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Form 68 for rectification of mistakes in Form 1, Form 1a and Form 44
The Ministry of Corporate Affairs has, vide circular No. 42/2012 dated 21st December 2012, notified that w.e.f 23.12.2012, for a period of 180 days, from that date. Form 68 may be filed with a fee of Rs. 1000/- for Form 1 and IA, and Rs. 10000/- for Form 44 to rectify the mistakes made during the filing of such forms even prior to year 2009. Earlier, this form could only be filed for mistakes to be rectified with 365 days from date of approval of the said forms by the Registrar concerned.
NOC for registration of companies or LLP’s for professional work
Vide circular No. 40/2012 dated 17th December 2012, the Ministry of Corporate Affairs has directed that in case of registration of companies or LLP’s where one of the objects is to carry on the profession of Chartered Accountant, Company Secretary, Cost Accountants, Architect etc. NOC from the concerned regulator, the approval of the council/regulators governing the profession shall be obtained both at the time of application for incorporation and while seeking to change the name of the existing LLP.
S/s. 9(1)(vii), 195 and 201 – Payments made abroad for services in respect of arrangement of logistics for shooting of films outside India does not amount to fees for technical services.
Facts:
Yash Raj Films (taxpayer) is engaged in the business of production of films, the shooting of which is often done outside India. During the relevant previous year, the taxpayer made payments to overseas service providers (OSPs) for the services availed in connection with the shooting of different films which mainly included arranging for extras, security, locations, accommodation of cast and crew, necessary permissions from local authorities, makeup of the stars, insurance cover, shipping and custom clearances, obtaining visas. The tax authority considered the payments for obtaining the above services to be in the nature of fees for technical services (FTS) and considered the taxpayer as an assessee-in-default for not withholding taxes.
Held:
Considering the nature of the services rendered by OSPs to the taxpayer as spelt out in the relevant agreements, the said services cannot be treated as technical services within the meaning given in Explanation 2 to section 9(1)(vii).
The said services rendered outside India by the OSPs in connection with making logistic arrangement are in the nature of ‘commercial services’ and the amount received by them from the taxpayer for such services constitutes their business profit which is not chargeable to tax in India in the absence of any Permanent Establishment (PE) in India of the said service providers. The taxpayer, therefore, is not liable to withhold taxes on the payments made.
Taxation of Long Term Capital Gains on Transfer of Unlisted Securities
Clause (c) of the section 112 (1) of the Income tax Act, 1961 provides for reduced rate of tax on transfer of securities by non-residents. The reduced rate of tax applicable till the F.Y. 2011-12 for all listed securities or units or zero coupon bonds was 10%; whereas, for unlisted securities, e.g. shares of a private limited company, the rate of tax was 20%. In order to bring parity of tax rate on the transfer of unlisted securities, an amendment is made by the Finance Act, 2012, w.e.f. 1-4-2013, whereby it is provided that gains on transfer of unlisted securities also would be subject to 10% tax. This Article analyses the impact of this amendment as certain unwarranted controversies are likely to crop up.
1.0 Introduction and Background
Section 10 (38) of the Income tax Act, 1961 (Act) provides that long term capital gains (LTCG) arising from transfer of equity shares in a company or units of an equity linked units will be exempt from tax provided Security Transaction Tax (STT) is being paid on such transfer. Essentially, all transactions on a recognised stock exchange are subject to STT. In other words, LTCG on transfer of all listed shares will be exempt. This exemption, is applicable equally to residents as well as non-residents.
In this article, we will restrict our discussion to taxability of LTCG on transfer of unlisted securities in the hands of non-residents. Section 112(1)(c) of the Act deals with taxability of the LTCG in the hands of non-residents.
Proviso to section 112(1), inserted w.e.f. 1-4-2000, provided a rate of tax @ 10% in respect of LTCG on transfer of “listed securities, units and zero coupon bonds”. For the meaning of the term “listed securities”, reference has been made to the Securities Contracts (Regulation) Act, 1956 (32 of 1956) (SCRA). As stated earlier, LTCG, on listed securities, being equity shares, on which STT is paid, is exempt u/s 10(38), and it is assumed that this provision would be useful in respect of other listed securities. However, the unlisted securities continued to be taxed @ 20 %.
In order to bring about parity and encourage investment by Private Equity players in Unlisted Shares, an amendment was made to section 112 (1)(c) vide the Finance Act, 2012 w.e.f. 1-4-2013 to provide for a rate of tax @ 10% on the LTCG on transfer of unlisted securities.
The amendment assumes significance for Private Equity Investors (PEI) who invests in India in large numbers through Private Limited Companies. Even the Memorandum explaining amendment to section 112 (1) (c) refers to extending benefit of reduced rate of 10% to the PEI. Let us examine whether this intention is fulfilled by the amendment to section 112 carried out by the Finance Act, 2012.
2.0 Law as amended
Relevant extract of the section 112(1)(c), as amended, is as follows:
The following sub-clauses (ii) and (iii) shall be substituted for sub-clause (ii) of clause (c) of s/s. (1) of section 112 by the Finance Act, 2012, w.e.f. 1-4-2013:
(ii) the amount of income-tax calculated on longterm capital gains [except where such gain arises from transfer of capital asset referred to in sub-clause (iii)] at the rate of twenty %; and
(iii) the amount of income-tax on long-term capital gains arising from the transfer of a capital asset, being unlisted securities, calculated at the rate of ten % on the capital gains in respect of such asset as computed without giving effect to the first and second provisos to section 48; Relevant extract [Clause 43 & First Schedule] of the Supplementary Memorandum Explaining the Official Amendments Moved per the Finance Bill, 2012 is as follows:
Circular No. 3/2012, Dated: June 12, 2012
Concessional rate of taxation on Long Term Capital Gains in case of non-resident investors
“Currently, under the Income-tax Act, a long term capital gain arising from sale of unlisted securities in the case of Foreign Institutional Investors (FIIs) is taxed at the rate of 10 % without giving the benefit of indexation or of currency fluctuation. In the case of other non-resident investors, including Private Equity investors, such capital gains are taxable at the rate of 20% with the benefit of currency fluctuation but without indexation. In order to give parity to such non-resident investors, the Finance Act reduces the rate of tax on LTCG arising from transfer of unlisted securities from 20% to 10% on the gains computed without giving the benefit of currency fluctuations and indexation by amending section 112 of the Income-tax Act.
This amendment is to take effect from 1st April, 2013 and would, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.
Consequential amendments to provide for tax deduction at source have also been made in the First Schedule and will be effective from 1st April, 2012.” One distinction persisting between taxability of LTCG of listed and unlisted securities @ 10 % u/s. 112 is that, while listed securities (being shares and debentures) will get the benefit of the first proviso of section 48 of the Act (meaning gains shall be computed in the same currency in which the investment was made), such unlisted securities will not get a similar benefit.
Except for the aforenoted distinction, the intention of the legislature appears to be very clear and that is to give parity in the case of other non-resident investors [other than the FIIs], including Private Equity investors.
However, in fact, the amendment has led to some ambiguity/controversy which is discussed hereunder:
2.0 Meaning of the term “Securities”
Explanation to the section 112 (1), as replaced by the Finance Act, 2012 w.e.f. 1-4-2013, reads as follows:
(a) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956);
(aa) “listed securities” means the securities which are listed on any recognised stock exchange in India;
(ab) “unlisted securities” means securities other than listed securities;
(b) “unit” shall have the meaning assigned to it in clause (b) of Explanation to section 115AB.
As the Act refers to the SCRA, let us examine the definition of “Securities” as defined in section 2(h) of SCRA as follows:
“2(h) ‘securities’ include –
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (emphasis supplied)
(ii) Government securities; and
(iii) rights or interests in securities”.
(iii) rights or interests in securities”.
2.1 Meaning of the term “Unlisted Securities”:
Unlisted Securities are defined to mean securities other than listed securities. Listed Securities, in turn, are defined to mean the securities which are listed on any recognised stock exchange in India.
A plain reading of the definition of “Securities” under the SCRA would mean:
“shares, scrips, stocks, bonds, debentures, debenture stock in or of any incorporated company or a body corporate” or “other marketable securities of a like nature in or of any incorporated company or other body corporate”. If the above interpretation is adopted, then there is no issue and one can interpret that the benefit of reduced rate of tax would be available to LTCG arising on transfer of any securities of a private limited company as well.
However, there is a strong view that the term “other marketable securities of a like nature” goes with other securities mentioned therein, according to which, the definition of securities as per SCRA covers only shares which are ‘marketable’ i.e. freely transferable in the nature. Thus, since the shares of a private company normally have restrictions on free transferability, they would fail to meet the ‘marketable’ test and hence, may not be covered under the ambit of the definition of unlisted securities and would be liable for the higher rate of tax of 20% instead of concessional rate of tax of 10%, as provided in the newly inserted clause (iii) u/s. 112 (1) (c) of the Act.
The above interpretation derives strength from two old decisions of the Bombay High Court and one decision of Kolkata High Court as discussed in the subsequent paragraphs:
2.2 Judicial Interpretation
In the case of Dahiben Umedbhai Patel And Others vs Norman James Hamilton and Others [(1983) 85 BOMLR 275, 1985 57 CompCas 700 Bom.], the Division Bench of the Honourable High Court interpreted “marketable securities” as appearing in SCRA as follows:
“Now, it is difficult for us to accept the argument of the appellants that the definition of “securities” must be so read that the words “other marketable securities of a like nature” were not intended to indicate an element of marketability in so far as the preceding categories were concerned. A reading of the inclusive part of the definition shows that the Legislature has enumerated different kinds of securities and by way of a residuary clause used the words “or other marketable securities of a like nature”. The use of these words was clearly intended to mean that the earlier categories of securities had to be marketable and any other securities of “like nature”, that is to say, like those which were categorised or enumerated earlier were also to be marketable before they could be held to fall within the definition of “securities”.
In Webster’s Third New International Dictionary, “marketable” is stated to mean “fit to be offered for sale in a market; being such as may be justly or lawfully sold or bought”. In order that securities may be marketable in the market, namely, the stock exchange, the shares of a company must be capable of being sold and purchased without any restrictions. In other words, the transfer of a share in a company must vest title in the purchaser and this vesting of title in the purchaser should not be made to depend on any other circumstance except the circumstance of sale and purchase. A market, therefore, contemplates a free transaction where shares can be sold and purchased without any restriction as to title. The shares which are sold in a market must, therefore, have a high degree of liquidity by virtue of their character of free transferability. Such character of free transferability is to be found in the shares of a public company. The definition of a “private company” in section 3 of the Companies Act, 1956, speaks of the restrictions for which the articles of the private company must provide. The articles of a private company must :
“3(1)(iii)(a) restricts the right to transfer its shares, if any;
(b) limits the number of its members to 50, not including –
(i) persons who are in the employment of the company, and
(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and
c) prohibits any invitation to the public to subscribe for any shares in or debentures of, a company.”
“It is thus clear that the shares of a private company do not possess the character of liquidity, which means that the purchaser of shares cannot be guaranteed that he will be registered as a member of the company. Such shares cannot be sold in the market or in other words, they cannot be said to be marketable and cannot, therefore, be said to fall within the definition of “securities” as a “marketable security”. On the other hand, in the case of a sale of share of a public company, the transfer is completed and even if the transfer is not registered, the transferor holds the shares for the benefit of the transferee”.
Based on the above observations, the Court Ruled that “it is thus clear to us that the definition of “securities” will only take in shares of a public limited company notwithstanding the use of the words “any incorporated company or other body corporate” in the definition.”
In the case of Norman J. Hamilton vs. Umedbhai S. Patel and Ors. [(1979) 81 BOMLR 340, (1979) 49 CompCas 1 Bom], also the single bench judge held a similar view that “the definition of “securities” would exclude from its purview shares which are not marketable, such as shares in a private limited company.”
In yet another case of B. K. Holdings (P.) Ltd. v. Prem Chand Jute Mills [1983] 53 Comp. Cas. 367 (Cal.), the Kolkata High Court held as follows:
“Whatever is capable of being bought and sold in a market is marketable. There is no reason whatsoever for limiting the expression “marketable securities” only to those securities which are quoted in the stock exchange.” Therefore, transaction of purchase and sale of shares of public limited company would be covered by the provisions of the Act even if the shares are not quoted in stock exchange.
2.3 Summary of Judicial Pronouncements
The rationale or the principles laid down by the above judicial pronouncements can be summarised as follows:
i) The term “Marketable” when used in conjunction with the word “securities”, connotes that the securities which are to be termed as marketable possess a high degree of liquidity;
ii) A private limited company by its very definition restricts the right to transfer its shares. Hence, its shares cannot be said to be “marketable”, as normally interpreted or understood.
iii) The words “other marketable securities of a like nature” are words of a general character which would apply to all the preceding words, namely, “shares, scrips, stocks, bonds and debentures, applying the principle of “Noscitur a sociis”, which means that “the meaning of a word to be judge by the company it keeps”.
The sum and substance of the above interpretations could be that the amendment carried out by the Finance Act, 2012 has little or no effect as far as securities of the Private Limited Companies are concerned. However, the restrictions on transfer of shares of Private Limited Companies as provided in section 3 of the Companies Act, 1956 are not applicable to an unlisted public company and therefore, one can take a view that the reduced rate of 10 % will be applicable only in respect of LTCG on transfer shares of unlisted public company.
Table: Summary of Tax Implication under Different Situations
3.0 Conclusion
The moot point dealt with herein is : What is the intention of amending the expression “unlisted securities”. If we apply the restrictive meanings applied by the Bombay and Kolkata High Courts as discussed above, then it would not include securities of a private limited company. In that scenario, the amendment to section 112 would be meaningful only to the extent of unlisted securities of a public limited company. This does not seem to be the intention of the legislature as flowing from the Explanatory Memorandum explaining amendment of section 112 by the Finance Bill, 2012 wherein it is clearly mentioned that the intention of amendment is to bring about parity in taxability of LTCG in the hands of NRs other than FIs, including Private Equity Investors @ 10% who also invest heavily in private limited companies.
In the light of the foregoing, a suitable retrospective amendment is imperative to remove doubts, if any, and obviate avoidable litigations. After all, the intent of the legislative and the words conveying the said intent need to be synchronised.
Protocol to India-UK Tax Treaty – Impact Analysis
Introduction
During the calendar year 2012, the Indian Government put a lot of focus on improving bilateral relationships with countries across the globe. In this regard, it entered into some new Double Tax Avoidance Agreements (‘Tax Treaty’) by extending its treaty network and entered into Protocols with countries with whom it already had Tax Treaties. Last in this list (but a significant one) is the Protocol entered into with the UK. This Protocol due to Articles on Exchange of Information and Collection of Taxes dealing with procedural aspects, apart from some changes in the aspects of taxation as well is important. In this article, we have tried to broadly capture impact of the Protocol on tax payers from both the countries.
Treaty Benefits to UK Partnerships:
The India-UK Tax Treaty (prior to insertion of the Protocol) specifically excluded ‘partnership’ from the definition of ‘person’ under Article 3(1) (f). However, an Indian partnership, which is a taxable unit under the Indian Income-tax Act, 1961 (‘the Act’), was considered as ‘person’ as per Article 3(2).
Under the UK domestic law, a UK partnership is not treated as an entity separate and distinct from the partners. Hence, the UK partnership is considered as tax transparent or a pass-through entity, and the income of the partnership is directly taxed in the hands of the partners based on their residential status and their share in the partnership income.
Due to the tax transparent status of the partnership in the UK, a UK partnership was specifically excluded from the definition of ‘person’ under Article 3(1)(f) of the India-UK Tax Treaty. The effect of such specific exclusion suggested that in case a UK partnership earns income from India, it was not eligible to have access to the India-UK Tax Treaty, even though such income was taxed in the UK (in the hands of its partners).
In this regard, contrary to the literal interpretation, Mumbai Income-tax Appellate Tribunal (‘Tribunal’) in the case of Linklaters LLP vs. ITO (132 TTJ 20) extended the benefits under the India-UK Tax Treaty to a UK Limited Liability Partnership (‘LLP’). The Hon’ble Tribunal observed that where a partnership is taxable in respect of its profits, not in its own right but in the hands of partners, as long as the entire income of the partnership firm is taxed in the country of residence (i.e. UK), treaty benefits could not be denied. The Article 3(1)(f) of India-UK Tax Treaty clearly excluded a UK partnership from the definition of ‘person’, and hence, the Tribunal had to analyse this aspect in greater detail. By applying legal analogy based on past judicial precedents, it granted the Treaty benefit to a UK LLP. Thus, this aspect was highly debatable and involved an extensive legal analysis of interpretation of the international tax framework.
Similarly, the Mumbai Tribunal in the case of Clifford Chance vs. DCIT (82 ITD 106) [which was subsequently affirmed by the Bombay High Court (318 ITR 237)] also granted benefits of the India-UK Tax Treaty to a UK partnership firm comprising lawyers. However, a detailed evaluation of the eligibility of the UK partnership claiming benefits under the India- UK Tax Treaty was not done in the said decision.
This controversy has now been put to rest by the Protocol, which has proposed to amend the definition of ‘person’ under the India-UK Tax Treaty by deleting the specific exclusion of partnership from the definition.
Further, an amendment is also proposed in Article 4(1), which defines the term ‘resident of a Contracting State’, to provide that, in case of a partnership, only so much of income as derived by such partnership, which is subject to tax in a Contracting State as the income of the resident of such Contracting State either in its hands or in the hands of its partners, would be eligible for claiming benefits under the India-UK Tax Treaty. Hence, in the case of a UK partnership earning income from India, only so much of income which is subject to tax in the UK as the income of the UK resident partner would be eligible for India-UK Tax Treaty benefits.
It is interesting to note that similar to the UK, US partnerships are also treated as tax transparent entities under the US domestic tax law, and their income is taxed in the hands of partners directly. The definition of the term ‘resident of a Contracting State’ is pari-materia to the India-USA Tax Treaty. In this context, it would be noteworthy to refer to the definition of the term ‘person’ provided under Article 4(1)(b) of the India-USA Tax Treaty and the Technical Explanation thereof issued by the Treasury Department, which acts as guidance for the interpretation of the terms referred in the India-USA Tax Treaty. The Technical Explanation clarifies that to the extent the partners of a US partnership are subject to tax in US as US residents, the income received by such US partnership will be eligible for India-USA Tax Treaty benefit. Hence, the eligibility of a US partnership to access the India- USA Tax Treaty depends upon the residential status of the partners in such partnership.
Considering the Technical Explanation to the India- USA Tax Treaty and the wordings of the proposed amendment to the definition of ‘resident of Contracting State’ under the India-UK Tax Treaty, an analogy may be drawn that a UK partnership may not be granted benefits under the India-UK Tax Treaty in respect of income that belongs to a person who is not a tax resident of the UK. In other words, if, a UK partnership firm has a Canadian individual as a partner who is not a tax resident of UK (as his income is not taxable in the UK on account of his residence or similar criteria) then, the income earned by the UK partnership (from India), to the extent of such Canadian partner’s share would not be eligible for the India-UK Tax Treaty benefit.
It is pertinent to note that the Technical Explanation issued with reference to the India-USA Tax Treaty though, not binding while interpretating of the terms under India-UK Tax Treaty, it would be of relevance since, the Indian Government had agreed to such interpretation in the past while signing the Technical Explanation to the India-USA Tax Treaty. Hence, it will have a persuasive value on the application of India-UK Tax Treaty as well.
In light of the above, once the Protocol to India-UK Tax Treaty comes into force, an Indian entity will have to consider the tax residence of the partners of the UK partnership at the withholding stage, while granting Treaty benefits to the UK partnership. In this context, attention is invited to the recently introduced section 90(4) of the Act, which requires a non-resident claiming Treaty benefits in India to obtain a certificate containing prescribed particulars (i.e. Tax Residency Certificate or TRC) from the Government of the home country. It would be interesting to observe how a TRC would be issued by the UK Government to a UK partnership earning income from India (specifically, where one of the partners therein is a non-resident).
Treaty benefits to Trusts and Other Entities
Under the current India-UK Tax Treaty, a ‘trust’ or an ‘estate’ may qualify as a ‘person’ under Article 3(1) (f) of India-UK Tax Treaty, only if they are treated as a separate taxable unit under the taxation laws in force of the concerned country. Hence, in a scenario, where a UK trust is treated as a pass-through entity (and not a separate taxable unit) for taxation purposes in the UK and its income is taxable in the hands of its beneficiaries, then the income derived by such a trust from India may not be eligible for the India-UK Tax Treaty benefits.
The Protocol has proposed to amend the definition of the ‘resident of the Contracting State’ in Article 4(1) to provide that in case of an income derived by a ‘trust’ or an ‘estate’, if such income is subject to tax in tge resident country in the hands of its beneficiaries as tax resident of that country, then to that extent it would be eligible for benefits under the India-UK Tax Treaty. Hence, even if the UK trust is not treated as a separate taxable unit under the UK domestic tax laws, if certain portion of the income of the UK trust is taxable in the UK in the hands of beneficiaries who are residents of the UK, then to that extent, income of the UK trust would be eligible for benefits under the India-UK Tax Treaty.
Tax Withholding on Dividend:
One of the much discussed benefits proposed to be granted under the Protocol is the reduced rate of tax withholding on payment of dividend by replacing the existing Article 11 of the India UK Tax Treaty. The Protocol has provided for revised withholding tax rate as follows –
a. 15% of the gross amount of dividends where such dividend is paid out of income derived directly or indirectly from immovable property by an investment vehicle which distributes most of its income annually and whose income from such immovable property is exempted from tax;
b. 10% of gross amount of dividends in all other cases.
Dividend by Investment Vehicle Earning Income from Immovable Property
The new Article 11(2)(a) proposed to be introduced by the Protocol provides 15% withholding rate on declaration of dividend by an investment vehicle earning income from immovable property where such income is exempt in its hands. It seems to cover investment vehicle like Real-Estate Investment Trusts (REITs) registered in India, even though the income earned by such REITs are not currently exempted in India. Hence, it does not seem to have any significant impact from the Indian perspective. However, an investment vehicle in the UK (like UK REITs) earning income from immovable property, which is exempt in its hands in UK, may fall within the ambit of this provision.
Dividend in Other Cases
The Protocol proposes to amend the withholding tax on dividend (other than the dividends covered above) to 10% vide Article 11(2)(b) in line with the withholding tax rate applicable for other OECD countries.
This amendment does not appear to bring any impact on the investors from either country (except in certain cases)n due to the current tax regime under the domestic tax laws of India and the UK.
UK Shareholder Earning Dividend from Indian Company
Under the Income-tax Act, 1961, an Indian company declaring dividend has to pay Dividend Distribution Tax (DDT) . Such dividend is tax exempt in India in the hands of resident as well as non-resident share-holder and there is no withholding tax. Hence, under the current domestic tax law, the reduction in with-holding tax rate will not have any impact, though it would be critical if in the future, the DDT regime is withdrawn from the domestic tax law in India.
Interestingly, the Protocol does not throw any light on tax credit to UK shareholder in the UK with respect to DDT suffered on distribution of dividend by an Indian company. It has been over a decade now since the concept of DDT has been in place under the Income-tax Act. Issue of credit for the DDT paid in India in the hands of foreign investor in their home country is unclear and has been a matter of debate. In the past, while entering into a Protocol with Hungary, some clarity has been provided to this effect.
It is pertinent to note that the UK domestic tax law provides for the underlying tax credit for taxes paid on income earned in overseas country (i.e. corporate tax). Hence, the UK shareholder earning dividend from an Indian company would be entitled to tax credit for corporate tax paid by the Indian company on its profits from which dividends are distributed. Hence, uncertainty on the tax credit for DDT practically does not have a serious bearing.
Indian Shareholder Earning Dividend from a UK Company
Under the current UK domestic tax laws; in most of the cases, there is no tax withholding on distribution of dividend by a UK Company (subject to satisfaction of certain conditions).
In a scenario, where the Indian shareholder does not satisfy any of the prescribed conditions and is unable to claim exemption under the UK domestic tax laws, he suffers tax withholding in the UK. Only in such case, the UK company will have to withhold tax on distribution of dividend to Indian shareholder. Currently, the tax withholding rate on dividend as per the India-UK Tax Treaty is 15% which is proposed to be reduced to 10% by the Protocol.
Article on Limitation of Benefits (LOB):
UK government as well as the Indian government intend to introduce General Anti-Avoidance Rules (GAAR) under their respective domestic tax laws. UK is intending to implement the same from the next fiscal year and the Indian gvernment has recently deferred the implementation of GAAR by two years and is proposed to be introduced with effect from 1st April, 2016. Pending this, GAAR provisions have been introduced under the Protocol. Article 28C on LOB clause proposes to deny the Treaty benefits with respect to a transaction if the main purpose or one of the main purposes of the transaction was to obtain benefits under the India-UK Tax Treaty. Further, it is also provided, that the treaty benefits may also be denied if the main purpose or one of the main purpose of creation or existence of any entity in either of the country was to obtain benefits under the India-UK Tax Treaty.
This type of LOB clause is also inserted in many recently concluded Indian Tax Treaties, for example, treaties with Georgia, Uzbekistan, Nepal, Iceland, Finland, etc. The effect of the LOB clause can be far-reaching and its implementation would depend largely upon the implementation of GAAR provisions by both the countries in their domestic tax laws.
Exchange of Information and Assistance in Collection of Taxes:
The Protocol also proposes to introduce certain other measures to curb tax evasion practices by introducing Article 28 on Exchange of Information, Article 28A on Tax Examinations Abroad and Article 28B on Assistance in Collection of Taxes in the India-UK Tax Treaty.
As one of the purposes of double tax avoidance agreements is to enable and facilitate the exchange of information between the tax authorities, Article 28 on Exchange of Information gives a statutory recognition to the formal process of information exchange between the competent authorities. The information that can be exchanged under this Article is that which enables the carrying out the provisions of the Treaty or enforcement of domestic law of the Contracting States effectively. However, inspite of exchange of information, under the principle of procedural autonomy, collection of taxes by one Contracting State from the residents of the other Contracting state remains a difficult task. Thus, to overcome this, Protocol proposes to introduce Article 28B on Assistance in Collection of Taxes in the Treaty for smoothing the process of recovery of taxes. This Article is also found in tax treaties entered into by India with countries like Norway, Denmark, Sweden, Ukraine, South Africa, etc.
Entry into force:
The provisions of this Protocol will take effect only when both the governments complete the necessary implementing measures by notification to this effect.
Conclusion:
The clarity on allowability of Treaty benefits to the UK partnerships and other tax transparent entities (like trust, estates, etc.) is a welcome step; though the Indian Judicial Authorities have evaluated this aspect in the past. The reduced withholding rate on dividend seems to suggest very limited applicability. However, the implementation of LOB clause with respect to invocation of GAAR may have a far reaching impact and guidelines under the domestic tax laws on this aspect would bring in more clarity.
The procedural amendments like Article on exchange of information and assistance in collection of taxes would help to bring more transparency for the Governments of both the countries.
Last date for physical submission of audit report in Form 704 for FY 2011-2012 Trade Cir. No 2T of 2013 dated 15-1-2013
It is clarified that besides e filing of the audit report in form 704 on or before 15-1-2013, dealer should also submit physical copy of Part-I of Form 704 along with certification duly signed by the auditor, signed copy of acknowledgement of e filing of Form 704 and the statement of submission of audit report on or before 28th January, 2013.
Non levy of penalty for filing delayed audit reports by developers
Trade Cir. No 1T of 2013 dated 4-1-2013 It has been clarified that the developers who have obtained registrations up to 15th October 2012, filed returns and paid taxes due up to 31st October 2012 and who file the audit reports in Form 704 on or before 15th January 2013 for all the past periods i.e. from 2006-07 to 31-3-2012 shall not be subjected to penalty u/s 61(2) of MVAT Act, 2002. It has also been clarified that the audit report u/s. 61 in Form no. 704 for all periods up to 2011-12 is to be filed electronically.
Notification No. VAT/AMD-1012/1B/Adm-8 dated 20.11.2012
By this Notification, amendments are made in the Maharashtra Value Added Tax Rules, 2005 making various insertions and substitutions in VAT return forms numbered 231, 232, 233, 234, & 235.
Mega Exemption Notification amended Notification No. 49/2012 – Service Tax dated 24th December, 2012
Notification no.25/2012-Service Tax, dated the 20th June, 2012, regarding mega exemption has been amended by adding that services of life insurance business provided under the schemes of Janashree Bima Yojana (JBY) and Aam Aadmi Bima Yojana (AABY) are exempted u/s. 66B.
Notices/Reminder letters for renewal premium to life insurance policyholders are not invoices
Circular No.166/1 /2013 –
ST It is clarified that reminder letters/notices being issued to the life insurance policyholders to pay renewal premiums are not invoices within the meaning of Rule 4A of the Service Tax Rules, 1994 and consequently, no tax point arises on account of issuance of such reminders and hence, it would not invite levy of Service Tax.
No service tax on transportation of milk within India by rail or a vessel. Circular No.167/2 /2013 – ST dated 1st January, 2013
The expression ‘foodstuff’ specified in the exemption Notification No. 25/2012-ST dated 20-6-2012 would cover ‘milk’ and hence, no service tax will be applicable on transportation within India of milk by rail or vessel .
If the services were received by SEZ for their SEZ operations and were ultimately consumed within SEZ, they are eligible for exemption under Notification No.4/2004-ST dated 31-3-2004. The said Notification was inconsistent with section 51 of SEZ Act – If the transaction is of sale of software and CST is paid on the same, it would not form part of value of taxable services in respect of professional services for ERP implementation – The privity of contract being between an Indian entity and a fo<
Facts:
Three issues were involved in the matter:
• The appellant availed benefit of exemption Notification No. 4/2004-ST dated 31-3-2004 in respect of professional services of internal audit and indirect support services, rendered to SEZ units. Department denied the exemption on the ground that the services were not consumed within SEZ. However, the appellant submitted that service receivers were granted a letter of approval by the Government of India, Ministry of Commerce to act as developer/unit and these entities were operating in SEZ and did not have other place of business. Therefore, the services were consumed exclusively for SEZ operations and within SEZ and the exemption was available to them.
• The appellants also rendered professional services in relation to ERP implementation and had purchased the software, the price of which was subsequently reimbursed by the service receiver. The department demanded service tax on such software considering it part of the value of taxable service essential for implementation of ERP system. According to the appellants, the supply of software was transaction of sale whereon CST was paid on it as there was a transfer of property in goods.
• The appellants rendered professional services for the infrastructure project in India of Indian Government for & on behalf of PricewaterhouseCoopers (PWC) Lanka (Pvt.) Ltd., Sri Lanka. The department demanded service tax on the ground that one of the pertinent conditions for export of services is that the services are delivered outside India and used outside India and this is not satisfactory in the present case. The appellants submitted that they did not have any privity of contract with the Indian Government and the beneficiary of services was PWC Lanka (Pvt.) Ltd., Sri Lanka outside India who was ultimately responsible for deliverables and even though the work was carried out in India, the same was delivered outside India.
Held:
• SEZs are deemed to be foreign territory for trade operations. SEZs are formed to promote exports and earn foreign exchange and for the overall economic development of India. In the present case, it was not disputed that the services were utilised by SEZ and therefore, were ultimately consumed within SEZ. The said notification used wordings consumption of services within SEZ, which were inconsistent with section 51 of the SEZ Act, 2005. Since Section 51 of SEZ Act has an overriding effect on all other laws and also having regard to the intention of the Government, the benefit of exemption was available to the appellants.
• Since the software was sold, there was no service involved and the same would not form part of the taxable value of services and as such, not leviable to service tax.
• As per the contractual arrangement, entity at Sri Lanka was beneficiary of the assignment and the services were delivered from India and used outside India. Therefore, the present case was covered under export of services not leviable to Service tax.
Extension of time limit for form 23 AC/ACA XBRL
Vide General Circular number 01/2013 dated 15.01.2013, time limit to file financial statements in XBRL mode (for the financial year commencing on or after 01.04.2011) without any additional fee has now been extended upto 15th February 2013 or within 30 days of AGM of the company, whichever is later.
Amendments to Form DIN1, DIN 4 and Form 18
The Ministry of Corporate Affairs vide Notification G.S.R (E) dated 24th December, 2012 has amended e-forms DIN 1, DIN 4 and Form 18. The new e-forms are in effect from 25th December 2012. Some of the changes are as follows:
a) The Application for Directors Identification Number vide Form DIN 1 now requires the current occupation and Educational Qualification to be filled in and the Affidavit to be attached thereto needs to be on duly notarised non-judicial Stamp Paper of Rs. 10/-.
b) DIN numbers allotted by the Central Government, if not activated within 365 days from date of allotment, can be deactivated or cancelled.
c) DIN 4 being the form for changes to DIN 1 requires the verification by a Professional that they are satisfied of the identity of the Director or designated partner and that the person is personally known to the professional or that the professional has met the person alongwith the originals of the documents attached. In case where the applicant is residing outside India, the particulars have to be verified from the documents duly attested by the attesting authority as mentioned in the instruction kit.
d) A mandatory Clause 4(b) has been introduced to the Form 18 – Form for notification of Registered Office Address as follows: “(b) Registered Office is
• Owned by company
• Owned by Director (not taken on lease by company)
• Taken on Lease by Company
• Owned by any other entity/Person (Not taken on lease by company)”
Form 18 now requires proof of Registered Office address as a mandatory attachment alongwith a No-objection certificate from director if Registered Office is owned by director (not taken on lease by company) or a proof that the Company is permitted to use the address as the registered office of the Company if the same is owned by any other entity/Person (not taken on lease by Company).
Additionally, a mandatory verification has been inserted that: “The company undertakes to file the form 18 for change of registered office address with the ROC within prescribed period.”
Also a certificate, certifying the personal visit by CA/ CS/CWA (whosoever is certifying the form) to new address is inserted which is as follows: “I further certify that I have personally visited the new address, verified it and I am of the opinion that the premises are intended to be at the disposal of the applicant company.”
External Commercial Borrowings (ECB) Policy – Repayment of Rupee loans and/or fresh Rupee capital expenditure – $ 10 billion scheme
Presently, only Indian companies, in the manufacturing and infrastructure sector, who are consistent foreign exchange earners, can avail of ECB for repayment of outstanding Rupee loan(s) availed of by them from the domestic banking system and/ or for fresh Rupee capital expenditure.
This circular grants similar facilities to Indian companies in the hotel sector (with a total project cost of Rs. 250 crore or more). As a result, these companies can now avail of ECB for repayment of outstanding Rupee loan(s) availed of by them from the domestic banking system and/or for fresh Rupee capital expenditure.
Reporting under Foreign Exchange Management Act, 1999 (FEMA)
This circular states that corporates and individuals have, during the compounding process, attributed the delays in reporting to acts of omission and commission by their Banks. The circular further states that delay in reporting transactions relating to FDI, ECB & ODI affects the integrity of data and consequently the quality of policy decisions relating to capital flows into and out of the country. The circular advices Banks to take necessary steps to ensure that checks and balances are incorporated in systems relating to dealing with and reporting of foreign exchange transactions so that contraventions of provisions of FEMA, 1999 attributable to them do not occur and warns that RBI can impose a penalty on them for contravening any direction given by the RBI or failing to file any return as directed by RBI in terms of Section 11(3) of FEMA, 1999.
Foreign Direct Investment (FDI) in India – Issue of equity shares under the FDI scheme allowed under the Government route
This circular has amended the following conditions relating to issue of equity shares/preference shares under the Approval Route by conversion of import of capital goods, etc.: –
|
A. P. (DIR Series) Circular No. 74 dated 30th June, 2011 |
Earlier Condition |
Revised condition |
|
Para 3(I) |
Import of capital goods/Machineries/ equipment (including secondhand machineries), |
Import of capital goods/Machineries/ equipment (excluding secondhand machineries), |
|
Para 3(I)(b) |
There is an independent valuation of the capital goods/ machineries/ quipment (including second-hand machineries) by a third party entity, preferably by an independent valuer from the country of import along with production of copies of documents/ certificates issued by the customs authorities towards assessment of the fair value of such imports; |
There is an independent valuation of the capital goods/ machineries/ equipment (excluding second-hand machineries) by a third party entity, preferably by an independent valuer from the country of import along with production of copies of documents/ certificates issued by the customs authorities towards assessment of the fair value of such imports; |
Uploading of Reports on FINnet Gateway
This circular states that as FIU-IND has ‘gone-live’ from 20th October, 2012 authorized persons who are indian agents under MTSS must discontinue submission of reports in CD format after 20th October, 2012 and use only FINnet gateway for uploading of reports in the new XML reporting format. Any report in CD format received after 20th October, 2012 will not be treated as a valid submission by FIU-IND.
Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT) Standards – Cross Border Inward Remittance under Money Transfer Service Scheme
This circular states that FATF has updated its Statement on ‘Improving Global AML/CFT Compliance: on-going process’ on 19th October, 2012 and advices authorised persons who are Indian agents under MTSS and their sub-agents to consider the information contained in the said update.
Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT) Standards – Money changing activities
This circular states that FATF has updated its Statement on ‘Improving Global AML/CFT Compliance: on-going process’ on 19th October, 2012 and advices authorised persons and their agents/franchisees to consider the information contained in the said update.
External Commercial Borrowings (ECB) Policy – Non-Banking Financial Company – Infrastructure Finance Companies (NBFC-IFCs)
Presently, Non-Banking Finance Companies (NBFC) categorised as Infrastructure Finance Companies (IFC) can avail of ECB, including the outstanding ECB, up to 50% of their owned funds under the Automatic Route. ECB above 50% of their net owned funds can be availed of under the Approval Route. This circular has: – a. Raised this limit of 50% under to 75% and hence, permits IFC to avail of ECB, including the outstanding ECB, up to 75% of their owned funds under the Automatic Route. ECB above 75% of their net owned funds can be availed of under the Approval Route. b. Reduced the hedging requirement for IFC for currency risk from 100% of their exposure to 75% of their exposure.
Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT) Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 Money changing activities.
This circular provides that for KYC purposes, Authorised persons engaged in Money changing activities and their agents & franchisees can accept, where the address on the document submitted for identity proof by the prospective customer is same as that declared by him/her current address, the same document can be accepted as a valid proof of both identity and address. However, in cases where the address indicated on the document submitted for identity proof differs from the current address declared by the customer, a separate proof of address should be obtained.
(2012) 54 SOT 44 (Hyd.) J.V.Krishna Rao vs. Dy. CIT ITA Nos.1866 & 1867 (Hyd.) of 2011 A.Y.2008-09. Dated 15-06-2012
Sections 54F – Exemption is available even if borrowed funds are used for investment.
Facts
For the relevant assessment year, the assessee’s claim for exemption u/s. 54F was denied by the Assessing Officer on the ground that the assessee’s deposit in the `Capital Gains Accounts Scheme’ included borrowed funds. The CIT(A) upheld the disallowance.
Held
The Tribunal, relying on the decisions in the following cases, allowed the exemption u/s. 54F :
a. Muneer Khan V. ITO (2010) 41 SOT 504 (Hyd.)
b. Sita Jain V. Asst. CIT (IT Appeal Nos.4754, 4755 and 5036 (Delhi) of 2010, dated 20-5-2011
c. Bombay Housing Corpn. vs. Asst. CIT (2002) 81 ITD 545 (Mum.) d. Mrs.Prema P.Shah vs. ITO (2006) 100 ITD 60 (Mum.)
The Tribunal noted as under :
The capital gains earned by the assessee can be utilised for other purposes and as long as the assessee fulfils the condition of investment of the equivalent amount in the asset qualifying for relief u/s.54F by securing the money spent out of the capital gains from other sources available to him, either by borrowing or otherwise, he is eligible for relief u/s. 54F in respect of the entire amount of capital gains realised.
In this case, even though part of those capital gains were utilised for other purposes, the assessee made deposits of the amounts equivalent to the capital gains in Capital Gains Account Scheme, by borrowing the amount equivalent to such utilised funds. Therefore, he is entitled to relief u/s. 54F as ultimately the assessee deposited the requisite amount in the Capital Gains Account Scheme within the time stipulated by the statute.
Global review lauds CAG reports
An international peer review of the CAG has appreciated its audit framework as “conceptually sound” while noting that stakeholders, including government departments, appreciate its reports as “valuable information”.
The CAG requested an international peer review in August 2011, less than a year after it submitted the 2G scam audit. The peer review team was led by the Australian National Audit Office and included representatives from audit bodies of Canada, Denmark, the Netherlands and the US.
“The objective of the peer review was to assess the extent to which the performance audit function of the Supreme Audit Institution (SAI) India adheres to applicable standards of professional practice; and to identify opportunities for improvement,” the report said.
“During the peer review, we met with a range of SAI India’s stakeholders, including the PAC and COPU (Committee on Public Undertakings) members, and senior government officials. They advised that SAI India’s performance audits provide valuable information, often not otherwise available, on the performance and on-the ground impact of government programs and funding. Stakeholders also provided positive feedback on the quality of recent performance audit reports,” the report said.
The peer review team also recorded that the CAG’s Audit Quality Management Framework (AQMF) “is conceptually sound”, but there was a “need to strengthen the AQMF to increase the level of assurance provided to the CAG that these auditing requirements are consistently being met”. The review covered 35 performance audits from April 2010 to March 2011 that covered the period when the 2G audit was also submitted.
The peer group found that there was “variability” in CAG’s adherence to applicable standards of professional practice across the performance audit function. “Individual audit guidelines, which outline the plan for each audit, were developed for all but one of the performance audits in the peer review sample,” it said. The CAG “also interacted with the audited entities in accordance with accepted conventions, including seeking to conduct entry and exit conferences and providing a draft audit report to the audited entity for comment. The peer group said areas where CAG could improve in “the application of reporting standards” to make them more “balanced, fair, persuasive, and satisfy audit objectives.” It also said that there was scope in about half of the considered reports to be more balanced in content and tone.
(2012) 150 TTJ 159 (Mumbai) BSEL Infrastructure Realty Ltd. vs. Asst. CIT ITA No.6559 (Mum.) of 2011 A.Y.2007-08 Dated 13-04-2012
Section 271(1)(c) of the Income-tax Act 1961 – Penalty cannot be levied when additions were made while computing the total income under normal provisions of the Income-tax Act but finally the assessee’s income was determined on the basis of book profit u/s. 115JB.
Facts
For the relevant assessment year, the Assessing Officer made disallowances/additions to the assessee’s income as per normal provisions of the Income Tax Act. Finally, however, income was determined and tax was computed u/s. 115JB. The Assessing Officer, thereafter, levied penalty on all the disallowances/additions. The CIT(A) deleted the penalty on certain additions, while confirming the same on other additions.
Held
The Tribunal, relying on the decisions in the following cases, deleted the penalty:
a. CIT vs. Nalwa Sons Investments Ltd.(2010) 235 CTR (DEL.) 209/(2010) 45 DTR (Del.) 345/(2010) 327 ITR 543 (Del.)
b. Ruchi Strips & Alloys Ltd. vs. Dy. CIT ITA Nos.6940 & 6941 (Mum.) 2008 The Tribunal noted as under:
1. If book profits are deemed to be the total income of the assessee in terms of section 115JB and is more than income under the normal provisions of the Act, then by legal fiction such a book profit will be deemed to be the total income of the assessee.
2. Therefore, if tax has been imposed and collected on the deemed income u/s. 115JB in the assessment, then the tax under the normal provisions/computation is not leviable or charged.
3. Therefore, if any addition or disallowance has been made in the normal provisions/computation of the Income Tax Act and finally assessment has not been completed or tax has not been levied on such normal computation, then such additions/disallowances cannot be a subject matter of penalty because no tax has been levied on such additions/disallowances.
4. When income tax is paid on the book profits by a legal fiction, such a legal fiction has to be taken to its logical conclusion and it cannot be held that for the purpose of penalty, normal computation would be considered even though tax has not been levied under the normal provision/ computation. Therefore, penalty u/s. 271(1)(c) cannot be imposed because there was no tax sought to be evaded.
Recovery of tax pending stay application – A draconian directive
New Year Shock
The Central Board of Excise and Customs (CBEC) has, in supersession of seven previous circulars on the same subject, issued Circular No. 967/01/2013 CX dated 1-1-2013 (the new Circular), directing the departmental officers to initiate recovery action in cases where 30 days have expired after the filing of appeal by an assessee before an appellate authority. This action by CBEC is highly unprecedented and totally unjust and unfair inasmuch as it would not only result in penal consequences for reasons beyond the control of an assessee, but also render the statutory right of appeal nugatory.
While the taxpayer fraternity fully recognises that the Government is empowered under the relevant statutory provisions to collect and recover legitimate taxes due from assessees, at the same time, the taxpayer fraternity does feel that as a good tax administration practice, it is essential that, in regard to tax demands which are pending in appeal before various appellate authorities, the legitimate rights of assessees under the relevant statutory provisions are also recognised, before initiation of coercive action for recovery of tax dues.
Impact
The new Circular which seeks to instruct departmental officers to initiate recovery action, if no stay is granted by the concerned appellate authorities within 30 days of filing of an appeal, is likely to result in severe hardships to taxpayers. Coercive actions for recovery of tax like attachment of bank accounts, assets and properties, etc. of assessees pending disposal of stay applications would adversely impact businesses in a significant way and also cause unprecedented hardships. It is also likely to result in filing of writ petitions before the High Courts across the country in large numbers. In fact, the Honourable Andhra Pradesh High Court has granted interim stay against the operation of the new Circular in a writ petition.
Reasons for High Level of Tax Litigation
Before issuing such a drastic and draconian circular, the Government needs to appreciate and take cognizance of the fact that, the principal reason for extensive tax litigation is high pitched adjudications which do not fully appreciate the correct legal position in a matter. A perusal of records available with the Government would clearly reveal that, in a high number of tax litigations, the matters are finally decided against the revenue and in favour of tax payers. Statistics (Refer Table) given by the Union Minister of State for Finance, Mr. S.S. Palanimanickam in a written reply to a question in the Lok Sabha on 5-9-2012, regarding the outcome of revenue cases supports the above view.
Table – Revenue Department’s Success Rate (%)
|
Year |
Supreme Court |
High |
CESTAT |
|
2008-09 |
9.81 |
29.6 |
10 |
|
2009-10 |
7.85 |
35.1 |
18.2 |
|
2010-11 |
5.5 |
27.1 |
17.2 |
|
2011-12 |
10.64 |
29.85 |
19.7 |
The Minister also mentioned that, even though approx. Rs. 86,000 crore were held up in court cases, it should not create an impression that the Government would get much monies upon finalisation of litigation. It may get only about 10% to 15% of the said amount. In the light of the above stated position, in a scenario where tax demands are unrealistic and sustained in a very small number of cases by the appellate authorities, it is totally unfair, unjust and unwarranted on the part of the Government to pressurise tax payers for no fault on their part.
Unjust and Unfair Circular
The new Circular is unjust and unfair to the taxpayer due to the following reasons, in particular:
a) Initiation of coercive actions to recover the tax dues in regard to which appeal and stay application are pending disposal before the concerned appellate authorities, is not in consonance with the settled principles of natural justice, laid down by the Supreme Court of India from time to time.
b) It also needs to be appreciated that, in a large number of cases, stay applications are not disposed off due to inactions at the end of the concerned appellate authority and for no fault of the assessee.
c) The new Circular refers to a very old Supreme Court ruling in Krishna Sales (P) Ltd (1994) 73 ELT 519 (SC) wherein it was observed as under: “As is well known, mere filing of an Appeal does not operate as a stay or suspension of order appealed against”.
However, the significant observations made by the the Honourable Supreme Court of India in a subsequent ruling in Commissioner of Cus & CE vs. Kumar Cotton Mills Pvt. Ltd. (2005) 180 ELT 434 (SC), have been totally ignored. The relevant observations are reproduced below for ready reference :
Para 6
“The s/s. which was introduced in terrorem cannot be construed as punishing the assessees for matters which may be completely beyond their control. For example, many of the Tribunals are not constituted and it is not possible for such Tribunals to dispose of matters. Occasionally by reason of other admin-istrative exigencies for which the assessee cannot be held liable, the stay applications are not disposed within the time specified. ….
The aforesaid observations need to be appropriately recognised and appreciated by the Government.
d) There are a large number of judicial decisions including those of various High Courts, to the effect that, no recovery actions should be taken until the disposal of the stay application by the appellate authorities. In this regard, useful reference can be made to the following rulings:
i) In Legrand (India) vs. UOI (2007) 216 ELT 678 (BOM HC DB), the Asst. Commissioner enforced the bank guarantee even before the expiry of the statutory period of filing appeal, despite a directive of High Court (in another case) not to take coercive action for recovery in such cases. It was held that this was a civil contempt of Court.
ii) Quoting CBEC Circular, in Shree Cement Ltd vs. UOI (2002) 126 STC 324 (Raj HC DB), it was held that no coercive action for recovery should be taken when stay application is pending.
iii) A view similar to the view expressed in the above case was expressed in Delhi Acrylic Mfg C6 vs. CC (2002) 144 ELT 24 (DEL HC DB).
It is most inappropriate for the CBEC to issue a circular in disregard to the binding court judgments and showing no respect for judicial precedence on the subject.
Suggestions
The following is suggested so as to ensure that undue hardship is not caused to tax payers:
a) CBEC Circular No. 967/01/2013 – CX dated 1-1-2013 needs to be immediately withdrawn/appropriately modified to provide that no recovery actions are initiated until the disposal of the stay applications by the appellate authorities.
b) Suitable instructions need to be issued that recovery action be restricted to cases where stay applications are disposed off and stipulated conditions are not complied with.
c) Vacancies existing in Tribunals/Courts should be filled up at the earliest.
d) All stay applications pending before appellate authorities be disposed off, in terms of existing provisions under the relevant law, on a war footing by appointing fast track Tribunals/Courts.
e) Alternatively, in all cases where appeals are filed, stay be granted and appeal itself be taken up for disposal.
Reforming Tax Administration – Some Recommendations
In order to promote and encourage good tax administration practices, from a long term perspective, the following measures are recommended:
a) Establish accountability in tax administration whereby statutory provisions are enacted in tax laws specifically providing for actions against departmental officers passing inappropriate orders.
b) Install quality reviews/audits of tax administration processes including adjudication process in particular.
c) Expand the scope of Advance Ruling Mechanism to minimise litigation.
d) Evolve new speedy dispute redressal mechanisms.
e) Award costs to the assessees so as to cover litigation expenses.
f) Increase the existing rate of interest on refunds of pre-deposit pending appeals as well as other refunds so as to be on par with prevailing commercial rate of interest.
g) Introduce incentive schemes for team of departmental officers, in cases where, demands are sustained at higher judicial levels.
Conclusion
It is projected that by 2030, India is likely to become a World Economic Power. Hence, the entire world is looking at us. As per the taxation policy announced by the Government, it is expected that substantive tax reforms (viz. DTC & GST) are likely to be introduced in the near future. However, the Government needs to expressly recognise and take cognizance of the fact that, from a taxpayer perspective, the need of the hour is reforming tax administration. Employing unfair, unjust and coercive tax administration methods, would only encourage dishonest practices and non-compliances, rather than boosting tax revenues. Government needs to recognise that employing coercive tax administration methods is not the right policy to boost tax revenues. Instead, in order to boost tax revenues, priority focus of the government should be on evolving good tax administration practices.
Centralised Processing of Statements of Tax Deducted at Source Scheme, 2013 – Notification No. 03 /2013 dated 15th January 2013
CBDT has made the subject scheme to set out the procedures for filing correction statement, rectifications, appeals, etc in connection with TDS statements filed online.
Clarifications regarding deduction for software related expenses – Circular 1/2013 dated 17-1-13
Exemption would be available u/s. 10A, 10AA and 10B (as applicable) vis-à-vis software business in following scenario:
• Software developed abroad at a client’s place amounting to ‘deemed export’, so long as there exists a direct and intimate nexus or connection of development of software done abroad with the eligible units set up in India pursuant to a contract between the client and the eligible unit.
• Profits earned from deployment of technical manpower at the client’s place abroad specifically for software development work pursuant to a contract between the client and the eligible unit provided such deputation of manpower is for the development of such software and all the prescribed conditions are fulfilled.
• In case of each Statement of Works which is a part of a Master Service Agreement.
• Research and Development activities pertaining to software development would be covered under the definition of ‘Computer Software’.
• In case of a slump sale, the tax holiday can be availed of for the unexpired period at the rates as applicable for the remaining years, subject to fulfilment of prescribed conditions.
• Separate books of account need not be maintained for each eligible unit. However, the assessee should be able to produce the required details called for by the AO.
• When an eligible SEZ unit relocates physically to another SEZ in accordance with the prescribed rules, tax holiday would be available for the unexpired period at the rates applicable to such years.
• Exemption would be available to a freshly set up unit, as long as it is set-up after obtaining necessary approvals from the competent authorities; has not been formed by splitting or reconstruction of an existing business; and fulfils all other conditions prescribed in the relevant provisions of law.
(2012) 54 SOT 263 (Bangalore) ITO vs. Mahaveer Calyx ITA Nos.153 & 998 (Bang.) of 2011 A.Ys.2007-08 & 2008-09. Dated 31-08-2012
Section 80-IB of the Income-tax Act 1961 – Deduction available even if sold area exceeds approved area and assessee has not paid fees to regularise the same.
Facts
For the relevant assessment year, the Assessing Officer disallowed the assessee’s claim for deduction u/s. 80-IB since the built-up area sold by the assessee was in excess of the sanctioned area. The Assessing Officer, therefore, held that the project constructed by the assessee was not an approved housing project. Before the CIT(A), the assessee contended that though it had not made payment of the compounding fee for regularisation of the excess area constructed, it could not be said that the housing project was not approved. The CIT(A) held that the assessee was entitled for deduction u/s. 80IB(10).
Held
The Tribunal, relying on the decisions in the following cases, held that the CIT(A)’s order in favour of the assessee was in accordance with law: a. Petron Engg. Construction (P.) Ltd. V CBDT (1989) 175 ITR 523/(1988) 41 Taxman 294 (SC) b. Pandian Chemicals Ltd. V CIT (2003) 262 ITR 278/129 Taxman 539 c. CIT V N.C. Budharaja & Co. (1993) 204 ITR 412/10 Taxman 312 d. IPCA Laboratories Ltd. V Dy. CIT (2004) 266 ITR 521/135 Taxman 594 The Tribunal noted as under : It was clear that the assessee has fulfilled the conditions mentioned in section 80-IB(10). The assessee has obtained approval of the concerned local authorities for construction of a housing project. The fact that the compounding fee for regularisation of the excess area constructed by the assessee has not yet been paid would not mean that the housing project constructed by the assessee is unlawful. Thus, there was no violation of the provisions of section 80-IB.
The incentive provisions must be interpreted in a manner which advances the object and intention of Legislature. The fact that the assessee has obtained approval for the housing project cannot be lost sight of. As for the excess area constructed, it is for the local authority to look into the violations, if any, in the construction of the housing project. That, however, does not authorise the Assessing Officer to hold that the assessee has not got approval for the housing project or that the conditions laid down in section 80-IB(10) violated.
Therefore,the assessee was entitled to deduction u/s. 80-IB(10).
Know Your Customer (KYC) norms/Anti-Money Laundering (AML) standards/Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 – Cross Border Inward Remittance under Money Transfer Service Scheme
Authorised persons engaged in Money transfer services and their agents & sub-agents can accept, where the address on the document submitted for identity proof by the prospective customer is same as that declared by him/her current address, the same document can be accepted as a valid proof of both identity and address. However, in cases where the address indicated on the document submitted for identity proof differs from the current address declared by the customer, a separate proof of address should be obtained.
US Decision Giving Relief to Satyam Directors – Implications for Independent Directors in India
The recent US Court decision to give relief to Satyam independent directors/audit committee members has raised both – concerns and hopes. Concerns on corporate governance are indeed ineffective in practice and impossible to enforce, as has long been the suspicion. Hopes are that SEBI’s actions against independent directors and others in several recent cases, are perhaps unwarranted or probably even without legislative sanction.
Recently, the independent directors/audit committee members of Satyam Computers Limited were given relief in a class action suit filed against them in USA, for their alleged recklessness (it may be recollected that, as widely reported, in 2009, in settlement of class action claims, Satyam had paid INR7,797 million and the Auditors had paid INR1,591 million). Would the latest decision change SEBI’s approach ? Will independent directors in India be also treated with the same standards by SEBI or will they continue to be punished, as they have been punished in several recent cases, for alleged negligence, connivance, etc.?
First of all, what does the US decision say? It will be beyond the competence of this author to comment on what the scheme of provisions is in the US in this regard nor is it relevant significantly here. But a summary of some aspects apparent on the face of the decision can be made.
The decision is related to many issues, apart from the role of independent directors, such as whether the US courts had jurisdiction if shares of an Indian company was acquired on Indian stock exchanges. However, the relevant issue for discussion here is whether the independent directors (including audit committee members) could be held liable for loss caused to the investors.
The allegations in Satyam may be recollected. The company falsified its records and showed fictitious revenues, profits and assets. Further, it showed fictitious expenditure through which monies were channeled out in group companies. Loans from related parties were shown to have been taken in Satyam to compensate for the cash shortage. Such funds diverted were used in a related party – Maytas – to acquire huge amounts of immovable properties. Such fictitious amounts rose over the years and in a last ditch effort to cure the fraud, it sought to merge the related party into Satyam and show that the fictitious assets were used to acquire immovable properties and that too at an inflated price. Though this alleged fraud was carried out over several years, neither the independent directors, the Audit Committee members, nor the auditors detected or reported it. The question in the US decision was whether independent directors (including audit committee members) could be held liable for the fraud?
It needs to be noted that the US decision was not given on merits – that is — where the facts of the case were examined in great detail and decision given. The decision was on whether the class action could be dismissed on preliminary grounds that the facts, as alleged, were insufficient to determine reasonable scienter or state of mind/knowledge. The standards for this decision were simple. Are the facts – as merely alleged and not even proved – sufficient to reach the standards of scienter or a guilty state of mind, in terms of recklessness, connivance, etc.?
Thus, the plaintiffs were required to have alleged a certain level of facts which, assumed to be wholly true, should show a level of scienter/recklessness on the part of the independent directors. Several facts were alleged. That the fraud was so huge that it could not have escaped scrutiny of such competent people. That the auditors raised certain red flags in the form of certain internal control systems not being followed. That the independent directors approved the Maytas purchase without sufficient scrutiny. That though the auditors were paid huge amount for “other services”, the independent directors did not question this properly and grasp why the auditors were engaged for ‘other services’. That the norms of corporate governance in India required several things to be done by the independent directors/audit committee members who failed in performing. And so on.
The Court found that these alleged facts were not sufficient to establish scienter/recklessness. Hence, the class action was dismissed. More specifically, it was even observed that the independent directors were more likely the victims of a sophisticated fraud themselves rather than its perpetrators. The Court observed, “The majority of the allegations in the FACC concern an intricate and well-concealed fraud perpetrated by a very small group of insiders and only reinforce the inference that the AC Defendants were themselves victims of the fraud. The strength of this competing inference outweighs the inference of scienter asserted by lead plaintiffs.”
The Court dismissed the case, stating as follows:-
“Having considered the FACC in its entirety, the Court finds that lead plaintiffs have failed to plead sufficient facts to raise a strong inference of recklessness on the part of the AC Defendants that is at least as compelling as the non-fraudulent inference reasonably drawn from the allegations.”
There are some important points to note here. Firstly, this was a private action for damages, and not an action by a regulator against persons having certain statutory obligations. Secondly, certain actions were already taken against the company and its auditors and settlement for compensation was made. Arguably, the provisions of law and standards of proof required for fraud/negligence/recklessness, etc. are different in the US as compared to India, even though some of the obligations of the independent directors in the Satyam case were traced to Indian laws. Further, what are the obligations of persons under US law and how are they deemed to be contravened are also different. The specific allegations made in the class action is also to be seen in this context.
Nevertheless, it makes a difference that the actions/ omissions of the independent directors were held as not to constitute recklessness/scienter and it has some relevance in general times in India too. This is because, unless it is alleged and found that the independent directors did not comply with specific obligations under law, the issue before the Indian regulator would be similar – and that is, did the independent directors do their duties correctly? Interestingly, to the best of the author’s knowledge, there are no findings made as of today for any of such independent directors in the Satyam case. And it would be interesting to see whether what finding SEBI makes against the same independent directors who are given relief by the US Court.
However, it is also noteworthy for comparable or even lesser levels of manipulations in several cases, SEBI has taken stringent actions against independent directors, members of audit committee, CFOs, etc. For example, in several cases (Bharatiya Global Infomedia Limited, Pyramid Saimira, Tijaria Polypipes Limited, etc. as also discussed earlier in this column), independent directors and audit committee members (and even CFOs/CSs) have been strongly acted against by SEBI. The question that will be relevant is whether such actions were correct in context of the US decision. Or whether, in India, even the Satyam independent directors would be held liable.
On balance, this author submits that the US decision should be taken in its context and will result in change in India’s approach
Having said that, there are some basic wrong things that exist in the Indian framework for corporate governance. Firstly, and perhaps most importantly, they are contained in Clause 49 of the listing agreement, which is not a law, but an agreement. Moreover, it is an agreement between the stock exchange and the company. Of course, recently, violation of the listing agreement has been made punishable. However, still, it is a legally bad place to be for a provision that is meant to have such significance.
Secondly, while a significant level of obligations are laid down on independent directors in Clause 49, their rights are fairly marginal and difficult to enforce, particularly when one compares the powers of auditors under the Companies Act, 1956. Often, the only recourse left for an independent directors is to resign or otherwise report what he has already found to be objectionable.
Thirdly, this weak basis of law making causes problems even for SEBI. It really does not have any specific powers – as it has for various other ills – for taking action against errant companies, independent directors, etc. Thus, it uses its generic powers – which are meant to be used in exceptional cases – and debars them. While it is true that SEBI as an expert body needs certain wide and discretionary powers to take action in the face of newer and innovative types of market manipulations, corporate governance is fairly old now for resorting to such actions.
Finally, the scheme of law leaves the investors uncompensated. Whether it is Satyam, Pyramid or other cases, it was the investors who were left stranded with their shares devalued, as they assumed that SEBI had put in an effective system of corporate governance, where there are responsible persons to carry out the safeguards. The weak basis of law which, at best, punishes the independent directors by debarring them, does not help the investors recover their losses.
There is another dimension too. The general principles and even the concept of corporate governance are borrowed from the West where the management is with executives whose total holdings is usually in single digits. In comparison, in India, companies are promoter controlled, usually families and who often hold 35-50% and even more of the company. The concept of independent directors, etc. are relevant where shareholders holding 90% can appoint such people to safeguard their interests. While in India, if such concepts are blindly introduced for similar purposes, they would be – and indeed they are often – defeated by promoters, having full power to appoint people who are favourably disposed to them and the inherent power to remove them.
In the end, it seems that a transparent, effective, and comprehensive scheme of law governing corporate governance relevant to Indian realities, is needed. In this context, then, it is sad that neither the concept paper on corporate governance recently issued by SEBI nor the Companies Bill 2011 addresses these fundamental issues. The result then is likely to be a false sense of security, which would often be taken away by scams and which would be acted against by SEBI using its discretionary and arbitrary powers.
Attest function where the member is personally interested (Clause 4 of Part I of the Second Schedule).
Attest function where the member is personally interested (Clause 4 of Part I of the Second Schedule). Shrikrishna (S) – Arjun, I rang your office. They told me you are not attending for the last three days. Somebody said you were at home only. Arjun
(A) – Yeah! While doing duniyabharka work, our own family’s work remains pending.
(A) – Yeah! While doing duniyabharka work, our own family’s work remains pending.
S – What was pending?
A – My brother’s all the returns are pending. Tax audit as well as VAT audit! 15th January was the last date. Now everything is done. Great relief!
S – VAT I can understand. But tax audit date has gone long back.
A – Agreed. But my experience is that while doing VAT audit, many ‘lochas’ in tax audit are revealed! That is why, in some cases, I prefer to do it together!
S – But then, you should prepone VAT audit, rather than postponing tax audit.
A – True. But who has time to do VAT audit in the September pressure! Continuously, firefighting is going on in our office. S – Anyway, I hope, your brother’s audit is done by somebody else.
A – Why? Mere bhaika audit doosre ko kyo doo?
S – Arey baba, you cannot certify the financial statements of your relatives. It is a misconduct!
A – Yes. But I make it clear in the report that the person whose audit I am signing is my relative. That’s what we learnt when we did our CA
S – That was the position long ago! Prior to 2006. But your CA Act was amended in 2006. Are you not aware?
A – We recognise only Income Tax Act. All other Acts are of no relevance to me!
S – Then remember. As I mentioned to you, you cannot sign the financial statements of any business or enterprise where you have a substantial interest.
A – Baap Re! It doesn’t talk of mere relative?
S – No. Not only that. Even if your firm or any of your partner has a substantial interest, that also you cannot attest.
A – So wide! That means I cannot sign the balance sheet of even my partner’s wife!
S – This is only to ensure your independence. If you are interested in something how can you be impartial?
A – This is strange !
S – Otherwise, people will always believe that you have ‘accommodated’ the relative. Your credibility is in doubt.
A – But I make a disclosure of interest?
S – That won’t suffice. Previously, it was permitted. But now they have deleted the words – ‘unless he discloses the interest also in his report’. Thus, that exception is a thing of the past now !
A – Oh. I never knew.
S – Your Council has issued further guidelines on 8th of August of 2008 – Date is easy to remember – 8-8-8 !
A – And what it says?
S – It says – not only your own interest – But even if one or more persons who are your relatives have a substantial interest in a concern, then that also you cannot audit.
A – Ah – But relative is a very narrow concept in Income Tax, section 2(41) only talks of parents, spouse, brother and sister !
S – Listen carefully. It is not ‘relative’ under tax act; but under the Companies Act. Section 6!
A – Oh My God! That will cover many persons. And that again I have to check in respect of my partners also!
S – Yes, my dear. Don’t take it lightly. A – And what is substantial interest?
S – For that, you need to refer to your CA Regulations. – In that, Appendix (9).
A – But it would be 20%, I believe.
S – Yes. But read it at least once! See, the Council feels that you should err on safer side; and not merely adhere to the words of law. Try to understand the spirit of it. Otherwise you may lose or compromise your independence.
A – You mean, there should not be conflict of interest and duty. Right?
S – Exactly. Therefore, as an employee of an organisation, you cannot sign as auditor. Not only that, even if you are an employee of a group concern under the same Management, then also you cannot sign.
A – What if I am a part-time lecturer in a college – and I want to sign the audit of the college? S – Even that is not allowed. For that matter, if your partner is a trustee or employee of a trust, that trust’s audit also you cannot sign.
A – Where shall I get all this to read? And who has time to read? After all who is going to see even if I sign?
S – Remember. In the Mahabharata, I supported you because you were on the right side of law. If you are casual and don’t take your rules seriously, I cannot side with you. Then you be prepared to suffer.
A – I believe, apart from our CA Act, there is some prohibition in the Company Law also.
S – Of course, yes. Section 226 of Companies Act directly states the disqualifications of auditors.
A – I will have to read it again. What other things should I see?
S – I am sure, you are not writing the accounts of any client and also signing them.
A – Ah! That I know. Therefore, I give the accounts writing invoice in my wife’s name. Sometimes in Draupadi’s name, sometimes in Subhadra’s. Advantage of having two wives!
S – But do they know what is accounting? They have learnt only classical dancing. Take care. You may invite trouble.
A – You are giving me shock after shock. Ultimately then how to practice?
S – One more thing. Just as you cannot audit the books which you have written, same way you cannot sign statutory audit where you have also done internal audit. I feel, an internal auditor should also not sign a tax audit.
A – Well, you have told me so many things. I cannot remember all this. I’d better get the literature and read it myself.
S – I can see that you have become nervous after hearing all these. But if you see the provisions of the Companies Bill, 2012, they are even more stringent and wider.
A – Oh my God!
The above dialogue is with reference to Clause 4 of Part I of the Second Schedule which reads as under:
Clause (4): expresses his opinion on financial statements of any business or enterprise in which he, his firm or a partner in his firm has a substantial interest; Further, readers may also refer to the following: – Chapter IV of Council General Guidelines, 2008 dated 8th August, 2008 (refer page nos. 313 – 323 of the Code of Ethics publication January 2009 edition or the website of ICAI). – pages 239 – 244 of ICAI’s publication on Code of Ethics, January 2009 edition (reprinted in May 2009).
Conducting of impact tests on cars amounts to rendering of technical services/information; and amounts paid to a French Company were ‘fees for technical services’, chargeable to tax in India.
Asst. Year: 2005-2006
Sections 9(1)(vii), I T Act ,
Article 13(4), India-France DTAA
31st August 2009
Issue
Conducting of impact tests on cars amounts to rendering of
technical services/information; and amounts paid to a French Company were ‘fees
for technical services’, chargeable to tax in India.
Facts
The assessee was an Indian company (IndCo) engaged in
manufacture of cars. Cars manufactured by it were sold globally. For evaluation
of the safety of the cars, impact tests were required to be done on the cars.
For conducting the tests, IndCo engaged a company which was a tax resident of
France (“FrenchCo”). FrenchCo was in the business of conducting impact rests on
automobiles, and manufacturers from all over the world would approach it for
conducting the tests.
FrenchCo conducted tests on IndCo’s cars only in France. At
the time of the tests, representatives of IndCo were also present. After
conducting the tests, FrenchCo furnished impact testing reports to IndCo. These
reports contained only test results and did not make available or provide any
technical know-how, knowledge or expertise to IndCo.
IndCo applied to the AO for remittance of the amount to
FrenchCo without deduction of tax. According to IndCo:
-
The payments
were not in the nature of technical services; -
There was no
enrichment or gaining of technical knowledge or expertise by IndCo; -
FrenchCo had
merely performed its business in France; -
FrenchCo had
not transferred any knowledge by which IndCo could carry out testing; -
The tests
were required for obtaining regulatory approval; and -
Hence, the
payments were not fees for technical services as defined in Explanation 2 to
Section 9(1)(vii) of the Income-tax Act.
However, the AO concluded that FrenchCo had the expertise and
the skill to perform the tests and it had rendered technical services.
Accordingly, the AO directed IndCo to deduct tax @10% from payments being made
to FrenchCo.
In appeal, CIT(A) confirmed that as the testing charges were
paid in consideration for services of technical nature, they were ‘fees for
technical services’ within the meaning of Section 9(1)(vii) of Income-tax Act
and Article 13 of India-France DTAA.
Before the Tribunal, apart from the foregoing contention,
relying on Kolkata Tribunal’s decision in DCIT Vs ITC Ltd [2002] 82 ITD 239 (Kol),
IndCo also contended that the definition of ‘fees for technical services’ in
Article 13(4) of India-France DTAA should be interpreted in the context of other
treaties between India and a member-State of OECD. It submitted that the tests
reports were just like blood test reports of a pathological laboratory and that
there is a vast difference between technical services and a technical report
obtained from a technician. From the test reports, IndCo simply came to know of
the deficiencies in the design of its cars and hence it could not be called
technical services. It also relied on Mumbai Tribunal’s decision in Raymond Ltd
Vs DCIT [2003] 86 ITD 791 (Mum). It further contended that impact testing
charges were paid for use of a standard facility which was provided by FrenchCo
to all those willing to pay and, therefore, it could not be construed as fees
for technical services. In support of this contention, it relied on Skycell
Communication Ltd Vs DCIT [2001] 251 ITR 53 (Mad), CESC Ltd Vs DCIT [2003] 87
ITD 653 (Kol) (TM),) NQA Quality Systems Registrar Ltd. v. Dy. CIT 2 SOT 249
(Del), National Organic Chemical Industries Ltd Vs DCIT [2005] 96 TTJ (Mum) and
DCIT Vs Boston Consulting Group Pte Ltd [2005] 94 ITD 31 (Mum).
The Tribunal referred to definition of ‘fees for technical
services’ in Article 13(4) of India-France DTAA and also in Explanation 2 to
Section 9(1)(vii) of the Income-tax Act. It observed that after excluding the
consideration for construction, etc., project or “salaries” from the definition
in Explanation 2 to Section 9(1)(vii) of Income-tax Act, both definitions were
same and would include payments made to any person in consideration of a
managerial, technical or consultancy services. The Tribunal also referred to
definitions in India-UK DTAA, India-USA DTAA and India-Switzerland DTAA and
observed that in these DTAAs, unless the fees for services were ancillary and
subsidiary, as well as inextricably and essentially linked to the sale of
property which is attributable to a PE and fulfills other requirements under the
business profits Article, they cannot be taxed in a source country. Thus, the
scope of ‘fees for technical services’ in these treaties was much restricted
than that under India-France DTAA.
The Tribunal further observed that the impact tests were not
in the nature of managerial services.
Held:
The impact tests were to be performed so as to pass the
quality tests. The presence of IndCo’s representatives was with an intention of
getting experience. Therefore, they were in the nature of technical services
which enhanced the product development capacity of IndCo. As the test reports
were used by IndCo for modification of its products, it would amount to
rendering of technical services/information and hence, the amounts paid would be
in the nature of fees for technical on consultancy services.
The decision in ITC Ltd was held distinguishable on the
ground that that case involved purchase of equipment. The foreign company did
not have any PE in India to which such income could be attributed. The payments
made for installation and commissioning of equipment were related to technical
services, which were ancillary and subsidiary as well as inextricably and
essentially linked to the sale of the property; and hence, it was held that the
payments were not liable to be taxed in India,
As regards the
taxability under Article 13(4), read with Explanation 2 to Section 9(1)(vii),
the Tribunal
relied on AAR’s ruling in Steffen, Robertson and Kirsten Eng Vs CIT [1998] 230
ITR 206 (AAR) wherein the AAR had held that the statutory test for
determining the place of accrual is not the place where the services for which
the payments are being made are rendered but the place where the services are utilized. Therefore, the payments
made to FrenchCo were chargeable to tax in India. Accordingly, IndCo was liable
to deduct tax at source on such payments.
The differential amount on discounting of bills with a non-resident financier are not liable to TDS under Section 195 and hence, Section 40(a)(i) cannot be invoked.
15 ACIT Vs Cargill Global
Trading (I) (P) Ltd [ 2009] 126 TTJ 516 (Del)
Asst. Year: 2004-2005
Sections 40(a)(i), 195, I T Act
9th October 2009
Issue
The differential amount on discounting of bills with a
non-resident financier are not liable to TDS under Section 195 and hence,
Section 40(a)(i) cannot be invoked.
Facts
In the course of its business, an Indian company (“IndCo”)
exported goods out of India. Usually, the exports would on a credit term of up
to six months. IndCo would draw the bill of exchange on the foreign buyer, which
would be accepted by the foreign buyer. After acceptance, IndCo would get the
bill of exchange discounted with its affiliate company, which was a tax resident
of Singapore (“SingCo”). SingCo would immediately remit the discounted amount of
the bill of exchange. The discounting was on ‘without recourse’ basis, i.e.,
even if the buyer does not pay on due date, SingCo cannot recover its value from
IndCo. Thus, SingCo would collect the payment on its own behalf. SingCo was
engaged, among others, in the business of subscribing, buying, underwriting or
otherwise acquiring, owning, holding, selling or exchanging securities or
investments of any kind including negotiable instruments, commercial paper, etc.
Further, in the course of its business, it would draw, make, accept, endorse,
discount, execute and issue promissory notes, bills of exchange, etc. SingCo did
not have a PE in India in terms of Article 5 of India-Singapore DTAA.
The AO concluded that:
-
The
discounting charges were in the nature of “interest” within the meaning of
Section 2(28A) of the Income-tax Act; -
As the
payment of such interest was made to a non-resident, IndCo was required to
deduct tax at source; -
As such tax
was not deducted, it was disallowable in terms of Section 40(a)(i) of the
Income-tax Act.
In reaching this conclusion, the AO relied upon Gujarat High
Court’s decision in CIT Vs Vijay Ship Breaking [2003] 261 ITR 113 (Guj).
In appeal, relying on CBDT’s Circular No 65, which provides
that in such a case where a supplier discounts a usance bill with a bank, the
discounting cannot technically be regarded as interest, CIT(A) held that the
discounting charges paid by IndCo were not “interest” as neither any money was
borrowed nor any debt was incurred. Therefore, no tax was required to be
deducted from such payment. Accordingly, the CIT(A) deleted the disallowance.
The Tribunal examined the issue: What is the nature of the
discount? It observed that, according to IndCo, the discount is not in the
nature of interest and hence, it is not disallowable under Section 40(a)(i) of
Income-tax Act, whereas, according to AO, it is in the nature of interest as
defined in Section 2(28A) of the Income-tax Act. The Tribunal then referred to
the definition of “interest” in Section 2(28A) of Income-tax Act (which does not
refer to discount on bill of exchange) and Section 2(7) of Interest-Tax Act
(which specifically refers to discount on bill of exchange). Noticing this
difference, the Tribunal observed that where legislature wanted to, it had
included discount on bill of exchange within “interest”.
Held
Having relevance to the definition of “interest” in Section
2(28A) of the Income-tax Act, CBDT’s Circular No 65, which though was issued in
the context of Section 194A, would be relevant as regards discounting charges,
opining that since the property in the usance bill/hundi passes to the bank and
the collection by the bank being on its own behalf, it is the price paid for the
bill. The Gujarat High Court’s decision in CIT Vs Vijay Ship Breaking
Corporation [2003] 261 ITR 113(Guj) being reversed by the Supreme Court in Vijay
Ship Breaking Corporation Vs CIT [2009] 314 ITR 309 (SC) , the discounting
charges were not in the nature of “interest” paid by the assessee. Further, as
discounting charges were business profits of SingCo and as SingCo did not have
any PE in India, it was not liable to tax in India in respect of such discount
charges. Hence, IndCo did not have any obligation to deduct tax at source under
Section 195 of the Income-tax Act. Accordingly, the amount could not be
disallowed by invoking Section 40(a)(i) of the Income-tax Act.
In the circumstances, reorganization involves transfer of shares of an Indian company for no consideration and hence not chargeable to tax.
Part C — Tribunal & AAR International Tax Decisions
14 Dana Corporation (AAR)
(2009–TIOL-29-ARA-IT)
30 November, 2009
Issues :
-
In the
circumstances, reorganization involves transfer of shares of an Indian company
for no consideration and hence not chargeable to tax. -
Liabilities of the transferor taken over by the transferee as a part of
reorganisation cannot be treated as “consideration”; nor can it be adopted as
measure of “consideration”.
As Section 92 is
not an independent charging provision, if no income arises from an
international transaction, the Transfer Pricing (T.P) provisions are not
applicable.
Facts :
The applicant, a US company (USCo), held shares in three
Indian companies (ICos), two US entities [viz Dana World trade Corporation
(DWTC) and Dana Global Products (DGP)] and other companies outside USA.
As part of a bankruptcy reorganization process, initiated
under the Bankruptcy Code of US, shares held in ICos, together with other
non-Indian assets and liabilities were transferred to DWTC and DGP, wholly owned
subsidiaries of USCo. The transfer was for no consideration and involved
reorganization in that shares which the applicant held directly in ICos (each
with > 50% stake) were now held indirectly through wholly owned subsidiaries.
The liabilities taken over by DHC from DC were more than the assets.
It was explained that one of the reasons for such transfer
was to achieve homogeneity of business in the same or similar products dealt
with by the group entities.
As part of bankruptcy transfers, the following
steps/transactions were undertaken:
-
Two new
entities DHC and DCLLC were formed by USCo. -
An
independent private equity concern infused funds (capital) into DHC in
exchange for shares of DHC. -
Additional
shares of DHC were distributed as settlement for certain claims made against
USCo in bankruptcy. DHC thus became publicly held entity. -
DC
transferred shares held by it in the three Indian companies to DWTC and DGP. -
DC
transferred shares held in DWTC and DGP to DHC. -
Finally, USCo
merged with DCLLC.
The basic issue raised before the AAR was whether transfer of
shares of ICOs to DWTC and DGP attracted tax implications in India.
USCo raised the following contentions before the AAR:
-
The shares of
ICOs were transferred without consideration. As the transfer was part of the
overall reorganization under the Bankruptcy Code, no consideration can be
attributed to such a transfer of shares. In the absence of or
non-determinability of the full value of the consideration, the computation
mechanism stipulated under the Income Tax Act failed and, consequently, the
charge also failed. -
Since the
transfer of shares under the proposed reorganization did not result in any
income chargeable to tax under the provisions of the Act, the T.P provisions
cannot be applied.
The tax
department raised the following contentions:
-
Consideration
did exist for transfer of ICo shares under the proposed reorganization. The
liabilities taken over by DHC can be legitimately taken as consideration for
transfer of shares. The tax department referred to and relied on the
Bankruptcy Court Order which stated that the transfer was for ‘fair value’ and
for ‘fair consideration’. -
The applicant
did not provide details of valuation of assets, including shares of the Indian
companies. And whether such values have been considered while agreeing to the
proposed reorganization. It cannot, therefore, be said that there was no
consideration merely because the applicant had failed to identify the
consideration attributable to ICos shares.
• In any case, since the transfer of ICos shares was between
associated persons, the arm’s length price determined under T.P provisions will
form the basis.
Held
Relying on Supreme Court’s judgments in the case of B C
Srinivasa Shetty (128 ITR 294) and Sunil Siddharthbhai (156 ITR 509), the AAR
held that the charging section must be construed harmoniously with the
computation mechanism. If the computation provision cannot be given effect to,
the charging section fails.
The profits taxable as capital gains are those which are
definite, determinable and clearly identifiable. Notional or hypothetical basis
cannot be considered.
The liabilities of the applicant, taken over as part of the
reorganization, cannot be treated as the consideration or a measure of the
consideration for the transfer. When the entire assets and liabilities have been
taken over in order to re-organize the business, it is difficult to envisage
that a proportion of the liabilities constitute the consideration for the
transfer. It cannot be said that the applicant derived profit by transferring
shares of the Indian companies to its US-based subsidiaries. In the
circumstances, the contention that the transfer was without consideration was
accepted to be the correct position.
The Annual Report of the transferees does not support the proposition
that a definite or agreed consideration has been received
by the applicant for transferring the shares of the Indian companies. The
shares may have been notionally valued for the purpose of preparing such financial statements
or to facilitate the reorganization
process. But, it cannot be said that the book value or the market value of the
shares represents the consideration for the transfer or the profit arising from
such a transfer.
The observations of the Bankruptcy Court, in its
order on ‘fair value’ and ‘fair consideration’ are with respect to the
creditors of the applicant and not with reference to the applicant itself or
its share-holders. As part of the reorganization, the claims of the creditors
were compromised and, therefore, the creditors received certain shares of DHC.
The T.P provisions under the Income Tax Law are applicable
only when there is income arising from an international transaction. The T.P
provisions are not independent of
charging provisions. The expression ‘income arising’ postulates that the income has
already arisen under the charging provisions of the Income Tax Law. Therefore, if no chargeable income
has arisen due to failure of the computation mechanism, then the T.P
provisions cannot be applied. In this
context, the AAR referred to its earlier ruling in the case of
Vanenbury Group B.V [289 ITR 464] which held that the T.P provisions are
machinery provisions which do not apply in the absence of liability to tax.
(i) Service charges received by company engaged in operation of aircraft from third-party airline companies are not entitled to benefit of Article 8 of India-USA treaty. (ii) Interest on deposit placed to meet possible tax liabilities is not income from o
Part C — International Tax Decisions
17 ADIT v.
Delta Airlines Inc.
(2008) TIOL 646 ITAT (Mum.)
Article 8 of India-USA DTAA
A.Ys. : 1992-93 to 1999-2000. Dated : 29-9-2008
Issues :
(i) Service charges received by company engaged in
operation of aircraft from third-party airline companies are not entitled to
benefit of Article 8 of India-USA treaty.
(ii) Interest on deposit placed to meet possible tax
liabilities is not income from operations and is not entitled to benefit of
Article 8 of India-USA treaty.
Facts :
The assessee, an airline company of the USA, is engaged in
the business of international air transport. In addition to main activity of
operation of aircraft, the assessee earned certain service charges in respect of
the following services :
(1) Security screening services provided to the third-party
airline companies with the help of X-Ray machines. The machines were basically
installed for screening of baggage of the cargo of Delta’s own passengers —
but, were also used for rendering services to other foreign airlines for a
charge.
(2) Third-party charter handling services provided to other
charter companies at the airports in India.
The assessee claimed that the entire income from the above
services was exempt from tax in India on the ground that the same represented
income incidental to operation of aircraft in international traffic and the
right of such taxation exclusively vested in the USA in terms of Article 8 of
India-USA treaty.
The assessee had also earned interest income on certain bank
deposits. As per the advice of the Tax Department, the assessee had held back
certain amount to meet probable tax liability. Interest earned on such deposit
was claimed exempt on the ground that the interest was incidental to the
activity of airline operation.
The Tax Department denied benefit of Article 8 in respect of
the above-mentioned incomes on the ground that the service fees for baggage
screening or third-party charter handling service were not covered by Article 8.
Likewise, the Department held that interest income was covered by Article 11 of
the treaty. The Department supported its view on the basis that Article 8 of
India-USA treaty specifically restricted treaty benefit only to income from
activities which relate to the actual transportation.
Held :
(a) The ITAT noted that : (i) Article 8(2) of the treaty
defines scope of expression ‘profits from operation of aircraft’; (ii) the
scope of India-US treaty is restrictive as compared to the scope of similar
Article of OECD model or that of US model; (iii) Since India-US treaty has
deviated from the model text and has specifically defined the scope of
expression ‘profits from operation of aircraft’, the same needs to be
understood as defined in the treaty; and hence, Commentary on OECD model or
technical explanation on US model cannot be relied upon to understand the
scope of the term defined differently in the treaty.
(b) In terms of Article 8(2) of India-US treaty, the
benefit is available only if income is earned from activity directly connected
with the transportation of passengers, cargo, etc. by the assessee as an
owner/lessee/charterer of the aircraft. The services of baggage screening or
third-party charter handling provided to the third-party airline company or
charterers is not connected with transportation of passengers, goods, etc. by
the assessee. Income is therefore not eligible for treaty benefit.
(c) Interest income earned on deposit made to meet possible
tax demand was not income which was connected with business of operation of
the aircraft and hence was not covered by Article 8 of the treaty.
Transportation of goods in international traffic by ships operated by other enterprises under slot-chartering arrangement is not entitled to the benefit of Article 8 of India-Brazil treaty
Part C — International Tax Decisions
16 DDIT
v. M/s. Cia De Navegacao
Norsul
(2008) TIOL 621 ITAT (Mum.)
Article 8 of India-Brazil treaty
A.Y. : 2001-02. Dated : 25-11-2008
Issue :
Transportation of goods in international traffic by ships
operated by other enterprises under slot- chartering arrangement is not entitled
to the benefit of Article 8 of India-Brazil treaty.
Facts :
In this case, the assessee, a Brazil shipping company, earned
freight income in respect of cargo transported from Indian port to the ultimate
destination in the subcontinent of America.
The assessee was a member of a consortium between various
shipping companies. The members of the consortium owned/leased/chartered various
ships and agreed to a pool arrangement. The assessee had about 2 vessels which
were part of such pool arrangement. The vessels of the consortium members were
operated from hub port to final destination — say, in South Africa to the
subcontinent of America.
The assessee entered into freight arrangement with various
consignors in India and provided bill of lading for transportation from India to
the final destination (say, subcontinent of America). However, for
transportation from India to the hub port, it entered into slot arrangement with
third parties.
The third parties carried the cargo from Indian ports to the
hub port in feeder vessels. The mother vessel operated by the consortium members
carried the cargo onwards to the final destination. The following presents the
information in a schematic manner.
/Deepali/Files/1-Feb2008.JPG)
The assessee claimed benefit of India-Brazil treaty on the
ground that the entire income was earned from operation of ship.
The AO asked the assessee to file ship registration
certificate/charter party arrangement of ships operated by it and also to
substantiate that the cargo lifted by the feeder vessel, was on one-to-one
basis, transported further by the mother vessel. Since this requirement of the
AO was not met, the benefit of Article 8 was denied to the assessee. The amount
was taxed as business income in view of presence of agency PE. The amount of
income was calculated @ 10% of the freight under Rule 10.
The CIT(A) granted the benefit on the basis that the assessee
was engaged in the business of operation of ship in international traffic.
Before the Tribunal, the DR contended that the assessee
merely owned/chartered two ships and therefore all the voyages from Indian port
by feeder vessels were not continued by the mother vessel owned or chartered by
the assessee and therefore benefit of Article 8 was not available.
Held :
The Tribunal noted that the profit from operation of ship
would qualify for exemption in terms of India-Brazil treaty which grants
exclusive right of taxation to country of residence.
The Tribunal noted that unlike OECD Model, India-Brazil
treaty defined the term ‘operation of ships’ as under :
“The term ‘operation of ships or aircraft’ shall mean
business of transportation of persons, mail, livestock or goods carried on by
the owners or lessees/charterers of the ships or aircraft, including the sale
of tickets for such transportation on behalf of other enterprises”.
Having noted the above and having referred to the decision of
DDIT v. Balaji Shipping (UK) Ltd., (12 DTR 93) (Mum.), the Tribunal
concluded :
(1) Since the term operation of ship is specifically
defined in India-Brazil treaty, the same will need to be given the meaning as
defined and the scope of expression cannot be extended beyond the definition.
The OECD or other commentaries dealing with undefined terms are of no
assistance on interpretation of defined term.
(2) The expression ‘operation of ship’ as defined in
India-Brazil DTAA is restrictive to include business of transportation only by
the owner, lessee or charterer of the ship. The definition requires both the
conditions viz. (i) the business of transportation by ship, and (ii)
the assessee has to be a person who owns/leases/charters the ship.
(3) The transportation from Indian port to the hub port
pursuant to the slot arrangement is not covered by Article 8, as the feeder
vessel is not owned/leased/chartered by the assessee. The benefit was denied
in respect of feeder activity.
(4) The benefit of the treaty was restricted to the profit
attributable to transportation by mother vessel. The Tribunal noted that
Article 8(3) of India-Brazil treaty specifically made the Article applicable
to profits from the participation in a pool, a joint business or an
international operating agency. Accordingly, the consortium arrangement
pursuant to which the mother vessels were available at the disposal of the
assessee pursuant to pool arrangement were accepted to be the ships which
could be regarded as owned/leased/chartered by the assessee.
(5) Since the evidence about the ships owned/
leased/chartered were not available, the matter was restored to the file of
the CIT(A) with the direction that the benefit of Article 8 was to be
restricted only to the extent of transportation by the ships which were
owned/leased/chartered by the consortium members.
Operations of Hong Kong company in India through its liaison office confined to purchase of goods for export from India is not taxable in terms of provisions of clause (b) of Explanation 1 to S. 9(1)(i) of the Income-tax Act.
Part C — International Tax Decisions
15 Ikea Trading Hong Kong Ltd. In Re
(2008) TIOL 23 ARA IT (AAR)
S. 9(1)(i) of Income-tax Act
Dated : 19-12-2008
Issue :
Operations of Hong Kong company in India through its liaison
office confined to purchase of goods for export from India is not taxable in
terms of provisions of clause (b) of Explanation 1 to S. 9(1)(i) of the
Income-tax Act.
Facts :
The Ikea Group, a multi-national retailer of furniture and
home furnishing products, marketed goods under the brand name of Ikea. It
purchased products from suppliers worldwide including India. The applicant, the
Ikea Group Company, was a tax resident of Hong Kong. The applicant had
established a liaison office in India.
Certain functions of the Group were performed in a
centralised manner from outside India. For example, the group entity at Sweden
undertook research and development, designing, determination of range of
products, quality, etc. One of the group entities at Switzerland performed the
function of acting as central treasury and made payments to various vendors on
behalf of the group concerns.
After verifying diverse details, the AAR proceeded on the
basis of the following fact pattern :
(1) The applicant company purchased goods from India.
(2) The liaison office in India provided support in the
form of identifying potential suppliers, collecting information and samples,
quality check, acting as communication channel between applicant and Indian
exporters, etc.
(3) The goods were exported by the vendors from India
directly in the name of the applicant – though, the goods were delivered
outside India for and on behalf of the group entity which purchased goods from
the applicant.
(4) The applicant received sale price of such goods outside
India. The applicant therefore did not have tax liability in India in terms of
S. 5(2) of the Act on the basis of receipt of money in India.
(5) The tax liability of the applicant was, if at all,
attracted u/s.9 of the Act.
Before the AAR, the applicant claimed that entirety of its
operations in India were confined to purchase of goods for the purposes of
export and hence in terms of clause (b) of Explanation 1 to S. 9(1)(i), no part
of the income was chargeable to tax in India.
The Tax Department contended before the AAR that the
purchases from India were not for the purpose of export by the applicant, but
were really the transactions of purchase by the associates of the applicant in
respect of which the applicant earned service fee and that the applicant merely
acted as a procurement agent. The Department therefore contended that such
income was not covered by the exception carved out in clause (b) of Explanation
1 to S. 9(1) and was accordingly chargeable to tax in India.
Held :
The AAR accepted the contention of the applicant and held
that based on the representation and the facts submitted before it, the
applicant cannot be subjected to tax in India. Since the activities of the
applicant in India were confined to purchase of goods for export from India, the
AAR held that there cannot be any income attributable or apportioned towards
such operations by virtue of exception provided in terms of clause (b) of the
Explanation to S. 9(1)(i) of the Act.
Transportation of goods in international traffic by ships operated by other enterprises under slot-chartering arrangement is entitled to benefit of Article 9 of India-UK treaty where treaty provision matches with that of OECD Model.
Part C — International Tax Decisions
14 DDIT v. Balaji Shipping (UK
Ltd.)
(12 DTR 93) (Mum.)
Article 9 of India-UK treaty
A.Ys. : 2001-02, 2002-03. Dated : 13-8-2008
Issue :
Transportation of goods in international traffic by ships
operated by other enterprises under slot-chartering arrangement is entitled to
the benefit of Article 9 of India-UK treaty where the treaty provision matches
with that of the OECD Model.
Facts :
The assessee, UK Company, is a shipping company engaged in
transportation of goods in international traffic. The appeal relates to two
assessment years viz. A.Y. 2001-02 and A.Y. 2002-03. For both the years,
the assessee computed income on presumptive basis @ 7.5% of the total freight
receipt. Relying on Article 9 of India-UK treaty, it claimed that no part of the
income was taxable in India as Article 9 granted exclusive right of taxation to
UK.
For A.Y. 2001-02 (Year 1), the Assessing Officer found that
from out of the total freight receipts of about Rs.40 Cr.,1
only a small amount of freight receipt of Rs.1.7 Cr. was on account of the
freight carried in the vessels chartered by the assessee. The AO noted that
major part of the freight was in respect of cargo lifted from Indian ports
pursuant to the carrier agreement which the assessee had signed with a shipping
company at Mauritius (Mauco or Carrier). The carrier offered service of
container slot space to the assessee for transportation of cargo from Indian
port to the hub port at Dubai, Singapore, etc. (hub port).
The assessee collected cargo from Indian ports from the
consignors at its own risk and issued bill of lading for the entire
transportation from the port of loading to the port of destination. The Mauco
provided service bill of lading in respect of the containers carried in the
feeder vessel. The AO denied benefit of treaty in respect of freight earned
pursuant to carrier arrangement, but accepted computation of income @7.5% of the
total freight.
In year 2, the AO observed that the assessee did not furnish
evidence about the ships operated by it pursuant to the charter or similar
arrangement. The AO noted that the assessee had containers which were used in
transportation of cargo pursuant to the carrier arrangement. The benefit of
Article was denied in respect of the entire income on the ground that the
assessee did not operate any ship and did not bear risk of operating ship. The
AO denied benefit of the treaty and computed income @10% of the total freight
receipt. For both the years, the AO held that the assessee had PE in India in
view of Agent’s presence and hence the amount of income so determined was
chargeable under Article 7.
The CIT(A) admitted the benefit of treaty in respect of
entire freight receipts for both the years. The CIT(A) concluded that to qualify
for the treaty benefit, it was not necessary to examine whether every operation
was performed through the ship owned or chartered by the appellant. If the
assessee was engaged in operation of ship, the benefit of the treaty was
available in respect of all the ancillary and auxiliary activities connected
with the business even though they were performed through the ship belonging to
and operated by others.
Before the ITAT, the DR assailed the order of the CIT(A) by
raising following contentions :
(a) The assessee can be said to be engaged in the operation
of ship only if the ship is placed at the disposal of the assessee and the
assessee performed all the functions necessary for the purpose of running and
operating the ship in the business of transportation and earning the profit.
(b) OECD Commentary as also Klaus Vogel Commentary grants
benefit of the Article only in respect of profit obtained from ‘operation of
ship’ i.e., the ship should be in possession and at the disposal of the
assessee either on account of ownership, lease or charter arrangement and risk
of operation should be on the assessee.
(c) The activity of the assessee pursuant to the carrier
arrangement is in the nature of trading activity viz. that of purchase
of slot space and resell thereof and therefore the activity conducted pursuant
to slot arrangement does not amount to operation of ship.
(d) In the case of the assessee, almost entire income was
from purchase of space on slot basis and hence not from operation of ship. The
activity was thus not incidental or auxiliary to overall shipping operations.
In the circumstances, the activity was an independent activity and the main
business of the assessee. Since the slot charter arrangement constituted main
source of income, the activity was not eligible on the ground of it being
ancillary to the business of operation of the ship.
On the other hand, the AR supported the order of the CIT(A)
and supported eligibility to the treaty benefit by contending :
(a) The slot arrangement is an integral part of business of
operation of the ship in the international traffic.
(b) Since the term operation of ship is not defined in the
India-UK treaty, reference can be made to the OECD and other commentaries.
OECD Commentary and Klaus Vogel Commentary was relied to contend that the term
operation of ship needs to be understood in a broader sense to include even
slot arrangement.
Held :
ITAT held :
(1) Any expression defined in the treaty needs to be
understood in the sense as given in the treaty definition. If the term is not
defined in the treaty, it needs to be understood as per definition, if any, in
the local law of the contracting state as of the date the treaty is signed. If
the term is undefined, the same needs to be understood in accordance with the
rule of contemporaneous thinking. For the purpose of ascertaining
contemporaneous thinking, guidance can be taken from provisions of domestic
law or from the various commentaries available at the time of signing of DTAA.
(2) India-UK treaty does not define scope of expression
‘operation of ship’. The definition provided in Chapter XII-G introduced in
2005 in domestic law is not of relevance for interpretation of India-UK treaty
signed in year 1993.
S. 14A — Assessee maintaining separate books of account for the purpose of business and the investments, from which the exempt income was earned — Held no disallowance.S. 36(2) — Bad debts in the business of vyaj badla — Held, allowable.
UNREPORTED DECISIONS
(Full texts of the following Tribunal decisions are available at
the Society’s office on written request. For members desiring that the Society
mails a copy to them, Rs.30 per decision will be charged for photocopying and
postage.)
16 Pawan Kumar Parmeshwarlal
v. ACIT
ITAT ‘C’ Bench, Mumbai
Before D. Manmohan (VP) and
B. Ramakotaiah (AM)
ITA No. 530/Mum./2009
A.Y. : 2005-06. Decided on :
11-1-2011
Counsel for assessee/revenue
: Assessee in person /P. N. Devdasan
(A)
S. 14A of the Income tax Act, 1961 —
Disallowance of expenditure to earn exempt income — Assessee maintaining
separate books of account for the purpose of business and the investments,
from which the exempt income was earned — No disallowance made on the ground
of personal expenditure while assessing business income — Held that no
disallowance can be made u/s.14A.
(B)
S. 36(2) of the Income-tax Act, 1961 — Bad
debts in the business of vyaj badla — Whether allowable — Held, Yes.
Per B. Ramakotaiah :
Facts :
The assessee was an
individual, the proprietor of M/s. Pawankumar Parmeshwarlal, dealing in shares
and securities. During the year under appeal, the assessee had claimed as exempt
the income earned by way of dividend Rs.3.19 lacs, interest on RBI bonds Rs.1.11
lacs and PPF interest of Rs.0.07 lac. According to the assessee, none of these
activities required any expenditure and as such no amount was disallowable
u/s.14A. However, the AO was of the view that assessee would have spent some
amount for earning the tax-free incomes and disallowed an amount of Rs.0.2 lac
u/s.14A.
The assessee had claimed the
sum of Rs.13.16 lacs as bad debts in the business of vyaj badla and the same was
disallowed by the AO.
On appeal before the CIT(A),
in respect of claim re : disallowance u/s.14A, the CIT(A) directed the AO to
compute deduction as per Rule 8D. In respect of the claim for bad debts, he
relied on the decision in the case of Arshad J. Choksi v. ACIT, (51 ITD 511),
and held that the conditions u/s.36(2) were not satisfied in the badla
transactions.
Held :
(A) In respect of
disallowance u/s.14A :
The Tribunal noted that the
assessee was maintaining separate books of account for the purpose of business
and the investments, from which the exempt income was earned, were made in his
personal capacity. Further, while assessing the business income, no part of
expenditure claimed by the assessee was treated or disallowed by the AO on the
ground of being of personal in nature. In view of this, it held that the
expenditure claimed in the business of share dealings cannot be correlated to
the incomes earned in personal capacity. Further, it noted that the Bombay High
Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT, (328 ITR 81) has
considered Rule 8D to be applicable prospective and since the assessment year
involved was before the introduction of Ss.(2) and Ss.(3) of S. 14A, it held
that there was no question of disallowing the amounts invoking Rule 8D.
(B) In respect of bad debts
:
According to the Tribunal,
the lower authorities were not correct in disallowing the claim of bad debts. It
noted that the assessee, being a stock-broker, had advanced money as part of his
business activity. Therefore, relying on the decision of the Special Bench
Mumbai Tribunal in the case of DCIT v. Shreyas S. Morakhia, (5 ITR TRIB.1), it
held that the amounts advanced by the assessee in the course of business
activity were to be treated as an allowable amount u/s.36(2).
Wealth-tax Act, 1957, S. 2(ea)(i)(5) — Where the assessee owns a warehouse which is let out on rental basis and used by the tenant for its business, the warehouse is to be excluded as an asset.
UNREPORTED DECISIONS
(Full texts of the following Tribunal decisions are
available at the Society’s office on written request. For members desiring that
the Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)
15 Dy. CIT v. Hind Ceramics
Pvt. Ltd.
ITAT Kolkata ‘B’ Bench
Before B. R. Mittal (JM) and
C. D. Rao (AM)
WTA Nos. 42 & 43/Kol. of
2010
A.Ys.: 2003-04 and 2004-05
Decided on : 7-1-2011
Counsel for revenue/assessee
: D. R. Sindhal
& Piyush Kolhe/Rajeeva Kumar
Wealth-tax Act, 1957, S.
2(ea)(i)(5) — In a case where the assessee owns a warehouse which is let out on
rental basis and the same is not used by the assessee for the purposes of its
business but is used by the tenant for its business, the warehouse is to be
excluded as an asset in view of S. 2(ea)(i)(5) of the Act.
Per B R Mittal :
Facts :
The assessee was the owner
of a warehouse, a part of which was used by the assessee for the purposes of its
own business and a part was let out. Warehousing charges received were offered
for taxation under the head ‘Income from House Property’. The assessee
considered the let out portion of the warehouse as being used for commercial
activity and accordingly did not consider it as an ‘asset’ chargeable to tax.
The Assessing Officer (AO) relying on the decision of the Madras High Court in
the case of Indian Warehousing Industries Ltd. (269 ITR 203) (Mad.) held that
merely because warehouse is let it cannot be said that the assessee is using it
for its business purposes and commercially. He considered it to be an ‘asset’
chargeable to tax.
Aggrieved the assessee
preferred an appeal to CWT(A) who observed that the decision of the Madras High
Court was in the context of S. 40(3) of the Finance Act, 1983, whereas the
present case is covered by the law as amended by the Finance Act, 1992 w.e.f.
1-4-1993. He held that after the amendment, the moot point is how the property
is utilised and not who utilises it. Even if the lessee utilised the property as
a commercial establishment or complex it will be excluded from the list of
assets. He allowed the appeal filed by the assessee.
Aggrieved the Revenue
preferred an appeal to the Tribunal.
Held :
The Tribunal observed that
the decision of the Madras High Court in the case of Indian Warehousing
Industries Ltd. (supra) and also the decision of the Kolkata Bench of the
Tribunal in the case of T. P. Roy Chowdhury & Co. Ltd. (69 ITD 135) (Cal.),
dealt with the provisions of S. 40(3) of the Finance Act, 1983. The Tribunal
noted that the definition of asset as applicable to assessment years under
consideration has been amended by the Finance Act (No. 2), 1996 w.e.f. 1-4-1997
and subsequently items 4 and 5 were inserted by the Finance Act (No. 2) w.e.f.
1-4-1999. Upon considering the ratio of the decision of the Pune Bench of ITAT
in the case of Satvinder Singh v. DCWT, (109 ITD 241) (Pune), which dealt with
the amended Section, the Tribunal noted that since a part of the warehouse was
used by the assessee for the purposes of its own business and the part let out
was used by the lessee for commercial purposes, the entire warehouse is held to
be used by the assessee for commercial purposes and in view of the provisions of
S. 2(ea)(i)(5) of the Act the said property is to be excluded as an asset for
the purposes of computing taxable net wealth. The Tribunal upheld the order
passed by the CIT(A).
The appeals filed by the
Revenue were dismissed.
S. 23 (1)(a) — Municipal ratable value determining factor — Rent received more — Actual rent to be annual value — Notional interest on interest-free security deposit/rent received in advance not to be added.
UNREPORTED DECISIONS
(Full texts of the following Tribunal decisions are available at
the Society’s office on written request. For members desiring that the Society
mails a copy to them, Rs.30 per decision will be charged for photocopying and
postage.)
14 DCIT v. Reclamation
Realty India Pvt. Ltd.
DCIT v. Reclamation
Properties India Pvt. Ltd.
DCIT v. Reclamation Real
Estate Co. India Pvt. Ltd.
ITAT ‘D’ Bench, Mumbai
Before N. V. Vasudevan (JM)
and
Pramodkumar (AM)
ITA No. 1411/Mum./2007,
1412/Mum./2007 and 1413/Mum./2007
A.Y. : 2004-05. Decided on :
26-11-2010
Counsel for assessee/revenue
:
Aarati Vissanji/Jitendra
Yadav
Income-tax Act, 1961, S. 23
— For applying provisions of S. 23(1)(a) of the Act, municipal valuation/ratable
value should be the determining factor — Since the rent received by the assessee
was more than the sum for which the property might reasonably be expected to let
from year to year, the actual rent received should be the annual value of the
property u/s.23(1)(b) of the Act — Notional interest on interest-free security
deposit/rent received in advance should not be added to the same in view of the
decision of the Bombay High Court in the case of J. K. Investors (Bombay) Ltd.
Per Bench :
Facts :
M/s. Reclamation Real Estate
Co. Pvt. Ltd., the assessee, owned premises admeasuring 15,645 sq.ft. situated
on 9th floor of a building known as Mafatlal Centre (‘the property’). It had let
out the property to J. P. Morgan Chase Bank on an annual rent of Rs.2,87,87,660.
The lease commenced from 17-12-1998 for a period of 152 weeks up to November
2001. The lease was thereafter renewed for a further period of 156 weeks from
November 2001. The lease was to expire in November 2004. When the lease was
renewed in April 2002, the entire rent for the period of lease i.e., for 156
weeks, was paid by the tenant. This was a sum of Rs.8,58,91,050. In addition,
the tenant also paid a refundable interest-free security deposit of
Rs.2,60,00,000. Rate of rent at Rs.2,87,87,660 (being rent for the previous year
2003-04) in terms of rate per sq.ft. worked out to Rs.152.50 per month.
Municipal valuation of the property was Rs.27,50,835.
Since the amount of rent
received (Rs.2,87,87,660) was more than the municipal valuation of the property,
the assessee adopted actual rent received as the annual value of the property.
According to the AO, the
municipal valuation as adopted by the municipal authorities did not reflect the
true sum for which the property might reasonably be expected to let from year to
year. He held that the rent of Rs.152.50 per sq.ft. was too low and the rent was
reduced due to the fact that the rent for the entire period of lease was paid in
advance and tenant had also given an interest-free security deposit. He
estimated the annual value by allocating notional interest on rent received in
advance and interest-free security deposit and arrived at an annual value of
Rs.3,42,23,856. He held that he was not adding notional interest on security
deposit and rent received in advance to the actual rent received for determining
annual value u/s.23(1)(b) of the Act, but was treating the same as the sum for
which the property might reasonably be expected to let from year to year
u/s.23(1)(a) of the Act.
Aggrieved the assessee
preferred an appeal to CIT(A) who allowed the appeal.
Aggrieved the Revenue
preferred an appeal to the Tribunal.
Held :
The Tribunal considered the
original provisions of S. 23 of the Act and the amendments made thereto by
Taxation Laws Amendment Act, 1975 w.e.f. 1-4-1976 and noted that :
(i) Circular No. 204,
dated 24-7-1976 gives an indication as to how the expression ‘the sum for
which, the property might reasonably be expected to let from year to year’
used in S. 23(1)(a) has to be interpreted;
(ii) the Calcutta High
Court in CIT v. Prabhabati Bansali, (141 ITR 419) concluded that the
municipal valuation and the annual value u/s. 23(1)(a) are one and the same;
(iii) the decision of
the Calcutta High Court has been followed by the Bombay High Court in the
case of M. V. Sonawala v. CIT, 177 ITR 246 (Bom.);
(iv) the Bombay High
Court has in the case of Smitaben N. Ambani v. CWT, 323 ITR 104 (Bom.) in
the context of Rule 1BB to the Wealth Tax Rules, which uses the same
expression ‘the sum for which the property might be reasonably expected to
let from year to year’ as is found in S. 23(1)(a) of the Act, held that
ratable value as determined by the municipal authorities shall be the
yardstick.
The Tribunal held that :
(i) the charge u/s.22 is
not on the market rent but is on the annual value and in the case of
property which is not let out, municipal value would be a proper yardstick
for determining the annual value. If the property is subject to rent control
laws and the fair rent determined in accordance with such law is less than
the municipal valuation, then only that can be substituted by the municipal
value;
(ii) the Bombay High
Court which is the jurisdictional High Court has held that ratable value
under the municipal law has to be adopted as annual value u/s.23(1)(a) of
the Act. The decision of the Mumbai Bench of ITAT in the case of Makrupa
Chemicals (108 ITD 95) (Mum.), following the decision of Patna High Court in
the case of Kashi Prasad Katarvk
Section 271(1)(c) – No penalty can be imposed if Assessing Officer has not pointed out any specific fact not disclosed by the assessee or any wrong particulars furnished by the assessee. Based on the primary facts disclosed by the assessee inference drawn by the AO could have been drawn.
Facts:
The assessee is a company incorporated in the USA. It was awarded three distinct contracts by a company in India viz., PGCIL. The contracts entered into were for on shore supply of goods and services as well as for off shore supply of goods. The assessee executed only the offshore supply contract and sub-contracted onshore supply and the major part of the onshore service contracts to an Indian party on cost to cost basis with approval of PGCIL. All the above contracts were being carried forward from preceding years. That in AY 2003-04, on the same facts, the Assessing Officer had accepted that the assessee was not having any PE in India and, therefore, no tax was levied on offshore supply of equipment and services rendered outside India. However, during the year under consideration, the Assessing Officer held that the assessee is having PE in India and accordingly, taxed the income from offshore supply of hardware equipment and also in respect of payment for onshore services. Since a small amount was involved, the assessee, with a view to buy peace and end the litigation, did not file any appeal against the assessment order. The AO then levied penalty u/s. 271(1)(c) of Rs. 13.12 lakh for furnishing inaccurate particulars of income. On appeal, however, the penalty order was struck down by the CIT(A).
Held:
The tribunal noted that the facts of the year under consideration and of assessment year 2003-04 are identical. In AY 2003-04, the Assessing Officer had accepted the assessee’s claim that the assessee company did not have any PE in India. However, on the basis of the same facts in the year under consideration, the Assessing Officer came to the conclusion that there was a PE. The Assessing Officer has not pointed out any specific fact which was not disclosed by the assessee or any wrong particulars furnished by the assessee. It was the question of inference to be drawn from the primary facts which were duly disclosed by the assessee.
The tribunal further observed that merely because the assessee’s claim that it was not having a PE in India was not accepted by the Revenue in the year under consideration, by itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee. It further noted that on identical facts, the assessee’s claim that it was not having a PE was accepted by the Revenue in the immediately preceding year. In view of the above, the tribunal following the decision of the Apex Court in the case of Reliance Petroproducts Pvt. Ltd. [322 ITR 158 (SC)] upheld the order of the CIT(A).
(2012) 150 TTJ 590 (Pune) Dy.CIT vs. Magarpatta Township Development & Construction Co. ITA No.822 (Pune) of 2011 A.Y.2007-08. Dated 18-09-2012
Section 80-IB(10) of the Income-tax Act 1961 – Assessee is entitled for deduction u/s. 80-IB(10) on enhanced income resulting from statutory disallowance u/s. 40(a)(ia), 43B and 36(1)(va).
Facts
For the relevant assessment year, the Assessing Officer did not allow assessee’s claim u/s. 80-IB(10) on the enhanced income resulting from statutory disallowances u/s. 43B, 40(a)(ia) and 36(1)(va). The CIT(A) allowed the claim of the assessee.
Held
The Tribunal, relying on the decision in the case of S.B.Builders & Developers V. ITO (2011) 136 TTJ 420 (Mum.)/(2011) 50 DTR (Mumbai) (Trib) 299, allowed the assessee’s claim. The Tribunal noted as under:
It is held by the jurisdictional High Court in the case of CIT vs. Gem Plus Jewellery India Ltd. (2010) 233 CTR (Bom) 248/(2010) 42 DTR (Bom) 73 that the claim of deduction u/s. 10A was to be allowed on enhanced profit resulting from disallowance u/s. 43B/36(1) (va).
It is held by the Ahmedabad bench in the case of ITO vs. Computer Force [(2011) 136 TTJ 221 (Ahd.)/(2011) 49 DTR (Ahd.)(Trib) 298, ITA Nos.1636/Ahd./2009, 2441/Ahd./2007, 2442/Ahd./2007 and 1637/Ahd./2009 order dt.30.07.2010] that enhanced income due to disallowance u/s. 40(a)(ia) was eligible income under the head `Profits and gains of business or profession’, on which claim u/s. 80-IB was allowable.
In view of the ratio of these decisions, it is abundantly clear that in the appellant’s case also deduction u/s. 80-IB(10) was liable to be allowed in case there was enhanced income on account of statutory disallowances u/s. 43B, 40(a)(ia) and 36(1) (va) etc. as mentioned above. Since the nature of receipts on the credit side of P&L a/c. for the eligible housing project u/s. 80-IB(10) was the same and the disallowance was of the expenditure on the debit side for the same eligible housing project, it would result into enhancement of the net profit of the said eligible housing project. Therefore, the appellant’s claim is to be allowed.
(2012) 150 TTJ 581 (Mum.) Dy.CIT vs. Ranjit Vithaldas ITA No.7443 (Mum.) of 2002 A.Y.1998-99. Dated 22-06-2012
54 is allowable where capital gains arising from sale of two residential houses are invested in a single residential house.
Facts
The assessee sold one residential flat in A.Y.1997-98 and another residential flat in 1998-99. He invested part of the capital gain arising from sale of these two flats for construction of a residential house and paid tax on the balance (uninvested) amount. He claimed exemption u/s. 54 in respect of the amount invested. The assessee contended that though the two flats were not contiguous, both had been used as one residential house and, therefore, it was submitted that the same should be treated as one house in view of judgment of the Honourable Allahabad High Court in the case of Shiv Narain Chaudhari vs. CWT 1977 CTR (All) 149: (1977) 108 ITR 104 (All).
The Assessing Officer did not accept the claim of the assessee that both flats constituted one residential house. The Assessing Officer also observed that section 54 allowed exemption in respect of one residential house, the income from which was chargeable under the head “Income from house property”. In this case, the assessee owned two residential houses and exemption from house property income was available only in respect of one house as self-occupied property. The assessee had claimed exemption u/s. 54 in respect of the first flat in the A.Y.1997-98, meaning thereby that the said flat had been treated as selfoccupied property. Therefore, the income from the second flat was chargeable to tax but since the assessee had not declared any income under the head “Income from house property” in respect of the said flat, the assessee had treated the flat as being used for the purpose of business because only in such a case, the income from the property is not chargeable. The Assessing Officer, therefore, held that since the second flat had been used for the purpose of business, income from the same was not chargeable to tax under the head “Income from house property”. Hence, the exemption u/s. 54 was not available. He, therefore, held that the assessee was not entitled to exemption u/s. 54 in the A.Y.1998-99.
The CIT(A) allowed the contentions of the assessee and allowed the exemption u/s. 54.
Held
The Tribunal allowed the exemption u/s. 54, but it was unable to agree with the view taken by the CIT(A) that the two flats constituted one residential house. The flats were located in two different buildings owned by the two different housing societies and were situated on two different roads. These flats were acquired in two different years. There was no common approach road to the buildings. Therefore, the two flats cannot be treated as one residential property only on the ground that two buildings in which the flats were located were within walking distance, as claimed by the learned Authorised Representative. The judgment of the Honourable Allahabad High Court in the case of Shiv Narain Chaudhari (supra) is distinguishable and not applicable to the facts of the present case. Therefore, the CIT(A) has wrongly placed reliance on the judgment of the Honourable High Court of Allahabad (supra) which is not applicable to the facts of the present case.
Having held that the two flats were two different residential houses, the Tribunal proceeded to examine whether the assessee was entitled for exemption u/s. 54 of the Act in respect of the sale of more than one residential house. The Tribunal noted as under:
No restriction has been placed in section 54 that exemption is allowable only in respect of sale of one residential house. Even if the assessee sells more than one residential house in the same year and the capital gain is invested in a new residential house, the claim of exemption cannot be denied if the other conditions of section 54 are fulfilled.
In section 54, there is an in-built restriction that capital gain arising from the sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential house cannot be invested in one residential house. In case capital gain arising from sale of more than one residential house is invested in one residential house, the condition that capital gain from sale of a residential house should be invested in a new residential house gets fulfilled in each case individually, because the capital gain arising from sale of each residential house has been invested in a residential house. Therefore, even if two flats are sold in two different years and the capital gain of both the flats is invested in one residential house, exemption u/s. 54 will be available in case of sale of each flat provided the time-limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.
The assessee had shown no income from the second flat because the assessee had treated both the flats as one residential house which had been used as a self-acquired property. Therefore, only on the ground that the assessee had not shown any income from the second property, it cannot be concluded that the flat had been used for the purposes of business when there is no material to support the said conclusion. Even at the time of hearing before the Tribunal, the Departmental Representative did not produce any material to show that the second flat had been used for the purposes of business. Therefore, the flat had to be treated as residential house, the income from which is chargeable to tax under the head “Income from house property”.
The only requirement of section 54 is that income should be chargeable to tax under the head “House property income” and it is not necessary that income should have been actually charged. Therefore, capital gain arising from the sale of the second flat would be eligible for exemption u/s. 54 subject to fulfillment of other conditions.
(2012) 150 TTJ 444 (Mum.) Kishore H.Galaiya vs. ITO ITA No.7326 (Mum.) of 2010 A.Y.2006-07 Dated 13-06-2012
Section 54 of the Income-tax Act 1961 – Amount exceeding capital gains arising from sale of old residential house having been paid by assessee to a builder within three years for construction of new residential house, assessee was entitled to exemption u/s.54 notwithstanding that assessee obtained possession after three years and also failed to deposit capital gains in the capital gains account scheme before due date of fling return of income u/s.139 (1) for relevant year.
Facts
The assessee’s claim for exemption u/s. 54 of long term capital gain on sale of a residential house was denied by the Assessing Officer. The CIT(A) confirmed the disallowance.
Held
The Tribunal, relying on the decisions in the following cases, held that the assessee was entitled to exemption u/s. 54 :
a. Asst. CIT vs. Smt. Sunder Kaur Singh Gadh (2005) 3 SOT 206 (Mum.)
b. ITO vs. Mrs. Hilla J.B. Wadia 113 CTR 173 (Bom.)/ (1995) 216 ITR 376 (Bom.)
c. Jagan Nath Singh Lodha vs. ITO (2004) 85 TTJ 173 (Jd.)
d. CIT vs. Mrs. Jagriti Aggarwal (2011) 245 CTR 629 (P&H)/(2011) 64 DTR 333 (P&H)/(2011) 339 ITR 610 (P&H)
e. Jagtar Singh Chawla vs. Asst. CIT ITA No.4923 (Del.) of 2010 dated 30-06-2011
The Tribunal noted as under:
The assessee had booked a new residential flat with the builder jointly with his wife and he had paid booking amount of Rs.1,00,000 to the builder before the due date of filing of the return of income u/s. 139(1) for the A.Y.2006-07 and the balance amount had been paid in instalments after the said date. The builder was to handover the possession of the flat after construction. It has, therefore, to be considered as a case of construction of new residential house and not purchase of flat. This position has been clarified by the CBDT in Circular No.672, dated 16-12-1993 in which it has been made clear that the earlier Circular No.471, dated 15-10- 1986 in which it was stated that acquisition of flat through allotment by DDA has to be treated as a construction of flat, would apply to co-operative societies and other institutions. The builder would fall in the category of “other institutions”. Thus, in the present case, the period of three years would apply for construction of new house from the date of transfer of the old flat.
The assessee had invested the capital gains in construction of a new residential house within a period of three years and this should be treated as sufficient compliance of the provisions of the Act. It is not necessary that the possession of the flat should also be taken within the period of three years. The taking of the possession may be delayed because of many factors not under the control of the assessee due to default on the part of the builder and, therefore, merely because the possession had not been taken within the period of three years, the exemption cannot be denied. Within the period of three years, the assessee had invested more than the amount of capital gain in the construction of new residential house. Therefore, the claim of the exemption in this case cannot be denied on the ground that the possession of the flat had not been taken within the period of three years.
The other objection raised by the Revenue is that the assessee had paid/utilised only a sum of Rs. 1 lakh towards the construction of flat till the due date of filing of the return of income u/s. 139(1) for the relevant year, and, therefore, the balance amount of capital gain was required to be deposited in the Capital Gains Account Scheme which had not been done. This is only a technical default and on this ground, the claim of exemption cannot be denied particularly when the amount had been actually utilised for the construction of residential house and not for any other purpose.
The assessee has also made a point that the due date of filing of the return of income u/s. 139(1) for the purpose of utilisation of the amount for purchase/ construction of residential house has to be construed with respect to the due date prescribed for filing of the return u/s. 139(4). In the present case, the capital gain earned by the assessee was Rs. 9.98 lakh and the assessee had utilised a sum of Rs. 13.50 lakh towards the construction of residential house by 05-07-2007, which was within the extended period of filing of the return u/s. 139(4) till 31-03-2008 for the A.Y.2006-07. The assessee had, thus, utilised the amount which was more than capital gain earned towards construction of new residential house within extended period u/s. 139(4) and, therefore, there was no default in not depositing the amount under the Capital Gains Account Scheme.
Money transfer from abroad whether banking and financial services or business auxiliary services – Whether it is export of services when performed in India and whether the sub-agents appointed also deemed to have exported the services. Reimbursement of advertisement and sales promotion is export of services.
Facts:
Paul Merchants Ltd (PML) entered into an agreement with Western Money Union Network Ltd., Ireland (Western Union or WU) to enable the receipt of money transferred from persons from outside India to persons in India. PML had also appointed sub-agents to provide transfer of money services to Western Union. Western Union also reimbursed PML the advertisement and promotional expenses in India. The question arose whether the service of PML is categorised under Banking & Financial Services or Business Auxiliary Services and whether such services were to be considered as deemed to be export under Export of Services Rules, 2005 for the period 1st July 2003 till 30th June 2007. Similarly, the services of sub-agents were to be considered export or not as sub-agents were appointed by PML in India. Thirdly, whether the reimbursement of advertisement and promotion expenses were also to be treated as export and hence, no tax was chargeable. Lastly, whether a longer period was invokable. The two members of the Delhi Tribunal had a difference of opinion as to whether the services were in the nature of export as the said services were performed in India. The case was referred to the third member due to difference of opinion.
Held:
• The services provided by PML or the sub-agents were classified as “Business Auxiliary Services” which both the members agreed on and hence, no discussion was required on this subject. The major question was whether the service was to be considered as export as the services were provided in India. The term ‘export’ has not been defined either in Article 280(l)(b) or in any of the articles of the Constitution of India. “Though the Apex Court’s judgments in the case of the State of Kerala vs. The Cochin Coal Company Ltd. [(1961) 2 STC 1 SC] and Burmah Shell Oil Storage & Distribution Co. of India vs. Commercial Tax Officer & Others reported in (1960) 11 STC 764 (SC) explain the meaning of the term ‘export’. The ratio of these judgments which are with regard to export of goods, is not applicable for determining what constitutes the export of services. There was no question of Export of Service Rules, 2005, being in conflict with Article 286(1)(b) of the Constitution of India. The principle of equivalence between the taxation of goods and taxation of service had been laid down by the Apex Court in the case of Association of Leasing & Financial Service Companies vs. Union of India (2010-TIOL-87-SCST- LB) and All India Federation of Tax Practitioners vs. Union of India (2007-TIOL-149-SC-ST) in the context of constitutional validity of levy of service tax on certain services. This principle does not imply that service tax should be levied and collected in exactly the same manner as the levy and collection of tax on goods or that export of service should be understood in an exact manner in which the export of goods is understood. The question as to what constitutes export or import of service was neither raised nor discussed in the judgments of the Apex Court. There is nothing in Export of Service Rules, 2005 which can be said to be contrary to the principle that a service not consumed in India is not to be taxed in India. What constitutes export of service is to be determined strictly with reference to Export of Service Rules, 2005. The service is classified as “Business Auxiliary Service” and provided to WU and it is WU who is the recipient and consumer of this service provided by PML and their sub-agents, not the persons receiving money in India. Thus, when the person under whose instructions the services in question had been provided by the agents/sub-agents in India and who is liable to make payment for these services, is located abroad, the destination of the services in question has to be treated abroad.
The destination has to be decided on the basis of the place of consumption, not the place of performance of service.
• Reimbursement of advertisement and sales promotion received from WU is not taxable as the same are for the services provided to WU, which are exports of services. • The question of time bar is not relevant when the main question has been answered in favour of the agent and sub-agents.
• The services provided by the agent and subagents throughout during the period of dispute are classifiable as “Business Auxiliary Service” and the same have been exported. Hence no service tax is leviable. The following judgements were relied on for this matter:
• Muthoot Finance Corpn. Ltd. vs. CCE reported in 2010 (17) STR 303 (Tribunal-Bang)
• Nipune Service Ltd. vs. CCE, Bangalore reported in 2009 (14) STR 706 (Tribunal-Bang)
• Kerala State Financial Enterprises vs. CCE, reported in 2011 (24) STR 585 (Tribunal-Bang)
[Readers may note that contrary to the above, recently the Mumbai Tribunal did not grant complete stay in Life Care Medical System relying on Microsoft Corporation (I) Pvt. Ltd. vs. CST. New Delhi 2009 (15) STR 680 (Tri.-Del) reported at 2013 (29) STR 129 (Tri.-Mum), digest of which was provided in January 2013 of BCAJ under this feature].
The substantial benefit of CENVAT credit should not be denied for procedural defects of minor nature. On the other part, the assessees should also make an honest attempt to follow the procedures laid down under relevant Rules.
Facts:
The appellants providing telephone services throughout India took CENVAT credit on certain equipments installed at other secondary switching areas (SSAs) registered separately with service tax authorities. Since the equipments were not used in the premises of the appellants, CENVAT credit was disallowed.
However, the appellants argued that the services were rendered throughout India from any SSA using capital goods installed anywhere in the country. Since the issue was technology based and facts were to be determined, the matter was remanded back by the Tribunal. On examination, the Tribunal observed that in case the proposition of the appellants is accepted, all the SSAs using equipment installed at any other SSA would be eligible for CENVAT credit. Further, DGM (Projects), Salem had placed the order for these capital goods and had handed over the duty paying documents to BSNL, Salem and CENVAT credit was availed only once by BSNL, Salem and the capital goods were used in the premises of BSNL. It was contested by the appellants that there was no condition of installing the capital goods in the premises of service provider unlike in the case of capital goods used in the manufacture of excisable goods as per Rule 2(a)(A) of the CENVAT Credit Rules, 2004. The only condition to be satisfied was that the capital goods should be used for providing output services and accordingly, the appellants were eligible for the CENVAT credit. The department’s contention was that the equipments had to be used by the registered entity and if it is used elsewhere, the department cannot verify the use of the capital goods and correctness of the CENVAT credit availment. Hence, the appellants should have taken registration as input service distributor and should have followed the proper procedures.
Held:
The present case was of not following appropriate procedures and not a case of misutilisation of ineligible CENVAT credit. No CENVAT credit was distributed since the entire CENVAT credit was availed by only one office and the same could have been verified by the department. The premises, where equipments were installed, belonged to BSNL and also the capital goods were used for providing output services.
Therefore, substantial benefit of CENVAT credit was not to be denied for procedural defects of minor nature. However, the procedures laid down under the Rules should not be circumvented quoting different decisions of the Tribunal and BSNL was directed to make an earnest attempt to follow such procedures.
CENVAT credit can be availed on capital goods received in the premises of service provider only after the services became taxable.
Facts:
The respondents were brought into service tax net with effect from 16-6-2005. They availed CENVAT credit on capital goods received in the premises of service provider on 5-5-2005 i.e. prior to services became taxable.
Held:
Decision delivered by Gujarat High Court in case of Gujarat Propack 2009 (234) ELT 409 (Guj) was not applicable to the present case as the facts of the case were completely different. Following the decision delivered by larger Bench of the Tribunal in case of Spenta International Ltd. 2007 (216) ELT 133 (Tri.-LB), it was held that CENVAT credit was available in respect of capital goods received in the premises of service provider only after the goods became dutiable and therefore, the respondents were not eligible for the said CENVAT credit on capital goods received prior to the date of the service becoming taxable.
Payment of duty made under protest during investigation – To be considered as ‘deposit’ and not duty – Principle of unjust enrichment not applicable.
Facts:
Appellant paid duty under protest during the investigation and later, it was held that it was not dutiable. Revenue asked to prove there was no unjust enrichment. It was a case of refund of ‘deposit’ and not of ‘duty’ as per the appellant wherein the principle of unjust enrichment was not applicable.
Held:
The Department did not bring anything on the record that the appellant had passed on the incidence of the duty. Further, the amount was paid under protest. Therefore, the same was in the nature of ‘deposit’ and not ‘duty’.
Imported as well as indigenous drawings and designs – Once considered as ‘goods’ by customs authorities, cannot be considered ‘services’ by service tax authorities – Import of services cannot be taxed prior to insertion of section 66A.
Facts:
• Appellant, a company incorporated in Japan, entered into four different contracts with TISCO to set up a Skin Pas Mill at Jamshedpur. Two agreements were for supply of imported as well as indigenous designs and drawings and the other two were for supply of plant, machinery and equipments. A demand of Rs. 76 lakh was made treating supply of drawings and designs as “consulting engineer’s services”.
• Appellant’s appeal before Tribunal was remanded with a direction to consider the bill of entry and determine whether they were goods. The Commissioner after considering the relevant bill of entry, confirmed the demand and also levied equal amount of penalty. Hence, this appeal. According to the appellant, customs authorities had assessed the imported drawings and designs as ‘goods’ and appropriate customs duty was paid under chapter 49 by TISCO, and therefore, the same could not be considered as services by the service tax department for the levy of service tax and that erection, commissioning and installation activities were not covered under the head of “Consulting Engineer’s Services” as per CBEC circular dated 13-5-004.
• Further, the Indian service tax authorities had no jurisdiction to tax the appellant being a foreign company. Moreover, such services became taxable only after 18-4-2006 in the hands of recipient under reverse charge. The impugned activities were carried out much before the same. Whereas according to the revenue, designs and drawings were in essence system engineering or basic engineering and the scope of “consulting engineer’s services” was very wide. Though the appellant was a foreign company, it had a project office as well as representational office in India for more than 15 years which can be considered as fixed establishments.
Held:
• Designs and drawings imported and assessed as ‘goods’ cannot be considered as ‘services’ and be subjected to service tax. The activities purported before the insertion of section 66A, i.e. before 18-4-2006 could not be taxed under service tax.
CENVAT credit pertaining to input services for the period prior to having service tax registrationallowed.
Facts:
The appellant having an office in Software Technology Park was engaged in software export. They obtained registration in 2009 and availed CENVAT credit in respect to period from April 2008 to March 2009. Revenue took a view that they had not obtained registration during the said period and therefore, could not be said to be provider of taxable output services. Hence, CENVAT credit cannot be allowed. The appellant argued that the issue was no more res integra as the same is fully covered by Tribunal’s decision in case of Well Known Polyesters Ltd. reported in 267 ELT 221, wherein it was held that service tax registration is not a pre-requisite to avail CENVAT credit.
Held:
Admitting appellant’s plea and relying on the Tribunal’s decision in case of Well Known Polyesters Ltd. (supra), Tribunal held that the appellant was eligible to claim CENVAT credit of the service tax paid on input services, after getting registration even if the registration is not in place at the relevant time of availing input services.
Service tax not collected along with insurance premium in first three instalments – Insurance policy silent about service tax – Unfair trade practice – Insurance company cannot claim it subsequently.
Facts:
Second respondent took life Insurance policy from the appellant at an annual premium of Rs. 4,810/- in 2006. Service tax was applicable to insurance premium during the extant period. However, for the initial three years, appellant did not charge service tax on the premium. In 2009, the appellant asked for service tax along with the insurance premium. The second respondent approached the first respondent, who in turn held that no separate charge of service tax could be collected by the appellant over and above the premium of Rs. 4,810/-. A writ petition filed by the appellant against the order of the first respondent was dismissed and therefore, this appeal.
Held:
Policy was issued when service tax was in force. The appellant showed by way of its conduct that service tax was included in the premium in the initial three years. If the premium did not include service tax, the insurance company could have stated it explicitly. The company offered services to public at large and was duty bound to disclose real price being charged. Non disclosure of real price would be tantamount to conduct of unfair trade practice as per Consumer Protection Act, 1986 and the appeal was dismissed.
High Court should examine and decide the case on merits when huge stakes are involved and Puloma Dalal, Jayesh Gogri Chartered Accountants Part a: Service Tax Recent Decisions ? Indirect Taxes 45 46 56 Bombay Chartered Acountant Journal, February 2013 BCAJ INDIRECT TAXES 596 (2013) 44-B BCAJ not dispose the case on the grounds of delay in filing appeal by department.
Facts:
High Court disposed off the case on the grounds of delay in filing appeal by the department.
Held:
In cases where huge stakes are involved, the High Court should examine and decide the case on merits and should not dispose off the same based on the mere grounds of delay in filing appeal by the department. In such a case, the High Court may impose costs on the department. Accordingly, the present matter was remitted to the High Court to decide the case de novo in accordance with the law.
Composite construction contracts entered into prior to 1-6-2007 on which service tax was discharged already, cannot be reclassified as works contract services post 1-6-2007 to avail the benefit of composition scheme.
Facts:
The appellant was engaged in executing various composite construction contracts and paid service tax taking abatement under Notification No. 1/2006-ST dated 1-3-2006 prior to 1-6-2007 under erection, commissioning or installation services, commercial or industrial construction services and construction of residential complex service. Works contract service was introduced with effect from 1-6-2007 and consequently, a composition scheme was introduced whereby service tax was payable @ 2% on the gross amount charged for works contract. The appellant classified the ongoing contracts as on 01.06.2007 under works contract service.
Circular No. 98/1/2008 dated 4-1-2008 clarified that classification of services was to be determined as per the nature of services and it cannot be vivisected into two different taxable services on the criteria of time of receipt of consideration. Based on this circular, a SCN notice was issued challenging such change in the classification and payment under the Composition Scheme.
The appellant contested the said Circular on the ground of being contrary to Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and section 65(105) (zzzza) of the Finance Act, 1994 and that this would result in keeping the similar contracts on different footing and that it could not override the statutory provisions.
According to revenue, the Circular was explanatory in nature which merely explained Rule 3(3) of the said Rules and that the appellant had challenged the Circular and not the provisions of Rule 3(3). Therefore, as per the provisions of Rule 3(3), the appellant cannot opt for the Composition Scheme. The revenue also contended that reclassification was not permissible and in view of Rule 3(3), the appellant did not enjoy the benefit of Composition Scheme.
Held:
• Circular No.98/1/2008-ST dated 4-1-2008 only explained the provisions of Rule 3(3) and it was not contrary to the Act or the Rules.
• Since the appellant had not challenged constitutional validity of Rule 3(3), the Honourable Supreme Court did not comment on the same.
• Even if the Circular were to be set aside, Rule 3(3) was operational and as per Rule 3(3), the assessees had the option to pay service tax under Composition Scheme before payment of service tax in respect of the works contract and the option so exercised was applicable to the entire works contract. Since the appellant had already paid service tax prior to 1-6-2007, Composition Scheme was not available to the appellant.
• Thus, the Supreme Court has upheld the decision of Andhra Pradesh High Court (2010 (19) STR 321 (AP).
“Goods/Sales Return” – Scope
Introduction
Under Sales Tax laws, the sales effected are liable to tax. However, if there is sales return (also referred to as “Goods return”) then the amount relating to such returns is not liable to tax. However, there are certain time limits for allowing this deduction. For example, under MVAT Act, 2002 and CST Act, 1956 following are the time limits for allowing the claim of ‘goods return’.
Rule 3 of MVAT Rules, 2005
“3. Goods returned and deposits refunded:- The period for return of goods and refund of deposits for the purposes of clauses (32) and (33) of section 2 shall be six months from the date of the purchase or, as the case may be, the sale.”
Similarly, Section 8A (1) (b) of CST Act provides as under:
“Section 8A (1)(b) The sale price of all goods returned to the dealer by the purchasers of such goods,-
(i) Within a period of three months from the date of delivery of the goods, in the case of goods returned before the 14th day of May, 1966.
(ii) Within a period of six months from the date of delivery of the goods, in the case of goods returned on or after the 14th day of May, 1966.
Provided that satisfactory evidence of such return of goods and of refund or adjustment in accounts of the sale price thereof is produced before the authority competent to assess or as the case may be, re-assess the tax payable by the dealer under this Act.”
It can be seen from above, that the total period (time limit) allowed for claim of goods returns is six months. The issue, for consideration herein is, if the goods return is beyond a period of six months, because of valid reasons, whether the claim is tenable. More particularly, such issue arises in relation to medicines where there is date of expiry of the medicines. In normal circumstances, the said dates are beyond the period of six months. In other words, if there are unsold medicines lying with the dealer after the expiry date, such medicines have to be returned, which may be beyond six months. In such a situation, whether the statutory time limits for ‘sales return’ can be ignored and deduction can be allowable.
Recently, Honourable Kerala High Court had an occasion to deal with such an issue. The judgment is in case of Glaxo Smithkline Pharmaceuticals Ltd. vs. State of Kerala (50 VST 486)(Ker). In this case, the medicines were returned by the buyers after the expiry date and such dates were beyond six months. In other words, the sales returns were beyond six months and the assessing authority disallowed the claim. Before the Honourable High Court, the dealer made two fold arguments. It was his submission that either sales returns should be allowed or the sales should be considered as unfructified sales. The High Court, after considering the arguments, gave detailed judgment on the same, observing as follows:
“3. After hearing both sides, what we find is that the petitioner’s claim of sales return was not allowed because the rule does not permit it. What was sold was medicines with potency and what is returned much after sale and second round of sale is medicines, the life period of which is over. Having had a pre-fixed period of potency, it is unlikely that sales return of life expired medicines will be within three months. Manufacture of medicines itself is geared up to patient demand soon after marketing is done. Therefore, when first sales are made, the medicines sold will have beyond three months shelf-life. Therefore, sales returns do not happen within three months of sales. So much so, under the existing rules which permit deduction of sales return only within three months of sale, the petitioner or other medical companies cannot get deduction of sales returns. The Kerala General Sales Tax Act or the Rules do not specifically provide any provision for refund or adjustment of tax paid in respect of sale of medicines which have lost potency at the hands of the dealer and which have been collected and destroyed by the company. The only provision for granting deduction is rule 9(b)(i) which provides for sales return within three months of sale which does not happen, because no medicine sold will have such short-period of three months of shelf-life. The petitioner also has no case that the sales return claimed of shelf-life expired medicines were within three months of the sale by the petitioner and so much so, the claim was rightly rejected in assessment and confirmed by the Tribunal. We do not find any error with the finding of the lower authorities.
The counsel for the petitioner raised an alternate contention that transaction should be treated as unfructified sales and so much so, since there is no time-limit for claiming deduction, the petitioner is entitled to refund of tax paid. This is opposed by the Government Pleader on several grounds.
In the first place, the sale of the item has really taken place from the petitioner to the distributor and from the distributor in turn to the dealer. The fact that the last retail dealer could not sell the medicine with the shelf-life period does not mean that the sale by the petitioner to distributor and in turn to dealer had not taken place. On the other hand, goods reach retail dealers only on second sales and admittedly the petitioner has not directly sold medicines to the retail dealers who returned the goods through distributors.
Therefore, the petitioner’s claim that the sale has not taken effect and on return of the medicines after expiry of the shelf-life, the original sale gets cancelled or frustrated is unacceptable. The practice followed is that shelf-life expired medicines are collected by the company from distributors and destroyed as part of the condition of the marketing to save dealers from loss. In fact, such loss is essentially borne by the manufacturing company, and the dealers or distributors obviously and rightly are not called upon to meet the loss. Further, as a matter of practice, the medicines returned on expiry of shelf-life are not replaced by the petitioner as such. But its value is reimbursed to the distributors through credit notes who in turn issue credit notes to retail dealers. Therefore, it is not a case of return of medicine on expiry of shelf-life and cannot be treated as fructified sales or unfructified sales. So much so, the petitioner’s contention in this regard is also not acceptable.”
Conclusion
It can be seen that statutory provisions apply in spite of genuine difficulties. The claim of unfructified sale is also not maintainable. The legislatures should provide relief in such genuine cases. In fact, in the above judgment, the Honourable High Court has observed for providing necessary statutory relief.
Taxability of Sub-Contracted Services
Preliminary
Sub–contracting is a significant mode of business operations in the country (both in the manufacturing sector as well as the service sector).
In order to deal with the issue of multiple taxation, Central Excise exemptions have been granted by issuing Job work Notifications, which have the force of law. Under service tax, there are no statutory provisions which specifically deal with taxability of sub-contracted services. However, clarifications have been issued by the service tax authorities in the matter from time to time, while taxability of sub–contracted services remains a highly contentious issue.
With effect from 1-7-2012, taxability of sub-contracted services has assumed increased significance with the introduction of Negative List based taxation of services, more particularly in view of the fact that, despite substantially widening the taxation base, the threshold exemption continues to be 10 lakh. Hence, the same is discussed hereafter, separately for position prior to 1-7-2012 and after 1-7-2012.
Position prior to 1-7-2012:
• Department clarifications on or after 23/08/2007.
A Master Circular No.96/8/2007-ST dated 23-8- 2007 was issued by the Government whereby all the earlier circulars, clarifications etc. from time to time till the date of the said circular were superseded. An extract from the said circular is provided in Table 1:
• Circular No. 138/07/2011, May 2011
“Subject: Representation by Jaiprakash Associates Limited, Noida, in terms of Judgement dated 14-2-2011 in W.P. No. 7705 of 2008 – regarding
1. The Works Contract Service (WCS) in respect of construction of dams, tunnels, road, bridges etc. is exempt from service tax. WCS providers engage sub-contractors who provide services such as Architect’s Service, Consulting Engineer’s Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc. The representation by Jaiprakash Associates Limited seeks to extend the benefit of such exemption to the sub-contractors providing various services to the WCS provider by arguing that the service provided by the sub-contractors are “in relation to” the exempted works contract service and hence they deserve classification under WCS itself.
2. The matter has been examined.
(i) Section 65A of the Finance Act, 1994 provides for classification of taxable services, which mentions that classification of taxable services shall be determined according to the terms of the sub-clauses (105) of section 65. When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected under the sub-clause which provides the most specific description and not the sub-clauses that provide a more general description.
(ii) In this case, the service provider is providing WCS and he in turn is receiving various services like Architect service, Consulting Engineer service, Construction of complex, Design service, Erection Commissioning or installation, Management, Maintenance or Repair etc., which are used by him in providing output service. The services received by the WCS provider from its sub-contractors are distinctly classifiable under the respective sub-clauses of section 65(105) of the Finance Act by their description. When a descriptive sub-clause is available for classification, the service cannot be classified under another sub-clause which is generic in nature. As such, the services that are being provided by the sub-contractors of WCS providers are classifiable under the respective heads and not under WCS.” …………………..
3. “Therefore, it is clarified that the services provided by the subcontractors/consultants and other service providers are classifiable as per section 65A of the Finance Act, 1994 under respective sub-clauses (105) of section 65 of the Finance Act, 1944 and chargeable to service tax accordingly.”
• CBEC Circular No. 147/16/2011-ST dated 21-10-2011 “
1. Reference is invited to the Circular No.138/07/2011– Service Tax dated 06.05.2011 wherein it was clarified that the services provided by the sub-contractors/consultants and other service providers to the Works Contract Service (WCS) provider in respect of construction of dams, tunnels, road, bridges etc. are classifiable as per section 65A of the Finance Act, 1994 under respective sub-clause (105) of section 65 of the Finance Act and are chargeable to service tax accordingly. Clarification has been requested as to whether the exemption available to the Works Contract Service providers in respect of projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc., is also available to the subcontractors who provide Works Contract Service to these main contractors in relation to those very projects.
2. It is thus apparent that just because the main contractor is providing the WCS service in respect of projects involving construction of road, airports, railways, transport terminals, bridges, tunnels, dams etc. it would not automatically lead to the classification of services being provided by the sub-contractor to the contractor as WCS. Rather, the classification would have to be independently done as per the rules and the taxability would get decided accordingly.
3. However, it is also apparent that in case the services provided by the sub-contractors to the main contractor are independently classifiable under WCS, then they too will get the benefit of exemption, so long as they are in relation to the infrastructure project mentioned above. Thus it may happen that the main infrastructure projects of execution of works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams, is sub-divided into several sub-projects and each such sub-project is assigned by the main contractor to the various sub-contractors. In such cases, if the sub-contractors are providing works contract service to the main contractor for completion of the main contract, then service tax is obviously not leviable on the works contract service provided by such sub-contractor.”
- Taxability of sub-contractors under VAT – Important Judicial Principles
In the case of Larsen & Toubro Ltd. v. State of Andhra Pradesh (2006) 146 STC 610 (AP), there were three parties, viz.:
Contractee – One who awarded the contract
Contractor – One who took the whole con-tract
Sub–Contractors – To whom main contractor gave the contract.
Petitioner filed a writ petition praying for a declaration that section 4(7), Explanation VI to section 2(28) of the Andhra Pradesh Value Added Tax Act, 2005, Rule 17(1)(a) and 17(1)(c), read with Rule 17(1)(e) of the Andhra Pradesh Value Added Tax Rules, 2005 are against Article 366(29A)(b) of the Constitution of India and the scheme of levy and recovery of taxes both at the hands of the nominated sub-contractors and the main contractor is beyond the legislative competence of the state legislature. The Andhra Pradesh High Court held as under:
• “Sub–contractor is an agent of the contractor – Though there are two agreements in the transaction of execution of works contract by a contractor through sub-contracts, satisfying the definition of “works contract” under the APVAT Act, it must be noticed that there is no agreement between the contractee and the sub -contractor and, consequently, there is no legal relationship creating either rights or obligations between them under an agreement. In between the contractee and the sub -contractor, the relationship is simply that the sub-contractor is an agent of the contractor.
• Property in goods passes directly from the sub-contractor to the contractee – In a works contract, the property in goods passes directly to the contractee by the theory of accretion. In the event of a contractor awarding the contract to a sub-contractor, the property in goods does not pass to the contractor at any point of time. The sub-contractor is only an agent of the contractor and the property in goods passes directly from the sub-contractor to the contractee and, therefore, there can be only one sale recognised by the legal fiction created under Article 366(29A).”
• Taxing both contractor and sub-contractor would be double taxation – That to hold that there are two taxable events in such a transaction, enabling the State to levy and collect tax both from the sub-contractor and the contractor, would be violative of Article 14 also for the reason that wherever a contractor executes a works contract himself without employing the sub-contractor, the deemed sale of goods involved in such execution of works contract would attract the tax only once and whenever the contractor employs a sub-contractor, the transfer of property in the same goods involved in the execution of such works contract attracts the tax twice, which is plainly irrational and violative of article 14 of the Constitution of India.
• Finally, the Andhra Pradesh High Court concluded that it is open for the State to frame appropriate rules to collect the same either from the sub-contractor or from the contractor, we emphasise, not from both. That means that tax can be collected from sub-contractor or from the contractor, but not from both.
The Supreme Court in State of Andhra Pradesh v. Larsen & Toubro Ltd. [2008] 17 VST 1 (SC) affirmed the above decision of AP High Court.
The Supreme Court explained that by virtue of Article 366(29A)(b) of the Constitution of India, once the work was assigned by the contractor the only transfer of property in goods would be by the sub-contractor, who was registered dealer, and who claimed to have paid the taxes under the Act on the goods involved in the execution of works.
Once the work was assigned by the assessee to the sub-contractor, the assessee ceased to execute the works contract in the sense contemplated by Article 366(29A)(b) because the property passed by accretion and there was no property in the goods with the contractor which was capable of re-transfer, whether as goods or in some other form. Thus, in such a case, the work executed by the sub-contractor resulted only in a single transaction and not multiple transactions.
The position emerging from the ruling of Larsen & Toubro Ltd. by the Andhra Pradesh High Court (affirmed by the Supreme Court) can be summed up as under:
• Sub-contractor is an agent of main contractor and has no privity of contract with contractee.
• Property in goods in a sub-contract works contract passes directly from the sub-contractor to the contractee and there can be only one sale recognised by legal fiction created under Article 366 (29A) of the Con-stitution of India.
• Taxation of contractor and sub-contractor on the same works contract (or a part thereof) would mean double taxation.
The above important principle laid down by the Supreme Court in the context of VAT, could be relevant for service tax, in appropriate cases.
- Taxability of sub-Contracted services under service tax – judicial considerations
• In regard to position for the period prior to 23.08.2007, based on relaxations granted through departmental clarifications, the matter stands settled by various judicial rulings viz.
• Urvi Construction vs. CST, (2010) 17 STR 302 (Tri.-Ahmd)
• CCE vs. Shivhare Roadlines (2009) 16 STR 335 (Tri.–Del)
• Harshal & Company vs. CCE (2008) 12 STR 574 (Tri.– Ahmd)
• Semac Pvt Limited vs. CCE (2006) 4 STR 475 (Tri.–Bang)
• Shiva Industrial Security Agency vs. CCE (2008) 12 STR 496 (Tri.– Ahmd)
• Synergy Audio Visual Workshop P. Ltd. vs. CST (2008) 10 STR 578 (Tri.– Bang)
• OIKOS vs. CCE, (2007) 5 STR 229 (Tri.–Bang)
• Viral Builders vs. CCE (2011) 21 STR 457 (Tri.– Ahd)
to the effect that there cannot be double taxation in cases where services are rendered by a person through another person to the ultimate consumer, as long as the main contractor who has the privity of contract with the final cus-tomer has paid service tax on the gross amount.
• Some of the important observations by judicial authorities as regards taxation of sub–contracted services are as under:
Vijay Sharma & Co. vs. CCE (2010) 20 STR 309 (Tri.–ND) (LB)
Para 9
It is true that there is no provision under Finance Act, 1994 for double taxation. The scheme of service tax law suggest that it is a single point tax law without being a multiple taxation legislation. In absence of any statutory provision to the contrary, providing of service being event of levy, self same service provided shall not be doubly taxable.
CCE vs. Areva T&D India Ltd (2011) 23 STR 33 (Tri – Chennai)
Para 6
……………..
The dispute relates to services rendered by the respondents to their customers utilising engineering firms as sub-contractors. The original authority held that the respondents have not rendered any “Repair Service”. It is not being disputed that the respondents are having contract for rendering services with the ultimate customers and they receive payment from them and ensure the quality of services rendered to them. Mere engagement of sub-contractors for some of the activities does not take away the role of respondents as service provider to their ultimate clients. The reasoning adopted by the original authority may lead to the conclusion that the respondents are not liable to pay any service tax at all in respect of activities undertaken through sub-contractors. Apparently, the implications are not being understood or appreciated by the original authority. From the facts of the case, it emerges that the respondents are rendering services to their ultimate customers and while rendering the said service, they are receiving services from the engineering firms appointed by them. They receive payment of service charges from the ultimate customers and part of it is paid to the sub-contractors for the services rendered by them and naturally the respondents are making some profits…………..
National Building Construction Corp Ltd vs. CCE & ST (2011) 23 STR 593 (Tri.–Kolkata)
In this case, NTPC awarded contract to NBCC who entrusted work for site formation and clearance to two sub-contractors and Demand raised against sub-contractors for providing service to NTPC on behalf of NBCC. The Tribunal observed as under:
Services were rendered by sub–contractor to main contractor who are answerable to NTPC, and no service was rendered by sub-contractors to NTPC on behalf of NBCC main contractor. Hence, no tax was demandable as a case of revenue neutrality & NBCC having paid tax on the entire amount received from NTPC.
- Taxability position of sub-contracted services
• For the period prior to 23-8-2007, it would appear that there was reasonable clarity based on department clarifications and judicial rulings to the effect that in case of sub-contracting of services, where the main contractor has discharged the service tax liability on the gross amount, there would be no liability to service tax at the end of the sub-contractor.
• For the period on or after 23-8-2007, based on department clarifications dated 23-8-2007, 6-5-2011 and 21-10-2011 stated above and subject to observations in paras (c) & (d) hereafter, it would appear that a better view would be that sub–contracted service provider (SCSP) is to be treated as an independent service provider and taxability needs to be determined based on appropriate service classification, applying the principles for classification of services contained in section 65A of the Act.
• In the context of works contract services, based on Supreme Court ruling in the L&T case discussed above, it can be contended that in case of sub-contracting, tax can be collected either from the sub-contractor or the main contractor, but not from both.
• In the absence of statutory provisions under service tax law as regards taxability of sub-contracted services, larger issue as to whether there can be liability at the end of sub-contractor at all, in cases where main contractor has discharged the service tax liability on the gross amount, remains judicially unresolved for the period on or after 23-8-2007.
• Taxability of sub-contracted services provided to SEZ Units are discussed separately.
Position on or after 01/07/2012
- Provisions u/s. 66F of the Finance Act, 1994 (Act)
Section 66F of the Act (principles of interpretation of specified description of services or bundled services) provides as under:
“(1) Unless otherwise specified, reference to a service (hereinafter referred to as main service) shall not include reference to a service which is used for providing main service.”
……………..
Para 9.1-1 of Guidance Note 9 of Education Guide issued by CBEC dated 20/06/2012 provides the following illustrations to explain this first rule of interpretation contained u/s. 66F of the Act:
“Provision of access to any road or bridge on payment of toll is a specific entry in the negative list in section 66D of the Act. Any service provided in relation to collection of tolls or for security of a toll road would be in the nature of service used for providing such specified service and will not be entitled to the benefit of the negative list entry.
Transportation of goods on an inland water-way is a specific entry in the negative list in section 66D of the Act. Services provided by an agent to book such transportation of goods on inland waterways or to facilitate such transportation would not be entitled to the benefits of the negative list entry.”
From the above illustrations, it is clear that, as per section 66F(1), services procured for providing a service (main service) are not automatically classifiable under the same category as the main service. The above provision seems to confirm the position clarified by CBEC in May, 2011 and October, 2011 (referred earlier)
- Mega Exemption Notification No.25/2012 – ST dated 20/6/12 (Mega N 25)
Despite the fact that excepting provisions u/ s. 66F(1), no specific provisions have been made under service tax law in regard to taxability of sub-contracted services, significant exemptions have been granted to specific sections of sub–contracted services under Mega N25. The relevant entry is reproduced hereafter:
• Entry No. 29
“Services by the following persons in respective capacities –
(a) sub-broker or an authorised person to a stock broker;
(b) authorised person to a member of a commodity exchange;
(c) mutual fund agent to a mutual fund or asset management company;
(d) distributor to a mutual fund or asset management company;
(e) selling or marketing agent of lottery tick ets to a distributor or a selling agent;
(f) selling agent or a distributor of SIM cards or recharge coupon vouchers;
(g) business facilitator or a business corre spondent to a banking company or an insurance company, in a rural area; or
(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.”
• In addition to (a) above, sub-contracted services could be exempted from service tax, if they fulfill the criteria for entitlement to specific exemption under a notification (other than 10 lakh exemption). To illustrate:
Mega N25 (Entry No. 13)
“Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –
(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;
(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
(c) a building owned by an entity registered u/s. 12AA of the Income-tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;
(d) a pollution control or effluent treatment plant, except when located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased;”
Mega N25 (Entry No. 14)
“Services by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) an airport, port or railways, including monorail or metro;
(b) a single residential unit otherwise than as a part of a residential complex;
(c) low-cost houses up to a carpet area of 60 square meters per house in a housing project approved by competent authority empowered under the “Scheme of Affordable Housing in Partnership” framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;
(d) post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or
(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;”
- Taxability position of sub-contracted services
• Subject to observations in paras hereafter, it would appear that, a better view would be that SCSP is to be treated as an independent service provider and taxability needs to be determined based on appropriate service & classification applying the principles contained in section 66F of the Act.
• In the context of works contract services, based on Supreme Court ruling in L&T case discussed earlier, it can be contended that in case of sub-contracting, tax can be collected either from the SCSP or the main service provider (MSP), but not from both.
• Despite the fact that specific exemptions have been granted to a large section of sub-contracted services, it is a well settled principle laid down by the Supreme Court to the effect that, an exemption cannot necessarily imply liability to tax/duty. Hence, the larger issue as to whether there can be liability at the end of SCSP at all in cases where MSP has discharged the service tax liability on the gross amount, needs to be tested judicially.
• Another point required to be noted is that all SCSPs do not necessarily enjoy the exemption that is available to MSP under Mega N25. For instance, certain services provided to the Government, local authority etc. are exempt under “entry No. 25” of the said Mega N25. However, when a sub-contractor is retained by MSP providing services to the Government, technically services provided by SCSP to MSP are not provided to the Government, Therefore unless SCSP enjoys exemption independently under any other entry, he would be liable for service tax in spite of the fact that his services are merged into the services of MSP who ultimately provides services to the Government.
• Taxability of sub-contracted services provided to SEZ units are discussed herein below:
Taxability of sub–contracted services provided to SEZ Units
The relevant extracts from Notification No. 40/2012–ST dated 20-6-2012 (“N40”) are as under:
“The exemption contained in this notification shall be subject to the following conditions, namely:-
(a)the exemption shall be provided by way of refund of service tax paid on the specified services received by a unit located in a SEZ or the developer of SEZ and used for the authorised operations:
Provided that where the specified services received in SEZ and used for the authorised operations are wholly consumed within the SEZ, the person liable to pay service tax has the option not to pay the service tax ab initio, instead of the SEZ unit or the developer claiming exemption by way of refund in terms of this notification.
Explanation – For the purposes of this notification, the expression “wholly consumed” refers to such specified services received by the unit of a SEZ or the developer and used for the authorised operations, where the place of provision determinable in accordance with the Place of Provision of Services Rules, 2012 (hereinafter referred as the POP Rules) is as under:-
(i) in respect of services specified in Rule 4 of the POP Rules, the place where the services are actually performed is within the SEZ ; or
(ii) in respect of services specified in Rule 5 of the POP Rules, the place where the property is located or intended to be located is within the SEZ; or
(iii) in respect of services other than those falling under clauses (i) and (ii), the recipient does not own or carry on any business other than the operations in SEZ;
…………………”
The substantive position of exemption in regard to services provided to SEZ units prior to 1-7-2012 continues with effect from 1-7-2012 as well, excepting consequential changes due to introduction of POP Rules in lieu of Rules for Export of Services/lImport of Services which were in force upto 30-6-2012.
According to one school of thinking, benefit of exemption under N 40 would not be available in regard to services availed by a MSP from a SCSP in regard to services provided by them for SEZ projects. This is supported by one or more of the following reasons:
• SCSP has privity of contract with MSP and has no independent legal relationship with SEZ clients of MSP. Hence, MSP is the recipient of Services provided by SCSP and not SEZ clients of MSP.
• According to department clarifications dated 23-8-2007, 6-5-2011 and 21-10-2011 and provisions of section 66F(1) of the Act, SCSP is to be treated as an independent service provider and taxability determined accordingly.
• Though according to Rule 10 of SEZ (Amendment) Rules, 2009 benefit of exemptions & concessions available to a Contractor shall also be available to sub-contractors read with section 51 of SEZ Act, it has been judicially held that, provisions of SEZ Act/Rules do not necessarily override the provisions of the relevant statute. [Reference can be made to UOI v. Essar Steel Ltd. (2010) 249 ELT 3 (GUJ) affirmed by Supreme Court – (2010) 255 ELT A 115]
According to an alternative school of thinking, benefit of exemption under N 40 would be available in regard to services availed by MSP from SCSP in regard to services provided by them for SEZ projects. This is supported by one or more of the following/reasons:
• SCSP has provided services on behalf of MSP to their SEZ clients. Hence, though privity of contract is between MSP and their SEZ clients, there is a constructive receipt of service by units located in SEZ from SCSP. Hence, benefit of N 40 would be available.
• Views expressed through department clarifications that, a SCSP is an independent service provider, has no statutory force. Hence, taxation at the end of SCSP results in multiple taxation which is not contemplated under the scheme of service tax law generally.
• Section 51 of SEZ Act read with Rule 10 of SEZ (Amendment) Rules, 2009 supports the contention that benefits available to a MSP should also be available to a SCSP.
Based on the above, it would appear that entitlement to the benefit of N 40 by a SCSP continues to be a contentious issue.
CENVAT credit on service tax paid on input services availed in connection with services provided by MSP to units in SEZ/developers of SEZ.
For availment of CENVAT credit under CENVAT Credit Rules, 2004 (CCR) on input services availed for “exported services”, it has been a settled position that, “exported services” are to be treated in the nature of “taxable services” and not “exempted services”. Hence, restrictions on availment of CENVAT credit under Rule 6 of CCR, would not apply and benefit of CENVAT credit of service tax paid on input services is available. However, whether services provided to a unit in SEZ/developer of SEZ, are to be treated as being in the nature of “exported services” or “exempted services” has also been a very contentious issue.
With effect from 1-3-2011, however, a new sub–rule (6A) has been inserted in Rule 6 of CCR to the effect that provisions of sub–rules (1), (2), (3) & (4) of Rule 6 of CCR shall not apply in cases when taxable services are provided, without payment of service tax to a unit in SEZ/developer of a SEZ for their authorised operations. Hence, with effect from 01/03/2011, benefit of CENVAT credit would be available on service tax paid on input services availed in connection with services provided to a unit in SEZ/developer of SEZ. This amendment has been given a retrospective effect, by the Finance Act, 2012. Hence, MSP can avail benefit of CENVAT Credit in cases where service tax is paid on services availed from SCSP for SEZ Projects on which Service tax has been paid by a MSP, subject to conditions stipulated under CCR.
Export of Goods and Services – Simplification and Revision of Softex Procedure at SEZs
This circular provides that the revised Softex procedure which was applicable only to software exporters in Software Technology Parks of India (STPI) will, with immediate effect, be applicable to all software exporters whether in SPTI/SEZ/EPZ/100% EOU/DTA.
As per the revised procedure, a software exporter whose annual turnover is at least Rs. 1,000 crore or who files at least 600 SOFTEX forms annually on all India basis, will be eligible to submit statements in the revised excel format sheets as per formats Annexed to this circular.
Protocol amending the DTAA between India and Netherlands notified with effect from 2nd November 2012 signed – Notification no. 2/2013 dated 14-1-2013
Protocol amending the DTAA between India and Netherlands notified with effect from 2nd November 2012 signed – Notification no. 2/2013 dated 14-1-2013
Extension of time limit for filing ITR V – Notification no. 1/2013 under the CPR Scheme 2011 dated 7-1-1203
Time limit for filing ITR V for AY 2010-11 filed during financial year 2011-12 and for AY 2011-12, for returns filed on or after 1-4-2011, the due date is extended till 28th February, 2013. For returns filed for AY 2012- 13, the due date is extended till 31st March, 2013 or 120 days from filing the return whichever is later.
No deduction of TDS u/s. 197A in certain specified cases –Notification no. 56/2012 DATED 31-12-2012
CBDT has notified that w.e.f 1st January 2013, no TDS would be deducted in the below mentioned payments made by a person to a Scheduled bank as per RBI Act (excluding a foreign bank:
• bank guarantee commission
• cash management service charges;
• depository charges on maintenance of DEMAT accounts;
• charges for warehousing services for commodities; • underwriting service charges; • clearing charges (MICR charges);
• credit card or debit card commission for transaction between the merchant establishment and acquirer bank.
Assessment of preceding years in search cases during election period – Circular No. 10/2012 dated 31-12-2012
Pursuant to introduction of Rule 112F, for cases of search u/s. 132 and requisition made u/s. 132A and cash or other assets seized during the election period, no further investigations would be carried out for any preceding assessment years subject to certain certification to be obtained from investigating officer with the approval of the DGIT.
Instructions regarding e-payment of ITAT fees: Office order [F. No. 19-AD(ATD)/2012 dated 13-12-2012 (Reproduced)
Advocates/Chartered Accountant/Authorised Representative and assessees are hereby informed that in case of E-Payment of Tribunal Fees, the respective Challans are to be countersigned by the concerned bank manager or attested by the authorised Representatives or assessees themselves. In case of non compliance of these instructions, the remittent of Tribunal fees will not be treated valid.
Section 32, Appendix to Income-tax Rules – UPS being energy saving device is entitled for higher depreciation @ 80%.
Facts:
The assessee claimed depreciation on UPS @ 80% on the ground that it is employed by it as an energy saving device. The claim of the revenue was that the same is not an energy saving device but an energy supply device.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that the issue is covered by the decision of the Tribunal in assessee’s own case for A.Y. 2002-03 in ITA No. 2792/M/06; for AY 2003-04 in ITA No. 1071/M/2007; for AY 2004-05 in ITA No. 5569/M/2007 and for AY 2005-06 in ITA No. 6964/M/2008. The Tribunal noted the following observations in respect of AY 2002-03:
“13. We have heard the rival contentions. Short question is whether UPS is a `Automatic Voltage Controller’ falling within the heading of energy saving device in the Appendix to the Income-tax Rules, 1962 giving depreciation rates. Legislature in its wisdom has chosen to show an Automatic Voltage Controller as an electrical equipment eligible for 100% depreciation, falling under the broader head of energy saving devices. Once Legislature deemed that an `Automatic Voltage Controller’ is a specie falling within energy saving device, it is not for the Assessing Officer or Ld CIT(A) to further analyse whether such an item would (sic was) indeed be an energy saving device. In fact it is beyond their powers. Hence the only question to answer, in our opinion is whether an UPS is an `Automatic Voltage Controller’. It is mentioned in the product brochure (Paper Book Page 64) that the UPS automatically corrected low and high voltage conditions and stepped up low voltage to safe output levels. Thus in our opinion, there cannot be a quarrel that UPS was doing the job of voltage controlling automatically. Even when it was supplying electricity at the time of power voltage, the voltages remained controlled. Therefore in our opinion, a UPS would definitely fall under the head of `Automatic Voltage Controller’. We are fortified in taking this view by the decision of Jodhpur Bench in the case of Surface Finishing Equipment (supra). As for the decision of the Delhi Bench in the case of Nestle India (supra) referred by the Ld. DR, there the question was whether UPS could be considered as `computer’ for depreciation rate of 60%. There was no issue or question, whether it could be considered as an Automatic Voltage Controller and hence in our opinion that case would not help the Revenue here. Therefore, we are of the opinion that the assessee was eligible for claiming 100% depreciation on UPS. Disallowance of Rs. 6,82,443 therefore stands deleted. Ground number 3 is allowed.”
Following the above mentioned decision, the Tribunal decided the issue in favour of the assessee.
This ground was decided in favour of the assessee.
Certainty of justice can deter rapists more than the severity of punishment
The three-member committee, led by former Chief Justice J S Verma, that is to suggest amendments on laws dealing with sexual assault, must listen to and take on board suggestions from women’s and civil society groups too, not just from political parties. The shock and anger about the gang rape in New Delhi, and the victim’s death, must not translate into a misplaced overemphasis on harshness of laws. Rather, as the measure to institute fast-track courts to death with rapes and crimes against women highlights, the stress should be on enforcing the swiftness and inevitability of justice.
It is a moot point whether the severity of punishment has, and can, act as a deterrent against any crime if that punishment is deferred indefinitely. And given the debacles, stigma and inherent biases victims of rapes face in India, it is necessary to first ensure things like unfailing registration of complaints, and then a speedy investigation and conviction of the perpetrators. The abysmally low conviction rate on rapes is testimony to the fact that these drawbacks in the justice delivery system are most responsible for many perpetrators walking away scot free — even as most rape cases are never even reported because of stigma, pressures and plain coercion. The certainty of the law catching up, and swiftly, is what can deter such crimes more than the spectre of being hanged to death, for example.
While being commensurate with the severity of a crime, the law also needs to encompass all forms of molestation and sexual assault against women. The law, the justice delivery mechanisms, must be geared to protect, encourage and aid the victim in seeking and getting that justice, not further traumatise her, as is the case now. Care must also be taken that rape laws aren’t misused by, for example, parents who seek to control and punish their offspring for relationships they don’t approve of. In the broader perspective, rape is a crime of patriarchy; eliminating the various forms of the latter will be a wider, perhaps slower process. But the law can make a beginning; and its framing, now, must be a genuinely consultative process.
Asking for trouble – Bank licences to industrial houses are a serious error
India has not issued a new bank licence since 2004. There is a persuasive case to be made that India’s banking sector needs to be more open; but aspects of the recent decision to award more licences are, none the less, disquieting. Well-informed voices from across the spectrum of opinion have, in the past few days, been raised against the proposal to allow large business conglomerates to set up banks if they have a “successful track record” – judged, presumably, by the licensing authority – and a minimum capital of Rs 500 crore. The head of the Prime Minister’s Economic Advisory Council, C Rangarajan, has urged the Reserve Bank of India ( RBI) to start by issuing licences to “non-corporate businesses” first, and to look elsewhere only if there are no such qualified applicants.
The left-leaning Columbia University economics professor and Nobel laureate Joseph Stiglitz said in an interview that it would be “very risky” to allow companies to own banks. It was not allowed in the US, he added, and correctly so; the conflicts of interest that it would open up were “sufficiently great” and regulators would “not be able to circumscribe them easily — or at all”. And the right-leaning economist Percy Mistry has also said allowing industrial houses to run banks would leave “massive scope for malfeasance”. Japan, he pointed out, is one country where banks and industries are enmeshed with each other, and it is still to emerge from a twodecade- old financial crisis.
Crackdown on Shell Firms, Benami Directors – Onus for verification to be on CAs
In a massive clean-up exercise to address the ageold problem of shell companies and directors with questionable credentials, the ministry of corporate affairs (MCA) has tightened the rules governing the registration of addresses and appointment of directors. The exercise has been set off through a series of notifications amending key rules.
The ministry has amended Form 18, the standard filing for details of the registered office or any change in it. Under the new form, the onus will be on the chartered accountant (CA), cost accountant or company secretary (CS) to physically verify the filing and check the existence of a firm.
Harvard and the Kumbh Mela
An estimated 10 million people bathed in the Ganga on Monday, the first day of the ongoing Maha Kumbh Mela at Allahabad. It is billed as the biggest single religious gathering in the world.
Behind the massive show of religious devotion is a quiet secular machine that services the millions who pour into Allahabad for the Kumbh Melas. The details are mind boggling. The crowd on the main days is large enough to be visible from space satellites. Some 25,000 tonnes of foodgrains are sent to feed the pilgrims. About 700,000 tents are erected to house the visitors. Pipes have to be laid so that clean drinking water is available. A temporary super-specialty hospital has been built for anybody who falls seriously sick. Thirty-one police stations and 41 police check-posts have come up to maintain law and order. Massive television screens flash information about missing people. Thirty-six fire stations will get into the act in case there is a conflagration.
The entire effort is so unique that it has attracted the attention of Harvard University. Six of its departments are collaborating to understand the Kumbh Mela phenomenon: the Faculty of Arts and Sciences, Harvard Divinity School, Harvard Graduate School of Design, Harvard Business School, Harvard Medical School and the Harvard School of Public Health.
The South Asia Institute at Harvard notes on its website: “A temporary city is created every 12 years in Allahabad to house the Kumbh Mela’s many pilgrims. This city is laid out on a grid, constructed and deconstructed within a matter of weeks; within the grid, multiple aspects of contemporary urbanism come to fruition, including spatial zoning, an electricity grid, food and water distribution, physical infrastructure construction, mass vaccinations, public gathering spaces, and night-time social events.”
The megacity that magically pops up at Allahabad during the Kumbh Mela is as large as New York, London and Paris combined. The sheer scale of the effort shows that the Indian state machinery, usually a creaking mess, can be galvanized into action when there is the will to do something.
Unlocking India’s potential – We can transform the country, eradicating poverty and unemployment, if we make the right moves
The United States of the early to mid-1900s has some striking parallels with the India of today. It was around this time that America began its journey towards becoming the world’s largest economy.
The biggest factors that propelled the growth and transformation of the US were technology, natural resources, manufacturing and private enterprise; a few men who dreamt big helped create the modern America.
All the five men were also great philanthropists who donated most of their wealth for the larger benefit of society. These were used to set up large universities, hospitals, museums, art and culture centres, libraries and charities. The universities also contributed as powerful research centres and acted as think tanks in areas of technology, material and space research, liberal arts and political science. Moreover, they helped develop political, business and other leaders. These created large employment opportunities and also spawned entrepreneurship.
America’s growth journey has some lessons for India. Both are large vibrant democracies with abundant natural resources. While America benefited from a large flow of immigrants in search of the American dream, India has a large population in the working age group. More importantly, like the US, India has people with entrepreneurial spirit who can visualise a new India and unleash its potential.
Five drivers – private enterprise, exploration of natural resources, development of manufacturing, tourism and simplification of regulatory and approval processes can be key to developing India as an all-round superpower.
Indian franchisees pay too much royalty to their foreign HQs
The annual royalty that McDonald’s Indian franchisee will pay to the US-headquartered fast-food company is all set to go up from three per cent of net sales now to eight per cent by 2020. Ever since the government liberalised the royalty rules in 2010, there has been a sharp increase in payouts to foreign collaborators. An analysis by this newspaper of 75 companies listed on the Bombay Stock Exchange shows that royalty payments more than trebled between 2007-08 and 2011-12, though sales grew 80 per cent and net profit a little over 30 %. Proxy advisory firm Institutional Investors Advisory Services says that while the money remitted by the top three royalty-paying companies – Maruti Suzuki, ABB and Nestle India – jumped over three times from Rs 784 crore in 2007-08 to Rs 2,495 crore in 2011-12, their collective revenue increased only 1.8 times. It said four companies had paid no dividends in the last five years, though they had paid Rs 385 crore in royalty to their overseas partners. And, in one case, the Indian company had to fork out royalty to its Japanese promoter, though it had reported a loss for the year. Recently, ACC-Ambuja Cements had to cut the royalty payment to parent Holcim from two per cent of net sales to one per cent after the independent directors on the company’s board objected to the high payout.
There are at least three issues here. One, high royalty is iniquitous to minority shareholders. It is like a super dividend to the foreign shareholder. It reduces the net profit, and therefore causes the valuation of the Indian venture to fall. Also, since royalty is a commercial arrangement, minority shareholders have no say in it. They are seldom told the reason why it has been changed. Shareholder activists have, therefore, started demanding that royalty payments ought to be decided in the annual general meeting of shareholders, and any change must be cleared by 75 % of the shareholders. Two, the negotiations for royalty are often between the foreign promoter and the managers it has put in place. These managers have no incentive to drive a hard bargain; if they do, they could simply lose their jobs. It is, in that sense, a negotiation between non-equals. That’s perhaps the reason why multinational corporations have been able to extract favourable royalty terms from their Indian ventures. Three, royalty makes the government lose out on tax revenue.
The government ought to see the overall impact of its liberalised royalty regime, and then take corrective action. Royalty is paid for the use of the foreign partner’s technology, trademark or brand name. The government must scrutinise how real the technology transfer is and if the brand name of the foreign partner is indeed helping the Indian company charge a premium in the marketplace. Royalty has been a bone of contention between Indian business leaders and their overseas partners for a while. Several collaborations have fallen apart because of squabbles over royalty.
Taxation, not litigation – Penalise tax dept for orders struck down by courts.
Tax reform need not focus merely on tax slabs and the nature of the laws governing taxation. It can, indeed it must, also look at the decision-making processes and the incentives governing those in charge of tax assessment. One good indication of the maladministration at work in this branch of the government is the overall number of tax orders that are eventually taken to be adjudicated to the tax appellate tribunals, and thenceforth to the high courts and the Supreme Court. Sukumar Mukhopadhyay, writing in his column in this newspaper earlier in the week, has quoted numbers that the minister of state for finance told Parliament in a written reply to a question. Over the past four years, the revenue department’s success rate at the tribunal level varied between 10 and 20 per cent. In other words, over 80 per cent of the revenue department’s claims were thrown out by the tribunal. The tax officials did a little better at the high court level, winning around 30 per cent of the time; but at the Supreme Court, they did much worse, losing about 90 per cent of their cases. (emphasis supplied)
These numbers make clear that India’s tax administration is frequently pressing taxpayers to pay money that is not required under law, and which will not stand up to judicial scrutiny or review. Yet recovery norms are being tightened, often forcing taxpayers to pay arbitrarily demanded amounts in a month, even while a stay application is being disposed of in the courts. This penalises taxpayers for legal delays, allowing the government to take their money and sit on it even when it is unjustified in law — and given the dilatory nature of legal proceedings, for many it will seem like it has vanished forever. More, appeal is nearautomatic even if the government loses at one level; taxpayers are forced to fight cases all the way up the judicial ladder. And once they win their case, companies litigating for indirect taxes frequently discover that the government refuses to refund the money anyway, claiming it would unjustly enrich the companies’ coffers, when the company was merely indirectly collecting taxes from consumers of their products for the government.
Reform of this dysfunctional process is overdue. The judiciary, of course, must move to speed up tax cases and the tax department should initiate efforts to bring down the number of legally untenable orders its appellate officers are handing out. This can, perhaps, happen through direct penalties being levied on officers who hand out a disproportionate number of subsequently overturned orders. But, as importantly, the tradition of automatic appeal and confiscation of money in the interim needs to end — which will in and of itself alter the incentives for the revenue department. There are many ways to do this. One possibility is that, if the tax department wishes to appeal once it has lost at a particular judicial level, it should pay a punitive interest rate on the money it holds.
The government has discovered that broadening the tax net is not easy. The reason that there continues to be widespread evasion and distrust is rooted in the unreformed and red-tapist nature of the tax administration. The time has come to change that, and ensuring that delayed justice does not incentivise arbitrary confiscation is a good place to start.
S. 250(6) — An order passed by CIT(A) without mentioning point of determination as also without giving any reason for decision while dismissing the appeal is violative of S. 250(6).
UNREPORTED DECISIONS
(Full texts of the following Tribunal decisions are available at
the Society’s office on written request. For members desiring that the Society
mails a copy to them, Rs.30 per decision will be charged for photocopying and
postage.)
13 Rang Rasayan Agencies v.
ITO
ITAT ‘C’ Bench, Ahmedabad
Before Bhavnesh Saini (JM)
and
D. C. Agrawal (AM)
ITA No. 917/Ahd./2009
A.Y. : 2004-05. Decided on :
18-1-2011
Counsel for assessee/revenue
:
Ketan M. Bhatt/Ms. Anurag
Sharma
Income-tax Act, 1961, S.
250(6) — An order passed by CIT(A) without mentioning point of determination as
also without giving any reason for decision while dismissing the appeal is
violative of S. 250(6) of the Act and cannot be sustained in law.
Per Bhavnesh Saini :
Facts :
The assessee had preferred
an appeal to the CIT(A). Due to non-appearance by the counsel of the assessee
before the CIT(A), the CIT(A) dismissed the appeal of the assessee. In the order
passed by the CIT(A), he did not mention the point for determination and also
did not mention the reason for decision.
Aggrieved by the order of
CIT(A), the assessee preferred an appeal to the Tribunal.
Held :
The Tribunal noted that S.
250(6) requires the CIT(A) to mention the point of determination in the
Appellate order and also the reason for decision. Since the order passed by the
CIT(A) did not mention any point of determination in the Appellate order and
also did not give any reason for decision while dismissing the appeal of the
assessee, the Tribunal held the order of the CIT(A) to be violative of S. 250(6)
of the Act and consequently unsustainable in law. The Tribunal observed that the
act of the CIT(A) in merely noting the default committed by the counsel for the
assessee in not putting appearance before him and dismissing the appeal cannot
be sustained. Accordingly, the Tribunal set aside the impugned order and
restored the appeal of the assessee to the file of the CIT(A) with a direction
to re-adjudicate the appeal of the assessee on merit by giving reasons for
decision in the Appellate order.
The appeal filed by the
assessee was allowed.
(2012) 150 TTJ 265 (Ahd.)(TM) ITO vs. Sardar Vallabhbhai Education Society ITA No.2984 (Ahd.) of 2008 A.Y.2000-01 Dated 18-09-2012
Section 11(1)(d) of the Income-tax Act 1961 – Since assessee had produced books of account, original receipt books of corpus fund and confirmation letters from the donors, the donations received constituted corpus fund of the Society.
Facts
For the relevant assessment year, the Assessing Officer taxed the entire amount of Rs. 154.67 lakh of donations received by the Trust on the grounds that:
a. None of the donation receipts were signed by the donors.
b. The donation receipts were self made evidence furnished in support of the corpus fund collected and
c. As per section 11(1) of the Income Tax Act, there must be a specific direction from the donors in respect of their donations that it should be for the purpose of the corpus.
The CIT(A) deleted the addition made by the Assessing Officer. Since there was a difference of opinion between the members of the Tribunal, the matter was referred to the Third Member u/s. 255(4).
Held
The Third Member, agreeing with the Judicial Member, held in favour of the assessee-trust. The Third Member noted as under :
The assessee has produced complete books of account along with original receipt book of corpus fund wherein complete names and addresses of the donors were recorded and the column “corpus fund” has been duly “ticked” and signed by the employees of the trust.
It was for the Assessing Officer to make or not to make further inquiry in the facts and circumstances of the case, with regard to the genuineness of the donation claimed by the assess-trust to have been received by it towards its “corpus fund”.
The Tribunal, as a second appellate authority, could not direct the Assessing Officer to make detailed inquiry for the reason that the issue of “inquiry” is not before the Tribunal.
The Assessing Officer has not made any detailed inquiry further and added the amount of corpus fund as income in the hands of the assessee on the plea that such receipts were prepared by the employees of the trust and in none of the receipts, signatures of the donors was available. This approach of the Assessing Officer in finalising the assessment of the assessee is not in accordance with law.
In view of the fact that the CIT(A) has accepted declarations from all the 60 donors of the corpus fund certifying that they have donated towards corpus fund of the assessee-society and the Revenue has not raised any ground of appeal against the admission of these declarations produced by the assessee before the CIT(A), the amount in question has to be held as constituting corpus fund of the assessee-society.
Section 246A, Rule 45(2) – Once the appeal filed by the assessee if found to be legally invalid and dismissed as such, the assessee can file another appeal which has to be considered along with condonation application, and if admitted has to be decided on merit.
Facts:
Aggrieved by the exparte order dated 31-12-2008 passed by the Assessing Officer (AO) u/s 144 of the Act the assessee filed an appeal to CIT(A). The memorandum of appeal was signed by CA, Shri S. U. Radhakrishnani, as authorised representative. Since the assessee neither submitted any valid power of attorney nor was there any explanation as to why the appeal was not signed by the assessee, CIT(A) vide order dated 11-10-2010 dismissed the appeal as invalid. Thereafter, the assessee filed a fresh appeal on 7-3-2011 along with application for condonation of delay. The CIT(A) in his order dated 22-12-2011 held that the appeal filed by the assessee against the assessment order had already been adjudicated by CIT(A) and dismissed. There was no provision for filing of an appeal when the first appeal had been dismissed. The appeal was also filed beyond the time limit. CIT(A) therefore dismissed the appeal in limine. Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
Once the appeal was treated as invalid, the same became non-est. The assessee had the right to file another appeal which of course has to be considered as delayed appeal and, in case delay is condoned, the appeal has to be decided on merit. The Tribunal held that the view taken by CIT(A) does not represent the correct view and therefore, has to be rejected. Once the appeal filed by the assessee is found to be legally invalid and dismissed as such, the assessee can file another appeal which has to be considered along with condonation application and, if admitted after due consideration of condonation application, it has to be decided on merit.
The Tribunal restored the matter to CIT(A) for deciding the same afresh after necessary examination in the light of observations made by the Tribunal.
As regards the first appeal which was not signed by the assessee, disposal by CIT(A) was considered as just and fair and the same was upheld.
Substantial Question of Law — Whether reassessment made without issue of notice u/s.143(2) of the Act is invalid, is a substantial question of law.
13 Substantial Question of Law — Whether
reassessment made without issue of notice u/s.143(2) of the Act is invalid, is a
substantial question of law.
[L. N. Hota and Company v. CIT, (2008) 301 ITR 184
(SC)]
The Assessing Officer issued a notice on 3-12-1998 to the
assessee u/s.148 of the Act, requiring the assessee to file the return of its
income for the A.Y. 1997-98, which was served on 7-12-1998. The assessee filed
the return of income on 5-1-1999, whereafter the AO issued a notice u/s.142(1)
on 28-6-2000. The AO, vide his order dated 27-11-2000, completed the assessment
estimating the income of the assessee from the business by applying the
provisions of S. 145 of the Act. The assessee’s appeal was dismissed by the
Commissioner of Income-tax (Appeals) vide his order dated 4-1-2002 without
adjudicating the issue of legality of the assessment. An application u/s.154 was
also rejected by the Commissioner of Income-tax (Appeals) vide his order dated
25-2-2002. The Tribunal vide its order dated 13-4-2004, rejected the priority
prayer of the assessee that assessment made without issuance of notice
u/s.143(2) within a period of one year was invalid, but on the merits of the
case, remanded the matter to the AO. On appeal, the Orissa High Court in its
order dated 14-8-2006 dismissing the appeal held that as the assessment order
had not come about by way of scrutiny, the provisions of S. 143(2) would not be
applicable. On an appeal by way of special leave to the Supreme Court, it was
held that though the question of the applicability of S. 143(2) was specifically
raised throughout, prima facie, no finding based on law as it stood, had
been recorded. The Supreme Court therefore remitted the matter to the High Court
for a fresh decision in accordance with the law.
MAT credit : MAT credit to be given before charging interest u/s.234B and u/s.234C of the Act.
Reported :
49 MAT credit : Interest
u/s.234B and u/s.234C r/w S. 115JAA of Income-tax Act, 1961 : A.Y. 1999-00 : MAT
credit has to be given before charging interest u/s.234B and u/s.234C of the
Act.
[CIT v. Salora
International Ltd., 329 ITR 568 (Del.)]
For the A.Y. 1999-00, the
income of the assessee company was assessed u/s.115JA of the Income-tax Act,
1961. Interest u/s.234B and u/s.234C was charged without reducing the MAT credit
u/s. 115JAA. The assessee contended that the interest has to be computed after
allowing the MAT credit. The Tribunal accepted the assessee’s claim.
On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held as under :
“Before charging interest u/s.234B and
u/s.234C of the Income-tax Act, 1961, credit of minimum alternative tax was to
be first allowed to the assessee.”
Income : Income u/s.56(2)(v) Loan received without interest and repaid : Not a receipt within the meaning of S. 56(2)(v) .
Reported :
48 Income : Receipt without
consideration : Income u/s.56(2)(v) of Income-tax Act, 1961 : A.Y. 2006-07 :
Loan received without interest and repaid : Not a receipt within the meaning of
S. 56(2)(v) of the Act.
[CIT v. Saranapal Singh (HUF),
237 CTR 60 (P&H)]
The assessee had received
short-term loan without interest in the relevant year and the same was repaid.
The Assessing Officer added the said amount of loan to the total income treating
the same to be the receipt within the meaning of S. 56(2)(v) of the Income-tax
Act, 1961. The Tribunal deleted the addition and observed as under:
“(i) There is no dispute
regarding the nature and source of the impugned unsecured loans.
(ii) Merely because the
amount of loan has been raised without involving payment of interest, cannot
be seen to have vested the impugned amount with characteristics of an
income, within the meaning of S. 56(2)(v) of the Act.
(iii) The existence of
the expression ‘without considerstion’ in S. 56(2)(v) cannot distract from
the fact that in the impugned case, the sum of money received in question
carried a liability of its repayment and the same was not received by the
assessee with an absolute unfettered right of possession.”
On appeal by the Revenue,
the Punjab and Haryana High Court upheld the decision of the Tribunal and held
as under :
“(i) The amount
contemplated u/s.56(2)(v) of the Act cannot include loan which is shown to
have been repaid.
(ii) In the facts and
circumstances of the present case, a concurrent finding of fact has been
recorded that the amount received was a short-term loan which was duly
repaid. The said amount cannot be treated as income of the assessee
u/s.56(2)(v) of the Act. Thus, no substantial question of law arises.”
Section C : Withdrawal of Audit Report issued earlier : Satyam Computer Services Ltd.
Compilers’ Note :
In the case of the above company, Statutory Audit Reports and
Limited Review Reports for the period June 2000 to September 2008 were issued by
the Statutory Auditors as required under the provisions of the Companies Act,
1956 and Clause 41 of the Listing Guidelines. In view of certain developments,
the said reports have been withdrawn by the Statutory Auditors by writing a
letter to the new Board of Directors and the Company Secretary with copies
marked to the ROC, SEBI, RBI, CBDT, BSE, NSE, NYSE. The said letter of the
Statutory Auditors is reproduced below.
Dear Sirs,
Re : Our audit of your financial statements
1. As statutory auditors, we performed audits of Satyam
Computer Services Limited (the ‘Company’) from the quarter ended June
2000 until the quarter ended September 30, 2008 (‘Audit Period’).
2. The above-referred financial statements were prepared by
the management of the Company.
3. We planned and performed the required audit procedures on
such financial statements, and examined the books and records of the Company
produced before us by the Company management. We placed reliance on management
controls over financial reporting, and the information and explanations provided
by the management, as also the verbal and written representations made to us
during the course of our audits.
4. As you are aware, vide a letter dated January 7, 2009 (“Chairman’s
Letter”) addressed to the erstwhile Board of Directors of the Company, the
former Chairman of the Company, Mr. Ramalinga Raju has stated that the financial
statements of the Company have been inaccurate for successive years. The
contents of the said letter, even if partially accurate, may have a material
effect (which effect is currently unknown and cannot be quantified without a
thorough investigation) on the veracity of the Company’s financial statements
presented to us during the Audit Period. Consequently, our opinions on the
financial statements may be rendered inaccurate and unreliable. A copy of the
Chairman’s Letter, extracted from the official website of the National Stock
Exchange is annexed hereto as Annexure A, for the sake of record. (not
reproduced here)
5. The ICAI has issued a guidance note on revision of audit
reports in January 2003 (‘Guidance Note’), which prescribes steps to be
followed by the auditor to prevent reliance on audit reports in such
circumstances. In view of the contents of the Chairman’s Letter, we hereby, in
accordance with the Guidance Note, state that our audit reports and opinions in
relation to the financial statements for the Audit Period should no longer be
relied upon.
6. Such a requirement is also prescribed under the generally
accepted accounting standards in the United States, where, as you are aware, the
American Depository Receipts of the Company are listed. We wish to inform you
that pursuant to Section 10A of the United States Securities and Exchange Act of
1934, the information contained in the Chairman’s Letter indicates that an
illegal act could have occurred. Accordingly, we advise that the Board of
Directors of the Company should promptly commence an independent investigation
pursuant to Section 10A of the United States Securities and Exchange Act of 1934
in order to determine whether such illegal acts occurred and, if so, the nature
and extent of such acts.
7. We hope to work with the Company and provide assistance to
the new Board of Directors to address any issues that arise in the course of
such investigation, to enable both the Company and us as your Statutory Auditors
to fulfil obligations under applicable law.
8. We wish to advise that the Company should promptly notify
any person or entity that is known to be relying upon or is unlikely to rely
upon our audit report that our audit opinion should no longer be relied upon.
9. Consequently, such notification should be made to at least
the Company’s shareholders, lenders, creditors, Indian regulatory authorities
and the United States Securities and Exchange Commission, and indeed to all the
stock exchanges, whether in India or abroad, where such securities of the
company are listed. We expect such notification would be made promptly and
request that the Company advise us as soon as the notification has been made.
Since we are required under the Guidance Note to mark a copy of this letter to
the relevant regulatory authorities, we have done so.
Section A : Audit Report containing Qualifications on Going Concern, etc.
From Notes to Accounts :
3. Legal proceeding by and/or against the company
3.1 Share capital includes 11,624,472 equity shares of Rs.10
each (issued at a premium of Rs.30 each) originally allotted to the three
investment companies of S. K. Modi Group (SKM). These shares were partly paid
and were treated as fully paid by adjusting the calls in arrears of Rs.333.18
million against assignment of security deposit of Rs.360 million by Agache
Associates Limited (belonging to SKM) in favour of the said investment
companies. The Security deposit of Rs.360 million was shown payable to Agache
Associates Limited, under a purported lease agreement dated September 11, 1995,
which was to be effective from April 1, 1996 for a property situated at
Calcutta, West Bengal. Subsequently, the Delhi High Court has passed an order on
July 15, 2005 appointing Receivers to sell shares belonging to SKM’s group
companies and deposit the proceeds with the Court. The manner of receipt of
these sale proceeds by the Company shall be decided by the Court in the pending
proceedings. The Company had also filed a criminal complaint in the Court of
Chief Metropolitan Magistrate, New Delhi against some of the erstwhile promoter
directors and ex-employees of the Company for executing the above transaction.
3.3 In respect of ICDs aggregating Rs.100 million, the
Company has not accrued interest payable amounting to Rs.240.95 million up to
March 31, 2008 (previous year Rs.222.15 million), computed based on interest
rates as per original contract terms for reasons explained below :
l
ICD of Rs.50 million in the name of Agache Associates Limited (affiliated to
SKM) being a party to the fraudulent transactions (Refer Note 3.1 above).
l
In a suit filed by one of the ICD lenders (petitioners), the Company had
deposited a sum of Rs.50 million with the Bombay High Court and the Hon’ble
Bombay High Court later allowed the petitioner to withdraw the said amount
upon furnishing an undertaking that the petitioner will restitute the said sum
or such part thereof, with 9% interest, to the Company, if and as directed by
the Court at the time of the final decision of the suit filed by the
petitioner. Accordingly, pending finality of the matter, both the ICD and
deposit with the High Court have been disclosed under the unsecured loans and
advances, respectively.
3.5 The Company has in its possession the bank-statement of
ICICI Bank, New Delhi, which shows a deposit of Rs.34.29 million on account of
refunds from the Income-tax Department on November 6, 2000 and July 2, 2001 and
subsequent withdrawals (details of amounts appropriated not available with the
Company) on various dates aggregating to Rs.34.29 million against cheques/drafts
issued to several parties, including group companies of SKM, by erstwhile
Director(s) and/or some ex-employees of the Company, which amount to fraudulent
preference under Section 531 of the Companies Act, 1956, which was brought to
the notice of the Hon’ble Court vide CA 606of 2003 and CA797 of 2000. The
difference of Rs.34.29 million between balance as per books (since no accounting
entry has been recorded for unauthorised withdrawals) and that confirmed by the
bankers, is being carried as recoverable under Loans and Advances and is pending
appropriate adjustment on outcome of the ongoing cases and has not been provided
for in the accounts.
3.7 The Company has in its possession the bank statement of
Standard Chartered Grindlays Bank, Mumbai, which shows deposits of Rs.14.20
million and withdrawals of Rs.16.01 million through various transactions made
during the period March 1999 to March 2002. However, in the absence of complete
details of these transactions, appropriate accounting entries could not be
recorded in the books in respect of these transactions. The difference of
Rs.1.81 million between the balance as per books and that confirmed by the bank,
is carried as recoverable under ‘Loans and Advances’ and is pending appropriate
adjustment on the outcome of the ongoing litigations with SKM and entities in
which they are interested.
5. The Management and Board of Directors of the Company are
looking at various steps to improve financial performance of the Company by
rationalising network, improve yield and lower non-fuel costs as a result of
industrywide efforts. Steps are also being taken to evaluate various
alternatives for raising funds for which a merchant banker has been appointed.
The Board of Directors expects improvement in the business results in the
forthcoming years. Accordingly, the financial statements have been prepared on
going concern basis.
From Auditors’ Report :
4. Without qualifying our opinion, we draw attention to Note 5in Schedule XVII to the financial statements which indicate that the Company has suffered recurring losses from operations with net loss for the year ended March 31, 2008, without considering the impact of the matters mentioned in paragraph 5 below, amounting to Rs.1,335.07 million, and as of that date, the Company’s accumulated losses amounted to Rs.5,074.52 million, as against the Company’s share capital and reserves of Rs.5,354.33 million. Also, as discussed in Note 3 in Schedule XVII to the financial statements, realisation of the carrying amount of certain receivable amounting to Rs.68.82 million and dismissal of interest liability amounting to Rs.240.95 million is dependent upon success of the claims filed by the Company against some of the erstwhile directors and employees. These conditions raise significant doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 5. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties and also do not include any adjustments relating to the recoverability and classification of asset carrying amount or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
5. We report that:
(a) As more fully explained in the Note 3.1 of Schedule XVII to the financial statements, an amount of Rs.360 million, given as security deposit towards lease of a property, is carried as recoverable under the head Loans and Advances, of which an amount of Rs.26.82 million appears to be doubtful for recovery. The Company has not made provision for this doubtful amount in the financial statements.
(b) As more fully explained in the Note 3.3 of Schedule XVII to the financial statements, the Company has not accrued interest in respect of outstanding inter-corporate deposits of Rs.10 million, which as at March 31, 2008 amounts to Rs.240.95 million.
6. (e) Subject to our comments in paragraph 5 above, ….
IFRS 9: Financial Instruments: The new “Avatar”
1. Background information
The IASB has undertaken a project to replace the existing IAS
39 on Financial
Instruments: Recognition and Measurement
in order to improve the usefulness of financial statements for users by
simplifying the classification and measurement requirements for financial
instruments. The accounting standard on financial instruments is large and
complex; hence the International Accounting Standard Board (‘IASB’ or ‘the
Board’) has decided to replace the IAS 39 in three phases:
-
Classification and
measurement of financial instruments:
IFRS 9 was published in November 2009. This standard is currently applicable
for financial assets only. The Exposure draft (ED) on financial liabilities is
expected in 2010. -
Impairment of
financial assets:
The IASB has issued an ED in November 2009 -
Hedge Accounting:
An ED is expected in the first quarter of 2010
Apart from the above, the IASB has also issued an exposure
draft relating to Derecognition and Fair Value Measurements that would either be
part of, or relevant to, accounting for financial instruments.
IFRS 9 currently is applicable only to financial assets
(accordingly, this article covers only financial assets within the scope of IFRS
9). Financial liabilities are currently removed from the scope of IFRS 9 due to
concerns raised on entity’s own credit risk in liability measurement. IASB needs
more time for deliberation and exploring alternative approaches to account for
financial liabilities.
2. Scope and recognition principle for financial assets
The objective of IFRS 9 is not to dramatically change the
accounting for financial instruments, but to simplify the accounting. Hence, the
standard has not modified the scope of financial assets under IAS 39.
3. Measurement principle for financial assets
3.1. Initial measurement
Like IAS 39, all financial assets under IFRS 9 shall be
initially recorded at fair value plus, in case of assets not classified as ‘fair
value through profit or loss’ (FVTPL), transaction costs directly attributable
to its acquisition.
3.2. Subsequent measurement
Like IAS 39, IFRS 9 has retained the ‘mixed model approach’
whereby, at inception, the financial assets are categorized into those that will
be subsequently remeasured at (a) amortised cost or (b) fair value. Thus IFRS 9
has eliminated the three categories of financial assets viz loans and
receivables, held to maturity (HTM) and available for sale, while the FVTPL
category is retained.
4. Principles for classification of financial assets
4.1. Classification criterion
An entity shall classify financial assets (as subsequently
measured) at either amortised cost or fair value on the basis of both (a) the
entity’s business model for managing the financial assets; and (b) the
contractual cash flow characteristics of the financial asset. The standard aims
at aligning the accounting in line with how management deploys assets in its
business, while also considering its characteristics.
4.2. Amortised Cost
Unlike IAS 39, the revised standard has laid down specific
criteria for classification of financial assets at amortised cost. A financial
asset shall be measured at amortised cost if the following two conditions are
met:
(a) the asset is held within a business model whose objective
is to hold assets in order to collect contractual cash flows.
(b) the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.
If both the above criteria for amortised cost accounting are
not met, then it is measured at fair value.
4.3. Business Model
The Board clarified that an entity’s business model does not
relate to a choice (i.e. it is not a voluntary designation) but rather, it is a
matter of fact that can be observed by the way an entity is managed and
information is provided to its management. IFRS 9 requires the key managerial
personnel (as defined in IAS 24 on Related Party Disclosures) to determine the
objective of the business model. The entity’s business model is not determined
at the level of every instrument, but is determined at a higher level. An entity
may also have more than one business model for managing financial assets. For
example, a bank’s retail banking division may hold its loan assets and manage
the same in order to collect contractual cash flows while its investment banking
business has the objective to realise fair value changes through the sale of
loan assets prior to their maturity.
4.4. Cash flow characteristics
For amortised cost measurement, the cash flows from financial asset should represent solely payments of principal and interest on the principal amount outstanding on specified dates. Interest here means the consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time.
Leverage is not consistent with the ‘solely payments of principal and interest’ criterion. Leverage is described as increasing the variability of the contractual cash flows such that they do not have the economic characteristics of interest. The standard lists
freestanding swaps, options and forwards as instruments that contain leverage.
Examples
The following are examples when both the above conditions are met and hence the financial asset is subsequently remeasured at amortised cost:
A bond with variable interest rate and an interest cap;
A fixed interest rate loan;
Zero coupon bond;
Variable interest loans including an element of fixed credit spread which is determined at inception e.g. LIBOR + 300 bps;
Purchase of impaired / discounted loans which are then held to collect the contractual cash flows.
On the other hand, an investment in a convertible loan note would not qualify for amortised cost measurement because of the inclusion of the conversion option which is not deemed to represent payment of principal and interest. Similarly, an inverse floating interest loan which has an inverse relationship to market rates does not represent consideration for the time value of money and credit risk.
4.5. Impact of sale of financial assets on business model
Under IAS 39, subject to certain exemptions, if the entity sells / reclassifies held-to-maturity assets before maturity, tainting provisions under paragraph 9 to IAS 39 shall apply. Under IFRS 9, not all of the assets in a portfolio have to be held to maturity in order for the objective of the business model to qualify as holding assets to collect contractual cash flows. A sale of financial asset may not preclude subse-quent measurement at amortised cost if, for example, a financial asset is sold as per entity’s investment policy when the credit rating of the financial asset declined below certain threshold or a financial asset is sold to fund capital expenditures. The standard does not give any bright line or indicator as to what frequency of anticipated sales would preclude an amortised cost classification.
IAS 39 prescribed very limited circumstances under which sale of financial assets within HTM category were permitted without attracting tainting provisions. Under IFRS 9, portfolio of financial assets continue to be measured at amortised cost as long as the sale of financial assets is infrequent in number. Thus the scope for permitted sales of financial assets is much wider for the reporting entities.
4.6. Contractually linked instruments especially for securitisation transactions
An entity may have prioritised payments to holders of multiple ‘contractually linked’ instruments that create concentrations of risk e.g. the tranches of securitised debt. The complexity arises because the junior tranches provide credit protection to the more senior tranches and the characteristics of the tranches depend on the underlying instruments held. The holder should ‘look through’ the structure until the underlying pool of instruments that are creating (rather than passing through) the cash flows are identified for assessment for solely pay-ments of principal and interest, instruments which reduce cash flow variability and exposure to credit risk. Determining whether a tranche has a lower credit risk than that of the underlying instruments should, in many cases, be straightforward. The most senior tranches will qualify, while the most junior tranches will not. For the tranches in between, the entity may have to evalu-ate on a quantitative basis. E.g. Tranches with underlying instruments where the interest rate is linked to a commodity index would not have contractual cash flows that are solely payments of principal and interest.
When it is impracticable to assess the underlying pool of instruments, the test is deemed to fail and the tranche must be measured at FVTPL.
In practice, significant management judgement shall be required for classifying a financial asset where sale of some of these assets is anticipated. In such cases, management needs to determine whether the particular activity involves one business model with some infrequent sale of assets, or whether there are two business models where one is held for collecting contractual cash flows while the other could be sold in future. However, an entity that actively manages a portfolio in order to realise fair value changes, or a portfolio that is managed and whose performance is evaluated on a fair value basis, does not hold the asset under a business model to collect contrac-tual cash flows. Such instruments would not qualify for amortised cost measurement; hence the portfolio would be subsequently remeasured at fair value every reporting date.
5. Option to designate financial asset at FVTPL
Like IAS 39, an entity can choose to designate a financial asset which otherwise would qualify for amortised cost accounting as measured at FVTPL only if it eliminates or significantly reduces a recognition or measurement inconsistency that otherwise would arise from measuring financial assets or liabilities, or recognising gains or losses on them, on a different basis. The election is available only on initial recognition of the asset and is irrevocable.
For instance, an entity may have issued foreign currency convertible bonds (FCCB) that is measured at fair value in entirety. These funds were utilised in investment of fixed rate bonds and met the amortised cost criteria in accordance with IFRS 9. This would lead to accounting mismatch as the liability is mea-sured at fair value while the asset is measured at amortised cost. This accounting mismatch can be significantly reduced by designating the financial asset at fair value through profit or loss as per IFRS 9.
IAS 39 also permitted an entity to designate a financial asset at FVTPL in two other scenarios.
IAS 39 permitted designating financial asset at FVTPL if the portfolio consists assets managed on a fair value basis. For instance, an entity may hold a portfolio of debt securities. The entity manages the portfolio to maximise its returns (i.e. interest and fair value changes) and evaluates its performance on that basis. In such a case, IAS 39 permitted the entity to designate the portfolio as FVTPL.
As discussed above, these assets cannot qualify for amortised cost measurement under IFRS 9 and therefore are required to be measured at fair value.
a) IAS 39 permitted hybrid instruments (containing an embedded derivative and the host contract) to be designated as FVTPL. Under IFRS 9, hybrid instrument as a whole is assessed for classification as amortised cost or FVTPL. If not classified as at amortised cost, entire instrument is measured at fair value through profit or loss. Point 9.4 below explains the difference in the accounting treatment under IAS 39 and IFRS 9 with an example.
Option to designate investment in equity shares at fair value through other comprehensive income (FVOCI)
6.1. Initial designation
The standard allows an entity, at initial recognition only, to elect to present changes in fair value of an investment in an equity instrument (not held for trading) in ‘Other comprehensive income’ (‘OCI’). The election is irrevocable and can be made on an instrument-by-instrument basis. However, investments in associates and joint ventures for venture capital organizations, mutual funds, unit trusts are not permitted such an option on account of equity accounting or proportional consolidation.
6.2. Subsequent measurement of equity instruments
IFRS 9 requires all investments in equity instruments (including unquoted equity instruments) to be measured at fair value. IFRS 9 permits cost to be an appropriate estimate of fair value of unquoted equity instruments in very limited circumstances.
6.3. Accounting implications on profit or loss
The amounts recognised in OCI are not recycled to profit or loss on disposal of the investment. However, dividend income on these investments continues to be recogn-ised in profit or loss, unless the dividend clearly represents a repayment of part of cost of the investment. Under IFRS 9, no separate impairment loss is to be recognised in profit or loss even if the equity invest-ment is designated as FVOCI.
7. Reclassifications
7.1. Change in business model
Classification of financial instruments is determined on initial recognition. Subsequent reclassification is prohibited. However, when an entity changes its business model in a way that is significant to its operations, a re-assessment is required of whether the initial classification remains appropriate. The standard expects such changes to be very infrequent and demonstrable to external parties.
7.2. New carrying value
If a financial asset is reclassified from fair value measurement to amortised cost measurement, then the fair value at the reclassification date becomes the new carrying amount. Conversely, if a financial asset is reclassified from amortised cost measurement to fair value measurement, then the fair value at the reclassification date becomes the new carrying amount and the difference between amortised cost and fair value is recognised in profit or loss.
7.3. Reclassification date
The reclassification date is the first day of the next reporting period. The reason that the reclassification date is different from the actual date of change in business model is that the IASB did not want to allow entities to choose a reclassification date to achieve an accounting result. Thus, from the date of change in business model until the reclassification date, financial assets continue to be accounted as if the business model has not changed.
8. Embedded derivatives
8.1. Embedded derivatives on financial asset host
Under IAS 39, embedded derivatives on financial assets hosts are assessed whether they need to be accounted separately. If the embedded derivative is separated from the host contract, the embedded derivative is measured at fair value while the host could be measured at amortised cost. IFRS 9 requires an entity to assess whether the hybrid instrument (i.e. host with embedded derivative) being a financial asset within the scope of the standard meets the criteria provided in the standard for amortised cost measurement. If the amortised cost measurement criteria are fulfilled, the entire hybrid instrument is measured at amortised cost (Refer 9.4 below). Else, the entire hybrid instrument is measured at fair value (Refer 9.3 below). However, in both cases, the embedded derivative is not separated.
8.2. Embedded derivatives on non-financial asset host
IFRS 9 does not change the accounting prescribed under IAS 39 for embedded derivatives with host contracts that are not financial assets within the scope of the standard. E.g. rights under leases, insurance contacts, financial liabilities and other non-financial assets
9. Examples for classification under IFRS 9 and IAS 39
9.1. Investment in quoted as well as unquoted equity instruments
Under IAS 39, the investments shall be classified as Available-for-sale (AFS), unless held for trading, and measured at fair value every reporting date. The fair value changes shall be recognised in OCI. The entity may also have recorded the unquoted equity instrument at cost based on the exemption given in IAS 39.
Under IFRS 9, the investment does not meet the criteria for amortised cost measurement. Hence they will be measured at fair value at every reporting date. The fair value changes shall be recognised in profit or loss, unless the entity elects to recognise the same in OCI.
9.2. Investment in quoted debt securities
Under IAS 39, an investment in a debt instrument quoted in active market is not permitted to be classified as loans and receivable category. Hence, these investments shall be classified as Available for sale unless there is a stated intent and ability to hold the instrument to maturity (in which case, the instrument would be classified as Held to Maturity and measured at amortised cost)
Under IFRS 9, if the objective of the business model is to collect solely principal and interest on the principal, then the instrument shall be subsequently measured at amortised cost. Thus, the fact that the debt instrument is quoted in active market has no impact on classification of financial asset.
9.3. Investment in Convertible bonds (at the option of investor)
Under IAS 39, the presence of the con-version feature that is exercisable by the investor precludes classification as HTM category. Such convertible bonds are clas-sified as AFS by the investor. Further, the embedded conversion option shall have to be separately accounted for.
Under IFRS 9, the conversion option shall preclude the amortised cost measurement as the investment shall not be considered to collect solely principal and interest. The entire instrument shall be classified at fair value through profit or loss (FVTPL) with fair value changes reported in income state-ment.
9.4. Prepayment options with reasonable additional compensation for early termination
Under IAS 39, if a debt instrument has a prepayment option that permits the holder to redeem the debt instrument for an amount that is approximately equal on each exercise date to the amortised cost of the debt instrument, such option is deemed to be closely related to the host and does not require separation.
IFRS 9 does not preclude amortised cost classification for a financial asset with a prepayment option when the prepayment amount substantially represents unpaid amounts of principal and interest, including reasonable additional compensation for early termination. Thus, in some cases, amortised cost accounting may be possible for the entire hybrid contract under IFRS 9, while separation of prepayment option may be required under IAS 39.
9.5. Term extending options
Under IAS 39, term extending option is an embedded derivative. The embedded derivative does not require separation if the rate of interest for the extended period approximates to the market rate of interest at the time of obtaining extension. Else, the derivative would require separation.
Under IFRS 9, amortised cost classification
for a term extension option is not precluded if the instrument is held under a business model whose objective is to collect contractual cash flows. Thus in such cases, the entire hybrid instrument shall be carried at amortised cost.
Summary of key differences between IAS 39 and IFRS 9
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Particulars |
IAS 39 |
IFRS 9 |
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1. |
Categories of |
There are four categories of financial |
There are two categories of |
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financial assets |
assets: |
(a) Fair value through profit or loss and |
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and |
(b) |
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(d) Fair value through profit or loss. |
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2. |
Embedded |
Under |
Under |
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rivatives |
is |
be assessed for amortised |
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financial asset |
to the |
in its |
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the |
sification criteria are met, the entire instru– |
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separately |
ment is |
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fair |
the |
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at fair |
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3. |
Equity |
All |
All instruments, other than those classified |
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ments |
fied as AFS securities are subsequently |
as |
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measured |
FVTPL. |
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recognised |
equity |
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AFS |
to |
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recognised |
as |
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income |
changes |
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these |
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to the |
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4. |
Designation |
Apart |
IFRS 9 |
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financial assets |
39 permits designating financial assets |
financial asset at FVTPL only to eliminate |
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as |
as at |
or |
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the portfolio |
match. As discussed above, the classifica– |
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a fair |
tion in case of a portfolio of financial |
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evaluated |
managed |
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hybrid |
instrument |
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financial asset) shall be |
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(without |
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The standard is effective for annual periods beginning on or after 1 January 2013. Early application is permitted.
The standard has given certain transitionary provisions which provide guidance on how companies who are currently following IAS 39 principles can transition to IFRS 9 within the period when the standard is issued and the effective date of application referred above.
The transitionary provision also provides guidance on classification and measurement of financial as-sets existing on the date of initial application of IFRS 9.
IFRS – Is it a smooth drive for auto companies?
IFRS – Is it a smooth drive for auto companies?
Notwithstanding the recent representation by a leading
industry body to defer the implementation of IFRS in India, the automotive
industry is watching closely, as the events unfold on the roadmap for IFRS
transition in India. Several phase 1 auto companies that are in the advanced
stage of IFRS transition realise that some of the IFRS related changes could
have a significant impact on the financial and business parameters. This article
attempts to highlight some of the key IFRS impact areas for the auto industry in
relation to (a) Revenue recognition; (b) Property, plant and equipment, (c)
capital structure and (d) group structure.
Revenue recognition
Timing of recognition of revenues
Currently under Indian GAAP (hereafter referred to as IGAAP),
many auto companies recognise revenues on dispatch of the product for sale from
the production unit, which coincides with transfer of legal title of goods.
However, as per IFRS, revenue can be recognised only when significant risk and
rewards are transferred to the buyer and the seller does not retain managerial
involvement or effective control over the goods sold.
For example, for domestic sales, if the company bears the
risk of damage/loss to vehicles before it reaches the dealer/customer, then
revenue recognition may need to be deferred till delivery.
In the auto sector, a significant proportion of revenue comes
from month-end billings. There is a possibility that revenues from such
month-end billing may get deferred to the next quarter or fiscal year when the
revenue recognition criteria are met. This may result in a one-time impact (but
will be balanced out on an ongoing basis) on the company’s financials due to the
IFRS transition. Companies may have to align their internal processes so that
they can fulfill the revenue recognition criteria as prescribed under IFRS.
Customer incentives and discounts
Auto companies offer a range of dealer discounts and
incentives (including free service coupons to ultimate customers) to boost their
sales. Under IGAAP, the majority of such discounts and incentives are recognised
as sales promotion expenses, while the sales are reported gross of such
incentives. Under IFRS, all forms of discounts and incentives to the dealers are
recognised as a reduction of revenue. As such, revenues are presented net of
related discounts/incentives. Though such IFRS adjustment may not have an impact
on the profits for the year, they do impact the revenues and key ratios related
to revenue (for example, gross profit margins).
Warranties
Auto companies usually offer two types of warranties (i)
initial warranty that is bundled along with every vehicle sold without any
additional cost and (ii) extended warranty (commencing after expiry of initial
warranty) that is offered to the customer as per their choice and for a price.
Under IGAAP, as the initial warranty is not identified as a
separate element of the contract, sales are recorded for the full amount at the
time of the delivery of the vehicle. Correspondingly, a provision (calculated at
the amount of expected undiscounted cost to be incurred on meeting the warranty
obligation) is recognised upfront. Under IFRS, similar accounting treatment is
required for ‘normal’ warranties, except that the provision is required to be
discounted.
In case of ‘extended’ warranties, the contract contains
multiple elements i.e. sale of vehicles and sale of extended warranty. Under
IGAAP, there is no specific guidance on accounting for multiple elements in a
contract, and practice varies. Under IFRS, the price attributable to the
extended warranty is required to be deferred and recognised in income statement
over the extended warranty period.
The revenue attributable to the extended warranty may be
calculated based on the relative fair value method (relative fair values of sale
of vehicle and the extended warranty) or the residual fair value method (the
fair value of extended warranty is deferred).
Property, plant and equipment
Component approach for depreciation
Currently, most companies apply schedule XIV rates for
providing depreciation on assets. As such, the entire depreciable amount (i.e.
cost less residual value) is depreciated over the useful life estimated under
Schedule XIV to the Companies Act, 1956. Any replacement of significant
component is generally charged to profits as repairs cost.
Under IFRS, companies would be required to depreciate an
asset over its useful life, which may be different from industry benchmarks.
Further, if the asset includes a component, that can be readily identifiable; is
of significant value in relation to the asset; and has a significantly different
useful life; IFRS requires to treat such components as akin to separate assets.
Such components are depreciated over the component’s useful life and the
replacement of such a component is treated as akin to replacement of an asset
(i.e. disposal and fresh purchase).
As depreciation under IFRS may undergo a change, a
corresponding impact may also arise on valuation of inventories.
Contracts with suppliers
Automobile companies maintain vendor parks where suppliers
are in close proximity to the main plant to supply components used in the
manufacture of vehicles. Most of these vendors exclusively serve the plant, and
the automobile company enters into take-or-pay arrangements (such as a minimum
procurement guarantee or a per unit fee along with a fixed annual fee), whereby
the vendor will recover their capital costs irrespective of the actual off-take
from the company. In substance, under IFRS, maintaining exclusive assets against
fixed recoveries of capital costs make it a lease arrangement where the auto
companies are deemed to have taken the vendor’s assets on lease. Under IGAAP,
such contracts are not construed as a lease. Once the arrangement is classified
as a lease, it is further classified as an operating or financial lease
depending on the terms.
If the arrangement contains a financial lease, the fair value
of the asset is recognised on the automobile company’s balance sheet, increasing
its asset base and debt levels, while the impact on the income statement will be
in the form of depreciation on the leased asset and interest payment for the
lease. Under IGAAP, such expenditure would be recognised as part of operating
expenses. This treatment would have a positive impact on the EBITDA of the
company.
From the perspective of inventory valuation for the auto company, the entire payments may be construed as the cost of inventories under IGAAP. However, under IFRS, as charge to the income statement over a period of time would be in the form of depreciation on the leased assets and interest on lease obligation, the interest component may not be considered as cost of inventories.
Intangibles with indefinite useful lives
IGAAP requires all intangibles to be amortised over their useful life, though there is a rebuttable presumption that the useful life of an intangible asset will not be greater than ten years. Under IFRS, there is an additional category of intangible asset i.e. intangible assets with indefinite useful life. The term ‘indefinite’ here does not denote ‘infinite’; instead it denotes a useful life that is relatively long and is not certain eg: brands if they meet certain conditions as detailed in the standard. Such intangible assets are not amortised; rather they are tested for impairment atleast once annually.
Capital structure and borrowing costs
Sales tax deferral loan
Auto companies that have set up plants in certain notified areas are eligible to collect sales tax from customers and are required to pay the same after a few years without any interest charge, based on their total investment in the region. Under IGAAP, such interest-free loans are recognised at the amount collected throughout the tenure of the loan.
Under IFRS, such loans would be considered as financial liabilities and hence recognised at the present value of future cash flows. The difference between the nominal value (i.e., the amount collected from customers) and the present value of the loan would be recognised as a deferred government grant. The difference between the present value and the nominal value of the loan would be recognised as reduction in the value of the underlying fixed assets, or as a deferred income over the depreciable life of the underlying asset.
Borrowing costs
The borrowing costs under IGAAP are primarily determined based on the coupon rates on the financial instrument. As such, the borrowing costs in most cases represent an actual and separately earmarked cash outflow.
Under IFRS, the borrowing cost also includes the effects of routine non-lending transactions that also comprise a financing element. Consider, for instance, the above mentioned sales tax deferral loan. As stated above, the loan liability, which is initially calculated at the present value of future cash flows, shall subsequently be measured at amortised cost and the effects of unwinding of the discount would be recognised as borrowing costs.
Further, if the borrowing cost is attributable to the construction of a qualifying asset as defined under IAS 23, then such effects of unwinding of the loan liability shall also be capitalised to the carrying value of qualifying asset though there is no separate payment of interest made on the loan.
Securitisations
Stringent conditions for securitisation of loans will impact the financing arms of auto companies. Under IGAAP, an entity may de-recognise its assignments of loans and advances with credit enhancements as a ‘sale’ transaction.
Under IFRS, the assessment of retention or transfer of risks and rewards is a critical criterion to determine if de-recognition is appropriate. Legal transfer is not sufficient criteria to achieve ‘sale’ accounting.
Qualitative factors such as credit enhancement facilities provided by the originator to the special purpose trust or to a counterparty in the case of a direct assignment will also have to be evaluated to assess if the de-recognition criteria is met.
This may result in grossing-up of the balance sheet for ‘sold’ assets and related debt (sale proceeds). This, in turn, may impact debt equity ratios.
Group structure
Joint arrangements Under IFRS, consolidation is based on the control (both direct and indirect) over the entity rather than ownership. This may result in consolidation of some current JVs and associates and de-consolidation of certain JVs and subsidiaries based on contractual arrangements.
In the auto industry, the partnerships between Indian and foreign auto companies, where the Indian company may hold a majority stake but has shared control with the foreign company, may be impacted under IFRS eg: veto power with the foreign partner for approval of annual budgets and operating plans etc.
Based on the above guidance, if the consolidated entity is classified as an associate or a joint venture, the company would not be able to disclose the entire revenue of the investee in its consolidated financial statements.
Special Purpose Entity (SPE)
IFRS provides indicators to determine whether an entity controls an SPE, including an assessment of an entity’s exposure to the majority of risks and rewards of ownership of the SPE. Therefore, if the ‘control’ criteria over the SPE are met, the entity will be required to consolidate the SPE in its financial statements, even though it may have no legal ownership of the equity shares of the SPE.
In the automotive sector, the entity operates through a wide network of auto component manufacturers that work on an auto-pilot mechanism or are funded by the automotive company. Such arrangements need to be assessed for SPEs. If such entities are classified as SPEs and meet certain criterias, the SPEs are consolidated with the entity. Thus, all the assets and liabilities of these SPEs are recognised in the entity’s consolidated financial statements, thereby affecting key ratios of the entity. IGAAP does not provide for such guidance.
The financial and non-financial aspects relating to IFRS convergence need to be planned and tested in advance of the implementation date. Global experience has shown that the early adopters are generally more successful in managing the overall IFRS transition. The early-mover advantage not only provides adequate time to carry out required changes, but protects critical decisions being taken within the constraints of time and resources.
Purchase of immovable property by Central Government — Lease for 9 years renewable at option of lessee for a further period of 9 years would be covered by Explanation to S. 269UA(f)(i) attracting the provisions of Chapter XX-C.
17 Purchase of immovable property by Central Government —
Lease for 9 years renewable at option of lessee for a further period of 9 years
would be covered by Explanation to S. 269UA(f)(i) attracting the provisions of
Chapter XX-C.
[Govind Impex P. Ltd. & Ors. v. Appropriate Authority,
Income-tax Department, (2011) 330 ITR 10 (SC)]
The appellants, the owners of property bearing No. B-68,
Greater Kailash, Part-I, New Delhi had let out the same at monthly rental of
Rs.2,50,000 with effect from June 1, 1991 for a period of nine years renewable
for a further period of nine years. The Appropriate Authority of the Income-tax
Department, issued show-cause notice to the appellant dated December 4, 1995,
inter alia, alleging that since the lease is for a period of nine years
extendable for a further period of nine years, it was lease for a period of more
than 12 years and hence the provisions of Chapter XX-C of the Income-tax Act
would be attracted and the lessor and the lessee were obliged to submit Form
37-I within 15 days of the draft agreement. The appellants submitted their
show-cause on January 12, 1996, inter alia, contending that the lessee had an
option to renew the lease by giving three months’ notice prior to the expiry of
the lease and further a fresh lease deed was required to be executed and
registered, hence the provisions of Chapter XX-C of the Act would not be
attracted. The show cause filed by the appellants was considered and finding no
merit, the Appropriate Authority rejected the same by order dated April 24, 2001
holding the appellants guilty of not complying with the provisions of S. 269UC
of the Act. Accordingly, a complaint was made on April 30, 2001 u/s.276AB read
with S. 278B of the Act before the Additional Chief Metropolitan Magistrate,
alleging contravention of S. 269UC of the Act. The learned Magistrate by its
order dated April 30, 2001 took cognizance of the offence and issued process
against the appellants.
The appellants filed writ petition before the High Court for
quashing the aforesaid order dated April 24, 2001 of the Appropriate Authority
rejecting their show cause and deciding to file criminal complaint. However,
since the prosecution had already been launched against the appellants, the
Division Bench of the High Court directed for treating the writ petition as an
application u/s.482 of the Code of Criminal Procedure. Ultimately, the learned
Single Judge by order dated October 10, 2002 dismissed the same.
Aggrieved by the same the appellant have preferred an appeal
with the leave of the Supreme Court.
The Supreme Court observed that there was no serious dispute
in regard to the interpretation of the Explanation to S. 269UA(f) of the Act and
in fact, it proceeded on an assumption that it would cover only such cases where
there existed a provision for extension in the lease deed. According to the
Supreme Court, therefore, what it was required to consider was the terms and
conditions of lease. The Supreme Court observed that the terms of lease are not
to be interpreted following strict rules of construction. One term of the lease
cannot be taken into consideration in isolation. The entire document in totality
has to be seen to decipher the terms and conditions of lease. In the present
case, clause 1 in no uncertain term provided for extension of the period of
lease for a further period of nine years and clause 12 thereof provided for
renewal on fulfilment of certain terms and conditions. Therefore, when the
document was construed as a whole, it was apparent that it provided for the
extension of the term. If that was taken into account the lease was for a period
of not less than twelve years. Once it was held so the Explanation to S.
269UA(f)(i) was clearly attracted. The Supreme Court was of the opinion that the
High Court was right in observing that “on a conjoint reading of paragraphs 1
and 12 of the lease deed, the lessor intended the lease to last for 18 years”
and further the lessor could not have refused to renew/extend the lease after
the first term if the lessee complied with the conditions.
As the matter was pending since long, the Supreme Court
directed the Magistrate in seisin of the case to conclude the trial within six
months from the date of appearance of the appellants. It further directed the
appellants to appear before the Court in seisin of the case within six weeks
from date of the order.
High Court — Appeal lies only when substantial question of law is involved — Cash credits — Where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as income of the assessee of that previou
16 High Court — Appeal lies only when substantial question of
law is involved — Cash credits — Where any sum is found credited in the books of
the assessee for any previous year, the same may be charged to income-tax as
income of the assessee of that previous year, if the explanation offered by the
assessee about the nature and source thereof is in the opinion of the Assessing
Officer, not satisfactory.
[Vijay Kumar Talwar v. CIT, (2011) 330 ITR 1 (SC)]
The assessee was a partner in a firm, named and styled as
M/s. Des Raj Tilak Raj, having its business at Delhi, with a branch at Calcutta.
The said partnership firm was dissolved with effect from April 1, 1982. As per
dissolution deed, the assessee took over the business of the Calcutta branch of
the erstwhile firm. Thereafter, from October 21, 1982, the assessee started a
proprietary concern by the name of M/s. Des Raj Vijay Kumar.
On May 27, 1983, a search took place at the assessee’s
premises during which certain incriminating documents were recovered and seized.
During the course of assessment proceedings for the A.Y. 1983-84, for which the
previous year ended on March 31, 1983, the Assessing Officer examined the seized
record. One of the registers so examined, revealed cash receipts of Rs.3,49,991
in the name of 15 persons, most of which were purportedly received during the
period of April, 1982 to October, 1982. When the Assessing Officer sought an
explanation from the assessee with regard to the said cash credits in the
register, the assessee merely stated that the cash receipts were in the nature
of realisations from the past debtors of the erstwhile firm. In order to
appreciate the said stand, the Assessing Officer called for the account books of
the Calcutta branch of the erstwhile firm for the relevant period, but the
assessee failed to produce them. The Assessing Officer also examined the
assessee’s brother, a partner in the erstwhile firm, who also stated that the
account books were not available.
Having noted that the outstanding realisations of the
Calcutta branch in the preceding years varied from Rs.25,000 to Rs.30,000, the
Assessing Officer held that the assessee’s submission that cash receipts of
Rs.3,49,991 related to earlier years was untenable. Therefore, the Assessing
Officer added a sum of Rs.3,49,991 as the assessee’s income under the head
‘unexplained cash receipts’.
Aggrieved, the assessee appealed to the Commissioner of
Income-tax (Appeals) who dismissed the same and confirmed the addition made by
the Assessing Officer.
Being still aggrieved, the assessee carried the matter in
appeal before the Tribunal. The Tribunal remitted the matter back to the
Assessing Officer for de novo adjudication. The Tribunal inter alia observed
that some of the entries pertained to the period when the erstwhile firm was in
existence, whereas the assessee did not conduct business at Calcutta in a
proprietary capacity but was only a partner in the erstwhile firm.
Pursuant to the Tribunal’s order, the Assessing Officer asked
the assessee to file confirmations of the 15 parties in whose names cash credit
entries appeared in the register seized. In reply, the assessee filed
confirmations of seven parties with address of other six parties. The Assessing
Officer considered the two remaining parties as non-existent. The Assessing
Officer did not accept the confirmation filed because they were identical and it
did not contain GIR No. Also, when the letters were sent to those parties, four
letters were returned unserved, and one of the parties denied any relationship
with the firm. Out of the letter sent to six parties whose addresses had been
supplied, three did not respond, while two others denied any relationship with
the firm and remaining one letter was returned unserved. The Assessing Officer
therefore confirmed the original assessment. The assessee preferred an appeal
before the Commissioner of Income-tax (Appeals), which was dismissed. Still not
being satisfied, the assessee carried the matter in appeal before the Tribunal.
The Tribunal, held that the addition of Rs.3,49,991 was correct.
The assessee moved an application u/s.254(2) of the Act
before the Tribunal for rectification of mistakes in the order of the Tribunal,
which was rejected by the Tribunal.
The assessee preferred an appeal before the High Court
u/s.260A of the Act, which was dismissed holding that the findings recorded by
the Commissioner of Income-tax (Appeals) and the Tribunal were findings of fact
and no substantial question of law arose for consideration.
On further appeal, the Supreme Court held that it was
manifest from a bare reading of the Section that an appeal to the High Court
from a decision of the Tribunal lies only when a substantial question of law is
involved, and where the High Court comes to the conclusion that a substantial
question of law arises from the said order, it is mandatory that such questions
must be formulated. The expression ‘substantial question of law’ is not defined
in the Act. Nevertheless, it has acquired a definite connotation through various
judicial pronouncements. The Supreme Court referred to its decisions in Sir
Chunilal V. Mehta and Sons Ltd. v. Century Spinning and Manufacturing Co. Ltd.,
AIR 1962 SC 1311, Santosh Hazari v. Purushottam Tiwari, (2001) 3 SCC 179,
Hero Vinoth. (Minor) v. Seshammal, (2006) 5 SCC 545, Madan Lal v. Mst.
Gopi, (1980) 4 SCC 255 and Ors., in this regard.
Examining on the touch-stone of the principles laid down in the aforesaid decisions, the Supreme Court was of the opinion that in the instant case the High Court had correctly concluded that no substantial question of law arose from the order of the Tribunal. The Supreme Court observed that all the authorities below, in particular the Tribunal, had observed in unison that the assessee did not produce any evidence to rebut the presumption drawn against him u/s.68 of the Act, by producing the parties in whose name the amounts in question had been credited by the assessee in his books of account. In the absence of any evidence, a bald explanation furnished by the assessee about the source of the credits in question viz. realisation from the debtors of the erstwhile firm, in the opinion of the Assessing Officer, was not satisfactory. The Supreme Court held that it was well settled that in view of S. 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income-tax as the income of the assessee of that previous year, if the explanation offered by the assessee about the nature and source thereof is in the opinion of the Assessing Officer, not satisfactory. The Supreme Court was of the opinion that on a conspectus of the factual scenario, the conclusion of the Tribunal to the effect that the assessee had failed to prove the source of the cash credits could not be said to be perverse, giving rise to a substantial question of law. The Tribunal being the final fact finding authority, in the absence of demonstrated perversity in its finding, interference therewith by the Supreme Court was not warranted.
[Note : The decisions referred to in the judgment explains as to what is a substantial question of law and when findings of fact gives rise to question of law.]
Capital or revenue expenditure – Replacement of machinery in a spinning mill is not revenue expenditure.
25 Capital or revenue expenditure – Replacement of machinery
in a spinning mill is not revenue expenditure.
[A]
CIT vs. Sri Mangayarkar
Mills P. Ltd. [2009] 315 ITR 114 (SC)
Entries in the book of accounts may not be determinative as
to the nature of expenditure but were indicative of what the assessee himself
thinks of the expenditure.
The respondent assessee was engaged in the manufacture and
sale of cotton yarn. During the assessment year 1995-96, the assessee claimed an
amount of
Rs.61, 28,150 as being expenditure incurred on replacement of
machinery as revenue expenditure. The assessee believed that such expenditure
was merely expenditure on replacement of spare parts in the spinning mill system
and, therefore, amounted to revenue expenditure. The Assessing Officer (AO) did
not, however, accept this view of the assessee. According to him, each machine
in a spinning mill performs a different function and the product from one
machine is taken and manually fed into another machine and the output obtained.
All the machines are thus not integrally connected. Based on this reasoning, the
Assessing Officer disallowed the above claim of the assessee and held the said
expenditure to be of a capital nature. The AO further held that the assessee had
treated the said expenditure as capital expenditure by capitalizing the assets
in the books of account and had, thus, shown profit in its profit and loss
account to third parties like bankers, financial institutions, creditors,
shareholders, etc. However, from the tax point of view, the respondent wanted to
reduce the net profit and the total taxable income by claiming such huge
expenditure in the statement of total income computation for acquisition of
fixed assets as revenue expenditure. The AO further held that the assessee could
claim depreciation on the said assets as per Income-tax Rules.
On an appeal, the Commissioner of Income Tax (Appeals)
allowed the appeal of the assessee, inter alia, holding that the replacement of
machinery by the assessee in this case constituted revenue expenditure.
On appeal by the Revenue, the Tribunal followed the decision
of the Madras High Court wherein it was decided that replacement of the ring
frame constitutes only replacement of a part of the machinery in textile mills.
The Tribunal thus upheld the order of the Commissioner of Income-tax (Appeals)
and dismissed the appeal of the Revenue.
The High Court, relying on its own decision in CIT vs.
Janakiram Mills Ltd. [2005] 275 ITR 403 (Mad) and CIT vs. Loyal Textile Mills
Ltd. [2006] 284 ITR 658 (Mad), dismissed the appeal filed by the Revenue and
held that the expenditure on replacement of machinery was revenue in nature. The
High Court further held that the question whether the expenditure on replacement
of machinery was capital or revenue in nature was not determined by the
treatment given to it by the assessee in the books of account or in the
balance-sheet. The claim had to be determined only by relying on the provisions
of the Act and not by the accounting practice followed by the assessee.
On further appeal, the Supreme Court observed that the first
issue was whether each machine in a textile mill is an independent item or
merely a part of a complete spinning textile mill, which only together are
capable of manufacture — and there is no intermediate product produced.
According to the Supreme Court, this issue had been satisfactorily answered by
its decision in CIT vs. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 21 (SC).
In that case, the court had held unambiguously that “each machine in a segment
of a textile mill has an independent role to play in the mill and the output of
each division is different from the other.” The Supreme Court thus held that
each machine in a textile mill should be treated independently as such and not
as a mere part of an entire composite machinery of the spinning mill. It can at
best be considered part of an integrated manufacture process employed in a
textile mill.
On the issue of “current repairs” under section 31 of the
Act, in CIT vs. Saravana Spinning Mills P. Ltd. (Supra), it has been laid down
that in order to determine whether a particular expenditure amounted to “current
repairs”, the test was “whether the
expenditure was incurred to preserve and maintain”, an already existing asset
and not to bring a new asset into existence or to obtain a new advantage. For
“current repairs” determination, whether the expenditure was “revenue or capital
was not the proper test”.
The Supreme Court held that replacement of such an old
machine with a new one would constitute the bringing into existence of a new
asset in place of the old one and not repair of the old and existing machine.
Thus, replacement of assets as in the instant case could not amount to “current
repairs”, and the expenditure made by the assessee could not be allowed as a
deduction under Section 31 of the Act.
The Supreme Court observed that given that Section 31 of the
Act was not applicable to the said expenditure of the assessee, the next issue
was whether it could be considered “revenue expenditure” of the nature envisaged
under Section 37 of the Act. The Saravana Mills’ case held that the expenditure
was deductible under Section 37 only if it: (a) was not deductible under Section
30-36, (b) was of a revenue nature, (c) was incurred during current accounting
year, and (d) was incurred wholly and exclusively for the purpose of the
business. According to the Supreme Court, the assessee’s expenditure satisfied
requirements (a), (c) and (d) as stated above. The dispute was with respect to
the nature of expenditure, that is, whether it was revenue or capital in nature.
The Supreme Court was of the opinion that the expenditure of the assessee in
this case was capital in nature.
Before concluding, the Supreme Court observed that it was
clear on record that the assessee had sought to treat the said expenditure
differently for the purpose of computing its profit and for the purpose of
payment of income-tax. The said expenditure had been treated as an addition to
existing assets in the former and as revenue expenditure in the latter. Though
accounting practices may not be the best guide in determining the nature of
expenditure, in this case they were indicative of what the assessee itself
thought of the expenditure it made on replacement of machinery, and that the
claim for deduction under the Act was made merely to diminish the tax burden,
and not under belief that it was actually revenue expenditure.
Co-operative Society – Deduction under Section 80P(2)(e): An assessee-society engaged in distribution of controlled commodities on behalf of the government under Public Distribution System and getting commission is not entitled to deduction under section
26 Co-operative Society – Deduction under Section 80P(2)(e):
An assessee-society engaged in distribution of controlled commodities on behalf
of the government under Public Distribution System and getting commission is not
entitled to deduction under section 80P(2)(e), as it earned its income from
business and not from letting of godowns or warehouses for the purpose of
storage, processing or facilitating the marketing of commodities.
[B]
Udaipur Sahakari
Upbhokta Thok Bhandar Ltd. vs. CIT [2009] 315 ITR 21 (SC)
The appellant, a co-operative society registered under the
Rajasthan Co-operative Societies Act, 1965, was running a consumer co-operative
store at Udaipur since 1963. It had 30 branches. The appellant was dealing in
non-controlled commodities through its branches. In addition, the appellant was
also doing the work of distribution of controlled commodities such as wheat,
sugar, rice and cloth on behalf of the government under the public distribution
scheme (PDS) for which it was getting commission. The distribution of the
controlled commodities was regulated by the District Supply Officer (DSO
–Authorized Officer) under the Rajasthan Foodgrains and other Essential Articles
(Regulation of Distribution) Order, 1976 (for short, “the 1976 Order”). The
appellant claimed to be stockist/distributor of controlled commodities. It took
delivery from the Food Corporation of India (FCI) and the Rajasthan Rajya
Upbhokta Sangh, as per the directives of the state government. The price,
quantity and the person from whom the delivery was to be taken was fixed by the
state government under the said 1976 Order. After taking the delivery, the
appellant stored these goods in its godowns, both owned and rented. The storage
godowns were open to checking by the concerned officers of the state government.
The stocks stored by the appellant were delivered to fair price shops
(FPS-retailers), as per the directives of the state government. The quantity
price and the FPS to whom the delivery was to be given, were fixed by the state
government. According to the appellant, therefore, the above modus operandi
indicated that the state government exercised total control over the stock of
controlled commodities stored in the godowns of the appellant-society. On
February 28, 1977, the appellant was granted licence for purchase/sale/storage
for sale of foodgrains under the Rajasthan Foodgrains Dealers Licensing Order,
1964.
On August 31, 1990, the appellant filed its returns for the
assessment year 1989-90, claiming deduction under section 80P(2)(e) of the 1961
Act on the income of commission received by it from the government for storage
of controlled commodities. The appellant later filed its returns of income for
the subsequent assessment years 1990-91, 1991-92, 1992-93, 1993-94, 1994-95,
1995-96, inter alia, claiming deduction on the income of commission received by
it from the state government for storage of controlled commodities. Vide order
dated March 26, 1992, the AO (Assessing Officer) disallowed the claim on the
ground that the appellant-society was a wholesaler of foodgrains and it was not
a mere stockist as claimed, and consequently, it was not entitled to deduction
under section 80P(2)(e) of the 1961 Act. This order was applied for the
assessment years in question. Aggrieved by the assessment order(s), the
appellant filed appeals before the Commissioner of Income-tax (Appeals). The
Commissioner of Income-tax (Appeals) held that the appellant was entitled to
deduction under section 80P(2)(e) of the 1961 Act on the income of commission
received from the state government for stocking the above foodgrains. This
decision was affirmed by the Tribunal, vide its decision dated October 20, 2000,
dismissing the department’s appeal by a common order holding that the appellant
was entitled to deduction under the said section. This view of the Tribunal,
however, was overruled by the decision dated November 2, 2006, of the Rajasthan
High Court which took the view that the appellant-society was storing the said
controlled commodities in its godowns as part of its own trading stocks; that
the appellant acted as a trader in the essential commodities in question and
consequently the appellant was not entitled to deduction under section 80P(2)(e)
of the 1961 Act. Against the impugned decision, the appellant went to the
Supreme Court by way of petition for special leave.
The Supreme Court, at the outset, noted that the appellant
had composite business. The appellant was a dealer in non-controlled commodities
and it was an authorization holder in respect of controlled commodities under
the 1976 Order. It owned godowns and it also hired godowns on rent. It earned
commission during the relevant assessment years at the rate of 2.25 per quintal
(e.g. for rice). Under clause 20 of the 1976 Order, every authorization holder
had to comply with general or special directions given in writing from time to
time by the Collector in regard to purchase, sale, storage for sale,
distribution and disposal of controlled commodities. The Supreme Court further
noted that the appellant earned commission on the principle of “netting”. In
other words, the appellant set off “issue price” against “sale price” and
retained commission fixed at Rs.2.25 per quintal.
The Supreme Court, referring to the rate fixation mechanism
indicated by one of the orders issued on 12th March, 1987, w.e.f. 1st May, 1987
and adverting to the working given therein, observed that the said working
indicated that Rs.247.82 (issue price) was treated by the appellant as expense
and it was set off against the sale price of Rs.251.07. In other words, the
working indicated cost plus mechanism, i.e. Rs.247.82 was the cost plus profit
margin which included Rs.2.25 as commission. Therefore, Rs.2.25 was part of the
profit margin. The Supreme Court, referring to the written submissions filed by
the appellant, observed that the appellant had taken into its books of account
the consolidated value of the closing stock. According to the Supreme Court, the
circumstances reinforced the finding of the High Court in its impugned judgement
that the appellant was storing the commodities in its godowns as a part of its
own trading stock.
The Supreme Court noted that Section 81(iv), followed by the
Section 14(3)(iv) in the 1922 Act (as amended) was a predecessor to Section
80P(2)(e) of the 1961 Act; and it had come up for consideration before the
Gujarat High Court in the case of Surat Venkar Sahakari Sangh Ltd. vs. CIT
[1971] 79 ITR 722. In that case, it was inter alia held that:
(i) On a plain natural construction of the language used in
section 81(iv) that what is exempted under that section is income derived from
the letting of godowns or warehouses, provided the letting is for any of the
three purposes, namely, ‘storage’, ‘processing’ or ‘facilitating the marketing
of commodities”.
ii) On a proper interpretation of Section 14(3) (iv) and Section 81(iv), separate exemption is not granted in respect of income from the letting of godowns or warehouses for storage, income from processing and income from facilitating the marketing of commodities. But the exemption is available only in respect of income derived from letting of godowns or warehouses where the purpose of letting is storage, processing or facilitating the marketing of commodities.
The Supreme Court approved the reasoning given by the Gujarat High Court on the interpretation of Section 81(iv) and Section 14(3)(iv) of the 1922 Act. The Supreme Court held that on reading the above judgement, it became clear that under Section 80P(2) of the 1961 Act, an assessee is entitled to claim special deduction from its gross total income to arrive at total taxable income. The burden is on the assessee to establish that exemption is available in respect of income derived from the letting of godowns or warehouses, only where the purpose of letting is storage, processing or facilitating the marketing of commodities.
According to the Supreme Court two points arose for its determination, namely, whether the appellant acted as an agent of the government in the subject transaction, and the real nature of the payment received by the said society under the head “commission”. In the view of the Supreme Court, both the points stood covered by the judgement of the Supreme Court in A. Venkata Subbarao vs. State of Andhra Pradesh, AIR 1965 SC 1773. In that case, it was inter alia held that the margin or difference in the purchase and sale price was necessary in order to induce any one to engage in this business, and it was of the essence of a control over procurement and distribution which utilized normal trade channels. It would, therefore, be a misnomer to call it ‘remuneration’ or ‘commission’ allowed to an agent; and so, really no argument could be built on it in favour of the relationship being that of principal and agent. Coming to the question of agency, it was held that the government can derive no advantage from the words “procurement agent” mentioned in the Procuring Order, 1946, from the agreement executed by such procuring agent. The court specifically dismissed the argument advanced on behalf of the government that A. Vernkata Subbarao (appellant) had acted as an “agent” on behalf of the government.
Applying its judgement in the case of A. Venkata Subbarao, the Supreme Court held that the High Court was right in coming to the conclusion that the assessee was storing the commodities in question in its godowns as part of its own trading stock, hence, it was not entitled to claim deduction for such margin under Section 80P(2)(e) of the 1961 Act.
Recovery of Tax — Strangers to the decree are afforded protection by the Court because they are not connected with the decree.
15 Recovery of Tax — Strangers to the decree
are afforded protection by the Court because they are not connected with the
decree.
[Janatha Textiles & Ors. v. Tax Recovery Officer & Anr.,
(2008) 301 ITR 337 (SC)]
The appellant M/s. Janatha Textiles was a registered firm
with four partners, viz., Radhey Shyam Modi, Pawan Kumar Modi, Padmadevi
Modi and Indira Chirmar. The firm and its partners were in arrears of tax for
the A.Ys. 1985-86, 1986-87, 1987-88, 1989-90. All the demands pertaining to the
A.Ys. 1986-87 to 1989-90 had been stayed by various income-tax authorities and
these demands were never enforced for collection. The demand pertaining to the
A.Y. 1985-86 was alone enforced.
The agricultural lands owned by the partners of the
appellant-firm at Bodametlapalem had been attached and sold in public auction on
August 5, 1996, after following the entire procedure laid down under the Second
Schedule to the Income-tax Act, 1961. Nine people participated in the public
auction held on August 5, 1996. The sale was confirmed in favour of L. Krishna
Prasad who offered the highest price. No procedural irregularity or illegality
in public auction process was alleged by the appellant.
Even after issuance of sale proclamation, the
respondent-Department issued communication in SR No. 2/94 dated July 15, 1996,
informing the appellants that a sum of Rs.5,68,913 was due as on that date
towards tax, interest and penalty under the 1961 Act. The said amount, however,
does not include interest payable u/s.220(2) of the 1961 Act. The appellant-firm
acknowledged receipt of the letter on July 17, 1996, and had not contradicted
the quantum of tax and interest as mentioned in the said letter. It was made
clear that the demand for the A.Y. 1985-86 alone was being enforced.
In an SLP, learned counsel for the appellants contended that
even though they had filed objections at various stages of the notice issued for
the auction sale, the respondent-Department without disposing of the said
objections proceeded with the sale and, therefore, on that ground the sale
conducted by the respondent-Department was illegal and unsustainable. The
appellants further submitted that with reference to the A.Y. 1985-86, the
application for waiver of interest was pending before the authorities and
further the stay application filed before the Commissioner was not disposed of.
Even on that count also the sale conducted by the respondent-Department on
August 5, 1996, was illegal and unsustainable. The appellant contended that the
High Court had failed to notice that the nature of the lands in the auction
notice was wrongly mentioned as dry lands. In fact the said lands were a mango
orchard and building structure and of much higher value. The auction ought to be
vitiated on this ground alone.
The appellant also submitted that the appellants had received
the notice of demand as defaulters in their individual capacity and also as the
partners of the firm. However, the respondent-Department had failed to give
notice of demand to the appellants qua their shares. They did not receive
notices indicating their respective shares. It was asserted on behalf of the
respondent-Department that the amount fetched in the public auction was more
than reasonable.
The Supreme Court observed that the appellant had never
complained about fixing of the reserve price before holding of auction, though
they were intimated of the same through sale proclamation. In pursuance of the
notice issued by the Supreme Court, the respondent-Department had filed the
counter-affidavit. Respondent No. 2 (auction purchaser) also had filed a
separate counter-affidavit. Respondent No. 2 in the counter-affidavit stated
that it was totally incorrect to suggest that the auction sale did not fetch the
actual market value of the property. Respondent No. 2 also mentioned in the
counter-affidavit that the said lands were agricultural dry lands and there were
no mango gardens as alleged by the appellant. There were, however, a few mango
trees scattered all over the land.
The respondent-Department in the counter-affidavit stated
that the appellant-firm had alternative efficacious remedy by way of filing a
petition under Rules 60 and 61 of the Second Schedule to the 1961 Act. The
appellant ought to have availed of the statutory remedy for ventilating its
grievances instead of filing a petition before the High Court.
The Supreme Court further observed that there was another
very significant aspect of this case, which pertained to the rights of the
bona fide purchaser for value. The Supreme Court held that the law makes a
clear distinction between a stranger who is a bona fide purchaser of the
property at an auction sale and a decree-holder purchaser at a court auction.
Strangers to the decree are afforded protection by the Court, because they are
not connected with the decree. Unless the protection is extended to them court
sales would not fetch the market value or fair price of the property. The
Supreme Court held that the appeal was devoid of any merit and was accordingly
dismissed.
Export — Deduction u/s.80HHC — Duty drawback and cash compensatory allowance received in the year other than the year of exports is eligible for deduction u/s.80HHC of the Act in the year of receipt, in a case where assessee is following the cash system o
14 Export — Deduction u/s.80HHC — Duty
drawback and cash compensatory allowance received in the year other than the
year of exports is eligible for deduction u/s.80HHC of the Act in the year of
receipt, in a case where assessee is following the cash system of accounting.
[B. Desraj v. CIT, (2008) 301 ITR 439 (SC)]
The appellant was a sole proprietor of M/s. D. R. Enterprises
engaged in the business of export of textiles/fabrics. Consequent upon exports
made by him, inward remittance came into India in foreign exchange during the
accounting year ending 31-3-1991 (A.Y. 1990-91). However, the appellant
recovered cash compensatory allowance of Rs.7,74,785 and duty drawback of
Rs.35,565 in the next accounting year ending on 31-3-1992 (A.Y. 19991-92). The
appellant, who was following cash system of accounting, claimed deduction
u/s.80HHC on the aforesaid amounts in A.Y. 1991-92, that is, in the year of
receipt.
According to the AO, admittedly, the appellant had not made
export sales during A.Y. 1991-92 and therefore, the said duty drawback and cash
compensatory allowance did not constitute eligible income deductible from the
gross total income u/s. 80HHC. On appeal, the Commissioner of Income-tax
(Appeals) took the view that the above amounts were admittedly relatable to the
sales made during the earlier year and consequently, the Assessing Officer had
wrongly rejected the appellant’s claim for deduction u/s.80HHC. The Tribunal
upheld the decision of the Commissioner of Income-tax (Appeals).
On an appeal by the Department, the Madras High Court
overruled the decision of the Tribunal on the ground that during the A.Y.
1991-92, the assessee had received cash compensatory support and duty drawback
for the exports made in the earlier year and that there were no exports made in
that year and therefore, the said amounts did not constitute eligible income for
deduction u/s.80HHC.
On an appeal by the appellant, the Supreme Court
observed that by the Finance Act, 1990 it was clarified that cash compensatory
support and duty drawback would be taxable u/s.28(iiib) and in a Circular issued
by the CBDT it was clarified that export incentives, namely, cash compensatory
support and duty drawback have to be included in the profits of the business for
computing the deduction u/s.80HHC. According to the Supreme Court, with the
issuance of the said Circular, the point was no more res integra.
The Supreme Court after noting the formula for the purpose of computing
deduction u/s.80HHC observed that the business profits included export
incentives. The Supreme Court, therefore, held that the words ‘business profits’
in the formula u/s. 80HHC(3) would include cash compensatory allowance and duty
drawback, and the AO was directed to work out the deduction in accordance with
the law as it stood during the relevant A.Y. 1991-92.
Industrial undertaking: Deduction u/s. 80IB of I. T. Act, 1961: A Y 2002-03: Deduction allowable in respect of exchange rate difference:
Unreported :
41 Industrial undertaking: Deduction u/s. 80IB of I. T. Act,
1961: A Y 2002-03: Deduction allowable in respect of exchange rate difference:
CIT Vs. M/s. Rachna Udyog (Bom); ITA No. 2394 of 2009 dated
13/01/2010:
The assessee’s industrial undertaking was entitled to
deduction u/s. 80IB of the Income-tax Act, 1961. The Tribunal had allowed the
deduction in respect of (1) Duty drawback; (2) Export entitlement; (3) DEPB
licence, and (4) Exchange rate difference.
In an appeal by the Revenue, the Bombay High Court set aside
the order of the Tribunal as regards the first three items, in view of the
judgment of the Supreme Court in Liberty India Vs. CIT; (2009) 317 ITR 218 (SC).
And as regards the fourth item, the Bombay High Court held as below:
“i) In so far as the question of difference in the rate of
exchange is concerned, the submission of the assessee before the Assessing
Officer was that exchange rate fluctuation forms a part of the sale proceeds
eligible for deduction u/s. 80IB. According to the assessee, the receipt was
directly related to the process of carrying on the business of the industrial
undertaking. The export invoices were made in terms of US $. When the sale
proceeds of goods exported are received in India in convertible foreign
exchange, the rupee equivalent of the sale proceeds is liable to vary
consequent to the fluctuations in the rate of foreign exchange between the
date when the goods are exported and the date on which the sale proceeds are
received in India. In other words, it was the contention of the assessee that
the value of the goods exported remains the same but the rupee equivalent is
liable to vary due to fluctuation in the rate of foreign exchange.
Consequently, a book entry is made in order to ensure that the rupee
equivalent of the value of the goods exported out of India is correctly
reflected in the books of account, since the books are maintained in rupee
terms.
ii) We are of the view that the difference on account of
exchange rate fluctuation is liable to be allowed u/s. 80IB. The exchange rate
fluctuation arises out of and is directly related to the sale transaction
involving the export of goods of the industrial undertaking. The exchange rate
fluctuation between the rupee equivalent of the value of the goods exported
and the actual receipts which are realized arises on account of the sale
transaction. The difference arises purely as a result of a fluctuation in the
rate of exchange between the date of export and the date of receipt of
proceeds, since there is no variation in the sale price under the contract.
iii) In the circumstances, we would affirm the judgment of
the Tribunal in so far as the question of exchange rate fluctuation is
concerned.
Appeal to ITAT by undertaking owned by the government: Approval from the Committee on Disputes not required:
Unreported :
39 Appeal to ITAT by undertaking owned by the government:
Approval from the Committee on Disputes not required:
M/s. Shivshahi Punarvasan Prakalp Ltd. Vs. UOI (Bom); W. P. No. 2270 of
2009 dated 05/01/2010:
The petitioner is an undertaking owned by the Government of
Maharashtra. The Income Tax Appellate Tribunal dismissed the appeal filed by the
petitioner on the ground that no approval was obtained of the Committee on
Disputes constituted in pursuance of the judgment of the Supreme Court in ONGC
Vs CCE (1992 Suppl (2) SCC 432).
The Bombay High Court allowed the writ petition filed by the
assessee petitioner and held as follows:
“i) The Counsel appearing on behalf of the Revenue has
stated before the court that it was not, and is not the contention of the
Revenue that the approval of the Committee on Disputes was required in order
to prefer an appeal before the Income Tax Appellate Tribunal in a matter
relating to an adjudication of dispute relating to exaction of revenue under
the Income-tax Act, 1961. The learned counsel appearing on behalf of the
assessee has also adopted the same contention. In that view of the matter, the
basis on which the Tribunal dismissed the appeal, namely, on the footing that
approval had to be obtained from the Committee on Disputes appears to be
fallacious.
ii) During the course of this proceeding, we have requested
the Additional Solicitor General to assist the court. The Additional Solicitor
General states that the Union of India would be ready and willing to
constitute a committee to look into a dispute between the central government
and state government entities, on a case to case basis, if so directed by the
court; but this would not be necessary in a matter such as the present which
relates to the adjudication of a dispute under the Income-tax Act, 1961.
iii) Since we have come to the conclusion that the basis on
which the appeal was dismissed by the Tribunal was erroneous, it would be only
appropriate and proper to set aside the order of the Tribunal in order to
facilitate adjudication on merits. In the circumstances, the order of the
Tribunal is restored to the file of the Tribunal for a decision on its
merits.”
Capital gain or business income: Rule of consistency: Profit on sale of shares taken as capital gain in past: Assessment of such profit as business income in the relevant year as business income: Not just:
In The High Courts
K. B. Bhujle
Advocate
Unreported :
40 Capital gain or business income: Rule of consistency:
Profit on sale of shares taken as capital gain in past: Assessment of such
profit as business income in the relevant year as business income: Not just:
CIT Vs. Gopal Purohit (Bom); ITA No. 1121 of 2009 dated
06/01/2010:
In an appeal u/s. 260A of the Income-tax Act, 1961 by the
Revenue before the Bombay High Court, the following two queries were raised:
"a) Whether, on the facts and circumstances of the case
and in law, the Hon’ble ITAT was justified in treating the income from sale
of 7,59,003 shares for Rs. 5,00,12,879/- as an income from short-term
capital gain, and the sale of 3,88,797 shares for Rs. 6,65,02,340/- as
long-term capital gain, as against the "Income from business" assessed by
the A.O.
b) Whether, on the facts and circumstances of the case
and in law, the Hon’ble ITAT was justified in holding that the principles of
consistency must be applied here as the authorities did not treat the
assessee as a share trader in preceding year, in spite of existence of a
similar transaction, which cannot in any way operate as res judica to
preclude the authorities from holding such transactions as business
activities in current year
The Bombay High Court held as hereunder:
"i) The Tribunal has achieved a pure finding of fact that
the assessee was engaged in two different types of transactions. The first
set of transactions involved investment in shares. The second set of
transactions involved dealing in shares for the purpose of business. The
tribunal has correctly applied the principle of law in accepting the
position that it is open to an assessee maintaining two separate portfolios:
one relating to investment in shares and another relating to business
activities involving dealing in shares. The tribunal held that delivery
based transactions in the present case should be treated as those in the
nature of investment transactions, and the profit received thereof should be
treated either as short-term or, as the case may be, long-term capital gain,
depending on the period of holding. A finding of fact has been arrived at by
the Tribunal as regards the existence of two distinct types of transactions,
namely, those by way of investment on the one hand, and those for the
purposes of business on the other hand. Query (a) above, does not raise any
substantial question of law.
ii) In so far as query (b) is concerned, the Tribunal has
observed in paragraph 8.1 of its judgment that the assessee has followed a
consistent practice with regard to the nature of the activities, the manner
of keeping records and the presentation of shares as investment at the end
of the year, in all the years. The Revenue submitted that a different view
should be taken for the year under consideration, since the principle of res
judicata is not applicable to assessment proceedings. The Tribunal correctly
accepted the position that the principle of res judicata is not attracted
since each assessment year is separate in itself. The Tribunal held that
there ought to be uniformity in treatment and consistency when the facts and
circumstances are identical, particularly in the case of the assessee. This
approach of the Tribunal cannot be faulted. The Revenue did not furnish any
justification for adopting a divergent approach for the assessment year in
question. Query (b), therefore, does not also raise any substantial
question."
Liability of Trust : Assessee, a provident fund trust of employees : Assessable in the status of individual : Not liable to TDS u/s.194A
55 TDS : Liability of Trust : S. 194A of
Income-tax Act, 1961 : A.Ys. 2002-03 to 2005-06 : Assessee Corporation, a
provident fund trust of employees : Assessable in the status of individual : Not
liable to deduct tax at source u/s.194A.
[CIT v. Food Corporation of India Contributory Provident
Fund Trust, 218 CTR 625 (Del.)]
The assessee is a provident fund trust of the employees.
The Assessing Officer found that the amounts being credited to the account of
the ex-employees after cessation of employment, had the character of interest.
The AO held the assessee was required to deduct tax at source u/s.194A of the
Income-tax Act, 1961 on the interest so credited. The assessee having failed
to do so was treated as being in default and demands were raised u/s.201(1) &
201(1A) of the Act. The Tribunal held that the assessee being assessed to tax
in the status of an individual, was not liable to deduct tax at source
u/s.194A and accordingly deleted the demands.
On appeal by the Revenue, the Delhi Court upheld the
decision of the Tribunal and held as under :
“Assessee corporation, a provident fund trust of employees
created after seeking exemption u/s. 16 of the Employees Provident Fund Act,
1952, being assessable in the status of individual, was not liable to deduct
tax at source u/s.194A while crediting amounts to the account of
ex-employees.”
Charitable purpose : Exemption u/s.11 : Determination of the percentage of funds to be applied for the purposes of trust depreciation to be taken into account
Reported :
47 Charitable purpose :
Exemption u/s.11 of Income-tax Act, 1961 : A.Y. 2005-06 : Determination of
the percentage of funds to be applied for the purposes of trust depreciation
allowable should be taken into account.
[CIT v. Market
Committee, Pipli, 330 ITR 16 (P&H)]
The assessee is a
charitable trust eligible for exemption u/s.11 of the Income-tax Act, 1961.
For the A.Y. 2005-06, for the purpose of ascertaining whether 85% of the
funds were applied for purposes of trust, the AO disallowed the depreciation
on the ground that since the income of the assessee was exempt u/s.11,
allowing depreciation would amount to conferring double benefit. The
Tribunal allowed the assessee’s claim.
On appeal by the
Revenue, the Punjab and Haryana High Court upheld the decision of the
Tribunal and held as under :
“The income of the
assessee being exempt, the assessee was only claiming that depreciation
should be reduced from the income for determining the percentage of funds
which had to be applied for the purposes of the trust. There was no double
deduction claimed by the assessee. It could not be held that double benefit
was given in allowing the claim for depreciation for computing income for
purposes of S. 11.”
(iv) In the instant
case, the consideration for selling 52% of the site was four flats
representing 48%. All the four flats were situated in a residential
building. Those four residential flats constituted ‘a residential house’ for
the purpose of S. 54. Profit on sale of property was used for residence. The
four residential flats could not be construed as four residential houses for
the purpose of S. 54. They had to be construed only as ‘a residential house’
and the assessee was entitled to the benefit accordingly.
(v) In that view of the
matter, the Tribunal as well as the Appellate Authority were justified in
holding that there was no liability to pay capital gain tax as the case
squarely fell u/s. 54.”
Capital gains : Exemption u/s.54 : Joint development agreement for development of assessee’s residential property : Assessee to get 4 flats : Assessee entitled to benefit u/s.54 in respect of entire value of four flats.
Reported :
46 Capital gains : Exemption
u/s.54 of Income-tax Act, 1961 : A.Y. 2004-05 : Joint development agreement for
development of assessee’s residential property into 8 residential units :
Assessee to get 4 flats as her share : Assessee was entitled to benefit u/s.54
in respect of entire value of four flats.
[CIT v. Smt. K. G.
Rukminiamma, 196 Taxman 87 (Kar.)]
The assessee had a
residential property on certain land. Under a joint development agreement, she
gave that property to a builder for putting up flats. The builder agreed to
construct residential apartments and agreed to deliver 48% of the super-built
area to the assessee in the form of residential apartments. The entire cost of
construction and other expenses were to be borne by the builder. Accordingly,
the builder constructed eight flats and handed over four flats to the assessee.
The assessee claimed benefit of S. 54F and, therefore, she declared capital gain
as ‘Nil’. The Assessing Officer disallowed the assessee’s claim and computed
capital gain by taking cost of construction of four flats as sale consideration
for transfer of property. The Commissioner (Appeals) held that the assessee was
entitled to deduction u/s.54 and not u/s.54F. The Tribunal dismissed the
Revenue’s appeal.
On appeal to the High Court,
the Revenue contended that u/s.54, the expression used is ‘a residential house’,
which would mean that if more than one residential house is acquired as in the
instant case, the benefit can be extended only in respect of one residential
flat.
The Karnataka High Court
held as under :
“(i) A reading of S. 54
makes it very clear that the property sold is referred to as original asset
in the Section. That original asset is described as buildings or lands
appurtenant thereto and being a residential house. Therefore, it is not
merely ‘a residential house’. The residential house may include buildings or
lands appurtenant thereto. The stress is on the use to which the property is
put to. Only when that asset is used as a residential house, which may
consist of buildings or lands appurtenant thereto, the income derived from
the sale of such a residential house is chargeable under the head ‘income
from house property.’
(ii) If the assessee
has, within a period of one year before or two years after the date on which
the transfer took place, purchased or has within a period of three years
after that date, constructed a residential house, then instead of the
capital gain being charged to income-tax as income of the previous year in
which the transfer took place, it shall be dealt with in accordance with the
aforesaid provisions. In this part of the Section also, the expression ‘a
residential house’ is again used. The said residential house necessarily has
to include buildings or lands appurtenant thereto. It cannot be construed as
one residential house.
(iii) The context in
which the expression ‘a residential house’ is used in S. 54 makes it clear
that it was not the intention of the legislation to convey the meaning that
it refers to a single residential house. If that was the intention, they
would have used the word ‘one’. As in the earlier part, the words used are
buildings or lands which are plural in number and that is referred to as ‘a
residential house’, the original asset, an asset newly acquired after the
sale of the original asset also can be buildings or lands appurtenant
thereto, which also should be ‘a residential house’. Therefore, the letter
‘a’ in the context it is used should not be construed as meaning ‘singular’.
But, being an indefinite article, the said expression should be read in
consonance with the other words ‘buildings’ and ‘lands’ and, therefore, the
singular ‘a residential house’ also permits use of plural by virtue of S.
13(2) of the General Clauses Act.
(iv) In the instant
case, the consideration for selling 52% of the site was four flats
representing 48%. All the four flats were situated in a residential
building. Those four residential flats constituted ‘a residential house’ for
the purpose of S. 54. Profit on sale of property was used for residence. The
four residential flats could not be construed as four residential houses for
the purpose of S. 54. They had to be construed only as ‘a residential house’
and the assessee was entitled to the benefit accordingly.
(v) In that view of the
matter, the Tribunal as well as the Appellate Authority were justified in
holding that there was no liability to pay capital gain tax as the case
squarely fell u/s. 54.”
Business income : Benefit or perquisite S. 28(iv) has no application to any transaction involving money : Loan obtained from bank : Paid part of principal : One-time settlement : Bank waived principal amount and interest : S. 28(iv) not applicable : Waive
Reported :
45 Business income : Benefit
or perquisite from business or profession : S. 28(iv) of Income-tax Act, 1961 :
A.Y. 2001-02 : S. 28(iv) has no application to any transaction involving money :
Assessee had obtained a bank loan for acquiring capital assets : Paid part of
principal amount : One-time settlement : Bank waived outstanding due of
principal amount and interest : Transaction being a loan transaction, S. 28(iv)
would not apply : Amount of waiver could not be termed as income u/s.2(24).
[Iskraemeco Regent Ltd.
v. CIT, 196 Taxman 103 (Mad.)]
The assessee was engaged in
the business of development, manufacturing and marketing of electro-mechanical
and static energy meters. It had taken a loan from the bank for purchase of
capital assets. In view of loss suffered, the assessee went before the BIFR. In
terms of the scheme of rehabilitation sanctioned by the BIFR, a one-time
settlement was arrived at between the assessee and the bank, under which the
bank waived the outstanding due of principal amount and interest. The assessee
credited the waiver of principal amount to the ‘capital reserve account’ in the
balance sheet treating it as capital in nature. The Assessing Officer treated
the said amount as ‘income’ u/s.28(iv), read with S. 2(24). The Tribunal upheld
the addition.
On appeal by the assessee,
the Madras High
Court reversed the decision of the Tribunal and held as under :
(i) S. 28(iv) speaks
about the benefit or perquisite received in kind. Such a benefit or
perquisite received in kind other than in cash would be an income as defined
u/s.2(24). In other words, to any transaction which involves money, S.
28(iv) has got no application.
(ii) Therefore, the
transaction in the instant case being a loan transaction having no
application with respect to S. 28(iv), the same could not be termed as an
income within the purview of S. 2(24). In other words, inasmuch as S. 28(iv)
was not applicable to the transaction on hand, it could not be termed as
income which could be made taxable as receipt.
(iii) Hence, such a
receipt which did not have any character of an income being that of a loan
could not be made exigible to tax.
(iv) Similarly, S.
41(1)(a) also could not have any application inasmuch as the said provision
would be applicable only to a trading liability. Accordingly, a loan
received for the purpose of capital asset would not constitute a trading
liability and, hence, S. 41(1) had no application.
(v) The Revenue
submitted that the facts involved in the instant case would come under the
purview of S. 28(i). The said contention could not be accepted for the
simple reason that it was not the case of the Assessing Officer as well as
the other authorities that the instant case would come under the purview of
S. 28(i).
(vi) The authorities
proceeded only on the footing that S. 28(iv) would be applicable. Further,
S. 2(24) defines ‘income’. While defining ‘profit and gains’, it refers to
the transactions involved u/s.28(iv). Therefore, inasmuch as the provision
contained u/s.28(i) having been not defined as income u/s.2(24), the same
would not partake the character of the income and, therefore, it is not
assessable to tax.
(vii) In other words,
only an income as defined u/s.2(24) can be made assessable to tax. It is a
well-established principle of law that all receipts are not income and,
therefore, liable to be taxed.
(viii) Insofar as the
reference made u/s.36(1)(iii) was concerned, said Section speaks about other
deductions. The said provision deals with the amount of interest paid in
respect of capital borrowal for the purpose of business. Therefore, it had
no relevance to the instant case.
(ix) Accordingly, the
assessee’s appeal was to be allowed by setting aside the orders passed by
the authorities below.”
Block assessment :Proceedings u/s. 158BD initiated on the basis of statement recorded during search and not on any books of account or asset : Proceedings u/s.158BD not legal.
Reported :
43 Block assessment :
Proceedings u/s.158BD of Income-tax Act, 1961 : Proceedings u/s. 158BD initiated
on the basis of statement recorded during search and not on any books of account
or asset : Proceedings u/s.158BD not legal.
[CIT v. Late Raj Pal
Bhatia, 237 CTR 1 (Del.)]
Search was carried out at
the premises of one C. No books of account or other documents or assets pertaining to assessee were found or seized during the search. The
Assessing Officer initiated proceedings u/s.158BD of the Income-tax Act, 1961
against the assessee on the basis of the statement of C recorded during the said
search operation. The Tribunal held that the initiation of the proceedings
u/s.158BD against the assessee was illegal.
On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held
as under :
“(i) In the present
case, admittedly, during the search carried out at the premises of C, no
books of accounts or other documents or other assets pertaining to the
assesses herein were found or seized. The entire foundation of the block
assessment u/s.158BD, insofar as assesses are concerned, was the statement
of C recorded during the course of search. Admittedly, statement of C is
neither ‘books of accounts’ nor ‘assets’. Statement was not the document
which was found during search. In fact this was the document which came to
be created during the search as the statement was recorded at the time of
search. Therefore, it cannot be said that the statement was ‘seized’ during
the search, and thus, would not qualify the expression ‘document’ having
been seized during the search. In such a scenario, proper course of action
was reassessment u/s.147.
(ii) The Tribunal has
deleted the addition taking a view that the very provision of S. 158BD
invoked by the Assessing Officer and initiating block assessment proceedings
itself was illegal. Therefore, no substantial question of law arises and
accordingly these appeals are dismissed in limine.”
Business expenditure : Disallowance u/s. 40A(2) Assessee-company purchased goods from its subsidiary at higher rate — Assurance of huge quantity of uniform quality : Assessee and subsidiary in same tax bracket : No disallowance : Subsidiary is not a ‘rela
Reported :
44 Business expenditure :
Disallowance u/s. 40A(2) of Income-tax Act, 1961 : A.Y. 1985-86 : Assessee-company
purchased goods from its subsidiary company at higher rate in view of assurance
of supply of huge quantity of uniform quality : Assessee and subsidiary in same
tax bracket and paid same rate of tax : No disallowance could be made u/s.40A(2)
: Subsidiary company is not a ‘related person’ u/s.40A(2)(b) : S. 40A(2) not
attracted.
[CIT v. V. S. Dempo & Co.
(P) Ltd., 196 Taxman 193 (Bom.)]
The assessee-company was
engaged in the business of extraction and export of iron ore. During the
relevant assessment year, it purchased iron ore from its subsidiary company. The
Assessing Officer held that the prevailing rates of sale/purchase of the same
grade of iron ore in the State were lower than the rate at which the assessee
had purchased the ore from its subsidiary and, therefore, the provisions of S.
40A(2) were attracted. The Assessing Officer, accordingly, made certain
disallowance. On appeal, the Commissioner (Appeals) held that the rates at which
the iron ore was purchased by the assessee from its subsidiary were determined
under a contract, under which the assessee was assured a huge quantity and
quality of ore and, therefore, the assessee was justified in paying the higher
rate than the rate at which the ore was available during the relevant time on
non-contractual basis. The Commissioner (Appeals) further held that the assessee
was a company and the seller of the goods was also a company and, therefore, the
rate of tax applicable to both of them was identical, namely, the highest rate
of tax. Therefore, by buying ore at rate higher than the market rate, there was
no reduction in the amount of tax payable. The Commissioner (Appeals),
accordingly, deleted the addition. The Tribunal confirmed the order of the
Commissioner (Appeals).
On appeal by the Revenue the Bombay High Court upheld the decision of the Tribunal and held as under:
“(i) In a business of export, consistency of supply as well as quality of supply is important. In order to assure a consistent supply of material of the same quality, the purchaser of a commodity may pay to a seller bound under a contract a little higher than the current rate. Furthermore, in case of yearly contracts by agreeing to buy goods at a specified rate, the exporter is insulated from vagaries of any seasonal rise in the market rate. Therefore, unless the rate agreed is so very much excessive or unreasonable as to doubt the objective behind the agreement, it cannot be said that the rate, a little higher than the seasonal market rate, is unjustified or amounts to diversion of profit. In that connection, the fact that the assessee as well as its subsidiary company, which was the seller, were in the same tax bracket and paid the same rate of tax assumed importance.
(ii) Admittedly, it was not a case of tax evasion inasmuch as if the rate would have been less, the assessee’s profit would have been more, but the profits of the seller would have been less and both being taxable at the same rate, there would be no difference in the aggregate tax payable by the assessee and its subsidiary.
(iii) Further, the object of S. 40A(2) is to prevent diversion of income. An assessee, who has large income and is liable to pay tax at the highest rate prescribed under the Act, often seeks to transfer a part of his income to a related person who is not liable to pay tax at all or liable to pay tax at a rate lower than the rate at which the assessee pays the tax. In order to curb such tendency of diversion of income and thereby reducing the tax liability by illegitimate means, S. 40A was added to the Act by an amendment made by the Finance Act, 1968.
(iv) Clause (b) of S. 40A(2) gives the list of related persons. It is only where the payment is made by the assessee to the related persons mentioned in clause (b) of S. 40A(2), that the Assessing Officer gets jurisdiction to disallow the expenditure or a part of the expenditure which he considers excessive or unreasonable. The Revenue submitted that the instant case fell under sub-clause (ii) or sub-clause (iv) of clause (b) of S. 40A(2). Sub-clause (ii) provides that where the assessee is a company, firm, AOP or HUF, any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member would be a related person. In the instant case, the assessee was a company and the seller was its subsidiary company. The seller, i.e., the subsidiary company did not fall in any of the categories mentioned under sub-clause (ii) of clause (b). Only a director of the company, partner of the firm, or member of the association or family or any relative of such director, partner or member is a related person under sub-clause (ii) of clause (b) of Ss.(2). Another company, even if it is a subsidiary of the assessee, is not a related person within the meaning of sub-clause (ii) of clause (b) of
S. 40A(2). Sub-clause (iv) of clause (b) of S. 40A(2) provides that in case of a company, firm, AOP or HUF having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member is a related person. Again a subsidiary company does not fall in any of the class of persons mentioned in sub-clause (iv) of clause (b) of S. 40A(2). In law, a holding company is a member of subsidiary company and holds more than 50 per cent equity share capital of the subsidiary company (except in cases where it controls the composition of the board of directors without holding majority of the shares). While the holding company is a member of its subsidiary company, the subsidiary company is not a member of the holding company. As the subsidiary company was not a member of the assessee, sub-clause (iv) of clause (b) of S. 40A(2) was also not attracted in the instant case.
(v) Therefore, there was no merit in the appeal and same was to be dismissed.”
Appellate Tribunal : Power u/s.254(2) : Power to recall order : No absolute prohibition : Prejudice caused to party by mistake to be seen
Reported :
42 Appellate Tribunal :
Power u/s.254(2) of Income-tax Act, 1961 : A.Ys. 2000-01 to 2005-06 : Power to
recall order : No absolute prohibition : Prejudice caused to party by mistake to
be seen.
[Lachman Das Bhatia
Hingwala (P) Ltd. v. ACIT, 330 ITR 243 (Del.) (FB)]
Dealing with the scope of
power of the Tribunal u/s.254(2) of the Income-tax Act, 1961, in this case the
Full Bench of the Delhi High Court explained the decision of the Supreme Court
in Honda Siel Power Products Ltd. v. CIT, 295 ITR 466 (SC) and held as under :
“(i) In CIT v. Honda
Siel Power Products Ltd., 293 ITR 132 (Del.), the High Court considered the
contention that the recall of the Tribunal’s entire decision was prohibited
on the basis that in the garb of rectification, the order cannot be
recalled. The application for rectification was filed as the Tribunal had
not taken note of a binding precedent, though it was cited before the
Tribunal. In that factual background, the Supreme Court held that the power
of rectification has been conferred on the Tribunal to see that no prejudice
is caused to either of the parties appearing before it by its decision based
on a mistake apparent on record and that atonement to the wronged party by
the Court or the Tribunal for the wrong committed by it has nothing to do
with the inherent power to review. The Court took note of the fact that the
Tribunal committed a mistake in not considering material which was already
on record and the Tribunal acknowledged its mistake and accordingly
rectified its order.
(ii) The decision of the
Supreme Court in Honda Siel Power Products Ltd. v. CIT, 295 ITR 466 (SC) is
an authority for the proposition that the Tribunal in certain circumstances
can recall its own order and S. 254(2) of the Act does not totally prohibit
so. Decisions which lay down the principle that the Tribunal under no circumstances can recall its order in entirety do not lay down the correct statement of law.
(iii) The Tribunal,
while exercising the power of rectification u/s.254(2) of the Act, can
recall its order in entirety if it is satisfied that prejudice has resulted
to the party which is attributable to the Tribunal’s mistake, error or
omission and which error is a manifest error and it has nothing to do with
the doctrine or concept of inherent power of review.”
Business deductions : Restriction u/s.80IA(9) applies for the total amount allowable as deduction and not for the computation.
Unreported :
41 Business deductions :
Computation of the amount for deduction and the amount allowable as deduction :
Restriction u/s. 80IA(9) of Income-tax Act, 1961 : A.Y. 2003-04 : Restriction
u/s.80IA(9) applies for the total amount allowable as deduction and not for the
computation.
[Associated Capsules Pvt.
Ltd. v. Dy. CIT, (Bom.); ITA No. 3036 of 2010, dated 10-1-2011]
The following question was
considered by the Bombay High Court regarding the restriction u/s. 80IA(9) of
the Income-tax Act, 1961 :
“Whether the Tribunal was
justified in holding that S. 80IA(9) of the Income-tax Act, 1961 mandates that
the amount of profits allowed as deduction u/s.80IA(1) of the Act has to be
reduced from the profits of the business of the undertaking while computing
deduction under any other provisions under heading ‘C’ in Chapter VI-A of the
Income-tax Act, 1961.”
The High Court answered the
question in the negative, i.e., in favour of the assessee and held as under :
“(i) In our opinion, the
reasonable construction of S. 80IA(9) would be that where deduction is
allowed u/s.80IA(1), then the deduction computed under other provisions
under heading ‘C’ of Chapter VI-A has to be restricted to the profits of the
business that remains after excluding the profits allowed as deduction
u/s.80IA, so that the total deduction allowed under the heading ‘C’ of
Chapter VI-A does not exceed the profits of the business.
(ii) S. 80IA(9) does not
affect the computability of deduction under various provisions under heading
‘C’ of Chapter VI-A, but it affects the allowability of deductions computed
under various provisions under heading ‘C’ of Chapter VI-A, so that the
aggregate deduction u/s.80IA and other provisions under heading ‘C’ of
Chapter VI-A do not exceed 100% of the profits of the business of the
assessee.
(iii) Our above view is
also supported by the CBDT Circular No. 772, dated 23-12-1998, wherein it is
stated that S. 80IA(9) has been introduced with a view to prevent the
tax-payers from claiming repeated deductions in respect of the same amount
of eligible income and that too in excess of the eligible profits.
(iv) Thus, the object of
S. 80IA(9) being not to curtail the deductions computable under various
provisions under heading ‘C’ of Chapter, it is reasonable to hold that S.
80IA(9) affects allowability of deduction and not computation of deduction.
(v) To illustrate, if
Rs.100 is the profit of the business of the undertaking, Rs.30 is the
profits allowed as deduction u/s.80IA and the deduction computed as per S.
80HHC is Rs.80, then, in view of S. 80IA(9), the deduction u/s.80HHC would
be restricted to Rs.70, so that the aggregate deduction does not exceed the
profits of the business.”
Transfer of case: S. 127 of I. T. Act, 1961: Before transfer, assessee should be given reasonable opportunity of hearing:
Reported:
47 Transfer of case: S. 127 of I. T. Act, 1961: Before
transfer, assessee should be given reasonable opportunity of hearing:
Reasons must be recorded and must be part of the order of
transfer:
Deep Malhotra Vs. Chief CIT; 185 Taxman 290 (P&H):
Allowing the writ petition challenging the transfer of case
u/s. 127 of the Income-tax Act, 1961, the Punjab & Haryana High Court held as
under:
“i) The legislature has provided by Section 127(2) that
before transferring any case from one
Assessing Officer, subordinate to him, to another Assessing Officer, the
assessee is required to be given reasonable opportunity of hearing and the
reasons are to be recorded for passing such an order.
ii) The provisions of section 127(2), in substance, provide
for hearing, besides requiring an agreement between the Chief Commissioner and
Commissioner of transferring the place where the cases are to be transferred.
Further, the agreements between both the Commissioners cannot be withheld from
the assessee and a copy thereof also has to be furnished to the assessee.
iii) The argument of the Revenue that the reasons had been
recorded in a separate order would not satisfy the requirement of section 127;
because the reasons have to be part of the order and recording of separate
reasons on file without communicating the same to the assessee, has been
considered as unfair and unwarranted. Therefore, the aforesaid argument was to
be rejected.
iv) For the reasons aforementioned, the impugned order was
to be set aside.”