BCAJ | Bombay Chartered Accountant Journal

TDS: Disallowance of business expenditure: Sections 40(a)(ia) and 194C of Income-tax Act, 1961: A.Y. 2006-07: Assessee-firm engaged in transportation business, secured contracts with oil companies for carriage of LPG, executed the contracts through its partners retaining 3% commission as charges: Sections 194C and 40(a)(ia) not applicable.

[CIT v. Grewal Bros., 240 CTR 325 (P&H)]

The assessee, a partnership firm, was engaged in the business of transport. It entered into contracts with oil companies for carriage of LPG. From the payment made to it, the companies deducted tax. The assessee firm passed on the transportation work to its partners and made the payment received from the said companies to its partners after deducting 3% commission as charges for the firm having secured the contract. The Assessing Officer held that in giving the contract of transportation by the firm to the partners there was a sub-contract and the firm was liable to deduct TDS [u/s.194C(2)] out of the payment made to the partners. Since the tax was not deducted at source on payments made to the partners, the Assessing Officer disallowed the amounts paid by the firm to the partners resulting in addition to the income. The CIT(A) and the Tribunal accepted the assessee’s plea and deleted the addition.

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

“(i) No doubt the firm and the partners may be separate entities for income-tax and it may be permissible for a firm to give a contract to its partners and deduct tax from the payment made as per section 194C, it has to be determined in the facts and circumstances of each case whether there was any separate sub-contract or the firm merely acted as agent as pleaded in the present case.

(ii) The case of the assessee is that it was the partners who were executing transportation contract by using their trucks and payment from the companies was routed through the firm as agent. The CIT(A) and the Tribunal accepted this plea on facts.

(iii) Once this plea was upheld, it cannot be held that there was a separate contract between the firm and the partners in which case the firm was required to deduct tax from the payment made to its partners u/s.194C.

(iv) The view taken by the Tribunal is consistent with the view taken by the Himachal Pradesh High Court in CIT v. Ambuja Darla Kashlog Mangu Transport Co-operative Society, 227 CTR 299 (HP) and the judgment of this Court in CIT v. United Rice Land Ltd., 217 CTR 332 (P&H).

(v) The matter being covered by earlier judgment of this Court, no substantial question of law arises.”

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Search and seizure: Interest u/s.132B(4) of Income-tax Act, 1961: Period for which interest is payable on seized amount: Search assessment resulting in no additional tax liability: Interest payable up to the date of refund and not up to the date of the assessment order.

[Mohit Singh v. ACIT, 241 CTR 244 (Delhi)]

In the course of search u/s.132 of the Income-tax Act, 1961 on 11-9-2003, an amount of Rs.17 lakhs was seized. Block assessment order for the block period 1998-99 to 2003-04 was passed on 23-3-2006 which resulted in no additional tax liability. The seized amount of Rs.17 lakhs was paid on 15-4-2008. Thereafter on 16-5-2008, interest amount of Rs.1,91,704 was paid covering the period from 7-5-2004 to 23- 3-2006. No interest was paid for the period from 23-3-2006 to 15-4-2008 i.e. date of refund.

On a writ petition filed by the assessee the Delhi High Court directed the Revenue to pay the interest at the rate of 7.5% for the period from 23-4-2006 to 15-4-2008 i.e., the date of the refund.

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Loss return: Carry forward of unabsorbed depreciation: Section 32(2), section 80 and section 139(3) of Income-tax Act, 1961: A.Ys. 2000-01 and 2001-02: Section 80 and section 139(3) apply to business loss and not to unabsorbed depreciation covered by section 32(2): Period of limitation for filing loss return not applicable.

[CIT v. Govind Nagar Sugar Ltd., 334 ITR 13 (Del.)]

For the A.Y. 2001-02, the assessee filed loss return belatedly on 31-3-2003. The AO computed the loss at Rs.6,03,14,560, but did not allow the assessee to carry forward the loss including the depreciation by relying on the provisions of sections 80 and 139(3) of the Income-tax Act, 1961. The Tribunal allowed the carry forward of the depreciation of the relevant year and also of the A.Y. 2000-01.

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

“(i) Sections 80 and 139(3) of the Act apply to business losses and not to unabsorbed depreciation which was exclusively governed by section 32(2) of the Act. That being so, the period of limitation for filing loss return as provided u/s.139(1) would not be applicable for carrying forward of unabsorbed depreciation and investment allowance.

(ii) U/s.32(2), unabsorbed depreciation of a year becomes part of depreciation of subsequent year by legal fiction and when it becomes part of the current years depreciation it was liable to be set off against any other income, irrespective of whether the earlier years return was filed in time or not.”

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Capital gain: Exemption u/s.54E of Incometax Act, 1961: A.Y. 2007-08: Long-term capital gain on transfer of depreciable asset: Investment of net consideration in Capital Gains Deposit Account Scheme: Assessee entitled to exemption u/s.54F.

[CIT v. Rajiv Shukla, 334 ITR 138 (Del.)]

In the A.Y. 2007-08, the assessee had long-term capital gain on transter of depreciable assets. The assessee invested the net capital gain in the Capital Gains Deposit Account Scheme and calimed exemption u/s.54F of the Income-tax Act, 1961. The AO disallowed the claim on the ground that the capital gain arising from transfer of a depreciable asset shall be deemed to be capital gain arising from transfer of a short-term capital asset. 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: “The income earned by the assessee on sale of depreciable asset was to be treated as long-term capital gain, entitling him to the benefit of section 54F.”

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Business expenditure: Deduction only on actual payment: Section 43B of Income-tax Act, 1961: A.Y. 1989-90: Excise duty paid in advance: Assessee entitled to deduction: AO not right in holding that deduction allowable only on removal of goods from factory.

[CIT v. Modipon Ltd., 334 ITR 106 (Del.)]

For A.Y. 1989-90, the assessee had claimed a deduction of Rs.14,71,387 as business expenditure on account of excise duty paid in advance. Reliance was placed on section 43B of the Income-tax Act, 1961. The Assessing Officer disallowed the claim holding that the deduction can be claimed only on removal of goods from the factory. 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) With regard to the deduction of Rs.14,71,387 on account of excise duty paid in advance as business expenditure, the procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods were removed from the factory premises. The duty, thus, already stood deposited in the accounts of the assessee maintained with the treasury and the amount, thus stood paid to the State.

(ii) The submission of the Department that it was only on removal of goods that the amount credited to the personal ledger account could be claimed as deductible u/s.43B of the Act, could not be accepted.”

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Appeal to Commissioner: Tax recovery by auction sale of property: Income-tax Act, 1961 Sch. II, RR. 63, 65 and 86: TRO confirming sale in recovery proceedings: Order confirming sale is not conclusive: Appeal is maintainable: Period of limitation runs from the date of knowledge of the order.

[Vijay Kumar Ruia v. CIT, 334 ITR 38 (All.)]

A property belonging to one I was sold by auction on 22-3-1988 by the TRO for recovery of tax dues. The auction was confirmed by the TRO by order dated 25- 4-1988 and certificate of sale was issued in favour of the auction purchaser on the same day. The executor of the will of I preferred an appeal before the Commissioner purporting to be u/r. 86 of Schedule II to the Income-tax Act, 1961. The appeal was dismissed as not maintainable and being barred by time.

The Allahabad High Court allowed the writ petition challenging the order of the Commissioner and held as under:

“(i) An appeal u/r. 86 lies against the original order of the TRO, provided such an order was not conclusive in nature. The relief claimed in the appeal was to cancel and set aside the sale of property. Rule 63 did not contemplate the order of confirmation of sale to be conclusive order. The appeal was maintainable.

(ii) The intention was to challenge the order of sale confirmation and the order issuing the sale certificate. What was intended to be challenged was the sale of the immovable property also and not only the sale certificate. Mere mentioning of a wrong provision in appeal would not take away the statutory right of the petitioner, if the appeal was otherwise provided under the statute and was maintainable.

(iii) The limitation for filing appeal u/r. 86(2) was 30 days from the date of the order. The petitioner acquired the knowledge of the auction sale, the order of sale confirmation and issuance of sale certificate for the first time on 18-8-1988. The appeal was filed on 19-9-1988, within limitation from the date of knowledge.

(iv) If the party aggrieved was not made aware of the order it could not be expected to take recourse to the remedy available against it. Therefore, the fundamental principle was that the party whose rights were affected by an order must have the knowledge of the order. Thus, the appeal was within limitation both from the date of knowledge of the order and its service.”

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Reassessment: Section 147 and section 148 of Income-tax Act, 1961: Reopening of assessment on reason to believe that certain items of income have escaped assessment: Finding in reassessment proceedings that such items of income have not escaped assessment: Reassessment proceedings not valid: AO cannot assess any other income.

[Ranbaxy Laboratories Ltd. v. CIT (Del.), ITA No. 148 of 2008 dated 3-6-2011]

The assessee-company was engaged in the business of manufacturing and trading of pharmaceutical products. For the relevant year, the assessee filed the return of income on 31-10-1994, which was processed u/s.143(1)(a) of the Income-tax Act, 1961. Subsequently, a notice u/s.148 was issued on 23-1- 1998 for the reason that the items viz., club fees, gifts and presents and provision for leave encashment have escaped assessment. In reassessment proceedings the assessee explained that there is no escapement of income on account of these items and the explanation was accepted by the Assessing Officer. Accordingly, no addition was made on that count. However, the Assessing Officer reduced the claim for deduction u/s.80HHC and u/s.80I of the Act. The assessee challenged the validity of the assessment order and the additions. The Tribunal upheld the reassessment and the additions.

On appeal by the assessee, the Delhi High Court followed the decision of the Bombay High Court in the case of Jet Airways; 331 ITR 236 (Bom.), allowed the appeal and held as under:

“(i) Though Explanation 3 to section 147 inserted by the Finance Act, 2009 w.e.f. 1-4-1989 permits the Assessing Officer to assess or reassess income which has escaped assessment even if the recorded reasons have not been recorded with regard to such items, it is essential that the items in respect of which the reasons had been recorded are assessed.

(ii) If the Assessing Officer accepts that the items for which reasons are recorded have not escaped assessment, it means he had no “reason to believe that income has escaped assessment” and the issue of the notice becomes invalid. If so, he has no jurisdiction to assess any other income.”

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Business expenditure: Revenue or capital: A.Y. 2002-03: Assessee in business of manufacture of steel wire rods, etc.: Paid Rs. 45,21,000 to Mahanagar Gas Ltd. towards CNG connection: Is revenue expenditure.

[CIT v. TATA SSL Ltd. (Bom.), ITA No. 1321 of 2010 dated 8-6-2011] The assessee, a public limited company, was engaged in the business of manufacturing steel wire rods, wires, CR sheets and profiles. In the relevant year i.e., A.Y. 2002-03, the assessee had paid Rs. 45,21,000 to Mahanagar Gas Ltd. towards CNG connection. The assessee claimed the expenditure as revenue expenditure. The Assessing Officer disallowed the claim. The Assessing Officer held that expenditure is capital in nature on the ground that the payment was made as capital contribution towards the cost of acquiring service meter, twin steam regulator, meter regulating station and cost of pipelines up to meter regulating station and that the payment was made before commencement of the gas supply. The Tribunal allowed the assessee’s claim. The Tribunal held that by paying the impugned amount to Mahanagar Gas Ltd., the assessee did not acquire any right or control over the gas facility. The Tribunal held that the facilities served the sole purpose of supplying the gas to the assessee’s work and, therefore, it was an integral part of profitearning process and facilitated in carrying on the assessee’s business more efficiently without giving any enduring benefit to the assessee.

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

“(i) In the present case, the finding recorded by the Tribunal is that the assets remained the property of Mahanagar Gas Ltd. and that the sole object of payment was to get gas to facilitate the manufacturing activity carried on by the assessee.

(ii) In these circumstances, in our opinion, no fault can be found with the decision of the Tribunal.”

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Interest-tax — Supreme Court — Matter remanded for determining the questions that arose in accordance with the law.

[Motor and General Finance Ltd. v. CIT, (2011) 334 ITR 33 (SC)] The assessee, a non-banking financial company registered with R.B.I., was engaged in the business of hirepurchase and leasing. In the return of income, 1961 it showed the following components of income:

Rs.
(A) Lease charges 40,86,85,186
(B) Hire-purchase charges 32,64,89,358
(C) Bill discounting charges 1,91,48,614

The assessee did not, however, file any return of interest under the Interest-tax Act, 1974 (for short ‘1974 Act’). The Assessing Officer served a letter on the assessee asking the assessee to explain the reasons for not filing the Interest-tax return for the A.Y. 1995-96. A reply was filed by the assessee requesting the Assessing Officer to withdraw his letter, as the assessee claimed that it was not liable to file returns under the 1974 Act. On 31st March, 2005, a notice u/s. 10 of the 1974 Act was served on the assessee calling upon it to file its return of interest. According to the Assessing Officer, the interest chargeable to tax had escaped assessment. According to the Assessing Officer, on a perusal of the income-tax return of the assessee for the A.Y. 1995-96, it was found that the assessee was engaged in financial activities; that it had income from net hire-purchase charges, lease charges and bill discounting charges as indicated hereinabove. Since the assessee did not file the required return of chargeable interest the Assessing Officer assessed the chargeable interest by way of best judgment assessment u/s. 8(3) of the 1974 Act. The total interest chargeable, according to the Assessing Officer, was Rs.75,43,23,158. One of the issues which arose for determination was whether the transactions undertaken by the assessee were in the nature of hire-purchase and not in the nature of financing transactions. According to the assessee, there is a dichotomy between financing transactions and hire-purchase transactions. According to the assessee, its principal business was of leasing. For the aforestated reasons, the assessee contended that it was not covered by the definition of ‘financial company’ u/s. 2(5B) of the 1974 Act. On examination of the facts of the case and looking into all the parameters, including the parameter of the principal business, such as turnover, capital employed, etc., it was held by the Commissioner of Income-tax (Appeals) that the assessee carried on hire-purchase business activity and bill discounting activity as the principal business and, therefore, the assessee constituted a ‘credit institution’ as defined u/s. 2(5A) of the 1974 Act and was, therefore, taxable under the 1974 Act. However, after coming to the conclusion that the reopening of the proceedings was valid and that the assessee constituted a credit institution, the Commissioner of Income-tax (Appeals) went into the merits of the case and came to the conclusion that the transactions entered into by the assessee were not financing transactions, as the ownership of the vehicle in each case remained with the assessee; that the hirer did not approach the assessee after purchasing the vehicles; that the vehicle stood purchased by the assessee and let out to the hirer for use on payment of charges. Consequently, the Commissioner of Income-tax (Appeals) held that the hire-purchase transactions of the assessee were not financing transactions or loan transactions and, therefore, the Assessing Officer, was not justified in bringing to tax hire-purchase charges of Rs.32,64,89,358. The Commissioner of Income-tax (Appeals), however, held that the Assessing Officer was justified in treating receipts from bill discounting charges of Rs.1,91,48,614 as ‘chargeable interest’ under the 1974 Act. Lastly the Commissioner of Income-tax (Appeals) held that the lease transaction undertaken by the assessee and the lease charges received by it did not fall within the ambit of section 2(7) of the 1974 Act because the Department had accepted the case of the assessee that it remained the owner of the leased assets for all times to come and, therefore, it was not open for the Department to say that charges received for leasing the vehicles are financial charges exigible to the Interest-tax Act, 1974. Consequently, the Commissioner of Income-tax (Appeals) came to the conclusion that the Assessing Officer had erred in bringing to tax lease rental charges of Rs.40,86,85,186 as chargeable interest under the 1974 Act.

Aggrieved by the decision of the Commissioner of Income-tax (Appeals) the assessee as well as the Department went in appeal(s) to the Tribunal which held that the Department was justified in confirming the validity of action u/s. 10 of the 1974 Act. On the question as to whether the assessee was a ‘financial company’ as defined u/s. 2(5B), it was held that the assessee was not a finance company and therefore it did not fall within the definition of ‘credit institution’ as envisaged in section 2(5A) of the 1974 Act and, therefore, it fell outside the purview of the 1974 Act. That, bill discounting charges was taxable under the 1974 Act. That the plea of the assessee that such charges were not covered by the definition of the word ‘interest’ was not acceptable. Consequently, the appeals filed by the assessee were partly allowed. In the Department’s counter-appeal the Tribunal held on examination of the transaction in question that the Commissioner of Income-tax (Appeals) was right in holding that the hire-purchase agreement in the present case was not a financing transaction. Similarly, on examining the lease transaction undertaken by the assessee, the Tribunal held that the asset owned by the lessor was given to the lessee for use only and therefore the Commissioner of Income-tax (Appeals) was fully justified in holding that the receipt on account of lease charges was not taxable as finance charges or interest under the 1974 Act.

Aggrieved by the decision of the Tribunal, the Department carried the matter in appeal to the Delhi High Court u/s. 260A of the Income-tax Act, 1961. The appeal was allowed by the High Court, it was held by the High Court that the Tribunal had erred in holding that for deciding the principal business of a taxable entity under the 1974 Act only the receipt from business is the criteria and the other parameters such as turnover, capital employed, the head count of persons employed, etc. were not relevant. Accordingly, the Tribunal’s decision stood set aside. The High Court also remitted the case to the Assessing Officer saying that it was not clear from the material produced before the Court as to whether the lease agreements entered into by the assessee were financial lease or operational leases or both.

Aggrieved by the decision of the High Court, the assessee went to the Supreme Court by way of civil appeals. The Supreme Court was of the view that the High Court had not examined whether the transaction entered into by the assessee constituted financial transactions so as to attract the provisions of the 1974 Act. The Supreme Court noted that the Commissioner of Income Tax had examined the nature of the transactions entered into by the assessee and the three components of the receipt of the assessee under 1974 Act. According to the Supreme Court the main question which arose for determination in this case was whether the receipt from lease charges, from net hire-purchase charges and bill discounting charges could be taxed under the 1974 Act. This was apart from the question as to whether the assessee which was a non-banking financial company was a credit institution u/s. 2(5A) of the 1974 Act. The Supreme Court was of the view that the matter needed reconsideration and hence set aside the judgment of the High Court with a direction to decide the matter in accordance with law.

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The power of parliament to make law with respect to extra-teritorial aspects or causes — Part iI

G. V. K. Industries Ltd. & Anr. v. ITO & Anr. — 228 ITR 564 (A.P.):

3.1 Brief facts in the above case were: main object of the company was to generate and sell electricity for which purpose it was constructing a power generation station designed to operate using natural gas as fuel near Rajahmundry in the State of Andhra Pradesh. For the purpose of raising funds for the said project, GVK Inds. Ltd. (Company) needed expert services of qualified and experienced professionals who could prepare a scheme for raising finance and tie-up the required loan. For this purpose, the Company had entered into an agreement with a non-resident company (NRC), namely, ABB-Project and Trade Finance (International) Ltd. Zurich, Switzerland. Under the agreement, the NRC was to act as financial advisor and render requisite services for a success fee. Accordingly, the NRC rendered professional services from Zurich by correspondence as to how to execute documents for sanction of loan by the financial institutions within and outside India on the basis of which the Company approached such institutions and obtained the requisite loan. For a successful rendering of services, the NRC sent an invoice to the Company for payment of success fee amounting to US$.17.15 lakh (Rs.5.4 crores). For the purpose of remittance of this amount, the Company approached the ITO for issuing NOC for remitting the amount without TDS u/s. 195 without any success. The Company also approached the CIT, u/s. 264, who ultimately took the view that the NOC can be issued only after making TDS and payment thereof to the Government. This was challenged by the Company before the Andhra Pradesh High Court.

3.2 After considering various contentions raised on behalf of the Company and various judgments of the Apex Court as well as High Courts and after considering the scope of the services/work undertaken by the NRC, the Court took the view that a ‘business connection’ between the Company and NRC has not been established. Hence what remains to be considered is whether the amount of success fee can be treated as FTS u/s. 9(1)(vii)(b). In this context, it was contended on behalf of the Company that the NRC merely rendered advice in connection with procurement of loan which does not amount to rendering technical or consultancy services and hence, amount in question is not FTS. The Revenue had taken a view that the success fee is FTS as the services rendered by the NRC fall within the ambit of both managerial and consultancy services as contemplated in the definition of FTS given in Explanation to section 9(1)(vii) (b) considering the scope of the services/work of the NRC, the Court took the view that the advice given to procure loan to strengthen finance would be as much a technical or consultancy service as it would be with regard to management, generation of power or plant and machinery. Accordingly, the Court held that the success fees in question fall within the ambit of section 9(1)(vii). In fact, it appears that this was not seriously disputed by the counsel appearing for the Company, but the main argument seems to be that if that is so, then, provisions would be unconstitutional for want of legislative competence. For this, reliance was placed on the commentary given in the book (i.e., Law of Income Tax and Practice) written by the learned authors Kanga and Palkhivala.

3.3 Dealing with the above-referred issue raised on behalf of the Company, the Court stated that having regard to the present liberalisation policy, it is for the Government to take steps to have clause (vii)(b) of section 9(1) either replaced or amended so as to make income by way of FTS chargeable only when territorial nexus exists. After making this observation, the Court upheld the validity of the provisions mainly relying the judgment of the same Court as well as of the Apex Court in the case of ECIL (referred to in para 2 in Part-1).

G. V. K. Industries Ltd. & Anr. v. ITO & Anr. — 332 ITR 130 (SC):

4.1 The judgment of the Andhra Pradesh High Court in the above case came up for consideration before the Apex Court at the instance of the Company (i.e., assessee). Considering the importance of the issue involving validity of section 9(1)(vii)(b), the matter was finally referred to the Constitutional Bench. For the purpose of deciding the issue, the Court noted that the High Court having held that section 9(1)(i) did not apply in the facts of the case of the Company, nevertheless upheld the applicability of section 9(1) (vii)(b) and also upheld the validity of the said provisions mainly relying on the judgment of three-Judge Bench of the Apex Court in the case of ECIL.

4.2 For the purpose of dealing with the issue, the Court noted that the Apex Court in the case of ECIL conclusively determined that clauses (1) and (2) of Article 245, read together, imposed requirement that laws made by the Parliament should bear a nexus with India and ask that the Constitution Bench be constituted to consider whether the ingredients of section 9(1)(vii)(b) indicate such a nexus. In the course of proceedings before the Constitution Bench, the Company (i.e., GVK Inds. Ltd.) withdrew its challenge to the constitutional validity of section 9(1)(vii)(b) and elected to proceed only on the factual matrix as to the applicability of the said section. However, the learned Attorney General (A.G.), appearing on behalf of the respondent, pressed upon the Bench to reconsider the decision of the three-Judge Bench in the case of ECIL. Considering the constitutional importance of the issue, the Court agreed to consider the validity of the requirement of relationship to or nexus with the territory of India as a limitation on the powers of the Parliament to enact laws pursuant to Article 245(1).

4.3 For the purpose of deciding the above issue, the Court noted that the central constitutional theme before the Court relate to whether the Parliament’s powers to legislate, pursuant to Article 245, include legislative competence with respect to aspects or causes that occurred, arise, or exist or may be expected to do so, outside the territory of India. For this purpose, the Court noted that there are two divergent and dichotomous views on this. First one arises from a rigid reading of the ratio in the case of ECIL which suggests that the Parliament’s powers to legislate, incorporate only competence to enact laws with respect to aspects or causes that occur, or exist, solely within India. In this context, the Court further observed as follows (page 133):

“….A slightly weaker form of the foregoing strict territorial nexus restriction would be that the Parliament’s competence to legislate with respect to extra-territorial aspects or causes would be constitutionally permissible if and only if they have or are expected to have significant or sufficient impact on or effect in or consequence for India. An even weaker form of the territorial nexus restriction would be that as long as some impact or nexus with India is established or expected, then the Parliament would be empowered to enact legislation with respect to such extra-territorial aspects or causes. The polar opposite of the territorial nexus theory, which emerges also as logical consequence of the propositions of the learned Attorney General, specifies that the Parliament has inherent powers to legislate ‘for’ any territory, including territories beyond India, and that no Court in India may question or invalidate such laws on the ground that they are extra-territorial laws. Such a position incorporates the views that the Parliament may enact legislation even with respect to extra-territorial aspects or causes that have impact on, effect in or consequence for India, any part of it, its inhabitants or Indians, their interest, welfare, or security, and further that the purpose of such legislation need not in any manner or form be intended to benefit India.”

4.4 After noting the above-referred divergent views, the Court framed the following two questions for the decision of the Constitutional Bench (pages 133/134):

“(1) Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on, or effect(s) in, or con-sequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?

(2) Does the Parliament have the powers to legislate ‘for’ any territory, other than the territory of India or any part of it?

4.5 Before proceeding to decide the questions framed, the Court noted the provisions of Article 245 of Constitution, which fall in part XI of Chapter 1 under the head ‘Extent of laws made by the Parliament and by the Legislatures of the States’. The Court also stated that many expressions and phrases that are used contextually in the flow of language, involving words such as ‘interest’, ‘benefit’, ‘welfare’, ‘security’ and the like in order to satisfy the purpose of laws and their consequences, can have range to meanings. The Court then, for the purpose of the judgment, decided to set forth the following range of meanings for such expressions and phrases (pages 134/135):

‘aspects or causes’, ‘aspects and causes’:

“events, things, phenomena (howsoever common place they may be), resources, actions or transactions, and the like, in the social, political, economic, cultural, biological, environmental or physical spheres, that occur, arise, exist or may be expected to do so, naturally or on account of some human agency.”

‘extra-territorial aspects or causes’:

“aspects or causes that occur, arise, or exist, or may be expected to do so, outside the territory of India.”

‘nexus with India’, ‘impact on India’, ‘effect in India’, ‘effect on India’, ‘consequence for India’ or ‘impact on or nexus with India’:

“any impact(s) on, or effect(s) in, or consequences for, or expected impact(s) on, or effect(s) in, or consequence(s) for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well being of, or security of inhabitants of India, and Indians in general, that arise on account of aspects or causes.”

‘benefit to India’ or ‘for the benefit of India’, ‘to the benefit of India’, ‘in the benefit of India’ or ‘to benefit India’ or ‘the interests of India’, ‘welfare of India’, ‘well-being of India’, etc.:

“protection of and/or enhancement of the interest or, welfare of, well-being of, or the security of India (i.e., the whole territory of India), or any part of it, its inhabitants and Indians.”

4.6 Dealing with the ratio of the judgment in the case of ECIL, the Court stated as under (pages 136/137):

“The requirement of nexus with the territory of India was first explicitly articulated in the decision by a three-Judge Bench of this Court in ECIL. The implication of the nexus requirement is that a law that is enacted by the Parliament, whose ‘objects’ or ‘provocations’ do not arise within the territory of India, would be unconstitutional. The words ‘object’ and ‘provocation’, and their plural forms, may be conceived as having been used in ECIL as synonyms for the words ‘aspects’ and ‘cause’, and their plural forms, as used in this judgment.”

4.6.1 The Court further noted that in the case of ECIL, while dealing with the validity of section 9(1) (vii)(b) of the Act and interpreting the provisions of Article 245(1) and (2), the Court, in that case, drew the distinction between the phrases ‘make laws’ and ‘extraterritorial operation’ — i.e., the acts and functions of making laws versus the acts and functions of effectuating a law already made. The Court also noted the conclusion of the Court in that case that the operation of the law can extend to persons, things and acts outside the territory of India. However, the principle enunciated in that case does not address the question as to whether a Parliament may enact a law ‘for’ a territory outside boundaries of India. The Court then observed as follows (page 138):

“….To enact laws ‘for’ a foreign territory could be conceived of in two forms. The first form would be, where the laws so enacted, would deal with or be in respect of extra-territorial aspects or causes, and the laws would seek to control, modulate or transform or in some manner direct the executive of the legislating State to act upon such extra-territorial aspects or causes because: (a) such extra-territorial aspects or causes have some impact on or nexus with or to India; and (b) such laws are intended to benefit India. The second form would be when the extra-territorial aspects do not have, and neither are expected to have, any nexus whatsoever with India, and the purpose of such legislation would serve no purpose or goal that would be beneficial to India.”

4.6.2 The Court then further noted that in the case of ECIL, it was concluded that the Parliament does not have the powers to mark laws that bear no relationship to or nexus with India. The obvious questions that arises from this is: “what kind of nexus?” According to the Court, in this context, the words used in that case (referred to in para 2.5.2 in Part-1) are instructive both as to principle and also the reasoning. The Court then opined that the distinction drawn in that case between ‘make laws ‘ and ‘operation of laws’ is a valid one and leads to a correct assessment of relationship between clauses (1) & (2) of Article 245.

4.6.3 Concluding on the possible effect of the rigid reading of the judgment of in the case ECIL, the Court stated as under (page 139):

“We are, in this matter, concerned with what the implications might be, due to use of the words ‘provocation’, ‘object’, ‘in’ and ‘within’ in connection with the Parliament’s legislative powers regarding ‘the whole or any part of the territory of India’, on the understanding as to what aspect and/or causes the Parliament may legitimately take into consideration in exercise of its legislative powers. A particularly narrow reading or understanding of the words used could lead to a strict territorial nexus requirement wherein the Parliament may only make laws with respect to objects or provocations — or alternately, in terms of the words we have used ‘aspect and causes’ — that occur, arise or exist or may be expected to occur, arise or exist, solely within the territory of India, notwithstanding the fact that many extra-territorial objects or provocations may have an impact or nexus with India. Two other forms of the foregoing territorial nexus theory, with weaker nexus requirements, but differing as to the applicable tests for a finding of nexus, have been noted earlier.

4.7 Having noted the implications of the judgment in case of ECIL and the issue arising therefrom, and the impact thereof on the powers of the Parliament to enact a law with respect to ‘extra-territorial aspects or causes’, the Court also noted that learned A.G. appeared to be concerned by the fact that the narrow reach of Article 245 in the context of the ratio in the case of ECIL would significantly incapacitate the Parliament, which is charged with the responsibility of legislating for the entire nation, in dealing with extra-territorial aspects or causes that have an impact on or nexus with India. The Court also noted the following propositions made by the learned A.G. with respect to the meaning, purport and ambit of Article 245 (pages 139/140), which, it seems, the Court found as moving to another extreme:

“(1) There is a clear distinction between a Sovereign Legislature and a Subordinate Legislature.
(2) It cannot be disputed that a Sovereign Legislature has full power to make extra-territorial laws.

(3) The fact that it may not do so or that it will exercise restraint in this behalf arises not from a Constitutional limitation on its powers but from a consideration of applicability.

(4) It does not detract from its inherent rights to make extra-territorial laws.

(5) In any case, the domestic courts of the country cannot set aside the legislation passed by a Sovereign Legislature on the ground that it has extra-territorial effect or that it would offend some principle of international law.

(6) The theory of nexus was evolved essentially from Australia to rebut a challenge to income-tax laws on the ground of extra-territoriality.

(7) The principle of nexus was urged as a matter of construction to show that the law in fact was not extra-territorial because it has a nexus with the territory of the legislating State.

(8) The theory of nexus and the necessity to show the nexus arose with regard to State Legislature under the Constitution since the power to make extra-territorial laws is reserved only for the Parliament.”

4.7.1 According to the Court, the main propositions are that the Parliament is a ‘Sovereign Legislature’ and that such a ‘Sovereign Legislature’ has full power to make extra-territorial laws. The Court, then, stated that this can be analysed in two ways. The first aspect of this is: the phrase ‘full power to make extra-territorial laws’ would implicate the competence to legislate with respect to extra-territorial aspects or causes that have an impact on or nexus with India, wherein the State machinery is directed to achieve the goals of such legislation by exerting the force on such extra-territorial aspects or causes to modulate, change, transform or eliminate their effects. The second aspect of this is: such powers would also extend to legislate with respect to the extra-territorial aspects or causes that do not have any impact on or nexus with India. The Court then noted that according to the learned A.G., both these forms of powers are within the legislative competence of the Parliament. The Court then assumed that the learned A.G. did not mean that the Parliament would have powers to enact extra-territorial laws with respect to foreign territories that are devoid of justice i.e., they serve no benefits to the denizens of such foreign territories. Considering historical background of establishment of India as a nation, the Court, in this context, observed as under (page 141):

“To the extent that extra-territorial laws enacted have to be beneficial to the denizens of another territory, three implications arise. The first one is when such laws do benefit the foreign territory, and benefit India too. The second one is that they benefit the denizens of that foreign territory, but do not adversely affect India’s interest. The third one would be when such extra-territorial laws benefit the denizens of the foreign territory, but are damaging to the interest of India. We take it that the learned Attorney General has proposed that all three possibilities are within constitutionally permissible limits of legislative powers and competence of the Parliament.”

4.7.2 The Court then also noted the propositions of the learned A.G. that the Courts do not have power to declare the extra-territorial laws enacted by the Parliament invalid on the grounds that they have an ‘extra-territorial effect’ whether such laws are with respect to extra-territorial aspects or causes that have any impact on or nexus with India, or that do not in any manner or form work to, or intended to be or hew to the benefit of India or that might even be detrimental to India. The Court then noted the far-reaching implications of this proposition including the one that the judiciary also has been stripped of its essential role even where such extra-territorial laws may be damaging to the interests of India.

4.8 For the purpose of considering the propositions made by the learned A.G., the Court referred to relevant principles of constitutional interpretation. In this context, the Court noted that under the scheme of Constitution the sphere of actions and extent of powers exercisable by various organs are specified. Such institutional arrangements made under the constitution are legal, inter alia, in the sense that they are susceptible to judicial review with regard to determination of vires of any of the actions of the organs of the State. The actions of such organisation are also judiciable, in appropriate cases, where the values or the scheme of the constitution may have been transgressed. The Court then dealt with the guiding principles for interpretation in the process of such review, the powers of the Parliament to amend the Constitution and also noted that such amending powers do not extend to the basic structure of the Constitution. The Court also referred to relevant principles of interpretation in this context and the methods to be adopted for the same.

4.9 The Court then proceeded to analyse the provisions of Article 245 and stated that under the clause

(1), the Parliament is empowered to enact a law ‘for’ the whole or any part of the territory of India. The word that links subject, ‘the whole or any part of the territory in India’, with the phrase that grants the legislative powers to the Parliament is ‘for’. After noting the range of meanings of the word ‘for’, the Court observed as under (page 146):

“Consequently, the range of senses in which the word ‘for’ is ordinarily used would suggest that, pursuant to clause (1) of Article 245, the Parliament is empowered to enact those laws that are in the interest of, to the benefit of, in defence of, in support or favour of, suitable or appropriate to, in respect of or with reference to ‘the whole or any part of the territory of India.”

4.9.1 The Court then noted that the problem with the manner in which Article 245 has been explained in the case of ECIL relates to the use of the word ‘provocation’, and ‘object’ as the principal qualifiers of laws and then specifying that they need to arise ‘in’ or ‘within’ India. Considering the effect of this, the Court took the view as under (page 147):

“Consequently, the ratio of ECIL could wrongly be read to mean that both the ‘provocations’ and ‘objects’ — in terms of independent aspects or causes in the world of the law enacted by the Parliament, pursuant to Article 245, must arise solely ‘in’ or ‘within’ the territory of India. Such a narrowing the ambit of clause (1) of Article 245 would arise by substituting ‘in’ or ‘within’, as prepositions, in the place of ‘for’ in the text of Article 245. The word ‘in’, used as a preposition, has a much narrower meaning, expressing inclusion or position within the limits of space, time or circumstances, than the word ‘for’. The consequence of such a substitution would be that the Parliament could be deemed to not have the powers to enact laws with respect to extra-territorial aspects or causes, even though such aspects or causes may be expected to have an impact on or nexus with India, and laws with respect to such aspects or causes would be beneficial to India.”

4.9.2 The Court then noted that the view that a nation/state must be concerned only with respect to persons, property events, etc. within it’s own territory emerged in the era when external aspects and causes were thought to be only of marginal significance, if at all. The Court also noted the earlier versions of sovereignty emerged in the context of global position and lesser interdependence of the nations at the relevant time. Having noted the earlier scenario, the Court stated that on account of scientific and technological developments, the magnitude of cross border travel and transactions has tremendously increased. Moreover, existence of economic, business, social and political organisations that operate across borders, implies that their activities, even though conducted in one territory, may have an impact on or in another territory. Global criminal and terror network are also example of how things and activities in a territory outside one’s own borders would affect interests, welfare, well being and security within. The Court then stated that within the international law, the principles of strict territorial jurisdiction have been relaxed, in the light of greater inter dependencies and other relevant reasons. At the same time, no State attempts to exercise any jurisdiction over matters, persons, or things with which it has absolutely no concern. After noting this position with regard to international law concerning power of making law with regard to extra-territory aspects and causes, the Court held as under (page 149):

“Because of interdependencies and the fact that many extra-territorial aspects or causes have an impact on or nexus with the territory of the nation/ state, it would be impossible to conceive legislative powers and competence of national parliaments as being limited only to aspects or causes that arise, occur or exist or may be expected to do so, within the territory of its own nation-state. Our Constitution has to be necessarily understood as imposing affirmative obligations on all the organs of the State to protect the interest, welfare and security of India. Consequently, we have to understand that the Parliament has been constituted, and empowered to, and that its core role would be to, enact laws that serve such purposes. Hence even those extra-territorial aspects or causes, provided they have a nexus with India, should be deemed to be within the domain of legislative competence of the Parliament, except to the extent the Constitution itself specifies otherwise.”

4.10 The Court then dealt with the extreme view canvassed by the learned A.G. that the Parliament is empowered to enact a law in respect of extra-territorial aspects or causes that have no nexus with India, and further more could such laws be bereft of any benefit to India? While rejecting such a proposition, the Court stated as under (pages 149/150):

“The word ‘for’ again provides the clue. To legislate for a territory implies being responsible for the welfare of the people inhabiting that territory, deriving the powers to legislate from the same people, and acting in a capacity of trust. In that sense the Parliament belongs only to India and its chief and sole responsibility is to act as the Parliament of India and of no other territory, nation or people. There are two related limitations that flow from this. The first one is with regard to the necessity, and the absolute base line condition, that all powers vested in any organ of the State, including the Parliament, may only be exercised for the benefit of India. All of its energies and focus ought to only be directed to that end. It may be the case that an external aspect or cause, or welfare of the people elsewhere may also benefit the people of India. The laws enacted by the Parliament may enhance the welfare of people in other territories too; nevertheless, the fundamental condition remains: that the benefit to or of India remain the central and primary purpose, That being the case, the logical corollary, and hence the second limitation that flows therefrom, would be that an exercise of legislative powers by the Parliament with regard to extra-territorial aspects or causes that do not have any, or may be expected not to have nexus with India, transgresses the first condition. Consequently, we must hold that the Parliament’s powers to enact legislation, pursuant to clause (1) of Article 245 may not extend to those extra-territorial aspects or causes that have no impact on or nexus with India.”

4.10.1 The Court further explained reasons for taking the above view and drew support from sources such as Directive Principle of State Policy, etc. The Court then stated that it is important to draw a clear distinction between the acts and functions of making laws and acts and functions of operating laws. Making laws implies the acts to changing or enacting laws.

The phrase ‘operation of law’, in its ordinary sense, means effectuation or implementation of the laws. The acts and functions of implementing laws already made fall within the domain of the executives. The essential nature of the act of invalidating a law is different from both the act of making a law, and act of operating a law. Invalidation of laws falls exclusively within the functions of the judiciary, and occurs after examination of vires of a particular of law.

4.11 Dealing with the powers of judiciary to invalidate a law, the Court stated that the only organ of State which may invalidate the law is judiciary and the provisions of Article 245(2) should be read to mean that it reduces the general and inherent. powers of the judiciary to declare a law ultra vires only to the extent of that one ground of invalidation. Explaining the effect of this provision, the Court stated as under (page 154):

“Clause (2) of Article 245 acts as an exception, of a particular and a limited kind, to the inherent poser of the judiciary to invalidate, if ultra vires, any of the laws made by any organ of the State. Generally, an exception can logically be read as only operating within the ambit of the clause to which it is an exception. It acts upon the main limb of the article — the more general clause — but the more general clause in turn acts upon it The relationship is mutually synergistic in engendering the meaning. In this case, clause (2) of Article 245 carves out a specific exception that law made by the Parliament, pursuant to clause (1) of Article 245, for the whole or any part of the territory of India may not be invalidated on the ground that such law may need to be operated extra-territorially. Nothing more. The power of judiciary to invalidate laws that are ultra vires flows from its essential functions, Constitutional structure, values and scheme, and indeed to ensure that the powers vested in the organs of the State are not being transgressed, and they are being used to realise a public purpose that subserves the general welfare of the people. It is one of the essential defences of the people in a constitutional democracy.”

4.12 Referring to various decisions, cited and relied on by the learned A.G. in support of his propositions, the Court stated that in none of these cases, the issue under consideration has been dealt with. The Court also noted that having gone through those decisions, none stand for the proposition that the powers of the Parliament are unfettered and the Parliament possesses a capacity to make laws that have no connection whatsoever with India. Having noted this factual position, the Court also dealt with some of the decisions.

4.13 Before answering the questions framed, the Court also decided to share its thoughts on some important concerns such as claims of supremacy or sovereignty for various organs to act in a manner that is essentially unchecked and uncontrolled. In this context, the Court also explained the misconception of the sovereignty and of power, and predilections to oust judicial scrutiny even at the minimum level, such as examination of the vires of the legislation or other type of state actions.

4.14 Finally, while answering the first question framed, the Court held as under (page 166):

“(1) Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or con-sequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?

Answer to the above would be yes …..”

4.14.1 Explaining the effect of the above answer, the Court further held as under (page 166):

“However, the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, -events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like, that occur, arise, or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental, or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians.”

4.14.2 While answering the second question framed (referred to in para 4.4 above), the Court also held that the Parliament does not have power to legislate ‘for’ any territory, other than the territory of India or any part of it.

4.15 After taking the above view, the Court has sent back the matter of GVK Inds. Ltd. (referred to in para 3 above) to the Division Bench for its decision in the light of judgment of the Constitution Bench.

Conclusion:

5.1 In the above case, the Constitution Bench has laid down the criteria to test the validity of the laws enacted by the Parliament or any provisions of such laws. Therefore, any law enacted by the Parliament (including tax laws) would be governed by the same.

5.2 The Court has held that the Parliament is constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians. The Court has also held that any law enacted by the Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra vires as that would be law made “for” a foreign territory.

5.3 The Court also held that in all other respects (other than referred to in para 5.2 above), the Parliament has a power to enact a law with respect of extra-territorial aspects or causes and such power is not subject to test of ‘sufficiency’ or ‘significance’ or in any other manner requiring a pre-determined degree of strength. For this purpose, all that is required is that the connection to India be real or expected to be real, and not illusory or fanciful.

5.4 On the basis of the tests and principles laid down by the Apex Court in the above case, any issue arising under the IT Act relating to validity of any provision, will have to be decided. Accordingly, challenge if any, to the validity of the provisions of section 9(1)(vii)(b) will have to be tested on that basis.

5.5 Considering the meanings ascribed to various expressions, such as ‘aspects or causes’ ‘extra territorial aspects’, etc. (referred to in para 4.5 above), the scope of inclusion within the legislative competence is substantially wider and of such exclusion is much narrower. In this context, by and large, the Parliament has the power to enact any law in national interest with regard to extra territorial aspects or causes, once there in real connection thereof with India.

5.6 It seems that validity of the retrospective introduction/substitution (w.e.f. 1-4-1976) of Explanation to section 9(1) by the Finance Act, 2010 (referred to in para 1.5 in Part-1) may need to be separately considered.

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Cost of acquisition in case of Property of Ex-Rulers

Issue for consideration : Prior to independence,
India had a large number of native states, each having a separate Ruler.
Many of these ex-rulers owned substantial number of properties even
today, which were part of their princely possessions inherited by them
from their forefathers who had acquired such properties by way of
conquest or by way of jagir (grant).

The Supreme Court in the
case of CIT v. B. C. Srinivasa Setty, 128 ITR 294, held that no capital
gains tax is payable by an assessee where it was not possible to compute
the capital gains u/s.48 of the Act. It held that capital gains could
not be computed in cases where the cost of acquisition could not be
conceived at all. Of course, this position of law has been slightly
altered by the insertion of section 55(2)(a), which provides that the
cost of certain assets shall be deemed to be nil in cases of the assets
specified therein. Sale of such specified assets, though not having any
cost of acquisition, is now subjected to capital gains tax by virtue of
this amendment. Section 55(2)(a) however does not include such property
of ex-rulers.

The question has arisen before the courts as to
whether such property of ex-rulers acquired by their forefathers by way
of conquest or by way of jagir has no cost of acquisition, and the gains
arising on sale of such property is not subject to capital gains tax,
or whether such property has a cost of acquisition and the gains thereon
is subject to capital gains tax on sale. While the Madhya Pradesh,
Madras, and Gujarat High Courts have taken the view that the sale of
such property would not be subject to capital gains tax, the Full Bench
of the Punjab and Haryana High Court has recently taken a contrary view
that the provisions relating to capital gains tax do apply to such
properties. The decision, though rendered in the context of an ex-ruler,
has far-reaching implications inasmuch as it seeks to chart a new
course of thinking by relying on the provisions of section 55(3) for
bringing to tax gains arising even in cases not covered by section
55(2).

Lokendra Singhji’s case : The issue first came up before
the Madhya Pradesh High Court in the case of CIT v. H.H. Maharaja Sahib
Shri Lokendra Singhji, 162 ITR 93.

In this case, the assessee
was the ex-ruler of the erstwhile State of Ratlam, which was founded by
Maharaja Ratansinghji. A jagir of the entire state of Ratlam was
conferred on Ratansinghji in the 17th century by Emperor Shahjahan for
his daring feat of killing a mad elephant with a dagger. The assessee
sold certain land and building within the compound of Shri Ranjit Vilas
Palace, Ratlam during the relevant year, which property was a part of
the estate received as jagir, and which had been inherited by the
assessee in his capacity as the ruler.

The assessee initially
included the capital gains (loss) on sale of the property in his tax
return, by claiming the fair market value of the land and building on
1st January 1954 as the substituted cost of acquisition. The Assessing
Officer computed the assessment by taking such fair market value as on
1st January 1954 at a lower figure, which figure was slightly enhanced
by the Commissioner (Appeals).

Before the Tribunal, for the 1st
time the assessee raised an additional ground claiming that there was no
cost of acquisition of the asset and as such there could be no capital
gains as a result of the transfer of the property. The Tribunal admitted
the additional ground and came to the conclusion that no capital gains
arose as a result of the sale of the land and building.

Before
the Madhya Pradesh High Court, on behalf of the Revenue, it was argued
that the Tribunal was not justified in holding that no capital gains
arose, and that the main controversy was whether the sale proceeds of
the property were in the nature of capital receipts and whether such
receipts attracted the provisions of section 45. It was argued that as
the assessee had received the property by way of inheritance and himself
opted for substitution of the cost of the capital asset as on 1st
January 1954, the Tribunal was not right in concluding that there being
no cost of acquisition of the property to the initial owner, there was
no question of capital gains.

On behalf of the assessee, it was
submitted that though the property was a capital asset, there was no
gains because the forefathers of the assessee were not required to pay
any cost in terms of money for acquiring the property, given the history
of Ratlam State. It was argued that in the absence of any cost of
acquisition, no liability to capital gains could be fastened on the
assessee, though he might have accepted the valuation as on 1st January
1954 and had disclosed the capital loss in his return of income.
Reliance was placed on the decisions of the Bombay High Court in the
case of CIT v. Home Industries and Co., 107 ITR 609, of the Madhya
Pradesh High Court in CIT v. Jaswantlal Dayabhai, 114 ITR 798, and of
the Supreme Court in CIT v. B. C. Srinivasa Setty, 128 ITR 294, all of
which decisions were rendered in the context of goodwill, for the
proposition that the charging section and the computation provisions
together constituted an integrated code, and where the computation
provisions could not apply at all, such a case was not intended to fall
within the charging section. Reliance was also placed on the decisions
of the Delhi High Court in the case of Bawa Shiv Charan Singh v. CIT,
149 ITR 29, and the Bombay High Court in the case of CIT v. Mrs.
Shirinbai P. Pundole, 129 ITR 448 in the context of tenancy rights.

The
Madhya Pradesh High Court noted that though none of the cases cited by
the assessee related to the sale of an immovable property as was the
case before it, but the gist of all these decisions was that if there
was no cost of acquisition, then the gains on sale would not attract the
provisions of capital gains. According to the Madhya Pradesh High
Court, the liability to capital gains tax would arise in respect of only
those capital assets in the acquisition of which the element of cost
was either actually present or was capable of being reckoned and not in
respect of those assets in acquisition of which the element of cost was
altogether inconceivable, as in the case before it.

The Madhya
Pradesh High Court observed that a case where a person acquired some
property by way of gift or reward (for instance, jagirs from a ruler)
and the property passed on by inheritance to succeeding generations, and
was sold for a valuable consideration, because the initial owner had
not acquired it at some cost in terms of money, it would not attract
capital gains tax in such a transaction of sale, there being no gains
that could be computed as such. The Madhya Pradesh High Court therefore
held that the gains on sale of the property would not attract capital
gains tax.

This view taken by the Court in this case was
followed subsequently by the Court in the case of CIT v. Pushparaj
Singh, 232 ITR 754 (shares/securities transferred to the assessee by the
government as a moral gesture), by the Gujarat High Court in the case
of CIT v. Manoharsinhji P. Jadeja, 281 ITR 19 (property acquired by
forefathers by conquest), and by the Madras High Court in the case of
CIT v. H.H. Sri Raja Rajagopala Thondaiman, 282 ITR 126. The Punjab and
Haryana High Court also took a similar view in the case of CIT v. Amrik
Singh, 299 ITR 14, in the context of ownership acquired by the assessee
by Court’s sanction in terms of section 3 of the Punjab Occupancy
Tenants (Vesting of Proprietary Rights) Act, 1952.

Raja
Malwinder Singh’s case :

The issue again recently came up before the Full Bench of the Punjab and Haryana High Court in the case of CIT v. Raja Malwinder Singh, 334 ITR 48. In this case the assessee was an ex-ruler of the Pepsu State, which state was acquired under an instrument of annexation. Certain plots of land which were part of that state were sold. The assessee claimed that since the cost of acquisition could not be ascertained, capital gains tax was not attracted.

The Assessing Officer assessed the capital gains by taking the cost of acquisition equal to the market value as on 1st January 1954/1964. The Commissioner (Appeals) rejected the assessee’s appeal and the contention that cost of acquisition was incapable of ascertainment, but the Tribunal reversed the decision, following the judgment of the Supreme Court in the case of B. C. Srinivasa Setty (supra). The Division Bench of the Punjab and Haryana High Court prima facie differed with the view taken by the same court in the case of Amrik Singh (supra), and therefore referred the matter to a large Bench.

On behalf of the Revenue, before the Full Bench, a distinction was sought to be drawn between the judgment of the Supreme Court in the case of B. C. Srinivasa Setty (supra) and the case before the Court, on the ground that in a newly started business the value of goodwill was not ascertainable, whereas in the case of acquisition of land, the same was either acquired at some cost or without cost, and under the scheme of the Act, there could be no situation where the cost was incapable of ascertainment.

The Punjab and Haryana High Court noted that in the case before it, the assessee acquired the property by succession from the previous owner. It also noted that according to the assessee, the cost of acquisition by the previous owner could not be ascertained and had failed to exercise the option of adopting the market value on the date of acquisition or the cost of the previous owner. Therefore, according to the Court, the only option available to the Assessing Officer was to compute capital gains by taking the cost of asset to be the fair market value on the specified date (1st January 1954/1964, as the case may be).

According to the Full Bench of the Punjab and Haryana High Court, even in a case where the cost of acquisition could not be ascertained, section 55(3) statutorily prescribed the cost to be equal to the market value on the date of acquisition. Therefore, capital gains was not excluded even on the plea that value of the asset in respect of which capital gains was to be charged was incapable of ascertainment.

The Full Bench of the Punjab and Haryana High Court therefore held that the view taken by it earlier in Amrik Singh’s case was not correct, being against the statutory scheme. The Court also held that the view taken by the Madhya Pradesh High Court in Lokendra Singhji’s case (supra) could not be accepted, as it did not give effect to the mandate of section 55(3), which provided for a situation where the value of the asset acquired could not be ascertained. According to the court, if the market value of an asset on the date of its acquisition could be ascertained, the cost of acquisition had to be taken to be equal to that, and if the value could not be so ascertained, the cost had to be equal to the market value on a specified date (for example, 1-4-1964 or 1-4-1981) at the option of the assessee. The Court observed that it was not the case of the assessee that the land had no market value on the date of its acquisition.

The Full Bench of the Punjab and Haryana High Court therefore held that once an asset had a market value, on the date of its acquisition, capital gains tax would be attracted by taking the cost of acquisition to be fair market value as on the specified date or at the option of the assessee, the market value on the date of acquisition where no cost was incurred. The Court accordingly held that the gains made on sale of the property of the ex-ruler was subject to capital gains tax.

Observations:

Computation of capital gains is possible where all of the following information is available :

Date of acquisition,

Cost of acquisition,

Mode and manner of acquisition,

Date of transfer,

Consideration for transfer, and

Mode and manner of transfer.

These requirements are sought to be taken care of by provisions of section 45(2) to (6), section 46 to 49, 50 and section 55(1) to (3) and section 2(42A). Further, the decision of the Supreme Court provides for the course of action, to be adopted, where the cost of acquisition and the date of acquisition are not known or cannot be determined. One dimension however, i.e., the mode and the manner of acquisition remains unexplored where no information is available about the mode of acquisition of the previous owner who had acquired the asset by any of the modes not specified by section 49(1). On a harmonious reading of the provisions of Chapter IVE, it appears that the capital gains cannot be brought to tax where the information in relation to any of the above referred dimensions is not available.

The Supreme Court in the case of B. C. Srinivasa Setty, 128 ITR 294 was concerned with the taxability of the receipts on transfer of goodwill. The Court in the context of the said case observed and held as under :

It was impossible to predicate the moment of the birth of goodwill and there can be no account in value of the factors producing goodwill. No business possessed goodwill from the start which generated on carrying on of business and augmented with the passage of time.

The charging section 45 and the computation provisions of section 48 together constituted an integrated code.

All transactions encompassed by section 45 must fall under the governance of its computation provisions. A transaction that cannot satisfy the test of computation must be regarded as never intended to be covered by section 45.

Section 48 contemplated an asset in the acquisition of which it was possible to envisage a cost, an asset which possessed the inherent quality of being available on the expenditure of money to a person seeking to acquire it.

The date of acquisition of an asset was a material factor in applying the computation provisions and for goodwill, it was not pos-sible to ascertain such date.

Taxing the goodwill amounted to taxing the capital value of the asset and not the profits or gains.

The Supreme Court in the above-referred case observed that what was contemplated for taxation was the gains of an asset in the acquisition of which it was possible to envisage a cost; the asset in question should be one which possessed the inherent quality of being available on the expenditure of money to a person seeking to acquire it. Importantly, it observed that it was immaterial that although the asset belonged to such a class it might have been acquired without the payment of money, in which case section 49 would determine the cost of acquisition for the
purposes of section 48. This finding is heavily relied by the taxpayers to canvass that the Court implied that an asset for which no payment is made and which is not covered by section 49 is outside the scope of section 48.

The Court on a reference to section 50 and section 55(2) as also section 49 gathered that section 48 dealt with an asset that was capable of being acquired at cost; these provisions indicated that section 48 excluded such assets for which no cost element could be identified or envisaged and the goodwill was one such asset.

Significantly the Court observed that it was impossible to determine the cost of acquisition of goodwill even in the hands of the previous owner who had transferred the same in one of the modes specified in section 49(1). It also held that section 55(3) could not be invoked in such a case, because the date of acquisition of the previous owner re-mained unknown. In cases where the cost of an asset cannot be conceived at all, it appears that the fair market value as prescribed by section 55(3) cannot be adopted even where the date of acquisition of the previous owner is known. Whether the cost of acquisition is ascertainable or not should be examined from the standpoint of the assessee or the previous owner, as the case may be and in doing so, due importance should be given to the mode of acquisition by the assessee. An asset may be the one which is capable of being acquired at cost and may have a fair market value, but in the context of the assessee, it may not be possible to conceive any cost for him on account of his mode of acquisition.

The observation, findings and the ratio of the decision in the said Srinivasa Setty’s case when applied to the issue under consideration, the following things emerge:

It is essential to determine the cost of acqui-sition in the hands of previous owner where the asset was acquired in any of the modes specified in section 49(1). If such cost to the previous owner cannot be determined, there will be no liability to Capital Gains tax. It is impossible to determine the cost of acquisition of goodwill having regard to the nature of asset.

S/s. 55(3) cannot be invoked in cases where the date of acquisition by the previous owner remains unknown.

The asset i.e., the immovable property, in the facts of the cases under consideration, is an asset that was originally acquired by the forefathers of the transferor on conquest and/or ascension. The assessee transferor acquired the asset by inheritance. In computing the capital gains of the transferor, it was essential to adopt the cost of the previous owner and also determine the date of acquisition of the previous owner. It is an admitted fact that the immediate previous owner of the asset did not incur any cost of acquisition. In such cases, by virtue of the Explanation to section 49(1), one was required to travel back in time to reach such an owner who had last acquired it by a mode of acquisition other than that, that is referred in clause (i) to (iv) of section 49(1). Following the mandate provided by the said Explanation, it was essential to find out the cost of acquisition of the persons from whom the asset was acquired by the forefathers of the assessee, on conquest. Admittedly this was not possible for scores of reasons and therefore the cost to the assessee could not have been ascertained by resorting to the provisions of section 49(1) for computing the capital gains. Accordingly, while it was possible to ascertain the date of acquisition and the period of holding of the asset, the cost of acquisition of such asset remains to be determined as it is unknown and therefore the capital gains could not be computed and be brought to tax in the facts of the case. Further, no cost could have been envisaged in the cases ‘of conquest and/ or ascension. Similarly, where the property was acquired by conquest in a war, it cannot be said that the cost incurred on the war is the cost of acquisition of the property. Therefore, in all such cases of property of ex-rulers, one cannot envisage a cost of acquisition at all, and it is not merely a case of difficulty of determination or ascertainment of cost of acquisition.

One has to at the same time examine whether the conclusion reached in the above paragraph meets the test provided by section 55(3) of the Act. The Full Bench of the Punjab & Haryana High Court has heavily relied on the provisions of section 55(3) for the purposes of overruling the decision of Madhya Pradesh High Court. The said section 55(3) reads as : “where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner”. Ordinarily, an assessee is required to ascertain his cost only and not of the previous owner unless where section 49(1) apply. From a reading of section 55(3), it is clear that the provision applies only in cases where an assessee is required to ascertain the cost of the previous owner which requirement arises only in cases where the asset is acquired by any of the modes specified in section 49(1) and not otherwise. Section 55(3) appears to take care of situations where the cost of previous owner can-not be ascertained.

On insertion of the said Explanation to section 49(1) w.e.f. 1-4-1965 by the Finance Act, 1965, an assessee is required to adopt that cost of acquisition which was the cost of the previous owner in time who had last acquired the asset under a mode other than the one specified in section 49(1). It appears that the said Explanation is specifically inserted to take care of the situations where it is difficult to ascertain the cost of the previous owner. It requires an assessee to travel back in time and adopt the cost of that owner, previous in time, who last acquired it by any of the mode not specified in section 49(1). It appears that the provisions of section 55(3) are rendered redundant on introduction of the said Explanation. The attention of the Full Bench of the Court was perhaps not invited to the presence of the said Explanation. Had that been done, the Court might not have relied solely on the provisions of section 55(3) for reaching the conclusion derived by it.

The said Explanation has the effect of defining the term ‘previous owner of the property’ to mean the last previous owner of the capital asset who acquired it by a mode of acquisition other than that referred to in section 49(1). The notes to clauses and the memorandum explaining the provi-sion of the Finance Bill, 1965 reported in 55 ITR 131 explain the objective behind the introduction of the said Explanation to section 49(1). Please also see Circular No. 31, dated 21-9-1962 and Circular No. 3-P, dated 11-10-1965.

The Supreme Court on page 301 specifically held that having regard to the nature of the asset, it was impossible to determine the cost of acquisition even of the previous owner for the purposes of section 49(1). It also held that section 55(3) could not be invoked because the date of acquisition by the previous owner remained unknown. It is relevant to note that the Court in that case was concerned with A.Y. 1966-67 and the said Explanation was inserted w.e.f. 1-4-1965. Even assuming that the provision of section 55(3) continues to be relevant, it may be difficult to substitute the fair market value prevailing on the date of conquest or ascension on account of the fact that the asset is acquired on conquest and due to the manner of acquisition of the asset no cost can be envisaged for acquisition of such an asset.

It is relevant to note that presently section 55(2) provides for adopting the cost of acquisition of certain specified assets, including the goodwill at Nil. It provides for cases of the goodwill, tenancy rights, loom hours, stage carriage permits, trade mark or a brand name associated with the business, no-compete rights, right to manufacture, etc. On a closer reading, it is seen that the assets specified for are the ones which are not acquired on a given day for a cost and whose value has been generated over a period of time on regular efforts made over a period. The cost of such an asset including the cost of the regular efforts cannot be identified and quantified. The said section does not provide for such a fiction in cases of the assets acquired on conquest and/or ascension. In the circumstances, it is fair for the assessee to contend that the capital gains in his case cannot be computed as the cost of an asset so acquired could not be taken to be Nil. Wherever the government has intended no cost assets to be subjected to capital gains tax, such assets have been specifically included in the provisions of section 55(2)(a). The very fact that such property of ex-rulers has not been included in this section over the years in spite of so many courts taking the view that the sale of such property is not subject to capital gains tax, clearly indicates that the intention is not to tax such sale proceeds. It is intriguing to note that the Revenue in the past has not relied on section 55(3) while defending the cases of tenancy rights and goodwill. The better view therefore is that such property of an ex-ruler acquired by way of conquest or grant by his ancestors does not have any cost of acquisition, and the capital gains on sale of such property is not subject to tax.

The Direct Tax Code, proposed to be introduced from Financial Year 2012-13, provides that the cost of acquisition will be taken as Nil in all cases where the asset is acquired for no cost in any of the modes for which the cost of the previous owner is not permitted to be adopted.

Neither section 49 nor section 55(3) shall apply in cases where no cost is paid for an asset by the assessee, and the asset is acquired by him by any of the modes not specified by section 49, inas- much as there is no previous owner. Even if there is one, his cost would be ascertainable and therefore section 55(3) does not apply in his case and that section 49(1) cannot apply as the asset is not acquired by any of the modes specified therein.

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FAMILY BUSINESSES

Kongo Gumi Co. a Japanese Family company established in 578 AD was the oldest family business until it was taken over in 2007. It was managed by the family for 40 generations. Kongo Gumi’s ability to survive for over 1,400 years as a family business is a subject of study to all those interested in family businesses.

World over family businesses play an important role’ from mom-and-pop shop to large listed entities that are controlled by families. At times, the business is managed by the family itself while in some cases the family only controls the policy while the actual day-to-day running is through professional managers.

A family business has certain distinct advantages. A family can take a long-term view while deciding the policy and taking business decisions. If properly managed and controlled, it has a great potential to grow and prosper. Yet few family businesses survive more than two generations. This is due to the fact that family businesses face some unique challenges and problems. Inability to raise sufficient capital without diluting the shareholding (that being sacrosanct to many families), unwillingness to professionalise even the operating management, egos of the family members, complacency in the subsequent generations, unwillingness of the older generation to pass on the baton at the right time and other succession issues cause demise of many successful family businesses. It is also a fact that due to lack of corporate governance, family businesses often lack credibility.

Traditionally, businesses in India have been managed by families. Hindu Undivided Family was for many generations an accepted entity for carrying on business. There was a well-established (though not the best) system to decide the succession issue – who would be the Karta. Even today, a very large portion of the Indian business is controlled by business families. This includes large listed companies such as Reliance, Tata Group, Godrej, Mahindra and Mahindra to name a few. It also includes a very large number of small and medium-sized companies. Products of even some of the small and medium-sized companies have been household names e.g. Bedekar pickles, Tortoise Brand Mosquito oils, Nirlep Non-Stick Cookware, Sumeet Kitchen Appliances, Vicco Turmeric Cream and Toothpowder.

The Indian economy has opened up substantially and businesses are facing global competition, reservations and protection for small-scale industries are fast disappearing. Even larger businesses which indirectly got protection due to licence and permit regime are facing the heat of the competition. With nuclear families, there are lesser family members to manage the business. At the same time, due to shift in culture, more family members want to be in the forefront irrespective of their capacity to run the business. In the male dominated society of India, daughters are increasingly demanding their fair share in the ownership and management of the family businesses. This also leads to dissatisfaction and disputes within the family causing destruction of flourishing business.

It is necessary to take a hard look at family businesses and understand their problems. Enlightened business families should be encouraged to ask themselves some relevant questions. This will only help the family businesses to formulate their mission and values, develop a business strategy, define their ownership structure, business structure and governance structure. These issues are common to all family businesses, whether large or small.

Most practising chartered accountants as well as those in industry render service to family businesses. Considering the importance of Family Businesses, we bring this Special Issue with four articles on family businesses – `In Defence of Family Companies’ by Mr. Balan Wasudeo, the founder of NeoCFO, `Family Managed Companies in a Globalising Economy’ by Dr. V. L. Mote, a distinguished retired professor from IIM Ahmedabad, `Succession Issues in Family-Run Companies’ by our own Dr. P. P. Shah, Chartered Accountant and `A Journey from a Family-owned to a Professionally Managed Listed Company’ by Mr. Arjun S. Handa, an entrepreneur. We hope you find these articles interesting.

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THE SECRET OF SUCCESS

Many times we wonder why success eludes us. The success we seek may be monetary or name and fame or professional or in personal life or may be the highest: viz. realisation of God. However, few realise that the seed of success is really the deepest desire of our heart. Whatever is this deepest desire in that we shall be successful. If the deepest desire of our heart is material success or money, we will get money. If it is the ‘name and fame’, we will achieve ‘name and fame’. If it is God we desire, sooner or later we will reach God. Once we are possessed by a deep and intense desire, the desire will manifest in our thoughts and actions and then success is only a matter of time. Once this happens, the universe will provide conducive surroundings for our success. On the spiritual path, this intense desire makes a Guru appear before the aspirant to lead him to the realisation of God. The whole universe has come into existence by manifestation of God’s will, and we being a small spark of God will have the same potential to manifest the object of our will.

Every person has some deep desire whether he knows it or not. The key is to know what that ‘deep desire’ is and then manifest that desire in our personality and actions. However, intense desire is not enough to achieve and attain, it has to be backed by action — dedicated action. Desire motivates us to set a goal and ceaselessly work to achieve it. Know for sure that if our deepest desire is one and we pursue some other goal, we may have limited success but the success will not be phenomenal. So to know the thing one really wants in life is very important and whether we know it or not today, life will go on taking shape in that direction and one day, we will know it. To know our deepest desire and consciously pursue the same with patience and perseverance shall advance us rapidly in achieving our goal.

How can one know what is his or her deepest desire? It requires some amount of purity and a lot of concentration of mind. If one sits regularly in meditation and daily spends some time with oneself in solitude, one day one shall know what is it that one ‘deeply desires’.

Pursuing our deepest desire determines our destiny. Hence, having the right desire is cardinal. If money for money’s sake is what we want, money will come but with its negative aspects. This is what we are witnessing today. The same is true for name and fame. Desire is the seed, Karma or action is the plant and it will bear fruit according to the quality of the desire and the action. So one needs to be wise in choosing the right desire and also the right means to fulfil the desire. Fortunate are those who know what they desire because they shall get it. But most fortunate are those who have the right desire in their heart and know it. The choice of desire is relevant to achieving a satisfying success.

Ultimately, what everyone desires is happiness and tries to find the same in various objects like money, name and fame, etc. However, true happiness can be only found in God. All other desires should be a stepping stone to realise God. The key is: Don’t get attached to stepping stones. In reality, every one of us is on the spiritual path and knowingly or unknowingly desires only God. Let us always remember that life after all is a series of small awakening steps till we realise God — that is — self realisation.

Ultimately every pursuit is for happiness and the objective is to know where our real happiness lies and ceaselessly strive for the same. I would conclude by quoting Swami Vivekananda: “Take up one idea, make that one idea your life — think of it, dream of it, live on that idea, let the brain, muscles, nerves, every part of your body be full of that idea and just leave every other idea alone. This is the way to success.”

“He is the wisest who seeks God. He is the most successful who has found God.”

— Paramhansa Yogananda

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A Journey from a Family-owned to a Professionally Managed Listed Company

From a small-sized family-owned company to becoming a large professionally managed public listed company in the pharmaceutical industry, the journey was not an easy one for us. The Company leadership had to confront many challenges from time to time for the transition from an entrepreneur-driven company to a professionally managed company. The leadership had to undergo significant changes in terms of roles, orientation, business strategy, organisational culture, governance, systems, decisionmaking, structures and overall way of working.

The Company incorporated in 1999. It started as a trading company with the seed capital raised from within the family. At that time, it was entirely family-owned and run. Within a few months, stepping on the dream of being a global company since beginning, the first international office was inaugurated. Also parallely, the first manufacturing facility with three production lines was set up in India. In a short span of two years the sterile manufacturing facility received an important certification and the Company also touched an important revenue landmark. This brought immense confidence to us and gave us a direction towards the upward journey. Integrity, implementation, excellence, innovation and patient satisfaction became our values.

In 2003, the Company received approvals from regulatory authorities from various other developing countries. The global growth strategy also permitted the Company to apply in various developed markets. Still, the organisation’s size was small and structure was not very much in order, hence most of the functions were directly managed by the family members. Managing an international set-up for a family-run company was obviously placing a great deal of pressure on the top management. The time had come for us to transit to the next orbit. Today we have market a presence in 76 countries and this has been achieved by decentralising the organisation and creating various presidents, business heads, division heads, and managers.

When I stepped into the MD’s role, I first focussed on new product development and streamlining of manufacturing and operations of the Company. We brought advanced technology equipments and automated machines to add up to manufacturing capacity and to enhance productivity. We established management systems and processes and review mechanisms across organisation which were to become base for advanced transition later.

In 2006, one of the largest international private equity funds invested in our Company. The introduction of this private equity fund in the Company was a crucial point in the transition of our Company towards professional management. We inducted independent directors to improve our corporate governance and to attain the highest standards of corporate governance. Improving the corporate governance helped us in maximising the long-term value for all stakeholders of the Company, including shareholders, employees, customers, society, etc. Our corporate governance philosophy and practice consists of the following facets:

To make timely disclosures and adopt transparent policies
To show greater responsibility and fairness in dealings with all
To demonstrate the highest level of accountability towards employees
To conduct our business in an ethical manner.

We introduced more robust systems like SAP and centralised inventory system. On one hand, where the business was flourishing in terms of back-end, on the other, the front-end needed further focus to match with the market demands and be at the edge with the competition. Hence, as MD I took charge of Businesses (Sales and Marketing) and focussed more on visiting countries, meeting people, getting market insights and devising international marketing strategies. We established a great market presence across various regulated markets as well as emerging markets. USFDA approval for sterile injectable manufacturing facility was one of the greatest milestones which opened a new scope for expansion of the business. The Company also focussed on enhancing visibility in the market in terms of participation in conferences and competing in awards and came out with flying colours. We received several awards. We also ramped up effective management of back-end and front-end as per demand of time-witnessed manifold growth in business, presence across countries, thousand-plus registrations across.

Looking at the volume and growth of the company, it became quintessential to streamline and professionalise the organisation structure. We developed the second-level and third-level management cadre and assigned functional accountability to non-family members who needed to independently handle their teams. Delegation of responsibility and giving authority to the second level helped improve the organisation and also develop a better workforce. We maintained inherent cultural values, focussed on people policies and practices which later helped the Company achieve recognition as one of ‘the Best Places to Work for in India’ and #1 Healthcare Company to work for.

The Company started to work on its dream of going public, following a culture of continuously upgrading best practices in corporate governance and management quality. The Company shifted gears and prepared itself in all aspects to take this big move. In 2010, the Company became a listed company. This was the next big thing for us and has put us in a completely different bracket. Through the IPO, the Company raised proceeds which it has already started investing in augmentation of manufacturing capabilities. Listing brings with it greater responsibility and greater external scrutiny but also puts your company on a higher pedestal.

Throughout, the journey, the Company made sure that its growth does not get hampered in bringing about a professional management approach. We always believed in ourselves and will continue to do so, thereby removing every hurdle that comes on the way. The underlying mantra behind the success story is ‘dream big and work hard’. As we look back on these 12 years, we have transitioned from a family-run and owned company to a professionally-run company to a PE-funded company and finally to a family-owned listed company. The road has been long and arduous but very satisfying and fulfilling. We have miles to go before we sleep but we believe in one motto which has been our mantra through the years:

“The world changes view, if you change yourself”.

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Family managed companies in a globalising economy

The role of the family managed companies in a globalising economy that the Editorial Board of the BCA Journal has chosen for discussion is timely and opportune. It is timely because we are now living in a world that is getting increasingly interdependent. The natural barriers like mountains and oceans have ceased to be barriers for preventing the interdependence of nations. Now our currencies are linked, commerce is one and our fortunes are interdependent. What happens somewhere, matters everywhere. India and Pakistan acquiring capabilities to produce nuclear weapons are not only a matter of regional concern but are matters of concern across the globe.

The topic is opportune because the ‘family managed companies’, are now a powerful force and play a dominant role in an economy. Family business has graduated long ago from ‘mom-and-pop stores’ to giant companies like Cargil having headquarters in the United States. Cargil1 the family controlled company2 is the rule in most of the world. Statistics indicate that family controlled company businesses account for 99% of Italian businesses, 70% of Portuguese, 75% of British, 80% Spanish, between 85% and 90% of Swiss, 90% of Swedish and 80% of Canadian. Even in the United States between 80% and 95% of the companies are family controlled.

As of 20093, the private sector represented 95% of all companies in China, the vast majority are family controlled firms and most of the remaining firms are state owned enterprises. The rural areas are heavily populated by small farms.

In India,4 family businesses account for as much as 95% of all Indian businesses. Nearly 80% of family companies dominate Indian economy. About 461 of the 500 most valuable companies are under family control. In addition, the family controlled businesses also comprise large groups like the Tata group and the Aditya Birla group to mention a few. “IT giant TCS and financial services major HDFC (once a family managed company) have been named as India’s two best managed companies in an annual poll conducted by Finance Asia magazine. TCS and HDFC are followed by IT major Infosys, telecom giant, Bharti Airtel and PSU behemoth ONGC in the list of the top-five best managed companies in the country”, says a report in The Times of India on 18th May 2011. The best managed companies are thus a mixed bag.

“The Aditya Birla Group5 is also a hard-charging multinational corporation emerging from that country. (India). The Birla Group produces and sells such products as fibre, chemicals, cement, metals, yarns and textiles, apparel, fertiliser, and carbon black (a petroleum-based material used in the manufacture of rubber and plastic). It is a US $ 30 billion conglomerate operating in about 25 countries, with 60% of its revenues now coming from outside India.”

Competition that firms face now, as we pointed out earlier, is no longer local. Competition cannot remain confined within the borders of a nation. In many industries, competition has now become global. Textile and clothing, automobile, IT, and ITES are just a few examples of industries which now face global competition. Firms compete globally with global strategies in mind. Firms compete globally by participating in global trade and through direct foreign investments. The family managed companies must therefore face global competition.

What are family controlled companies? Do they have the vitality and the dynamism to compete globally? The purpose of this article is to discuss these questions.

A family business6 is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business’ overall well-being.

“Family firms7 were often able to take a longerterm, more strategic approach and kept stronger relations with their customers, says Harvard Business School professor Belén Villalonga, who has just completed a study comparing the performance of 4,000 family and public firms in the U.S. and Europe. Between 2006 and 2009, she says, family controlled firms both gained market share — increasing sales 2% faster than non-family firms — and outperformed their public peers by 6% on company market value. Another report, by the German consultancy Roland Berger, looked at family owned firms in Europe’s biggest economy and found they navigated the crisis with better liquidity and less debt. This all builds on what has become a decade-long trend of family firms outperforming the market, says Villalonga.”

The Indian experience seems to support this view. Indian companies like Wipro, TCS, Reliance Industries have achieved impressive growth in their sales revenues, exports, profits and market capitalisation. The development of all these organisations in a short period is truly astounding.

Our discussion so far should not lead us to the conclusion that all is well with family managed companies. The carcases of the closed textile mills in Ahmedabad show the utter failure of the family management of the textile industry, the oldest Indian industry. These seasoned captains of the industry could not anticipate the changing competition in the Indian textile industry and therefore could not forge a new competitive strategy to survive in the changed environment.

“From8 behemoths such as Ford to mom-andpop shops, they (family businesses) share a set of common challenges in today’s business climate.” This quotation from Stacy Perman’ article ‘Taking pulse of family business’ aptly describes the situation in India. The small and medium enterprises in India face similar challenges as the large family businesses face. Similarly, the small and medium family businesses have the same dynamism as the large family businesses have. We illustrate our reasoning with the help of an example from the textile and clothing industry. In Appendix I, we present the data about the export of textiles and clothing. The Indian exporters of textiles are mostly medium and large textile mills that are large family controlled [Except the textile mills owned by the National Textile Corporation (NTC) that are not family controlled textile mills. However, the contribution of the NTC mills to export is not substantial and we can safely ignore it]. This data shows the Chinese exports of textiles are about 2.42 times the Indian exports of textiles.

On the other hand, the Indian exporters of clothing are small to medium family owned firms. Here again we notice that the Chinese exports of clothing are 2.79 times the Indian exports of clothing (The firms in the clothing industry are small and medium family owned businesses). These examples support our point that small and medium family businesses have the same dynamism as the large family businesses have.

It may not be out of place to cite another example of a medium-sized family owned pharmaceutical company to reinforce our point about the dynamism in the medium-sized family owned companies. The name of this company is Shiva Pharmachem Pvt. Ltd. whose annual sales in the year 2009-10 were about one billion rupees (Rupees one hundred crore). However, before we discuss the example of Shiva Pharmachem Pvt. Ltd., we explain below some terms that we have used in discussing the example of Shiva Pharmachem Pvt. Ltd.

Value added. Following Paul Samuelson9, we will define the term value added as the sales an organisation achieves minus the items that it buys form outside to achieve the sales that it makes. Some scholars define value added as:

Total income – items bought from outside

– depreciation.

(1.1)

Value
added

Value added per employee

=
(1.2)

Total no. of employees

Capital employed. We will define capital
employed as net worth plus long-term loans or as net fixed assets plus
working capital.

Return on Capital employed

We will define return on Capital employed as

Return on

Profit before tax –Financial

charges

Capital employed =

(1.3)

Capital employed

Margin on sales

Profit
after tax – Financial charges

Margin on sales =

(1.4)

Net income

Capital turnover

Net income

Capital turnover

(1.5)

Capital employed

From these definitions, it is easy to see
that

Capital turnover x Margin on sales

= Return on capital employed.

(1.6)

Why must we consider both the measures, valued added per employee and the return on capital employed? Will it not suffice if we focus our attention only on the return on capital employed? The answer to this question is no. It is important that an organisation must achieve high value added per employee and a high return on capital employed10. The reason for this is that the value added per employee judges the organisation’s effectiveness in using its human resources. Similarly, the return on capital employed judges the organisation’s effectiveness in using the capital at its disposal. An organisation will not prosper in the long run if it does not effectively use its human capital and monetary resources. Is it possible for an organisation to earn a high return on capital employed but earn very low value added per employee? Unfortunately, the answer is yes. The dabbawalas of Mumbai provide an excellent example of an organisation that earns a high return on capital employed but earns very low value addition per employee. In Appendix I, we provide the details.

We now return to the example of Shiva Pharmachem Pvt. Ltd. that we want to cite in support of our point. In Table 1 below, we show the salient features of the company’s financial statements for the years ending 31st March 2010 and 2009, respectively.

Salient features of
Shiva Pharmachem Pvt. Ltd.’s financial statements

Units

Year ending

Percentage

31-3-2010

31-3-2009

change 2010

over 2009

Total income

Rs.

1,098,460,704

829,779,826

24.46%

Capital employed

Rs.

317,443,961

193,143,180

39.16%

Value added

Rs.

995,495,000

731,879,761

26.48%

Value added per employee

Rs.

2,488,738

1,829,699

26.48%

per employee

per year

Profit before tax

Rs.

202,661,937

125,113,584

38.26%

Margin (profit before tax +

financial
charges)/Total income

20.22%

20.20%

0.05%

Return on capital employed

69.95%

86.8%

Capital turnover

Number

3.46

4.30

How effectively has Shiva Pharmachem Pvt. Ltd. used its human and monetary resources? Do the financial results of the company show the management’s dynamism? We now turn to a discussion of these questions.

From Table 1 we can glean the three important conclusions that we list below.

(1) The firm’s return on capital employed declined in the financial year ending 31 March 2010. However, even the lower return on capital employed is sufficiently high to give the firm’s owners a good return on their capital.

(2) The value addition the firm achieved in the year 2009-10 was higher than the value addition the firm achieved in the year 2008-09.

Further, the value added per employee in 2010 is much higher than the minimum a company should achieve. We believe that the minimum value addition that a company must achieve is about Rs.1,200,000. Now it is quite common to see that the average wage bill for a company per employee per year is about Rs.100,000.

(3) Therefore, the results the company achieved comprise a mixed bag. It has used its human capital better than what it has used in the previous year. However, it has not used its monetary capital as well as it used in the previous year.

The reason for the decline in the return on capital employed is easy to see. From the last two rows of Table I, we see that in the year 2010, the margin the company achieved on sales was almost equal to the margin on sales the company achieved in the previous year. However, the turnover of capital the company achieved was much lower in the year 2010 than what the company achieved in the previous year. Now, we have from (1.6) Return on capital = margin on sales x turn over.

From Table 1 we can see that the margin on sales is almost the same as the margin on sales in 2009. However, the capital turnover in 2010 is much lower than the capital turnover in 2009. Therefore, the return on capital will be lower in 2010. Does the decline in the return on capital in the year ending on 31st March 2010 show the lack of the management’s dynamism in using the capital effectively? The answer is not conclusive. We must wait for at least two years before we come to that conclusion. The decline in the return on capital employed shows the management’s enthusiasm to grow and develop rapidly by making substantial investment in the business. From Table 1 we can see that the capital employed in the company has increased by 39.16% in the year ending on 31st March 2010. Obviously, the management would not make such a large capital investment unless it has a strong desire to develop rapidly, and has the confidence in its abilities to earn a good return on the capital it invests. Here is another example of a family managed company that has the vitality to participate actively in a globalising business. Having achieved high levels of productivity that we measure by its value addition per employee and return on capital employed, Shiva Pharmachem Pvt. Ltd., we have no hesitation in saying that the company is ready to prosper and develop in a globalising economy.

However, all is not well with the family managed businesses. Stacy Perman in his report ‘Taking the Pulse of Family Business’11 observes

“Generally speaking, the failure rate for all private businesses is high. According to the Small Business Administration’s Office of Advocacy, 580,900 new businesses were launched in 2004, the most recent date available for data, while 576,200 closed. Given that only one in three family businesses succeeds in making it from the first to the second generation, it’s clear they have their own inherent risks.

Each succeeding generation has its own ideas about taking the company forward — or if, indeed, it wants to join the family business at all. Successful transition has always been crucial to the continued success of family businesses —and in the next ten years will see a major increase in the number of companies facing that hurdle, as more baby boomers begin to retire.”

Accordingly, the question arises as to whether and how boomers will pass the baton along to their children. The issue is fast becoming a critical one. The challenges to longevity are substantial.

For starters, many of the concepts that have been traditionally associated with family businesses have eroded and new sources of potential conflicts have arisen, as have new opportunities and challenges. Compared with 10 or 20 years ago, the sense of duty and obligation to join the family business has weak-ened, while the sense of entitlement has grown.

In the same vein Michael J. Conway12, JD and Ste-phen J. Baumgartner, MSc (Econ) observe “While there is entertainment value to the drama and intrigue which surround the Earnhardt, Wrigley, Murdoch, and Walton family owned businesses, their highly publicised trials and tribulations can also provide real-life lessons for family owned businesses that operate well out of the limelight. Family owned businesses face unique issues — succession planning, marriages and divorces, complicated relationships — as well as routine issues that emerge around turf battles, shareholder control, compensation structures, and processes for strategic decision-making. Without proper documentation in place to help address these and other issues when they arise, the family owned business is at risk from an operational, management and financial perspective.”

Closer at home, Professor D. Tripathi13 observes “Behind the glare of momentous changes wrought by liberalisation, a very significant development went almost unnoticed. This was the declining importance of business families in the nation’s life. A well-regarded observer of contemporary business scene has gone to the extent of suggesting that the joint family is dead for all practical purposes.” Professor Tripathi concludes by saying “These prognoses may or may not turn out to be correct, but the mounting crisis in family business is bound to greatly influence the course of private enterprise and its management in the future.”

This article would be incomplete without a discussion about the dichotomy between family managed companies and professionally managed companies. Rahul Bajaj is directionally correct in his comments on the dichotomy between family managed companies and professionally managed companies. According to Bajaj14 , “if a professionally managed firm means one that is managed by those who hold no equity in the enterprise, there is ‘no reason to believe that a non-owner is more competent than an owner. In fact, a lot of studies done recently in the U.S. show that family owned businesses are doing better than non-family managed companies.’ What is relevant in a competitive economy is that the company has to be efficiently managed.” To resolve the apparent dichotomy we must understand the significance of the word ‘profession.’ In the contemporary world management, practitioners and thinkers use two yardsticks to judge whether a business is profession. Below we list the yardsticks.

(1) Are the practices in the business based on a body of knowledge that can stand a rigorous logical scrutiny as in medicine and engineering?

(2) Is there a code of conduct in the business that puts service before self?

The last verse of the Bhagvadgita15 sums up the code of conduct extremely well. The last verse asks us “to unite vision (yoga) and energy (dhanuh) and not allow the former to degenerate into madness and the latter into savagery. High thought and just action must ever be the aim of man”.

When we use the word profession to mean that its practices are based on rigorous logic and the profession demands a high code of conduct, then the dichotomy between professionally managed companies and the family managed companies disappears.

Unfortunately, the recent spate of ‘scams’ that we are witnessing leads us to ask “does the Indian business have a code of conduct? In India, businesses, both the professionally managed and the family managed, fail to measure up to the second yardstick.

Appendix I

Appendix II?: India’s share of Textile and Clothing
Export in World T&C Export

Textile Export

Clothing Export

Total T&C Export

Year

World

India

China

World

India

China

India

China

(US$ bn)

(%Share)

(US bn)

(%Share)

(US$ bn)

(%Share)

(US bn)

(%Share)

(US$ bn)

1994

133

2.91

3.87

8.98

141

2.63

3.71

16.86

7.53

35.55

1995

152

2.86

4.35

9.14

158

2.60

4.11

15.19

8.47

37.97

1996

153

3.23

4.94

7.93

166

2.54

4.22

15.07

9.15

37.15

1997

156

3.37

5.26

8.88

178

2.45

4.36

17.91

9.59

45.63

1998

150

3.04

4.56

8.55

186

2.57

4.78

16.16

9.34

42.87

1999

146

3.48

5.08

8.92

185

2.79

5.16

16.29

10.24

43.12

2000

159

3.78

6.01

10.17

198

3.12

6.18

18.21

12.18

52.21

2001

149

3.6

5.36

11.27

194

2.83

5.49

18.91

10.86

53.48

2002

156

3.87

6.04

13.19

206

2.93

6.04

20.03

12.07

61.86

2003

175

3.92

6.86

15.41

234

2.83

6.62

22.24

13.47

78.96

2004

196

3.58

7.02

17.1

261

2.55

6.66

23.74

13.64

95.28

2005

205

4.13

8.47

20.01

278

3.31

9.20

26.68

17.67

115.21

2006

219

4.27

9.35

22.27

311

3.27

10.17

30.63

19.52

144.07

CAGR

4.24%

3.25%

7.63%

7.86%

6.81%

1.83%

8.77%

5.10%

8.26%

12.37%

China/

India

2.42

2.79

(Source: http://stat.wto.org)
Appendix II
Pages reproduced from www.mydabbawala.com
ABOUT DABBAWALAS

A dabbawala (one who carries lunch box), some-times spelled dabbawalla, tiffinwalla, tiffinwallah or dabbawallah, is a person in the Indian city of Mumbai whose job is to carry and deliver freshly home-made food in lunch boxes to office workers. Tiffin is an old-fashioned English word for a light lunch, and sometimes for the box it is carried in. Dabbawalas are sometimes called tiffin-wallas.

Though the work sounds simple, it is actually a highly specialised trade that is over a century old and which has become integral to Mumbai’s culture.

The dabbawala originated when a person named Mahadeo Havaji Bachche started the lunch delivery service with about 100 men. Nowadays, Indian businessmen are the main customers for the dabbawalas, and the service often includes cooking as well as delivery.

Economic analysis

Everyone who works within this system is treated as an equal. Regardless of a dabbawala’s function, everyone gets paid about two to four thousand rupees per month (around 25-50 British pounds or 40-80 US dollars).

More than 175,000 or 200,000 lunches get moved every day by an estimated 4,500 to 5,000 dabbawalas, all with an extremely small nominal fee and with utmost punctuality. According to a recent survey, there is only one mistake in every 6,000,000 deliveries.

The BBC has produced a documentary on dabbawalas, and Prince Charles, during his visit to India, visited them (he had to fit in with their schedule, since their timing was too precise to permit any flexibility). Owing to the tremendous publicity, some of the dabbawalas were invited to give guest lectures in top business schools of India, which is very unusual. Most remarkably in the eyes of many Westerners, the success of the dabbawala trade has involved no western modern high technology. The main reason for their popularity could be the Indian people’s aversion to western style fast food outlets and their love of home-made food.

The New York Times reported in 2007 that the 125-year-old dabbawala industry continues to grow at a rate of 5-10% per year.

Low-tech and lean

Dabbawala in action: Although the service remains essentially low-tech, with the barefoot delivery men as the prime movers, the dabbawalas have started to embrace modern information technology, and now allow booking for delivery through SMS. A website, mydabbawala.com, has also been added to allow for online booking, in order to keep up with the times. An online poll on the website ensures that customer feedback is given pride of place. The success of the system depends on teamwork and time management that would be the envy of a modern manager. Such is the dedication and commitment of the barely literate and barefoot delivery men (there are only a few delivery women) who form links in the extensive delivery chain, that there is no system of documentation at all. A simple colour coding system doubles as an ID system for the destination and recipient. There are no multiple elaborate layers of management either — just three layers. Each dabbawala is also required to contribute a minimum capital in kind, in the shape of two bicycles, a wooden crate for the tiffins, white cotton kurta-pyjamas, and the white trademark Gandhi topi (cap). The return on capital is ensured by monthly division of the earnings of each unit.

Uninterrupted services

The service is uninterrupted even on the days of extreme weather, such as Mumbai’s characteristic monsoons. The local dabbawalas at the receiving and the sending ends are known to the customers personally, so that there is no question of lack of trust. Also, they are well accustomed to the local areas they cater to, which allows them to access any destination with ease. Occasionally, people communicate between home and work by putting messages inside the boxes. However, this was usually before the accessibility of instant telecommunications.

In literature

One of the two protagonists in Salman Rushdie’s controversial novel The Satanic Verses, Gibreel Farishta, was born as Ismail Najmuddin to a dabbawallah. In the novel, Farishta joins his father, delivering lunches all over Bombay (Mumbai) at the age of ten, until he is taken off the streets and becomes a movie star.

Dabbawalas feature as an alibi in the Inspector Ghote novel Dead on Time.

Etymology

The word ‘Dabbawala’ can be translated as ‘box-carrier’ or ‘lunch pail-man’. In Marathi and Hindi, ‘dabba’ means a box (usually a cylindrical aluminium container), while ‘wala’ means someone in a trade involving the object mentioned in the preceding term, e.g., punkhawala with ‘pankha’ which means a fan and ‘wala’ mean the person who owns the pankha (The one with the fan).

1. Cally Jordan ‘The family
controlled company in Asia’ (Melbourne Law School: The University of Melbourne,
Legal Studies Research paper 334 P. 5).

2 . Ibid P. 4

3 . The author has downloaded this information from
the Internet.

4. Ibid

5. Vikas Sehgal, Ganesh
Panneer, and Ann Graham ‘A Family-owned Business Goes Global’ downloaded from
the Internet.

6. The author has downloaded this definition from
the Internet.

7. Sandy Huffaker/Corbis ‘In
Hard Times, Family Firms Do Better’ Newsweek P. 2. The author has downloaded
this article form the Internet. Consequently, the author did not have the
complete details about the date of publication of the article and the Volume
number of the Newsweek’s issue in which this article was published.

8. Stacy Perman ‘Taking pulse
of family business’ (Bloomberg Businessweek special report, 13 February 2006)

9. Paul A. Samuelson, Economics International, Student
Edition (Tenth Edition) P. 185.

10. “Productivity is the
prime determinant in the long run of a nation’s standard of living, for it is
the root cause of national per capita income. The productivity of human
resources determines their wages while the productivity with which capital is
deployed determines the return it earns for its holders.” Michael Porter, The
competitive advantages of nations (London and Basingstoke, 1990, The Macmillan
Press Ltd.) P. 6.

11. Stacy Perman ‘Taking pulse
of family business’ (Bloomberg Businessweek special report 13 February 2006) P.
1

12. Michael J. Conway, JD and
Stephen J. Baumgartner, MSc (Econ) ‘The Family-Owned Business’ (2007 Volume 10
Issue 2)P.1

13. D. Tripathi ‘Crisis in
family businesses’ (Chapter VIII from a forthcoming book) P. 1

14. Rahul Bajaj ‘on
Family-Owned Enterprises, the U.S. Auto Industry and Global Pollution’ (India
Knowledge@Wharton 16 November 2006) P. 1

15. S. Radhakrishnan ‘The
Bhagavadita’ (Bombay: Blackie & Son Publishers Pvt. Ltd. 1982) P. 383.

shailesh.kwebmaker

In defence of Family Companies

The Credit Suisse Family Index, a composite index based on an universe of 172 large US and European family companies, has regularly outperformed other major global indices like MSCI, S & P 500, etc. There are, in fact, various surveys conducted from time to time which generally conclude that family managed companies perform better than non-family managed companies. In the Indian context, an Economic Times analysis published in their issue dated September 22, 2006, avers that there is no clear difference in the performance of family and non-family companies. Yet, public debates in the recent years have mostly depicted the former in a very poor light. This article attempts to examine whether family companies are indeed the villains of the corporate world.

All data, analysis and arguments put forth in this article are in the context of listed companies alone for obvious reasons. Secondly, non-family company’s universe would include Government-owned companies which face certain challenges unique to them, but are not discussed in this article.

We now look deeply into the many pros and cons of family companies versus non-family companies normally tendered in any discussion on this subject. These can be grouped broadly under five categories and then objectively assessed. These five categories are as follows.

A. Family wealth versus Company wealth

By far the largest number of arguments against family companies is that they have poor standards of corporate governance. Many lay persons carry the impression that owner families tend to treat family wealth and company wealth as fungible. Memories are fresh of robber barons who in the past have expropriated a disproportionate wealth from public companies under their control.

Good governance is, without any doubt, a fundamental attribute of a ‘good company’. However, on the other hand, one cannot just assume that a non-family company would have passed the governance test automatically. The latter, if controlled by self-serving professionals, could be as bad. There is enough evidence to bear this fact.

Hence, at the end of the day, a robust regulatory environment and an active set of independent board members can alone ensure similar standards of governance in either class of companies.

B. Control versus Ownership

The second issue is that families exert control over their companies far in excess of their economic interests. Though it appears serious on the face of it, we think it is a non-issue for three reasons.

(i) At the end of the day, whether professionals or families, there has to be a single point of control over the affairs of the company. Without this, the company will not pull in one direction. As long as the governance issues are reasonably addressed, it does not matter the percentage holding of the controlling entity.

(ii) In India, in fact, there is a tendency of the family to keep its holding as high as possible. Data shows that during the last decade many of India’s top families have increased their stake in their leading companies. (ET dated 20th June, 2011).

(iii) And, finally, the market now has a takeover code that would dissuade families to mismanage their companies whilst having a small stake.

The above two categories cover most of the issues that are listed as negatives of family companies. These were, in fact, very significant negatives of such companies in the past. It is our case that in the current environment they are not necessarily applicable to only one class of companies. On the other hand, the next three categories of arguments definitely favour family companies.

C. Entrepreneurship versus Professionalism

Even the strongest critic of family companies cannot deny that (i) entrepreneurship is the sine quo non of a commercial venture, and (ii) this quality is to be generally found with families who risk their wealth. Yes, professionals are likely to be better qualified on the average (though lately the gap is narrowing) and bring more scientific rigour to the decision-making process. But they sometimes fall prey to what is crudely termed ‘paralysis from analysis’ syndrome.

Finally, key decisions, are driven by a combination of intuition and entrepreneurial dreams. Family companies will certainly score better on this front.

Another point that finds mention is that non-family companies have elaborate systems and processes unlike in family companies. Well this is not entirely true. Family companies also have systems but they are more informal and centred around the promoter. (This issue becomes serious when more members of newer generations come on board and each wants his/her own informal system.)

D. Long-term versus Short-term Families, especially in Asia, tend to create and build for their progeny. Therefore, they tend to take a very long-term view of all value-creating propositions. On the other hand, professionals do not have any incentive to look beyond their own tenure. In addition, it is felt that performance-based remuneration militates against taking a long-term view. Interestingly there are reports that the tenure of a professional CEO is becoming shorter and shorter. In short, the family companies are more likely to work towards long-term goals.

E. Personal reputation versus Company reputation

And, lastly, the family equates its own reputation with that of the companies it manages. Nonperformance of one impacts adversely the family’s ability to tap the capital markets for fresh funds. So much so, one very often comes across a family placing its private wealth and personal guarantee as collateral to help out a listed company during financial difficulties. It is very unlikely that a professional director would pledge his personal reputation, let alone his wealth, to bail out the company which he manages.

Based on the above discussions we now face a conundrum. Empirical studies indicate that family companies perform as well as non-family ones, if not better. The dissertation of the anatomy of both these classes of companies lead to a conclusion that family companies are more likely to create long-term value for all stakeholders. Yet, popular opinion is almost against the former as a preferred model for managing companies. What is the reason for the disconnect between facts and perception ?

The reasons lie partly in history and partly in definitions.

Historically, as stated earlier, because of a weak regulatory framework, there have been many instances of corporate misdeeds. But more important, different sectors/companies in an economy do become uncompetitive and slowly decay or disappear. This is economics at work. Sometimes changes in government policy, labour laws, etc. have adverse consequences. Unfortunately, failures arising out of such developments tended to be family companies as there were hardly any professionally managed Indian companies in the early days of Indian corporate history. Therefore, public memory tends to associate corporate failures with family managements.

A more rational reason may be found in the way people, subconsciously, define ‘family’ and ‘professional’. Let us take, as an example, a venture started by a bright IIT engineer with no history of business behind him. After nurturing the business successfully for, say, five years he floats the company through a listing. Even as a listed company, he will continue to hold a stake and will control the company for many more years. But, in popular perception, this company will be bracketed as a professional company and will command relatively higher valuation. On the other hand, the perception of a similar venture started by an old-economy family company would be quite different even if that venture were to employ equally bright IIT engineers as employees.

This leads us to believe that the markets are not averse to ‘family’ per se. What it is saying is that so long as the Board/Management team exhibits entrepreneurial energy, sound domain knowledge and unitary control, it is does not matter if the promoter/family runs it. In the second example we gave above, whilst the promoting family may still be good entrepreneurs, the board would typically have members of the extended family with little domain knowledge. Hence the poor treatment by the market.

To put it differently the markets are, perhaps, saying that they prefer a family company as long as the founding family member is still firmly in control. But with the passage of time the family members grow in number, control gets diffused and domain knowledge diluted. Therefore, as the company moves from generation to generation, the role of professionals in the decision-making process should increase exponentially for this company to enjoy higher valuation.

Long ago, a popular topic for school debates used to be: Which is more important — Art or Science. Whilst all argued their respective cases vociferously, the moderator always used to sum it up by saying that both are important for the well-being of the human race. In the similar vein, both family and non-family companies have important roles to play depending at what stage of the evolution the company is in.

shailesh.kwebmaker

IFRS introduces a single control model for asesing control over investes

On 12th May 2011, the IASB issued its new suite of consolidation and related standards, replacing the existing accounting for subsidiaries and joint ventures (now joint arrangements), and making limited amendments in relation to associates. In this article we focus on IFRS 10 Consolidated Financial Statements

and IAS 27 (2011) Separate Financial Statements, giving our perspectives on the requirements that are modified and that are expected to have an impact on the preparers and users of IFRS financial statements.

New suite of standards

Key

IFRS 10 Consolidated Financial Statements ? IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IAS 27 (2011) Separate Financial Statements

IAS 28 (2011) Investments in Associates and Joint Ventures

IFRS 10 supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation — Special Purpose Entities; while the requirements of IAS 27 (2008) relating to the separate financial statements are retained in IAS 27 (2011).

Change in control criteria In a nutshell, IFRS 10 provides similar guidance in relation to the exemptions from preparing consolidated financial statements and the consolidated procedures as contained in IAS 27 (2008); the major change introduced by IFRS 10 is in relation to the definition of control over the investee.

The definition of a subsidiary under IAS 27 (2008) focusses on the concept of control and has two parts, both of which need to be met in order to conclude that one entity controls another, i.e., (a) the power to govern the financial and operating policies of an entity, and (b) to obtain benefits from its activities.

Under IFRS 10, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Thus, an investor controls an investee if the investor has all the following:

(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee; and
(c) the ability to use its power over the investee to affect the amount of the nvestor’s returns.

The exposure to risks and rewards of an investee does not on its own, determine that the investor has control over an investee; it is one of the factors of the control analysis.

Control is assessed on a continuous basis, i.e., it is reassessed as facts and circumstances change. A change in market conditions does not trigger a reassessment of the control conclusion unless it changes one or more of the elements of control (e.g., whether potential voting rights are substantive).

In assessing control over an investee, the investor considers the purpose and design of the investee so as to identify the investee’s relevant activities, how decisions about such activities are made, who has the current ability to direct those activities and who receives returns therefrom.

New single control model

To assess control over the investee under the new single control model under IFRS 10, the following factors may be considered:

(1) Identify the investee;
(2) Identify the relevant activities of the investee;
(3) Indentify how decisions about the relevant activities are made;
(4) Assess whether the investor has power over the relevant activities;
(5) Assess whether the investor is exposed to variability in returns;
(6) Assess whether there a link between power and returns.

The investor considers all relevant facts and circumstances when assessing control over the investee. The approach comprises a collection of indicators of control, but no hierarchy is provided in the approach. In cases where the investor has majority of the voting rights over the investee, the assessment of control may be straightforward; while in certain other cases, a more detailed analysis of all facts and circumstances of the case needs to be made before concluding on the investor’s control over the investee.

Let us understand each of the above-mentioned six factors of the new control model:

Identify the investee

IFRS 10 requires the investor to assess control over the investee, which is a separate legal entity. However, in certain cases, the investor may acquire control over specified assets and liabilities of an entity, such that those specified assets and liabilities may be considered as a deemed separate entity. Such deemed entities are referred to as ‘Silo’ for the purpose of applying the consolidation standard. Specified assets and liabilities qualify as ‘Silo’ if:

In substance, the assets, liabilities and equity of the silo are separate from the overall entity such that none of those assets can be used to pay other obligations of the entity and those assets are the only source of payment for specified liabilities of the silo; and

Parties other than those with the specified liability, have no rights or obligations related to the specified assets or residual cash flows from those assets.

Where one party controls a silo, the other parties exclude the silo when assessing control over the separate legal entity.

Key changes from IAS 27 (2008)

Under IAS 27 (2008), control under is assessed at the level of the separate legal entity; whereas under IFRS 10, the control may also be assessed at the level of silo.

Identify the relevant activities of the investee

For the purpose of IFRS 10, the term ‘relevant activities’ imply activities of the investee that significantly affect the investee’s returns.

Range of activities

For many investees, a range of operating and financing activities significantly affect their returns such as (a) selling and purchasing of goods or services; (b) managing financial assets during their life (including upon default); (c) selecting, acquiring or disposing of assets; (d) researching and developing new products or processes; and (e) determining a funding structure or obtaining funding.

In such cases, the decisions affecting the returns may be linked to decisions such as establishing operating and capital decisions of the investee, including budgets; and appointing and remunerating an investee’s key management personnel or service providers and terminating their services or employment.

Relevant activities occur only when particular circumstances arise or events occur

There can also be investees for which relevant activities occur only when particular circumstances arise or events occur, as the direction of activities is predetermined until this date. In such cases, only the decisions about the investee’s activities when those circumstances or events occur can significantly affect its returns and thus be relevant activities.

As can be noted above, determination of activities that significantly affect the returns of an investee will be highly judgmental in some cases.

Key difference from IAS 27 (2008)

Unlike IFRS 10, IAS 27 (2008) does not include any guidance on the relevant activities of an investee for the purpose of assessing control.

Identify how decisions about the relevant activities are made

To determine control over the investee, IFRS 10 requires the investor to assess whether the investee is controlled by means of voting instruments or is controlled by means of other rights. Depending on the means of control, a different analysis is per-formed to assess which Investor has control over the Investee.

Assess whether the investor has power over the relevant activities

An investor has power over an investee when the investor has existing rights that give it the current ability to direct the activities that significantly affect the investee’s returns. As the definition of power is based on ability, power does not need to be exercised.

In assessing whether the rights held by an investor give it power, the following are considered:

Substantive rights

Only substantive rights held by the investor and oth-ers are considered. To be substantive, rights need to be exercisable when decisions about the relevant activities need to be made, and their holders need to have a practical ability to exercise the rights.

It may be noted that the ‘rights that need to be exercisable when decisions about the relevant activities need to be made’ is different from the current requirement under IAS 27 (2008) of ‘rights that are currently exercisable’. For instance, Entity A has an option to acquire a majority stake in Entity B and the option, which is deep in the money, is exercisable in 25 days’ time. Any shareholder of Entity B can call for a general meeting of the Company by giving a notice of 30 days. Thus in the given case, by the time the general meeting will be held, Entity A would have obtained the majority stake in Entity B and thereby the control (presuming the voting rights are considered relevant). This is different from IAS 27 (2008) where the control would be established only when the option becomes exercisable i.e., after 25 days. Thus, the revised control model may change the date of obtaining control over an investee.

Under IAS 27 (2008), the management’s intentions with respect to the exercise of potential voting rights are ignored in assessing control, because these intentions do not affect the existence of the ability to exercise power. Further, the exercise price of potential voting rights and the financial capability of the holder to exercise them also are ignored. As such, the intent of the parties is not considered when determining whether the rights are currently exercis-able. It seems that IFRS 10 would require the intent of the party who writes or purchases the potential voting rights would be taken into account when assessing whether the rights are substantive.

Protective rights are related to fundamental changes in the activities of an investee or apply only in exceptional circumstances. They cannot give their holders power or prevent others from having power.

IFRS 10 provides guidance on the rights of other parties, and in particular on protective rights. IAS 27 (2008) does not provide any such guidance and as such, guidance is mainly drawn from US GAAP.

Voting rights

An investor can have power over an investee when the investee’s relevant activities are directed through voting rights in the following situations:

? the investor holds the majority of the voting rights, and these rights are substantive; or
? the investor holds less than half of the voting rights but: (1) has an agreement with other shareholders; (2) holds rights arising from other contractual arrangements; (3) holds substan-tive potential voting rights; (4) holds rights sufficient to unilaterally direct the relevant activities of the investee (de facto power); or

(5) holds a combination of those.

The above guidance on voting rights under IFRS 10 is similar to that prescribed by IAS 27 (2008).

De facto control
The investor had de facto control over the investee, because its rights are sufficient to give it power as it has the practical ability to direct the relevant activities unilaterally.

Assessing whether an investor de facto has power over an investee is a two-step process:

? In the first step, the investor considers all facts and circumstances, including the size of its holding of voting rights relative to the size and dispersion of the holdings of other shareholders.

As a result, if the investor holds significantly more rights than any other shareholder and the other shareholdings are widely dispersed, then the investor may have sufficient information to conclude that it has power over the investee. In other cases, it may be clear that the investor does not control the investee. If the first step is not conclusive, then additional facts and circumstances are analysed in the second step.

? In the second step, the investor considers whether the other shareholders are passive in nature as demonstrated by voting patterns at previous shareholders’ meetings. Assessing the voting patterns at previous shareholders’ meeting may require consideration of the number of shareholders that typically come to the meeting to vote i.e., the usual quorum in shareholder’s meeting, and not how other shareholders vote i.e., whether they usually vote the same way as the investor.

If, after this second step, the conclusion is not clear, then the investor does not control the investee.

Assessing de facto control involves exercise of man-agement judgment. The areas involving higher level of management judgment includes:

? Determining whether the current shareholding in the Investee is sufficient;

? Determining whether the other shareholding is sufficiently dispersed; and

? Determining the exact date when the de facto control is obtained. It may be noted that the investor may not have any evidence of de facto control as at the date of acquiring investments. The evidence of de facto control may be obtained only after the initial stages of holding of an investment in the investee.

IAS 27 (2008) does not provide guidance on control whether it should be based on only the power to govern; or in addition to power to govern, the evaluation of control take into account the de facto circumstances. In practice, the reporting entities have an accounting policy choice whether to assess control based on power to govern or, based on de facto circumstances in addition to power to govern. IFRS 10 requires consideration of de facto circumstances as part of the control analysis, and as such eliminates the said accounting policy choice.

Rights other than voting

When holders of voting rights as a group do not have the ability to significantly affect the investee’s returns, the investor considers the purpose and design of the investee and the following three factors:

?   evidence that the investor has the practical ability to direct the relevant activities unilater-ally;
?   indications that the investor has a special relationship with the investee;
?   whether the investor has a large exposure to variability in returns.

The first of these three factors is given the greatest weight in the analysis.

Assess whether the investor is exposed to variability in returns

The investor also should consider whether it is exposed, or has rights, to variability in returns from its involvement with the investee. Returns are defined broadly, and include distributions of economic benefits and changes in the value of the investment, as well as fees, remunerations, tax benefits, economies of scale, cost savings and other synergies.

Assess whether there a link between power and returns

Delegated power

In order to have control, an investor needs to have the ability to use its power over the investee to affect returns for the investor’s own benefit, i.e., there needs to be a link between power and returns.

An investor that has decision-making power over an investee determines whether it acts as an agent or as a principal when assessing whether it controls an investee. If the decision-maker is an agent, then the link between power and returns is absent and the decision maker’s delegated power is deemed to be held by its principal(s).

To determine whether it is an agent, the decision-maker considers:

(1) whether a single party holds substantive rights to remove the decision-maker without cause; if this the case, then the decision maker is an agent;

(2) whether its remuneration is on an arm’s-length terms; if this is not the case, then the decision-maker is a principal;

(3) the overall relationship between itself and other parties through a series of factors if neither (1) nor (2) is conclusive. These factors include:

?   the scope of its decision-making authority over the investee;
?   substantive rights held by other parties;
?   the decision-maker’s remuneration (level of linkage with the investee’s performance); and
?   its exposure to variability of returns because of other interests that it holds in the investee.

Different weightage is applied to each of the factors depending on particular facts and circumstances. The last two factors, i.e., remuneration and other interests held, are sometimes considered in aggregate in IFRS 10 and referred to as the decision-maker’s ‘economic interests’. The greater the magnitude of and variability associated with its economic interests, the more likely it is that the decision-maker is a principal.

Relationship with other parties

The investor determines whether other parties that have an interest in the investee are acting on behalf of the investor. When this is the case, the investor considers the decision-making rights held by these parties together with its own rights to assess whether it controls the investee.

Consolidation procedures

The consolidation procedures under IFRS 10 are similar to the consolidation procedures prescribed under IAS 27 (2008). This also includes accounting for loss of control over an investee.

Separate financial statements

The requirements of IAS 27 (2008) relating to separate financial statements have been retained in IAS 27 (2011).

Effective date and transitional requirements

Effective date
IFRS 10 and IAS 27 (2011) are effective for annual periods beginning on or after 1st January 2013. Early adoption is permitted provided that the entire consolidation suite is adopted at the same time.

Summary

Overall, the implementation of IFRS 10 will require significant judgment in several respects. While the standard is not mandatorily effective until periods beginning on or after 1 January 2013, it is expected that preparers will want to begin evaluating their involvement with investees under the new consolidation standard sooner than that, as the changes in the consolidation conclusion under the new standard generally will call for retrospective application.

At this moment, it is unclear by when the corresponding changes will be introduced under Ind AS framework. However, it is advisable for the companies to continue the process of estimating the impact of the convergence on their business, especially in the light of continuous changes to IFRS.

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The Paper Products Ltd. (31-12-2010)

From Notes to Accounts:
(a) Directors’ remuneration:

(i) The above does not include gratuity and leave encashment benefits as the provisions for these are determined for the Company as a whole and therefore separate amounts for the directors are not available.

(ii) Chairman and Managing Director, Chief Executive Office and Executive Director and Executive Director and Chief Operating Officer of the Company are entitled to options under ‘Option Right Plan’ and shares under the ‘Share Ownership Plan’ of Huhtamaki Oyj (the ultimate holding company) which entitles the holder of the option rights to subscribe to the shares of the ultimate holding company at a future date, at a price fixed based on the fair market prices of the shares during specified period plus certain percentage of market value on the exercise date and the recipient of grants under share ownership plan is entitled to receive shares at nil cost, respectively. The schemes detailed above are assessed, managed and administered by the ultimate holding company and there is no cost charged to the Company. The charge taken by Huhtamaki Oyj in its accounts for the year ended 31st December 2010 for these options and shares is Rs.7,193 Thousand (previous year Rs.11,214 Thousand).

(iii) The above remuneration does not include the remuneration of the Chairman and Managing Director of the Company of Rs.11,812 Thousand (previous year Rs.4,196 Thousand) which is received from Huhtamaki Oyj, the ultimate parent company, for his role as Executive Vice-President (‘EVP’) — Flexibles Packaging Global, Huhtamaki Oyj.

(b) Computation of net profit in accordance with sections 198, 349 and 350 of the Companies Act, 1956 and commission payable to Directors as shown in Table 1 on previous page:

The Company depreciates its fixed assets as enumerated in Schedule 16 Policy III wherein estimated useful lives for certain assets are lower than implicit estimated useful lives prescribed by Schedule XIV of the Companies Act, 1956. Thus, the depreciation charge in the books is higher than the minimum prescribed by the Companies Act, 1956. This higher depreciation charges has been considered as deduction for the Computation of Managerial Remuneration above.

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Macmillan Publishers India Ltd. (31-12-2010)

From Notes to Accounts:
8. The remuneration of the Managing Director and Whole-time Director has been approved by shareholders at the Extra Ordinary General Meeting held on 23rd October 2008. An application seeking Central Government’s approval for the remuneration of Managing Director and Whole-Time Director has been filed to comply with provisions of section 309 read with Schedule XIII of the Companies Act, 1956. The approval of the Central Government is awaited.

From Auditors’ Report:
(v) Attention is invited to Note No. III(8) of Schedule 18 regarding the payment of remuneration to the Managing Director and Whole-time Director, which is subject to approval of the Central Government.

(vi) Subject to the matter referred to in paragraph (v) above in our opinion and to the best of our information according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India.

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Ranbaxy Laboratories Ltd. (31-12-2010)

From Notes to Accounts:

(a) Director’s remuneration*

(i) Liabilities in respect of gratuity pension and leave encashment (for one of the directors) as the same is determined on an actuarial basis for the company as a whole.

(ii) Compensation cost of Rs. nil for the loss of office to a director (previous year Rs.481.38).

Mr. Arun Sawhney was appointed as the Managing Director of the Company with effect from 20th August 2010 for a period of three years. The appointment and remuneration of Mr. Arun Sawhney as the Managing Director has been approved by the Board of Directors, but the requisite regulatory approval from shareholders is yet to be obtained. In accordance with the remuneration determined by the Board of Directors, Rs.32.91 (including commission) has been accounted for as an expense in the Profit and Loss Accounts for the year ended 31st December 2010.

From Auditors’ Report: (f) Without qualifying our report, we draw attention to Note 14 of Schedule 23 of the financial statements, wherein it is stated that the appointment and remuneration of Mr. Arun Sawhney as the Managing Director of the Company with effect from 20 August 2010 has been approved by the Board of Directors, but the requisite regulatory approval from shareholders is yet to be obtained. In accordance with the remuneration determined by the Board of Directors, Rs.32.91 million (including commission) has been accounted for as an expense in the Profit and Loss Account for the year ended 31st December 2010.

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Gaps in GAAP Change In Terms Of An Operating Lease Agreement

Issue Consider the following example involving change in terms of an operating lease. Entity Z is the lessee in an operating lease. The lease term is 10 years. Annual rent is Rs.200, with a fixed escalation of 5% each year. This results in a straight-lined annual lease expense of Rs.252. At the end of year 5, Entity Z and the landlord agree to modify the lease terms. The fixed escalation of 5% is replaced with CPI-linked escalation. The base rent for this purpose is the escalated rent at year 5 under the original terms (Rs.243). At the end of year 5, Entity Z has accrued rent of Rs.153 in its balance sheet as a consequence of straight-lining (prior to any adjustment to reflect the new terms). Entity Z’s accounting policy for contingent rents on operating leases is to expense them in the period to which they relate. The CPI-based escalation clause is considered to be a closely-related embedded derivative and is therefore not separated from the host contract. How is the modification recognised?

Alternative views

AS-19 has no specific guidance on the measurement implications of amending the terms of a lease. Therefore several views are possible, each of which have their own advantages and disadvantages. Also see appendix for the calculations.

View 1: Cancellation and new lease

View 1 treats the modification to the lease contract as a cancellation of the existing lease along with a new lease. AS-19.10 states that “Lease classification is made at the inception of the lease. If at any time the lessee and the lessor agree to change the provisions of the lease, other than by renewing the lease, in a manner that would have resulted in a different classification of the lease under the criteria in paragraphs 5 to 9 had the changed terms been in effect at the inception of the lease, the revised agreement is considered as a new agreement over its revised term. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased asset) or changes in circumstances (for example, default by the lessee), however, do not give rise to a new classification of a lease for accounting purposes.” The wording of AS- 19.10 and its reference to a ‘new agreement’ might be viewed as providing support for this approach (albeit acknowledging that this paragraph addresses reassessment of lease classification and is therefore not directly on point).

As a consequence:

the accrued rent of Rs.153 arising out of straight-lining is released to profit & loss in its entirety at the end of year 5

a new minimum lease payment (MLP) is determined prospectively as Rs.243 per annum. This amount is straight-lined as the non-contingent portion of the annual lease expense in years 6-10

the effect of the CPI adjustment is recognised in each annual period, being the cumulative effect of CPI from year 6 onwards.

One argument against this approach is that it is questionable that it results in a pattern of lease expense that reflects the time pattern of the lessee’s benefits in accordance with AS-19.23 which states that “Lease payments under an operating lease should be recognised as an expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.”

Moreover, it is also questionable that the revision to the lease terms is in substance a cancellation of an existing lease.

View 2: Continuation of lease — revise SLM expense based on adjusted MLPs

View 2 treats the revised lease terms in years 6-10 as a continuation of the original lease. However, the MLPs are now different and the straight-line calculation should reflect this. One method is to determine the new total MLPs for the entire lease (i.e., years 1-10) under the revised terms. A straightline expense is determined for the fixed portion based on that amount.

As a consequence:

a revised straight-line (non-contingent) annual lease expense of Rs.232 per annum is determined based on the revised total MLPs

the accrued rent at the end of year 5 is adjusted. The revised accrual is the difference between the cumulative expense based on Rs.232 and the actual payments up to year 5. This results in Rs.96 being released to P&L instead of the entire Rs.152 under view 1

the effect of the annual CPI adjustment is recognised in each annual period as per view 1.

View 3: Continuation of lease — use original SLM and adjust for variation between original rent and revised rent each period

Like view 2, view 3 treats the revised lease terms in years 6-10 as a continuation of the original lease. However, under view 3 the contingent adjustment is characterised as the variation between the original payment each year and the revised payment. This might be argued to be a better representation of the substance of the revision, which swaps fixed escalation for index-based escalation.

As a consequence:

the accrued rent at year 5 is not adjusted

the original straight-lined annual lease expense of Rs.252 continues to be recognised as the non-contingent portion

the contingent portion in years 6-10 is the difference between the original cash rent for that year based on 5% escalation and the revised cash rent based on CPI.

Conclusion

Each of the above views is essentially unsupported in the standard, and have their own merits and drawbacks. Nevertheless View 3 appears to be the most logical as it results in a better reflection of substance of the change in the operating lease arrangement and is a better representative of the time pattern of the user’s benefit. Appendix

Original Lease Term & Expense Profile

Year

MLP’s

Accrual

Cumulative

expenses

accrued

200.00

251.56

-51.56

210.00

251.56

-41.56

-93.12

220.50

251.56

-31.06

-124.17

231.53

251.56

-20.03

-144.21

243.10

251.56

-8.46

-152.66

255.26

251.56

3.70

-148.96

268.02

251.56

16.46

-132.50

281.42

251.56

29.86

-102.64

295.49

251.56

43.93

-58.71

310.27

251.56

58.71

0.00

Total

2515.58

0.00

Revised Lease Term &
Expense Profile

Year

MLP’s

CPI

Cash

rent

200.00

251.56

210.00

251.56

220.50

251.56

231.53

251.56

243.10

98.89

154.08

251.56

243.10

1.05

255.26

244.22

251.56

243.10

1.06

270.57

259.53

254.11

243.10

1.07

289.51

278.47

259.65

243.10

1.06

306.88

295.84

262.95

243.10

1.05

322.23

311.19

263.52

Total

2320.63

2549.57

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(2011) 11 taxmann.com 840 (AAR) Articles 7, 11 of India-USA DTAA; Sections 2(28A), 9(1)(v), 245R(2) of Income-tax Act Dated: 3-5-2011

(i) There being no debt claim, ‘discount’ is not ‘interest’ under India-USA DTAA.

(ii) Income from discounting is business income and accrues in India and is taxable under Income-tax Act. However, in absence of PE, it would not be taxable in terms of DTAA.

(iii) Income accrues on discounting though the proceeds are realised later.

(iv) Since income is not liable to tax in India, transfer pricing documentation/report not required.

(v) As income is taxable under Income-tax Act, but extinguished under DTAA, return of income should be filed.

Facts:
The applicant was an American Company, which was tax resident of the USA. The applicant provided various financial services to its group companies as well as to other companies. As part of its business, it was drawing, making, accepting, endorsing, discount, executing and issuing Promissory Notes (PN), bills of exchange, etc.

ABC India Private Limited was a group company. The applicant proposed to purchase bills of exchange drawn by ABC India on its customers. It also proposed to purchase the PNs issued by the customers of ABC India from ABC India on ‘without recourse’ basis. The applicant has stated that it:

(a) may hold PNs till maturity, or

(b) sell them to another buyer, or

The applicant raised the following issues before the AAR for its ruling:

(1) Whether the income earned from discounting bills of exchange or PNs pertaining to its Indian group entities was liable to tax in India under the Income-tax Act or under DTAA?

(2) If it was taxable, whether it would be taxable at the time of discounting, or on maturity, or on re-discounting?

(3) Whether the applicant would have PE in India? If yes, whether profits from discounting could be attributed to such PE?

(4) Whether income of the applicant would be subject to withholding tax u/s. 195 even if it was held not taxable in India?

(5) Whether transfer pricing documentation was required to be maintained and report was required to be filed, even if income was held not liable to tax in India?

(6) Whether the applicant was required to file a return of income even if it did not have any income chargeable to tax in India?

The applicant contended as follows:

The discount is the business income of the applicant. The applicant has no PE in India. Hence, the business income should be accessed outside India.

The discounted margin is not ‘interest’ u/s. 2(28A) of the Income-tax Act read with section 9(1)(v) of the Income-tax Act. Discounting is a mercantile practice and it does not create a loan or debt. The Revenue contended as follows:

The proposed transaction was a case of merchanting trade. The percentage of discount was really the interest on money advanced by the applicant to ABC India. It was a ruse to avoid taxation in India. Hence, such payment would be ‘interest’ u/s. 2(28A) of the Incometax Act.

Proceedings on similar questions were pending before the High Court and the Tax Authority in case of other group companies of applicant. Hence, advance ruling should not be given in this case.

Ruling:
The AAR ruled as follows:

(i) The bar of proviso (i) to section 245R(2) of the Income-tax Act is not attracted since the transaction in respect of which the ruling was sought was different from that in which other group entities were involved.

(ii) Discounting of bill is distinguishable from a pledge on deposit of security. If amounts to purchase of negotiable instrument and does not involve debtor-creditor relationship between endorser and endorsee, nor does it result in assignment of original debt. For ‘interest’ to arise, existence of a debt claim is necessary. Hence, ‘discount’ is not ‘interest’ under Article 11 of DTAA.

(iii) Applying the normal rule that ‘the debtor must seek the creditor’, the payment is to be made in India. Hence, the income accrues in India. Such income is business income taxable in accordance with provision of the Incometax Act, but subject to the rights conferred under DTAA. As applicant did not have PE in India, in terms of Article 7 of DTAA, it would not be taxable in India.

(iv) Income accrues on discounting even though the proceeds are realised later.

(v) The applicant would not be subject to withholding of tax u/s. 195.

(vi) Transfer pricing documentation were not required to be maintained and the report was not required to be filed since the income was not liable to tax in India.

(vii) As the income of applicant was liable to tax under the Income-tax Act and as such liability is extinguished only under DTAA, consistent with the ruling in VNU International BV (2011) 198 Taxman 454 (AAR), the applicant is liable to file a return of its income.

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Verizon Data Service India Pvt. Ltd. (2011) TII 13 ARA-Intl. Article 12 of India-US DTAA Section 9(1)(vii) of Income-tax Act Dated: 27-5-2011

(i) On facts, seconded employees continued to remain employees of foreign company. Hence, services were performed by the foreign company. Therefore, cost-to-cost reimbursement to foreign company was income of foreign company.

(ii) Under India-USA DTAA, ‘make available’ clause does not apply to non-technical services. Hence, payments for managerial services were FTS and chargeable to tax @20%.

(iii) Being managerial services, payments were FTS as defined in Explanation 2 to section 9(1)(vii) of Income-tax Act.

Facts:
The applicant is an Indian company, which is a whollyowned subsidiary of an American Co. The applicant is providing certain telecom and information technology-enabled services to USCo.

For improving efficiency and productivity, the parent American Company seconded certain employees of its affiliate, also an American Company (‘USCo’), to the applicant. USCo was also engaged in a business similar to that of the applicant.

The applicant entered into a secondment agreement with USCo. Pursuant to the secondment agreement, USCo deputed three persons. Each seconded employee was to function and act exclusively under the direction, control and supervision of the applicant and USCo was not responsible or liable as regards the work performed by the seconded employees. USCo was to pay to the employee the salary which the employee was entitled to receive and the applicant was to reimburse the same to USCo. Responsibility to withhold tax was of the applicant and the payment to USCo was to be on net of tax basis.

The applicant raised the following issues before the AAR for its ruling:

(1) Whether reimbursement by the applicant to USCo is income of USCo and liable to tax deduction u/s. 195?

(2) If answer to 1 is ‘yes’, whether it is taxable as FIS?

(3) Does USCo have a PE in India and, if yes, whether amount received by it from the applicant is ‘business profits’ attributable to the PE under the DTAA?

(4) If answer to 3 is yes, whether the taxable income would be nil because of cost-to-cost reimbursement?

(5) If reimbursement is income of USCo, what would be the rate of withholding tax?

The applicant contended as follows:

Since the applicant was the economic employer of these seconded employees, withholding tax obligation was of the applicant. The payments made to USCo were cost-to-cost reimbursements and no income arose to USCo. Since the applicant had withheld tax u/s. 192 (on salary), there should not be any further withholding u/s. 195.

USCo was not rendering any services to the applicant. The employees work under the control of the applicant, the reimbursement of salary to USCo was for administrative convenience and hence, it should not qualify as FIS under Article 12 of the DTAA as FIS would require that technical knowledge, skill, etc. is ‘made available’.

USCo had no fixed place from where it carried on business in India. Even if it was held that USCo had a fixed place of business in India, salary and expenses incurred on seconded employees would be deductible as expenditure and due to cost-to-cost reimbursement, net income would be nil. Hence, no tax deduction would be required.

The Revenue contended as follows:

Since, the applicant, the parent company and USCo were part of the same group, seconded employees represented the parent company and relying on DIT v. Morgan Stanley and Co. Inc, (2007) 292 ITR 416 (SC), they do not become employees of the applicant. Thus, the applicant would not be the economic employer.

Seconded employees claimed to be part of the parent company. Only USCo had the authority to terminate their services.

In A.T. & S. India P. Ltd., In re (2006) 287 ITR 421 (AAR), it was held that reimbursement of cost of seconded employees is in the nature of FTS and payment of taxes under the head ‘salaries’ is of no consequence. It is not correct to say that persons occupying managerial position cease to render technical service. The employees were seconded to render only technical advice/guidance. Hence, payments would be FIS even under DTAA.

Ruling:
The AAR ruled as follows:

(i) The three employees together constituted a team. While they were providing services to the applicant, they remained employees of USCo and their employment could be terminated only by USCo. This showed that it was USCo who rendered managerial services to the applicant.

(ii) As the seconded employees continued to remain the employees of USCo, it followed that the managerial services were performed by them as employees of USCo and not as those of the applicant.

(iii) The two receipts — one in the hands of USCo (for managerial services) and the other in the hands of employees (salary for employment) — spring from different sources, are of different character and represent different species of income. By correlating the two payments/ receipts, neither the nature nor substance of the transaction would change to give it the character of reimbursement. Amounts paid by the applicant to USCo represent income of USCo.

(iv) From reading of MOU to DTAA, it was clear that ‘make available’ clause does not apply to non-technical services. Since services provided by USCo were managerial services, the payments were FIS under Article 12(4) of DTAA. As regards the Income-tax Act, since the services were managerial in nature, the payments were FTS as defined in Explanation 2 to section 9(1)(vii).

(v) Since the reimbursed amounts were FIS, they would be chargeable to tax @20% under Article 12(4)(b) of DTAA. Also, as the payments are taxable as FIS answers to the other questions were academic.

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R. R. Donnelley India Outsource Private Limited (2011) 11 taxmann.com 94 (AAR) Article 13 of India-UK DTAA Dated: 16-5-2011

Under India-UK DTAA, if the services are not managerial, technical or consultancy services and do not involve usage of sophisticated technology, fees are not taxable.

Facts:
The applicant is an Indian company providing solutions in commercial and financial printing, print and mail management, product customisation, logistics, call centres, transactional online services, digital photography, colour services, etc.; high-end support services to the customers identified by its associated enterprises; online data-related services for different kinds of businesses.

RRDUK is a foreign company and is a tax resident of UK (‘UKCo’). UKCo was engaged in the business of communication management. For efficient discharge of service to its customers, the applicant had entered into data processing services agreement with UKCo. As per the agreement, the applicant was to pay fees to UKCo based on the invoice of UKCo.

The applicant raised the following issues before the AAR for its ruling:

(1) Whether amount receivable by UKCo is taxable as FTS under the Income-tax Act and DTAA?

(2) If the amount receivable by UKCo is not taxable in India, whether the applicant is required to withhold tax u/s. 195 of the Income-tax Act?

The applicant contended that the payment made to UKCo was not for technical services and hence, was not taxable in India. Further, in terms of Article 13 of DTAA unless the services are ‘made available’, they cannot be said to be technical services. The applicant also relied on rulings of the AAR in Invensys System Inc. (2009) 317 ITR 438 (AAR) and Intertek Testing Services India P. Ltd. (2008) 307 ITR 418 (AAR)1.

The Revenue contended that the personnel of UKCo periodically visiting India did not stay for more than 30 days and hence, no PE existed in India. However in view of explanation to section 9(2) of the Incometax Act (inserted with retrospective effect by the Finance Act, 2010), the applicant would be liable to withhold tax in India.

Ruling:
The AAR ruled as follows:

(i) The AAR observed that once the knowledge or technical know-how is transferred, no further assistance is required from the services provided. The services mentioned in the agreement are not managerial, technical or consultancy services and as stated by the ap-plicant, they do not involve usage of any sophisticated technology. Hence the fees for these services are not taxable.

(ii) As the fees are not taxable, question of withholding tax u/s. 195 does not arise.

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Lanka Hydraulic Institute Ltd. (2011) 11 taxmann.com 97 (AAR) Articles 5, 7, 12, 22 of India-Sri Lanka DTAA; Sections 9(1)(vi), (vii) of Income-tax Act Dated: 16-5-2011

(i) Time spent by employees under control and supervision of independent service provider not to be considered for determining service PE.

(ii) Where consideration is for use of scientific work, etc. and no IPR in software is transferred, payment is royalties.

(iii) As DTAA does not have specific Article for taxation of FTS, it would be governed by other income Article.

Facts:
The applicant was a company incorporated in, and tax resident of, Sri Lanka. The applicant was engaged in providing technical feasibility studies, preparation of coastal zone management plan, port and other water-related engineering projects, etc. The applicant did not have any office or place of business in India.

Kolkata Port Trust had awarded a contract to a PSU. The PSU subcontracted the work to the applicant. Under the agreement with the PSU, the applicant was to provide services pertaining to software supplies, installations, modelling, field data collection, transfer of on-job training/technology, maintenance, monitoring, handover of software, designs and submissions of reports, etc. As per the applicant, on the basis of man-hours, substantial part of the services were rendered in Sri Lanka and only about 20% of the services were rendered in India. For rendering the services in India, the applicant deputed engineers to the project site at short intervals.

The applicant had outsourced part of the services to an Indian Company (‘IndiaCo’). Further, the applicant had also engaged a representative for assistance in connection with the contract.

The PSU treated the receipts of the applicant u/s. 9(1)(vii) of the Income-tax Act and deducted tax u/s. 195. The applicant had applied to the AO for nil withholding tax certificate u/s. 197, but subsequently withdrew its application and approached AAR raising the following questions:

(1) Whether on facts, the applicant had constituted PE in India in terms of Article 5 of DTAA read with the Protocol to, DTAA?

(2) Whether the consideration received by the applicant under the contract with the PSU was taxable in India under Article 7 of DTAA?

(3) If answer to the above question is no, whether the consideration received by the applicant under the contract with the PSU was taxable in India under any other article of DTAA?

The applicant contended as follows:

The contract is predominantly for services and supply of software is incidental to the contract. Thus, the payment is for obtaining limited rights for effective operation of the software and not for commercial exploitation of software. Hence, it cannot be considered royalty.

Consideration for provision of services is business receipts. The applicant did not have any fixed place of business, management or branch in India. Under Article 5(2)(i) of DTAA, a service PE is constituted if services are furnished for more than 183 days in any 12 months’ period. Due to MFN clause in DTAA, the period of 183 days is extended to 275 days as that is the period in Sri Lanka-Yugoslavia DTAA.

The Revenue contended as follows:

As DTAA did not have specific provision dealing with FTS, taxing under any other Article of DTAA would mean changing the character of the income. As such, FTS should be taxed u/s. 9(1)(vii) of the Income-tax Act.

As the software was not sold but licensed, the nature of consideration was royalty u/s. 9(1)(vi) of the Income-tax Act.

Presence in India of employees deputed by the applicant for less than 183 days was not ascertainable. Further, while subcontracting part of the work to IndiaCo and the representative, the applicant had given them instructions and thereby controlled them both. The applicant had also not substantiated that IndiaCo and the representative had not provided similar service to others. Hence, it cannot be concluded that they were not dependent agents. Therefore, the applicant has a PE in India.

Under contract between the PSU and the applicant, the applicant cannot outsource certain part of the work. Hence, u/s.s 190 to 194 of the Indian Contract Act, IndiaCo would constitute sub-agent. Therefore, the time spent by employees of IndiaCo should also be considered for determining service PE.

Ruling:
The AAR ruled as follows:

(i) IndiaCo is an independent service provider having expertise who has provided similar services to others. Indiaco has rendered services through its employees under its own control and supervision. Hence, employees of IndiaCo cannot be considered ‘other personnel’ under Article 5(2)(i) of DTAA. Therefore, duration of time spent by employees of IndiaCo is not to be considered for determining PE in India of the applicant.

(ii) The applicant did not sell any off-the-shelf product but provided scientific equipment for perpetual use. The tendered document envisages transfer of technology by means of field data collection and desk study of data to arrive at mathematical model by using software. Though the software is heart and soul of the transferred technology, no intellectual property rights in software are transferred. The consideration is for use of scientific work, model, plant, scientific equipment and scientific experience. Hence, it is royalties under Article 12 of DTAA.

(iii) As DTAA does not have specific Article for taxation of FTS, FTS would be governed by Article 22 (other income) and not as per Article 7.

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Circular No. 143/12/2011-ST, dated 26-5-2011.

By this Circular it has been clarified that benefit of exemption as provided by the Central Government vide Notification No. 14/2004-ST, dated 10-9-2004 is available in respect of process of

(1) threshing and drying of tobacco leaves and then after packing the same, and

(2) processing of raw cashew and recovering kernel as far as the activity is conducted by processing units for and on behalf of client as the activity doesn’t result in any change in their essential character at the output stage. In addition, this Circular also clarifies that service tax is not applicable on commission paid to agents stationed abroad who provide business auxiliary service to promote the export of rice.

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Circular No. 142/11/2011-ST, dated 18-5-2011.

Subsequent to issuance of Notification No. 17/2011- ST, dated 1st March, 2011 regarding refund of service tax paid on services provided to units located in SEZ, the CBEC has issued this Circular in questionnaire format clarifying certain issues.

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Wrong move — The point is to go after the tax evader, not squeeze taxpayers further.

The Finance Ministry’s move to subject high networth taxpayers (HNIs) to intense year-round scrutiny is simply absurd. It should stop harassing those who duly file their income tax returns. The Government should drop the proposal to create a dedicated cell to monitor those who report earnings over Rs.1 crore per annum, spending more than Rs.10 crore a year or having assets in excess of Rs.100 crore. Instead of squeezing more from those who already file returns and pay taxes, the Department should go after those who remain outside the tax net. This is eminently feasible with rigorous analysis of annual information returns (AIR) that identify potential taxpayers by examining expenditure patterns. Today, the Department is behind the curve in mining information gathered through the tax information network (TIN). Audit trails break-up as the permanent account number (PAN) is found missing in several large financial transactions gathered through TIN. This is untenable. Every transaction should be tagged by a PAN and the unique identifier should be made mandatory for all those who make high-value purchases. A fool-proof PAN and robust TIN, not a dedicated cell for HNIs, will enable the Department to identify tax evaders. Selective focus on HNIs is a bad idea that would only duplicate work for the Department that already has a system in place to scrutinise income tax returns, selecting cases through the computer-assisted scrutiny system (CASS) that also captures information provided by banks, credit card companies, mutual funds through the AIR. A 360-degree profile of every taxpayer can be easily created with creative and intelligent use of information technology.

Last year, around 10,600 tax-filers reported annual incomes over Rs.1 crore. The number dropped to 1,257 for those with an yearly income of over Rs.5 crore. Hardly surprising, given that less than 3% of people file tax returns in India. The base of income tax should be widened to raise the level of tax collection to GDP. The best way to do that is to expand the coverage of AIR. Also, moderate income tax rates, simple and transparent tax laws will improve compliance and stop generation of black money.

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Charitable trusts under I-T scanner

Enhanced scrutiny, modified auditors’ report and new return form part of exercise to curb misuse of tax exemption. The Income-tax (I-T) Department has launched a comprehensive exercise for tightening the administrative mechanism for charitable institutions.

Scrutiny of cases where misuse of tax exemption has been noticed and modifications in reporting procedures to capture their activities, funding patterns and income are among measures taken for streamlining procedures. The Directorate of Exemption has already identified a substantial number of cases, which are being selected for scrutiny. These cases pertain to the new proviso added to section 2(15) of the Income-tax Act, applicable from 2009-10.

The new norm disentitles tax exemption to any trust or society, engaged in the advancement of any object of general public utility, if it collects fees or other charges for services rendered in the nature of business, commerce or trade.

The Directorate has suggested a criteria for selection of cases during the current year. It includes quantum of refund claim, quantum of investment, gross receipts and income from business and profession.

Modifications in Form No. 10-B associated with the auditors’ report for charitable institutions has also been planned to get full details of activities of these entities. The proposed modified features include disclosure of nature of charitable activities and places of primary business.

Further, complete information with regard to donation by both internal and external donors with details of Foreign Contribution Regulation Act (FCRA) approvals would also be required in this format.

Details of exemption claims made simultaneously under different provisions, yearwise break-up of accumulation and utilisation of funds, information in respect of cash transactions, Tax Deducted at Source (TDS) compliance and other business transactions would have to be furnished once the Central Board of Direct Taxes (CBDT) approves this new form.

A new income tax return form for public charitable trusts is also being prepared by the Directorate to facilitate comprehensive reporting of their income and expenditure. It would facilitate e-filing and help in selecting cases for investigation and would also provide details of foreign, anonymous and corpus donations, donation in kind and FCRA approvals.

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Choosing head of IMF: Self goal

A lot of people talk about India rising. It is after all the second-fastest growing economy, a member of the G20, a pillar of BRICS, and a claimant to permanent membership of the Security Council. However valid the revivalist narrative might be, there has always been a vulnerable underbelly to the story of India Shining: massive poverty, and ‘under-development’ on many fronts (the largest number of poor people, the largest number of malnourished people, the largest number of illiterates, the largest number of blind people. . . .). You can sense the unstated position in many minds around the world that India is running ahead of itself, that it is confusing potential with achievement, and that its leadership role in world affairs is yet to be demonstrated. The less charitably inclined will also have been muttering ‘arriviste’.

If the country needed a wake-up call, it has got it in the run-up to choosing a new managing director of the International Monetary Fund. First, there was the small matter that its favoured candidate for the post was over-aged — a fact ignored for several days amidst expectant speculation. It now turns out that China, while seeming to go along with the BRICS position that the choice should not automatically go to a European, has done a deal while quietly offering support to the French candidate. There is a precedent worth recalling: the election of the United Nations Secretary-General. The Government backed Shashi Tharoor’s candidature when he had little hope of winning because the US preferred a candidate from another ‘risen’ country with whom it has a military alliance, South Korea. India, in comparison (and rightly so), seeks strategic autonomy in international relations.

Such tactical mistakes are not without cost. If it turns out that China has in fact done a deal, securing the No. 2 position at International Monetary Fund (IMF) for its national as quid pro quo for supporting Christine Lagarde, then India has scored an own goal. From the perspective in New Delhi, a European or American would have been preferred in that position, rather than a Chinese. Indeed, the Prime Minister is known to have argued in the past that having a European at the head of the IMF has served India well. What might happen in the IMF could be a precursor of other things to come. Pushing for re-ordering the global order, and a declining role for the West, means that the default country that gets to fill the power vacuum will be China — which after all has an economy thrice as big as India’s, a much greater role in world trade, a pivotal place in the currency market, and much else.

BRICS solidarity is also a double-edged sword. In the Doha Round of trade talks, the rich countries have been able to drive a wedge between ‘emerging markets’ like India and the more numerous poor economies, by pointing out that the two groups’ interests are not synonymous. In a recent meeting of the World Trade Organisation, some of the fiercest criticism of BRICS positions came from poor countries in Africa. In short, India should be careful about what it wishes to achieve in international affairs and how it leverages group dynamics; it might well get what it asks for — only to discover that the earlier arrangement was more to its advantage.

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The Finance Minister must focus on the fiscal challenge

Finance Minister Pranab Mukherjee must devote his energies to improving fiscal management if his budgetary arithmetic has to be prevented from going awry. The danger signals are all up. His Ministry has now acknowledged the Reserve Bank of India’s earlier warning that economic growth in fiscal 2011-12 is likely to be lower than budgeted originally. A sharp deceleration in the denominator will mean a sharp increase in the fiscal deficit-to-gross domestic product (GDP) ratio. The timely arrival of the monsoon augurs well for the economy, which may surprise the markets and policy makers. But this cannot be taken for granted. Moreover, reports of investment deceleration suggest that some kind of a crowding-out of private investment may already be happening as a result of persistently high government borrowing. The most worrisome aspect of recent fiscal trends is the sharp increase in the Government’s subsidy bill. Total subsidies — food, fertilisers and petroleum — have been persistently high and as a percentage of GDP went up from less than 1.5% till 2007 to close to 2.5% in 2008-09 and above 2.0% in 2009-10. While Mr. Mukherjee has budgeted for a lower ratio this fiscal, there is little evidence so far that he will be able to meet his budgetary targets — not with the continued foot-dragging on petroleum and fertiliser subsidies and pressures to increase food subsidy.

The only thing that has saved the Union Government’s fiscal strategy so far, especially in the face of sluggish revenue receipts, is the less-than-budgeted defence expenditure. It was widely expected that immediately after the state Assembly elections were wrapped up the Government would attend to the extant fiscal challenge. Apart from the heroic increase in petrol prices, no other action has been taken. On the other hand, it appears that the Finance Ministry may not be able to meet the disinvestment target it had set. While no one expects last year’s bonanza to be repeated this year, even budgeted amounts may not be forthcoming if the overall approach to macroeconomic management remains lack lustre.

The delay in tax reform — with the introduction of a Goods and Services Tax still on hold and the apparent inability of major political parties to focus attention on issues pertaining to revenue mobilisation and revival of growth — is raising fresh concerns about the sustainability of even 8.0% economic growth. With the international economic environment remaining precarious and far from stable and with regional security re-emerging as a major policy concern, the gathering clouds do not bode well for growth, revenue generation and fiscal correction. It is not our intention to sound needlessly alarmist, but the time has come to ring a warning bell. India’s macroeconomic authorities must focus on fiscal stabilisation and Mr. Mukherjee has to provide the leadership as Finance Minister.

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America’s political deficit

S&P finally wakes up to fiscal mismanagement in US Credit rating agency Standard and Poor’s (S&P’s) decision to shift the long-term credit outlook for the United States from stable to negative is yet another reminder that the aftershocks of the global financial crisis of 2008 are yet to dissipate. This should serve as a warning that unless the US administration and Congress can handle the fiscal consequences of the myriad stimulus measures put in place to fight the global recession, another financial crisis could be in the making. S&P’s specific concern is that “US policy-makers might not reach an agreement on how to address medium- and long-term fiscal challenges.” The challenge in this case is to reduce the US debt burden from close to 100 per cent of GDP, which is likely in 2011, to more manageable levels in the medium term. S&P’s scepticism appears to stem more from its assessment of the US’ current political situation in which partisan point-scoring seems to stand in the way of sensible policy making. In short, the rift between the Republican-dominated House of Representatives, which wants to put the burden of consolidation on spending cuts alone (particularly state-funded medical insurance, Medicare), and the Democrat-controlled Senate, which wants to use a mix of higher taxes and spending reduction, could compromise any workable plan of fiscal consolidation.

This, however, is not yet an outright downgrade of US sovereign debt and it is unlikely that the US government will default on its credit obligations in the near future. However, if concerns about fiscal health intensify (US treasury credit default swap spreads have been rising steadily), the status of US treasury bonds as the ‘default’ safe haven (and by extension the US dollar) in times of rising risk aversion will come into question. Europe’s travails rule out any European alternative. The only viable safe haven appears to be gold and German bonds, since Germany’s robust growth (and, consequently, its fiscal health) seems to be miles ahead of its moribund neighbours. One could argue that emerging markets like India and China, despite their immediate inflation problem, should get the safe haven status. Their underlying growth momentum (cyclical corrections notwithstanding) remains strong and their fiscal health, at least in comparison with the Western world, certainly looks to be in the pink. On the other hand, emerging markets could face other problems. Where US treasury yields to rise on the back of fiscal anxieties, it could turn off the spigot of cheap dollars that have been flooding these markets. Asset prices in these markets could see a sharp correction. Commodity prices that have ridden the wave of easy liquidity could also be hit. The worst-case scenario would be one in which rising interest rates and a heavy fiscal burden could drive the US economy down and that, in turn, would pull the global economy back into the throes of a recession. Though this seems a tad unlikely at this stage, one cannot simply wish the likelihood away. The world expects better leadership from US politicians, but S&P is clearly doubtful if this would be forthcoming.

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(2011) TIOL 323 ITAT-Mum. ITO(TDS) v. Moraj Building Concepts Pvt. Ltd. ITA No. 1232/Mum./2010 A.Y.: 2006-07. Dated: 18-3-2011

Sections 200(3), 206C, 273B — Non-availability of PAN of payees who were ordinary labourers constitutes reasonable cause for delay in filing TDS returns.

Facts:
The assessee, a private limited company, deducted tax at source from payments made to labour contractors from many unorganised sectors. The amount of tax deducted at source was paid, but the TDS returns for the four quarters of financial year 2005-06 were delayed by a period ranging from 733 days to 1031 days. The Assessing Officer (AO) rejected the explanation furnished by the assessee and levied a penalty of Rs.2,14,550 for failure to comply with section 206/206C of the Act.

Aggrieved the assessee preferred an appeal to the CIT(A) who recorded the following findings and cancelled the penalty levied:

(a) The applicable provision is section 200(3) which provision has been inserted w.e.f. 1-4-2005 and this was the first year after the introduction of the provision;

(b) Under Rule 31A of the Income-tax Rules, the assessee has to obtain PAN from deductees. Since the deductees were small-time labourers, there was difficulty in collecting those details from them;

(c) The nature of contract was such that the assessee had to employ labour contractors from many unorganised sectors, which made it more difficult to collect the PAN;

(d) The Chief Accountant of the assessee company who was working with it for past ten years and was looking after TDS and IT-related compliances resigned. He was replaced by another accountant who also resigned and had to be replaced;

(e) Every corporate assessee has faced similar difficulties in preparing the statements or in filing them in electronic form;

(f) Despite all the difficulties, the quarterly TDS returns were ultimately filed voluntarily without being prompted by any notice from the Department;

(g) There is no revenue loss since the tax deducted has been paid to the Government. Only paperwork was delayed, which is only a technical breach.

Aggrieved, the Revenue filed an appeal to the Tribunal.

Held:
The Tribunal noted that though the penalty order refers to section 206/206C, the default, as found by the CIT(A) and as explained to the Bench, is u/s.200(3). It also noted that the penalty order was in a cyclostyled form without referring even to the appropriate section. This may show non-application of mind. The only question which arose was whether the delay on the part of the assessee was due to a reasonable cause within the meaning of S. 273B. The Tribunal held that the findings of the CIT(A), which were not disputed by the Revenue, constituted a reasonable cause for delay in filing the TDS returns. The Tribunal upheld the order passed by the CIT(A).

The appeal filed by the Revenue was dismissed.

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Vide Notification dated 3rd June, 2011, the MCA has issued ‘The Companies (Cost Audit Report) Rules, 2011 which shall apply to every company in respect of which an audit of the cost records has been ordered by the Central Government under sub-section (1) of section 233B of the Act.

For further information:

http://www.mca.gov.in/Ministry/notification/pdf/ Revised_Report_Rules_03jun11.pdf

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Circular No. 141/10/2011-ST-TRU, dated 13-5-2011.

The CBEC in relation to the expression ‘used outside India’ in Rule 3(2)(a) of the export rules as prevalent prior to 28-2-2010 has clarified that:

(i) The words should be interpreted to mean that ‘the benefit of the service should accrue outside India’;

(ii) The words ‘accrual of benefit’ is not restricted to mere impact on the bottomline of the person who pays for the services;

(iii) The above interpretations should not apply to services which are merely performed from India and where the accrual of benefit and their use outside India are not in conflict with each other. The relation between the parties may also be relevant in certain circumstances.

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(2011) 22 STR 214 (Tri.-Chennai.) — CCEx., Tirunelveli v. DCW Ltd.

Cenvat credit of Service tax paid on air travel service, servicing charges and insurance charges of company vehicle and residential telephone lines of staff of the assessee — Credit eligible — Revenue’s appeal rejected.

Facts:
The Revenue was in appeal for Cenvat credit of Service tax paid on passenger air fare, servicing and insurance charges of company vehicle and on residential telephone lines of staff.

Held:
(a) The respondents were eligible for credit of Service tax paid on air travel fare if the air travel was performed for company’s business.

(b) The service tax paid on servicing and insurance charges of company vehicle being in relation to manufacture of final products was held to be allowed in view of the Tribunals decision in the case of CCE., Guntur v. CCL Products (India) Ltd., 2009 (16) STR 305.

(c) The credit of Service tax paid on residential telephone lines of staff was held to be admissible following the decision of ITC Ltd. v. CCEx., Salem, 2009 (14) STR 847.

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(2011) 22 STR 448 (Tri.-Ahmd.) M/s. Dixit Security & Investigation Pvt. Ltd. v. CST, Ahmedabad.

Penalty — Difference between ST-3 return and Profit & Loss Account — Appellant on their own calculated differential Service tax, got it verified by Chartered Accountant and submitted the same to the Department — Section 80 of Finance Act, invoked — Appeal allowed.

Facts:
? The appellants were providing taxable Security Services. It was noticed that the value of service provided by the appellants shown in ST-3 returns was less than shown in the Profit & Loss Account and therefore, a letter was issued to them requesting them to produce a copy of balance sheet with Profit & Loss Account along with the bifurcated figures. The appellants submitted the copies as required and on verification of the same, it was observed that there was a difference in value as compared with ST-3 returns filed with the Department and therefore there was short payment of Service tax.

? The appellant submitted that the difference in value of services was on account of noninclusion of reimbursement received from their customers. This proved that the appellant had a reasonable belief that Service tax paid by them was correct. On noticing this, the appellant paid Service tax along with the interest. The appellant submitted the Profit & Loss Account within a week and thereafter made detailed calculation and paid the same, duly certified by Chartered Accountant. Thus the appellant was not interested in evading Service tax, but made a bona fide mistake. The very fact that even before the show-cause notice was issued, the appellant made the payment with interest showed that it was a fit case for waiver of penalty u/s. 80 of the Finance Act.

Held:
The fact that the appellant did not challenge the demand for Service tax and interest and wanted to end the litigation by paying tax with interest, the cause was held reasonable and the penalties were waived and the appeal was allowed.

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(2011) 22 STR 467 (Tri.-Ahmd.) M/s. Stone & Webster International Inc. v. CCEx., Vadodara.

Consulting engineer — The agreement had 3 parts
i.e., Licence Agreement, Engineering Agreement, Guarantee Agreement —
Designs, technical knowhow, etc. prepared by the appellant in Boston,
stand transferred by them to IOCL — It was specifically observed that
the services rendered by the appellant were consumed in India — Whether
import of services a taxable event? — The taxable event not occurred in
India as the activity of development of technology, know-how, transfer
of design, drawing, etc. taken place in USA.

Extended period of
limitation — Any bona fide lapse not to make enquiries about its
obligation to pay duty/tax, cannot be made reason for invocation of
extended period unless there is evidence to show that such lapse was on
account of mala fide intention, and with guilty mind of avoiding payment
of tax — Demand is barred by limitation — Appeal allowed.

Facts:
The
Department demanded Service tax along with imposition of penalty on the
ground that the appellants rendered Consulting Engineer Services to
M/s. IOCL Gujarat. The appellant a company incorporated under the laws
of the USA, entered into an agreement with IOCL Gujarat Refinery,
Vadodara for designing, constructing, operating, maintaining, repairing,
re-constructing of unit for the commercial practice of Fluidised
Catalytic Cracking (FCC). The said agreement had three parts i.e.,
Licence Agreement, Engineering Agreement, Guarantee Agreement. Certain
technical know-how and patent rights were licensed to IOCL. The
technical information and patents were solely meant to be used by IOCL
for the purpose of designing, constructing, operating, maintaining and
repairing and re-constructing units at Gujarat Refinery. In lieu, the
appellants were paid royalty. The appellants provided certain
engineering design to prepare, process, design and basic engineering
designs and deliver copies of the same to IOCL.

? The Revenue
took a view that the appellant was within the scope of Consulting
Engineer’s services and was required to pay Service tax on the same. The
Commissioner held that merely because the ground work of preparation of
services had been done outside India, the services had been provided by
organisation located outside India, the services had to be treated as
those rendered outside India. The services stand received and consumed
by IOCL, who are located within territorial waters of India and as such
they have to be treated as having been provided/rendered in India.

?
The appellant challenged the contention of the Department stating that
the services so provided by them were provided from a place outside the
territory of India and that no service rendered in the areas beyond the
territorial waters of India and designated areas, shall not be liable to
Service tax.

(i) For the above proposition, they stated that
development of designs, prices, preparation of operating manual, etc.
was done by them in Boston, USA and copies of design/manual so prepared
were sent by them from the USA to IOCL in India. As such, the services
were developed by them entirely outside the territory of India for use
by IOCL.

(ii) They further clarified that though the agreement
provided for deputation of skilled personnel to IOCL in India, none of
their experts visited India. It was basically a transfer of technical
know-how/design, which is nothing but the goods to the appellant.

(iii)
It could be specifically observed that the services rendered by the
appellant had been consumed in India and the services were not rendered
in India. The consumption of service in India is not a taxable event.
Situs of the tax would be where the taxable event occurs and not where
the effect or the consequence thereof is felt.

(iv) The activity
of development of technology, technical information and know-how,
transfer of design, drawing etc. has taken place in the USA and the
consumption of such services was in India.

(v) Further, the
demand in question was barred by limitation. The Commissioner had
invoked the extended period of limitation. The Commissioner had not
referred to or relied upon any instance to show that the appellants had
knowingly suppressed the above facts from the Department, with mala fide
intention not to pay the tax. As per law, misstatement or suppression
or contravention of any provisions, has to be with intent to evade
payment of duty. It was held that bona fide lapse on the part of the
assessee to get licences and to pay duty, could not be made the reason
for invoking extended period.

Held:
In view of the above, the demand was set aside and the appeal was allowed in favour of the appellant.

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Circular No. 140/2011-ST, dated 12-5-2011.

It is clarified that prosecution provisions will be launched where there is existence of culpable mental state and the burden of proving non-existence of ‘mens rea’ is on the accused. The Circular has also clarified that prosecution proceedings will be launched in cases where the offence is exceeding the monetary limit of ten lacs except where the case is of repeated offence. The prosecution can be launched only with the approval of Chief Commissioner.

The Circular has given detailed guideline to the field formulations regarding prosecution provisions in relation to:

(a) Provisions of services without issue of invoice;

(b) Availment and utilisation of CENVAT credit without actual receipt of input services;

(d) Non-payment of service tax collected for a period of more than 6 months, etc.

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Circular No. 139/8/2011-TRU, dated 10-5-2011.

The CBEC has made detailed clarifications relating to services provided by specified restaurants and by way of short-term hotel accommodations. The Board has made clarification on the vital issues related to relevance of declared tariff, inclusion and exclusion of some of the costs from the declared tariff, off-season tariff, taxability of more than one restaurant in the same complex belonging to the same entity, exclusion of VAT and luxury tax from the taxable value, etc.

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Circular No. 138/07/2011-ST, dated 6-5-2011.

It is clarified that when taxable service is classified under two or more sub-clauses of clause (105) of section 65, classification shall be effected under the sub-clause which provides the most specific description and not the sub-clause that provides more general description. The Board has also made reference to the Circular No. 96/7/2007-ST, dated 23-8-2007 to clarify the matter.

It is clarified that the services provided by the subcontractors/ consultants and other service providers are classifiable as per section 65A of the Finance Act, 1994 under respective sub-clauses of clause (105) of section 65 of the Finance Act, 1944 and chargeable to service tax accordingly.

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VAT Administration vis-à-vis Busines Audit

From 1st April 2005, the Bombay Sales Tax Act, 1959 (BST Act) was abolished and as per national consensus the Value Added Tax system (VAT) was introduced. For that purpose, the Maharashtra Value Added Tax Act, 2002 (MVAT Act) came into operation w.e.f. 1-4-2005. The said new Act has many distinguishing features as compared to the earlier BST Act. One of them is change in the assessment procedure. Under the provisions of the BST Act, assessment of the dealer for each year was mandatory. It is a well-settled position that whatever position might have been shown in the returns, the dealer was entitled to put the last updated position before the assessing authority in the course of assessment. The assessing authority was also under obligation to assess the dealer as per final records produced by the dealer. Therefore, pre-assessment procedures like returns, etc., had not much effect on the final assessment. This was a very good opportunity in the hands of the dealer to get himself assessed as per law and as per books, in spite of the fact that in the returns, etc., correct position might not have been shown.

There is drastic change in the above procedure. Under the MVAT Act, there is no compulsion for carrying out assessment of dealer/s. The same is optional for the Department and if it feels necessary, then only it may take up the assessment, otherwise the position shown in return will be final. Therefore, under the MVAT Act, returns are much more important documents. The dealer has to file returns with absolute care. Normally there will not be any opportunity to correct the situation, as it was under the earlier BST Act where assessment was mandatory. If the Sales Tax Department initiates assessment, then the dealer may be in position to put up his latest position, which was not reflected in the returns. However, if there is no assessment, he will not have such an opportunity and has to remain contended with the position shown in returns.

In the MVAT Act, there is a provision for audit by an independent agency like VAT Audit by CA and Cost Accountant. However, in spite of the same, the Sales Tax Department also wants to supervise the position on its own. Therefore, the Department has brought in the concept of ‘Business Audit’. This is a new concept which has been provided by way of section 22 of the MVAT Act. When this section was originally inserted it had eight (8) sub-sections detailing various aspects of ‘Business Audit’. Subsequently six (6) sub-sections were removed and now there are only two (2) sub-sections. A few important pros and cons of the Business Audit provision can be noted as under:

(1) As stated above, initially all the procedural aspects about the Business Audit were specified in section 22 itself. After removal of such subsections, the only thing remains in section 22 is giving authority for carrying out the Business Audit and the authority of the officer during the Business Audit. Therefore, in relation to other aspects, the Commissioner of Sales Tax has issued Circular bearing no. 25T of 2008, dated 23-7-2008. Thus, a number of procedural aspects has been left to the sweet will of the Commissioner of Sales Tax. As in other cases, the Commissioner of Sales Tax has interpreted the scope of section 22 in wider way than intended by the said section.

(2) The intention of the Legislature in carrying out the Business Audit is to promote compliance of VAT Law by the dealers. Therefore, it is in the nature of guiding the dealers. To serve the real purpose, it is expected that the Business Audit will be carried out for initial year of the dealer, whereby he will be able to note his noncompliance at an early stage and will be able to correct it at the earliest. In fact, it should be at the beginning of the year, so for rest of the year, as well as in future, he will get guided. However, experience shows that the Business Audits are being carried out very late. Like a Business Audit from 2005-06 onwards is being done in 2010-11. This completely demolishes the real purpose of the Business Audit. By such late action, the non-compliance gets accumulated for past number of years and if it is attracting liability, it gets multiplied. The Sales Tax Department should think over making the above provision more dealer friendly.

(3) The Business Audit appears to be a pre-assessment verification of the records. If the Business Audit officer is satisfied with the compliance, there will not be any further action. If he is not satisfied, he will give intimation in form 604 for correcting the position. If the dealer agrees to the same, the Business Audit may be closed. If the dealer does not agree, the officer may initiate assessment.

In the above whole process, it is seen that the Sales Tax Department is using the provision only to find out additional liability. It seems to be a misunderstanding of the provision by the Department. The intention of the Legislature is that the Business Audit should be carried out for promoting compliance of the provisions of the MVAT Act. The provisions include various beneficial provisions in favour of dealers, like set-off. Therefore, if in the course of the Business Audit, the officer finds out any short claim of set-off by the dealer, he is duty bound to give opportunity to the dealer to correct the said position and grant additional set-off. However, no such instructions are given in the Circular, nor is it done practically. It shows that the provision is being used in unfair manner and against the real purpose of the Business Audit provision.

(4) In the Circular No. 25T of 2008, the Commissioner of Sales Tax has given certain aspects of scope of audit. Some of the items mentioned cannot fall in the scope of Business Audit under the MVAT Act. A few of them are as under:

(a) It is mentioned that the Business Audit Officer will be entitled to look into other Acts also like Profession Tax Act. This appears to be incorrect, as Profession Tax Act does not refer to the MVAT Act for procedural aspects and hence such substantial provision of the MVAT Act cannot be used for the Profession Tax Act.

(b) The provision in section 22(5) suggests that the dealer should afford necessary facility for inspection of books, etc. Therefore, there cannot be compulsion about any of the matters. In any case, the Business Audit Officer cannot have power of Civil Court about proof of facts by affidavit, summoning and enforcing the attendance, etc. This is so because the Business Audit Officer is not assessing the dealer, so as to pass final order of liability. He is only verifying the records for looking into compliance by the dealer. If after noticing irregularities, he wants to initiate assessment and to decide the liability as per statutory provision, then he may get the above powers for determining the facts before passing order of liability. Therefore, granting such powers, in the course of Business Audit, appears to be pre-mature and excessive.

(c) In the Circular No. 25T of 2008, it is mentioned that the Business Audit Officer can also come without intimation if he wishes to carry out surprise audit. This power also appears to be beyond the scope of section 22. Whenever the Sales Tax Department wants to carry out surprise checks, there are separate powers of investigation u/s. 64 of the MVAT Act. The Sales Tax Department can utilise the said powers for surprise visits. If section 22 powers of Business Audit are used for such purpose, it will amount to circumventing requirements of section 64. As per section 64, a surprise visit can be given, if there is ‘reason to believe’ for tax evasion, etc. Thus, there is burden upon the Sales Tax Department to record the reasons about tax evasion and then to take out surprise visit. There are cases where investigation actions have been struck down by Courts, if it is established that the investigation action is without discharging burden of establishing ‘reason to believe’. Now, because of above mentioned Circular, investigation action may take place u/s. 22, without discharging the burden of establishing ‘reason to believe’. This appears to be overuse or misuse of powers granted u/s. 22. This is also contrary to intention of the Legislature.

(d) In the above Circular, it is also mentioned that wherever necessary, the Business Audit Officer can seek intervention by the Investigation Branch. Thus, this again is a situation of avoiding necessary parameters of section 64 and beyond the scope of section 22 of the MVAT Act. It is expected that such unintended and unauthorised instructions should be withdrawn, if the provision is really to be used for the intended purpose i.e., guiding the dealers.

There are many other aspects for which detailed deliberations need to take place. At this juncture, we just wish that the provision should be administered in a fair manner and within its legislated scope.

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Vide notification dated 23rd May 2011, the MCA has issued amendments to Schedule XII of the Companies Act, 1956 pertaining to remuneration of Managing Director or Whole-Time Director for a subsidiary of a listed company.

For further information:

http://www.mca.gov.in/Ministry/notification/pdf/ G.S.R_30may2011.pdf

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Vide Notification dated 30th May 2011, the MCA has issued the Companies (passing of resolution by postal Ballot) Rules, 2011 to include voting by electronic mode and sending of notices through e-mail for listed companies for certain business as listed therein in Rule 5.

For further information:

http://www.mca.gov.in/Ministry/notification/pdf/ G.S.R_30may2011.pdf

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Vide Notification dated 2nd June 2011, the MCA has issued ‘The Companies Director Identification Number (Second Amendment) Rules, 2011’ which are effective from 12th June, 2011 and wherein the Annexure I and II to the Din Forms 1 and 4 have been modified and the form can also be digitally signed by a Company Secretary in full-time employment of the company.

For further information:

http://www.mca.gov.in/Ministry/notification/pdf/ DIN_GSR_02jun2011.pdf

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Creation of a new Directorate of Incometax (Criminal Investigation) — Notification No. 29/2011 [F.No. 286/179/2008-IT(INV.II)], dated 30-5-2011.

This new Directorate has been formed in the CBDT with immediate effect to investigate criminal matters having any financial implication punishable as an offence under any direct tax law viz.

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Press Release — Central Board of Direct Taxes — No. 402/92/2006-MC (10 of 2011), dated 28-5-2011.

The Double Tax Avoidance Agreement is signed between India and Tanzania on 27th May, 2011.

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Press Release — Central Board of Direct Taxes — No. 402/92/2006-MC (09 of 2011), dated 27-5-2011.

The Double Tax Avoidance Agreement is signed between India and Ethiopia on 25th May, 2011.

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Double Tax Avoidance Agreement between India and Republic of Mozambique — Notification No. 30, dated 31-5-2011.

The Double Tax Avoidance Agreement signed between India and Republic of Mozambique on 30th September, 2010 has been notified to enter into force on 28th February, 2011. The treaty shall apply from 1st April, 2012 for India.

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Agreement for Exchange of Information with respect to Taxes with Isle of Man — Notification No. 26/2011 [F.No. 503/01/2009], dated 13-5-2011.

The Tax Information Exchange Agreement (TIEA) with Isle of Man signed on 4th February, 2011 has been notified to enter into force on 17th March, 2011. All the provisions of this Agreement shall be given effect to, in India on or after 4th February, 2011.

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Agreement for Exchange of Information with respect to Taxes with Commonwealth of Bahamas — Notification No. 25/2011 [F.No. 503/6/2009], dated 13-5-2011.

The Tax Information Exchange Agreement (TIEA) with the Bahamas signed on 11th February, 2011 has been notified to enter into force on 1st March, 2011. All the provisions of this Agreement shall be given effect to, in India on or after 11th February, 2011.

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Amendment in Rule 114B relating to furnishing of PAN for certain transactions — Notification No. 27/2011 [F.No. 149/122/2010- SO(TPL)], dated 26-5-2011.

The Rule is amended to provide that in addition to transactions prescribed in the Rule, every person shall quote his PAN in the following trans-actions:

(a) Payment in cash for travel to an authorised person as defined in clause (c) of section 2 of FEMA, 1999.

(b) Making an application to any banking company or to any other company or institution for issue of a debit card.

(d) Payment to a dealer of an amount of Rs.5 lakh or more at any one time or against a bill for an amount of Rs.5 lakh or more for purchase of bullion or jewellery.

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CBDT Instructions No. 7, dated 24-5-2011 regarding standard operating procedure on filing of appeal to the High Court u/s. 260A and related matters.

Copy of the Instructions is available on www.bcasonline.org

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Tricon Enterprises Ltd. v. ITO ITAT ‘E’ Bench, Mumbai Before Pramod Kumar (AM) and V. Durga Rao (JM) ITA No. 6143/Mum./2009 A.Y.: 2006-07. Decided on: 31-5-2011 Counsel for assessee/revenue: B. V. Jhaveri/ Ashima Gupta

Section 36(1)(vii) — Bad debts — Assessee’s claim, who was an exporter, for allowability of bad debts was rejected on the grounds that the assessee was allowed deduction u/s.80HHC as also that it had not obtained RBI’s permission for write-off — Whether the lower authorities justified — Held, No.

Facts:
The assessee was 100% exporter. Its claim for allowability of Rs.33.6 lakh as bad debts was disallowed by the AO on the grounds amongst others that it was allowed deduction u/s.80HHC. The CIT(A) dismissed the appeal for the reason that the assessee had not taken RBI’s permission for writing off of debts.

Held:
The Tribunal noted that the assessee had not included the unrealised export bills while claiming deduction u/s.80HHC. Further, relying on the decision of the Delhi High Court in the case of CIT v. Nilofer I. Singh, (309 ITR 233), it held that obtaining RBI’s permission for write-off of dues on a foreign importer was an irrelevant factor, so far as admissibility of deduction as bad debt was concerned. Relying on the Supreme Court decision in the case of TRF Ltd. v. CIT, (323 ITR 397), the Tribunal allowed the appeal of the assessee.

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ACIT v. Shalimar Synthetic Pvt. Ltd. ITAT ‘G’ Bench, Indore Before Joginder Singh (JM) and R. C. Sharma (AM) ITA No. 464/Ind./2006 A.Y.: 2000-01. Decided on: 29-3-2011 Counsel for revenue/assessee: Keshav Saxena/Jitendra Jain

Section 37(1) — Capital v. Revenue receipt — Amount received in foreign currency towards share application money kept in foreign branch of the bank — Subsequently share application money had to be refunded by the assessee — After refunding share application money surplus of about Rs.1 crore on account of appreciation in value of foreign currency remained in the account — Whether such amount can be taxed as revenue receipt — Held, No.

Facts:
Pursuant to a foreign collaboration agreement, the foreign collaborator paid Rs.54 lac in DM towards share application money for 54,000 shares. The amount so received was deposited in Frankfurt branch of the State Bank of India. The assessee had also paid advance to the foreign collaborator against supply of plant and machinery. However, the project was subsequently abandoned and the assessee was required to refund the share application money received. By then, on account of appreciation in value of foreign currency, the balance in the SBI’s account in terms of rupees had appreciated by more than Rs.1 crore.

After obtaining RBI’s permission, the assessee repaid to its erstwhile foreign collaborator share application money by adjusting advance paid for plant and machinery and the balanced sum out of the balance with SBI. The issue before the Tribunal was regarding the taxability of Rs. 1 crore which arose on account of appreciation in value of foreign currency. The AO taxed the amount treating the same as revenue receipt. However, on appeal, the CIT(A), relying on the decision of the Supreme Court in the case of Sutluj Cotton Mills Ltd. (116 ITR 1) and Tata Locomotive & Engg. Co. Ltd. (50 ITR 405) held that the receipt was in the nature of capital receipt not liable to tax.

Held:
According to the Tribunal, the money received by the assessee on share capital account as well as the money paid for plant and machinery, both were on capital account. Therefore, according to it, the appreciation or depreciation with respect to this money on account of depreciation of currency was liable to be treated as capital receipt/expenditure. Thus, it observed that if due to fluctuation in currency, the assessee got higher amount out of the credit balance in share capital account, the same was liable to be treated as capital receipt not liable to tax. Similarly, if any higher amount was liable to be paid to the foreign collaborator on account of refund of advance due to appreciation in value of foreign currency, the same was not allowable as revenue expenditure. Accordingly, the order of the CIT(A) was upheld and the appeal filed by the Revenue was rejected.

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Gajendra Kumar T. Agarwal v. ITO ITAT ‘G’ Bench, Mumbai Before D. Manmohan (VP) and Pramodkumar (AM) ITA No. 1798/Mum./2010 A.Y.: 2006-07. Decided on: 31-5-2011 Counsel for assessee/revenue: S. L. Jain/ Pavan Vaid

Sections 43(5), 72, 73 — Assessee is entitled to set off the loss incurred in the business of dealing in derivatives in the assessment years prior to A.Y. 2006-07 against the profits earned in the same business in the A.Y. 2006-07 and later assessment years.

Facts:
During the A.Y. 2006-07 the assessee earned profit of Rs.1,91,48,060 from dealing in derivatives. He had brought forward losses, for A.Y. 2001-02 to 2005-06, from this activity amounting to Rs.4,68,75,320. The assessee in his return of income claimed set-off of brought forward losses against the current years profit and the balance amount of losses amounting to Rs.2,77,27,260 was claimed to have been carried forward to subsequent years. The set-off and also the carry forward as claimed was allowed. Subsequently, the CIT was of the view that the setoff granted by the AO rendered the assessment order erroneous and prejudicial to the interest of the Revenue to the extent of carry forward of losses. The CIT, in view of the amendment to S. 43(5) which he held to be prospective, declined the set-off of past losses (which he considered to be as speculative in nature) in dealing in derivatives against the profits in dealing in derivatives in the current year (which were considered to be non-speculative).

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
(1) The business loss, speculative or nonspeculative, incurred by an assessee in one assessment year can be set off against the profits of the same business, speculative or non-speculative, or any other business in the same category.

(2) The ratio of the decision of the Supreme Court in the case of CIT v. Manmohan Das, (59 ITR 699) (SC) read with the ratio of the decision of the Bombay High Court in the case of Western Oil Distributing Ltd. v. CIT, (126 ITR 497) (Bom.) is an authority for the following significant propositions viz.:

(a) Whether a particular business loss, speculative or non-speculative, incurred by the assessee in an earlier year is eligible for set-off against business income in a subsequent year, is to be taken in the course of proceedings in the subsequent assessment year, i.e., the assessment year in which set-off is claimed;

(b) Section 73(2) confers a statutory right upon the assessee who sustains a loss of profits in any year in any business, profession or vocation to carry forward the loss as is not set off under sub-section (1) to the following year, and to set it off against his profits and gains, if any, from the same business for that year. Once this statutory right is recognised, it is a natural corollary of that recognition that when an assessee incurs a loss in a business, speculative or non-speculative, in any year, such loss has to be, subject to the fulfilment of other pre-conditions, to be set off against profits of the same business in subsequent year;

(c) In the course of proceedings of the subsequent assessment year, i.e., the assessment year in which set-off of loss is claimed, it is open to even decide the true nature and character of loss incurred in the earlier relevant assessment year. Even a finding about the nature of loss, in the assessment year in which loss is incurred, does not bind the assessee, and that aspect of the matter can be decided afresh in the course of proceedings in the assessment year in which set-off is claimed.

(3) The question whether the losses incurred in dealing in derivatives are eligible for set-off has to be determined as per the law prevailing in the year of set-off. As in the year of set-off, derivatives transactions are not, pursuant to the amendment to section 43(5), treated as ‘speculative transactions’, the losses incurred prior to the amendment have to be treated as normal business losses and are eligible for setoff against all business income in accordance with section 72.

(4) The provisions of carry forward and set-off are to be construed in a manner so as not to defeat the plain and unambiguous intention of the Legislature. This amendment was to provide relief to the taxpayers and is to be viewed as beneficial provisions, as such, one cannot possibly proceed on the basis that the object of making amendment in section 43(5) was to kill the brought forward losses of dealing in derivatives or make them ineligible for being set off against the profits of the same business in subsequent years. Whatever may be the characterisation of income for the purpose of intra-assessment year set-off in the relevant assessment year, and irrespective of the fact that such a characterisation has achieved finality in assessment, the losses and profits from dealing in derivatives must be characterised on a uniform basis in the assessment year in which set-off is claimed.

The Tribunal allowed the appeal filed by the assessee and held that there was no infirmity in the AO granting set-off and the order of the AO could not be held to be erroneous and prejudicial to the interest of the Revenue. The revision proceedings were quashed.

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ITO v. Laxmi Jewel Pvt. Ltd. ITAT Mumbai Bench Before R. V. Easwar (President) and B. Ramakotaiah (AM) ITA No. 2165/Mum./2010 A.Y.: 2004-05. Decided on: 29-4-2011 Counsel for revenue/assessee: Shravankumar/K. A. Vaidyalingam

CBDT Instruction No. 3/2011, dated 9-2-2011 — CBDT Circular fixing monetary limits for filing appeals by the Department applies to pending appeals as well.

Facts:
This was an appeal filed by the Revenue against the order of the CIT(A) directing the AO to allow deduction u/s.10A amounting to Rs.5,78,432 in respect of interest income, which according to the AO was not derived from the business or profession. On behalf of the assessee, relying on the decision of the Bombay High Court in the case of CIT v. Madhukar K. Inamdar, (318 ITR 149) (Bom.) and also on the ratio of the decision of the Delhi High Court in the case of CIT v. Delhi Race Club Ltd., (ITA No. 128 of 2008 dated 3-3-2011), it was argued that the tax effect is only Rs.2,07,512 and as per Instruction No. 3/2011, the Revenue should not contest appeal up to Rs.3,00,000.

Held:
Considering the similar situation where tax limits were modified by the CBDT Instruction No. 5 of 2008, the Jurisdictional High Court in the case of CIT v. Madhukar Inamdar, (HUF) (supra) held that the Circular will be applicable to the cases pending before the Court either for admission or for final disposal.

The Tribunal dismissed the appeal filed by the Revenue on issue of tax effect involved.

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(2011) 22 STR 429 (Tri.-Bang.) Bharat Fritz Werner Ltd. v. CCEx., Bangalore.

CENVAT credit of Service tax — Input services — Architect Services and Interior Decorator services, Authorised Service Stations, Real Estate Agent Service and Stock-Broker Services — Credit of Service tax paid on above services could not be denied as they were directly or indirectly used for purpose of business.

Facts:
? The appellants had availed CENVAT credit of Service tax on Architect Services and Interior Decorator Services, Authorised Service Stations, Real Estate Agent Service and Stock- Broker’s Services. The lower authorities issued a show-cause notice denying credit to the appellant on the ground that as per Rule 2(1)(ii) of the CENVAT Credit Rules, input service would include any services used by them directly or indirectly in relation to the ‘manufacture of final products and clearance of final products’.

? The appellants contended that the services received by them were in respect of the premises used for the marketing programmes. Repair and maintenance of vehicle services were used by their staff and stockbroker services were used for the purpose of enhancement of their business.

? The definition of ‘input service’ means any service

“used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal”.

And includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, storage up to the place of removal, procurement of inputs, storage up to the place of removal and outward transportation up to the place of removal.

? According to the Department, the said services rendered outside the manufacturing premises cannot be considered as used by them directly or indirectly for manufacturing final products. The goods manufactured by the appellant were at the factory and hence the services availed by them outside the factory premises cannot be considered as input services.

Held:
It was held that the services rendered by the appellant were directly or indirectly used for the purpose of their business and hence, credit could not be denied.

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(2011) 22 STR 428 (Tri.-Delhi) CCEx., Jaipur-I v. Unimax Granites (P) Ltd.

Refund of CENVAT credit of Service tax under Notification 5/2006-CE(N.T.) — Documents for claiming refund — Photocopy of shipping bill and AR-1 return submitted and not attested by the Customs Officer that goods in fact exported —Attestation by the Customs Officer not required.

Facts:
? The respondents are 100% EOU and availing CENVAT credit on services availed by them. Being an exporter, they are not eligible for utilising CENVAT credit, however, under Rule 5 of the CENVAT Credit Rules, they filed a refund claim. Along with the refund application they submitted AR-1 and shipping bills before the adjudicating authority, who on examination granted the refund.

? Against the said refund claim, the Revenue was in appeal as the photocopy of the shipping bill and AR-1 return were not duly certified by the Customs Officer, but were attested by the respondents themselves.

? The respondent submitted that the said documents were duly certified by the Customs Officer showing that the goods had been exported by them.

Held:
It was concluded that as per the Notification, the attestation of these documents is not required and the refund claim was allowed.

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(2011) 22 STR 421 (Tri.-Delhi) Punjab Engineering College v. CCEx., Chandigarh.

Consulting Engineer’s Service — Liability of educational institution — Appellant is an engineering college providing technical assistance to the needy in respect of technical aspects by its engineering faculty — No evidence that appellant institute was an engineering consultant providing engineering consultancy service.

Facts:
The appellant being an engineering college provided technical assistance to the needy in respect of technical aspects by its engineering faculty. The Commissioner illustrated the meaning of ‘scientific or technical consultancy’ and ‘consulting engineering services’ in the review order. An institution providing scientific or technical advice or such assistance falls under the purview of ‘scientific or technical consultancy service’, similarly engineering services provided by a commercial establishment fall under ‘Engineering Consultancy’.

Held:
The appellant’s institute is not said to be an ‘engineering consultant’. Service tax is levied on value of economic services which are commercially feasible and are consumed by the recipient with a clear object to pay for commercial services. The appellant does not serve such purpose and cannot be brought in the fold of taxation in disguise. Setting aside the review order, the appeal was allowed.

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(2011) 22 STR 400 (Tri.-Bang.) Phoenix IT Solutions Ltd. v. CCEx., Visakhapatnam.

Electricity Call Centre, Customer Service Centre, Computerised Collection Centre, Watch and Ward and Route Rider Service — Business Auxiliary Services v. Business Support Services — Business Auxiliary service as service rendered on behalf of electricity company/department.

Billing and Accounting — Energy audit — Consumer indexing — Business Support Services.

Demand — Limitation — Period involved from 1-7-2003 to 30-9-2006 — Appellant did not approach Department till 1-3-2006 — Classification changed by the Tribunal — Matter remanded to adjudicating authority for fresh consideration and determination of tax liability and penalty imposable.

Classification of Services — Business Auxiliary Services — Business Support Services — Support Services to Business or commerce (BSS) provided in relation to business or commerce while Business Auxiliary Services provided on behalf of the client.

Facts:

The appellant was engaged in providing services such as Electricity Call Centre, Customer Service Centre and Computerised Collection Centre services to electricity companies and electricity departments. The appellant relied on Notification No. 8/2003-ST, which exempted call centre service. However, the Department demanded payment of tax under Business Auxiliary Service.

The Department investigated and on verification of the records understood that the appellant had rendered the following taxable services:

Operating and maintaining the Electricity Call Centre, Customer Service Centre, Computerised Collection Centre, Energy Audit, Consumer Indexing, Watch and Ward and Route Rider service, Billing and Software maintenance services.

The Department took a view that the said activities would fall under Business Auxiliary Service and the assessee was liable to levy of Service tax with interest as applicable.

The learned advocate on behalf of the appellant challenged the same on the following grounds:

Correctness of classification of services made in the Order-in-Original
Limitation
Imposition of penalty

Held:

Call Centre activities: The activities of registration of complaints/monitoring of complaints, collection of payments, accounting for the same and management of accounts and complaints cannot be called as call centre activities.

Registering of complaints and collection of bills: Once the appellant deals with the customer, he is acting on behalf of the electricity company/ department and therefore classification of services provided by the appellant may be classified under Business Auxiliary Service and not under BSS.

Business Support Services: Billing and Accounting, Energy Audit and Consumer indexing services fall under Business Support Services.

Extended period of limitation: It is a statutory obligation on part of every service provider to see whether the service rendered by him is liable to Service tax and make declaration to the Department. There is no indication to show whether the appellant had sought clarification from the Department or obtained any legal opinion as regards liability to Service tax. It has to be noted that even on 3-3-2006, when the application was made, the appellant had not indicated all the activities undertaken by them. Therefore, invocation of extended period was upheld.

Penalty: Since the Commissioner had imposed penalty, but not quantified the same, the order was held defective to that effect.

In view of the fact that in some cases, classification had changed, in some cases, the assessee’s claim was accepted and the demand as such was to be re-quantified, the matter was remanded for fresh consideration and determination of duty liability and imposition of penalty.

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(2011) 22 STR 368 (Tri.-Delhi) CCEx., Chandigarh v. Super Music International.

CENVAT credit — Input used in manufacture of exempted intermediate product, which in turn used in final product cleared on duty payment — Credit of duty cannot be denied on such inputs — CBEC Manual binding on Department — Credit allowed.

Facts:
Respondents were in the business of manufacture of blank/unrecorded cassettes and were availing CENVAT credit facility. One of the inputs used by them was art-paper and gum-base paper which was converted into inlay cards and stickers used in the manufacture of cassettes. Inlay cards as well as stickers are fully exempt from duty. The dispute arose regarding eligibility of CENVAT credit on art-paper and gum-base paper.

According to the Revenue, since art-paper and gum-base paper are directly used in the manufacture of inlay cards and stickers, which are exempt from payment of duty, are not eligible for CENVAT credit even if the inlay cards and stickers manufactured from these inputs are used in the factory for manufacture of cassettes, whereas according to the assessee inlay cards as well as stickers are not finished products but intermediate products used in the manufacture of final product and therefore, CENVAT credit on art-paper and gum-base paper would be eligible for taking credit. Cenvat credit of duty on inputs used in the manufacture of intermediate product would be available even if the intermediate product is exempt from duty as long as the intermediate product is used in the manufacture of finished goods on which duty is paid. Further, a reference to the CBEC’s Excise Manual of supplementary instructions was made by the Tribunal, wherein the issue regarding availment of CENVAT Credit on intermediate products is discussed.

Held:
Applying the ratio of the Supreme Court judgement in the case of Escorts Ltd. v. CCE, Delhi-2004 (171) E.L.T. 145 (SC), it was held that CENVAT credit shall be admissible in respect of the amount of inputs contained in any of the bye-product and similarly credit shall not be denied if the inputs are used in any intermediate product. Although the intermediate goods are exempt from payment of duty and that the inputs are used in or in relation to the manufacture of final products, whether directly or indirectly. It was held that in case there is no reference of a particular issue in the Act/Rules, inference can be drawn from the CBEC’s Excise Manual and the said instructions will be binding on all Central Excise officers and applicable to all situations. The Revenue’s appeal was dismissed.

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(2011) 22 STR 361 (Tri.-Bang.) — CCEx. & Cus. (Appeals), Tirupati v. Kores (India) Ltd.

Refund of CENVAT credit — Well-settled law that amount of credit lying unutilised on account of closure of factory can be refunded — Rule 5 of the CENVAT Credit Rules, 2004.

Facts:
The respondents took CENVAT credit on capital goods and claimed refund of the amount on the ground that the factory was closed and they would not be able to utilise the balance in the said account. The lower authority rejected the refund claim stating that it would amount to non-payment of duty on capital goods which is not permissible and further there is no provision regarding refund of unutilised credit under Rule 5 of the CENVAT Credit Rules or even section 11B of the Central Excise Act. The respondents approached the Commissioner (Appeals). The Commissioner (Appeals) held that only the refund of unutilised credit is asked for, hence, it does not amount to refund of duty paid on capital goods.

Held:
Referring to a number of case laws and relying on the decision in the case of UOI v. Slovak India Trading Co. Pvt. Ltd., 2008 (10) STR 101 (Kar.), it was held that when the amount lying in the CENVAT credit account cannot be utilised, then the assessees are entitled for cash refund and the Revenue’s appeal was accordingly rejected.

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(2011) 22 STR 351 (Tri.-Chennai) — T. V. Ramesh v. CCEx., Madurai.

Penalty — Enhancement of mandatory penalty in revision order which was passed after passing of order-in-appeal against the original adjudication order — Revenue stating that Commissioner in revision proceedings not informed of appeal proceedings — Commissioner in revisionary proceedings not justified in enhancing such penalty — Enhancement quashed.

Facts:
The Commissioner (Appeals) upheld the order of the original authority, as the same related to imposition of penalty u/s. 78. Meanwhile, the Commissioner issued a notice enhancing the imposition of penalty. The appellant had not brought to the notice of the Commissioner that the same order of the original authority was challenged before the Commissioner (Appeals).

The Commissioner had issued the order after passing of the said order by the Commissioner (Appeals).

Held:
The Commissioner was not made aware of the appeal proceedings before the Commissioner (Appeals) against the original order. The Commissioner (Appeals) set aside the penalty u/s. 76 and upheld the penalty u/s. 78. In the light of these facts, the Commissioner was held as not justified enhancing the penalty and the appeal was allowed by quashing enhanced penalty.

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(2011) 22 STR 342 (Tri.-Bang.) — MTR Foods Ltd. v. CCEx., Bangalore.

CENVAT credit of Service tax can be availed on CHA services engaged by the appellant for export of its products.

Facts:
? The appellants engaged services of Clearing House Agent (CHA) for export of their goods. They were disallowed availment of CENVAT credit of Service tax paid on services rendered by CHA on the ground that the said service does not fall under the category of ‘input service’ and that the service does not relate to ‘business activities’. CHA services are rendered beyond the place of removal.

? Relying on the case of CCE, Nagpur v. UltraTech Cement Ltd., [2010 (20) STR 577 (Bom.)], the appellants inter alia contended that Service tax paid on services required for the activities relating to business could not be denied CENVAT credit. In the case of Rolex Rings (P) Ltd. 2008 (230) ELT 569 (Tri.), it was held that CHA and surveyors’ services are utilised at the time of export of goods and it could be concluded that the place of removal in case of exported goods is the port area. The ownership of the goods remains with the seller till the port area, it can be safely held that all the services availed by the exporter till the port area are required to be considered as ‘input service’ inasmuch as the same are clearly related to the business activities. Activities relating to business are covered by the definition of input service and admittedly CHA and surveyors services are relating to the export business.

Held:
The issue involved in the case is settled in many decisions which followed the decision in the case of Rolex Rings P. Ltd. (supra). Further, the judgment in the case of UltraTech Cement (supra) squarely covers the issue. Where the sale takes place at the destination point and the ownership of the goods remains with the seller till the delivery of the goods, the place of removal would get extended to the destination point and the credit of Service tax paid on the transportation up to such place of sale would be admissible. The Commissioner (Appeals) went beyond the scope of show-cause notice while concluding that some goods exported by the assessee were exempted goods and the appellants could not have availed CENVAT credit on the activities relating to such goods. Thus, the appeal was allowed.

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(2011) 22 STR 282 (Tri.-Mumbai) — Indian Oil Corporation Ltd. v. CCE, Mumbai-II.

Goods Transport Agency (GTA) service — Benefit of abatement of 75% under Notification No. 1/2006- ST cannot be denied to the appellant.

Facts:
The appellant being a service recipient has availed CENVAT credit on inputs, capital goods and input services and had taken benefit of Notification No. 1/2006. Benefit of Notification No. 1/2006-ST and 12/2003-ST was denied to the appellants on the ground that:

? Inadmissible exemption was availed under Notification No. 1/2006-ST.

? As per the Notification, 75% abatement of the taxable value under GTA service can be availed on the condition that the service provider has not availed CENVAT credit on inputs, capital goods and input services used for providing the service.

Held:
The Tribunal held that the restriction as to admissibility of abatement with respect to non-availment of CENVAT credit applies to the service provider. The assessee being service recipient of GTA service is entitled to abatement and hence, appeal was allowed.

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(2011) 22 STR 257 (Ori.) — Utkal Builders Ltd. v. Union of India.

Constitutional validity of Service tax — Levy on renting of immovable property service held valid.

Facts:
The petitioner filed a writ application declaring the provisions, i.e., section 65(90a) read with section 65(105)(zzzz) of the Finance Act, 1994 as null and void and ultra vires the Constitution of India.

The arguments of the petitioner were as under:

(i) The petitioner relied on the case of Home Solution Retail India Ltd. v. Union of India and Others, 2009 (14) STR 433 (Del.) which stated that renting of immovable property was not a taxable service by itself. The amendment made to section 65(105)(zzzz) as amended by the Finance Act, 2010 does not remedy the constitutional infirmity as held by the Delhi High Court.

(ii) The contention of the petitioner clearly distinguished between ‘property-based service’ and ‘performance-based service’. Any service connected with ‘renting of immovable property’ would fall within the ambit of Service tax. However, whether renting would constitute a taxable service or not, especially when there was no value addition by the service provider, it could not be regarded as service.

(iii) The Revenue placed reliance on the judgment of the Punjab and Haryana High Court in the case of M/s. Shubh Timb Steels Ltd. v. Union of India and Another, wherein the challenge to the levy of Service tax on ‘renting activity’ was and turned down by the Court. They further contended that in Tamil Nadu Kalyana Mandapam Association v. Union of India and Others, (2004) 5 SCC 632 it was clearly held that services rendered by ‘mandap’ were termed as ‘property-based services’ and currently, renting itself is deemed as taxable services due to the retrospective amendment from 1st June, 2007 on renting of immovable property service.

Held:
The definition of ‘taxable service’ includes the activity of renting, for use in the course or furtherance of business or commerce with the introduction of the Finance Act, 2011. Although challenge is made to the amendment made by the Finance Act, 2010 with retrospective effect, the nature of transaction made by the petitioner with its tenant clearly amounts to renting of an immovable property for the purpose of business or commerce. Service tax is clearly leviable thereon. The Court held a considered view that the renting of immovable property itself is clearly covered by section 65(90a) of the Act and that the Delhi High Court did not discuss its scope and impact in the case of Home Solution Retail India Ltd.’s case (supra) and the entire focus was on the amendment of section 65(105(zzzz) of the Finance Act. It is a well-settled principle of law that if a judgment proceeds without taking note of the relevant provisions of law, it cannot be held to have correctly decided the case. The amendment is clearly clarificatory in nature and the Parliament possessed requisite competence to declare it retrospective. The writ was dismissed accordingly.

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PROSECUTION UNDER SERVICE TAX

Preliminary

Sections 88 to 92 of the Finance Act, 1994 (the Act) provided for prosecution for certain offences, such as failure to furnish prescribed returns, false statement in verification, abetment of false return, etc. These provisions were omitted by the Finance (No. 2) Act, 1998 w.e.f. 16-10-1998. However, through the Finance Act, 2011, amendments have been made to introduce prosecution provisions by enacting a new section 89 under FA. Further, sections 9A, 9AA, 9B, 9E and 34A of the Central Excise Act, 1944 (‘CEA’) have been made applicable to Service tax. These provisions together constitute the provisions relating to prosecution under Service tax, which are discussed hereafter.

Prosecution provisions Offences punishable

The punishable offences specified in section 89(1) of the Act are as under:

(a) Provision of taxable services or receipt of any taxable services where the recipient is liable to pay Service tax, without an invoice issued in accordance with the provisions of the Act or the Rules made hereunder;

(b) availment and utilisation of credit without actual receipt of taxable service or excisable goods either fully or partially in violation of the Act or Credit Rules;

(d) failure to supply information or supply of false information;

(e) failure to pay to the Government any amount collected as Service tax beyond a period of six months from the date on which such payment became due.

2.2 Quantum of punishment

In absence of ‘special and adequate reasons’ to be recorded in the judgment of the Court the punishment mentioned in Sr. Nos. 1 and 3 above, cannot be reduced below six months. The following grounds would not be considered ‘special and adequate reasons’ in terms of section 89(3) of the Act:

(a) conviction of the accused for the first time for an offence under the Act;

(b) payment of penalty or any other action taken for the same act which constitutes the offence

(c) the fact that the accused was not the principal offender and was acting merely as a secondary party in the commission of the offence.

(d) The age of the accused.

Sanction

Prosecution can be initiated only with prior approval of the Chief Commissioner of Central Excise (CCCE).

Central Excise Sections provisions made applicable to Service tax

The provisions of sections 9A 9AA, 9B, 9E and 34A of CEA which have been made applicable to Service tax are briefly explained as under:

(a) The offences would be ‘non-cognisable’ i.e., an offence in which a police officer has no authority to arrest without a warrant. Further the CCCE is also empowered to compound the offences on payment of the compounding amount as may be prescribed (section 9A of CEA).

(b) If an offence is committed by a company (which includes a firm), the persons liable to be proceeded against and punished are:

(i) the company;
(ii) every person, who at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business, except where he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence; and
(iii) any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed. (section 9AA of CEA)

(c) The Court is empowered to publish the name, place of business, etc. of person convicted under the Act (section 9B of CEA)

(d) In case of a person who is less than 18 years of age, the Court, under certain circumstances, is empowered to release the accused on probation of good conduct u.s 360 of the Code of Criminal Procedure, 1973 or to release the offenders on probation under the Probation of Offenders Act, 1958. (section 9B of CEA)

(e) The imposition of penalty would not prevent infliction of other punishment on the offender. (section 34A of CEA)

Dept. clarifications vide Circular No. 140/9/2011-TRU, dated 12-5-2011

Relevant extracts from the Dept. Circular are given hereafter for reference:

Para 2
Prosecution provision was introduced this year, in Chapter V of the Finance Act, 1994, as part of a compliance philosophy involving rationalisation of penal provisions. Encouraging voluntary compliance and introduction of penalties based on the gravity of offences are some important principles which guide the changes made this year in the penal provisions governing Service tax. While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations. Accordingly, it is imperative for the field formations, in particular the sanctioning authority, to implement the prosecution provision keeping in view the overall compliance philosophy. Since the objective of the prosecution provision is mainly to develop a holistic compliance culture among the taxpayers, it is expected that the instructions will be followed in letter and spirit.

Para 4
Clause (a) of section 89(1) of the Finance Act, 1994 is meant to apply, inter alia, where services have been provided without issuance of invoice in accordance with the prescribed provisions. In terms of Rule 4A of the Service Tax Rules, 1994, invoice is required to be issued inter alia within 14 days from the date of completion of the taxable service. Here, it should be noted that the emphasis in the prosecution provision is on the non-issuance of invoice within the prescribed period, rather than non-mention of the technical details in the invoice that have no bearing on the determination of tax liability.

Para 5
In the case of services where the recipient is liable to pay tax on reverse-charge basis, similar obligation has been cast on the service recipient, though the invoices are issued by the service provider. It is clarified that the date of provision of service shall be determined in terms of the Point of Taxation Rules, 2011. In the case of persons liable to pay tax on reverse-charge basis, the date of provision of service shall be the date of payment, except in the case of associated enterprises receiving services from abroad where the date shall be earlier of the date of credit in the books of accounts or the date of payment. It is at this stage that the transaction must be accounted for. Thus the service receiver, liable to pay tax on reverse-charge basis is required to ensure that the invoice is available at the time the payment is made or at least received within 14 days thereafter and in the case of associated enterprises, invoice should be available with the service receiver at the time of credit in the books of accounts or the date of payment towards the service received.

Para 7
Clause (b) of section 89(1) of the Finance Act, 1994 refers to the availment and utilisation of the credit of taxes paid without actual receipt of taxable service or excisable goods. It may be noted that in order to constitute an offence under this clause the taxpayer must both avail as well as utilise the credit without having actually received the goods or the service. The clause is not meant to apply to situations where an invoice has been issued for a service yet to be provided on which due tax has been paid. It is only meant for such invoices that are typically known as ‘fake’ where the tax has not been paid at the so-called service provider’s end or where the provider stated in the invoice is non-existent. It will also cover situations where the value of the service stated in the invoice and/or tax thereon have been altered with a view to avail Cenvat credit in excess of the amount originally stated. While calculating the monetary limit for the purpose of launching prosecution, the value shall be the amount availed as credit in excess of the amount originally stated in the invoice.

Para 8

Clause (c) of section 89(1) of the Finance Act, 1994 is based on similar provision in the Central Excise law. It should be noted that the offence in relation to maintenance of false books of accounts or failure to supply the required information or supplying of false information, should in material particulars have a bearing on the tax liability. Mere expression of opinions shall not be covered by the said clause. Supplying false information, in response to summons, will also be covered under this provision.

Para 9

Clause (d) of section 89(1) of the Finance Act, 1994 will apply only when the amount has been collected as Service tax. It is not meant to apply to mere non-payment of Service tax when due. This provision would be attracted when the amount was reflected in the invoices as Service tax, service receiver has already made the payment and the period of six months has elapsed from the date on which the service provider was required to pay the tax to the Central Government. Where the service receiver has made part payment, the service provider will be punishable to the extent he has failed to deposit the tax due to the Government.

Para 11

Section 9C of the Central Excise Act, 1944, which is made applicable to the Finance Act, 1994, provides that in any prosecution for an offence, existence of culpable mental state shall be presumed by the Court. Therefore each offence described in section 89(1) of the Finance Act, 1994, has an inherent mens rea. Delinquency by the defaulter of Service tax itself establishes his ‘guilt’. If the accused claims that he did not have guilty mind, it is for him to prove the same beyond reasonable doubt. Thus “burden of proof regarding non-existence of ‘mens rea’ is on the accused.

Para 13

Sanction for prosecution has to be accorded by the Chief Commissioner of Central Excise in terms of the section 89(4) of the Finance Act, 1994. In accordance with Notification 3/2004 -ST dated 11th March 2004, the Director General of Central Excise Intelligence (DGCEI) can exercise the power of the Chief Commissioner of Central Excise, throughout India.

Para 14

The Board has decided that monetary limit for prosecution will be Rupees Ten Lakh in the case of offences specified in section 89(1) of the Finance Act, 1994 to ensure better utilisation of manpower, time and resources of the field formations. Therefore, where an offence specified in section 89(1) involves an amount of less than Rupees Ten Lakh, such case need not be considered for launching prosecution. However the monetary limit will not apply in the case of repeat offence.

Para 15

Provisions relating to prosecution are to be exercised with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched merely on matters of technicalities. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The sanctioning authority should record detailed reasons for its decision to sanction or not to sanction prosecution, on file.

Para 16

Prosecution proceedings in a Court of law are to be generally initiated after departmental adjudication of an offence has been completed, although there is no legal bar against launch of prosecution before adjudication. Generally, the adjudicator should indicate whether a case is fit for prosecution, though this is not a necessary pre-condition. To launch prosecution against top management of the company, sufficient and clear evidence to show their direct involvement in the offence is required. Once prosecution is sanctioned, complaint should be filed in the appropriate court immediately. If the complaint could not be filed for any reason, the matter should be immediately reported to the authority that sanctioned the prosecution.

Para 17

Instructions and guidelines issued by the Central Board of Excise and Customs (CBEC) from time to time, regarding prosecution under Central Excise law, will also be applicable to Service tax, to the extent they are harmonious with the provisions of the Finance Act, 1994 and instructions contained in this Circular for carrying out prosecution under Service tax law.

4. Guidelines for launching prosecution issued by CBEC under Central Excise (Circular No. 33/80 CX 6. Dated 26-7-1980 read with CBEC Circular No. 15/90 – CX 6, dated 9-8-1990.)

(i) Prosecution should be launched with the final approval of the Principal Collector after the case has been carefully examined by the Collector in the light of the guidelines.

(ii) Prosecution should not be launched in cases of technical nature, or where in the additional claim of duty is based totally on a difference of interpretation of law. Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual had guilty knowledge of the offence, or had fraudulent intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt. It follows, therefore, that in the case of public limited companies, prosecution should not be launched indiscriminately against all the Directors of the company but it should be restricted to only against such of the Directors like the Managing Director, Director in charge of Marketing and Sales, Director (Finance) and other executives who are in charge of day-to-day operation of the factory. The intention should be to restrict the prosecution only to those who have taken active part in commit-ting the duty evasion or connived at it. For this purpose, the Collectors should go through the case file and satisfy themselves that only those Chairman/Managing Directors/Directors/Partners/ Executives/Officials against whom reasonable evidence exists of their involvement in duty evasion, should be proceeded against while launching the prosecution. For example, Nominee Directors of financial institutions, who are not concerned with day-to-day matters, should not be prosecuted unless there is very definite evidence to the contrary. Prosecution should be launched only against those Directors/Officials, etc., who are found to have guilty knowledge, fraudulent intention, or mens rea necessary to bind them to criminal liability.

(iii)    In order to avoid prosecution in minor cases, a monetary limit of Rs. 10,000 was prescribed in the instructions contained in Board’s letter F. No. 208/6/M-77-CX 6, dated 26-7-1980. Based on experience, and in order not to fritter away the limited man-power and time of the Department on too many petty cases, it has now been decided to enhance this limit to Rs.1 lakh. (See Note Below) But in the case of habitual offenders, the total amount of duty involved in various offences may be taken into account while deciding whether prosecution is called for. Moreover, if there is evidence to show that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.

(iv)    One of the important considerations for deciding whether prosecution should launched is the availability of adequate evidence. Prosecution should be launched against top management when there is adequate evidence/ material to show their involvement in the offence.

(v)    Persons liable to prosecution should not normally be arrested unless their immediate arest is necessary. Arrest should be made with the approval of the Assistant Collector or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Collector, who will consider whether the case is a fit one for prosecution.

(vi) Decision on prosecution should be taken immediately on completion of the adjudication proceedings.

(vii) Prosecution should normally be launched immediately after adjudication has been completed. However, if the party deliberately de-lays completion of adjudication proceedings, prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.

(viii) Prosecution should not be kept in abeyance on the ground that the party has gone in appeal/revision. However, in order to ensure that the proceedings in appeal/revision are not unduly delayed because the case records are required for purposes of prosecution, a parallel file containing copies of the essential documents relating to adjudication should be maintained. It is necessary to reiterate that in order to avoid delays, the Collector should indicate at the time of passing the adjudication order itself whether he considers the case is fit for prosecution so that it should be further processed for being sent to the Principal Collector for sanction.

Applicability of prosecution provisions
Section 89 of the Act has become operative upon enactment of the Finance Act, 2011 on 8-4-2011. Hence, it would appear that prosecution provisions would apply to offences committed on or after 8-4-2011.

In this regard, useful reference can be made to precedents under income tax. In the context of section 276C which was inserted w.e.f. 1-10-1975, it has been held in a number of cases that the said section would not apply to an offence committed prior to that date.

Time limit for launching prosecution
The Economic Offences (Inapplicability of Limitation) Act provides that there is no time limit for launching prosecution in case of offences under some specified Acts. Further, limitation bar contained in Criminal Procedure Code, is not applicable to offences under Central Excise, Service Tax and Customs Law.

It would appear that there is no time limit for launching prosecution under Service tax.

Note: The monetary limit has been enhanced to Rs.25 lakh vide CBEC Circular dated 12-12-1997.

Few judicial considerations are as under:

? In Devchand Kalyan Tandel v. State of Gujarat, 89 ELT 433 (SC) it was held that in case of economic offences, the Courts should not take lenient view, as stringent measures are necessary in case of economic offences. (In this case, there was lapse of 13 years between the occurrence and the date of judgment.)

? In V. K. Agarwal v. Vasantraj, (1988) 3 SCC 467 and A. A. Mulla v. State of Maharashtra, 1997 AIR SCW 63, the Supreme Court declined to stop further proceedings on the matter though the matters had become very old. (In this case, the case was already filed long ago i.e., in 1969).

Procedures relating to prosecution

The CBE&C has clarified that prosecution can be approved only by the CCCE in terms of section 89(4) of CEA throughout India.

Some judicial and other considerations are as under:

? Appeal against sanction of prosecution cannot be filed with CEGAT — [Jagatjit Industrial Ltd. v. CCE, (1993) 67 ELT 878 (CEGAT)]

? Decision to grant sanction for prosecution is merely an administrative act. No hearing is necessary. Prima facie, authority sanctioning prosecution should be satisfied that an offence is committed. Even exoneration by disciplinary authority (in excise and customs matters, it means departmental adjudication) is also not relevant [Supdt. of Police (CBI) v. Deepak Chowdhary, (1995) 6 SCC 225, the same view in State of Maharashtra v. Ishmal Piraji Kalpatri, AIR 1996 SC 722.]

? Opportunity of personal hearing is not required to be given before grant of sanction of the Commissioner to file criminal prosecution — [Assistant Commissioner v. Velliappa Textiles, (2003) 157 ELT 369 (SC 3-member Bench).]

? Decision to prosecute does not involve ex-ercise of any quasi-judicial power, [Praveen Kumar R. Jain v. Chief Judicial Magistrate, Dindigul, 1995 (79) ELT 353 (Mad. HC).]

? Specific approval for launching prosecution is required. Mere signing on file by the Chief Commissioner would not mean that he has applied his mind and granted approval. If prior approval of the Chief Commissioner is not obtained, prosecution cannot continue and accused has to be acquitted. – [UOI v. Greaves Ltd., (2002) 139 ELT 34 (CEGAT)].

? In CIT v. Camco Colour Co., (2002) 254 ITR 565 (Bom. HC), it was held that monetary limit prescribed is a policy decision with a view to reduce litigation and the same is binding on the Revenue.

? The CBE&C has clarified that when action is launched under the Central Excise Act, action under Indian Penal Code, 1860 should also be launched, wherever found feasible — [CBE&C Circular No. 178/12/1996, dated 28-2-1996.]

Compounding of offences
Section 9A(2) of CEA, provides that any offence under CEA can be compounded by the CCCE. Such compounding can be done either before or after the institution of prosecution. Procedure for compounding has been prescribed in the Central Excise (Compounding of Offences) Rules, 2005 and Guidelines for Compounding have been issued vide MF (DR) Circular No. 54/2005-Cus, dated 30-12-2005. Since, section 9A of CEA has been made applicable to Service tax, the Rules/Guidelines and precedents under Central Excise would be relevant for Service tax.

Some judicial considerations are as under:

? In Vinod Kumar Agarwal v. UOI, (2008) 223 ELT 19 (Bom HC DB), it was held that compound-ing under the Customs Act cannot result in discharge of offences under other Acts like IPC.

? In Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Company, (2004) 52 SCL 224 (Bom HC DB), it was held that if the offence is compounded, it is as if no offence had even been committed in the first place.

? In P. P. Varkey v. STO, (1999) 114 STC 251 (Ker. HC), it was held that once the offence is compounded, penalty or prosecution proceedings cannot be taken for the same offence.

? In S. Viswanathan v. State of Kerala, (1999) 113 STC 182 (Ker HC DB), it was held that once the matter is compounded, neither the Department nor the assessee can challenge the compounding order.

? A person having agreed to the composition of offence is not entitled to challenge the said proceedings by filing appeal. [S. V. Bagi v. State of Karnataka, (1992) 87 STC 138 (Karn HC FB) — followed in Sakharia Bandhu v. ADCCT (1999) 112 STC 449 (Karn HC DB).]

9. Conclusion
Service tax law has evolved as a law based on voluntary compliance. In this backdrop, re-introduction of prosecution provisions is a retrograde step. One does understand that there may have been many cases of tax evasion detected by the Tax Dept. However, the same is no justification for re-introduction of prosecution provisions, inasmuch as there are wide powers for the tax administration under the existing tax structure and other laws to deal with such cases and impose stiff penalties.

Overall, the provisions are too harsh, and are likely to be misused by the authorities causing severe harassment to taxpayers. In particular, non-issue of tax invoice by a service provider being specified as an offence, is totally unjustified. Further, non-issue of tax invoice as per the Service Tax Rules by a service provider based outside and its non-issue to be treated as an offence at the end of service recipient in India, is unprecedented and needs to be done away with.

It is suggested that a monetary limit of tax evaded amount of Rs. 1 crore need to be prescribed for a judicious implementation of prosecution provisions and minimise hardships to small and medium taxpayers.

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(2011) TIOL 330 ITAT-Mum. DCIT v. Telco Dadajee Dhackjee Ltd. MA No. 509/Mum./2010 A.Y.: 1998-1999. Dated: 11-3-2011

Sections 254(2), 254(4) and 255 — No miscellaneous application lies against the order of the Third Member since as per the scheme of Sections 254(1), 254(2) and 255 every case adjudicated by the Third Member should go back to the regular Bench for final decision.

Facts:
The appeal filed by the assessee was originally heard by the Division Bench. Upon there being a difference of opinion between the two Members who originally heard the appeal, the points of difference were referred to the Third Member u/s. 255(4) of the Act. The Third Member answered both the questions referred to him in favour of the assessee.

Against the order of the Third Member, the Revenue filed a miscellaneous application on the ground that there were mistakes apparent from the record which require rectification.

Held:
(1) The decision rendered by the Third Member is one which does not finally dispose of the appeal till the point or points are decided according to the opinion of the majority of the Members for which another order is to be passed by the Tribunal and it is this order which finally disposes of the appeal. An application u/s.254(2) would lie only when that order is passed and not before.

(2) When there is a difference between the Members while disposing of the appeal it cannot be said that the appeal has been finally disposed of. The point of difference has to be referred to the President of the Tribunal for nominating a Third Member. The Third Member hears the parties on the point of difference and renders his decision. His decision creates the majority view, but it is not a final order disposing of the appeal because he is not seized of the other points in the appeal, if any, on which there was no difference of opinion between the Members who heard the appeal originally. Even if there were no other points in the appeal, still his order is not one finally disposing of the appeal. S/s. (4) of section 255 requires that after the opinion of the Third Member, the point of difference ‘shall be decided’ according to the majority opinion and this clearly suggests that a final order has to be passed disposing of the appeal in its entirety which order alone would be an order passed by the Tribunal u/s.254(1).

(3) In the present case the Revenue has missed the distinction between a finding on a point of difference and the final order of the Tribunal u/s.254(1).

(4 ) The decision of the Third Member is not a final order disposing of the entire appeal as contemplated by section 254(1), it is difficult to appreciate how an application would lie u/s. 254(2) against his decision.

The miscellaneous application filed by the Revenue was held to be not maintainable.

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Anupam kher & the profession of acting

Excerpts from interview With anupam kher

Most of us know Anupam Kher as an actor par excellence. Mr. Kher is renowned for his versatile acting, both in the world of theatre and films and his stage is truly the whole world. What many of us may not know is his love and commitment to the profession of acting that has culminated in starting an acting school called ‘ACTOR PREPARES’. The school, founded in 2005, now operates in Mumbai, Chandigarh, Chennai and the UK with a mission to prepare competent and professionally committed actors, skilled in every aspect of an actor’s art and craft – physical, mental and emotional. It lays the foundation for a self-fulfilling and meaningful career as a performer.

On a warm Monday afternoon of June 11, 2012, we (Ameet Patel and Nandita Parekh) had the rare opportunity to meet with Anupam Kher to understand from him the profession of acting, the commitment required, the opportunities and challenges and the future of the profession. We share with you, his thoughts, as communicated to us . . . . . .

Unfortunately, we cannot share with you the eloquence with which he dealt with each question and the warmth with which he received us in his ever-busy schedule.

BCAJ – Is ‘performing arts’ just an art or a profession?

Anupam Kher (AK) – To me, performing arts, be it dancing, singing, acting – is a profes-sion. Art is an expression of one’s emotions, one’s feelings and to that end, everyone is an artist. All of us have drawn pictures as children, but that does not make any of us professional artists. Similarly, most people will have an ability to dance or sing or even act – but that does not make them professional performers. One of the differences is that a professional artist shares his work or his art with others, and pursues it as the main purpose of his life. For a professional artist his art is not just an expression of his emotions, but a driving force of his life, a source of livelihood combined with a compelling need to share. To this end, I am of the view that performing arts in general and acting in particular is definitely a profession that needs specialised skills, training and orientation.

BCAJ As I understand, the acting school founded by you – ‘Actor Prepares’ is committed to helping talented individuals become professional actors. How much of the acting profession as you see around you has gone through some professional training? And is it very different in other countries in Europe or the USA?

AK -We are a young country; we got our independence in 1947. Before that for 200 years we were ruled by the British and before that by the Mughals. Yet, if you see, art in its various forms is an integral part of our culture and the early architecture – the carving of Ajanta, the miniature paintings . . . . all depict scenes of dancing, singing and other forms of performing arts. Each state has its own folk art and thus, we are a culturally rich country in terms of various forms of performing arts that have been handed down from earlier eras. As a country, we have given to the world the earliest available book on acting and stage craft called the ‘Natya Shastra’, written somewhere between 200 BC and 200 AD. In the early periods after independence, the country had many priorities – agricultural reforms, industrial reforms, poverty eradication, education and so on – acting and performing arts were clearly not a national priority. On the other hand, the people of the country were hungry for entertainment and were ready to lap up anything that was given to them as ‘entertainment’. The audience was not discerning, and hence, we have a situation that many of the movies made in the early post-independence era, we may enjoy today due to nostalgic reasons, but find that the acting skills were often non-existent. In these last 60 odd years, there must be over 20,000 actors who have appeared in our films. How many are remembered for their acting skills? Hardly 10-12, a number we can count on our fingertips. This was mainly because cinema was the primary source of entertainment; the only other option being ‘khetiwadi’ programmes on black and white TV or a once a week show such as ‘Chhayageet’. Watching a movie every weekend was almost a religion for seekers of entertainment during this skewed demand-supply situation. In such a situation, most actors did not have any formal training – professionally trained actors were few and far in between, I being one of them. Interestingly, performing artists in the music and dance space always went through rigorous training, primarily because of the classical forms and schools of music and dance . . . . Or perhaps because it was easier for the audience, however undemanding, to distinguish the good from the bad in these art forms. Today, the scenario has dramatically changed. With globalisation, people in India have a wide choice in the area of entertainment, from multiplexes to multitude of TV channels and live performances by world-renowned artists. So, the person who used to sit at the edge of the seat and watch a movie, today sits back in his chair and says “Okay, let me see what you have!” The audience today is discerning and demanding and that has created a need for professionalism in the performing arts. The ‘fluke’ artists will no longer hold centre stage – the future clearly belongs to actors who are not only trained to be good actors, but are also professional and disciplined in their conduct.

BCAJ -What are the macro changes that are likely to impact the profession of acting?

AK It is only 8-9 years back that cinema was given the status of ‘industry’ by the Government of India. Till that time, the Government did not even recognise cinema as an industry. With this recognition, there is a sea change in the way the movie industry is viewed. The access to commercial financing, the corporatisation within the cinema industry, the international platform for screening Indian movies – all this has led to professionalism all around. This includes the technology used, the distribution systems, the pricing and also, the acting. Otherwise, till recently, anyone with a trace of talent believed that ‘I too can act’. And, perhaps that is somewhat true – because I believe that anyone who can lie, can act; for lying is the first form of acting. So, most of us can act!

BCAJ -On that note, we would like to know how do you deal with situations where you are required to act in a role or propagate a message that you don’t personally subscribe to. Does this create a conflict in your mind? And if so, how do you deal with it?

AK Acting always requires you to portray yourself as a person you are not. It is my job as an actor to represent the character that I am required to portray. When I am Dinanath or Asgar Ali in a movie, that is not who I am. Anupam Kher the actor is not the same as Anupam Kher the person. When I fight against corruption and go on stage with Anna Hazare – that is me as a person. Thus, an actor will play roles that are different from what he stands for, what he may be as a person – and, in my mind, there is no conflict in this respect. Acting is part of my life, it is not my life. (For us, at BCAS, Anupam Kher who voluntarily and readily agreed to speak to demotivated CA students after a very dismal examination result and helped them regain their self confidence – is Anupam Kher, the person!)

BCAJ -An actor has a great influence on the audience and to that end a greater social responsibility. In that light, does it matter what kind of roles you choose to do?

AK – A movie or a play is entertainment, not education – it is not good, not bad, just entertainment. The meaning that a viewer derives from the movie is his prerogative. Also, an anti- hero or a villain is required to show the contrast. A ‘Raam’ is viewed in comparison to a ‘Raavan’; without ‘Raavan’, ‘Raam’ has limited significance. I do not think that people judge an actor by the roles he plays. The well-known villains of the Indian film industry are some of the best individuals that I have come across and I believe they are well respected by society. I have played a diverse set of roles and not restricted myself to the role of a hero or a villain or a comedian. There are nine emotions and as an actor it is important for me to express a variety of emotions – for that it is important to do different roles.

BCAJ – Do you think that there is adequate mentoring in your profession for the newcomers that helps them to clearly understand the distinction between their real life and their reel life?

AK – While acting is a profession, cinema is an industry. It is for each actor to determine his personal philosophy on how he wants to treat his reel life and real life – there is no reason for any mentoring in that respect. A profession requires training – and with that training how you pursue your profession, whose guidance you seek and who you choose as your role models is your personal choice.

BCAJ – Actors have a capacity to create a significant public influence and opinion. The profession of acting trains you to communicate very effectively with your audience and hence, gives you an ability to reach out to a vast audience effectively. But, on the other hand, the private acts of a well-known personality are also minutely examined by the public. Do you think there is a need for actors to conduct them-selves any differently in their private lives?

AK – Well, as a chartered accountant you too have an influence on the public, and so does a leading doctor or a lawyer. It is for each person to decide how he wants to conduct himself in his personal life, irrespective of whether or not he has the ability to influence others. As actors, perhaps we are more conscious of the image that we create of ourselves – but that does not make us any different from others. We all have to conduct ourselves in a manner that suits our conscience, our value system. Also, at a different level, no one forces you to watch a movie – it is a choice that you have. So, the kind of movies you choose to watch is entirely your choice.

BCAJ – Earlier you mentioned that a professional actor needs to be disciplined. We as outsiders often hear that movies get delayed due to the inability of the actors to live up to their committed schedules. Any views?

AK – I thought we were to talk about performing arts as a profession – this is a question on individual behavioural traits. However, when you hear that an actor did not meet his schedule there could be a variety of reasons, like the payment that was committed to him is not made, that a number of times when he has blocked his time for a producer there have been last-minute cancellations from the producer’s side and so on. I do not believe that without a valid reason or a serious constraint any actor would not adhere to his commitment, as he too is interested in a timely release of the movie. Further, the time discipline that was not very important till recently is now becoming of paramount importance due to corporatisation of the movie industry and the manner in which it is financed. The word of mouth agreement has been replaced by crisply worded contracts that run into 20-30 pages and there are consequences of not meeting the commitments made. Internationally this has been the practice for a long period now, but in India, we are seeing this now.

BCAJ – Is there adequate opportunity for a new-comer who wants to enter the profession of acting to learn or to acquire structured training? We know that you have founded a school of acting, but are there adequate such institutions? Is there room for consolidation of training, larger institutes and accreditation?

There are many acting schools and many of them are fraud institutions. We are masters at replicating and selling something that has no value. But ultimately the institutes that will draw students are the ones that provide honest, sincere training and make a long-term commitment to training. The product that comes out of the school is the strongest evidence of the quality of training. Also, today’s newcomers have an ability to learn quickly and to gather knowledge and training from a variety of sources. So, the courses that required 3-4 years earlier can now be taught in months. This Internet and Google age has made information easy to seek but has taken away the sense of wonder from today’s generation.

An acting school is not just about teaching the acting skills. It is education and all education teaches primarily one thing – the ability to distinguish the right from the wrong and the good from the bad. Thus, a good acting school also helps an actor make better decisions and choices. Also, training is not something that happens at the beginning of your professional career – it is something you go back to every time you realise the need for further enhancement to your skills. It is an ongoing process to an actor’s career and very often, the persons who seek training have already acted in plays, in TV shows/serials and movies.

I believe that every individual, whether an actor or not, gets at least one chance that will materially change his life – if he is able to rise up to that chance and seize the opportunity when it is knocking at his door, he will have a different future than when he lets that one chance pass.

BCAJ – What is the future of the profession?

AK – I firmly believe that this is the golden era for professional actors. The audience is educated and has an appetite for a wide range of movies. Earlier, the movies were all made on a standard theme and dialogues such as ‘maine mere haathonse kheer banaayi hai’ ‘kaash tere pita aaj jinda hote’ became so clichéd and predictable. Today, we have movies like Shanghai, Kahaani and A Wednesday that appeal to the audience. The audience is intelligent and appreciates good cinema, good acting. Further, globalisation has also had a big impact on the acting profession. Many Indian movies are screened across the globe and that has created, for some actors, opportunities to work in international films with very credible directors and production houses. This is definitely the most exciting period for an actor who wants to make a mark. But, it is also a period where an actor will have to work hard and display a high level of sincerity and commitment to the profession.

As we ended our meeting, we realised the common string that runs between the acting profession and our profession. A professional actor benefits from training, just as a good articleship makes a world of a difference to a chartered accountant. Further, training imparted at the beginning of the career is not enough – there is a need for ‘Continuing Professional Education’. The times have changed and globalisation has had an impact on the profession of acting, just as it has had on the profession of chartered accountancy. For some, the world has opened up, for others there is a dismal future – for it is in these time that the destiny of a professional, be it a chartered accountant or an actor, will be defined by his training, his hard work, his commitment and most of all, his ability to recognise and seize that one chance that offers him a very different future!

shailesh.kwebmaker

The Everyday Architect

The word ‘architecture’ always and immediately brings to mind subjects like real estate, home, high-rises, heritage and monuments. However this is sadly a very limited view on architecture, and one could also say a misguided understanding of what ‘architecture’ means. As an extension to this limited and partly faulty understanding of ‘architecture’, the architect remains to be a technician of sorts — someone who has technical knowledge of certain subjects and who uses that to the best of his capacity to ‘make buildings’. In a more romantic understanding the architect tends to be the maverick artist who has put together marvels and embodiments of beauty in brick and stone or concrete and steel. In more contemporary times, where real estate is the only logic to urban development and financial graphs have crazy rises and drastic falls, architect remains only a service-provider in most cases. He, and sometimes she, is expected to make sure the size of the kitchen or work-station is correct to an optimum, the light falls in the right direction, the water drains well, there is some fancy play of colours and materials which can be discussed as the creative quotient of the project and finally a building should ‘look good and sassy’ in advertisements for the people on the street. The architect’s job is done, he can move to the next project and reproduce the same set of correct applications, with a change of some ‘creative’ inputs, and buildings can be rubber-stamped one after the other, still looking different as every exterior is made just to do that — look different!

Having said this, one can also look at the use of the word ‘architect’ — Jawaharlal Nehru is referred to as the ‘architect’ of modern India, or Dr. B. R. Ambedkar is the ‘architect’ of India’s Constitution, or Mahatma Gandhi is the ‘architect’ of India’s struggle to freedom from British rule. In all these cases, the term ‘architect’ is no technician, is no maverick artist, is no façade designer; the architect, clearly in all these instances, is someone who has shouldered responsibility and has been the shape-giver to important ideas — modern nation, constitution and a movement. The term is not engineer of modern India or doctor of the freedom movement, but ‘architect’ is the idea that is used. So then what defines an architect? What job does an architect do? What role does he perform in society? And the answer to all these will depend on — What is architecture?

Architecture is surely a profession at one point, with the architect a trained and licensed professional who is expected to provide a certain set of services to the best of his capacity. However, architecture is also a discipline — it is a subject with its own history, its theory and its ideas on issues of space, beauty, cultural interventions, role within a social set-up, cultural implications, etc. Architecture deals with making of buildings, but it is much beyond the building — architecture is a broad field of ideas and practices. Architecture has always had historians and theorists, critics and writers who discuss architecture and challenge the contemporary practices of their times. So the realm of ideas and thoughts, theories and critical propositions also makes up the world of architecture. Just as the knowledge of materials and plumbing is important to architecture, so is the awareness of issues and theories that challenge the field is very important. One can say, that from nuts and bolts to the realm of dreams, architecture has to deal with it all.

Architects also work within their own peer pressures. The architect trained in a particular set of ideas and principles of design, is also living and working in particular contexts. Contexts are made up of cultural images, political inclinations, social relationships that you may or may not agree with. These contexts and the architect’s training generates influences on the design board where decisions are judged against popular imaginations, economic constraints, hyped practices like vaastu, personal convictions or lack of it, and desires or aspirations of clients. The studio of the architect is a complex combination of strains and stresses, desires and convictions. Who is the architect addressing his/her questions and designs to – the client, the user (who she/he may never meet), the fraternity, the critic, the economic demands, space crunch, real estate wars, technicians that supply plumbing and electricity? As much as this dilemma is a reality of conditions, and as much as we realise how architecture stretches much beyond making a ‘good building’, the question is not simply a technical issue of how many questions and demands an architect can answer satisfactorily. The point that needs investigation is — what is the idea of architecture that we as thinkers and professionals in the field of architecture subscribe to. Do we understand our responsibility towards ‘architecture’ itself, to begin with?

Architecture is a realm where imaginations and values will have to be resolved. How do universal values of humanity translate into architectural values and imaginations? To acknowledge that architecture operates as the physical fabric within which our homes, neighbourhoods and cities are defined is very crucial. This physical fabric constructs the way we imagine our world, and this physical fabric is inherently visual and material — we see it and we feel it. The visual as well as the material is always a coded logic — if the Mughals used white marble it was to imagine the sense of beauty within the sense of grandeur that political and pristine, making the political an aspect of technology and geometry; if the new stock of corporate towers feel the need to shine in the hot sun as they shoot to crazy heights, tallness and brightness mean something — aspirations to unashamedly compete, rather make competition a value and loudness of domination a virtue is what this architecture signals. Is then at times the patron, the developer, the client the real designer, the real architect? Is then the architect simply a handmaiden to the forces that make his profession possible? But then can the architect simply moan his status in the chain and continue being the handmaiden? Does architecture have the power to reject and change that which is given and practised in the world? Or does architecture simply mirror the culture and society that produces it?

Architecture is a condition much more than a building here and a building there. Architecture, especially with the world taking an urban turn is the site where ideas and cultures are shaped and human societies are constantly shaping and re-shaping. Architecture is no stage for the drama of life, but a constant game-player in this scenario. Architecture, as a dynamic set of ideas and elements, is part of the narrative that we call culture and socio-political world. Whether new buildings are built, or some old ones are conserved, and some others are lost in time, or whether housing in the avatar of slums is demolished — architecture is constantly shaping and redefining itself. One of the most crucial aspects of architecture — Space, is one of the most cov-eted and discussed subject. Space of the family or the space in your colony or mohalla, or the space from where hawkers are thrown out in the name of discipline or beautification, or the space of mills converted to tall apartment blocks — are the versions of space that architecture choreographs and gives it a logic and a language. The architect can be the handmaiden and provide an architectural language that feeds into the popular idea of life and the world provided today by globalization and capitalism, else that architect can use his skills and language of architecture to challenge the dominant ideas. With the design of better homes, flush with appliances and its interiors designed with high-end materials, does family life automatically become better and more affectionate? The idea of architecture constantly weaves through all these situations and events; then is architecture a physical structure any longer or is it just about events and reactions? The sociality of life, as much as it is embedded in architecture, also seems disjointed from the generally and commonly appreciated properties of architecture.

Does the idea of architecture — a discursive field of knowledge on the one hand, a profession on the other — accommodate the notion of ethics? Ethics here is not an issue of morality, but one of integrated principles and convictions guided by vision and a critical understanding of the world and life. Principles are not meant to be stringent and unchanging, but they are guidelines that can be adequately and appropriately changed, redefined and interrogated. Convictions need not be misunderstood as rigid belief, but convictions is a tool box of imaginations and critical argumentation that is built up through a keen observation of life and culture, and a constantly reworked understanding of one’s own field. Visions are not dogmatic and cast-in-stone diagrams, but they should be projections of ideas that can generate a dialogue and argument, that can make us see the world with fresh eyes but not forget that we come from a past that is loaded with dreams and nightmares. Ethics of architecture help us build arguments and methods towards a world, a city that is other wise a chaotic mix of loud voices — demolitions, developments, change, preserve, conserve, beautify. These words for most of us are only images and not concepts that mean certain real-life situations. These words will become valuable ideas to be discussed and debated when a sense of ethics is the basis for their existence.

Architectural ethics are not about which colour looks good, or which building has a fancier façade than the other, but architectural ethics is a way to our understanding of what world and society do we wish to live in. Can we talk of sustainable environments and economies while we view the hawker on the roadside only as a nuisance? Hawking is an essentially urban condition, that produces a set of urban values and conditions, which are also part of existing economic networks. But hawking is also an understanding of values in space, the architecture of reuse and repair. Are gated communities with taller and taller high-rises packed behind tall compound walls and gates the future of living? Have we not enjoyed mohallas and padas where sharing spaces with neighbours and shopkeepers was a way family and city life developed? A sense of architectural ethics will give us ways in which we can innovatively address some old issues. To question the idea of architecture is central to establishing relationships in a society and understanding them. No human life, and no human social or cultural group lives in isolation — with our different eating habits and different religious preferences, we still are a species that needs exchange and interaction with others who are not like yourself to survive a wholesome life.

Architectural ethics of sharing space, understanding quotients of privacy and openness is very important to a healthy social world-space.

Whether we look at questions of women and social space, or issues of caste and cultural space, or theatre and the traditions of space and costume, or whether we simply evaluate how we perceive shared and public space like a railway station in Mumbai or a park or a maidan, we will realise that architecture deals with aspects of value and ethics as much as it deals with scale, colour and materials. The architect is the builder, he is the thinker, he is also often a philosopher — but in the world of today this bleeding of different roles is also the cause for dilemmas and confusions. But these dilemmas need to be occasions for asking questions and thinking — where new meanings for architecture could be discovered, debated and argued. The new meanings will provide new occasions and new tools for the architect to work with. As long as a sense of ethics and values in architecture is understood, the architect can remodel his profession and his field, with growing understanding and an evolving vision.

shailesh.kwebmaker

Challenges Faced by Professional Firms

The accountancy profession and the legal profession are intertwined. The services rendered by these professions overlap to a large extent. Moreover, when a lawyer is involved in a major corporate takeover transaction, he depends on the financial structure evolved by a chartered accountant and when a chartered accountant is considering and advising on a major financial transaction he would undoubtedly need help and assistance from a lawyer to ensure compliance of legal requirements in the transaction. Shri Gopaldas P. Kapadia, the first President of the Institute of Chartered Accountants of India, who is recognised as the father of the accountancy profession in India always maintained that the accountancy profession and the legal profession are sister professions. He even expressed a dream that at some point of time the two professions would merge under a common umbrella.

In the context of the changes in the business pattern in India during the last two decades both the professions are required to work shoulder to shoulder acting as supplement to the services rendered by each other.

Over the past few years, we have witnessed unprecedented economic advancement and growth, which has resulted in the globalisation of the world’s economies and has opened up the world’s economies. This wave of globalisation and economic progress has resulted in huge opportunities and potential for businesses to expand their footprint all over the world. This, coupled with the rapid growth of the Internet has resulted in a truly global market place. It has literally resulted in a ‘world without borders’. India has been at the centre stage of this economic revolution over the past decade. Over the years, India has witnessed a large amount of both inbound and outbound foreign investments. Today, leading companies from all over the world are either in India, or are queuing up to enter. Similarly, numerous Indian businesses have acquired or are acquiring businesses outside the country. Over and above this, with the inflow and outflow of investments, businesses have begun to scale up and have today reached enormous sizes, scales that could not have ever been imagined a few years ago. All of this has resulted in a huge demand for professional services. The changing economy has resulted in a complete change in the operating dynamics of professionals. I propose to deal with some of the common issues and challenges faced by law and accountancy professional firms in today’s changing times.

The role of a professional has evolved dramatically over the past few years and is far different from what it used to be a few years ago. The increase in demand for professional services has resulted in a very large growth in the professional service space. Every day, there are new entrants in the sector, resulting in intense competition. With the increasing demand of professional services, professionals are facing new challenges and new burdens every day.

Earlier, whilst any professional had to contend with a certain limited number of issues, the number of issues faced by them today have increased greatly. This can be attributed to various factors. With economic progress, business transactions are becoming more and more complex by the day. Businesses are becoming more competitive and focussed on factors like growth, performance, etc. Further, the ever-changing economic landscape and globalisation have resulted in new and complex legislations and regulations being introduced by lawmakers.

As a result, the need for professional advice on business transactions or on legislations has become ever increasing. This has therefore resulted in a great demand for services of professionals and more so for accountants and lawyers. This great demand for the services of professionals has resulted in an unprecedented number of new entrants into both the professions, which has resulted in an increase in competition amongst professionals themselves. Whilst, the entry of an increasing number of professionals in any field is always welcome, it has triggered intense competition amongst rival firms. It may be argued that with the present growth in the economy, there is enough space for a large number of new upcoming professionals to enter into the professions and grow. But at the same time, it is interesting to note that the increasing competition has resulted in various issues, which professionals may not have faced earlier.

Some of the major issues faced by a professional (whether a lawyer or a chartered accountant), in carrying on his profession today are:

(i) Professional ethics

(ii) Professional responsibility;

(iii) Professional liability;

(iv) Building and retaining teams;

(v) Keeping abreast with the latest updates;

(vi) Advertising/promoting services;

Let us now examine these issues in detail.

(i) Professional ethics

Both the legal and the accountancy professions have their own rules of professional ethics. The Chartered Accountants Act, 1949 and the Regulations made thereunder prescribe certain rules in this behalf. Similarly, the Advocates Act, 1961 and the Bar Council Regulations govern the legal profession. Professional ethics are codes of practice that have been laid down by bodies governing the profession to ensure that the highest standards of integrity and professionalism are maintained in the profession. Each professional organisation must ensure that the ethics and codes laid down in that profession are followed. A professional is a person who is specially trained and possesses specialised skills and knowledge. He must, in providing his services, adhere to the highest standards of ethics to ensure that not only the interests of his client are safeguarded but also that standard of his profession are maintained. Some of the virtues that fall within the ambit of professional ethics are virtues like honesty, integrity, transparency, etc. Of late, various incidents have come to light where leading professionals from large professional service firms have been caught committing certain acts in the course of their professional duties which go against the very basic canon of their profession and against the basic virtues of professional ethics. At this juncture, one would question as to why would a professional who is associated with a multi-national firm at a very senior level, become involved in such acts. The answer to that question is quite simple. With increasing competition amongst professionals, clients often try to pressurise a professional to commit acts or give them advice as per their needs. The professional, in the fear of losing the business of the client, is likely to buckle down under the pressure of the client and do whatever is required of him to retain such a client. This sort of pressure often leads to professionals committing various acts which are against the very basic guidelines/codes that are governing them. Though it is important in today’s time to retain clients and expand, a professional must never forget his duties and must always carry out the same within the prescribed boundaries.

ii) Professional responsibility

Similarly, professionals have a responsibility to their clients. They must act in a responsible manner and must ensure that there is no breach of fiduciary duties on their part whilst dealing with clients. In a large firm, where there are a large number of partners and senior associates, it is possible that the firm may, unknowingly take up an assignments, which is conflicting in interest with some other assignment being handled by the firm. Such a situation must be avoided and the firm must take steps and build systems to ensure that there is no conflict of interest between the firms’ clients. Another important aspect that a firm must safeguard is confidentiality of clients’ information. A firm must ensure that the clients information that has been provided to it must be kept confidential and that the same should not ever be revealed by any person, save and except in the manner prescribed under law or authorised by the client.

(iii) Professional liability

A professional in exercising his duties and advising his clients, must always exercise due care and caution and ensure that he has fulfilled his duties to the best of his ability. A professional must ensure that he has considered and reviewed all possible scenarios before advising the client. Professionals, being experts in their respective fields, are liable to their clients for any act of negligence on their part. A client comes to a professional because a professional is an expert in the field and that he possesses specialised knowledge. At the same time, since a professional is an expert in his field, he must ensure that he takes greater care and caution when advising his client as compared to an ordinary person. A professional would thus be responsible to his client in the event that a client suffers and harm or prejudice as a result of any act of negligence on the part of the professional.

(iv) Building and retaining teams

With increasing competition amongst professionals today, a major challenge faced by firms is that of attracting and retaining the best manpower. Over the years, the number of persons entering various professions has greatly increased. This has resulted in a huge pool of manpower being made available to firms to choose from. Even then, there is an intense competition amongst firms to select the best talent that is available. Firms today invest huge amount of time, effort and money in training associates to ensure that they are able to offer best services to the clients. However, with increasing competition and increasing amount of work, there is always a dearth of good talent that is available at any time. Competing firms are always looking out for good talent. A firm must ensure that it retains good talent by not only offering good remuneration but by also providing a good working environment.

(v) Updated knowledge
As stated above, with the ever-changing economic climate and with new developments taking place practically on a daily basis, it is important for professionals to always keep themselves updated and abreast with all the latest developments in their fields. With the advent of technology, it has become relatively simple and easy for one to keep updated with the latest developments at all times. Referring to and using tools like the Internet, e-mail, news media, academic journals, etc., are helpful in ensuring that one is updated with the ever-changing situation in ones profession at all times.

(vi) Advertising

The increasing demand for professional services and the increase in the number of professionals offering such services has resulted in intense competition amongst rival professionals. In India, till date, both the legal and accountancy professions have restrictions on advertising, which by and large restrict professionals from advertising their services. Recently, Bar Council of India which governs the legal profession has allowed lawyer/law firms to set up websites but with limited information. Of late, we have also witnessed a large number of professional firms being associated with various events organised by various bodies, chambers, societies, etc. now whereby representatives of such firm make presentations/speak at such events. Another practice that is gaining quick popularity amongst professionals is of publishing articles/research papers/reports across various media like newspapers, journals, magazines and on the Internet.

From the above, we can see the number of common issues and challenges faced by both the professions in todays times. Whilst, the picture is rosy and there is great potential on the horizon for both the professions, the professions of lawyers and chartered accountants have largely benefited by the recent upturn of economy and increase of high-value business transactions. Both the professions have been working as complimentary to each other and as a result, the client gets the advantage of double expertise. Let us hope this sangam will get stronger day by day.

Before I end, I would like to refer to one recent trend which I consider to be against the interest of the clients and may even term it as dangerous. Some chartered accountant firms have been keeping lawyers on their role and try to render legal services to the clients including drafting of complicated documents while some law firms have recruited chartered accountants on their staff, with a view to extend the services to be offered to the clients. It is felt that the junior-level assistance availed in this way may not do proper justice to the clients and is even likely to affect the quality of the services needed in a particular case. It would be in the ultimate benefit of the clients if each profession sticks to its own expertise without trying to encroach upon the field of the other.

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Professionaly Speaking…

The Australian Council of Professions defines a profession as: ‘A disciplined group of individuals who adhere to high ethical standards and uphold themselves to, and are accepted by, the public as possessing special knowledge and skills in a widely recognised, organised body of learning derived from education and training at a high level, and who are prepared to exercise this knowledge and these skills in the interest of others.’ On a lesser idealistic plane, a profession is an occupation, which necessitates widespread training and study, and generally has a professional association, ethical code and the procedure of certification or licensing.

Classically, there were three recognised professions – divinity, medicine and law (not considering the oldest profession of the world!) Over a period, with the development of specialised bodies of knowledge and technology, other occupations came to be recognised as professions or started claiming the status of profession. It is a process of evolution and today in the expanded meaning of profession, one would include many other occupations although they may not possess all the characteristics of a profession. In that sense, professionalism is a matter of attitude.

Professionals enjoy a high status and esteem, because the society considers the work that they do, functions that they perform as vital and valuable to the society.

Professionals and professional associations often have a power – power to regulate members of the profession and guard and protect their area of specialisation. To that extent, an organised profession is monopolistic. This is often considered necessary to maintain the high standards of learning, expertise and capability to exercise the profession.

Till about 50 years back, the line between profession and business was clear and well understood. In the recent years, this line is becoming increasingly hazy and blurred. There could be many reasons for this. A profession renders services where it has a monopoly as well as services that even a person who is not a member of the profession renders. A professional rendering unregulated service finds competing in such an environment a disadvantage and knowingly or unknowingly crosses the `Laxman Rekha’. With technological advances the investment required for exercising the profession has increased manifold. This is particularly true with the profession of medicine where expensive equipment plays a major role in diagnosis and at times even in the treatment.

Often the equipment has a short life due to obsolescence. This makes the medical professional or the institutes engaging them think on the lines of business rather than profession. Possibly due to this, the way the professions are excised today has also changed. In the past, a professional practised individually or in small partnerships.

Today, mammoth organisations of professionals or those engaging professionals are dominating. This is a reality of the ever-changing world. What one needs to ensure is that while the size and the type of organisations change, the profession retains its high ethical standards. Traditionally, there has always been a wide variance between earnings even within a profession. In a lighter vein, there were always two types of `outstanding lawyers’ – those who excelled in their profession and those who stood outside the courtrooms to solicit clients. This is true with all professions.

On a serious note, this gap is only increasing. One needs to debate whether this is desirable, is it inevitable or it is the market’s way of enabling the talented younger members of the profession to gain a foothold by charging lower fees. As professionals, we often tend to stay in the ivory tower forgetting what is society’s perception about our profession, what the society expects and what the profession offers or delivers. It is a fact that professionals today enjoy a diminished level of respect and esteem. True, every profession has a few black sheep whose behaviour gives a bad name to the whole profession inspite of exemplary work by the majority. Consider the recent TV episode of Satyamev Jayate hosted by Amir Khan.

While the viewers felt that the programme depicted the reality, there is a muted outrage within the medical profession. Certainly, all medical professionals are not engaged in unethical practices. But all professions need to introspect whether the black sheep amongst us are increasing in numbers and do we need to do something about it. Do professional bodies need to strengthen their disciplinary mechanism?

It is a matter of pride that amongst various professions, Chartered Accountants have a very sound and effective disciplinary mechanism. A weak self-regulation will sooner or later prompt the government to assume the power of regulation. In a globalised world competition has become the key word. Agreements or arrangements promoting monopolies or curtailing competition are struck down as illegal. World Trade Organisation (WTO) agreements, domestic laws on the subject foster competition.

These will pose challenges before professions. For example, whether recommended schedule of fees breaches the Competition law? Internationally these aspects are being debated. Traditionally, professionals did not advertise or market their services, in many jurisdictions they were prohibited from charging success-based fees, sharing fees with even members of allied professions. Today, these restrictions are being questioned. Increasingly, professionals are facing action under various Consumer Protection Laws.

Professions need to think about these issues. We believe that there is a common thread running through various professions. A few years back BCAS even attempted to form an organisation of various professions. We feel that it is necessary to give a thought to various issues facing professionals. With this objective in mind, we bring this issue to you with two articles, one from Mr. M. L. Bhakta a respected advocate and solicitor and one from Mr. Kaiwan Mehta a renowned architect.

We also bring you an interview with Mr. Anupam Kher who may not fit into the classical definition of a professional but is a professional in true sense. Going forward we hope to bring to you periodically, articles dealing with issues faced by professionals.

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Life And Death

The cycle of birth, life and death goes on. What is born has to die. Both birth and death are not in our hands at all. As Saigal sang in good old days . . .

(Readers are requested to listen to excellent rendering of this ghazal by K. L. Saigal)

Both birth and death are not in our hands. But having been born, it is better to do something in our lives, instead of wasting it and lamenting when our end comes that I have not done anything worthwhile in my life. Bhagvad Gita says . . .

Even if Gita says that rebirth is always there, we cannot postpone living, hoping to catch up with life in the next birth. We have to consider that we are not playing the first inning of a test match, where a second inning is possible, but are playing an ODI knowing that there is no second inning and overs too are limited.

The basic question is: ‘how must one live’? Should we follow the policy of ‘eat, drink and be merry’? That would not have been the purpose of life. The scriptures tell us that to be born as a human being is very fortuitous — a rare happening and one cannot waste this priceless gift of God.

“You don’t get to choose how you are going to die, You can only decide how you are going to live” — Joan Baez

Oddly many times one finds the right answer, of all the things, in film songs! One remembers the song written by Sahir Ludhianvi and sung by Mukesh.

We must live a life that brings true happiness to us and all around us. In this journey, we will meet several cotravellers who need our help. Helping does not necessarily have to be in terms of money. One only needs richness of the heart. As we go along, we must wipe the tears of those who are suffering and bring back happiness in their lives. Even a smile can make someone’s day. Let us lead a life whereby, people will remember when we are no more. The objective of living should be:

I recollect the words found in the diary of a young girl who died in a house collapse in an earthquake.

“Life is short

Make it sweet

Keep not all the flowers

For the grave”

Many times attachment to our family members holds us back from serving others. One remembers the lines sung by Mukesh in that unforgettable duet he sung with Sudha Malhotra.

We have to remember that a good life is one that is used in serving others. True happiness comes from selfless service. Therefore, lead a life, so that when death comes there are no regrets, as we have lived a life of service with a smile.

This is a small poem written in the last letter of Ensign Heiichi Okabe, a Japanese Kamikaze (Suicide Bomber) pilot to his family before he left for his last suicide bombing flight to crash his bomb, laden plane on an American battleship in the last stages of the second World War:

“Like cherry blossoms

In the springs

Let us fall

Clean and radiant”

Let us then learn to live and die like a cherry blossom flower.

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Circular No. 3/2012, dated 12-6-2012 giving gist of the official amendments to the Finance Bill, 2012.

Circular No. 3/2012, dated 12th June, 2012 giving gist of the official amendments to the Finance Bill, 2012 as reflected in the Finance Act, 2012 (Act No. 23 of 2012) which was enacted on 28th May, 2012

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Notification No. 20/2012, dated 12-6-2012 — DTAA between India and Nepal notified.

The Double Tax Avoidance Agreement signed between Nepal and India on 27th November, 2011 has been notified to be entered into force on 16th March, 2012. The treaty shall apply from 1st April, 2013 in India.

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Notification No. 21/2012 [F. No. 142/10/2012- SO(TPL], dated 13-6-2012.

The following specified payments can be made after 1st July, 2012 without deduction of tax at source u/s.194J of the Act: Payment by a person for acquisition of software from another resident person, where —

(i) the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification,

(ii) tax has been deducted — (a) u/s.194J on payment for any previous transfer of such software; or (b) u/s.195 on payment for any previous transfer of such software from a non-resident, and

(iii) the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor.

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CBDT has issued a clarification [F. No. 500/111/2009-FTD-1(Pt.)], dated 29-5-2012.

The CBDT has issued a clarification [F. No. 500/111/2009-FTD-1(Pt.)], dated 29-5-2012 stating that in case where assessment proceedings have been completed u/s.143(3) of the Act, before the first day of April, 2012, and no notice for reassessment has been issued prior to that date, then such cases shall not be reopened u/s.147/148 of the Act on account of the clarificatory amendments in section 2(14), section 2(47), section 9 and section 195 introduced by the Finance Act, 2012. However, assessment or any other order which stand validated due to the said clarificatory amendments in the Finance Act 2012 would of course be enforced. Copy of the letter is available on www.bcasonline. org.

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India has entered into a Tax Information Exchange Agreement (TIEA) with Bahrain for sharing of information.

India has entered into a Tax Information Exchange Agreement (TIEA) with Bahrain for sharing of information, including banking information between the tax authorities of the two countries. The Agreement was signed on 1st June, 2012.

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Notification No. 19/2012 (F. No. 506/69/81- FTD.1), dated 24-5-2012.

Amendments to Article 11 of India-Japan Double Tax Avoidance Agreement have been notified. The amendment is effective from 1st April, 2012.

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The Finance Bill, 2012.

The Finance Bill 2012, received the Presidential Assent on 28th May, 2012.

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Circular No. 2/2012 [F. No. 142-01-2012- SO(TPL)], dated 22-5-2012 regarding Explanatory notes to the provisions of the Finance Act, 2011.

Copy of the Circular available on www.bcasonline. org

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Notification No. 18/2012 (F. No. 142/5/2012- TPL), dated 23-5-2012 — Income-tax (6th Amendment) Rules, 2012 — Insertion of Rule 10AB.

For the purpose of computation of arm’s length price, section 92C(1) of the Act provided for five methods and the sixth method was ‘such other method as may be prescribed by the Board’.

Rule 10AB is inserted to provide the ‘other method’. Rule 10AB shall come into force with effect from 1st April, 2012 and shall apply to A.Y. 2012-13 and subsequent years.

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Direct Tax Instruction No. 4/2012, dated 25- 5-2012 — F. No. 225/34/2011-ITA.II — Instructions for processing of returns of A.Y. 2011-12 — Steps to clear backlog.

The Board has decided to withdraw Instruction No. 01/2012 issued on 2nd February, 2012 on the above subject with immediate effect. The following decisions have been taken in this regard:

(i) In all returns (ITR-1 to ITR-6), where the difference between the TDS claim and matching TDS amount reported in AS-26 data does not exceed Rs.5,000, the TDS claim may be accepted without verification.

(ii) Where there is zero TDS matching, TDS credit shall be allowed only after due verification.

(iii) Where there are TDS claims with invalid TAN, the TDS credit for such claims is not to be allowed.

(iv) In all other cases TDS credit shall be allowed after due verification.

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Seminar on Finance Act, 2012 — Direct Tax Provisions

Seminar on Finance Act, 2012 — Direct Tax Provisions

This seminar was organised by the Taxation Committee on Saturday 9th June, 2012 at Walchand Hirachand Hall, IMC. The faculty Kishor Karia, Pradip Kapasi, and Sanjeev Pandit analysed threadbare various changes in the direct tax provisions enacted by the Finance Act, 2012. The programme received enthusiastic response from the participants who gained immensely from the wealth of knowledge and experience shared by the learned faculties.

Release of BCAS Referencer 2012-13

The most awaited Golden Jubilee Collector’s Edition of the BCAS Referencer for the year 2012-13 was released on Thursday, 14th June, 2012 at Swatantrya Veer Savarkar Rashtriya Smarak, Shivaji Park at the hands of our Past Presidents Narayan Varma, Pradyumna Shah and Arvind Dalal. The release was followed by a musical programme on the theme of ‘Kal, Aaj aur Kal’ where the artists regaled audience of over 400 with melodious and memorable songs from films of Raj Kapoor, Rishi Kapoor and Ranbir Kapoor.

6th Residential Study Course on Service Tax & VAT

The Indirect Taxes and Allied Laws Committee organised this 6th Residential Study Course on Service Tax & VAT from 22nd June to 24th June, 2012 at Rio Resort, Goa that was attended by nearly 150 participants from various parts of India including Hyderabad, Mumbai, Ahmedabad, Secunderabad, Chennai, Jaipur and Pune. L to R: Kishor Karia (Speaker), Pradip Thanawala (President), Gautam Nayak (Speaker) and Saurabh Shah Front Row: L to R – Deepak Shah, Narayan Varma (Past President), Pradyumna Shah (Past President), Arvind Dalal (Past President), Rajesh Shah, Pradip Thanawala (President), Pranay Marfatia. Behind Row: L to R – Rajeev Shah, Naushad Panjwani, Yatin Desai, Narayan Pasari Sunil Gabhawalla, Chartered Accountant, presented paper on ‘Concept of Negative List based Taxation of Services, Important Definitions, Exclusions and Exemptions’. Adv. P. K. Sahu presented paper on ‘Sale vs. Service — Overlap of VAT and Service Tax’.

Case Studies in POT Rules, Valuation of Services and Bundled Services were presented jointly by Sunil Gabhawalla, Chartered Accountant and A. R. Krishnan, Chartered Accountant.

Adv. K. Vaitheeswaran presented a paper on ‘Indirect Tax Issues in Real Estate Industry’.

A. R. Krishnan, Chartered Accountant also presented a paper on ‘Analysis of Place of Provision of Services Rules’.

The participants gained immensely from the wealth of knowledge and experi-ence shared by the learned faculty at this residential study course. n

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Jal Erach Dastur Students’ Annual Day:

Jal Erach Dastur Students’ Annual Day celebration was organised on Saturday, 26th May 2012 at the Navinbhai Thakkar Auditorium of Shri Vile Parle Gujarati Mandal, Vile Parle (East), Mumbai-400057.

The event commenced with Saraswati Vandana followed by welcome address by President Pradip Thanawala. Chairman Mayur Nayak commended the efforts put in by students in organising this event. He briefed about various activities of the students undertaken by the BCAS. He welcomed the Key Note Speaker Padmashri T. N. Manoharan, past president of the ICAI. The key-note speaker made a very inspiring presentation with the help of Power point. The topic was ‘Transcending the challenges’. The talk was motivational and inspirational. He touched upon various topics such as values of life, setting goals, managing time, putting hard work, focusing on the career, sacrificing unimportant things and distractions, keeping physical, emotional and mental balance, maintaining highest standards in profession, etc. There were three competitions, namely Essay Writing, Elocution and Quiz.

1. Essay competition

46 students took part in the Essay competition; three essays were selected for printing in the BCA journal. The judges for the Essay Competition were Mihir Sheth, core group member and member of the HR Committee, Vipin Batavia, Past President of the Chamber of Tax Consultant and member of the HR Committee and Sangeeta Pandit, core group member. The winners were (1) Rohan Shah (2) Rushab Vora (3) Chhaya Joshi 2. Elocution competition The Elocution Competition was organised under the auspices of Smt. Chandanben Maganlal Bhatt Foundation. Mukesh Bhatt from the said Foundation graced the occasion and presented trophies to the winners. 31 students took part in the Elocution competition. After the elimination round, finally eight participants competed on the Annual Day for the 1st, 2nd and 3rd positions. It was a close competition as all of them did a good job. The judges for the elimination round of Elocution competition were, Ashok Solanki, Aliasgar Kherodawala and Vijay Bhatt. The judges for the final round were TV actor Sumeet Raghavan, Rajesh Muni, Past President and Stanny Pinto, an academician.
The winners of the Elocution competition were:

First Prize – Utsav Shah – Rashmin Sanghvi & Associates
Second Prize – Shweta Agarwal
Third Prize -Shweta Mishra – PHD & Associates

3. Quiz competition 45 students took part in the Quiz competition. Four teams comprising two students each were selected for the final round. The Quiz competition was hosted by the Ashish Fafadia in his inimitable style. He made even the audience to participate in the quiz.

The winners of the Quiz competition were:

First – Murtaza Bootwala – B.D. Jokhakar & Co.- Prize Riken Patel C.M. Gabhawala & Co.
Second – Ashish Shukla – M.B. Nayak & Co.Prize Ashwini Shah M.B. Nayak & Co.
Third – Bhuma Iyer -R.R. Muni & Co. Prize Sonal Pilwankar R.R. Muni & Co.

This year more than 400 students registered and about 50 principals and parents witnessed the talent presented by students. The event was compered by Shweta Agarwal and Nishad Vora and was well supported by Khusboo Shah. The event concluded with a sumptuous and delicious dinner.

Students left for home with lots of learning, fun and rich experience.

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Indians among world’s happiest people.

Despite economic woes, wars, conflicts and natural disasters the world is a happier place today than it was four years ago and Indonesians, Indians and Mexicans seem to be the most contented people on the planet. More than three-quarters of people around the globe who were questioned in an international poll said they were happy with their lives and nearly a quarter described themselves as very happy.

“The world is a happier place today and we can actually measure it because we have been tracking it,” said John Wright, senior vice-president of Ipsos Global, which has surveyed the happiness of more than 18,000 people in 24 countries since 2007. But he added that expectations of why people are happy should be carefully weighed. “It is not just about the economy and their well being. It is about a whole series of other factors that make them who they are today.”

Brazil and Turkey rounded out the top five happiest nations, while Hungary, South Korea, Russia, Spain and Italy had the fewest number of happy people. Perhaps proving that money can’t buy happiness, residents of some of the world biggest economic powers, including the United States, Canada and Britain, fell in the middle of the happiness scale. “Sometimes the greatest happiness is a cooked meal or a roof over your head,” he explained. “Relationships remain the No. 1 reason around the world where people say they have invested happiness and maybe in those cultures family has a much greater degree of impact.”

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White lies on black money.

Estimates of ‘black money’ generated in the Indian economy vary: from rather minuscule amounts of a couple of billion dollars to more unbelievable numbers. The Union finance ministry issued a white paper on the subject that highlighted various measures of black money and what needs to be done to curb its generation. The analysis carried out in it does not represent anything new; it certainly does not give a road map for handling this problem.

In India, the easy fixes to curb tax evasion and the generation of black money have all been exhausted: there will be few, if any, taxpayers who try and evade what they owe the government. The tax administration is robust enough to detect and capture evasion by these citizens. The problem lies elsewhere.

The white paper itself illustrates these issues. Three examples can be highlighted. The issue of taxation of wealth generated in the businesses linked to exploitation of natural resources such as mining, hydrocarbons, telecom and other related sectors; the problem of income in “vulnerable” sectors such as real estate and, finally, the issue of political willpower required to make a difference. In each of these, this government has been an abject failure.

Consider the natural resources sector first. The problem lies in the vast discretionary powers enjoyed in allocating these resources. From spectrum allocation to that of issuing mining licences, there has been little or no transparency. The result is that there are inbuilt drivers to generate illicit wealth. If anything, this government is complicit in this process: it is deeply unhappy with auctions as a process to allocate these resources. In a firstcome- first-served process, there is ample scope for corrupt practices. Clearly, it has to address that issue before it can even argue that natural resource allocation processes are a problem. In fact, the sector can only be dubbed as a ‘politically exposed sector’.

In case of ‘vulnerable’ sectors such as real estate, the cause and effect are mixed: real estate is both a recipient and a generator of black money. Illicit gains made elsewhere can be parked in residential and commercial property without much fear of tax enforcers. But that is just one part of the problem. The high taxes — stamp duty is a prime example — levied make evasion a worthwhile chase. And high stamp duty being an important source of revenue for many states ensures that undervalued transactions are a norm and not an exception.

Finally, this government lacks the willpower to deter potential tax evaders — the big fish that is. The surest way to do so will be to disclose the names of evaders that are available with the government. Given that our politicians are sure to figure on such a list, confidentiality of agreements with other governments and, hold your breath, human rights of tax evaders (page 68 of the white paper) come in the way of public disclosures. This is difficult to believe.

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Don’t blame Greece for our problems.

In the gloomy economic environs of a falling rupee, slowing economy and a general drift of things, an easy way to shirk responsibility would be to lay the blame at Greece’s door. Former ICICI Bank chairman N. Vaghul would strongly recommend not to rummage through the ruins of the Athenian economic Acropolis to explain our problems away.

“No one is going to believe if we say our problems are because of Greece. Our problems are self-inflicted”, says the celebrated banker, reasoning that the “root cause of India’s troubles lies in a decline in its values”.

“It isn’t a question of some fiscal, inflation or some other problem like a fall in the value of the rupee. It doesn’t have to do with the change in recent times in our tastes with regard to music, clothes, marriage or some social mores. Those are irrelevant. What is hurting is that our core values are disappearing and it has been six decades of decline with the political, economic and industrial leaderships dropping in integrity,” he says. Blending his characteristic wit with banking analogy, Vaghul says,

“the root cause of our financial crisis is that we have created derivatives without underlying assets,” referring to the decline in values in all spheres of life. Holding forth on the importance of upright leadership at an event here to remember banking stalwart and former SBI chairman R. K. Talwar, Vaghul said work ethics ought to be the cornerstone on which to build careers and industry and that the decline in values witnessed all around reminded one of the importance of the philosophy of those like Talwar, who thought everyone was an instrument of the divine.

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Corporate anonymity — Incorporation with limited liability is a privilege. It should not include anonymity.

Limited liability — A commercial venture that protects its shareholders from personal bankruptcy —is one of the greatest wealth-creating inventions of all time. The law allows companies to borrow money, to take risks and to make contracts as if they were people, but without the human beings who own it going bust if things go wrong, as they would in an unlimited partnership.

Limited liability allowed Elizabethan adventurers to finance voyages to spice islands; it allows Silicon Valley technologists now to make similarly risky bets. But limited liability is a concession — something granted by society because it has a clear purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to withdraw that unjustified perk deserve to succeed. In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a company while hiding or disguising the ultimate beneficial owner.

This is of great use to wrongdoers, and a huge headache for those who pursue them. Anonymously owned companies can buy property, make deals (and renege on them), launch intimidating lawsuits, manipulate tenders — and disappear when the going gets tough. Those who seek redress run into baffling bureaucracy and a legal morass. Seeking real names and addresses means dealing with lawyers and accountants who see it as their job to shield their clients from nosy outsiders.

Owning up

Reform ought to be simple. Anyone registering a limited company should have to declare the names of the real people who ultimately own it, wherever they are, and report any changes.

Lying about this should be a crime. Some dodgy places will try to hold out. But anti-money-laundering rules show international co-operation can work. You can no longer open an account at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited company.

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How to declutter your mind.

By life overloads our senses with a barrage of sensations: information, sights, sounds and choices. We have portable devices that inform, entertain, update and connect. We are not designed to deal with so much information all at once. The noise keeps us from focussing on what matters, keeping us disconnected from the big picture.

Breath: Take a few deep breaths and relax. Concentrate on your breathing as it comes in and goes out of your body. This has a calming effect and allows other thoughts to float away.

Write it down: Pen down your thoughts. It helps to get them on paper and off your mind. This keeps your head from being filled with everything you need to do and remember. List and prioritise: Tasks that are critical to do today, tasks that you need to do in the next 1-2 weeks — prioritise what’s urgent and important.

Eliminate: Now that you’ve identified the essential, identify what’s not essential and eliminate those items. It declutters your mind really fast.

Decide now: List the things which you are yet to decide. Stop procrastinating and tackle them. Do a physical activity: Spending some physical energy clears the mind. Reduce TV time: It fills your head with noise. By reducing it, you will find that you have time for the more important things in life.

Take a break: Short breaks during work hours will help you feel more re-energised and fresh. Go slow: Life is not a race all the time. Do things one at a time. Relax and move at your own pace. As a result, your mind is less hassled.

Forgive and forget: Harbouring negative emotions of anger and frustration only add to the mental stress.

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Time for change — The country needs a new government, under a new leader.

The second UPA government is observing its third anniversary. The second of those three years saw rampant and large-scale corruption emerge as a hot-button issue. The third and latest year has been disastrous for the economy. So the two principal attributes credited to Prime Minister Manmohan Singh — as a man of probity and as the author of economic reforms — have ceased to be political assets for the government. At the heart of the government’s problems is the dyarchy that prevails, something which the Westminster system of parliamentary government is simply not equipped to deal with. Political power rests with Sonia Gandhi, and she therefore has an important say in what must happen. In practice, therefore, the prime minister serves so long as he enjoys her confidence, and he has to consult her on ministerial appointments. More importantly, he cannot dispense with any of them if he so chooses. This fundamentally undermines his authority in the Cabinet, a situation which many ministers have exploited to thumb their noses at him.

Many other things are wrong with this government. For a start, its leading lights are simply too old. The prime minister will be 80 in a few months, while the foreign minister is already 80. Mr. Mukherjee is 77, and Mr. Antony 71. Among those exercising the sovereign functions of the state, only Mr. Chidambaram (67) is below 70. In the Cabinet as a whole, 15 of 34 ministers are 70 or older. Any government with so many old people, who have little to look forward to other than political survival for a few more years, is likely to be short on energy and initiatives, and tied to old ways of thinking. It also matters that most of the stalwarts in the Cabinet are political lightweights who have no real clout with voters in their states.

A lightweight prime minister has around him a bunch of other lightweights. This may have to do with the nature of the Congress party — if it is to be protected and preserved as family property, the party’s only real vote-getters must be from the Gandhi family; and young ministers like Jyotiraditya Scindia and Sachin Pilot cannot be allowed to flower too early or they might outshine Rahul Gandhi. It is frequently said that the bane of this government has been its recalcitrant allies. Perhaps, but how much of the failure to carry them along rests with the Congress? How often has the UPA actually met as an alliance? Why does it not have a common minimum programme, which everyone has agreed on? Why is there no effective system of discussion and consultation? Is it simply because the leading lights of the UPA lack political ability — the prime minister is reticent if not retiring, the home minister gets people’s backs up, and the finance minister has too much on his plate to focus on anything in particular? In any case, the ministerial mathematics tells its own story: 28 out of 34 Cabinet posts are with the Congress, as also all seven positions of minister of state with independent charge; that’s a score of 35 out of 41. Of the six posts with five allies, the government has got almost unstinting support from Sharad Pawar’s Nationalist Congress, Farooq Abdullah’s National Conference and Ajit Singh’s Rashtriya Lok Dal. When push came to shove, the Dravida Munnetra Kazhagam too played along, even allowing its Cabinet representation to shrink. The sole problem case can be said to be Mamata Banerjee. Is this really an unmanageable situation, or a failure of management?

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Lionising the indicted — Politics must reconnect with respect for law, propriety.

In Punjab, the declared killer of a former state chief minister is honoured by those speaking in the name of a whole community. In Tamil Nadu, Andimuthu Raja returns to his home state as a conquering hero, after having had to resign as communications minister and then spending 15 months in jail. In the first case, the killer is awaiting execution, while in the second the trial is still to get under way.

In that sense, the two are on different planes. But it is necessary to ask whether the Dravida Munnetra Kazhagam (DMK) is no better than some of the Akali factions when they cock a defiant snook at the law. It was left to the General who led Operation Bluestar to express his unhappiness at a memorial being built in memory of those killed by soldiers during Bluestar, since those killed included terrorists and armed separatists.

As for Mr. Raja, he is technically innocent, since no court has declared him guilty, but he has been indicted in no uncertain terms, as a simple reading of the Comptroller and Auditor General’s (CAG’s) report on the telecoms scam shows. He twisted the principle of ‘first-come-first-served’ by fixing arbitrary cut-off dates and other criteria in such a manner as to make the ultimate choice of licensees completely arbitrary, and therefore devoid of principle. Even when it came to simple paperwork, he gave licences to companies that did not qualify or were not eligible because they had not given the prescribed information or the prescribed documentation in time. Whether he committed any crime is something that is yet to be determined, as also the question of any quid pro quo. But on the evidence already set forth, it is clear that Mr. Raja is not someone who should be getting lionised by any serious political party, given that his handling of a ministerial portfolio did not set standards worthy of emulation. That the DMK has chosen to lionise such a person tells the country that politics in Tamil Nadu is as disconnected from propriety as it is in Punjab.

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White paper on Black Money:

Generation of black money and its stashing abroad in the tax havens and offshore financial centres has dominated discussion and debate in the Parliament and in public forum in recent years. In the White Paper on Black Money recently laid before the Parliament this problem and its complexities have been discussed in detail. In this report para 5.2.75 deals with ‘Enhancing the Accountability of Auditors’ which reads as under.

“5.2.75 Unlike many developed countries, Auditors in India have not been requisitely accountable, resulting in frequent undermining of this important aspect. Apart from recent cases of distortionary corporate governance involving highly reputed firms, cases are detected regularly by the regulatory authorities where the Auditors have failed to point out gross violations and even blatant misrepresentations. In the absence of adequate effective provisions, the Auditors are hardly ever held accountable for these lapses. Another aspect of this problem is the way in which a firm opts for an Auditor in this environment of low accountability and prevalent evasion, since a strict Auditor ready to blow the whistle can hardly expect to thrive amidst competitors, many of whom may be more than willing to co-operate and compromise at different levels. As a result, a very important regulatory tool is virtually losing its role in contributing towards greater compliance. There will be need in future to look into various aspects of the functioning and regulation of the role of Auditors and various other professionals verifying the declarations and statements made by firms and ensure that there are adequate safeguards and sufficient accountability of such professionals.”

Such sweeping remarks about our profession in an official document laid before the Parliament indicate the present thinking in the minds of these who govern and regulate our profession. Members of ICAI should adequately respond to such remarks.

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EAC opinion – Revenue recognition in case of construction contracts

Facts:

A public sector company (‘company’), listed in the stock exchanges, is engaged in the field of engineering, manufacture of equipments, erection & commissioning of power projects. In power project business, the contracts received by the company are either Engineering, Procurement and Construction (EPC) contracts or Boiler, Turbine and Generator (BTG) Packages, where civil works and Balance of Plant (BOP) package items are not in the scope. The normal execution period of a contract ranges between 3 to 5 years. The scope of the contract includes supply of equipments, erection, commissioning, ensuring guarantee output from the machines, completing the trial operation and synchronising the plant to the grid.

The company has stated that long-term construction contracts are obtained by the company’s marketing wing which allocates the scope and value to various manufacturing units and regions/ sites for execution. The units/regions bill the customers based on Billing Break Up (BBU) agreed with the customers.

The accounting policy of the company for revenue recognition in respect of construction contracts is on percentage completion method based on percentage of actual cost incurred up to the reporting date to the total estimated cost of the contracts. Actual cost incurred up to reporting period is worked out on actual cost incurred for each contract in respect of items manufactured and physically dispatched to the project site. Further, in power sector regions/sites, actual cost incurred towards engineering, commissioning, etc. by region/site is considered for working out percentage of completion for revenue recognition. Items like steel, cement and bought-outs directly supplied from supplier to project site and billed to the customer are also considered as part of actual cost incurred for working out percentage of completion for revenue recognition.

Query

On the above facts, the company has sought the opinion of the EAC: (a) whether the practice of cost of manufactured items dispatched to project site alone being considered as ‘cost incurred’ without considering the cost of raw material in stocks, works in progress at the plant, finished goods at stores as cost incurred is in line with the revenue recognition principle as per AS-7?, (b) In case of erection sites, whether the cost of cement and steel procured and delivered at the project site, specific to the project, in respect of which billing has been done as per the BBU agreed with the customer can be considered as ‘cost incurred’ in working out the percentage of completion as per AS-7 and whether the same is in line with the revenue recognition principle as per AS-7?, and (c) Whether change in estimated revenue and estimated cost in respect of long-term contracts executed over a longer period needs to be disclosed as ‘change in estimate’ as per AS-5?

Opinion:

After considering paragraphs 21, 29 and 30 of AS-7, the Committee is of the view that determination of contract costs incurred for calculating stage of completion depends upon the performance of contract activity rather than mere incurrence of cost. Costs that relate to future activity are to be recognised as ‘work in progress’. Accordingly a judgment is to be exercised by the management while determining the contract costs incurred considering various factors, such as terms and specifications of the contract, identifiability with the contact, achievement of milestone in relation to the contract, etc.

In view of the above, the practice of the company to consider the cost of manufactured items dispatched to the project site alone as ‘cost incurred’ is not correct, since mere event of dispatch can not be considered as a completion of a stage and may not trigger revenue recognition.

As regards steel and cement procured and delivered at the contract site and billed to the customer cannot trigger considering a cost as ‘contract cost incurred’. These items are general in nature for a construction activity and cannot be said to be specific for a project even though supplied directly to the contract site. Accordingly, this should be considered for determining ‘contract cost incurred’ only when these have been used/ applied for performance of contract activity. Till that time, these should be considered as ‘work in progress’.

Change in estimate on account of changes in estimated contract revenue and costs should be disclosed in accordance with AS-5 read with AS-7. Accordingly, the effect of change in estimated contract revenue and cost which has or is expected to have a material effect in the current period or subsequent periods needs to be disclosed. However, if it is impracticable to quantify the amount of change, the fact should be disclosed. [Please refer pages 1825 to 1830 of C.A. Journal, June, 2012]

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Section 37(1) — Whether payments towards noncompete fees can be claimed as deferred revenue expenditure — Held, Yes.

31. (2011) 131 ITD 385 (Chennai) Orchid Chemicals & Pharmaceuticals Ltd. v. ACIT A.Y.: 2003-04. Dated: 18-6-2010

Section 37(1) — Whether payments towards non-compete fees can be claimed as deferred revenue expenditure — Held, Yes.

Facts:

The assessee was engaged in the business of manufacture and export of bulk drugs and other pharmaceuticals. The assessee in the previous year paid a sum of Rs.24 crore to three of the parties for acquiring the Intellectual property rights, brands and drug licences. The above payment also included a sum of Rs.2 crore paid towards non-compete clause. The assessee claimed the above expense as revenue expenditure. The Assessing Officer refused the claim on the basis that the expenditure incurred for non-compete agreement was for a fairly long period of four years and as it was of enduring nature, it cannot be treated as revenue. On appeal the Commissioner (Appeals) upheld the order. The assessee thus appealed to the Tribunal. The assessee raised additional grounds which were alternative to other grounds. The assessee contended that the sum paid may be allowed as deferred revenue expenditure or alternatively depreciation on the same should be allowed.

Held:

(1) The payment made for non-compete fee cannot certainly be treated as revenue expenditure in view of decisions in the case of Hatsum Agro Products Ltd. (ITA No. 1200/Mad./1999, dated 27th July, 2005), Asianet Communications (P) Ltd. (ITA No. 4437/Mad./2004, dated 3th January, 2005) (ITA No. 615/Mad./1999, dated 10th February, 2005) and Act India Ltd. No doubt section 28(va) of the Act considers a receipt of non-compete fee as income but it would not by itself lead to a conclusion that any payment of like nature would be on revenue account only. (2) Further, relying on the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. (225 ITR 802) (SC), the expenses should be held in the nature of deferred revenue expenses since the noncompete agreement precluded the sellers from engaging in a competing activity for a period of four years. (3) Hence, the payment made for non-compete fee should be allowed as deferred revenue expenses over a period of four years.

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CENVAT credit — Bills of entry showing address of some other unit but goods received at the factory — Credit cannot be denied even if it was not claimed immediately on receipt of goods and even if the address not mentioned on the bill of entry.

43. (2012) 26 STR 395 (Tri.-Mumbai) SGS India Pvt. Ltd.

CENVAT credit — Bills of entry showing address of some other unit but goods received at the factory — Credit cannot be denied even if it was not claimed immediately on receipt of goods and even if the address not mentioned on the bill of entry.

Facts:

The appellant received goods at the factory, however, the bills of entry showed the address of their head office. Moreover, the credit was claimed after a span of one year. The Department relying on the case of Marmagoa Steel Ltd. (2004) 178 ELT 480 (T) denied the credit on two grounds: the address of the factory was not mentioned in the bills of entry and the credit was supposed to be claimed immediately on receipt of goods.

Held:

The case on which the Department was relying had been reversed by the Bombay High Court and such reversal has been affirmed by the Supreme Court 229 ELT 481 (SC). The credit cannot be denied to the appellant merely on the ground that credit was not taken immediately. The Tribunal further observed that not taking credit immediately affected the assessee more than the Revenue.

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Construction services — Construction completed before the introduction of Service tax on such services — However, completion certificate obtained by the appellant after the introduction of the levy — Held, it is a very small part of the contract and for that reason Service tax cannot be demanded.

42. (2012) 26 STR 367 (Tri.-Del.) Ashokumar Jain v. CCE, Indore.

Construction services — Construction completed before the introduction of Service tax on such services — However, completion certificate obtained by the appellant after the introduction of the levy — Held, it is a very small part of the contract and for that reason Service tax cannot be demanded.

Facts:

The appellant was a construction service provider (a civil contractor). The appellant had undertaken a works contract of constructing 10 flats prior to levy of Service tax. However, the payment was realised post levy of Service tax on construction services. The Department levied Service tax on the amount received post the introduction of the levy by the appellant.

Held:

The construction was completed long before Service tax was imposed on construction services. Even if the procuring completion certificate was the responsibility of the appellant, it was a very small part of the contract. For this reason, Service tax could not be levied.

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Penalty — Service tax registration not obtained and Service tax not paid — However, the details of commission paid available in the balance sheet — The details were submitted as soon as asked by the Department — Substantial portion of Service tax paid — Nonpayment not considered as wilful — Penalty set aside.

41. (2012) 26 STR 359 (Tri.-Del.) DCM Textiles v. CCE, Gurgaon.

Penalty — Service tax registration not obtained and Service tax not paid — However, the details of commission paid available in the balance sheet — The details were submitted as soon as asked by the Department — Substantial portion of Service tax paid — Non-payment not considered as wilful — Penalty set aside.

Facts:

The appellant a manufacturer of cotton yarn, for procuring export orders, paid commission to various agents located in different countries. No Service tax was paid on the same under reverse charge. The Department levied penalties along with tax and interest. The appellant pleaded that non-payment of taxes was due to bona fide belief that services rendered by foreign agents are not taxable within India. The Commissioner (Appeals) upheld the levy of penalty.

Held:

To levy penalty u/s.78, it is necessary to prove the mala fide intention of the assessee. In the present case, the appellant disclosed all the relevant information in the balance sheet. Moreover, all the requisite details were provided on being asked by the Department. Relying on Cosmic Dye Chemical 75 ELT 721 (SC), the Tribunal held that the appellant had disclosed all the information and therefore, penalty u/s.78 could not be imposed.

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Cenvat credit — Service tax on group medical insurance policy — Mandatory requirement — Held, though a welfare measure, is in relation to business as defined in the definition of ‘input service’ — Eligible as credit.

40. (2012) 26 STR 383 (Kar.) CCE, LTU, Bangalore v. Micro Labs Ltd.

Cenvat credit — Service tax on group medical insurance policy — Mandatory requirement — Held, though a welfare measure, is in relation to business as defined in the definition of ‘input service’ — Eligible as credit.

Facts:

The respondent claimed credit of Service tax paid on group medical insurance. It was mandatory on the part of the respondent u/s.38 of the Employees State Insurance Act, 1948. The credit was denied on the ground that insurance service was not specified in the definition of ‘input service’.

Held:

Merely because the service is not specified in the definition, credit cannot be denied. Service tax on all those services which have been utilised by the assessee directly or indirectly in or in relation to the manufacture of the final products is eligible as CENVAT credit. Employee Mediclaim Insurance though a welfare measure, is a statutory obligation which the assessee needs to obey. CENVAT credit admissible.

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