BCAJ | Bombay Chartered Accountant Journal

Article 5(6) & Article 12 of India-Singapore DTAA; Explanation 2 to section 9(1)(vii) of the Act – Presence of employees is to be tested separately for each type of service for computing Service PE threshold; Application of beneficial provisions of the Act for one source of income and treaty for another source of income is permissible

10.
TS-604-ITAT-2018 (Mum)

Dimension Data Asia Pacific Pte Ltd.
vs. DCIT Date of Order: 12^th October, 2018 A.Y.: 2012-13

Article 5(6) & Article 12 of India-Singapore DTAA; Explanation 2 to
section 9(1)(vii) of the Act – Presence of employees is to be tested separately
for each type of service for computing Service PE threshold; Application of
beneficial provisions of the Act for one source of income and treaty for
another source of income is permissible

Facts

Taxpayer, a private limited company incorporated in
Singapore, was engaged in the business of providing management support services
to its group entities in Asia Pacific region. Taxpayer had a wholly owned
subsidiary in India (ICo). During the years under consideration, Taxpayer sent
its employees to render following services to ICo in India.

·
Management
support services

·
Technical
assistance and guidance to ICo in relation to setting up of internet data
centres (IDCs) in India.

The duration of
stay of the employees in India during the relevant year was as follows:

Type of service rendered in India

No. of solar days spent in India during the year

Management support fees (not being FTS)

2 days

Technical service

171 days

Total days of presence in India

173 days

Taxpayer
received consideration in the form of management fee for management support
services and a separate service fee for providing technical services for
setting up of internet data centres (IDCs) in India.

Taxpayer conceded that service fee qualified as Fee for
Technical Services (FTS) under the Act as well as the DTAA and offered it to
tax in India. However, Taxpayer contended that management support fee qualified
as business income. Since the presence of employees for rendering management
support services in India was less than 30 days, Taxpayer contended that such
presence did not result in creation of a PE in India. Hence, management support
fee was not taxable in India.

The Assessing Officer (AO), however, aggregated the
number of days of presence of Taxpayer’s employees in India and held that the
Taxpayer has a service PE in India. Thus, AO taxed the management fee as well
as service fee as business Income in India.

On appeal, the Dispute Resolution Panel (DRP) upheld AO’s
order. Aggrieved, the Taxpayer appealed before the Tribunal.

Held

·
In cases of multiple sources of income, a taxpayer has an
option to choose the provisions of the Act for one source while applying the
provisions of the DTAA for the other source of income. Reference in this regard
was made to Bangalore ITAT decision in the case of IBM World Trade
Corporation vs. ADIT (2015) 58 Taxmann.com 132 and IBM World Trade Corporation
vs. DDIT (IT) (2012) 20 taxmann.com 728.

·
Taxability
of Management Support Fees:

• There
is no dispute that the management support fee qualifies as business income
under Article 7 of the India-Singapore DTAA. However, such income would be
taxable only if the Taxpayer had a PE in India under Article 5 of the DTAA.

• Since
the employees’ presence in India for rendering management support services was
less than 30 days, such presence of employees did not create a Service PE for
the Taxpayer in India. Hence, management support fee received from ICo is not
taxable in India. Presence of employees in India for rendition of technical
services is not to be reckoned for calculation of service PE duration.

Taxability
of Service Fee:

• Taxpayer’s
employee had the requisite expertise in the field of IDCs and they were sent to
India to assist and provide guidance to ICo in setting up of IDCs. Thus, the
services rendered by the employees of the Taxpayer made available technical
knowledge and skill to ICo. Hence, the fee paid for such services qualified as
FTS under Article 12 of DTAA. Therefore, such service fee was taxable in
India.

• Once
the income qualified as FTS under Article 12 of DTAA, owing to exclusion in Article
5 with respect to services covered under Article 12 of DTAA, the same fell
outside the scope of Article 5 of DTAA dealing with PEs. Hence, evaluation of
whether there was a service PE became academic

shailesh.kwebmaker

Section 194C – Value of by-products arising during the process of milling paddy into rice, which remained with the millers, not considered as part of the consideration for the purpose of TDS

6. ITO (TDS) vs. Punjab State
Warehousing Corporation (Chandigarh)

Members: Sanjay Garg, JM and Annapurna Gupta, AMITA Nos.: 1309 /CHD/2016 A.Y.: 2012-13 Dated: 30^th October, 2018 Counsel for Revenue / Assessee: Atul Goyal, B. M. Monga, Rohit Kaura and
Vibhor Garg / Manjit Singh

Section 194C – Value of by-products arising
during the process of milling paddy into rice, which remained with the millers,
not considered as part of the consideration for the purpose of TDS

Facts

The assessee is a procurement agency of
Punjab Government which procures paddy on behalf of Food Corporation of India
(FCI), get it milled and supply rice to FCI. The paddy was given to the millers
for milling at the rates as fixed by FCI. As per the terms of the agreement,
the millers were required to supply rice in the ratio of 67% of the paddy given
to them by the assessee in return the millers would get Rs. 15 per quintal as
milling charges. As per agreement, the by-products, if any, arising from the
process would remain with the millers and the assessee had no right in respect
thereof. The assessee deducted the tax at source u/s. 194C on the milling
charges of Rs. 15 per quintal so paid to the millers.

According to the AO, since as per the
agreement, the by-products i.e. remaining 33% part, out of the milled paddy,
was retained by the millers and the same had a marketable value, it was part of
the consideration paid by the assessee to the millers, whereon the assessee was
required to deduct tax at source u/s. 194C. Since the assessee failed to do so,
he held the assessee as assessee in default u/s. 201 (1) and 201 (1A) of the
Act.

The assessee appealed before the CIT(A) who
relying on the decisions of the Delhi Bench of the tribunal in the case ITO
vs. Aahar Consumer Products Pvt Ltd. (ITA No. 2910-1939-1654 &
1705/Delhi/2010) and of the Amritsar Bench of the Tribunal in the case of D.M.
Punjab Civil Supply Corporation Ltd, (ITA No. 158/Asr/2016) allowed the
appeal of the assessee and quashed the demand raised by the AO on account of
short deduction of tax.

Being aggrieved by the order of the CIT(A),
the revenue appealed before the Tribunal and made following submissions in
support of its contention that the tax at source should have been deducted
after taking into account the value of the by-products:

While fixing the milling
charges by FCI, the value of by-product in the shape of broken rice, rice kani,
rice bran and phuk and which had a reasonable market value, was duly taken into
consideration and thereafter net milling charges of Rs. 15 was arrived at;

Reliance was placed on the
correspondence / clarification from the Secretary, Food and Civil Supplies
Department that milling charges were fixed taking into consideration the value
of the by-product which was a part of the consideration paid by the assessee to
the millers for paddy milling contract;

As per the press release
issued by the Ministry of Consumer Affairs, Food & Public Distribution, the
Union Food Ministry had clarified that the milling charges for paddy paid by
the Central Government to the State Agencies were fixed, on the basis of the
rates recommended by the Tariff Commission, who had taken into account value of
the by-products derived from the paddy, while suggesting net rate of the
milling price payable to the rice millers;

As per the report of the
Comptroller and Auditor General of India (C&AG) on Procurement and Milling
of Paddy for Central Pool, the milling charges were fixed after adjusting for
by-products cost recovery;

It also relied on the
decisions of the Andhra Pradesh High Court in the case of Kanchanganga Sea
Foods Ltd. vs. CIT (2004) 265 ITR 644, which was confirmed by the Supreme
Court reported in (2010) 325 ITR 549.

Held

The Tribunal noted that the milling charges
were fixed by the Government and neither the assessee nor the millers had any
say on the milling charges fixed. Even the out-turn ratio was also fixed and
the miller had to return 67% of the manufactured rice, irrespective of the fact
whether the yield of rice manufactured was low or high from the paddy entrusted
to him.

Thus, the nature of the contact, according
to the Tribunal, was not purely a work contract, but it was something more than
that. Under the contract, the miller had no choice to return rice and
by-products as per the actual outcome and claim only the milling charges.

Further, it was noted that the agreement
contained specific term that ‘the by-product is the property of the miller’,
which meant that the property in the by-product passed immediately to the
miller on the very coming of it, into existence. Thus, moment the paddy was
milled, the assessee lost its ownership and control over the paddy and the
by-product, and acquired the right only on the ‘milled rice’.

Thus, as per the agreement, the by-product
never became the property of the procurement agencies. Therefore, according to
the Tribunal, it cannot be said that the said by-product had been handed over
as consideration in kind by the assessee to the millers. When one is not the
owner of the product and the property in the product had never passed on to
other person, he, under the circumstances, cannot pass the same to the others.

The property in the by-product from the very
inception remained with the miller and, hence, the Tribunal held that the same
cannot be said to be the consideration received by the miller. According to the
Tribunal, even though the consideration was fixed taking into consideration the
likely benefit that the miller will get out of milling process in the form of
by-products, such benefits cannot be said to be consideration for the
contract.

As
regards the reliance placed by the revenue on the decision in the case of Kanchanganga
Sea Foods Ltd., the same was distinguished by the Tribunal and held that
the same was not applicable to the assessee’s case. In the result, the Tribunal
dismissed the appeals filed by the revenue and upheld the order of the CIT(A).

shailesh.kwebmaker

Section 2(47) – Conversion of compulsory convertible preference shares into equity shares does not amount to transfer

5. Periar
Trading Company Private Limited vs. Income Tax Officer (Mumbai) Members: Mahavir Singh, JM and N.K. Pradhan, AMITA No.: 1944/Mum/2018 A.Y.: 2012-13. Dated: 9^th November, 2018 Counsel for Assessee / Revenue: Percy Pardiwala
and Jeet Kandar / Somnath M. Wagale

Section 2(47) – Conversion of compulsory
convertible preference shares into equity shares does not amount to transfer

Facts

During the year
under appeal, the assessee company converted 51,634 number of cumulative and
compulsory convertible preference shares (CCPS) held by it in Trent Ltd., into
equity shares. According to AO, the conversion of CCPS into equity shares was
transfer within the meaning of the definition provided in section 2(47)(i) of
the Act. Accordingly, the sum of Rs. 2.85 crore, being difference of market
value of 51,634 number of equity shares of Trent Ltd. as on date of conversion
and the cost of the acquisition of CCPS was by him as taxable as capital gains.
On appeal, the CIT(A) confirmed the order of the AO.

Held

The Tribunal noted that the CBDT vide its
Circular F. No. 12/1/84-IT(AI) dated 12.05.1964 has clarified that where one
type of share is converted into another type of share, there is no transfer of
capital asset within the meaning of section 2(47). It also relied on the Mumbai
Tribunal’s decision in the case of ITO vs. Vijay M. Merchant, [1986] 19 ITD
510.

According to it, the decision of the Supreme
Court in the case of CIT vs. Motors & General Stores (P.) Ltd [1967] 66
ITR 692 and relied on by the CIT(A) in his order, was entirely
distinguishable on facts of the present case. It further observed that, the
contrary interpretation would lead to double taxation in as much as, having
taxed the capital gain upon such conversion, at the time of computing capital
gain upon sale of such converted shares, the assessee would still be taxed
again, as the cost of acquisition would still be adopted as the issue price of
the CCPS and not the consideration adopted while levying capital gain upon such
conversion. Accordingly, it was held that conversion of CCPS into equity shares
cannot be treated as ‘transfer’ within the meaning of section 2(47) of the Act.

shailesh.kwebmaker

Sections 50, 54F – Deemed short term capital gains, calculated u/s. 50, arising on transfer of a depreciable asset, which asset was held for more than 36 months before the date of transfer qualify for exemption u/s. 54F, subject to satisfaction of other conditions mentioned in section 54F. Assessee having utilised the net consideration by the due date as specified u/s. 139(4), is entitled to exemption u/s. 54F though he failed to deposit the net consideration in the capital gain account scheme within the time specified u/s. 139(1).

18. [2018] 99 taxmann.com 88 (Ahmedabad-Trib.) Shrawankumar G. Jain vs. ITO ITA No. 695/Ahd./2016 A.Y.: 2011-12.Dated: 3^rd October, 2018.

Sections 50, 54F – Deemed short term
capital gains, calculated u/s. 50, arising on transfer of a depreciable asset,
which asset was held for more than 36 months before the date of transfer
qualify for exemption u/s. 54F, subject to satisfaction of other conditions
mentioned in section 54F.

Assessee having utilised the net
consideration by the due date as specified u/s. 139(4), is entitled to
exemption u/s. 54F though he failed to
deposit the net consideration in the capital gain account scheme within the
time specified u/s. 139(1).

FACTS

The assessee, an individual, carrying on his
proprietorship business under the name and style of MM sold his factory shed on
which depreciation had been claimed. Accordingly, the income earned thereon was
shown as short-term capital gain u/s. 50. However, in the return of income the
assessee had claimed exemption u/s. 54F against the short-term capital gain on
the ground that same was invested in purchase of residential property.

The Assessing Officer (AO) held that the
exemption is available u/s. 54F, only on transfer of a long-term capital asset.
The impugned factory shed was subject to depreciation u/s. 32 therefore, the
gain earned on the sale of such factory shed was liable to be taxed u/s. 50
being short-term capital gain. Once, the gain was held as short-term by virtue
of the provision of section 50, same could not be subjected to exemption under
section 54F. The Assessing Officer also
observed that the object for enacting the provision of section 50 was to avoid
the multiple benefits claimed by the assessee. He held that the assessee was
not eligible for exemption u/s. 54F.
Besides above, he also observed that the assessee had violated the
provision of section 54F(4) as he failed to deposit the amount of net sale
consideration in the capital gain account scheme. Therefore, the assessee could
not be allowed exemption u/s. 54F.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who upheld the order passed by the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that It is undisputed
fact that the period of holding of factory shed, on which depreciation was
claimed and which has been sold, was exceeding 36 months. Thus, the gain
arising on sale was held as short term by virtue of the provision of section
50.

The Tribunal on a combined reading of the
sections 50 and 54F noted that all the provisions of the two sections are
mutually exclusive to each other. There is no mention under section 50
referring to the provision of section 54F and vice versa. Therefore, the Tribunal
held that the provision of one section does not exclude the provision of other
section. It held that both the provisions should be applied independently in
the instant case. The Tribunal held that the capital gain earned by the
assessee on the sale of depreciable assets being factory shed is eligible for
exemption u/s. 54F as it is long-term capital assets as per the provision of
section 2(42A). The Tribunal observed
that it has no hesitation in deleting the addition made by the AO by
disallowing the exemption available to the assessee.

The Tribunal also held that there is no
dispute the net consideration was utilised by the assessee before filing the
income tax return within the due date as specified u/s. 139(4). Therefore, the
assessee is eligible for exemption u/s. 54F, though he failed to deposit the
net consideration in the capital gain account scheme within the time specified
u/s. 139(1). The appeal filed by the assessee was allowed.

shailesh.kwebmaker

Sections 22, 24 – Income earned by assessee, society, by letting out space on terrace for installation of mobile tower / antenna is taxable as “Income from House Property” and consequently, deduction u/s. 24(a) is allowable in respect of such income.

17. [2018] 98 taxmann.com 365 (Mumbai-Trib.) Kohinoor Industrial Premises Co-op Society
Ltd. vs. ITO ITA No. 670/Mum/2018 A.Y.: 2013-14.
Dated: 5^th October, 2018.

Sections 22,
24 – Income earned by assessee, society, by letting out space on terrace for
installation of mobile tower / antenna is taxable as “Income from House
Property” and consequently, deduction u/s. 24(a) is allowable in respect of
such income.

FACTS

The assessee, a co-operative society,
derived income by letting out space on terrace for installation of mobile
tower/antenna. This income was declared
in the return of income, filed by the society, under the head `Income from
House Property’ and deduction u/s. 24(a) was claimed.

The Assessing Officer (AO) observed that the
terrace cannot be regarded as house property as it was a common amenity for
members. He also observed that since the
conveyance was not executed, the society is not the owner of the premises. The AO taxed the income under the head
“Income from Other Sources”.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that the issue before
it is, what is the nature of income received by the assessee for letting out
such space to the cellular operator/mobile company for installing and operating
mobile towers/antenna? It held that the terrace of the building cannot be
considered as distinct and separate but certainly is a part of the
house property.

Therefore, letting-out space on the terrace
of the house property for installation and operation of mobile tower/antenna
certainly amounts to letting-out a part of the house property itself. It held
that the observation of the AO that the terrace cannot be considered as house
property is unacceptable.

As regards the
observation of the Commissioner (Appeals) that the rental income received by
the assessee is in the nature of compensation for providing services and
facility to cellular operators, the Tribunal observed that the revenue has
failed to bring on record any material to demonstrate that in addition to
letting-out space on the terrace for installation and operation of antenna the
assessee has provided any other service or facilities to the cellular operators.

The Tribunal
directed the AO to treat the rental income received by the assessee from
cellular operator as income from house property and allow deduction u/s. 24(a).

Appeal filed by the assessee was allowed.

shailesh.kwebmaker

Section 145(3) – Books of Accounts cannot be rejected u/s. 145(3) merely because Gross profit from a particular segment was lower and assessee was not in possession of proper documentary evidences in respect of expenses where the genuineness of expenses was not doubted.

16.
(2018) 65 ITR (Trib.) 532 (Jaipur)

Dreamax
Infrastructure Developers vs. ITO ITA No. :
364/JP/2017 A.Y.:
2012-13Dated: 25^th May, 2018

Section 145(3) – Books of Accounts cannot
be rejected u/s. 145(3) merely because Gross profit from a particular segment
was lower and assessee was not in possession of proper documentary evidences in
respect of expenses where the genuineness of expenses was not doubted.

FACTS

The appellant, a partnership firm, engaged
in the business of Infrastructure and industrial project of Construction of
Road, Industrial Township, Security Barracks etc., was awarded two different
projects. One of road work and industrial township (Chittorgarh project) and
another of a highway road project (Pune Project). Appellant had maintained
single set of books for whole of its business covering both the projects. No
work was carried in respect of Pune project and no revenue was generated,
whereas, there was contractual revenue from the Chittorgarh project. Appellant was asked to submit separate
trading account for each project by the Assessing Officer (AO). Appellant had
not maintained separate books for each project, however books were audited and
the same were produced along with other required details. AO further pointed
out that assessee had not supported the expenditure with proper vouchers. AO
also noted that appellant had shown very less Gross Profit (GP) for the
relevant Assessment year from the work executed. Accordingly, the AO doubted
the correctness of the books of accounts of the assessee and rejected the same
by invoking the provisions of section 145(3) of the Income Tax Act and adopted
8% Net Profit rate on Contract receipts. The rejection of Books was challenged
before the Hon’ble ITAT.

HELD

When AO does
not dispute the fact that appellant maintains Books, which are also audited,
then he is not justified in segregating the activities in different category
and then observing that appellant had reported low GP in some category ,
whereas overall 7.44% GP rate was declared which was not objected by the
revenue. Further, AO had only pointed out that expenses were not supported with
proper evidences and he had not doubted the genuineness of expenditure. When
appellant had produced relevant documentary evidences, insignificant defects in
supporting evidence cannot be a reason for rejection of books of account. It
was further held that if the expenditure claimed by the appellant was not found
to be bogus/ excessive then the low profit cannot be reason for rejection of
Books. As the work was carried under a composite work contract and appellant
was working as one enterprise there was no need for production of separate
books for each activity. Further, Hon’ble ITAT followed the decision of the
Hon’ble jurisdictional High Court in case of Malani Ramjivan Jagannath vs.
ACIT 316 ITR 120, wherein it was held that mere deviation of GP rate cannot
be a ground for rejecting books of accounts and income cannot be determined on
the basis of estimate and guesswork. Accordingly it was held that appellant’s
case did not warrant rejection of Books of Accounts u/s. 145(3).

shailesh.kwebmaker

Section 10(1) – Cultivation of Mushroom, although in controlled condition using trays placed above land, is an agricultural activity and income derived there from is exempt u/s. 10(1).

15.
(2018) 65 ITR (Trib.) 625 (Hyderabad – SB)

DCIT vs.
Inventaa Industries (P.) Ltd. ITA No.:
1015 to 1018(Hyd.) of 2015 C.O. No.:
53 to 56 (Hyd.) of 2015 A.Ys.:
2008-09 to 2012-13 Dated: 9^th July, 2018

Section 10(1) – Cultivation of Mushroom,
although in controlled condition using trays placed above land, is an
agricultural activity and income derived there from is exempt u/s. 10(1).

FACTS

The assessee company was engaged in growing
Edible White Button Mushrooms and the income from the said activity was treated
as Agricultural Income claiming exemption u/s. 10(1). Assessing Officer (AO) contended that as
Mushrooms were grown in ‘growing rooms’ under ‘controlled conditions’ in racks
placed above land and using compost manure which is not land and hence the said
activity was not an agricultural activity. CIT(A) ruled in assessee’s favor by
concluding that production of mushroom was a process of agricultural production
and income derived from such a process was agricultural income eligible for
exemption u/s. 10(1). The question before the Special Bench of the Hon’ble ITAT
(Hyderabad Bench) was, whether income from production and sale of Mushrooms can
be termed as ‘agricultural income’ under the Income Tax Act, 1961?

HELD

The Special Bench of the Hon’ble ITAT
supported the view of assessee that ‘soil’ is a part of the land, which is part
of earth. Mushrooms are grown on ‘soil’. Certain basic operations are performed
on it, which require ‘expenditure of human skill and labour’ resulting in
raising the mushrooms. When soil is placed on trays, it does not cease to be
land and when operations are carried

out on soil, it would be agricultural activity carried upon land itself.

In order to
claim exemption u/s. 10(1), use of land and performing activity on it, so as to
raise a natural product, is sufficient. If the strict interpretation is adopted
for the word ‘Land’ appearing in definition of “agricultural Income” u/s. 2(1A)
of the Act, then, when ‘soil’ attached to earth is cultivated, it would be
agricultural activity and when ‘soil’ is cultivated after detaching the same
from earth, it would not be agricultural activity. Such an interpretation is
unintended and unfair. It was concluded that ‘soil’, even when separated from
land and placed in trays, pots, containers, terraces, compound walls etc.,
continues to be a specie of land.

Further, on the question whether mushroom is
‘plant’ or a ‘fungus’ it was observed that one cannot restrict the word
‘product’ to ‘plants’, ‘fruits’, ‘vegetables’ or such botanical life only. The
only condition was that the “product” in question should be raised on
the land by performing some basic operations. Mushrooms produced by the
assessee are a product.

This product is raised on land/soil, by
performing certain basic operations. The product draws nourishment from the
soil and is naturally grown, by such operation on soil which require expenditure
of ‘human skill and labour’. The product so raised has utility for consumption,
trade and commerce and hence would qualify as an ‘agricultural product’ the
sale of which gives rise to agricultural income which is exempt u/s. 10(1) of
the Act.

Just because mushrooms are grown in
controlled conditions it does not negate the claim of the assessee that the
income arising from the sale of such mushrooms is agricultural income.
Accordingly, exemption u/s. 10(1)was allowed to the assessee.

shailesh.kwebmaker

Section 68 – No addition u/s. 68 can be made when assessee is not liable to maintain books of accounts, further bank passbook cannot be regarded as books maintained by assessee.

14. (2018) 65 ITR (Trib.) 500 (Delhi)

Babbal
Bhatia vs. ITO ITA Nos.
5430 & 5432/DEL/2011 A.Ys.: 2010-11 to 2012-13 Dated: 8^th June, 2018

Section 68 – No addition u/s. 68 can be made when assessee is not liable to
maintain books of accounts, further bank passbook cannot be regarded as books
maintained by assessee.

FACTS

Assessment was reopened u/s. 147 based on
information that Assessee had earned Rental income and had made huge cash
deposit in her bank account. In response to notice u/s. 148, she filed her
Return of Income (ROI) wherein she clearly stated that she did not maintain
books of accounts. Further, assessee had declared her income under the
presumptive taxation provisions of section44AF, however as per the contentions
of revenue, the turnover and profit shown by assessee did not entitle assessee
to be governed by section 44AF. During the assessment proceeding, she submitted
Cash Flow Statement and stated that cash deposited was received from cash sales
and withdrawals from other banks. However, the Assessing Officer (AO) rejected
the explanation and made addition of cash deposit u/s. 68.

CIT(A) upheld the order of AO and assessee
filed appeal before the Hon’ble ITAT.

HELD

The Tribunal allowed the assessee’s appeal
and held as under:

1. If returned income did not match the
presumptive tax rates u/s. 44AF revenue authorities should have treated the ROI
as invalid. Further in such circumstances, AO cannot proceed by making addition
u/s. 68 in respect of cash deposited in Bank account knowing fully that
assessee was not maintaining books of accounts.

2. The Hon’ble ITAT relied on the following
decisions:

(a) ITO vs. Om Prakash Sharma (ITA
2556/Del/2009) wherein it was accepted that bank passbook does not
constitute Books of Accounts, further when no Books are maintained by assessee
addition u/s. 68 cannot be made. Reliance was placed on CIT vs. Bhaichand H.
Gandhi [141 ITR 67 (Bom.)], Sampat Automobile vs. ITO [96 TTJ(D)368], Mayawati
vs. DCIT [113 TTJ 178(Del.)], Sheraton Apparels vs. ACIT [256 I.T.R. 20 (Bom.)].

(b) Baladin Ram v. CIT [1969] 7 ITR 427[SC]
wherein the apex court held that passbook could not be regarded as books of
account of assessee as relationship between banker and customer is that of
debtor-creditor and not of trustee-beneficiary.

(c) CIT vs. Ms. Mayawati [338 ITR 563 (Del
HC)] wherein it was held that Bank neither act as agent of customer nor
maintains pass book under the instructions of customer (assessee). Thus, cash
credit in the Pass Book of the assessee does not attract provisions of section
68.

(d) Anandram Ratiani vs. CIT [1997] 223 ITR
544 (Gauhati) wherein it was observed that perusal of section 68 of the
Act, shows that in relation to the expression “books”, the emphasis
is on the word “assessee” meaning thereby that such books have to be
the books of the assessee himself and not of any other person.

3. The very sine qua non for making
addition u/s. 68 presupposes a credit of the amount in the Books of the
assessee. A credit in the Bank account of assessee cannot be construed as
credit in the books of the assessee.

4. The Hon’ble ITAT stated that it is settled
position that statutory provision has to be given plain literal interpretation
no word howsoever meaningful it may appear can be allowed to be read into a
statutory provision in garb of giving effect to the underlying intent of
legislature. Thus, credit in bank of assessee cannot be construed as credit in
Books of assessee. Accordingly no addition u/s. 68 can be made in the given
case.

shailesh.kwebmaker

Section 54 r.w. section139 and 143 – There is no bar/restriction in provisions of section 139(5) that assessee cannot file a revised return after issuance of notice u/s. 143(2). The AO could not reject assessee’s claim for deduction u/s. 54 raised in revised return on ground that said return was filed after issuance of notice u/s. 143(2)

13. [2018] 195 TTJ 1068 (Mumbai – Trib.)

Mahesh H. Hinduja vs. ITO ITA No.
176/Mum/2017 A.Y.:
2011-12. Dated: 20^th June, 2018.

Section 54
r.w. section139 and 143 – There is no bar/restriction in provisions of section
139(5) that assessee cannot file a revised return after issuance of notice u/s.
143(2). The AO could not reject assessee’s claim for deduction u/s. 54 raised
in revised return on ground that said return was filed after issuance of notice
u/s. 143(2)

FACTS

The assessee filed his return declaring
certain taxable income. Subsequently, the assessee filed a revised return of
income in which while offering long-term capital gain, he claimed deduction of
the said amount u/s. 54 towards investment of an amount in a new residential
house. The AO taking a view that revised return of income was filed after
issuance of notice u/s. 143(2), held that the said revised return being
invalid, assessee’s claim for deduction u/s. 54 could not be allowed. Aggrieved
by the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) confirmed the said disallowance.

HELD

The Tribunal held that in the original
return of income the assessee had neither declared the long-term capital gain
nor has claimed deduction u/s. 54. Therefore, the assessee filed a revised
return of income within the time prescribed u/s. 139(5) declaring net long-term
capital gain of Rs.49,96,681, though, it was claimed as deduction u/s. 54
towards investment in a new residential house.

A careful
reading of the provisions contained u/s. 139(5) would make it clear that if an
assessee discovered any omission or wrong statement in the original return of
income, he could file a revised return of income within the time limit as per
section 139(5). There was no bar/restriction in the provisions of section
139(5) that the assessee could not file a revised return of income after
issuance of notice u/s. 143(2) of the Act. The assessee could file a revised
return of income even in course of the assessment proceedings, provided, the
time limit prescribed u/s. 139(5) was available. That being the case, the
revised return of income filed by the assessee u/s. 139(5) could not be held as
invalid.

When the
assessee had made a claim of deduction u/s. 54 of the Act, it was incumbent on
the part of the Departmental Authorities to examine whether assessee was
eligible to avail the deduction claimed under the said provision. The
Departmental Authorities were not expected to deny assessee’s legitimate claim
by raising technical objection. In view of the aforesaid, the impugned order of
the CIT(A) was set aside and the issue was restored to the file of the AO for
examining and allowing assessee’s claim of deduction u/s. 54 subject to
fulfilment of conditions of section 54.

shailesh.kwebmaker

Section 2(24) r.w. section 12AA – Corpus specific voluntary contributions being in nature of ‘capital receipt’, are outside scope of income u/s. 2(24)(iia) and, thus, same cannot be brought to tax even in case of trust not registered u/s.12A/12AA

12. [2018] 195 TTJ 820 (Pune – Trib.)

TO(E) vs. Serum Institute of India Research
Foundation ITA No.
621/Pune/2016 A.Y.:
2005-06. Dated: 29^th January, 2018.

Section 2(24) r.w. section 12AA – Corpus
specific voluntary contributions being in nature of ‘capital receipt’, are
outside scope of income u/s. 2(24)(iia) and, thus, same cannot be brought to
tax even in case of trust not registered u/s.12A/12AA

FACTS

The assessee was registered trust under the
Bombay Public Trust Act, 1950, however, it was unapproved by the CBDT as
required u/s. 35(1)(ii) of the Act. Further, it was also not registered u/s.
12A/12AA. This is the second round of the proceedings before Tribunal. During
the relevant year, the AO brought to tax the corpus donation of Rs. 3 crore on
the ground that approval u/s.35(1)(ii) had not been granted to the assessee and
the assessee had also not been registered u/s. 12A. During the first round of
the proceedings, the assessee submitted before Tribunal that even if approval
u/s. 35(1)(ii) was not granted then also the amount could not be brought to tax
since it was in nature of a gift and said aspect had not been considered by the
lower authorities. The Tribunal restored the issue to the file of the AO with a
direction to examine the contention of the assessee that the amount of Rs.3
crore received as corpus donation was in the nature of gift and, therefore, same
was not taxable.

In remand
proceedings, the AO held that “corpus donation” did not tantamount to
exempt income as laid down u/s. 2(24)(iia) of the Act. The AO referred the provisions of section 12A/11(1)(d) and
reasoned that the voluntary contribution to the corpus of the trust were
taxable as the income of the trust but for the provisions of clause (d) of
section 11(1) of the Act. In the absence of any such specific exclusions
provided in the provisions of section 10(21), the said donation became taxable
in the hands of the assessee.

Aggrieved by
the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) held that section 2(24)(iia) was required to be read in the context of
introduction of the section 12 considering the simultaneous amendments to both
the provisions with effect from 01-04-1973 and that the said amount of corpus
donation was not taxable under the Act being in the nature of capital receipt.

HELD

The Tribunal held that it was necessary to
examine the non-taxability of the corpus donations in assessee’s case despite
inapplicability of the provisions of section 12(1)/11(1)(d)/section 35/10(21).
On the face of it, the provisions of section 2(24)(iia) applied to the case of
the assessee. It had been held in various cases decided earlier that the corpus
donation received by the trust, which was not registered u/s. 12A/12AA, was not
taxable as it assumed the nature of ‘capital receipt’ the moment the donation
was given to the “Corpus of the Trust”. The provisions of sections
2(24)(iia)/12(1)/11(1)(d)/35/56(2) were relevant for deciding the current
issue. It was a settled legal proposition that in case of a registered trust,
the corpus specific voluntary contributions were outside the scope of income as
defined in section 2(24)(iia) due to their “capital nature”. But
assessee was an un-registered trust. Despite the detailed deliberations made by
revenue, the principles relating to judicial discipline assume significance and
the priority. It was also well settled that there was need for upholding the
favourable view if there existed divergent views on the issue. As mentioned
above, there were multiple decisions in favour of the assessee. Accordingly,
the corpus-specific-voluntary contributions were outside the taxations in case
of an unregistered trust u/s. 12/12A/12AAA too.

shailesh.kwebmaker

Section 40A(2) – Where AO made disallowance u/s. 40A(2)(a) without placing on record any material which could prove that payments made by assessee were excessive or unreasonable, having regard to fair market value of services for which same were made or keeping in view legitimate needs of business of assesee or benefit derived by or accruing to assessee therefrom, said disallowance could not be sustained.

11. [2018] 195 TTJ 796 (Mumbai – Trib.) Nat Steel Equipment (P.) Ltd. v. DCIT ITA Nos.: 4011 & 5070/Mum/2013 A.Y.s: 2009-10 & 2010-11
Dated: 13^th June, 2018.

Section 40A(2) – Where AO made disallowance
u/s. 40A(2)(a) without placing on record any material which could prove that
payments made by assessee were excessive or unreasonable, having regard to fair
market value of services for which same were made or keeping in view legitimate
needs of business of assesee or benefit derived by or accruing to assessee
therefrom, said disallowance could not be sustained.

FACTS

The assessee
had made an aggregate payment to its related parties by way of commission/legal
and professional charges. However, the assessee had failed to place on record
any documentary evidence in support thereof. The AO was of the view that the
assessee had paid commission to its related parties at an exorbitant rate of 10
per cent of the sale value. It was further observed by the AO that not only the
payments made by the assessee to its related parties appeared to be
unreasonable, but rather 90 per cent of the total payments were found to have
been made to such related parties. After characterising the payments made by
the assessee to its related parties as unreasonable and excessive, the AO had
disallowed 30 per cent of such payments and made a consequential addition in
its hands.

Aggrieved, the assessee preferred an appeal
to the CIT(A). The CIT(A) confirmed the disallowance of 30 per cent of total
commission.

HELD

The Tribunal held that once the AO formed an
opinion that the expenditure incurred by the assessee in respect of the goods,
services or facilities for which the payment was made or was to be made to the
related party was found to be excessive or unreasonable, then the onus was cast
upon the assessee to rebut the same and prove the reasonableness of such
related party expenses. However, the Legislature had in all its wisdom in order
to avoid any arbitrary exercise of powers by the AO in the garb of the
aforesaid statutory provision, specifically provided that such formation of
opinion on the part of the AO had to be arrived at having regard to the fair
market value of the goods, services or facilities for which the payment was
made by the assessee.

In the case of the assessee, the CIT(A) had upheld the ad hoc disallowance of 30 per
cent of the payments made by the assessee to its related parties, without
uttering a word as to on what basis the respective expenditure incurred by the
assessee in context of the related party services was found to be excessive or
unreasonable, having regard to either the fair market value of the services for
which the payment was made by the assessee or the legitimate needs of its
business or the benefit derived by or accruing to the assessee therefrom. The
lower authorities had carried out the disallowance u/s. 40A(2)(a) on an ad hoc
basis viz. 30 per cent of the payments made to the related parties and made a
disallowance without placing on record any material which could prove to the
hilt that the payments were excessive or unreasonable, having regard to the
fair market value of the services for which the same were made or keeping in
view the legitimate needs of the business of the assessee or the benefit
derived by or accruing to the assessee therefrom.

In the absence
of satisfaction of the basic condition for invoking of section 40A(2)(a), the
Tribunal held that the disallowance of 30 per cent of the related party
expenses i.e.Rs.38,87,705 made u/s. 40A(2)(a) could not be sustained.

shailesh.kwebmaker

Section 222 and Rule 68B of Second Schedule – Recovery of tax – Where TRO had issued on assessee a notice dated 18/11/2004 for auction of its attached property and SC vide order dated 16/01/2001 had dismissed SLP of assessee filed against assessment order, period of three years enacted in Rule 68B(1) of Second Schedule to the Act would begin to run from 01/04/2001 and notice dated 18/11/2004 was, therefore, barred by limitation

27. Rambilas Gulabdas (HUF) vs. TRO;
[2018] 98 taxmann.com 309 (Bom); Date of order: 27^th
September, 2018

Section 222 and Rule 68B of Second Schedule
– Recovery of tax – Where TRO had issued
on assessee a notice dated 18/11/2004 for auction of its attached property and
SC vide order dated 16/01/2001 had dismissed SLP of assessee filed against
assessment order, period of three years enacted in Rule 68B(1) of Second
Schedule to the Act would begin to run from 01/04/2001 and notice dated
18/11/2004 was, therefore, barred by limitation

The Tax Recovery officer
had issued on the assessee a notice dated 18/11/2004 for auction of its
attached property. The assessee filed a writ petition praying to quash the
above notice. It submitted that the notice was barred by limitation because of
rule 68B of Second Schedule of the Act. The assessee had challenged the
relevant assessment order upto Supreme Court and the Supreme Court vide order
dated 16/01/2001 had dismissed the SLP of the assessee.

The Bombay High Court allowed
the writ petition and held as under:

“i) Perusal of memo of writ petition does not show any effort made by
revenue after 16/01/2001 till 18/11/2004 for auction of attached property. The
only effort appears to be on 18/11/2004. It, therefore, is not a case of resale
but first or initial sale or auction only.

ii) Perusal of the judgment of the Andhra Pradesh High Court rendered
in the case of S.V. Gopala Rao v. CIT [2005] 144 Taxman 395/[2004] 270 ITR 433
shows that the CBDT does not have power to issue Notification to amend a
provision enacted by Parliament. Notification dated 01/03/1996 enhancing period
of limitation of three years stipulated in rule 68B(1) to four years is,
therefore, found to be bad. This judgment of Andhra Pradesh High Court was challenged
by department before the Apex Court. The Apex Court has endorsed the findings
of Andhra Pradesh High Court. With the result, it follows that period of
limitation of three years enacted by Parliament in rule 68B(1) could not have
been altered by the CBDT. The period, therefore, was always three years.

iii) Here the SLP of assessee is also dismissed on 16/01/2001 by the
Apex Court. The period of limitation, therefore, begins to run from 01/04/2001.
The period of three years expired on 31/03/2004 and period of four years
expired on 31-03-2005.

iv) The steps are initiated by the department in present matter on
18/11/2004, i.e., after expiry of period of three years but before expiry of
period of four years. The judgment of Apex Court endorses reasoning of Andhra
Pradesh High Court on lack of authority in CBDT to increase the period from
three years to four years. The incompetent authority, therefore, cannot
prejudice legal rights of the assessee flowing from statutory provisions or
eclipse the same in any manner. Notice dated 18/11/2004 is, therefore, beyond
period of three years and, therefore, hit by rule 68B(1).

v) In view of the aforesaid, the notice dated 18/11/2004 is
unsustainable and deserved to be quashed. Consequently, in view of mandate of
rule 68B(4), attachment of property which formed subject matter of notice dated
18/11/2004 is also set aside.”

shailesh.kwebmaker

Sections 147 and 148 – Reassessment – Validity of notice – No action taken on notice u/s. 148 dated 23/03/2015 for A. Y. 2008-09 – Another notice u/s. 148 issued on 18/01/2016 for A. Y. 2008-09 by new AO – Notice not mentioned that it was in continuation of earlier notice – Notice barred by limitation – No reasons given – Notices and consequent reassessment not valid

26. Mastech Technologies P. Ltd. vs. Dy.
CIT; 407 ITR 242 (Del): Date of order: 13^th July,
2017

A. Y. 2008-09

Sections 147 and 148 – Reassessment –
Validity of notice – No action taken on notice u/s. 148 dated 23/03/2015 for A.
Y. 2008-09 – Another notice u/s. 148 issued on 18/01/2016 for A. Y. 2008-09 by
new AO – Notice not mentioned that it was in continuation of earlier notice –
Notice barred by limitation – No reasons given – Notices and consequent
reassessment not valid

The assessee filed writ
petition and challenged the validity of two notices dated 23/03/2015 and
18/01/2016 issued u/s. 148 of the Act by the Assessing Officer for the A. Y.
2008-09. During the pendency of the writ petition, the Assessing officer passed
the reassessment order making additions but did not give effect to the order in
terms of the interim order passed by the High Court.

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

“i) The Revenue did not pursue the notice dated 23/03/2015 issued to
the assessee u/s. 148 of the Income-tax Act, 1961. The notice dated 18/01/2016
did not state anywhere that it was in continuation of the earlier notice dated
23/03/2015. There was no noting even on the file made by the Assessing Officer
that while issuing the notice he was proposing to continue the proceedings that
already commenced with the notice dated 23/03/2015. The entire proceedings u/s.
148 stood vitiated since even according to the Assessing Officer, he initiated
proceedings on 18/01/2016 on which date such initiation was clearly time
barred.

ii) Secondly, the fresh initiation did not have
the approval of the Additional Commissioner, as required by law. The Assessing
Officer had followed a very strange procedure. The reasons that he furnished
the assessee by the letter dated 23/02/2016 contained only one sentence. For
some reasons, the Assessing officer did not provide the assessee the reasons
recorded in annexure A to the pro forma which contained the approval of the
Additional Commissioner dated 19/03/2015. Also, clearly, these were not the
reasons for reopening of the assessment on 18/01/2016. There was no
satisfactory explanation as to why the notice dated 23/03/2015 was not carried
to its logical end. The mere fact that the Assessing Officer who issued that
notice was replaced by another Assessing Officer could hardly be the
justification for not proceeding in the matter. On the other hand, the
Assessing Officer did not seek to proceed u/s. 129 of the Act but to proceed de
novo u/s. 148 of the Act.

iii) This was a serious error which could not be accepted to be a mere
irregularity. As regards the non-communication of the reasons as contained in
annexure A to the pro forma on which the approval dated 19/03/2015 was granted
by the Additional Commissioner, there was again no satisfactory explanation.
The fact remained that what was communicated to the assessee on 23/02/2016 was
only one line without any supporting material.

iv) Consequently, there were numerous legal infirmities which led to
the inevitable invalidation of all the proceedings that took place pursuant to
the notice issued to the assessee first on 23/03/2015 and then again on
18/01/2016 – both u/s. 148 and all consequential proceedings including the
assessment order dated 30/03/2016 was to be set aside.”

shailesh.kwebmaker

Section 80-IB(10) – Housing project – Deduction u/s. 80-IB(10) – TDS – Amendment w.e.f. 01/04/2010 barring deduction where units in same project sold to related persons – Prospective in nature – Flats sold to husband and wife exceeding prescribed area in 2008 – Assessee entitled to deduction

25. CIT vs. Elegant Estates; 407 ITR 425
(Mad): Date of order: 19^th June, 2018

A. Ys. 2010-11 to 2012-13

Section 80-IB(10) – Housing project –
Deduction u/s. 80-IB(10) – TDS – Amendment w.e.f. 01/04/2010 barring deduction
where units in same project sold to related persons – Prospective in nature –
Flats sold to husband and wife exceeding prescribed area in 2008 – Assessee
entitled to deduction

The assessee was in the
business of real estate development. For the A. Ys. 2011-12 and 2012-13 the
assessee claimed deduction u/s. 80-IB(10) of the Act. The Assessing Officer
disallowed the claim on the grounds that two adjacent flats were sold to
husband and wife, that the total super built-up area was 3225 sq. ft. and that
the sale of the flats was recognised on 31/03/2010, during the previous year
2009-10, relevant to the A. Y. 2010-11. He was of the view that the provisions
of section 80-IB(10) were not attracted, since two flats had been sold to
related persons thereby contravening clause (f) of section 80-IB(10).

The Commissioner (Appeals)
allowed the appeals and held, inter alia, that the flats in question
were sold on 14/04/2008 and 16/07/2008 respectively and that the amendment of
section 80-IB which was prospective w.e.f. 01/04/2010 had no application. The
Tribunal dismissed the appeal filed by the Department.

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

“The Appellate Commissioner
and the Tribunal based on their concurrent factual finding that the actual sale
of the flats in question took place on 14/01/2008 and 16/07/2008 respectively
before the amendment of section 80-IB(10) had rightly held that the amendment
was prospective w.e.f. 01/04/2010 and that the assessee was entitled to
deduction. No question of law arose.”

shailesh.kwebmaker

Section 10B – Export oriented undertaking (Date of commencement of production) – Deduction u/s. 10B – Where in order to determine admissibility of assessee’s claim u/s. 10B, date of commencement of manufacture or production could be ascertained from relevant documents such as certificate of registration by competent authority, mere wrong mentioning of said date in Form No. 56G filed in support of claim of deduction, could not be a ground to reopen assessment

24. MBI Kits International vs. ITO;
[2018] 98 taxmann.com 473 (Mad):

Date of order: 4^th October,
2018 A. Y. 2010-11

Section 10B – Export oriented undertaking
(Date of commencement of production) – Deduction u/s. 10B – Where in order to
determine admissibility of assessee’s claim u/s. 10B, date of commencement of
manufacture or production could be ascertained from relevant documents such as
certificate of registration by competent authority, mere wrong mentioning of
said date in Form No. 56G filed in support of claim of deduction, could not be
a ground to reopen assessment

The assessee firm was
formed with an object to carry on the business of manufacturing and testing
chemicals. The Madras Export Processing Zone issued a letter of permission
dated 28/03/2000. The Government of India, Ministry of Commerce by letter dated
29/03/2000, granted permission to the petitioner to carry on its business of
manufacturing of test kits used for checking iodized salt. The assessee filed
its return of income for A. Y. 2010-11, claiming deduction u/s. 10B of the Act.
An order of assessment u/s. 143(3) was passed on accepting the claim of
deduction u/s. 10B. Subsequently, the Assessing Officer noticed that in Column
No. 7 to Form No. 56G, filed in support of claim of deduction u/s. 10B, date of
Commencement of manufacture or products was mentioned as 28/03/2000. According
to the Assessing Officer if the date of commencement of manufacture or
production referred to in the Column No. 7 in Form No. 56G as 28/03/2000 was
taken as true, the deduction claimed was at the eleventh year and not at the
tenth year which was not permissible. Thus, Assessing Officer took a view that
on account of assessee’s failure to disclose all material facts truly and fully
at time of assessment, deduction u/s. 10B was wrongly allowed. He thus relying
upon proviso to section 147, initiated reassessment proceedings.

The assessee raised an
objection to initiation of reassessment proceedings by contending that actual
date of commencement of manufacturing was only on 25-5-2000 and, thus,
deduction was claimed in tenth year itself. The Assessing Officer rejected the
assessee’s objection.

On a writ petition
challenging the validity of the notice the Madras High Court allowed the writ
petition and held as under:

“i) The assessee is engaged in manufacturing of test chemicals. They
got approval from the Development Commissioner, Export Processing Zone on
29/03/2000. It is claimed by the assessee that they commenced the manufacturing
activities only on 25/05/2000 and not on 28/03/2000, as has been wrongly stated
in Form 56G, an Auditor’s Report filed for claiming deduction u/s. 10B of the
Act.

ii) Admittedly, the assessee has furnished the details in Columns 7
and 8 of Form 56G. According to the revenue, if the date of commencement of manufacture
or production referred to in the Column No.7 in Form No.56G as 28/03/2000 is
taken as true, the deduction claimed was at the eleventh year and not at the
tenth year. The assessee seeks to explain that the entry made in Column No.7 of
Form 56G was by mistake and on the other hand, the actual date of commencement
of manufacture was only on 25/05/2000. At the same time, Column No.8, which
deals with number of consecutive year for which the deduction claimed, relevant
year was rightly stated as tenth year. Therefore, the question that arises for
consideration, under the above stated circumstances, is as to whether these
contradictory statement made by the assessee can be brought under the purview
of non-disclosure of fully and truly all material facts necessary for his
assessment, to attract the extended period of limitation.

iii) No doubt, Column Nos.7 and 8 contradict each
other with regard to the commencement of manufacture. However, when one of such
column has specifically referred the number of consecutive year as the tenth
year to claim section 10B deduction and when the Assessing Officer has also
considered and allowed such deduction, it has to be construed that such
deduction was granted by the Assessing Officer by forming his opinion based on the
conjoined consideration of materials already placed. In other words, it cannot
be stated that the assessee has availed the benefit u/s. 10B by giving false
details. If the date of manufacture as referred to in Form 56G is taken as the
right date, the Assessing Officer ought not to have allowed the deduction.
Likewise, if the number of consecutive year referred to in Form 56G as tenth
year is taken as the true statement, the Assessing Officer was right in
allowing the deduction. Therefore, it is evident that by furnishing the wrong
date of manufacture as 28/03/2000, the assessee has not either deceived or
suppressed any material fact before the Assessing Officer to claim deduction
u/s. 10B. If the exact date of manufacturing/production could be ascertained or
gathered from the conjoined consideration of other material documents, such as
relevant certificates of registration by the competent authority, mere wrong
mentioning of the date in Column 7 could not be construed as non-disclosure of
true and material facts, especially when column 8 of statement supported the
claim. One can understand and appreciate the stand of the revenue for reopening
the assessment, if the assessee, by giving a false information regarding the
date of commencement of manufacture as 28/03/2000 alone, had obtained deduction
u/s. 10B. Thus, it is seen that the Assessing Officer, who has originally
chosen to allow the deduction based on the materials filed already, has now
changed his opinion and has chosen to reopen the assessment, which cannot be
done after a period of four years.

iv) Accordingly, the writ petition is allowed and the impugned
proceedings of the respondent in reopening the assessment for the A. Y. 2010-11
are set aside.”

shailesh.kwebmaker

Sections 253 and 260 – A Appeal to High Court – Power of High Court to review – High Court has power to review its decision Appeal to Appellate Tribunal – Decision of Commissioner (Appeals) based on report on remand by AO – Tribunal not considering report – Decision of Tribunal erroneous – Decision of High Court upholding order of Tribunal – High Court can recall its order – Matter remanded to Tribunal

22. B. Jayalakshmi
vs. ACIT; 407 ITR 212 (Mad) : Date of order: 30^th July,
2018: A. Ys. 1995-96 to 1997-98

Sections 253 and 260 – A Appeal to High Court
– Power of High Court to review – High Court has power to review its decision

Appeal to Appellate Tribunal – Decision of
Commissioner (Appeals) based on report on remand by AO – Tribunal not
considering report – Decision of Tribunal erroneous – Decision of High Court
upholding order of Tribunal – High Court can recall its order – Matter remanded
to Tribunal

A search u/s. 132 of the
Act was conducted in the residential premises of the assesee. In consequent
reassessment proceedings the Assessing Officer added an amount as unaccounted
income of the assessee holding the same represented undisclosed income of her
husband, which had been brought in the name of the assessee in the guise of
agricultural income.

Before the Commissioner
(Appeals), apart from furnishing other details, the assessee produced a copy of
the decree passed by the civil court granting a decree of permanent injunction
in her favour, when an attempt was made to evict her from the leased property.
Since fresh evidence in the form of court orders and other details were placed
before the Commissioner (Appeals), a report was called for from the Assessing
Officer on the stand taken by the assessee in the appeal proceedings.
Accordingly, the Assessing Officer submitted a report, dated 25/11/2002. The
report was wholly in favour of the assessee. Thus taking note of the report of
the Assessing officer, as well as the report of the Inspector of Income-tax,
the Commissioner (Appeals) held that the action of the Assessing Officer
treating the sum of Rs. 4,08,841/- as “non-agricultural income” was incorrect.
In appeal by the Revenue, the Tribunal upheld the assessment order and the
addition and reversed the decision of the Commissioner (Appeals).

The Madras High Court
dismissed the appeals of the assessee by order dated 30/09/2013. The assessee
preferred a review petition. The High Court allowed the writ petition and held
as under:

“i) In VIP Industries Ltd. vs. CCE (2003) 5SCC
507, it was held that all provisions, which bestow the High Court with
appellate power, were framed in such a way that it would include the power of
review and in these circumstances, sub-section (7) of section 260A of the
Income-tax Act, 1961 cannot be construed in a narrow and restricted manner. In
the case of M. M. Thomas, the Supreme Court held that the High Court, as a
court of record, has a duty to itself to keep all its records correctly in
accordance with law and if any apparent error is noticed by the High Court in
respect of any orders passed that the High Court has not only the power but
also a duty to correct it.

ii) The Tribunal repeated verbatim the order passed by the Assessing
officer dated 29/03/2001, and ignored the remand report dated 25/11/2002 and
the findings rendered by the Commissioner (Appeals) based on such remand
report. Thus, if such is the situation, the appeal itself would have been
incompetent. Hence, this question, which touches upon the jurisdiction of the
Tribunal, has not been considered by the Tribunal, we are inclined to review
the judgment and remand the matter to the Tribunal for fresh consideration.

iii) In the result, the review petitions are allowed and the judgment
dated 30/09/2013 is reviewed and recalled and the appeals stand disposed of, by
remanding the matter to the Tribunal to decide the question of its jurisdiction
to entertain the appeals by the Revenue against the orders of the Commissioner
(Appeals). In the event, the Tribunal decides the question in favour of the
Revenue, it shall reconsider the other issues after opportunity to the Revenue
and assessee.”

shailesh.kwebmaker

Sections 68, 69A and 254(1) – Appeal to Appellate Tribunal – Jurisdiction and power – Cannot go beyond question in dispute – Subject matter of appeal in regard to addition made u/s. 68 – Tribunal holding addition u/s. 68 unjustifiable – Tribunal cannot travel beyond issue raised in appeal and make addition u/s. 69A – Order vitiated

21. Smt. Sarika Jain vs. CIT; 407 ITR
254 (All); Date of order: 18^th July,
2017 A. Y. 2001-02

Sections 68, 69A and 254(1) – Appeal to
Appellate Tribunal – Jurisdiction and power – Cannot go beyond question in
dispute – Subject matter of appeal in regard to addition made u/s. 68 –
Tribunal holding addition u/s. 68 unjustifiable – Tribunal cannot travel beyond
issue raised in appeal and make addition u/s. 69A – Order vitiated

In the A. Y. 2001-02, the
assessee had inducted capital in the firm in which she was a partner. During
reassessment proceedings u/s. 147 of the Income-tax Act, 1961, (hereinafter for
the sake of brevity referred to as the “Act”), the assessee explained
the source of the amounts received as gifts through banking channels and also
produced the gift deeds. The statements of the two donors were also recorded
u/s. 131. However, the Assessing Officer held that the gifts were not genuine
and added the amounts u/s. 68 of the Act as undisclosed income.

The Commissioner (Appeals)
affirmed the order and recorded findings that the documentation in respect of
the gifts was complete and that the assessee had established the identity of
the donors and their creditworthiness to make the gifts, but did not
acknowledge the gifts as genuine. The Tribunal held that the additions made by
the Assessing Officer u/s. 68 and sustained by the Commissioner (Appeals) could
not be sustained. Thereafter the Tribunal added the said amount as the income
of the assessee u/s. 69A.

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

“i) The use of the word “thereon” in section 254(1) of the Income-tax
Act, 1961 is important and it reflects that the Tribunal has to confine itself
to the questions which arise or are subject matter in the appeal and it cannot
travel beyond that. The power to pass such order as the Tribunal thinks fit can
be exercised only in relation to the matter that arises in the appeal and it is
not open to the Tribunal to adjudicate any other question or issue, which is
not in dispute and which is not the subject matter of the dispute in appeal.

ii) The Tribunal travelled beyond the scope of the appeal in making
the addition of the amounts of the gifts as income u/s. 69A. The subject matter
of the dispute all through before the Tribunal in the appeal was only with
respect to the addition, made u/s. 68, of the amounts received by the assessee
and not whether such addition could have been made u/s. 69A.

iii) The Tribunal had recorded a categorical finding that it was clear
that under the provisions of section 68, the addition made by the Assessing
Officer and sustained by the Commissioner (Appeals) could not be sustained
meaning thereby that the Tribunal was of the opinion that the Assessing Officer
and the Commissioner (Appeals) had committed an error in adding the amounts
u/s. 68 to the income of the assessee.

iv) When the amounts could not have been added u/s. 68, the Tribunal was
not competent to make the addition u/s. 69A. Therefore, the order of the
Tribunal was vitiated in law. Matter remanded to the Tribunal.”

shailesh.kwebmaker

TRANSFER PRICING: WHAT HAS CHANGED IN OECD’S 2017 GUIDELINES? [PART 1]

Transfer prices are
significant for both taxpayers and tax administrations because they determine
in large part the income and expense and therefore taxable profits of
associated enterprises in different tax jurisdictions. With a view to minimise
the risk of double taxation and achieve international consensus on
determination of transfer prices on cross-border transactions, OECD¹ from time to time provides guidance in
relation to various transfer pricing issues.

In 2015, the OECD
came out with its Reports on the 15 Action items agreed as a part of the BEPS² agenda. These include Actions 8-10 (Aligning
Transfer Pricing Outcomes with Value Creation), Action 13 (Transfer Pricing
Documentation and Country by Country Reporting), and Action 14 (Making Dispute
Resolution Mechanisms More Effective). With a view to reflect the
clarifications and revisions agreed in 2015 BEPS Action Reports, the Transfer
Pricing guidelines were substantially revised and new Guidelines were issued in
2017 (2017 Guidelines).

This Article summarises the key additions
/ modifications made in the 2017 Guidelines (600
plus Pages) as compared to the earlier Guidelines.

These additions / modifications provide important new guidance to practically
look at different aspects of transfer pricing. From the perspective of the
taxpayers as well as tax practitioners, it is important to understand and
implement the new guidance to undertake, conceptually, a globally acceptable
transfer pricing analysis.

The first part
of the article deals with general guidance contained in Chapters 1 to 5 of the
2017 Guidelines. The second part of the article will deal with guidance
relating to specific transactions – Intangibles, Intra-Group Services, Cost
Contribution Agreements, and Business Restructuring.

This part of the
article summarises the following key changes in the 2017 Guidelines vis-à-vis
earlier guidelines:

1. Comparability Analysis

• Guidance on accurate delineation of
transactions between associated enterprises

• Functional analysis (including,
specifically, risk analysis) based on decision-making capabilities and
performance of decision-making functions

• Recognition / de-recognition of accurately
delineated transactions

• Additional comparability factors which may
warrant comparability adjustments

2. Application of CUP Method for analysing
transactions in commodities

3. New guidance on transfer pricing
documentation (three-layered documentation)

4. Administrative approaches to avoiding and
resolving transfer pricing disputes

Each of the above
aspects have been discussed in detail in subsequent paragraphs.

1. Comparability Analysis

The OECD Transfer
Pricing Guidelines advocate the arm’s length principle to determine transfer
prices between associated enterprises for tax purposes and consider
“Comparability Analysis” at the heart of the application of arm’s
length principle. The 2017 Guidelines provide detailed guidance on certain
aspects discussed below.

1.1 Accurate delineation of transactions as the starting point for
comparability analysis

The 2017 Guidelines
provide two key steps in comparability analysis:

Identification of
commercial or financial relations between associated enterprises and conditions
and economically relevant circumstances attaching to those relations in order
that the controlled transaction is accurately delineated;

Comparison of the
conditions and economically relevant circumstances of the controlled
transaction as accurately delineated with the conditions and the economically
relevant circumstances of comparable transactions between independent
enterprises.

______________________________________________________________

1 Organisation
for Economic Cooperation and Development

2 Base
Erosion and Profit Shifting

The 2017 Guidelines provide that the controlled transaction should be
accurately delineated. Further, for the purpose of accurate delineation of the
actual transaction(s) between associated enterprises, one needs to analyse the
commercial or financial relations between the parties and economically relevant
circumstances surrounding such relations. The process starts with a broad
understanding of the industry in which the MNE group operates, derived by an
understanding of the environment in which the MNE group operates and how it
responds to the environment, along with a detailed factual and functional
analysis of the MNE group. This information is likely to be documented in the
Master File of the MNE group. The process then narrows to identify how each entity
within the MNE group operates and provides analysis of what each entity does
and its commercial or financial relations with its associated enterprises.

This accurate
delineation is crucial since the application of the arm’s length principle
depends on determining the conditions that independent parties would have
agreed in comparable transactions in comparable circumstances. For applying the
arm’s length principle, it is not only the nature of goods or services
transacted or the consideration involved that is relevant; it is imperative for
taxpayers and practitioners to accurately delineate the underlying
characteristics of the relationship between the parties as expressed in the
controlled transaction.

The economically
relevant characteristics or comparability factors that need to be identified in
order to accurately delineate the actual transaction can be broadly categorised
as:

Contractual
terms

Functional analysis

Characteristics of property
or services

Economic circumstances,

Business strategies.

Information about these economically relevant characteristics is expected to be
documented in the local file of the taxpayer involved³.

__________________________

3 Refer
para 1.36 of 2017 Guidelines

1.2 Functional Analysis (Primarily, Risk Analysis)

The 2017 Guidelines
provide a detailed discussion on functional analysis, specifically on risk
analysis, as compared to earlier guidelines.

The focus of the
Guidelines with respect to functional analysis is on the actual conduct of the
parties, and their capabilities – including decision making about business
strategy and risks. The Guidelines also clarify that in a functional analysis,
the economic significance of the functions are important rather than the mere
number of functions performed by the parties to the transaction.

The 2017 Guidelines
provide detailed guidance on risks analysis as a part of functional analysis.
This is especially because the 2017 Guidelines have recognised the practical
difficulties presented by risks – risks in a transaction tend to be harder to
identify, and determination of the associated enterprise which bears the risk
can require careful analysis.

The Guidelines
stress on the need to identify risks relevant to a transfer pricing analysis
with specificity. The Guidelines provide for a 6-step process for analysing
risk in a controlled transaction, in order to accurately delineate the actual
transaction in respect to that risk. The process is outlined below:⁴

^{_______________________________________}

4 Refer
Para 1.60 of 2017 Guidelines

It is expected that
going forward, functional analysis in any transfer pricing evaluation will
specifically focus on the above framework to analyse risks.

A detailed
understanding of the risk management functions is necessary for a risk
analysis. Risk management comprises three elements:⁵

he capability to make
decisions to take on, lay off, or decline a risk bearing opportunity, together
with the actual performance of that decision-making function

The capability to make decisions
on whether and how to respond to the risk associated with the opportunity,
together with the actual performance of that decision-making function

The capability to mitigate
risk, that is the capability to take measures that affect risk outcomes, together
with the actual performance of such risk mitigation

The 2017 Guidelines
provide that the party assuming risk should exercise control over the risk and
also have the financial capacity to assume the risk. Control over risk involves
the first two elements of risk management relating to accepting or declining a
risk bearing opportunity, and responding to the risk bearing opportunity. In a
case where the third element, risk mitigation, is outsourced, control over the
risk would require capability to determine the objectives of the outsourced
activities, decision to hire risk mitigation service provider, assessment of
whether mitigation objectives are adequately met, decision on adapting or
terminating the services of the outsourced service provider etc. Financial
capability to assume the risk refers to access to funding required with respect
to the risk and to bear the consequences of the risk if the risk materialises.
Access to funding also takes into account the available assets and the options
realistically available to access additional liquidity, if needed.

As can be seen, the guidance gives weightage to decision-making
capability and actual performance of decision-making functions. The Guidelines
provide that decision makers should be competent and experienced in the area
which needs a decision regarding risks. They should also understand the impact
of their decisions on the business. Decision making needs to be in substance
and not just form. For instance, mere formalising of the outcome of
decision-making in the form of, say, minutes of board meetings and formal
signatures on documents would not normally qualify as exercise of decision
making function and would not be sufficient to demonstrate control over risks.
It is pertinent that these aspects are considered in particular when
undertaking a functional analysis – to identify the ‘control’ over decision
making of a particular function, rather than going by mere contractual terms or
other similar documents that evidence the ‘performance’ of the function.

________________________

5 Refer
Para 1.61 of 2017 Guidelines

The implication of
this detailed new guidance on functional analysis is that a party which under
these steps does not assume the risk, nor contributes to the control of the
risk will not be entitled to unanticipated profits / losses arising from that
risk.

The following
example illustrates application of 6 step process outlined in the 2017
guidelines in the context of risk analysis:⁶

____________________________-

6 Refer
Example 1 (Para 1.83) of the 2017 Guidelines

Company A seeks to
pursue a development opportunity and hires a specialist company, Company B to
perform part of the research on its behalf. Company A makes a number of
relevant decisions about whether and how to take on the development risk.
Company B has no capability to evaluate the development risk and does not make decisions
about Company A’s activities.

Step 1– Development risk is
identified as economically significant risk

Step 2–Company A assumes
contractual development risk

Step 3–Functional analysis
shows that Company A has capability and exercises authority in making decisions
about the development risk. Company B reports back to Company A at
pre-determined milestones and Company A assesses the progress of development
and whether its ongoing objectives are being met. Company A has the financial
capacity to assume the risk. Company B’s risk is mainly to ensure it performs
the research activities competently and it exercises its capability and
authority to control that risk through decision-making about the specifics of
the research undertaken – process, expertise, assets etc. However, this risk is
distinct from the development risk in the hands of Company A as identified in
Step 1.

Step 4–Company A and B
fulfil the obligations reflected in the contracts and exercise control over the
respective risks that they assume in the transaction, supported by financial
capacity.

Step 5–Since the conditions
specified in Step 4 are satisfied, Step 5 will not be applicable i.e. there is
no requirement of re-allocation of risk.

Step 6–Company A assumes and
controls development risk and therefore should bear the financial consequences
of failure and enjoy financial consequences of success of the development
opportunity. Company B should be appropriately rewarded for the carrying out of
its development services, incorporating the risk that it fails to do so
competently.

1.3 Recognition / De-recognition of accurately
delineated transaction

As discussed
earlier, one needs to identify the substance of the commercial or financial
relations between the parties and the actual transaction will have to be
accurately delineated by analysing the economically relevant characteristics.
For the purpose of this analysis, the 2017 Guidelines provide that in cases
where the economically significant characteristics of the transaction are inconsistent
with the written contract, the actual transaction will have to be delineated in
accordance with the characteristics of the transaction reflected in the actual
conduct of the parties.

The 2017 Guidelines
also provide for circumstances in which the transaction between the parties as
accurately delineated can be disregarded for transfer pricing purposes. Where
the actual transaction possesses the commercial rationality of arrangements
that would be agreed between unrelated parties under comparable economic
circumstances, such transactions must be respected even where such transactions
cannot be observed between independent parties. However, where the transaction
is commercially irrational, the transaction may be de-recognised.

1.4 Additional comparability factors which may
warrant comparability adjustments

While the
Guidelines discuss about the impact of losses, use of custom valuation, effect
of government policies in transfer pricing analysis, the 2017 Guidelines also
provide for some additional comparability factors that may warrant
comparability adjustments. In the past, in the absence of clear guidance by the
OECD, some of these factors (such as location savings) have led to litigation,
where the tax authorities have insisted on a separate compensation for the
existence of these factors, whereas, taxpayers have claimed these to be merely
comparability factors not necessitating any transfer pricing adjustments per
se. These factors are:

Location Savings:
The Guidelines provide the following considerations for transfer pricing
analysis of location savings: i) whether location savings exist; ii) the amount
of location savings; iii) the extent to which location savings are retained by
an MNE group member, or passed on to customers or suppliers; iv) manner in
which independent parties would allocate retained location savings.

Other Local Market
Features: These factors refer to other market features such as
characteristics of the market, purchasing power and product preferences of
households in the market, whether the market is expanding or contracting,
degree of competition in the market and other similar factors. These market
factors may create advantages or disadvantages, and appropriate comparability
adjustments should be made to account for these advantages or
disadvantages.

Assembled workforce:
The existence of a uniquely qualified or experienced employee group may affect
the arm’s length price of services provided by the group of the efficiency with
which services are provided or goods produced. In some other cases, assembled
workforce may create liabilities. Existence of an assembled workforce may
warrant comparability adjustments. Depending upon precise facts of the case,
similar adjustments may be warranted in case of transfer of an assembled
workforce from one associated enterprise to another.

MNE group synergies: Group
synergies may be positive or negative. Positive synergies may arise as a result
of combined purchasing power or economies of scale, integrated computer or
communication systems, integrated management, elimination of duplication,
increased borrowing capacity, etc. Negative synergies may be a result of
increased bureaucratic barriers, inefficient computer or networking systems
etc. Where such synergies are not a result of deliberate concerted group
actions, appropriate comparability adjustments may be warranted. However, when
such synergies are a result of concerted actions, only comparability
adjustments may not be adequate. In such situations, from a transfer pricing
perspective, it is necessary to determine: i) the nature of advantage or
disadvantage arising from the concerted action; ii) the amount of the benefit /
detriment; iii) how should the benefit or detriment be divided amongst the
group members (generally, in proportion to their contribution to the creation
of the synergy under consideration).

2. Application of CUP Method for analysing
transactions in commodities

The OECD Guidelines
provide that the selection of a transfer pricing method should always aim at
finding the most appropriate method for a particular case. The guidance
provides description of traditional transaction methods and transactional
profit methods. The 2017 Guidelines provide additional guidance in the context
of CUP method.

The 2017 Guidelines
provide that that CUP method would generally be an appropriate transfer pricing
method (subject to other factors) for establishing the arm’s length price for
the transfer of commodities between associated enterprises. The reference to
“commodities” shall be understood to encompass physical products for
which a quoted price is used as a reference by independent parties in the
industry to set prices in uncontrolled transactions. The term “quoted
price” refers to the price of the commodity in the relevant period
obtained in an international or domestic commodity exchange market. Quoted
price also includes prices obtained from recognised and transparent price
reporting or statistical agencies or from government price setting agencies,
where such indexes are used as a reference by unrelated parties to determine
prices in transactions between them.

Such quoted price
should be widely and routinely used in the ordinary course of business in the
industry to negotiate prices for comparable uncontrolled transactions.

Further, the
economically relevant characteristics of the transactions or arrangements
represented by the quoted price should be comparable. These characteristics
include physical features and quality of the commodity; as well as contractual
terms of the transaction such as volumes traded, period of arrangements, timing
and terms of delivery, transportation, insurance and currency terms. If such
characteristics are different between the quoted price and the controlled
transaction, reasonably accurate adjustments ought to be carried out to make
these characteristics comparable.

The Guidelines also
provide that the pricing date is an important element for making a reference to
the quoted price. Depending on the commodity involved, the pricing date could
refer to specific time, date or time period selected by parties to determine
the price of the commodity transactions. The price agreed at the pricing date
may be evidenced by relevant documents such as proposals and acceptances,
contracts, or other relevant documents. The Guidelines place the onus on the
taxpayer to maintain and provide reliable evidence of the pricing date agreed
by the associated enterprises. If reliable evidence is provided and it is
aligned with the conduct of the parties, the tax authorities should ordinarily
base their examination with reference to the pricing date. Otherwise, the tax
authorities may deem the pricing date based on documents available with them
(say, date of shipment as evident from the bill of lading).

Illustration:

An illustration of
how this guidance relating to the relevance of the pricing date is relevant, is
provided below.

Assume the case of a commodity the price of which fluctuates on a daily
basis. The commodity is available in the spot market. In some cases, the prices
are also agreed for a future date / period for future deliveries. A taxpayer in
India (ICo.) imports the commodity from its AEs, at prices agreed two months in
advance. For the sake of this example, assume that the future prices of the
commodity tend to be same / similar as the spot prices (with the possibility of
a small future premium of up to 0.10% in some cases). ICo also imports certain
quantities of the commodity on a spot basis from third parties – in order to
take advantage of a potential favourable price movement.

Some of the dates of transactions entered into by ICo, and the
corresponding prices are provided in the table below, along with comparable
uncontrolled prices for the exact same dates.

Transaction
Date

Transaction Price in INR per unit

CUP
Available in INR on Transaction Date

30^th June 2017

10,000

10,450

30^th September 2017

10,600

10,300

31^st December 2017

10,200

10,650

31^st March 2018

10,800

10,900

From a plain
reading of this table, which represents the approach of comparing the prices as
at the transaction date, it would appear that the import prices are at arm’s
length for the three purchases made in June 2017, December 2017 and March 2018.
However, for the purchases made in September, 2017, there is a comparable
transaction available with a lower price. Accordingly, it appears that a
transfer pricing adjustment for the difference (INR 10,600 – INR 10,300 = INR
300 per unit) is warranted in the instant case. In fact, based on similar data,
there could be a potential transfer pricing adjustment in the hands of the AE
of ICo for the months of June 2017, December 2017 and March 2018⁷.
Clearly, the above analysis does not represent the commercial reality of the
transactions – that the pricing of the transactions with the AE has been
decided much before the transaction has been entered into, and under the CUP
Method, the same cannot be compared with the spot prices paid for third party
imports.

_________________________________________

7 For
the purpose of this analysis, it is assumed that all relevant comparability
criteria for application of CUP Method are satisfied.

However, if ICo is
able to provide evidence of the dates on which the prices have been agreed with
its overseas AE, data pertaining to such dates may be considered even if there
is no comparable uncontrolled transaction entered into by ICo during such
dates. Now consider the additional evidence provided by ICo in the following
table (see highlighted columns).

As can be seen from
the table above, the transaction prices appear more closely aligned with the
quoted prices as at the PO date. These prices are, in fact, better indicators
of the real market scenario – since in the real world, in case prices are
determined in advance of the transaction taking place, the parties do not have
the benefit of hindsight, and would consider the prevailing quoted prices to
arrive at their transfer prices. ICo and the AE would yet need to demonstrate,
in their respective jurisdictions, that the difference between the quoted price
and the transaction price is representative of the arm’s length future premium,
however, this explanation should be a lot easier and involve far lesser tax
risk than starting from a relatively inaccurate starting point –prices agreed
at a different date.

Transaction Date

Purchase Order (PO) Date

Transaction Price in INR per unit

Quoted Price in INR on PO date

CUP Available in INR on Transaction Date

30^th June 2017

30^th April 2017

10,000

10,010

10,450

30^th September 2017

30^th July 2017

10,600

10,300

31^st December 2017

31^st October 2017

10,200

10,205

10,650

31^st March 2018

31^st January 2018

10,800

10,810

10,900

It is important for
the tax teams of MNEs to ensure that the procurement or sales teams (depending
on the nature of the transaction) document the correct period at which the
price was agreed (date or time, as the case may be – and depending on the
volatility of the price of the quoted product), and maintain evidence of the
quoted price of the commodity at the same period.

There appears to be
a direct correlation between the frequency and quantum of fluctuations in the
commodity prices, with the accuracy of the period of price setting that needs
to be evidenced.

3. New guidance on transfer pricing
documentation (three-tiered documentation)

The 2017 Guidelines
outline transfer pricing documentation rules with an overarching consideration
to balance the usefulness of the data to tax administration for transfer
pricing risk assessment and other purposes with any increased compliance
burdens placed on taxpayers. The purpose is also to ensure that transfer
pricing compliance is more straightforward and more consistent amongst
countries⁸.

Briefly, the three
fold objectives of transfer pricing documentation as outlined in 2017
Guidelines are (a) ensuring taxpayer’s assessment of its compliance with the
arm’s length principle (b) effective risk identification (c) provision of
useful information to tax administrations for thorough transfer pricing audit.

The 2017 Guidelines
suggest a three-tiered approach to transfer pricing documentation and insist on
countries adopting a standardised approach to transfer pricing documentation.
The elements of the suggested three-tiered documentation structure are
discussed below.

Master File – Master
File is intended to provide a high level overview to place MNE group’s transfer
pricing practices in their global economic, legal, financial and tax context.
The information required in the Master File provides a blueprint of MNE group
and contains relevant information that can be grouped in 5 categories (a) MNE
group’s organisational structure (b) a description of MNE’s business or
businesses (c) MNE’s intangibles (d) MNE’s intercompany financial activities
and (e) MNE’s financial and tax positions⁹. The Guidelines are not
rigid in prescribing the level of details which need to be provided as a part
of the Master File, and require that taxpayers should use prudent business
judgment in determining the appropriate level of detail for the information
supplied, keeping in mind the objective of the Master File to provide a high
level overview of the MNE’s global operations and policies.

_____________________________________

8 The earlier guidelines emphasised on the
greater level of co-operation between tax administrations and taxpayers in
addressing documentation issues. Those guidelines did not provide for a list of
documents to be included in transfer pricing documentation package nor did they
provide clear guidance with respect to link between process for documenting
transfer pricing, the administration of penalties and the burden of proof.

9 Refer
Para 5.19 of 2017 Guidelines

Local File – Local
file provides more detailed information relating to specific inter-company
transaction. The information required in local file supplements the master file
and helps to meet the objective of assuring that the taxpayer has complied with
the arm’s length principle in its material transfer pricing positions affecting
a specific jurisdiction. Information in the local file would include financial
information regarding transactions with associated enterprises, a comparability
analysis, and selection and application of the most appropriate method.

Country by Country
Reporting (CbCR) – The CbCR requires aggregate tax jurisdiction wide
information relating to the global allocation of the income, the taxes paid and
certain indicators of the location of economic activity among tax jurisdictions
in which the MNE group operates¹⁰. The Guidelines provide that CbCR
will be helpful for high level transfer pricing risk assessment purposes, for
evaluating other BEPS related risk (non-transfer pricing risks), and where
appropriate, for economic and statistical analysis¹¹. The Guidelines
provide that the CbCR should not be used as a substitute for a detailed
transfer pricing analysis based on a full functional analysis and comparability
analysis; and should also not be used by tax authorities to propose transfer
pricing adjustments based on a global formulary apportionment of income.

The Guidelines
provide (as agreed by countries participating in the BEPS Project) for the
following conditions underpinning the obtaining and the use of the CbCR:¹²

• Legal protection of the confidentiality of
the reported information

• Consistency with the template agreed under
the BEPS Project and provided as part of the Guidelines

• Appropriate use of the reported information
– for purposes highlighted above

Further, the 2017
Guidelines provide for ultimate parent entity of an MNE group to file CbCR in
its jurisdiction of residence and implementing arrangements by countries for
the automatic exchange of CbCR. The participating jurisdictions of the BEPS
project are encouraged to expand the coverage of their international agreements
for exchange of information.

Practically, this
three – tiered documentation is one of the most important transfer pricing
exercise which taxpayers and tax practitioners have been engaged in, over the
past more than a year– in aligning the three sets of documents, and ensuring
they provide consistent information.

______________________________________________-

10 The 2017 Guidelines recommend an exemption
for CbCR filing for MNE groups with annual consolidated group revenue in the
immediately preceding fiscal year of less than EUR 750 million or a near
equivalent amount in domestic currency as of January 2015. Refer Para 5.52.

11 Refer Para 5.25 of 2017 Guidelines

12 Refer Paras 5.56 to 5.59 of 2017 Guidelines

Detailed
discussion and analysis of the contents of Master File, Local File and CbCR
have been kept outside the purview of this Article. One may refer to Annex 1,
Annex II and Annex III to Chapter V of the 2017 Guidelines for the details of
contents of the Master File, Local file and CbCR respectively.

4. Administrative approaches
to avoiding and resolving transfer pricing disputes

The 2017 Guidelines
have provided administrative approaches to resolving transfer pricing disputes
caused by transfer pricing adjustments and for avoiding double taxation.
Differences in guidance as compared to the earlier guidance have been discussed
in this section.

MAP and Corresponding
Adjustments

The 2017 Guidelines
provide that procedure of Article 25 dealing with Mutual Agreement Procedure
(MAP) may be used to consider corresponding adjustments arising out of transfer
pricing adjustments.

The 2017 Guidelines
specifically discusses regarding the concern of taxpayers in relation to denial
of access to MAP in transfer pricing cases. The Guidelines make a reference to
the minimum standard agreed as a result of the BEPS Action 14 on ‘Making
Dispute Resolution Mechanisms More Effective’ and re-emphasise the commitment
on the part of countries to provide access to the MAP in transfer pricing
cases. The Guidelines also provide detailed guidance relating to time limits,
duration, taxpayer participation, publication of MAP programme guidance,
suspension of collection procedures during pendency of MAP etc. Overall, the
idea appears to be to make the MAP program more effective and meaningful for
taxpayers, and to enhance accountability of the tax administration in MAP
cases.

Safe Harbours

The 2017 Guidelines
highlight the following benefits of safe harbours:¹³

• Simplifying compliance

• Providing certainty to taxpayers

• Better utilisation of resources available
to tax administration

____________________________-

13
Refer Para 4.105 of 2017 Guidelines

The Guidelines also
highlight the following concerns relating to safe harbours:¹⁴

• Potential divergence from the arm’s length
principle

• Risk of double taxation or double non
taxation

• Potential opening of avenues for
inappropriate tax planning

• Issues of equity and uniformity

__________________________

14
Refer Para 4.110 of 2017 Guidelines

The 2017 Guidelines
provide that in cases involving small taxpayers or less complex transactions,
the benefits of safe harbours may outweigh the problems / concerns raised in
relation to safe harbours. The appropriateness of safe harbours can be expected
to be most apparent when they are directed at taxpayers and / or transactions
which involve low transfer pricing risks and when they are adopted on a
bilateral or multilateral basis. The Guidelines however provide that for more
complex and higher risk transfer pricing matters, it is unlikely that safe
harbours will provide a workable alternative to rigorous case by case
application of the arm’s length principle.

Concluding Remarks

The 2017 Guidelines
reflect the clarifications and revisions agreed in reports on BEPS Actions 8-10
(Aligning Transfer Pricing Outcomes with Value Creation), Action 13 (Transfer
Pricing Documentation and Country by Country Reporting), and Action 14 (Making
Dispute Resolution Mechanisms More Effective).

Evidently, the
focus areas of the 2017 Guidelines are substance, transparency and certainty.
Several practices and recommendations of the Indian tax administration do find
place in the BEPS Actions, and consequently, in the 2017 Guidelines also. India
is largely aligned with the 2017 Guidelines.

Even at the grass
root level, taxpayers and professionals are already experiencing the evolution
of transfer pricing analysis from a contractual terms based analysis to a more
deep rooted factual analysis considering several facts and circumstances
surrounding the transaction. Further, the way this analysis is documented is
also being transformed – from a jurisdiction specific documentation, to a
globally consistent, three-tiered documentation.

From the
perspective of the tax authorities, they now have the ‘big picture’ available
to them. This should enable them to undertake a comprehensive and more
business-like analysis of the MNE’s transfer pricing approaches.

shailesh.kwebmaker

TOP BOOKS ON PROFESSIONAL SERVICES MANAGEMENT

INTRODUCTION

When compared to
the study of business management, the study of professional services management
is of recent vintage. While business management education is most sought after
the world over, the knowledge and skills required for managing professional services
are usually acquired on the job,and many times through trial and error.
Professionals study technical subject, but often leave out the management
aspects, which impact their growth and profitability. It is therefore
imperative to keep in touch with the developing management thinking and best
practices about professional services.

David Maister, an
authority on this subject, emphasises that professional services involve a high
degree of customisation with a strong component of face-to-face interaction with
the client. A former Harvard Business School professor, Maister argues that
management principles and approaches from the industrial or mass consumer
sectors, which are based on standardisation, supervision and marketing of
repetitive tasks and products,are not only inapplicable to professional
services but may also be dangerously wrong.

Thankfully, there
are many books to study and learn the art and science of professional services
management. Some of the top books which also feature on several recommendation
lists are:

Title

Author(s)

The Trusted Advisor

David H. Maister, Charles H. Green and
Robert M. Galford

Managing the Professional Service Firm

David H. Maister

Flawless Consulting: A Guide to Getting
Your Expertise Used

Peter Block

Million Dollar Consulting: The
Professional’s Guide to Growing a Practice

Alan Weiss

The McKinsey Way

Ethan Rasiel

The Consultant with Pink Hair

Cal Harrison

This feature
attempts to summarise and highlight key learnings from some of the above books.
This article presents the summary of the first such book.

The Trusted
Advisor by David H. Maister, Charles H. Green and Robert M. Galford

THEME

The central theme
of this book revolves around the fact that the key to professional success is
not just technical mastery of one’s discipline, which is most essential, but
also the ability to work with clients in such a way as to earn trust and gain
their confidence.

At one time, being
a professional automatically carried prestige and easily win clients’ trust.
However, things have changed. The notion of embedded trust has been affected.
These days, professionals often find that they need more client access, more
ways to cross-sell and more opportunities to show the quality of their work
(beyond price considerations). Many clients now treat professionals as
untrustworthy, because they question the advisors’ motives or do not see them
as experts.

To break out of
these boundaries, one must become a “trusted advisor.” This requires
developing an ever-deepening relationship with each client. As such a
relationship evolves, the client will involve you in a broader range of
business issues. Along the way, you can progress from being a subject-matter
expert, to being an associate with expert knowledge and additional valuable
specialties. Moving from one level to the next is evolutionary, but once you
become a trusted advisor, your client will openly discuss both personal and
professional issues with you.

As an example of a
“trust-based relationship”, the book narrates the case of sports
agent David Falk and basketball star Michael Jordan. In 1977, Falk helped
negotiate Jordan’s $2.5 million endorsement deal with Nike. As Jordan’s career
progressed, Falk negotiated more endorsements. Eventually, Falk sold his agency
for $100 million, but he still collects 4% of Jordan’s earnings. Falk earned
Jordan’s trust and friendship by knowing what his client wanted, including
Jordan’s opinions about his fees. There were a few times when Falk waived his
fee without any discussion with Jordan because Falk knew Jordan might object to
the cost. He continues to work with Jordan today mainly due to the trust with
Jordan that Falk built.

With deep insights,
examples from real life and practical tips, the trust and behaviour framework
from this book has become a key element of management education for
consultants, and it has been helping a large number of professionals to pursue
the right approach and technique in their journey of being trusted advisors to
their clients.

PERSPECTIVES ON TRUST

Ambitious
professionals invest tremendous energy in improving their specific expertise
and gaining experience, but do not give adequate thought to creating and
strengthening the trust relationships with their clients. Many professionals do
not know how to think about or examine trust relationships. A useful framework
is provided to gauge the depth of the client relationship:

Depth of Relationship

Focus is on

Energy
spent on

Client receives

Indicators of success

Service Based

Answers, expertise, input

Explaining

Information

Timely, high quality delivery

Needs-based

Business problem

Problem Solving

Solutions

Problems resolved

Relationship-based

Client organisation

Providing insights

Ideas

Repeat business

Trust-based

Client as individual

Understanding the client

Safe haven for hard issues

Varied; e.g. creative pricing

The three basic
skills that a Trusted Advisor needs:

Earning Trust

Building Relationships

Giving Advice Effectively

Key characteristics
of trust are:

1. It grows instead of just appearing – it
results from accumulated experiences over time.

2. It is both rational and emotional – trust is
lot richer than logic alone and is a significant component of success.

3. It presumes a two-way relationship – between
two persons and is highly personal.

4. It is intrinsically about perceived risk –
creating trust entails taking some personal risks.

5. It is different for the client than it is for
the advisor – just because you can trust does not mean you can be trusted.
However, if you are incapable of trusting, you probably can’t be trusted.

6. It is personal–trust requires being understood
and having some capacity to act upon that understanding which can be performed
only by individuals and not institutions.

A sound advice
requires asking the following critical questions:

1. What options do we have for doing things
differently?

2. What advantages do you foresee for different
options?

3. How do you think relevant players would
react?

4. How do you suggest we deal with adverse
consequences of an action?

5. Other people have encountered difficulties
when they tried that. What can we do to prevent such things from occurring?

6. What benefits might arise if we tried a
different approach?

A good process for
the advisor to follow is:

1. To give them their options

2. To educate them about the options
(including enough discussion for them to consider each option in depth)

3. To give them a recommendation

4.To allow them flexibility to choose

Building a business relationship involves similar elements you would use
to build a personal relationship. You need to be sympathetic, understanding,
available, reinforcing and respectful. You need to understand the clients’
business and know what a decision involves. When you get to know a client, you
will often be able to tell when your advice is being sought and when it is not.
Both matter. Do not assume you can solve everything.Trusted advisors have
strong professional and personal relationships with clients.

A trusted advisor
must develop appropriate attitude or “mindsets”, the most important of which
are:

1. Client-focus — instead of “how this
reflects on me”, “solving my client’s problem”, make that
transition from the power of “technical competence” to the power of
“facilitating competence”.

2. Self-confidence — instead of worrying about
insecurity, focus on the problem at hand.

3. Ego-strength — instead of assigning
credit/blame, focus on bringing about the solution. “It’s amazing what you
can achieve when you are not wedded to who gets the credit”.

4. Curiosity — instead of “knowing”,
develop an attitude of inquiry.

5. Inclusive professionalism — seeing the client
as a peer and solving the problem together.

Sincerity is
crucial to both trust and relationships. If you have it and can show it, you
will do well. If you try to “fake it”, it will show up, making it not only
ineffective, but also creating an adverse reaction.

Getting into the
right mental frame of mind happens in two ways, simultaneously:

“from within” —
feeling a genuine interest/caring for the client and their success

“from without” —
acting in ways that express interest/caring for the client.

Sometimes you have
to start with one end or the other; “from without” is easier to initiate.
You can have genuine human contact without being a personal friend. In very
rare cases, you may not be able to work with someone. One of the most important
lessons to learn is that to earn trust, you must bet on the long term benefit
of the relationship. The hallmark of trusted advisors is that they don’t bail
out when the times get tough.

THE STRUCTURE OF TRUST BUILDING

The most critical
learning from this book is the ‘Trust Equation’. The authors suggest that there
are four primary components of trustworthiness, as shown below:

These components
have to do with the trustworthiness of words, actions, emotions, and motives,
as shown in below table:

Component

Realm

Trust behaviour

Trust failings

Credibility

Words

I can trust what he says about…

Windbags¹

Reliability

Actions

I can trust her to…

Irresponsible

Intimacy

Emotions

I feel comfortable discussing this…

Technicians

Self-orientation

Motives

I can trust that she cares about…

Devious

Credibility – The notion of credibility includes notion of both accuracy and
completeness. Accuracy, in the client-advisor world, is mostly rational.
Completeness, on the other hand, is frequently assessed more emotionally. While
most providers sell on the basis of technical competence, most buyers buy on
the basis of emotion. What we tend not to do is to enhance the emotional side
of credibility: to convey a sense of honesty, to allay any unconscious
suspicions of incompleteness. The best service professionals excel at two
things in conveying credibility: anticipating needs, and speaking about needs
that are commonly not articulated.

Reliability – It is one component of the trust equation that is action-oriented
and that distinguishes it from credibility. Reliability in the larger rational
sense is the repeated experience of links between promises and action. It also
has an emotional aspect, which is revealed when things are done in a manner
that clients prefer, or to which they are accustomed. In this emotional sense,
reliability is the repeated experience of expectations fulfilled.

Intimacy – The most common failure in building trust is the lack of
intimacy. Business can be intensely personal surrounded by obvious human
emotions related to issues at hand without involving private lives. It is the
extent to which a client can discuss difficult topics/agendas with you.

Self-orientation – There is no greater source of distrust than advisors who appear
to be more interested in themselves than in trying to be of service to the
client. The most egregious form is to be in it for the money – it extends
beyond greed and covers anything that keeps us focused on ourselves rather than
on our client.

DEVELOPMENT OF TRUST IN FIVE STAGES

It is important to
understand how trust-based relationships are developed; indeed, when examined
closely, you can see five essential stages that lead, consistently, to trusting
relationships.

__________________________________

1 a person who talks at length but says
little of any value

1. Engage – Give your clients and
prospects individual attention. Offer customisation. Make personal, timely,
topical connections with clients about their business challenges. Find out all
you can about new prospects. Seek opportunities to discuss activities of mutual
interest. Discuss more than factual content, because that can pigeonhole you as
a technician, instead of as an advisor.

2. Listen– Sometimes an advisor’s most
important job is to listen, sympathise, integrate and get involved. Listening
is an activity and not a passive process. When arranging a meeting, set an
agenda. That can help you prioritise various decisions, prompt a conclusion and
foster action. When clients share the agenda, they become involved in the
meeting and gain a vested interest in its outcome.

3. Frame – Once advisors can clearly
state their clients’ problems, they are more than half-way toward reaching a
solution. Framing a problem is challenging, but when you do it correctly, it is
very rewarding. You can frame problems in a rational or emotional context.
Rational framing breaks a problem down to its component parts. It works best
when it reveals a new perspective. Emotional framing uncovers any personal
feelings that may be linked to a decision. This can often be uncomfortable since
it involves saying things that have been left unsaid, often deliberately.

4. Envision – Articulating a possible new
reality opens a client’s imagination to new ways of doing things; it can spark
creativity or challenge the status quo. Envisioning, which is crucial to
problem solving, sets the stage for future actions.

5. Commit – Once you frame a problem,
shape a vision and determine a general course of action. Explain the
implementation details to your client. Covering all the pitfalls and barriers
is an essential part of getting the client to agree to future action. This
links the plan to the nuts-and-bolts of execution. Manage the client’s
expectations on what will happen. Restrain excess anticipation by clearly
stating what you plan to do and what the client should do. Give details to
avoid misunderstanding.

PUTTING TRUST TO WORK

The following behaviours can help a professional gain trust that would
have the highest impact, or fastest payback:

1. Listen to everything: Force yourself
to listen and paraphrase, in order to get what the client is trying to say.

2. Empathise (for real): Anyone who
understands us has earned the right to engage in discussion or even debate;
anyone who empathises with us has earned the right to disagree and still have
our respect. Listen to where the client is coming from, understand that
perspective and acknowledge that understanding.

3. Note what the client is feeling: Note
what clients say and do in your interactions with them. Make careful deductions
about what their feelings might be. Acknowledge your own feelings and voice
them as well, but carefully.

4. Build a shared agenda: Whether you are
in a large or informal meeting, share your ideas for an agenda and ask the
client to add their ideas as well. This creates buy-in and shows you have a
“we, not me” attitude.

5. Take a point of view: Go out on a limb
with an idea or perspective, even if you are not entirely sure of it. Such
articulation stimulates reactions and crystallises issues, serving as a
catalyst to draw ideas out of your client.

6. Take a personal risk: Put yourself
“out there” for your client — reveal something about yourself, even though such
revelations carry with them risks of personal loss, even ridicule.

7. Ask about a related area:
Advisors who notice and express interests outside their particular realm of
experience make an impression on their clients. They show that they care enough
about the client to not merely focus on the narrow realm of their professional
issues and interests, but to expand that focus to address a wide array of
client needs.

8. Ask great questions: Open-ended
questions allow you to probe the client’s needs without artificially framing
the client’s response or biasing them one way or another. The objective is to
hear what the speaker has to say, in the speaker’s own terms. By doing this,
you show the speaker respect by allowing him or her to set the frames of
reference, not contorting them to fit your viewpoint.

9. Give away ideas: Expertise is like
love — not only is it unlimited, but you can destroy it by not giving it away.
It cannot be scanned into a database; rather, it is the unique human ability to
redefine a problem and come up with creative solutions for solving it. It is
what a successful advisor brings to every situation, and it only gets better
with practice.

10. Return calls with unbelievable speed:
Getting back to the client, fast, could be the most trust-creating thing you
do. No one expects it, and it demonstrates how much you value your client.

11. Relax your mind: Critical meetings with
your client can be stress-inducing environments; it is crucial to rid your
mind, however temporarily, of internal distractions prior to entering into such
situations. Think about one saying or one question at a time. Write out your
feelings about the one you choose, or talk through it, aloud, prior to a client
meeting. Doing so will help cleanse your mind of distractions or internal
conflicts prior to heading into a potentially stressful situation.

SUMMING – UP

The experience
suggests that trusted advisors form a strong professional and personal bond
with their clients. They focus on their clients’ needs and believe that doing
the right thing has long-term benefits.

Trusted advisors
place the client relationship first and foremost, even if a current project
fails. This often means that the professional makes a substantial commitment to
the client even when there is no immediate prospect of a profit. Successful
trusted advisors continually explore new ways to help, define problems and work
on solutions.

In an organisational context, the
behavioural framework is also helpful to the subordinates in gaining greater
trust from their seniors.

shailesh.kwebmaker

AMENDMENTS IN COMPANIES ACT BY AN ORDINANCE

1.
Introduction

The Companies Act, 2013, (Act) came into force on 1.4.2014. There are 470 sections in this Act as
compared to more than 650 sections in the previous Companies Act, 1956. Various sections of the present Act were
brought into force in a phased manner.
This Act was amended by the Companies (Amendment) Act, 2015 and again by
the Companies (Amendment) Act, 2017.
These amendments were brought into force in a phased manner. Now, some important amendments are made in
the Act by the Companies (Amendment) Ordinance, 2018, which has been
promulgated by the Hon’ble President on 2^nd November, 2018. These amendments have come into force on 2^nd
November, 2018. Some of the important
amendments made by the Ordinance are discussed in this Article.

2. FINANCIAL YEAR – SECTION 2(41)

(i) The term “Financial Year” is
defined in section 2(41) of the Act. This section provides that the Financial
Year of a Company or a Body Corporate shall end on 31^st March, every
year. However, a company or a body a company which is holding, subsidiary or
associate of a Foreign Company which is required to prepare financial
statements with different Financial Year for submission of consolidated
accounts outside India, according to the law of that country, can have a
different Financial Year if the National Company Law Tribunal
(Tribunal), on application by such
company or body corporate, permits the same.
In this case such company or body corporate can have a different
financial year for the purpose of consolidation of accounts.

(ii) By amendment of this section it is now
provided that on and after 2.11.2018 such application will have to be made to
the Central Government in the prescribed form.
In other words, power to grant this permission is now transferred from
the Tribunal to the Central Government.
All pending applications as on 2.11.2018 before the Tribunal can be
disposed of by the Tribunal.

3. COMMENCEMENT OF BUSINESS BY A COMPANY – (NEW SECTION 10A AND SECTION 12)

(i) At present there is no provision for giving
intimation about commencement of
business by a company. A new section 10A
is now inserted to provide that a company incorporated on or after 2.11.2018
and having a share capital shall not commence any business or exercise any borrowing powers without complying with
the following procedure.

(a) A declaration in the prescribed form should be
filed by a Director of the company within 180 days of the date of incorporation
with the ROC. In this declaration it should be stated and verified that every
subscriber to the Memorandum of Association has paid the value of the shares
agreed to be taken by him on the date of making such declaration.

(b) Further, it is to be stated in the declaration
that the company has filed a verification of its Registered Office u/s. 12(2)
with the ROC.

(ii) If the above declaration is not filed, the
company will be liable to penalty of Rs. 50,000/-. Further, every officer who is in default will
be liable to pay penalty of Rs. 1,000/- per day during which the default continues
subject to a maximum of Rs. 1 Lakh.

(iii) Further, if the above declaration is not filed
within 180 days of the date of incorporation and the ROC is satisfied that the
company is not carrying on any business or operations, he can remove the name
of the company from the Register of
Companies as provided in Chapter XVIII of the Act.

(iv) It may be noted that s/s. (9) is added in
section 12 to provide that if the ROC is satisfied that a company is not
carrying on any business or operations, he can make physical verification of
the Registered Office of the Company in the prescribed manner. If the ROC is satisfied that no such
Registered Office is maintained by the company and no business or operations
are carried on by the company, he can remove the name of the company from the
Register of Companies as provided in the Chapter XVIII of the Act.

(v) It may be noted that consequential amendment
is made in section 248 dealing with power of ROC to remove the name of the
company from the Register of Companies.
It may further be noted that similar provision existed in this section
when enacted in 2013. However, this was omitted by the Companies (Amendment)
Act, 2015, w.e.f. 29.05.2015. The same provision is now brought back w.e.f.
2.11.2018 by amendment of section 248.
Further, this power to remove the name of the company for the above
default applies to a Private or a small company having share capital.

(vi) The above power appears to have been given to
the ROC to weed out some bogus or in operative companies which are formed by some
unscrupulous persons for money laundering and other anti-social activities.

4. CONVERSION OF PUBLIC COMPANY INTO PRIVATE COMPANY – (SECTION 14)

At present section
14(1) provides that a Public Company can be converted into a Private Company
with approval of the Tribunal. This
section is now amended to provide that such conversion can be made only after
approval by the Central Government. For
this purpose application should be made to the Central Government in the
prescribed form. It is also provided that all pending applications before the
Tribunal shall be disposed of by the Tribunal.

5. PROHIBITION ON ISSUE OF SHARES AT DISCOUNT – (SECTION 53)

(i) At present the punishment for non-compliance
with the section is fine between Rs. 1 Lakh to Rs. 5 Lakh payable by the
company and imprisonment of officer in default for a period upto six months or Fine
between Rs. 1 Lakh and Rs. 5 Lakh or with both.

(ii) This section is now amended to provide that
in the event of non-compliance with the
provisions of the section, the company and every officer in default shall be
liable to Penalty upto an amount equal to the amount raised through issue of shares at a discount or Rs.
5 Lakh whichever is less.

(iii) Further, the company will have to refund all
monies received from the persons who
have subscribed to such shares with
interest at the rate of 12% P. A. from the date of receipt to the date of
refund .

(iv) It may be noted that the
punishment by way of imprisonment of defaulting officers is now done away with.

6. NOTICE TO BE GIVEN TO ROC FOR ALTERATION OF SHARE CAPITAL – (SECTION 64)

Under the existing
section 64(2) the Company and every
officer in default has to pay Fine of Rs. 1,000/- per day during
which the default continues subject to maximum of Rs. 5 Lakh. The amendment to this section provides that
the amount shall be payable as Penalty for contravention of the
section.

7. DUTY TO REGISTER CHARGES – (SECTION 77)

(i) Section 77 provides that any charge created
by the company shall be registered with ROC within 30 days of such
creation. If this is not done, the
charge can be registered within 300 days of creation of the charge on payment
of the prescribed additional fees. If the
charge is not registered within this period of 300 days, the company can apply
for extension of time to the Central Government as provided in section 87.

(ii) This provision for extension of time beyond
30 days is now amended by amendment of
section 77 as under:

(a) The ROC may allow, on application by the
company, to register charges created before 2.11.2018 and the same can be filed
within 300 days of the date of creation, if not filed within 30 days, on
payment of prescribed additional fees

(b) If charge created before 2.11.2018 which has
not been filed within 300 days, the same can be filed within 6 months from
2.11.2018 on payment of such prescribed additional fees and different fees may
be prescribed for different classes of companies.

(c) The ROC may allow, on application by the
company, to register charges created on or after 2.11.2018, if not filed within
30 days, and the same can now be filed with 60 days of creation on payment of
the prescribed additional fees. It may
be noted that existing period of 300 days is now reduced to 60 days.

(d) In the case of a charge created on or after
2.11.2018, if the charge is not filed within 60 days, the ROC, on application
made by the company, may allow registration of charge within a further period
of 60 days after payment of such advalorem fees as may be
prescribed. This will mean that the fees
payable for the delay will be calculated as a percentage of the amount of the
charge.

(iii) Existing section 86 provides for punishment to
the company and its officers in default for contravention of sections 77 to
85. In addition to this punishment, this
section is now amended to provide that if any person willfully furnishes any
false or incorrect information or knowingly suppresses any material information
required to be registered u/s. 77, he shall be liable for action under section
447. U/s. 447 there is provision for levy of fine as well imprisonment of the
defaulting officer for specified period.

8. RECTIFICATION BY CENTRAL GOVERNMENT IN REGISTER OF CHARGES – (SECTION 87)

The existing
section 87 is replaced by a new section 87 which provides as under:

(i) The section provides for a situation in which
there is omission to give intimation to ROC of payment or satisfaction of a
charge within the stipulated time limit.
It also deals with the omission or misstatement of any particulars with
respect to any such charge or modification or with respect to any memorandum of
satisfaction or other entries made as provided u/s. 82 or 83.

(ii) With respect to the above, if the Central
Government is satisfied that such omission or misstatement was accidental or
due to inadvertence or some other sufficient cause or it is not prejudicial to
the position of creditors or shareholders, it may, give the following relief.

(a) Extend time for giving intimation of payment
or satisfaction of debt.

(b) Direct that the omission or misstatement be
rectified in the Register of Charges.

9. REGISTER OF SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY – (SECTION 90)

(i) A very comprehensive new section 90 was
introduced by the Companies (Amendment) Act, 2017. Under this section a person having beneficial
interest of not less than 25% or, such percentage as may be prescribed in the
Shares of the Company or has right to exercise significant influence or control
as defined in section 2(27) has to give a declaration in the prescribed manner.
Section 90(9) provides that the company or the person aggrieved by the order of
the Tribunal passed u/s. 90(8) can make an application to the Tribunal for
relaxation or lifting of the restriction placed u/s. 90(8).

(ii) Section 90(9) has now been
amended to provide that the above application can be made within one year from
the date of the order u/s. 90(8).
Further, if no such application is made within one year, such shares as
referred to in section 90 shall be transferred to the authority constituted
u/s. 125(5), in such manner as may be prescribed. In other words, in the event
of delay in filing the declaration under
this section, the shares may be transferred to Investor Education and
Protection Fund set up u/s. 125.

(iii) Section 90(10) provides for punishment for
contravention of the provisions of section 90.
This section is amended to provide that
the person who fails to make the declaration of significant beneficial
ownership in the company u/s. 90 shall be punishable with imprisonment for a
term upto one year or with minimum fine of Rs. 1 Lakh which may extend to Rs.
10 Lakh or with both. If the default
continues, a further fine upto Rs. 1,000/- per day will be payable for the
period of default.

(iv) The above amendment appears to have been made
to deal with cases of benami shareholders in companies.

10. ANNUAL RETURN – (SECTION 92)

(i) The existing section 92(5) provides for
punishment for delay in filing Annual Return within the time specified in section
92(4). This punishment is by way of Fine
payable by the company and by way of imprisonment of officers in default or
with fine or both.

(ii) The above provision for punishment is now
modified by amendment of section 92(5) as under:

(a) The
company and every officer in default will be liable to pay penalty of Rs.
50,000/-.

(b) In case of continuing default, further penalty
of
Rs. 100/- per day subject to maximum of Rs. 5 Lakh is also payable.

It may be noted
that the provision for prosecution of the officer in default is now deleted.

11. STATEMENT TO BE ANNEXED TO SPECIAL NOTICE OF GENERAL MEETING – (SECTION 102) AND PROVISION FOR PROXIES – (SECTION 105)

In both the
sections 102 and 105 there is provision for punishment for contravention of the
provisions of the sections in the form of monetary payment by way of Fine. By amendment of these sections it is now
provided the same monetary amount shall be payable as Penalty.

12. RESOLUTIONS AND AGREEMENTS TO BE FILED WITH ROC – (SECTION 117)

The existing
section 117 (2) provides for levy of Fine if the specified
Resolutions and Agreements to be filed with ROC are not filed within the
specified time. The monetary limits of Fine is reduced and it is
now provided that the following Penalty shall be payable for the
default.

(i) The company shall be liable to pay penalty of
Rs. 1 Lakh and, in case of continuing default, further penalty of Rs. 500/- per
day of default, subject to maximum of Rs. 25 Lakh.

(ii) Further, every officer in default (including
the Liquidator, if any) shall be liable to pay Penalty of Rs. 50,000/- and, in
case of continuing default, he shall be liable to pay a further penalty of Rs.
500/- per day, subject to maximum of Rs. 5 Lakh.

13. REPORT ON AGM TO BE FILED WITH ROC – (SECTION 121)

U/s. 121 Report on
Annual General Meeting held by a listed public company is to be filed by such
company within the time provided in the section. U/s. 121(3) the company and
every officer in default is required to pay Fine for
non-compliance with the requirement of the section. This provision is now amended and it is
provided that Penalty for this default will be payable as under:

(i) The company will have to pay Penalty
of Rs. 1 Lakh and, in case of continuing
default, further penalty of Rs. 500/- per day of default subject to maximum of
Rs. 5 Lakh will be payable.

(ii) Further, every officer in default shall be
liable to pay penalty of Rs. 25,000/- and, in case of continuing default, a
further penalty of Rs. 500/- per day of default, subject to a maximum of Rs. 1
Lakh will be payable.

14. COPY OF FINANCIAL STATEMENTS TO BE FILED WITH ROC -(SECTION 137)

U/s. 137(3) the
company and the officers in default, as specified in the section, are liable to
pay fine of specified amount for non-compliance with the requirements of the
section. There is also provision for prosecution of the officers in
default. These provisions are amended
and it is now provided for payment of Penalty as under:

(i) The company shall be liable to pay Penalty of
Rs. 1,000/- per day during the period of default subject to a maximum of Rs. 10 Lakh.

(ii) Every officer in default, as specified in the
section, shall be liable to pay Penalty of Rs. 1 Lakh and, in case of continuing default, further
penalty of Rs. 100/- per day of default shall be payable subject to a maximum of Rs. 5 Lakhs. It may be noted
that the existing provision for imprisonment of the officer in default for a
specified period is now deleted from this section.

15. REMOVAL AND RESIGNATION OF AUDITOR – (SECTION 140)

Section 140 (2)
provides that an Auditor of a company has to file with ROC and the Company (C
& AG, if applicable) a Statement in the prescribed form (ADT-3) within 30
days about details of his resignation as Auditor. Section 140 (3) provides that
in the event of failure to comply with
this requirement the Auditor will have to pay Fine of Rs.
50,000/- which may extend to Rs. 5 Lakh.

Section 140(3) is
now amended to provide that the Auditor will have to pay for non-compliance
with the provisions of section 140(2) Penalty of Rs. 50,000/- or
an amount equal to his remuneration as Auditor, whichever is less. Further, in case of continuing default, a
further penalty of Rs. 500/- per day of default subject a maximum of Rs. 5 Lakh
will be payable.

16. COMPANY TO INFORM DIN TO ROC – (SECTION 157)

Section 157(1) provides for furnishing information about Director
Identification Number (DIN) to ROC and other prescribed authorities within the
specified time. In the event of default
in complying with this requirement the company and the officers in default have
to pay Fine as stated in section 157 (2). The provisions of
section 157(2) have now been amended to provide for payment of Penalty
as under:

(i) The Company shall be liable to pay penalty of
Rs. 25,000/-. Further, in case of continuing default, a
further penalty of Rs. 100/- per day of default subject to maximum of Rs. 1
Lakh shall be payable.

(ii) Further, every officer in default will be
liable to pay penalty of Rs. 25,000/- and a further penalty for continuing
default shall be payable at Rs. 100/- per day of default subject to a maximum
of Rs. 1 Lakh.

17. PUNISHMENT FOR CONTRAVENTION OF SECTIONS 152,155 AND 156 – (SECTION 159)

The existing
section 159 providing for payment of Fine as well imprisonment of
the individual or Director in default has been replaced by a new section 159.
This new section 159 removes the provision for imprisonment of the Individual
or Director in default and provides for levy of penalty as under:

(i) Penalty which may extend upto Rs. 50,000/-

(ii) In case of continuing default, a further
penalty which may extend upto Rs. 500/- per day during the period when the
default continues.

The wording of the
above section indicates that a penalty of less than Rs. 50,000/- or less than
Rs. 500/- per day may be levied at the discretion of the concerned authority.

18. DISQUALIFICATIONS FOR APPOINMENT OF DIRECTOR – (SECTION 164)

Section 164 gives a
list of circumstances under which a director may be disqualified for
appointment as Director in any other company.
The amendment of this section states that a person who has not complied
with the provisions of section 165(1) will now be disqualified for appointment
as Director of any other company. It may
be noted that section 165(1) provides that a person will not be entitled to
become director of more than specified number of Companies.

19. NUMBER OF DIRECTORSHIPS – (SECTION 165)

U/s. 165(6), if a
person accepts an appointment as a director in contravention of the specified
number of directorships stated in section 165(1), he is liable to pay Fine
of specified amount. This provision is now modified by amendment of section
165(6). It is now provided that such
person will be liable to pay Penalty of Rs. 5,000/- for each day
during which the default continues.

20. PAYMENT TO DIRECTOR FOR LOSS OF OFFICE – (SECTION 191)

U/s. 191(1) no
director can receive any compensation for loss of office under specified
circumstances. If there is contravention
of this provision, section 191(5) provides for payment of Fine by
such Director of Rs. 25,000/- which may extend to Rs. 1 Lakh. This section is
now amended to provide for payment of Penalty of Rs. 1 Lakh by such Director
for contravention of the provisions of section 191.

21. MAXIMUM REMUNERATION PAYABLE TO MANAGERIAL PERSONNEL – (SECTION 197)

(i) Section 197(7) provides that an Independent
Director shall not be entitled to receive any stock option from the
company. He can only receive sitting
fees, commission and reimbursement of expenses.
Now sub-section (7) of section 197 is omitted. Effect of this amendment will be that besides
sitting fees, commission etc., an Independent Director can enjoy the benefit of
Stock Option from the Company.

(ii) At present section 197(15) provides for
payment of Fine of specified amount by the person who contravenes
the provisions of this section. By
amendment of this section the Penalty of Rs. 1 Lakh can be levied
on the person who contravenes the provisions of section 197. Hitherto, no Fine was payable by the company.
By this amendment it is provided that if the company has contravened the
provisions of section 197, it will have to pay penalty of Rs. 5 Lakh.

22. APPOINTMENT OF KEY MANAGERIAL PERSONNEL – (SECTION 203)

The monetary limits
of Fine u/s. 203 (5) for non-compliance with section 203 have now
been modified by amendment of section 203(5) as under:

(i) The company will be liable to pay Penalty of
Rs. 5 Lakhs

(ii) Every Director and Key Managerial Personnel
who is in default shall be liable to pay penalty of Rs. 50,000/-.

(iii) In case of continuing default, further penalty
of Rs. 1,000/- per day of default subject to maximum of Rs. 5 Lakh shall also
be payable.

23. REGISTRATION OF OFFER OF SCHEMES INVOLVING TRANSFER OF SHARES – (SECTION 238)

U/s. 238(3) the
Director who is in default is liable to pay Fine between Rs.
25,000/- to Rs. 5 Lakh. This is now changed to Penalty of Rs. 1
Lakh by amendment of this section.

24. COMPOUNDING OF CERTAIN OFFENCES – (SECTION 441)

(i) At present section 441(1)(b) provides that an
offence punishable under the Act with
Fine only which does not exceed Rs. 5 Lakh can be compounded by the Regional
Director. By amendment of this section this limit of Rs. 5 Lakh is increased to
Rs. 25 Lakh. Therefore, the Regional Director can now compound any offence
where the Fine is below the limit of Rs. 25 Lakhs. U/s. on 441(1) (a) the
Tribunal has power to compound an offence where the amount of Fine leviable is
of any amount (i.e. even more than Rs. 25 Lakh).

(ii) Section 441(6) is now amended to provide that
any offence which is punishable under the Act with imprisonment only or with
imprisonment and also with Fine shall not be compoundable. In the existing section 441(6) it was provided
in specified cases it was possible to compound the offence with the permission
of Special Court. This concession is now
not available.

25. LESSER PENALTIES FOR ONE PERSON AND SMALLER COMPANIES – (SECTION 446B)

Section 446 B was
enacted by the Companies (Amendment) Act, 2017.
It came into force on 9.2.2018.
This section provided that if a One Person Company or a Small Company
fails to comply with provisions of section 92(5), 117(2) or 137(3), such
company or any officer in default shall be punishable with Fine or
Imprisonment, such Fine or Imprisonment shall not be more than half of the Fine
or half of the period of Imprisonment specified in the above sections. Now this section is amended to provide that,
if the company or the officer in default is liable to penalty, the same shall
not be more than half of the penalty specified in the above sections. This amendment is made as in the above
sections the punishment in the form of Fine and Imprisonment is now replaced by
the specified amount of penalty.

26. PUNISHMENT FOR FRAUD – (SECTION 447)

The second proviso
to section 447 provides that if fraud involves an amount of less than Rs. 10
Lakhs or one percent of the turnover of the company, whichever is less, and
does not involve public interest, such person may be awarded punishment by way
of imprisonment upto 5 years. Further,
fine upto Rs. 20 Lakh can be levied. By
amendment of this section the amount of the fine is now increased upto Rs. 50
Lakh.

27. ADJUDICATION OF PENALTIES – (SECTION 454)

Section 454
provides for appointment of adjudicating officer for adjudging penalty under
the provisions of the Act in such manner as may be prescribed. As per section 454(3) the adjudicating
officer may, by an order, impose a penalty on the company and the officer in
default. Now, s/s. (3) is substituted by
another s/s. (3) granting power to adjudicating officer to impose penalty on
any other person in addition to company and officer in default. Further, it is
also provided that adjudicating officer may direct such company or officer in
default or any other person to rectify the default wherever he considers fit.

28. PENALTY FOR REPEATED DEFAULT – (NEW SECTION 454 A)

This new section
provides for levy of Penalty for repeated defaults. It provides for levy of additional penalty on
the company, any officer in default or any other person in whose case any
penalty is levied under any provision of the Act, again commits such default
within 3 years from the date on which such penalty order is passed by the Adjudicating
Officer or the Regional Director. In
such a case for a second or subsequent default, the amount of the Penalty shall
be an amount equal to twice the amount of penalty provided for such default in
the relevant section. From the wording
of the section it appears that if penalty is once levied for non-compliance of
section 64, double the amount of penalty can be levied for subsequent default
for non-compliance of section 64 only and not for default under any other
section. This new section is on the same
lines as section 451 which provides for levy of double the amount of Fine for
second or subsequent default.

29. FINE VS. PENALTY

From some of the
amendments made by the above Ordinance it will be noticed that in some
sections, which provided for levy of Fine, the word “Fine” is replaced by the word “Penalty”. The distinction between the expression “Fine”
and “Penalty” can be explained as under;

(i) Chapter XXVIII (sections 435 to 446A) deals
with appointment of Special Courts and their powers. If we read these provisions it will be seem
that where the Act provides for punishment for contravention of any provision
by way of levy of Fine on the company or
levy of Fine and or Imprisonment of any defaulting officer, the same can be
done by the Special Court only. It is
also provided in section 441 that where only Fine can levied, the same can be
compounded by the Regional Director or the Tribunal. This is a time consuming procedure.

(ii) As compared to the above, where there is a
provision for levy of Penalty for default in complying with a particular
provision of Act, section 454 Provides that such Penalty can be levied by an
Adjudicating Officer appointed by the Central Government. By a separate Notification, some Registrars
of Companies (ROC) are appointed as Adjudication Officers. Thus, penalty leviable under different
sections can be levied by ROC. Any
company or officer in default aggrieved by levy of penalty by ROC can file
appeal before Regional Director u/s. 454(5).
This procedure will be less time consuming.

30. TO SUM UP

(i) The above amendments in the
Companies Act, 2013, have been made by an Ordinance promulgated by the Hon’ble
President on 02.11.2018 on the basis of the recommendations of the expert panel
appointed by the Ministry of Corporate Affairs.
This Panel was headed by the Corporate Affairs Secretary, Shri
Srinivas. The Ordinance covers only some
of the suggestions made by the Panel which the Government considered to be of
urgent nature. There are some more
recommendations by the Panel which are under consideration of the
Government. It appears that some more
amendments may be made in the Companies Act during the coming months.

(ii) It may be noticed from the amendments made in
some of the sections that punishment to officers in default by way of
imprisonment for specified period has been done away with. These sections deal with procedural
lapses. In some of the sections the
provision for Fine has been replaced by Penalty. Since the Fine can be levied by a Court and
Penalty can be levied by ROC, the administration of the provision for levy of
penalty will be less time consuming.

(iii) Some
of the amendments made by this Ordinance are of procedural nature. Taking an
overall view, the amendments by this Ordinance are Welcome. One area in which major amendments are
required relates to provisions applicable to private limited companies. As these Companies experience difficulties in
complying with some of the stringent provisions of the Act, which apply to all
companies, there is need to make relaxation in these provisions so that there
is ease of doing business for small and medium size industries and traders and
their compliance burden in reduced.

shailesh.kwebmaker

ANSWERS TO SOME IMPORTANT RERA QUESTIONS

REGISTRATION

Q.1. A developer
wants to develop a land admeasuring 500 sq. meters having 8 apartments. He is
advised by RERA expert that in view of section 3(2) he does not need to
register that project. The Developer wants to know whether his Project will be
totally outside the purview of RERA and none of the provisions of the Act will
be applicable to his project.

Issue regarding the
applicability of RERA in respect of the projects which should have been
registered but not registered by the Promoter for any reason, as also the
projects which are not required to be registered under the provisions of
section 3(2) of RERA, has been subject of varying views with different
Authorities taking different approach in the matter.

According to one
view the regulatory power is exercised on the basis of information furnished by
the promoter in the application for registration. In the absence of
registration of project, the Authority will not get the required information.
Hence, many provisions of RERA would become unworkable e.g. provisions based on
the sale agreement as per proforma,quantum of penalty, conveyance etc.

The other view is
that RERA nowhere restricts its application to registered projects. The
definition of ‘Real Estate Project’ is not confined to registered projects only.
Registration is only one of the obligations cast on the promoter, default in
respect of which visits with penalty under the Act. Non- compliance with one of
the obligation by the promoter, does not absolve him from all other obligations
which are cast on him for safeguarding the interest of the buyers which happens
to be primarily object and purpose of the legislation. It cannot be the
legislative intent to deprive the buyers of the protection provided under RERA
because of the self-serving default of the promoter.

MahaRERA had
consistently taken the view as mentioned in FAQs that it will entertain
complaint only in respect of registered projects. In a Writ Petition Mohmd
Zain Khan vs. MahaRERA & Others W.P. lodged under No. 908 of 2018
decided on 31.07.2018 the High Court of Bombay directed the Authority to
entertain complaints even in respect of unregistered projects and consequently
MahaRERA agreed to upgrade its software to record such complaints.
Consequently, the complaints in respect of unregistered projects also are being
registered by MahaRERA.

This settles the
controversy about the projects that are required to be registered but not
registered, The High Court order did not make it clear whether it will apply to
the projects which are exempted from registration by virtue of section 3(2) of
the Act. A view is possible to be taken that what applies to unregistered
projects, equally apply to unregisterable projects as well. Certain projects,
considered small, have been exempted from the requirement of registration for
ease of operation. It cannot be the legislative intent to deprive the
purchasers of apartments in real estate projects, the protection granted to the
purchasers under the Act. There is also no specific provision in the Act to
exclude these projects from the operation of RERA nor are they kept out of the
meaning of real estate project.

Q.2. As per
section 3(2)(b) the registration of the project will not be required if the
promoter has received completion certificate before 01.05.2017. This implies
that the relevance of O.C. is only for ongoing projects and not for those
projects which commence on or after 01.05.2017. Can a promoter start a new
project without advertising and without registering if he sells all the
apartments only after getting O.C.?

Section 3(1)
provides that w.e.f. 1^st May 2017 the Promoter can advertise and
sell the apartments only after registration of the project. As per section
3(2)(b), if promoter has received completion certificate before 1^st
May 2017 then registration is not required. This indicates that relevance of OC
is only in respect of the ongoing projects. However, as per the answer received
by us, MahaRERA has clarified that if a project is constructed, OC is obtained
and till the date of OC the promoter has not made any advertisement, then such
projects do not require registration. It means OC is relevant for new projects
also. If this view is adopted, the builder can avoid registration provided he
does not give advertisement and does not sell apartments till the date of OC.
This way he can save GST also.

The clarification,
however, has to be taken with a bit of caution. Any legislation needs to be
understood and interpreted in the context of the object and purposes it seeks
to serve. RERA is designed to introduce professionalism and transparency in the
sector and to ensure that the interest of the buyers are safeguarded against
the prevalent malpractices of the promoters. A question arises as to whether
the receipt of OC leaves the promoter with no scope for any other malpractice
against which remedies are provided under the Act.

Q.3. Suppose a
new project was registered on 15.05.2017 mentioning possession date as
30.08.2017. The Promoter could not complete construction. Hence, he got
extension of one year upto 30.08.2018. He obtained OC in August, 2018 but could
not sell all apartments upto 30.08.2018. Can he sell his unsold apartments
after 30.08.2018 when the registration certificate is not valid?

It has been
clarified by MahaRERA that after OC, registration is not required for a project
of a single building. Hence, sale of Apartments in building with OC does not
require MahaRERA registration.

The validity of
dispensing with the requirement of registration after issue of OC is a debatable
issue. In the facts of the case in the question, technically speaking, there
should not be any sale without registration. However, considering the
unavoidable hardship to the promoter, the Authorities may take a lenient view.

JOINT DEVELOPMENT PROJECT

Q.4. In
redevelopment arrangement where the landowner and the developer join to develop
a project, who is the promoter when-

(i) there is an arrangement of area sharing?

(ii) there is arrangement for revenue sharing?

RERA defines the
promoter as one who constructs or causes to be constructed apartments for sale.
The Explanation, however, provides that if the person constructing and the
person selling the apartments are different persons, both will be considered as
promoter and will be jointly liable in the project. Applying this provision, in
a redevelopment arrangement based on area sharing, both the landowner as well
as the developer will be treated as promoters as, while the construction will
be carried on by the developer, the sale of the share coming to the landowner,
will be made by the landowner.

The position in a
redevelopment arrangement based on revenue sharing, however, appears to be
different. MahaRERA in its clarification has been treating the area sharing and
revenue sharing arrangements at par and treating both as promoter. There is no
provision in the Act which makes the landowner sharing the revenue, as the
promoter when the entire work of construction and sale is carried out by the
developer alone.

Q.5. Whether a
cooperative Housing Society which enters into redevelopment arrangement in
consideration of part of additional constructed area to be allotted to existing
members, will be a promoter jointly liable with the developer. If so, whether
the Society will be responsible to the buyers of apartments sold by the
developer?

The issue is in the
realm of uncertainty. As per the definition of Promoter, the construction is to
be for the purpose of sale. In a redevelopment arrangement for development of
society land, the society, generally, gets the apartments from the builder, not
for sale, but for allotment to its members in lieu of the flats that they were
occupying pre-development. Strictly speaking, in such a case the society should
not be treated as promoter. MahaRERA, however, in its clarifications has been
taking different view and holding the society also as a promoter.

In a recent case of
Jaycee Homes Pvt. Ltd.,[7713] the Authority has taken the view that the
society is also a promoter and is also liable to the purchasers of the free
sale area made available to the developer. The order appears to have raised a
controversial issue. It needs to be read in the context in which the view was
taken by the Authority. Jaycee Homes Pvt. Ltd. executed development agreement
with Udayachal Goregaon CHS Ltd. The Developer constructed up to 11^th
floor out of 15 floors. It sold flats of his share. Meanwhile the society
terminated the agreements of the developer and refused to recognise the
purchasers of apartments from the developer. The purchasers filed a complaint
with MahaRERA and contended that their agreements are binding upon the society
as the society is also a promoter as per section 2(zk). Society relied upon the
judgement of Bombay High Court in the case of Vaidehi which held that as per MOFA,
the society is not a promoter. It was also contended that there was no privity
of contract between the society and the purchasers who purchased apartments
from the developer. But the Authority held that the society is a promoter and
liable to the purchasers.

In the facts of the
case above, the decision of the Authority seems to be influenced by the fact
that the development agreement having been terminated, the purchasers from the
developers were left in lurch and were without any remedy for no fault of
theirs. The society was brought within the meaning of ‘Promoter’ because of the
fact that by cancelling the development agreement of the developer and revoking
his power of attorney, the society regained the control and ownership of the
sales component. What the decision would have been, if the development of
building had gone in normal way without termination of the agreement, cannot be
said with any degree of certainty.

In our view, the
decision remains contentious. A cautious view is called for.

Q.6. Where the
person constructing and person selling are different, RERA makes both of them
promoters and make them jointly liable in respect of the project. In a
situation of redevelopment, on area sharing basis, whether it will be incumbent
on both to open separate specified bank accounts and deposit 70% of their
respective receipts in their accounts. If so, what will be the basis for the
landowner to withdraw from the bank account since no cost will be incurred by
him in the construction of the project and there will be no cost of land to the
project?

MahaRERA has taken
the stand that in such cases both the person being the promoter, should open
separate bank accounts and deposit 70% of their respective receipts in these
accounts. (Circular No. 12 ) In our view, the view needs reconsideration. The
law requires opening of the bank account for the project and not for the
promoter(s). In any case, the view leads to a position in which the landowner
having deposited 70% of the receipt from his share will not be able to withdraw
any amount as he will not be incurring any cost and as far as land owner is
concerned, there will be no land cost for the project. A view which results in
such situation of unintended hardship, can not be the legislative intent.

LEASE AGREEMENTS

Q.7. Lavasa
Corporation Ltd. is developing a township at Lavasa. It is executing agreements
for transfer of apartments by charging substantial premiums and Re. 1/- lease
rent per annum for 999 years. Lavasa Corporation Ltd. is of the view that the
purchasers are given apartments on rent. Hence, Lavasa Corporation Ltd. is not
a promoter but Landlord. Provisions of
RERA are not applicable to the lease of apartments by Lavasa Corporation Ltd.
What view can be taken in such matter?

A complaint was
filed before the Regulatory Authority against Lavasa Corporation Ltd. which was
dismissed by the Authority accepting the arguments of the promoter, for want of
jurisdiction. The learned member came to this conclusion on the basis of
definition of allottee given in section 2(d) of the Act. In the appeal filed by
the allottee before RERA Tribunal, it was held as under:

“10) The Respondent Lavasa
by its conduct of filing reply did not object to the point of jurisdiction and
also got its project registered with the RERA Authority is estopped in law in
terms of sec. 115 of the Evidence Act. The conduct of Lavasa naturally made it
believe to the customer / the Appellant that there was no bar to jurisdiction
with the MahaRERA Authority. Again when the registration was caused on 28^th
July 2017 in the Schedule, the property or the apartment, where the Appellant
has booked the flat is included. There is no exclusion at the time of
registration of specific property in the Hill Station – the township of Lavasa.
In the absence of such exclusion It is not open for Lavasa to canvass that the
point of jurisdiction raised before the Ld. Adjudicating Member was just.”

“Section 18 of the Act
contemplates as under: 18(1) if the promoter
fails to complete or is unable to give possession In accordance with terms of
Agreement for Sale or as the case maybe, duly completed by the date specified
therein. The term “as the case may be”, necessarily indicate to the
agreement which is subject of controversy. It means, depending on
circumstances. The statement in the Section equally applies to two or more
alternatives, Such Agreement in the situation cannot be by-passed or alleged to
be a Rent Agreement. This is supported by overall effect of Agreement,
referring Appellant to be a customer and not a tenant.”

“Sec. 105 of the Transfer
of Property Act contemplates a lease of immovable property to be a transfer of
right to enjoy immovable property for a certain time or in perpetuity in
consideration of price paid or promised, in the instant case, the terms are for
999 yrs. with an annual rental of Re. 1/-. The annual rental is of no
consequence as the Agreement itself provides a deposit of Rs.50,000/- by the
Appellant for meeting with exigencies. Consequently, there can’t be in
perpetuity any breach of any payment or deposit of rentals. The amt. of
Rs.43,77,600/- was accepted as premium naturally to provide freehold rights to
the Appellants to enjoy the property subject to restrictions under the Development
Control Authority or the Regulatory Authority of a township or the Hill Station
Rules. However, that by itself would not tantamount to squeezing the rights of
the Appellant to enjoy the property absolutely or to invoke the jurisdiction of
RERA.”

Although the
decision is on the facts of the case, it can be taken to be the view in all
such matters where the property is transferred on long term lease with
substantial amount by way of premium and a very nominal amount as rent to give
it the colour of a lease. Following several other cases cited by the appellant,
the Tribunal has held that the premium is to provide freehold rights to enjoy
the property subject to restrictions under the applicable Acts. The allottee
cannot be deprived of the benefits of RERA merely because a different
nomenclature is given to the transactions. The decision may be of help in all
such cases of long-term leases where the amount of premium forms a significant
part, almost equal to the price, forming in substance, a substitute of the
price of the property.

MOFA AND RERA

Q.8. The local
laws dealing with real estate promotion and development which prevailed when
RERA was introduced have not been repealed. As a result of which two
legislations dealing with the same subject are in operation simultaneously. In
such a situation, when RERA regulates ongoing projects also, how will the
defaults in delivery of possession in respect of agreements executed prior to
1.5.2017 will be dealt with in the matters of –

(i) Award of interest?

(ii) Award of compensation?

(iii) Quitting the project?

It was held by the
Tribunal in Aparna Arvind Singh vs. Nitin Chapekar (10448) that the
ongoing project bring with them the legacy of rights and liabilities created
under the statute of the land in general and MOFA in particular. Section 88
provides that its provisions shall be in addition to and not in derogation of
the provisions of any other law. MOFA has not been repealed.

MahaRERA in Order
No.4 dated 27.06.2017 clarified that ongoing projects in which agreements were
executed prior to 1^st May, 2017 shall be governed by the MOFA. Based
on this view, if the provisions of MOFA are applied, the position should be:-

Interest- Under MOFA, section 8 provides for payment of interest in case of
delay.at the rate of 9%. The Model agreement under MOFA also provides for
interest @ 9%. Hence, unless any other rate of interest is provided in the
agreement, that rate should be applied and in the absence of any rate, the rate
as per MOFA can be applied.

The question as to
whether the proposed date of completion should be as per the MOFA agreement or
the revised date informed under RERA. This question has been answered by the
Mumbai Tribunal in the case of Sea Princess Realty (0078) holding that
any extension of the date mentioned in the agreement is impermissible and the
promoter cannot give a go-by to solemn affirmation made at the time of
registration of the Agreement.

Compensation- There being no provision under MOFA for award of compensation in
case of default, award of compensation in accordance with RERA may not be
permissible.

Quitting the
Project- There being no provision under MOFA for
quitting the project, it is debatable whether an allottee can be permitted to
quit as per section 18 of RERA. Although, the Authority constituted under RERA
do allow the Allottees to quit and receive interest.

Section 88 of RERA
provides that the provision of this Act shall have effect, notwithstanding
anything inconsistent therewith contained in any other law for the time being
in force. With such a provision, in our view, it should not be impermissible to
decide the above issues in accordance with the provisions of the RERA and the
rules and regulations made thereunder.

ONGOING PROJECT

Q.9. Will a
project which was completed and occupied by the buyers but no OC was received
before 01.05.2017 qualify as an ongoing project required to be registered.
Also, whether the project which is completed with OC but the promised amenities
and facilities are yet to be provided, will qualify as ongoing?

MahaRERA in their
clarification through FAQs had taken the view that the projects which are
completed and occupied by the purchasers are not required to be registered as
ongoing projects, even if the OC has not been received. However, the Authority
in the decision, given by its Member Shri Kapadnis in Parag Pratap Mantri
vs. Green Space Developers has taken a different view holding that the
promoters of the buildings which are occupied by the residents without OC, must
register such projects with MahaRERA. The decision is of far reaching
consequence, at least in Mumbai where thousands of buildings are occupied but
are without the occupation certificate.

A view can be taken
that a project of a building with OC but without amenities like swimming pool
/office is not complete project. Such projects should be registered.

Q.10. If an
ongoing project is registered with MahaRERA, then will the Act be applicable
for the entire project or will it be applicable only to units sold after
registration?

Registration is of
the Project/Phase as a whole. The ongoing project is registered in its
entirety. Hence, the provisions of the Act are applicable to all units of the
Project/Phase irrespective of whether the agreement in respect of those
apartments was entered into prior to or post RERA.

REMEDIES U/S.18

Q.11. Does the
issue of OC debars the allottee to seek remedy u/s. 18 of RERA? Whether all the
provisions of RERA or certain provisions only, cease to apply after the receipt
of OC?

There is no
provision in the Act which takes away its jurisdiction in cases where OC is
received. The only exception is in respect of the project which were complete
before RERA came into force and OC was received. The object of the Act is to safeguard the
interest of the apartment buyers and protect them against the default committed
by the promoters/agents irrespective of whether the OC was received or not when
they entered into contract with the promoter. Non-receipt of OC is a violation
of the provision by the promoter for which he is subjected to penalty. The law
does not discriminate between the buyer who files complaints before receipt of
OC and one who files complaints for getting remedy u/s. 18 after OC. In the
absence of any provision to this effect, the protections under RERA are
available to both.

In a decision
MahaRERA has based the order on the premise that once the project is completed,
the rights of the buyers for remedy u/s. 18 cease. If the project is complete
and OC received, the buyer will cease to have remedy u/s. 18 even if the
possession was not delivered in time. The Authority has relied on the word “
is” used in section 18 which, according to it, rules out its application in
case of defaults if the project is complete and OC issued. In our view, the
Authority has misconstrued the import of the word ís’ and has failed to
appreciate that every word in the statute which needs to be construed in the
context in which it occurs.

In our view, the
only provision that ceases to be applicable, after the issue of OC, is the
provision to deposit 70% of the proceeds in the separate bank account. It is
because once the project is complete, the very purpose of the provision ceases
to exist. The Rules also provide that the money remaining in the bank account
can be withdrawn after the OC is issued. All other provisions of the Act
continue to be applicable even after the issue of OC.

Q.12. Whether
relief u/s. 18 can be claimed where no date of possession is mentioned in the
agreement of sale executed before the coming into force of RERA?

In Aparna Arvind
Singh vs. Nitin Chaphekar (10448) where the agreement was made under MOFA
and no date of possession was mentioned in the agreement, the Mumbai Tribunal
applied the provisions of section 4(1A) of MOFA and held that the promoter
committed breach of the provision by not mentioning the date of possession in
the agreement.

Going by the
cumulative effect of section 71(1), 72(d), 79 and 88 of RERA and the provisions
of MOFA, it was held that effect will have to be given in favour of the cause
propounded by the affected party. Beneficial legislation cannot be extended in
favour of a deceit against the docile flat purchaser/allottee.

Q.13. Is it
possible to claim relief u/s. 18 and other sections of RERA on the basis of
allotment letters?

In Ashish
RajkumarBubna vs. S R Shah Developer [0251] where there was specific
reference of flat number., its area, consideration, mode of payment, date of
possession and other necessary details given in the allotment letter itself,
the Mumbai Tribunal held that the parties were under an obligation to adhere to
the allotment letter.

Q.14. Whether
the refund of money envisaged u/s. 18 on failure of the promoter to complete
the project and deliver possession in time includes refund of service tax, VAT
charged from the allottee?

There are contrary
decisions of the Mumbai Tribunal on this issue. In Venkatesh Mangalwedhe vs.
D. S. Kulkarni [10409] the promoter was directed to refund the amount of
VAT and Tax charged from the purchaser. In the later decision in Ashutosh
Suresh Bag vs. MahaRERA [0120] , the Tribunal held that the refund of VAT
could not be given by the promoter as the tax amount is credited to the State
government in the name of the allottee. The promoter cannot be held responsible
to refund the VAT amount.

In this connection,
it may be relevant to refer to the provisions of section 72 which contains the
factors which the Adjucating Officer is required to take into account in
adjudging the quantum of compensation or interest. Clause (b) of the section
mentions ‘the amount of loss caused as a result of the default’. On
cancellation of Agreement VAT, GST paid by the purchaser is a loss to the
purchaser but not a gain for the promoter. Hence, final verdict will depend
upon the view taken by the High Court. .

CHANGES IN SANCTIONED LAYOUT

Q.15. Rule 4(4) 0f the Maharashtra Rules permit
inclusion of contiguous land parcel to the project land. Will it involve
obtaining written consent of at least two-third number of allottees and
revision of the original registration? Or, the contiguous land piece should be
registered as independent project or phase of the project even when the same is
dependent on the earlier project in certain matters including the right of way?

Since the rules
permit the amalgamation of a contiguous piece of land with the main project
land, there should be no legal necessity of obtaining the consent of at least
two-third of the number of allottees unless there will be changes in the
layout plan consequent to such amalgamation. The Rule permits separate
registration of the project either as independent project or as a phase of the
project.

Third proviso to Rule 4 states consent of 2/3^rd allottees may not be
necessary for implementation of proposed plan disclosed in the agreement prior
to registration and for changes which are required to be made by the promoter
in compliance of any direction or order by any Statutory Authority.

Q.16. If due to
a change in government policy, the promoter is entitled to additional FSI etc.,
can the promoter build additional floors in a registered ongoing project where
initially those floors were not planned?

Yes, but subject to
the approval of the Competent Authority and the consent of at least two- third
number of allottees as required u/s. 14 of RERA.

Q.17. Can the
promoter change the plans of subsequent phases after registration of the 1^stphase?

If a subsequent
phase has not been registered, the promoter can change the plans of the
subsequent phase without obtaining consent of the allottees from the allottees
of registered phase. However, if the subsequent phase is also registered,
consent of allottees, of the concerned phase, would be needed if the change in
the subsequent plan impacts the interest of the allottees of the registered
phase.

There are
situations where, when a project is divided in phases and registered
separately, the amenities and facilities in respect of all the phases are
concentrated in the last phase In such a case any change in the sanctioned plan
of the last phase will necessitate the consent of atleast two-third of the
number of allottees of all the earlier phases.

END USER VS. INVESTOR

Q.18. Whether
RERA differentiates between the end-user and the investor in matter of
application?

In PIL
developers vs. S R Shah [10411], the purchaser purchased 11 flats and a
plea was taken by the promoter that the purchaser was not an allottee under the
Act, but an Investor. The Mumbai Tribunal held that the Act nowhere makes a
distinction between the investor and actual user.

POSSESSION

Q.19. Whether
possession given for fit out is to be treated as possession given to the
allottee under the Act?

In BhavanaDuvey
vs. Teerth Realities [054] the Mumbai Tribunal held that Fit out possession
without occupancy certificate is not the contemplated possession under the Act.
Under RERA/MOFA the Act, possession can be given only after the issue of OC and
any possession given for whatever purpose before the issue of OC will not be in
accordance with the law.

PAYMENT BEFORE AGREEMENT

Q.20. Sometimes
buyer is ready and gives undertaking that he is okay with giving money beyond
10% but he does not want to register the agreement and pay stamp duty. Should
it be allowed?

No. Section 13(1)
of the Act prohibits the promoter from taking more than 10% of the cost of
apartment without entering into a written agreement for sale, duly registered.

CONVEYANCE

Q.21. If a phase is considered up to certain
floors as envisaged in the rules, then how & when will conveyance take
place. Assuming the next phase approvals for upper floors are not obtained in a
timely manner, what will be the position for effecting conveyance for the
floors constructed for which O.C. received?

Conveyance of the
structure (floors) contained in the phase is possible. As per section 17 the promoter
shall execute conveyance of the structure in favour of the Allottees and common
areas to the association of the Allottees. Thus, conveyance of the structure of
existing floors is possible as per section 17 of RERA.

In case the
amenities and facilities and other common area is tagged on and can be
determined only after the upper floors are constructed, the apartments in the
phase can be conveyed but conveyance of the common area to the Apex society
will wait till they are constructed.

VARIATIONS BETWEEN PROVISIONS OF RERA AND RULES

Q.22. What
should be the approach in matters where the rules framed by the State
Legislature are at variance with the provisions of RERA?

The States, in exercise of their rule making
power, have, in certain matters made rules which are at variance with the
substantive provisions of the Act. As a general principle, Rules are
subordinate legislation and a subordinate legislation cannot override the
substantive law. However, the Central Government is silent over it. As the variations
are generally benefiting the promoters, there is little possibility that these
rules will be challenged. One should, however, be aware of the possibility of
the rules being struck down
if, there is a challenge.

shailesh.kwebmaker

Is the word ‘Expert’ a misnomer?

The Ministry of Corporate Affairs constituted Committee of Experts (COE)
recently published a report¹ on regulating audit firms as directed
by the Supreme Court of India. Amongst other things, it concluded that
‘Multinational Accounting Firm’ (MAF) was a ‘misnomer’. The Supreme Court asked
them to revisit regulations to “regulate and discipline the MAFs” and lo and
behold – they have come up with a finding – there is no such thing as a MAF.
Let me walk you through some observations:

Constitution: The COE did not have any expert. The experts on
the committee are three bureaucrats with no skin in the game, no ground level
experience. Can such a committee even be considered as duly constituted as
envisaged by the highest court of India?

Selective Samples: The experts engaged 21 ‘stakeholder’² bodies. Notable amongst them were 4 trade
associations³ ; ONLY 7 CA firms (4 MAF⁴ who are accused
of violations + 2 affiliated to next tier international networks and ONLY 1
Delhi Firm) and 1 Delhi CA association. Authors of earlier reports mentioned by
the Supreme Court are disregarded. Can this be considered a representative
sample? If you look at the 11 points questionnaire circulated by the COE, you
can tell that it is superficial at best. One wonders if a more accurate
description of such stakeholders could have been ‘selectholders’.

While COE did propose some new ideas in their scholarly looking report,
they seem to have not considered the main point of the Supreme Court⁵
with the rigour expected of them. Additionally, a report relied upon (of Chawla
committee) is not even attached. Important fallacies doled out in the Report:

__________________________________________________________________

1 Finding and Recommendations on Regulating
Audit Firms and the Networks, October 2018

2 Page
204 of the COE Report

3 The
usual names who are not directly connected with the regulating audit firms, so
no skin in the game. Seemed like name lending.

4 One
of them enmeshed in one of the biggest fraud involving auditors in India and
those who were fined with about $1.5million by PCAOB for conducting “deficient
audits…”

5 Dated
23^rd February, 2018

1. Conflict of Interest: These
words define the biggest problems with MAF. The report collates some ‘best’
global practices (which have not stopped this menace in those jurisdictions)
and some legal provisions but lacks original thinking and way out. The problem
obviously is not legal or about the percentage of non-audit fees – it is real –
and some real answers are missing.

Conflict of interest is a complex problem. Audit firms and group
entities operate under the same brand, common ownership and/or management and
pose as ONE in the market, and sell audit and consulting services. Tell me –
can a judge advise on potential legal scheme that might come for scrutiny in
his court? The longest serving former SEC chairman⁶ has this to say:
“Consulting contracts were turning accounting firms into extensions of
management – even cheerleaders at times”. The expected rigour and
innovative suggestions are missing. Should a report sound like a nod or a wink?

2. Circuitous Entry &
Control: It is a sovereign right to allow or not to allow accounting services
under similar reciprocity with other countries. The MAFs circumvent this to
operate indirectly through ‘networks’ and entities that carry out accounting
and auditing in India to which India is yet to conclude under trade
negotiations. The effective management and/or control and significant influence
of MAF situated outside, are visible and identifiable. Here are some points
whose basis is disregarded in the report although mentioned in detail by the
Supreme Court:

a. Control and Influence: CEO
changes post-Satyam debacle and global CEO comes and meets a cabinet minister.
Recently, a CEO was changed to a person who is not even a partner of Indian
registered firm or any other Indian entity. A MAF website reads thus about the
change that seems to be carried out from overseas: “… Indian Board and ratified
by the Indian partners”.

__________________________________________________________________

6 Arthur Levitt

Another example⁷ : “All of the PwC Network Firms in India
share the same Territory – Senior Partner and Managing Partner…The PwC Network
Firms located in India share office space and telephone numbers. ..the Global
Engagement partner shall engage a senior audit professional from a PwC Network
Firm located outside India to oversee
and control the execution.

b. Business-Tests: Using brand,
marketing under the same name as MAF, cross-selling services, using
infrastructure, process, technology, people, strategy, marketing and
soliciting, influencing decisions, strategy, promotional materials, key
appointments, and other dependency etc., show that the MAFs operate in India
indirectly.

c. PCAOB Orders: If you
carefully study the reports of PCAOB they show MAFs operating in India through
LLP or Private Limited entities (not registered with ICAI) and use the Indian
ICAI registered firms for audit work. A response in respect of these audits is
signed by ‘Head of Audit’ on the letter head of such MAF. Many orders mention –
partners, locations, number of professional staff etc.

3. Chequered Legacy:
Professional malpractice, breach of contract, tax shelter fraud⁸ ..
are some of the words used by enforcement agencies. 2018 fallouts involving
MAF: Carillion⁹, Steinhoff, Colonial Bank & Federal Deposit
Insurance Corp¹⁰ , Quindell¹¹ , Ted Baker¹² ,
BHS and these stories of fines just don’t go away. Would you call such MAFs
‘reputed international brand name’¹³ ? A reasonable question that
arises is: why does the report refer to MAF as ‘potential indemnifier of
losses’ and their appointment ‘signalling a superior quality of audit’?

__________________________________________________________________

7 PCAOB Report Dated April 5, 2011 in the
matter of Pricewaterhouse

8 KPMG Tax Shelter Fraud – admitted charges of
criminal wrongdoing to help dodge $2.5 billion and agreed to pay $456 million
(about 2700 crore) involving partners, deputy chairman, and others with similar
titles.

9 Reported in UK newspapers and attributed
to UK MPs: KPMG (earning about £ 1.5 million/year) were rubber-stamping figures
that “misinterpreted the reality of business” … “in failing to exercise professional
skepticism…. KPMG was complicit in them”. The failure included “accounting for
revenue that had not even been agreed” [Some others used a more terrifying
language.]

A report, that in parts reads like a prospectus of MAFs, in praise and
even awe and seeks to wipe clean the past in disregard to the Supreme Court
directions is fit for rejection. One wonders why would a ministry report
disregard the obvious, discard the well reported and ignore what the Supreme
Court has said in such detail. After reading the conclusion given in the report
that ‘Multinational Accounting Firms’ is a misnomer, one wonders whether the
word ‘expert’ is a misnomer too!

Raman
Jokhakar

Editor

__________________________________________________________________

10 Federal Judge asked PwC to pay $625 million to
FDIC in one of the largest bank failure. Deloitte had earlier settled a claim
of $7 billion at an undisclosed amount in a fake mortgage case of TBW collapse
relating to the same matter. (www.marketwatch.com April 7, 2018)

11
KPMG fined £3.2 million after the
accounts were restated twice. This is a reduced fine as they chose to settle.

12 KPMG fined $3million by FRC for admission of
misconduct for providing expert witness services in breach of ethical standards.
(FRC website 20.8.2018)

13 Page 63

shailesh.kwebmaker

EGO – Edging God out

‘A
man wrapped up in himself makes a very
small bundle’

Benjamin
Franklin

The issues are: why is it said that if Ego is in, Ego edges God out and if so what
is Ego –what it does and how to manage it :

I believe that all success is based on Ego.
It is the one emotion which impels a person to achieve his goal. No one can
achieve anything in any field of operation without Ego. The conquerors of the
world – Alexander, Julius Ceaser, Napoleon, Ashoka and others had Ego. Ego is
the base of all activity – it is a great motivator. President Trump says:‘Show
me an individual without ego and I will show you a loser’. Let us not
forget that Gandhi’s ego was hurt when he was thrown out of the train in Africa
and it is this hurt that made him a leader. However, Gandhi knew how to manage
it and thereby became a Mahatma.

I also believe that both sinner and saint
have ego. Rishi Durvasa is known to have cursed Indra and Shakuntala
for having ignored him. Rishi Vishwamitra, giver of Gayatri,
created another heaven when his ego was hurt and hence remained a Rajarshi.
Vishwamitra became Brahmarshi only when he managed his ego. Let
us accept that a sinner commits murder because his ego is hurt. Nations
fight war when egos are hurt. No one is spared by Ego.

What does Ego do? Ego makes a person restless, capricious, dominating, self-centred,
selfish and above all, unconcerned about the impact his actions have on others.
An egoist is devoid of care and compassion and deprived of contentment despite
his success. In short, ego makes a person lonely and unhappy. An Egoist is a
seeker of success – to him `ends matter and means have no meaning’. He
deems trampling over others is his birthright. In short, Ego divides us –
breaks relationships, creates strife, destroys families and ruins businesses.
Divorces of every genre – whether in relationship or business – are based on
clash of egos.

Emerson says – ‘shadows of life are
caused by our standing in our own sunshine’. However, ego makes one a doer
and gives one an identity.

How does one
manage ego! Ashoka and
Gandhi have shown us the way. The way is : thoughts and action based on
and backed by principles, taken with care, concern and contemplation. Once an
egoist’s actions are based on these three ‘C’s the same are automatically based
on knowledge – the doer then becomes an instrument in the hands of God. Emperor
Ashoka is the finest example when after the battle of Kalinga he became an
instrument in the hands of God, developed humility and became a messenger of His
word.

The irony of Ego is that even when a person
is doing good, Ego raises its tetra head. The solution is : give up the concept
of doership–become an instrument in His hands. Do this, believe me, Ego stands
managed. This will bring peace, pleasure, happiness, success and above all
contentment which we all seek. In short :Befriend Ego.

I would conclude by quoting Dada Vaswani:

‘We
are restless until we find our rest in God’

Rest here means – surrender to God’s will.
Believe in and practice ‘let thy will be done’.

shailesh.kwebmaker

9 Section 2(14) of the Act – Sub-license of patented technical know-how does not result in extinguishment of right but sharing of rights, Income from such sub-licensing is taxable as business income.

TS-513-ITAT-2017(Bang)

Bosch Limited
vs. ITO

A.Ys: 2007-08
& 2008-09

Date of Order:
6^th November, 2017

Section 2(14)
of the Act – Sub-license of patented technical know-how does not result in
extinguishment of right but sharing of rights, Income from such sub-licensing
is taxable as business income.

FACTS

Taxpayer, an
Indian company, entered into technical collaboration agreement with its foreign
parent company (FCo). Under the agreement Taxpayer was granted non-exclusive,
non-transferable right to use patents owned by FCo for manufacturing automobile
equipment products for sale.

After obtaining
approval of FCo, Taxpayer granted sub-license of the patents to another company
situated in Iraq (FCo1) for manufacture and assembly of automotive generators
using design and know-how of FCo for lump sum consideration. While granting the
permission, FCo stipulated that Taxpayer will share sub-license feewith FCo.

During the
relevant year, Taxpayer received sub-license fee from FCo1. Taxpayer contended
that the fee was in the nature of capital gains. The Assessing Officer (“AO”)
assessed the fee as business income. Aggrieved by the order of AO, Taxpayer
appealed before CIT(A) who upheld the order of AO.

Aggrieved, the
Taxpayer appealed before the Tribunal.

HELD

– The right
to use patented technical know-how/ technology of FCo granted to Taxpayer was
non-transferable and non-exclusive. Since the right was non-transferable,
Taxpayer had to obtain permission of FCo to sub-license the right to use
patented technology to FCo1. Sub-licensing to FCo1 did not result in
extinguishment of rights of the Taxpayer to use the patented technology, but it
merely resulted in sharing of the use of technology by the Taxpayer with FCo1.

– Transfer
of capital asset involves extinguishment of ownership or right in the property
of the transferor and its vesting in the hands of the transferee. Since
sub-license did not result in extinguishment of any right of the Taxpayer,
income from such sub-license cannot be classified as capital gains in the hands
of the Taxpayer.

shailesh.kwebmaker

Practical Issues Relating To Foreign Tax Credit

In September, 2017 we dealt with various
methods of elimination of double taxation and salient feature of the Foreign
Tax Credit Rules in this column. This article covers some of the practical
issues that may arise in claiming FTC¹.

Q.1 Rule 128(1) provides
that “An assessee, being a resident shall be allowed a credit for the amount
of any foreign tax paid by him in a country or specified territory outside
India, by way of deduction or otherwise, in the year in which the income
corresponding to such tax has been offered to tax or assessed to tax in India,
in the manner and to the extent as specified in this rule:

Issue for consideration

What do you mean by
the words “deduction or otherwise”? What proof one needs to submit for claiming
the credit?

A.1 An assessee can pay
taxes either by way of withholding tax (WHT) (i.e. Tax Deducted at Source, TDS,
e.g. in case of salaries, professional fees etc.) or by way of an advance tax
or self assessment tax. WHT/TDS would be regarded as payment by deduction
whereas any other method of payment would be regarded as payment of taxes
“otherwise”.

The assessee
needs to submit an acknowledgement of online payment or bank counter
foil or challan for payment of tax or proof of tax deducted at source, as the
case may be, along with his FTC claim in form 67 before the due date of filing
Income-tax return.

_____________________________________________________________

¹ Recently
BCAS had organised a workshop on FTC which was addressed by CA. P. V.
Srinivasan and CA. Himanshu Parekh. Several issues were discussed at that
workshop. This article covers some of the important issues discussed therein as
well as some other issues that may arise in claiming FTC. Views expressed in
this article are of authors of this column only and have not been endorsed by
the workshop speakers.

Readers
are also advised to read the Article published in the August 2015 issue of the
BCAJ on “Issues in claiming Foreign Tax Credit in India”.

Q.2 Sub-rule (4) of Rule 128
of FTC provides that no credit under sub-rule (1) shall be available in respect
of any amount of foreign tax or part thereof which is disputed in any manner by
the assessee.

Issue for consideration

Whether credit shall
be available if the dispute is initiated by the revenue authorities in source
country? Whether issuance of Show Cause Notice (SCN) by revenue authorities to
challenge the rate of withholding in source country be said to be the
initiation of dispute by the revenue authority?

A.2 Once the tax is in
dispute (whether the dispute is initiated by the assessee or the tax official),
the credit may be denied and/or postponed to the year of settlement of such
dispute. Issuance of SCN is a matter prone to dispute and therefore credit may
be denied. However, in genuine cases one can approach CBDT to provide relief
u/s. 119 of the Income-tax Act, 1961 (the Act).

Q.3 Rule 128(1) provides
that FTC is allowable in the year in which the income corresponding to such tax
has been offered to tax or assessed to tax in India.

Issue for consideration

At what point in time
the income needs to be offered – Whether method of accounting is relevant or
provisions of DTAA are relevant?

A.3 DTAA provisions do not
provide for computation of income. Computation of income is always left to the
provisions of domestic tax laws. Assessee is subject to computational
provisions as per the local laws. Also the method of accounting should be as
per the provisions of the domestic tax laws. For instance, in India, the
assessee is supposed to compute his income as per the method of accounting
prescribed in section 145 of the Act read with the Income Computation and
Disclosure Standards² .

The provision for
claiming FTC is very clear and that is FTC will be available in the year in
which the corresponding income is offered for taxation in India.

Q.4 Sub-rule 7 of Rule 128 provides that “if
foreign tax credit available against the tax payable under the
provisions of section 115JB or 115JC exceeds the amount of tax credit available
against the normal provisions, then while computing the amount of credit u/s.
115JAA or section 115JD in respect of the taxes paid u/s. 115JB or section
115JC, as the case may be, such excess shall be ignored.”

There are three limbs
in this sub-rule

i) foreign tax credit
available

ii) tax payable under the
provisions of section 115JB or 115JC

iii) The amount of tax credit
available against the normal provisions.

From the provisions,
it can be seen that one has to work out whether there is an excess of (i) over
(iii). If yes, then such an excess has to be ignored while computing credit
u/s. 115JAA or section 115JD in respect of the taxes paid u/s. 115JB or section
115JC. However, sections 115JAA and 115JD nowhere suggest that foreign tax
credit is not the tax paid under MAT.

Issue for consideration

Can Rule 128 override
provisions of section 115JAA/JD?

A.4 Before we proceed to
answer the question, let us understand with the help of an example, the provisions
of denial of carry forward of the excess FTC in case of MAT or AMT provisions.

________________________________________________________-

2 Some
of the ICDSs have been struck down by the Delhi High Court in
Chamber of Tax Consultants vs. Union of India [2017] 87 taxmann.com 92.

Particulars

Amount in Rupees

Tax as per normal provisions of the Act

1000

MAT payable as per section 115JB

1500

Foreign Tax Credit

1200

Excess credit against MAT due to FTC Not allowed to be
carried forward

200

FTC Rules are framed
under delegated powers and hence cannot override provisions of Act.

The Delhi High Court
in case of National Stock Exchange Member vs. Union of India (UOI) and Ors.
on 7^thNovember, 2005 (Delhi HC) listed following order of hierarchy
in India:

“In our country this
hierarchy is as follows:-

(1) The Constitution of India.

(2)Statutory Law, which may be either Parliamentary Law or law made
by the State Legislature.

(3) Delegated legislation which may be in the form of rules,
regulations etc. made under the Act.

(4) Administrative instructions which may be in the form of GOs,
Circulars etc.”

In case of Ispat
Industries Ltd. vs. Commissioner of Customs, Mumbai (29^th September
2006) the Supreme Court held that “if there is any conflict between the
provisions of the Act and the provisions of the Rules, the former will prevail.”

Q.5 Some countries follow
financial year which is different from the Indian financial year (i.e. April to
March). For example, USA follows calendar year. Therefore, though the income
will accrue and be chargeable to tax in India the effective rate at which tax
is payable in source country is not determinable at the time of filing of
return in India.

To illustrate, the
effective rate of tax in respect of income accruing to Mr. B from USA in
calendar year 2017 will be determined only post 31^st December 2017
and therefore for there will be problem is applying effective rate of tax for
claiming FTC in India, in respect of income from 1^st Jan. 2017 to 31^st
March 2017, the return for which will be due on 31^st July 2017.

Issue for consideration

How would the
statement in Form 67 be filed in such case and how credit for tax payable in
source country be availed?

A.5 In the above case, the
credit of taxes on the income earned during Jan – Mar 2017 would be calculated
considering the taxes paid before the filing of return. The calculation of
effective tax rate would take into account the taxes deducted at source and
advance taxes paid up to date of filing income-tax return in India. However, in
most of cases the effective tax rate would change especially where there is
other income or income where the tax is not deducted at source. In such
scenario, revised Form No. 67 and revised Income tax return has to be filed by
the assessee calculating the final effective tax rate.

Q.6 It is a settled
position that where there is a DTAA the taxes covered under the said DTAA would
be allowed as a credit. And where there is no DTAA, unilateral credit of
income-tax paid in the foreign country will be allowed as credit u/s. 91 of the
Act. Clause (iv) of Explanation to section 91 of the Act defines the term
“income-tax” as follows: – “the expression income tax in relation to any
country includes any excess profit tax or business profit tax charged on the
profits by the government of any part of that country or a local authority
in that country”.(emphasis supplied). What do we mean by the term “any
part of that country or a local authority”? Does that mean income tax levied by
the state government or prefecture would be allowed as a credit u/s. 91 of the
Act?

A.6 In the USA, income-tax
is levied by both, the central government (Federal income-tax) and state
government (state-tax). However, the India-US tax treaty covers only Federal
tax. Therefore a question arises whether an assessee can claim credit of state
taxes in India? In the case of Tata Sons [2011] 43 SOT 27, the Mumbai
Tribunal held that as per provisions of section 90(2) of the Act, the assessee
is entitled to opt for the beneficial provisions between a tax treaty and the
domestic tax law. Since section 91 is more beneficial, assessee can claim
credit of state income tax. Relevant excerpt from the Ruling is reproduced here
in below:

“Accordingly, even
though the assessee is covered by the scope of India-US and India-Canada tax
treaties, so far as tax credits in respect of taxes paid in these countries are
concerned, the provisions of section 91, being beneficial to the assessee, hold
the field. As section 91 does not discriminate between state and federal taxes,
and in effect provides for both these types of income taxes to be taken into
account for the purpose of tax credits against Indian income tax liability, the
assessee is, in principle, entitled to tax credits in respect of the same.”

The ratio of the
above decision will apply in relation to any other country where besides
central or federal income-tax, states also have power to levy income-tax.

However, section 91
covers only income-tax and therefore any other indirect tax such as VAT,
Turnover Tax etc. will not be available for credit. However, Bombay High Court
in the case of K.E.C International Ltd (2000) 256 ITR 354 held that such
indirect taxes are allowed to be deducted as business expenditure without
attracting provisions of section 40(a)(ii) of the Act for disallowance.

Q.7 Co. “A” incorporated in
Singapore is considered to be a tax resident of India u/s. 6 of the Act as its
Place Of Effective Management (POEM) is situated in India. Company “A” has
royalty income from the USA on which tax has been withheld in USA. Can Company
“A” claim credit of withholding tax in USA in India? Which treaty would be
applicable – India-USA, India-Singapore or Singapore-USA?

A.7 Since Co. “A” is
considered to be a tax resident of India, it would be taxed on its world-wide
income, including royalty income from USA. Therefore, Co. “A” can claim credit
of withholding tax in USA under provisions of the India-USA tax treaty. Even
Article 4 of a tax treaty considers residence based on POEM.

Q.8 As per the FTC Rules,
the credit shall be available against the amount of tax, surcharge and cess
payable under the Act but not in respect of any sum payable by way of interest,
fee or penalty. However, it is not clear that whether interest or penalty paid
in foreign jurisdiction will be allowed as credit. Can one argue that interest
and penalty is at par with tax paid, especially the interest element?

A.8 It seems difficult to
consider interest or penalty at par with income-tax and claim credit. At best
one may try to claim them as business deduction. However, such a claim is
fraught with possibility of litigation.

Q.9 Certain income which may
be exempt in a foreign country may be taxable in India. However, if the DTAA
provides for tax sparing clause, then credit for foreign taxes spared will be
available on deemed payment basis. However, the FTC Rules provide only for the
ordinary credit. How can one reconcile this dichotomy?

A.9 Income-tax Rules cannot
override provisions of the Act (Please refer to answer to Q.4 supra). FTC
Rules restricts the credit of foreign taxes by providing only one mode of
credit and i.e. Ordinary Credit; whereas many tax treaties provide for full
credit or tax sparing method. In case, where tax treaty is applicable, the
assessee will be eligible to opt for treaty provisions (being more beneficial) and
claim credit of foreign taxes on deemed basis. The practical difficulty would
be putting up claim in Form 67 which does not contain any details regarding tax
sparing. The assessee can lodge claim by filing a manual request.

Q.10 How does one compare the
tax rate applicable in India on a foreign sourced income as in India income
from all sources is grouped together and taxed based on applicable slab (for
individuals and HUFs)? Also there may be a situation that there is a loss from
one source or country and profit from another source or a country? Whether one
needs to aggregate income from all sources and different countries or is to be
computed separately vis-à-vis each source and each country?

In the above
situation what would be the correct method to avail the credit – on the basis
of a) lower/lowest slab rate; b) higher/highest slab rate; and c) average rate?

A.10 In this case, two views
are possible. According to one view, one may compare the foreign source income
with the highest slab rate on the premise that it is open to assessee to take a
beneficial tax provision while claiming a foreign tax credit. As per the other
view, one may aggregate income from all sources, arrive at an average rate of
tax, then compare the same with the foreign tax rate and claim credit of lower
of the two.

As far as source by
source computation of income is concerned, it is interesting to note the
observation of the Supreme Court in case of K. V. A. L. M. Ramanathan
Chettiar vs. CIT [1973] 88 ITR 169. In this case, assessee had earned
business profits from rubber plantation in Malaysia amounting to Rs. 2,22,532/-
and had a business loss in India of Rs. 68,568/- and other income of Rs.
39,142/-. The AO allowed double taxation relief on a sum of Rs. 1,92,816/-
(2,22,532+39,142-68,568). However, Commissioner allowed relief only on Rs.
1,53,674/- (i.e. 2,22,532-68,568) stating that only net business profits
suffered double taxation. Even ITAT and High Court concurred with this view.

However, the Supreme
Court ruled in favour of the assessee and held that such source by source
computation is not envisaged in the Income-tax Act, 1922.

Relevant extract of
the decision which is very relevant, is reproduced herein below for ready
reference:

“The income from
each head u/s. 6 (the reference is to Income-tax Act, 1922) is not under the
Act subjected to tax separately, unless the legislature has used words to
indicate a comparison of similar incomes but it is the total income which is
computed and assessed as such, in respect of which tax relief is given for the
inclusion of the foreign income on which tax had been paid according to the law
in force in that country. The scheme of the Act is that although income is
classified under different heads and the income under each head is separately
computed in accordance with the provisions dealing with that particular head of
income, the income which is the subject matter of tax under the Act is one
income which is the total income. The income tax is only one tax levied on the
aggregate of the income classified and chargeable under the different heads; it
is not a collection of distinct taxes levied separately on each head of income.
In other words, assessment to income-tax is one whole and not group of assessments
for different heads or items of income. In order, therefore, to decide whether
the assessee is entitled to double taxation relief in respect of any income,
the consideration that the income has been derived under a particular head
would not have much relevance.”

From the above
discussion, it appears that one need to aggregate income from all sources and
find out effective rate of tax in India which then needs to be compared with
the rate at which income is taxed in the foreign jurisdiction and the lower of
the two shall be allowed as foreign tax credit.

However, specific
language of section 90(2) which gives an assessee right to choose the
beneficial provisions between a tax treaty and the Act, may lead us to a
different result.

As far as aggregation
of income from different countries is concerned, it is interesting to consider
the observations of the Bombay High Court in the case of Bombay Burmah Trading
– 259 ITR 423. In this case the assessee had business income from the Tanzania
branch and loss from Malaysia branch. The AO wanted to consider FTC based on
net foreign income (i.e. setting off of loss from Malaysia against income from
Tanzania). However, the High Court ruled in favour of the assessee stating that
income from each country needs to be considered separately and that they cannot
be aggregated for claiming FTC in India.

The Honourable High
Court in this case in the context of section 91 held that “If one analyses
section 91(1) with the Explanation, it is clear that the scheme of the said
section deals with granting of relief calculated on the income country wise
and not on the basis of aggregation or amalgamation of income from all foreign
countries” (Emphasis supplied).

Though the above
decision is in the context of section 91 (i.e. unilateral tax credit), one can
apply this analogy to a bilateral treaty situation also, as the method of
granting tax credit is within the purview of the domestic tax laws. In this
context, it is interesting to go through the provisions of section 90 of the
Act. Relevant extract of the said section is as follows:

“90. Agreement with foreign countries

(1) ] The Central
Government may enter into an agreement with the Govsernment of any country
outside India-

(a) for the granting
of relief in respect of income on which have been paid both income- tax under
this Act and income- tax in that country, or

(b) for the avoidance
of double taxation of income under this Act and under the corresponding law
in force in that country,…… (Emphasis supplied)

From the above
provisions, it is clear that the foreign tax credit is to be granted vis-à-vis
each country as per the specific agreement with that country.

Q.11 Whether credit for the
income tax paid in source country on the basis of presumptive basis (i.e. in
the nature of fixed amount irrespective of income) be available against the
income tax payable in India?

A.11 In case of a country
where no tax treaty exists, the credit will be available u/s. 91, as long as
income has suffered taxation in the source country. However, in case where
India has signed a tax treaty, the FTC will be subject to the provisions of the
concerned tax treaty. Almost all treaties invariably provide that relief from
double taxation will be available only in respect of those incomes which have
been taxed in accordance of the provisions of that agreement. Even though
treaties provide only distributive rights of taxation, maximum rate of tax in
the source state is prescribed in respect of some types of income, e.g.
dividends, interest, royalties and fees for technical services. As long as
presumptive taxation does not increase the respective threshold, the credit
should be available. For example, if the treaty provides that rate of tax on
royalty should not exceed 10% in the state of source, but the assessee has
suffered 15% withholding tax under the domestic tax law of the source state,
then the credit in the residence state may be either denied or restricted to
10%.

Q.12 How does one compute FTC
in case where in a source country (e.g. USA) joint returns are filed by the
taxpayer, whereas in India concept of joint return in not applicable?

A.12 In such as case, the
taxpayer need to find out the effective or average rate in the country wherein
the joint return is filed, and then compare the same with an effective rate in
India, after including the respective share of income. FTC will be allowed for,
at the lower of the two rates.

Q.13 FTC rules are silent on
the methodology of allowing credit due to the difference in characterization of
income between India and other country. How does one classify income for FTC
purposes – As per provisions of the Act or DTAA or source country?

A.13 A situation may arise
where an Indian company deriving Fees for Technical Service (FTS) income from
UK pays 10 per cent withholding tax as per India-UK DTAA. However, as per the
AO, the said income is in the nature of business profits and in absence of PE,
the said income ought not to have been taxed in UK as FTS and therefore deny
FTC in respect of the said income. One of the solutions in such a case may be
invocation of provisions of Mutual Agreement Procedure by the assessee.

Similarly foreign
country may also deny credit of taxes paid in India which are in accordance
with the treaty provisions. Consider following examples:

(i) An Indian company may
withhold tax on payment of export commission u/s. 195 of the Act considering it
as Fees for Technical Services. However, the foreign country may consider that
payment as business income/profits in the hands of the recipient and thereby
deny the credit of taxes withheld by an Indian company. Even if the Indian
company has wrongly applied article on FTS under a tax treaty for withholding
of tax, the other government can deny the credit.

(ii) Payment for software,
which is considered as a royalty in India is most prone to litigation as most
countries consider software as goods and therefore apply the PE test.

Q.14 What are the
consequences if a tax payer forgets to upload Form 67? Whether consequence will
change if the same is furnished in the course of assessment before the AO?

A.14 Rule 128 (8) make it
mandatory to submit a statement of income from a country or specified territory
outside India offered for tax for the previous year and of foreign tax deducted
or paid on such income in Form No.67 and verified in the manner specified
therein.

CBDT issued a
Notification No. 9 dated 19^th September, 2017 containing the
procedure for filing a Statement of income from country or specified territory
outside India and foreign tax credit. The said Notification has made it clear
that “all assesses who are required to file return of income electronically
u/s. 139(1) as per rule 12(3) of the Income tax rules 1962, are required to
prepare and submit form 67online along with the return of income if credit for
the amount of any foreign tax paid by the assessee in a country or specified
territory outside India, by way of deduction or otherwise, is claimed in the
year in which the income corresponding to such tax has been offered to tax or
assessed to tax in India.”

From the above it is
clear that as of now an assessee has no choice but to file form 67 online.
Failure to file form 67 may result into litigation. However, this requirement
being procedural in nature, Courts may take a lenient view of the matter.

Q.15 Under what circumstances
FTC can be denied?

A.15 In following
circumstances FTC may be denied:

(i) Non-compliance of any
documentation, procedure or condition of FTC rules;

(ii) Non payment of taxes
as per provisions of a tax treaty (Income characterisation issues – Refer
answer to Q.14)

(iii) Excess tax paid under
FATCA. The USA is levying 30% withholding tax on US sourced income, in case of
those entities who have failed to comply with provisions of FATCA. Such an
excess amount will not be eligible for FTC in India.

(iv) Excess taxes paid over
and above treaty rates, for example 20% tax paid u/s. 206AA of the Act for
non-compliance of PAN or other requirements.

(iv) Local body taxes, city
or church taxes, state level taxes or any other taxes not in the nature of
direct tax and taxes not covered by the bilateral tax treaty. For example,
Equalisation Levy by India. At best, they may be allowed as business
deductions. (Refer answer to Q.6)

Conclusion

Rule 128 (1) provides that FTC shall be
allowed to an assessee in the manner and to the extent as specified in this
rule. It is perfectly alright for rules to lay down the procedure or
method of claiming FTC. However, can they unilaterally limit the extent of
foreign tax credit dehors provisions of the bilateral tax treaty. Will such a
provision not make rules ultra-vires the Act?

The stringent requirement of online
submission of form 67 should be relaxed and the assessee should be allowed to submit
the same offline and/or even during the course of assessment proceedings. In
any case, the finality of the FTC is determined much later after submission of
the tax return in India.

FTCR have addressed several issues, yet many
have remained unaddressed. It would be desirable if government revisits
provisions of FTCR to make them more robust and comprehensive to reduce
litigations in days to come.

shailesh.kwebmaker

Bravo, Bravi

As you read
this, 2017 will start to slide into memory. The common, indelible and
unquestionable memory of 2017 for professionals, businesses and tax
administrators will be GST. As we say, so long 2017, this editorial is
dedicated to that landmark transition: to say Bravo to every tax professional
and government and Bravi¹ to
the millions of tax payers.

Bravo – Governments and Professionals

The governments,
at states and centre, deserve our deep regard for concluding the economic and
tax integration of India after 70 years. Future generations will look back in
disbelief at the type and manner of fragmented taxation systems that thrived
for so long. Let me walk you through it: 1944 (Central Excise) to 1956 (Central
Sales Tax) to 1965 (Octroi) to 1986 (MODVAT Credit) to 1994 (Service Tax) to
2002 (Service Tax Credit) to 2005 (VAT) to 2017 (GST). If there was one synonym
of GOOD in the definition of G(Good)ST, this is it. Bravo!

A supply
of booming round of applause to professionals – for having braved the onslaught
of compliance overdose and GSTN goof ups in first 5 months. If there was one
noun before which the adjective SIMPLE can be placed, it would be –
unbelievable – as in simply unbelievable. Bravo!

Bravi – Taxpayers

Bravi – millions of tax payers! For going through
the scary roller coaster rides by whatever name called: ‘teething troubles’,
‘invoice uploading’, ‘lame excuses’ and more, due to a
substandard compliance protocol. Those traders, manufacturers and the so called
‘informal’ sector² will prove
that in spite of being subjected to such tax compliance catastrophe, they will
come out and shine bright! While there is noise on return of ‘GDP growth’, the
‘informal’ is what really gives work, dignity and livelihood to the millions
even if they don’t seem to give as much taxes. Bravi!

GST – A five month old baby

The GOOD of GST
is irrefutable, desirable and long overdue! The SIMPLE of GST is unverifiable,
contestable and hazy. GST is another example of an opportunity undermined. GST
could have transformed law making into the greatest enabler of doing business
at every level and create a solid revenue base for our nation. This was shot
down by legislative negligence in bringing out a substandard product and
executive misadventure of unleashing it before testing the GSTN. We can now
hope that both these do not lead us to judicial trauma of litigation³ and target driven revenue collection.
However, let’s not lose hope, for GST is still a baby!

Taking that
analogy, GST is a premature child, born to its ‘biological’ parents
Excise/Service tax and VAT, both having below average antecedents. Its genetic
makeup does mirror its family lineage. Some serious surgeries⁴have
already been administered by super specialists⁵ on this baby. We hope that these surgeries in
the early stages will allow the baby to grow up into a well formed, pleasing
and healthy toddler. Tax compliance professionals had to play the role of baby
sitters and nannies to keep the baby safe and healthy, succumb to its tantrums
and cleaning the mess it made.

However, this
baby is a darling of everyone! We have made suggestions and recommendations for
its sound upbringing. We hope that by its first birthday, when it will start
walking and talking, it will be more cheerful, out of the ICU and will be as
playful as a young one can be! If I can speak for most, we all look forward to
a refined version of GST with excitement and anticipation!

So long 2017

As the year
comes to a close, let me mention that this is the best time ever in the history
of human race. There has never been a time like the one we are living in! I
wish you the best ever 2018! Whatever be your new year resolutions – be it diet
and exercise, to reading books, to taking more time off work, to giving back to
the society, to learning a new skill, … to becoming the person you ever wanted
to be – I wish they all come true!

Raman
Jokhakar

Editor

_______________________________________________________________________

1 Plural of Bravo, often used at the end of musical performances.
2 Informal sector is said to provide 80-90% of all jobs and therefore dignity and economic freedom, while the 10-20% of large tax payers gives 80% of tax revenue but fewer jobs and fast switching to automation, robotics and AI.
3 Government is the largest litigant in the country.
4 Numerous notifications and circulars issued to amend the new law
5 The GST Council

shailesh.kwebmaker

Life Skills

We are living in an era where there
is great focus on skill development. Unfortunately, skills are interpreted only
to mean those that could be easily monetised. This distorts the whole paradigm
of life and makes it money centric. Wise men have professed that the purpose of
knowledge should be to educate and help human beings to have a balanced view of
life. It should help human beings to fully enjoy the experience of life. It
should make him understand that money is a medium of exchange and does not
assure happiness. Such a balanced view of life can be made possible through
right education that teaches us to develop “Life Skills” to follow the path of
wisdom.

What are Life Skills?

Life skills are those skills that
are necessary for full participation in everyday living. They help us to live
life with grace, positive mind and gratitude. These are the skills that help us
to deal with challenges in life effectively and attain happiness by developing
objectivity. Life takes each individual through experiences to evolve him.
Knowledge of life skills can give one maturity to understand this process and
attain stoicism towards the happenings in his life.

Life Skills can be classified into
two types; “Gross” and “Subtle”. At gross level, these are the skills
that deal with inter personal skills, effective communication, time management,
problem solving… etc. These skills can give one an edge in dealing
with challenges in daily life. Their importance though cannot be denied, what
could be a life changing experience for the human being is the understanding of
life skills at subtle level that teaches one how to live rightly. These
skills are about the way we should deal with life as it comes. They are
discussed below.

Life is a Teacher

Life is a gift from God to give you
an opportunity to evolve. Experiences that you go through in life, whether good
or bad, are preordained to prepare you for better future. The moment you learn
to appreciate this, your resistance and negativity to the untowardly happenings
around you vanishes. You make a conscious choice of flowing with the nature
with positive mindset. You develop faith that every dark night is certain to be
followed by bright sunshine and the darkness you are enveloped into will soon
give way to the golden rays of sun. You learn a cosmic truth (and a life skill)
so important, that the purpose of darkness was to let you experience the true
joy of sunshine. This learning helps you deal with challenges head on and live
life without any despair.

Love and Accept Yourself

The world we live in is not perfect.
In imperfection lies the beautiful perfection. There is a harmony even in
imperfection. Each individual is unique in his strength and weakness and
complements another such creation of the God. The life skill that can give one
a great strength is an understanding that one cannot live life with regret and
guilt of inadequacy. It teaches that comparison of self with any other is inapt
and against the cosmic law. One needs to focus on one’s strengths rather than keep on trying to improve one’s
weaknesses. This enhances one’s self esteem and teaches one to love
himself. It is obvious that when one loves oneself without any ego as a beautiful
and divine creation of God, one also learns to love others and accept them as
what they are. This shift makes him create a win-win situation even under most
difficult circumstances. With this life skill one learns to accept that there
is a place for divergent opinions without any personal bias and each could be
justified on his respective opinion. Failure to get a desired result in such
cases does not beget guilt of personal inadequacy or anger and frustration of
failure. As a consequence, one’s confidence increases to tackle even difficult
people, and situations. _

(To be concluded next month)

shailesh.kwebmaker

Works Contract – Rate Of Tax Vis-À-Vis Nature Of Goods Transferred

Introduction

Taxation of Works Contract
has always remained a debatable issue even under the VAT era. As per the position
prior to GST, Works contract was separate subject by itself as it was
considered as deemed sale. Article 366 (29A)(b) provided the definition of
‘works contract’ which is as under:

(29A) tax on the sale or
purchase of goods includes:-

(a) …

(b) a tax on the transfer of property in
goods (whether as goods or in some other form) invoked in the execution of a
works contract;

As per the definition,
‘transfer of property in goods’ is considered as deemed sale. The issue arose
whether it is single transaction attracting one rate of tax on the total
contract value or transfer of various goods involved in the same so as to
attract respective rates on the goods so transferred? There are a number of
judgements throwing light on the given disputable issue.

Recent judgement of M.S.T. Tribunal

Recently, similar issue
arose before Hon. M.S.T. Tribunal in case of Sai Construction (S.A.No.375
of 2016 dated 31.8.2017) and the period involved was 2008-2009. The
short facts of the appeal narrated by the Hon. Tribunal can be reproduced as
under:

4. Shri V. P. Patkar,
learned Advocate, has explained the entire case and process of work done by the
appellant. The appellant is engaged in execution of works contract in general
and construction contract in special. During the period under assessment,
appellant has constructed road bridges. Contracts were awarded by Executive
Engineer Public Works Department, Miraj. For the purpose of construction of
said bridge, appellant purchased cement,
and metals. Said material is mixed together which is normally called
mortar and used in the construction of bridge. Appellant is assessed u/s. 23(3)
and taxable sale of goods is calculated according to the provisions u/r. 58.
According to Shri Patkar, lower authorities have erred in levying tax @ 12.5%
on sale of ‘sand’ and ‘khadi’ used in the execution of contract. According to
the appellant, sand and khadi is taxable @ 4%. Hence, it should be taxed
accordingly. Concrete prepared from sand and khadi is not purchased. It is
prepared during the process for use in the construction of bridge. Hence
concrete is not purchased by the dealer and not liable to tax @ 12.5%. Shri
Patkar, learned Advocate relied upon various judgments and authorities. We will
mention and discuss the same as we proceed further.

The arguments of the
department are also narrated by the Tribunal as under:

5. Shri S. S. Pawar,
learned Asst Commissioner of Sales Tax (Legal), appeared on behalf of revenue,
he has vehemently argued the case and also relied on various judgments of
different High Courts and Apex Courts. According to Shri S. S. Pawar, it is
important to ascertain what are the goods actually used in the execution of
said contract. The goods used in the contract are liable to tax u/s. 6 of MVAT
Act. The appellant has purchased sand, khadi, cement and they are mixed in
specified proportion. This mixture is called ‘concrete’ or ‘mortar’. Mortar is
then poured in the designed patterns at site. Then what is used in contract is
important. Shri Pawar further stated that, according to the theory of
accretion, goods accreted at the site are subject matter of tax according to
the deeming provisions as promulgated in sub clause (b) of clause 29A of
Article 366 of the Constitution. Transfer of property in the goods under clause
29A(b) of Article 366 is deemed to be sale of the goods involved in the
execution of works contract by the person making the transfer and the purchases
of those goods by the persons to whom such transfer is made. It is not
necessary to ascertain what dominant intention of the contract is.

Based on above two sets of
arguments, the Tribunal referred to historical background of the works contract
taxation and also analysed various judgements cited before it. After having all
the discussion, the Tribunal observed as under:

10. Considering all judgments
and authorities, we have come to the conclusion that, after 46^th
amendment to the constitution it has become possible for the state to levy
sales tax on the value of goods involved in the works contract in the same way
in which the sales tax was leviable on the price of the goods and material
supplied in a building contract which has been entered into two distinct and
separate parties as goods and services (Builders Association of India,
1989)(SC) provisions in section 2(24)(b)(ii) clearly interpret that, sales
means “transfer of property in goods whether as goods or in some other form
involved in the execution of works contract.” It clearly shows that, goods can
be used as goods in the same form or in some other form, it does not make
difference. It clearly indicates that, the goods which are appropriated to the
contract in which property is transferred are liable to tax in the State. When
the property is transferred to the buyer, it may be in some other form.
According to lower authorities, the theory of accretion is important. In the
present case, movable goods in the form of mortar is accreted as per section 6
of the W.C.T. Act, 1989, but not under the MVAT Act, 2002. We do not agree with
this contention of the revenue. Sand and Khadi purchased and appropriated to
the contract of construction of bridge is important aspect for levy of tax.
When transfer of property in the goods is to be held liable to tax then, goods
appropriated to the contract are important. In the present case, sand and khadi
are appropriated to the contract, in which property is transferred, as these
are the goods involved in the execution of bridge construction contract. In
W.C.T. Act, 1989, levy of tax explained in section 6. In section 6 goods were
liable to tax as per their form. Whether goods are sold in the same form or
otherwise was an important aspect but under the provisions of the MVAT Act and
as held by the Apex Court in Builders Association case (cited supra)
state is entitled to levy tax on the value of goods involved in the execution
of contract in the same way in which sales tax was leviable on the price of
goods and material supplied in building contract.

11. Considering all these
aspects and discussions made above, lower authorities have erred in applying
the rate of tax on the goods involved in the execution of contract. In our
considered opinion, in the present case, sand and khadi involved in the
execution of contract is liable to tax at price as arrived at after deducting
various items as per Rule 58 of MVAT Rules. Sand and khadi is used in the form
of mortar and thereafter the transfer of property takes place in the form of
bridge does not make any difference. Constitution article 366(29A)(b) clearly
says that, it is a deemed sale of goods involved in the execution of contract
whether as goods or in some other form. Hence, the tax levied @ 12.5% on
concrete/mortar is liable to be set aside. It requires fresh calculation at
specified rate of sand and khadi. Hence, the matter is required to be remanded
back to the first appellate authority.

Thus, the Tribunal has
provided useful guidelines about nature of goods transferred in a works
contract. It will be useful for discharging correct tax liability.

Conclusion

Under Works Contract, there
are a number of disputes including whether the transaction is a works contract
or not? Similarly, there are disputes about valuation of goods transferred. As
far as rate of tax is concerned, there are also a number of disputes. However,
by the above judgement, there is a very useful guideline to interpret nature of
goods for the purpose of applying rate of tax. _

shailesh.kwebmaker

GST – First Principles On Valuation (Part-1)

One of the
important aspects of taxation is the determination of the value on which tax is
sought to be computed and collected. The
Goods & Service Tax law has been designed on value addition principle and
has adopted the ‘transaction value’ approach for defining the tax base. In view of the number of concepts in
valuation, the article has been split into two parts – this article captures
the basic concepts and issues in valuation and the next article would capture specific
instances of valuation.

A) Gist
of the Valuation provisions

The scheme of valuation hovers around
‘transaction value’. Section 15 of the Central/ State GST law contain the
valuation provisions and the scenarios where an adjustment should be made to
arrive at the taxable value. The entire
scheme of valuation can be depicted by way of a flow chart as under:

B)
Analysis of Valuation Provisions

a) Meaning of the term
‘Transaction Value’

Section 15 states that the taxable value
would be the transaction value of supply i.e. ‘price paid or payable’ for the
supply of goods or services. Though the
term ‘price’ is not defined in the GST law, the Sale of Goods Act, 1930 defines
price to mean ‘money consideration’. It
is the price which is contractually agreed between the parties to the
supply. The phrase ‘paid or payable’
implies that the consideration would include all sums which have accrued to the
supplier, irrespective of its actual payment.
As per Customs Interpretative notes to the Customs Valuation Rules, the
said phrase refers to total payment made by the buyer to or for the
benefit of the seller. Payment need not
always involve transfer of money and would include payments through letter of
credits, negotiable instruments, settlement of debt, etc.

b) Consideration – Nexus
Theory

The term consideration has been defined in
section 2(31) of the CGST/ SGST law to refer to any payment (monetary or
non-monetary) or monetary value of an act or forbearance, ‘in respect of’
or ‘in response to’ or ‘for inducement of ’ the supply of goods
or services. It refers to the
counter-promise received in response to the supply and it is immaterial whether
such counter-promise is in monetary or non-monetary form.

On a reading of the definition of
consideration, it can be inferred that a nexus between the payment and the
supply is essential to term it as consideration. The italicised phrases indicates this
requirement. In view of the clear
definition of ‘consideration’, it can be contended that the decision of the
Hon’ble Supreme Court in CCE, Mumbai vs. Fiat India Pvt. Ltd.
would no longer apply¹. Therefore, where prices are subsidised or
set below the cost (such as market penetration sales), it would still be termed
as sole consideration, unless the supplier has received any other direct
benefit for the said supply.

Activities
undertaken by the buyer on his own account are not to be considered as indirect
payments to the seller, even-though that might be regarded as resulting in a
benefit to the seller. As an example,
advertisement expenses incurred to advertise aerated products (finished goods)
manufactured by a third party bottler were held to be excludible from
assessable value of concentrates (which are raw materials) manufactured and
sold under an agreement with the bottlers (CCE, Mumbai v. Parle
International Ltd.²). These costs are incurred by the
concentrate manufacturer on his own account and not as an indirect payment to
the bottler of goods.

1 2012 (283) E.L.T. 161 (S.C.) – The Court had
interpreted the term ‘consideration’ to include market considerations/ factors
which influence price, such as reduction of price for market penetration.
Accordingly, it held that price was not the sole consideration as market
penetration was an additional consideration for deciding the price.

c) Price to be sole consideration

According to Black laws dictionary, ‘sole’
refers to single, individual, separate as opposite to joint. By sole, the legislature requires that price
should be the lone consideration for it to be accepted as the transaction
value. It should not be adversely affected by any supplementary or ancillary
transaction. As per Customs
Interpretative Notes, price would not be regarded as being the sole
consideration, where the seller establishes or places a restriction on the
buyer that sale of goods is conditional to purchase of other goods, and
therefore, reference to valuation rules may be warranted. Further, if money
consideration is affected by any other non-monetary payment or any act or
forbearance, then price is not
considered as a sole consideration and reference should be made to the
valuation rules.

Where price is not the sole consideration
(in case of a non-monetary component in the transaction) or where price is not
determinable, Rule 27 is to be invoked.
A sort of an hierarchial valuation structure has been provided where
subsequent clauses would apply only if the preceding rule fails to provide
reliable basis of valuation:

Once a comparable transaction is identified,
certain adjustments may be required to bring parity for ascertainment of value,
such as:

– Difference
in commercial level of supply

– Difference
in commercial terms (such as freight, insurance, warranty, etc.)

– Difference
in product characteristics (additional features, add-ons, etc.)

In the above flow chart, Open market value
(OMV) would refer to ‘full money value’ of the goods/services supplied at the
same time when the supply being valued is made.
Comparable value (CV) would refer to value of goods or services of like
kind and quality under similar commercial terms. Substantial resemblance to the
subject supply would suffice while determining comparable value. It may be
worth appreciating that the law has made a subtle difference between OMV and
the Comparable Value. This can be
tabulated as follows:

Parameter

Open Market Value

Comparable Value

Price of

Identical Goods

Similar goods

Degree of Comparability

Very High

Substantial resemblance

Time Factor

OMV at the same time of supply

No specification

Priority

Higher

Lower

To cite an example, if a Company is valuing
a related party transaction of say ‘Surf Excel’ washing powder, one cannot
directly adopt the market value of ‘Ariel or Tide’ since these are only
comparable products. The valuation
provisions require that an attempt should first be made to ascertain the market
value of Surf Excel itself, at the same time at which the supply under
consideration is being made. It is only
in the absence of such a market value, should the comparable values of either
Ariel or Tide be adopted (off-course with the justification that they share a
similar reputation). This is more or
less in line with the principle laid down in the Customs Valuation Rules where
a priority is given to identical goods (i.e. goods are same in all respects except
with minor differences not having a bearing on value) over similar goods.

d) Transaction to be between
unrelated parties

Price would be adopted as the transaction
value only if the supply is between unrelated parties. Explanation to the said section deems, inter-alia,
the following persons as related parties:

a. Persons are officers or
directors in one another’s business

b. Persons are legally
recognised partners – say joint venture partners

c. Employer and their
employees

d. One of the parties
directly or indirectly controls the other or they are controlled by a third
person or they together control a third person

e. Members of same family

f. Sole agent or
distributor or concessionaire would be deemed to be related.

The said definition has been borrowed from
the Customs Valuation rules. In cases
where the transaction is between related parties, Rule 28 requires the assesse
to follow the similar pattern as applicable in Rule 27 (above). By way of a second proviso, a concession is
provided by way of an assurance of acceptance of invoice value in cases where
the recipient of such supply is eligible for full input tax credit. It may be interesting to note that the
proviso does not explicitly state whether the full input credit should be
examined at the entity level or at the invoice level eg. A sells to its related
entity B certain goods. B is entitled to
full input tax credit at the invoice level (T4 bucket of Rule 42) but avails
proportionate credit at the entity level.
A view can be taken that the test of full input tax credit should be
examined at the invoice level and not at the assesse level. Simply put, if the recipient is able to justify
that the credit is exclusively for taxable supplies i.e. (for inputs or input
services), then valuation in related party transactions cannot be questioned.
This is purely on the rationale that any under-valuation would be revenue
neutral since the output tax at the supplier’s end would become the input tax
credit at the recipient’s end.

e) Principal-Agent Transaction
for supply of Goods (Rule 29)

Transaction of supply of goods, inter-se,
between the principal and agents have been deemed as supply transactions in
terms of entry 3 of Schedule I of the CGST/ SGST law. The valuation rules would be invoked in the
absence of a ‘price’ between the principal and agent. Rule 29 provides for an option of adopting
the OMV or 90% of the re-sale price of the goods by the supplier.

f) Common provisions for Rule
27, 28 & 29 (Rule 30 & 31)

The valuation rules also provide a last
resort (in cases where value is in indeterminable under the preceding rules)
under Rule 30. The said rule prescribes
that cost of ‘production/manufacture’ or cost of ‘acquisition’ or cost of
‘provision of services’ with 10% mark-up can be adopted as the transaction
value. The rules do not provide for a mechanism to determine such costs. In such cases, it may be advisable to apply
the generally accepted accounting/costing standards³. An indicative
matrix of costs which may be generally included or excluded has been provided
below:

Manufacturing

Trading

Services

Direct
RM Costs

Purchase
Costs

Direct
Salary Costs

Direct
Labour Costs

Inward
Logistics Costs

Other
direct overheads allocable to the service

Allocated
/ Identified Manufacturing Overhead Costs⁴

Product
loss within acceptable limit (such as evaporation, etc)

Project
specific costs

Know-how
/ royalty for production

Loss
of Goods in Storage

Outward
logistic Costs

Administration
Costs

Sales
& Marketing Costs

Financial
Costs

Brand/
Marketing Royalty

After
Sales Support Services

Rule 31, as residuary rule provides that
valuation should be made keeping in line with the valuation principles outlined
in the preceding rules. The purpose of Rule 31 is to ease the valuation
mechanism in the case of failure of the preceding rules to arrive at a
value. It must be appreciated that this
rule is not a ‘best judgement assessment’ as it would still require the person
invoking the valuation to establish failure of preceding methodologies and also
give a justifiable basis of valuation.
To cite an example, in case of renting of an immovable property between
related parties (say recipient is unable to avail entire credit), earlier
mechanisms may not in some circumstances be suitable to arrive at the
appropriate value. It may be possible
for an assessee or the tax officer to use the discounting model or the IRR
model and arrive at the fair lease rental for the subject immovable
property. Similarly, in case of supply
of intangibles, it is challenging to identify the OMV/CV or even the cost of
such intangible. The intangibles may have been developed over a fairly long
period of time (including several failures) which would not be clearly
ascertainable. In such cases, a
discounted free cash flow method from an independent valuer may form a suitable
basis under this Rule. ____________________________________________________________

3 Cost Accounting Standards Issued by Cost Accounting Standards Board (CASB) may form a reliable basis

4 Including cost of consumables

C) Table
comparing the erstwhile valuation schemes

A comparative tabulation of the broad
features of erstwhile law would assist in appreciating the essence of the
valuation scheme:

Parameter	Sales Tax/VAT	Excise Law	Service Tax Law	Customs Law
Taxable Event	Sale transactions	Manufacture of Goods	Service Transactions	Importation / exportation of Goods
Valuation Principle	Price	Duty on goods with reference to its value	Money/ non-monetary consideration	Duty on goods with reference to its value
Base Value	Contracted Price	Transaction value	Gross amount charged	Transaction Value
Valuation Rules	Absent, except to the extent of removal of non-taxable portion in case of composite supplies	Specific scenarios	Restricted cases	Elaborate and applicable to all cases
Additions to base value	NIL	Additional amount in connection with sale (such as advertisement, publicity, etc.)	NIL	Freight, Insurance, Handling, etc. and royalty, etc. in connection with sale of imported of goods
Specific Deductions	Trade Discounts, Freight charged separately	Trade Discounts, Post removal recoveries	Deficiency in services	Post importation recoveries
Reference to time and place for valuation	NIL, being a transaction tax	Valuation at the time and place of removal	NIL, being a transaction tax	Valuation at the time and place of importation / exportation
Scenarios for reference to Valuation rules	NIL	Related party transaction, price not being sole consideration, free of cost (FOC) supplies, absence of sale/ transaction value, captive consumption, difference place of sale and place of removal	Consideration either partly or wholly in non-monetary form, non-taxable component in gross amount charged, FOC supplies, notified transactions, specific inclusions or exclusions	Similar to excise with additional adjustments for post importation payments (for royalty, technical services, etc.) , restrictions placed by supplier, accruals to importer from sale proceeds, etc.
Valuation methodology	NA	Cost accounting rules prescribed	Value of similar services or Cost of provision of service	Sequential mechanism of arriving at value based on price of identical or similar goods or either through deductive or computed price method
Post taxable event adjustment	Post-sale expenses are not relevant	Post removal accruals, those having a nexus with the transaction of removal/ sale includible	No specific provision but generally included as part of gross amount charged	Post importation flow back of consideration includible in specific scenarios
Cum-tax benefit	NIL unless specifically included	Available	Available	Not Applicable

Parameter

Sales Tax/VAT

Excise Law

Service Tax Law

Customs Law

Taxable Event

Sale transactions

Manufacture of Goods

Service Transactions

Importation / exportation of Goods

Valuation Principle

Price

Duty on goods with reference to its value

Money/ non-monetary consideration

Duty on goods with reference to its value

Base Value

Contracted Price

Transaction value

Gross amount charged

Transaction Value

Valuation Rules

Absent, except to the extent of removal of non-taxable
portion in case of composite supplies

Specific scenarios

Restricted cases

Elaborate and applicable to all cases

Additions to base value

NIL

Additional amount in connection with sale (such as
advertisement, publicity, etc.)

NIL

Freight, Insurance, Handling, etc. and royalty, etc.
in connection with sale of imported of goods

Specific Deductions

Trade Discounts, Freight charged separately

Trade Discounts, Post removal recoveries

Deficiency in services

Post importation recoveries

Reference to time and place for valuation

NIL, being a transaction tax

Valuation at the time and place of removal

NIL, being a transaction tax

Valuation at the time and place of importation / exportation

Scenarios for reference to Valuation rules

NIL

Related party transaction, price not being sole
consideration, free of cost (FOC) supplies, absence of sale/ transaction
value, captive consumption, difference place of sale and place of removal

Consideration either partly or wholly in non-monetary form,
non-taxable component in gross amount charged, FOC supplies, notified
transactions, specific inclusions or exclusions

Similar to excise with additional adjustments for post
importation payments (for royalty, technical
services, etc.) , restrictions placed by supplier, accruals to
importer from sale proceeds, etc.

Valuation methodology

Cost accounting rules prescribed

Value of similar services or Cost of provision of service

Sequential mechanism
of arriving at value based on price of identical or similar goods or either
through deductive or computed price method

Post taxable event adjustment

Post-sale expenses are not relevant

Post removal accruals, those having a nexus with the
transaction of removal/ sale includible

No specific provision but generally included as part of gross
amount charged

Post importation flow back of consideration includible in
specific scenarios

Cum-tax benefit

NIL unless specifically included

Available

Not Applicable

As evident from the table above, the scheme
of valuation under the GST law is a concoction of the valuation scheme under
the erstwhile laws. The settled principles in earlier laws may not have a
direct application to the GST law, yet a possible conclusion/inference can be
drawn from those decisions. Though there is an excise/customs hue to the
current valuation scheme, the term Supply is more akin to the term
sale/service, both being based on a contractual arrangement.

Therefore, the basic tenet of valuation
under GST should ideally follow the sales tax law principle rather than
excise/customs valuation principles. It may be worthwhile to study the
important principles under the earlier law in this context and appreciate the
difference in approach under the said laws.

Sales Tax Law

In the famous
case of State of Rajasthan vs. Rajasthan Chemists Association⁵,
the Hon’ble Supreme Court struck down the attempt of the Legislature to tax a
sale transaction on the basis of the MRP of the product. But importantly, it
stated that unlike in Excise where the duty is on the goods itself, the levy of
sales tax is on the activity of sale rather than the goods itself. Therefore,
the attempt of the Legislature to adopt a measure of tax on the value of goods
at a point distinct from its taxable event is unconstitutional. The legislature
cannot attempt to tax a ‘likely price’ in a contract of sale since what can
only be taxed is a completed sale transaction and not an agreement of
sale.

5 (2006)
147 STC 542 (SC)

Service Tax Law

In the context of service tax, the Delhi
High Court in Intercontinental Consultants and Technocrats Pvt. Ltd. vs. UOI
(2013) 29 STR 9 (Del) stated that the valuation should be in consonance
with the charging provision under the Finance Act, 1994. Since the charging
section levied a tax on service, nothing else apart from the consideration for
the service can be included in arriving at the value of a service. On this
basis, the Court struck down a valuation rule which exceeded the scope of the
charging section of the Service tax law.
In a slightly different context, the Delhi High Court in G.D.
Builders vs. Union of India 2013 (32) S.T.R. 673 (Del.) also stated that
the value of a service should be restricted only to the service component in
the transaction, implying that the valuation scheme is limited by the scope of
the charging provisions.

Excise Law

The excise law has had significant amount of
litigation over the valuation of goods manufactured and removed from the
factory premises of a manufacturer. The excise law has progressively evolved
from a wholesale price approach to a normal price approach and then to a
transaction value approach w.e.f 01. 07. 2000. Though the Central Excise scheme
focused on determining duty on manufacture of goods, the valuation provisions
were linked to the price paid or payable (i.e. including post manufacturing
costs and profits) with adjustments where price was not a reliable basis of
valuation. On a challenge over inclusion of post manufacturing costs/profits,
the Hon’ble Supreme Court in Union of India vs. Bombay Tyres International
case (1983) ELT 1896 (SC), made a clear distinction between the subject
matter of tax and the measure of tax and held that the Legislature had the
flexibility to fix the measure of tax different from the subject matter of
taxation so long as the character of impost is not lost. Courts have concluded that while the levy of
excise duty was on the manufacture or production of goods, the stage of
collection need not in point of time synchronise with the completion of the
manufacturing process; the levy had the status of a constitutional concept, the
point of collection was located where the statute declared it would be. This issue is again under consideration
before a larger Bench of the Hon’ble Supreme Court in the case of CCE,
Indore vs. Grasim Industries⁶ in view of a difference in opinion by the
coordinate three judge bench in Commissioner of Central Excise vs. Acer Ltd.⁶. Be that as it may, the basis of levy of duty
under excise law is clearly distinct from that of the GST law and therefore,
excise law principles should not be directly applied while interpreting the
valuation scheme under the GST law.

GST Law

In GST, the term ‘supply’ is a contractual
term. It comes into existence only under
an obligation of a contract. The list of
transactions cited as examples in section 7 (sale, exchange, barter, lease,
license, etc.) arise out of contractual obligations. In line with the
sales tax law, it is very well possible to contend that the taxable event of
supply should also be understood in the context of the obligations agreed
between parties under a contract.
Consequently, valuation should also be undertaken with due consideration
to the obligations between the contracting parties for the supply. Therefore,
where there was no supply intended between the contracting parties, say FOC
materials, its value cannot be included in the transaction value. This
principle may have implications in various scenarios which have been discussed
later.

Valuation principle – Conceptual aspects

D) Key
principles emerging from a reading of valuation provisions

Conceptual aspects

The following conceptual points may be
applied while addressing a point on valuation in GST:

i. Taxable value is a
function of the contracted price.
Intrinsic value/fair value/market value of goods or services are not
relevant except in specific circumstances.

______________________________________________________________________

6 in Civil Appeal No. 3159 of 2004 & (2004) 8 SCC 173

ii. Price implies monetary
consideration agreed for the subject supply.

iii. Valuation of a supply
would succeed its categorisation – into ‘composite or mixed supply’
basket.

iv. Valuation provisions are an
amalgam of erstwhile laws including the Customs law.

v. Receipt of
price/consideration could be from any third party and not necessarily by the
recipient.

vi. Each supply transaction is
distinct and independent from the previous transactions and price of one
transaction cannot generally have a bearing on another transaction.

vii. Transaction value is not
with reference to any particular time or place – a distinguishing feature in
comparison to the erstwhile Excise law or Customs Law.

viii. Every ‘gross amount
charged’ (like service tax) is not the transaction value – there should be some
nexus between the amount charged and supply of goods/services.

Other Procedural aspects

i. Valuation Rules would
trigger only under specific scenarios – in all other cases, price should be
accepted as transaction value – Onus is on the revenue to establish that the
pre-requisites of invoking the valuation rules have been satisfied. Valuation guidelines have to be followed
necessarily and best judgement assessments are not permissible.

ii. Valuation rules attempt to
identify undervaluation of transaction. While valuation rules do not
specifically prohibit questioning over-valuation, the consequential legal
implications of over-valuation in terms of adjudication/recovery etc. do
not capture cases, such as excess payment of output taxes, etc.

iii. Any upward or downward
revision in price or value should be undertaken by issuance of a debit or a
credit note by the supplier of the goods or services only. Downward revision in
price is different from non-recovery of consideration (such as bad debts). Bad debts are not deductible from taxable or
already taxed value, though non recovery on account of there being no supply of
goods or services or on account of deficient supply are deductible by way of
credit notes.

iv. Valuation rules are not
mutually exclusive. Eg. in case of second hand goods between related parties
operating under the margin scheme, valuation officer can invoke the valuation
rules to recalculate the sale price for arriving at the appropriate gross
margin.

E) Specific
issues in Valuation

Ex-works/
FOB/CIF basis of pricing and delivery

The erstwhile sales tax and excise law were
flooded with disputes over valuation especially in the context of inclusion of
freight, insurance and other costs in the taxable value. The pricing and terms
of delivery in the transaction were critical in deciding the issue on
valuation. Under sales tax law, ex-works
sales indicated exclusion of post-sale freight and insurance charges. Under the
excise law, ex-works delivery terms indicated exclusion of all costs recovered
after removal of goods from the factory gate.

In the context of GST, the price agreed
between parties is considered as the taxable value of the supply. Sub clause
(c) to section 15(2) specifically includes an incidental expense charged by the
supplier for anything done before delivery of goods to the customer. The
law has clearly shifted the goal post from the point of supply to the point of
delivery of goods. All recoveries from the customer until the supply/sale of
goods would be includible in price agreed for the goods. Additional recoveries
post sale/ supply but until delivery of goods would be includible in the
taxable value u/s. 15(2), even if the ownership or price agreed between the
parties is on ex-works or FOB basis. On application of section 15(1) and 15(2),
all pre-delivery costs charged from the customer would be includible in the
taxable value of supply.

There are cases where the sale and delivery
by the manufacturer is ex-works/FOB, but the supplier arranges for the
transportation in pursuance of the buyer’s instructions. The supplier incurs a
‘freight advance’ and recovers the same either in the invoice our buy way of an
additional debit note. In such cases, the supplier has undertaken post-delivery
activities as a ‘pure agent’ of the buyer and hence should not form part of the
taxable value either u/s. 15(1) or 15(2) of the GST law. An alternate
contention can be placed by invoking the concept of composite supply, ie, the
arrangement of transport by the supplier is naturally bundled with the supply
of goods and hence, part of transaction value. Disputes on this front are bound
to continue unless the supplier takes a conservative view in cases where the
recipient is eligible for full input tax credit.

Discount
Policies

Like the issue over freight, the sales tax
law and excise law experience litigation over deduction of discounts. Trade discount granted at the time of sale or
at the time of removal of goods were generally deductible under the sales
tax/excise law. The issue arose especially where discounts were granted after
sale or removal of goods.

Under the excise law, trade discounts given
at the time of removal of goods were considered deductible, while any post
removal discounts were held to be non-deductible. In Union of India & Ors vs. Bombay
Tyres International (P) Ltd.⁷ and subsequently in the case of Purolator
India Ltd. vs. CCE, Delhi⁷, it was held that discounts stipulated
in the agreement of sale but provided subsequently would be eligible for
deduction from the price “at the time of removal”.

In a recent decision of the Hon’ble Supreme
court in Southern Motors vs. State of Karnataka⁸, the
Supreme Court read down a rule contained in the VAT law which required
discounts to be disclosed in the invoice for it to be eligible to claim a
deduction from the total turnover of a dealer. The Court relying upon the
decision of the Supreme Court in IFB Industries Ltd. vs. State Of Kerala and
Deputy Commissioner of Sales Tax (Law) vs. M/s. Advani Orlikon (P) Ltd.⁹ observed as follows:

“21. This Court
referred to the definition of “sale price” in Section 2(h) of the Act and noted
that it was defined to be the amount payable to a dealer as a consideration for
the sale of any goods, less any sum allowed as cash discount, according to the
practice normally prevailing in the trade. While observing that cash discount
conceptually was distinctly different from a trade discount which was a
deduction from the catalogue price of goods allowable by whole-sellers to
retailers engaged in the trade, it was exposited that under the Central Sales
Tax Act, the sale price which enters into the computation of the turnover is
the consideration for which the goods are sold by the assessee. It was held
that in a case where trade discount was allowed on the catalogue price, the
sale price would be the amount determined after deducting the trade discount.
It was ruled that it was immaterial that the definition of “sale price” under
Section 2(h) of the Act did not expressly provide for the deduction of trade
discount from the sale price. It also held a view that having regard to the
nature of a trade discount, there is only one sale price between the dealer and
the retailer and that is the price payable by the retailer calculated as the
difference between the catalogue price and the trade discount. Significantly it
was propounded that, in such a situation, there was only one contract between
the parties that is the contract that the goods would be sold by the dealer to
the retailer at the aforesaid sale price and that there was no question of two
successive agreements between the parties, one providing for the sale of the
goods at the catalogue price and the other providing for an allowance by way of
trade discount. While recognizing that the sale price remained the stipulated
price in the contract between the parties, this Court concluded that the sale
price which enters into the computation of the assessee’s turnover for the
purpose of assessment under the Sales Tax Act would be determined after
deducting the trade discount from the catalogue price.”

7 1984
(17) E.L.T. 329 (S.C.) & 2015 (323) E.L.T. 227 (S.C.)

8 [2017]
98 VST 207 (SC)

9
(1980) 1 SCC 360

The Court also expounded the meaning of
trade discount as follows:

“28. A trade
discount conceptually is a pre-sale concurrence, the quantification whereof
depends on many many factors in commerce regulating the scale of sale/purchase
depending, amongst others on goodwill, quality, marketable skills, discounts,
etc. contributing to the ultimate performance to qualify for such discounts.
Such trade discounts, to reiterate, have already been recognized by this Court
with the emphatic rider that the same ought not to be disallowed only as they
are not payable at the time of each invoice or deducted from the invoice
price.”

The GST law seems to have simplified the law
to the extent that any pre-supply discount is considered as deductible provided
it is recorded in the invoice issued to the customer. The law also provides an
additional deduction in respect of post supply discounts provided two
conditions are satisfied – (a) the terms of discount is agreed before the
supply and (b) corresponding input tax credit has been reversed by the
recipient of supply. As regards the first condition, the law requires that the
principles, eligibility or formula of discount is agreed before the supply
occurs. The quantification of the discount could take place any time subsequent
to the supply by way of credit notes (of-course within the permissible time
limit). The objective is to deny benefit of discounts which are an
afterthought. The second condition
requires that corresponding input tax credit on such discounts is reduced by
the customer.

Price
Support vs Discounts

Section 15(2)(e) provides that price
subsidies (i.e. directly linked to the price of a product), except those
provided by the Central/State Governments are includible in the transaction
value. ‘Subsidy’ refers to paying a part of the cost. Subsidy could be received from any party
interested in the transaction and is not restricted to the manufacturer of
goods. Commercial trade adopts innovative formats and nomenclatures in order to
subsidise the price of their products and promote their sale. One such format
of subsidy is providing a ‘price support’ to the person stocking the goods in
order to liquidate the stocks for commercial reasons. The price support could
be in the form of monetary reimbursements by issuance of credit notes in favour
of the stockist or also in non-monetary form but it ultimately reduces the
original sale price for the stockist. In certain states like Tamil Nadu/
Karnataka, the VAT law required reversal of input tax credit where the sale
price was less than the purchase price but such a provision is absent in the
GST law. Is this price support a subsidy
or a discount or neither of these? The
possible differentiating factors can be tabulated below:

Discount	Price Subsidy	Price Support/ Protection
*Deductible from turnover in hands of supplier*	*Added to the value in the hands of recipient*	*Depending on whether it is a discount or price subsidy*
Contractually agreed at the time of original supply and provided subject to fulfillment of certain conditions	Usually provided by someone other than the seller of goods	Provided subsequent to the transaction of supply for liquidating stocks at lower prices
By the seller of the goods but not generally linked to the subsequent sale price	Pre-agreed & specifically linked to a subsequent sale by the recipient	Discretionary, ie companies are not obliged to provide it contractually though it is in their own interest to support their distribution channels
		Could be provided by the seller, manufacturer or even an online platform

Discount

Price Subsidy

Price Support/ Protection

Deductible from turnover in hands of supplier

Added to the value in the hands of recipient

Depending on whether it is a discount or price subsidy

Contractually agreed at the time of original supply and
provided subject to fulfillment of certain conditions

Usually provided by someone other than the seller of goods

Provided subsequent to the transaction of supply for
liquidating stocks at lower prices

By the seller of the goods but not generally linked to the
subsequent sale price

Pre-agreed & specifically linked to a subsequent sale by
the recipient

Discretionary, ie companies are not obliged to provide it
contractually though it is in their own interest to support their
distribution channels

Could be provided by the seller, manufacturer or even an
online platform

On the above basis, the treatment of price
support may be adopted as follows:

a. Where price support is
provided by the supplier (contracting parties to the supply), it should be
treated as a trade discount and treated in accordance with section 15(3).

b. Where price support is
provided by third parties (such as an online platform), it should be treated as
a subsidy and treated as per section 15(2)(e) and added to the sale value.

Moulds/
Dies/ Tools, etc.

Under the excise law, products were
manufactured from moulds or dies supplied by the buyer of such goods. Generally, the intellectual property of these
moulds and dies continued to be with the buyer of the said goods. These moulds were usually sent on free of
cost (FOC) and returnable basis.

Resultantly, the conditions of transaction
value were not satisfied since the price of the manufactured goods was not the
sole consideration – in view of section 4(1)(a) read with Rule 6 of the Excise
Valuation Rules, such FOC items were termed as additional consideration. The
said rule contained an explanation requiring the manufacturer to amortise or
apportion the value of such moulds, etc. as additional consideration to
the transaction.

The GST law imbibes the concept of ‘price
being sole consideration’ but does not contain corresponding rules like Rule 6
of Excise Valuation rules. Since this
rule was made in order to identify and attribute a value towards additional
consideration, a question arises regarding an attribution similar to excise. There are arguments both for and against this
which have been tabulated below:

Attribution required because:	Attribution not required because:
FOC could certainly result in undervaluation – Price of the product does not contain the cost of the FOC item and therefore price is not sole consideration in such cases	GST being a contract/ transaction tax (similar to sales tax/ service tax), unlike Excise, cannot extend beyond the contracted price and not a notional price
Sole consideration-Similar terms have been used under the excise law where such an attribution was an accepted legal principle	There is no corresponding rule which requires such addition like Rule 6. The law is silent on the mechanism, etc. which indicates that it does not intend to tax such items
	Sales tax law did not contain any such rule for valuation – The service tax law contained specific rules for inclusion of FOC items unlike in GST

Attribution required because:

Attribution not required because:

FOC could certainly result in undervaluation – Price of the
product does not contain the cost of the FOC item and therefore price is not
sole consideration in such cases

GST being a contract/ transaction tax (similar to sales tax/
service tax), unlike Excise, cannot extend beyond the contracted price and
not a notional price

Sole consideration-Similar terms have been used under the
excise law where such an attribution was an accepted legal principle

There is no corresponding rule which requires such addition
like Rule 6. The law is silent on the
mechanism, etc. which indicates that it does not intend to tax such
items

Sales tax law did not contain any such rule for valuation –
The service tax law contained specific rules for inclusion of FOC items
unlike in GST

In the view of
the author, GST being a transaction tax rather than a duty on goods, the case
for a non attribution seems to be a stronger proposition. Reliance can be
placed on the decision of the Hon’ble Supreme Court in Moriroku UT India
(P) Ltd. vs. State of UP 2008 (224) E.L.T. 365 (S.C.), which was
rendered in the context of the sales tax law wherein the court stated that
toolings and moulds supplied by the customer to the manufacturer/seller cannot
be amortised as in the case of Excise Duty under the Central Excise Act,
1944. A CBEC circular dt. 26^th
October, 2017 has been issued in the context of valuation of supply of paraffin
by way of extraction from Superior Kerosene Oil (SKO). The circular clarifies
that the value of supply is the quantity of paraffin retained from extraction
of SKO rather than the entire quantity of SKO sent by refinery for extraction.
This in a way resounds that valuation of supply is with reference to the
charging section and limited to price paid or payable in a supply transaction.

The subsequent article on valuation
would address specific instances where valuation under GST would pose certain
challenges and possible resolutions to such issues by taking hints from the
earlier indirect tax laws.

shailesh.kwebmaker

9 Sections 32, 43(3) – The benefit of additional depreciation is available to the assessees who are manufacturers and is not restricted to plant and machinery used for manufacture or which has first degree nexus with manufacture of article or thing.

9. [2017] 87 taxmann.com 103 (Kolkata)

DCIT vs. Bengal
Beverages (P.) Ltd.

ITA No. :
1218/KOL/2015

A.Y.: 2010-11

Date of
Order: 6^th October, 2017

Sections 32,
43(3) – The benefit of additional depreciation is available to the assessees
who are manufacturers and is not restricted to plant and machinery used for
manufacture or which has first degree nexus with manufacture of article or
thing.

A manufacturer of soft drinks is entitled to claim additional
depreciation on `Visicooler’ installed at the distributor’s or retailer’s
premises so as to ensure that the cold drink is served chilled to the ultimate
customer. Such installation at the
premises of the distributor or the retailer would tantamount to use of the
`visicooler’ for the purpose of business.

FACTS

During the
previous year under consideration, the assessee company was engaged in the
business of manufacture of soft drinks, generation of electricity through wind
mill and manufacture of pet bottles for packing of beverages. The assessee
claimed additional depreciation on Visicooler amounting to Rs. 90,56,200 (Rs.
41,67,159 + Rs. 48,89,004). The Visicoolers were kept at the premises of the
distributors/retailers and not at the factory premises of the assessee. The
assessee submitted to the Assessing Officer (AO) that the Visicoolers were
required to be installed at the delivery point to deliver the product to the
ultimate consumer in the chilled form, therefore these Visicoolers are part of
assessee’s plant entitling the assessee to claim additional depreciation.

The AO was of
the view that the assessee is not carrying out manufacturing activity on the
product of the retailer at the retailer’s premises and merely chilling of
aerated water cannot be termed as manufacturing activity and even that chilling
job is the activity of the retailer and not of the assessee. The AO, disallowed
the assessees claim of additional depreciation of Rs. 90,56,200.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who observed that the twin reasons
for which the AO disallowed claim for additional depreciation on visi coolers
was –

(i) visi cooler
was not used by the assessee at its own premises but at the premises of the
distributor; and

(ii) the
visi cooler cannot be said to be used for manufacture of cold drinks.

The CIT(A) held
that depreciation is allowed to an assessee if he owns the asset and the asset
is used for the purposes of his business.
Save and except these two conditions, no further or additional conditions
are required to be fulfilled by an assessee to claim depreciation. In order to
prove that an asset is used “for the purpose of business”, it is not necessary
to prove the first degree nexus between the “use of asset” and its use by the
assessee himself. So long as the use of
the asset, directly or indirectly, benefits or enables an assessee to carry on
its business, it will be sufficient to satisfy the criteria of “use for the
purpose of business”. The Apex Court has
in the case of ICDS Ltd. vs. CIT [2013] 29 taxmann.com 129, while
interpreting this condition held that language of section 32 did not mandate
usage of the asset by the assessee itself.
So long as the asset is used or utilised for the purposes of business,
the requirement of section 32 stands satisfied notwithstanding non usage of the
asset itself by the assessee. The contention of the assessee that the usage of
visicooler at the distributor’s premises so as to ensure that the “cold drink”
is served “cold” to the ultimate consumer tantamount to usage in the course and
for the purpose of business. The CIT(A)
deleted the addition made by the AO.

HELD

The Tribunal
noted that the Apex Court has in the case of Scientifc Eng. House (P.) Ltd.
vs. CIT [1986] 1257 ITR 86 (SC) laid down a test viz. Did the article
fulfill the function of a plant in the assessee’s trading activity? Was it a
tool of his trade with which he carried on his business? If the answer was in
the affirmative it would be a plant.

The Tribunal
held that applying the said test to the Visicooler came to a conclusion that
the answer is in the affirmative. It
held that visicooler is a tool which is necessary for carrying out, the
business of the assessee. The Tribunal upheld the order passed by CIT(A).

The appeal filed by the Revenue was dismissed.

shailesh.kwebmaker

8 Section 54F – If the assessee has invested sale consideration in the construction of a new residential house within three years from the date of transfer, deduction u/s. 54F cannot be denied on the ground that he did not deposit the said amount in capital gain account scheme before the due date prescribed u/s. 139(1) of the Act.

[2017]
86 taxmann.com 72 (Kolkata)

Sunayana Devi vs. ITO

ITA No. : 996/KOL/2013

A.Y. : 2004-05

Date of Order:
13^thSeptember, 2017

Section 54F – If the assessee has invested
sale consideration in the construction of a new residential house within three
years from the date of transfer, deduction u/s. 54F cannot be denied on the
ground that he did not deposit the said amount in capital gain account scheme
before the due date prescribed u/s. 139(1) of the Act.

FACTS

During the
previous year under consideration, the assessee, an individual, sold land for a
consideration of Rs. 20 lakh on 9.12.2003.
The stamp duty value of the land sold was Rs. 41,00,000. Of the Rs. 20 lakh received on sale of land,
the assessee utilised a sum of Rs. 3,50,000 on purchase of land for
construction of a new residential house, on 29.7.2004, and also paid Rs. 31,839
as stamp duty thereon.

The Assessing Officer with a view to verify
the details of deposit of balance consideration in Capital Gains Account called
for the required details. The assessee
did not file the required details. In the circumstances, the AO proceeded to compute
long term capital gain at Rs. 38,94,750 by adopting stamp duty value of the
land transferred as full value of consideration. He denied allow exemption u/s.
54F of the Act.

Aggrieved, the
assessee preferred an appeal to CIT(A).
In the course of appellate proceedings, photocopy of pay in slip was
furnished to substantiate that cash of Rs. 2,60,000 was deposited on 31.7.2004
in Capital Gains Account Scheme and a cheque of Rs.13,90,000 was deposited on
30.7.2004 which cheque was misplaced by the Bank and on 12.2.2005 a fresh
cheque was issued to the bank for deposit in Capital Gains Account Scheme. The CIT(A) held that the assessee was
entitled to deduction of Rs. 2,60,000 u/s. 54F as this was the amount deposited
in Capital Gains Account Scheme by 31.07.2004 being due date of furnishing
return of income u/s. 139(1) of the Act.
With regard to the balance sum of Rs. 13,90,000 ( Rs.16,50,000 – Rs.
2,60,000) since deposit was made after 31.07.2004, the CIT(A) held that the
assessee will not be entitled to deduction u/s. 54F of the Act.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

In the course
of appellate proceedings before the Tribunal, it was submitted that though the
completion certificate was not received within three years, the remand report
established that an Inspector was deputed to conduct spot inquiry and the
Inspector reported that the construction was completed within three years from
the date of transfer.

The Madras High
Court has in the case of CIT vs. Sardarmal Kothari [2008] 302 ITR 286
(Mad.), held that it would be enough if the assessee establishes that he
has invested the entire net
consideration within the stipulated period. The Chennai Bench of ITAT in the
case of Seetha Subramanian vs. ACIT [1996] 59 ITD 94 (Mad.) has taken a
view that investment of net consideration for construction of the house has
alone to be seen for allowing deduction u/s. 54F of the Act. The Tribunal held
that the absence of completion certificate cannot be a ground to deny the
benefit of deduction u/s. 54F of the Act.

The Tribunal
observed that having come to the conclusion that the assessee had utilised the
net consideration in construction of a house within a period of 3 years from
the date of transfer, the question would be whether the absence of deposit of
unutilised net consideration in a specific bank account as is required u/s
54F(4) of the Act, should the assessee be denied the benefit of deduction u/s.
54F of the Act.

The Tribunal
noted that the Karnataka High Court has in the case of CIT vs. K.
Ramachandra Rao [2015] 567 taxmann.com 163 (Karn.) held that if the
assessee invests the entire consideration in construction of the residential
house within 3 years from the date of transfer, he cannot be denied deduction
u/s. 54F of the Act on the ground that he did not deposit the said amount in
capital gains account before the due date prescribed u/s. 139(1) of the Act.

Considering the
factual position that the assessee invested the sale consideration in
construction of a residential house within three years from the date of
transfer and also the decision of the Karnataka High Court in the case of CIT
vs. K. Ramachandra Rao (supra), the Tribunal held that the assessee should
be given the benefit of deduction u/s. 54F of the sum of Rs. 16,50,000 also and
this benefit cannot be denied on the ground that he had not complied with the
requirements of section 54F(4) of the Act.

The Tribunal
held that in effect the assessee would be entitled to a deduction of Rs.
20,31,839 viz. for the investment of Rs. 3,50,000 in purchase of land, Rs.
31,839 stamp duty and registration charges and Rs. 16,50,000 utilised for
construction of a residential house within the period specified u/s. 54F(1) of
the Act. It directed the AO to allow
deduction of Rs. 20,31,839 u/s. 54F of the Act.

shailesh.kwebmaker

7 Section 37 – Expenditure incurred on stamp duty and registration charges on sale of flats, to attract buyers, as an incentive scheme by duly advertising the same, is allowable as a revenue expenditure.

[2017] 87 taxmann.com 70 (Mum.)

Kunal
Industrial Estate Developers (P.) Ltd. vs. ITO

ITA No. :
307/MUM/2017

A.Y.: 2012-13

Date of
Order: 10^th October, 2017

Section 37 –
Expenditure incurred on stamp duty and registration charges on sale of flats,
to attract buyers, as an incentive scheme by duly advertising the same, is
allowable as a revenue expenditure.

Interest on
delayed payment to creditors for payment beyond credit period is allowable
expenditure, since it is in relation to business carried on by the assessee.

FACTS-I

During the
previous year under consideration, the assessee, a builder, with a view to
attract buyers came up with a scheme of bearing expenses on stamp duty and
registration charges. This offer was known as Monsoon Offer and was advertised
in the newspapers as such. The assessee
incurred a sum of Rs. 2,28,400 as Stamp Duty and Rs. 1,28,450 as registration
charges in respect of flats registered and recorded as sales during the
year. This amount was claimed as a
deduction. In the course of assessment proceedings, the assessee filed copies
of relevant extracts of the newspaper in which the scheme was advertised. The
Assessing Officer (AO) disallowed this expenditure without stating the ground
or reason for disallowance.

Aggrieved, the
assessee preferred an appeal to CIT(A) who upheld the action of the AO without
mentioning any specific reason except mentioning that it is not a revenue
expenditure.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD-I

The Tribunal
noted that the CIT(A) had not given any reasons for upholding the disallowance
except stating that it is not a revenue expenditure. It held that when the
assessee had made the expenditure on stamp duty and registration charges, as
the incentive scheme by duly advertising the same, it did not give any reason
as to how it could not be treated as a revenue expenditure. It observed that
this expenditure is in relation to the sale of the item in which the assessee
deals in and the same is stock-in-trade.

Expenditure
related to the sale of the item in which the assessee deals in, can by no
stretch of imagination be deemed to be capital expenditure. The Tribunal set
aside the orders of the authorities below on this issue and decided this ground
in favour of the assessee.

FACTS-II

During the
previous year under consideration, the assessee, a
builder, incurred and
claimed a sum
of Rs. 17,999 as
interest on delayed payments to parties. This interest, it was submitted, was
charged by the parties since their payments were delayed beyond the credit
period. The AO disallowed this amount
claimed by the assessee.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the action of the AO on
the ground that this interest payment on delayed payment to creditors is not
compensatory in nature and therefore, not allowable.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD-II

The Tribunal
noted that the AO made the disallowance by holding that this interest is penal
in nature and cannot be allowed as a business expenditure. However, there is no
discussion in the assessment order as to how this is penal payment, not
allowable as a business expenditure. The action of the CIT(A) was held to be
absolutely mechanical. The Tribunal held that when the assessee is paying the
creditors interest for payment made beyond the credit period allowed, the
expenditure is undoubtedly in relationship (sic relation) to the
business conducted by the assessee and is therefore allowable. The Tribunal set
aside the orders of the AO and CIT(A) on this issue and decided this ground in
favour of the assessee.

shailesh.kwebmaker

7 Section 271(1)(c) – Penalty levied on account of depreciation wrongly claimed deleted.

Harish Narinder Salve vs. ACIT

Members:
H. S. Sidhu (J. M.) and L.P. Sahu (A. M.)

I.T.A. No. 100/Del/2015

A.Y.: 2010-11.
Date of Order: 21^stSeptember, 2017

Counsel for Assessee / Revenue: Sachit Jolly / Arun Kumar Yadav

Section 271(1)(c) – Penalty levied on
account of depreciation wrongly claimed deleted.

FACTS

The assessee is an Advocate by profession. During
the assessment proceedings, additions on account of, amongst others, excess
depreciation claimed in his return of income of Rs. 11.4 lakh and for claiming
as expenditure, a sum of Rs. 1.69 lakh towards loss on sale of fixed assets,
were made. According to the AO, the
assessee furnished inaccurate particulars of income which resulted into
concealment of income. Considering the same, the penalty of Rs. 4.04 lakh u/s.
271(1)(c) was levied which was confirmed by the CIT(A).

Before the Tribunal, the revenue justified
its action stating that the assessee had made illegal and unjustified claim of
expenses on account of depreciation on car and on account of loss on sale of
fixed assets. The assessee had understated his taxable income by claiming
higher depreciation of Rs. 11.4 lakh and loss on sale of fixed assets at Rs.
1.69 lakh. The assessee did not voluntarily surrender the claim of
depreciation, it was only when a show cause was issued by the AO as to the
basis of claim of depreciation for the entire year, the assessee offered to tax
additional income. Before issuing show cause, the assessee was sitting quietly.
This shows that it was not merely a bonafide mistake or error. The revenue
further stated that the assessee was unable to prove that he had filed the true
particulars of his income and expenses during the assessment proceedings. The
facts clearly showed that though the car was purchased and delivered in
November 2009, the assessee had wrongly claimed depreciation for the entire
year. According to it, the fact was very much in the knowledge of the assessee
and the claim of depreciation and loss on sale of assets was ex-facie bogus
which attracted penalty u/s. 271 (1) (c). In support of the above contention,
the revenue also relied upon the following cases:

– MAK
Data P. Ltd. vs. CIT (38 Taxmann.com 448) / (2013 358 ITR 593);

– CIT
vs. Escorts Finance Ltd. (183 Taxman 453);

– CIT
vs. Zoom Communication (P) Ltd. 191 Taxman 179 (Delhi);

– B.
A. Balasubramaniam and Bros. Co. vs. CIT (1999) 236 ITR 977 (SC);

– CIT
vs. Reliance Petroproducts (2010) 189 Taxman 322 (SC);

– Union
of India vs. Dharmendra Textile Processors (2007) 295 ITR 244.

HELD

The Tribunal noted that during the
assessment proceedings, the assessee had given his explanation supported by
documentary evidences on the additions in dispute, especially relating to the
depreciation issue, that he had forgone the benefit of 50% depreciation on
account of car and offered the amount to tax vide his letter dated 20.11.2012
to avoid litigation. According to the Tribunal, the claim for depreciation only
gets deferred to subsequent years by claiming it for half year. The Tribunal
further added that the deferral of depreciation allowance does not result into any
concealment of income or furnishing of any inaccurate particulars.

As regards wrongful claim of loss on sale of
fixed assets, the Tribunal agreed that it was a sheer accounting error in
debiting loss incurred on sale of a fixed asset to profit & loss account
instead of reducing the sale consideration from written down value of the block
under block concept of depreciation. There was a separate line item viz., loss
on fixed asset of Rs.1.69 lakh in the Income & Expenditure Account which
was omitted to be added back in the computation sheet. The error went unnoticed
by the tax auditor as well as by the tax consultant while preparing the
computation of income. According to it, there was no intention to avoid payment
of taxes. The quantum of assessee’s tax payments clearly indicated the
assessee’s intention to be tax compliant. The assessee’s returned income of Rs.
34.94 crore and tax payment of more than Rs.10.85 crore, according to the
Tribunal, did not show any mala fide intention to conceal an income of Rs.13.09
lakh (not even 0.4% of returned income) with an intention of evading tax of Rs.
4 lakh (not even 0.4% of taxes paid). Therefore, in view of the above mentioned
facts and circumstances, the allegation that the assessee was having any mala
fide intention to conceal his income or for furnishing inaccurate particulars
of income was not correct. Hence, the penalty in dispute needs to be deleted.

According to the Tribunal, the case laws
relied upon by the revenue were distinguishable on the facts of the present
case, and hence, the same were not applicable in the present case.

Further, relying on the decision of the
ITAT, Mumbai Bench in the case of CIT vs. Royal Metal Printers (P) Ltd.
passed in ITA No. 3597/Mum/1996 AY 1991-92 dated 8.10.2003 reported in (2005)
93 TTJ (Mumbai) 119, the Tribunal set aside the orders of the authorities below
and deleted the levy of penalty.

shailesh.kwebmaker

20 Sections 2(15) and 12AA – Charitable purpose – Registration and cancellation – A. Y. 2009-10 – Exclusion of advancement of any other object of general public utility, if it involved carrying out activities in nature of trade, commerce or business with receipts in excess of Rs. 10 lakh – Dominant function of assessee to provide asylum to old, maimed, sick or stray cows – Selling milk incidental to its primary activity – No bar on selling its products at market price – Assessee not hit by proviso to section 2(15) – No need to cancel registration of assessee

20. Charitable
purpose – Registration and cancellation – Sections 2(15) and 12AA – A. Y.
2009-10 – Exclusion of advancement of any other object of general public
utility, if it involved carrying out activities in nature of trade, commerce or
business with receipts in excess of Rs. 10 lakh – Dominant function of assessee
to provide asylum to old, maimed, sick or stray cows – Selling milk incidental
to its primary activity – No bar on selling its products at market price –
Assessee not hit by proviso to section 2(15) – No need to cancel registration
of assessee

DIT
(Exemption) vs. Shree Nashik Panchvati Panjrapole; 397 ITR 501 (Bom)

The
assessee trust was registered with the Charity Commissioner since 1953. The
assessee was granted a certificate
of registration u/s. 12A of the
Act, on 04/08/1975. By Finance (No. 2) Act, 2009, the definition of “charitable
purpose” u/s. 2(15) of the Act, was amended w.e.f. April 12, 2009. According to
the newly added proviso, charitable purpose would not include advancement of
any other object of general public utility, if it involved carrying out
activities in the nature of trade, commerce or business, with receipts in
excess of Rs. 10 lakh. The Director of Income-tax (Exemption) issued a show
cause notice upon the assessee and held that the activities carried out by the
assessee of selling milk were in the nature of trade, commerce or business and
thus, the assessee was not entitled to registration u/s. 12A of the Act. In
response to the show-cause notice, the assessee pointed out that it was running
a panjrapole i.e., for protection of cows and oxen for over 130 years. The
activity of selling milk was incidental to its panjrapole activity and in any
case did not involve any trade, commerce or business, so as to be hit by the newly
added proviso to section 2(15) of the Act. But the Director of Income-tax
(Exemption) cancelled the assessee’s registration under the Act invoking
section 12AA(3) of the Act, in view of the newly added proviso to section 2(15)
of the Act. The Tribunal held that the activity of selling milk would be
incidental to running a panjrapole and the proviso to section 2(15) of the Act
was not applicable. The Tribunal set aside the order of the Director of
Income-tax (Exemption) cancelling the registration.

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

i) The
appeal should be decided only on the grounds mentioned in the order for
cancellation of registration and no other evidence not considered by the Director
of Income-tax (Exemption) could be looked into, while deciding the validity of
the order. The Tribunal recorded a finding of fact that the dominant function
of the assessee was to provide asylum to old, maimed, sick and stray cows.
Further, only 25% of the cows being looked after yielded milk and if the milk
was not procured, it would be detrimental to the health of the cows. Therefore,
the milk which was obtained and sold by the assessee was an activity incidental
to its primary activity of providing asylum to old, maimed, sick and disabled
cows.

ii) The
activity of milking the cows and selling the milk was necessary in the process
of giving asylum to the cows. An incidental activity of selling milk which
might be resulting in receipt of money, by itself would not make it trade,
commerce or business nor an activity in the nature of trade, commerce or
business to be hit by proviso to section 2(15) of the Act.

iii) Further,
the fact that the milk was sold at market price would make no difference as
there was no bar in law on a trust selling its produce at market price.
Therefore there was no need to cancel the registration. The appeal is
dismissed.”

shailesh.kwebmaker

19 Section 68 – Cash credit – A.Y. 2006-07 – Sums outstanding against trade creditors for purchases – Appellate Tribunal concluding that assessee having failed to furnish confirmation had paid in cash from undisclosed sources – Finding not based on any material but on conjectures and surmises – Perverse – Addition cannot be sustained

19. Cash credit – Section 68 – A.Y. 2006-07 –
Sums outstanding against trade creditors for purchases – Appellate Tribunal
concluding that assessee having failed to furnish confirmation had paid in cash
from undisclosed sources – Finding not based on any material but on conjectures
and surmises – Perverse – Addition cannot be sustained

Zazsons
Export Ltd. vs. CIT; 397 ITR 40 (All):

The assessee was a
manufacturer of leather goods for export purposes. It purchased the raw
material on credit from petty dealers, who were shown as trade creditors in the
books of account, and payments were made subsequently. For the A.Y. 2006-07,
the assessee disclosed the purchase of raw materials from small vendors, part
of which amount was confirmed and the remaining was unconfirmed. Such
unconfirmed amount was treated as cash credits u/s. 68 of the Income-tax Act,
1961 (hereinafter for the sake of brevity referred to as the “Act”),
and added as income of the assessee. The Commissioner (Appeals) deleted the
addition. The Appellate Tribunal restored the addition on the ground that the
assessee had failed to confirm the amount and that such purchases were made on
cash payment, which had not been accounted for and as such liable to be added
to the assessee’s income u/s. 68.

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

i) The
credit purchases of raw material shown in the books of account of the assessee
from petty dealers even if not confirmed would not mean that it was concealed
income or deemed income of the assessee, which could be charged to tax u/s. 68
of the Act. The finding of the Appellate Tribunal that it was possible that the
assessee paid them in cash from undisclosed sources without accounting for it
and therefore, the amount paid was to be added to the income of the assessee,
was based on no material but on conjectures and surmises. The purchases made by
the assessee were accepted by the Assessing Officer and the trade practice that
payment in respect of the purchases of raw material was made subsequently was
not disputed. Therefore, its finding was perverse.

ii) In
order to maintain consistency, a view which had been accepted in an earlier
order ought not to be disturbed unless there was any material to justify the
Department to take a different view of the matter. In respect of the earlier
assessment year, 2005-06, the Department had accepted the decision of the
Appellate Tribunal that the trade amount due to the trade creditors in the
books of account of the assessee could not be added to the income of the
assessee. There was nothing on record to show that any appeal had been filed by
the Department against that order, which had become conclusive.

iii) The
appeal is allowed insofar as the addition of Rs. 1,05,01,948 u/s. 68 of the Act
is concerned.”

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Loan or Advance to Specified ‘Concern’ by Closely Held Company which is Deemed as Dividend U/S. 2 (22) (E) – Whether can be Assessed in the Hands of the ‘Concern’? – Part I

Introduction

1.1 Section
2(22)(e) of the Income-tax Act,1961 (the Act) creates a deeming fiction to
treat certain payments by certain companies to their shareholders etc.
as dividend subject to certain conditions and exclusions provided in section
2(22) ( popularly known as ‘ deemed dividend’). These provisions are applicable
to certain payments made by a company, not being a company in which public are
substantially interested (‘closely held company’/ such company) of any sum
(whether as representing a part of the assets of the company or otherwise) by
way of advance or loan. For the sake of brevity, in this write-up, such sum by
way of advance or loan both are referred to as loan. In this context, section
2(32) is also relevant which defines the expression ‘person who has a
substantial interest in the company’ as a person who is the beneficial owner of
shares, not being shares entitled to a fix rate of dividend, whether with or
without a right to participate in profits (shares with fixed rate of dividend),
carrying not less than 20% of the voting power in the company. Under the
Income-tax Act, 1922 (1922 Act), section 2(6A)(e) also contained similar
provisions with some differences [such as absence of requirement of substantial
interest etc.] which are not relevant for the purpose of this write-up. Such
payments can be treated as ‘deemed dividend’ only to the extent to which the
company possesses `accumulated profits’.
The expression “accumulated profits” is also inclusively defined in
Explanations 1 & 2 to section 2 (22). Section 2(22)(e) also covers certain
other payments which are not relevant for this write-up.

1.2 The
Finance Act, 1987 (w.e.f. 1/4/1988) amended the provisions of section 2(22)(e)
and expanded the scope thereof. Under the amended provisions, dividend includes
any payment of loan by such company made after 31/5/1987 to a shareholder,
being a person who is the beneficial owner of the shares (not being shares with
fix rate of dividend) holding not less than 10% of the voting power, or to any
concern in which such shareholder is a member or partner and in which he has
substantial interest. Simultaneously, Explanation 3 has also been inserted to
define the term “concern” and substantial interest in a concern other than a
company. Accordingly, the term ‘concern’ means a Hindu undivided family (HUF),
or a firm or an association of person [AOP] or a body of individual [BOI] or a
company and a person shall be deemed to have substantial interest in a
‘concern’, other than a company, if he is, at any time during the previous
year, beneficially entitled to not less than 20% of the income of such
‘concern’. It may be noted that in relation to a ‘concern’, being a company,
the determination of person having substantial interest will be with reference
to earlier referred section 2(32). As such, with these amendments, effectively
not only loan given to specified shareholder but also to a ‘concern’ in which
such shareholder has substantial interest is also covered within the extended
scope of section 2(22)(e) (New Provisions – Pre-amended provisions are referred
to as Old Provisions).The cases of loan given by such company to specified
‘concern’ are only covered under the New Provisions and not under the earlier
provisions.

1.3 Under
the 1922 Act, in the context of the provisions contained in section 2(6A)(e),
the Apex Court in the case of C. P. Sarathy Mudaliar (83 ITR 170) had
held that the section creates a deeming fiction to treat loans or advances as “
dividend” under certain circumstances. Therefore, it must necessarily receive a
strict construction .When section speaks of “shareholder”, it refers to the
registered shareholder [i.e. the person whose name is recorded as shareholder
in the register maintained by the company] and not to the beneficial owner of
the shares. Therefore, a loan granted to a beneficial owner of the shares who
is not a registered shareholder cannot be regarded as loan advanced to a
‘shareholder’ of the company within the mischief of section 2(6A)(e).This
judgment was also followed by the Apex Court in the case of Rameshwarlal
Sanwarmal (122 ITR 1) under the 1922 Act. Both these judgment were in the
context of loan given by closely held company to HUF, where it’s Karta was
registered shareholder. As such, under the 1922 Act, the position was settled
that for an amount of loan given to a shareholder by the closely held company
to be treated as deemed dividend, the shareholder has to be a registered
shareholder and not merely a beneficial owner of the shares. Even in the
context of expression ‘shareholder’ appearing in section 2(22) (e), this
proposition , directly or indirectly, found acceptance in large number of
rulings under the Act. [Ref:- Bhaumik Colour (P). Ltd – (2009) 18 DTR 451
(Mum- SB), Universal Medicare (P) Ltd – (2010) 324 ITR 263 (Bom), Impact
Containers Pvt. Ltd. – (2014) 367 ITR 346 (Bom), Jignesh P. Shah – (2015) 372
ITR 392, Skyline Great Hills – (2016) 238 Taxman 675 (Bom), Biotech Opthalmic
(P) Ltd- (2016) 156 ITD 131 (Ahd), etc]

1.4 Under
the New Provisions, loan given to two categories of persons are covered viz. i)
certain shareholder (first limb of the provisions) and ii) the ‘concern’ in
which such shareholder has substantial interest (second limb of the
provisions). In this write-up, we are only concerned with the loan given to
person covered in the second limb of the provisions (i.e. ‘concern’). For both
these provisions, the expression shareholder was understood as registered as
well as beneficial shareholder as explained by the special Bench of the tribunal
in Bhaumik Colour’s case (supra) and this position of law largely
held the field in subsequent rulings also.

1.4.1 For
the purpose of understanding the effect of section 2(22)(e) under both the
limbs of the provisions, the decision of the Special Bench in Bhaumik
Colour’s case (supra) is extremely relevant as that has been
followed in number of cases and has also been referred to by the High courts.
Basically, in this case, the Special Bench laid down following main principles:

(i) The expression ‘shareholder’ referred to
in section 2(22)(e) refers to registered shareholder. For this, the Special
Bench relied on the judgments of the Apex Court under 1922 Act, delivered in
the context of section 2(6A)(e), referred to in para 1.3 above.

(ii) The
expression ‘ being a person who is beneficial owner of shares’ referred to in
the first limb of the New Provisions is a further requirement introduced under
the New Provisions which was not there earlier. Therefore, to invoke the first
limb of New Provisions of section 2(22)(e), a person has to be a registered
shareholder as well as beneficial owner of the shares. As such, if a person is
a registered shareholder but not the beneficial shareholder then the provisions
of the section 2 (22)(e) contained in the first limb will not apply. Similarly,
if a person is a beneficial shareholder but not a registered shareholder then
also this part of the provisions of the section 2(22)(e) will not apply.

(iii) The second limb of the New Provisions
dealing with treatment of loan given to specified ‘concern’ is introduced for
the first time in the New Provisions. The expression ‘such shareholder’ found
in this provision dealing with a loan given to a ‘concern’, only refers to the
shareholder referred to in the first limb of the provisions referred to in (ii)
above. As such, to invoke this provision, a person has to be a registered
shareholder as well as beneficial shareholder having requisite shareholding
[i.e. 10 % or more] in the lending company and this shareholder should have a
substantial interest in the ‘concern’ receiving the loan.

(iv)
If, the conditions of second limb of provisions referred to in (iii) above are
satisfied, then the amount of the loan should be taxed as deemed dividend only
in the hands of the shareholder of the lending company and not in the hands of
the ‘concern’ receiving the amount of
loan.

1.5.
Even in cases where the condition for invoking the second limb of the
New Provisions are satisfied (i.e. the concerned person is a registered shareholder
as well as beneficial owner of the shares), the issue is under debate that, in
such cases, where the loan is given to a ‘concern’ in which such shareholder
has substantial interest, whether the amount of such loan is taxable as deemed
dividend in the hands of such shareholder or the ‘concern’ to whom the loan is
given. In this context, the CBDT (vide Circular No 495 dtd. 22/9/1987) has
expressed a view that in such cases, the deemed dividend is taxable in the
hands of the ‘concern’. However, the judicial precedents largely, directly or
indirectly, showed that in such cases, the deemed dividend should be taxed in
the hands of the shareholder [Ref: in addition to most of the cases referred to
in para 1.3., Ankitech (P) Ltd. – (2012) 340 ITR 14 (Del), Hotel Hilltop –
(2009) 313 ITR 116 (Raj), N. S.N. Jewellers (P) Ltd.- (2016) 231 Taxman 488
(Bom), Alfa Sai Mineral (P) Ltd. – (2016) 75 taxmann.com 33(Bom), Rajeev
Chandrashekar – (2016) 239 taxman 216 (Kar), etc.

1.6
In the context of loan given to an
HUF by a closely held company in which it’s Karta is the registered shareholder
having requisite shareholding, the issue was under debate as to whether the New
Provisions relating to deemed dividend will apply and if these provisions are
applicable, the amount of such deemed dividend should be taxed in whose hands
i.e. the registered shareholder or the HUF, which received the amount of loan.
This issue has been dealt with by the Apex Court in the case of Gopal &
Sons (HUF) [391 ITR 1]. The Apex Court in this case, based on the facts of that
case, decided that the amount of such loan will be taxable as deemed dividend
in the hands of the HUF. As such, the Court impliedly decided the issue
referred to in para 1.5 which gives support to the opinion expressed in the
CBDT circular referred to in that para. This judgment has been analysed by us
in this column in April and May issues of the journal.

1.7 Recently,
the issue referred to in para 1.5 directly came-up for consideration before the
Apex Court in the case of Madhur Housing & Development Co. Considering the
impact of the judgment in this case, it is thought fit to consider the same in
this column.

CIT
vs. Madhur Housing and Development Company [ITA 721/2011- Delhi HC]

2.1 In the above case, the relevant facts [as found
from the decision of the Tribunal] were: the assessee company was a closely
held company and during the previous year relevant to A. Y. 2006-07, the
assessee company had received Rs. 1,87,85,000 from M/s Beverley Park
Operations & Maintenance (P) Ltd. [BPOM] against the issue of fully
paid debentures by the assessee company. In BPOM, one Mrs. Indira Singh was
holding 33.33% equity shares, in her individual capacity, carrying voting
power. She as well as her husband [Mr. K. P. Singh] were also indirectly
holding 32.3 % equity shares each in BPOM through another company, which was
ultimately held [through layer companies] by holding company controlled by Mr.
and Mrs. Singh with the holding of all the equity shares [50% each] . All these
companies were part of DLF group of companies and were controlled by Mr. K. P.
Singh and family. There was sufficient accumulated profits in BPOM to cover the
amount of debentures issued to it by the assessee company. It was also revealed
that Mr. K. P. Singh and Mrs. Indira Singh [both, break-up in individual name
is not available] were holding 58.27% of equity shares in the assessee company
for which the investment was made by the partnership firm known as General
Marketing Corporation [GMC]. As such, GMC was the beneficial owner of the
shares [58.27%] held in the assessee company which were registered in the name
of its partners [namely, Mrs. Indira Singh and Mr. K. P. Singh]. Necessary
disclosures for holding these shares on behalf of the firm [GMC] were also made
before the Registrar of Companies [ROC]. Mr. & Mrs. Singh were also holding
certain preference shares with fixed rate of dividend in the assessee company.

2.1.1
During the assessment
proceedings, the Assessing Officer [AO] took the view that the assessee company
received a loan in the form of debentures from BPOM and Mr. K. P. Singh and
Mrs. Indira Singh are having substantial interest as they are registered
shareholder holding 10,200 equity shares [58.27%] in the assessee company. Name
of the GMC is not there in the register of the assessee company and as such,
they are registered and beneficial shareholder having substantial interest in
the assessee company. They are also beneficially holding more than 10% equity
shares in BPOM [may be , more so as Mrs. Indira Singh was holding 33.33% shares
directly for herself in BPOM]. As such, the conditions of section 2(22)(e) are
satisfied and accordingly, the AO treated the said amount of 1,87,85,000 as
deemed dividend in the hands of assessee company. While doing so, the AO
rejected the main contentions of the assessee that: Mr. K P Singh and Mrs.
Indira Singh were only registered shareholders of the assessee company as the
firm as such can not hold shares in it’s name and shares were actually held by GMC
through its partners, payment by BPOM was not a loan but investment in
debentures and the amount given by BPOM was in the ordinary course of business
and money lending is a substantial part of the business of BPOM and as such,
the transaction is covered by the exceptions provided in section 2(22)(e).

2.2 When
the above issue came up before the Commissioner of Income- tax (Appeals) [CIT
(A)] at the instance of the assessee company, the CIT (A) noted the principles
laid down by the Special Bench of the tribunal in Bhaumik Colour’s case
(supra) to the effect that the deemed dividend can be assessed only in
the hands of the shareholder of the lending company and not in the hands of a
person other than a shareholder and the expression shareholder in section 2(22)(e)
refers to both registered shareholder as well as beneficial shareholder [refer
para 1.4.1 above].

2.2.1 The
CIT (A) then noted the fact that Mr. K. P. Singh and Mrs. Indira Singh are
holding 10,200 equity shares [i.e. 58.27% of equity capital] in the assessee
company. However, these shares are beneficially held by the GMC and they are
registered in the name of it’s partners. Therefore, these shares are not
beneficially held by Mr. and Mrs. Singh. Mrs. Indira Singh and Mr. K. P. Singh
are also holding certain non- cumulative preference shares in the assessee
company in their individual capacity which are carrying fixed rate of dividend
and not carrying any voting power and therefore, this fact is not relevant for
involving section 2(22)(e).The assessee company is neither a registered
shareholder nor a beneficial shareholder in BPOM and further, admittedly, Mrs.
Indira Singh held equity shares in both the companies [i.e. assessee company as
well as BPOM] but, she did not hold any equity shares in the assessee company
in her individual capacity as equity shares held by her in assessee company
were on behalf of GCM in which she is one of the partners. Finally, CIT(A) took
the view that in the light of these facts, in view of the decision of Special
Bench of the tribunal in Bhaumik Colour’s case (supra), the
provisions of section 2(22)(e) cannot be invoked in this case. Accordingly, CIT
(A) deleted additions made on account of deemed dividend. It seems that CIT (A)
does not seem to have either gone in to other contentions raised by the
assessee company before the AO (ref para 2.1.1) or had not found any merit in
the same.

2.2.2
From the above, it appears that CIT (A) seems to have deleted the
additions of deemed dividend on two counts viz. (i) the assessee company is neither a registered
shareholder nor the beneficial shareholder in BPOM (i.e. lending company) and
(ii) though Mrs. Indira Singh is registered as well as beneficial shareholder
holding more than 10% equity shares in BPOM, she did not
beneficially hold any equity share in the assessee company as the shares
registered in her name were held by her for and on behalf of GMC(i.e. she is
registered shareholder but not the beneficial
owner of the shares).

2.3
The above matter was carried to the Appellant Tribunal at the instance
of the Revenue [ITA NO: 1429/Del/2010]. After hearing contentions of both the
parties which primarily related to the decision of the Special Bench in Bhaumik
Colour’s case (supra), the Tribunal observed as under:

“7.2
We have carefully considered the submissions. We find that the Tribunal in the
Special Bench decision in the case of Bhaumik Colours has held that
deemed dividend can be assessed only in the hands of a person who is a
shareholder of the lender company and not in the hands of the borrowing concern
in which such shareholder is member or partner having substantial interest.
Admittedly, in the case assessee is not shareholder of BPOM. Hence, the amount
of Rs. 1,87,85,000/- borrowed by the assessee from BPOM cannot be considered
deemed dividend in the hands of the assessee.”

2.3.1
Finally, the Tribunal decided the issue in favour of assessee and held as under

“7.3
Ld. Commissioner of Income Tax (Appeals) has followed the aforesaid Hon’ble
Special Bench decision and found that the ratio is applicable in this case and
no contrary decision or contrary facts has been brought to our notice. On the
facts of the present case the ratio of the said decision is applicable. Hence,
we do not find any infirmity or illegality in the order of the Ld. Commissioner
of Income Tax (Appeals). Accordingly, we uphold the same.”

2.3.2
From the above, it would appear that the tribunal has effectively
confirmed the order of the CIT (A). This shows that the Tribunal has also
confirmed the findings of the CIT (A) and both the reasons given by CIT(A) for
deletion of the additions referred to in para 2.2.2 above.

2.4
The matter then travelled to the Delhi High Court at the instance of the
Revenue. It seems that on an earlier day, the Division Bench of the Delhi High
Court had already decided similar issue in the case of Ankitech (P) Ltd.
[ITA No 462/2009]. Following that decision, the High Court dismissed the
appeal [vide order dated 12-05-2011] of
the Revenue by observing as under:

“This
matter is covered by the judgment of this Court dated 11.5.2011 passed in ITA
No. 462/2009 (CIT vs. Ankitech Pvt. Ltd.) In view of the said judgment, the assessment cannot be in the
hands of the assessee herein u/s. 2(22)(e) of the Income-tax Act, but it has to
be in the hands of the shareholder of
the company.”

2.5 From
the above, it would appear that the issue was decided in favour of the assessee
company on the short ground that the assessee company was not the shareholder
of the lending company and the deemed dividend u/s.2(22)(e) can not be assessed
in the hands of the assessee company (i.e. ‘concern’) but can be assessed only
in the hands of shareholder of the company. As such, it seems that the High Court decided the issue only on one
ground for deletion [given by the CIT(A)] referred to in para 2.2.2 for
confirming the deletion of the addition made on account of deemed dividend u/s.
2(22)(e). _

[To be
continued]

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Set-Off of Losses from an Exempt Source Of Income

Issue for consideration

It is usual to come across cases of losses
on transfer of shares of listed companies held as long term capital assets.
These losses arise for several reasons including on account of erosion in
value, borrowing cost and indexation. Such losses, where on capital account,
are computed under the head ‘capital gains’. Any long-term capital gains on
transfer of listed shares, on which STT is paid, is exempt from liability to
taxation u/s. 10(38) provided the conditions prescribed therein are satisfied.

Sections 70 and 71 permit the set-off of the
losses under the head ‘capital gains’ against any other income within the same
head of income and also against the income under any other sources subject to
certain specified conditions.

An issue often discussed is about the
eligibility of the losses, of the nature discussed above, for set-off in
accordance with the provisions of section 70 and 71 of the Act. In the recent
past, the Mumbai bench of the Tribunal held that such losses are eligible for
set-off against income from other sources, while the Kolkata bench held that it
is not permissible to do so.

LGW Ltd.’s case

The issue arose in the case of LGW Ltd.
vs. ITO, 174 TTJ 553 (Kol.). In that case, the assessee incurred a loss of
Rs.5,00,160 on sale of listed shares for assessment year 2009-10. The loss was
claimed as a deduction in the computation of the total income by setting off
against the other income. The AO disallowed the set-off of loss in view of the
fact that section 10(38) exempted any income arising from the long-term capital
asset being equity share and as such the loss if any should be kept outside the
computation of the total income; thus, loss in view of section10(38), would not
enter the computation of total income of an assessee. The appeal of the
assessee against the said order was dismissed by the CIT(A). The assessee not
being satisfied raised the following ground before the Tribunal; “That the
learned Commissioner of Income Tax (Appeals) erred in confirming the
disallowance of loss of Rs.5,00,160 incurred by the assessee company on sale of
Long Term investment in shares.”

On behalf of the assessee, it was submitted
that section 10(38) of the Act used the expression “any income” and
therefore loss on sale of long term capital asset being equity shares should be
allowed as deduction. In reply, the Revenue relied on the order of CIT (A).

The Tribunal observed that the stand taken
by the assessee was not acceptable in view of the decision in the case of CIT
vs. Harprasad & Co. (P.) Ltd. 99 ITR 118 (SC)., and cited with approval
the following part of the decision : ‘From the charging provisions of the
Act, it is discernible that the words ” income ” or ” profits
and gains ” should be understood as including losses also, so that, in one
sense ” profits and gains ” represent ” plus income ”
whereas losses represent ” minus income ” (1). In other words, loss
is negative profit. Both positive and negative profits are of a revenue
character. Both must enter into computation, wherever it becomes material, in
the same mode of the taxable income of the assessee. Although section 6
classifies income under six heads, the main charging provision is section 3
which levies income-tax, as only one tax, on the ” total income ” of
the assessee as defined in section 2(15). An income in order to come within the
purview of that definition must satisfy two conditions. Firstly, it must
comprise the ” total amount of income, profits and gains referred to in
section 4(1) “. Secondly, it must be ” computed in the manner laid
down in the Act “. If either of these conditions fails, the income will
not be a part of the total income that can be brought to charge.’

The Tribunal noted that Supreme Court in
that case, took note of the fact that any capital gains arising between April 1, 1948, and April 1,
1957 was not chargeable to tax and therefore had held that the condition, namely,
“the manner of computation laid down in the Act” which “forms
an integral part of the definition of ‘ total income’ ” was not
satisfied and in the assessment year,
capital gains or capital losses did not form part of the “total
income” of the assessee which could be brought to charge, and therefore,
were not required to be computed under the Act.

The Tribunal held that the law laid down by
the Supreme Court clearly supported the stand taken by the Revenue and as a
consequence, the claim for deduction by way of set-off of loss was without any
merit and the same was dismissed.

Raptakos Brett & Co. Ltd.’s case

The issue arose in the case of Raptakos
Brett & Co. Ltd. vs. DCIT, 58 taxmann.com 115 (Mumbai). In that case,
the assessee, a pharmaceutical company, in the computation of income had shown
long term capital loss on sale of shares amounting to Rs.57,32,835 and loss on
sale of mutual funds units amounting to Rs.2,61,655. The said long term capital
loss had been set off against the long term capital gains of Rs.94,12,00,000
arising from sale of land at Chennai. The AO held that the losses claimed could
not be allowed since the income from long term capital gain on sale of shares
and mutual funds was exempt u/s. 10(38) of the Act of 1961. He held that the
long term capital loss in respect of shares, where securities transaction tax
had been paid, would have been exempt from long term capital gain had there
been profits, and therefore, long term capital loss from sale of shares could
not be set off against the long term capital gain arising out of the sale of
land. The CIT(A) confirmed the action of the AO on the ground that exempt
profit or loss construed separate species of income or loss and such exempt
species of income or loss could not be set off against the taxable species of
income or loss. He held that the tax exempt losses could not be deducted from
taxable income and, therefore, the AO had rightly disallowed the claim of
losses from shares to be set off against the long term capital gain from sale
of land. The assesseee company in appeal to the Tribunal raised the following
grounds; ‘1.1 On the facts and circumstances of the case and in law, the
learned Commissioner of Income-tax (Appeals) – Central II, Mumbai [“the
CIT(A)”] erred in confirming the action of Deputy Commissioner of Income
Tax (the A.O) by not allowing the claim of set off of Long term Capital Loss on
sale of shares where Security Transaction Tax (“STT”) was deducted
against the Long Term Capital Gain arising on sale of land at Chennai; 1.2 the
appellant prays that such set off of the said Long Term Capital Loss be
allowed;

It was submitted that what was contemplated
in section 10(38) was exemption of positive income and losses would not come
within the purview of the said section; the set off of long term capital loss
had been clearly provided in sections 70 and 71; the legislation had not put
any embargo to exclude long term capital loss from sale of shares to be set off
against long term capital gain arising on account of sale of other capital
asset; even in the definition of capital asset u/s. 2(14), no exception or exclusion
had been provided to equity shares the profit/gain of which were treated as
exempt u/s. 10(38); capital gain was chargeable on transfer of a capital asset
u/s. 45 and mode of computation had been elaborated in section 48; certain
exceptions had been provided in section 47 to those transactions which were not
regarded as transfer; nothing had been mentioned in sections 45 to 48 that
capital gain or loss on sale of shares were to be excluded as section 10(38)
exempted the income arising from the transfer of long term capital asset being
an equity share or unit; legislature had given exemption to income arising from
transfer of long term capital asset being an equity share in company or unit of
equity oriented fund, which was chargeable to STT; section 10(38) could not be
read into section 70 or 71 or sections 45 to 48.

The assessee supported the contention by
relying upon the decision of the Calcutta High Court in the case of Royal
Calcutta Turf Club vs. CIT, 144 ITR 709 to submit that similar issue with regard
to the losses on account of breeding horses and pigs which were exempt u/s.
10(27), whether it could be set off against its income from a business source
was considered and the High Court after considering the relevant provisions of
section 10(27) and section 70, had held that section 10(27) excluded in
expressed terms only any income derived from business of livestock breeding,
poultry or dairy farming and did not exclude the business of livestock
breeding, poultry or dairy farming from the operation of the Act. The losses
suffered by the assessee in respect of livestock, breeding were held to be
admissible for deduction by the court and were allowed to be set off against
other business income. It was pointed out that the court in turn had relied on various
decisions, especially in the case of CIT vs. Karamchand Premchand Ltd.40 ITR
106(SC). It was pointed out that there was a decision of the Gujarat High
Court in the case of Kishorebhai Bhikhabhai Virani vs. Asstt. CIT, 367
ITR 261, which had decided the issue against the assessee and the said decision
had not referred to the decisionof the Calcutta High Court at all and
therefore, did not have precedence value as compared to the Calcutta High Court
decision, which was based on Supreme Court decision on the point. Also pointed
out was the fact that the ITAT Mumbai bench also in the case of Schrader
Duncan Ltd. vs. Addl. CIT 50 SOT 68 had decided a somewhat similar issue
against the assessee but was distinguished.

On the other hand, the Revenue strongly
relied upon the order of the AO and CIT(A) and submitted that, firstly, if the
income from the long term capital gain on sale of shares was exempt, then the
loss from such sale of shares would also not form part of the total income and
therefore, there was no question of set off against other income or long term
capital gain on different capital asset. Secondly, the decisions of the Gujarat
High Court and ITAT Mumbai bench were required to be followed. It was further submitted
that it was quite a settled law that income included loss also and, therefore,
if the income from sale of shares did not form part of the total income, then
the losses from such shares also would not form part of the total income.

The Mumbai Tribunal on the conjoint reading
and plain understanding of all the sections observed that;

– firstly,
shares in the company were treated as capital asset and no exception had been
carved out in section 2(14), for excluding the equity shares and unit of equity
oriented funds that they were not treated as capital asset;

– secondly,
any gains arising from transfer of Long term capital asset was treated as
capital gain which was chargeable u/s. 45;

– thirdly,
section 47 did not enlist any such exception that transfer of long term equity
shares/funds were not treated as transfer for the purpose of section 45, and
section 48 provides for computation of capital gain, which was arrived at after
deducting cost of acquisition i.e., cost of any improvement and expenditure
incurred in connection with transfer of capital asset, even for arriving of
gain in transfer of equity shares;

– sections
70 & 71 elaborated the mechanism for set off of capital gain. Nowhere, any
exception had been made/carved out with regard to Long term capital gain
arising on sale of equity shares. The whole genre of income under the head
‘capital gain’ on transfer of shares was a source, which was taxable under the
Act. If the entire source was exempt or was considered as not to be included
while computing the total income then in such a case, the profit or loss
resulting from such a source did not enter into the computation at all.
However, if a part of the source was exempt by virtue of particular
“provision” of the Act for providing benefit to the assessee, then it
could not be held that the entire source would not enter into computation of
total income.

– the
concept of income including loss would apply only when the entire source was
exempt and not in the cases where only one particular stream of income falling
within a source was falling within exempt provisions. Section 10(38) provided
exemption of income only from transfer of long term equity shares and equity
oriented fund and not only that, there are certain conditions stipulated for exempting
such income and as such exempted only a part of the source of capital gain on
shares.

– it
needed to be seen whether section 10(38) exempted the source of income which
did not enter into computation at all or only a part of the source, the income
in respect of which was excluded in the computation of total income.

– the
precise issue had come up for consideration before the Calcutta High Court in Royal
Calcutta Turf Club’s case (supra), wherein the court observed that “under
the Income tax Act, 1961 there are certain incomes which do not enter into the
computation of the total income at all. In computing the total income of a
resident assessee, certain incomes are not included under s.10 of the Act. It
depends on the particular case; where the Act is made inapplicable to income
from a certain source under the scheme of the Act, the profit and loss
resulting from such a source will not enter into the computation at all. But
there are other sources which, for certain economic reasons, are not included or
excluded by the will of the Legislature. In such a case, one must look to the
specific exclusion that has been made.” The court relying specifically
on the decision of in the case of Karamchand Premchand Ltd. (supra),
came to the conclusion that “cl.(27) of s.10 excludes in express terms
only “any income derived from a business of live-stock breeding or poultry
or dairy farming. It does not exclude the business of livestock breeding or
poultry or dairy farming from the operation of the Act. Therefore, the losses
suffered by the assessee in the broodmares account and in the pig account were
admissible deductions in computing its total income”

– the
decision in the case of Schrader Duncan Ltd. (supra), the issue
involved was slightly distinguishable and secondly, the ratio of Calcutta High
Court was applicable in the case before them. Lastly, the decision of the
Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani (supra),
though the issue involved was almost the same, and was decided against the assessee,
the ratio of the decision of the Calcutta High Court was to be followed more so
where the said decision had not been referred or distinguished by the Gujarat
High Court.

The Mumbai bench of the Tribunal finally
held that the ratio laid down by the Calcutta High Court was clearly applicable
and accordingly was to be followed in the case before them to conclude that
section 10(38) excluded in expressed terms only the income arising from
transfer of long term capital asset being equity share or equity fund which was
chargeable to STT and not entire source of income from capital gains arising
from transfer of shares and that the provision of section 10(38) did not lead
to exclusion of the entire source and not even income from capital gains on
transfer of shares. Accordingly, long term capital loss on sale of shares was
allowed to be set off against long term capital gain on sale of land in
accordance with section 70(3) of the Act.

Observations

The issue being considered here has a long
history. Time and again, it has been subjected to judicial inspection including
by the Supreme Court and in spite of the decisions of the Apex court,
conflicting decisions are being delivered by the courts on the subject as was
highlighted by this feature published in BCAJ, some 25 years ago.

The Supreme court in the case of Harprasad
& Co. (P) Ltd. 99 ITR 118 (SC) (supra) held that losses from a
source, the income whereof did not enter into computation of total income, was
not eligible for set-off against income from other sources. The Supreme court
in yet another case, Karamchand Premchand & Co. (supra),
narrated the circumstances where the losses of the given nature were eligible for set-off.

One would have thought the issue of set-off
was settled with the Supreme court decisions on the subject, but as is pointed
out by the conflicting decisions of the Tribunal that the issue is alive and
kicking. Subsequent to the Apex court decisions, the Madras High Court in the
case S.S. Thiagarajan 129 ITR 115(Mad) examined the issue to decide
against the eligibility for set-off of such losses from an exempt source of
income. In that case, the assessee had incurred losses on his activity of
racing and betting on horses, the income whereof was otherwise exempt u/s.
10(3) of the Income-tax Act. Subsequently, the Calcutta High Court in the case
of Royal Calcutta Turf Club 144 ITR 709 held that the losses from a
source, the income whereof was otherwise exempt, was eligible for set-off
against income from other sources. In that case, the assessee club had incurred
losses on its activities of livestock breeding, dairy farming and poultry
farming, the income whereof was exempt from taxation under the then section
10(27) of the Act and had sought its set off against the income from dividend
which was then taxable. In deciding the issue, the High Court took notice of
the decision of the Madras High Court in the case of S.S. Thiagarajan (supra)
and dissented from the ratio of the said decision.

A finer distinction is to be kept in mind,
for supporting the claim, between a case where an income does not enter into
computation of total income per se, as per the scheme of taxation, for
e.g., an agricultural income or a capital receipt as against the case of an
income, otherwise taxable, but has been exempted expressly from taxation for
economic reasons or where a part thereof only is exempted and not the entire
source thereof or a case where the exemption is conditional. It is believed
that in the later cases, where the exemption is conferred for economic reasons
and few other reasons cited, the law otherwise settled by the Supreme Court in
the case of Harprasad & Co. should not apply. Needless to say that
the exemption, u/s. 10(38) for long term capital gains on sale of shares was
given for economic reasons of developing the securities market and was also
otherwise a case quid pro quo inasmuch as exemption was only on payment
of another direct tax namely STT and in any case is conditional and further, is
not for all types of capital gains.

There also is a merit in the contention that
section 10(38) deals with the case of an ‘income’ alone and should not be
stretched to include the case of a ‘loss’ and principle that an ‘income
includes loss ‘should not be applicable to the provision of section 10(38) of
the Act.

Section 10(38) is a beneficial provision
introduced to help the tax payers to minimise their tax burden, once an STT is
paid. In the circumstances, it is in the fitness of the things that the
provisions are construed liberally in favour of the exemption. Bajaj Tempo
Ltd., 196 ITR 188(SC). The fact that the issue of eligibility of setoff is
controversial and is capable of two conflicting views is highlighted by the two
opposing decisions discussed here and therefore, a view favourable to the tax
payer, in such cases, should be taken. Vegetable Products, 88 ITR 192 (SC).

In Harprasad & Co.‘s case (supra)
, the assessee claimed capital loss on sale of shares of Rs.28,662 during the
previous year relevant to assessment year 1955-56. The AO disallowed the loss
on the ground that it was a loss of a capital nature and the CIT (A) confirmed
his order. Before the Tribunal, the assessee modified its claim and sought that
the loss which had been held to be a ” capital loss ” by the authorities
below, should be allowed to be carried forward and set off against profits and
gains, if any, under the head ” capital gains ” earned in future, as
laid down in sub-sections (2A) and (2B) of section 24 of the Act of 1922. The
Tribunal accepted the contention of the assessee and directed that the ”
capital loss ” of Rs. 28,662
should be carried
forward and set off
against ” capital gains “, if any, in
future. On appeal, the Delhi High Court confirmed the order of the tribunal.

On further appeal by the Revenue, the
Supreme Court considered: “Whether, on the facts and in the
circumstances of the case, the capital loss of Rs. 28,662 could be determined
and carried forward in accordance with the provisions of section 24 of the
Indian Income-tax Act, 1922, when the provisions of section 12B of the
Income-tax Act, 1922, itself were not applicable in the assessment year 1955-
56. “The Court, on due consideration of facts and the law, held: ‘Under
the Income Tax Act, 1922, capital gain was not included as a head of income and
therefore capital gain did not form part of the total income. Certain important
amendments were effected in the Income-tax Act by Act XXII of 1947. A new
definition of ” capital asset ” was inserted as Section 2(4A) and
” capital asset ” was defined as ” property of any kind held by
an assessee, whether or not connected with his business, profession or vocation
“, and the definition then excluded certain properties mentioned in that
clause. The definition of ” income ” was also expanded, and ” income
” was defined so as to include ” any capital gain chargeable
according to the provisions of Section 12B “. Section 6 of the Income-tax
Act was also amended by including therein an additional head of income, and
that additional head was ” capital gains, ” Section 12B, provided
that the tax shall be payable by an assessee under the head ” capital
gains ” in respect of any profits or gains arising from the sale, exchange
or transfer of a capital asset effected after 31st March, 1946, and that such
profits and gains shall be deemed to be income of the previous year in which
the sale, exchange or transfer took place. The Indian Finance Act, 1949,
virtually abolished the levy and restricted the operation of section 12B to
” capital gains ” arising before the 1st April, 1948. But section
12B, in its restricted form, and the VIth head, ” capital gains ” in
section 6, and sub-sections (2A) and (2B) of section 24 were not deleted and
continued to form part of the Act. The Finance (No. 3) Act, 1956, reintroduced the
” capital gains ” tax with effect from the 31st March, 1956. It
substantially altered the old section 12B and brought it into its present form.
As a result of the Finance (No. 3) Act of 1956, “capital gains ”
again became taxable in the assessment year 1957-58. The position that emerges
is that ” capital gains ” arising between April 1, 1948, and March
31, 1956, were not taxable. The capital loss in question related to this
period.’

In Karamchand Premchand & Co. Ltd.
(supra) the court held ; “What it says in express terms is that the Act
shall not apply to any incosme, profits or gains of business accruing or
arising in an Indian State etc. It does not say that the business itself is
excluded from the purview of the Act. We have to read and construe the third
proviso in the context of the substantive part of section 5 which takes in the
Baroda business and the phraseology of the first and second provisos thereto,
which clearly uses the language of excluding the business referred to therein.
The third proviso does not use that language and what learned counsel for the
appellant(Revenue) is seeking to do is to alter the language of the proviso so
as to make it read as though it excluded business the income, profits or gains
of which accrue or arise in an Indian State. The difficulty is that the third
proviso does not say so; on the contrary, it uses language which merely exempts
from tax the income, profits or gains unless such income, profits or gains are
received in or brought into India”. It went on to hold “ Next, we have to
consider what the expression “income, profits or gains” means. In the
context of the third proviso, it cannot include losses ……….. and the expression
“income, profits or gains” in the context cannot include losses. ………
The appellant(Revenue) cannot therefore say that the third proviso excludes the
business altogether, because it takes away from the ambit of the Act not only
income, profits or gains but also losses of the business referred to therein.”
Lastly, “The argument merely takes us back to the question—does the third
proviso to section 5 of the Act merely exempt the income, profits or gains or
does it exclude the business ? If it excludes the business, the appellant
(Revenue) is right in saying that the position under the proviso is not the
same as under section 14(2)(c) of the Indian Income-tax Act. If on the contrary
the proviso merely exempts the income, profits or gains of the business to
which the Act otherwise applies, then the position is the same as under section
14(2)(c). It is perhaps repetition, but we may emphasize again that exclusion,
if any, must be done with reference to business, which is the unit of taxation.
The first and second provisos to section 5 do that, but the third proviso does
not.”

The Mumbai bench of the Tribunal, in
deciding the issue in favour of the assessee, has taken due note of the direct
decision of Gujarat High Court in the case of Kishore Bhikhabhai Virani,
(supra) which in turn had followed the decision of Madras High Court in S.S.
Thiagarajan’s case(supra) and chose to chart a different course of
action for itself only after due consideration of the law on the subject. The
Kolkata bench of the Tribunal has however followed the said decision of the
Gujarat High Court to arrive at the opposite conclusion.

In deciding the issues before them, both the
High Courts have based their decisions on the different decisions of the
Supreme court, one in the case of Harprasad & Co.(supra) and
the other in the case of Karamchand Premchand Ltd.(supra). The
Mumbai bench has dutifully examined the ratio of these decisions of the Supreme
court while applying one of the ratios of the decisions of the high courts. It
has also examined the application or otherwise of the direct decision of the
Gujarat High Court. In that view of the matter, the decision of the Mumbai
bench is the only decision which has examined the issue with its various facets
and has brought on record a very detailed analysis of a vexatious and complex
issue on due application of judicial process. The better view, in our humble
opinion, is in favour of allowance of the set-off of losses against income from
other sources, for the reasons discussed here. _

shailesh.kwebmaker

Building A Top Global Indian Accounting Firm

Introduction

During his address on the occasion of the CA Day on 1st July
2017 hosted by the Institute of Chartered Accountants of India (ICAI), Hon’ble
Prime Minister Shri Narendra Modi exhorted the Chartered Accountants and said,

“There are so many accounting firms in India, but none had
managed to find a place among the top global players…By 2022, let us have a
Big Eight, where Four firms are Indian”.

The ICAI, in its Vision 2030, states that it will develop
skilled professionals with competencies to service clients not only within
India but across the globe that requires technical skills as also
cross-cultural appreciation and understanding of global needs.

The above goals are audacious! While there are many Indian
Chartered Accountants who have become successful global professionals, our
profession will need to overcome many challenges and shortcomings to pursue
realisation of this goal of building top global Indian Accounting Firms (IAFs).

This article attempts
to present a current snapshot of the accounting profession in India with an
international benchmarking and discuss some of the measures required in
building a global accounting firm.

Indian Accounting Profession and International Benchmarking

Let’s look at the current
landscape of the accounting profession in India and how it fares in
international comparison to understand the enormity of the challenge presented
by the Hon’ble PM. Given our historical linkage and comparable size of our
economies based on the GDP in nominal US Dollar terms, the UK has been selected
for the international comparison.

Particulars	India	UK
¹GDP, current prices (USD Billions) 2017 est.	2,439	2,565
²Members of Accounting Bodies	2,70,307 (1.4.2017)	3,50,912 (31.12.2016)
³Total Accounting Firms	69,428 (24.9.2017)	43,700 (10.3.2017)
⁴Proprietary Firms %	69%	49%
⁴Firms with 2 to 6 Partners %	29%	45%
⁵Firms with 50 or more Partners	9	21
⁵Firms with 100 or more Partners	1	14
⁵Partners in the largest firm	133	956
⁵Total Partners in top 50 Firms	1,677	5,962
⁵Total Partners in Big FourNetwork Firms	Not available	3,180
⁶Peer Reviewed Firms/Registered Audit Firms	1,826 (11.08.2017)	6,010 (31.12.2016)
Peer Reviewed Firms/Registered Audit Firms as % of Total Accounting Firms	2.63%	13.75%
⁶Recognised Qualifying Bodies (RQBs) offering audit qualification	1	6
⁶Recognised Supervisory Bodies (RSBs) responsible for supervising the work of statutory auditors	1	4

Particulars

India

¹GDP,
current prices (USD Billions)
2017 est.

2,439

2,565

²Members
of Accounting Bodies

2,70,307

(1.4.2017)

3,50,912

(31.12.2016)

³Total
Accounting Firms

69,428

(24.9.2017)

43,700

(10.3.2017)

⁴Proprietary
Firms %

69%

49%

⁴Firms
with 2 to 6 Partners %

29%

45%

⁵Firms
with 50 or more Partners

⁵Firms
with 100 or more Partners

⁵Partners
in the largest firm

133

956

⁵Total
Partners in top 50 Firms

1,677

5,962

⁵Total
Partners in Big FourNetwork Firms

Not available

3,180

⁶Peer
Reviewed Firms/Registered Audit Firms

1,826

(11.08.2017)

6,010

(31.12.2016)

Peer Reviewed Firms/Registered Audit
Firms as % of Total Accounting Firms

2.63%

13.75%

⁶Recognised
Qualifying Bodies (RQBs) offering audit qualification

⁶Recognised
Supervisory Bodies (RSBs) responsible for supervising the work of statutory
auditors

Sources and notes:

1. www.imf.org. India is catching up fast and
expected to surpass by 2019 as per the recent estimates by the IMF.

2. www.icai.org and www.frc.org.uk. The total
number of members for the seven accountancy bodies in the UK and Republic of
Ireland (ROI) within these two countries.

3. www.icai.org and www.ons.gov.uk.

4. www.icai.org and www.frc.org.uk. The UK data
represents the registered audit firms.

5. www.icai.org and www.accountancyage.com – UK’s
Top 50+50 Accountancy Firms 2017 by Accountancy Age.

6. www.icai.org and www.frc.org.uk.

The Select Committee on Economic Affairs of the
House of Lords of the UK(the Select Committee) in its report “Auditors:
Market concentration and their role” published in March 2011 notes that the
Big Four audited 99 of the FTSE 100 leading firms and around 240 of the
next-biggest FTSE 250 in 2010. They also had about 80% audits of the FTSE small
capitalisation firms. The Select Committee commented that it took 150 years
from the beginnings of modern audit in Britain around 1850 to the emergence of
the Big Four. The Committee added that internationalisation of business,
economies of scale and the reputational assurance to be the significant factors
that helped the dominance of the Big Four.

In contrast, the Big Four in India audited merely
26% of the total 1,519 companies listed on the National Stock Exchange (NSE) as
per a study report published by Prime Database in September 2016. The report
also stated the percentage of the companies audited by the Big Four was higher
at 47% in the Nifty-500 subset. Despite a much lower proportion (2.63%) of the
IAFs being subject to peer review, the percentage of the Big Four amongst the
NSE listed companies is much smaller.

The history of the Big Four in India is of recent
vintage, and the evolution of large IAFs is in early stages. There have been
several successful IAFs with a long history. However, very few of them have
been able to evolve beyond a set of individuals into an institution and expand
their footprint significantly. A good number of such IAFs have become part
of the Big Four in order mainly in the wake of globalisation post-1991.

The statistics in the above table show that the
IAFs are much more fragmented with a higher ratio of the proprietary firms even
though the Small and Medium Practitioners (SMPs) form a large part of the
Accounting Profession even in a matured market. The economics of the SMP
practice is such that the intensity of competition exerts further pressure on
margins which results in inadequate investment required in turn hampering their
evolution into a large organisation. India has witnessed very few successful
examples of AFs coming together to build a bigger firm that could encourage the
consolidation in the accounting profession. A major impediment is the ability
of the founders/partners to grow beyond the personal capacity of serving the
clients and building the business.

The statistics in the above table also show a much
lower number of IAFs with 50/100 or more partners as well as the aggregate
number of the partners in such large firms in India when compared to the UK.
The advent of the Limited Liability Partnership (LLP) removing the restrictions
on the number of partners in India and possibility of forming
multi-disciplinary partnerships should give an impetus to open tremendous
growth opportunities for the IAFs.

Building a Top Global Accounting Firm

David H. Maister, in his well acclaimed book “Managing
Professional Services Firm” writes that every professional service firm in
the world, regardless of size, specific profession, or country of operation,
has the same mission statement: “Outstanding service to clients, satisfying
careers for its people and financial success for its owners.”

Building a top global AF requires striving well
beyond these necessary ingredients of outstanding client service, nurturing a
winning team and ensuring the financial success. Research on what makes a
long-lasting global organisation shows that the following elements are critical
in building a top global IAF:

Core Ideology

In his book “Built to Last”, the author Jim Collins
narrates how their research revealed that the visionary company was guided more
by a core ideology—core values and a sense of purpose beyond just making
money—than the comparison company was. Jim says that a deeply held core
ideology gives a company both a strong sense of identity and a thread of
continuity that holds the organisation together in the face of change.
Another important learning from their research is that the architects of
visionary companies don’t just trust in good intentions or “values statements;”
they build cult-like cultures around their core ideologies. These learnings
apply equally to the AFs wanting to transform into a long-lasting organisation
that will transcend beyond individuals and to be regarded as institutions.

Marketplace Strategy

A successful AF will require evolving winning
strategy not only regarding whether to specialise or to generalise but also the
marketplace positioning. As an example, one may adopt “Cost leadership” as a
strategy given the India advantage or pursue a “Differentiation” strategy or a
research-driven “Focus/Expertise” as a strategy. Many IAFs cruise along and do
not exercise a conscious choice when it comes to this critical element. Several
firms take up every assignment that comes their way and not focus on a specific
segment/area where they wish to be. Research shows the business that are
focussed on specific market segments are able to build a stronger brand and
also are more profitable.

Eminence and Thought Leadership

Closely linked with the marketplace strategy are
the eminence and thought leadership strategy and plans. The AFs need to build
their reputation in a way that helps create new relationships and drive the
growth. In an increasingly competitive and complex world, an AF that can
showcase early-stage thinking and the unique expertise of an emerging thought
Leader to win the battle for ideas will stand to gain.

Partnership governance

The partnership governance is the most critical
factor. However, being a highly sensitive subject and perhaps due to conflict
of interest, there is minimal discussion around this. A strong Partnership
governance where the individual partners regard the organisational benefits
above self-interests is crucial to building a large, long-lasting organisation.
The norm today is for the firm to be democratic whereby every member of the
Partnership, howsoever senior, should be required to abide by the majority vote
regardless of how they feel about a matter. The partners elect a governing
board and to strive for consensus on major issues, such as strategy,
compensation, hiring, training, organisation, and choice of service lines.

As part of the governance process, the AF should
evolve a structured approach to deal with partners’ compensation and promotion
that can be based on measurable performance usually adapting the principles of
the balanced scorecard. The measures could include quantitative as
well as qualitative criteria such as earnings, billable hours, collection,
cross-referrals, contribution to firm’s initiative such as building eminence,
etc. Such a performance appraisal process can raise contentious, confusing and
conflicting issues in many firms, but data-driven, objective and structured
appraisal process covering even the managing partner or the CEO can contribute
to long-term growth and success of an AF.

Collaboration

Building a global AF will require fostering a
culture of collaboration and ensuring the people do not work in silos. A higher
degree of cooperation is needed in the areas of staffing (cross-staffing, staff
rotation), client relationship, knowledge-sharing and training &
development to break through the silos and pursue growth. David Maister
describes the preferred model as “The One-Firm Firm”. Maister suggests that a
firm that cultivates an environment focused on the outcomes for the firm as a
whole rather than for the individuals only, will operate as an effective team.
Such a firm also needs to foster the culture of coaching and mentoring at all
levels starting from the top with the Partners actively helping to solve
problems, develop opportunities and provide inspiration.

Talent management

The importance of attracting the right talent and
nurturing them can never be over-emphasised. A typical SMP falls into the trap
of lower fees resulting in lesser ability to attract and retain quality staff.
A regular challenge faced by an AF is the inability of a senior member to
delegate appropriately. There is a core tendency of ‘professionals’, to assume
higher levels of expertise, find it necessary to do the work and that there is
less standardisation possible – a problem caused by insecurity or unresolved
ego issues. Building a right mix of the staff pyramid and ensuring appropriate
delegation with rewards and recognition at each level are crucial to the
success of an AF.

Technology

In today’s age, the technology has become an
essential enabler for an AF to success. Many firms are embracing cloud and
digital technologies for real-time collaboration with the clients and manage
the paperless workflow. The AFs need to groom and encourage younger leaders to
adapt to the changes and overcome the challenges thrown by continuously
evolving technology.

Conclusion

The successful global accounting firms, such as the
Big Four, present several lessons that can help IAFs embrace the opportunity
and pursue growth. There are several top global Indian information technology
(IT) companies, and India has emerged as the Worlds’ largest sourcing
destination for the IT industry. A large number of Indians occupy the
leadership positions in large global businesses.

These successes have led not only the economic
transformation of the country but also altered the perception of India in the
global economy. The rise of Indian multinational companies has been well
acclaimed and can provide a strong backbone to the IAFs in pursuing global
growth opportunities.

Let’s hope the nudge from the Hon’ble PM on 1^st
July 2017 triggers the IAFs and the Profession at large to

reflect and pursue the goal of building a top global IAF in times to come.

shailesh.kwebmaker

Ind As – Learnings From Phase 1 Implementation Tips For A Smooth Implementation (Part 2)

Introduction

The first human landing on the moon was
aptly described by Neil Armstrong as “One small step for man, but a giant leap
for mankind.” For Phase 1 Ind AS conversion process one may say, “One small
step for the regulators, but a giant leap for the profession and the corporate
sector.”

In accordance with the road map, phase 2
entities have started providing quarterly results under Ind AS starting from
the first quarter of 2017-18 with comparative Ind AS numbers for 2016-17. Under
Ind AS 101, the first time adoption choices are open and can be changed till
the preparation of the first annual financial statements for 2017-18. Also,
quarterly results do not include the disclosures required in the Ind AS annual
financial statements. It is therefore worthwhile for Phase 2 entities to learn
from Phase 1 Ind AS implementation. Some important tips were included in Part I
of the article. With Part II, we conclude this topic.

Make the
Ind AS conversion process a system driven process and not a manual
process

For many Phase 1 entities, transition was
not a smooth process. Most companies used short cuts such as doing the Ind AS
conversion process using spread sheets. Fixed asset registers were not updated
for the Ind AS impacts. Neither did the entity consider the impact of Ind AS
conversion on internal financial controls. Reliance was placed more on manual
controls rather than automatic IT controls. Tax accounts were generated offline
and consolidation was done on spread sheets instead of using an accounting
package. The conversion processwas dependent entirely on a few people and was
not institutionalised. Therefore it became a people driven activity rather than
a process driven activity. With the departure of those critical people, some
entities may haveexperienced severe difficulty.

Phase 1 entities grappled with a lot of
challenges simultaneously, such as, GST, ICDS, Company law, Audit rotation, MAT
and Ind AS. As a result of lack of time and an
unstable platform, it was probably not possible or efficient for Phase 1
entitiesto make the Ind AS change a system driven process. In contrast, Phase
II entities have a relatively stable platform, more time and have already dealt
with some other challenges, such as audit rotation or Company law. Phase II
entities should therefore make the Ind AS conversion a system driven process.

Closely consider matters relating to control
and consolidation

The definition of control and joint control
under Indian GAAP and Ind AS are significantly different. For companies that
have a lot of structured entities or strategic investments, Ind AS may have a
huge impact in the consolidated financial statements (CFS). Consider an
example.

The Insurance Laws (Amendment) Act, 2015
provides specific safeguards relating to Indian ownership and control.
Currently, FDI is allowed only upto 49%. Many Indian companies have set-up
insurance companies in partnership with foreign partners. Though the Indian
company owns 51% of the shares, but through the shareholders agreement, the
foreign partner was having effective control or joint control of the insurance
company.

Under Indian GAAP, the Indian partner fully
consolidated the Insurance subsidiary, based on 51% shareholding.

Under Ind AS, the insurance company is not a
subsidiary of the Indian partner, since it does not have the effective control.
The auditors insisted that the company cannot be consolidated by the Indian
partner under Ind AS; whereas, the Insurance Regulatory and Development
Authority (IRDA) wanted the Indian partner to consolidate the entity since as
per the Insurance Laws (Amendment) Act, the Indian partner should have the
control of the insurance company. In a particular case, the shareholders
agreements was changed to enforce IRDA’s guidelines on ‘India Owned India
Controlled’. Another example of legal challenge relates to real estate. The
regulations on Urban Land Ceilings (ULC) would restrict the quantum of land
owned by a real estate company. As a result, real estate companies own land
through several structured land holding entities, which are not subsidiaries
under Indian GAAP and therefore not consolidated. Till such time the outdated
legislations are amended, these strategies will have to be evaluated, after due
consideration of the Ind AS requirements.

Similar issues may arise in e-retail,
defence, hospital, education, payment banks, etc. where FDI norms or
other regulations apply. These issues are very complicated and would need
careful consideration, legal opinions and timely planning.

Watch-out for Unintended Consequences

A lot of puritanical accounting required by
Ind AS can create challenging situations for Indian entities. Consider an
example.

Example 1

Telecom companies are required to pay
license fees on their revenue. As per the Honorable Supreme Court judgement,
revenue includes treasury income. Under the Companies Act 2013, a loan to a
subsidiary company should be interest bearing and the interest rates are market
linked. However, a telecom company may have subscribed to redeemable preference
capital issued by a subsidiary that provides only discretionary dividend.
Consequently, this would require the Telecom Company to present the preference
share investment in Ind AS financial statements at a discounted amount, and
subsequently recognise P&L credit arising from the unwinding effect. This
is elaborated in the example below.

A day prior to transition, Parent gives 10
year INR 1000 interest free loan to Subsidiary.

Parent
accounting

Debit

Credit

Comments

On
transition date (TD)

Investment
in redeemable preference shares (Loan to Subsidiary)

600

Recorded
at discounted amount

Addition
to equity investment in Subsidiary

400

MAT
benefit available on sale or realization of the investment

Bank

1000

Going
forward over 10 years

Investment
in redeemable preference shares (Loan to Subsidiary)

400

Interest
income (P&L)

(unwinding
of interest on loan)

400

MAT
will be paid on the book profits over the 10 year period of interest income
recognition

A similar accounting would be required when
the Telecom Company provides a financial guarantee to a bank on behalf of its
subsidiary. P&L will also be credited for the unrealised fair value gains
on mutual fund valuation, when the net asset value of the mutual fund has
increased.

From an accounting point of view, counting
the chicken before they are hatched, may be appropriate as it represents the
substance of the transaction or the fair value at the date of the balance
sheet. Consequently, regulators may argue that telecom companies are required
to pay license fee on such artificial income recognised in accordance with Ind
AS. Similarly, if the Telecom Company is in the Minimum Alternate Tax (MAT)
regime, all the above artificial income would be included in book profits and
subjected to a MAT tax. Is it fair, that an accounting change should have
such severe unintended consequences for Indian entities? These are some
unintended consequences of implementing Ind AS, which in the opinion of the
author should have been taken care of by the authorities much before the
implementation of Ind AS was announced.

Phase II companies should not
underestimate the business consequences of implementing Ind AS, and carefully
plan for these unintended consequences. For example,
in the above situation, if the Telecom Company had converted the loan into
equity prior to the TD, the above consequences can be mitigated. However, there
may be other tax consequences of converting loan into equity. Therefore,
entities should strategize after obtaining appropriate tax advice.

Do some out of the box thinking

Some out of the box thinking will always
help. For this purpose, the entity will need to be assisted by people
with many years
of Ind AS experience and expertise. Consider an example. With respect to
joint ventures, some entities may have preference for the proportionate
consolidation method, because it helps the consolidating entity to show a
higher revenue and a larger balance sheet size. Other entities may have
preference for the equity method of accounting for joint ventures, because it
reduces the debt and the leverage in the consolidated balance sheet. Under
Indian GAAP, joint ventures are always consolidated using the proportionate
consolidation method. However, Ind AS invariably requires the equity method of
accounting for jointly controlled entities. The actual impact in the case of a
tower infrastructure company is given below.

Impact on Ind AS results of FY March 2016
compared to Indian GAAP results for the same period

INR million

Approximate % of reduction

Reduction in revenues

68,000

50% reduction

Reduction in Property, Plant and Equipment (PPE)

79,000

57% reduction

Reduction in gross assets

38,000

15% reduction

It may be noted that under Ind AS 108, Operating
Segments, the segment operating results do not have to be prepared based on
the accounting policies applied in the preparation of the financial statements
of the entity. The segment disclosures are presented in the financial
statements, based on how those are reported to the Chief Operating Decision
Maker (CODM) for the purposes of his/her decision making. It is therefore
possible for an entity to present the segment disclosures in which the jointly
controlled investee is consolidated using proportionate consolidation method
though for the financial statements it was consolidated using the equity
method. This strategy can be applied only if the CODM actually uses the segment
information for decision making prepared on the basis of proportionate consolidation
method.

There will be many such situations where an
entity will be required to do some out of the box thinking.

More planning required for mergers and
amalgamations (M&A)

Entities will need to rethink their
strategies around M&A because Ind AS requirements are very different
compared to Indian GAAP. More importantly, the Companies Act now requires an
auditor’s certificate to certify that the accounting given in the M&A
scheme submitted to the court is in compliance with the accounting standards.
This requirement applies irrespective of the listing status of the company.
Many companies faced situations where they did not have any clarity on the
M&A accounting, particularly those that happened prior to the TD or in the
comparative Ind AS period. The end result was that the M&A accounting
particularly those prior to the TD and in the comparative period ended up all
over the place. Trying to explain all that is meaningless, and will sound
gobbledegook.

Two key differences between Indian GAAP
and Ind AS is that under Indian GAAP, the M&A is to be accounted from the
appointed date mentioned in the scheme. Under Ind AS, the M&A is accounted
at the effective date, which is when all the critical formalities relating to
the M&A are completed. For example, in the case
of a merger of two telecom companies, TRAI approval, court order, CCI approval,
etc. would need to be completed and the date when all these important
formalities are completed would be the effective date for accounting the
M&A. The other major difference is that under Indian GAAP, it was easily
possible with a bit of tweaking to either apply the pooling of interest method
or the acquisition accounting method. Contrarily, under Ind AS, M&A between
group companies under common control is only accounted using the pooling of
interest method and M&A between independent companies is only accounted
using the acquisition accounting method. Therefore under Ind AS entities will
no longer have the flexibility that Indian GAAP provided.

It may be noted that under the pooling of
interest method, the M&A is accounted at book values of the net assets of
the transferor company and the difference between the fair value of the
consideration paid and the share capital of the transferee company is adjusted
against reserves. This accounting could therefore significantly dent the net
worth of the acquirer.

A common challenge is whether the M&A is
accounted from the appointed date or the effective date. This would depend on
whether we perceive the Court approval as a substantive hurdle or a mere
procedural formality. The author believes that under Indian jurisdiction, court
approval should be considered as a substantive hurdle. It cannot be considered
as a mere procedural formality.The Madras High Court by way of its order dated
6^th June, 2016 in the case of Equitas passed a very
interesting order. In the said case, the holding company had applied to the RBI
for in-principle approval to establish a Small Finance Bank (SFB). The RBI
granted an in-principle approval subject to the transfer of the two transferor
companies into the transferee company, prior to the commencement of the SFB
business. The Regional Director (RD) raised a concern that the scheme did not
mention an appointed date, and that the appointed date was tied to the
effective date. Further, even the effective date was not mentioned and it was
defined to be the date immediately preceding the date of commencement of the
SFB business. The court observed that under section 394 of the Companies Act
such a leeway was provided to the Company. Further, section 394 did not fetter
the court from delaying the date of actual amalgamation/merger. This judgement
would provide a leeway to the Company to file scheme of mergers/amalgamation
with an appointed date/effective date conditional upon happening or
non-happening of certain events.

M&A prior to TD also lent itself to
numerous tax mitigation or balance sheet sizing opportunities. Consider an
example. Parent acquires business under slump sale before TD from home grown
subsidiary, the book value of which was INR 600 and fair value was INR 650. The
accounting under Indian GAAP is as follows.

Scenario under Indian GAAP: Apply
acquisition accounting under AS 14

Particulars

INR

Consideration

1000

Fair value

650

Goodwill

350

Under Ind AS, since this is a common control
transaction, pooling of interest method would apply and consequently no
goodwill is recorded.

Scenario under Ind AS: Common control
transaction. Apply pooling of interest method. No goodwill.

Particulars

INR

Consideration

1000

Book value

600

Capital reserve (negative)

400

In the normal Income Tax computation, when
the M&A was first recorded under Indian GAAP, goodwill will form part of
the gross block of asset and tax depreciation deductions would be available
subject to fulfillment of certain conditions. On the other hand, by applying
Ind AS retrospectively to the M&A, goodwill in the TD balance sheet is
eliminated, and consequently future P&L is protected against any impairment
of that goodwill. This strategy should not taint the tax deductibility of
goodwill, since it is already included in the gross block in the tax computation.

Do not forget that impact of regulations can
be debilitating

Appendix A to Ind AS 11 Service
Concession Arrangements applies to an arrangement in which the Government
regulates the pricing and has residual interest in that project. Hitherto,
under Indian GAAP, an infrastructure company recorded the investment in an
infrastructure project as PPE (INR 100 in example below) and the user charges
collected from users as revenue. Under Ind AS, such an arrangement would be
treated as an exchange transaction between the Government and the
infrastructure company. The exchange involves providing construction
services in lieu of a right to charge users (eg, toll in the case of a
road) or receive annuity from the Government. Accordingly the infrastructure company
would record construction services at fair value (INR 120 in below example) in lieu
of an intangible asset (or annuities) it receives from the Government. This
accounting results in recording a profit of INR 20 (in the example below) as
the construction services are provided.

Indian GAAP

Ind AS

PPE

100

Construction cost

100

Construction margin/ profit

Construction revenue

120

Intangible Asset or Receivables

120

The above accounting creates numerous
business challenges, a few of which are given below:

– Certain
infrastructure projects require a percentage of revenue to be shared with the
Government. The above Ind AS accounting results in a huge revenue recognition
upfront, potentially creating an obligation on the infrastructure company to
pay a share of the revenue to the Government. The amount and the consequences
and the litigation that can follow, can be debilitating to an infrastructure company.

– For
an infrastructure company that is under MAT regime, it would have to pay MAT on
the artificial income of INR 20. Besides, for a company that is under normal
tax regime, an obligation to pay tax may arise on INR 20, depending on how ICDS
is interpreted.

– If
the arrangement entails annuity payments by the Government, then instead of an
intangible asset a receivable from the Government would be recorded at fair
value. This could potentially make an infrastructure company an NBFC, exposing
it to a whole set of financial regulations and RBI requirements.

The above are only a few examples of the
consequences of adopting Ind AS for an infrastructure company. The author
believes that these are unintended consequences, which the authorities should
have resolved before making Ind AS implementation mandatory. The problems faced
by infrastructure companies are enormous. This will further add to their
burden.

Similar challenges also arise in multiple
areas, for example, in the case of leases embedded in service contracts.
However, with careful planning and structuring, an entity may be able to
eliminate or minimise the adverse consequences.

Great opportunity to correct size the balance
sheet

The Ind AS conversion process provides a
once in a life time opportunity to get the balance sheet right, and to execute
tax mitigating opportunities. Consider some examples.

1. The
Expected Credit Loss (ECL) model can be applied on the TD for making a
provision against receivables or work in progress. This strategy can reduce
some of the stress on the old receivables, particularly arising from the time
value of money. More importantly, since the provision amount is adjusted
against retained earnings the future P&L will be protected. As per FAQ 6 in
“Clarifications on computation of book profit for purposes of levy of MAT
u/s 115JB of the Income-tax Act, 1961 for Ind AS compliant companies”
issued by CBDT, TD adjustments relating to provision for doubtful debts shall
not be considered for the purpose of computation of the transition amount for
MAT deduction.

2. Upward increase in fair
value of PPE, particularly land will improve the net worth of an entity. If all
PPE is fair valued upwards, it may result in higher depreciation charge in
future years. On the other hand, if only land is fair valued, then net worth
may improve significantly without causing any dent on future P&L on account
of depreciation. A downward fair valuation of PPE may be applied in cases when
those assets are on the threshold of an impairment charge. A downward fair
valuation of the PPE, will ensure that future P&L is protected from an
impairment charge.

3. Perpetual debts are
instruments that do not contain an obligation for redemption or interest
payments. However, they do contain an economic compulsion, such as, dividend
blocker on other equity shares of the issuer or steep increases in the interest
rate for future periods, etc. An entity can achieve a better balance
sheet by using appropriate capital instruments. For example, instruments which
do not contain a redemption obligation would be classified as equity. Therefore,
perpetual debts in the books of the issuer will be classified as equity and the
interest outflow will be treated as dividends and debited to Statement of
Changes in Equity (SOCIE). One will
also need to consider tax risks of Tax Authority seeking to deny deduction of
interest in normal tax computation and/or seeking to levy Dividend Distribution
Tax u/s. 115-O on the ground that it is in the nature of dividend. Further,
since interest outflow will be debited to SOCIE, the company will lose out on
MAT deduction in the absence of debit to P&L.

Phase II companies should evaluate the
numerous possibilities of getting the balance sheet right.

Conclusion

Phase 2 entities should use the benefit of
lessons learnt on Phase 1 implementation and avoid any pitfalls. It will
require help from an expert, careful consideration of regulatory and business
impacts and timely planning. _

shailesh.kwebmaker

E-Assessments – Insights on Proceedings

In 2006, the Indian government introduced
mandatory e-filing of income tax returns by the corporate assesses. Later on,
this was extended to other types of assessees and since then, the digitisation
in this area has progressed for betterment. Gradually, a lot of facilities have
been provided through the official e-filing website of income tax like checking
refund status and demand status, filing of online rectifications, viewing 26AS
for the ease of tax payers etc.

Until now, processing of returns is done by
two ways, i.e. summary assessments u/s. 143(1) and scrutiny assessment u/s.
143(3). In summary assessment, the arithmetical accuracy of returns filed like
errors in interest calculation or claim of credit u/s. 26AS or any such errors
are checked by Centralised Processing Centre (CPC) on e-filing of return of
income. Intimation is thereby sent to the taxpayer by email determining a
demand, refund or just accepting the return as filed, if there are no errors.
Tax payer can file a response to this intimation online on the e-filing portal.
In the latter case of scrutiny assessment, the case is transferred from CPC to
the jurisdictional Income Tax Officer of the assessee to analyse the case in detail.

A scrutiny assessment requires submission of
lot of paper work, evidences and submission of basically everything which the
Assessing officer (AO) desires. Also, the assessee is required to be present
every time the AO will request attendance by way of notice. The entire process
of filing heaps of paper with several meetings and of course, a never-ending
wait outside the officer’s cabin has made the entire process of assessment time
consuming and cumbersome, not to mention the menace of growing corruption in
the whole practice.

As a part of the e-governance initiative and
with a view to facilitate a simple way of communication between the Department
and the taxpayer, through electronic means, the Central Board of Direct Taxes
(CBDT), the policy making body of income tax department, launched its pilot
project on E-assessment proceedings in October, 2015. The idea was to reduce
human interface in the proceedings and to bring transparency and speed.

Initially, the pilot project was launched in
5 metro cities i.e. in Ahmedabad, Bengalaru, Chennai, Delhi and Mumbai where a
few non corporate assessees were assessed through notices and replies shared
through electronic mails (E- mails) and through e-portal of income tax, and
later on it was extended to another two metros – Kolkata and Hyderabad. This
pilot project was successful in these 7 cities. A latest blue print prepared by
the department on the subject states that the number of paperless or
e-assessments over the internet has seen growth in the last three years. It
also said that a simple analysis of the figures states that the growth in the
number of cases being processed in an e-environment has jumped slightly over 78
times. As digital platform is now available to conduct end to end scrutiny
proceedings, CBDT has decided to utilise it in a widespread manner for conduct
of proceedings in scrutiny cases.

The Finance Bill, 2016 proposed to amend
various provisions of the Income-tax Act, 1961 read with Rule 127 of Income Tax
Rules, 1962 and the Notification No. 2/2016 issued by the Central Board of
Direct Taxes (CBDT) which aimed to provide adequate legal framework for
e-assessment, in order to enhance the efficiency and reduce the burden of
compliance.

Accordingly, section 282A is amended so as
to provide that notices and documents required to be issued by income-tax
authority under the Act shall be issued by such authority either in paper form
or in electronic form in accordance with
such procedure as may be prescribed. Also, sub-section (23C) is inserted to
section 2 so as to define the words “Hearing” to include the communication of
data and documents through electronic mode.

The Central Board of Direct Taxes (CBDT)
vide Income-tax (18^th Amendment) Rules, 2015 had notified Rule 127
for Service of notice, summons, requisition, order and other communication on 2^nd
December 2015. This rule states the manner of communications through physical
and electronic transmission. Also, the Principal Director General of Income tax
(Systems) has specified by Notification No. 2/2016, the procedure, formats and
standards for ensuring secured transmission of electronic communication in
exercise of the powers conferred under sub-rule (3) of Rule 127. So, all the e-
assessment proceedings will be governed by the above stated section, rule and
notification.

Who and what is covered under E-assessments?

– All
taxpayers who are registered under the e-filing portal of income tax –
http//:incometaxindiaefiling.gov.in are technically covered by this initiative.

– The
new regime is voluntary for the tax payer and the tax payer can choose between
the e-proceedings through electronic media or the existing manual assessment
proceedings with the income tax department.

– The
E-functionality shall be open for all types of notices, questionnaires, and
letters issued under various sections of the Income-tax Act, 1961, and it shall
cover the following:

– Regular Assessment
proceedings u/s. 143(3).

– Transfer pricing
assessments.

– Penalty proceedings under various
sections.

– Revision assessments.

– Proceedings in first
appeal for hearing notice.

– Proceedings for granting
or rejecting registrations u/s. 12AA, 80G or other exemptions.

– Proceedings for seeking
clarification for resolving e-nivaran grievances.

– Rectification applications
and proceedings and any other things which may be notified in future.

Step by step procedure of E-assessment
proceedings:

– All
the notices and questionnaires will be visible to the taxpayers after they log
onto the income tax e-filing website under “E-proceeding” tab and the same
shall also be sent to the registered email address of the taxpayer. In case a
taxpayer wishes to communicate through any other alternative email ID, the same
may be informed to the officer in writing. All mails from the income-tax
department for the e-assessment proceedings should be sent through the
designated email ID of the assessing officer having the official domain, for
eg: domain@incometax.gov.in.

– Also,
a text message will also be required to be sent on the mobile number of the
taxpayer registered on the e-filing website.

– Notice
received u/s. 143(2) should clearly mention the nature of scrutiny as “Limited
Scrutiny” or “Complete Scrutiny” as the case may be, along with issues
identified for examination i.e. reason for selection by the Assessing Officer
is supposed to have detailed description related to the case collected from
AIR, CIB and other sources.

– All
notices/questionnaires/communications sent by department through e-proceeding
shall be digitally signed by the Assessing officer.

– The
ITO along with these correspondences shall also send a letter by email seeking
consent for use of email based communication of paperless assessment. However,
the assessee will have the choice to opt out of the e-proceedings and this can
be communicated by sending a response through e-filing website. Also, the
assessee can, even after he has opted for e-assessment proceedings, at any time
choose to switch to manual proceedings with prior mention to the Assessing
Officer. This should remove apprehensions about limiting the right to
being heard.

– Manual
mode can also be adopted for those assessees who are not registered on the
E-filing website of The Income-tax Department or if the Income-tax Authority so
decides with specific reasons which should be recorded in writing and approved
by the immediate supervisory authority.

– Response
should be submitted in PDF format as attachments and the size of attachments in
a single email cannot exceed 10MB. In case total size of the attachments
exceeds 10 MB, then the tax payer shall split the attachment and send in as
many emails as may be required to adhere to the limit of the attachment size of
10MB per mail. Alternatively, responses may also be sent in e-filing website
through e-proceeding tab available.

– The
Assessee will be able to view the entire history of
notice/questionnaire/letter/orders on ‘My Account’ tab on the e-filing website
of the department, if the same has been submitted under this procedure.

– All
email communications between the tax officer and taxpayer shall also be copied
to e-assessment@incometax.gov.in for audit trail purposes.

– In
order to facilitate a final date and time for e-submission, the facility to
submit a response will be auto closed 7 days prior to the Time-Barring (TB)
date, if any. If there is no statutorily prescribed TB date, then the
income-tax authority can, on his volition, close the e-submission whenever the
compliance time is over or when the final order or decision is under
preparation to avoid last minute submissions. The authority shall close
proceedings in such case after mentioning in the electronic order sheet that
‘hearing has been concluded’

– Once
the proceeding is closed or completed by the income-tax authority, e-submission
will not be allowed from assessee.

– Once
the scrutiny/hearing is completed, the tax officer shall pass the assessment
order/final letter and email it in PDF format to the taxpayer and the same will
also be uploaded on the e-filing portal of the user.

Salient Features of CBDT’s Instruction no.9/2017
dated 29^thSeptember, 2017:

CBDT vide its Instruction No. 8/2017 dated
29^thSeptember, 2017 has brought about various aspects of conducting
assessments electronically in cases which are getting time barred by limitation
during the financial year 2017-18.

– All
time barring scrutiny assessments pending as on 1^st October 2017,
where hearing has not been completed shall be now migrated to e-proceeding
module on ITBA. An intimation informing the same shall be sent by the AO to
assessee before 8^th October, 2017.

– In
respect of ‘limited scrutiny’ cases, now an option has been made available to
the assessee to give his consent to conduct e-proceeding of their scrutiny
assessment. The consent is required to be submitted before 15^thOctober,
2017.

– Scrutiny
cases which are covered as above or cases where assessee has opted for manual
proceedings, all time barring assessments u/s. 153C/53A or any specific time
barring proceedings such as proceedings before the transfer pricing officer,
before the Range head u/s. 144A shall be continued to be conducted
manually.

–
Assessment proceedings being carried out through e–proceeding facility may
under following situations take place manually:

– Where manual books of
accounts or original documents needs to be examined.

– Where AO invokes
provisions of section 131 of the Act or notice has been issued for any third
party investigation/enquiries.

– Where examination of
witness is required to be made by the concerned assessee or department.

– Where a show cause notice
has been issued to the assessee expressing any adverse views and assessee
requests for personal hearing to explain the matter.

– In
time barring ‘limited scrutiny cases’ or seven metros under email based
assessment where now proceedings will be conducted through e-proceeding
facility, the records related to earlier case proceedings shall be continued to
be treated as part of assessment records. In these cases, case records as well
as note sheet of subsequent proceedings through e-proceeding shall be maintained
electronically.

Advantages if the taxpayer opts for the
scheme:

– It
shall certainly save a lot of time and money of the tax payer contrary to the
existing scenario, where most of the time goes in travelling to the income tax
offices and being present personally before the officer, as also waiting
outside the cabins of the officers.

– No
bulky submissions are required to be made physically anymore, so this will
definitely reduce the compliance burden on the assessee. It will also result in
saving of tonnes of paper.

– Facilitates
ease of operation for both the taxpayer as well as the Income Tax Officer.
Taxpayer can at anytime, and from anywhere, reply to the questionnaires and
notices issued by the Income Tax Officer.

– Taxpayer
and Assessing Officer can track a complete record of any number of proceedings
between the two, thus offering stability and uniformity.

– The
e-assessment process will limit the interactions between the taxman and the
taxpayer and will improve transparency in the entire course of assessments,
accordingly helping in reducing corruption in the system.

– The
taxpayer has flexibility any time at his discretion to opt out of this scheme
with prior intimation to the Assessing Officer.

Prospective issues which may occur:

– The
complete proceedings of e-assessments are based on technology and hence, the
system shall totally depend on the timely and appropriate two way communication
between the tax payer and the tax officer and also the simplicity the system
provides.

– Currently,
many tax payers are reluctant to opt for e-assessments, worrying that it will
be difficult to make a complex representation.

– For
assessments where voluminous data and details are asked by the assessing
officer, it may be a challenge to upload everything online within the given
limit of 10 MB, and may also become an onerous task at the same time.

– Once
the proceedings are closed by the officer, no e-submission of the assessee will
be accepted, one has to wait and watch the consequences of genuine defaults and
delays.

– The
proceedings can be a nightmare for senior citizens who may not be technology
savvy to use this service, so they may opt for manual proceedings only.

However, given the limited hardships it has,
the expediency offered by the paperless proceedings cannot be neglected. The
time and cost saved in consultants, record keeping, and making personal
representations are worth appreciating. Considering the significance of
technology in today’s era, it is a welcome move by the government towards
digitalisation of India.

The e-proceedings are hassle free and cannot
be tampered with under vigilant cyber security laws. If best practices are
adopted by the taxmen and the taxpayer towards the e-proceedings, it shall
prove to be a historic change in the tax systems of the country. A large number
of assessments today are done based on asking for details and data and seeking
justifications and explanations; this option should help such assessees.

The success of the scheme shall depend upon
the ease of operation in e-proceedings, acceptance of tax officers to get acquainted
with it and the willingness of the taxpayers to opt for it. _

shailesh.kwebmaker

6 Section 40a(i) read with section 195 – Sales commission paid to foreign agent is neither technical service nor managerial, hence not covered under Explanation to section 9(2). No tax required to be deducted u/s. 195.

6.
Divya Creation vs. ACIT

Members:
R. K. Panda (A. M.) and Suchitra Kamble (J. M.)

ITA No.5603/Del/2014.

A.Y.: 2010-11

Date of Order: 14^thSeptember,
2017

Counsel for Assessee / Revenue: Piyush Kaushik / Arun Kumar Yadav

Section 40a(i) read with section 195 –
Sales commission paid to foreign agent is neither technical service nor
managerial, hence not covered under Explanation to section 9(2). No tax
required to be deducted u/s. 195.

FACTS

The assessee is a partnership firm engaged
in the business of manufacturing and export of plain and studded gold and
silver jewellery. During the year under
appeal, the assessee had paid commission of Rs. 62.13 lakh to two parties in
France and Switzerland for promoting the sales in Europe.The AO disallowed the
commission u/s. 40a(i) for non-deduction of tax at source u/s. 195 giving
following reasons:

– commission
has been remitted to the foreign agent only after realisation of proceeds by
the assessee from the customers solicited by the agents;

– as
per the agreement, in case of losses / interest which are not paid by the
customers on account of delay in payment, the same was to be adjusted against
commission payable to the agent;

– as
per the agreement, the agent was personally acting as agent of the assessee,
which was inferred by the AO as that the income of foreign agent had a real and
intimate connection with the income accruing to the assessee and this
relationship amounted to a business connection through or from which income can
be deemed to accrue or arise to the non-resident.

Further, relying on the decision of the AAR
in the case of SKF Boilers and Driers Pvt. Ltd. reported in 68 DTR 106 and the
decision of AAR in the case of Rajiv Malhotra reported in 284 ITR 564, the AO
disallowed the commission u/s. 40a(i). According to the CIT(A) although the
non-resident agents had rendered services and procured orders abroad, but the
right to receive the commission arose in India when the orders got executed by
the assessee. Accordingly, he upheld the order of the AO.

Before the Tribunal, the revenue relied on
the orders of the lower authorities.

HELD

The Tribunal referred to the following
decisions:

– The
Ahmedabad Tribunal in the case of DCIT (International Taxation) vs. Welspun
Corporation Ltd. reported in 77 taxmann.com 165 held that the commission
paid to agent cannot be considered as the fees for payment for technical
services. Such payments were in nature of commission earned from services
rendered outside India which had no tax implications in India. The Tribunal
while deciding the issue had also considered the two decisions of the AAR which
were relied on by the AO as well as the CIT(A);

– The
Allahabad High Court in the case of CIT vs. Model Exims reported in 363
ITR 66 held that the payments of commission to non-resident agents, who have
their own offices in foreign country, cannot be disallowed, since the agreement
for procuring orders did not involve any managerial services. It was held that
the Explanation to section 9(2) was not applicable;

– The
Delhi High Court in the case of CIT vs. EON Technology P. Ltd. reported
in 343 ITR 366, held that non-resident commission agents based outside India
rendering services of procuring orders cannot be said to have a business
connection in India and the commission payments to them cannot be said to have
been either accrued or arisen in India;

– The
Tribunal also referred to the decision of the Supreme Court in the case of CIT
vs. Toshoku Ltd. reported in 125 ITR 525, Madras High Court in the cases of
CIT vs. Kikani Exports Pvt. Ltd. reported in 369 ITR 96 and CIT vs.
Faizan Shoes Pvt. Ltd. reported in 367 ITR 155.

In view of the above, the Tribunal held that
the assessee was not liable to deduct tax under the provisions of section 195
on account of foreign agency commission paid outside India for promotion of
export sales.

shailesh.kwebmaker

6 Business expenditure – Mark to market loss – Loss suffered in foreign exchange transactions entered into for hedging business transactions – cannot be disallowed as being “notional” or “speculative” in nature: Section 37(1)

6. Business
expenditure – Mark to market loss – Loss suffered in foreign exchange
transactions entered into for hedging business transactions – cannot be
disallowed as being “notional” or “speculative” in nature: Section 37(1)

CIT-4 vs. Walchandnagar Industries Ltd. [Income tax Appeal no. 352 of
2015 dated : 01/11/2017 (Bombay High Court)].

[Walchandnagar Industries Ltd. vs. ACIT. [ITA No. 3826/Mum/2013; Bench
: G ; dated 21/08/2014 ; AY 2009-10, Mum. ITAT ]

The
assessee is a manufacturer of engineering goods. During the course of the
assessment proceedings, the A.O noticed that the assessee has shown loss on
account of foreign exchange currency rate fluctuation. On perusing the details,
the A.O noticed that the loss was on account of marked to market loss.

The
assessee was show caused to explain why the exchange rate fluctuation loss
should not be treated as speculation loss. The assessee explained the
difference between forward contracts and option contracts. The AO did not
accept the detailed submission of the assessee. The AO was of the opinion that
the loss arising from revaluation as on 31.3.2009 is a notional loss and cannot
be allowed as expenditure u/s. 37(1) of the Act.

The
assessee carried the matter before the Ld. CIT(A) but without any success.

Before
ITAT, the assessee stated that the issue of disallowance on account of marked
to market loss is squarely covered in favour of the assessee by the decision of
the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India
Pvt. Ltd. 312 ITR 254.

The
ITAT find that the Hon’ble Supreme Court in the case of Woodward Governor
India (Supra) has held that loss suffered by the assessee on account
of fluctuation in the rate of foreign exchange as on the date of the balance
sheet is an item of expenditure u/s. 37(1) of the Act. Respectfully following
the decision of the Hon’ble Supreme Court, the AO is directed to delete the
disallowance of Rs. 2,28,01,707/-.

Being
aggrieved the Revenue filed an appeal to the High Court. The court perused the
said decision of this Court in the case of CIT vs. M/s. D. Chetan &
Co ( 2017) 390 ITR 36 (Bom.)(HC); the Court held that ; Loss
suffered in foreign exchange transactions entered into for hedging business
transactions cannot be disallowed as being “notional” or “speculative” in
nature.

Hence, no
substantial question of law arises and accordingly the appeal was dismissed.

shailesh.kwebmaker

5 TDS – Section 194C or 194J – subtitling and standard fee paid for basic broadcasting of a channel at any frequency

5. TDS – Section
194C or 194J – subtitling and standard fee paid for basic broadcasting of a
channel at any frequency

CIT (TDS) vs. UTV Entertainment Television Ltd. [ Income tax Appeal no.
525 of 2015 dated : 11/10/2017 (Bombay High Court)].

[UTV Entertainment Television Ltd. vs. ITO (OSD)(TDS) 3(1). [ITA No.
2699, 4204, 4205 & 2700/Mum/2012; Bench: F ; dated 29/10/2014 ; Mum. ITAT ]

The
assessee is a Public Limited Company carrying on business of broadcasting of
Television (TV) channels. The assessee operates certain entertaining channels.
During the survey, A.O found that certain amounts were paid by assessee on account
of ;

(i)
Carriage Fees / Placement Charges.

(ii)
Subtitling charges (Editing Expenses).

(iii)
Dubbing Charges.

Tax
was deducted on the said amounts as per section 194C of the Act. The A.O was of
the opinion that the carriage fees, editing charges and dubbing charges were in
the nature of fees payable for technical services and, therefore, tax should
have been deducted u/s. 194J of the Act. The A.O passed an order that the three
items were not covered by section 194C but by section 194J.

The
appeal preferred by the assessee before the CIT(A) was partly allowed holding
that there was no short deduction of tax by the assessee on account of payment
of placement charges, subtitling charges and dubbing charges. Further appeal
was before the ITAT where Revenue appeal was dismissed.

Being
aggrieved by the said order, an appeal was preferred by the Revenue before the
High Court. The Revenue submitted that the payments made by the assessee was
not contractual payments and, therefore, section 194C of the Act will not be
applicable. His contention was that the activity for which payments were made
by the assessee are either for professional or for technical services and,
therefore, section 194J will apply to the present case. As per the Agreements
these payments are given to MSO/Cable Operators to retransmit and/or carry the
service of the channels on ‘S’ Band in their respective territories. The
services provided by these MSOs/Cable Operators does not come within the
purview of section 194C of the Act, as placing the service of the channel on
‘S’ Band is a Technical Service for which the TDS is required to be deducted as
per the provisions of section 194J of the Act.

The
Hon. Court observed that as per the agreements entered into between the
assessee and the cable operators/ Multi System Operators (MSOs), the cable
operators pay a fee to the assessee for acquiring rights to distribute the
channels. It is pointed out that the cable operators face bandwidth constraints
and due to the same, the cable operators are in a state to decide which channel
will reach the end viewer at what frequency (placement). Accordingly,
broadcasters make payments to the cable operators to carry their channels at a
particular frequency. Fee paid in that behalf is known as “carriage fee” or
“placement fee”. The payment of placement fee leads to placement of channels in
prime bands, which in turn, enhances the viewership of the channel and it also
leads to better advertisement revenues to the TV channel. The placement charges
are consideration for placing the channels on agreed frequency bands. It was
found that, as a matter of fact, by agreeing to place the channel on any
preferred band, the cable operator does not render any technical service to the
distributor/ TV channel. Reference is made to the standard fee paid for basic
broadcasting of a channel at any frequency. It has considered clause (iv) of
the explanation to section 194C which incorporates inclusive definition of
“work”. Clause (iv) includes broadcasting and telecasting including production
of programmes for such broadcasting and telecasting.

The
subtitles are textual versions of the dialogs in the films and television
programmes which are normally displayed at the bottom of the screen. Sometimes,
it is a textual version of the dialogs in the same language. Reliance is placed
on the CBDT notification dated 12^th January 1977. The said
notification includes editing in the profession of film artists for the purpose
of section 44AA of the Act. However, the service of subtitling is not included
in the category of film artists. As noted earlier, subclause (b) of clause (iv)
of the explanation to section 194C covers the work of broadcasting and
telecasting including production of programmes for such broadcasting or telecasting.

The
High Court observed that when services are rendered as per the contract by
accepting placement fee or carriage fee, the same are similar to the services
rendered against the payment of standard fee paid for broadcasting of channels
on any frequency. In the present case, the placement fees are paid under the
contract between the assessee and the cable operators/ MSOs. Therefore, by no
stretch of imagination, considering the nature of transaction, the argument of
the Revenue that carriage fees or placement fees are in the nature of
commission or royalty can be accepted. Thus, the High court concur with the
view taken by the Appellate Tribunal. The Revenue appeals were dismissed.

shailesh.kwebmaker

4 Cessation of liability – waiver of loans availed by assessee from DEG, Germany – in nature of capital liability – hence, the provision of section 41(1) was not applicable.

4. Cessation of liability – waiver of loans availed by assessee from DEG,
Germany – in nature of capital liability – hence, the provision of section
41(1) was not applicable.

CIT-4 vs. Rieter India Pvt. Ltd. [ Income tax Appeal no 477 of 2015
dated : 18/08/2017 (Bombay High Court)].

[ACIT vs. Rieter India Pvt. Ltd. [dated 24/07/2014 ; AY : 2003-04 ;
Mum. ITAT ]

The
assessee company had obtained the term loan from DEG, Germany in the course of
the FY: 1994-95 and 1995-96. The term loan from DEG, Germany has been approved
by the RBI.

The
said RBI approval reveals that the assessee was permitted to raise foreign
currency loan from DEG, Germany for financing the import of capital equipments
for manufacturing of textile spinning machinery and components.

Further,
even the loan agreement with DEG, Germany reflects financing of the project
undertaken by the assessee of manufacturing textile spinning machinery and
components thereof. The said agreement also shows that the loan raised from
DEG, Germany was a long term means of finance for the purposes of funding assessee’s
project of manufacturing textile spinning machinery and components for textile
industries.

The
assessee had placed the list of machineries which have been acquired from
Spindle Fabrik Suessen, Germany and the respective invoices thereof. The
financial statements of the assessee as on 31.03.1995 reveals that a liability
of Rs.32.75 crore was outstanding as a part of current liabilities of Rs.42.60
crore against the name of Spindle Fabrik Suessen, Germany, against the
machineries acquired. The aforesaid position is not disputed by the Revenue.
The loan from DEG, Germany was received on 30.09.1995 and was utilised for
payment of the outstanding liability towards acquisition of fixed assets of
Rs.32.75 crore, apart from meeting other liabilities. It is not in dispute that
assessee has utilied the loan raised from DEG, Germany for payment of Rs.32.75
crore to Spindle Fabrik Suessen, Germany, which was a liability outstanding
against acquisition of fixed assets from the said concern.

The
Dept. contented that discharge of such liability of Spindle Fabrik Suessen,
Germany cannot be treated as utilisation of term loan from DEG, Germany for
acquisition of fixed assets, because the assets already stood acquired prior to
that date.

The
Tribunal held that the payment made by the assessee to Spindle Fabrik Suessen,
Germany towards outstanding liability against acquisition of fixed assets of
Rs.32.75 crore, which is out of the loan funds from DEG, Germany is to be understood as utilisation of loan funds towards
acquisition of capital assets. Therefore, it has to be understood that the loan
availed from DEG, Germany was utilised for the purposes of acquisition of
capital assets, to the above extent.

Further,
the Tribunal held that the subsequent waiver of such an amount, cannot be said to be waiver of a loan raised
for trading activity. The waiver of the principal amount of term loan granted
by DEG, Germany of Rs.29,63,27,000/- was with respect to a loan which was
granted as well as utilised for purchase of capital assets, namely, plant &
machinery. Considered in the aforesaid factual backdrop, the waiver of the
principal amount of loan utilised for acquisition of capital assets and not for
the purposes of trading activity and accordingly the issue was covered in
favour of the assessee by the judgment of the Hon’ble Bombay High Court in
the case of Mahindra and Mahindra Ltd. (2003) 261 ITR 501 (Bom).

The
High Court agreed with the conclusion arrived at by ITAT, the same to be in consonance with the
principle of law laid down by the Division Bench of this Court in the case of Mahindra
& Mahindra Ltd. vs. CIT, (2003) 261 ITR 501. The Revenue in support
of the appeal, however, urged that the Tribunal ignored the law laid down in
another Judgement reported in Solid Containers Ltd. vs. DCIT, 308 ITR 417.
However, the court held that the facts and circumstances involved in the
present case were not identical to those considered in Solid Containers (supra).
The court observed that such facts as
are disclosed in the records of the present case are closer to that of Mahindra
& Mahindra and not Solid Containers. The assessee relied upon a latest
order passed in ITXA No. 1803 of 2014 dated 07^th August 2017, Commissioner
of Income Tax9 vs. M/s. Graham Firth Steel Products (I) Ltd. In the
above view, the appeal of revenue was dismissed.

shailesh.kwebmaker

27 Sections 147 and 148 – Reassessment Sections 147 and 148 – A.Ys. 1999-00 to 2004-05 – Procedure – Failure to furnish copy of reasons recorded for reopening of assessments – Not mere procedural lapse – Notices and proceedings vitiated

27. Reassessment – Sections 147 and 148 – A.Ys.
1999-00 to 2004-05 – Procedure – Failure to furnish copy of reasons recorded
for reopening of assessments – Not mere procedural lapse – Notices and
proceedings vitiated

Principal CIT vs. Jagat Talkies Distributors; 398 ITR 13 (Del):

The
assessee did not file returns u/s. 139(1) of the Act, for the A.Ys. 1999-00 to
2004-05, but had filed returns for earlier years. On the basis of information
received from the banks to which the assessee had let out its property, it was
discovered by the Department that rent had been paid to the assessee by them
after deducting tax at source. The Assessing Officer recorded reasons for
reopening of the assessment u/s. 147 and issued notices u/s. 148 asking the
assessee to file the returns. Pursuant to the notice, the assessee filed
returns which disclosed the income from the property and the business income.
The Assessing Officer initiated the assessment proceedings by issuing notices
u/s. 143(2) and section 142(1) of the Act. The assessee sought supply of the
reasons recorded for the reopening of the assessments. The reasons were not
furnished by the Assessing Officer to the assessee. Since the assessment was
getting time barred, the Assessing Officer made additions on account of the
income from house property and passed separate reassessment orders in respect
of each of the assessment years in question. The Appellate Tribunal held that
the failure to supply the reasons u/s. 148 despite the request made by the
assessee, vitiated the entire reassessment proceedings.

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

i) The Appellate Tribunal was right in holding
that on account of failure on the part of the Assessing Officer to furnish the
copy of reasons recorded for reopening the assessments u/s. 147, to the
assessee, the reassessment proceedings stood vitiated. Failure by the Assessing
Officer to provide the assessee the reasons recorded for reopening the assessment
could not be treated as a mere procedural lapse.

ii) The assessments for the A.Ys 1999-00 onwards
for five years were sought to be reopened. Having contested those proceedings
for nearly two decades, the Department was not fair in making the offer to
consider the assessee’s objections to the reopening and pass orders thereon. No
reasons could be discerned why the Assessing Officer had failed to furnish to
the assessee the reasons for reopeniong the assessments. It was not disputed
that the assessee had made requests in writing for reasons in respect of each
of the assessment years in question.

iii) Merely because the assessee did not repeat
the request did not mean that it had waived its right to be provided with the
reasons for reopening the assessment. According to the provisions of section
292BB(1) there was no estoppels against the assessee, on account of
participating in the proceedings, as long as it had raised an objection in
writing regarding the failure by the Assessing Officer to follow the prescribed
procedure. No question of law arose.

shailesh.kwebmaker

26 Sections 200, 201 and 221 – Penalty – DS – A.Y. 2009-10 – Foreign company Expatriate employees – Failure to deposit tax deducted at source with Central Government within prescribed time – Penalty – Delay in depositing amount on account of lack of proper understanding of Indian tax laws and compliance required thereunder – Tax deducted at source deposited with interest before issuance of notice – Sufficient and reasonable cause shown by assessee – Deletion of penalty proper

26. Penalty – TDS – Sections 200, 201 and 221 – A.Y.
2009-10 – Foreign company Expatriate employees – Failure to deposit tax
deducted at source with Central Government within prescribed time – Penalty –
Delay in depositing amount on account of lack of proper understanding of Indian
tax laws and compliance required thereunder – Tax deducted at source deposited
with interest before issuance of notice – Sufficient and reasonable cause shown
by assessee – Deletion of penalty proper

Principal
CIT(TDS) vs. Mitsubishi Heavy Industries Ltd.; 397 ITR 521(P&H):

The assessee was a company
registered in Japan. For the F. Y. 2008-09, it deducted tax at source u/s. 200
of the Act, on the salaries paid to its employees sent on secondment to India.
The assessee failed to deposit the amount of tax deducted at source within the
prescribed time limit as laid down under rule 30 of the Income-tax Rules, 1962.
A notice u/s. 201 r.w.s. 221(1) was issued to the assessee for failure to
comply with the provisions of Chapter XVIIB. The assessee, inter alia,
submitted that the delay in depositing the amount was on account of lack of
proper understanding of Indian tax laws and the compliance required thereunder.
It further submitted that the tax deducted at source had been deposited along
with interest on 05/06/2009, before the issuance of the notice. By an order
dated 10/08/2010, the Assessing Officer held that the assessee is deemed to be
an “assessee in default” u/s. 201 and imposed penalty u/s. 221. The
Commissioner (Appeals) cancelled the penalty and held that there was sufficient
and reasonable cause before the Department for the assessee’s non-compliance
with the provisions of tax deducted at source as the deduction of tax at source
involved complexities and uncertainty and that therefore, the order passed by
the Assessing Officer imposing penalty was unsustainable. The Appellate
Tribunal upheld the decision of the Commissioner (Appeals).

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

The Department had not
been able to show any illegality or perversity in the findings recorded by the
Commissioner (Appeals) which had been affirmed by the Appellate Tribunal. No
question of law arose.

shailesh.kwebmaker

25 Sections 147 and 148 – Reassessment Notice after four years – Failure by assessee to disclose material facts necessary for assessment – No evidence of such failure – Notice not valid

25. Reassessment
– Sections 147 and 148 – A. Y. 2004-05 –
Notice after four years – Failure by assessee to disclose material facts
necessary for assessment – No evidence of such failure – Notice not valid

Anupam
Rasayan India Ltd. vs. ITO; 397 ITR 406 (Guj):

For the A.Y. 2004-05, the
assessment of the assessee company was completed u/s. 143(3) of the Act,
wherein the total income was computed at Nil and the company was allowed to
carry forward the unabsorbed depreciation of Rs. 3.81 lakh. Thereafter the
Assessing Officer issued a notice u/s. 148 dated 28/09/2009 seeking to reassess
the assessee’s income for the A. Y. 2004-05. The assessee filed writ petition
challenging the validity of the notice.

The Gujarat High Court
allowed the writ petition and held as under:

i) While
citing five different reasons for exercising the power of reassessment, the
Assessing Officer in each case had started with the preamble “on going through
the office record it is seen that …” or something similar to that effect. In
essence therefore, all the grounds of reopening emerged from the materials on
record.

ii) In
the background of the documents on record and the scrutiny previously
undertaken by the Assessing Officer it was clear that there was no failure by the
assessee to disclose material facts necessary for assessment. The notice for
reassessment was not valid.”

shailesh.kwebmaker

24 Income Computation and Disclosure Standards (ICDS) are intended to prevail over the judicial precedents that are contrary. Section 145 permits Central Government to notify ICDS but not to bring about changes to settled principles laid down in judicial precedents which seek to interpret and explain statutory provisions contained in the Income-tax Act (Act)

24. Income
Computation and Disclosure Standards (ICDS) are intended to prevail over the
judicial precedents that are contrary. Section 145 permits Central Government
to notify ICDS but not to bring about changes to settled principles laid down
in judicial precedents which seek to interpret and explain statutory provisions
contained in the Income-tax Act (Act)

Chamber of
Tax Consultants vs. UOI; [2017] 87 taxmann.com 92 (Delhi)

The Chamber of Tax
Consultants challenged the validity of Income Computation and Disclosure
Standards (ICDS)notified by the Department. The Delhi High Court held as under:

Article 265 of the
Constitution of India states that no tax shall be levied or collected except
under the authority of law. Section 145(2) does not permit changing the basic
principles of accounting that have been recognised in various provisions of the
Act unless, of course, corresponding amendments are carried out to the Act
itself.

In case the ICDS seeks to
alter the system of accounting, or to accord accounting or taxing treatment to
a particular transaction, then the legislature has to amend the Act to
incorporate desired changes.

The Central Government
cannot do what is otherwise legally impermissible. Therefore, the following
provisions of ICDS are held as ultra vires and are liable to be struck
down:-

(1) ICDS-I
: It does away with the concept of ‘prudence’ and is contrary to the Act
and to binding judicial precedents. Therefore, it is unsustainable in law.

(2) ICDS-II
: It pertains to valuation of inventories and eliminates the distinction
between a continuing partnerships in businesses after dissolution from the one
which is discontinued upon dissolution. It fails to acknowledge that the
valuation of inventory at market value upon settlement of accounts on a partner
leaving which is distinct from valuation of the inventory in the books of the
business which is continuing one.

(3) ICDS-III
: The treatment of retention money under Paragraph 10 (a) in ICDS-III will have
to be determined on a case-to-case basis by applying settled principles of
accrual of income.

a. By deploying ICDS-III in a manner that seeks
to bring to tax the retention money, the receipt of which is
uncertain/conditional, at the earliest possible stage, irrespective of the fact
that it is contrary to the settled position, in law, and to that extent para 10
(a) of ICDS III is ultra vires.

b. Para 12 of
ICDS III, read with para 5 of ICDS IX, dealing with borrowing costs, makes it
clear that no incidental income can be reduced from borrowing cost. This is
contrary to the decision of the SC in CIT vs. Bokaro Steel Limited
[1999] 102 Taxman 94 (SC).

(4) ICDS
IV : It deals with the bases for recognition of revenue arising in the
course of ordinary activities of a person from sale of goods, rendering of
services and used by others of the person’s resources yielding interest,
royalties or dividends.

a. Para 5 of ICDS-IV requires an assessee to
recognise income from export incentive in the year of making of the claim, if
there is ‘reasonable certainty’ of its ultimate collection. This is contrary to
the decision of the SC in Excel Industries [2013] 38 taxmann.com 100.

b. As far as para 6 of ICDS-IV is concerned, the
proportionate completion method as well as the contract completion method have
been recognized as valid methods of accounting under the mercantile system of
accounting by the SC in CIT vs. Bilhari Investment Pvt. Ltd. [2008] 168
Taxman 95. Therefore, to the extent that para 6 of ICDS-IV permits only one of
the methods, i.e., proportionate completion method, it is contrary to the above
decisions, held to be ultra vires.

(5) ICDS-VI
: It states that marked to market loss/gain in case of foreign currency
derivatives held for trading or speculation purposes are not to be allowed that
is not in consonance with the ratio laid down by the SC in Sutlej Cotton
Mills Limited vs. CIT [1979] 116 ITR 1.

(6) ICDS-VII
: It provides that recognition of governmental grants cannot be postponed
beyond the date of accrual receipt. It is in conflict with the accrual system
of accounting. To this extent, it is held to be ultra vires.

(7) ICDS-VIII
: It pertains to valuation of securities.

a. For those entities which aren’t governed by
the RBI to which Part A of ICDS-VIII is applicable, the accounting prescribed
by the AS has to be followed which is different from the ICDS.

b. In effect, such entities are required to
maintain separate records for income-tax purposes for every year, since the
closing value of the securities would be valued separately for income-tax
purposes and for accounting purposes.

shailesh.kwebmaker

23 Income or capital receipt – A. Y. 2004-05 – Sales tax subsidy – Is capital receipt

23. Income or capital receipt – A. Y. 2004-05 –
Sales tax subsidy – Is capital receipt

CIT vs.
Nirma Ltd.; 397 ITR 49 (Guj):

Dealing with the nature of
sales tax subsidy the Gujarat High Court held as under:

i) The
character of the subsidy in the hands of the recipient whether revenue or
capital will have to be determined having regard to the purpose for which the
subsidy is given. The source of fund is quite immaterial.

ii) Where
a subsidy though computed in terms of sales tax deferment or waiver, in essence
was meant for capital outlay expended by the assessee for setting up the unit
in the case of a new industrial unit and for expansion and diversification of
an existing unit, it would be a capital receipt.

shailesh.kwebmaker

22 U/s. 10A – Exemption – A.Y. 2005-06 – Newly established undertaking in free trade zone – Units set up with fresh investments – Units not formed by reconstruction or expansion of earlier business – Business of each unit independent, distinct, separate and not related with other – Assessee entitled to deduction u/s. 10A

22. Exemption
u/s. 10A – A.Y. 2005-06 – Newly established undertaking in free trade zone –
Units set up with fresh investments – Units not formed by reconstruction or
expansion of earlier business – Business of each unit independent, distinct,
separate and not related with other – Assessee entitled to deduction u/s. 10A

CIT vs.
Hinduja Ventures Ltd.; 397 ITR 139; (Bom):

The assessee had four units
engaged in the business of information technology and information technology
enabled services. For the A.Y. 2005-06, the assesee claimed deduction u/s. 10A
of the Act, in respect of unit II and unit III. The Assessing Officer did not
allow deduction u/s. 10A. Even though the remand report was in favour of the
assessee, the Commissioner (Appeals) confirmed the order of the Assessing
Officer. The Tribunal agreed with the remand report of the Assessing Officer
and held that unit II and unit III were entitled to the benefit u/s. 10A of the
Act.

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

“i) The
Assessing Officer in his remand report had specifically observed that both
units were set up with fresh investment. The assessee purchased plant and
machinery for these units and it was not the case that these units were formed
by splitting or reconstructing existing business.

ii) Separate
books of account were maintained. The employees of each of the units were fresh
set of employees and were not transferred from the existing business. The
nature of activity of both units was totally different. The customers of each
unit were completely different and unrelated and both the units had new and
independent sources of income.

iii) Thus,
unit II and unit III were not formed by reconstruction of earlier business nor
were they expansions thereof. Though permission was sought by way of an
expansion, the facts on record categorically and succinctly establish that the
business of unit II and unit II was independent distinct and separate and they
were not related with each other or even with unit I. Therefore, the assessee
was entitled to benefit u/s. 10A of the Act.”

shailesh.kwebmaker

21 u/s. 11 – Charitable purpose – Exemption – A.Y. 2012-13 – Assessee incurring expenditure for upkeep of priests who belonged to particular community – Programmes conducted by assessee open to public at large – Activity of assessee not exclusively meant for one particular religious community – Assessee is entitled to exemption u/s. 11

21. Charitable
purpose – Exemption
u/s. 11 – A.Y. 2012-13 – Assessee incurring
expenditure for upkeep of priests who belonged to particular community –
Programmes conducted by assessee open to public at large – Activity of assessee
not exclusively meant for one particular religious community – Assessee is
entitled to exemption u/s. 11

CIT vs.
Indian Society of the Church of Jesus Christ of Latter day Saints.; 397 ITR 762
(Del):

The assessee was registered
u/s. 12A(a) of the Act. The main object of the assessee was to undertake the
dissemination of useful religious knowledge in conformity with the purpose of
the Church of Jesus Christ of Latter-Day Saints, to assist in promulgation of
worship in the Indian Union, to establish places of worship in the Indian Union,
to promote sustain and carry out programmes and activities of the Church, which
were among others, educational, charitable, religious, social and cultural. A
second amendment to the memorandum and articles of association was adopted by
the assessee and it included providing educational opportunities to its young
members who could not
afford to finance their education. For the A. Y. 2012-13, the
Assessing Officer held that the assessee was incurring expenditure for upkeep
of the priests who belonged to a particular community and did not pursue any
activity in the true nature of charity for the general public directly itself.
The Assessing Officer noted that the expenses incurred by the assessee included
donations for general public utility. However, on the ground that it
constituted “a very small part of the total expenditure”, the Assessing Officer
held that the assessee was not using its funds for public benefit but rather
for the benefit of specified persons u/s. 13(3) of the Act. He held that section
13(1)(b) of the Act would be attracted and it could not be granted exemption
u/s. 11 of the Act. The Tribunal granted exemption u/s. 11 of the Act.

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

“The Tribunal found that
the programmes conducted by the society were open to the public at large
without any distinction of cast, creed or religion and the benefits of these
programmes held at the meeting house were available to the general public at large.
Since the activity if the assessee, though both religious and charitable, were
not exclusively meant for one particular religious community, the assessee was
rightly not denied exemption u/s. 11 of the Act.”

shailesh.kwebmaker

10 Explanation 1(a) to section 9(1)(i) of the Act – consortium comprising non-resident foreign company and ICo is not an AOP since there was clear demarcation in the work and cost between the consortium members; contract was clearly divisible since there was no business connection in India, offshore supplies were not taxable in India.

TS-497-ITAT-2017(Mum)

Vitkovice
Machinery A.S. vs. ITO

A.Y: 2011-12

Date of Order:
27^th October, 2017

Explanation
1(a) to section 9(1)(i) of the Act – consortium comprising non-resident foreign
company and ICo is not an AOP since there was clear demarcation in the work and
cost between the consortium members; contract was clearly divisible since there
was no business connection in India, offshore supplies were not taxable in
India.

FACTS

The Taxpayer, a
non-resident company, was engaged in the business of steel production and
supply of heavy machinery. Taxpayer formed a consortium with an Indian company
(ICo) to bid for a contract for supply and installation of certain equipment in
India. The contract was awarded to the consortium of Taxpayer and ICo. There
was a clear demarcation of work and cost between the Taxpayer and ICo and each
one was fully responsible and liable for its respective scope of work. While
the Taxpayer was responsible for design, engineering, supply, commissioning,
guarantees, supervision services of all the main and critical equipment, ICo
was responsible for supply of all indigenous equipment and auxiliaries, civil
and erection work and providing assistance during commissioning and performance
tests at the site.

During the
relevant year, Taxpayer received income from offshore supply of goods made to
the Indian entity.

The AO held
that the consortium between the Taxpayer and ICo was taxable as an Association
of persons (AOP). Further, though the contract between consortium and the
Indian entity was a composite contract, to avoid taxability in India it was
artificially divided into offshore and onshore supply and services components.

Hence, the AO
held that the income from offshore supply was also taxable in India.

On appeal,
relying on SC ruling in Ishikawajima Harima Heavy Industries (2007) 288 ITR 408
and Delhi HC ruling in Linde AG [TS-226-HC-2014(DEL)], Dispute Resolution Panel
(DRP) held that income from offshore supply was not taxable in India for
following reasons.

– Merely
because a project was a turnkey project would not necessarily imply that the
entire contract had to be considered as an integrated one for taxation
purposes.

– As per
Explanation 1 to section 9(1)(i) only income attributable to operations in
India is taxable in India.

– Where
equipment and machinery is manufactured and procured outside India, such income
cannot be taxed in India in absence of a business connection in India.

– Mere
signing of a contract in India would not constitute a business connection in
India.

Aggrieved, AO appealed before the
Tribunal.

HELD

– The purpose
of the consortium was to procure the contract jointly. However, there was a
clear demarcation of work and cost between the Taxpayer and ICo. Each of them
was fully responsible and liable for their respective scope of work. While the
Taxpayer was responsible for design, engineering, supply, commissioning,
guarantees, supervision services of all the main and critical equipment, ICo
was responsible for supply of all indigenous equipment and auxiliaries, civil
and erection work and providing assistance during commissioning and performance
tests at the site.

– The
contract between the consortium and the Indian entity specifically provided for
a break up of consideration payable to each party as well as for each activity
to be carried on by the parties. Segregation of the contract revenue was agreed
upon at the stage of awarding the contract and not after awarding the contract.
Thus, the contract was clearly divisible. The consideration was also paid
separately to the Taxpayer and ICo against separate invoices raised by them in
relation to their respective work.

– Both ICo
and Taxpayer incurred expenditure only in relation to their specified area of
work. Taxpayer and ICo incurred profit or loss depending on performance of
their share of work under the contract. There was no joint liability between
the Taxpayer and ICo. Also, liquidated damages, if any, under the contract was
deductible from the contract price of defaulting party alone.

– Having
regard to the above, it was clear that the contract was divisible.

– Taxpayer
was responsible for offshore supply of equipment and material. The equipment
and material were manufactured, procured and supplied outside India. Thus,
income from offshore supply was not taxable in India in absence of a business
connection in India. Reliance in this regard was placed on SC decision in the
case of Ishikawajima Heavy Industries Limited (2007) 288 ITR 408.

shailesh.kwebmaker

Delhi High Court On ICDS – Battle Begins!

The first ever decision on ICDS has been pronounced by Delhi High Court in a writ petition filed by The Chamber of Tax Consultants assailing its constitutional validity. The Court has read down the provisions of section 145(2) enabling the Central Government to notify only such standards which do not seek to override binding judicial precedents interpreting statutory provisions contained in the Act. Some of the ICDS have been struck down fully and few selected provisions of other ICDS which were inconsistent with judicial precedents have been knocked off.

Here is a summary of the important observations of the Court on the conflicting provisions of ICDS and the final decision of the Court thereon.

ICDS	Observations	Final Decision
ICDS I – Accounting Policies	Non-acceptance of the concept of prudence in ICDS is per se contrary to the provisions of the Act. This concept is embedded in Section 37(1) of the Act which allows deduction in respect of expenses “laid out” or “expended” for the purpose of business. It is acknowledged by the Courts also.	ICDS is unsustainable in law.
ICDS II – Valuation of Inventories	The requirement to value inventories at market value in case of the dissolution of a firm, where its business is taken over by other partners is contrary to the decision of the Supreme Court in the case of Shakti Trading Co. vs. CIT 250 ITR 871. Where the assessee regularly follows a certain method for valuation of goods then that will prevail irrespective of the ICDS because of a non-obstante clause in Section 145A.	ICDS is held to be ultra vires the Act and struck down.
ICDS III – Construction contracts	ICDS requires recognition of the retention money as a part of the contract revenue on the basis of percentage of completion method. However, the retention money does not accrue to the assessee until and unless the defect liability period is over. The treatment to be given to the retention money depends upon the facts of each case and the conditions attached to such amounts.	To that extent, Para 10(a) of ICDS is held to be ultra vires.
Para 12 of ICDS III read with Para 5 of ICDS IX, provides that no incidental income can be reduced from the borrowing cost while recognising it as a part of contract costs. This is contrary to the decision of the Supreme Court in CIT vs. Bokaro Steel Limited 236 ITR 315 wherein it was held that if an Assessee receives any amounts which are inextricably linked with the process of setting up of its plant and machinery, such receipts would go to reduce the cost of its assets.	This particular provision of ICDS is struck down.
ICDS IV – Revenue Recognition	ICDS requires an Assessee to recognise income from export incentive in the year of making of the claim if there is ‘reasonable certainty’ of its ultimate collection. It is contrary to the decision of the Supreme Court in the case of CIT vs. Excel Industries Limited 358 ITR 295 wherein it was held that, until and unless the right to receive export incentives accrues in favour of the assessee, no income can be said to have accrued.	This particular provision in Para 5 of ICDS is ultra vires the Act and struck down.
	The proportionate completion method as well as the contract completion method have been recognised as valid method of accounting under mercantile system of accounting by the Courts. However, Para 6 of ICDS permits only one of the methods, i.e., proportionate completion method for recognising revenue from service transactions and therefore, it is contrary to the Court decisions.	This particular provision in Para 6 of ICDS is ultra vires the Act and struck down.
ICDS VI – Effects of Changes in Foreign Exchange Rates	In Sutlej Cotton Mills Limited vs. CIT 116 ITR 1 (SC), it was held that exchange gain/loss in relation to a loan utilised for acquiring a capital item would be capital in nature. ICDS provides contrary treatment. ICDS does not allow recognition of marked to market loss/gain in case of foreign currency derivatives held for trading or speculation purposes. This is also not in consonance with the ratio laid down by the Supreme Court.	ICDS is held to be ultra vires the Act and struck down as such.
	Circular No. 10 of 2017 clarifies that Foreign Currency Translation Reserve Account balance as on 1st April 2016 has to be recognised as income/loss of the previous year relevant to the AY 2017-18. It is only in the nature of notional or hypothetical income which cannot be even otherwise subject to tax
ICDS VII – Government Grants	ICDS provides that recognition of government grants cannot be postponed beyond the date of actual receipt. It is contrary to and in conflict with the accrual system of accounting.	To that extent it is held to be ultra vires the Act and struck down.
ICDS VIII – Securities (Part A)	The method of valuation prescribed under ICDS is different from the corresponding AS. Therefore, the assessees will be required to maintain separate records for income tax purposes for every year since the closing value of the securities would be valued separately for income tax purposes and for accounting purposes.	To that extent it is held to be ultra vires the Act and struck down.

ICDS

Observations

Final Decision

ICDS I – Accounting Policies

Non-acceptance of the concept of prudence in
ICDS is per se contrary to the provisions of the Act. This concept is
embedded in Section 37(1) of the Act which allows deduction in respect of
expenses “laid out” or “expended” for the purpose of business. It is
acknowledged by the Courts also.

ICDS is unsustainable in law.

ICDS II – Valuation of Inventories

The requirement to value inventories at market
value in case of the dissolution of a firm, where its business is taken over
by other partners is contrary to the decision of the Supreme Court in the
case of Shakti Trading Co. vs. CIT 250 ITR 871.

Where the assessee regularly follows a certain
method for valuation of goods then that will prevail irrespective of the ICDS
because of a non-obstante clause in Section 145A.

ICDS is held to be ultra vires the Act
and struck down.

ICDS III – Construction contracts

ICDS requires recognition of the retention
money as a part of the contract revenue on the basis of percentage of
completion method. However, the retention money does not accrue to the
assessee until and unless the defect liability period is over. The treatment
to be given to the retention money depends upon the facts of each case and
the conditions attached to such amounts.

To that extent, Para 10(a) of ICDS is held to
be ultra vires.

Para 12 of ICDS III read with Para 5 of ICDS
IX, provides that no incidental income can be reduced from the borrowing cost
while recognising it as a part of contract costs. This is contrary to the
decision of the Supreme Court in CIT vs. Bokaro Steel Limited 236 ITR 315
wherein it was held that if an Assessee receives any amounts which are
inextricably linked with the process of setting up of its plant and
machinery, such receipts would go to reduce the cost of its assets.

This particular provision of ICDS is struck
down.

ICDS IV – Revenue Recognition

ICDS requires an Assessee to recognise income
from export incentive in the year of making of the claim if there is
‘reasonable certainty’ of its ultimate collection. It is contrary to the
decision of the Supreme Court in the case of CIT vs. Excel Industries
Limited 358 ITR 295 wherein it was held that, until and unless the right
to receive export incentives accrues in favour of the assessee, no income can
be said to have accrued.

This particular provision in Para 5 of ICDS is
ultra vires the Act and struck down.

The proportionate completion method as well as
the contract completion method have been recognised as valid method of
accounting under mercantile system of accounting by the Courts. However, Para
6 of ICDS permits only one of the methods, i.e., proportionate completion
method for recognising revenue from service transactions and therefore, it is
contrary to the Court decisions.

This particular provision in Para 6 of ICDS is
ultra vires the Act and struck down.

ICDS VI – Effects of Changes in Foreign
Exchange Rates

In Sutlej Cotton Mills Limited vs. CIT 116
ITR 1 (SC), it was held that exchange gain/loss in relation to a loan
utilised for acquiring a capital item would be capital in nature. ICDS
provides contrary treatment.

ICDS does not allow recognition of marked to
market loss/gain in case of foreign currency derivatives held for trading or
speculation purposes. This is also not in consonance with the ratio laid down
by the Supreme Court.

ICDS is held to be ultra vires the Act
and struck down as such.

Circular No. 10 of 2017 clarifies that Foreign
Currency Translation Reserve Account balance as on 1st April 2016 has to be
recognised as income/loss of the previous year relevant to the AY 2017-18. It
is only in the nature of notional or hypothetical income which cannot be even
otherwise subject to tax

ICDS VII – Government Grants

ICDS provides that recognition of government
grants cannot be postponed beyond the date of actual receipt. It is contrary
to and in conflict with the accrual system of accounting.

To that extent it is held to be ultra vires
the Act and struck down.

ICDS VIII – Securities (Part A)

The method of valuation prescribed under ICDS
is different from the corresponding AS. Therefore, the assessees will be
required to maintain separate records for income tax purposes for every year
since the closing value of the securities would be valued separately for
income tax purposes and for accounting purposes.

To that extent it is held to be ultra vires
the Act and struck down.

It is relevant to note that the Delhi High Court has held that the ICDS is not meant to overrule the provisions of the Act, the Rules there under and the judicial precedents applicable thereto as they stand. There may be instances, other than those taken up before the Delhi High Court, where the provisions of ICDS are contrary to and/or overrule the judicial precedents applicable, in view of the ratio of the Delhi High Court, such provisions of ICDS will also have to give way to the provisions of the Act, the Rules there under and the judicial precedents applicable. To illustrate, ICDS IX on Borrowing Costs requires capitalization of interest to Qualifying Assets. Work-in-progress in the case of a builder / developer will qualify as a qualifying asset as defined in ICDS IX. A question arises as to whether the requirement of capitalizing borrowing costs to inventory as per ICDS is in conflict with section 36(1)(iii) of the Act. The Bombay High Court has in the case of CIT vs. Lokhandwala Construction Industries (2003) 260 ITR 579 (Bom) held that interest on funds borrowed for construction of work-in-progress in case of a builder is a period cost. Similar is the view expressed in the Technical Guide of ICAI on ICDS in para 4.5 of Chapter X titled ‘ICDS IX: Borrowing Costs’. The ratio of the decision of Delhi High Court will be applicable to such cases as well.

The decision of the Delhi High Court is the only decision of the competent court in the country. A question arises as to whether the decision of the Delhi High Court under consideration is binding throughout the country or it is binding only to cases falling within the jurisdiction of the Delhi High Court. In this connection it is relevant to note that Bombay High Court in the case of Group M. Media India Pvt. Ltd. vs. Union of India [(2017) 77 taxmann.com 106] was dealing with a case where the Bombay High Court was concerned with an instruction which had been struck down by the Delhi High Court. The Court, observed as under – “Therefore, in view of the decision of this Court in Smt. Godavaridevi Saraf (supra), the officers implementing the Act are bound by the decision of the Delhi High Court and Instruction No.1 of 2015 dated 13th January, 2015 has ceased to exist. Therefore, no reference to the above Instruction can be made by the Assessing Officer while disposing of the petitioner’s application in processing its return u/s. 143(1) of the Act and consequent refund, if any, u/s. 143(1D) of the Act. Needless to state that the Assessing Officer would independently apply his mind and take a decision in terms of Section 143 (1D) of the Act whether or not to grant a refund in the facts and circumstances of the petitioner’s case for A.Y. 2015-16.”

In view of the above observations of the Bombay High Court, it appears that the ratio of the decision of the Delhi High Court could be considered to be binding on all the officers implementing the Act.

BCAS had made number of suggestions through representations (November 20161 to scrap ICDS and December 20152 on specific aspects of all 10 ICDS) which did not find favour in the formulation / implementation of ICDS. When the need of the hour is to bring tax certainty, bringing more cohesiveness amongst laws and bring reduction in multiplicity of compliances, ICDS in their present form are taking things in a contrary direction. It is unfortunate that the tax payers have to seek judicial intervention to arrest anomalies that are already pointed out through well reasoned representations.

This intervention and Court’s strictures seem to be a beginning of the battle over ICDS. Time will only tell as to what would be fate of these and many more controversial provisions of ICDS.

1 https://www.bcasonline.org/resourcein.aspx?rid=389

2 https://www.bcasonline.org/files/res_material/resfiles/1612152944merged_document.pdf

shailesh.kwebmaker

Report On Corporate Governance – SEBI Committee Recommends Significant Changes In Norms

Background

The norms relating to corporate governance in India see periodical revisions and thus have come a long way. From being recommendatory at one time, to forming part of the Listing Agreement, some provisions relating to corporate governance now form part of the Companies Act, 2013. To review the requirements, particularly in the light of several recent developments, a Committee was set up. The Committee has made several recommendations which, whilst mostly being largely incremental, have already become contentious. Considering the past, where after considering, the recommendations are fast tracked and finally implemented, and hence the proposed changes need to be highlighted. The Report itself, however, recommends a phased adoption with extra time being given in appropriate cases. The recommendations are numerous. However, considering paucity of space, only some of the important ones are highlighted.

Requirements relating to accounts/auditors

Several recommendations have been made in the area of accounts/audit. The Committee is of the view that there is a need to improve disclosures in financial statements and also enhance the quality of financial statements and audit. Important recommendations are summarised below :

Presently, a company is required to quantify the impact of audit qualifications on various financial parameters such as profits, net worth, etc. The Report recommends that the management shall mandatorily make an estimate of impact of qualifications, where the impact on financial parameters of qualifications is not quantifiable. However, such estimate need not be made on matters like going concern or sub-judice matters. But in such cases, the management shall give reasons and the auditor shall review them and report thereon.

The Report then recommends that where the auditor is not satisfied with the opinion of an expert (lawyer, valuer, etc.) appointed by the company on an issue, he is entitled to obtain, at the cost of the listed company, opinion of another expert appointed by him.

The Committee noted that, presently, the auditor of the holding company may place reliance on audit performed by respective auditors of subsidiaries while reporting on the consolidated financial statements. He may, however, decide that supplemental tests on the financial statements of the subsidiary are necessary and he may send a questionnaire seeking information to the auditor of the subsidiary. Whether this was enough or whether the auditor should have more active role was the question. In line with global standards, the Committee recommended that the auditor should be made responsible for the audit opinion of all material unlisted subsidiaries. Thus, the auditor of the holding company would have more control over how the audit of the subsidiary is conducted.

The Committee has recommended that both quarterly consolidated and standalone statements, should be published. Further, half-yearly cash flow statement should also be published. The quarterly limited review should now include review also of the subsidiaries in such a manner that at least 80% of the consolidated revenue/assets/profits are covered in such review. In the last quarter, regulations currently require that the last quarter figures would be the balancing figures of the whole year’s figures minus those of the preceding three quarters. For this purpose, the Committee recommends that material adjustments made in the last quarter but relating to preceding quarters shall be disclosed.

The Committee recommends that the detailed reasons given by the auditor for his resignation before the end of his term shall be disclosed.

A recommendation that could have far reaching effect relates to power of SEBI to take action against auditors. Presently, a decision of the Bombay High Court (Price Waterhouse & Co. vs. SEBI (2010) 103 SCL 96) affirms the power of SEBI to take action against the auditors in case of fraud/connivance. The Committee recommends that this power be taken one step ahead and SEBI should be allowed to take action also in case of gross negligence. However, the ICAI has opposed this recommendation stating that “the regulation of chartered accountants is covered under the Chartered Accountants Act, 1949” and also “to avoid jurisdictional conflict and other issues.”

The Committee has made recommendations regarding the Quality Review Board (“QRB”) in relation to review of audits including strengthening this Board, enhancing its independence, etc. The ICAI has dissented with this recommendation stating that it was outside the scope of reference of the Committee. Further, it has stated that QRB has already applied for membership of International Forum of Independent Audit Regulators (IFIAR).

Changes regarding board/independent directors/women directors/Chairman

One of the pillars of good governance is sufficient number of independent directors. The principle is to balance the promoter/management dominated board with independent directors who have no connection or relationship with the promoters or the Company. Hence, the present law requires a significant number of independent directors on the board and at least one woman director on the board.

The Report now recommends certain changes. Firstly, it recommends that the minimum board size be increased from the current three to six. The intention clearly is to have a larger board having diverse expertise, which would help in better governance. While boards having only the bare minimum 3 directors may be rare, several companies have boards in the range of 3-6 directors. Companies will now need to find more directors. Importantly, since the number of independent directors is calculated as a fraction (one-third or half) of the Board size, more independent directors would also have to be appointed. Liability of independent directors (and even directors generally) under the Companies Act, 2013, as well as the SEBI Regulations is already very high.

Remuneration of independent directors

Remuneration, particularly of independent directors, remains low and limited. The Committee has recommended increase in remuneration. The irony is that a higher remuneration to independent directors may supposedly result in dilution of independence. It would thus be tough to find directors who are really independent directors.

Remuneration of independent directors is a tricky area. Give too less they lose incentive to put in the efforts required. Give too much, they become dependent on the company for getting substantial remuneration and compromise their independence. At same time, the increased remuneration will also be a burden on the Company, even if for a valid purpose.

Presently, the law requires that at least one-third of the Board should consist of independent directors, but if the Chairman is from the promoter group or an executive director, the said proportion is one-half. The Report recommends that :

– the Chairman should not be an executive director.

– the number of independent directors should at least be 50% of the Board size.

– Woman director should be an independent director to comply wih the spirit of the law.

The objective is to strengthen further this pillar of corporate governance. Needless to emphasise that the demand for independent directors will increase.

But perhaps the most curious of requirements relates to who should be Chairman. Presently, there are already some restrictions on appointing a promoter/executive director as Chairman. However, now, the Report goes much further, noting the already existing similar requirement under the Companies Act, 2013, and proposes a blanket prohibition and recommends that the Chairman shall not be an executive director. The rationale provided is that this would avoid in excessive concentration of powers in the hands of one person. I submit that this is a western concept where promoter holding is scattered and hence the CEO has vast powers without any counter balance. In India, companies are largely promoter dominated who typically hold controlling interest. The CEO, even if professional, is easily balanced by the promoter group along with the independent directors. Further, the post of Chairman, at least in India, is largely ceremonial unless executive power is specifically granted. The Chairman conducts the meetings as per law and not arbitrarily. It is reiterated that he does not have ipso facto any executive or overriding powers. On the other hand, he does represent the face and image of the Company. Shareholders do know that a promoter driven company has usually the senior family member of the promoter family in the forefront. In such a case, seeking to replace him with a non-executive person does not make sense. It may only result in a member of the promoter group being appointed as Chairman but without being an executive director. But it will not change the position that the promoters control the company. The Report does clarify that initially the requirement be made only for companies with at least 40% public shareholding. But even that is too low since this may require even a company with 51% promoter holding to have such a non-executive Chairman.

The Report now suggests that it would be fair to provide at least a certain level of minimum compensation to independent directors. This is suggested to be worked out as a mix of their actual role in terms of work done and also in terms of performance of the company in terms of profits. The Report recommends at least Rs. 5 lakh (if profits permit) should be provided as minimum remuneration (including sitting fees) to independent directors for the top 500 listed companies. The minimum sitting fees should be Rs. 50,000 for board meetings, Rs. 40,000 as sitting fees for Audit Committee meetings and Rs. 20,000 for other Committee meetings, for top 100 companies (with half of that for next 400 top companies).

This will clearly incentivise the directors. However, considering that this increase is also together with overall increase in number of independent directors, the burden on companies in terms of costs will also increase.

Sharing of information with Promoters, etc.

Finally, the Report deals with an issue having special relevance to India. And that is sharing of unpublished price sensitive information in listed companies in India with its promoters and generally also with significant shareholders who have rights under an agreement of access to such information.

The issue is detailed and complex and would require a full length article to even cover the main points. But suffice here to say that the Report makes certain recommendations to ensure that the information that the promoters and others get is not misused. In particular, they face restrictions on their use/distribution, etc. similar to insiders under the Regulations relating to insider trading.

Conclusion

There are other recommendations too. However, the Report has faced controversy on some issues, not just from outside but within the Committee itself with certain members/representatives openly and strongly expressing their dissent. It will be beyond the scope of this article to analyse the merits of such objections.

But one can conclude that some of the important recommendations may either get dropped or substantially modified and perhaps get delayed in implementation till a broader debate is conducted and a consensus arrived at. Nevertheless, the path of future corporate governance leads is visible and it is a tough call for independent directors.

shailesh.kwebmaker

Background: Gst Returns For Small And Medium Enterprises

The GST law requires that:

i) Every person, supplying
taxable goods and/or services, to take registration if his aggregate turnover
of all supplies of goods and services (including tax free and exempt supplies)
exceeds the prescribed limit during a financial year;

ii) All those persons who were
registered under the earlier laws (Excise, Service Tax and State Vat, etc.)
to take registration w.e.f. 1^st July 2017;

iii) Every person so registered,
must report invoice wise details of all sales and purchases every month to the
Central and State Government authorities through various prescribed forms by
the due dates so prescribed and pay the taxes accordingly, every month.

The procedural aspects of filing return and
payment of taxes may be summarised, in brief, as follows:-

(Ref: sections 37, 38 and 39 of CGST Act and
Rules 59, 60 and 61 of CGST Rules)

The provisions, contained in above referred
sections and Rules, require every ‘registered person’ to file monthly returns
in three stages by three different dates every month. While monthly details of
invoice wise outward supplies have to be submitted and filed (in GSTR-1) by the
10^th day of the succeeding month, invoice wise details of inward
supplies to be filed (in GSTR-2) between 11^th day and 15^th
day of the succeeding month, and the final calculation of liability to be filed
(in GSTR-3) between 16^th day and 20^th day of the
succeeding month. There are two more forms namely GSTR-2A and GSTR-1A. While
information in GSTR-2A is provided by the GST portal to all registered dealers,
GSTR-1A is to be submitted by the suppliers in certain circumstances. In
addition thereto, those who are doing business of providing e-commerce
facility, those who are liable to deduct TDS or TCS and those who are Input
Service Distributors, have to file separate monthly returns (in prescribed
forms) in respect of those specified activities. All these forms have to be
submitted and filed every month, by all such registered persons (other than
those who have opted for composition scheme) by different due dates within that
overall limited period of 20 days. And the dates so prescribed (i.e. by and
between) have to be followed strictly. In case of failure, there are provisions
for levying Late Fees and penalties, etc., if any of these returns are
not filed within that prescribed date/s of filing, as well as levy of interest
for delayed payment, if any.

Representation to Government and
Assurance:-

Considering such a cumbersome procedure of
filing returns, almost all trade associations, from all over India, requested
the Government that such a procedure is impracticable and needs to change. It
was also represented that it would be almost impossible for small and medium
enterprises to comply with the requirements in such a manner. Various
suggestions were presented before the authorities concerned to simplify the
procedure. Two major suggestions may be noted here as follows:-

1. The three different forms i.e. GSTR-1, GSTR-2 and GSTR-3, which are
prescribed to be submitted on three different dates, should be combined together.
Thus, all that information which is required for the purpose can be submitted
in one return only. There is no need of three different forms for this purpose.

2. The requirement of filing monthly returns should be made applicable
to large tax payers only (those big dealers/registered persons who are having
large turnover of more than certain prescribed limit). All others should be
asked to file quarterly return (as was the procedure under the earlier laws).

Further;

3. It was specifically represented
that small and medium enterprises (SMEs) should be asked to file one quarterly
return (instead of three returns a month).

4. It was also represented to look
into the tax collection data, available with the Department, which may reveal
that 80 to 90 % of revenue is contributed by 10 to 20 % of total tax payers.
Thus, remaining more than 80% of tax payers contribute just 10 to 20 % of total
revenue to the Government. But, these 80% tax payers (most of them falling in
the category of small and medium enterprises) play a most important role in the
entire chain of production and distribution of goods and services throughout
the country. Their concerns need to be addressed appropriately. The procedure,
which may be applicable to large and very large tax payers, cannot be made
applicable to small tax payers, particularly those falling in SME category.

The Prime Minister, the Finance Minister and
the Revenue Secretary of the Government of India, who met representatives of
various SMEs, at various occasions post implementation, personally appreciated
the importance of role played by SMEs, acknowledged the practical difficulties
of stringent compliances and assured to mitigate the hardship faced by them. In
fact, the Prime Minister, in the first week of October at a public rally, made
a big announcement that we have provided big relief to Small and Medium
Enterprises (chhote and majhole udyog). It
was impressed upon that the SMEs will now file only one return every three
months instead of three returns a month to be filed by other taxable persons.

However, the GST Department issued a
press release stating that all those tax payers whose annual turnover is up to
1.5 crore will file quarterly returns instead of monthly returns (although no
notification was issued to that effect).

Problem and Unfairness: Who are SMEs?

Our Government, specifically almost all our
ministers, time and again have said that we take due care of our small and
medium business enterprises as the SMEs play an important role in our economy.
There is a separate ministry in the Government to look after the welfare of
Micro, Small and Medium Enterprises. And, if we look at the definition of SMEs
as provided in Micro, Small & Medium Enterprises Development (MSMED) Act,
2006, Small and Medium Enterprises are classified in two Classes i.e. (1) Manufacturing
Enterprises and (2) Service Enterprises.

Small Enterprises (in the manufacturing
sector) are defined as those who have investment of more than Rs. 25 lakh but
does not exceed Five crore rupees. And in the service sector, the investment
limits have been kept at minimum Rs. 10 lakh and maximum Two crore rupees.

Medium Enterprises (in the manufacturing sector) need to have
investment of more than Five crore rupees, but not exceeding Ten crore rupees,
while for the service sector, this limit is rupees Two crore and Five crore.

Although the above definitions are based upon
investment in business (plant & machinery, equipments, etc.), there
is no turnover criteria prescribed under the MSMED Act, but one can expect that
the same can be worked out by applying Investment to expected Turnover ratio
(which may be considered as between 1:5 and 1:10). Thus, expected turnover of
SMEs may fall between 10 crore to 100 crore rupees.

Based upon the ground realities and assurance
given by the Prime Minister, the SMEs were expecting that Government will
provide relief at least to all those dealers, whose annual turnover is up to 50
crore rupees. As the trade and industry was not asking for any monetary aid,
there was no loss of revenue to Government, it was just asking for simplified
procedure of statutory compliance, the SMEs were sure that their Government
will certainly take care to mitigate their hardship, but it looks like that the
Departmental authorities have some different view. From the developments so
far, it looks like that according to GST Department, the SMEs should not have
turnover of more than Rs. 1.5 crore per annum.

And if that is not the intention, then it
would be necessary to clarify the issue in larger public interest. Either the
definition of SMEs under MSMED Act needs to change or the mindset of those who
are responsible for designing and approving procedural aspects of GST
compliances.

Is It Fair?

The question arises, is it fair to ask a
businessman to invest Rs. 2 crore to Rs. 10 crore in a business which will have
turnover of just Rs. 1.5 crore per annum?. _

shailesh.kwebmaker

13 Article 6 and 7 of India-Kenya DTAA; Indian bank earned rental income from house property in Kenya. Rental income not taxable in India as per Article 6 of DTAA. Notification or circular can neither override the provisions of tax treaty nor alter the nature of income

TS-515-ITAT-2017(Mum)

Bank of India vs. ITO

A.Y: 2009-10

Date of Order: 8^th November, 2017

Article 6 and
7 of India-Kenya DTAA; Indian bank earned rental income from house property in
Kenya. Rental income not taxable in India as per Article 6 of DTAA.
Notification or circular can neither override the provisions of tax treaty nor
alter the nature of income

FACTS

The Taxpayer,
an Indian public sector bank, had a branch in Kenya. During the relevant year
the Taxpayer earned business income from its branch in Kenya. Further, the
Taxpayer also earned rental income from a house property located in Kenya.
Taxpayer claimed that the business income and rental income earned by the Kenya
branch was not taxable in India as per Article 6 and Article 7 of India-Kenya
DTAA.

Relying on the
CBDT Notification No.91 of 2008, AO contended that the business income and
rental income is taxable in India¹. Aggrieved by the contention of
the AO, the Taxpayer appealed before CIT(A) who upheld the order of the AO.

Aggrieved, the
Taxpayer appealed before the Tribunal.

HELD

– Relying on
its own order for earlier years in the case of the same Taxpayer, the Tribunal
held that business income from foreign branches was not taxable in India as per
Article 7 of India-Kenya DTAA. The earlier decision of the Tribunal relied on
SC ruling in the case of Kulandagan Chettiar (267 ITR 654) for arriving at such
conclusion.

– AO had
treated the business income and rental income as one source of income. However,
the DTAA contains two different Articles i.e., Article 7 which governs business
income and Article 6 which governs income from immovable property.

– Any
notification or circular cannot alter the nature of income that has been
specifically included in DTAA. Even amendment in a section of the Act would not
affect the provisions of tax treaties, unless same are not ratified by both the
countries.

– Rental
income received by the Taxpayer is covered by Article 6 of India-Kenya DTAA. As
per Article 6, such rental income is not taxable in India.

P.S: The
meaning of “may be taxed” provided by Notification No. 91 of 2008 was not
applicable to the facts of the case. _

_____________________________________________________

1 Notification No. 91 of 2008 provides that
where an DTAA is entered into by the Central Government of India with the
Government of any country outside India for granting relief of tax or as the
case may be, which provides that any income of a resident of India “may be
taxed” in the other country, such income shall be included in his total
income chargeable to tax in India in accordance with the provisions of the Act
a’nd relief shall be granted in accordance with the method for elimination or
avoidance of double taxation provided in such DTAA.

shailesh.kwebmaker

12 Section 5(2), 6(1) of the Act – Salary income earned by a non-resident for services rendered in foreign country while on deputation is not taxable in India

[2017] 87 taxmann.com 98 (Delhi)

Pramod Kumar
Sapra vs. ITO

A.Y: 2011-12
Date of Order: 30^th October, 2017

Section 5(2),
6(1) of the Act – Salary income earned by a non-resident for services rendered
in foreign country while on deputation is not taxable in India

FACTS

The Taxpayer,
an individual was employed by ICo. Taxpayer was deputed to Iraq for the purpose
of employment by ICo. During the year under consideration, total number of days
of his stay outside India was 203 days. Further, his stay in India for the four
FYs preceding the relevant FY was less than 365 days.

The Taxpayer
filed his return of income in India in the capacity of a non-resident (NR). In
his return, Taxpayer claimed that the salary earned outside India for the
period during which he was on deputation in Iraq is not taxable in India.

The return of
income filed by the Taxpayer was accepted by the AO. However, Principal
Commissioner of Income tax (PCIT) set aside the assessment order. PCIT
contended that the salary earned by the Taxpayer for the period of deputation
was received in his bank account in India. Taxes were also deducted on such
income in India. Thus, such income was taxable on receipt basis in India u/s. 5
of the Act. As A.O. had proceeded with the assessment without considering this
fact and without making any enquiry, the assessment made by AO was erroneous
and prejudicial to the interest of the revenue. Thus, the order of AO was
needed to be set aside u/s. 263 of the Act.

Aggrieved by
the order of PCIT, Taxpayer appealed before the Tribunal

HELD

– Since
Taxpayer was present in India for less than 182 days and his total stay in
India during the preceding four FYs was less than 365 days, he was NR for the
relevant FY.

– The fact
that salary income has been received in India, i.e., it has been credited in
the bank account of the taxpayer in India and also that TDS has been deducted
by the employer, cannot be determinative of the taxability under the Act. What
is relevant is, whether the income can be said to be received or deemed to be
received in India u/s. 5 of the Act.

– Section
5(2) merely provides that if the income of NR has been received or has accrued
in India or is deemed to be received or accrued in India, the same shall be
treated as total income of that person. Section 5 does not envisage that income
received by NR for services rendered outside India can be reckoned as part of
total income.

– Taxpayer
received salary during his employment outside India for carrying on his
activities outside India. Such income cannot be treated as income received or
deemed to be received by the Taxpayer in India. Hence salary received by the
Taxpayer for services rendered in Iraq was not taxable in India.

shailesh.kwebmaker

Maintenance Under Hindu Law

Introduction

The codified Hindu Law consists of four main Acts which deal with different aspects of family law, such as, succession, adoptions, guardianship, marriage, etc. One such important Act is the Hindu Adoptions and Maintenance Act, 1956 (“the Act”). As the name suggests, this Act deals with two diverse topics – Adoptions by a Hindu and Maintenance of a Hindu. Let us consider some of the facets of the Maintenance part of this Act.

Maintenance of Different Persons

The Act provides for the maintenance of four different categories of persons, namely:

(a) maintenance of a wife by her husband;

(b) maintenance of a widowed daughter-in-law by her father-in-law;

(d) maintenance of dependants by the heirs of a deceased Hindu.

What is Maintenance?

The Act defines the term maintenance in a wide and inclusive manner to include in all cases, provision for food, clothing, residence, education and medical attendance and treatment. Thus, even the right to residence is treated as a part of maintenance – Mangat Mal vs. Smt Punni Devi, (1995) 6 SCC 88.

Further, in the case of an unmarried daughter (included in the category of children), it also includes the reasonable expenses of and incidental to her marriage. What is reasonable would depend upon the facts of each case and the financial status of each family. No hard and fast rule could be laid down in this respect and it would be a qualitative answer which would vary from family to family.

The Act provides that it is the discretion of the Court to determine whether and what maintenance would be awarded. In doing so, it would consider various factors. For instance, in the case of an award to a wife, children or aged parents, it would consider the position / status of parties, reasonable wants of the claimant, value of the claimant’s property, income of the claimant, number of persons entitled to maintenance under the Act. Similarly, while determining the maintenance of dependants, it would consider the net value of the estate of the deceased, degree of relationship between the deceased and dependants, reasonable wants of dependants, past relations, value of property of the dependant and their source of income, number of persons entitled to maintenance under the Act. The Court is granted very wide discretion. In Kulbhushan Kumar vs. Raj Kumari, 1971 SCR (2) 672, income-tax was allowed as a deduction in computing the income of the husband for determining the maintenance payable to his wife.

Maintenance of Wife

A Hindu wife is entitled to be maintained by her Husband during her life-time. Of course, this is subject to the marriage subsisting. Once a marriage is dissolved on account of a divorce, then an order for maintenance / alimony would be u/s.25 of the Hindu Marriage Act, 1925 and not under this Act. In Chand Dhawan vs. Jawaharlal Dhawan, 1993 (3) SCC 406, it was held that the court is not at liberty to grant relief of maintenance simplicitor obtainable under one Act in proceedings under the other. Both the statutes were codified as such and were clear on their subjects and by liberality of interpretation, inter-changeability could not be permitted so as to destroy the distinction on the subject of maintenance.

In Kirtikant D. Vadodaria vs. State of Gujarat, (1996) 4 SCC 479, it was held that there is an obligation on the husband to maintain his wife which does not arise by reason of any contract – expressed or implied – but out of jural relationship of husband and wife consequent to the performance of marriage. The obligation to maintain is personal, legal and absolute in character and arises from the very existence of the relationship between the parties. The Bombay High Court in Bai Appibai vs. Khimji Cooverji, AIR 1936 Bombay 138, held that under the Hindu Law, the right of a wife to maintenance is a matter of personal obligation on the husband. It rests on the relations arising from the marriage and is not dependent on or qualified by a reference to the possession of any property by the husband. The Supreme Court in BP Achala Anand vs. S Aspireddy, AIR 2005 SC 986 held that the right of a wife for maintenance is an incident of the status or estate of matrimony and a Hindu is under a legal obligation to maintain his wife.

A Hindu wife is also entitled to live separately from her husband without forfeiting her claim to maintenance in several circumstances, namely ~ if he is guilty of desertion, i.e., abandoning her without reasonable cause and without her consent; if he has treated her with cruelty; if he is suffering from virulent leprosy; if he has any other wife alive; if he keeps a concubine; if he has converted to a non-Hindu or if there is any other cause justifying her living separately. However, the wife loses her right to separate residence and maintenance if she is unchaste or converts to a non-Hindu.

Maintenance of Daughter-in-law

A Hindu widow is entitled to be maintained by her father-in-law provided the following circumstances exist:

(a) She has not remarried and is unable to maintain herself out of her own earnings or property; or

(b) She has not remarried, has no property of her own and she cannot obtain maintenance from the estate of her husband or her father or mother or from her son or daughter or their estate.

In either case, the obligation on the father-in-law is not enforceable if he does not have the means to maintain her from the joint property in his possession. If he has no coparcenery property, then a claim cannot lie against him. Of course, it is trite, that this provision cannot have force when a Hindu lady’s husband is alive, it is only a widow who can avail of this protection. Further, this right ceases when she remarries.

An interesting question would be whether this right would lie against her mother-in-law?

In Vimalben Ajitbhai Patel vs. Vatslaben Ashokbhai Patel, Appeal (Civil) 2003 / 2008 (SC), it was held that the property in the name of the mother-in-law can neither be a subject matter of attachment nor during the life time of the husband, his personal liability to maintain his wife can be directed to be enforced against such property.

Maintenance of Children and Parents

A Hindu male/female has an obligation to maintain his/her children and aged /infirm parents. Children can claim maintenance till they are minor. However, the Act also provides that the obligation to maintain parents or unmarried daughter extends if the parent/unmarried daughter is unable to maintain himself/herself from own earnings/other property. Hence, a conjoined reading of the different provisions of the Act would indicate that minority is relevant only for maintenance of sons but for daughters, the obligation continues till they are married whatever be her age – CGT vs. Bandi Subbarao, 167 ITR 66 (AP). However, it has been held in CGT vs. Smt. G. Indra Devi, 238 ITR 849 (Ker) that gifts to daughter after her marriage would not fall within the purview of maintenance.

Maintenance of Dependants

The Act has an interesting provision where it states that the heirs of a deceased Hindu (male or female) are bound to maintain the dependants of the deceased out of the estate inherited by them from the deceased. If a dependant has not obtained (under a Will or as intestate succession) any share in the estate of a deceased Hindu, then he is entitled to maintenance from those who take the estate. The liability of each of the persons who take the estate, shall be in proportion to the value of the estate’s share taken by him. The list of dependants is as follows:

(a) father

(b) mother

(d) son/son of predeceased son/son of predeceased grandson, till he is a minor

(e) unmarried daughter/unmarried daughter of pred-eceased son/unmarried daughter of predeceased grandson

(f) widowed daughter

(g) widow of son/widow of son of predeceased son

(h) illegitimate minor son

(i) illegitimate unmarried daughter.

For certain types of dependants, the claim for maintenance is subject to they not being able to obtain maintenance from certain other sources.

Maintenance under Domestic Violence Act

In addition to maintenance under Hindu Law, it also becomes essential to understand maintenance payable to a wife under the Protection of Women from Domestic Violence Act, 2005 (“the 2005 Act”). It is an Act to provide for more effective protection of the rights, guaranteed under the Constitution of India, of those women who are victims of violence of any kind occurring within the family. It provides that if any act of domestic violence has been committed against a woman, then such aggrieved woman can approach designated Protection Officers to protect her. An aggrieved woman under the 2005 Act is one who is, or has been, in a domestic relationship with an adult male and who alleges to have been subjected to any act of domestic violence by him. A domestic relationship means a relationship between two persons who live or have, at any point of time, lived together in a shared household, when they are related by marriage, or through a relationship in the nature of marriage or are family members living together as a joint family. A live-in relationship is also considered as a domestic relationship. In D. Velusamy vs. D. Patchaiammal, (2010) 10 SCC 469, it was held that in the 2005 Act, Parliament has taken notice of a new social phenomenon which has emerged in India, known as live-in relationships. According to the Court, a relationship in the nature of marriage was akin to a common law marriage.

Under this Act, the concept of a “shared household” is very important and means a household where the aggrieved lady lives or at any stage has lived in a domestic relationship with the accused male and includes a household which may belong to the joint family of which the respondent is a member, irrespective of whether the respondent or the aggrieved person has any right, title or interest in the shared household. Section 17 of the 2005 Act provides that notwithstanding anything contained in any other law, every woman in a domestic relationship shall have the right to reside in the shared household, whether or not she has any right, title or beneficial interest in the same. Further, the Court can pass a relief order preventing her from being evicted from the shared household, against others entering / staying in it, against it being sold or alienated, etc. The Court can also pass a monetary reliefs order for maintenance of the aggrieved person and her children. This relief shall be adequate, fair and reasonable and consistent with her accustomed standard of living.

An interesting decision was rendered by the Bombay High Court in the case of Roma Rajesh Tiwari vs. Rajesh Tiwari, WP 10696/2017. This was a case of domestic violence in which the wife had alleged that she was driven out of her husband’s home, but she was willing to go back to that home. She filed a petition before the Family Court for allowing her to stay in her husband’s home. This petition was rejected as it was held that the flat exclusively belonged to her father-in-law and there was nothing to show that her husband had any interest or title in the property, hence, she had no right to claim any relief in respect of the property, which stood in the name of her husband’s father. On appeal, the Bombay High Court set aside the Family Court’s order and analysed the definition of the term shared household under the 2005 Act. It also analysed section 17 which stated that every woman in a domestic relationship shall have the right to reside in the shared household, whether or not she has any right, title or beneficial interest in the same. It held that since the couple were living in the father-in-law’s flat, it became a shared household under the 2005 Act. It was irrelevant whether the husband had an interest in the same and title of the husband or that of the family members to the said flat was totally irrelevant. The question of title or proprietary right in the property was not at all of relevance. It held that the moment it was proved that the property was a shared household, as both of them had resided together there up to the date when the disputes arose, it followed that the wife got a right to reside therein and, therefore, to get the order of interim injunction, restraining her husband from dispossessing her, or, in any other manner, disturbing her possession from the said flat.

Contrast this decision of the Bombay High Court with that of the Delhi High Court in the case of Sachin vs. Jhabbu Lal, RSA 136/2016 (analysed in detail in this Feature in the BCAJ of January 2017). In that case, the Delhi High Court held that in respect of a self acquired house of the parents, a son and his wife had no legal right to live in that house and they could live in that house only at the mercy of the parents up to such time as the parents allow. Merely because the parents have allowed them to live in the house so long as his (son’s) relations with the parents were cordial, does not mean that the parents have to bear the son and his family’s burden throughout their life. A conclusion may be drawn that in cases of domestic violence, a wife can claim shelter even in her in-laws’ home, but in a normal case she and her husband cannot claim a right to stay in her in-laws’ home.

Conclusion

Right to claim maintenance has been provided to several persons under the Act. Codification of this important part of Hindu Law has resolved a great deal of ambiguities, but considering the complex nature of this Act dealing with personal law, it does have its fair share of controversies and litigations.

shailesh.kwebmaker

11 Section 92B of the Act – Providing corporate guarantee in respect of loans taken by AE does not constitute international transaction; amendment to section 92B relating to international transaction of issuance of corporate guarantee applies prospectively from FY 2012-13. Transfer of funds with intention to make investment cannot be treated as international transaction especially where shares are allotted against such advances.

[2017] 86 taxmann.com 254 (Hyderabad Trib.)

Bartronics
India Ltd. vs. DCIT

A.Y: 2012-13

Date of Order:
27^thSeptember, 2017

Section 92B of
the Act – Providing corporate guarantee in respect of loans taken by AE does
not constitute international transaction; amendment to section 92B relating to
international transaction of issuance of corporate guarantee applies
prospectively from FY 2012-13. Transfer of funds with intention to make
investment cannot be treated as international transaction especially where
shares are allotted against such advances.

FACTS

The Taxpayer,
an Indian company provided a corporate guarantee in respect of the borrowings
of one of its overseas associated enterprises (AEs) without charging any
guarantee fee. Further, the Taxpayer had provided certain interest free
advances to its AE. Such advances were recorded in the books of the Taxpayer as
loans.

The Taxpayer
contended that the furnishing of corporate guarantee is not an international
transaction for the reason that the amendment by Finance Act 2012 which
included corporate guarantee within the definition of “international
transaction” is prospective in nature and does not apply to the year under
consideration.

Further, the
advances were provided out of business expediency as an investment and/or as a
parental support to the AE from taxpayer’s surplus/owned funds; without
incurring any costs. Hence, they should not be treated as international
transaction. In any case, since AE had allotted shares against advances
provided by the Taxpayer in the subsequent assessment year, they could not be
treated as international transaction.

During the
course of assessment proceedings, Transfer Pricing Officer (TPO), imputed
corporate guarantee fee and interest on advances in the hands of the Taxpayer.
Aggrieved by the order of TPO, Taxpayer appealed before the DRP. DRP confirmed
the action of the TPO.

Aggrieved by
the order of DRP, Taxpayer appealed before the Tribunal.

HELD

– Although
the definition of “international transaction” was amended by FA 2012, to
include corporate guarantee within its ambit with retrospective effect, such
amendment has to be treated as effective from FY 2012-13.

– Although
different views have been taken by different Tribunals on the prospective
applicability of the FA 2012 amendment, Taxpayer can adopt a view which is
favourable to him until a contrary view is taken by a higher court. Reliance in
this regard was placed on the decision of Dr. Reddy Laboratories [2017] 81
taxmann.com 398 (Hyd. Trib). Thus, corporate guarantee granted by the Taxpayer
prior to FY 2012-13 did not qualify as an “international transaction”.

– Though the
advances were classified in the books of the Taxpayer as “advances”, what is
relevant is to evaluate the intention of providing the advances. Mere
classification of transaction as loans and advances in the balance sheet did
not qualify them as loan.

– Taxpayer
had transferred the funds with the intention of investing in its AE. In fact,
shares were allotted by the AE against such advances. Thus, granting of such
advances could not be treated as international transaction. Reliance was placed
on KAR Therapeutics & Estates (P.) Ltd. [IT Appeal No. 86 (Hyd.) of 2016].
Thus, ALP adjusted in this regard was also not warranted.

shailesh.kwebmaker

COMPILERS NOTE

This month’s
Twitter Treats would obviously be dominated by the event that has shaken up the
whole of India – Demonetization of the currency notes. Since 8th November
evening, thousands of tweets on this subject have been sent out. Here are some
of the interesting ones:

@patelameet

Earthquake
measuring 10 on the Rich – chor scale hits the black money hoarders in India
#indiafightscorruption

@joshikhushboo7

Country’s
detoxification on! #DeMonitization

@rishibagree

Journalist
snubbed his driver when he asked Rs 500 advance After #DeMonetisation
same journo called the driver & gave him 12 months advance

@b50

I saw one
shop accept an old Rs 500 note for a Rs80 item and give back change,
smilingly. The customer told her God Bless You. Respect.

@DrGarekar

#IncomeTax
must be taught from Nursery so that paying taxes become ingrained in DNA of
every child as he grows to adulthood & start earning

@PawanDurani

UPA which
said Rs 30 is sufficient for daily expense of a common man in India for
a day is complaining about Rs 2000 withdrawal limit #Irony

@navinkhaitan

Congratulations
those who got the Rs 2000 note U hv successfully cleared Level1 Level2:
Find someone to accept the note n give u change

@anilkumble1074

Massive
googly bowled by our Hon. PM @narendramodi today. Well done Sir! Proud of you!!

@patelameet

More notes
will be counted tonight in India than votes in USA #indiafightscorruption

@kapsology

ATMs giving
only Rs 2000 note if you withdraw Rs 2000. Iss note ka achaar
daale kya? No one is going to give change for it in the market.

@FortunateYogi

I want to
have a meal of Rs. 80 and all I have is a 2000 note, for which no
one gives me change. #MyExperience #ConfusedModiSarkar

@coolfunnytshirt

One out of
many positive side effects of #Demonitization – It has unmasked many
‘neutral’, ‘unbiased’ and ‘apolitical’ people on our TL.

@gauravcsawant

My first Rs
2000 note. Almost didn’t want it to go. Then the vegetable vendor said: the
more it changes hands better for all of us :))

@rameshsrivats

Maybe we can
call this ATM calibration issue a Why-2K problem?

@rameshsrivats

Good that we
are diverting cash from shady purposes to shaadi purposes.

@rameshsrivats

ATM:
Welcome. Please enter PIN.

Rahul: Here,
take.

ATM: Ouch!
Not that pin.

And here are
some more tweets worth reading!

@graphic_foodie

I never love
my husband more than when he does my tax return #truelove

ObamaMalik

How do
illegal people pay income tax if they have no social security for their
tax form? I am legal. I have social security. I pay tax

@ashwinmushran

Pay Service
Tax! Then told there is now a Service Tax half yearly return! Then
pay accountant to file that you’ve paid service Tax! Repeat

@aquasaurabh

After Income
Declaration Scheme to tackle black money the Govt has Patriotism Declaration Scheme
fr just 5 cr #ADHMReleaseDrama @karanjohar

@mkvenu1

“Sin
tax” under GST regime is being lowered drastically to enable the “sinners”
to generate more cash. They help fund elections, after all.

@JamuntinI

God may even
forgive your Sins, taxation dept., wouldn’t. Sin tax @ 40% for your
Smoke…probably. #GST Update.

@rameshsrivats

Now that a
real estate tycoon is winning the US elections, Congress must be seriously
looking at Robert Vadra.

@rameshsrivats

Watching
NDTV. The Congress spokesperson is putting full nonsense. He should be treated
like a 1,000 rupee note, & discontinued immediately.

And here is
the list of a few bollywood actors’ twitter
handles that you may want to follow:

Madhuri
Dixit Nene – @madhuridixit

Shah Rukh
Khan – @iamsrk

Alia Bhat –
@aliaa08

Dilip Kumar
– @TheDilipKumar

Deepika
Padukone – @deepikapaduokne

Priyanka
Chopra – @priyankachopra

Karan Johar
– @karanjohar

Aamir Khan –
@aamir_khan

Anil Kapoor
– @AnilKapoor

Anupam Kher
– @AnupamPKher

Rishi
Kapoor – @chintskap _

shailesh.kwebmaker

PROPOSED AMENDMENTS TO INVESTOR ADVISERS’ REGULATIONS – WIDE RANGING IMPLICATIONS INCLUDING TO CHARTERED ACCOUNTANTS

SEBI has issued on 7^th October 2016 a consultation paper
proposing some amendments to regulations relating to investment advisors and
investment advice generally. Some of the proposed changes affect Chartered
Accountants, Company Secretaries, lawyers and other professionals directly. The
changes generally would make the regulations relating to investment advisors
much stricter. They will also make the categorisations between various types of
advisers sharper, so much so that they may end up being mutually exclusive.

Curiously, this paper has
invited widespread criticism on the grounds that SEBI perhaps did not expect.
Clearly, there were certain valid concerns SEBI has had to address through the
proposals. However, partly due to over-reach and partly due to
ill-drafted/ill-conceived proposals, there has been a strong opposition.
However, considering that amendments are inevitable, it is necessary to
consider the background and also the proposals as they presently stand.

Background of the provisions

SEBI had in 2013 notified regulations
relating to investment advisers (the SEBI (Investment Advisers) Regulations
2013 or “the Regulations”). These Regulations created a fresh category of
persons who assist investors in making investments. The others include
portfolio managers, mutual fund distributors, stock brokers, etc. This
category was created for a specific objective and to resolve certain conflicts
of interest that arose when the adviser was also the seller/distributor of
products.

An investor who approaches an
intermediary faces a concern about the objectivity of the intermediary. On one
hand, the investor expects that the intermediary will give him impartial advice
on which product he should invest in, taking into account his needs and
circumstances. On the other hand, the intermediary usually is paid by the
organisation (i.e., mutual fund, etc.) whose product he distributes. In
any case, he has his further own self interest to serve which may motivate him
to push those products that give him the highest of commissions/remuneration.
The result can not only be costly for the investor in terms of his effectively
paying high cost for making investments, but he may also end up holding
investments that are not suited to him. Mis-selling of units is such a serious
issue that it has actually been made a category of fraudulent practice under
the PFUTP Regulations. Generally, code of conduct relating to intermediaries
too lay stress on their taking into account interests of their clients above self-interest.

However, obviously, this is not
enough. So long as there is conflict of interest, temptations will remain and
no regulations can resolve it merely by mandating against it or banning it. The
Investment Advisers Regulations created a neat solution. It created a category
of intermediaries – Investment Advisers – who would focus on giving advice and
not distributing products. Thus, they will render skilled advice to clients
taking into account their needs and circumstances and thus suggest a portfolio
or investment products that serve their needs. More importantly, their fees
will be directly paid by such clients. The Investment Advisers thus have
motivation as well as interest in focussing only the interests of clients. They
are generally not permitted to accept remuneration/commission from entities
whose products they may recommend.

The Regulations go further and
mandate a higher level of professionalism in such Investment Advisers. They are
required to carry out proper client analysis and document it. Acting as
Investment Advisers would require prior registration. A certain level of
qualifications and also certification is also mandated for such persons.

However, while Investment
Advisers generally were required to obtain registration, exemption from
registration was given to certain persons. For example, persons who give
investment advice as part as incidental to their other activities are not
required to register. A good example is of Chartered Accountants who may give
such advice as part of their practice of rendering tax and related advice to
their clients. Similarly, distributors of products may also give such advice. Such persons are not required to be registered.

This may now undergo a
significant change as per the proposals made in the Consultation Paper.

No exemption to Chartered
Accountants and others who render investment advice incidentally

Chartered Accountants, Company
Secretaries, lawyers, stock brokers, etc. who give investment advice
incidental to their primary activity of professional practice will now require
registration as Investment Advisers. The result will be that such persons will
now have to focus on their core activity and cannot, even if asked, render
investment advice to their clients.

It is not as if such persons
are not qualified or otherwise unregulated. Further, it is also not as if they
have conflict of interest. Yet, this requirement is proposed.

It is possible that some such
persons may obtain the required registration to enable them to continue giving
such advice to their clients. However, it is more likely that the
categorisation of persons will become more distinct and separate with each group
focussing on their own activities.

Mutual Fund distributors to be
debarred from giving investment advice

As explained earlier,
intermediaries such as mutual fund distributors face the very conflict of
interest that is the focus of the Investment Advisers Regulations. They are
paid by the mutual fund/AMC whose products they sell though the investor may
expect that they are given impartial advice suited to their circumstances. Such
distributors under the Regulations were not required to be registered as Investment
Advisers, if they gave advice that is incidental to the selling of such
products. The Consultation Paper now proposes to wholly prohibit them from
giving such advice even incidental to selling.

Categorisation between Research
Analysts and Investment Advisers

Research Analysts and
Investment Advisers provide similar functions in relation to giving of
investment advice. However, the nature of their functions and approach is
significantly different and thus requirements relating to their registration
and functioning are covered under separate Regulations. A proposal now makes
this categorisation even sharper.

The Consultation Paper observes
that investment advice is often given in electronic and broadcasting media. A
certain level of exemption is presently provided under the Investment Advisers
Regulations to such advice that is widely available to public. It is now
proposed to divide such advice being given. Simply stated, generic advice in
such media to public at large can be given by research analysts while client
specific advice can be given by Investment Advisers.

Another recommendation further
clarifies this divide. Research Analysts would be required to send their
recommendations to all classes of its clients at the same time. The reason is that
their recommendations are generic and product related and not client specific.
Thereafter or independently, the role of the Investment Adviser would arise
where the investor would take the help of such Adviser to decide whether such
recommendation is suitable for his needs and circumstances.

Investment tips via social
media and the like

This proposal has seen very
strong criticism. While the criticism is justified, the evil that is sought to
be addressed also needs to be considered.

It is too often found – as
evidenced by several orders of SEBI – that there are persons who use the
internet and social media for giving tips in dubious scrips whose price and
trading are manipulated to trap unsuspecting investors. Tips are given by SMS,
whatsapp, social media, etc. Often, these scrips are what are known as
“penny stocks” who rarely have any intrinsic value but are quoted at low
prices. The price of the shares are manipulated and huge volume is also seen in
stock exchange which tempts investors into investing. The investing public may
be influenced by the low price and hence, there is expectation that loss too
can be low. The shares, after some time, see their price and volumes both
crashing with investors then left holding the valueless shares. In some cases,
SEBI has identified persons who carry out such manipulative/fraudulent
activities and debar/punish them. At other times, it may be difficult even to
identify who they are.

The Consultation Paper now
seeks to wholly debar giving of such tips unless such persons who give tips are
themselves registered as Investment Advisers and thus subjected to the
regulatory requirements. Moreover, giving of such tips in violation of such
requirements will be treated as a fraudulent act inviting stringent punishment.

This proposal has invited very
strong criticism. The objection obviously is not against action against such
dubious/fraudulent tippers. It is the blanket and overreaching ban against all
type of tips on internet and social media irrespective of who is giving such
types, of what type and in what manner. To give a most basic example, a person
may recommend in passing to his friend a particular share in a conversation
over WhatsApp. This may not be well researched and even accurate. Yet, such a thing is so common. Such a tip may attract severe punishment.

It is common to find
whatsapp/facebook groups where investment advice is freely taken/given amongst
like minded persons. There are countless blogs that discuss investments and it
is likely that some sort of recommendation may be given on such blogs. Critics
have given example of comments of persons like Warren Buffet and the like who
discuss their investments publicly.

It is felt that SEBI has not
thought through this issue well and their recommendation may restrain free
discussion of stocks and investments generally. It is even stated that such
restriction amounts to severe and unjustified restraint on freedom of speech.

One will have to see how SEBI
deals with this criticism and what modified form of regulation it comes out
with.

Ban on schemes, competition,
games, etc. relating to stock market

SEBI has observed that many
persons organise competition, games, etc. relating to stock market which
may involve predicting the price of shares on stock markets. The paper makes it
clear that SEBI does not approve or endorse such schemes and thus the public
may engage in such schemes at their own risk. However, SEBI goes a step beyond
such hands-off/caveat emptor approach and notes that the public may end up
suffering losses. Hence, the paper recommends a total ban on such schemes, etc.

Client Agreement by Investment
Advisers

Client agreements have always
been a concern in respect of intermediaries in securities markets. There may be
non-uniformity or even sheer non-existence of such agreements. Or the terms may
be one-sided or opaque. Certain minimum level of protection of clients may not
be provided. Hence, SEBI often provides for certain standard form of such
agreements with certain minimum requirements that cannot be deviated from. For
Investment Advisers, the paper recommends a “Rights and Obligation” document.
The paper recommends a certain minimum provisions in such document including
various disclosures by the Investment Adviser. The result would be that, while
avoiding over-formalisation, a certain level of protection as well as
disclosure would be available to the client.

Other recommendations

The Paper generally seeks to
make several other amendments. The Regulations particularly relating to Investment
Advisers will thus see substantial amendments.

Conclusion

Intermediaries are considered
to be the gatekeepers to securities markets who deal with investors directly.
It is then inevitable that such intermediaries will face considerable
regulation and supervision. It is also expected that SEBI would ensure that,
through registration, it creates a requirement whereby only qualified persons
who comply with certain basic requirements as well as ethics are only permitted
to operate. Further, conflicts of interests are also avoided. This has resulted
in not only multiple categories of such intermediaries but increasingly complex
regulatory requirements. Whatever shape the final requirements may come in
following the consultation paper, they will only increase such requirements
which eventually will also increase costs of compliance. The multiple
categories will ensure that there is sharp specialisation and many
intermediaries and even professionals like Chartered Accountants will have to
give up certain activities they may otherwise be engaging in. The investors
will have advantage of such specialisation but will then have to go to multiple
intermediaries to fulfill their simple desires of investing in capital market
products. _

shailesh.kwebmaker

INDIA ON THE CUSP OF CHANGE!

On 8^th
November 2016, the Prime Minister may have possibly altered the course India
was taking. He announced demonetisation of Rs. 1000 and Rs. 500 notes which
constituted 86% of the currency in circulation. For its sheer magnitude, his
courageous decision deserves kudos. I would like to compare this decision to
that of his predecessor (as the then Finance Minister) in 1991, which broke the
shackles of the Indian economy. His announcement will have possibly the same
impact if not greater.

The decision
of demonetisation has been taken for three reasons-to tackle the menace of
counterfeit notes, consequentially to turn off the terror funding tap, and last
but not the least to bring holders of unaccounted money to book. To what extent
the decision will succeed in achieving the objectives only time can tell. The
announcement took virtually everyone by surprise and has been applauded by the
majority. The world is looking at India with expectation. Economists differ on
the possible outcomes, as they do in most cases. Political parties, while
supporting the intent have raised questions about tardy implementation, a major
part of them being justified.

The ordinary
citizen has borne the brunt of the difficulties of the currency crunch, and the
problem is far more serious in the villages than in the cities where plastic
money and various forms of electronic transactions have already taken root.
Indians however are patiently bearing the” inconvenience”, to put it mildly, in
the hope that the decision will be of great benefit to the country, reduce
corruption and result in punishing the persons engaged in illegal activities
and evasion of taxes. One hopes that, as far as the drive against the
unaccounted wealth is concerned, this is only the beginning of a series of
actions which the Prime Minister has promised to take.

Much has
already been said about the economic downturn on account of cash crunch. If
long term benefits are to be realised, a limited fall in economic growth should
be acceptable. In any case, this decision will garner much more for the
government coffers, than the two amnesty schemes for foreign/domestic
unaccounted wealth and income could get. If Rs.15 lakh crore is the money in
high denomination notes and 30% of it is not returned / deposited or exchanged,
that itself would amount to Rs. 4.5 lakh crore.

While the
intent of the Prime Minister in this initiative cannot be doubted, there are
certain concerns which need to be addressed. The first is in regard to the
notices that various persons have been receiving on their depositing cash in
their bank accounts and the surveys that are being carried out. While the
Income tax Department certainly has the power to enquire into the source of
money, such actions should not lead to inspector raj which could, in turn, lead
to abuse of power. Even prior to demonetisation, there were complaints of tax
terrorism. There must be a balance between seeking information and
inconvenience to the public.The use of authority must be judicious.

The second
aspect which the government must brace itself for is a possible rise in crime.
If reports are to be believed, a large part of the underworld, particularly the
foot soldiers are unemployed, as hawala, gambling, extortion have halted or
reduced due to non-availability of cash. For a few days, they would survive on
what they have earned in the past, but if society does not create alternative
sources of employment, retrain them or assimilate them into the mainstream
economy,there would be many unemployed youth on the streets who could cause
problems for other sections of society.

While these
problems are certainly a cause for concern, the move to demonetise currency
notes has several benefits, some intended, others unintended. There seems to be
a fall in terrorist activities, both internal and external, with their sources
of funds having totally been choked. This lull in activity is probably an
opportunity to launch a social/ political offensive, so that the menace can be
contained, if not eradicated.

Demonetisation
has also given a fillip to the drive for financial and digital inclusion.
Banks, both in public sector and private sector, are making a serious attempt
to reach the rural areas. This is a drive which the government must
wholeheartedly support with the funds now at its command. Secondly, a much
larger number of people – consumers, manufacturers, traders and service
providers have started making and accepting payment in the cashless mode. This
will ensure that transactions are recorded and costs in making them are cut.

As I write
this editorial, the Finance Minister presented a bill in the Lok Sabha
proposing additional tax liability in respect of the undisclosed income,
voluntarily declared, assessed or income unearthed after a search. In addition,
the said bill contains a scheme whereby the declarant can pay only 50%, 25%
would have to be deposited in a scheme known as Pradhan Mantri Garib Kalyan
Yojana 2016 (PMGKY), and the declarant would be entitled to retain the balance
25%. After the demonetisation announcement, a detailed article had been worked
on by two of our illustrious past presidents Pradip Kapasi and Gautam Nayak.
However, as they were in the process of finalising it, the Taxation Laws
(Second Amendment) Bill, 2016 was moved. It has now been passed in the Lok
Sabha and awaits presidential assent. Reading the clauses in the bill, the
article would have required complete rewriting. After considering the
limitation of time given the deadline for printing of this issue, it was
impossible to make the changes and provide a detailed analysis of the
amendments, which would be expected by readers. The two authors would however
endeavour to carry out the necessary changes in their article and a sincere
attempt will be made to place that article on the BCAS website. This is of
course presuming that more changes are not made! As an information to readers,
I have attempted to summarise the provisions of the bill in regard to the
enhanced tax liability, surcharge and penalty under the Income-tax Act in
respect of such undisclosed money, etc., which makes the PMGKY seem a
worthwhile alternative. Readers may kindly note that this is only a prima facie
view as I do not possess the ability of the eminent past presidents.

Category of Income

Rate of Tax

Surcharge

Penalty

Total liability

If unexplained income is declared in return of income

60%

15%

nil

75%

If unexplained income is determined by
assessing officer

60%

15%

7.5%

82.5%

Education cess would also be payable at 3% of the above
tax and surcharge.

A separate
penalty is also provided if income is found after a search which is carried out
after the bill receives presidential assent, and undisclosed income is
unearthed as a consequence thereof.

The
cumulative effect of the demonetisation, and the amendments in tax provisions
will have to be seen as time progresses.

To conclude, the last quarter of 2016 has seen
the Indian Premier taking a pathbreaking decision. If all goes well, the year
2017 should see the rise of a brighter sun on the Indian horizon.

shailesh.kwebmaker

19. Appellate Tribunal – Power to consider new ground etc. – Sections 142(2A) and (2C) – A. Y. 2005-06 – Tribunal has power to consider the question of validity of extension of time u/s. 142(2C) of the Act – Amendment by Finance Act, 2008 is prospective and not retrospective

Principal CIT vs. Nilkanth Concast P.
Ltd.; 387 ITR 568 (Del):

The relevant year is the A. Y. 2005-06. In
the appeal filed by the Revenue before the Delhi High Court, the following
questions were raised:

“i) Whether the ITAT is
competent to adjudicate the order of the AO under proviso to section
142(2C), which is not provided u/s. 146A
or 153?

ii) Whether the ITAT is
competent to admit an issue for the first time where there is no material in
the assessment order or in the order of the Commissioner of Income-tax
(Appeals) on the basis of quite the issue of validity of the order of the
Assessing Officer under the proviso to section 142(2C) could be raised
and considered?”

iii) Whether the AO is
competent to extend the period of filing the audit report on the express
request of the nominated auditor under proviso to section 142(2C) r.w.s.
142(2A) ?”

The High Court held as under:

“i) The powers of the Tribunal
are wide enough to consider a point which may not have been urged before the
Commissioner(Appeals) as long as the question requires to be examined in the
interest
of justice.

ii) The Tribunal had not
exceeded its jurisdiction in examining the question whether the Assessing
Officer was justified in extending the time for the auditor nominated u/s.
142(2C), to submit the audit report.

iii) Under proviso to
section 142(2C) of the Act, there was no power with the Assessing Officer to suo
moto extend the time for filing audit report prior to April 1, 2008. The
power was subsequently provided by amending the proviso by the Finance
Act, 2008 and the amendment was prospective in nature.

iv) The Assessing Officer was
not competent to extend the period for filing the audit report on the request
of the nominated auditor. It could be done only on the request made on behalf
of the assessee.”

shailesh.kwebmaker

APARIGRAHA (NON-POSSESSION)

An Ashramite of Gandhi
Ashram was required to adopt “Ekadash Vrats” – Eleven vows. Vows are not
just rules but has a much more deeper meaning. A vow requires unflinching
determination; determination which does not bend before discomfort and
difficulties. According to Gandhiji, “Taking vows is not a sign of weakness,
but of strength to do at any cost something that one ought to do constitutes a
vow”. Further, according to him, “to do something ‘as far as possible’ provides
a fatal loop hole. To do something ‘as far as possible’ is to succumb to the
very first temptation. Vows are necessary for the purpose of self-purification
and self-realisation.

What are these eleven
vows? They are (1) Truth, (2) Ahimsa. (3) Brahmacharya, (4) Control of the
palate, (5) Non-stealing, (6) Non-possession, (7) Fearlessness, (8) Removal of
untouchability, (9) Bread labour – work, (10) Tolerance – Equality of Religions
and (11) Humility.

Of the above eleven vows,
the one of non-possession also called ‘Aparigraha’ is to my mind a very
important one. Non-possession is allied to non-stealing according to Gandhiji.
If we posses something, if we hold on to something which is not required by us,
it amounts indirectly to stealing. We are depriving others of what we hold on
to, which they need and we do not. A bird, an animal does not think of what it
will need tomorrow and worry about it.

It is true of course, that
a human being cannot possibly live like a bird, without a house, without
clothes and without providing for his needs for food. However, one can keep
one’s needs to a minimum and do with little. As we reduce our dependence on
material things, our happiness and inner satisfaction and peace increase. We
have to learn to simplify our lives.

But what do we see around
us, and what do we actually put in practice? The homes of the rich are stuffed
full of material things. Hundreds of saris, dresses, scores of costly purses
and shoes and dozens of shirts, etc. This is not uncommon…. And yet the
urge to collect more and more is never satisfied. On the other hand, millions
do not get even two square meals a day; so many go hungry to bed every night,
many do not have even a spare set of clothes.We have to learn to “Share and
Care”. We cannot, like Marie Antoinette, the French Queen, say that “If they do
not have bread, let them eat cake.”

According to Gandhiji, the
principle of Non-possession (Aparigraha) is applicable not only to
things but also to thoughts. We should not clutter up our brains with too much
of needless information and useless knowledge. Wrongful thoughts keep us away
from the rightful path and come in the way of our search for God.

What would happen if all
of us start observing “Aparigraha” – non-accumulation – and accept it as
a governing value of our lives? Then there would be no more poverty, and no
needy persons. As Gandhiji has said, “there is enough in this world for
everyone’s need but not for everyone’s greed.” There would neither be rich
persons nor poor persons. The divide between the haves and have-nots would
disappear. It may not be possible to totally observe ‘Aparigraha’ in our
day to day life. But we can certainly reduce senseless accumulation of
possessions and wealth which even our great grandchildren will not need.

Is it even possible to
follow ‘Aparigraha’? I know of some professionals who do follow it. In
their case, whatever they earn in excess of their needs goes straight for
charity. Recently, I came across one person who since the last 42 years is
keeping only 20% of his income for himself and gives away 80%! And believe me,
his income is not all that great.

So let us begin. Begin
now, today itself. Begin small but begin. Let us go through our possessions. Is
it necessary to keep 30 shirts? Or 300 sarees? 12 pairs of shoes? 20 ties?

Friends, without waiting
any longer, we should have a fresh look at our wealth and our incomes and start
the process of ‘Aparigraha’ – of non-accumulation. It would certainly
simplify our lives and make us a lot more happier.

shailesh.kwebmaker

20. Assessment – Transfer pricing – DRP is superior to AO- AO is bound by decision of DRP – ESPN Star Sports Mauritius

S. N.
C. ET Compagnie vs. UOI; 388 ITR 383 (Delhi):

In this
case, the DRP declared that the Assessing Officer lacked jurisdiction to deal
with an issue. However, the Assessing Officer passed a final assessment order
ignoring the order of the DRP.

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

“i) The
language used by the Assessing Officer while disagreeing with the binding order
of the DRP was wholly unacceptable.

ii) The
draft assessment order dated 28/03/2014 and the final assessment order dated
28/01/2015, passed by the Assessing Officer were void ab initio and
liable to be quashed on that basis.”

shailesh.kwebmaker

Section 10A – Claim for deduction u/s. 10A cannot be denied merely beause the assessee has inadvertently omitted to furnish the relevant details relating to deduction u/s. 10A in the appropriate columns of the return of income filed electronically

10. ACIT vs. Albert A. Kallati
ITAT Mumbai `A’ Bench
Before B. R. Baskaran (AM) and Amit Shukla (JM)
ITA No.: 2888/Mum/2013
A.Y.: 2009-10. Date of Order: 3rd August, 2016.
Counsel for revenue / assessee: Reepal Tralshawala / Sachchidanand Dubey

FACTS
The assessee, a manufacturer of diamond studded gold jewellery having manufacturing unit located in SEZ, filed his return of income for the year under consideration on 30.9.2009. Subsequently, he revised his return of income twice. In all the three returns of income, the assessee did not show any claim for deduction u/s. 10A of the Act, even though the total income was shown at Rs. Nil in the original return. Hence, the Assessing Officer (AO) did not allow deduction u/s. 10A of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who called for a remand report wherein the AO submitted that the assessee had been allowed deduction u/s.10A of the Act in AY 2006-07 to 2008-09. Before the CIT(A) the assessee submitted the relevant details relating to deduction u/s. 10A which were inadvertently omitted to be furnished int eh appropriate columns of the return of income filed electronically. The CIT(A) was convinced that there was a genuine mistake and accordingly, he directed the AO to allow the deduction.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal observed that there was no dispute with regard to the fact that the assessee is eligible for deduction u/s. 10A of the Act for the year under consideration. The AO did not allow the claim, since it was not claimed in the return of income. However, the conduct of the assessee shows that he assessee had intended to claim the same, but the relevant details were omitted to be entered in the return of income. The Tribunal held that the inadvertent omission so made should not come in the way of the assessee to claim the deduction, which he is legally entitled to. The Tribunal upheld the order of the CIT(A).

The appeal filed by the revenue was dismissed.

shailesh.kwebmaker

Sections 40(a)(ia), 194I – U/s. 194I tax is not required to be deducted on reimbursements and therefore, the amount so reimbursed cannot be disallowed u/s. 40(a)(ia)

9. Aditya Birla Minacs Worldwide Ltd. vs. ACIT
ITAT Mumbai `A’ Bench
Before B. R. Baskaran (AM) and Amit Shukla (JM)
ITA No.: 4549/Mum/2014
A.Y.: 2007-08. Date of Order: 2nd August, 2016
Counsel for assessee / revenue: Ronak G. Doshi / A. Ramachandran

FACTS
The assessee reimbursed rent and parking charges amounting to Rs. 71.49 lakh to its holding company, PSI Data System Ltd. The holding company had entered into a rent agreement with M/s Golf Links. The assessee entered into a Memorandum of Understanding with its holding company on 1.4.2006 pursuant to which the assessee company would occupy a portion of premises taken on lease by the holding company and the holding company shall apportion the rent payment with the assessee company in the ratio of space actually utilised by the assessee. The MOU also provided that all statutory liabilities in relation to rental facilities such as TDS, service tax, are the responsibilities of the holding company.

During the year under consideration, the assessee reimbursed a sum of Rs. 71,49,545 to its holding company as its share of rental expenditure incurred by the holding company. The assessee did not deduct tax at source from the said payment on the reasoning that the liability to deduct tax at source from the rent payment paid to the landlord was taken up by the holding company. The landlord, M/s Golf Links, had obtained a certificate u/s. 197(1) for non-deduction of tax at source, therefore, the holding company did not deduct tax at source from the rent paid by it to the landlord. The holding company had obtained no deduction certificate for payments covered by sections 194A, 194C and 194J. It was also submitted to the AO that the holding company was of a bonafide belief that reimbursement of rent from the assessee would not form part of its income in its hands and hence it did not obtain specific certificate for payments covered by section 194I.

The AO held that the assessee should have deducted tax from rent payments made by the assessee to its holding company. He disallowed Rs. 71,49,545 by invoking provisions of section 40(a)(ia) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the rental agreement has been entered into between the holding company and the land lord and hence the inference drawn by the tax authorities is against the facts available on record. The Tribunal observed that an identical issue was considered by the co-ordinate bench of the Tribunal in the case of Prime Broking Co. (I) Ltd. vs. ACIT (ITA No. 6627/Mum/2010 dated 19.10.2012) and the Tribunal held that the provisions of section 194I shall not apply to reimbursement of rent. The decision rendered by the Tribunal has since been upheld by the Bombay High Court vide its order dated 9th June, 2015 reported in 2015-TIOL-1472-HC-Bom-IT.

The Tribunal further observed that the return of income of the holding company for the year under consideration has been accepted. Since the payment received from the assessee towards rent has been offered in the return of income filed by the holding company, the provisions of section 40(a)(ia) cannot be applied to the case of the assessee as per the second proviso thereto, which is held to be retrospective by the Delhi High Court in the case of Ansal Land Mark Township (P.) Ltd. (377 ITR 635)(Del).

Considering the ratio of the judgments of the Bombay High Court and the Delhi High Court, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition made u/s. 40(a)(ia) of the Act relating to reimbursement of rent.

shailesh.kwebmaker

Section 41(1) – Amounts shown in Balance Sheet cannot be deemed to be cases of “cessation of liability” only because they are outstanding for several years. The AO has to establish with evidence that there has been a cessation of liability with regard to the outstanding creditors.

8. ITO vs. Vikram A. Pradhan

ITAT Mumbai `F’ Bench
Before Jason P. Boaz (AM) and Sandeep Gosain (AM)
ITA No.: 2212/Mum/2012
A.Y.: 2008-09. Date of Order: 24th August, 2016
Counsel for revenue / assessee: M. V. Rajguru / None

FACTS

In the course of assessment proceedings the Assessing Officer (AO) observed that the assessee’s balance sheet reflected creditors of Rs. 33,44,827. Upon enquiry, the assessee submitted that these are old creditors pertaining to the period when he carried out business in Indore and that these have been carried forward for past 7 to 8 years and are unpaid due to disputes with the creditors.

The AO considered the entire creditors balance outstanding aggregating to Rs. 33,44,827 as income of the assessee by invoking section 41(1) as cessation of liability for the reason that these are old amounts and pertain to assessee’s old place of business and still remain unpaid.

Aggrieved, the assessee preferred an appeal to the CIT(A) who after considering the material on record and also referring to the judicial pronouncements of the Apex Court in the case of CIT vs. Sugauli Sugar Works (P.) Ltd. 236 ITR 518 (SC) and UOI vs. J. K. Synthetics Ltd. (199 ITR 14)(SC) held that in the case on hand there was no write back of liability payable to creditors which is disclosed in the assessee’s balance sheet. He also observed that no independent inquiries were carried out by the AO to establish that these creditors have written off the debts appearing in their respective account. He held that the AO was not justified in unilaterally deciding that the amounts reflected as liabilities in the balance sheet of the assessee have ceased to exist within the meaning of section 41(1) of the Act. He allowed the appeal.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the AO has failed to cause enquiries to be made with or notices issued to creditors to ascertain from them whether they have remitted the dues from the assessees in their books of account. The fact that the creditors outstanding balances were not written back in the assessee’s books of account, but rather stood reflected in the asseessee’s balance sheet clearly establishes that there is no cessation of liability. On the contrary, it is an acknowledgement by the assessee of existing debts it owes to its creditors. It further observed that no material has been brought on record by the AO to show that there was remission or cessation of liability. When the AO was of the view that there was cessation of liability in the case on hand, it was incumbent upon him to cause necessary enquiries to be made in order to bring on record material evidence to establish the requirement for invoking the provisions of section 41(1) of the Act. The very fact that the assessee reflects these amounts as creditors in his Balance Sheet is an acknowledgement of his liability to these creditors and this also extends the period of limitation u/s.18 of the Limitation Act. Once the assessee acknowledges that the debts to creditors are outstanding in his Balance Sheet, that he is liable to pay his creditors, Revenue cannot suo moto conclude that the creditors have remitted their liability or that the liability has otherwise ceased to exist, without bringing on record any material evidence to the contrary. Since the AO had not brought on record any material evidence to establish that there was cessation of liability in respect of the outstanding creditors reflected in the Balance Sheet, the Tribunal concurred with the finding of the CIT(A) that the addition of Rs. 33,44,827 u/s. 41(1) of the Act is unsustainable.

The Tribunal dismissed the appeal filed by the Revenue.

shailesh.kwebmaker

Sections 271(1)(c), 271AAA – Penalty levied u/s. 271(1)(c) to a case covered by section 271AAA is void

7. Nukala Ramakrishna Eluru vs. DCIT
ITAT Vishakapatnam Bench
Before V. Durga Rao (JM) and G. Manjunatha (AM)
ITA Nos.: 189 to 192/Vizag/2014
A.Ys.: 2005-06 to 2008-09. Date of Order: 16th September, 2016.
Counsel for assessee / revenue: C. Subramanyam / T.S.N. Murthy

FACTS

On 16.11.2007, a search u/s. 132 of the Act was conducted in the residential as well as business premises of the assessee, engaged in the business of rearing and trading of fish and other ancillary business activities. During the course of search, department unearthed details of investments made in the purchase of immovable properties standing in the name of the assessee and his family members including business concerns. The assessee filed his return of income for AY 2008-09 on 30.09.2008 declaring total income of Rs. 75,39,560. This return of income was revised on 14.9.2009 and a total income of Rs. 1,82,84,170 was declared in the revised return of income. Subsequently, this return of income was again revised and in the final revised return of income the income disclosed was Rs. 4,10,32,920.

The AO assessed the total income of the assessee to be Rs. 4,10,32,990. He initiated penalty proceedings u/s. 271(1)(c) of the Act and after asking the assessee to explain why penalty should not be levied for concealment of particulars of income or furnishing inaccurate particulars of income, he levied penalty u/s. 271(1)(c).

Aggrieved, the assessee preferred an appeal to the CIT(A) who directed the AO to levy penalty on the difference between Rs. 1,82,84170 (being total income in first revised return) and Rs. 75,39,560 (being total income in the original return of income).

Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended on his behalf that the levy of penalty for AY 2008-09 u/s. 271(1)(c) of the Act was void ab initio.

HELD

In the present case on hand, on perusal of the facts available on record we find that the search had taken place on 16.11.2007 which falls under the assessment year 2008-09 which is the year before us. The year before us was therefore, covered by the Explanation of specified previous year as per Explanation (b) to section 271AAA of the Act. It is not in dispute that the income in question has been assessed as income of the assessment year 2008-09 i.e. specified previous year. The AO himself has treated the undisclosed income of the assessee as such. Once we come to the conclusion that the year before us is a specified previous year and the undisclosed income belongs to this year, an inevitable finding in view of the discussions above is that the provisions of section 271AAA will come into play to deal with penalty for concealment of particulars of income. It is clear from the above fact that the AO has not invoked the correct provisions of law for levying penalty for concealment of income. Therefore, we are of the view that the AO erred in levying penalty u/s. 271(1)(c) of the Act, when a specific provision is provided by way of section 271AAA to deal with penalty provisions, in cases where search took place on or after 1.6.2007.

The Tribunal considering the facts and circumstances of the case and also the ratio of the decision of the Delhi Bench of the Tribunal in the case of DCIT vs. Subhash M. Patel in ITA No. 256/AHD/2012 dated 20.7.2012, held that the penalty order passed by the AO under s. 271(1)(c) of the Act, is void ab initio and liable to be quashed.

The Tribunal quashed the penalty order passed by the AO u/s. 271(1)(c) of the Act for AY 2008-09.

The appeal filed by the assessee was allowed.

shailesh.kwebmaker

Sections 51 and 56 – Clause (ix) of section 56(2) (inserted w.e.f. 01.04.2015) which lays down that amount of advance received for sale of property shall be treated as income if the same is forfeited and negotiations do not result in transfer of such capital asset and corresponding proviso to section 51 (inserted with effect from 01-04-2015) which states that if the amount of advance received was treated as income in pursuance of section 56(2)(ix), then no deduction of the said amount shall be done in computing the cost of acquisition when the said property is ultimately sold, do not have a retrospective effect.

[2016] 160 ITD 426 (Mumbai Trib.) ITO vs. Fiesta Properties (P.) Ltd.
A.Y.: 2010-11 Date of Order: 11th August, 2016

Section 41(1) read with Sections 28(i) and 51- Prior to 01.04.2015, if an assessee builder had received advance towards sale property held by it as a capital asset and the same was standing as liability in balance sheet of the assessee and if the actual sale transfer didn’t materialise, then the said amount would not be taxable u/s. 41(1) on writing off of corresponding amount by transferee but would be deducted u/s. 51 from cost of acquisition in computing capital gain when the property is ultimately sold.

FACTS

The assessee company was engaged, interalia, in the business of construction of properties. During the year under consideration, the assessee company had shown income mainly from rent under the head ‘Income from house property’ and also ‘Income from business’.

During the course of assessment proceedings, the AO noted that there was a liability of Rs.3.74 crore as shown in the balance sheet of the assessee, in the name of M/s Dawat-E-Hadiyah Trust. The said liability was created in the year 1995, when the assessee had received the said amount from the said trust as an advance for sale of assessee’s property. The AO conducted enquiries from M/s. Dawat-E-Hadiyah Trust, who vide their letter dated 29.11.2012 replied that the liability had been written off in the year under consideration.

AO was of the view that the assessee being in the business of construction had trading liability and hence, the cessation of said liability should be treated as income of the assessee u/s. 41(1) of the Act. Accordingly, he added the said amount of Rs.3.74 crore to the total income of the assessee. The AO also observed that though both the assessee as well as M/s Dawat-E-Hadiyah Trust, contended that the transaction was in respect of transfer of property, but both the parties failed to furnish any proof that the transaction was for an immovable property. Without any documentation, a property transaction of the magnitude of Rs. 3.74 crore in the year 1995 was beyond comprehension. Since there was no supporting evidence, the AO held that the advance received by the assessee from M/s Dawat-E-Hadiyah Trust was an interest-free unsecured deposit in the course of the business of the assessee company. Thus, on the ground of cessation of the liability, the AO added the amount of Rs. 3.74 crore u/s. 41(1) of the Act.

Being aggrieved, the assessee filed appeal before CIT(A). It was submitted that the impugned amount was received by the assessee with regard to sale of property located at Chennai. The assessee also furnished copies of the correspondences between itself and M/s Dawat-E-Hadiyah Trust indicating that all through, the intention of the advance received was for transfer of the assessee’s property at Madras and when the deal did not materialise, the said M/s Dawat-E-Hadiyah started demanding its money back. Copies of all these correspondences were also furnished before the AO. After considering the entire submissions it was held by CIT(A) that impugned amount was not taxable in the hands of the assessee either u/s. 41(1) or u/s. 28(iv) or under any other provisions of the Act and that whenever the impugned property is sold by the assessee, the cost of acquisition of the property shall be reduced by the amount of Rs.3.74 crore for the purpose of computation of capital gains in view of provisions of section 51 of the Act.

On revenue’s appeal before the Tribunal:

HELD

The admitted facts on record are that assessee has been showing its rental income from its properties, including the impugned property located at Madras and the same has also been assessed by the AO under the head ‘Income from house property’. These properties have been undoubtedly shown as capital assets in the balance-sheet and never have been declared as stock-in-trade. This position has all along been accepted by the revenue.

Further, as far as the assessee is concerned, the liability of Rs.3.74 crore is still outstanding in the name of aforesaid party. The CIT(A) has recorded a clear and categorical finding that correspondence between the assessee company and said party revealed that the transaction was in respect of assessee’s property located at Madras. But, the transaction could not be completed. This factual finding could not be rebutted by the Ld DR. Thus, as per facts and records brought before us, aforesaid property is undoubtedly capital asset of the assessee company. Under these circumstances, it has been rightly held by the CIT(A) that the impugned amount of advance received towards sale of immovable property being capital asset of the assessee company, cannot be taxed under the provisions of section 41(1) or section 28(iv) of the Act, especially due to the fact that the legislature has provided the specific provision in this regard, i.e. section 51 of the Act.

Clause (ix) of section 56(2), inserted w.e.f. 01-04-2015, clearly lays down that amount of advance received for sale of property shall be treated as income if the same is forfeited and negotiations do not result in transfer of such capital asset. Also proviso, introduced with effect from 01-04-2015 to section 51, states that if the amount of advance received was treated as income in pursuance of section 56(2)(ix), then no deduction of the said amount shall be done in computing the cost of acquisition when the said property is ultimately sold.

These provisions are not clarificatory in nature. These provisions lay down a substantive law creating additional tax liability upon an assessee and, therefore, this cannot have retrospective effect. Further, with the insertion of these provisions, it becomes clear that earlier the law was not like this. Thus, for the year before us, i.e. A.Y. 2010-11, the then existing provisions of section 51 shall be applicable which clearly provides that the amount of advance received should be reduced from the cost of acquisition of asset.

Thus, the action of CIT(A) in directing the AO to delete the addition of Rs.3.74 crore which was made by the AO u/s. 41(1) of the Act, is hereby upheld.

shailesh.kwebmaker

9. Genuineness of trust – a breach/contravention of the Bombay Public Trust Act, 1950-would not result in the trust being disqualified from being approved u/s. 80G.

D.I.T. (Exemptions) Mumbai vs. Shri Sai
Baba Charitable Trust. [ Income tax Appeal no. 902 of 2014 dt : 15/10/2016
(Bombay High Court)].

[D.I.T. (Exemptions) Mumbai vs. Shri Sai
Baba Charitable Trust., [dated 13/11/2013 ; A Y: 2011-12. Mum. ITAT ]

The assessee is a Charitable Trust duly
registered u/s. 12AA Act. On 2^ndDecember, 2011, the assessee Trust
applied to the Director of Income Tax (Exemption) for renewal of Certificate /
approval u/s. 80G. The application was rejected by the Director of Income Tax
(Exemption). This rejection was on the ground that the Trust had obtained
unsecured loan of Rs. 50 lakh from third parties without obtaining prior
approval of the Charity Commissioner as required u/s. 36A(3) of the Bombay
Public Trust Act, 1950. Thus, concluding that the assessee is not a genuine
trust.

Being aggrieved, the assessee filed an
appeal to the Tribunal. The Tribunal by the impugned order held that there is
no dispute that the assessee fully satisfied the conditions specified in
section 80G(5) of the Act for approval there under. It further observed that
there is no requirement under the Act that a breach / contravention of the
Bombay Public Trust Act, 1950 would result in the trust being disqualified from
being approved u/s. 80G of the Act. It held that the very fact that the Revenue
had not initiated any action u/s. 12AA of the Act to revoke its registration
would imply that the activities of the Trust are genuine.

Moreover, the Tribunal also records the fact
that the Charity Commissioner has not taken any action against the assessee for
violation of the provisions of section 36A of the Bombay Public Trust Act, 1950
in having borrowed funds without its prior permission. In the aforesaid circumstances,
the appeal of the assessee was allowed.

The Revenue appealed before the High Court
and urged that the Trust is not a genuine trust in as much as it has been
borrowing funds on regular basis from third persons and has been repaying it by
borrowing further funds from other parties on regular basis.

The Hon. High Court find that the impugned
order of the Tribunal has on the basis of the clear provision of section 80G
recorded that the assessee completely satisfies/fulfils all the conditions
specified in section 80G(5) for the purposes of availing benefit u/s. 80G. This
coupled with the fact that the Revenue itself has also not taken any
proceedings to have the registration cancelled, would itself imply that the
Revenue does consider the Trust to be a genuine trust.

It is an undisputed position that the assessee
satisfies all conditions for approval of the trust u/s. 80G. Therefore, it is
not open to the Authorities to refuse approval by imposing conditions which are
not mentioned in Section 80G. In the above circumstances, the impugned order of
the Tribunal was upheld. Therefore,
the appeal was dismissed.

shailesh.kwebmaker

8. Interpretation – SUBLATO FUNDAMENTO CEDIT OPUS – Once the foundation is removed, the superstructure falls.

Commissioner of Income Tax, TDS vs.
M/s.Oberoi Constructions Pvt.Ltd. [Income tax Appeal no 573 of 2014 dt :
01/10/2016 (Bombay High Court)].

[Commissioner of Income Tax, TDS vs.
M/s.Oberoi Constructions Pvt.Ltd., [dated 06/10/2013 ; A Y: 2006-07. Mum. ITAT
]

The assessee is in construction business.
During the AY: 2006 – 07, the assessee had paid share application money to one
M/s. Siddhivinayak Realities Pvt. Ltd. The Assessing Officer added the amount
of Rs.10.35 crore as deemed dividend on a substantive basis in the hands of
Siddhivinayak Realities Pvt. Ltd. and on a protective basis in the hands of its
director Mr. Vikas Oberoi in their assessment orders. Being aggrieved, both
M/s.Siddhivinayak Realities Pvt. Ltd. and Mr. Vikas Oberoi challenged their
orders of assessment holding that they are in receipt of deemed dividend. Their
appeals were allowed by the CIT(A) holding that they could not be charged to
tax on the amount of Rs.10.35 crores as recipients of deemed dividend u/s.
2(22)(e).

Being aggrieved by the order of CIT(A), the
Revenue filed an appeal to the Tribunal which was dismissed. Thereafter, the
Revenue filed an appeal to High court, being in the case of M/s.Siddhivinayak
Realities Pvt. Ltd. and Mr. Vikas Oberoi. The High Court by orders dated 4^thJuly 2014 and 8^th June 2016, respectively, dismissed both the
Revenue’s appeals from the orders of the Tribunal holding that M/s.
Siddhivinayak Realities Pvt. Ltd. and Vikas Oberoi cannot be charged to tax as
recipients of deemed dividend.

In the meantime, pending the aforesaid
proceedings, the ACIT (TDS) passed an order dated 11^th February 2011
u/s. 201(1) and 201(1A) of the Act holding the assessee to be an assessee in
default for not having deducted tax on the deemed dividend of Rs.10.35 crore
paid to M/s. Siddhivinayak Realities Pvt. Ltd. The assessee, being aggrieved,
filed an appeal to the CIT (A). The appeal of the assessee was allowed by the
CIT (A) holding that as in the appellate proceedings in respect of M/s.
Siddhivinayak Realities Pvt. Ltd. and Mr. ikas Oberoi, the addition of income
to the extent of Rs.10.35 crore u/s. 2(22)(e) of the Act on substantive and
protective basis had been deleted, there was no taxable income which had to
suffer tax deduction at source. Consequently, no failure to deduct tax could
arise.

Being aggrieved, the Revenue carried the
issue in further appeal to the Tribunal. The Tribunal upheld the order of the
CIT (Appeals) holding that once the addition made on account of deemed dividend
is deleted in the hands of the recipient of the amount of Rs.10.35 crore, there
could be no failure to deduct tax at source thereon. Thus, the consequent
demand u/s. 201(1) and 201(1A) upon the assessee was not justified.

Being aggrieved, the Revenue filed an appeal
before High Court. The High Court held that both the CIT (A) as well as the
Tribunal in these (TDS) proceedings have held that as the very basis for
holding the assessee liable for failure to deduct tax did not subsist, the TDS
proceedings must also fail. This was in view of the orders passed in the case
of recipients i.e. M/s.Siddhivinayak Realities Pvt. Ltd. and Mr.Vikas Oberoi in
appeal by the authorities under the Act including this Court that they were not
liable to any tax as they had not received any deemed dividend u/s. 2(22)(e).
Once the foundation is removed, the superstructure falls (sublato fundamento
Cedit opus). The grievance of the Revenue is that in TDS proceedings, one
must ignore the orders passed in the hands of the recipients i.e.
M/s.Siddhivinayak Realities Pvt. Ltd. and Mr.Vikas Oberoi.

The Court observed that the officers of the
Revenue while administering the TDS provisions are not outside the scope of the
Act and orders passed under the Act in respect of the character of the payment
made under the Act are binding upon them. The fact that at the time the order
of the ACIT (TDS) was passed, there was basis to do so does not mean that
orders passed on income in the hands of the recipients will have no bearing in
deciding its validity. One must not ignore the fact that this order of the TDS
officer is tentative in nature and its existence would depend upon the nature
of receipt in the hands of the recipient and subject to the orders passed in
respect thereof by appropriate court. In the above view, the appeal was
dismissed.

shailesh.kwebmaker

Section 54F – The assessee cannot be denied deduction u/s. 54F, if the assessee makes investment in residential house within the time limit prescribed u/s. 54F but is unable to get the title of the flat registered in his name or unable to get the possession of the flat due to fault of the builder.

10. [2016] 159 ITD 964 (Mumbai Trib.) (SMC)

Rajeev B. Shah vs. ITO
A.Y.: 2010-11 Date of Order: 8th July, 2016

FACTS

During the year under consideration, the assessee had sold one plot of land and had claimed deduction u/s. 54F for investment of sale proceeds in an under-construction flat.

The Developer had allotted, flat No. 602 of 6th floor, to the assessee.

The AO rejected the claim of deduction u/s. 54F of the Act on the ground that the property was incomplete and document related to purchase of property was not registered even after three years of the said investment.

Aggrieved, the assessee preferred appeal before the CIT(A), who also confirmed the action of the AO by stating that merely because a so-called letter of allotment was issued in a building which was never given permission for construction beyond two floors, it cannot be said that for the purpose of section 54F, the appellant’s obligation ended as soon as he issued the cheque.

Aggrieved, the assessee filed appeal before the Tribunal.

HELD

We find that the facts in question are not disputed and the only issue is that whether assessee is eligible for deduction u/s 54F, when the assessee has made investment in purchase of residential house within the time limit prescribed u/s. 54F but is unable to get the title of the flat registered in his name or is unable to get the possession of the flat due to fault of the builder.

The intention of the assessee is very clear that he has invested almost the entire sale consideration of land in purchase of this residential flat. It is another issue that the flat could not be completed and the suit, directing the builder to complete the construction, filed by the assessee, is pending before the Hon’ble BombayHigh Court.

It is impossible for the assessee to complete formalities such as taking over possession for getting the flat registered in his name and this cannot be the reason for denying the claim of the assessee for deduction u/s. 54F of the Act.

Hence, the appeal filed by the assessee is allowed.

shailesh.kwebmaker

7. Reopening of assessment – the reasons for reopening must be based on some material – the material used by the AO for forming his opinion must have some bearing or nexus with escapement of income – If not, the reopening notice would be clearly without jurisdiction: Section 148.

Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co.
[ Income tax Appeal no. 670 of 2014, dt : 04/10/2016 (Bombay High
Court)].

[Director of Income Tax (IT) vs. Doosan
Heavy Industries & Construction Co,. [ITA No. 3930/MUM/2006, 3897/MUM/2006,
746/MUM/2007; Bench : L ; dated 19/07/2013; AYs: 2000-2001, 2003-2004. Mum.
ITAT ]

The Assessee is a Project Contractor. It
awarded a contract by Kondapalli Power Corporation Ltd.(KPCL), Andhra Pradesh
to set up a power plant on a turnkey basis. Further, KPCL had awarded an
onshore contract to the Assessee for supply of goods and services along with
the commissioning of the plant. KPCL also awarded an offshore supply contract
to Hanjung DCM Co. Ltd. (Hanjung) for supply of equipment valued at US$ 103
million. The equipment valued at US$ 103 million was supplied by Hanjung and
taken delivery of outside India by the Assessee for and on behalf of KPCL. The
aforesaid equipment was lost during its transit after the Assessee took
delivery from Hanjung. As the insurance claim was not honoured, the Assessee
filed a suit against the Insurance Company for recovery of US$ 103 million. The
regular assessment proceeding was completed for the subject A.Y. u/s. 143(3).

A reopening notice was issued by the
Assessing Officer for the subject A.Y. and the reasons to believe that income
chargeable to tax has escaped assessment u/s. 147 of the Act. During the course
of assessment proceedings, it was noticed that there was another contract
titled “Offshore Equipment Supply Contract” also dated 1^st February,
1998 entered into between M/s. Lanco Kondapalli Power Private Limited and M/s.
Hanjung DCM Co. Ltd. (Hanjung). The AO had reason to believe that income of US$
51.5 million chargeable to tax has escaped assessment. Issue notice u/s. 148.

The assessee during the assessment
proceedings consequent to reopening notice dated 26^th March 2004
submitted that the same is without jurisdiction and, therefore, must be
quashed. Nevertheless, the AO proceeded on the basis that in the suit filed by
the Assessee in the Secunderabad Court against the Insurance Company it had
claimed to have supplied equipment valued at US$ 103 million which was lost.

The Assessing Officer placed reliance on
para 5 of the plaint, which reads as under :

“ 5. MAIN SUPPLY CONTRACT “

Under the terms
of contract dated 15^th February 1998 (“Supply Contract”) between
Plaintiff and LKPL, Plaintiff agreed to supply equipment, materials and design
for the construction of LKPL’s combined cycle power plant at Kondapalli IDA,
Andhra Pradesh in India (the “Kondapalli Project”). The value of this Supply
Contract was about US$ 103 million.” It was on the aforesaid basis that the AO
sought to justify his reasons to believe that income chargeable to tax has
escaped assessment and, therefore, proceeded to hold even on merits against the
Assessee.

On appeal, the CIT(A) examined all the
facts. These facts included not only the suit as filed but also the terms of
the contract and scope of work, in particular the responsibility of the parties
there under. Based on this examination, the CIT(A) concluded that in terms of
its obligation to insure the goods/equipment during transit, the appellant had
taken out an Insurance policy as a contractor with KPCL as the principal. Based
on this policy coupled with the plaint as filed, the CIT(A) observed that the
plaint has to be read as a whole. So read, the nature of the relationship
between the parties as described in paragraph 4 thereof, which, as extracted in
the order, reads as under :

“4. A brief reference to the parties
involved in relation to the subject matter of this suit is as follows :

a. Lanco Kondapalli Power Pvt. Limited (formerly a public limited
company) (‘LKPL’) is the owner of the Kondapalli Power Project.

b. Plaintiff is the EPC
contractor for the Kondapalli Power Project, and an assured under the policy
issued by Defendant.

i. Encon Services Limited (‘Encon’) is the subcontractor of Plaintiff
for transportation of the GT & GTG from Kakinada to Machilipatnam.

j. Seaways Shipping Limited
(‘SSL’) was appointed by Encon for inland transportation of GT & GTG from
Kakinada to Machilipatnam, and was the character of ‘Jala Hamsa’ and ‘AmethiI’.

n. Aistom are the suppliers of the GT & GTC, from whom Plaintiff
arranged to procure the replacement equipment for ensuring completion of the
project.”

The CIT(A) came to the conclusion that on
the basis of the words used in para 5 of the plaint, it cannot be established
that the assessee had supplied (as owner) the equipment, material and design,
and that the word “supply” only refers to the responsibilities of the assessee
for setting up of the power project as per the onshore contract. The reasons as
recorded do not therefore suggest any link between the material found by him and
his conclusion that there was reason to believe that the income chargeable has
escaped assessment. He, therefore, concluded that there was no reason to form a
belief that income chargeable to tax has escaped assessment.

On appeal by the Revenue, the Tribunal, by
the impugned order, confirmed the finding of the CIT(A).

The Hon. High Court observed that at the
stage of a notice of reopening, the AO does not have to “establish” that any
income has escaped assessment. However the AO must simply be shown to have
formed an opinion, which, in turn, is supported by reasons. The reasons
themselves must be based on some material. A minimum requirement one would
expect in the face of this scheme of things is that the material used by the AO
for forming his opinion must have some bearing or nexus with escapement of
income. If not, the reopening notice would be clearly without jurisdiction. In
the present case, the material used by the AO for purportedly forming this
opinion is the description of the assessee of itself as “a supplier” of the
equipment in an EPC contract, which inter alia required it to take offshore
delivery of the equipment from a foreign vendor and supply and install the same
onshore. Mere description as a “supplier” in a suit by the assessee against the
insurance company claiming an insurance claim for loss of equipment, when the
assessee insured the equipment jointly with the purchaser, can possibly have no
connection with the escapement of any income arising out of sale of the
equipment. Since that was the only material used by the AO for issuance of the
reopening notice, the notice is without any legal basis or justification. In
these circumstances, the order of the coordinate bench for Assessment Years
1999-2000 and 2002-2003 also supports the Respondent’s contention that they
were not suppliers of the equipment and no income assessable to tax has escaped
assessment. It’s obligation was to insure the goods/equipment during transit
done by it either on its own or through a subcontractor.

The Hon. High Court also found that, the
contract provided that the contractor, i.e. Assessee will provide/arrange at
its own cost in the joint name of the owner and contractor a comprehensive
insurance cover to the project, including any damage to the goods during transit.
It was in that context that the Assessee had made a claim for insurance. Taking
into account the concurrent findings of fact arrived at by the CIT(A) and by
the Tribunal, and that nothing has been shown to indicate that the finding is
perverse the appeal was dismissed.

shailesh.kwebmaker

6. Penalty – CIT(A) could not have imposed penalty on a new ground which was not the basis for initiation of penalty – penalty could be only on the ground on which it was initiated – Not liable for penalty : u/s. 271(1)(c)

CIT vs. Acme Associates. [ Income tax
Appeal no 640 of 2014 dated : 17/10/2016 (Bombay High Court)].

[Acme Associates vs. ACIT. [ITA No.
649/MUM/2011; Bench : I; dated 13/09/2013 ; A Y: 2005- 2006.( MUM.) ITAT ]

The assessee is in the business of Real
Estate Development. For the A.Y. 2005-06, the assessee has filed its ROI ,
declaring a income of Rs. 2.04 crore claiming 100% deduction u/s. 80IB(10).
During the course of the assessment proceedings, the AO noticed that two
buyers, viz. Ms. Sulbha M. Waghle and Mr. Mangesh G. Waghle had entered into
joint agreement for purchase of flats which in the aggregate exceeded 1,000
sq.ft. Consequently, AO disallowed the deduction claimed u/s. 801B(10) and
initiated penalty proceedings u/s. 271(1)(c) on the aforesaid ground for furnishing
inaccurate information/concealing income.

The assessee carried the issue in appeal to
the CIT(A). During pendency of the appeal, a search action u/s. 132 was carried
out on the assessee group. Consequent to which, notices u/s.153A were issued to
the assessee including one for the subject A Y 2005-06. In the above
circumstances, the assessee withdrew its appeal for A.Y. 2005-06 pending before
CIT(A). Thereafter, by order dated 30^th March, 2010, the AO imposed
penalty upon assessee u/s. 271(1)(c). This was on the very ground on which the
AO had initiated penalty proceedings viz. selling of flats to two members of
the family which in the aggregate was in excess of 1000 sq.ft. of built up
area. Therefore concluding that the Assessee has furnished incorrect
particulars of income/concealed particulars of income. Consequently, a penalty
was imposed.

Being aggrieved, the assessee carried the
order of the AO imposing penalty u/s. 271(1)(c) to CIT(A). The CIT (A)
confirmed the penalty imposed by the AO. However, the confirmation was on a
completely new and different ground viz. that during search proceedings, the
assessee had made disclosure that the project in respect of which deduction
u/s. 801B(10) was being claimed was not completed before the due date i.e. 31^stMarch 2008. Thus confirming the order dated 30^th March, 2010.
It is to be noted that CIT(A) in its order did not deal with the issue on which
the AO had initiated and confirmed the penalty upon the assessee.

Being aggrieved, the assessee filed a
further appeal to the Tribunal. The Tribunal held that the initiation and
confirmation of penalty by the AO u/s. 271(1)(c) was not on the ground that the
project was not completed by the due date, on which the CIT (A) confirmed the
penalty. Thus, the Tribunal held that this could not be done by the CIT(A) as
the penalty proceedings were initiated on account of selling flats of an area
in excess of 1000 sq.ft. i.e. a ground different from the ground on which
the CIT(A) confirmed the penalty. The
order also noted the fact that at the time when the return of income was filed
on 31^stOctober 2005, it was not possible to predict whether the
project would be completed on or before the specified date 31^st
March 2008. Further, the Tribunal also examined the issue on which the
Assessing Officer had imposed penalty, namely, selling of two flats to the
members of same family, the area of which in the aggregate exceeded 1000 sq.ft.
built up and held that no material was brought on record that assessee had
constructed a flat of more than 1000 sq.ft. built up area or that the assessee
had sold any unit of more than 1000 sq.ft. It renders a finding of fact that
after units had been sold the buyers had joined two flats resulting in a flat
in excess of 1000 sq.ft. In the aforesaid view, the Tribunal held that there is
no furnishing of inaccurate particulars and/ or concealing of income warranting
the imposition of penalty u/s. 271(1)(c).

The Hon. High Court in the revenue appeal
held that, it was the original ground on basis of which penalty was initiated,
that the assessee was required to offer explanation during penalty proceedings
to establish that the claim as made in the return of income was not on account
of furnishing of inaccurate particulars of income or concealment of income vis-a-vis
of selling flat having area 1000 sq.ft. The AO under the Act also considered
the assessee’s explanation in the context in which the penalty proceedings were
initiated and did not rightly place any reliance upon the subsequent events. In
an appeal from the order of the Assessing Officer, the CIT(A) could not have
imposed penalty on a new ground which was not the basis for initiation of
penalty. The appeal before the CIT(A) was with regard to issue of penalty u/s.
271(1)(c) only on the ground on which the penalty proceedings were initiated in
the assessment order. Although the powers of CIT(A) are coterminous with that
of the AO, the imposition of penalty could be only the ground on which it was
initiated. This is not the case, where the CIT(A) had independently initiated
penalty proceedings on a new ground in an order in quantum proceedings in
appeal from the Assessment Order. This alone could lead to the imposition of
penalty u/s. 271(1)(c) on the new ground. The ground on which the penalty was
initiated and penalty imposed by the AO, namely, that the flat had been sold in
the project which was in excess of 1000 sq.ft., the Tribunal has recorded a
finding of fact that the flats were sold individually by two separate
agreements individually to the purchasers in joint names. However, two flats
were subsequently joined by the purchasers aggregating the size of two flats to
1000 sq.ft. built up purchased from the assessee. This is finding of fact which
has not been shown to be perverse or arbitrary. In the above view, revenue
appeal was dismissed.

shailesh.kwebmaker

28. TDS – Interest u/s. 28 of Land Acquisition Act- capital gain or income from other sources – Sections 45, 56 and 194A – Interest assessable as capital gain – Tax not deductible at source on such interest

Movaliya Bhikhubhai Balabhai vs. ITO; 388
ITR 343 (Guj):

Pursuant to acquisition of land of the
assessee, by a Court order dated 23/03/2011, additional compensation was
awarded with interest. The executive engineer proposed to deduct tax at source
of Rs. 2,07,416/- u/s. 194A. The assessee made an application to the Assessing
Officer u/s. 197 to issue certificate
for Nil deduction of tax. The Assessing Officer rejected the application.

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

“i) In the case of CIT vs.
Ghanshyam (HUF) 315 ITR 1 (SC), the Supreme Court held that it is clear
that whereas interest u/s. 34 of the Land Acquisition Act, 1894 is not treated
as a part of income subject to tax, interest earned u/s. 28, which is on
enhanced compensation or consideration making it exigible to tax u/s.
45(5). The substitution of section 145A
by the Finance (No. 2) Act, 2009 was not in connection with the decision of the
Supreme Court in CIT vs. Ghanshyam (HUF) 315 ITR 1 (SC), but brought to
mitigate the hardship caused to the assessee on account of the decision of the
Supreme Court in Rama Bai vs. CIT 181 ITR 400 (SC), whereby it was held
that arrears of interest computed on delayed or enhanced compensation shall be
taxable on accrual basis.

ii) Therefore, the words
“interest received on compensation or enhanced compensation” in section 145A of
the Act have to be construed in the manner interpreted by the Supreme Court in CIT
vs. Ghanshyam (HUF) 315 ITR 1 (SC). As a necessary corollary, therefore,
the payment made u/s. 28 of the 1894 Act is interest as envisaged u/s.
145A and cannot be treated as income
from other sources.

iii) The Assessing Officer was not
justified in requiring the deduction of tax at source u/s. 194A in respect of
such interest. The assessee was, therefore, entitled to refund of the amount
wrongly deducted u/s. 194A .”

shailesh.kwebmaker

27. Revision – Limitation – Section 263 – A. Y. 2007-08 – Reassessment in respect of items other than item sought to be revised by Commissioner – Period of limitation begins from original assessment – Not from date of reassessment in which item was not in question

I. G. Electronics India Pvt. Ltd. vs.
Principal CIT; 388 ITR 135 (All):

For the A. Y. 2007-08, the assessment u/s.
143(3) was completed on 31/10/2011. Sales tax incentive received from UP
Government was treated as revenue receipt, but the sales tax subsidy received
from the Maharashtra Government was not treated as revenue receipt and
accordingly was accepted as capital receipt. Subsequently, a reassessment order
u/s. 147 was passed on 15/03/2015 making disallowance u/s. 40(a)(i), on account
of non-deduction of tax at source. Thereafter, on 08/06/2016, the Principal
Commissioner issued notice u/s. 263, on the ground that the sales tax subsidy
accruing to the assessee under the scheme of the Government of Maharashtra was
not brought to tax as revenue receipt.

The Allowed High Court allowed the writ
petition filed by the assessee challenging the notice u/s. 263 and held
as under:

“i) Limitation prescribed u/s.
263(2) for exercise of power u/s. sub-section (1) thereof is two years from the
end of financial year in which the order sought to be revised was passed.

ii) The reassessment order was
not for review or reassessment of the entire case but only in respect of a
particular item. In all other respects, the original assessment order was
maintained, and addition made by assessment order dated 26/03/2015 was added in
the income assessed in the original assessment order. Though the notice u/s.
263(1) referred to the reassessment order, in fact, it referred to a
discrepancy in the regular assessment order dated 31/10/2011, wherein the
incentive of value added tax from Maharashtra Government received by the
assessee was allowed to be deducted. This incentive had no concern with the
reassessment proceedings in the order dated 26/03/2015.

iii) Since the notice issued
by the Principal Commissioner was in reference to a discrepancy in the original
assessment order dated 31/10/2011 and not the reassessment order dated
26/03/2015, the limitation would run from the dated of the regular order of
assessment and therefore, the notice was barred by limitation prescribed u/s.
263(2). Impugned notice dated 08/06/2016 is quashed.”

shailesh.kwebmaker

26. TDS – Payment of salary to priests and nuns of catholic institutions – Ultimate beneficiaries congregation or dioceses with benefit of exemption from tax – No liability to deduct tax at source

Holy Cross Primary School vs. CBDT; 388
ITR 162 (Mad):

The assessee filed writ petition for
quashing of the letter dated 07/10/2015 of the Income-tax Department and the
Circular of the Director of Treasuries dated 26/10/2015 insisting in deduction
of tax at source from the salaries of the religious nuns and priests in the
service of the assessee school contending that, the concerned religious priests
and nuns did not take the salaries, but were ultimately depositing it with the
concerned diocese or congregation or institution only which are exempt from tax.

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

“Tax need not be deducted at source in so
far as the payments of salaries of the religious priests and nuns of the
catholic institutions who were attached to the respective congregation or
dioceses who were already exempted from the purview of the income tax liability
as on the date of the order.”

shailesh.kwebmaker

25. Capital gains – Section 50C: A. Y. 2006-07 – Stamp duty value higher than sale price- Reference to DVO – Valuation by DVO binding on AO

Principal CIT vs. Ravjibhai Nagjibhai
Thesia; 388 ITR 358 (Guj):

In the A. Y. 2006-07, the assessee sold his
land for a consideration of Rs. 16 lakh. The Stamp Valuation Authority valued
the property at Rs. 2,33,70,600/-. The case was therefore referred to the DVO
at the request of the assessee u/s. 50C(2). The DVO valued the property at Rs.
24,15,000/-. However, the Assessing Officer passed the assessment order before
the report of the DVO was received treating the difference of Rs. 2,17,70,600/-
as undisclosed income. The Commissioner (Appeals) and the Tribunal deleted the
addition and held that the capital gain has to be computed u/s. 50C on the
basis of the valuation by the DVO.

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

“i) Once a reference was made
by the Assessing Officer u/s. 50C of the Act, to the DVO, for valuation of the
capital asset, the Assessing Officer was obliged to complete the assessment in
conformity with the estimation made by the DVO.

ii) Under sub-section (2) of
section 50C, it was such lower valuation which was required to be taken into consideration
for the purposes of assessment. There was no legal infirmity in the orders of
the appellate authorities warranting interference.”

shailesh.kwebmaker

LIFTING THE CORPORATE VEIL

Introduction

A company is a separate legal entity with a perpetual succession and an identity distinct from its members. Members may come and go but a company continues to exist independent of its members. This is a principle of law which has been laid down since the time the very first statute dealing with companies came into existence. However, there are times when the Courts decide to look behind the company, i.e., lift or pierce the corporate veil and ascertain who are the real beneficiaries behind the entity. Such scenarios are very few and far between but they do exist and are resorted to by the Courts in the rarest or rare cases.

Recently, the Supreme Court in the case of Estate Officer UT Chandigarh vs. M/s. Esys Information Technologies P Ltd, CA No 3765/2016 (“Esys’s case”) had an occasion to deal with the circumstances when the corporate veil may be lifted.

Corporate Identity

Section 9 of the Companies Act, 2013 provides that from the date of incorporation of a company, all its members shall be a body corporate by the name under which it is formed and the company shall be capable of owning property and shall have a perpetual succession. Thus, this section lays down the corporate identity of a company which is distinct and separate from its members.

Factual Matrix of Esys’s Case

Esys,a subsidiary of a Singapore company, was allotted a site at an Information Technology Park at Chandigarh under the Allotment of Small Campus Site in Chandigarh Information Services Park Rules, 2002. Esys was supposed to carry out construction of a campus site but before doing so, 98% of its shareholding was transferred by its Singapore-based holding company to a Dubai-based group company. The Dubai-based group company, in turn, transferred its controlling stake to another company, known as Teledata Informatics Ltd. In neither case was permission obtained for the transfer of shares. The Estate Officer concluded that since the shareholding changed hands after land allotment and that too without the prior permission of the Estate Officer, there was a violation of the terms of the allotment letter. The particular clause of the allotment letter being referred to by the Officer stated that the transfer of the site would not be allowed for 10 years from the date of allotment without the prior permission. It may be allowed in the event of merger or split of the allottee and that too after obtaining prior permission. Further, all cases of transfer were subject to payment of prescribed transfer charges.

As a result of the transfers, not only did the Dubai-based company became the owner of the land but it was further transferred to Teledata. This fact of transfer to Teledata was suppressed on oath by the Director of Esys but was discovered by the Estate Officer from an affidavit filed by the Director before the High Court of Singapore in another matter. In that affidavit the Director had very clearly conceded that Teledata was the new owner of Esys. The Estate Officer concluded that the manner in which the transfer was made was not permissible as per the Rules and terms of the allotment letter. The holding company and its subsidiaries were two distinct legal entities and hence, the corporate veil should be lifted so as to unearth the mala fide, dishonest and fraudulent design of the allottee. Accordingly, the Officer contended that this amounted to an illegal transfer of the land and also ordered that the allotted site be resumed. The Appellate Authority upheld this Order of the Estate Officer.

High Court’s verdict

The Punjab and Haryana High Court overruled the verdict of the Appellate Authority. It refused to lift the corporate veil in the case under discussion. It stated that there was neither a transfer of the allotted site nor a merger of the allottee. The allottee was a juristic entity and continued to remain as such. It relied upon an old decision of Saloman vs. Saloman, 1897 AC 22(1) which held that a company is separate and distinct legal entity. It also relied on the Supreme Court’s decision in the case of Bacha F. Guzdar vs. CIT, 27 ITR 1(SC) where the Court held that that a shareholderhas got no right in the property of the company. His only rights are the right to vote and right to dividend, if declared, but that does not, either individuallyor collectively, amount to more than a right to participate in the profits of the company. The company was a juristic person and was distinct from the shareholders. It was the company which owned the property and not the shareholders. It also discussed the judgment in the case of Andhra Pradesh State Road Transport Corporation vs. ITO, AIR 1964 SC 1486 which held that a shareholder does not own the property of the corporation or carries on the business with which the corporation is concerned. The High Court further held that the argument that the principle of lifting of the corporate veil should be applied, did not arise in the impugned case since the shareholders were distinct from the company and there was no change in the name of the allottee. The allotment continued in the name of the company. Change in shareholding could not be construed to be violative of the allotment letter as the company was a distinct and separate entity and composition of share holding did not change the nature of the company. It accordingly set aside the Officer’s site resumption order.

Based on this the Estate Officer appealed to the Supreme Court where a pointed question was raised by the Supreme Court to the director as to whether the shares of Esys have been transferred to Teledata? The director stated on oath that they have not been which was in fact, contrary to the truth.

When can the Veil be Lifted?

The Supreme Court held that in Juggilal Kamlapat vs. CIT 73 ITR 702 (SC), it has been laid down that it is true that from juristic point of view a company is a legal personality entirely distinct from its members and it is capable of enjoying rights and being subjected to rights and duties which are not the same as those enjoyed or borne by its members but in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation or to perpetrate fraud. It further discussed the decisions of Jai Narain Parasrampuria vs. Pushpa Devi Saraf, 2006 (7) SCC 756;State of U.P vs. Renusagar Power Co., AIR 1988 SC 1737 wherein the Supreme Court held that it was well settled that the corporate veil could in certain situations can be pierced or lifted. In the expanding horizon of modern jurisprudence, lifting of corporate veil was permissible. Its frontiers were unlimited. It must, however, depend primarily on the realities of the situation. The aim of legislation was to do justice to all the parties. The principle behind the doctrine was a changing concept and it was expanding its horizon Whenever a corporate entity was abused for an unjust and inequitable purpose, the court would not hesitate to lift the veil and look into the realities so as to identify the persons who are guilty and liable therefor. The Apex Court observed that the corporate veil even though not lifted was becoming more and more transparent in modern company jurisprudence. It held that the case of Saloman vs. Saloman, 1897 AC 22(1) was still popular but the veil has been pierced in many cases. The lifting of the veil has been held to be permissible in Life Insurance Corporation of India vs. Escorts Ltd. AIR 1986 SC 1370 which held that it may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be in reality, part of one concern.

Though not considered in this decision but the Supreme Court in Vodafone International Holdings BV vs. UOI, 341 ITR 1 (SC) had also dealt with this issue by stating that lifting of the corporate veil is readily applied in the cases coming within the Company Law, Law of Contract, and Law of Taxation. Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also for tax evasion, the Court can always lift the corporate veil and examine the substance of the transaction. The Court is entitled to lift the veil of the corporate entity and pay regard to the economic realities behind the legal facade meaning that the court has the power to disregard the corporate entity if it is used for tax evasion. This principle is also applied in cases of a holding company – subsidiary relationship- where in spite of being separate legal personalities, if the facts reveal that they have indulged in dubious methods for tax evasion. This decision examined the concept of whether a transaction should be “looked at” or “looked through”. The amendments made by the Finance Act, 2012 to section 9 and section 2(47) of the Income-tax Act, 1961, which introduced the concept of taxation of Indirect Transfers, are nothing but an extension of the doctrine of lifting of the corporate veil.

Apex Court’s Decision

After considering various factors, the Supreme Court overruled the decision of the High Court in Esys’s case. It also held that prima facie from the affidavit of the director filed in Singapore, there was a transfer in favour of Teledata. Inspite of a direction to disclose the facts, there was a concealment of material facts. Esys was guilty of concealing the truth and thus, it held that the provisions of the allotment letter have been clearly violated and the Estate Officer was within his rights to resume possession of the land.

Fallout of this Decision

This decision raises several unanswered questions. Was this view taken by the Supreme Court merely because the director lied on on oath or would the doctrine of lifting the veil be applied in all cases where shares of a company are transferred? It appears that the Court was driven towards this view because of the concealment by the director. However, if there was no concealment, would the decision of the Supreme Court been different? It is relevant to note that the allotment letter contained no restriction on the transfer of shares of the allottee! All that it prohibited was a transfer of the site.

This question is relevant in several other situations. In case of transfer of shares of a company owning a valuable piece of land at Mumbai would stamp duty be levied @ 0.25% as on a transfer of shares or 5% as on conveyance of property? The Mumbai ITAT in the case of Irfan Abdul Kader Fazlani, ITA No. 8831/Mum/11 has held that section 50C cannot be applied to the sale of shares of a property owning company. The veil cannot be pierced in such a case to contend that what is being sold is actually land and building.

Similar questions also arise in flats where collector’s charges are to be paid. These charges are currently being avoided because what is being sold are shares of the company and not the property per se.

Further, if shares of such a company are long-term capital assets but the land held by the company is short-term capital asset, then would the gain on sale of shares be treated as short-term capital gain? A similar question was placed before the Karnataka High Court in Bhoruka Engineering Industries Ltd vs. DCIT, 356 ITR 25 (Kar). In that case, shares of a listed company were sold through the exchange and capital gains exemption was claimed u/s. 10(38). The only asset of the company was land. The AO contended that the veil should be lifted since what had been sold was virtually land and hence, the exemption should be denied.

The High Court denied this plea of the Department and held that the transaction was real, valuable consideration was paid, all legal formalities were complied with and what was transferred was the shares and not the immovable property. The finding of the assessing authority that it was a transfer of immovable property was contrary to the law and contrary to the material on record. It held that they committed a serious error in proceeding on the assumption that the effect of transfer of share was transfer of immovable property and therefore, if the veil of the company was lifted what appeared to them was transfer of immovable property. According to the High Court, such a finding was impermissible in law.

Conclusion

One can only hope that the lifting of the veil is resorted to in select cases, such as, those where there are instances of fraud or deceit. A wrong use of this decision could open up a Pandora’s box and it could be like Vodafone’s case being revisited all over again – one only hopes this purdah is not lifted easily!! _

shailesh.kwebmaker

24. Income – Accrual – Mercantile system of accounting- Section 145(1) – A. Ys. 2007-08 and 2009-10 – Nonconvertible unsecured debentures issued by group company – Group company in financial difficulties – Resolution passed by board of directors of assessee to waive interest on debentures for six years – The Tribunal holding that even though assessee following mercantile system of accounting interest did not accrue – Neither perverse nor arbitrary – Notional interest cannot be brought to tax

CIT vs. Neon Solutions Pvt. Ltd; 387 ITR
667 (Bom):

The assessee
subscribed 2 % non-convertible unsecured debentures issued by one of its group
companies in 2003. As the company which issued the debentures was in financial
difficulties, waiver of interest on the debentures till March 31, 2010 was
approved at a meeting of the debenture holders in 2004. A resolution was passed
by the board of directors of the assessee to this effect.

The Assessing
Officer brought to tax the notional interest at the rate of 2 % on the debentures for the A. Ys. 2007-08 and
2009-10 on the ground that the waiver of interest was unbelievable. The
Tribunal deleted the addition and held that even in the mercantile system of
accounting, income could be regarded as accrued only if there was certainty of
receiving it and not when it was waived.

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

“i) The
order of the Tribunal was based on the facts and its findings were not found to
be perverse or arbitrary. It found that the various resolutions passed by the
company and the communications exchanged between the parties established the
fact that the interest on the debentures was waived for six years and that
there was no reason to disbelieve the resolution waiving the interest.

ii) Amalgamation of the
issuing company with the also establishes the fact that it was in financial
difficulties. Moreover, for the A. Ys. prior to 2007-08 no additions were made
by the Department on account of notional interest.

iii) No question of law
arose.”

shailesh.kwebmaker

23. Business expenditure – Gratuity – Sections 36(1)(v), 40A(9) – A. Ys. 2007-08 to 2009-10 – Application by assessee for approval of scheme neither approved nor rejected by Competent Authority – Finding that assessee complied with conditions stipulated for approval – Assessee entitled to allowance

CIT vs. Jaipur Thar Gramin Bank; 388 ITR
228 (Raj):

The assessee is a co-operative society doing
banking business. For the A. Ys. 2007-08 to 2009-10, it claimed deduction u/s.
36(1)(v), of the sum paid on account of employer’s contribution to the gratuity
scheme created by it exclusively for the benefit of its employees under an
irrevocable trust. It claimed that it had filed an application to the competent
authority for approving the gratuity scheme. The Assessing Officer disallowed the expenditure
on the ground that formal order had been passed by the competent authority. The
Commissioner (Appeals) and the Tribunal allowed the claim for deduction.

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

“i) The assessee could not be
made to suffer for the inaction of the authorities and the Assessing Officer
ought not to have disallowed the claims of contribution to gratuity scheme
merely because the Commissioner had not granted approval to the gratuity
scheme.

ii) The assessee was sponsored
by the UCO bank, a Government of India undertaking and held duly complied with
the conditions laid down for approval u/s. 36(1)(a) of the Act.

iii) Both the appellate
authorities had found the expenses allowable based on material and evidence on
record. The assessee had fulfilled the condition laid down for approval having
created a trust with the Life Insurance Corporation of India and had deposited
the amount.

iv) The Tribunal was justified
in holding that the claims were proper and allowable. No question of law
arose.”

shailesh.kwebmaker

6. Reassessment – Full and true disclosure – Giving value of land in a certificate of registered architect and engineer supplied in response to a query would not amount full and true disclosure of the actual asset of plot – Reopening was valid

M/s. Girilal and Co. vs. ITO and Ors.(2016) 387 ITR 122
(SC)

The appellant, a partnership firm, was engaged in the
business of construction of building and development of real estate. In the
year 2000, the appellant/firm was engaged in developing two housing projects on
a plot bearing CTS No. 329 B(Part) of village Kondiwita in Andheri (East)
Mumbai (hereinafter referred to as “the said plot”). The said plot was acquired
by the appellant originally as a capital asset but portion thereof was
converted at different point of time into stock-in-trade. The appellant on
October 29, 2001 filed its return of income for the assessment year 2001-02. On
May 1, 2003, an assessment order was passed u/s. 143(3) of the Act determining
the total income at Rs. 12,36,393 after allowing deduction u/s. 80-1B (10) of
the Act. After scrutiny of the said return of income, a notice dated March 15,
2007, was served on the appellant u/s. 148 of the Income-tax Act, 1961
(hereinafter referred to as “the Act” ) inter alia alleging that the
appellant’s income chargeable to tax for the assessment year 2001-02 has
escaped assessment within the meaning of section 147 of the Act. Vide
communication dated April 11, 2007, the appellant sought the reason recorded
for reopening the assessment which were made available to the appellant on
April 12, 2007. It was found that the appellant had not correctly disclosed the
actual *assets of the said plot and hence, the appellant was not entitled for
deduction u/s. 80(1B)(10) of the Act. It was noted that the information
regarding the actual size of the plot used for the construction was only
available in the valuation report and hence, the case was covered under
Explanation 2(c)(iv) of section 147 of the Act. The appellant objected to the
assumption of jurisdiction u/s. 148 for the reason that the appellant had
disclosed all the facts fully and truly and respondent No. 1 was fully aware of
the floor space index. Respondent No.2 rejected the objections. Being
aggrieved, the appellant preferred a writ petition before the High Court
challenging the notice dated March 15, 2007 issued u/s. 147 of the Act. The
High Court vide impugned judgment dated December 12, 2007 dismissed the
writ petition. The High Court was of the opinion that as there was no true
disclosure of the exact size of the plot when the new construction commenced it
prima facie could not be said that there were no reasons to believe. The
information was in the annexures and consequently Explanation 2(c)(iv) of
section 147 of the was applicable.
Accordingly, to the High Court, the question was whether the petitioners
considering the size of the plot and part of it having already been developed
could claim the benefit u/s. 80-1B (10) of the Income-tax Act. The issue as to
whether the size of the plot of land to be considered at the time the new
construction is being put up or whether the building already constructed
including various deduction like R. G. Area, set back had to be considered in
computing the size of the plot was an issue which it did not wish to answer at
the stage in the exercise of their extraordinary jurisdiction.

Before the Supreme Court, the Learned Senior Counsel
appearing on behalf of the appellant/firm submitted that there was no reason to
reopen the assessment when in the return filed by the appellant full disclosure
of all the relevant facts was made. On this basis, it was further argued that
it was merely a case of change of opinion which was not a valid ground for
reopening of the assessment. He drew the attention of the Supreme Court to the
communication dated February 10, 2003 addressed by the appellant to the
Assessing Officer. In para 11 thereof, there was a mention about the land in
question. The Supreme Court rejected the aforesaid submissions of the learned
senior counsel for the appellant as according to the Supreme Court, in para 11,
only the value of the land was stated and in support, a certificate from the
registered architect and engineer was filed. The Supreme Court held that it was
clear from the above that this information was supplied as there was some query
about the value of the land. Obviously, while going to this document the
Assessing Officer would examine the value of the land. However, the reason for
issuing notice u/s. 148 of the Income-tax Act was that the appellant had not
correctly disclosed the actual *assets of the plot and hence, it was not
entitled for deduction u/s. 80-IB (10) of the Act. The income-tax authority
itself had mentioned in the notice u/s.148 of the Act that such information was
available only in the valuation report. Giving the information in this manner
was of no help to the appellant as the Assessing Officer was not expected to go
through the said information available in the valuation report for the purpose
of ascertaining the actual *construction of the plot.

On the facts of this case, therefore, the Supreme Court found
that the Revenue was right in reopening the assessment and the High Court had
rightly dismissed the writ petition of the appellant challenging the validity
of the notice u/s. 148 of the Act.

*
Note: This should be the size of the plot. _

shailesh.kwebmaker

22. Business expenditure – A. Y. 1999-00 – Same business or different business – tests – Expenditure incurred in setting up new line of same business is deductible

CIT vs. Max India Ltd. (No.1); 388 ITR 74
(P&H):

For the A. Y. 1999-00, the Assessing Officer
made disallowance of Rs. 6,70,78,483/- on account of expenses for setting up
new business. The Commissioner (Appeals) and the Tribunal allowed the
deduction.

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

“i) While determining whether
two or more lines of businesses of the assessee are the same “business” or
“different businesses” regard must be had to the common management of the main
business and other lines of businesses, unity of trading organization, common
employees, common administration, a common fund and a common place of business.
For evaluating the “same business”, the test of unity of control and the nature
of business is to be applied.

ii) The Commissioner (Appeals)
after appreciating the evidence produced on record had observed that various
businesses carried on by the assessee including health care constituted the
same business of the assessee. The Appellate Tribunal was right in law in
allowing the expenses in setting up new business of Rs. 6,70,78,483 treating it
as revenue in nature.”

shailesh.kwebmaker

RATE OF TAX APPLICABLE TO CAPITAL GAINS ON LOSS OF EXEMPTION BY A CHARITABLE OR RELIGIOUS TRUST

Issue for Consideration

A charitable or religious trust is entitled to exemption
under sections 11 and 12 of the Income-tax Act, 1961, provided that it is
registered u/s. 12AA and fulfils other requirements of sections 11 to 13. Under
sections 13(1)(c) and 13(1)(d), if a benefit is provided to a specified person
or the specified investment pattern is not adhered to, the benefit of the
exemption is lost and the income of the trust so losing the exemption is
taxable at the maximum marginal rate by virtue of the provisions of section
164(2).

Normally, for all assessees, long term capital gains is
chargeable to tax under the provisions of section 112 at the rate of 20%, while
certain types of short term capital gains arising on sale of equity shares on a
recognised stock exchange is chargeable to tax at the concessional rate of 15%
under the provisions of section 111A.

The issue has arisen before the tribunal as to what should be
the rate of taxation in respect of income in the nature of a long term capital
gains, in the case of a charitable or religious trust, losing exemption on
account of violation of section13. While the Mumbai bench of the tribunal has
taken the view that such gain is taxable at the rate of 20% u/s. 112, the
Chennai bench of the tribunal has taken a contrary view, holding that such gain
is taxable at the maximum marginal rate as per section 164(2) of the Act.

Jamsetji Tata Trust’s case

The issue first came up for consideration before the Mumbai
bench of the Tribunal in the case of Jamsetji Tata Trust vs. Jt.DIT(E), 148
ITD 388 (Mum).

In this case, the assessee trust sold certain shares of Tata
Consultancy Services Ltd, and acquired preference shares of Tata Sons Ltd. It
earned long-term capital gains on sale of the shares of TCS, which was exempt
u/s. 10(38), dividends, which were exempt u/s. 10(34), and other interest and short
term capital gains. It claimed exemption u/s. 11 in respect of the interest and
short term capital gains, besides the exemptions under sections 10(34) and
10(38) in respect of the dividends and the long term capital gains.

The assessing officer denied the benefit of the exemption
u/s. 11, by invoking the provisions of section 13(1)(d), on the ground, that by
holding equity shares of TCS and Tata Sons, the assessee had violated the
investment pattern specified in section 11(5). The assessing officer taxed the
entire income of the trust, including the dividends, the long-term capital
gains, the short term capital gains as well as the interest income at the
maximum marginal rate, by applying the provisions of section 164(2).
The Commissioner(Appeals) upheld the order of the assessing officer.

Before the Tribunal, on behalf of the assessee, it was argued
that the denial of exemption u/s. 11 was not justified, that the assessee was
entitled to the exemptions u/s. 10, and that only the income from the investments
attracting the provisions of section 13(1)(d) was taxable at the maximum
marginal rate. It was further argued that the rate of tax on the short term
capital gains arising from sale of shares should have been the rate prescribed
u/s. 111A, and not the maximum marginal rate.

On behalf of the revenue, it was argued that the denial of
exemption u/s. 11 was justified. As regards the rate of tax, it was argued that
since the provisions of section 164(2) were applicable, the maximum marginal
rate was to be applied to the entire taxable income of the assessee, and not
separate rates on income of separate nature.

The Tribunal, after considering the arguments of the assessee
and the revenue and after analysing the provisions of the Income-tax Act, held
that only the income arising from the prohibited investments was ineligible for
the benefit of the exemption u/s. 11, and attracted tax at the maximum marginal
rate, and not the entire income. The Tribunal further held that the income
which was exempt u/s. 10 (dividends and long term capital gains) could not be
brought to tax under sections 11 and 13, since those sections did not have
overriding effect over section 10. Once the conditions of section 10 were
satisfied, no other condition could be fastened for denying the claim u/s. 10.

Addressing the issue of whether the rate u/s. 111A of 15% or
the maximum marginal rate u/s. 164(2) was to be applied to the short term
capital gains, the Tribunal noted that section 164(2) did not prescribe the
rate of tax, but mandated the maximum marginal rate as prescribed under the
provisions of the Act. It observed that section 111A was a special provision
legislated for providing for rate of tax chargeable on short term capital gains
on sale of equity shares or units of an equity oriented fund, which was
subjected to securities transaction tax (STT) and as such the maximum marginal rate for income from
specified short term gains should be the rate prescribed therein.

According to the Tribunal, when the short term capital gains
arising from the sale of shares subjected to STT was chargeable to tax at 15%,
then the maximum marginal rate, referred to in section 164(2), on such income
could not exceed the maximum rate of tax provided u/s. 111A of the Act. It
accordingly held that the short term capital gains on sale of shares already
subjected to STT was chargeable to tax at the maximum marginal rate, which
could not exceed the rate provided u/s. 111A of the Income-tax Act.

India Cements Educational Society’s case

The issue again came up before the Chennai bench of the
tribunal in the case of DDIT vs. India Cements Educational Society 157 ITD
1008.

In this case, the assessee was a Society registered u/s.
12AA. It sold a plot of land and advanced the sale proceeds of the land to a
company in which the president of the Society and his wife were directors. It
claimed exemption in respect of capital gains arising on such sale on the
ground that the sale proceeds were reinvested in a specified capital asset.

The assessing officer denied exemption u/s. 11 to the Society
on the ground that the amount advanced to the company was not an approved
investment u/s. 11(5). He therefore taxed the income of the Society and the
maximum marginal rate under the provisions of section 164(2).

The Commissioner (Appeals) allowed the assessee’s appeal,
holding that the assessing officer had not proved what benefit accrued to the
specified person from the advancement of the amount to the company, and that
mere making of an advance to third parties could not be treated as utilisation
for investment in capital asset within the meaning of section 11(5). He
therefore held that while the benefit of exemption u/s. 11 was available, the
making of the advance out of the sale proceeds was not an investment in a new
capital asset. In the context of the issue under consideration, the
Commissioner(Appeals) held that the capital gains to be assessed as per section
48, was to be taxed at the rate prescribed u/s. 112 of the Act, and not at the
‘maximum marginal rate’ adopted by the assessing officer.

Before the tribunal, on behalf of the assessee, it was argued
that the entire income of the Society, other than the capital gains, continued
to be exempt u/s. 11 of the Act and that the capital gains alone was to be
taxed in terms of section 164(2) on account of the alleged violation of the
conditions of section 13 of the Act by applying the maximum marginal rate
Reliance was placed on the decision of the Bombay High Court in the case of DIT(E)
vs. Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533, and the decision of
the Karnataka High Court in the case of CIT vs. Fr Mullers Charitable
Institutions 363 ITR 230, for the proposition that whenever there was a
violation u/s. 11(5), then only income from such investment or deposit which
was made in violation of section 11(5) was liable to be taxed, and violation
u/s. 13(1)(d) did not result in denial of exemption u/s.11 for the entire total
income of the assessee. Reliance was also placed on the CBDT circular number
387 dated 6.4.1984 152 ITR 1 (St.), where it was stated in paragraph 28.6 that
where a trust contravened the provisions of section 13(1)(c) or 13(1)(d), the
maximum marginal rate of income tax would apply only to that part of the income
which had forfeited exemption under those provisions.

In the context of the issue under consideration, It was
further argued by the assessee that, in view of the decision of the Karnataka
High Court in the case of Fr Muller’s Charitable Institutions (supra),
the rate of tax applicable for taxing the capital gains was the rate prescribed
u/s. 112. Reliance was also placed on the decision of the Mumbai bench of the
tribunal in the case of Jamsetji Tata Trust (supra), which had held, in
the case of short term capital gains on sale of shares subject to STT, that the
maximum marginal rate on capital gains could not exceed the rate provided u/s.
111A. This decision had been followed by the Mumbai bench in the case of Mahindra
and Mahindra Employees Stock Option Trust vs. DCIT 155 ITD 1046, where the
tribunal had held that capital gain was to be assessed by applying the
provisions of section 112, even if the income was assessed as per section 164.

The tribunal examined the provisions of sections 11 and 13.
It noted that in the case before it, there was a violation of section 13(1)(c),
as the Society had invested funds in a limited company, where the trustee was
the managing director and his wife was a director. Following the decision of
the Supreme Court in the case of CIT vs. Rattan Trust 227 ITR 356 and the
decision of the Madras High Court in the case of CIT vs. Nagarathu Vaisiyargal
Sangam 246 ITR 164, the tribunal held that the assessing officer was
justified in applying the provisions of section 13(1)(c), and denying exemption
u/s. 11 to the Society.

Analysing the provisions of section 164(2), the Tribunal,
observed that the income of a charitable or religious trust, which was not
exempt u/s. 11 or 12 was charged to tax as if such exempt income was the income
of an AOP. The proviso to that section provided that where the non-exempt
portion of the relevant income arose as a consequence of the contravention of
the provisions of section 13(1)(c) or (d), such income would be subjected to
tax at the maximum marginal rate.

Considering both the decisions of the Mumbai bench of the
Tribunal, cited before it, the Chennai bench of the tribunal, in the context of
the issue under consideration, found that the Mumbai bench had not considered
the meaning of the term ‘maximum marginal rate’ as defined in section 2(29C),
whereunder the term was defined to mean the rate of income tax (including
surcharge on income tax, if any) applicable in relation to the highest slab of
income in the case of an individual, association of persons or, as the case may
be, body of individuals as specified in the Finance Act of the relevant year.
The Chennai bench of the tribunal observed that on account of section 2(29C),
the two decisions of the Mumbai bench could not be said to have laid down the
correct proposition of law.

The Chennai bench of the Tribunal therefore held that the
benefit of section 112 to assess the gain from the transfer of the capital
asset could not be given to the Society, and that the long-term capital gains
was chargeable at the maximum marginal rate u/s. 164(2) r.w.s. 2(29C) of the Act.

Observations

A similar question has arisen in the case of private trusts,
where the individual share of beneficiaries is unknown, known as discretionary
trusts. Under the provisions of section 164(1), the income of such trusts is
also taxable at the maximum marginal rate. The issue has been decided by Delhi
and Gujarat High Courts, in the cases of CIT vs. SAE Head Office Monthly
Paid Employees Welfare Trust (2004) 271 ITR 159 (Del) and Niti Trust vs.
CIT (1996) 221 ITR 435 (Guj), that the long term capital gains earned by a
discretionary trust is not taxable at the maximum marginal rate u/s. 164(1),
but at the concessional rate of tax u/s. 112. These decisions have not been
considered by the Chennai bench of the Tribunal. The language of both sections
164(1) and 164(2) being similar, the ratio of these decisions would apply
squarely to section 164(2) as well.

Section 2(29C) while defining the term ‘maximum marginal
rate’ provides for adoption of the highest slab rate prescribed for an
individual, etc. This rate, in
certain cases, varies w.r.t . the nature of income and head of income and in
such cases the rate specially provided for becomes the maximum marginal rate
for taxing such income. In cases where the rate is specifically provided for in
a particular provision of the Act, it is that rate that should then be taken to
represent the maximum marginal rate. The decisions above referred to support
such a view.

Alternatively, it can be contested that both the provisions
are independent and operate accordingly. he language of neither section
111A/112 nor section 164(2) indicates that one has a specific overriding effect
over the other. None of these provisions could be said to be general. The
principle generalia specialibus non derogant providing that a specific
provision prevailing over a general provision also cannot be readily applied.
While section 111A/112 is a provision applicable to specific types of income of
all assessees, section 164(2) applies to all incomes of specific types of
assessees. In any case, if a view is to be taken then the better view is to
treat section 112 as a special provision.

It needs to be kept in mind that section 112 provides for a
rate of tax for long term capital gains, irrespective of the type of assessee
who earns the capital gains. This rate applies not only to individuals and
HUFs, but also to partnership firms, associations of persons, domestic
companies, as well as foreign companies. While an individual is liable to tax
at slab rates of tax, partnership firms and domestic companies are liable to a
flat rate of tax of 30%, and foreign companies are liable to tax at a flat rate
of 40%. Yet, for all these different types of entities liable to different
rates of tax, the rate of tax u/s. 111A or section 112 is the same, i.e. 15%
and 20% respectively. This indicates that the rate applicable to such types of
capital gains should not differ, irrespective of the rate of tax applicable to
the other income of the entity.

On the other hand, the provisions of section 164(2) are
intended to ensure that the trust losing exemption on account of the violation
of the provisions of sections 13(1)(c) or 13(1)(d) does not benefit by paying a
lower rate of tax by taxing such incomes at the maximum marginal rate. However,
till assessment year 2014-15, a trust would claim exemption under the
provisions of section 10 in respect of income such as dividends, long term
capital gains on sale of equity shares on which STT was paid, etc.,
irrespective of whether the remainder of its income was exempt u/s. 11 or not.
The question of payment of tax at the maximum marginal rate did not arise in
the case of such income which was exempt. That being the case, where certain
incomes, such as long term capital gains or short term capital gains is liable
to tax at lower rates of tax than normal income, the question of taxation at
the maximum marginal rate should equally not apply. The maximum marginal rate
should therefore apply to income which is otherwise not taxable at a
concessional rate of tax.

If one also examines the format of the income tax returns for
charitable and religious trusts in Form No 7, as well as the forms applicable
to discretionary trusts in Form No 5, there is a specific reference in schedule
SI – Income Chargeable to tax at special rates, to specific rates of 15% under
section 111A for specified types of short term capital gains and of 20% u/s.
112 for long term capital gains. This clearly indicates that such gains are not
intended to be taxed at the maximum marginal rates.

The view that is beneficial to the assessee should be adopted
in a case where two views are possible. Besides, whenever there is a difference
of opinion between two benches of the Tribunal, such a difference is required
to be referred to a Special Bench of the Tribunal for consideration. The
Chennai bench of the tribunal chose to not to follow the decisions of the Mumbai
bench of the Tribunal, though cited before it, on the ground that the Mumbai
bench had overlooked a certain provision of the Act, rather than referring the
issue to a Special Bench.

The better view therefore is that of the Mumbai
bench of the Tribunal, that even if a charitable or religious trust loses
exemption u/s. 11 by virtue of the provisions of sections 13(1)(c) or 13(1)(d),
the short term capital gains covered by section 111A or long term capital gains
covered by section 112, is chargeable to tax at the rates specified in those
sections, and not at the maximum marginal rate specified in section 164(2). _

shailesh.kwebmaker

ANALYSIS OF “EQUALISATION LEVY” AND SOME ISSUES

1. Background

The Finance Act,
2016 (FA) in the chapter VIII (comprising clauses 163 to 180)
has introduced a new tax i.e “equalisation levy” on consideration received or
receivable for any specified services.

The article deals with
some of the important provisions of the chapter and the issues arising there
from.

The Government of India
constituted a committee on taxation of E- commerce. The said committee made
proposal for equalisation levy on specified transactions. The Committee took
cognisance of the Report on Action 1 of Base Erosion & Profit Shifting
(BEPS) Project, wherein very significant work has been undertaken for identifying
the tax challenges arising from digital economy, the possible options to
address them and constraints likely to be faced. The Committee also noted that
this report has been accepted by G-20 countries, including India and OECD,
thereby providing a broad consensus view on these issues. The committee
submitted its report in February, 2016 and accepting the proposal contained in
the report, the Government has introduced this chapter.

The committee stated in
its report that “The significant difference, between an ‘Equalisation Levy’
that is proposed to be imposed on gross amount of payments, and the withholding
tax under the Income-tax Act, 1961 would be that under the latter, withholding
tax is only a mechanism of collecting tax, whereas an ‘Equalisation Levy’ on
gross payments would be a final tax.”

As far as
constitutionality of the provision is concerned, the committee expressed the
view that “Equalisation levy on gross amounts of transactions or payments made
for digital services appears to be in accordance with the entries at Serial
Number 92C70 and 9771 of the First List in the Seventh Schedule of the
Constitution of India. The existing precedent in the form of the Service Tax
appears to remove any ambiguities and doubts in this regard. Thus this
committee is of the view that Equalisation Levy as a tax on gross amounts of
transactions, imposed by the Union through a statute made by the
Parliament, would satisfy the test of constitutional validity.”

It is noteworthy to look
at the memorandum explaining the provisions of the Finance bill so as to
understand the rationale for imposition of the levy.

“……..The Organization
for Economic Cooperation and Development (OECD) has recommended, in Base
Erosion and Profit Shifting (BEPS) project under Action Plan 1, to impose a
final withholding tax on certain payments for digital goods or services
provided by a foreign e-commerce provider or imposition of a equalisation
levy on consideration for certain digital transactions received by a
non-resident from a resident or from a non-resident having permanent
establishment in other contracting state.

Considering the
potential of new digital economy and the rapidly evolving nature of business
operations it is found essential to address the challenges in terms of taxation
of such digital transactions as mentioned above. In order to address these
challenges, it is proposed to insert a new Chapter titled “Equalisation
Levy” in the Finance Bill, to provide for an equalisation levy of 6 % of
the amount of consideration for specified services received or receivable by a
non-resident not having permanent establishment (‘PE’) in India, from a
resident in India who carries out business or profession, or from a
non-resident having permanent establishment in India.”

The objective of the
Government is to impose tax on the consideration received by the non-resident.
The rationale is, on the one hand the consideration paid is tax deductible
while computing the income of the payer, the same escapes the source country
taxation, because payee does not have a permanent establishment in India or
otherwise. The equalisation levy is quantified with reference to the
consideration received by the non resident. The equalisation levy is charged at
the rate of 6% on the amount of consideration received or receivable by the non
resident.

2. Scope
of the levy

2.1. Section163
provides that the provisions of the chapter extends to the whole of India,
except Jammu and Kashmir and the same will come into force from the date of its
applicability notified by the Central Government i.e appointed date. The
Government has appointed 1^stday of June,2016 as the date on which
Chapter VIII would come into force.

2.2. The
provisions will apply to the consideration received or receivable for specified
services provided on or after the appointed date. By implication, any
consideration received after the appointed date for the services provided
before the appointed date shall be outside the provisions of this chapter. The
provisions of the chapter will not apply to the consideration received or
receivable for the services provided outside the territorial jurisdiction. This
obviously would require determining the place of provision of the services. For
determining the place of provision of services, one may have to look at the
provisions of the service tax act and the rules framed thereunder. Generally,
place of provision of service is the location of the service receiver.

3. Important
Definitions

Section 164 defines
various terms used in the chapter. It also provides that any words and
expressions which is used in the chapter but not defined in the chapter will
have the same meanings as it has under the Income tax act (ITA) or the rules
there under if the same have been defined there under. Some of the important
terms defined in the chapter are:

i) “equalisation
levy” means the tax leviable on consideration received or receivable for any
specified service under the provisions of this Chapter; It may be noted that though the word levy is
used in the nomenclature, it is clearly a tax.

ii) “specified
service” means online advertisement, any provision for digital advertising
space or any other facility or service for the purpose of online advertisement
and includes any other service as may be notified by the Central Government in
this behalf. The committee on E-commerce has recommended more services to be
subject to equalisation levy and the Government has accordingly retained the
power to notify more services as specified services.

iii) “online”
means a facility or service or right or benefit or access that is obtained
through the internet or any other form of digital or telecommunication network;

iv) “permanent
establishment” includes a fixed place of business through which the business of
the enterprise is wholly or partly carried on. The definition is an inclusive
definition and is on the same line as is in section 92F(iiia) of the ITA.

4. Charge
of levy

4.1. Section
165 deals with the charge of the equalization levy. It provides that the
equalisation levy @6% be charged on the amount of consideration received or
receivable for providing specified services. The other conditions are:

a) The
service provider has to be non-resident and

b) It
should receive consideration for the services from

i) a
person resident in India who is carrying on business or profession or

ii) a non resident having a permanent
establishment (PE) in India (hereinafter referred to as ‘specified persons’ or
‘assessee’).

4.2. It
also provides for the cases when the equalisation levy will not be charged.
They are:

i) when
the non resident who is providing the specified services has a permanent
establishment in India and such services are effectively connected to the said
permanent establishment i.e when the non-resident offers the income from the
specified services as a part of its PE profit.

ii) when
the aggregate amount of consideration received or receivable for the specified
services from each of the specified persons in a previous year is INR one lakh
or less.

iii) when
the specified persons makes the payment towards specified services not for the
purposes of carrying on its business or profession. In such a case even if the
payment exceeds INR one lakh, the same will not be subject to equalisation levy
since the same is not claimed as deduction for the purposes of computing the
taxable income of the specified persons.

It is pertinent to note
that as per the Article 7 of any double taxation avoidance agreement (DTAA),
non residents are taxable in their country of residence as far as the taxation
of the business profits is concerned. They can be taxed in the source country
only if they carry on business in the source country through a permanent
establishment and in such case also only
to the extent of the income attributable to the permanent establishment. Equalisation
levy is sought to be imposed on the business income of the non resident when
the non resident has no PE in India. Hence, to that extent the tax is not
consistent with the provisions of the DTAA. However, it may be noted that the
scope of the DTAA is confined only to the taxes covered under Article 2. Since
this is a new tax, none of the existing DTAA would have covered the same.
However, a question may arise that whether equalisation levy be regarded as an
identical or similar tax to the existing taxes covered by the Article 2? Most DTAA
provides to include similar taxes imposed subsequently to be included within
the scope of Article 2 subject to certain conditions. Hence, if the answer to
the question is yes, then imposition of equalisation levy on the business
profits of the non resident when it has no PE in India may not be regarded as
compatible with Article 7 of the DTAA. The current imposition presupposes that
it is not.. The stand of the Government appears to be that it is not a tax on
the income (and hence, it it has been kept outside the ITA and imposed by the
Finance Act) and therefore there is no inconsistency between the treaty
provisions and the imposition of equalisation levy.

5. Collection
and Recovery

5.1. Section
166 provides for the collection and recovery of the equalisation levy. It
designates the specified persons as assessee and cast an obligation on them to
deduct the amount of equalisation levy from the amount of consideration paid or
payable to the non resident towards the provision of the specified services.

5.2. There
is no obligation to deduct the levy from the consideration if the aggregate
amount payable to a non resident in a previous year is INR one lakh or less.
The wording seems to suggest that the limit of one lakh rupees is qua
each non resident. The assessee has to pay levy so deducted during a month to
the credit of the Central Government by the 7^th of the next calendar
month. Delay in the payment would be visited with the simple interest @ 1% per
month or part thereof. In addition to the interest, the assessee would be
liable to a penalty of INR 1000 per day of delay. However, it is provided that
such penalty should not exceed the amount of the levy.

5.3. The
liability to pay the levy would be there irrespective of the fact whether the
assessee has deducted the same from the payment made to the non resident. When
the assessee fails to deduct the levy, in addition to the interest, penalty
equivalent to the amount of levy is imposable on the assessee. In such a case a
question would arise as to whether the levy so paid will increase the cost of
the services availed or it will appear as a separate item in the books of
accounts. In both the cases, in my view the amount should be deductible while
computing the income of the assessee.

5.4. The
possible three scenarios which can arise in view of the above provision is
illustrated by the respective accounting entries:

a. Assessee
makes payment of Rs. 100 towards specified services to X and deduct tax there
from:

Specified Services A/c. Dr. 100

To X 100

X A/c Dr.
100

To Bank 94

To Equalisation Levy 06

Equalisation Levy
Dr. 6

To Bank 6

b. Assessee has as a
part of agreement agreed to bear the equalisation levy

Specified Services A/c. Dr. 106.38

To X 106.38

X A/c Dr.
106.38

To
Bank 100

To
Equalisation Levy 06.38

Equalisation Levy
Dr. 6.38

To Bank 6.38

(In both the above cases, the payment of
Equalisation levy by the assessee would be regarded as deducted from the
payment made to X)

c. Assessee
fails to deduct but makes the payment of the levy as envisaged u/s. 166(3)

Specified Services A/c. Dr. 100

To X 100

X A/c Dr.
100

To
Bank 100

Equalisation Levy
Dr. 6

To Bank 6

Would the 3rd scenario survive? The act has
envisaged the same. In this case the assessee may save the tax of 0.38 but he
will be exposed to the penalty equivalent to the amount of equalisation levy
u/s. 171. However, it may be noted that penalty is discretionary and may not be
levied in appropriate cases.

5.5. As
noted above, the levy is not chargeable when the non resident providing the
service has a PE in India and the specified service is effectively connected to
such PE. The assessee is either a person resident in India or a PE of a non
resident in India. The assessee before deducting the levy will have to ensure
that the non resident providing the service has no PE in India and even if it
has a PE in India, the said service is not effectively connected to the said
PE. They may have to possibly depend on the declaration from the non -resident
in this respect.

5.6. Whether
a non-resident has a PE in the source country or not is generally a contentious
issue and it is very rare that the taxpayer and the tax authorities would agree
at the initial stage. If it is ultimately found or held that the levy was not
chargeable, can the refund be granted to the assessee? There are provisions in
the chapter for grant of the refund to the assesse on processing the statement
furnished by the assessee. Such a case may not be covered by the said refund
provision and also because there are limitations of the time to grant refund
under such cases. Can the refund be claimed on the ground that the levy is
without any authority of law and hence the limitation should not apply?

6. Procedure
and Penalties

6.1. Section
167 imposes an obligation on every assessee to furnish a statement in the
prescribed format in respect of all specified services during the financial
year. The government has notified Equalisation Levy Rules, 2016 and prescribed
Form No. 1 as the prescribed form of the statement. The rules provide that the
said form should be furnished annually on or before 30^th June in
respect of the preceding financial year. The form should give information in
respect of all the specified services chargeable to equalisation levy during
the financial year.

6.2. The
assessee would be entitled to revise the statement if he notices any errors or
omissions at any time within two years from the end of the financial year in
which the specified service was provided. He may also furnish the statement in
the aforesaid period if he has not furnished the statement within the
prescribed time.

6.3. The
Assessing officer may serve a notice on any assessee to furnish the statement
if he has not furnished the same within thirty days from the date of service of
the notice. However, the section does not provide any time limit within which
the AO may serve the said notice. On a harmonious reading of the provisions,
one may take a view that the said notice has to be served within the aforesaid
period of two years. What is the basis on which the AO can issue such notice
has not been provided. What are the rights available to the assesse when he
receives the notice, can he challenge the issue of the notice by the AO? Section 172 provides that an assessee who
fails to furnish the statement within the time prescribed under the rules or
the time prescribed by the AO in his notice, would be liable to pay a penalty
of INR 100 for each day of failure.

6.4. The AO, before imposing any penalty under the
chapter has to give the assessee an opportunity to advance his case as to why
the penalty should not be imposed. If the assessee proves that that there was a
reasonable cause for the failure and the AO is satisfied about the same, AO
should not impose any penalty. The order imposing the penalty has been made
appealable to CIT(A) and the order of CIT(A)
has been made appealable to the Tribunal. Provision of section 249 to 251 and section
253 to 255 of the ITA has been made applicable to such appeals. Section 178 of
the FA, 2016 list down various other sections of the ITA which would apply in
relation to equalisation levy as they apply in relation to income tax.

6.5. Section
168 provides for the processing of the statement and issue of intimation to the
assessee after carrying out adjustment in respect of arithmetical accuracy and
computation of interest. The intimation is required to be sent within one year
from the end of the financial year in which the prescribed statement under
clause 167 is furnished.

6.6. Section
169 empowers the AO to rectify the intimation for any mistake apparent from
record and provides that the intimation be amended within one year from the end
of the financial year in which the same was issued. The AO may rectify the
mistake on his own or on the same being brought to his notice by the assessee.
Any rectification which has the effect of increasing the liability of the
assessee or reducing the refund entitlement to the assessee, be made only by
making an order and after giving the assessee a show cause to that effect and a
reasonable opportunity of being heard. If in consequence of any order, any
amount is payable by the assessee, the rules provides the AO to serve a notice
of demand in form no.2 specifying the amount payable by the assessee. The
chapter is silent about the appellability of this order. Under the rules, it is
provided that the intimation u/s. 168 is deemed to be notice of demand. If the
intimation is deemed as notice of demand under the ITA and the same is in
consequence of an order, then the appeal provisions under the ITA should also
follow.

7. Consideration
to be exempt from tax in the hands of non resident

7.1. A new
clause (50) has been introduced in section 10 of the Income-tax act, whereby
any income arising from specified services which is chargeable to equalisation
levy under chapter VIII of the FA 2016 is exempt from the charge to the income
tax. The said clause is reproduced hereunder for ready reference:

‘(50) any
income arising from any specified service provided on or after the date on
which the provisions of Chapter VIII of the Finance Act, 2016 comes into force
and chargeable to equalisation levy under that Chapter.

Explanation.—For the purposes of this clause,
“specified service” shall have the meaning assigned to it in clause (i) of
section 164 of Chapter VIII of the Finance Act, 2016.’

7.2. In
other words income of the non resident from provision of the specified services
to the assessee under chapter VIII of the Finance Act, 2016 is exempt from
income tax in the hands of the non resident if the same is chargeable to
equalisation levy. However, it does not mean that the income of the non
resident from the specified services would be charged to income tax if the same
is not chargeable to equalisation levy for any reason. The charge to income tax
has to be independently established under the ITA.

8. Disallowance
of payment in the hands of payer

8.1. A new
clause (ib) has been introduced in section 40 of the Income-tax act with effect
from 1^stJune,2016. Section 40 provides for the cases when the
amount is not permitted to be deducted from computing the income under the head
“profits and gains of business or profession” or permitted to be deducted
subject to certain conditions. The said clause is reproduced hereunder for
ready reference:

“(ib)
any consideration paid or payable to a non-resident for a specified service on
which equalisation levy is deductible under the provisions of Chapter VIII of
the Finance Act, 2016, and such levy has not been deducted or after deduction,
has not been paid on or before the due date specified in sub-section (1) of
section 139:

Provided
that where in respect of any such consideration, the equalisation levy has been
deducted in any subsequent year or has been deducted during the previous year
but paid after the due date specified in sub-section (1) of section 139, such
sum shall be allowed as a deduction in computing the income of the previous
year in which such levy has been paid;”.

8.2. In
this respect, the following may be noted:

a) Chapter
VIII of the FA 2016 provides for due dates of payment of the equalisation levy
and consequence of the delayed payment. For the purpose of section 40(ib) of
the ITA, the same is irrelevant. The relevant date for the same will be the due
date of furnishing the return of income u/s. 139 of the ITA.

b) Section
166(3) of the Finance Act envisages a situation when the assessee fails to
deduct the levy from the amount paid or payable to a non resident. As per the
said section, the assesse e is liable to pay the levy even if he has not
deducted the same from the payment. Section 40(ib) of the ITA envisages
situation of deduction of the levy and payment thereof thereafter. Can a view
be taken that cases u/s. 166(3) of the FA are not covered by section 40(ib) of
the ITA? Whether in such a case, provision of section 43B of the ITA would be
applicable and the compliance thereof would be necessary?.

c) What will
be the impact of non discrimination article of the relevant double tax
avoidance agreement (DTAA) on section 40(ib) of the ITA? Relevant extract of
article 24(4) of the OECD and UN model convention (both are identical) is
reproduced hereunder for ready reference:

24(4) Except where the provisions of paragraph 1
of Article 9, paragraph 6 of Article 11 or paragraph 4 of Article 12, apply,
interest, royalties and other disbursements paid by an enterprise of a
Contracting State to a resident of the other Contracting State shall, for the
purpose of determining the taxable profits of such enterprise, be deductible
under the same conditions as if they had been paid to a resident of the
first-mentioned State…..

Section 40(ib) disallowance is applicable in
respect of consideration paid or payable to non-resident for specified services
and not to the resident. Hence, prima facie, the assessee can invoke the
said article of the relevant DTAA. Article 24(6) provides that the provisions
of non discrimination article will not be restricted to the taxes covered under
article 2 and the same extends its applicability to taxes of every kind and
description. In view of this, equalisation levy would be covered by the
non-discrimination article notwithstanding what is the scope of article 2. The
question that may still survive is whether payment towards specified services
would be covered within the words “other disbursements” appearing in article 24(4)?

It may be noted that any consideration received
or receivable by a resident from the provision of the specified services to the
assessee is not subject to equalisation levy and hence, there is no question of
any deduction from the payment and consequential disallowance. In fact, to this
extent there is discrimination. However, the existing provision of Article 24
does not specifically recognise such discrimination. Can revenue argue that the
payment to resident is not subject any equalisation levy at all and hence,
there is no discrimination within the meaning of Article 24(4)?

9. Challenges

9.1. A
question that arises is whether it is a tax on the income of the non resident?
According to the Government, it is not a tax on the income of the non resident.
In fact the income of the non resident which is subject to the levy is
specifically made exempt from income tax. By exempting the income under the ITA
which is subject to equalisation levy, whether the Government has weaken its
case that it is not a tax on income or a tax akin to tax on income?

9.2. Who is
the person chargeable to tax? Under the FA, the assessee is the person making
payment towards the specified services and claiming the said payment as
expenditure while computing its taxable income. Whether he is charged to tax or
it is the non resident?

9.3. In tax
jurisprudence, it is well settled that following four factors are essential
ingredients to a taxing statute:-

a. subject
of tax;

b. person
liable to pay the tax;

c. rate at
which tax is to be paid, and

d. measure
or value on which the rate is to be applied.

9.4. From
the analysis of the provisions of the chapter, it is clear that the subject of
tax is the specified services. From the harmonious reading of the section 165
and 166, it appears that the person liable to pay tax is non resident, but the
collection and the recovery is made from the persons paying the considerations
towards the specified services by way of deduction and they are being regarded
as assessee. It is interesting to note that the non resident receiving the
consideration has no obligation whatsoever under the chapter. What is the
difference between a person charged to tax and a person liable to pay tax? Can
a person who is charged to tax be not liable to tax? Can not the person who is
liable to tax and who is also regarded as assessee, should be considered as the
person charged to tax? Is it that in the scheme of equalisation levy, these questions
does not matter? These questions pose a significant challenge to the new tax. _

shailesh.kwebmaker

(Ethical dilemma)

Arjun (A) — Oh, I am surrounded by the ocean around! But not a single drop of water to drink! Hey Shree Ram!
Shrikrishna (S) — What reminds you of that great poetry? And why you called Shree Ram when I am always around you?
A —    Shrikrishna, sorry. You are not only around me, but always in my heart too. I am just thinking of the present situation. I wanted both Shree Ram and Shrikrishna to help me.
S —    What situation? Which ocean you are thinking of?
A —    Ocean of old notes! High Denomination Notes. HDN! These are in plenty everywhere. But of no use at all !
S —    And you don’t have small value notes to spend. Right?
A —    Absolutely! I did not have money to pay for the cab. Nowadays, you have stopped driving my chariot! So I came here on foot.
S —    Good for health.
A —    Cannot buy provisions and vegetables – and day-to-day things. Literally starving.
S —    That is also good for health. Of late, you all had taken to over-eating!
A —    Jokes apart; but this cancellation of HDNs has spoilt our sleep.
S —    Why? You had so much of it?
A —    No. If I had that kind of money, I would not have continued this ‘magajmari’ in the practice.
S —    Then why are you bothered so much if you don’t have HDNs?
A —    Wherever I go, people keep on asking me about ‘conversion’ round the clock !
S —    Why can’t you tell that Government’s pronouncements are very clear. You can exchange notes at many places.
A —    Oh Lord! Why are you pretending to be ignorant though you are omniscient?
S —    Ha! Ha! Ha! People seek your advice on converting huge black money into white. Is that correct?
A —    Yes. They ask questions about what will happen in income tax? Will they charge tax as well as penalty?
S —    So you give answers. What is there? That’s your usual work.
A —    No Lord! It is not that simple. It is more complicated than even your Bhagwad Geeta!
S —    Really? But what is your dilemma?
A —    See, basically, there are too many questions and no definite answers. There is guess-work and speculation.
S —    Then say, you don’t know the answer. Why are you afraid?
A —    Actually, they ask me whether I can convert their notes into ‘white’ money.
S —    That’s money-laundering.
A —    But many of our CA friends have taken it as an opportunity to earn money! My dilemma is, what should I do? Whether to jump into that game or remain away.
S —    Similar dilemma you were faced with in Mahabharata.
A —    And you had advised me to jump in; and not run away from it. What is your advice now?
S —    Arjun, my advice is the same. ‘jump in’ in the same way.
A —    Oh! So you are advising me to enter into the field of conversion? Simply fall in line with my friends doing this change of colour of money? Bhagwan, you too?
S —    No my dear! I had advised you to jump in the war that time. Same way, here also jump in the war with the weapons of honesty and straight forwardness. Say ‘No’ to such temptations.
A —    So you mean, honesty is the best policy. They say, it is true that by honest business practices, one can become a millionaire; but for that, one first needs to be a billionaire!! Ha! Ha!
S —    See, Arjun, whether this withdrawal of HDN was good or bad in economic sense, time alone will decide. But it was an honest decision; taken with good intentions.
A —    No doubt about it. It requires lot of courage. Failure in execution on the part of Administration does not mean the decision was bad. I agree. These hoarders of black money had literally spoilt our country.
S —    You said it! No value for truth. All-pervasive corruption. All unscrupulous elements. Bribery, on money, no value for merit. This had threatened even the national security.
A —    It was necessary to teach a lesson to such economic offenders and enemies of the nation.
S —    If that is your view, and still if you indulge in abetting the money-laundering, it will be the greatest treachery.
A —    But as a part of my profession, I must help my clients. I should steer them out of the difficulties in financial and tax matters. That is our sacred duty! Should I give it up? That is my dilemma.
S —    When two such values seem to be conflicting, always remember, there cannot be compromise with honesty. That is one of the noblest virtues. Moreover, national interests, interests of the society are supreme! They are above all other considerations. If you help the wrong-doers today, there will be further deterioration, downfall – of the society. Your posterity is going to live in that kind of the world. Is it acceptable to you?
A —    You are right. But our next generation has already migrated!
S —    Why they were required to leave the country? It was because of the inaction, indifference of the intellectual class. You used your brilliant brains in protecting and helping; if not encouraging the wrong elements.
A —    Bhagwan, you have opened my eyes. I must tell this to my CA friends.
S —    Moreover, there could be criminal liability on you people – prosecution under tax laws, prevention of Anti-money laundering Act, FEMA, Benami Transactions Act, and what not! This is abetment.
A —    Yes. My Lord! I will caution all my friends. They should avoid all the jugglery – not just out of fear; but with a positive thought that we should be supporting only good things. Bless me Lord !
S —    Tathaastu.
Om Shanti.
Note:
This dialogue is based on the present situation arising out of cancellation of the HDNs. CAs are expected to give preference to the ‘values’ in life and national duty. _

shailesh.kwebmaker

FRAUD INVESTIGATION TECHNIQUES AND OTHER ASPECTS – PART II

Use of the juxtaposition test in audit to detect fraud

Conventional audit tests look for reasonable evidence to
support the financial statements being audited. Vouching, tracing, casting and
scrutiny of accounts, whether in manual or soft data form, usually include
examination of records or documents, but they are seldom penetrative enough to
detect duplication, falsification,
manipulation and forgery. In this regard, the additional use of a juxtaposition
test may be very useful in many audit situations to directly ferret out fraud.
What exactly is this juxtaposition test? It is a simple common sense test of
comparison, by placing side by side, two or more pieces of evidence. In simple
words, to juxtapose means to put adjacent to, or to place side by side to
facilitate comparison. It can be used either to detect similarities where none
are expected or differences where there should be none.

Usually in the course of day-to-day business, senior
management executives have to review, sign, or approve various documents,
invoices, even agreements and contracts with external parties such as vendors,
customers, etc. Even within an organisation, there are documents
constantly floating around for approval, such as vouchers, letters, minutes of
meetings. In almost every such situation, the relevant document (say for example
a vendor’s bill), will be seen or examined only one at a time. Two or
more documents (or any other evidence such as CCTV, Audio recordings, pictures
etc) from a particular party will seldom be examined together for comparison.
Usually only very important details, computations, amounts, or specific clauses
are examined and scrutinised more carefully. Consequently a fraud like a
duplicated letterhead bill from a vendor can easily escape detection because
one may not remember what exactly the original letterhead looked like. This
kind of fraud and many other frauds in evidence relied upon can perhaps be
detected by applying this simple juxtaposition test.

This juxtaposition test can be used in myriad number of ways,
in different situations, on different objects. Let us consider the various
places where such a juxtaposition test can be used:

1. Comparison of external letters / documents for
inexplicable similarities indicating that the source is the same. Eg, multiple
quotations may not be from different parties but actually the same. Similarly
reference letters from two different employers may have some unique
similarities where there should be none. For example the following instances of
two such reference letters from totally different organisations indicate
exactly the same grammatical mistakes, spelling mistakes and english sentences.
These can be easily spotted only by juxtaposition and are outlined below.

(Above names,
addresses, are purely for academic and demonstrative purposes. Any resemblance
to any entity is purely co-incidental. Nowhere is any fraud suggested or
implied)

2. Approval signatures. Just as a bank manager
compares a signed cheque or an RTGS form with the specimen signature, it is
imperative for an auditor to see hard copy documents such as vouchers,
agreements, bills, minutes etc., with the specimen signature of those
who have signed. In one case, an auditor specifically asked for a list of
specimen signatures of the approving authorities on agreements, important
documents, records and vouchers. The company initially resisted but relented
and provided him such signatures. There were some sarcastic remarks about him
conducting an investigation instead of an audit. However the auditor was
unruffled and took this step as a routine control testing procedure and his
effort paid rich dividends. He meticulously conducted a sample check comparison
of approval signatures on payment vouchers with specimen signatures provided by
the company to him. He found some signatures which did not match with any
signature on the list given to him. He then went to the CFO of the company to
inquire about these unidentified signatures. The CFO was also surprised because
he too could not identify any of those signatures. After making detailed
inquiries with all departments, it was eventually established that they belonged
to no one and were mere scribbles. There were no such authorised
signatories and approvals for such vouchers were fictitious and invalid
authorisations. No one bothered to inquire who had authorized them and the
cashier presumed that these were genuine authorisations. In a year almost Rs 80
lacs were so paid through multiple small value vouchers. All that was required
was someone to see whether such signatures were known and valid before permitting
such expenditure. It is important to note that one need not be a signature
verification technical expert. A simple comparison with given signatures is
enough to detect fraud.

Example of an unidentifiable signature

3. Juxtaposition check can be even within a
document. In the above case, the cashier did not have readily all the specimen
signatures. The juxtaposition test is sometimes missed out even when it is
possible on one single document. A huge purchase order of over Rs. 60 lakh was
executed without anyone realising that all the three signatures of the buyer,
checker and approver were the same. The human mind becomes so cluttered with
other information on any given document that focus is given only on critical
information such as value, rate, date, vendor, description of the material and
the existence of approval signatures. The human mind gets switched off beyond
that to examine deeply by applying any test for deception or wrongdoing. In
this case since the three signature were side by side (juxtaposed) on the
voucher. Just by looking at the three signatures, one could easily see that
they were by the same person.

(above is just an imaginary voucher with assumed names,
product and signatures for demonstration purposes; any resemblance is
co-incidental and unintentional and nowhere is any such person or entity
connected with fraud).

In the same manner, the juxtaposition test can be used to
compare:

(a) Vendors’ bills. Usually printing and stationery
bills, transport bills, courier charges, and similar regular expenditure
related bills are the ones most likely to be duplicated or replicated. By
juxtaposing these expenses, we will be in a position to identify anomalies and
perhaps spot a fictitious bill.

(b) Agreements and contracts lying between two or
more departments such as legal department, commercial department, purchase
department etc. It is expected that these are identical copies, but
wrongdoers even make alterations in copies of different departments for ulterior
motives of facilitating fraud.

(c) Documents with different ages. A two year old
document when compared with a recent document will have a difference in the
physical condition. Over a period of time, paper yellows out, creases, smudges
with handling and even tears a little.
However, new documents have a crisp, whiter look and usually do not have
many smudges. In one case an auditor compared bills from a suspected supplier for a two year period and
applied a juxtaposition test. Though he did not find anything anomalous in the
content matter, he noticed that one of
the oldest bills was absolutely white and crisp. This stood out in complete
contrast with all the bills of that year. On a detailed investigation, it was
revealed that the bill was inserted recently because the original one had been
removed for a wrongful purpose of alteration.

There are many such examples of the juxtaposition test on
documents; but one may well ask whether
this test is going to be useful in the paperless environment with soft data,
spreadsheets, data on audio recordings, videos, CCTVs etc. The answer is
yes, very much. In some of the future articles in BCAS journal, further examples and illustrations of usage
of juxtaposition test will be given. _

shailesh.kwebmaker

SECTION B: REVISED AS 10 ‘PROPERTY, PLANT & EQUIPMENT’ APPLICABLE FROM ACCOUNTING YEARS COMMENCING FROM 1ST APRIL 2016 ONWARDS FOLLOWED IN FY 2015-16

NHPC Ltd. (31-3-2016)

From Notes to Financial Statements

Note 29, para 15:

The Ministry of Corporate Affairs has notified revised AS-10,
“Property, Plant & Equipment” on 30.03.2016, to be applicable for
accounting periods commencing on or after that date. Para 9 of revised AS-10 permits
Unit of Measure Approach which allows capitalisation of expenditure of capital
nature incurred for creation of facilities, over which the company does not
have control but the creation of which is essential principally for
construction of the project. Further,
the transitional provision in revised AS-10 allows retrospective capitalisation
of costs charged earlier to the statement of profit and loss but eligible to be
included as a part of the cost of a project for construction of property, plant
and equipment in accordance with the requirements of paragraph 9. The Unit of
Measure Approach also exists in Para 9 of Ind AS-16, “Property, Plant &
Equipment.” It strengthens the accounting policy no.2.3.4 on capital work in
progress. Had this policy not been adopted but implemented from 01.04.2016, the
para 88 of Revised AS-10 on transitional provision would automatically take
care of capitalisation of such expenditure.
As such, significant accounting policy no.2.3.4 and consequential
accounting treatment of enabling assets as followed in FY 2014-15 has been
continued. Accordingly, an amount of Rs.176.21 crore (Previous year Rs.173.61
crore) has been included in Fixed Assets as Tangible Assets/CWIP.

From Auditors’ Report

Emphasis of Matters

We draw attention to the following matters in the Notes to
the financial statements:

a)
to e) … not reproduced

Auditor’s Comment tor’s
Comment

Management’s reply

Accounting policy no.2.3.4 On capital work in progress read with
note no. 29 Para 15 to the financial statements about the capital expenditure
incurred for creation of facilities over which the company does not have
control but the creation of which is essential principally for construction
of the project is charged to “expenditure attributable to construction (eac)”
as the same is in line with revised as-10 notified on 30.03.2016 As para 88
of the revised accounting standard which stated about transitional provision
that shall result into the same treatment.

Disclosure through note is a statement of fact.

shailesh.kwebmaker

DEEMED COST EXEMPTION ON FIXED ASSETS AND INTANGIBLES

Introduction

The application of the deemed cost
exemption to fixed assets and intangible assets has led to peculiar issues and
challenges. Let us first consider the wording of the exemption followed by the
clarifications provided by the Ind AS Transition Facilitation Group (ITFG).

Paragraph D7AA of Ind AS 101

D7AA – Where there is no change in
its functional currency on the date of transition to Ind ASs, a first-time
adopter to Ind ASs may elect to continue with the carrying value for all of its
property, plant and equipment as recognised in the financial statements as at
the date of transition to Ind ASs, measured as per the previous GAAP and use
that as its deemed cost as at the date of transition after making necessary
adjustments for decommissioning liabilities. If an entity avails the option, no
further adjustments to the deemed cost of the property, plant and equipment so
determined in the opening balance sheet shall be made for transition
adjustments that might arise from the application of other Ind ASs. This option
can also be availed for intangible assets covered by Ind AS 38, Intangible
Assets and investment property covered by Ind AS 40 Investment Property.

Salient features of the exemption

1. The
entity can continue with the carrying amount under previous GAAP for all of its
fixed assets, investment property and intangible assets after making necessary
adjustment for decommissioning liabilities. The ITFG opined that if a first
time adopter chooses the D7AA option, then the option of applying this on
selective basis to some of the items of property, plant and equipment and using
fair value for others is not available.

2. The exemption is
available to an entity only where there is no change in the functional currency
on the date of transition to Ind AS.

3. No further adjustments to
the deemed cost so determined in the opening balance sheet shall be made for
transition adjustments that might arise from the application of other Ind ASs

4. The exemption is an
additional option under Ind AS. An entity may choose not to use this option,
and instead use other first time adoption options. For example, in the case of
fixed assets, an entity may choose to:

a. state retrospectively all
the fixed assets in accordance with Ind AS principles

b. selectively choose to
fair value some fixed assets and use Ind AS principles for other fixed assets.

ITFG Clarification Bulletin 3 – Issue 9

The Company has chosen to continue
with the carrying value for all of its property, plant and equipment as recognised
in the financial statements as at the date of transition to Ind AS, measured as
per the previous GAAP. The Company has recorded capital spares in its previous
GAAP financial statements as a part of inventory, which under Ind AS would
qualify to be classified as fixed assets. Would such a reclassification be
required under Ind AS? Would such a reclassification taint the deemed
cost exemption?

As per paragraph D7AA, once the
company chooses previous GAAP as deemed cost as provided in paragraph D7AA of Ind
AS 101, it is not allowed to adjust the carrying value of property, plant and
equipment for any adjustments other than decommissioning costs. In this case, a
question arises whether the company may capitalise spares as a part of
property, plant and equipment on the date of transition to Ind AS. It may be
noted deemed cost exemption as the previous GAAP is in respect of carrying
value of property, plant and equipment capitalised under previous GAAP on the
date of transition to Ind AS. The ITFG opined that this condition does not
prevent a company to recognise an asset whose recognition is required by Ind AS
on the date of transition. The ITFG opined that the Company should recognise
‘capital spares’ if they meet definition of PPE as on the date of transition,
in addition to continuing carrying value of PPE as per paragraph D7AA of Ind AS
101.

ITFG Clarification Bulletin 5 – Issue 4

The Company has chosen to continue
with the carrying value for all of its property, plant and equipment as
recognised in the financial statements as at the date of transition to Ind AS,
measured as per the previous GAAP. The company has previously taken a loan for
construction of fixed assets and paid processing fee thereon. The entire
processing fees on the loan were upfront capitalised as part of the relevant
fixed assets as per the previous GAAP. The loan needs to be accounted for as
per amortised cost method in accordance with Ind AS 109, Financial
Instruments. Whether the Company is required to adjust the carrying amount
of fixed assets as per the previous GAAP to reflect accounting treatment of
processing fees as per Ind AS 109?

When the option of deemed cost
exemption is availed for property, plant and equipment under paragraph D7AA of
Ind AS 101, no further adjustments to the deemed cost of the property, plant
and equipment shall be made for transition adjustments that might arise from
the application of other Ind AS. Thus, once the entity avails the exemption
provided in paragraph D7AA, it will be carrying forward the previous GAAP
carrying amount.

Paragraph 10 of Ind AS 101, inter
alia, provides that Ind AS will be applied in measuring all recognised
assets and liabilities except for mandatory exceptions and voluntary exemptions
other Ind AS. Processing fees is required to be deducted from loan amount to
arrive at the amortised cost as per the requirements of Ind AS 109. In view of
this, with respect to property, plant and equipment, the company shall continue
the carrying amount of PPE as per previous GAAP on the date of transition to
Ind AS since it has availed the deemed cost option provided in paragraph D7AA
of Ind AS 101 for PPE. In the given case, the Company need to apply the
requirements of Ind AS 109 retrospectively for loans outstanding on the date of
transition to Ind AS at amortised cost. The ITFG opined that the adjustments
related to the outstanding loans to bring these in conformity with Ind AS 109
shall be recognised in the retained earnings on the date of transition. Consequently,
the carrying value of PPE as per previous GAAP cannot be adjusted to reflect
accounting treatment of processing fees.

ITFG Clarification Bulletin 5 – Issue 5

The Company received government
grant to purchase a fixed asset prior to Ind AS transition date. The grant
received from the Government was deducted from the carrying amount of fixed
asset as permitted under previous GAAP, i.e. AS 12, Accounting for Government
Grants. The Company has chosen to continue with carrying value of property,
plant and equipment as per the previous GAAP as provided in paragraph D7AA of
Ind AS 101. As per Ind AS 20, Accounting for Government Grants and
Disclosure of Government Assistance, such a grant is required to be
accounted by setting up the grant as deferred income on the date of transition
and deducting the grant in arriving at the carrying amount of the asset is not
allowed.

In this situation, whether the
Company is required to add to the carrying amount of fixed assets as per
previous GAAP and reflect the addition as deferred income in accordance with
Ind AS 20?

The ITFG opined that when the
option of deemed cost exemption under paragraph D7AA is availed for property,
plant and equipment, no further adjustments to the deemed cost of the property,
plant and equipment shall be made for transition adjustments that might arise
from the application of other Ind AS. Accordingly, once an entity avails the
exemption provided in paragraph D7AA, it will have to be carry forward the
previous GAAP carrying amounts of PPE. Consequently, the company shall
recognise the asset related government grants outstanding on the transition
date as deferred income in accordance with the requirements of Ind AS 20, with
corresponding adjustment to retained earnings.

Salient feature of the ITFG responses

The ITFG has provided conflicting
responses. In the context of accounting for the government grants and
processing fees, the ITFG opined that the impact of accounting for government
grants and processing fees should be adjusted against retained earnings.
Consequently, the previous GAAP carrying amount of fixed assets should not be
tampered with in order to comply with the requirements of D7AA. On the other
hand, the ITFG in the context of reclassification between inventory and fixed
assets, opined that the reclassification was necessary, and that such
reclassification would not result in non-compliance of D7AA.

The author also feels that too much
focus has been put on complying with the technical requirement of D7AA rather
than on the substance and the spirit of the exemption. This has led to a very
absurd interpretation. For example, in the case of fixed asset related
government grants, the grant amount was deducted from fixed assets under Indian
GAAP. However, the ITFG requires an entity to ignore the same and recreate the
deferred income on grant by adjusting the retained earnings. In subsequent
years, the deferred income would be released to the P&L account under Ind
AS. This effectively means that the government grant gets accounted twice; once
under Indian GAAP by deducting the grant amount from fixed assets and again
under Ind AS through creation of deferred income on Ind AS transition date.
Similarly the ITFGs response in the case of processing fee results in its being
treated as borrowing cost twice – once under Indian GAAP and again under Ind
AS.

Practical issue not dealt with by ITFG

Whether D7AA exemption is available
to service concession arrangements (SCA)?

Paragraph D22 of Ind AS 101
requires an operator of SCA to apply SCA accounting retrospectively. If it is
not practical to apply SCA accounting retrospectively, then the operator may
use the previous GAAP carrying amounts as the carrying amount at that date.
Assuming that there is no change in functional currency, whether in addition to
the above exemption, D7AA option is available?

One argument is that since
paragraph D22 contains specific requirements for intangible assets recognised
in accordance with the standard, the transitional provisions in D22 will apply
to intangible assets arising under the SCA. For all other intangible assets,
exemption in paragraph D7AA may be used.

The second argument is that there
is nothing in paragraph D7AA to suggest that it does not apply to SCAs. Hence,
the company can apply exemption under paragraph D7AA to all intangible assets,
i.e., SCA related intangible assets as well as all other intangible assets
covered within the scope of Ind AS 38.

The application of second view will
give rise the following additional issues:

– While the company continues the same carrying
amount as under previous GAAP, it will need to reclassify those amounts based
on requirements of Ind AS. For e.g., toll road classified as PPE under Indian
GAAP will be reclassified as intangible or financial asset, as applicable, at
the Indian GAAP carrying amount.

– Accounting for premium payable by operator to
grantor (negative grant): Companies may have followed one of the following
treatment under Indian GAAP:

• Certain companies have
created liability at undiscounted amount.

• Certain companies have
not created liability for negative grant under Indian GAAP.

In both the above cases, the
related question would be when the financial liability amount is reflected as
per Ind AS 109, whether the corresponding adjustment should be made to retained
earnings or to the intangible asset. Some may even argue that the strict
requirements of D7AA means that no adjustment is made to the financial
liability amount and consequently the corresponding adjustment is also not
made.

Conclusion

There are numerous questions around
the practical application of D7AA. These issues were not probably conceived
when D7AA was hurriedly introduced in Ind AS 101. The drafting of D7AA has
resulted in numerous unanswered questions. The ITFG has also provided
conflicting guidance on the subject. Besides some of the recommendations, for
example, in the case of processing fees and government grant accounting are
counter-intuitive and are against the spirit and intention of the exemptions.
In light of the above, the author would recommend that a broader view may be
taken on this issue, and in light of the lack of clarity arising from a not so
clear drafting of D7AA, companies may be allowed more room for different
interpretations. _

shailesh.kwebmaker

Section 195 – payments made to non-residents for rent for office outside India, advertisement in foreign journals and exhibition expenses being business profits are not taxable in India in absence of a PE in India

12. [2016] 74
taxmann.com 191 (Delhi – Trib.)

ITO vs. Brahmos Aerospace (P.) Ltd.

A.Y.:2011-12, Date of order: 14^th September, 2016

Facts

The Taxpayer had made payments to certain non-residents
(NRs). The payments pertained to rent for office outside India, advertisements
and expenses for participation in exhibition outside India. Mistakenly, the
Taxpayer had withheld tax on the said payments at minimum rates and hence
Taxpayer applied for rectification u/s. 154 of the Act. However, the AO
contended taxes were required to be withheld @ 20% and rejected rectification
application of the taxpayer. The CIT(A) allowed the appeal of the Taxpayer.
Against the order of CIT(A), the revenue appealed to the Tribunal.

Held

– The payments made to non-residents were in
respect of rent, advertisement and exhibition expenses. Such payments are in
the nature of business receipts of the payee and are taxable in India only if
the NR has a PE in India in terms of the relevant DTAA² .

2 The decision does not mention DTAA of any
specific country and also does not refer to any specific Article (such as,
Article 7 read with Article 5) of any DTAA.

– Since the NR does not have PE in
India, the receipts from the Taxpayer are not chargeable to tax in India.
Consequently, the Taxpayer is not required to withhold tax on such payments.

shailesh.kwebmaker

Subsequently concluded APA which accepted that the taxpayer was not a contract manufacturer for relevant years under appeal have considerable bearing on TP dispute and can be admitted as an evidence before the Tribunal

11. ITA Nos.
779/Mds/2014, 801 Mds/2015 & 810/Mds/2016

Lotus Footwear Enterprises Ltd (India Branch) vs. DCIT

A.Y.s: 2009-10 to 2011-12,

Date of Order: 21^st September, 2016

Facts

The Taxpayer was engaged in manufacture of footwear for its
associated enterprise (AE) in BVI. For FY 2009-10 to 2011-12, assessment orders
were passed basis the directions of the DRP. Certain adjustments were made
under TP by regarding the taxpayer to be a contract manufacturer. It is not
clear as to what was the claim of the taxpayer and basis on which the TPO
concluded that the taxpayer was a contract manufacturer permitting TP
adjustment during the years under appeal.

Taxpayer appealed against the assessment orders before the
ITAT and assailed the additions made on account of transfer pricing
adjustments.

Taxpayer had signed an APA in 2016 for FY 2014-15 to 2018-19,
with a roll back for three years from FY 2011-12 to FY 2013-14.

The APA was signed on the basis that for the years covered by
APA and the three earlier years for which roll back was claimed, the business
model of the taxpayer was that of a contract manufacturer and such change was
effected only after F.Y. 2010-11 (A.Y. 2011-12) due to multiple labour strikes
in its units. It was also claimed that roll back which was applicable for
earlier 4 years including one of the years under appeal viz. F.Y. 2010-11 (A.Y.
2011-12) was not made applicable, as for the relevant year, as per the facts
which the taxpayer could furnish before APA authorities, the taxpayer was not a
contract manufacturer. Thus, for F.Y. 2010-11, APA authorities had accepted the
contention of the taxpayer that it was not a contract manufacturer as against
departmental contention that the taxpayer was a contract manufacturer.

It is in this background that taxpayer relied on APA and
claimed that its contention about it not being a contract manufacturer during
the relevant years of appeal is to be accepted.

Held

Tribunal concurred that APA should be considered while
deciding the appeal of the Taxpayer, for the following reasons:

– The APA rollback period was reduced to three
years only after considering and accepting the submissions of the Taxpayer that
it was not a contract manufacturer in FY 10-11 and the years prior to it.

– Nature of business of the Taxpayer as
determined under APA would have considerable bearing on the ALP study of the
international transactions of the Taxpayer for the FYs under consideration.

– Since the APA was concluded in May 2016, the
Taxpayer did not have the opportunity to submit it to the lower authorities.

Having regard to the above, the additional evidence was
admitted and the matter was set aside for fresh consideration.

shailesh.kwebmaker

Article 5 of India-Switzerland DTAA – on facts, subsidiary company and its managing director (MD) constituted fixed place PE and dependent agent PE of the taxpayer in India

10. I.T.A.No.1742/Mds/2011

Carpi Tech SA vs. ADIT

A.Y.: 2008-09, Date of Order: 24^th August, 2016

Facts

Taxpayer a company resident in Switzerland, was engaged in the
business of water proofing and providing drainage systems. During the relevant
assessment year, the Taxpayer had received certain amounts for undertaking a
project for an Indian company.

The Taxpayer contended that the project was only for 40 days (i.e.,
less than six months), and it did not have ‘continuous presence’ or ‘business
connection’ or ‘permanent establishment’ in India. Therefore, receipts from
such project is not chargeable to tax in India. The Taxpayer also had an Indian
subsidiary¹ (“Sub Co”).

In the course of inquiry, the AO found that the Taxpayer had also
executed a project in financial year 2004-05 and 2005-06. The duration of the
said project was 105 days. Between the two projects, the time lag was three
years.

During the intervening period, the MD of Sub Co was making efforts
to secure other projects for the Taxpayer in India. The website of the Taxpayer
mentioned office-cum-residential address of the MD for correspondence. The MD
was given a power of attorney (PoA) to undertake the activities of the Taxpayer
in India. Further Sub Co also had a PoA to represent the Taxpayer in its
projects in India.

Based on these as well as several other facts, the AO concluded
that Sub Co and its MD were dependent agents exclusively acting for the Taxpayer
and that the income was subject to tax under Article 7. The DRP upheld the
order of the AO.

1 While the decision mentions Indian company
as a subsidiary, the facts appear to indicate that though the name of Indian
company was similar to the name of the Taxpayer, all the shares were held by
two individual shareholders one of whom was MD of the company. Thus, impliedly,
the Taxpayer did not have any shares in the Indian company.

Held

– The facts and the documents indicates that
all the actions related to the project were undertaken by or routed through Sub
Co or its MD. The MD was also holding PoA from the Taxpayer and signed all
documents on behalf of the Taxpayer.

– It is not necessary that place of business
should be exclusively available to the Taxpayer. What is required is that to
constitute a PE, business must be located at a single place for reasonable
length of time though the activity need not be permanent, endless or without
interruption. In Sutron Corporation vs. DIT [2004] 268 ITR 156 (AAR) and
in Motorola Inc vs. DCIT [2005] 95 ITD 269 (Del) (SB), residence of
country manager was held to be fixed place of business since it was used as an
office address.

– The residence of MD from where all activities
of the Taxpayer in relation to Indian project, such as participation in bids,
correspondence with customers, signing of contracts, execution of the project
and closure of the project etc. was carried on triggered a fixed place
PE for the Taxpayer in India.

– Sub Co incurred all the project-related
expenses. The Taxpayer reimbursed these expenses

– The activities of the Taxpayer and Sub Co
were intertwined and Sub Co participated in economic activities of the
Taxpayer. Sub Co was the face of the taxpayer in India and had a PoA to
represent the Taxpayer in India. Thus the premises of Sub Co also resulted in a
fixed place PE for the Taxpayer in India.

– Further the Taxpayer was relying on the skills and knowledge of the
MD. His role was critical to all the aspect of the contract through the stage
of signing to its execution.

– There was no evidence for the claim of the
Taxpayer that MD of Sub Co was independent agent because he represented other
companies. While an independent agent would be required to have objectivity in
execution of tasks of its principal, role played by MD could not be easily
separated from services of the Taxpayer. MD was acting exclusively or almost
exclusively for the Taxpayer.

– The functions performed by MD or Sub Co could
not be considered as preparatory or auxiliary in character. The Taxpayer had
not demonstrated that it had a mere passing, transient or casual presence in
India. Accordingly, Sub Co and MD constituted fixed place PE and dependent
agent PE of the Taxpayer in India.

shailesh.kwebmaker

Article 7 & 5 of India-UAE DTAA; – In absence of a specific article on Fee for technical service (FTS), income from services rendered in the normal course of business is to be classified as business income; in absence of a Permanent establishment (PE) in India, income from such services is not taxable in India

9. [2016] 75
taxmann.com 83 (Bangalore – Trib.)

ABB FZ-LLC vs. ITO

A.Y: 2012-13, Date of Order: 28^th October, 2016

Facts

The Taxpayer was a company incorporated in and resident in
UAE. The Taxpayer had entered into an agreement with an Indian company for
providing certain services. In consideration, the Taxpayer received certain
fee.

According to the Taxpayer, in absence of a specific article
on FTS in the India-UAE DTAA, income from services is to be classified as
business profit under Article 7. Further, in absence of a PE in India, the fee
is not chargeable to tax in India. The Taxpayer however, did not dispute that,
the receipt was FTS in terms of section 9(1)(vii) of the Act.

AO however, contended that if a DTAA does not have any clause
for taxation of any item of income, such income is to be taxed in accordance
with the Act. Since the Act has a specific provision for taxing FTS, such
specific provision would prevail over the general provision of DTAA.
Accordingly, AO applied provisions of section 9(1)(vii) of the Act and taxed
the fee as FTS. The Dispute resolution panel (DRP) confirmed the view of the
AO.

Held

– If royalty or FTS is derived from regular
business activities of the Taxpayer, it is to be regarded as business income
under the Act as well as DTAA. However, if these items of income are separately
classified, then taxation would be as applicable to that classification.

– Income is derived by the taxpayer from
providing services, which is a regular business activity, and hence such income
from such services is to be classified as business income under the DTAA.

– Absence of a specific provision in the DTAA
is not an omission but an agreement between the two contracting states not to
separately classify such income as FTS. Once the income is classified as
falling within the ambit of other article of the DTAA, thereafter, scope of
assessing such income cannot be expanded by importing classification from the
Act and taxing such income under that classification in the Act.

– Accordingly, in absence of specific Article
dealing with FTS in India-UAE DTAA, the fee received by taxpayer would be
taxable in terms of Article 7 and in absence of a PE of the Taxpayer in India,
such income is not chargeable to tax in India.

– Reliance in this regard can be placed on the
Tribunal decision in the case of IBM India Pvt Ltd vs. DDIT (ITA Nos.489 to
498/Bang/2013), wherein the Tribunal held that even if the payments were
not covered by Article 7, they would be covered under Article 23 (other income)

shailesh.kwebmaker

INTERNATIONAL WORKERS AND SOCIAL SECURITY AGREEMENTS – GROWING SIGNIFICANCE – AN OVERVIEW

In view of significant increase in
the mobility of cross border workers / employees in the recent years, issues
relating to social security benefits to such International Workers [IWs] have
acquired immense importance. Consequently, Social Security Agreements [SSAs],
being bilateral instruments, entered into by various countries to protect the
social security interests of such international workers has assumed lot of
significance. India is not remaining far behind in this respect. In this
article, we have attempted to give an overview of SSAs and social security
issues of International Workers.

1. Background

Foreign nationals coming
for employment in India were earlier excluded from the provisions of the
Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 [EPF Act] as
their remunerations in most cases far exceeded above the statutory threshold
limit.

On the other hand,
Indian citizens working overseas (other than countries having operational SSA
with India and fulfilling relevant conditions prescribed therein) are subjected
to all contributions to the social security fund of the country where they
work, irrespective of the time spent in another country. Often, the amount so
contributed would stand forfeited, since like the Indian Provident Fund, all
social security schemes are subject to long-term rules of withdrawal, causing
the Indian expatriate or his employer heavy losses.

In order to create level
playing field and to pressurise other countries to enter into SSAs with India,
‘International Worker’ is introduced as a concept and they are bound to comply
with PF provisions, regardless of their remuneration break-up.

In October 2008,
Government of India made fundamental changes in the Employees’ Provident Funds
Scheme, 1952 [EPFS] and Employees’ Pension Scheme, 1995 [EPS] by bringing
International Workers [IWs] under the purview of the Indian social security
regime. The Government of India had vide its notifications dated 1^st
October, 2008 introduced Para 83 to the Employees’ Provident Fund Scheme, 1952
and Para 43-A to the Employees’ Pension Scheme, 1995 creating Special
provisions in respect of the International workers [Special provisions].

In September 2010, the
Ministry of Labour and Employment [MoLE)] issued a notification further
amending the EPFS and EPS vis-à-vis the IWs. However, the notification raised a
lot of issues which required clarifications. In May 2012, the MoLE vide its
notification dated 24^th May, 2012 made further amendments in the
Employees’ Provident Scheme to clarify various issues.

An important
clarification is that IWs who are covered under an SSA that India has signed
with other countries and that are in force can withdraw their PF accumulations
immediately on cessation of employment in establishments covered under EPF Act
in India and will not have to wait till 58 years of age to get access to their
PF accumulations. Further, the definition of excluded employee (who need not
contribute to Provident Fund in India) has been expanded to cover exemption
granted under bilateral economic agreements.

2. Social Security

The term ‘Social
Security’ has been explained by the International Labour Organisation as the
protection which society provides for its members, through a series of public
measures, against economic and social distress that otherwise would be caused
by the stoppage or substantial reduction of earnings resulting from sickness,
maternity, employment injury, unemployment, invalidity, old-age and death; the
provision of medical care; and the provision of subsidies for families with
children.

The key social security
legislations in India with respect to employees are:

(i) The Employees’ Provident
Fund and Miscellaneous Provisions Act, 1952; (ii) The Employees’ State
Insurance Act, 1948; (iii) The Employees’ Compensation Act, 1923; (iv) The
Maternity Benefit Act, 1961; and (v) The Payment of Gratuity Act, 1972.

The Social Security
contributions have significant importance while structuring international
assignments for employees. Any social security benefit payable in the host
country may become an added cost to the employer, especially in situations
where there are restrictions for withdrawal. It is in this context that SSAs
executed between countries come into perspective and they need to be carefully
evaluated to help reduce the financial implications. At times, secondment
arrangements are structured to ensure that the expatriate employee continues to
derive social security benefits in the home country during the period of
assignment.

3. Social Security Agreement

a. Social Security Agreement

A Social Security
Agreement is a bilateral instrument to protect the social security interests of
workers posted in another country. Being a reciprocal arrangement, it generally
provides for equality of treatment and avoidance of double
coverage/contribution.

b. Main provisions covered
in a SSA

Generally a Social
Security Agreement covers 3 provisions. They are:

a) Detachment:
Applies to employees sent on posting in another country, provided they are complying
under the social security system of the home country.

b) Exportability of
Pension: Provision for payment of pension benefits directly without any
reduction to the beneficiary choosing to reside in the territory of the home
country as also to a beneficiary choosing to reside in the territory of a third
country.

c) Totalisation of
Benefits: The period of service rendered by an employee in a foreign
country is counted for determining the “eligibility” for benefits,
but the quantum of payment is restricted to the length of service, on pro-rata
basis.

c. Articles forming part of
a typical SSA

The brief description of
the Articles contained in the latest India-Australia SSA signed on 18-11-2014,
are as follows:

Sr. No.

Part / Article No.

Description of Part / Article

Part I

General Provisions

Article 1

Definitions

Article 2

Legislative Scope

Article 3

Personal Scope

Article 4

Equality of Treatment

Article 5

Export of Benefits

Part II

Provisions and Coverage

Article 6

Purpose and Application

Article 7

Diplomats and Government Employees

Article 8

Avoidance of Double Coverage

Article 9

Secondment from Third States

10.

Article 10

Exceptions

11.

Article 11

Certificate of Coverage

Part III

Provisions relating to Australian Benefits

12.

Article 12

Residence or presence in India

13.

Article 13

Totalisation

14.

Article 14

Calculation of Australian Benefits

Part IV

Provisions relating to Benefits of India

15.

Article 15

Totalisation of Insurance period

16.

Article 16

Calculation of Indian Benefits

Part V

Miscellaneous and Administrative Provisions

17.

Article 17

Lodgement of Documents

18.

Article 18

Payment of Benefits

19.

Article 19

Exchange of information and Mutual Assistance

20.

Article 20

Administrative Arrangement

21.

Article 21

Exchange of Statistics

22.

Article 22

Resolution of Disputes

23.

Article 23

Review of Agreement

Part VI

Transitional and Final Provisions

24.

Article 24

Transitional Provisions

25.

Article 25

Entry into Force

26.

Article 26

Termination

4. Status of various Operating Indian SSAs

India presently has 17 operating
SSAs, the brief details of which are given below:

Sr. No.

Country

Date of Signing

Date of entry into Force

Duration of Detachment

Exportability of Pension

Totalisation
Benefits

1 .

Belgium

03-11-06

01-09-09

Germany

08-10-08

01-10-09

N/A

Switzerland

03-09-09

29-01-11

N/A

Denmark

17-02-10

01-05-11

Luxembourg

30-09-09

01-06-11

France

30-09-08

01-07-11

Korea

19-10-10

01-11-11

Netherlands

22-10-09

01-12-11

N/A

Hungary

02-02-10

01-04-13

10.

Finland

12-06-12

01-08-14

Sweden

26-11-12

01-08-14

[Extendable for additional 24 months]

12.

Czech

09-06-10

01-09-14

13.

Norway

29-10-10

01-01-15

14.

Austria

04-02-13

01-07-15

15.

Canada

06-11-12

01-08-15

16.

Australia

18-11-14

01-01-16

17.

Japan

16-11-12

01-10-16

(Abbreviations used:- A:
Available NA: Not Available.)

4.1 Administrative
Agreements

In all cases where
India has signed SSAs except in case of SSA with Switzerland, Canada and
Hungary, Administrative arrangements have been entered into or Administrative
Agreements have also been signed, concerning the implementation of the
agreement on social security.

4.2 SSAs with Portugal
& Quebec

In addition to above mentioned 17 operating SSAs,
SSA with Portugal has been signed on 04-03-13 and SSA with Quebec has been
signed on 26-11-13. However, both these SSA have not been notified so far and
have, therefore, not entered into force.

4.3 SSA with Germany

The SSA with
Germany was executed on 8th October, 2008 and came into effect on 1^stOctober,
2009. This agreement however covered only the detachment provisions, as per
which, individuals on short term contract up to 48 months (extendable to 60
months with the prior consent of the appropriate authority) can avail
detachment from host country social security. Since this agreement did not
address exportability of pension and totalisation of contribution periods, the
Governments of India and Germany have negotiated and signed a comprehensive
social security agreement on 12^th October, 2011. This agreement is
to subsume the SSA signed on 8^th October 2008. However, a
notification bringing into effect the new agreement is still awaited. The new
comprehensive agreement with Germany envisages the following benefits to Indian
nationals working in Germany:

(i) The employees of the home country
deputed by their employers, on short-term assignments for a pre-determined
period of less than 5 years, need not remit social security contribution in the
host country. For example, in case of deputation of an Indian employee to
Germany vide a short term contract of up to five years, no social security
contribution would need to be paid under the German law by the employee
provided he continued to make social security payment in India.

(ii) The benefits under the
SSA shall be available even when the Indian company sends its employees to
Germany from a third country.

(iii) Indian workers shall
be entitled to the export the social security benefit if they relocate to India
after the completion of their service in Germany.

(iv) Self-employed Indians
in Germany would also be entitled to export of social security benefit on their
relocation to India.

(v) The period of
contribution in one contracting state will be added to the period of
contribution in the second contracting state for determining the eligibility
for social security benefits (totalisation).

4.4 Negotiations with USA
and UK

USA: USA has
entered into Totalisation Agreements i.e. SSAs with 25 countries including the
UK, South Korea, Australia, Japan and Chile etc. For almost a decade,
India and USA have had talks on the totalisation agreement, however, without
much success. India sends the highest numbers of temporary workers to the USA,
who mostly work for the tech companies.

The current social security laws in
the US, including the Employee Retirement Income Security Act of 1974, allow an
employee to withdraw pension on only after a minimum qualifying period i.e. 10
years while the visa regime does not ordinarily permit the employee to stay
beyond 10 years. Therefore, Indian employees who travel to USA for a period
less than 10 years forego their social security contributions when they return.
This has ended up being a significant issue on account of the large number of
Indian employees in USA.

It however seems that the due to
lack of political will, US is holding back the signing of the agreement since
it believes that India is likely to gain disproportionately from such an
agreement. However, whenever the long pending agreement between India and US is
executed and comes into force, it will benefit a large number of Indians
working in the US, with regard to social security contributions.

UK: The recent maiden visit of the
UK Prime Minister in November, 2016 gave a ray of hope to the supporters of
proposed SSA between India and UK. As the UK is one of the prime destinations
for outbound employees from India, a SSA will favourably impact the cost of
employment for employers in both countries.

5. Some relevant Questions and Answers in respect of IWs and SSAs

4.1 Who is an International
Worker?

An IW may be an Indian worker or a foreign
national. IW means any Indian employee having worked or going to work in a foreign
country with which India has entered into a social security agreement and being
eligible to avail the benefits under social security programme of that country,
by virtue of the eligibility gained or going to gain, under the said agreement.

An employee other
than an Indian employee, holding other than an Indian Passport, working for an
establishment in India to which the EPF Act applies, is also an IW.

4.2 Is an Indian worker
holding Certificate of Coverage [COC], an International Worker?

Merely holding the
COC does not make an employee an International Worker. He/she becomes IW only
after being eligible to avail the benefits under social security programme of
any country. After obtaining COC, the employee is exempted from contributing to
the social security systems of the foreign country with whom India has SSA,
hence he/she is not eligible to avail the benefits under the social security
programme of that country.

4.3 Who is an ‘excluded
employee’ under these provisions?

a) A detached IW contributing
to the social security programme of the home country and certified as such by a
Detachment Certificate for a specified period in terms of the bilateral SSA
signed between that country and India is an ‘excluded employee’, under relevant
provisions; or

b) An IW, who is contributing
to a social security programme of his country of origin, either as a citizen or
resident, with whom India has entered in to a bilateral comprehensive economic
agreement containing a clause on social security prior to 1^st
October, 2008, which specifically exempts natural persons of either country to
contribute to the social security fund of the host country (e.g. para 4 of
Article 9.3 of CECA between India and Singapore provides that “Natural
persons of either Party who are granted temporary entry into the territory of
the other Party shall not be required to make contributions to social security
funds in the host country).

4.4 Who all shall become
the members of the EPFS?

a) Every IW, other than an
‘excluded employee’- from 1^st October, 2008.

b) Every excluded employee,
on ceasing the status – from the date he ceases to be excluded employee.

4.5 Which category of establishments shall take cognizance of provisions
relating to IWs?

All such
establishments covered/coverable under the EPF Act (including those exempted
under section 17 of the Act) that employ any person falling under the category
of ‘International Worker’ shall take cognisance of relevant provisions.

4.6 Whether PF rules will
apply to an employee if his salary is paid outside India?

Yes, the provisions
will apply irrespective of where the salary is paid. The PF contributions are
liable to be paid on wages, DA, and Retaining Allowance, if any, payable to the
employee. Hence, if salary is payable by establishment in India contribution
shall be payable in India and other rules will also apply accordingly.

4.7 Whether PF will be
payable only on the part of salary paid in India in case of split payroll?

In case of split payroll
the contribution shall be paid on the total salary earned by the employee in
the establishment covered in India.

4.8 ‘Monthly Pay’ for
calculating contributions to be paid under the EPF Act?

The contribution
shall be calculated on the basis of monthly pay containing the following
components actually drawn during the whole month whether paid on daily, weekly,
fortnightly or monthly basis: • Basic wages • Dearness allowance (all cash
payments by whatever name called paid to an employee on account of a rise in
the cost of living) • Retaining allowance • Cash value of any food concession.

4.9 What portion of salary
on which PF would be payable in case an individual has multiple country
responsibilities and spends part of his time outside India?

Contribution is
payable on the total salary payable on account of the employment of the
employee employed for wages by an establishment covered in India even for
responsibility outside India.

4.10 Is there a minimum
period of days of stay in India which the employee can work in India without
triggering PF compliance?

No minimum period is
prescribed. Every eligible International Worker has to be enrolled from the
first date of his employment in India.

4.11 Is there a cap on the
salary up to which the contribution has to be made by both the employer as well
as the employee?

No, there is no cap
on the salary on which contributions are payable by the employer as well as
employee.

4.12 Is there a cap on the
salary up to which the employer’s share of contribution has to be diverted to
EPS?

No, there is no cap
on the salary up to which the employer’s share of contribution has to be
diverted to EPS, 1995 and the same is payable on total salary of the employee.

4.13 Should the eligible
employees from any country other than the countries with whom India has entered
a social security agreement contribute as International Workers?

Yes, International
Workers from any country can be enrolled as members of EPF.

4.14 Regarding Indian
employees working abroad and contributing to the Social Security Scheme of that
country with whom India has a Social Security Agreement, are they coverable for
PF in India or treated as excluded employees?

No, only employees
working in establishments situated and covered in India may be covered in
India.

4.15 Regarding Indian
employees working abroad and contributing to the social security scheme of a
country with which India DOES NOT have a Social Security Agreement, are they
coverable for PF in India?

If an Indian employee
is employed in any covered establishment in India and sent abroad on posting,
he is liable to be a member in India as a domestic Indian employee, if
otherwise eligible. He is not an International Worker.

4.16 Whether foreign
nationals employed in India and being paid in foreign currency are coverable?

Yes, foreign
nationals drawing salary in any currency and in any manner are to be covered as
IWs.

4.17 Whether foreigners
employed directly by an Indian establishment are coverable?

Foreigners employed
directly by an Indian establishment would be coverable under the EPF Act as
IWs.

4.18 What is the criterion
for receiving the withdrawal benefit for services less than 10 years under EPS,
1995?

Only those employees
covered by a SSA will be eligible for withdrawal benefit under the EPS, 1995,
who have not rendered the eligible service (i.e. 10 years) even after including
the totalisation benefit, if any, as may be provided in the said agreement. In
all other cases of IWs not covered under SSA, withdrawal benefit under the EPS,
1995 will not be available.

4.19 How long can an Indian
employee retain the status of “International Worker”?

An Indian employee
attains the status of “International Worker” only when he becomes
eligible to avail benefits under the social security programme of other country
by virtue of the eligibility gained or going to gain, under the said agreement on
account of employment in a country with which India has signed SSA. He/she
shall remain in that status till the time he/she avails the benefits under EPF
Scheme. In other words, once an IW, always an IW.

4.20 Whether the
International Worker will earn interest even after cessation of service after
three years also in view of provisions of inoperative accounts?

Since the provisions
of inoperative accounts are not applicable in case of international workers,
the restriction of earning interest will not apply. The international worker
shall continue to earn interest upto the age of 58 years or otherwise becomes
eligible for withdrawal.

4.21 Under what circumstances
accumulations in the Fund are payable to an International Worker?

On retirement from
service in the establishment at any time after the attainment of 58 years. On
retirement on accounts of permanent and total incapacity for work due to bodily
or mental infirmity. A member suffering from tuberculosis or leprosy or cancer.

In respect of a
member covered under a social security agreement entered into between the
Government of India and any other county on such grounds as may be specified in
that agreement till the time he/she avails the benefits under a social security
programme covered under that SSA.

4.22 Under what condition the
contributions received in the PF account are payable along with interest to
International Worker?

The full amount
standing to the credit of a member’s account is payable if anyone of the
circumstances mentioned under amended Para 69 of the EPF Scheme, 1952 is
fulfilled, namely: i) on retirement from service in the establishment at any
time after 58 years of age; ii) on retirement on account of permanent and total
incapacity for work due to bodily or mental infirmity, duly certified by the
authorised medical officer; and iii) in accordance with the terms and
conditions provided in an SSA.

4.23 Is there a cap on the
salary up to which the contribution has to be made under the EDLI Scheme, 1976
by the employer?

Yes, the amended cap
on the salary up to which contribution has to be made under the EDLI Scheme,
1976 is Rs. 15,000.

5. SSA Provisions Explained – Based on India-Belgium SSA

5.1 How it is that double
coverage is avoided after an agreement?

When you are employed
either in India or Belgium and sent on a posting to the other contracting
Country, you and your employer would normally have to pay Social Security
Contributions/taxes to both countries for the same work. With the agreement in
place, this double coverage is eliminated and you are required to pay
Contributions/taxes to only one country, provided your posting in the other
country is for no more than 60 months.

5.2 How does it help
employees who work or have worked in both countries to augment their
eligibility for monthly retirement, disability or survivors benefits?

a. When you have Social
Security insurance periods in both India and Belgium, you may be eligible for
benefits from one or both countries.

b. Should you have enough
insurance periods under one country’s system, you will get a regular benefit
from that country.

c. If
you do not have enough insurance periods, the agreement may help you augment
your eligibility for a benefit by letting you add together your Social Security
insurance periods in both countries, only for the purpose of deciding your
eligibility.

d. However, each country will
pay a benefit based solely on your periods of insurance under its pension
system.

e. Although each country may
count your insurance periods in the other country, they are not actually
transferred from one country to the other.

f. Since your insurance
periods remain on your record in the country where you earned them, they can
also be used to qualify for benefits there.

5.3 What is a detachment
certificate?

A detachment certificate is otherwise a
“Certificate of coverage” issued by one country (indicating the details of
coverage/membership under its social security system) that serves as proof of
exemption from Social Security contributions/taxes on the same earnings in the
other country.

5.4 How to obtain a
Certificate of coverage?

To seek an exemption
from coverage under the Belgian system, the employee must be working in an
establishment covered or coverable under Employees’ Provident Fund Organisation
(EPFO), the Indian Liaison agency. Both the employer as well as the employee
must jointly request a certificate of coverage, in the prescribed format, from
the jurisdictional Regional Provident Fund Commissioner of EPFO.

5.5 I am holding a
Certificate of coverage. When does the date of exemption from the other
country’s social security system start?

The certificate of
coverage carries a provision for indicating the effective date of your
exemption (based on the information provided in your joint application) from
paying Social Security contributions/taxes in the other country. Normally, this
date shall be on or after the date you started working in the other country but
cannot be a date earlier than the date of effect of the Agreement.

5.6 Who are all eligible
for applying for a certificate of coverage?

There are 2
categories of employees eligible for applying for a Certificate of coverage.

a.Those already deputed on a
pre-determined short-term assignment and working in Belgium should apply for a Certificate
of coverage for the period from 1^st Sept. 2009 to the date of
completion of the deputation.

b.Those to be deputed on or
after 1^st Sept. 2009 should apply for a certificate of coverage for
the entire period of deputation in Belgium.

5.7 How to ascertain
whether an employee is coverable under the Indian or Belgian Social Security
system?

a.
An Indian national working in Belgium

Nature of employment

Coverage under

1. Sent on
short-term posting by an Indian employer for a period of less than 5 years

Indian system

2. Sent on
Long-term posting by an Indian employer for a period of more than 5 years

Belgian system

3. On local
employment by an Indian employer directly in Belgium

Belgian system

4. On local
employment by a Non-Indian employer directly in Belgium

Belgian system

b. A Belgium
national working in India

Nature of employment

Coverage under

1. Sent
on short-term posting by a Belgian employer
for a period of less than 5 years

Belgian system

2. Sent on
Long-term posting by a Belgian employer for a period of more than 5 years

Indian system

3. On local
employment by a Belgian employer directly in India

Indian system

4. On local
employment by a Non- Belgian employer directly in India

Indian system

5.8 What benefits are due
to an employee covered under the Indian system administered by EPFO?

S. No.

Benefit

Nature

To whom payable

Provident fund benefit (EPF

A lump sum cash benefit that gets
accrued in a member’s account by way of the contributions remitted and the
interest earned thereon.

1. Member: on leaving
employment on superannuation or disability.

2. Survivors, if the
member is not alive.

Pension benefit (EPS)

A Monthly cash benefit paid into the
credit of the beneficiary’s bank account.

1. Member: on leaving
employment on superannuation or disability. Or

2. Widow/widower and
the eligible children: if the member is not alive. Or

3. Nominee/Parents: if
the member dies without leaving any family.

Insurance benefit (EDLI)

A lump sum cash benefit.

1. To the survivors on
death of the member.

2. The death should
have occurred during employment.

5.9 Whom does the agreement
help?

The agreement helps the employee,
her/his family and the employer.

5.10 How does the agreement help
the employee?

The
agreement helps at 3 stages.

a) During the period while the employee is
working;

b) At the time of claiming the benefits and

c) At the time of receiving the benefits.

While working

a. If both the Indian and Belgian Social Security
systems cover an employee’s work, the employer along with the employee would
normally have to pay Social Security contributions to both countries for the
same work. The agreement eliminates this double coverage so that contributions
are paid to only one system.

b.Under the agreement, an eligible Belgium
national employed in India will be covered by India, and that employee and the
employer will pay Social Security contributions only to India. If an Indian
national is employed in Belgium, she/he will be covered by Belgium, and that
employee and the employer shall pay Social Security contributions only to
Belgium.

c.On the other hand, if an employer sends an
employee from one country to work for that employer in the other country for
five years or less, that employee will continue to be covered by her/his home
country and that she/he will be exempt from coverage in the host country. For
example, if an Indian employer sends an employee to work for that employer in
Belgium for no more than five years, the employer and the employee will
continue to pay only Indian Social Security contributions and will not have to
pay in Belgium.

When claiming the benefits

a. An employee may have contributed to the Social
Security systems in both India and Belgium but not have enough insurance
periods to be eligible for benefits in one country or the other. The agreement
makes it easier to qualify for benefits by allowing totalisation of such Social
Security contributory periods in both countries.

b. If an employee has Social Security insurance
periods in both India and Belgium, she/he may be eligible for benefits from one
or both countries. If she/he meets all the basic requirements under one
country’s system, she/he will get a regular benefit from that country. If she/he
does not meet the basic requirements, the agreement may help her/him qualify
for a benefit by allowing totalisation of insurance periods in both the
countries.

c. If she/he does not qualify for regular
benefits, she/he may be able to qualify for a partial benefit from India,
against the contributions made to India, based on totalisation of both Indian
and Belgian insurance periods.

d. Similarly, she/he may be entitled for a partial
Belgian benefit against the contributions made to Belgium, based on totalisation
of both Belgian and Indian insurance periods.

At the time of receiving the benefits

The benefits under Indian social
security system is not payable outside India. An employee from Belgium was at a
loss being not able to get the due benefits on her/his relocation outside
India. Now, the agreement provides for making payment of benefits to the member
irrespective of whether she/he lives in India or Belgium or a third country.

5.11 Can you tell me an example how the employees
are benefited under the Agreement?

A member who worked in India and
contributed to EPS, 1995 for 7 years is now living in Belgium after
contributing under the Belgian system for 20 years. He is more than 58 years
old.

Entitlement

a. Without the Agreement:

The member has less than the 10 years of
pensionable service required to qualify for member’s pension under EPS, 1995
and hence is not entitled to receive any pension benefit.

b. With the Agreement

– Eligibility to Pension under EPS 1995 can be
claimed by totalizing the insurance periods spent under the Indian system (7
years) with the Belgian system (20 years).

– Since the total insurance period will work out
to 27 years (7+20), which is more than the required minimum eligible service of
10 years, the member becomes eligible to get pension under EPS, 1995.

– However, this totalised period shall be
considered for deciding the eligibility only and hence, the actual pension will
be sanctioned taking into account the period spent under the EPS, 1995 (7
years) as the pensionable service.

– Such a pension is payable to the member’s bank
account either in Belgium or in India.

7. Conclusion

India’s move to require IWs to
contribute to the Indian social security system has encouraged many countries
to negotiate and execute SSAs with India. The SSAs significantly benefit Indian
workers employed abroad, especially those on short-term contracts.

In cases where employees are suspended
but their employment is not terminated, in the home country, it is difficult to
ascertain whether the same would trigger provisions of EPF Act and the SSAs. In
some cases, it is difficult to ascertain whether the relationship is in the
nature of employment or assignment and hence whether provisions of EPF Act and
the SSAs would be applicable.

Application and interpretation of SSAs
and the social security law in India with respect to expatriates is still
evolving. There are open questions when it comes to secondment and deputation
arrangements, especially in light of possible tax implications.

It is advisable that readers should
carefully examine the provisions of the SSAs before providing any structuring
and other guidance relating to mobility of IWs. _

shailesh.kwebmaker

HOME OFFICE AS PE

Background

Permanent Establishment (PE) confers taxation right
to host country to tax business profits. Once PE is constituted, business
profits are taxable at rate applicable to non-resident. Most common is the
creation of fixed place PE, Agency PE, Service PE, rules of which are designed
to cater to different forms of business. Increasingly, transactions entered
into by non-residents are scrutinised from PE perspective. Often, a foreign
enterprise appoints employees/agents in India to conduct its business. Such employees
use their home as office to work for foreign enterprise. Recently, the Chennai
Tribunal in case of Carpi Tech SA (TS-587-ITAT-ITAT-2016) held that residence
cum office of Indian director creates permanent establishment in India for
activities carried out in India for short period of time. This article proposes
to analyse some of the nuances of the decision.

Facts of the case:

– The Taxpayer, a company resident in
Switzerland, undertook Geo Membrane waterproofing project for NHPC in India
(the NHPC project). The NHPC project lasted for less than 40 days.

– Mr. V. Subramanian (Mr. V) is one of the
directors of the Taxpayer since its incorporation. He was designated as project
representative and/or project coordinator of the Taxpayer in India. He held a
Power of Attorney to undertake all activities on behalf of the Taxpayer.

– I Co was engaged in the same business as the
Taxpayer. Further, I Co was also given a Power of Attorney to represent the
Taxpayer in its projects in India. Additionally, Mr. V is the Managing Director
of I Co.

– Mr. V’s residential address is also used as
office address of I Co. Further, the same address is also used as communication
address by the Taxpayer in India for all its official purposes.

– The Taxpayer was of the view that in the
absence of a PE under the India – Swiss DTAA (‘DTAA’), its income from NHPC
project was not taxable in India. Hence, it disclosed NIL income in its tax
return for the tax year under consideration.

The Tax Authority, based on the directions received
by the Dispute Resolution Panel (DRP) in India, held that the Taxpayer created
a PE in India in terms of Article 5 of the DTAA as below:

– Fixed place PE at the residential-cum-office
address of Mr. V/ I Co

– Agency PE due to functions performed by Mr. V
/ I Co on behalf of the Taxpayer

The Taxpayer filed an appeal before the Chennai
Tribunal against the DRP order.

Issue before the Tribunal

Whether income of the Taxpayer from the NHPC
project was taxable in India under provisions of the DTAA?

Key arguments of the Taxpayer

– Duration of the NHPC project was very short
(40 days). Such duration also does not meet six months threshold to create a PE
in India. Taxpayer’s earlier projects in India were undertaken three years back
and such previous projects may not be relevant for examining PE in the current
tax year.

– Type of activities undertaken in India by Mr.
V on behalf of the Taxpayer (i.e. design, manufacture, supply and installation
of exposed PVC Geo composite Membrane) fell under installation PE provisions of
the DTAA. However, the threshold of six months is not fulfilled to create a PE.

– Mr. V’s residential-cum-office address is
merely a mailing address. Mere existence of books of account and bank account
at Mr. V’s residence-cum-office cannot either conclusively or inferentially
point to emergence of a fixed PE.

– Mr. V is an independent
agent of the Taxpayer. He is representing other unrelated companies also in
India in the ordinary course of his business and is not exclusively working for
the Taxpayer. The POA provided to Mr. V was a specific one and it did not
provide any continuous or general authority to Mr. V to act on behalf of the
Taxpayer. Hence, it does not create an Agency PE also.

Tribunal’s ruling

Fixed
PE

– Residence-cum-office premises of Mr. V
created a fixed PE of the Taxpayer, due to the following reasons:

• Business of the Taxpayer is conducted from
the address of Mr. V.

• All correspondences related to participation
in bids, correspondence with customers, signing of contracts, execution of the
project and closure of the project etc. were initiated or routed through
the same address.

– Authority of Advance Rulings (AAR) in the
case of Sutron Corporation (268 ITR 156) supports that residence of country manager
can create a fixed PE if the same was used as an office address by taxpayer.

– Once Fixed PE test is satisfied, there is no
need to evaluate Construction PE clause under the special inclusion list.

– In any case, services rendered by the
Taxpayer were more in the nature of repair and supply of material rather than
building site, construction, installation or assembly project to fall under the
Construction PE provisions. Hence, the 182 days threshold of Construction PE
was not relevant.

– I Co also created a PE of the Taxpayer for
the following reasons:

• Activities of I Co and the Taxpayer are
interlinked such that the role played by the director as an agent of the
Taxpayer and I Co (which rendered similar services) cannot be easily separated.
Further, I Co participates in the economic activities of the Taxpayer.

• I Co and the Taxpayer were carrying out
identical nature of work in India. Their names and letter heads were also
similar.

• I Co was the face of the Taxpayer in India.
I Co held POA and was the authorised representative of the Taxpayer for the
NHPC project.

• I Co incurred all expenses in India to
execute the NHPC project which were later reimbursed by the Taxpayer. I Co
appointed vendors to render services locally and made payments to them.

Agency PE

– Mr. V was held to be acting as a dependent
agent of Taxpayer, based on the following:

• Mr. V was holding a POA on behalf of the
Taxpayer and was also the project coordinator/representative for NHPC project.

• The Taxpayer was relying on the skills and
knowledge of Mr. V. His role was critical to all the aspect of the contract
through the stage of signing to its execution.

• Mentioning Mr. V’s address on the website as
well as letterheads of the Taxpayer were indicating the fact that Mr. V was the
face of the Taxpayer in India and was representing the Taxpayer in all
practical matters.

• No evidence was provided to prove that Mr. V
was an independent agent. On the other hand, he was acting exclusively or
almost exclusively for the Taxpayer. Hence, to that an extent, the same is not
in furtherance of his ordinary course of business.

– The role of Mr. V for the Taxpayer and I Co
was such that it cannot be separated. There existed a unison of interest to a
great extent, while as an independent agent there would be required an
objectivity in execution of the tasks of the non-resident company.

– Activities performed by I Co and Mr. V cannot
be said to be of preparatory or auxiliary character to qualify for PE
exclusion.

– I Co represented by Mr. V or Mr. V himself
created a PE of the Taxpayer in India.

Analysis of The Tribunal decision:

In summary, the Tribunal held that Mr V. as also I Co
constituted PE in India based on following reasoning:

– Residence-cum-office premises of Mr. V
created a fixed PE of the Taxpayer on account of its usage for business purpose
of Taxpayer.

– Fixed place PE can be constituted even if its
activities in India are for 40 days.

– Once fixed place PE is constituted there is
no need to analyse Construction PE. In any case, repair and supply of material
does not fit within Construction PE.

– I Co created PE of Taxpayer on account of
similarity of activities, identical nature of work and reimbursement of all
expenditure incurred in India by I Co.

– Mr V. created agency PE as it held POA on
behalf of Taxpayer; Taxpayer relied upon the skills of Mr V; Mr V worked
exclusively or almost exclusively for Taxpayer.

Aforesaid aspects have
been analysed in the ensuing paragraphs-

Place of disposal test:

– Indian jurisprudence as also OECD Commentary
has considered satisfaction of disposal test as pre-requisite for constitution
of fixed place PE. Disposal test postulates that foreign enterprise has right
or control over premises which constitutes fixed place PE. In this case,
Tribunal has not specifically provided any positive observation on satisfaction
of disposal test. Perhaps Tribunal has presumed satisfaction of disposal test
given the dependence of Taxpayer on Mr V. and use of premises of Mr V for official
purpose/communication.

– OECD’s revised proposal concerning the
interpretation & application of Article 5 (Permanent Establishment) of the
OECD Model Tax Convention (2011) stated that home office can constitute PE in
limited situations. OECD revised proposal stated that home office of employee
should not lead to an automatic conclusion of PE and would be dependent on
facts of each case. It is further stated that where a home office is used on a
regular and continuous basis for carrying on business activities for an
enterprise and it is clear from the facts and circumstances that the enterprise
has required the individual to use that location to carry on the enterprise’s
business (e.g. by not providing an office to an employee in circumstances where
the nature of the employment clearly requires an office), the home office may
be considered to be at the disposal of the enterprise.

– Incidentally, disposal test is also not dealt
with by AAR in Sutron Corporation (supra) which is relied upon by
Tribunal.

Duration
Test:

– A fixed place PE can exists only if place of
business has certain degree of permanence. There is no standard time threshold
provided by treaty and thus duration test involves subjectivity. Much depends
upon individual facts and nature of operations of Taxpayer.

– Conventionally, it is understood that six
months’ time period should be satisfied for constitution of PE. However, there
are special situations where nature of a business of a foreign enterprise
requires it to be carried on only for a short period of time, then in such
cases a shorter period will suffice duration test.

– The Tribunal relied upon decision of Fugro (supra)
wherein PE was constituted for 91 days of work carried on in India. As against
that there are other precedents which has held that no PE is constituted in
India in following situations:

• a foreign enterprise in State S for 27 days
for one project and 68 days for another project [ABC, In re (1999) 237
ITR 798 (AAR)]

• a vessel in India for 2.5 months [DCIT
vs. Subsea Offshore Ltd, (1998) 66 ITD 296 (Mum) ] or a sailing ship
crossing over to Indian waters for 10 days [Essar Oil Ltd vs. DCIT, (2006)
102 TTJ 614 (Mum)]

• A foreign enterprise engaged in dredging and
which had its project office in India for 153 days [Van Oord Atlanta B. V.
vs. ADIT, (2007) 112 TTJ 229 (Kol)]

• The performance of work under an agreement
had been accomplished by the occasional visits of the applicant’s personnel for
site visits and meetings. The nature of service was such that most of the
services were rendered outside India. The aggregate period spent in India by
the personnel was 24 days in the first year and 70 days in the next year. Two
or three employees of the applicant stayed in India for about a month [Worley
Parsons Services Pty. Ltd, In re (2009) 312 ITR 317 (AAR)]

• The assessee was engaged in the business of
telecasting cricket events. Its employees and representatives (TV crew,
programmer and engineers, other technical personnel, etc.) cumulatively stayed
in India for less than 90 days [Nimbus Sport International Pte. Ltd. vs.
DDIT, (2012) 145 TTJ 186 (Del)]

• The assessee was engaged in the activity of
supervision of plant and machinery for steel and allied plants in India. For
one project, it deputed foreign technicians to India who stayed in India for
220 days [GFA Anlagenbau Gmbh vs. DDIT, TS-383-ITAT-2014-HYD]

Interplay between fixed place PE and Construction
PE

– The Tribunal held that once fixed place PE is
constituted there is no need to analyse Construction PE. In other words, the
Tribunal held that fixed place PE overrides Construction PE.

– Aforesaid observations are not in sync with
following illustrative decisions of the Tribunal and AAR which has held that
Article 5(3) overrides article 5(1). In other words, there cannot be fixed
place PE unless time threshold specified under Construction PE is satisfied.

• GIL Mauritius Holdings Ltd. vs. ACIT
(2012) 143 TTJ 103 (Del)

• ADIT vs. Valentine Maritime (Mauritius)
Ltd. (2010) 3 taxmann.com 92 (Mum)

• Sumitomo Corporation vs. DCIT (2007) 110
TTJ 302 (Del)

• DCIT vs. Hyundai Heavy Industries Ltd.
(2010) 128 TTJ 4 (Del)

– The Tribunal additionally held that repair
and supply of material does not fall within the purview of installation,
construction or assembly project. As against that OECD and UN Commentary on
Article 5 at para 17 observed that renovation involving more than maintenance
or redecoration would fall within Construction PE.

Agency PE

– The Tribunal held that Taxpayer had Agency PE
in India on account of factors like Taxpayer reliance on Mr V’ skills, granting
of POA to Mr V and exclusive service to Taxpayer.

– Mr V was dependent on the Taxpayer and he was
taxpayer’s Indian representative.

– Whilst the aforesaid may be sufficient for
creation of dependent agent but for creation of dependent agent PE following
additional condition needs to be satisfied:

• agent has and habitually
exercises in that State, an authority to negotiate and enter into
contracts for or on behalf of the enterprise.

– The Tribunal has not dealt explicitly with
satisfaction of aforesaid conditions of authority to enter contracts by Mr V or
by ICo.

Conclusion

Decision of the Tribunal is likely to create
litigation for foreign enterprise which has a minuscule presence in India and
is dependent upon Indian agent/employee for Indian business. The Tribunal has
considered overall presence of Taxpayer in India as also surrounding circumstances
like commonality of directors; active role paid by Mr V; holding of POA;
exclusive nature of arrangement with Mr V; similarity in names of Indian
company; reimbursement of all expenditure of Indian company by Taxpayer to
reach to the conclusion that Taxpayer has PE in India.

Similar was the decision of Aramex International
Logistics Pvt Ltd (2012) 22 taxmann.com 74 (AAR) wherein AAR held that
dependence of group company in conducting business in India creates PE. In this
case, Taxpayer a Singaporean Company engaged in business of door-to-door
express shipments by air and land entered into an agreement with its Indian
subsidiary (ICO) to look after movement of packages within India, both inbound
and outbound. AAR held that where a subsidiary is created for purpose of
attending business of a group in a particular country, that subsidiary must be
taken to be a permanent establishment of that group in that particular country.

It may be noted that none of the decisions have
dealt with base conditions which are the pre-requisites for constitution of PE.
It will be interesting to see how decisions will be dealt with by higher forums
where satisfaction of fundamental conditions of PE will be tested. _

shailesh.kwebmaker

INTER STATE SALE VIS-À-VIS INTRA STATE SALE

Introduction

Whether transaction is Inter State
or Intra State sale is always a very delicate issue. The nature of transaction
depends upon facts of case. By now, there are number of precedents laying down
tests for deciding nature of inter-state sale. However, it still cannot be said
that it is a settled law.

Section 3(a) of the Central Sales
Tax Act (CST Act) lays down the principles to define inter-state sale.

Although, section 3(b) also
describes certain transaction to be inter-state sale but the same is not
discussed here.

Section 3(a) reads as under:

“S.3. When is a sale or purchase of
goods said to take place in the course of inter-State trade of commerce.- A
sale or purchase of goods shall be deemed to take place in the course of
inter-State trade or commerce if the sale or purchase-

a. occasions the movement of goods from one
State to another; or ……………..…”

Thus, normal understanding is that
the sale which is linked with inter-state movement of goods is inter-state
sale. And it is also expected that same goods are moved, which are subject
matter of sale.

If the goods sold and goods
actually moving are different then it is difficult to say that there is
inter-state sale in the hands of seller. However, we find contrary judgments on
the issue as discussed here under.

Inter State sale under section 3(a) –
Scenario I

State of Tamil Nadu vs. Sun Paper
Mill Ltd. & Ors. (23 VST 191)(Mad)

The facts in this case, in words of
Hon. High Court are as under:

“The assessee – first respondent is
a public limited company, which is engaged in the business of manufacture and
sale of papers. They are dealers in newsprint and assessed on the file of the
Deputy Commercial Tax Officer, Ambasamudram, in TNGST 802529/93-94. The
relevant assessment year is 1993-1994. The assessee has effected sales of
newsprint to the tune of Rs. 25,07,671 during the assessment year to Tvl. Kerala
Sabdam and Tvl. Kollam Muthari, Kollam and claimed those sales as inter-state
sales. But the assessing officer rejected their claim on the ground that the
newsprints sold to them were not moved to another State. They were moved only
to Sivakasi and later the said newsprints were converted into news magazine in
Pioneer Press (P) Limited, Sivakasi and then the same were moved to Kerala.
Therefore, the assessing officer assessed the said turnover under the Tamil
Nadu General Sales Tax Act, 1959. Aggrieved by that order, the assessee filed
an appeal before the Appellate Assistant Commissioner (CT), Tirunelveli in CST
AP No. 345 of 1995. The Commissioner allowed the appeal on the ground that the
movement of goods from the State of Tamil Nadu to Kerala would certainly form
an inter-State transaction. Later, the Joint Commissioner (CT)(SMR) suo motu
revised the order of the Appellate Assistant Commissioner and treated the
transaction as local sales.

Assessee pursued the matter further
and ultimately came before Hon. Madras High Court by way of a Writ Petition.
After hearing parties, Hon. High Court ruled as under:

“After taking note of the
principles enunciated in the above Supreme Court judgments, we have to find out
whether there is movement of goods. The present case falls u/s. 3(a) of the
Act. There are two ingredients in the section, i.e., (i) it must be a sale of
goods; (ii) the sale occasions the movement of goods from one State to another.
In respect of sale, there is no dispute. We have to see here whether there is
sale occasioning the movement of goods. In the case on hand, the seller and the
buyer contemplated movement of goods from Tamil Nadu to Kerala. At the
instruction of the buyer, the goods were dispatched to Sivakasi, wherein
conversion took place and after conversion, the goods were moved to Kerala.
Because of conversion, it cannot be held that there is no movement of goods. It
is only for the purpose of section 5(3) of the Act that any goods undergoing
commercial change is relevant. It is not for the purpose of determining the
inter-state sale u/s. 3(a) of the Act.

Mere stoppage at Sivakasi and
conversion would not alter the character of the transaction. The stoppage and
conversion occurred only at the instance of the buyer at Kerala. There is no
dispute in respect of the contract. The goods were moved pursuant to the
contract. The goods dispatched to Sivakasi were not meant to be sold in the
open market. There is no restriction that the goods should be moved intact. It
is not for the Revenue to suggest that the goods must reach as it is. The
authorities, who are acting as guardian of the Revenue, must examine and
consider the transaction from the standpoint of a businessman. The yardstick is
that of a prudent businessman. Otherwise, first, the goods have to go to Kerala
and then betransported back to Sivakasi for conversion and once again after
conversion, it must go to Kerala. To avoid multiplicity of transaction, the
seller sent the goods to Sivakasi at the instance of the buyer and after conversion,
the same were sent to Kerala. There is no material available to show that the
goods are meant to be in Sivakasi. It is not the contention of the petitioner
that the goods were not moved from Tamil Nadu to Kerala. Stoppage and
conversion do not make the transaction a local sale. After applying the
principles enunciated in the judgments cited supra and also taking into
consideration the facts involved, we are of the view that the transaction
involved is only an inter-State sale.”

Inter State sale under section 3(a) –
Scenario II

Tamil Nadu Petro Products Ltd. vs.
Assistant Commissioner (CT), Fast Track Assessment Circle II, Chennai and
another’s (95 VST 118)(Mad)

The facts in this case, as narrated
by the High Court are as follows:

“2. The controversy which led to
the petitioner seeking for the clarification arose under the following
circumstances. HLL are engaged in the manufacture of detergents and they are
registered dealers on the file of the Assistant Commissioner (CT), Fast Track
Assessment Circle-II, Greams Road, Chennai, under the provisions of the TNGST
Act and the Central Sales Tax Act, 1956, (CST Act). HLL placed purchase order
dated 15.06.2000, for sale of LAB and for delivery of the same at M/s. Ultra
Marine and Pigments Limited, Ranipet, (Job Worker). The said purchase order was
raised by HLL from their Mangalore office. The job worker is required to
manufacture Acid Slurry from LAB and such product is stock transferred to the
factory of HLL at Mangalore. Therefore, the question arose as to whether the
petitioner can avail the concessional rate of tax on production of form-XVII
declaration.”

The following argument on behalf of
Revenue further clarifies the controversy:

“5. Mr. Manokaran Sundaram, learned
Additional Government Pleader appearing for the respondents submitted that the
petitioner entered into a contract with HLL, Mangalore for supply of LAB; a raw
material for manufacture of detergent and as per the agreement, it had to be
supplied and delivered to their job worker at Ranipet and later after
conversion of raw material as Acid Slurry, the same would be transported to
HLL, Mangalore for further processing and manufacturing as detergents.
Referring to the purchase order dated 15.06.2000, it is submitted that it
clearly shows the dealer at Mangalore had placed the purchase order and in
pursuance to the same, the petitioner had effected sale to the dealer at
Mangalore and the transaction is clearly an interstate sale and the only
difference being delivery has been made to the job worker at Ranipet and after
completion, for onward transmission to the purchaser at Mangalore.”

After examining controversy, the
Hon. High Court held as under:

“12. Undoubtedly, the products sold
by the petitioner was not the product which was moved out of the Ranipet
factory on stock transfer to HLL Mangalore. Thus, the factory at Ranipet had
manufactured a commercially distinct product than what was sold by the
petitioner to HLL. In other words, the products sold by the petitioner was LAB,
the product which was manufactured from LAB was Acid Slurry. In my view, it
would be unnecessary to test the present transaction based on whether the
product manufacture within the State was an intermediary product for
manufacture of another product outside the state.

14. If the case on hand is tested
on the anvil of the decision of the Hon’ble Supreme Court, it is not in dispute
that the contract of sale with the petitioner stood completed within the State
of Tamil Nadu upon delivery of the goods at Ranipet. The movement of the goods
after undergoing a process of manufacture and after being converted into a
commercially different product is an independent transaction and the
transaction could not be treated as an interstate element.”

Thus, the transaction of sale by
seller to buyer (HLL) is held to be intra state sale.

Conclusion

It can be seen that on similar
facts, the same High Court has given different rulings. Thus, the situation
becomes very uncertain. The dealer community remains in great confusion about
the correct tax to be collected from buyer. It is felt that the latert judgment
specifies correct scope of section 3(a) of CST Act for inter-state sale. The
goods sold and moved to other State should be same goods, else it will create
an unexpected situation.

It is expected that the controversy
will get settled by the later judgment. _

shailesh.kwebmaker

ONUS OF LIABILITY TO PAY SERVICE TAX

Preliminary

Service providers often face
practical difficulties (due to financial constraints, non-recoveries from
clients etc.) in paying service tax to the Government in time resulting in
interest and other penal consequences. In such situations, issues arise as to
whether service providers can direct service tax authorities to recover tax
dues from their debtors. This aspect and related issues are discussed hereafter
with the help of a Delhi High Court ruling, special leave petition against
which has been dismissed by the Supreme Court.

Relevant Extracts from the Finance
Act, 1994 as amended (“Act”)

– Section 68 of the Act (payment of service tax)

(1) Every person providing
taxable service tax to any person shall pay service tax at the rate specified
in section 66B in such manner and within such period as may be prescribed.

(2) Notwithstanding anything
contained in s/s. (1), in respect of such taxable services as may be notified
by the Central Government in the Official Gazette, the service tax thereon
shall be paid by such person and in such manner as may be prescribed at the
rate specified in section 66B and all the provisions of this Chapter shall
apply to such person as if he is the person liable for paying the service tax
in relation to such service;

Provided that the Central
Government may notify the service and the extent of service tax which shall be
payable by such person and the provisions of this Chapter shall apply to such
person to the extent so specified and the remaining part of the service tax
shall be paid by the service provider.

– Section 87 of the Act (recovery of any amount due to Central
Government)

Where any amount payable by a
person to the credit of the Central Government under any of the provisions of
this Chapter or of the rules made thereunder is not paid, the Central Excise
Officer shall proceed to recover the amount by one or more of the modes
mentioned below:

(a) the Central Excise Officer
may deduct or may require any other Central Excise Officer or any officer of
customs to deduct the amount so payable from any money owing to such person
which may be under the control of the said Central Excise Officer or any
officer of customs;

(b) (i) the Central Excise Officer may, by notice in
writing, require any other person from whom money is due or may become due to
such person, or who holds or may subsequently hold money for or on account of
such person, to pay to the credit of the Central Government either forthwith
upon the money becoming due or being held or at or within the time specified in
the notice, not being before the money becomes due or is held, so much of the
money as is sufficient to pay the amount due from such person or the whole of
the money when it is equal to or less than that amount;

(ii) every person to whom
a notice is issued under this section shall be bound to comply with such
notice, and in particular, where any such notice is issued to a post office,
banking company or an insurer, it shall not be necessary to produce any pass
book, deposit receipt, policy or any other document for the purpose of any
entry, endorsement or the like being made before payment is made,
notwithstanding any rule, practice or requirement to the contrary;

(iii) in a case where the
person to whom a notice under this section is sent, fails to make the payment
in pursuance thereof to the Central Government, he shall be deemed to be an
assessee in default in respect of the amount specified in the notice and all
the consequences of this Chapter shall follow;

…………….

Delhi High Court Ruling in Delhi
Transport Corporation (DTC) vs. CST (2015) 51 GST 511 (DEL)
(2015-TIOL-961-HC-DEL-57

Facts in Brief

With the objective of augmenting
its revenue, DTC entered into contracts with seven agencies
(contractors/advertisers) providing space to such parties for display of
advertisements on bus queue shelters and time keeping booths. Two of the said
contracts contained similar stipulations including clause No 9 which reads as
under:

“It shall be
responsibility of the contractor/advertiser to pay direct to the authority and
MCD concerned the advertisement tax or any other taxes levy payable or imposed
by any authority and this amount will be in addition to the license fee quoted
above”

According to the Revenue, on the
basis of inputs received from its anti-evasion branch, DTC having engaged
itself in aforementioned contracts had failed to pay tax on services. Hence
show cause notices were issued by the revenue demanding service tax on receipts
by DTC on account of “sale of space or time for advertisement” along with
interest and penalty.

DTC submitted replies to the
effect that it is an autonomous body of government of NCT of Delhi created
under the Road Transport Act and had no intention to violate the provisions of
the taxing statutes. They further submitted that the obligation for
registration under the Service Tax Rules had escaped the notice of its accounts
department and chartered accountant/auditors and thus, the omission was neither
intentional nor deliberate. It was submitted that after the requirement had
come to its notice, DTC had taken requisite steps for registration. It further
stated that since it was obliged to provide transport services to the public at
large at subsidised rates, it was incurring losses and consequently depended on
grants from the government and for this reason it was moving the Central
Government to grant exemption. DTC further stated that in terms of the
contractual arrangement, the liability towards statutory taxes, including
service tax, was to be borne by the contractors engaged by it and that all such
contractors, except the two mentioned above, were paying the service tax
chargeable in their respect pursuant to supplementary bills raised from time to
time and further that all such remittances received were duly deposited with
the service tax department.

DTC resisted the show cause
notices also on the ground that the two contractors had taken a stand contradictory to the
contractual terms in such regard, failing to abide by their obligation in terms
of clause 9 (as quoted earlier), in spite of directions of this Court on the
petitions u/s. 9 of Arbitration and Conciliation Act, 1996. DTC informed the
Revenue that it intended to institute contempt/execution proceedings against
the said contractors for failure to deposit the service tax in spite of
contractual obligation and the directions of the High Court. It added that the
amount of service tax to the extent realized from the contractors was deposited
with the service tax department.

The show cause notices were
confirmed upon adjudication. In reaching at conclusions, the adjudicating
authority repelled the contentions of DTC objecting to the assessment for the
extended period of five years holding that the assessee contravened the
relevant statutory provisions thereby indulging in “suppression of
material facts”. In addition to penalty u/s. 77 of the Act, penalty was
imposed u/s. 78 of the Act, declining benefit of section 80, referring in this
context to the facts that the assessee had neither applied for service tax
registration nor discharged its service tax liability even though it had been
made aware of the obligations.

Appeal before CESTAT

The order of Commissioner
(Adjudication), service tax was challenged before CESTAT. As noted by the
CESTAT in (para 5 of) the impugned order, DTC did not assail the conclusion of
the adjudicating authority as to the classification of the service nor
impeached the quantum of service tax that was confirmed. Its contentions were
restricted to the following (para 11) :

“5. … that since under
agreements with advertisers, the reciprocal obligation of the parties
covenanted that the recipient of the service would be liable for tax, the
appellant was under a bona fide belief that the liability to remit service tax
stood transferred to the recipient qua the agreements; that this was a bona
fide belief which caused the failure to file returns and remit service tax.
Therefore, the extended period of limitation invoked while issuing the first
show cause notice dated 04/01/2008 is unjustified and for the same reasons,
penalty u/s. 78 of the Act should not have been imposed, by exercising
discretion u/s. 80 of the Act.”

The appellant relied on the
Supreme Court Ruling in Rashtriya Ispat Nigam Limited vs. Dewan Chand Ram
Saran (2012) 35 STT 664 (SC) to urge that having entered into the contracts
in the nature mentioned above, it was a legitimate expectation that the service
tax liability would be borne by the contractors/advertisers and thus, there was
no justification for the appellant being held in default or burdened with the
penalty u/s. 78 of the Act. It was argued that in the wake of orders of this
Court on the applications of the two contractors u/s. 9 of Arbitration and Conciliation
Act, 1996, fastening the liability of service tax (in the event of it being
imposed) on such contractors, the revenue ought not to insist upon such payment
by DTC. The CESTAT, however, held that such considerations would not transfer
the substantive and legislatively mandated liability to service tax from the
appellant (the service provider) to the advertisers (the service recipients).

The CESTAT rejected the claim of
DTC as to “bona fide belief” by observing in para 13 as under:

“6. A bona fide belief
is a belief entertained by a reasonable person. The appellant is a public
authority and an instrumentality of the State and should have taken care to ascertain whether it was liable to tax in
terms of the provisions of the Act. There is neither alleged, asserted nor
established that there is any ambiguity in the provisions of the Act, which
might justify a belief that the appellant/service provider, was not liable to
service tax. It is axiomatic that no person can harbour a “bona fide
belief” that a legislated liability could be excluded or transferred by a
contract. The appellant was clearly and exclusively liable to service tax
on rendition of the taxable service of “sale of space or time for
advertisement”. This liability involved the non-derogable obligation to
obtain registration, file periodical ST-3 returns and remit service tax on the
consideration received during the period covered by such ST-3 returns. These
were the core and essential obligations the appellant should have complied
with. We therefore find no basis for the claim that the appellant harboured a
bona fide belief.”

Accordingly, the appeals of DTC
were dismissed by CESTAT.

OBSERVATIONS AND FINDINGS OF
THE DELHI HIGH COURT

– There is no dispute that services provided are taxable within the
meaning of section 65 (105) (zzzn) and that the appellant is liable to pay
service tax thereupon. We, however, do not agree with the views of CESTAT that
the service tax liability could not have been transferred by way of a contract.
The reliance of DTC on the ruling in Rashtriya Ispat case (supra) on
this score was correct and it appears that the same has not been properly
appreciated by CESTAT. Noticeably, the claim of the assessee in that case was
also founded on contractual terms similar to the one relied upon by the
appellant here. [Para 17]

– The service tax liability in Rashtriya Ispat case arose out of
contract given out for transportation of goods. The contractor engaged had
undertaken to “bear and pay all taxes, duties and other liabilities in
connection with discharge of his obligation”. The contractor had invoked
the arbitration clause for raising a dispute as to its liability to pay service
tax. The claim petition was dismissed by the arbitrator which award was
challenged by a petition u/s. 34 of Arbitration and Conciliation Act before a
Single Judge of Bombay High Court. The learned Judge held that insofar as the
service liability is concerned, the appellant (Rashtriya Ispat which had given
the contract was the assessee and liable to tax. The appeal preferred against
the said order on the petition was dismissed by the division bench of the High
Court. [Para 18]

– Against the backdrop of the above-noted facts in civil appeal
carried to Supreme Court, it was observed
as under:-

“37. As far as the
submission of shifting of tax liability is concerned, as observed in para 9 of
Laghu Udyog Bharati vs. Union of India, (1999) 6 SCC 418, service tax is an
indirect tax and it is possible that it may be passed on. Therefore, an
assessee can certainly enter into a contract to shift its liability of service
tax.

……………

39. The provisions concerning service tax are relevant only as
between the appellant as an assessee under the statute and the tax authorities.
This statutory provision can be of no relevance to determine the rights and
liabilities between the appellant and the respondent as agreed in the contract
between two of them. There was nothing in law to prevent the appellant from
entering into an agreement with the respondent handling contractor that the
burden of any tax arising out of obligations of the respondent under the
contract would be borne by the respondent.” [Para 19]

– The above ruling of Supreme Court in the case of Rashtriya Ispat,
however, cannot detract from the fact that in terms of the statutory provisions
it is the appellant which is to discharge the liability towards the Revenue on
account of service tax. Undoubtedly, the service tax burden can be
transferred by contractual arrangement to the other party. But, on account of
such contractual arrangement, the assessee cannot ask the Revenue to recover
the tax dues from a third party or wait for discharge of the liability by the
assessee till it has recovered the amount from its contractors. [Para 20]

– The
directions of this Court on the two petitions u/s. 9 of Arbitration and
Conciliation Act (instituted by the two contractors) would only govern the
rights and obligations arising out of the contracts entered upon by DTC with
the contractors. It may be that in terms of the said orders, DTC would be in a
position to recover the amount of service tax paid by it to the Revenue
respecting the services in question. The
fastening of liability on such account by such order on the contractors is,
thus, a matter restricted to claims of the appellant against such parties. It
would have no bearing insofar as the claim of the Revenue against the appellant
for recovery of the tax dues is concerned. [para 21]

– We agree with the observations of CESTAT that the plea of
“bona fide belief” is devoid of substance. The appellant is a public
sector undertaking and should have been more vigilant in compliance with its
statutory obligations. It cannot take cover under the plea that contractors
engaged by it having agreed to bear the burden of taxation, there was no need
for any further action on its part. For purposes of the taxing statute, the
appellant is an assessee, and statutorily bound to not only get itself
registered but also submit the requisite returns as per the prescription of law
and rules framed thereunder. [Para 22]

For the foregoing reasons, it was
held that the imposition of service tax liability and the levy of interest
thereupon cannot be faulted. For the same reasons, the penalties imposed under
sections 76 and 77 of the Act, were upheld. However, penalty u/s. 78 of the
Act was dropped invoking provisions of
section 80 of the Act.

SLP before the Supreme Court

– SLP against the foresaid ruling of Delhi High Court ruling was
dismissed by the Supreme Court through a short order [Ref (2016) 55 GST 763
(SC)].

Recovery of service tax by the
service providers from the service recipient – Some judicial considerations.

– Since the commercial understanding is between the service provider
and service recipient, if service recipient does not pay taxes to the service
provider, the latter is entitled to file civil suit in terms of applicable
commercial laws and obtain appropriate orders. As far as service tax department
is concerned, it should, ordinarily deal only with person liable to pay service
tax, who is an ‘assessee’ under the Act. In this regard attention is drawn to a
Court ruling in Damodar Valley Corpn. vs. CCE&ST (2014) 41 taxmann.com
58 (JHARKHAND), wherein the High Court set aside a direction of the
department to the service recipient to pay Service tax to the service provider,
essentially because no opportunity of hearing was given by department to the
service recipient.

– In Bhagwati Security
Services vs. UOI [2013] 31 STR 537 (All), it was held that that, since
service tax is an indirect tax and is a statutory liability, even if agreement
between parties is silent as to levy of service tax, service providers may
bring suit before Courts to seek collection of service tax from the service
recipient, inasmuch as service providers are merely a collecting agency who
collect service tax from recipient and pay it to Government.

– As regards recovery of levy / increase in service tax, useful
reference can be made to the ruling in Satya Developers Pvt. Ltd. vs. Pearey
Lal Bhawan Association (2015) 39 STR 429 (DEL) and 39 STR J173 (SC). In
the said ruling in particular, it was held that, section 64A of the Sale of
Goods Act, 1930 is also applicable for service tax. However, in a contrary
view, it was held in Multi Engg & Scientic Corp. vs. Bihar State
Electricity Board (2015) 39 STR 414 (PAT) that liability to pay service tax
is on service provider and in absence of any agreement to the contrary,
reimbursement of service tax cannot be claimed from service recipient. Section
64A of the Sale of Goods Act, 1930 was held inapplicable to services.

Summation

In light of foregoing discussions,
it can be reasonably summed up as under :

– Under the service tax law service provider is liable to pay
service tax, excepting in cases notified in terms of section 68 (2) of the Act
read with Notification No. 30/2012 – ST dated 20/06/2012 (as amended), in which
case the persons liable to pay service tax shall be as prescribed in Rule 2(d)
of Service Tax Rules, 1994 (Rules).

– In terms of section 65B (12) of the Act, ‘assessee’ means a person
liable to pay tax and includes his agent. Hence, in appropriate cases, agents
of service providers / persons specified in Rule 2(d) of Rules could be liable
to pay service tax.

– Being an indirect tax, service tax can be recovered by the service
provider from the service receiver, subject to commercial understanding to the
contrary.

– Though service tax burden can be transferred by contractual
agreement by a service provider to the service receiver, such consideration would
not transfer the substantive and legislatively mandated liability to service
tax from a service provider to the service recipients. Further, service
providers cannot ordinarily ask the service tax department to recover tax dues
from a third party or wait for discharge of their liability till it has
recovered the amounts from their clients.

– In appropriate cases, service providers can in terms of applicable
commercial laws seek directions / orders from the Court as regards tax amount
due to them which is not paid by their clients.

– Section 87 of the Act which in particular empowers service tax
department to recover service tax from an assessee’s debtors can be usually
invoked in extreme cases where a service provider fails to pay service tax to
the government. _

shailesh.kwebmaker

Section 28, 41(1) – In a case where assessee has filed confirmation from creditors along with PAN number, amounts payable to creditors cannot be added to income merely on the ground that the assessee could not produce creditors

11. ITO vs. Mahesh N. Manani
ITAT Mumbai `B’ Bench
Before Shailendra Kumar Yadav (JM) and Rajesh Kumar (AM)
ITA No.: 389/Mum/2014
A.Y.: 2010-11. Date of Order: 4th August, 2016.
Counsel for revenue / assessee: Shivaji Ghode / None

FACTS
During the course of assessment proceedings, the AO noticed that sundry liabilities at the end of the year were shown at Rs. 90,00,563 as against the previous years amount of Rs. 19,69,537. He issued notice u/s. 133(6) of the Act, which were not returned back but there was no response received. Therefore, assessee was asked to produce the creditors with their relevant income-tax records for verification. However, the creditors did not come before the AO. The AO added this sum of Rs.90,00,563 to the total income of the assessee.

Aggrieved, the assessee filed an appeal to the CIT(A) where elaborate reasoning was given for assessee not being able to produce creditors. The assessee also filed confirmatory letters from all the 8 creditors which contained complete names, addresses and even income tax particulars of the creditors. The CIT(A) remanded the matter to the AO with a direction to make enquiries/ investigation as he thinks fit to ascertain the facts of the matter.

In the remand proceedings, the AO instead of making any enquiries asked the assessee to produce the creditors which the assessee could not do for the very reasons mentioned in the submissions filed before CIT(A). The CIT(A) observed that through the letter calling for remand report specifically directed the AO to make an enquiry, investigation as was necessary and thereafter submit a factual report, the AO did not do any enquiry at his end. The CIT(A) allowed the appeal and held that that the assessee on his part has primarily discharged his onus cast upon him to establish the credits in his books whereas AO except harping on the point that the assessee has failed to produce them along with records has not brought any material to establish that the liabilities were fictitious.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
The AO was not justified in rejecting the claim of the assessee mainly on the ground that assessee could not produce creditors. It is not in dispute that the assessee has filed confirmation from creditors along with PAN number. This view is fortified by the decision of Hon’ble Apex Court in the case CIT vs. Orissa Corporation (P.) Ltd. [159 ITR 78 (SC)]. In view of this, CIT(A) was justified in deleting the addition.

The Tribunal dismissed the appeal filed by the revenue.

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21. Business expenditure – Section 37 – A. Y. 2005-06- Capital or revenue expenditure – Assessee engaged in oil exploration – Expenses on dry dockings of rigs and vessels – is expenditure on maintenance of assets – deductible

CIT
vs. ONGC Ltd; 387 ITR 710 (Uttarakhand):

The assessee was engaged in oil exploration.
For the A. Y. 2005-06, the Assessing Officer disallowed expenditure on dry
docking of its rigs and vessels treating the same as capital expenditure. The
Tribunal allowed the assessee’s claim for deduction. The Tribunal found that
under the Merchant Shipping Act, every floating rig and vessel has to undergo a
compulsory survey at specified intervals in order to determine whether it is
seaworthy and can withstand the safety standards laid out. Under such survey,
the structural and mechanical fitness of a floating installation is tested. The
expenses on dry docking were on account of removing the old paint and
repainting the rigs and vessels, overhauling the propellers, thrusters, gears
and electric motors, repair and replacement/upgrading of the obsolete
equipment. Such expenses were, therefore, only for maintaining and preserving
the existing assets. It was deductible.

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

“The expenditure on dry docking is revenue expenditure and hence
deductible.”

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