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The dealer undertook works contract for effluent treatment at the place of employer by using certain chemicals. The chemical mixture used by the dealer is named as ‘enviroflock’. The waste water is subjected to chemical treatment by using such chemical at the place of the employer. Due to this chemical treatment, coagulation of suspended particles and precipitation of dissolved organics take place. The solid particles settled at the bottom and the clear liquid overflows. The overflow water is subjected to activated sludge process and oxygen is supplied by means of surface aerators. The treated water is discharged to the river without containing any chemicals or pollutant. The sales tax authorities levied tax on supply of chemicals used in effluent treatment holding it as a sale whereas the dealer contested that there is no sale as chemicals are consumed in the process. The Division Bench referred matter to the Full Bench in view of later decisions of SC. The Full Bench of the High Court by majority, after considering judgment of various High Courts and SC, confirmed the levy of tax.
Held:
(1) It is undoubtedly true that even after the 46th amendment to the Constitution, sales tax cannot be levied merely because there is a works contract. There must be a transfer of property in goods whether in the same form or in any other form.
(2) It is also undoubtedly true that in view of the decision of SC in Gannon Dunkerley & Co. v. State of Rajasthan, (1993) 88 STC 204, the cost of consumables involved in works contract cannot be taxed.
(3) The issue is when property in goods passes? When the dealer has used it, will it remain the owner of the chemical any longer? Will not the property in the goods pass to the awarder? The effluent and the treated effluent both belonged to the awarder. It is therefore, into the property of the awarder, namely, the effluent, that the dealer supplies the chemical. Just like the toner and developer having been put into Xerox machine becoming the property of the customer in the case before the Apex Court in Xerox Modicorp Ltd. case and the sale taking place before the goods are consumed, in the same way, the property in the chemical passed to the awarder the moment they are put into the effluent by the dealer and its subsequent consumption is the consumption after sale and it does not detract from the factum of sale and consequently the exigibility to tax becomes unquestionable.
(4) There was indeed a sale of chemical involved in the execution of the works contract, in view of the Judgment of the Apex Court in Xerox Modicorp Ltd. v. State of Karnataka, (2005) 142 STC 209), as there is delivery of the same to the awarder by virtue of the chemical being poured into the effluent. Per Shri A. K. Basheer J. (Dissenting view):
(1) The short question is whether or not the combination of chemicals known as ‘Envirofloc’ used by the petitioner for effluent treatment is a consumable as envisaged u/s.5(C)(1)(c)(iii) of the Act.
(2) In case of Xerox ModiCorp Ltd., under the Standards and Service Maintenance Agreement (SSMA), the appellant-company was bound to maintain the xerox machines and supply the spare part including toners, developers, etc. as and when required. Obviously the cost of tonersand developers to be supplied by the appellant company were to be borne by the customers. The short question that arose for consideration was whether the appellant-assessee would be liable to be assessed to sales tax for the sale of toners, developers, spare parts, etc. Their Lordships held that transfer of property took place the moment the goods viz., toners, developers, spare parts, etc. were put into the machine. In other words, tangible goods in toners, developers, etc. were transferred as and when they were used by the customer.
(3) The dictum laid down in Xerox Modicorp has absolutely no relevance, particularly to the facts of this case. There is no transfer of any goods in property whether as goods or in some other form attracting levy of sales tax. Still further, by virtue of the provisions contained in section 5C(1)(c)(iii), the cost of the chemicals used by the petitioner for the purpose of effluent treatment is liable to be deducted, they being consumables.
The Full Bench of the High Court by majority held in favour of the Department holding sale of goods attracting sales tax.
The Sales Tax Department filed SLP Nos. 113581 of 2008 and 15883 of 2008 before the SC against the judgment of the Rajasthan High Court holding sale of Jaljira by the dealer taxable @10% under residual Entry 199 being not a masala. The State Government issued Notification from time to time classifying packed masala attracting higher rate of tax. The Deputy Secretary, Finance Department, Government of Rajasthan clarified vide letter dated November 12, 2001 that the term ‘Packed Masala’ used in Entry 184 of Notification dated 29-3-2001, means a masala where two or more ingredients are mixed and sold in packed conditions. Spices sold singly will continue to be taxed as per Entry 82 (at the rate of 4% tax).
Held:
It is settled law that when a particular item is covered by one specified entry, then the revenue is not permitted to travel to the residual entry. There is no doubt that ‘Jaljira’ is a drink. The contents of ‘Jaljira’ are put into water and taken as digestive drink, but when we look into the manner and method of preparation we find that it is a mixture of different spices after grinding and mixing. Therefore, it is nothing but a ‘masala’ packed into packets of different nature and quantity. Accordingly it was held that for all practical purposes, it would come within the Entry 184 being a ‘masala’ and it cannot be said that it would come under the residuary entry as held by the High Court. The judgment of the High Court was set aside and assessment order was restored.
The appellant is a company engaged in running a hotel in Indore and provided services of lodging and boarding as also rent-a-cab service, mandap- keeper service, etc. Service provided in relation to the use of the mandap was taxable service u/s.65(105)(m) of the Finance Act, 1994. However exemption Notification No. 1/06-ST entitled the assessee for abatement of 66% when catering services were also provided by the mandap-keeper, subject to certain conditions. No CENVAT credit of inputs or capital goods had been taken under the Cenvat Credit Rules, 2004. The appellant availed the benefit of Notification No. 12/03-ST by splitting the bill of charges of the mandap and charges for food and beverages. The Department was of the view that exemption under Notification No. 12/03-ST was not applicable to the appellant. The appellant contended that they paid service tax on the total amount collected towards banquet hall charges, other information and service charges for serving food and beverages, on which no abatement or exemption was claimed. This represented the value of mandap-keeper services. They were paying sales tax/VAT and were availing service tax exemption under the Notification No. 12/03-ST with respect to sale value of food and beverages and thus correctly availed exemption under Notification No. 12/03-ST. The availment of abatement applies under the Notification 1/2006-ST was always optional. The appellant raised invoice for sale of food and beverages and showed only the value of goods provided and did not include the value of service provided along with the sale of food. The charges for serving the food and drinks were already included in the charges in relation to the use of the mandap on which service tax was paid and thus the supply of food and beverages to their guest was a sale within the meaning of the Sale of Goods Act, 1930. It was also submitted that the Supreme Court had held that VAT and service tax were mutually exclusive and both could not be levied simultaneously on the same value and thus the mandap-keeper providing food and beverages also must have the option to avail of the Notification No. 1/06-ST or Notification No. 12/03-ST and contended that there was no suppression of facts or willful misstatements or fraud and therefore penalty u/s.78 of the Finance Act, 1994 was not leviable. The Revenue contended that serving of food and beverages to the guests in course of mandap is an activity ancillary to and part of the main activity of providing service in relation to the use of the mandap and thus the same cannot be split up into value of supplying food and beverages and the value of services in relation to the use of mandap and denied the benefit of the Notification No. 12/2003-ST. The Revenue submitted that through the appellant claimed that the charges for food and drink did not include the charges for service and the same were included in the charges of mandapkeeper, the invoices did not show the same and there was no evidence in this regard. Therefore in this case, serving of food and beverages by the mandap-keeper to their client’s guests in course of mandap was a pure service and the same could not be split up into catering service element and cost of food and beverages and further alleged suppression, etc.
Held:
Supply of food i.e., catering service is incidental to main service of mandap-keeping. Supply of food cannot be considered as sale of goods even if separately charged and therefore deduction under the Notification No. 12/03 is not available. It was further held that the matter was remanded to the Commissioner for re-quantifying the service tax demand after permitting abatement under the Notification No. 1/06-ST, subject to the condition that the appellant reversed the CENVAT credit availed by them and imposed penalty u/s.76 and set aside penalty u/s.78.
The Revenue filed an appeal against the order wherein the input service credit on insurance policy for workmen’s compensation was allowed by the first Appellate Authority. The Revenue appealed on the ground that insurance policy taken for workmen’s compensation was no way related to manufacturing activity and hence sought for denial of input service tax credit. According to the assessee insurance policy for workmen’s compensation was taken for the workers who were involved in the manufacturing process and to cover the risk of those workers and hence it was directly related to the manufacturing process as per the CENVAT Credit Rules, 2004.
Held:
Appeal of the Revenue was rejected on the grounds that insurance policy for workmen’s compensation was taken by the respondent to cover the risk of the of the workers who were involved in the manufacturing process of the final product and hence entitled for Input Service Credit as per Cenvat Credit Rules.
The Appellate Authority extended the benefit of Notification No. 76/86-C.E. to the respondent. The Revenue appealed that the benefit of Notification No. 76/86-C.E. was never claimed by the respondents at the time of investigation. It also drew the attention to the provision of Notification No. 36/2001-C.E. (N.T.), dated 26-6-2001, which stated that it was mandatory for any manufacturer to claim the benefit of exemption and to file a declaration to the Department. It appealed that no declaration was filed and no claim of exemption was made and thus the Commissioner was not justified in excluding the benefit. The assessee claimed that Exemption Notification can be claimed anytime if the same is otherwise available. The case of Share Medical Care v. UOI, 2007 (209) ELT 321 (SC) was referred to. It was held in the case that even if the applicant does not claim benefit under a particular Notification at the initial stage, he is not prohibited from claiming such benefit at a later stage.
Held:
In view of the Supreme Court judgment, the benefit of any Notification if otherwise available cannot be denied on the sole ground that the same is claimed belatedly.
The appellant availed credit of duty on capital goods for which a demand was raised to the tune of over twelve crore including penalty u/s.78. The demand was raised on the grounds that the appellant availed credit in excess of 20% of the tax paid every month.
Held:
It was clear that the Commissioner erroneously applied the restrictions mentioned under Rule 6(3) to the credit used towards capital goods. The restriction under the said Rule is in respect of credit utilised on inputs and input services. Credit utilised by the assesse pertained to capital goods. The claim of the appellant was therefore held valid and the order was remanded to the Commissioner for fresh proceedings.
The assessee provided space at their authorised service station to financial institutions. The service provided by the assessee to the financial institutions amounted to Business Auxiliary Services according to the Revenue. The Revenue contended that the assessee did not pay service tax at the required time and thus was liable to be charged with willful intent to evade duty as they did not approach the Revenue seeking clarification and the Department discovered only during investigation by the Department.
Held:
It was established that mere non-approaching the Revenue seeking clarifications cannot be a valid reason for applying extended period of limitation unless the same is done, with a willful intent to evade payment of duty. The demand was held as barred by limitation.
The Commissioner (Appeals) denied the availment of credit on telephone installed at the premises of one of the partners of the firm and ordered imposition of interest and penalty thereon. The telephone was installed for business purposes and was used to contact overseas customers since the appellants exported the goods produced by them. The appellants claimed that the Income-tax Department had also allowed such telephone expenses. The Revenue claimed that the appellants failed to declare the premises where the telephone was installed as their office, to the Department.
Held:
The contention of the appellant that the service tax was used by the assessee for the purposes of business was held to be valid and thus, the CENVAT credit claimed on such telephone expenses was not objectionable. The Department could not produce any contrary evidence that the telephone was not used for business purpose or that they had undertaken any investigation to prove that the phone was used for purposes other than business. The credit was allowed.
The respondent was a property dealer and a service provider of taxable service. An SCN was issued for failure to file returns and pay service tax on taxable services. The adjudicating authority imposed penalty u/s.76 for non-payment of service tax, u/s.77 for not filing the return and u/s.78 for suppressing the taxable value. However on appeal, penalty u/s.76 and u/s.77 was deleted, but the penalty u/s.78 was upheld. The Revenue argued that the concept of penalty u/s.78 is different from those u/s.76 and u/s.77 by referring to the case of Assistant Commissioner of Central Excise v. Krishna Poduval, 2006 (1) STR 185 which stated that even without suppression there could be failure to pay service tax. The respondent argued that there had been an amendment to section 78 by the Finance Act, 2008 stating that if penalty was payable u/s. 78, provision of section 76 would not apply.
Held:
The Tribunal held that even though the reasoning given by the Appellate Authority that if penalty was imposed u/s.78, penalty could not be levied u/s.76 of the Act was incorrect, the Appellate Authority was within its jurisdiction to drop penalty u/s.76 as the penalty was imposed u/s.78. The amount was relatively small and this contention was in consonance with the amendment by the Finance Act, 2008 prescribing non-levy of penalties under both the penal sections simultaneously.
The assessee paid service tax of Rs.1.02 crore in anticipation of receipt of permission from RBI for import of intellectual property service. Since permission was not granted, the assessee filed a claim of refund for the service tax paid since no services were actually imported. The refund claim was rejected by the Revenue on the ground of inadequate documentary evidences. However, the Commissioner (Appeals) decided that the assessee actually furnished all the requisite documents and directed the assessee to refurnish all the relevant documents and directed the Adjudicating Authority to decide the refund claim in a month’s time along with interest u/s.11BB. The refund claim was sanctioned but interest on such refund was denied on the grounds that documents were submitted only during the hearing. The appellant contended that once the refund claim is allowed, the entitlement of interest is statutory and that he had filed the relevant documents with the Adjudicating Authority within the specified time limit.
Held:
It was held that the order passed by the Commissioner (Appeals) specifically mentioned ‘interest payable u/s.11BB’. As per section 11BB, if any duty is ordered to be refunded, and if it is not refunded within three months from the date of receipt of application, the applicant shall be entitled to interest on such duty immediately after the date of expiry of three months till the date of such refund. It was held that the entitlement of the assessee to interest, once all the requisite conditions are fulfilled, follows as a matter of law and is a mandate of the statute. It was established that the assessee had furnished all the relevant documents along with the application. The furnishing of the documents once again at the personal hearing does not change the fact that the documents were already submitted at the time of making the application.
Held that interest u/s.11BB was payable by the Revenue.
Under Sales Tax Laws, transactions of sale are liable to tax. The Constitution of India has provided adequate safeguards against unauthorised taxation of any transaction. Section 4 of the Central Sales Tax Act, 1956, provides for situs of sale. In other words, the State in which sale is taking place is to be determined by way of section 4 of the CST Act, 1956, which reads as under: “4. When is a sale or purchase of goods said to take place outside a State
(1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States.
(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State —
(a) in the case of specific or ascertained goods, at the time of the contract of sale is made; and
(b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.
Explanation :
Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of this sub-section shall apply as if there were separate contracts in respect of the goods at each of such places.”
Therefore, a sale takes place in the State where the goods are ascertained to the contract of sale.
Normally there are three kinds of sale: One, local sale i.e., within the same State, second, inter-State sale i.e., when the sale occasions movement of goods from one State to another State and the third type of sale is export sale where the goods moves to a destination out of India.
Sale to Bombay High — a fourth kind of sale
An interesting issue that is being debated is whether sale made to ONGC for its oil platforms (known as Bombay High region) are liable to tax as inter-State sale? The judicial history of above issue can be briefly tracked as under:
In case of Pure Helium (India) P. Ltd. (A. No. 48 of 90, dated 30-4-1994), M.S.T. Tribunal held that sale to ONGC for Bombay High region is inter-State sale.
In Pure Helium India P. Ltd. S.A. Nos. 1472 to 1477 of 1994, dated 7-12-1996. M.S.T. Tribunal held that sale to ONGC for Bombay High Region is export sale.
Looking to the conflicting judgments referred above, the Division Bench referred the matter in case of Industrial Oxygen Company Ltd (S.A.No. 45 of 1990) and Pure Helium Ltd (S.A. No. 592 of 2007) to the Larger Bench of the M.S.T. Tribunal. The Larger Bench by its judgment dated 9-7-2010 held that the sale to ONGC for Bombay High is inter-State sale and not export.
Recent judgment of the Gujarat High Court in the case of Larsen and Toubro Ltd. v. Union of India, (2011 VIL 46 Guj. dated 2-9-2011). This is the latest judgment on the issue from a High Court.
The transactions effected by Larsen & Toubro Ltd. to ONGC for the above Bombay High Region were held as inter-State sale and taxed accordingly under the CST Act. Hence writ petition was filed before the Gujarat High Court.
The facts in this case are noted in para 6 of the judgment as under:
“6. It is the case of the petitioners and with respect to which no dispute has been raised by the respondents that all the above four contracts were indivisible turnkey projects consisting both of supply of goods and rendition of service including labour. To execute such turnkey contracts, the petitioners had arranged for supply of certain parts, equipments and machineries from its Hazira plant at Surat to ONGC at Bombay High, which is situated around 180 kms off the baseline of coast of India and forms part of ‘Exclusive Economic Zone’. It is also an undisputed position that such goods were used in execution of turnkey project of erection, installation and commissioning of the platforms located in Exclusive Economic Zone and only on commissioning that the petitioners’ obligation under the contract would stand discharged. It is thus the case of the petitioners that the title of goods supplied by the petitioner to ONGC, during the course of and in furtherance of execution of the turnkey project, passed at Bombay High and not at Hazira. Even the respondents, in particular, the State authorities, under the CST Act, have accepted this factual stand of the petitioners and the entire order under challenge is founded on such admitted facts. We have, therefore, proceeded to examine the grievances of the petitioners on the basis of this conceded factual position, namely, that the title of the goods sold by the petitioners to ONGC passed at ONGC site at Bombay High and not at Hazira.”
The Gujarat High Court examined the issue in light of Articles 1 and 297 of the Constitution of India and the provisions of the Territorial Waters, Continental Shelf, Exclusive Zone and other Maritime Zones Act, 1976 (Maritime Zone Act).
After elaborately examining the issue the Gujarat High Court has held as under:
“34. From the above provisions it can clearly be seen that though the Union of India has certain rights over the Exclusive Economic Zone, the Indian Union does not have sovereignty over such a region. Clause (a) to s.s (7) of section 7, for example, provides that the Union has, over the Exclusive Economic Zone, sovereign rights for the purpose of exploration, exploitation, conservation and management of the natural resources. Sovereign rights are thus for the limited purposes provided therein.
S.s (4) of section 7 does not speak of unlimited sovereign rights, much less sovereignty of the Union of India over the exclusive economic zone. It is only by virtue of the Notification in Official Gazette that the Central Government may declare any area of exclusive economic zone to be a designated area and make such provision as it may deem necessary with respect to such area for different purposes including for the purpose of customs and other fiscal matters in relation to such designated area. Further s.s (7) of section 7 empowers the Central Government to issue Notification to extend certain laws to any part of the exclusive economic zone and to make such provisions as are necessary for enforcement of such enactments. It is further provided that thereupon the enactments so extended shall have effect as if the exclusive economic zone or the part thereof to which it has been extended is a part of the territory of India. The language used in clause (b) of s.s (7) of section 7 to the Maritime Zones Act is significant as it does not provide that the designated area upon Notification by the Union of India, shall be part of the territory of India. It provides that law so notified shall be extended as if the exclusive economic zone or the part thereof is a part of the territory of India. The language is clear and gives rise to a deeming fiction for the limited purpose of extension and application of laws notified and for that limited purpose the Exclusive Economic Zone shall be deemed to be a part of the territory of India. It is not the same thing as to suggest that the Exclusive Economic Zone becomes part of the territory of India. It is not even the case of the respondents that the Exclusive Economic Zone is part of the territory of India as provided in Article 1 of the Constitution of India. There is no claim of sovereignty over such an area, it is sovereign rights which are extended to such area by virtue of formation of the Exclusive Economic Zone for the limited purposes envisaged under the statute. By virtue of clause (b) of s.s (7) of section 7 of the Maritime Zones Act it becomes further clear that as and when the Union of India issues Notification extending any enactment over the Exclusive Economic Zone or part thereof such enactment extended is applicable as if the Exclusive Economic Zone or part thereof to which it has been extended is a part of the territory of India.
“35. In view of the above discussion, it clearly emerges that when the sale of goods took place at Bombay High, for which the goods moved from Hazira to Bombay High, such movement does not get covered within the expression ‘movement of goods from one State to another’ contained in clause (a) of section 3 of the CST Act. It is clear that the goods had not been moved from one State to another since, in our opinion, Bombay High does not form part of any State of the Union of India.”
Accordingly the Gujarat High Court held that the taxing of given transaction under the CST Act is unauthorised and set aside the assessment. The Gujarat High Court has made it clear that it is not examining the issue whether it is export sale or not and also there can be possibility of local sale, as those are not the issues involved here. However, the Court held that since it was not an inter-State sale, tax under the CST Act was not chargeable, held the Gujarat High Court. Thus now there is a possibility of one more kind of sale which is neither local, inter-State nor export, but at the same time not liable to Indian Sales Tax Laws.
The judgment will go a long way in solving the issues in various States, including Maharashtra.
Given the fact, that in India we have a separate legislation each for taxing a ‘sale’ by the States and taxing a ‘service’ under the Union law, tug of war between the two taxing laws victimises many law-compliant business outfits for many complex transactions or even apparently simple transactions like purchase or sale of software, providing telecommunication services, serving food or processing and developing photographs. Despite paying tax on the whole of the transaction under one or both the tax legislations, considering it either sale or service or a composite transaction having both the elements, a business entity is forced into litigation process under one or both the tax legislations on account of conflicting or different views of administrators of different tax legislations. For a simpliciter transaction of a pure sale like a retailer/ wholesaler selling simple goods across the counter or a stand-alone service transaction like a chartered accountant providing tax advisory or a stock-broker buying or selling securities for its client and charging brokerage does not generally cause any issue in determining applicable tax law. However, a very large number of transactions are more complex than this where constantly issues occur over the parentage of the tax law for the transaction and whether or not the transaction can be split into two and have refuge under both taxing statutes. If at all there appears apparent finality on any issue, it is only subjective. The underlying cause of this controversy is separate taxing statute and separate taxing authorities for sale of goods and services and the two administrating bodies never seem to have a meeting point and therefore the least important factor is the assessee in the scenario, who suffers uncertainty and cost of long-drawn litigation.
In the State of Uttar Pradesh v. UOI, 2004 (170) ELT 385 (SC), the Supreme Court observed:
“By calling sale as service or vice versa, the substance of the transaction will not get altered. This has to be determined by discerning the substance of the transaction in the context of the contract between the parties or in a case of statutory contract in the light of relevant provisions of the Act and the Rules. If an activity or activities are comprehensively termed as ‘service’, but they answer the description of ‘sale’ within the meaning of statute, they can nonetheless be regarded as sale for the purpose of that statute. In other words, it is possible that an activity may be service for the purpose of one Act and sale for the purpose of another Act. It may also be that in a given case, on the facts of that case, a particular activity can be treated as ‘service’, but in a different fact situation the same could be ‘sale’ under the same statute”.
The above decision however was overruled by the Supreme Court in the landmark case of Bharat Sanchar Nigam Ltd. & Anr. v. UOI & Ors., 2006 (2) STR-161 (SC) and in respect to a specific question formulated by the Court that “would the aspect theory be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Government levies service tax?” The Court held that “the aspect theory would not apply to enable the value of the services to be included in the sale of goods or price of goods in the value of service”. The law enunciated by BSNL (supra) is a settled position. Whereas in the case of Imagic Creative Pvt. Ltd. v. COL, 2008 (9) STR 337 (SC), the Supreme Court held “the payment of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract.
It may consist of different elements providing for attracting different nature of levy. It is therefore difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract, irrespective of the element of service provided” (emphasis supplied). Does the problem get solved at this point or does it give rise to another issue viz. which contracts are composite contracts and which are indivisible? Or, the seemingly composite contract is held a contract of pure sale or of pure service! The overlap if any in a transaction is not always visible and it can be interpreted as either or both by different administrations giving rise to litigation.
In a few recent decisions, it is noticed that apparently settled position is unsettled. Keeping aside the question of correctness of the same for the time being, the controversy is discussed with reference to photography service.
Issue for consideration
Photography service was introduced in the service tax net with effect from July 16, 2001. Clauses (78) and (79) of section 65 of the Finance Act, 1994 (the Act) r.w.s. 65(105)(zb) of the Act contain the provisions relating to this service. The scope of the service also includes jobs carried out by processing laboratories. This position as of date is not controversial. The Madhya Pradesh High Court in a writ filed by Colourway Photo Lab v. UOI, 2009 (15) STR 17 (MP) held that “colour laboratories would be a part of photography studio or agency involved in providing the service to the consumer and are amenable to service tax”. The controversial issue relates to whether or not paper, chemicals and other consumables used in the creation of photographs is excludible from the value of service chargeable to service tax in terms of Notification No. 12/2003-ST of 20-6-2003, whereby the value of goods sold during provision of service is excluded, provided no CENVAT credit of duty paid on such goods is claimed by the service provider. Before discussing this aspect, it may be noted that Explanation 1(iii) to section 67 as it stood till 17-4-2006 provided that the cost of unexposed photography film if sold to the receiver of service during the course of providing photography service will not be included in the value of service. Section 67 with effect from 18-4-2006 was amended. Rule 6 of the Valuation Rule does not contain any express provision in this regard. However, for the separate supply of unexposed film, the exclusion under Notification 12/2003-ST is not an issue. The issue only centres around excludability of value of paper chemicals and other consumable under the same Notification.
Rainbow Colour Lab’s case
[2001 (134) ELT 332 (SC)]
This case came up before the Supreme Court as the Madhya Pradesh High Court decided in favour of levying sales tax on business turnover of photographs considering jobs rendered by photographer in taking photographs, developing and printing films amounted to works contract and exigible to sales tax. The Supreme Court categorically distinguished the decision in Builders’ Association of India v. UOI, 1989 (73) STC 370 relied upon by Madhya Pradesh High Court while holding that to the extent of the photo-paper used in the printing of positive prints, there is a transfer of property in goods and therefore the job done becomes a ‘works contract’ as contemplated under the Article 366(2A)(b) of the Constitution. However, this reliance was expressly referred to as ‘misplaced’ and relying inter alia on Hindustan Aeronautics Ltd. v. State of Karnataka, 1984 (55) STC 314 and Everest Copiers v. State of Tamil Nadu, 1996 (103) STC 360, the Supreme Court held that mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be one of sale. In every case, one is necessitated to find out the primary object of the transaction. The Court further held that “unless there is a sale and purchase of goods either in fact or deemed and which sale is primarily intended and not incidental to the contract, the State cannot impose sales tax on a works contract simplicita in the guise of expanded definition of Article read with the relevant provisions in the State Act,” and quoted observation in Builders’ Association’s case (supra) which read, “as the Constitution exists today, the power of the States to levy taxes on sales and purchases of goods including ‘deemed’ ‘sales’ and purchases of goods under clause 29(A) of Article 366 is to be found only in entry 54 and not outside it.” The Court held that the work done by the photographer is only in the nature of a service contract not involving any sale of goods. The contract is for use of skill and labour by the photographer to bring about a desired result. The occupation of photographer, except insofar as he sells the goods purchased by him is essentially one of skill and labour.
[Note: It is interesting to note that in the case of Associated Cement Companies Ltd., 2001 (128) ELT 21 (SC), the Larger Bench of three Judges pointed out that the principle laid down in Rainbow Colour Lab (supra) runs counter to the express provision contained in Article 366(29A), since after the 46th Amendment to the Constitution, the States now would be empowered to levy sale tax on material used in a works contract. It also pointed out that the principle in Rainbow Colour Lab (supra) runs counter to the decision of the constitutional Bench in Builders’ Association’s case (supra) and thus doubted the judgment.]
C. K. Jidheesh v. Union of India’s case [2006 (1) STR 3 (SC)]
In this case, the Supreme Court distinguished Associated Cement’s case (supra) when it was pointed out by the appellant that correctness of decision in Rainbow Colour Lab’s case (supra) was doubted by the Bench of three judges in Associated Cement Companies Ltd. (supra) and thus stood overruled. The Court observed that in Associated Cement Companies Ltd.’s case (supra) the question was whether or not customs duty could be levied on drawings, designs, diskettes, manuals, etc. as they were contended to be intangible properties and not goods as defined in section 2(22) of the Customs Act and the question of levy of service tax did not arise there. The Court further observed that the observations relied upon were mere passing observations and did not overrule Rainbow Colour Lab’s case (supra). While examining the plea of the petitioner for bifurcation of gross receipts of processing of photographs into the portion attributable to goods and that attributable to services, and tax only the portion attributable to services followed the decision in Rainbow Colour Lab’s case and held that “contracts of photography are service contracts pure and simple. In such contracts there is no element of sale of goods and in view of Rainbow Colour Lab’s judgment, the question of directing the respondent to bifurcate the receipts into an element of goods and the element of service cannot and does not arise.”
During about past five years however, several decisions were given by the Tribunals on this issue. Beginning with the decision in the case of Adlabs v. Commissioner, 2006 (2) STR 121, the Tribunal relied on the Board’s letter dated 7-4-2004 to Punjab Colour Association (later superseded by Circular dated 3-3-2006) clarifying that exemption under Notification No. 12/2003-ST for excluding input material consumed/sold was available. Based on the letter, the Tribunal held that the appellant was eligible for the benefit of deduction of cost of material used during provision of service. This stand was dissented to by the Delhi Tribunal in the case of Laxmi Colour Pvt. Ltd., 2006 (3) STR 363 (Tri.-Del.) which followed the Supreme Court’s decision of C. K. Jidheesh (supra). Between then and now, Tribu-nals in Agarwal Colour Lab v. CCE, Raipur 2006 (1) STR 41 (Tri.-Del.) and Panchsheel Colour Lab v. CCE, Raipur 2006 (4) STR 320 (Del.) decided in favour of the Revenue i.e., not allowing exclusion of inputs in photography service whereas in umpteen number of cases, the decision was against the Revenue. C. K. Jidheesh (supra) was considered overruled in the case of Bharat Sanchar Nigam Ltd.’s case (supra) and cited by the Tribunal in the case of Shilpa Colour Lab v. CCE, Calicut 2007 (5) STR 423 (Tri.-Bang.) and it followed the decision in the case of Adlabs (supra). The list of decisions against the Revenue included Delux Colour Lab & Others, 2009 (13) STR 605 (Tri.), Technical Colour Lab v. CCE, 2009 (13) STR 589 (Tri.-Del.), Jyoti Art Studio v. CCE, 2008 (10) STR 158 (Tri.-Bang.), M/s. Edman Imaging v. CCE, 2008 (9) STR 91 (Tri.-Bang.), Roopchhaya Colour Studio v. CCE, 2008 (11) STR 125 (Tri.-Bang.), Digi Photo Laser Imaging P. Ltd. v. CCE, 2007 TIOL 1169 (CESTAT-Bang.), Ajanta Colour Lab (2009) 20 STT 395 (New Delhi CESTAT). Savitri Digital Lab v. CCE, (2009) 23 STT 82 (Chennai-CESTAT) and a few others as well. Further, following the views of the Delhi CESTAT in Sood Studios v. CCE, (2009) 19 STT 453 (New Delhi), the Punjab and Haryana High Court in CCE v. Vahoo Colour Lab, 2010 (18) STR 548 (P&H) following BSNL (supra) held that “the components of sale of photography, developing and printing, etc. are clearly distinct and discernible than that of photography service. Therefore as the photography is in the nature of works contract and it involves the elements of both sale and service, the service tax is not leviable on the sale portion in obtaining circumstances of the case”. We summarise below the case of Shilpa Colour Lab (supra) as it contained a number of appellants and it has also been relied upon in a number of later decisions holding that value of goods and consumables was excludible under Notification No. 12/2003-ST while providing photography service.
Shilpa Colour Lab v. CCE, Calicut’s case 2007 (5) STR 423 (Tri.-Bang.)
In this case, a bunch of appeals related to the issue of levying service tax on the amount charged in the case of printing photograph for other than service component. This case had followed earlier decision of the same Bench in the case of Adlabs v. Commissioner, 2006 (2) STR 121 (Tri.). The Tribunal in this case observed that goods sold while providing service are not liable to service tax as that would amount to sales tax which constitutionally is State subject and not that of Union. Decisions in Rainbow Colour Lab (supra) and C. K. Jidheesh (supra) were examined. It was pointed out by the appellants that the Apex Court in Bharat Sanchar Nigam Ltd., 2006 (2) STR 161 (SC) had overruled the decisions in the cases of C. K. Jidheesh and Rainbow Colour Lab. Para 47 of the BSNL decision (supra) was specifically cited to read as follows. “47. We agree. After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of Clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying. Therefore when in 2005, C. K. Jidheesh v. Union of India, (2005) 8 SCALE 784 held that the aforesaid observations in Associated Cement (supra) were merely obiter and that Rainbow Colour Lab (supra) was still good law, it was not correct. It is necessary to note that Associated Cement did not say that in all cases of composite transactions the 46th Amendment would apply.”
Based on this, the Tribunal held that the Apex Court had overruled the decisions in Rainbow Colour Lab and C. K. Jidheesh in BSNL’s (supra) case and further observing BSNL’s ruling that “aspect theory would not apply to enable the value of services to be included in the sale of goods the price of goods in the value of service”, the Tribunal held that the implication of BSNL’s case is that in photography service, if value of goods and material are consumed, then such value cannot be included in the value of service for the levy of service tax.
[Note — The Supreme Court dismissed the Departmental appeal filed against this decision].
In the midst of the above, the case of Agarwal Colour Advance photo System v. CCE, Bhopal reported at 2010 (19) STR 181 (Tri.-Del.) came up before the Delhi CESTAT wherein detailed analysis of the various decisions including the above deci-sions (both for and against the Revenue) and the decisions referred to in these decisions viz. BSNL (supra ), Imagic Creative (supra), Associated Cements (supra), Rainbow Colour Lab (supra), Everest Photocopier (1996) 163 STC 360 (SC) inter alia were discussed alongside the discussion on sale, deemed sale, etc. On account of there being several judgments against the Revenue and a number of them in its favour, to maintain judicial propriety wherever the Bench differs with the decision of a co-ordinate Bench, the matter was referred to the Larger Bench of the Delhi Tribunal.
The recently reported Aggarwal Colour Advance Photo System’s case
[2011 (23) STR 608 (Tri.-LB)]
In an attempt to end the controversy and conflicting decisions in Aggarwal Colour Advance Photo System, 2011 (23) STR 608 (Tri.-LB), only two questions were decided (agreed by both the parties) to be dealt with by the Larger Bench in the appeal out of 5 questions of law referred to it [as reported in 2010 (19) STR 181 (Tri.-Del.)] are as follows :
Answering the first question cited above, the Bench expressed its view that in case of services in relation to photography, service tax has to be levied on the gross amount charged for providing such service which would include value of all material or goods used/consumed or becoming medium, it being inseparable and integrally connected and enabling performance of service. The only permissible deduction will be for the value of unexposed film, if any sold. This view was expressed by following C. K. Jidheesh (supra), a direct judgment of the Supreme Court on the valuation of photography service. According to the Bench, decisions of the Tribunal in cases of Shilpa Colour Lab (supra), Adlab v. CCE (supra) and Delux Colour Lab & Others v. CCE, Jaipur (supra) were impediments and appeared contrary to law laid down by C. K. Jidheesh (supra).
The appellant’s key contention inter alia on merits was that on the basis of the settled law, various Benches of Tribunal rightly excluded the value of goods used in providing photography service to determine assessable value of such service. The Finance Act, 1994 could not attempt to tax goods as there did not exist provision in that law to do so and that benefit of excluding sale of goods under Notification 12/2003-ST was not deniable. Among others, and relying on the decision of the High Court of Punjab & Haryana in the case of Vahoo Colour Lab, 2010 (18) STR 548 (P&H), it was contended that processing of photography being a works contract involved both sale and service and therefore service tax was not leviable on the sale portion. Whereas the Revenue contended that providing photography is a pure and simple service contract and there is no contract for sale of goods unless a distinct sale is available, the consideration received for photography service becomes measure of value of taxation. The Revenue inter alia further contended that the word ‘sale’ in Notification 12/2003-ST has to be interpreted on the basis of its meaning as per section 2(h) of the Central Excise Act, 1944 as applicable to service tax by virtue of section 65(121) of the Act. When there is no primary intention of the parties to sell paper or consumables in providing photography service, there is no room for applicability of ‘deemed sale’ concept in absence of any such sale of commodities as goods.
Valuation of taxable service
The Larger Bench of the Tribunal observed that service tax is leviable on the gross value of taxable service and this being a measure of tax, determination thereof was crucial. Service tax being destination-based consumption tax, all cost additions till the service reaches consumer form part of the value of the service. Citing the judgment of Association of Leasing & Financial Service Companies v. UOI, 2010 (20) STR 417 (SC), it was opined by the Bench that the principle of equivalence was applicable and there was a thin line of divide between sale and service and such principle was in-built into the concept of the Finance Act, 1994. It is a value added tax and the value addition is on account of the activity which provides value addition.
Notification No. 12/2003, dated 20-6-2003 granting exemption to value of goods sold to the recipient of service
While answering the second question, the Bench observed that to satisfy the said condition of the Notification and claim the part of value as exempt, the assessee was to discharge the burden to show the value of goods and material actually sold. The term ‘sold’ cannot include ‘deemed sale’ of goods and material consumed by the service provider while generating and providing service. Whether any goods or material are sold while providing photography service, there should be documentary proof specifically indicating the value of goods and material in question sold while providing service and this is further subject to condition of non-availment of credit of duty on such goods. Granting an exemption always depends on factual evidence and differs from case to case depending on facts and circumstances of each case which is left to the domain of the Tax Administration for determining whether such burden was discharged by the assessee.
The Bench noted that there was no doubt that papers, consumables and chemicals are used and consumed to bring photographs into existence and it is also true that no person goes to buy paper and chemicals from the photography service provider. Service recipient expects delivery of photograph. Consumables and chemicals disappear when the photograph emerges. Relying on C. K. Jidheesh (supra), it was observed that photography contract was not a composite contract of sale of goods and service. It was also noted by the Bench that since the Supreme Court rendered decision of Surabhi Colour Lab (supra) by remanding the matter to verify whether the assessee maintained records of inputs used in photography and no report was produced as to how the matter was concluded, it could not be relied upon. Further, the decision in Technical Colour Lab (supra) was rendered purely by following Surabhi’s case (supra), they were bound to follow the ratio of C. K. Jidheesh (supra). While accepting the Revenue’s contention, the Bench observed that in terms of the rulings of several High Courts (included inter alia V. V. Jha v. State of Meghalaya, Gauhati High Court etc.), there was ‘no sale’ or ‘deemed sale’ of goods and material in photography service. The obiter reference in the case of BSNL (supra) being a different question of law and fact. (In the case of BSNL, the Supreme Court had to examine whether any right to use any goods involved in telephone connection provided by BSNL to its subscribers could be subject to sales tax), it did not stand to overrule either C. K. Jidheesh (supra) or Rainbow Colour Lab (supra). The Bench accordingly answered the questions as follows:
Conclusion
From the aforesaid discussion, it appears that generally if the cost of paper and other material appears separately in an invoice during the course of providing service, the issue prima facie of non-allowance of benefit under Exemption Notification 12/2003-ST may not arise. However, appreciating that this practice more often than not, is not followed and also considering the recent controversial decision in the case of Sayaji Hotels Ltd. v. UOI, (24) STR 177 (Del.-Trib.) (Refer Recent Decisions – Indirect Taxes, Part A of this issue) if the facts of a specific case demand examination of applicable provisions of law, the following questions whether can be answered with finality or the controversy may continue on account of conflicting views and interpretations, time alone would decide it:
Gains arising to Mauritius company from sale of Indian company’s shares are not taxable in India under Article 13 of India-Mauritius DTAA.
Mauritius company is entitled to receive sale consideration without tax deduction.
Mauritius company is required to file its return of income in India in respect of sale of shares of an Indian company, even though the transaction is not liable to tax in India.
AAR accepted the contentions of MauCo and held that it would not be liable to tax in India on account of transfer of shares of ICO to its German group company for following reasons:
Non-resident lessor does not have Permanent Establishment (PE) or business connection in India on account of leased assets used in India but delivered outside India, provided the lease agreement is entered on principal-to-principal basis.
T. K. Sharma (JM) and A. K. Garodia (AM) Present for the appellant: Millin Mehta Present for the respondent: Samir Tekriwal
In the absence of revenue having brought anything on record to show that assessee was doing construction work, consideration received by assessee was not from doing construction work and consequently, did not fall within the exclusion of Explanation 2 to section 9(1)(vii). Therefore, the income of assessee was liable to tax in terms of section 115A @10%.
Held
Annexed to this Circular is a new applicationcum- declaration form for purchase of foreign exchange under the Liberalised Remittance Scheme (popularly known as the INR12,360,898 Scheme). This new form has become necessitated due to certain additional items being covered under the said Scheme.
We saw in the immediately preceding
article in this column some highlights of the recently introduced SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(‘Regulations’) which replaced the preceding Regulations of 1997. In
this second and concluding article, let us examine the newly notified
Regulations from a perspective of day-to-day applicability of the
Regulations. The first impression of the Regulations is that they apply
to takeovers including substantial acquisition of shares and control.
These are fairly rare or at least quite infrequent events. Also, the
procedure for open offers in such takeovers, etc. is quite elaborate and
hence their detailed study and analysis may not be worthwhile for most
Chartered Accountants including even those who are concerned with
compliance matters.
However, the reality is that the Regulations
apply to a far wider range of events and there are also certain
periodic compliances. These are required to be complied with even when
there is no substantial acquisition of shares or takeovers. In fact,
even if the shareholding is unchanged, there are some reporting
requirements. Acquisition of a relatively small quantity of shares can
also result in compliances and even an open offer. The problem also is
that innocuous transactions may also inadvertently lead to an open
offer. If one even casually reviews the SEBI orders where penalty or
other adverse action has been taken, a very significant number of orders
relate to non-compliance of the Regulations in situations where there
was no takeover or even substantial acquisition of shares.
The
other aspect is that even while carrying out other type of corporate
restructuring transactions, the Takeover Regulations have to be kept in
mind because they can affect the structure being worked out. A buyback
of shares, a merger of even group companies, significant borrowings and
even an innocuous rights issue could require compliance of the
Regulations.
Hence, some such situations and some regular compliances are explored in this article.
The
most common case of significant noncompliance of the earlier
Regulations of 1997 was that promoters and substantial holders of shares
did not report their holdings of shares in the manner required. A
person is required to report his acquisitions on acquiring a certain
number of shares and also, if he holds certain number of shares, then he
is required to regularly report the holding even if there is no change
in holding.
Acquisition of non-substantial quantity of shares
An
acquirer is required to report acquisition of shares when he crosses
certain specified limits. In fact, as we will see, under certain
circumstances, even the sales are to be reported. When an acquirer
[along with persons acting in concert (‘PAC’)] acquires more than 5% of
shares in a listed company, he is required to report such acquisition
within the specified time to the Company and the stock exchanges where
the shares of the Company are listed. The Company thereafter is required
to also report such acquisition to the stock exchanges. This is
obviously an early warning to shareholders of the Company (indeed even
the Promoters) that an acquirer is acquiring shares and could result in a
takeover. Arguably, this 5% limit can be viewed to be a little low to
serve as an early warning of an impending takeover. It made sense under
the 1997 Regulations when the trigger for open offer was 15%. Now the
trigger is 25%, but this trigger for disclosure of 5% remains unchanged.
Once the 5% limit is crossed, thereafter, every purchase and
sale of 2% is required to be reported. Thus, at any point of time, the
public knows what types of significant transactions are carried out by
persons holding significant quantity of shares.
Regular reporting of holdings
Even
where there is no acquisition of shares beyond the specified limit, a
person holding more than specified percentage of shares and certain
other persons are required to report their holdings periodically.
An
annual disclosure of holdings as of 31st March is required by persons
holding 25% or more shares. Similar disclosure is required by the
Promoters of the Company. This reporting is in addition to the reporting
required under other laws such as the listing agreement. Thus, the
shareholders and general public can keep track of the holdings of the
shares of such significant shareholders and stakeholders.
Encumbrances/pledges/liens
It
may sound curious why encumbrances are required to be disclosed and
that too under Regulations relating to takeovers and substantial
acquisition of shares. After all, there is no takeover or even
acquisition of shares. The issues sought to be addressed are dual.
Firstly, it is human ingenuity to find a way to avoid the law. Thus,
often, acquisitions/sales were sought to be disguised as encumbrances
and then ‘invoked’ only a little later and thus the spirit of the
Regulations of advance warning may be lost. Also, at times, certain
lenders have argued that pledges/ encumbrances in their favour, even
when they are invoked and underlying shares acquired, should not be
treated as acquisition of shares. SEBI had adopted an ad hoc approach in
this regard. Some types of encumbrances were treated not to be
acquisitions. Reporting of encumbrances were, till recently, not
required at all. Also, some part of the law was laid down by the
Securities Appellate Tribunal in appeal. Expectedly, there was still
some confusion in some areas and the recodification of the law was a
good time to make comprehensive provisions in this regard. The present
law now provides, to simplify a little, as follows.
Firstly,
encumbrances are treated similar with acquisitions in the sense of
making disclosures. Similarly, releases of encumbrances are also
required to be disclosed. However, unlike acquisitions/sales,
disclosures of encumbrances and their release is required to be made
without regard to the quantity of shares involved. However, of course,
encumbrances are not treated as acquisitions for the purposes of
triggering the open offer requirements unless the encumbrances result in
transfer of shares. What is encumbrance and what types of such
encumbrances are covered under the Regulations is a separate and
detailed subject, but suffice is here to state that the revised
definition is fairly wide.
Creeping acquisition of shares
In
the normal course, Regulations on takeovers should be attracted once
and only once — and that is in case of a takeover where the control of a
company changes from one group to another. Thus, acquisitions up to 25%
should not concern the Regulations and acquisitions beyond 25% shares
(or of control), after an open offer is made, should not concern the
Regulators. However, for several reasons, not necessarily wholly valid,
restrictions are specified even otherwise. It was argued in the early
stages of the introduction of the Takeover Regulations that Indian
Promoters did not have significant holding of shares and thus they
should be allowed to acquire further shares from time to time to
increase their holdings without requiring an open offer to be made.
Grudgingly, a certain percentage of shares (which kept changing by
amendments) was allowed to be acquired every financial year to allow
their holdings to increase slowly (and hence the term ‘creeping
acquisition’ of shares). If shares were acquired in a financial year
more than such permitted percentage, then the open offer requirements
got triggered.
Over a period of time, these requirements got fairly complicated since for every crisis in the markets or economy or for other reasons, amendments were made in the law. Thus, there were twists and turns and back-turns on the road from 15 to 75% holding (and even beyond).
The new law is now fairly simple at least in its basic structure. A person holding 25% or more shares in a company can increase his shareholding by 5% every financial year without the open offer requirements getting triggered. This he can continue doing till his holding reaches the maximum permitted to allow the minimum prescribed public holding to be maintained. Thus, for a company in which a minimum 25% holding is prescribed to be held by the public, acquisition of up to 5% per annum can be made till the maximum limit of 75% is reached.
Inter se transfer of shares
It is quite common for the promoters of a company to hold shares through various entities. The issue is: whether transfer between these entities and persons acting in concert would trigger public offer. In the normal course, since there is no increase in the total holding of an acquirer and persons acting in concert with him the open offer (or other) requirements are not attracted. However, by a slight reverse and even weird logic, since it is provided that inter se transfers are exempted subject to certain conditions, it is an accepted interpretation that inter se transfer is not exempt. Thus, if there is an acquisition even by way of inter se transfer of, say, more than 5% in a financial year, then the open offer requirements would be attracted unless certain conditions are met.
The Regulations thus provide that inter se transfer is exempted from the requirements of open offer if certain conditions are met. However, it is important to note that such acquisitions are altogether not counted as acquisitions even as ‘creeping acquisitions’. Thus, an acquirer is free to acquire further shares as ‘creeping acquisitions’ even if he has acquired shares as inter se transfer that are exempt under the Regulations.
The 1997 regulations provided for several types of inter se transfer and exempted such transfers under different conditions. In practice, some misuse of such inter se transfers was observed. The newly codified Regulations made significant modifications and while removing certain provisions that were misused, made detailed complex provisions. One common condition, for exempting inter se transfer amongst immediate relatives, is that the transferor and transferee should be disclosed as promoters/persons acting in concert, etc. for at least 3 years prior to such transfers. Further, the acquisition price for such inter se transfer should not be more than 25% of the price calculated as per prescribed formula. The intention seems to be that the acquirer should not pay more than 25% of the value of the shares that is calculated with reference to ruling market prices in the recent past or, if the shares are not frequently traded, then as per valuation of the shares in the manner prescribed.
Further, certain types of inter se transfers also need to be specially reported in the prescribed manner along with payment of prescribed fees.
Conclusion
It is seen that there are numerous requirements that would go without being complied with if one considers the Takeover Regulations to apply only to significant acquisition of shares/takeovers. Non-compliance of these requirements can result in significant adverse consequences in terms of theoretically huge penalties and open offer, apart from the taint of having violated the Regulations. A careful review of the Regulations is a must for all persons concerned with compliance of securities laws by listed companies, by their promoters and generally by large investors. Even persons concerned with restructuring of companies need to consider these requirements.
Section 314 of the Companies Act, 1956 (‘the Act’) deals with situations where either the director or any of his relative or any person mentioned in section 314 holds ‘office or place of profit’.
Meaning
As per s.s (3) of section 314, any office or place shall be deemed to be an ‘office or place of profit’:
In case of director
If the director obtains from the company anything by way of remuneration over and above remuneration to which he is entitled as such director, whether as salary, fees, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.
In case of any other individual or body corporate
If the individual or that body corporate obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisite, the right to occupy free of rent any premises as a place of residence, or otherwise.
Conditions
As per s.s (1) of section 314, except with the consent of the company accorded by a special resolution:
(a) No director of a company shall hold office or place of profit, and
(b) (i) No partner or relative of such direc tor,
(ii) no firm in which such director, or a relative of such director is a partner
(iii) no private company of which such director is a director or member, and
(iv) no director or manager of such a private company shall hold office or place of profit carrying a total monthly remuneration as prescribed (Rs. 250,000 per month).
One may interpret that because of the word ‘such’ used above, the relative or partner or firm or private company as mentioned above would attract the provisions of section 314(1) only when the concerned director is already holding office or place of profit. Where the director himself does not fall within the ambit of section 314, the relative/firm/private company as mentioned above need not satisfy the condition of special resolution even though he/it may be holding office or place of profit.
However, s.s 314(1B) starts with a non-obstante clause which states that notwithstanding anything contained in s.s (1), where the relative/partner/firm/ private company holds any office or place of profit carrying monthly remuneration more than the sum prescribed (Rs.250,000 p.m. from April 2011), then the company shall be required to obtain prior approval of the Central Government and pass a special resolution for such an appointment.
Hence, it deduces that where the remuneration exceeds the prescribed limit i.e., Rs.250,000 per month, the approval of the Central Government and special resolution will be required even when the concerned director does not hold place of profit.
The above requirement applies to private limited companies also. This implies that even small private limited companies which are nothing but family-managed businesses would be required to comply with this section. This article attempts to bring out the unfairness in applying section 314 particularly the condition of obtaining the Central Government approval in case of private limited companies.
The underlying object of this section is to prohibit a director from misusing its influential position in the company. Hence, section 314 puts certain checks like special resolution by the company and approval of the Central Government. Naturally, it follows that such checks particularly, getting approval of the Central Government would be more apt when interest of public at large is involved.
However, there are many small private limited companies with family members as shareholders and occupying important positions. Normally, these companies do not have outside persons as shareholders. Hence, their internal affairs would not affect the interest of general public. In such scenario, applying to the Central Government does not make much of sense. Again, getting the Central Government approval would prove to be a task in itself in terms of time and efforts involved.
Moreover, many of these small private limited companies are not liable to furnish Compliance Certificate to the Registrar of Companies. They do not have a dedicated company secretary to point out company law compliances. There is every possibility that requirements of section 314 may go unnoticed. Again the threshold limit of Rs.250,000 has been raised in April 2011 only. Previously, the limit was only Rs.50,000. This steep rise in the limit itself implies how irrational the earlier limit was.
Further, it is pertinent to note that section 40A(2) of the Income-tax Act, 1961 already seeks to provide some control over excessive or unreasonable remuneration. However, in case of this provision also, there is an element of unfairness in its implementation. Interestingly, there are decisions to say that where the payment is actually made and where the payee has incorporated such payment in its/ his income and paid taxes thereon, disallowance u/s.40A(2) cannot be made [see CIT v. Udaipur Distillery Company Ltd., (Raj.) (316 ITR 426) and Modi Revlon (P) Ltd. v. ACIT, (Del.) {2 ITR (Trib.) 632}].
Suggestions
In all fairness, it would be in interest of all the parties involved to exempt private limited companies from rigours of section 314. Seeking of prior Central Government approval may be made mandatory only for public companies and private companies which are subsidiaries of public companies.
An RTI activist, known for his opposition to various illegal activities in Juhapura area of Ahmadabad was hacked to death. Nadeem Saiyed, 38, who was also an eyewitness in the Naroda Patia riots case, was stabbed 25 times with a butcher’s knife and axes.
A decade ago, there were no problems but now, one moves with caution. “There is cautiousness in the administration. Nobody is willing to take a decision,” he added.
After collecting various documents from Dr. Rathod’s hospital, Patel filed an RTI query, enquiring about Rathod’s presence in the hospital on April 27. Patel was in for a rude shock as the hospital authorities in their reply stated that Dr. Rathod was present at the hospital on April 27, and was even paid Rs. 7,368 as NPA.
Mr. Dhiraj Rambhai’s success story
WHAT A SURPRISE! THINGS WHICH WERE NOT DONE IN 90 DAYS GOT DONE IN 9 MINUTES
Government departments which were working at lesiure at tortoise speed have started working at hare speed due to RTI ACT, 2005. Here is one more example.
Kanti Gada & Priti Gada stay at Mulund Vinanagar having business of plastic drum manufacturing.
They own a farm house in the outskirts of Mumbai at Asangaon district, Thane. On 5th June 2011 due to heavy rains the wires supplying electricity to their farm house got short circuited and the power supply to their farm house was cut as safety mea-sures. After 2-3 days when the weather was normal Preeti Gada requested local MSEDCL office to re-store the supply but no action was taken on their repeated complaints. They lodged the complaint in writing 5-6 times but it went to files only and their farm house remained in dark for almost three months. One fine day they read one of the success story of the RTI in Dhiraj Rambhia column ‘JAN JAGE TO SAVAR’ on the RTI in Gujarati news paper MUMBAI SAMACHAR. Inspired by the column they approached TARUN MITRA MANDAL, Thane RTI guidance centre on 27th August. After listening to Preeti Gada’s problem, Thane centre volunteers prepared the RTI application asking for the information on (1) steps taken on Preetiben’s earlier complaints (2) the reasons recorded regarding delay in action on complaints (3) the name and designation of the officer responsible for the delay in action. On 28th August, Priti Gada went to local MSEDL office to submit the application, When the officer in the office read the application his fuse got blown. He immediately pleaded to Priti Gada not to make the application and immediately phoned the concerened line men to connect the electric supply Thus, action which was not taken for 90 days was done in 9 minutes.
The plaintiff No. 1 is the husband of the original plaintiff No. 2 who suffered from cancer and was consequently admitted to the hospital of defendants being the Trustees of Bombay Hospital Trust. The defendant No. 1 was an Honorary Surgeon attached to Bombay Hospital (BH). The plaintiffs’ case is that the original plaintiff No. 2 suffered from cancer since July 1977. She was admitted to BH. The husband i.e., plaintiff No. 1 desired the services of the defendant No. 1. He was informed that the defendant No. 1 would separately charge his fees. The plaintiffs accepted and agreed to those terms. It is the case of the plaintiffs that it was agreed between the defendant No. 1 and the plaintiffs that the defendant No. 1 will himself operate upon the plaintiff No. 2.
It is the plaintiffs’ case that despite the contract between the plaintiffs and the defendant No. 1, the defendant No. 1 failed and neglected to operate upon the plaintiff No. 2 and accordingly committed a breach of the contract by non-performance. The surgery of the original plaintiff No. 2 was wholly unsuccessful. It was realised upon her abdomen being opened that nothing further could be done. Her abdomen was stitched up. She was given treatment in the hospital thereafter. The plaintiffs’ case in tort upon medical negligence is essentially that the advise of the defendant No. 1 itself was erroneous and was given without any care or caution despite having been shown the reports of the doctors from the USA who had earlier treated the plaintiff No. 2. Upon the complete non-performance by the defendant No. 1 of performing surgery or treating the plaintiff No. 2 the plaintiffs claim that BH itself through its trustees were vicariously liable in tort for the negligence of the defendant No. 1.
The Court observed that the contract between the parties was absolutely clear as to the contracting parties, as to the performance of the date of the contract as also the specific operation to be performed. It is admitted that the contract was not performed by the defendant No. 1 as to why it was not performed, calls for the consideration of the aspect on damages for its breach.
The Court observed that the attitude of the defendant doctor shows how the patients are treated by doctors of such standing and how much the patient can expect of the doctor. It shows the standard of care and the quality of the personal service given by the doctor and the extent of service accepted by the patient under extreme constraint and hopelessness. It however does not alter the legal obligations and rights of the parties. It would at best require the Court to see how the surgeon, who contracted with the patient, at least remained available near her and at her service. Availability cannot include a direction without a look at the patient. The damages can be claimed for breach of the contract as well as for negligence in tort. Since the contract was voluntarily entered into and was breached, the plaintiffs would be entitled to damages upon such breach of contract by nonperformance or misperformance even if there be no negligence in tort.
The extent of damages for the breach of the contract of professional services agreed and failed to be rendered and for the consequent mental agony, distress and anguish would be analogous to the damages which are grantable for similar effects upon a tort. The Court also observed that the breach of the contract of a personal nature more so by a professional involves violations of human rights and is the most acute and profound in case of doctors. Their breach by non-performance would result also in fatality. It would result in considerable mental distress and may lead to other mental problems including depression arising from such distress and agony. Such damages cannot be computed upon the precise monetary loss alone. The Court granted interest @ 16% p.a. for the entire period from the date of the surgery of the original plaintiff till the date of the judgment and thereafter @ 6% p.a. till payment/realisation.
The Trial Court on the objection raised by the respondent with regard to admissibility of partition deed had held that the same was inadmissible in evidence on the ground that it was neither registered, nor properly stamped.
The Court on further appeal observed that section 36 of the Stamp Act provides that where an instrument had been admitted in evidence, such admission shall not, except as provided in section 61 thereof, be called in question at any stage of the same suit or proceeding on the ground that the instrument has not duly been stamped. Section 35 of the Act casts a duty on the Court not to admit in evidence any document which is not duly stamped. Similarly section 36 bars the objection with regard to admissibility of a document at any stage of the same suit or proceeding on the ground that the instrument has not been duly stamped. One of the essential elements of estoppels by conduct is that the party against whom it is pleaded, should have made some representation intended to induce a course of conduct by the party to whom it was made.
Section 74 of the Evidence Act, 1872 (1872 Act) provides that the documents which are on record of the acts of the Court are public documents within the meaning of section 74(1)(iii) of the 1872 Act. There is distinction between the record of the acts of the Court and record of the Court. A private document does not become public document because it is filed in the Court. To be a public document it should be a record of act of the Court. In the instant case, admittedly, the partition deed was marked as exhibit. Marking of an exhibit on the document is an act of the Court. Thus, the partition deed is record of the act of the Court and is thus a public document within the meaning of section 74(1)(iii) of the 1872 Act.
The other issue i.e., whether the partition deed which is unregistered and unstamped can be looked into for collateral purposes. It is well settled in law that relevancy, admissibility and proof are different aspects which should exist before a document can be taken into evidence. Mere production of certified copies of public documents does not prove the same, as the question of its admissibility involves that contents must relate to a fact in issue or a facet relevant under various sections of the Indian Evidence Act. Thus, merely because the document in question is a public document, it is not per se admissible in evidence. It is required to be stamped under the provisions of the Indian Stamp Act, 1899. The Court further relying on the Supreme Court decision in case of Avinash Kumar Chauhan v. Vijay K. Mishra, AIR 2009 SC 1489 held that if a document is not duly stamped it would not be admissible even for collateral purpose.
In
a suit filed against the carrier for damage caused to insured goods the
Court observed that u/s.151 of the Contract Act, the carrier, as a
bailee, is bound to take as much care of the goods bailed to him as a
man of ordinary prudence would, under similar circumstances, take of his
own goods. If that amount of care, which a person would have taken of
his own goods, is not taken by the carrier, it would amount to
deficiency in service and the carrier would be liable in damages to the
owner for the goods bailed to him. The liability of a carrier to whom
the goods are entrusted for carriage is that of an insurer and is
absolute in terms, in the sense that the carrier has to deliver the
goods safely, undamaged and without loss at the destination, indicated
by the consignor. So long as the goods are in the custody of the
carrier, it is the duty of the carrier to take due care as he would have
taken of his own goods and he would be liable if any loss or damage was
caused to the goods on account of his own negligence or criminal act or
that of his agent and servants.
The plea that since the goods
were booked at ‘Owner’s Risk’ the carrier would not be liable for any
loss to those goods, is not acceptable because even where the goods were
carried at ‘owner’s risk’, the carrier is not absolved from his
liability for loss of or damage to the goods due to his negligence or
criminal acts. Section 9 of the Carriers Act provides that the common
carriers are liable for the loss, if any, caused to the goods entrusted
to the carriers and it is the duty of the carriers to carry the goods to
the destination station.
A suit was filed by one Bimla Rani (the plaintiff) seeking partition of the suit property. The plaintiff Bimla Rani is the daughter of late Bhola Ram and Smt. Lajo Devi. The defendants are the step-sisters of the plaintiff; the defendants are borne out of the wedlock of late Bhola Ram and Smt. Motia Rani (second wife). Father of the Plaintiff and the defendants late Bhola Ram is common.
The late Bhola Ram was the owner of the suit property. He had by a registered will bequeathed the property to Motia Rani. Motia Rani had by a subsequent will bequeathed the property to her two daughters i.e., the two defendants. There was no dispute that after the death of Bhola Ram by virtue of his will, Motia Rani had become the owner of this suit property. The contention of the plaintiff was that she also being the daughter of Bhola Ram was entitled to a share in the suit property, therefore the suit for partition had been filed. Contention of the defendants was that under the law of succession, the daughters of Motia Rani alone could have inherited this property from Motia Rani and Bimla Devi not being her ‘daughter’, (u/s.15 of the Hindu Succession Act, 1956); she had no interest in the suit property.
The High Court observed that u/s.14 of the Hindu Succession Act, 1956 (HSA) any property possessed by a female Hindu, whether acquired before or after the commencement of that Act, shall be held by her as full owner thereof and not as a limited owner. Thus, there is no dispute that the suit property had devolved upon the Motia Rani in her capacity as a full-fledged owner. The dispute between the heirs was as to whether the expression ‘daughter’ as appearing in section 15(1)(a) includes a step-daughter i.e., the daughter of the husband of the deceased by another wife. The word ‘daughter’ and ‘step-daughter’ have not been defined in the HSA. The expression ‘daughter’ in section 15(1)(a) of the Act would thus include:
(a) daughter borne out of the womb of the female by the same husband or by different husbands and includes an illegitimate daughter; this would be in view of section 3(j) of the HSA.
(b) adopted daughter who is deemed to be a daughter for the purpose of inheritance. Children of a pre-deceased daughter or an adopted daughter also fall within the meaning of the expression ‘daughter’ as contained in section 15(1)(a). If the Legislature had felt that the word ‘daughter’ should include the word ‘step-daughter’, it should have said so in express terms. Thus, the word ‘daughter’ appearing in section 15(1)(a) would not include a ‘step-daughter’ and such a step-daughter, would fall in the category of an heir of her husband as referred to in clause 15(1)(b). When once a property becomes the absolute property of a female Hindu, it shall devolve first on her children (including children of the predeceased son and daughter) as provided in section 15(1)(a) of the Act and then on other heirs, subject only to the limited change introduced in section 15(2) of the Act. The step-sons or step-daughters will come in as heirs only under clause (b) of section 15(1) or under clause (b) of section 15(2) of the Act.
The step-daughter of Motia Rani does not fall in the category of succession as contained in section 15 of the HSA; the expression ‘daughter’ in section 15(1)(a) does not make reference to a ‘stepdaughter’ i.e., a daughter borne to the husband of the deceased female Hindu out of the wedlock with another woman.
Private Equity Investments and Foreign Direct Investments in nine out of 10 cases, contain an exit option. This may be in the form of a put option whereby the investor has a right/option but not an obligation to sell the shares to the promoter of the investee company in case the company does not give an exit in the form of an IPO or an Offer for Sale or Buyback of the investor’s shares. In some cases, the promoters also have a call option under which, they can buy out the investor at their option. In addition, the investment carries certain pre-emption rights for the investor in the form of Right of First Refusal, Tag Along Rights, Drag Along Rights, etc. This is a standard practice internationally and is something which is not unique to the Indian scenario. Even in India, this has been in vogue for the last several years and the ship was sailing quite smoothly. However, recent change in stance by the SEBI, the RBI and the DIPP and the High Courts have created a very stormy and turbulent climate for private equity/ foreign investment/joint ventures in India. If the issues thrown up by these changes are not resolved urgently, then we may see a severe hit to India’s growth story since most international investors would be wary of investing in such a climate. Let us look at the murky environment which has been created due to these changed regulatory positions.
FDI Policy
Exit options have been a norm in foreign direct investments. However, since the last couple of years the RBI has been taking a view that exit options, such as put and call options, attached to Compulsorily Convertible Debentures/Preference Shares for foreign direct investment are not valid. The view being taken was that a fixed exit option makes the equity instrument equivalent to a debt instrument. Another view advanced by the RBI was that only exchangetraded derivatives are permissible and these option agreements are not exchange-traded. Gradually the RBI extended this view even to options attached to equity shares.
A counter-argument to this view of the RBI was that as long as the pricing guidelines are met on the exercise of the option and there is no fixed rate of Internal Rate of Return/fixed price, the option agreements are valid. If there is no guaranteed exit price and the ultimate price is subject to the prevailing FEMA pricing guidelines, a put or a call option was considered to be valid. Another argument was that if these were debt instruments, then who was the borrower? The foreign investment was in the Company, but the exit option was provided by the promoter. In such an event how can the options be classified as debt?
While this debate was raging, the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce issued the Consolidated FDI Policy vide Circular 2/2011 on 30th September 2011, which acted like the final straw which (temporarily) broke the camel’s back. This Policy contained a Clause 3.3.2.1, which stated that only equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI. Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the ECB guidelines. This bolt from the blue left the industry reeling.
Subsequently, taking heed to the adverse industry reaction, on 31st October 2011, a Corrigendum was issued by the DIPP deleting the above Clause 3.3.2.1. Hence, now according to the FDI Policy, even equity instruments/CCDs/CCPS issued/transferred to nonresidents having in-built options, would qualify as eligible instruments for FDI. Accordingly, they would not have to comply with the ECB Guidelines.
Earlier, there was a question mark over the validity of such options under the FEMA Regulations. However, it is now submitted that in view of the express provision in the FDI Policy banning exit options and its subsequent deletion, the Government’s position on this issue has become clear. For instance, the Supreme Court in the case of V. M. Salgaocar, 243 ITR 383 (SC) held that the fact a provision was introduced in the Income-tax Act in 1984 and subsequently repealed in 1985 showed the legislative intent. Now to take a view that put and call options are not permissible under the FDI Policy/FEMA Regulations is not tenable in the author’s view. One hopes that this is the last see-saw in the FDI Policy/FEMA Regulations and this stand is endorsed by all concerned.
SEBI’s view for listed companies
In addition to the flip-flop in the FDI policy, lately the SEBI has also sought removal of option clauses from Agreements. This stand was taken by the SEBI in the context of listed companies. The SEBI first took this view in the case of Cairn India Ltd.-Vedanta Resources Plc. When Vedanta filed a letter of offer to acquire the shares of Cairn India, the SEBI noticed that there was a put and call arrangement and preemptive rights. The SEBI asked the parties to drop these clauses.
Again, in the Informal Guidance issued by the SEBI to Vulcan Rubber Ltd., the SEBI held that an option arrangement in the case of a listed company is not valid. Option agreements have been around since several years. It is only now that the SEBI has woken up to them and is raising objections. However, these option agreements in the case of listed companies have had a very chequered past which also merits attention. Given below is a brief account of their history in chronological order:
(a) The Securities Contracts (Regulation) Act (‘SCRA’) regulates transactions in securities. This Act prohibits certain type of contracts and permits spot-delivery contracts or contracts through brokers. Spot-delivery contracts have been defined to mean contracts in securities which provide for the delivery and payment either on the day of the contract or on the next day.
(b) As far back as in 1955, the Division Bench of the Bombay High Court in the case of Jethalal C. Thakkar v. R. N. Kapur, (1955) 57 Bom. LR 1051 had upheld the validity of an option agreement in the context of the erstwhile Bombay Securities Contracts Control Act, 1925 (the Act in force prior to the SCRA). The Court held that an option agreement is a contingent contract and not a contract at all till such time as the contingency occurs. Hence, it is a valid contract and enforceable in law.
(c) By a 50-year old Notification (SO 1490), issued in 1961, the Central Government had specified that contracts for pre-emption or similar rights contained in the promotion or collaboration agreements or in Articles of Association of limited companies would not be covered within the purview of the Act. Thus, as far back as in 1961, the validity of pre-emptive and other rights were upheld.
(d) Subsequently, in June 1969, the Government issued another Notification u/s.16 of the SCRA stating that all contracts for sale and purchase of securities other than spot-delivery contracts were prohibited. The 1969 Notification did not rescind the 1961 Notification.
(e) The 1969 Notification was superseded by a Notification dated 1st March 2000, which divided the power to regulate various contracts in the securities between the SEBI and the RBI. The sum and substance of the 2000 Notification was on the lines of the 1969 Notification.
(f) Section 20 of the SCRA, which specifically prohibited options in securities was deleted w.e.f. 25-1-1995. Even the preamble prohibiting options was deleted. It is submitted that these deletions specifically show that the legislative intention was to permit options after 1995.
(g) In 2005, in a Summons for Judgment No. 766 of 2004 (in Summary Suit No. 2550 of 2004) a Single Judge of the Bombay High Court held in the case of Nishkalp Investments & Trading v. Hinduja TMT Ltd., that an agreement for buying back the shares of a company in the event of certain defaults was hit by the definition of spot-delivery contract under the SCRA and hence, unenforceable. It distinguished the Division Bench’s judgment in the case of Jethalal Thakkar (supra) on the grounds that it was rendered in the context of an earlier Act.
(h) As recent as in 2009, the validity of the 1961 Notification, relaxing pre-emptive and other rights from the purview of the SCRA, was upheld by the Punjab & Haryana High Court in the case of M/s. Rama Petrochemicals Ltd. v. Punjab State Industrial Development Corp. Ltd., CWP No. 12861/2006 (Order dated 27th Nov., 2009).
Thus, it is evident that this is a matter which is not free from a judicial controversy. Under the Indian Contract Act, 1872, an offeror makes a proposal to an offeree. Only when such an offer/proposal is accepted by the offeree and there is a valid consideration for the same, an agreement is said to have been executed. An agreement enforceable by law is a contract. Thus, a contract is completed only when there is an offer and an acceptance. In the case of an option agreement, there is only an offer, but no acceptance. Acceptance only takes place when the offeree exercises its option and at that point of time a contract is concluded. Till such time it is a contingent contract. Further, if the option agreement provides that once the option is exercised, it would be executed on a spot-delivery basis, i.e., the payment and delivery would take place either on the same day or by the next day, then the spot-delivery condition would also be complied on exercise of the contract.
Section 2 of the SCRA defines three terms – contract, derivatives and option in securities. Sections 13 and 16 of the SCRA deal with contracts. Section 18A deals with derivatives. Erstwhile section 20 dealt with options. Even section 20 which deals with penalties, provides separate penalties for contracts and derivatives. With the deletion of section 20 even the penalty provision relating to options was deleted from section 23. Thus, there are three separate sections dealing with three different types of instruments. Hence, it is submitted that the 2000 Notification u/s.16 of SCRA applies only to a contract in securities and not to an option in securities. Options in securities is not covered by section 16 and the erstwhile section 20 has been specifically deleted.
Hence, it is submitted that an option agreement is not an executed contract but only a contingent contract and that such an agreement is valid and not hit by the prohibitions under the SCRA.
One can still find some merit in the SEBI’s argument in cases where both the put and call options are at the same price (As was the case in the Vedanta deal). This is because in such cases it is a no-brainer that one of the parties would definitely exercise its option under the Agreement and this could make it the equivalent of a definite/binding forward contract. However, where there is a price differential between the two, then, in the author’s view, an option agreement is valid and enforceable. An option agreement is a contract between two shareholders of a company. How can there be any fetters on the right of a shareholder to sell his shares, to grant an option on these shares, etc.? Can the SEBI’s jurisdiction extend over such private treaties also? Several Government disinvestments, such as, Balco, contained put and call options. Were all of these also be invalid and that too ab initio? One hopes the Regulator takes a relook at these factors and does a rethink on its stance.
Validity of Pre-emptive Rights
Even while we are jostling with the issue of validity of option agreements, comes a much larger issue — are pre -emptive and other rights valid at all in the case of listed and unlisted public companies? These would include pre-emptive rights, such as right of first refusal, tag along rights, drag along rights, etc.
Various Supreme Court decisions, such as V. B. Rangaraj v. V. B. Gopalkrishnan, 73 Comp. Cases 201 (SC), have held that a Shareholders’ Agreement executed between members of a company is binding on the company only if it is contained in the Articles of Association of the company.
A Single Judge of the Bombay High Court in the case of Western Maharashtra Development Corporation v. Bajaj Auto Ltd., (2010) 154 Comp. Cases 593 (Bom.), had ruled that a Shareholders’ Agreement containing restrictive clauses was invalid since the Articles of a public company could not contain clauses restricting the transfer of shares and it was contrary to section 108 of the Companies Act, 1956.
Subsequently, a two-Member Bench of the Bombay High Court, in the case of Messer Holdings Ltd. v. Shyam Ruia and Others, (2010) 159 Comp. Cases 29 (Bom.) has overruled this decision of the Single Judge of the Bombay High Court. The Court here was concerned with the validity of a Right of First Refusal Clause. The Court held that the intent of section 111A of the Companies Act dealing with free transferability of shares does not in any manner hamper the right of its shareholders to enter into private treaties so long as it is in accordance with the Companies Act and the company’s Articles. Had the Act wanted to prevent such private contracts it would have expressly done so. The Court relied on the Supreme Court’s decision in the case of M. S. Madhusoodhanan v. Kerala Kaumudi Pvt. Ltd., (2004) 117 Comp. Cases 19 (SC) which has held that consensual agreements between shareholders relating to their shares do not impose restriction on transferability of shares and they can be enforced like any other agreement.
Hence, as the position now stands, restrictive clauses and pre-emptive rights in a public limited company would be valid under the Companies Act. It may be specifically noted that the judgment in Messer Holdings (supra) was in the case of a listed company which is contrary to SEBI’s stance taken in the case of Cairns as regards validity of pre-emptive rights. The High Court’s judgment is binding even on the SEBI.
A later decision of a Single Judge of the Bombay High Court in the case of Jer Rutton Kavasmanek v. Gharda Chemicals Ltd., (2011) 166 Comp. Cases 377 (Bom.) has held that there are only two types of companies under the Companies Act — private and public. The concept of a deemed public company has been done away with and hence, pre-emptive rights which are contained in the Articles of a public company must not be recognised. Shares of a public company are freely transferrable and this would override anything contained in the Articles to the contrary. It may be noted that the Court did not go into whether a Shareholders’ Agreement executed by members which contained a pre-emptive clause was valid or not. It only dealt with a situation where the Articles of Association contained pre-emptive clauses. The conclusion arrived at seems to be that where the shareholders have not executed any agreement, but the Articles themselves provide for a restriction, the same would be invalid.
Conclusion
One fails to understand when the position has been so well settled since the last several years, why take such steps which upset the investment climate? Even Courts respect the doctrine of stare decisis, i.e., to stand by the decided and not to unsettle the settled law which has been practiced for several years — ALA Firm, 189 ITR 285 (SC). At a time when the international economy is reeling with recession, India is one of the few countries which are looked upon favourably by foreign investors. A monkey wrench in the works would only scare away PE/FDI funds and seriously curtail the Indian growth story. One can only hope that this fog of uncertainty is cleared and sunshine returns soon. The current puzzled regulatory scenario reminds one of William Shakespeare’s famous quote:
“Confusion Now Hath Made his Masterpiece!”
Computers and computer networks are usually the heart and mind of any computer ecosystem, whether at your office or at your home. Generally, one tends to attach a lot more significance to the business ecosystem as compared to the ecosystem in one’s home and the common excuse is cost vs benefit analysis. Often the argument forwarded is that the data in the office is sensitive and therefore needs to be secured. This argument ignores the fact that the data at home is far more personal and any compromise there may well turn out to be a fatal error.
This article aims to give some quick easy, do it yourself tricks for securing your computer, wireless networks and your phone.
For those of you who missed it . . . . . . last month the BCAS had organised a free lecture meeting on ethical hacking. The speaker was Master Shantanu Gawade. A master not only because of the knowledge he possess on the subject of hacking, computer programming, etc., but also because he is a tender 14 years of age. Shantanu’s presentation evoked mixed reactions of shock and awe. Most of the members present were shocked by the potential threats that they had inadvertently exposed themselves to, and in awe because of the skills and knowledge displayed by a precocious boy of 14 years. Those who were able to comprehend the dangers that lay ahead asked — how do we deal with this menace, how do we insulate ourselves? Shantanu was candid enough to say that there are no silver bullets to this problem and that prevention was one of the best answers.
While it would be difficult to address every single issue, there are a few ‘do-it-yourself’ steps that you can take to reduce the threats. This write-up summarises the steps that you can take
Those of you who were present during Shantanu’s presentation would instantly agree that the above would be good starting point.
How safe is your WIFI network:
A WIFI network provides several advantages (no wires and no ugly holes in your wall are just two of them1). A WIFI network allows a user to access the network without being tied to one particular spot. In other words, the user has the convenience of moving from his desk to another desk or conference room, etc. (at home- from your living room to any other room) and still be able to access the Internet or your server. WIFI signals can travel within the periphery (i.e., 360° of the periphery) of the router/ access point up to a particular range. You may say “it’s a huge convenience” and your neighbour might say “a huge convenience to me also”.
An unsecured connection allows neighbours and strangers access to your Internet connection and possibly your home network2. They could stream video over your connection, slowing down your own Internet access. If they have the skills, they may be able to search your hard drive for bank account numbers and other sensitive information. Even worse, they could download something illegal, such as hack some critical infrastructure, pornography, and make it look to the police as if you’re the guilty party. (You may recall that the cybercrime cell had traced some terror emails to the house of gullible citizens with an unsecured network — exploited by trouble-makers.)
So how do you prevent yourself from such threats. While switching off the network may be the easiest way, the proper solution would be to use WPA2 security. WPA2 offers considerably more than the older standards, WEP and WPA, both of which can be cracked in minutes. WPA2 can also be cracked, but if you set it up properly, cracking it will take more of the criminal’s time than anything on your network is worth. Unless of course hacking networks is the criminal’s bread and butter, sole purpose of the criminal’s existence.
Locking your WIFI network
Step 1 in this direction would be to check your router’s menus or manual to find out how to set up WPA2 protection. Once you have activated the settings the next step would be to lock down the same with a secure password.
If Step 1 fails, then to get started, you’ll need to log in to your router’s administrative console by typing the router’s IP address into your web browser’s address bar. Most routers use a common address like 192.168.1.1, but alternatives like 192.168.0.1 and 192.168.2.1 are also common. Check the manual that came with your router to determine the correct IP address; if you’ve lost your manual, you can usually find the appropriate IP address on the manufacturer’s website. Once you have find the appropriate IP address, first change the default password. Generally the default password is ‘admin’ or something similar provided by the manufacturer. Retaining the default password is very risky, because it is rumoured that there’s a public database containing default login credentials for more than 450 networking equipment vendors and there is a high probability that the hacker has already accessed it.
Though no password is foolproof, you can build a better password by combining numbers and letters into a complex and unique string. It is also important to change both your Wi-Fi password (the string that guests enter to access your network) and your router administrator password (the one you enter to log in to the administration console — the two may sometimes be the same) at regular intervals.
Step 2 is to change the Service Set ID (‘SSID’):
Every wireless network has a name, known as a Service Set ID (or SSID). The simple act of changing that name discourages serial hackers from targeting you, because wireless networks with default names like ‘linksys’ are likelier to lack custom passwords or encryption, and thus tend to attract opportunistic hackers. Don’t bother disabling SSID broadcasting; you might be able to ward off casual Wi-Fi leeches that way, but any hacker with a wireless spectrum scanner can find your SSID by listening in as your devices communicate with your router.
Step 3 is to enable the WAP 2 security:
If possible, always encrypt your network traffic using WPA2 encryption, which offers better security than the older WEP and WPA technologies. If you have to choose between multiple versions of WPA2 — such as WPA2 Personal and WPA2 Enterprise — always pick the setting most appropriate for your network. (Unless you’re setting up a large-scale business network with a RADIUS server, you’ll want to stick with WPA2 Personal encryption.)
Step 4 is to enable MAC filtering:
Running ipconfig will display your current network configuration. Every device that accesses the Internet have a Media Access Control (‘MAC’) address, which is a unique identifier composed of six pairs of alphanumeric characters. You can limit your network to accept only specific devices by turning on MAC filtering, which is also a great tip for optimising your wireless network. To determine the MAC address of any Windows PC do the following:
Thankfully, most modern routers display a list of devices connected to your network along withtheir MAC address in the administrator console, to make it easier to identify your devices. If in doubt, refer to your router’s documentation for specific instructions.
Step 5 limit DHCP Leases to your devices:
Dynamic Host Configuration Protocol (DHCP) makes it easy for your network to manage how many devices can connect to your Wi-Fi network at any given time, by limiting the number of IP addresses your router can assign to devices on your network. Tally how many Wi-Fi-capable devices you have in your home; then find the DHCP settings page in your router administrator console, and update the number of ‘client leases’ available to the number of devices you own, plus one for guests. Reset your router, and you’re good to go.
Step 6 is Block WAN Requests:
This is the last step. Enable the Block WAN Requests option, to conceal your network from other Internet users. With this feature enabled, your router will not respond to IP requests by remote users, preventing them from gleaning potentially useful information about your network. The WAN is basically the Internet at large, and you want to block random people out there from initiating a conversation with your router.
Once you’ve taken these steps to secure your wire-less network, lock it down for good by disabling remote administration privileges through the administrator console. That forces anyone looking to modify your network settings to plug a PC directly into the wireless router, making it nearly impossible for hackers to mess with your settings and hijack your network. In case you find the above steps difficult to follow, please take the services of a professional and get it done before it’s too late.
Hope you have a safe computing experience. Cheers!
If for any reason ESOP discount cannot be claimed u/s.37, it would alternatively be allowable u/s.28 of the Act.
Business loss is different from expenditure
Disbursement or expenses of a trader is something ‘which goes out of his pocket’. A loss is something different. That is not a thing which he expends or disburses. That is a thing which comes upon him ‘ab-extra’ from outside.
There is a distinction between the business expenditure and business loss. Finlay J said
in the case of Allen v. Farquharson Bros., 17 TC 59, 64 observed
“…expenditure or disbursement means something or other which the trader pays out; I think some sort of volition is indicated. He chooses to pay out some disbursement; it is an expense; it is something which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which so to speak, comes upon him ab-extra”
Certain judicial principles have held that section 37 does not envisage losses. The Supreme Court in the case of CIT v. Piara Singh, (1980) 124 ITR 40 (SC) held —
“The confiscation of the currency notes is a loss occasioned in pursuing the business; it is a loss in much the same was as if the currency notes had been stolen or dropped on the way while carrying on the business.”
In the case of Dr. T. A. Quereshi v. CIT, (2006) 287 ITR 547 (SC), the Supreme Court relied on the aforesaid judgment and held —
“The Explanation to section 37 has really noth-ing to do with the present case as it is not a case of a business expenditure, but of business loss. Business losses are allowable on ordinary commercial principles in computing profits. Once it is found that the heroin seized formed part of the stock-in-trade of the assessee, it follows that the seizure and confiscation of such stock-in-trade has to be allowed as a business loss.”
If ESOP discount is not held to be expenditure, its deductibility will have to be examined u/s.28 of the Act.
Business loss allowable u/s.28
Sections 30 to 37 are not exhaustive of the type of permissible deductions. Non deductibility u/s.30 to 37 does
not mar the claim for business loss as a deduction. These are to be allowed in section 28 itself.
“The list of allowances enumerated in sections 30 to 43D is not exhaustive. An item of loss incidental to the carrying on of a business may be deducted while computing the profits and gains of that business, even if it does not fall within any of the specified sections”.
The above observations have been quoted with approval in CIT v. Chitnivas, AIR 1932 PC 178; Ram-chander Shivnarayan v. CIT, (1978) 111 ITR 263, 267 (SC); Motipur Sugar Factory Ltd. v. CIT, (1955) 28 ITR 128 (Pat.); Tata Iron & Steel Co. Ltd. v. ITO, (1975) 101 ITR 292, 303 (Bom.).
As mentioned earlier, the charge u/s.28 is on ‘profits’. This term has to be understood in a commercial sense. Expenditure incurred or loss suffered in the course of business or which is incidental to the carrying of business would be allowed as a deduction even in the absence of any statutory provision granting such deduction.
The concept of ‘profit’ in section 28 and the provisions of sections 30 to 43D correspond to section 10(1) and section 10(2) respectively of the Indian Income Tax Act, 1922. The interrelation of these sections was explained by the Supreme Court in Badridas Daga v. CIT, (1958) 34 ITR 10 (SC), in the following words:
“It is to be noted that while section 10(1) imposes a charge on the profits and gains of a trade, it does not provide how those how profits are to be computed. Section 10(2) enumerates various items which are admissible as deductions, but it is settled that they are not exhaustive of all allowances which could be made in ascertaining profits taxable u/s.10(1). The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2) whether it is admissible or not will depend on whether having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed provided of course there is no prohibition against it, express or implied in the Act.”
Accordingly, a loss suffered in the course of business and incidental to the carrying of business is allowable as a deduction even in the absence of any specific provision conferring the said deduction.
Conditions for claim of loss u/s.28
In order to claim a loss u/s.28, such loss should fulfill the following conditions:
A. ESOP discount is real loss and not notional or fictitious
Under the general principles of tax laws, artificial and/ or fictitious transactions are disregarded. In order to be deductible, the loss must be a real loss and not merely notional or anticipatory.
In an ESOP, the loss is the sum that the company could have derived, if it had issued the shares at the premium prevailing in the market. It is the quantum of money forgone, as a result of the employer choosing not to issue shares at market value.
A fair measure of assessing trading profits in such circumstances is to take the potential market value at one end and the actual proceeds at the other. The difference between the two would be the loss since loss is not notional or fictional.
Section 145(1) is enacted for the purpose of determining profits under the head ‘Profits and gains of business or profession’. In the present case, section 28 is relevant and hence, section 145(1) is attracted. Under the principles of mercantile system of accounting on which section 145 is founded, ‘prudence’ is an extricable part. Under this principle, the expenditure is debited when a legal liability has been incurred. Any ‘delay in actual disbursement’ or ‘non occurrence of disbursement’ does not mar the liability so created. In other words, expenses ought to be recognised in the year of incurrence of liability irrespective of the time of actual disbursement.
The recognition of the said loss is supported by the corresponding benefit enjoyed by an employee.
The enjoyment of a benefit by an employee and the corresponding suffering of a pecuniary detriment by the employer are two sides of the same coin. Being inter-related, the nature of benefit should influence the characterisation of the sufferance by the other.
ESOP is nothing but a bonus or an incentive paid in the form of company stocks. From an employee perspective, it is an election made by him by opting to have the bonus/incentive received in the form of shares. Alternatively, the employee may opt for actual payment of salary and subsequently, pay it back to the company as subscription to share capital. If such a mode is adopted the salary payment would be deductible. The receipt of subscription monies thereafter would be on capital account. The character of the subsequent transaction would not impact the allowability of the earlier payment. This conclusion should not alter merely because the two-stage transaction is accomplished through a unified act. One may rely on the principles underlined in Circular No. 731 [(1996) 217 ITR (St.) 5], dated December 20, 1995, in relation to claim u/s.80-O of the Act.
Circular No. 731, dated 20-12-1995 reads as follows:
“1. Under the provisions of section 80-O of the Income-tax Act, 1961, an Indian company or a non-corporate assessee, who is resident in India, is entitled to a deduction of fifty per cent. of the income received by way of royalty, commission, fees, etc., from a foreign Government or foreign enterprise for the use outside India of any patent, invention, model, design, secret formula or process, etc., or in consideration of technical or professional services rendered by the resident. The deduction is available if such income is received in India in convertible foreign exchange or having been converted into convertible foreign exchange outside India, is brought in by or on behalf of the Indian company or aforementioned assessee in accordance with the relevant provisions of the Foreign Exchange Regulation Act, 1973, for the time being in force.
2. Reinsurance brokers, operating in India on behalf of principals abroad, are required to collect the re-insurance premia from ceding insurance companies in India and remit the same to their principals. In such cases, brokerage can be paid either by allowing the brokers to deduct their brokerage out of the gross premia collected from Indian insurance companies and remit the net premia overseas or they could simply remit the gross premia and get back their brokerage in the form of remittance through banking channels.
3. The Reserve Bank of India have expressed the view that since the principle underlying both the transactions is the same, there is no difference between the two modes of brokerage payment. In fact, the former method is administratively more convenient and the reinsurance brokers had been following this method till 1987 when they switched over to the second method to avail of deduction u/s.80-O of the Act.
4. The matter has been examined. The condition for deduction u/s.80-O is that the receipt should be in convertible foreign exchange. When the commission is remitted abroad, it should be in a currency that is regarded as convertible foreign exchange according to FERA. The Board are of the view that in such cases the receipt of brokerage by a reinsurance agent in India from the gross premia before remittance to his foreign principals will also be entitled to the deduction u/s.80-O of the Act.”
(Emphasis supplied by us)
The Apex Court relied on the aforesaid circular, in the case of J. B. Boda and Company Private Limited v. CBDT, (1996) 223 ITR 271 (SC); and held —
“It seems to us that a ‘two-way traffic’ is unneces-sary. To insist on a formal remittance to the foreign reinsurers first and thereafter to receive the commission from the foreign reinsurer will be an empty formality and a meaningless ritual, on the facts of this case.”
Applying this principle in the present case, insisting for actual payment of salary to employees and taking it back as subscription to capital is unnecessary. The purpose is short circuited by issue of ESOP shares instead of initial salary payment and deployment of salary by the employees to buy stocks.
Hypothetically, it could be assumed that employees are paid remuneration with an attached compulsion/ condition to appropriate such payments mandatorily towards Company’s shares. In such cases, whether the deductibility of salary payments could be questioned? — The answer obviously is no. Disallowing ESOP discount on the ground that there is no actual payment of salary, but only profit forgone may not be a correct proposition of law.
B. Whether ESOP expenses have actually arisen/ incurred, not contingent upon future events?
A loss is allowable in the year in which it is incurred. In a commercial sense, trading loss is said not to have resulted so long as reasonable chances of obtaining restitution is possible. Losses can be claimed in the year in which they occur if there are no chances of recovery/restitution.
If one follows the mercantile system, the loss becomes deductible at the point when it occurs. Lord Russell in the case of CIT v. Chitnavis, 6 ITC 453, 457 (PC) stated
“You may not, when setting out to ascertain the profits and gains of one year, deduct a loss which had, in fact, been incurred before the commencement of that year. If you did you would not arrive at the true profits and gains for the year. For the purposes of computing yearly profits and gains, each year is a self contained period of time in regard to which profits earned or losses sustained before its commencement are irrelevant.”
The accounting treatment of a contingent loss is determined by the expected outcome of the contingency. If it is likely that a contingency will result in a loss to the enterprise, then it is prudent to provide for that loss in the financial statements.
The term ‘contingent’ has not been defined in the Act. Section 31 of the Indian Contract Act, 1872 defines ‘contingent contract’ as
A ‘contingent contract’ is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
A contract which is dependent on ‘happening’ or ‘not happening’ of an event is a contingent contract. In an ESOP, the loss contemplated is the discount on issue of shares. The quantum of loss would depend on the number of employees accepting the offer. This however does not render the loss ‘contingent’. In other words, the aggregate obligation to discharge discount to all the employ-ees in a year cannot be regarded as contingent merely because some employees may forfeit their rights. Accordingly, ESOP discount is not a contingent loss.
Support can be drawn from Owen v. Southern Railway of Peru Ltd., (1956) 36 TC 602 (HL) which dealt with a liability arising on account of gratuity benefit. It was held —
“where you are dealing with a number of obligations that arise from trading, although it may be true to say of each separate one that it may never mature, it is the sum of the obligations that matters to the trader, and experience may show that, while each remains uncertain, the aggregate can be fixed with some precision.”
ESOP discount is thus an ascertained loss. ESOP discount is actuarially calculated. The Black-Scholes model or the Binomial model is generally used in quantifying the discount. The method of ascertaining the loss is scientific. It is not adhoc or arbitrary.
C. Whether ESOP discount is incidental to business and not on capital account
It is only a trading loss that is allowable and not capital loss. The loss should be one that springs directly from carrying on of the business or is incidental to it. From section 28 it is discernible that the words ‘income’ or ‘profits and gains’ should be understood as including losses also. In other words, loss is negative profit. Thus, trading loss of a business is deductible in computing the profits earned by the business. The loss for being deductible must be incurred in carrying out business or must be incidental to the operation of business. The determination of whether it is incidental to business is a question of fact.
For the reasons already detailed, ESOP discount should be treated as a revenue account. Business income is to be computed based on the general commercial principles. In the application of these commercial principles, reckoning a loss is an integral part.
In summary, ESOP discount is a loss incidental to business which is incurred by the company. This loss is incurred on account of forgoing the right to issue shares at a higher value. The company abdicates such right in favour of employees as a part of employee recognition and compensation strategy. It is an act which is consistent and justified by the business interest of the employer. Accordingly, a claim of ESOP discount should be allowable u/s.28 of the Act, if it is, for any reason, not allowable u/s.37.
PART C(5) — Year of deductibility
After ascertaining that the ESOP discount is a deductible expense, the year of deductibility needs to be determined. As per section 145, provision should be made for all known liabilities and losses, even though the amount cannot be determined with certainty. Section 145(1) regulates the method of accounting for computing incomes under the ‘Business income’ and ‘Income from other sources’ head. It provides:
“(1) Income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources’ shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.”
Assessees therefore have a choice in selecting the system of accounting to be followed in maintenance of the books of account. However, u/s.209 of the Companies Act, 1956, companies are bound to maintain their accounts on the accrual or mercantile basis only. If companies fail to follow the accrual system of accounting, it will be deemed that no proper books have been maintained by them.
Under the mercantile or accrual system of accounting, income and expenditure are recorded at the time of their accrual or incurrence. For instance, income accrued during the year is recorded whether it is received during the year or during a year preceding or following the relevant year. Similarly, expenditure is recorded if it becomes due during the previous year, irrespective of the fact whether it is paid during the previous year or not. The profit calculated under the mercantile system is profit actually earned during the previous year, though not necessarily realised in cash.
There can be no computation of profits and gains until the expenditure necessary for earning the receipts is deducted therefrom. Profits or gains have to be understood in a commercial sense. Whether the liability was discharged at some future date, would not be an impediment in the claim as a deduction. The difficulty in the estimation of expenditure would not convert the accrued liability into a conditional one. This was upheld by the Apex Court in the case of Calcutta Co. Limited v. CIT, (1959) 37 ITR 1 (SC).
The use of the words ‘laid out or expended’ in section 37 along with the word ‘expenditure’ indicates that the expenditure may either be an actual outgo of money irretrievably (expended as per the cash system of accounting) or a putting aside of money towards an existing liability (laid out as per the mercantile system of accounting) . The decisions in 3 CIT v. Nathmal Tolaram, (1973) 88 ITR 234 (Gauhati) and Saurashtra Cement and Chemical Industries Ltd. v. CIT, (1995) 213 ITR 523 (Guj.) support this proposition.
The ESOP discount is an expenditure incurred for the purpose of business. In accordance with section 145, business income has to be computed in accordance with the method of accounting regularly followed by the assessee. As discussed earlier, the choice of ‘method’ of accounting is with the assessee. The computation of income and expenses should be in accordance with the ‘method of accounting’ so followed by the assessee. The term ‘method’ is defined in the Oxford Dictionary as ‘procedure for attaining an object’.
The operative portion of section 145 uses the phrase ‘system of accounting regularly employed’. The term ‘regularly’, as defined in Concise Oxford Dictionary means ‘following or exhibiting a principle, harmonious, constituent, systematic’. Such system/method of accounting for ESOP discount is prescribed by SEBI. The SEBI guidelines mandates the ESOP discount to be spread over the period of vesting. The company is therefore obliged to follow the guidelines and that forms its ‘regular system of accounting’ (for the purposes of section 145). Income-tax statute follows the system so mandated. A method/system of accounting may be disregarded only when the assessing officer is not satisfied about the correctness or completeness of accounts or where the method of accounting has not been regularly followed. Such system which is based on guidelines prescribed by the regulatory bodies cannot be negated on the grounds that there are alternative methods/systems possible. An aliquot portion of the ESOP discount may be allowed in each of the years and this is the position recommended by SEBI as well.
Part D — Judicial pronouncements
Certain favourable judicial pronouncements
The honorable Chennai Tribunal in the case of S.S.I. Limited v. DCIT, (2004) 85 TTJ 1049 (Chennai) held that the ESOP discount is an allowable expenditure. In the aforesaid case, the assessee amortised the ESOP discount over a period of three years and claimed it as staff welfare expense. The Assessing Officer (AO) allowed this claim of expenditure. The Commissioner of Income-tax initiated proceedings u/s.263 of the Act holding the AO’s order to be prejudicial to the interests of the Revenue. It enlisted various grounds in support of this. Specifically, ground number 5 reads as below:
“…..The Assessing Officer has allowed this claim without any application of mind inasmuch as no details have been called for. What was the basis of arriving at the difference has also not been ex-amined. The difference between the market value of the shares and the discounted value at which these were allotted to the employees cannot be a revenue expenditure.”
The CIT directed the AO to disallow the ESOP discount. The assessee appealed against such order before the Chennai Tribunal. The Tribunal’s decision is therefore with reference to appeal against the revision order passed by the CIT u/s.263 and not the basis of regular appeal.
The basis of the assumption of the jurisdiction u/s.263 by the CIT is that the AO had not applied his mind in deciding on the issues in his order. Typically, the Tribunal would examine this aspect and decide whether the exercise of such jurisdiction is justified or not. In the SSI’s case, the Tribunal gave its decision by discussing merits of each of the issues in detail. An extract of discussion on the ESOP discount is as follows :
“…..It was a benefit conferred on the employee and a benefit, which could not be taken back by the company. So far as the company is concerned, once the option is given and exercised by the employee, the liability in this behalf is ascertained. This fact is recognised even by SEBI and the entire ESOP scheme is governed by the guidelines issued by SEBI. It is not the case of contingent liability depending upon various factors on which the assessee had no control…. There can be no denial of the fact that in respect of ESOP, SEBI had issued guidelines and assessee-company had followed these guidelines to the core and the claim of expenditure was in accordance with the guidelines of SEBI…. ”
(Emphasis supplied by us)
The ESOP discount was held as an employee benefit. It was an ascertained liability which was recognised in the books of account. Reliance was placed on the SEBI regulations. The regulations mandated charge of such expense to profit and loss account.
In the case of Consolidated African Selection Trust v. Inland Revenue Commissioners, (1939) 7 ITR 442 (CA), the Court dealt with the issue of shares be-ing an alternate mode of liability discharge. It was observed:
“If an employer having two receptacles, one containing cash and the other containing goods, chooses to remunerate his employee by giving him goods out of the goods receptacle instead of cash out of the cash receptacle, the expenditure that he makes is the value of those goods, not their purchase price or anything else but their value, and that is the amount which he is entitled to deduct for income-tax purposes.”
Distinguishing certain judicial precedents
In this part, we discuss why the decisions of the Delhi Tribunal in Ranbaxy’s case (2009) 124 TTJ 771 (Del.) and Lowry’s case 8 ITR 88 (Supp) are distinguishable where the ESOP discount was held as not an allowable expenditure.
It is a trite law that a judgment has to be read in the context of a particular case. A judgment cannot be applied in a mechanical manner. A decision is a precedent on its own facts. In State of Orissa v. Md. Illiyas, AIR 2006 SC 258, the Supreme Court explained this principle in the following words:
“…..Reliance on the decision without looking into the factual background of the case before it is clearly impermissible. A decision is a precedent on its own facts. Each case presents its own features.”
The following words of Lord Denning in the mat-ter of applying precedents have become locus classicus:
“Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect, in deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one case against the colour of another. To decide therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive…..”
Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches, else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it.”
Ranbaxy case has largely relied on this decision of the House of Lords and accordingly, we have not provided any specific comments on this case. Here-inbelow are our comments/rebuttal on contentions raised in the Lowry’s case. These would apply for the Ranbaxy case also apart from what has been outlined hereinbefore.
Lowry’s case based on foreign law
The decision of the Court in Lowry’s case was based on the then prevailing English law. Before dwelling on the specific arguments/contentions in this case, it may be relevant to discuss the principle of interpretation in case of foreign judicial precedents.
The words and expressions in one statute as judicially interpreted do not afford a guide to the construction of the same words or expressions in another statute unless both the statutes are pari materia legislations. English Acts are not pari materia with the Indian Income-tax Act. In some cases, English decisions may be misleading since the Act there may contain provisions that are not found in the Indian statute or vice versa. As a result, foreign decisions are to be used with great circumspection. They are not to be applied unless the legal and factual backgrounds are similar.
The Supreme Court in the case of Bangalore Water Supply and Sewerage Board v. A. Rajappa, AIR 1978 SC 548 held — “Statutory construction must be home-spun even if hospitable to alien thinking.”
The Supreme Court in the case of General Electric Company v. Renusagar Power Co., (1987) 4 SCC 213 held — “When guidance is available from binding Indian decisions, reference to foreign decisions may become unnecessary.”
The rationale of the ESOP discount being capital expenditure is largely based on the Lowry’s case. This was a landmark judgment by the House of Lords in the year 1940. However, the applicability of this judgment in the present age, case and context is debatable.
The Lowry’s case was adjudged on the principles prevailing then before the House of Lords. Lord Viscount Maugham (one of the judges who held the ESOP discount to be capital in nature) observed:
“The problem which arises under Schedule D seems to me to be a very different one, since it concerns profits of a trade and is subject to a large number of prohibitions as to the deductions which alone are permissible and no other statutory rules of some complexity.”
(Emphasis supplied by us)
From the above observation, one can infer that deductibility of any business expenditure was subject to strict prohibitions. An expense would not be a deductible unless specifically allowed. This is in total contrast to the provisions of deductibility under the Income-tax Act (as discussed earlier) which allows any business expenditure unless specifically prohibited. The provisions of law applied in the case of Lowry are not pari materia with the Act. Accordingly, the judgment cannot and should not be relied upon.
It is presumed that Parliament intends the Court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes. The interpretation must keep pace with changing concepts and values and should undergo adjustments to meet the requirements of the developments in the economy, law, technology and the fast changing social conditions. The Supreme Court decisions in the cases of Bhagwati J. Gupta v. President of India, AIR 1982 SC 149 and CIT v. Poddar Cements, 226 ITR 625 (SC) can be referred in this regard.
In the treatise ‘The Principles of Statutory Interpre-tation’ by Justice G. P. Singh, (9th edition — page 228) the learned author observes:
“It is possible that in some special cases a statute may have to be historically interpreted “as if one were interpreting it the day after it was passed.” But generally statutes are of the “always speaking variety” and the court is free to apply the current meaning of the statute to present-day conditions. There are at least two strands covered by this principle. The first is that the court must apply a statute to the world as it exists today. The second strand is that the statute must be interpreted in the light of the legal system as it exists today.”
(Emphasis supplied by us)
The Apex Court in the case of CIT v. Poddar Cements, 226 ITR 625 (SC) relied on the treatise ‘Statutory Interpretation’ by Francis Bennion, (2nd edition — section 288) with the heading ‘Presumption that updating construction to be given’ (page 617, 618, 619) and observed as follows:
“It is presumed that Parliament intends the Court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as current law.
In construing an ongoing Act, the interpreter is to presume that Parliament intended the Act to be applied at any future time in such a way as to give effect to the true original intention. Accordingly the interpreter is to make allowances for any relevant changes that have occurred, since the Act’s passing, in law, social conditions, technology, the meaning of words, and other matters…. That today’s construction involves the supposition that Parliament was catering long ago for a state of affairs that did not then exist is no argument against that construction. Parliament, in the wording of an enactment, is expected to anticipate temporal developments. The drafter will try to foresee the future, and allow for it in the wording.
An enactment of former days is thus to be read today, in the light of dynamic processing received over the years, with such modification of the current meaning of its language as will now give effect to the original legislative intention. The reality and effect of dynamic processing provides the gradual adjustment. It is constituted by judicial interpretation, year in and year out. It also comprises process-ing by executive officials.”
The Supreme Court in the case of Bhagwati J. Gupta v. President of India, AIR 1982 SC 149 held:
“The interpretation of every statutory provision must keep pace with changing concepts and values and it must, to the extent to which its language permits or rather does not prohibit, suffer adjustments through judicial interpretation so as to accord with the requirements of the fast changing society which is undergoing rapid special and economic transformation. The language of a statutory provision is not a static vehicle of ideas and concepts and as ideas and concepts change, as they are bound to do in a country like ours with the establishment of a democratic structure based on egalitarian values and aggressive developmental strategies, so must the meaning and content of the statutory provision undergo a change. It is elementary that law does not operate in a vacuum. It is not an antique to be taken down, dusted admired and put back on the shelf, but rather it is a powerful instrument fashioned by society for the purpose of adjusting conflicts and tensions which arise by reason of clash between conflicting interests. It is therefore intended to serve a social purpose and it cannot be interpreted without taking into account the social, economic and political setting in which it is intended to operate. It is here that the Judge is called upon to perform, a creative function. He has to inject flesh and blood in the dry skeleton provided by the Legislature and by a process of dynamic interpretation, invest it with a meaning which will harmonise, the law with the prevailing concepts and values and make it an effective, instrument for delivery of justice….”
In case of ESOP, the primary issue revolves around the character of discount — whether capital or revenue? In this context, it may be relevant to quote one of the observations of the Apex Court in the case of Alembic Chemical Works Co. Ltd. v. CIT, (1989) 177 ITR 377 (SC). The Court observed:
“The idea of ‘once for all’ payment and ‘enduring benefit’ are not to be treated as something akin to statutory conditions; nor are the notions of ‘capital’ or ‘revenue’ a judicial fetish. What is capital expenditure and what is revenue are not eternal verities, but must be flexible so as to respond to the changing economic realities of business. The expression ‘asset or advantage of an enduring nature’ was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.”
Interpretation must be with reference to the law and circumstances as it exists when tax has to be paid. This helps in keeping the meaning updated with changing times. In the present eco-nomically advancing modern world, the purpose of ESOP should not be defeated by the narrow interpretation of colouring the transaction as a mere transaction of ‘issue of shares’. The approach of the present-day taxes is to recognise ESOP as a tool of employee compensation.
In Lowry’s case, as per the then prevailing law, a claim of deduction was subject to a large number of prohibitions which alone were permissible. This contradicts the rules of deductibility under the Act. This law is not pari materia with the Act. Accordingly, the binding nature of the Court is diluted. Even otherwise, the Court’s decision could be rebutted on the following points:
Intention of the parties to the transaction and objective were discerned by placing a huge reliance on the terms and conditions in the employee letters. However, Lord Russell (judge of the majority view) has himself acknowledged:
“The transactions as evidenced by the documents does not, I think, warrant the terminology.”
Any conclusion drawn by placing reliance on badly drafted document is not valid. Reliance was placed on employee letters which were tainted by erroneous drafting/wrong language and nomenclatures. The majority view that ESOP is primarily to issue shares and not employee remuneration (by deriving support from the impugned letters), is thus not a correct statement of fact. The Court seems to have given weightage to form over substance of the transaction.
The Court held that the ESOP discount is not an item of profit/trading transaction and there was no impact on the financial position.
This write -up has examined the treatment of the ESOP discount from various angles, namely, commercial accounting, international practices, statutory guidelines and from an income-tax perspective. All lead to the same conclusion that ESOP is a revenue item which needs to be treated as a charge against profits. It is a part of the financial statements.
All the judges deliberated on some of the judicial precedents (primarily, Usher’s case and Dexter case).
These cases are not applicable in the present case — they are factually distinguishable. Even otherwise, these judgments relate to foreign law which is not pari materia with the Act and hence are inconsequential.
Company’s perspective: The Court held that no money’s worth had been given up by the Company.
The ESOP discount is the difference between the strike price paid and the value of the share at the date the option is exercised. This difference is certainly a charge against the profits — as an expense, profit forgone or a loss. There is a loss of opportunity of issue of shares at the prevailing market price. It is certainly a money’s worth given up. In fact Lord Viscount (judge from majority view) said:
“If this House had regarded the transaction as one in which the company was giving “money’s worth” in the sense of an equivalent for cash in consider-ation of the promise to subscribe for shares the decision would have been the other way.”
In case of the ESOP discount, the Company has for-gone share premium receivable. The Company has given up a portion of money receivable on issue of its shares. Accordingly, the aforesaid contention is rebutted.
Employee’s perspective: ESOP was held to be gift to the employees and that employees had not given up anything for procuring these shares.
ESOP is a form of employee remuneration. It is a remuneration paid either for his past services or with intent to retain his services for the future. Thus it is an award in lieu of his services to the organisation rendered/expected to be rendered. This truth has been acknowledged by the regulatory bodies — OECD, SEBI and ICAI. The Karnataka High Court has acknowledged ESOP as an employee remuneration tool.
The Court held that ESOP being an application of salary to employees for share subscription — is only a hypothetical proposition.
The ESOP discount is amount notionally received on capital account and utilised on revenue account. Instead of salary being paid and inturn application of employees to ESOP, this two-way transaction has been short-circuited. Support can be drawn from Circular 731, dated 20-12-1995 and Apex Court decision in the case of J. B. Boda and Company Private Limited v. CBDT, (1996) 223 ITR 271 (SC).
The Court held that share premium is a capital receipt. Forbearance of such capital receipt is not deductible.
It has been sufficiently put forth that the ESOP discount is a revenue item. The ESOP discount is not a capital receipt. The determination of capital v. revenue should be done based on the utilisation of expense. The ESOP discount is incurred for employee benefit and hence revenue in nature.
The Court held that the fact that the employee paid tax on ESOP (on benefit of discount on share premium) was inconsequential in determining the allowability of the ESOP discount.
It is an accepted principle that ‘Income charge-ability’ is not the basis for ‘expenditure allowability’. The fact that amount receivable has the character of income in the hands of recipient, is not relevant for determining the expense allowability. The fact that it does not get taxed or is taxed at a later point of time or is taxed under a different head in the hands of the employee would not be relevant.
Additionally, comments of Lord Wright (judge from minority view) are worth men-tioning which held that ESOP was held taxable in employee’s hands, but was not correspondingly entitled to deduction in the hands of employer:
“….he was receiving by way of remuneration money’s worth at the expense of the company, and yet that the company which was incurring the expense for purposes of its trade to remunerate the directors was not entitled to deduct that expense in ascertaining the balance of its profits….”
The Court held that the Company was entitled to issue shares at a lesser/discounted value and it did so. It was a matter of election or choice and not a discharge of any liability/debt.
It may be relevant to note that ESOP is a form of employee remuneration/salary. Salary is a consideration for services rendered by the employees. It is an obligation/liability incurred for the business. Accordingly, the ESOP discount is allowable expenditure. In fact Lord Viscount (judge of majority view) held as follows:
“….If in this case the employees were paying the par value of the shares and also releasing to the company some amounts of salary due to them, the case would be very different from what it is….”
This observation supports the view that the ESOP dis-count in discharge of salary due to employees could have been held deductible by the Court itself.
To summarise, there are judicial precedents supporting the ESOP discount to be an allowable revenue expenditure and judgments with contrary view can be distinguished on law and facts.
Closing comments
Typically, a payment to an employee is called as ‘Salary’. This payment may be ‘paid in meal or malt’. ESOP is just another form of such salary given to employees. Etymologically, the term ‘Salary’ owes it origin to the Latin term ‘salarium’ which means ‘money allowed to Roman soldiers for purchase of salt’. One could therefore trace back the concept of payment in kind to the Roman age. This payment of salary in kind has taken various forms over a period of time. Employees have been rewarded with assets such as gold, accommodation, motor vehicles; facilities such as personal expense reimbursement, insurance and medical facilities, etc.; sometimes not only for employees but for their family members as well. Employee rewards in kind have taken various shapes. ESOP is one among them. It is an employee welfare measure. Such measures need a boost from the income-tax authorities. Such support would only escalate into a supportive social measure.
The Karnataka High Court in the case of CIT and Anr. v. Infosys Technologies Ltd., (2007) 293 ITR 146 (Kar.) had an occasion to comment on the same issue of ESOP discount. It held:
“India is a growing country. The technological development of this country has resulted in economical prosperity of this country. Several giant undertakings have shown interest in this great country after taking note of the manpower and the intelligence available in this country. Stock option is nothing new and it is being continued in the larger interest of industrial harmony, industrial relations, better growth, better understanding with employees, etc. It is a laudable scheme evolved and accepted by the Government. Good old days of only master and only servant is no longer the mantra of today’s economy. Today sharing of wealth of an employer with his employees by way of stock option is recognised, respected and acted upon. Such stock option is way of participation and it has to be encouraged…. The Department, in our view, must approve such welfare participatory pro-labour activities of an employer. Of course, we do not mean that if law provides for taxation, no concession is to be shown. But wherever there are gray areas, it is preferable for the Department to wait and not hurriedly proceed and arrest the well-intended scheme of welfare of the employer. We would be failing in our duty if we do not note the Directive Principles of the Constitution in the matter of labour participation. Article 43A provides that the State shall take steps by suitable legislation or by any other way to secure participation of workers in the management of undertakings, establishment or other organisation engaged in other industries…. We would ultimately conclude by saying that any welfare measure has to be encouraged, but of course within the four corners of law. We do hope that other employers would follow this so that the economic and social justice is made available to the weaker sections of society also.”
Human resource management has evolved as a separate field of study. Today this study is not restricted populating a concern with right people. The challenge is not mere correct staffing. This human resource need to be nurtured, trained and developed. They should be transformed from ‘people in the organisation’ to ‘people for and of the organisation’. This transformation is not automatic. It is a result of the committed effort from the concern/company. It is a commitment to reward for the past services of its employees as well as their future endeavours. This reward kindles motivation in employees; seemingly the only antidote to attrition. ESOP is just another employee motivation tool. No statute or fiscal law should discourage an employee motivation/welfare measure. Our attempt in this write-up has been to uphold this very thought.
(i) The transfer does not conform to the pricing guidelines as stipulated by the Reserve Bank from time to time; or
(ii) The transfer of shares requires the prior approval of the FIPB as per the extant Foreign Direct Investment (FDI) policy; or
(iii) The Indian company whose shares are being transferred is engaged in rendering any financial service; or
(iv) The transfer falls under the purview of the provisions of SEBI (SAST) Regulations. Similarly, transfer of shares from a Non-Resident to a Resident which does not conform to the pricing guidelines as stipulated by the RBI also requires prior approval of RBI.
This Circular provides that prior approval of RBI will not be required in the following cases:
A. Transfer of shares from a Non-Resident to Resident under the FDI scheme where the pricing guidelines under FEMA, 1999 are not met, provided that:
(i) The original and resultant investment are in line with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation, etc.
(ii) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations/guidelines (such as IPO, Book building, block deals, delisting, exit, open offer/substantial acquisition/ SEBI SAST, buyback).
(iii) Chartered Accountants’ Certificate to the effect that compliance with the relevant SEBI regulations/guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank. B.
Transfer of shares from Resident to Non- Resident:
(i) Where the transfer of shares requires the prior approval of the FIPB — provided that:
(a) The requisite approval of the FIPB has been obtained; and
(b) The transfer of share adheres with the pricing guidelines and documentation requirements as specified by the RBI from time to time.
(ii) Where SEBI (SAST) guidelines are attracted — subject to the adherence with the pricing guidelines and documentation requirements as specified by RBI from time to time.
(iii) Where the pricing guidelines under the Foreign Exchange Management Act (FEMA), 1999 are not met provided that:
(a) The resultant FDI is in compliance with the extant FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation, etc.
(b) The pricing for the transaction is compliant with the specific/explicit, extant and relevant SEBI regulations/guidelines (such as IPO, book building, block deals, delisting, exit, open offer/ substantial acquisition/SEBI SAST).
(c) Chartered Accountants’ Certificate to the effect that compliance with the relevant SEBI regulations/guidelines as indicated above is attached to the form FC-TRS to be filed with the AD bank.
(iv) Where the investee company is in the financial sector provided that:
(a) NOC are obtained from the respective financial sector regulators/regulators of the investee company as well as transferor and transferee entities and such NOC are filed along with the form FC-TRS with the AD bank.
(b) The FDI policy and FEMA regulations in terms of sectoral caps, conditions (such as minimum capitalisation, etc.), reporting requirements, documentation etc., are complied with.
This Circular has relaxed the requirements as under:
FII:
(i) FII would, in addition to investment in infrastructure companies, also be allowed to invest in non-convertible debentures/bonds issued by Non-Banking Financial Companies categorised as ‘Infrastructure Finance Companies’ (IFC) by the Reserve Bank of India within the overall limit of INR1,545 billion.
(ii) The lock-in-period of three years for FII investment stands reduced to one year up to an amount of INR309 billion within the overall limit of INR1,545 billion. This lock-in-period shall be computed from the time of first purchase by FII.
(iii) The residual maturity of five years would now onwards refer to the original maturity of the instrument at the time of first purchase by an FII.
QFI:
(i) QFI would, in addition to investment in Mutual Fund debt schemes, also be allowed to invest in non-convertible debentures/bonds issued by Non-Banking Financial Companies categorised as ‘Infrastructure Finance Companies’ (IFC) by the Reserve Bank of India within the overall limit of INR185 billion.
(ii) The residual maturity of five years would now onwards refer to the original maturity of the instrument at the time of first purchase by a QFI.
This Circular has done away with the criteria of 1:1 ratio between metro and non-metro branches.
This Circular has extended the relaxation for a further period of one year i.e., up to September 30, 2012. Hence, export proceeds representing the full export value of goods or software exported, can be realised and repatriated to India within twelve months from the date of exports made up to September 30, 2012.
This Circular clarifies that:
(a) In terms of s.s 4 of section (6) of FEMA, 1999, a person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was:
(i) Acquired, held or owned by such person when he was resident outside India or
(ii) Inherited from a person who was resident outside India.
(b) An investor can retain and reinvest overseas the income earned on investments made under the Liberalised Remittance Scheme.
This Circular states that FCNR(B) accounts can now be opened in any freely convertible currency.
This Circular has increased this limit per transaction from INR30,902 to INR185,413 with immediate effect.
In absence of ‘test of cohesiveness, interconnection and interdependence’ for the contracts being met, time spent on each contract executed in India cannot be aggregated for the purpose of determination of Construction PE under Article 5(3) of India-Singapore DTAA.
Each contract needs to satisfy time threshold of 183 days in the relevant financial year to constitute a PE under the DTAA.
Facts
Financial year Particulars Duration
Held:
Facts:
1. The assessee company was engaged in the business of manufacturing of specialised equipment of solid waste and a liquid waste treatment for industries.
2. The A.O was of the opinion that assessee is not engaged in the business of construction hence the benefit of 5% value of fringe benefit should not be given to the assessee. The CIT(A) upheld the order of the A.O.
3. Aggrieved the assessee filed an appeal to the Hon’ble ITAT.
Held:
1. The word used in section 115WC(2)(b) is ‘construction’ and not ‘civil construction’.
2. The word ‘construction’ is not defined in the Act. Hence, the ordinary meaning of the word construction shall be considered.
3. The dictionary meaning of the word construction and construct are:
Construction: A bridge under construction building, erection, elevation, assembly, framework, manufacture, fabrication. Construct: Construct a housing estate/construct a bridge, build, erect, put up, set up, raise, elevate, establish, assemble, manufacture, fabricate, make.
4. Referring to the above definitions, it was clear that it refers to not only construction of a building but it also includes activities of assessee i.e manufacturing of specialised equipment which included fixation of some equipment to land and certain degree of civil construction.
5. Thus it was held, the assessee was said to be engaged in the business of construction and therefore covered by section 115WC(2)(b).
Note: Though the above decision relates to fringe benefit tax, it brings out an important difference between ‘construction’ and ‘civil construction’.
The assessee, engaged in providing multidisciplinary management consultancy services having a worldwide reputation, filed its return of income for the assessment year 2000-01 on 30-11-2000 accompanied by tax audit report u/s. 44AB of the Act. In column 17(i) of the Form No.3CB, it was stated that the provision for payment of gratuity of Rs.23,70,306/- debited to the Profit & Loss Account was not allowable u/s 40A(7). Even though the statement indicated that the provision towards payment of gratuity was not allowable, the assessee inadvertently claimed a deduction thereon in its return of income. On the basis of return, the assessment order was passed u/s.143 (3) on 26-3-2003 allowing the aforesaid deduction.
A notice u/s. 148 of the Act was issued on 22-1-2004 reopening the assessment for the assessment year 2000-01 for disallowing the provision of gratuity of Rs.23,70,306/- u/s. 40A(7). The reason recorded for reopening the assessment was communicated to the assessee on 16-12-2004.
Soon after the assessee was communicated the reasons for reopening the assessment, it realised that a mistake had been committed and accordingly by a letter dated 20-1-2005, it informed the Assessing Officer that there was no willful suppression of facts by the assessee, but that a genuine mistake or omission had been committed. The assessee filed a revised return on the same day. The assessment order was passed on the same day and the assessee paid the taxes due, as well as the interest thereon.
The Assessing Officer however initiated penalty proceedings u/s. 271(1)(c), and after obtaining response from the assessee, levied penalty of Rs.23,37,689 being 300% on the tax sought to be evaded. The Commissioner of Income Tax (Appeals) upheld the penalty imposed on the assessee. The Tribunal upheld the imposition observing that though the mistake could be described as silly it could be not be expected from the assessee which was a high calibre and competent organisation. However, the Tribunal reduced the penalty to 100%. The High Court dismissed the appeal of the assessee.
The Supreme Court allowed the appeal, observing that the assessee was undoubtedly a reputed firm and had great expertise available with it. Notwithstanding this, it was possible that even the assessee could make a “silly” mistake and this was acknowledged both by the Tribunal as well as by the High Court. The fact that the tax audit report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable u/s. 40A(7) of the Act, indicated that the assessee made a computation error in its return of income. Apart from the fact that the assessee did not notice the error, it was not noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer had made a mistake in overlooking the contents of the tax audit report. According to the Supreme Court, the contents of the tax audit report suggested that there was no question of the assessee concealing its income. There was also no question of the assessee furnishing any inaccurate particulars. In the opinion of the Supreme Court through a bona fide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This could only be described as a human error, which everyone is prone to make. The calibre and expertise of the assessee had little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present one, did not mean that the assessee was guilty of either furnishing inaccurate particulars or had attempted to conceal its income.
According to the Supreme Court, the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars.
Living Media India Ltd., a company incorporated under the Companies Act, 1956, publishes the magazines Reader’s Digest and India Today. These magazines are registered newspapers, vide Registration Nos. DL 11077/03-05 and DL 11021/01-05 respectively issued by the Department of Posts, Office of the Chief Post-Master General, Delhi Circle, New Delhi (in short “the Postal Department”) under the provisions of the Indian Post Office Act, 1898 (in short “the Act”), read with the Indian Post Office Rules, 1933 (in short “the Rules”), and the Post Office Guide and are entitled for transmission by post under concessional rate of postage.
On 14th October, 2005, the manager (circulation), Living Media India Ltd., submitted an application to the Postal Department seeking permission to post December, 2005, issue of Reader’s Digest magazine containing the advertisement of Toyota Motor Corporation in the form of booklet with calendar for the year 2006 at concessional rates in New Delhi. By letter dated 8th November, 2005, the Postal Department denied the grant of permission for mailing the said issue at concessional rates on the ground that the booklet containing advertisement with calendar is neither a supplement nor a part and parcel of the publication. On 17th November, 2005, the Director (Publishing), Living Media India once again submitted an application seeking the same permission which was also denied by the Postal Department by letter dated 21st November, 2005.
In the same way, the Postal Department also refused to grant concessional rate of postage to post the issue dated 26th December, 2005, of India Today magazine containing a booklet of Amway India Enterprises titled “Amway”, vide their letter dated 18th February, 2006, and 17th March, 2006, stating that the said magazine was also not entitled to avail of the benefit of concessional rate available to registered newspapers.
Living Media India Ltd., being aggrieved by the decision of the Postal Department filed a Writ Petitions before the High Court. The learned single judge of the High Court, by order dated 28th March, 2007, allowed both the petitions filed by Living Media India Ltd.
Being aggrieved, the Postal Department filed LPA’s before the High Court. The Division Bench of the High Court, vide common final judgment and order dated 11th September, 2009, while upholding the judgment of the learned single judge, dismissed both the appeals.
Challenging the said order, the Postal Department preferred appeals by way of special leave before the Supreme Court. There was a delay of 427 days in filing the above appeals.
The learned senior counsel for Living Media India Ltd., seriously objected to the conduct of the appellants in approaching the Supreme Court after the enormous and inordinate delay of 427 days in filing the above appeals.
The Supreme Court, after noting the various judgments cited by both the parties and the affidavits filed by the Postal Department dismissed the applications, holding that the Postal Department had itself mentioned and was aware of the date of the judgment of the Division Bench of the High Court as 11th September, 2009. Even according to the department, their counsel had applied for the certified copy of the said judgment only on 8th January, 2010, and the same was received by the department on the very same day. There was no explanation for not applying for certified copy of the impugned judgment on 11th September, 2009, or at least within a reasonable time. The fact remained that the certified copy was applied only on 8th January, 2010, i.e., after a period of nearly four months. In spite of affording another opportunity to file better affidavit by placing adequate material, neither the Department nor the person in-charge had filed any explanation for not applying the certified copy within the prescribed period. The other dates mentioned in the affidavit clearly showed that there was delay at every stage and there was no explanation to why such delay had occurred. The Supreme Court observed that, though it was stated by the Department that the delay was due to unavoidable circumstances and genuine difficulties, the fact remained that from day one, the Department or the person/persons concerned had not evinced diligence in prosecuting the matter to the court by taking appropriate steps. The person(s) concerned were well aware or conversant with the issues involved including the prescribed period of limitation for taking up the matter by way of filing a special leave petition in the court. The Postal Department cannot claim that they have separate period of limitation when the Department was possessed with competent persons familiar with court proceedings. According to the Supreme Court in the absence of plausible and acceptable explanation, the delay could not to be condoned mechanically merely because the Government or a wing of the Government was a party before it. The Supreme Court held that though it was conscious of the fact that in a matter of condonation of delay when there was no negligence or deliberate inaction or lack of bona fide, a liberal concession had to be adopted to advance substantial justice, but in the facts and circumstances, the Department could not be allowed to take advantage of various earlier decisions. The claim on account of impersonal machinery and inherited bureaucratic methodology of making several notes could not be accepted in view of the modern technologies being used and available. According to the Supreme Court, the law of limitation undoubtedly binds everybody including the Government.
In the opinion of the Supreme Court, unless all the Government bodies, their agent and instrumentalities have reasonable and acceptable explanation for the delay and there was bona fide effort, there is no need to accept the usual explanation that the file was kept pending for several months/ years due to considerable degree of procedural red-tape in the process. The Government departments are under a special obligation to ensure that they perform their duties with diligence and commitment. Condonation of delay is an exception and should not be used as an anticipated benefit for Government departments. The law shelters everyone under the same light and should not be swirled for the benefit of a few.
According to the Supreme Court, there was no proper explanation offered by the Department for the delay except mentioning of various dates; the Department had miserably failed to give any acceptable and cogent reasons sufficient to condone such a huge delay. The Supreme Court dismissed the appeals on the ground of delay.
The assessee, a manufacturer of mining equipments, entered into an agreement with an American company on 7th June, 1990. The agreement with the American company was called “licence and technical assistance agreement” under which the American company was required to transfer technical know-how to the assessee for consideration of $ 25,000 to be paid in three instalments. The first instalment in convertible Indian currency amounting to Rs.17,49,889 was paid on 29th November, 1990. Subsequently, disputes arose between the contracting parties and the know-how was not transferred by the American company.
The short question which arose for determination before the Supreme Court was, whether the amount of Rs.17,49,889 could be claimed by the assessee as a deduction u/s. 37 of the Income-tax Act, 1961.
The claim of the assessee u/s. 37 of the Income Tax Act, 1961 was rejected by the Department. However, the Department allowed the expenditure to be amortised u/s. 35AB of the Act.
The contention of the assessee was that section 35AB of the Act was not applicable to this case. The Supreme Court found no merit in the said contention.
The Supreme Court observed that s/s. (1) of section 35AB of the Act clearly states that, where the assessee has paid in any previous year any lump sum consideration for acquiring any knowhow for use for the purpose of his business, then one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. The Explanation to the said section says that the word “know-how” means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine. According to the Supreme Court if one carefully analyses section 35AB of the Act, it would be clear that prior to 1st April, 1986, there was some doubt as to whether such expenditure could fall u/s. 37 of the Act. To remove that doubt, section 35AB of the Act stood inserted. In s/s. (1) of section 35AB of the Act, there is a concept of amortisation of expenditure. The Supreme Court observed that in the present case, it was true that on account of certain disputes which arose between the parties, the balance amount was not paid by the assessee to the American company. However, the word “for” in section 35AB of the Act, which is a preposition in English grammar, has to be emphasised while interpreting section 35AB of the Act. Section 35AB of the Act says that the expenditure should have been incurred for the purposes of the business of the assessee. In the present case, the technical assistance agreement was entered into between the assessee and the American company for acquiring know-how which was, in turn, to be used in the business of the assessee. Once section 35AB of the Act comes into play, then section 37 of the Act has no application.
According to the Supreme Cour,t there was no error in the impugned judgment of the High Court. The Supreme Court dismissed the civil appeal filed by the assessee.
The assessee, a private limited company, carried on the business of manufacture and sale of television sets. For the assessment year 1987-88, the Assessing Officer while completing the assessment u/s. 143(3) found that the assessee had not included in the closing stock the element of excise duty. Accordingly, he added a sum of Rs.16,39,000 to the income of the assessee on the ground of undervaluation of closing stock.
The question before the Supreme Court was whether the Department was right in alleging that the closing stock was undervalued to the extent of Rs.16,39,000/-.
The Supreme Court noted that, it was not in dispute that the assessee had been following consistently the method of valuation of closing stock which was “cost or market price, whichever is lower.” Moreover, the Assessing Officer had conceded before the Commissioner of Income Tax (Appeals) that he revalued the closing stock without making any adjustment to the opening stock. According to the Supreme Court though u/s. 3 of the Central Excise Act, 1944, the levy of excise duty in on the manufacture of the finished product, the same is quantified and collected on the value (i.e. selling price). The Supreme Court referred to the judgment in the case of Chainrup Sampatram v. CIT reported in [1953] 24 ITR 481 (SC) in which it has been held that, “valuation of unsold stock at the close of the accounting period was a necessary part of the process of determining the trading results of that period. It cannot be regarded as source of profits. That the true purpose of crediting the value of unsold stock is to balance the cost of the goods entered on the other side of the account at the time of the purchase, so that on canceling out the entries relating to the same stock from both sides of the account, would leave only the transactions in which actual sales in the course of the year has taken place and thereby showing the profit or loss actually realised on the year’s trading. The entry for stock which appears in the trading account is intended to cancel the charge for the goods bought which have remained unsold which should represent the cost of the good”.
The Supreme Court for the above reasons, held that, the addition of Rs.16,39,000 to the income of the assessee on the ground of undervaluation of the closing stock was wrong.
Section 12A r.w.s. 12AA of the Income-tax Act, 1961 provides the procedure for grant of registration of a trust or institution (“trust”). According to this procedure, the trust has to make an application for registration in Form No. 10A prescribed under Rule 17A of the Income-tax Rules, 1962 within one year from the date of creation of the trust or the establishment of the institution. Upon receipt of the application, the Commissioner (SIT) shall call for documents and information and conduct inquiries to satisfy himself about the genuineness of the trust or institution.
After he is satisfied about the charitable or religious nature of the objects and genuineness of the activities of the trust, he will pass an order granting registration. If he is not satisfied, he will pass an order refusing registration. The order granting or refusing registration has to be passed within six months from the end of the month in which the application for registration is received by the Commissioner.
Section 12AA, inserted by the Finance (No. 2) Act, 1996 with effect from assessment year 1997-98, reads as under:
“12AA Procedure for registration.
(1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) of ss. (1) of section 12A, shall—
(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about institution and may also make such inquiries as he may deem necessary in this behalf; and
(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he—
(i) shall pass an order in writing registering the trust or institution;
(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant :
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard……
(2) Every order granting or refusing registration under clause (b) of subsection (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) or clause (aa) of sub-section (1) of section 12A.
(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) or has obtained registration at any time under section 12A as it stood before its amendment by the Finance (No. 2) Act, 1996 (33 of 1996) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution:
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard.”
Section 12AA therefore, details the provisions for registration of a trust for which an application has been filed u/s 12A. A reading of sub-clauses (a) and (b) of Section 12AA(1) makes it clear that the CIT has to satisfy himself about the genuineness of the activities of the trust and also about the objects of the trust.
As regards the objects of the trust, these can be determined from a perusal of the Memorandum or the deed of the trust, which is filed along with the registration application. If the objects of the trust are not for any charitable or religious purpose, registration may be refused by the CIT.
On the other hand, in order to determine the genuineness of the activities of the trust or the institution, the CIT has powers to make inquiries, call for documents or information. In cases where application is made after the activity is commenced, the CIT would exercise such powers of inquiry.
Given the time limit prescribed for making application for registration of a trust, in many cases, the application is made before the commencement of any activity by the applicant-trust. A controversy has arisen as to whether the CIT can reject the registration application of a trust, which has not commenced any activity, on the ground of non-determination of genuineness of activities of the trust. While the Delhi, Karnataka and Allahabad High Courts have taken a view that registration u/s. 12AA of the Act cannot be rejected by the CIT on the ground that it had not yet commenced any activity, the Kerala High Court has held that until the activity is commenced by the applicant trust/institution, registration should not be granted by the CIT.
Grant of Registration to a trust u/s. 12AA of the Act is important, since it is one of the conditions for grant of exemption u/s. 11 and 12 for the income of a trust.
Self Employers Service Society’s Case
The issue first came up before the Kerala High Court in the case of Self Employers Service Society v CIT 247 ITR 18.
The society was registered as a charitable society under the Travancore Cochin Literary Scientific and Charitable Societies Registration Act, 1955. The members of the society were mainly merchants. Though it had a large number of charitable objects, it had not commenced any of them during the first year of its functioning. It was accepting recurring deposits from its members and fixed deposits from the public. Loans were being given to its members at 21 % interest. The Commissioner found that in spite of the reference to a large number of charitable objects in its bye-laws, the activity carried on by the society was confined to its members, numbering about 150. Since such activities could not be regarded as charitable in nature, the Commissioner refused registration u/s.12AA.
The High Court noted that though several charitable activities were included in the objects of the society, it had not been able to do any of such charitable activities during the first year of its functioning. The proposal to start a technical educational institution itself was taken after the order of the CIT, rejecting the registration. The Court observed, that in the present case, the charitable society had not done any charitable work during the relevant period, but the activity which was undertaken during the said period was only for the generation of income for its members. It also noted that there were no materials before the Commissioner to be satisfied of the genuineness of the activities of the trust or institution. The Court therefore held that the rejection of the application could not be termed as illegal or arbitrary.
Foundation of Opthalmic and Optometry Research Education Centre’s Case
The issue under consideration again recently arose before the Delhi High Court in the case of DIT vs. Foundation of Ophthalmic and Optometry Research Education Centre 210 Taxman 36.
In this case, the assessee, a society registered under the Society Registration Act on 30th May 2008 with charitable objects of Optometry and Ophthalmic Education applied for registration before the Director of Income-tax (Exemption) [‘DIT(E)’] and filed other documents as sought by DIT(E)’s office from time to time. The DIT(E) refused to grant registration to the assessee by relying on the decision of Kerala High Court in the case of Self Employers Service Society vs CIT (supra), on the ground that no charitable activity was undertaken by the newly established assessee society.
On appeal by the assessee, the Tribunal, following the decision of the Allahabad High Court in the case of Fifth Generation Education Society (185 ITR 634), held that non-commencement of charitable activity cannot be a ground for rejection of application of registration filed by the assessee u/s. 12AA of the Act and thereby upheld the contention of the assessee.
Aggrieved with the judgement of the Tribunal, the Revenue filed an appeal before the High Court reiterating its arguments as placed before the Tribunal. The assessee-applicant on the other hand, relied on the decision of the Karnataka High Court in the case of DIT(E) v. Meenakshi Amma Endowment Trust (2011) (50 DTR 243) , wherein the High Court while considering similar facts of the assessee applicant held that when no activities are undertaken by the newly established trust/institution, then in such a scenario, the objects of the trust have to been taken into consideration by the CIT for determination of question of registration.
The High Court, after hearing the arguments of both the parties, upheld the contention of the assessee. The Court distinguished the judgements of Self Employers Service Society (supra) and Aman Shiv Mandir Trust (Regd.) v. CIT (296 ITR 415)(P&H) relied on by the Revenue on the ground that reasons for refusal of registration in the aforesaid decisions were not that the Trusts were newly registered, but that the activities of the Trusts under consideration were not charitable.
The High Court, after referring to the provisions of section 12AA, further held that the provision did not prohibit or enjoin the CIT from registering a trust solely based on its objects, without any activity, in the case of a newly registered trust. It also observed that the statute did not prescribe a waiting period for a trust to qualify itself for registration. Based on the said observations and following the decision of the Karnataka High Court of Meenakshi Amma Endowment Trust (supra), the appeal of the Revenue was rejected.
The Karnataka High Court in the case of Meenakshi Amma Endowment Trust (supra ) had earlier interpreted the provisions of section 12A r.w.s. 12AA of the Act and opined in context of registration of a newly established trust without undertaking any activity, as under:
“….When the trust itself was formed in January 2008 with the money available with the trust, one cannot expect them to do activity of charity immediately…. In such a situation, the objects of the trust could be read from the trust deed itself. In the subsequent returns by the trust, if the Revenue comes across that factually trust has not conducted any charitable activities, it is always open to the authorities concerned to withdraw the registration already granted or cancel the said registration u/s. 12AA of the Act.
A trust can be formed today and within a week registration u/s. 12A could be sought as there is no prohibition under the Act seeking such registration…..… the objects of the trust for which it was formed will have to be examined to be satisfied about its genuineness and activities of the trust cannot be the criterion, since it is yet to commence its activities.”
In other words, the High Court held that where a trust has not commenced its activities, then the CIT is required to examine the objects of the trust in order to ascertain the genuineness of its activities.
The Allahabad High Court in the case of Fifth Generation Education Society (supra) also had opined on the issue. The Court, while considering the provisions of registration of trust/institution u/s. 12A of the Act relating to assessment years prior to Finance (No. 2) Act, 1996, held that at the time of considering the application for grant of registration u/s. 12A, the CIT was not required to examine the application of income or carrying on of any activity by the trust. The Court further held that the CIT may at this stage examine whether the application was made in accordance with the requirements of section 12A r.w. Rule 17A, Form 10A was properly filled, along with determination of whether the objects of the trust were charitable or not.
Observations
On perusal of the decisions as discussed above, one may find that the Delhi, Karnataka and Allahabad High Courts have rightly interpreted the procedural provisions of section 12AA of the Act and rejected the contention of the Revenue to read in the condition of actual conduct of charitable activities for grant of registration of trusts, who have not commenced their charitable activities. Instead, in such situations, where trusts are yet to commence their activities, the Courts have sought to ascertain the genuineness of the activities of the trust by relying on their objects.
The Courts have also acknowledged that, injecting such subjectivity of satisfaction of conduct of charitable activities may be susceptible to varied interpretations by the relevant authorities, wherein some may be satisfied with activities of a month or few months, while others may wish to examine the activities of the applicant for a longer time.
The plain and simple procedures laid down in section 12AA do not empower the CIT to reject the grant of registration to trust, until the actual charitable activities are undertaken by the trust. On the contrary, in case of any abuse of procedures of section 12AA by any non-genuine trust, the Act provides for a safeguard by empowering the CIT u/s. 12AA(3) of the Act to cancel the registration of such trusts.
Further, the decision of the Kerala High Court was rightly distinguished by the Delhi High Court, wherein the refusal of registration of trust was not on account of non-commencement of activities of the newly constituted trust, but was for undertaking non-charitable activities. So, the view taken by the Kerala High Court that there had to be some material before the CIT showing the genuineness of activities actually carried on by the trust does not seem to be justified, and the view taken by the other high courts, that carrying on of activity is not a prerequisite for grant of registration u/s.12AA, seems to be the better view of the matter.
Social networking sites have grown tremendously over the last decade. These sites have two significant attributes, namely that of a global platform with virtually unlimited access, and communication at substantial speed virtually in real-time. These characteristics could both be virtues as well as lead to disastrous consequences. Whatever is expressed on the platform is accessible to the world, and in fact, that seems to be intent for which the platform was promoted.
These platforms have changed the meaning of concepts and words. In my generation, the concept of a “friend” was one with whom you shared some degree of commonality. A person with whom you had nothing in common was rarely termed as a friend. On these sites you have “ friends” with whom you do not have a single common trait. So the neighbour who stays next door is a stranger, but a person in a distant country whom you have not seen in a life time is a friend !
If you” liked” a particular act or thing, there was a degree of feeling which resulted in your making the comment. It is true that at times, one said that one liked a particular thing only as a matter of courtesy, but if that was the case the manner of communication made it apparent. If one looks at the “likes” that one receives on some of the posts on networking sites, one really wonders whether the word has any meaning at all.
While networking platforms have encouraged a trend to disclose everything ( including certain private experiences) to the world at large, other advances in technology have resulted in an invasion of privacy. The cell or the mobile has been a culprit. In the good old days, if you wanted to maintain a degree of solitude, one stayed away from a landline. Callers on account of choice or by way of compulsion respected an individual’s desire to remain unavailable. With the advent of the mobile, the caller calls on the cell and expects the same to be answered. Not answering the cell when the caller calls repeatedly is taken as being impolite. Unsolicited calls and messages are extremely disturbing as my professional colleagues would have experienced in the past few weeks, and will probably have to endure this problem for a few more days.
The use of information technology, without understanding its fallout, has also led to two very disturbing trends. On account of the ability to store information which can be accessed virtually real-time, most of us have stopped using what we call the “memory” within. Earlier, we memorised the personal details of our relatives and friends like their telephone numbers and addresses etc. Since this information is now stored on our handheld cell phones, we rarely find the need to remember it. Consequently, if the cell phone is lost so are we. In the words of Henry Thoreau “men have become the tools of their tools”. Information or knowledge was earlier accessed from books or journals. Today, one rarely uses the printed word. If some information is required, one simply “googles”. In fact, when I was discussing the virtues of memorising tables with one of my nephews, he pointed out that it was a total waste of “memory” when these tables could be easily stored in a machine. In his view, the memory in our brain should remain free for better use. What sort of use it is now being put to is a matter of debate.
Another aspect of the matter is a perception that technology can substitute human attributes or human characteristics. It is now possible to communicate with any person across the globe at the touch of a button. One can not only hear a person irrespective of the geographical distance but can also see him. Unfortunately, this has its own disadvantages. An old lady in our family was depressed after her daughter, consequent to her marriage left for the United States . I tried to console her by stating that “geography was now history” and that she could speak to her daughter at any time and through the web cam could even see her. The old lady merely smiled and told me that it was in fact the web cam that caused immense pain. She explained that earlier she was able to only speak to her daughter and was content in the belief that her daughter was enjoying a good life in the States, because that is what she heard over the phone. Seeing her on the web cam, the old lady could see the pain on her daughter’s face and what was hidden in words was now unmasked. Being unable to physically comfort or console her daughter resulted in the old lady having sleepless nights.
This is not to say that we should shun technology. In fact, even if we wanted to, it is now impossible. One must however sensitise society in regard to the pitfalls of excessive reliance on technology. It needs to be emphasised particularly to youngsters that technology is a tool and not a substitute for human attributes and values. We should harness technology and put it to use. Tools are means and not an end. We must remain the master of our tools and not permit them to become ours!
India has a rich ancient heritage of thousands of years where Rishi-Munis lived with their families deep in the forests and jungles and worked for the welfare of the people.Recently I had the fortune of meeting and listening to Dr. Kavita and Dr. Ashish Satav, modern-day Rishis, and understood the true purpose of life, courtesy ‘Caring Friends’ and Shri Pradeep Shah.
Dr. Ashish Satav, MD, influenced by his ‘nana’, a close associate of Vinoba Bhave, has been leading a simple life right from his impressionable years. Inspired by the Sarvodaya philosophy of Mahatma Gandhi and encouraged by Baba Amte and Dr. Abhay Bang, Dr. Satav decided to serve the tribals of Melghat, instead of pursuing a lucrative medical practice in the comfort and security of a metropolis. Dr. Kavita’s background and outlook are also Gandhian. With hardly any resources, they set up the MAHAN (Meditation, AIDS, Health, Addiction and Nutrition) Trust in 1997 and started a small hospital in a small hut at Melghat, a hilly forest area in the Satpuda mountain ranges in Amravati District.
Melghat is known by two words, “Malnutrition” and “Project Tiger’’ and is an underdeveloped area of about 320 villages spread over 4,000 sq. km. It is 150km away from the district headquarters and the uneven road crosses through a dense forest and sharp ghats. Even today a large number of these villages have very poor or no infrastructure like transportation, electricity & communication and the area lacks basic amenities. Most of the tribals (>75%) are below poverty line and illiterate (>50%) and live in hamlets (>90%), with very high maternal and infant mortality rates.
MAHAN hospital started from a small hut with very limited facilities. The patients were brought in bullock carts as there was no ambulance. Initially, the locals were very suspicious and reluctant for modern medical treatment and relied on traditional faith healers and quacks. Over last 15 years, Dr. Ashish and Dr. Kavita have braved many challenges such as superstitions, limited infrastructure, political interference and lack of funds. Both Dr. Ashish and Dr. Kavita have gone beyond the conventional notions of service – for instance, Dr. Kavita narrated how she became a “Milk Mother” to a newly born adivasi child when their only son was just a few months old. This is being true to the concept of service before self.
This journey has enabled Satavs to demystify a lot of medical myths as well. They have proved how even without sophisticated medical facilities a lot can be achieved and even serious ailments can be treated. Within four years of MAHAN’s intervention, the infant mortality rate has reduced by more than 50%. MAHAN identifies local villagers, mostly women, and trains them in basic health care segments. It has built a team of close to 40 trained village health workers. MAHAN now serves more than 75,000 persons in Melghat region.
The opposition to their work, especially from local politicians and government officials, has been tackled with the Gandhian thought of ‘truth can be troubled but cannot be defeated’. Dr. Satav has also fought the bureaucratic system through numerous applications under the RTI Act and PILs and has been instrumental in ensuring improvement in benefits of the Government’s welfare spending reaching the needy.
The hospital based in a hut, shifted to a larger structure in July 2007 and presently has an ambulance, two operation theaters, an OPD, a spectacle shop and staff quarters. Now, Dr. Satav has a vision to carry out various research projects and develop models that can be replicated nationally.
Work done by Dr. Kavita and Dr. Ashish Satav is nothing short of a Yagna, often translated as “sacrifice” or “worship”. A heartfelt Namaskar to this modern day Rishi Couple!
Errata
In our October 2012 issue,
In ‘Namaskaar’ featuring ‘Remembering Mahatma Gandhi’, two paragraphs at the end of the feature were inadvertently omitted. These paragraphs are reproduced on page 19.
The error is regretted – Editor.
a) Of Companies against whom there are complaints
b) Companies that have raised money from public through public issue of shares or debentures
c) Cases where auditors have qualified their reports
d) Where there is default in payment of matured deposits and debentures
e) References received from regulatory authorities pointing out violations/irregularities calling for action under the Companies Act, 1956
a) Companies are required to inform within 30 days from the date of approval of the MCA of Form 23 C ( i.e. Form for approval of Government for Appointment of Cost Auditor) with a formal letter of Appointment to the Cost Auditor, as approved by the Board.
b) The cost Auditor needs to file the prescribed Form 23D along with the letter of Appointment from the Company within 30 days of the date of formal letter.
c) In case of change of cost auditor caused by death of existing cost Auditor, the fresh e-form 23C is to be filed without additional fee within 90 days of the date of death.
d) Change of Cost Auditor for reasons other than death then fresh Form 23C to be filed with applicable fee and additional fee unless supported by relevant documents for the change.
This circular has modified certain KYC requirements as under: –
Presently, all single branch authorised money changers (AMC) having a turnover of more than $ 100,000 or equivalent per month and all multiple branch AMC are required to institute a system of monthly audit.
This circular has modified the above procedure in respect of multiple branch AMC. As a result, multiple branch AMC are required to put in place a system of Concurrent Audit, which will cover 80 % of the transactions value-wise under a system of monthly audit and rest 20 % of the transactions value-wise under quarterly audit.
Presently, authorised persons (AP), who are Indian Agents under the Money Transfer Service Scheme (MTSS), are required to submit a list of their subagents to the Foreign Exchange Department (FED), Central Office (CO) of RBI on a half yearly basis.
This circular provides that, since the list of subagents is already placed on RBI website (www.rbi. org.in), AP are no longer required to submit a list of their sub-agents to BI on a half-yearly basis. AP are now required to inform immediately any change/ addition/deletion to the list of their sub-agents to the Regional Offices of FED of RBI. AP are further required to verify the correctness of the list from the RBI website and intimate the same to RBI either through a letter or by e-mail within 15 days of the end of each quarter.
This circular states that SIDBI has been added as an eligible borrower for availing of ECB upto $ 500 million per financial year for on-lending, for permissible end uses, to the Micro, Small and Medium Enterprises (MSME) sector, subject to the following conditions: –
(a) On-lending must be done directly to the borrowers, either in INR or in foreign currency (FCY): –
(i) Foreign currency risk must be hedged by SIDBI in full in case of on-lending to MSME sector in INR; and
(ii) on-lending in foreign currency can only be to those beneficiaries who have a natural hedge by way of foreign exchange earnings.
(b) ECB, including the outstanding ECB, upto 50% of owned funds, can be availed under the automatic route and ECB beyond 50% of owned funds, can be availed under the approval route.
Presently, the simplified & revised procedure for submitting Softex Form is applicable/available only to units in Software Technology Parks of India (STPI) at Bengaluru, Hyderabad, Chennai, Pune and Mumbai.
This circular states that the said simplified and revised procedure for submitting Softex Form is now applicable/available to units in all STPI in India.
The circular further provides that a software exporter, whose annual turnover is at least Rs.1000 crore or who files at least 600 SOFTEX forms annually on all India basis, can now submit a statement in excel format as detailed in A. P. (DIR Series) Circular No. 80 dated 15th February, 2012.
Presently, units in the DTA can make
payment in foreign currency to units in SEZ against supply of goods by
the unit in SEZ to the unit in DTA.
This circular permits units in the DTA to make payment in foreign currency to units in SEZ against supply of services by the unit in SEZ to the unit in DTA. However, care should be taken to ensure that the Letter of Approval issued to the SEZ unit by the Development Commissioner of the SEZ contains a provision permitting the SEZ unit to supply goods /services to units in DTA and consequent receipt of payment from units in DTA in foreign currency.
Presently, FII are permitted to hedge the currency risk on the market value of their entire investment in equity and / or debt in India, as on a particular date, only with designated bank branches.
This circular permits FII to hedge the currency risk on the market value of their entire investment in equity and / or debt in India, as on a particular date, with any bank, subject to certain conditions. However, when the FII undertakes hedge with a non-designated bank branch, the same has to be settled through the Special Non-Resident Rupee A/c maintained with the designated bank through RTGS / NEFT.
During a search at the residential and business premises of the assessee, certain material was seized which, inter alia, revealed investment in various properties by the assessee. One such property was a flat, which was purchased for Rs. 17.55 lakh. The Assessing Officer noticed that it was a commercial property which was fetching rent of Rs. 7.02 lakh per annum. He was of the view that a property which was fetching such a substantial rental income could not have been acquired for Rs. 17.55 lakh. He concluded that the fair market value of the property should be estimated in accordance with Rule 3 of Schedule III to the Wealthtax Act, 1957. The difference between value of the property calculated in accordance with the said rule and the amount shown in the sale document came to Rs. 65.32 lakh which was assessed as unexplained investment u/s. 69B of the Income-tax Act, 1961. The Tribunal deleted the addition.
On appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal and held as under:
“i) Section 69B in terms requires that the Assessing Officer has to first ‘find’ that the assessee has ‘expended’ an amount which he has not fully recorded in his books of account. It is only then that the burden shifts to the assessee to furnish a satisfactory explanation. Till the initial burden is discharged by the Assessing Officer, the section remains dormant.
ii) A ‘finding’ obviously should rest on evidence. In the instant case, it is common ground that no incriminating material was seized during the search which revealed any understatement of the purchase price. That is precisely the reason why the Assessing Officer had to resort to Rule 3 of Schedule III to the Wealth Tax Act.
iii) Section 69B does not permit an inference to be drawn from the circumstances surrounding the transaction that the purchaser of the property must have paid more than what was actually recorded in his books of account for the simple reason that, such an inference could be very subjective and could involve the dangerous consequence of a notional or fictional income being brought to tax contrary to the strict provisions of article 265 of the Constitution of India and Entry 82 in List I of the Seventh Schedule thereto which deals with ‘Taxes on income other than agricultural income’.
iv) Applying the logic and reasoning in K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) , for the purposes of section 69B, it is the burden of the Assessing Officer to first prove that there was understatement of the consideration (investment) in the books of account. Once that undervaluation is established as a matter of fact, the Assessing Officer, in the absence of any satisfactory explanation from the assessee as to the source of the undisclosed portion of the investment, can proceed to adopt some dependable or reliable yardstick with which to measure the extent of understatement of the investment. One such yardstick can be the fair market value of the property determined in accordance with the Wealth Tax Act.
v) Since the entire case has proceeded on the assumption that there was understatement of the investment, without a finding that the assessee invested more than what was recorded in the books of account, the decision of the Income-tax Authorities cannot be approved.
vi) Section 69B was wrongly invoked. The order of the Tribunal is upheld.”
The assessee is a hospital. In the course of search, the Department discovered unaccounted collection of fees in the name of doctors and distribution thereof to doctors in the relevant period. The assessee hospital contended that it had distributed the entire amount to the doctors in whose names the collections were made and no part of the collections was retained as its income. The Assessing Officer assessed the entire amount as unexplained expenditure falling u/s. 69C. The Tribunal deleted the addition.
On appeal by the Revenue, the Kerala High Court upheld the decision of the Tribunal and held as under:
“i) Cases falling u/s. 69C are of essentially expenditure accounted as such by the assessee. The entire amount was collected without bringing it into the regular accounts and the payments were also made by the assessee without accounting for them.
ii) This was not a case of failure of the assessee to explain the expenditure. In fact the assessee, on being confronted with the accounts seized from it, conceded that the entire amounts were collected by it for payment to doctors serving the hospital. The assessee, prima facie, discharged its burden or at least shifted the burden to the Revenue when it gave particulars of payments made to the doctors.
iii) The Department should have issued notice to the doctors for confirmation of the payments and if they confirmed receipts, made assessments on doctors and if they denied the receipts, proceeded against the assessee and direct it to prove assessment of the amount u/s. 69C. Since this exercise had not been done, the addition u/s. 69C was not justified. ”
The petitioner was a trust recognised under the Income-tax Act. For the relevant period, the petitioner was not required to file return of income u/s. 139. However, in order to claim refund of TDS, the petitioner filed returns claiming refunds. Since the returns were filed beyond the time limit, they were treated as invalid returns and the Assessing Officer rejected the application for the refunds. The petitioner filed applications before the Chief Commissioner u/s. 119(2) of the Act requesting to condone the delay in filing the returns claiming refunds. The petitioner explained that the delay was caused due to bifurcation of the trust. The application was rejected by the Chief Commissioner.
The Gauhati High Court allowed the writ petition filed by the petitioner and held as under:
“i) The Revenue authorities did not dispute the entitlement of the petitioner for refund of the deducted amount. The Trust in this case was being deprived of a sum of Rs. 8,93,773/- for which it could not be blamed at all. It had no liability whatsoever to pay this amount to the Revenue. Yet, the Revenue had refused to refund the sum taking a hypertechnical view of the matter.
ii) The petitioner was entitled to condonation of delay in filing the claim for refund.”
For the A. Y. 1985-86, the petitioner did not receive the assessment order and the demand notice u/s. 156. However, the Department served recovery notice. In response to the recovery notice, the petitioner had objected to the initiation of the recovery proceedings pointing out that it had not received the assessment order and the demand notice u/s. 156 of the Act. Thereafter, over the years, from time to time, recovery notices were issued to the petitioner and on each occasion, the petitioner had responded to the notice by requesting the Assessing Officer to serve the assessment order and the demand notice u/s. 156 of the Act on the petitioner. However, the assessment order and the demand notice u/s. 156 was not served on the petitioner.
In the circumstances, the petitioner filed a writ petition before the Gujarat High Court requesting to quash the recovery notices and the recovery proceedings. Gujarat High Court allowed the petition and held as under:
“I) In the absence of service of demand notice u/s. 156 of the Act on the petitioner, which was a basic requirement for invoking the provisions of section 220 of the Act, the petitioner could not have been treated to be an assessee in default. The subsequent proceedings u/ss. 220 to 226 of the Act were without jurisdiction.
ii) The impugned notice and the recovery proceedings are hereby quashed and set aside.”
For the A. Ys. 2003-04 and 2004-05, the assessee was entitled to refund of Rs. 122.57 crore and Rs. 107.42 crore respectively. In the normal course, refund should have been paid by the authorities to the petitioner. However, the refund amount was not paid to the petitioner. The refund was adjusted against the demand for A. Y. 2006-07 in respect of which the assessee was in appeal before the Tribunal. The petitioner had made an application before the Assessing Officer u/s. 220(6) for stay of recovery till the disposal of the appeal by the Tribunal. The petitioner had also made a stay application before the Tribunal. The Tribunal held that the Assessing Officer should first dispose of the application u/s. 220(6) of the Act.
The petitioner therefore filed a writ petition before the Delhi High Court, requesting for the stay of the recovery and refund of the amounts. Delhi High Court allowed the petition and held as under:
“i) Section 220(6) which permits the Assessing Officer to treat the assessee as not in default is not applicable when an appeal is referred before the Tribunal, as it applies only when an assessee has filed an appeal u/s. 246 or 246A.
ii) As per Circular No. 1914 dated 2nd December, 1993, the Assessing Officer may reserve a right to adjust, if the circumstances so warrant. In a given case, the Assessing Officer may not reserve the right to refund. Further, reserving a right is different from exercise of right or justification for exercise of a discretionary right/power. Moreover, the circular is not binding on the Tribunal.
iii) The Tribunal has power to grant stay as an inherent power vested in the appellate authority as well as u/s. 254 and the rules. The Tribunal is competent to stay recovery of the demand and if an order for “stay of recovery” is passed, the Assessing Officer should not pass an order of adjustment u/s. 245 to recover the demand. In such cases, it is open to the Assessing Officer to ask for modification or clarification of the stay order to enable him to pass an order of adjustment u/s. 245 of the Act.
iv) Different parameters can be applied when a stay order is passed, against use of coercive methods for recovery of demand and when adjustment is stayed. Therefore, the Tribunal can stay adoption of coercive steps for recovery of demand but may permit adjustment u/s. 245. When and in what cases, adjustment u/s. 245 of the Act should be stayed would depend upon the facts and circumstances of the case.
v) The discretion should be exercised judiciously. The nature of addition resulting in the demand is a relevant consideration. Normally, if the same addition/ disallowance/issue has already been decided in four of the assessee by the appellate authority, the Revenue should not be permitted to adjust and recover the demand on the same ground. In exceptional cases, which include the parameters stated in section 241 of the Act, adjustment can be permitted/allowed by the Tribunal.
vi) The action of the Revenue in recovering the tax in respect of additions to the extent of Rs. 96 crore on issues which were already covered against them by the earlier orders of the Tribunal or the Commissioner (Appeals) was unjustified and contrary to law.
vii) Accordingly, directions are issued to the respondents to refund Rs. 30 crore, which will be approximately the tax due on Rs. 96 crore.”
For the A. Y. 2006-07, the assessee had claimed deduction u/s. 54EC of the Income-tax Act, 1961. On the request of the Assessing Officer, the assessee had filed the details of the investment u/s. 54EC. The Assessing Officer considered and allowed the deduction to the extent of Rs. 7.40 crore. Subsequently, the Assessing Officer issued notice u/s. 148 for withdrawing the deduction. Assessee’s objections were rejected.
The Bombay High Court allowed the writ petition filed by the assessee and held as under:
“i) While granting the benefit, the Assessing Officer took a view that investment made out of earnest money/advance received as a part of the sale consideration before the date of the transfer of the assets would also be entitled to the benefit of section 54EC. This view was possible, in view of Circular No. 359 dated 10-05-1983, and the decision of the Tribunal.
ii) The reasons recorded did not state that the deduction u/s. 54EC was not considered in the assessment proceedings. In fact, from the reasons, it appeared that all facts were available on record and, according to the Revenue, the deduction was only erroneously granted. This was a clear case of review of an order.
iii) The application of law or interpretation of a statute leading to a particular conclusion, cannot lead to a conclusion that tax has escaped assessment, for this would then certainly amount to review of an order which is not permitted unless so specified in the statute.
iv) The order disposing of the petitioner’s objections also proceeded on the view that there had been non-application of mind during the original proceedings for assessment. This was unsustainable and a fresh application of mind by the Assessing Officer on the same set of facts amounted to a change of opinion and did not warrant reopening.
v) In view of the above, the notice u/s. 148 is without jurisdiction and we set aside the same.”
A company AP was wound up by virtue of the order of the company court and was amalgamated with the assessee company w.e.f. 01-04-1995. On 20-01-1997, the Assessing Officer issued notice u/s. 17 of the Wealth-tax Act, 1957 on AP directing it to file its wealth tax return in respect of a period prior to 01-04-1995 i.e. prior to amalgamation. Pursuant to the notice, reassessment order was passed. The notice and the reassessment was upheld by the Commissioner (Appeals) and the Tribunal.
On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:
“i) Section 17 of the Wealth-tax Act, 1957, is similar to the provisions contained in section 148 of the Income-tax Act, 1961, and section 34 of the Indian Income-tax Act, 1922. The jurisdiction to reopen a proceeding depends upon issue of a valid notice under the provisions, which gives power to the Assessing Officer to reopen a proceeding. A notice to a person who is not in existence at the time of issuing such notice is not valid. The fact that the real assessee subsequently filed its return with the objection that such notice is invalid and cannot cure the defects which go to the root of the jurisdiction to reopen the proceedings.
ii) The authorities below totally overlooked the fact that initiation of the proceedings for reassessment was vitiated for not giving notice u/s. 17 of the Act to the assessee and the notice issued upon AP which was not in existence at that time, was insufficient to initiate proceedings against the assessee which had taken over the liability of AP prior to the issue of such notice.
iii) Reassessment proceedings were not valid and were liable to be quashed.”
The assessee was an exporter and was eligible for deduction u/s. 10A. Due to diminution in rupee value, the assessee gained a higher sum in rupee value while earning the export income. The assessee claimed the deduction of the whole of the export profit u/s. 10A including the gains on account of fluctuation in rate of foreign exchange. The Assessing Officer disallowed the claim in respect of the gains on account of rate of foreign exchange. The Tribunal allowed the assessee’s claim.
On appeal by the Revenue, Madras High Court upheld the decision of the Tribunal and held as under:
“In order to allow a claim u/s. 10A, what is to be seen is whether such benefit earned by the assessee was derived by virtue of export made by the assessee. When fluctuation in foreign exchange rate was solely relatable to the export business of the assessee and the higher rupee value was earned by virtue of such exports carried out by the assessee, the benefit of section 10A should be allowed to the assessee.”
On shifting the registered office of the petitioner from Mumbai to Pune, the petitioner in June-July 2009 had applied for transfer of assessment records from Mumbai to Pune. After exchange of several letters, by his order dated 22-11-2011, the CIT-10 Mumbai transferred the powers to assess the petitioner from ACIT-10(1) Mumbai to DCIT, Circle-1(2) Pune. However, on 30-03-2012, ACIT-10(1) Mumbai issued notice u/s. 148 with a view to reopen the assessment for the A. Y. 2005-06.
The Bombay High Court allowed the writ petition filed by the petitioner and quashed the impugned notice u/s. 148 dated 30-03-2012 and held as under:
“i) In the affidavit-in-reply filed by the DCIT-10(1) Mumbai, it is stated that by a corrigendum order dated 27-03-2012, the CIT-10 Mumbai has temporarily withdrawn/cancelled the earlier transfer order dated 22-11-2011 for the sake of administrative convenience and therefore, the notice dated 30-03-2012 would be valid. It is the case of the petitioner that neither any notice to pass a corrigendum order was issued to the petitioner nor the alleged corrigendum order dated 27-03-2012 has been served upon the petitioner.
ii) The question therefore to be considered is, when the CIT-10 Mumbai has transferred the jurisdiction to assess/reassess the petitioner from ACIT-10(1) Mumbai to DCIT Circle-1(2) Pune u/s. 127 of the Act after hearing the petitioner on 22-11-2011, whether the CIT-10 Mumbai at the instance of ACIT-10(1) Mumbai is justified in issuing a corrigendum order on 27/03/2012 behind the back of the petitioner and whether the ACIT-10(1) Mumbai is justified in issuing the impugned notice u/s. 148 of the Act dated 30-03-2012 on the basis of the said corrigendum order dated 27-03-2012 which was passed without issuing a notice to the petitioner, without hearing the petitioner and which is uncommunicated to the petitioner.
iii) The conduct of the ACIT and CIT is highly deplorable. Once the jurisdiction to assess the assessee was transferred from Mumbai to Pune, it was totally improper on the part of ACIT Mumbai to request the CIT to pass a corrigendum order with a view to circumvent the jurisdictional issue. Making this request was in gross abuse of the process of law. If there was any time barring issue, the ACIT Mumbai ought to have asked his counterpart at Pune to whom the jurisdiction was transferred to take appropriate steps in the matter instead of taking steps to circumvent the jurisdictional issue.
iv) It does not befit the ACIT Mumbai to indulge in circumventing the provisions of law and his conduct has to be strongly condemned. Instead of bringing to book persons who circumvent the provisions of law, the CIT has himself indulged in circumventing the provisions of law which is totally disgraceful. The CIT ought not to have succumbed to the unjust demands of the ACIT and ought to have admonished the ACIT for making such an unjust request.
v) The CIT ought to have known that there is no provision under the Act which empowers the CIT to temporarily withdraw the order passed by him u/s. 127(2) for the sake of administrative convenience or otherwise. If the CIT was honestly of the opinion that the order passed u/s. 127(2) was required to be recalled for any valid reason, he ought to have issued notice to that effect to the assessee and passed an order after hearing it.
vi) Writ petition is allowed by quashing the impugned notice dated 30-03-2012. Though the CCIT agrees that the actions of CIT and ACIT are patently unjustified and not as per law, he has expressed his helplessness in the matter. It is expected that the CCIT shall take immediate remedial steps to ensure that no such incidents occur in the future. Department shall pay a cost of Rs. 10,000/- which may be recovered from CIT and ACIT.”
Krishi Utpadan Mandi Samiti, a market committee incorporated and registered u/s. 12 of the Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964 (“the 1964 Adhiniyam” for short), carried out its activities in accordance with section 16 of the 1964 Adhiniyam, under which it is required to provided facilities for sale and purchase of specified agricultural produce in the market area. The members of the said market committee consisted of producers, brokers, agriculturists, traders, commission agents and arhatiyas. The source of income of the assessee was in the form of receipt collected as market fee from buyers and their agents, development cess on sale and purchase of agricultural products and licence fees from traders. U/s. 17(iv), the Mandi Samiti has to utilise the market committee fund the purpose of the 1964 Adhiniyam.
Under the 1964 Adhiniyam, broadly there are two distinct entities or bodies. One is Mandi Samiti (assessee) and the other is Mandi Parishad.
Section 26A of the 1964 Adhiniyam deals with establishment of the Mandi Parishad (Board). Under the 1964 Adhiniyam, the Board shall be a body corporate. Section 26A, inter alia, states that the Mandi Parishad (Board) shall have its own fund which shall be deemed to be a local fund and in which shall be credited all monies received by or on behalf of the Board, except monies required to be credited in the State Marketing Development Fund u/s. 26PP. U/s. 26PP, the State Marketing Development Fund has been established for the Mandi Parishad (Board) in which amounts received from the market committee u/s. 19(5) shall be credited. Section 19(5), inter alia, states that every market committee shall, out of its total receipts realised as development cess, shall pay to the Mandi Parishad (Board) contribution at a specified rate. The said payment from the Market Committee (Mandi Samiti) shall be credited to the State Marketing Development Fund u/s. 26PP. The State Marketing Development Fund shall be utilised by the Mandi Parishad (Board) for purposes indicated u/s. 26PP(2). Section 26PPP deals with establishment of Central Mandi Fund to which amounts specified in s/s. (1) shall be credited. Section 26PPP(2), inter alia, states that the Central Mandi Fund shall be utilised by the Mandi Parishad (Board) for rendering assistance to financially weak and underdeveloped market committees; that the funds would be used for construction, maintenance and repairs of link roads, market yards and other development works in the market area and such other purposes as may be directed by the State Government or the board.
The short question that arose before the Supreme Court was, whether transfer of amounts collected by Mandi Samiti to Mandi Parishad would constitute application of income for charitable purposes.
The Supreme Court noted that, both the Mandi Samiti and the Mandi Parishad were duly registered u/s. 12AA of the Income-tax Act, 1961 (“the 1961 Act”, for short). That, after the amendment of section 10(20) and section 10(29) by the Finance (No.2) 2 of 2002 with effect from 1st April, 2003, the words “local authority” had lost its restricted meaning and, therefore, the assessee (market committee) had to satisfy the conditions of section 12AA read with section 11(1)(a) of the 1961 Act, like any other body or person.
According to the learned senior counsel for the Department, in view of the said amendment, vide the Finance (No.2) Act of 2002, the assessee had to show that, during the relevant assessment year, income had been derived from property held under trust and that the said income stood applied to charitable purposes. According to the learned counsel, if one analysed the scheme of the 1964 Adhiniyam, it would become clear that the amounts transferred by the assessee to the Mandi Parishad could not constitute application of income for charitable purposes within the meaning of section 11(1)(a) of the 1961 Act in view of the fact that the assessee (Mandi Samiti) was only a conduit which collected Mandi shulk (fees) whereas utilisation of the said Mandi shulk was not by the assessee but is made by another entity, i.e., Mandi Parishad whose accounts were not verifiable and, therefore, according to the Department, such income would not get the benefit of exemption u/s. 11(1)(a) of the 1961 Act.
The Supreme Court held that u/s. 19(2) of the 1964 Adhiniyam, all expenditure incurred by the assessee in carrying out the purposes of the 1964 Adhiniyam (which includes advancing credit facilities to farmers and agriculturists as also construction of development works in the market area) had to be defrayed out of the market committee fund and the surplus, if any, had to be invested in such manner as may be prescribed. This was one circumstance in the 1964 Act to indicate application of income. Similarly, u/s. 19B(2) of the 1964 Adhiniyam, the assessee was statutorily obliged to apply the market development fund for the purposes of development of the market area. U/s. 19B(3), the assessee was statutorily obliged to utilise the amounts lying to the credit in the market development fund for extending facilities to the agriculturists, producers and payers of market fees. The market development fund was also to be statutorily utilised for development of market yards. Similarly, all contributions received by the market committee (Mandi Samiti) from the members u/s. 19(5) were to be statutorily paid by the market committee (assessee) to the Uttar Pradesh State Marketing Development Fund. These provisions indicated application of income of the assesee to the statutory funds set up under the 1964 Adhiniyam. According to the Supreme Court, keeping in mind the statutory scheme of the 1964 Adhiniyam, whose object falls u/s. 2(15) of the 1961 Act, there was no doubt that the assessee satisfied the conditions of section 11(1)(a) of the 1961 Act. The income derived by the assessee (which was an institution registered u/s. 12AA of the 1961 Act) from its property had been applied for charitable purposes, which includes advancement of an object of general public utility.
The registered association of the stamp vendors of Ahmedabad approached the Gujarat High Court to quash the communication received from the Income Tax Department calling upon the State Government to deduct tax at source u/s. 194 H on commission or brokerage to the person carrying the business as “Stamp Vendors” and for a declaration that section 194H was not applicable to an assessee carrying on business as a stamp vendor.
The principal controversy before the High Court was whether the stamp vendors were agents of the State Government who were being paid commission or brokerage or whether the sale of stamp papers by the Government to the licensed vendors was on principal to principal basis involving the contract of sale.
The High Court after considering the Gujarat Stamps and Sales Rules, 1987, Gujarat Sales Tax Act, 1969 and the authorities cited held that the stamp vendors were required to purchase the stamp papers on payment of price less the discount on the principal to principal basis and there was no contract of agency at any point of time and that the discount made available to the licensed stamp vendors under the provisions of the Gujarat Stamps and Supply and Sales Rules, 1987, does not fall within the expression ‘commission’ or ‘brokerage’ u/s. 194H of the Act.
On appeal by the Department, the Supreme Court held that 0.50 % to 4 % discount given to the stamp vendors was for purchasing the stamps in bulk quantity and the said discount was in the nature of the cash discount. The Supreme Court concurred with the judgement of the High Court that the impugned transaction was a sale and consequently, section 194H had no application.
Facts:
For assessment year 2008-09, the assessee e-filed return which was revised by filing another e-return on 05.01.2009.
During the said year the assessee had short term capital gain of Rs. 2,65,853 which was chargeable at special rates u/s. 111A. In the returns, the assessee had at Item No. 3(a)(i) inadvertently/due to clerical error mentioned the amount as Nil but at the same time in item no. 3(a)(ii) and 3(a)(iii) short term capital gain of Rs. 2,65,853 was shown. Also in Schedule CG–Capital Gains on page 19 of e-return shown short term capital gain at item no. 6 but due to inadvertence/clerical error at item No. 7 – Short Term Capital Gain u/s. 111A included in 6 above the amount was stated to be Nil.
In the intimation received by the assessee, short term capital gain was charged to tax at normal rates instead of rate mentioned u/s. 111A. The assessee’s application u/s. 154 to rectify this was rejected on the ground that the assessee ought to have rectified the mistake in the returns by filing a revised return and this mistake is not rectifiable u/s. 154 of the Act.
Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the Assessing Officer (AO).
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that in the present system of e–filing of return which is totally dependent upon usage of software, it is possible that some clerical errors may occur at the time of entering the data in the electronic form. The return is prepared electronically which is converted into an XML file either through the free downloaded software provided by CBDT or by the software available in the market. In either of the case, there is every possibility of entering incorrect data without the expert knowledge of preparing an XML file. The Tribunal also noted that the assessee had under Schedule SI – income chargeable to income-tax at special rate IB which is at internal page 24 of the return shown short term capital gains at Rs 2,65,853 and tax thereon @ 10% to be Rs 26,585. The Tribunal directed the AO to rectify intimation u/s. 143(1) and to charge tax on short term capital gains @ 10%.
The appeal filed by the assessee was allowed.
Facts:
During the previous year relevant to the assessment year under consideration, the assessee returned capital gain arising on transfer of house property. While computing such capital gain, the assessee had regarded interest on loan taken in 2003 for purchasing the property as forming part of cost of acquisition of the property. In the course of assessment proceedings, the Assessing Officer (AO) noticed that the amount of interest which has been regarded as cost of acquisition had already been claimed as deduction u/s. 24(b). He was of the view that since the amount of interest was already claimed u/s. 24(b) the same could not again be allowed u/s. 48. He added the amount of interest to the income of the assessee from short term capital gains.
Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the assessee’s appeal and held that the assessee was entitled to include interest amount for computation u/s. 48 despite the fact that the same had been claimed u/s. 24(b) while computing income from house property.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Held:
The Tribunal noted that admittedly the loan was taken to acquire house property and the deduction allowed u/s. 24(b) was in accordance with the statutory provisions. Upon going through the provisions of section 48 the Tribunal held that the deduction u/s. 24(b) and computation of capital gains u/s. 48 are altogether covered by different heads of income i.e. `income from house property’ and `capital gains’. A perusal of both the provisions makes it unambiguous that none of them excludes operation of the other. The Tribunal held that it did not have the slightest doubt that interest in question was indeed an expenditure in acquiring the asset. Since both the provisions are different, the assessee was held to be entitled to include interest amount at the time of computing capital gains u/s. 48 of the Act. CIT(A) was right in accepting the contention of the assessee and deleting the addition made by the AO.
The appeal filed by the revenue was dismissed.
Facts:
For the assessment year 2009-10, the assessee uploaded its return of income electronically without digital signature on 25-09-2009. The acknowledgment in form ITR-V was dispatched by the assessee by ordinary post on 5-10-2009 but was received by CPC on 29-11-2010. Though there was some controversy about date of dispatch of ITR-V, admittedly the same was received by CPC within the time prescribed, as was extended by CBDT from time to time.
The Assessing Officer (AO) served notice u/s. 143(2) on 26-08-2011 i.e. beyond a period of six months from the end of financial year in which return was furnished, if the date of uploading the return is to be regarded as date of furnishing the return of income. However, if the date of receipt of ITR-V by CPC is regarded as date of furnishing the return of income then the notice was served within time prescribed by section 143(2).
Held:
The Tribunal upon going through the scheme framed by CBDT noted that as per the scheme, in respect of returns filed electronically without digital signature the date of transmitting the return electronically shall be the date of furnishing of return if the form ITR-V is furnished in the prescribed manner and within the period specified. In this case the period specified was 31-12-2010 or 120 days whichever is later. Admittedly, Form ITR-V was received by CPC on 29-11-2010 which was within the prescribed time, in the prescribed manner and in the prescribed form. Hence, the date of filing of the return shall relate back to the date on which the return was electronically uploaded i.e. 25-09-2009. The assessment order passed by the AO was quashed on the ground that the notice served on the assessee u/s. 143(2) on 26-08-2011 was beyond the period of six months from the end of the financial year in which the return was furnished.
The appeal filed by the assessee was allowed.
Installation services that are ancillary/inextricably linked to supply of equipment are not taxable under the India-Canada DTAA.
Facts
The Taxpayer, an Indian Company (ICo), is engaged in the business of engineering and general contracting.
During the relevant year a Canadian company (FCo) supplied certain equipment to ICo and also rendered installation and commissioning services. The services were rendered under a separate contract.
The payments in respect of installation and commissioning charges to FCo were made without deducting any taxes on the basis that the same was not chargeable to tax in India as per the exclusion given in Explanation 2 to section 9(1)(vii) of IT Act and Article 12(5)(a)3 of the India-Canada DTAA (DTAA).
The issue before the Tribunal was whether the consideration paid by ICo to FCo on account of installation and commissioning charges is covered by the exclusion provided in Explanation 2 to section 9(1) (vii) and/or under article 12(5)(a) of the DTAA.
Held
The contract for services was entered into by ICo simultaneously on the same date as that of the supply contract and both the contracts, i.e., for supply of equipment as well as installation and commissioning of said equipment were placed with reference to the same letter of intent.
With regard to taxability u/s. 9(1)(vii) of the IT Act, the Tribunal held that the services were not covered within the exclusion provided for construction and like activities, as the same refers to consideration for actual construction activities undertaken in India and not the consideration for any services in connection with the construction project.
Under the DTAA, having regard to this fact and the terms and conditions of both the contracts, Tribunal observed that the services of installation and commissioning rendered by FCo were ancillary and subsidiary, as well as inextricably and essentially linked, to the supply/sale of the equipment and therefore, they were not chargeable to tax in India in the hands of FCo as fees for included services by virtue of article 12(5)(a) of the DTAA.
ICo, therefore, was not liable to deduct tax at source from the said payment made to FCo and the disallowance made by the tax authority was not sustainable.
Commission for such offshore services was not offered to tax by FCo and it was claimed that the same is not service in the nature of FTS.
The issue before the Tribunal was whether buying agency services can be regarded to be in the nature of FTS under the IT Act.
Held
For a particular stream of income to be characterised as FTS, it is necessary that some sort of ‘managerial’, ‘technical’ or ‘consultancy’ services should have been rendered in. Various components of FTS should be interpreted based on their understanding in common parlance.
Buying agency services are not FTS but routine services offered for assisting in the process of procurement of goods. The buying agency service agreement shows that FCo was to receive commission for procuring the products of AE and for rendering incidental services for purchases.
Relying on Delhi High Court’s decision in J.K. (Bombay) Ltd. [118 ITR 312], Madras HC’s decision in Skycell Communications Ltd. [251 ITR 53] and Mumbai Tribunal’s decision in Linde AG [62 ITD 330], the Tribunal held that the services rendered by FCo were purely in the nature of procurement services and cannot be characterised as ‘managerial’, ‘technical’ or ‘consultancy’ services.
Accordingly, the consideration received by FCo was classified as ‘commission’ and not FTS.
Where right or property in respect of which the shipping income earned by the Taxpayer, is not effectively connected with the Taxpayer’s PE in India, such income will be taxable only in country of residence. The term “effectively connected” will apply only if the “economic ownership” of the ships is with the Taxpayer’s PE in India.
Facts
The taxpayer, a company incorporated in Switzerland, was engaged in the business of operations of ships in international waters through chartered ships. In respect of its activities in India, the Taxpayer had an Indian company (I Co) as its agent which triggered agency PE for the taxpayer. In its return of income for the tax year 2002-03, the Taxpayer declared NIL taxable income on the grounds that under the India-Swiss Double Taxation Avoidance Agreement (DTAA): (i) no article specifically covered the taxation of international shipping profits; (ii) Article 7 specifically excluded taxation of such profits; and (iii) Other Income article gave taxation rights only to Switzerland in absence of effective connection of ship with PE.
The Tax Authority contended that the combined effect of the exclusion of international shipping profits in Article 7 makes it clear that such profits are to be taxed by each country, as per their domestic laws. In any case, the Taxpayer has a dependent agent PE in India and that profits of the Taxpayer are effectively connected with the PE.
At the First Appellate Authority level, income was held to be not taxable in India. Aggrieved, the Tax Authority filed an appeal before the ITAT.
Held
On meaning of the expression “dealt with” under the Swiss DTAA: Coverage by Other Income article.
The purpose of a DTAA is to allocate taxation rights as held, inter alia, by the Supreme Court in the case of Azadi Bachao Andolan [263 ITR 706]. The expression “dealt with” used in Article 22 has to be read in the context of purpose of the DTAA, which is allocation of taxation rights. From this angle, an item of income can be regarded as “dealt with” by an article of DTAA only when such article provides for and, positively, vests the power to tax such income in one or both the countries. Such vesting of jurisdiction should be positively and explicitly stated and it cannot be inferred by implication.
Mere exclusion of international shipping profits from Article 7 cannot be regarded as vesting India with a right to tax international shipping profits and such profits cannot be regarded as “dealt with” as envisaged in Article 22.
Having regard to exchange of letters signed and agreed to between the competent authorities of India and Switzerland, it was clear that shipping profits were intended to be covered by other income Article.
On existence of PE
On facts, I Co was a legally and economically dependent agent, managing and controlling some of the Taxpayer/principal’s operations in India. Furthermore, the scope and authority of I Co is to work exclusively for and on behalf of the Taxpayer and not to accept any other representation without the written consent of the Taxpayer. Thus, the Taxpayer has an agency PE in India.
On whether the profits are “effectively connected” to the PE
The expression “effectively connected” is not defined in the Swiss DTAA or the IT Act, and therefore, it has to be understood using the general principles, keeping in mind the common uses associated with the phrase.
Economic ownership can be taken as basis to apply the concept of “effectively connected with”. 1
A right or property in respect of which income paid will be effectively connected with a PE if the economic ownership of that right or property is allocated to that PE. The economic ownership of a right or property, in this context, means the equivalent of ownership for income tax purposes by a separate enterprise with the attendant benefits and burdens.2
Since the economic ownership of the ships cannot be said to be allocated to the agency PE, it cannot be said that the ships were effectively connected with the PE in India. Accordingly, such income will not be taxable in India, but will be taxable in the country of residence of the Taxpayer, viz., Switzerland.
FCo earned revenues from the sellers of goods, who were required to pay a user fee on every successful sale of their products on the website.
Further, FCo had engaged its Indian affiliates (ICos) for availing certain support services in connection with the website for which it had entered into a Marketing Support Agreement (MSA).
The Tax Authority considered FCo’s income to be in the nature of Fees for Technical Services (FTS) which was taxable under the IT Act. Additionally, the Tax Authority took the view that FCo had a dependent agent permanent establishment (DAPE) in India on account of arrangements with ICos.
The issues before the Tribunal were:
(i) Whether the user fee from the sellers in India was in the nature of FTS under IT Act?
(ii) Whether ICos constituted a Permanent Establishment (PE) for FCo under India- Switzerland DTAA?
Held
Characterisation as FTS under the IT Act FCo’s websites are analogous to a “market place” where the buyers and sellers assemble to transact. FCo only provides a platform for doing business and cannot be regarded as rendering managerial services to the buyer or the seller.
Services are said to be technical when special skill or knowledge relating to a technical field is required for the provision of such service. Where technology is used in developing or bringing out any standard facility and the provider of such ‘standard facility’ receives some consideration in lieu of allowing its use, the users cannot be said to have availed any technical service from the provider by the mere act of using such standard facility.
There is no point at which FCo renders any consultancy service, either to the buyer or to the seller, as regards the transaction. It is also not possible for the buyers to consult FCo as regards the product to be purchased by them.
Thus, apart from making the websites available in India on which various products of the sellers are displayed, FCo has no role to affect the sales. Consequently, the consideration does not fall within the purview of FTS under the IT Act.
Whether ICos constitute a PE
ICos are dependent agents of FCo as ICos are legally and economically dependent on FCo. However, the following features suggest that ICos do not constitute a DAPE of FCo and hence the income is not taxable in India:
Websites are not directly or indirectly controlled by ICos and they have no role in directly introducing users to FCo.
The agreements between the sellers and FCo and the finalisation of transactions between the sellers and the buyers (without any interference or involvement of ICos) are done through the websites situated and controlled from abroad.
Further, the various conditions (i.e., concluding contracts, maintenance of stock and delivery of goods, manufacture or processing of goods) required to constitute a DAPE are also not satisfied by ICos.
Also, ICos do not constitute a PE under the “place of management” clause because ICos perform only market support services for FCo; they have no role to play in the online business between the sellers and FCo or between the buyers and the sellers.
Since the appellants relied on CBEC Circular, there was no suppression of facts and extended period of limitation could not be invoked.
Facts:
The appellants were engaged in providing services such as management consultancy, manpower recruitment, consulting engineer services etc. During the period from 2001-2002 to 2004-2005, the appellants also provided compliance services i.e. assistance in relation to complying with the regulation of RBI, Foreign Investment Promotion Board etc., filing application for import export code, returns under Income Tax Act, returns with the office of Registrar of Companies, sales tax returns etc. The Revenue contended that such compliance services were covered under the management consultancy services and hence the appellant had short paid the service tax for the above mentioned period. The appellants put forth the following arguments:
Management covers both strategic and operational level functioning and would include tasks such as planning, organising, staffing, directing, controlling and co-ordinating. He argues that the primary purpose of complying with rules and regulations of the country is only a responsibility of Managers and does not fall within the functions which are considered to be the core of management functions. They placed reliance on the letter no. V/DGST/21-26MC/9/99 dated 28th January, 1999 which clarified that activities in relation to complying with rules and regulations would not be covered under the ambit of management consultancy services and also on TRU letter F. no. 341/21/99-TRU dated 28th January, 1999 clarifying that practitioners providing assistance in relation to ESI and PF regulations, would not be covered under the expression “management consultant”. They also relied on CBEC circular no. 1/1/2001-ST dated 27th June, 2001, wherein it was clarified that if the agency’s role is limited to the compliance of such act or regulations and not governed by any contractual relationship with the advisee company, then such services will not be covered under the scope of ‘management consultant’.” They further placed reliance on the Hon’ble Tribunal’s decision in case of CCE, Chennai vs. Futura Polyesters Ltd. 2011 (24) STR 751 (Tri.-Chennai) ruling that such services (compliance services) shall not be taxable u/s. 65(105)(zr). The appellants in response to the revenue’s argument of meaning of management services relied on the Supreme Court’s decision in case of CCE vs. Parle Exports (P) Ltd. 1988 (38) ELT 741 (SC), that it is laid down by the Hon’ble Supreme Court that a taxing entry should be understood in the same way in which these are understood in the ordinary parlance.
The revenue on the other hand contended that without the compliance services, the receiver of service could not have carried out its managerial function and contended that the definition of “management consultancy services” was extremely broad to cover any service directly or indirectly provided in connection with the management of any organisation in any manner and the ‘inclusive’ part of the definition though was specific, did not restrict the scope of the ‘means’ part of the definition. Further, since the appellants had not included the said details in the service tax returns, a suppression was alleged and therefore justified invoking of extended period of limitation.
Held:
Though compliance with laws was part of the responsibilities of management, such responsibility per se would not bring any activity within the phrase “in connection with the management of any organisation” as already decided in and Futura Polyesters (supra) was being followed. The decision of Parle Exports (supra) as relied upon by respondents, specified that a taxing entry should be understood in its common parlance. CBEC circular should not have been ignored by the adjudicating authority, which stated that compliance services were not management consultancy services.
Since the appellants had relied on the CBEC circular during the relevant period, the demand was held as barred by limitation also. If the public acted relying on such circulars and still the charge of suppression is slapped on them, it can be the worst travesty of justice. So, there was no case for invoking suppression.
The reader is advised to refer the text of the relevant DTAA or the Protocol while dealing with facts of a particular case.
A) DTAAs/Protocols Signed and Notified
1. Finland
A revised DTAA and Protocol has been signed on 15-01-2010 between India and Finland, effective from 1st April, 2011.
As
per the revised Agreement, withholding tax rates have been reduced on
dividends from 15 % to 10 % and on royalties and fees for technical
services from 15 % or 10 % to a uniform rate of 10 %.
The
revised DTAA excludes the concept of “Make Available” from Article 12
(FTS). The revised Agreement also expands the ambit of the Article
concerning Exchange of Information to provide effective exchange of
information.
The Article, inter-alia, provides that a
Contracting State shall not deny furnishing of the requested information
solely on the ground that it does not have any domestic interest in
that information or such information is held by a bank etc. An Article
for Limitation of Benefits to the residents of the contracting countries
has also been included to prevent misuse of the DTAA.
Other features of the revised Agreement are:-
a) Provisions regarding Service PE has been included in the Article concerning PE.
b)
Paragraph 2 to Article 9 has been included to increase the scope for
relieving double taxation through recourse to Mutual Agreement Procedure
(MAP).
c) A new Article on assistance in collection of taxes
has been added, to ensure assistance in collection of taxes when such
taxes are due under the domestic laws and regulations.
d) The
time test for Independent Personal Service has been extended from 90
days or more in the relevant fiscal year to 183 days or more in any
period of 12 months commencing or ending in the fiscal year concerned.
2. Switzerland
India
has signed a Protocol amending the DTAA with Switzerland, notified on
27-12-2011, effective from 01-04-2012 (and, in respect of Exchange of
Information Article 26, effective from 01-04-2011).
The 14 Articles of the Protocol deal with various matters. Some of the noteworthy changes are as follows:
i) International Traffic to include transport via ship also:
The
earlier definition under the Article 3 (i) of the DTAA referred to
means of transport as ‘aircraft’ alone. Now the ambit has been increased
and the word ‘ship’ has also been added. The business profits will not
exclude the profits from the operation of ships; the change in
definition is evident due to the change in the ambit of international
traffic, which now includes ‘ship’ also as one of the means of
transport. Further changes under Article 8 in addition to air transport
also include shipping, which is consequential. Similar changes are
incorporated under Article 11 & 13.
ii) Non-discrimination clause:
Article
24 of the India-Swiss Protocol has incorporated the changes on the
basis of agreement which is line with the USA. Therefore, the taxation
of a permanent establishment which an enterprise of a Contracting State
has in the other Contracting State, shall not be less favorably levied
in that other State than the taxation levied on enterprises of that
other State carrying on the same activities. This provision shall not be
construed as obliging a Contracting State to grant to residents of the
other Contracting State any personal allowances, reliefs and reductions
for taxation purposes on account of civil status or family
responsibilities, which it grants to its own residents.
Further,
it is clarified that the non-discrimination provision shall not be
construed as preventing a Contracting State from charging the profits of
a permanent establishment which a company of the other Contracting
State has in the first mentioned State, at a rate of tax which is higher
than that imposed on the profits of a similar company of the first
mentioned Contracting State, nor as being in conflict with the
provisions of business profits. However, the difference in tax rate will
not exceed 10 % points in any case.
iii) Exchange of Information:
The
competent authorities of the States will exchange information for the
purposes of carrying out provisions of the DTAA between India and Swiss
and the domestic laws and compliances concerning the taxation. Further,
the exchange of information is not restricted to apply only to the
residents of the Contracting State alone. Proper disclosure methods have
also been provided. On a request for information from India,
Switzerland will need to use its administration to obtain that
information regardless of whether it requires this information under its
own tax laws, as long as it does not violate its legal process. The
information may be held by a bank, financial institution, nominee or
person acting in an agency or a fiduciary capacity. But for the same,
India has to first exhaust its own laws to obtain the information. A
host of procedures are provided in the protocol which are mandatory.
The
amendment clarifies that exchange of information which is foreseeable
and relevant, the procedure has to be set out in order to safeguard the
genuine issues.
iv) Definition of the term “Resident of a Contracting State” in Article 4 (1) expanded:
A
new paragraph is added to the Protocol, which expands the scope of the
term “Resident of a Contracting State”, and includes a recognised
pension fund or pension scheme in that Contracting State. These pension
funds or pension schemes will be recognised and controlled according to
the statutory provisions of that State, which is generally exempt from
income tax in that state and which is operated principally to administer
or provide pension or retirement benefits.
v) Conduit Arrangement:
This
provision is a anti-abuse provision. It states that benefits under
Articles 10 (Dividends), Article 11 (interest), Article 12 (Royalty) and
Article 22 (Other Income) would not be available, where such sums are
received under a “conduit arrangement”.
The term “Conduit Arrangement” means a transaction or series of transactions which is structured in such a way that a resident of a Contracting State entitled to the benefits of the Agreement, receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either Contracting State and who, if it received the item of income directly from the other Contracting State in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favourable than those available under this agreement to a resident of a Contracting State and the main purpose of such structuring is obtaining benefits under this Agreement.
3. Lithuania
India signed a DTAA with Lithuania on 26-07-2011 and notified on 26 -07-2012, effective from 01 -04-2013. Lithuania is the first Baltic country with which a DTAA has been signed by India.
The Agreement provides for fixed place PE, building site, construction & installation PE, service PE, Off-shore exploration/exploitation PE and agency PE.
Dividends, interest and royalties & fees for technical services income, will be taxed both in the country of residence and in the country of source. The low level of withholding rates of taxation for dividend (5% & 15%), interest (10%) and royalties & fees for technical services (10%) will promote greater investments, flow of technology and technical services between the two countries.
The Agreement further incorporates provisions for effective exchange of information including exchange of banking information and supplying of information without recourse to domestic interest. Further, the Agreement provides for sharing of information to other agencies with the consent of supplying state. The Agreement also has an article on assistance in collection of taxes. This article also includes provision for taking measures of conservancy. The Agreement incorporates anti-abuse (limitation of benefits) provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.
4. Mozambique
India has notified the DTAA with Mozambique on 31st May, 2011, effective from 1st April, 2012.
The DTAA provides that profits of a construction, assembly or installation project will be taxed in the state of source, if the project continues in that state for more than 12 months.
The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic, shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 7.5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.
The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.
5. Tanzania – Revised DTAA
India has signed a revised DTAA with Tanzania on 27th May, 2011, effective from 1st April, 2012.
The DTAA provides that business profits will be taxable in the source state, if the activities of an enterprise constitute a permanent establishment in the source state. Profits of a construction, assembly or installation project will be taxed in the state of source, if the project continues in that state for more than 270 days.
The DTAA provides that profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed a two-tier 5% or 10% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.
The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions, to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.
6. Georgia
India has signed a DTAA with Georgia on 24-08-2011, effective from 1st April, 2012.
The Agreement provides for fixed place PE, Building Site, Construction & Installation PE, Service PE, Insurance PE and Agency PE. The Agreement incorporates para 2 in Article concerning Associated Enterprises. This would enhance recourse to Mutual Agreement Procedure, to relieve double taxation in cases involving transfer pricing adjustments.
Dividends, interest and royalties & fees for technical services income will be taxed both in the country of residence and in the country of source. The low level of withholding rates of taxation for dividend (10%), interest (10%) and royalties & fees for technical services (10%) will promote greater investments, flow of technology and technical services between the two countries.
The Agreement incorporates provisions for effective exchange of information, including exchange of banking information and supplying of information without recourse to domestic interest. The Agreement also provides for sharing of information to other agencies with the consent of supplying state.
The Agreement has an article on assistance in collection of taxes, including provision for taking measures of conservancy. The Agreement incorporates anti-abuse (limitation of benefits) provisions to ensure that the ben-efits of the Agreement are availed of by the genuine residents of the two countries.
7. Singapore
India has signed a Second Protocol amending DTAA with Singapore on 24th June, 2011, entered into force from 1st September, 2011, but shall be given effect to for taxable periods falling after 01-01-2008, i.e. Financial Year 2008-09 & subsequent financial years. Both India and Singapore have adopted internationally agreed standard for exchange of information in tax matters. This standard includes the principles incorporated in the new paragraphs 4 and 5 of OECD Model Article on ‘Exchange of Information’ and requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.
8. Norway
India signs revised DTAA with Norway on 2nd February, 2011, effective from 1st April, 2012.
The revised tax treaty provides for exchange of information between the two nations including banking data. It also provides that each state would be required to collect and provide the information, even though such information is not needed by that state.
It also provides for the Limitation of Benefit (LOB) clause, whereby the treaty benefit would be denied, if the main purpose of the transaction or creation or existence of residence is to avail the treaty benefit.
9. Japan
India has notified on 24-05-2012, amendments to Article 11 of the India-Japan DTAA, but effective from 1st April, 2012.
As per Article 11(3), interest arising in India and derived by Central Bank or any financial institution wholly owned by Government of Japan, is not taxable in India. Earlier, Inter-national business unit of Japan Finance Corporation was one of the entities entitled to the benefit under Article 11(3). According to the amendment, Japan Bank for International Cooperation would be entitled to the benefit now, instead of the International business unit of Japan Finance Corporation.
10. Taipei (Taiwan)
The Taipei Economic and Cultural Center in New Delhi has signed a DTAA with the India – Taipei Association in Taipei. Taiwan’s Ministry of Finance (MOF) on August 17, 2012 announced that Taiwan’s income tax agreement and protocol with India entered into force on August 12, 2012 and will apply to income derived from Taiwan on or after January 1, 2012, and to income derived from India on or after April 1, 2012. The agreement has been entered u/s. 90A of the Income-tax Act, 1961 wherein any “specified association” in India may enter into a DTAA with any “specified association” in a “specified territory” outside India. The Taipei Economic and Cultural Center in New Delhi and India – Taipei Association in Taipei have been notified as “specified associations” and “the territory in which the taxation law administered by the Ministry of Finance in Taipei is applied”, has been notified as the “specified territory” for the purpose of Section 90A.
Salient Features of the DTAA
Persons Covered – The DTAA applies to persons who are residents of India, Taipei or both.
Taxes Covered
• In case of India, the DTAA will cover income tax (including any surcharge thereon).
• In the case of Taipei, it would cover the following (including the supplements levied thereon):
– the profit seeking enterprise income tax;
– the Individual consolidated income-tax; and
– the income basic tax.
Definition of Person
• The term “person” to include an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws of the respective territories.
Resident
• In order to qualify as a “resident of a territory” under the DTAA, person has to be “liable to tax” therein by reason of his domicile, residence, place of incorporation, place of management or any other criterion of a similar nature, and also includes that territory and any sub-division or local authority thereof.
• Further, the term ‘resident’ does not include any person who is liable to tax in that territory only in respect of income from sources in that territory.
• In case of dual residency, necessary tie breaker rules have been prescribed to determine tax residency. For individuals, the DTAA provides for criteria such as permanent home, centre of vital interests, habitual abode, etc. For persons other than individuals, the tie breaker provides for place of effective management criteria.
Permanent Establishment (‘PE’) – The DTAA contains clauses for constitution of a fixed place PE and inclusions thereon. For construction/supervisory PE, the activities at a building site, or construction, installation, or assembly project or supervisory activities should last for more than 270 days. In respect of constituting a PE by way of furnishing of services, including consultancy services, the services should be rendered for a period or periods aggregating to more than 182 days within any 12 month period for the same or connected project.
Shipping and air transport – Profits from operation of ships or aircraft in international traffic shall be taxable only in the territory of residence.
Dividends, Interest, Royalties and Fees for Technical services (‘FTS’)
• Dividends, Interest, Royalties and FTS may be taxed in the territory of residence as well as in the source territory.
• The rate of tax in the source territory shall not exceed the following rates (on a gross basis) in case the beneficial owner of the Dividend, Interest, Royalties and FTS is a resident of the other territory:
– Dividends: 12.5%
– Interest: 10%
– Royalties and FTS: 10%
• FTS has been defined to mean payments of any kind, including the provision of services of technical or other personnel.
Capital gains
• Income by way of Capital gains shall be taxed as follows:
– From alienation of Immovable property: In the territory in which the immovable property is situated.
– From alienation of ships or aircraft operated in international traffic: The territory in which the alienator is a resident.
– From alienation of shares deriving more than 50% value from immovable property: In the territory in which such immovable property is situated.
– From alienation of any other shares: The territory in which the company whose shares are alienated, is a resident.
– From alienation of any other property: The territory in which the alienator is a resident.
Methods of Elimination of Double Taxation (Tax Credit)
• The DTAA allows for the “credit method” to eliminate taxation of income by both India and Taipei. The tax credit for taxes paid on such income in the other territory is available as a credit to a taxpayer in his territory of residence. However, the above tax credit should not exceed the tax on the doubly taxed income in the territory of his residence.
• It has also been provided that, where any income received in accordance with the provisions of the DTAA by the resident of the other country is exempt from tax in the country of residence, then in calculating the tax on the remaining income of such resident, the resident country may nevertheless take into the exempted income.
• Further, India would not grant credit to its residents on the Land Value Increment Tax imposed under the Land Tax Act, in Taiwan.
Limitation of Benefits (LOB)
• This Article restricts the benefits under the DTAA if the primary purpose or one of the primary purposes was to obtain the benefits of the DTAA. Legal entities not having bonafide business activities are also covered by the LOB clause.
(Source: Taiwan’s Ministry of Finance)
11. Nepal
India signed a revised DTAA with Nepal on 27-11-2011 and notified on 12-06-2012, effective from fiscal year beginning on or after the 1st day of April, 2013.
B) DTAAs signed but not notified
12. Australia – Protocol amending the DTAA
The protocol was finalised in February, 2011. The protocol amending the DTAA was signed on 16th December, 2011. However, the same is not yet notified.
In the Protocol, the threshold limit to avail the exemption for service, exploration and equipment permanent establishments and taxation thereof have been enhanced/rationalised to encourage cross border movement of capital and services between the two countries. It also removes the “Force of Attraction Rule” in Article 7.
The Exchange of Information Article is updated to internationally accepted standards for effective exchange of information on tax matters, including bank information, and also for exchange of information without domestic tax interest. It also provides that the information received from Australia in respect of a resident of India can be shared with other law enforcement agencies with authorisation of the competent authority of Australia and vice-versa. This will facilitate higher degree of mutual cooperation between the two countries.
The protocol provides that India and Australia shall lend assistance to each other in the collection of revenue claims.
According to it, the assets or money kept in one country can be recovered by the other country for the purposes of recovery of taxes by following certain conditions and procedure.
In the existing treaty, the concept of non-discrimination was not present. As per the protocol signed, nationals of one country shall not be discriminated against the nationals of the other country in the same circumstances in line with international practices.
13. UK – Protocol to the DTAA
India has signed a protocol dated 30th October, 2012 with UK and Northern Ireland amending the DTAA. This Protocol amends the DTAA which was signed on 25th January, 1993. However, the same is not yet notified.
The Protocol streamlines the provisions relating to partnership and taxation of dividends in both the countries. Now, the benefits of the DTAA would also be available to partners of the UK partnerships to the extent income of UK partnership are taxed in their hands. Further, the withholding taxes on the dividends would be 10% or 15% and would be equally applicable in UK and in India.
The Protocol also incorporates into the DTAA anti-abuse (limitation of benefits) provisions to ensure that the benefits of the DTAA are not misused.
The Protocol incorporates in the DTAA provisions for effective exchange of information, including exchange of banking information and supplying of information irrespective of domestic interest. It now also provides for sharing of information to other agencies with the consent of the supplying state.
There would now be a new article in the DTAA on assistance in collection of taxes. This article also includes provision for taking measures of conservancy.
14. Indonesia – Revised DTAA
India has signed a revised DTAA with Indonesia on 27th July, 2012. However, the same is not yet notified.
The revised DTAA gives taxation rights in respect of capital gains on alienation of shares of a company to the source State. The Agreement further provides for rationalisation of the tax rates on dividend income, royalties and Fees for Technical Services in the source State @ 10%.
The revised DTAA further incorporates provisions for effective exchange of information including banking information and sharing of information without domestic tax interest. The revised DTAA also provides for assistance in collection of taxes and incorporates Limitation of Benefits and anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents.
15. Uruguay
India has signed a DTAA with Uruguay on 8th September, 2011. However, the same is not yet notified.
The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalty income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source and tax credit will be given in the country of residence.
The Agreement also incorporates provisions for effective exchange of information including banking information and assistance in collection of taxes including anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.
16. Ethiopia
India has signed a DTAA with Ethiopia on 25th May, 2011. However, the same is not yet notified.
The DTAA provides that profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 183 days.
The DTAA provides that profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest, royalties and fees for technical services income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 7.5% in the case of dividends and 10% in the case of interest, royalties and fees for technical services. Capital gains from the sale of shares will be taxable in the country of source.
The Agreement incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.
17. Colombia
India has signed a DTAA with Colombia on 13-05-2011. However, the same is not yet notified.
The DTAA provides that profits of a construction, assembly or installation projects will be taxed in the State of source if the project continues in that State for more than six months.
The DTAA provides that profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalty income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source.
The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.
18. Netherlands
India and Netherlands have concluded a Protocol on 10th May, 2012 to amend the Article 26 of the DTAA concerning Exchange of Information. However, the same is not yet notified.
The Protocol will replace the Article concerning Exchange of Information in the existing DTAC between India and Netherlands and will allow exchange of banking information as well as information without domestic interest. It will now allow use of information for non-tax purpose if allowed under the domestic laws of both the countries, after the approval of the supplying state.
Search and seizure operation were carried out during the period 29-7-1987 to 1-8-1987 at the residential/business premises of the assessee HUF, represented by the Karta, Shri Kalyanmal Karva. Assets worth Rs.48,32,000 besides incriminating documents were seized. On 1-8-1987, the Karta while surrendering the amount made a statement u/s. 132(4). The return of income for the assessment year 1987-88 which was required to be filed u/s.139(1) on or before 31-7-1987 was not filed. Pursuant to notices issued u/s.142(1)(ii) in December 1988, the assessee on 16-2-1990 furnished required information including statement of all assets and liabilities whether included in the accounts or not. In the said statement, the said Karta reiterated his earlier statement of concealment. The Department denied the immunity under clause (2) of Explanation 5 to section 271(1) (c) mainly for the reason that the assessee had failed to file his return of income on or before 31-7-1987 and had failed to pay the tax thereon.
The Supreme Court observed that Explanation 5 is a deeming provision. It provides that where, in the course of search u/s. 132, that assessee is found to be the owner of unaccounted assets and the assessee claims that such assets have been acquired by him by utilising, wholly or partly, his income for any previous year which has ended before the date of search or which is to end on or after the date of search, then, in such a situation, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall be deemed to have concealed the particulars of his income for the purposes of imposition of penalty u/s. 271(1)(c). The only exception to such a deeming provision or to such a presumption of concealment is given in sub-clause (1) and (2) of Explanation 5. Three conditions have got to be satisfied by the assessee for claiming immunity from payment of penalty under clause (2) of Explanation 5 of section 271(1)(c). The first condition was that the assessee must make a statement u/s. 132(4) in the course of search, stating that the unaccounted assets and incriminating documents found from his possession during the search have been acquired out of his income, which has not been disclosed in the return of income to be furnished before expiry of time specified in section 139(1). Such statement was made by the karta during the search which concluded on 1st August, 1987. It was not in dispute that condition No.1 was fulfilled. The second conditions for availing of the immunity from penalty u/s. 271(1)(c) was that the assessee should specify, in his statement u/s. 132(4), the manner in which such income stood derived. Admittedly, the second condition, in the present case also stood satisfied. According to the Department, the assessee was not entitled to immunity under clause (2) as he did not satisfy the third condition for availing of the benefit of waiver of penalty u/s. 271(1)(c) as the assessee failed to file his return of income on 31st July, 1987, and pay tax thereon particularly when the assessee conceded on 1st August, 1987 that there was concealment of income.
The Supreme Court held that the third condition under clause (2) was that the assessee had to pay the tax together with interest, if any, in respect of such undisclosed income. However, no time limit for payment of such tax stood prescribed under clause (2). The only requirement stipulated in the third condition was for the assessee to “pay tax together with interest”. In the present case, according to the Supreme Court, the third condition also stood fulfilled. The assessee had paid tax with interest up to the date of payment.
The Supreme Court held that the assessee was entitled to immunity under clause (2) of Explanation 5 to section 271(1)(c).
Relevant Law
Insider trading is often wrongly perceived in India. The general impression of insider trading is that it is profiting unfairly from unpublished inside information by insiders of that company. To that extent, it is surely true. For example, the CFO of a listed company may know in advance that the Company is going to declare far larger profits that would result in the market price to soar. He may thus buy shares before this information is made public officially and then sell shares at a higher price after the information is made public. This is the commonly understood concept of insider trading.
However, the actual legal concept of insider trading is much wider, particularly as a result of amendments over the years. Firstly, the inside information may not be merely about the company in relation to which a person may be an insider. It can be even about another company with which the first company may be dealing in. For example, Company X may be in the process of giving a huge contract to Company Y whereby the share price of Company Y may get a boost. This is also an inside information that the insiders of Company X are prohibited by law to deal in.
Secondly, a person who even receives or has access to unpublished inside information, is deemed to be an insider and hence his deals may amount to inside trading, though he may not be connected with the Company the way directors, officers, auditors, etc. are connected. This is an unduly wide and badly drafted provision though.
In context of the present case, the facts were Company X, through one of its controlled companies, sought to acquire substantial shares, of Company Y. This information was admittedly price sensitive in the sense that if known to the market, would have resulted in increase in the price of the shares of Company Y. The issue was, can persons connected with Company X (such as a non-executive director) deal in the shares of Company Y on the basis of such information?
Facts of the Case
In the present case, the facts (as reported in the decision cited above) were as follows. Ranbaxy Laboratories Limited (“Ranbaxy”) was a company in which one Mr. V was a non-executive director. Ranbaxy had two wholly owned subsidiaries which, in turn, jointly and wholly owned another company, Solrex Pharmaceuticals Limited (“Solrex”). Ranbaxy decided to acquire the shares of Orchid Chemicals and Pharmaceuticals Ltd. (“Orchid”), a listed company. The quantity of shares proposed to be acquired were substantial enough for it to be taken as accepted that such proposed acquisition was a price-sensitive information, which if made known to the markets would result in an increase of the price of the shares of Orchid. Solrex did not have funds to make this acquisition and the funds would have come from Ranbaxy.
The Board of the two subsidiaries held a meeting on 20th March 2008, to open a demat account for the purposes of such acquisition of shares on behalf of Solrex. Ranbaxy held a Board Meeting on 28th March 2008 to approve use of funds for such acquisition of a sum upto Rs. 800 crore (though actual acquisition was of Rs. 151 crore).
V transferred funds to his wife’s bank account and 35000 shares of Orchid were acquired by her at an average price of Rs. 131.71 on 27th and 28th of March 2008. These shares were sold on 10th April 2008 at an average price of Rs. 219.94. Solrex had made its acquisition of shares of Orchid from 31st March 2008 onwards. The proceeds of sale of such shares were transferred to the account of V from his wife’s account. The broker through whom such transactions were carried out was the same broker through which Solrex bought the shares of Orchid.
It was found that V was in constant touch with decision makers in respect of such purchases by Solrex.
The question was whether V and his wife were guilty of insider trading. SEBI held on the facts that they were guilty and, accordingly, levied a penalty of, in the aggregate, Rs. 60 lakh.
V and his wife appealed against this decision before the SAT.
Decision by SAT
The main contention raised before SAT was that, insider trading can only be in respect of a company in relation to which a person is an insider. In essence, the contention was that V could have been an insider only in respect of inside information in relation to Ranbaxy. The information of proposed purchase of shares of Orchid was not price sensitive information as far as Ranbaxy was concerned. As far as Orchid was concerned, V was not an insider. Further, even if the information was price sensitive as far as share prices of Orchid was concerned, legally speaking, so the appellant argued, it was not covered by the definition of unpublished price sensitive information. The appellant contended that the framework of law was such that the unpublished price sensitive information could only be in relation to the acquirer company and not the company whose shares were being acquired. Such latter company, it was argued, may not even be aware of such proposed acquisition.
The SAT did not accept this contention. However, it is interesting to see how weak the provisions of law are on the basis of which the appellants, perhaps because of special facts, were confirmed to be guilty.
The provisions of law relating to insider trading are scattered and even undefined to some extent. On the other hand, they are so broadly framed that even unintended cases may be covered.
Section 12A of the SEBI Act prohibits insider trading. It also prohibits dealing in shares on the basis of “material or non-public information”, etc. In addition but without directly linking to these express provisions, there are the SEBI (Prohibition of Insider Trading) Regulations 1992, which provide a very detailed set of provisions in relation to prohibition of insider trading.
The appellants had submitted that they could be held to be guilty of insider trading, only if they dealt in the shares of the company with respect of which they were insiders. The SAT pointed out that this was not the law. They can be insiders with respect to the company with which they were connected. However, the inside information and also the ban on trading of shares was in respect of any company. In the present context, though the appellant was a director of Ranbaxy and thus a connected person/ insider with respect to it, the inside information may be in respect to any other company also. Thus, the SAT held that the prohibition on dealing in shares on the basis of inside information was in respect of the shares of another company too.
The SAT thus held that since the appellants, who were insiders with respect to Ranbaxy, dealt in the shares of Orchid on the basis of unpublished price sensitive information in respect to shares of Orchid, they were guilty of insider trading.
Thus, the SAT confirmed the penalty of Rs. 60 lakh.
Problems in law
While the decision of SAT cannot be faulted either in law or in facts, the loose and vague framework of law as well as its extreme wide nature comes to light.
The scheme of law generally was indeed what the appellants argued and that it is framed in respect of insider trading with respect of the shares of the company with whom a person is an insider. However, by partial amendment of the law later, it has been provided that an insider with one company can still be prevented from dealing in shares of another company.
Thus, a person who is not an insider with respect to a company may still be held to be guilty of insider trading of the company. However, the narrow wording of the provisions itself, has the seeds of its own failure. For example, a person would still need to be insider with respect to another company. On one hand, this is too narrow a definition and on the other hand, this connection obviously does not always make sense.
At the same time, the dual and unconnected provisions – one in the Act and one in the Regulations – make the provisions too broad. The Act does not define many things including what is insider trading.
Perhaps, in this case, the findings of facts as stated in the decision were so glaring that they may have made it difficult for the parties to pursue a purely technical stand. V was a non-executive director. The purchases by him of shares were quite near the dates when the important decisions in relation to purchase of shares were taken. The price rose substantially by more than 60% in barely a couple of weeks. V/his wife purchased and sold the same number of shares and through the same broker.
However, it may happen in other cases that the facts may not be so glaring. It is possible that owing to such provisions of law that are porous on one hand and over-broad on the other, may not always have the desired effect and consequences that were intended of it.
The obvious reason for this is that the amendments have been made piecemeal, sometimes in the Regulations and sometimes in the Act. An rehaul of the provisions is desirable. At the same time, a far higher consciousness and law abiding approach is also required. As an ending point, it is also worth pointing out that the SAT referred to and, to an extent, relied on the observations in the most recent US decision in Rajratnam’s case in relation to insider trading.
The alleged “criminal conduit” between executive engineer Ajit Karnik and local RTI activist Mukesh Kanakia was exposed by Municipal Commissioner, R.A. Rajeev after Ajit Karnik reportedly asked a Naupada-based doctor to pay Rs. 2.75 lakh to Kanakia to get him to withdraw his complaint about a nursing home being set up in a residential flat.
“It is a case of collusion. As an executive engineer, Karnik is tasked with the key role of scrutinising building plans, verifying legal papers and recommending sanctions for construction projects. He chose to act as a go-between for Kanakia and the doctor for which he would get his share of money,” Rajeev said.
The episode, however, has opened a Pandora’s Box of the goings-on in the town planning department which has been accused of being the hotbed of corruption in the Thane corporation. Mr. Rajeev suspended Mr. Karnik.
The Right To Information can help people get an answer from an unresponsive bureaucracy, but what if it could do more than that? Could it clean up the system? A study by two Yale political scientists show that this might just be true.
Leonid V. Peisakhin and Paul Pinto, two PhD candidates at Yale University’s department of political science, conducted a field experiment in a Delhi slum among residents who were trying to apply for a ration card. Peisakhin and Pinto found that putting in an application for ration card and then filing an RTI request checking on its status, was almost as effective as paying a bribe. Most significantly, when poor people filed an RTI request, it erased the class disadvantage they otherwise faced, and their applications were cleared as fast as those of middle class.
The Government has spent Rs. 43.31 lakh on the Myanmar delegation that traveled to Delhi, Gurgaon and Mumbai.
The Speaker of the lower house of the Myanmar Parliament, Thura Shwe, was gifted a wooden elephant and all others with him took back dancing peacock statuettes worth Rs. 7,550; the total spend on the gifts to them was Rs. 1.11 lakh.
Similarly, Rs. 36.36 Lakh was spent during a goodwill visit of a German Delegation that journeyed to Delhi, Amritsar, Jodhpur and Mumbai. When a delegation from Cuba visited Delhi and Agra, the government spent Rs. 4.61 lakh on hosting them. “These were the years when the government had declared its austerity drive. But the RTI response reveals that millions of rupees were spent on putting up foreign dignitaries. All of them were flown to various parts of India and put up in five-star hotels,” said Agrawal. “One fails to understand why those who accompaning dignitaries cannot be put up in government guesthouses.”
In addition, Rs. 64.76 lakh was spent by Indian missions across the world on the SPG which travelled with Sonia.
Sonia is Z-plus security protectee with a high level of threat perception.
Information in relation to the donations made by the President from time to time was not disclosed by the President’s Secretariat by invoking section 8(1)(j) of the Act i.e. by treating the information as personal information, the disclosure of which was stated to be not in the public interest. CIC rejected the said defence of the petitioner and directed the disclosure of the information.
The submission of learned ASG Sh. A. S. Chandhiok firstly, was that the CIC has equated donations made by the President with subsidy, which is not the case. It was also submitted that the learned CIC has not dealt with the petitioner’s submissions founded upon section 8(1)(j) of the Act. It was also argued that the right to privacy of third parties would be breached, in case such disclosure is made. In any event, the right of third parties/recipients of the donation, to oppose disclosure by resorting to section 11 has not been dealt with. It was argued that the matter requires reconsideration, and the petition should be admitted for further hearing by the court.
A perusal of the impugned order, showed that the donations made by the President are out of public funds. Public funds are those funds which are collected by the State from the citizens by imposition of taxes, duties, cess, services charges, etc. These funds are held by the State in trust, for being utilised for the benefit of the general public.
The reliance was placed by the petitioner on the earlier decision of the CIC dated 18-12-2009, pertaining to the disclosure of information under the Act in relation to the Prime Minister’s Relief Fund. Commission had held that it has no relevance to the facts of the present case, assuming for the sake of argument that the said decision of the CIC takes the correct view. The Delhi High Court noted that it was concerned with the disclosure vis-à-vis the Prime Minister’s Relief Fund, and hence the said issue was not dealt in the present writ petition. The Court further noted: “In any event, unlike in the case of the Prime Minister’s Relief Fund, in the present case, the donations have been made by the Hon’ble President of India from the tax payers’ money. Every citizen is entitled to know how the money, which is collected by the State from him by exaction has been utilised. Merely because the person making the donations happens to be the President of India, is no ground to withhold the said information. The Hon’ble President of India is not immune from the application of the Act. What is important is, that it is a public fund which is being donated by the President, and not his/her private fund placed at his/her disposal for being distributed/donated amongst the needy and deserving persons.”
The learned ASG had submitted that the disclosure of information with regard to the donations made by the President would impinge on the privacy of the persons receiving the donations, as their financial distress, other circumstances, and need would become public. The Court responded:
“I do not find any merit in the aforesaid submission of the learned ASG. Firstly, I may note that the learned CIC has directed disclosure of some basic information, such as the names of the recipients of the donations, their addresses and the amount of donation made in each case. Further details i.e. the facts of each case, and justification for making donation, have not been directed to be provided. Even if further details are sought by a querist in relation to any specific instance of donation made by the President, the same would have to be dealt with in terms of the Act. There could be instances where the entire details may not be disclosed by resorting to section 8, 10 and 11 of the Act. However, it cannot be said that mere disclosure of the names, addresses and the amounts disbursed to each of the donees would infringe the protection provided to them u/s. 8(1)(j) of the Act.”
“The donations made by the President of India cannot be said to relate to personal information of the President. It cannot be said that the disclosure of the information would cause unwarranted invasion of privacy of, either the President of India, or the recipient of the donation. A person who approaches the President, seeking a donation, can have no qualms in the disclosure of his/her name, and address, the amount received by him/her as donation or even the circumstance which compelled him or her to approach the First Citizen of the country to seek a donation. Such acts of generosity and magnanimity done by the President should be placed in the public domain as they would enhance the stature of the office of the President of India. In that sense, the disclosure of the information would be in the public interest as well.”
“The submission of Mr. Chandhiok that the learned CIC has confused donations with subsidy is not correct. The CIC has consciously noted that donations are being made by the President from the public fund. It is this feature which has led the learned CIC to observe that donations from out of public fund cannot be treated differently from subsidy given by the Government to the citizens under various welfare schemes. It cannot be said that the CIC has misunderstood donations as subsidies.”
“For all the aforesaid reasons, I find no merit in this petition and dismiss the same. The interim order stands vacated.”
[President’s Secretariat vs. Nitish Kumar Tripathi W.P. (C ) 3382/2012 dated 14-06-2012. Citation- RTIR IV (2012) 92 (Delhi) delivered by Vipin Sanghi. J]
Sometime back, the Government of India introduced the draft of the Real Estate (Regulation of Development) Act (“RERA”).
While this is yet to become law, the Maharashtra Government has
introduced a Bill for passing Maharashtra Housing (Regulation and
Development) Act, 2012 (“MHRD”). This Bill was passed by both
Houses of the State in July 2012 and press reports indicate that the
Governor has given his oral assent. However, a formal Notification in
the Official Gazette is yet awaited. Once it is notified, the Bill would
become an Act. On coming into force, one important consequence that it
will have is that it would repeal the nearly 50-year old Maharashtra
Ownership Flats (Regulation of the Promotion of Construction, Sale,
Management and Transfer) Act, 1963 (MOFA).
The Preamble
states that the MOFA did not have an effective implementing arm as the
flat purchasers could only approach the Consumer Forums or Civil Courts.
It further provides that the Bill has been drafted to ensure full
disclosure by promoters, to ensure compliance of agreed terms and
conditions and to usher in transparency and discipline in the
transaction of flats and to put a check on abuses and malpractices.
Let
us examine this important piece of Legislation which is expected to
soon become the Law and also compare it with the existing provisions of
MOFA which it seeks to repeal, to understand whether the MHRD is vintage
wine packaged in a flashy new bottle or something more?
Non-applicability
The
MHRD does not apply to MHADA. Further, the Maharashtra Apartment
Ownership Act, 1970 is not repealed. Thus, condominium structures would
yet continue to be governed by the earlier law.
Housing Regulatory Authority and Appellate Tribunal
The
Bill proposes to introduce a radical change in the real estate
industry. For the first time, a Housing Regulatory Authority (HRA) would
be constituted to regulate, control and promote planned and healthy
development and construction, sale, transfer and management of
properties. Thus, just as the capital markets have a regulator in the
form of SEBI, the banking industry has RBI, the real estate sector would
also have an authority. It would be an autonomous body in the form of a
body corporate consisting of a Chairperson and Two or more Members.
The
Authority would have powers to ensure compliance of the obligations
cast upon builders under the Act, to make inquiries into compliance of
its Orders, etc. It has powers of a Civil Court and hence, it is a
quasi-judicial authority.
An additional feature is the
establishment of the Housing Appellate Tribunal, which would hear all
appeals against the Orders of the Authority. The Tribunal shall be a
three member bench to be headed by a sitting or retired judge of a High
Court. Thus, the Tribunal has been constituted on the lines of tribunals
under other Corporate Laws, such as the Securities Appellate Tribunal.
Both
these features are on the lines of the Central Act which would
constitute a Real Estate Regulatory Authority and a Real Estate
Appellate Tribunal.
One only hopes that the addition of two new authorities does not lead to more delays and latches in serving justice.
Promoter’s Obligations
The
obligations cast on a “promoter” of a project, i.e., the builder, are a
combination of those under MOFA in a new avatar and some additional
ones. A promoter has been defined to cover any person, firm, LLP, AOP or
any other body which constructs a block or a building of flats. In the
event that the builder and the person selling the flats are different,
then both of them are promoters. The decision of the Bombay High Court
in the case of Ramniklal Kotak v. Varsha Builders AIR 1992 Bom 62 is
relevant on this issue. A mere contractor of the builder would not come
within the definition of the term.
The definition of “flat” is
also relevant and it is defined as a separate and self-contained
premises which may be used for residence, office, show-room, shop,
godown, etc., and includes an apartment. The definition of the term flat
is similar to the one u/s. 2 of MOFA except that it does not include
the words “and includes a garage”. This is a fallout of the celebrated
decision of the Supreme Court in the case of Nahalchand Laloochand P Ltd
v Panchali Co-op. Hsg. Society (2010) 9 SCC 536 which held that the
promoter has no right to sell open or stilt parking spaces. A terrace
has been held not to be a flat. The premises contemplated by the term
“flat” refers to a structure which can be used for any of the purposes
specified in the definition, for example, residence, office, show room,
etc. – Association of Commerce House v Vishandas, 1981 Bom CR 716.
Let us Look at some Key Obligations of Promoter:
(a)
Registration of a Project – This is a new requirement cast on the
developer, which was not found under MOFA. Every developer must apply
for registration of his project with the HRA and for displaying it on
the HRA’s website. The HRA must register such project within a period of
seven days from application. Registration is required even for ongoing
projects where the Occupation Certificate has not been received. If a
Court declares that the title of the promoter to the land is invalid,
then the HRA can cancel the registration of the project which is built
on such land. If registration is cancelled, then the promoter is
prohibited from selling the flats constructed in such project.
Registration is not required in the following cases:
(i) When the land area to be developed does not exceed 250 sq. mtrs.
(ii) When the total number of flats to be developed is less than five.
(iii) When the promoter has received the OC before the provision came into force.
(iv)
Where the project is one of a renovation, repairs, reconstruction or
redevelopment project not involving a fresh allotment or marketing of
flats.
Once the project is registered, the promoter can upload
details on the HRA’s website. The features relating to a central
registry and a website are similar to the RERA. The monetary penalty for
not registering a project is Rs. 1,000 per day of default. In addition,
a promoter cannot issue any advertisement for a project or receive any
advance payment for the same, unless it is displayed on the HRA’s
website.
(b) Disclosures by the promoter – The promoter must
make full and true disclosure of several documents and information in
respect of the project, e.g., details of the entity developing the
project, consultants used, phase-wise time schedule for completion, type
of materials used, fixtures and fittings bifurcated between branded and
unbranded, possession date, nature of organisation to which conveyance
would be made, etc. One such requirement is obtaining a title
certificate to the land which should be certified by an advocate with a
minimum three years’ standing. While disclosures are a good move, it
must be ensured that it does not lead to undue red tape.
(c)
Agreement for Sale – Similar to the current provisions of section 4 of
MOFA, the promoter must execute an Agreement for Sale in the prescribed
form before accepting any advance payment/ deposit exceeding 20% of the
sale price. Once a promoter has executed an Agreement to Sell, he would
not mortgage or create any charge on the plot, building or apartment
without the previous consent of the allottee.
The Bombay High
Court’s decision u/s. 4 of MOFA in the case of Ramniklal Kotak v. Varsha
Builders, AIR 1992 Bom 62 is relevant in this respect :
“To prevent bogus sales being effected by a Promoter and to put a check to malpractices indulged in by the Promoters in regard to sales and transfer of flats, the Legislature has provided that the Promoter shall :
(i) not accept any sum or money as advance payment or deposit more than 20% of the sale price;
(ii) enter into a written agreement with each individual flat owner.”
The Bombay High Court in Association of Commerce House Block Owners v. Vishnidas Samaldas (1981) 83 Bom. L.R. 339 held that the provisions of section 4 are mandatory and not directory in nature. The ratio of the above-mentioned decisions would apply even under the provisions of the Bill.
The Agreement must also be registered. However, even if it is unregistered, the same would be admissible as evidence in a suit for specific performance or as evidence of part performance of a contract. A similar section is present under MOFA and was inserted to overrule the Bombay High Court’s decision in the case of Association of Commerce House Block Owners v. Vishnidas Samaldas that non-registered agreements are wholly invalid and void ab initio and create no rights between the parties.
(d) Responsibilities – If any flat buyer suffers a loss due to any false statement, then the promoter must compensate him. If the buyer withdraws, then he would be refunded the sum invested along with interest @ 15% p.a. Under MOFA, this is refundable with interest @ 9% p.a.
The promoter would have to take various specified safety measures for the builder. He is not allowed to give possession of the flats till the OC or Completion Certificate has been obtained. Interestingly, a majority of the builders in Mumbai do not obtain a Building Completion Certificate.
The promoter needs to adhere to the plans and project specifications which have been approved and which have been disclosed to the prospective flat allottees. Further, if any defect is brought to the promoter’s notice within three years from possession, then he is required to rectify the same wherever possible or offer such compensation to the flat allottees as the HRA may decide.
(e) Carpet Area Selling – The MOFA was specifically amended in 2008 to provide that one of the responsibilities of the promoter is to sell flats on the basis of the carpet area only. He could, however, separately charge for the common areas in proportion to the carpet area. The Statement of Objects and Reasons introducing this Amendment mentioned that flat purchasers are not understanding the difference between carpet, built-up, super built-up area and hence, the promoters must sell flats on carpet area alone.
While the Bill requires a promoter to disclose the carpet area and the Agreement for Sale should mention the extent of the carpet area, the amendment made in 2008 is nowhere to be found. The Agreement is required to mention the total price of the flat, but there is no reference in this clause to the carpet area pricing. MOFA also provided that the definition of carpet area for carpet area pricing included the balcony area of the flat. The Bill now defines carpet area for all purposes under the Bill to mean the net usable floor area within a flat or building in accordance with the Development Control Regulations.
Powers of Promoters
Section 12A of MOFA provides that the promoter cannot, without just and sufficient cause, cut off, with-hold, curtail or reduce essential supply or services enjoyed by a flat purchaser. Any person who contravenes the provision of this section shall on conviction be liable to imprisonment for a term of up to three months and/or fine. These include, water, electricity, lights in passages / stair-cases, lifts, conservancy or sanitary services, etc.
The Bill contains similar provisions with some differences. The responsibility of the promoter to provide these services has been made subject to the service provider providing the same. If the service provider does not provide the services, the promoter would not be responsible. This is a welcome change. However, an interesting addition has also been made.
If the flat purchaser fails to pay the maintenance charges to the promoter for a period of more than three months, then the promoter is entitled to, after giving a seven day notice period, cut-off or withhold such essential supply or service. The provision for three months imprisonment which currently exists in MOFA has also been laid to rest.
Accounts and Audit
One interesting and welcome new facet is the compulsory maintenance of building-wise separate bank accounts. The promoter must maintain a separate bank account of the sums taken by him as advance /deposit/towards the share capital for the formation of a cooperative society or a company/towards the outgoings/taxes. He must hold these sums for the purposes for which they were given and disburse them for those purposes.
A promoter who has registered under the Act must maintain accounts for various specific heads. The promoter must also get such accounts audited by a Chartered Accountant. The HRA can direct the promoter to produce all such books of account or other documents relating to a project or flat in case of a complaint against the promoter.
“6. Prohibition to register for two regular courses of study.
No student shall be allowed to simultaneously register for a law degree program with any other graduation or post graduation or certificate course run by the same or any other University or an Institute for academic or professional learning excepting in the integrated degree program of the same institution. Provided that any short period part time certificate course on language, computer science or computer application of an Institute or any course run by a Centre for Distance Learning of a University however, shall be excepted.”
As per the above clause, a Law student cannot pursue any other academic/professional course. Many students of C.A./C.W.A/C.S. course intending to pursue Law course simultaneously as an additional or necessary supplementary qualification are adversely affected by the above rule.
It is submitted that the said restriction is harsh/ unreasonable and unfair for the following reasons.
i) There is already a restriction on pursuing more than one University course. Thus, effectively the above restriction remains applicable only to the courses of the Institutes.
ii) The expression “Institute” is not defined in the Rules.
Thus, the prohibition is a sweeping one. Some Institutes are statutory. Some are either run or recognised by the various administrative Ministries of Central/State Governments. Some others are purely private. The examples, other than of ICAI/ICWA/ICSI, are of Insurance Institute of India and Indian Institute of Bankers. These Institutes are running the academic courses which are mostly pursued by insurance and bank employees.
iii) The above restriction appears to be proceeding on the premises that Law course is pursued only for the practice in Law. The fact is that the same is pursued by majority as an additional or necessary supplementary qualification.
iv) A student of three years Law course can be in the full time employment, but cannot pursue other courses as above.
v) Even if a person is qualified for practice in more than one discipline, he/she can practice only in one discipline. It is therefore unreasonable to put restriction at the qualifying stage.
vi) In the case of any course, after completing the tuition period, one may be required to only appear for exams for completing the course for a long period. It is not clarified during what period a Law student can be said to be pursuing other courses.
vii) While a University student, whether for graduate or post graduate studies in other branches can simultaneously pursue a non-University course, a student of Law course, which is essentially a University course, cannot do so.
viii) There is an uncertainty about completing any particular course. By curtailing the options, the career prospects of a student gets adversely affected.
The inbuilt exemption to distant learning courses is quite logical. But it is applicable only to a University. It is a different thing that it may come into the clutches of a University’s own rules. However, if the said that exemption to distant learning education is extended to the Institutes also, the situation can be substantially salvaged. The issue is highlighted for the attention of various Institutes, academicians and prominent professionals for their consideration and pursuing it further, if and as may be deemed appropriate.
At the most, if at all the prohibition is to be applied, it should be restricted to the five year course and not for the three year course of LLB. Further, depriving the law students from acquiring indepth knowledge of accountancy, costing, corporate laws etc. would eventually be to their own detriment. In the present day world, multi-disciplinary knowledge is not only desirable, but essential. …………..
The
Plaintiffs are mother and three children. They have entered into an
agreement for sale with Defendant No.1 on 3rd December 1988. On the date
of the execution of the agreement Plaintiff Nos. 3 and 4 were minors.
Their mother Plaintiff No.1 signed the agreement on behalf of herself
and her minor children. Plaintiff No.2 has signed for herself. The
consideration under the agreement was Rs.2.5 lakhs. Rs.1 lakh has been
admittedly paid. The sale was to be completed within one month from the
date the title was clear by the permission of the competent authority
and the permission of the Court was obtained for sale of the minors’
share. An Irrevocable General Power of Attorney was also executed
similarly by the Plaintiffs along with the agreement for sale. The
Plaintiff Nos. 1 and 2 have also executed a declaration and indemnity on
6th December 1989, showing the possession of the property was handed
over to Defendant No.1. It is the Plaintiffs’ case that thereafter only
in the year 2007 the Defendants sent to the Plaintiffs a draft Deed of
Conveyance and draft Irrevocable General Power of Attorney to be
executed along with a declaration cum indemnity bond.
It is the
case of the Plaintiffs that the consideration under the document is not
paid. It is the case of the Defendants that it is. The consideration is
receipted in the Deed of Conveyance itself. The Defendants have shown
the amount debited to their bank account. The Defendants have, however,
not shown that the amounts are credited to the bank account of the
Plaintiffs.
However, the document remained to be registered. The
Defendant No.1 has sought to register a conveyance in February 2007
under a Deed of Confirmation executed by him as a Constituted Attorney
of the Plaintiffs under the Irrevocable General Power of Attorney
executed by the plaintiffs in 1989.
The Court observed that
there are no disputes shown between the mother and the children. The
minors who attained majority alleged that the transaction was against
their interest and was not for legal necessity and could not have been
entered into by their mother.
It may be mentioned that u/s. 8(3)
of the Hindu Minority and Guardianship Act 1956, the disposal of an
immovable property by a natural guardian is voidable at the instance of a
minor. It is for the minor to avoid the contract. The contract can be
avoided within the prescribed period of Limitation. Article 60 of
Schedule I to the Limitation Act 1963 provides the period of 3 years
from the time the minor attains majority to set aside a transfer made on
his behalf by his guardian.
Defendant Nos. 3 & 4 attained
majority in 1994 and 1996. They could have voided the contract in 1997
and 1999 respectively. They failed to do so. They must be taken to have
acquiesced in the transfer. In fact in 2008, the minor Plaintiff No.4
affirmed the transaction. Though the most determinative aspect is the
payment and the receipt of consideration and though the payment is
sought to be shown, the receipt has not been shown by any
contemporaneous evidence of the banking transaction, the fact that the
tenants have been attorned and Defendant No.1 has been collecting rents
show knowledge on the part of the Plaintiff that the Defendant No.1 had
become the owner. That aspect was accepted. Plaintiff No.4 confirmed the
transaction on attaining the majority. Plaintiff No.2 never sought to
avoid the transaction entered into by her guardian. It is only because
the conveyance was not registered in 1993 itself, that the Plaintiffs
sought to claim rights upon the registration made years thereafter, when
the construction on the suit land became rife. In that case, it is
observed that the Plaintiffs who are minors would not have been bound by
the agreement entered into, they being minors, if they have not chosen
to standby it. It is open to them either to standby it or renounce it.
It is observed in that case, that it was reasonable to assume that the
minors therein were aware of their rights upon the facts of that case.
They did not deny the agreement. They continued to enjoy the properties.
They went on alienating items of those properties. They were taken to
have ratified the agreement entered into by their guardian, as they
elected to stand by that agreement. In this case, the benefit that they
would have obtained is only the consideration, but the circumstantial
evidence about the allowance to receive rents by the purchaser in the
agreement for sale shows that they stood by the agreement for sale even
after Plaintiff Nos. 3 & 4 attained majority. Plaintiff Nos. 1 and 2
in any event stood by the said agreement at all times by attorning
tenancies. The Plaintiffs are not entitled to any relief of injunctions.
The appellant disclosed that the dispute between the parties were already settled in another succession case filed by the appellant (Rashmi Bharti). It was further claimed that she being legally married wife of Late Sanjeev Kumar, she had got statutory right to inherit in toto the estate of Sanjeev Kumar to the exclusion of all other relatives of Late Sanjeev Kumar. Besides this, the appellant further asserted that after the death of her husband Late Sanjeev Kumar, the Respondent No. 1 had also obtained Rs. 50,000/- from the account of Late Sanjeev Kumar lying in Punjab National Bank. The appellant herself had accepted that subsequent to death of her husband Late Sanjeev Kumar, she had married one Arun Sao. It was submitted that the applicant/ respondent No. 1 was only nominated by her Late husband to get the amount from the insurance company, whereas, the appellant as Class I heir was entitled to get the entire amount of the insurance policy. He submits that law in respect of nominee has already been settled by the Apex Court in a case reported in AIR 1984 SC 346 (Smt. Sarbati Devi and another v. Smt. Usha Devi).
The Court observed that it is not in dispute that only being nominee in the policy taken by the deceased Sanjeev Kumar, the respondent no. 1 was not entitled to claim succession certificate in his favour in respect of insurance policy of deceased Sanjeev Kumar. Only on the basis of being nominee he was not entitled to claim. The issue regarding the right of a nominee is no longer res integra. It has already been settled in Sarbati Devi Case (Supra). In the present case, it is not in dispute that the appellant after the death of her husband had remarried, and as such, she had forfeited her right to claim any interest in the property of her deceased husband. Remarriage of a widow stands legalised by reason of the incorporation of the Act of 1956 but on her remarriage, she forfeits the right to obtain any benefit from her deceased husband’s estate and Section 2 of the Act of 1856 is very specific that the estate in that event would pass on to the next heir of her deceased husband as if she were dead.
In view of the aforesaid, the court held that the appellant herself had initially filed succession case vide Succession Case No. 123 of 2004, and thereafter, she agreed to withdraw the said case after accepting certain amount. This fact regarding compromise in between the parties was admitted by the appellant in her written statement filed before the court below. Once after compromise she had withdrawn the succession case, at subsequent stage, the appellant shall not be entitled to claim any succession right in the property of her husband (deceased), that too, after being remarried.
The district Judge rightly allowed the issuance of succession certificate in favour of Respondent No. 1 (brother of deceased)
The premises in question were earlier occupied by one Sadashiv Sheshappa Amin, who was a tenant and had filed R.A. Declaratory Suit. On 11th December, 2009, he surrendered the tenancy rights. On 12th December, 2009, the landlords Mrs. Urmila L. Pittie and Mr. Arvind L. Pittie inducted the Petitioners as tenants in respect of the premises.
The stamp duty of Rs. 100/- was affixed to the Tenancy Agreement and an Application for adjudication was made. Thereupon, the Collector of Stamps, Mumbai issued a demand notice, demanding a stamp duty of Rs.1,35,130/- alongwith penalty of Rs. 8,108/- by claiming that the Instrument was chargeable with stamp duty for lease under Article 36 of the Schedule to the Bombay Stamp Act, 1958. The Petitioners contended that Article 5 (g-d) was applicable and hence, according to the Petitioners, a stamp duty of Rs. 50,000/- only was payable.
Consequently, the Collector directed payment of sum of Rs.1,12,575/- as deficit stamp duty with penalty of Rs. 4505 after giving a discount of 50% only as building was very old.
The Petitioners case was that since earlier tenant had surrendered the tenancy and since immediately on the next date a new tenancy was created, the transaction was in fact covered by Article 5 (g-d) since it was the transaction of transfer of tenancy. He, therefore, submitted that Article 36 had no application to the facts of this case.
The Hon’ble Court observed that if the Petitioners, Landlords and the earlier Tenant who had surrendered tenancy had entered into one composite instrument whereby the tenancy had been transferred in favour of the Petitioners, then certainly the instrument would be one covered by the Article 5(g-d). However, in this case, such a composite tripartite agreement has not been executed.
Agreement of surrendering the tenancy and the agreement of creation of tenancy are two different and distinct documents arising out of the two different and distinct transactions. It is, therefore, not possible to accept the submission of the Petitioner that a composite transaction of transfer of tenancy had taken place.
On the second contention of the Petitioners about the discount on old buildings, the court observed that the Agreement of Tenancy specifically mentions that the building in which the premises in question are situated was 250 years old. The relevant extract of the Ready Reckoner also provides for different rates of depreciation for old buildings and provides that if the building was more than 60 years old only 30% of the market value is charged, meaning thereby that 70% discount over the market value for new property has to be given. Thus, the second contention of the Petitioner to get a discount of 70% was upheld.
The plaintiff – Reetu brought a suit for declaration of title and to declare the sale deed executed by Hira Kunwar in favour of defendant – Rengtu Chandra and Ramlal Sonar as void and if it is found that plaintiff is not in possession of the suit land, the possession of the suit land be given back to the plaintiff, alleging that the owner of the suit property was late Matharu. After his death, the suit land came into possession of his widow Budhwara. Late Matharu was issueless. Plaintiff, being real brother of late Matharu, inherited the suit property but respondent No. 1 – Hira Kunwar, who is daughter of Budhwara from her previous husband, got her name mutated in the revenue records behind his back. The trial Court, after recording evidence, decreed the plaintiff’s suit for declaration of title, finding inter alia, that after the death of Matharu, suit property was inherited by the appellant and that the respondent No. 1 – Hira Kunwar had no right or title over the suit land and had also no right to alienate the property.
The Hon’ble Court observed that the words “sons and daughters and the husband” appeared in Clause (a) of sub-section (1) of Section 15 of the Act, 1956 only mean “sons and daughters and the husband of the deceased and not of anybody else”. The use of the words ‘of the deceased’ following ‘son or daughter’ in Clauses (a) and (b) of sub-section (2) of Section 15 and absence of the same in sub-section (1) make no difference. Therefore, where on death her daughter from previous husband would not be entitled to inherit said property within meaning of section 15(1)(e) of Act and in absence of son or daughter of deceased wife from her husband, property would devolve upon brother of the deceased husband, being an heir of the husband.
The common proposition of law that emerged for consideration was, whether an authorised signatory of a company would be liable for prosecution u/s. on 138 of the Negotiable Instruments Act, 1881 without the company being arraigned as an accused. There was difference of opinion between the two learned Judges in the interpretation of sections 138 and 141 of the Act and, therefore, the matter was placed before the larger bench.
The Appellant, Anita Hada, an authorised signatory of International Travels Limited, issued a cheque dated 17th January, 2011 for a sum of Rs.5,10,000/- in favour of the Respondent, namely, M/s. Godfather Travels & Tours Private Limited, which was dishonoured, as a consequence of which, the said Respondent initiated criminal action by filing a complaint before the concerned Judicial Magistrate u/s. 138 of the Act. In the complaint petition, the Company was not arrayed as an accused. However, the Magistrate took cognisance of the offence against the accused Appellant.
The Hon’ble Court observed that Section 141 of the Act is concerned with the offences by the company. It makes the other persons vicariously liable for commission of an offence on the part of the company. The vicarious liability gets attracted when the condition precedent u/s. 141 of the Act stands satisfied. The Court also held that the power of punishment is vested in the legislature and that is absolute in section 141 which clearly speaks of commission of offence by the company. The liability created is penal and thus warrants strict construction. It cannot therefore be said that the expression “as well as” in section 141 brings in the company as well as the Director and/or other officers who are responsible for the acts of the company within its tentacles and, therefore, a prosecution against the Directors or other officers is tenable, even if the company is not arraigned as an accused. The words “as well as” have to be understood in the context. Applying the doctrine of strict construction, it is clear that commission of offence by the company is an express condition precedent to attract the vicarious liability of others. Thus, it is absolutely clear that when the company can be prosecuted, then only the persons mentioned in the other categories could be vicariously liable for the offence, subject to the averments in the petition and proof thereof. It necessarily follows that for maintaining the prosecution u/s. 141 of the Act, arraigning of a company as an accused is imperative. Only then, the other categories of offenders can be brought in the dragnet on the touchstone of vicarious liability as the same has been stipulated in the provision itself. Accordingly, the proceedings initiated under Section 138 of the Act are quashed.
Facts:
The respondent/assessee is a dealer in opticals, and sold frames after having purchased frames as such without fitting them into spectacles, while the assessing authority has given categorical finding that the frames had not been sold as such without fitting them in spectacles to its customers as a product through separate bills for (i) frame and (ii) lens.
Before the Tribunal, the respondent/assessee contended that the manufacture of spectacles based on a specific description issued by the Doctors and choosing the lens pertaining to the power prescribed, the same is handed over to the skilled labourers for processing and sizing the lens such as grinding the shape of the lens, etc., before fitting the same into frames. It was therefore contended that such a process of manufacture according to the specific requirement is based on prescription issued by the Doctor, which would fall within the concept of “works contract” falling u/s. 3B of the Tamil Nadu General Sales Tax Act and as such eligible for claim of second sale not liable to tax. The Tribunal allowed the appeal filed by the assesse and set aside the order of assessment and first appeal. The Department filed Revision Petition before the Madras High Court challenging the order of the Sales Tax Appellate Tribunal, for the period 1994-95.
Held:
In the first place, what is sold by the respondent/ assessee to their customers is the spectacle. The spectacle is manufactured to the requirement of each of the customers based on a prescription of an ophthalmologist. What is being carried out by the respondent/assessee falls within the expression “manufacture”, i.e., manufacture of spectacle based on the orders placed by the customers. Even such manufacturing activity is carried on by the respondent/assessee in their workshop. Therefore, in every respect, the necessary ingredients of works contract are absent. The contract is of sale and not a works contract.
The spectacle manufactured by the respondent/ assessee which contains a frame and lens and certain other parts, can be independently analysed in order to find out whether any tax is leviable on such different parts contained in the spectacles. Therefore, the action of the respondent/assesse in having raised two separate bills, one for the frame and the other for the lens and thereby, there would be collection of tax on sale of lens alone and not on the frame was permissible and cannot be questioned.
Accordingly, the HC dismissed the revision petition filed by the Department and answered the question of law in favour of the respondent/assessee.
Facts:
Petitioners were educational institutions providing boarding and lodging facilities to students staying inside the campus in the hostel and they were provided food. The supply of foodstuff was sought to be assessed as a sale under the Act. The petitioner managing the institution on a non-profit basis as a charitable organisation without there being any profit-motive involved and, in this regard, also registered u/s. 12A of the Income-tax Act as a charitable organisation. Many students of the petitioner-institution are using the boarding facilities provided by the institution and, for this purpose, the petitioner charged a lump sum amount towards tuition fee and boarding fee. The petitioner was not charging any separate amount or cost for food supplied to the students, who were using the hostel facility. The mess was run by the institution itself and was not being done by any catering contractor. It was alleged that before the promulgation of the Uttarakhand Value Added Tax Act, 2005 (hereinafter referred as “the Act”), the U.P. Trade Tax Act was applicable in the State of Uttarakhand and, while the said Act was in force, the petitioner was not subjected to any tax for the supply of food to its residential students nor was the petitioner recognised as a “dealer” under the Act, but after coming into force the Act of 2005, the petitioner received a notice dated 2nd June 2009, for the assessment years 2005-06, 2006-07, 2007-08 and 2008-09 from the Assistant Commissioner Commercial Tax to show cause as to why the petitioner should not be liable to pay value added tax on the supply of food to its students, which amounted to a sale under the Act.
The petitioner, being aggrieved by the issuance of the notice, filed the writ petition before the High Court praying for the quashing of the notice for assessment years 2005-06, 2006-07, 2007-08 and 2008-09, for a direction restraining the respondents from making any assessment pursuant to the notice dated 2nd June 2009, as it is not carrying on the business of sale of foodstuff and, therefore, is not liable to be taxed, nor the Act is applicable and consequently, the issuance of the notice is wholly illegal and without jurisdiction.
Held:
Merely because there is a deemed sale or the fact that the deemed sale is incidental or casual, the tax could only be imposed if the person is a dealer and is engaged in a business activity of purchase and sale of taxable goods. The main activity of the petitioner is imparting education and is not business. Any transaction, namely, supply of foodstuff to its residential students which is incidental would not amount to “business” since the main activity of the petitioner could not be treated as commerce or a business as defined u/s. 2(6) of the Act. Consequently, since no business is being carried out and there is no sale, the petitioner would not come within the meaning of the word “dealer” as defined under the Act.
Accordingly, the HC allowed all writ petitions and said notices were consequently quashed.
Facts:
The appellants had received consulting engineering services from outside India for the period March, 2004 to September, 2007 and had paid service tax under reverse charge u/s. 66A of the Finance Act, 1994 read with Rule 2(1)(d)(v) of the Service Tax Rules, 1994. However, service tax was paid on the value of services excluding tax deducted at source (TDS) under the Indian Income Tax laws. The appellants contended that there should not be any tax on the amount of TDS specifically in view of the fact that the payment to foreign consultant should be the basis of service tax levy. The revenue contested that the agreement stated that the consideration was net of all Indian taxes and such taxes were payable by the appellants in addition to the amount payable to foreign consultant and therefore, forms part of the contract price. Further, vide section 66A of the Finance Act, 1994, the recipient was treated as service provider and therefore, by legal fiction, the consideration inclusive of TDS, shall be the assessable value. It was also the case of the respondents that the appellants could not prove its contention as to why TDS should not form part of the “gross amount charged” vide Rule 7 of the Service Tax (Determination of value) Rules, 2006, according to which, service tax was leviable on actual consideration charged for services provided or to be provided.
Held:
The Tribunal held that the appellants were not liable to pay service tax under reverse charge prior to 18/04/2006 in absence of statutory provisions in this regard as had been upheld by the Hon’ble Supreme Court in case of Union of India vs. Indian National Shipowners Association 2010 (17) STR J57 (SC). In the present case, as per the terms of the contract, TDS formed part of the contract price and therefore, was includible in the value of taxable services. The benefit of cum-tax should be available to the appellants while raising the modified demand on the basis of the observations made by the Tribunal. In view of the law being at the stage of inception, penalty u/s. 78 of the Finance Act, 1994, was set aside.
Facts:
The appellants availed CENVAT credit on the basis of an invoice issued on registered office and not on factory. Revenue relied on various Tribunal and High Court decisions and contended that the registered office should have taken input service distributor registration and thereafter, should have issued a separate invoice on factory for availment of CENVAT credit. However, the appellants contended that they had only one factory and therefore, there was no question of distribution by taking input service distributor registration. Further, it was not disputed by the department that the services were received in the factory of the appellants and relying on Tribunal precedents in case of CCE, Vapi vs. DNH Spinners 2009 (16) STR 418 (Tri.) and Modern Petrofils vs. CCE, Vadodara 2010 (20) STR 627 (Tri.-Ahmd.) the credit should not be disallowed.
Held:
The Tribunal observed that the decisions relied upon by the revenue were not applicable to the facts of the present case. All those cases dealt with the effective date of registration of an input service distributor, whereas the dispute in the present case is totally different. The dispute is whether the registered office of the appellant is required to be registered at all when they have one factory and where the credit has been taken by the factory on the basis of invoices issued by service providers. The Tribunal also observed that the case laws cited by the appellants squarely covered the present case. Therefore, the Tribunal held that CENVAT credit was available to the appellants since the appellants had only one factory and the services were received in the factory, though the invoice was in the name of the registered office.
Facts:
The appellants were engaged in providing renting of immovable property services. The appellants availed CENVAT credit of industrial or commercial construction services for construction of an immovable property. The department contested that vide Circular no. 98/1/2008-ST dated 04-01-2008, commercial or industrial construction services or works contract services, were input services for immovable property which was neither goods exigible to excise duty nor service leviable to service tax and therefore, CENVAT credit was not available to the appellants. The appellants argued that the Circular clarified the position contrary to law and was required to be ignored as held in the case of Ratan Melting and Wire Industries 2008 (12) STR 416 (SC).
Held:
As observed by this Tribunal in case of Mundra Port and Special Economic Zone Ltd. vs. CCCE, Rajkot 2009 (13) STR 178 (Tri.-Ahmd.), the phrase “used for providing output services” has to be differentiated from the phrase “used in or in relation to the manufacture of the final product”. The Hon’ble Supreme Court’s decision in case of Ratan Melting and Wire Industries (Supra) was misconstrued. In the said case, the Hon’ble Supreme Court had only held that departmental circulars and instructions issued by the board were binding on the authorities of respective statute and not on Hon’ble Supreme Court or High Courts and rejected the appellant’s claim of CENVAT credit.
Facts:
The appellants were engaged in the business of construction of malls and renting out spaces in such constructed malls and providing space for advertisement in malls. The appellants availed CENVAT credit of input services such as tours and travel agent services, security services, etc. during the year 2007-2008 and utilised the same against renting of immovable property services during the year 2008-2009 once the mall was opened commercially.
The contention of the department was that the appellants were not eligible to avail CENVAT credit, since input services were not used by the appellants for providing taxable output service. The appellants in response to the department’s contention argued that input services were used for construction of mall which was owned and leased by the appellants. The appellants further added that without a mall, there could not be any output service and therefore, services were eligible input services vide provisions of CENVAT Credit Rules, 2004. The department contested that vide Circular no. 98/1/2008-ST dated 04-01-2008, commercial or industrial construction services or works contract services, were input services for immovable property which was neither goods exigible to excise duty nor service leviable to service tax and therefore, CENVAT credit was not available to the appellants.
Held:
The definition of input and input services are pari materia as far as service providers are concerned and therefore, following the decision delivered by the Andhra Pradesh High Court in case of Sai Samhita Storages (P) Ltd. 2011 (23) STR 341 (AP), the Tribunal held that without utilising services, the mall would not have been constructed and renting would not have been possible and therefore, the services used for construction of malls were eligible input services for availment of CENVAT credit even when the output service was renting of immovable property services.
Facts:
The department issued a SCN for the period from 01-12-2005 to 31-07-2007 contesting that the appellants wrongly availed benefit of exemption Notification no. 4/2004-ST dated 31-03-2004 in respect of CHA services rendered outside SEZ. The appellants contended that during the period under consideration, services provided to SEZ unit were exempted vide the said Notification. Further, as per section 26 of the Special Economic Zone Act, 2005 and Rule 31 of the Special Economic Zone Rules, 2006, every developer and entrepreneur was entitled for exemption from service tax on the taxable services provided to a developer or a unit to carry out the authorised operations in a SEZ. Accordingly, Notification no. 4/2004-ST dated 31-03-2004 should be read alongwith the said section and Rule and interpreted to provide service tax exemption to the appellants.
The department submitted that the said Notification was a conditional exemption and was available only with respect to services provided within SEZ. Since the services were not provided within SEZ, benefit of the said exemption was not available to the appellants.
Held:
The Tribunal observed that in terms of various decisions of the Hon’ble Supreme Court, an exemption notification has to be interpreted as per the language used therein and the notification should be interpreted strictly to ascertain whether a subject falls in the notification. Accordingly, exemption under Notification no. 4/2004-ST dated 31-03-2004 was available only if the services were consumed within SEZ. The cannon of interpretation “Expresso unius est exclusion alterius” was applicable to the said notification which meant express mention of one thing excluded all others and in the present case, services consumed within SEZ were only covered by the said notification which was a conditional exemption. Further, the notification was issued in 2004 whereas the SEZ Act and Rules were introduced in 2005 and 2006 and therefore, the notification cannot be interpreted on the basis of SEZ Act and SEZ Rules. If the intention of the legislation was to align the exemption with SEZ Act or Rule, then the notification would have been amended to reflect the same. In view of no prima facie case in favour of the appellants and no pleading for financial hardship and taking into consideration the interest of revenue, the appellants were directed to pre-deposit part of the service tax demand.
Facts:
The
respondents availed CENVAT credit of Countervailing Duty (CVD) paid on
imported inputs on the basis of true copy of bill of entry. The
department contested that the CENVAT credit was not available on the
basis of the copy of bill of entry vide Rule 9 of the CENVAT Credit
Rules, 2004 and CENVAT credit was available only on original documents
relying on the decision of the Hon’ble Supreme Court and High Court. The
respondents argued that the original bill of entry was available at the
time of receiving the inputs. However, the same was misplaced after
availment of CENVAT credit and therefore the respondents got the copy of
the ex-bond bill of entry certified by the customs authority, relying
on the High Court and Tribunal precedents. Further, the erstwhile rules
allowed CENVAT credit on the basis of triplicate or duplicate bill of
entry. However, the present rules, used the phrase “bill of entry” and
therefore, in absence of any prefix and nature of bill of entry, the
same can be understood to include copy of the bill of entry and the
CENVAT credit should not be denied.
Held:
The
Tribunal observed and held that CENVAT credit was available based on
various documents mentioned under Rule 9 of the CENVAT Credit Rules,
2004. In the said rules, if the phrase “bill of entry” was interpreted
to include copy of bill of entry, then all other documents such as
invoice, challan, supplementary invoice, etc., should also include
copies thereof. However, at earlier occasions, the said interpretation
was not accepted by High Courts and Supreme Court.
Further, the
bill of entry was dated 10-02-2005 and the CENVAT credit was availed on
14-04-2006 and it was not obvious that the original bill of entry was
misplaced only after April, 2006. It was also observed that the
respondents had only produced a copy of challan and the original challan
also could not be produced.
Therefore, the Tribunal held that
the CENVAT credit was not available to the respondents, relying on the
Hon’ble Supreme Court’s decision and the Punjab and Haryana High Court’s
decisions in Union of India vs. Marmagoa Steel Ltd. 2008 (229) ELT 481
(SC) and S. K. Foils Ltd. vs. CCE, New Delhi 2009 (239) ELT 395
(P&H), affirmed by Hon’ble Supreme Court reported in 2010 (252) ELT
A100 (SC) respectively.
Facts:
A writ petition was filed stating that, inclusion of the expenses and salary paid to the security guards and statutory payments such as ESI, EPF, etc. in the “gross amount charged” was ultra vires to the Constitution of India. The appellant contended that they received a petty amount as commission, while providing security personnel to any service receivers and bulk of the amount received was expended towards salary and statutory dues. Further, sometimes, the service receivers directly paid salaries to security personnel. Therefore, it was not logical to include salary and statutory dues in “gross amount charged” u/s. 67 of the Finance Act, 1994 dealing with valuation of taxable services and that it was violation of Article 14 and 19(1)(g) of the Constitution of India. The appellant stated that the gross amount without segregating the expense towards salary and statutory payment should not form part of taxable service and reliance was also placed on Advertising Club vs. CBEC, 2001 (131) ELT 35 (Mad). The appellant contended that service tax is not a charge on business but on services as held by the Hon’ble Supreme Court in case of All India Federation of Tax Practitioners and others vs. Union of India 2007 (7) STR 625 (SC). The learned counsel of the appellant submitted that the challenge is not in regards to the leviability of service tax on the applicant, but on the gross amount as determined u/s. 67.
The revenue, relying on various Supreme Court and High Court precedents, contended that the provisions were introduced through powers vested with the parliament vide relevant entry under List I of the 7th Schedule. Further, the Hon’ble Apex Court and Madras High Court had held that sustainability of the provision cannot be questioned or established with reference to the “measure of taxation”.
Held:
Following various Supreme Court and High Court precedents, the Honourable High Court observed that there was no case for the petitioner that the Parliament did not have legislative competence to enact the law and there was no violation of any fundamental rights with respect to the business. The measure of tax could not alter the nature of taxation. The legislation had the discretion to decide the class of taxpayers, events, quantum etc. There was no master and servant relationship between the security personnel and the service receivers and the appellants could raise invoices on service receivers for the salaries, expenses and service tax thereon and therefore, the appellants were not aggrieved by the said levy in any manner and therefore, the writ petition failed.
The High Court observed that the assessing authority while adjudicating any issue, functions as a quasi judicial authority and that the powers exercised by the appellate authority or Central Government as revisional authorities, are quasi judicial powers. Reliance was placed on the ruling of the Hon’ble Supreme Court’s decision in case of Orient Paper Mills vs. Union of India 1978 (2) ELT J345 (SC), stating that the powers of the Collector were quasi judicial powers and cannot be controlled by the directions issued by CBEC. The respondents argued on the same lines that unless the quasi judicial authority was allowed to function independently and impartially, the orders passed by it cannot be said to be orders passed in accordance with the law.
Held:
The assessing authorities, appellate and revisional authorities are quasi judicial authorities and orders passed by them are also quasi judicial orders. Therefore, such orders should be passed by exercising independent mind and without being biased. The circulars guiding the authorities should be considered as evidence available before them. Accordingly, based on all the material available on record including these circulars, the assessing authority has to come to an independent finding. Therefore, the appeals were disposed off, directing the assessing authorities to consider the matter afresh in the light of the above observations without examining the merits of the case.
A further question arose as to how value of the goods can be found out from composite value of the contract. The issue has again been dealt with by the Supreme Court in the case of Gannon Dunkerly & Co. vs. State of Rajasthan (88 STC 204). In relation to finding out value of goods, Supreme Court has observed as under;
“The aforesaid discussion leads to the following conclusions:
(1) to (3)……
(4) The tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract falling within the ambit of article 366(29-A)(b) is leviable on the goods involved in the execution of a works contract and the value of the goods which are involved in the execution of works contract would constitute the measure for imposition of the tax.
(5) In order to determine the value of the goods which are involved in the execution of a works contract for the purpose of levying the tax referred to in article 366(29-A)(b) it is permissible to take the value of the works contract as the basis and the value of the goods involved in the execution of the works contract can be arrived at by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract.
(6) The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execution of the works, (ii) amount paid to a sub-contractor for labour and services, (iii) charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract, (iv) charges for planning, designing and architect’s fees, and (v) cost of consumables used in the execution of the works contract, (vi) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, (vii) other similar expenses relatable to supply of labour and services, and (viii) profit earned by the contractor to the extent it is relatable to supply of labour and services.
(7) To deal with cases where the contractor does not maintain proper accounts or the account books produced by him are not found worthy of credence by the assessing authority, the Legislature may prescribe a formula for deduction of cost of labour and services on the basis of a percentage of the value of the works contract but while doing so, it has to be ensured that the amount deductible under such formula does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract. It would be permissible for the Legislature to prescribe varying scales for deduction on account of cost of labour and services for various types of works contract.
(8) While fixing the rate of tax, it is permissible to fix a uniform rate of tax for the various goods involved in the execution of a works contract, which rate may be different from the rates of tax fixed in respect of sales or purchase of those goods as a separate article.”
Determination of sale price in works contract
From the above observations of the Supreme Court, it is clear that value of the goods on which sales tax can be levied is to be arrived at by taking contract value as the base. From the contract value, labour portion can be deducted as narrated above and where determination of labour charges is not possible, it is to be arrived at by taking standard deduction as may be prescribed by the government.
Cost plus gross profit method
In the present controversy about levy of tax on builders and developers, one issue which was hotly discussed was about adopting cost plus gross profit method. One view was that, it is not mandatory to start from contract value and take the deductions for labour charges to arrive at value of goods. As per the said view, the value of the goods can be arrived at by taking cost price of the materials involved and adding gross profit to the same. In other words, the aggregate of cost of the goods involved and gross profit margin on the same will constitute value of goods for levy of tax.
The Commissioner of Sales Tax, Maharashtra State, issued Circular bearing no. 18 T of 2012 dated 26.9.2012. In this circular, Commissioner of Sales Tax, amongst others, clarified that the working as per cost plus gross profit is not the statutory method and will not be admissible. It was clarified that the working should be as per statutory methods, as mentioned in the circular i.e. as per rule 58 read with rule 58(1A) of the MVAT Rules, 2005 or as per the composition schemes. In other words, it was effectively clarified that the cost plus gross profit method will not be admissible.
Writ Petition before Bombay High Court
A Writ Petition was filed before Hon’ble Bombay High Court by the Builders Association of India (Writ Petition (LODG) No. 2440 of 2012). Amongst others, it was challenged that the circular disallowing cost plus gross profit method is unconstitutional, as well as ultra virus. The plea was that the same method should be allowed to work out the value of goods. Hon’ble Bombay High Court has decided the said Writ Petition vide judgment dated 30th October, 2012. In respect of the above plea about the method of working out value of goods for levy of tax, Hon’ble Bombay High Court has observed as under;
“17. Essentially, what rule 58(1A) does is to provide a particular modality for determining the value of goods involved in the execution of construction contracts where an interest in land or land is also to be conveyed under the contract. The provisions of rule 58(1A) are not under challenge. Where the Legislature has an option of adopting one of several methods of determining assessable value, it is trite law that the legislature or its delegate can choose one among several accepted modalities of computation. The legislature while enacting law or its delegate while framing subordinate legislation are legitimately entitled to provide, in the interest of uniformity, that a particular method of computation shall be adopted. So long as the method which has been adopted is not arbitrary and bears a reasonable nexus with the object of the legislation, the Court would not interfere in a statutory choice made by the legislature or by its delegate. In the present case, rule 58(1A) mandates on how the value of goods, involved in the execution of a construction contract at the time of the transfer of property in the goods is to be determined in those cases where contract also involves a transfer of land or interest in land. The Circular dated 26.9.2012 does no more than specify the mandate of the statute. The Circular has not introduced a condition by way of a restriction which is not found in the statute. Plainly, rule 58(1A) does not permit the developer to take recourse to a method of computation other than what is specified in the provision. Hence, the Circular dated 6th September 2012 was only clarificatory.”
Observing as above, at the end of the judgment, Hon’ble High Court has held that the circular is not ultra virus.
In view of above, it can be said that effectively Hon’ble High Court has put a seal of approval on the proposition made in the circular. The contractor has to find out the value of goods as per the statutory provisions and cannot adopt other methods like cost plus gross profit etc.
Conclusion
The above judgment is in relation to builders and developers. However, the legal position discussed is about validity of the method for finding out the value of goods for levy of VAT. From the judgment, it is clear that no method other than statutory method can be adopted for working out the value of goods. Therefore, though the judgment is in relation to builders and developers, it will govern the position in relation to other contracts also. In other words, even in relation to other contracts, it may be difficult to adopt cost plus gross profit method and the working may have to be done as per the statutory methods.
Taxability of self supply of services (i.e. transactions between mutual concerns and its members/transactions between various units a single legal entity) has been a contentious issue prior to 1/7/12, more particularly in the context of cross border transactions due to deeming provisions in section 66A of the Finance Act, 1994 (Act) as existed prior to 1/7/12.
An attempt is made to discuss the tax implications of self supply of services under the Negative List based Taxation regime introduced w.e.f. 1/7/12, more particularly in regard to cross border transactions.
Relevant Statutory Provisions (w.e.f. 1/7/12)
Section 65 B(44) of the Finance Act, 1994 (as amended)
“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include –
a) An activity which constitutes merely, –
I) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
II) Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or III) A transaction in money or actionable claim;
b) a provision of service by an employee to the employer in the course of or in relation to his employment;
c) fees taken in any Court or Tribunal established under any law for the time being in force.
Explanation 1. – For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to, –
(A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and members of other local authorities who receive any consideration in performing the functions of that office as such member; or
(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Government or local authority and who is not deemed as an employee before the commencement of this section.
Explanation 2. – for the purposes of this clause, transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
Explanation 3. – For the purposes of this Chapter, –
a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;
b) an establishment of a person in the taxable territory and any of his other establishment in a non – taxable territory shall be treated as having an establishment of distinct persons.
Explanation 4. – A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory.
Service Tax Rules, 1994 as amended (ST Rules)
Rule 6A – (Export of Services)
The provision of any service provided or agreed to be provided shall be treated as export of service when –
a) The provider of service is located in the taxable territory,
b) The recipient of service is located outside India,
c) The service is not a service specified in section 66D of the Act,
d) The place of provision of the service is outside India,
e) The payment for such service has been received by the provider of service in convertible foreign exchange, and
f) The provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of Section 65B of the Act.
Where any service is exported, the Central Government may, by notification, grant rebate of service tax or duty paid on input services or inputs, as the case may be used in providing such service and the rebate shall be allowed subject to such safeguards, conditions and limitations, as may be specified by the Central Government, by notification.
Relevant Departmental Clarifications
Extracts from departmental clarifications titled “Education Guide” dated 20/6/12 issued in the context of Negative List based taxation of services introduced w.e.f. 1/7/12, are as under :
Para 2.4.1
What is the significance of the phrase “carried out by a person for another”?
The phrase “provided by one person to another” signifies that services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice versa.
Para 2.4.2
Are there any exceptions wherein services provided by a person to oneself are taxable?
Yes, Two exceptions have been carved out to the general rule that only services provided by a person to another are taxable. These exceptions, contained in Explanation 2 of clause (44) of section 65B, are:
Para 10.2.2
Can there be an export between an establishment of a person in taxable territory and another establishment of same person in a non – taxable territory?
No. Even though such persons have been specified as distinct persons under the Explanation to clause (44) of section 65B, the transaction between such establishments have not been recognised as exports under the above stated rule.
Mutuality Concept
Relevance under Service tax
Though the concept of “mutuality” has been a subject matter of extensive judicial consideration under Income tax & Sales tax, under Service tax, it has been tested judicially to a very limited extent. However, it assumed significance in the context of Club or Association Services Category introduced w.e.f 16/6/05, more particularly in the context of co-operative societies, trade associations & clubs.
The following Explanation was inserted at the Section 65 (105) of the Act w.e.f. 1/5/06:
“For the purpose of this section, taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration.”
Attention is particularly invited to the following Explanation inserted to newly introduced section 65B(44) which defines ‘Service’:
Explanation 2 – For the purpose of this Chapter, –
a) An unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons.
General Concept
It is widely known that no man can make a profit out of himself. The old adage that a penny saved is a penny earned may be a lesson in household economics, but not for tax purposes, since money saved cannot be treated as taxable income. It is this principle, which is extended to a group of persons in respect of dealings among themselves. This was set out by the House of Lords in Styles vs. New York Life Insurance Co.. (1889) 2 TC 460 (HL). It was clarified by the Privy Council in English and Scottish Joint Co -operative Wholesale Society Ltd. vs. Commissioner of Agricultural Income-tax (1948) 16 ITR 270 (PC), that mutuality principle will have application only if there is identity of interest as between contributors and beneficiaries.
It was the lack of such a substantial identity between the participants, with depositor shareholders forming a class distinct from the borrowing beneficiaries, that the principle of mutuality was not accepted for tax purposes for a Nidhi Company (a mutual benefit society recognised under section 620A of the Companies Act, 1956) in CIT vs. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 (SC).
Judicial Considerations under Service tax
The service tax authorities had issued show cause notices to various clubs demanding service tax under the Category of “Mandap Keeper” on the ground that the Clubs have allowed the members to hold parties for social functions. Two of such clubs disputed the levy before the Calcutta High Court viz:
In Saturday Club’s case, a members Club, permitted occupation of club space by any member or his family members or his guest for a function by constructing a mandap. On the principle of mutuality, there cannot be (a) any sale to oneself, (b) any service to oneself or (c) any profit out of oneself. Therefore, the Calcutta High Court, held that the same principle of mutuality would apply to Income tax, sales tax and service tax in the following words:
“……….. Income tax is applicable if there is an income. Sales tax is applicable if there is a sale. Service tax is applicable if there is a service. All three will be applicable in a case of transaction between two parties. Therefore, principally there should be existence of two sides/entities for having transaction as against consideration. In a members’ club there is no question of two sides. ‘Members’ and ‘club’ both are same entity. One may be called as principal when the other may be called as agent, therefore, such transaction in between themselves cannot be recorded as income, sale or service as per applicability of the revenue tax of the country. Hence, I do not find it is prudent to say that members’ club is liable to pay service tax in allowing its members to use its space as ‘mandap’.
……………
Therefore, the entire proceedings as against the club about the applicability of service tax stands quashed……”.
[Chelmsford Club vs. CIT (2000) 243 ITR 89 (SC) & CIT vs. Bankipur Club Ltd. (1997) 226 ITR 97 (SC) were referred]
Principles laid down by the Calcutta High Court under Service tax
The principles laid down by the Calcutta High Court in Saturday Club & Dalhousie Institute discussed earlier, have been followed in a large number of subsequently decided cases. To illustrate:
In CST vs. Delhi Gymkhana Club Ltd. (2009) 18 STT 227 (New Delhi – CESTAT) the Tribunal observed:
“using of facilities of club, cannot be said to be acting as its clients and hence, in respect of services provided to its members, a club would not be liable to pay service tax in the category of club or association service”.
Revenue appeal against the above ruling has been dismissed by the Delhi High Court on technical grounds. It needs to be noted that, Explanation inserted at the end of section 65 (105) of the Act w.e.f. 1/5/06, has not been discussed in the aforesaid ruling.
Recent Judgement in Ranchi Club Ltd v CCE & ST (2012) 26 STR 401 (JHAR)
The said ruling has been analysed and discussed in detail in the July, 2012 issue of BCAJ. In this ruling, the High Court observed as under:
“It is true that sale and service are two different and distinct transactions. The sale entails transfer of property whereas in service, there is no transfer of property. However, the basic feature common in both transaction requires existence of the two parties; in the matter of sale, the seller and buyer, and in the matter of service, service provider and service receiver. Since the issue whether there are two persons or two legal entity in the activities of the members’ club has been already considered and decided by the Hon’ble Supreme Court as well as by the Full Bench of this Court in the cases referred above, therefore, this issue is no more res integra and issue is to be answered in favour of the writ petitioner and it can be held that in view of the mutuality and in view of the activities of the club, if club provides any service to its members may be in any form including as mandap keeper, then it is not a service by one to another in the light of the decisions referred above as foundational facts of existence of two legal entities in such transaction is missing. [Para 18]”
Self Supply of Services – Judicial & Other Considerations under Service tax
Some judicial considerations under service tax are as under:
Under Central Excise, the concept of captive consumption has been in force, for many years. However under the service tax law ,there is as such no concept of captive consumption of services whereby services provided by one division of a company to another division are liable to service tax. As such, service provider–customer/client relationship is necessary for being liable for service tax.
In this connection, attention is drawn to the Ban-galore tribunal ruling in the case of Precot Mills Ltd. vs. CCE (2006) 2 STR 495 (Tri – Bang) wherein it was held as under :
“Technical Guidance provided by applicant to its own constituent (a Sister Concern), cannot be brought with the ambit of Management Services and Service Tax in the absence of Consultant – Client relationship between the two”.
Attention is drawn to the following observations of Tribunal in Rolls Royce Industrial Power (I) Ltd v Commissioner (2006) 3 STR 292 (Tribunal):
“…………Thus, there are no two parties, one giving advise and the other accepting it. Service tax is attracted only in a case involving rendering of service, in this case, engineering consultancy. That situation does not take place in the present case. Therefore, we are of the opinion that the duty demand raised is not sustainable………..”
Magus Construction Pvt. Ltd. Vs. UOI (2008) 11 STR 225 (GAU)
In the said ruling, the Honourable Gauhati High Court observed:
“In the light of the various statutory definitions of “service”, one can safely define “service” as an act of helpful activity, an act of doing something useful, rendering assistance or help. Service does not involve supply of goods; “service” rather connotes transformation of use/user of goods as a result of voluntary intervention of “service provider” and is an intangible commodity in the form of human effort. To have “service”, there must be a “service provider” rendering services to some other person(s), who shall be recipient of such “service”. (Para 29)
In the context of construction services, it has been repeatedly clarified that, in case of self supply of services there can be no liability to service tax. In this regard, useful reference can be made to the department circular dated 17/9/04 on estate builders, Master Circular dated 23/8/07 in regard to applicability of service tax to real estate builders/developers and department Circular dated 29/1/09 regarding imposition of service tax on builders.
In the context of cross border transactions, a deeming fiction was introduced in section 66A of the Act w.e.f. 18/4/06 (relevant upto 30/6/12), whereby reverse charge liability was triggered in cases of payments made by an establishment based in India to an establishment based outside India, despite the fact that the said establishments are part of one legal entity.
In this regard, attention is drawn to the para 4.2.5 from department circular dated 19.4.06:
“Provision of service by a permanent establishment outside India to another permanent establishment of the same person in India is treated, for the purpose of charging service tax, as provision of service by one person to another person. In other words, permanent establishment in India and the permanent establishment outside India are treated as two separate legal persons for taxation purposes.”
It is pertinent to note that, there was no deeming fiction on similar lines, under the Export of Services Rules, 2005 (ESR) which were in force upto 30/6/12.
Taxability of transactions between mutual concerns and their members
The terminology employed in Explanation 3 [Para (a)] inserted in section 65B (44) of FA 12 which defines ‘Service’, w.e.f. 1/7/12, is identical to that employed in Explanation to section 65 (105) of the Act which was in force upto 30/6/12. Hence, it would appear that, principles of mutuality upheld by the Calcutta High Court in Saturday Club and Dalhousie Institute and Jharkhand High Court in Ranchi Club would continue to be relevant.
Further, under sales tax law, a constitutional amendment was carried out to enable States to levy sales tax on sale of goods by a club or association to its members. No such amendment is carried out for service tax.
However, it needs to be expressly noted that the issue is likely to be a subject of extensive litigation.
Taxability in case of self supply of services within India
As discussed above, upto 30-06-2012 it is a reasonably settled position to the effect that, in the absence of a service provider – client relationship transactions between divisions/units within a legal entity would not result in any service tax liability.
In the context of Negative List based taxation of services introduced w.e.f. 01-07-2012, it would appear that, the above stated position would continue. However, in regard to transactions between units located in India and J & K, the implications discussed below would be relevant to note.
Taxability in case of self supply of services in cross border transactions
As regards the position upto 30-06-2012 as discussed above, deeming fiction enacted in section 66A of the Act would be triggered, resulting in service tax liability under reverse charge in case of payments made by an establishment based in India to an establishment based outside India despite the fact that two establishments are a part of one legal entity.
However, in the absence of deeming fiction under ESR, if the cross border transactions between two establishments of one legal entity satisfy the conditions of ‘export’ under ESR, there may not be any liability to service tax.
To conclude, it would appear that, whether cross border transactions in the nature of self supply of services can be made liable to service tax at all, needs to be judicially tested inasmuch principles of taxability of self supply of services discussed above would be relevant.
As regards position w.e.f. 1/7/12, vide Explanation 3 [Para (b)] to section 65B (44), a legal fiction has been created whereby two establishments of a person, one located in the taxable and other in non–taxable territory are to be treated as two separate persons. The obvious intention of the deeming fiction is to tax the transactions between two branches or between head office and branch office, where one is located in the non–taxable territory and other is located in the taxable territory.
For example, in a case of a head office in India remitting salaries for its staff employed at branches in 50 different countries world wide, section 65B (44) of FA 12 specifically excludes services provided by employees from the definition of ‘service’. However, an issue could arise, as to whether deeming fiction created in Explanation 3 [Para (b) ] to section 65B (44) can be triggered and a view adopted that transactions between two separate entities cannot be regarded as “salary”, but on an application of deeming fiction transactions are in the nature of supply of services between two persons liable to service tax. This would be an extreme and highly controversial view which could result in extensive litigation.
There could be similar issues in case of several other transactions between head office and overseas branches. For example, disbursements by head office to sales offices for meeting establishment ex-penses and funding of losses in the initial set up period. By invoking the deeming fiction stated earlier, reverse charge provisions could be triggered, if the transactions are not excluded in terms of 66B (44)/ Negative List/Exempted List of Services.
Let us now discuss the implications in case of cross borders transactions between head office/branches which result in inward remittances in India in convertible foreign exchange. These transactions could be either genuine ‘export’ transactions or could be for salary disbursements, establishment disburse ments etc. to branches/sales offices set up in India by an overseas company based outside India.
In this context, it is very important to note that para 1(f) of Rule 6A of ST Rules which defines “Export of Services” specifically excludes transactions between two establishments within one legal entity. Hence, even if all the other conditions for ‘export’ specified under Rule 6A of ST Rules are satisfied, the benefit of export would be denied, resulting in a possible service tax liability.
It has been a stated policy of the Government to the effect that, we should export our goods & services and not taxes. However, it seems provisions of Rule 6A of ST Rules would result in export of taxes, which is clearly contrary to the policy of the Government. This needs to be addressed immediately.
To conclude, it would appear that, deeming fiction created through Explanation 3 [Para (b)] to Section 65B (44) of FA 12 read with Para 1(f) of Rule 6A of ST Rules, is likely to have far reaching implications on cross border transactions under Negative List based taxation regime and is likely to increase costs of international transactions. This needs to be appropriately addressed to encourage cross border business and avoid litigations as well.
However, though deeming fictions are to be construed strictly, whether cross borders transactions between two units of one legal entity in the nature of self supply of services can be taxed at all in the absence of service provider client relationship, needs to be judicially tested.
Facts:
The assessee is a charitable trust registered with the Charity Commissioner as well as u/s 12A of the Act. In the assessment order passed for the year under appeal, the AO held as under:
1. In respect of depreciation of Rs. 19.48 lakh claimed: Since cost of fixed assets had already been allowed as application of income in the earlier years, relying on the decision of the Supreme Court in the case of Escorts Ltd. & Anr. Vs. Union of India (199 ITR 43), the claim for depreciation was denied;
2. Re: Treatment of repayment of loan of Rs. 2.92 crore as the application of income: Since the loan when it was raised was not declared/treated as income in the year of receipt, relying on the decision of the Supreme Court in the case of Escorts Ltd. & Anr. (supra), the assessee’s claim would result into double deduction, hence not permissible;
3. The above loan was taken without the Charity Commissioner’s permission, thus in violation of the provisions of section 36A(3) of the Bombay Public Trust Act. Therefore, relying on the Bombay high court decision in the case of CIT vs. Prithvi Trust (124 ITR 488), he forfeited the exemption granted u/s. 11.
Being aggrieved by the order of the CIT(A), who held in favour of the assessee, the revenue filed appeal before the tribunal. Before the tribunal, the revenue justified the order passed by the AO and further relied on the decision of the Cochin bench of tribunal in the case of DDIT Vs. Adi Shankara Trust (ITA no. 96/Coch/2009 dated 16-06-2011) and on the Cochin tribunal decision in the case of Lissie Medical Institution (2010 TIOL 644). According to it, the later decision was also affirmed by the Kerala high court. Further, it was contended that the decision of the Bombay high court in CIT vs. Institute of Banking Personnel Selection (264 ITR 110) relates prior to insertion of section 14A of the Act without considering the judgment of Escorts Ltd.
Held:
As regards the denial of exemption u/s. 11 on the ground that loan taken by the assessee in earlier years from managing trustee was in violation of the Bombay Public Trust Act, the tribunal held that under the Act, once the CIT grants registration u/s. 12AA, looking to the objects of the trust, the same cannot be withdrawn until and unless there was a violation of provisions of section 13 or the registration is cancelled u/s. 12AA(3). The tribunal further observed that once the loan taken was duly shown in the Accounts, there was no requirement under the Act that the provisions of other Acts have to be complied with. According to it, the Bombay high court decision in the case of Prithvi Trust was on a different ground, hence, not applicable to the case of the assessee. According to it, the decision of the Supreme court in the case of ACIT vs. Surat City Gymkhana (300 ITR 214) and Mumbai tribunal decision in the case of ITO (Exemption) vs. Bombay Stock Exchange (ITA No. 5551/Mum/2009 dt. 22. 08. 2006) also support the case of the assessee.
As regards the allowability of depreciation – the tribunal preferred to follow the decision of the Bombay high court in the case of Institute of Banking Personnel Selection. It further noted that on the similar issue, the Punjab & Haryana high court in the case CIT vs. Market Committee, Pipli (330 ITR 16) after considering the decision of the Supreme Court in the case of Escorts Ltd., held in favour of the assessee. Also, taking note of the Mumbai tribunal decision in the case of ITO vs. Parmeshwaridevi Gordhandas Garodia (ITA No. 4108/ Mum/2010 dated 10-08-2011), the tribunal held that allowing of depreciation is application of income and it does not amount to double deduction. Hence, the order of the CIT (A) was upheld on this ground also.
As regards the claim for treating repayment of loan as the application of income, the tribunal agreed with the order of the CIT (A) and relying on the CBDT Circular No. 100 dated 24-01-1973 and the decision of the Gujarat high court in the case CIT vs. Shri Plot Swetamber Murti Pujak Jain Mandal (211 ITR 293)and of the Rajasthan high court in the case of Maharana of Mewar Charitable Foundation (164 ITR 439), held that such repayment of loan originally taken to fulfill one of the objects of the trust will amount to an application of income for charitable and religious purposes.
Facts:
The assessee sold her capital asset resulting in long-term capital gains which was claimed as exempt as the the assessee was proposing to construct a residential house property out of the sale consideration. The exemption was claimed u/s. 54F. The assessee sold the property on 8th June, 2006 and immediately thereafter, on 5th July, 2006, purchased a landed property to construct a house. The purchase price paid for the land was more than the long-term capital gains arisen in the hands of the assessee on sale of her capital asset. But the assessee could not construct the residential house in the land purchased by her as proposed, due to injunction granted to the owners by the Civil Court. The expiry of the threeyear period from the date of sale of the property was on 8th June, 2009. The matter went upto the Hon’ble Supreme Court, which was dismissed by the Hon’ble Supreme Court and all proceedings were dismissed on 13th September 2011.
Held:
The facts demonstrate that the assessee had arranged the transaction in such a bona fide manner so as to claim the exemption available u/s. 54F. It is after the purchase of the property that hell broke loose against the assessee in the form of civil litigation. The litigation started on 25th February, 2008 and ended only on 19th September, 2011. By that time, the available period of three years to construct the house was already over, on 8th June, 2009. It is an accepted principle of jurisprudence that law never dictates a person to perform a duty that is impossible to perform. In the present case, it was impossible for the assessee to construct the residential house within the stipulated period of three years.
A dominant factor to be seen in the present case is that the entire consideration received by the assessee on sale of her old property has been utilised for the purchase of the new property. The conduct of the assessee unequivocally demonstrates that the assessee was in fact proceeding to construct a residential house, based on which the assessee had claimed exemption u/s. 54F. It is true that the assessee could not construct the house. In the special facts and circumstances of the present case, therefore, it is necessary to hold that the amount utilised by the assessee to purchase the land was in fact utilised for acquiring/constructing a residential house.
Prior to 1st June 1997, companies used to pay dividend to their shareholders after withholding tax at prescribed rates. This was the “classic” withholding tax where shareholders were required to include dividend received as part of their income. They were allowed to use tax withheld by the company against tax payable on their own income. Collection of tax from individual shareholders in this manner was cumbersome and involved a lot of paper work. In case of levy of tax on individual shareholders, tax rate varied depending on class of shareholders. For example, corporate shareholders and shareholders in high income group paid tax at a higher rate, whereas shareholders in low income group paid tax at a lower rate or did not pay any tax at all. Also, certain shareholders may not comply with tax law in spirit, resulting in a loss of revenue to the government.
The government realised that it may be easier and faster to collect tax at a single point, i.e. from the company. It, therefore, introduced the concept of Dividend Distribution Tax (DDT). Under DDT, each company distributing dividend is required to pay DDT at the stated rate (currently 15% basic) to the government. Consequently, dividend income has been made tax free in the hands of the shareholders.
DDT paid by the company in this manner, is treated as the final payment of tax in respect of dividend and no further credit, therefore, can be claimed either by the company or by the recipient of the dividend. However, DDT is not required to be paid by the ultimate parent on distribution of profits arising from dividend income earned by it from its subsidiaries (section 115-O). Such exemption is not available for dividend income earned from investment in associates/joint ventures or other companies. Also, no exemption is available to a parent which is a subsidiary of another company.
DDT is applicable irrespective of whether dividend is paid out of retained earnings or from current income. DDT is payable even if no income-tax is payable on the total income; for example, a company that is exempt from tax in respect of its entire income still has to pay DDT, or a company pays DDT even if distribution was out of capital; though those instances may be rare.
Accounting for DDT under Indian GAAP in standalone financial statements
The accounting for DDT under Indian GAAP is prescribed by the “Guidance Note on Accounting for Corporate Dividend Tax”. As per this Guidance Note, DDT is presented separately in the P&L, below the line. This guidance was provided prior to revised Schedule VI. Under revised Schedule VI, DDT is adjusted directly in Reserves & Surplus, under the caption P&L Surplus. The guidance note justifies the presentation of DDT below the line as follows – “The liability in respect of DDT arises only if the profits are distributed as dividends, whereas the normal income-tax liability arises on the earnings of the taxable profits. Since DDT liability relates to distribution of profits as dividends which are disclosed below the line, it is appropriate that the liability in respect of DDT should also be disclosed below the line as a separate item. It is felt that such a disclosure would give a proper picture regarding payments involved with reference to dividends.”
Accounting for DDT under IFRS in stand alone financial statements
It is highly debatable under IFRS, whether DDT in the standalone financial statements is a below the line or above the line adjustment. In other words, is DDT an income tax charge to be debited to P&L or is it a transaction cost of distributing dividend to shareholders, and hence, is a P&L appropriation or Reserves & Surplus adjustment.
The argument supporting a P&L charge under IFRS is as follows:
1 Paragraph 52A and 52B of IAS 12 Income Taxes clearly treats DDT as an additional income tax to be charged to the P&L A/c.
52A – In some jurisdictions, income taxes are payable at a higher or lower rate, if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In some other jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In these circumstances, current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits.
52B – In the circumstances described in paragraph 52A, the income tax consequences of dividends are recognised when a liability to pay the dividend is recognised. The income tax consequences of dividends are more directly linked to past transactions or events than to distributions to owners. Therefore, the income tax consequences of dividends are recognised in profit or loss for the period as required by paragraph 58, except to the extent that the income tax consequences of dividends arise from the circumstances described in paragraph 58(a) and (b).
2 Paragraph 65A of IAS 12 states as follows – “When an entity pays dividends to its shareholders, it may be required to pay a portion of the dividends to taxation authorities on behalf of shareholders. In many jurisdictions, this amount is referred to as a withholding tax. Such an amount paid or payable to taxation authorities is charged to equity as a part of the dividends.” Some may argue that DDT is not paid on behalf of the shareholders, because they do not get any credit for it. The shareholders do not get the credit for the tax paid by the entity on dividend distribution. The obligation to pay tax is on the entity and not on the recipient. Further, there is no principalagency relationship between the paying entity and the recipient. In other words, the tax is on the entity and on the profits made by the entity.
The arguments supporting a below the line adjustment (also referred to as equity or P&L appropriation adjustment) are as follows:
1 IFRIC at its May 2009 meeting, considered an issue relating to classification of tonnage taxes. The IFRIC was of the view that IAS 12 applies to income taxes, which are defined as taxes based on taxable profit. Taking a cue from the IFRIC conclusion, it can be argued that DDT is not an income tax scoped in IAS 12. Firstly, a company may not have taxable profit or it may have incurred tax losses. If such a company declares dividend, it needs to pay DDT on dividend declared. This indicates DDT has nothing to do with the existence of taxable profits. Secondly, DDT was introduced in India, without a corresponding reduction in the applicable corporate tax rate. Thus, DDT has no interaction with other tax affairs of the company. Lastly, the government’s objective for introduction of DDT was not to levy differential tax on profits distributed by a company. Rather, its intention is to make tax collection process on dividends more efficient. DDT is payable only if dividends are distributed to shareholders and its introduction was coupled with abolition of tax payable on dividend. Thus, DDT is not in the nature of an income tax expense under IAS 12.
2 As per The Conceptual Framework for Financial Reporting, “expenses” do not include decreases in equity relating to distributions to equity participants. DDT liability arises only on distribution of dividend to shareholders. Thus it is in the nature of transaction cost directly related to transactions with shareholders in their capacity as shareholders and should be charged directly to equity.
3 Support for treating DDT as an equity adjustment can also be found in paragraph 109 of IAS 1 reproduced here – “Changes in an entity’s equity between the beginning and the end of the reporting period reflect the increase or decrease in its net assets during the period. Except for changes resulting from transactions with owners in their capacity as owners (such as equity contributions, reacquisitions of the entity’s own equity instruments and dividends) and transaction costs directly related to such transactions, the overall change in equity during a period represents the total amount of income and expense, including gains and losses, generated by the entity’s activities during that period.”
4 Support for treating DDT as an equity adjustment can also be found in paragraph 35 of IAS 32 reproduced here – “Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability, shall be recognised as income or expense in profit or loss. Distributions to holders of an equity instrument shall be debited by the entity directly to equity, net of any related income tax benefit. Transaction costs of an equity transaction shall be accounted for as a deduction from equity, net of any related income tax benefit.” It may be noted that this paragraph has now been amended to remove the reference to income-tax; and consequently to bring income-tax purely in the scope of IAS 12 only.
Although DDT is paid by the company, the economic substance is similar to the company withholding the tax and paying it on behalf of the shareholders. The shareholder has the entire dividend income exempt from tax, to reduce the administrative effort to track the flow from the company to the shareholder. In other words, DDT in substance is a type of with-holding tax borne by the shareholder that should be accounted as a deduction from equity.
Almost all companies in India that prepare IFRS financial statements treat DDT as an equity adjustment rather than as an income-tax charge.
Accounting for DDT in the consolidated financial statements (CFS) under IFRS & Indian GAAP
There is an interesting but very significant difference when it comes to presentation of DDT at the CFS level under IFRS. Consider an example, where a group comprises of a parent, a 100% subsidiary and the parents investment in a joint venture. The joint venture pays dividend to the parent and the corresponding DDT is paid to the government.
In the CFS, the group would account for its proportionate share of the DDT (paid by the joint venture) as an income -tax charge in the P&L account (and not as a P&L appropriation or equity adjustment). The reason for this treatment is that it is a cost of moving cash from one entity to another in a group. In the standalone accounts of the joint venture, when the dividends are paid to the ultimate shareholder (the parent company in this case) from the perspective of the joint venture, the DDT is reflected as an equity adjustment, and one of the arguments for doing so was that in substance, it is tax paid on behalf of shareholders. In the CFS, even if the DDT paid by the joint venture was on behalf of the parent, the parent does not get any tax credit for the same. In other words, at the group (CFS) level, there is ultimately a tax outflow, for which no tax credit is available. Hence, the same is charged to the P&L account as an income tax charge. In India, almost all companies preparing IFRS CFS, adopt this approach. However, strangely, this approach is not followed by most companies in the CFS prepared under Indian GAAP. This is perhaps done erroneously and due to lack of understanding of the standards, which needs to be rectified by appropriate intervention from the Institute of Chartered Accountants of India.
