July Archives

Income from house property vs. income from other sources – Section 22, 28(i) & 56 – A. Y. 2008-09 – Income from licensing of terrace floor for telecom antenna, constructing room for its personnel and storage – receipts are income from house property –

Naigara Hotels and Builders (P) Ltd. vs. CIT; 286 CTR 94 (Del):

The assessee had let out the terrace floor for raising telecom antenna and constructing a room for its personnel and storage. The Assessee offered the license fees as income from house property. The Assessing Officer assessed it as business income. The Tribunal held that it is income from other sources.

On appeal the Delhi High Court allowed the assessee’s claim and held that the income is to be assed under the head “Income from house property.”

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Inland port – Deduction u/s. 80-IA – A. Y. 2009- 10 – Container freight stations are inland ports within the meaning of section 80IA(4)(i) – Assessee entitled to benefit u/s. 80IA –

CIT vs. Kailash Shipping Services P. Ltd.; 283 ITR 630 (Mad):

The assessee is a clearing and forwarding agent. For the A. Y. 2009-10 the assessee claimed deduction u/s. 80IA of the Income-tax Act, 1961, on the container freight station. The Assessing Officer disallowed the claim holding that the container freight station could not be classified as an inland port for the purpose of section 80IA(4)(i) of the Act. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The office memorandum of Ministry of Commerce and Industry dated May 21, 2009 clarified the status of the container freight stations as inland ports and the Chennai Port Trust had issued a certificate stating that the container freight station of the assessee might be considered an extended arm of the port in accordance with the CBDT Circular No. 793 dated 23/06/2000 read with Circular No. 133 of 1995 dated 22/12/1995 of CBEC.

ii) The assessee was entitled to the benefit u/s. 80IA of the Act.”

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Industrial Undertaking – Special Deduction – Profits derived from business – So long as the profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies (which reimburses, wholly or partially, costs actually incurred) is the Government would make no difference and thus are qualified for deduction u/s. 80-IB(4)

CIT vs. Meghalaya Steels Ltd. [2016] 383 ITR 217 (SC)

The
assessee was engaged in the business of manufacturing of steel and
ferro silicon. The assessee submitted its return of income for the year
2004-05 disclosing an income of Rs.2,06,970 after claiming deduction
u/s. 80-IB of the Income Tax Act, 1961 on the profits and gains of
business of its industrial undertaking. The assessee had received the
following amounts on account of subsides:

The
Assessing Officer, in the assessment order held that the amounts
received by the assessee as subsides were revenue receipts and did not
qualify for deduction u/s. 80-IB(4) of the Act and accordingly, the
assessee’s claim for deduction of an amount of Rs.2,74,09,386 on account
of the three subsidies aforementioned were disallowed. The assessee
preferred an appeal before the Commissioner of Income-tax (Appeals),
who, dismissed the appeal of the assessee. Aggrieved by the aforesaid
order, the assessee preferred an appeal before the Income-tax Appellate
Tribunal which allowed the appeal of the assessee. The Revenue carried
the matter to the High Court u/s. 260A of the Act, which decided the
matter against the Revenue. The Revenue therefore filed an appeal before
the Supreme Court against this judgment.

The Supreme Court
analysed all the decisions cited on behalf of the Revenue. The Supreme
Court noted that in the first decision, that is, in Cambay Electric
Supply Industrial Co. Ltd. vs. CIT (113 ITR 84), it was held that since
an expression of wider import had been used, namely, “attributable to”
instead of “derived from”, the Legislature intended to cover receipts
from sources other than the actual conduct of the business of generation
and distribution of electricity. In short, a step removed from the
business of the industrial undertaking would also be subsumed within the
meaning of the expression “attributable to”. The Supreme Court observed
that since it was directly concerned with the expression “derived
from”, this judgment was relevant only in so far as it made distinction
between the expression “derived from”, as being something directly from,
as opposed to “attributable to”, which could be said to include
something which was indirect as well.

The Supreme Court noted
that the judgment in Sterling Foods (237 ITR 579) laid down a very
important test in order to determine whether profits and gains are
derived from business or an industrial undertaking. It has stated that
there would be a direct nexus between such profits and gains and the
industrial undertaking or business. Such nexus cannot be only
incidental. It therefore found, on the facts before it, that by reason
of an export promotion scheme, an assessee was entitled to import
entitlements which it would thereafter sell. Obviously, the sale
consideration therefrom could not be said directly from profits and
gains by the industrial undertaking but only attributable to such
industrial undertaking inasmuch as such import entitlements did not
relate to manufacture or sale of the products of the undertaking, but
related only to an event which was post manufacture namely, export. The
Supreme Court held that on an application of the aforesaid test to the
facts of the present case, it could be said that as all the four
subsidies in the present case were revenue receipts which were
reimbursed to the assessee for elements of cost relating to manufacture
or sale of their products, there could certainly be said to be a direct
nexus between profits and gains of the industrial undertaking or
business, and reimbursement of such subsidies. The Supreme Court noted
that according to the Counsel for the Revenue the fact that the
immediate source of the subsides was the fact that the Government gave
them and that, therefore, the immediate source not being from the
business of the assessee, the element of directness was missing. The
Supreme Court did not agree with this contention. According to the
Supreme Court, what is to be seen for the applicability of section 80-IB
and 80-IC is whether the profits and gains are derived from the
business. So long as profits and gains emanate directly from the
business itself, the fact that the immediate source of the subsidies is
the Government would make no difference, as it cannot be disputed that
the said subsidies are only in order to reimburse, wholly or partially,
costs actually incurred by the assessee in the manufacturing and selling
of its products. The “profits and gains” spoken of by sections 80-IB
and 80-IC have reference to net profit. And net profit can only be
calculated by deducting from the sale price of an article all elements
of cost which go into manufacturing or selling it. Thus understood, it
was clear that profits and gains are derived from the business of the
assessee, namely profits arrived at after deducting manufacturing cost
and selling costs reimbursed to the assessee by the Government
concerned.

According to the Supreme Court the judgment in
Pandian Chemicals Limited vs. CIT (262 ITR 278) was also
distinguishable, as interest on a deposit made for supply of electricity
was not an element of cost at all, and this being so, was therefore a
step removed from the business of the industrial undertaking. The
derivation of profits on such a deposit made with the Electricity Board
could not therefore be said to flow directly from the industrial
undertaking itself, unlike the facts of the present case, in which, as
has held above, all the subsidies aforementioned went towards
reimbursement of actual costs of manufacture and sale of the product of
the business of the assessee.

Further, the Supreme Court
observed that Liberty India (317 ITR 218) being the fourth judgment in
this line also did not help the Revenue. What the court was concerned
with was an export incentive, which was very far removed from
reimbursement of an element of cost. A Duty Entitlement Pass Book
Drawback Scheme was not related to the business of an industrial
undertaking or selling its products. Duty entitlement pass book
entitlement arose only when the undertaking exported the said product,
that is after it manufactured or produced the same. Pithily put, if
there were no export, there were no duty entitlement pass book
entitlement, and therefore its relation to manufacture of a product and
or sale within India was not proximate or direct but was one step
removed. Also, the object behind the duty entitlement pass book
entitlement, as has been held by the court, was to neutralize the
incidence of customs duty payment on the import content of the export
product which was provided for by credit to customs duty against the
export product. In such a scenario, it could not be said that such duty
exemption scheme was derived from profits and gains made by the
industrial undertaking or business itself.

The Supreme Court
referred to the decision of the Calcutta High Court in Merinoply and
Chemicals Ltd. vs. CIT [1994] 209 ITR 508 (Cal), in which it was held
that transport subsidies were inseparably connected with the business
carried on by the assessee.

The Supreme Court noted that
however, in CIT vs. Andaman Timber Industries Ltd.[2000] 242 ITR
204(Cal), the same High Court had arrived at an opposite conclusion in
considering whether a deduction was allowable u/s. 80HH of the Act in
respect of transport subsidy without noticing the aforesaid earlier
judgment of a Division Bench of that very court.

The Supreme
Court further observed that a Division Bench of the Calcutta High Court
in CIT v. Cement Manufacturing Company Limited, distinguished the
judgment in CIT vs. Andaman Timber Industries Ltd. and followed the
impugned judgment of the Gauhati High Court in the present case.

According
to the Supreme Court the judgment in Merinoply and Chemicals Ltd. and
the recent judgment of the Calcutta High Court had correctly appreciated
the legal position.

The Supreme Court thereafter referred to
the judgment in Jai Bhagwan Oil and Flour Mills [(2009) 14 SCC 63] in
which it was held that and economically viable transport subsidy was
given so that industry could become competitive.

Further, the
Supreme Court referred to the decision in Sahney Steel and Press Works
Ltd. vs. CIT[1997] 228 ITR 253(SC), which dealt with subsidy received
from the state Government in the form of refund of sales tax paid on raw
materials, machinery, and finished goods subsidy on power consumed by
the industry; and exemption from water rate. It was held that such
subsidies were treated as assistance given for the purpose of carrying
on the business of the assessee.

The Supreme Court thereafter
referred to a Delhi High Court judgment in CIT vs. Dharam Pal Prem Chand
Ltd. [2009] 317 ITR 353 (Delhi) from which a special leave petition
preferred in the Supreme Court was dismissed. This judgment also
concerned itself with section 80-IB of the Act, in which it was held
that refund of excise duty should not be excluded in arriving at the
profit derived from business for the purpose of claiming deduction u/s.
80-IB of the Act.

The Supreme Court thereafter considered one
further argument made by the Counsel for the Revenue. He had argued that
as the subsidies that were received by the respondent, would be income
from other sources referable to section 56 of the Income-tax Act, any
deduction that was to be made, could only be made from income from other
sources and not from profits and gains of business, which was a
separate and distinct head as recognised by section 14 of the Income-tax
Act. The Supreme Court held that the Counsel for the Revenue was not
correct in his submission that assistance by way of subsidies which were
reimbursed on the incurring of costs relatable to a business, were
under the head “Income from other sources”, which is a residuary head of
income that could be availed only if income did not fall under any of
the other four heads of income. The Supreme Court held that section
28(iii)(b) specifically states that income from cash assistance, by
whatever name called, received or receivable by any person against
exports under any scheme of the Government of India, would be income
chargeable to income-tax under the head “Profits and gains of business
or profession”. If cash assistance received or receivable against
exports schemes are included as being income under the head “Profits and
gains of business or profession”, it was obvious that subsidies which
go to reimbursement of cost in the production of goods of a particular
business would also have to be included under the head “Profits and
gains of business of profession”, and not under the head “Income from
other sources”.

The Supreme Court therefore dismissed the appeal.

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Charitable purpose – Depreciation – Disallowance u/s. 11(6) – A. Y. 2005-06 – Section 11(6) barring allowance of depreciation on such assets is prospective in nature operating w.e.f. 01/04/2015 – Depreciation on assets allowable for earlier period –

DIT vs. Al-Ameen Charitable Fund Trust; 283 ITR 517 (Karn):

The assessee is a charitable institution registered u/ss. 12AA and 10(23C) . For the A. Y. 2005-06, the Assessing Officer completed the assessment u/s. 144 of the Act denying exemption u/s. 10(23C) of the Act. The Assessing Officer disallowed the claim for depreciation on the ground that the assets were acquired out of the exempt income. The Commissioner(Appeals) and the Tribunal allowed the assessee’s claim.

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

“i) The argument advanced by the Department apprehending double deduction was misconceived. While in the year of acquiring the capital asset, what is allowed as exemption is income out of which such acquisition is made, when depreciation is allowed in the subsequent years, it is for the losses or expenses representing the wear and tear of such capital incurred, and if it is not allowed there is no way to preserve the corpus for deriving its income. The Appellate Tribunal was right in holding that depreciation was allowable u/s. 11 of the Act and there was no double claim of the capital expenditure.

ii) Section 11(6) of the Act, which provides for disallowance of the depreciation is prospective in nature and operates w.e.f. April 1, 2015.”

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Disallowance of expenditure in respect of exempt income – Section 14A – A. Y. 2009-10 – Investment from common pool – Non-interest bearing funds more than investment in tax free securities No interest disallowance can be made u/s. 14A –

CIT vs. Microlabs; 383 ITR 490 (Karn):

Dealing with the scope of section 14A read with Rule 8D the Karnataka High Court held as under:

“When investments are made out of a common pool of funds and non-interest bearing funds were more than the investments in tax-free securities, no disallowance of interest expenditure can be made u/s. 14A of the Incometax Act, 1961.”

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Search and Seizure – Block Assessment – Limitation – As a general rule, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings. Search and Seizure – Block Assessment – Limitation to be reckoned with the last panchnama when the search is finally concluded in the absence any challenge to subsequent searches

VLS Finance Ltd. & Anr. vs. CIT & Anr. [2016] 384 ITR 1 (SC)

Search and seizure took place in the business premises of the appellant companies on June 22, 1998 on the strength of warrant of authorisation dated June 19, 1998, which went up to in the morning hours of June 23, 1998. It was followed by further searches from time to time which went on till August 5.

Notice u/s. 158BC(c) of the Income-tax Act, 1991 (hereinafter referred to as the “Act”), was issued on June 28, 1999 requiring the appellants to furnish return for the block period from April 1, 1988 to June 22, 1998. This notice was withdrawn and another notice was issued on July 26, 1999. In response thereto, the appellants filed return for the aforesaid block period on September 10, 1999. As per section 158BE of the Act, assessment is to be completed within two years from the end of the month in which the last of the authorised for search under section 132 or for requisition u/s. 132A, as the case may be. However, the Assessing Officer could not do so because of certain developments which took place.

A direction u/s. 142(2A) was issued on June 29, 2000, which was served to the appellants on July 19, 2000 for conducting special audit for the aforesaid block period.

A writ petition (Civil) no.4685 of 2000 was filed by the Appellants, wherein a challenge was laid to the aforesaid order dated June 29, 2000, issued by Respondent No.2 directing a special audit in respect of appellants u/s. 142(2A) of the Act. In the said writ petition, the appellants also challenged the clarificatory order dated August 10, 2000 issued by respondent No.2 with regasrd to special audit in respect of appellant No.1 for the period from the assessment year 1994-95 to assessment year 1998-99 and in so far as appellant No.2 the period for assessment year 1994-95 to assessment year 1996-97.

During the pendency of the writ petition, as amendment application was filed being CM No. 9305 of 2006, seeking to add addional ground that the block assessment proceedings u/s. 158BC (c) of the Act were time barred. The appellant submitted that the time limit for completion of block assessment expired on June 30, 2000 in terms of section 158BE of the Act, since 2 years period expired on that date. It was further submitted that the authorization executed on June 22, 1998 could not have been utilised for conducting further search till August, 1998. It was also contended that the order u/s. 142(2A) of the Act was issued in violation of principles of natural justice as there was no complexity in the accounts of the appellants and, therefore, there was no justification in law to order special audit u/s. 142(2A) of the Act.

The respondents filed their affidavit in reply to the show cause explaining that the order for special audit u/s. 142(2A) of the Act was issued with proper authorization made by the Commissioner of Income Tax after due deliberation and on the basis of the report of the Assessing Officer, viz., Assistant Commissioner of Income Tax, New Delhi. It was further submitted that the period of completion of block assessment was to expire on August 31, 2000 and not on June 30, 2000 as claimed by the appellants. As per the respondents, since seizure operations were conducted from June 22, 1998 and there operations concluded only on August 5, 1998, the time limit of two years for completion of “block assessment” was to expire only on August 31, 2000.

In Writ Petition (Civil) No.4685 of 2000, interim order dated August 24, 2000 was passed, giving interim stay of the orders dated June 29, 2000.

This stay remained in operation during the pendency of the writ petition.

The matter was finally heard and decided by the Delhi High Court vide judgment dated December 15, 2006. It has quashed the direction for special audit in view of the fact that no hearing was afforded to the appellant before issuing such direction, which was necessary as per the law laid down in the case of Rajesh Kumar vs. Deputy CIT(287 ITR 91).

However, the High Court decided the question of limitation in favour of the Department holding that the period between August 24, 2000, i.e., date on which interim order was passed staying special audit direction under section 142(2A) dated June 29, 2000 and December 15, 2016, i.e., when the High Court has passed the order setting aside the direction for appeal audit, be excluded in counting limitation for concluding block assessment.

The appellant contended before the High Court that since there was no stay on block assessment proceedings in terms of interim order dated August 24, 2000, the direction to exclude the period between August 24, 2000 to December 15, 2006 was beyond its jurisdiction. It was alternatively contended before the High Court that the limitation for passing the block assessment having expired on June 30, 2000 in terms of section 158.

BE(1) of the Act, the direction to exclude the limitation period between August 24, 2000 to December 15, 2006 would not, in any case, save limitation. While rejecting the aforesaid contentions raised by the appellants, the High Court held that since special audit was an important and integral step in the assessment proceedings, once the direction for special audit was stayed by the High Court, assessment proceedings ipso facto could not go on. The High Court rejected the assessee’s second alternative argument holding that limitation period of two years was years was to be calculated from August 5, 1998, on which date last panchnama was drawn.

On appeal, the Supreme Court observed that in effect the central issue was one of limitation, which had the following two facts, viz:

(a) Whether the period of limitation expired on August 31, 2000 or the last date for completing block assessment was June 30, 2000?

(b) Whether the period between August 24, 2000 and December 15, 2006, when interim stay was in operation, required to be excluded for the purposes of counting limitation period?

The Supreme Court taking the second issue first, noted that it was not in dispute that the period during which interim stay of the order passed by the court was in operation had to be excluded while computing the period of two years as limitation period prescribed for completing the block assessment. The parties had, however, joined issue on the nature of stay order which qualify for such exclusion.

The Supreme Court noted that the plea of the appellants was that only that period could be excluded in computing the period of limitation, during which assessment proceedings were stayed. A certain distinction was tried to be drawn in the instant case by referring to the interim order which was passed by the High Court on August 24, 2000 which had stayed the order of the Department directing compulsory audit. It was, thus, argued that stay was limited only to conducting compulsory audit and there was no stay of the assessment proceedings.

The Supreme Court referring the language of Explanation 1 held that it was not in doubt that this explanation granted benefit of exclusion only for those cases where “the assessment proceeding is stayed by an order or injunction” of the court. On literal construction, therefore, it became clear from the reading of this provision that the period that was to be excluded while computing the period of limitation for completion of block assessments was the period during which assessment proceedings are stayed by an order of a court and this provision shall not apply if the stay of some other kind, i.e., other than staying the assessment proceedings, was passed. The counsel for the appellants were justified in their contention that the provision relating to limitation need to be strictly construed.

The Supreme Court further held that as a general rule, therefore, when there is no stay of the assessment proceedings passed by the court, Explanation 1 to section 158BE of the Act may not be attracted. However, this general statement of legal principle has to be read subject to an exception in order to interpret it rationally and practically. In those cases where stay of some other nature is granted than the stay of the assessment proceedings but the effect of such stay is to prevent the Assessing Officer from effectively passing assessment order, even that kind of stay order may be treated as stay of the assessment proceedings because of the reason that such stay order becomes an obstacle for the Assessing Officer to pass an assessment order thereby preventing the Assessing Officer to proceed with the assessment proceedings and carry out appropriate assessment. For an example, if the court passes an order injecting the Assessing Officer from summoning certain records either from the assessee or even from a third party and without those records it is not possible to proceed with the assessment proceedings and pass the assessment order even such type of order may amount to staying the assessment proceedings. In that context, the High Court, in the impugned judgment had propounded the correct and relevant test, viz,. whether the special audit is an intergral pat of the assessment proceedings, i.e., without special audit it is not possible for the Assessing Officer to carry out the assessment ? If it is so, the stay of the special audit may qualify as stay of assessment proceedings and, therefore, would be covered by the said Explanation.

The Supreme Court agreed with the High Court that the special audit was an integral step towards assessment proceedings. The argument of the appellants that the writ petition of the appellant was ultimately allowed and the court had quashed the order directing special audit would mean that no special audit was needed and, therefore, it was not open to the respondent to wait for special audit, would not be a valid argument to the issue that was being dealt with. The Assessing Officer had, after going through the matter, formed an opinion that there was a need for special audit and the report of special audit was necessary for carrying out the assessment. Once such an opinion was formed, naturally, the Assessing Officer would not proceed with the assessment till the time that special audit report is received, inasmuch as in his opinion, report of the special audit was necessary. Take a situation where the order of special audit is not challenged. The Assessing Officer would naturally wait for this report before proceeding further. Order of special audit followed by conducting special audit and report thereof, thus, become part of assessment proceedings. If the order directing special audit is challenged and an interim order is granted staying the making of a special report, the Assessing Officer would not proceed with the assessment in the absence of the audit as he thought, in his wisdom, that special audit report is needed. That would be the normal and natural approach of the Assessing Officer at that time. It is stated at the cost of repetition that in the estimation of the Assessing Officer special audit was essential for passing proper assessment order. If the court, while undertaking judicial review of such an order of the Assessing Officer directing special audit ultimately holds that such an order is wrong (for whatever reason) that event happens at a later date and would not mean that the benefit of exclusion of the period during which there was a stay order is not to be given to the Revenue. Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted.

The Supreme Court therefore, answered this question in favour of Revenue.

With this, the Supreme Court reverted to the other question, viz., from which date the period of limitation was to be counted, i.e., from June 22, 1998 when the respondent authorities visited the premises of the appellants on the basis of warrant of authorization dated June 19, 1998 or August 5, 1998, on which date the Revenue authorities last visited the premises of the appellants on the basis of the same warrant of authorization dated June 19, 1998 and conducted the search of the appellant’s premises. If the period was to be counted from June 19, 1998, the last date by which the assessment was to be carried would be June 30, 2000. If it was to be counted from August 5, 1998, then the limitation period was to expire on August 31, 2000. In the event the last date for completing the block assessment was held to be June 30, 2000, then the assessment became time barred even before the interim stay was granted by the High Court as it was granted on August 24, 2000, i.e., after the supposed limitation period was over and, therefore, the conclusion was reached in answering the other question, as above, would not come to the rescue of the Department. On the other hand, if the period of limitation was to expire on August 31, 2000, then by virtue of our answer to the first issue, the period of limitation for block assessment had not expired inasmuch as this court had passed an order dated February 5, 2007 that audit may go on but no final assessment order be passed.

The Supreme Court observed that the Revenue authorities visited and searched the premises of the appellants for the first time on June 22, 1998. In the panchanama drawn on that date, it was remarked “temporarily concluded”, meaning thereby, according to the Revenue authorities, search had not been concluded. For this reason, the respondent authorities visited many times on subsequent occasions and every time panchnama was drawn with the same remarks, i.e., “temporarily concluded”. It was only on August 5, 1998 when the premises were searched last, the panchnama drawn on that date recorded the remarks that the search was “finally concluded”. Thus, according to the respondents, the search had finally been completed only on August 5, 1998 and panchnama was duly drawn on the said date as well. The appellants, in the writ petition filed, had nowhere challenged the validity of searches on the subsequent dates raising a plea that the same were illegal in the absence of any fresh and valid authorization. On the contrary, the appellant proceeded on the basis that search was conducted from June 22, 1998 and finally concluded on August 5, 1998.

On the aforesaid facts and in the absence of any challenge by the appellants to the subsequent searches, the Court held that it cannot countenance the arguments of the appellants that limitation period was not to be counted from the last date of search when the search operation completed, i.e., August 5, 1998. The Supreme Court, therefore, decided this issue also in favour of the respondents.

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Whether payment of transaction charges to stock exchange amounts FTS – SecTION 194J – Part – II

CIT vS. Kotak Securities Ltd . – Unreported – Civil Appeal No. 3141 of 2016 (SC)

3. As stated in Part I of this write-up, the Bombay High Court in the case of Kotak Securities Ltd. took the view that the Stock Exchange is rendering managerial services by providing in-built mechanism for trading in securities to its members and therefore, the payment of transaction charges by the members to the Stock Exchange is ‘fees for technical services’ [FTS] as the definition of the FTS includes consideration for ‘managerial services’ and accordingly, the same is covered by section 194J. At the same time, the High Court also held that both the parties for a decade proceeded on the footing that provisions to Sec. 194J were not applicable in this case and therefore, the disallowance u/s. 40(a)(ia) is not justified. Taking this judgment of the Bombay High Court as a lead case for the purpose of deciding the similar issues arising in various appeals before the Apex Court, the Court dealt with the judgment of the Bombay High Court for the purpose of deciding the issue referred to in para 1.5 of Part-I of this write-up.

3.1 For the purpose of deciding the issue of applicability of section 194J to the payment of transaction charges and consequent disallowance of the expenses in computing the business income, the Court noted the view taken by the Bombay High Court referred to in para 3 above. Before the Apex Court, the assessee had challenged the view of the Bombay High Court that the payment of the transaction charges to the Stock Exchange amounts to FTS covered u/s. 194J and the Revenue had challenged the view of the High Court that the disallowance u/s. 40(a)(ia) cannot be made for the Asst. Year in question.

3.2 The Court then noted the relevant parts of provisions of section 194J, Sec. 40(a)(ia) and the definition of FTS given in the said Explanation to section 9(1)(vii) as they stood at the relevant time.

3.3 Having referred to the relevant provisions of the Act, the Court stated that the moot question is what meaning should be ascribed to the expression ‘technical services’ [TS] appearing in the definition of FTS. For this purpose, the Court noted the following observations from its judgment in the case of Bharti Cellular Ltd (referred to in para 1.4 of Part –I of this write-up) :

“Right from 1979, various judgments of the High Courts and Tribunals have taken the view that the words “technical services” have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words “technical services” in section 9(1)(vii) read with Explanation 2 comes in between the words “managerial and consultancy services”.

3.3.1 Dealing with the above view taken in the case of Bharti Cellular Ltd (supra), the Court observed as under:

“Managerial and consultancy services” and, therefore, necessarily “technical services”, would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular Ltd. (supra). However, it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made.”

3.4 Referring to a lengthy discourse on the services made available by the Stock Exchange contained in the Assessment order, the Court observed that this would go to show that apart from facilities of a faceless screen-based transaction, a constant up gradation of such services and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity is provided by the Stock Exchange and specifically noted that all such fully automated services are available to all the members of Stock Exchange in respect of every transaction entered into by them. The Court also noted that there is nothing special/exclusive or customized in the service that is rendered by the Stock Exchange.

3.4.1 Having noted the above factual position, the Court proceeded to deal with the meaning of words ‘technical services’ in the context of the definition of the FTS and its applicability to the present case. In this context, the Court stated as under:

“. . .Technical services” like “Managerial and Consultancy service” would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression “technical services” appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act. ”

3.4.2 Having taken a view that the services rendered by the Stock Exchange would be merely in the nature of facility offered or available to its all members which cannot be regarded as ‘technical services’ as contemplated in the definition of the FTS as given in the said Explanation, the Court felt that another aspect of this matter also requires to be specifically noted and that is, each and every transaction by a member involves the use of such services provided by the Stock Exchange on compulsory payment of additional charges based on transaction value over and above the membership charges. The Court also noted that the view taken by the High Court that the member of the Stock Exchange has the option of trading through an alternative mode is not correct and the member has no option in this matter but to avail of such services. Having noted this additional specific aspect, the Court further stated as under:

“. . . The above features of the services provided by the Stock Exchange would make the same a kind of a facility provided by the Stock Exchange for transacting business rather than a technical service provided to one or a section of the members of the Stock Exchange to deal with special situations faced by such a member(s) or the special needs of such member(s) in the conduct of business in the Stock Exchange. In other words, there is no exclusivity to the services rendered by the Stock Exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the Stock Exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the Stock Exchange on payment and does not amount to “technical services” provided by the Stock Exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential hallmark of the expression “technical services” as appearing in Explanation 2 to section 9(1)(vii) of the Act.”

3.5 Finally, while deciding the issue raised by the assessee in appeal in its favour, the Court concluded as under:

“For the aforesaid reasons, we hold that the view taken by the Bombay High court that the transaction charges paid to the Bombay Stock Exchange by its members are for ‘technical services’ rendered is not an appropriate view. Such charges, really, are in the nature of payments made for facilities provided by the Stock Exchange. No TDS on such payments would, therefore, be deductible under Section 194J of the Act.”

3.6 Having decided that the services rendered by the Stock Exchange would be termed as facilities provided by the Stock Exchange which does not amount to TS as contemplated in the definition of the FTS given in the said Explanation and hence, the payment of transaction charges does not amount to FTS u/s. 194J, the Court further decided that in view of this conclusion, it is not necessary to examine the correctness of the view of the Bombay High Court with regard to the issue of disallowance u/s. 40(a)(ia). As such, this issue still remains open.

Conclusions
4 From the above judgment, the position is now settled that there is a clear distinction between services and facilities provided by the service provider and the latter, even if termed as a service, cannot be regarded as TS within the narrower meaning of those words appearing in the definition of FTS.

4.1.1 From the above judgment, in the context of meaning of the words TS appearing in the definition of FTS, it becomes clear that for a service to be regarded as TS, like ‘managerial and consultancy service’, it should cater to special needs of the customer/ user, as may be felt necessary, which is rendered by the service provider. Accordingly, it should be specialised and exclusive to the service seeker. It has to be a service specifically sought by the user or customer. This feature of a service rendered is the essential hallmark of the expression TS. As such, in this context, the test of specialised, exclusive and individual requirement of the user/ consumer [`exclusivity test’] should be satisfied to treat the consideration for service as FTS. Therefore, it appears that the general/standard services provided by an entity, which is available to everyone who intends to avail the same, should be regarded as service in the nature of facility offered or available to all and the same will not fall within the meaning of TS as contemplated in the definition of FTS.

4.1.2 The above meaning of the words TS appearing in the definition of FTS would go a long way in considering the applicability of section 9(1)(vii) as well as of section 194J. As such, this would also be very useful for interpreting the expression FTS under many Double Tax Avoidance Agreements (‘tax treaties’) entered into by India with other countries where the relevant portion of the definition of the expression FTS is identical to the one given in the said Explanation.

4.1.3 The services provided by the Stock Exchange in the above case do not satisfy the ‘exclusivity test’. As such payment of transaction charges does not amount to FTS and therefore, cannot be regarded as TS.

4.2 From the observations of the Apex Court in the above case mentioned in para 3.3 above, it would appear that the Court reiterated the principle emerging from the judgment of Apex Court in the case of Bharat Cellular Ltd. (supra) that the words TS appearing in the definition of FTS have got to be read in a narrower sense.

4.2.1 In the above context, the Court also reaffirmed the interpretation that human involvement is necessary for treating a service provided as TS within the meaning of the definition of FTS.

4.2.2 Further, in the above context, the Court also felt that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which service may be provided and hence, search for a more effective basis may be made. It seems that these observations of the Court do not affect the settled position referred to in paras 4.2 and 4.2.1 and the same should be read in the context of the facts of the case before the Court.

4.3 Interestingly, the Bombay High Court treated the payment of transaction charges as FTS covered u/s. 194J on the ground that the services rendered by the Stock Exchange are in the nature of ‘managerial services’ as mentioned in para 2.8.1 of Part-I of this write-up and para 3 above. However, the Apex Court did not deal with this specific view taken by the Bombay High Court but dealt with the meaning of the words TS appearing in the definition of FTS and proceeded on that basis to decide the issue without considering the aspect of ‘managerial services’ considered by the Bombay High Court. However, it seems to us that this should not make any difference to the final view taken by the Apex Court. In the above case, the Court has also held that the services rendered by the Stock Exchange are in the nature of facility offered or available and they also do not satisfy the ‘exclusivity test’.

4.4 As pointed out in para 2.9 of Part- I of this write-up and para 3 above, the Bombay High Court also took the view that for a decade, both the parties have proceeded on the footing that section 194J was not applicable to the payment of transaction charges. On this peculiar facts, the disallowance u/s. 40(a) (ia) cannot be made for the year in question before the Court. The correctness of this view has not been examined by the Apex Court as stated in the para 3.6 above. In view of this, the said view of the Bombay High Court stills holds good and could be useful to contest the disallowance u/s. 40(a)(ia), if the facts of a particular case are similar to the case before the Bombay High Court in the case of Kotak Securities Ltd. (supra)

4.5 As mentioned in para 1.1 of Part- I of this writeup, section 194J is amended with effect from 13/7/2006 to include within its scope payment by way of ’royalty’. For this purpose, the definition of royalty given in Explanation 2 to section 9(1)(vi) is made applicable, which, in turn, is very wide and includes any consideration paid for the use of any industrial, commercial or scientific equipment (with some exceptions) – popularly known as ‘equipment royalty’, etc,. From the judgment of the Bombay High Court in the above case, it appears that the assessee had started deducting tax u/s. 194J from the subsequent year from payment of transaction charges as ‘royalty’ as observed by the Bombay High Court (refer para 2.9 of Part- I of this write-up).

4.5.1 In the above judgment, the Apex Court has taken a view that the Stock Exchange is rendering services which are in the nature of facility provided/offered and therefore, not a TS within the meaning of the definition of FTS as mentioned in paras 3.4.1 & 3.4.2 above. Therefore, the moot question may arise as to whether the payment of transaction charges could at all be regarded as ‘royalty’, the same being paid primarily for the services rendered, which, though, may be regarded as in the nature of facility provided/offered. This may need separate consideration.

4.6 In view of the amendment made in section 40(a) (ia) by the Finance Act, 2012, with the introduction of the second proviso w.e.f. 1/4/2013, providing relaxation from the rigor of this provision for disallowance, when certain conditions mentioned in the first proviso [introduced by the Finance Act, 2012 w.e.f. 1/7/2012] to section 201(1) are met [such as the resident payee has furnished the Return of Income u/s. 139, he has taken into account such payment in computing his income, etc.], the disallowance u/s. 40(a)(ia) could be avoided on that basis. However, this relaxation applies only when the payee is a resident and, the benefit of this relaxation is not available if the payee is not a resident. As such, the above judgment would be more useful in cases where the payee is not a resident and the applicability of TDS requirement to the payment for services as well as disallowance u/s. 40(a)(i) is to be contested.

shailesh.kwebmaker

Interest paid on borrowings for purchase of house- SECTION 24 & SECTION 48

ISSUE FOR CONSIDERATION
An assessee acquiring a house property with borrowed funds, pays interest on such borrowed funds, till such time as the borrowed funds are repaid by him. In most of the cases, the funds are repaid over a period of years, for which the interest is paid on the borrowings made.

In computing the income from such house property, a deduction is allowed u/s. 24(b) of the Income Tax Act of interest on such borrowings subject to certain conditions contained in the said provisions.

The interest so paid, over the period of years, is paid for the purposes of acquiring a capital asset, namely, the house property, and accordingly, the interest paid constitutes the cost of acquisition or the cost of improvement for the purposes of section 48 and generally qualifies for deduction in computing the capital gains arising on transfer of such house property.

Cases have come up wherein the assesses, who are allowed a deduction u/s. 24(b) of interest paid in computing the income from house property, have, on transfer of the house property, claimed deduction for the said interest in computing the capital gains on the ground that such an interest was a part of the cost of acquisition /improvement of the said asset. Obviously the Income Tax department, in such cases, has refused to allow deduction for interest paid in computing the capital gains on the ground that a deduction was already allowed, in the past assessment years, in computing the income from house property.

Conflicting decisions by different benches of the Income Tax Appellate Tribunal have warranted attention to this interesting issue. The Chennai bench of the tribunal has held that the deduction in computing the capital gains for interest is allowable while the Bangalore bench has held that such a deduction is not permissible in computing the capital gains.

C. Ramabrahmam’s case
The issue arose in the case of ACIT v. C. Ramabrahmam, 57 SOT 130 (Chennai), for the A.Y 2007-08 during which year the assessee had transferred a house property for a valuable consideration. In computing the capital gains, on transfer of the said house property, a deduction was claimed for an amount of Rs. 4,82,042, which amount represented the interest paid on a housing loan, taken in the year 2003, for purchasing the property, a deduction for which was allowed u/s. 24(b), in computing total income for A.Y. 2004-05 to 2006-07. The Assessing Officer disallowed the claim for deduction of the said interest in computing the capital gains for A.Y. 2007-08. On appeal, the CIT(A) allowed the claim of the assessee, by holding that the assessee was entitled to claim the deduction for interest u/s. 48, despite the fact that the same had been claimed u/s. 24(b) while computing income from house property.

In appeal to the tribunal, the Revenue contended that once the assessee had availed a deduction u/s. 24(b) for interest, he could not claim again a deduction for the same amount for the purposes of computation of Capital Gains. In reply, the assessee relied upon the findings and the order of the CIT(A).

The tribunal noted that there was no dispute about the fact that the interest in question was claimed and allowed as a deduction in the past in computing the income from house property under the statutory provisions of section 24(b). It further noted that the assessee had chosen to claim the said interest again as a deduction in computing the Capital Gains.

The Chennai tribunal, on consideration of the facts and the law, held in Para 8 of the order that; “We are of the opinion that deduction u/s. 24(b) and computation of capital gains u/s. 48 of the “Act” are altogether covered by different heads of income i.e., ‘income from house property’ and ‘capital gains’. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operation of the other. In other words, a deduction u/s. 24(b) is claimed when concerned assessee declares income from ‘house property’, whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed u/s 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains u/s 48 of the “Act”. Therefore, the CIT(A) has rightly accepted the assessee’s contention and deleted the addition made by the Assessing officer. Hence, qua this ground, we uphold the order of the CIT(A).”

Captain B. L. Lingaraju’s case
The issue once again arose in the case of Captain B L Lingaraju vs. ACIT, before the Bangalore bench of the tribunal in ITA No. 906/Bang/2014 for A.Y 2009-10. In that case, the claim of the assessee for deduction u/s.48, of interest paid on a loan amounting to Rs.13,24,841, was disallowed by the A.O. on the ground that the said interest was allowed as the deduction u/s.24(b), in computing the income from house property. The action of the A.O. was upheld by the CIT(A).

In appeal to the tribunal, the assessee filed a paperbook containing written submissions and supported his claim by relying on the decisions of the Karnataka high court in the cases of CIT vs. Sri Hariram Hotels (P) Ltd., 229 TR 455 and CIT vs. Maithreyi Pai, 152 ITR 247 and also on the decisions of the Delhi and Madras high courts. He however did not appear for hearing and the appeal was decided ex-parte, qua the assessee.

The tribunal, on consideration of the written submissions and the decisions relied upon by the assessee therein, noted that the Court in the case of Sri Hariram Hotels (supra) had followed its earlier decision in the case of Maithreyi Pai (supra) to hold in Hariram Hotels case, that an interest paid on borrowings for the acquisition of capital asset must fall for deduction u/s.48 only if the same was not allowable as deduction u/s.57 of the Act and that no assessee under the scheme of the Act could be allowed a deduction of the same amount twice over. On the facts in B L Lingaraju’s case, the tribunal noted that the assessee had claimed a deduction of interest of Rs.1,50,000 in computing the income from self-occupied house property as per section 24(b) of the Act. Relying on the decision of the jurisdictional Karnataka high court in the case of Maithreyi Pai (supra), the tribunal held that no deduction u/s.48 could be allowed for the same interest in computing the Capital Gains, where it was allowed as deduction or was allowable as a deduction. The appeal of the assessee was thus dismissed by the tribunal.

Observations
Section 24(b) reads as under:

“Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—
(a) …………………………………..

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

Provided ………………………………”

The relevant part of Section 48 reads as under:

“The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

Provided ……………………………”

The principle that the cost of acquisition is a dynamic and a fluctuating number is by now widely accepted; it may increase in a subsequent year as a result of a liability or expenditure incurred after the date of acquisition. The cost of acquisition can increase on account of the interest paid, post acquisition of asset, on borrowings made for the acquisition of the asset. CIT vs. Mithlesh Kumar 92 ITR 9(Delhi), CIT vs. K.S Gupta 119 ITR 372 (AP), CIT vs. A.R Damodara Mudaliar & Co. 119 ITR 583 (Madras), CIT vs. K Raja Gopala Rao 252 ITR 459 (Madras) and CIT vs. Maithreyi Pai 152 ITR 247 (supra).

While the above stated principle permits increase in the cost of acquisition by the amount of interest, such an increase has been made conditional by the Karnataka high court in Maithreyi Pai’s case(supra), by observing that an interest which had already been allowed as revenue expenditure could not be virtually deducted again u/s 48 MLG Enterprise vs. CIT 167 ITR 11.

Usually unless otherwise prohibited, a deduction under a specific provision cannot be denied under a different provision for the same expenditure. The Act has a few parallels wherein such deductions or allowances are found by the courts to be allowable; for example the investments in depreciable assets are treated as an application for charitable purposes, and depreciation on such assets has been held to be eligible for deduction again from income u/s 11, in computing the income of a charitable institution.

The Income Tax Act is replete with examples of the provisions which specifically provide that no deduction under any other provision of the Act would be allowable in the cases where a deduction is allowed under a particular provision; e.g. section 35AD(3). The present day’s trend therefore appears to be that the legislature, wherever intended, makes a specific provision for denying double deductions. No such express provision is found either in section 24(b) or in section 48, as has been confirmed by the Chennai bench of the tribunal. These provisions operate in different fields and that too for computation of income under two different heads of income. Further the deduction in one case is a statutory deduction, whereas in the other, it is on capital account. One may at the same time have to look into the reasons behind the observations of the Karnataka high court in the case of Maithreyi Pai (supra) wherein the court observed that an interest for which a deduction had already been allowed could not be allowed twice over while computing the capital gains u/s. 48. Apparently, one does not find any express provisions in any of the provisions of the Act, at least not in section 48 and section 24(b), which could have formed the basis for the court to have observed as it did.

One may also ascertain whether there is anything in the law of taxation that has prompted the court to hold that a deduction u/s. 48 was not allowable once it was allowed in the past. The Supreme court held in Escorts Ltd vs. UOI, 191 ITR 43 a double deduction could not be a matter of inference; it must be provided for in clear and expressive language, regard being had to its unusual nature and its serious impact on the revenues of the State. Having noted the findings of the apex court, one is required to appreciate that the case of the assessee, in the issue under consideration, is not a case of having claimed a deduction for revenue expenditure at all. In the facts of the case, under the issue, a specific deduction is allowed u/s. 24(b) in computing the income from house property and, in another case, the interest constitutes the cost of acquisition and is therefore claimed as a deduction representing the capital expenditure. Considering the distinction, it may be possible to contend that the case under consideration, is not squarely covered by the decision of the Supreme court in Escort’s case. Whether it is a case of double deduction, at all, is the question that remains to be concluded.

In B. L. Lingaraju’s case, the deduction for interest was restricted to Rs.1,50,000/-, though actual interest paid was much higher than the said amount, leaving open a possibility for claiming a deduction u/s. 48, at least for the balance unclaimed amount of interest, that was not allowed and was not even allowable.

shailesh.kwebmaker

RULE FOR INTERPRETATION OF TAX STATUTES PAR T-IV

Introduction:
In the April, May and June issues of the BCAJ I had discussed the basic rules of interpretation of tax statutes and have tried to explain some rules with binding precedents. Other rules / concepts / dictums are finally discussed hereafter.

1. Harmonious Construction :

It is well settled that the provisions of a statute must be read harmoniously together. However, if this is not possible then it is settled law that where there is a conflict between two sections, and one cannot reconcile the two, one has to determine which is the leading provision and which is the subordinate provision, and which must give way to the other. A legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. Where conflict appears to arise from the language of particular provisions, the conflict must be alleviated, so far as possible, by adjusting the meaning of the competing provisions to achieve that result which will best give effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions. Reconciling conflict provisions will often require to determine which is the leading provision and which the subordinate provision, and which must give way to the other. Only by determining the hierarchy of the provisions will it be possible in many cases to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme.

2. Construction of a document :

A document, as is well known, must be read in its entirety. When character of a document is in question, although the heading thereof would not be conclusive, it plays a significant role. Intention of the parties must be gathered from the document itself but therefore circumstances attending thereto would also be relevant; particularly when the relationship between the parties is in question. For the said purpose, it is essential that all parts of the deed should be read in their entirety. A document as is well known, must primarily be construed on the basis of the terms and conditions contained therein. It is also trite that while construing a document the court shall not supply any words which the author thereof did not use.

3. Ratio decendi, the words and expressions :

It is a well settled principle of law that the decision on an interpretation of one statute can be followed while interpreting another provided both the statutes are in parimateria and they deal with identical scheme. However, the definition of an expression in one statute cannot be automatically applied to another statute whose object and purpose are entirely different. One should not place reliance on decisions without discussing how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they were words in a legislative enactment. Judicial utterances are made in the setting of the facts of particular cases. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.

3.1. For reliance on the words and expressions defined in one statute and applying to the other statute it has also to be seen as to whether the aim and object of the two legislation, is similar. When the word is not so defined in the Act it may be permissible to refer to the dictionary to find out the meaning of that word as it is understood in the common parlance. But where the dictionary gives divergent or more than one meaning of a word, in that case it is not safe to construe the said word according to the suggested dictionary meaning of that word. In such a situation, the word has to be construed in the context of the provisions of the Act and regard must also be had to the legislative history of the provisions of the Act and the scheme of the Act. It is a settled principle of interpretation that the meaning of the words, occurring in the provisions of the Act must take their colour from the context in which they are so used. In other words, for arriving at the true meaning of a word, the said word should not be detached from the context. Thus, when the word; read in the context conveys a meaning, that meaning would be the appropriate meaning of that word and in that case we need not rely upon the dictionary meaning of that word.

4. Discretion :

Many provisions confer discretion on the Court or the Authority. Discretion should be exercised judiciously as a judicial authority well versed in law. In Halsbury’s Laws of England, it has been observed: “A statutory discretion is not, however, necessarily or, indeed, usually absolute; it may be qualified by express and implied legal duties to comply with substantive and procedural requirements before a decision is taken whether to act and how to act. Moreover, there may be a discretion whether to exercise a power, but; no discretion as to the mode of its exercise; or a duty to act when certain conditions are present, but a discretion how to act. Discretion may thus be coupled with duties”.

4.1. Discretion, in general, is the discernment of what is right and proper. It denotes knowledge and prudence, that discernment which enables a person to judge critically of what is correct and proper united with caution; nice discernment, and judgment directed by circumspection; deliberate judgement; soundness of judgment; a science or understanding to discern between falsity and truth between wrong and right, between shadow and substance, between equity and colourable glosses and pretences, and not to do according to the will and private affections of persons. When it is said that something is to be done within the discretion of the authorities, that something is to be done according to the rules of reason and justice, not according to private opinion; according to law and not humour. It is to be not arbitrary, vague, and fanciful, but legal and regular. And it must be exercised within the limit, to which an honest man, competent to the discharge of his office ought to confine; himself. (See S.G. Jaisinghani vs. Unkon of India and other AIR 1967 SC 1427.

4.2. The word ‘discretion’ standing single and unsupported by circumstances signifies exercise of judgement, skill or wisdom as distinguished from folly, unthinking or haste; evidently therefore a discretion cannot be arbitrary but must be a result of judicial thinking. The word in itself implies vigilant circumspection and care; therefore, where the Legislature concedes discretion it also imposes a heavy responsibility to exercise it soundly and properly.

5. Other Considerations :

Recourse to construction or interpretation of statute is necessary when there is ambiguity, obscurity or inconsistency therein and not otherwise. An effort must be made to give effect to all parts of statute and unless absolutely necessary, no part thereof shall be rendered surplus or redundant. True meaning of a provision of law has to be determined on the basis of what provides by its clear language, with due regard to the scheme of law. Scope of the legislation on the intention of the Legislature cannot be enlarged when the language of the provision is plain and unambiguous. In other words statutory enactments must ordinarily be construed according to its plain meaning and no words shall be added, altered or modified unless it is plainly necessary to do so to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute. It is also well settled that a beneficent provision of legislation must be liberally construed so as to fulfill the statutory purpose and not to frustrate it.

5.1. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used.” This view has been reiterated by the Supreme Court time and again. In State of Bombay vs. Automobile and Agricultural Industries Corporation (1961) 12 STC 122, the court said (page 125) : “But the courts in interpreting a taxing statute will not be justified in adding words thereto so as to make out some presumed object of the Legislature……. If the Legislature has failed to clarify its meaning by the use of appropriate language, the benefit thereof must go to the taxpayer. It is settled law that in case of doubt, that interpretation of a taxing statute which is beneficial to the taxpayer must be adopted.”

5.2. To the extent not prohibited by the statute, the incidents of the general law are attracted to ascertain the legal nature and character of a transaction. This is quite apart from distinguishing the “substance” of the transaction from its “form”. The court is not precluded from treating what the transaction is in point of fact as one in point of law also. To say that the court could not resort to the so-called “equitable construction” of a taxing statute is not to say that, where a strict literal construction leads to a result not intended to subserve the object of the legislation another construction, permissible in the context, should not be adopted. In this respect, taxing statutes are not different from other statutes.

5.3. A public authority cannot be stopped from doing its duty, but can be estopped from relying on a technicality as said by the Lord Denning. Francis Bennion in his Statutory Interpretation, “Unnecessary technically : Modern courts seek to cut down technicalities attendant upon a statutory procedure where these cannot be shown to be necessary to the fulfilment of the purposes of the Legislation.”

5.4. The definition section of the Act in which various terms have been defined, if it opens with the words “in this Act, unless the context otherwise requires” would indicate that the definitions, which are indicated to be conclusive may not be treated to be conclusive if it was otherwise required by the context. This implies that a definition, like any other word in a statute, has to be read in the light of the context and scheme of the Act as also the object for which the Act was made by the legislature. While interpreting a definition, it has to be borne in mind that the interpretation placed on it should not only be not repugnant to the context, it should also be such as would aid the achievement of the purpose which is sought to be served by the Act. A construction which would defeat or was likely to defeat the purpose of the Act has to be ignored and not accepted.

5.5. In Raja Jagdambika Pratap Narain Singh vs. C.B.D.T. (1975) 100-ITR-698, Supreme Court held that “equity and income-tax have been described as strangers”. The Act, in the very nature of things, cannot be absolutely cast upon logic. It is to be read and understood according to its language. If a plain reading of the language compels the court to adopt an approach different from that dictated by any rule of logic, the court may have to adopt it, vide Azam Jah Bahadur (H.H. Prince) vs. E.T.O. (1972) 83- ITR-82 (SC). Logic alone will not be determinative of a controversy arising from a taxing statute. Equally, common sense is a stranger and an incompatible partner to the Income-tax Act. It does not concern itself with the principles of morality or ethics. It is concerned with the very limited question as to whether the amount brought to tax constitutes the income of the assessee. It is equally settled law that if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.

5.6. When a word is not defined in the Act itself, it is permissible to refer to dictionaries to find out the general sense in which that word is understood in common parlance. However, in selecting one out of the various meanings of a word, regard must always be had to the context, as it is a fundamental rule that ‘the meaning of words and expressions used in an Act must take their colour from the context in which they appear’.”

5.7. When a recognized body of accountants, such as the Institute of Chartered Accountants of India, after due deliberation and consideration publishes certain material for its members, one can rely upon it. The meaning given by the Institute clearly denotes that in normal accounting parlance the word “turnover” would mean “total sales”. The sales would definitely not include scrap which is either to be deducted from the cost of raw material or is to be shown separately under a different head. There is no reason not to accept the meaning of the term “turnover” given by a body of accountants, having statutory recognition. If all accountants, auditors, businessmen, manufacturers normally interpret the term “turnover” as sale proceeds of the commodity in which the business unit is dealing, there is no reason to take a different view, as held in C.I.T. vs. Punjab Stainless Steel Industries (2014) 364-ITR-144 (SC).

5.8. The principle of statutory interpretation embodies the policy of the law, which is in turn based on public policy. The court presumes, unless the contrary intention appears, that the legislator intended to conform to this legal policy. A principle of statutory interpretation can therefore be described as a principle of legal policy formulated as a guide to legislative intention.

5.9. Justice P. N. Bhagwati in Francis Coralie Mullin vs. Administrator, Union Territory of Delhi, AIR 1981 S.C. 746 ‘emphasized the importance of reading the text of the Constitution in a progressive manner in tune with the social reality and to serve the cause of improverished sections of humanity : “The principle of interpretation which requires that a constitutional provision must be construed, not in a narrow and constricted sense, but in a wide and liberal manner so as to anticipate and take account of changing conditions and purposes so that constitutional provision does not get atrophied or fossilized but remains flexible enough to meet the newly emerging problems and challenges….”

6. Some Words & Doctrines :

(i) “Profit” : means the gross proceeds of a business transaction less the costs of the transaction. Profits imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. E.D. Sassoon and Company Ltd. vs. CIT (1954) 26-ITR-27 (SC).

(ii) “Without Prejudice” : The term “without prejudice” means (i) that the cause of the matter has not been decided on merits, (ii) that fresh proceedings according to law were not barred, as held in Superintendent (Tech.I) Central Excise, I.D.D. Jabalpur vs. Pratap Rai (1978) 114- ITR-231 (SC). It signifies that the mere filing of a return will not be allowed to be used against the assessee implying its admission. “Without prejudice” implies future rectification in accordance with law, as held in C.W.T. vs. Apar Ltd. (2004) 267-ITR-705 (Bom.).

(iii) “Sums Paid” : The context in which the expression “sums paid by the assessee” has been used makes the legislative intent clear that it refers to the amount of money paid by the assessee as donation, as held in H.H. Sri Rama Verma vs. C.I.T. (1991) 187-ITR-303 (SC).

(iv) “Presumption” : A presumption is an inference of fact drawn from other known or proved facts. It is a rule of law under which courts are authorized to draw a particular reference from a particular fact. It is of three types, (i) “may presume”, (ii) “shall presume” and (iii) “conclusive proof”. “May presume” leaves it to the discretion of the court to make the presumption according to the circumstances of the case. “Shall presume” leaves no option with the court not to make the presumption. The court is bound to take the fact as proved until evidence is given to disprove it. In this sense such presumption is also rebuttable. “Conclusive proof” gives an artificial probative effect by the law to certain facts. No evidence is allowed to be produced with a view to combating that effect. In this sense, this is an irrebuttable presumption- as held in P.R. Metrani vs. C.I.T. (2006) 287-ITR-209 (SC) at 211.

(v) “Suo Moto” : “Means of own accord or on its own motion. However the Judge, even when he is free, is still not wholly free. He is not to innovate at pleasure. He is not a knighterrant roaming at will in pursuit of his own ideal of beauty or of goodness. He is to draw his inspiration from consecrated principles. He is not to yield to spasmodic sentiment, to vague and unregulated benevolence. He is to exercise a discretion informed by tradition, methodized by analogy, disciplined by system, and subordinated to “the primordial necessity of order in the social life”. Wide enough in all conscience is the field of discretion that remains” as observed by Benjamin N. Cardozo in the legal classic “The Nature of the Judicial Process”.

(vi) Doctrine of lifting Veil : The doctrine of ‘piercing the veil’ is applied to reach at reality, substance and avoid façade. It can be invoked if the public interest so requires or if there is allegation of violation of law by using the device of corporate entity or when the corporate personality is being blatantly used as a cloak for fraud or improper conduct or where the protection of public interests is of paramount importance or where the Company has been formed to evade obligations imposed by law or to evade an existing obligation to circumvent a statue or to avoid a welfare legislation etc. State of Rajasthan vs. Gotam Lime Khanij Udhyog Pvt. Ltd. – AIR 2016 S.C. 510.

7. Conclusion :

General principles of interpretation of Law including the Tax Laws are to protect a citizen against the excesses of the Executive, Administration, Corrupt authority, erring individuals and the Legislature. It is an aid to protect and uphold ‘enduring values’ enshrined in the Constitution and Laws enacted by the Parliament/Legislatures. It is to assist, to arrive at the real intention, object and purpose for which Laws are enacted and to make life of each citizen worth living. Let the hopes of the framers of the Constitution and the father of Nation, Mahatma Gandhi, inspire all Constitutional functionaries, Judges, Jurists, Members of Tribunals, Advocates, Chartered Accountants and the people of India to preserve their freedom and mould their lives on sound principles of interpretation of Laws. Endeavour should be to deliver justice, which is a divine act.

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Expectations From The Profession

As I write this editorial, the results of the referendum in UK are out. By a small majority, the country has voted for an exit from the European Union (EU). The difference in the manner in which various parts of the United Kingdom voted was a revelation. To majority of the stakeholders, their expectations from the EU were not fulfilled while others expected that remaining with EU would be to their long-term benefit. Life is full of expectations but these are different for each individual. This leads one to either clamour for change or resist it.

The expectations from our profession have ben manifold and are ever increasing. The role of Chartered Accountants has seen a complete metamorphosis in a century. From being mere bookkeepers, we have now become consultants who advise on complex business strategies. As our role has increased so have the expectations. Keeping this in mind, we at the Society have kept the theme for this special issue of the journal as “Expectations from the profession”.

While, as chartered accountants, we play various roles, our niche area is that of audit. When businesses were small, in a majority of the cases there was complete identity between the management and the ownership. Consequently, the assurance that was required from the auditor was limited. As businesses became more complex, the number of stakeholders underwent a continuous increment. Today, the financial statements authenticated by auditors are relied on by investors from the public, lending banks and financial institutions, regulators and tax gatherers. The expectations of all these stakeholders are different, distinct and at times contradictory.

In order to cater to all the different expectations, audits have also been divided into different categories. A statutory audit assures the reader that the financial statements depict a true and fair view, an internal auditor reports on various areas of interest to the management, while a forensic audit seeks to detect fraud where the management or appointing authority suspects one. Unfortunately, neither can these roles be divided into straitjacket compartments, nor is the distinction understood by various stakeholders. This is the challenge that the profession has to meet. In fact, various changes in the reporting requirements under various statutes have increased the responsibilities of an auditor manifold. Apart from various amendments to CARO, an auditor is now required to comment on the adequacy or otherwise of internal financial controls. It is expected that once an amendment to the tax audit report is notified, the tax auditor may have to comment on compliance with Income Computation and Disclosure Standards (ICDS) as well.

One can often sympathise with the auditor as he strives to meet these different and often contradictory expectations. The management expects the financial statements to be drawn up in a manner that the investor is happy to remain invested and the lender is willing to lend. The investor expects that the statements are true and reflect the actual position (and possibly indicate what will happen in future) and expects the auditor to warn him of aberrations, if any. The public expects that the accounts are free from fraud / error and sees the auditor as a whistle blower, while the taxman expects the audited statements and the report thereon to reflect all the data required for computation of income.

While our profession is expected to meet all the expectations from the stakeholders which I have discussed above, it has two other challenges to overcome. The first is to convince the business houses to maintain that level of documentation which will enable the auditor to establish that he has done his duty properly. The second is to ensure that while doing his duty he maintains his independence and reports fearlessly. Although the statutes which deal with the reporting requirements, as well as the regulators do give him some support, that may not necessarily be adequate.

Apart from the role of an auditor in different forms, businesses expect a chartered accountant to perform an advisory function. On account of the expertise that he possesses, his advice in regard to conduct of business, mergers, acquisitions and restructuring thereof, as well as financial planning is extremely valuable. In this special issue, Akeel Master and Gaurish Divekar deal with the distinct expectations from statutory, internal and forensic audits, Chetan Dalal examines the role of forensic audits, while Dinesh Kanabar discusses the role of a chartered accountant as an advisor. I am grateful to these eminent chartered accountants for having authored these articles despite their busy schedules.

I hope that these articles will make interesting reading.

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Mangal Singh Palsania vs. ACIT ITAT Jaipur Bench Before Vikram Singh Yadav (AM) and Laliet Kumar (JM) ITA No. 53/JP/14 A.Y.: 2008-09. Date of order: 31.03.2016 Counsel for Assessee / Revenue: M. Gargieya / Ajay Malik

Section 32(1) – In order to claim depreciation on vehicles, registration of vehicles under the Motor Vehicle Act is not essential requirement.

FACTS
The assessee derives income from transport business. The tankers used in the business were not registered in the name of the assessee. Hence, the depreciation claimed Rs. 21.02 lacs was denied by the AO. On appeal, the CIT(A) confirmed the order of the AO.

Being aggrieved the assessee appealed before the Tribunal. Before the Tribunal, the revenue submitted that the test of ownership is governed by the registration under the Motor Vehicle Act and since the tankers were not registered in the name of the assessee, the AO was justified in denying the depreciation claim.

HELD
The Tribunal referred to the observations of the Supreme Court in the case of I.C.D.S vs. CIT (29 Taxman 129) that the repository of a general statement of law on ownership may be the Sale of Goods Act. The Motor Vehicle Act was not a statement of law on ownership. Further, it also noted the observation of the Apex Court in the case of Mysore Minerals Ltd. vs. CIT (239 ITR 779) that anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefrom and having right to use and occupy the property in his own right would be considered as the owner of the property for the purpose of section 32(1) though a formal deed of title may not have been executed and registered. According to the Tribunal, the above proposition of law was fully satisfied by the assessee. The assessee was having possession and dominion over the income and control over the operation of the tankers. Accordingly, the Tribunal held that the assessee was eligible to claim depreciation.

Income Tax Officer vs. Rajeshwaree Shipping & Logistics ITAT “D” Bench, Mumbai

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[2016] 70 taxmann.com 33 (Ahmedabad – Trib.) Urvi Chirag Sheth vs. ITO ITA Nos. 630 /Ahd/2016 A.Y.: 2012-13 Date of order: 31.05.2016

Section 56 – Interest on accident compensation, which is a capital receipt, can be characterized as income only if interest is a kind of statutory interest. Otherwise it retains the same character as that of the compensation and is not liable to tax

FACTS
The assessee met with a serious accident leaving her permanently disabled. She claimed compensation of Rs. 15,00,000 which was awarded to her by the Supreme Court. The Supreme Court also granted her interest at the rate of 8% on the enhanced compensation from the date of filing the claim petition before Motor Accidents Claims Tribunal (MACT) till the date of realisation. The amount of interest worked to Rs. 7,47,143. The Assessing Officer held that this interest of Rs. 7,47,143 is taxable and is covered by section 145A(b) r.w.s. 56(viii) of the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the payment made to the assessee was in the nature of compensation for the loss of her mobility and physical damages and was therefore a capital receipt and beyond the ambit of taxability of income since only such capital receipts can be brought to tax which are specifically taxable under section 45. What is termed as interest also is of the same character and seeks to compensate the time value of money on account of delay in payment. On the first principles, such an interest cannot have a standalone character of income, unless the interest itself is a kind of statutory interest at the prescribed rate. It noted that in the present case interest was awarded by the Supreme Court in its complete and somewhat unfettered discretion. An interest of this nature is essentially a compensation in the sense it accounts for a fall in value of money itself at the point of time when compensation became payable vis-à-vis the point of time when it was actually paid, or for the shrinkage of, what can be termed as, a measuring rod of value of compensation. If the money was given on the date of presenting the claim before the MACT, it would have been Rs 15 lacs but since there was an inordinate delay, though partially, delay in payment of this amount, interest is to factor for fall in the value of money in the meantime. The transaction thus remains the same, i.e. compensation for disability, and the interest rate, on a rather notional basis, is taken into account to compute the present value of the compensation which was lawfully due to the assessee in the distant past. Viewed thus, the amount of compensation received at this point of time, whichever way it is computed, has the same character. If compensation itself is not taxable, the interest on account of delay in payment of compensation cannot be taxable either. The Tribunal held that the conclusion of the Allahabad High Court in the case of CIT v. Oriental Insurance Co. Ltd. 92012) 211 Taxman 369 (All) supports the school of thought that when principal transaction, i.e. accident compensation for delayed payment of which interest is awarded, itself is outside the ambit of taxation, similar fate must follow for the subsidiary transaction, i.e. interest for delay in payment of compensation as well. It also noted that the decision of the Punjab & Haryana High Court in the case of CIT v. B Rai (2004) 264 ITR 617 (P & H) which draws a line of demarcation between the interest granted under a statutory provision and interest granted under discretion of the court and holds that the latter is outside the scope of `income’ which can be brought to tax under the Act. It noted that the situation before it is covered by the observation of the Punjab & Haryana High Court viz. “where interest ….. is to be paid is in the discretion of the court, as in the present case, the said interest would not amount to `income’ for the purposes of income-tax”.

The Tribunal held that the authorities below were completely in error in bringing the interest awarded by the Supreme Court to tax. The Tribunal vacated the action of the AO and disapproved the CIT(A)’s action of confirming the same.

The appeal filed by the assessee was allowed.

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2016 – TIOL – 1063 – ITAT – VIZAG ITO vs. Mother Theresa Educational Society ITA No. 326/Vizag/2013 A. Y.: 2009-10 Date of order: 31.03.2016

Ss. 40(a)(ia) and 43B – When income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and 43B are not applicable.

FACTS
The assessee society, registered under Andhra Pradesh Societies Registration Act and also registered under section 12A of the Act, filed its return of income declaring total income to be Nil by claiming exemption under section 11 of the Act. In the course of assessment proceedings the AO noticed that assessee was deriving income from various sources such as fees from students, income from hospital, income from pharmacy, rent from premises and interest on bank deposits against which various expenses such as salaries of faculty and administrative staff, administrative expenses, college maintenance, etc were claimed. The AO observed that the receipts of the society increased from Rs. 1,58,84,406 to Rs. 22,57,55,509 over a period of four years from AY 2005-06 to 2008-09. He also noticed that the society had availed term loans from banks for construction of college buildings, etc.

The AO observed that though the objects are not under dispute, not is any case being made out for reconsidering the exemptions by virtue of registration under section 12A of the Act. However, he held that since the assessee’s activities are akin to any commercial activity income needs to be assessed under the head `income from business’. While assessing income under the head `Income from Business’, he disallowed various expenditures by invoking provisions of sections 40(a)(ia) and 43B of the Act.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
The Tribunal observed that the AO has neither doubted the genuineness of the activities nor pointed out any violations referred to in sections 13(1)(c) or 13(1)(d), which are preconditions for denying exemption u/s. 11. The Tribunal held that the AO was not correct in denying exemption under section 11 and having assessed income under the head `profits and gains of business or profession’.

The Tribunal noted that Chapter III of the Act deals with incomes which do not form part of total income. Sections 11, 12 and 13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax, if such conditions are fulfilled. Sections 40(a)(ia) and 43B fall under Chapter IVD, which deals with computation of profits and gains from business or profession. The provisions of sections 40(a)(ia) and 43B are relevant if income is computed under the head `profits and gains of business or profession’.

The Tribunal held that the concept of computation of income under section 11 is real income concept, which is computed on the principles of real income generated from property held under trust and not notional income like under other provisions of the Act. Section 11(1)(a) provides for application of income for charitable purpose, therefore, the question of application of income arises only when income is available for application. If any expenditure is disallowed by invoking the provisions of section 40(a)(ia) and 43B, it leads to a situation where assessee income available for application is enhanced without there being any real income for application for charitable purpose, which leads to an absurd situation where the trusts / societies enjoying exemption u/s 11 have to pay taxes. This is because, the assessee claiming exemption under section 11 shall apply 85% of income for objects of the trust. The legislature in its wisdom has kept separate provisions which are independent from any other provisions of the Act for computation of income of trusts claiming exemption u/s 11 of the Act. The Tribunal held that when income is computed under section 11 of the Act, the provisions of section 40(a)(ia) and section 43B of the Act are not applicable. This was also the ratio of the decision of the co-ordinate Bench in the case of Mahatma Gandhi Seva Mandir v. DDIT (Exemption) (2012) 52 SOT 26 (Mum.).

The Tribunal held that the CIT(A) had rightly deleted the additions.

The appeal filed by the revenue was dismissed.

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[2016] 158 ITD 329 (Bangalore Trib.) T. Shiva Kumar vs. ITO A.Y.: 2009-10. Date of order: 19.02.2016

Section 54 – Where assessee after selling residential property; pays sale consideration to another person, within the time limit prescribed under section 54, for purchase of house property then assessee’s claim for deduction under section 54 is to be allowed even though the said purchase transaction does not eventually materialise and another person refunds the consideration paid by the assessee.

FACTS
For the relevant assessment year, the assessee had filed his return declaring income of about 3 lakhs. During the course of assessment proceedings, the AO noted that the assessee had sold a house property and the conveyance deed in relation to the said sale was executed on 15-4- 2008. However, the assessee had not shown any capital gains in his return of income.

The assessee’s case was that it had intention to invest in a residential house building from the very beginning as the entire sum realized on sale was given by him to his brother for acquiring a house property owned by his brother. However, the transaction did not go through and the amount was returned to the assessee.

Subsequently, said sum was paid to one ‘M’ for acquiring a residence owned by her on basis of agreement entered into on 10-3-2010. The said transaction also did not eventually materialise.

The AO thus denied the exemption claimed by assessee u/s. 54 as the assessee could neither show that he purchased a house within two years from the date of transfer of the original asset nor could the assessee show that he had constructed a residential house within three years of such transfer.

The CIT(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
The time period allowed for making a purchase if it is done after the date of transfer is two years and if it is construction it is three years. Thus, if the intention was to construct a residential house the period is three years, the outer limit of three years for constructing a house in the given case was 14-4-2011. Vide sub-section (2) of section 54 a deposit under capital gains scheme, if the capital gain is not appropriated for such construction, has to be done before the due date for furnishing the return of income under section (1) of section 139.

The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Ms Jagriti Aggarwal [2011] 339 ITR 610 has held that sub-section (4) of section 139 can only be construed as a proviso to sub-section (1) and thus, the due date of furnishing the return mentioned in section 139(1) is subject to the extended period provided under section 139(4). The impugned assessment year is assessment year 2009-10, and the extended time period under section 139(4) is before expiry of one year from the end of the relevant assessment year or before completion of assessment whichever is earlier. One year from the end of the impugned assessment year would expire only on 31-3-2011.

The assessment for the impugned assessment year having been completed only on 29-12-2011 the date to be reckoned for the purpose of application of sub-section (2) of section 54 in this case is 31-3-2011. Thus, it is clear that the assessee had time upto 31-3-2011 to deposit the capital gains in capital gains account scheme, if he could not utilise it for acquiring or constructing a residence.

This brings us to the question of whether assessee can be considered to have constructed or acquired a residence before 31-3-2011. Apart from the transaction that assessee claimed to have made with his brother, the assessee had undisputedly entered into a purchase agreement with one ‘M’ on 10-3-2010. The assessee had also paid a post-dated cheque pursuant to such agreement. The agreement dated 30-3-2011 through which consideration originally agreed by the assessee with ‘M’ was reduced from Rs. 70 lakhs to Rs. 40 lakhs has been placed on record. It is clearly mentioned therein that assessee had issued a cheque dated 2-12-2010 to ‘M’ for Rs. 40 lakhs. The bank account of the assessee shows that the above cheque was encashed by ‘M’ on 18- 12-2010. The agreement clearly mentions the intention of the seller to sell a building. It is also mentioned therein that the reduction in the consideration was due to vendor’s inability to complete the work of the residence before the agreed date. The agreement also mentions that the vendor had delivered to the assessee the original documents of title and the vacant possession of the scheduled property.

The liberal interpretation of the term purchase as it appears in section 54 has to be given also to the term ‘constructs’ appearing therein, in conjunction to the former. The Hon’ble Karnataka High Court in the case of CIT vs. Smt. B. S. Shanthakumari [2015] 233 Taxman 347 has held that the completion of construction within three years period was not mandatory and what was necessary was that the construction should have commenced. There is no dispute that the construction of the property for which agreement was entered by the assessee with ‘M’ had already begun. The question whether the above agreement finally fructified is a different matter altogether. Assessee had for all purposes satisfied the conditions u/s. 54 and earnestly demonstrated his intention to invest the capital gain in a residential house. Therefore, the disallowance of such claim stands deleted.

In the result, the appeal filed by the assessee is treated as allowed.

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[2016] 158 ITD 179 (Hyderabad Trib.) Heritage Hospitality Ltd. vs. DCIT A.Y.: 2007-08. Date of order: 22.01.2016.

Sections 28(i) and 22 – Where assessee does not let out any property but receives occupancy charges on daily basis for accommodating employees of various companies and moreover assessee’s memorandum of association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses, etc, the occupancy charges so received is assessed as income from business and not income from house property.

FACTS
The assessee owns property on which it is running the hospitality business. The assessee had entered into agreements with various companies for accommodating their employees in assessee’s guest rooms and received rental receipts charged on daily basis for the same. Such incomes had been accepted up to assessment year 2006- 07 as ‘income from business’.

For relevant assessment year, the Assessing Officer (AO) opined that the assessee had let out the property and did not have any license to run the catering part and on enquiry it was found out that the assessee was not running a kitchen but providing food by outsourcing, on cost to cost basis. He, accordingly, held that the income received by the assessee should be brought to tax as ‘income from house property’.

The AO also noted that various companies deducted tax at source u/s. 194-I and, consequently, the rentals received were to be assessed as ‘income from house property’. The AO also opined that in case assessee’s incomes were to be assessed as ‘business income’, the expenditure could not be allowed fully. Therefore, he had substantially disallowed the amounts on a protective basis.

The CIT(A) confirmed the order of the AO.

On second appeal before the Tribunal.

HELD
There is no dispute with reference to certain facts as follows; (i) assessee owns the property on which it is running the hospitality business; (ii) assessee has not let out property per se but has entered into agreement for providing accommodation to the software engineers of various companies in its property; (iii) the agreement indicates that the charges are payable on occupancy basis on per day basis without any food, except providing coffee and tea and light snacks; (iv) the receipts which are received are for occupancy only of the seven rooms assessee is owning.

There is no letting out of any property as such, but the amounts were paid by the said companies as rent for occupation of the property. It is also not in dispute that in earlier years, assessee’s receipts were accepted under the head ‘business’. Moreover, assessee’s memorandum of association indicates that main object of the company is to carry on the business of hotels, resorts, boarding, lodges, guest houses, etc.

The Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT [2015] 373 ITR 673 has held that where in terms of Memorandum of Association, main object of the assessee-company was to acquire properties and earn income by letting out the same, the said income is to be brought to tax as ‘income from business’ and not as ‘income from house property’. In assessee’s case, assessee has not let out any property but has allowed the occupancy of its properties charged on a daily rental basis and thus AO’s contention that income has to be assessed under ‘house property’ has no basis at all.

Provisions of section 194-I may be applied for any rental income paid, but as seen from the definition of ‘rent’ in section 194-I, rent includes any payment by whatever name called, for use of buildings including factory buildings, equipment, furniture or fittings. Even if machinery was leased, the consequent rent comes under the definition of section 194-I. But machinery lease cannot be considered under ‘income from house property’. Thus AO’s opinion that since TDS made under section 194-I, incomes are to be assessed under head ‘income from house property’ cannot be accepted.

Therefore, both on facts of the case and also on law, as established by the Hon’ble Supreme Court in the above said case, receipts of the assessee cannot be brought to tax under the head ‘house property’. The same is to be assessed under the head ‘Profits and gains of business or profession’ only. Thus the issue of head of income to be assessed is decided in favour of assessee and the issue of allowance of expenditure is restored to the file of AO for fresh consideration.

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The CIT 11 vs. M/s. Goodwill Theatres Pvt.Ltd [Income tax Appeal no- 2356 of 2013 dt – 6/06/2016 (Bombay High Court)].[Affirmed The CIT 11 vs. M/s. Goodwill Theatres Pvt.Ltd) ; ITA No. 8185/Mum/2011 Bench G ; dt 19/6/2013 (A Y: 2008-09 )]

Mesne Profits- Not taxable- Amount received from a person in wrongful possession of its property, would be mesne profits and was capital in nature.

The assessee company received mense profit for unauthorised occupation of the premises (Novelty Chambers) from Central Bank of India who was in possession of the rented premise in the Novelty Chambers. The tenancy of Central Bank of India ended on 1.6.2000. As per the order of the Supreme Court in which the court directed the Bank to hand over the possession to the assessee company by 30/06/2003 due to which the Bank gave possession of Novelty Chambers to the assessee company on 30/09/2003. Hence a suit was filed by the assessee company for mesne profit for the aforesaid period. The Small Causes Court at Mumbai passed an order dated 28/03/2007 wherein the Mesne Profit was fixed at Rs.8,33,474/- per month for the period between 1/06/2000 to 30/09/2003 plus interest thereon. The period was decided on the basis of the fact that the tenancy of Central Bank of India was terminated on 1/06/2000 and it vacated the premises and gave peaceful possession to the assessee company on 30/09/2003. The total compensation was thus fixed at Rs.3,33,38,960/- plus interest thereon at the rate of 6%. Thereafter, Central Bank of India filed an Application to the Small Causes Court for staying execution and operation of the order dated 28/03/2007 which was disposed by directing the appellant to pay Rs.1,47,28,280/-. Central Bank of India had also preferred an appeal against the said determination of mesne profit which was admitted and was pending. Thus, in the mean time during AY 08-09, Central Bank of India paid Rs.1,47,18,280/- to the assessee company which the assessee company had directly taken to the capital reserve without crediting the profit and loss account holding it to be a capital receipt exempt from Income-tax. The appeal of the Central Bank of India was still pending for adjudication.

The Department did not accept the assessee’s contention that mesne profits of Rs.1,47,18,280/- received by it constituted a capital receipt not chargeable to tax, in spite of the decision of the Hon’ble Madras High Court in the case of CIT vs. P. Mariappa Gounder, 147 ITR 676, holding the same to be revenue in nature.

Assessee preferred appeal before the CIT(A). Since the mesne profit was capital in nature in view of the decision of the Special Bench, in case of Narang Overseas Pvt Ltd. therefore, they cannot be brought to tax under Section 115JB of the Act. Even the Explanation 2 to Section 115JB supports the case of the assessee. The CIT (A) allowed the appeal. The ITAT confirmed the order of CIT(A)

The Revenue filed an appeal before the High Court challenging the order of ITAT . Revenue had preferred an appeal against the decision of the Special Bench in Narang Overseas Pvt. Ltd. 100 ITD (Mum)(SB)

The Hon’ble COurt found that the issue before the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra) was to determine the character of mesne profits being either capital or revenue in nature. The Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra) held that the same is capital in nature. There was no doubt that the issue arising herein was also with regard to the character of mesne profits received by the Assessee. Accordingly, the appeal if the revenue was dismissed.

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Palkhi Investments & Trading Co. P. Ltd., Mumbai .. vs. The Income Tax Officer, Mumbai [INCOME TAX APPEAL NO.50 OF 2014; dt 9/6/2016 (Bombay High Court )] Affirmed [Palkhi Investments & Trading Co. Pvt Ltd vs. ITO CIR 9(2)(4) (ITA No.2623/Mum/2011 AY-2005-06; 24- 07-2013)]

Penalty u/s. 271(1)(c) – Addition made u/s 41(1) of the Act on account cessation of liabilities – Liabilities not genuine- Reflecting such liabilities without bonafide belief of their existence amounted to furnishing of inaccurate particulars:

The Assessing Officer made an addition of Rs.1.26 crore to the total income declared by the assessee. This addition was in respect of trade liabilities which had ceased to exist and represented income in terms of Sec. 41(1) of the Act. Being aggrieved the assessee carried the issue in appeal to the CIT (Appeal), who confirmed the same. On further appeal, the Tribunal reduced the addition u/s. 41(1) of the Act from Rs.1.26 crores to Rs.1.05 crores. The assessee carried the issue in further appeal to the High Court. The Court by order dated 16th November, 2010 dismissed the appeal interalia recording as under :

“The tribunal also recorded a finding that one of the creditors had even denied that any amount was due to it from the assessee. The tribunal has also recorded a finding of fact that some of the creditors named by the assessee were not found available at the addresses given by the assessee.”

The appellant filed SLP to the Supreme Court and the same was also dismissed. Thereafter review petition before High court was also dismissed on 4th August, 2015.

The Assessing Officer imposed penalty u/s 271(1)(c) of the Act. This was for furnishing inaccurate particulars of income and concealing income in its return of income for subject assessment year. The order of the Assessing Officer imposing penalty was confirmed by the CIT (A).

The Tribunal recorded the fact that the assessee was unable to prove genuineness of the amount shown as outstanding liabilities to the extent of Rs.1.05 crore. In the above view the assessee had to show on the basis of some evidence that it had a bonafide belief that the liability shown in the balance sheet was existing. During the course of hearing in penalty proceedings the Tribunal raised two queries, namely, evidence to prove as to when liability claimed to be subsisting arose for first time and other whether the assessee had received any letter from HDFC Ltd. stating that the amount due to M/s. Karamchand Chunnilal should be paid over to them as it had taken over its business as contended by the assessee. The impugned order records that the assessee was not in position to respond on both the issues. The impugned order further recorded that the claim made with regard to existing liabilities was not genuine claim as already established in quantum proceedings. The tribunal held that it was established that the assessee had filed inaccurate particulars of claim of income resulting in concealing of income. In above view, the tribunal upheld the order of AO imposing penalty of Rs.38.71 lakhs u/s. 271(1)(c) of the Act.

The Hon’ble Court observed that in quantum proceedings which were taken up to the Supreme Court the Tribunal had recorded a fact that a creditor had denied that any amount was due to the appellant and one of them was also not found at the address given. Further, in penalty proceedings all three authorities have concurrently arrived at a finding of fact that the claim made by the assessee with regard to its outstanding liabilities for subject assessment year was false. These findings of fact are not shown to be perverse in any manner. The legal claim made before the court that once a liablility is shown in the balance sheet, it must follow that it is bonafide, is not understood. The liability shown in the balance sheet as existing is found to be false. The assessee has to show the reason why he believed at the time he filed his balance sheet, it was true. No such attempt was even made.

The fact is that in terms of section 139 of the Act a return of income under the Act has to be filed along with the balance sheet and profit and loss account. In its absence the return of income is defective. Thus, same are to be considered as a part of the return of income. Further by showing a non existing liability as an existing liability, in the subject AY , the attempt was to escape offering of the ceased liability as income obliged to do u/s. 41(1) of the Act. Thus, not offering to tax, the above ceased liabilities would by itself amounted to furnishing inaccurate particulars of income leading to escapement of income from tax. In view of the above the assessee’s appeal was dismissed.

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DIT (E) vs. M/s. Khar Gymkhana Income tax Appeal no -2349 of 2013 dt : 6/06/2016 (Bombay High Court).[Affirmed M/s Khar Gymkhana vs. DIT (E) ; ITA No. 373/Mum/2012 Bench: A ; dt 10/7/2013 ;(A Y: 2009-10 )]

Charitable Institution- Registration of a charitable institution granted u/s. 12AA – cancellation of registration is to be initiated strictly in accordance with sections 12AA (3) and 12AA (4):

The assessee came into being by virtue of Deed of Trust dated 04.10.1934 for the promotion of sports, physical culture and social inter-course among members. The assessee trust had facilities such as promotion and advancement of games like cricket, tennis, badminton, a library consisting of sports books and periodicals, other indoor and outdoor games facilities. The CIT, Bombay City IV, allowed the registration of the trust u/s. 12A(a). Since then, the assessee was enjoying the exemption granted by the Income Tax department.

In the assessment proceedings for AY : 2009-10, the AO came to a conclusion that the assessee trust was carrying on the activities, which were in the nature of trade, commerce, business etc. This, he concluded by noticing that out of the receipts, the assessee had earned income by the sale of liquor at Rs. 1,45,99,037/-, canteen compensation at Rs. 20,67,807/- card and daily games at Rs. 81,883/-, guests fee at Rs. 31,50,078/- and income from banquet hall. The AO, therefore, asked the assessee to explain as to why the registration may not be cancelled in view of the newly inserted proviso to section 2(15), applicable from 2009-10, as the objects are not merely the advancement of games and social interaction, and the activities were of nature set out in the proviso i.e.:

a) any activity in the nature of trade, commerce or business or

b) any activity of rendering any service in relation to any trade, commerce or business.

as prescribed by Circular No. 11/2008, dated 19.12.2008. The AO held that if any trust/Institution whose main object is “for advancement of any other object of general public utility” carries out any activities which are in the nature of any trade, commerce or business for a cess or fee , it brings all actions of a trust which are resulting in such receipts as part of its earnings under the ambit of aforesaid proviso. Since the receipts were in excess of monitory limit as led down in the aforesaid proviso, there was a clear cut contravention of the provisions of Section 2(15) r.w. proviso.

The Tribunal held that it was not the case of the department that the assessee crossed the twin conditions, as mentioned in the section 12AA(3), which are, ” … that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution …”. In the instant case, the department has nowhere mentioned that “social inter-course among members” was not one of the objects of the trust, when it was originally formed on 04.10.1934. The revenue authorities have erred in cancelling the registration u/s 12AA(3).

The Revenue filed an appeal before the High Court challenging the order of ITAT .

It was submitted by the assessee that in view of the CBDT Circular having Circular No. 21 of 2016 dated 27th May, 2016, the Revenue cannot press this appeal.

The Hon’ble Court observed the Circular No.21 of 2016 when read as a whole, specifically lists out in paragraphs 4 and 5 that the Registration granted under Section 12AA could not be cancelled, only when the receipts on account of business exceeded the cutoff, specified in the proviso to section 2(15) of the Act. The jurisdiction to cancel the Registration only arises if there is change in the nature of activities of the institution or the activities of the institution, are not genuine. The aforesaid Circular by placing reliance upon 13(8) of the Act inter alia provides that the Registration granted to the Trust would continue even when the receipts on account of business is in excess of Rs.25 lakhs.

In view of the issue being covered by the CBDT Circular No.21 of 2016, no grievance against the impugned order can be made by the Revenue. Therefore, the appeal of the revenue was dismissed.

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The CIT: 21 vs. Parleshwar Coop. Housing Society Ltd. [Income tax Appeal no 1569 of 2007 dt -08/06/2016 (Bombay High Court)]. Affirmed decision in[Shree Parleshwar Co-Op. Housing vs. ITO, Ward 21(2)(4); AY- 1998-99 to 2000-2001 (2006 8 SOT 668 Mum)]

Character of income- Contribution received by the Society from its four new members would be covered by the concept of mutuality and not chargeable to tax – Principle of mutuality :

The assessee was a, housing co-operative society, registered under the Maharashtra Co-operative Societies Act, 1960. The assessee fell in the category known as “tenant co-partnership housing society”. The main feature of such a society is that it owns both land and building either on leasehold or freehold basis and on construction of tenements they are allotted to its members. The society constructed 198 flats from 1954 till 1956 and allotted them to members, who, among others, had a right to transfer their right of membership and other attendant privileges.

During these assessment years the assessee society collected interest free loans from the incoming members. The AO was of the view that the loans so taken are really not refundable and consequently represented income in its hand, liable to be taxed. The assessee submitted that the loans in question were all repayable sums. In fact, all the loans were eventually repaid .

The assessee before ITAT contended that the department did not properly appreciate that the loans in question were only in the nature of loans and did not have the character of income. Even otherwise, on the basis of mutuality the sum could not be brought to tax.

The issue stood concluded against the Revenue and in favour of the assessee by the decision of the Apex Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. vs. Commissioner of IncomeTax, (2004), 270 ITR 1.

As regards second issue the said Society owned both the land and the building and only alloted its tenaments to its members. The respondent society was constituted in the year 1954 and had 198 members occupying its tenaments. The respondent Society had available unutilised FSI (Floor Space Index) and sought to exploit it by constructing four additional tenaments and also enclosing the balconies (Verandah) of the existing tenaments resulting in additional l00 sq.ft. to its members. None of the existing members came forward to seek allotment of the four additional tenaments which were to be constructed on exploitation of the unutilised FSI.

In 1998, four persons sought membership of the Society. The above four new members were subsequently alloted the tenaments on construction by the respondent Society. The four new members had after becoming members contributed to the Society in the aggregate an amount of Rs.1.10 Crore. This resulted in allotment of four new tenaments constructed by the Society. However, the aforesaid contribution received from the four new members was not offered to tax by the Society on the principle of mutuality. However, the Assessing Officer did not accept assessee’s contention in respect of mutuality and held that the contribution from the four new members is in fact consideration received for sale of four new tenaments and, therefore, chargeable to tax as the income of the Society.

The CIT (A) dismissed the Society’s appeal holding there is no reason to disturb the findings of the Assessing Officer.

On further appeal by the Society, the Tribunal while allowing the Society’s appeal placed reliance upon the decision of the Apex Court in Commissioner of Income Tax vs. Bankipur Club Ltd. 226 ITR 97 wherein it was held that where a number of persons combine together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators.

The tribunal held that the contribution received by the Society from its four new members would be covered by the concept of mutuality and not chargeable to tax

The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the test to determine the satisfaction of mutuality had been laid down by the decision of the Apex Court in Banglore Club vs. CIT 350 ITR, 509. The Apex Court has observed that the basis of not taxing surplus funds in the hands of an Assessee on the principle of Mutuality found its origin in the concept that no man can make a profit of himself. The Apex Court in Banglore Club (supra) set out three tests to be satisfied as under before the principle of mutuality can be applied as under :

i) There must be a complete identity between the contributors and the participants as a class;

(ii) The actions of the participants and contributors must be in furtherance of the activities of the assessee; and
(iii) There must be no scope of profiteering by the contributors from a fund made by them, which could only be expended or returned to them.

Thus, on facts, tests are satisfied therefore the Appeal of the revenue is dismissed.

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CIT- 15 vs. Sanjay Manohar Vazirani. [ Income tax Appeal no 2442 of 2013 dated- 07/06/2016 (Bombay High Court)]. Affirmed [Sanjay Manohar Vazirani vs. Commissioner of Income Tax 15 . [ITA No. 5178/MUM/2012 ; Bench – E ; dated 30/01/2013 ; A Y: 2009- 2010. Mum. ITAT ]

New Claim – Without filing revised return before AO – No Bar to entertain such claim by Appellate authority – Borrowing funds for its business of sale and purchase of shares held allowable:

The assessee in his return of income had claimed carry forward short term loss of Rs.1,17,70,414/-, in respect of sale and purchase of shares. During the course of assessment proceedings the assessee vide letter dated 17/10/2011 claimed that the activity of the assessee regarding sale and purchase of shares should be considered to be in the nature of business activity. It was pleaded that loss arising out of sale and purchase of shares should be allowed as loss arising out of business of sale and purchase of shares. A loss of Rs.5,40,98,454/- was computed by the assessee in respect of sale and purchase of shares . It was submitted that the activity of sale and purchase of shares should be considered to be business activity as all the necessary ingredients which are required to hold an activity as business activity have been fulfilled viz. (i) there is a high frequency of purchase and sale of shares; (ii) the transactions are substantial ; (iii) there is a voluminous trade as the total purchase are to the tune of Rs.51.24 crores and sales are of Rs.49.00 crores; (iv) the holding period of shares is very low; (v) the assessee has utilized borrowed funds for purchasing and holding the shares.

The AO did not accept such contentions of the assessee The AO also rejected the claim of the assessee regarding interest on loans which was claimed to the tune of Rs.71,18,278/- as according to AO only a portion of the said interest could be considered for the purpose of purchase and sale of shares. AO held that 40% of such interest is disallowable. Accordingly, he made disallowance of Rs.28,47,311/- .

Before the CIT (A) the assessee raised the same contentions . The Ld.CIT(A) did not accept the submission of the assessee on the ground that the assessee himself, in the return of income, has disclosed the income arising out of share transactions under the head capital gain; in the balance sheet, the stock had been shown under the head investment. He held that the claim made by the assessee during the course of assessment proceedings was an after thought the assessee could not be allowed to change the stand just to take advantage of some provisions of the Act; the assessee was not a trader of shares and purchase and sale of shares by him was only a part time activity because the assessee was getting regular salary income from the company; mere frequency of transactions could not be a proof of trading activity. Therefore, he held that AO was right in treating such income under the head “capital gain” and in this manner CIT(A) confirmed the action of the AO. The CIT(A) also confirmed the disallowance made by the AO in respect of interest.

The ITAT held that activity of sale and purchase entered into by the assessee was in the nature of business, as it had not been disputed by the revenue that borrowed funds on which interest had been paid by the assessee were utilized for the purpose of purchase of shares, the same was allowable out of income earned by the assessee from the activity of sale and purchase of shares. Thus appeal filed by the assessee was allowed .

The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the Tribunal has followed the decision of this Court in CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. 349 ITR 336. Thus, the assessee’s contention was accepted that the gain on account of purchase and sale of shares was in the nature of business income. Consequently the interest paid by the assessee for borrowing funds for its business had necessarily to be allowed. In the above view, Appeal was dismissed.

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TDS – Perquisite – A. Y. 1993-94 – Free interairline tickets provided to the employees of the assessee by other airlines – Cannot be considered as perquisite provided by assessee – No tax deductible at source –

CIT vs. Air France; 384 ITR 142 (Del):

The assessee is in the business of air transport. The Assessing Officer treated as perquisite the free interairline tickets provided to the employees of the assessee by other airlines. He held the assessee liable for short deduction of tax at source. The CIT(Appeals) and the Tribunal allowed the assessee’s claim that there is no perquisite.

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

“The Tribunal did not commit any error in deleting the addition. The Department was unable to explain how the free air ticket provided to the employees of the assessee by some other airlines could be treated as perquisites provided by the assessee.”

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TDS – Compensation or interest accruing from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term income –

Managing Director, Tamil Nadu State Transport Corpn. (Salem) Ltd. vs. Chinnadurai; [2016] 70 taxmann.com 53 (Mad)

In this case the Madras High Court considered the question as to whether it would be appropriate to insist the victim who is awarded compensation in motor accident cases to part with it or the interest that accrued on it towards payment as Tax Deduction at Source (TDS) ?

The High Court held as under:

“i) If there is a conflict between a social welfare legislation and a taxation legislation, then, this Court is of the view that a social welfare legislation should prevail since it subserves larger public interest. The Motor Vehicle Act is one such legislation which has been passed with a benevolent intention for compensating the accident victims who have suffered bodily disablement or loss of life and the Income Tax Act which is primarily intended for Tax collection by the State cannot put spokes in the effective and efficacious enforcement of the Motor Vehicles Act. In fact, if one might deeply analyse, it could be seen that there is no direct conflict between any provisions of the Income Tax Act and the Motor Vehicles Act and it is only by the interpretation of the provisions the concept of compulsory payment of TDS has crept into the realm of compensation payment in Motor Vehicle Accident cases.

ii) This Court arrives at the conclusion that the compensation awarded or the interest accruing therein from the compensation that has been awarded by the Motor Accident Claims Tribunal cannot be subjected to TDS and the same cannot be insisted to be paid to the Tax Authorities since the compensation and the interest awarded therein does not fall under the term ‘income’ as defined under the Income Tax Act, 1961.

iii) Therefore, this Court directs that the Petitioner Corporation cannot deduct any amount towards TDS and the same shall also be deposited in addition to the amount that has already been deposited to the credit of M.CO.P.No.879 of 2006, on the file of the Motor Accident Claims Tribunal, Additional District Judge, Fast Track Court, Dharmapuri, within a period of four weeks from the date of receipt of a copy of this order and the Respondent is entitled to take appropriate steps in a manner known to law to withdraw the amount.”

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Search and seizure – Retention of seized assets – Section 132B – Application for release of seized articles within time and explanation furnished regarding the articles – Department has no authority to retain seized articles if no dispute raised within 120 days – Direction to authorities to immediately release seized articles –

Mul Chand Malu (HUF) vs. ACIT; 384 ITR 46 (Gau):

The assessee’s were members of a HUF. Under searches conducted in different premises of the assesses, jewellery ornaments and bullion amounting to Rs. 13,44,70,018 were seized. The assesses filed application under first proviso to section 132B(1)(i) on 26/11/2014 for release of the assets. Without taking any decision on the application within the stipulated period of 120 days from the date on which the last authorization for search was executed, the assesses were informed that by an order dated 28/01/2015 centralisation of their cases has been done and therefore jurisdiction of the office of the Assistant Commissioner of Income- Tax, Gauhati had ceased and that the application dated 26/11/2014 was treated as disposed of in the light of the order dated 28/01/2015.

The Gauhati High Court allowed the writ petition filed by the assesses for release of the assets and held as under:

“i) When an application is made for the release of the assets under the first proviso to section 132B(1)(i) of the Act explaining the nature and source of the seized assets and if no dispute was raised by the Department during the permissible time of 120 days, it had no authority to retain the seized assets in view of the mandate contained in second proviso to section 132B(1)(ii) of the Act.

ii) The authorities are directed to release the seized assets of the assesses immediately.”

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TDS: Credit for TDS – A. Y. 2009-10 – TDS belonging to sister concern credited to Form 26AS of assessee – TDS deducted from payment to REPL, sister concern of assessee – Deductor mistakenly mentioned PAN of assessee and hence TDS amount appeared in Form 26AS of assessee – REPL paid taxes without claiming adjustment of said TDS and also not objecting to grant of credit of the same to the assessee –

Assessee is entitled to credit of the said amount of TDS: CIT vs. RELCOM; 286 CTR 102 (Del):

In the A.Y. 2009-10, one of the customers, in its TDS return mentioned the PAN of the assessee in respect of the TDS from payment to the sister concern REPL. REPL did not claim the credit of the said TDS and paid tax on its income. REPL did not have objection in giving credit of the said TDS in favour of the asessee. The said TDS reflected in Form 26AS in the case of the assessee and the assessee claimed credit of the same. The Assessing Officer refused to give credit of the said amount to the assessee. The Tribunal allowed the assessee’s claim.

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

“i) The Revenue relies on the phrase “shall be treated as a payment of tax on behalf of the person from whose income the deduction was made” in section 199 to contend that the assessee’s TDS claim cannot be based on the receipts of REPL.. However, the assessee fairly admitted throughout the proceedings for its TDS claim of Rs. 1,20,73,097 that the benefit of such claim has not been availed by REPL. Therefore, the Revenue, having assessed, REPL’s income in respect to such TDS claim cannot now deny the assessee’s claim on the mere technical ground that the income in respect of such TDS claim was not that of the assessee, given that the assessee and REPL are sister concerns and REPL has not raised any objection with regard to the assessee’s TDS claim.

ii) Procedure is the handmaid of justice, and it cannot be used to hamper the cause of justice. Therefore, the Revenue’s contention that the assesse, instead of claiming the entire TDS amount, ought to have sought a correction of the vendors mistake, would unnecessarily prolong the entire process of seeking refund based on TDS credit.

iii) The question of law is answered against the Revenue and the appeal is dismissed.”

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Search and seizure – Release of seized assets – Ss. 132A and 132B(1)(i) – Time limit for disposing application – If no decision taken within time department cannot wait for outcome of assessment but bound to release asset –

Nadim Dilipbhai Panjvani vs. ITO; 383 ITR 375 (Guj):

The Department seized cash from the petitioner while he was travelling on March 25, 2014. The petitioner applied for release of cash under petition dated April 14, 2014 which was filed on April 17, 2014. The application was rejected on 20/07/2015 on the ground that the cash could be released only when its source was explained to the satisfaction of the Assessing Officer and release of seized assets could be considered only after the final assessment of the tax and penalty proceedings. The contention of the petitioner that this decision should have been taken within the time envisaged under further proviso to clause (i) of sub-section (10) of section 132B of the Income-tax Act, 1961 was rejected by the Assessing Officer.

The Gujarat High Court allowed the writ petition filed by the assessee and held as under:

“i) The second proviso to clause (i) of sub-section (1) of section 132B puts a time limit within which a seized asset must be released. The question of not releasing the asset would arise only upon the decision on an application that may have been made by the person concerned being taken by the Assessing Officer. If no decision is taken, necessarily, the option of the Assessing Officer to adjust such seized assets would be confined to the existing liabilities.

ii) It is in this context the legislature requires the Assessing Officer to follow the time limit scrupulously. In other words if the person concerned has made an application for release of the assets within the prescribed time, the authority can refuse such request on the ground of not being satisfied about the source of acquisition. But if no such decision is taken within the time envisaged in the further proviso, releasing of the asset becomes imminent.

iii) The action of the Assessing Officer was not sustainable. The impugned order dated July 20,2015 is set aside. The seized cash shall be released in favour of the petitioner with interest as per the statute.”

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Before Saktijit Dey (J. M.) and Ramit Kochar (A. M.) ITA no.7297/Mum./2013 A.Y.: 2010–11. Date of order: 27.05.2016 Counsel for Revenue / Assessee: K. Mohan Das / Jignesh R. Shah

Section 40(a)(ia) – Assessee not liable to deduct tax at source when the payment made is on behalf of the client.

FACTS
The assessee, a partnership firm, is engaged in the business of providing logistic services relating to export/ import viz. transportation, warehousing, packaging, custom clearance, organizing of container with the shipping lines, arrangement of labour for unloading cargo, etc. During the assessment proceedings the AO noticed that during the year, the assessee had paid an amount of Rs. 3.29 crore to Container Freight Station (CFS) and Inland Container depots (ICD) for/on behalf of importer/ exporter. The AO was of the view that as the assessee was dealing with the CFS for and on behalf of its client, it was the liability of the assessee to deduct tax u/s 194C while making payments to CFS. On account of its failure to deduct tax at source, the AO disallowed the sum of Rs. 3.29 crore by invoking the provisions of section 40(a)(ia).

On appeal, the CIT(A) deleted the addition as the assessee had made payments on behalf of the importer/ exporter. According to him, the payments so made were deemed to be the expenditure of the importer/exporter and not an expenditure by the assessee. Since the assessee had never claimed these payments as expenditure in the Profit & Loss account, the provisions of section 40(a)(ia) cannot be invoked to disallow the same.

HELD
According to the Tribunal, when the AO himself admitted the fact that the assessee had made payments to CFS/ ICD on behalf of importer as a custom house agent and the documentary evidence produced by the assessee also proved such fact, the AO cannot disallow the payments under section 40(a)(ia) alleging non–deduction of tax by the assessee, especially when the expenditure / payment does not relate to the assessee. Merely because the assessee made payments on behalf of its client the liability of deduction of tax on the assessee would not get attracted. More so, when the assessee has not claimed such payments as expenditure by debiting to its Profit & Loss account. In coming to the conclusion, the Tribunal also found support from the Mumbai Tribunal decisions in the case of DCIT v/s Rank Shipping Agency Pvt. Ltd. (ITA no. 5946/Mum./2008 dated 21.11.2012) and in the case of ITO v/s M/s. Universal Traffic Co. (ITA no.1426 to 1429/Mum./2013 dated 17.12.2014). With the result, the Tribunal dismissed the appeal filed by the revenue.

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[2016] 69 taxmann.com 199 (Mumbai-CESTAT) – Indago vs. Commissioner of Service Tax

Appellate authority cannot reject refund claim on grounds/issues which are not arising out of adjudication order. Time limit of one year for filing a refund claim shall be calculated from end of quarter.

Facts
Appellant filed a refund claim under Rule 5 of CENVAT Credit Rules for the period April 2012 to June 2012 on 08/05/2013. The sanctioning authority rejected a part of the refund claim on the grounds of (i) certain invoices mentioned incorrect address and (ii) FIRC was received by Appellant on 13/04/2012 and hence refund claim filed on 08/05/2013 was time barred. On appeal to Commissioner (Appeals), the claim was rejected on altogether different ground i.e. FIRC was issued in March 2012 and hence there being no export during April to June 2012, Appellant is not entitled to refund.

Held
Tribunal observed that the Commissioner (Appeals) categorically held that since the refund has to be filed quarterly the period of 1 year should be computed from the end of the quarter and held that the refund is not time-barred. In other words, reason given by adjudicating authority for denial of refund was rejected by the Commissioner (Appeals). However, he rejected the refund on some other ground i.e. by interpreting the amended provision as per Notification No. 18/2012-CE(NT) dated 17/03/2012 according to which, though the FIRC was received in the month of April 2012, the export had to be considered made in the month of March 2012 and hence there being no export during the quarter from April 2012 to June 2012, refund was rejected. In such a situation, Tribunal held that it was not open for the Commissioner (Appeals) to go into the issues, which do not arise out of the adjudication order. Since refund was rejected only on time-bar, the Commissioner (Appeals) was supposed to decide the issue only on time-bar. It further held that as the refund of the Appellant was filed within 1 year from the quarter ending was within time-limit, the refund was not time-barred and assessee was entitled to refund.

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[2016] 69 taxmann.com 198 (Mumbai-CESTAT) – Franco Indian Pharmaceutical (P) Ltd. vs. Commissioner of Service Tax, Mumbai

Tribunal explains the concept of joint employment and held that the activity of deputation of employees between group companies in the course of “joint employment” arrangement and cost of employees borne by such companies on actual basis would not constitute service.

Facts
Appellant’s three sister concerns entered into an agreement for utilizing marketing network of Appellant for their businesses and paid certain percentage of sales towards recovery of expenses. It is also mentioned in the agreement that cost attributable to salary, wages, bonus, incidental expenses etc. for employees who were deputed to the group companies was also recovered. The revenue contended that the Appellant being specialist in marketing of Pharma products was rendering “business auxiliary services” and if not “business auxiliary services”, at least “manpower recruitment and supply services” and charged a consideration in the form of pre-decided percentage of sales.

Held
Tribunal found that agreement is suggestive of the fact that when employees were deputed to group companies, they are governed by rules and regulations of such group companies; such group companies were required to address and solve any complaint regarding sales (of products manufactured by them) made by deputed employees; Further, after completion of jobs, employees were re-deputed to any of the group companies or retained by the Appellant. Hence, Tribunal found that there was no indication of Appellant rendering promotion/ marketing services to group companies. It was further held that legislative intent of keeping services in the course of employment outside the purview of service tax is also applicable to cases of joint employment where employee renders services to more than one employer. Such joint arrangements are entered into on account of reasons such as unwillingness of employees for entering into several contracts, convenience in accounting and contracting etc. and as a result, contract of joint employment is signed by one employer and not all. Tribunal concurred with Draft Circular dated 27/07/2012 (which was never released), to the extent it provided that where one entity pays the salary and other expenses of the staff on behalf of other joint employers which are later recouped from the other employers on an agreed basis on actual, such recoveries will not be liable to service tax as it is merely a case of cost reimbursement. It was explained that mere fact that the employee’s appointment letter is signed by just one employer and not by others would not mean that it’s not a case of collective employment. If an employee consents to his deputation or secondment to another company and willingly works for other employercompanies for long periods of time, knowing fully well that his emoluments are being paid by such other companies, his contract of employment with a single employer will, by virtue of the parties conduct, transform itself into a contract of joint employment with several employers. In this case, employees have been working for many years with several group companies who have, in terms of a pre-existing understanding amongst themselves, been sharing the actual cost of employment on an agreed basis. It was held that the collective conduct of employees and employer companies for a long period of time has effect of establishing that contract of employment as one of the joint employment. In the absence of such a mark-up/ margin, the payments received against debit notes by one employer-company upon the other employer-companies, will not partake the character of consideration for any service, but will represent only reimbursement of shared costs.

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[2016-TIOL-1300-CESTAT-MUM] M/s Red Hat India P. Ltd vs. Principal Commissioner, Service Tax, Pune

Works Contract service is excluded from the definition of input service only when it is used for construction service. Further the department is liable to pay interest if there is delay in sanctioning refund beyond three months of filing of the claim.

Facts
The Appellant filed a refund claim of service tax charged on the works contract service for monthly maintenance of photocopier, computer and building premises availed by them under Rule 5 of the CENVAT Credit Rules, 2004. The refund was denied on the ground that works contract service was excluded from the definition of input service under Rule 2(l) of the CENVAT Credit Rules, 2004. Therefore the present appeal is filed.

Held
The Tribunal noted that Works Contract Service is excluded only when it is used for construction service, whereas in the present case service was used for maintenance of office equipment and building therefore, this particular works contract service does not fall under the exclusion category and is eligible for refund under Rule 5. Further it was also held that irrespective of any circumstances whatsoever, if there is delay in granting refund beyond three months from the filing thereof, the department is duty bound to grant the interest for the delayed period in sanctioning the refund under section 11BB of the Central Excise Act, 1944.

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Expectations

‘We get caught by not what we give,
but what we expect’.
Swami Vivekanand

1.1 We don’t realise but we are prisoners of expectations. We expect from our colleagues, clients, parents, children, spouse, friends, even acquaintances and above all from ourselves. We are conscious that all expectations are reciprocal therefore our actions are nothing but a trade or a barter.

1.2 As expectations are rarely met we feel life is muddy and messy, resulting in conflict, confusion, stress and anger. Let us realise that suffering is the result of having expectations of how things should be. Expectations make life imperfect and unhappy though happiness is what we seek in expectations. Stephen Hawking has rightly said `when one’s expectations are reduced to zero, one appreciates everything. The issue, is : Is this possible !

2. The danger of living upto other people’s expectations is: one puts on a mask and conceals the real person – result – our lives become artificial. In such an environment one develops a strong ego which results in or is the beginning of what one may say : `is the end of happiness’.

3.1 Expectations make us slaves of our emotions. We react instead of responding – result – impacting relationship and at times even destroying relationship. The outstanding example is the increase in divorce cases. Have we ever reflected as to why some ‘love marriages’ fail and result in divorce despite the fact that the two human beings have known each other and have chosen each other. This is because of expectations – expectation of utopia – which doesn’t exist in any relationship. As opposed to this in an arranged marriage there are virtually no expectations as persons involved virtually don’t know each other. They enter into a relationship with a few expectations and desire to make the marriage work. Let me clarify that there are divorces even in arranged marriages and the same are increasing because of the current environment of expectations, individuality and intolerance. We little realise that relationship is based on appreciating each others strengths and accepting faults for no human is without faults.

3.2 Expectations are normally based on emotions – let expectations be devoid of emotions. The issue is: is this possible! The answer is yes for if no emotions are involved there would be no disappointment –result is: if expectations are not met our relationships will not be impacted. The irony of life is we expect from those whom we love little realising that love is based on giving and not receiving. Love is unconditional.

3.3 Swami Sukhabodhanand referring to emotions advises: `One should be emotionally fit, and that emotion should be directed by intellect. Intellect without emotion and emotion without intellect, both are incomplete’.

4. Our beliefs and behaviour reflect our expectations – for example – in India parents expect to be looked after by children whereas in the West the expectations from children are much less. India is also changing and we now have an increasing number of old age homes.

5. Expectations from oneself should be based on awareness of one’s limitations. Awareness of limitations is not failure but makes life happy. This awareness also gives one confidence.

6.1 The issue is : How does one manage ‘expectations’. The answer is simple but difficult to practice. It is ‘being realistic’. Being realistic with oneself and others: Practice of this will lead to ‘happiness’.

6.2 It is rightly said: Let go of expectations. The issue is: what do you do when expectations are not met because this leads to frustration and disappointment. The fact is that expectations are nothing else but a dream we dreamt but dreams rarely come true. We need to realise that we can never live life without expectations. The answer is: Analyse whether expectation was realistic as there is always a gap between dream and reality – accept what one gets and move on.

6.3 Another way to manage expectations, is : to understand the difference between `giving’ and ‘sharing’ because in ‘giving’ one expects whereas whilst ‘sharing’ one enjoys. So let us ‘share’.

6.4 Whilst dealing with expectations from oneself – we need to use expectations as a tool of motivation to achieve our goals and nothing more.

6.5 I would conclude by quoting Eli Khamarov :

?The best things in life are unexpected – because there were no expectations’.

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On Low Interest Rate Regime, Raghuraman Rajan takes critics head on

Reserve Bank of India (RBI) Governor Raghuram Rajan tore into his critics on Monday, lobbying for a low interest rate regime to spur economic growth, by stating that such views are “hopelessly optimistic” about the powers of the central bank and any clever solutions in the form of unorthodox painless pathways lead to “depressingly orthodox consequences”.

Rajan was speaking at his first public engagement after expressing on Saturday his desire to go back to academia after his term at the central bank comes to an end on September 3. The outgoing central bank governor, dressed in a sharp black suit and maroon tie, was addressing a packed hall of students and members of academia at the foundation day of the Tata Institute of Fundamental Research (TIFR).

In a long speech that went into lucid explanations of how inflation and interest rate dynamics work in a monetary policy, Rajan, the academician, almost spelt out a point by point rebuttal to arguments charging RBI of misguided actions under his command. Defending his hawkish stance on inflation, Rajan said contrary to perceptions, savings rates have gone up in the economy as the savers are finally getting real interest rates in the form of low inflation. “In recent years, our fight against inflation also meant the policy rate came down only when we thought depositors could expect a reasonable positive real return on their financial savings. This has helped increase household financial savings relative to their savings in real assets, and helped bring down the current account deficit,” he said.

Critics in favour of targeting Wholesale Price Index (WPI) because it is low now would be eager to switch to Consumer Price Index (CPI) when WPI starts rising and crosses CPI, which it has done quite a few times in the past.

In fact, WPI is something that gets influenced by what global policymakers do rather than what RBI does and therefore, it should be CPI that needs to be the policy peg, the governor said.

“By focusing on WPI, we could be deluded into thinking we control inflation, even though it stems largely from actions of central banks elsewhere. In doing so we neglect CPI which is what matters to our common man, and is more the consequence of domestic monetary policy,” Rajan said, adding, “In doing so we neglect Consumer Price Index which is what matters to our common man, and is more the consequence of domestic monetary policy.”

Turning to the charge that RBI killed private investment by keeping rates too high, he said the policy rate in effect plays a balancing act.

Monetary policy is not responsible for high interest rates charged to highly indebted customers, but such companies are charged hefty risk premiums by banks as the lenders presume the loans may not get repaid. “This credit risk premium is largely independent of where the RBI sets its policy rate,” Rajan said.

The central bank also came under fire for the monetary policy failing to show effects on inflation when the economy is supply constrained, especially in case of food inflation. “The reality is that while it is hard for us to control food demand, especially of essential foods, and only the government can influence food supply through effective management, we can control demand for other, more discretionary, items in the consumption basket through tighter monetary policy,” Rajan said. Rajan said the central bank was prepared to face any volatility that may arise due to Brexit. “Brexit can be quite damaging if it happens. Of course, we have factored in some probability of it happening. If it doesn’t happen, you could see some significant rebound. We are preparing for it and monitoring the markets. We have said earlier that we have three lines of defences – good policy, we have pushed out the maturities of foreign borrowings and they are not significantly worrisome at this point, and finally we have plenty of reserves,” Rajan said. “We will do what it takes to moderate market volatility, but once the initial bouts of wave abate, people look for good fundamentals.”

(Source: News Report in Business Standard dated 21.06.2016)

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Notification No. FEMA 10 (R) / 2015-RB dated January 21, 2016

Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 10/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Foreign currency accounts by a person resident in India) Regulations, 2000.

Further, this Notification contains regulations updated up to June 01, 2016 with respect to Foreign currency accounts by a person resident in India (including changes made vide Notification No. FEMA 10 (R) / (1) / 2016-RB dated June 01, 2016, mentioned above).

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Notification No. FEMA 10 (R)/(1)/2016-RB dated June 01, 2016

Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) (Amendment) Regulations, 2016

This Notification has made the following changes in Regulation 10(R): –

Amendment to Regulation 5

A. The existing sub-regulation (E) shall be renumbered as (F).

B. In the re-numbered regulation (F), the existing subregulation (3) shall be substituted by the following namely:

“Insurance/reinsurance companies registered with Insurance Regulatory and Development Authority of India (IRDA) to carry out insurance/reinsurance business may open, hold and maintain a Foreign Currency Account with a bank outside India for the purpose of meeting the expenditure incidental to the insurance/reinsurance business carried on by them and for that purpose, credit to such account the insurance/reinsurance premia received by them outside India.”

C. After the existing sub-regulation (D), the following shall be inserted namely: –

“(E) Accounts in respect of Startups

An Indian startup or any other entity as may be notified by the Reserve Bank in consultation with the Central Government, having an overseas subsidiary, may open a foreign currency account with a bank outside India for the purpose of crediting to it foreign exchange earnings out of exports / sales made by the said entity and / or the receivables, arising out of exports / sales, of its overseas subsidiary.

Provided that the balances in the account shall be repatriated to India within the period prescribed in Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 dated January 12, 2016, as amended from time to time, for realization of export proceeds.

Explanation: For the purpose of this sub-regulation a ‘startup’ means an entity which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.”

Amendment to Schedule 1

In Paragraph 1, in sub-paragraph (1), after the existing clause (vi), the following shall be inserted namely: – “vii) Payments received in foreign exchange by an Indian startup, or any other entity as may be notified by the Reserve Bank in consultation with the Central Government, arising out of exports/ sales made by the said entity or its overseas subsidiaries, if any.

Explanation: For the purpose of this schedule a ‘startup’ means an entity which complies with the conditions laid down in Notification No. G.S.R 180(E) dated February 17, 2016 issued by Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.”

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A. P. (DIR Series) Circular No. 74 dated May 26, 2016

Export Data Processing and Monitoring System (EDPMS) – Additional modules for caution listing of exporters, reporting of advance remittance for exports and migration of old XOS data

This circular contains details of proposed enhancements to the EDMS system which will be operational from June 15, 2016. The enhancements are in the areas of Caution / De-caution Listing of Exporters, Reporting of Advance Remittance for Exports & Export Outstanding Statement.

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A. P. (DIR Series) Circular No. 73 dated May 26, 2016

Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) – Compounding of Contraventions under FEMA, 1999

This circular states that RBI will upload on its web site www.rbi.org.in all compounding orders passed on or after June 1, 2016.

Further, annexed to this circular are the guidelines, along with examples, used by RBI for calculating the amount imposed under Section 13 of FEMA. The said Annex is as under: –

II. The above amounts are presently subject to the following provisos, viz.

(i) the amount imposed should not exceed 300% of the amount of contravention

(ii) In case the amount of contravention is less than Rs. One lakh, the total amount imposed should not be more than amount of simple interest @5% p.a. calculated on the amount of contravention and for the period of the contravention in case of reporting contraventions and @10% p.a. in respect of all other contraventions.

(iii) In case of paragraph 8 of Schedule I to FEMA 20/2000 RB contraventions, the amount imposed will be further graded as under:

a. If the shares are allotted after 180 days without the prior approval of Reserve Bank, 1.25 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
b. If the shares are not allotted and the amount is refunded after 180 days with the Bank’spermission: 1.50 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).
c. If the shares are not allotted and the amount is refunded after 180 days without the Bank’s permission: 1.75 times the amount calculated as per table above (subject to provisos at (i) & (ii) above).

(iv) In cases where it is established that the contravenor has made undue gains, the amount thereof may be neutralized to a reasonable extent by adding the same to the compounding amount calculated as per chart.

(v) If a party who has been compounded earlier applies for compounding again for similar contravention, the amount calculated as above may be enhanced by 50%.

III. For calculating amount in respect of reporting contraventions under para I.1 above, the period of contravention may be considered proportionately {(approx. rounded off to next higher month ÷ 12) X amount for 1 year}. The total no. of days does not exclude Sundays / holidays.

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A. P. (DIR Series) Circular No. 72 dated May 26, 2016

Memorandum of Procedure for channeling transactions through Asian Clearing Union (ACU)

Presently, the minimum amounts for which transactions can be channelized through the ACU mechanism is US $ 25,000 / € 25,000 and thereafter the amounts should be in multiples of US $ 1,000 / € 1,000.

The circular has reduced the minimum as well as multiples amount for which transactions can be channelized through the ACU mechanism. Hence, the new minimum amounts are US $ 500 / € 500 and the amounts should be in multiples of US $ 500 / € 500.

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Notification No. FEMA 368/2016-RB dated May 20, 2016

Given below are the highlights of certain RBI Circulars & Notifications

Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Seventh Amendment) Regulations, 2016

Vide this amendment a new regulation – Regulation 10A has been inserted in Notification No. FEMA. 20/2000-RB dated 3rd May 2000 – Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000. This Regulation 10A permits deferment of 25% of the total consideration for a period of 18 months with respect to payment for transfer of shares between a resident and non-resident.

The said Regulation is as under: –

“10A. In case of transfer of shares between a resident buyer and a non-resident seller or vice-versa, not more than twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within a period not exceeding eighteen months from the date of the transfer agreement. For this purpose, if so agreed between the buyer and the seller, an escrow arrangement may be made between the buyer and the seller for an amount not more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the date of the transfer agreement or if the total consideration is paid by the buyer to the seller, the seller may furnish an indemnity for an amount not more than twenty five per cent of the total consideration for a period not exceeding eighteen months from the date of the payment of the full consideration.

Provided the total consideration finally paid for the shares must be compliant with the applicable pricing guidelines.”

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SEBI imposes restrictions on Wilful defaulters – concerns also for independent directors & auditors

The Securities and Exchange Board of India has joined and followed the Reserve Bank of India in imposing restrictions on `wilful defaulters’ from raising monies from the public. The step is laudable. Defaults, while a necessary risk of lending/investing, are a problem enough for lenders and investors. The tedious laws relating to taking action against them aggravate these problems. However, when persons default not due to difficulties but out of deliberate defiance, law does need to go an extra mile. Naming and shaming them is of course one step. However, now, SEBI, following RBI, has imposed certain restrictions on them from raising capital from the markets.

There are, however, difficulties. The definition of `wilful defaulter’ is felt to be a little too broad. The process for labelling a borrower a `wilful defaulter’ too has raised questions. There are concerns about independent and non-executive directors as to how they will be affected, though at least on paper there is some relief. As will be seen later, such matters have gone in litigation and Court had already read down the rules to some extent. These concerns are more since labelling as `willful defaulter’ would have a cascading effect on companies where such persons may be directors. Generally, auditors too of `wilful defaulters’ would be affected since there are provisions for debarring them from being given more work, etc. if they are found at fault.

Summary of new requirements
There already exist some restrictions on `wilful defaulters’ in the SEBI Regulations. However, now, SEBI has amended its Regulations relating to raising monies by issue of securities and also taking control of companies by `wilful defaulters’.

An issuer who is a `wilful defaulter’ is debarred from making any public issue of its equity securities. This bar will also apply if any of its directors or promoters is a `wilful defaulter’. Public issue of convertible debt instruments or debt securities are also barred in such cases. Further, if it is in default of repayment of principal amount of it debt instruments/debt securities or in payment of interest thereon for more than six months, then too such bar will apply. Certain disclosures are also required in respect of the `wilful default’ where issue is by way of private placement. This will ensure that subscribers know about such past defaults.

The bar does not cover issue of equity securities on `right basis’. However, certain disclosures would have to be made to ensure that the subscribers are made aware of the fact that the issuer is a `wilful defaulter’. Further, the promoters or the promoter group cannot renounce their rights except within the promoter group.

SEBI has also debarred `wilful defaulters’ from making open offers for acquiring shares under the Takeover Regulations. They are also barred from entering into any transaction that could result into attraction of obligation of making such an open offer. However, if someone else makes an open offer, then the `wilful defaulter’ can make a competing bid by way of an open offer. The intention is apparent. `Wilful defaulters’ would thus be prevented from taking control of a listed company or consolidating their stake therein.

Definition of `wilful defaulter’
The SEBI Regulations that impose restrictions on `wilful defaulters’ define the term as follows:-

“wilful defaulter” means an issuer who is categorized as a `wilful defaulter’ by any bank or financial institution or consortium thereof, in accordance with the guidelines on `wilful defaulters’ issued by the Reserve Bank of India and includes an issuer whose director or promoter is categorized as such.”

Thus, SEBI will effectively follow lead of the Reserve Bank of India. Hence, if a person is categorized as a `wilful defaulter’ by the banks/financial institutions in accordance with the guidelines of RBI, he would also become a `willful defaulter’ for the purposes of SEBI Regulations. Promoter or director of a wilful defaulter would also be categorized a `wilful defaulter’.

The Master Circular of the Reserve Bank of India on `Wilful Defaulters’ dated 1st July 2014 has defined `wilful default’ as follows:-

“A “wilful default” would be deemed to have occurred if any of the following events is noted:-

(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.

(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.

There are some points that can be observed from the above definition. For a person to be held to be a wilful defaulter, he needs to have made a default in meeting his payment/repayment obligations to the lender. This is a primary and obvious pre-condition. Such a defaulter would thus become a `wilful defaulter’ if he is found to have done one or more additional wrongs. For example, he may have capacity to honor his obligations and yet he defaults. He may have not utilised the finance for the specific purpose for which it was raised but diverted the funds for other purposes, or he has siphoned off the funds and such funds are not available with the unit in the form of other assets. Finally, he has disposed of or removed assets given as security without the knowledge of the lender.

The term diversion or siphoning of funds has been elaborated further and the meaning seems to go not just beyond the ordinary meaning but also to a situation where there can be serious difficulties. For example, “transferring borrowed funds to the subsidiaries / Group companies or other corporates by whatever modalities;” is also deemed to be diversion/siphoning. Now it is of course true that funds are often siphoned off through the subsidiary/group companies route. However, bonafide investments are also needed to be made through such entities. Deeming such investments in hindsight to be siphoning off can be harsh. A similar difficulty arises in respect of another category of deemed siphoning which reads “investment in other companies by way of acquiring equities / debt instruments without approval of lenders”. One trusts that these words are read in context of the original definition and that such deeming would apply only if such investments were in violation of the specific terms on which the finance was given.

Where Independent Directors/Nonexecutive directors are declared as `wilful defaulters’
The SEBI Regulations specifically provide that a person is declared as a `wilful defaulter’, then the companies where he is a director or a promoter would also be deemed to be a `wilful defaulter’. This is irrespective whether the director is a non-executive director or an independent director. This thus would have a wider effect. However, fortunately, this deeming is not the other way round too. If a company is held to be a `wilful defaulter’, its directors are not automatically deemed to be `wilful defaulters’.

As regards independent/non-executive directors, the RBI’s Master Circular does require that the principles for determining whether such a person is a `officer in default’ under the Companies Act, 2013 would be applied here. Thus, unless such an independent/non-executive director can be so held, he would not be considered a `wilful defaulter’.

However, once a persons is held to be a `wilful defaulter’, there is a cascading effect. The other companies where he is also a director would be required by its lender banks/ financial institutions to remove him.

It is interesting to note that the original wide reach of the Rules has been reducedto an extent by the Gujarathas been reducedto an extent by the Gujarat High Court, in Ionic Metalliks vs. Union of India (128 SCL 316 (Gujarat)[2015]), the court has held that the Master Circular, so far as it said that all the directors of the `wilful defaulter’ company would also become `wilful defaulters’ is arbitrary and unreasonable. To this extent, the Circular has been declared as ultra vires the powers of RBI and has been declared to be violative of Article 19(1)(g) of the Constitution of India. The Master Circular now provides for caution and requires, that the conditions under the Companies Act, 2013, for holding a director as officer in default should be applied.

Cut off amount of Rs. 25 lakhs of lending for categoriSation of `wilful defaulters’
Wilful defaulters of any amount would attract various consequences as applicable under law. However, the Master Circular provides that “…keeping in view the present limit of Rs. 25 lakh fixed by the Central Vigilance Commission for reporting of cases of `wilful default’ by the banks/FIs to RBI, any wilful defaulter with an outstanding balance of Rs. 25 lakh or more, would attract the penal measures stipulated at para 2.5 below. This limit of Rs. 25 lakh may also be applied for the purpose of taking cognisance of the instances of ‘siphoning’ / ‘diversion’ of funds”.

Process of declaration of a person as a `wilful defaulter’
An elaborate, transparent and multi-level process has been laid down in the Master Circular to declare a person as a wilful defaulter. A Committee consisting of an Executive Director and two other senior officers of rank of general manager/deputy general manager would examine the evidence whether there was a case of `wilful default’. If it is so concluded, a show cause notice would be issued to the company and its whole-time directors/ promoters and their submissions, including in personal hearing if deemed fit to be given, would be noted. Finally, another Committee headed by Chairman/CEO/MD of the Bank and consisting of two independent directors would review and take a final decision. While this process does sound reasonable, concerns are also raised since the process can be subjective and that it is the lender itself who takes the final decision. In this context, the Gujarat High Court, in the matter of Ionic Metalliks vs. Union of India (ibid) can be usefully referred to for its observations.

Conclusion
`Wilful default’ is something that cannot be generally defended. However, it is necessary that, considering the disclosure, restrictions, etc. that the process of declaring entities and individuals as willful defaulters is fair, transparent and objective. The consequences on persons having no direct role can be devastating in terms of reputation and business both. At the same time, it serves as caution to directors of companies to be extra vigilant in companies on whose board they serve. Considering, the already heavy responsibilities of non-executive/ independent directors under the Companies Act, 2013 and SEBI’s norms on corporate governance, like other laws, this is yet one more reason deterring individuals from coming forward to serve on Board of companies.

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Euthanasia– The Right to Die

Introduction
We have all heard that a Will takes effect when a person dies. However, a Living Will is different than a regular Will since it takes effect even when a person is alive. A Living Will is increasingly gaining popularity the world over. It is defined as a document executed by a person in his lifetime which states his desire to have or not to have extraordinary life prolonging measures when recovery is not possible from his terminal condition. It is also known as a medical power of attorney. Its popularity stems from the fact that it lays down the desire of a person as to how he should be medically treated in case he is not in a position to exercise his discretion. The US President Barrack Obama publicly announced that he has prepared a Living Will and encouraged others to also do so. Thus, should a person in a coma or a vegetative state remain so or does he have the right to prescribe beforehand that he desires to end his suffering? Is it valid in India? Let us analyse.

Indian Judicial controversy over Euthanasia
Euthanasia is a derivative of two Greek words and means ‘good death’. The more popular meaning is mercy killing. Thus, it denotes the act of terminating a terminally ill patient / person suffering from a very painful condition in order to putting an end to his suffering. The world over there is a raging controversy over whether euthanasia is valid or not. It is also known as physician assisted suicide. In India, an attempt to commit suicide is a punishable offence under the Indian Penal Code. Hence, the issue which arises is whether a physician assisted suicide or euthanasia is valid? Three Supreme Courts have analysed this issue in great detail.

Smt. Gian Kaur vs. State of Punjab, (1996) 2 SCC 648
In this case, the Constitution Bench of the Supreme Court was faced with the issue of the constitutional validity of the Indian Penal Code which deems attempt to suicide to be a criminal offence. The Court upheld the validity of this section and also discussed certain aspects of euthanasia. It analysed Art. 21 of the Constitution which guarantees the Right to Life and held that to give meaning and content to the word ‘life’ in Article 21, it has been construed as life with human dignity. Any aspect of life which makes it dignified may be read into it but not that which extinguishes it and is, therefore, inconsistent with the continued existence of life resulting in effacing the right itself. The right to die’, if any, is inherently inconsistent with the right to life’ as is death’ with life’. It further held that propagating euthanasia on the view that being in a persistent vegetative state is not of benefit to a patient with terminal illness cannot be an aid to determine whether the guarantee of right to life’ in Article 21 includes the right to die’. The right to life’ including the right to live with human dignity would mean the existence of such a right up to the end of natural life. This also includes the right to a dignified life up to the point of death including a dignified procedure of death. In other words, this may include the right of a dying man to also die with dignity when his life is ebbing out. But the ‘right to die’ with dignity at the end of life cannot be confused or equated with the right to die’ an unnatural death curtailing the natural span of life. The Court raised a question whether a terminally ill patient or one in a persistent vegetative may be permitted to terminate it by a premature extinction of his life? It felt that such category of cases may fall within the ambit of the ‘right to die’ with dignity as a part of right to live with dignity, i.e., cases when death due to termination of natural life is certain and imminent and the process of natural death has commenced. These are not cases of extinguishing life but only of accelerating the process of natural death which has already commenced. Ultimately, the Supreme Court concluded that the debate even in such cases to permit physician assisted termination of life is inconclusive. Thus, the Court did not give any definitive ruling.

Aruna Ramchandra Shanbaug vS. UOI, (2011) 4 SCC 454
This was the famous case of Aruna Ramchandra Shanbaug, the nurse who was in a vegetative state for over 38 years. A Writ Petition was filed by a social activist on her behalf urging the Supreme Court to permit mercy killing since there was no hope of recovery. Disallowing the plea, the Supreme Court embarked upon an extensive disposition on the topic of euthanasia in India and internationally.

The Court explained that euthanasia is of two types : active and passive. Active euthanasia entails the use of lethal substances or forces to kill a person e.g. a lethal injection given to a person with terminal cancer who is in terrible agony. Passive euthanasia entails withholding of medical treatment for continuance of life, for example, if a patient requires kidney dialysis to survive, not giving dialysis although the machine is available, is passive euthanasia. Similarly, if a patient is in coma or on a heart lung machine, withdrawing of the machine will ordinarily result in passive euthanasia. Similarly, not giving lifesaving medicines like antibiotics in certain situations may result in passive euthanasia. Denying food to a person in coma may also amount to passive euthanasia. The general legal position all over the world seems to be that while active euthanasia is illegal unless there is legislation permitting it, passive euthanasia is legal even without legislation provided certain conditions and safeguards are maintained. An important idea behind this distinction is that in “passive euthanasia” the doctors are not actively killing anyone; they are simply not saving him. Active euthanasia is legal in certain European countries, such as, the Netherlands, Luxembourg and Belgium but passive euthanasia has a far wider acceptance in the USA, Germany, Japan, Switzerland, etc.

It made a further categorisation of euthanasia between voluntary euthanasia and non voluntary euthanasia. Voluntary euthanasia is where the consent is taken from the patient, whereas non voluntary euthanasia is where the consent is unavailable e.g. when the patient is in coma, or is otherwise unable to give consent. While there is no legal difficulty in the case of the former, the latter poses several problems

It observed that the Constitution Bench of the Indian Supreme Court in Gian Kaur vs. State of Punjab, 1996(2) SCC 648 held that both, euthanasia and assisted suicide, are not lawful in India. It further observed that Gian Kaur has not clarified who can decide whether life support should be discontinued in the case of an incompetent person e.g. a person in coma or persistent vegetative state. This vexed question has been arising often in India because there are a large number of cases where a person goes into coma (due to an accident or some other reason) or for some other reason is unable to give consent, and then the question arises as to who should give consent for withdrawal of life support. The Court discussed the question as to when can a person said to be dead and concluded that one is dead when one’s brain is dead. The Court observed that there appeared little possibility of Aruna Shanbaug coming out of her permanent vegetative state. In all probability, she will continue to be in the state in which she is in till her death. The question now was whether her life support system should be withdrawn, and at whose instance? The Court said even though there were no Guidelines in India on this issue, it agreed that passive euthanasia should be permitted India. Accordingly, it framed guidelines for the same till Parliament framed a Law and stated that this procedure should be followed all over India until Parliament makes legislation on this subject:

(i) A decision has to be taken to discontinue life support either by the parents or the spouse or other close relatives, or in the absence of any of them, such a decision can be taken even by a person or a body ofpersons acting as a next friend. It can also be taken by the doctors attending the patient. It must be taken bona fide in the best interest of the patient.

(ii) Such a decision requires approval from the High Court, more so in India as one cannot rule out the possibility of mischief being done by relatives or others for inheriting the property of the patient.

(iii) In the case of an incompetent person who is unable to take a decision whether to withdraw life support or not, it is the Court alone, which ultimately must take this decision, though, no doubt, the views of the near relatives, next friend and doctors must be given due weightage.

(iv) When such an application is filed, a Bench of at least two Judges should decide based on an opinion of a committee of three reputed doctors, preferably a neurologist, a psychiatrist, and a physician.The committee of doctors should carefully examine the patient and also consult the record of the patient as well as taking the views of the hospital staff and submit its report to the High Court Bench.

(v) The Court shall also issue notice to the State and close relatives of the patient e.g. parents, spouse, brothers/ sisters etc. of the patient, and in their absence his next friend. After hearing them, the High Court bench should give its verdict.

(vi) The High Court should give its decision speedily at the earliest, since delay in the matter may result in causing great mental agony to the relatives and persons close to the patient.

Surprisingly, the Supreme Court did not lay down any guidelines on the concept of a living Will. Thus, while it upheld passive euthanasia, it did not suggest adhering to guidelines on treatment laid down by the patient himself.

Common Cause vS. UOI, WP (Civil) 215/2005 (SC)
This is the latest decision on the issue of euthanasia. In this case, an express plea was made before the Court to recognise the concept of a Living Will. which can be presented to hospital for appropriate action in the event of the executant being admitted to the hospital with serious illness which may threaten termination of life of the executant. It was contended that the denial of the right to die leads to extension of pain and agony both physical as well as mental which can be ended by making an informed choice by way of people clearly expressing their wishes in advance called “a Living Will” in the event of their going into a state when it will not be possible for them to express their wishes.

The Supreme Court analysed both Gian Kaur and Aruna Shanbaug’s decisions explained above. It held that in Gian Kaur, the Constitution Bench did not express any binding view on the subject of euthanasia rather reiterated that legislature would be the appropriate authority to bring the change.

It felt that in Aruna Shanbaug’s case, the Court upheld the validity of passive euthanasia and laid down an elaborate procedure for executing the same on the wrong premise that the Constitution Bench in Gian Kaurhad upheld the same. Hence, it felt that Aruna’s decision proceeded on an incorrect footing.

Finally the Court held that although the Constitution Bench in Gian Kaur upheld that the ‘right to live with dignity’ under Article 21 is inclusive of ‘right to die with dignity’, the decision does not arrive at a conclusion for validity of euthanasia be it active or passive. So, the only judgment that holds the field in regard to euthanasia in India is Aruna Shanbaug which is based on an incorrect understanding of an earlier decision. Considering the important question of law involved which needs to be reflected in the light of social, legal, medical and constitutional perspective and the unclear legal position, the Apex Court held that it becomes extremely important to have a clear enunciation of the law. Thus, it felt that this issue requires careful consideration by a Constitution Bench of the Supreme Court for the benefit of humanity as a whole. Hence, the matter was placed before the Constitution Bench. The case is still pending and is expected to be disposed of soon.

Recent Legislation
The Government has recently introduced a draft Bill titled “The Medical Treatment of Terminally-Ill Patients (Protection of Patients and Medical Practitioners)”. The key features of this Bill are as follows:

(a) Every competent person who is a major, i.e., above 16 years (yes you read it right, not 18 years) can take a decision on whether or not he should be given / discontinued medical treatment. Thus, in India, a person cannot drive, cannot drink, cannot vote, cannot marry, cannot contract, cannot be tried for an offence as an adult, before he / she turns 18, but such a person can take a decision about whether or not he wants to live? A bit paradoxical, would you not say?

If such a decision is given to a doctor then it is binding on him, provided the doctor satisfies himself that the patient has given it upon free will. Further, a competent patient is one who can take an informed decision about the nature of his illness and the consequences of treatment or absence of it. It would be very difficult for a doctor to determine whether or not the patient is a competent or incompetent person. How would he also determine the free will of a patient? Most doctors would be wary of taking such a subjective call and hence, in most cases would fear turning off life support systems or withdrawing medical treatment. This provision totally takes away the right to die of a patient.

(b) The doctor must then inform the close relatives about the decision of the patient and wait for 3 days before giving effect to the decision to withdraw treatment.

(c) Any close relative may apply to the High Court for obtaining permission in case of an incompetent patient or a competent one who has taken an uninformed decision. The Court will then appoint 3 experts to examine the patient and then give its decision by following a process similar to the that laid down in Aruna Shanbaug’s case. The Bill states that as far as practicable the Court must dispose of the case within a month. Is this possible? Further, why should a terminally ill patient suffer even for a day let alone a month?

(d) A Living Will / advanced medical directive is one given by a person stating whether to give medical treatment in case he becomes terminally ill. The Bill states that such a living Will is void and not binding on any doctor. It is surprising that while Parliament thought it fit to enact a law on passive euthanasia, it has not yet allowed a living Will. Rather than moving a Court, a Living Will would have been the answer to many vexed questions. One hopes that the final version of this all important law permits a Living Will.

Conclusion
While a Living Will is currently not accepted in India, one must nevertheless prepare one. One never knows when the tide may turn and the same may be legally accepted in India. In any event, it would surely have persuasive value if an application is to be made to a High Court since it indicates the wishes of the patient himself. One hopes that the Parliament and the Medical Council of India join hands to frame detailed guidelines to give legal sanctity to Living Wills. While it is important to permit them, there must also be safeguards to protect against misuse of the same. A Living Will must not become a tool to get rid of old / ill relatives in an easy manner. As rightly remarked by the Supreme Court,

“This is an extremely important question in India because of the unfortunate low level of ethical standards to which our society has descended, its raw and widespread commercialisation, and the rampant corruption, and hence, the Court has to be very cautious that unscrupulous persons who wish to inherit the property of someone may not get him eliminated by some crooked method”.

shailesh.kwebmaker

(Gearing up!)

(Gearing up!)

Arjun (A) —Hey Bhagwan, with great devotion I am offering my pranam to you!

Shrikrishna (S) — What happened to you suddenly? We have been meeting so often, but you never started with such ‘pranam’!

A — Bhagwan, I didn’t say it so expressly earlier. I always bow before you. I pray you and seek blessings from you.

S — You are always blessed. But what is the special reason today?

A — No; I was just wondering how I will cope up with the work of audits and tax returns. The season has started! Next 3 to 4 months is a ‘kurukshetra’ – battlefield for us CAs.

S — But this is going on for so many years. What is frightening you so much this year?

A — I believe, this year they are not going to extend the due date! We are always banking on extension.

S — But why do you need extension every year? Can you not plan the work well in advance?

A — It is easy to say so, but difficult to implement.

S— Why?

A — Every month we are busy meeting some deadline or the other. Recently I am told, a reputed bank recruited many employees. Out of them, 80% are for compliances and only 20% for business promotion!

S — Oh! But don’t you agree that such compliances are required for having financial discipline? And you have so much of automation at your disposal.

A — I agree. Still, it is rather too much.

S — Then that is your work opportunity. Look at it positively.

A — But every year they add something new. Our time goes in updating ourselves.

S— What is new this year?

A — So many things! CARO report is changed. They have added many points. Then Ind ASs. And on the top of it that ICDS in Income Tax!

S — What have you done to keep yourself updated? Good that you have compulsory CPE hours – continuous education. At least something you can know. Thereafter, you can study on your own.

A — What you say is right. But our CAs look at CPE hours also as a compliance! They are rarely interested in the lecture.

S — Then what do they do?

A — They just enrol themselves by paying fees. Then either leave the venue and re-appear at the closing hours to sign the attendance sheet. Otherwise, they doze off in the auditorium, sitting at the back. Or depute a proxy!

S — So, people also ‘manage’ CPE hours

A — Yes. Now I am told, they are going to increase the hours.

S — Unfortunately, many of you don’t appreciate the spirit behind CPE hours. How can one do such a demanding profession without updating the knowledge? You should not only upgrade your own knowledge and skills; but also see to it that your staff and trainees are also properly trained.

A — Ah! These days articles (trainees) are absolutely of no use. They have their own priorities. Exam and leave! I wonder why they join articles. And work-wise mostly they are a big zero!

S — Arjun, tell me how much time you have spent to train up your articles? Do you have proper systems in office? Do you implement what you studied in audit subject?

A — True. We are not ourselves well organised. We have no reference files of audit-clients, we don’t do proper documentation. But we have to work under so many constraints! No space, no manpower……

S— I appreciate that. But what is basically lacking is the will power. Anyway, for audit whatever is essential, have you started doing?

A — Like what?

S — Basically, third party confirmations from banks, debtors, creditors…….

A — Who has time to do all that? Our clients never listen to us.

S — No; but somewhere you need to take a firm stand. If you tell them at the last moment, they will resist. You have to insist or indicate to your client that you would then have to put a remark in the report.

A — What you say is right. We need to be more pro-active and assertive. We need to gear up on all fronts. It is high time. We need to wake up!

S— Yes. I suggest you can also see your last year’s files, make checklist, send mails to clients….

A — Yes. And I think, I should take out some time and study important laws applicable to my clients. This will help me in my audit work also

S— Arjun, be also very particular about your documentation. This makes things easier.

A — Yes. You are right.

S— Infact, you should be alert all the time. This will help you in being pro-active automatically. And that is precisely your Institute’s motto – Ya Esha Supteshu Jagarti!

Om Shanti.

shailesh.kwebmaker

Precedent – Judicial discipline – Tribunal cannot assume power to declare judgement of division Bench of Court as per incuriam and refuse to follow it. [Karnataka Sales Tax Act, 1957, Section 6B]

State of Karnataka vs. Deccan Sales Corporation Ltd [2016] 87 VST 265 (Karn).

Reassessment u/s. 12-A of the Act was passed on the basis of the judgment dated 25.11.2004 of this Court in the case of Pali Chemical Industries, Nippani, Belgaum vs. The Additional Commissioner of Commercial Taxes, Zone-I, Bangalore and another reported in 2005 (58) KLJ 54 (HC) (DB), that the chemical fertilizer mixture is not eligible for exemption from turn over tax even if its components have already suffered local tax under the Act.

The Tribunal after noticing that, while delivering the judgment in Pali Chemical Industries case, the decision in the case of State of Karnataka vs. Kothari Industrial Corporation, reported in 2000-01 (5) K.C.T.J. 193 was not noticed or brought before the Hon’ble High Court by the parties concerned in Pali Chemical Industries case, held that the judgment in Pali Chemical Industries case cannot be considered as a binding precedent.

The High Court observed that we would like to place on record that we are very much disturbed by the tendency exhibited by the lower authorities in refusing to follow the law laid down by this Court saying that the same is not binding on them merely because other binding precedents are not taken into consideration in those judgments. It appears that the Tribunal has assumed the power to declare the judgment of the Division Bench of this Court as per incuriam and thereby refused to follow the judgment. The justification for such a course of action is that it is permitted to do so by another Division Bench. If this tendency is not nipped in the bud, we are afraid that there will be total lawlessness especially in the branch of Taxation Law.

The High Court further held that if another Division Bench of this Court is not persuaded to accept the said view, the only course open is to place relevant papers before the Hon’ble Chief Justice to enable him to constitute a larger Bench to examine the question. That is the proper and traditional way to deal with such matter.

It is high time that the lower authorities learn to maintain judicial discipline and stop showing disrespect to the constitutional ethos. Breach of discipline has great impact on the credibility of the judicial institution and encourages chance litigation. It must be remembered that practicability and certainty is a hallmark of the judicial jurisprudence developed in the country in the last six decades.

shailesh.kwebmaker

Precedent – Stay – Strictures – Recovery of demand by adjustment of refund from stayed demand – In identical case for different years of the same assessee such mode of recovery was set aside by the High Court and revenue was unable to show how facts were different this time around. Recovery was set aside. Warning that officers would in future be personally liable.

Larsen & Toubro Ltd vs. UOI 2016 (335) E.L.T. 215 (Bom)

The Bombay High Court held that officers after officers are reluctant to take decisions for the consequences might be drastic for them. No officer is acting independently and following judgments of this Court, but waiting for the superiors to give them a nod. Even the superiors are reluctant given the status of the assessee and the quantum of the demand or the refund claim. We are sure that some day we would be required to step in and order action against such officers who refuse to comply with the Court judgments and which are binding on them as they fear drastic consequences or unless their superiors have given them the green signal. If there is such reluctance, then, we do not find any enthusiasm much less encouragement for business entities to do business in India or with Indian business entitles. Such negative reactions / responses hurt eventually the National pride and image. It is time that the officers inculcate in them a habit of following and implementing judicial orders which bind them and unmindful of the response of their superiors. That would generate the right support from all, including those who come forward to pay taxes and sometimes voluntarily. Hereafter if such orders are not withdrawn despite binding Division Bench judgments of this Court that would visit the officials with individual penalties, including forfeiture of their salaries until they take a corrective action. If any approval or nod is required from superiors that should also be granted expeditiously and while obeying the court orders, the officers can always reserve the Revenue’s rights to challenge them in appropriate legal proceedings. A copy of order be sent to the Secretary in the Ministry of Finance, Government of India and the Chairman, Central Board of Excise and Customs.

shailesh.kwebmaker

Bombay Stamp Act – Amalgamation – Scheme of amalgamation is not chargeable to stamp duty. It is the order of court sanctioning the scheme that is chargeable. [ Bombay Stamp Act,1958, Section 3,2(1)]

The Chief Controlling Revenue Authority, Maharashtra vs. Reliance Industries Ltd AIR 2016 BOMBAY 108 Full Bench.

The Reliance Industries Limited and Reliance Petroleum Limited, Jamnagar Gujarat entered into a scheme of amalgamation u/ss. 391 & 394 of the Companies Act 1956. Company petitions were filed by the transferor company in Gujarat High Court and the transferee company in Bombay High court. The Scheme was sanctioned by both the High Courts. Accordingly, stamp duty was paid in Gujarat of Rs 10 crore. When the order sanctioning the Scheme of amalgamation was presented for stamp duty adjudication in Maharashtra, the Company claimed set off of the stamp duty paid in Gujarat which was refused.

The full bench of the Bombay High court held that as the scheme of arrangement or amalgamation has no effect or force unless or until it was sanctioned by the court, it is the order sanctioning the scheme that would be an instrument u/s. 2(l) and not the scheme of amalgamation. Hence, the Company was not entitled for rebate of stamp duty paid in Gujarat.

shailesh.kwebmaker

Expectations from an Advisor

“Look for what’s missing. Many Advisors can tell a President how to improve what’s proposed or what’s gone amiss. Few are able to see what isn’t there”

Donald Rumsfeld

Over the years that I have been in the profession. I have seen the role of an advisor undergo a radical change and marked shift on the expectations that one has from the advisor. And over these years, I have seen a few things remain constant. The constants are the bedrock of the traits of an advisor and foundation without which no advisor can be successful. The changes emanate from the evolution of the profession and the changes in the ecosystem in which we operate.

Let’s first talk of the changes; I would describe them as:

– execution is the key

– the broad basing of the recipients

– recognising that change is the only constant and

– no man is an island.

Let me elaborate.

It is all about execution. There was a point of time when what was expected from an advisor was advice and the execution was left in-house. While clients do have execution capabilities, they now expect the advisor to be fully involved and lead the execution process. The reason is simple. The challenges at the execution level impact the advice and its efficacy. Whether the Registrar of Companies (ROC) will approve a Limited Liability Partnership (LLP) carrying on financial services or whether SEBI permits an AIF to be an LLP are issues to which the advice reading the law may be different from how execution happens at the ground level.

There was a point of time when the recipient of the advice was the only constituent who the advisor had to address. No longer so. The wider constituents who can be impacted by the advice today expect their interests to be addressed. This is critical from the view point of the advisor too. Increasingly, if the client is accused for breaking a law, the advisor could have his reputation sullied or be held to abet.

The world is in a constant flux of change. Just in the field of taxation, we grew up to say that tax and equity are strangers. One merely has to look at what the law says and no more, no less. No longer so. BEPS is making changes which will have deep rooted impact on the way a MNC operates. Street protests are held if a MNC is perceived as not paying ‘fair’ taxes. The world of taxes and equity are not as strangers as it seemed!! We need to recognise this change as advisors; in fact, the result of the actions we advise today will be evaluated after a few years and we need to anticipate changes and advice accordingly

Finally, the need is to collaborate with other specialists. An accounting advice has tax and financial implications; a tax advice has accounting and financial implications and, most important, all of these need to dovetail into the overall business objectives of an organisation. As advisors, we tend many a time to forget the overall business objective and focus on the little area of specialisation we have. The broad basing of the objective, the ability to relate to the bigger picture and interaction with other Advisors to provide holistic advice is the key to success.

Let us now look at a few constants which I have experienced over the decades;

– the spirit of partnership

– client before self

– tenacity and

– ethics and values

The identification of the advisor with the client and proactively finding solutions is a key constant. Most times, clients do not know the right questions to ask. It is for the advisor to prompt the client to the right question and guide them in the spirit of partnership.

Client before self may sound like a cliché!! It is not and I have seen the most successful advisors, when proposed an assignment by a client, respond that it is not necessary to carry out the assignment!! Indeed, sometimes the client believes in a complex solution which may mean larger fees to the advisor but the solution can be quite simple. It is for the advisor, at all times, to put client’s interest first. In fact, the best advisors have the ability to tell a client that he is not the right advisor but someone else is!!

Solutions provided by an advisor may be difficult to implement and often the client wants short cuts. Building substance to a transaction is a difficult process. It may be the only way to sustain a structure. An advisor needs to be firm with his convictions and not go down the path of least resistance; howsoever convenient it may sound in the short run

Last, but the most important, is ethics and integrity. Short term gains which compromise integrity come up all the time in a variety of ways. Some of these, like referral fees, may sound innocuous but pose conflicts of interest. Similarly, disclosure of interests or potential conflicts is critical. At the end of the day, an advisor has just one reputation to protect and its compromise is the end of the journey.

shailesh.kwebmaker

IND AS ROAD MAP – CORPORATE vs. NBFC

One of the key issues with the Ind AS roadmap is the alignment of implementation dates between NBFC companies and non NBFC companies. For example, phase 1 non NBFC companies go live on Ind-AS from 1-4-2016, with a transition date of 1-4-2015. The first Ind AS financial year will be 2016-17. In the case of NBFC, phase 1 companies will go live on Ind-AS from 1-4-2018, with a transition date of 1-4-2017. The first Ind AS financial year will be 2018-19. In the case of NBFC company, early adoption of Ind AS is prohibited. This poses a unique challenge to a consolidated group that has an NBFC company and a non NBFC company. Consider the diagram below.

When the NBFC is on the top of the structure, the problem is very acute. In this case, the non NBFC companies below the NBFC Parent company (M Co, T Co & S Co) will prepare Ind AS for financial year 2016-17 as they are in phase 1. For 2016-17, the NBFC Parent will prepare stand-alone and CFS under Indian GAAP, since it is prohibited from early adopting Ind AS. For purposes of consolidation by the NBFC Parent; M Co, T Co & S Co will have to continue preparing their accounts under Indian GAA P as well. Therefore M Co, T Co & S Co will end up preparing accounts both under Indian GAAP & Ind AS, which will be a huge burden.

When a NBFC is below a non NBFC company, the NBFC will prepare Indian GAAP accounts for standalone purposes and to enable non NBFC parent to prepare Ind AS CFS, the NBFC will also prepare Ind AS accounts. In the above diagram, the NBFC subsidiary will prepare Indian GAAP stand-alone financial statements since it is prohibited from early adopting Ind AS. However to enable M Co to prepare Ind AS CFS, the NBFC subsidiary will also need to provide Ind AS numbers to M Co.

Conclusion
A group that has NBFC and non NBFC companies will bear a huge burden of preparing financial statements under both Indian GAAP and Ind AS. RBI/ MCA can remove this burden by allowing NBFCs, particularly those that are not systemically important to early adopt Ind AS.

In the author’s opinion, in such an instance, NBFC should have the option of earlier adoption of Indian AS. A clarification will avoid confusion and duplication.

shailesh.kwebmaker

GST – A Huge Area of Practice Opportunities

Background

The total indirect tax revenue in 2016-17 was Rs.17 lakh
crore. It has been guesstimated that about 30% of traders, small manufacturers
and service providers who are liable to be registered and pay duty/ tax have
not registered in the past. They were part of the “grey/ parallel economy”.
There is a business of fake bills without sale or service provision presently.
This sector is expected to close down substantially due to the matching concept
under which GST needs to be paid for credit to be available. Some part of this
segment may be forced to join the mainstream tax payers over a period. Some
sectors who still have the highest rate of 28% with or without additional
cesses could try and keep the entire transaction outside the recording and may
risk the seizure of their goods and demands.

The total number of registered assessees in about 6 months of
its implementation is expected to cross 1 Crore!!. This could be the result of
demonetisation as well as withdrawal of exemption and broad basing objective of
GST. The need for the receiver of the services to pay under reverse charge for
all unregistered supplies including raising of invoice, classification, payment
may lead to all businesses to avoid any unregistered supplies whether for goods
or services. Dealers and Service providers who do not wish to stop their services
to the trade, industry or businesses would now voluntarily register to ensure
clients do not have to comply on their behalf. This maybe even if they are
eligible for the exemption upto Rs. 20 lakh.

The CA Advantage

The knowledge of accounts, costing, direct/ indirect tax
laws, company Law and commercial laws makes a CA’s quite complete from legal/
tax side. This coupled with the experience from understanding businesses
through conduct or audit, providing opinions, preparation/ certifying of financial
statements, representing before many financial and tax authorities provides a
CA with a deep understanding of business.

The total number of CAs who have attended at least a 20 hour
GST awareness as on date who are in industry and practice maybe around
1,00,000. As on date around 5000 CAs are learning every week in seminars,
workshops, certificate courses conducted by the ICAI, study circles, BCAS and
other associations across the country.

The non-qualified consultants who outnumber us today
operating in indirect tax area may find that the scope of being an intermediary
between the client and the officers is restricted. Those in advisory who have
learnt GST well and have some accounting knowledge may continue to support
clients in the GST regime. They would of course need to take the services of
CAs for the mandatory audit which would be started to be conducted post May
2018.

The CAs already practicing in VAT, Service Tax and Excise /
Customs would find it easier to understand the GST which is a mixed bag of all
these laws. In the present GST Act and Rules 2017, we observe that most of the
provisions have been borrowed from VAT and to some extent service tax and
excise. The GST law was supposed to be simple and clear, but as it stands today
is very cumbersome and it may not be possible for SMEs to comply without
professional assistance.

The total number of CAs (delegates) who have attended various
type of GST related CPE awareness / training sessions as on date is in excess
of 1,20,000 with 6,000 additionally being trained every week either through the
indirect tax committee initiatives or the various regional councils, branches
and associations. Even if some have gone for multiple programs, the minimum
number of CAs who are aware maybe in excess of 50,000.

Therefore, in the view of the paper writer, the CA would be
the first option for all enterprises of turnover above Rs. 2 crore. If they are
unable to accept, only then other professionals would be considered as an
option.

Opportunity for Image Makeover

It is indeed sad but true that a small proportion of CAs are
able to create a negative perception of the profession at large. However, the
fact that in many wrongdoings by trade/industry, the CAs are being implicated/
targeted indicates that the view of the public/ media needs to be reversed. The
common perception of the “black sheep” of our profession is normally not
discussed, much less penned. The paper writer has attempted to list a few areas
where we could improve and avoid such allegations:

1. Do not suggest/ manipulate the accounts.
Always give accurate certificates based on evidence (copies to be in working
papers) especially on the claim of credit on stocks, credit admissibility etc.
This would compel the tax authorities do place weight on all certificates
issued by us.

2. To avoid assisting / helping clients in tax
evasion. It maybe far better to provide a true picture to client and stress on
the advantages of compliance. The “trust” factor which is very important to be
enhanced in the GST regime.

3. When he gives opinions especially on issues of
continuation of business rates and credit, see that there is a clear
communication of what the client wishes in writing. If not there, communicate
what is expected from us to client and then do a professional job clearly
stating the assumptions if any and not trying to reduce the tax impact. This
would build respect of the client over time as well as the GST officers.

4. CAs can and need to be more communicative. We
also most times have not been trained in drafting. Complete communication,
clear case law reference, differentiating the adverse judgment, attaching
expert opinions/ books (especially in classification) and concluding logically
could stand us in good stead.

5. CAs would do well to escalate to higher level
officers when lower level are not helpful to resolve issues of the clients.
This should always be done in writing. The results of this practice has been
found to be favourable in the present regime and in GST would be far more
successful.

6. We can improve in many more areas including
professionalism in dealing with the client viz., keeping commitment for
delivery of requisite quality in time, keeping the service motive etc.

These negative perceptions over time are to be overcome with
honest, ethical work, demonstrated over and over. The law is moving towards
transparency and the days of the intermediaries seem to be getting over. When
the VAT law came, the pure intermediary population came down by about 30% from
2005 onwards.

Humongous Opportunity under
GST

The distinction can be made between the pre / post GST period
openings / service streams.

Role – Pre-GST period

This is a one-time opportunity focused on GST preparedness of
clients. Specific contribution by the professional could be:

a. Assist in classification and arriving at the
rates applicable using the Harmonised System of Nomenclature (HSN) as well as
the interpretative rules set out in the notification. Similarly, carefully
advising on availability of any exemption based on the notification ensuring
that the conditions if any are complied;

b. Analyse the industry impact considering the
global and Indian situation of the product / service. This study may also have
to include the major vendors and customers;

c. In case of unintended hardship to some
sectors- representation to the drafter would be in order as the level of
listening presently is very high. This could be done upto a period of 6 months after
the implementation date;

d. For the walk in clients who have not done an
impact study, the clarity on the major impact on the client under GST due to
indepth understanding of the business could be a value add;

e. CA could be part of the core team of client
for transiting into GST smoothly without business disruption and safeguarding
of the margins as a knowledge advisor;

f. Understanding legacy tax systems at client
workplaces so as to provide appropriate advise on migrating to better systems/
ERP or suggest modification to make the existing systems GST compliant;

g. Assisting in preparation of a strategic plan
for procurement and marketing systems of clients needed under GST. For example,
supporting in decisions on: Closure/ reduction in godowns and branches; direct
sale through e-commerce; evaluation of the working with C&F agents; in
house/ outsourcing the distribution function to logistic companies; sourcing
inputs at lowest cost within shorter time; linking to the ERP of the customer etc.;

h. Suggesting the changes in accounting software
and internal control systems to suit GST. Test and confirm the robustness;

i. GST awareness at initial stages and training
for management, staff, customers, vendors of clients on ongoing basis
especially the operational team consisting of the marketing and purchase;

j. Vetting and suggestion to modify agreements/
contracts/ major purchase orders overlapping or supplies to be made in GST
regime;

k. Ensuring that the credits in the past are
examined for their eligibility and those missed are availed. The reconciliation
of the credit as per books to the returns before GST is implemented can be a
value added activity. This would include validating the last return. The time
window for this is limited to a couple of months after implementation;

l. The verification to ensure that the credits
carried forward are eligible and complete. The deduction for the unreconciled
forms as provided is made and if negative, the decision not to claim the carry
forward;

m. Ensuring that the claim of credit on stock in
hand is maximised by ensuring purchasing with excise duty paying documents as
well as proper stock recording especially with job workers and agents and
ensuring well thought of stocking policy;.

n. Reviewing the various business transactions to
examine whether closing out the transaction in the pre GST or post GST period
is advantageous;

0. The students of CA- the future CAs and staff
in the CA office would also require to be taught the new law to enable them
also to actually do the verification. Review and audit in GST and confirm that
the transition mistakes are not material;

o. Many CAs have specialisation in information
technology and some even hand on consulting skills in ERP environment. These
skills could ensure that the client would get his IT integrated and able to
comply with the complex needs of GST compliance.

Role – Post-GST

The implementation of GST would bring many challenges for
trade / industry and for us, opportunities to serve:

i. In the initial stages of GST implementation,
there would be many doubts which are not covered in the new law. There may also
be gaps in knowledge of GST at various levels in the organisation. These are
likely to unintendedly result in denial of registration, interruption to do
business, loss of eligible credit, old law risks and exposures carried forward,
inadvertent non-compliance in GST. There would a period of uncertainty and need
for someone to confirm the myriad issues arising. The internet (Google) at such
times may not be effective as too much of inaccurate/ incorrect suggestions in
the initial stages are expected. The proactive professional handholding and
quick response may not only ensure continuation of the clients’ business, but
enable them to take advantage of the changes in the business structures;

ii. Regular online documented service to the
functional head of clients’ business;

iii. Assisting in the filing of the 1^st
return, claim of tax credit on stocks in hand accurately;

iv. Review the compliances in transition. It maybe
noted that the disputes in GST would come normally after 3-4 years and at that
time, rectifying past errors would well nigh not be possible;

v. A one time comprehensive review after 3 months
of implementation to ensure GST compliance;

vi. Regular review and reconciliation on credit
matching and recovering credits lost from the vendors in case of payment made
on gross would also be required;

vii. Once GST stabilises over a year or so, the
focus would be more on compliance which means a regular internal audit of GST;

viii. The GST audit by CAs in the year 2018 would be
a watershed year for the profession to demonstrate that we as CAs are competent
and knowledgeable; Also to assure the revenue department that there is no need
of invasive investigation or audit by tax officers;

ix. Routine tax assignments for payment and filing
of returns would see a spike at least in the initial stages of uncertainty;

x. It is true that if one can avoid a dispute in
tax it is better. Therefore, a preventive exercise of early correction/
disclosure could avoid or mitigating the disputes allowing clients to
concentrate on their core activities;

xi. In case of dispute, look at the possibility of
passing on the impact where credit is available as an option. If not possible,
then support in making replies based on fact as well as legal principles.

xii. Support in resolving disputes where it cannot
be mitigated due to interpretation differences or due to demand raised by
revenue.

Conclusion

This new levy is bound to come up with many obvious
challenges due to the law being in the process of being drafted. It is expected
that the rough edges of the law would be ironed out in the period of 6 month to
a year post implementation of GST. This was our experience in Company Law in
the past few years.

The extent of making use of the opportunities would largely
depend on understanding the law and preparedness for what is not covered in the
law. In the words of Abraham Lincoln – “Give me six hours to chop down a
tree and I will spend the first four sharpening the axe”.

The implementation of GST by July 2017 is not
clear as on date. We the CAs can be ready to serve now in this period of
uncertainty and later when the law is passed. We can, by getting the axe forged
and keep sharpening it, to deliver beyond the expectation. Wish readers to have
an empowered service to the employer/client in GST era.

shailesh.kwebmaker

Impact of GST on Practising Chartered Accountants

Preamble

The most talked about change in the indirect tax laws i.e.
Goods & Services Tax (“GST”) is expected to be effective from 1^st
July 2017. We, chartered accountants, being service providers are also covered
under the ambit of GST. Currently, we are liable for payment of service tax
under the provisions of the Finance Act, 1994 (“Service Tax legislation”). This
legislation will be subsumed under the GST.
We will be governed by the provisions of the GST Acts.

An effort has been made in this article to highlight
important provisions that would be applicable to practising chartered
accountants, its impact and the challenges we might face as GST assessees.

Migration

All practising chartered accountants registered under the
Service Tax legislation are required to compulsorily get themselves migrated to
GST. [Section 22(2) of Central Goods and Services Tax Act (CGST Act)] If they
do not expect the value of their aggregate turnover during the financial year
2017-18 to exceed Rs. 20 lakh (or Rs. 10 lakh in special category states), they
can surrender their GST registration [Rule 17(4) of Registration Rules]. Aggregate turnover includes exempt supplies
and zero rated supplies also. Usually, for a practising chartered accountant
most of his services would be taxable only. However, export of services,
services provided to SEZ units and also to SEZ developers will have to be
included while computing aggregate turnover even though they are zero rated
supplies.

Registration

Under Service Tax legislation, a practising chartered
accountant has the option of not getting himself registered if his aggregate
taxable turnover in a financial year does not cross Rs. 10 lakh. If the aggregate turnover on pan India basis
exceeds Rs. 20 lakh (Rs. 10 lakh for special category states), one has to get
himself registered under GST. The aggregate turnover would include all taxable
supplies as well as exempt and zero rated supplies also. All chartered
accountants registered under the Service Tax legislation and having turnover
between Rs.10 lakh and Rs. 20 lakh (not from the special category states), have
the option of not getting themselves registered under the GST Laws. This may
save them from the hassles of the compliances under the GST Laws. However,
negative fallout would be that they would lose credit of all the GST paid on
their inputs, capital goods and input services. It would be a cost to them.

The chartered accountant making any inter-state supply has to
get himself registered irrespective of his turnover [Section 24(i) of CGST
Act]. Similarly, if the chartered accountant is liable to pay tax under reverse
charge, then also he has to get himself registered irrespective of his turnover
[Section 24(iii) of CGST Act].

The Certificate of Registration is required to be displayed
in a prominent location at all places of business. [Rule 11 of the Registration
Rules]

Branches

In service tax, service provider was having the option to go
either for centralised registration or standalone registration for its branch
offices. Unlike Service Tax legislation, there is no concept of centralised
registration under GST. A chartered accountant having offices in more than one
state will have to obtain separate registration under the GST Laws for offices
in each state.

Further when any service is provided by one branch to another
branch without any consideration, the same will be treated as a supply liable
to GST and invoice for the same will have to be raised. [Entry 2 Schedule I
read with section 7(1)(c) of the Central Goods & Services Act]. This was
not a case in service tax as self-service was not liable to service tax.

Place of Supply

This is one of the most important provisions of the GST Laws.
This determines the tax to be charged i.e. Central GST & State GST or
Integrated GST. The Service Tax legislation was a central law and a single tax
was charged irrespective of the Place of Supply of such services.

GST is a dual tax and hence a chartered accountant needs to
find out place of supply and raise invoice accordingly on client. Section 12(2)
of IGST Act determines the place of supply of services by a chartered
accountant where the location of the chartered accountant and the location of
the recipient of services are both in India. Place of supply in such case will
be the location of the service recipient where the address on record exists
otherwise the location of the supplier of services will be the place of supply.
Mostly in all cases, the address of the client (the service recipient) as well
as his GST number will be available with the chartered accountant. Hence such
address would be the place of supply.

The location of supplier (in the given case a chartered
accountancy firm) is a crucial factor for determining whether the provision of
service is intra-state supply or inter-state supply. It will be a challenge to
determine the location of the supplier in case of multi locational firm having
presence in various states providing services to same client from different
locations.

Services Accounting Code

All invoices raised need to mention the Services Accounting
Code (SAC). This was not a requirement under the Service Tax legislation and
also there was only one category of service i.e. Chartered Accountancy
Services. At the time of making the invoice, one will have to keep in mind the
nature of services provided and its corresponding service classification. The
most common classification of services which would cover the regular services
provided by practising chartered accountants is listed hereunder:

Sr. No.

Service Code

Service Description

997156

Financial
Consultancy Services

998221

Financial
Auditing Services

998222

Accounting
and Bookkeeping Services

998231

Corporate
Tax Consulting and Preparation Services

998232

Individual
Tax Preparation and Planning services

GSTIN of Clients

One of the mandatory requirements for preparing an invoice
under the GST Laws is that if the service recipient is registered, the invoice
has to contain his GST registration number i.e. GSTIN. All chartered
accountants need to collect their clients’ GSTIN. It should be readily
available in their database and they need to ensure that the same is printed on
the invoice issued to client.

Issue of Invoice

Section 31(2) of the CGST Act read with Rule 2 of GST Invoice
Rules makes it mandatory for service provider (including Chartered Accountants)
to issue invoice within 30 days from the date of supply of service. In case of
statutory audit, the chartered accountant will have to raise invoice within 30
days of attesting financial statements. For other services, one may determine
the date of supply of services on the basis of contractual arrangement with the
client.

Invoices are required to be prepared in duplicate the
original copy being marked “Original for Recipient” and the duplicate copy
being marked “Duplicate for Supplier” [Rule 3(2) of the Tax Invoice, Credit
& Debit Note Rules].

For all advances received, a Receipt Voucher will have to be
issued containing the prescribed particulars [Section 31(3)(d) of the CGST
Act].

Time of Supply of Service

Under the service tax provisions, the chartered accountant
had the option of paying tax on receipt basis where the value of taxable
services provided in a financial year was less than Rs. 50 lakh. Most of the
chartered accountants maintain their books of account on cash method. It was
very convenient for them to compute their tax liability on cash basis of
accounting. However, under the GST there is no such option. Everyone has to
discharge their tax liability as per the time of supply which is earlier of
date of invoice or date of receipt of payment or the date of provision of
service, where the invoice is not raised within 30 days of provision of
service. This would now involve regular reconciliation and may require
maintaining additional set of records.

Applicability of Reverse Charge

Any taxable goods or services procured by a registered person
from an unregistered supplier, the registered person procuring such supply will
have to pay tax under reverse charge [Section 9(4) of the CGST Act]. A
practising chartered accountant would be incurring many expenses such as
purchase of stationery, tea & snacks for office staff, repairs &
maintenance, etc. which are mostly supplied by unregistered persons.
Registered chartered accountants will have to pay tax under reverse charge on
all such procurements and also generate an invoice and a payment voucher
[Section 31(3)(f) of the CGST Act] for the same. However, vide Notification No.
8/2017 dated 28^th June, 2017, the Government has exempted intra
state supplies of goods or services received from an unregistered supplier from
the applicability of the provisions of reverse charge where the aggregate of
such supplies from any or all the suppliers do not exceed Rs. 5,000/- in a day.
This would bring a major relief to all the tax payers. In addition to this,
section 9(3) of CGST Act prescribes for payment of tax under RCM on notified
services even if it is procured from registered vendor.

Relevant Transitional Provisions

Section 142(11)(b) of CGST Act provides that GST is not
payable on those services where service tax was leviable under the Finance Act,
1994. In other words, GST will not be payable on advances received or invoices
raised before the effective date.

What happens in case where chartered accountant (liable to
discharge service tax liability on realisation basis) has provided services and
issued the invoice in pre GST regime and realises the consideration in post GST
regime? It seems such chartered accountant will be liable to pay service tax
and not GST on such consideration as the point of taxation in respect of such
services has already arisen in pre-GST regime.

Section 140(1) of the CGST Act entitles a registered person
(chartered accountant) to carry forward the Cenvat credit balance reflected in
the service tax return filed for the period immediately preceding the effective
date of GST. He has to file form GST
TRAN-1 within 90 days of the appointed day specifying the amount of Cenvat
credit to be carried forward [Rule 1(1) of Transitional Rules].

Valuation

Section 15 of the CGST Act provides that the value of supply
shall be the transaction value which shall include all incidental expenses
charged by the service provider to the service recipient. Hence, all
reimbursement of expenses (other than incurred as pure agent) will be liable to
GST. Moreover, any expenses which the supplier is liable to pay in relation to
such supply but which is paid by the recipient will have to be included in
value of supply. Even interest or late fees received by chartered accountants
for delayed payment will also be liable to GST.

GST Rate

There is no specific entry for the services provided by
chartered accountants in the schedule of GST Rates released by the GST Council.
It falls in the residual entry No. 36 wherein the rate of GST is 18 %. So all
services provided by practising chartered accountants will be liable to GST @
18 %. If the supply is intra-state, then 9 % CGST and 9% SGST will have to be
charged and if the supply is inter-state, then 18% IGST.

Input Tax Credit

Under the Service Tax legislation, a service provider was
entitled to credit of service tax paid on input services and also excise duty
paid on inputs and capital goods. He was not entitled to credit of VAT paid on
inputs and capital goods. It was a cost to the service provider.

Under the GST, a registered chartered accountant will be
entitled to input tax credit of both i.e. GST paid on goods as well as
services. To this extent, there would be a reduction in the cost.

However, the credit would be available only if the goods and
services are received; invoice for the same is received and contains the
recipient’s GSTIN and the supplier has paid the applicable GST on the same and
also filed his GST return. Unless all the above is not done input tax credit
would not be available [Section 16(2) of the CGST Act].

Where payment to the vendor is not made within 180 days from
the date of issue of the invoice, the corresponding input tax credit will have
to be reversed. The same shall be available on making payment for the same
[Section 16(2) of the CGST Act]. Under the Service Tax legislation, this period
is 3 months.

Section 16(4) of the CGST Act provides for the time limit to
avail input tax credit. It can be claimed on the basis of invoice or tax paid
document before earlier of:

– Due date of filing of return for the month of
September following the end of the financial year to which such invoice or tax
paid document pertains; or

– Date of filing of annual return .

Tax deducted at Source

GST law provides for
deducting tax at source from the payment made to vendor by persons or such
category of persons as notified by government where total value of such supply
under a contract exceeds Rs. 2,50,000. Rate of TDS is 2% [1% CGST and 1% SGST
or 2% IGST].

There are chances that chartered accountant firms having
turnover above a certain limit might be covered under TDS. If covered, the
chartered accountancy firm will be obliged to deduct TDS on payments made to
its vendors, issue TDS certificate and file TDS returns [Section 51(1) of the
CGST Act].

The Chartered Accountancy firm would also be tax deductee.
This will add to the administrative burden of reconciling GST TDS and the
revenue declared in the GST returns.

Return Filings and Tax Payments

Currently, service tax is required to be paid on quarterly
basis and the returns are required to be filed every half year. Under the GST Laws, the payment of tax has to be made on monthly
basis on or before 20^th of succeeding month.

All registered persons need to file returns as under:

Type of statement

Due Date

Details
of outward supplies

10^th
of succeeding month

Details
of inward supplies

15^th
of succeeding month

Monthly
Return

20^th
of succeeding month

TDS
Return

10^th
of succeeding month

Annual
return

31^st
December following the end of the financial year

This will increase the compliance burden substantially.

Similar to Service Tax provisions, Nil returns are also
required to be filed under the GST Laws [Section 39(8) of the CGST Act].

Under the Service Tax regime, only the consolidated value of
services rendered in a quarter was required to be filed. In the GST returns,
details of each individual invoices (unless issued in favour of an unregistered
person) has to be uploaded. This again will increase compliance.

Any Return filed without payment of self-assessed tax, will
be treated as an invalid return. Returns for any tax period will not be allowed
to be furnished, if the return for any of the previous tax period has not been
filed [Section 39(10) of the CGST Act].

Audit

There is no provision under service tax legislation for
compulsory audit of accounts by a chartered accountant or a cost
accountant. However, under the GST
regime, all assessees having turnover exceeding Rs. 200 lakh will be required
to get their accounts audited by a chartered accountant or a cost accountant
[Section 35(5) of the CGST Act read with Rule 21(3) of the Returns Rules].

Electronic Back-Up of Records

Proper electronic back-up of records will have to be
maintained so that in the event of destruction of such records due to accident
or natural causes, the information can be restored within a reasonable period
of time [Rule 2 of Accounts & Records Rules].

Conclusion

The chartered accountants are facing dual
challenge of gearing up their clients for GST as well as gearing up their own
organisation to cope up with this major indirect tax reform. It is very
interesting and challenging time and as usual chartered accountants will
definitely sail through it successfully.

shailesh.kwebmaker

GST and its Impact on Accounting

Accounting for GST is yet
another challenge the businesses will have to accept so as to be ready for
compliance in GST Regime.

The present article is
divided into various segments to understand the impact of GST on the accounting
aspects of businesses. Provisions under GST Acts require maintenance of
records, uploading information and/or periodic reporting and producing the same
on demand.

Chapter VIII of the CGST
Act contains provisions in respect of maintenance of accounting records. The
draft Rules also provides for certain additional compliances and maintenance of
documents.

Basic records by all
registered persons

In view of section 35(1),
every registered person shall maintain books of accounts and other records
relating to each place of business at the respective place of businesses. This
section requires maintenance of a true and correct account of the following
records:

a. Production
or manufacture of goods

b. Inward
and outward supply of goods or services or both

c. stock of
goods

d. Input tax
credit availed

e. Output
tax payable and paid and

f. Such
other particulars as may be prescribed.

Registered person may keep
and maintain accounts and other particulars in electronic form.

Warehouse keeper/
transporter

The owner or operator of
warehouse or godown, used for storage of goods, and the transporter is also
required to maintain records of the container, consignee and other relevant
details of goods.

Section 35(6) provides
that if the records are not maintained properly or the amount of tax payable on
goods or services are not accounted for then the Proper Officer will determine
the amount of tax payable on the goods or services as if the said goods or
services were supplied as such by the person.

Additional requirements

The draft rules in respect
of accounts and records also require the registered person to keep account and
other relevant documents including invoices, bills of supply, delivery challan,
Credit and Debit notes, receipt vouchers, payment vouchers, refund vouchers and
E- way bills. Besides this, he has to maintain records in respect of imports
and exports of supplies and the cases where tax is payable on Reverse Charge
Basis.

The rule also requires to
maintain the record separately for each activity including
manufacturing, trading and provision of services. For persons other than those
who have opted for composition scheme u/s. 10, the stock records are also to be
maintained. This includes data/documents in respect of the stock which is lost,
stolen issued as gift or free samples. In case of manufacturer the records of
raw material, finished goods, generation of scrap and wastage should also be
maintained. Under the GST law, besides information and records to be
maintained, as discussed hereinabove, these persons shall be required to
maintain accounts in respect of advances received and adjusted, liability under
the reverse charge mechanism, ITC claimed, name and addresses of vendors and customers,
places where the goods are stored including for transit storage etc. The record
should maintain audit trail in case of records maintained in electronic
format.

Service provider

Service provider should
also maintain records in respect of goods used in rendering of services, input
service utilised and services supplied. In case of a works contractor
the records need to be maintained for each contract separately.

Records to be
retained/preserved

These records including
the records in respect of invoices, bills of supply etc. have to be retained
for a period of 72 months from the due date of furnishing of Annual return for
the year pertaining to such accounts and records. Thus, the records are to be
maintained for a period of six years from the year end plus for the period of
time available for filing annual return that is till the 31^st
December of the subsequent year. Therefore, effectively, records are to be
maintained for six years and nine months from the end of the year.

In case of matters which
are pending in appeal or other proceedings including enforcement actions,
records are to be kept till the matters are settled plus a period of 1 year
from the date of orders in such appeals/other proceedings.

Agent & Principal

Every agent shall also maintain
records; from authorisation received by him from each principal to receive or
supply of goods/ services on behalf of such principal, the particulars of the
value and quantity of goods or services received, value and quantity of Goods
or services supplied, details of accounts furnished and the taxes paid on
receipt or on supply of goods or services on behalf of every principal.

Similarly, carrier of
goods, consignment sales Agent, clearing forwarding agent should also maintain
records in respect of delivery/ dispatch of goods, records in respect of the
goods handled by him on behalf of the registered person.

Owner or operator of godown
or warehouse and transporters

Every owner or operator of
godown or warehouse and a transporter should maintain accounts and submit
details regarding his business electronically on common portal in form GST
ENR -01. On submission of such information, a unique enrolment number
shall be generated and communicated to the said person that is the owner/
operator of godown or a transporter. Such enrolment once granted in one State
or Union Territory would be deemed as registration by such person in all the
States or Union territory. Moreover, the operator of the godown should store
the goods in such a manner that they can be identified item wise and owner wise
and should facilitate physical verification for inspection by the proper
officer on demand.

It is clear from the above
that the GST Act and the Rules provide for elaborate guidelines for
maintenance, retention and production of accounts and records to facilitate
determination of correct liability under the GST law. The other objective is to
maintain records in such manner that it facilitates cross matching of
information when processed on the Common Portal. The data to be uploaded on the
common portal requires transaction wise, HSN/SAC code wise, State wise data to
be uploaded of inward as well as outward supplies. Thus, for maintaining
accounting records a registered person will be required to reorganise its
accounting department, the information technologies software and also
appropriate training to its staff.

In view of the above legal
requirements to maintain accounts and records, the businesses are expected to
re-energise and rearrange its entire system of accounting.

Chart of accounts to be
maintained

Traditionally the accounts
include accounts in respect of excise duty payable, State VAT and CST account
Payable as also accounts in respect of CENVAT available and input tax credit
available. However, in view of the change, the following ‘Charts of Account’
will have to be created and maintained in the accounting system.

Chart of Accounts:

Under GST all these taxes
(excise, VAT, service tax) will get subsumed into one account, and following
new accounts have to be created.

– Input CGST a/c

– Output CGST a/c

– Input SGST a/c

– Output SGST a/c

– Input UTGST a/c

– Output UTGST a/c

– Input IGST a/c

– Output IGST a/c

– Electronic Cash Ledger (to be maintained on
Government GST portal to pay GST)

– Electronic Credit Ledger (to be maintained on
Government GST portal to pay GST)

– Electronic Liability Ledger (to be maintained
on Government GST portal to pay GST)

It may be noted all these
records are to be maintained state wise, hence if a person is having
registration under the GST Act, say in five states, the above chart of accounts
need to be multiplied by five times.

Accounts to be maintained
under GST Regime

To summarise, every
registered taxable person shall keep and maintain, at his principal place of
business, a true and correct account of production, inward and outward supply
and such other records as specified under Goods and Services Tax Act.

Accounts / Records

Information required

By whom?

Account
should contain detail of goods manufactured in a factory or production house

Every
assessee carrying out manufacturing activity

Purchase/Inward
Register

All
supplies received during each tax period for manufacturing/sale/supply of
goods and/or services

All
Assessees

Sales/Outward
Register

Account
of all the supplies made whether of goods or services during each tax period

All
Assessees

Stock
Register

This
register should contain a correct record of inventory available at any given
point of time.

All
Assessees

Input
Tax Credit Availed

This
register should contain the details of Input Tax Credit availed in each tax
period

All
Assessees

Output
Tax Liability

This
register should contain the details of GST liability in respect of al taxable
supplies with reference to rate of tax

All
Assessees

Output
Tax Paid

This
register should contain the details of amount paid as CGST, SGST and IGST,
each tax period wise

All
Assessees

Other
Records as may be specified

Government
can further specify, by way of a notification, additional records and
accounts to be maintained

Specific
Business as may be notified by the government

Having discussed the basic
records to be maintained and chart of account required, let’s discuss other
challenges, some of them in respect of transition to the GST, in the book
keeping.

Reconciliation statements
to be maintained

A. Reconciliation of financial records
maintained at GSTN portal:

Since the concept of
supply is so wide that practically speaking, everything debited to Profit &
Loss A/c & credited to Profit & Loss A/c barring exceptions like
salaries & wages, interest and depreciation / amortisation of expenses,
etc., are all either inward supply or outward supply. Moreover, despatches to /
from branches, addition and disposal of assets etc are also added to the
aggregate supply. In the circumstances, there would be differences between
financial books of account and the ‘aggregate turnover’ reported in GSTR-1.
Even currently, such reconciliation is required to be made. However, the type of
transactions which will get reflected in the reconciliation statement would
increase substantially. To highlight one,in case of where the Head office
placing order on the vendor asking the vendor to directly despatch the goods to
the branch outside the state, would require generating an additional document
between Head office and the respective branch and treat that transaction as
‘supply’ in view of section 10(1)(b) of the IGST Act. Obviously, the financial
accounting system do not recognise this type of peculiar transaction.
Similarly, the reconciliation exercise should also involve the amount lying in
the tax credit ledger maintained at the Govt portal. Typically, the credit
reversed on account of mismatches, orphaned entry or non-payment to vendor will
get reflected only on the GSTN portal; however, in the financial books these
items will continue as claimable credits. Therefore, reconciliation of these
numerous entries and taking appropriate decisions in each of these cases is
very important.

B. Reconciliation of GSTR with the financial / MIS
reports

The GSTR requires
reporting of the transaction wise and HSN wise and SAC wise information. Thus,
aggregate of the turnover of sales as per particular HSN code – say bulk drug
should tally with the sales reflected of bulk drug in the financial accounts.
The disposal of assets in the financial books and its valuation and/or
taxability under the GST act will be quite different. This may also require
reconciliation.

In view of the above
background certain accounting challenges which requires attention and IT
support are discussed herein below in brief.

Listed below are some of
the transactions or documents that requires cross references, tracking, taking
corrective actions and/ or review at regular intervals. The accounting team and
the persons in the organisation who created those records, will have to get
involved in the process so that these transactions get attended at the
earliest. Help from the accounting software and other MIS reports generated in
this respect will certainly help in the process. Needless to say, allowance of
ITC, credit notes/debit notes, credits for TDS and TCS etc is dependent on the
actions from the vendor/customer of the company. Early resolution of these
entries goes a long way in proper accounting and determination of liability of
payment of taxes, profitability as also drawing of state of affairs on the
Balance Sheet day.

As mentioned herein above,
IT support would facilitate to a great extent in compiling the information
required and its reporting need while filing the GSTR. Some of these challenges
are enumerated/ highlighted hereunder:

1. Linkages
of debit note/ credit note with original invoices.

2. Adjustment
of advance received against a supply and tracking of receipt voucher and
payment voucher. Returns requires reference of the transaction no/id to be
mentioned to enable to correlate each of these transactions of adjustments of
‘advances’.

3. Generation
of electronic way bill and mention thereof on the supply invoice.

4. Tracking
and monitoring of mismatches / unmatched orphaned entries for claim of ITC.

5. Monitoring
and verification of ITC reversal.

6. Statistical
information in respect of number of invoices raised during the period.

7. Claim of
ITC in case of proportionate allowance on a provisional basis while filing the
returns and the review therefore to carry out adjustments, if any, at the year
end.

8. Tracking
transactions / information normally not part of the financial books of account
but are required as ‘supply’ to be reported in GSTR-1 e.g. barter and exchange,
free issues do not get captured in the financial records. However, these are
now required to be reported in GSTR-1. Further, valuation of the barter and
exchanges etc. requires framing of company policy in this respect.

9. Creating
and updating product master and service master with the respective HSN / SAC
codes.

10. Discipline
in maintaining records. Traditional book keeping wherein generally, the rate
difference / quantity difference is in purchase / service inward invoices is
over written on the invoice and recomputed. This practice will have to be given
a good bye and system of issuing debit notes/ credit notes has to be introduced
and followed strictly. Similarly, the overall discipline in accounting,
classifying and reporting HSN and SAC codes will have to adhered to.

11. The IT
software should prompt an alert or determine the ‘place of supply’ [POS] and
‘location of supplier’ [LOS] so that errors in determining intra-state or
inter-state supplies is eliminated / minimised. Similarly, the software should
select the invoice type like ‘tax invoice’ or ‘bill of supply’ in appropriate
cases.

12. The
delivery challan should have cross reference of invoice number. Even in case of
stock transfer advices attracting IGST, similar references of tax invoice be
given.

13. Cancellation
of invoices: ERP packages normally do not allow cancellation of invoice once
generated. To nullify the wrong issuance of invoices, credit note is required
to be issued. Care should be taken that such wrong issuance of invoices and
rectifying credit notes, do not get reported in the GSTR.

14. The
invoicing / accounting software should have built in rule / concept to
determine the following:

a. Interstate
and intra state

i. Location
of supplier

ii. and
place of supply

for different types of supplies

b. Rate of
tax

i. HSN or
SAC code classification

ii. Composite
supply

iii. Mixed
supply

c. RCM –
inward supply

i. LOS and
POS thereof

ii. Rate of
tax

iii. Claim
of ITC

iv. Creation
of payment voucher

v. Reporting

d. Bill to
ship to type of transaction

i. POS and
LOS thereof

ii. HO
placing order on behalf of branch factory etc. – generation of document and
recognising of the tax liability

15. The
concept under the GST Act in respect of supply, intra-state, inter-state,
composite supply, mixed supply, etc. are totally new and requires them to be
made understood to the accounting, commercial, logistics and other staff in the
organisation.

16. Mechanism
to rectify errors in intra state vis-a-vis inter-state supplies – Such wrong
classification of transaction needs to be attended to as this would result into
claim of refund of wrong deposit and/or paying incorrect taxes. Appropriate
accounting entries need to be passed in books.

17. Claims on
account of goods return / deficiency in services, etc.

18. Revision
in pricing etc. Issue of D/N or C/N. passing of the tax credit or recognising
the additional tax liability.

19. Fixation
of responsibility in the organisation in tracking and monitoring of the items
of reconciliation statements

20. Maintenance
and distribution of ISD – input service credit.

a. transfer
of credit to the state wise electronic credit ledger in the financial books

21. Inter
branch reconciliation.

22. Policy
determination in respect of inter-branch service billing and its valuation.

23. State
wise Trial Balance: It is observed that majority of the ERP software in the
present configuration of accounts do not facilitate drawing of state-wise Trial
Balance. Currently the assessment under state VAT Acts poses practical
difficulties in the assessment proceedings as the officers at times, demand
either state-wise Trial Balance and/or a certificate from a chartered
accountant certifying the sales and purchase turnover in the State. Now that
the software is either amended or configured for GST compliances, the software
should be able to generate state wise Trial Balances.

24. Transition
– TRAN-1. In the transition to GST, Form TRAN 1 is required to be submitted
declaring the carry forward of tax credit from CENVAT or State VAT returns into
ST, claiming of duty/ tax credit in respect of stock etc. This Form also
requires to generate certain information and supporting documents such as:

a. data /
documents / statement required for submission of TRAN-1

b. back up
documents and reconciliation statements in support of TRAN-1

25. Accounting
challenge in case of goods return in GST period where the sale was effected in the
pre-GST period. As per provisions contained in section 142(1), if the goods
return effected by the registered dealer, it would be treated as independent
supply under the GST and the customer would charge the applicable GST say SGST
and CGST. This will get reflected in the GSTR-1 of the customer as also
supplier. However, in the financial books; the entry would be to reversal of
the original sales / service income. On GSTN portal this would be tracked as
ITC claimable and appropriate adjustment would happen in the electronic credit
ledger. In the financial books, actually speaking, the original VAT or the
service tax payable will have to be reversed. As against this the GSTR – 1
would show fresh purchases / inward in the hands of supplier and fresh outward
supply in hands of the customer. Surely, the financial books will not recognise
this and would result into reconciliation item with financial books. Please
note, hundreds of such types of transactions will be required to be tracked and
this would have to be tracked state-wise based on the original sales offered
under the respective State VAT / service tax returns. It is quite possible that
the return could be intra state whereas the original sale was inter state sales
and was booked in the CST return. All such situations are likely to complicate
the tracking mechanism.

26. Physical
stock vs. book stock as on 30^th June 2017: In the transition to GST,
stock held as on 30^thJune is required to be uploaded and credit, if
any, in respect of CED or VAT is to be carried forward to GST regime.
Reconciliation / rectification entries in respect of the physical vs. book
stock may have to be passed in the pre-GST period so as to avoid disallowance
of ITC etc in the GST Regime.

27. Credit
note in respect of scheme discount pertaining to Pre-GST period be passed in
the pre-GST period so that the reduction in the VAT liability, if any, can be
claimed in the pre-GST period. Similarly, the issue of free goods in respect of
supplies effected during the pre-GST period be issued in the pre -GST period.

From the above discussion, it is obvious that the
accounts team will have to be trained and made aware about appropriate
book-keeping, documentation, as also transitional compliances under the GST
Act. It is observed that many organisations have initiated review of the
present accounting and MIS software to evaluate the need for amendments into it
so that it is made GST compliant. Since a denovo approach has to be taken,
attempt should be made to ensure that the software helps in timely compliances
and the manual intervention is minimised.

shailesh.kwebmaker

Provisions of E-Way Bills in GST Law

Introduction

Both Central and State
Governments have decided to implement GST from 1^st July, 2017 in
place of excise, service, VAT, etc. The GST is said to be ‘One Nation One Tax’.
It is presumed under GST that there will be a free flow of inter-State trade
and commerce. One of the hurdles of levy of CST on inter-State transaction is
subsumed in GST to levy IGST with a benefit of ITC in receiving State. It was
also expected, that since IGST will be levied on each and every inter-state
supply, the check post and e-way bill provisions contained in various State VAT
Laws would be abolished. However, to the surprise of trade and industry, the
GST Act provides for “way bills” and detention, seizure and release of goods
and conveyance in transit and confiscation thereof, etc. The draft e-way
rules are also available in public domain. Although, it is not yet clear that
from which date the provisions of E-Way Bills will be effective and whether in
the same form or in a modified manner, in this article an attempt is made to
discuss provisions of draft e-way bills rules made available as on this day.

Information to be furnished prior to Movement of Goods (Rule
1)

Rule 1 provides for
furnishing of information prior to commencement of movement of goods and
generation of e-way bill. Accordingly, every registered person who causes
movement of goods of consignment value exceeding fifty thousand rupees;-

i) in relation to a supply:;or

ii) for
reasons other than supply; or

iii) due to
inward supply from an unregistered person, shall,
before commencement of movement of
goods, furnish information in Part A of Form GST INS-01.

The form is to be
furnished electronically, on the common GSTN portal.

Generation of E-way Bill by Registered Supplier/ Recipient

The e-way bill is
required to be generated for
transporting goods whether in his own conveyance or hired one and
registered supplier or recipient may generate e-way bill in form GST INS-1
after furnishing information in Part B of Form GST INS-01.

Generation of E-way Bill by Transporter

Where the e-way bill is
not generated as above and goods are handed over to a transporter, the
registered person has to furnish information relating to the transporter in Part
B of FORM GST INS-01. Then transporter shall generate e-way bill on the
basis of information furnished by registered person in Part A of FORM GST
INS-01.

Generation of E-way
Bill for consignment less than Rs. 50000/

It is mandatory to
generate e-way bill for transporting goods valuing more than Rs.50,000/-.
However, it is provided that the registered person or transporter may at his
option generate and carry the e-way bill even where the value of consignment is
less than Rs. 50,000/-.

Supply by unregistered person

Even an unregistered
person or transporter can generate e-way bill. However, under Explanation to
sub–rule 1, it is provided that where the goods are supplied by an unregistered
person to a registered recipient, the movement is deemed to be caused by such
recipient , if it is known at the time of commencement of movement of goods. As
a result of this explanation, in such cases the registered recipient has to
furnish the information and generate the e-way bill.

Unique E-Way bill
Number (EBN)

Upon generation of the
e-way bill on the common portal, a unique e-way bill number ( EBN) shall be
made available to the supplier, the recipient and the transporter on the common
portal.

Transfer of Goods
during Transit

Sub-rule (3) of rule 1
provides that when a transporter transfers goods from one conveyance to another
in the course of transit, he shall generate new e-way bill before such transfer
and further movement of goods specifying the mode of transport.

Multiple Consignments

In case of multiple
consignments in one conveyance, the transporter shall indicate the serial
number of e-way bills generated in respect of each such consignment and a consolidated
e-way bill in Form GST INS-2 shall be generated by him. Where the
consignor has not generated e-way bill and the value of consignment exceeds Rs.
50,000/-, then the transporter shall generate Form GST INS-01 on the basis of
invoice, bill or delivery challan, as the case may be, and also generate
consolidated e-way bill in Form GST INS-02.

Furnishing of Information

The information furnished
in Part A of Form GST INS-01 shall be made available to the registered
supplier on the common portal who may utilise the same for furnishing details
in return Form GSTR-1. In case of unregistered supplier the information
shall be furnished to him through his mobile number or e-mail, if available.

Cancellation of E-way
Bill

Sub-rule (6) to rule 1 provides for cancellation of e-way
bill when goods are either not transported or not transported as per details
given in e-way bill. The e-way bill can be cancelled either directly on GSTN or
through a Facilitation Centre notified by the Commissioner. However, the e-way
bill should be cancelled within 24 hours of its generation. But, it cannot be
cancelled once it is verified by the proper officer.

Validity of E Way-Bill

Sub rule (7) to rule 1
provides validity of e-way bills and form the relevant date as under;-

Sr. No.

Distance

Validity Period

Less
than 100 km.

One
day

100
km. or more but less than 300 km.

Three
Days

300
km. or more but less than 500 km.

Five
Days

500
km. or more but less than 1000 km.

Ten
Days

100
km. or more but less than 300 km.

Fifteen
Days

The commissioner has the
power to extend the validity of e-way bill by notification for certain
categories of goods as may be specified therein.

The relevant date is
defined by way of explanation to the said sub-rule to mean that the date on
which the e-way bill is generated and the period of validity shall be counted
from the time at which it is generated.

Acceptance or
Rejection of Details of E-Way Bill by Recipient

The details of e-way bill
generated shall be made available to registered recipient of goods on common
GSTN portal. The recipient has to communicate acceptance or rejection of
consignment covered by the e-way bill. When he does not communicate his
acceptance or rejection within 72 hours of the communication to him on the
common portal, it is deemed that he has accepted the details. The facility of
generation and rejection of e-way bill may also be made available through SMS.

Documents and Devices to be carried by the Person In-charge

Rule 2 provides for
carrying of following documents and devices by the person in charge of a
conveyance;-

a) The
invoice or bill of supply or delivery challan, as the case may be,

b) A copy
of e-way bill or e-way bill number either physically or mapped to a Radio
Frequency Identification Device (RFID) embedded on to the conveyance in such
manner as may be notified by the Commissioner. The Commissioner may by
notification require the transporter to get the said device embedded on to the
conveyance and map the e-way bill to the RFID before movement of goods.

A registered person may
obtain an Invoice Reference Number by uploading a tax invoice issued by him in Form
GST-INV-1 and produce the same for verification by the proper officer in lieu
of the tax invoice. Such number shall be valid for a period of thirty days
from the date of uploading. When registered person uploads the invoice, the
information in Part A of Form GST INS-01 shall be auto populated on the
basis of the information furnished in Form GST INV-1.

The Commissioner may, by
notification, require the person in charge of conveyance to carry the following
documents instead of e-way bill;-

a) tax
invoice, or bill of supply or bill of entry; or

b) a delivery
challan, where the goods are transported other than by way of supply.

Verification of Documents and Con-veyance

Under rule 3, the
Commissioner or an authorised proper officer may intercept any conveyance to
verify the e-way bill or the e-way bill number in physical form for all intra
or inter-state movement of goods. The Commissioner shall get RFID readers
installed at a place where the verification of movement of goods is carried out
and it shall be verified through such RFID readers where the e-way bills are
mapped with RFID. However, where any information is received for tax evasion
then the authorised proper officer, after obtaining prior approval, physical verification
of conveyance can be carried.

Inspection and Verification of Goods

The proper officer shall
prepare summary report of every inspection of goods in transit and it shall be
recorded on line in Part A of Form GST INS-03 within twenty four hours of
inspection and final report in Part B of Form GST INS-03 shall be
recorded within three days of the inspection. It is also provided that where
the physical verification of goods being transported is done at one place
within the State or any other State, no further verification of the said
conveyance shall be carried out again in the State unless specific information
relating to evasion of tax is made available subsequently.

Facility of Uploading of Information of Detention of Vehicle

It is the policy of the
Government not to detain any vehicle for more than 30 minutes. Therefore, a
provision is made in sub-rule (5) for uploading details by transporter of
information of detention of vehicle for more than 30 minutes in Form GST
INS-04.

Other Miscellaneous

The provision for e-way
bill is applicable to all goods whether taxable or not. Even for transportation
of NIL rated goods also e–way bill is required.

The e-way is applicable
for transportation of goods by unregistered person including agriculturist. However,
in that case the recipient shall have to generate e-way bill if the
unregistered person has not generated it.

E-way bill is required
for each and every movement of goods whether in same city or in a State or
interstate. Also, it is required for movement of goods between the branch of
same person within or outside the State.

The term ‘conveyance’
defined in section 2 (34) of the Act to include a Vessel, an aircraft or
vehicle. Hence the e-way bill is required only when the goods are transported
through defined conveyance.

The term value is not
defined in the draft rule. So it should be transaction value of the goods
supplied by way of sale. In any other case, valuation rule may apply to
determine the value of goods. However, when the goods are supplied for
provision of services that is by way of hire then, no clarity is required to
take value of supply of service and not the value of goods itself.

In case of contravention
of provisions of e-way bill, the goods and vehicle carrying the goods can be
detained and confiscated u/s. 129 of the act. The goods can be released upon
payment of applicable tax and penalty equal to 100% of tax if owner comes
forward for release of goods. In case the owner does not come forward for
release of goods, the payment of tax and penalty equal to 50 % of value of goods is required for release of goods.

In case of exempt goods
for owner, the payment of two percent of value of goods or twenty five thousand
rupees whichever is lower is required to be paid for release of goods. If owner
does not come forward for release of exempted goods, the amount five percent of
goods is required to be paid for release of goods.The goods can be released
upon furnishing a security of the amount payable as provided herein above.

Conclusion

The rules for e-way bills
are not yet finalised. The discussion herein above is based upon draft rules
and it is subject to final rules made in this respect. It seems that an attempt
is being made to check evasion of tax and at the same time minimum interception
is proposed. In most cases, the checking will be made through electronic basis.
In GST, the thrust of the government is to have e-process and e-checking which
may serve the purpose in a better manner than human intervention, and, it may
also ensure free flow of movement of goods. It would have been desirable that
at initial stage the e-way bill provisions are made applicable to tax evasion
prone goods and thereafter made applicable to other goods. The trade,
transporters and industry must be given sufficient time to adjust and adapt the
new provisions of GST law and the e-environment.

shailesh.kwebmaker

Export, Deemed Export, SEZ, Operations in Territorial Waters and High Seas Including Refund Provisions

Introduction

Across the globe, value added tax by whatever name called,
applies to international trade on destination principle, exports are free of
VAT and imports are taxed on the same basis and at the same rate as local
production. This destination principle is sanctioned by World Trade
Organization (WTO) Rules.What is free of VAT is termed as zero-rated where tax
on costs and overheads can be recovered.The principle of neutrality takes
centre stage in the context of international trade. GST thus being based on destination
principle, exports from a country of origin go out at zero-rated tax, after
exempting or refunding the input taxes that may be given to the resources used
in its manufacturing. Zero-rating of exports ensures neutrality of VAT in
international trade through unequivocal application of the destination
principle. The OECD guidelines on neutrality of VAT in international trade lay
this down as the first guideline. Thus, exports must leave the country
completely free of tax whereas tax on imported goods should be the same as the
tax levied on domestically produced goods.

Exports: Goods

Following the above principle and as also under the laws
relating to central excise, VAT laws of States and service tax, exports
continue to remain zero-rated and a similar benefit continues to be given to
Special Economic Zones (SEZs) under GST law effective from July 01, 2017. While
this benefit is extended to processing zones of the SEZ, sales from SEZ to
Domestic Tariff Area (DTA) continue to remain taxed under GST system.

As per section 2(5) of IGST Act, 2017 IGST Act) “Export of
goods” with its grammatical variations and cognate expressions, means taking
goods out of India to a place outside India”.

As per section 2(52) of CGST Act, ‘goods’ means every kind
of movable property other than money and securities but includes actionable
claim, growing crops, grass and things attached to or forming part of the land
which are agreed to be severed before supply or under a contract of supply”.

Thus, it appears that both tangible as well as intangible
goods are covered by the above expression. Now as per section 7(1)(d) of the
CGST Act, certain activities are treated as supply of services as listed in
Schedule II. This list inter alia includes the following transactions as
service transactions at para 5:

“(c) Temporary transfer or permitting the use
or enjoyment of any intellectual property.

(d)Development, design, programming,
customization, adaptation,upgradation,enhancement, implementation ofinformation
technology software”.

Thus, these activities have to be considered as services
under the GST law. Currently, when software is exported on a tangible medium,
it is considered as export of goods. The Karnataka High Court in Sasken
Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes,
Bangalore 2011-TIOL-707-HC-KAR-ST held “Intellect is not property by itself.
Through intellect you can create intellectual property.” It is that
intellectual property that will become goods “once put on a medium for sale”.
Intellectual property does not exist in the mind of the technician. What exists
in his mind is the intellect. Using that Intellect, a technician creates or
develops ‘goods’. It is that goods which is called intellectual property when
put on a medium for sale.” In view of this, no service tax was chargeable
on the said transaction of sale. Further, the above service description
appearing in respect of software service and intellectual property in Schedule
II is the same as under service tax law in section 66E. Therefore, software
when provided on a tangible medium and if also capable of replicating should be
considered sale of goods. From the description above viz. “temporary transfer”
of intellectual property or permitting use thereof only is to be treated as ‘service’.
It implies thus that permanent transfers of IPR or providing software on a
tangible medium would be treated as ‘goods’. However, considering the given
law, the issue of classification may remain open. In case of an export
transaction, there may not be direct tax implication as whether goods or
service, it will be a zero-rated supply. Nevertheless, there may be implication
when the Government announces/notifies any incentive either for export of goods
or services.

Export: Services

As per Rule 2(6) of IGST Act, “Export of services” means the
supply of any service when,––

(i) the supplier of service is located in
India;

(ii) the recipient of service is located outside
India;

(iii) the place of supply of service is outside
India;

(iv) the
payment for such service has been received by the supplier of service in
convertible foreign exchange; and

(v) the supplier of service and the recipient
of service are not merely establishments of a distinct person in accordance
with Explanation 1 in section 8”.

In order that a supply of any service is considered exported,
conditions provided in section 2(6) of IGST Act are to be complied with as
discussed below. Further, as against export of goods, where only physical
movement is relevant, in case of services, the location of the supplier and
that of the recipient are relevant. For this, the provisions to determine the
place of supply are required to be looked at.

– Location of supplier in India

When a supply is made by a service provider
from his business place or an establishment located in India, the first
condition of the above Rule 2(6) stands fulfilled i.e. the supplier of service
is located in India. The expression “location of the supplier of services” is
defined in section 2(15) of IGST Act. This is for determination of the exact
location i.e. place of business or a fixed establishment or any other
establishment, from where the supply of a service is made.

– Location of recipient outside India:

The service supplied by a person in India
should be received outside India. For this purpose, ‘recipient’ is defined in
section 2(93) of CGST Act and “location of recipient of services” is defined in
section 2(14) of IGST Act. The meaning of recipient is provided based on
whether consideration is payable or otherwise and would include an agent on
behalf of the recipient to mean that the supply is made to the principal even
when the agent has received a service.

– The place of supply of service

When a service is supplied by a person
located in India to a recipient located outside India, the place of supply
should be determined as “outside India”. This is to be determined in accordance
with section 13 of the IGST Act. (This is discussed and analysed in detail in
this July 2017 issue of BCAJ in the article “Place of supply of services“ and
hence not touched upon here). Under the service tax law, Place of Provision of
Service Rules, 2012 and prior to July 2012, Export of Services Rules 2005 were
prescribed for the purpose.

– Receipt of payment in convertible foreign
exchange

On the lines of service tax provisions, GST
law also contains the condition of receipt of consideration or the payment for
the service to be in convertible foreign exchange to consider a service as
exported. This condition does not exist for export of goods. The service
supplier is required to produce evidence of such receipts in convertible
foreign exchange such as Foreign Inward Remittance Certificate (FIRC) issued by
banks in this regard. In the case of Sun-Area Real Estate Pvt. Ltd. 2015
(39) STR 897 (Tri.-MUM) “foreign exchange” was interpreted in detail.
Referring to Notification No. FEMA 9/2000-RB of 03/05/2000, the rupee payment
appearing in FIRC was held as receipt in “convertible foreign exchange”.
Further, referring to the Supreme Court’s judgement in J B. Boda And Company
Private Limited vs. CBDT (SC) 223 ITR 271 (SC), it was observed as follows:

“The Hon’ble Supreme Court has held that
the said amount of brokerage retained by the Indian insurance broker from the
total amount due to the foreign insurer shall be treated as foreign exchange.
In view of the above judgments, I am of the view that when a foreign bank is
maintaining Indian rupees in their account obviously such Indian rupees were
obtained in lieu of foreign exchange. For example, if any payment is made from
India to any foreign country it is to be made in foreign exchange and thus
there is an outflow of foreign exchange but if the payment is made in Indian
rupees, there is a saving of foreign exchange and if the said Indian rupees is
received in India, the same is in lieu of foreign exchange which was saved at
the time of repatriation of Indian rupees to foreign country. On this logic
under the Foreign Exchange Management Act also it provided that if the payment
in Indian rupees is received in India through banking channel it is deemed to
be convertible foreign exchange.”

– Supplier and recipient of service are not
merely establishments of distinct person:

Under GST law, two establishments of a person in two
different States or a Union territory and establishment of a person in India
and an establishment outside India are treated as establishments of distinct
persons in terms of Explanation-I to section 8 of GST Act. Thus a service
provided by a company located in Mumbai, India to their branch office in
Mauritius is not considered as an export of service as they are establishments
of distinct persons or they are not two separate legal entities.

Export of goods and services are zero-rated under GST law and
therefore exports can be made without payment of any tax. However, for all
zero-rated supplies, input tax credit is available even when exempt supplies
are exported.

Deemed Exports

“Deemed Exports” is a unique concept operating as a part of
Foreign Trade Policy (FTP) of India. Essentially, deemed exports mean those
transactions in which the goods supplied do not leave the country and the
supplier in India receives the payment for goods either in Indian rupees or in
free foreign exchange. The purpose for ‘deeming’ is to extend certain benefits
and relaxations in so categorised transactions even though they are not export
in nature but are viewed crucial and therefore deemed as exports. Section 2(39)
of CGST Act defines deemed export as such supplies of goods as may be notified u/s.
147. Thus, the notification in this regard is yet to be issued when this is
written. Under FTP, supply of goods under advance authorisation, supply of
goods to Export Oriented Units (EOU) software technology Park (STP), Electronic
Hardware Technology Park (EHTP), Bio-Technology Park Scheme (BTP) etc.,
supply of capital goods to EPCA authorisation holders, supply of maritime
freight containers by 100% EOU when these containers are exported out of India
within 6 months or such further period as permitted by Customs, supply to
projects funded by U. N. agencies etc. are considered eligible supplies
to be ‘deemed’ as exports. The said concept may continue on the onset of GST
with or without modification.

SPECIAL ECONOMiC ZONE (SEZ)

Both, Special Economic Zone (SEZ) and Special Economic Zone
Developer (SEZ developer) are defined in the IGST Act in sub-sections (19) and
(20) respectively in section 2. These terms derive their meanings as per
definitionsunder the Special Economic Act, 2005 (SEZ Act). The SEZ Act 2005
contains special provision regarding procurement of goods and service without
payment of taxes. In line with existing laws of central excise, service tax etc.,
GST law also provides for refund of taxes paid by the supplier supplying goods
or services to a developer or a unit holder. There has been a significant
amount of litigation on the interpretation of provisions of SEZ Act, a few of
which cited here may help under GST as well although these have been ruled in
the context of service tax or customs duty. In case of Essar Steel Ltd. vs.
UOI 2010 (249) ELT 3 (Guj), Essar located in SEZ at Hazira, Surat received
iron ore pellet from their non Vizage Pellet unit in SEZ. Customs department
demanded export duty considering that SEZ is outside the territory of India.
The High Court set-aside the demand observing that section 53 of the SEZ Act
provides that the Zone would be deemed a territory outside the customs
territory of India for the purpose of authorised operations. However, the
customs territory cannot be equated with the territory of India and such
interpretation would render SEZ Act redundant. The Zone cannot be considered
outside Indian Territory under service tax law. Notification No.9/2009-ST
provided exemption from payment of service tax for services provided to
developer or units in SEZ. In Reliance Ports and Terminals Ltd. 2015 (40)
STR 200 (Tri.-Ahmd.), the revenue’s case was that during the relevant
period March 2005 and 20/05/2009, the exemption did not exist. Therefore,
service tax should be paid by service provider and appellant would claim refund
thereof. The Tribunal interalia observed that section 51 of SEZ Act had
overriding effect if there is anything inconsistent with the provisions in any
other law and therefore exemption was available to SEZ unit under section
26(1)(e) of SEZ Act. In Norsia Container Lines 2011 (23) STR (Tri.-Del),
containers were used by unit for authorised operations in SEZ and also
sometimes outside SEZ. The Tribunal observed that as long as the containers
were used for export of goods, the exemption was available.

As per section 7(5)(b)of IGST Act, supply of goods and
services or both to or by a SEZ developer or SEZ unit would be treated to be
supply in the course of interstate trade or commerce. In accordance therewith,
for example, even if a person in Mumbai provides any service to a unit in SEZ
in Maharashtra, it will be treated as interstate supply and IGST is chargeable
primarily, notwithstanding that refund would be available since the supply is
zero-rated as in the case of exports, however subject to conditions and
safeguards and procedure prescribed for granting refund as briefly discussed
below.

Operation in territorial waters

Section 9 of IGST Act, a non-obstante clause provides that
notwithstanding anything contained in this Act, where location of the supplier
is in territorial waters, the location of such supplier or where the place of
supply is in the territorial waters, the place of supply would be considered to
be in the coastal state or union territory where the nearest point of the
appropriate baseline is located. This provision primarily seems to be aimed at
avoiding litigation in relation to supply to or from any location in
territorial waters.

However, there requires better clarity as discussed hereafter.
The limit of territorial waters is of 12 nautical miles from the nearest point
of the appropriate baseline as per section 3(2) of the Territorial Waters,
Continental Shelf, Exclusive Economic Zone and other Maritime Zone Act, 1976.
The continental shelf of India comprises the seabed and sub-soil of the
submarine areas that extend beyond the limit of its territorial waters
throughout the natural prolongation of its land territory to the outer edge of
continental margin or to a distance of 200 nautical miles from the baseline
referred above. India has and always had full and exclusive sovereign rights in
respect of its continental shelf (sections 6CD(1) and (2) of the said Act of
1976).

The exclusive economic zone of India is an area beyond and adjacent
to the territorial waters and the limit of such zone is 200 nautical miles from
the baseline referred above. ‘India’ as per section 2(56) is defined to
includethe land mass of the country, its territorial waters, seabed and sub
soil underlying such waters, continental shelf, exclusive economic zone or
other maritime zone and the airspace above its territory and territorial
waters. Therefore the issue that requires examination is for example, when a
supply of repairs and maintenance services including supply of spare parts is
made to offshore oil and gas industry operation at Mumbai High by a Mumbai
vendor on offshore oilfield located in Arabian Sea around 160 km. West of the
Mumbai Coast, whether it would be considered supplies made in the State of Maharashtra
only as the power to levy GST is delegated to States as the said section 9 has
an overriding effect. The question is whether the expression “territorial
waters” used in section 9 would be construed as area upto 12 nautical miles
only. In any case, supplies in the area beyond 12 nautical miles and upto 200
nautical miles can neither beconsideredexport nor an interstate movement as
this area does not form part of any State of the country. Therefore by default
also, whether the supply would be construed as made in Maharashtra is an issue.
Conversely, if oil recovered at Bombay High is transferred to a refinery in
Mangalore, Karnataka, the supply would be considered interstate supply and IGST
would be recoverable.

The issue whether materials supplied on the vessel located in
the territorials waters was a sale within the state of Maharashtra in the
context of Maharashtra VAT provisions was considered by the Bombay High Court
in the case of Raj Shipping vs. State of Maharashtra [2015] 62 taxmann.com
309 (Bombay), wherein the Bombay High Court noted that since the agreement
to sell was entered in the state of Maharashtra, the refinery was very much
within the state of Maharashtra and the assessee’s place of business was in
Mumbai and the contract was carried out from Mumbai the sale was held to be
within the State of Maharashtra (The matter lies in the Supreme Court for
finality). Another interesting decision of the Apex Court is also relevant here
i.e. In UOI vs.Rajendra Dyeing and Printing Mills Ltd. (2004) 10 SCC 187,
it was held that when there is movement of goods outside territorial waters of
India, it is then an export may be said to have taken place. In the instant
case, the cargo was destroyed when the vessel sank within territorial waters of
India. Therefore, there was no export of cargo and no duty drawback was
available in respect of the cargo. Considering theserulings, litigation as
regards supply to or from territorial waters cannot be ruled out.

High Sea sale

What is known in common parlance as High Sea sale is a sale
taking place by transfer of documents of title to goods before the goods have
crossed the customs frontiers of India, thus is a sale in the course of import.
Such transactions are known as deemed imports. There is no bar on the same
goods being sold more than once while the goods are on high sea. The delivery
from customs is therefore on account of last high sea sale purchaser. Bill of
Entry is also filed in the name of the last purchaser. These transactions are
exempt under Central Sales Tax Act, 1956.

As per section 7(2) of the IGST Act, supply of goods imported
into the territory of India till they cross the customs frontiers of India
shall be treated to be a supply of goods in the course of interstate trade or
commerce. Whereas as per proviso to section 5(1) of the IGST Act, IGST shall be
levied on goods imported into India and will be collected as per section 3 of
the Customs Tariff Act, 1975 on the value determined under the said Act at the
point when duties of customs are levied on the said goods u/s. 12 of the
Customs Act, 1962. Thus, reading of section 7(2) indicates that sale in the
course of import before crossing the customs frontier would be chargeable to
IGST. However, harmonious reading of both section 7(2) and charging section
5(1) indicates that the supply made prior to the goods reaching customs
frontiers should not be liable for IGST. Thus, whether the provision of section
7(2) leading to charging IGST on a high sea sale is unintended or otherwise,
cannot be concluded with certainty. The question that still remains is whether
jurisdiction of the GST law as per the definition of India discussed above
remains upto 200 nautical miles from the baseline and therefore, whether
“international transfer or supply of goods” made beyond 200 nautical miles
would be outside the scope of GST law. However, to prove that ‘supply’ was made
prior to the vessel or aircraft entering the ‘limit’ of jurisdiction of the law
also appears a challenging task. In view hereof, the route of high sea sale
would lose its relevance if in terms of section 7(2), the sale made prior to
goods reaching customs is subject to IGST.

Refund provisions: Zero-rated supplier

Section 16 of IGST Act defines zero-rated supply as follows:

16. (1)
“zero rated supply” means any of the following supplies
of goods or servicesor both, namely:––

(a) export of goods or services or both; or

(b)
supply of goods or services or both to a Special Economic Zone developeror a
Special Economic Zone unit.

Sub-section (3) of the said section 16 reads as follows:

(3) A registered person making zero rated supply shall be
eligible to claim refund under either of the following options, namely:––

(a) he may supply goods or services or both under
bond or Letter of Undertaking, subject to such conditions, safeguards and
procedure as may be prescribed, without payment of integrated tax and claim
refund of unutilised input tax credit; or

(b) he may supply goods or services or both,
subject to such conditions, safeguards and procedure as may be prescribed, on
payment of integrated tax and claim refund of such tax paid on goods or
services or both supplied,

in accordance with the provisions of
section 54 of the Central Goods and Services Tax Act or the rules made thereunder.

Thus the export of goods and services and supply of goods and
services to SEZ developer or units in SEZ are zero-rated supplies. As
distinguished from service tax law, supply of services/or the goods can be made
without payment of IGST only under bond or letter of undertaking or else the
payment of integrated tax to be made (from input tax credit account) and then
claim refund thereof.In turn, the refund in respect of all zero-rated supplies
is governed by section 54 of the CGST Act along with refund in other cases. In
terms of these provisions as well as the already prescribed Refund Rules,
important requirement or conditions are listed below:

– Only registered persons would be eligible to
claim refund. Thus in order to be eligible for claiming refund, registration is
a prerequisite.

– An application is required to be made in the
prescribed form from the relevant date within 2 years. Relevant date for
exported goods would be the date of vessel or aircraft leaving India or the
date of dispatch by the post office as the case may be. In case of deemed
exports, the date of furnishing the relevant returns. In case of exported
services, the relevant date is the date of receipt of foreign exchange when
services are completed prior to the receipt of such payment and when advance is
received prior to supply of services, the date of issue of invoice.

– Refund can be claimed by a registered person
at the end of any tax period for unutilised input tax credit.

– No refund of unutilised input tax credit is
available where exported goods are subject to export duty.

– Also when drawback is availed in respect of
central tax or integrated tax by supplier of goods or services, refund would
not be allowed.

– All applications would have to be accompanied
by adequate documentary evidence as prescribed to establish that refund is due
to the applicant.

– 90% of the total amount claimed (excluding
the amount of input credit provisionally accepted) will be refunded within 7
days and thereafter within 60 days a final order will be made in respect of
applications complete in all respects after due verification of documents in
terms of prescribed procedure subject to the conditions that the claimant of
refund is not prosecuted during the preceding 5 year period or under the
existing law where the amount evaded was above Rs.2.5 crore.

– No refund can be withheld or deducted in
certain circumstances such as non-filing of any return or in case of pendency
of any tax interest or penalty dues.

– When the goods or services are exported
without payment of tax under bond or letter of undertaking, refund will be
granted as per the following formula:

Refund amount = (turnover of zero-rated
supply of goods + turnover of zero rated supply of services x net ITC +
adjusted turnover.

In the above, refund means the maximum
admissible fund, net ITC means credit availed on inputs and input services
during relevant period. Turnover means the turnover in a State or Union
Territory excluding the value of exempt supplies other than zero-rated supplies
during the relevant period

Conclusion

When GST era begins, given various limitations
in the law, it is least likely that litigations for interpretational issues
even reduces in comparison with those under the existing statutes governing
central excise, service tax, VAT etc. Further and importantly it also
remains to be seen how ‘seamless’ would be the flow of input tax credit and how
simplified would be the refund procedure for the zero-rated suppliers.

shailesh.kwebmaker

Contract Manufacturing And Job Work Operations

Job-work industry constitutes a significant sector in the
Indian economy. It is an indispensable arm of our industrial sector. “Job work”
includes outsourced activities which may or may not result into manufacture.
The person undertaking the job work is called job worker. The job worker works
under the instructions of the principal manufacturer and exercises his labour
over the inputs or material belonging to his principal. Where exercise of
labour results in manufacture of goods, excise duty becomes applicable and in
other cases, service tax comes into play. Some job works involve transfer of
material from job-worker to principal manufacturer in the course of execution
of the work in which case VAT/CST may get attracted. In some cases, a job
worker provides pure labour and entire inputs/ raw materials are provided by
the principal manufacturer.

Job-Work and Existing Law

The context of Central Excise Act, the Hon’ble Supreme Court
in the case of Ujagar Prints, etc. vs UOI 1988 (38) ELT 535 had held
that, the assessable value of the goods in the hands of job-worker, would
include value of the goods supplied to the job-worker for processing plus the
value of the job-work done plus manufacturing profits and manufacturing
expenses whatever would be included in the price at the factory gate but not
any other subsequent profit or expenses. Subsequently, Rule 10A was inserted in
the Central Excise Valuation whereby, transaction value of the goods processed
by the job-worker was amended to also include profits of the principal
manufacturers (i.e. transaction value of the goods sold by the principal
manufacturer at the time of removal of goods from the factory). The job work
operations not amounting to manufacture would be regarded as service. The
job-work processing charges charged by the job-worker to principal manufacturer
would attract service tax. This would include price of the raw material, labour
and processing charges. The raw material supplied by the Principal manufacturer
free of charge may not form the part of value of taxable services.

Job-Work and GST

Under the GST regime, the term “job work” is defined in
section 2(68) to mean any treatment or process undertaken by a person on
goods belonging to another registered person and the expression “job
worker” shall be construed accordingly. Contract manufacturing is not strictly
same as job-work as in that case, contract manufacturer uses his own material.
The principal manufacturer only affixes his label and sells the product.
Therefore, ‘contract manufacturing’ would not be considered as job-work.
Distinction between contract manufacturer and job-worker would be relevant in
GST since transaction between principal manufacturer and job-worker has been
given special treatment in GST Law.Various provisions concerning job-work
transactions are discussed in this Article.

Whether supply of goods from Principal to Job-work would
attract GST if provisions of section 143 are ignored?

Section 143 of the GST Act, makes special provisions for
transactions between manufacturer and job worker. It provides that, a
registered person (say principal manufacturer) may send any inputs or capital
goods to a job-worker, without payment of tax on the basis of intimation
given to the proper officer and subject to certain conditions. The levy under
the GST law is on “supply” of goods and services.

The term supply is wide enough to cover any form of supply
such as sale, service, transfer, barter, exchange, licence, rental, lease,
disposal etc. However, supply made by one person to another person
without consideration would not attract GST [unless the supplier and receiver
are related persons]. Hence, author is of the view that, even in the absence of
section 143(1), a supply of any goods (inputs, capital goods, consumables,
tools, jigs etc.) by a manufacturer to unrelated job-worker would not
require payment of tax.

Why scheme under section 143 is required?

Then a question may arise as to whether principal is required
to reverse Input Tax Credit (ITC) availed by the manufacturer in respect of
such goods supplied to job-worker on the ground that outward movement of such
goods to job-worker does not suffer GST. Besides, when the job-worker returns
the ‘processed goods’ back to manufacturer and charges job-work processing
charges, the question may arise as to whether value of ‘such goods’ for the
purpose of GST would include only ‘job work charges’ or ‘transaction value’ of
the processed goods.

As regards entitlement of ITC, section 19 provides that the
principal (manufacturer sending the raw material etc.) shall, subject to
certain conditions and restrictions as may be prescribed, be allowed input tax
credit on inputs/ capital goods sent to a job worker for job work. Such
conditions and restrictions are contained in Rule 10 of the ITC Rules approved
on 17.05.2017 (discussed later). The ITC is allowed, even if the inputs/
capital goods are directly sent to a job worker for job work without being
first brought to his place of business. However certain additional
conditions are contained in section 19, which makes it necessary for principal
and job-worker to avail the benefit of scheme contained in section 143. In
other words, benefit of section 19 is available to manufacturer only if he
avails the benefit of scheme u/s. 143.

It appears that, intention of section 19(3) and 19(6) is
to require the principal to reverse the ITC, if benefit of scheme contained in
section 143 requiring the principal to give intimation is not obtained or in
case the goods are not received back within stipulated period as per section
143, but that intention is not coming out from the wordings of section 19(3)
and 19(6). Section 19 provides that, where the inputs (or capital goods)
sent for job work are not received back by the principal after completion of
job work or otherwise or are not supplied from the place of business of the job
worker in accordance with clause (a) or clause (b) of sub-section (1) of
section 143 within one year of inputs (and within three years in case of
capital goods) being sent out, it shall be deemed that such inputs/ capital
goods had been supplied by the principal to the job worker on the day when the
said inputs were sent out. The exception is provided only in respect of moulds
and dies, jigs and fixtures, or tools.The use of the expression “it shall be
deemed that such inputs had been supplied by the principal to the job worker on
the day when the said inputs were sent out” in section 19(3) is a misfit
and appears to be a drafting error – copy pasting from provisions of 143(3) and
143(4) of the Act. The suggested correct wordings would be, “the principal
shall be liable to pay Input Tax Credit availed on such inputs or capital goods
on the date of supply of such goods to job-worker in accordance with provisions
contained in section 143(3) and 143(4).”

Thus, going by the spirit of section 19, if the Principal has
given/obtained benefit of scheme u/s. 143, he would not be required to reverse
the ITC in respect moulds and dies, jigs and fixtures, or tools sent out to a
job worker for job work at all, even if he had paid no GST at the time of their
supply to the job-worker. As regards inputs and other capital goods, the
reversal of ITC is not required at the time of sending such goods to job
worker, only if goods are brought back or otherwise dealt with by the principal
and job-worker, within time limit specified in the provisions of section 143.

Time Limit contained in section 143

Under section 143, if the principal supplies goods to
manufacturer under intimation, then he shall be required to bring back to
any of his place of business, the inputs after completion of job work or
otherwise within one year or capital goods within three years of their being
sent out. The restriction is not applicable to moulds and dies, jigs and
fixtures, or tools. Alternatively, such processed goods or capital goods can,
within the aforesaid period, also be supplied from the place of business of a
job worker on payment of tax within India, or with or without payment of tax
for export. However, in order to supply such goods directly from the place of
job-worker, principal shall either be required to declare the job-worker’s
place as his place of business or the job worker should be a registered dealer.
In other words, if the place of job-work is not registered with the department,
the processed goods shall be first required to be brought to any registered
place and it can be supplied only from such place.

In this context, another question may arise that, if the
job-worker has his own registration with the department and the principal
decided to supply the goods directly from the place of business of such
job-worker on payment of duty, then who shall pay the tax on such supply,
principal or job-worker? In this regard, Explanation below section 21 provides
that, the supply of goods, after completion of job work, by a registered job
worker shall be treated as the supply of goods by the principal
referred to in section 143, and the value of such goods shall not be included
in the aggregate turnover of the registered job worker. Besides section 143(2)
also provides that, the responsibility for keeping proper accounts for the
inputs or capital goods shall lie with the principal. If legislative intention
is to make the principal liable to pay tax in respect of such supply, then this
explanation was more suitable u/s. 143 instead of section 21. It would also
mean that, principal would be required to register job-worker’s premises as his
place of business (notwithstanding the job-worker has his own registration) as
only in that case principal would be in a position to declare and pay tax on
such outward supplies in his GSTR-1.

In short, it appears that, section 143 requires the
job-workers to pay GST only in respect of their processing/ job working charges
and not on the transaction value of the processed goods. In addition to job
work charges, if any waste and scrap is generated during the job work, the job
worker shall be required to pay tax on supply of such scrap if he is registered
and only in cases where such job-worker is not registered, payment is required
to be made by the principal.

Whether section 143 is applicable, if Job-worker’s Premise is
registered as additional place of business of Principal, where both are located
in the same State

The aforesaid discussion will be applicable, if principal and
job-worker are located in different States. However, if they are located in the
same State, then the question may arise as to what would happen, if the
job-worker’s place of business is registered by the principal as its additional
place of business? In that case, whether it would be necessary to take recourse
to provisions of section 143.

Author is of the view that, in such case, provisions of
section 143 will be of no consequence. The concept of supply presupposes
existence of more than one person. Under GST, the transaction between two units
of the same entity without consideration is regarded as supply only if said
units have obtained separate registration. Therefore, if both the units are
covered in the same registration certificate, the movement of goods between
such units would not be regarded as supply for the purpose of GST. The movement
of goods within places of businesses covered under same registration also does
not contemplate any reversal of ITC. Hence, if job-worker’s place in the same
State is registered as additional place of business of the principal, supply of
goods made by principal to job-worker as his additional place of business would
not attract GST, the question of reversal of ITC would not arise and the supply
of processed goods from the said premises of job-worker to any other premise of
the principal in the same State (covered under same registration) would also
not attract GST. Besides, the principal would be in a position to supply the
processed goods to his customers directly from place of such job worker in a
routine manner, that being his own registered place of business. The job-worker
will only be required to pay GST on his job-working charges and if the
job-worker is unregistered, principal would be liable to pay it under reverse
charge mechanism and claim ITC thereof.

Author is therefore of the view that, if the job-worker is located in the same State as that of Principal, it is
advisable to register job-worker’s premises as his additional place of
business.

Rule 10 – Conditions and restrictions in respect of inputs and
capital goods sent to the job worker

As per Rule 10, the inputs, semi-finished goods or capital
goods shall be sent to the job worker under the cover of a delivery challan
issued by the principal, including where such goods are sent directly to a
job-worker. The delivery challan shall be issued at the time of removal of
goods for transportation, by the principal to the job worker and shall contain
the following details:

– delivery challan should be serially numbered
not exceeding sixteen characters, in one or multiple series, and shall contain
a date.

– name, address and GSTIN of the consignor, if
registered,

– name, address and GSTIN or UIN of the
consignee, if registered,

– HSN code and description of goods,

– quantity

– taxable value,

– place of supply, in case of inter-State
movement, and

– signature.

The details of challans in respect of goods dispatched to a
job worker or received from a job worker during a tax period shall be included
in FORM GSTR-1 [ Table -13] furnished for that period.

Where the inputs or capital goods are not returned to the principal
within the time stipulated in section 143, the challan issued under sub-rule
(1) shall be deemed to be an invoice for the purposes of the Act.

Transitional Provisions concerning Job-Worker

As per section 141 where any inputs/ semi-finished goods
received at a place of business had been removed as such or removed after being
partially processed to a job worker in accordance with the provisions of
existing law prior to the appointed day and they are returned to the said place
on or after the appointed day, no tax shall be payable if such inputs/
semi-finished goods, after completion of the job work or otherwise, are
returned to the said place within six months from the appointed day. If however,
such inputs / semi-finished goods are not returned within a period of 6 months
as specified in section 141, then CENVAT Credit taken by the principal
manufacturer on such inputs / semi-finished goods is liable to be recovered
from the manufacturer in accordance with provisions of section 142(8)(a).
Similar provisions are also contained in respect of excisable goods sent for
job work for further processing not amounting to manufacture, carrying out
tests etc. As regards semi-finished goods/excisable goods sent for
further processing, carrying out tests etc., section 141 allows transfer
the said goods to the premises of any registered person for the purpose of
supplying therefrom on payment of tax in India or without payment of tax for
exports within the period specified in this sub-section. Section 141 also
requires the manufacturer and the job worker to declare the details of the
inputs or goods held in stock by the job worker on behalf of the manufacturer
on the appointed day in such form and manner and within such time as may be
prescribed. As per Rule 3 of Transition Rules approved by Council of
04.06.2017, principal and job-worker shall submit declaration in Form TRAN-1
specifying therein, the stock of the inputs, semi-finished goods or finished
goods, as applicable, held by him on the appointed day. The relevant Format is
contained in Table-9 (a) and (b) of TRAN-1 and such form is also required to be
furnished by the job-worker whether or not he is registered in GST.

As regards contract
manufacturing, since it is not a job-work and generally there is no supply of
goods from principal to contract manufacturer, job-work provisions would not be
applicable. In that case, contract manufacturers would be required to take
registration and would be required to pay GST on the manufactured goods
supplied by him to the principal as if it is a supply of goods and not as supply of service.

shailesh.kwebmaker

Impact of GST on Small & Medium Businesses (Including Composition Scheme)

1. Small & Medium Business Enterprises / Tax
Payers including Non – Profit bodies, Co-operative Societies etc [SME]

SME Sector comprises a
significant component of the Indian Economy. Under the prevailing business
scenario in the country, there are small & tiny business units scattered
across the country in large numbers extensively in the Unorganised Sector. Though,
SME Sector contributes very small portion in terms of taxes, it is very
important to our Economy inasmuch as, it significantly contributes to India’s
GDP, provides employment (directly/indirectly) to a large number of people
& also contributes substantially to the Exports of our Country. Accurate
statistics in this regard are not formally available. However, the following be
noted:

– According to Annual Report (2015-16) of the
Ministry of Micro, Small & Medium Enterprises, there are estimated to be
about 51 Million MSME businesses, employing more than 117 Million people and
have a combined Fixed Asset value of 15 lakh crore (app).

– According to other press reports, if the
entire unorganised sector is considered comprehensively on a pan India basis,
the SME businesses in India estimated to be around 51 Million, could be
contributing to 45% of India’s GDP and employing 450 million people (app).

– It is also estimated that SME Sector could be
contributing around 30% to 40% of India’s Total Exports.

SME Sector is likely to be severely impacted by the GST
Regime. Hence, the implications on this Sector are discussed hereafter, for the
awareness & understanding of SME tax payers. All references in the write up
to Central GST would cover corresponding provisions under State GST as
well.

2 Threshold Limits

Threshold Limits are usually provided for imposition of any
tax, so that SME are kept out of the tax net. This is also administratively
expedient as it is difficult to exercise control over large number of SME,
where revenue generated is less compared to administrative costs involved.

2.1 Existing
Position

The present threshold limits for SME under different indirect
tax laws are as under:

a) Central Excise Act, 1944 (CEA)

• SSI Exemption Scheme upto Value of Taxable
Clearances of 150 lakh in a year subject to terms & conditions.

• Concessional Excise Duty (2%) without CENVAT
Credit on Specified Products of mass consumption.

b) Finance Act, 1994 (Act)

(Service Tax)

• SSI Exemption Scheme upto Value of Taxable
Services of 10 lakh in a year subject to terms & conditions.

c) Maharashtra VAT, 2002

• Turnover upto 5 lakh in a year subject to
conditions.

• Composition Scheme for specific businesses
subject to terms & conditions.

2.2 Threshold Limits under GST

a) The threshold limits under Central Goods &
Services Tax Act, 2017 (CGST) & State Goods & Services Tax Act 2017
(SGST) are as under :

• turnover upto 10 lakh in a year
(Registration Limit 9 lakh)

• turnover upto 5 lakh in a year (Registration
Limit 4 lakh) for Specified States.

b) There is no threshold limit under the
Integrated Goods & Services Tax Act, 2017 (“IGST”) in regard to inter–state
transactions of goods & services

c) For computing the threshold limit, “aggregate
turnover” is defined u/s. 2(6) of CGST as under:

“aggregate turnover” means the aggregate value of all taxable
supplies (excluding the value of inward supplies on which tax is payable by a
person on reverse charge basis), exempt supplies, exports of goods or services
or both and inter–State supplies of persons having the same Permanent Account
Number, to be computed on all India basis but excludes Central tax, State tax,
Union territory tax, integrated tax and cess;

d) Under Section 2 (47) of CGST, “exempt supply”
is defined as under :

“exempt supply” means supply of any goods or services or both
which attracts nil rate of tax or which may be wholly exempt from tax u/s. 11,
or u/s. 6 of the Integrated Goods and Services Tax Act, and includes
non–taxable supply;

e) Notwithstanding the threshold limits stated in
Para (a) above, the following category of persons shall be required to be
compulsorily registered in terms of ection 24 of CGST:

i) Persons making any inter–State taxable supply

ii) Casual taxable persons

iii) Persons who are required to pay tax under
Reverse Charge

iv) Persons who are required to pay tax under
section 9(5) of CGST

v) Non – Resident taxable persons

vi) Persons who are required to deduct tax u/s. 51
of CGST whether or not separately registered

vii) Persons who supply goods and/or services on
behalf of other registered taxable persons whether as an agent or otherwise

viii)Input
Service Distributor, whether or not separately registered

ix) Persons who supply goods and/or services, other
than supplies specified in Section 9(5) of CGST, through electronic commerce
operator who is required to collect tax at source u/s. 52 of CGST

x) Every electronic commerce operator

xi) Every person supplying online services from a
place outside India to a person in India, other than a registered person.

xii) Such other person or class of persons as may be
notified by the Central Government or a State Government on the recommendations
of the Council.

3 Composition Scheme – Section 10 of CGST
(Scheme)

a) The Salient Features of the Scheme are as
under:

i) Scheme is available to those SMEs whose
aggregate turnover in a financial year does not exceed Rs. 75 lakh (increased
from earlier limit of 50 lakh as per press reports) on an optional basis if the
registered person :

• is not engaged in supply of services other
than supply of food & services for human consumption [as referred in clause
(b) of para 6 of Schedule II – CGST]

• is not engaged in making any supply of goods
which are not leviable to tax under CGST

• is not engaged in making an interstate
outward supplies of goods

• is not engaged in supply of goods through
electronic commerce Operator (covered by section 52 of CGST)

• is not a manufacturer of such goods as may
be notified by the govt.

ii) All registered taxable persons having the same
PAN number can opt for the Scheme if all such persons also opt for the Scheme:

iii) The taxable persons opting for the Scheme will
have to pay a fixed percentage of gross turnover as tax. The rates of tax for
Composition Scheme are as under :

Category of persons	Rate of tax as % of Turnover	Aggregate rate of tax (Centre & State) as % of Turnover
Manufacturers (other than notified goods)	1%	2%
Service Providers [viz Suppliers of food / beverages as referred in clause (b) – Para 6, Schedule II of CGST]	2½	5%
Any other eligible supplier u/s. 10 of CGST	½ %	1%

Category
of persons

Rate
of tax as %

of
Turnover

Aggregate
rate of tax (Centre & State) as % of Turnover

Manufacturers
(other than notified goods)

Service
Providers [viz Suppliers of food / beverages
as referred in clause (b) – Para 6, Schedule II of CGST]

2½

Any
other eligible supplier u/s. 10 of CGST

½ %

iv) SME opting for Scheme would not be entitled to
any ITC.

v) Taxable persons who opt for the Scheme will
not be allowed to charge GST in their invoice and cannot recover tax from
customer

vi) Scheme is subject to reverse charge provisions
contained in section 9(3) & (4) of CGST

vii) The option availed of by a registered person
under the Scheme shall lapse from the day on which his aggregate turnover
during a financial year exceeds the specified limit of 75 lakh (increased from
50 lakh as per press reports)

viii)Registered
Person opting for the Scheme shall have to comply with conditions &
restrictions stipulated under the Composition Rules notified under CGST / SGST.

4 Concerns of SME Sector

4.1 Fixation to Effective lower threshold would
expand SME Coverage under GST

a) The threshold limits under GST regime, as
stated in para 2, above, is likely
to bring a large chunk of SME Sector under GST inasmuch as :

• Present exemption limit of 150 lakh under
central excise is reduced to 20 lakh under GST;

• Presently, a tax payer having business
across different states in India, is entitled to the benefit of threshold limit
in each State. Under GST, in such cases, the threshold limit would be available
on an all India
basis; and

• Compulsory Registration irrespective of
threshold limit for large number of specified tax payers as stated in para 2.2(e)
above, would result in substantially higher registrations.

b) Compared to the threshold exemption scheme
presently prevalent which is applicable to taxable turnover (Central Excise
& Service tax,) effective threshold limits under GST would be very low
inasmuch as :

• for computing, aggregate turnover, taxable
and exempt supplies of goods & services & export turnover is to be
considered

• “exempt supply” would cover non taxable
supplies.

These factors would make the effective
threshold limit for Registration under GST very low & increase
registrations in SME Sector substantially:

It has been provided in section 23(1)(a) of
CGST that a person engaged exclusively in the business of supplying not taxable
/exempt goods & services shall not be required to be registered. However,
even with a nominal taxable supply of goods /services, registration may become
necessary if the aggregate turnover exceeds Rs. 20 lakh.

A significant fall out of the above, is
that such persons would be hit by provisions of section 9(4) of CGST discussed
in para 4.2 hereafter.

c) Even in cases covered by section 23(1)(a) of
CGST, Registration would become necessary, in regard to cases covered under
Reverse Charge Provisions [viz section 9(3) of CGST.]

d) Since the threshold limit of 75 lakh
(increased from 50 lakh as per press reports) for Composition Scheme would
cover exempt / non–taxable Supplies, the effective exemption limit would be
very low. In this regard, it is pertinent to note that, in the Union Budget for
2016-17 the turnover limit for presumptive taxation (for Specified Business)
has been increased from 1 crore to 2 crore.

4.2 Tax on purchases by registered persons from
unregistered persons

The relevant
extract of section 9(4) of CGST is reproduced hereafter :

The Central tax in respect of the supply of taxable goods or
services or both by a supplier, who is not registered, to a registered person
shall be paid by such person on reverse charge basis as the recipient and all
the provisions of this Act shall apply to such recipient as if he is the person
liable for paying the tax in relation to the supply of such goods or services
or both.

It is very likely that a large number of SME businesses
(traders, service providers etc.) could be within threshold limit of Rs.
20 lakh and hence strictly not required to be registered under GST. However, as
stated above, a most unprecedented provision has been made under GST law, to
the effect that if a registered person purchases goods/services from an
unregistered person, he is required to
discharge tax liability under reverse charge basis on such purchases without
any threshold limit.

This provision is most
absurd and defies any rationale inasmuch as the govt. on the one hand has given
threshold exemption and at the same time, has indirectly taken it away on the
other hand. It would increase compliances (preparation of invoices for each
procurement) for the registered SME and also increase costs of doing business.
Another implication is, due to increased compliances, registered persons may
avoid dealing with unregistered SME. This could drive away lakhs of SMEs out of
business & affect their basic survival & livelihood.

4.3 Hardship Provisions relating to Input Tax
Credit (ITC)

a) No ITC in cases where tax is not paid by the
supplier

Section 16(2)(c) of CGST provides that no
ITC can be claimed, by a taxable person who receives the goods/services, in
cases where the GST is not paid by the supplier of goods & services.

This is a highly draconian provision in GST
without any sound justification & rationale inasmuch as a taxpayer
receiving goods / services and making valid payment (with tax) to the supplier
would be penalised for default committed by the supplier (non – payment of
tax). Instead, in such cases, the supplier should face stiff penal actions.
Instead, a compliant tax payer is being penalised, for no fault of his.

It has
been a very well settled practice, under MODVAT (CENVAT) Credit Mechanism which
is prevalent under Central Excise / Service Tax for the past 30 years, to the
effect that, if the manufacturer / service provider availing credit has
properly and validly received goods / services supported by duty / tax paid
document and has taken reasonable steps to ensure that there is no malafide
evidence from the duty / tax paid document issued by the supplier, such
manufacturer / Service provider is entitled to Credit and Credits cannot be
reversed even in cases where it is subsequently found that the supplier has not
paid the duty / tax to the govt. There is no convincing reasoning / justification
provided as to why this settled practice is being done away with under GST.

This provision would create unprecedented
hardships to Trade & Industry particularly in the SME Sector which is
always short of working capital and is contrary to the cause of “ease of doing
business” in India.

b) Matching, Reversal & Reclaim of ITC

Under the GST regime, all GST registered
businesses are required to uplift all supply information through the GSTN
portal by the 15^th day following the close of a month. In order to
claim an ITC, the purchaser must upload all purchase information by the 15^th
day following the close of that month. A credit will only be available where
the purchaser’s invoice matches the sales invoice uploaded by the supplier and
the GST has been paid.

Under this approach, it will be almost
impossible for a business to claim its credit entitlement on a timely basis.
The delay in claiming credits and the costs associated with managing this
system alone will unnecessarily increase the working capital of SME businesses,
eroding one of the benefits of moving to a GST system.

c) Reversal of ITC in case of non – payment to
supplier

In cases where a registered person avails
ITC but payment is not made to supplier within 180 days from the date of issue
of invoice, such registered person is required to reverse such ITC and also
liable to pay interest from the date of availment of ITC till the date of
payment. It is further provided that, such registered person shall be entitled
to claim ITC upon payment.

This would adversely impact the SME Sector
who usually operate with low margins and under severe working capital
constraints.

d) Denial of ITC in case of non –
compliances

Some
examples are as under :

i) No ITC would be available during the period
for which a tax payer is not registered.

ii) Non – filing of GST returns for a consecutive
period of six months (3 Returns in case of Composition Scheme), would result in
cancellation of the GST registration. The fallout of this provision is onerous,
inasmuch as a cancellation of registration under GST shall be deemed to be a
cancellation of registration under GST. Further, once registration is
cancelled, ITC would be denied to the customers of such taxpayer.

iii) Section 16(2)(d) of CGST provides that
registered taxable person shall not be entitled to ITC unless he has furnished
Return u/s. 39.

The above provisions are too harsh inasmuch
non – compliances could happen due to variety of reasons and would adversely
impact SME Sector who operate with limited infrastructure.

4.4 Working Capital Blockages & Constraints

In addition to the hardship provisions
relating to ITC stated in Para 4.3 above,
the following provisions under GST, would also result in working capital
blockages & impact cash flows of SME Sector :

a) Unlike the practice prevalent under current
indirect tax regime, under GST regime, stock transfers to own branches would be
taxable. With GST being paid on the date of transfer but Credit becoming
available only when stocks are liquidated by the receiving branch, cash flows
would be severely impacted.

b) Merchant Exporters’ Business Model is widely
prevalent in the SME Sector. Under the existing indirect tax regime, Merchant
Exporters procure goods from exempted SSI units without excise duty and without
payment of State VAT in terms of declaration filed for export. However, under
the GST regime, suppliers’ would charge GST/SGST/IGST to the Merchant
Exporters. Upon payment, Merchant Exporters would have to claim refund. Though
it has been provided that 90% of the refund claims would be granted
provisionally within 7 days, delays are very much likely. This is likely to
create huge cash flow constraints for SME Merchant Exporters’ and cause
hardships.

4.5 Substantial Increase in Compliances

It is widely known that the SME Sector operates with a very
limited skilled infrastructure. The level of statutory compliances, at the present
itself, is very high. Since GST would work on total automation, compliance
level is likely to increase substantially. Under GST, 3 Returns would be
required to be filed every month and 1 Annual Return. In case TDS provisions
are applicable, there would be additional compliance. The compliance costs are
likely to increase substantially for the SME Sector (including non–profit
bodies, Co-operative Societies etc.).

4.6 Recommendation

Considering the peculiar business scenario in the country and
the circumstances under which SME Sector operates, their significance in the
Indian Economy and practices prevalent worldwide, the following is recommended:

– Threshold
limits (including composition) should be rationalised. In this regard,
Threshold for presumptive taxation under income tax, be considered.

– Scope of
Composition Scheme should be enlarged to cover specific businesses (as
successfully prevalent under present State VAT regime).

– Comprehensive Code should be put
in place for SME Sector, which should in particular include, provisions for
quarterly compliances, removal of hardship provisions under ITC and summary
assessments.

shailesh.kwebmaker

GST Returns

INTRODUCTION

Most of the indirect tax statutes in India are based on selfassessment
procedure. Filing of returns is an important
part of implementing the tax and the self-assessment
scheme. In simple words, a return is a declaration that
a tax payer gives to the tax administration which would
broadly comprise of furnishing details of his outward
supplies (and the tax collected thereon), inward supplies
(and tax charged thereon) and the net tax payable or
refundable.

Due to the multiplicity of indirect taxes, a tax payer, at
present, may be required to file more than one return
under more than one of the applicable tax legislations.
Each of the applicable legislations would have its own form
of return requiring various details. This makes compliance
under existing indirect tax structure time-consuming and
cumbersome.

RETURN FILING PROCESS UNDER GST
REGIME

A return is defined u/s. 2(97) to mean any return prescribed
or required to be filed under the Act or any rules made
thereunder. While the procedure of self-assessment would
continue under the GST regime, the process of return
filing would witness a radical change. Broadly, the filing
process envisages furnishing information through three
statements/returns, which are required to be furnished by
three different dates as prescribed under the law. In view
of complete electronic compliance and matching concept,
the sensitivity of furnishing accurate data would assume
immense importance in the GST regime.

SALIENT FEATURES OF RETURN
COMPLIANCE UNDER GST

TYPES OF RETURNS UNDER GST

The types of returns, nature of compliance, periodicity
and references to statutory provisions and return rules
are tabulated hereunder:

Form GSTR	Nature of Compliance/ Category of tax payer	Periodicity	Due Date in the succeeding month	Section/ Return Rule
1	Furnishing details of outward supplies	Monthly	10th	S. 37 Rule-1(1)
2A	Auto drafted details of supplies to the Recipient [paying tax u/s. 9]	Monthly	After 10th	S. 37 Rule-1(3)
2	Filing of monthly details of inward supplies	Monthly	15th	S. 38(2) R. Ret-2(1)
1A	Communication of auto drafted details of supplies to the Supplier	Monthly	After 15th	S. 38(3)/(4) R. Ret-1(4)
3	Monthly Return	Monthly	20th	S. 39(1) R. Ret-3
4	Composition Taxable person	Quarterly	18th	S. 39(2) R. Ret-4
4A	Auto drafted details to recipient being a Composition Tax payer	Quarterly	After 10th	S. 37 Rule-1(3)
5	Return for Non- Resident Taxable persons	Monthly	20th	S. 39(5) R. Ret-5
5A	Details of supplies of OIDAR services provided by person located outside India to a non-taxable in India	Monthly	20th	R. Ret-5A
6	Return for Input Service Distributors	Monthly	13th	S. 39(4) R.Ret-6
6A	Auto drafted details to recipient being an ISD	Monthly	After 10th	S. 37 Rule-1(3)
7	TDS return	Monthly	10th	S. 39(3) R.Ret-7
8	Statement of TCS	Monthly	20th	S. 52(4 R. Ret-8)
11	Inward Supply statement by UIN holders	Monthly		R.Ret-23

FORM GSTR1: DETAILS OF OUTWARD
SUPPLIES

The process of return filing under GST shall commence
with Form GSTR-1. A registered taxable person [‘RTP’]
shall furnish details of his outward supplies [including
deemed supplies under Schedule-1]. The various tables
in the form are summarised hereunder:

Table

CONTENTS OF GSTR -1

Details of B2B Taxable Outward Supplies [Inter and Intra State] to registered taxable persons holding GSTIN]:

◆ Taxable under forward charge

◆ Taxable under RCM

◆ Through E-Comm attracting TCS [E-Comm wise]

Broad details to be furnished are as under: Recipient’s GSTIN/ UIN, Invoice details [Rate wise], taxable value, tax amount and place of supply (where it is different from the recipient) have to be furnished

Details of Taxable Inter-State outward supplies to unregistered person [B2C] where invoice value is

> Rs.2.5 Lakhs:

◆ Supplies other than through E-Comm

◆ Supplies through E-Comm attracting TCS [E-Comm wise]

Details to be furnished include:

◆ Details similar to Table 4 to be furnished [except GSTIN]

◆ Place of supply field is

mandatory

Details of Zero Rated supplies and deemed exports:

◆ Direct Exports out of India

◆ Supplies made to SEZ Developer or unit

◆ Deemed Exports

Details to be furnished include:

◆ GSTIN of the recipient [of the supplier in case of exports]

◆ Details of Invoice, Shipping Bill or Bill of Export

◆ Rate-wise details of taxable value and amount of IGST/Cess

Details of B2C inter and intra- states taxable outward supplies not covered in Table 6 shall be covered in this table [Net of Debit/ Credit Notes]:

◆ Inter and Intra State supplies [Including made through E-Comm]

◆ Separate summary of supplies made through E-Comm [included above] to be given separately

Details to be furnished include:

◆ Rate wise consolidated values and tax there on

◆ Identify State for Inter- State supplies

◆ Summary of supplies through E-Comm

Details of value of NIL rated, exempted and Non-GST supplies to be furnished, classified as B2B Inter and Intra State and B2C Inter and Intra State

Details of amendments to taxable outward supplies for earlier periods furnished in Table 4, 5 and 6

Details to be furnished include:

◆ Requires tagging amendments to original document

◆ Revised details of above documents like rate, taxable value, tax & State name

Allows amendments relating to B2C supplies covered in Table 7 of earlier periods. Month wise revised details to be furnished where correction is required

Table

CONTENTS OF GSTR -1

Details of advances received and adjustment of advances against outward supplies:

◆ Advances received in the current month

◆ Adjustments of advances against invoices issued during the current month

◆ Amendment to information furnished in Table 11 during earlier months

Details to be furnished include:

◆ Rate wise details of advances received or adjusted in the current month against taxable outward inter and intra state supplies

◆ Identify place of supply

◆ Also provides separate table for amendment tod details furnished earlier

HSN wise value of outward supplies made during the period. HSN codes would be mandatory as under:

The GST Law and the rules made thereunder require a tax payer to issue number of documents for various purposes [E.g. Invoices, Credit note, debit note, receipt voucher]. This table requires the tax payer to provide a document summary.

AUTO DRAFTED DETAILS OF SUPPLIES
– GSTR-2A/ 4A/ 6A

Auto drafted details of outward supplies furnished
by n-number of suppliers shall be communicated to
respective RTP’s in Form GSTR 2A [regular RTP’s],
GSTR-4A [Composition RTP’s] and GSTR-6A [ISD’s].
These shall be made available to the recipients after 10th
of the month following the tax period on the common
portal based on details furnished in GSTR 1, 5, 6, 7 and 8. The auto drafted details shall comprise of the following:

Table	Contents	Source return
TABLE A
3	Inward Supplies received from RTP [other than RCM supplies]	GSTR-1/5
4	Inward Supplies from RTP on which tax is to be paid under RCM	GSTR-1/5
5	Debit/ Credit Notes including amendments thereof	GSTR-1
PART B
6	ISD Credit [Including amendments thereof]	GSTR-6
PART-C
7	TDS/ TCS Credit (Including amendments thereof)	GSTR-7/8

FORM GSTR2: FURNISHING DETAILS OF
INWARD SUPPLIES

Section 38 of the CGST Act states that every RTP shall
furnish details of inward supplies received during a month.

This process would require the RTP to first go through
the herculean task of reconciling the auto drafted details
made available in GSTR-2A with the actual supplies as
per his books of accounts. Supplies that are not auto
populated shall be entered by the RTP and he shall selfclaim
the credit thereon. Table-wise details to be furnished
in GSTR-2 are summarised hereunder:

Table

CONTENTS OF GSTR -2

Furnish details of taxable inward supplies [Inter and Intra State] from RTP [other than RCM supplies. Details to be furnished shall include:

◆ Rate-wise invoice level of supplies from RTP after verifying details contained in GSTR-2A. If invoice carries supplies attracting different rates separate disclosure shall be made for each such supply

◆ Entries in GSTR-2A may be kept pending for action [E.g. Supplies not received]

◆ At invoice level the RTP needs to identify the following in respect of each entry

• Nature of supply – Input, Input Services or Capital Goods

• Identify invoices where ITC is ineligible

• Identify amount of ITC available in the current period

Details of following taxable inward RCM supplies to be furnished in this table:

◆ Received from RTP

◆ Received from unregistered person

◆ Import of services

[To the extent time of supply arises]

RTP shall furnish following details

◆ GSTIN of supplier and rate wise invoice details

◆ Name of the State [where different from the recipient]

◆ Nature of supply – Inputs, Input services or capital goods

◆ Identify whether ITC eligible

◆ Amount of ITC available

Details relating to supplies of inputs or capital goods received on a Bill of Entry from:

◆ Outside India [Direct Imports]

◆ Received from SEZ unit

Details to be furnished are as under:

◆ GSTIN [Where supply from SEZ unit]

◆ Bill of entry details

◆ Rate-wise invoice details

◆ Nature of supply, ITC eligibility and amount available

Details of amendments to details in Table 3,4,5 furnished earlier to be provided in this table relating to:

◆ Details in Table 3 or 4

◆ Import details in Table 5

◆ Original Debit and Credit Notes

◆ Debit or Credit Notes – amendments

Details to be furnished are as under:

◆ Tag revised details to original document and the GSTIN

◆ For whichever sub-table correction is required furnish revised details by selecting the appropriate sub-table and month

Values of following Inter/ Intra State supplies to be furnished in this table supplies from

◆ From Composition Tax payer ◆ Exempt Supplies

◆ NIL rated supplies ◆ Non-GST supplies

Details of ISD Credit received:

◆ Document and levy-wise ISD credit received [and reversal on account of Credit Note]

◆ Identification of eligible ITC

Details of TDS and TCS:

◆ TDS – Gross amount and TDS amount [Levy-wise]

◆ TCS – Gross amount less sales return and TCS amount [Levy- wise]

Table

CONTENTS OF GSTR -2

This table requires furnishing following details:

◆ Advances paid for RCM supplies and tax thereon

◆ Adjustments of invoices against advance paid

◆ Correction to Information provided in this table in earlier months

Details to be furnished: Advances liable for RCM Tax Rate, Advance paid, State

name and tax amount [Levy-wise] Adjustments of [For current month]

Same details as specified above Amendments to details furnished earlier

Furnish details for entire month against the sub-table that requires correction

ITC reversal and reclaim shall be furnished [To be added to output liability]

Reversal to ITC would broadly include following situations:

◆ Non Payment to supplier within 180 days [S. 2nd proviso16(2)(d), Rule ITC-2]

◆ ISD Credit distributed is in the negative [Rule ITC 4(1)(j)(ii)]

◆ Pro-rata reversal of ITC on inputs or input services put to other than business use or used for exempted outward supplies [S. 17(1)/(2), Rule ITC-7(1)(m)]

◆ Pro-rata reversal of ITC on capital goods put to other than business use or used for exempted outward supplies [S. 17(1)/(2), Rule ITC- 8(1)(h)]

◆ Short reversal on account of final determination of amount to be

reversed under section 17(1) and (2) [Rule ITC 7(2)(a)]

Reclaim of ITC reversed would broadly include following situations:

◆ On account of final determination as above where excess amount

has been reversed [Rule ITC-7(2)(b)]

◆ On account of amount paid subsequent to reversal of ITC

Amendment in respect of information in information submitted in earlier period in Table 11 can be made by furnishing revised information on selecting the relevant month in Table 11

Levy-wise addition or reduction in output tax for mismatch and other reasons to be furnished in this table

Output Tax to be increased for following reasons:

◆ ITC claimed on mismatched or duplication of Invoices/ Debit notes

◆ Tax liability on account of mismatched credit notes Output Tax to be reduced for following reasons:

◆ Reclaim on account of rectification of mismatched invoice/ debit

notes

◆ Reclaim on account of rectification of mismatched credit note

◆ Negative Tax liability from previous tax period

◆ Tax paid on advance in earlier tax period and adjusted with tax on supplies made in current tax period

Reporting criteria for HSN shall be same as required in GSTR-1wise value of outward supplies made during the period. .

FORM GSTR-1A: AUTO DRAFTED DETAILS
OF SUPPLIES TO SUPPLIER

Details of inward supplies as added, corrected or deleted
by the recipients shall be communicated to the supplier
in Form GSTR-1A [Section 38(3)/ (4) r/w Rule Ret-1(4)].
This implies that supplier shall be provided only details
of unmatched transactions in GSTR-1A.The source of
details appearing in GSTR-1A shall be counter party
GSTR 2, GSTR-4 or GSTR-6. The supplier is required to
accept or reject the details contained in GSTR-1A on or
after 15th but before the 17th of the month succeeding the
tax period. Consequently, details furnished in GSTR-1 by
such supplier shall be updated. If the supplier does not accept the change made by the recipient, it shall qualify
as an unmatched transaction in the hands of the recipient.
GSTR-1A shall contain details of mismatch in respect of:

 Taxable supplies to RTP other than those attracting
RCM

 Taxable supplies to RTP attracting RCM

 Zero rated supplies made to SEZ units or developer
and deemed exports

 Debit/ Credit notes including amendments there of
issued during the period.

FORM GSTR-3: MONTHLY RETURN

Subsequent to filing GSTR-1 and 2, a monthly return in
Form GSTR-3 has to be furnished which can be filed only
after GSTR-1 and 2 are uploaded. It consists of two parts.
Part-A shall be auto generated based on details furnished
in GSTR-1 and 2. It comprises of details of turnover,
output taxes, RCM liability, ITC, reversal and reclaims
relating to ITC and reduction in output liability, TDS, TCS
and liability to pay interest and late fees. In Part-B, the tax
payer needs to furnish details of tax, interest and late fee
payments and details of refund claims.

PART-A: Elements relating to ITC and other credits

Part-A would also provide details of various credits that
flow from the claims made in GSTR-2. The structure of
details relating to credits is explained with the help of a
diagram hereunder:

PART A: Details of Interest and Late Fees

Table 10 shall auto populate levy-wise details of interest
payable on account of various reasons. Extract of the
table is reproduced hereunder. Table 11 shall also furnish
details of late fees payable.

PART-A: Elements for computing total tax liability in Table 9

Part B of the return is to be filled by the tax payer. Various
tables in which details have to be furnished in Part B are
enumerated hereunder:

FORM GSTR-4: QUARTERLY RETURNS BY
COMPOSITION TAX PAYER

Section 10 of the CGST Act provides for composition
levy for small businesses.The threshold for opting for
composition levy has been capped at Rs. 75 Lakhs.
Under composition levy the RTP is not allowed to claim
ITC. However, he has to verify details of inward supplies
received in Form GSTR-4A and prepare details of inward supplies. GSTR-4 is a consolidated return which would
contain details of outward and inward supplies and
computation of tax and other dues and details of payment
thereof.

Where RTP opts for paying tax under composition at the
beginning of the financial year, the RTP shall continue to
furnish GSTR 1, 2 and 3, wherever required, relating to
supplies for the prior period. He shall continue doing so till
the due date for filing return for the month of September
in the succeeding financial year or date of furnishing of
annual return for the previous year, whichever is earlier.
However, in such cases he shall not be entitled to claim
any ITC in respect of invoices pertaining to period
prior to opting for composition levy [Rule Return-4(4)].
Conversely on the same lines where RTP opts to withdraw
from composition he shall continue filing GSTR-4, where
required up to the dates referred above [Rule Return-4(5)].
Broad contents of GSTR-4 are tabulated hereunder:

FORM GSTR-5: RETURN FOR NON-RESIDENT
TAXABLE PERSON

Non-Resident taxpayers are required to furnish details of
all taxable supplies in GSTR-5.Details to be furnished in
GSTR-5 are tabulated hereunder:

FORM GSTR-5A: DETAILS OF SUPPLIES OF
OIDAR SERVICES BY A PERSON LOCATED
OUTSIDE INDIA TO A NON-TAXABLE PERSON
IN INDIA

The above person shall be required to furnish return in
Form GSTR-5A. Details to be furnished in the return
broadly include the following:

1 State wise and rate wise details of supplies made to
consumers in India and IGST/ Cess thereon
Amendments to above details may be made in Table
5A

2 Interest, penalty or any other amount payable

3 Tax, Interest, late fee or any other amount payable
and paid.

FORM GSTR-6: RETURN FOR INPUT SERVICE
DISTRIBUTOR [‘ISD’]

An ISD is shall furnish details of receipt ITC for distribution
and distribution of ITC in GSTR-6. The auto populated
details of inward supplies shall be made available to ISD
in GSTR-6A. The ISD shall verify, modify, accept or reject
the contents and prepare details in GSTR-6. Since, the
ISD only receives tax invoices it shall not be liable for any
payment under RCM. At its level it has to identify invoices
with respect to eligibility of ITC at invoice level in GSTR-6.
However, it shall distribute the eligible as well as ineligible
ITC [Table-5]. Further, Tax effect of amendments, credit
and debit notes as well as mismatches of ITC shall also
be distributed amongst the units by issuing credit note
[Table-8]. Any excess or short distribution amongst units
shall be re-distributed [Table-9]

FORM GSTR-7: RETURN FOR TAX DEDUCTION
AT SOURCE [‘TDS’]

Under the GST regime, certain persons are required to
deduct tax at source on specified inward supplies. Details
to be furnished in GSTR-7 include the following:

 Deductee-wise details of amount paid and TDS
deductee quoting the GSTIN of the deductee.

 Amendments to above details furnished can be made
in Table 4.

 Amount of TDS and amount paid.

 Interest, late fees payable and paid.

 Refund claimed from Electronic cash ledger

 Details of entries in Electronic cash ledger for payment
of TDS/ Interest shall be populated after payment of
tax and submission of returns

 Certificate of TDS is to be issued in GSTR-7A

FORM GSTR-8: STATEMENT OF TAX
COLLECTION AT SOURCE [‘TCS’]

An E-Comm is required to collect tax at source from net
value of taxable supplies made through it. It has to furnish
details of supplies made through it and the TCS in GSTR-
8. Broad details furnished in GSTR-8 are as under:

MISCELLANEOUS RETURN COMPLIANCES

Every RTP [Other than ISD, NR Taxable person, casual
taxable person and persons liable for TDS/ TCS] shall file
an annual return for every financial year on or before 31st
December of following the end of the said financial year:

LATE FEE [SECTION 47]

Section 47 provides for levy of late fee for default in
furnishing of returns on or before the due date. The same
are tabulated hereunder:

MATCHING CONCEPT

The GST regime has introduced the concept of matching
claims of ITC and claims relating to reduction of output
taxes by a RTP. This concept forms an important basis for
claiming of ITC under GST regime. Currently, many states
in India match input set-off claimed with corresponding
sales disclosed by suppliers. However, this is not a
practice followed under Central Excise and Service Tax.
Under GST regime the matching is envisaged on two
broad fronts:

 Matching of ITC claims

 Matching of claims relating to reduction in output tax
[e.g. Credit notes].

MATCHING, REVERSAL AND RECLAIM OF
ITC [SECTION 42]

Section 41 states that a RTP shall be allowed to self-claim
ITC in respect of his inward supplies on provisional basis
for 2 month [As per the FAQ released by the CBEC on
31-03-2017]. This provisional acceptance shall be subject
to the matching of claims in terms of section 42. In terms
of section 42, all claims of ITC by a RTP being a recipient
of supply shall be matched by the GSTN portal after the
due date of filing GSTR-3. The claims shall be matched –

 With corresponding details of outward supply
furnished by the concerned supplier in the same or
earlier month. Following details shall be matched:

• GSTIN of Supplier

• GSTIN of the Recipient

• Invoice or Debit note no.

• Invoice or Debit note date

• Tax Amount

 With the IGST paid on Import of goods by him

 For duplications of claims of ITC

Claims shall be accepted in following cases

 In respect of invoices and debit notes that were
accepted by the recipient without amendments on the
basis of GSTR-2A shall be accepted subject to the
supplier filing a valid return;

 Where the amount of ITC claimed by the recipient is
equal to or less than the amount of output tax paid by
the supplier on such invoice or debit note.

Explanation 1 & 2 to Rule ITC-10]

Details of claims that have matched shall be communicated
to the recipient in Form MIS-1 [Rule ITC-11]

Discrepancy in ITC Claim

The matching process may lead to discrepancy on
following broad grounds:

 Recipient has claimed ITC in excess of the tax
declared by the supplier

 There is no matching declaration by the supplier

 Duplication of claim of ITC by recipient.

Consequences in Case of Discrepency

The discrepancy in ITC claim shall be communicated on
GSTN portal to the recipient in [Form MIS-1] and supplier
[Form MIS-2] on or before the end of the month in which
matching is done. This process may lead to the following
situations:

MATCHING, REVERSAL AND RECLAIM OF
REDUCTION IN OUTPUT TAX [SECTION 43]

The matching process envisaged by section 43 is in respect
of credit notes issued by a RTP. Any reduction in output
tax on account of credit note requires a corresponding
reversal of ITC claim by the recipient. Section 43 states
that the details of every credit note issued by a supplier
shall be matched –

 With the corresponding reduction in claim of ITC by
the recipient, in the same or subsequent month, and;

 For duplication in claim of reduction of output tax

The matching of reduction in output tax shall be done in
respect of following details:

 GSTIN of the supplier and the recipient

 Credit note no. and date

 Tax amount

The other procedure relating to matching, reversal and
reclaim of reduction in output tax contained are similar to
provisions relating to matching, reversal and reclaim of
ITC discussed above.

CONCLUSION

It is evident that compliance under GST is going to be a
month-long activity and not a monthly activity. Accuracy
of data punching would be of utmost importance. Further,
the technology driven matching concept would surely
make GST a self-monitoring system. However, in times
to come small businesses would face great challenge in
coping up with high compliance requirements coupled
with increased cost of compliances.

GLOSSARY/NOTE

 E-Comm: Electronic Commerce Operator

 RTP: Registered Taxable person

 ITC – Input Tax Credit

 All references to section should be read as reference
to CGST Act.

shailesh.kwebmaker

Registration under GST

Registration of an assessee or a ‘taxable person’ is the
starting point in any tax law. It is the most fundamental requirement of
identification of the business for tax purposes and monitoring compliance
requirements.

CGST Act provides for registration of every supplier
effecting the taxable supplies. Every supplier having aggregate turnover
exceeding Rs. 20 lakh in the financial year is required to be registered. This
threshold limit of Rs.20 lakh is reduced to Rs.10 lakh in cases of supplies
effected in the States of Himachal Pradesh, Uttarakhand, Manipur, Arunachal
Pradesh, Assam, Jammu & Kashmir, Meghalaya, Mizoram, Nagaland, Sikkim, and
Tripura. For calculating the Threshold limit, supply of goods by a registered
Job-worker after completing job work, shall be treated as the supply of goods
by the “principal” and shall not be included in the aggregate
turnover of the registered job worker.

Registration, under GST, is a State-wise requirement which
means a person making supplies in every State is required to be separately
registered in that State once the threshold limit is crossed taking to account
supplies from all States. Such a person making taxable supplies from different
places in the State will be required to take one registration in the State,
except in case of business verticals in which case multiple registrations are
permitted. If a tax payer supplies from different places in the State, he has
to opt for one place as “principal place of business” and mention all other
places in the State as “additional place of business” at the time of obtaining
registration. The application for registration will have to be made within 30
days from the date the liability of registration arises.

A business vertical means a distinguishable component of an
enterprise that is engaged in the supply of individual goods or services or a
group of related goods or services which is subject to risks and returns that
are different from those of the other business verticals and for this purpose
the following factors shall be considered:

– the nature of the goods or services;

– the nature of the production processes;

– the type or class of customers for the goods
or services;

– the methods used for distribution of goods or
supply of services; and

– the nature of regulatory environment
(wherever applicable), including banking, insurance, or public utilities.

Aggregate turnover is defined to mean the aggregate value of
all taxable supplies, exempt supplies, export of goods or services or both and
inter-State supplies made by the person having same Permanent Account Number to
be computed on the all India basis. However, Central tax (CGST), State tax
(SGST), Union Territory tax (UTGST), Integrated tax (IGST) and Cess are not to
be included in such supplies. Further, value of inward supplies on which tax is
payable on reverse charge basis is also to be excluded.

A Special Economic Zone unit or developer shall make a
separate application for registration as a business vertical distinct from its
other units located outside the Special Economic Zone.

All the existing tax payers (under Excise, VAT or Service
Tax) are not eligible for threshold limit exemptions. They have to compulsorily
migrate and obtain provisional registration from GSTN before the appointed day,
irrespective of the fact that their turnover is less than threshold limit
specified in the GST Law. However, such tax payers can opt out from the
provisional registration if their supplies are not covered under GST or they
are within the threshold limit.

A casual taxable person or a non-resident taxable person
shall have to apply for the registration at least 5 days prior to the
commencement of business. A casual taxable person is one who occasionally
undertakes transaction involving supply of goods for services or both in the
course or furtherance of business in a State or Union Territory where he does
not have fixed place of business. A non-resident taxable person is one who
occasionally undertakes transaction involving supply of goods for services or
both in the course or furtherance of business but not having fixed place of
business or residence in India.

Categories of persons who are required to be registered
irrespective of the threshold

– person making any inter-State taxable supply;

– casual taxable person making taxable supply;

– persons who are required to pay tax under
reverse charge;

– electronic commerce operator undertaking
supplies on behalf of other suppliers (liable to discharge tax liability for
supply of services as may be notified)

– non-resident taxable person making taxable supply;

– persons who are required to deduct tax at
Source under GST;

– persons who supply goods or services or both
on behalf of other registered taxable person whether as an agent or otherwise;

– input service distributor;

– every electronic commerce operator;

– every person supplying online information and
database access or retrieval services from a place outside India to a person in
India, other than a registered taxable person;

– such other person or class of persons as may
be notified by the Central Government or a State Government on the
recommendations of the Council.

Following persons are not liable for registration

– Any person engaged exclusively in the
business of supplying goods or services or both that are not liable to tax or
wholly exempt from tax under CGST or under the Integrated Goods and Services
Tax Act

– An agriculturist, to the extent of supply of
produce out of cultivation of land.

– Government may, on the recommendations of the
Council, by notification, specify the category of persons who may be exempted
from obtaining registration under this Act.

Voluntary registration

Provisions are made for a person, though not required to be
registered, may get himself registered voluntarily.

Deemed registration or rejection of application for
registration and cancellation or revocation of registration certificate

Any grant of registration or Unique Identity Number under any
SGST or UTGST shall be construed as grant of registration under CGST.
Similarly, any grant of registration or Unique Identity Number under CGST shall
be construed as grant of registration under SGST or UTGST, as a case may be.
Any rejection of application for registration or cancellation or revocation of
registration shall be treated likewise.

Transfer of Business and Registration

A transferee, or the successor of a business on going concern
basis shall be liable to be registered with effect from the date of such
transfer or succession. In a case of transfer pursuant to sanction of a scheme
or an arrangement for amalgamation or, de-merger of two or more companies by an
order of a High Court, the transferee shall be liable to be registered with
effect from the date on which the Registrar of Companies issues a certificate
of incorporation giving effect to such order of the High Court. This means that
the Registration Certificate issued to a person is not transferable to any
other person.

Special Provisions relating to casual taxable person and
non-resident taxable person

The Certificate of Registration issued to a casual taxable
person and non-resident taxable person shall be valid for 90 days from the
effective date of registration or any earlier period as specified in the
application. An extension of period not exceeding 90 days may also be granted
on sufficient cause being shown. An advance deposit of tax shall be credited to the electronic cash ledger equivalent to the estimated
tax liability for the registration period sought.

Suo Moto Registration by the department

During the course of any survey, inspection, search, enquiry
or any other proceeding under the Act, it is found that a person liable to
register has failed to apply for the same, proper officer may register such
person on temporary basis and issue order in FORM GST REG-12. Registration will
be effective from the date of order. Such person is required to apply for
registration within 30 days from the date of such temporary order, unless he
files an appeal against such order.

Amendment to registration

There are various situations in which the Registration issued
by the competent authority requires amendment in line with real time
situations. In such a case, every registered taxable person shall inform any
changes in the information furnished at the time of registration within 15 days
of such changes.

The proper officer cannot reject the request for amendment
without affording a reasonable opportunity of being heard by following the
principles of natural justice.

Cancellation of registration

A registration granted can be cancelled by the proper officer
either on his own or on application of the registered person when —

– the business is discontinued, transferred
fully for any reason including death of proprietor, amalgamation with other
legal entity, demerged or otherwise disposed of; or

– there is any change in the constitution of
the business; or

– the taxable person is no longer liable to be
registered.

Registration may be cancelled
retrospectively if the proper officer so deems fit any of the following
situations after giving the person an opportunity of being heard:

(a)
Registered person has contravened such provisions of the Act or Rules;

(b) Person
paying tax under Composition Scheme has not furnished returns for 3 consecutive
tax periods;

(d) person
who has taken voluntary registration has not commenced business within 6 months
from the date of registration;

(e)
Registration has been obtained by means of fraud, willful misstatement or
suppression of facts.

As such, cancellation of registration shall not affect the
liability of the taxable person to pay tax and other dues under the Act for any
period prior to the date of cancellation whether or not such tax and other dues
are determined before or after the date of cancellation.

Where the registration is cancelled, the registered taxable
person shall pay an amount equivalent to the credit of input tax in respect of
inputs held in stock and inputs contained in semi-finished or finished goods
held in stock on the day immediately preceding the date of such cancellation or
the output tax payable on such goods, whichever is higher. The payment can be
made by way of debit in the electronic credit or electronic cash ledger.

In case of capital goods, the taxable person shall pay an
amount equal to the input tax credit taken on the said capital goods reduced by
the percentage points (to be prescribed) or the tax on the transaction value of
such capital goods whichever is higher.

Revocation of cancellation of registration

Any registered taxable person, whose registration is
cancelled, may apply to proper officer for revocation of cancellation of the
registration within thirty days from the date of service of the cancellation
order.

The proper officer shall not reject the application for
revocation of cancellation of registration without giving a show cause notice
and without giving the person a reasonable opportunity of being heard.

Procedure for registration

– Online application to be made in FORM GST
REG-01 by declaring PAN, mobile number, email address, State or UT, along with
other documents duly signed and electronically verified. Persons who are liable
to deduct TDS or collect TCS shall apply in FORM GST REG-07. Non-resident
taxable person shall apply in FORM GST REG-09. A non-resident taxable person
shall be allotted a Temporary Reference Number for making an advance deposit of
estimated tax liability.

– Acknowledgement will be generated in FORM GST
REG-02.

– Proper officer shall either grant
registration or issue a notice in FORM GST REG-03 for any additional
information and clarification within 3 working days. Applicant should reply in
FORM GST REG-04 within 7 working days from date of receipt of notice. If
applicant fails to reply, proper officer may reject the application in FORM GST
REG-05 or if he is satisfied with the information furnished then he may grant
registration within 7 working days

– Registration Certificate will be issued in
FORM GST REG-06.

shailesh.kwebmaker

Goods and Services Tax Network – Concept and Challenges in Implementation

Background

Introduction of The Goods and Services Tax (‘GST’) is being
touted as a paradigm shift in the field of indirect tax reforms in India and
rightly so because it is expected to change the manner in which taxes are
administered and at the same time it will change the way business is conducted
in India. Two key outcomes expected after the introduction of GST is the
reduction of the cascading effect of multiple taxes and the creation of a
common national market. These outcomes are sought to be achieved by merging
several Central and State taxes into a single tax namely GST, parallelly, the
introduction of GST will also make tax administration transparent and easier to
administer.

By the time this article is published, GST will have come
into effect and India will have embarked on its journey to an integrated goods
and services tax regime.

Islands of data

With the introduction of GST there was a need for a mega
infrastructural support and IT infrastructure is a key component in this.
Before GST, the Centre and State indirect tax administrations have been working
under different laws, regulations, procedures and formats and consequently they
had independent IT systems. Needless to say, independent IT systems are small
islands of data – isolated from others and dis-integrated. Integrating them for
GST implementation and bringing them under an entirely new indirect tax system
and administration need fresh institutional arrangement. For this task, the
government has created Goods and Services Tax Network (GSTN).

Concept

The GST System Project is a unique and complex IT initiative.
It is unique as it seeks, for the first time to establish a uniform interface
for the tax payer and a common and shared IT infrastructure between the Centre
and States. Integrating them for GST implementation is a complex exercise given
that it entails the consolidation of all the tax administrations (Centre, State
and Union Territories) to the same level of IT maturity with uniform formats
and interfaces for taxpayers and other external stakeholders, only then an
indirect tax ecosystem will be created.

Besides the above, given that GST is a destination based tax,
the settlement mechanism amongst the States and the Centre for settlement of
taxes accruing from inter-State trade of goods and services (IGST) needs to be
robust. This will be possible only when there is a strong IT Infrastructure and
Service back bone which enables capture, processing and exchange of information
amongst the stakeholders (including tax payers, States and Central Governments,
Accounting Offices, Banks and RBI).

The Goods and Services Tax Network (‘GSTN’)

GSTN is a section 25, not for profit organisation owned by
government and private players jointly. GSTN has been entrusted with the
responsibility of building Indirect Taxation platform for GST to help tax
payers prepare, file, rectify returns and make payments of their indirect tax
liabilities. It is expected to be a one stop solution for all indirect tax
requirements, business will be able to manage tax easily. Unlike current
indirect tax, where there are multiple sites backed by provisions and
compliances, it is expected to become lot easier for the assesse and government
to track the status of returns and payments with the help of GSTN.

What are the functions of GSTN?

The GSTN as a back end infrastructural support mechanism has
the main responsibility of providing a robust IT infrastructure and related
services to the Central and State Governments, taxpayers and other
stakeholders, by integrating the common GST portal and connecting it to the
existing tax administration IT systems.

Administrative functions of GSTN

GSTN as a tax
administration platform will be inter-connected with the existing
administrative mechanisms. The common GST Portal developed by GSTN will
function as the front-end of the overall GST IT eco-system. The common GST
portal by GSTN will process applications for registration, payment, return and
prepare MIS/ reports.

Similarly, the IT systems
of CBEC (Central Board of Excise and Customs) and State Tax Departments (except
Model I states) will function as back-ends. The work of back-end operation is
to handle tax administration functions such as registration approval,
assessment, audit, adjudication etc.

Functions of GSTN

Following are the main functions
of GSTN:(i) facilitating
registration;

(ii) filing
and forwarding the returns to Central and State tax authorities;

(iii) computation
and settlement of IGST;

(iv) matching
of tax payment details with banking network;

(v) providing
various Management Information System reports to Governments.

(vi) analysis
of tax payers’ profile; and

(vii) running
the matching engine for input tax credit.

Relationship of GSTN with Tax Administrations

The common GST Portal developed by GSTN will function as the
front-end of the overall GST IT eco-system. The IT systems of CBEC and State
Tax Departments will function as back-ends that would handle tax administration
functions such as registration approval, assessment, audit, adjudication etc.
Various States and CBEC are developing their backend systems themselves. GSTN
is doing the backend for 20 States and 5 UTs. GSTN is interacting with CBEC and
States for ensuring mutual interaction between the front-end that would be
operated by GSTN and the back-ends of the tax administrations. During the
operation phase, as well GSTN will continue the interaction with CBEC and
states and extend help wherever necessary.

GST IT Strategy

The GSTN has been assigned the role of facing taxpayers and
these among other things include filing of registration application, filing of
return, creation of challan for tax payment, settlement of IGST payment (like a
clearing house), generation of business intelligence and analytics. All
statutory functions to be performed by tax officials under GST like approval of
registration, assessment, audit, appeal, enforcement etc. will remain
with the respective tax departments. The diagram below shows the work
distribution.

Role of GSTN with respect to Filing of Returns

Under GST, there will be common return for CGST, SGST and
IGST, eliminating the need to file separate tax returns with Central and state
GST authorities. Checking of claim of Input Tax Credit (ITC) is one of the
fundamental pillars of GST, for which data of Business to Business (B2B)
invoices have to be uploaded and matched. The Common GST Portal created and
managed by GSTN will do this matching on the basis of invoice level data filed
as part of return by all taxpayers. Similar exercise will be done for inter-state
supplies where goods or services will move from the state of origin to the
state of consumption and so will the taxes. The claim of IGST and its
utilisation will be settled based on returns filed at the Common GST portal.

Role of GSTN with respect to Registration Application

Under GST, the registration of taxpayers will be common under
Central and State GST and hence one place of filing application for the same
i.e. the Common GST portal. The application so received will be checked for its
completeness by the GST portal, which will also carry out validation of data
like PAN from CBDT, CIN/DIN from MCA and Aadhaar of promoters, if provided,
from UIDAI. After completion of validation, the registration application will
be shared with respective central and state tax authorities. Query of tax
authorities, if any and their final decision will be communicated to GST portal
which in turn will communicate the same to the taxpayer.

The Common GST Portal, as explained in brief above, will be
the single interface for all taxpayers from any part of the country. Only in
case where a taxpayer is picked up for scrutiny or audit, and such cases are
expected to be small in number, he will interface with the respective tax
authority issuing the notice under the Act. For all other cases, which is
expected to be around 95%, the Common GST Portal will be the only taxpayer
interface.

Access to Data

The design of GST systems is based on role based access. The
taxpayer can access his own data through identified applications like
registration, return, view ledger etc. The tax official having
jurisdiction, as per GST law, can access the data. Data can be accessed by
audit authorities as per law. No other entity can have any access to data.

Challenges

The challenges before the GSTN are daunting but not
unsurmountable. Challenges inter alia include:

– Integrating multiple databases

– Creating the IT environment and enabling all
the checks and balances/validation with a moving goal post (frequent changes in
law)

– Collating data for more than 60 million tax
payers (existing and fresh) and issue registration numbers to all

– Creating a single window for accepting
returns for all tax payers

– Creating a facility for accepting invoice
level data on a month to month basis, storing and archiving the same for later
retrieval.

– Creating and maintaining online credit
ledgers to receive and disseminate data to all stakeholders

– Enable the online matching of credits and
reconciliation of mis-matches

– Maintaining data integrity, confidentiality
and security.

The aforesaid challenges and many other will be
dealt with on the go as and when we encounter them. Until then, let us welcome
GST.

shailesh.kwebmaker

Reverse Charge Mechanism under Goods and Services Tax (GST)

Preamble

Usually a supplier of goods or service is a taxable person
liable to discharge tax liability under Goods and Service Tax Act (‘GST Act’).
However, in exceptional cases, GST legislation stipulates that the liability
under the GST Act shall be discharged by recipient instead of supplier of goods
or services. This is popularly known as reverse charge mechanism (‘RCM’).

While the RCM is not entirely a new concept under the Indian
indirect tax landscape, given the fact that it was quite common under the
erstwhile Sales tax regime. However, the
tax considerations were quite different back then, considering that Sales tax
was a single point levy (i.e. levied at the first point of sale) with limited
input tax credits, leading to value shifting and leakage of tax revenue. In
contrast, the current Value Added Tax regime is a multi-point levy whereby the
full value is captured under the tax net. Similarly, under the Central Excise
legislation, full value is sought to be covered by levying tax on the Maximum
Retail Price (‘MRP’). Due to this reason, perhaps, neither the Central Excise
nor VAT legislation (barring the States of Punjab, Assam and Madhya Pradesh)
presently provides for RCM. Given its successful implementation under service
tax legislation, the Government has decided to continue the same in GST also.

Administrative convenience and ease of tax collection are
primary motivations for using RCM. The tax authorities prefer to collect tax
from small number of assessees from organised sector instead of chasing large
number of small and unorganised tax payers. Broadening tax base could be
another purpose of RCM.

Basics of RCM

Reverse charge applies only when there is a charge on supply.
If supply is exempted, nil rated or non-taxable, RCM does not apply in such a
case.

Recipient of goods or services discharges GST under RCM as if
he is the person liable for paying the tax on supply procured by him. All
provisions of the Act including the collection, recoveries and penal provisions
apply to the recipient and he is required to pay applicable tax i.e. CGST and
SGST/ UTGST, or IGST depending on location of supplier and place of supply. The
tax liability needs to be discharged under RCM at applicable rate of tax.

Recipient makes payment on his own account under the
recipient’s GSTIN number and is declared in his GST Returns as taxable supplies
on which tax liability is discharged.

Payment made under RCM is not a Tax Deducted at Source
(‘TDS’) paid by recipient on behalf of supplier and hence, the supplier does
not get credit of tax paid under RCM by the recipient.

Once the tax is paid under RCM by the recipient, it becomes
an input tax and the recipient (payer of tax under RCM) is entitled to avail
Input Tax Credit (‘ITC’) thereof, subject to other provisions contained in
Chapter V of CGST Act and Input Tax Credit Rules.

Relevant Legal Provisions

Section 9 of Central Goods and Services Tax Act, 2017 (‘CGST
Act’) provides for levy and collection of Central Goods and Service Tax
(‘CGST’). The power to collect tax under RCM from recipient is derived by
government u/s. 9(3) and 9(4) of CGST Act which read as under:

“Section 9(3) – the Government, on recommendation of the
Council, by notification, specify categories of supply of goods or services or
both, tax on which shall be paid on reverse charge basis by recipient of such
goods or services or both and all the provision of this Act shall apply to such
recipient as if he is the person liable for paying the tax in relation to the
supply of such goods or services or both.

Section 9(4) – the central tax in respect of the supply of
taxable goods or services or both by a supplier who is not registered, to a
registered person shall be paid by such person on reverse charge basis as the
recipient and all the provisions of GST legislation Act shall apply to such
recipient as if he is the person liable for paying the tax in relation to the supply
of such goods or services or both.”

Similarly, section 5 of the Integrated Goods and Services Tax
Act, 2017 (‘IGST Act’), section 7 of the Union Territories Goods and Services
Tax Act, 2017 (‘UGST Act’) and respective section of the State Goods and Services
Tax Act, 2017 (‘SGST Act’) also provide for RCM on a similar pattern to that of
the CGST Act.

Reverse Charge Mechanism (‘RCM’) in brief

Based on the above, it can be said that reverse charge
applies in case of notified supplies of goods and services or in case of
supplies by a specified category of suppliers.

RCM on notified goods or services

Recipient of notified goods or services or both is liable to
pay CGST under RCM on supply of notified goods or services u/s. 9(3) of CGST
Act.

Recipient is liable to discharge GST liability under RCM
irrespective of:

– Recipient being registered person or
unregistered person; or

– Supplier of notified goods or services is
registered person or unregistered person.

Notified
goods under RCM

Presently, the GST Council has recommended very few goods,
i.e., tobacco leaves, cashewnuts in shell, etc. are notified
goods for the purpose of RCM. Any person buying tobacco leaves will be liable
to discharge GST under RCM on purchase of tobacco leaves.

The Government, on the recommendation of GST Council, may in
future expand the list of goods liable under RCM.

Notified services under RCM

GST Council has recommended following services on
which tax will be payable on RCM:

Nature of Service	Service Provider (‘SP’)	Service Recipient (‘SR’)	% of GST payable by SR
Import of Services	Any person who is located in non-taxable territory	Any person located in taxable territory other than non-assessee online recipient (Business Recipient)	100%
Goods Transport Agency Services in respect of transportation of goods by road	Goods Transport Agency	a. Factory b. Society c. Co-operative society d. Person registered under GST Act e. Body corporate f. Partnership Firm g. Casual taxable person .	100%
Legal Services	Individual advocate or firm of advocate	Any business entity	100%
Arbitration Services	Arbitral Tribunal	Any business entity	100%
Sponsorship Services	Any person	Body corporate or partnership firm	100%
Services by Government or local authority excluding: – Renting of immovable property – Services by department of posts – Services in relation to aircraft or vessel inside or outside precincts of port / airport – Transport of goods or passengers	Government or local authority	Any business entity	100%
Director’s service	Director of company or body corporate	Company or body corporate	100%
Insurance agency service	Insurance agent	Any person carrying on insurance business	100%
Recovery agency service	Recovery agent	Banking company, financial institution, NBFC	100%
Transportation of goods by a vessel from a place outside India up to customs station of clearance in India	Person located in non-taxable territory to a person located in non-taxable territory	Importer as defined under Customs Act, 1962	100%
Transfer or permitting use or enjoyment of Copyright relating to original literary, dramatic, musical or artistic works	Author or music composer, photographer, artist, etc.	Publisher, Music Company, Producer	100%
Rent-a-cab service through e-commerce operator	Taxi driver or rent-a-cab operator	Any person	100% by e-commerce operator

Nature of Service

Service Provider (‘SP’)

Service Recipient (‘SR’)

% of GST payable by SR

Import
of Services

Any
person who is located in non-taxable territory

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

100%

Goods
Transport Agency Services in respect of transportation of goods by road

Goods
Transport Agency

a. Factory

b. Society

c. Co-operative
society

d. Person
registered under GST Act

e. Body
corporate

f. Partnership
Firm

g. Casual
taxable person

100%

Legal
Services

Individual
advocate or firm of advocate

Any
business entity

100%

Arbitration
Services

Arbitral
Tribunal

Any
business entity

100%

Sponsorship
Services

Any
person

Body
corporate or partnership firm

100%

Services
by Government or local authority excluding:

– Renting of immovable property

– Services by department of posts

– Services in relation to aircraft or vessel
inside or outside precincts of port / airport

– Transport of goods or passengers

Government
or local authority

Any
business entity

100%

Director’s
service

Director
of company or body corporate

Company
or body corporate

100%

Insurance
agency service

Insurance
agent

Any
person carrying on insurance business

100%

Recovery
agency service

Recovery
agent

Banking
company, financial institution, NBFC

100%

Transportation
of goods by a vessel from a place outside India up to customs station of
clearance in India

Person
located in non-taxable territory to a person located in non-taxable territory

Importer
as defined under Customs Act, 1962

100%

Transfer
or permitting use or enjoyment of Copyright relating to original literary,
dramatic, musical or artistic works

Author
or music composer, photographer, artist, etc.

Publisher,
Music Company, Producer

100%

Rent-a-cab
service through e-commerce operator

Taxi
driver or rent-a-cab operator

Any
person

100% by e-commerce operator

While the aforesaid list of services covered under reverse
charge is by and large on the same lines as the current list of services
(specified in Notification no 30/2012-ST read with Rule 2(1)(d) of Service tax
Rules, 1994, it is pertinent to note that (a) services by Online Information
Data Access providers, (b) services related to distribution and marketing of
lottery tickets, (c) supply of manpower for any purpose or security, and (d)
references to representational services by senior advocates have been excluded
and certain changes / additions have been made such as: (a) in case of GTA
services – casual taxable persons have also been obligated to pay on a reverse
charge basis, (b) Transfer or permitting the use or enjoyment of a copyright
covered under clause (a) of sub-section (1) of section 13 of the Copyright Act,
1957 relating to original literary, dramatic, musical or artistic works and (c)
in case of radio taxis or passenger transport services provided through
ecommerce operators – the obligation has been cast upon the ecommerce operator.

Partial reverse charge: Under service tax, partial
reverse charge is prescribed on few services wherein certain portion of tax
liability is to be discharged by service provider and balance to be discharged
by service recipient under RCM.

There is no concept of partial reverse charge in GST.

RCM on procurement of goods or services from unregistered
persons

Registered (taxable) person is liable to pay tax under RCM on
any goods or services or both procured by him from an unregistered
person. Following are likely to be the unregistered persons under the GST
regime:

– Person not carrying on any business or
profession; or

– Person whose aggregate turnover is below the
threshold limit; or

– Supplying exempt goods or services

– Supplying goods or services which are taxed
at NIL rate of tax

– Supplying services which are covered under
reverse charge

– Person located in Jammu & Kashmir; or

– Person located outside India; or

– In simple terms, he is not registered though obliged
to get registered.

Followings are a few illustrations to demonstrate the
circumstances in which RCM triggers:

– An unregistered architect (whose turnover is
Rs. 15 lakh) raises an Invoice of Rs. 1 lakh on builder. In such a case,
builder being registered person will be liable to pay GST on Rs. 1 lakh under
RCM.

– An item of stationery is bought by registered
business entity from small unregistered shop. In such a case, such business
entity will have to discharge GST under RCM.

Time of supply for RCM

Due date of payment of tax under RCM is linked to the time of
supply as prescribed u/s. 12 and 13 of CGST Act.

Time of Supply for goods:

It shall be earliest of following:

– Date of receipt of goods; or

– Date of payment entered in books of accounts or
date of debit in bank, whichever is earlier; or

– Date immediately after 30 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice

Receipt of goods

Date of payment

31^st day from date of invoice

Time of Supply

30/09/17

15/10/17

31/10/17

30/09/17

15/11/17

30/11/17

31/10/17

30/09/17

15/11/17

16/08/17

31/10/17

16/08/17

Time of Supply for
services:

It shall be earliest of
following:

– Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

– Date immediately after 60 days from date of
invoice

Where it is not possible
to determine time of supply as above, time of supply shall be date of entry in
books of accounts of recipient of supply.

Illustration:

Date of Invoice

Date of payment

61^st day from date of invoice

Time of Supply

30/09/17

15/10/17

30/11/17

15/10/17

30/09/17

10/12/17

30/11/17

Mandatory registration for
person liable to pay GST under RCM

Section 24(iii) of CGST Act mandates compulsory registration
for persons liable to pay tax under RCM. Threshold limit is not applicable to
persons liable to pay under RCM. Person having less than Rs. 20 lakh turnover
or supplier of exclusively exempt or non-taxable goods /services will also be
liable for GST registration if he is obliged to discharge tax under RCM.

Illustration: Co-operative society availing goods
transport agency (‘GTA’) services of nominal value will be liable to pay GST
under RCM and consequently, liable to get itself registered irrespective of the
fact that such a society is not making any taxable supply or their aggregate
turnover is below the threshold limit.

Obligation on Service
providers (providing services covered by reverse charge) to obtain registration
under GST legislation

Service providers supplying the aforementioned services if
they are not already registered under some other category or those not given
the benefit of migration will have to obtain registration under GST
legislation, as and when the portal is enabled for the same.

In this regard, there is an ongoing controversy whether or
not persons covered under reverse charge are required to obtain registration.
In this connection, attention is invited to section 22(1) of the CGST Act which
provides that ‘Every supplier shall be liable to be registered under this
Act in the State or Union territory, other than special category States, from
where he makes a taxable supply of goods or services or both,
if his aggregate turnover in a financial year exceeds twenty lakh rupees’.
It is highlighted that unlike Service tax legislation wherein the obligation to
register was cast upon the person liable to pay tax, under the GST legislation,
the obligation has been linked to making a taxable supply (irrespective of
whether the said service is covered by forward or reverse charge). While the
GST Council in its 16^thmeeting has resolved that lawyers /
advocates would be exempted from obtaining registration as per a notification
(proposed to be issued) u/s. 23(2) of the CGST Act, the fate of various other
service providers such as insurance agents, GTAs, independent directors, etc.,
remains undecided.

Documentation

Section 31(3)(f) mandates registered person liable to pay GST
under RCM to issue an invoice in respect of goods and services received by him
from unregistered supplier. Such invoices should contain all particulars as
prescribed u/s. 31(1) and 31(2) read with GST Invoice Rules to the extent
applicable. This would mean registered person procuring goods and services and
paying tax under RCM is obliged to mention HSN Codes and Service Accounting
codes of goods or services procured by him.

Rule 1 of Input Tax Credit Rules provides that a registered
person shall avail input tax credit on the basis of an invoice raised in
accordance with provisions of section 31(3)(f).

Further, registered person liable to pay GST under RCM shall
issue a payment voucher at the time of making payment to supplier.

Unintended casualties,
unanswered question and challenges posed by reverse charge provisions
pertaining to unregistered persons

While the Government may claim that there are laudable
objectives in casting obligation to pay tax on URD purchases, there are certain
unintended casualties and unanswered question and challenges which will have to
be faced going forward. Some of these are briefly described below:

Freshly qualified Chartered Accountants: One of
the outcomes expected post implementation of GST legislation is that most
businesses will shy away from dealing with an unregistered person. This would
be primarily on account of the additional compliance burden attached to the
consumption of such supplies. One direct and unintended casualty to these
provisions will be a freshly qualified Chartered Accountant and small
practitioners. It is quite likely that their turnover will be below the
threshold limit on account of which they have not obtained registration. Notwithstanding
this fact, reverse charge would apply and business will cringe at the time of
availing their services. Such small practitioners will be forced to obtain
registration, maintain records and file no less than 37 returns annually, thus
casting a huge financial and administrative burden on the fledgling
practitioner.

Requirement for a minimum threshold limit: The
obligation pay tax on procurements from unregistered persons has been cast
without reference to any monetary limit and without prescribing any exceptions.
As a result, even the smallest of purchases – i.e. purchase of a cutting chai
or basic refreshments, photocopying charges or the like will have to be mapped
and reported. In this connection, entry no. 81 of the Service exemption list released
on 18^th of May suggests that an omnibus exemption may be granted
from payment of GST u/s. 9 (4) of CGST/SGST Act in respect of supplies upto Rs
10,000/-. We will have to wait and watch out for relevant notifications to this
effect. Key factors would be whether the exemption will be qua the
suppliers or qua the transaction, etc.

Obligation to issue an invoice, classification of
supply and maintain records

Every recipient procuring supplies from unregistered persons
is obligated to issue an invoice at the time of procuring the services (refer
section 31 of CGST Act). Does this mean that the Government intends all
businessmen and their employee should carry an invoice book with them wherever
they go and make an invoice every time they procure basic items or that they
should only work with the organised (registered) players and cut out the small
and medium (mom & pop stores) enterprises. Painful and yet pertinent
question which remains unanswered.

Value addition is already taxed

Considering that GST is a tax on the value added, it is a
fact taken for granted that all supplies from unregistered would form part of
the value added and ultimately form part of the price charged at the time of
making outward supply. In such cases, there would be no loss of revenue to the
Government. Despite this glaring fact, the Government seems to have fallen a
prey to its greed to garner revenue.

Inter-State transactions

Legally speaking inter-State suppliers are required to obtain
registration from Rupee 1 (i.e. without a threshold limit), nonetheless, the
Government machinery maintains a stoic silence when asked a direct question as
to whether reverse charge would apply in case of inter-State supplies. The
silence becomes even more apparent when they are asked what happens if the
inter-State supplier is later made to pay tax on the same transaction, won’t it
result in double taxation – what are the safeguards? Questions like these speak
volumes of the challenges that are likely to be faced by business and the
administration when dealing with such transactions.

Transactions with non-residents

In the earlier paras, we have described the obligation
cast by sections 22 and 24 of the CGST Act to register, that too
notwithstanding the fact that supplies procured from non- residents would be
taxed in the hands of the importer. One is at a loss to understand, how the
Government proposes to administer these transactions.

Transactions with persons located in Jammu and Kashmir

CGST Act does not extend to the State of Jammu and Kashmir (J
& K) and recent reports in the public domain suggest that J & K is not
likely to implement GST on 1^stof July along with the rest of the
country. All trade with businesses / suppliers / customers are likely to face
uncertainty. Questions raised to the Government have remained unanswered.

Conclusion

The person paying tax under RCM is entitled to tax credit in
most of the cases. The Government may not be getting substantial revenue from
RCM. In the past, most of the State legislations for sales tax was having
concept of ‘purchase tax’ to be paid by registered dealer on purchases from
unregistered dealers. However, it was found to be a futile exercise (not
resulting into any substantial revenue to the Government), and therefore, in
most of the State VAT legislations, the concept of URD tax (purchase tax) was
scrapped.

RCM has inherent disadvantage of being an obstacle in the
free flow of tax credits across the businesses and the nation. It also raises the question
whether it is fair on the part of government to put more burden of compliance
on law abiding organised sector of the economy.

It would be too cumbersome for a majority of the assessees to
comply with such a rigid compliance requirement. Moreover, it is difficult for
an assessee to reconcile their expenses as per financial statements with tax paid
under RCM as per returns. It is indeed a pain for any organisation to reconcile
such figures and satisfy the authorities in course of scrutiny, assessment,
audit and investigations, etc.

RCM provisions, as stated in the CGST Act as on
today, may be described as totally against the concept of ease of doing
business. One may feel that Government should not have brought the concept of
RCM (in this manner) under GST. The GST legislation, without RCM, would be much
more taxpayer-friendly law.

shailesh.kwebmaker

Transitional Provisions

GST is a reality

Touted as a landmark reform, GST, which is an amalgam of
around 14 indirect taxes is a reality and is all set to be effective from 1^stJuly 2017. The transition to GST from a plethora of existing indirect
taxes (“existing laws”) would necessarily entail challenges since not only the
legislations are different but even many of the fundamental concepts of
taxation are different.

In order to ensure a smooth transition and to keep such
challenges at the bare minimum, the GST Laws provide for various provisions
relating to transition. Such provisions are enshrined in Chapter XX of the CGST
Act. More or less similar provisions are contained in the SGST Laws as well. In
view of section 20 of the IGST Act, the transitional provisions of CGST Act
would apply to IGST Act as well.

Summary of the Transitional Provisions

The following table provides a
bird’s eye view of the statutory provisions dealing with transition from
existing laws to the GST Laws.

Section	Situation	Provisions
139	Registrations	Existing registrations will be automatically migrated provisionally.
140(1)	CENVAT Balance	Existing CENVAT Balance to be carried forward subject to conditions. State VAT Balance to be carried forward only subject to production of pending documents
140(2)	Capital Goods	Unavailed CENVAT Credit can be availed
140(3)	Stock in hand	Excise Duty Credit embedded in stock to be allowed (only for last one year) 40% / 60% notional CGST Credit if duty paying document not available
140(5)	Goods/Services in transit	Credit can be claimed within a period of 30 days from the transition date
140(6)	Stock in hand for composition dealer	Excise Duty Credit embedded in stock to be allowed (only for last one year)
140(7)	Input Service Distributor	Input Services eligible for distribution after the transition date also
140(8)	Centralised Registration	Carry forward of credit in case of centralised registration of service providers
140(9)	Recredit	Credit already reversed on account of non payment to vendors will be available for recredit if paid within 3 months
142(1)	Goods Returns	From registered dealers – independent supply From unregistered dealers – claim refund under earlier law
142(2)	Debit Note Credit Note	Discharge GST Claim GST Adjustment subject to ITC Reversal by the customer
142(3)	Pending Refund Claims	To be adjudicated under the earlier law
142(4)	Refund Claims to be filed	Under the earlier law, subject to the condition of non carry forward of credit to that extent
142(5)	Refund Claims	On account of non provision of service to be claimed under earlier law
142 (6&7)	Pending Appeals	Under the earlier law
142(8)	Pending Adjudication	Under the earlier law
142(9)	Revised Return	If results in additional tax, recoverable under the current law If results in excess credit, refund to be claimed under earlier law
142(10)	Ongoing Contracts	Supplies after appointed date taxable under current law
142(11)	Advances	If tax paid under earlier law, no tax payable under current law
142(12)	Goods on Approval	No tax if returned within 6 months
142(13)	TDS on works contract under existing laws.	Not liable if payment made after appointed date

Section

Situation

Provisions

139

Registrations

Existing registrations will be automatically migrated provisionally.

140(1)

CENVAT Balance

Existing CENVAT Balance to be carried forward subject to conditions.

State VAT Balance to be carried forward only subject to production of
pending documents

140(2)

Capital Goods

Unavailed CENVAT Credit can be availed

140(3)

Stock in hand

Excise Duty Credit embedded in stock to be allowed (only for last one
year)

40% / 60% notional CGST Credit if duty paying document not available

140(5)

Goods/Services in transit

Credit can be claimed within a period of 30 days from the transition
date

140(6)

Stock in hand for composition dealer

Excise Duty Credit embedded in stock to be allowed (only for last one
year)

140(7)

Input Service Distributor

Input Services eligible for distribution after the transition date
also

140(8)

Centralised Registration

Carry forward of credit in case of centralised registration of service
providers

140(9)

Recredit

Credit already reversed on account of non payment to vendors will be
available for recredit if paid within 3 months

142(1)

Goods Returns

From registered dealers – independent supply

From unregistered dealers – claim refund under earlier law

142(2)

Debit Note

Credit Note

Discharge GST

Claim GST Adjustment subject to ITC Reversal by the customer

142(3)

Pending Refund Claims

To be adjudicated under the earlier law

142(4)

Refund Claims to be filed

Under the earlier law, subject to the condition of non carry forward
of credit to that extent

142(5)

Refund Claims

On account of non provision of service to be claimed under earlier law

142 (6&7)

Pending Appeals

Under the earlier law

142(8)

Pending Adjudication

Under the earlier law

142(9)

Revised Return

If results in additional tax, recoverable under the
current law

If results in excess credit, refund to be claimed under earlier law

142(10)

Ongoing Contracts

Supplies after appointed date taxable under current law

142(11)

Advances

If tax paid under earlier law, no tax payable under current law

142(12)

Goods on Approval

No tax if returned within 6 months

142(13)

TDS on works contract under existing laws.

Not liable if payment made after appointed date

Scope of this Article

As can be seen from the
above table, there are multiple provisions dealing with issues surrounding
transition. Further, many situations have not been envisaged. Broadly, the
provisions relating to transition can be divided into provisions dealing with
output taxes, provisions dealing with input credits and procedural matters.

In view of the size
constraints, this article deals with transitional provisions in relation to
output taxes and input credits. For transition provisions related to procedural
matters like registration, refunds, etc., the readers may look up to the
relevant sections.

Repeal and Savings

Section 174 of the CGST
Act repeals various existing laws from the date of commencement of the Act. At
the same time, it is also provided that the repeal of the said laws shall not
impact certain proceedings, rights and obligations already accrued under the
existing laws. Further, it is also stated that the general application of
section 6 of the General Clauses Act, 1897 is not impacted due to section 174.

The proviso to
section 174(2)(c) specifies that any tax exemption granted as an incentive
against investment shall not be treated as a privilege and accordingly, the
savings clause shall not apply. In the case of Shrijee Sales Corporation vs.
Union of India 1997 (89) E.L.T. 452 (S.C.), the Supreme Court held that
though the principle of promissory estoppel is applicable against
Government, in case of supervening public equity, the Government is allowed to
change its stand and can withdraw a time-bound exemption notification prior to
its expiry.

The above proviso
and the decision may become very relevant in understanding situations where
long term exemptions provided for investment in backward areas have already
been granted under the existing laws and not continued under the GST Law.

Taxable Event and
Collection of Duty/Tax

Section 3(1) of the
Central Excise Act, 1944 levies an excise duty on all goods manufactured in
India. Rule 9 requires the payment of duty at the time of removal of the said
goods. In this context, the Supreme Court in the case of CCE vs. Vazir
Sultan Tobacco Co. Limited 1996 (83) E.L.T. 3 (S.C.) has observed that
section 3 cannot be read as shifting the levy from the stage of manufacture or
production of goods to the stage of removal, that the levy is and remains upon
the manufacture or production alone and only the collection part of it is
shifted to the stage of removal

Accordingly, in the
context of special excise duty, the Court held that

The goods produced prior
to the date of the levy were not subject to such levy. If that is so, the levy
cannot attach nor can it be realised because such goods are removed on or after
the date of the levy

Goods manufactured during
the impost of levy but cleared after the lapse of levy would be liable for duty
at the rate and valuation in force as on the last date of levy.

Similar principles would
apply in the context of service tax where the taxable event u/s. 66B is on the
provision of service whereas the time of collection is defined through the
Point of Taxation Rules, 2011. However, in the context of VAT, generally the
taxable event as well as the collection is aligned to be at the time of
transfer of ownership in the goods.

While the GST Law provides
for repeal of the existing laws, it does not explicitly contain any provision
for extinguishing the liability already created under the existing laws. This
would imply that in cases where the taxable event is under the existing law,
the liability to pay tax continues under the existing law and is not exhausted
by payment of tax under the GST Law.

Services provided before
the appointed date but POT arises under the GST Regime

Rule 3 of the Point of
Taxation Rules, 2011 defines the point of taxation to be the date of issuance
of invoice if the same is issued within 30 days from the date of completion of
service. A testing agency issues a certificate of quality on 26^th
June 2017 and issues an invoice on 2^ndJuly 2017. In view of the
principles illustrated above, the testing agency will be required to discharge
service tax on the said transaction since the taxable event of rendition of
service is completed when the levy of service tax was in force. Section 142(10)
of the CGST Act will not come to the rescue of the agency since the said
provision applies only for supplies after the appointed date. Of course,
section 140(5) of the CGST Act will permit the credit of the service tax to the
recipient if the transaction is recorded in his books of accounts before 30^th
July 2017. For the said purpose, the phrase “services received on or after the
appointed date” will have to be read as “invoices received on or after the
appointed date” to make the provision operational.

A construction contractor
provides a continuous service to his clients. In view of the proviso to
Rule 3 of the Point of Taxation Rules, 2011, each event which requires the
receiver of service to make any payment to service provider (‘payment
milestone’) is deemed to be completion of the service to that extent. In a
particular instance, the construction contractor may have performed partial
work but the milestone may not be triggered on 30^th June 2017. In
such situations, since the deemed completion of service is not triggered at
all, the levy does not crystallise in the service tax regime and the
construction contractor may bill under the GST law with applicable GST. This
would also be in alignment with the provisions of section 142(10) of the CGST
Act.

A manufacturing company
avails the services of an advocate on 2^nd June 2017. The said
services are covered under reverse charge mechanism under the service tax law.
The payment to the advocate is made on 12^thAugust 2017. Rule 7 of
the Point of Taxation Rules, 2011 defines the point of taxation in case of
reverse charge mechanism to be the date of payment if the payment is made
within three months from the date of invoice. In this case, since the services
were rendered in June, the liability to pay service tax arises. The said
liability is payable for the month of August 2017 and needs to be discharged by
6^th September 2017. Unluckily, there is no provision
permitting the credit of such service tax paid.

In case of import of
services, section 21 of the IGST Act becomes relevant. The said provision
requires the payment of GST for import of services made after the appointed
date regardless of whether the transaction had been initiated before the
appointed date. However, the term ‘import of services made’ has not been
defined and therefore the interpretation of the said term may result in
litigation.

POT exhausted under the
existing laws, but supplies made after the appointed date

A converse situation can
arise in the context of goods and services where advances are received or
invoices are raised prior to 30^th June 2017 but the actual supply
happens under the GST Regime. In such situations, the correct trigger point of
taxation would be GST and not the existing tax requiring the assesse to file a
refund claim for the existing tax and further liability towards payment of GST
under the GST Law. However, in order to ease the process, Section 142(11)
provides for a transitional benefit under the GST Law.

Section 142(11)(a) states
that no tax shall be payable on goods under the GST Act to the extent that the
tax was leviable under the VAT Act of that State. Similarly, Section 142(11)(b)
states that no tax shall be payable on services under the GST Act to the extent
that the tax was leviable under the service tax law.

Section 142(11)(c) further
states that where tax was paid on any supply both under the Value Added Tax Act
and under the service tax law, GST shall be payable to the extent of supplies
made after the appointed day and the taxable personshall be entitled to take
credit of value added tax or service tax paid earlier

Subsequent Adjustments

It is likely that for a
supply effected in the pre-GST regime, there could be some variation in the
value of taxable service or value of goods on account of discount, etc. In such
cases, since the taxable event was under the existing law, the differential tax
should be payable under the existing law. However, as a transition provision,
Section 142(2) permits the issuance of a debit/credit note under the GST Regime
and such debit/credit note is deemed to have been issued in respect of an
outward supply under the GST Regime. This provision permits an adjustment on
account of GST for supplies which initially attracted VAT/Excise Duty/Service
Tax. Though no corresponding amendment is carried out under the existing laws
to insulate against the liability for the said debit notes, it can be said that
section 142(2) will have an overriding effect over the provisions of the
existing laws.

A downward adjustment of
tax consequent to the issuance of a credit note is permitted u/s.142(2)(b) only
subject to a corresponding reduction of input tax credit by the recipient. In
cases where the recipient was not eligible for input tax credit under the
existing laws, it is very likely that he will not agree for such a reduction in
his input tax credit. In such situations, will it be open for the supplier to
disregard the provisions of section 142(2)(b) of the CGST Act and invoke the
provisions of Rule 6(3) of the Service Tax Rules, 1994 and file a consequent
refund claim? In view of the legal principles enunciated, it is felt that such
an approach may be feasible.

Most of the current VAT
Regimes permit an adjustment on account of goods rejection if the rejection
happens within a period of six months. Section 142(1) reiterates the
eligibility of refunds under the existing law in case of goods rejection from
unregistered buyers. In fact, the said provision would also permit entitlement
of refund for excise duty. To that extent, the said provision is in alignment
with the legal principles. However, through a proviso in the said
section, it is stated that if the goods are returned by a registered person,
the return of such goods shall be deemed to be a supply. Can this proviso create
a tax liability on the person who is returning the goods? Further, can it override
the express provisions under the existing laws permitting the adjustment on
account of goods rejection in all cases?

Transitional Arrangements
in respect of input tax credit

Section 140 deals with
various situations where transitional arrangements are made for claim of
credit. The essence of the said provisions is covered in subsequent paragraphs.

Section 140(1) permits a
registered person to claim the CENVAT Credit carried forward in the last return
under the existing law. The Credit can be carried forward subject to certain
conditions. Similarly, the unutilised input tax credit disclosed in the VAT
Returns can be carried forward subject to certain conditions, one of which
pertains to receipt of all pending declarations.

Section 142(9)
specifically deals with situations of revised returns and states that any
increase in CENVAT Credit consequent to a revised return will not be carried
forward under GST, but be eligible for cash refund under the existing law. Will
this beneficial provision permit a back door entitlement for entities
accumulating substantial CENVAT Credits and unable to utilise the same?

Section 140(2) permits the
claim of unavailed credit on capital goods in cases where the credit under the
existing laws is available in instalments.

Section 140(3) is an
important provision permitting the claim of credit of eligible duties in
respect of inputs held in stock and inputs contained in semi-finished or
finished goods held in stock on the appointed day subject to various conditions
mentioned therein. The credit is available to a registered person, who was not
liable to be registered under the existing law, or who was engaged in the
manufacture of exempted goods or provision of exempted services, or who was
providing works contract service or a first stage dealer or a second stage
dealer or a registered importer or a depot of a manufacturer.

It may be noted that one
of the important conditions for the claim of credit is that the said registered
person is in possession of invoice evidencing payment of duty under the
existing law in respect of such and that such invoice is issued not earlier
than twelve months immediately preceding the appointed day.

In cases where the person
is not in possession of a duty paying document, a proportionate credit linked
to the output tax liability under the CGST Act has been prescribed through the
Transitional Rules. Similarly, in certain cases, the manufacturer is permitted
to issue a Credit Transfer Document to enable the person possessing the goods
to claim the credit on the basis of such document.

Section 140(9) permits
recredit of service tax credit already reversed under the existing law on
account of non-payment to vendors. The said re-credit will be available if the
value and the tax is paid to the vendor within 3 months from the appointed
date.

Section 140(5) permits a
credit of eligible duties and taxes in respect of inputs or input services
received after the appointed date if the said transactions are recorded in books of
accounts within 30 days from the appointed date.

Conclusion

Each reform or a revolution
comes with its’ own set of challenges and GST can be no exception. The
transition would present both opportunities as well as difficulties. While the
Legislature has provided for many situations to deal with transition, it will
be upto the implementers to either look at the spirit of the provisions to
avoid double taxation or non taxation and also for the judiciary to balance
between the legal principles of strict interpretation and need for minimal
business disruption.

shailesh.kwebmaker

Input Tax Credit (ITC)

Preface

Input Tax Credit or to say ITC mechanism is the backbone of
any system of Value Added Taxation (Vat). Goods and Services Tax (GST) being
based upon the principles of Vat, it has to provide for an appropriate
mechanism by which the basic concept of Vat remains intact. As we are well
aware, GST is a destination based tax, the burden of tax has to be borne by the
ultimate consumer of goods or services as the case may be. Neither there should
be any cascading of taxes nor any burden of such tax should fall on businesses.
Governments have to collect taxes from their subjects and the people have to
pay. While direct taxes are collected directly by the Government from all those
who are liable to pay such tax, in case of indirect taxes it may not be
possible for the Government to collect directly from the consumers. It is in
these circumstances, that responsibility is cast upon the businesses to collect
tax from consumers and deposit it into the Government Treasury. The businesses
as such are performing the role of a mediator. It is necessary therefore, that
such a mediator should not be burdened to pay any amount of such tax from his
own pocket. While the businesses will collect tax from consumers and deposit
into Government Treasury, it is necessary to ensure that Government gets
correct amount of taxes, as being paid by the consumers, and there is no
leakage of revenue.

Businesses, in any country, operate through a chain of people
performing different activities, and, sometimes it is a very long chain between
origin of goods and its consumption in the hands of ultimate consumer. An
importer or manufacturer may be the first person in the chain of production and
distribution of goods. Thereafter, there may be a distributor, a stockist, a
whole seller or a trader and the retailer, etc. Thus, before the goods reach in
the hands of ultimate consumer, they pass through various hands, and, each such
person may be adding some value to such goods whether by way of enhancing its
utility or otherwise whereby the price of such goods gets increased at each
stage in that chain of production and distribution. To take a simple example
suppose a manufacturer sells his goods at 100 rupees, the distributor adds his
expenses of transportation, etc. and after adding his margin sells at 110,
whole sellers sells at 120 and the retailer sells the same goods to the
consumer at 150 rupees. And if the rate of tax applicable is 10%, the consumer
is required to pay 15 rupees by way of tax (10% of 150), the Government should
get this 15 rupees in its treasury neither less nor more. One method of
collection of tax may be that Government collects 15 rupees directly from the
retailer and all other persons i.e. manufacturer, distributor, whole seller,
etc. need not collect or pay any tax.
Such a system is called last stage taxation, which was prevailing long back but
discontinued due to large scale of revenue leakages. The system of first stage
taxation (i.e. collecting the intended amount of tax from the manufacturer
himself), which was there under the earlier sales tax laws, had to be
discontinued because of low tax base, and the MRP based system of collecting
taxes from the first stage dealer also does not find favour under a fair and
equitable system of taxation. However the system of Vat provides all such
benefits which we can expect from a fair and transparent system of taxation.
Under this system taxes are collected at each stage of production and
distribution at a predetermined rate of tax. Thus, in the above example: the
manufacturer has to collect a sum of Rs. 10 (10% of 100) from his purchaser
(the distributor). He has to deposit the same amount into Government treasury.
The distributor will collect Rs. 11 (10% of 110) from the whole seller. As he
has already paid Rs. 10 to the manufacturer, he will deposit Rs. 1 into the
treasury (11-10). Here Rs. 11 is the amount of output tax and Rs. 10 is the
input tax credit. Similarly whole seller will collect Rs. 12 (10% of 120) and
will pay into the treasury Rs. 1 (i.e. 12-11) and the retailer will collect Rs.
15 from the consumer (10% of 150) and he will deposit a net sum of Rs. 3
(15-12) into the treasury. Thus, Government will get a total sum of Rs. 15
(10+1+1+3) through all these persons involved in the production and
distribution chain. The consumer has paid Rs. 15 as tax for consuming the
product, the Government is getting the exact amount into its treasury, and,
none of the businesses have paid any amount out of their own pocket. They have
deposited the entire amount of tax that they have collected from their customer
after deducting there from the amount of tax which they have already paid
through their supplier/s. Neither any gain nor any loss to the businesses.
Thus, the amount of tax paid on supplies received in the business may be
considered as advance payment of tax, which in Vat terminologies is called as
Input Tax Credit. (Credit of taxes paid on inputs).

This concept of ITC is not new to all those who have been
dealing with Excise Duty, Service Tax and State Vat laws, wherein it already
exits either partially or fully in the form of Cenvat (earlier called Modvat)
and setoff, etc. But, as these taxes are being levied at different stages and
by different Government/s, there is no inter connectivity of these taxes and
therefore taxes paid under one or more enactments are not cenvatable against
the other. It is fragmented Vat, which is in practice in our country at
present. To overcome this difficulty the concept of GST was suggested long back
and now the stage has come that our country is ready to implement GST, although
it is dual GST, to begin with, due to federal structure, but in this form also
it will overcome several disadvantages and in future we may hope for a single
GST across the country. Thus, let all of us together ‘Welcome GST’.

The Indian GST law i.e. The Central Goods and Services Act
(CGST Act), IGST Act, UTGST Act as well as State GST Acts contain elaborate
provisions regarding input tax credit and claim thereof by eligible taxable
persons. The Rules made there under provide conditions for such claim. As the
provisions and the conditions are on the same line in all such enactments, the
provisions contained in CGST Act and the Rules may be discussed in brief as
follows:

Input, Input Tax and Input
Tax Credit

Section 2 of the Central Goods & Services Act defines
various terminologies. Relevant definitions for the purposes of our discussion
are reproduced herein as follows:-

(59) “input” means any goods other than capital goods
used or intended to be used by a supplier in the course or furtherance of
business;

(60) “input service” means any service used or
intended to be used by a supplier in the course or furtherance of business;

(62) “input tax” in relation to a registered person,
means the central tax, State tax, integrated tax or Union territory tax charged
on any supply of goods or services or both made to him and includes—

(a)
the integrated goods and services tax charged on import of goods; (b) the tax
payable under the provisions of sub-sections (3) and (4) of section 9;

(c)
the tax payable under the provisions of sub-sections (3) and (4) of section 5
of the Integrated Goods and Services Tax Act;

(d)
the tax payable under the provisions of sub-sections (3) and (4) of section 9
of the respective State Goods and Services Tax Act; or

(e)
the tax payable under the provisions of sub-sections (3) and (4) of section 7
of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy;

(63) “input tax credit” means the credit of input tax;

(67) “inward supply” in relation to a person, shall
mean receipt of goods or services or both whether by purchase, acquisition or
any other means with or without consideration;

(19) “capital goods” means goods, the value of which
is capitalised in the books of account of the person claiming the input tax
credit and which are used or intended to be used in the course or furtherance
of business;

(94) “registered person” means a person who is
registered u/s. 25 but does not include a person having a Unique Identity
Number;

(105) “supplier” in relation to any goods or services
or both, shall mean the person supplying the said goods or services or both and
shall include an agent acting as such on behalf of such supplier in relation to
the goods or services or both supplied;

(106) “tax period” means the period for which the
return is required to be furnished;

(107) “taxable person” means a person who is
registered or liable to be registered u/s. 22 or section 24;

(108) “taxable supply” means a supply of goods or
services or both which is leviable to tax under this Act;

(47) “exempt supply” means supply of any goods or services or
both which attracts nil rate of tax or which may be wholly exempt from tax u/s.
11, or u/s. 6 of the Integrated Goods and Services Tax Act, and includes
non-taxable supply;

(78) “non-taxable supply” means a supply of goods or
services or both which is not leviable to tax under this Act or under the
Integrated Goods and Services Tax Act;

Eligibility to claim Input
Tax credit

Section 16(1) of the CGST act provides that: Every registered
person is entitled to take credit of input tax charged on any supply of goods
or services or both to him which are used or intended to be used in the course
or furtherance of his business.

Thus, to claim Input Tax Credit (ITC) it is necessary that
the claimant is a ‘registered person’. All such persons who are registered
under the Act (other than persons holding UIN) are eligible to claim ITC in
respect of taxes paid (i.e. CGST, SGST or UTGST and IGST) on all inward
supplies of goods and services received, which are used or intended to be used
in the course of his business or for furtherance of business.

Such inward supplies may be of inputs, input services or
capital goods. All such supplies are eligible for claim of ITC. Thus, whether
it is raw material, packing material, trading goods, consumables, capital goods
or items of expenditure (debited to profit & loss a/c under various heads)
all such items are eligible provided the same are used or intended to be used
in the course or furtherance of business (subject to such conditions and
restrictions as may be prescribed).

Conditions & Restrictions

Apart from the basic condition i.e. used or intended to be
used in the course or furtherance of business, section 16(2) provides for
certain conditions, which may be summarised as follows:

(a) Goods
and/or services (as the case may be) must have been received.

(b) He must
have in possession a Tax Invoice (issued by the supplier) in respect of such supply

(c) Tax
charged on such inward supply must have been paid to the Government (whether in
cash or by way of utilisation of ITC).

(d) A return
(in accordance with section 39) has been furnished

(e) In
respect of capital goods, if the registered person has claimed depreciation
(under the Income Tax Act) on tax component of such assets (capital goods), ITC
shall not be admissible. That would mean that if tax component has been added
to the cost of such capital goods, ITC to that extent is not eligible.

It has further been provided that if the recipient fails to
make payment to the supplier in respect of supplies so received (on which ITC
has been claimed) within a period of 180 days from the date of issuance of Tax
Invoice, the ITC so claimed has to be reversed. And such amount can be
reclaimed after making due payment to the supplier.

Reduction in ITC

Section 17 provides for certain conditions in which the claim
of ITC may get reduced to certain extent or proportionate reduction may have to
be worked out in following circumstances:-

(1) If the taxable
supplies received are used partly for the purposes of business and partly for
any other purposes (may be for personal use). ITC will be admissible to the
extent of business uses only. If the exact amount is not ascertainable then
proportionate reduction method will be applicable.

(2) If the taxable supplies received are used partly for the
purposes of outward supply of taxable goods and/or services (including zero
rated supplies) and partly for exempt supplies. ITC will be admissible to the
extent of use in taxable supplies including zero rated supplies). If the exact
amount is not ascertainable then proportionate reduction method will be
applicable.

Note: ‘Zero Rated supplies’ are defined u/s. 16 of IGST Act
as follows:-

“16. (1) “zero rated supply” means any of the following
supplies of goods or services or both, namely:–

(a) export
of goods or services or both; or

(b) supply of goods or services or both to a
Special Economic Zone developer or a Special Economic Zone unit.”

Thus, although there is no tax payable on outward supplies,
which are zero rated, input tax credit is available in full (without any
reduction).

(3) A banking company or a financial institution including a
non-banking financial company, engaged in supplying services by way of
accepting deposits, extending loans or advances shall have the option to either
comply with the provisions of section 17(2) (i.e. bifurcation of taxable and
exempt supplies), or avail of, every month, an amount equal to fifty per cent.
of the eligible input tax credit on inputs, capital goods and input services in
that month and the rest shall lapse.

No ITC

Section 17(5) of the CGST Act provides that; Notwithstanding
anything contained in sub-section (1) of section 16 and sub-section (1) of
section 18, input tax credit shall not be available in respect of the
following, namely:-

(a) motor vehicles and other conveyances except when they are
used––

(i) for making the following taxable supplies,
namely:—

(A) further
supply of such vehicles or conveyances; or

(B)
transportation of passengers; or

(ii) for
transportation of goods;

(b) the following supply of goods or services or both—

(i) food and
beverages, outdoor catering, beauty treatment, health services, cosmetic and
plastic surgery except where an inward
supply of goods or services or both of a particular category is used by a
registered person for making an outward taxable supply of the category of goods
or services or both or as an element of a taxable composite or mixed supply;

(ii) membership
of a club, health and fitness centre;

(iii)
rent-a-cab, life insurance and health insurance except where––

(A) the
Government notifies the services which are obligatory for an employer to
provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or
both of a particular category is used by a registered person for making an
outward taxable supply of the same category of goods or services or both or as
part of a taxable composite or mixed supply; and

(iv) travel benefits extended to employees on
vacation such as leave or home travel concession;

(c) works contract services when supplied for construction of
an immovable property (other than plant and machinery) except where it is an
input service for further supply of works contract service;

(d) goods or services or both received by a taxable person
for construction of an immovable property (other than plant or machinery) on
his own account including when such goods or services or both are used in the
course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d),
the expression “construction” includes re-construction, renovation, additions
or alterations or repairs, to the extent of capitalisation, to the said immovable
property;

(e) goods or services or both on which tax has been paid u/s.
10 (composition schemes);

(f) goods or services or both received by a non-resident
taxable person except on goods imported by him;

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of
by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of
sections 74, 129 and 130 (specific cases).

Explanation.––For the purposes of Chapter V (Input Tax
credit) and Chapter VI (registration), the expression “plant and machinery”
means apparatus, equipment, and machinery fixed to earth by foundation or
structural support that are used for making outward supply of goods or services
or both and includes such foundation and structural supports but excludes-

(i) land,
building or any other civil structures;

(ii)
telecommunication towers; and

(iii)
pipelines laid outside the factory premises.

It may further be noted that following persons are not entitled
to claim input tax credit in respect of any of the items of inward supply of
goods or services:

1. An un-registered person

2.
Registered persons who have opted for Composition Scheme/s

3. Persons holding Unique Identification Number
(UIN)

4. A registered person whose registration is
cancelled (in respect of inward supplies on or after the date of cancellation).

Documentation requirements and conditions for claiming ITC

The input tax credit shall be availed by a registered person,
including the Input Service Distributor, on the basis of any of the following
documents, namely:-

(a) Tax invoice issued by the supplier of goods or
services or both in accordance with the provisions of section 31;

(b) An invoice issued in accordance with the provisions
of clause (f) of sub-section (3) of section 31, subject to payment of tax (i.e.
in respect of purchases from un-registered dealers, where tax is payable under
reverse charge scheme);

(c) A debit note issued by a supplier in accordance
with the provisions of section 34 (in respect
of goods return, rate difference, etc.);

(d) A bill of entry or any similar document
prescribed under the Customs Act, 1962 or rules made there under for assessment
of integrated tax on imports;

(e) An ISD invoice or ISD credit note or any
document issued by an Input Service.

Distributor in accordance with the
provisions of sub-rule (1) of rule invoice 7.

Time Limit for claim of ITC

The procedure to claim ITC
by a registered person is that the same can be claimed immediately in
respective month (Tax Period) to which the Tax Invoice relates (subject to
actual receipt of such goods/services). Each such claim of ITC is credited to
the Electronic Credit Register of such registered person. He may utilise the
credit as and when he would like to adjust the same against his output tax
liability.

However, if a person has not claimed ITC in the respective
month, for any reason, he may claim the same any time (i.e. in any tax period)
within 6 months from the end of financial year or before the time limit for
submitting Annual Return for the said financial year, whichever is earlier.
(The time limit prescribed for submitting annual return, at present is 31^st
December of next financial year. Thus, practically a person can claim the
unclaimed amount of ITC till he submits his return for the month of September
of next financial year).

It may be noted that credit of CGST, SGST or
UTGST and IGST has to be maintained separately and the same can be utilsed in a
prescribed manner only. The credit of CGST can be utilised for discharge of
output tax liability of CGST and if balance remains it can be utilised for IGST
also. But credit of CGST cannot be utilsed for payment (discharge of output tax
liability) of SGST. Similarly credit of SGST cannot be utilsed for output tax
liability of CGST. In short, cross utilisation of CGST and SGST is not permitted.
However, the credit of IGST can be utilsed first for discharge of output tax
liability of IGST, then against CGST, and if still balance remains, against
SGST.

shailesh.kwebmaker

Valuation of Supplies in GST

1. Background

Provisions for valuation of supplies in GST
are common for both goods and services. Section 15 of CGST Act read with nine
rules contained in Draft Valuation Rules (DVR) as approved by the GST Council
in May 2017 lay down the principles of valuation.

Essentially, these principles of valuation
are to be applied in three buckets, depending on the nature of supply:

S. No.

Nature of supply

Applicable Section of CGST Act

Supply:

a)
to a recipient who is not related to the supplier; and

b)
where price is the sole consideration

15(1)

Supply:

a)
to a recipient who is related to the supplier; or

where
price is not the sole consideration

15(4)

Supplies
notified by Government on the recommendations of GST Council

15(5)

For each of the above buckets, different (and in some cases,
alternate) methods of valuation have been prescribed in the law, depending on
existence of specified circumstances in different situations under each
buckets. These methods are discussed in subsequent paras separately.

However, for each of the above buckets, while
determining the value of supply:

a) Section 15(2) lists specific amounts which
are required to be included; and

b) Section 15(3) and Rule 7 of DVR lists
specific amounts which are required to be excluded

2. Mandatory inclusions in value of supply

Irrespective of the nature of supply, as
per section 15(2), following amounts shall be included in the value of a supply
(some practical examples of these are given in brackets):

i. any taxes, duties, cesses, fees and charges
levied under laws other than GST related Acts, if charged separately by the
supplier (e.g. basic customs duty, property tax, etc. separately charged by
supplier to recipient);

ii. any amount that supplier is liable to pay for
the supply but is incurred by the recipient and is not included in the price
actually paid/payable for the supply (e.g. salaries of suppliers’ employees,
electricity bill of supplier etc. paid by recipient);

iii. incidental expenses, including commission and
packing, charged by supplier to recipient (e.g. outward freight, fumigation
charges etc.);

iv. any amount charged for anything done by
supplier for supply at the time of, or before delivery of goods / supply of
services (e.g. warehousing charges);

v. interest/late fee/penalty for delayed payment
of consideration for supply; and

vi. subsidies directly linked to price of supply
excluding Government subsidies (e.g. subsidy received by canteen contractor
from recipient for subsidised meals given to recipient’s employees).

3. Mandatory exclusions from value of supply

Irrespective of the nature of supply, as
per section 15(3), following amounts shall not be included in the value of a supply,
if the conditions specified there against are satisfied (some practical
examples of these are given in brackets):

i. any discount given before/at the time of
supply, if it has been recorded in the invoice issued for such supply (e.g.
discount on stock clearance sale);

ii. any
discount given after supply, if such discount is:

– established in terms of agreement entered
into at/before time of supply;

– specifically linked to relevant invoices; and

– input tax credit (ITC) attributable to it on
the basis of document issued by supplier has been reversed by recipient.

(e.g. volume/target discount given as
per milestones)

It needs to be noted that the above
exclusions are specific and conditional. Hence, neither any other type of
discount nor any of the aforesaid two types of discounts where the specified
conditions are not fulfilled, will be allowed to be deducted by the supplier
from the value of supply for computing GST liability of supplier.

However, net effect of the above is that if
in practice,in respect of post-supply discount:

– supplier does not want to seek reduction in
its GST liability (already discharged for the supply); and

– recipient does not want to reverse ITC
attributable to such discount (already claimed earlier based on original invoice
of supplier),

they can very well do so, with the supplier
issuing credit note to recipient u/s. 34 of CGST Act, only to the extent of the
amount of post supply discount, without giving any credit to the recipient for
the GST already charged in the original invoice for the supply, ITC for which
was already taken earlier by the recipient.

As per Rule 7 of DVR, expenditure/costs
incurred by a supplier as a pure agent of recipient shall be excluded
from value of supply if all the following seven conditions (as against
twelve conditions specified in present Valuation Rules under Service Tax Law)
are satisfied:

(i) supplier acts as pure agent of recipient when
he makes payment to third party on authorisation of recipient;

(ii) payment made by pure agent on behalf of
recipient is separately indicated in invoice issued to recipient;

(iii) supplies procured by pure agent from third
party are in addition to services (and possibly goods or both² )
supplied on his own account;

(iv) supplier acts as pure agent to incur
expenditure/costs in the course of his supply as per contractual arrangement
with recipient;

(v) supplier neither intends to hold nor holds any
title to goods/services procured/supplied as such agent;

(vi) supplier does not use goods/services so
procured for his own interest; and

(vii) supplier receives only actual amount incurred
to procure such goods/services, in addition to amount received for supply made
on his own account.

4. Value of supply to non-related persons

Supply to a non-related person could be
such where:

(a) price is the sole consideration
for supply; or

(b) price is not the sole consideration
for supply.

In situation (a), as per section 15(1),
value of such supply shall be ‘transaction value’, which is the price
actually paid/payable for the supply.

In situation (b), as per section 15(4),
value shall be determined as per Rule 1 of DVR.

The term ‘consideration’ is defined very
widely in section 2(31) of CGST Act in an inclusive manner. Therefore, in
addition to the specific inclusions stated in that definition, whatever
qualifies as consideration ordinarily and in terms of the Indian Contract Act,
will also be regarded as consideration. Following essential features of such
specific inclusions in the definition of ‘consideration’ need to be noted
carefully:

(a) any payment made or to be made, whether in
money or otherwise (i.e. in kind) in respect of, in response to, or for the
inducement of, the supply of goods/services;

(b) such payment may be made by the recipient or by
any other person (other than subsidy given by Government);

(c) monetary value of any act or forbearance, in
respect of, in response to, or for the inducement of, the supply of goods or
services or both, whether by the recipient or by any other person (other than
subsidy given by Government);

(d) deposit given in respect of the supply of
goods/services, if the supplier applies such deposit as consideration for such
supply.

Treatment of Free Issue/Free of Charge Material

It appears that Free Issue Material (FIM)/Free of Charge
(FOC) material made available by the recipient to the supplier in terms of
a condition precedent stated in the contract with the supplier, clearly
defining the scope and nature of the supplies of the supplier, can be argued to
be not includible in the value of the supply in terms of specific inclusions
stated in (a) and (c) above. To avoid possible disputes in this regard that
could be raised by Departmental Officers on account of the use of phrases like
‘in respect of’ and ‘for the inducement of’ having wide meanings in the
definition of ‘consideration’ as explained above, it would be desirable that
Government appropriately clarifies whether in aforesaid and/or other
circumstances, FIM/FOC material made available by recipient to the supplier is
or is not, required to be added to the value of supply by the supplier.

Treatment of consideration in kind

Where supply is to a non-related person but price is not
the sole consideration, i.e. where price is partly in money and partly in kind,
or it is wholly in kind, Rule 1 of DVR provides for the following methods of
arriving at valuation in the sequence stated below i.e. if the first method
fails, value has to be determined as per next method and if the next one fails,
the third method and so on, where the last method is prescribed in Rule 5:

(a) Open Market Value (OMV) of the supply;

(b) sum total of consideration in money and such
further amount in money that is equivalent to the consideration not in money
(if such amount is known at the time of supply);

(d) sum total of consideration in money and such
further amount in money that is equivalent to the consideration not in money as
determined by application of Rule 4 or Rule 5 in that order (these Rules are
briefly narrated at S. Nos. 3 & 4 respectively in the table in Para 6
below).

5. Meaning of ‘related persons’

Curiously, the definition of ‘related
persons’ is not given in the definition section 2 of CGST Act, but it is given
in the Explanation to section 15 by clearly stating, ‘For the purposes of
this Act, – ”.

As per this Explanation, in eight specified
types of relationships, persons will be deemed to be ‘related persons’, and
‘person’ for this purpose will include legal persons. Instances of these
specified types of relationships are – employer and employee; members of the
same family; one person directly/indirectly controls the other; persons who are
legally recognised partners in business; persons who are officers/directors of
one another’s businesses; a person who is associated with another person as its
sole agent/sole distributor/sole concessionaire.

6. Value of supply to agents, related persons or
between distinct persons³

Valuation for supply between a person
(being a principal) and his agent (other than sole agent), is prescribed in
Rule 3 of DVR, while valuation of supply between related persons (including
sole agent) or between distinct persons is prescribed in Rule 2 of DVR – both
of which Rules require determination of value as per Rule 4 or Rule 5 in
specified situations.

Rules 2 to 5 also provide for sequential
method of arriving at valuation summarised in the table below:

S. No.

Method of valuation (in sequential order)

Supply between principal and agent

(other than sole agent)

Supply between distinct persons and related persons
(including

sole agent)*

Open
Market Value (OMV) of supply

[Rule 3
clause (a)]

[Rule 2
clause (a)]

Value
of supply of goods/services of like kind and quality

N.A.

[Rule 2 clause (b)]

110%
of cost of production/manufacture/acquisition of goods or cost of provision
of services

[Rule 4]

Value
using reasonable means consistent with the principles and general provisions
of section 15 and DVR

[Rule 5]

Option available to supplier – 90% of price charged for goods of like kind and quality by
recipient to his unrelated customer

(this option is in place of OMV method only)

(this option is in place of all above methods)

*Most importantly, as per second proviso to Rule 2 of DVR,
in all these situations, value declared in invoice of supplier shall be deemed
to be OMV, where the recipient is eligible for full input tax credit.This is
a great relief to businesses, as it will avoid possible valuation disputes with
Department in these situations.

The expressions ‘Open Market Value’ (OMV) and ‘supply
of goods or services or both of like kind and quality’ are defined in the
Explanation at the end of Rule 9 of DVR as under:

a) ““open market value” of a supply of goods or
services or both means the full value in money, excluding the integrated tax,
central tax, State tax, Union territory tax and the cess payable by a person in
a transaction, where the supplier and the recipient of the supply are not
related and price is the sole consideration, to obtain such supply at the same
time when the supply being valued is made.”

(emphasis supplied)

In essence, OMV is arm’s length price.

b) ““supply of goods or services or both of
like kind and quality” means any other supply of goods or services or both made
under similar circumstances that, in respect of the characteristics, quality,
quantity, functional components, materials, and reputation of the goods or
services or both first mentioned, is the same as, or closely or
substantially resembles, that supply of goods or services or both.”

(emphasis supplied)

In practice, several challenges could arise in determining
what are ‘similar circumstances’ in light of the above specified
characteristics of a supply and therefore, due caution will have to be
exercised in this regard by drawing support from publicly available
information, opinions of experts, etc. which should be well documented – as is
done in case of transfer pricing regulations under Income Tax Act.

7. Option to determine value of notified supplies

As per section 15(5) read with Rule 6 of
DVR, in case of following notified supplies, where the recipient may or may not
be related or price may or may not be the sole consideration, supplier has
the option to determine the value as per method prescribed in Rule 6 of DVR
for each such notified supply (subject to satisfaction of specified
conditions), instead of determining value as per the principles discussed
in Paras 4 to 6 above:

S. No.	Nature/type of supply	Relevant criteria / optional deemed valuation method prescribed in Rule 6 – depending on specified situations
1	Exchange of foreign currency	a) Difference between RBI buying and selling rates of specified currency b) 1% of gross amount of INR c) 1% of specified amount of INR derived/assumed to be received
2	Supply of foreign currency, including money changing	a) Upto Rs.1 lakh – 1% of gross amount of currency exchanged (subject to minimum of Rs.250) b) > Rs.1 lakh but < Rs.10 lakh – Rs.1,000 plus 0.5% of gross amount of currency exchanged c) > Rs.10 lakh – Rs.5,500 plus 0.01% of gross amount of currency exchanged (subject to maximum of Rs.60,000)
3	Booking of air travel tickets by air travel agent	a) Domestic – 5% of basic fare b) International – 10% of basic fare
4	Life insurance (other than pure risk cover policies)	a) Gross premium less amount allocated for investment/savings b) Single premium annuity policy (other than (a) above) – 10% of premium c) Any other policy – 25% of premium in first year and 12.5% of premium in subsequent years
5	Supply of second hand goods by person dealing in buying and selling such goods where no ITC is availed on purchase of such second hand goods	Positive difference, if any, between selling and purchase price (In case of goods purchased from defaulting unregistered borrower for recovery of loan/debt, purchase price of person making repossession shall be deemed to be the purchase price of such borrower reduced by 5% for every quarter/part thereof between date of purchase and date of disposal by such person making repossession)
6	Token, voucher, coupon or stamp (other than postage stamp) redeemable against supply of goods/services	Money value of goods/services redeemable
7	Taxable services provided by notified class of service providers from out of persons having more than one registrations under different GST Acts but treated as distinct persons (referred to in Para 2 of Schedule I of CGST Act),where ITC is available	Nil

S. No.

Nature/type of supply

Relevant criteria / optional deemed valuation method
prescribed in Rule 6 – depending on specified situations

Exchange
of foreign currency

a) Difference
between RBI buying and selling rates of specified currency

b) 1%
of gross amount of INR

c) 1%
of specified amount of INR derived/assumed to be received

Supply
of foreign currency, including money changing

a) Upto
Rs.1 lakh – 1% of gross amount of currency exchanged (subject to minimum
of Rs.250)

b) >
Rs.1 lakh but < Rs.10 lakh – Rs.1,000 plus 0.5% of gross amount of
currency exchanged

c) >
Rs.10 lakh – Rs.5,500 plus 0.01% of gross amount of currency exchanged (subject
to maximum of Rs.60,000)

Booking
of air travel tickets by air travel agent

a) Domestic
– 5% of basic fare

b) International
– 10% of basic fare

Life
insurance (other than pure risk cover policies)

a) Gross
premium less amount allocated for investment/savings

b) Single
premium annuity policy (other than (a) above) – 10% of premium

c) Any
other policy – 25% of premium in first year and 12.5% of premium in
subsequent years

Supply
of second hand goods by person dealing in buying and selling such goods where
no ITC is availed on purchase of such second hand goods

Positive
difference, if any, between selling and purchase price

(In
case of goods purchased from defaulting unregistered borrower for recovery of
loan/debt, purchase price of person making repossession shall be deemed to be
the purchase price of such borrower reduced by 5% for every quarter/part
thereof between date of purchase and date of disposal by such person making
repossession)

Token,
voucher, coupon or stamp (other than postage stamp) redeemable against supply
of goods/services

Money
value of goods/services redeemable

Taxable
services provided by notified class of service providers from out of persons
having more than one registrations under different GST Acts but treated as
distinct persons (referred to in Para 2 of Schedule I of CGST Act),where ITC
is available

Nil

8. Rate of exchange and value inclusive of GST

As per Rule 8 of DVR, for determining rupee
value of supplies involving foreign currency, the rate of exchange to be
applied shall be the applicable RBI reference rate on the date and time of
relevant supply in terms of section 12 (time of supply for goods) and section
13 (time of supply for services) of CGST Act.

As per Rule 9 of DVR, where value of supply
is inclusive of GST, tax fraction shall be applied to determine the GST amount
included in such value i.e.

GST = Value of supply inclusive of GST X Applicable GST rate for the supply /

100 + Applicable GST
rate for the supply

This method would particularly become relevant
in cases of supplies of taxable goods/services obtained from unregistered
persons, where the registered person (i.e. recipient) is liable to pay GST
under reverse charge as per section 9(4) of CGST Act.

9. Conclusion

Given the complexities in real life
situations of supply of goods/services and related matters like conditions
precedent, nature of payments, need for outsourcing, nature of
concessions/incentives given, actual conduct of parties, technological
advancements etc., area of valuation of supplies liable to GST will pose
several challenges as well as opportunities for small, medium and large
businesses.

All decision makers will have to be
cautious, methodical and process oriented for being fully GST compliant on one
hand and simultaneously achieving tax optimisation, for not only sustaining in
the increasingly competitive and disruptive business environment but also
increasing one’s market share in the world’s fastest growing economy.

Revisiting
existing arrangements, contracts, processes and technology and re-imagining the
entire eco system with proper involvement of all stakeholders is the best way
to successfully navigate the transition into GST, which will completely
transform the socio, political and economic environment of India.

shailesh.kwebmaker

Classification of Goods and Services

Introduction

In any taxation matter, the classification of any items plays
an important role in determining the quantum of tax payable by the taxable
person. The GST Council has also approved four slabs of rates which are 5%,
12%, 18% and 28%. The different rates have been approved for different products
by the GST Council in their meeting held on 19/05/2017 and 20/05/2017. The
appropriate classification of goods or services will determine the rate of GST
payable.

The Tribunal and Courts have laid down different principles
of classification of goods or services. These principles are very helpful in
classifying the goods and services and accordingly determining the rate of tax.

Principles of Classification

The various principles are summarised below:

(a)
Commercial/Trade Parlance

(b)
Definition given in statute or chapter note/section note etc.

(d)
Most specific description to be preferred over general description

(e)
Functional use of the product

(f)
Essential characteristics of goods or service

(g)
Importance of expert opinion and other evidentiary value

(h)
Importance of ISI specification

(i)
Importance of Finance Ministers speech

(j)
Importance of trade notice, circulars etc.

(k)
Chemical examination only provides content and not classification

(l)
Provision of relevant time

(m)
Burden to prove classification on department

(n)
Exemption notification cannot interpret tariff heading or sub heading

(o)
Beneficial classification

(p)
Jurisdiction to decide classification

Each of the above principles are discussed as follows:

a) Commercial/Trade Parlance

If meaning of goods/service is not defined
in relevant places in GST Act, then, meaning of the goods/service has to be
judged in the manner understood by the people dealing with it, i.e., the
goods/service should be understood in the commercial sense. This rule has been
consistently applied by various courts to decide the classification of the
product. For example, whether the product should be classified as cosmetic or
medicament shall be judged by the manner in which the people dealing the
product understand.

The observation of the Supreme Court in
paras 29 & 34 in the case of Dunlop India vs. UOI 1983 (13) ELT 1566
(SC) substantiate this principle. The Supreme Court has observed as follows:

“29. It is well
established that in interpreting the meaning of words in a taxing statute, the
acceptation of a particular word by the trade and its popular meaning should
commend itself to the authority.”

“34. We are, however,
unable to accept the submission. It is clear that meanings given to articles in
a fiscal statute must be as people in trade and commerce, conversant with the
subject, generally treat and understand them in the usual course. But once an
article is classified and put under a distinct entry, the basis of the
classification is not open to question. Technical and scientific tests offer
guidance only within limits. Once the articles are in circulation and come to
be described and known in common parlance, we then see no difficulty for statutory
classification under a particular entry.”

The above Principle of classification has
been followed consistently by the Supreme Court in the following cases:

Indian Aluminium Cables Ltd. vs. UOI 1985 (37)

E.L.T (S.C)

Collector of Central Excise,
Kanpur vs. Krishna

Carbon Paper Co.1988 (37) E.L.T
480 (S.C)

Commissioner vs. Pio Food Pack 1980
(6) ELT 353 (SC)

Reliance Cellulose Products Ltd.,
Hyderabad vs. Collector of Central Excise, Hyderabad 1997 (93) E.L.T 646
(S.C)

This is the basic principle to determine the classification
of goods or service. Affidavits from persons like customers, distributors,
dealers along with purchase orders from customer, description of product in
invoice raised by supplier, normally substantiate the manner in which the
product is understood in the commercial parlance.

b) Definition given in statute or chapter
note/section note etc.

The principle of classification of product
as per trade parlance is not absolute principle. The statute making authority
has the power to define the product in a particular manner. The Hon. Supreme
Court in the case of Akbar Baharuddin vs. Collector of Central Excise, 1990
(47)ELT 161 (SC) has held that tariff entry shall not only be based on trade
parlance and understanding between the person in the trade. The said doctrine
of commercial understanding should be departed where the statute either in the
act or chapter note or in schedule or anywhere else defines the product in a
particular manner. The definition in the statute will take precedence over the
commercial understanding of the product in the trade.

c) Description in HSN has persuasive value

Under the General Agreement for Trade and
Tariff, commonly known as GATT agreement, World Trade Organization (WTO) has
been formed.The Customs Coordination Council (CCCN) working under WTO has
published Harmonized System Nomenclature (HSN) which is normally adopted by all
countries who have signed the GATT Agreement for the purpose of classification of
the products for Customs. In India, classification under Central Excise and in
various state VAT is also basedon HSN. The classification made in GST is also
based on HSN. Harmonized System Nomenclature published by CCCN gives a detailed
description of various products which are covered under a particular heading or
sub-heading. The description in HSN is very helpful in deciding the
classification of the product. The Hon. Supreme Court in the case of Wood
Crafts Products Ltd., 1995 (77) ELT 23 (SC) has held that the description
in HSN Explanatory Note has persuasive value.The Supreme Court has observed in
paras 12 and 18 as follows:

“12. It is significant, as
expressly stated, in the Statement of Objects and Reasons, that the Central
Excise Tariffs are based on the HSN and the internationally accepted
nomenclature was taken into account to “reduce disputes on account of tariff
classification”. Accordingly, for resolving any dispute relating to tariff
classification, a safe guide is the internationally accepted nomenclature
emerging from the HSN. This being the expressly acknowledged basis of the
structure of Central Excise Tariff in the Act and the tariff classification
made therein, in case of any doubt the HSN is a safe guide for ascertaining the
true meaning of any expression used in the Act. The ISI Glossary of Terms has a
different purpose and, therefore, the specific purpose of tariff classification
for which the internationally accepted nomenclature in HSN has been adopted,
for enacting the Central Excise Tariff Act, 1985, must be preferred, in case of
any difference between the meaning of the expression given in the HSN and the
meaning of that term given in the Glossary of Terms of the ISI.

18. We are of the view that the
Tribunal as well as the High Court fell into the error of overlooking the fact
that the structure of the Central ExciseTariff is based on the internationally
accepted nomenclature found in the HSN and, therefore, any dispute relating to
tariff classification must, as far as possible, be resolved with reference to
the nomenclature indicated by the HSN unless there be an express different
intention indicated by the Central Excise Tariff Act, 1985 itself. The
definition of a term in the ISI Glossary, which has a different purpose, cannot,
in case of a conflict, override the clear indication of the meaning of an
identical expression in the same context in the HSN. In the HSN, block board is
included within the meaning of the expression “similar laminated wood” in the
same context of classification of block board. Since the Central Excise Tariff
Act, 1985 is enacted on the basis and pattern of the HSN, the same expression
used in the Act must, as far as practicable, be construed to have the meaning
which is expressly given to it in the HSN when there is no indication in the
Indian Tariff of a different intention.

The same principle is repeated in the case of Business
Forms Ltd., 2002-142-ELT-18 (SC). Thus, description given in HSN is
very useful indetermining classification of the product.

d) Most specific description to be preferred over
general description

It is a general principle of classification
that most specific description shall be preferred over a more general
description. The judgements laying down the principle that most specific shall
be preferred to general in the matter of classification are discussed below:

In
the case of Dunlop India Ltd. vs. Union of India 1983 (13) ELT1566 in
para 37, the Supreme Court has observed ‘when an article has by all standard
a reasonable claim to be classified under an enumerated item in the Tariff
Schedule, it will be against the very principle of classification to deny it
the parentage and consign it to the orphanage of the residuary clause.’

In the case of Moorco (India) Ltd. vs. CCE
(supra), the Supreme Court has observed ‘in either situation, the
classification which is most specific has to be preferred over the one which is
not specific or is general in nature. In other words, between the two competing
entries one nearer to the description should be preferred. Where the class of
goods manufactured by the assessee falls, say, in more than one heading, of
which one may be specific, other more specific, 3^rd most specific
and 4^th general, the rule requires the authorities to classify the
goods in the heading which gives most specific description.’

e) Functional use of the product

Functional use of the product can certainly
be one of the factors in determining the classification, but cannot be the sole
criteria for determining the classification. Normally use of the product is not
relevant as the product is required to be classified in the condition in which
it is supplied. However, sometimes, tariff heading itself provides the use of
the product. In such a case, the ultimate use of the product is very important
for classifying the product. For example, entry No. 2309 in Central Excise
Tariff Act is “preparation of a kind used in animal feeding”. It is evident
from the description itself that preparation shall be used in animal feeding.
Where the description itself specifies the use of the product, classification
will be based on the ultimate use of the product. The Hon. Supreme Court in the
case of Atul Glass Industries vs. Collector of Central Excise, 1986 (25)
ELT 473 has held that in such a case, the goods are to be classified on the
basis of their primary function.

f) Essential characteristics

The product is purchased and sold due to
its essential characteristics. The principles for determining the essential
characteristics are –

(a) Cost of components of the
product.

(b) Functionality of the product.

These are discussed below:

(i)
Cost of components of the product—

The Hon’ble Supreme Court in the case of Xerox
India Ltd. vs. Cenvat Credit 2010 (260) ELT 161 has determined the
classification of multifunctional printing machines on this basis. The assessee
claimed classification under Chapter heading 8479.89 whereas the revenue
claimed classification under Chapter heading 8471.60. The machine performs
various functions of printer, fax, copier and scanner. The court observed that
printing function emerges as principal function and gives the machine its
essential character. In arriving at the principal function, the court held
that, in case of product Xerox Regal 5799, 85% of its total parts and
components and manufacturing cost is allocated to printing. Similarly, in case
of product Xerox XD 155df model, 74% of the parts and components along with
cost are allocated to printing. Similar principle of determining the essential
characteristic based on cost has been laid down in various other judgments.
Therefore, this is one of the criteria which can be applied for the purpose of
determining the essential characteristic.

(ii)
Functionality of the product—

In the case of CCE, Hyderabad vs.
Bakelite Hylam Ltd. 1997 (91) ELT13 (SC) the issue was regarding
classification of decorative laminate sheet where paper constituted 60% to 70%
of the total weight and other input was plastic which constituted 30% to 40% of
the total weight. The Hon’ble Supreme Court in para 25, reproduced below, held
that the essential characteristic is given by plastic. The quality of plastic
like rigidity, strength, resistance to heat provide essential characteristic to
the product. Therefore, the product merits classification as plastic.

“25. Rule 1 does not help to
classify the goods in the present case because Note 1(f) in Chapter 48 is not
applicable to these goods. The other relevant rule of interpretation is Rule
3(b) which provides that mixtures or composite goods consisting of different
materials which cannot be classified with reference to Rule 3(a) as in the
present case, are to be classified as if they consisted of the material or
component which gives them their essential character. In the present case, the
essential character of a decorative laminated sheet is its rigidity or strength
and its resistance to heat and moisture. These are essentially characteristics
which are imparted by resins. Paper does not possess any of these
characteristics.Therefore, applying Rule 3(b) and going by the essential
characteristicsof such laminated sheets, these goods are more appropriately
classifiable under Chapter 39.”

Thus, in determining the essential
characteristics, the above two factors
can be considered as guidelines.

g) Importance of expert opinion and other
evidentiary value

Very often, when there is dispute regarding
nature of goods, it will be advisable for the authorities as well as the
taxable person to obtain opinion from technical experts or person dealing in
the goods to know the true character of the goods. It has been consistently
held that expert opinion is to be taken to understand the nature of product but
cannot decide the classification of the goods. It has no binding effect, but
only guiding effect on the authorities because ultimately, decision of proper
classification of the product is to be decided by the jurisdictional authority.
The Delhi Tribunal in case of Guest Keen William 1987 (29)ELT 68 has
observed in para 23 as follows:

23. ……………………We have also
examined Shri Gujral’s argument that the opinion of the expert should be considered.
He cited the case of ‘K. Mohan & Co., Bombay vs. Collector of Customs,
Madras’ reported in ‘1984(15) E.L.T. 430’, and also cited ‘1984 E.C.R. 1086’
and ‘1986 (6) E.C.R. 334’. While we agree that expert opinion should be
considered, we observe that it is the language of the notification and the
facts of the matter whichshould be examined. An expert’s opinion has to be
given due respect but it cannot be the deciding, or binding factor.

The above judgement has been maintained by
the Supreme Court in case of Guest Keen Williams Ltd. vs. Collector – 1997
(95) E.L.T. A144(S.C)

It is also held that expert opinion
expressed by specialised institution has to be preferred over the opinion of
individual experts obtained at the instance of the assessee. These expert
opinions are not ignorable particularly if they are given by public
authorities. Opinion of any other persons who have knowledge in the field
regarding the product shall be given due importance for deciding the
classification of the product. The opinion of authorities like Textile
Commissioner, Law Ministry, etc. are to be given due importance for
classification of the product.

h) Importance of ISI specification

In many cases, the product is manufactured
as per ISI specification. Sometimes, the taxable person also affixes ISI mark
on the product.The ISI specification certifies the quality of the product and
not the name or character. View of the ISI shall be looked at some amount of
credibility for deciding the classification. It can be used as specialised
material in expert opinion, but other tangible consideration should also weigh
while determining the classification. Therefore, description of product in ISI
has limited value in determining the classification of goods.

i) Finance Minister’s speech

In some case, Finance Minister in the
Finance Bill may make certain reference while introducing the changes. Speech
of the Finance Minister represents the manner in which the authorities have
understood the change. Therefore, the speech of the Finance Minister can be
helpful in deciding the classification as held by the Hon. Gujarat High Court
in the case of ECHJAY Industries vs. UOI 1988 (34) ELT 42 (Guj)

j) Importance of Trade Notice/Circulars, etc.

Section
168 of GST Act empowers the Board or the Competent Authority of the State
wherever it considers necessary for the purpose of uniformity in implementation
of the Act to issue such orders, instructions or directions to GST Officers as
may deem fit. Similar provisions are contained in section 37B of Central Excise
Act. It has been consistently held that trade notices, tariff advices,
circulars, press notes etc. issued by the authorities are hardly
relevant for the purpose of classification of the product under Central Excise
Act as it cannot override the true meaning or interpretation underlined
statutory provisions. The classification has to be decided by the authorities
based on the description of relevant tariff entry and not on the basis of
tariff advice or instructions or circulars etc.

k) Report by Chemical Examiner

Very often, the authorities insist upon
testing of the product in order to determine the true composition of product
and nature of the product. Section 154 of GST Act also provides taking of
samples. It has been consistently held that the role of Chemical Examiner is
only to provide the content of the product or the nature of the product, but
not to decide classification of the product. Mention of classification in the
test report shall be ignored.The Hon. Gujarat High Court in the case of Stadfast
Paper Mills vs. Dr.Kohli, Former Collector of Central Excise, Baroda and
others 1983 (12)ELT 744 (Guj) has held that Chemical Examiner is required to
provide the constituent of different material contained in the article to
substantiate the nature of product. If the report mentions the classification
of product, the same shall be ignored. The relevant Extract of the above
judgment is as follows:

12………………… Here it should
be recalled that the evidentiary value of the report of the Chemist lies only
in so far as it supplies the data obtained by him through the Chemical
analysis. It is none of the functions of the Chemists to give an opinion as to
whether the goods in question would be covered by a particular item of the
Tariff Schedule.

l) Provision at the relevant time

Sometime, the tariff description of the
entry may be amended over a period of time. While classifying the product, the
tariff description of relevant period should only be used for classification.
For example, say, goods are supplied in the month of August 2017. Further
assume there is amendment in the tariff entry in April 2018. The classification
of the product based on tariff description in August 2017 should only be
considered while classification for supplies made in August 2017. Subsequent
amendment will not be relevant for the purpose of deciding the classification.

m) Burden to prove classification is on department

It has been held under Central Excise Act
that burden to prove is primarily on the excise authorities to establish
whether particular products falls under one tariff heading or another when the
manufacturer has classified the product in a particular tariff heading and the
department intends to classify it in a different heading. The department must produce enough evidence to substantiate
that the product must classify differently. In other words, the burden of proof
of particular classification is on the department. This burden can be shifted
to the assessee when the classification adopted by him is not totally correct.

n) Exemption notification cannot interpret the
tariff entry

Sometimes, the department provides
exemption to a particular product and specifies the tariff entry for that
product. In such cases, the department has been taking plea that the product
should be classified under the heading mentioned in the exemption notification.
It has been consistently held that exemption notification cannot interpret the
tariff entry nor it can provide norms for the purpose of classification. The
classification of product must be decided based on description of tariff entry.
The Hon. Bombay High court in case of Mechanical Packing Industries vs.UOI
1987 (32) ELT 35 (Bom) has observed in para 11 as follows:

11.Secondly,
this is exactly what the Government cannot do by virtue of an exemption
notification. If there has to be any exemption, or classification that
necessarily must be done by the legislature and not by virtue of any power to
issue exemption notification under Rule 8(1) or (2) of the Central Excise
Rules.

o) Beneficial classification

It is a well established principle that when
the goods are classified under two different items or said items or ambiguous
sentences leave reasonable doubt about its meaning, then benefit of doubt is
given to the manufacturer and the classification should be adopted which is
beneficial to the manufacturer. This is based on the principle that when the
legislature has not clearly laid down the provisions of law benefit of doubt is
given to the manufacturer. The Hon. Bombay High Court in the case of Garware
Nylons Ltd. vs. UOI 1980 (6) ELT 249 (Guj) has held that the classification
beneficial to the assessee should be adopted.

p) Jurisdiction to decide classification

The jurisdiction to decide the
classification is on the jurisdictional officers of the supplier of
goods/service. The classification cannot be decided by the jurisdictional
officer of recipient of goods/service. They have no authority to change the
classification adopted by supplier of goods/service. The Hon. Supreme Court in
the case of Sarvesh Refractories, 2007 (218) ELT 488 (SC) has held that
classification cannot be changed by jurisdictional officer of recipient. The
relevant extract of the above mentioned judgment is as follows:

6. The finding recorded by the
Tribunal is unexceptionable. We agree with the view taken by the Tribunal that
the appellant could not get the classification of ‘Loadall’ changed to Heading
84.27 from 84.29, as declared by the manufacturer. Insofar as the penalty
imposed by the authority-in-original is concerned, we are of the view that a
case for imposition of penalty is not made out and accordingly the same is set
aside and deleted. Rest of the order of the Tribunal restoring the order of the
authority-in-original is confirmed.

The taxable person shall apply the above
principles for the purpose of classifying the goods or services.

Classification of composite supply

In trade parlance when both the goods or
services are supplied, it is considered as a ‘works contract’. However, under GST the ‘works contract’ has
been defined in Section 2(119) as follows:

“119. “works contract” means a contract for building,
construction, fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation, alteration or
commissioning of any immovable property wherein transfer of property in goods
(whether as goods or in some other form) is involved in the execution of such
contract.”

The definition of ‘works contract’ can be
divided into following two parts:

a) It should be contract for building,
construction, fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation, alteration or
commission;

b) It should result in an immovable property
wherein transfer of goods is also involved.

Thus, as a result of provision of supply,
the contract shall result in immovable property. If it does not result in
immovable property, the supply cannot be considered as a supply of ‘works
contract’.

If the contract of supply involves both
supply of goods or services and does not result in immovable property, the
supply can be considered either as a mixed supply or composite supply. The
‘mixed supply’ and ‘composite supply’ has been defined in section 2(30) and
2(74) of the GST Act which reads as follows:

30. “composite
supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of
goods or services or both, or any combination thereof, which are naturally
bundled and supplied in conjunction with each other in the ordinary course of
business, one of which is a principal supply.”

Illustration: Where goods are packed, and
transported with insurance, the supply of goods, packing materials, transport
and insurance is a composite supply and supply of goods is a principal supply.”

74. “mixed supply” means two or more individual supplies of goods
or services, or any combination thereof, made in conjunction with each other by
a taxable person for a single price where such supply does not constitute a
composite supply.

Thus, the composite supply will be
classified as a supply of goods or service based on principal supply. Hence in
any composite supply, the principal supply is required to be determined. For
example, a person books a ticket from Mumbai to Delhi in Rajdhani Express. The
railways provide the service of transportation of passengers which is a
principal supply. However, in a train the food is also served and bed rolls are
also provided. These two supplies of food and bed rolls are to make the supply
of transportation of passengers more convenient and comfortable. Therefore, as
per section 2(30) of the GST Act, all the three supplies will be classified as
‘transportation of passengers’ and the tax rate applicable to transportation of
passengers will be payable by the railways.

However, in many cases, it becomes very
difficult to determine the principal supply in composite supply. The Honourable
Supreme Court has laid down certain principles for determining the essential
character of the product. These principles can be helpful in determining the
principal supply of a product. These principles are:

a. Cost of components of
the product—

The Hon’ble Supreme Court in the case of Xerox
India Ltd. vs. CC 2010 (260) ELT 161 has determined the classification of
multi-functional printing machines. The assessee claimed classification under
Chapter heading 8479.89, whereas the revenue claimed classification under
Chapter heading 847160. The machine performs various functions of printer, fax,
copier and scanner. The court observed that printing function emerges as
principal function and gives the machine its essential character.In arriving at
the principal function, the court held that, in case of product XeroxRegal
5799, 85% of its total parts and components and manufacturing cost is allocated
to printing. Similarly, in case of product Xerox XD 155df model, 74% of the
parts and components along with cost are allocated to printing. Similar
principle of determining the essential characteristic based on cost has been
laid down in various other judgements. Therefore, this is one of the criteria
which can be applied for the purpose of determining the essential
characteristic.

b. Functionality of the product
–

In the case of CCE, Hyderabad vs.
Bakelite Hylam Ltd. 1997 (91) ELT 13 (SC) the issue was regarding
classification of decorative laminate sheet where paper constituted 60% to 70%
of the total weight and other input was plastic which constituted 30% to 40% of
the total weight. The Hon’ble Supreme Court in para 25, reproduced below, held
that the essential characteristic is given by plastic. The quality of plastic
like rigidity, strength, resistance to heat provide essential characteristic to
product. Therefore, the product merits classification as plastic.

“25. Rule 1 does not help
to classify the goods in the present case because Note 1(f) in Chapter 48 is
not applicable to these goods. The other relevant rule of interpretation is
Rule 3(b) which provides that mixtures or composite goods consisting of
different materials which cannot be classified with reference to Rule 3(a) as
in the present case, are to be classified as if they consisted of the material
or component which gives them their essential character. In the present case,
the essential character of a decorative laminated sheet is itsrigidity or
strength and its resistance to heat and moisture. These are essentially
characteristics which are imparted by resins. Paper does not possess any of
these characteristics.Therefore, applying Rule 3(b) and going by the essential
characteristics of such laminated sheets, these goods are more appropriately
classifiable under Chapter 39.”

Thus, in determining the essential
characteristic, the above two factors can be considered as guidelines.

Thus, the functionality test or the test of
cost of product can be applied for the purpose of determining the principle of
supply.

This principle can be applied to
comprehensive AMC. In case of comprehensive AMC, the intention of the recipient
is to ensure that the equipments run in a smooth condition, so that the maximum
benefit of the equipment can be derived by the recipient. Therefore, the
supplier of service regularly visits and inspects the equipments. He carries
out the function of cleaning, washing and greasing wherever required for the
equipments. However, wherever requbired, the service provider will also carry
out the replacement of the part which is covered in the contract. There may or
may not be any replacement of any part. Therefore, in this case, applying the
principle of functionality test, the service appears to be predominant and
accordingly the entire contract shall be classified as a service contract
levied to tax rate of 18%. It is quite possible that the part if any which is
replaced in the performance of the contract may attract 28% tax. However, since
it is a composite supply, where service is a principal supply, therefore, the
rate of tax would be 18%.

Conclusion

The classification of goods or services has
always been a matter of dispute. One will observe from the various rates
approved by the GST Council that the tax rate may be 18% or 28%. The difference
of 10% in tax rate can always result in area of dispute where the taxable
person proposes to classify the product under the head which attracts 18% and
the department classifies the product which attracts 28%. The certainty in tax
rate in such a case is very difficult. In such circumstances, more particularly
when the recipient is unable to get any of the credit of taxes paid, the
dispute will be very long drawn.

shailesh.kwebmaker

Place of Supply of Services – Critical Analysis

Introduction

The Goods and Services Tax [“GST”] is a landmark piece of
legislation to be introduced in India. It is a destination based tax on
consumption of goods and services i.e., the tax should accrue to the taxing
authority which has jurisdiction over the place of consumption. For this
purpose, one needs to determine what is popularly known as Place of Supply
[“POS”] i.e. the place where goods or services have been supplied so as to
decide the taxing jurisdiction. ‘Place of Supply of Services’ [“POSoS”]¹alongwith the ‘Location of Supplier of Service’ [“LS”] would
determine whether the supply is intra-state or inter-state, that are the two
types of supplies in GST but having different GST implications.

_________________________________________________________________________________________________

1 The author while
dealing with the concept of Place of Supply of Service has assumed that the
basic concepts such as supply, dual levy and input tax credit mechanism has
already been explained in other articles. All those concepts are relevant for
study of POS

Types of Supply

Intra-state supply will be the case where the LS and POS
are in the same State. Inter-state Supply would be a case where LS is in
one state and POS is in another state. Since there are other kinds of
Inter-state supply as well, for ease of reference we refer to this Inter-state
supply as Domestic Inter-state supply.

There are four types of Inter-state supplies as envisaged by
section 7 of the Integrated Goods and Services Tax Act, 2017 [“IGST Act”]:

(i) Domestic Inter-state supply i.e. supply
between two states.

(ii) Cross border supply.

(iii) Supply to or by a

a. SEZ Developer; or

b. SEZ Unit.

(iv) Non Intra-state supply not covered above.

Domestic Inter-state supply is a case where the LS and
POS are:

(i) in two different States; or

(ii) in two different Union Territories; or

(iii) one in a State and another in a Union
Territory.

N.B.: For ease of
reference, while referring to Domestic POSoS in this article, the elucidation
of the provisions will be in respect of (i) above though it would be the same
for (ii) and (iii).

Cross Border supply of service will cover the following
supply of services:

(i) Import of Services.

(ii) Export of Services.

N.B.: (i) Import of
services and export of services is separately
explained in Annexure 1 attached.

(ii) On a perusal of the said
Annexure 1, it will be noted that in respect of export of services under GST
scenario, the condition of receipt of foreign currency is a must as against the
current Place of Provision of Services Rules, 2012, where the said condition of
receipt of foreign currency is relevant only to the extent of allowance of
input credit in respect of services used for exports but service tax would not
be payable.

Place of Supply of Services [“POSOS”]

The POSoS is the Heart of GST which is very likely
to be subjected to “Attacks” post GST implementation. A proper study of
POSoS may ensure “Bypass” ensuring no need of a “Stent” or a “Stunt”.

As explained in the earlier paragraphs, two factors are
relevant to determine whether the supply is inter-state or intra-state viz. LS
and POSoS. Further, as per the POSoS provisions, the basic
principle is that the place of supply of service shall be the ‘Location of
Recipient of service’ [“LR”]. However, exceptions have been provided in
case of performance based services, immovable property based services, certain
specified services and transportation service etc. where other criteria
such as location of supplier of service, location of performance of service,
location of immovable property etc. are relevant. Thus in effect, there
would be three factors which are relevant in determining whether the
supply is intra-state or inter-state viz. i) LS; ii) LR; and iii)
POSoS. The ‘Location of Supplier of Service’ and ‘Location of
Recipient of Service’ are defined separately in GST based on certain tests.
Of course, these tests will really test the legal acumen of assessee,
department and the judiciary in the years to come. In fact, to locate the LS
or LR would be in many cases a Big Challenge. It is separately being
dealt in Annexure 2 attached so as not to disturb the flow of the article on
the subject under consideration viz. POSoS. However the readers are
advised to carefully read the said Annexure 2 before proceeding further. In
fact. it is MOST IMPORTANT!

Once the LS and LR both are determined, it
would be necessary to determine the POSoS in order to determine whether
the supply is inter-state or intra-state.

Determining the POSoS has always been a challenging
task world over. However, internationally, the POSoS is generally
determined in a cross border transaction i.e. where either the Service provider
or the Service recipient is abroad and the other is in home country. However,
Indian Curry and Indian Laws are always spicy!!! The GST in India has
complicated the entire issue of POSoS by its dual structure [i.e.
Central Tax (“CT”) & State Tax (“ST”)]. Thus, the study of POSoS would
involve:

(i) Study of Domestic POSoS i.e. where LS
and LR both are in India. [Section 12 of IGST Act]

(ii) Study of Cross Border POSoS i.e. where
either LS or LR is outside India. [Section 13 of IGST Act]

Keeping in mind the constraints of space in this article [Of
course also the reader’s tolerance level – otherwise there would be a taxable
supply of tolerating an act – Consideration???], I would deal with the Domestic
POSoS which is unique and has raised various challenges and issues. As
regards the Cross border POSoS; they are similar to the existing Place
of Provision of Service Rules, 2012 under the Service tax law, and hence I
shall deal with it very briefly.

Domestic Place of supply of Service [Section 12 of the IGST
Act]

While the catchword is “One nation, One Tax”, The Central
Goods and Services Tax Act, 2017 [“CGST Act”] and The State Goods and Services
Tax Act, 2017 [“SGST Act”] have been so designed that each state is an
independent taxing jurisdiction. Each state has been ring fenced i.e. a
tax paid in one state cannot be adjusted against tax liability of another
state. Further, Inter – unit supply between an unit in one State to an unit in
another State though belonging to the same entity is considered as
supply. The LS and POS will also have far reaching impact on
ultimate cost of goods and services based on the credit availability. Thus, the
study of Domestic POSoS is most crucial to the business.

Section 12(1) of the IGST Act provides for determination of
the Domestic POSoS i.e. where the LS and LR both are in
India. The provisions dealing with Domestic POSoS for different
situations are explained below.

General principle – POSoS is Location of
service recipient [Section 12(2)]

The general or default principle is that the POSoS is
the –

(i) ‘LR’ if the supply is made to a
recipient registered for GST (i.e. B2B transactions);

However in case of supply to an unregistered person (i.e. B2C
transactions), the POSoS will be –

(a) ‘LR’ where the recipient’s address is
available in the records of the supplier; and

(b) ‘LS’ in other cases.

The above general principle would apply unless the
transaction falls within any of the other sub-sections of Section 12.

POSoS relating to immovable property would be the
location of immoveable property [Section 12(3)].

The POSoS of the following services shall be the place
where the immovable property is located or intended to be located [i.e.
property to come into existence]:

(i) Services provided directly in relation to
an immovable property e.g. construction, repair, renovation of a building, etc.
Services remotely connected to immovable property would not be covered u/s.
12(3) e.g. real estate feasibility studies or advice on capital gains, etc;

(ii) services provided by experts e.g. architects,
interior decorators, surveyors, engineers, and other related experts or estate
agents;

(iii) grant of rights to use immovable property.

(iv) carrying out or co-ordination of construction
work;

(v) Provision of accommodation in immovable
property for organising marriage or reception or matters related thereto,
official, social, cultural, religious or business function including services
in relation to such function at such property;

(vi) Ancillary services to above 5 services.

POSoS relating to lodging accommodation in immovable
property or boat or vessel would be the location of immovable property or boat
or vessel [Section 12(3)].

The POSoS by way of lodging accommodation in a hotel,
inn, guest house, home stay, club or campsite, by whatever name called, and
including a house boat or any other vessel and ancillary services thereto shall
be the place where the immovable property or boat or vessel is located
or intended to be located [i.e. property to come into existence].

Comments: When a company’s employee based in
Mumbai goes to Delhi for office work, the supply for hotel accommodation would
be an intra-state supply [LS and POSoS fall in Delhi] but the Delhi CT+ST
charged by hotel may not be available as credit to the Mumbai-based company due
to the ring fencing.

N.B. (i) Where
the location of immovable property or boat or vessel is located or intended to
be located outside India the POSoS shall be the ‘LR’ in India. [Proviso to Section
12(3)]

Comments: This is
akin to the existing rule 8 read with rule 5 of the Place of Provision of
Services Rules, 2012 where the place of provision of service is where the ‘LR’
is situated and not where the immovable property is situated.

(ii) Where the
immovable property or house boat or vessel is in more than one State/Union
Territory [“UT”], the supply would be considered to be made in each of
respective State or UT in proportion to value for service separately collected
or determined as per contract / agreement and if there is no contract /
agreement then on such other basis in the manner prescribed.

Comments: It would
involve a laborious exercise to determine the POSoS when the boat wherein the
accommodation services are provided, moves from one state to another state.
Perhaps it would have been better to provide that the POSoS be the place of
commencement of journey by the house boat or vessel.

Performance based services [Sections 12(4) and 12(5)]

Supply of

POSoS

u Restaurant
& catering services

u Personal
grooming, fitness, beauty treatment; &

u Health
services including cosmetic / plastic surgery

Location
where services are actually performed

u Training and performance appraisal services
to –

• Registered person (B2B)

• Unregistered person (B2C)

• Location
of such registered person

• Location
where services are actually performed

Event Based services
[Sections 12(6) and 12(7)]

*Supply of services by way of*	*POSoS*
1. Admission to specified events* and services ancillary to such admission	Location of event
2. Admission to amusement park or any other place including ancillary services	Location of such park / place
3. (i) Organisation of specified event including conference, fair, exhibiton, celebration or similar event (ii) services ancillary to organisation of above events; & (iii) assigning of sponsorship to above events provided : • To registered person (B2B) • To unregistered person (B2C) – (a) For event held in India (b) For event held outside India	• Location of such person (a) Location where event is held (b) Location of recipient of service
N.B. Events held in more than 1 state for a consolidated amount	Supply in each state/UT in proportion to value of service separately collected or determined from terms of contract / agreement or on other basis prescribed

Supply of services by way of

POSoS

1. Admission
to specified events* and services ancillary to such admission

Location
of event

2. Admission
to amusement park or any other place including ancillary services

Location
of such park / place

3. (i)
Organisation of specified event including conference, fair, exhibiton,
celebration or similar event

(ii) services
ancillary to organisation of above events; &

(iii) assigning
of sponsorship to above events provided :

• To
registered person (B2B)

• To
unregistered person (B2C) –

(a) For
event held in India

(b) For
event held outside India

• Location
of such person

(a) Location
where event is held

(b) Location
of recipient of service

N.B.

Events
held in more than 1 state for a consolidated amount

Supply
in each state/UT in proportion to value of service separately collected or
determined from terms of contract / agreement or on other basis prescribed

*Specified Events are
cultural, artistic, sporting, scientific, educational and entertainment event.

Goods Transportation
services [Sections 12(8)]

Supply of

POSoS

Goods
transportation service (including by mail / courier) to –

• Registered
person (B2B)

• Unregistered
person (B2C)

•
Location of such person

•
Location where goods are handed

over for their transportation

Comments: This rule would apply to transport by road, rail, air and sea
whether locally or outside India provided the supplier and recipient both are
in India. An important change is that ocean freight for cargo exported for a
shipper in India would be subject to GST though presently ocean freight for
export cargo undertaken for a shipper in India is not liable to service tax in
view of Rule 10 of the Place of Provision of Service Rules, 2012.

Passenger transportation service [Sections
12(9)]

Supply of

POSoS

Passenger
Transportation Service to

• Registered person
(i.e. B2B)

• Unregistered person
(point of embarkation known)

• Point
of embarkation unknown in respect of right to passage for future use

• Location of such
person

• Place where
passenger embarks on conveyance for continuous journey*

• Refer Para 4.3
[i.e. General Rule]

*Return journey to be treated as separate journey

Services provided on board a conveyance [Section 12(10)]

The POSoS on board a conveyance including a vessel, an
aircraft, a train or a motor vehicle, shall be the first scheduled point of departure
of the conveyance on that journey.

Comments: Issues – Can it be said that
supply of packaged Drinking water/packed Biscuit is ‘Supply of goods’ and
Supply of Sandwich/Samosa is ‘Supply of Service’. While POS of Service is first
scheduled point of departure irrespective of where the food/eatables is taken
on the board, the POS of goods is the location at which the goods are taken on
board. Thus it is imperative to decide whether the said supply is supply of
goods or supply of services.

Telecommunication / data
transfer / broadcasting / cable / DTH services [Sections 12(11)]

*Supply of service by way of*	*POSoS*
u Telecom line, leased circuits, internet circuit, cable / dish antenna	Location of installation for receipt of such services
u Lease circuit installed in more than 1 state / UT and consolidated amount charged	Supply in each state/UT in proportion to value of service collected or determined from contract and in absence, on other basis as may be prescribed
u Post paid mobile connection for telecommunication / internet services	Location of billing address of service receiver in supplier’s records and if such address not available location of supplier
u Prepaid mobile connection for telecommunication / internet services / DTH services on pre-payment –
• Through sale of SIM card or voucher by selling agent, Distributor, reseller	Address of selling agent, distributor, reseller as per supplier’s record at time of supply
• Provided to final subscriber	Location where prepayment received / voucher sold
• Through internet banking/ electronic mode	Location of service receiver as available in record of supplier
u Mobile connection for tele-communication / internet services other than postpaid / pre-payment basis	Address of recipient as per supplier’s record & if such address not available location of supplier

Supply of service by way of

POSoS

u Telecom line, leased circuits, internet
circuit, cable / dish antenna

Location
of installation for receipt of such services

u Lease circuit installed in more than 1
state / UT and consolidated amount charged

Supply
in each state/UT in proportion to value of service collected or determined
from contract and in absence, on other basis as may be prescribed

u Post paid mobile connection for telecommunication / internet
services

Location
of billing address of service receiver in supplier’s records and if such
address not available location of supplier

u Prepaid mobile connection for telecommunication / internet
services / DTH services on
pre-payment –

• Through sale of SIM
card or voucher by selling agent, Distributor, reseller

Address of selling agent, distributor, reseller as per
supplier’s record at time of supply

• Provided to final
subscriber

Location
where prepayment received / voucher sold

• Through internet
banking/ electronic mode

Location
of service receiver as available in record of supplier

u Mobile connection for tele-communication /
internet services other than postpaid / pre-payment basis

Address
of recipient as per supplier’s record & if such address not available
location of supplier

Banking & Other Financial services (including stock
broking services) [Section 12(12)]

Supply of

POSoS

Banking
and Other Financial Services:

• Where Location of
recipient available in supplier’s record

• Where Location of
recipient not available in supplier’s record

• Location of
recipient of service.

• Location of
supplier of service

N.B.: The CGST law does not define what is Banking
and Other Financial Services. Does it cover only services provided by banks or
NBFC? What about merchant banking services, asset management services etc.,
which under the existing definition are covered under Banking and Other
Financial Services. The only saving grace is whether it is rule 12(2) [Para
4.3] or 12(12) [Para 4.12] it may not make a significant difference.

Insurance services [Section 12(13)]

Supply of

POSoS

Insurance
Services to:

• registered person
(B2B)

• Unregistered person
(B2C)

• Location of such
person

• Location of
recipient as per records of supplier of service

N.B.: The policy holder’s address will be
there in Insurance company’s records

Advertisement services to Central / State
Government/Statutory Body/Local Authority/UT for identifiable States [Section
12(14)]

The POSoS for the above services shall be each state
and the value of supply would be proportionate to the amount attributable for
dissemination in each State determined as per contract/agreement or in absence
of contract/agreement on any other basis as maybe prescribed

Cross –border place of supply of services [Section 13 of IGST
Act]

Section 13 of IGST Act provides for determination of the
Cross border POSoS i.e. where the ‘LS’ or ‘LR’ are outside
India [section 13 of IGST Act]. The Cross border POSoS for different
situations envisaged by section 13 are given below:

Sl. No	Description of service	Place of supply of services
1.	Basic principle (All services except if specifically covered below)	Location of service recipient. If location of recipient is not available in the ordinary course of business, then location of supplier
2.	Performance based Service [See note (i) below]	Location of performance of service
3.	Service relating to Immovable Property	Location of the immovable property
4.	Service relating to Events [See Note (ii)]	Location of event
5.	Services (2, 3, 4 above) supplied at more than one location [including location in Taxable Territory (‘TT’)]	Location in the Taxable Territory
6.	Services (2, 3, 4 above) supplied in more than one state or union territory. [See Note (iii)]	Respective State/ Union Territory. Value of supply – in proportion to value of service separately collected or based on contract/ agreement; and in case no contract – on prescribed basis.
7.	Specified Services [See note (iv)]	Location of service provider
8.	Goods Transportation services (other than mail or courier)	Place of destination of goods
9.	Passenger transportation service	Place of embarkation for continuous journey
10.	Service on board a conveyance during the course of passenger transportation	First scheduled point of departure of conveyance on the journey
11.	Online Information Database Access or Retrieval (OIDAR) services	Location of recipient of service [See note (v)]

Sl. No

Description of service

Place of supply of services

Basic principle (All services except if
specifically covered below)

Location of service recipient. If
location of recipient is not available in the ordinary course of business,
then location of supplier

Performance based Service [See note (i)
below]

Location of performance of service

Service relating to Immovable Property

Location of the immovable property

Service relating to Events [See Note
(ii)]

Location of event

Services (2, 3, 4 above) supplied at
more than one location [including location in Taxable Territory (‘TT’)]

Location in the Taxable Territory

Services (2, 3, 4 above) supplied in
more than one state or union territory. [See Note (iii)]

Respective State/ Union Territory. Value
of supply – in proportion to value of service separately collected or based
on contract/ agreement; and in case no contract – on prescribed basis.

Specified Services [See note (iv)]

Location of service provider

Goods Transportation services (other
than mail or courier)

Place of destination of goods

Passenger transportation service

Place of embarkation for continuous
journey

10.

Service on board a conveyance during the
course of passenger transportation

First scheduled point of departure of
conveyance on the journey

11.

Online Information Database Access or
Retrieval (OIDAR) services

Location of recipient of service [See
note (v)]

Notes:

(i) Performance based services are of two types:

A. Work upon goods: services supplied
in respect of goods made physically available by service recipient to
the supplier or to any person acting on behalf of the supplier in order to
provide the service e.g. Repairs, Storage and cargo handling. There are two
exceptions.

(a) Remote access – POSoS is Location of
goods at the time of supply of service;

(b) Goods temporarily imported into India for
repair and re-exported subject to the condition that goods not put to use in
India (except for such repair). POSoS under sl. no. 2 would not apply.
Basic principle (sl. No. 1) would apply.

B. Work upon individuals: Services
supplied to individuals physically present in their personal capacity or on
service recipient’s behalf e.g. beauty treatment, plastic surgery, etc.

(ii) In this case, it would cover supply of
admission to an event as well as organisation of event and services ancillary
thereto. Thus, in case of cross-border supply of event based services, POSoS
is location of event but in case of Domestic POSoS the location of event
is relevant for the services of admission but for organisation of the event,
the POSoS is different as explained in para 4.7.

(iii) Thus, on a reading of sl. No. 5 & 6 above
it appears that if an architect in India provides services for his client’s
immovable property abroad, the POSoS would be outside India. But
however, if he supplies services to the same person for 3 properties – one in
UK, one in Karnataka, and one in Kerala, the POSoS for the entire
consideration would be Kerala and Karnataka.

(iv)
Specified services are:

(a) Services supplied to Account holders by banks,
Financial Institutions, NBFCs ;

(b) Intermediaries

(v) Person receiving OIDAR services is deemed to be
located in Taxable Territory (TT) –

if any 2 of the following non-contradictory conditions are
satisfied viz.:-

– location of address presented by service
recipient (SR) via internet is in TT;

– credit card /debit card/ store value card/
charge card/ smart card/ any other card by which SR settles payment has been
issued in TT;

– SR’s billing address is in TT;

– Internet Protocol [IP] address of device used
by SR is in TT;

– SR’s bank account used for payment maintained
in TT;

– country code of SIM card used by SR is of TT;

– location of SR’s fixed land line through
which service is received by person, is in TT.

Challenges

I have dealt with some of the challenges in the
implementation of GST qua POS provisions while elucidating the provisions
to determine Location of supplier of service and Location of recipient of
service in Annexure 2. I have also given my comments on some of the significant
Domestic POSoS provisions.

However as explained in Annexure 2, the Biggest Challenge is
WHO is providing service to WHOM and from WHERE? This will be the most crucial
question to be answered. This will also involve examining whether LS and
LR be – the contracting office or actual performing / receiving office.
There are several situations that may arise when the determination of three
factors viz. LS, LR and POSoS may pose a challenge. Due to
restrictions of space, I take up only 2 case studies.

CASE STUDY 1

In a typical case of contract for renting of offices, say, a
landlord based in Mumbai owns several properties at different places in India
which he has given on rent to various corporates across India. The landlord’s
Principal Place of Business [“PPoB”] is in Mumbai and accordingly, all the
license/rental agreements are entered into by the landlord from his PPoB in Mumbai.
This may be given by way of table.

Sl. No	Location of property	Location of licensee’s office signing the license agreement
1.	Delhi Office premises – P1	Mumbai – L1
2.	Delhi Office premises – P2	Delhi – L2
3.	Delhi Office premises – P3	Chennai – L3
4.	Mumbai office premises – P4	Mumbai – L4
5.	Mumbai office premises – P5	Hyderabad – L5

Sl. No

Location of property

Location of licensee’s office signing the license agreement

Delhi Office premises – P1

Mumbai – L1

Delhi Office premises – P2

Delhi – L2

Delhi Office premises – P3

Chennai – L3

Mumbai office premises – P4

Mumbai – L4

Mumbai office premises – P5

Hyderabad – L5

In the above case, the issue arises whether the landlord has
Place of Business [“PoB”] at all places [i.e. where the properties are
located], since that would decide LS which is one of the important
factors to determine whether the supply is intra-state or inter-state. A view
that could be taken is that the landlord is located only in Mumbai since the
registered PoB is Mumbai and the other locations cannot be considered as Fixed
Establishment [“FE”] since he has no people working in those locations so as to
constitute a FE. The result would be as under;

Sl. No	Location of property	Location of licensee’s office signing the license agreement	Location of Supplier	Place of Supply [Section 12(3) Para 4.4]	Nature of supply
1.	Delhi Office premises – P1	Mumbai – L1	Mumbai	Delhi	Inter – state
2.	Delhi Office premises – P2	Delhi – L2	Mumbai	Delhi	Inter – state
3.	Delhi Office premises – P3	Chennai – L3	Mumbai	Delhi	Inter – state
4.	Mumbai office premises – P4	Mumbai – L4	Mumbai	Mumbai	Intra – state
5.	Mumbai office premises – P5	Hyderabad – L5	Mumbai	Mumbai	Intra – state

Sl. No

Location
of property

Location
of licensee’s office signing the license agreement

Location
of Supplier

Place
of Supply [Section 12(3) Para 4.4]

Nature
of supply

Delhi Office premises – P1

Mumbai – L1

Mumbai

Delhi

Inter
– state

Delhi Office premises – P2

Delhi – L2

Mumbai

Delhi

Inter
– state

Delhi Office premises – P3

Chennai – L3

Mumbai

Delhi

Inter
– state

Mumbai office premises – P4

Mumbai – L4

Mumbai

Intra
– state

Mumbai office premises – P5

Hyderabad – L5

Mumbai

Intra
– state

N.B.: In the last case, the licensee in Hyderabad
may not get the credit of Maharashtra CT + ST due to ring fencing as explained
in Para 4.1 above

CASE STUDY 2

A Partnership firm of 8 CAs specialising in internal audit
based in Mumbai [Head Office (“H.O”)] having branches in the cities of Delhi,
Bangalore and Chennai gets an internal audit assignment from a leading
Mumbai-based IT company who also have branches in the cities of Delhi,
Bangalore and Chennai. The letter of engagement for the assignment comes from
the registered office of the client based in Mumbai addressed to the CA Firm’s
Head Office in Mumbai. But the CA firm does the internal audit of Delhi,
Bangalore and Chennai using its resources at the relevant locations viz.,
Delhi, Bangalore and Chennai. Thus, an issue may arise as to which unit of
CA firm should bill to which unit of client and how much.

The issue in such cases that arises is to determine the LS
or LR, the contracting unit is relevant or performing unit is
relevant.

(i) Firstly the letter of engagement is given to
the Mumbai CA H.O. from the Mumbai based office of client

(ii) The planning of audit, maintaining client
interface, signing, responsibility and accounta-bility are all from H.O. at
Mumbai.

It is not possible to slice the value attributable to each
location of the supplier or the recipient so as to say that supply comes from
one LS to a specific LR. The best course of action would be to
consider location of contracting party [i.e. Head office of the CA firm] as ‘location
of supplier’ and accordingly the Head Office should bill to the client and
the concerned branches should bill to the Head Office at the appropriate rate
as may be prescribed. Of course this would have to be backed by a Policy
Document / Framework so as to provide –

i) Only H.O would interact with client.

ii) The branches provide service to H.O and not to
client – Accountability, service level expectation etc.

iii) Branches bill H.O at cost plus.

Conclusion

The analysis and the views given above have to be taken by
the reader with a pinch of salt considering that GST is a very new law. GST law
has evolved over the last 6 months with at least 3 versions. It is also still
evolving and almost every day a rule or a clarification is coming out and many
issues are still unfolding. By the time this article reaches you, there could
be some more changes in the rules / notifications. Please note the author is
also evolving and revolving with the GST law. In time both the law and the
author will mature. Till then HAPPY GST (Great Super Time) with GST!!!

Annexure 1

Relevant extract of section 2 of IGST Act:

“2(11)
“import of service” means the supply of any service, where

(a) the supplier of service is
located outside India,

(b) the recipient of service is
located in India, and

“2(6)
“export of service” means the supply of any service when

(a) the supplier of service is
located in India,

(b) the recipient of service is
located outside India,

(d) the payment for such service has
been received by the supplier of service in convertible foreign exchange, and

(e) the supplier of service and
recipient of service are not merely establishments of a distinct person in
accordance with explanation 1 of section 8;

N.B.:
In respect of export of services under GST scenario, the condition of
receipt of foreign currency is a must as against the current Place of Provision
of Services Rules, 2012, where the said condition of receipt of foreign
currency is relevant only to the extent of allowance of input credit in respect
of services used for exports, but service tax would not be payable.

Annexure 2

Location of supplier of service and Location of recipient of
services [sections 2(15) and s. 2(14) of the IGST Act]

A2. Provisions to determine Location of
supplier of service and Location of recipient of service

A2.1 The ‘location of supplier of services’ and
‘location of recipient of services’ are most relevant to determine the
nature of supply – whether intra-state or inter-state. The provisions to
determine the LS and LR are explained below.

A2.2 The ‘location of the supplier of services’
[Section 2(15) of IGST Act] is to be determined by applying the following 4
rules in seriatum

s.2(15)

Supply made from

(i)

Registered
Place of Business (“PoB”)

Registered
PoB (see note 1)

(ii)

Fixed
Establishment (“FE”) other than Registered PoB

FE
(See note 2)

(iii)

More than one establishment, whether PoB or FE

Location of establishment most directly concerned with the
provision of supply

(iv)

In
absence of PoB or FE

Usual
Place of Residence [see note 3]

Notes:

1. Place of business includes –

– Place from where business ordinarily carried
on and includes warehouse, godown, any other place where goods are stored or
goods/services are provided / received

– Place where Account books are maintained

– Place where taxable person engaged in
business through agent

[Section 2(85) of CGST Act]

2. “Fixed establishment” means a place (other
than the registered place of a business) which is characterised by a sufficient
degree of permanence and suitable structure in terms of human and technical
resources to supply services or to receive and use services for own needs.
[Section 2(50) of CGST Act]. In a nutshell, three factors are determinative
of a ‘fixed establishment’: (i) a place; (ii) people, (iii) with
a degree of ‘permanence’ [the three PPPs like a three piece suit!].
The definition has almost all the attributes of a PoB. In fact, all FEs would
be a PoB.

3. ‘usual place of residence’, means –

(a) in case of an individual, the place where he
ordinarily resides;

(b) in other cases, the place where the person is
incorporated or otherwise legally constituted. [Section 2(113) of CGST Act].

A2.3 The ‘location of the recipient of
services’ [Section 2(14) of IGST Act] is to be determined by applying the
following 4 rules in seriatum

s.2(14)

Supply is received at

(i)

Registered
Place of Business

Registered
PoB [Refer Note 1 to Para A2.2]

(ii)

Fixed
Establishment (“FE”) other than Registered PoB

FE
[Refer Note 2 to Para A2.2]

(iii)

More than one establishment, whether PoB or FE

Location of establishment most directly concerned with the
receipt of supply

(iv)

In
absence of PoB or FE

Usual
Place of Residence [Refer Note 3 to Para A2.2]

A2.4 The following rules apply as to
establishments:

(i) Establishment outside India and Establishment
in India are treated as separate persons [Clause (i) of Explanation 1 to
Section 8 of IGST Act].

(ii) Establishment in a State/UT² and
Establishment outside that State/UT are treated as separate persons [Clause
(ii) of Explanation 1 to Section 8 of IGST Act]

_______________________________

2 UT
= Union Territory

(iii) A person carrying on business though a
branch, agency or representational office in a territory shall be treated as
having establishment in the territory [Explanation 2 to section 8 of IGST Act].

(iv) Where LS/PoS is in the territorial
waters (12 nautical miles from Indian shores), the LS / PoS would be in
the coastal State/UT where the nearest point of appropriate baseline is located
[Section 9 of IGST Act].

Establishment most directly
concerned in providing/ receiving a supply

A2.5 The rules provide that where services are
supplied / received from more than one establishment, whether Place of Business
or fixed establishment, the PoB/establishment most directly concerned with
the supply / receipt of the service would be relevant. This provision is going
to pose a Big Challenge. There will be several instances where the contract
with the client will be with the Head Office but the Services maybe provided
from the several branches in different states. The client also may have several
offices in different states, which are being serviced by the Service provider. The
issue is what would the LS and LR qua the transaction – the
contracting office or actual performing / receiving office. WHO is providing
service to WHOM and from WHERE? This will be the most crucial question to
be answered. What will be the factors to be taken into account to arrive at a
conclusion. This is an issue which is being pondered world over by all the
nations having GST. But generally, it concerns cross border transactions.
However, in India, it would be relevant for Domestic Inter-State supply also.
Each State may say that the supply is from their state. If it goes into
litigation, the assessee cannot ask the two States to settle between
themselves, but may have to pay the GST in one State and claim refund in
another State if matter goes against him in an adjudicating forum – thus
perhaps leaving the poor assessee in a SORRY STATE.

A2.6 In order to ascertain the ‘establishment
more directly concerned in provision of supply’, the test adopted is to
consider the significance of the activities performed by the establishments in
question and the part they play in their contribution to the service supplied.
[Chinese Channel (Hongkong) Ltd. vs. Commissioners of Customs and Excise
(1998) Simon’s Tax Cases 347 (High Court of Justice – Queens Bench Division,
UK)]. In this context when the present Place of Provision of Services Rules,
2012 was introduced, the CBEC’s Education Guide has given guidance as follows:

“This will depend on the facts and
supporting documentation, specific to each case. The documentation will include
the following:-

– the contract(s) between the service
provider and receiver;

– where there are no written contracts, any
written account (documents, e-mail etc.) between parties which sets out
in detail their understanding of the oral contract;

– details of how the business fits into any
larger corporate structure;

– the establishment whose staff is actually
involved in the execution of the job;

– performance agreements (which may sbe
indicative both of the substance and actual nature of work performed at a
particular establishment).”

However, we are still left with the issue
whether establishment in Contracting State or the establishment in the
Performing State is more important to determine where is the LS or LR.
In the author’s view, unless the context otherwise requires, the establishment
contracting with the client may be more relevant.

shailesh.kwebmaker

Place of Supply of Goods under GST

Introduction

‘One Nation One Tax’ – The
new system for indirect tax – GST, is now set to commence in India. For quite a
long time it has generated public debate and its shape was eagerly awaited by
all stakeholders. Now the parliament has passed the laws required by the
Centre, and, the States are in the process of doing so. At present, the Central
Goods and Services Tax (CGST), Union Territory Goods & Services Tax Act
(UGST), State Goods and Services Tax (SGST) for many States and Integrated
Goods and Services Tax (IGST) Acts are available.

On going through the
provisions contained in these Acts, it appears that the laws are drafted by
incorporating provisions from different existing Acts, which are being subsumed
in GST like Excise, Service Tax and State VAT etc. Therefore, for the
trading class, some of the provisions are very new and they feel that the
system will be a bit complicated along with too much time-consuming compliance
requirements. However, it is said that any new law has such teething problems,
which may get resolved in the days to come as well as due to steps taken by the
Government to resolve such issues by necessary modifications and clarifications
from time to time. We expect the same, in relation to GST.

Situs of sale

So far as indirect tax on
goods is concerned the basic requirement is to identify the place where tax is
to be discharged.

For sale transactions of
goods, there are various ingredients connected with same like, place of buyer,
place of preparing invoice, place of payment, place of actual despatch, place
of transfer of ownership in goods etc.

In the old days, (prior to
incorporation of Central Sales Tax Act) the States used to levy tax on sale
transaction on the basis of ‘nexus theory’. In other words, taking nexus of any
one ingredient happening in their State, tax was sought to be levied in that
state. A simple example can be that a seller in Maharashtra sells goods to
buyer in Delhi. Maharashtra Government used to levy tax on said sale
transaction in Maharashtra as the seller and the goods were located in their
State. The Delhi Government would try to levy tax on said transaction on the
ground that actual sale i.e. transfer of ownership took place in their State.
Thus on one transaction, more than one State could lay their claim of tax.

This created chaos and
trading community was required to face multi-state tax on one sale
transaction.

Central Sales Tax Act (CST
Act)

To avoid the above
confusion and unwarranted multi-state levy, the Central Sales Tax Act, 1956 was
enacted. One of the main objects of the Act was to determine place of sale i.e.
situs of sale. Section 4(2) of CST Act reads as under:

“S.4. When is a sale or
purchase of goods said to take place outside a State.—

(1) Subject to the
provisions contained in section 3, when a sale or purchase of goods is
determined in accordance with sub-section (2) to take place inside a State,
such sale or purchase shall be deemed to have taken place outside all other
States.

(2) A sale or purchase of
goods shall be deemed to take place inside a State, if the goods are within the
State –

(a) in the case of specific or ascertained goods, at
the time of the contract of sale is made; and

(b) in the case of unascertained or future goods, at
the time of their appropriation to contract of sale by the seller or by the
buyer, whether assent of the other party is prior or subsequent to such
appropriation.

Explanation.- Where there is a single contract of sale or
purchase of goods situated at more places than one, the provisions of this
sub-section shall apply as if there were separate contracts in respect of the
goods at each places.”

Thus, the ‘place of ‘sale’
was linked with physical ascertainment of goods towards sale. By the above
provision, it was laid down as to which state the sale will be deemed to have
taken place and once it was held to be taking place in one particular state, it
was to be outside all other States. This brought finality to place of sale and
this gave much required relief to the trading community. The nature of
transaction whether interstate or intra state can be decided based on movement
of goods. However, it cannot be taxable in more than one State. Till today, the
system has worked satisfactorily.

GST/IGST Act/SGST Act

The above Acts are collectively
referred to as “GST laws/GST” in this article.

Under GST, the concept of
‘sale’ is replaced by ‘supply’ which is a broad term and includes supply of
goods as well as services.

There are several
incidences by which “supply” can take place and “sale” is one of them.

So far as supply of goods
is concerned, unlike the CST Act, there is no direct provision about situs of
supply of goods. However, the supply of goods may be intra-state or
inter-state. The tax will be attracted accordingly. If it is held to be
intra-state, it will be liable to CGST/SGST and if it is held to be
inter-state, it will be liable to IGST. Situs of supply is required to
be determined to find out the State from which the supply is made and then to
decide its nature i.e. whether intra state or interstate.

Under GST, the provisions
to determine the nature of interstate/intra state supplies are contained in
IGST Act.

Relevant Provisions of
IGST Act

Section 7 defines the nature of interstate supply.

Section 8 defines the nature of intra state supply.

The nature of supply, as
to whether intra state or interstate, depends upon location of supplier and
place of supply. If both fall in same state, it will be intra state and if in
different states, it will be interstate.

The aspects related to the
above are discussed subsequently in this article.

Section 9 specifically deals with supplies in territorial
waters. It is provided that when the location of supplier or place of supply is
in territorial waters, the supply should be deemed to be in the Coastal State
or Union Territory where the nearest point of the appropriate baseline is
located. The further categorisation as to intra state or interstate should be
determined taking into consideration above position of place of location of
supplier and place of supply.

As per above provisions,
the Taxable person is required to First determine place of supply of goods. If
such place of supply creates a situation that the location of supplier is in
one state and the place of supply is in different State, there will be
interstate supply. If both are in same state, there will be intra state supply.

There is no definition of
“location of supplier”. However, place of supply is to be determined as per
section 10 reproduced below.

“10. (1) The place of
supply of goods, other than supply of goods imported into, or exported from
India, shall be as under,––

(a) where the
supply involves movement of goods, whether by the supplier or the recipient or
by any other person, the place of supply of such goods shall be the location of
the goods at the time at which the movement of goods terminates for delivery to
the recipient;

(b) where the goods
are delivered by the supplier to a recipient or any other person on the
direction of a third person, whether acting as an agent or otherwise, before or
during movement of goods, either by way of transfer of documents of title to
the goods or otherwise, it shall be deemed that the said third person has
received the goods and the place of supply of such goods shall be the principal
place of business of such person;

(c) where the
supply does not involve movement of goods, whether by the supplier or the
recipient, the place of supply shall be the location of such goods at the time
of the delivery to the recipient;

(d) where the goods
are assembled or installed at site, the place of supply shall be the place of
such installation or assembly;

(e) where the goods
are supplied on board a conveyance, including a vessel, an aircraft, a train or
a motor vehicle, the place of supply shall be the location at which such goods
are taken on board.

(2) Where the place of
supply of goods cannot be determined, the place of supply shall be determined
in such manner as may be prescribed.”

Analysis of Section 10

One of the critical issues
to decide nature of supply transaction will be to decide place of supply.
Section 10 provides clue to find the place of supply. There will be in all five
situations envisaged by section 10(1). All are required to be interpreted
harmoniously.

(a) Situation
contemplated by section 10(1)(a)- Goods involving movement

This section is applicable
where the supply involves movement of goods. Since it refers to ‘supply
involves movement’, it is understood that the situation is required to be seen
per supply transaction. The nature of goods, whether capable of movement or not
etc., is not relevant. The position can be seen with simple examples:-

A machinery as installed
in factory is for sale by auction. The term of ‘auction’ is that it will be
supplied on “as is where is basis”. Under this situation, it can be said that
movement is not involved in supply.

In the same example, if
condition appears that the recipient should move the goods to its factory, then
it can be said that movement is involved in supply transaction. Section
10(1)(a) appears to cover the second example.

The movement may be
available from written contract/purchase order or any such other relevant
documents.

If not in written form
then it can be inferred from intention of parties. In normal cases the supply
of goods will be deemed to involve movement as the recipient is expected to
take goods to its place.

However, for clarity of
nature of transaction, it will be advisable that parties mention about movement
of goods in the contract document.

Once the goods involve
movement, the next step will be to decide place of supply. As per the said
section, the place of supply will be the location of goods at the time at which
the movement of goods terminates for delivery to recipient.

It is a settled law that
the provisions should be interpreted in its plain language. Reference can be
made to the judgment of Hon. Supreme Court in case of M/s. Polestar
Electronic P. Ltd. (41 STC 409)(SC), where in the Hon. Supreme Court has
observed as under about interpretation of provision:-

“A statutory enactment
must ordinarily be construed according to the plain natural meaning of its
language and no words should be added, altered or modified unless it is plainly
necessary to do so in order to prevent a provision from being unintelligible,
absurd, unreasonable, unworkable or totally irreconcilable with the rest
of the statute. This rule of literal
construction is firmly established and it has received judicial recognition in
numerous cases.”

Applying the above
principle, the place of supply will be where the movement terminates for
delivery to recipient.

The essential fact will be
to decide when the movement terminates. If any express term in documents, the
issue can be decided accordingly. If no express term in contract, the delivery
point can be decided on inference and intention of parties and relevant facts.
There can be different situations about termination of delivery. For example,
the supply is ex-work. When such is the position, the delivery can be said to
have terminated at place of work/godown, shop of the supplier. This will be
place of supply in above transaction. Obviously, location of supplier and place
of supply being same, it will be considered to be intra-state transaction
attracting CGST/SGST.

The other situation will
be that the delivery is home delivery to recipient. In such a case, the
supplier will carry goods to godown/shop of recipient and delivery will
terminate at such place. If the location of supplier and place of supply are in different states, it will be interstate sale, attracting IGST.

There can be many other
situations arising on facts of the case. Suppose a supplier in Maharashtra has
agreed to deliver goods to recipient at its godown in Karnataka. In between,
there is a breakdown of transport vehicle, before crossing Maharashtra border.
The parties renegotiate and it is agreed that recipient will take delivery at
breakdown point (which is within Maharashtra) and will carry goods on its own
to Karnataka. Here, though initially the transaction appeared to be inter-state
(delivery point to be in Karnataka), due to change in terms, the delivery will
be deemed to terminate within Maharashtra and the transaction will be intra
state transaction.

It is felt that the
parties should make delivery termination point/place clear in the documents, to
avoid any confusion in future.

The above analysis shows
that the principle of seamless credit is not fulfilled. If a trader of
Karnataka acquires any goods within Maharashtra, where delivery terminates
within Maharashtra, the supplier will charge CGST/SGST. Even if the goods are
taken to Karnataka and consumed there, still no ITC will be eligible to trader
of Karnataka and the ITC will lapse. There will also be cascading effect,
though GST is meant for avoiding the same.

(b) Section
10(1)(b)- “Bill to ship to” model

This section is not worded
very happily. It appears that the above section is meant to cover cases where
more than two parties are involved before termination of delivery (bill to ship
to model). In existing law such transactions are identified as sale by transfer
of documents and hence have special status as per provisions of section 6(2) of
the CST Act, 1956.

If section 10(1)(b) is
dissected for proper interpretation it shows following position:

“Where the goods are
delivered by the supplier to a recipient

or any other person

on the direction of third
person

whether acting as agent or
otherwise

before or during movement
of goods

either by way of transfer
of documents of title to goods or otherwise

it shall be deemed that
the said third person has received the goods

and the place of supply of
such goods shall be the principal place of business of such person.”

The section contemplates
delivery to recipient or any other person as per direction of third person.

The reference to third
person is not comprehensible.

Normally, the owner or
would be owner of goods who has power to give direction. In my opinion, the
recipient is the correct person to give direction to supplier. What is locus
standi of third person to give direction is not clear from section and hence,
there is ambiguity in the provision.

The term ‘recipient’ is
defined in section 2(93) of CGST Act as under:

“(93) “recipient” of supply of goods or services or both, means—

(a) where a
consideration is payable for the supply of goods or services or both, the
person who is liable to pay that consideration;

(b) where no
consideration is payable for the supply of goods, the person to whom the goods
are delivered or made available, or to whom possession or use of the goods is
given or made available; and

(c) where no
consideration is payable for the supply of a service, the person to whom the
service is rendered, and any reference to a person to whom a supply is made
shall be construed as a reference to the recipient of the supply and shall
include an agent acting as such on behalf of the recipient in relation to the
goods or services or both supplied.”

Thus the person who is
going to pay consideration is the recipient. Only buyer of goods can be liable
to pay consideration and therefore, buyer can be recipient. While placing order
on supplier or afterwards, such buyer can give direction to deliver goods to
third person and the place of supply could be decided accordingly. Instead of
above logical situation, the section refers to “third person” for even delivery
to recipient and provides to consider principal place of business of third
person as place of supply.

It is felt that in the
present form, the above section does not serve any purpose.

Following pictorial
example can be seen to ascertain the position as per literal meaning of section
10(1)(b).

In this case, C will be
third person. As per plain reading of section, C should give direction to
Supplier. It appears to be unrealistic but for the sake of discussion, it is
assumed that C gives direction. In this case, the place of supply will be
principal place of C and it being in Tamil Nadu, for A the sale to B will be
interstate supply.

However, there is no clue
to decide place of supply when B bills to C. There is no third person to give
direction to B and therefore section 10(1)(b) cannot apply for transaction
between B and C. Similar will be the position in all further supply
transactions in chain like from C to D etc.

Thus, section 10(1)(b)
gives illogical and unexpected results in present form.

There is another view that
one should interpret the section in a workable manner. Under such view it is
suggested that the third person should be considered to be recipient and the
position should be analysed accordingly.

For example, in above diagram,
‘B’ will give direction to ‘A’ to delivery to ‘C’. The place of supply will be
the principal place of business of ‘C’ i.e. Tamil Nadu and the transaction
between ‘A’ and ‘B’ will be liable under IGST. The further transaction between
‘B’ to ‘C’ will also be IGST as in this supply transaction, ‘B’ is supplier and
‘C’ recipient have principal places of business in different States. Thus every
transaction will be required to be seen separately. This appears to be workable
interpretation of section 10(1)(b). However, though the above view is practical
and certainly gives desired meaning one cannot ignore the plain language and
even adjudicating authority may not agree to above workable interpretation. It
is reported that the authorities are going to issue certain guidelines about
place of supply. We hope the above confusion in section is clarified to remove
the ambiguity, which will guide traders for deciding correct nature of
transaction.

In both the above sections
10(1)(a)/(b), one more aspect is about location of supplier. Suppose the place
of business of supplier is in Delhi but goods are located in Maharashtra and
supplied to recipient of Maharashtra, the issue will arise as to in which state
the liability will arise for supplier?

Above difficulties are
being faced as neither situs of sale is provided nor “location of
supplier” is defined.

It is expected that all
such issues will be clarified at the earliest for ease of business.

With the above pending
issues of interpretation, the section 10(1)(b) lays down that place of supply
is principal place of business of third person. There is no connection with
actual place of delivery of goods or termination of delivery.

Unlike under CST Act,
under this section there is no continuation of nature of transaction during one
movement by transfer of documents of title to goods. Under the CST Act, all
transactions effected during one interstate movement of goods will remain
inter-state sales till movement terminates, irrespective of addresses of
parties etc. Under GST, every transaction will be different and one
transaction may be inter-state, the next one can be intra state, depending upon
location of supplier and place of supply. The issue of seamless credit may also
get affected due to nature of transaction being different at each stage.

Section 10(1)(c) – appears to be supplementary to section
10(1)(a)/(b). This section seems to take care where no movement is involved in
the given supply transaction. The example is already given above.

In such a case, the
transaction will always be intra-state attracting CGST/SGST.

(d) Section 10(1)(d) – Installation/assembly

Section 10(1)(d) deals with situation where installation or
assembly at site is required. The place of installation or assembly will be
place of supply. An example can be of installation of air conditioner. A
Maharashtra supplier supplies air conditioner to Gujarat recipient and installs
it as part of supply transaction. In such a case, the place of supply will be
State of Gujarat. Since the location of supplier and place of supply is in two
different States, transaction will be liable under IGST. However, there is
possibility that, Gujarat authority, considering the goods are brought in
Gujarat as branch transfer and installed in Gujarat may consider it a
intra-state state transaction in Gujarat based on above provision of section
10(1)(d).

This difficulty arises as
no connection is provided between movement of goods from Maharashtra and place
of supply, as under CST Act. Section 3(a) of CST Act provides to consider
transaction as inter-state sale if the movement of goods from moving state is linked with ultimate sale in other State.

However, under GST, there
is no such inter linking provision. Therefore, even if goods are moved from
Maharashtra for assembly in other State, there is possibility that it may be
considered as intra state sale in assembly state.

The meaning of “assembly”
and “installation” may also be a bone of contention. Mere putting the goods in
place like putting fan in hook in ceiling, will amount to installation? There
may be such debatable issues.

To avoid litigation and
further adverse contingency it is better the transactions are clearly
identified as far as possible in relevant documents.

(e) Section
10(1)(e) – On board a conveyance

Section 10(1)(e) – deals
with situation where goods are supplied on board a conveyance. “Conveyance” is
defined in section 2(34) of CGST Act as under:

(34) “conveyance”
includes a vessel, an aircraft and a vehicle;

This clause is a good
attempt to resolve the issue being faced presently. In normal course, taxation
of supplier on trains / aircrafts to passengers is a very debatable issue. It
requires per state wise detail about sales taking place in respective states.
To resolve such issue, it is provided that the place of supply will be deemed
to be place where such goods are taken on board. For example, the articles are
taken on board the train at Mumbai, which is actually sold to passengers on
running train travelling through several states.

The place of supply for
all such supplies will be one i.e. Mumbai and tax will be required to be
discharged accordingly. Whether such supply will be interstate or intra state
will further depend upon location of supplier and the place of supply, decided
as above.

Certain issues can still
arise under the above clause. For example, the goods are taken on board at
Mumbai on board an aircraft, which is travelling to Delhi. Certain goods are
sold out on board the aircraft which will mean the place of supply for such goods
will be Mumbai. After Delhi, suppose the aircraft moves to Lucknow as different
flight say from Delhi to Lucknow and remaining goods are sold on board the said
flight. Whether the place of supply will still remain Mumbai ?

The issue arises as one
journey is over and fresh journey starts with original stock. Looking to the
intention of the provision even such goods supplied on board the Lucknow
flight, the place of supply should be Mumbai. However, if a view is taken that
the goods were taken on board for particular flight and the goods taken on
board are for such particular flight, then the place of supply Mumbai will end
on termination of said flight. The next fresh journey will be separate. The
issue will again arise about place of supply. Some clarification on the above
issue will be appreciated.

Residuary – Section 10(2)

The Act provided by
section 10(2) that where the place of supply cannot be determined with
reference to earlier provisions, then the place of supply should be determined
as may prescribed. The prescription may come by Rules or notification. It can
be presumed that the prescription will solve the issues for remaining
situations as well as debatable issues with reference to situations in section
10(1), discussed above.

Place of supply of goods
imported into or exported from India

Section 11 of IGST Act
reads as under:

“11. The place of supply of goods,––

(a) imported into
India shall be the location of the importer;

(b) exported from
India shall be the location outside India.”

This section is specific
for import/export supplies.

Place of supply is
normally meant to apply to supplies of goods so as to determine nature of
supply. When goods are imported, there is supply by foreign supplier and place
of supply will be relevant to said supplier, if nature of supply is to be
determined in its hands. However, normally such situation will not arise as no
tax is contemplated on foreign exporter, who is supplier.

It appears that the above
clause about place of supply for imported goods will also equally apply to
importer and the place of supply for importer of goods will be the location of
importer. Importer is required to discharge the IGST on imported goods. For
example, importer is in Delhi and the goods are physically unloaded and cleared
at Mumbai Port. The place of supply in such case will be location of importer
and it will be Delhi. The importer in Delhi will be required to pay IGST in
Delhi under GSTN of Delhi.

Section 11 also provides
place of supply for export. In case of export the place of supply will be
located outside India. It means in such a case, the place of supply will be
place in foreign country where the goods are exported.

Since Export is zero rated
supply, it appears that above provision has no practical effect.

Conclusion

“Place of supply of goods”
is a very important aspect of GST. Payment under correct Act i.e. CGST/SGST or
IGST will depend upon the correct determination of place of supply. It will be
better if ambiguities discussed above are clarified by the authorities at the
earliest time. I hope the above discussion will be useful for initiating
further thought process on the topic.

shailesh.kwebmaker

Destination Based Taxation – The Concept of ‘Place of Supply’, Its Philosophy and Significance

INTRODUCTION

The indirect tax system in India, both at the Centre and the
States’ level, remains unduly complex, unfair, distortionary and structurally
flawed, with a narrow base and susceptible to tax avoidance and evasion. This
is despite the sincere and painstaking efforts made in the past two decades to
bring structural changes in the design of the present tax system.

Needless to say, the basic objective of any tax reform in the
‘Indirect Tax Regime’ would be to address the problems of the current system.
It should not only establish a system that is economically efficient and
neutral in application and simple to administer, but at the same time, be
capable of broadening the tax base while maintaining the autonomy of the
taxation powers of the Centre and the States guaranteed under the Constitution.
The switchover to ‘Goods and Services Tax’ (“GST”) is justified as it is
viewed that GST is capable of addressing the problems associated with the
current tax system and of achieving the above objectives.

After a long and painful wait, GST is finally knocking at the
door of every business entity in the country..! This eagerly-awaited, grand,
‘game-changer’ and gargantuan ‘Tax-reform’ is set to be implemented in the
country from July 1, 2017. If one goes by the oft-repeated, confident and clear
utterances – that brooks ‘no nonsense’ – of the top echelon of the North Block,
GST will certainly meet its destiny on this date..!

‘Place of Supply’ Provisions – Current Tax Regime vis-à-vis
GST Regime

The current Indirect Tax Regime in India is ‘origin-based’
and therefore, a formal concept of ‘Place of supply of goods’ is, as such, not
prevalent. The major principle for determining the ‘situs of sale of
goods’ as prescribed under the Central Sales Tax Act, 1956 (‘CST Act’) is the
‘location of the origin of the goods’. Thus, Central Sales Tax (CST) being
levied under the CST Act is an ‘origin-based tax’ that is against the
‘destination principle’.

Under the Service Tax regime, no doubt, ‘Place of Provision
of Services Rules’ are prescribed which are based on the ‘destination
principle’. However, a close look at these Rules would reveal that their
relevance is primarily in the context of the cross-border i.e. international
transactions in services. Since ‘Service Tax’ is a Central levy, the
determination of ‘place of supply of service’ in case of the domestic
transactions is never an issue.

However, as GST is ‘destination based consumption tax’,
it is essential that an elaborate set of principles governing ‘Place of
Supply’ (POS) for goods or services is provided. The federal character of
Indian Republic also poses another challenge when one contemplate the POS
provisions. (Please refer the discussion in the ensuing paragraphs). The
provisions for determining ‘Place of Supply’, therefore, are critical to the
whole design of GST.

The POS provisions – which are distinct for goods and
services – are contained in the Integrated Goods and Services Act, 2017
(‘IGST Act’). The POS provisions are largely based upon the ‘International
VAT/GST Guidelines’ (‘Guidelines’) issued by OECD in November, 2015. These
important Guidelines merit a brief discussion here.(For the ease of reading,
the terms ‘VAT’ & ‘GST’ are used as synonymous terms throughout the
article.)

OECD’s VAT/GST Guidelines & its significance

The Guidelines are the culmination of nearly two decades of
efforts to provide internationally accepted standard for consumption taxation
of cross-border trade, particularly in services and intangibles. The Guidelines
aim at reducing the uncertainty and risks of double taxation and unintended
non-taxation that result from inconsistencies in the application of VAT in
cross-border context.

a. Overarching purpose of a VAT: a broad-based
tax on final consumption

The overarching purpose of a VAT is to impose a broad-based
tax on consumption, which is understood to mean final consumption by
households. A necessary consequence of this fundamental proposition is that the
burden of the VAT should not rest on businesses.

The Central design feature of a VAT: staged collection
process

The central design feature of a VAT, and the feature from
which it derives its name, is that tax is collected through a staged process.
This central design feature of the VAT, coupled with the fundamental principle
that the burden of the tax should not rest on businesses, requires a mechanism
for relieving businesses of the burden of the VAT they pay when they acquire
goods, services or intangibles. There are two principal approaches to implementing
the staged collection process of VAT, one is invoice-credit method
(which is a ‘transaction-based method’) and other is subtraction
method (which is ‘entity based method’). Almost all VAT
jurisdictions (including India) of the world have adopted the invoice-credit
method.

This basic design of the VAT with tax imposed at every stage
of the economic process, but with a credit for taxes on purchases by all but
the final consumer, gives the VAT “its essential character in domestic trade as
an economically neutral tax”. As the introductory chapter to the Guidelines
explains:

“The full right to deduct
input tax through the supply chain, except by the final consumer, ensures the
neutrality of the tax, whatever the nature of the product, the structure of the
distribution chain, and the means used for its delivery (e.g. retail stores,
physical delivery, internet downloads). As a result of the staged payment
system, VAT thereby “flows through the businesses” to tax supplies made to
final consumers”.

POS Provisions : ‘A crucial cog in the GST Wheel’

The principal aim of VAT (or GST) and its central design
demand that VAT system must have mechanisms for identifying the jurisdiction of
consumption, by connecting the supplies to the jurisdiction where final
consumption of the goods or services or intangibles to take place. VAT systems,
thus, need ‘Place of Taxation’ (or ‘Place of Supply’) Rules to implement the
destination principle, not only for business-to-consumer (B2C) supplies, which
involve final consumption, but also for business-to-business (B2B) supplies,
even though such supplies do not involve final consumption. POS provisions,
thus, act as a crucial cog in the GST wheel and keeps it running
uninterruptedly and smoothly.

POS Provisions under GST Regime: Different Perspectives

The POS Provisions under GST regime can essentially be viewed
from the following perspectives, viz:

– Constitution Perspective

– Destination Perspective

– Taxability Perspective

– Seamless Credit Perspective

These are briefly discussed below:

I. Constitution Perspective

As stated above, India is a federal republic where the Centre
and the States enjoy distinct taxation powers. This division of taxation powers
between the Centre and the States is guaranteed under the Constitution of India
vide Article 246 read with Schedule VII thereof. This Constitutional Scheme of
taxation powers for the Centre and the States has ensured that the Centre
cannot levy tax on the distributive trade and the States cannot levy tax on
services.

However, the core feature of GST requires that both, the
Centre and the States have concurrent jurisdiction to levy tax on all supplies
of goods or services or both and on the same tax base. This objective is
achieved through ‘The Constitution (One Hundred and First Amendment) Act, 2016’
vide which certain significant amendments have been carried out in the
Constitution, paving a way for ultimate introduction of GST in the country.

The inevitability of maintaining the autonomy of taxation
powers of the Centre and the States as guaranteed under the Constitution has
also compelled India to adopt a ‘Dual GST structure’ rather than a ‘unified
GST structure’. Under Dual GST structure, both the Centre and the States
would concurrently levy Central GST (CGST) and State GST (SGST) respectively on
all supplies on a comprehensive basis.

In order to ensure a smooth implementation of GST regime,
keeping in mind the ‘destination principle’ and with a view to avoid any
possibility of conflicting interpretations, the powers to enact the laws
governing ‘Inter-state supplies’ are vested with the Centre only. Thus, the
statutory framework governing Inter-State supplies, imports and exports is
provided by the IGST Act that also contains the principles of determining
‘Place of Supply’ of goods or services or both.

II. Destination Perspective

The fundamental issue of economic policy in relation to the
application of the VAT/GST is whether the levy should be imposed by the
jurisdiction of origin or destination. Under the destination principle, tax is
ultimately levied only on the final consumption that occurs within the taxing
jurisdiction. Under the origin principle, the tax is levied in the various
jurisdictions where the value was added. The key economic difference between
the two principles is that the destination principle places all the firms
competing in a given jurisdiction on an even footing whereas the origin
principle places consumers in different jurisdictions on an even footing.

The application of the ‘destination principle’ in VAT
achieves neutrality in cross-border trade. Thus, in international trade,
applying this principle, exports are not subject to tax with refund of input
taxes (that is, “free of VAT” or “zero-rated”) and imports are taxed on the
same basis and at the same rates as domestic supplies. By contrast, under the
‘origin principle’, each jurisdiction would levy VAT on the value created
within its own borders.

For these reasons, there is a widespread consensus that the
destination principle, with revenue accruing to the country of import where final
consumption occurs, is preferable to the origin principle from both a
theoretical and practical standpoint. In fact, the destination principle is the
international norm and is sanctioned by World Trade Organization (‘WTO’) rules.

Because of the widespread acceptance of the destination
principle for applying VAT to cross-border trade, most of the POS provisions
are generally intended to tax supplies of goods, services and intangibles
within the jurisdiction where consumption takes place.

In theory, POS Provisions or Place of Taxation Rules should
aim to identify the actual place of business used for B2B supplies (on the
assumption that this best facilitates implementation of the destination
principle) and the actual place of final consumption for B2C supplies. However,
the Guidelines recognise that Place of Taxation Rules (or POS Provisions) are
in practice rarely aimed at identifying where business use or final consumption
actually take place. This is a consequence of the fact that VAT must in principle
be charged at or before the time when the object of the supply is made
available for business use or final consumption. In most cases, at that time,
the supplier will not know or be able to ascertain where such business use or
final consumption will actually occur. VAT systems therefore generally use
proxies for the place of business use or final consumption to determine the
jurisdiction of taxation, based on features of supply that are known or
knowable at the time that the tax treatment of the supply must be determined.
For this purpose, B2B supplies are assumed to be supplies where both the
supplier and the customer are recognised as businesses, and B2C supplies are
assumed to be supplies where the customer is not recognised as a business.

III. Taxability Perspective

POS Provisions, when viewed from ‘taxability perspective’,
involve the following considerations, viz:

– nature of supply, that is, whether the
‘supply’ is ‘Inter-state’ or Intra-State’?

– subject of supply, that is, whether supply is
of ‘goods’ or ‘services’ or ‘both’?

– category of supply that is, whether the
supply is ‘business-to-business’ or ‘business-to-consumers’?

I. ‘Inter-State Supply’ and ‘Intra-State Supply

Section 7 and Section 8 of the IGST Act define, in an
elaborate manner, the terms ‘Inter-State supply’ and ‘Intra-state supply’
respectively.

To summarise, an ‘Inter-state Supply’ of goods or services,
within the terms of Section 7, is:

i. Where the location of the supplier and the
place of supply are in two different States or two different Union Territories
or a State and a Union Territory;

ii. Supply of goods into the territory of India,
till they cross the customs frontiers of India;

iii. Supply of services imported into the territory
of India;

iv. Supply of goods/services to or by an SEZ
Developer or an SEZ Unit;

v. Supply when supplier of goods or services or
both is located in India and the place of supply is outside India;

vi. Any other supply in the taxable territory, not
being an Intra-state supply and not covered elsewhere u/s. 7.

On the other hand, an ‘Intra-state supply’ of goods or
services in terms of section 8 is where the location of the supplier and the
place of supply of goods/services are in the same State or same Union
Territory. However, ‘Intra-state supply’ shall not include:

i. supply of goods/services to or by a SEZ
Developer or SEZ Unit;

ii. supply of goods imported into the territory of
India till they cross the customs frontiers of India; and

iii. supplies made to a tourist referred to in
Section 15.

In order to determine whether the supply of goods or services
qualify as ‘Inter-state’ or ‘Intra-State’, one has to first determine the
location of the supplier and the place of supply in terms of POS provisions.

Viewed from another angle, it is also important to determine
whether a ‘supply’ is an ‘Inter-state’ or ‘Intra-state’ so as to ensure
discharge of appropriate tax liability and that is, IGST or CGST/SGST. The
adverse consequences in terms of section 19 of the IGST Act or section 77 of
the CGST Act may follow in the event of the wrong determination of the
character of supply and the consequential inappropriate discharge of tax
liability.

POS provisions facilitate the proper determination of the
‘nature or character of supply’.

II. Subject of ‘supply’: Whether ‘goods’ or
‘services’ or ‘both’?

Implementation of the destination principle i.e. adopting
practical place-of-taxation-rules (or POS rules) that identify the jurisdiction
in which final consumption occurs, raises a host of additional questions
because identification of the jurisdiction in which final consumption occurs
can be effectuated only through proxies that reflect one’s “best guess” where
final consumption is likely to occur since ‘in many (if not most) cases consumption
is not directly observable.’

Implementing the destination principle with respect to
cross-border trade in goods is relatively straight forward, based on the
assumption that the destination of the goods determined by physical flows is a
reasonable proxy for where consumption of the goods is likely to occur. Thus,
exported goods are commonly ‘zero rated’ and imported goods are taxed at the
border.

However, implementing the destination principle is more
complicated with respect to the taxation of cross-border trade in services and
intangibles than with respect to cross-border trade in goods. Until fairly
recently, cross-border trade in services attracted relatively little attention
because most services were consumed where they were performed. Consequently,
there was not much cross-border trade with respect to which a ‘destination’
needed to be identified.

This state of affairs changed dramatically with the enormous
growth in cross-border trade in services, driven by forces of globalisation and
facilitated by technological innovation. With the increasing “disconnect”
between performance and consumption or use of services in a territorial sense,
the traditional rule for determining the place of taxation of services by
reference to the service provider’s establishment becomes problematic. The
problem was exacerbated by the growth of multinational corporations, which
render services in myriad locations through complicated legal structures. The problem is not merely confined to
designing an appropriate regime for taxing cross border trade in services and
simply adopting a destination-based rule for the place of taxation of services
akin to the rule for the place of taxation of goods.

The more fundamental problem is that the enormous growth in
services involving suppliers in one jurisdiction and customer in another often
involves services that are intangible in nature, making it more difficult both
to determine the appropriate jurisdiction of ‘destination’ and to enforce the
tax on the basis of that determination, because such services are not amenable
to border controls in the same manner as goods. Such services circularly
defined as services “where the place of consumption may be uncertain” or,
perhaps, a bit more precisely, as ‘services and intangible property that are
capable of delivery from a remote location’ include services such as
consultancy, accountancy, legal and other intellectual services, banking and
financial transactions, advertising, transfer of copyright, provision of
information, data processing, broadcasting, telecommunication services, online
supplies of software and software maintenance, online supplies of digital
content, digital data storage and online gaming.

The above challenges, in
fact, raised by cross-border trade in services and intangibles are the raison
d’etre of the OECD’s VAT/GST Guidelines which also is the bedrock on which
the POS Provisions of the IGST Act rest.

III. Category of Supply: Whether B2B or B2C?

The approaches used by VAT systems to implement the
destination principle for B2B supplies and the tax collection methods used for
such supplies are often different from those used for B2C supplies. This
distinction is attributable to the different objectives of taxing B2B and B2C
supplies: taxation of B2C supplies involves the imposition of a final tax
burden, while taxation of B2B supplies is merely a means of achieving the
ultimate objective of the tax, which is to tax final consumption. Thus, the
objective of place of taxation rules (or POS Provisions) for B2B supplies is
primarily to facilitate the imposition of a tax burden on a final consumer in
the appropriate country (and/or the State) while maintaining neutrality within
the VAT system. The overriding objective of place of taxation rules (or POS
Provisions) for B2C supplies, on the other hand, is to predict, subject to
practical constraints, the place where the final consumer is likely to consume
the services or intangible supplied.

In addition, because of the different characteristics of
supplies to businesses and supplies to households, VAT systems often employ
different mechanism to collect the tax in connection with B2B and B2C supplies,
and these different mechanisms in turn often influence the design of place of
taxation rules (or POS Provisions) and of the compliance obligations for
suppliers and customers involved in cross-border supplies.

IV. Seamless Credit Perspective:

One of the many meanings ascribed to GST reads as under:

“A destination-based Value Added Tax which is levied on
‘Value Added’ to goods and services at each stage in the economic chain of
supply. Therefore, all different stages of production and distribution act as
mere ‘Tax Pass-through’ and the tax essentially sticks on the final consumption
within the taxing jurisdiction. Credit is made available across goods and
services and even across the States. GST thus, operates as a pure VAT.”

It is thus, evident that
all types of supplies, whether Inter-state or Intra-state, of goods or services
or both are likely to be covered within the tax net with only minimal
exclusions. It is therefore imperative to ensure ‘seamless credit’ across the economic
chain of supply of goods or services which is the chief aim of GST or VAT. The
availability of seamless credit will also ensure that tax is not imposed nor
does it rest on the businesses but is ultimately imposed only on the final
consumption in the hands of the final consumer. Since, in principle, GST is a
creditable/refundable tax, it shall not be a cost for the business nor a
revenue proposition for the Centre or the States.

This ‘wash-through’ nature of GST or VAT has a significant
bearing, not only on the conceptual design of IGST and its operative mechanism,
but also the designing of the POS Provisions, particularly in the context of
Inter-state transactions.

Conclusion:

A careful reading and analysis of the POS Provisions
contained in the IGST Act would reveal that the provisions are broadly in
conformity with the OECD International VAT/GST Guidelines as well as prevalent
practices in many VAT /GST jurisdictions of the world. The Guidelines are based
on certain generally accepted principles of tax policy applicable to
consumption taxes and also recognised by the Ottawa Taxation Framework
Conditions (1998). These principles are as follows:

– Neutrality: Taxation should seek to be
neutral and equitable between forms of electronic commerce and between
conventional and electronic forms of commerce. Business decisions should be
motivated by economic rather than tax considerations. Taxpayers in similar
situations carrying out similar transactions, should be subject to similar
levels of taxation.

– Efficiency: Compliance costs for
businesses and administrative costs for the tax authorities should be minimised
as far as possible.

– Certainty and Simplicity: The tax
rules should be clear and simple to understand so that taxpayers can anticipate
the tax consequences in advance of a transaction, including knowing when,
where, and how the tax is to be accounted.

– Effectiveness and Fairness: Taxation
should produce the right amount of tax at the right time. The potential for tax
evasion and avoidance should be minimised while keeping counteracting measures
proportionate to risks involved.

– Flexibility: The systems for taxation
should be flexible and dynamic to ensure that they keep pace with technological
and commercial developments.

POS Provisions will certainly be an unknown and unchartered
area for the distributive trade though a section of the manufacturers and
service providers may have some familiarity with the concept in view of the
‘Place of Provision of Services Rules’ currently in vogue under Service Tax
Regime. POS Provisions are like veins of the GST body, carrying both tax and
corresponding credit throughout the body. It is, therefore, not only essential
but also inevitable for all the stakeholders, whether taxpayers or tax
administrators or tax professionals, to gain sufficient understanding of these
provisions so as to be able to comply with the GST law correctly.

Acknowledgements:

1. International
VAT/GST Guidelines by OECD (April 2014)

2. Discussion Drafts for Public Consultation –
International VAT/GST Guidelines by OECD (Dec. 2014 – Feb. 2015)

3. A Hitchhiker’s Guide to the OECD’s
International VAT/GST Guidelines by Walter Hellerstein, University of Georgia
School of Law (18 FLA Tax Rev 589 (2016))

4. Interjurisdictional Issues by Keen &
Hellerstein

5. Jurisdiction to Tax in the New Economy by
Walter Hellerstein (38 GA.L. Rev. I. 28(2003))

shailesh.kwebmaker

“Supply” Under GST – Some Interpretational Issues

The objective of this article is to examine and analyse some
of the important interpretational issues noticed while unravelling the
definition of “Supply” in the Central Goods and Service Tax Act, 2017 (CGST
Act).

Under any taxation legislation, the levy of tax depends on
undertaking of an event. Levy of Excise Duty is on ‘manufacture or production
of goods’, while for levy of Service Tax, there has to be a ‘provision of
service’ and levy of Sales Tax/VAT triggers on ‘sale of goods’. According to
Article 366(12A) of the Constitution of India, ‘Goods and Service Tax’ means “a
tax on supply of goods or services, or both, except ………” The
definition of “supply” contained in the new GST legal framework, is central to
the ambit of its applicability. Therefore, for GST to be levied on a
transaction, it must satisfy the ingredients of definition of ‘supply’.

Section 7 of the CGST Act defines ‘Supply’ as under

“….the expression “supply” includes–

(a) all forms of supply of goods or services or
both such as sale, transfer, barter, exchange, licence, rental, lease or
disposal made or agreed to be made for a consideration by a person in the course
or furtherance of business;

(b) import of services for a consideration whether
or not in the course or furtherance of business;

(d) the activities to be treated as supply of goods
or supply or services as referred to in Schedule II.”

Whether use of the word ‘includes’ has enlarged the scope
of “supply” to include all transactions even if these are not covered in
Clauses (a) to (d) or the word “includes” is to be construed as equivalent to
“means and includes”.

Where the definition of a term employs the word “includes”,
the natural connotation is of an extensive, rather than restrictive, definition
and construction. This interpretation has been held by judiciary in many cases.
But, this interpretation may be contentious in the context of GST, as it would
render filters of applicability ineffective, granting an arbitrary taxing
power. Further, this could result in transactions that were not intended to be a
“supply”, being held to constitute “supply” for the purposes of this law.

Hence, the implications of the word “includes” in the
definition of “supply” requires consideration. While the use of the word
“includes” in a definition usually denotes that the definition is prima
facie extensive, it is capable of another construction.

Lord Watson in the Privy
Council in the case of Dilworth vs. Commissioner of Stamps¹
stated that this alternate construction may become imperative if the context of
the Act is sufficient to show that it was not merely employed for the purpose
of adding to the natural significance of the words or expressions used. It may be equivalent to ‘mean and include’ and in
that case, it may afford an exhaustive explanation of the meaning which for
the purposes of the Act must invariably be attached to those words or
expressions.

________________________________________________

1 (1899) AC 99, pp. 105,
106

The following Supreme Court judgments take cognisance of this
dicta and illustrate possible situations which allow for the word
“includes” to be construed as equivalent to “mean and include”, providing for a
restrictive and exhaustive definition of the term.

1) South Gujarat Roofing Tile Manufacturers
Association vs. State of Gujarat, AIR 1977 SC 90

Entry 22 added by the Gujarat Government to Part I of the
Schedule to the Minimum Wages Act, 1948 is followed by an explanation which
reads: ‘For the purpose of this entry potteries industry includes the
manufacture of the following articles of pottery namely – (a) Crockery, (b)
Sanitary appliances, (c) Refractories, (d) Jars, (e) Electrical Accessories…’

The Supreme Court held that constructing the explanation, the
items included in it were plainly comprised in the expression which showed that
the word ‘includes’ was not used to extend the normal meaning of the
expression. The word ‘includes’ was used in the explanation in the sense of
‘means’ and so the definition provided by the explanation was exhaustive.
Hence, Mangalore pattern roofing tiles manufactories lay outside the ambit of
Entry 22 as they were not included in the Explanation.

2) RBI vs. Peerless General Finance and Investment
Co. Ltd., (1987) 1 SCC 424

The Supreme Court held that interpretation must depend on the
text and the context. They are the bases of interpretation. One may well say if
the text is the texture, context is what gives the colour. Neither can be
ignored. Both are important. That interpretation is best which makes the
textual interpretation match the contextual. A statute is best interpreted
when we know why it was enacted. With this knowledge, the statute must be read,
first as a whole and then section by section, clause by clause, phrase by
phrase and word by word. If a statute is looked at, in the context of its
enactment, with the glasses of the statutemaker, provided by such context, its
scheme, the sections, clauses, phrases and words may take colour and appear different
than when the statute is looked at without the glasses provided by the context.

3) NDP Namboodripad vs. Union of India, (2007) 4
SCC 502

Rule 62 of Part III of the Kerala Services Rules uses the
word “includes” in the definition of “emolument”.

The Supreme Court held that the word “includes” in Rule 62
should be read as “comprises” or “consists of”. Accordingly, clearness
allowance and special allowance cannot be added to the pay for the purposes of
pension as they were not contained in the definition.

Based on above discussion, it is amply clear that use of word
‘includes’, cannot be read to enlarge the scope of ‘supply’ to any absurd
situation. Therefore, in my opinion, a supply without consideration (not
specifically covered by Schedule I will not be considered as a supply liable to
GST, despite use of the word ‘includes’ in the definition.

In the course or furtherance of business

The words ‘in the course or furtherance of business’ would be
important to determine whether particular activity can be taxed or not. The
word ‘business’ has been defined in an inclusive manner in section 2(17) giving
a wide meaning. Activities without profit motive or even infrequent or
irregular transactions are also considered as business. However, despite such a
wide connotation, in my opinion, a personal activity or activities for pleasure
or sport would still not fall under ‘business’. In the case of State of
Mysore vs. K. N. Chandrasekhar AIR 1965 SC 533 and State of Andhra
Pradesh vs. H. Abdul Bakhi AIR 1965 SC 531, it was held that the expression
‘business’ though extensively used as a word of indefinite import, in taxing
statute, it is used in the sense of an occupation, or profession which occupies
the time, attention and labour of a person and is normally with an object of
making profit and not for pleasure or sport. FAQ on GST issued by CBEC (2^nd
Edition) has clarified that selling of personal car by an individual is not a
business activity. Therefore, an intention of a person carrying out a
particular transaction can be one of the determining factors in deciding
whether it is a business transaction or not.

Consideration in kind and Barter/Exchange Transactions –

– Barter/ exchange transactions were not liable
to VAT, as these were considered as transaction without a valuable
consideration. However, GST law specifically includes these transactions in the
definition of supply. Provision of architect/construction services for which
consideration is paid by way of transfer of
flat by a builder or exchange of old phones/cars for new ones, etc.
are illustration of non-monetary consideration and liable to GST as covered by
definition of “supply”.

– In case of redevelopment projects where a
developer may agree to construct a new building for existing flat owners, the
service of construction provided by builder would be considered as provided in lieu
of additional FSI received by him. This activity would come in the category
of barter transaction and liable to GST. It is interesting to note that in
barter transactions, both person are making supply to each other and GST is
leviable on both persons, if the transactions satisfy other requirements of the
definition. In such transactions, valuation of each of the supplies will be
governed by the Valuation Rule. Rule 1, provides for considering the open
market value of the goods supplied by the supplier in such cases. Therefore,
despite the consideration for both the supplies being same in commercial sense,
the valuation for taxability under GST may differ.

Whether issuing bills payable to a creditor results in
Exchange liable to GST? The exchange is of one form of payment to another,
therefore, the transaction is in money and neither party receives goods or
services. Therefore, despite being an exchange in common parlance, it will not
be liable to GST.

Unilateral Disposal

In order to cover the disposal as a supply, it has to be made
to another person with a consideration, therefore, unilateral disposal of
waste, even though made in the course of business, e.g. flaring of gas,
disposing refuse, etc. without consideration is not a ‘supply’, consequently,
not liable to GST.

Supplies without a consideration (Schedule I)
Clause (c)

As per main definition u/s. 7(1)(a), an activity without
consideration is not “supply”. However, Clause (c) provides that in certain
cases, even though there is no consideration, the same would be treated as
‘supply’. Such cases are listed in Schedule I. Hence, normal cases of free
service by a professional or free supply of goods, like free samples or gifts
to customers would not be liable to GST, unless these are covered by the
specified transactions listed in Schedule I.

Permanent transfer of business assets

Permanent transfer or disposal of business assets where input
tax credit has been availed has been deemed to be supply even if it is made
without consideration as per entry 1 of the Schedule I. The word ‘permanent
transfer’ implies that goods should be transferred without any intention or
requirement of having to receive the goods back by a person. Typically,
donation of business assets or disposal in any other manner would qualify as
‘supply’ under this clause, where input tax credit has been claimed on the
same.

Whether destruction by natural causes or intentional
destruction would also be covered within the meaning of disposal? Destruction
by natural causes, in my view, may not be covered under the scope of disposal,
as disposal is an intentional and deliberate act as against the destruction by
natural causes. On the other hand, intentional destruction, say scrapping of a
machine, may be covered in the scope of disposal.

A linked issue to disposal of business asset is that of
double taxation. When any capital goods or plant or machinery is supplied,
proportionate input tax or GST on transaction value, whichever is higher, is
required to be paid in terms of section 18 (6) of CGST Act. On the same
transaction, GST would also be required to be paid, as it is deemed to be
supply under this entry of Schedule I. Further, no input tax credit can be
availed in case where goods are lost, stolen, destroyed, written off or
disposed of by way of gift or free samples as per section 17(5)(h) of CGST Act.
Therefore, unless an exemption is provided for one of these transactions, it
would lead to double taxation.

Gifts to employee of more than Rs. 50,000 in a financial year

Employee and employer have been deemed to be related persons
as per section 15 of CGST Act. Entry 2 of Schedule I provides that supply of
goods between related persons without consideration is also deemed to be
supply. However, the proviso to the said entry provides for an exemption
to gift up to Rs. 50,000 in a year. The term ‘gift’ has not been defined in the
Act. Therefore, whether payments like bonus, free accommodation, free
food/beverages, free transportation, diwali gifts, Sodexo coupons, ex-gratia
payments would be considered as gift? In my view, all payments which are part
of the employment contract cannot be treated as a gift. Pre-decided bonus, free
accommodation are illustrations of this category. Further, there are some
perquisites which are given to employees as part of normal business practice
like free food and beverages during office hours or use of gym in office, as
these may also not be considered as Gift. On the other hand, payment in cash or
kind like Diwali gifts or gift vouchers on achievement by a child of employee
or any ex-gratia payment may come in the category of Gift.

Clause (d) – Schedule
II

Schedule II to the CGST Act lists down activities to be
treated as supply of goods or services and all these activities have been
deemed to be supply as per clause (d) of Section 7(1).

While other clauses of section 7(1) specifically provide for
the existence or otherwise of the conditions of consideration and furtherance
of business, this clause does not mention requirement of any such condition.
Therefore, does it mean that these activities will be considered as supply,
even if they are made without consideration or are not in the course or
furtherance of business? For example, transfer of car to a daughter without any
consideration may fall in entry 1 (a) of said Schedule II. Further, some of the
entries, like 4(a) and (b) provides for coverage under the scope of ‘supply‘
whether or not with a consideration. Entry 5 (f) also prescribe a condition of
consideration. Does it mean that for other entries in the Schedule, there is no
requirement of consideration?

Transfer of Development Right (TDR) – whether covered in GST?

Entry 2(a) of said Schedule provides that any lease, tenancy,
easement, license to occupy land is a supply of service. Further, entry 5 of
Schedule III treats the activity of sale of land as not a supply. Development
Right are one of many rights attached to earth.

As per definition of Immovable Property, u/s. 3(26) of the
General Clauses Act, 1897, any benefit arising out of land is also considered
as an immovable property. As per Entry 18, List III, of Seventh Schedule to the
Constitution, land also includes rights in or over land. It has also been held
by Bombay High Court in Chedda Housing Development Corporation (2007 (3)MHLJ
402 that TDR is an immovable property. In the case of goods, the activity of
any transfer of right in goods without transfer of title has been treated as a
supply of service. However, in case of land and building, only specific modes
like lease, tenancy, easement, and license to occupy land and only lease and
letting out building has been deemed to be a supply of service.

This shows the intention of the legislature to not include
all types of transfer of rights relating to land under the purview of GST. In
the present Service Tax law, a view could have been taken that transaction of
sale of TDR was in the nature of transfer of title in the immovable property,
hence, was excluded from the definition of Service u/s. 65 B (44). However, in
GST law, exclusion is only towards sale of land. Hence, taking a view that sale
of TDR is equivalent to sale of land is fraught with risk.

Construction of Complex

Like in present Service Tax Law, construction service has
been made liable to GST. Entry 5 in Schedule II provides for this activity. In
the said entry, in addition to the issue of completion certificate, one more
condition of first occupation has been added. First Occupation requirement
would be applicable only when requirement of issue of completion certificate is
not there, say in case of villages. Explanation (2) to the said entry provides
that the expression “construction” includes additions, alterations,
replacements or remodeling of any existing civil structure. It means that any
activity, say of alteration of existing flat, would also be covered under the
scope of construction activity.

However, it is unclear as to how the test of receipt of
consideration before issuance of completion certificate or after its first
occupation can be fulfilled in such situations. In fact, there can be cases
where alteration or additions can be made in one part of building, even with
residents staying inside the building. Further, in such cases, generally there
is no requirement to issue completion certificate. Therefore, it appears that
the Explanation has been added without realising the implication thereof.

Conclusion

The soul
of any taxation law lies in the charging provisions and for any activity to be
considered leviable to GST, it must cross the bar of its coverage under
definition of ‘Supply’. Even though refinements have been made in the final
law, there still exist many areas where clarity eludes a reader. Unless the
Government comes out with reasonable clarifications, disputes are bound to
arise in GST era even for the basic and fundamental issue of definition of a
‘Supply’.

shailesh.kwebmaker

Constitutional Perspective of GST – Issues and Challenges

India is a Union of States, modelled along a federal system
of governance where legislative, administrative and executive powers are
distributed between two levels of government, Parliament and States. The Indian
Constitution bifurcates the power to enact laws between the Parliament and State
Legislatures on diverse subjects, as categorised by the three Lists to the
Seventh Schedule. In respect of matters enumerated in List I, Parliament is
delegated exclusive powers to enact laws, while in respect of matters
enumerated in List II, only State Legislatures have power to enact laws. The
prerogative to enact laws pertaining to matters enumerated in List III is
shared concurrently between Parliament and State Legislatures.

Need for the Constitutional Amendment

Prior to the enactment of the Constitutional (One Hundred and
First Amendment) Act, 2016, the States did not possess the authority to levy
tax on the provision of Services or Manufacture of goods, with the exception of
alcoholic liquor for human consumption, opium, Indian hemp, narcotics and other
narcotic drugs. List II does not assign a bare power to tax supply per se to
the States.

Although a separate entry could have been included in the
Concurrent List enabling the levy of taxes on the supply of goods and services,
Article 254(1) provides that any inconsistency between laws enacted by the
Parliament and the State Legislatures, is to be resolved in favour of the
Parliament, rendering the opposing State law void to that extent. In view of
Article 254(1), the addition of such an entry could not have assigned equal and
concurrent powers to both the Parliament and the State Legislatures.

Consequently, this impasse has been addressed by the
introduction of Article 246A in the Constitution, which reads as under:

“246A. (1) Notwithstanding anything contained in articles
246 and 254, Parliament, and, subject to clause (2), the Legislature of every
State, have power to make laws with respect to goods and services tax imposed
by the Union or by such State.

(2) Parliament has exclusive power to make laws with
respect to goods and services tax where the supply of goods, or of services, or
both takes place in the course of inter-State trade or commerce.

Explanation.—The provisions of this article, shall, in
respect of goods and services tax referred to in clause (5) of article 279A,
take effect from the date recommended by the Goods and Services Tax Council.’’

Article 246A empowers both the Parliament and the State
Legislatures to legislate with respect to GST. The Constitution provides for
the creation of the GST Council (GSTC), which shall inter alia make
recommendations to the Union and the States on:

a. model Goods and Services Tax Laws, principles
of levy, apportionment of Integrated Goods and Services Tax and the principles
that govern the place of supply;

b. the rates including floor rates with bands of
goods and services tax;

c. any special rate or rates for a specified
period, to raise additional resources during any natural calamity or disaster;

d. special provision with respect to the States
of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.

The role of GSTC is limited to that of a recommendatory body.

Are the recommendations of GST Council binding?

To me, it appears that the recommendations of the GSTC are
mere suggestions or guidelines, which the Parliament or the State Legislature,
as the case may be, may or may not accept and implement.The concept of granting
recommendatory powers to constitutional bodies is not unfamiliar. However, the
existing jurisprudence, discussed herein
below, does not conclusively postulate that the recommendations have to
necessarily be adopted. Therefore, the consequences following non-implementation
of the recommendations by the GSTC will have to be judicially determined.

A) The United States Constitution provides in
Clause 2 of Section 3, known as the “Recommendation Clause”, that the President
shall recommend to the Congress (Parliament) such measures as he shall judge
necessary and expedient. This clause has
been interpreted by the US Supreme Court in the case of Youngstown Sheet
& Tube Co. vs. Sawyer¹
to mean that the Recommendation Clause serves as a reminder that the
President cannot legislate unilaterally, and further, that the President merely
has the power to recommend. The prerogative to legislate is possessed
exclusively by the Congress.

B) Similarly, in the Indian context, Article
233(2) of the Constitution provides for the recommendation of the High Court
for appointment of an advocate or a pleader as the district judge. In the case
of Chandra Mohan vs. State of Uttar Pradesh², the Apex
Court observed that under Article 233(2), the Governor can only appoint a
person recommended by the High Court. On the other hand, in the case of Supreme
Court Advocates vs. Union of India³,
it was observed that, “In cases governed by Article 233(2), normally as a
matter of rule, the High Court’s recommendation must be accepted unless there
exist ‘good and weighty reason’ in which case the executive should communicate
its views to the High Court and give the latter an opportunity to react to the
same.” Therefore, the contours and strength of the recommendation power
prescribed by Article 233(2) to the High Court is amenable to ascertainment by
judicial examination.

Mechanism for Dispute resolution

In cases where the States deviate from the recommendations of
the GSTC and enact an absolutely contrary GST Law, it could lead to utter chaos
and defeat the stated objective of GST, namely, for the provision of a common
national market for goods and services. Whether such a deviation is permissible
or not, and whether the same would withstand judicial scrutiny is something
that only time will tell.

I must however, point out that Article 279A(11) stipulates
that the GSTC shall establish a mechanism to adjudicate any dispute arising
between the Government and the States or between the States out of its
recommendations or implementation thereof. However, the scope of this mechanism
is coloured with opacity. It remains unclear whether it would address a
situation where one State does not follow the recommendations. Further, the
said article does not specifically provide that the resolution of the dispute
under the mechanism would be binding.

It may be relevant to point out that under the Hundred and
Fifteenth Amendment Bill, 2011, Article 279B had proposed that “Parliament
may, by law, provide for the establishment of a Goods and Services Tax Dispute
Settlement Authority to adjudicate any dispute or complaint referred to
it by a State Government or the Government of India arising out of a
deviation from any of the recommendations of the Goods and Services Tax
Council constituted under article 279A that results in a loss of revenue to a
State Government or the Government of India or affects the harmonised
structure of the goods and services tax.”

However, the said Article was not enacted in the
Constitutional Amendment Act and no other mechanism was provided for in such
specific terms.

Is GST a challenge to the ‘Basic Structure Theory’?

Primarily, the GSTC would take decisions on the basis of
majority votes, however, there is a possibility that certain decisions of the
GSTC, which were not accepted by some States or the Centre, are challenged.
Such challenge may have recourse to the theory of “Basic Structure” pronounced
by the Apex Court in the landmark case of Kesavananda Bharati vs. State of
Kerala⁴ and subsequent judgments building on the principle.

It can be argued that the forefathers of the Constitution had
provided for the division of taxation powers to enable the Parliament and the
State Legislatures to exercise their own freedom. The concept of GST itself may
be challenged on the grounds of impinging upon the freedom of the States and
Base Structure theory.

Non-divestment of powers by the Centre

Further, a subject of intrigue is the possibility of
overlapping concentrations of power. On the one hand, the 101^st
Constitutional Amendment Act, 2016 has divested the States of their powers to
tax sale or purchase of goods, except for specified goods, by substituting
Entry 54 of List II of the Seventh Schedule to the Constitution. While on the
other hand, the Union has not divested itself of the power to tax sale/purchase
of any goods in the course of inter-State trade or commerce as also of the
residual power to levy tax of sale/purchase/supply of goods or services, the
supply of which would already have suffered GST. The said entries are
reproduced hereunder for ease of reference:

i) Entry 54 of State List (List II):

Existing Entry:

“Taxes
on sale or purchase of goods other than newspapers, subject to the
provisions of entry 92A of List I.”

Substituted Entry:

“Taxes
on the sale of petroleum crude, high speed diesel, motor spirit (commonly
known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for
human consumption, but not including
sale in the course of inter-State trade or commerce or sale in the course of
international trade or commerce of such goods.”

ii) Entry 92A of the Union List (List I) – to be
retained as it is

“Taxes
on the sale or purchase of goods other than newspapers, where such sale or
purchase takes place in the course of inter-State trade or commerce.”

iii) Entry
97 of the Union List (List I) – to be retained as it is

“Any other matter not enumerated in
List II or List III including any tax not mentioned in either of those
Lists.”

Conclusion

The Constitutional Amendment seems to have been
enacted without the provision of any safeguard, or effective redressal
mechanisms addressing deviations from the recommendations of GST Council,
thereby defeating the very principles underlying the GST reform.

shailesh.kwebmaker

GST – A Business Perspective

The Goods & Services Tax (‘GST’), is the biggest
reform in the Indian indirect tax structure since the economy opened up, twenty
six years ago. At last, it will become a reality. The 122^nd
Constitution Amendment Bill which was cleared in the Rajya Sabha last August
laid the foundation for the change. It was further cemented by the formation of
the GST Council & passage of the GST Act and Rules. Now with the GST Rates
and Transition provisions finalised, the 1^st July deadline for the
radical change is inevitable.

As per the current law, businesses are required to pay
multiple taxes and adhere to multiple compliances and timelines. Once GST comes
into play, all taxes will come under one umbrella, making it much simpler for
the industry. The GST Law will also prove to be a boon for the industry that
currently has to deal with different tax processes in all different States. The
hassle of dealing with different State Governments with varied rules will be
done away with.

This tax aims to make India a single market, avoid the effect
of cascading taxes and reduce tax burden on the consumer. The key features of
this tax regime are elimination of tax on tax, lower rates, faster growth and
system driven compliances for the industry as well as the consumers.

While GST will impact various stakeholders differently, the
consumer shall be the most benefitted party. Consumer items continue to be
exempt from a levy of GST or are to be subjected to GST at lower rate as more
than 50% of the items within the consumer price index bracket are placed at a
lower rate than they presently are.

Having said the above, I am mindful that this is a complete
change for the Industry and its functioning. The way of dealing with
transactions would completely undergo a change with the new concept of supply
resulting in a paradigm shift from the age old scanner of manufacture, sale and
service concepts. This would not only entail changes in business processes, but
would completely change the accounting processes and the ERP system of every
business would require to adapt to this change quickly.

For Corporates, now the decision to set up manufacturing
operations and supply chain would be influenced not by tax benefits, but based
on business efficiencies. With destination based principle of taxation and
export to be zero rated, the competitiveness of Indian firms would surely
increase.

The law in the current form has been successful in attempting
the above. Credit should be given to the Tax Authorities and the political
willingness to achieve this by both the Houses of Parliament, State Governments
and the Finance Ministry.

With the support of the industry and the receptive consumers,
GST will be successfully implemented and accepted by India.

My sincere hope for the future is an India in
which trade is free, compliances are easier, growth is phenomenal and consumers
are satisfied. This would have been best achieved through a single low rate
structure, similar to what was originally proposed.

shailesh.kwebmaker

Indian Goods and Services Tax – A Macro Overview

The Tax

India Goods and Services Tax (GST), a new consolidated
indirect tax, slated to be implemented from 1^st July 2017 as per
current indications, is a common tax on supply of both, goods and services, to
be commonly levied and collected by Centre, 28 States and 7 Union Territories,
on a common base, at common rates, having common procedures to be administered
fully electronically through a common digital platform.

Reaching this far, with an enactment, at the Central level,
of all the three laws, Integrated GST, Central GST, Union Territory GST as also
law for imposing Compensation Cess, an innovative instrument to collect tax for
distribution among State Governments for likely loss of revenue on GST
implementation, is no mean achievement.

Most rules are also finalised and agreed, rate schedules are
broadly agreed and announced and the State Governments are in the process of
enacting State GST Acts. This is an unparalleled accomplishment for a country
having a federal structure of governance, with population of over a billion
people and wide diversity in many ways.

We are all now waiting with bated breath for the
implementation of this historic indirect tax reform; a new tax structure which
has many unique and unprecedented features in the history of indirect taxation,
not only in India but around the world.

The Model – Australia, EU and Canada and India

Our new indirect tax system retains the basic principles of
value added tax system, adopts features of indirect taxation system of some
developed, more advanced/experienced nations, encompasses latest
recommendations of Organisation of Economic Co-operation and Development (OECD)
for consumption taxes and tops it with India’s unique challenges, traditions,
culture, level of development, and experience of our own taxation systems.

When we look around the world for comparables, we find that
Australia, Canada and EU have some comparable features in their tax reforms and
consumption tax models.

Australia consolidated wholesale sales tax and state level
duties and taxes into a federal level system of GST in 2000 and they adopted a
standard rate of 10 % (comparatively lower rate). So, they now have only one
Federal GST and states do not levy sales tax as also few other levies, duties
which they were levying prior to introduction of federal level GST described as
“New Tax System”. It used pricing control and anti-profiteering provisions to
monitor prices¹.

European Union Council issued a direction² in 1977
to all member nations to harmonise their national VAT systems through which tax
was levied on supply of goods and services; turnover taxes. The objective was
to achieve a common base for taxation, apply common meanings to the terms
“taxable person”, “taxable transaction” and others, common provisions relating
to place of supply of goods and services, common list of exemptions,
deductions, assessment basis and the like, so as to achieve non-discrimination
as to origin of goods and services and permit fair competition among member
nations. The system, in a way, is similar to our State Level VAT system (except
that it is at independent country level and includes taxation of services and
importation of goods); not comparable with our New GST system.

Canada has a federal structure of governance and they have
national as well provincial level (similar to States in our system) GST³.
The rate of the national level GST is uniformly applied across the country but,
States determine their own system of taxation including rate of tax on supply
of goods and services and they have varied systems. One province (Ontario) has
value added tax system described as Provincial Tax System, some provinces
impose tax only at retail level (British Columbia, Manitoba and Sasketchewan),
some provinces (Nova Scotia, Newfoundland and Labrador) have merged their
provincial taxes with national tax and adopted harmonised system of taxation
(HST) administered by national administrator, the Canada Revenue Agency, and
one province (Alberta) does not impose provincial tax at all⁴. So, this is also not comparable with Indian system of GST⁵.

___________________________________________________________________________

1 GST final report –
ACCC oversight of pricing responses to the introduction of the new tax
system-January 2003 –
https://www.accc.gov.au/system/files/GST%20Final%20Report.rtf

2 Sixth Directive,
77/388/EEC -17 May 1977 – ref http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV%3Al310063 Article 226b of the Sixth Directive

3 Introduced from
1.1.1991

4 https://en.wikipedia.org/wiki/Goods_and_services_tax_(Canada)

5 https://en.wikipedia.org/wiki/Goods_and_services_tax_(Canada)

We, in India, have adopted dual model for taxation of goods
and services whereby Central Government and State Governments (including Union
Territories) will levy and administer the new tax, GST on supply of goods and
services. Uniformity, non-discrimination, no non-double taxation or no
non-taxation are sought to be achieved through overarching GST Council, a body
established through the Constitution having powers to make recommendations on
all key aspects of GST like rate, tax base, goods, services and taxes to be
subsumed in GST and so on. This body is somewhat on the lines of the European
Commission. The voting powers within GST Council are so fixed that neither
Centre alone nor States ( even if they all join hands) can change the decisions
of the Council, a path-breaking move to achieve uniformity and stability as is
described, ‘one tax across the nation’.

GST Features

We have adopted, as charging event, the concept of “supply”,
the term used internationally, replacing manufacture, sale and provision of
services as major taxes, Central Excise Duty (on manufacture levied by Central
Government), State Value Added Tax (on sale of goods levied by State
Governments), Service tax (on provision
of service levied by Central Government), Octroi and Entry tax (on entry of
goods in local area for consumption levied by Local Authorities and State Governments),
Luxury tax (on specified services levied by State Governments) and specified
cesses levied by Central and State Governments merge into one tax, GST, levied
at the same rate by Central and State Governments on common base.

All taxable goods and services, across the country, when they
move from one state to another, will have paid tax, the Integrated GST (I-GST)
which is sum of Central GST (C-GST) and State GST (S-GST) or Union Territory
GST (UT-GST). This will be so, even in cases where goods/services move to own
branches, depots, distributors, stockists, otherwise than on sale/transfer of
property in goods. The tax so paid, to the extent of B2B (and, in most cases,
when the goods move to own branches, depots and like will be B2B transactions)
will be fully creditable unlike the earlier system where, Central Sales Tax was
not levied on transfer of stocks to own depot, branch ( against F form), levied
at concessional rate for B2B transactions ( against C form) and was not
creditable; it was retained by the originating State.

The objective of this design feature of our GST system is to
ensure that goods and services moving across States do not have to be supported
by C/F/I and like forms, prevalent under the current system for no or
concessional rate of tax ( forms to be obtained from tax department) as also
verified at check-posts set up by State Governments at their borders to capture
movement of goods without taxes, can be done away with (to achieve one tax
across the nation without, sort of, border restrictions) and, at the same time,
provide reasonable assurance to the State Governments of non-leakage of
revenue. Of course, the unscrupulous will attempt to find ways around it;
vigilance and way bill mechanism in the new system seek to track such leakages.

So far as movement of goods and services pursuant to supply
within a State is concerned, goods and services would have paid due tax, C-GST
plus either S-GST or UT-GST .

I would not be surprised, if, after a few years, some of the
Union Territories merge their U-GST and some smaller States merge their S-GST
with C-GST and hand over tax administration to Central Government – like
Harmonized GST of Canada. This could result in a fair degree of saving of tax
compliance cost for businesses and administration cost for governments at State/UT
level.

Gains and Pains

The charge on supplies within one legal entity [identified
based on Permanent Account No. (PAN) allotted by Income tax Department], when
goods move to another State to self has a logic in that it enables transfer of
input tax credit from one State to another where sale will take place and the
input tax credit can be utilised. This feature is enabled through I-GST
mechanism which is a sort of settlement mechanism. I- GST can be used for
payment of I-GST itself, C-GST, S-GST and UT-GST and, in same manner, all those
taxes, C-GST, S-GST and UT-GST, can be used for paying I-GST. Same is not true
so far as C-GST and S-GST/UT–GST are concerned. They will move parallel and not
meet, meaning C-GST input tax credit cannot be utilised for payment of S-GST/UT
GST and vice versa.

This requirement of payment of tax on inter-state transfer of
stocks will add cost in terms of cash flow management. But, a bigger worry of
businesses is valuation – whether administrations will be flexible on this aspect
since the transaction is tax neutral. Current provision, to the effect that
value declared by tax payer for such supplies will be accepted if the taxable
person is eligible for “full” input tax credit or that, the value could be 90%
of the sale price at the time of supply to third parties, is met with
skepticism.

The inclusion of such provision for services though is
puzzling. Valuation of services for transfers within an organisation will be a
challenge and, it appears that the department’s perspective is that even
employee cost must be included to arrive at open market value of services. This
means, taxing employee services which are specifically excluded from charge of
GST. There is provision for input service distribution and that could have been
used for transfer of input tax credits in case of services. Some rethink is
required on this aspect. Hopefully, sooner than later!

Our GST adopts same basic principles of value addition –
which we had adopted for Central Excise Duty, State VAT and Service tax. The chain for taxation starts from origin and
ends when it reaches the ultimate consumer.
Taxes paid at each of the earlier stages are rebated through mechanism
of input tax credit. Ideally, therefore, no tax cost should stick to
businesses, they being mere pass -through entities. Practically, that does not
happen due to non-allowance of input tax credit on several grounds like exempt
supplies with taxable supplies, supplies used for personal purposes or those,
where input tax credit is specifically restricted like motor vehicles.

A provision not to allow input tax credit when no tax is
payable on output is a reasonable one as the chain of input tax credit stops
there. The difficulty arises when the list of disallowable input tax credit
becomes large. The items on which input tax credit is not allowable under our
GST include expenses like outdoor
catering, rent-a-cab, free samples, health insurance of employees and others.
These have been subject matter of significant litigation in the past and
attempt appears to be to clarify intent and avoid litigation; provide
certainty. However, it is desirable that tax paid on all inputs, goods and
services, used for purpose of business ought to be eligible for input tax
credit to minimise tax cost and cascading.

Exports will be zero rated and imports will be charged to
IGST, collected, at the time of clearance of import consignments, with the
Customs duties. There is a feature in export of services that appears to be
different from current regime of service taxation. A supply of service where
supplier is in India and place of supply is outside India is an interstate
transaction. Where the recipient is also outside India, consideration is
received in convertible foreign exchange and the supplier and recipient are not
establishments of distinct persons (different establishment of the same legal
entity), the transaction is “export of service”⁶ and will be
zero-rated. The difference is, if these three conditions are not fulfilled,
supply will be subjected to IGST though the place of supply is outside India.

The rates and exemptions under GST are more or less
maintained at the current level to ensure that the current overall tax burden
does not increase in GST. There are four rate bands, 5% and 12% (merit rate),
18% (standard rate) and 28% (demerit rate). There is also Compensation Cess
which varies significantly and is fairly steep for luxury/sin goods like
tobacco and tobacco products. It ranges from 1% to 15% for motor vehicles
depending on specifications. Special rate of 0.25% is prescribed for rough
diamonds and 3% for gold, gold jewellery, silver and processed diamonds⁷.
The exercise of rate fitment is currently ongoing.

The varied rate structure is different from other countries
and a question often asked, in the backdrop of one of the objectives of GST of
simplification of current complex indirect tax structure, is: is this
simplification ? While there could be no two arguments that ideally, one ought
to have only two rates, merit and standard, given the diversity and need for
consideration of all strata of society, variable rate was a must for our
country. Over a period of time, this too will be modified and we too will move
to two or three rate structure.

____________________________________________

6 S2(6)
of IGST Act,20175

7.Statement of Revenue Secretary post
GST Council Meeting of 3 June 2017- Business Standard Article of 5 June,2017-
business-standard.com

Several areas where there was litigation and department has
accepted the position or there are decisions of higher courts, have been
incorporated in the law and will hopefully, reduce litigation. For example, a
specific provision is made as regards amalgamation or merger of companies⁸.
Not all issues are addressed though and, hopefully, will be addressed as we go
along.

There are a few pain points too like paying tax on reverse
charge basis on purchases from unregistered persons, generating self invoice
and the like. This specific provision will, no doubt, increase cost of
compliance and will lead to the threshold losing its relevance. Reverse charge
is also continued for few services like that of legal services provided by
individual advocate or firm of advocates to business entity. This too is not
compatible with GST concept and ought to have been avoided.

______________________________________

8 S
87 0f CGST Act,20177.

Need for pan India service providers to register in each
state and work out tax liability state wise as also requirement for providing
information about each branch together with name and address of the person in
charge, besides proof of address, is a time consuming exercise. Maybe, going
forward, the IT system will soften this burden.

There is significant unease among pan India suppliers of
goods and services about possibility of differing views/approaches that could
be adopted by different authorities and likely multiple demands on identical
transactions. A centralised audit system for such suppliers by a group
comprising officers representing Central Government and State Governments
(these could be rotated from State to State depending on the volume of activities
in a State and can be done electronically without human intervention) is a
solution, referred to in the passing, and may be adopted as the tax authorities
across different States gain experience.

Requirement of quoting detailed HSN Code or Service
Accounting Code at the time of registration on GSTN portal itself is causing
huge anxiety especially for non-manufacturing sector. Asking this information,
at this early stage of GST implementation, could be done away with. Broad
industry classification could meet the objective; facilitating government in
collating industry-wise data and simplifying process for tax payers from
compliance perspective.

There are very detailed and exhaustive transition provisions
which have envisaged various situations and dealt with them. Yet, there are
areas that need to be addressed. Leasing industry is an example where
transition provision is missing.

A provision that is causing significant apprehension during
transition is that of “anti-profiteering”; up to what level should one go and
how to determine it? There are mixed reports from Australia and more recently,
Malaysia, as to effectiveness of such provisions in controlling prices post GST
implementation. Some sectors like consumer goods or fast moving capital goods,
where there is intense competition, will self-adjust prices and the likelihood
of price increase is less. Monopolies and monopolistic sectors are the ones
where Government will have to focus. This will certainly be an area of intense
interest for all, especially, the consumer groups.

Entirely digital administration is a super feature of our GST
system facilitating several processes like enabling businesses to comply with
laws of all the States from one location; complete one to one matching of
invoices to avoid disputes and demands at a later date. But, this feature has
its own challenges, connectivity issues, comparability and so on. Here again,
as we gain experience, systems and processes will be streamlined. Technology
platform will significantly ease verification of input tax credits and overall
compliances as is the experience with TDS under Income tax.

Mindset change

In the midst of all this, the most encouraging
factor is the constructive approach of Governments, with full support and
attention from the highest level, from Prime Minister, Union Finance Minister,
State Chief Ministers, all Finance Ministers and other functionaries. They are
addressing concerns and suggestions in most rational and consensual manner. We
do hope this positivity continues and percolates down to the administrative
officers; we do hope to see complete “mindset change” all around and
Governments to adopt the maxim that the objective of tax gatherers is to
collect due tax in a fair manner and not penalties; they should not be unjustly
enriched!

shailesh.kwebmaker

GST Finally Arrives!

I am experiencing mixed feelings
as I write this last editorial of my tenure as the editor of one of the most
prestigious journals of our profession. It has been an enthralling journey,
with a number of challenges. Like everything that you do at the BCAS, this
stint as editor has enriched me greatly. The Journal will soon enter its 50th
year and to share with you that golden moment, you will have my young successor
Raman Jokhakar at the helm. Raman is brimming with new ideas and energy. We at
the Society are sure that this heavy responsibility will rest lightly on his
young shoulders.

On each annual day, the Society
brings out a special issue of the Journal with a theme. I am singularly
fortunate that I will sign off, with the GST special, an issue that contains
more than 20 articles from eminent authors covering virtually all the facets of
this new law. Since the issue is fully devoted to GST it does not contain any
of the regular features. Goods and Service Tax (GST), is possibly one of the
most significant milestones in national history since the independence. It has
been discussed for more than a decade and its impact on all sections of society
can be gauged from the fact that the Parliament will hold a special session on
30^th June, to mark this historic moment and will ring in this new
law at the stroke of midnight from 1^st July 2017.

While we as citizens take pride
in India’s character as a land with diverse people, cultures, languages and
religions, this diversity, at times, is a bottleneck and hurdle for growth of
business. Our country has a federal structure wherein the states have the power
to legislate on the taxation front. Consequently, we had excise levied by the
Centre, octroi, sales tax and other local taxes levied by different states.
With the growth of the service sector, we had the Centre levying service tax
from 1994. All these, different levies, maze of compliances, enabled the
unscrupulous to evade the law.This, finally resulted in increased costs to the
hapless customer. GST was a necessity to support the Prime Minister’s promise
of creating an environment where there would be “ease of doing business”. On 1^st
July, it will become a reality. It is significant that this new law commences
on CA Day, possibly indicating the opportunities that it will create for many
of us.

Undoubtedly, the law that has
been passed after the required constitutional amendment is not ideal. One had
expected GST to be one levy to subsume all others but in its current form we
have CGST, SGST and in the case of interstate transactions IGST. Different
registrations in different states will create substantial compliance burden on
business entities. Normally, GST was expected to be levied in a manner that
only the incremental value addition would attract the tax. Unfortunately, due
to stringent rules for grant of input credit that may not happen. Further
reverse charge mechanism (RCM) would create a burden on the registered
taxpayers. It is also felt that RCM may severely affect the small and micro
enterprises who do not register themselves because they do not cross the
threshold of the turnover limit.

Though there are large number of
problems /issues, GST is indeed a historic step. One is hopeful that as we go
along, many of the creases will get ironed out. The government is alive to
various procedural glitches and is responsive to representations from
professionals, businesses and other stakeholders. Another significant
characteristic of GST is the digital platform through which it will be
administered. If this turns out to be robust it will reduce the leakages and in the long run
consumers will certainly benefit. The next couple of years promise to be
exciting and challenging for professionals.

This special issue seeks to
unravel some of the mysteries of this new law. I am sure that readers will
benefit from finding answers to their questions at one place. I am thankful to
the chairman of the Indirect Tax Committee Govind Goyal and his entire team for
conceptualising this issue. I am
grateful to all the authors who have devoted their time and energy in
contributing excellent articles.

I must also thank, all my
colleagues, my seniors in the Journal Committee for supporting me in my tenure.
Thanks are due to all authors and contributors to this esteemed journal.
Finally, I must record appreciation for all readers for their love and
affection.

As I write this piece, there is
the relief for having been relieved from a great responsibility, and a tinge of
sadness that I will miss writing to you each month. My successor has assured me
that he will occasionally grant me the opportunity to write to you.

Therefore, I bid adieu, till we
meet again!

shailesh.kwebmaker

Devotion

‘There is no God, but where

there is devotion God exists’

Sadhguru Jaggi Vasudev

Devotion is an integral part of our life – existence –
success and satisfaction come only with devotion. – for example – we are
devoted to our parents, teachers, mentors and family. We professionals would
not be successful if we were not devoted to our profession – our work. We are
devoted to our clients – this is basically devotion to our work which is
reflected in relationship with our clients. I am aware that service to our
clients is ‘barter’ because it is in exchange for monetary reward – but
more than financial reward it is the appreciation and respect we receive from
them. All this is because we are devoted to ourselves and above all we are
devoted to our Creator – one who looks after us through the thick and thin of
our life. Devotion is what keeps us on our path. However the paradox is that
when devotion leads to fanaticism and fundamentalism, it results in
destruction. The fanatic – (devotee) who is a terrorist creates misery
and even war.. This is the reason why it is said that devotion should make one
creative, caring and compassionate. The three ‘C’s represent our
devotion to society and God and has its own rewards. Hence, devotion needs
direction which initially comes from our parents, then from our teachers –
gurus – and thereafter from our own self. Devotion to our self directs us to
have a balanced and realistic expectation from our own self and others.
Devotion is the elixir of life and devotion removes dilemma and yields clarity.
Sadhguru Jaggi Vasudev says ! ‘to be devoted, does something beautiful to
you’.

Devotion – in the ultimate implies that one dissolves into
the object of one’s devotion. Devotion to Krishna converted queen Meera into
one who sang Krishna’s praise in the streets of Mewar. Ultimately, Meera lost /
merged herself in Krishna and became one with Krishna.

Let us consider a few other examples of devotion :

– Bharat’s devotion to Ram – everyone gives
example of Lakshman’s devotion to Ram but only few mention Bharat’s devotion to
Ram – who surrenders to Ram, rules as his proxy and lives the life of a sanyasi
in Ayodhya till Ram’s return.

– Devotion of Jesus to God made him say ‘I
and my father are one’ – total loss of identity.

– Devotion converted doubting Thomas into Saint
Thomas.

– Surdas plucked his eyes not to be swayed by
his senses from devotion to Krishna.

– Devotion of Hanuman made him say to Ram ?there
is no difference between you and me’. This devotion – merging of identity
made him immortal – Hanuman is believed to be alive even today in human form.

It is rightly said that `devotion is a one way street and has
the power to create the Creator’. I conclude by saying: without devotion
we stumble through life – so let us develop and live devotion.

I believe no action will give us satisfaction
unless it has a touch of devotion. – for example – we work with devotion
amongst other things to have our daily bread – food, hence let us ask ourselves
a simple question : Do we enjoy our daily bread ! The answer is No
because we consume it mechanically and we hardly enjoy what we eat but if we
are conscious of what we are eating – thank God before and after eating – take
time to enjoy our food we will experience satisfaction. Food will have a
different effect on our mind and body. We must be devoted to HIM who gives us
our daily bread. In other words – eat with devotion.

shailesh.kwebmaker

Fundamental and Operational Ethics

Morality is a quickly shifting thing, and those who hold on to previous iterations become villains’.

JOEL STEIN Time 13th June 2014

The basic issue is what is Ethics: Philosophers and sociologists have given various definitions, some of which have been reproduced as part of this issue. However, in my view the concept of ethics can be divided into two: viz: fundamental and operational. The fundamentals are ‘truth, honesty and compassion’. Change in circumstances and environment do not impact the fundamentals. If I am not wrong the first codification of these fundamentals are enshrined in the Ten Commandments. Mahatma Gandhi defined ethics negatively by enumerating seven sins: viz:

Wealth without work.
Pleasure without conscience.
Science without humanity.
Knowledge without character.
Politics without principle.
Commerce without morality.
Worship without sacrifice.

The fundamentals are also represented by the three proverbial monkeys – ‘see no evil, speak no evil, and hear no evil’.

Coming to the operational ethics, one can say that this continues to evolve by society and change. Some behaviours and actions which were not accepted say a century back or even a few decades back have become the norm and the new norm is accepted without batting an eye. Some of the vivid examples are: divorce, same sex marriages, live-in relationship and women as part of work force. There was a time when the concept of ‘doli’ and ‘arthi’ prevailed – divorce was unthinkable, unaccepted and castigated. Today it is not only accepted but even approbated. According to some statistics the number of women seeking divorce exceeds the number of men seeking divorce.

The English attitude over the years has changed towards Prince Charles and his second wife – a divorcee – Camilla, the Duchess of Cornwall. English are today willing to accept her as queen.

Silvio Berlusconi (77) former prime minister of Italy has won election in 2013 after having been convicted for tax evasion and liaison with a minor and having divorced for the second time his wife after 22 years of marriage and three children and still continues to head Forza Italia party. Incidentally Berlusconi is also embroiled in court cases for allegedly trying to bribe a senator. – TOI 20.2.2014 –

Two instances of society’s change towards marriage and corruption.

A working woman from a middle class family was unacceptable and was even considered by some as not being ethical a few decades back – today it is the norm because of economic necessity and / or because the woman is not only educated but is professionally qualified. Today women contribute to not only to economic and political activity but also take part in intellectual pursuits. The list of women business leaders today is large. Recently General Motors have appointed a Mary Barra as CEO. Let us not forget that both Google (Sherye Sandberg) and Yahoo (Marissa Mayer) have women CEO’s – These ladies have successfully changed their company’s business models. Janet Yellen (2014) heads the Federal Reserve Bank, USA and Indra Nooyi heads Pepsi. In India to name a few would be Kiran Majumdar, Swati Piramal, Chanda Kocher, Shikha Sharma and Aisha De Sequeira. Today women stand tall and head financial, manufacturing, media and marketing behemoths. In the political arena we have had both national and international figures like Indira Gandhi, Golda Meir, Margaret Thatcher, Sirimavo Bandaranaike, Hillary Clinton to name a few. Time issue of 28th Oct. 2013 carries an article on how 20 lady senators are collaborating and impacting decision making in USA. Let us remember, they are smart – they are good listeners and have always instinctively known and practised the art of using whip. There is no area of operation today where women are not excelling.

Same sex relationship which was castigated by society is today accepted. The Supreme Court is being criticised for its recent verdict holding the relationship illegal and section 377 of the Indian Penal code is likely to be amended. The verdict is considered as discriminatory and in violation human rights. Amartya Sen says ‘These people are like ‘life style minority’ – and the Supreme Court judgement is in violation of protection rights of minorities’. U.K., and many countries and many states in USA have legalised same sex marriages. Ireland, a catholic country through a referendum has approved same sex marriage.

Talking on sexuality, Dalai Lama said in Mumbai Mirror 8.3.2014 that: ‘There is difference between public policy and individual morality – people should follow their own religion’s rules on sexuality. But for nonbeliever’s that is up to them’.

Times of India of 12 Dec. 2013 reports that the 3rd place for the Time’s ‘man of the year’ (2013) is U.S – gay activist Edith Windsor in honour of her victory in June 2013 when the U.S. Supreme Court granted same sex marriages the same federal benefits as heterosexual couples.

Pope Francis when questioned on same sex liaisons responded by saying ‘if a person is gay and he seeks God and has goodwill, who am I to judge?’ Times of India of 17.12..2013 reported that because of his view Pope Francis has been named ‘person of the year’ of the oldest gay magazine in the United States.

Ugandan President, Yoweri Museveni said in Time 10.3.2014:

‘There’s now an attempt at social imperialism – to impose social values’.

Few years back when a President of France (Sarkozy) was visiting India it was diplomatically conveyed that his live-in lady (Carla Bruni) would not be extended customary courtesies. However in 2013 when the President Francois Hollande visited with his live-in lady of years Valerie Trierweiler no such action was taken. Further President Hollande’s breakup with Valerie Trierweiler caused by his affair with an actress has been accepted by society. This is an instance of evolution of ‘operational ethics’.

Marriage though not yet out of fashion is co-existing with ‘live-in’ relationships. The best part is that ‘live-in’ relationship is being legally recognised and in some countries even accepted under Succession Laws. The Supreme Court since 2010 has consistently ruled in favour of couples living together as husband and wife, giving woman the rights of a wife. The Victorian concept of manwoman relationship has undergone an unrecognisable change in the way society views this relationship.

According to a survey report by Outlook dt: 24 Feb. 2014 premarital relationship is becoming the order of day even in India. India Today’s survey of 2015 on habits of Indians is an eye opener as it points out to a fact that parents are more concerned about the marks their children get in the exams than their moral habits. According to the TOI of 27th March 2014 contraceptive devices in UK will be freely available to girls below 25 at schools to avoid unwanted pregnancies.

Prenuptial agreements are entered into not only for sharing assets but also pets. The issue is: It may be legal but is it ethical to plan for divorce even before marriage.

These represent change in the attitude of society towards marriage.

Girl child is still not preferred in countries like India, China, Middle East etc. Hence, there has been an increase in girl child abortions despite law prohibiting sex testing and abortions. However, now ‘Family balancing services’ are now available in, USA, Mexico, Cyprus, etc. for determining the sex of a child at prenatal and preconception stage – IVF services. The issue still remains:

Is it ethical to avoid the birth of a female – is this not sex discrimination.

Use of marijuana – as a recreational article was illegal and looked down upon is being legalised and accepted by society is another instance of ever changing operational ethics. President Barrack Obama is said to have remarked: ‘I smoked pot as a kid —- I don’t think it is more dangerous than alcohol’. According to Time of 30 Jan. 2014, $ 1 million – estimated sales on Colorado’s first day of legalising marijuana sales.

Global commission on Drug Policy’s 2014 report recommends legalisation of drugs – marijuana, heroin and cocaine as the cost of prohibition is greater than the alternative. This is probably because the number of people who have died in drug wars is greater than the people who have died of use. Time – 29th September 2014.

Ethics in food business over the years has undergone change – for example – obesity and GM foods have become an issue of importance. Companies have started – foreseeing legislation and change in consumer requirement have started disclosing GM content in their food products. Time 20 Jan. 2014.

Corruption both in economic and political arena though visible and accepted is still castigated. The tragedy is it is not shunned and shamed. This is the change in our behaviour. We in India and world over have scams. The scamster when and if caught is punished but still gives reasons justifying his action. Operations of investigating agencies are interfered with by those in power. In one case the Supreme Court called the CBI a ‘caged parrot’.

In the past a politician or a minister even if suspected of corruption was not accepted by the public. Let us not forget that Mr. T.T. Krishnamachari, the finance minister and Mr. H. K. Patel, the finance secretary had to resign because of LIC’s investments in mundra companies as a result of the report of Chagla Commission. Today according to Mumbai Mirror of 20th April 2014, 321 candidates with criminal record are fighting parliamentary elections. TOI of 22 April 2014 reports 70% voters are willing to ignore candidate’s criminal record. It is rightly said,

‘Honesty in little things is not a little thing’.

Operational ethics is always impacted by the environment, for example, lobbying is the norm in USA and is suspect in India – Nadira tapes case and India looking into Walmart lobbying for business in India. Some politicians have suggested that lobbying should be legalised in India. However, the fundamental concept of that corruption though prevalent is not accepted – which is again exemplified by the Foreign Corruption Practices Act in USA, the UK Bribery law and the relevant Indian law is under amendment.

Shankar Sharma in his article ‘corruption is a non-issue for the voter’ – Business Standard 23 April 2014 cryptically observes:

Was middleclass India so innocent as to be unaware that bribes are an integral part of doing business to run any regulated business such as infrastructure, power or mining (anywhere in the world, actually)? That contracts in these businesses are almost never won honestly, or that bids won honestly have little if any profits embedded in them?

Truth be told: Indians were happy to make money off corruption and happily turned a blind eye to what lay beneath the boom.

We start clambering on to the high moral ground only when we start to feel that somehow the gravy train is eluding us.

We as a nation, are ready for a Faustian bargain. Give us a fistful of economic promissory notes and we will barter all the lofty ideals we once held dear.

More realistically, let us assume that no Indian is that naive. So what does that tell you about our mindset? Not pretty: that as long as the fruits of corruption are trickling down to us, it is a non-issue.

The issue is: what does this represent – change in Society’s attitude towards corruption!

It is because of prevalent corruption we are going through a transparency revolution, for example, the Right to Information Act, The Right to Services Act, Citizen’s Charter etc. Even the corporate laws are continuously changing to bring in better reporting.

Let us not forget that President Clinton was impeached not for what happened in Oval Office (operational ethics) but for telling a lie and denying what happened in Oval Office fundamental ethics – Truth.

Gandhi, Martin and Mandela, despite their perceived weaknesses practiced ethics and fought injustice ethically and succeeded.

Speaking on Kali Yuga, the last of the four ages is characterised by impiety, violence and decay, the Vishnu Purana says, “Social status depends not upon your accomplishments, but in the ownership of property; wealth is now the source of virtue; passion and luxury are the sole bonds between spouses; falsity and lying are the conditions of success in life; sexuality is the sole source of human enjoyment;; religion, a superficial and empty ritual, is confused with spirituality. E.T. 28 January 2015.

Mahabharat is what we are living. In Mahabharat we have good people having vices and the wicked practicing ethics. But the real answer lies in Gita in which Krishna preaches the practice of eternal ethics – values. In times of conflict let us remember what Pearl S. Buck said:

‘You cannot make yourself feel something you do not feel,
but you can make yourself do right inspite of your feelings’.

I would conclude by restating what I said earlier that there is a difference between operational and fundamental ethics. Despite the fact that we are in Kali Yug. I still believe that society inherently believes in the fundamental of truth, honesty and compassion and that is the reason that there is revival in the practice of spirituality.

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ABOUT OUR AUTHORS in this SPECiAL ISSUE

K. C. Narang
Chartered Accountant

Having qualified as a Chartered Accountant, he joined Dalal, Desai & Kumana in 1956 and Retired as Senior Partner of the firm in 1997. He has been Past President of the Bombay Chartered Accountants’ Society (BCAS). He has contributed several articles and papers on Accounting Auditing and Direct Taxes.

Somasekhar Sundaresan
Advocate
A partner in JSA, a national Indian law firm, he heads the securities law practice. He is an active participant in various policy-making and law-writing initiatives, notable among which are regulations on insider trading, takeover regulations, policy on global depository receipts, the draft Indian Financial Code recommended by the Financial Sector Legislative Reform Commission and the RBI’s committee on corporate governance in the banking sector. He is a former assistant editor of The Times of India and now writes a weekly column in a few editions of the Mirror, and a monthly column in Business Standard.

Sanjeevani Bhelande
Singer
She is the first ever winner of a TV talent show in 1995 and has won the best playback singer award for the film, ‘Kareeb’. She has performed over 1,500 live concerts world-wide. She has also ‘song slated’ Meera Bai’s poems into English creating her book and album named ‘Meera and Me’. She has composed and sung around 100 tracks devotional music, she is now learning Odissi dance. An masters in cdommerce, with a degree in Hindustani music and a diploma in Mass Communication, she is now learning Odissi dance.

Dilip Deshmukh
Architect
He has his own firm M/s. Dilip Deshmukh & Associates, after having worked with well-known architects for nearly 18 years. A graduate from the Raheja College of Artchitecture with an additional degree in Architecture from the Mumbai University, he has developed method of conceptualizing a project unique ways, beyond vaastu. He has undertaken a number of turnkey projects, designing commercial offices, residential complexes, hospitals, media rooms, auditoriums conference halls, community centres etc.

Prakash Bhikdeo Bal
Journalist
He is now the Hon. Director of the C.D. Deshmukh Administrative Training Institute, having been a Lecturer there since 1990. He was the Deputy Editor of the Maharashtra Times and the Resident Editor of the Loksatta. He has been a Member of the Board of Studiesof the the BMM Course in the Mumbai University. He has written books on the ethnic conflicts in Sri Lanka and on the 9/11 terrorist attacks in the U.S.A.

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DIPP – Press Note No. 7 (2015 Series) dated June 3, 2015

Review of Foreign Direct Investment (FDI) Policy on Investments by Non-Resident Indians (NRIs), Person of Indian Origin (PIOs) and Overseas Citizens of India (OCIs)

This Press Note has made the following two amendments to the Consolidated FDI Policy issued on May 12, 2015, with effect from June 18, 2015: –

(i) Para 2.1.27 is amended to read as below:
‘Non-Resident Indian’ (NRI) means an individual resident outside india who is a citizen of Indian or is an Overseas Citizen of India cardholder within the meaning of section 7 (A) of the citizenship Act, 1995. ‘Person of indian origin cardholders registered as such under notification No. 26011/4/98 F.I, dated 19.8.2008, issued by the Central Government are deemed to be ‘Overseas Citizen of India’ Card holders.

(ii) Insertion of a new para 3.6.2(vii), after a para 3.6.2(vi) of the consolidated FDI policy Circular of 2015:

Investment by NRIs under Schedule 4 of FEMA ( Transer or issue of security by persons Resident Outside India) Regulations will be deemed to be domestic investment at par with the investment made by residents.

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DIPP – Press Note No. 6 (2015 Series) dated June 3, 2015

Review of Foreign Direct Investment (FDI) Policy on Investments by Non-Resident Review of the investment limit for cases requiring prior approval of the Foreign Investment Promotion Board (FIPB) / Cabinet Committee on Economic Affairs (CCEA)

This Press Note has revised Paragraph 5.2 of the Consolidated FDI Policy issued on May 12, 2015, with effect from June 18, 2015: –

5.2 Levels of Approvals for Cases under Government Route

5.2.1 The Minister of Finance who is in charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow up to Rs. 3000 crore.

5.2.2 The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 3000 crore would be placed for consideration of Cabinet Committee on Economic Affairs (CCEA)

5.2.3 The CCEA would also condier the proposals which may be referred to it by the FIPB/the Minister of Finance ( in-charge of FIPB).

5.2.4 The FIPB Secretariat in Department of Economic Affairs will process the recommendations of FIPB to obtain the approval of Minister of Finance and CCEA.

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A. P. (DIR Series) Circular No. 110 dated June 18, 2015

BEF statement – Submission under XBR L

This circular has made the following two amendments with regards to submission of BEF Statement: –

1. With effect from the half year ending June 2015, BEF has to be submitted online and Bank-wise (instead of the present system of branch-wise submission) to the respective Regional Offices of RBI.

2. Banks have to submit data in a single format giving details of all remittances for import exceeding USD 100,000, as on end of June and December of every year, in respect of which importers have defaulted in submission of appropriate document evidencing import within 6 months from the date of remittance.

Details of the same can be accessed at https://secweb. rbi.org.in/orfsxbrl/. The formats for the same are also Annexed to this Circular.

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A. P. (DIR Series) Circular No. 109 dated June 11, 2015

External Commercial Borrowings (ECB) for Civil Aviation Sector

Presently, eligible borrowers in India could avail of ECB for working capital as a permissible end-use, under the Approval Route, up to March 31, 2015.

This circular has extended the period up to which ECB can be availed under the Approval Route by eligible borrowers in India from March 31, 2015 to March 31, 2016.

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A. P. (DIR Series) Circular No. 108 dated June 11, 2015

External Commercial Borrowings (ECB) for low cost affordable housing projects

Presently, eligible borrowers in India could avail of ECB for low cost affordable housing projects, under the Approval Route, up to March 31, 2015.

This circular has extended the period up to which ECB can be availed under the Approval Route by eligible borrowers in India from March 31, 2015 to March 31, 2016.

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A. P. (DIR Series) Circular No. 107 dated June 11, 2015

Notification No. FEMA.337/2015-RB dated March 2, 2015
Notification No. FEMA.338/2015-RB dated March 2, 2015
Subscription to chit funds by Non-Resident Indian on non-repatriation basis

Presently, a person resident outside India cannot make investment in India, in any form, in a company or partnership firm or proprietary concern or any entity, whether incorporated or not, which is engaged or proposes to engage “in the business of chit fund”.

This circular now permits Non-Resident Indians (NRI) to subscribe to the chit funds, without limit, on non-repatriation basis, provided: –

i. The chit fund is authorized by the appropriate Authority to accept subscription from Non-Resident Indians on nonrepatriation basis.
ii. The subscription to the chit funds must be brought in through normal banking channel, including through an account maintained with a bank in India.

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A. P. (DIR Series) Circular No. 106 dated June 1, 2015

Notification No. FEMA 341/2015-RB dated May 26, 2015
Ministry of Finance – Dept. of Economic Affairs – G.S.R. 426(E) dated May 26, 2015

I.
Liberalised Remittance Scheme (LRS) for resident individuals- increase
in the limit from USD 125,000 to USD 250,000 and rationalisation of
current account transactions
II. Remittance facilities for persons other than individuals

Notification
No. FEMA 341/2015 has substituted provisos to the existing
sub-regulation (a) of Regulation 4 of the Foreign Exchange Management
(Permissible Capital Account Transactions) Regulations, 2000.

G. S. R. 426(E) has substituted: –
a. Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000.
b. Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000.

This circular has made the following changes: –

1. Limits & facilities under the Liberalized Remittance Scheme (LRS)

a.
A resident individual can now remit up to US $ 250,000 per financial
year (as against the present limit of US $ 125,000) for any permitted
current or capital account transaction or a combination of both (except
for making remittances for any prohibited or illegal activities such as
margin trading, lottery, etc.). If an individual has already remitted
any amount during the current financial year under the LRS, then the
amount so remitted has to be reduced from the present limit of US $
250,000 for the financial year and the individual can remit the balance
amount.

b. All facilities for remittances under the Schedule III
of the Foreign Exchange Management (Current Account Transactions)
Rules, 2000 (including drawal of foreign exchange for personal /
business visits overseas) have now been merged / subsumed within the
said limit of US $ 250,000.

c. Application-cum-declaration for
remittance / drawal of foreign exchange for personal / business visits
has to be made in the Form annexed to this circular.

d. No part
of the foreign exchange of US $ 250,000 can be used for remittance
directly or indirectly to countries notified as non-cooperative
countries and territories by the Financial Action Task Force (FATF).

2. Permissible transactions under LRS

Permissible capital account transactions by an individual under LRS are: –

i) Opening of foreign currency account abroad with a bank;

ii) Purchase of property abroad;

iii) Making investments abroad;

iv) Setting up Wholly owned subsidiaries and Joint Ventures abroad;

v)
Extending loans including loans in Indian Rupees to Non-resident
Indians (NRIs) who are relatives as defined in Companies Act, 2013.

Permissible current account transactions by an individual under LRS are: –

(i) Private visits to any country (except Nepal and Bhutan);
(ii) Gift or donation;
(iii) Going abroad for employment;
(iv) Emigration;
(v) Maintenance of close relatives abroad;
(vi)
Travel for business, or attending a conference or specialised training
or for meeting expenses for meeting medical expenses, or check-up
abroad, or for accompanying as attendant to a patient going abroad for
medical treatment / check-up;
(vii) Expenses in connection with medical treatment abroad;
(viii) Studies abroad;
(ix) Any other current account transaction.

However,
for the purposes mentioned at item numbers (iv), (vii) and (viii), the
individual can avail of exchange facility for an amount in excess of the
limit prescribed under the LRS if it is so required by the country of
emigration, medical institute offering treatment or the university,
respectively.

3. Facilities for persons other than individuals

As
per the provisions of amended Schedule III, persons other than
individuals can make remittances, within the limits and subject to
conditions laid down therein, for:
i) Donations to educational institutions;
ii) Commissions to agents abroad for sale of residential flats / commercial plots in India;
iii) Remittances for consultancy services and
iv) Remittances for reimbursement of pre-incorporation expenses.

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A. P. (DIR Series) Circular No. 103 dated May 21, 2015

External Commercial Borrowings (ECB) denominated in Indian Rupees (INR) – Mobilisation of INR

Presently, residents can avail ECB in Indian Rupees from recognized non-resident lenders if the lenders have mobilized Indian Rupees through a swap undertaken with a bank in India.

This circular states that recognized non-resident lenders can now lend in Indian Rupees by entering into a swap transaction with their overseas bank which will, in turn, enter into a back-to-back swap transaction with any bank in India, subject to complying with KYC and other procedures as prescribed.

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A. P. (DIR Series) Circular No. 102 dated May 21, 2015

Rupee Drawing Arrangement – Increase in trade related remittance limit

This circular has increased the limit for trade transactions under the Rupee Drawing Arrangements (RDA) with respect to Vostro Accounts of Non-resident Exchange Houses from Rs. 500,000 to Rs. 1,500,000 with immediate effect.

Banks have been authorized, subject to certain conditions, to regularize payments exceeding the prescribed limit under RDA if they are satisfied with the bonafide of the transaction. Banks are also required to take the following steps: –

1. Ensure the remittances received under RDA are from FATF compliant countries.

2. Take care of KYC / AML / CFT and other due diligence concerns.

3. Review individual Exchange Houses that are frequently sending large value trade related remittances and report them to RBI.

4. Contact their correspondents that maintain accounts for or facilitate transactions on behalf of Exchange Houses in order to request additional information regarding high value trade related transactions and the parties involved. The collected details must be kept on record and it must be made available for scrutiny,

5. Ensure that the proceeds of export payment through RDA is applied to the outstanding export finance if any, availed by the exporter from any bank for the concerned export transaction and obtain a declaration to that effect from the exporter.

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Will – Suspicious Circumstances – Minor mistake / error in Final Will – Nothing to show that signature on will was forged – Will would be valid: Hand writing Expert opinion is fallible : Succession Act, 1925 section 63

Hoshang Pesi Hodiwala vs. Bonny Behramshah Bhathena & Ors; AIR 2015 (NOC) 473 (Bom.)

The plaintiff was the grandson of the deceased, one B.M. Bhathena who executed a will dated 27th November, 1985 and who expired on 25th May, 1989. The deceased left behind one son and two daughters as his only heirs. They would be entitled to an equal 1/3rd share in the estate of the deceased on intestacy. The plaintiff had sought to probate the will. The plaintiff was the son of one of the daughters. The son of the deceased challenged the will of the deceased sought to be probated by the plaintiff. He was survived by the defendants.

The defendant had contended that the signatures of the deceased on pages 1 and 2 were forged. He had shown some inaccuracies in the will. He claimed that the will was not genuine and was forged.

The will of the deceased was typewritten. It ran into three pages. It was prepared in the lawyers office. It was signed by one lawyer and the managing clerk of the lawyer who prepared it. It was deposited with the sub registrar of assurances. The plaintiff evidence shows that the will had been duly executed. The attesting witness has deposed about the specific attestation of the will in the presence of the deceased.

The defendants had shown several suspicious circumstances and certain errors in the typewriting of the will. The name of the deceased was not correctly shown on page one of the will as also in the execution clause. There was an error in the name of the father of the deceased which forms a part of full name of the deceased. In line two the full name of the deceased only shows two blanks in his father’s name. The remainder of the name was correctly shown.

The Hon’ble Court observed that the name of the deceased B.M. Bathena in execution clause shows only M. Bathena. These mistakes may creep into any document. A party reading the will may or may not notice such error. The will is not on a computer printout, it is typewritten. The draft was made earlier by the steno of the advocate. The final will was typed by attesting witness who was his managing clerk. There can be a mistake in the final draft even if there was no mistake in the first draft. If the deceased had read the first draft and approved it, he may not meticulously go through the final draft before its execution. He may execute the will upon cursorily going through the will which he had seen earlier. Hence the errors of such kind which are shown are neither germane nor can raise any suspicion.

It was seen that the will was most natural. The deceased has bequeathed a single immoveable property. He had three children. He has bequeathed it to all in equal shares. Even on intestacy they would be entitled to the same share of course, as on the date of the execution of the will the defendant would have been entitled to 50% share in the estate of the deceased and his two sisters would have been together entitled to 50% share of his estate. That was prior to the amendment to Chapter III of the Indian Succession Act, (ISA) 1991. Be that as it may, upon intestacy half the property would devolve upon the son of the deceased, his residence with family therein notwithstanding. Consequently making of the will for giving equal shares does not matter. It would show the impartial intention of the deceased.

The Court had considered each of the circumstances contended to be suspicious. The conscience of the Court has to be satisfied that the will sought to be propounded is the will of the deceased. This would depend upon the facts of each case. Various facts shown by the defendants to create suspicions are mere stray contentions none of which is such as to raise suspicion of the Court. The deposit of a will in the office of the sub registrar after its preparation upon a draft by an advocate and its execution before another advocate in the same office and another witness bequeathing the estate of the testator in equal shares to his heirs would show the due execution of the will. Consequently it is seen that the will of the deceased B.M. Bhathena dated 27th November, 1985 has been duly and validly executed.

The defendant had produced, before the handwriting expert photocopies of two money order receipts of 1982, 3 years prior to the execution of the will showing the signatures of the deceased. He has also produced one cheque signed by the deceased on 21st July, 1997, 14 years prior to the execution of the will. He had also produced a driving license of the deceased dated 28th February, 1956, about 30 years prior to the execution of the will showing his signature. The signatures at such distance in time are likely to be slightly different.

The handwriting expert’s evidence would be required to be considered. (See Ajay Kumar Parmar vs. State of Rajasthan, AIR 2013 SC 633) However, it was held that the opinion of the handwriting expert is as fallible/ liable to error as that of any other witness and hence the Court can compare the signatures as required u/s. 73 of the Indian Evidence Act. Consequently in a case such as this the Court would see the opinion of the expert and apply its own observation by comparing the signatures or handwritings for providing a decisive weight or influence to its decision. There was absolutely nothing to show that any of the signatures is forged.

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Stamp Duty – Several instruments in one transaction – Duty Chargeable on principal instruments so determined shall be highest duty chargeable in respect of any of said instruments: Bombay Stamp Act, 1958 section 4

Prasun Developers vs. State of Maharashtra & Ors; AIR 2015 (NOC) 541 (Bom.)

Section 4 of the Bombay Stamp Act, 1958 inter alia, provides that where, in case of any specific instrument, i.e. development agreement, sale, mortgage or settlement, if several instruments are employed for completing the transaction, then the principal instrument only shall be chargeable with duty prescribed in Schedule – I and each of the other instruments shall be chargeable with duty of Rs.100/- instead of the duty, if any, prescribed for it in that schedule.

Sub section (2) of section 4 of the said Act enables the parties to determine for themselves which of the instruments so employed shall for the purposes of sub section (1), be deemed to be the principal instrument. Sub section (3) of section 4 of the said Act provides that where parties fail to determine the principal instrument between themselves, then the officer before whom the instrument is produced may, for the purposes of this section, determine the principal instrument.

The proviso to section 4, which governs the entire section provides that the duty chargeable on principal instrument so determined shall be the highest duty which would be chargeable in respect of any of the said instruments so employed. Thus, in order that the provisions of section 4 of the said Act are attracted, in the first place it will have to be established that several instruments were employed for completing one and the same transaction. In the context of present case therefore, it was for the petitioner to establish that the development agreement, power of attorney and the sale deed were nothing but several instruments employed for completing the transaction of the sale of the said property.

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Right to Representation – Duty of lawyer to defend every person – Professional ethics require that lawyer must not refuse a brief: Constitution of India

A.S. Mohammed Rafi vs. State of Tamil Nadu; 2015 (319) ELT 10 (SC)

The Hon’ble Supreme Court while disposing a matter, commented upon a matter of great legal and constitutional importance.

The Hon’ble Court observed that the Bar Association of Coimbatore had passed a resolution that no member of the Coimbatore Bar could defend the accused policemen in the criminal case against them in this case. Several Bar Association all over India, whether High Court Bar Associations or District Court Bar Associations have passed resolutions that they could not defend a particular person or persons in a particular criminal case. Sometimes there were clashes between policemen and lawyers, and the Bar Association passes a resolution that no one will defend the policemen in the criminal case in court. Similarly, sometimes the Bar Association passed a resolution that they would not defend a person who is alleged to be a terrorist or a person accused of a brutal or heinous crime or involved in a rape case.

The Hon’ble Court opined that such resolutions are wholly illegal, against all traditions of the bar, and against professional ethics. Every person, however, wicked, depraved, vile, degenerate, perverted, loathsome, execrable, vicious or repulsive he may be regarded by society, has a right to be defended in a court of law and correspondingly it is the duty of the lawyer to defend him.

The Hon’ble Court gave some historical examples in this connection. When the great revolutionary writer Thomas Paine was jailed and tried for treason in England in 1792 for writing his famous pamphlet ‘The Rights of Man’ in defence of the French Revolution the great advocate Thomas Erskine (1750-1823) was briefed to defend him. Erskine was at that time the Attorney General for the Prince of Wales and he was warned that if he accepted the brief, he would be dismissed from office. Undeterred, Erskine accepted the brief and was dismissed from office.

However, his immortal words in this connection stand out as a shining light even today :

“From the moment that any advocate can be permitted to say that he will or will not stand between the Crown and the subject arraigned in court where he daily sits to practice, from that moment the liberties of England are at an end. If the advocate refuses to defend from what he may think of the charge or of the defence, he assumes the character of the Judge; nay he assumes it before the hour of the judgment; and in proportion to his rank and reputation puts the heavy influence of perhaps a mistaken opinion into the scale against the accused in whose favour the benevolent principles of English law make all assumptions, and which commands the very Judge to be his Counsel”

The Hon’ble Court observed that Indian lawyers have followed this great tradition. The revolutionaries in Bengal during British rule were defended by our lawyers, the Indian communists were defended in the Meerut conspiracy case, Razakars of Hyderabad were defended by our lawyers, Sheikh Abdulah and his co-accused were defended by them, and so were some of the alleged assassins of Mahatma Gandhi and Indira Gandhi. In recent times, Dr. Binayak Sen has been defended. No Indian lawyer of repute has ever shirked the responsibility on the ground that it will make him unpopular or that it is personally dangerous for him to do so. It was in this great tradition that the eminent Bombay High Court lawyer Bhulabhai Desai defended the accused in the I.N.A. trials in the Red Fort at Delhi (November 1945 – May 1946).

However, disturbing news was coming now from several parts of the country where bar associations were refusing to defend certain accused persons.

The Hon’ble Court observed that professional ethics requires that a lawyer cannot refuse a brief, provided a client is willing to pay his fee, and the lawyer is not otherwise engaged. Hence, the action of any Bar Association in passing such a resolution that none of its members will appear for a particular accused, whether on the ground that he is a policeman or on the ground that he is a suspected terrorist, rapist, mass murderer, etc. is against all norms of the Constitution, the Statute and professional ethics. It is against the great traditions of the Bar which has always stood up for defending persons accused for a crime. Such a resolution was, in fact, a disgrace to the legal community. The Court held that all such resolutions of Bar Associations in India are null and void and the right minded lawyers should ignore and defy such resolutions if they want democracy and rule of law to be upheld in this country. It is the duty of a lawyer to defend, no matter what the consequences, and a lawyer who refuses to do so is not following the message of the Gita.

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Can You Gift Without Giving?

Introduction Is there an error with the Title – “Can You Gift Without Giving?” Is it possible for someone to make a gift of a property but at the same time not give the property? Illogical as this may sound this oxymoron has been upheld by a 3 Member Bench of the Supreme Court of India giving it the highest form of recognition! One would wonder what is the purpose of the donor gifting if he does not intend to give the property to the donee? Let us analyse this issue in more detail to answer some nagging questions.

What is Gifting without Giving?
This is a simple way of defining the legal phrase of “retaining a life-interest benefit”. For instance, say a father wants to gift his residential flat to his son instead of under his Will so as to avoid any bequest related challenges. However, at the same time, he wants to reside in the flat in his lifetime and ensure that the flat passes to the son only upon his death. Can he achieve both the objectives? Would it not be great to kill two birds with one stone – ensuring smooth succession on death thereby avoiding Probate related challenges and at the same residing in the flat in one’s lifetime?

An answer to the above challenge would lie in creating a gift deed in favour of the son wherein the father retains the possession of the flat during his lifetime and the same would pass to the son only upon the father’s death. Is this too good to be true, is the question one would ask? The Larger Bench of the Supreme Court in its decision in the case of Renikuntla Rajamma vs. K. Sarwanamma, (2014) 9 SCC 445 has said this is possible. Hence, a donor can gift without actually giving possession of the property.

What does the Law Provide?
The law in respect of Gifts, whether immovable or movable, is enshrined in Chapter VII of the Transfer of Property Act, 1882. Section 122 of this Act defines a gift as follows:

It is the transfer of certain existing movable or immovable property

It is made voluntarily and without consideration

By one person, called the donor, to another, called the donee

It must be accepted by or on behalf of the donee during the lifetime of the donor and while he is still capable of giving

If the donee dies before acceptance, the gift is void.

Section 123 of this Act lays down the manner in which the transfer of a gift may be made:

Gift of Immovable Property – the transfer must be made by a registered instrument signed by or on behalf of the donor, and attested by at least two witnesses
Gift of Movable Property – the transfer may be effected:

• either by a registered instrument signed as aforesaid or
• by delivery of the movable property

For gift of an immovable property only one mode of transfer is permissible, i.e., by a registered gift deed. However, the Act provides two alternative modes for transfer in case of gift of a movable property, i.e., either by a registered gift deed or by delivery and possession. If the first mode, i.e., registered gift deed is selected, for a movable property then section123 does not mandate that delivery and possession of the movable property must be given. Similarly, in the case of immovable property section123 does not mandate that delivery and possession of the immovable property must be given.

Another important provision is section 6(d) of the Act which states that if the enjoyment of any property is restricted to the owner personally, then he cannot transfer the same. Thus, if a person is not the absolute owner of a property he cannot transfer the same.

Judicial History
The reason for the matter to be referred to a Three Member Bench of the Apex Court was that there were two conflicting decisions of the Division Bench of Supreme Court. In Narmadaben Maganlal Thakker vs. Pranjivandas Maganlal Thakker, (1997) and 2 SCC 255 K. Balakrishnan vs. K Kamalam, (2004) 1 SCC 581.

In the earlier case of Narmadaben Maganlal Thakker, a conditional gift of an immovable property was made by the donor without delivering possession and there was no acceptance of the gift by the donee. There was no absolute transfer of ownership by the donor in favour of the donee. The gift deed conferred only limited right upon the donee and gift was to become operative after the death of the donor. The donor reserved permanently his rights to collect the mesne profit of the property throughout his lifetime. After the gift deed was executed, the donee violated certain conditions under the deed.

Hence, the Supreme Court held that the donor had executed a conditional gift deed and retained the possession and enjoyment of the property during his lifetime. Since the donee did not satisfy the conditions of the gift deed, the gift was void.

In the latter Supreme Court case of K. Balakrishnan, the donor gifted her share in land and a school building. However, the gift deed provided that the management of the school and income from the property remained with the donor during her lifetime and thereafter would be vested in the donee. The Supreme Court upheld the gift without possession and held that it was open to the donor to transfer by gift title and ownership in the property and at the same time reserve its possession and enjoyment to herself during her lifetime. There is no prohibition in law that ownership in a property cannot be gifted without its possession and right of enjoyment. It examined section 6(d) of the Transfer of Property Act, 1882 which states that an interest in property restricted in its enjoyment to the owner personally cannot be transferred by him. However, the Supreme Court held that Clause (d) of Section 6 was not attracted to the terms of the gift deed being considered by the Court because it was not merely an in property property, the enjoyment of which was restricted to the owner personally. The donor, in this case, was the absolute owner of the property gifted and the subject matter of the gift was not an interest restricted in its enjoyment to herself. The Court held that the gift deed was valid even though the donor had reserved to herself the possession and enjoyment of the property gifted.

Rajamma’s Case
Coming to the facts of the three Member Bench decision of the Supreme Court in Rajamma, in this case, the donor made a gift of an immovable property by way of a registered gift deed which was duly attested. However, she (the donor) retained the possession of the gifted property for enjoyment during her life time and she also retained the right to receive the rents of the property. The question before the Court was that since the donor had retained to herself the right to use the property and to receive rents during her life time, whether such a reservation or retention or absence of possession rendered the gift invalid?

The Supreme Court upheld the validity of the gift. It held that a conjoint reading of sections 122 and 123 of the Transfer of Property, 1882 Act made it abundantly clear that “transfer of possession” of the property covered by the registered instrument of the gift duly signed by the donor and attested as required was not a sine qua non for the making of a valid gift under the provisions of the Transfer of Property Act, 1882. Section 123 has overruled the erstwhile requirement under the Hindu Law/Buddhist Law of delivery of possession as a condition for making of a valid gift. The law today protects only the rules of Muhammadan Law from the provisions of Chapter VII relating to gifts.

In so far as the transfer of movable property by way of gift is concerned the same can be effected by a registered instrument or by delivery. Transfer by way of gift of immovable property no doubt requires a registered instrument but the provision does not make delivery of possession of the immovable property gifted as an additional requirement for the gift to be valid and effective. Absence of any such requirement led the Court to the conclusion that delivery of possession was not an essential prerequisite for the making of a valid gift in the case of immovable property.

The Court also distinguished on facts, the earlier Supreme Court decision in the case of Narmadaben Maganlal Thakker. It held that in that case, the issue was of a conditional gift whereas the current case dealt with an absolute gift. The Court accepted the ratio laid down in the latter case of K. Balakrishnan.

Thus, the Supreme Court established an important principle of law that a donor can retain possession and enjoyment of a gifted property during his lifetime and provide that the donee would be in a position to enjoy the same after the donor’s lifetime.

How is This principle helpful? The principle laid down would be very helpful in case of gifts amongst family members. The donor can gift a property and retain possession during his lifetime thereby quelling any succession disputes post his demise which are typical in the case of a Will. Added to this is the recent relaxation under the Maharashtra Stamp Act, 1958 whereby any residential property gifted to a spouse, children or grand children would attract a duty of Rs. 200 only. The Income-tax Act also exempts from taxation gifts received from certain defined relatives. If the gifted immoveable property is yielding income by way of rent, one needs to consider in whose hands such income will be taxed since the recipient of income will not be the owner of the property.

Thus, a person can have a simple, low-cost succession solution at least qua his residential property which often is a big asset for several families.

So the Moral of the Story is Gift Away But Don’t Give Away (for now)!!

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Precedent – Conflicting decisions of Supreme Court – Later judgement in point of time will be followed

The South Indian Sugar Mills, Bangalore & Ors vs. Govt. of Karnataka & Ors.; AIR 2015 (NOC) 559 (Kar.)

The Hon’ble Court observed that if this Court was confronted with two conflicting decisions of the Hon’ble Supreme Court by its Benches consisting of equal number of Judges, this Court would follow the judgment, which is later in point of time.

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Hindu Law – Suit for partition – Concept of dual ownership – Land and building or structure standing thereon

Dattaram Waman Kambli vs. Shantaram Bapu Kambli & Ors.; AIR 2015 (NOC) 474 Bom.

The plaintiff and his two brothers namely, the defendant nos. 1 and 2 had equal share in the land. The dispute was about the entitlement of the plaintiff to any share in the house, which was constructed on the land in question. The plaintiff did not dispute that he had not contributed anything towards the construction of the house and the defendant nos. 1 and 2 were permitted to construct the house with their own funds. The house was constructed in the year 1977 in which the defendant nos. 1 and 2 were residing.

The learned counsel for the appellants submitted that the concept of dual ownership is recognised in India and it has been accepted by the Courts in India despite a contrary concept prevailing under the British law.

It was submitted that though, the share of the plaintiff in the land is not disputed, in view of the aforesaid position of law accepted by the Courts in India, the plaintiff is not entitled to get any share in the structure of the house constructed thereon. As against this, the learned counsel appearing for the respondent (Original Plaintiff) submits that the Hindu law does not recognise such a concept of dual ownership.

The Hon’ble Court observed that in Ramkrishna Girishchandra Dode & Others vs. Anand Govind Kelkar & Others delivered by this Court reported in (1999) 1 Bombay Case Reporter 63, it has been held as under:

“The concept of dual ownership one of the land and the other of the structure on the land has been recognised by several decisions of this Court. The consistent view taken by this Court is that where the landlord get a decree for eviction of a plot of land against a tenant the licensee or a sub-tenant inducted by the tenant on the structure put by him has no right against the landlord. If therefore the landlord is entitled to get vacant possession of the land, he is entitled to evict the occupant in the said structure erected by the tenant, in as much as the occupant of the structure has no legal right against the landlord in so far as the land is concerned. The land must be put in possession of the landlord, free from any encumbrance whatsoever.”

In view of the aforesaid position of law, it was apparent that the concept of the dual ownership, one of the land and the other in the building or structure standing thereon had been recognised and accepted by the Courts in India. The applicability of the principle would not be different even if it is a case between the real brothers and the law as has been laid down by the Courts in India would apply to the dispute between the real brothers also. Merely because, the plaintiff had share in the land beneath the building, it does not automatically follow that he would have share in the building constructed also. The plaintiff did not dispute that he has not contributed anything for construction of the house on the land in which he has a share. It is also not in dispute that he had permitted his brothers to construct building/house with their own funds. No objection was raised for such construction. Therefore, it had to be held that though the plaintiff has share in the land, he did not have any share in the structure or building erected thereon.

The plaintiff is not entitled to a partition and possession of the suit house.

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GUIDANCE NOTE ON ACCOUNTING FOR DERIVATIVE CONTRACTS

The recently issued ‘Guidance Note on Accounting for Derivative Contracts’ (GN) under Indian GAAP amongst other things will apply to forward contracts or derivatives that hedge a highly probable forecasted transaction or firm commitment. It will also apply to derivatives entered into for hedging both foreign currency and interest rate risk such as a cross currency interest rate swap which are outside the scope of AS-11.

The GN however does not cover items that are within the scope of other standards, for example, investments which are in the scope of AS-13 and forward exchange contracts to hedge existing items in the balance sheet which are in the scope of AS-11.

The GN is not meant to be exhaustive, for example, it does not cover accounting of embedded derivatives.

The GN contains the following broad requirements:

i. All derivative contracts should be recognised on the balance sheet and measured at fair value.

ii. If any entity decides not to use hedge accounting as described in this GN, it should account for its derivatives at fair value with changes in fair value being recognised in the statement of profit and loss.

iii. If an entity decides to apply hedge accounting as described in this GN, it should be able to clearly identify its risk management objective, the risk that it is hedging, how it will measure the derivative instrument if its risk management objective is being met and document this adequately at the inception of the hedge relationship and on an ongoing basis.

iv. An entity may decide to use hedge accounting for certain derivative contracts and for derivatives not included as part of Hedge Accounting, it will apply the principles at (i) and (ii) above.

v. Adequate disclosures of accounting policies, risk management objectives and hedging activities should be made in its financial statements.

In case a derivative contract is not classified as a hedging instrument because it does not meet the required criteria or an entity decides against such designation, it will be measured at fair value and changes in fair value will be recognised immediately in the statement of profit and loss.

Transitional provisions in the GN
The transitional provisions in the GN requires any cumulative impact (net of taxes) to be recognised in reserves as a transition adjustment and disclosed separately. The GN becomes applicable for accounting periods beginning on or after 1st April, 2016; its earlier application is encouraged.

Query
In March 2008, the ICAI issued an announcement that in case of derivatives, if an entity does not follow AS 30, keeping in view the principle of prudence as enunciated in Accounting Standard (AS) 1, Disclosure of Accounting Policies, the entity is required to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market.

Accordingly, Company Aggrieved Ltd. (CAL), accounting policy is to recognise mark to market losses on derivative, and ignore mark to market gains. As per its accounting policy this exercise is carried out on an itemised basis (and not on a portfolio basis).

Assume CAL is a private company with a low net worth and therefore is not covered under Ind AS, nor does it want to apply it voluntarily. On 1st April, 2016, CAL expects a huge unrecognised mark to market gain, which under the GN it is required to be recognised in reserves. CAL falls in the normal income tax bracket, and is not covered under MAT. For certain reasons, CAL wants to recognise the unrecognised mark to market profits at 31st March, 2016 in the P&L. It feels aggrieved that it is not allowed to do so under the GN.

Can CAL recognise in the year ended 31st March 2016 P&L, the unrecognised mark to market gains?

Author’s Response
Yes. The transitional provisions in the GN are conflicting with the requirement of notified accounting standard AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. As per AS 5, any changes in accounting policies, other than those that are caused on account of a new accounting standard is recognised in the P&L. The changes in accounting policies caused as a result of a new accounting standard are recognised as per the requirement contained in that new accounting standard. The new accounting standard may require the change in accounting policy to be recognised in the reserves.

In the instant case, the change in accounting policy is not caused as a result of a new accounting standard but due to a new Guidance Note. The changes in accounting policy due to the GN should therefore be necessarily recognised in the P&L. This will be the technically right thing to do. However, given that the GN has been issued under the authority of the ICAI, it appears that entities will have an option of either following the principle of AS 5 or to follow the requirements of the GN. In other words, the unrecognised mark to market gains can either be recognised in the 31st March 2016 P&L or alternatively is adjusted in the reserve at 1st April 2016.

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[ITA No 7646 to 7653, 7654 to 7669/ Mum/ 2012] (Unreported) Mckinsey & Co. Inc vs. ADIT A.Y: 2009-10, Dated: 17.04.2015

If the facts are similar, settlement reached under Mutual agreement procedure (MAP) for one assessment year also applies to other assessment years .

Facts:
The Taxpayer, a US company, was engaged in the business of providing strategic consultancy services. I Co was part of Taxpayer’s group and was set up to provide similar services to customers in India.

For rendering services in India, I Co availed following assistance from the Taxpayer.

• Advice on matters such as prevailing practices in various geographical areas, industries, etc. as may be relevant to the specific client assignment;
• Provision of information/data as may be specifically requested by I Co in areas such as population, GDP, inflation, production capacities, regulations, policy framework, etc., and
• Other advisory support as may be required by I Co for the purposes of executing the client assignments.

On similar facts, but for a different assessment year, Government of India and Government of USA had agreed under a Mutual Agreement procedure (MAP) that the services rendered by the Taxpayer would not fall in the category of fee for included services (FIS), and hence such fees will not be taxable in India.

For the year under reference, The Tax Authority held that services were chargeable in India as FIS and the MAP proceeding relating to a different assessment year is not applicable for the relevant assessment year.

Held:
India –USA DTAA provides the Taxpayers to approach the competent authorities of its resident State, where an action of the other State results in taxation not in accordance with the DTAA. The competent authorities are required to endeavour to resolve the issue through mutual agreement procedure. Any such agreement reached is implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States. Accordingly, even the Tribunal was bound by the settlement arrived under MAP proceedings. Hence services rendered by the Taxpayer are not taxable in India.

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TS-325-ITAT-2015 (Mum) Idea Cellular Limited vs. ADIT A.Ys: 2010-11, Dated: 10.06.2015

Section 9(1)(v), 9(1)(vii) – “Arranger Fee” paid to foreign bank to facilitate loan from, and negotiating terms and conditions with, NR lender, is not in the nature of interest or fees for technical services (FTS).

Facts:
Taxpayer, an Indian Company (I Co), entered into term loan agreement with an a non-resident (“NR”) lender. This term loan was arranged by a foreign bank (F Co) as an arranger. As per the arranger agreement, F Co was required to act as an intermediary between I Co and the lender, liaise with the NR lender and negotiate the terms and conditions of the facility with the lender on behalf of I Co. For such services, I Co paid “arranger fee” to F Co. I Co contended that the payment made to F Co was not in the nature of interest under the Act and hence, taxes were not required to be withheld on “arranger fee”. However, the Tax Authority contended that the “arranger fee” was in the nature of interest or alternatively qualified as FTS and hence liable to tax u/s.9(1)(v)/(vii) of the Act.

Held:
The issues in appeal were decided as under:

Whether arranger fee can be regarded as interest

FCo, as an arranger, facilitated the credit facility between the lender and I Co on terms which were agreeable to both the parties. Thus, F Co had acted as a sort of broker or middleman for arranging the loan for I Co.

Interest is defined under the Act and the definition has two limbs. The main limb of the definition clearly provides that interest should be in respect of the money borrowed or debt incurred. F Co was not the lender because no debt was incurred by I Co in favour of F Co vis-a-vis the money borrowed. FCo was merely a facilitator who brought parties together for facilitating the loan/credit facility.

The second limb of the definition of interest is an inclusive limb and includes service fee or other charge. However, such fee or charge should also be in respect of money borrowed i.e. given by the lender to the borrower. The service fee or other charge does not bring within its ambit any third party or intermediary who has not given any money.

The fundamental proposition permeating between various kinds of payments covered by “interest” under the Act is that, those payments are paid or payable to the lender either for giving loan or for giving the credit facility. Nowhere the definition suggests that interest includes fees paid to a third party who did not give any loan or extend any credit facility.

The element of borrower-lender relationship is a key factor to bring the payment within the ambit of definition of interest under the Act. The Arranger fee may be inextricably linked with the loan or utilisation or loan facility but it is not a part of interest payable in respect of money borrowed or debt incurred.

Whether arranger fee can be regarded as FTS

“Arranger fee” is also not in the nature of ‘consultancy services’ as F Co did not provide any advisory or counselling services. The payment is also not for managerial services.

The term ‘managerial’ essentially implies control, administration and guidance for business and day-to-day functioning. It includes the act of managing by direction or regulation or superintendence. F Co was not involved in: providing control, guidance or administration of credit facility; or in day-to-day functioning of I Co; or in overseeing the utilisation or administration of the credit facility. Thus, on facts, F Co cannot be said to have rendered managerial services. Consequently, “arranger fee” cannot be termed as FTS within the meaning of section 9(1)(vii) of the Act. The Tribunal also relied on decisions in Credit Lyonnais ([2013] 35 taxmann.com 583) and Abu Dhabi Commercial Bank Ltd ([2013] 37 taxmann.com 15)..

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[ITA No.5406/DEL/2012] (Unreported) Pride Offshore International LLC (Presently known as Ensco Offshore International Taxation) vs. ADIT A.Y: 2008-09, Dated: 22.05.2015

Section 44BB – Income from providing drilling rig on hire to a person who is engaged in drilling activities in India for ONGC is eligible for the benefit of presumptive taxation u/s. 44BB of the Act.

Facts:
Taxpayer, a Company incorporated in USA (USCo), was a non-resident (“NR”) engaged in the business of providing drilling rig, and rendering services and facilities in connection with prospecting, production and extraction of mineral oil. USCo provided an offshore drilling rig on hire to one of its group entity- also a NR (Group Co) which the Group Co used for drilling activity in India carried out on behalf of oil producing Indian company (I Co). USCo had a PE in India. The income from the contract entered into by USCo in India was effectively connected with that PE in India.USCo filed its return of income by declaring income from provision of drilling rig on presumptive basis u/s 44BB of the Act. However, the Tax Authority argued that the rig was not provided by USCo pursuant to a direct contract with I Co but was provided to a sub-contractor. Accordingly, the Taxpayer was not entitled to avail benefit of taxability u/s. 44BB of the Act.

Held:
The benefit of presumptive taxation u/s 44BB requires that the Taxpayer should be a NR and it should be

• engaged in the business of providing services or facilities in connection with the prospecting, production and extraction of mineral oil (first limb)or
• engaged in the business of supplying ‘plant and Machinery’ on hire used or to be used in the prospecting, or extraction of mineral oils (second limb)

The second limb requires that the NR Taxpayer must supply plant and machinery and such plant and machinery should be used for prospecting for extraction or production of mineral oils. The emphasis is on “use for” and not “use by”.

Whether the rig is deployed in the prospecting activities pursuant to a direct contract with I Co or pursuant to a contract with sub-contractor is nowhere the condition or any mandatory provision of section 44BB. The only essence is that equipment is used in the prospecting for or extraction of mineral oils.

Where the provision does not create any discrimination between the person who actually does the activity of prospecting for or extraction or production, and the person who supplies the plant and machinery, the narrow interpretation of the provisions is not permitted.

Further in the case of PGS Geophysical (269 CTR 433), Delhi HC laid down two conditions for the applicability of section 44BB as follows:
• Taxpayer should have a (Permanent Establishment) PE in India during the relevant period and
• The contract entered into by the Taxpayer in India should be effectively connected with that PE in India.

As both these conditions were fulfilled, benefit of section 44BB was available to USCo.

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MORALITY OF A LAWYER’S ETHICS

Morals are an emotive concept. Everyone has a view on what exactly it means and how exactly to live a morally right life. Like the story of the blind men and the elephant, it means different things to different people. This is even more pronounced when it comes to the practice of law. Every situation requires a judgement- what is the right thing to do and what would be wrong – “legally right” and “legally wrong”, one must hasten to add. That professional judgement is invariably also judged from the moral standpoint. That is when all hell can break loose.

Morals, Ethics and Law
Each of morals, ethics and laws, are about assessment of the right and the wrong. An individual’s own principles of right and wrong, constitutes his morals. Every human being has an innate sense of what is right and wrong to his mind – this dictates his “morals”. Ethics is about the rules of conduct that a community of individuals, formed on the basis of activity or even culture, writes for itself. Ethics have a clear link to character (“ethos”) of the section of society that follows it.

Law, binds an entire society, and evolves from the influence of morals and ethics. It is essentially a product of averaging the forces of morals and ethics and developing an acceptable minimum standard of conduct across society. All averages leave constituents unhappy – those above and below the average can always feel shortchanged. Therefore, despite doing the legally right thing, one can be perceived as morally wrong, and doing the something legally wrong too can get lauded as ethically sound.

Decline of morality: really?
First, let’s deal with the issue of morality. The refrain that “moral values are on the decline” is as old as the hills. It is something that could have been said in almost every phase of human history. It is quite like that oft-stated phrase: “we live in interesting times.” You can say it in every single conceivable situation. Examples abound of how societies would have said morals are on the decline. A society’s sense of morals can change with time. Jesus Christ devoted his short life to preaching his sense of morality. The society in which he preached believed that Christ was an assault on their moral values – in today’s moral compass, unthinkable. References to Shylock in The Merchant of Venice allude to how immoral the moneylender was in asserting his legal right to a pound of flesh. If that play were to be written today, Shakespeare would have been castigated for holding anti-semitic prejudices by referring to Shylock’s membership to the Jewish community.

Take the worst that man can do to man: slavery. When slave labour was being questioned by citizens in the northern parts of the United States, slave owners in the south argued that moral values were on the decline. They asserted how it was morally wrong to attack their legal right to own property that they had legally paid for. Indeed, slave owners would quote the Bible to convince their slaves that a life committed to slavery was Godendorsed. Today, it is revulsive to even think about it. Yet, those who indulge in slave labour today (yes, it is alive and kicking – and yes, it can even take the form of the domestic help in Mumbai households without any of the rights their employers would take for granted from their employers) surely convince themselves about the morality of their actions so that they get sleep at night.

One man’s soul-filling morality can be another man’s toxic poison. When the Indian Supreme Court refused to strike down law criminalizing homosexuality, a section of society argued that the court’s refusal to intervene is evidence that moral values were on the decline. The sections that went to the Supreme Court had argued that the Delhi High Court striking down that law was evidence that morality was on the decline. They wanted the Supreme Court to correct that. This moral bunch had representation from the ayatollahs of every faith that lives in India and whose fatwas, large sections of our society are accustomed to follow.

Even individuals who have given a lifetime of commitment to universal brotherhood and doggedly adhering to their sense of morality are not immune from attack of those who don’t accept that moral compass. Mahatma Gandhi was even killed. His killers would have developed a strong moral argument in their own minds to convince themselves that taking his life was the “right” thing to do. The Dalai Lama, a living idealist who uses scientific methods in his bid to emphasize that it is not extraordinary to be compassionate even with those who may inspire hate, is accused by some young-and-violent Tibetans of neglecting their interests with his peace-based approach to the universe. Some of them immolate themselves in protests – indicating that at least in their minds, they have the fullest moral conviction that their approach is right and the Dalai Lama’s practice is wrong.

Evolution of Law
Therefore, what is morally right and wrong is incapable of being tied down to the satisfaction of all. It can vary depending on the individual considering the question. For the same individual, it can vary with the time in which she considers the question. It could even vary if the context in which she considers the question varies, even if at the same time. When every individual in a society has a strong view on the right and the wrong, consensus is impossible. It is to grapple with this dilemma that societies need “law” – a minimum set of rules that everyone needs to conform to, across sections of society. It is enforced by the coercive power of the “State”.

What then should be the moral and ethical compass for a practitioner of law? By nature, human society is judgmental. One of my favourite questions in talks that I give on the rule of law is: “How many in this room believe Ajmal Kasab should have a trial?” I have not come across a single instance of a huge majority response that he indeed needs trial. The nature of audience has ranged from chartered accountants, businessmen, consultants, bureaucrats, and sadly, even lawyers.

It is this apathy that would come to bite when a chartered accountant, businessman, consultant, bureaucrat or lawyer stands accused and the popular voice of society is that she does not need a trial. Business and crime are being considered synonymous in the rising din of society and the same treatment that the educated professional class wants to mete out to Kasab is the treatment that the rest of society wants to mete out to this class.

The need for a trial to assess what actually happened in the eyes of law is a critical component of the rule of law. Our constitution guarantees protection to members of our society against incriminating themselves for a very sound reason. If there were no such protection, all it would need to “solve crime” would be to physically beat false confessions out of people. Therefore, even where someone confesses to a crime, the justice system is required to go into whether the confession is truthful and to see that justice is indeed done. How else does one prevent drivers owning up banging up cars they never drove, or for that matter, weak youngsters in a professional firm from being forced to confess to wrongs they never committed just to protect the erring partner in a professional negligence claim? What really transpired can only be found out by trial.

One is seeing increasing instances of assaults on lawyers agreeing to represent those accused of crimes that anger society. It can take varying forms. Physical assaults on potential lawyers for Kasab, tongue-lashing of Salman Khan’s lawyer, reputational assault on amicus curiae (a “friend of the court” appointed by the court to render assistance) in the Supreme Court appeal of Kasab’s sentence when he was reported to have said that the trial had not been fair. It is in this milieu that developing a strong sense of adherence to a personal moral and ethical standard is critical to save society from the rule of the mob. What is that standard?

The lawyer’s Ethical Standard a lawyer is required to dispassionately present facts and law to the judge, who required to dispassionately rule on matters before her without fear or favour and uncaring for consequences outside the realm of law and justice. Every lawyer is duty-bound to accept any brief at a fee consistent with his standing. That is the real ethic of a lawyer. That a brief can turn politically controversial or socially unpopular is not a ground for refusing a brief. A lawyer is obliged to use all fair, legitimate and honourable means to uphold his client’s interests regardless of his personal opinion as to the guilt. His loyalty is to the law.

Judging his client’s guilt is the court’s role. The lawyer is but one of the officers of that court.

Not too long ago, Kerala Congressmen were upset that party spokesman Abhishek Manu Singhvi represented a local lottery distributor. The Bharatiya Janata Party had once expelled Ram Jethmalani for representing convicts in the Indira Gandhi assassination case. Eventually, one of the accused was actually absolved in appeal. Both these politician-lawyers had stood their ground. But not all do so. They fall into the unethical trap of finding reasons to return briefs, or worse, even going on national television to argue how an accused like Kasab should never get trial. Such attitudes erode the objectivity and fearlessness critical for an effective run of the rule of law.

For a real professional, the foundational rule is not to judge. More importantly, not to be influenced by others’ judgements, in distraction from the facts and merits of the situation. It is the role of the judge to render judgement and not that of the professional. A lawyer refusing to take up representation despite having time on hand is identical to a doctor refusing to treat a patient because of his own moral judgments – say the dying patient is gay and the doctor is a homophobe.

Worse is taking up representation and deliberately jeopardizing the case. Sadly these are the kinds of suggestions one hears of in a charged up society. It is another matter that such suggestions would have been heard all through human history. It is akin to doctors injecting poison into Kasab in revenge instead of saving his life. That would have been an insult to the efforts of those who gave up their lives in the process of apprehending Kasab.

The worst of all is to intimidate and attack those who do their job in conformity with their ethical standard. There can be nothing more immoral than questioning the morality of those who serve the cause of dispensation of justice on the ground that they are serving clients accused of crime.

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TS-327-ITAT-2015 (Hyd) Locuz Enterprise Solutions vs. DIT A.Ys: 2008-09 and 2009-10 Dated: 03.06.2015

Section 9(1)(vi), 195 – Payment for purchase of computer software for reselling to ultimate users, does not amount to royalty under the Act.

Facts:
Taxpayer, an Indian Co, was engaged in the business of trading of software. Taxpayer made certain payments to a non-resident (“NR”) for the purchase of computer software without withholding taxes on such payments u/s. 195 of the Act. Tax Authority contended that the payments were towards obtaining user license in the computer software and hence they represented use of copyright and accordingly being in the nature of royalty, were chargeable to tax in India.

The Taxpayer contended that it is a distributor of NR’s software products and the payments were made merely for the purchase of software for distributing them to the ultimate customers (i.e., the actual users of the software) in the prescribed territory. Accordingly, payments did not represent payment for use the software nor for acquiring license for use of the software and hence, were not royalty.

Held:
Taxpayer is purely a trader in software and not the user of the software. NR has appointed Taxpayer as nonexclusive distributor/re-seller of the software products of the for the territory.

The end user of the software products is not the Taxpayer but the customers in India, to whom the Taxpayer has sold the products.

Based on the agreement between the Taxpayer and NR, it is evident that the Taxpayer is a registered reseller, who books orders with NR on behalf of customers, collects payments and delivers software to the end users or customers. Further most of the time, the delivery is actually made via e-mail or via internet download. Since no ownership rights in the patents, copyrights relating to the software have been transferred by the NR to the Taxpayer, payment does not amount to royalty under the Act and hence taxes are not required to be withheld.

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TS-296-ITAT-2015 (Del) Mitsubishi Corporation India vs. DCIT. A.Y: 2010-11, Dated: 26.05.2015

Section 40(a)(i), Article 9 and 24 of India-Japan Double Taxation Avoidance Agreement (DTAA) – Disallowance for failure to withhold tax at source being discriminatory, and independent of Transfer Pricing (TP) adjustment under Article 9, Taxpayer is entitled to invoke Article 24.

Facts
The Taxpayer, an Indian company, made purchases from its AEs in Japan. Taxpayer did not withhold taxes on payments made towards purchase of goods from the AE. The Taxpayer contended that it was entitled to the benefit of Non-discrimination clause in terms of Article 24(3) of the India – Japan DTAA due to which, for the purpose of computing the taxable profit of an Indian enterprise, the provisions of Act shall apply, as if it is a transaction with an Indian enterprise. This is because there is no provision for withholding tax at source on payments for purchases made from an Indian resident; whereas purchases from a Non-resident (NR) is liable for tax withholding under the Act, which leads to non-permissible discrimination.

Tax Authority had made certain transfer pricing (TP) adjustment, though unrelated to the purchase of goods. The Tax Authority contended that since TP adjustment was made, Article 9 was applicable. Hence, Taxpayer cannot avail of the benefits of non-discrimination clause enshrined in Article 24(3) of the DTAA.

Held:
The contention of the Tax Authority that application of Article 24(3) is not possible in view of operation of Article 9 is not correct. The overriding effect of Article 9 over Article 24(3) is limited to the extent provided in Article 9. It does not render Article 24(3) redundant in totality.

A conjoint reading of these two Articles brings out that if there is some discrimination in computing the taxable income as a result of TP adjustments, then, such discrimination will continue as such. The rest of the discriminations will be removed by Article 24(3) to the extent as provided.

In the instant case, Taxpayer had sought the benefit of article 24 qua the disallowance for non-withholding of taxes and not in respect of an unrelated TP adjustment. Thus, Taxpayer is entitled to rely on Article 24 of the DTAA and will not be liable to suffer disallowance in respect of value of purchases for failure to withhold taxes under provisions of the Act.

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OECD – Base Erosion and Profit Shifting Project [BEPS] – Part I

There is a growing perception that governments lose substantial corporate tax revenue because of planning aimed at shifting profits in ways that erode the taxable base to locations where they are subject to a more favourable tax treatment. Recent news stories show increased attention mainstream media has been paying to corporate tax affairs. Civil society and non-governmental organisations (NGOs) have also been vocal in this respect, sometimes addressing very complex tax issues in a simplistic manner and pointing fingers at transfer pricing rules based on the arm’s length principle as the cause of these problems. In this article, an attempt has been made to explain the background of a very ambitious and important BEPS Project undertaken by OECD. In addition, brief description of the task and issues of all the 15 Action Plans alongwith the time line and present status has been given for an understanding of the same.

1. Background on BEPS
Base erosion and profit shifting (BEPS) is a global problem which requires global solution. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).

In an increasingly interconnected world, national tax laws have not always kept pace with tax planning by global corporations, fluid movement of capital, and the rise of the digital economy, leaving gaps that can be exploited to generate double non-taxation. This undermines the fairness and integrity of tax systems.

This increased attention and the inherent challenge of dealing comprehensively with such a complex subject has encouraged a perception that the domestic and international rules on the taxation of cross-border profits are now broken and that taxes are only paid by the naive. Multinational enterprises (MNEs) are being accused of dodging taxes worldwide, and in particular in developing countries, where tax revenue is critical to foster long term development.

Business leaders often argue that they have a responsibility towards their shareholders to legally reduce the taxes their companies pay. Some of them might consider most of the accusations unjustified, in some cases deeming governments responsible for incoherent tax policies and for designing tax systems that provide incentives for Base Erosion and Profit Shifting (BEPS). They also point out that MNEs are still sometimes faced with double taxation on their profits from cross-border activities, with mutual agreement procedures sometimes unable to resolve disputes among governments in a timely manner or at all.

The debate over BEPS has also reached the political level and has become an issue on the agenda of several OECD and non-OECD countries. The G20 leaders meeting in Mexico on 18-19 June 2012 explicitly referred to “the need to prevent base erosion and profit shifting” in their final Declaration. This message was reiterated at the G20 finance ministers meeting of 5-6 November 2012, in the final communiqué.

The European Commission presented an Action Plan on 17-06-2015 to fundamentally reform corporate taxation in the EU. The Action Plan sets out a series of initiatives to tackle tax avoidance, secure sustainable revenues and strengthen the Single Market for businesses. The measures to be developed complement the work carried out in the OECD/G20 BEPS Project, whose outputs are expected to be presented to the G20 in October 2015.

1.1 Legality and issues relating to BEPS
Corporate tax is levied at a domestic level. When MNEs undertake activities across borders, the interaction of domestic tax systems means that an item of income can be taxed by more than one jurisdiction, thus resulting in double taxation. The interaction can also leave gaps, which result in income not being taxed anywhere. BEPS strategies take advantage of these gaps between tax systems in order to achieve double non-taxation or very low taxation.

Although some schemes used are illegal, most are not. Largely they just take advantage of current rules that are still grounded in a bricks and mortar economic environment rather than today’s environment of global players which is characterised by the increasing importance of digital economy, e-commerce, intangibles and risk management.

A question arises for consideration: if the BEPS strategies/ schemes are considered to be legal, then why should anyone worry about BEPS. There are three important factors in this regard. First, because it distorts competition: businesses that operate cross-border may profit from BEPS opportunities, giving them a competitive advantage over enterprises that operate at the domestic level. Second, it may lead to inefficient allocation of resources by distorting investment decisions towards activities that have lower pre-tax rates of return, but higher after-tax returns. Finally, it is an issue of fairness: when taxpayers (including ordinary individuals) see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers.

1.2 Importance of BEPS Project now and OECD’s role in addressing BEPS
The OECD has been providing solutions to tackle aggressive tax planning over the years. The debate and concern over BEPS has now reached the highest political levels in many OECD and non-OECD countries. The OECD does not see BEPS as a problem created by one or more specific companies. Apart from some cases of very bad and easily noticed abuses, the issue lies with the tax rules themselves. Business cannot be faulted for making use of the rules that governments have put in place. It is therefore governments’ responsibility to revise the rules or introduce new rules.

Many BEPS strategies take advantage of the interaction between the tax rules of different countries, which means that unilateral action by individual countries will not fully address the problem. In addition, unilateral and uncoordinated actions by governments responding in isolation could result in double – and possibly multiple – taxation for business. This would have a negative impact on flow of capital and technology, investment, growth and employment globally. There is therefore a need to provide an internationally coordinated approach which will facilitate and reinforce domestic actions to protect tax bases and provide comprehensive international solutions to respond to the issue. The BEPS Action Plan provides a consensus-based plan to address these issues and is part of the OECD’s ongoing efforts to ensure that the global tax architecture is equitable and fair.

1.3 BEPS Action Plans
It sets forth 15 actions to address BEPS in a comprehensive and coordinated way. These actions will result in fundamental changes to the international tax standards and are based on three core principles: coherence, substance, and transparency. The Action Plan also calls for further work to address the challenges posed by the digital economy. Looking toward innovative approaches to deliver change quickly, the Action Plan calls for a multilateral instrument that countries can use to implement the measures developed in the course of the work. While the OECD steps up its efforts to address double nontaxation, it will also continue work to eliminate double taxation, including through increased efficiency of mutual agreement procedures and arbitration provisions.

In July 2013, the Action Plan on Base Erosion and Profit Shifting directed the OECD to commence work on 15 actions designed to ensure the coherence of corporate income taxation at the international level. The first seven of these actions were presented to G20 Leaders at the Brisbane Summit in November 2014.

1.4 Actions plans being carried out in the context of BEPS
Domestic tax systems are coherent – tax deductible payments by one person results in income inclusions by the recipient. We need international coherence in corporate income taxation to complement the standards that prevent double taxation with a new set of standards designed to avoid double non-taxation. Four actions in the BEPS Action Plan (Actions 2, 3, 4, and 5) focus on establishing this coherence.

Current rules work well in many cases, but must be modified to prevent instances of BEPS. The involvement of third countries in the bilateral framework established by treaty partners puts a strain on the existing rules, in particular when done via shell companies that have little or no economic substance: e.g. office space, tangible assets, business operations and employees. In the area of transfer pricing, rather than replacing the current system, the best course is to fix the flaws in it, in particular with respect to returns related to over-capitalisation, risk and intangible assets. Nevertheless, special rules, either within or beyond the arm’s length principle, may be required with respect to these flaws. Five actions in the BEPS Action Plan focus on aligning taxing rights with substance (Actions 6, 7, 8, 9, and 10).

Because preventing BEPS requires greater transparency at many levels, the Action Plan calls for: improved data collection and analysis regarding the impact of BEPS; taxpayers’ disclosure about their tax planning strategies; and less burdensome and more targeted transfer pricing documentation. Four actions in the BEPS Action Plan focus on improving transparency (actions 11, 12, 13, and 14).

The brief description, timeline and present status of the Action plans are given in para 2 below.

1.5   Implementation of the BEPS actions
The BEPS Action Plan calls for the development of tools that countries can use to shape fair, effective and efficient tax systems. Because BEPS strategies often rely on the interaction of countries’ different systems, these tools will have to address the gaps and frictions that arise from the interaction of these systems. Some actions, for example, work on the OECD Transfer Pricing Guidelines and the Commentary to the OECD Model Tax Convention, will result in changes that are directly effective. Others will be implemented by countries through their domestic law, bilateral treaties, or a multilateral instrument.

1.6   Time frame for action plans
Addressing BEPS is critical for most countries and must be done in a timely manner so that concrete actions can be delivered quickly before the existing consensus-based framework unravels. At the same time, governments need time to complete the necessary technical work and achieve widespread consensus. Against this background, it is expected that the Action Plan will largely be completed within 2 years of its adoption. Indeed, the first set of measures and reports was released in September 2014, just 12 months after the launch of the BEPS project. Work on the reports to be delivered in 2015 has already started, and this work will continue at a fast pace to ensure the rapid development of concrete measures that countries can use to end double non-taxation and base erosion due to artificial shifting of profits.

1.7   Role of the G20 in BEPS project
Since its launch by the OECD, the work on BEPS received strong and consistent support by the G20 and it is a key item on the Finance Ministers’ and Leaders’ agendas.

Furthermore, all G20 countries have participated as equal partners in the development of the work. Their continued participation and endorsement at the highest levels of government have been critical to guarantee a level playing field and prevent inconsistent standards.

The delivery of the 2014 BEPS outputs is concrete evidence of how OECD and G20 members working together can achieve consensus on important tax reforms with a worldwide impact. Non-OECD G20 countries are Associates in the BEPS Project and participate on an equal footing in the decision making process, at the level of both the OECD Committee on Fiscal Affairs and of its subsidiary bodies carrying out the technical work. In addition, other countries and stakeholders have engaged in regular and fruitful dialogues throughout this process.

1.8 BEPS action plan and Tax competition Taxation is at the core of countries’ sovereignty, and each country is free to set up its corporate tax system as it chooses, including by charging the rate it chooses. The work is not aimed at restricting the sovereignty of countries over their own taxes; instead, it is aimed at restoring and strengthening sovereign taxing rights by ensuring that countries can protect their tax bases. It does so by addressing regimes that apply to mobile activities and that unfairly erode the tax bases of other countries, potentially distorting the location of capital and services.

1.9 Risk of not addressing harmful Tax Practices
The dangers of not addressing harmful tax practices can be felt both by governments and business. Firstly, harmful tax competition can introduce distortions and an unlevel playing field between businesses operating at domestic level and those that operate globally and have access to preferential tax regimes. Secondly, countries have long recognised that a “race to the bottom” would ultimately drive applicable tax rates on certain sources of income to zero for all countries, whether or not this is the tax policy a country wishes to pursue.

1.10 BEPS action plan & “Tax Havens”
The BEPS Action Plan aims to end the use of shell companies used to stash profits offshore or unduly claim tax treaty protection and neutralise all schemes that artificially shift profits offshore. Though the BEPS Action Plan is not about dictating whether countries should have a specific corporate income tax rate, it will have an impact on regimes that seek to attract foreign investors without requiring any economic substance.

1.11 Is BEPS effectively a tax increase on multinationals?
The BEPS project is not about increasing corporate taxes. Non- or low-taxation is not itself the concern, but it becomes so when it is achieved through practices that artificially separate taxable income from the activities that generate it. These strategies may increase tax disputes as countries fight against tax strategies that defy common sense. Implementation of the recommendations coming out of the BEPS project will reduce those disputes, giving business greater certainty, and reinforcing the fairness and consistency of international tax system.

1.12 Involvement of businesses and civil society in BEPS project
During the course of the work so far, stakeholders have been consulted at length. Discussion drafts released during the course of the work so far have generated more than 3,500 pages of comments, and have attracted a large number of participants at various public consultations. The OECD’s public webcasts of these consultations and updates on the project have attracted more than 10,000 viewers. This transparent and inclusive consultation process will continue throughout the course of the work.

1.13 BEPS action plan and offshore Tax Evasion
The work on BEPS focusses largely on legal tax planning techniques rather than offshore tax evasion, which is illegal. However, other work being carried out by the OECD and the OECD Global Forum on Transparency and the Exchange of Information is focused on combatting offshore tax evasion. More information about this work can be found on line at www.oecd.org/tax/exchange-of-tax¬information.

2. Brief description, timeline and present status of the BEPS action plans

2.1 Action 1 – Address the tax challenge of the digital economy

a)   Anticipated result: Report identifying issues raised by the digital economy and possible actions to address them
b)   initial deadline: September 2014
c)   Present status: Final Report Issued.
d)   Description of tasks and issues:
Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation.

Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location relevant data through the use of digital products and services, the characterisation of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross- border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector.

2.2   Action 2 – Neutralise the effects of hybrid mismatch arrangements
a)   Anticipated result: Changes to the Model Tax Convention Recommendations regarding the design of domestic rules.
b)   initial deadline: September 2014
c)   Present status: Comments on discussion draft received and published.
d)   Description of tasks and issues:
Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long- term deferral) of hybrid instruments and entities.

This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payer; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on coordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be co-ordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping.

2.3 Action 3 –Strengthen CFC rules

a)   Anticipated result: Recommendations regarding the design of domestic rules.
b)   initial deadline: September 2015
c)   Present status: Comments on discussion draft received and published.
d)   Description of tasks and issues:
Develop recommendations regarding the design of controlled foreign company rules. This work will be coordinated with other work as necessary.

2.4 Action 4 – Limit base erosion via interest deductions and other financial payments

a)   Anticipated result: (i) Recommendations regarding the design of domestic rules.
(ii)   Changes to the Transfer Pricing Guidelines
b)   initial deadline: (i) September 2015 and (ii) December 2015, respectively.
c)   Present status: Comments on discussion draft received and published.
d)   Description of tasks and issues:
Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related- party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments.

The work will evaluate the effectiveness of different types of limitations. In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements. The work will be coordinated with the work on hybrids and CFC rules.

2.5 Action 5 – Counter harmful tax practices more effectively, taking into account transparency and substance

a)   Anticipated result: (i) Finalise review of member country regimes; (ii) Strategy to expand participation to non OECD members; and (iii) Revision of existing criteria.
b)   initial deadline: (i) September 2014; (ii) September 2015; and (iii) December 2015, respectively.
c)   Present status: Interim report issued; deadline for second output September 2015 (engaging with other non-OECD member countries on the basis of the existing framework).
d)   Description of tasks and issues:
Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.

2.6   Action 6 – Prevent treaty abuse
a)   Anticipated result: (i) Changes to the Model Tax Convention; and (ii) Recommendations regarding the design of domestic rules.
b)   initial deadline: For both (i) & (ii) September 2014.
a) Present status: First Discussion draft released on 21-11-2014. Based on the Comments received, a new discussion draft released on 22- 5-2015, for Public Comments by 17-06- 2015. Comments on the revised discussion draft have been received and published on 18-06-2015.
c)   Description of tasks and issues:
Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be coordinated with the work on hybrids.

2.7   Action 7 – Prevent the artificial avoidance of PE status
b)   Anticipated result: Changes to the Model Tax Convention.
c)   initial deadline: September 2015
d)   Present status: First Discussion draft released on 31-10-2014. Based on the Comments received, a new discussion draft released on 15- 05-2015, for Public Comments by 12-06- 2015. Comments have been received and published on 15-06-2015.
e)   Description of tasks and issues:
Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions.
Work on these issues will also address related profit attribution issues.

2.8 Action 8 – Assure that transfer pricing outcomes are in line with value creation: intangibles

a)   Anticipated result: (i) Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention; and (ii) Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention.
b)   initial deadline: (i) September 2014; and (ii) September 2015, respectively.
c)   Present status: Discussion draft released. Comments received and published on discussion draft on Actions 8, 9 and 10. Detailed discussion draft on Cost Contribution Arrangements also released. Comments on discussion draft on Cost Contribution Arrangements have been received and published on 01-06-2015. Comments on discussion draft on Action 8 (Hard-to-value intangibles) have been received and published. Public consultation on discussion draft will be held on 6-7 July 2015.

d) Description of tasks and issues:
Develop rules to prevent BEPS by moving intangibles among group members. Phase:
I. (i) adopting a broad and clearly delineated definition of intangibles;
(ii) ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation;

II. (iii) developing transfer pricing rules or special measures for transfers of hard-to-value intangibles; and
(iv) updating the guidance on cost contribution arrangements.

2.9   Action 9 – Assure that transfer pricing outcomes are in line with value creation: risks and capital
a)   Anticipated result: Changes to the Transfer Pricing Guideline and possibly to the Model Tax Convention.
b)   initial deadline: September 2015.
c)   Present status: Discussion draft released. Comments received and published on discussion draft on Actions 8, 9 and 10.
d)   Description of tasks and issues: Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation. This work will be coordinated with the work on interest expense deductions and other financial payments.

2.10   Action 10 – Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions
a)   Anticipated result: Changes to the Transfer Pricing Guideline and possibly to the Model Tax Convention.
b)   initial deadline: September 2015.
c)   Present status: Discussion drafts released. Comments received and published on discussion draft on Actions 8, 9 and 10. Comments also received and published on Action 10: low-value adding services, Cross-border commodity transactions and Use of profit Splits in the context of the global value chains.
d)   Description of tasks and issues:
Develop rules to prevent BEPS by engaging   in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to:
(i)   clarify the circumstances in which transactions can be recharacterised;
(ii)   clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains; and
(iii)   provide protection against common types of base eroding payments, such as management fees and head office expenses.

2.11   Action 11 – Establish methodologies to collect and analyse data on bEPS and the actions to address it
a)   Anticipated result: Recommendations regarding data to be collected and methodologies to analyse them.
b)   initial deadline: September 2015.
c)   Present status: Discussion draft released. Comments on discussion draft received and published.
d)   Description of tasks and issues:
Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it.
The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and micro- level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses.

2.12   Action 12 – require taxpayers to disclose their aggressive tax planning arrangements
a)   Anticipated result: Recommendations regarding the design of domestic rules
b)   initial deadline: September 2015
c)   Present status: Discussion draft released. Comments on discussion draft received and published.
d)   Description of tasks and issues:
Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. One focus will be international tax schemes, where the work will explore using a wide definition of “tax benefit” in order to capture such transactions. The work will be coordinated with the work on co-operative compliance. It will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations.

2.13 Action 13 – Re-Examine transfer pricing documentation

a)   Anticipated result: Changes to Transfer Pricing Guidelines and recommendations regarding the design of domestic rules.
b)   initial deadline: September 2014
c)   Present status: Discussion draft released. Comments on discussion draft received and published. A Country-by-Country Reporting Implementation package developed under the OECD/G20 BEPS Project has been released on 08-06-2015.
d)   Description of tasks and issues:
Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.

2.14   Action 14 – Make Dispute resolution mechanisms more effective

a)   Anticipated Result: Changes to the Model Tax Convention
b)   Initial Deadline: September 2015
c)   Present Status: Discussion draft released. Comments on discussion draft received and published.
d)   Description of tasks and issues:
Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.

2.15 Action 15 – Develop a multilateral instrument

a)   Anticipated Result: (i) Report identifying relevant public international law and tax issues; and (ii) Develop a multilateral instrument.
b)   Initial Deadline: (i) September 2014; and (ii) December 2015, respectively.
c)   Present Status: (i) Final Report issued.
d)   Description of tasks and issues:

Analyse the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.

On the basis of this analysis, interested Parties will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution.

In the next part(s), we would discuss the various other aspects relating to BEPS Project including engagement with developing countries and impact on Non-G 20 or Non- OECD countries.

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Amendment in Notification No. VAT 1509/CR 89/Taxation-1, dt. 5.11.2009 (Consulate general Notification) addition of Russian Federation

VAT 1515/CR11/Taxation 1.dtd. 29 05 2015

Notification regarding refund to Diplomatic Authorities amended by adding “Russian Federation” under Other Organisations.

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Non Acceptance of correspondence and letters Trade Circular 8 of 2015 dated 16.6.2015

Commissioner of Sales Tax has instructed all officers and authorities of department to accept the correspondence and letters marked and addressed to them and also instructed to accept application u/s 23(11) for cancellation of assessment orders be accepted and thereafter considering the facts & merits of the individual cases officer should decide whether the cancellation be effected or not. If any instances of refusal of correspondence arise then the matter may be brought to the notice of higher authority and simultaneously the complaints may be addressed to the Commissioner of Sales Tax at cst@mahavat.gov.in .

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Clarification on rate of service tax on restaurant service Circular No. 184/3/2015-St dated 03 06 2015

The CBEC vide Circular No. 184/3/2015-ST dated June 3, 2015 has clarified that Pursuant to increase in rate of Service tax from 12.36% to 14% effective from June 1, 2015, effective rate of service tax on services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, having the facility of air-conditioning or central air-heating in any part of the establishment would be 5.6% (i.e. 40% of 14%) of total amount charged. It is further clarified that exemption from service tax still continues to services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, not having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year.

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M/S. Malbar Gold Pvt. Ltd vs. Commercial Tax Officer and Others, [2013] 58 VST 191 ( Ker)

VAT- Franchisee Agreement for Use of Trade Mark –Is Transfer of Right to Use Goods- Deemed Sales- Liable to VAT, s/s. 2(xx),(xliii) of The Kerala Value Added Tax Act, 2003

Facts
The petitioner company engaged in marketing, trading, export and import of jewellery, diamond ornaments, platinum ornaments, watches, etc., was the sole proprietor of the trade mark, ‘Malabar Gold’. The company had entered into franchisee agreements with several companies, situated inside and outside the State of Kerala and also abroad, as per which, on mutually agreed terms and conditions, these companies were allowed to use the trade mark owned by the petitioner. Franchisee services, being an activity attracting service tax under the Finance Act, 1994, the petitioner had obtained registration under section 69 of the Finance Act. For the year 2008-09, the petitioner received royalty of Rs. 3,27,68,607 from its franchisee companies for use of its trademark and for sharing business know-how and on this amount, they paid service tax. While so, the assessing authority issued notice stating that transfer of right to use any goods is taxable u/s. 6(1) of the Act and that, royalty received by the petitioner from its franchisees for use of its trade mark would attract VAT under entry 68 of the Third Schedule to the Act. On receipt of the notice, the petitioner contended that the transaction in question attracted service tax and payments of service tax and VAT are mutually exclusive and hence VAT is not payable.

Thereafter, the assessing authority passed the assessment order confirming the demand for Rs. 13,10,744 along with interest of Rs. 2,78,009 and also imposed penalty by a separate order. The petitioner company filed writ petition before the Kerala High Court to quash the assessment order as well as penalty order.

Held
From the constitutional and statutory provisions, it is clear that a transfer of right to use any goods for any purpose, for cash, deferred payment or other valuable consideration is deemed to be a sale for the purposes of the Act. In the pleadings in the writ petition itself, the petitioner company admitted that by virtue of the agreements entered into with their franchisees, the franchisees were authorised to use their trade mark and that in consideration thereof, they were receiving the agreed royalty. In such circumstances, it can be concluded that the trade mark of the petitioner is transferred to the franchisees for their use and the consideration received is the royalty paid to the petitioner. Such a transaction is a “deemed sale” as defined in section 2(xliii) of the Act read with Explanation V thereof.

The High Court further observed that as far as the requirement that transfer of trade mark to the transferees should be to the exclusion of the transferor is concerned, if the petitioner had a case that the franchisee has no exclusive right within the territory allotted to it, it was for them to plead and prove this contention. There was no such plea before the High Court and copy of the agreements were not even been produced before the Court. Further, the specimen franchisee agreement, made available by the counsel for petitioners before the Court, showed that the franchisee had undertaken not to use the showroom for any purpose or activity other than that were provided in the agreement and to stock only products authorised by the petitioner. In such circumstances, the High Court held that even according to the petitioner, the trade mark had been transferred for the use of their franchisees for royalty paid on terms which are agreed between the parties. Therefore, the contention with respect to nonexclusive transfer of right was not accepted by the Court.

The High Court further held that royalty received is liable to be taxed under the Act and the court was not called upon to decide the legality of the levy of service tax on the royalty received by the petitioner. Therefore, if the petitioner had a case that levy of service tax is illegal for any reason; it is up to them to challenge the levy in appropriate proceedings. Accordingly, the High Court dismissed the writ petition filed by the petitioner company.

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Commercial Tax Officer vs. Whirlpool India Ltd [2013] 58 VST 177 (Raj)

Sales Tax Act- Collection of Optional Warranty Charges- At The Time of Sale of Goods-Does not Form Part of Sale Price- Not Liable to Tax, The Rajasthan Sales Tax Act, 1994.

Facts
The department challenged the orders of Rajasthan Tax Board, passed on December 5, 2002 holding that optional service/warranty charges were not included in the price of the goods sold (refrigerators) as they do not constitute a part of the sale price. The Rajasthan Tax Board has held that such charges paid by a customer to a dealer would not be liable to attract levy of tax under the Rajasthan Sales Tax Act, 1994.

Held
The Tax Board has held that the charges levied on account of after sales service/warranty were optional. There was enough material before the Tax Board to hold that the charge levied by the assessee towards service/warranty charges at the time of the sale was not universal but optional. Following this finding the legal consequences would be inexorable and entail exclusion of such charges from the ambit of sale price of the goods being post sale. Accordingly, the High Court dismissed the petition filed by the department.

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M/S. National Mineral Development Corporation Ltd. vs. State of AP, [2013] 58 VST 136 (AP)

Sales Tax- Surrender of Exim Scrip- Not a Sale – Not Liable to Tax, section 2(1)(n) of The Andhra Pradesh Sales Tax Act,1957.

Facts
The appellants had REP licences/ exim scrips which they surrendered to the Government and received 20 per cent premium as provided in circular No. 11/93 dated May 5, 1993. The assessing authorities took the view that the amounts received by them towards the premium/price on the surrender of the REP licences/exim scrips is liable to tax as they are “goods” within the meaning of section 2(h) of the Andhra Pradesh General Sales Tax Act,1957. The appellants however contended that they surrendered the REP licences/ exim scrips and received premium as incentive and therefore the surrender value of the scrips cannot be subjected to tax. The appellants filed petition before the AP High Court against the judgment of tribunal holding it as sale liable to tax.

Held
Admittedly, the policy and system under which REP licences/ exim scrips were issued was discontinued with effect from March 1, 1992 and the Director-General of Foreign Trade issued the circular No. 11/93 dated May 5, 1993 announcing that unutilised exim scrips could be surrendered and authorised the Joint Director-General of Foreign Trade to pay 20 per cent premium to the exporters through State Bank of India and its subsidiaries. After the expiry of the period of validity, these REP licences/ exim scrips became valueless and holders of such REP licences/ exim scrips could neither import goods duty-free nor sell them for value. Thus, they ceased to be items which could be freely traded in the open market and on their surrender to the Government of India, even the Government of India cannot use them for trading in the open market and they would stand cancelled and were valueless. By no stretch of imagination can it be said that such surrender by an exporter of REP licences/ exim scrips is in the course of trade or business. The premium paid by the Government to the exporters on the surrender of the REP licences/ exim scrips is only a solatium for the inability of the exporters to avail of the benefit of the incentives and cannot be treated as price or valuable consideration.

Therefore, the transaction of surrender of REP licences/ exim scrips is not a “sale” within the meaning of section 2(1)(n) of the Act and also would not constitute “turnover” within the meaning of section 2(1)(s) of the Act. Accordingly, the High Court allowed the petition filed by the appellants.

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