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A.P. (DIR Series) Circular No. 50, dated 4-5-2010 — Release of foreign exchange for visits abroad — Currency component.

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Part B : Indirect Taxes


Part C : RBI/FEMA

45 A.P. (DIR Series) Circular No. 50, dated 4-5-2010 —
Release of foreign exchange for visits abroad — Currency component.

Presently, travellers proceeding to countries other than
Iraq, Libya, Islamic Republic of Iran, Russian Federation and other Republics of
Commonwealth of Independent States are permitted to carry foreign exchange in
the form of foreign currency notes and coins, up to US $ 2,000 or its
equivalent.

This Circular has increased this limit from US $ US $ 2,000
or its equivalent to US $ 3,000 or its equivalent with immediate effect, without
the prior permission from the Reserve Bank. Accordingly, travellers proceeding
to countries other than Iraq, Libya, Islamic Republic of Iran, Russian
Federation and other Republics of Commonwealth of Independent States are
permitted to carry foreign exchange in the form of foreign currency notes and
coins, up to US $ 3,000 or its equivalent. However, travellers proceeding to
Iraq or Libya are permitted to carry US $ 5,000 or its equivalent, out of the
overall foreign exchange released and travellers proceeding to the Islamic
Republic of Iran, Russian Federation and other Republics of Commonwealth of
Independent States can carry the full entitlement of foreign exchange in the
form of foreign currency notes and coins.

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A.P. (DIR Series) Circular No. 49, dated 4-5-2010 — Notification No. FEMA 205/2010-RB dated 7-4-2010 — Foreign Direct Investment (FDI) in India — Transfer of shares/Preference shares/Convertible debentures by way of sale — Revised pricing guidelines.

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Part C : RBI/FEMA

44 A.P. (DIR Series) Circular No. 49, dated 4-5-2010 —
Notification No. FEMA 205/2010-RB dated 7-4-2010 — Foreign Direct Investment
(FDI) in India — Transfer of shares/Preference shares/Convertible debentures by
way of sale — Revised pricing guidelines.

This Circular contains the revised the guidelines for
transfer of equity shares from a resident to a non-resident and from a
non-resident to a resident. The guidelines are applicable to transfer of shares
of an Indian company in all sectors. The said guidelines are as under :

(a) Where shares of an Indian company are listed on a
recognised stock exchange in India — The price of shares transferred by way of
sale shall not be less than the price at which a preferential allotment of
shares can be made under the SEBI Guidelines, as applicable, provided that the
same is determined for such duration as specified therein, preceding the
relevant date, which shall be the date of purchase or sale of shares.

(b) Where the shares of an Indian company are not listed on a
recognised stock exchange in India — The transfer of shares shall be at a price
not less than the fair value to be determined by a SEBI registered Category-I
Merchant Banker or a Chartered Accountant as per the discounted free cash flow
method.

The price per share arrived at should be certified by a SEBI
registered Category-I Merchant Banker /Chartered Accountant. Also, when the
transfer is from a non-resident to a resident, the price of shares transferred
by way of sale, must not be more than the minimum price at which the transfer of
shares can be made from a resident to a non-resident.

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Clarification regarding availment of credit on input services — Circular No. 122/03/2010-ST, dated 30-4-2010.

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Part B : Indirect Taxes


43 Clarification regarding availment of credit on input
services — Circular No. 122/03/2010-ST, dated 30-4-2010.

By this Circular following issues regarding avail-ment of
credit on Input services have been clarified :

(a) As per Rule 4(7) of the CENVAT Credit Rules, 2004, the
CENVAT credit on input services is available only on or after the day on which
payment is made of the value of input service and service tax. The Rule however,
does not mention form of payment, nor does it place restriction on payment
through debit in books of account or book adjustment. Therefore, it is clarified
that if the service charges as well as the service tax have been paid in any
prescribed manner so as to be entitled to be called ‘gross amount charged’
within the meaning of S.67(4) of the Finance Act, 1994, then credit should be
allowed under said Rule 4(7).

(b) In the cases where the receiver of service reduces the
amount mentioned in the invoice/bill/challan and makes discounted payment, then
it should be taken as final payment towards the provision of service. The
invoice in fact stands amended to that extent and accordingly credit taken would
be equivalent to the amount that is paid as service tax. The mere fact that
finally settled amount is less than the amount shown in the invoice, does not
disentitle the service receiver to take credit of input service tax paid.

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No Service Tax on Container Detention Charges — Circular No. 121/3/2010-ST, dated 26-4-2010.

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Part B : Indirect Taxes


42 No Service Tax on Container Detention Charges — Circular
No. 121/3/2010-ST, dated 26-4-2010.

By this Circular it has been clarified that in respect of
marine containers, full load of container is taken out of port and activity of
stuffing or de-stuffing is carried out at the place of exporter/ importer. The
shipping companies provide a pre-determined period within which the container is
to be returned which is called the pre-holding period. In case there is delay on
the part of the customer in returning the container, the charges known as
‘detention charges’ are collected. Such charges can best be called as ‘Penal
Rent’ for retaining the container beyond predetermined period. In such view of
the matter, to retain container beyond predetermined period is neither service
provided in the nature of Business Auxilliary Service, nor is it an
infrastructural support in the nature of Business Support Services. Therefore,
the amount collected as detention charges is not chargeable to service tax.


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No Service Tax on Re-insurance Commission — Circular No. 120(a)/2/2010-ST, dated 16-4-2010.

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Part B : Indirect Taxes


41 No Service Tax on Re-insurance Commission — Circular No.
120(a)/2/2010-ST, dated 16-4-2010.

By this Circular it has been clarified that the insurance
company in terms of S. 101A (Part IV-A) of the Insurance Act, 1938 is required
to re-insure a specified percentage of sum insured with another insurance
company. The shared amount of expenditure is commonly known as ‘Commission’
though strictly it is not in the nature of commission. Since the arrangement
between insurance company and re-insurance company is only sharing of expense
and there is no question of services provided by the insurance company to the
re-insurer for consideration. Hence question of charging service tax even under
any other taxable service does not arise.

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Assessee rendering services in the nature of Modular Employable Skill Course not to pay Service Tax — Notification No. 23/2010-ST, dated 29-4-2010.

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Part B : Indirect Taxes


40 Assessee rendering services in the nature of Modular
Employable Skill Course not to pay Service Tax — Notification No. 23/2010-ST,
dated 29-4-2010.

By this Notification exemption has been granted to taxable
services referred to in sub-clause (zzc) of clause (105) of S. 65 when provided
in relation to Modular Employable Skill Courses approved by the National Council
of Vocational Training.

To avail such exemption, the Vocational Trainer should be
registered under the Skill Development Initiatives Scheme with the Directorate
General of Employment and Training, Ministry of Labour & Employment, GOI.

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Amendments to MVAT Rules 2005 — Circular No. 18T of 2010, dated 18-5-2010.

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Part B : Indirect Taxes


39 Amendments to MVAT Rules 2005 — Circular No. 18T of 2010,
dated 18-5-2010.

Retailer opting for Composition of Tax and dealer having
liability to file six-monthly return shall be required to pay tax, from the end
of the six monthly period, within 30 days instead of 21 days and additional time
of 10 days from due date to upload the return continues to be available.
Amendment would apply for six-monthly period ending on 30th September, 2010 and
thereafter. Newly registered dealer now required to file quarterly return
instead of six-monthly return.

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Salient features of amendments explained — Trade Circular No. 17T of 2010, dated 17-5-2010.

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Part B : Indirect Taxes


38 Salient features of amendments explained — Trade Circular
No. 17T of 2010, dated 17-5-2010.



(i) Amendment to Maharashtra State Tax on Professions, Trade, Callings and
Employment Act, 1975 w.e.f. 1st May, 2010.


This amendment will enable audit of the esta-blishment of an
employer under the PT Act so far as it relates to the disbursement of salary,
wages, etc. in line with the MVAT Act, 2002. It is decided to extend procedure
of electronic return and electronic payment to the P.T. Act also. A separate
Trade Circular for operational modalities related to audit, electronic filing
and electronic payment will be issued shortly.

(ii) Amendment to Maharashtra Tax on Luxuries Act, 1987 w.e.f.
1st May, 2010 :

If charge for luxury per day per accommodation is less than
Rs.750, then luxury tax would be Nil, if such luxury is between Rs.751 to
Rs.1,200, luxury tax would be 4% and for luxury above Rs.1,200, luxury tax would
be at 10%.

It is decided to extend procedure of electronic return and
electronic payment to Luxury Tax also.

A separate Trade Circular for operational modalities related
to electronic filing and electronic payment will be issued shortly.

(iii) Amendments to Maharashtra Value Added Tax Act, 2002
w.e.f. 1st May, 2010 :

(i) If there is change in nature of business like
manufacturing to trading or import or vice versa, or opened a new bank account
or closed existing account, such information shall be furnished within 60 days
from the date of occurrence of such changes.

(ii) Dealer required to file revised return due to findings
by MVAT Audit within 30 days of submission of MVAT Audit report.

(iii) Minimum penalty for non-issuance of tax invoice or cash
memorandum increased to Rs.1,000.

(iv) Failure to comply with the notice in respect of any
proceedings under the Act increased from Rs.1,000 to Rs.5,000.

(v) Increase in time limit for levy of penalty from 5 years
to 8 years.

(vi) For Developers a Composition Scheme — This scheme will
be optional and apply to all agreements entered into from 1st April, 2010
onwards. A Notification will be issued shortly.

(vii) In respect of refund on application in Form-501,
amendments are made for reduction of refund if declarations or certificates as
required under the Central Sales Tax Act, 1956 are not received or tax has not
been paid on earlier sales by the vendor.

(viii) Existing turnover limit of Rs.40 lakh increased to
Rs.60 lakh for applicability of MVAT Audit from financial year 2010-11.

(ix) PSI holding unit would be required to get his accounts
audited irrespective of turnover.

(x) Order levying interest u/s.30(2) or u/s.30(4),
Intimations issued u/s.63(7) and Order passed by the Joint Commissioner U/ss.(1)
and (2) of S. 35 are now non-appealable.

(xi) Now it is mandatory for the selling dealer to state TIN
of the purchasing dealer on the tax invoice, failing which such invoice will not
be treated as tax invoice and purchasing dealer will not be entitled to claim
set-off in respect of that invoice.

(xii) Certain notifications and Schedule entries amended.

(xiii) The amended tax rates shall be effective from 1st May
2010

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Income-tax Act, 1961 — Section 139A(5B) and S. 272B — Whether Press Release dated September 25, 2007 and February 12, 2008 issued by CBDT brings down the rigours of S. 139A(5B) —Held : Yes. Whether penalty u/s. 272B cannot be levied in a case where an ass

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  1. 2009-TIOL-257-ITAT-Bang

Hewlett-Packard Globalsoft Pvt. Ltd. vs. DCIT.

A.Y. : 2008-2009. Date of Order : 25.3.2009

Income-tax Act, 1961 — Section 139A(5B) and S. 272B —
Whether Press Release dated September 25, 2007 and February 12, 2008 issued by
CBDT brings down the rigours of S. 139A(5B) —Held : Yes. Whether penalty u/s.
272B cannot be levied in a case where an assessee has submitted Permanent
Account Number of such number of deductees as satisfies the threshold limit
mentioned in the Press Release issued by CBDT —Held : Yes.

 

Facts :

The Assessing Officer (AO) found that the assessee had
filed its quarterly statement in Form No. 24Q for the 3rd quarter of financial
year 2007-08 wherein it had not furnished Permanent Account Number (PAN) of
2154 deductees out of the total of 29,733 deductees. He also found that
details furnished for 38 deductees were not in accordance with the provisions
of S. 139A(5B) of the Act. In response to the show-cause notice issued by the
AO the assessee submitted that the number of deductees whose PAN had been
furnished by the assessee exceeded the threshold limit of 90% stated in the
press release issued by the CBDT and therefore penalty u/s. 272B is not
leviable. However, the AO was of the view that the compliance to the extent of
threshold limit stated in press release issued by the CBDT is only for filing
quarterly TDS statements and that such compliance does not debar an AO from
initiating penal action. He, accordingly, levied penalty u/s. 272B. The CIT(A)
confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to
the Tribunal.

Held :

The Tribunal upon going through the Press Release dated
September 25, 2007 and also subsequent Press Release dated February 12, 2008,
held that it is evident from paras 2 and 3 of the Press Release that the CBDT
has prescribed a threshold limit for compliance i.e., to provide
information of PAN data by virtue of S. 139A(5B)(iv) of the Act. It held that
the sole intention of the Press Release is to bring down the rigour of the
provision of S. 139A(5B) and 272B keeping in view the laborious and cumbersome
task of compliance.

Since the assessee had furnished PAN data to the extent of
93% of the total deductees there was compliance in furnishing PAN data in
accordance with the threshold limit of 90% prescribed in press release by the
CBDT, the penal provisions were held to be not attracted. Accordingly, the
Tribunal deleted the penalty levied u/s. 272B of the Act.


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Income-tax Act, 1961 — Section 271(1)(c) — Concealment penalty — Impact of the decision of the Apex Court in Dharmendra Textile Processors on the scheme of S. 271(1)(c) — Whether even a civil liability for penalty can be invoked only when the conditions f

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  1. 2009-TIOL-278-ITAT-Pune

Kanbay Software India Pvt. Ltd. vs. DCIT

A.Y. : 2002-2003. Date of Order : 28.4.2009

Income-tax Act, 1961 — Section 271(1)(c) — Concealment
penalty — Impact of the decision of the Apex Court in Dharmendra Textile
Processors on the scheme of S. 271(1)(c) — Whether even a civil liability for
penalty can be invoked only when the conditions for imposition of penalty
under Section are satisfied — Held : Yes. Whether once the mandate of S.
271(1)(c), read with Explanations thereto are satisfied, there is no further
onus on the AO to establish mens rea —Held : Yes. Whether ratio decidendi of
the judgment of Apex Court in Dharmendra Textile Processors and Ors. is
confined to treating the willful concealment as not vital for imposing penalty
u/s. 271(1)(c) and not that in all cases where addition is confirmed, the
penalty shall mechanically follow — Held, Yes.

 

Facts :

The assessee company was engaged in the business of
development and export of computer software. The assessee had two units
eligible for deduction u/s. 10A. For assessment year 2002-03, in the first
unit the assessee had made profits, while in the second unit, the assessee
incurred losses. The assessee filed a revised return of income for AY 2002-03,
wherein it claimed carry forward of loss and unabsorbed depreciation of second
unit and claimed a deduction u/s. 10A on the profits of first unit without
setting off loss and depreciation of the second unit. Appropriate disclosure
was made in the return of income. The Assessing Officer (AO) rejected this
claim and the assessee accepted the decision of the AO. The AO initiated
proceedings for furnishing inaccurate particulars of income and levied penalty
u/s. 271(1)(c) which action of the AO was confirmed by CIT(A). Aggrieved,
assessee preferred an appeal to the Tribunal.

Held :

The Tribunal deleted the penalty and held as under :

(a) On first principles, penalty u/s. 271(1)(c) is not
simply a consequence of an addition being made to the income of the
assessee. Unless it is established that there is concealment of income or
furnishing of inaccurate particulars or it is established that on the facts
of the case, concealment of income can be deemed in accordance with the
provisions of law, the penalty provisions cannot be invoked at all,
irrespective of whether penalty is a civil liability or a criminal
liability.

(b) The judgment of the Supreme Court (SC) in UOI vs.
Dharmendra Textile Processors
(306 ITR 277) has to be understood in the
correct perspective. Penalty u/s. 271(1)(c) has been held to be a ‘civil
liability’ in contradistinction to prosecution u/s. 276C. It is wrong to
infer that because the liability is a ‘civil liability’ it ceases to be
penal in character. There is no contradistinction in a liability being a
civil liability and the same liability being a penal liability as well,
though a civil liability cannot certainly be a criminal liability as well.

(c) The only impact of a liability being a civil
liability is that mens rea or the intentions of the assessee need not
be proved. Unless contravention of law takes place and unless the conditions
for imposition of penalty u/s. 271(1)(c) are satisfied, even a civil
liability cannot be invoked. The action which triggers the civil liability
is the lapse on the part of the assessee.

(d) An addition made during the course of assessment
proceedings, by itself, cannot be enough to initiate, leave aside conclude,
penalty proceedings u/s. 271(1)(c).

(e) The proposition that mens rea need not be
proved before penalty u/s. 271(1)(c) can be imposed was not laid down by SC
in Dharmendra Textile for the first time. Even in the case of K. P.
Madhusudan (251 ITR 99), a three-judge Bench of SC had so held.

(f) Dharmendra Textiles is not an authority for the
proposition that penalty is an automatic consequence of an addition being
made to the income of the taxpayer for the reason that whether it is a civil
liability or a criminal liability, penalty can only come into play when
conditions are satisfied. All that Explanation 1 to S. 271(1)(c) is to shift
the onus of proof from AO to the assessee; instead of AO being under an
obligation to establish the mala fides of the assessee, the onus is
now on the assessee to establish his innocence and righteous conduct.

(g) The observations in Dharmendra Textile to the effect
that penalty is to provide a remedy for loss of Revenue cannot be construed
to mean that penalty can be imposed as an automatic consequence for addition
to returned income, given the scheme of S. 271(1)(c).

(h) An assessee’s statutory obligation u/s. 139(1) is to
give correct and complete information with the return of income. If this is
complied with, then there is no contravention which can attract even a civil
liability. The fact that additions and disallowances are made by the AO does
not mean that there is a breach of the obligation. The proposition that just
because penalty u/s. 271(1)(c) is a civil liability, it must mean that
penalty can automatically be levied on the basis of any addition to income
is not correct.

Section 143 — Notice under Section 143(2) is required to be served on assessee within 12 months from end of month in which return of income has been filed and mere issuance of notice within a period of 12 months is not sufficient —The onus to prove servic

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[2009] 116 ITD 123 (Del.)

BHPE Kinhill Joint Venture


vs. Additional DIT (Delhi).

A.Y. : 2000-01 Dtd. : December 14, 2007

Section 143 — Notice under Section 143(2) is required to be
served on assessee within 12 months from end of month in which return of
income has been filed and mere issuance of notice within a period of 12 months
is not sufficient —The onus to prove service of notice on assessee within
statutory period is upon Assessing Officer.

 


The assessee filed return of income on 22-10-2001. The
Assessing Officer issued notice by way of foreign air registered letter on
31-10-2002. The assessee contended that since the notice under Section 143(2),
dated 31-10-2002 had not been received by it by 31-10-2002, the assessment
proceedings were not valid in law. The Commissioner (Appeals) relying on the
decision of the Apex Court in Prima Realty vs. Union of India [1997]
223 ITR 655, held that the Post Office had acted as an agent of the assessee
and, therefore, the date of service under the provisions of Section 143(2)
would be treated as 31-10-2002, which was within time.

On second appeal by the assessee, the ITAT held that :

1) The onus to prove the service of notice on the
assessee within the statutory period is upon the Assessing Officer and not
upon the assessee.

2) In the instant case, the notice was only issued by the
Assessing Officer on 31-10-2002, but neither the same had been received back
by the Assessing Officer nor the Department was able to prove the service of
notice upon the assessee on 31-10-2002. Therefore, the notice under Section
143(2) was not proved to have been served upon the assessee on or before
31-10-2002 by the Department.

3) In the case of Prima Realty vs. Union of India
[supra] the Apex Court was dealing with the payment made by cheque.
The ratio of that case is that whether the addressee has shown his desire
either expressly or impliedly to send a cheque by post, the property in the
cheque passes to him as soon as it is posted. Therefore, the Post Office
acts as an agent of the person to whom the cheque is sent and so the facts
of that case are clearly distinguishable with the facts of the case of the
assessee.

4) In case the Revenue has failed to establish the
service of the notice upon the assessee under Section 143(2) within the
statutory period of limitation provided under the proviso to Section 143(2)
then the assessment proceedings completed by the Assessing Officer in
violation of statutory provision of Section 143(2) are liable to be
cancelled/quashed.

In support of his contention, the assessee has relied upon
the decision of the ITAT Delhi Bench ‘C’ in the case of Whirlpool India
Holdings Ltd. vs. Dy. DIT
rendered in I.T. Appeal No. 330 (Delhi) of 2004
for the assessment year 2000-01, which has also considered the decision of the
Apex Court in the case of Prima Realty (supra). The Tribunal has also
placed reliance on the decision of jurisdictional High Court of Delhi in the
case of CIT vs. Lunar Diamonds Ltd. [2006] 281 ITR 1 (Delhi), wherein
Their Lordships have also discussed the decision of Apex Court delivered in
the case of Prima Realty (supra).

Cases relied upon :



1. Whirlpool India Holdings Ltd. vs. Dy. DIT [IT
Appeal No. 330/Delhi of 2004]

2. Raj Kumar Chawla vs. ITO [2005] 94 ITD 1
(Delhi) (SB).



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S. 50C — Difference between sale consideration of the property shown by assessee and FMV determined by DVO u/s.50C(2) was less than 10% — AO not justified in substituting value determined by DVO for sale consideration disclosed by assessee.

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Part
A: Reported Decisions

28 (2010) 38 DTR (Pune) (Trib) 19
Rahul Constructions v. DCIT
A.Y. : 2004-05. Dated : 12-1-2010

 

S. 50C — Difference between sale consideration of the
property shown by assessee and FMV determined by DVO u/s.50C(2) was less than
10% — AO not justified in substituting value determined by DVO for sale
consideration disclosed by assessee.

Facts :

The assessee received an amount of Rs.19,00,000 as sale
consideration on account of sale of basement of a building. The stamp valuation
authorities adopted the value of Rs.28,73,000. Since the assessee objected to
valuation of the stamp valuation authorities on various grounds, the AO referred
the matter to the DVO who valued the property at Rs.20,55,000. The AO thereafter
substituted this value for the purpose of calculating the capital gain.

The CIT(A) observed that the assessee has not objected to
this valuation either before the DVO or before the AO or even before him.
Distinguishing the decision of the Supreme Court in the case of C. B. Gautam v.
UOI, 199 ITR 530, the CIT(A) upheld the action of the AO.

Held :

As against value of Rs.28,73,000 adopted by stamp valuation
authorities, DVO has determined the FMV on the date of transfer at Rs.20,55,000.
This shows that there is wide variation between the two values. Further, value
adopted by the DVO is also based on some estimate. The difference between sale
consideration shown by the assessee and FMV determined by the DVO is less than
10%. Since such difference is less than 10% and considering that valuation is
always a matter of estimation where some degree of difference is bound to occur,
it was held that FMV determined by the DVO cannot be substituted for the sale
consideration received by the assessee.

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Additions made by AO u/s.40A(2)(b) — Penalty levied — Held : it is not a case of concealment of income or furnishing of inaccurate particulars.

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Part
A: Reported Decisions

27 Jhavar Properties (P.) Ltd.
123 ITD 429 (Mum.)
A.Y. 2001-02. Dated : 10-9-2008

 

Additions made by AO u/s.40A(2)(b) — Penalty levied — Held :
it is not a case of concealment of income or furnishing of inaccurate
particulars.

The assessee was engaged in business of real estate
development and construction. During assessment, it was found by the AO that the
assessee has claimed a sum of Rs.63 lakhs as payment made to sister concern for
job work. After examination of details, the AO found that the value of job
entrusted to the sister concern was only Rs.32,09,974 for which the appellant
made a payment of Rs.63,00,000. He thus disallowed a sum of Rs.30,82,026
u/s.40A(2)(b). This was confirmed by the CIT(A). The AO initiated penalty
proceedings and levied penalty.

Held :

Since, no specific disclosure is required to be made in
respect of income subject to scrutiny u/s.40A(2)(b) in Act or in Rules or in the
form of return of income, the assessee cannot be held guilty of non-disclosure
of income. It is not a case of concealment of income or furnishing of inaccurate
particulars. When additions are made on the basis of estimate and not on account
of any concrete evidence of concealment, penalty was not leviable.

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Exemption available under the law should be granted by the Assessing Officer, even if the assessee has not claimed it in its return of income.

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Part
A: Reported Decisions

26 ACWT v. Ku. Ragini Sanghi
123 ITD 384 (Indore)
A.Ys. : 1997-98 and 1998-99
Dated : 25-1-2008

 

Exemption available under the law should be granted by the
Assessing Officer, even if the assessee has not claimed it in its return of
income.

The assessees are beneficiaries of a trust and enjoy 50%
share of interest in the assets of this trust. The trust owned a flat which was
a residential house. As per the assessment order of the trust, the value of
assets owned by it was to be included in the hands of beneficiaries. Since no
interest in the assets of trust was shown in the original return of
beneficiaries, notice u/s.17 was issued to the beneficiaries. The assesses
submitted that the flat was exempt u/s.5(1)(vi) of the Wealth-tax Act since they
had no other residential house in their names. Thus the value of the flat was
shown as NIL. It was contended on behalf of Department that since the assessee
claimed deduction at the assessment stage and not in the return of wealth, it
should not be allowed.

Held :

S. 5(1)(vi) of the Wealth-tax Act clearly provides for the
exemption of one house and as such, the law as it stood should have been applied
by the AO for granting exemption. There is no need for the assessee to seek
exemption as per law. Even when the assessee has not sought exemption expressly,
the AO should apply the statutory provisions and grant exemption.

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S. 80P(2)(a)(i) — Interest on income-tax refund — Assessable under the head ‘Income from other sources’ — Since it is covered within the expression ‘profits and gains attributable to banking business’, deduction u/s.80P(2)(a)(i) is available.

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Part
A: Reported Decisions

25 (2010) 37 DTR (Mumbai) (SB) (Trib) 194
The Maharashtra State Co-Operative Bank Ltd. v. ACIT
A.Y. : 2000-01. Dated : 22-1-2010

 

S. 80P(2)(a)(i) — Interest on income-tax refund — Assessable
under the head ‘Income from other sources’ — Since it is covered within the
expression ‘profits and gains attributable to banking business’, deduction
u/s.80P(2)(a)(i) is available.

Facts :

The assessee received interest u/s.244A of Rs.34.33 crores
which was included in its total income under the head “Income from Business” and
deduction was claimed u/s.80P(2)(a)(i). This interest has arisen upon favourable
order of Tribunal for earlier assessment years and the resultant refund of
assessment dues collected. The AO denied the deduction u/s.80P(2)(a)(i) in
respect of the same.

Upon further appeal, the CIT(A) confirmed the order of the AO
and has held as under :

(i) The interest was assessable under the head ‘Income from
other sources’.

(ii) The interest on income-tax refund was not attributable
to the banking business.

(iii) The favourable decision of the Tribunal in assessee’s
own case for A.Y. 2001-02 was distinguishable, because in that case the issue
was about the interest u/s.244A arising out of excess deduction of tax at
source.

Held :

The principle of consistency qua the judicial forums is not
unexceptionable. If the subsequent Bench finds it difficult to follow the
earlier view due to any convincing reason such as change in the factual or legal
position or non-raising or non-consideration of an important argument by the
earlier Bench having bearing on the issue, then the earlier view cannot be
thrust upon it and in such a case a reference should be made to a larger Bench.
The appeal in the present case needs to be decided on merits rather than
following the earlier view taken by the Tribunal in its own case. Upon merits,
three issues were identified :

(1) Head of income under which interest on income-tax
refund falls :


In order to categorise income under the head ‘Profits and
gains of business of profession’, it is imperative that income should have
arisen from business carried on by the assessee and Business refers to a
systematic, real and organised activity conducted with a view to earn income.
Payment of income-tax is an event which takes place after the determination of
profits of the business for the year. Eventually when the income-tax was
refunded along with interest u/s.244A, that would also, naturally, be an event
after the determination of income on year-to-year basis. Payment of income-tax
cannot be held to be a business activity or a transaction done during carrying
on of the business. There cannot be an intention of the assessee to earn income
by paying income-tax. Interest on refund of income-tax does not and can never
fall under the head ‘Profits and gains of business or profession’, irrespective
of the fact that the assessee is in banking or non-banking business.

(2) Meaning of expression ‘profits and gains’ of
business as used in S. 80P :


The use of the expression ‘profits and gains of business’ in
S. 80P(2) is to be seen in contradiction to the expression ‘income chargeable
under the head ‘Profits and gains of business or profession’. The latter
expression is used in several Sections of the Act including S. 80E, S.
80HHC(baa), etc. The employment of the expression ‘profits and gains’ in S.
80P(2) demonstrates the intention of the Legislature that the benefit of
deduction is not confined to the income arising directly from the banking
business (as covered by ‘profits’), which falls under the head ‘Profits and
gains of business or profession’, but also includes other items of income (as
covered by ‘gains’), which have some relation with the business of banking even
though they do not fall under the head of business income. Since income-tax was
paid in relation to the banking business, the interest on income-tax refund will
be considered as ‘gain’ (not ‘profit’) of banking business covered within the
expression ‘profit and gains’ of banking business.

(3) Scope of phrase ‘attributable to’ eligible business
:


The scope of the phrase ‘attributable to’ is wider than
‘derived from’. Whereas in the case of the latter, the relation of the income
with the source must be direct and that of the first degree, but in the former
even some commercial or casual connection suffices the test. The expression
‘attributable to’ covers ‘receipts from sources other than the actual conduct of
the business’. The income-tax, on which interest was granted, was utilised to
satisfy the demand raised in relation to the banking business. It is for the
banking business that income-tax was originally paid and subsequently the amount
was refunded along with interest. There exists a commercial and causal
connection between the interest on income-tax refund and the banking business
and hence it can be regarded as attributable to the banking business.

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Undisclosed income on the basis of cheques found during the course of search — Cheques received from various parties as security against advances made in cash out of undisclosed income — Amount not recovered by assessee telescoped against undisclosed inco

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Part
A: Reported Decisions

24 (2010) 37 DTR (Chennai) (TM) (Trib) 233
ACIT v. M. N. Rajendhran
A.Y. : 1-4-1995 to 24-1-2002. Dated : 29-1-2010

 

Undisclosed income on the basis of cheques found during the
course of search — Cheques received from various parties as security against
advances made in cash out of undisclosed income — Amount not recovered by
assessee telescoped against undisclosed income assessed on basis of same
cheques.

Facts :

During course of search, certain cheques were found from
premises of the assessee, which were received from various parties as a security
against loans advanced to them by the assessee in cash out of undisclosed
income. Loans were not repaid as confirmed by the parties. Addition was made by
the AO as an undisclosed income.

Upon further appeal to the CIT(A), addition was deleted on
the basis of his own order in the assessee’s brother’s case on the inference
that on the face of evidence, money lent for money-lending business had not been
recovered as per the statements of debtors placed on record.

The decision of CIT(A) in the assessee’s brother’s case was
upheld by the Tribunal. However, the learned Judicial Member set aside the
matter on the ground that the decision of the Tribunal in the case of the
assessee’s brother is entirely on different point. The learned Accountant Member
did not agree and the matter was referred to the Third Member.

Held :

In the assessee’s brother’s case, the Tribunal accepted the
assessee’s plea that no income accrued to the assessee as the cheques remained
unencashed. The amount not recovered by the assessee is telescoped against the
undisclosed income assessed on the basis of same cheques. This ratio is
applicable in the present case also. On the same set of facts, a Co-ordinate
Bench of the Tribunal cannot come to a diametrically opposite conclusion than
arrived at in the earlier case. The names of creditors do not matter. Therefore,
the addition was deleted.

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The AO observed that the assessee has earned an amount of Rs.1,31,39,526 on account of trading in shares and also earned brokerage of Rs.1,49,75,135. He held that according to Explanation to S. 73, the nature of share trading business of the assessee is d

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23 2010 TIOL 232 ITAT (Mum.)
ACIT v. KNP Securities Pvt. Ltd.
A.Y. : 1999-2000. Dated : 26-3-2010
S. 28, S. 43(5) and S. 73 — Explanation 2 to S. 28 does not apply if the
assessee is dealing in delivery-based transactions.

Facts :

The AO observed that the assessee has earned an amount of
Rs.1,31,39,526 on account of trading in shares and also earned brokerage of
Rs.1,49,75,135. He held that according to Explanation to S. 73, the nature of
share trading business of the assessee is deemed to be speculative and as per
Explanation to S. 28, speculation business should be segregated from other
business. Therefore, he allocated the expenditure incurred to speculative
business and other business. He, accordingly, arrived at a speculation loss of
Rs.49,66,658.

The CIT(A) deleted the allocation of expenditure made by the
AO and allowed this ground.

The Revenue preferred an appeal to the Tribunal.

Held :

The CIT(A) has correctly held that considering the
transactions as speculative will come only when a particular transaction is
considered as speculative in nature u/s.43(5). So long as the assessee deals in
delivery-based transactions, Explanation to S. 28 does not come into operation
as there are no speculative transactions u/s.43(5). The issue can only be
considered with reference to Explanation to S. 73. That portion of the Section
will come into play after considering the income under the head ‘Income from
Business’ as also income under other heads. The allocation of expenditure and
segregation of business will come into picture only when the assessee indulges
in speculative nature of transactions. The order of the CIT(A) was held to be
correct both on facts as well as on law.

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Explanation 1 to S. 17(2), S. 192 — Assessee employer is not hit by the retrospective insertion of Explanation 1 to S. 17(2) in the absence of any such extension of retrospective effect either in S. 192 or S. 201.

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22 2010 TIOL 231 ITAT (Hyd.)
State Bank of India, IFB Branch, Hyderabad v. DCIT (TDS)
A.Ys. : 2004-2005 to 2007-08.
Dated : 3-12-2009

 

Explanation 1 to S. 17(2), S. 192 — Assessee employer is not
hit by the retrospective insertion of Explanation 1 to S. 17(2) in the absence
of any such extension of retrospective effect either in S. 192 or S. 201.

Facts :

The assessee employer took residential premises on lease and
provided them to its employees. It recovered from its employees standard rent
for the accommodation so provided. Lease rent paid by the assessee was greater
than amount recovered by it from its employees. In accordance with the ratio of
decisions of several High Courts including the jurisdictional High Court, the
difference between the amount of rent paid by the employer and the amount of
standard rent charged from the employee was not regarded as a perquisite.
Subsequently, the Finance Act, 2007 inserted Explanation 1 to S. 17(2)(ii) with
retrospective effect from 1-4-2002. As a result of the retrospective amendment
the employee became chargeable to tax on perquisite value of the accommodation
where the rent paid by the assessee was greater than the rent recovered from the
employee.

The AO held that the assessee has short-deducted income-tax
at source from salaries paid by it to its employees and consequently the AO held
the assessee to be an assessee in default and demanded the amount of income-tax
short-deducted along with interest u/s.201(1A). The CIT(A) upheld the action of
the AO.

The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that :

(a) at the relevant time, when the TDS was to be effected
by the assessee-bank, there was no such provision on the statute book and the
law was amended at a later date with retrospective effect from 1-4-2002.

(b) the issue under consideration is covered in favour of
the assessee with the decision of the Nagpur Bench of the Tribunal in the
group cases of Canara Bank where it has been held that as far as the
assessee-employer is concerned, it is not hit by the retrospective insertion
of Explanation 1 to S. 17(2) thereof in the absence of any such extension of
retrospective effect either to S. 192 or S. 201.

The Tribunal, agreeing with the ratio of the Nagpur Bench
division decided the issue in favour of the assessee.

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S. 2(15) — Provisions of proviso to S. 2(15) are prospective and not retrospective — not applicable to donations received up to 31-3-2009.

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21 2010 TIOL 226 ITAT (Hyd.)
The Andhra Pradesh Chambers of Commerce and Trade Secunderabad v. DDIT
Dated : 23-12-2009

 

S. 2(15) — Provisions of proviso to S. 2(15) are prospective
and not retrospective — not applicable to donations received up to 31-3-2009.

Facts :

The assessee-was registered under the provisions of Andhra
Pradesh (Telangana Area) Public Societies Registration Act in 1982. It was
established for promotion of trade and commerce and some other charitable
objects. It was granted registration u/s.12A and was also granted recognition
u/s.80G.

It’s application dated 8-3-2008 for renewal of recognition
u/s.80G was rejected by DIT on the ground that the Finance Act, 2008 has w.e.f.
1-4-2009 amended the definition of the term ‘charitable purpose’ by adding a
proviso to S. 2(15), which specifically lays down that advancement of any other
objects of general public utility shall not be ‘charitable purpose’ if it
involves carrying on of any activity in the nature of trade, commerce or
business for a cess or fee or any other consideration, irrespective of the
nature of use of application, or retention, of the income from such activity.

The assesee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that :

(a) there was no violation of S. 80G(5) by the assessee;

(b) the decision of the Tribunal, relied upon by the D.R.,
in Andhra Pradesh Federation of Textile Association (ITA No. 88/Hyd./08, dated
30-1-2009) is not applicable to the facts of this case, as in that case, it
was found that the element of charity in the activities of the assessee was
absent, and held that the association could not be considered as a charitable
association within the meaning of S. 2(15) of the Act;

(c) the issue is covered by the decision of the Tribunal in
DDIT v. Indian Electrical and Electronics Manufacturers Association, (2009) 31
SOT 346 (Mum.) where it has been held that the proviso to S. 2(15) is not
clarificatory in nature and would not apply retrospectively;

(d) Legislature has specified the date from which proviso
to S. 2(15) is applicable;

(e) the provisions of S. 80G allowing certain deductions to
the donors apply to specific act of donation made on particular date.

Held that, the provisions of proviso to S. 2(15) shall not
apply to donations received by the assessee up to 31-3-2009. In the absence of
any violation of provisions of S. 80G(5), the assessee is entitled for approval
u/s. 80G in respect of donations received up till 31-3-2009. The Tribunal
directed the DDIT accordingly and allowed the appeal of the assessee.

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S. 194C — Payments made to producers, directors, actors for financing film production are not covered by S. 194C.

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20 2010 TIOL 210 ITAT (Mum.)

Entertainment One Ltd. v. ITO (TDS)
A.Ys. : 2003-2004 to 2006-2007
Dated : 15-6-2009

S. 194C — Payments made to producers, directors, actors for
financing film production are not covered by S. 194C.

Facts :

The objects of the assessee company inter alia included
production of feature films, TV serials, video films and documentary films, etc.
In the course of survey action it was found that assessee had made payments to
various film and T.V. serial producers and directors under different agreements.
The AO, on examining the agreements entered into, came to the conclusion that
the assessee has incurred expenditure for production of films as a whole. After
the film is produced, it acquires the entire right of the film concerned,
including the intellectual property right as well as complete ownership of
distribution and exhibition rights of the film and serial.

He rejected the arguments of the assessee that

(a) it has merely financed the film and has retained
control over negative rights of the completed film as assurance of realisation
of money from the producer;

(b) control over distribution of the film has been taken to
ensure best price available can be recovered from the distribution of the
film;

(c) the producer is in full command of making the film and
not the assessee;

(d) the assessee has neither produced the film, nor has it
got it produced;

(e) the producers/directors with whom agreements are
entered into and to whom advances are made are not
contractors/sub-contractors. For all these reasons the assessee contended that
the provisions of S. 194C are not attracted to the payments made by ic.

The AO held that advances made by the assessee to producers
and directors are covered u/s.194C. He issued notice u/s.201 treating the
assessee as an assessee in default and raised demands for tax and interest
u/s.201(1)/(1A).

In appeal, the CIT(A) gave partial relief to the assessee.
The assessee preferred an appeal to the Tribunal.

Held :

The Tribunal observed that :

(a) in majority of the agreements film-makers and producers
have right to participate in the surplus after repayment of the principal
amount and these terms support the case of the assessee that status of the
film-makers/ producers is also like principal, as in normal commercial
practice, once the contract is executed, the contractor is out of the project
and the entire surplus is enjoyed by the principal;

(b) while the relationships of the principal and contractor
can be determined on the basis of the terms of the agreement or contract, at
the same time, industry and trade practices and conventions are also to be
taken judicial note of, and considered before arriving at final conclusions,
in respect of the relationships created. In film industry, it is not uncommon
that the entire film project is financed by a third party, who otherwise is
not involved in the execution of a film project;

(c) the AO had admitted that the assessee has not hired the
services of the producer and director. This itself takes the
producers/directors out of the term “contractors” and hence, the first mandate
of S. 194C is not fulfilled;

(d) production of the film goes through many stages and it
is nowhere the case of the Revenue that the assessee has any active role in
the production of the film;

(e) Censor Board certificates in respect of the films which
the assessee has financed were all in the name of the producers. If the
assessee’s role was as a producer, then the Censor Board Certificates being
very important legal documents, would have shown the assessee as a producer.

On examining the agreements, the Tribunal concluded that no
relationship of ‘principal’ and ‘contractor’ was created between the assessee
and film-producers/directors, but all agreements were finance agreements with
unique features
to participate in the surplus by taking the risk of losses also.

The Tribunal held that the payments made by the assessee to
producers and directors of the film/TV serials cannot be said to be covered by
S. 194C. It held that the assessee is not a deemed defaulter u/s.201(1) and
there is no question of levy of interest u/s.201(1A).

The Tribunal allowed the appeal of the assessee.

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S. 35DDA — Claim for deduction of 1/5th of the expenditure incurred on VRS cannot be denied merely on the ground that there was no manufacturing activity during the year, particularly when similar expenses are allowed in the previous year.

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19 2010 TIOL 205 ITAT (Mum.)

Apte Amalgamations Ltd. v. DCIT
A.Y. : 2002-03. Dated : 9-3-2010

S. 35DDA — Claim for deduction of 1/5th of the expenditure
incurred on VRS cannot be denied merely on the ground that there was no
manufacturing activity during the year, particularly when similar expenses are
allowed in the previous year.

Facts :

The assessee-company had in its return of income claimed a
deduction of Rs.19,18,441 being 1/5th of the total expenditure incurred on VRS.
The Assessing Officer (AO) disallowed this on the ground that the expenditure
was incurred subsequent to closure of the business and hence VRS expenditure was
not wholly and exclusively incurred for the purpose of business.

In appeal to the CIT(A) observed that during the current year
there was no manufacturing activity, hence, the question of allowability of
expenses relating to manufacturing business did not arise. He confirmed the
disallowance on further appeal by the assessee:

Held :

The Tribunal noted that :

(a) the AO observed that “the assessee-company is engaged
in the business of manufacturing chemicals and trading of scientific
instruments”;

(b) the CIT(A) while considering the assessee’s claim of
depreciation has observed that during the year the assessee had not undertaken
any manufacturing activity and that the business income was by way of trading,
service charges and commission. He upheld the disallowance of depreciation on
plant and machinery, but allowed depreciation on non-manufacturing items
(computer, furniture and motor cars) as the assessee was having some business
activity during the year, and

(c) in the A.Y. 2001-02 similar disallowance made by the AO
on the ground that expenditure has been incurred subsequent to closure of
business was deleted by the CIT(A) and the Tribunal had, on an appeal by the
Revenue, upheld the action of the CIT(A),

Following the order of the Tribunal for the earlier year and
also keeping in view that merely because the assessee has closed its
manufacturing activity did not mean that the assessee has not carried out its
business activities, the claim of the assessee was held allowable.

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Income-tax Act, 1961 — Section 6(1)(c) and Explanation to S. 6(1) — In the case of an assessee who is sent on deputation by his Indian employer to a company outside India and his salary is borne and paid by the foreign company, can it be said that the ass

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  1. 2009-TIOL-261-ITAT-Mad.

DCIT vs. Ashok Kumar

A.Y. : 2004-2005. Date of Order : 6.3.2009

Income-tax Act, 1961 — Section 6(1)(c) and Explanation to
S. 6(1) — In the case of an assessee who is sent on deputation by his Indian
employer to a company outside India and his salary is borne and paid by the
foreign company, can it be said that the assessee has left India for the
purpose of employment and therefore his case is covered by clause (a) of
Explanation to S. 6(1) — Held : Yes.

 

Facts :

The assessee was an employee of ONGC. During the previous
year relevant to assessment year 2004-05, he was seconded to ONGC Nile Ganga
BV, a Dutch company. During the year under consideration his stay in India was
for 98 days. The AO held that in view of S. 6(1)(c) of the Act the assessee
became resident and accordingly he charged to tax salary received by the
assessee from ONGC Nile Ganga in Sudan. The AO held that the assessee did not
leave India for employment outside India but was sent for work of ONGC out of
India and, therefore, his income was chargeable to tax.

The CIT(A) held the assessee to be a non-resident and
directed the AO to exclude salary received by the assessee from ONGC Nile
Ganga by treating the assessee as a non-resident.

The Revenue filed an appeal to the Tribunal.

Held :

The Tribunal noted that during the period when the assessee
was deputed to ONGC Nile Ganga no salary was paid by ONGC. It held that since
ONGC Nile Ganga B.V. is a foreign company, a separate entity, the assessee can
be said to have left India but joined employment in a foreign country and,
therefore, the condition for treating him as resident would be for 180 days (sic
182 days) as against 60 days provided in the Explanation. Accordingly, it
held that the assessee was a non-resident and therefore, income received by
him from ONGC Nile Ganga in Sudan would not be taxable. It noted that this
view was also supported by the decision of AAR in the case of British Gas
India P. Ltd. (285 ITR 218). The Tribunal dismissed the appeal of the Revenue.


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Income-tax Act, 1961 — Sections 40(a)(i) and S. 195 — Whether provisions of S. 195 apply only to income chargeable to tax in India — Held : Yes. Whether in a case where amount paid to non-resident is not chargeable to tax in India and therefore provisions

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  1. 2009-TIOL-241-ITAT-Mad.

DCIT vs. Venkat Shoes Pvt. Ltd.

A.Y. : 2004-2005. Date of Order : 6.3.2009

Income-tax Act, 1961 — Sections 40(a)(i) and S. 195 —
Whether provisions of S. 195 apply only to income chargeable to tax in India —
Held : Yes. Whether in a case where amount paid to non-resident is not
chargeable to tax in India and therefore provisions of Chapter XVII-B are not
applicable, can such an amount be disallowed u/s. 40(a)(i) — Held : No.

 

Facts :

The assessee paid a sum of Rs.23,57,715 as commission to a
non-resident. The commission was paid for services rendered by the agent
outside India. The assessee did not deduct tax at source on the ground that
the services have been rendered outside India. The AO held that in view of the
ratio of the decision of the Supreme Court in the case of Transmission
Corporation of India the assessee ought to have deducted tax at source. The AO
disallowed this sum u/s. 40(a)(i) since according to the him tax was
deductible on this sum and the assessee had failed in its duty of deducting
tax as per S. 195.

The CIT(A) held that (a) the commission paid by the
assessee was not chargeable to tax in India as per Ss. 4 and 5 of the Act; (b)
the case of the assessee was supported by CBDT Circular No. 786, dated
7.2.2000. Accordingly, he held that the provisions of S. 195 and S. 40(a)(i)
were not applicable. He also accepted the assessee’s contention that the Apex
Court decision in the case of Transmission Corporation of AP Ltd. and Another
mandated deduction of tax at source only when the same is chargeable to tax in
India. Accordingly, he allowed the assessee’s appeal.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal noted that as the non-resident rendered
services outside India, the amount under consideration could not be said to
have been deemed to accrue or arise in India and also the payment was remitted
abroad and therefore the amount was not exigible to tax in India. The Tribunal
held that since the payment was not chargeable to tax in India, the provisions
of S. 195(2) are not applicable.

The Tribunal also found the case of the assessee to be
fully meeting the criteria laid down by the CBDT in its Circular No. 786,
dated 7th February, 2000 and Circular No. 23, dated 23rd July, 1969 according
to which, no tax is deductible u/s. 195. The Tribunal noted that in view of
the decision of the Apex Court in Azadi Bachao Andolan the circulars of CBDT
are binding on the Revenue authorities.

The Tribunal held that it cannot be said that the decision
of the Apex Court in Transmission Corporation mandates deduction of tax at
source, if non-resident renders service outside India which is not chargeable
to tax. The Hon’ble Court’s exposition in that case was on the premise that at
least some part of the receipt may be chargeable to tax. The Apex Court has
clearly upheld that the obligation of the assessee to deduct tax at source is
limited to the appropriate portion of income chargeable under the Act. So when
there is no income chargeable to tax, the question of deduction at source does
not arise.


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Clarification regarding eligibility of expenditure pertaining to widening of roads eligible for deduction u/s.80-IA(4)(i) of the Act — Circular No. 4/2010, dated 18-5-2010.

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Part A : Direct Taxes

34 Clarification regarding eligibility of expenditure
pertaining to widening of roads eligible for deduction u/s.80-IA(4)(i) of the
Act — Circular No. 4/2010, dated 18-5-2010.

It has been clarified by the Board that widening of an
existing road by constructing additional lanes as a part of a highway project by
an undertaking would be regarded as a new infrastructure facility for the
purpose of S. 80IA(4)(i). However, simply relaying of an existing road would not
be classifiable as a new infrastructure facility for this purpose.

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Fresh Additional Relief Package — PIB Press Release No. BY/KP/GN-151/10, dated 29-4-2010.

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Part A : Direct Taxes

33 Fresh Additional Relief Package — PIB Press Release No.
BY/KP/GN-151/10, dated 29-4-2010.

The following important amendments were made to the Finance
Bill 2010 :

  • Two items are included as
    ‘specified business for availing the benefit of investment linked deduction
    u/s.80-IB(11C) of the Act — business of a new hospital anywhere in India
    (unlike certain prescribed areas as proposed earlier), with at least 100 beds
    for patients, and business of developing and building a housing project under
    a scheme for slum redevelopment or rehabilitation framed by the Central
    Government or a State Government.

  • Transfer of shares by
    shareholders on conversion of a company into an LLP is proposed to be tax
    exempt.



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The Finance Bill received the Presidential Assent on 8 May 2010 and hence got enacted with effect from 8-5-2010

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Part A : Direct Taxes

32 The Finance Bill received the Presidential Assent on 8 May
2010 and hence got enacted with effect from 8-5-2010.

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Notification No. FEMA. 174/2007-RB, dated 25-11-2007 — Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) Regulations, 2008.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 

 

13 Notification No. FEMA. 174/2007-RB, dated
25-11-2007 — Foreign Exchange Management (Foreign Currency Account by a Person
Resident in India) Regulations, 2008.


This notification substitutes Regulation 6 of the Foreign
Exchange Management (Foreign Currency Account by a Person Resident in India)
Regulations, 2000 with effect from April 30, 2007.

 

It permits the opening, holding and maintaining of Foreign
Currency Account in India by :

1. Shipping or airline company incorporated outside India or
its agent in India for meeting local expenses in India of the shipping or
airline company out of freight or passage collected in India or out of inward
remittances through normal banking channels from office/principal outside India.

2. Ship-manning/crew managing agencies in India for undertaking transactions
in the ordinary course of their business.



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Notification No. FEMA. 171/2007-RB, dated 10-12- 2007 — Foreign Exchange Management (Foreign Currency Account by a Person Resident in India) (Second Amendment) Regulations, 2007.

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New Page 2

Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.



12 Notification No. FEMA. 171/2007-RB, dated
10-12- 2007 — Foreign Exchange Management (Foreign Currency Account by a Person
Resident in India) (Second Amendment) Regulations, 2007.

This notification amends the proviso to Regulation 9(1) of
the Foreign Exchange Management (Foreign Currency Account by a Person Resident
in India) Regulations, 2000 with effect from April 30, 2007 as under :

“The EEFC account referred to in Regulation 4, shall be
opened, held or maintained in the form of an account in terms of such
directions as may be issued by the RBI from time to time”.


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A.P. (DIR Series) Circular No. 41, dated 28-4-2008 — Foreign investment in Commodity Exchanges — Amendment to the Foreign Direct Investment Scheme.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


11 A.P. (DIR Series) Circular No. 41, dated
28-4-2008 — Foreign investment in Commodity Exchanges — Amendment to the Foreign
Direct Investment Scheme.

Pursuant to Press Note No. 2 (2008) issued by Commerce
Ministry (see April 2008 BCAJ, page 97).

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A.P. (DIR Series) Circular No. 40, dated 28-4-2008 — Foreign investment in Credit Information Companies — Amendment to the Foreign Direct Investment Scheme.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 



10 A.P. (DIR Series) Circular No. 40, dated
28-4-2008 — Foreign investment in Credit Information Companies — Amendment to
the Foreign Direct Investment Scheme.

Pursuant to Press Note No. 1 (2008) issued by Commerce
Ministry (see April 2008 BCAJ, page 97).

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A.P. (DIR Series) Circular No. 39, dated 28-4-2008 — Bids in foreign currency for projects to be executed in India.

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Part C : RBI/FEMA


Given below are the highlights of RBI Circulars and
Notifications.


 

9 A.P. (DIR Series) Circular No. 39, dated
28-4-2008 — Bids in foreign currency for projects to be executed in India.

Presently, person resident in India can incur liability in
foreign exchange and to make or receive payments in foreign exchange in respect
of global bids only where the Central Government has authorised such projects to
be executed in India and approval of the concerned Administrative Ministry has
been obtained.

 

This circular has done away with the requirement of obtaining
prior permission of Administrative Ministry/Authorisation from Central Govt. may
not be necessary for International Competitive Bidding (ICB). Hence, persons
resident in India are now permitted to incur liability in foreign exchange and
to make or receive payments in foreign exchange in respect of global bids for
projects to be executed in India without insisting on prior approval of the
concerned Administrative Ministry for ICB.

 


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Amendments in the Cenvat Credit Rules, 2004 w.e.f. 1-4-2008 — Clarification about Rule 6 : Circular No. 868/6/2008-CX dated 9-5-2008.

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Part A : DIRECT TAXES Part
B : Indirect taxes


8 Amendments in the Cenvat Credit Rules, 2004
w.e.f. 1-4-2008 — Clarification about Rule 6 : Circular No. 868/6/2008-CX dated
9-5-2008.

In the Finance Act, 2008, certain amendments are made, among
others, to Rule 6 of Cenvat Credit Rules, 2004. The above circular clarifies
certain doubts relating to these amendments.

 

Others :

Employees’ State Insurance Corporation has amended the
Regulation 26 of the ESI (General) Regulations, 1950 and the Return of
Contributions in Form 5. The salient features of the amendments made in the Form
5 are as under :

Sr.
No.
Category of dealers
Eligibility criteria
Period of
first return
Due date of
submission of such first return
1 Dealers eligible to
file monthly returns
(1) Taxes paid more
than Rs.10 lac or Refund was more than Rs.1 crore during the previous year
April 2008 21-5-2008
2 Dealers eligible to
file quarterly returns

(1) Dealers under Package Scheme of Incentive. to
30-6-2008

(2) Taxes paid more than Rs.1 lac and less than Rs.10 lac
or Refund more than Rs.10 lac and less than Rs.1 crore during the previous
year

1-4-2008 21-7-2008
3 Dealers eligible to
file six-monthly returns
(1) Newly registered
dealers

(2) Retailers
opted for Composition

 (3)
Taxes paid less than Rs.1 lac or Refund less than Rs.10 lac during the
previous year

1-4-2008 to 30-9-2008
Scheme
21-10-2008




  • Self declaration by the employers, regarding maintenance of records and
    registers, submission of declaration forms, distribution of
    temporary/permanent identity cards, coverage of employees directly or through
    immediate employers and wages paid to workers.



  • All employers employing 40 or more employees, shall append a certificate duly
    certified by a Chartered Accountant, in the revised format of Return of
    Contributions.


All employers, employing less than 40 employees, will provide
self certification without any certification by a C.A.


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Amendments to VAT rule for periodicity of filing of returns under Rule 17 of Maharashtra Value Added Tax Rules 2005 : Trade Circular No. 17T of 2008 dated 5-5-2008.

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Part A : DIRECT TAXES Part
B : Indirect taxes




M-VAT

7 Amendments to VAT rule for periodicity of
filing of returns under Rule 17 of Maharashtra Value Added Tax Rules 2005 :
Trade Circular No. 17T of 2008 dated 5-5-2008.

The Government by Notification No. VAT/1507/CR 17/Taxation 1
dated 31-10-2007 and No. VAT/1507/CR 94/Taxation 1 dated 14-3-2008 has carried
out certain amendments to Rule 17 of Maharashtra Value Added Tax Rules, 2005
pertaining to the periodicity of filing of return.

 

As per the amendments the periodicity of filing of Returns
for the periods starting on or after 1st April 2008 will be as under :




  • The earlier return forms 221, 222, 223, 224 and 225 have been replaced with
    the new return forms 231,232, 233, 234 and 235, respectively.



  • The dealers whose tax liability in the previous year i.e. 2006-07 was
    equal to or above Rs.1 crore, have to file their return from February 2008
    onwards in electronic form.



  • The dealers whose tax liability in the previous year i.e. 2007-08 was
    equal to or above Rs.10 lakhs, have to file their return for the month of May
    2008 onwards in electronic form.



  • The dealers eligible to file electronic return under MVAT Act Rules should
    file their Central Sales Tax return in Form IIIE electronically.



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Post Budget notifications to give effect to the provisions of Finance Act, 2008 (18 of 2008) dated 10-5-2008 (Press release reproduced).

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Part A : DIRECT TAXES Part
B : Indirect taxes


Service tax :

6 Post Budget notifications to give effect to
the provisions of Finance Act, 2008 (18 of 2008) dated 10-5-2008 (Press release
reproduced).

The Finance Bill, 2008 received the assent of the President
of India on the 10th May 2008 and consequently the Finance Act, 2008 is being
published in the Gazette of India dated 10th May 2008 as Act No. 18 of 2008.
Central Government has issued seven notifications relating to service tax so as
to give effect to various provisions of the Finance Act, 2008.


 

2. Transaction between associated enterprises :



2.1 In the Finance Act, 2008, S. 67 has been amended. As per
this amendment, service tax is required to be paid by the person liable to pay
service tax on the taxable services provided even if the consideration for the
taxable services provided is not actually received. In such cases, service tax
is required to be paid immediately after crediting/debiting of the amount in the
books of accounts or receipt of payment, whichever is earlier. However, this
provision is restricted to transaction between associated enterprises and shall
come into force w.e.f. 10th May 2008. Explanation to Rule 6(1) of the Service
Tax Rules, 1994 has been added as removal of doubts stating that any payment
received towards the value of taxable service shall include any amount credited
or debited, as the case may be, to any account, whether called ‘Suspense
account’ or by any other name, in the books of account of a person liable to pay
service tax (Refer Notification No. 19/2008-Service Tax dated 10-5-2008).


 

3. Certain provisions relating to the levy of service tax in
the Finance Act, 2008 shall come into force from a date to be notified. For this
purpose, Notifications No. 18/2008 to 24/2008-Service Tax, all dated 10th May,
2008 have been issued.

 

4. Following changes/amendments shall come into force w.e.f.
16-5-2008 :


à
Seven services which are specifically mentioned in the category of taxable
services and amendments made relating to existing taxable services.


à
Amendments made in S. 65 (defines taxable services and specified terms used in
relation to taxable services) and S. 66 (charging section) vide the Finance
Act, 2008.


à
Amendments made in Export of Services Rules, 2005 and the Taxation of Services
(Provided from Outside India and Received in India) Rules, 2006 so as to
categorise the newly specified taxable services under Rule 3 [Refer
Notification No. 20/2008-Service Tax dated 10-5-2008 and Notification No.
21/2008-Service Tax dated 10-5-2008].


à
Optional Scheme for payment of service tax on Purchase or Sale of foreign
currency : Service tax is leviable on purchase or sale of foreign currency,
including money changing, provided by an authorised dealer in foreign currency
or an authorised money changer, or a foreign exchange broker. Where the
consideration for the services provided in relation to purchase or sale of
foreign currency is not explicitly indicated, the person liable to pay service
tax has been given the option to pay service tax calculated at the rate of
0.25% of the gross amount of currency exchanged. The method is prescribed
under Rule 6(7B) of the Service Tax Rules, 1994. [Refer Notification No.
19/2008-Service Tax dated 10-5-2008].


5. Government of India has already notified, vide
Notifications No. 41/2007-Service Tax, dated 6-1-2007 and 43/2007-ST, dated
29-11-2007, sixteen taxable services attributable to export goods, whether or
not in the nature of input services, providing refund of service tax paid on the
said sixteen taxable services. Consequent upon the enactment of the Finance Act,
2008, Government has notified 16-5-2008 as the effective date for the
specifically included taxable services vide the Finance Act, 2008. Out of the
said taxable services, refund of service tax paid by exporters has been extended
to the following additional 3 services :


à
Purchase or sale of foreign currency under banking and other financial
service,


à
Purchase or sale of foreign currency under foreign exchange broking service,


à
Supply of tangible goods for use of service (refer Notification No.
24/2008-ST, dated 10-5-2008)


6. Notifications No. 18/2008 to 24/2008-Service Tax, all
dated 10th May 2008 are available on the CBEC website http://www.cbec.gov.in.
For details, relevant provisions of the law and notifications may be referred of
the Ministry of Finance, Department of Revenue, Tax Research Unit, Govt. of
India.


Revision of monetary limits for filing appeals by the Income-tax Department before ITAT, HC and SC : Instruction No. 5/2008, dated 15-5-2008.

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Part A : DIRECT TAXES



5 Revision of monetary limits for filing
appeals by the Income-tax Department before ITAT, HC and SC : Instruction No.
5/2008, dated 15-5-2008.

Appeals shall be filed by the Department after 15th May,
2008, only if the cases where tax effect exceeds monetary limits given
hereunder :

Sr. No.
Appeals in Income tax matters

Monetary limit (In Rs.)
1
Appeal before Appellate Tribunal

2,00,000
2
Appeal u/s.260A before High Court

4,00,000
3
Appeal before Supreme Court

10,00,000

Tax effect has been defined to mean difference between tax
assessed and tax that would have been chargeable on disputed issues (to apply to
loss cases also). It is also clarified that ‘tax’ shall not include interest. In
the cases of penalty orders, the tax effect will mean quantum of penalty deleted
or reduced in the order to be appealed against. The instructions also specify
the cases, wherein appeal can be filed by Department irrespective of the
monetary limit and the mode of computation for consolidated appeals which cover
more than one assessment year. It has been clarified that non-filing of appeal
by department due to monetary limits as prescribed does not mean the decision as
taken by the appropriate authority is accepted. Also there are instances
specified when the appeal needs to be filed irrespective of the quantum
involved.

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Clarification on deduction of tax at source on service tax component on rental income u/s.194-I.

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Part A : DIRECT TAXES


4 Clarification on deduction of tax at source
on service tax component on rental income u/s.194-I.

CBDT has clarified that TDS provisions u/s.194-I would be
applicable only on the net rent paid/payable excluding the service tax
component.


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India has signed a DTAA with Mexico. The said agreement shall enter into force on a date to be notified in due course.

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Part A : DIRECT TAXES


3 India has signed a DTAA with Mexico. The
said agreement shall enter into force on a date to be notified in due course.

 

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Benign Assessment procedure for assesses engaged in diamond manufacturing and/or trading : Instruction No. 2/2008 dated 22-2-2008.

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Part A : DIRECT TAXES


2 Benign Assessment procedure for assesses
engaged in diamond manufacturing and/or trading : Instruction No. 2/2008 dated
22-2-2008.

In the last Budget, the Finance Minister had announced a
Benign Assessment procedure for assesses engaged in diamond manufacturing and/or
trading. The main features of the scheme are :



  •  If the assessee offers 6% or more of its total turnover as business income,
    the same should be accepted by AO



  •  Separate books of account need to be maintained



  •  6% would not be a precedent for that or any other assessee



  • This procedure would not apply when :



* assessment is pursuant to search, survey, requisition or seizure action


* 50% or more of such income is claimed as a deduction


* Where there is information of income being escaped




  •  The said procedure shall apply for assessments made during the financial year
    2008-09.




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The Finance Bill, 2008 received the assent of the President of India on 10th May 2008, after certain amendments to clauses of Finance Bill, 2008.

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Part A : DIRECT TAXES


1 The Finance Bill, 2008 received the assent
of the President of India on 10th May 2008, after certain amendments to clauses
of Finance Bill, 2008.

 

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Extension of date for physical submission of acknowledgement of audit report in Form 704 — Trade Circular No. 16T of 2010, dated 10-5-2010.

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Part B : Indirect Taxes


MVAT

37 Extension of date for physical submission of
acknowledgement of audit report in Form 704 — Trade Circular No. 16T of 2010,
dated 10-5-2010.

Date for physical submission of acknowledgement of Audit
Report in Form 704 along with required document is extended from 10-5-2010 to
15-5-2010.

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Form Saral II notified for assessees having income from salary, income from house property (except those having brought forward loss or more than one property) and income from other sources (except those having income from lottery winnings or race horses)

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Part A : Direct Taxes

36 Form Saral II notified for assessees having income from
salary, income from house property (except those having brought forward loss or
more than one property) and income from other sources (except those having
income from lottery winnings or race horses) — Notification No. 34/2010, dated
19-5-2010.

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Clarification regarding eligibility of deduction u/s.80C of the Act for investment under Jeevan Akshay-VI — Notification No. 34/2010, dated 19-5-2010.

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Part A : Direct Taxes

35 Clarification regarding eligibility of deduction u/s.80C
of the Act for investment under Jeevan Akshay-VI — Notification No. 34/2010,
dated 19-5-2010.

Jeevan Akshay-VI of the Life Insurance Corporation of India
has been approved as an annuity plan eligible for deduction under clause (xii)
of Ss.(2) of S. 80C of the Act. This clarification would be applicable for
investment made under this scheme for A.Y. 2008-09 and onwards.

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Buyback/Prepayment of Foreign Currency Convertible Bonds (FCCBs)

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 65, dated April 28, 2009

Buyback/Prepayment of Foreign Currency Convertible Bonds
(FCCBs)

Presently, buyback of FCCB up to US $ 50 million is
permitted, subject to certain terms and conditions, under the approval route.

This Circular has raised this limit for buyback out of
internal accruals from US $ 50 million to US $ 100 million, subject to the
following :

i) Minimum discount of 25 per cent of book value for
redemption value up to USD 50 million;

ii) Minimum discount of 35 per cent of book value for the
redemption value over USD 50 million and up to USD 75 million; and

iii) Minimum discount of 50 per cent of book value for
the redemption value of USD 75 million and up to USD 100 million.

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External Commercial Borrowings (ECB) Policy — Liberalisation

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 64, dated April 28, 2009

External Commercial Borrowings (ECB)
Policy — Liberalisation

Presently, ECB could be obtained, up to June 30, 2009, at
rates higher than the all-in-cost ceilings by obtaining approval of RBI under
the approval route.

This Circular has extended this date for borrowing at rates
higher than the all-in-cost ceilings by obtaining approval of RBI under the
approval route from June 30, 2009 to December 31, 2009.

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Is it fair to make it mandatory for holding companies to have net worth of Rs.2 crores and obtain registration as NBFC ?

IS IT FAIR

Introduction :

After liberalisation/globalisation, overall entre-preneurism
has been increased and lots of entrepreneurs are forming multiple entities doing
multiple businesses. In such situation, they also prefer to route all the
investments through one Holding Company. However, the Reserve Bank of India
(RBI) guidelines for Non-Banking Financial Companies (NBFC) can become a hurdle
for such companies.

RBI Norms about NBFC :

Pursuant to the provisions of S. 45-I(c) of the Reserve Bank
of India Act, 1934 (RBI Act, 1934), any company which carries on the business of
financial institution, i.e., carries on the business of financing, acquisition
of shares, stocks, bonds, debentures or other securities, shall be regarded as
an NBFC. Every such NBFC is required to satisfy the following requirements :

  • Registration with RBI


  • Net owned funds of Rs.2
    crores


As per the definition of ‘net owned funds’ provided in the
RBI Act, 1934, it shall be calculated in the following manner :

(a) the aggregate of the paid-up equity capital and free
reserves as disclosed in the latest balance sheet of the company after deducting
therefrom :

(i) accumulated balance of loss;

(ii) deferred revenue expenditure; and

(iii) other intangible assets; and





(b) further reduced by the amounts representing :

(1) investments of such company in shares of

(i) its subsidiaries;

(ii) companies in the same group;

(iii) all other non-banking financial companies; and





(2) the book value of debentures, bonds,  outstanding
loans and advances (including hire-purchase and lease finance) made to, and
deposits with

(i) subsidiaries of such company; and

(ii) companies in the same group,

to the extent such amount exceeds 10% of (a) above.

Thus, the definition of Net Owned Funds excludes
investments in subsidiaries, companies in the same group.


RBI has vide Press Release 1998-99/1269, dated 8-4-1999
announced that any company will be treated as an NBFC if its financial assets
are more than 50% of its total assets (netted off by intangible assets) and
income from financial assets are more than 50% of the gross income, as per
latest audited financials. If both these tests are satisfied, then such
company’s principal business shall be regarded as that of an NBFC and the
aforesaid requirements or RBI registration and Net Owned Funds shall be required
to be complied with.

Status of Holding Companies as an NBFC :

As mentioned in opening para, a number of entrepreneurs float
a company which will hold all their investments in subsidiaries or group
companies. Such a company is commonly called as ‘Holding Company’ of that Group.

Thus, any holding company having subsidiaries and whose
latest audited financial statements represent the position as stated in the
above Press Note shall be regarded as an NBFC and it needs to approach RBI for
registration. (Rather it cannot carry out this activity without obtaining
registration with RBI.)

However, while calculating its Net Owned Funds, the
investment made by such company in its subsidiaries/group companies shall be
deducted.

The financial position of many companies makes them go for
RBI registration just because of their investments in subsidiaries. But this
investment in subsidiaries shall not be counted for Net Owned Funds criteria.
Therefore, the companies have no choice, but to bring in additional funds to
meet the Net Owned Funds requirement and have them invested in
companies/entities which are not within the same group.


It is an unfair compulsion on the holding companies to make
the investments in non-group entities. (Here we are particularly considering the
entities which do not carry out any business on their own except the holding of
investments in subsidiaries/group companies.)

There are a few entities e.g., stock brokers, asset
management companies exempted from obtaining registration with RBI as an NBFC.
However there is no such exemption granted to holding companies which have been
formed with the primary objective to route all investments of a group through a
single entity.

Conclusion :

It is unfair to deduct the investment made in subsidiaries
and group companies while calculating the Net Owned Funds of a company AND
making it mandatory for them to obtain NBFC registration with RBI.

To make the position fair in respect of such companies, the
RBI Act, 1934 needs to be amended suitably to :

1. exempt investment companies which are holding shares in
subsidiaries and group companies from the requirement of registration with RBI
as NBFC; or

2. include the investments in subsidiaries and group
companies while calculating the Net Owned Funds of such companies

It can be made mandatory for such companies to raise net
owned fund up to Rs.2 crore, if such company wants to make any investment in
non-subsidiaries/non-group companies.

Further, these regulations should exempt companies which do not accept
deposit from public, from the requirement of registering with RBI. However, such
companies may be required to file the requisite returns with RBI.

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Is it fair to reckon the time for S. 54EC from the date of conversion u/s.2(47)(iv)

Is It Fair

1. Introduction :


Readers are aware that due to the inflationary tendencies,
huge capital gains result out of sale of capital assets, especially the
immovable properties. There are many practical difficulties and controversies —
such as distinction between capital gain vis-à-vis business income,
fund-flow problems with reference to investments and advance tax, cancellation
or major modification of deals, new house not getting ready within the
stipulated time and so on. Due credit should at the same time be given to the
law-makers as considerable reliefs have been provided in the Act in terms of
indexation, exemptions u/s.54, u/s.54F, u/s.54EC, etc. On the other hand, there
are dragons like S. 50, S. 50C. The purpose of this article is to bring out the
unfairness in provisions of S. 54EC, where despite a genuine intention and
attempt by the assessee, it is not feasible to avail of the benefit.

2. S. 54EC :


2.1 If long-term capital gains are invested in specified
infrastructure bonds within six months from the date of transfer, there is an
exemption to the extent of investment made. There are, occasionally,
difficulties on account of irregular and unpredictable timings of availability
of bonds. But then, the CBDT does allow suitable extensions, though quite late.

2.2 The maximum limit on investment is Rs.50 lakhs in one
financial year. There is an ambiguity as to whether Rs.50 lakhs each can be
invested in two different financial years for the same capital gain.

2.3 The important point is that the investment has to be made
within six months from the date of transfer. Now, S. 2(47), which defines
‘transfer’ includes clause (iv) — conversion of capital asset into stock in
trade, as contemplated in S. 45(2).

2.4 S. 45(2) is quite rational in providing that although the
transfer may have already taken place long ago, the tax is payable when such
converted asset is actually sold. This is equitable as it recognises the reality
that income cannot be generated from oneself — at the time of conversion — that
is — gain arises only on actual transfer and not on deemed transfer.

2.5 As against this, there is a Circular No. 560, dated
18-5-1990 — in the context of S. 54E (predecessor to S. 54EC) that the period
for investment should be counted from the date of conversion and not from the
date of actual sale. This is very unfair. It is quite inherent and obvious in
the scheme of S. 45(2) that in reality, no gains arise merely at the stage of
conversion. Particularly, in respect of immovable properties, there is a long
time-gap between the date of conversion and the date of actual sale of the
constructed units. Amounts involved are also quite sizeable. Thus, it is
impracticable to expect an assessee to make investment at that point of time.

2.6 This may be seen in the context of S. 45(5) which
contemplates practical situations in respect of compulsory acquisition of
properties by the Government. It states that whenever the compensation is
revised and enhanced in subsequent years, the gains will be taxable in the
respective year when revised compensation is actually received. It goes one step
further to state in Explanation (iii) that when such compensation is received by
the legal heir of the assessee or any other person, due to death of the assessee
or other reason, the amount will be taxed in the hands of the heir or such other
person.

2.7 There is a similar, equitable Circular that the amounts
received by the legal heirs from deposit under the capital gains accounts scheme
are not taxable in their hands. (Circular 743, dated 6-5-1996)

2.8 Interestingly, even u/s.54E, there was a Circular No.
349/F No. 207/8/82–IT (AII), dated 10-5-1983 — that if advances or earnest
moneys are received before the actual transfer, investment may be made within 6
months from the date of receipt (even if it is before the transfer).

2.9 Against this background, Circular No. 560 appears to be
illogical and unfair.

3. Suggestion :


It is presumed that since the substance of both the Sections
viz. S. 54E and S. 54EC is the same, the Circular u/s.54E would be
applicable to S. 54EC as well. The suggestion is obvious. The period of six
months for S. 54EC should be counted from the date of actual sale as
contemplated in S. 45(2).

Equity can be achieved and litigation avoided by issuing a clarificatory
Circular or amending the law.

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Foreign Exchange Management (Deposit) Regulations, 2000 — Loans to Non-Residents/Third Party against security of Non-Resident (External) Rupee Accounts [NR(E)RA]/Foreign Currency Non-Resident (Bank) Accounts [FCNR(B)] — Deposits

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 66, dated April 28, 2009

Foreign Exchange Management (Deposit) Regulations,
2000 — Loans to Non-Residents/Third Party against security of Non-Resident
(External) Rupee Accounts [NR(E)RA]/Foreign Currency Non-Resident (Bank)
Accounts [FCNR(B)] — Deposits

Presently, loans up to Rs. 20 lakh can be availed by the
account holder/third party against security of deposits in NR(E)RA and FCNR(B)
accounts.

This Circular has increased this limit from Rs. 20 lakh to Rs. 100 lakh.
Hence, account holder/third party can avail loans up to Rs. 100 against
security of deposits in NR(E)RA and FCNR(B) accounts.

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Foreign Direct Investment (FDI) in India — Transfer of Shares/Preference Shares/Convertible Debentures by way of sale — Modified Reporting Mechanism

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 63, dated April 22, 2009

Foreign Direct Investment (FDI) in India — Transfer of
Shares/Preference Shares/Convertible Debentures by way of sale — Modified
Reporting Mechanism

This Circular has made the following changes, with
immediate effect, in respect to reporting requirements in case of transfer of
shares/preference shares/convertible debentures by way of sale from resident
to non-resident and vice versa :

1. Form FC-TRS has been revised as per format attached to
this Circular.

2. Proforma for reporting of inflows/outflows by banks
has also been revised as per format attached to this Circular.

3. Bank receiving the remittance/handling the transaction
will have to carry out KYC non-resident purchaser as per format (Annex II)
attached to this Circular.

4. The resident transferor/transferee will have to submit
Form FC-TRS to the bank within 60 days from the date of receipt of the
amount of consideration.

5. In case of deferment of consideration (which continues
to require prior approval of RBI) the bank carrying out the transaction will
have to submit Form FC-TRS to RBI within 60 days from the date of receipt of
the full and final amount of consideration.

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External Commercial Borrowings (ECB) Policy —Liberalisation — Issue of guarantee for operating lease

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars

  1. A. P. (DIR Series) Circular No. 62, dated April 20, 2009

External Commercial Borrowings (ECB)
Policy —Liberalisation — Issue of guarantee for operating lease

Presently, AD Category – I banks are permitted to convey
‘no objection’ under FEMA for creation of charge on immoveable assets,
financial securities and issue of corporate pr personal guarantees in favour
of overseas lender/security trustee, to secure ECB to be raised by the
borrower, subject to compliance with prescribed conditions.

This Circular, in addition to the above, allows AD
Category – I banks to convey ‘no objection’ under FEMA for issue of corporate
guarantee in favour of the overseas lessor, for operating lease in respect of
import of aircraft/aircraft engine/helicopter, subject to compliance with
prescribed conditions.

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Part B: Some Recent Judgments

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Service Tax

I.
High Court :


1. Classification :


Whether consignment agent can be classified as Clearing &
Forwarding agent :


ADH Agencies v. CCE, Chandigarh, [2010 (18) STR 259 (P &
H)]

The appellants claimed that they were consignment agents and
not Clearing and Forwarding agents and therefore, not liable to pay service tax
during the relevant period of dispute.

The High Court relied on their own decision in case of
Kulcip Medicines (P) Ltd.
[2009 (14) STR 608 (P & H)] wherein the Court had
accepted the view taken by the Tribunal in Mahavir Generic’s case [2006
(3) STR 276].

The High Court in the case of Kulcip Medicines (supra)
had held that :

  • The activities of
    clearing as well as forwarding both to be undertaken by an agent in order to
    be taxable under the category of ‘Clearing and Forwarding agent services’ and
    that the word ‘and’ after clearing and before forwarding cannot be interpreted
    as ‘or’.


  • The word ‘and’ has to be
    understood in conjunctive sense.


  • Whenever, a person is not
    performing both the functions, that is clearing and forwarding, he cannot be
    made liable to pay service tax under the category of C & F agents.





In the present case, the High Court held that the appellants
are not liable to pay service tax under the category of C & F agent and that the
consignment agents are not covered within the category of C & F agent services.

2. Penalty :


Whether penalty is automatic where extended period is
invoked ?


Commr. of S.T., Bangalore v. Atria Convergence Tech. P. Ltd.,
[2010 (18) STR 265 (Kar.)]

Service tax was demanded by invoking extended period and also
levied penalty u/s.78 of the Finance Act, 1994. In an appeal filed by the
appellants against penalty, decision was given in favour of the appellants
holding that there was neither suppression, nor deliberate misrepresentation of
facts.

The Tribunal confirmed the order of the CCE
(Appeals). The Department was of the view that with the invoking of extended
period, levy of penalty was automatic and therefore, appealed against Tribunal’s
order before the High Court.

The Court held that the fact of non-suppression has already
been examined by the CCE (Appeals) and the same being confirmed by the Tribunal,
no penalties can be imposed in the instant case u/s. 78.

3. Renting of immovable property service :


Whether Department’s recovery action legal ?


SSIPL Retail Ltd. v. Union of India, [2010 (18) STR 262
(Del.)]

The Delhi High Court in the case of Home Solution Retail
India Ltd. v. UOI,
[2009 (14) STR 433 (Del.)] had held that service tax was
not applicable on renting per se. However, the Revenue filed a special
leave petition before the Supreme Court against this decision and the matter is
pending before the Apex Court. However, the Department started raising the
demands and also threatened the appellants of actions if they stopped paying
service tax.

The High Court observed that the Apex Court has not granted
stay on Home Solution’s ruling (supra) and therefore, the Revenue cannot
resort to other means to protect revenue.

The appellant’s counsel undertook that corrective steps shall
be taken by the Revenue and the officers shall be instructed not to threaten the
assessees of coercive actions in case of non-payment of tax by them.

4. Stockbrokers :



CCE, Chandigarh v. N. K. Chugh & Co., [2010 (18) STR 145
(P&H)]

The respondents were sub-brokers. The question before the
Court was whether services provided by sub-brokers were covered under service
tax and were taxable. For the similar issue, the Tribunal in 2007 (7) STR 518
had held that sub-brokers were not liable to pay tax when the main broker paid
service tax. However, in the similar case, in 2009 the Tribunal in
(13) STR 158 took a view that the words ‘in connection with’ employed in S. 65
(105)(a) had been overlooked in the said earlier decision and that the earlier
decision was incuriam therefore, sub-brokers are liable to pay service tax.

Since there were conflicting decisions by the same Tribunal,
the High Court directed the case to the Larger Bench of the Tribunal.

II. Tribunal :


5. CENVAT Credit :


(a) Whether CENVAT credit of service tax paid by a
job-worker (not liable to pay tax by virtue of exemption Notification No. 8/205
ST, dated 1-3-2005) on a taxable service be denied to service receiver.



CCE & C, Aurangabad v. Laxmi Metal Pressing Works Pvt. Ltd.,
[2010 (18) STR 149 (Tri.-Mumbai)]

The job-worker was exempted from payment of service tax under
Notification No. 8/2005 ST. However, he paid service tax and the recipient of
service availed the CENVAT credit of the same.

The appellant raised a legal issue with reference to the
provisions of Rule 3 of the CENVAT Credit Rules, 2004. The Department was of the
view that under Rule 3 of the CENVAT Credit Rules, 2004, the CENVAT credit is
allowed in respect of ‘service tax leviable’ u/s.66 of the Finance Act, 1994 and
since job-worker is exempt from payment of service tax, the same cannot be
considered as ‘service tax leviable’ u/s.66. The respondents pointed out that
the exemption Notification was issued u/s.93, which would exempt the service
provider from payment of service tax leviable u/s.66. Therefore, service tax
though leviable to job-worker, is exempted by virtue of Notification and CENVAT
credit would be available under Rule 3. The Rule permits availment of CENVAT
credit of service tax ‘paid’ by service provider and not ‘payable’. The appeal
by the Department was dismissed.

(b) Whether following services, namely; (i) rent-a-cab
service, (ii) outdoor catering service, (iii) air-travel booking, (iv)
telephone/mobile services, and (v) steamer agent service, are eligible ‘input
services’.



Semco Electrical Pvt. Ltd. v. CCE, Pune, [2010 (18) STR
177 (Tri.-Mumbai)]

The appellant, a 100% Export-Oriented Unit manu-facturing excisable goods viz. electrical wiring, accessories made of aluminium, zinc and copper alloys, exported all goods except for waste and scrap, which was cleared in DTA (on payment of central excise duty). However, the quantum of the sale was small. As a result, credit of service tax on input service remained unutilised. Accord-ingly, the appellant filed periodical refund claims for service tax paid on ‘input service’ used in the manufacture under Notification No. 05/2006-CE, dated 14-3-2006.

Rejection of refund claims was made on the ground that services, namely (i) rent-a-cab service, (ii) outdoor catering service, (iii) air-travel booking, (iv) telephone/mobile services and (v) steamer agent service were not eligible input services as defined in Rule 2(l) of the CENVAT Credit Rules, 2004.

The following were the stands taken by the appellant?:
    i) The definition of ‘input service’ under the CENVAT Credit Rules is wide enough employ-ing words like ‘activities relating to business’, and ‘such as’. Hence, the manifest intention of the Legislature is to allow credit on all such services, which are relating to business.

    ii) The term ‘business’ cannot be given a restricted definition to say that business of a manufacturer is to manufacture final products, in a case like the present, business of the assessee is an integrated activity comprising of manufacture of final products, advertisement of the final products, entering into sale agreements with the foreign purchasers, export of the said goods, etc.

    iii) Expenses incurred on the ground of commercial expediency by the assessee are covered by the term ‘activities relating to business’, even if it benefits somebody else also. Hence, the Department cannot make artificial distinction between activity relating to business and activity relating to manufacturing activity.

    iv) As observed in All India Federation of Tax Practitioners v. Union of India, 2007 (7) SCC 527, service tax is VAT, which in turn is both a general tax as well as destination-based consumption tax. In the present case, service tax paid on expenditure incurred by the assessee on the outdoor catering, telephone, etc. has to be allowed as input stage credit, particularly since the same forms a part of the price of final product of the assessee.
    
v) Each of the limbs of the definition of input service is independent of the other limb. If an assessee can satisfy any one of the limbs, then credit of the input service should be available.
    
vi) While rejecting the appeals, the Commissioner (appeals) relied upon the one and only one decision of Coca Cola India Private Limited v. CCE, 2007 (7) STR 529. However, the said decision has since been reversed by the jurisdictional Bombay High Court vide decision reported at 2009 (15) STR 657 (Bom.). On this sole ground, the case of the Department should fail. The above view is supported by the decision of the Larger Bench of the Tribunal in the case of ABB Limited v. CCE, 3009 (15) STR 23.

    vii) In the case of CCS v. GTC Industries Limited, 2008 (12) STR 468, the Larger Bench has held ‘outdoor catering service’ received in the canteen of the manufacturer as input service.
    viii)The assessee contended that though the Supreme Court in the case of Maruti Suzuki has held that only the item satisfying all the three parts of the definition under Rule 2(k) would be considered as ‘input’ when it is used within the factory of production, there is no parallel between the inclusive part of the definition of input and input service.
    ix) The assessee pointed out that the Notification No. 41/2007-ST allows refund of service tax paid on ‘service’. The said exemption Notifica-tion does not use the term ‘input service’ and the intention of the Government is to export goods and not taxes.

The Department’s contentions were as follows?:

    i) The decision given by the Supreme Court in the case of Maruti Suzuki applies to the present case as far as eligibility of CENVAT credit is concerned. The use of input service in or in relation to the manufacture of the final products is a condition sine qua non for allowing the CENVAT credit thereon. Similar view was expressed by the Apex Court, the High Court of Bombay and the Tribunal in their decisions of Kirloskar Oil Engines Ltd., M/s. Cummins Generator Technologies India Ltd., and Mahindra Sona Ltd.

    ii) The decision in GTC Industries by the Larger Bench should not be followed since no. of workers of the assessee in the present case is less than 250 and therefore, there was no statutory requirement of provision of outdoor catering services to workers and therefore, CENVAT credit on the same should not be allowed.
    iii) The view expressed by the Larger Bench in the case of Cummins Generator should be fol-lowed and the test of 250 workers should be applied to each case to decide the eligibility of CENVAT credit.

The Tribunal made the following observations?:

  •     The High Court in the case of Coca Cola has categorised the definition of input services and the present case falls under the 5th category i.e., ‘Services used in relation to activities re-lating to business and outward transportation up to the place of removal.’ And conceptually any input service forming part of value of final product should be eligible for CENVAT credit.

  •     The definitions of ‘input’ and ‘input services’ being not comparable and coverage of ‘input service’ being wider, the case of Maruti Suzuki could not be relied upon. The intention of the Legislature was that the activities relating to the business should be allowed.

  •     It is for Court to examine whether a service could be considered as an activity relating to business.

  •     That the condition of 250 workers was just an additional fact that was examined by the Larger Bench in the case of GTC industries and therefore, it does not mean that a factory having 249 workers would not be entitled for CENVAT credit.

  •     It was held that the appellants were entitled to CENVAT credit availed on the services used in or in relation to the manufacture of final products or used in relation to the business activity and the services under examination being used by the appellants in relation to business activity were entitled for CENVAT credit.

    c) Whether CENVAT credit of input services is allowed to a unit availing value-based exemption.

Vallabh Vidynagar Concrete Factory v. CCE & C, Vadodara, [2010 (18) STR 271 (Tri.-Ahmd.)]

The appellants, being a small-scale manufacturing unit, were availing excise duty exemption under Notification No. 8/2003 C.E., dated 1-3- 2003 and at the same time were availing CENVAT credit of service tax paid on input services. The Department denied CENVAT credit and also levied interest.

The contention of the Department was that as per Rule 6 of the CENVAT Credit Rules, 2004, CENVAT credit could not be taken on the services which have been used exclusively for manufactur-ing products fully exempt or liable to ‘Nil’ rate of duty. The appellants argued that Rule 6 of the CENVAT Credit Rules is applicable only to those manufacturers who are manufacturing both dutiable as well as exempt goods and that Notification No. 8/2003 does not restrict availment of credit of service tax/excise duty paid on services as well as capital goods. And, therefore, credit could not be denied. Accepting the said plea, the Tribunal allowed credit of service tax paid on services used for manufacturing products even if no duty was paid as per Notification No. 8/2003.

    6. Classification?:

    a) Handling of export cargo under port premises by custom house agent be classifiable as ‘Port services’ or ‘CHA services’??

    CC & E, Visakhapatnam v. Chowgule Brothers Pvt. Ltd., [2010 (18) STR 164 (Tri.-Bang.)]

The appellants, Custom House Agent (CHA) registered under CHA services were also engaged in cargo handling in the port premises. Cargo handling services includes handling of export cargo. Relying on the Board’s Circular B43/1/1997 -TRU, dated 6-6-1997, the Commissioner found that loading/handling of import or export goods, transferred from the premises of the exporter, etc. were activities relating to CHA services.

It was held that cargo handling in relation to export goods undertaken by the respondent CHA in port premises cannot be subject to tax classifying the same as ‘Port services’. Upholding the CCE (Appeals) order which was in favour of the assessee, the Tribunal observed that the order of the CCE (Appeals) was in conformity with the decision of this Tribunal in case of M/s. Konkan Marine Agencies v. CCE, Mangalore, [2007 (8) STR (Tri.-Bang.)] which has been upheld by the High Court [2009 (13) STR 7 (Kar.)]. Therefore, the Departmental appeal was rejected and stay application was disposed of.

    b) Whether the master biometrics service agreement be considered as manpower supply agency service or information technology software service.

Cognizant Tech. Solutions (I) Pvt. Ltd. v. Commissioner, LTU, Chennai, [2010 (18) STR 326 (Tri.-Chennai)]

The appellant entered into a master biometrics service agreement with Pfizer Pharmaceuticals (India) Pvt. Ltd. The contract was for rendition of the following services?:

  •     Biometric services in the nature of clinical programming and writing (CPW).
  •     Global Clinical Data Services (GCDS).

  •     Data management.

  •     Bio-statistics and reporting

And the same was divided into two phases?:

At the initial stage, the appellants were supposed to retain workforce of full- time equivalent staff providing data management and bio -statistics and reporting services on behalf of Pfizer. In the second phase, the appellants had to provide functional services to Pfizer.

The workforce recruited and retained by the ap-pellants were required to work under a project manager appointed by the appellants, who has to act as single point of contact being responsible for overall management of the project. It is important to note that the recruitment and training precedes provision of specialised services.

The Tribunal held that the nature of service required to be provided was information technology service as it was related to data management, which was out of the purview of service tax net at the relevant point in time.

    7. Mistake apparent from record?:

When binding decision not considered by Tribunal, be considered as mistake apparent from records.

CCE, Trichy v. Maha Sree Aruna Chemicals, [2010 (18) STR 239 (Tri.-Chennai)]
The Department filed an application for rectification of mistake as the Tribunal had not followed binding judgment delivered in case of Gauri Plas-ticulture (P) Ltd. v. Commissioner of Central Excise, Indore, 2006 (202) ELT 199 (Tri.-LB), as the same was not brought to notice of the Tribunal by the Revenue.

The Apex Court, in Furest Day Lawson Ltd. v. Jindal Exports Ltd., 2001 6 SCC 356, had held that if the Tribunal failed to notice a binding authority, the principle of per incuriam should be applied and as per the decision by the Larger Bench in Hindustan Lever Ltd., binding precedent not considered would constitute an error apparent from record and the same can be reviewed.

It was held that the final order was passed per incuriam the binding authority of the Larger Bench of the Tribunal and the application of rectification of mistake filed by the Revenue was allowed.

    8. Penalty?:

Whether labour contract in present case be considered under manpower recruitment or supply agency service and whether extended period can be invoked.

Jivanbhai Makwana v. CCE, Ahmedabad, [2010 (18) STR 206 (Tri.-Ahmd.)]

The appellant was engaged in supplying man-power and was covered by supply of manpower service brought in the tax net with effect from 16-6-2005. The appellant obtained registration on 7-4-2005 and on 1-6-2005 the appellant surrendered the registration stating that he was not covered by manpower recruitment agency service. The definition employed words ‘.?.?.?.?.?.?supply of manpower.?.?.?.?.?.’ which were not there prior to 16-6-2005. The Department then advised the ap-pellant to obtain registration on 25-1-2007. The Department then demanded service tax with in-terest and imposed penalty for the period from 16-6-2005 to 31-3-2006.

The appellant contended that the contract en-tered into did not mention about the number of labourers to be provided, but the appellant had to ensure?that?the factory premise is kept clean, bathrooms, and toilets are cleaned properly and drinking water and coffee are supplied to staff and loading and unloading is carried out. Therefore, he does not satisfy the definition contained in the Finance Act, 1994.

The Tribunal held that the contract of supply of manpower is covered by the definition of man-power recruitment agency services since certain services like house-keeping, loading and unloading were related to number of labourers supplied and the contract required to provide labourers as per the company’s requirement and the payment to be made by the company was related to number of labourers supplied during a specified period.

With regard to extended period, the appellant argued that he himself had obtained registration and the appellant was genuine and therefore, there was no suppression of facts. However, it was held that the appellant was aware of the amendment in law and therefore, the appellant could not escape from payment of service tax merely because show cause notice was not issued within time limit and therefore, extended period was invokable. It being a bona fide belief of non-liability, penalties u/s. 73, u/s.76 and u/s.78 of the Finance Act, 1994 were set aside.

    9. Refund?:

    a) Whether exporter claiming refund can be re-viewed for payment of service tax by service provider.

CCE, Indore v. Anant Commodities Pvt. Ltd., [2010 (18) STR 214 (Tri.-Del.)]

Notification No. 41/2007 ST provides for claim of refund by an exporter who had used certain specified services for export of goods subject to conditions specified in the said Notification. In the present case, the following grounds emerged?:

    i) The Department argued that weighment, sam-pling and analysis services, cargo handling and stevedoring charges were not specified in the said Notification and the same was wrongly allowed by the Appellate Authority. Weigh-ment and sampling services are not treated as taxable service by the Tribunal and therefore, even if service provider had paid service tax, the same should not be refunded. However, the respondents argued that no separate service tax was paid by service provider for such services and service tax was paid under the category of ‘technical testing and analysis services’.

    ii) The Department represented that the Commis-sioner (Appeals) had erred in allowing refund of service tax on account of ‘Agency services’ instead of Custom House Agent (CHA). The re-spondents submitted that they availed services of a CHA for export of goods and the CHA paid service tax. Therefore, while considering refund of respondents, the assessment of service tax of CHA (service provider) should not be re-opened.

    iii) Refund should not be admissible of the tax not payable but paid by service provider and the same should be treated as deposit. The re-spondents urged that the respondent exporter cannot be reviewed for payment of service tax by service provider.

The Tribunal observed that in the present case, it was not the Revenue’s case that service provider who had provided the taxable service, in question, to the respondents, were not of the categories specified in the said Notification. What the Revenue sought to do as to conduct a detailed review of service tax payment by service providers and then disallow certain amounts of service tax refund to the respondents on the ground that those amounts represented tax on amounts charged for services which were not the part of value of such services. The Tribunal in its series of judgments has held that CENVAT credit cannot be denied to receiver of duty paid inputs, by the Central Excise authorities having jurisdiction over the input received, by revising the assessment of duty at the supplier’s end. The same principle was applied by the Tribunal and the Departmental appeal was dismissed.

b) Whether refund could be denied on the ground that all the details and linkage with goods were not mentioned on invoice of service provider.

M. R. Organisation v. CCE, Ahmedabad, [2010 (18) STR 209 (Tri.-Ahmd.)]

According to Notification No. 41/2007 ST, dated 6-10-2007 as amended by Notification No. 3/2008 ST, dated 19-2-2008, for claiming refund, the receipt issued by courier agency should contain details of exporter, IEC No., etc. and also there should be evidence to link the courier service to export goods. The period of such invoices issued was very close to the Notification date and there-fore, on request, the courier company provided all relevant details.

There was no dispute with regard to export of goods and availment of courier services. The only objection by the Revenue was with regard to details on invoice. It was held that there is no bar to provide the details separately in case original receipt did not contain these details. There is no requirement that the invoice should contain link-age. The exporter can produce evidence later. The matter was remanded back to original authority to decide afresh.

c) Whether refund of pre-deposit be made in cash.

Narendra Raja Textiles Pvt. Ltd. v. Commissioner of Central Excise, Coimbatore 2010 (18) STR 249 (Tri.-Chennai)

The assessee was sanctioned part of the refund claim and the Dy. Commissioner ordered the same to be credited to RG 23 account. The appellant asked the Dy. Commissioner (Refunds) to sanction refund in cash. The Commissioner (Appeals) observed that the impugned amount was pre-deposited in cash and the appellant was eligible for refund in cash. The refund of such amount was not governed by S. 11B of the Central Excise Act, 1944. However, since the appeal against first order was not filed on time, the assessee could not be granted refund.

As per CBEC Circular No. 275/37/2K -CX.8A, dated 2-1-2002, if the appeal is decided in favour of ap-pellant or matter is remanded for fresh decision, the amount of pre-deposit should be refunded. As observed in case of CCE v. Dhiren Chemicals Ltd. delivered by the Constitutional Bench of the Supreme Court, if the Circulars issued by CBEC have placed a different interpretation, then the same would be binding on the Revenue.

It was held that the appellant was eligible for refund in cash suo moto by the Revenue authorities and the appeal was allowed.

d) Whether refund can be granted of input services not consumed for providing output services to be exported.

Kbase Tech Pvt. Ltd. v. Commissioner of Central Excise/CST, [2010 (Tri.-Bang.)]

The appellant claimed that by virtue of Circular, No. 120/01/2010-ST, dated 19-1-20110 which was issued recently to grant relief to exports in respect of refund claims, the appellant is entitled for refund of unutilised CENVAT credit. The appellant quoted various recent judgments delivered by the Tribunals on the similar issue.

The Department contended that the orders passed by the lower authority are not legal and proper as it does not take into consideration the conditions laid down in Notification No. 5/06-CE(NT), dated 14-3-2006 related to refund of CENVAT credit and that only that part of CENVAT credit which is attributable to the provision of exported output services can be allowed as refund and the Department’s counsel took support of various judgments as well.

The Tribunal observed that?:

  •     The Legislature has empowered, u/s.37(2) of the Central Excise Act and S. 94(2) of the Finance Act, 1994, the Government to make rules for allowing credit of service tax and rebate of service tax on taxable services which are consumed for providing output services for export and therefore, the rule-making power has to be exercised by the Central Government within this mandate of the statute.
  •     The definition of ‘input service’ has been adopted for the purpose of the Export of Service Rules, 2006 which uses expression ‘any service used by a provider of taxable service for providing output service’, which not only differs from the expressions used in the statutes, but certain inclusions of the said definition prima facie go beyond the scope of the rule-making power of the Government as provided in the legislation.

  •     Under Rule 5 of the CENVAT Credit Rules, 2004 governing grant of refund, the expressions used are ‘input service used in providing output service’.

  •     The Officer on Special Duty, who has issued the said Circular dated 19-1-2010, is an officer authorised to communicate orders of the Board or not could not be confirmed. Again the Circular does not speak that it is being issued u/s.37B of the Central Excise Act, 1944. Therefore, the binding effect of it is in doubt.

  •     It was held that the Board’s Circular No. 120/01/2010-ST, dated 19-1-2010 does not have the effect of amending the statute and cannot be seen as authorising sanction of refund if the credit of service tax does not relate to services consumed for providing the output service in view of express language used in statute.

  •     The amendment proposed in respect of the said Notification No. 5/2006 to replace the words ‘in relation to’ to ‘in connection with’ is immaterial as the statute or rules are not amended.

  •     All the rules relating to procedural aspects should be an aid to justice. Language employed in subordinate legislation alone most often is not decisive, but regard must be had to the extent, subject-matter and object of the statutory provision in question, in determining whether the same is in consonance with legislative mandate. It is the duty of the Courts of Justice to try to get at the real intention of the Legislature by carefully attending to the whole scope of the statute to be considered.

  •     The impugned orders were set aside and ap-peals were remanded to the original authority for fresh examination and decision.


    10. Service to own constituent?:

Whether HUF and its constituent separate entities for service tax??

CCE, Hyderabad v. Universal Travels, [2010 (18) STR 157 (Tri.-Bang.)]

The respondents, one of the constituent units of HUF rendered manpower supply services to other constituent units of HUF, sister concerns and group companies.

They did not pay service tax on the ground that different units of HUF are to be treated as one legal entity.

The Department held that all the constituent units of HUF, though termed as group companies, sister concerns were independent concerns/companies registered under relevant law and had independent business activities and hence service tax was payable on the amounts received form HUF constituents. When appealed, the Commissioner (Appeals) relying on a chartered accountant’s certificate, registration certificate for professional tax and copy of letter issued by ACIT, allowed the appeal. Therefore, the Revenue appealed before the Tribunal.

The Department contended that service tax registration was in the name of M/s. Universal Travels clearly indicating the unit as a separate legal entity under service tax laws and it issued debit notes on other units. Therefore, both the statutory requirements for levy of service tax under ‘manpower recruitment or supply agency’ were satisfied. The respondents contend that they were one of the constituents of HUF and different units of the same HUF doing different businesses cannot be treated as separate legal entities.

The Tribunal observed that the adjudicating authority had not shown or proved under which relevant laws the constituent units are registered as separate legal entities for their legal existence as such. However, on the other hand, the respondents had produced chartered accountant’s certificate, registration certificate for professional tax and copy of letter issued by the ACIT. Therefore, it is as good as providing service to self. Relying upon the Tribunal’s decision in Precot Mills Ltd. v. CCE, Tirupati, [2006    STR 495 (Tri.-Bang.)] the Tribunal rejected the Revenue’s appeal.

Authority for Advance Ruling (AAR)

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I. Authority for Advance Ruling (AAR) :


Ruling No. AAR 13 (ST)/2008, dated 7-4-2008.

Construction of residential complex : Liability of builders :


In re : Hare Krishna Developers [2008 (10) 341 (AAR)]

(i) The applicant was a partnership firm desirous of setting
up a joint venture with a non-resident to develop residential complex in Gujarat
on the following lines :

Complex of more than 12 residential units on its own land
and expense where booking of units would be done on the receipt of token
amount. In the agreement to be executed, full value of the unit would be
indicated. Possession would be provided on receipt of full amount and
completion of construction. The construction would be carried out under two
scenarios :



  • by employing own labour;



  • by appointing labour contractors.




(ii) The questions for consideration of AAR were :



  • Whether booking of units by the applicant considered taxable service in both
    the scenarios above i.e., under the category of construction of
    residential complex service as per S. 65(105)(zzzh) ?



(iii) The applicant contended that in both the cases,
the construction was their own and so was ownership until handing over
possession and since the development of property was for self, no service
provider-receiver relationship emerged. CBEC Circular No. 96/7/2007-ST of
23-8-2007 in support of such claim was referred to. Further, the Allahabad High
Court’s decision in Assotech Reality’s case [2007 (7) STR 129 was relied upon,
contending that activities in both the cases were not ‘works contract’.

(iv) Contention of the Department as against the above was
that the proposed activity was either taxable as ‘construction of residential
complex’ service or ‘works contract service’. However, the former being more
specific and also that the relevant clause (zzzh) occurred before (zzzza), by
virtue of rules of interpretation laid down in S. 65A, construction service was
the correct classification. Further, that the Board’s circular referred above
did not provide benefit to the activity as it refers to builder/developer
completing construction on his own and then entering into transaction with the
buyer, thus making a sale of the constructed unit. Also that decision of
Assotech Reality (supra) did not fall in line with the law enunciated by
the Supreme Court in Raheja Development Corporation v. State of Karnataka,
2006 (3) STR 337 (SC) and finally whether construction through own labour or
engaging contractors did not alter the position.

(v) AAR examined and discussed the agreement for booking/sale
of units in the self-developed ‘housing project’ in detail and it was noted by
the authority that actual sale of land together with constructed unit would take
place on completion of construction and subject to payment of full
consideration.

The said agreement for sale inter alia contained the
following salient features :



  • Construction would be as per approved plan under control and supervision of
    the developer and right, title and interest in land and construction would
    vest in builder until delivery of possession.



  • Total consideration and timing of installments to be paid by the
    booker/purchaser.



  •  The booker to become member of the society to be set up to provide maintenance
    of the unit and common infrastructure facility against contribution for the
    same on actual basis.



  • Booker could cancel the booking if desired at any stage and would be entitled
    to refund with interest at agreed rate.



  • Builder to be responsible for obtaining requisite permissions for drainage,
    water connection, power, building use, etc. and booker to sign relevant papers
    for the same.



  • Service Tax applicable, if any, would be paid by the booker.



vi) In the above context, Board’s Circular of 23-8-2007 (supra) was distinguished stating that the classification pertained to the case where developer and buyer met only after the construction was completed and therefore, the relationship was purely of seller and buyer, whereas the proposed activity was qualitatively different. AAR contended further that the whole purpose of inserting sub-clause (zzzh) in S. 65(105) appeared to being within its fold the services of builders / developers in connection with construction of complexes. Making construction as per plan, design and specifications, providing amenities and a host of facilities would undoubtedly constitute services to be provided by the applicant. The timing of transferring ownership would  not determine liability to pay tax. Although from one angle, the applicant can be said to be constructing unit on its own and not exactly on behalf of the booker, the fact remains that honouring of commitment to booker is done from where valuable con-sideration is received in instalments. Construction and allied services is referable to the agreement and cannot be viewed in isolation. Possibility of booker terminating is not material for evaluating true nature of transaction. The authority contended that correct classification of the activity was ‘construction of residential complex’ and it was difficult to accept the contention that it was a self-service and there was no recipient of service, as such argument ‘had no basis, whereas the words used in the construction of construction service ‘in relation to’ were of wide import and a greater nexus was established by these words between the construction and services implicit in such construction. Thus, not merely construction was relevant, but correlated and incidental services were all embraced within the scope of (zzzh).

Further, AAR  found force in  contention of the Departmental Representative that the Allahabad High Court in Assotech (supra)’s case making distinction from K. Raheja’s case (supra) was not valid and the ratio of the Supreme Court was not correctly appreciated by the learned Judges. However, it was stated by AAR that this alternative contention of the Revenue need not be gone into.
 
Accordingly, it was ruled that applicant was liable to pay Service Tax for the proposed activity in both the scenarios under the category of ‘construction of residential complex’ service.

Real Estate Laws : Recent Developments

Law and Business

1. Introduction :


The last few months have witnessed a hectic activity on the
real estate front. Several important laws have been amended or enacted and
several crucial decisions have been rendered by the Supreme Court and the Bombay
High Court. Some of these amendments are good and some of these are not so good.
These amendments would have a major bearing on the way immovable property
transactions are carried out in the State of Maharashtra. This Article presents
an overview of these important enactments and cases.

2. MOFA : Deemed conveyance :


2.1 The Maharashtra Ownership Flat Act, 1963 (‘MOFA’) was
recently amended to provide that builders/developers must compulsorily make a
conveyance of the property to the co-operative housing society within a
stipulated period. If they fail to do so within the stipulated time, then the
designated competent authority, i.e., the District Deputy Registrar can
take action against the builder.

2.2 One of the important provisions of the amendment is that
the designated competent authority i.e., the District Deputy Registrar,
can take action against the builder for non-compliance. He can issue an
automatic conveyance (Unilateral Deemed Conveyance), whereby the rights will be
transferred to the society. As per the amendment, the punishment for a builder,
who fails to transfer the plot to the housing society, would be imprisonment for
a term from 6-12 months or a fine of Rs.10,000 to Rs.50,000 or both. He could
also be debarred from any construction project for five years.

2.3 However, certain grey areas remain in the amendment. The
law allows both the competent authority as well as the sub-registrar to issue
show-cause notices to the builder for not having executed conveyance. This
dichotomy of authorities may unnecessarily complicate matters and delay the
proceedings.

A sub-registrar can after giving the promoter a hearing come
to a conclusion contrary to the competent authority and thus refuse to register
the unilateral deemed conveyance. What happens next is unresolved.

2.4 The new law requires the competent authority to dispose
of all cases in six months, but strangely, it does not provide for the time
period within which the sub-registrar must issue the conveyance.

2.5 While it is a welcome step, as with all laws the proof of
the pudding lies in its successful implementation.

3. Registration process simplified :


3.1 A recent Circular of the Revenue and Forest Department
has simplified the process of registering conveyance of immoveable properties in
the State. Now, it is possible to register a property without waiting for a
no-objection certificate from the various authorities, e.g., Collector,
etc.

3.2 This Circular has its genesis in a Supreme Court decision
which has declared Section 22A of the Registration Act, 1908 as
unconstitutional. Section 22A casts an obligation to obtain ‘No Objection’
Certificates from various authorities such as the Collector, etc., to whom the
land belonged before registering a property. The Court also directed that no
registrar or sub-registrar of assurances could refuse registration under any
notifications issued under the provision.

3.3 Thus, now an NOC would not be required for transferring a
flat on collector’s land, e.g., in Nariman Point, Cuffe Parade. This
would speed up the registration process and would lead to greater voluntary
registration of property. This would automatically improve the title to the
property.

3.4 Another effect is that flat buyers requiring home loans
had to get their documents registered before availing the loan. Such buyers were
unable to obtain loans since registration was held up for want of NOCs. Now they
can avail of a loan as registration no longer requires an NOC.

In most cases the NOCs were time-consuming and sometimes led
to cancellation of the deal. This was especially true in the case of
transactions on Collector’s land, in areas like Nariman Point, etc. Other
permissions required were N.A. (Non-Agricultural) Permissions, BMC, etc.

3.5 Besides a speedier registration, one can also look
forward to less bureaucracy, fewer touts and reduced corruption in the
registration process. Such amendments are not only good for the real estate
sector, but good for administration. We often criticise the Government for old
outdated laws, this time kudos to the Government as it eliminates a
‘bottleneck’.

4. Buildings on forest land :


4.1 The Bombay High Court in a recent decision has held that
all development on more than 1,000 acres of land in the certain suburbs of
Mumbai is illegal, since the development was on forest land.

Over 125,000 flats spread over 120 acres are affected by the
Court’s decision. Both the existing developments and under-construction projects
would be affected by this Order. An SLP against the same is expected soon.

4.2 This case was moved by an NGO, Bombay Environmental
Action Group (BEAG), to protect the forest lands encroached upon by the
builders. Most of the disputed flats are in areas Kandivali, Borivali, Ghatkoper,
Bhandup, Mulund, Thane, etc. A Division Bench of Chief Justice Swatanter Kumar
and Justice S. C. Dharmadhikari dismissed about 19 petitions filed by the
builders.

4.3 The Government is now proposing to regularise all such
houses built on illegal lands by levying a one-time penalty. In the meanwhile,
the Registrar has a blacklist of survey numbers which fall within the illegally
developed areas. Registration of any transaction under these survey numbers is
being rejected. The sub-regsitrar’s offices have displayed all these blacklisted
survey numbers. Thus, a lot of flat owners and buyers are being inconvenienced
by this order. As a result, natural corollary property rates in the blacklisted
areas have crashed. The Forest Department is deciding upon its next course of
action, i.e., whether or not it should demolish these illegal
constructions.

4.4 The proposed action of the Government will bring relief to the affected persons.

5.  Use of extra FSI by builders:

5.1 A recent Bombay High Court Order has held that builders will no longer need the consent of existing flat owners if they have extra FSI on a plot and are planning to have additional buildings or structures if the new construction has all the necessary approvals from the municipal authorities. The consent of the flat owners would be needed only if the new construction results in alterations to the existing building or the construction as described in the flat purchase agreement executed between the flat buyer  and builder.

5.2 This order was passed by Justice A. M.’ Khanwilkar of the Bombay High Court in the case of Mehani Builders v. Jamuna Darshan Co-operative Housing Society Ltd. The society was objecting to the additional construction carried out by the builder by using extra FSI. The Court delivered its judgment under the Maharashtra Ownership of Flat Act (MOFA) 1963.

5.3 As per the judgment, the agreement should-very clearly mention the potential FSI utilisation. Further, developers must now construct their buildings in accordance to the plans and specifications and in accordance with the agreement entered into-by both parties and they should spell out how they propose to use any extra FSI.

5.4 Now construction of additional buildings is permissible so long as it is under the scheme or projects of development in the layout and subject to the relevant building rules or byelaws or development control rules. This is an order which would promote greater transparency in property transactions.

5.5 The Government should also incorporate this order also whilst regularsing development on forest land.

TDS Law & Procedure – Recent Developments

Subject : TDS Law & Procedure — Recent Developments

Speaker : Rajesh Kothari, C.A., Past President, B.C.A.S.

Venue : I.M.C. Hall, Churchgate, Mumbai.

Date : 13th May, 2009.

1. Mr. Kothari, while introducing the subject remarked that the provisions of TDS are not only complex, difficult to interpret and still more difficult to implement. It expects the deductor to discharge his duties gratis on time bound basis. For due performance there is no reward but any failure on his part attracts not only interest, penalty and prosecution but he has to suffer disallowance. The injustice is aggravated where procedural changes are made in last week of March made effective from 1st April of the year following. For example, introduction e-payment of TDS is to be made after 1st April, 2009 instead of using paper challans. On 11th April, 2009, the Press Note has extended the time limit for e-payment till 1st July, 2009. Till then TDS can be paid by using challans presently in use.

2. Changes made in Sections & Rules :

i) Sec. 199(1) of the Act dealing with grant of credit of TDS was amended to provide for a situation where income becomes assessable in the hands of person other than the recipient due to operation of Sections 60, 61, 64, 93 & 94 of the Act.

ii) In case of AOP or Trust, the Rule provides that where the income is assessed in the hands of a member, the credit for TDS thereon will be available to him.

iii) In case of a Trust the credit will be given to Trustee. Where the income is assessable in hands of beneficiary, the credit will be available to him.

iv) Where the asset generating the income is held by Partner on behalf of firm, the credit for TDS will be available to the firm.

v) Where deductee is holding asset as Karta of his HUF the credit of TDS will be available to the HUF. A practical difficulty may arise where asset of HUF is held by a member other than Karta, the income though gets assessed in hands of HUF, the credit of TDS may be in jeopardy. Similar difficulty may arise in case of partial partition of HUF. In that case, the assessment of income will get continued as HUF income even though the partitioned asset will go outside the books of HUF.

vi) In case of a property deposit, security, units or shares held by an individuals jointly with others the credit of TDS will be given in the ratio of share of deductee and other co-owners.

3. The mechanism provided for claiming of Credit :

    In the above situations the concerned deductees have to furnish a declaration to the deductor giving details of names, addresses and PAN of or co-owners to whom the credit of TDS is to be given. There is no specific Form of Declaration. It can be given on plain paper also. Though no time limit is prescribed for furnishing the information to deductor, the deductee should ensure that such declaration is submitted before deductor effects deduction.

    The deductor has to issue certificate of deduction in the names of persons mentioned in the declaration.

4. Method of Accounting decides the Year of Assessability

    The speaker observed that different methods of accounting followed by deductor & deductee may cause mismatch of information given by deductor to I.T. Dept. and the year in which the deductee is submitting such income to tax. The deductee will be entitled to get credit.

5. Judicial views on TDS provisions :

    Delhi High Court as well as P & H High Court have taken a stand that credit should not be denied to the assessee on technical ground.

    i) In case of Escorts Ltd. the company was following accrual method. The Certificate for TDS was not available at the time of filing the return. The assessment was completed. The assessee claimed the credit in the year in which TDS certificate was received.

    ii) The Delhi High Court held that Sec.155 (14) empowers the Assessing Officer to consider the TDS even after 2 years from completion of assessment. Hence the A.O. should have given the refund of tax even though the assessment was completed.

    iii) In case of Sonal Bansal before the P & H High Court, the assessee, holding Deep Discount Bonds, received proceeds on maturity. The difference between maturity value and issue price was treated as interest by Bond issued and TDS was effected thereon. However, these bonds were purchased in the market at premium. The bond holder treated the difference between maturity value and his cost as interest since the seller of Bonds to him had paid Capital gain tax. So in such case, interest accounted will be less than income adopted for TDS. The Court took the view that he is entitled to tax credit because otherwise no one would get credit for TDS suffered.

6. Other Procedural Amendments

i) Rule-38 has been amended. There is no change in time permitted for effecting payment of TDS to Government. The only change is applicable to tax deducted by Government. Such tax had to be paid into the treasury on same day. Now, the time limit as is applicable to Non-Government organisation will apply even to Govt. So now the time limit will be 7 days from end of month in which tax is deducted. The time limit of 2 months will not apply, as the Government accounts are on cash basis.

ii) The payments can be made quarterly after obtaining permission of A.O. The mode of payment is for the first time prescribed in the Rule. Instead of challan No.280, now the challans should be in Form No.17 to be paid electronically.

iii) No consequences are prescribed for not paying challans electronically after 1st July, 2009. Tax deducted prior to 31.03.2009 can be paid by old challans.

iv) The new mode of payment will also apply to Government. In Form No.17, there is no need to put Assessment year but Unique Transaction Reference No. (UTN) is to be put. The challan has to make reference deductee-wise, giving the PA Nos. of the deductees , if they are ten or less. If the deductees are more than ten, a separate statement is to be prepared. In the Challan you have to give PAN of Deductor & the name of his Bank. Last year on 14th July, 2008, CBDT has come out with a Circular No.5 of 2008 to deal with payment from third party’s Bank A/c. The software will develop unit Transaction No. which is to be given in all statements submitted to LT. Department. There may be situations where PAN is not validated or where deductee’s PAN is wrong put, there may be some difficul ties.

v) Challan No.17 does not provide for the information under which Section the tax is deducted. However, in Form 26Q the section under which payment is made is to be given; as well as Name and PAN of deductees section-wise. Therefore Form No.17 must be used separately for each section.

vi) Form 27Q applies  to TDS from payment  to Non-Residents or Residents but not Ordinary Residents.

Similar difficulty may arise in case of concerns having multiple branches and multiple PAN Nos./TAN Nos. Difficulties AI will arise in matching payments. Though payments can be made by credit card or Debit card, no facilities are available in software on websites. Similarly, in case where service tax is paid in a Bank other than permitted Bank, the assessee can’t be asked to pay tax again.

vii) As regards Tax Collected at Source, the Press Note states that the time limit will be 7 days from end of month & the time limit of 2 months does not apply to TCS.

7. Amendments in time limit for Issue of TDS Certificates

i) Rule 31 deals with issue of IDS Certificate. It applies from 01.07.2009. Formats of Form No. 16 & 16A remain unchanged. In respect of provision made in the accounts at year end, the TDS was payable before 31st May. Thereafter deductor was duty bound to issue certificate within 7 days i.e. 7th June. Now, it is provided that certificate should be given within one week from date of payment to Government. A Consolidated Certificate can therefore be issued within 1 month from close of the year. So, in cases where tax is paid after 30th April to 31st May, a separate certificate will have to be given.

As regards duplicate certificate the only change is that deductor should certify it as duplicate certificate.

8. Additional Information to be provided in Forms of TDS Certificates & in the Returns

i) Form No.16 has been modified. The new form includes TDS certificate No.(optional), UTN, Information whether PAN is uploaded and validated by LT. Department, Information about Gross Amount paid/ credited to such employee. This amount will be different from amount chargeable as salary due to perquisites and exempt allowances. The details of perquisites are required to be given in Form 12-BB (though now not in existence).

ii) Form 16A certifies payments other than Salary. Certificate of TCS is to be given in Form No. 27E. Earlier there was a provision for issue of consolidated certificate, the consolidation of TCS between two periods, April to September and October to March is now deleted. Now TCS Certificate is to be issued every month.

iii) Rule-31A  –  Quarterly   Statement   of TDS and TCS – This is to be furnished in Form 24C. If any deductor has to cancel the TAN, he has to approach TDS Officer for cancellation. Till the cancellation is not effected, obligation of filing Returns, Challans & other information continues.

iv) It is now provided that Form No.24C is to be filed on quarterly basis whereas Forms 24Q, 26Q, 27Q should be compiled on quarterly basis but the same are to be e-filed collectively before 15th June of succeeding financial year. Uptil now the obligation to submit Form 24Q and 26Q on software like diskettes or CDs was applicable to bodies corporate or concerns and individuals to whom Tax audit was applicable or where number of deductees are less than 50. Now, since every assessee has to make e-filing, hence filing through diskettes or C.D. Rom is not necessary.

v) The time limit for submitting Form 24C is 15th July, 15th October, 15th January and for March quarter it will be 15th June. Form 24C is newly introduced and is designed afresh. The information is to be filed on quarterly basis.

9. Filing of the details of total expenses incurred each month under each head to which TDS applies i.e. Sec. 192 to 195

i) The total expenses will include revenue as well as capital expenditure on which IDS is deductable. It will also include the amounts on which tax is not deducted due to submission of declarations or orders of Assessing Officer permitting non-deduction.

ii) Where u/s:194C, TDS is required to be made the debit effect may be to various account heads like Printing and Stationery, Advertisement and Publicity, Repairs and Maintenance etc. Therefore, Form 24C should contain the details of all such account heads and expenses from which IDS is made. This creates the need to keep back up support if TDS assessment is taken up.

iii) As regards salary, the Form requires you to mention expenses for the month on which TDS is liable to be deducted as well as the amount of salary on which IDS is deducted. As per law, for working out TDS on Salary, a bonafide estimate of salary for the whole year is required to be made for ascertaining TDS amount. As regards exemption and allowances, it is difficult to ascertain on monthly basis.

iv) As regards Returns for Tax collection at source, Similar Form Nos. 24Q, 26Q & 27Q are not to be filed every quarter though the back up information is to be maintained. Form 16AA is omitted.

10. New Requirements of Form No.27 BB applicable to TDS on payment to Non Residents. (applicable Forms No. 15CA & 15CB)

As per Form 15CA, information is to be given by a person making payment to NR. Such person has first to obtain certificate from Chartered Accountant. Such certificate will be in Form 15CB and remittance cannot be made unless this Form is submitted. After the Form is submitted electronically thereafter print out is to be signed and submitted to tax authority through deductor. The PAN of the recipient is also to be given.

11. Recently, Bombay High Court has held (293 ITR) that even if deductor has not deducted the tax, it cannot be recovered by the LT. Department from the deductee.

12. In 115 TTJ it is held that if the employer is not issuing certificate in Form 16 to employee then the A.O. must use his statutory power to enforce compliance from employer.

13. In Hindusthan Coca Cola’s case it was held that if the tax is deducted from employee, he will not be liable to pay to Govt. any shortfall in deduction for any mistakes of the deductor. In such cases, deductor may suffer disallowance u/s. 40(a).

14. In case of Mahindra and Mahindra vs. DCIT it was held by Special Bench that time limit for reopening as applicable to normal assessment will also apply to l’DS assessment. No enquiry can be initiated after expiry of 4 years or 6 years depending on facts and circumstances.

15. Supreme Court in Larsen and Toubro case has held that employer is not under obligation to collect supporting evidence in respect of claims of employees. Similarly, TDS is required to be deducted from salary to foreign employee even if income is not liable to tax.

The meeting then terminated with a vote of thanks to the learned speaker Mr. Rajesh Kothari.

Certain issues on Accounting Standards with special emphasis on AS-22 and AS-10 — Revised.

Lecture Meeting

Subject : Certain issues on Accounting Standards with
special emphasis on AS-22

(Deferred Tax) and AS-10 (Fixed Assets)- Revised.


Speaker : Narendra P. Sarda, Past President, ICAI


Venue : Walchand Hirachand Hall, IMC



Date : 23-4-2008


1. Scope and coverage of subject :



The speaker dealt with recent developments, revisions and
reviews of existing Accounting Standards, as well as the new Accounting
Standards which will be taking effect from accounting years ended 31st March
2008 and subsequent two years. He divided the subject into five heads, viz. :

(i) AS-22 — Accounting for Taxes on Income

(ii) AS-10 Fixed Assets — Revised Standard (yet to become
effective).

(iii) AS-11 — Accounting for Changes in Foreign Exchange
Rates — Certain Issues and Developments.

(iv) AS-15 — Employees Benefits — Certain Issues and
Developments.

(v) Recent Pronouncement of Institute in respect of
Derivative Instruments.


2. General :


The Institute has announced that Company’s Accounting
Standards Rules are applicable to any accounting year commencing on or after 7th
December 2006.

Issues :

A question arises in cases where certain deviation in
existing standard is recommended by the Institute but not yet incorporated in
Rules, then for reporting on compliance of Accounting Standards u/s.210, whether
the Auditor should report such deviations as and by way of information or should
qualify true and fair view of accounts. The speaker said that the deviation
should be reported as information and not as qualification.


3. AS-22 — Accounting
for Taxes on Income :


Issues and Developments in respect thereof :




(a) Timing difference considers tax effects of differences
in book income and taxable income. Timing differences get reverted in future
and are taken care of by incorporating Deferred Tax Assets and Deferred Tax
Liability. The permanent differences are due to disallowances. They are
ignored for Deferred Tax treatment.

International Accounting Standard (IAS-12), takes Balance
Sheet approach for deferred tax treatment. Such situation arises in
revaluation of assets, as well as in amalgamations and mergers.

(b) Tax outgoing is treated as an expense chargeable to
Profit & Loss Account. It includes two elements, current tax and deferred tax.
In a situation when there is no profit from current year’s activity, but
surplus in accounts is due to reversal of deferred tax liability. In such case
whether the dividend can be declared out of such surplus ? According to the
speaker, it is permissible.

(c) For determining the liability under MAT, not only
current tax provision but deferred tax provision is also to be added back.

(d) Accounting of Deferred Tax Asset — When turning
differences are having the effect of reducing accounting income below taxable
income, it gives rise to deferred tax asset; whereas when accounting income is
more than tax income, it results in deferred tax liability. For deferred tax
asset, Para 15 and Para 17 of AS-22 are relevant. Para 15 states that if there
is a reasonable certainty of recovering the losses in future, then only
deferred tax asset should be recognised.

Para 17 talks of virtual certainty of future profits
sufficient to absorb current and brought forward losses and depreciation.
Before creating deferred tax asset, the auditor should ask for convincing
evidence about certainty of future profit. Accounting Standard Inter-pretation
(ASI) No. 9 provides guideline for verification of credibility of evidence
propagated by client companies. This factor assumers still greater importance
when the current years’ losses include long-term capital losses. This is
because such losses can be set off only against long-term capital gains.

(e) Financial Report Review Board (FRRB) of the Institute
verifies the published accounts recognising deferred tax assets and ascertains
from concerned members whether due care is taken by them in this regard
i.e.,
virtual certainty of future profits, particularly when the amount is
material.

(f) Reassessment and review of deferred tax asset created
in earlier years can be made if the circumstances demand such adjustment after
proper review.

(g) In amalgamation of two companies or absorption of
loss-making by profit-making company, the deferred tax assets/liabilities of
loss-making company should be dealt with after considering profits and
profitability of amalgamated company ASI-11 deals with both situations.

If the loss-making company is taken over in amalgamation
scheme and that company has not created deferred tax asset due to
non-existence of virtual certainty of future profits, then the profit-making
company taking over such loss-making company can create deferred tax asset in
its books, since it will be entitled to claim set-off of such losses.

(h) There may be a situation that a newly started company
has losses and unabsorbed depreciation for last 3 years, which gives rise to
deferred tax asset. At the same time, it has provided depreciation in accounts
which is less than depreciation allowable under the IT Act, in such case it
will give rise to deferred tax liability. Therefore both deferred tax asset
and liability will require consideration. Unless there is virtual certainty of
future profits, deferred tax asset should not be accounted. Since to the
extent of deferred tax liability there is certainty, the deferred tax asset
can be accounted to that extent. This issue is covered in background material
of the Institute on AS-22.

(i) As regards tax rate, if at the end of the year the
budget has provided for a change in rate of tax, it should be given effect to.
No discounting of rates is permitted.

j) Presentation of deferred tax asset/liability. Earlier year’s brought forward balances should not be mixed up with current year’s figures and current year asset/liability cannot be net out. In Schedule VI, the deferred tax liability should appear after unsecured loans but before current liabilities and provisions, so also deferred tax asset should appear after investments but before current assets.

k) If deferred tax effect is not accounted in earlier years, but is proposed to be accounted in current year, then such adjustment can be made through revenue reserve. It there is no reserve, then it should be debited to profit and loss account.

l) If a company is having tax holiday for certain years, say, u/s.80IA or u/s.80IB, then though there is timing difference in accounting income and tax income, ASI-3 provides that if out of timing differences, some figures are going to reverse after tax holiday period, it is necessary to provide deferred tax liability only on such amounts. ASI-5 considers the situation where company’s income is covered by exemption u/s.l0A and u/s.l0B.

m) ASI-4 deals with losses under the head Capital gains, which are adjustable only against future capital gains. Therefore normally there cannot be virtual certainty. So ASI-4 advices not to create deferred tax asset with reference to capital loss.

n) ASI-6 considers situation under MAT liability where book profit is higher than taxable income, the tax is payable with reference to book profit @ 7.5% plus surcharge. In such cases, on timing differences the tax at normal rate of” 30% plus surcharge should be considered.

o) In respect of quarterly reporting of income for listed companies, the average rate of tax on an income should be ascertained. Such rate should be applied to the income for the quarter.

II. AS-IO – Fixed Assets – Revised Standard (yet to become effective) :


i) Exposure draft was issued in 2006. After considering the views thereon, Press Note of the Institute, announced in August, 2006 that the draft is finalised. It was proposed to make it effective from 1-4-2009. Yet the effective date is not announced, presumably because the Company Law Board will have to modify the Accounting Standard Rules suitably.

There are some conceptual differences in the Revised Standard. This is so in respect of spares and components which are purchased or in stock at year end. If these components are exclusively for use in plant and machinery, then requirements of Revised Standard will have to be complied with.

ii) The Revised AS-10 will be dealing with Accounting of Fixed Tangible Assets as well as Depreciation Accounting, which was hitherto governed by AS-6. So earlier AS-6 will stand withdrawn after its merger with revised AS-10. From the earlier AS-10, Para 14 & Para 24 will continue. Para 14 deals with assets held for disposal, so also Para 24 deals with non-current assets for disposal.

iii) Institute has issued ASI-2 on machinery spares which has discussed the circumstances when it will be machinery spares and when it will be fixed assets. This interpretation will also become inoperative after revised AS-lO becomes operative. After such date, machinery spares, which can only be used in machinery will be treated as machinery and not as part of inventory spare and components under current assets. So ASI-2 dealing with inventory will not apply to machinery spares.

iv) For real estate developers, the applicable Accounting Standard will be AS-10 and not AS-7. For revised treatment to machinery spares, the test of economic benefits will be required to be satisfied. So also cost thereof should be’ ascertainable. For subsequent expenditure on existing fixed asset, current repairs will be charged to profit and loss account, but substantial expenditure which increases existing capacity of machinery will be capitalised and depreciated thereafter.

v) Revised AS-10 also deals with component accounting. While accounting, the WDV of component replaced should be transferred to profit and loss account and cost of new components should be capitalised and depreciated. Alternatively, old component’s WDV can continue and of new component to be debited to Profit and Loss account. These are the two options given.

vi) Where inspection of useful balance life is a costly affair as in case of aircrafts or where major replacement is a feature of, say, every four years, it was earlier recommended to spread such cost over four years by creating provision every year. But, now it is not permitted by AS-29. This Standard does not permit provision where expenditure is not actually made. Provision can be made for existing obligation and not for future obligation.

vii) The solution is to capitalise such expenditure and then amortise over certain years and write off old unamortised amount. Cost of dismantling of old asset can be added to new asset and depreciated.

viii) On the issue of Revaluation of Fixed Assets, the speaker listed the rules to be followed, viz. :

a) Revaluation should be done uniformly for en-tire class of assets like building machinery, etc. Revaluation at fair value and not any ad-hoc value.

b) Revaluation should be done uniformly every year to arrive at fair value.

c) For depreciation Para 13 of AS-10 dealing with depreciation accounting, the rates should be at prescribed rates unless circumstances warrant higher rates. In any case, lower rate than pre-scribed rate cannot be adopted.

d) Para-16 of AS-10 (revised) describes depreciation as a systematic allocation of cost over useful life. Components, having different useful life, should be depreciated at different rates. The rate and depreciation should be reviewed every year in the light of information about useful life.

e) Method of depreciation should also be reviewed every year. When there is a change in rate, it is change in estimate and not change in accounting policy. When method is changed from SLM to WDV, it is change in accounting policy. For this the change should be prospective.

f) In the past when asset is revalued the book value goes up. Additional depreciation due to revaluation should be adjusted by withdrawing such differential amount from revaluation reserve. However, in Revised Standard, depreciation on revalued asset will appear in profit and loss account – Now withdrawal from revaluation reserve will not be permitted.

III. AS-ll (Revised) Accounting of changes in foreign exchange rates:

This Standard was originally passed in 1993. It was revised in 2003 and made effective from 1-4-2004. In earlier Standard it was provided that increase in liability for repayment of unpaid price of fixed assets like plant and machinery had to be capitalised. A view was taken while finalising the Revised Standard that such change is a finance charge and credit or debit should be taken to profit and loss account. However, as Schedule VI needed capitalisation, the Institute announced that Schedule VI will prevail over Revised Standard i.e., Capitalisation was approved.

Now, this position is again changed. In respect of accounting year commencing on or after 7-12-2006, the Companies Accounting Standard Rules are coming into play. While Government agreeing with the Institute’s views re: finance charge has put a note to Accounting Standard Rules that in spite of Schedule VI, such exchange difference can be taken to profit & loss account. On 17-7-2007 the Institute issued pronouncement that the note to A. S. Rules should be given effect in respect of capitalisation, made between 2004 to 2007. For assets acquired between 1993 to 2003, the position will not be disturbed. Between 1-4-2004 to 6-12-2006, Schedule VI protection is still available. A legal view is taken that since Schedule VI is part of the Companies Act, it will prevail over Rules in spite of the view taken by the Government and the Institute.

IV. AS-15 –    Retirement Benefits    for Employees:

The Standard was originally issued in 1993 and revised in 200S. The new Standard covers entire gamut of benefits except share-based benefits. This was originally to become effective from 1-4-2006 which date is postponed to the year commencing after 7-12-2006. The issues are:

The liability accrues at the point when the service is rendered and not at the time of payment. The Institute has issued FAQs containing 18 questions and replies thereto. This Standard applies when employer-employee relation subsists.

i) In case of gratuity which becomes payable only after completion of five years still provision has to be made for the liability accruing each year. The liability is to be quantified by actuarial valuation.

ii) Leave encashment is also required to be provided. Maximum accumulation is 240 days whereas availment each year is 30 days. In such case the actuary should evaluate the liability.

iii) As regards P.P. contribution by employer the liability is determined, but as regard gratuity it is to be evaluated.

iv) In revised Accounting Standard AS-IS, the matter is not left entirely to actuary. It now provides that liability to be ascertained by applying Projected Unit Credit method (PUC).

v) As regards VRS benefit, the amount paid is amortised over five years. But the new Standard provides that it is an expenditure of current year and cannot be deferred, because it is not an asset. VRS paid up to 31-3-2009can be amortised, but payments thereafter cannot be amortised but to be wholly debited to profit and loss account, so also earlier year’s amortisation cannot be carried beyond 1-4-2010.

vi) Where earlier year’s liability is sought to be provided for the first time, the prior year’s liability can be debited to revenue reserves or another option of amortisation over five years is given by revised AS-IS. However, such treatment should be reported by way of note as information or disclosure and not as qualification to true and fair view.

 v) Derivative Instruments Accounting and Institutes Views:

i) The Institute’s announcement dated 28-3-2008 on issues is applicable for accounting year ended 31-3-2008.

Derivative instruments being financial instruments are covered by Accounting Standard-30 which will be applicable from 1-4-2011. Till then it is recommendatory. The foreign exchange derivative contracts as well as other derivative contracts put the company to huge liabilities. Derivative contracts comprise of index, exchange and commodity derivatives. Though AS-30 is not put in operation, still AS-1 is applicable insofar as concept of prudence, for providing for losses.

ii) Where there is profit in some and losses in other derivatives, whether provision should be made contractwise or classwise or on global basis. The global treatment is certainly not correct. The categorywise treatment is recommended. If net is a loss it should be provided, if net is gain the same is to be ignored.

iii) Hedging transactions – if in underlying contract of purchase/sale there is a loss and in derivative contract there is a gain, then both are to be netted.

(iv) If there are derivative contracts covered by AS-11, Paras 36 and 37 talk about hedging, whereas Paras 38 and 39 talk about derivatives speculation and trading. If on 31st March the position shows a loss, but on subsequent Balance Sheet date, there is a gain, such subsequent event accruing in next year cannot be taken into accounts.

The meeting was terminated with a vote of thanks to the speaker.

Underlying tax credit — Concept and its significance

Recent decision in the case of E*Trade Mauritius Limited — issues arising therefrom

International Taxation

1. Background

1.1 After the Supreme Court’s [SC] decision in Azadi Bachao Andolan’s case [2003] 263 ITR 706 and the CBDT’s Circular No. 789 dated 13th April 2000, taxpayers and tax planners were clear that the matter was settled and closed and that Mauritius entities holding Tax Residency Certificates [TRCs] issued by Mauritius Tax Authorities could claim exemption from Capital gains tax on sale of shares in Indian Companies under Article 13(4) of Indo-Mauritius Tax Treaty [DTAA] without any hassles. The recent Bombay High Court’s orders dated 26th September, 2008 and dated 23rd March, 2009 in Writ Petition No. 2134 of 2008 have caused consternation in the minds of overseas investors and their tax and investment advisors. This decision seems to have rekindled the controversy in the matter.

    1.2 E*Trade Mauritius Limited [ETM] is a wholly owned subsidiary of Converging Arrows Inc. USA [CAI], which in turn is a wholly owned subsidiary of E*Trade Financial Corporation, USA [ETFC], listed on NASDAQ. ETM acquired a substantial stake [43.85%] in M/s. IL&FS Investsmart Ltd., [IIL] a listed company in India. ETM sold its holding in IIL to HSBC Violet Investments (Mauritius) Limited [HSBC Violet]. As a result, substantial capital gains accrued to ETM.

    1.3 ETM applied to ADIT (IT), Mumbai [AO] for issue of a Certificate under section 197 of the Income-tax Act, 1961 [the Act] for authorising HSBC Violet not to deduct any tax at source from amounts payable to ETM in view of Article 13(4) of the DTAA. However, the AO directed HSBC Violet to withhold tax @ 21.11% on the gross amount of the sale consideration rather than on the net amount of capital gains.

    1.4 ETM challenged the AO’s order u/s. 197 of the Act before the Bombay High Court in the aforesaid writ petition. The Bombay High Court, with the consent of both the parties, directed ETM to file a revision petition before the Director of Income-tax (International Taxation) [DIT(IT)] within a week and the DIT(IT) was directed to decide upon the revision petition within a period of three months from the date of filing of the revision petition. The High Court further directed that HSBC Violet should deduct a sum of Rs.24.50 Crores from the sale consideration and deposit the same with the Court and directed the DIT(IT) to pass appropriate order about the disposal of the amount.

    1.5 Being Orders relating to summary proceedings u/s. 197, the High Court’s Orders do not discuss the facts of the case in detail and the legal issues arising therein, which have been discussed in detail in the AO’s Certificate u/s. 197 and the DIT(IT)’s Order u/s. 264. As the said Certificate and Order are now in public domain, having been placed in writ proceedings before the Bombay High Court, we intend to summarise and analyse the facts and legal issues mentioned therein.

2. Summary of AO’s Certificate u/s. 197


2.1 The AO, based upon the Public Announce-ment [PA] made by HSBC Securities and Capital Markets (India) Private Limited [HSCI] and HSBC Violet alongwith persons acting in concert [PACs] [the Acquirers] under the provisions of the SEBI Takeover Code and the Share Purchase Agreement between Infrastructure Leasing & Financial Services Limited [IL&FS] and HSCI dated 16th May, 2008 [IL&FS Share Purchase Agreement] drew attention to the fact that one of the conditions precedent to the IL&FS Share Purchase Agreement was completion of the E*Trade Share Purchase Agreement between ETM & HSBC Violet dated 16th May, 2008.

The AO also drew attention to the statement in the PA under the Reasons for the Offer and Future Plans that pursuant to the substantial acquisition, the acquirers will be in control of the management of the target company. The acquirers propose to reconstitute the Board of Directors of the target company upon completion of the offer formalities.

It is worth noting that upon the acquisition of shares by the Acquirers from IL&FS and ETM under both the abovementioned agreements, the acquirers’ shareholding in IIL would amount to 73.21%, besides the acquisition of shares from other minority shareholders.

2.2 The AO rejected the contentions of the ETM based upon Article 13(4) of the DTAA and drew the following inferences and held as follows :

a. “It is inferred that the transaction is prima facie, liable to Income Tax in India. E*TRADE, by reason of this transaction has earned income liable for Capital Gains Tax in India as the income was earned towards sale consideration of transfer of its business/economic interests, in favour of the acquirers.”

b. “Like most other taxing jurisdictions, the Indian Income Tax Act follows the twin basis for taxation, (i) based on residence or domicile and (ii) based on source of income. While Indian residents are taxed on global income under Section 5(1), non residents are taxed only on the income, which has its source in India under Section 5(2). The non-residents should have either received or deemed to have received the income in India or the income should have arisen or accrued in India or should be deemed to have accrued or arisen in India. The deeming provision is enumerated in section 9 of the Income Tax Act. It is the submission of the Revenue that the income or capital gains of E*TRADE is deemed to have accrued or arisen in India and therefore, it squarely falls within the ambit of Section 9 and is hence chargeable to Income Tax.”

c. “The question that arises for considera-tion in the present case is

(i) what was the subject matter of the transaction;

(ii) whether the subject matter can be said to be a capital asset;

(iii) whether the transaction involved transfer of a capital asset situate in India.

(i) The subject matter of the present transaction between the acquirer and E*TRADE is nothing but transfer of interests, tangible and intangible, in Indian company in favour of the acquirer and not an innocuous acquisition of shares of some Mauritian Company.

ii) From the facts and material available as of now, it is demonstrable that a strong prima facie case is made out to show that the transaction entered into by the Acquirer amounts to transfer of capital asset situated in India. The above transfer is a transfer of a capital asset and not merely a transfer simpliciter of controlling interest ipso facto in a corporate entity. It is :

a) A transfer  of a bundle  of interests;

b) Substitution of the Acquirer as a successor in interest;
    
c) Transfer of Controlling Interest in an Indian Company; and

d) Transfer  of Management  Rights

iii) Mode of transfer of an asset is not determinative of the nature of the asset.

Shares in themselves may be an asset but in some case like the present one, shares may be merely a mode or a vehicle to transfer some other asset(s). In the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Mauritian Company, but the assets situated in India. The choice of the acquirer in selecting a particular mode of transfer of these right enumerated above will not alter or determine the nature or character of the asset.

It is seen that E*TRADE Mauritius Limited, a limited company formed under the laws of Mauritius is a subsidiary of E*TRADE’ Financial Corporation, a company incorporated under the laws of the State of Delaware, USA. The very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to laws of India, including the Indian Income Tax Act.

d. Prima facie on the basis of details available on record and submissions of the applicant, it is seen that the Capital Gains have accrued in India. The transaction is not a transaction merely of shares but is a transaction which is not covered under article 13(4) of the India-Mauritius DTAA. Also it may be mentioned here that this application is an application for tax deduction at source and not an assessment proceeding.”

Thus, the AO ignored ETM’s submissions based on Article 13(4) of the DTAA and decided to tax the capital gains u/s. 9(1) of the Act.

2.3 Accordingly, the AO directed HSBC Violet to deduct tax at source @ 21.11% on gross payments to be made to ETM. This was the Order u/s. 197 which was subject matter of the writ petition before the Bombay high court.

3. Findings and observations of the DIT(IT) in his order u/s. 264

3.1 Pursuant to the order of the High Court on 26.9.2008, ETM filed a revision petition u/ s. 264 with the DIT(lT) on 3.10.2008, urging the DIT(IT) to quash / set aside the Order of the AO u/s. 197. The ETM submitted as follows:

a) The applicant is a company incorpo-rated in Mauritius and holds a Tax Residency Certificate issued by the competent authority of that country.

b) Consequent to that, Circular No 789 issued by the Board is applicable to the facts of the case, and

c) As a corollary to the above two facts, capital gains earned from the sale of shares of the Indian Company IlL, would not be taxable in India in view of Article 13(4) of the Indo-Mauritius Tax Treaty.

3.2 The DIT(IT), in his order u/s. 264 dated 1st January, 2009 essentially upheld the Order of the AO but on different grounds. However, the DIT(IT) directed the AO to substitute the quantum of the capital gains by the net amount of capital gains instead of gross sales consideration adopted by the AO in his order u/s. 197. He further upheld the rate of tax @ 21.11% as against tax rate of 10% sought by ETM as per proviso to section 112. The findings and observations of the DIT(IT) are summarised in the following paragraphs.

3.3 On the basis of the enquiries made and information gathered by the DIT(IT) from the public domain, mainly through Internet, the DIT (IT) noted and observed as under:

(i) The CAI was incorporated in November 2000 in the State of Nevada, USA. It holds various investments in equity shares and manages corporate cash and investments on behalf of ETFC.

ii) Dilemma of the Managerial Spectrum :
The DIT noted the composition of Board of Directors of CAI (about Two Directors), ETFC (10 Directors), ETM (5 Directors) and IlL, before sale of shares by ETM (17 Directors).

iii) The DIT (IT) further noted that certain key personnel from ETFC, USA and group companies were deputed to the Indian Company IlL, including the MD & CEO of Indian Company, who prior to joining IlL was employed with ETFC USA as its Vie-President Finance-Capital Markets and who was also on ETM’s Board for some period. He noted that these key personnel were neither shareholders in ETM nor its employees nor its Directors except one person. The DIT(IT) concluded from these facts that ETFC, the ultimate parent company of ETM, was exercising the rights available to a Shareholder in appointment of Directors in the Indian Company and the management of the Indian company through deputation of its senior managerial personnel. It may be noted that ETM declined to furnish the aforesaid information on the ground that they were not concerned as the matter relates to ETFC whom it did not represent and the DIT(IT) obtained the information from the public domain through Internet and the Indian Company.

iv) Intricacies of the Financial Conundrums: The DIT(IT) noted, observed and concluded as follows:

a) ETM was incorporated in October, 2004. In November, 2004 it entered into Share Purchase Agreements (with 3 Companies) for purchase of share in IlL i.e. from a Mauritian Company, a Japanese Company and IL&FS, aggregating to 48.80 Lakhs shares.

b) IIL, the investee company, was a party to a Share Purchase Agreement under which it undertook to furnish an Annual Certificate to the US parent ETFC under the US tax laws in relation to its status as Passive Foreign Investment Company as per section 1297 of the US Internal Revenue Code.

c) Thereafter, between December 2005 to November 2006, ETM acquired GDRs issued by IlL and thus increased its holding in IlL to 37.67%, which exceeded the holding of the Indian Promoter namely IL&FS of 29.36%. ETM further acquired shares by an open offer increasing its shareholding in IlL to 43.85% at a Total Cost of Rs. 494.38 Crores.

d) The DIT(IT) noted from the Bank Statements of ETM that these funds were contributed either by CAlor ETFC. He further noted that in some cases dividends due to ETM were remitted to E*Trade Securities (HK) Ltd., as an associate company of ETFC.

e) He further analysed the Bank Statements of ETM for the year ended 31.12.2005, 31.12.2006 & 31.12.2007 and based on his analysis he concluded that not only the funds for investments have been completely sourced from the parent companies but even their allocation in the accounts of ETM are not clear and dividends received from IlL have been remitted as reimbursement of excess funds.

f) Accordingly, the DIT (IT) came to a conclusion, that “The Financial element was routed through the Mauritian entities whereas the management of those routed funds invested in the Indian Company was ensured by” deputation of senior key personnel from ETFC and group companies.

g) The DIT(IT) has extracted relevant information from Annual Report of IlL for FY 2004-05, Prospectus dated 13th July, 2005 issued by IlL and Public Announcement of offer to the equity shareholders of IlL by ETFC dated 7th October, 2006 to arrive at an inference that “This ingeniously planned affair appears to have been conceptualised by and between both the Groups i.e. IL&FS, the Indian Promoter Group and E Trade Group, USA in the year 2004 itself when E* Trade made its first investment in the Indian company. The Mauritius subsidiary was set up in October, 2004. Some of the disclosures made in the Annual Report of IlL for the Year 2004-05, in the Prospectus and in the appointments of MD &  CEO as well as deputationists indicate and prove this inference.”

h) Based on the above discussions, the DIT(IT) concluded as follows:

“Three issues emerge from the entire discussion above, one which is certain that there existed a Permanent establishment of the parent company, ETFC in terms of Article 5 (2) (l) of the India-US Tax Treaty, and the second one, that whether a permanent establishment of the Mauritian company, ETM existed would depend on further enquiries. It is a fact that Mr. James Leslie Whiteford was director in ETM from October 2004 till May 2008 and was also MD & CEO in I1L from May 2007 to May 2008 when ETM thought to divest its 43.85% stake in IlL. The discussions in respect of the managerial and financial aspects throw light in that direction to some extent. Another situation may emerge where the comingling of assets and management of the Indian company by persons from US company and their activities in India may lead to their carrying on business of the US entity in India and the Mauritian entity is simply a facade. At this moment, the evidence captured indicates such a possibility but more evidence is surely needed to hold so. The fact of direct exercise of rights available to a shareholder and remittance of dividend received from IlL immediately after the receipt thereof coupled with deployment of ETFC’s senior personnel on deputation and with the Board of Directors in the Indian company IlL, is a clear indication for such a possibility.”

4. Taxpayer’s  Response

4.1 The taxpayer challenged the inquiries made to ascertain the facts and circumstances by contending that this amounts to exercise of jurisdiction under Section 263 of the Act and not under Section 264. It was asserted that the DIT(IT) can make enquiry only concerning the record of the proceedings which were before the AO and grant relief to the taxpayer in light of the legal position on the subject matter of the revision petition.

4.2 The DIT(IT) repelled the said contention of the tax payer as follows:

a) The High Court had observed that all the contentions available to both the sides are kept open to be raised before the revision authorities;

b) The statutory provisions empower the Revision Authority to make such enquiry or cause such enquiry to be made and pass such order thereon, as he thinks fit. However, the order passed under Section 264 should not be prejudicial to the assessee. Explanation 1 to Section 264 defines what should not be considered as prejudicial to the assessee. There is no mandate in the section that whatever relief is sought for by the assessee must be allowed to him.

(c)    The assessee has contended that under Section 264, the revision authority is required to rectify the order of the AO for just and equitable relief. Such a mandate is not discernible from a reading of Section 264 of the Act.

5. Applicability of Circular 789 and Supreme Courts decision in Azadi Bachao Andolan’s case

5.1 The taxpayer’s main argument was that in view of Tax Residency Certificate issued by the Mauritius Revenue Authority, it is a tax resident of Mauritius. Accordingly, it claimed to be entitled to the benefit available under Article 13(4) of the Treaty, as per Circular 789 issued by the CBDT and the judgement of Hon’ble Apex Court in the case of Azadi Bachao Andolan reported in (2003) 263 ITR 706.

5.2 The DIT (IT) repelled the taxpayer’s argument in the following words:

a) “The facts and circumstances discussed above leave the question wide open whether the said Treaty would at all apply here. Assuming for a moment – though not admitting that it is so, it is a fact that Circular 789 was issued to provide that where a Tax Residency Certificate is issued by the Mauritian Revenue Authority, the provision of India-Mauritius Tax Treaty should be given effect to. That situation does not exist in the present case and needs further examination.”

b) “The explanation of the applicant was also called for especially in the context of judgement dated 14th October 2008 of the Hon’ble Apex Court in the case of Commissioner of Central Excise vs. Ratan Melting & Wire Industries 2008 (231) ELT 22 (SC). The applicant, inter alia, replied vide letter dated 15th December 2008 that the above referred decision has no impact or effect on the validity, applicability, and maintainability of the CBDT Circular No 789.”

c) “The moot question is whether India-Mauritius Tax Treaty would apply on the given facts or India-US Tax Treaty would be applicable in the light of overwhelming facts indicative of the ownership of shares resting with the US Company. These complex issues which do not admit solution through doctrinaire or straight jacket formula cannot be decided in these summary proceedings. Since ETM is regularly assessed to tax by the ADIT (IT) -3 (2), Mumbai, these issues can be examined in greater detail in the course of regular assessment and be decided therein.”

6. Decision  of the  DIT(IT)

6.1 The DIT(IT) citing the following High Court Decisions held that provision of the section 195 of the Act is only for the tentative deduction of income-tax subject to regular assessment and the rights of the parties are, not adversely affected in any manner and that the orders u/s. 195(2)/ 197 are not conclusive and they do not pre-empt the tax department from passing appropriate assessment orders:

a) CIT vs. Tata Engineering and Locomotive Company Limited [2000] 245 ITR 823 (Bom)    

b) CIT vs. Elbee Services Private Limited [2001] 247 ITR 109 (Born).

6.2 Based on the above discussions, the DIT(IT) crystallised the following three issues for decision:

1. Whether tax should be deducted from the gross sale consideration received on the sale of shares of the Indian company, IlL by the Mauritian company ETM ?

2. Whether such capital gains are exempt from tax in view of the benefit available under Article 13(4) of the India- Mauritius Tax Treaty in view of Circular 789 issued by CBDT and ratio of the Hon’ble Apex Court in the case of Azadi Bachao Andolan reported in 263 ITR 706?

3. What would be the rate of tax, if the gains are to be taxed ?

6.3 The DIT(IT) decided the above issues as follows:

a) Tax should be deducted from the net amount of capital gains instead of gross sale consideration as adopted by the AO. He thus reversed the direction of the AO on this point and granted partial relief to the taxpayer.

b) It can not be said at this stage that capital gains have arisen to the Mauritian entity, ETM and not to the US entity and much is left to be looked into as apparent does not appear to be real. There are enough flaws, defects and discrepancies in the claim of the applicant which need to be explained by it before the claim of the applicant can be accepted. In view of the same, in so far as this finding of the AO is concerned that capital gains are made by ETFC, at this stage, no interference is called for.

c) Following the Mumbai Tribunal’s decision in the case of BASF Aktiengesellschaft vs. Deputy Director of Income tax (International Taxation) [2007] 12 SOT 451/110 TTJ (MUM.) 741, the DIT (IT) held that proviso to Section 112would not apply in the case of long term capital gains arising on account of sale of shares of a listed company and consequently, the rate of tax on long term capital gains computed under the first proviso to section 48 would be 20 per cent.

d) In view of the above, the DIT(IT) ordered that an amount of Rs. 18.94 lakhs be returned to the taxpayer and a sum of Rs. 24.31 crores be deposited with the AO.

7. Analysis

7.1 It appears that the DIT(IT) has virtually lifted the corporate veil of ETM to ascertain the beneficial ownership of such capital gains and in order to bypass the application of the Indo-Mauritius DTAA. It may be pointed out here that the concept of beneficial ownership is applicable to Article 10 (Dividends) and Article 11 (Interest) and not to Article 13 of the Treaty in respect of Capital Gains.

7.2 The matter will be finally decided by the AO in the regular assessment proceedings wherein the taxpayer would have opportuni ty to furnish all such facts, documents, explanations and legal submissions as may be appropriate in its case and the tax department would also be able to make such further inquiries and collect such further evidence as it may deem necessary. However, the AO is unlikely to adopt a line different from that of his superior. Hence, the matter may be tested in successive appeal proceedings.

7.3 In the meantime, the tax officers, in appropriate cases, are likely to use this precedent, depending upon the facts and circumstances of each case, to deny the benefit of Article 13(4) of the DTAA to Mauritius entities resulting in protracted litigation and it may impact flow of investments through Mauritius.

7.4 In view of this precedent, such investors and their investment and tax advisors would be well advised to take proper precautions to ensure that there is substance in the operations of the Mauritius entities and that financial transactions are routed through Mauritian entities and not directly with other group entities Iaccounts. The recording of the transactions in the books of accounts and their documentation should be done very meticulously and various financial disclosures to various regulatory authorities are well thought out and vetted by the tax advisors.

7.5 It is important to note that from the orders of the High Court it appears that the Taxpayer did not vehemently urge its case based on the CBDT’s Circular No. 789 and the decision of the Supreme Court in Azadi Bachao Andolan’s case (Supra). Had it been so, perhaps the decision of the High Court could have been different, even in a case involving summary proceedings u/s. 1971 195(2).

7.6 The DIT(IT) has relied upon the SC’s decision in the case of Ratan Melting and Wire Industries (Supra) to rebut the tax payer’s reliance upon the aforesaid CBDT Circular No. 789. In Ratan Melting’s case, the SC held that Circulars and instructions issued by the Central Board of Excise and Customs are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifica tions I circulars issued by the Central Government and State Govern-ments are concerned, they represent merely their understanding of the statutory provisions. They are not binding upon Courts. It is for the Court, and not for the Executive, to declare what the particular provision of a statute says. Further, a circular which is contrary to the statutory provisions has really no existence in law.

The DIT(IT) ought to have appreciated that the legal validity of the said CBDT Circular No. 789 has been upheld by the SC in unequivocal terms in Azadi Bachao Andolan’s case (Supra) and it is not a case where the court has held that the said circular is contrary to the statutory provisions. Thus, in our view, Ratan Melting’s case has no application in respect of the validity and the binding nature of the said Circular No. 789.

7.7 Media reports appearing at the point in time when the said Circular No. 789 was issued, suggest that the same was issued keeping in mind the then prevailing economic conditions, fiscal situation, position of the forex reserves and the need to attract foreign investments into the country, both FDI as well as FII investments. In addition, in view of notices being issued/inquiries being made by the revenue authorities to/with Mauritius-based FIls and investors, a huge hue & cry was made by such investors severely impacting the stock markets adversely as well as the fear of negatively impacting the inflow of the foreign investments into the country leading to issuance of the said circular by the CBDT, probably under political pressure. The veracity of this statement cannot be verified and it is in the realm of speculation.

To ensure that the decision of E*Trade Mauritius’s case does not create uncertainty in the minds of the FIls’ and the Investors coming through Mauritius and such other jurisdictions, it would be perhaps in the fitness of things that Political leadership, Revenue authorities in both the countries, Investors and Tax Advisors put their heads together to find a viable and acceptable solution to the issue. This would help in removing the uncertainties from the minds of the investors and also in avoiding protracted litigation.

7.8 The moot point is whether in respect of a matter which has been concluded and settled by the SC and which under Article 141 of the Constitution becomes the law of the land, is it open to the revenue authorities to reagitate the matter for some reason or the other?

7.9 There is no doubt that the provisions of India Mauritius DTAA have been used for Treaty shopping and may cause loss of revenue. Treaty Shopping has been clearly upheld by the Supreme Court in Azadi Bachao Andolan’s case. A more appropriate course of action would be for the political leadership to take a firm stand in the matter to renegotiate the treaty about which we have been hearing for a long time but there is no real action on the ground.

7.10 In view of the experience in Vodafone’s case and E*Trade Mauritius’s case, the tax payer would be well advised to submit to the tax authorities requisite facts, documents and information during such summary proceedings as well as regular assessment proceedings in order to avoid antagonism and protracted litigation because the tax authorities are now becoming more tech savvy and are able to gather lot of relevant information available in the public domain through Internet or from the filings with the regulatory authorities in domestic/foreign jurisdictions.

Refund of service tax paid on taxable services provided in relation to the authorised operations in a Special Economic Zone

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New Page 2

Part B : Indirect taxes


Updates in VAT and Service Tax :

Service Tax update

Circulars

  1. Refund of service tax paid on taxable services provided in
    relation to the authorised operations in a Special Economic Zone

This Circular explains the new Notification No.15/2009, dated 20.05.2007 in
relation to Refund of service tax paid on taxable services provided in
relation to the authorised operations in a Special Economic Zone.

levitra

Event Risks — Case Study

Preamble:
Case studies have been an excellent teaching and learning tool, especially in a live setting. Thus, even though formal academic training relies primarily on texts, lectures and tests, in a less formal setting, especially for continuing education, the case study method is preferred.

In fact the tales of the Pancliatanira and Hitopadesha are excellent examples of how this method can transform people, making them smart, intelligent, successful, wise and knowledgeable.

I personally prefer case studies, as a case study cannot and does not have one right answer. In fact no answer given with enough understanding and application of mind can ever be wrong.

The case gives a situation, often a problem and seeks responses from the reader. The approach is to study the case, develop the situation, fill in the facts and suggest a solution.

Depending on the approach and perspective the solutions will differ but they all lead to a likely feasible solution. Ideally a case study is left to the imagination of the reader, as the possibilities are Immense.

Readers’ inputs and solutions on the case are invited and will be shared with others in the next issue. A suggested solution from the author’s personal viewpoint has also been provided for guidance.

Overview:

Event risk is a contingent risk as it depends on and materialises on the happening of an external event that is often calamitous having far reaching consequences. It being an external risk on which the organisation has little/minimal control it is a high-level risk that is difficult to predict, prepare for and handle.

Such events generally create a shakeout and destabilise / change the business, economic, social and cultural environment. Examples of such events in the recent past range from the tsunami, which was caused by nature, to man made events like the terrorist attack on 26/11 in Mumbai.

Event risks can also be classified in different ways as can be seen from the figure below:
External events by their impact on different dimensions and functional areas of the business pose a threat as well as present opportunities for growth of business and development of new lines of business. Post-tsunami, agencies involved in disaster management and relief work and those connected with insurance got a substantial boost.

Similarly, post 26/11, businesses dealing with security — physical, information security, etc. as well as those providing security cover and selling security devices and equipments are also witnessing a substantial boost.

In terms of stock market analysis, event risk can be described as a risk that comes from unexpected and unpredictable events such as a negative industry report, a competitor reporting unexpected poor financial results, or a ratings downgrade by an analyst or by a rating agency. (reference www.yourdictionary.com/event-risk).

Event risk can then be summarised as risks due to unforeseen events partaken by or associated with the company. These are extreme portfolio risks marked by substantial changes in market price. The example picked up for this month’s case study is that of a company employed in conducting corporate training programmes.

Capable Corporate Trainers Limited has been in the business of corporate training for over fifteen years now. It operates in major metros — Mumbai, Kolkata, Delhi and Chennai as well as in Bangalore and Pune.

The business model of the company consists of identifying training needs, developing programmes tailored to suit existing as well as emerging topics and delivering these through own (in-house) and outsourced faculty. Currently the company has two in-house trainers. All others are taken on contract basis as and when required.

The company has managed to hold its own against growing competition due to its good marketing, strong faculty, winning programmes, training ideas, etc.

The recent series of events and incidents have however, adversely affected the company.

1. The terrorist attack incident in Mumbai in November, has depressed the training market in Mumbai, the commercial capital.

2. The economic slowdown, meltdown and downturn, coupled with the stock market crash have been severe events with far reaching impact on the economy as a whole and on the training space in particular.

3. Changed policy of hotels regarding bookings and security measures in light of the fallout of the terrorist attacks on 26/11 have also been affecting the programmes.

Thus although currently the training calendar is set for the months of January to March 2009, sustaining the programme schedules and numbers of participants may prove difficult with cancellations and dropouts being the order of the day.

The top management has decided to have a Board meeting to sort out these issues and address the event risk faced by the company. The consultant to the company has compiled and furnished following further information for our reference.

The likelihood of another terrorist attack in any of the metros, larger cities and sensitive states is quite high. According to analysts, the financial downturn, economic meltdown and stock market crash are likely to adversely affect business till the end of 2009 and depress corporate training demand.

These various aspects and issues reflect a strong event-risk in operation.

As a risk manager, you are expected to identify and analyse these risks and advise the company on the best course of action, and come up with a ‘contingency plan’.

The Solution: The suggested strategy is outlined and implemented as below:

After identifying the risks, the company must put in place safeguards to eliminate or minimise the associated risks to the company based on the level of the risk.

For example, terrorist attacks pose a dual risk to the company. Firstly there is an inherent risk from where the buildings that the company is operating may be at risk of terrorist attack. The company must look at their insurance plan to see that it covers such risks. Secondly, the company must consider alternative storage for critical documents, training records, etc. The other risk is that of the possibility of harm to the faculty of the organisation while traveling to corporate clients’ offices to conduct training programmes. This can be addressed by a specific insurance plan for the faculty, which will not only take care of any company liability but also reassure the faculty with regards to the financial safety of their families. In addition to this, the company must also consider commencing security awareness and training programmes, particularly aimed at the staff of hotels and corporate offices. The demand for such programmes will naturally be high, given civic concerns.

The economic slowdown is the single biggest risk to the company’s business. With this in mind, the company must concentrate on those training programmes and clients which are the most profitable. The company may consider offering benefits in the form of discounts to loyal clients who generate a minimum guaranteed amount of business in a particular year. The company may also start looking at the business of training videos in CDs (DVDs), computer based programs, etc. This will reduce the risk to the company’s faculty and the cost to the client, while at the same time generating a new source of revenue.

Changes in hotel policies and booking arrangements can be addressed by tying up with chain of hotels (to be identified via enquiries through travel agents) that will reduce the formalities for bookings by identifying standardised documents, and other procedures to be followed. Further, the company may consider asking local clients to arrange for the booking themselves to be paid for by either the client or the company itself.

The risk of subsequent terrorist attacks may be minimised by considering online interactive training programmes at a subsidised cost, that will not only mini mise travel inconveniences and risks, but also the associated costs for the company.

To meet the dual risk of economic slow down (cost) and another attack (safety) the risk advisor also suggested:

  • Change of venue from star hotels to other comparable facilities available in the town.

Many of these suggestions may require investment by the company in technology, particularly information technology. However, sound marketing of these new training measures coupled with judicious use of money and other company resources may lead to sustenance and higher profits in the long term.

Missing in action

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22 Missing in action

MPs’ absenteeism subverts Indian democracy

Inflation is a burning issue because it eats into the already
meager incomes of the poor, and our politicians are concerned. Right ? Wrong.
MPs revealed how much they really care about rising prices of essential
commodities as opposed to how much they would like us to believe that they care
— by largely playing truant when the matter came up for discussion in both
Houses of Parliament. In the Lok Sabha, even among the few MPs who bothered to
turn up, many staged a quiet exit soon after. The lack of quorum in the House
was dealt with simply by not drawing attention to the inconvenient fact.


Even though India is a democracy, this apathy makes it
resemble a dictatorship. A dictator rules by decree and has the power to silence
the opposition. In a democracy whose politicians are apathetic, the opposition
silences itself. Dissent in a dictatorship can be expressed only through street
protests or militant agitations. That’s also the idiom in which opposition
politicians like to express themselves in India.


In both cases there’s little scope for dialogue or rational
debate. Politics is reduced to posturing or making token gestures. If
politicians want us to believe that they are serious about the causes they
espouse, let them at least show up when the issue is tabled in Parliament. Scant
attendance of parliamentarians reduces democracy itself to a formal affair.

(Source : The Times of India, 16-4-2008)

 

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Samsung chief charged with $ 114m tax evasion. Also helped son gain control

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23 Samsung chief charged with $ 114m tax
evasion. Also helped son gain control


Samsung Group chairman Lee Kun Hee will stand trial for tax
evasion and breach of duty, prosecutors said, after a three-month probe into
allegations of corruption at South Korea’s largest industrial group.

 

Lee, 66, was charged with evading 112.8 billion won ($ 114
million) of taxes, the special prosecutors said at a press conference in Seoul
on Thursday. Lee is also charged with breach of duty for incurring losses at
Samsung when helping his son gain control of units of the group. Nine other
Samsung executives were also charged. Lee, one of South Korea’s richest men, has
denied the allegations. Samsung Group, which accounted for about 20% of South
Korea’s exports in 2006, said it will reorganise its business and management.
President Lee Myung Bak, who took office in February, pledged during election
campaigning to increase corporate transparency and governance after scandals
involving South Korea’s biggest industrial groups.

(Source : Bloomberg)

 

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Corrupt Govt. official’s wife is also guilty : HC

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21 Corrupt Govt. official’s wife is also
guilty : HC


The spouse of a Government officer in a corruption case who
has benefitted from his/her ill-gotten wealth is equally guilty, the Bombay High
Court has ruled. Justice V. R. Kingaonkar of the HC’s Aurangabad Bench recently
held Dhule resident Mangalabai Wagh guilty of abetment in a disproportionate
assets case for allowing her husband Bhaskar Wagh to acquire several properties
in her name.

 

The Judge upheld a Trial Court verdict sentencing Mangalabai
to three years’ rigorous imprisonment and imposing a fine of Rs.2 lakh. The HC
also dismissed an appeal by Wagh challenging his punishment of seven years’
rigorous imprisonment and a fine of Rs.3 lakh awarded by the Trial Court.

 

‘Mangala held shares and immovable property as well as a
vehicle in her name despite not having any source of income,’ said the Judge.
‘It will have to be said that she abetted the commission of offence of criminal
misconduct by (her husband) Wagh,’ he added.

(Source : The Times of India, 9-4-2008)

 

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Quotation of the month

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20 Quotation of the month


 ‘All governmental orders must comply with the requirements of
a statute as also the constitutional provisions. Our Constitution envisages a
rule of law, and not rule of men. It recognises that howsoever high one may be,
he is under law and the Constitution. All the constitutional functionaries must,
therefore, function within the constitutional limits’.










(Source : Supreme Court of India,

The Economic Times, 7-3-2008)

 







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Arbitration delays

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  1. Arbitration delays

Arbitration delays hit investor mood. Leading US-based
investment bank Lehman Brothers, affirmed last week that India remained one of
the world’s hottest investment destinations, but while the market and business
opportunities beckon, the adjudication of commercial disputes is still a thorn
for many investors looking for a system that would make things easier.

Experts say arbitration, involving a friendly third-party
to help business disputes, suffers many handicaps in India, dampening foreign
investor sentiment somewhat. The Arbitration and Conciliation Act, 1996, has
failed to provide an effective alternative redressal for commercial disputes,
because arbitration has become the beginning of a litigation, while elsewhere
in the world, it usually marks the end. “Companies are losing trust in the
arbitration process in India. In-house advocates are advising their clients
not to insist for an arbitration clause in agreements”, says Dushyan Dave, a
senior Supreme Court Advocate.

Jurists argue that with a 2-Judge Bench decision in 2003,
the Supreme Court enlarged the extent to which Courts can intervene in
arbitration proceedings. This, says Dave, has increased litigation on arbitral
awards in the Indian Courts. “Several decisions by the Courts have truncated
Article 16 of the model law evolved by UNCITRAL. As a result, Judges can now
actually enter into an arbitration treaty while deciding on the question of
appointing an arbitrator”, adds Dave. The Law Commission had in 2003 said the
delays in arbitration proceedings have practically made it similar to the
Indian judicial system and an expensive proposition for corporate houses.
“Therefore, the commission had recommended fast track arbitration wherein
arbitrators were required to sit for five hours every day”.

(Source : Hindustan Times, dated 11.05.2009)

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Deal-making hubris

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  1. Deal-making hubris

Ratan Tata’s admission of poor timing in Corus and Jaguar
Land Rover deals must be applauded for courage and openness.

It is rare for a businessman to readily admit in public
that he has made a mistake with a major business decision. In recent times,
perhaps, only Warren Buffet has admitted to being “dead wrong” in the
investment decisions that he made in 2008. From that point of view, Ratan
Tata’s admission to a British newspaper of poor timing in the Corus and Jaguar
Land Rover (JLR) deals in 2007 and 2008, respectively, must be applauded for
courage and openness. But Mr. Tata was not the only Indian businessman to be
afflicted by the irrational M&A exuberance of those years.

The Tata group is now grappling with the consequences of
both acquisitions. The Anglo-Dutch steelmaker Corus, for which Tata Steel paid
$6.7 billion following a bruising auction against Brazilian rival CRN, is
currently reeling under losses. A rescue package for one of its UK plants fell
through after four international companies terminated their contract with the
organisation, raising fears of 2,000 job losses.

(Source : Business Standard, dated 12.05.2009)

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Tax Reforms in USA — Follow Obama’s lead

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  1. Tax Reforms in USA — Follow Obama’s lead

Before anyone in India gets hot under the collar about US
President Barack Obama’s tax proposals, because they might seem targeted at
job creation in ‘Bangalore’, it is important to understand what he is trying
to do. For, on any rational basis, it is hard to be critical. American
companies that invest abroad have been tax-exempt on the profits from such
businesses until they bring the profits back into the US; however, they have
been allowed to claim a set-off on the expenses related to such investment.
This has been an open invitation to invest overseas and not in the home
market, especially if the money is routed through tax havens so that the firms
pay no tax on their profits anywhere.

Mr. Obama has called this a ‘scam’, a term to which
American businessmen have taken umbrage, but it is hard to think of it in any
other terms. The figures trotted out, showing that effective tax rates on such
investments have been in the 2-3 percentage points range, support the
president’s drive to raise the effective level of tax on such corporate
activity, at a time when he is running a gigantic deficit and needs money for
other programmes. Indeed, India should do likewise (companies that borrow
money to invest overseas, and claim a tax set-off on the interest cost of the
loan, should not get a set-off unless they remit the profits home and pay tax
on it). In other words, this is not about jobs in Bangalore or Buffalo, though
that is how Mr. Obama put it somewhat dramatically.

(Source : Business Standard, dated 07.05.2009)

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Nominee is not sole heir of property : Bombay HC

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  1. Nominee is not sole heir of property : Bombay HC

A nominee of a property in a housing society does not
automatically become the absoluteowner of the property after the death of the
original owner, the Bombay High Court has ruled in an important order.
Delivering the verdict Justice A P Deshpande said it would be the personal law
of an individual that would determine the successor to the property and not
the nomination under the Cooperative Societies Act. “The Maharashtra
Cooperative Societies Act (MCSA) does not provide for a special rule of
succession altering the rule of succession laid down under the personal law,”
the Judge said, citing two earlier judgments. The Court held that a nominee
did not become the ‘absolute owner’ and was empowered only to hold the
“property in trust for the real owners, that too for the purpose of dealings
with the society”.

(Source : The Times of India, dated 06.05.2009)

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SC snubs retd Judges for charging heavy fee in arbitration cases

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  1. SC snubs retd Judges for charging heavy fee in arbitration
    cases

The Supreme Court has disapproved retired Judges charging
exorbitant fees in arbitration cases. A Bench comprising Justices R. V.
Raveendran and H. L. Dattu, while dismissing the appeal of the Centre
challenging a Delhi High Court order appointing a retired Judge of a High
Court as sole arbitrator in a dispute between the Railways and a contractor.
Institutional arbitration has provided a solution as the arbitrators fees is
not fixed by the arbitrator themselves on a case to case basis but is governed
by a uniform rate prescribed by the institution under whose aegis the
arbitration is held.

Another solution is for the court to fix the fees at the
time of appointing arbitrator, with the consent of parties, if necessary in
consultation with the arbitrators concerned.

What is found to be objectionable is parties being forced
to go to an arbitrator appointed by the court and then being forced to agree
for a fee fixed by such arbitrator, the Bench said.

(Source : Media Reports & Internet, dated 11.05.2009)

(Compiler’s Note : Arbitration proceedings have become
as costly and time-consuming as the main litigation. After getting an Award,
there is another round of litigation to get it enforced !)

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Black money trail : Swiss ready to revise treaty

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  1. Black money trail : Swiss ready to revise treaty

The Government has approached Swiss authorities to
renegotiate its Double Taxation Avoidance Agreement (DTAA), a tax treaty
between the two countries in force since 1995, to obtain details of bank
accounts maintained by Indians in Switzerland.

The Swiss Government has in the past refused to share bank
information pertaining to Indians with New Delhi on the ground that such
details were not necessary for application of the DTAA. Swiss authorities had
expressed inability to provide details, citing their own laws, since India’s
requests were related to enforcement of its internal tax laws.

India is part of the task force constituted by the G-20 at
its London summit to formulate a “global plan for recovery and reform which
promises to take action against non-cooperative jurisdictions, including tax
havens and also to deploy sanctions to protect public finances and financial
systems”. On alleged role of Swiss banks in the 2004 stock market crash, the
affidavit said that Securities and Exchange Board of India had in 2005 barred
Swiss financial institution UBS Asia from issuing and renewing any
participatory notes for a year. But this was following its refusal to disclose
information relating to an investigation carried out by SEBI, not for its role
in the market crash.

(Source : The Times of India, dated 04.05.2009)

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I-T dept. flouts rules, to pay costs

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  1. I-T dept. flouts rules, to pay costs

The Income-tax Department routinely imposes cost on
assesses for late filing of returns or delayed tax payment. For a change, it
was at the receiving end when the High Court imposed a cost of Rs.25,000 for
retaining books of accounts impounded from a city builder for almost five
years.

Justice D. V. Shylendra Kumar, while disposing of the
petition filed by Shubha & Prabha Builders Private Ltd., observed that the I-T
Department couldn’t flout its own rules and regulations.

(Source : Media Reports & Internet, dated 27.04.2009)

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Notification No.15/2009 — Service Tax dated 20.05.2009. Amendment to Notification No. 9/2009-Service Tax, dated the 3rd March, 2009

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Part B : Indirect taxes


Updates in VAT and Service Tax :

Service Tax update

Notifications

  1. Notification No.15/2009 — Service Tax dated 20.05.2009.
    Amendment to Notification No. 9/2009-Service Tax, dated the 3rd March, 2009

Exemption to levy service tax on services provided in
relation to the authorised operations in a Special Economic Zone. So the
refund procedure has been dispensed with by this notification when services
have been utilised wholly in the SEZ. Refund procedure will continue where
taxable services provided to SEZ are consumed partially or wholly outside SEZ.
Exemption is subject to conditions and requirements specified in this
notification.

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Meditate your way to a bigger brain

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  1. Meditate your way to a bigger brain

Push-ups, crunches and gyms are fine for building bigger
muscles and stronger bones. But can you meditate your way to a bigger brain ?

The answer is yes, as a new study has established that
certain regions in the brains of those meditating long term were larger than
in a similar group.

A group of researchers at the University of California Los
Angeles (UCLA), used high-resolution magnetic resonance imaging (MRI) to scan
the brains of people who meditate. Specifically, such people showed
significantly larger volumes of the hippocampus and areas within the orbito-frontal
cortex, the thalamus and the inferior temporal gyrus-regions known for
regulating emotions. “We know that people who consistently meditate have a
singular ability to cultivate positive emotions, retain emotional stability
and engage in mindful behaviour”, said Eileen Luders, study co-author and
postdoctoral fellow at the UCLA Lab of Neuro Imaging.

Luders and colleagues examined 44 people, 22 control
subjects and 22 who had practised Zazen, Samatha and Vipassana meditation,
among others. They had devoted an average of 24 years to the practice. More
than half of all the people who meditate said that deep concentration was an
essential part of their practice, and most meditated bet. 10 and 90 minutes
daily, said an UCLA release.

The researchers used a high-resolution, three-dimensional
form of MRI and two different approaches to measure differences in brain
structure.

These findings were published in Neuro Image.

(Source : The Times of India, dated 14.05.2009)

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Accounting fiction

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  1. Accounting fiction

US banks have started reporting profits, even repaying some
of the funds given to them by the government. But, as Nobel Laureate Paul
Krugman points out, a bank’s profits aren’t really hard numbers, since a great
deal depends on how much money the bank sets aside to cover the possibility of
future losses. As Citigroup’s $1.6 billion first quarter profits show, there
is quite a lot of elbow room for massaging the numbers. Around $700 million of
the bank’s revenues came from selling off its remaining stake in the Brazilian
credit card firm, Redecard.

Another $250 million were released from reserves, and $110
million came from a tax rebate. But most important of all, and perhaps
shocking, was the $2.7 billion boost to revenues from an accounting rule that
allowed Citigroup to buy back its debt at a lower price. US Financial
Accounting Standard 159 says that when a debt declines in value, banks have to
assume they bought the debt back and retired it. Since the notional buyback is
at less than sticker price, the bank has now made money on the deal !

Then there is the case of Bank of America, whose net income
rose to $4.25 billion in the January-March quarter, from $1.21 billion a year
earlier, only to find its stock price fall by a staggering 24 per cent. That
is because investors realised that out of the total increase, $1.9 billion
came from the bank’s sale of its stake in China Construction Bank, while
another $2.2 billion came from the fact that some of the Merrill Lynch debt
fell in value (long live FAS 159 !). Similarly, as Dr. Krugman points out,
Goldman Sachs changed its definition of a quarter so that (in Dr Krugman’s
words), “the month of December, which happened to be a bad one for the bank,
disappeared from this comparison”. JPMorgan Chase has also reported better
numbers, using FAS 159.

(Source : Business Standard, dated 23.04.2009)

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Accountants finally get a hearing aid for appeals

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  1. Accountants finally get a
    hearing aid for appeals


Tribunal, instead of Courts, to review regulatory decisions

Chartered accountants, company secretaries and cost
accountants facing disciplinary action from their professional regulators can
now appeal to a specialised Appellate Tribunal instead of a High Court.

The appeals will be heard by professionals who have
regulatory experience and can deliver speedy decisions, an official in the
Ministry of Corporate Affairs said. The delay at the heavily burdened High
Courts often hurts the careers of many professionals who seek a review of the
disciplinary action.

(Source : The Economic Times, dated 23-4-2009)


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One of the best mails ever . . . .

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32 One of the best mails ever . . . .

Speech by Thomas Friedman in the New York Times . . . .

“When we were young kids growing up in America, we were told
to eat our vegetables at dinner and not leave them.

 

Mothers said, think of the starving children in India and
finish the dinner.’

 

And now I tell my children

 

‘Finish your homework. Think of the children in India who will make you
starve, if you don’t.”

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Perspectives

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30 Perspectives


 


  •  “You offend God not only by stealing, blaspheming or coveting your neighbor’s
    wife, but also by ruining the environment.”

Vatican Bishop
Gianfranco Girroti, on the Roman Catholic Church’s new list of seven deadly
sins for the modern age, which include eco-abuse,

obscene
consumerism and genetic manipulation.

  •  “I didn’t know the Army had anything left to sell. I thought it had all been
    stolen long ago.”

An
unidentified Russian Army Officer, commenting on the military’s plan to raise
money by auctioning off

mansions, land
and even whole towns in its possession.

(Source :
Newsweek , 24-3-2008)

 

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SEC Advisory Committee takes up fair value accounting, drops discussion of IFRS

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28 SEC Advisory Committee takes up fair
value accounting, drops discussion of IFRS


The jury is still out on the absolute merits of fair value
accounting for financial statements, a variety of experts told the Securities
and Exchange Commission’s Advisory Committee on Improvements to Financial
Reporting in an open meeting on May 2, 2008, in Chicago.

 

“What are users most interested in ?” said one of the
participants. “Then there’s the issue of what’s doable. I think we’re finding
with [the Financial Accounting Standards Board’s (FASB) Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value Measurements] it’s challenging
for financial statements.”

 

The sub-committee’s report cautions against expanding the use
of fair value in financial reporting until a number of issues are better
understood and resolved, including the FASB’s project on the measurement
framework, which is looking at developing a consistent approach to determine
which measurement attribute should apply to different types of business
activities.

 

“What we have proposed is a framework not based on any one
asset, we’ve based it on activities,” said Susan Schmidt Bies, the Chair of
CIFR’s Substantive Complexity Subcommittee and a member of the Federal Reserve
Board from December 2001 through March 2007. “We think that’s what users want,
and it’s more based on what businesses do, because it asks what is the cash flow
recognised in the financial statement and how is that related to what’s going on
in the income statement.”

 

The sub-committee report says the SEC should recommend that
the FASB “be judicious in issuing new standards and interpretations that expand
the use of fair value in areas where it is not already required, until
completion of a measurement framework.”

(Source : Internet Newswires, 6-5-2008)

 

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Improve methodology for ranking ease of paying taxes

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27 Improve methodology for ranking ease of
paying taxes


The Chairman of the Prime Minister’s Economic Advisory
Council, Dr. C. Rangarajan, has taken issue with the World Bank over the
methodology used in the latter’s ‘Paying Taxes 2008’ study, which ranked various
countries in terms of ease of paying taxes.

 

India was ranked 168 among 178 countries. The corresponding
rank for Pakistan was 146, Sri Lanka 158 and Bangladesh 81.

 

“We feel there are serious shortcomings in the methodology
used by the World Bank study in making these rankings. Besides the judgments
made in the choice of the firm, taking the number of tax payments and time spent
with tax payments is far too simplistic,” Dr. Rangarajan said in his address at
the Fifth Asia Tax Forum, jointly organised by the Union Finance Ministry and
the National Institute of Public Finance and Policy here on Monday.

(Source : Internet newswires)

 

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Citigroup to lay off 9,000 as Q1 losses touch $ 5.1 billion

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25 Citigroup to lay off 9,000 as Q1 losses
touch $ 5.1 billion


Citigroup posted its second straight quarterly loss on
Friday, hurt by more than $ 16 billion of write-downs and costs related to
credit losses, and said it will cut another 9,000 jobs.

 

Though the $ 5.11 billion first-quarter loss was larger than
expected, analysts and investors expressed optimism that the largest US bank and
its new chief executive, Vikram Pandit, were taking necessary steps to move past
credit problems and drive down costs.

 



  •  Citigroup’s net loss pegged at $ 1.02 a share


  • Revenue has fallen 48% to $ 13.22 billion


  •  Citi has lost close to $ 15 billion in the last two quarters in asset
    writedowns


  • Bank has written down over $ 46 billion since the subprime lending crisis
    erupted mid-2007


  • Investment bank business has suffered the brunt of write-downs.

 


In the last two weeks, Citigroup has said it was selling its
Diners Club International credit card network and most of its North American
commercial lending and leasing business. Expenses, meanwhile, fell 2% from the
fourth quarter.

(Source : The Economic Times, 19-4-2008)

 

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Derivative blow : Axis makes Rs.72 crore provisions

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26 Derivative blow : Axis makes Rs.72 crore
provisions


Axis Bank today said it has made provisions of Rs.71.97 crore
during the fourth quarter of 2007-08 for six foreign exchange derivatives
transactions that have been repudiated by two of its customers.


While the bank has 188 derivatives transactions with an
aggregate mark-to-market (MTM) loss of Rs.673.55 crore at the end of March 2008,
there are six transactions where companies are not willing to honour the
contract. Of the 188 deals, 113 are outstanding transactions dealing in foreign
exchange derivatives where the aggregate MTM loss is Rs.547.72 crore.


While a host of banks, a majority of which are new-generation
private players, have sold derivatives products, Axis Bank is the first to
disclose the details of such transactions, some of which involved cross-currency
options and swaps.

The private sector bank did not disclose the identity of the
two companies that have gone to Court, but it is widely known that these are
Rajshree Sugars & Chemicals and Nahar Industries. The bank pointed out that the
outstanding contracts have not turned non-performing assets and involve MTM
losses. Reserve Bank of India guidelines require banks to treat assets as NPAs
90 days after default. ‘None of these assets has turned into an NPA,’ the bank
said in a statement.

The Reserve Bank of India (RBI) has initiated talks with
accounting standards regulator Institute of Chartered Accountants of India (ICAI)
to advance the mandatory implementation of accounting standards for derivatives
transactions by Indian banks and companies from its present 2011 deadline.

(Source : Business Standard, 22-4-2008)

 

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Commodity crash

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24 Commodity crash


The sudden price crash in global commodities markets last
week, after they had peaked at all-time highs at the start of the month, took
most observers by surprise. The shock value was all the more because it was the
steepest weekly drop in 50 years, exceeding by a substantial measure the
previous record weekly slump of 9.2%, way back in December 1980. That drop had
been triggered chiefly by a 20% hike in interest rates by US banks on
instructions from the Federal Reserve, which wanted to tame rampant inflation.
The present cave-in is also remarkable in that it has cut across the gold, crude
oil, metals and agro commodities markets, including corn, wheat and vegetable
oils.

(Source : Business Standard, 25-3-2008)

 

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Part A : CIC’s decisions, Part B : The RTI Act, Part C : Other News

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Delay in reply by PIO
and change of stand, etc. :


Three interesting points are decided in CIC’s decision dated
30-4-2008 in the matter of Shri Deepak H. Chhabria of Mumbai v. Ministry of
Overseas Indian Affairs
.

In Shri Chhabria’s RTI application, he wanted to know whether
a demand draft of Rs.25,000 sent by the Employment Promotion Council of Indian
Personnel, Mumbai, was encashed by the Ministry for renewal of RC for 25 years,
etc.

1.1 RTI application filed on 8 March, 2007 was first replied
by the PIO on 21 June, 2007, i.e., a delay of more than two months,
beyond the period (one month) stipulated for reply in the RTI Act.

1.2 The Commission, therefore, decided to issue a show-cause
notice as to why penalty should not be levied for this delay under Section 20(1)
of the Act.

2.1 In the first reply given, the respondents informed the
appellant that they were collecting the information which would be supplied to
him. However, later through a letter of 14 August 2007, they informed the
appellant that they regarded the information asked for as third-party
information.

2.2 The Commission was sorry to see this change of stand of
the respondents. The Commission examined the issue and came to the conclusion
that even though the information asked is about others than the appellant who
filed the application, in view of the public interest involved in the case, this
cannot be regarded as third-party information. The matter, obviously, involves
and affects a lot of persons. It, therefore, directed the respondents to
disclose all the documents/files on the subject to the appellant by 21 May 2008.

3.1 The Commission also noticed that the replies received by
the appellant from the respondents were signed neither by the PIO, nor by the
Appellate Authority but other officials in the Department.

3.2 The Commission warned the respondents to henceforth
ensure that provisions of the Act are adhered to in letter and spirit and that
response to the RTI applications and appeals are signed by the PIO and the
Appellate Authority, respectively. They were also directed to mention the name
of the Appellate Authority while making the first response to the RTI
application.

(No. CIC/OK/A/2007/01297 decided on 30-4- 2008)




Inspection of files
where investigation is in process :


This is the case of one Shri Dhirendra Krishna. In this case
the decision was given on 29-2-2008. In the said decision, while quoting from
the judgment of the Delhi High Court in Shri Bhagat Singh v. Chief
Information Commissioner & Ors.,
(Refer BCAJ, May 08) the Commission had
concluded as follows :

“To enable us, therefore, to examine as to the manner in
which inspection of the concerned file will impede the process of prosecution
in this case, if at all, particularly since this process has been pending for
so long, the concerned file will be submitted to us for our inspection on
2-5-2008 at 4.00 p.m. in the office premises of the CBI.”


The inspection was shifted to the CIC’s office. In the
submissions, CBI’s representative submitted a statement of details of Court
hearings. The same were from 27-1-2000 to 26-3-2008, next hearing fixed on
2-9-2008. As many as 17 hearings had taken place along with number of
adjournments from time to time.

The CBI representative submitted that the failure to frame
charges was not a result of any resistance on the part of the prosecution, he
submitted that in this case the appellant together with other co-accused in the
same case have sought discharge first in the Trial Court and then from the High
Court, but their discharge applications have been dismissed. He further
submitted that whereas they have brought all the relevant records for the
inspection, they have no difficulty in allowing inspection of any record held by
them in relation to the case of appellant Shri Dhirendra Krishna, whether relied
upon and therefore filed before the Trial Court or indeed records that have not
been filed and have not been relied upon, which appellant Shri Dhirendra Krishna
has in his appeal before us and subsequent representations repeatedly claimed to
exist by pleading that such records will assist him in contesting the case.
These are open for inspection by appellant Shri Dhirendra Krishna. With this
therefore, respondents have in fact, withdrawn the exemption from disclosure
sought u/s.8(1)(h), agreeing to inspection which will include any record of
which a list was handed over to the appellant Shri Dhirendra Krishna with a copy
retained on the CIC’s record in the hearing on 22-2-2008.

It is difficult to imagine why the CBI changed its stand, may
be after coming to know of the contents of the judgment of the High Court of
Delhi as reported in May 2008 issue of BCAJ.

Part B : The RTI Act


Part II of Chapter 5 of the Annual Report 2005-06 as
published by the Central Information Commission deals with suggestions for
reforms.

Clause (g) of S. 25(3) mandates that each such report shall
state :

(g) recommendations for reform, including recommendations
in respect of the particular public authorities for the development,
improvement, modernisation, reform or amendment to this Act or other
legislation or common law or any other matter relevant for operating the right
to access information.

In this part, the Commission has listed suggestions received
from different public authorities for reforming the Act to ensure better
implementation. Some of such reforms suggested are :

Public Information Officers should be provided with supporting staff and other infrastructure such as computer, printer, space for staff, etc.

Time limit for destroying old files be re-evaluated and re-fixed and that clarifications should be issued regarding entitlement of the questioner to very old records, which will not help the public.

A specific amendment may be made in the RTI Act with reference to the period up to which in-formation can be requested/furnished.

The fee be increased for detailed information covering large periods of time, which is sought in a format in which the information is generally not maintained by Ministries/Departments.

This suggestion is given by several public authorities as they feel that this is a lacuna, which needs to be taken care of to discourage frivolous and superfluous requests under the Act.

Several  public  authorities  want  some  sort  of exemption  from  the purview  of the Act. For example, while the Union Public Services Commission (UPSC, Ministry of Personnel, Public Grievances & Pensions) requested exemption from disclosure of information relating to examination and recruitment/ appointment cases, the DMRC requested __ general exemption as it is undertaking a time-bound exercise of completing the Delhi Metro.

 The Supreme  Court  of India  (Ministry of Law , Justice) has sought exemption from the Act for any information, which, in the opinion of the Chief Justice of India or his nominee, may adversely affect or interfere or tend to interfere with the independence of the judiciary or administration of justice.

“‘.. The Supreme Court of India has suggested that a decision by the Chief Justice of India under the Act should not be subjected to further appeal. It has suggested adding the following proviso to S. 19(3) :

“Provided further that the second appeal arising out of the Order passed by an officer of the Supreme Court of India inferior in rank to Registrar General of the Supreme Court of India shall lie before the Registrar General of the Supreme Court of India”.

Some public authorities have suggested that provisions of the RTI Act be extended to cover private sector as well or exemption be considered for public sector undertakings in the same field, like banks, insurance companies, Sail v. Tata Steel, RIL v. ONGe, etc.

Canara Bank (Ministry of Finance) has suggested making the application fee mandatory for appeals as well.

The CBI has observed that if the immediate Appellate Authority has also rejected a request for information, it is not fair to penalise the Central Public Information Officer alone for not providing the information.

    Many suggestions have been received for safe-guards to be built into the Act, such as :

  •     Safeguards to discourage those who request personal information,


  •     Safeguards  to ensure  that  the Act does not become a tool in the hands of delinquent employees to serve their own interests,


  • Requested the inclusion of provisions to check the bona fide of the requester and to refuse information to those who are not directly concerned with it or might use it for promoting their own business interests or may misuse it.


The time frame of one month for replying to queries may be increased, the number of questions in a single representation may be restricted to only one; suitable amendment may be made in the Act, so as to specify / curtail the number of applications an applicant can make on the same issue.

In conclusion, the report states that the stocktaking of the implementation of the Act reveals that more still needs to be done.

These include:

  • Proper indexing and computerisation of records for regular and consistent publishing on the website of the public authority, so that members of the public do not need to personally file an application or VISitthe official to seek information.


  • Public authorities must also begin to use open access software such as Wiki or Plone to upload information that they have disclosed to citizens under RTI on their website. They could initially upload only the information which is most requested by citizens, and steadily, say, within the next 12 months, move towards a system where all information that is requested is automatically made public, unless it falls under the exempted category.


  • Finally, an attitudinal change is needed among public officials who still believe that they have a monopoly over records and resent the public’s demand for ‘too much’ information for ‘too less’ a fee.


  • Public authorities must attempt to make the Act as citizen-friendly as possible rather than pitch for exemption from its purview. Initiatives such as the ones listed above would be more in line with the letter and intent of the Act, which has placed on public authorities the onus of its effective implementation.


Part C : Other News


Government’s    apathy    for RTI Act:

‘Mint’ under  the feature  ‘Our View’ has made very revealing  remarks  on the Government’s  apathy  to ‘f’  spread  awareness  of the RTI Act, even though  the Act mandates it to do it. ‘Mint’ writes:

“The contrast is a stark one. While cricket fans are endlessly reminded through TV spots about the Governments’ flagship Bharat Nirman programme, there is no attempt to publicise the provisions of the landmark Right to Information Act, 2005. Why? Because the former is a potential vote winner, while the latter is politically useless and a bureaucratic nightmare.”

•  Judiciary  under  RTI Act:

After the speaker of Loksabha (reported in BCAJ May issue) now, the former Chief Justice of India, J. S. Verma has commented on the issue of the coverage of the Courts under the RTI Act.

In reply to the question: How do you view CJI K. G. Balakrishnan’s controversial statement that being a constitutional office holder he was not answerable under RTI ?

He replies: In a democracy, no one is unaccountable. The mode of enforcement of accountability may, can and should vary according to the nature and position of the public functionary. The CJI is no exception to this rule. The Constitution provides for his removal, which is the ultimate form of accountability. He is accountable even for his judicial functioning. He has to hear cases in open Court and give reasoned decisions which are subject to public scrutiny. So, where is the scope to suggest that he can’t be accountable for his administrative functioning?

Further, in reply to the question: Doesn’t the judiciary’s hostility to RTI make a mockery of the three resolutions of judicial accountability passed by the SC Judges under your leadership?

His reply  is : When  those  three  resolutions were unanimously adopted on May 7, 1997, I did hope that they would be institutionalised in due course. Much as I admire the SC ruling that every political candidate should disclose his antecedents, I cannot imagine how a judge can hold others to a standard he does not apply to himself.

It appears that CJI, Mr. Balakrishnan, still maintains that CJI is not ‘a public authority’ within the meaning of the RTI Act.

It is now learnt that undeterred by the Chief Justice of India’s assertion that he does not come under the Right to Information (RTI) Act, the Central Information Commission (CIC) has decided to take up the issue in a Full-Bench hearing soon.

The issue is likely to come up before the Supreme Court breaks for recess. The issue comes at a time when the CJI has mellowed down from his earlier stance and said that his office is that of a public servant. “The CJI is a constitutional authority. RTI does not cover constitutional authorities”, the CJI had recently remarked. In a statement later, he clarified that he was a public servant and the issue of being governed under the Act was debatable.

•  Interesting incident in SIC’s  office:

Hussain, an Indian Forest Service officer of the 1980 batch, was appointed Secretary to the Maharashtra Information Commission a year ago. On one day in May, when Hussain reached the office, he was told that he had already been relieved and that he should get in touch with his parent (forest) department for his new assignment. According to reports, Buldhana collector Vasant Poreddiwar has taken over as the new Secretary of the Commission.

Hussain had been busy organising a one-day meeting of Chief Information Commissioners at Pune. After the meeting, when he reached his office in the New Administrative Building across Mantralaya, he saw Poreddiwar already occupying his office. He was then informed that he had been repatriated to his parent (forest) department. It was a mockery of the Right to Information Act. The CIC, which decides on applications under the RTI, failed to inform Hussain that he had been transferred.

•  Does  R in RTI mean ‘RedressaI’?:

One RTI activist writes: The Right to Information Act, in its second year, can well be christened the Redressal through Information Act. For, in an un-recorded trend, the 2005 law, meant to empower citizens with details of Government decisions, is now being increasingly used as a means of redressal of grievances.

Chief Information Commissioner Wajahat Habibullah says that the use of RTI as a grievance-redressal mechanism was not totally unexpected, at least by activist groups. It is noticed that RTI now is being largely used for getting details of delayed. passports, ration cards, denial of pensions and son. While the CIC is clear on the purpose of RTI, in such cases where there is a violation of rules or law, citizens certainly can be helped. The pattern of redressal grievances is picking up in the country. Some of the instances are :

  • A resident of Jhansi got details of what he al-leged was the forged DNA fingerprinting report of his 5-year old son, which his wife had got done.


  •  An appellant got details of the computation of his pensionary benefits denied to him for the last 10 years.   


  • The North-Eastern Railways was asked to furnish all information to an applicant relating to” recruitment and promotion of engineers, since . he had alleged malpractices in promotion of staff .


  • The Municipal Corporation of Delhi was asked to respond in 10 days to an applicant who had for long been seeking information regarding permissible limits for construction on a plot.


  •  A group of appellants from Varanasi filed a complaint against the Ministry of Textiles, since they were aggrieved with non-implementation of; health-insurance scheme for weavers. The Ministry was asked to settle the grievances within a month.


  • The CIC made a “strong recommendation” to the Delhi Development Authority (DDA) to allot a plot under the Janata category in Rohini, since the applicant’s allotment number was wrongly quoted by the bank and the allotment cancelled. “This amounts to denial of the right of a member of the public and also denial of natural justice,” the CIC order noted.


  • The Employees Provident Fund Organisation was ordered to return Rs.625 deducted from an applicant’s subsistence allowance to be paid to -: the Prime Minister’s Relief Fund, since it was done without taking his consent.


RTI exposes nepotism  in Kerala Government:

RTI query has put Kerala’s left Government in a spot, inviting charges of promoting nepotism and also raising questions about the CPM’s stand on ethics in public life.

At the  centre  of the  storm  is Kerala  Health Minister P. K. Sreemathi,  who has inducted  her daughter-in-law   Dhanya  M. Nair  into her personal  staff. This was  revealed  by the  General ;.,Administration   Department  in response  to RTI query  seeking  details  of Sreemathi’s  personal staff. The request  was  filed by AIADMK State Secretary Sreenivasan Venugopal.

In reply, Venugopal got a list of 22 names including Dhanya, who is married to Sreemathi’s son. She had joined the staff as a clerk and was only recently promoted to the post of additional personal assistant.  Her salary works  out to around Rs. 17,000 p.m. Dhanya  will also be eligible for pension  once she completes 2 years in her post.

Delays in appeals before Central Information Commission and the State Information Commissions:

Almost everywhere it has been a sorry state of affairs. Recently, it has come to the public notice that in UP, more than half of over 9000 appeals and complaints made are pending. Out of 9946 appeals and complaints received in UP SIC’S office during 2006-07, as at the end of March 2008, 4088 appeals and complaints have remained pending .

CIC’s Press  Release:

To foster the spirit of ‘share  & care’ amongst  the stakeholders,  the Central  Information  Commission  has  provided   a platform   on  its website

where the public authorities/Central Government Ministries/Departments can post what they consider a ‘Best Practice’ with regard to implementation of the RTI in their set-up. The enlight- I ened citizens among us who want to publicly acknowledge and recognise the ‘heroes’ amongst the public authorities who they consider to have innovated a procedure in their organisations or improved on the existing ones, so as to make the accessibility of information hassle-free to the larger masses may also share their experience and what they liked about the practice in the public authority, so that it could be replicated and/ or further improved.

Miscellaneous — National Pension Scheme notified with effect from 1 May 2009.

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  1. Miscellaneous — National Pension Scheme notified with
    effect from 1 May 2009.

National Pension Scheme which was erstwhile applicable only
to Government employees is now made applicable to all the eligible citizens of
India (both resident and non-resident) of the age of 18 to 55 years of age,
with effect from 1 May 2009. An individual can contribute savings into this
non-withdrawable account which matures and can be annutised post 60 years of
age or as prescribed by the scheme. There is another voluntary contribution
scheme, wherein money can be withdrawn, however the same is yet to be
notified. To enrol in the scheme, an individual needs to submit a registration
Form UOS-s1 to selected agencies. NRIs should have a bank account in India to
register in this scheme. After the account is opened, the Central Record
Keeping Agency shall allot a unique Permanent Retirement Account Number (PRAN)
card. As per the scheme the minimum contribution is Rs. 500 (Rs. 6000 per
year) and a person needs to contribute at least 4 times a year. Investment
options are also available as prescribed in the scheme.

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Clarifications on the amendments/introduction of the new TDS/TCS provisions vide Notification No. 31/2009, dated 25 March 2009 — Circular No. 2/2009, dated 21 May 2009.

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  1. Clarifications on the amendments/introduction of the new
    TDS/TCS provisions vide Notification No. 31/2009, dated 25 March
    2009 — Circular No. 2/2009, dated 21 May 2009.


The CBDT vide a press release (as mentioned above) had
stalled the implementation of the new provisions relating to TDS/TCS
provisions till 1 July 1009. The CBDT has now reinstated the implementation of
these provisions with effect from 1 April 2009, by issuing this Circular and
clarifying certain ambiguities which arose due to the introduction/amendments
relating to the captioned subject. Important clarifications are under :


  •  Claim for TDS would be allowed only if amount has been
    deposited and information relating to the deductee has been provided by the
    deductor/collector and the claim matches with that of the deductee/collector.


  •  Central and State Government deductors have also been
    made responsible for payment of TDS in the bank unlike earlier when book
    adjustments/consolidated payments were allowed.


  •  Every deduction record will generate a Unique
    Transaction Number (UTN) on loading the information on NSDL and payment of
    the TDS/TCS to the Government Treasury. UTN would be emailed by the NSDL to
    the deductor, and needs to be quoted in the TDS certificate. This UTN can
    also be independently viewed by the deductee on the website of NSDL.


  •  It is mandatory for all TAN holders to furnish Form 24C
    quarterly irrespective of whether any payment liable to TDS has been made or
    not. The first quarter in respect of which Form 24C is required to be
    furnished is the quarter ending on 30th June, 2009 by 15th July.


  •  The above new system will be effective for all TDS/TCS
    on or after the 1st April, 2009. However, any TDS or TCS effected on or
    after the 1st April, 2009 but not later than 31st May, 2009 can be continued
    to be paid to the credit of the Central Government by using the old challan
    form. Post 1st June, 2009 such TDS/TCS shall be required to be paid by
    electronically by furnishing income tax challan in Form No. 17. By 15 July,
    for those TDS/TCS which have been paid in the old challan, Form No 17 needs
    to be filled up so that UTNs for these can be generated.


  •  For splitting the payment of TDS/TCS , a separate Form
    17 needs to be filled for each payment.


  •  In the said Circular, it has been clarified for the AY
    2008-09 and onwards, UTNs are going to be generated by NSDL and detailed
    procedure has been prescribed for claiming TDS on the basis of this UTNs.
    Since the returns for AY 2008-09 have already been filed, it remains to be
    seen how this would be practically implemented.


  •  Similarly new procedures have been prescribed for issue
    of TDS/TCS certificates in Form 16/16A and 27D.



Instructions for new Income Tax Return forms for Assessment
Year 2009-2010 — Circular No. 3/2009, dated 21 May 2009.

Certain clarifications have been given by the CBDT for
the
E-returns for AY
2009-10, the important ones being :






  •  It has been reiterated that no enclosures need to be
    submitted along with the paper return. The only exception being transfer
    pricing report which needs to be filed separately as per the provisions of the
    Act.


  •  With respect to E-filing(without digital signatures) and
    subsequent filing of verification form in ITR-V — hard copy of verification
    form ITR-V now can be filed within 30 days (instead of the earlier time limit
    of 15 days) from date of electronic filing. Further, the CBDT has decided to
    process all the paper returns i.e., ITR V Centrally at Bangalore.
    Hence, all the ITR V needs to be sent by the assessee at the following
    address :


“Income Tax Department — CPC, Post Box No.1, Electronic
City Post Office, Bangalore- 560100, Karnataka”

Please note that it has been specifically mentioned that
the document should be posted in A-4 size envelope without folding it since
the ITR V is bar-coded. On receipt of the ITRV, the Department will email an
acknowledgement to the taxpayer at the email id mentioned in the ITR V. There
is only one exception being ITR 7 which is Trust returns.

  •  It has been reiterated in this Circular that the credit
    for TDS/TCS and the advance tax/self assessment tax would be available mainly
    on the basis of the UTN information and CIN information feeded in the return.



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Press Release dated May, 15th 2009.

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  1. Press Release dated May, 15th 2009.

The Reserve Bank has designated 926 branches of private and
public sector banks for receiving advance Income tax in Mumbai and Navi
Mumbai. Out of these 926 branches, 862 are public sector banks and 35 are HDFC
bank branches, 10 are ICICI bank branches and 19 are AXIS bank branches.

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Press Release No. 402/92/2009 — MC (11 of 2009), dated 11.5.2009

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  1. Press Release No. 402/92/2009 — MC (11 of 2009), dated
    11.5.2009

The Central Board of Direct Taxes have decided to defer the
implementation of Notification No.31/2009, dated 25-3-2009 amending or
substituting Rules 30, 31, 31A and 31AA of the Income Tax Rules, 1962. The
amended/substituted Rules will now come into effect on 1st July 2009 instead
of 1st April 2009. Tax deductors/collectors may continue to deposit TDS/TCS
tax and file TDS/TCS returns as per the pre-amended provisions in the interim
period. This however is only for records due to the Circular issued later
which is outlined below.

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TDS on commission paid by MTNL/BSNL to owners of PCO under Section 194-H of Income-tax Act, 1961 —Instruction No. 03/2009, dated 8.5.2009 (reproduced) — [F. No. 275/15/2002-IT(B)]

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  1. TDS on commission paid by MTNL/BSNL to owners of PCO under
    Section 194-H of Income-tax Act, 1961 —Instruction No. 03/2009, dated 8.5.2009
    (reproduced) — 
    [F.
    No. 275/15/2002-IT(B)]

A number of representations have been received from BSNL/MTNL
and field formations regarding raising of/pending demands for non-deduction of
tax at source on commission payments to the franchisees/PCO owners by MTNL and
BSNL prior to 1/6/2007. The matter was discussed by the Board recently and it
has been decided that the demands raised against MTNL/BSNL on account of
non-deduction of TDS u/s. 194H on all such commission payments to franchisee/PCO
owners, etc. may not be enforced till the matter is sorted out by the Board.
However, in case MTNL/BSNL have already deducted TDS on commission payments to
the PCO owners, etc., but have not deposited it to the Govt. accounts because
of incorrect interpretations of instruction dated 15th July, 2002, they have
to be directed to deposit such sums immediately to the Govt. Account.

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ENVIRONMENTAL LAWS

Laws and Business

1. Introduction :


1.1 The environment in which businesses operate is extremely
important and valuable. If it is not preserved it would be lost forever since it
is rapidly depleting. Pollution of the environment is one of the main culprits.
Pollution could be of air, water, noise and could be caused by sewage,
effluents, waste, bio-medical waste, release of chemicals or smoke, etc. in the
air, noxious chemicals, etc.

1.2 Businesses need to follow the principle of sustainable
development and have legal and moral responsibility towards preserving the
environment. To protect and preserve the environment, the Government has enacted
various laws. Let us briefly examine some of the important Central enactments on
this subject.

1.3 The Courts are also taking a very strict view when it
comes to violation of environmental laws and have not hesitated in prosecuting
directors responsible along with offending companies. A recent judgment of the
Supreme Court in the case of UP Pollution Control Board v. Dr. B. K. Modi,
(2009) 2 SCC 147, has examined this issue in the context of discharge of
pollutants by a company in the river. The company, Modi Carpets was prosecuted
by the Board for discharging noxious effluents in the Sai River. The Pollution
Control Board also filed a criminal complaint against the Directors and MD. The
Allahabad High Court quashed the operation of the complaint against the MD by
holding that there was no material to prove that he was responsible for the
daily conduct of the business or that the offence was committed by his consent
or connivance. The SC referred to its earlier decision in the case of UP
Pollution Control Board v. Mohan Meakins Ltd., (2000) 3 SCC 745. In that case
also, the Directors were sought to be prosecuted for discharge of effluents by
the company in a river. In that case, the SC observed that in view of the
specific averments in the complaint against the Directors, the prosecution of
the Directors was permitted. The SC further observed in the impugned case, that
in matters of public health, the Courts cannot afford to take matters lightly.
All persons big or small should share the parliamentary concern over the
escalating pollution levels. Those who discharge effluents in the environment
should be dealt with sternly, irrespective of technicalities. Hence, the Court
ruled that the Magistrate should proceed with the complaint against the MD and
declined to quash the proceedings against him. Thus, compliance with
environmental laws has become extremely important.


2. Environment
(Protection) Act, 1986 :


2.1 This is a general Act which deals with
the protection and improvement of the environment. Although there were specific
Acts which dealt with air, water, and other pollution, the need was felt for a
general Act which would cover other environmental hazards which were left out.
The Act fixes responsibilities on persons carrying out industrial operations or
those who handle hazardous substances to comply with prescribed safety standards
and also to control and prevent pollution arising from the same. The Government
lays down various standards for the same under the Act and also requires the
filing of information, inspections, etc.


2.2 Definitions :


The Act defines the term environment to include water, air
and land and the inter-relationship which exists among and between water, air
and land and human beings, other living creatures, plants, micro-organisms and
property.


An environmental pollutant is any solid, liquid or
gaseous substance present in such concentration as may be or tend to be
injurious to the environment.

The all important term ‘environmental pollution’ means
the presence of any environmental pollutant in the environment.

A hazardous substance means any substance or
preparation which by reason of its chemical or physico-chemical properties or
handling is liable to cause harm to human beings, other living creatures,
micro-organisms, property or the environment.


2.3 Obligations :


2.3.1 The Act lays down various obligations on industries,
factories, etc. It prohibits the carrying on of any industry, operation or
process which discharges or emits any environmental pollutant in excess of the
prescribed standards. The standards are prescribed under the Environmental
Protection Rules, 1986. Further, no person can handle any hazardous substance
otherwise than in accordance with the prescribed safety standards.

2.3.2 If the discharge of any pollutant is or is likely to be
in excess of the prescribed standards, then the person responsible should take
steps for prevention or mitigation of the pollution and should also furnish
certain prescribed information to the authorities of the same. The authorities
would then take such remedial measures as are necessary, at the cost of the
polluter.

2.3.3 The Act prescribes for powers of entry, inspection,
examination, testing, searching, etc. of any place in connection with the
prevention of environmental pollution. The person so authorised can take samples
of air, water, soil or other substances for this purpose. However, he needs to
comply with the procedure prescribed in this respect.

2.3.4 The Act also empowers the Government to establish
environmental laboratories for carrying out certain inspection, testing,
analysis, functions under the Act.


2.4 Penalties :


Whoever contravenes any provisions of the Act or Rules, is
punishable with imprisonment up to five years or with a fine up to Rs.1 lakh or
both. Continuing defaults attract a fine of Rs.5,000 per day. Where the
contravention continues beyond a period of one year from conviction, the
punishment is an imprisonment of up to seven years.


2.5 Environmental
clearance :


The Government is empowered to prohibit or restrict the
location of industries, operations, in certain areas keeping in mind maximum
allowable limits of concentration of environmental pollutants, the climatic
features, the net adverse environmental impact, the proximity of the proposed
project to protected areas, etc.


2.6 Environmental
audit :


Every person carrying on an industry, operation or process
requiring consent under the Water Pollution Act, Air Pollution Act, and the
Hazardous Wastes Rules must submit an environmental statement for every
financial year to the State Pollution Control Board.


2.7 Rules :


The following Rules have been framed under the Act :

    a) Environmental (Protection) Rules, 1986

    b) Hazardous Wastes (Management and Handling) Rules, 1989

    c) Manufacture, Storage and Import of Hazardous Chemicals Rules, 1989

    d) Manufacture, Use, Import, Export and Storage of Hazardous Micro-Organisms/Genetically Engineered Organisms or Cells Rules, 1989

    e) Chemical Accidents (Emergency Planning, Preparedness and Response) Rules, 1996

    f) Bio-Medical Waste (Management and Handling) Rules, 1998

    g) Plastics Manufacture Sale and Usage Rules, 1999

    h) Noise Pollution (Regulation and Control) Rules, 2000

    i) Ozone Depleting Substances (Regulation and Control) Rules, 2000

    j) Municipal Solid Wastes (Management and Handling) Rules, 2000

    k) Batteries (Management and Handling) Rules, 2001

    l) Hazardous Wastes (Management, Handling and Transboundary Movement) Rules, 2008
    
3. Air (Prevention and Control of Pollution) Act, 1981 :

3.1 This is a specific Act dealing with prevention, control and abatement of air pollution.

3.2  Definitions :

Air pollutant means any solid, liquid or gaseous substance including noise which is present in the atmosphere in such concentration as may be or tend to be injurious to human beings or living creatures or plants or property or environment.

Air Pollution means the presence of any air pollutant in the atmosphere.

Emission means any solid, liquid or gaseous substance coming out of any chimney duct or other outlet.

3.3 The Act provides for establishing Central and State Pollution Control Boards for prevention of air pollution. The same Boards also serve as Boards for water pollution. The Central Boards can establish or recognise laboratories to assist the Board in carrying out its functions. The State Boards lay down standards for emission of air pollutants into the atmosphere from industrial plants and automobiles or for the discharge of any air pollutant into the atmosphere from any other source.

3.4    Prevention and control of air pollution :
3.4.1 The State Government may, after consultation with the State Board, declare any area or areas within the State as air pollution control areas for the purposes of the Act. If the State Government is of opinion that the use of any fuel, other than an approved fuel, in any air pollution control area may cause air pollution, then it may prohibit the use of such fuel in such area. It can also direct that no appliance, other than approved appliances, shall be used in the premises situated in an air pollution control area.

3.4.2 With a view to ensuring that the standards for emission of air pollutants from automobiles laid down by the State Board are complied with, the State Government shall give such instructions as are necessary to the concerned authority in charge of registration of motor vehicles under the Motor Vehicles Act, 1939.

3.4.3 No person shall, without the previous consent of the State Board, establish or operate any industrial plant in an air pollution control area.

3.4.4 No person operating any industrial plant, in any air pollution control area shall discharge or cause or permit to be discharged the emission of any air pollutant in excess of the standards laid down by the State Board.

3.4.5 If the emission of any air pollutant, is or is likely to be in excess of the standards laid down by the State Board by reason of any person operating an industrial plant or otherwise in any air pollution control area, then the Board may make an application to Court for restraining such person from emitting such air pollutant.

3.4.6 The Act gives powers to the State Board to authorise any person for entry, inspection, examination, testing, searching, etc. of any place in connection with the prevention of air pollution. The person so authorised can also take samples. However, he needs to comply with the procedure prescribed in this respect.

3.5    Penalties :

Failure to comply with the key provisions of the Act attracts a penalty in respect of each such failure, or imprisonment for a term which shall not be less than one year and six months but which may extend to six years and with fine, and in case the failure continues, with an additional fine which may extend to Rs. 5,000 for every day during which such failure continues after the conviction for the first such failure. If the failure continues beyond a period of one year after the date of conviction, the offender shall be punishable with imprisonment for a term which shall not be less than two years but which may extend to seven years and with fine.

    4. Water (Prevention and Control of Pollution) Act, 1974 :

4.1 This Act seeks to prevent and control water pollution and for maintaining or restoring the wholesomeness of water.

4.2  Definitions :

‘Pollution’ means such contamination of water or such alteration of the physical, chemical or biological properties of water or such discharge of any sewage or trade effluent or of any other liquid, gaseous or solid substance into water (whether directly or indirectly) as may, or is likely to, create a nuisance or render such water harmful or injurious to public health or safety, or to domestic, commercial, industrial, agricultural or other legitimate uses, or to the life and health of animals or plants or of acquatic organisms.

‘Sewage Effluent’ means effluent from any sewerage system or sewage disposal works and includes sullage from open drains.

‘Sewer’ means any conduit pipe or channel, open or closed, carrying sewage or trade effluent.

‘Trade Effluent’ includes any liquid, gaseous or solid substance which is discharged from any premises used for carrying on any industry, operation or process or treatment and disposal system, other than domestic sewage.

4.3 The Act provides for establishing Central and State Pollution Control Boards for prevention of water pollution. The Central Boards can establish or recognise laboratories to assist the Board in carrying out its functions. The State Boards lay down standards for sewage and trade effluents and for the quality of receiving waters, works for the purification thereof and the system for the disposal of sewage or trade effluents.

4.4 Prevention of water pollution :

The State Government can restrict the application of the Act to certain areas, known as Water Pollution Prevention and Control area. No person shall cause any poisonous, noxious or polluting matter to enter into any stream or well or sewer or on land.

The State Board may make surveys of any area and gauge and keep records of the flow or volume and other characteristics of any stream or well in such area. A State Board may give directions requiring any person who in its opinion is abstracting water from any such stream or well in the area in quantities which are substantial in relation to the flow or volume of that stream or well or is discharging sewage or trade effluent into any such stream or well, to give such information as to the abstraction or the discharge at such times and in such form as may be specified in the directions.

The  State  Board  is  empowered  to  samples  of effluents or sewage or trade effluents. The Act gives powers to the State Board to authorise any person for entry, inspection, examination, testing, searching, etc. of any place in connection with the prevention of water pollution.


4.5 No person shall, without the previous consent of the State Board :

    a) Establish or take any steps to establish any industry, operation or process, or any treatment and disposal system or any extension or addition thereto, which is likely to discharge sewage or trade effluent into a stream or well or sewer or on land.

    b) Bring into use any new or altered outlet for the discharge of sewage.

    c) Begin to make any new discharge of sewage.

The Act lays down the procedure for the same.

4.6 Penalties :

Whoever fails to comply with any directions on information about abstraction of water or discharge of effluence or information regarding construction, installation or operation of any establishment of or any disposal system shall, on conviction, be punishable with imprisonment for a term which may extend to 3 months or with fine which may extend to Rs.10,000 or with both and in case the failure continues, with an additional fine which may extend to Rs.5,000 for every day during which such failure continues after the conviction for the first such failure.

Certain other offences are punishable with imprisonment for a period ranging from 18 months to 6 years and with fine. Continuing offences attract a fine of Rs.5,000 per day. Where such a failure continues beyond one year, the offender can be punished with imprisonment for a term of 2 to 7 years.

    5. Director’s responsibilities :

5.1 The Board of Directors should enquire of the company’s compliance with the environmental laws. This especially true in the case of industries where environmental law compliance is critical to the survival of the entity. The recent example of the oil spill by British Petroleum in the Gulf of Mexico is an example in this direction. The issue has escalated into a high-profile political issue and could end up causing substantial losses to BP.

5.2 The company must designate a Compliance Officer to ensure compliance with various environmental laws. He must be a person who is well versed with the legal and commercial field. At every Board Meeting, the Compliance Officer should be asked to table a Compliance Certificate certifying compliance with all environmental laws. This should also be preferably signed by the Managing Director and/or the Whole-Time Directors and must be backed up with supporting certificates from various departmental heads who are responsible for compliance at an operational level.

    6. Auditor’s duty :
6.1  In case the Auditor comes across a serious violation of environmental laws, then he should consider obtaining an opinion on its validity and/ or appropriate disclosure in the accounts and his report. In case of a hazardous chemical company, a serious lapse of an environmental law can make or mar the future of the company. In some cases, it could affect the ‘going concern concept’ of the company.

6.2 It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’. By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services.

Competition Law

I. Introduction

    India has embraced globalisation and liberalisation by throwing open its doors for large corporate houses, both Indian and foreign. Earlier restrictions have been removed, barriers reduced, etc. Even the Monopolies and Restrictive Trade Practices Act which, for quite some time, was the bane of the Indian Industry has been watered down to near insignificance. It is in this background that the Parliament thought it fit to introduce a legislation to curb monopolies and promote competition. Competition is essential for the working of any economy to reduce economic inequalities. The Competition Act, 2002 (‘the Act’) is a step in this direction. The Act contains two aspects, one dealing with anti-competitive agreements, abuse of dominant position, etc., and the other dealing with the regulation of certain business combinations, such as mergers, acquisitions, etc. which have an adverse effect on competition. Recently, the Government has appointed the Chairman and two members of the Commission. The Commission is expected to begin hearings on matters of anti-competitive agreements and abuse of dominant positions soon. This Article deals with some of the salient features of the Act dealing with the regulation of business combinations. The provisions of the Act have overriding effect on any other inconsistent statute, e.g., Companies Act, Stamp Duty, FEMA, etc.

II. Background

    2.1 Many countries such as the USA have an Anti-trust Law which aims at preventing monopolies and mega mergers which impede competition. These laws need to be also considered while structuring a cross-border merger. In UK, mergers and acquisitions may need the approval of the Monopolies and Mergers Commission. For instance, in the USA certain business combinations require filings and clearances with the Federal Trade Commission (FTC) or Department of Justice (DOJ) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act). The HSR Act requires parties to a merger to file certain information before the FTC and the DOJ before the merger proceeds. There is a minimum waiting period after filing the information with these agencies.

    For instance, the acquisition of Honeywell by GE, ran into various problems under the Anti-trust provisions especially with the European Union. It was probably one of the rare acquisitions in which Mr. Jack Welch failed.

    2.2 The U.K. Competition Act, 1998 is also a legislation in this direction. Similar provisions exist under the European Commission Regulations.

    2.3 The Act seeks to ensure fair competition in India by the creation of a Competition Commission of India. The Commission would have a Principal Bench and several Additional Benches, including Merger Benches.

III. Business Combinations

    3.1 Ss. 5 and 6 of the Act deal with the regulation of certain business combinations. While s. 5 defines the combinations which are covered within the purview of the Act, s. 6 lays down the regulations which would apply to such business combinations.

    3.2 Combinations covered by s. 5

        In certain cases the :

        (i) acquisition of any enterprise(s) by any person(s); or

        (ii) merger/amalgamation of enterprises

        shall be treated as a combination of such enterprises and persons (in case of an acquisition) or enterprises (in case of an merger/amalgamation). These cases are as stated hereunder.

    3.3 Acquisitions treated as combinations

    Any ‘Acquisition’ where :

    (a) the Acquirer and the Target Enterprise (i.e., whose control, shares, voting rights or assets are being acquired) jointly have :

    (i) in India assets of a value exceeding Rs.1,000 crores; or

    in India a turnover of a value exceeding Rs.3,000 crores; or

    (ii) in India or abroad, in aggregate :

    (A) assets of a value exceeding US$ 500 million; or

    (B) turnover of a value exceeding US$1,500 million

    (b) the group to which the Target Enterprise would belong post-acquisition would jointly have :

    (i) in India assets of a value exceeding Rs. 4,000 crores; or

    in India a turnover of a value exceeding Rs. 12,000 crores; or

    (ii) in India or abroad, in aggregate :

    (A) assets of a value exceeding US$ 2 billion; or

    (B) turnover of a value exceeding US$6 billion

    Any acquisition of control by a person over an enterprise in a case where he already has direct or indirect control over another similar enterprise which is engaged in the production, distribution or trading of similar/identical/substitutable goods or services, if :

    (a) the Acquirer and the Target Enterprise jointly have :

    (i) in India assets of a value exceeding Rs. 1,000 crores; or

    in India a turnover of a value exceeding Rs. 3,000 crores; or

    (ii) in India or abroad, in aggregate :

    (A) assets of a value exceeding US$ 500 million; or

    (B) turnover of a value exceeding US$1,500 million

    (b) the group to which the Target Enterprise would belong post-acquisition would jointly have :

    (i) in India assets of a value exceeding Rs. 4,000 crores; or

    in India a turnover of a value exceeding Rs. 12,000 crores; or

    (ii) in India or abroad, in aggregate :

    (A) assets of a value exceeding US$ 2 billion; or

    (B) turnover of a value exceeding US$ 6 billion

Any Merger  or Amalgamation    in which:

a) the merged  enterprise  would  have:

i) in India assets of a value exceeding Rs. 1,000 crores; or
in India a turnover of a value exceeding Rs. 3,000 crores; or

ii) in India  or abroad,  in aggregate:

    A) assets of a value exceeding US$ 500 million; or
    B) turnover of a value exceeding US$l,500 million

b) the group to which the merged enterprise would belong post-merger would have:

i) in India assets of a value exceeding Rs. 4,000 crores; or
in India a turnover of a value exceeding Rs. 12,000 crores; or

ii) in India  or abroad,  in aggregate:

    A) assets of a value exceeding US$ 2 billion; or

    B) turnover of a value exceeding US$ 6 billion

3.4 The Value of the assets are to be computed as under:

Book Value of the Assets as per the last Audited Accounts

(-) Depreciation

(+) Value of Intangible  assets such as value of

brand,goodwill, copyright/patent/ registered trademark / designs / registered user /permitted use, etc.

The last audited accounts means those pertaining to the financial year immediately prior to the financial year in which the date of the proposed merger falls. Interestingly, a similar provision has not been drafted in case of acquisitions.

3.5 Definitions

The Act defines certain terms which are used in

s.5 and s.6. These are as follows:

a) Acquisition means directly or indirectly acquiring or agreeing to acquire:

    i) shares, voting rights or assets of any enterprise; or
    ii) control over management or control over assets of any enterprise.

b) Control includes controlling the affairs or management by :

    i) one or more enterprises, either jointly or singly, over another enterprise or group; or

    ii) one or more groups, either jointly or Singly, over another ern-r pr ise or group.

c) Group means two or more enterprises which directly or indirectly are in a position to:

    i) exercise 26% or more voting in the other enterprise; or
    ii) appoint more than 50% of the Board of Directors in the other enterprise; or
    iii) control the management or affairs of the other enterprise.

d) Enterprise  means:

    i) a person or a Government department engaged in any activity (including profession or occupation).

    ii) of production/ storage/ distribution/ supply / acquisition/ control of articles or goods or providing services.

    iii) investment or the business of acquiring, holding, underwriting or dealing with any securities of any other body corporate

    iv) either directly or indirectly through its uni ts / divisions / subsidiaries.

    e) Person has been defined to include an individual, HUF, firm, company, AOP /BOl, corporation, body corporate incorporated abroad, co-operative society, local authority and every artificial juridical person.

    f) Shares means shares carrying voting rights and includes:

    (i) any  security   which  carries   voting rights; stock unless otherwise distinguished. Thus, preference shares would not be covered.

IV. Regulation of Business Combinations

4.1 No person or enterprise can enter into a combination which causes an appreciable adverse effect on competition within the relevant market in India and if they do then such a combination shall be void. Such agreements are known as Anti-competitive Agreements. For this purpose the term relevant market means the market which may be determined by the Commission with reference to the relevant product market or the relevant geographical market of both markets. Relevant geographic market means a market comprising the area in which the conditions of combination of supply of goods or provision of services or demand for the same are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas. Relevant product market means a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer. However, these provisions do not apply to any share subscription or acquisition by a Fl, Bank, VC Fund pursuant to a loan agreement. The Central Government has power to exempt any class of enterprises in public interest.

4.2 Any person or enterprise which proposes to enter into a combination, must give a notice to the Competition Commission, in the prescribed form disclosing the details of the proposed combination, within 30 days of :

    a) the approval of the proposal relating to the merger or amalgamation, by the board of directors of the enterprises concerned with such merger or amalgamation;

    b) the execution of any agreement or other document for an acquisition or acquiring of control.

After giving the Notice, for a period of 210 days thereof, the combination will not come into effect. Hence, the minimum waiting period is 210 days from the date of the Notice. Such a long waiting period is not only unusual compared to international anti-trust statutes but also undesirable.

The Commission shall inquire:

    a) whether the disclosure made in the notice is correct;

    b) whether the combination has, or is likely to have, an appreciable adverse effect on competition.

4.3 On receipt of the above Notice, the Commission shall or alternatively it may suo moto if it is of the opinion that the combination is likely to cause, an appreciable adverse effect on competition within the relevant market in India, issue a show cause notice to the parties to respond within 30 days of the receipt as to why an investigation in respect of such combination should not be conducted. Any person may also complain to the Commission that a proposed combination is likely to cause an appreciable adverse effect on competition or that it would abuse its dominant position.

4.4 In case the Commission is prima facie of the opinion that the combination has such an adverse effect, it shall, within 7 days from the date of receipt of the response direct the parties to publish details of the combination within 10 working days for bringing the combination to the knowledge or information of the public and persons affected by such combination. Any objection must be filed within 15 days. The Commission has power to call for further information.

4.5 Under section 31, the Commission has power to accept, reject or accept subject to modifications the combination. In all cases where the Commission is of the opinion that the combination has an appreciable adverse effect on competition it has powers to order that:

    a) the acquisition;

    b) the acquiring  of control;  or

    c) the merger  or amalgamation

shall not be given effect to. This provision is quite unusual as it gives the Commission powers to undo even a Court approved scheme of merger. Keeping in mind the fact that a merger scheme involves payment of stamp duty and consists of such other issues it would be quite interesting to learn how the merger would be undone.
 

4.6 The Commission has a maximum of 210 days to pass its Order in the absence of which it is deemed to have approved the Combination.

4.7 An appeal against the order of the Commission lies directly before the Supreme Court.

4.8 Concession under Regulations

The Draft Regulations issued by the Competition Commission of India have held that certain combinations are not likely to cause an appreciable adverse effect on competition in India and hence, they would be exempted from applying to the CCl. Some of the important combinations proposed to be exempted include:

i) an acquisition of shares or voting rights by the parties, solely as an investment or in the ordinary course of business, of not more than 15% of the total shares or voting rights of the company;

ii) an acquisition of assets by the parties, not directly related to the business activity of the acquirer or made solely as an investment or in the ordinary course of business, not leading to control of the enterprise whose assets are being acquired except in certain cases;

iii) an Acquisition of or Acquiring Of Control or Merger or Amalgamation, where the assets or turnover of Rs.1,OOOcrores or Rs.3,OOO crores respectively, does not include assets of Rs.200 crores or turnover of Rs.600 crores, respectively, of each of at least two of the parties to the combination; or

iv) an acquisition of or acquiring of control or merger or amalgamation, where the minimum assets or turnover, in India, of Rs.500 crores or Rs.1,500 respectively, does not include assets of Rs.200 crores or turnover of Rs.600 crores, respectively, of each of at least two of the parties to the combination;

Thus, several overseas acquisitions by Indian companies of Foreign Companies which do not have any presence in India would not be covered within the purview of the CCL This is a welcome step towards encouraging overseas buyouts. For example, the acquisition by Tata Motors of Jagaur of UK, would not fall within the CCI’s purview, since Jaguar does not have any presence in India and the Rules provide that both the parties must have at least Rs.600 crores of turnover in India.

4.9 Till the draft regulations get finalised and the operative sections for regulation of business combinations get notified by the Government, the Commission cannot entertain any hearings in respect of business combinations. Hence, till such time, these provisions would not have any effect.

V. Directors’ Responsibilities

5.1 Under the provisions of the Act, where the person committing any offence is a company, then every person who at the time of the offence was responsible for the conduct of the business of the company as well as the company would be directly liable to be punished.

5.2 Further, any director with whose connivance, neglect or active consent any offence has been committed by the company, shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished.

VI. Role of CAs

6.1 Chartered Accountants are authorised to appear before the Commission to represent the Complainant or the Defendant. This is a new area of practice for Chartered Accountants as the number of mergers and acquisitions which India is witnessing is only the tip of the iceberg.

6.2 In case of mergers or acquisitions of the auditee which satisfy the above tests and thus, fall within the purview of the Commission, the CA in his capacity as the Auditor should alert his client about the provisions of the Act and the action which can be taken by the Commission under the Act. By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby provide value added services to his client.

END TO ACCOUNTING ‘FLEXIBILITY’ IN CORPORATE RESTRUCTURING ? — Amends to The Listing Agreement

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Securities Laws

SEBI has sought to limit certain accounting ‘flexibility’ in
mergers, demergers and other restructuring. SEBI has done this by issuing a
Circular directing an amendment to the listing agreement. The focus of the
amendment is on certain deviations from Accounting Standards commonly carried
out as part of schemes of mergers, demergers, reduction of capital, etc.

SEBI has sought to attain this objective indirectly and, one
could even say cleverly, and with apparently more effect than it would have done
it directly. It has also attempted to kill several birds with one stone. Or has
SEBI attempted too much and ended up with a provision with limited effect?

In essence, SEBI has required that companies proposing
certain schemes of mergers, demergers, etc. shall submit, in advance, a
certificate from their auditors that the matters contemplated in the scheme are
in compliance with Accounting Standards.

Let us consider some background.

First, let us consider mergers and demergers. Schemes of
mergers, demergers, etc. provide for transfer of assets and liabilities and/or
for other matters. The implications of accounting for amalgamations are
substantial enough to warrant a separate Accounting Standard 14 on Accounting
for Amalgamations.

While AS-14 deals with several matters, it makes a special
provision for treatment of Reserves. It states that if the scheme provides for
treatment of reserves otherwise than what the AS requires, the scheme should be
followed, but certain disclosures should be made particularly about what would
be the effect if the AS was followed. In other words, deviations would be
possible but through disclosure. Thus, the scheme would, to that extent,
override the Accounting Standard, subject to the safeguard of disclosure.

In fact, as a general principle, we know that ICAI’s
Accounting Standards do not override provisions of law. As paragraphs 4.1 and
4.2 of the Preface to the Statements on Accounting Standards says, in case of
inconsistency, the provisions of law will prevail. However, in such a case, the
ICAI will determine the extent of disclosure required in the financial
statements and the auditors report. See also the general ‘Announcement’ of the
ICAI on the implications of a Court/Tribunal order sanctioning an accounting
treatment which is different from that prescribed by an Accounting Standard
which is highlighted later.

It is quite common then that such schemes provide for an
alternate accounting treatment of reserves, etc. and Courts usually approve
them. Thus, there is a fairly widespread practice of what I would call
‘deviations through disclosure’
.

The SEBI amendment also covers other forms of restructuring
such as capital reduction. Even under such schemes, inter alia, capital reserves
such as securities premium and capital redemption reserves can be used for
purposes which otherwise are not allowed. Moreover, as we will see in the Bombay
High Court’s decision in Hindalco’s restructuring case, such schemes may go
beyond mere freeing up of the capital reserves. They may even provide for
debit of certain expenses to such reserves where such debit may otherwise
(allegedly in that case) not be permissible under the Accounting Standards.

Of course, it is not as if all such deviations are
necessarily attempts to avoid the spirit of the Accounting Standards and, very
often, the intention may be bona fide including avoidance of some archaic
provisions of law or simply to give a better picture of the underlying
commercial reality. There is also at least the small safeguard of disclosure.
However, it is also true that, particularly as we will see in case of other
restructuring such as reduction of capital, this was also seen to be an almost
carte blanche power.

SEBI has pointed out in the Circular that in some recent
schemes filed before the High Courts, the accounting treatment of ‘various
items’ is not in accordance with the applicable Accounting Standards (‘AS’). To
stop this, it has introduced the requirement of auditors’ certificate that the
scheme is in compliance with Accounting Standards. More importantly, the actual
amendment further provides that a mere disclosure as permitted under AS-14
giving certain details relating to a departure from the AS is not sufficient.


The amendment, as I said earlier, is clever. No regulation
has been laid down (which would have required certain law-making procedures to
be followed) to make such requirement. Nor has SEBI needed to plead to the MCA
to amend its rules relating to Accounting Standards. Indeed, no substantive
requirement has been made at all even in the listing agreement to follow the
Accounting Standards. Instead, a simple procedural requirement is made
that the auditors’ certificate will be obtained — in advance — stating that
Accounting Standards have been complied with in respect of matters covered in
the scheme. And further, the usual route of deviating by disclosing would not
be permitted.


Does this stop the accounting ‘flexibility’ through such
schemes ?

The amendment does make the listed company indirectly comply
with Accounting Standards and the specific requirement that deviation through
disclosure is not permitted makes it even more effective.

Note several implications and limitations though.

The auditors’ certificate is required for compliance of all
Accounting Standards and not merely Accounting Standard-14.

Secondly, the certificate is required for all types of
schemes
— whether of mergers,
demergers, reduction of capital, etc. — in fact, all scheme/petitions to
be filed before any Court or Tribunal u/s.391, u/s.394 and u/s.101 of the
Companies Act, 1956. AS-14 is, of course, applicable only to amalgamations and
not to other type of schemes. Courts have also held that the said AS-14 applies
only to amalgamations and hence its applicability cannot be raised in other
schemes [see, e.g., Gallops Reality’s case 150 Comp. Cas. 596 (Guj.)]. However,
where other Accounting Standards apply to the particular transactions in a
scheme, the certificate would cover them too.

Having said that, the requirement applies only to compliance
of Accounting Standards and not to accounting of transactions where Accounting
Standards do not apply.

Further, if certain restructuring of reserves is carried out
under a statutory provision, the clause cannot apply. A good example is
restructuring of capital reserves such as share premium or other similar capital
surpluses. Even though SEBI has sought to cover schemes involving reduction of
capital, it is arguable that since the accounting of share premium is strictly
not covered by Accounting Standards, the new provisions will not apply.

Consider another aspect that is not touched by the Accounting Standards and therefore remains untouched by the amendment. If a reserve is treated as a ‘capital reserve’ as so required by the AS, does that, by itself, make it a ‘capital reserve’ for the purposes of the Companies Act, 1956, particularly for the provisions relating to reduction of capital

    Thus, for example, would such reserve would become thereby at par with ‘Share Premium’ ? To take it further, would it make at par with ‘Revaluation Reserve’ — particularly when, in reality, its source may be revaluation ? Would the statutory restrictions relating to dividends, bonus shares, etc. apply to such a reserve ? I believe that this would continue to remain a grey area even after this amendment.

Then there is a larger issue and this can be explained by a case study in the form of a recent Bombay High Court decision in the case of Hindalco Industries Limited (2009) 94 SCL 1 (Bom.). In this case, to summarise the essence, the company proposed a scheme of restructuring u/s.391 of the Companies Act, 1956, under which the Securities Premium Account of the company would be transferred to a ‘Reconstruction Reserve Account’. To this account, certain specified expenses and losses would be debited. The question was, if such adjustment was otherwise not in compliance with Accounting Standards, whether such a scheme could be permitted and generally whether non-compliance with accounting standards was permissible.

    Essentially, the Court stated that, firstly, the provisions of S. 211(3A)-(3C), while they do create a requirement of compliance with accounting standards, do also provide that where they are not followed, certain disclosures shall be made. In other words, it held that there is also a form of ‘deviation through disclosure’ possible.

    The Court also referred to ICAI’s ‘Announcement on Disclosures in cases where a Court/Tribunal makes an order sanctioning an accounting treatment which is different from that prescribed by an Accounting Standard’. This substantive part of this Announcement reads as under :

Paragraph 4.2 of the ‘Preface to the Statements of Accounting Standards’ (revised 2004) provides as under :

“4.2 The Accounting Standards by their very nature cannot and do not override the local regulations which govern the preparation and presentation of financial statements in the country. However, the ICAI will determine the extent of disclosure to be made in financial statements and the auditor’s report thereon. Such disclosure may be by way of appropriate notes explaining the treatment of particular items. Such explanatory notes will be only in the nature of clarification and therefore need not be treated as adverse comments on the related financial statements.”

In the case of companies, S. 211(3B) of the Companies Act, 1956, provides that “Where the profit and loss account and the balance sheet of the company do not comply with the Accounting Standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely :

  a)  the deviation from the accounting standards;

  b)  the reasons for such deviation; and

    c) the financial effect, if any, arising due to such deviation.”

In view of the above, if an item in the financial statements of a company is treated differently pursuant to an order made by the Court/Tribunal, as compared to the treatment required by an Accounting Standard, following disclosures should be made in the financial statements of the year in which different treatment has been given :
  (1)  A description of the accounting treatment made along with the reason that the same has been adopted because of the Court/Tribunal Order.
  (2)  Description of the difference between the accounting treatment prescribed in the Accounting Standard and that followed by the company.
  (3)  The financial impact, if any, arising due to such a difference.It is recommended that the above disclosures should be made by enterprises other than companies also in similar situations.

  (c)  The question then is whether this decision is now overridden by the SEBI amendment ? The answer does not seem to be wholly clear. One view can be that the company has to obtain an auditor’s report stating that the Scheme is in compliance of the Accounting Standards. If it can be held on the facts that the scheme is not and therefore the auditor’s certificate states so accordingly, then, despite the aforesaid decision, the requirement would not be complied with. The other view can be that since SEBI has specifically stated that ‘deviation through disclosure’ of only the specified requirements of   AS-14  would not be permitted and therefore, in case of ‘deviation through disclosure’ for other Accounting Standards remains open.
  (i)  Incidentally, there can also be two views whether, particularly in light of the Supreme Court’s decision in J. K. Industries v. UOI, (2007) 80 Comp. Cas. 415 (SC), whether the aforesaid decision in Hindalco’s case is, with respect, correct. This is specifically on the Bombay High Court’s view that ‘deviation through disclosure’ is permissible and that, in that sense, the Accounting Standards are not strictly mandatory. However, this controversy is best left open here and may be a subject of a separate discussion.

In the end, it is seen that SEBI’s shot, howsoever well intended, has limited effect. It has limited cover-age of types of transactions and schemes. It does not cover all types of reserves — indeed, in practice, it may not cover statutory reserves such as share premium, etc. and the impact on other reserves is also limited. With slightly better wording, it could have covered assuredly even covered matters other than treatment of reserves.

However, the amendment is likely to bring a partial end to the route of deviation through disclosure.

SEBI has thus attempted to hit several birds with one stone, but apparently it has brushed, not even hit, one bird, but that, I guess, is better than nothing.

SOUL SEARCHING

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Namaskaar

As I put down Gurucharan Das’ book ‘The Difficulty of Being
Good,’ the question that arises in one’s mind is if we want to be good, why are
we not able to be good ? He has written on the subtle art of Dharma based on the
Mahabharata. He examines closely the moral idea the Mahabharata has thrown up
and how it relates to our daily life.

I was reminded of another well-written and researched book,
‘Bury the Chains’ by Adam Hochschild. This book is about the slavery trade — how
a few individuals fought to free the slaves. While slavery is reprehensible
today, it was an accepted practice in the 18th and 19th centuries. Both George
Washington and Thomas Jefferson were slave owners. Thomas Clarkson, Granville
Sharp and others led the fight for eradication of slavery which took several
decades to yield results. It was not before 1833 that the Slave Emancipation
Bill was passed in the British Parliament, although the matter had come up in
the Parliament as early as the second half of the 18th century.

The abolitionists had good motives but the difficulties that
they had to surmount were huge. Otherwise normal and sane people kept quiet when
the dehumanising slave trade was on and even demanded compensation from the
government when slaves were freed (Slaves being property, there should be
compensation for loss, was the argument).

63 years after Independence, what is the relevance of the
above books for India ? We want to be good, would like to fight for the right
causes and being human beings, would like to have fairness, equity and justice.
Given this positive mindset, can we resolve to make the changes that will impact
favourably the vast sections of the population ?

Take just three areas — primary education, health and water.

Only 66% of students complete primary education. More often
than not, teachers are not present in government schools. Classrooms are
crowded. Amidst the noise, it will be the child’s fortune if she can even hear
what the teacher says.

Maternal mortality is 450 per 100,000 live births (10 times
that of China). The under-5 mortality rate is 72 per 1000 live births.

People still have to walk some distance to get water. Potable
water is a far cry in many places.

To say that this is not a satisfactory state of affairs is a
gross understatement. Yes, there has been remarkable improvement in several
directions after the Independence. In the post-liberalisation era of last 19
years, benefits have reached far and wide.

Intentions of every government — central or state — are
honourable. Good intentions do not itself make for effective actions. Funds
allocated in budgets for education and health are increasing. There is no dearth
of new schemes. A report on Bharat Nirman scheme in Business Standard of 23rd
February, 2010 is telling. The targets achieved in 2009-10 have been
disappointing, whether for road construction, electrification or drinking water.
For example, Pradhan Mantri Gram Sadak Yojna has a target of 13,000 villages in
2009-10. Till November, 2009 it had covered only 1,643 villages i.e., about 13%.
Rajiv Gandhi Vidyutikaran Yojna has targeted 4,73,000 villages in 2009-10 — it
has achieved coverage of only 8% till October, 2009. In addition to target
slippages, sustainability and maintenance of assets created is a problem.

Can we move towards a situation where we can say with pride
that every child completes secondary education regardless of gender, quality of
education is comparable to private schools, potable water is available at the
doorstep and improved sanitation facilities are available to one and all ?
Education, particularly of girl child, and improved health care can make all the
difference to society. I was ‘volunteering’ in Bangalore in a school for
children of disadvantaged sections of society. Located in a crowded area on a
narrow road, this school caters to children who were once child labourers or
whose parents are barely literate. It was a pep talk for students taking 10th
standard examination. For their families, it was an important occasion as
perhaps for the first time someone in their family would pass out of school.
When I asked the students what they want to be later in life, answers came back
spontaneously — engineers, computer professionals, doctors (to my chagrin, none
said CA !) This school caters primarily to members of the minority community and
some students who wanted to be doctors were girls. This is what education does.

Can we ask ourselves the following questions ?

(1) Do we agree that everyone in the country should have
certain minimum entitlements ?

(2) How do we have elected representatives who work
altruistically to make this possible ?

(3) Can we depend only on the government to make this
possible ? If so, how do we hold the government accountable ?

(4) If we agree that we should not leave it to the government
alone to make this possible, can civil society take up this duty ?

(5) Is civil society equipped to do this ? Can it work
effectively with the government in bringing about the change ?

(6) What is the role of professionals like us ? Do we go
beyond management of our clients’ affairs ?

The freedom struggle produced men who were selfless,
innovative (take the case of Salt March) and importantly, produced leaders who
not only sent the British back home but made freedom possible in every British
colony. They had a common objective and worked towards achieving it.

The freedom struggle has lessons even today for us to arrive at a common
goal. Perhaps 50 years from now, posterity will remember what their forefathers
did in the second decade of the 21st century.

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Gift of pain !

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Namaskaar

Nobody wants pain but everybody gets it ! May be of different
variety and intensity, but if we are living in this world, then we all share the
common inheritance and experience of pain, either physical or
psychological . . . .


“Pain is inevitable, suffering is optional”

What’s the difference among us when we come across pain ?
Simply, some people, who are overwhelmed by their pain, lose control over them
and are controlled by pain. They begin to panic with frustration and seek
instant solution. While others cope and manage pain simply by accepting. The
realistic perspective on pain, no matter how harsh and painful, keeps us
mentally, emotionally, and spiritually sound.

“The nature of rains is the same, but it makes thorns grow
in the marshes and flowers in the gardens”.


“Suffering is an emotional response; pain is a neurological
one.”

More Suffering occurs just because of basic tendency to
hold on ! ! It is worth realising that pain is more of a psychological
phenomenon than physical. Just an emotional state of mind.

Mullah Nassrudin was asked after his wife’s operation : “How
is your wife now ? Has she fully recovered now from the operation ?”
And
he answered : “No, not yet. She is still talking about it.”



The gift of pain :

From health’s perspective, pain is a wake-up call ! Through
pain, we are educated to understand the iron laws of the universe. Pain gives
us a signal to realise that something is wrong, something needs to change, and
problem needs treatment. Unless we experience pain, we would not be compelled
to cure and would rot !

For instance, a person who enjoys eating sweets may later
suffer from diabetes. But with the signals of warning in form of little pain,
sickness and weakness, he can control and cure the same by changing diet,
taking exercise, etc.

The pain phenomenon in life makes us wiser, strengthens us,
preserves us and teaches us compassion. It just helps in regulating desire and
gradually extirpating desire.


No pain, no gain.

Even though we can’t always choose what happens to us, we
can choose not to be a victim. Pain and pleasure are experienced, not by the
body but always by the mind. Just by changing the perception towards pain, one
remains unruffled in all situations. Enjoying pleasures is a worthwhile
objective. However, a careful scrutiny will show us that there is structural
error in our thinking. Pleasure and pain keep on swapping. Nature has provided
us with these two feelings to help us in our growth and development. Joy and
sorrow are both essential to light the rainbow in the sky of human life. I
have always regarded adversity as a challenge, and great opportunity to learn
and improve. Pleasant experiences make life delightful, but they don’t lead to
growth in themselves. Pain throws light on our own weakness, fault and
mistakes. Suffering identifies area where you need to grow and be transformed.

Just changing our attitude towards pain can change our life

When we face sufferings in the right spirit, we release the
hidden potential in our spirit, from unconscious depth to surface. To react to
adversity with bitterness defeats the Divine plan. Growth and spiritual
evolution depend upon very special qualities like tolerance, perseverance and
endurance.

Pain is the sensation which eventually helps us in growing
and expanding our consciousness. To establish in pure consciousness, is the
essence of our life. The suffering with quiet, steady and concentrated mind
provides a deep understanding of life which in turn helps us to see life
objectively with witness like attitude. One moves towards detachment,
disinterestedness and attains Sakshibhav. This attitude gradually elevates the
soul to realise that there is something super which is just beyond body, mind
and intellect.

That is ‘Atma’, our true nature ! Which is real, eternal and
blissful !



From spiritual perspective, adversities are meant to
strengthen our resolve, test our faith and enhance our determination to move
Godward. It is the pain or adversity that helps us to develop our spiritual
muscles. Rather, adversity is essential for our spiritual progress
.

Thank God ! There is pain !

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The goal of our life

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NamaskaarBe at ease.
“What we give out, we get back”


Every thought we think creates our future. We create our
experiences by our thoughts and feelings. The thoughts we think and the words we
speak create our world. When we create peace and harmony and balance in our
minds, we will find the same in our lives. This is the state of ‘being at ease’.
This is the goal of our existence.

We are here in the physical form, to experience the best of
this planet, our Mother Earth. We all have the right to feel joyous. Our
non-physical self, i.e., our higher self, is always guiding us and has
the knowledge of our past, present and future. Therefore, in order to finish our
lessons, we choose our parents, partners, children, staff, etc. We choose our
life plan to move further in our evolution. Being a human, we have the great
gift of ‘making a choice !’ We can choose to ‘change’ our thoughts and feelings
— for example we can change our thought that ‘People are selfish’ to that
“Everyone is always helpful”. Here the feeling of suspicion or hatred is
converted into a feeling of trust . This thought gives us a new experience of
‘being at ease’. And this new pattern of thought creates a new positive truth in
our life and hence the situations which we create for us !

The state of disease comes from a state of unforgiving. The
universe supports any form of our belief system. Therefore, it is important to
dissolve any negative, and foolish ideas that build our belief system and change
them into a new, healthy pattern which nourishes and supports our belief system
to bring ease and harmony into our life.

For this to happen, we first need to forgive everyone and
release ourselves from the past.

The act of willingly forgiving itself is the beginning of
‘healing’. Releasing the past is the key to changing ourselves. No matter how
you forgive, just let go by saying : “I forgive you for not being the way I
wanted you to be. I forgive you and set you free.” When we truly accept and
approve or love ourselves exactly the way we are, then everything in our life
works !

As the universe completely supports every thought we choose
to think and believe, let us change our thought process in order to create a
new, desirable future : “The Truth of my being is that, I was created perfect,
whole and complete. I now choose to live my life in this understanding. I
believe I am in the right place, at the right time, doing the right thing. I am
willing to change, I am willing to release all resistance.”

Hence, put the mental energy into releasing the old and
creating a new thought pattern.

I believe : Fighting the negative is a total waste of time.
The more you don’t want the more of it you create.

What you put your attention on, grows and becomes permanent
in your life. It is beneficial to put our attention on what we really want and
‘be at ease’. Hence, change thoughts :

From “I don’t want to be sick” to “I am going to be
totally healthy.”


From “I hate my job” to “I will now create a wonderful new
job.”


From “I don’t want to be fat” to “I am going to be
slender.”


From “I do not have enough money” to “I will create a new
avenue to have enough money.”


We have come here to express who we are. We are meant to be
different ! Think thoughts that make you happy and do things that make you
happy. ‘Plant in’ the new seed — the new belief system, water it with
affirmations. Let the sunshine of
positive thoughts beam. Weed out negative thoughts and allow positive thoughts
to blossom and grow.

(Based on “You Can Heal Your Life” by Louise Hay)

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Tribunal

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III. Tribunal :


1. Banking & other financial services : Receipt of payment of bills of
client :



Federal Bank Ltd. Ernakulam v. CCE Calicut, [2008 (10)
STR 320 (Tri.-Bang)].

Appellant received commission for collecting bills of
customers of BSNL. The Department held the service as Business Auxiliary Service
holding it as customer care service on behalf of client in terms of clauses
(iii) and (vi) of S. 65(19). The Commissioner (Appeals) confirmed the order
along with penalties u/s.76 and u/s.77. In support of the claim of the Revenue,
various judgments including the following were cited :



  •  Corporate Debt Management Services (I) Pvt. Ltd. v. CCE-CST, 2007 (8)
    STR 261 (Tri.-Che.)



  • Bridgestone Financial Services v. CST Bangalore, 2007 (8) STR 505
    (Tri.-Bang.)



The appellants contended that they neither promoted or
marketed any service, nor were they recovery agents in order that they could be
covered under Business Auxiliary Service. Therefore, the cited judgments were
distinguished. They contended that ‘cash management’ was excluded from the
definition of banking and other financial services in S. 65(12). The appellants
referred to the judgment in the case of Dr. Lalpath Lab. Pvt. Ltd. v. CCE
Ludhiana,
2006 (4) STR 527 (Tri.-Del.), which acted as blood sample
collection centres. The judgment was discussed at length in the final order and
it was held by the Tribunal that “once there is a specific entry for item in the
tax code, it cannot be taken out of that specific entry and taxed under a very
general entry only because under the specific entry no tax is payable. This
approach is contrary to the scheme of legislation.” Accordingly, holding ‘cash
management’ as excluded service from the specific category of banking and other
financial services, the order was set aside.

(Note : ‘Cash management’ exclusion in S. 65(12)
ceased to exist with effect from 1-6-2007).

2. Business Auxiliary Services : Reduction in price given
to purchasers of vehicles by DSAs of banks :



CCE Jaipur v. Kamal Auto Industrial, [2008 TIOL 610
CESTAT-Del.].

The Revenue filed appeal against order of the Commissioner
(Appeals), wherein respondent acted as direct selling and marketing agent
besides being a vehicle dealer. Since the respondent refused to accept notice of
the registry, the matter was decided ex-parte. The case of the Revenue
was that the portion of ‘pay out’ given to purchasers of vehicles out of
commission amount due to respondent, in respect of which even the TDS deducted
was subject to Service Tax as commission paid to customers directly or through
the banks would not change the nature of receipts in their hand. The facts of
the case were found similar to the case of Chambal Motors (P) Ltd. (2007 TIOL
1835 CESTAT-Del.) The case was remanded for fresh decision on merit in the light
of the decision in Chambal Motors’ case.

3. CENVAT credit : Different address on invoice than on
Registration Certificate :



Raaj Khosla & Company v. CCE, New Delhi [2008 TIOL 153
CESTAT-Del.].

The appellant was denied CENVAT credit of over Rs.5 lakh, on
the ground of difference of address on the invoice from the address of the
registration certificate. Later, all the addresses were registered including one
on the invoice. Denial of credit was held as not sustainable. However, in
respect of credit taken for telephone invoices in previous owner’s name although
service was utilised by the appellant, denial of credit was upheld.

4. Export of services : Indenting agent booking order for
foreign suppliers :



CST New Delhi v. M/s. CANI Merchandising P. Ltd., [2008
619 CESTAT-Del.].

The Revenue contended in this case that services
were provided in India by the assessee and they were not to be treated as
‘export’, as the respondents
situated in India, booked orders for foreign suppliers for supply of goods in
India. The respondents contended this as exported services and filed a rebate
claim under Rule 5 of the Export of services Rules, 2005. Since the Revenue’s
contention of services not delivered outside India and also not used outside
India was not considered by the adjudicating authority as well as by the
Commissioner (Appeals), the matter was remanded for de novo adjudication.

5. Import of services : Commission to overseas agents and
applicable date :


(i) CCE – Ludhiana v. Bhandari Hosiery Exports Ltd.,
[2008 TIOL 604 CESTAT-Del.].

The Revenue filed appeal against order, whereby demand for
extended period and penalties were set aside. The assessee filed cross objection
for the demand confirmed in the order. The assessee being exporter of hosiery
goods, paid commission to overseas agents. Service Tax was demanded from
9-7-2004 to February 2006, treating the assessee as receiver of services under
Rule 2(1)(d)(iv). Following the decision in case of Foster Wheeler Energy Ltd.
2007 (7) STR 443, it was held that prior to introduction of S. 66A, reverse
charge did not apply and accordingly the Revenue’s appeal was dismissed and
cross-objection of the assessee was allowed.

(ii) Prabhat K. Tyagi v. CCE (appeals) Bangalore,
[2008 (10) STR 240 (Tri.-Bang)].

In this case also it was held that offshore services are
liable to service only after insertion of S. 66A with effect from 18-4-2006
where Foster Wheeler Eng. Ltd. 2007 (7) STR 443 (Tri.-Ahd.) was referred by the
appellant and due cognizance was also taken of Circular No. 36/4/2001 of
8-10-2001.

6. Show-cause notice and out of pocket expense reimbursement:

Aurobindo Pharma Ltd. v. CCE & S. Visakhapatnam, [2008 TIOL 679 CESTAT-Bang.].

The show-cause notice had proposed demand of Service Tax under consulting engineer’s service. The amount represented Service Tax on different services including out of pocket expenses. The appellant relied on the following decisions, wherein it was held that even if services are within the purview of Service Tax, but if they do not conform to the alleged service in the show-cause notice, no Service Tax is payable:

  • Siemens Ltd. v. CST Bangalore, 2007 (8) STR 33 (Tri.-Bang.)

  • Volvo Ltd. v. CST Bangalore, 2007 (7) STR 600 (Tri.-Bang.)

  • Waters India P. Ltd. v. CST Bangalore, 2006 (4) STR 524 (Tri.-Bang.)

Further, as regards out of pocket expenses on actual basis, Board’s clarification vide Trade Notice 5/98 Service Tax of 14-10-1998 and decision in case of Scott Wilson Kirkpatric (India) Pvt. Ltd. v. CST Bangalore, 2007 (5) STR 118 (Tri.-Bang.) were relied upon by the appellant. The Tribunal on both the counts found the Revenue’s demand unsustainable.

Judicial Rulings under Service Tax

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7. Judicial Rulings under Service Tax :


An illustrative list of rulings under Service Tax as regards
invocation of extended period of 5 years is given hereafter for reference :

(a) Appellants under bona fide impression that their
activities would not come within the purview of Service tax under the category
of Mandap Keeper — Demand restricted to normal period [Secretary, Town Hall
Committee v.
(2007) 8 STR 170 (Tri.-Bang.)

(b) Audit objections stating that impugned services were
liable to tax — Prima facie, thereafter, Department cannot allege
suppression of facts and invoke larger period of limitation [Vikram Ispat
v. Commissioner,
(2007) 8 STR 559 (Tri.-Mumbai)]

(c) Appellant supplied labour as per contract for packing,
loading and unloading of cement. Department accepting coverage under manpower
recruitment agency and collecting service tax not to argue for coverage under
cargo handling service for prior period. Labourers rendering limited
assistance only in entire activities and their role ancillary. Labour supply
not to be equated with cargo handling involving interpretation of law and
larger period of limitation not invocable — Demand of Service Tax, interest
and penalty set aside [K. K. Appachan v. Commissioner, (2007) 7 STR 230
(Tri.-Bang.).

(d) Clarification not sought by appellant from Central
Government as regards exemption —Details not declared u/s.73 of the Act
extended period of limitation invocable. [Karnataka Govt. Insurance
Department v. Commissioner,
(2008) 9 STR 355 (Tri.-Bang.)]

(e) Confusion on part of officers also as regards correct
scope of services being provided by appellant — With introduction of new
service, the activities undertaken by appellant were examined, notices issued
but not pursued — Short levy, if any, is not on account of mala fide
intention on part of appellant and no suppression on misstatement with a view
to evade duty can be attributed to him — Demand barred by limitation [Velji
P. & Sons (Agencies) P. Ltd. v. Commissioner,
(2007) 8 STR 236 (Tri.-Ahmd.)]

(f) Appellant selling aluminium products through
consignment agents – Service Tax demanded holding consignment agents’ services
covered under clearing and forwarding agent — Impugned order noting presence
of conflicting views of Tribunal on taxability of consignment agent under
clearing and forwarding agent — Extended period not invocable when different
views prevalent on applicability of tax — Demand hit by time-bar — Appeal
allowed on limitation — [Bharat Aluminium Co. Ltd. v. Commissioner,
(2007) 8 STR 27 (Tri.-Del.)]

(g) Adjustment of excess payment towards payment of tax
during later period — Return specifically mentioned the adjustment having been
filed by respondents — Full facts of such adjustment remained disclosed by
assessee [Demand time-barred [Commissioner v. Hexacom India Ltd.,
(2006) 1 STR 110 (Tri.-Del).]

(h) Suppression not alleged and extended time-period not
invoked in show-cause notice — Reasons for invocation of larger period of
limitation need to be clearly spelt out in SCN — Mere non–registration not
sufficient to uphold suppression of facts [Mahakoshal Beverages Pvt. Ltd.
v. Commissioner,
(2006) 3 STR 334 (Tri.-Bang.)]

(i) SCN bereft of any reasons to invoke larger period —
Revenue to bring out proviso to larger period like suppression of facts,
willful mis-statement with intent to evade Service tax — Such facts not
brought out in show-cause notice — Demand for larger period not sustainable —
[Elite Detectives Pvt. Ltd. v. CST, (2006) 4 STR 583 (Tri.-Bang.)]

(j) Statements records from proprietor admitting liability
to tax on 13-12-2000 and SCN issued on 7-12-2001 — No invocation of larger
period in SCN — Department cannot enforce demand in SCN and due to inordinate
delay in issuing SCN — Assessee paid Service Tax for initial period and
thereafter due to loss in business, he failed to pay Service Tax — Demand for
larger period set aside — [Free Look Outdoor Advertising v. Commissioner,
(2006) 2 STR 102 (Tri.-Bang.)]

(k) Suppression of facts and omission to pay Service Tax —
Communication between appellants and foreign airlines supported by statements
of their officials in India clearly show that they had knowledge of taxability
of overriding commission — Appellants willfully not got themselves registered
with Department under category of business auxiliary services for their
Service Tax liability. Extended period of limitation invocable as suppression
of facts and omission to pay Service Tax proved [ETA Travel Agency Pvt.
Ltd. v. Commissioner,
(2007) 7 STR 454 (Tri.-Bang.)

(l) Repeated reminders sent by Department to an entity to
get itself registered for Service Tax purposes — However, number of CBEC
Circulars existing, wherein that entity could legitimately entertain bona
fide
belief that their activity was not liable to Service Tax — Extended
period found not invocable especially as Department had knowledge of
activities of the entity [Zee Telefilms Ltd. v. Commissioner, (2006) 4
STR 349 (Tri.-Mumbai)]

(m) Returns filed on 22-10-1999, wherein adjustment in
relation to Service Tax on DOT interconnected bills specifically mentioned —
Reasons for adjustment being declared, suppression with intent to evade
Service Tax not to be alleged in respect of SCN dated 20-4-2004 — Extended
period of limitation not invocable, Demand time-barred [Commissioner v.
Spiced Communication (P) Ltd.,
(2006) 4 STR 74 (Tri.-Del.)]

(n) SCN issued on ground that appellants, who are basically
commission agents, are liable to pay Service Tax as clearing and forwarding
agents — Issue involved interpretation of legal provisions — Appellants under
bona fide belief that they are not covered by definition of clearing
and forwarding agents, hence not applied for Service Tax registration and not
followed subsequent procedures — No evidence to show that appellants
suppressed information with an intention to evade payment of duty – Demand
barred by limitation [NRC Ltd. v. Commissioner, (2007) 5 STR 308
(Tri.-Mumbai)]

o) ST-3 returns filed by appellants, wherein they had given entire particulars of amounts received by them from their clients – Reimburs-able amount received from clients also men-tioned in Annexure to Return – Chartered Accountant’s Certificate also produced – Lower authorities passed their orders without proper scrutiny of information contained is ST-3 returns – Longer period of limitation not invocable [Scott Wilson Kirkpatrick (I) Pvt. Ltd. CST, (2007) 5 STR 118 (Tri.-Bang.)]

p) Appellants failed in their duty to inform the Department of their activity inviting Service Tax liability – Since intention to evade duty liability is established, benefit of time-bar not applicable [Bridgestone Financial Services v. CST, (2006) 4 STR 279 (Tri.-Bang).]

q) Appellants sourcing customers for personal loans and housing loans – Promotion of services rendered by client – Activity comes under Business Auxiliary Services – Statement and records given but SCN issued after normal period – Bona fide belief on non-liability as per statement – No finding on willful suppression with intent to evade payment of Service Tax – Demand not sustainable on account of time-bar [Bridgestone Financial Services Commissioner, (2007) 8 STR. 505 (Tri. Bang).]

r) Details and mode of computation of Service Tax being paid not disclosed in ST-3 form – Plea that there was bona fide belief that service was not taxable rejected and held that there was suppression of material facts – Invocation of extended period upheld [Bharti Cellular Ltd. v. Commissioner, (2006) 3 STR 423 (Tri.-Del.)]

High Court

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II. High Court :


(i) No question of law arising out of Tribunal’s order :
Clearing & forwarding agent :



CCE Jalandhar v. United Plastomers, 2008 (10) STR 229
(P&H).

Respondent acted as consignment agent of IPCL. The issue
involved was that of whether or not the service was that of clearing and
forwarding agent or of commission agent under the Business Auxiliary Service
category.

The Tribunal had upheld the assessee’s plea that the services
did not relate to clearing and forwarding agent’s services and had rejected the
Department’s plea for enhancement of penalty which was reduced by the
Commissioner (appeals). The Tribunal had also set aside penalty levied on
Service Tax for subsequent period on the ground that the same was paid before
the issue of show-cause notice. The Revenue strongly argued in favour of
treating the agreement of the assessee with IPCL as Del Credre agent and
the agreement as distributor to be falling in within the purview of C&F
operation. They further submitted that the Tribunal had placed reliance on the
case of Raja Rajeshwari Ind. Polymers Pvt. Ltd. v. CCE Bangalore, 2006
(3) STR 561(T) itself was appealed against in the Karnataka High Court and also
that the penalty was wrongly deleted by the Tribunal. The provisions of Business
Auxiliary Service were discussed in this context by the appellant and they
relied on Larger Bench’s decision of Larsen & Toubro v. CCE Chennai, 2006
(37) STR 321 (Trib.-L.B). The Court dismissed the Revenue’s appeal, holding that
there was no substantial question of law as the Tribunal had already examined
the expressions ‘directly or indirectly’ and ‘in any manner’ in the definition
of ‘clearing and forwarding agent’, and the Court held that while interpreting
these expressions, they cannot be isolated from the activity of clearing and
forwarding operations and the agent engaged only for processing orders on
commission basis could not be considered as directly or indirectly engaged in
clearing and forwarding operations.


(ii) Import of
services : Effective date :



Union of India v. Aditya Cement, 2008 (10) STR 228 (Raj.)

The Court ruled that order of the Tribunal that recipient was
liable to Service Tax from 1-1-2005 and in the prior period liability could not
be fastened on the recipient was found proper on examination of S. 65, S. 66, S.
66A and S. 68 including Notification issued u/s.68(2). Revenue’s appeal
accordingly was dismissed.

(Note : The above refers to the Tribunal decision in
Aditya Cement v. CCE, 2007 (007) STR 0153 (Tri.-Del.) where it was held
that since Notification No. 36/2004-ST came into force from 1-1-2005, Service
Tax paid on engineering services received during October and November 2003 under
misunderstanding of law should be refunded).

(iii) Question of law not taken up before lower
authorities — Whether can be taken up before the High Court ?



CCE , Jalandhar v. Onkar Travels P. Ltd., 2008 (10) STR
237 (P&H).

Show-cause notice was issued u/s.74 of the Act to enhance
assessment under allegation of short levy on the assessee who was air travel
agent. Adjudication order confirming the demand and imposing penalty was
confirmed by the Commissioner (Appeals). The Tribunal allowed the appeal, on the
ground that S. 74 dealing with rectification of a mistake is not applicable and
there was no apparent error in the assessment. The Revenue filed appeal against
the Tribunal’s order under the plea that mention of S. 74 was inadvertent in
place of S. 73 and it would not debar Revenue authority from assessing escaped
taxable service. The respondent contended that the plea of wrong provision of
Service Tax was taken for the first time and that throughout the course of
proceedings before the Tribunal and the authorities below, the stand taken by
the Department that invoking S. 74 and passing the order by the Superintendent
was perfectly legal and within limitation period of 2 years applicable to S. 74.
The Court ruled that such question is not permissible to be taken up first time
in appeal. Only substantial questions of law arising out of the Tribunal’s order
are to be considered by the Court and in absence of such ground, the appeal
could not be entertained.

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Important rulings under Central Excise

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6. Important rulings under Central Excise :


An illustrative list of important judicial rulings under
Central Excise which could be useful for Service Tax, depending upon the facts
and circumstances of a given case, are set out hereafter :


(a) No suppression if all facts disclosed :


(i) If an assessee has disclosed all details in price list,
it is futile to contend that there was suppression of facts. Extended period
of limitation held as not available to the Department [CCE v. ITEC (P)
Ltd.,
(2002) 145 ELT 280 (SC).]

(ii) If facts are disclosed in classification list,
extended period be invoked [Primella Sanitary Products Pvt Ltd. v. CCE,
(2005) 184 ELT 117 (SC 3-member Bench).

(b) Mere inaction is not suppression of facts :


(i) Suppression means not providing information which the
person is legally required to state, but has intentionally or deliberately not
stated. The Supreme Court, in CCE v. Chemphar Drugs and Liniments,
(1989) 40 ELT 276, has held that mere inaction or failure on part of
manu-facturer will not amount to suppression of facts. Conscious or deliberate
withholding of information when the manufacturer knew otherwise, is required
to be established, before saddling the manufacturer with liability for a
period beyond one year (that time 6 months) [The same view has been held in
MK Kotecha v. CCE,
(2005) 179 ELT 261 (SC 3-member Bench).]

(ii) Extended period of limitation can be invoked only on a
positive act of fraud, etc. Such a positive act must be in contra distinction
to mere inaction like non-taking of licence, etc. [ITW Signode India Ltd.
v. CCE,
(2004) 158 ELT 403 (SC 3-member Bench).]

(iii) There can be no suppression of facts if facts which
are not required to be disclosed are not disclosed [Smt. Shirisht Dhawan v.
Shaw Brothers,
AIR 1992 SC 1555; Apex Electricals Pvt Ltd. v. UOI,
(1992) 61 ELT 413 (Guj HC)]

(c) Ground for invocation of extended period should be specified in the
SCN :


(i) Since the longer period of limitation can be invoked on
a variety of grounds, the particular ground which is alleged against an
assessee must be specifically made known to the assessee. There is no scope
for assuming that the ground is implicit in the issuance of SCN [CCE v. HMM
Ltd.,
(1995) 76 ELT 497 (SC); Raj Bahadur Narayan Singh Sugar Mills v.
UOI,
(1996) 88 ELT 24 (SC); Kaur & Singh v. CCE, (1997) 94 ELT 289
(SC)].

(ii) Extension of the period of limitation entails both
civil and criminal consequences and therefore must be specifically stated in
the SCN, in absence whereof the Court would be entitled to raise an inference
that the case was not one where the extended period of limitation could be
invoked. [CCE v. M/s. Payal Laminates Pvt. Ltd., (2006) 7 SCC 431;
Larsen & Toubro Ltd. v. CCE,
(2007) 211 ELT 513 (SC)]

(d) Omission to provide facts must be deliberate :



Suppression of facts does not mean any omission and it must
be deliberate and willful to evade payment of duty. In taxation, it can have
only one meaning that the correct information was not disclosed deliberately
to escape payment of duty. Mere failure to declare does not amount to willful
suppression. There must be some positive act from the side of the assessee to
make it willful suppression. [Anand Nishikawa Co. Ltd., CCE (2005) 188
ELT 149 (SC); CCE v. Damnet Chemicals Pvt. Ltd., (2007) 216 ELT 3
(SC)].


(e) No suppression of facts if an assessee had a bona fide belief :


(i) If an assessee bona fide believes in a legal
position (e.g., that no duty is payable or no licence is required in
his case) and if there is scope for such belief and doubt, provisions of
proviso to S. 11A will not apply [Padmini Products v. CCE, (1989) 43
ELT 195 (SC); CCE v. Surat Textile Mills Ltd., (2004) 167 ELT 379 (SC 3
member bench) Gopal Zarda Udyog v. CCE, (2005) 188 ELT 251 (SC 3-member
Bench).]

(ii) If there were conflicting decisions of various High
Courts and when the assessee was under bona fide belief that he need
not declare production of an exempted item, extended period is not applicable.
[Jaiprakash Industries v. CCE, (2002) 146 ELT 481 (SC 3-Member Bench).]

(iii) If different views were expressed at different stages
by Tribunal and High Court, extended period of five years is not invocable [Mentha
& Allied Products Ltd. v. CCE,
(2004) 167 ELT 494 (SC)]

(iv) If there was difference of opinion in the Department
itself and Departmental officials were regularly visiting factory and were in
knowledge of process of manufacture adopted by the assessee, pleas of the
assessee of bona fide belief is sustainable and extended period is not
invocable [Ugam Chand Bhandari v. CCE, (2004) 167 ELT 491 (SC)]

(v) If there was bona fide dispute whether process
is ‘manufacture’ or not — extended period is not invocable [Tecumesh
Products India Ltd. v. CCE,
(2004) 167 ELT 498 (SC).]

(f) No suppression if Department aware of facts :


(i) If the Department had issued SCN earlier and had
considered the matter earlier, there cannot be any suppression of facts, if at
a later stage authorities come to a different conclusion [P & B
Pharmaceuticals v. CCE,
(2003) 153 ELT 14 (SC)]

(ii) If the Department had issued SCN earlier and it was
adjudicated, another SCN in respect of the same subject matter cannot be
issued invoking extended period of limitation. [Nizam Sugar Factory v. CCE,
(2006) 197 ELT 465 (SC)]

Implications under Service Tax

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5. Implications under Service Tax :


The extensive judicial precedence (in particular Supreme
Court Rulings which have laid down principles) under Central Excise, as regards
invocation of extended period of 5 years, would be available as a good guide for
the purpose of Service Tax to the extent relevant and applicable.

In cases where Service Tax has not been paid by an assessee,
due to bona fide belief as to its liability, which could be due to views
expressed in judicial rulings, Dept. Clarifications, legal advice, etc., the
benefit of settled position under Central Excise can be availed for Service Tax
to challenge invocation of extended period and consequent penalty action,
depending upon the facts and circumstances of a given case.


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Settled principles for invocation of extended period under Central Excise

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4. Settled principles for invocation of extended period
under Central Excise :


It is a very clearly laid-down principle that in cases where
the Central Excise Dept. wishes to invoke the extended time limit of 5 years for
issuing SCN, it can be done only if an assessee is guilty of willful mis-statement
or collusion or suppression of facts or contravention of any of the provisions
of Central Excise Rules, 2002 with the intent to evade payment of duty. The
elements of wilfulness, collusion and suppression of facts with an intent to
evade payment of duty, all belong to the domain of criminal jurisprudence having
an element of mens rea i.e., existence of guilty mind. Therefore, the
onus is on the Central Excise Dept. to prove that one or the other of these
elements is present, so as to justify the issue of SCN by availing the extended
time-limit. This is supported by a number of rulings of the Supreme Court,
relevant extracts from some of which are given below :



  • In Tamil Nadu Housing Board v. CCE, 74 ELT 9 (SC), in the context of S.
    11A of CEA, it was held that :

The proviso is in the nature of an exception to the
principal clause and its exercise is hedged on one side with the existence of
such situations by using strong expressions as fraud, collusion etc. and on
the other hand there should be an intention to evade the payment of duty. Both
must concur to enable the Excise Officer to invoke the exceptional power. The
initial burden is on the Department to prove that the situations visualised by
the proviso existed and to bring on record material to show that the appellant
was guilty of any of the situations visualised by the Section.


  •  In Pushpam Pharmaceuticals Company v. CCE, 78 ELT 401 (SC), it was held
    that :

A perusal of proviso to S. 11A indicates that the
expression ‘suppression of fact’ has been used in company of such strong words
as fraud, collusion or wilful default. In fact it is the mildest expression
used in the proviso. Yet, considering the surroundings in which it has been
used, it has to be construed strictly. It does not mean any omission. The act
must be deliberate. In taxation, it can have only one meaning that the correct
information was not disclosed deliberately to escape from payment of duty,
where facts are known to both the parties; the omission by one to do what he
might have done and not that he must have done, does not render it
suppression.


  •  In Cosmic Dye Chemical v. CCE, 75 ELT 721 (SC), it was held that :

‘Intent to evade duty’ must be proved for invoking proviso
to S. 11A(1) of CEA for extended period of limitation. Intent to evade duty is
built into the expressions ‘fraud’ and ‘collusion’ but ‘mis-statement’ and
‘suppression’ are qualified by immediately preceding words willful
contravention of any of the provisions.


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Adjudicating Authorities (AA)

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2. Adjudicating Authorities (AA) :


In terms of CBEC Circular No. 80/1/05-ST, dated 10-8-2005 the
authorities for adjudicating Service Tax cases are under :

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Time limits for issue of SCN

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3. Time limits for issue of SCN :


A major amendment was made under Service Tax, relating to
recovery of Service Tax not levied or short levied, not paid or short paid or
erroneously refunded whereby Provisions of S. 11A of Central Excise Act, 1944 (CEA)
have been incorporated in Service Tax law by amending S. 73 of the Act. The time
limit for issue of SCN under the amended S. 73(1) of the Act is as under :

(a) Within one year of the relevant date : Where
Service Tax has not been levied or paid or has been short levied or short paid
or erroneously refunded, AA is required to serve a notice on the person
chargeable with Service Tax which has not been paid or levied or short paid,
requiring him to show cause as to why he is not liable to pay the amount
specified in the SCN.

(b) Within five years of the relevant date : If any
Service Tax has not been levied or paid or has been short levied or short paid
or erroneously refunded under specified circumstances.

The extended period of 5 years can be invoked in terms of
proviso to S. 73(1) of the Act, if any Service Tax has not been levied or has
been short levied or short paid by reason of :



  •  fraud or



  • collusion or



  • any wilful mis-statement or



  • suppression of facts


with an intent to evade payment of tax.

Hence existence of any of the circumstances specified above
is absolutely essential and a pre-requisite for invocation of extended period in
terms of proviso to S. 73(1) of the Act. The reasons for invoking the extended
period are required to be specified in the SCN.

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