during August 2009 referred to it for advice. The Commission advised
initiations of major penalty proceedings against 106 officers. Of these, 21
were from M/o Railways, 21 from public sector banks, 13 from MCD, 8 from
Northern Coalfields Ltd., 5 from Central Coalfields Ltd., 4 each from CBEC,
MHA & Ministry of Urban Development, 3 each from P.G. Institute of Medical
Education & CBDT, 2 each from D/o Telecommunications, Ministry of Labour and
ESIC. The remaining 7 cases pertained to different departments of the
Government of India and PSUs.

The Commission also advised imposition of major penalty
against 68 officers including 14 from National Aluminum Co. Ltd., 12 each from
Central Coalfileds Ltd. & Public Sector Banks, six from Ministry of Railways,
5 each from National Insurance Co. Ltd. & DDA, 2 each from Border Roads
Development Board & Central Board of Excise and Customs. Remaining 10 cases
pertained to different departments of the Government of India and PSUs.

On the Commission’s recommendations, the competent
authorities issued sanctions for prosecution against 20 officers including 16
from CBEC. Major penalty was imposed on 77 officers. These included 10 from
FCI, 9 from Ministry of Railways, 8 from New India Insurance Co. Ltd., 7 each
from Public Sector Banks & Oriental Insurance Co. Ltd., 6 each from Department
of Telecommunications & ICAR, 5 from Eastern Coalfields Ltd., 3 each from DDA,
Council for Development Peoples & CBDT, 2 each from Central Warehousing Corp.
Ltd. & Ministry of Water Resources. The remaining 6 cases pertained to
different departments of the Govt. of India and PSUs.

Recoveries to the tune of Rs.29.15 crore were affected
after Commission conducted technical examination of some departments.

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7,500 offshore tax evaders come clean

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  1. 7,500 offshore tax evaders come clean

Some 7,500 wealthy Americans turned over information about
hidden overseas assets, including some valued at more than $ 100 million,
ahead of a tax amnesty program’s deadline, the top US tax collector said. Doug
Shulman, commissioner of the Internal Revenue Service, said his agency would
expand its crackdown on offshore tax evasion and will open new criminal
investigation offices in Beijing, Panama and Sydney, Australia. The amnesty
plan revealed accounts in 70 countries.

Under the amnesty program that began in September, tax
cheats can declare offshore accounts and income, pay reduced fines and, in
general, get immunity from criminal prosecution. The program turned up
undeclared offshore accounts ranging from $ 10,000 to more than $ 100 million.
At the heart of the US offshore tax effort is the government’s investigation
of UBS AG (UBSN.VX). The giant Swiss bank earlier this year settled a criminal
probe by paying $ 780 million and admitting it helped US citizens evade taxes.
In August, the bank agreed to turn over 4,450 names of clients with
undisclosed offshore accounts to end a related civil lawsuit.

Senator Carl Levin, a Democrat and chairman of the Senate
Permanent Subcommittee on Investigations, has estimated the US loses $ 100
billion annually from international tax evasion. He questioned how many of the
individuals came forward without nudging from banks.

(Source : www.financialexpress.com, 20-10-2009)

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Govt. readies biz vigilance system

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  1. Govt. readies biz vigilance system

Having failed to detect the Satyam scam, the government has
embarked on a new vigilant system to track corporate frauds. As a part of
this, it has decided to look into companies whose financials are found to be
suspicious.

There will be several triggers to generate any suspicion on
the activities of a corporate. These include things like unusually high jump
in profits, suspect related party transactions, and huge amounts of unutilised
cash and bank balance, the official said.
Once a list of suspect companies is drawn up, these would be looked into by
the RDs and the RoCs who would look into their filings and financials further.

However, this would be a noninvasive document verification exercise, the
official said, pointing out that there was no intention of hounding the
corporate sector.

The technology-driven initiative comes as the government is
taking steps to further strengthen the MCA21 programme, which was initiated in
2006 and enables electronic filings, storage, retrieval, processing and
transmission of transactions, including incorporation of a company, and filing
of annual and statutory returns. The exercise to upgrade MCA21 has started,
ministry officials said.

(Note : Let us keep our fingers crossed & see how
the system actually works. People behind the system are more important than
the technology involved. Corruption can subvert any sophisticated & advanced
system.)

(Source : The Times of India, 27-10-2009)

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PwC wants early Satyam settlement

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  1. PwC wants early Satyam settlement

Price Waterhouse, the Indian affiliate of global accounting
firm PricewaterhouseCoopers, has filed a consent application with capital
market regulator SEBI as part of an effort to reach an early settlement to the
ongoing investigation into the accounting fraud at Satyam Computers, renamed
as Mahindra Satyam, after the Mahindra group acquired the troubled company
earlier this year.

Price Waterhouse was the statutory auditor for Satyam
Computer, whose founder Ramalinga Raju confessed in January this year to
having fudged accounts to perpetrate a Rs.7,000-crore financial fraud. A probe
into the scam revealed that documents were forged to back fake bank deposits.

Price Waterhouse filed an application late last week in response to the show
cause notice that SEBI had issued in February 2009. This consent application
is in line with SEBI’s regulations and does not acknowledge Price Waterhouse’s
alleged wrongdoing in the Satyam fraud.

A Price Waterhouse spokesperson confirmed that the firm has
decided to pursue consent proceedings in relation to SEBI proceedings on the
audit of Satyam Computer Services rather than engage in a potentially long
drawn out legal proceedings with the regulator.

Under SEBI rules, after a consent application is filed,
representatives of SEBI meet up with the company to arrive at some sort of a
settlement, which could also include payment of a fine. After both parties
agree to a settlement, a high powered committee of SEBI passes a consent
order.

(Source : The Economic Times, 24-10-2009)

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Rules under Information Technology Act notified

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  1. Rules under Information Technology Act notified

The Information Technology (Amendment) Act, 2008 has come
into force today. The Rules pertaining to S. 52 (Salary, Allowances and Other
Terms and Conditions of Service of Chairperson and Members), S. 54 (Procedure
for Investigation of Misbehaviour or Incapacity of Chairperson and Members),
S. 69 (Procedure and Safeguards for Interception, Monitoring and Decryption of
Information), S. 69A (Procedure and Safeguards for Blocking for Access of
Information by Public), S. 69B (Procedure and safeguard for Monitoring and
Collecting Traffic Data or Information) and notification u/s.70B for
appointment of the Indian Computer Emergency Response Team have also been
notified.

With proliferation of information technology enabled
services such as e-governance, e-commerce and e-transactions; data security,
data privacy and implementation of security practices and procedures relating
to these applications of electronic communications have assumed greater
importance and they require harmonisation with the provisions of the
Information Technology Act. Further, protection of Critical Information
Infrastructure is pivotal to national security, economy, public health and
safety, thus it had become necessary to declare such infrastructure as
protected system, so as to restrict unauthorised access.

So, penal provisions were required to be included in the
Information Technology Act, 2000. Also, the Act needed to be
technology-neutral to provide for alternative technology of electronic
signature for bringing harmonisation with Model Law on Electronic Signatures
adopted by United Nations Commission on International Trade Law (UNCITRAL)
Keeping in view the above, Government had introduced the Information
Technology (Amendment) Bill, 2006 in the Lok Sabha on 15th December 2006. Both
Houses of Parliament passed the Bill on 23rd December 2008. Subsequently the
Information Technology (Amendment) Act, 2008 received the assent of President
on 5th February 2009 and was notified in the Gazette of India.

(Source : Internet & Media Reports, 28-10-2009)

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New cyber law casts its net wide

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  1. New cyber law casts its net wide

The country’s cyber law has finally caught up with cyber
criminals. Eight months after it received presidential assent, the amended
Information Technology Act of 2008 came into force on October 27. The amended
Act has spread its net to tackle more offences, including cyber terrorism,
Wi-Fi hacking, sending and viewing child pornography, video voyeurism,
identity theft and even spam. But at the same time, it allows the government
to intercept information and snoop on its citizens. The original Act had
effectively just one criminal S. 66 for cyber crime and it was widely worded,
but vague. The new Act covers a range of crimes that attract punishment from a
three-year jail term to a life sentence.

Critics say the flip side is that it gives unfettered power
to the government to monitor all e-traffic. The information could be misused,
say cyber activists. The central government, though, says safeguards have been
put in place to check misuse.

(Source : The Times of India, 28-10-2009)

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One-third of 80,000 public limited companies not filing annual returns

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  1. One-third of 80,000 public limited companies
    not filing annual returns

The Corporate Affairs Ministry said that around 30% of the
80,000 public limited companies are not filing their annual returns. The
Ministry has asked the Registrar of Companies (RoC) not to strike off the
names of companies by classifying them as defunct, even if they have not filed
their annual returns for three years. This is to find out if any of such
companies have committed violations of law.

The Ministry has developed an Early Warning System to find
out if any Satyam-like frauds are happening in any company. The Early Warning
would be sounded if a company’s profits show an absurd jump (that is, if they
exceed a certain threshold limit) or if companies cite absurd values regarding
their related party transactions. Besides, the warning would be sounded if a
company has huge cash balances remaining unutilised for several years, he
said. The official said the Ministry has asked RoCs and Regional Directors to
spread awareness about the advantages of getting a company listed. “Listed
companies have a better corporate profile and they have more borrowing
opportunities,” he said.

(It appears that the Authorities were sleeping all these
years — they acted only as filing clerks !)

(Source : Internet & Media Reports, 28-10-2009)

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Changes to RTI Act will make it toothless

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  1. Changes to RTI Act will make it toothless

This is the second time in the past four years that the
Right to Information (RTI) Act, which has made a difference to the lives of
millions of ordinary people, is under the threat of becoming toothless.

This time around, the Centre has proposed several
amendments to the sunshine act, including denial of information about file
notings where decision is yet to be taken and adding clauses that allow a
public information officer (PIO) to deny information by deeming it as
frivolous or vexatious in nature.
Shailesh Gandhi, who is now the Central Information Commissioner, Delhi,
emphasised that the RTI Act must not be touched as its provisions empower
citizens to procure information without delay and harassment from state
officials. “Any kind of change will only cause confusion and it will be used
as a ploy by PIOs to deny information.’’

“The DoPT had proposed amendments such as defining
institutions which have substantial finance funding and even adding
sub-sections to S. 4 of the Act. S. 4 of the RTI Act empowers citizen to suo
moto inspect government files and documents and there is no need to add a
citizen charter to it. Similarly, quasi-government organisations and
charitable trusts partly funded by the government come within the ambit of the
RTI Act,’’ Gandhi said.

The RTI seminar was organised by the Bombay Chartered
Accountants’ Society (BCAS) along with Mahiti Adhikar Manch and Public Concern
for Governance Trust. About 50 RTI activists and citizens participated in a
discussion on future course of action to oppose these amendments.

(Source : The Times of India, 21-10-2009)

 

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A buffet of wisdom

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  1. A buffet of wisdom


Like the saying of some ancient Chinese, philosophers,
Warren Buffet’s worldly wisdom is deceptively simple and powerful in
application.

Buffet’s investments achievements are unparalleled. He owes
his success to hard work, integrity and that most elusive commodity of all —
common sense. Here are some of his smartest, funniest and very memorable
saying :


  • You can’t make a good deal with a bad person.



  • The fact that people are full of greed, fear or folly is predictable. The
    sequence is not predictable.



  • Never ask a barber if you need a haircut.



  • In
    looking for someone to hire, you look for three qualities : integrity,
    intelligence and energy. But the most important is integrity because if they
    don’t have that, the other two qualities are going to kill you.



  • With enough inside information and a million dollars you can go broke in a
    year.



  • It
    is easier to stay out of trouble than it is to get out of trouble.



  • You should invest your money in a business that even a fool can run, because
    someday a fool will !



(Source : From the book The Tao of Warren Buffett
by Mary Buffet and David Clark — quoted in ‘Fireside’ — The House magazine
of the Thermax Group Volume 39 No. 3 July-September, 2009)


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Independence breach costs E&Y $ 2.9 million

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23. Independence breach costs E&Y $ 2.9 million


Ernst & Young LLP agreed to pay more than $2.9 million to the
Securities and Exchange Commission to settle charges that it violated auditor
independence rules by co-producing a series of audio CDs with a man who was also
a director at three of E&Y’s audit clients.

According to the SEC, Ernst & Young collaborated with Mark C.
Thompson between 2002 and 2004 to produce a series of audio CDs called The Ernst
& Young Thought Leaders Series. The CDs featured E&Y partners interviewing CEOs
and CFOs in various different industry sectors, which the SEC says was part of
an effort by E&Y to promote its partners as experts in specific industries.

That relationship, said the SEC, violated independence rules
because Thompson was serving on the boards at several of E&Y’s clients during
the period when the CDs were produced. The SEC censured Ernst & Young and fined
the firm $ 2,918,987. It also censured partner John F. Ferraro for setting up
the relationship, and partner Michael G. Lutze for failing to alert one of his
audit clients — apparently Best Buy — after learning of the relationship. Lutze
was also suspended from practising before the commission for one year. The SEC
also issued a cease-and-desist order against Thompson. E&Y, Thompson, Ferraro,
and Lutze settled with the SEC without admitting or denying its findings in the
case.

Among the several reasons the SEC said the relationship did
violate independence rules was that fact that “unbeknownst to E&Y,” the
$ 377,500 that Thompson was paid for his work amounted to approximately half of
his net income at the time.

(Source : CFO.com US 7-8-2008)

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UK to limit liability for audit firms as a result of Enron, but US declines to do so

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22. UK to limit liability for audit firms as a result of Enron,
but US declines to do so


The UK is limiting its liability for audit firms because of
Enron, but the US does not want to do the same, arguably for the same reason.

The UK has won the battle in persuading government that
allowing auditor liability arrangements will serve the greater good in securing
a vital part of the profession which serves UK plc.

But it was a battle fought long and hard, mired with mistrust
of whether firms were exaggerating the risk, as well as outright annoyance that
the profession needed protecting in the first place.

In the UK, the good sense that prevailed over limiting
liability had much to do with the transparent approach of the UK firms, who went
out of their way after the Enron collapse to exhibit by way of
their financial statements the extent of the risk they faced in the event of
similar litigation.

Financial Reporting Council Chairman Paul Boyle said UK firms
generally had higher levels of transparency than their US counterparts, which
contributed to securing more support for limiting their liability. He suggested
that US firms reconsider
their stance.

One of the points they are arguing is that firms should not
publish their financial statements. There is a link here, which they might want
to think about, between them not wanting to publish these state-ments and the
lack of support for limiting liability.

The US firms may want to stick to private reports for now.

But if they want their proposals for limiting auditor
liability to be taken seriously, they should equally consider providing the
proof of the risk that they claim to face.

And if the risk is as serious as they say it is, it should
not be too hard to prove.

(Source : Internet, 12-9-2008)

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China shuns Paulson’s free market — As US Treasury Secretary Plans $ 700-B Bailout

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21. China shuns Paulson’s free market — As US Treasury Secretary
Plans $ 700-B Bailout


Eighteen months ago, US Treasury Secretary Henry Paulson told
an audience at the Shanghai Futures Exchange that China risked trillions of
dollars in lost economic potential unless it freed up its capital markets.

An open, competitive, and liberalised financial market can
effectively allocate scarce resources in a manner that promotes stability and
prosperity far better than governmental intervention,” Paulson said.

That advice rings hollow in China as Paulson plans a
$ 700-billlion rescue for US financial institutions and the Securities and
Exchange Commission bans short sales of Insurers, banks and securities firms.
Regulators in the fastest-growing major economy say they may ditch plans to
introduce derivatives, and some company bosses are rethinking US business
models.

“The US financial system was regarded as a model, and we
tried our best to copy whatever we could,” said Yu Yongding, a former adviser to
China’s central bank. “Suddenly we find our teacher is not that excellent, so
the next time when we’re designing our financial system we will use our own mind
more.”

(Source : The Economic Times, 25-9-2008)

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Failed corporations under FBI lens

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20. Failed corporations under FBI lens


The FBI has now opened preliminary investigations into
possible fraud involving the four giant corporations at the centre of the recent
turmoil — Fannie Mae and Freddie Mac, Lehman Brothers and the American
International Group, the Associated Press reported.

(Source : Business Standard, 25-9-2008)

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Failed Superhero : Ineffective rescue acts of US in 100 years

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18. Failed Superhero : Ineffective rescue acts of US in 100 years

The 1907 panic :

In October that year, a run on the knickerbocker Trust after
it failed to corner the market in United Copper shares caused panic on Wall
Street. Stocks plummeted, threatening major banks with failure. The calming
influence came not from the Fed — which did not exist — but from banker John
Pierpont Morgan, who organised a consortium of bankers to provide funds to prop
up banks and buy up stocks.

Great Depression, 1930s :

Some 9,000 banks failed after a stock market collapse
triggered severe restriction of credit, massive loan failures and ‘runs’ by
depositors to withdraw funds. President F. D. Roosevelt’s first act after his
1933 inauguration was to declare a 3-day bank holiday to cool things off. He
later signed into law the Glass-Steagall Act, creating Federal Deposit Insurance
Corp (FDIC), to restore depositors’ confidence in banks.

Commonwealth Bank, 1972 :

This was the first bank with over $ 1 billion in assets to be
bailed out. Being essential to Detroit’s inner city, so FDIC provided $ 36
million in loans — never to be repaid.

First Pennsylvania, 1980 :

Established in 1782 as one of the first US private banks,
First Penn was among many banks in the 1970s made insolvent by high deposit
interest rates that outstripped earnings from lower-yielding assets. It was
FDIC’s first large-scale bailout.

Continental Illinois, 1984 :

Once the seventh-largest US bank, Chicago-based Continental
Illinois National Bank and Trust was deemed ‘too big to fail’ and remains the
largest commercial bank taken over by the Fed and FDIC. The $ 40 billion-asset
bank became insolvent due to bad oil and gas exploration loans.

Bear Stearns, 2008 :

US Fed and treasury brokered a weekend deal for JPMorgan
Chase & Co to buy Bear Stearns at a rock-bottom price, with the Fed agreeing to
guarantee $ 29 billion in Bear Stearns assets taken on by JPMorgan.

Fannie Mae, Freddie Mac, 2008 :

The government seized control of mortgage finance firms
Fannie Mae and Freddie Mac to stabilise them after massive falls in their share
price made it impossible for them to raise needed capital to sustain mounting
mortgage losses.

AIG, 2008 :

Fed stepped in to rescue AIG, one of the world’s largest
insurers, with an $ 85 billion injection of taxpayer money. Under the deal, the
government will get a 79.9% stake in AIG.

(Source : The Times of India, 18-9-2008)

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Audit firms found deficient during PCAOB inspections.

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19. Audit firms found deficient during PCAOB inspections.


Audit firms that were found deficient during PCAOB
inspections usually accepted the way a client company accounted for sales in the
past, rather than checking for updates.

As U.S. and international accounting standard setters work to
fix, and then converge, rules related to revenue recognition, preparers and
auditors still struggle with proper real-world application of the regs. Indeed, during a meeting held in New York last week, a top official at the
Public Company Accounting Oversight Board noted that revenue recognition issues
regularly trip up audit firms. Further, a new survey of senior finance executives concluded that revenue recognition is
one of the most complex and risky accounting issues of the day.

At the meeting, sponsored by the New York State Society of
Certified Public Accountants, revenue recognition topped the list of
deficiencies uncovered by the PCAOB in their inspections of audit firms, said
Paul Bijou, the Deputy Director of Inspection at PCAOB.

Bijou noted that in virtually every review performed by the
PCAOB, inspectors “see elements that audit work could be better” with regard to
revenue recognition.

Bijou said that trouble spots included the way auditors
assessed multi-element contracts, contracts that lead to revenue, revenue
‘cut-offs,’ and timing related to acceptance of product.

Bijou said that the PCAOB team once had a top-ten list of
“significant or frequent auditing or quality-control deficiencies” that it
culled from its five years of inspections. But this year, the list grew to 11
items. The areas are : revenue, related-party transactions, equity transactions,
business combinations and impairment of assets, going concern considerations,
loans and accounts receivable (including allowance accounts), service
organisations, use of other auditors, use of work prepared by specialists,
independence issues, and concurring partner review.

The survey, conducted by RevenueRecognition.com and IDC,
polled 586 senior finance executives, and found that 42% of the respondents
believe that revenue-recognition reporting causes the most errors and
inaccuracies in financial statements. Contract management, which gained only 14%
of the vote, came in second, with planning and budgeting (11%), and account
reconciliations (10%) rounding out the top four answers.

Thirty-five percent of the respondents thought that revenue-recognition reporting was the most complex corporate accounting process
to manage, while 57% asserted that revenue-recognition errors had the highest
level of materiality in financial-statement reporting.

(Source : Internet, 20-9-2008)

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Smallwood v. Revenue and Customs Comrs (2010) EWCA Civ 778 (Court of Appeals)

Smallwood v. Revenue and Customs Comrs

(2010) EWCA Civ 778

(Court of Appeals)

Facts of the case:

This article is based on the judgment of the Court of Appeal of the UK. The case relates to capital gain earned by Mr. & Mrs. T. Smallwood (TS) during the tax year ended on 5th April 2001 (tax year comprised period 6th April 2000 to 5th April 2001). They were domiciled and residents of the UK.

In the year 1989, TS had made settlement for the benefit of himself and his family members (‘the Trust’). The Trust held certain assets, bulk of which comprised shares of two listed companies of the UK.

In April 2000, the trustee of the Trust was a Jersey company (L). The trustee was advised to dispose of the shares of listed UK companies which had appreciated considerably in value and to diversify the trust investment. Had the shares been sold by the Trustee directly, capital gain earned would have triggered significant taxation in the hands of the settlor (TS) in the UK. This is because the UK tax provisions permit taxation of income of a trust in the hands of the settlor if he himself happens to be a beneficiary of the trust.

As against the general provision permitting taxation of income in the hands of the settlor, the UK statute also has a provision which mandates assessment of trust income in the hands of the trustee if at any time during the tax year, the trustees are resident of the UK. As a result, the trust was advised ‘Round the World’ tax scheme by K, according to which (a) for part of the year, residence of its trustee was to be shifted to Mauritius (treaty favoured jurisdiction) by appointing a Mauritius-based corporate trustee (KM) in place of L, and (b) thereafter to be shifted to the UK before the end of the year by resignation of KM and appointment of LTS. This was to ensure that shares of UK companies were disposed of by the Trust while trustee was resident of Mauritius and therefore assessment in the name of the Trustee would permit the Trust to enjoy benefit of the UK-Mauritius treaty.

The following is the schematic description of the scheme.

In the return of income, TS claimed the capital gain on sale of shares as exempt, by claiming advantage of the DTAA between the UK and Mauritius.The claim was rejected by H.M. Revenue and Customs (HMRC), as a result of which the taxpayer appealed to the Special Commissioners.

The Special Commissioners held that residential test had to be applied for a given tax year. The Trust had dual residence and the tie-breaker test of Article 4(3) resolved in favour of the UK since Place of Effective Management (POEM) was in the UK. Factual finding and conclusion of the Special Commissioners were as follows:

    (i) POEM is not defined in the DTA; it is the place which is the centre of top-level management; that is, where the key management and commercial decisions are actually made.

    (ii) In this case the key decision was to dispose of all the shares in a tax-efficient way.

    (iii) The facts surrounding the appointment of KM leads one to the view that the real top-level management, or the realistic, positive management of the Trust, remained in the United Kingdom.

    (iv) It was a representative of K who approached KM and told them about the tax planning proposals and set out the basis of their appointment.

    (v) Although KM’s duties as trustee were laid down in legislation and in the trust deed and KM would only act within the context of what it was allowed to do, and the representative of KM stated on examination that the sale of the shares was not a condition for KM to accept the appointment as trustee and that the trustees only wished to receive appropriate advice and recommendations, nevertheless, it was also accepted by the representative that eventually as part of the tax planning exercise the shares would be sold at some time.

    (vii) All the actions of KM in Mauritius were carried out correctly and were properly documented. The appropriate meetings took place there and the necessary resolutions were passed. However, this merely meant that the administration of the Trust moved to Mauritius, but the ‘key’ decisions were made in the United Kingdom.

    (viii) The decision to sell the shares on the particular day was taken by the directors of KM at the telephone meeting; however, this only meant that if, for example, the price of the shares had fallen to a level as a result of which no gain would be realised on their disposal, the shares would not have been sold, but would have been retained and perhaps sold later. This was a lower-level management decision as there was no doubt that the shares would be sold; the real top-level management decisions, or the realistic, positive management decisions of the Trust, to dispose of all the shares in a tax efficient way, had already been, and continued to be, taken in the United Kingdom. The ‘key’ decisions were made in the United Kingdom.

    (ix) The state in which the real top-level management, or the realistic, positive management of the Trust, or the place where key management and commercial decisions that were necessary for the conduct of the Trust’s business were in substance made, and the place where the actions to be taken by the entity as a whole were, in fact, determined between 19 December 2000 and 2 March 2001, was in the UK.

On appeal by taxpayer to the High Court, the decision of Special Commissioners was reversed. The High Court adopted ‘snap-shot’ view of residential status and concluded as under at para 44:

    (i) The Commissioners erred in creating a simultaneous residence for the trustees.

    (ii) The correct analysis is that there were three periods of successive residence in the relevant UK tax year — Jersey, Mauritius and then the UK.

    (iii)    Article 13(4) gives the right to tax capital gains to the state in which there was residence at the time of the disposition.
    (iv)    That state was, at that date, Mauritius.
    (v)    Since there were no two jurisdictions vying for a claim of residence in that period, there is no tie for Article 4 to break.
    (vi)    Accordingly, Mauritius has the right to tax and the UK does not.

    The matter finally went to Court of Appeals. The Court, inter alia held (by majority) that on the primary facts which the Special Commissioners found, the POEM of the Trust was in the UK in the fiscal year in question. The scheme was devised in the UK by TS on the advice of K. The steps taken in the scheme were carefully orchestrated throughout from the UK. It was integral to the scheme that the trust should be exported to Mauritius for a brief temporary period only and then be returned, within the fiscal year, to the United Kingdom, which occurred. TS remained in the UK. There was a scheme of management of the trust which went above and beyond the day-to-day management exercised by the trustees for the time being, and the control of it was located in the UK.

    The Court of Appeal also adjudicated on a number of other issues. This Article is confined to treaty-related issue of POEM and does not deal with other issues which had an interplay of domestic law and treaty provisions.

    Inferences:

    From the judgment, the following inferences can be drawn:
 

  (i)    A formal resolution by board of directors does not establish that POEM is where the Board passes the resolution.
  
(ii)    The Board minutes are not conclusive as to where the POEM is.
 (iii)    If a scheme is devised at a particular place from where the steps in the scheme are orchestrated, it is that place where the scheme is devised/orchestrated is where the POEM is situated.
   
(iv)    Such scheme of management goes beyond the day-to-day management exercised by the Trustees for the time being and the control of it is located at a place where the scheme if devised. If a particular decision is taken in place ‘X’, then its implementation in other place ‘Y’ where the corporate trustee is situated does not make the other place the POEM. The POEM is situated where the key decisions are made.

    OECD/UN Commentaries:

    The OECD Commentary on Article 4(3), India’s observation to the OECD Commentary and the UN Commentary on A. 4(3) are reproduced below:

    OECD Commentary (2005) on Article 4(2):

    The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts in these circumstances must be examined to determine the place of effective management.

    OECD Commentary (2008) on Article 4(3):

    “24. As a result of these considerations, the ‘place of effective management’ has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.”

    India’s Observation to OECD Commentary on Article 4(3):
    “11. India does not adhere to the interpretation given in paragraph 24 that the place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. It is of the view that the place where the main and substantial activity of the entity is carried on is also to be taken into account when determining the place of effective management.”

    UN Commentary on Article 4(3):

    “10. It is understood that when establishing the “place of effective management”, circumstances which may, inter alia, be taken into account are the place where a company is actually managed and controlled, the place where the decision-making at the highest level on the important policies essential for the management of the company takes place, the place that plays a leading part in the management of a company from an economic and functional point of view and the place where the most important accounting books are kept.”

    Indian Perspective:

    The Indian perspective is explained separately for:
    (a)    the period up to 31st March 2012 (the last date up to which the Income-tax Act, 1961 (‘the Act’) will remain in force), and
    (b)    the period from 1st April 2012 (when the Direct Tax Code (DTC), assuming it will be enacted in the form in which the Bill is presented, will come into force).

    Income-tax Act, 1961:
    There is no definition of POEM in the Act. For the purposes of DTAAs, it has been held as follows by Tribunal/Authority for Advance Rulings (AAR):
    (i)    P. No. 10 of 1996, In re (1996) 224 ITR 473(AAR):
    In this case the Authority dealt with the issue of determining POEM for two companies. In the case of the first company, it was contended that the POEM is in Mauritius on account of the following facts:

            The company has two resident directors of appropriate calibre to exercise independence of mind and judgment.

  •             The company’s secretary is a resident in Mauritius;

  •             The registered office is in Mauritius;

  •             Banking transactions will be channelled through the Hongkong and Shanghai Banking Corporations;

  •             Accounting records will be maintained in Mauritius in accordance with the Companies Act, 1984;

  •             Board meetings will be held in or chaired from Mauritius;

  •             All statutory records, such as minutes and members’ register, will be kept at the registered office;

  •             The company has an ordinary status.

    The Authority observed that it is difficult to say that the effective management of the affairs of the company is not in Mauritius in the above situation unless there are facts to at least prima facie indicate that such control emanates elsewhere than from Mauritius.

    In case of the second company, the Authority observed that the POEM of a company is the place where its board of directors takes the decisions; the position would remain the same even if the board would rely, to a considerable extent, on advisors if these advisors are not decision-taking bodies and regardless of the delegation, the company remains responsible for all decisions and acts of any delegate as if it has been done by itself.

    (ii) P. No. 9 of 1995, In re. (1996) 220 ITR 377(AAR)

    The Authority held that the word ‘Place of ef-fective management’ refers to place from where factually and effectively, the day-to-day affairs of the company are carried on and not to the place in which may reside the ultimate control of the company (shareholder).

    (iii)    DLJMB Mauritius Investment Co., In re (1997) 228 ITR 268 (AAR):

    The applicant contended that its place of effective management was situated in Mauritius under Article 4(3) of India-Mauritius Tax Treaty on account of the following facts:

  •             At least two directors of the company were resident in Mauritius and such directors had appropriate caliber to exercise independence of mind and judgment.

  •             The company secretary of the company was resident in Mauritius.

  •             The registered office of the company was in Mauritius.

  •             Banking transactions were channeled through an offshore bank account in Mauritius.

  •             Accounting records were maintained in Mauritius in accordance with the Mauritian Companies Act.

  •             Director’s meetings were held in Mauritius.

  •             All statutory records, such as minutes and members’ register were kept at registered office.

  •             The auditors were Mauritian residents.

  •             The company had a Mauritian custodian for its assets.

  •            The company was regulated by the Mauritius

    Offshore Business Activities Authority of Mauritius (MOBAA).

  •             The company was required to report on a quarterly basis its investments operations to MOBAA.
  •             The company was subject to such enactments and conditions as may from time-to-time be adopted Mauritian authorities in relation to investment funds, collective investment schemes and conduct of investment business.

  •             The company was incorporated for investment in Indian companies and investors from different jurisdictions were investing in the Mauritian company and directors in the company were appointed from different jurisdictions.
  •             Dividends were remitted from India to the Mauritian company.

    The Authority quoted the observations in P. No. 9 of 1995, In re (1996) 220 ITR 377 (AAR) [see(ii) above] and held that the said reasons were equally applicable. Accordingly, it held that the POEM of the applicant was in Mauritius. It did not comment on the aforesaid factors pointed out by the applicant.

    (iv)    Integrated Container Feeder Service v. JCIT, (96 ITD 371) (Mum.):

    The appellant, a shipping company incorporated in Mauritius and carrying on activity of operating ships in international traffic from India contended that its POEM was in Mauritius. The Tribunal observed that:

    The term ‘place of effective management’ has neither been defined in DTAA, nor defined in Income Tax Act, 1961. Therefore, the said term should be understood in its natural meaning. It is plausible to say that the words ‘place of effective management’ refer to a place from where factually and effectively the day- to-day affairs of the company are managed and controlled and not to the place in which may reside the ultimate control of the company. In the context of the Company, it observed that it refers to a place where ships are put into service.

    It held that the company’s POEM was not in Mauritius on the following grounds:

  • No business activity was carried out in Mauritius.

  • The directors’ meetings were held in Mauritius only as a necessary formality to maintain its corporate status and to obtain tax residency certificate.
  •  The owners were from Dubai and entire business correspondence was made from Dubai.
  • Operating instructions were received only from Dubai.

  • The place of management was in UAE since all the staff, officers and captains were sitting in Dubai.

    The Tribunal observed that determination of the existence of effective management at a particular place is a question of fact which has to be determined according to facts of a particular case and that the certificate from Mauritian Authorities that the company’s POEM is in Mauritius is not sufficient.

    (v)    Saraswati Holding Corporation Ltd. v. DDIT, 16 SOT 535 (Del.):

    The appellant executed power of attorney in favour of Indian residents who conducted transactions through stock-brokers in India. The Assessing Officer held that the appellant had its POEM in India on the following grounds:

  •             The POA holders were in India; they were entitled to carry on activities on behalf of the appellant and that decisions regarding investments were taken by them.

  •             The share transactions were either concluded through one share-broker in India (V) who was managing investments of the appellant or through other brokers, in which case V was kept updated.

  •            The shares were being purchased and sold within a short span of three to four days and such decisions required close monitoring of the mood of the market.

    The Tribunal held that the reasons assigned by the Assessing Officer were insufficient to come to a conclusion that POEM of the appellant was in India. It observed that:

    The law is well settled that control and management of affairs does not mean the control and management of the day-to-day affairs of the business. The fact that discretion to conduct operations of business is given to some person in India would not be sufficient. The word ‘control and management of affairs’ refers to head and brain, which directs the affairs of policy, finance, disposal of profits and such other vital things consisting the general and corporate affairs of the company.

    It held that the place of effective management was not in India on account of the following reasons:

  •             The POA merely empowered the persons in India to conduct the day-to-day affairs of the company.

  •             Directions were issued by the two non-resident shareholders as evidenced by the telephone bills recording the calls made to India from time to time.

  •             The board of directors of the appellant had passed a resolution whereby the authority to take decisions was only with one of the two non-resident shareholders.

    (vi)    SMR Investments Ltd. v. DDIT, 2010 TII 66 ITAT Del-Intl:
    In this case, the orders for sale of shares held by the appellant were placed by a shareholder holding 99% of the shares in the appellant and who was a resident of India. The telephone calls were made from India. The appellant was asked to furnish the passport of the shareholder to verify whether the telephone calls were made from India or not. The passport was not furnished in spite of various opportunities. The AO held that it is the actual place of management of a company and not the place where it ought to manage and control the company that determines the POEM and accordingly he held that the appellant was resident of India. The appellant filed passport copies of a former director of the company and contended that from the passport it was clear that the director was in Mauritius on the dates on which the Board meetings of the Appellant were held. An affidavit of the director was also placed on record. Accordingly, the appellant indicated that the effective control was in Mauritius. The Revenue doubted the authenticity of the signatures. In view of this, the Tribunal restored the matter to the AO for examining the authenticity of the documents and deciding the issue afresh/ de novo. The facts and the Tribunal’s decision suggest that the Tribunal accepted that it was not the place where the orders were placed but the place where the board meetings were held that decided the POEM.

    DTC:

    The DTC Bill proposes to introduce a definition of POEM as follows:

    “(192) ‘place of effective management’ means —

    (i)    the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or
    (ii)    in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.”

    Summary:

    The OECD Commentary of 2008, specifically re-moves the reference to the board of directors. It reiterates the emphasis on the place where the decisions are made in substance. The UN Commentary provides for a number of circumstances to be taken into account for determining the POEM. It also uses the word ‘actually manage and control’ suggesting that it is the place of actual management which is relevant. The Commentary also states that the place that plays a leading part in the management of the company from economic and functional point of view is also a circumstance to be considered. It is not clear from this, whether the Commentary alludes to top management or the day-to-day management. It is also not clear as to how the place where the accounting books are kept could constitute a circumstance in deciding the POEM.

    5.2 So far as the judgment in Smallwood is concerned, it provides a useful guidance in inter-pretation of POEM, a concept which will acquire paramount significance in the DTC regime. A finer reading of the judgment reveals that the Court has accepted both OECD and UN Commentary’s (partly) understanding of concept of POEM. It has given weightage to the place where key and real topmost-level decisions were made in substance and held that place to be POEM. This place need not necessarily be the same place where Board meetings are conducted. In the Court’s view, the place where the whole tax planning scheme was orchestrated constituted the POEM.

    In the Indian context, the AAR/Tribunals have taken diverse views on the matter?: On the one hand it has been held that the place where the board of directors takes the decision is the POEM. On the other hand it is also been held that POEM refers to a place from where the day-to-day affairs of the company are managed and controlled. Again, factors other than the directors e.g., Company Secretary, Registered Office, etc. have also been considered to hold that the POEM was in Mauritius. Further, the Tribunal has held that the POEM refers to the place where all the employees were based and from where the revenue generating assets (ships) are put in service. In that case, the Tribunal went behind the Board meetings.

    It appears that:

    (a)    the POEM is at the place where the key man-agement decisions are actually taken. This is also supported by the dictionary meaning of the word ‘effective’ as ‘existing in fact, actual’ (www.thefreedictionary.com) and ‘real’ [see Worley Persons Services Pty. Ltd., In re (2009) 312 ITR 273 (AAR) interpreting ‘effectively connected’].

  

(b)    the place where the day-to-day affairs of the company are carried on does not constitute its POEM;
   
(c)    the factors such as company secretary, regis-tered office may not be relevant in the overall scheme of determination of POEM;
 
  (d)    the POEM is not necessarily at a place where the employees are based;
   
(e)    ordinarily it is the place where the board meet-ings are held is the POEM. However, this is a rebuttable presumption. If facts reveal that key management decisions are really or are actually taken at a place other than the place where board meetings are held and the board merely follows instruction or works within the framework provided by other person, then the POEM will lie at a place from where such other person instructs;
  
(f)    for the above, the onus would be on the Tax Department to prove that POEM lies at a place other than the place where board meetings are held. Some facts which may be relevant in deciding whether POEM lies at the place where the Board meetings are held or at some other place are:
   
(i)    Minutes of board meeting: Whether minutes provide evidence of elaborate discussion at the time of passing a particular resolution;
 
  (ii)    Composite of directors on the board:
    Their reputation, qualification, experience, attendance in board meetings, etc.
   
(iii)    Documentation of commercial rationale behind taking a particular decision.
   
(iv)    Residency of directors. If meeting are held through audio/video conferencing reason for their physical absence.
    (v)    Power of Attorney (POA) under which some functions of Board are delegated: Whether such POA is under the authority of the board and there are sufficient checks and control whereby actions taken by the attorney holder are monitored and controlled.

Suggestions on the draft Point of Taxation (for services provided or received in India) Rules, 2010

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Representation

4th
November, 2010


To,

The Chairman,
Central Board of Excise & Customs,
Department of Revenue,
Ministry of Finance & Company Affairs,
North Block,
New Delhi-110001.

Dear
Sir,


Subject
: Suggestions on the draft Point of Taxation (for services provided or received
in India) Rules, 2010



The Bombay Chartered Accountants’ Society (BCAS) is a voluntary organisation established on 6th July 1949. BCAS has about 8,000 members from all over the country at present and is a principle-centred and learning-oriented organisation promoting quality service and excellence in the profession of Chartered Accountancy and is a catalyst for bringing out better and more effective Government policies & laws and for clean and efficient administration and governance. We make representations regularly on Direct and Indirect Taxes.

Please find attached suggestions on the draft Point of Taxation (for services provided or received in India) Rules, 2010 (‘Rules’).

Thanking you,

Yours truly,

For Bombay Chartered Accountants’ Society

Mayur B. Nayak    
President 

Govind G. Goyal
Chairman Indirect Taxes & Allied Laws Committee

Encl : Suggestions

Bombay Chartered Accountants’
Society

Suggestions on the draft
Point of Taxation (for services provided or received in India) Rules, 2010
(‘Rules’)

Rules to be restricted only
for the purpose of ascertaining the date for determination of rate of service
tax and not for altering the time for payment of service tax from the present
receipt basis to accrual/invoice basis/receipt whichever is earlier.

1. The Point of Taxation
(for Services Provided or Received in India) Rules, 2010 (‘Rules’) are sought to
be issued in exercise of the powers conferred on the Government of India u/s.
94(2)(hhh) of the Chapter V of Finance Act, 1994 (hereinafter referred to as the
‘Act’), which is the law governing service tax.

2. The purposes of the draft
rules as stated in the preamble are :

    (i) To introduce clarity and certainty as to the date from which a new service would become payable

    (ii) To provide for the above in the context of continuous supply of services

    (iii) To link the liability to pay tax to provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is the earliest

    (iv) To bring the service tax law in line with Central Excise Laws and VAT laws; and

    (v) To smoothen transition to GST.

3. However, an important
point to be noted is that the Point of Taxation (for Services Provided or
Received in India) Rules, 2010 are sought to be issued pursuant to S. 94(2)(hhh)
which is dealing with ‘the date for determination of rate of service tax and the
place of provision of taxable services’. Hence in the present context, the Rules
must confine themselves primarily to prescribing the date for determination of
the rate of service tax whenever there are changes in the rate of service tax.

It cannot legally entrench
into other areas such as linking the liability to pay tax to provision of
service, raising of the invoice or receipt of payment for service provided or to
be provided, whichever is earliest or imposition of service tax on new services.
These areas would be outside the legal scope of S. 94(2)(hhh) of the Act.

4. Secondly, the charge of
service tax is on the value of ‘taxable services’. S. 65(105) defines ‘taxable
service’ as ‘any service provided or to be provided’ to ‘any person’, ‘client’,
‘customer’, etc. Thus, S. 65(105) which defines ‘taxable services’ covers — (a)
services ‘provided’; and (b) services agreed ‘to be provided’ within the ambit
of service tax. The intention is to collect tax when advance payments are
received for services to be provided. Thus, service tax would be payable even on
advances received. Thus, the taxable events would be two :

(a) a service provided;
and

(b) a service agreed to be
provided.

‘Taxable event’ with regard to services ‘provided’ is identified by the time of provision of the service and with regard to services ‘to be provided’ is identified by time of payment towards value of service to be provided. This has a significant bearing on the rate of tax. Thus where there has been a provision of services but no monies towards the value of services have been received, the rate of tax prevailing at the time of provision of services would apply. Similarly, in cases where monies have been received towards the value of services but the services are yet to be provided, the rate of tax prevailing at the time of receipt of payment towards the value of services would apply. These propositions are implicit in the law [S. 65(105), S. 66 & S. 67] and the Service Tax Rules, 1994 (Rule 6). The Rules sought to be notified must not alter these provisions but must make them explicit. Thus the relevant date for the purpose of determination of rate of tax would be the ‘date of provision of service’ or ‘the date of receipt of money, whichever is earlier. This is the present understanding.

5.    Thirdly, it would be better not to disturb the existing arrangement of paying service tax when monies for taxable services provided or to be provided are received. The changeover from the present dispensation which allows payment of tax on receipt of the payment (including advances) to a system where tax is paid to the Central Govern-ment on provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is earliest would involve several issues :

(i)    Changes in the Act to provide for the taxable event at the time of supply as in the UK. VAT law.

(ii)    Change in Rule 6 of the Service Tax Rules, 1994.

(iii)    Changes in Cenvat Credit Rules,2004 which allow credit of input services only when they are paid.

(iv)    Further, there are no provisions relating to bad debt adjustment or reduction in the invoices in case monies are not received or monies are received less as compared to the invoice amount. Hence the service providers would have to pay tax even on monies not received. Thus, the service provider would be out of pocket if they have to pay service tax on invoices issued but the monies for the service are not received.

(v)    The payment of tax upon issue of invoices without having received the payment would mean that the tax would have to be financed by internal accruals or borrowings which in most cases would be difficult for service providers.

(vi)    The provision of service is quite different compared to sale/manufacture of a product. Firstly, services are intangible unlike goods where the sale/clearance of a product is verifiable physically by delivery challans, transport documents, etc. In case of services the delivery of a service cannot be verified. Out of the three events — (i) provision of services; (ii) issue of invoice and (iii) receipt of payment, the last event viz., receipt of payment is historically and factually verifiable by the Department with a greater degree of certainty. Secondly, the service provider may not have a lien on the service unlike in case of goods.

There are no documents of title to services which can be put through the bank and hence the recoverability is suspect. The rights of an unpaid seller of goods are well guarded and recognised in law as against the rights of an unpaid service provider. Hence it may not be correct to equate goods and services. Thirdly, in case of Central Excise law and VAT law, the tax is not payable on advances. Thus, the purpose of the Rules viz., to bring the service tax law in line with Excise law and VAT law is not achieved nor is it necessary.

(vii)    Further there will be several issues when there is a transition from payment of service tax on receipt basis to/payment of service tax on provision of service, raising of the invoice or receipt of payment for service provided or to be provided, whichever is earliest. There would be several system and software issues. This needs to be avoided.

In this regard, it has to be appreciated that the payment of service tax on receipt of money towards provision of services was in vogue since 1998 and has worked quite well mainly due to its simplicity and more importantly, since it provides a more factually verifiable basis for the Department to collect service tax.

6.    In view of the above, it is submitted that the Rules must confine themselves only to provide for the date for determination of rate of service tax.

7.    Accordingly, a suggested draft of the Rules centred around carrying out the objective viz. prescribing the date for determination of rate of service tax is attached herewith marked Annexure A. Basically, the suggested draft revolves around an important maxim that the rate of service tax would be the ‘date of provision of service or receipt of payment of money for services, whichever is earlier’.

Other suggestions:

8.    In Rule 6 of the draft Rules, it has been provided that where the payment has been made before the date of introduction of service tax on a service, no tax shall be payable to the extent of payment received. In our view, this provision must be made by way of an exemption notification and cannot find place in the proposed Rules.

9.    A closely related issue is with regard to determination of value where invoiced amount is in foreign currency. In such cases, the Service tax (Determination of Value) Rules, 2006 must be amended to provide that the rate of exchange applicable shall be the rate prevailing on the ‘date of provision of service or receipt of payment of money for services, whichever is earlier’.

Draft of Service Tax (Determination of the Rate of Tax) Rules, 2010
 
In exercise of the powers conferred by clause (hhh)    of Ss.(2) of S. 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:

Short-title and commencement:

1.    (1) These Rules shall be called the Service Tax (Determination of the rate of tax) Rules, 2010.

(2) They shall come into force on the date of their publication in the Official Gazette.

 

Definitions:

2.    In these Rules, unless the context otherwise requires:

(a)    ‘Act’ means the Finance Act, 1994 (32 of 1994);

(b)    ‘continuous supply of service’ means any service which is provided, or to be provided, under a contract, for a period exceeding one year and for a consideration the whole or part of which is determined periodically and includes any service which the Central Government, by a Notification, prescribes to be a continuous supply of service, whether or not subject to any condition;

(c)    ‘Invoice’ shall have the meaning assigned to it in Rule 4A of the Service Tax Rules, 1994 and shall include any bill or challan as prescribed therein;

(d)    Words and expressions not defined in these Rules but defined in the Act or the Rules made thereunder shall have the meanings, in-sofar as maybe, assigned to them in the Act or the Rules made thereunder.

Date for determining the rate of service tax:

3.    For the purposes of ascertaining the date for determining the rate of service tax, the following provisions shall apply, namely:

(a)    where the service has been provided and no payment has been received, the rate of service tax shall be the rate prevailing on the date when the services are provided and if for any reason date of provision of services is not determinable, the date of receipt of money towards the service provided or to be provided shall be date for determining the rate of service tax.

(b)    If, before the provision of service, the service provider receives a payment in respect of the service to be provided, the rate of service tax shall be the rate prevailing on the date of payment to the extent covered by the payment.

Explanation: An interest-free refundable deposit shall not be considered as a ‘receipt of payment in respect of the service to be provided’. However, if the terms of the contract provide that such interest-free refundable deposit is adjustable against the consideration payable by the service receiver, then the date of adjustment shall be considered as the date of receipt of payment.

Continuous supply of service:

4.    In case of continuous supply of services, where the whole or part of the value is determined or payable periodically or from time to time, the rate of service tax shall be the rate prevailing at the following times:

(i)    If the date of payment is prescribed in the contract, the date on which the payment is liable to be made by the service receiver, irrespective of whether or not any invoice has been raised or any payment received by the service provider;

(ii)    If the payment is to be made on the completion of an event, the time of completion of that event;

(iii)    If the date of payment is not prescribed in the contract, each time when the service provider receives the payment, or issues an invoice, whichever is earlier.

Provided that the clauses (i) to (iii) shall be applied sequentially for the purposes of this rule.

Explanation: Where service tax is payable as a service recipient the date of issue of invoice has to be understood as date of receipt of invoice by the service recipient.

Associated enterprises:

5.    The rate of tax in respect of transactions between associated enterprises shall be the rate prevailing on the date on which the payment has been made, or the date of debit or credit in books of accounts, or issuance of invoice, whichever is earlier.

Explanation: Where service tax is payable as a service recipient the date of ‘issuance of invoice’ has to be understood as date of receipt of invoice by the service recipient.

Royalties and similar payments:

6.    In respect of royalties and similar payments, where the whole amount of the consideration for the provision of service was not ascertainable at the time when the service was performed, and subsequently the use or the benefit of this service by a person other than the supplier gives rise to any payment of consideration, the rate of service tax shall be the rate prevailing:

(i)    each time that a payment in respect of such use or the benefit is received by the provider; or

(ii)    an invoice is issued by the provider, whichever is earlier.

BCAS/MBN/40    November 9, 2010

To
The Concerned Officer,
Foreign Investment Promotion Board (FIPB),
Government of India,
New Delhi-110001

Dear Sir,

Subject : Submission of Representation on Issue of Shares for Consideration other than Cash

We are pleased to submit our considered represen-tation on the aspects of Foreign Direct Investments with regard to Issue of shares for Consideration other than Cash.

We hope that the same would be useful and would find your favour.

Please feel free to contact us for any further clarification or explanation in the matter.

We shall be pleased to assist you in framing a pragmatic policy on Foreign Direct Investment.

Thanking you,

Yours faithfully,

Mayur B. Nayak
President

Limitation of Benefits Articles – Concept and its Application in Indian Tax Treaties

1. Introduction :

1.1 While making cross-border investments, a tax-payer usually looks forward to, among others, the following objectives :

 

(a) protection against double taxation;

(b) achieving certainty in respect of quantum of tax liability, including withholding taxes;

(c) a tax-efficient structure; and

(d) hassle-free tax regulatory environment.

 

1.2 For achieving the above objectives, many a time appropriate tax treaties are used. Taking advantage of the Double Taxation Avoidance Agreement (DTAA) between two countries by a resident of third country is known as treaty shopping.

Of late, the tax authorities have expressed apprehensions on misuse of tax treaties, whether by way of treaty shopping or otherwise. As a result of the problems created by treaty shopping, strong views are expressed that a tax treaty should not facilitate tax avoidance and therefore, the common practice of treaty shopping should be restrained by incorporating various safeguards.

1.3 There has been a conscious attempt on the part of various countries to incorporate the concept of ‘Limitation of Benefits’ (LOB) in tax treaties, to ensure that their tax base is not eroded by foreign companies taking advantage of tax treaty network by way of treaty shopping, etc. Thus, the concept of LOB assumes lot of significance while studying and interpreting the international tax treaties.

1.4 The Supreme Court (SC) in Union of India v. Azadi Bachao Andolan, (263 ITR 706), observed as under :

 

“. . . . if it was intended that the national of a third state should be precluded from the benefits of Double Taxation Avoidance Convention, then a suitable term of limitation to that effect should have been incorporated therein . . . . The appellants rightly contend that in the absence of a limitation clause, such as the one contained in Article 24 of the Indo-U.S. Treaty, there are no disabling or disentitling conditions under the Indo-Mauritius Treaty prohibiting the resident of third nation from deriving benefits thereunder . . . . .”

 

Thus, the SC decision in Azadi Bachao appears to be a catalyst for India to take note and insist on the LOB clause in its tax treaties.

2. Meaning and Concept of Limitation of Benefits :

2.1 The terms ‘Limitation on Benefits’ or ‘Limitation of Benefits’ or ‘Limitation of Relief’ as are used in tax treaties, are generally not defined under the international tax treaties. At times, the relevant Articles/Clauses may not also be titled as such. The LOB provisions are intended to prevent treaty shopping, whereby an entity can be established without any economic connection, so that access can be had and thereby the benefits of treaty obtained. The LOB prevents treaty shopping and thus tax avoidance by denying treaty benefits to unintended beneficiaries who channel their investments through entities formed in a treaty country without being the resident thereof. The concept underlying such a provision is that a contracting state should accord treaty benefits only if the recipient of income has sufficient nexus with the other contracting state.

2.2 The IBFD International Tax Glossary defines the term ‘Limitation on Benefits Provision’ as under :

 

“Provision which may be included in a tax treaty to prevent treaty shopping e.g., through the use of a conduit company. Such provisions may limit benefits to companies which have a certain minimum level of local ownership (‘look-through approach’), deny benefits to companies which benefit from a privileged tax regime (‘exclusion approach’) or which are not subject to tax in respect of the income in question (‘subject-to-tax approach’), or which pay on more than a certain proportion of the income in tax-deductible form (‘channel approach’ or ‘base erosion rule’) . . . .”

 

2.3 From the above definition, it is apparent that LOB provisions are included in the tax treaties mainly to put restriction on availment of treaty benefits by a conduit company or an entity formed for the purposes of treaty shopping. However, the concept of LOB could also include the following :

(a) Look-through approach : Such provisions may limit benefits to companies which have certain minimum level of local ownership. Treaty benefit may be denied to a company not owned, directly or indirectly by residents of a state of which the company is resident.

(b) Subject-to-tax approach : Such provision may deny benefits to companies which are not subject to tax in respect of the income in question in the state of residence. Treaty benefits in the state of source are granted if the income in question is subject to tax.

(c) Channel approach : The provisions may deny benefits to companies which pay more than a certain percentage of the income in tax-deductible form to non-qualified entities. The treaty benefits could be denied if substantial interest in the company is owned by the residents of a third country and more than 50% of the income is used to satisfy claims by such persons.

(d) Exclusion approach : Such provisions may include denying treaty benefits (such as dividends, interest or capital gains) to specific type of companies enjoying tax privileges in the state of residence.

(e) Specific condition to be fulfilled with respect to exemption from particular category of income e.g., the Protocol to the India–Singapore DTAA provides for specific condition to be fulfilled by an entity for claiming exemption from capital gains tax in the source country.

(f) Specific LOB Articles dealing in general with conduit entities or treaty shopping or entities attempting to claim double non-taxation e.g., Indian DTAAs with countries such as UAE, Namibia, Kuwait, Saudi Arabia contain specific LOB Articles dealing in general with the treaty shopping or double non-taxation.

(g)OECD Model Convention in Article 10(2)(a) relating to concessional rate of tax on dividends in case of companies, provides for beneficial ownership of the minimum threshold percentage of the capital of the company paying the dividends. Many DTAAs entered into by India contain such clauses with varying threshold limits. Similarly, the interest and royalties and fees for Technical Services Articles restrict the benefit of lower rate of tax provided in those articles to only ‘beneficial owner’ of the respective incomes.

3. LOB Articles in the Model Conventions:

3.1 The OECD and UN Model Conventions do not contain separate Article in respect of LOB clause.

However, Commentary on OECD Model Tax Convention, July, 2008 update in para 20 on page 54, under Commentary on Article 1 provides as under:

“20. Whilst the preceding paragraphs identify different approaches to deal with conduit situations, each of them deals with a particular aspect of the problem commonly referred to as ‘treaty shopping’. States wishing to address the issue in a comprehensive way may want to consider the following example of detailed limitation-of-benefits provisions aimed at preventing persons who are not resident of either contracting states from accessing the benefits of a Convention through the use of an entity that would otherwise qualify as a resident of one of these states, keeping in mind that adaptations may be necessary and that many states prefer other approaches to deal with treaty  shopping:………..”

Thus, in para 20 of Commentary on Article I, the OECD has given example of detailed limitation of benefits provisions, which the states may adopt.

3.2 Article 22 of the United States Model Income-tax Convention of November 15,2006 contains separate article in respect of limitation on benefits. United States Model Technical Explanation accompanying the United States Model Income-tax Convention of November IS, 2006 gives detailed explanation and examples in respect of LOB Article. The reader would greatly benefit by going through the said explanation and examples in this regard. Article 24 of the India-US DTAA contains the provisions relating to limitation on benefits.

4. LOB Clauses in Indian Tax Treaties:

4.1 At present 8 DTAAs entered into by India with Armenia, Iceland, Namibia, Kuwait, Saudi Arabia, Singapore, USA and UAE contain separate articles in respect of LOB.

In addition, India’s recent treaties with Mexico (signed on September, 10, 2007) and Luxemburg (signed on June 2, 2008) contain LOB Articles, although both the treaties are yet to be notified by the Government of India.

4.2 The text of the relevant LOB Articles in the above-mentioned 8 DTAAs, is given below for ready reference .


Conclusion:

From the above, it is clearly evident that the significance of articles relating to Limitation of Benefits clause cannot be undermined. All concerned parties would need to pay specific attention to LOB clauses in India’s Tax treaties. India is increasingly including Limitation of Benefits clause in the new treaties and in some cases including the same in the existing treaties by renegotiating existing treaties through the protocols as in the cases of Singapore and UAE. A taxpayer would be well advised to look for and examine relevant LOB clauses very minutely before taking any decisions ‘in relation to the relevant DTAAs.

Representation on Compounding Procedures and Sums

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Representation

Representation


Bombay Chartered Accountants’ Society
7, Jolly Bhavan No. 2, New Marine Lines,
Churchgate, Mumbai-400020.

The Chamber of Tax Consultants
3, Rewa Chambers, Ground Floor,
31, New Marine Lines, Mumbai-400020.
   

Honourable Governor,
Reserve Bank of India.
Dr. D. Subbarao, Central Office,
Mumbai-400001.

 

Date
: 27th October, 2009

Respected Sir,

Re : Our Meeting on 21st October 2009 with CGM.Compounding
Procedures and Sums.



This is to sincerely thank you for the patient hearing granted
by Shri Salim Gangadharan, Chief General Manager on 21st October 2009. We had
a free and frank exchange of views.


We appreciate the opportunity granted to us to suggest and
submit proposal to alleviate hardships and at the same time achieve RBI’s
objectives.

We will prepare a proposal for compounding policies and
procedures including amnesty proposal. Two cases of injustice to the
applicants have been discussed. More than the events, the policy approaches
which have caused injustice need to be identified and reviewed.

We will also submit our proposals on some of the Master
Circulars, cases of difference between Government view and RBI view; and
related matters.

With warm regards,

Yours sincerely,

For Bombay Chartered
Accountants’ Society
Mr. Ameet Patel
President
For The Chamber of Tax Consultants
Mr. K. Gopal
President


Copies with compliments to :
Deputy Governor, Chief General Manager, and Chief General Manager MRO.


levitra

Tax Due Diligence — Indirect Taxes

M & A

After reading the series of
articles of ‘Financial and accounting due diligence’ and Tax due diligence —
direct tax, readers would be clear about the circumstances under which due
diligence exercise is performed and its objectives. In the context of mergers
and acquisitions, due diligence is mandated either by a vendor who intends to
divest stake in a particular business/unit or by the potential acquirer who
intends to acquire the subject business/unit. The objective, in both the cases,
is common i.e., to avoid any post-transaction unpleasant surprises.

In terms of process of
performing indirect tax due diligence, it is no different from the manner in
which it has been discussed in the earlier articles on financial, accounting and
direct tax due diligence. In fact, the process should be so integrally linked
that it should appear seamless to the target and the client management.

Need for indirect tax due
diligence :

As the words ‘indirect tax’
suggest, these taxes are not a direct hit to the person who has the statutory
obligation to pay these taxes since these are recoverable in nature. However,
the indirect tax-related exposure, whether emerging from pending litigation or
from a potential exposure identified during the course of due diligence, remains
and/or travels with the subject-business.

This is one of the prominent
distinctions between direct tax and indirect tax i.e., the indirect
tax-related risks in terms of statutory liabilities and obligations are largely
associated with the business, irrespective of the manner in which the business
changes the ownership; say, by slump-sale or by transfer of equity or by sale of
merely the manufacturing unit or service centre or a particular branch, etc.
Thus, unlike income-tax where generally the statutory obligations remain with
the transferor entity, in the case of a business transfer, the indirect tax
obligations travel with the business. Hence, identifying and analysing indirect
tax obligations pertaining to the subject-business remain key focus areas as
discussed below.

Incidentally, it would be
important to also define in the scope of work with the client as to which
indirect taxes are being covered by the indirect tax diligence and which other
taxes/duties are excluded, say, that are expected to be covered by the legal due
diligence. Generally, custom duties, excise duties, sales tax, VAT and service
tax are covered in an indirect tax due diligence and taxes such as stamp duties
are picked up by the legal due diligence team.

Key focus areas :

One may broadly examine the
indirect tax diligence through eight key focus areas viz. :

1. Pending litigations and contingent liabilities :

    This is one of the most common and traditional method of commencing the tax due diligence work. Here, the issues involved initially need to be studied from source documents, say, notices, demand orders and appeal papers made available along with interaction with the management and/or their tax advisors. The next step is to undertake research based on legal provisions, notifications, clarifications and judicial precedents found relevant. This leads to the third and important step involving merit analysis of the issue involved after considering the contentions of both the parties to the dispute and the result of indigenous research work along with tax positions adopted by industry members. Copies of legal opinion obtained should be reviewed with developments subsequent to the date of the opinion.

    It is generally accepted that unlike tax advisors/advocates who are attending to the tax disputes, the diligence team does not have the luxury to take significant amount of time to analyse the issue. Needless to say, the expectations are always there for the diligence team to arrive at an independent and conclusive view on each of the issues involved. Hence, greater focus should be applied on providing ‘substance’ rather than ‘form’ in terms of detailed articulation of arguments of both sides before arriving at the view. For example, in media industry, specifically in production and distribution segment, one of the issues that is under litigation is VAT liability and the state in which such liability to pay VAT arises on transfer of distribution and various broadcasting rights in the content (say, film, television serial, event, etc.). Companies are known to take different positions, ranging from a conservative stand to execute the agreement in the state where the business of the media company resides and pay VAT as applicable in that state, to a more aggressive stand where the agreements are executed outside India or in any of the Indian states where VAT is not applicable or exempted.

    Mere merit analysis of the disputed issues does not complete the exercise. What helps in achieving completion is understanding the accounting treatment in the books/financial statements i.e., the extent to which the amount is paid, provided as liability or disclosed as contingent liability. Even in case of payment, it would be relevant to ascertain the extent to which the amount paid under protest is accounted as a ‘receivable’ or charged to revenue. In case of industry engaged in export of services, say, IT and ITES industries, typically companies account for service tax and excise duty paid on input services, input and capital goods as a receivable, though the time the Tax Department generally takes in accepting the company’s contention, processing the refund claim and granting a refund is such that the possibility of receiving refund in the near future appears remote.

    It is also important to note that the analysis should not be restricted to the disputed period. If the issue involved is ‘recurring’ in nature, the aggregate exposure needs to be quantified including the potential exposure for periods subsequent to the dispute if there is no change in the provision of law and adopted tax position. The two long-ranging disputes that come to mind are applicability of service tax and/or VAT on (i) construction and sale of residential/commercial premises, and (ii) licensing of software/copyrights. These issues are perennially being faced by the construction & real-estate and IT & media industries, respectively.


2.    Observations in completed assessments and audits:

Completed assessment orders and audit memos provide opportunity to observe the acceptance or otherwise of the critical tax positions taken by the company. Tax positions include exemptions, abatements, incentives, reliefs, set-off claims, etc. claimed the company.

It may be noted that even though the assessments and/or audit memos finally do not result in any litigation, it is important to observe any disallowance or rejection of tax relief claimed which resulted into demand, which in turn have been accepted and paid by the company. These observations form the basis for analysing the tax positions in open assessments. At times, companies have been known to claim the benefit of inter-state sales at concessional tax rate against declarations in Form C, etc. in the return, but the collection and furnishing of these forms are not pursued aggressively until assessment (which generally takes after a period of three years or more) and results in some differential tax liability along with interest and penalty, when assessments are concluded. Hence, based on past trend of the company in completed assessments, the potential liability, if observed on this account, needs to be indicated.

3.    Potential issues in open/unassessed periods:

The best way to tap the open assessment periods is to peruse the tax returns and filings including VAT Audit reports. However, it is not practical to peruse all the tax returns, payments and filings done say on monthly basis for excise, VAT and service tax for each of the locations where the indirect tax registration has been obtained. This needs to be done judiciously on sample basis.

The focus here should be applied on the tax claims and tax positions not yet tested in the assessments/audits. On a case-to-case basis, if the stake involved in adopted tax positions is significant, focussed interaction with management is desired to know the rationale and compliance to conditions for taking such positions. When found relevant, key customer contracts and/or vendor contracts may be perused on sample basis. This helps in gathering some comfort about tax positions adopted in the open assessment period which carries higher element of uncertain risk as compared to the risk in the matters already under litigation.

4.    Positions vis-à-vis industry issues:

At times, it would be difficult to argue that merely because many/most players in the industry have adopted the same practice, the tax position would be acceptable. However, one cannot afford to ignore this altogether. It is because, there have been instances in the past where mere clarifications to the provisions of law (which otherwise is deemed to have been effective with retrospective effect) have been articulated in the Departmental circular or clarification so as to implement prospectively by providing relief for the past in indirect manner. The one example I recollect here is about clarifications on service tax liability in the case of international roaming under various scenarios of inbound and outbound roaming which provided some relief to telecom operators for the positions taken in historical period. This has happened generally when the issue involved is an ‘industry issue’ and contended on bonafideness. Thus, providing information on industry positions provides different level of business comfort.

5.    Tax incentives — eligibility, admissibility, fulfilment of terms, conditions & obligations and continuity:

Tax incentives, specifically area-based tax incentives (say, available to manufacturing units in Uttaranchal, Himachal, Kutch, North Eastern States, etc. and/or to units in Special Economic Zone, Electronic Software/Hardware Technology Park and/ or to units in specified backward areas in States for VAT incentives, etc.) are subject to complying with specified terms and conditions. In this regard, it is important to gauge the continuity of tax incentives post transaction. This is because the quantum of unused tax incentives and its entitlement play a vital role in valuation of the transaction and hence its fate.

When the transaction structure is known at the time of due diligence, it is appreciated if the things found critical for continuation of tax benefits post transaction are briefly but appropriately communicated along with major concerns and listing of broader compliance steps for continuation.

6.    Tax balances — perusal of reconciliation statement:

Understanding the quantum of tax balances accounted as ‘income’ (e.g., tax incentives/refunds), ‘expense’ (e.g., tax paid during audit observations), ‘assets’ (e.g., tax paid under protest and tax credit balance) and ‘liabilities’ (e.g., provision for periodical tax amount and for tax disputes) is important. It is because at the end of the due diligence exercise, one needs to identify the appropriateness of their accounting and the impact on profitability, net-worth and working capital.

After seeking reconciliation of tax balances, attention here needs to be paid on the rationale/ justification for each of the items forming part of the reconciliation statement. Post analysis, the resultant adjustments in terms of computation of profitability, net-worth, working capital, etc. should be identified and reported. The illustrative list of such adjustments includes (i) service tax refund for export of services, VAT refund for export, export incentives like duty drawbacks, etc. though entitled, not actually claimed before the appropriate authorities and accounted as ‘income’ and ‘receivable’, should be highlighted (ii) VAT/CST, etc. for March payable in April not accounted as ‘expense’ and ‘liability’ in the accounts for financial year, should be highlighted.

7.    Related-party transactions:

Transactions with related party(ies) desire twofold attention i.e., (i) when the provision of law (say governing excise duty and VAT in some states), require transactions between related parties to be at fair market value, and (ii) when the provision of law is silent (say, service tax law or VAT in some states).

In the first scenario, the potential exposure should be identified. While in the second case, it needs to be understood that if the proposed transaction is structured in such a way that the benefit of ‘related party’ may not continue post transaction (say, where only one of the related entities is proposed to be acquired and hence the concessional transaction value regime shall come to an end in commercial terms). In such situations, the consequential tax implications need to be identified, analysed and discussed.

8.    Important compliance procedures:

Verifying and reporting compliance matters is generally outside the work scope of due diligence as they generally do not give birth to any deal-breaker or significant valuation/risk issue. Besides, this requires greater amount of time and cost which always are constraints. However, understanding and providing broad flavour of tax compliance management (in terms of tax filings, tax payments, withholding tax on payment to works contract, etc.), tax team (in terms of qualification, level of competencies, etc.) and related systems (say, to undertake tax computations, to monitor collection of declaration forms, etc.) helps the client specifically in transactions envisaging change of management whether partially or completely.

In this regard, the indirect tax team would be well advised to clearly state the ‘exclusions’ from the scope of work of the indirect tax diligence so that there are no gaps in client expectations. Normally exclusions from an indirect tax diligence are review of tax compliance/procedural matters, providing tax advisory/planning services, etc.

Reporting:

Reporting is very critical to the entire exercise. Without adequate and smart reporting, the due diligence exercise may prove futile. While discussing the key issues, it needs to be ensured that though the approach and substance should suggest advisory role, the form in which the report is articulated should in no way appear as advisory deliverable like tax memo or opinion. The reason is obvious; the primary intention is not to repair the potential issue but to understand the worth and implications of the issues correctly.

For the foregoing reasons, the report is generally divided into three parts i.e.:

(i)    Key issues (i.e., ‘must to know’ issues involving significant implications on the financial state-ments based on historical issue or from future perspective (say, continuity of tax incentives in special industrial areas, view on high-value litigation matters, etc.)

(ii)    Other issues (involving non-key but ‘need to know’ issues) and

(iii)    Informative issues (i.e., help in understanding overview of business from indirect tax perspective).

It is important to note that when the key issues could be in the nature of potential deal-breakers, there is no formal or structured way to communicate them for the first time during the diligence exercise. It means, such deal-breakers must be communicated ‘as and when’ they are observed without waiting for due date.

For each of the issues explained in the report, it must cover, inter alia, the exposure period, the quantum of exposure along with interest and mandatory penalty. When the penalty is not mandatory, a broad range should be indicated. Each issue needs to be analysed on merit by classifying risk as ‘probable’, ‘possible’ or ‘remote’ with agreed weightage for valuation adjustments, say for arriving normalised earnings, net-worth and/or working capital.

Lastly, reporting the issues without mitigation a strategy may leave the client clueless. Hence, it is equally important to provide a risk mitigation strat-egy in terms of obtaining warranty/indemnity, or in making a valuation adjustment, or deferring a part of the consideration in escrow account, etc. till a more definitive resolution of the issues concerned.

Conclusion:

It may be said that though there may not be a standard error-proof approach for carrying out a relatively subjective exercise of due diligence under different circumstances, the foregoing should help practitioners in carrying out an indirect tax due diligence exercise in a more structured manner to bring out the value to the client along with building efficiency and superior risk management to the whole diligence process.

A misperception at times amongst clients and their advisors is that indirect tax does not have the same flamboyance as a direct tax or a legal issue which then dangerously leads to a lack of adequate focus by the client on the unresolved indirect tax issues. We, indirect tax practitioners are well aware of the unending complexities of the indirect tax acts, rules, notifications and clarifications in our country and the multitude of judicial interpretations. And I humbly submit that a majority of my fellow direct and indirect tax practitioners would also acknowledge that more often than not, the potential tax liability arising from an indirect tax issue can be far more crippling than any other demand!

It remains the responsibility of the indirect tax team to correct any such misperceptions of the client or his advisors about ‘indirect tax’ and to ensure that the client has a true and fair appreciation of the indirect tax issues in the proposed M&A transaction.

Can Chartered Accountants be Punished by SEBI ?

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Securities Laws

The issues are:


    (a) Are auditors governed only by ICAI as far as their auditing and certification is concerned?

    (b) Whether SEBI has the right to take action against the auditors, and if so under what circumstances?





These important issues have been recently answered by the
Bombay High Court in Price Waterhouse & Co. v. SEBI, [(2010) 103 SCL 96 (Bom.)].
As we will see later herein, the Court decided against the petitioners. However,
the Court stayed the proceedings for four weeks to allow filing of a special
leave petition to the Supreme Court. As of the date of writing this article, the
status of whether such a SLP has been filed or not is not known.

The issue is whether the work of an auditor should be judged
only by an expert body — that is — ICAI — an institution established under a
statute. It is a matter of serious concern if the same work is also scrutinised
by another authority that may reach a different conclusion and this also results
in multiple actions/
proceedings.

There is also another important reason to be concerned.
Chartered Accountants generally and even as Statutory Auditors are not required
to be ‘registered’ with SEBI. SEBI closely controls registered intermediaries
not only through the process of registration and suspension/cancellation of
registration, but also by closely regulating them through Rules and Regulations.
If SEBI can control and act against unregistered intermediaries, particularly if
they are regulated by another body, it would be a worrisome precedent for not
just chartered accountants, but any person having anything to do with listed
companies or capital markets.

Further, the anxiety is also because the type of action that
the SEBI Act permits is quite wide-ranging and the show-cause notice (‘the SCN’)
that SEBI issued in this matter showed this. The SCN pointed out several actions
that SEBI considered taking, assuming that the allegations were proved. For
example, it said: it would consider banning the auditors from carrying out
statutory audit or other audit/certification of not just listed companies, but
of any other intermediary, etc. registered with SEBI. It would also ban the CA
from ‘accessing the securities markets’ (though it is not clear how a CA may
access it) and certain related actions. It would even initiate prosecution that
may entail a fine of up to Rs.25 crores and imprisonment up to 10 years.

Thus, to summarise, the result would be multiple authorities
judging the auditor, resulting into multiple action and consequences.

It is to be clarified that the SCN was challenged on the
issue of the jurisdiction of SEBI to initiate action. There was no finding of
facts and the Court merely held that it is up to SEBI to investigate the actual
facts and first establish the allegations. But the Court also held that:



  • SEBI does have the power to investigate an auditor with regard to professional
    work done for listed companies and certain other specified persons.



  • Secondly, if the investigation established the allegations as true, then the
    actions of banning, etc. were permissible. In short, the Court held that the
    ICAI did not have exclusive jurisdiction over a CA with regard to the
    professional work done by them for such entities.



  • Thirdly, SEBI and ICAI operated from different angles and thus their
    jurisdictions are simultaneous but not really overlapping.


The issue arose out of the Satyam Computers episode where
several accounting and related frauds have been alleged and are as widely
reported, backed also by an email by Mr. Raju. The issue relating to the role of
the auditors arose as to whether there was any failure/deficiency in the
performance of their professional duties and/or whether there was connivance.

Now let us review the decision in a little more detail.

SEBI issued a show-cause notice to the auditors and certain
other parties. It alleged that in respect of the various alleged accounting
frauds including showing higher revenue, profits, assets, etc., the auditors and
other specified persons did not perform their professional work properly. It
thus asked these parties to explain their stand and said that if the
explanations were not found satisfactory, then it may take actions such as
banning the parties from carrying out audit, etc. of listed companies and
registered intermediaries, accessing capital markets, etc. It even stated that
prosecution may also be considered.

The parties raised a preliminary issue that since they were
Chartered Accountants carrying out professional work and since their
professional work was sought to be judged, they should be judged by the ICAI
only and SEBI had no jurisdiction.

SEBI, however, stated that auditors of listed companies were
entities associated with the capital market and since SEBI’s role was to protect
the integrity of capital markets, it had the right to take action against
persons associated with capital markets. Hence, SEBI has the jurisdiction.

Various issues were raised and it is worth running through
how the Court dealt with them.

The fundamental question is whether SEBI has jurisdiction
over Chartered Accountants or whether the ICAI has exclusive jurisdiction which
SEBI cannot encroach on? The Court raised the issue: (emphasis supplied in all
extracts of the decision in this article):

“However, it is required to be examined as to whether in substance by initiating the proceedings under the SEBI Act, the SEBI is trying to overreach or encroach upon the power conferred under the CA Act.”

“Looking to the provisions of the SEBI Act and the Regulations framed thereunder, in our view, it cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that SEBI cannot give appropriate directions in safe-guarding the interest of investors of a listed company. Whether such directions and orders are required to be issued or not is a matter of inquiry. In our view, the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that SEBI cannot regulate the profession of a Chartered Accountant. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by SEBI, it can never be said that it is regulating the profession of the Chartered Accountant. So far as listed companies are concerned, the SEBI has all the powers under the Act and the Regulations to take all remedial and protective measures to safeguard the interest of investors and the securities market. So far as the role of Auditors is concerned, it is a very important role under the Companies Act.”

Further, the Court reviewed the Chartered Accountants Act and the powers therein and did not find any contradiction. Since SEBI was not really seeking to regulate the profession of Chartered Accountants, the Chartered Accountants Act could not prevent SEBI from taking action of the nature proposed in the SCN.

Can SEBI order that an auditor shall be prohibited from auditing the accounts of a listed company? This is what the Court held:
“It is not uncommon nowadays that for financial gains, even small investors are investing money in the share market. Mr. Ravi Kadam has rightly pointed out that there are cases where even retired persons are investing their retiral dues in the purchase of shares and ultimately, if such a person is defrauded, he will be totally ruined and may be put in a situation where his life savings are wiped out. With a view to safeguard the interests of such investors, in our view, it is the duty of the SEBI to see that maximum care is required to be taken to protect the interest of such investors so that they may not be subjected to any fraud or cheating in the matter of their investments in the securities market. Normally, an investor invests his money by considering the financial health of the company and in order to find out the same, one would naturally bank upon the accounts and balance- sheets of the company. If it is unearthed during inquiry before SEBI that a particular Chartered Accountant, in connivance and in collusion with the Officers/ Directors of the company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed company. In our view, the SEBI has got inherent powers to take all ancillary steps to safeguard the interest of investors and securities market. The powers conferred under various provisions of the Act are wide enough to cover such an eventuality and it cannot be given any restrictive meaning as suggested by the learned counsel for the petitioners. It is the statutory duty of the SEBI to see that the interests of the investors are protected and remedial and preventive measures are required to be taken in this behalf. It is required to be noted that in the instant case the inquiry is still pending, ultimately the decision is required to be taken by SEBI on the basis of available evidence on record. However, in order to determine the jurisdiction of SEBI, the contents of the show-cause notice which is the first step of initiating proceedings are required to be seen. Reading the contents of the show-cause notices and the relevant statutory provisions, it cannot be said that SEBI has no jurisdiction at all to enquire into the affairs of the petitioners insofar as it relates to Satyam.”

The Court made it clear that SEBI definitely has jurisdiction in such matters by observing, “In our view, it cannot be said that the show -cause notices issued by SEBI are, on the face of it, not sustainable on the ground that SEBI has no jurisdiction to enter into the affairs of the petitioners or that it lacks jurisdiction to go into such questions.”

A critical question that often arises is who are persons associated with the securities markets since that would give jurisdiction to SEBI to inquire and take action. Thus, the question is whether auditors are such persons associated with the securities market. The Court answered in the positive, stating, “even though the petitioners may not have direct association in share market activities, yet the statutory duty regarding auditing the accounts of the company and preparation of balance-sheets may have a direct bearing in connection with interest of the investors and the stability of the securities market. In our view, the petitioners in their capacity as auditors of the company Satyam, which was at one point of time considered to be a blue chip company who had a defining influence on the securities market, can be said to be persons associated with the securities market within the meaning of the provisions of the said Act.”

The Court also held that the power of SEBI is over and above the provisions of S. 227 of the Companies Act, 1956, which provided for removal of an auditor. Thus, it negatived the contention that removal of auditor can only be u/s.227. The Court also compared the powers under SEBI Act with the powers under the Consumer Protection Act and said that neither of this can be said to be encroaching on the powers of ICAI. The Court also rejected the argument that such proposed action by SEBI would amount to infringement of fundamental rights under Article 19(1)(g) of the Constitution of India.

Interestingly, the Court held that the criteria for determining proper performance of duties by the auditors were the very audit norms prescribed by ICAI. The Court, observed, “However, if it is found in a given case that the Chartered Accountant has violated the audit norms prescribed by the Institute under the CA Act, the SEBI can certainly consider the said aspect in order to find out as to whether such a professional person should be allowed to continue to function as an Auditor of a listed company if by continuing such person as an Auditor of a listed company, it may hamper the interest of the investors of such a listed company.”

An interesting aspect is whether SEBI would have jurisdiction only when there is a mala fide intention or connivance by the auditors or whether professional negligence without such an active involvement is also covered. It is not clear from the decision, but the Court did make some interesting observations. An example of such an observation of the Court is:

“In a given case, if ultimately it is found that there was only some omission without any mens rea or connivance with anyone in any manner, naturally on the basis of such evidence the SEBI cannot give any further directions.”

Another thought that comes to the author is: whether the views of ICAI should have been taken here in some manner, since at least indirectly the issue related to the exclusive jurisdiction of ICAI.

Open offer pricing — recent decisions

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Securities Laws

(1) Open offers under the SEBI Takeover Regulations are
perhaps the rare situations in which intelligent investor interest focusses on
the wording and interpretation of securities laws. Whether there will be an open
offer and at what price and to whom are
questions, the answer to which present quick money-making opportunities to them.
In Western countries, professional arbitrageurs used to specialise in this
narrow field and some of them made hundreds of millions of dollars. As many of
these investors resorted to the use of inside information, this rewarding
activity came into disrepute.

(2) Even a simple takeover can create complications for an
intelligent and well-informed investor if he speculates. The issue gets further
complicated if takeover of Company C by B is quickly followed by takeover of B
by A.

(3) A recent decision of the Securities Appellate Tribunal
deals with just some of such complications and should present interesting
reading. The issue essentially related to what offer price should be given to
public shareholders under the mandatory open offer required under the Takeover
Regulations. The interesting aspect was that the company taken over itself
controlled another listed company (that was itself recently taken over). You can
picture the situation that a big fish eats a small fish and before the small
fish is even digested by the big fish, a bigger fish comes and eats the big
fish !

(4) Since the law requires that if a company is taken over
indirectly, then open offer is required for the indirectly acquired company
also. The question was what would be the price that should be offered for such
indirectly acquired company’s public shareholders. The case considers the
complexities that arise in such takeovers and how the law would be
expectedly found to be partially inadequate. The case also offers insights how
the Appellate Authority tries to find a meaningful solution to the issue,
filling in gaps through a ‘purposive’ approach to interpretation of the law. The
issue also is whether the Securities Appellate Tribunal, with due respect, took
an approach that gave benefits to public shareholders, but that was not
justified by the letter and perhaps even the spirit of the law.

(5) Let us go into the facts of this interesting case. The
decision is in the case of Dr. Jayaram Chigurupati v. SEBI and Others,
(Appeal No. 137 of 2009). The 3 companies involved were Zenotech Laboratories
Limited (‘Zenotech’), Ranbaxy Laboratories Limited (‘Ranbaxy’) and Daiichi
Sankyo Company (‘Daiichi’).

(6) Zenotech was the small fish in our analogy and was taken
over by Ranbaxy in the first instance. Ranbaxy made the required open offer to
the shareholders of Zenotech. Thereafter, Zenotech became a subsidiary of
Ranbaxy. Within a few months of the open offer by Ranbaxy — Ranbaxy itself was
taken over by Daiichi and thereafter became a subsidiary of Daiichi. It needs to
be noted that both Zenotech and Ranbaxy are listed companies.

(7) To recap the law, the Takeover Regulations require that
if a listed company is taken over, an open offer is required to be made to the
public shareholders of the listed company. The objective is that when an
acquirer buys shares typically from the Promoters of a Company, he should offer
to buy out at least some of the public shareholders too. The minimum percentage
for which the public offer has to be made is 20% of the equity capital. The
important other relevant factor crucial to the present case is the price at
which such an open offer has to be made. The offer price is determined by a
formula that takes into account the price paid for the initial acquisition, the
average of the prices for the preceding specified period, the price paid by the
acquirer or persons acting in concert with him in the preceding specified period
and so on.

(8) The Takeover Regulations require that if there is an
‘indirect’ takeover, the open offer would be required not only to the public
shareholders of the company taken over, but also of the company indirectly taken
over. The subsidiary company of the company taken over is a classic example of a
company indirectly taken over. In the context of our above example, Ranbaxy was
the company directly taken over by Daiichi and Zenotech was the company
indirectly taken over since Zenotech was a subsidiary of Daiichi.

(9) Thus, Daiichi would have to make an open offer not only
to the shareholders of Ranbaxy, but also to the shareholders of Zenotech. The
open offer to Ranbaxy’s shareholders did not offer any complication and was not
also in dispute here. Complications arose for the open offer of Zenotech and at
what price should the open offer be made to their public shareholders.

(10) A brief digression is required here to explain why the
law in relation to such indirect acquisition is a bit complicated and why it has
certain artificial parameters. Earlier, the differences in reality that may
arise between direct and indirect takeovers were not realised and hence the law
was not much different. However, experience made the lawmakers realise that
indirect takeovers had to be treated differently. It was seen that often
indirect takeovers were proposed but could not be completed because certain
approvals were not eventually received. This was particularly so in case of
cross-border acquisitions and where the parent company abroad was acquired.
Approvals of competition authorities and others made the completion of the
takeover uncertain and at least there was a significant delay involved. If an
open offer is required to be made for a takeover that finally does not happen,
then the shares so acquired would be an undue cost to the acquirer. For these
and other reasons, the law in India was amended and it was provided, in essence,
that in case of indirect takeovers, the open offer would have to be made within
3 months completion and consummation of the takeover of the first company.
However, to be fair to the public shareholders, the price to be offered to them
would be the higher of the prices calculated with reference to the original date
of the takeover of the first company and the date when the open offer is
triggered after the completion of the takeover of the first company.

(a) Thus, the complicated formula would have to be applied
with reference to both such dates.

(11) An interesting parameter provided for in this formula is
that if at any time during the preceding twenty-six weeks, the acquirer or any
person acting in concert with him had acquired shares at a higher price, then
such higher price would have to be offered to the public shareholders. The logic
is not far to see — the law intends to ensure that the highest of the prices
recently paid by the acquirer or persons acting in concert should be paid to the
public shareholders.

12. Now once again let us apply the above law to the facts of the present case and see the interesting twist. To recollect, Daiichi acquired Ranbaxy whose subsidiary was Zenotech. Thus, Daiichi had to make an open offer also to the shareholders of Zenotech within three months of completion of acquisition of Ranbaxy, Daiichi or persons acting in concert with it (except for the interesting twist discussed later) had not acquired any shares of Zenotech in the preceding twenty-six weeks. Thus, Daiichi made an open offer at Rs.114 (rounded off here for simplic-ity), since that was the price determined as per the various parameters.

13. However, the question and interesting twist to the whole issue was this. Ranbaxy had become a subsidiary of Daiichi after the acquisition. At the time when the open offer was being made by Daiichi to shareholders of Zenotech, Ranbaxy was thus a subsidiary of Daiichi. By definition, a subsidiary company is deemed to be a person acting in concert with the holding company unless it is established otherwise. Thus, Ranbaxy was a person acting in concert with Daiichi.

14. Ranbaxy had obviously acquired shares of Zenotech when it took it over and as part of open offer. However, only after such takeover of Zenotech that Ranbaxy was itself taken over by and became subsidiary of Daiichi. Since the preceding twenty-six week period was to be considered, and since Zenotech was taken over by Ranbaxy during this period, obviously Ranbaxy had acquired shares of Zenotech during this period under the first open offer. The question was that whether the price paid by Ranbaxy during this period was to be taken into account.

15. The stakes were large. Ranbaxy had paid a price of Rs.160 and thus instead of the Rs.114 to be paid, Rs.160 would be required to be paid.

16. The aggrieved parties petitioned to SEBI who rejected the claim of increase of the offer price to Rs.160 (interestingly, the erstwhile Promoters of Zenotech holding 26% shares were themselves the primary petitioners). The petitioners went in appeal to the Securities Appellate Tribunal (‘SAT’).

17. The SAT held that since Ranbaxy was a sub-sidiary of Daiichi, it was deemed to be acting in concert with Daiichi. No claims were made to refute this legal presumption. The SAT held that since this was the case, the acquisitions made by Ranbaxy during the prescribed period would also have to be taken into account. Since Ranbaxy had paid Rs. 160 to acquire shares of Zenotech during this period, this higher price would have to be the open offer price. Thus, though the open offer price otherwise determined taking also the current price was Rs.114, the price to be actually offered was held to be Rs.160.

18. Now, one may be tempted to say that if the small and public shareholder is benefitted, it is a good thing. The question, however, is also of justice. Incidentally, it was the erstwhile Promoters of Zenotech who held 26% that would be the major beneficiaries. (A side bar here – normally the Promoters of the target company cannot participate in an open offer and it is restricted to public shareholders only. However, since Zenotech was already taken over, the erstwhile Promoters, though holding 26%, became public shareholders and thus eligible for the open offer). Further, it is possible that eventually Daiichi may also have to pay interest on Rs.160 (for the grace period granted under law, SAT has held though  that no interest  would    be payable).

 19. With great respect, I submit that the decision is not correct in law.

 20. Let us first look at the intention of the law. The intention, as I read the law, is that if an acquirer buys shares that triggers an open offer, the highest recent price’ paid by him should be considered and not merely the price at which the lot of shares that resulted in attraction of the open offer were acquired. For this purpose, since it often happens that many entities of the acquirer group acquire shares, the price paid by such persons acting in concert are also considered. However, it is strange that a person who was never a person acting in concert to start with at the time of the original acquisition, is now deemed to be acting in concert. When Ranbaxy bought shares of Zenotech it had nothing to do with Daiichi. To say that Ranbaxy was acting in concert with Daiichi in view of an event that happened later on and apply this to an earlier date is strange.
 
21. The words used are ‘acting’ in concert and this is in the present tense. Quite apparently, as on the date of original acquisition Ranbaxy was not ‘acting’ in concert with Daiichi.

22. The concept of deemed person acting in concert is an artificial concept and it is a well-settled principle of law that such artificial and deeming provisions should be construed strictly.

23. I do not know whether the SAT deliberately took a view to favour the small shareholders and of course there are no words to that effect though SAT does say that it has taken a ‘purposive’ interpretation of the law. I respectfully submit that on a plain and literal reading as well as reading in terms of the object of the law, the conclusion is, with great respect, not justified in law.

24. As I write this article, there are reports that Daiichi may go in appeal to the Supreme Court and it would be interesting to consider what the Su-preme Court has to say in the matter.

Recent relaxation to creeping acquisition limits

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Securities Laws

This series of articles introducing securities laws for
listed companies to the lay reader continues . . .


(1) SEBI, vide Notification dated 30th October 2008 has
amended the Takeover Regulations. The amendment, in essence, permits an
acquirer, and persons acting in concert with him, hereinafter referred to as
promoter group/acquirer, to increase his holding by 5% by acquiring additional
shares or voting rights up to 5% through open market purchases or pursuant to
buyback of shares even if the promoter holding at present is in excess of 55%.

(2) The relaxation seems to be in the background of huge fall
in the stock market. It is apparently felt — rightly or wrongly — that the
present restrictions on promoter group buying shares should be relaxed and hence
this amendment has been made allowing promoter group holding 55% or more to buy
5% more shares from the stock market. Earlier, promoter group could not acquire
even a single share without making an open offer.

(3) The Notification amends Regulation 11(2) by inserting a
2nd proviso hereinafter referred to as the ‘2nd Proviso’ and also makes a
consequential amendment to Regulation 11(2A). There is also another amendment to
11(2). Here are some thoughts and issues.

(4) This new creeping acquisition is not available
annually and repetitively, unlike the creeping acquisitions up to
55%. Thus, the acquirer will be able to increase his holding by another 5% only.
To give an example, the holding of 58% can be increased up to 63% only. It is
not as if the acquirer can go on increasing 5% every year.

(a) Having said that, there is no time limit for acquiring
this additional 5% and it can be done in stages. One could say that this
facility has been introduced to deal with the low market prices today.
However, there is no restriction of time or stock market indices and one can
acquire this additional 5% even if the market booms again ! Of course, SEBI
could drop this facility at that time ! !


(5) Also, the maximum holding after this additional
acquisition can be only up to 75%. Thus, for example, the promoter group holding
73% can acquire only an additional 2% and not 5%.

(a) The Regulations recognise the fact that there could be
two maximum promoters’ holding — 75% and 90%. However, there is no special
concession in the 2nd Proviso for companies where promoters hold 90%.


(6) Acquisitions are permitted only through normal open
market purchases on the stock exchange or pursuant to buyback of shares by the
Company.

(a) Such acquisitions cannot be through bulk
deals/negotiated deals or preferential allotment.


(7) Can an acquirer buy a single lot of shares through the
open market ? This is important from many angles and in fact demonstrates
the conflicting objectives of SEBI/small shareholders and the promoters. SEBI
apparently wants that the acquisition should be from retail shareholders or at
least the opportunity should be available to all shareholders equally and
fairly. However, the reality can be that large quantity of shares may be with
shareholders such as FIIs, etc. If the promoters try to buy from the open
market, it is possible that the low liquidity may result in sharp increase in
the price even on purchase of a few shares. Bulk sellers may agree to sell at an
agreed price, though little higher than the market or, in present pathetic
times, even lower ! ! ! — considering that there may not be many buyers other
than the promoter group.

(a) To come back to the issue, can the promoters acquire a
large lot of shares from such sellers through a stock market operation ? While
strictly speaking such a purchase would be an open market purchase on the
stock exchange, we need to remember that the amendment specifically prohibits
bulk deals. SEBI also seems to have a paranoid view of synchronised deals and
even holding them indiscriminately to be manipulative, etc.


(8) Thus, there would be two categories of creeping
acquisitions. One creeping acquisition is for the slab of 15-55% where an
additional 5% is permitted in any manner, whether through open market purchases,
bulk deal, or otherwise including preferential allotment. The second slab is the
newly introduced 5%. Also, remember that up to 55%, one can acquire additional
5% every financial year.

(9) The issue is : How will the amendment affect a promoter
holding between 50-55% and if his acquisition of additional shares crosses 55%?
There is more than one complication here and let me raise some issues. Let me
illustrate by an example of an acquirer holding 53%.


(a) Firstly, can he acquire 2% in any form of purchases under creeping acquisition Regulation 11(1), and secondly, acquire additional shares under the new 2nd proviso only through the restricted route of open market purchases/buybacks ? On balance, he should be able to acquire 2% under 11(1) to reach 55% and purchase additional shares only under the new 2nd proviso to 11(2). However, I must admit that strictly and technically, there is scope for holding the other view, particularly if the purchase is through one lot that increases the holding, for example, increase in holding at one shot by 5% through preferential allotment.

(b) Will such person, after having acquired 2% (or even 5% under another interpretation and circumstances) under Regulation 11(1) be restricted to a further acquisition only 3% (0%) or can he acquire yet another 5% under the new 2nd proviso ? The answer seems to be that he can acquire another 5%. In fact, this would allow a person to acquire about 10% in a single financial year — 5% under 11(1) and another 5% under new proviso to 11(2). Thus, a person holding 50% can increase his holding to 60% in a single financial year.

(10) Now let us consider the amendment made by the 2nd Proviso permitting creeping acquisition also through buyback of shares, Let us first examine what the amendment is, and then consider the earlier controversy surrounding it and what is the change, if any.

(a) The amendment permits an acquirer to ‘acquire additional shares or voting rights’ …. (provided)
….  the acquisition  is :

•  made  through  open  market  ….   or

• the increase in the shareholding or voting rights is pursuant to a buyback of shares. (emphasis supplied).

ii) Thus, if a person holds, say, 55%, his holding, post-buyback can increase up to 60% under the 2nd Proviso.

iii) However, this is not as simple as it may sound because of peculiar mathematics. Let me explain as follows. The holding has to be between 55-75%. The buyback would affect differently, different holdings. To give an example, if a person holds 55%, a mere 8% buyback would result in increase in his holding by 5% (55/92% is 59.78%, i.e., there would be a 4.78% increase). A promoter holding 60% would find his holding increased by 5% at 7% buyback and for one holding 70%, 5% increase happens at just 6% buy-back. This problem would effectively limit the buyback that a company could carry out to 8% only, as compared to the maximum legal 25%. Of course, the simple solution is that the promoters should also sell their shares in a ,lmyback at the appropriate level to ensure that the net increase is only 5%. This may defeat the purpose of really giving retail investors a chance to sell their shares through this amendment. Also, in case of open market buyback, there is the issue of Promoter not being permitted to offer their shares in a ‘buyback’.

(b) I had written an article in the August 2008 issue of the BCAJ as to whether increase in percentage holding arising solely out of buyback of shares would amount to acquisition under the Takeover Regulations and thereby trigger an open offer or be counted as part of creeping acquisitions, etc. My view was that, on balance, even considering the fact that buybacks are initiated by the promoter, the ‘buy-back’ does not result in triggering ‘open offer’. This may be an anomaly and even an unfair loophole, but I had suggested that to remove this, the law needs to be specifically amended.

(c)To recollect further, in essence, the argument is that Regulations 10, 11 and others require a specific acquisition of shares or voting rights. If there is no acquisition, these Regulations  do not get attracted.  A buyback  of shares results in an increase in percentage  holding  without  any acquisition. While the promoters  cannot shrug off the  issue  by  saying  that  the  increase  is on account  of the company’s  decision when  they are in control of the company,  the fact remains that the express provisions of law do not cover ‘buyback’. SEBI,however, apparently required or permitted a practice by companies to seek an exemption for such increase and then wors-ened it by assuming in the recent amendment that this is also the law without amending 10, 11 and other Regulations. So where does this new amendment leave the view that increase in holding through buyback should not be counted for Regulations 10, 11, etc. ?

(d) Let us consider  here the exact wording  of the 2nd  proviso.   It  permits   an  acquirer   to “acquire additional shares or voting rights (provided) …. the  acquisition is made through  open market …. or the increase in the shareholding or voting rights of the acquirer is pursuant to a buyback of shares by the target company” (emphasis provided). Clearly, even this amendment is self-contradictory when it permits an acquirer to acquire additional shares and then clarifies that increase through buyback is also covered. Further, a strict view can be that even if increase through buyback is to be covered, it would be solely for the purposes of this clause only. One cannot, thus, require a person holding 14.99% shares, whose holding increases to, say, 15% on account of buyback to make an open offer. Again can law force a person holding 25% and whose holding increases to 30.1% on account of buyback, to make an open offer.

e) However, while we could debate endlessly, the reality is that companies/promoters have already been making applications for seeking exemption for increase on account of buyback. SEBI has also been expressly and publicly granting such exemptions on a case-to-case basis discussing the merits. SEBI has issued a Press Release indirectly stating that it considers increase through buyback as ‘creeping acquisition’. The recent amendment further supports this view. Consider also this in the background that in reality it is the promoter who pushes the buyback and it is the promoter who does not participate-in the buyback which results in the increase in promoter’s holding. All of this still cannot change the express provision of law. But, surely, a Judge interpreting this law, which requires a purposive interpretation, would want to inquire of the promoter how he can ignore the fact that his (promoter’s) holding has increased and hold that the amendment is effectively redundant?

11) SEBI has also made what seems to be a consequential amendment to 11(2A). Consistent with Regulation 11(2),Regulation 11(2A)provided that if a person holding between 55-75/90% seeks to acquire, he can do so only through an open offer. Now, the word ‘only’ has been dropped, apparently to suggest that one can acquire up to 5% under the 2nd Proviso but one could also go through the open offer route. This seems to be the intention, though the wording could have been better.

12) There is yet another interesting amendment to Regulation 11(2). Regulation 11(2) prohibits acquisition of ‘additional shares’. These words are amended and now read’ additional shares entitling him to exercise voting rights’. I confess I do not understand this amendment and its intent. The Take-over Regulations define shares as shares carrying voting rights including securities that entitle the holder to receive shares with voting rights, but excluding preference shares. The amendment now says that the additional shares should be such that should entitle the acquirer to exercise voting rights. Numerous questions arise of which I do not have answer and seek readers’ views:

a) Does this mean that, for acquisitions under 11(2), only shares presently carrying voting rights are covered? Does this mean, therefore, that, for example, fully convertible debentures can be acquired? But then, what would happen at the time of ‘conversion’ ?

b) The 2nd Proviso obviously is intended to be an exception to 11(2) and in such case, how can it have broader scope than 11(2) itself? Of course, under the 2nd Proviso one has to acquire ‘shares or voting rights’ through open market operations on the stock exchange and hence this issue may be academic.

c) Why has 11(1)not been so amended? Does this mean that creeping acquisition up to 55% may be of any type of ‘shares’ but thereafter, only by acquisitions of additional shares with such voting rights?

(13) To conclude, it is likely that this is just one of the many tweaking amendments that have been made to Regulations to try to revive stock markets. The law of course gets only more complex in the process! But who bothers.

Competition risk — Case study

Overview :

Inherent in business is the ‘risk of competition’, which can be local, regional, national and transnational. Surf faced it from Nirma and both are facing it from Ghadi and other regional brands. Despite the ‘risk of competition’, competition is the ‘breath and blood’ of business. Competition motivates managements to innovate. It creates entrepreneurs. Competition and competitiveness are necessary to meet the challenges of tomorrow. It improves both the cost and quality of the product. It would not be wrong to say that competition even changes the taste of the customer.

However, it is also necessary at this stage to see the impact of absence of competition. Its absence results in monopoly, deterioration in quality, increase in prices and consumer being short-charged. The automobile industry is an outstanding example of what absence and existence of competition has done in India. Padmini and Ambassador were both bad in quality and delivery. It used to be said that :

 

  •  the only thing that works is the horn, and

 

  •  one needs to book a car when a child is born.

 

Look at the market today. Competition has led not only to increased availability, but also improved quality and variety of models and makes. Cars at every price point are now available. ‘Nano’ the innovative product from Tata’s is changing the market. Many international car manufacturers are making India as the hub for producing small car. Again care for environment is internationally increasing competition for introducing hybrids. GM is working on a hybrid electric car which will give 230 miles per gallon. Daimler’s smart car will give 300 miles per gallon and Nissan’s product is expected to give 367 miles per gallon — Time 31 Aug. 2009.

Another outstanding example of what competition can do is our ‘telecom’ sector. It is the only product where cost to customer has reduced since the advent of mobile phone about a decade and half back. Today the customer pays not per minute of use but per second of use.

Nations fight for markets. That is what Doha is all about. Opening of services is expected to improve the quality of services. Even during the recent and current financial crises the impacted markets were inherently against taking protective measures as that would lead to lack of competition and result in a closed market which is against the interest of the consumer.

There are a number of factors that attract competition in a given business and industry. The primary factor of course is the prospect of earnings, and growth potential in term of revenues, profits, value addition, market share and customer base and loyalty. Hence, the challenges are :

 

A. The first real challenge is knowing your competitors, in being able to judge (i) the market segments that are exposed to the risk, (ii) the level and resources of the threat which they pose, (iii) the source of competition risk in respect of the particular competitors in terms of the 4ps of marketing, (iv) their relative strengths and weakness.

B. The second real challenge is in knowing what makes your products and services click in the market in the teeth of competition and why and how you are able to score over the competitors. These two aspects generally enable us to judge the extent of competition and its impact on our business.

C. The third aspect of competition risk pertains to potential and future competition. This is given by the attractiveness of the market, controlled by the extent and difficulty of entry barriers and the competition regulations and trade practices.

 

Competition encompasses not just the marketing and sales dimension of the organisation covering advertising, brand building and publicity, but affects the entire life cycle of the product and the organisation right from infrastructure planning, supply chain and sourcing, production, human resource to distribution, selling, after-sales service and even research and development.

The demand-supply equation, the entry barriers, the customer preferences, industry size, local, regional and global position all these determine the type and extent of competition an organisation is likely to face.

However ‘competition risk’ is not merely about the risk that your competitors will overtake you and make your product obsolete and your service look much poorer in comparison to theirs, or that they will beat you in the price or in reaching and occupying the market place and the hearts and minds of the consumers. ‘Competition risk’ could be both local and global. Apart from the 4ps of product, price, promotion and place which is the traditional sparring battle ground for competition, competition may also arise and manifest itself in location, policies, product mix, branding, recruitment and even reward and incentive schemes to staff as well as to customers.

‘Competition risk’ often goes much beyond into the realm of opportunities, possibilities, chance, market segments and niches that an organisation fails to spot and cash in on and the competitors are able to capitalise on. In fact creativity, innovative thinking and out-of-the-box approach often are the only offence and defense for dealing with competition.

Effectively dealing with the external risk of competition requires :

 

  •  A thorough understanding of the market

 

  •  An analysis of the environment, political, social, economic and cultural.

 

  •  An understanding of selective strengths and weaknesses of the organisation and its products and services vis-à-vis the competition.

 

  •  An understanding of potential competitors and the entry and exit barriers.

 

  •  A strategic and operational knowledge of competitor activity and customer expectations.

 

Thus, as can be seen from the above, it is indeed a very complex and daunting task, but it is nevertheless essential as without this, one cannot survive the competition.

The example for this month’s case study on competition risk is that of a company operating holiday tours and travel packages.

‘Sweet Memories’ is a tour company that was started about 15 years back in Mumbai. This company initially catered to the middle and lower middle-class segment and according to the budgets and the general trends in these times, arranged tours – and holiday packages to places of interest and cultural themes. It initially arranged tours to the West and South. This was followed by covering Rajasthan and the North.

Around four to five years back it started operating tours overseas to destinations in South-East Asia, Far East, Australia, New Zealand and is now arranging tours even to Europe and U.S.A. The customers are still essentially budget travellers belonging to the ” middle-class segment.

Of late the owners who have been casual in their approach and relying on word-of-mouth publicity ‘ and offering value for money to customers as their mainstay to survive in the market have found business difficult with the new entrants and bigger travel companies coming in with innovative concepts like theme tours, budget tours, action packed tours, exotic destinations and even sports-based tourism like the IPL South Africa tours.

Revenues of Sweet Memories have fallen and the management is at a loss as to how to deal with this” threat of sudden onslaught of competition with high-end tours, large publicity budgets, beautiful travel brochures, exotic destinations and innovative ideas.

They therefore approach you as a professional risk manager and consultant to identify and analyse competition risks and advise the tour company on the next course of action and develop an immediate plan to stop customers from migrating to competition. ‘

Suggested    solution for competition risk:

Competition risk analysis needs to be done of the, potential tour market based on :

Identifying existing and future risk for Sweet Memories:

An analysis of the situation reveals the following major issues:

Challenges and risks encountered from  competition:

1. Judging the high-end tourist market segments’ needs and expectations.

2. Identifying strategies of new entrants – e.g., price.

3. Developing a positioning strategy and organised approach from the existing casual unorganised approach.

4. Expanding own share in the pie and expanding the pie itself.

5. Review existing marketing plan: Product, pricing, promotion and locational access.

Strategies for overcoming existing competition risk:

1. SWOT analysis:

a. First step is to evaluate internal capabilities and identify areas which require improvement.

b. Determine  the scope of improvement.

c. Making small modifications to eliminate un-productive activities. This process requires ‘persistence’.

d. Conducting ABC analysis of revenue generating tourists and repeat tourists.

e. Identifying opportunities – that is – creating new untapped space in the market. e.g., International business exhibition tours, grooming and training with leisure tours for corporate executives, etc.

2. Study regional and international top 5 tour operators:

a. Complete  package  of offerings

b. Value added features like pickup and escorting services.

c. Customised onboard meal: Veg, Non-Veg. [ain, etc.

d. Event based tours: Brazil Carnival, New Year in Australia

e. Theme based tours: African safari, Buddhist circle, gaming, Dassera in Mysore and Christmas in Jeurusalem.

f. Promotion  and Branding  strategies

g. Hospitality training to their guides, cooks, other professionals

3. Strong Brand Building and positioning activities will lead towards reaching the customer’s Evoked Set (Unconscious Mind) and help in discriminating customer preferences and choice.

a. Providing a travel kit with most common and essential items with a logo mark.

b. Attractive and innovative brochures with graphics and a colorful appeal.

c. Positioning themselves as High-end quality of service with cost benefit.

d. Creating jingles, slogans, a cartoon character, modified colorfullogo, uniform dressing style for their professionals, etc.

4. Keeping a track of environmental happenings and events directly or indirectly influencing the industry: Social, Legal, Economical, Political, Technological and Cultural environments.

a) Assigning a representative in major interna-tionallocations will help in identifying key events and happening, which are not captured by major media agents.

b) Preparing a calendar with notes of future happening events and subsequently designing tour packages around those happenings – for example, Olympics in China and forthcoming Commonwealth games in Delhi.

6. Optimising  Entry and Exit Barriers

a. Creating a niche in the market which becomes a trademark and difficult to imitate by other competitors

b. Besides risk of existing competition, organisation should also open up their vision for other threats like:

1. Bargaining  power  of customers

2. Bargaining  power  of suppliers

3. Threat  from new  entrants

4. Threat from substitute  products

Porter’s    5 forces  for an organisation’s    risk:

– Risk of customer consistently demanding better quality product at reduced price.

– Suppliers demand higher volumes with sufficient margins and shorter payment cycle.

– New entrants possess more features with enhanced strengths like distribution power, innovative promotion, etc.

– Substitute product like jewellery or watches; amusement parks and resorts for tour operators; Nano car for two-wheelers’ market, etc. threatens the ability to cover large market share.

7. Adopting combination of marketing competition warfare strategies:

Sweet Memories depending on the market conditions and result of market study and analysis can adopt a combination of one or more of the following strategies to ward off competition risk.

a. Offensive marketing warfare strategies –  are used to secure competitive advantages; market leaders, runner-ups or struggling competitors are usually attacked.

b. Defensive marketing warfare strategies – are used to defend competitive advantages; lessen risk of being attacked, decrease effects of attacks, strengthen position.

c. Flanking marketing warfare strategies – Operate in areas of little importance to the competitor.

d. Guerrilla marketing warfare strategies – Attack, retreat, hide, then do it again, and again, until the competitor moves on to other markets.

e. Deterrence strategies – Deterrence is a battle won in the mind of the enemy. You convince the competitor that it would be prudent to keep out of your markets.

f. Pre-emptive strike – Attack before you are attacked.

g. Frontal attack –  A direct head-on  confrontation.

h. Flanking attack –  Attack the competitor’s  flank.

i. Sequential strategies – A strategy that consists of a series of sub-strategies that must all be sue” – cessfully carried out in the right order.

j. Alliance strategies – The use of alliances and partnerships to build strength and stabilise situations.

k. Position defence –  The erection of fortifications.

l. Mobile defence –  Constantly  changing positions.

m. Encirclement strategy – Envelop the opponent’s position.

n. Cumulative strategies – A collection of seemingly random operations that, when complete, obtain your objective.

o. Counter-offensive – When you are under attack, launch a counter-offensive at the attacker’s weak point.

p. Strategic withdrawal – Retreat and regroup so you can live to fight another day.

q. Flank positioning  –  Strengthen  your flank.

r.  Leapfrog strategy    – Avoid confrontation by bypassing enemy  or competitive forces.

To summarise, once competition risk has been identified, it has to be dealt with using a combination of strategies and tackled at all levels to keep competition out of the way. The selection of the strategy, techniques, tools will depend on your own financial and marketing strength, the competitor’s strength and the existing and expected market conditions.

Initially, the ‘risk advisor’ advised Sweet Memories to:

– renegotiate terms  with  suppliers

– add features to its tours, e.g., air conditioned buses

– develop advertising material in the form of brochures

– employ strategy of distributing brochures through newspaper vendors

– hold low-cost customer meetings prior to the departure of a tour

– distribute travel  kits at such meetings

– give specific information on places covered by the tour – e.g.,famous temples, churches, historic buildings, museums, gardens, etc. This information is normally available in local brochures.

The above low-cost strategy  has worked  in increasing the inflow  of customers  and  the efforts of the ‘risk adviser’  were appreciated.  It however  needs to ‘- be noted that ‘competition  risk’ is an always  existing risk and the management  has to be vigilant and pro-active  at all times.

Countries see hazards in free flow of capital

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30. Countries see hazards in free flow of capital


In China and Taiwan, regulators are imposing fresh
restrictions on stock market investments by foreigners. In Brazil, officials
have twice raised taxes on foreign investors. Even in South Korea, host to this
week’s Group of 20 meeting, pressure is building on the government to take
similar steps.

As the leaders of the 20 major economic powers gather in
Seoul, an increasing number of them have either imposed curbs or are in the
process of doing so to slow the torrent of hot money into their markets.

Short-term investment is now increasingly viewed as something
that needs to be controlled.

Emerging markets have been grappling all year with the
consequences of a flight of investor capital from rock-bottom interest rates in
Western countries in search of higher yields. Short-term capital investment in
emerging markets — largely in stock markets, which are at an all-time high — are
expected to hit $ 458 billion this year, the highest figure since 2007 when $
784 billion flowed into these markets, according to the Institute of
International Finance.

(Source : The Business Standard, dated 12-11-2010)

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Indian veggies, fruits remain highly toxic

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28. Indian veggies, fruits remain highly toxic


Rampant use of banned pesticides in fruits and vegetables
continues to put at risk the life of the common man. Farmers apply pesticides
such as chlordane, endrin and heptachor that can cause serious neurological
problems, kidney damage and skin diseases. A study conducted by Delhi-based NGO
Consumer-Voice reveals that the amount of pesticides used in eatables in India
is as much as 750 times the European standards. The survey collected sample data
from various wholesale and retail shops in Delhi, Bangalore and Kolkata.

(Source : The Times of India, dated 4-11-2010)

(Comment : The issue is what should the citizens do when the
authorities are apathetic to the consequences. The farmers should be made aware
of the harmful consequences. These also harm the health of the farmers coming in
contact with the chemicals.)

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Soon, pay just Rs.50k for heart surgery

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29. Soon, pay just Rs.50k for heart surgery


Want your heart fixed for just Rs.50,000 by skilled surgeons
in a top hospital with a family member to care for you ? Your wish will soon
come true. For, India’s first low–cost hospital will be up and running in Mysore
early next year.

These state-of-the art hospitals will be built at a cost of
Rs.16 crore, about one-fifth the cost of constructing a 300-bed super-speciality
hospital.

The brainchild of renowned cardio surgeon Dr. Devi Shetty,
this unique hospital will be piloted in Mysore and then in Siliguri (West
Bengal) and Bhubaneswar (Orissa).

Narayana Hrudayalaya has tied up with Larsen & Toubro to
execute the Mysore project which uses prefabricated material transported from
Puducherry. The general wards will receive daylight to the desired levels. Only
the OT complex and pre/post operation and ICU areas will have a conventional
concrete structure. “Most hospitals have huge vertical structures with heavy
air-conditioning. The best sanitizer for a hospital is sunlight and fresh air.
Dr. Shetty said, heart surgeries will be performed for Rs.50,000 and other
surgeries like gall bladder and hernia will cost between Rs.10,000 and
Rs.15,000. While hospitals in Mysore, Bhubaneswar and Siliguri will come up on
land given at subsidised rates, other hospitals will come up on the public
private partnership model.

(Source : The Times of India, dated 25-10-2010)

(Source : The Business Standard, dated 11-11-2010)

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Human development — India at the bottom of the barrel

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27. Human development — India at the bottom of the barrel


The most important takeaway for India from the recently
released United Nations Human Development Report, The Real Wealth of Nations :
Pathways to Human Development, is the ‘crucial and compelling evidence’ that
there is a lack of any significant correlation between economic growth and
improvements in health and education.

In the last few years, investments — and interest — in
India’s social sector have improved. Yet, as the report proves, the work is far,
far from over : between 2005 and 2010 — also the years of economic growth —
India has moved up only one step on the Human Development Index ladder. It’s now
at 119, out of 169 countries and areas.

This year, being the 20th edition of the HDR, three new
indices were introduced to make the process more robust : the
inequality-adjusted Human Development Index, the Gender
Inequality Index (GII) and the Multidimensional Poverty Index (MPI).

Though India’s HDI (0.519) is above the average of 0.516, for
countries in South Asia, in GII, it is embarrassingly behind even Bangladesh and
Pakistan, ranked at 116 and 112, respectively. The GII reflects women’s
disadvantages in reproductive health, empowerment and economic activity.

With women at such a low priority level, is it surprising
that we languish below on other indicators too ? Equally sad is our MPI : 55%
Indians suffer from multiple deprivations; the average in South Asia is 54%.

(Source : The Hindustan Times, dated 11-11-2010)

 

 

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McKinsey suggests e-payment to plug leakage of government funds

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26. McKinsey suggests e-payment to plug leakage of government
funds


An inefficient payment system is leading to an annual loss of Rs.1 trillion for the Government, and this can be tackled through
an electronic payment model, management consulting firm McKinsey and Co. said in
a report titled Inclusive growth and financial security : The benefits of
e-payments to Indian society. The report was commissioned by the Bill and
Melinda Gates Foundation.

A major chunk of this leakage — nearly Rs.71,000 crore — is
part of the Government welfare schemes to households, the McKinsey report said.

Current payment flows between the Government and individual
households, including subsidies and social services to individual citizens, is
around Rs.13 trillion.

According to the report, transaction costs account for 15-20%
of total losses to the Government and overhead and administrative costs around
5-10%. Leakages account for 75-80% of total losses.

Transaction costs are associated with cash or cheque payments
at payment source and destination, and overhead and administrative costs are a
result of manual payment processing, audits, and payment reconciliation.
Leakages are caused when payments of benefits or for services are diverted to
unintended individuals or groups, the report said.

(Source : The Mint Newspaper, dated 2-11-2010)

 

 

 

 

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Apple flips the playbook, putting mobile technology in PCs

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24. Apple flips the playbook, putting mobile technology in
PCs


Over the last few years, Apple used technologies from its
Macintosh computers to create the iPhone and the iPad, building a multi-billion
dollar mobile computing business that now accounts for 60% of its revenue.

Now Apple is doing the reverse, taking technologies like the
multi-touch user interface from the iPhone and the iPad and using them to
refresh its Mac business. Steven P. Jobs, the chief executive, unveiled two
versions of its ultra-thin MacBook Air laptops. He also demonstrated an early
version of Apple’s new OS X operating system, which will be available next
summer.

The new MacBooks come in two sizes of screens, 11.6-inch and
13.3-inch. They weigh 2.3 pounds, and 2.9 pounds, respectively. For comparison,
the iPad weighs 1.5 pounds. The laptops’ thickness tapers from 0.68 of an inch
at one end to 0.11 of an inch at the other. They have no optical or magnetic
storage. Instead, like the iPad, they are built on Flash storage, which allows
them to turn on instantly when powered up.

(Source : The Economic Times, dated 22-10-2010)

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The art of managing bosses

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25. The art of managing bosses


This communication touches upon many different aspects,
including communicating with your boss, peers, staff and people from other
cultures.

So often when we talk about management we automatically think
of those who report to us. But what about managing upwards ? After all, the boss
can make your life so much sweeter. There are some real skills needed here — and
you have to carefully think through your approach.

  •   Get to know your boss’ goals and challenges. Your boss has goals just like
    you. Find out and remember them. It’s easier to win more resources if they
    can deliver targets for your boss.


  •   Get to know the boss personally. How does he or she like to work ? What
    are his or her interests, likes or dislikes ?


  •   Set goals together. You need to make sure that you’re working on the right
    things. Don’t just update your boss with your achievements. Let him or her
    know where you’ll next be prioritising your attention.



  • Avoid surprises. No one wants to hear bad news. If you’ve got a suspicion
    that some-thing’s not going as planned, then let the boss know — fast !


  •   Talk their language. Every boss has a way of processing information. Some
    like headlines. Others like bottom lines. Find out and learn their language.


  •   Deliver on your commitments. It’s a rare boss who complains about a high
    achiever in their team. Deliver against your objectives and your boss’
    respect for you will rocket.


  •   Go to your boss with solutions — not just problems. Isn’t that what you
    want from your staff ? Show the boss that you’ve thought things through,
    even if you both come up with a different answer.


Always be tactful :

What is tact ? It’s choosing the right thing to say without
offending. ‘Choosing’ is the important word here. Tactless people don’t exercise
that choice. They instantly say what’s on their mind —and wish they hadn’t.
Managers have to filter what they say.

When you find yourself in a difficult conversation follow the
TACT approach.

T = Think — don’t speak. Any first rush of emotion soon
subsides. Get your brain under control and show interest. Do this and you’re 75%
of the way there.

A = Ask questions. There are two reasons for doing this.
First, questioning allows you crucial time to think. Second, you’re showing
respect by encouraging the person to give their view.

C = Clarify your understanding. Use clarification questions
to check that you fully understand the other person’s point of view. “So what
you’re upset about is . . . .”

T = Talk with care. Give yourself time and make sure that
what you say is neutral. Later on you may give your opinion because you’ve
thought it through. But do you need to do so now ?

(Source : The Mint Newspaper, dated 25-10-2010)

 

2013-TIOL-1550-CESTAT-MUM Varun Shipping Co. Ltd. vs. Commissioner of Service Tax, Mumbai

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Payment of tax before receipt of consideration is an advance and not an excess payment and thus can rightly be adjusted suo motu against the actual liability.

Facts:
The appellant paid service tax in December 2008 and reflected the same as advance payment of tax in the return for the period October 2008 to March 2009 without intimating the range superintendent. On receiving the consideration in April 2009, appellant adjusted the said advance and reflected the same in the return for the period April- September 2009. The department contended that the said payment was not an advance payment but excess payment and thus the appellant could not adjust it suo motu in terms of Rule 6(4B) of Service Tax Rules, 1994 and demanded the tax thereon with interest and penalty.

Held:
Observing that the appellant had reflected the payment of advance payment of tax particulars in both the returns, it was evident that what the appellant made was advance payment of tax and not excess payment of tax. Since the liability to pay tax arose only in April 2009, the Hon. Tribunal held that the payment made prior to such date can be contemplated only as an advance and thus no service tax was liable to be paid.

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2013 (32) STR 179 (Tri.-Delhi) Delhi Public School Society vs. Commissioner of Service Tax.

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Whether agreement to provide expertise, guidance etc. for setting up an enterprise for running an educational institution along with provision of brand name without sharing any profit or loss arising from said enterprises amounts to Joint Venture Agreement and not subjected to service tax?

Facts:
The appellant having a brand image and reputation for establishing and managing schools entered into an agreement termed as “Education Joint Venture Agreement” with other parties for setting up schools for the use of their brand name and to continue to provide managerial and operational techniques and standards of imparting education against receipt of annual fees. The appellant neither had any obligation for sharing any losses arising out of this activity nor enjoyed the benefits arising out of successful running of the other party’s institutions.

The Respondent issued various show cause notices for demanding service tax on the fees received in pursuance of the said Joint Venture Agreement under the category of “Franchise Fees” and confirmed the demand along with penalties.

Held:
It was held that the financial burden of establishing and maintaining the school was solely on the other party which signalled the absence of any partnership or joint venture and that the appellant was neither supposed to contribute towards capital nor liable for any loss or profit,
the appellant provided service not to itself but to other parties to the agreement. The Hon. Tribunal held that the scope of the Appellant clearly got covered within the category of ‘Franchise’ service as the ingredients of ‘franchise’ being satisfied, however quashed the show cause notices which were beyond the normal period of limitation, as there was no case of suppression.

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2013-TIOL-1518-CESTAT-MUM TCS e-serve Ltd. vs. Commissioner of Service Tax, Mumbai-II

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Data processing services provided to banks cannot be treated as “business auxiliary service” as it is not customer care, it is excluded from its scope.

Facts:
The appellant provided collection and sales service, call centre services and computerised data processing services and discharged service tax liability on the same with effect from 01-07-2003, 01-05-2006 and 01-05-2010 respectively under the categories of business auxiliary service and business support service.

On the activity of data processing, service tax was demanded with effect from 01-07-2003 under “Business Auxiliary Services” alleging that the customers of the bank submitted physical documents at the bank’s branches and the appellant performed computerised processes on the input submitted to the bank using the bank’s systems and saved the output on the bank’s system, which amounted to services incidental or auxiliary to the customer care services rendered by the bank. However, the reasoning recorded in the impugned order was that the appellant collected data from the clients’ customers, and the banks during the course of providing banking services also provided customer care services, and the services rendered by the appellant to the bank were incidental or auxiliary to the customer care services provided by the bank. It was also contended that the services provided by the appellant were not customer care services but banking and financial services as provided by the bank to its customers. The services of computerised data processing as specifically excluded under business auxiliary service cannot be taxed under the said category. Moreover the majority of the clients were located outside India and since the consideration was received in foreign  exchange, the services were to be treatedas exports and thus there would be no liability of service tax.

Held:
Observing that the order-in-original deviated from the charges made in the show cause notice, the Hon. Tribunal held that since there was a complete variation between the grounds alleged in the show cause notice and the grounds on which the demands were confirmed, the impugned order was liable to be set aside on that ground alone. The Hon. Tribunal also considered the other submissions of the appellant and held that no service tax was liable to be paid under business auxiliary service.

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2013-TIOL-1568-CESTAT-MUM Kpit Cummins Infosystems Ltd. vs. Commissioner of Central Excise, Pune-I

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Service tax being destination based consumption tax, services received outside India by branches of an Indian company outside India not liable for service tax u/s. 66A of the Finance Act, 1994.

Facts:
The overseas branches of the appellant provided services abroad and remitted the consideration for the bills raised by them to its Indian head office after deducting the expenditure incurred. Further, the appellant also had permanent establishments abroad by way of personnel located in the offices of their various clients and so remitted certain amount for the expenditure incurred by them for providing various services. The department contended to levy tax on the above said activities of the appellant. The appellant contended that the branches and the Indian head office were not independent entities and so there cannot be selfservice and assuming that they were independent entities, since the services were rendered abroad and consideration received in foreign exchange, it amounted to export of service. The case was of providing services abroad by the branches and not receiving of services from abroad by the Indian company to attract provisions of section 66A of the Act. Further, for the services provided by permanent establishments abroad, it was already subjected to the local tax laws and hence there was no jurisdiction with the Indian authorities to levy tax on the same.

Held:
Referring to the provisions of section 66A and affirming to the contentions of the  appellant, the Hon. Tribunal remanded the appeal with regards to the only question whether the adjudicating authority had any jurisdiction for the services completely rendered outside India and on which tax liability was already discharged under the local laws where the activity took place.

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