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Adjustment of Debenture Premium against Securities Premium in Ind AS

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Background

On April 1, 2011 a company issued zero coupon Nonconvertible debentures (NCDs) of INR 100 payable on 31 March, 2021 at a premium amount of INR 116 which provides an 8% IRR to the holder of the instrument. At the time of issuance of the NCDs, Companies Act, 1956 (1956 Act) applied. At current date, the provisions of the Companies Act, 2013 (2013 Act) have become applicable to the company.

The Company is covered under phase 1 of Ind AS roadmap notified under the Companies (Indian Accounting Standards) Rules, 2015 (as amended) and needs to start applying Ind AS from financial year beginning on or after 1 April 2016 with comparatives for the year ended 31 March 2016. Its date of transition to Ind AS will be 1 April 2015.

Section 78 of the 1956 Act ‘Application of premiums received on issue of securities’ states as below: “

(2) The securities premium account may, notwithstanding anything in s/s. (1), be applied by the company:

(a) In paying up unissued securities of the company to be issued to members of the company as fully paid bonus securities;

(b) In writing off the preliminary expenses of the company;

(c) In writing off the expenses of, or commission paid or discount allowed on, any issue of securities or debentures of the company; or

(d) In providing for the premium payable on the redemption of any redeemable preference securities or of any debentures of the company.”

Position taken by the Company under Indian GAAP For all periods including upto financial year ended 31 March 2016, the company is preparing its financial statements in accordance with Indian GAAP. With regard to Indian GAAP, the Companies (Accounting Standards) Rules, 2006, state as below:

“Accounting Standards, which are prescribed, are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular accounting standard is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements shall be prepared in conformity with such law.”

The Company adjusted the entire premium payable on redemption i.e. INR 116 against the securities premium, in the year of issuance of NCDs, i.e. in year ended 31 March 2012. A corresponding premium liability of INR 116 was created.

From 1 April 2014, section 78 of the 1956 Act has been replaced by section 52 of the 2013 Act. Section 52 states as below: “

(2) Notwithstanding anything contained in s/s. (1), the securities premium account may be applied by the company—

(a) Towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;

(b) In writing off the preliminary expenses of the company;

(c) In writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company

(d) In providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or

(e) For the purchase of its own shares or other securities u/s. 68.

(3) The securities premium account may, notwithstanding anything contained in subsections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies u/s. 133,—

(a) In paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or

(b) In writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or

(c) For the purchase of its own shares or other securities u/s. 68.”

Based on the above, under the 2013 Act, on a go forward basis, Ind AS companies cannot charge debenture redemption premium against securities premium account. However, the word ‘and’ in section 52(3) also highlighted above lends itself to another technical argument. One could read the provision as restricting the use of securities premium only when two conditions are fulfilled, ie, (a) the class of companies are prescribed and (b) that class of companies are those that comply with accounting standards under section 133. Since no class of companies are yet notified u/s. 52(3), the restriction on use of securities premium will not apply.

Query under Ind AS

Under Ind AS 109 Financial Instruments, NCD liability is measured at amortised cost. The application of this principle implies that premium liability is accrued over the life of NCDs using the amortized cost method under effective interest method and debiting profit and Loss (P&L). In accordance with Ind AS 101 First Time Adoption of Ind AS, an entity is required to apply Ind AS retrospectively while preparing its first Ind AS financial statements except for cases where Ind AS 101 provides specific exemptions/ exceptions. Ind AS 101 does not contain any exemption/ exception with regard to the application of effective interest rate accounting for financial assets or liabilities.

The amortized cost under Ind AS on transition date at 1 April 2015 will be INR 136 (original cost of INR 100 and premium accrued of INR 36). On a go forward basis also premium will be accrued at an IRR of 8% and the same will be charged to the P&L a/c.

Whether the Company needs to reverse premium payable on redemption of NC Ds previously charged to the securities premium INR 80 (INR 116 – INR 36). Consequently, will the debenture premium of INR 80 be charged to future Ind AS P&L using the effective interest method?

Author’s Response

The author makes the following key arguments to support non-reversal of premium payable on redemption of NCDs previously charged to securities premium:

1. With regard to Ind AS, the Companies (Indian Accounting Standards) Rules, 2015 states as follow: “Indian Accounting Standards, which are specified, are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular Indian Accounting Standard is found to be not in conformity with such law, the provisions of the said law shall prevail and the financial statements shall be prepared in conformity with such law.”

In light of the underlined wordings, the intention of Ind AS rules should not be construed as requiring reversals of actions done in accordance with the applicable laws.

2. Ind ASs have been notified under the Companies (Indian Accounting Standards) Rules, 2015, which is a subordinate legislation. It cannot override provisions of the main legislation. The action of the company in debiting its securities premium account in the relevant financial year was in accordance with the provision of section 78 of the 1956 Act. As per section 6 of the General Clause (GC) Act, the repeal of an enactment will not affect anything validly done under the repealed enactment. Hence, to the extent that any acts are validly done under any repealed provision of the 1956 Act, such action will not be affected upon corresponding provision of the 2013 Act becoming applicable. Therefore the application of the 2013 Act does not impact position taken in the past.

3. While section 78 of the 1956 Act allows premium on redemption to be adjusted against the Securities Premium, it does not prescribe the timing of such adjustment. Hence, it is permissible to make upfront adjustment for the premium at any time during the tenure of the debentures. The Company adjusted the entire debenture premium of INR 116 against the securities premium account in year ended 31 March 2012 is in accordance with the law and completely justified.

4. The financial statements for the year ended 31 March 2012 were approved by the shareholders. On the basis of the shareholders’ approval and the extant law, the securities premium was utilised. Section 78 of the 1956 Act/ section 52 of the 2013 Act contain specific requirement concerning creation as well as utilisation of the securities premium. Once the company has charged premium payable on redemption, it effectively tantamount to utilisation of the securities premium. One may argue that once utilised, in accordance with the extant provisions of the main law the premium cannot be brought back to life merely because of an accounting requirement contained in a subordinate legislation.

5. The 2013 Act only recognizes premium received on shares as balances that may be credited to securities premium account. In the present case the securities premium account has already been reduced by the full debenture premium amount. Therefore credit back to the securities premium account pursuant to any reversal is not permitted under the 2013 Act.

6. As discussed earlier in the article one view is that debenture redemption premium can be adjusted against securities premium account in accordance with section 52(3) because no notification as required u/s. 52(3) has yet been issued. If this interpretation is taken, then Ind AS companies will be allowed to use securities premium account to adjust debenture premium till such time a notification is issued by the MCA.

Conclusion

The transition from Indian GAAP to Ind AS will not impact actions previously taken by the company under other provisions of the Act (section 78 of the 1956 Act in this case). The Company can carry forward the Indian GAAP accounting (done in accordance with a law) in Ind AS financial statements. The Company need not reverse premium payable on redemption of NCDs previously charged to the securities premium INR 80 (INR 116 – INR 36). Consequently, the debenture premium of INR 80 will not be charged to future Ind AS P&L. The Company should make appropriate disclosures as required by the applicable Ind AS and governing laws in the financial statements.

It may be noted that the author’s view in this article is not consistent with the clarifications provided by the Ind AS Transition Facilitation Group (ITFG). However, it may be noted that the views of the ITFG are not those of the ICAI and are not binding on the members of ICAI.

ITA NO.4028/Mum/2002 ADIT vs. J Ray Mc Dermott Eastern Hemisphere Ltd A.Y.: 1998-99, Date of Order: 6th May, 2016

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Article 5(2)(i), 5(2)(c) of India-Mauritius DTAA – no construction PE in India as duration of each project in India was less than 9 months; Activities of LO being solely of a preparatory or auxiliary character, falls within the exclusion in Article 5(3)(e).

Facts
The Taxpayer, a Mauritius company was a member of a global group of companies, was engaged in transportation, installation and construction of offshore platforms for mineral oil exploration in India. During the relevant year, the Taxpayer carried out only one project the duration of which was only three months.

The AO considered the work executed by the Taxpayer at different locations in terms of different contracts represented one project. Accordingly, the AO aggregated number of days for execution of all the contracts and held that it exceeded period of 9 months. The AO also included the number of days estimated to have been spent for supervisory activities before the actual commencement of construction work. Thus, the AO held that the Taxpayer had a PE in India under Article 5(2)(i) (Construction PE) of India-Mauritius DTAA . Further, relying on the report of a survey carried out u/s. 133A of the Income-tax Act, 1961 (the Act), concluded that the LO premises of group company of the Taxpayer were used exclusively for the Taxpayer’s business and therefore the LO was a Fixed Place PE under Article 5(2)(c). Accordingly, the AO determined the taxable income of the PE and taxed it u/s. 44BB of the Act.

In appeal, CIT(A) held that while the Taxpayer did not have construction PE under Article 5(2)(i), it had Fixed Place PE since the LO was exclusively used for the projects of the Taxpayer in India.

The issues before the Tribunal were:

a) Whether independent activities of the Taxpayer under different contracts were to be aggregated for determining the 9-month threshold period under Article 5(2)(i) of India-Mauritius DTAA ?

b) Whether LO of group company of the Taxpayer constitute PE of the Taxpayer under Article 5(2)(c) of India-Mauritius DTAA ?

Held

As regards Construction PE

(i) In earlier year, the Tribunal after considering the language in Article 5(2)(i) had held that the permanence test for existence of a PE stands substituted by a duration test for building construction, construction or assembly project, or supervisory activity connected therewith. There is also a valid, and more holistic view of the matter, that this duration test does not really substitute permanence test but only limits the application of general principle of permanence test in as much as unless the activities of the specified nature cross the threshold time limit of nine months, even if there exists a PE under the general rule of Article 5(1), it will be outside the ambit of definition of PE by virtue of Article 5(2)(i).Plain reading of Article 5(2) (i) would show that, for the purpose of computing the threshold time limit, what is to be taken into account is activities of a foreign enterprise on a particular site or a particular project, or supervisory activity connected therewith on an independent and standalone basis.

(ii) As there is no specific mention about aggregating the number of days spent on various sites, projects, etc. each of the sites, projects, etc. is to be viewed on standalone basis. Thus the contention that all projects need to be aggregated for computing the threshold of 9 months is not valid.

(iii) In the relevant year Taxpayer carried on only one project and the duration of which did not exceed 9 months. Thus, the Taxpayer did not have a construction PE in India.

As regards LO as PE

(i) There was no material on record that the employees of the LO had reviewed engineering documents or had participated in discussions or approval of the designs. LO merely provided back office support in relation to projects in India. None of the documents showed that the employees of the LO negotiated or concluded contracts for the Taxpayer, or that substantive business was carried out from the LO. In absence of such material, the claim of the Taxpayer that its Project Office was merely a communication channel had to be accepted.

(ii) Since the main business of the Taxpayer was fabrication and installation of platforms, PE trigger can be examined only under Article 5(1)(i) Thus, the issue of determination of its ‘PE’ through any other clause does not arise unless and until any other activity is taken up by the Taxpayer which is having an independent identity or economic substance and yielding separate business profits

(iii) Thus, since the project of the Taxpayer did not have work duration of more than 9 months during the year, an activity of the maintenance of back-up cum support office ‘simpliciter’ will not constitute ‘PE’ in India.

[2016] 69 taxmann.com 106 (Mumbai – Trib.) DDIT vs. Savvis Communication Corporation A.Y. 2009-10, Date of order: 31st March, 2016

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Section 9 of the Act, Article 12 of India-USA DTAA – the payment for providing web hosting services (though involving use of scientific equipment) does not qualify as “consideration for the use of or right to use of, scientific equipment”; hence, not taxable either u/s. 9(1) (vi) or Article 12 of India-USA DTAA .

Facts
The Taxpayer, an American company, was engaged in providing information technology solutions, including web hosting services. During the relevant year, the Taxpayer had earned income from provision of managed hosting services to entities in India. The Taxpayer claimed that the income was not taxable in India in terms of Articles 12 and 7 of India-USA DTAA .

According to the AO, web hosting company provides space on a server (whether owned or leased) for use by client. The server is not owned by the client. The hosting contract is for limited period. Hence, the AO concluded that the payment received by the Taxpayer was for granting right to use scientific equipment and therefore, it was royalty in terms of Explanation 2(iva) to section 9(1) (vi) of the Act.

Held

The AO proceeded on the fallacy that when scientific equipment is used by the Taxpayer for rendering service, the receipt should be construed as receipt for use of scientific equipment.

If the Taxpayer receives income by allowing customer to use scientific equipment, it is taxable as royalty. However, use of scientific equipment by the Taxpayer, in the course of giving a service to the customer, is distinct from allowing the customer to use a scientific equipment.

The true test is: whether the consideration is for rendition of service (though involving use of scientific equipment), or whether the consideration is for use of equipment simplicitor by the Taxpayer. If it is former, consideration is not taxable and if it is latter, consideration is taxable as royalty for use of equipment.

If the person making payment does not have independent right to use equipment or have physical access to it, the payment cannot be said to be consideration for use of scientific equipment.

Accordingly, the receipt was not “consideration for the use of or right to use of, scientific equipment” which is a sine qua non for taxability under section 9(1)(vi) read with Explanation 2(iva) thereto.

[2016] 68 taxmann.com 305 (Mumbai – Trib.) DCIT vs. VJM Media (P) Ltd A.Y.: 2007-08, Date of Order: 13th April, 2016

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Article 12 of India-Singapore DTAA , Article 13 of India-UK DTAA – payment made to nonresidents for limited, restricted and one time use of photograph, not being for “use of copyright”, was not royalty in terms of DTAA .

Facts
The Taxpayer, an Indian company, was engaged in the business of publishing magazines. During the relevant year, the Taxpayer had made payments to non-residents (one located in Singapore and another located in UK) for procuring images and figures for publication in its magazines. The Taxpayer was downloading the images from the websites of the two non-residents and was required to make payment for each of such downloads. The Taxpayer had the right of one time use of the image in its own magazines.

Since the Taxpayer did not withhold tax from the payments, the AO invoked the provisions of section 40(a)(i) of the Act and disallowed the payment. In appeal, CIT(A) upheld the order of the AO.

Held

In terms of Article 12 of India-Singapore DTAA and Article 13 of India-UK DTAA, only payments made for use of copyright can be characterised as royalty. Further, the copyright should be only of any of the items mentioned therein.

Even if it is presumed that a photograph falls in one or more of the items mentioned, the tax authority is required to establish that the payment was for use of ‘copyright’ and not for ‘copyrighted article’.

In several judgments, it has been held that ‘copyright’ and ‘copyrighted article’ are two different things.

The Taxpayer was permitted only one time use of the photograph in the magazine but not permitted to edit the photograph, make copies for sale or to permit someone else to use the photograph. Thus, the Taxpayer was permitted to use the ‘Article’ and not the ‘copyright’. In absence of “use of copyright”, the payment cannot be regarded as royalty so as to trigger obligation to deduct tax at source.

Article 12 of India-Singapore DTAA , Article 13 of India-UK DTAA – payment made to nonresidents for limited, restricted and one time use of photograph, not being for “use of copyright”, was not royalty in terms of DTAA .

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Facts

The Taxpayer, an Indian company, was engaged in the business of publishing magazines. During the relevant year, the Taxpayer had made payments to non-residents (one located in Singapore and another located in UK) for procuring images and figures for publication in its magazines. The Taxpayer was downloading the images from the websites of the two non-residents and was required to make payment for each of such downloads. The Taxpayer had the right of one time use of the image in its own magazines. Since the Taxpayer did not withhold tax from the payments, the AO invoked the provisions of section 40(a)(i) of the Act and disallowed the payment. In appeal, CIT(A) upheld the order of the AO.

Held

  • In terms of Article 12 of India-Singapore DTAA and Article 13 of India-UK DTAA, only payments made for use of copyright can be characterised as royalty. Further, the copyright should be only of any of the items mentioned therein. ? E ven if it is presumed that a photograph falls in one or more of the items mentioned, the tax authority is required to establish that the payment was for use of ‘copyright’ and not for ‘copyrighted article’. ? I n several judgments, it has been held that ‘copyright’ and ‘copyrighted article’ are two different things. ? T he Taxpayer was permitted only one time use of the photograph in the magazine but not permitted to edit the photograph, make copies for sale or to permit someone else to use the photograph. Thus, the Taxpayer was permitted to use the ‘Article’ and not the ‘copyright’. In absence of “use of copyright”, the payment cannot be regarded as royalty so as to trigger obligation to deduct tax at source.

[2016] 68 taxmann.com 142 (Kolkata – Trib.) Gifford & Partners Ltd. vs. DDIT A.Ys.: 2005-06 and 2007-08, Date of Order: 6th April, 2016

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Section 9 of the Act; Article 13, 5 of India-UK DTAA – (i) as per amended section 9 of the Act, the payment made was FTS under section 9(1)(vii); (ii) since the exclusive ownership of the work prepared by Taxpayer was of I Co, technical knowledge, etc. were made available and hence, payment was taxable as FTS ; (iii) place provided to Taxpayer for limited and restrictive purpose could not constitute PE.

Facts
The Taxpayer, a UK company, was engaged in the business of providing consultancy services for execution of projects. An Indian company (“I Co”) engaged the Taxpayer for providing consultancy services for modernisation of its shipyard. The representatives of the Taxpayer visited the shipyard in India to study the existing design, plan and facilities. The collected data was sent to UK and the experts of the Taxpayer at UK prepared the project report containing plans, design, structural design, cost estimate, manner of implementation, etc.

While filing its return of income, the Taxpayer showed the profit from execution of contract as attributable to its PE in India. However, in course of assessment proceedings, the Taxpayer claimed that it did not have PE in India and also that amount received was not FTS as the services provided did not fulfil ‘make available’ condition in Article 13 of the India-UK DTAA. The AO, however, concluded that the Taxpayer had PE in India; the amount received was FTS in terms of Article 13. ;Further as the services were ‘effectively connected’ with the PE in India, the consideration for such services was taxable in India in terms of Article 7 read with article 13(6).

Held

As regards the Act

(i) The services provided by the Taxpayer being in nature of technical or consultancy services, the payment was in the nature of FTS and is deemed to accrue or arise in India in terms of section 9(1)(vii)(b)of the Act.

(ii) Having regard to the retrospective amendment to section 9, since the services were utilized in a business or profession carried on by payer in India, the payment was deemed to accrue or arise in India, irrespective of whether the non-resident had PE in India or whether the non-resident rendered services in India.

As regards India-UK DTAA

(ii) The agreement provided that all plans, drawings, specifications, designs, reports, etc. prepared by the Taxpayer shall become and remain the exclusive property of I Co. therefore technical knowledge, etc. were made available. Accordingly, payment was taxable as FTS even in terms of the treaty.

(iii) Further as the payer is a resident of India, such FTS arises in India and is taxable in India by virtue of Article 13 of the DTAA .

As regards constitution of PE

(i) It was noted that, I Co was contractually required to provide office space to the Taxpayer. However such space was used only for limited purpose of providing services under the contract and its usage was also subject to various restrictions. The Taxpayer did not carry on any other business in India.

(ii) Article 5(1) requires that to constitute a PE, business should be carried on through the fixed place. Carrying on of business would involve carrying on of any activity related to the business of the enterprise.

(iii) Since the Taxpayer could not carry on any other activity, the place provided by I Co for limited and restrictive use could not be said to be PE in India of the Taxpayer. Reliance in this regard was placed on the Special bench decision in the case of Motorola Inc [(2005) 95 ITD 269 (Delhi)] and Tribunal decision in the case of Airline Rotables Ltd [(2011)(44 SOT 368)(Mum)].

Non-resident: Fees for technical services- Section 9(1)(vii) Expl. 2 and 44BB(1)- A. Y. 2008-09- Geophysical services- Activity of two dimensional and three dimensional seismic survey carried on in connection with exploration of oil on land and off-shore- Consideration for services rendered cannot be construed as ”fees for technical services” Assessee was assessable u/s. 44BB(1) of the Act-

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PGS Exploration (Norway)AS; 383 ITR 178 (Del):

The assessee a company incorporated under the laws of Norway, was principally engaged in the business of providing geophysical services world wide. These services included the services of acquiring and processing two dimensional and three dimensional seismic data both on land and offshore. In the A. Y. 2008-09, the assessee opted to be taxed on presumptive basis u/s. 44BB(1) of the Act at the rate of 10% of the gross revenue. The Assessing Officer rejected the contention of the assessee that its income was liable to be taxed u/s. 44BB(1) of the Act and held that the services provided by the assessee were technical in nature and the consideration payable to the assessee for rendering services in terms of the contract was ”fees for technical services” within the scope of section 9(1)(vii) of the Act and that the tax on such income was to be computed u/s. 115A of the Act and not u/s. 44BB(1). The Tribunal upheld the decision of the Assessing Officer.

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

“i) The Tribunal was not justified in holding that the activity of two dimensional and three dimensional seismic survey carried on by the assessee in connection with the exploration of oil was in the nature of “fees for technical services” in terms of Explanation 2 to section 9(1)(vii) of the Act.

ii) Since the A. Y. 2008-09 fell within the period from April 1, 2004 to April 1, 2011, the Income of the assessee to the extent it fell within the scope of section 44DA(1) of the Act and excluded from section 115A(1)(b) of the Act, would be computed in accordance with section 44BB(1) of the Act.”

Jobs not quotas: Expanding quotas will not address frustrations arising from jobless growth

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Gujarat’s announcement of a 10% quota for economically backward classes in education and government jobs represents a misdiagnosis of a pressing problem. The proposal is bound to be challenged legally as aggregate quotas will overshoot the permitted 50% mark. Moreover the agitating Patels, who the announcement sought to pacify, have dismissed it as “another lollipop from the BJP factory”.

The reality is that government cannot expand jobs fast enough to address contemporary society’s malaise: joblessness. Myriad agitations are only symptoms of the frustration among young Indians. If our demographic transition, where there is an ongoing surge in the working age population, is to translate into a dividend and not a nightmare, governments must address the challenge of joblessness. Over the last 15 years millions have moved out of agriculture, with only construction expanding noticeably to absorb the influx. Worryingly, manufacturing and services have not pulled their weight in job creation. For this, governments’ counterproductive policies must take the blame.

The nature of government intervention needs to be radically transformed. Right now, at both central and state levels, we are witnessing more government and less governance. In a complex world characterised by rapid changes in technology and trends, governments are not in a position to pick winners. Entrepreneurs are best placed to make these choices and governments need to get out of their way by removing barriers to economic activity. Simplification of regulations needs to be complemented by smarter regulation.

Enhancing the quality of public education, dismantling the licence raj shackling private education, skilling and physical infrastructure will help India grab opportunities. As wages in China increase, it opens the door for India’s export-led apparel industry and other labour-intensive industries, which can generate millions of jobs. A World Bank report, entitled “Stitches to Riches?” estimates that even a 10% increase in Chinese apparel prices can be leveraged to create at least 1.2 million jobs in the Indian apparel industry. This would be particularly good for women who are prolifically employed by the apparel industry, addressing India’s appalling gender inequities. But the government’s approach must be tailored to capitalise on available opportunities.

For example India’s ruinous labour laws, which create a new caste system whose Brahmins are organised labour and whose quasi-untouchables are roughly 93% of the labour force consigned to the informal sector, must be reformed to give a better chance to the rest. (Source: The Times of India dated 02.05.2016)

War for Ambedkar: Parties who celebrate his birth anniversary would do well to learn from his legacy

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The UN observed Bhim Rao ‘Babasaheb’ Ambedkar’s 125th birth anniversary on 13.04.2016 – showcasing the universal appeal of the principal architect of India’s Constitution, who fought caste injustice. Indeed, from being an icon solely of Dalit parties in yesteryear, Ambedkar’s legacy is enjoying a revival with political parties across India’s ideological spectrum fighting to appropriate it. And now, with inequality a rising concern and cause for political turmoil in Western countries, Ambedkar’s appeal has reached Western shores as well.

The continuing re-imagination of Ambedkar reflects as much on his immense contributions in defining the Indian republic as it does on the contemporary relevance of themes he became synonymous with: equality, social justice and rule of law. Prime Minister Narendra Modi is scheduled to travel to Ambedkar’s birthplace in Mhow, MP tomorrow to observe Social Harmony Day. In a bid to steal Modi’s thunder Congress organised a big rally on Monday in Nagpur, the headquarters of RSS.

Ambedkar was a crusader against untouchability and the caste system, eventually embracing Buddhism in 1956. By putting up banners and posters of Ambedkar, BJP hopes to portray itself not only as a champion of social engineering, but also take advantage of the fading of Nehru’s lustre in post-liberalisation India. However, BJP’s Hindu-first agenda is contradicted by Ambedkar’s belief that caste hierarchies are an intrinsic part of Hinduism (that is why he converted to Buddhism). Likewise, Ambedkar resists appropriation by contemporary leftist causes as well. He disagreed with Mahatma Gandhi’s philosophy of self-governing villages as India’s foundation, viewing them instead as dens of inequality. He opposed insertion of the terms ‘socialist’ and ‘secular’ in the preamble to the Constitution. He opposed Article 370 and was an ardent supporter of the Uniform Civil Code.

It’s welcome that political parties are debating Ambedkar today. What’s less welcome, however, is their attempt to project their own beliefs on to Ambedkar. He stood, for example, for the total annihilation of caste. Were he to witness today’s permanent and expanding regime of caste quotas, which all political parties appear to be agreed on, he could well be turning over in his grave. He was, above all, a modern thinker, a practitioner of pragmatic politics who refused to be bogged down by any particular ideology or religion. Leaders who invoke him today would do well to learn from that legacy.

(Source: Times of India dated 13.04.2016)

How to view success

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With a broad theme like six lenses that shape our perception of the leadership challenges encountered in work and family Six Lenses: Vignettes of Success, Career and Relationships ends up being a gripping narrative of life’s many shades, which can encourage readers to look at their lives and careers in a different light.

There are three reasons for this: one, the author’s mastery of the art of story-telling and his intellectual rigour that helps connects the dots. R Gopalakrishnan is a prolific writer but this one is clearly his best. Two, he has carefully avoided the predictability of countless management books that offer instant, pre-packaged wisdom on how to succeed in one’s career. And three, the book subtly revolves around management and philosophy with multiple references from religious texts and binds them all with several interesting anecdotes – the extraordinary lessons the author learnt from everyday experiences of people to which readers can relate. In the process, the author shows how, by altering our perceptions, people can better overcome the challenges they face at work and in family matters.

Mr Gopalakrishnan also draws from the Vedantic idea of myth and reality to conclude that the idea of reality does not exist and that all man sees is through his perception of the world around him. It’s like a visit to the optician for an eye test – on the support frame, there are lenses that can be rotated to improve vision during testing. The rotation of each lens changes the clarity and the view. There are many perspectives that the viewer can get and he or she has to select the view that best suits him or her. Like an optician who keeps turning the lenses till the patient can see clearly, people need to keep shifting the proverbial six lenses until they find and arrive at an awareness of their life’s purpose and fulfilment.

The six lenses (the book has a chapter each that corresponds to each of these lenses) are: Purpose (the deep-seated belief about life’s aim); Authenticity ( who you are, at the core); Courage (overcoming obstacles and inequity); Trust (encompasses virtues such as reliability, never letting anyone down, etc); Luck (people pretend they don’t believe in it except when it suits them) and Fulfilment (it is about enjoying what exists rather than cry about what might have been missed).

Universally, people define success in terms of what other people think of it. But the important lesson the book provides is that there is no universally accepted measure of success. But the paradox is that while all success doesn’t lead to fulfilment, all fulfilment leads to success. The delightful stories about “people like us” tell us how each of them sought success and fulfilment and are great examples of what happiness means – it’s a complex phenomenon called emotional well-being. Young readers may scoff at the author’s prognosis that happiness is tied to giving rather than taking, to volunteering and to donating, but they could gain some deep insights.

Though its inclusion as a lens may be considered unusual by many, Mr Gopalakrishnan is at his best in the chapter on “Luck”. Through countless examples, he has shown how good outcomes are dressed up by the corporate types as strategic strokes of genius while catastrophes are attributed to bad luck.

Overall, Six Lenses… is a great read, made richer by an author who has enough experience and knowledge to offer readers views on the choices and assumptions that people make, as also their outcomes.

(Source: Extracts from Book Review by Shyamal Majumdar of Six Lenses – Vignettes of Success, Career and Relationships by R. Gopalkrishnan in Business Standard dated 06.04.2016)

India cannot get carried away by current growth superiority : RBI Governor Raghuram Rajan

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Reserve Bank of India (RBI) governor Raghuram Rajan clarified his remark that India was like a “one-eyed king in the land of the blind” and defended the thought process behind the remark that has attracted controversy.

Rajan, 53, also spoke of how “words are hung out to dry, as in a newspaper headline,” robbing them of context and opening them up to misinterpretation.

India cannot get carried away by its “current superiority in growth,” Rajan told an audience of students and bankers at the convocation of the National Institute of Bank Management in Pune.

“My intent in saying this (and it was an off-hand comment in an interview) was to signal that our outperformance was accentuated because world growth was weak,” said the RBI governor, whose choice of words had evoked the displeasure of some government ministers.

“But we in India are still hungry for more growth. I then explained that we are not yet at our potential but that we are at the cusp of a substantial pick-up in growth because of the reforms that are underway,” said Rajan.

He added that in a “news hungry” nation like India, the remarks had been seen as denigrating India’s success.

Finance minister Arun Jaitley had responded to Rajan’s “one-eyed king” remark by saying a growth rate of 7.5% would be a cause of celebration in any other country.

In an interview to financial news website Marketwatch on 17 April, Rajan, when asked about the popular notion that India was the “bright spot” in an otherwise gloomy global economy, said the country still has some way to go.

“Well, I think we’ve still to get to a place where we feel satisfied. We have this saying, ‘in the land of the blind, the one-eyed man is king’. We’re a little bit that way,” Rajan told the website.

On Wednesday, Rajan struck a note of caution.

“We cannot get carried away by our current superiority in growth for as soon as we start distributing future wealth as though we already have it, we stop doing what we are supposed to do to keep growing,” he said. “This movie has played too many times in the past for us not to know how it ends.”

Rajan noted that while India is compared to China in reference to economic growth rates, the Chinese economy is five times larger than India’s and the average Chinese citizen is four times richer than the average Indian.

The Indian economy is expected to grow 7.5% in 2016 compared to China’s 6.5%, according to forecasts released by the International Monetary Fund earlier this month.

“As a central banker who has to be pragmatic, I cannot get euphoric if India is the fastest growing large economy. Our current growth certainly reflects the hard work of the government and the people of the country, but we have to repeat this performance for the next 20 years before we can give every Indian a decent livelihood,” said Rajan. He said his remarks were not meant to disparage was has been done and is being done by governments.

“The central and state governments have been creating a platform for strong and sustainable growth, and I am confident the payoffs are on their way, but until we have stayed on this path for some time, I remain cautious.”

The media’s scrutiny of what Rajan called an off-the-cuffremark was a “teachable moment”, said the RBI governor, who is on leave from his teaching post at the University of Chicago.

The RBI governor questioned the manner in which every word spoken by public figures is “wrung out” for meaning. “When words are hung out to dry, as in a newspaper headline, it then becomes fair game for anyone who wants to fill in meaning to create mischief,” said Rajan, adding that if India is to have a reasonable public dialogue, words must be seen in context and not stripped of it. “That may, however, be a forlorn hope,” he said.

Rajan, in his speech titled ‘Words matter but so does intent,’ didn’t stop there. “This leads to the question—how much of our language is liable for misinterpretation? How forgiving should we be of a bad choice of words when the intent is clearly different?”

Rajan chose to make this point through examples.

He cited the famous words of Mahatma Gandhi who once said “an eye for an eye will make the whole world go blind.”One might take umbrage because the comment suggests that blindness is an inferior state of being, said Rajan. “Yet, Gandhiji’s comment was on the absurdity of the event and not a comment on blindness,” he noted.

“If we spend all our time watching our words and using inoffensive language…we will be dull and will not be able to communicate because no one will listen,” said Rajan. “For instance, an eye for an eye will only make the whole world go blind, could be replaced by—revenge reduces collective welfare,” quipped Rajan. “The latter is short and inoffensive but meaningless for most listeners who haven’t taken economics classes.”

Rajan concluded that all constituents have work to do to improve communication. Speakers have to be more careful with words and listeners should not look for insults where none may exist. (Source: Mint Newspaper dated 21.04.2016)

Three box strategy for success: Effective business leaders who see change when it’s coming tick all these three boxes

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Effective leadership is the high point in today’s competitive environment. It is imperative for leaders to have a sound plan for the future, a firm grip on the present and an understanding of the past. Without these, it is almost impossible to achieve and sustain success.

I have incorporated these elements within my framework for strategic innovation. I call it the Three Box Solution. This framework commences with an appreciation of time as a continuum.

Managing the present (Box 1) is the prime focus for most leaders today. With no revenue; without Box 1, business comes to a standstill. Therefore, the emphasis on the performance engine that generates revenue, is crucial. At the same time, attention to what one hopes to achieve tomorrow for the organisation (Box 3) is equally vital.

Without Box 3, there is no future. To implement Box 3, one has to discard some of the mindsets, practices, policies, and perhaps products or services that enabled both the leader and the company reach where they are today. Leaving behind the past (Box 2) completes the circle.

Among the three boxes, Box 2 is the most challenging. Good leaders are able to envisage an obsolete trend and implement changes to script a success story.

Following a particular trend or rationalising to keep elements that helped the organisation succeed in its journey, can take it only so far. Therefore, it is important to gauge futuristic goals, pick up the “weak signals” and act upon them to make the business and the organisation future ready.

Weak signals are emergent changes that appear on the horizon, sometimes so dim and distant as to be almost imperceptible. They could be changes in behaviour or demographics, technology, the economy—almost any activity related to humanity. Within the Three Box framework, they are the raw materials leaders can use to develop assumptions about what may happen in the future.

Weak signals are ubiquitous but, as mentioned above, sometimes are difficult to detect. Where do you find them? You can mine for signals by using a free-for-all approach, soliciting ideas from the public, for example. Or, you may choose to create a task force within your organisation, dedicated to identifying up-and-coming trends.

Another option is to look for individuals within your company who seem to have their eyes on the horizon. Often, these are younger individuals or people who have a reputation among co-workers for nonconformity. These mavericks see the world differently, tuning in to signals that others miss.

Effective leaders understand, however, that weak signals must be tested to determine whether they truly do foretell coming changes or are just noise. This is the third leadership behavior in which the Three Box framework is rooted. Experimentation resolves uncertainties and increases learning even as it reduces risk. Following is an example of how a humble candy became a global success story by picking up weak signals.

Innovative leaders realise the Three Box framework is an ongoing process, not a one-time project. They are always searching for and testing weak signals. They never cease building the future even as they ensure their organisations function at peak performance today. They are constantly vigilant for traps of the past. As a result, their companies are able to operate successfully and simultaneously within all three boxes. (Source: Extracts from Article written by Vijay Govindarajan in the Times of India dated 18.04.2016)

A. P. (DIR Series) Circular No. 71 dated May 19, 2016

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Rupee Drawing Arrangement – Submission of statement/returns under XBRL

This circular states that banks have to submit the statement E on total remittances from the quarter ending June 2016 in eXtensible Business Reporting Language (XBRL) system which can be accessed at https://secweb. rbi.org.in/orfsxbrl/.

Article 13(4) of India-UK DTAA –Payments made for consultancy services cannot be termed as technical services merely because consultancy services has technical inputs-Merely because the recipient of a technical consultancy services learns something with each consultancy, it cannot be considered as satisfying the make available condition.

12.
[2018] 93 taxmann.com 20 (Ahd)

DCIT vs.
BioTech Vision Care (P) Ltd. 

ITA No. :
1388, 2766 & 3154 (AHD.) OF 2014

A.Y.s:
2009-10 to 2011-12

Date of
Order: 18th April, 2018

 

Article 13(4) of India-UK DTAA –Payments made for
consultancy services cannot be termed as technical services merely because
consultancy services has technical inputs-Merely because the recipient of a
technical consultancy services learns something with each consultancy, it
cannot be considered as satisfying the make available condition.

 

Facts

Taxpayer, an Indian entity, made payments to a UK based
company (FCo) for consultancy services in specified areas2. The Taxpayer contended that payment made
to UK Co for such services qualified as business income and in absence of a PE
of the Taxpayer in India, such income was not taxable in India. Thus, Taxpayer
made payments to FCo, without withholding taxes at source.

 

 

AO contended that the payments made to FCo were in the
nature of ‘FTS’ under Article 13 of the India-UK DTAA. Thus, the AO disallowed
the payments made to FCo u/s. 40(a)(i) for failure to withhold taxes on such
payments. Aggrieved, the Taxpayer appealed before CIT(A).

 

CIT(A) deleted the disallowance by holding that the
services rendered by FCo did not make available any technical knowledge, skill
or knowhow and hence it did not qualify as FTS under article 13 of India-UK
DTAA.

 

Aggrieved, the AO appealed before the Tribunal.

 

Held

As per the terms of service
agreement between the Taxpayer and FCo, FCo was obliged to provide technical
advices on phone/fax/ email as and when required. It also required FCo to
provide for consultancy services to the Taxpayer in the specified areas.

The make available condition in
the FTS article can be considered to be satisfied only when there is a transfer
of technology in the sense that recipient of service is enabled to provide the
same service on his own, without recourse to the original service provider.
Reliance in this regard was placed on the decision in the case of CESC Ltd.
vs. DCIT [(2003) 87 ITD TM 653 (Kol)]
.

Merely because the consultancy
services provided by FCo had technical inputs, such services do not become
technical services. Further, simply because the recipient of a technical
consultancy services learns something with each consultancy, there is no
transfer of technology in a manner that the recipient of service is enabled to
provide the same service without recourse to the service provider.

        Thus, consultancy services
rendered by FCo does not satisfy the make available condition and hence it does
not qualify as FTS under the India-UK DTAA.

[1] Exact scope of services availed is not
clear from the ruling.

Article 12 of India-USA DTAA; Section 9(1)(vii), 40(a)(i) of the Act – Rendering of service through deployment of personnel having requisite experience and skill which could not have been performed by service recipient on its own without recourse to the service provider, did not qualify as FIS under the India-USA DTAA.

11. (2018) 92 taxmann.com 407

ACIT vs.
Petronet LNG Ltd.

ITA No. :
865/Del/2011

A.Y.:
2006-07

Date of Order:
6th April, 2018

 

Article 12 of India-USA DTAA; Section 9(1)(vii), 40(a)(i)
of the Act – Rendering of service through deployment of personnel having
requisite experience and skill which could not have been performed by service
recipient on its own without recourse to the service provider, did not qualify
as FIS under the India-USA DTAA.

 

Facts

Taxpayer, an Indian company availed certain consultancy
services from a U.S. company (FCo). As part of the service agreement, FCo, was
required to evaluate different types of LNG vaporizers, recommend a suitable
form of vaporiser and study the benefits of various schemes for generating
power through utilisation of LNG study.

 

Taxpayer contended that the payments made to FCo were
covered by Article 23 (other income) of the DTAA and hence was taxable only in
the residence state i.e. US. AO however contended that the payment made by
Taxpayer was in the nature of fee for technical services (FTS) as defined u/s.
9(1)(vii) of the Act and accordingly, disallowed the payments made by the
Taxpayer for failure to withhold taxes on the same.

 

Aggrieved, the Taxpayer appealed before the CIT(A). The
CIT(A) deleted the disallowance. Aggrieved the AO appealed before the Tribunal.

 

Held

 Article 12(4) of the India-US
treaty provides for a restrictive meaning of ‘fee for included services (FIS) vis-a-vis
the meaning of FTS under the Act. Under the DTAA, FIS is defined to include
only those technical/consultancy services which are ancillary and subsidiary to
the application/enjoyment of right, property or information or which ‘make
available’ technical knowledge, skill, knowhow, process etc.

 As explained in the Memorandum of
Understanding entered into, between India and USA, technology is considered to
be ‘made available’ only when the person acquiring the service is able to apply
such technology on his own.

Services provided by FCo involved
use of technical knowledge or skill. Although mere rendering of services
involving technical knowledge, skill etc. could qualify as FTS under the
Act, it would not qualify as FIS under Article 12(4) of the DTAA.

The scope of services rendered by
FCo involved deployment of personnel having the requisite experience and skill
to perform the services. Having regard to the nature of services, it was not
possible for the Taxpayer to carry out such services in future on its own
without recourse to the service provider. Hence, services rendered by FCo did
not qualify as FIS under Article 12(4) of the India-US DTAA. The services were
not taxable in India and accordingly no disallowance is warranted for alleged
default of withholding tax.

[1] It is not clear why
taxpayer resorted to other income article rather than rely on the proposition
that non –FIS overseas services rendered by US Company does not trigger tax in
absence of PE.


Article 7(1) of India-USA DTAA; Section 9(1)(i), 40(a)(i), 195 of the Act –Support services obtained from an associate entity in USA under a service agreement- Services were rendered within India as well as from outside India – payments for services rendered from outside India not subject to withholding as there was no involvement of PE in India while rendering such services.

10.  TS-190-ITAT-2018(Mum)

DCIT vs. Transamerica Direct Marketing
Consultants Pvt. Ltd.

ITA No. : 1978/MUM/2015

A.Y. : 2010-11

Date of Order: 19th
March, 2018

 

Article
7(1) of India-USA DTAA; Section 9(1)(i), 40(a)(i), 195 of the Act –Support
services  obtained from an associate
entity in USA under a service agreement- Services were rendered within India as
well as from outside India – payments for services rendered from outside India
not subject to withholding as there was no involvement of PE in India while
rendering such services.

 

Taxpayer,
a resident company, is engaged in the business of direct marketing activities
as well as providing management, scientific, technical and advisory consultancy
services in India. It obtained bundle of support services such as information
support system, marketing and new business development, new product
development, actuarial services, accounting support services, internal audit
etc.
from its associated entity in U.S.A (FCo). The services were rendered
by FCo both from outside India as well as within India.

 

While
making payments for services, Taxpayer withheld taxes only on the amount
pertaining to services rendered within India on the basis that FCo had a
service PE w.r.t such activities and thus profits were taxable in India under
Article 7(1) of the India-US DTAA. However, no withholding was made on payments
made for services received from outside India on the basis that such services
could not be attributed to the Service PE of FCo in India and the payments were
also not in the nature of Fees for Included Services (FIS) as defined under the
treaty. Accordingly, such amounts were not claimed to be taxable in India.

 

The
AO disallowed the payments attributable to services rendered from outside India
on the basis that such services were also taxable in India since the recipient
(being beneficiary) of the services is located in India.

 

Aggrieved,
the Taxpayer appealed before CIT(A).

 

The
CIT(A) placed reliance on the decisions in cases of Ishikawajima-Harima
Heavy Industries Ltd. vs. DIT (228 ITR 408 (SC)), WNS North America Inc.(ITA
No. 8621/Mum/2010) and Morgan Stanley & Co. (292 ITR 416)
to conclude
that payments made for services, not in the nature of FIS, rendered by the FCo
from outside India were not taxable in India and hence no disallowance is
needed for alleged failure to withhold tax. Aggrieved, AO appealed before the
Tribunal.

 

Held

       As per beneficiary test laid down by AO,
if the service recipient is in India, the payments for such services are
taxable in India. However, such test is relevant for the purpose of evaluating
the taxability of ‘fees for technical services’ in the hands of non-resident
recipient u/s. 9(1)(vii) of the Act. Whereas, in this case, the amount paid to
FCo under the service agreement is in the nature of ‘business profits’ which is
taxable under Article 7 of DTAA.

Reliance placed by CIT(A) on the case of WNS
North America Inc.(ITA No. 8621/Mum/2010)
, later approved by Bombay HC, was
correct where on similar facts, Mumbai ITAT had held that the amount received
for services rendered outside India cannot be said to accrue or arise in India
or deem to accrue or arise in India. Even the existence of a service PE in
India would not impact the taxability of offsite services if there is no
involvement of the PE in rendering of such services.

Services rendered by the employees of FCo
deputed to India are attributable to the service PE in India. However, services
rendered by the employees from outside India, are not attributable to the PE in
India and thus, not liable to be taxed in India.

 



Provisions Of TDS Under Section 195 – An Update – Part I

In
view of increasing cross border transactions which Indian enterprises have with
the non-residents, section 195 of the Income-tax Act, 1961 [the Act] dealing
with deduction of tax at source from payments to non-residents has assumed huge
importance over the years. Many amendments have taken place in the section(s),
relevant rules and forms relating to deduction of tax at source from payments
to non-residents. In addition, due huge litigation in this regard, there have
been plethora of judicial pronouncements and cleavage of judicial opinions on
various contentious issues. In this series of articles, we are dealing with the
amended provisions as well as various important judicial pronouncements and
practical issues relating to TDS u/s. 195.

 

In
view of the vastness of the subject, plethora of issues, judicial
pronouncements and space limitations, at various places we have only referred
to relevant statutory provisions, CBDT Circulars and Instructions and judicial
pronouncements. For a better understanding of the issues, reader is advised to
study the same in detail.

 

1.
Overview of Relevant Provisions

 

1.1     Relevant sections

 

Section

Particulars

195(1)

Scope
and conditions of applicability

195(2)

Application
by the ‘payer’ to the Assessing Officer [AO]

195(3),
(4) & (5)

Application
by the ‘payee’ to the AO, validity of certificate issued by the AO, Powers of
CBDT to make rules by issuing Notifications re s/s. (3)

195(6)

Furnish
the information relating to the payment of any sum under s/s. (1)

195(7)

Power
of CBDT to specify class of persons or cases where application to AO u/s.
195(2) compulsory

195A

Grossing
up of tax

197

Certificate
for deduction at lower rate

206AA

Requirement
to furnish Permanent Account Number

90(2)

Application
of Act or Treaty, whichever more beneficial

90(4)

Tax
Residency Certificate

94A(5)

Special
Measures in respect of transactions with persons located in notified
jurisdictional area

 

 

1.2     Other TDS provisions for payments to
non-residents

Section

Applicable to

Rate

192

Payment
of Salary

Average
Rate

194B

Winnings
from lottery or crossword puzzle or card game and other game of any sort

Rate
in force

194BB

Winnings
from horse races

Rate
in force

194E

Payment
to non-resident sportsmen or sports associations

20%

194LB

Interest
to non-resident by an Infrastructure Debt fund

5%

194LBA
(2) & (3)

Income
[referred in section 115UA of the nature referred in section 10(23FC) and
10(23FCA)] from units of a business trust to its unit holders

5%
/rate in force

194LBB

Income
[other than referred in section 10(23FBB)]in respect of units of investment
fund

Rate
in force

194LC

Interest
to non-resident by an Indian company or a business trust under approved loan
agreements or on long term Infra Bonds approved by Central Govt.

5%

194LD

Interest
to FIIs or QFIs on rupees denominated bonds or Government security

5%

196B

Income
from units u/s. 115AB purchased in foreign currency or Long-term capital
gains [LTCG] arising from transfer of such units

10%

196C

Interest,
Dividends or LTCG from Foreign Currency bonds or shares referred in section
115AC

10%

196D

Interest,
Dividends or Capital Gains of FIIs from securities (Other than interest
covered by section 194LD) referred in section 115AD (1)(a)

20%

 

 

1.3     Relevant Rules and Forms

 

Rule

Particulars

26

Rate
of exchange for the purpose of deduction of tax at Source on income payable
in foreign currency

115

Rate
of exchange for conversion into rupees of income expressed in foreign
currency

21AB

Certificate
(Form 10F) for claiming relief under an agreement referred to in section 90
and 90A

28(1),
28AA, 28AB & 29

Application
and Certificate for deduction of tax at lower rates

29B

Application
for Certificate u/s.195(3) authorising receipt of interest and other sums
without deduction of tax

37BB

Furnishing
of Information for payment to a non-resident, not being a company, or to a
Foreign Company

37BC

Relaxation
from deduction of tax at higher rate u/s 206AA

Form

Particulars

15CA

Information
to be furnished for payment to a non-resident, not being a company, or to a
Foreign Company

15CB

Certificate
of an Accountant

13

Application
for a Certificate u/s. 197

15C
& 15D

Application
u/rule 29B by a Banking Company and by any other person

10F

Information
to be provided u/s. 90(5) or 90A(5)

27Q

Quarterly
statement of deduction of tax u/s. 200(3) in respect of payments (other than
salary) made to non-residents

 

 

2.
Section 195 (1)

 

Other
sums.

 

195. (1) Any person responsible for paying to a non-resident, not being a
company, or to a foreign company, any interest (not being interest referred to
in section 194LB or section 194LC or section 194LD) or any other sum
chargeable under the provisions of this Act
(not being income chargeable
under the head “Salaries”) shall, at
the time of credit
of such income to the account of the payee or at the time of payment thereof in cash
or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax
thereon at the rates in force:

 

Provided that ….

 

Provided
further

that no such deduction shall be made in respect of any dividends referred to in
section 115-O.

 

Explanation
1
.—For
the purposes of this section, where any interest or other sum as aforesaid is
credited to any account, whether called “Interest payable account”
or “Suspense account” or by any other name
, in the books of
account of the person liable to pay such income, such crediting shall be
deemed to be credit of such income
to the account of the payee and the
provisions of this section shall apply accordingly.

 

Explanation
2.
—For
the removal of doubts, it is hereby clarified that the obligation to
comply with s/s. (1) and to make deduction thereunder applies and shall be
deemed to have always applied and extends and shall be deemed to have always
extended to all persons, resident or non-resident, whether or not the
non-resident person has—

 

(i) a
residence or place of business or business connection in India; or

 

(ii)        any
other presence in any manner whatsoever in India.”

2.1     Section 195(1) – Exclusions

 

The following are excluded from the scope
of section 195(1):

 

(i)  Interest
referred to in section 194LB or section 194LC or section 194LD.

(ii) Income
chargeable under the head “Salaries”.

(iii)       Dividends
referred to in section 115-O.

(iv)       Sum
not chargeable to tax in India.

 

a.  Non-chargeability
either due to Act or Double Taxation Avoidance Agreement [DTAA]. DTAA benefit
subject to obtaining TRC/Form 10F from the non-resident payee.

 

b.  Due
to scope of total income u/s. 5 or exemption u/s. 10.

 

c.  No
TDS on amounts exempt u/s. 10 – Hyderabad Industries Ltd. vs. ITO 188 ITR
749 (Kar).

 

d.  Income
from specified services such as online advertisement, digital advertising space
subject to Equalisation Levy (Chapter VIII of Finance Act 2016) – Exempt
u/s. 10(50).

 

(v) Section
172 – Profits of non-residents from Occasional Shipping Business

 

a.  CBDT
Cir. No. 723 dated 19.09.1995 – Payments to shipping agents of non-resident
ship owners – Provisions of section 172 apply and section 194C/195 will not
apply.

 

b.  CBDT
Cir. No. 732 dated 20.12.1995 – Annual No Objection Certificate u/s. 172 to be
issued by AO where Article 8 of DTAA applies – declaration that only
international traffic during period of validity of certificate.

 

c.  CIT
vs. V. S. Dempo & Co (P) Ltd. 381 ITR 303 (Bom)
– Section 195 not
applicable to shipping profits governed by section 172 and section 44B.

 

(vi)       Where
certificate is obtained by the payee u/s 197 for non-deduction of TDS and such
certificate is in force (not cancelled), then the payer cannot be treated as
assessee in default for non-deduction of TDS – CIT vs. Bovis Lend Lease
(I) Ltd. 241 Taxman 312 (SC).

2.2     Scope of section 195 (1) – Inclusions

 

(i)  Any
person
responsible for paying to a non-resident, not being a company or a
Foreign Company is covered in the scope of section 195(1). It includes all
taxable entities and there is no exclusion for individual/HUF.

 

(ii) The
term person includes a local authority. In CIT vs. Warner Hindustan
Limited 158 ITR 51 (AP),
the court while holding that the expression
“person” includes a Department of a foreign government like USAID held that “As
observed by us already the expression “person” is of wide connotation and it
includes, in our opinion, the Department of a foreign Government like USAID.
Learned counsel for the assessee invited our attention to a decision in Madras
Electric Supply Corporation Ltd. vs. Boar land (Inspector of Taxes) [1935] 27
ITR 612 (HL), to support the proposition that the expression “person” includes
Crown. We find that the above-referred decision supports the view that a
Government falls within the meaning of the expression “person”.”

 

(iii)       Section
195 includes residents as well as non-residents. Following the decision of the
Supreme Court in the case of Vodafone International Holdings BV vs. Union
of India 341 ITR 1 (SC)
, Explanation 2 has been
inserted by the
Finance Act, 2012 with retrospective effect from 1.4.1962, which clearly
provides that ‘For the removal of doubts, it is hereby clarified that
the obligation to comply with sub-section (1) and to make deduction thereunder
applies and shall be deemed to have always applied and extends and shall be
deemed to have always extended to all persons, resident or non-resident,

whether or not the non-resident person has (i) a residence or place of business
or business connection in India; or (ii) any other presence in any manner
whatsoever in India.

 

(iv)       If
a person is treated as agent of a non-resident u/s.163, the same person cannot
be proceeded u/s. 201 at the same time for non-deduction of TDS on payment to
non-resident. CIT vs. Premier Tyres Ltd. 134 ITR 17 (Bom).

 

(v) The
term Non-Resident includes a Non-resident Indian. However, it does not include
a person who is Resident but Not Ordinarily Resident [RNOR]. It is important to
note that the term non-resident includes RNOR for the purposes of sections 92,
93 and 168 but  not for the purposes of
section 195.

 

(vi)       Residential
status of a person i.e. whether he is resident or non-resident based on the
physical presence test in India of more 182 days in the current year may not be
known till year end. A question arises as to in the initial months of a
financial year, how it has to be determined as to a person is non-resident or
not.

 

Whether earlier year’s residential status
can be adopted in such cases? The Authority for Advance Ruling [AAR] in the
case of Robert W. Smith vs. CIT 212 ITR 275 (AAR) and Monte Harris vs.
CIT 218 ITR 413 (AAR)
, for purposes of determining the residential
status of an applicant u/s. 245Q, held that it appears more practical and
reasonable for purposes of determining the residential status of an applicant
u/s. 245Q to look at the position in the earlier previous year, i.e., the
financial year immediately preceding the financial year in which the
application is made. In the Monte Harris’s case, the AAR observed as follows:

 

“An application may be presented soon
after the commencement of the financial year. It may also have to be disposed
of before the end of that financial year. In that event, both on the date of
the application as well as on the date on which the application is heard and
disposed of, it may not be possible in all cases to predict with reasonable
accuracy whether the stay of the applicant in India during that financial year
will exceed 182 days or not. In other words, it will be difficult to determine
the residential status of the applicant with reference to the previous year of
the date of application. The expression ‘previous year’ should be so construed
as to be applicable uniformly to all cases. It cannot be said that a previous
year should be taken as the financial year in which the application is made
provided the stay of the applicant up to the date of the application or the
estimated stay of the applicant in India in that financial year exceeds 182
days and that it should be the previous year preceding that financial year in
case it is not possible to determine the duration of the stay of the applicant
in India in the financial year in which the application is made. It appears
more practical and reasonable for purposes of determining the residential status
of an applicant under section 245Q to look at the position in the earlier
previous year, i.e., the financial year immediately preceding the financial
year in which the application is made. This is a period with reference to which
the residential status of the applicant in every case can be determined without
any ambiguity whatsoever. In the instant case, though the applicant was
resident in India in the financial year 1994-95 during which the application
had been made, he was non-resident in India during the immediately preceding
financial year, i.e., 1993-94. The applicant must, therefore, be treated as a
non-resident for the purposes of the instant application. The application was,
therefore, maintainable.”

 

It remains to be judicially tested as to
whether a similar stand can be taken for the purposes of section 195(1).

 

(vii) In respect of TDS from the payment
to an agent of a non-resident in the following cases it was held that the payer
is required to deduct tax at source:

   Narsee
Nagsee & Co. vs. CIT 35 ITR 134 (Bom).

   R.
Prakash [2014] 64 SOT 10 (Bang.)

 

However, in the case of Tecumseh Products
(I) Ltd. [2007] 13 SOT 489 (Hyd.), the ITAT, on the facts of the case, held
that the assessee was not liable to TDS as the primary responsibility for payment
of interest was of the Bank and not of the assessee, though later on the bank
may recover the amount of interest paid by it from the assessee. In this
regard, the ITAT held as follows:

 

“In the instant case, the question for
consideration was as to who was responsible for making payment of interest to
the non-resident bank. Admittedly, the interest was paid by Andhra Bank and not
by the assessee. The case of the department was that since the bank had paid
interest on behalf of the assessee as an agent, the assessee was responsible
for making deduction of tax before payment. It was not in dispute that in terms
of letter of credit, non-resident bank negotiated with the Andhra Bank for
payment of interest on late payment. When the supplier presented the letter of
credit and negotiated the same through non-resident bank in terms of letter of
credit, Andhra Bank was bound to pay interest in case of any late payment. The
Andhra Bank might recover the payment from the assessee, but the immediate
responsibility was that of Andhra Bank and not the assessee. The Legislature
has used the words “any person responsible for paying”. In instant
case, the responsibility was of Andhra Bank and not of the assessee. The
payment might have been made on behalf of the assessee but that did not take
away the responsibility of Andhra Bank from paying interest to the foreign
bank. Therefore, it might not be proper to say that the assessee failed to
deduct tax while paying interest to the foreign banker.”

(viii) The term ‘any person’ includes a
foreign company, whether it is resident in India or not. It also includes
Indian branch of foreign company.

a)  Section
195(3) and Rule 29B contains relevant provisions regarding grant of a
certificate by the AO authorising such a branch to receive interest or other
sum without TDS as long as the certificate is force.

 

b)  A
foreign company having a branch or office in India is also covered. ITO vs.
Intel Tech India P. Ltd. 32 SOT 227 (Bang)
.

 

However, it is to be noted that payments
to foreign branch of an Indian company is not covered under the provisions of
section 195.

 

c)  Payment
by a branch to HO/Other foreign branch.

 

There is a cleavage of judicial
pronouncements on the subject. However, in respect of payment of interest by
the PE of a foreign bank, the law has been amended by insertion of Explanation
to section 9(1)(v), which has been explained below.

 

i. TDS Required: CBDT
Circular 740 dtd 17.4.1996 – Branch of a foreign company is a separate entity
and hence payment of interest by branch to HO is taxable u/s. 115A subject to
provisions of applicable DTAA.

 

Dresdner Bank [2007] 108 ITD 375 (Mum.).

 

CBDT Circular No. 649 dated 31st
March 1993 providing for treatment of technical expenses when being remitted to
Head Office of a non-resident enterprise by its branch office in India requires
that the branch – permanent establishment – should ensure tax deduction at
source in such cases in accordance with the provisions of section 195 of the
Act.

 

ii.  TDS
Not Required:
In the following cases it was held that TDS u/s 195 is
not applicable.

 

ABN Amro Bank NV vs. CIT [2012] 343 ITR
81(Cal),

Bank of Tokyo Mitsubishi Ltd vs. DIT 53
taxmann.com 105 (Cal),

 

Deutsche Bank AG vs. ADIT 65 SOT 175
(Mum),
and

Sumitomo Mitsui Bank Corpn vs. DDIT [2012]
136 ITD 66 (Mum)(SB).

 

iii. Amendment
vide Finance Act 2015 w.e.f 1.4.2016

 

Interest deemed to accrue or arise in
India u/s. 9(1)(v). Explanation inserted to section 9(1)(v) reads as follows:

 

“Explanation: for the purposes of this
clause,-

(a) it
is hereby declared that in the case of a non-resident, being
a person
engaged in the business of banking
, any interest payable by the
permanent establishment in India of such non-resident to the head office or any
permanent establishment or any other part of such non-resident outside India
shall be deemed to accrue or arise in India and shall be chargeable to tax in
addition to any income attributable to the permanent establishment in India and
the permanent establishment in India shall
be deemed to be a person
separate and independent of the non-resident person
of which it is a
permanent establishment and the provisions of the Act relating to computation
of total income,
determination of tax and collection and recovery
shall apply accordingly;”

 

Thus,

  The
aforesaid Explanation is applicable to non-resident engaged in business of
banking.

 

  Interest
payable by Indian PE to HO, any PE or any other part of such NON-RESIDENT
outside India deemed to accrue or arise in India.

 

  Chargeable
to tax in addition to any income attributable to PE in India.

 

  PE
in India deemed to be separate and independent of the NON-RESIDENT of which it
is a PE.

 

  Provisions
relating to computation of total income, determination of tax and collection
and recovery to apply accordingly.

 

2.3     Scope of section 195 (1) – Sum Chargeable
to Tax

 

(i)  Transmission
Corpn of AP Ltd. vs. CIT 239 ITR 587 (SC)

 

a)  Payment
to non-resident towards purchase of machinery and erection and commissioning
thereof.

 

b)  Assessee’s
contention – Section 195 applies only in respect of sums comprising of pure
income or profit.

c)  Held
that:                                                  

 

• TDS applicable not only to amount which
wholly bears income character but also to sums partially comprising of income.

• Obligation to deduct tax limited to
portion of the income chargeable to tax.

• Section 195 is for tentative deduction
of tax and by deducting tax, rights of the parties are not adversely affected.

 
Rights of parties safeguarded by sections 195(2), 195(3) and 197.

 
File application to AO – If no application filed, tax to be deducted.

 

(ii) GE
India Technology Centre (P.) Ltd. vs. CIT [2010] 193 Taxman 234 (SC)

 

The interpretation of the decision of SC
in the Transmission Corporation’s case (supra) was subject matter of litigation
in many cases and the issue once again came up for resolution before the
Supreme Court in this case. The SC held as under:

 

a)  The
moment there is a remittance out of India, it does not trigger section 195. The
payer is bound to deduct tax only if the sum is chargeable to tax in India read
with section 4, 5 and 9.

 

b)  Section
195 not only covers amounts which represents pure income payments, but also
covers composite payments which has an element of income embedded in them.

 

c)  However,
obligation to deduct TDS on such composite payments would be limited to the
appropriate proportion of income forming part of the gross sum.

 

d)  If
payer is fairly certain, then he can make his own determination as to whether
the tax is deductible at source and if so, what should be the amount thereof,
without approaching the AO.

 

(iii)       Instruction
No. 2 of 2014 dated 26-2-2014 directing that in a case where the assessee fails
to deduct tax u/s. 195 of the Act, the AO shall determine the appropriate proportion of the
sum chargeable to tax as mentioned in sub-section (1) of section 195 to
ascertain the tax liability on which the deductor shall be deemed to be an
assessee in default u/s. 201 of the Act, and the appropriate proportion of the
sum will depend on the facts and circumstances of each case taking into account
nature of remittances, income component therein or any other fact relevant to
determine such appropriate proportion.

 

(iv)       Tax
withholding from payment in kind / Exchange etc.

 

TDS u/s. 195 is required to be deducted.

 

a)  Kanchanganga
Sea Foods Ltd. vs. CIT 325 ITR 540 (SC).

 

b)  Biocon
Biopharmaceuticals (P) Ltd. vs. ITO 144 ITD 615 (Bang).

 

However, in the context of distribution of
prizes to customers wholly in kind (section 194B) and receipt of Certificate of
Development Rights against voluntarily surrender of the land by the landowner,
it has been held in the following cases that TDS provisions are not applicable:

 

c)  CIT
vs. Hindustan Lever Ltd. (2014) 264 CTR 93 (Kar)

 

d)  CIT(TDS)
vs. Bruhat Bangalore Mahanagar Palike (ITA No. 94 and 466 of 2015)(Kar).

 

(v) Payments
by one non-resident to another non-resident inside / outside India

 

a)  Asia
Satellite Telecommunications Co. Ltd. vs. DCIT 85 ITD 478 (Del)
– Source of
Income in India, are covered by section 195.

 

b)  Vodafone
International Holding B.V. vs. UoI [2012] 17 taxmann.com 202 (SC).

 

(vi)       For
non-compliance by a non-resident of TDS provisions, section 201 not applicable
if recipient pays advance tax.

 

a)  AP
Power generation Corporation Ltd. vs. ACIT 105 ITD 423.

2.4     Sum Chargeable to Tax – TDS Guidelines

 

Situation

Consequences

Entire payment not chargeable to tax

Not
required to withhold tax.

 Entire payment subject to tax

Tax
should be withheld.

Part of payment subject to tax

Tax
should be withheld on the appropriate proportion of sum chargeable to tax

[CBDT Instruction No. 2/2014 dated 26 February 2014].

Part of payment subject to tax in India – Payer unable to
determine appropriate portion of the sum chargeable to tax

Apply
to AO for determination of TDS.

Payer believes that tax should be withheld but payee does not
agree

Approach
the AO for determination of TDS.

 

 

2.5     Chargeability to tax governed by provisions
of Act/DTAA

 

Nature of Income

Act (Apart from section 5, wherever applicable)

Treaty

Business/Profession

Section
9(1)(i) – Taxable if business connection in India

Article
5, 7 and 14 – Taxable if income is attributable to a Permanent Establishment
in India

Salary
Income

Section
9(1)(ii) – Taxable if services are rendered in India

Article
15 – Taxable if the employment is exercised in India (subject to short stay
exemption)

Dividend
Income

Section
9(1)(iv), section 115A – Taxable if paid by an Indian Company (At present
exempt)

Article
10 – Taxable if paid by an Indian Company

Interest
Income

Section
9(1)(v), section 115A – Taxable if deemed to arise in India

Article
11- Taxable if interest income arises in India

Royalties
/ FTS

Section
9(1)(vi), section 115A – Taxable if deemed to arise in India

Article
12 – Taxable if royalty/ FTS arises in India

Capital
Gains

Section
9(1)(i), section 45 – Taxable if situs of shares / property in India

Article
13 – Generally taxable if the situs of shares/ property in India.

 

 

 

As
per the provisions of section 90(2), provisions of the Act or DTAA, whichever
is beneficial, prevails.

 

2.6     Scope of section 195 (1) – Time of
deduction

 

(i)  Twin
conditions for attracting section 195

For
payer – credit or payment of income

  For
payee – Sum chargeable to tax in India

 

(ii) On
credit or payment, whichever is earlier

  CIT
vs. Toshoku Ltd. [1980] 125 ITR 525 (SC)
;

  United
Breweries Ltd. vs. ACIT [1995] 211 ITR 256 (Kar);

  Flakt
(India) Ltd. [2004] 139 Taxman 238 (AAR)
.

  Broadcom
India Research (P) Ltd. vs. DCIT [2015] 55 taxmann.com 456 (Bang.).

 

(iii)       Merely
on the basis of a book entry passed by the payer no income accrues to the
non-resident recipient

  ITO
vs. Pipavav Shipyard Ltd. Mumbai ITAT – [2014] 42 taxmann.com 159 (Mum-Trib)
.

 

(iv)       1st
Proviso to section 195(1) provides exception for interest payment by Government
or public sector bank or a public financial institution i.e. deduction shall be
made only at the time of payment thereof.

 

(v) TDS
from Royalties and FTS at the time of payment:

  DCIT
vs. Uhde Gmbh 54 TTJ 355 (Bom) [India-Germany DTAA]

  National
Organic Chemical Industries Ltd. vs. DCIT 96 TTJ 765 (Mum) [India-Switzerland
and India-USA DTAA]

(vi)       When
FEMA/RBI approval awaited,

  United
Breweries Ltd. vs. ACIT 211 ITR 256
– Liability at the time of credit in
the books even if approval received later on.

  ACIT
vs. Motor Industries Ltd. 249 ITR 141
– It was held that the assessee was
not liable to interest u/s. 201(1A) since it was not obliged to deduct tax at source in respect of
amounts credited in its books for period when agreement was not in force as
foreign collaborator would have got a right to enforce its right to receive
payment only on conclusion of said agreement, (which was pending for approval).

 

(vii) TDS liability u/s. 195 when
adjustment of amount payable to a non-resident against dues i.e. when no
payment no credit.

  J.
B. Boda & Co. (P.) Ltd. vs. CBDT 223 ITR 271

  An
adjustment of the amount payable to the non-resident or deduction thereof by
the non-resident from the amounts due to the resident-payer (of the income)
would fall to be considered under “any other mode”. Such adjustment
or deduction also is equivalent to actual payment. Commercial transactions very
often take place in the aforesaid manner and the provisions of section 195
cannot be sought to be defeated by contending that an adjustment or deduction
of the amounts payable to the non-resident cannot be considered as actual
payment. Raymond Ltd. [2003] 86 ITD 791 (Mum).

 

(viii)
Dividend is declared but not paid pending RBI approval, then the same accrues
in the year of payment Pfizer Corporation vs. CIT (2003) 259 ITR 391 (Bom).

 

(ix) If no income accrues to non-resident
although accounting entry incorporating a liability is passed,
no liability for TDS. United Breweries Ltd. vs. ACIT 211 ITR 256.

 

(x) Payee should be ascertainable. IDBI
vs. ITO 107 ITD 45 (Mum)
.

 

(xi) Time of Deduction from the point of
view of the payer and not payee. Relevant in cases where one of them maintain
the books on cash basis and the other on accrual basis – C. J. International
Hotels Ltd. vs ITO TDS 91 TTJ (Del) 318.

 

2.7     Section 195(1) – Rates in force

 

(i)   Section
2(37A)(iii) provides in respect of Rates in Force for the purposes of section
195.

 

(ii)  Circular
728 dtd. 30-10-1995 – Rate in force for remittance to countries with DTAA.

 

(iii) Circular
740 dtd. 17-04-1996 – Taxability of interest remitted by branches of banks to
HO situated abroad.

 

(iv) No
surcharge and education cess to be added to Treaty rates.

  DIC
Asia Pacific Pte Ltd. vs. ADIT IT 22 taxmann.com 310.

   Sunil
V. Motiani vs. ITO IT 33 taxmann.com 252
;

  DDIT
vs. Serum Institute of India Ltd. [2015] 56 taxmann.com 1 (Pune Trib.).

 

(v)  Section
44DA read with 115A – Special provision for computing income by way of
royalties etc. in case of non-residents.

 

(vi) Section
44B – Non-resident in shipping business (7.5% Deemed Profit Rate [DPR])

 

(vii)      Section
44BB – Non-resident’s business of prospecting etc. of mineral oil (10% DPR)

 

(viii)     Section
44BBB – Non-resident civil construction business in certain turnkey power
projects (10% DPR)

 

(ix) Presumptive
provisions (44B, 44BB, 44BBB etc) – Section 195 applicable. Frontier
Offshore Exploration (India) Ltd vs. DCIT 13 ITR (T) 168 (Chennai)
.

 

(x)  Section
294 of the Act provides that if on the 1st day of April in any
assessment year provision has not yet been made by a Central Act for the
charging of income-tax for that assessment year, the provision of the
Income-tax Act shall nevertheless have effect until such provision is so made
as if the provision in force in the preceding assessment year or the provision
proposed in the Bill then before Parliament, whichever is more favourable to
the assessee, were actually in force.

 

2.8     Section 195(1) – Sum Chargeable to
tax-Exchange Rate Applicable

 

(i)   Rule
26 provides for rate of exchange for the purpose of TDS on Income payable in
foreign currency

 

(ii)  TDS
to be deducted on income payable in foreign currency.

   Value
of rupee shall be SBI TT buying rate.

   on
the date on which tax is required to be deducted.

 

(iii) Where
rate of exchange on date of remittance differs from exchange rate on date of
credit, no TDS to be deducted on exchange rate difference. Sandvik Asia Ltd
vs. JCIT 49 SOT 554 (Pune).

 

3.  Section 94A
– Notified Jurisdictional Areas

 

(i)   Section
94A(5) – Special measures in respect of transactions with persons located in
notified jurisdictional area

 

‘(5) Notwithstanding
anything contained in any other provisions of this Act, where any person
located in a notified jurisdictional area
is entitled to receive any sum or
income or amount on which tax is deductible under Chapter XVII-B, the tax
shall be deducted at the highest of the following rates, namely:-

 

(a) at the rate or rates in force;

(b) at the rate specified in the relevant
provisions of this Act;

(c) at the rate of thirty
per cent
.’

 

(ii)  Notification
No. 86/2013 [F. NO. 504/05/2003-FTD-I]/SO 3307(E), Dated 1-11-2013
– Cyprus
Notified.

 

(iii) Validity
of the notification upheld by the High Court of Madras in T. Rajkumar vs.
Union of India [2016] 68 taxmann.com 182 (Madras).

 

(iv) The
notification of Cyprus u/s 94A as a notified jurisdictional area for lack of
effective exchange of information, has been rescinded with effect from
1.11.2013 [Notification No. 114/2016 dated 14.12.2016]
.

 

4.
Grossing up of tax (195A)

 

(i)
Section 195A – Income payable “net of tax”

 

“In
a case other than that referred to in sub-section (1A) of section 192, where
under an agreement or other arrangement, the tax chargeable on any income
referred to in the foregoing provisions of this Chapter is to be borne by
the person by whom the income is payable, then, for the purposes of deduction
of tax
under those provisions such income shall be increased to such
amount as would, after deduction of tax thereon
at the rates
in force
for the financial year in which such income is payable, be
equal to the net amount payable
under such agreement or arrangement.”

 

(ii)  TDS Certificate to be issued even in case of
Grossing up – Circular 785 dt. 24.11.1999.

 

(iii) Absence of the words “tax to
be borne by the payer” in case of net of tax payment contracts by conduct –
Grossing up required. CIT vs. Barium Chemicals Ltd. [1989] 175 ITR 243 (AP).



(iv)
Section 195A envisages multiple grossing-up. For eg. amount payable to
non-resident is 100 and TDS rate is 10%; Gross amount for TDS purpose would be
111.11 (100*100/90)

 

(v)
No multiple grossing-up in case of presumptive tax u/s. 44BB. CIT vs. ONGC
[2003] 264 ITR 340 (Uttaranchal)
.

 

(vi)
Exemption from grossing-up u/s.10(6BB) – Aircraft and aircraft engine lease
rentals.

 

(vii)
Section 192(1A) – Tax on non-monetary perquisite – Not covered by section 195A.

 

Conclusion

In
this part of the Article, we have attempted to highlight various issues
relating to section 195(1), 195A and section 90(4) relating to TDS from
payments to non-residents.

 

In
the subsequent parts of the Article, we will deal with the other parts of
section 195 and other aspects thereof.
 

Sales Return – Scope

Introduction

Under VAT laws, tax can be
levied on sale of ‘goods’.  Completed
sale is liable to tax. However, there may be a situation where the goods sold
are returned by the buyer. Since the transaction of sale is already complete,
even if subsequently there is sales return (which is also referred to as ‘goods
return’) the liability will still remain on the same. However, the legislature
gave some latitude by giving facility of deduction of sales return from taxable
turnover, if such return is within the stipulated time limit.

 

There are provisions under
Maharashtra Vat Act (MVAT Act) and Central Sales Tax Act (CST Act) explaining
that if the goods sold are returned back within six months from the date of
sale, then such return should be given deduction and no tax should be payable
on such goods return portion. If the return is beyond the prescribed period of
six months, then the deduction is not allowable and tax is payable on the full
sale value.

 

Sales
Return – Scope
     

The issue arises as to when
the goods returned are eligible for deduction as sales return? An important
judgement has come on the same from Hon. Bombay High Court. The judgement is in
case of Reliance Industries Ltd. vs. State of Maharashtra (50 GSTR 1)(Bom).
The facts in this case, as narrated by High Court are as under:

 

“3. In Writ Petition No. 2217
of 2015, the Petitioner is Reliance Industries Limited (for short
“RIL”) which is a public limited company inter alia engaged in
the manufacture of petrochemicals. Respondent No.1 is the State of Maharashtra,
through its Secretary, Ministry of Finance. Respondent No.2 is the MSTT
constituted under the BST Act. Respondent No.3 is Bharat Petroleum Corporation
Limited (for short “BPCL”) which is a public sector undertaking
engaged in the business of refining and selling petroleum products and who is
the supplier of Kerosene to RIL in the present dispute. Respondent No.4 is the
Commissioner of Sales Tax functioning and discharging his duties under the
provisions of the BST Act.

 

4. It is the case of RIL that
in or around 1992, RIL had established a petrochemical plant in Patalganga for
manufacturing Linear Alkyl Benzenes (“LAB”). RIL required N-Paraffin
as a raw material for the manufacture of LAB. According to RIL, Kerosene (also
known as Paraffin), is a mixture of Hydrocarbons in the range of C-8 to C-18.
Out of such mixture, the Hydrocarbons C-8 and C-9 are known as Light Paraffin.
Hydrocarbons from C-10 to C-13 are known as N-Paraffin (which is required by
RIL). The range of Hydrocarbons from C-14 to C-18 are known as Heavy Paraffin.
According to RIL, N-Paraffin itself is also Kerosene and is one of the many
constituents of Kerosene.

 

5. According to RIL,
N-Paraffin is easily obtained from kerosene by using a molecular sieve. This,
according to RIL, is only a physical activity not involving any chemical
reaction. The molecular sieve would absorb the N-Paraffin only and the rest of
the Kerosene would simply pass through the said Sieve. Subsequently, the
N-Paraffin is de-absorbed from the molecular Sieve.

 

6. According to RIL, BPCL is
having a refinery at Mahul for many years prior to 1992. One of the products
produced by BPCL in the said refinery is Kerosene. Kerosene is as such sold by
BPCL through the Public Distribution System (involving a dealer network) to its
final consumers.

 

7. Be that as it may, an exclusive
pipeline of approximately 56 kms was laid connecting the Mahul refinery and
Petitioner’s factory at Patalganga so as to ensure continuous and constant to
and fro movement of the requisite quantity of Kerosene from BPCL to RIL and
from RIL to BPCL, respectively. It is in these circumstances that RIL entered
into an agreement dated 24th August, 1992 with BPCL for procurement
of Superior Kerosene Oil. As this Kerosene was required for manufacturing of
LAB as Feed Stock (FS), it was described as KO (LABFS). A copy of this
agreement can be found at Exhibit “C” to the Writ Petition.

 

8. According to RIL, it was
agreed between itself and BPCL that Kerosene would be delivered to RIL. In
turn, RIL would consume the suitable quantity of Kerosene by taking out N-
Paraffin required by it and send the balance quantity of Kerosene back to BPCL
as a “return stream”. According to RIL, this agreement mandatorily
required the Petitioner (by way of “return stream”) to return the
quantity of Kerosene after extracting the N-Paraffin. According to RIL, this
agreement thus provided for supply of Kerosene solely for the purposes of
consuming the requisite quantity of kerosene. Thereafter, the balance quantity
of Kerosene was to be returned back to BPCL.

 

9. According to RIL, the
“return stream” is a common phrase used in the petroleum and
petrochemical industry both within India as also internationally. A petroleum
product would be sent by the refinery to a petrochemical complex. The
petrochemical complex would use/consume the required quantity of item and
return the balance petroleum product to the refinery as a “return
stream”.”

 

In a nutshell, the issue was
that BPCL has to supply kerosene namely KO (LABFS) to RIL. RIL to extract
n-paraffin from the said kerosene and the balance kerosene will be returned
back to BPCL. The issue was whether such return of kerosene by RIL to BPCL will
be purchase by BPCL from RIL or it will simply be a case of sales return by RIL
to BPCL.

 

There were a number of issues
involved in the case. There were arguments from the both the sides.

Hon. High Court considered
arguments from both the sides and also referred to the relevant provisions
under MVAT Act like definition of manufacture, resale, turnover of sale etc.
After having such reference, Hon. High Court observed about the merits of the
case as under:

 

“53. What can be discerned
from the aforesaid definitions and as even correctly submitted by Mr.
Venkatraman as well as Mr. Dada is that for there to be a sales return, the
goods originally supplied and the delivery of the return stream should be one
and the same goods. If the goods that are sought to be returned are a product
which is different from the one that was originally supplied, the same can
never be termed as a sales return.

 

54. In the facts of the
present case, we are clearly of the view that the product that was supplied by
BPCL to RIL in the first leg of the transaction was different from the return
stream that was supplied/returned by RIL to BPCL. As mentioned earlier, the
Kerosene that was supplied by BPCL to RIL was rich in N-Paraffin. It comprises
of Hydrocarbons C9 to C14. The Kerosene that was sought to be returned by RIL
to BPCL was after the extraction of N-Paraffin. In other words, Hydrocarbons C9
to C14 were specifically denuded from the Kerosene that was returned by RIL to
BPCL. In fact, it is not in dispute that the returned Kerosene is denuded by
more than 50% of N-Paraffin. The Kerosene that was supplied by BPCL also known
as SKO (LABFS) which contains N- Paraffins was viable for commercial extraction
of N-Paraffin whereas the product given by the RIL to BPCL after extracting the
N-Paraffin is not viable for extraction of N-Paraffin due to the fact that the
return stream does not contain the extractable quantity. At least to our mind,
therefore, it is clear that the product supplied by the BPCL to RIL is very
different from the product that is returned by RIL to BPCL. To put it in other
words, the Kerosene supplied by the BPCL to RIL is pre-processed and the
Kerosene returned by RIL to BPCL is a processed product and hence are two
different commercial products. It is true that even the returned Kerosene meets
the BIS standards to be termed and used as Kerosene, but that alone cannot be
the test to come to the conclusion that the product returned by RIL is one and
the same as was supplied by BPCL to RIL in the first leg of the transaction. It
is an admitted fact before us, at least across the bar, that the Kerosene
supplied by BPCL to RIL can be used for extraction of N Paraffins whereas the
Kerosene returned by RIL to BPCL cannot be used for the same purpose. The
process of extraction carried out by RIL is thus a manufacture within the
meaning of the said expression as defined in the BST Act and the kerosene is
therefore not returned to BPCL in the same form. In other words, BPCL cannot
use the Kerosene returned by RIL to be supplied to another Petrochemical plant
for extraction of N-Paraffin. This, to our mind, would clearly go to establish
that the Kerosene supplied by BPCL to RIL in the first leg of the transaction
and the product returned by RIL to BPCL in the second leg of the transaction,
at least for the purposes of sales tax, are two different products. It cannot
be disputed that the two products are different in character and use. This
being the case, it is quite clear that the return stream of Kerosene and which
was sought to be returned by RIL to BPCL can never be termed as a sales return
but in fact a sale by RIL to BPCL.”

 

Thus, Hon. High Court decided
the yard stick about scope of sales return. If the goods sold and returned are
not the same goods but different goods, then there is no scope for claim of
sales return.

 

Prospective
effect to the liability

One more issue which is
decided in this matter is about prospective effect to the adverse determination
order. Since the dealer was guided earlier by favorable determination order.
Hon. High Court held that even if it is now reversed, still the protection is
required to be given for past liability. The relevant observations of Hon. High
Court are as under:

 

“70. What is ex-facie
clear from reading the provisions of Section 52 is that the Commissioner, in
the given facts and circumstances of the case, certainly has the power to
exercise his discretion and give prospective effect to the DDQ order passed by
him u/s. 52(1). As correctly submitted by Mr. Venkatraman as well as Mr. Dada,
in the facts of the present case, since the DDQ order dated 11th
September, 2006 was passed in favour of the assessee, there was no occasion nor
any reason to request the Commissioner to grant prospective effect to his
order. The question of prospective effect would only arise when the order of
the Commissioner was reversed by the Tribunal vide the impugned order dated 20th
January, 2015. Further, it is not in dispute before us that it is for the first
time in the history of the Bombay Sales Tax Act that the     DDQ  order      passed   by  
the    Commissioner u/s. 52 (1) was challenged by
the State of Maharashtra before the MSTT. From the facts narrated in this
judgement, it is also clear that bonafide litigation between the parties
has gone on right from the year 1992 till 2015. Further, right from the
assessment years 1988-1989 till 2004-2005, the assessments have been allowed in
favour of the assessee, namely RIL on the basis that the return stream of
Kerosene was a “goods return”. If prospective effect is not given to
the order of the Tribunal it would effectively lead to a situation that all
past assessments would have to be reopened and which would be highly unfair and
prejudicial not only to RIL but also to BPCL.”

 

Conclusion        

The judgement has far reaching
effect in understanding the scope of sales return. It is also a guiding
judgement in respect of use of discretionary power of prospective effect in
determination proceedings. The dealers’ community may have good guidance from
the above judgement.

Interesting issues on Interest

Tax laws operate on three fundamental
impositions viz tax, interest and penalties. Each of these recoveries are
designed to meet specific objectives and interest has one striking peculiarity
i.e. it is not static and accumulates
over time.

 

In common parlance, interest is understood
as a compensation payable to the owner of funds for the usage of money borrowed
from such person. Black’s Law Dictionary defines interest, in the context of
usage of money, as a compensation allowed by law or fixed by parties for the use or forbearance of borrowed money. In
the context of tax laws, the Supreme Court in Associated Cement Co. Ltd. vs.
CTO (1981) 48 STC 466
has explained tax, interest and penalty as follows:

 

“Tax, interest and penalty are three
different concepts. Tax becomes payable by an assessee by virtue of the
charging provision in a taxing statute. Penalty ordinarily becomes payable when
it is found that an assessee has wilfully violated any of the provisions of the
taxing statute. Interest is ordinarily claimed from an assessee who has
withheld payment of any tax payable by him and it is always calculated at the prescribed
rate on the basis of the actual amount of tax withheld and the extent of delay
in paying it. It may not be wrong to say that such interest is compensatory in
character and not penal.”

 

The Supreme Court in Prathibha
Processors vs. Union of India (1996) 88 ELT 12 (SC)
has held that interest
is compensatory and its levy is mapped to the actual amount of tax withheld
and the extent of delay in payment of tax
from the due date. 

 

Settled
principles on interest under fiscal legislations

The well-settled principles of interest
under fiscal legislations have been summarised for guidance while interpreting
the GST scheme:

 

i.   Interest
provisions are part of the substantive law of the fiscal statute and cannot be
imposed by implication. The statute should specifically provide for the
circumstances leading to the imposition of interest.

 

ii.  Imposition
of interest is mandatory in nature and with no scope for any discretion.

 

iii. Reason
for delay (intentional/ unintentional etc.) in payment of tax is irrelevant
while deciding the imposition.

 

iv. Interest
should be calculated as per the law prevailing for the period under
consideration.

 

v.  Interest
need not be quantified in the assessment order.

 

vi. Interest
can be waived only by specific statutory provisions (say VCES scheme, etc).

 

vii.       Interest
would be applicable even if there is an interim stay of recovery by any Court.

 

viii.      Interest
cannot be demanded where the tax recovery itself has become time barred.

 

Overview
of provisions of interest under GST Law

The provisions of interest under the GST
laws can be categorised as follows – (a) interest on demands; and (b) interest
on refunds. Any interest computation is based on three variables and the GST
law is no different:

 

(a) Principal
– Tax unpaid

(b) Time
period – Period commencing from due date of tax payment to date of actual
payment

(c) Rate
– Rate of interest prescribed as a percentage

 

A) Interest
on tax demands

 

Interest provisions are contained in
Chapter-X : Payment of tax. The circumstances under which interest is
applicable under GST law are:

 

i.   General
Provision – Interest on delayed/ short payment of tax

 

Section 50(1) applies when a person fails
to pay the tax or any part thereof within the prescribed period. Interest would
be calculated on the principal (being the tax involved) at the rate notified by
the Government, not exceeding 18% per annum (N-13/2017 –Central Tax dt.
28.06.2017 prescribes a rate of 18% p.a). The delta of the following dates is
used for the determination of the time period for which interest applies:

 

(a) Due date for payment of tax (section 39):
Section 39 provides that tax shall be paid as per the monthly return within the
due date for the said return. Rule 61 requires that every registered person is
required to furnish the monthly return in form GSTR-3 by 20th of the
succeeding calendar month. The said rule inserted an additional return in Form
GSTR-3B w.e.f. 27.07.2017 in cases where the due date of filing GSTR-3 has been
extended. Notifications have been issued from time to time prescribing the due
date of GSTR-3B as the 20th day following the relevant tax period.
The said notification also contains a clause that requires the assessee to
discharge its liability of tax, interest and penalty within the due date for
GSTR-3B.

 

(b) Date of payment of tax (section 49): Tax
liabilities (either self-assessed or otherwise) of a taxable person are
recorded in the electronic liabilities ledger (ELL) of the taxable person on
filing the return.  Section 49 provides
for depositing amounts in Government accounts under various heads (major and
minor heads) which would be reported in the electronic cash ledger (ECL). The
amounts available in the electronic cash ledger or electronic credit ledger
(ECrL) would be debited and adjusted towards the outstanding liabilities in the
ELL. Section 49(7) & (8) states that the taxes of a tax period would be discharged
in a particular manner.

 

Therefore, the due date for payment of
taxes is sought to be fixed by the notification as 20th of the
succeeding calendar month. Prima-facie, any delay in payment of taxes
after this date would involve payment of interest @ 18% p.a. The assessee would
have to follow the system of reporting the taxes on the GSTN portal and then
discharge its liabilities in the ledger by filing the due return. This position
is subject to further discussion of the interplay between GSTR-3 and GSTR-3B
explained later.

 

ii.  Interest
on undue or excess claim of input tax credit or reduction of output tax

 

Similarly, section 50(1) also provides for
interest in cases of an undue or excess claim of input tax credit u/s. 42(8) or
an undue or excess reduction in output tax u/s. 43(8).

 

– Section 42 applies where GSTR-2
(statement of inward supplies) generates a mismatch report on account of
duplication, incorrect data, etc. amounting to excess claim of input tax
credit. Section 42(8) levies interest on the amount so added from the month of
availment of credit till the corresponding addition is made in the return.

 

– On similar lines, section 43 applies
where the GSTR – 1 (statement of outward supplies) generates
a mismatch report on account of duplication, incorrect data, etc. in
credit notes claimed towards reduction of turnover. Section 43(8) levies
interest from the date of claim of reduction till the corresponding addition is
made in the return. 

 

Time frame for matching – Rule 69 of the
CGST rules provides for matching of the input tax credit claims by the
Government. The said rules do not provide for an outer limit within which input
tax credit matching should be performed by the Government, though it empowers
the Commissioner to extend the date of matching in cases where the filing of
GSTR-1 and 2 are extended. Rule 71 states that the mismatch report would be
communicated to the tax payers on or before the last date of the month in which
the matching is carried out.

 

The said provisions were originally
intended at matching of input tax credit claims/ output tax reductions by the
end of the calendar month in which returns were filed which effectively
resulted in interest on the mismatch for a period of 1 month, in case of
duplicate claims, and 2 months in the case of erroneous claims. GSTN is yet to
conduct the matching of GSTR-2 and 2A. To the knowledge of the author, none of
the Commissioners have exercised this power of extension on the presumption
that matching is the prerogative of GST Council. In view of the decision of the
GST council to defer matching, this reporting of mismatch has not taken place yet.

 

While discussions over the mechanism of
matching of input tax credit claims are underway in the GST council meetings,
it is evident that this would be undertaken sooner or later[1]. In the
recently concluded GST Council Meeting, it has been decided that a single
return would be formed for GST compliance with the matching being performed at
the backend. The said return is announced to be operationalised on the GST
portal within 6 months.

 

Until then, it unfortunately implies that
a mismatch would be recoverable from the recipient and interest provisions
would be invoked for a period more than what was originally envisaged. To add
to this, the supplier may not be in a position to even rectify the mismatch
identified by the GSTN since the same may be beyond the month of September of
the following financial year.  The tax
payer may have to bear the brunt of interest for delays attributable to the
Government/ GSTN which may extend to more than one year (one should consider
filing a counter claim from GSTN for such delay!).

 

iii. Interest
on provisional assessment

 

Section 60 provides for provisional
assessment in cases where tax is not determinable by the tax payer/ assessing
authority. Section 60(4) imposes interest in respect of any additional tax
payable on closure of such assessment from its original due date to the actual
date of payment of tax, irrespective of the date of conclusion of the
provisional assessment. This issue has experienced intensive litigation under
the Excise law right upto the Supreme Court. With specific provisions under the
GST law, it seems clear that interest liability has to be determined from the
original due date and not from closure of provisional assessment.

 

iv. Waiver
of interest in case of incorrect classification of supply

 

Section 77(2) r/w 73/74 of the CGST law
implicitly provides for fresh payment of the appropriate tax in cases where a
taxable person has incorrectly classified an ‘intra-state supply’ as an ‘inter
state supply’. Conversely, IGST law would also be read in a similar manner in
view of section 20 of the said law. However, the section waives the interest
liability on account of the delay in payment of the appropriate tax. This is on
the premise that the tax payer has made the tax payment, albeit under an
incorrect tax type and should not be saddled with an interest liability. This
is the only provision under the statute which waives interest liability on
account of delayed payment of taxes.

 

v.  Other
cases of interest recovery

 

Other provisions of interest are as follows:

 

Reversal of input tax credit where the payment
of the inward supplies has not been made within 180 days from the date of issue
of invoice: interest is applicable from the date of availment of input tax
credit to the payment by way of reversal/ addition to output liability.

Recovery of irregular input tax credit
distributed by the Input Service Distributor to its recipients : recovery of
tax and interest would be from the recipient of the ISD credit in terms of
sections 73 and 74 of the GST law.

ITC reversals in respect of any exempted/
non-taxable activity is provisionally arrived at on a monthly basis and finally
adjusted at the year-end at an aggregate level : interest is applicable from 1st
April following the end of the financial year till the date of payment/
reversal of such excess credit.

Inputs or capital goods which are supplied to a
job worker without payment of tax and either not returned or supplied therefrom
within 1 year/ 3 years respectively – interest is applicable from the month in
which such goods were original removed to the date of actual payment.

Rectification of any under-reporting of tax in
view of an omission/ error in any subsequent return (section 39(9)) is liable
for interest.

Failure/ delay on the part of the deductor to
deposit the taxes deducted to the Government within the prescribed date is
liable for interest in the hands of the deductor.

Rectification of any under-reporting and taxes
collected at source by an e-commerce operator is subject to interest.

Interest is applicable in cases where payment
of tax is permitted to be made on instalment basis in terms of section 80.

Amount demanded by an anti-profiteering body in
cases where the benefit of taxes have not been duly passed on would also be
subject to interest provisions.

As an exception to the general rule of tax
liability, section 13(6) and 14(6) defers the time of supply in cases where the
value/consideration of a service is enhanced due to inclusion of interest, late
fee or penalty as part of the value of supply in terms of section 15(2)(d).
Consequently, the start point of calculation of interest stands deferred to the
date of its receipt.

Interest on taxes short paid or not paid are
liable for recovery whether or not the same is stated or quantified in the show
cause notice or assessment order

Interest computed under the GST law should be
rounded off to the nearest rupee

 

B) Interest
on delayed refunds due to an applicant

 

Section 56 grants interest on refunds due
to the applicant if the same has not been paid within sixty days from the date
of refund application. Interest is applicable from the expiry of sixty days to
the date of actual refund at the rate presently notified at 6% p.a.

 

In cases where the refund is ordered by an
adjudicating authority, appellate authority, court, etc. the assessee is
entitled to an interest of 9% p.a. for the aforesaid period.  It also applies to cases where the refund
sanctioning authority orders refund in its order but fails to issue the refund
cheque to the applicant along with the refund order. For the purpose of
computation of interest of 9% p.a., the period has to be reckoned from the date
of application filed consequent to the said order. In cases of appellate
relief, interest would be applicable from the date of payment of the taxes
against the aggrieved order and not from the date of the appellate order
(section 115).

In context of availing refund for
zero-rated supplies u/s. 54, an applicant is not entitled to claim interest in
case the authority fails to grant the provisional refund of 90% (Rule 91 of the CGST
Rules) of the claim of refund of input tax credit.

 

In the context of section 77 (incorrect
classification of supply), though there is a waiver for interest on delay in
payment of the correct tax type, there is no bar on claiming the interest on
refund of the incorrect taxes paid in cases of any delay in granting such
refund. 

 

Issues
in determination of interest

i.   What
is the actual due date of payment of tax? In other words, by deferring the due
date of GSTR-3, has the Government also inadvertently deferred the due date of
payment of tax?

 

Section 39(7) states that self-assessed
taxes are required to be paid within the due date of filing the return. The GST
scheme originally envisaged the filing of the return in GSTR-3 on a monthly
basis by 20th of the succeeding month. The Government has however
made multiple changes in the return filing procedures in order to address the
technical challenges in the GSTN portal. GSTR-3B was introduced as an
additional return until the portal was sufficiently equipped for filing GSTR-3[2].  A question arises on whether the due date of
return/ payment of tax should be understood as per the due date prescribed for GSTR-3B or GSTR-3? We may look at the said provisions in detail. 

 

Section 39(1) requires a return to be
filed on a calendar month basis by 20th of the succeeding month –
the return referred to in section 39(1) is a return of outward/ inward
supplies, input tax credit availed/reversed, tax payable/ paid and other
prescribed particulars. Strictly speaking, GSTR-3B is only an additional return
(recording summary figures) to that originally envisaged u/s. 39(1).  As the law stands today, tax payers would
eventually have to file the monthly return in Form GSTR-3. 

 

Can one take a stand that the due date
prescribed for tax payment is vis-à-vis the due date of GSTR-3 and not
GSTR-3B? The thrust of this stand hinges on whether GSTR-3 or 3B is the
‘return’ referred to in section
39(1)/ (7). The arguments in favour of GSTR-3 may be as follows:

 

GSTR-1, 2 are statements which are
auto-populated in the monthly return in form GSTR 3 and should be considered as
part of GSTR-3 itself (Instruction 2 & 4 of form GSTR-3). Section 39(1)
refers to a return of inward and outward supplies with other details such as
input tax credit availed, reversed etc. The said section thus envisages
a return detailing the inward and outward supplies and not merely a form
reporting aggregate amounts i.e. GSTR-3.

[1] State officers in
some states have started issuing scrutiny notices for verification of input tax
credit claims by exercising powers u/s. 61.


Strictly speaking, GSTR-3B is not a return
of inward or outward supplies
– attention should be placed on the
preposition ‘of’ which means that the return should be that which records
outward and inward supplies and not merely the turnover at an aggregate level.

The instructions in GSTR-3 and GSTR-3B conveys
that ECL, ECrl and ELL are updated only on filing the GSTR-3 and not GSTR-3B
(contrary to the functionalities of the GSTN portal) – legally speaking,
GSTR-3B is not a valid document to update the ELL/ ECrL and should not be
considered as the return u/s. 39(1) & (7).

Section 39 refers to ‘a’ return to be filed for
every calendar month i.e. a singular return. The rules seem to extend beyond
the requirement of a singular return for every calendar month since the filing
of GSTR-3B does not dispense with the requirement of filing GSTR 3.  Therefore, GSTR-3B is a document which is
clearly not envisaged in section 39.

GSTR-3B does not displace GSTR-3 as a return
for inward or outward supplies. The returns seem to parallelly exist and this
requirement exceeds the mandate of section 39(1) of filing a singular
return. 

GSTR-3B can at most be considered as a
provisional document subject to the final return in form GSTR-3. The entries in
the electronic ledgers are merely provisional entries to tide over the
difficulties posed by the common portal until GSTR-3 is fully functional.

CBEC circular (No. 7/7/2017-GST dt. 01.09.2017)
clarified that any error in GSTR-3B could be rectified while filing GSTR-1/2
and 3. GSTR-3 certainly enjoys a superior status compared to GSTR-3B, and being
so, the due date should be understood with reference to the said document and
not from an inferior document.

Form GSTR-3, 4, etc. are titled ‘Return’
whereas GSTR-3B does not hone such a title.

As it is well settled, where there are two
interpretations of law, the one which is beneficial to the tax payer should be
adopted.

 

Based on the above arguments, one may take
a view that the extension of GSTR-3 has also lead to the extension of the due
date of payment of tax. 

 

However, the said contention may fail if
one applies the purposive interpretation as against a literal interpretation of
law. The intention behind introduction of GSTR-3B was to facilitate the
Government to collect taxes on a monthly basis and overcome the technical
glitches in the common portal. Rule 61(5) term GSTR-3B as a ‘return’ to be
filed in cases where GSTR 3 is extended in special circumstances (also refer Circular
7/7/2017-GST dt. 01.09.2017 & Circular 26/26/2017-GST dt. 29.12.2017).
 The Circular mentions that any rectification
subsequent to filing the GSTR-3B should be accompanied by interest on delayed
payment, if any.  The notification
prescribing due dates of GSTR-3B also requires the tax payer to discharge its
taxes, interest and penalty within the said due dates.  Further, Government(s) would be deprived of
its revenue, if taxes are not paid in a timely manner.  The taxes which are collected by suppliers
are in the capacity of an agent of the Government and the Government never
intended the tax payer to collect taxes from the consumers and retain this sum
without any outer time limit. 

 

If the amounts are substantial, this would
certainly be a heated issue between the tax payer and the department and
warrant a resolution by the Courts. 

 

ii.  Whether
balance available in respective ECL / ECrL can be reduced for ascertaining
taxes unpaid? As a corollary, whether interest is applicable if utilisation
through the return filing mechanism is not undertaken on the common portal?

 

The overall scheme of reporting and
payment may give pointers on this question. 
Section 40 provides for a mechanism of reporting liabilities and payment
of tax through electronic ledgers. Three ledgers have been designed for this
purpose: ECL, ECrl & ELL. The said ledgers have been created separately for
each enactment and cross movement of cash/ funds is not permitted except
through the cross credit utilisation mechanism in section 49(5) of CGST/ SGST
law and 18 of IGST law:

 

ECL: Credited with bank remittances and used
for payment of tax, interest, penalties, fees.

ECrL : Credited with self-assessed input tax
credits and used for payment of tax.

ELL : Credited with return related and
non-related liabilities and is debited with payments from ECL / ECrL.  This ledger is updated only after filing the
statutory return (currently GSTR-3B).

 

Discharge of tax dues under the GST law
involves a two-step mechanism – (a) a bank payment (involving flow of funds)
into the cash ledgers and (b) an accounting adjustment (an appropriation of
such funds).  There have been many
instances where assesse has sufficient ECL/ ECrL balance to set-off the ELL but
has failed to file the GSTR-3B for one reason or another, due to which the
utilisation or discharge of liabilities reported/ due to be reported in the ELL
has not taken place. 

 

In such cases, an issue arises whether
interest is applicable on failure to discharge the ELL / non-filing of return
even-though the tax payer has paid the amounts into Government coffers?  Has the law made a distinction between
payment of taxes and discharge of tax liability?  Are they co-terminus or independent actions
to be performed by the tax payer? 
Whether the double entry accounting adjustment on filing the return
would have any revenue impact for Government? 
These questions would certainly come up to address the question of
interest applicability.

 

While logically, there seems to be no doubt
that the benefit of funds available in ECL/ ECrL should be given to the tax
payer and non-filing of returns should not entail any interest liability, one
should also give cognisance to the literal interpretation of the Statute.

 

Literal interpretation

 

Section 60(1) terms the credit into the
ECL as a deposit towards tax, interest, penalty, fee or any other sum
dues.  Section 60(3) states that ECL may
be used for payment of tax under the Act. Section 60(7) & 60(8) provide
that all liabilities would be recorded in the ELL and discharged in a
prescribed manner. Rule 85(3) states that all liabilities would be paid by
debiting the ECL/ ECrL as permissible. 

 

ECL in form PMT-05 maintains separate
account heads – minor head (such as Tax, interest, penalty, etc.) under
each tax type – major head (CGST/ SGST/ IGST) for deposits made into such
account. The law does not permit cross transfer of amounts reported in one
account major/ minor head into other account heads.  

 

If one examines the GSTN portal, filing of
GSTR-3B creates a credit entry in the ELL and a simultaneous debit in the ECL/
ECrL as the case may be, as discharge of taxes. The tax dues are said to be
discharged on filing the returns and corresponding utilisation of ECL / ECrL.  Therefore, interest seems to be prima-facie
applicable from the due date to the actual date of filing the return. 

In the view of the author, even if the
returns are not filed, deposits into the Government accounts should be
considered as payment of tax dues and benefit of such credits be granted for
ascertainment of the taxes unpaid u/s. 50(1). Following arguments can be taken
in support of this stand:

 

Section 50 (1) states that interest is
applicable on failure to pay the tax dues. 
The failure is with reference to the tax payment and not with reference
to utilisation of the ECL with the ELL (referred to as discharge of tax
liability).

Section 39(7) requires the assessee to pay the
taxes due as per such return before the due date of filing the return, i.e. the
act of payment should be one which can be performed ‘before’ filing the
return.  As stated above, the book
adjustment (credit in ECL and debit in ECrL) takes place only after filing the
return (refer instructions of form GSTR-3). Therefore, payment of taxes is distinct
from discharge of taxes. 

Moreover, the IT framework does not allow one
to file a return unless sufficient balance is available in the appropriate
ledgers. This implies that payment of taxes precedes the adjustment in
ELL.  Hence, bank payment in ECL should
be considered as a ‘payment’ u/s. 39(7).

Principally, interest is collected to
compensate the Government of its rightful revenue. Amounts credited to ECL are
funds received into respective Government accounts and it is free to utilise
this revenue for its functioning.

The amounts lying in the ECL are not under the
control of the assessee. One has to necessarily follow the procedures
prescribed in GSTR-3B/3 to claim the refund of any excess balance, implying
that the funds are available with the Government. 

Provisions of refund provide for interest @ 6%
if the Government delays in refund of the excess ECL balance also implying that
these funds are being used by the Government and under its control.

Amounts lying in ECL are akin to amounts lying
in PLA under Excise laws.  Where a
manufacturer delays in filing its excise return or carries excess balance in
its PLA, it was considered as amounts paid under the Excise law.

Similarly, amounts lying in ECrL represents
credit eligible to the assessee – Courts have held that input tax credit
permissible under law is as good as taxes paid. 
Though an assessee may not have filed the returns, the liability of such
assessee for a tax period would have to be computed after deduction of amounts
lying in ECrL.

 

In view of this, one can take a stand that
the Government has not incurred any loss of revenue and hence interest should
not apply where sufficient amounts are lying in the ECL/ ECrL.  The CBEC Circular No. 7/7/2017 (supra)
on the contrary states in para 11 & 12 that interest is applicable till the
date of debit in the ECL/ ECrL; i.e. until the return is filed and the
corresponding utilisation in the respective ledgers takes place.

 

Inter-Government Account Settlement

 

The flow of funds
between Government accounts are an important factor to ascertain whether the
rightful Government is enjoying funds. 
The settlement of accounts of Governments takes place at the back-end
based on the returns filed by the tax payers. 
‘Place of supply’ reported in the tax invoices identifies the Government
which is entitled to the revenue in an outward supply.  However, these details can be ascertained by
the Government only when accurate and complete returns are filed in GSTR-1, 2
& 3. 

 

Transfer of funds on cross utilisation of
input tax credit and settlement of accounts by the Governments are covered u/s.
53 of the respective CGST/ SGST Acts and Chapter VIII of the IGST Act
(comprising of section 17 and 18).  The
settlement of accounts between Governments can be categorised in two broad
types:

 

a)  Input
tax credit Settlement

 

Section 53 of the respective CGST/SGST Acts
provide that on utilisation of the credit of CGST/ SGST for payment of IGST,
corresponding amounts would be transferred from the Central Government/ State
Government account to the IGST account.

Section 18 of the IGST Act provides that on
utilisation of the credit of IGST for payment of CGST/ SGST, corresponding
amounts would be transferred by the Central Government to the Central
Government / State Government account.

Section 53 and 18 above, convey that cross
utilisation of credits lead to a transfer of funds between Government accounts
in the back end and the Government granting the set-off towards input tax
credit receive its share of revenue.  The
section also states that this cross utilisation takes place only at the time of
filing the return and to the extent of the amounts are reported in the
return.  Where a return is not filed or
the return filed is erroneous, the cross utilisation to the extent of the error
would not take place and the rightful Government would not receive this
revenue. 

 

b)  Cash
Settlement

 

Cash payments in the ECL takes place through
electronically generated challan in PMT 06. 
Major heads represents each statute under which the collection is being
made and funds cannot be cross-transferred to other major heads; Minor heads
represents the folios under which collection is being made (such as tax,
penalty, interest, etc.) and merely an accounting head of the respective
Government. 

CGST/ SGST-ECL ledgers represents funds
received by the respective Government and hence no further adjustment or
transfers are required. The funds in the ECL can be used for any payment including
tax, interest and penalties.

IGST-ECL ledger represents the amounts
collected by the Central Government and due to both Central Government and
State Governments as per prescribed formula. Section 17 of the IGST Act
provides for a mechanism of apportionment of IGST collected and settlement of
accounts. 

 

Legally speaking, revenues would accrue to
the State only once the return is filed and the appropriate utilisations are
made in the ECL/ ECrL and ELL.  In case
this is not done, revenues would remain un-appropriated and fall into an
apportionment formula.  To this extent,
there is every possibility that the Government has not received its rightful
share of revenue.  Governments may then
claim that on account of an incorrect return or an omission of filing a correct
return, it has been deprived of the rightful revenue. In that sense, the issue
is not really of the amount being paid and only offset entry not done.

 

During the last one year, there have been
multiple cases where amount were lying in the ECL/ ECrL, but the assessee was
unable to file the return or failed to file the return within the due date, due
to which the appropriate utilisations could not be made at the back-end by the
Government(s). A matrix of various possibilities has been tabulated and the
compensatory nature of interest can be put to test based on the interpretation
that unless the Government is deprived of funds, interest should not apply.

 

Sl
No.

Scenarios

ECL

ECrL

ELL

Funds
held by

Funds
due
to

Interest

Major
heads : I/C/S

 

1

Sufficient Input Balance
(without considering cross utilisation)

I –
NIL

C –
NIL

S –
NIL

I –
100

C –
100

S –
100

 

I –
100

C –
100

S –
100

 

Respective Govts.

Respective Govts.

NIL

2

Sufficient Input Balance
(considering cross utilisation)

I –
NIL

C –
NIL

S –
NIL

 

I –
300

C –
NIL

S –
NIL

 

I –
100

C –
100

S –
100

 

Central Govt.

State Govt.

May apply to the extent of
SGST component (sec. 53) since no ITC settlement in favour of State Govt.

2A

-do-

I –
NIL

C –
NIL

S –
NIL

I –
NIL

C –
200

S –
100

I –
100

C –
100

S –
100

Central Govt.

Central Govt.

Should not apply since no
loss of revenue to Govt.

2B

-do-

I –
NIL

C –
NIL

S –
NIL

 

I –
NIL

C –
100

S –
200

 

I –
100

C –
100

S –
100

 

State Govt.

Central Govt.

May apply to the extent of
IGST component since no ITC settlement in favour Central Govt.

3

Sufficient Cash Balance

I –
50

C –
50

S –
50

I –
50

C –
50

S –
50

I –
100

C –
100

S –
100

Respective Govts.

Respective Govts.

NIL

3A

Sufficient Cash Balance (but
different major head of same Government)

I –
100

C –
NIL

S –
50

I –
50

C –
50

S –
50

 

I –
100

C –
100

S –
100

 

Central Govt.

Central Govt.

Should not apply since no
loss of revenue to Central Govt.

3B

Sufficient Cash Balance (but
different Government)

I –
NIL

C –
50

S –
100

I –
50

C –
50

S –
50

I –
100

C –
100

S –
100

State Govt.

Central Govt.

May apply to extent of IGST
component since no ITC settlement in favour of Central Govt.

4

Cash Balance (but different
major head of same Government)

I –
150

C – NIL

S –
50

 

I –
50

C –
NIL

S –
50

 

I –
100

C –
100

S –
100

 

Central Govt.

Central Govt.

Should not apply since same
Govt.

4A

Sufficient Cash Balance (but
different Government)

I –
150

C –
50

S –
NIL

 

I –
50

C –
50

S –
NIL

 

I –
100

C –
100

S –
100

 

Central Govt.

State Govt.

Will apply on 50 SGST being
unpaid balance.  May apply to the
extent of 50 SGST component since no ITC settlement in favour of State Govt.

 

In certain cases, interest becomes
applicable and in certain cases, interest should not apply on the fundamental
principle of being compensatory in nature. The above table depicts the
conundrum which one would face if they have to convince a Court that interest
is not applicable per compensatory principles. Though an argument can certainly
be taken that the assesse should not be saddled with an interest merely because
Governments have not settled their accounts internally.

 

iii. Whether
blocked/ ineligible credit claimed in ECrL and remaining unutilised is subject
to interest at the time of its recovery?

Sections 16, 17 and 18 provide for the
mechanism for granting the benefit of input tax credit to an assessee.  Input tax credit eligible under these
sections can be availed by reporting the same in GSTR-2 (currently in GSTR-3B)
and these amounts are credited in the ECrL for further utilisation u/s. 49(4)/
49(5).  Under the input tax credit
scheme, eligibility, availment and utilisation have distinct meanings:
Eligibility addresses the qualification of an amount to be termed as input tax
credit; availment involves recording these eligible amounts in ECrL as input
tax credit and utilisation involves making tax payments by way of adjustment
with the output tax liability. Eligibility precedes availment and availment
precedes utilisation.

Section 73 and 74 provide for recovery of
input tax credit erroneously availed or utilised by the assessee.  The said section empowers tax officers to
recover the input tax credit at the stage of availment itself and the assessing
officer need not wait for the assessee to utilise the said input tax
credit.  Financially speaking, there is
no outflow of revenue from the Government when the assessee avails input tax
credit in its returns. The flow of funds only takes place when the said amounts
are utilised from the said ledger for discharge of liabilities recorded in the
ELL (refer discussion above). The question thus arises on whether interest is
applicable on incorrect availment of input tax credit?

 

Similar instances came up under the Cenvat
Credit regime.  Rule 14 of the Cenvat
Credit Rules (as existed during the period up to 2012) contained a provision
for recovery of Cenvat availed ‘or’ utilised. The Supreme Court in Union of
India vs. Ind-Swift Laboratories ltd 2011 (265) ELT (3) SC
held that
revenue is permitted to recover the unutilised Cenvat at the stage of availment
itself. It also held that revenue can impose interest in case of incorrect
availment of Cenvat even though such amounts have not been utilised by the
assessee. However, the High Court of Karnataka and Andhra Pradesh have held to
the contrary in spite of the decision of the Supreme Court. Subsequently, the
law was amended in 2012 to recover Cenvat and interest only after utilisation
of such Cenvat Credit. 

 

In the context of GST, section 73 and 74
direct recovery of Input tax credit at the stage of availment but interest is
applicable in terms of section 50(1).  A
question arises on whether availment of input tax credit in ECrL results in
failure of payment of tax to the Government? 

 

Input tax credit is a claim by the
assessee from the Government for taxes in respect of taxes paid to the
supplier. From a recipient’s perspective, it represents amounts due ‘from’ the
Government rather than due ‘to’ the Government. 
If this claim is rejected prior to its utilisation, there is no revenue
loss and hence it cannot be said that taxes are ‘unpaid’ to the
Government. 

 

Section 49(4) also states that amounts
lying in the ECrL may be used for payment of taxes. The utilisation of input
tax credit is an option to the tax payer and if the tax payer does not utilise
this amount, it continues as a balance but does not result in ‘taxes unpaid’.
Though recovery provisions may be initiated for incorrectly availed input tax
credit, interest on such incorrect availment cannot be imposed. 

 

From the point of view of settlement and
flow of funds, sections 53 of the CGST/ SGST law and 18 of IGST law require
payment of funds from Centre to State or vice-versa only when the cross
utilisation takes place from the ECrL to the ELL. Until such time the
Government in whose name the Credit stands retains the funds.  On these grounds, one can take a stand that
interest is not imposable on incorrect availment if the same is not
utilised. 

 

iv. Whether
interest applicable on payment made through ECrL but later credit held to be
wrongly availed (say blocked credit)?

 

Section 50 uses the phrase ‘tax unpaid’.  This is different from input tax credit
wrongly availed and/or utilised.  Though
mathematically speaking, a wrong input tax credit claim results in short
payment of taxes, recovery of short payment of taxes is different from recovery
of erroneous availment and utilisation of input tax credit.  To cite an example : short payment of taxes
are cases of under-valuation or lower rate, etc where the error is on the
calculation of output taxes while recovery of input tax credit takes place in
case of an error on the inward supplies to an assessee. This distinction is
highlighted in view of separate phraseology for recovery of input tax credit
wrongly availed and utilised and for short payment of taxes in section 73 and
74.  Explanation to section 132 specifically
clarifies that taxes unpaid also includes input tax credit wrongly
availed or utilised. However, the said explanation has been made applicable
only section 132 and not section 50. 

 

Under the Cenvat Credit regime, Rule 14 of
the Rules, made specific provisions for recovery of input tax credit wrongly
availed or refunded. Rule 14(ii) specifically enabled the tax authorities to
recover interest under the Excise/ Service tax law. Section 50 of the GST does
not seem to capture this situation and the recovery of interest in such
scenarios can certainly be challenged by the assessee.

 

 

v.  Whether
interest is applicable on early claim of input tax credit?

 

The above analogy would apply in such
cases and interest is not recoverable from the assessee. It may also be
interesting to note that in terms of second proviso to section 16(2), where an
assessee fails to make a payment on inward supplies within 180 days of the date
of invoice, the assessee is specifically required to repay the input tax credit
along with interest.  The specific
mention of recovery of interest in such cases makes it clear that section 50
does not capture cases of erroneous input tax credit claims.

 

vi. How
is interest to be computed in cases of mismatch?


Section 50(1) and (3) provides for imposition of interest in cases where
mismatch reports are generated. Mismatch could arise under various
circumstances:

Non-reporting of invoice by supplier itself
resulting in short payment of taxes.

Erroneous reporting of invoice (incorrect
details) by supplier but taxes have been paid (wholly or partly in cases where
value is short reported).

Duplicate reporting of invoice by recipient.

 

There seems to emerge some confusion while
reading the provisions of section 42/43 (mismatch reports) and section 50(1)
and 50(3).  Section 42/43 provide a tax
payer a minimum of two attempts to claim input tax credit in its return – in
case of an error in the first attempt, the tax payer would be liable for
interest @ 18% for the period of 2 months. 
However, if there is an error in the second or any subsequent attempt,
the tax payer would be liable for interest @ 24%.

 

In such cases, interest is imposed for the
period during which the mismatch continued. It is interesting to note that
interest is imposed on the recipient right from the date of availment even
though taxes are paid along with interest at supplier’s end (wherever
applicable). There may be instances where the liability of interest is thrust
upon the recipient even for delays or errors on the part of the supplier. While
it is just to claim interest in case of duplicate reporting of an invoice, in
other cases, the Government seems to be receiving the interest from both sides
of the transaction.

vii. Whether
transition credit claimed but later reversed through GSTR3B/GSTR-3 liable for
interest?

 

In the view of the author, though
transition credit is directly credited to the ECrL from the Transition returns,
the answer to this question would remain the same.  Interest would not apply till the time the same
has been utilised from the ECrL based on the principles of compensatory
levy.  Even in cases where the said
amount has been utilised, interest would not apply in the absence of a specific
provision of recovery of interest u/s. 50 on irregular input tax credit. 

 

An issue also arises whether incorrect
carry forward of transition credit also entails interest under the erstwhile
laws. The savings clause u/s. 174 places the liability of interest on such sums
until the recovery of such incorrect credit. However, the said provisions are
subject to any specific provision under the GST law. GST law does not contain
any specific provision for recovery of interest for incorrect credits in the
ECrL directly. 

 

Therefore, interest may be liable to be
paid under the erstwhile laws on account of the saving provisions, no further
interest should be recovered under the GST law. 
One may take a stand that where the recovery provisions are invoked
under the earlier law and sums due to the Government have been paid with interest
till date, the credit brought forward in the GST law should not be disturbed,
else it would result in double jeopardy to the tax payer. 

 

In summary, it
seems evident that the front end portal, back-end settlement mechanism and the
GST laws are at divergence in many instances. 
A simple concept of interest will surely throw up unexpected challenges
and we are entering an era where calculation of interest is turning into an
subject by itself. This primarily arises due to the hybrid GST mechanism of bringing
all the States on a common platform. 



It is important for the GST Council to
identify all possible permutations to ensure that interest is paid to the right
Government and should be equipped to answer questions on accountability &
propriety of Government funds. At 18%, the stakes are certainly going to be
high for the tax payer as well as the Government!!!
 

GST @ 1: TAXPAYER REACTIONS

GST was launched with much
fanfare at the midnight of 30th June 2017. Touted as the most
important tax reform since independence, the same immediately met with extreme
reactions on both sides. Some course corrections were also carried out in terms
of reduction in tax rates, extension of due dates, filings, suspension of many
of the complex provisions in the law and the like.

 

Nearly a year since its’
implementation, GST continues to be the talk of the town. Last week, I met a
friend and in casual discussions, I could sense an element of frustration. When
I asked for the reasons, he explained that the deluge of due dates, to a large
extent sponsored by GST, just keep him super-busy and the compliance costs had
increased drastically. During the discussions, another friend joined in and he
had a diametrically opposite version to offer. He was very happy with the
introduction of GST and saw it as an opportunity to streamline his business
processes.

 

These diametrically opposite
versions, coinciding with the anniversary of GST prompted BCAS to conduct a
survey on the taxpayers’ reactions towards the implementation of GST. The
BCAS survey on GST included a cross section of industry verticals with
constituents of differing scale and complexity of operations. This article
summarises the key takeaways from the said survey.
To ensure
confidentiality, as requested by many of the participants, the names are
avoided in this article and reference to the position and industry is provided.

 

Whether introduction of GST was a step in the right
direction?

The rollback of GST in Malaysia
was the backdrop of the above question in the survey. Surprisingly, not a
single participant responded in the negative. The jury was unanimous. The
country was fed up with a plethora of indirect taxes like sales tax, VAT,
excise duty, service tax, CST, octroi, etc. Therefore, the dual levy of GST,
implemented in a unified manner was hailed by all the participants. To quote
the response of the Global Tax Manager at a large software exports company,
“This kind of reform under Indirect Taxes was the need of the hour I
congratulate the policy makers for that.”

 

Has GST resulted in ease of doing business?

To the next question on
analysing the impact of GST on the ease of doing business, the mood amongst the
participants was that of cautious optimism. While most of the participants felt
that there was an improvement in the ease of doing business, they felt that the
extent of improvement could have been better. Perhaps the initial teething
troubles resulted in this hesitation in response. The response of the AVP-GST
at a large diversified listed company summarises this mood well, “Over a period
of time once streamlined then it (the ease of doing business) will improve.”

 

Has GST resulted in reduction of product costs and
prices?

On the question of the impact
of GST on product costs and pricing, again the jury’s view  generally was that the costs have reduced due
to lower cascading of taxes and free flow of input tax credit. However, certain
sectors did see an increase in costs due to working capital blockages and
related issues. To quote the response of the Finance Controller at a midsized
pharmaceutical manufacturer, “Working capital requirements have increased and
funds are blocked due to procedure and timelines of refunds for exporters.”

 

Is the GST tax rate optimal?

Again, most of the
participants were comfortable with the rate of tax and to that extent the
response was not surprising. An astutely managed fitment of rates coupled with
a course correction of rate on many items kept most of the people happy.
However, some pockets were affected. The tax manager at a large public sector
bank responded “W.r.t. Banking sector, GST has really not resulted in cost
efficiencies.  In fact tax outgo has
increased. Further, w.r.t. banking services, the GST rate could have been lower”.
Similarly, the Finance Controller at the pharmaceutical manufacturer felt that
instances of inverted rate structure could have been avoided.

 

Has GST resulted in increase in compliance costs?

On the question of increase in
compliance costs, the general response was that GST did result in increase in
compliance costs. The transaction level uploading and multiple return
obligations perhaps resulted in such increase in costs. The increase in
compliance costs was more felt by small and mid sized organisations. To quote
from the response of the AGM of a small diamond assortment company, “Yes, the
number of returns and details to be provided in return is considerably
increased resulting in additional costs.”

 

Does the structure of dual GST present an inherent
risk of divergence?

The multiplicity of enactments
and the autonomy provided by the Constitution to both the Centre as well as the
State prompted this question. As of now, all seems well. However, what would
happen once the period of assured compensation for revenue loss is over? Will
some States digress from the uniform GST Structure? In response to this
question, most of the participants felt that a reasonable political consensus
has been achieved on the front of GST and there should really be no reasons to
worry. However, the response of the AVP at a large diversified listed company
was different, “I fear risks in consensus between Centre and States going
forward once there is a coalition based Central Govt.”

 

Is the allocation of administrative jurisdiction
between Centre and States fair?

The dual GST structure with
allocation of tax administration between the Centre and the State Authorities
has been a unique experiment in the Indian context. In response to a question
in this regard, most participants could not respond since they did not have
first hand experience of interaction with the respective jurisdictions.
However, the response from the public sector bank suggested some discontent on
this front, “Assessees seem to be allocated between Centre and State
Authorities in a random manner. Proper communication has also not been sent
which has led to confusion among assessees.”

 

Are there challenges in the legal provisions
pertaining to GST?

In various technical sessions,
it is highlighted that the legal provisions of GST present inherent conflict
and could result in litigations. The spate of litigations in the High Courts
and the advance rulings revalidate this aspect. Interestingly, the responses of
the industry on this front appeared to be much more forgiving.

 

The industry seems to have
reconciled to the expanded definition of supply and taxation of branch
transfers. The General Manager at a large cement manufacturing company
summarises the response, “Earlier also Excise Duty was paid but it was a cost.”
In fact, the Global Tax Manager at a large software exports company sees this
provision as a positive provision. In response to a pointed question on whether
there are difficulties on account of this extended definition of supply, he
responded, “In fact its otherwise the tax on branch transfer allows the credit
chain to remain intact.” GST is an interesting tax, people want to pay the tax!

 

One common resentment on the
legal provisions pertained to taxation of advances. It was unanimously
criticised by most of the participants. Luckily as a part of course correction,
tax on advances pertaining to supply of goods was kept in abeyance. This
presents another set of challenges. To quote the AVP-GST at a large diversified
listed company, “Its (The obligation is) onerous as at the time of advance the
purpose is not known.”

 

The place of supply rules not
only determine the nature of the tax but also the Government which effectively
enjoys the tax. In that sense, these rules go to the core of the GST
Implementation. Most of the constituents were reasonably happy with the
drafting of the rules and did not foresee any major risk of interpretation on
this account. With the aggregate tax remaining the same, the approach of the
industry seemed to be to take as conservative a stand as possible. As one of
the respondents stated, “We are taking safe route.”

 

On the requirement of matching
of input tax credit, the opinion was fairly divided. While some felt that this
requirement was fine, others felts that this resulted in an onerous obligation.
Some suggested a middle route to substitute the invoice level matching to
vendor level matching. There was also a feeling that the restrictions in the
claim of credit should be done away with. To quote tax manager at a large
public sector bank, “Restrictions can be further rationalised. In Banking as it
is 50% ITC is reversed so the list of ineligible items should be further
reduced or done away with.” Similar responses were received to do away with
restriction on claim of credits for employee related costs.

 

Were you able to use the portal effectively during
non-peak days?

Even the uninitiated would
know by now that the IT System for implementing GST was not totally ready at
the time of implementation and is still a work in progress. In fact, most of
the backlash against the Government was around this aspect of the portal not
supporting a smooth transition into GST[1]. In this
context, the response to the above question was a bit surprising with many
participants suggesting that the portal was fine to use during non-peak days.
However, in case of errors like digital signatures not matching, browser
compatibility issues, etc., it appeared that the industry was left to find its’
own solutions. Most of the responses expressed dissatisfaction about the
response time from the helpdesk. In fact, the response from the public sector
bank was, “(Our issues are) Not yet resolved in spite of repeated follow up and
reminders with GST helpdesk.”

 

Did the nationwide rollout of eWay Bill System bring about
uniformity,  ease of doing business and
transportation?

The first phase of
implementation of eWay Bills resulted in the system crashing on the first day
itself, resulting in postponement of the implementation. Thereafter, the system
has been implemented across the nation. In this context, the above question was
posed and most of the respondents felt that the system did bring about a
uniformity and ease of doing business and transportation. Those from the
service sectors like banking were less impacted. However, an interesting point
of view was presented by the global tax manager at the software company, “when
invoice wise details are reported to GSTN there is no case for eway bills, it
needs to be scrapped.”

 

Did the outreach programs of the Government help in
transitioning to GST?

Last year, around this time
saw an unprecedented flurry of outreach programmes from the Government. To its’
credit, the Government did try quite a few things to educate the trade and
industry about this gigantic reform. “FAQs, sessions with business/ Chambers
helped” was the crisp response from one of the participants.

 

Learnings from the Survey

Any legal expert would agree
that the Dual GST Structure along with a half baked law representing an amalgam
of multiple earlier laws does not augur well and can present fundamental
challenges. Things got complicated with confusion on administrative aspects
like portal, eWay Bills and the like. Despite these issues, the responses from
the industry have been positive. While there are issues, which did come out in
the survey as well, on a holistic basis, the industry understands the saying
that one cannot miss the woods for the trees. To summarise in a single line,
“There is a big thumbs up for the GST reform implemented by the Government.”

Ind AS 115 – Revenue From Contracts With Customers

Identifying the customer

Ind AS 115 defines a customer as a
party that has contracted with an entity to obtain goods or services that are
an output of the entity’s ordinary activities in exchange for consideration.
Beyond that, Ind AS 115 does not contain any definition of a customer. In many
transactions, a customer is easily identifiable. However, in transactions
involving multiple parties, for example, in the credit card business, it may be
less clear which counterparties are customers of the entity. For some
arrangements, multiple parties could all be considered customers of the entity.
However, for other arrangements, only some of the parties involved are
considered as customers. The identification of the performance obligations in a
contract can also have a significant effect on the determination of which party
is the entity’s customer.

 

Identifying the customer becomes
very important under Ind AS 115, because depending on who and how many
customers are identified, it will determine, the performance obligations in a
contract, the presentation and accounting of sales incentives, determination
and presentation of negative revenue, etc. The example below shows how the
party considered to be the customer may differ, depending on the specific facts
and circumstances.

 

Example — Travel Agents

An entity provides internet-based
airline ticket booking services. In any transaction, there are three parties
involved, the airline is the principal, the entity is an agent, and the
end-customer who purchases the ticket on the entity’s website. The entity gets
its majority of the income from the airline, to whom it charges a commission
(say INR 500 per ticket). The entity also receives a small convenience fee from
the end-customer (INR 20). To attract customers, the entity provides a cash
back of INR 120 to each end-customer.

 

If the entity considers, the
airline and the end-customer as two customers in a transaction, it will
determine revenue to be INR 400 (500+20-120). On the other hand, if the entity
had not received any convenience fees from the end-customer, and reduced the
cash back to INR 100, the entity will determine revenue to be INR 500. The
entity will also present INR 100 paid to third parties (end-customers) as a
selling cost.

 

Consideration paid to Customers’ Customer

Consideration payable to a customer
includes cash amounts that an entity pays, or expects to pay, to the customer.
Such amounts are reduced from revenue. This requirement also applies to
payments made to other parties that purchase the entity’s goods or services
from the customer. In other words, consideration paid to customers’ customer is
also reduced from revenue. For example, if a lubricant entity pays a
consideration to mechanics that purchases lubricants from the entity’s customer
(distributor), that amount will be reduced from the revenue of the lubricant
entity.

 

In some cases, entities provide
cash or other incentives to end consumers that are neither their direct
customers nor purchase the entities’ goods or services within the distribution
chain. One such example is depicted below. In such cases, the entity will need
to identify whether the end consumer is the entity’s customer under Ind AS 115.
This assessment could require significant judgment. The management should also
consider whether a payment to an end consumer is contractually required
pursuant to the arrangement between the entity and its customer (e.g., the
merchant in the example below) in the transaction. If this is the case, the
payment to the end consumer is treated as consideration payable to a customer
as it is being made on the customer’s behalf.

 

Example – Consideration paid to other
than customers

An entity provides internet-based
airline ticket booking services. In any transaction, there are three parties
involved, the airline is the principal, the entity is an agent, and the
end-customer who purchases the ticket on the entity’s website. The entity gets
its income from the airline, to whom it charges a commission (say INR 500 per
ticket). To attract users, the entity provides a cash back of INR 100 to each
end-customer on its own (i.e. without any contractual requirement from the
airline company).

 

If the entity considers, the
airline and the end-customer as two customers in a transaction, it will
determine revenue to be INR 400 (500-100). On the other hand, if the entity
determines that the end-customer is not its customer (because convenience fee is
not charge to the end-customer), the entity will determine revenue to be INR
500 and present INR 100 paid to third parties (end-customers) as a selling
cost. In case, the cash back to end user is paid because of a contractual
requirement between the airline and the entity, then such cash back paid will
be deducted from revenue, even when it is concluded that the end-user is not a
customer.  This is because, the entity is
making a payment on behalf of the customer as per agreement.

 

Both examples in the article are economically
the same; however, they provide different accounting consequences, based on how
a customer is identified. In the second example, a convenience fee is not paid
to end-customer, and hence it is concluded that the end-customer is not the
customer of the entity.


BCAS MANAGING COMMITTEE 2018-19

In accordance with clause no.18 of the Memorandum of
Association of the Bombay Chartered Accountants’ Society, as the names of
members who had filed their nomination for the Managing Committee for the year
2018-19 equalled to that of the number of posts, no election was necessary.

 

At the Special Committee Meeting held on 25th
May, 2018, in addition to the members elected unopposed, 6 other members have
been co-opted to the Managing Committee. The list of elected members and
co-opted members is as under:

President

CA. Sunil B.
Gabhawalla

Vice President

CA. Manish P.
Sampat

Hon. Joint
Secretary

CA. Abhay R.
Mehta

Hon. Joint
Secretary

CA. Mihir C.
Sheth

Treasurer

CA. Suhas S.
Paranjpe

Elected Member

CA. Anil D.
Doshi

Elected Member

CA. Bhavesh P.
Gandhi

Elected Member

CA. Chirag H.
Doshi

Elected Member

CA. Divya B.
Jokhakar

Elected Member

CA. Kinjal M.
Shah

Elected Member

CA. Mayur B.
Desai

Elected Member

CA. Rutvik R.
Sanghvi

Elected Member

CA. Samir L.
Kapadia

Co-opted  Member

CA. Anand
Bathiya

Co-opted  Member

CA. Ganesh
Rajgopalan

Co-opted  Member

CA. Mandar
Telang
                     

Co-opted  Member

CA. Pooja
Punjabi

Co-opted  Member

CA. Shreyas
Shah
                    

Co-opted  Member

CA. Zubin
Billimoria

Ex-Officio
Member

CA. Narayan
Pasari

Member (Editor
and Publisher-BCAJ)

CA. Raman H.
Jokhakar

The Committee will assume
office at the conclusion of the Annual General Meeting

to
be held on
6th
July, 2018.

A TAXPAYER’S GST PRAYER

May GST Network never play

with you ‘shy’ ..

And GST Council hear your

desperate ‘ cry’..!

May all your returns go well

in time ….

Your nights are not spent

in ‘ try and sigh’…!

May E-way Bill never block

your way …!

And reverse charge finally

say ‘ Goodbye’…!

May anti profiteering officer

remain at bay …

And you are not accused of

eating the whole ‘pie’ ..!

May TDS , TCS not cause

you headache …

And ‘late fee’ flash never

stare you in the ‘eye’..!

May ‘ Good and Simple Tax’

bless your life ….

And the ‘terror of tax’ remain

a distant cry..!!

 

– Shailesh Sheth, Advocate –

VAT/GST: A FRIGHTENING BUT FASCINATING FUTUREWORLD….!

“Once a new technology rolls over you, if you’re not
part of the steamroller, you’re part of the road.”
Steward Brand

INTRODUCTION

Taxes are as old as civilization, so the ‘Value Added Tax’
(VAT), hardly 63 years old, may seem to be relatively
young in the history of tax. For India, that embraced this development in taxation over the last half-century. Limited
to fewer than 10 countries in the late 1960s, VAT/GST is a
‘Consumption Tax’ of choice of some 170 countries today.
Presently, all member countries of the Organization of
Economic Cooperation and Development (OECD),
except United States, have VAT systems in place [See
Graph 1]. Significantly, UAE and Saudi Arabia have also fundamental ‘Indirect Tax Reform’ in the form of ‘Goods
and Services Tax’ (GST) only in July, 2017, it may even
resemble a ‘New-born Baby’ that has just arrived in the
world from the mother’s womb!

[The words ‘VAT’ and ‘GST’ are used synonymously
in this article.]

GLOBAL SPREAD OF VAT

The spread of VAT has been the most important implemented VAT from January 1, 2018, whereas, other
Gulf Cooperation Council (GCC) countries – Kuwait,
Qatar, Bahrain and Oman – are expected to levy VAT
from 2019.

In terms of revenue, VAT is now the largest source of
taxes on general consumption in OECD countries on
average. Revenues from VAT as a percentage of GDP
increased from 6.8% in 2012 to 7.0% in 2014 on average; and from 20.05% in 2012 to 20.07% in 2014 as a share of
total taxation. [See Graph 2].

INDIA’S ‘MIDNIGHT TRYST’ WITH GST

Finally, GST was launched from the Central Hall of Parliament
with much gaiety and fanfare in the midnight of June 30, 2017,
marking an opening of a new chapter in the indirect tax history
of the country. What was equally significant was the fact that
with the introduction of GST, a new era of ‘Cooperative
Federalism’ was perceived to have begun!

INDIAN GST – FAULT LINES BECOME VISIBLE

However, the fault lines inherent in the design and structure
of the country’s GST system soon became visible!
Exclusion of several key commodities from GST and
resultant distortion of credit chain, significant restrictions
placed on the entitlement of Input Tax Credit (ITC)
resulting into cascading effect of tax, multiple rates,
long list of exemptions, low threshold and ill-conceived
business processes are but only a few ills that plagued
the Indian GST design from its inception. The biggest
‘let-down’ turned out to be the GSTN Portal! Multiple and
complicated returns, cumbersome Return-filing process,
ill-conceived statutory requirements reflecting revenueoriented,
rigid and ‘i-don’t-trust-you’ attitude coupled with
hopelessly ill-prepared GSTN portal have ensured that
the GST implementation and compliance by ‘more-thanwilling’
taxpayers are anything but smooth! The poorly
drafted, hastily implemented and badly administered GST
laws have only added to the woes of the taxpayers. The
situation has reached such an impasse that the whole system appears to be running on extensions, promises
and assurances!

INDIAN GST DESIGN –WHAT LIES AHEAD?

GST has a potential and the intrinsic characteristics to be ‘a
blessing’ – instead of ‘a curse’ as being perceived by many
today – provided it is designed and structured intelligently
and diligently. The system should be supported by subsystems
such as minimalist number of rates; moderate tax
rate; minimum exemption; high exemption threshold; neatly
defined key expressions; minimal and clear classification;
simple valuation provisions; seamless credit chain; clean
and clutter-free business processes; robust, insightful and
forward-looking ‘dispute redressal machinery’ and many
more. Anything contrary to this would be a humungous
curse for the economy.

TO SUM UP…….

Demonetisation and GST have several common attributes.
The most striking one is the discourse of short-term pain
and long-term gain. However, the latter can be enjoyed
only if one does not succumb to the former. The objective
to plug the informal economy – mainly prevalent in MSME
Sector – into formal set-up may have benefits. But the cost
can outweigh the benefits if done forcefully through radical
reforms. Moreover, the decision to grow competitive should
be a matter of choice and not compulsion. Presently,
lower exemption threshold coupled with cumbersome
compliance can prove to be counter-productive and push
small businesses towards new ways of tax evasion, thereby
breeding corruption.

A mega reform like GST is nothing short of a paradigm
shift. Such reforms often gives rise to two broad categories
of inconveniences, foreseen and unforeseen. Presently,
most of the inconveniences were of ‘foreseen’ category
and could have been avoided. Nevertheless, now is not
the time to cry over ‘what it could have been?’ but, to
concentrate on ‘what it should be’.

It is, indeed, heartening to note that the benevolent and
responsive GST Council has pro-actively undertaken
mid-course corrections. Going by the decisions taken by
the Council in last three meetings, the Council appears
to be determined to ease the woes, particularly that of
compliance load, of the taxpayers and this itself should
‘smoothen the ruffled feathers’ of the taxpayers, at least,
for the time being!

CHANGING GLOBAL TAX HORIZON

Even while the GST Council faces the challenges of
finding ‘elusive design’ that may fit the bill and the right
matrix of the business processes and of building a solid
GST structure, the global tax landscape is going through a
period of fundamental change. The policy-makers and the
tax experts across the world are re-thinking how taxes are
or ought to be levied. Changes have been triggered by the
unimaginable advancement and rapid spread of technology,
digitalisation, new supply chains and an increased scrutiny
of multinational tax practices! These changes will certainly
have destabilising – if not, devastating – impact on the
taxation across the world including India and will inevitably
bring forth its own set of formidable challenges. Obviously,
these changes and challenges can be ignored by one
only at one’s own peril!

In the ensuing paragraphs, these technology-driven
changes and their likely impact on VAT system are briefly
discussed. But before that, it would be advantageous to
understand the meaning of ‘VAT’ and the core principles on
which the foundation of VAT rests.

VAT – MEANING AND ITS CORE PRINCIPLES

International Tax Dialogue, 2005 defines ‘VAT’ as ‘a broad
based tax levied at multiple stages of production (and
distribution) with – crucially – taxes on inputs credited
against taxes on output. That is, while sellers are required
to charge the tax on all their sales, they can also claim
a credit for taxes that they have been charged on their
inputs. The advantage is that revenue is secured by being
collected throughout the process of production (unlike a
retail sales tax) but without distorting production decisions
(as turnover tax does)’.

In November, 2015, OECD published its ‘International
VAT/GST Guidelines’ (Guidelines). The Guidelines are the culmination of nearly two decades of efforts to
provide internationally accepted standard for consumption
taxation of cross-border trade, particularly in services and
intangibles. The Guidelines aim at the uncertainty and risks
of double taxation and unintended non-taxation that result
from the inconsistencies in the application of VAT in crossborder
context.

The overarching purpose of a VAT is to impose a broadbased
tax on consumption, which is understood to
mean final consumption by households. A necessary
consequence of this fundamental proposition is that the
burden of the VAT should not rest on businesses.

The central design feature of a VAT, and the feature from
which it derives its name, is that tax is collected through
a staged process. This central design feature of the VAT,
coupled with the fundamental principle that the burden of the
tax should not rest on businesses, requires a mechanism
for relieving businesses of the burden of the VAT they pay
when they acquire goods, services or intangibles. There
are two principal approaches to implementing the staged
collection process of VAT, one is invoice-credit method
(which is a ‘transaction-based method’) and other is
subtraction method (which is ‘entity based method’).
Almost all VAT jurisdictions (including India) of the world
have adopted the invoice-credit method.

This basic design of the VAT with tax imposed at every
stage of the economic process, but with a credit for taxes on
purchases by all but the final consumer, gives the VAT “it’s
essential character in domestic trade as an economically
neutral tax”. As the introductory chapter to the Guidelines
explains:

“The full right to deduct input tax through the supply chain,
except by the final consumer, ensures the neutrality of the
tax, whatever the nature of the product, the structure of
the distribution chain, and the means used for its delivery
(e.g. retail stores, physical delivery, internet downloads).
As a result of the staged payment system, VAT thereby
“flows through the businesses” to tax supplies made to final
consumers”.

It is, thus, evident that the two core principles on which the
VAT system is based are:

◆ Neutrality principle

This is the core principle of VAT design. The Guidelines set
forth the following three specific precepts with respect to
‘basic neutrality principles’ of VAT:

• The burden of VAT themselves should not lie on taxable businesses except where explicitly provided for in
legislation;

• Businesses in similar situations carrying out similar
transactions should be subject to similar level of taxation;

• VAT rules should be framed in such a way that they are
not the primary influence on business decisions.

◆ Destination principle

This principle seeks to achieve neutrality in cross-border
trade.

The Guidelines provides: “For consumption tax purposes,
internationally traded services and intangibles should
be taxed according to the rules of the jurisdiction of
consumption.”

Keeping the above core principles of VAT system in mind,
let us now advert to certain key challenges facing the tax
system.

I. TAX CHALLENGES OF THE DIGITAL
ECONOMY

On March 16, 2018, OECD released ‘Tax Challenges
arising from Digitalisation – Interim Report 2018’. The
Interim Report is a follow-up to the work delivered by the
OECD in October 2015 under Action 1 of the Base Erosion
and Profit Shifting (BEPS) Project, which was focused on
addressing the tax challenges of the digital economy.

The Report states that ‘Digitalisation is transforming many
aspects of our everyday lives, as well as at the macro-level
in terms of the way our economy and society is organized
and functions. The breadth and speed of change have
been often remarked upon, and this is also true when one
considers the implications of this digital transformation on
tax matters’. The Report acknowledges the far-reaching
implications of digitalisation and its disruptive effects,
beyond the international tax rules, on other elements of
the modern tax system, bringing forth opportunities and
challenges. From the design of the tax system through
to tax administration, relevant developments include
the rise of business models facilitating the growth of the
‘gig’ and ‘sharing’ economies as well as an increase in
other peer-to-peer (P2P) transactions, the development
of technologies such as block chain and growing data
collection and matching capacities.

Chapter 7 of the Report titled “Special feature – Beyond
the International Tax Rules” explores some of these
changes including Online platforms and their impact on
the formal and informal economy. There is no denying
the fact that global e-commerce is becoming increasingly
important. The rapid growth of multi-sided online platforms is attributed to digitilisation. The estimates suggests B2C
sales of US$ 2 trillion annually and is registering an annual
growth of 10 to 15 per cent. Based on an average VAT rate
of 15%, this represents US$ 200 billion in tax revenues!
(It may be noted that US operates a sales tax and has
not embraced VAT as yet). Currently, online shoppers are
tagged at 1.6 billion and are estimated to rise to 2.2 billion
in 2022. E-Commerce admittedly creates challenges for
administrations (VAT and Customs) in terms of collection
since non-taxation creates an unlevel playing field.

The Interim Report notes that the opportunities presented
by multi-sided platforms as regards taxation are two-fold:

i. Facilitate integration into the formal economy;

ii. Drive growth and increase revenues

The Report then identifies the following issues that must
be addressed in order to realise the benefits as well as to
address some of the challenges arising from the operation
of online platforms:

• Understanding the tax implications of the changing
nature of work

• Fostering innovation and ensuring equivalent tax
treatment with similar, existing activity

• Improving the effective taxation of activities facilitated
by online platforms

In sum, the digital economy has become increasingly
entwined with our physical world. The Indian digital
economy is expected to be worth about US$ 35 billion
and it is growing at a pace of 24-25 per cent a year. Given
the high disruption that digital economy has brought
about and its blistering growth rate, a few key questions
arise – how should the digital ecosystem be taxed? How
can governments earn revenue from services that span
borders, as some of the world’s most valuable enterprises
like Google, Facebook and Amazon spread their reach in
emerging markets like India? What share of their revenue
can the Indian Government look at taxing? Is Indian GST
system geared up to address the challenges and seize the
opportunities presented by digitisation?

II. BLOCKCHAIN TECHNOLOGY AND ITS
IMPACT ON THE TAXWORLD

In early 2016, construction workers in London unearthed
hundreds of Roman writing tablets, including some of the
earliest known examples of receipts and IOUs. The find
reminded all that, essentially, the way in which we record
the transactions has barely changed in 2000 years. But will
we say the same five or ten years from now?

‘Blockchain’ – a relatively obscure technology until only a few years ago – is about to make the step from the theoretical to
practical. When it does, it will fundamentally change the way
businesses, people and governments operate.

‘Blockchain’, to put it simply, is a ‘secure distributed
ledger that simultaneously records transactions on a
large number of computers in a network’. In this type
of secure, shared database, participants have their own
copies of the stored data. Strong cryptography ensures
that transactions can be initiated only by certified parties,
that changes are validated by participants collectively and
that the outputs of the system are immediate, accurate and
irrevocable.

BLOCKCHAIN AND INDIRECT TAX

Indirect taxes like VAT are ‘transaction-based taxes’ and
often follow chains of transactions and their tax liabilities.
Obligations are often “triggered” by key events that need
to be documented and recorded securely. These events
include the performance of a service or the delivery of
goods, the conclusion of a contract, the manufacture of
a product and by an act of importing or exporting goods
and services.

However, by and large, the indirect tax systems have
their foundations in physical transactions and trade. The
rise of the sharing economy, digital business and new
business models have caused many people to think about
the current tax systems. Blockchain has emerged at a
time when many in the tax world are speculating about
the efficacy and relevance of the current tax system in
the modern, digital era. While the financial and business
world is naturally excited about Blockchain, ‘Tax’ is one
area where this technology could have a profound impact.
Blockchain’s core attributes, namely, Transparency,
Control, Security, Real-time information and ability to detect
fraud and error mean that it has significant potential for use
in tax regime. Naturally, the tax administrations around the
world – including Indian tax administration – have started
considering the adoption of the Blockchain technology.

Some of the likely near-term uses of Blockchain that could
have an impact on indirect taxes are:

a. Blockchain regimes

VAT and customs administrations could create blockchains
for the transmission of tax data and payments between
taxpayers and government portals. These blockchains
could involve taxpayers in a single jurisdiction or they could
cross multiple jurisdictions.

b. Real-time compliance and reporting

Tax administrations around the globe are already
demanding real-time information from businesses in order
to assess and support their VAT liabilities and deductions.
Blockchain could greatly increase the speed, accuracy and
ease of collecting this data, thereby improving the quality
of VAT compliance while reducing the cost of compliance.

c. Tax Invoices

Tax invoice is the most critical VAT document. In a
Blockchain-based regime, it is likely that for a VAT invoice
to be valid, it will require a digital fingerprint, derived through
the VAT blockchain consensus process.

The fingerprint would immediately confirm that the block
under scrutiny is permanently linked to the previous and
subsequent blocks. The entire history of the commercial
chain (forward and backward from this transaction) could
be followed and scrutinised by a tax official in an office, by
a robot or by a customs officer at a border.

d. Customs documentation

Customs declarations and export controls depend on
various detailed and accurate information, often provided
by third parties. The veracity and reliability of this
information is vital.

Blockchain can enable the customs officer to verify, with
complete accuracy, various information and also the origin
and nature of the goods at every stage of the chain.

As this technology would allow them to verify every aspect
of a shipment with certainty, they could maintain supply
chain security with fewer officers who could target their
inspections more accurately.

e. Supporting refunds, reliefs and rebates and
combatting fraud

The use of immediately verifiable information
could allow taxpayers to support claims for VAT
deductions (or ITC) and customs rebates and reliefs.

Blockchain technology could also be useful in tracking if
and when VAT has been paid and in doing so, reduce VAT
fraud. Blockchain could also help to drive behavioural
change because of the risks and consequences of
non-compliance which may even lead to ‘permanent
exclusion’ from the blockchain network. In these ways, it
is likely that blockchain could help reduce the ‘tax gap’ to
some extent.

f. Smart audits

Using blockchain technology, indirect tax administrations
could carry out independent risk analysis facilitated by
artificial intelligence.

To sum up, Blockchain technology has tremendous
potential, not only to transform business, but also the tax
regimes across the world. Blockchain has the potential to
streamline and accelerate business processes, to improve
cybersecurity and to reduce or eliminate the role of trusted
intermediaries in industry after industry. The technology
has already many real-world applications and many more
applications are likely to be adopted in future.

III. 3D PRINTING AND ITS IMPACT ON
TAXATION

In 3D printing, we once again have a new technology that
could upend supply chains, business models, customer
relationships – entrepreneurship itself. 3D printing takes
mass distribution and innovation to the next level, while
realigning the very geography of work and trade.

Any significant technology that emerges impacts different
industries at different times, places and levels of disruption.
It also raises tax, legal and policy implications that can trip
up corporate leaders and global policymakers alike as they
are in full stride toward the future.

3D printing – a process of making solid objects from the
instructions in a digital file – has the potential to be every
bit as revolutionary as the PC was in the 1980s or even as
the factory production line was in the early 20th century. It
is also creating unprecedented opportunities to customise
products and reduce manufacturing costs.

But 3D printing also presents a minefield of challenges for
tax authorities around the world. This is because almost
all of the taxable value for a business selling product to
be 3D printed is contained within its intellectual property
(IP) – namely, the digital file’s ownership and authorisation
of its use, rather than in its manufacture, transport and
point of sale.

a. Disrupting long-standing business models

3D printing brings particularly complex global tax challenges
because it threatens to bypass long-standing protocols
used to set taxes on the movement of goods and supply
of services. 3D printing will absolutely disrupt the existing
model of taxation of goods and services grounded in the
physical movement of things or the provision of services.

The question ‘where value is created’ lies at the centre of
any discussion about the taxation of goods and services.
While VAT applies at the point of consumption, in some
taxing jurisdictions of the world, taxes are levied on raw
materials or intermediate stages where value is created,
such as in a factory and on shipment or warehousing.

3D printing disrupts these assumptions by transferring
manufacturing from factories to printing devices located
nearer the consumer, potentially even in their homes.

b. Intellectual Property takes centre stage

If consumers have 3D printers at home, much of the
taxable value may migrate there, where the supply chain
ends, greatly reducing the potential for supply chain taxes.

IP, as a matter of fact, sets the stage for any discussion
of 3D printing and taxation. Any 3D printing tax strategy
needs to consider that IP ownership and authorisation
will account for much more of a product’s value. With the
anticipated shrinkage in manufacturing, customer support
and sales personnel that will accompany this process, tax
authorities’ focus on IP is expected to intensify.

c. Transfer pricing and geographical challenges

Another tax challenge is the effect of 3D printing on
transfer pricing within multinational companies. Every time
a company changes its supply chain, it needs to change
how it shares costs related to taxable functions. If a local
distributor begins printing replacement parts, it could be
considered a factory, so the related transfer pricing would
change. Under current tax laws, it is unclear how or by how
much.

As we enter a new world of 3D printing, there are few
comparables in the current world of manufacturing.

d. Beware of double taxation

As production costs fall, 3D printing could also affect the
percentage of a product’s value that resides in any given
manufacturing location. In a 3D printing world, the value of
a product becomes more intangible than tangible.

So when tax authorities in different geographical locations
ask where the base of product’s profit is located and who
gets the right to tax it, they could come up with very different
answers, setting the stage for double taxation.

e. Global jurisdictional challenges

Business will also face location-sensitive tax questions
related to globally distributed manufacturing via 3D printing including permanent establishment (PE), exit taxes and
“substantial contribution” provisos.

f. 3D printed products can confound customs

Companies and governments often find themselves
contesting the value of imports, as products are shipped
across borders and through customs controls. Such crossborder
calculations could become a whole new equation,
as the increasing placement of 3D printers in local markets
changes global trade flows. While the raw materials or
components used in 3D printers may still cross borders the
old-fashioned way, more of a product’s value will be defined
by the digital blue prints that invisibly traverse the globe.

3D printing could also change the cross-border tax equation
for the value of raw materials and components. If the value
of raw material declines in relation to parts or products, it
could in turn affect customs duties.

The governments will then be looking to replace lost tax
revenue, and pressure could mount for a product’s digital
blue print to become the taxable item.

To sum up, 3D printing, yet another ‘disruptive technology’
will surely turn the business world upside down and the tax
profile of a business inside out!

IV. ROBOTS AND TAXATION

What happens if a new technology causes men to lose their
jobs in a short period of time, or what if most companies
simply no longer need many human workers? These
gloomy prospects loom large because of the advancement
and wide-scale spread of ‘robotic technology’.

Last year, Bill Gates, the co-founder of Microsoft proposed a
tax on robots to fund government expenditure on cushioning
the potential dislocation of millions of workers by the
widespread introduction of robots, and to limit inequality.

However, the arguments ‘for’ and ‘against’ the ‘Robot Tax’
continue across the world and it is not intended to dwell
into the same here.

What one needs to clearly acknowledge is the fact that
we appear to be at a technological ‘tipping point’ in the
diffusion of robotic technology across commerce, industry,
professions and households. It could spread like wildfire.
This could unleash what the economist Joseph Schumpeter
apocalyptically described as a ‘gale of creative destruction’
and set into motion a ‘process of industrial mutation that
incessantly revolutionises the economic structure from
within, incessantly destroying the old one, incessantly
creating a new one’.

The pace of automation is accelerating. In 2015, global
expenditure on robotics rose to US$ 46 billion. Sales of
industrial robots are growing by around 13% a year,
meaning that the ‘birth rate’ of robots is practically doubling
every five years.

The widespread introduction of robots could substantially
reduce the government’s revenues, while simultaneously
creating an increased demand for its support for displaced
workers until they find alternative employment. The heated
debate on ‘whether to tax robots or not’ revolves around
this central issue. However, even while the issue is being
debated, it is imperative that as a first step in taxing robots,
the legislation clearly defines ‘what a robot is?’.

There is currently no clear or agreed definition of what
constitutes a ‘robot’. The term generally conjures up mental
images of mechanical men or even humanoids like the
laconic Terminator, as portrayed by Arnold Schwarzenegger
in films. But, in practice, it would be challenging to identify
robots by sight. As David Poole has noted, ‘A robot is not a
unit equal to a human. Most are not physical robots, they’re
software robots. It’s no different, really, to a spreadsheet!’.

Given the range and sophistication of robots likely to come
into development, the definition needs to be ‘form neutral’;
i.e. it should include all autonomous robots, bots and similar
smart AI machines. Any proposed definition should be
tested from not just from legal perspectives, but also from
economic, technological and constitutional approaches.

The government, obviously, has a range of possible tax
policy options which include:

• Taxing robots

• Increasing the corporation tax rate

• Lumpsum taxes

• Taxing forms on the imputed notional income of their
robots

• Robot levy

• Imposing a ‘payroll tax’ on computers

• Disallowing relief on the acquisition of robotic
technology

• Increasing the cost of robots

• Increasing the rate of VAT payable on value added by
robots.

To conclude, the governments will be required to urgently
develop a legislative definition and ethical-legal framework
for robots. They should also take steps to introduce
corporate reporting requirements on their deployment, to
gather information that would facilitate remedial action like
the introduction of new taxes. At present, a palpable lack of
leadership in facing up to the substantial risks posed by the rapid diffusion of robotic technologies is on display across
the governments of the world.

VAT: EMERGING GLOBAL TRENDS

Even while the various ‘disruptive technologies’ looming
large on the horizon gear up to wreak havoc with the tax
regimes across the globe, some clear trends or changes
are clearly visible or emerging in the global developments
of indirect taxation. These emerging trends sweeping the
indirect tax landscape are likely to define and reshape the
traditional design and structure of VAT system.
Given that over 60 years have elapsed since first VAT,
serious deliberations are on amongst the tax experts and
policymakers on the need to “reform this revolutionary ‘tax
reform’”, and the contours of such reforms, keeping a close
watch on the emerging global trends.
The discussion in the ensuing paragraphs briefly outlines
these emerging global trends in the field of VAT. The
discussion is based on two independent papers published
by two of the Big 4 Accounting firms. [For reference, see
‘Acknowledgements’]

EMERGING GLOBAL TRENDS IN INDIRECT
TAX

Recently, the Global Indirect Tax Leader at EY published
an article titled ‘Indirect Tax: Five Global Trends’ in the
Bloomberg BNA Indirect Taxes Journal. The article outlines
five key trends sweeping the global indirect tax landscape
which are :

1. VAT and GST rates are stabilizing, but remain high

Following the banking crisis of 2008, VAT and GST rates
increased globally. The average rate of indirect taxes
peaked at 21.5% in the EU and 19% in the OECD. Of
late, these increases have slowed down and may even be
reversing.

2. Reduced VAT and GST rates and exemptions are
making a come back

Related to the post-2008 trend of increased rates, many
countries have broadened their VAT or GST base by
removing exemptions and restricting reduced rates.
However, this trend also seems to be slowing and may be
reversing.

3. The global reach of VAT and GST expands

Globally, VAT and GST have rapidly replaced previousgeneration
single-stage retail sales taxes. Very few
countries do not have a VAT or GST.

4. Digital Tax Measures proliferate

Tax administrations are grappling with the problem of how
to tax cross-border e-commerce and electronic services,
such as, digital downloads, because untaxed online sales
distort competition and reduce tax receipts. Governments
have responded to the growth of digital commerce by
adapting tax laws and using technology to collect tax and
monitor tax information.

5. Tax administrations embrace technology

As well as finding new ways to tax the digital economy, tax
administrations are applying digital technology to administer
indirect taxes more effectively, imposing requirements such
as the electronic submission of VAT or GST declarations,
mandating the use of e-invoicing, and introducing new
reporting standards and real time collection.

While the above trends are, indeed, clearly visible in the
VAT/GST systems around the world, a detailed paper titled
“VAT: A pathway to 2025” published in International Tax
Review in November 2017 by Indirect Tax Team of KPMG
China, seeks to provide a different perspective and insight
in the emerging trends which are likely to sweep indirect
taxes beyond what one can already clearly see.

Starting with a quick snapshot of the ‘here and now’,
the article claims that there has never been a time when
there has been a greater certainty about the future global
direction of indirect taxes, at least over the next few years.
This claim is sought to be buttressed by three propositions:
First, VAT and GST rates throughout the world are at
an all-time high, and there is very little pressure being
brought to bear to either increase or decrease them.
Therefore, any global shift from ‘a rates perspective’ is
unlikely to be seismic, certainly as compared to what
took place globally in the period from 2008 to 2015.
Second, from 2016 through to 2018, we will have seen
several major economies throughout the world implement
a VAT or GST either for the first time or through the
expansion or rationalisation of their existing indirect tax
systems.

Third, in a global context, the period from 2015
through to 2019 (or thereabouts) will be remembered
for the proliferation of digital tax measures – whether
they are measures to tax the cross-border provision
of services that can occur digitally and without the
creation of a permanent establishment, or through a
new measure to tax the business-to-consumer (B2C)
importation of goods through e-commerce platforms.

However, the article asserts that while the OECD’s
recommendations were clearly designed with a view to
implementation in the EU, when applied to countries in
Asia Pacific region, they would be problematic, given
certain fundamental and structural weaknesses of the tax
systems of the countries of this region.

The article then poses a question – ‘Are there bigger
changes afoot with indirect taxes as we move into the
second quarter of the 21st century?’ With a clear intent
to prompt discussion and debate and add some colour
and controversy, while a pathway to 2025 is lighted, the
article posits three key indirect tax trends which are briefly
discussed below:

1. VAT and GST systems will more closely resemble
retail sales taxes

After adverting to the fundamental principles on which VAT
systems are intended to operate, the article states that
under this system, it is an implicit understanding that in a
typical supply chain when there is a flow of goods from say:
a. the manufacturer to the wholesaler;
b. the wholesaler to the retailer; and
c. then from the retailer to the end-consumer,

the only transaction that truly ‘matters’ from a VAT or
GST perspective in the sense that it raises the revenue to
which the tax is directed is transaction (c). The process of
collecting the tax and allowing input credits in transactions
(a) and (b) is merely an administrative mechanism to
reinforce the integrity of tax administration throughout the
wholesale supply chain.

However, from a tax adviser’s perspective, many of the
challenges which one confronts each day are focused on
the problems when the system breaks down in relation
to transactions (a) and (b) – that is, in ensuring the fiscal
neutrality of those transactions, leading to inefficiency,
non-competitiveness and tax cascading through the
supply chain.

The governments may therefore move from VAT system
into a tax system that more closely resembles a single
stage retail sales tax, mainly for three reasons:

First, technology will enable the settlement of tax obligations
between the supplier and the recipient instantaneously,
without the need for any real payment, crediting or refund.

Second, with a view to overcome the problems caused
by fraud – carousel or ‘missing trader’ fraud being the
most prominent -, the governments have resorted to the
reverse charge mechanism in place of VAT and more
recently, a number of EU countries have implemented,
or propose to implement ‘split payment’ methods for VAT
collection, whereby the recipient diverts the VAT included
in the purchase price directly to a bank account held for the
benefit of the tax authorities.

The fraud or evasion is often perpetrated in B2B transactions,
not B2C transactions. So, if there is a recognition already
that by taxing or crediting B2B transactions, the system is
prone to fraud or evasion, then, why do it?

Third, the concept of the supplier accounting for output tax
and recipient claiming input tax in B2B transactions will be
rendered superfluous. What one is left with is a retail sales
tax, that is, a single stage tax that applies to transactions
with end-consumers only.

The article, however, hastens to add that it is not necessarily
suggested that VAT or GST systems will be replaced as a
matter of form with retail sales taxes – rather, it is suggested
that VAT or GST systems will, as a matter of substance,
operate similarly to retail sales taxes.

2. Indirect Taxes to be managed almost exclusively
through technology

While growing automation of indirect tax determination
and administration process, both in government and
business, is clearly on display in last few years, the
technology developments in the broader economy itself will
mean that indirect taxes will be managed exclusively
through technology.

Indirect taxes are, by their very nature transaction-based
taxes. As more and more transactions occur in the digital
world, the logical outcome is that the indirect taxes
whose liabilities flow from these transactions will also be
managed and administered digitally. [See the discussion
on the ‘impact of technology on taxation’ in the preceding
paragraphs].

It is predicted that the role of the indirect tax adviser
will, therefore, be akin to the conductor of an orchestra
– not playing the instruments, but directing the
musicians and ensuring they keep time. The role of the
indirect tax adviser will be to maintain a watch over
the technology, testing the controls, and addressing
problems when they are detected.

The shift to automation will not simply be because the
technology will improve to help manage tax compliance,
but the tax itself will be adapted to fit the technology. The automation will be a function of two forces coming together
– technological advances to help manage tax compliance,
and developments in tax legislation to help the technology
apply in a more automated way.

3. The tax base for indirect taxes will be expanded in
ways not previously contemplated

It is stated that the principles which have, hitherto, defined
or shaped the indirect tax structure over the years may
not hold in 2025. The following developments which
have recently been enacted in China have been cited by
the article as leading a pathway for the rest of the world
to follow:

a. The pre-condition of being a ‘business’ or
‘entrepreneur’ for VAT/GST registration will no
longer apply

Virtually, all VAT systems (including GST system of India)
around the world have a pre-condition for registration and
VAT obligations that supplier is engaged in a business or
commercial or economic activity or is an entrepreneur.
China’s VAT system, by contrast, has no such precondition.
Instead, China’s VAT system imposes registration
and payment obligations on ‘units’ and then imposes
different obligations depending upon turnover thresholds.
The question that arises is whether a profit making
pursuit, coupled with a de minimis exclusion (where the
compliance costs would exceed the tax collected) is all
that is really needed as a precondition for imposing VAT
or GST liabilities. The private consumer/business divide
would then become redundant, in favour of a system that
more closely resembles what one already sees in China.

b. VAT/GST systems will even tax consumer-toconsumer
(C2C) transactions

Digital market places now facilitate trade between private
individuals. These developments in commerce are
commonly labelled as ‘sharing economy’, ‘crowd funding’,
‘crowd sourcing’, and ‘ride sharing’.

The central question is, why should the profit or gains
derived from these activities fall outside the VAT or GST
net? The bigger issue is that VAT or GST systems need to
be adapted to tax the value added, irrespective of whether
it is by a traditional business or a consumer sitting online.

In China, there is no real distinction drawn between
business and non-business activities.

c. Customs duty will need to find a new tax base

Customs duties are inherently narrow in their tax base in
that they typically apply only to goods, nor services. The
question is whether customs duty is at risk of a terminal
decline in its tax base unless changes are made. Is it
possible that customs duties will be expanded to services,
and if so, how would they be collected and administered?

d. VAT/GST will apply to financial services

The traditional reasons cited for not taxing financial services
under VAT or GST was the inability to apply the tax on a
transaction-by-transaction basis. However, that rationale
was conceived in an era when margins were the dominant
model rather than fee-based services.

Early steps to dismantle this were taken in places like
New Zealand (with GST imposed on insurance, through
a cash-based tax), in South Africa (with VAT on fee-based
services), in Australia (with the introduction of the reduced
ITC regime to remove the bias against outsourcing and
to achieve a broadly similar tax outcome to exemption),
in New Zealand again (with B2B zero rating) and more
recently, in China (with a broad-based VAT on financial
services with few exemptions).

The experiments in applying VAT to financial services are
shown to be largely working.

e. The tax base for VAT/GST will be expanded in other
areas too

Even the traditionally exempted areas such as healthcare
and education could potentially be taxed.

The challenge in this area is in balancing the desire for
good policy (which may support the removal of exemptions)
with the political realities of doing so (where taxing the
necessities of life may be seen as politically unpalatable in
some countries).

f. Taxes like a VAT/GST that are founded in
transactions or flows will continue to grow in
importance

The noticeable trend of a decline in the average global
corporate tax rate and increase in the average VAT/GST
rate may continue. In an era of unprecedented dislocation
and disruption to historical business models, what will
emerge is taxes that are imposed on ‘transactions’, or
on ‘cash flows’, and directed to the place where
‘consumption’ occurs.

While not predicting the demise of corporate taxes, it is
predicted that the corporate taxes will transmogrify until they more closely resemble the features of a VAT or GST.

FINAL THOUGHTS

After more than 60 years, VAT may now be at a turning
point in its life. At this juncture, the rapidly changing
climate poses serious challenges for the policymakers,
lawmakers, economists and the tax experts, including
the GST Council in India. The challenge lies in predicting
the intersection of two key developments – the first being
the profound changes we are witnessing to the economy
itself through technological developments that have been
labelled as the ‘fourth industrial revolution’; and the
second being an increasing reliance on indirect taxes
as they mature into a dominant form of taxation in the
21st century.

For Indian GST system, the frequent changes so far made
post-introduction of GST indicate that the government is
learning by its mistakes. In the words of Deng Xiaoping,
it is ‘crossing the river by feeling the stones’. But let
us not lose sight of the above formidable challenges that
lie over the taxation horizon even while we shape (or reshape)
our own GST design and structure! The GST
Council, led by the Union Finance Minister, seems to be
working only on the immediate challenges confronting the
system. However, the world is changing in the way and at
the speed which we cannot comprehend. What, therefore,
is required for the Council is to establish, even while fixing
the short-term challenges, a mechanism that starts working
on identifying the long-term challenges with the aim of
enabling the country’s tax systems to keep pace with the
seismic-level changes sweeping the taxation landscape.

“We must develop a comprehensive and globally
shared view of how technology is affecting our lives
and reshaping our economic, social, cultural, and
human environments. There has never been a time of
greater promise, or greater peril.”

Klaus Schwab, Founder and Executive Chairman,
World Economic Forum

ACKNOWLEDGEMENTS:

1. ASSOCHAM India and Deloitte (2015) – “Goods and
Services Tax (GST) in India – Taking stock and setting
expectations”

2. Banerjee Sudipto and Sonia Prasad – “Small
Businesses in the GST Regime”

3. Black Stefan – “Robots, technological change and
taxation” – Published on Tax Journal; September 14, 2017

4. Bulk Gijsbert, EY – “Indirect Tax: Five Global Trends”
– Published on International Tax Blog; April 13, 2017

5. Bulk Gijsbert and Barr Ros, EY (2017) – “How
blockchain could transform the world of indirect tax”

6. Charlet Alain and Owens Jaffrey – “An International
Perspective on VAT” – Tax Notes International, September
20, 2010; Vol.59, No.12

7. Charlet Alain and Buydens Stephane- “The OECD
International VAT/GST Guidelines: past and future
developments” – World Journal of VAT/GST Law; (2012)
Vol.1 Issue 2

8. EY (2017) – “In a world of 3D printing, how will you be
taxed?”

9. Flynn Channing, EY (2015) – “3D printing taxation –
Issues and impacts”

10. Hellerstein Walter, Professor Emeritus, University of
Georgia School of Law (October 2015) – “A Hitchhiker’s
Guide to the OECD’s International VAT/GST Guidelines”

11. Nicholson Kevin and Lynn Laetitia, PWC, UK – “How
blockchain technology could improve the tax system”

12. OECD – “Consumption Tax Trends (2016); VAT/GST
and Excise Rates, Trends and Administration Issues”

13. OECD/G20 Base Erosion and Profit Shifting Project –
“Tax Challenges Arising From Digitilisation – Interim Report
2018 (Inclusive Framework on BEPS)”

14. Owens Jeffrey, Piet Battiau, Alain Charlet – “VAT’s
next half century: Towards a single-rate system?”

15. O’Sullivan David, Consumption Taxes Unit, OECD
– “Global Developments in VAT/GST – Overview and
Outlook”

16. Poddar Satya and Ahmad Ehtisham – “GST Reforms
and Intergovernmental Considerations in India”.

17. Rao Govinda M. and Rao Kavita R., NIPFP (2005)
–“Trends and Issues in Tax Policy and Reform in India”

18. Rao Govinda M. – “GST Bill; First step, but with birth
defects” – Published in Financial Express, May 05, 2015

19. Shailendra Kumar, TIOL. “GST Roll-out with hiccups;
white paper on Future DESIGN warranted” – TIOL – COB
(WEB) – 561; July 06, 2017

20. Shailendra Kumar, TIOL- “Revamped GST calls
for change in Basic Design!” – TIOL-COB(WEB)- 583;
December 07, 2017

21. Shailendra Kumar, TIOL- “Rebooting of GST – A TIOL
word of caution for the Council” – TIOL-COB(WEB) -589;
January 18, 2018

22. Shailendra Kumar, TIOL – “Dear FM, Let’s not rush
into, India can ill-afford semi-cooked GST laws” – TIOLCOB(
WEB) -513; August 11, 2016

23. Steveni John and Smith Paul, PWC – “Blockchain –
will it revolutionise tax?” – July 01, 2016

24. Walker Jon – “Robot tax – A Summary of Arguments
“For” and “Against” – Last updated on October 14, 2017

25. Wolfers Lachlan, Shen Shirley, Wang John and
Jiang Aileen, KPMG China – “VAT: A pathway to 2025”
– Published on International Tax Review; November
28, 2017

VIEW AND COUNTERVIEW
GST – SHOULD TECHNOLOGY OVERRIDE THE LAW?

GST runs on technology platform.
Often technology and legal provisions are out of sync. Technology (GSTN)
prohibits actions that are specifically permitted by law. Often technology
seems to impede the letter and spirit of law and the tax payer is stranded.
Problems are many: Inability to claim credits if Place of Supply is different
than registered address, inability to upload an invoice where the customer is
wrongly tagged as SEZ Unit/Developer, issues of an erratic portal, mismatches
in Shipping Bill Numbers resulting in blockage of refunds to exporters, Forced
Utilization and Cross Utilization of Credit Balances before cash payment
settlement, Requirement to identify supplies to composition persons separately
in GSTR-3B…This third VIEW and COUNTERVIEW aims to inform the reader of multi
dimensional totality of an issue, and enable him to see a matter from a broad
horizon.

 

VIEW: Technology is
playing an Important Role in GST Implementation

 

Govind G. Goyal   

Chartered Accountant

 

In today’s
world, technology is playing plausible role in every sphere of our life. With
speedy internet access, technology has made it possible to accomplish many
things almost instantly. Technological developments in last few years have
changed the way we live our lives. Today, whether it is sharing of news, views,
pictures, messages, knowledge based discussion, buying, selling, travel,
entertainment, research, development, banking, investment, management, and administration
– most of our acts and deeds are guided or assisted by technology.

 

People, world
over, are using technology and so do the Governments. As far as GST is
concerned, such a mega reform in the field of indirect taxation would not have
been possible to implement without the use of well researched network of
Information Technology (IT).

 

Introduction
of GST, in India, is certainly a paradigm shift in the field of indirect taxes
which will necessarily change the manner in which the taxes were being administered.
Earlier the Centre as well as the States and Union Territories were having
their own laws and procedures for taxing goods and services whereby there were
multiple taxes, multiple compliances and so the multiple administrations
thereof. But, in GST, all those States, Union Territories as well as the Centre
have come together. Most of the taxes, which were levied separately, were
consolidated under the vision of ‘One Nation One Tax’. Although, legally
speaking there may be separate legislation for Centre and States, the
technological network has made it possible like ‘one registration’, ‘one
challan’, ‘one return’, etc.

 

India’s dual
GST system also ensures each stake holder (i.e. Centre, States and UTs)
receives their share of revenue in time. At the same time GST, being
destination based tax, it ensures that the tax amount travels simultaneously
with the movement of goods and/or services, as the case may be. The registered
tax payer (recipient of goods/services) has to be ensured every eligible input
tax credit of Central GST (CGST), State GST (SGST) or Integrated GST (IGST).
And there is Cess also on some of the commodities, which has to be accounted
separately. Migration of tax payers (under the earlier laws) to GST was a
tedious job. Nevertheless, all those tax payers (more than 64 lakh in number)
spread over various States and UTs could smoothly migrate to the new system,
thanks to the robust Information technology backbone. In addition, more than 44
lakh new tax payers (spread all over India) have opted for new registration
(July 17 to April 18). Each of these tax payers has been assigned one unique
GSTIN, which is valid for all the taxes i.e. CGST, SGST/UGST and IGST. There is
no separate number needed for Centre and State GST. Presently more than 10
million tax payers are liable to submit data of outward supplies, inward
supplies, tax payable and ITC, etc., through various returns and
formats. There are a large number of commodities and services, out of which
some are nil rated, while others are liable to tax at several different rates.
Some of the transactions are zero rated, while a few are liable for a
concessional rate of taxation. There are about 20 lakh taxpayers, who have
opted for ‘composition schemes’. Such tax payers are discharging their tax
liability differently than other registered tax payers. While dealing with
about 250 to 300 crore B2B invoices per month, one has to keep track of all
such kind of transactions so as to see that correct amount of tax is being paid
by the tax payer/s and instant credit thereof is granted as soon as the payment
is cleared through respective bank.       

 

The law
provides that GSTN (GST Network, which is presently managing IT network)
maintains three types of ledgers (or registers), for each tax payer, (1)
Liability Register – wherein tax payable on supplies made by the tax payer is
recorded (as per periodic data related to supplies uploaded by the tax payer)
(2) Credit Ledger – In which credit of ITC and utilisation thereof is recorded
and (3) Cash Register – wherein all payments made by the tax payer (through
bank challan) and utilisation thereof is recorded. All these ledgers/registers
are instantly updated and available for viewing by the tax payer. To avoid most
of the common mistakes, in preparation of challan for payment of taxes, a
system has been developed whereby a payment challan has to be created through
IT network of GST portal. The system has provided great relief to the tax
payers, bankers as well as the Government Departments.

 

GST IT Strategy:

The GSTN has
been assigned the role of facing taxpayers and these among other things include
filing of registration application, filing of return, creation of challan for
tax payment, settlement of IGST payment (like a clearing house), generation of
business intelligence and analytics. All statutory functions to be performed by
tax officials under GST like approval of registration, assessment, audit,
appeal, enforcement etc. remains with the respective tax departments.

 

Thus, GSTN has
the main responsibility of providing a robust IT infrastructure and related
services to the Central and State Governments, taxpayers and other
stakeholders, by integrating the common GST portal and connecting it to the
existing tax administration IT systems. The common GST Portal developed by GSTN
is functioning as the front-end of the overall GST IT eco-system. The back end
operations are being looked after by the IT systems of CBEC (Central Board of
Excise and Customs) and State Tax Departments.

 

Under GST, the
registration of taxpayers is common under Central and State GST and hence, one
place of filing application for the same i.e. the Common GST portal. The
application so received is being checked for its completeness by the GST
portal, which will also carry out validation of data like PAN from CBDT,
CIN/DIN from MCA and Aadhaar of promoters, if provided, from UIDAI. After
completion of validation, the registration application thereafter is shared
with respective central and state tax authorities. Query of tax authorities, if
any, and their final decision is communicated to GST portal which in turn
communicates the same to the taxpayer.

 

The Common GST
Portal, as explained in brief above, is the single interface for all taxpayers
from any part of the country. Only in case where a taxpayer is picked up for
scrutiny or audit, and such cases are expected to be small in number, he will
interface with the respective tax authority issuing the notice under the Act.
For all other cases, which is expected to be around 95%, the Common GST Portal
will be the only taxpayer interface.

 

As far as
filing of returns is concerned, under GST there is one common return for CGST,
SGST and IGST, eliminating the need to file separate tax returns with Central
and state GST authorities. Checking of claim of Input Tax Credit (ITC) is one
of the fundamental pillars of GST, for which data of Business to Business (B2B)
invoices have to be uploaded and matched. The Common GST Portal created and
managed by GSTN will do this matching on the basis of invoice level data filed
as part of return by all taxpayers. Similar exercise will be done for
inter-state supplies where goods or services will move from the state of origin
to the state of consumption and so will the taxes. The claim of IGST and its
utilisation will be settled based on returns filed at the Common GST portal.

 

Although,
there may have been initial hiccups due to various reasons, but learning from
past, adopting appropriate strategies, and constant improvement thereof is the
key to success. The fact remains that the IT network of GSTN, CBEC and that of
respective State Governments, together, are rendering plausible services to all
stake holders in the implementation of GST in our country.   

 

(Thanks to Shri Gajanan Khanande,
Deputy Commissioner of Goods and Services Tax, Maharashtra, for necessary
inputs.)

 

counterview:
Technology cannot override the provisions of Law

 

Sushil Solanki, IRS and
Drashti Sejpal

Chartered Accountants

 

One of the
important features of GST structure, adopted by the policy makers, is the IT
network which is the backbone for almost all the processes like registration,
return filing, tax payment, etc. On the face of it, it promises minimal
human intervention, giving the hope of a robust transparent system which should
have been welcomed by all the stakeholders.

After passing
of more than 10 months, the said hope has belied the expectations and there
have been a lot of hue and cry across the country about helplessness of the
taxpayers in handling the situation arising out of glitches or non-functioning
of the IT network.

 

Under the
authority of section 146 of the CGST Act, the Central Government has notified
vide Notification no. 4/2017- Central Tax, www.gst.gov.in, as the website
managed by Goods and Service Tax Network (GSTN).

 

While
operating the GSTN, the taxpayers have faced many situations whereunder, they
could not upload the information in the returns or even file the returns or
applications. Some of the illustrations are the following:

 

1) In many
cases TRAN-1 return was not uploaded even after it was ‘submitted’. It has
resulted in either not carrying forward the ITC balance available with the
taxpayer to the GST regime or mismatch between GSTR-3B and electronic credit
ledger. It also led to inability to file returns for subsequent months.
Exporters could not get refunds because of non-filing of returns.

 

2) In the case
of sale of imported bonded goods, the CBIC has clarified vide Circular No.
46/2017- Customs treating the said transaction liable to payment of IGST
irrespective of location of buyer (place of supply). Whenever sale was made to
customer within the same State, the said transactions were not accepted by GSTN
for payment of IGST as the system was classifying those transactions as
intra-state transaction liable to payment of CGST & SGST. The system was
behaving against the provisions of law. In future, GST Officer may allege
payment of wrong taxes and even wrong availment of credit by the buyers.

 

3) On
introduction of GST, all the existing taxpayers were migrated to GST. A large
number of them had stopped the business or decided to close the business, but
the GST portal did not have facility for cancellation of registration till
November 2017. This has led to imposition of penalties for non-filing of
returns. In one of the States, the GST officers have   issued  
the  best   judgement  
assessment  orders u/s. 62
treating the cases of non-filers and huge demands have been raised against them
because the system was not accepting their cancellation application and there
is no provision in the law to file manual applications.

 

4) Section 170
of the CGST Act requires rounding off the tax payable amount. On the other
hand, online GSTR-1 facility which calculates the tax payable amount
automatically does not round off the tax payment. It led to mismatch between
GSTR-3B and GSTR-1 return resulting in non-payment of refund to exporters.

 

There are many
such instances where GSTN portal was not supporting what the GST law has
provided for. The question, therefore, is whether GSTN portal can override the
provisions of law, thus taxpayers be made liable to suffer financial hardship
and penal consequences. The answer is definitely a big NO. Let us analyse this
with legal reasoning.

 

Section 146
and the Notification issued there under provides that, an electronic portal
would be notified by the Government for “facilitating” the processes like
registration, payment of tax, return filing and for carrying out functions and
purposes under the GST law. The existence of GSTN is only for facilitating the
functions and purposes of the GST law. Therefore, GSTN or the technology, which
is subservient to the law, can never override the provisions of law.

 

Even though,
to our knowledge, there is no judicial precedent available on the issue as to
whether technology would prevail over law or vice versa, but the courts
have consistently held that in the absence of any machinery provision to
implement a provision of law, the substantive law itself fails because of being
incapable of implementation.

 

The Supreme
Court has in the case of B. C. Srinavasa Shetty [1981 AIR 972], while
examining whether there arises capital gains liability on goodwill of a new
business, held that there cannot be a levy of tax without existence of a
machinery computation provision. A similar view has also been taken by the High
Court of Orissa in the case of Larsen and Toubro Limited [2008 12 VST 31
(Orissa)]
, which was later affirmed by the Supreme Court, wherein while
examining whether without a specific provision allowing reduction of the value
of land from the value of service, levy of tax on sale of under construction
flats by a builder is valid, the Court has held that charging provisions as
well as the machinery for its computation has to be provided in the Statute or
the rules framed under the Statute. The Act is unworkable in the absence of
necessary rules.

 

The Supreme
Court in the case of Govind Saran Ganga Saran (1985) 155 ITR 144, while
examining the validity of CST levy on cotton yarn where the law omitted to
prescribe the single point at which the levy could be imposed, observed that:

 

“The
components which enter into the concept of a tax are well known. The first
is the character of the imposition known by its nature which prescribes the
taxable event attracting the levy, the second is a clear indication of
the person on whom the levy is imposed and who is obliged to pay the tax, the third
is the rate at which the tax is imposed, and the fourth is the measure
or value to which the rate will be applied for computing the tax liability. If
those components are not clearly and definitely ascertainable, it is difficult
to say that the levy exists in point of law. Any uncertainty or vagueness in
the legislative scheme defining any of those components of the levy will be
fatal to its validity.”(emphasis supplied)

 

If we adopt
the reasoning given by the courts, it is crystal clear that if the law provides
for certain responsibility to be fulfilled by a taxpayer through a mechanism to
be put in place by Government or any other authority, the failure to provide
such mechanism will absolve the taxpayer from his responsibility and the
consequence thereof. The reason for such views taken by the courts is that in
the absence of any mechanism or facility which was to be provided by law, the
taxpayer cannot be made to suffer. In the case of GST, the non-availability of
certain facilities in the GST portal or inability of GSTN to permit entering of
certain details or filing of return cannot make the taxpayer to suffer its
consequences. The judicial pronouncements discussed above would definitely
support this view.

 

Because of
various glitches in the GSTN portal, a number of taxpayers have approached High
Courts. The courts, including Allahabad High Court (Continental Pvt. Ltd. and
others) and Bombay High Court (Abicore and Binjel Techno Weld Pvt. Ltd. and
others), have provided relief by allowing them to file manual TRAN-1 return or
to extend the deadline for filing of return/s.

The fact that
technology cannot override the provisions of law has also been admitted by the
Government vide CBIC (Central Board of Indirect Taxes and Customs) Circular
No. 39/13/2018-GST
, wherein an IT-Grievance Redressal Mechanism has been
put in place to redress the grievances raised by taxpayers with regards to the
failure to filing a return or form within the time limit prescribed in the law
due to IT related glitches. Para 5.2 of the said Circular clearly states that
the application for redressal has to be made for those glitches due to which
the due process as envisaged in the law could not be completed on the Common
Portal. The circular has also empowered the said committee to provide relief
for past cases.

 

It is,
therefore, quite clear that GSTN is merely an infrastructural tool which would
assist and facilitate the compliances to be done by a taxpayer and it cannot
override the provisions of the law.

 

I do realise
that there are possibilities of IT related glitches when a tax reform of this
magnitude for a vast country like India is introduced. It has happened in the
past while implementation of VAT in many States who also adopted technology
based systems.

 

But, what is
disheartening is that Government has taken considerable period of time to come
out with redressal mechanism. Moreover, the mechanism is very restrictive and
many of genuine grievances presented before the committee may be rejected on
the grounds that a problem relates to individual taxpayer and not large section
of taxpayer or it does not pertain to non-filing of return.

 

The Government
should have allowed all types of cases to be presented before the said
committee with an assurance that a time-bound solution would be provided. Alternatively,
taxpayer may be allowed to file manual returns or documents in order to help
him in claiming refund or allowing the credit to the buyer.

 

In fact,
making an omnibus provision in the GST law that no penal action including
interest liability would arise against any taxpayer or his customer due to
non-filing or wrong filing of returns etc. on account of IT glitches,
Government should keep in mind that handholding of taxpayers at the initial
stage of GST reform is one of their prime responsibilities.
 

GST@1: GOODNESS OF A SIMPLE TAX

If a tax was good and simple it would not be a tax. From the
Indian experience of past 70 years, calling a tax good and simple is mythical
and superfluous. If I had to paint a common taxpayer of pre GST regime in a
vivid visual description, I would choose to make him look like a duck stuck in
an oil spill. The first-year journey of GST left many people feeling like that
duck too. The difference between the two eras is that the oil spill is receding
fast and the promise of fresh waters is more conceivable. That I think is the
goodness of GST as I think of it on its first anniversary. 

 

Much water has flowed since the midnight of 30th
June 2017 – from rate changes, to law changes, to GSTN changes, to procedural
changes, to return changes, to timeline changes, to body clock changes (of GST
service providers). Amongst such changes, there is one change that cannot be
ignored: the change of opinion of taxpayers about GST. BCAS carried out a dip
stick survey of taxpayers. While many changes are necessary and expected, most
taxpayers remained positive, optimistic and pragmatic about GST.

 

India is known for its ‘unity in diversity’ and we have
evolved it in a way which grants something for everyone. The interpretation of
this axiom is such that everyone’s demand must be met! Call it states and
centre, rich and poor, forward and backward, farmer and trader and every other
binary. Law making also succumbed to that format. Nevertheless, we paid a price
of multiplicity, clutter, inefficiency, red tape, ambiguity, and all the
interplay between them. GST changed that in a big way. I would like to call it
Uniformity in Diversity in spite of all its shortcomings – a single umbrella to
fit everyone. 

 

Yesterday, I was returning through the Vashi bridge. On my
left, I saw the lonely and desolate board of Octroi check naka (remember the
‘good’ old days?). The entire complex was sealed with tall metal boards. Lines
of trucks waiting at ‘naka’ after ‘naka’ to be ‘checked’ flashed in my mind. As
I was driving – beyond the octroi post and through that thought, I realised
that in effect, the trucks were not halting, but our progress was. What seemed
like checking was actually choking our growth.

 

GSTN is painful when it so frequently does not work. The same
GSTN also remains the backbone and blood stream of GST law and especially its
future. GSTN brought together humongous spread of geographies and disjointed
tax regimes. With it, the promise of what is possible in the times to come.

 

My meeting in Vashi was with a French subsidiary. The group
CFO showed me an App that had Optical Character Recognition (OCR). France had
legally barred paper invoices/documents for companies last year. For expenses,
all he had to do was take a photo of the tax invoice through that app and up it
went into the company ERP. The app’s OCR read the vendor name, VAT number,
amount and even the description and it did all the rest from taking credit to
preserving the image for the company. Imagine, a paperless VAT in a country
that sold VAT stationery not too long ago. 

 

A week earlier, I met a trader in Pune. He told me a story
from those ‘good old days’ that were not too long ago. Their trade association,
he said once requested the state finance minister for a VAT / Sales Tax rate
reduction in return for some ‘greasing’.

 

Reading both these examples
together, the goodness of GST is simple – it holds colossal potential for
future – of making a tax that is both good and simple.

 

Raman Jokhakar

Editor

FORTHCOMING
EVENTS

COMMITTEE

EVENT NAME

DATE

VENUE

NATURE OF EVENT

June, 2018

Human Development and
Technology Initiatives Committee

The 11th Jal
Erach Dastur CA Annual Day
TARANG 2K18

Saturday, 9th June 2018

K C College

Student Annual Day

Human Development and Technology Initiatives Committee

Soulful Trip to Muni Seva
Ashram,
Baroda – Noble Social Cause

Thursday, 14th
& 15th June 2018

Dakor – Goraj, Muni Seva
Ashram, Baroda

Others Programme

Human Development and
Technology Initiatives Committee

POWER-UP SUMMIT

REIMAGINING PROFESSIONAL PRACTICE

Saturday, June 16th,
2018

Orchid Hotel, Mumbai

Others Programme

Indirect Taxation
Committee

12th
Residential Study Course on GST

Thursday to Sunday 21st
June to 24th June 2018

Marriott Hotel, Kochi

RSC/House Full

Managing Committee

Lecture Meeting on “Transforming Mumbai –
Challenges and Opportunities” by Shri. Ajoy Mehta

(Hon. Municipal Commissioner of Mumbai)

Tuesday, 26th
June 2018

Walchand Hirachand Hall
IMC 4th Floor Churchgate,
Mumbai-400020

Lecture Meeting

July, 2018

Managing Committee

Lecture Meeting on

“Taxation of Transactions
in Securities”,
by CA. Pinakin Desai

Wednesday,
11th July 2018

Walchand Hirachand Hall IMC 4th Floor Churchgate,
Mumbai
-400020

Lecture Meeting

August, 2018

International Taxation Committee

International Tax &
Finance

Conference, 2018

Wednesday, 15th
August 2018 to Saturday, 18th August 2018

Narayani Heights,
Ahmedabad

ITF

STUDY CIRCLE

June, 2018

Human Development and
Technology Initiatives Committee

“Saptapadi of Family
Happiness”

Monday, 25th
June, 2018

BCAS Conference Hall, 7,
Jolly Bhavan No. 2, New Marine Lines, Mumbai-400020.

HRD Study Circle

 

BCAS – E-Learning Platform
(https://bcasonline.courseplay.co/)

Course Name E-Learning Platform

Name of the BCAS Committee

Date, Time and Venue

Course Fees (INR)**

Members

Non – Members

Three Days Workshop On
Advanced
Transfer Pricing

International Taxation
Committee

As per your convenience

5550/-

6350/-

Four Day Orientation
Course on Foreign          Exchange
Management Act (FEMA)

International Taxation
Committee

As per your convenience

7080/-

8260/-

Workshop on Provisions
& Issues – Export/ Import/ Deemed Export/ SEZ Supplies

Indirect Taxation
Committee

As per your convenience

1180/-

1475/-

7th
Residential Study Course On Ind As

Accounting & Auditing
Committee

As per your convenience

2360/-

2360/-

Full Day Seminar On
Estate Planning, Wills and Family Settlements

Corporate & Allied
Laws Committee

As per your convenience

1180/-

1180/-

Workshop on “Foreign Tax
Credit”

International Taxation
Committee

As per your convenience

1180/-

1475/-

BCAS Initiative –
Educational Series on GST

Indirect Taxation
Committee

As per your convenience

Free

Free

GST Training program for
Trade, Industry
and Profession

Indirect Taxation
Committee

As per your convenience

Free

Free

**Course Fee is inclusive of 18% GST.

 For more details, please contact Javed Siddique at 022
– 61377607 or email to events@bcasonline.org

Do Facebook Friendships Make Parties Co-Conspirators? – SEBI Passes Yet Another Order

SEBI has
passed yet another order
* holding
that being ‘friends’ on Facebook is ground enough to allege that the two
parties are connected and thus guilty for insider trading violations. Based on
this, SEBI has passed an interim order requiring such ‘connected person’ to
deposit the allegedly ill-gotten gains and also initiated proceedings for
debarment. About two years back, by an order dated 4th February
2016, SEBI had made a similar ruling that was discussed in this column.
However, in that case, the social media connection was not the sole connection.
Such orders raise several concerns since people are increasingly connected in
social media to friends, relatives and even strangers.

 

Summary
of some relevant provisions of law relating to insider trading

Insider
trading is believed to be rampant not just in India but also in other
countries. Proving that there was insider trading the guilty is a difficult
task. In India, it is also perceived that lack of adequate powers with SEBI to
determine “connections” between parties makes Regulators’ job a little more
difficult. Primarily, SEBI has to show that a person is connected with the
company or persons close to it. Further, it has to also show that unpublished
price sensitive information existed that was used to deal in shares and make
profit. In many cases, close insiders like executives, directors, etc. get
access to valuable price sensitive information and fall to temptation of easy
profits. Such cases are easier to investigate, compile sufficient and direct
evidence and punish the wrong doer.

 

However,
capital markets also attract sophisticated operators who use advanced tools and
techniques to avoid detection. Information can be increasingly shared in a
manner difficult to even detect, much less prove, more so with fast developing
technology, encryption, etc.

 

The SEBI
(Prohibition of Insider Trading) Regulations, 2015 does use several deeming
provisions that help establish a basic case. Some of these presumptions can be
rebutted by showing facts to the contrary.

 

To determine
whether there was insider trading in such cases, certain facts/circumstances
would have to be established. Firstly, it would have to be shown that there was
price sensitive information relating to the company that was not yet made available
to the public. Then, it would have to be shown that the suspected person is
‘connected’ to the company or certain insiders. Several categories of persons
are deemed to be connected. Alternatively, if the suspect is an unconnected
person, then he should be shown to have received such information from the
company or a connected person or otherwise. Then it would have to be shown that
such person dealt in the securities of the company while such information was
not yet made public.

 

Proving
“connection”

As discussed
above, there are some categories of persons that are deemed to be connected.
Directors, employees, auditors, etc. are, for example, deemed to be
connected if their position enables them access to unpublished price sensitive
information (“UPSI”).

 

Then there
are persons who are in “frequent communication with its officers” which enables
them access to UPSI. And so on.

 

Proving
contractual connection of directors, auditors, etc. would be relatively
easy. Proving that their position enables them access to UPSI requires
compiling of relevant information such as their nature of duties, their
position in the company, the nature of information that was UPSI, etc.
This information can be compiled with the help of the company.

 

Difficulty
arises in proving connection of persons who are not so closely associated with
the company. It would have to be proved, for example, that he was in frequent
communication with the officers, etc. of the company. This may be
possible if SEBI is able to establish, for example, a pattern of communication
of such person with the officers, etc. Alternatively, it would have to
be shown that the person was in possession of such UPSI, which is often more
difficult, more considering that parties may use sophisticated
techniques/technology to communicate.

 

What
happened in the present case?

Before going
into the details of this case, it is emphasised that this is an interim order.
There are no final findings and the statements made therein are allegations,
though after a certain level of investigation and also inquiring and obtaining
information from the parties concerned.

 

SEBI found
that the Managing Director (“MD”) of the listed company in question had
acquired a significant quantity of shares of the company. These purchases were
made when certain price sensitive information existed but was not published. It
appears that SEBI also found that certain other persons had also dealt in the
shares of the company during this time and made significant profits.

 

The price
sensitive information concerned certain large contracts received by the
company. SEBI found that, during this period, the company had been awarded
large contracts of hiring of oil drilling rigs through a process of tender. The
process of tendering broadly involved certain stages. The first stage was
invitation of the bids and due submission of bids by the company. The second
stage was, in one case, revision of the bid to satisfy certain requirements. Thereafter,
the bids were opened and the top bidder (termed as L1) was declared. A formal
and final award of the order followed thereafter. SEBI held that declaration as
top bidder made it more or less certain that the contract would be awarded to
such person. Hence, SEBI decided that this was the time when price sensitive
information came into being. Till such information was formally published by
the company, the information remained UPSI and hence, insiders were barred from
dealing in the shares of the company.

 

It may be
added here that the contracts so awarded constituted a very significant portion
of the turnover of the company and hence, SEBI held that this information was
price sensitive. It also demonstrated that the price of the equity shares of
the company on stock exchanges increased when the information was made public.

 

The MD and
certain other persons were found to have purchased/dealt in the shares of the
company during this period.

 

Showing
that the MD was connected and dealt in the shares of the Company

SEBI held
that the MD was closely involved in the bidding process and indeed present at
the time when the bids were opened. The MD was thus held to be `an insider’.

 

It was then
shown that he had purchased shares of the company during this period and before
the information was made public. SEBI concluded that the MD had engaged in
insider trading.

 

Showing
that the other persons were connected and that they dealt in the shares of the
Company

SEBI found
that two other persons had dealt in the shares of the company during this same
period and made substantial profits. They had purchased shares of the company
before the UPSI was made public and sold the shares thereafter.

 

The
individual, Sujay Hamlai, was 50% owner of shares and director of a private
limited company, while his brother held the remaining 50% shares and was also
its director. Sujay and his company had dealt in the shares of the company.

 

When the MD
and these persons were asked whether they were connected to each other, their
reply, to paraphrase, was that they had no business connection but as
individuals they were socially acquainted.

 

SEBI checked
the Facebook profiles of such persons and found that the MD was ‘friends’ with
Sujay and his brother/spouse. Further, they had ‘liked’ each other’s photos
that were posted on this social media site. No other connection was found by
SEBI. However, SEBI held that this was sufficient for it to allege and hold for
the purposes of this order that they were connected and thus insiders.

 

Order
by SEBI

Having held
that the parties were insiders and that they had dealt in the shares of the
company while there was UPSI, it passed certain interim orders. It ordered them
to deposit in an escrow account the profits made with simple interest at 12%
per annum.

 

The interim
order also doubled up as a show cause notice, since, as mentioned earlier, the
findings of SEBI were meant to be allegations subject to reply/rebuttal by the
parties. Thus, the parties were asked to reply to these allegations and also
why adverse directions should not be passed against them. Such adverse
directions would be three. Firstly, the amount so deposited would be formally
disgorged/forfeited. Secondly, the parties may be debarred from accessing
capital market. Finally, the parties may be prohibited from dealing in
securities for a specified term.

 

Determination
of profits and total amount to be deposited

The
determination of profits is demonstrative of how working out of profits for
purposes of insider trading follows a particular method and hence worth a
review. SEBI first determined the purchase price of the shares by the parties.

 

In the MD’s
case, since he had not sold the shares. SEBI thus determined the closing price
of the equity shares immediately after the UPSI was made public. The
difference, the increase, was deemed to be the profit and the value of such
profit for the shares was held to be profits from insider trading.

 

Sujay and
his company had sold the shares some time after the UPSI was made public.
However, the method of determining profits from insider trading was the same as
for the MD. The difference between the closing price of the shares immediately
after the publishing of the UPSI and the purchase price was deemed to be the
profit from insider trading.

 

To such
profits, simple interest @ 12% per annum was added till the date of the Order.
Adjustment was also made for dividends received during this period.

The total
amount so arrived, being Rs. 175.58 lakhs for the MD, Rs. 18.20 lakhs for Sujay
and Rs. 47.86 lakhs for Sujay’s company, was ordered to be deposited in escrow
account pending final disposal of the proceedings. The parties were also
ordered not to alienate any of their assets till the amount was deposited.

 

Conclusion

It is seen
that in this case, the sole basis of alleging ‘connection’ between the MD and
Sujay/his company was their ‘connection’ on social media website Facebook.
There were of course other suspicious circumstances of timing of purchases by
Sujay, other factors listed in the order such as insignificant trades in other
shares, very recent opening of broker/demat account, etc. But the social
media connection seems to be the deciding factor.

 

Whatever may
be the final outcome in this particular case – whether in the final order of
SEBI after due reply by the parties and/or in appeal – some concerns come to
mind. SEBI uses social media activities and connections of parties to compile
information that it may be useful for its investigations in insider trading. It
is obvious that SEBI may do this also for other investigations where
connections are relevant such as price manipulations, frauds, takeovers, etc.
Even other authorities – regulators, police, etc. – would access social
media profiles of persons.

 

However, it is also common knowledge that more and
more people are on social media. There are also several other social media
websites apart from Facebook – viz., Twitter, Instagram, Linkedin, etc.
Connections are made not necessarily with persons whom one may know but even
with persons who are totally strangers. One may thus have thousands of
‘connections’. Making a connection is often a mere clicking on the ‘following’
button or ‘send’ or ‘confirm’ friend request and the like. The objective may be
to interact with such persons for online discussions or even to plainly
‘follow’ for knowing their views. It is possible that persons may end up facing
investigation purely on account of the activities of persons whom one may be
having such thin connections. While orders like these may be taken as a lesson
of caution for all of us as to whom we get ‘connected’ with, considering the
reality of social media, it is submitted that SEBI and other
regulators/authorities should come out with reasonable guidelines as to how
such ‘connections’ are treated and what presumptions are drawn.

*Order dated 16th April 2018,
in the case of Deep Industries Limited



New Construction in Mumbai

Introduction

Real estate development is big
business in a metropolis such as Mumbai. However, what happens if all new real
estate development is abruptly halted by the High Court? A large part of the
economy would come to a grinding halt. However, this is what happened in Mumbai
on account of an Order passed by the Bombay High Court. The Order was passed to
tackle the growing problem of solid waste management in the City and the
inefficiency of the Municipal Corporation of Greater Mumbai (MCGM) in tackling
it. Nevertheless, it caused a great deal of issues and strife for the real
estate community. Now, a Supreme Court Order has given some respite from this.

 

Bombay
High Court’s Order

A Public Interest Litigation (PIL)
was filed before the Bombay High Court against the inefficient disposal of
solid waste arising during construction of real estate properties in the City
of Mumbai. Based on this, the Bombay High Court passed its Order in the case of
Municipal Corporation of Greater Mumbai vs. Pandurang Patil, CA No.
221/2013 Order dated 29.02.2016.
  

 

The Court observed that everyday
the MCGM was illegally dumping over 7,400 metric tonnes of solid waste at its
dumping sites in Mumbai. This figure was expected to significantly increase on
various counts, including the several buildings being constructed in the City.
This illegal dumping would cause increased pollution along with posing fire
hazards. On the other hand, there were a large number of constructions going on
in the city. In fact, the State Government had amended the Development Control
Regulations by providing for grant of more and more Floor Space Index (FSI).
Thus, the Court held that the State Government was encouraging unsustainable
growth.

 

Further, under earlier PILs, the
High Court had granted time to the MCGM to set up waste disposal and processing
facilities at the dumping grounds which time had also expired and nothing was
done by the MCGM. The Court held that something drastic needed to be done to
improve the situation, such as, to impose some restrictions on the unabated
development in the city. Moreover, it was the duty of the Court to ensure that
the provisions of the Environment Protection Act,1986 and the Municipal Solid
waste (Management and Handling) Rules, 2000 were implemented in as much as the
breach thereof would amount to depriving a large number of citizens of Mumbai a
fundamental right guaranteed under the Constitution of India, which was, the
right to live in a pollution free environment.

 

Accordingly, the High Court
extended the time granted to the MCGM for installing waste processing
facilities till 30th June 2017. It noted that neither the said
Municipal Corporation nor the State Government had any solution whatsoever for
ensuring that the quantity of solid waste generated in the city should not
increase. Further, it was of the view, that the State Government was more
worried about the impact of imposing any restraint on the new constructions in
the city on the real estate industry. It felt that on one hand there was no
real possibility of any Authority complying with the Management of Solid Waste
Rules and on the other hand, the development by construction of buildings in
the city continued on a very large scale. There were also proposals for grant
of additional FSI by amending the Regulations. It therefore, was of the view
that, in case of certain development proposals, restrictions had to be imposed.
More so, because neither the State Government nor the Municipal Corporation has
bothered to make a scientific assessment of the impact of large scale
constructions going on in the city on the generation of the solid waste in the
city.

 

The Court was conscious of the fact
that in the city of Mumbai there were a large number of re-development projects
which were going on and the occupants of the existing premises might have
vacated their respective premises. Therefore, for the time being, it did not
impose any restrictions on the grant approval for proposals/applications for
the re-development projects including the construction of sale component
buildings under schemes sanctioned by the Slum Rehabilitation Authority (SRA).
However, it held that restrictions would have to be imposed on consideration of
fresh proposals/applications submitted for new construction of the buildings
for residential or commercial purposes.

 

Finally, the Bombay High Court
placed the following curbs on new development/construction in Mumbai:

 

(a) Development
permissions shall not be granted either by the MCGM or the State Government on
the applications/proposals submitted from 1st March 2016 for
construction of new buildings for residential or commercial use including
malls, hotels and restaurants. Such applications would be processed, but the
commencement certificate shall not be issued. However, this condition would not
apply to all the redevelopment projects and to the buildings proposed to be
constructed for hospitals or educational institutions. It would also not apply
to proposals for repairs/reconstruction of the existing buildings which do not
involve use of any additional FSI in addition to the FSI already consumed.

 

(b) Even
if there was an amendment of the Regulations made hereafter providing for grant
of additional FSI in the city, the benefit of the same shall not be extended to
the building proposals/ Applications for development permissions including for
the re-development projects submitted on or after 1st March 2016.

 

Supreme
Court’s Order

Aggrieved by this total ban on new
construction, the Maharashtra Chamber of Housing Industry approached the
Supreme Court by filing a Special Leave Petition. The Supreme Court gave its verdict
in Maharashtra Chamber of Housing Industry vs. Municipal Corporation of
Greater Mumbai, SLP(Civil) No. D23708/2017, Order dated 15th March
2018.

 

We make it clear that this order is
not intended to set aside or modify the aforesaid impugned judgement. We have
considered the matter only in order to explore the possibility of safe method
of permitting certain constructions in the city of Mumbai for a limited period
to pave the way for further orders that may be passed. We are satisfied that a
total prohibition, though selective, has serious ramifications on housing
sector which is of great significance in a city like Mumbai. It also has a
serious impact on the financial loans which have been obtained by the
developers and builders. Such a ban makes serious inroads into the rights of
citizens under Article 19, 21 and 300A of the Constitution of India. It might
be equally true that the activities and the neglect in disposing of the debris
invades the rights of other citizens under Article 21 etc. That issue is
left open for a proper determination.

 

The Supreme Court passed an Order
presenting the following solution:

 

(a) It
directed that any construction that was permitted hereafter for the purpose of
this order would be only after adequate safeguards were employed by the
builders for preventing dispersal of particles through the air. This would be
incorporated in the building permissions.

 

(b) According
to the MCGM, 10 sites had been located for bringing debris onto such specified
locations which require to be filled with earth. In another words, these sites
require land filling which will be done by this debris.

 

(c) The
MCGM would permit a builder to carry on construction on its site by imposing
the conditions in the permission, that the construction debris generated from
the site, would be transported and deposited in specific site inspected and
approved by the MCGM.

 

(d) The
Municipal Corporation shall specify such a site meant for deposit of
construction debris in the building permission. Any breach would entail the
cancellation of the building permission and the work would be stopped
immediately.

 

(e) The
Municipal Corporation would not permit any construction unless it has first
located a landfill site and has obtained ‘No Objection Certification’ or consent
of the land owner that such debris may be deposited on that particular site.
The Municipal Corporation shall incorporate in the permission the condition
that the construction was being permitted only if such construction debris was
deposited.

 

(f)  For
Small generators of Construction and Demolition Waste, the Waste would be
disposed of in accordance with the ‘Debris On-Call Scheme’ of the MCGM. 

 

(g)
For Large generators of Construction and Demolition Waste, the waste would be
disposed of as per the Waste/Debris Management Plan submitted by the
owner/developer at the time of applying for permissions and as approved by the
BMC.

 

(h) Builders
applying for permissions would have to give a Bank Guarantee of amount ranging
from Rs.5 lakh to Rs.50 lakh depending upon the size of the project and mode of
development, which bank guarantee shall remain in force solely for the purpose
of ensuing compliance of the Waste Management Plan/Debris Management Plan
approved by the MCGM, till the grant/issuance of the Occupation Certificate.

 

(i)  The
MCGM was instructed to submit a detailed report to the Supreme Court after the
expiry of 6 months from the date of the Order (i.e., 15th September
2018) and till such time the Supreme Court’s Order would remain in force. It
also ordered that no construction debris would be carried for disposal to the
Deonar and Mulund dumping sites.

 

Conclusion

While
the High Court’s Order may appear harsh, sometimes desperate situations call
for desperate measures. At the same time, it is laudable that instead of
adopting a very technical or legal approach, the Supreme Court has come out
with a workable solution. One only wishes that the MCGM and the State
Government come out with a concrete action plan to tackle this menace of solid
waste management!

A Chartered Route to International Anti-Corruption Laws

Corruption has been seen as an immoral and unethical practice since biblical times. But, while the Bible condemned corrupt practices, ironically Chanakya in his teachings considered corruption as a sign of positive ambition.1 However, there can be no doubt that in modern business and commerce, corruption has a devastating and crippling effect. According to the Transparency International Corruption Perception Index, India is ranked 76 out of 167 nations. These statistics do not help India’s image as a destination for ease of doing business.

The growth of anti-corruption law can be traced through a number of milestone events that have led to the current state of the law, which has most recently been expanded by the entry into force in December 2005 of the sweeping United Nations International Convention against Corruption (UNAC). Spurred on by a growing number of high-profile enforcement actions, investigative reporting and broad media coverage, ongoing scrutiny by non-governmental organisations and the appearance of a new cottage industry of anti-corruption compliance programmes in multinational corporations, anti-corruption law and practice is rapidly coming of age.

While countries have for long had laws to punish their own corrupt officials and those who pay them bribes, national laws prohibiting a country’s own citizens and corporations from bribing public officials of other nations are a new phenomenon, less than a generation old.

The US Foreign Corrupt Practices Act (FCPA) was the first anti-corruption law that rigorously pursued cross border bribery. For more than 25 years, the United States was the only country in the world that through the extra territorial reach of its FCPA, rigorously investigated bribes paid outside of its own borders.

It was surpassed by The UK Bribery Act enacted by the UK government in 2010 and is arguably the most radical extra-territorial anti-graft law to date. This law was put into place by the UK Parliament after a demand from the Organization for Economic Cooperation and Development (OECD) in 2007 that the UK offer some explanation for its failure to abide by its OECD Anti-Bribery Convention obligations.

The United Kingdom has in 2010 enacted the robust United Kingdom Bribery Act (UKBA), that has created a new anti-corruption compliance regime which is even more powerful than the FCPA in many respects. Failure to adhere to anti-bribery compliance obligations based on these and other new anti-corruption laws can result in substantial and potentially debilitating fines being imposed against companies and their aids.

Both legislation and the business response to anti-corruption are now intensifying. On 11th May 2016, The Law Society of England and Wales; The Institute of Chartered Accountants in England and Wales, The Society of Trust and Estate Practitioners; The Law Society of Northern Ireland; The Law Society of Scotland; The International Federation of Accountants; The Association of Chartered Certified Accountants; The Chartered Institute of Public Finance and Accountancy; The Institute of Chartered Accountants of Scotland; Chartered Accountants Ireland, The Chartered Institute of Management Accountants; The Association of Taxation Technicians; The Association of International Accountants; The Chartered Institute of Taxation; The International Association of Book-Keepers; The Institute of Certified Bookkeepers; The Institute of Financial Accountants; UK200; The Association of Accounting Technicians issued the Anti-Corruption Statement by Professional Bodies – deploring corruption and the significant harm it causes. The statement acknowledges that criminals seek to abuse the services provided by Professional service providers such as Chartered Accountants to launder the proceeds of corruption and we are committed to ensuring the professionals are armed with the tools to thwart this abuse.2

Chartered accountants, either in business or in the profession, have to be well informed of the latest developments to ensure that they play a meaningful role in the prevention of corruption in the organisations which they serve.

THE PREVENTION OF CORRUPTION ACT 1988 (POCA)

In India, the law relating to corruption is broadly governed by the Indian Penal Code, 1860 (‘IPC’) and the Prevention of Corruption Act, 1988 (‘POCA’). Apart from the risk of criminal prosecution under POCA, there is also the risk of being blacklisted, debarred and subject to investigation for anti-competitive practices.

Sections 8, 9 and 10 of the POCA are applicable to arrest the supply side of corruption namely: Taking gratification, in order, by corrupt or illegal means, to influence public servant (Sec.8), Taking gratification for exercise of personal influence with public servant (Sec.9), Punishment for abetment by public servant of offences defined in Section 8 or 9 (Sec.10). Section 11 criminalises various acts of public servants and middlemen seeking to influence public servants.

In the case of H. Naginchand Kincha vs. Superintendent of Police Central Bureau of Investigation 3, the Karnataka High Court has clearly held that the words occurring at section 8 of the Act “Whoever accepts or obtains, or agrees to accept, or attempts to obtain, from any person, for himself or for any other person, any gratification…………”

covers the persons other than the public servants contemplated by definition clause (c) of section 2 of the Act and that does not require much elaboration.4

Unlike laws in some other jurisdictions, POCA makes no distinction between an illegal gratification and a facilitation payment. A payment is legal or illegal. This treatment applies to other laws and regulations in India as well.

PREVENTION OF CORRUPTION (AMENDMENT) BILL 2013–2011 TO 2016

After India ratified the United Nations Convention on Anti-Corruption, the Government of India initiated measures to amend POCA to bring it in line with international standards. Materially, these included –

a. Prosecuting private persons as well for offences, b. Providing time-limits for completing trials, c. Attachment of tainted property,

d. Prosecuting the act of offering a bribe.

In 2013, the Amendment Bill was introduced in Parliament, reviewed by the standing committee and Law commission of India.

One of the significant amendments proposed, to widen the scope of the Act beyond bribery of public servants, provides that irrespective of capacity in which the person performs services for or on behalf of the commercial organisation either as an agent, service provider, employee or subsidiary, the liability under POCA would follow. This places an organisation at considerable risk since illegal acts by employees even at the entry level can expose the organisation to prosecution.

The above proposed amendments are corroborated by the WhistleBlowers Protection Act, 2014 and section 177(9) of the Companies Act 2013 which provides for the establishment of a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.

While the Companies Act, 2013 provides that companies should have a vigil mechanism, the Companies Act does not provide for consequences if a vigil mechanism is in place. In any event, companies may adopt measures provided in international documents like the UNCAC which provides for implementation of preventive anti-corruption policies and practices.

UNCAC provides for liability of legal persons. While commercial organisations and key officers should be prosecuted, there needs to be certainty and clarity in relation to the scope of such provisions. The UNAC further provides for the right of an aggrieved party to seek compensation/ damages for loss caused due to corrupt practices.

In light of the above, most commercial organisations may adopt measures provided in international documents and implement Anti-corruption compliance procedures which would not only be preventive in nature but would also assist in nailing the offender under law and fixing his liability. This would not only reduce the impact of the instance on the organisation by showing the bonafide of the organisation as a whole and bring to book corrupt individuals.

THE UNITEDSTATES FOREIGN CORRUPT PRACTICES ACT OF 1977 (FCPA)

For many years, the FCPA has been the world champion of ethical corporate behaviour on the part of companies registered in, or associated with, the United States (US). The combined determination of the Securities Exchange Commission (SEC) and the Department of Justice (DOJ) requires big business to take rigorous measures to thwart corporate bribery, or face substantial penalties.

The FCPA, which is an US federal law, targets the payment of bribes by businesses linked to the US to foreign government officials. The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments, or foreign political parties, with the intent of obtaining or retaining business. It also requires businesses to keep proper books and records. It also prohibits the payment of bribes indirectly through a third person. For these payments, coverage arises where the payment is made while knowing, that all or a part of the payment will be passed on to a foreign official.

Record penalties for corporate corruption were imposed against Siemens AG when the multi-national company settled FCPA charges with the Department of Justice, the Munich Public Prosecutor’s Office (i.e. in its home country Germany) and the SEC. These included multiple guilty pleas and $1.6 billion in fines and penalties, including $800 million in disgorgement of bribe-tainted profits to the US authorities. This case demonstrates how regulators in different jurisdictions are cooperating with each other more than ever. According to the DOJ, this was the largest monetary sanction ever imposed in an FCPA case.5

As is demonstrated by the Siemens settlement, there is no double-jeopardy defence for offenders, and the same set of facts can give rise to a multitude of prosecutions since the violations generally took place in subsidiaries in remote regions. This is an important factor for local companies, as many Indian corporates are expanding their business operations globally at a rapid rate. They will have to implement stern measures to manage the corruption risk and ensure that management in their remote subsidiaries avoid the payment of bribes or face the wrath of the not just the DOJ and SEC but also local judiciary.The DOJ signalled to companies that it would continue to book corporates on FCPA violations around the globe.

For violating anti-bribery provision, FCPA provides that;

  •     corporations and other business entities are subject to a fine of up to $2 million;

  •     Individuals, including officers, directors, stockholders, and agents of companies, are subject to a fine of up to

  •     $250,000 and imprisonment for up to five years.

For violating accounting provision of the FCPA6

  •     corporations and other business entities are subject to a fine of up to $25 million

  •    Individuals are subject to a fine of up to $5 million and imprisonment for up to 20 years.

Under the (US) Alternative Fines Act, courts may impose significantly higher fines than those provided by the FCPA—up to twice the benefit that the defendant obtained by making the corrupt payment, as long as the facts supporting the increased fines are included in the indictment and either proved to the jury beyond a reasonable doubt or admitted in a guilty plea proceeding.

The UK Bribery Act 2010

The Bribery Act 2010 expands its territorial applicability beyond the UK through section 6-Active bribery of a foreign official and section 7 Company failing to prevent bribery (corporate offense) (strict liability). Under section 11, the maximum penalties that can be imposed on an individual convicted of an offence u/s. 1, 2 or 6 is an unlimited fine and imprisonment for up to 10 years.

An organisation that can prove it has adequate procedures in place to prevent persons associated with it from bribing will have a defence to the Section 7 offence.

The guidance, provided u/s. 9 of the Act, will help commercial organisations of all sizes and sectors understand what sorts of procedures they can put in place to prevent bribery, as mentioned in section 7.

An organisation could also be liable where someone who performs services for it – like an employee, consultant or agent – pays a bribe specifically to get business, keep business, or gain a business advantage for the organisation. But the organisation will have a full defence for this particular offence, and can avoid prosecution, if the organisation can show it had adequate procedures in place to prevent bribery.

While under the Act there is no need for extensive written documentation or policies. organisations may have proportionate procedures through existing controls over company expenditure, accounting and commercial or agent/consultant contracts for example. In larger organisations, it will be important to ensure that management in charge of the day to day business is fully aware and committed to the objective of preventing bribery. In micro-businesses, it may be enough for simple oral reminders to keystaff about the organisation’s anti-bribery policies. In addition, although parties to a contract are of course free to agree whatever terms are appropriate, the Act does not require you to comply with the anti-bribery procedures of business partners in order to be able to rely on the defence.7

CONCLUSION

The principal problem in the modern corporation is mainly the separation of ownership and control in organisations, the managers have often different motives from the owners, the management often tries to find ways to conceal corrupt practices and/or any setbacks in the company’s performance. They postpone intimating the shareholders, or even to the board, waiting for things to improve. In these cases, transparency and full disclosure in financial reporting are often sacrificed.

Anti-corruption compliance is the new watch-phrase in global boardrooms, and chartered accountants have a responsibility to not only help organisations to develop meaningful and robust anti-corruption controls, but also to understand compliance obligations applicable to them and keep pace with any changes in the bribery risks and compliance mechanisms put in place by multi-national organisations. These mechanisms are intended to prevent the use of accounting practices to generate funds for bribery or to disguise bribery on a company’s books and records.

Violations of record-keeping requirements can provide a separate basis of liability for companies involved in foreign and domestic bribery. It is here that the Chartered Accountant would play an important role, of not just raising the red flag but refusing to sign the accounts until all questionable payments are explained to their satisfaction by the Company.

The role of Chartered Accountants (CAs) has been seen as promoting transparency and fairness. CAs are national-level watchdog. However, CAs are not specialised anti-corruption agencies: on the whole, they are not expressly charged with detecting or investigating corrupt activity, but they have expertise in auditing and reporting the facts. CAs have traditionally undertaken financial audits of organisations’ accounting procedures and financial statements, and compliance audits reviewing the legality of transactions made by the audited body, and it is this vigilance that is relied upon while bringing to task the bribe givers and takers.

Prevention of Corruption Act 1988, focuses on the legal definitions governing corruption, lacks the suggestive guidance of how best to implement in practice financial and other controls which would be effective to prevent corruption, and bring to light any questionable payments.It is through their detailed study of several financial systems adopted by their various clients that CA’s are equipped with the required information and can suggest best practices that may be incorporated by the Government in a Model anti-corruption vigilance mechanism which may serve as a guidance to various organisations, and a yard stick to assess the ethical quotient of any organisation.

1    Chanakya – His Teachings & Advice, Pundit Ashwani Sharma, Jaico Publishing House, 1998: In the forest, only those trees with curved trunks escape the woodcut-ter’s axe. The trees that stand straight and tall fall to the ground. This only illustrates that it is not too advisable to live in this world as an innocent, modest man.

2    ANTI-CORRUPTION STATEMENT BY PROFESSIONAL BODIES – ISSUED 11th MAY 2016; https://www.icaew.com/-/media/corporate/files/technical/legal-and-regulatory/business-crime-and-misconduct/anti-corruption-statement.ashx?la=en

3    http://judgmenthck.kar.nic.in/judgmentsdsp/bitstream/123456789/183651/1/CRL-RP1040-14-13-09-2017.pdf

4    http://bangaloremirror.indiatimes.com

5    U.S. v. Siemens Aktiengesellschaft, 2008 – Case No. 08-367.

6    Section 78(b) of the FCPA contains certain accounting provisions that are applicable only to issuers. These require issuers to make and keep accurate books and ac-counts as well as certain internal controls

7    https://www.justice.gov.uk/downloads/legislation/bribery-act-2010

Section 92B of the Act – Accretion to brand value, resulting from use of brand name of foreign AE under technology use agreement; since that agreement was accepted as an arrangement at an arm’s length price, an aspect covered by that agreement did not result in a separate international transaction requiring benchmarking.

13. [2017] 81 taxmann.com 5 (Chennai – Trib)

Hyundai Motor India Ltd vs. DCIT

A.Ys.: 2009-10 to 2011-12,

Date of Order: 27th April, 2017

Facts

The Taxpayer was a fully owned subsidiary of a South Korean
automobile company (“FCo”). It was engaged in the business of manufacturing
cars in India. The Taxpayer and FCo had entered into agreement for use of
technology (“the agreement”). Under the agreement, the Taxpayer was mandated to
use the trademark owned by FCo (“the trademark”) on every vehicle manufactured
by it.

According to the TPO, by using the trademark, the Taxpayer
had significantly contributed to its development in Indian market and thereby
FCo had ‘benefited due to brand promotion activity carried out by the
Taxpayer’. Hence, The TPO opined that FCo should have compensated the Taxpayer
with arm’s length amount for the benefit acquired at the cost of the Taxpayer
which was deprived of developing its own brand name and logo.

The TPO took a view that the increase in brand value each
year could be attributed to every vehicle manufactured by all the group
companies. Since sales of the Taxpayer was 18.07 % of the global sales of FCo
group, 18.07% of the global appreciation in the brand value should be
attributed to the Taxpayer. This amount was quantified at Rs. 198.66 crore and
added to ALP of the Taxpayer.

The DRP confirmed the addition.

Held

Whether increase in brand value constitutes ‘international
transaction’? 

   The TPO has emphasised on the benefit
accruing to FCo from increased brand valuation as a result of the Taxpayer selling
cars in India, and not as a result of conscious brand promotion by the Taxpayer
such as, incurring of advertising, marketing and sales promotion expenses.

  According to the TPO, the trigger for the
impugned ALP adjustment is not the expense incurred by the Taxpayer, or any
efforts made by the Taxpayer, for brand building for FCo, but the mere fact of
the sale of cars made by the Taxpayer. Though the Taxpayer had not rendered any
services, it should be compensated for the increase in brand valuation, proportionate
to sale of cars by the Taxpayer vis-à-vis the global sale of cars of
that brand, as the increase in the brand valuation is, to that extent, due to
sale of cars by the Taxpayer.

  The difference is that while AMP is a
conscious effort, brand building by sales simplictor is a subliminal exercise
and by-product of the economic activity of selling the cars in India.

     Whether use of brand name was privilege or
obligation of the Taxpayer?

   FCo owns a valuable brand name which has
respect and credibility globally including in India. Hence, the use of brand
name owned by FCo is a privilege, a marketing compulsion and of direct and
substantial benefit to the Taxpayer.

Whether mere
use of brand name results in AEs?

   U/s. 92A(2)(g) of the Act, two enterprises
are deemed to be AEs if “the manufacture or processing of goods or
articles or business carried out by one enterprise is wholly dependent on the
use of know-how, patents, copyrights, trade-marks, licences, franchises or any
other business or commercial rights of similar nature, or any data,
documentation, drawing or specification relating to any patent, invention,
model, design, secret formula or process, of which the other enterprise is the
owner or in respect of which the other enterprise has exclusive rights”.

   Hence, there can never be a comparable
controlled price for the kind of transaction between the Taxpayer and FCo
because, the moment use of an intangible like brand name is involved, the
entities entering into the transactions will become AEs.

     Whether incidental benefit to AE could be
‘international transaction’?

   It is a fact that the use of brand name,
owned by FCo, in vehicles manufactured by the Taxpayer does amount to
incidental benefit to the AE of the Taxpayer since increased visibility to the
brand name does contribute to increase in its valuation.

  In terms of section 92B of the Act, an
international transaction includes a mutual agreement or arrangement between
two or more AEs for the allocation or apportionment of, or any contribution to,
any cost or expense incurred or to be incurred in connection with a benefit,
service or facility provided or to be provided to anyone or more of such
enterprises.

  This is not a case of allocation of,
apportionment of, or contribution to, any costs or expenses in connection with
a benefit, service or facility. There is no dealing in money in the present
case. Therefore, this limb of the definition is not relevant.

   In respect of intangible property, only
purchase, sale or lease of intangible property is covered within ‘international
transaction’. However, in this case there is no purchase, sale or lease of
intangibles.

  Even extended definition in Explanation
(i)(b) to section 92B(2), does not cover accretion to the value of intangibles.
Further, the TPO has also not raised the issue that the consideration paid for
the transactions under this agreement is not an arm’s length consideration.

–     Accretion in brand value due to use in
products of the Taxpayer cannot be treated as service either. A service should
be a conscious activity. A passive exercise cannot be a service. What is
benchmarked is not the accrual of ‘benefit’ but rendition of ‘service’. The
expressions ‘benefit’ and ‘service’ have different connotations, and what is
relevant, is ‘service’ and not the ‘benefit’. In this case, there is no
rendition of service.

   For determination of arm’s length price, mere
rendition of service is not sufficient; it should be intended to result in such
benefit for which an independent enterprise would pay. Thus, two aspects need
to be present – first, rendition of service and second, benefit accruing from
such service. In the present case, since the first condition is not satisfied,
there is no question of benchmarking the benefit.

   Unless a transaction affects profits, losses,
income or assets of both the enterprises, it cannot be an ‘international
transaction’. If the assets of one of the enterprises increase unilaterally,
without any active contribution by the other enterprise, such increase in
assets cannot amount to an ‘international transaction’.

  The Taxpayer has not incurred costs, nor has
it made conscious efforts, for accretion in value of brand owned by FCo. Such
accretion also does not have any impact on profit, losses, income or alteration
in assets of the Taxpayer. Therefore, it cannot result in an ‘international
transaction’ qua the Taxpayer.

It is not the case of the revenue
that there was any sale, purchase or lease of intangibles. Accretion to brand
value was a result of use of the brand name of foreign AE under the technology
use agreement which permitted as well as bound the Taxpayer to use the brand
name of FCo on the products manufactured by the Taxpayer. Since that agreement
had been accepted to be an arrangement at an arm’s length price, an aspect
covered by that agreement could not be subject matter of yet another
benchmarking exercise. Therefore, such accretion did not result in a separate
international transaction requiring benchmarking.

Sections 9, 172 of the Act; Article 9 of India-Denmark DTAA – since; director of shipping company was resident of Denmark; had been operating business wholly from Denmark; all important decisions were taken in Denmark; tax residency certificate issued by Denmark authorities showed shipping company as resident of Denmark, place of effective management and control of shipping company was in Denmark and accordingly, profits arising from operations of ships in international traffic were not taxable in India.

12. [2017] 80 taxmann.com 217 (Rajkot – Trib)

Pearl Logistics & Ex-IM Corporation vs. ITO

A.Ys. 2010-11 TO 2013-14,

Date of Order: 20th March, 2017

Facts

The Taxpayer was an agent of a Denmark based ship broker
(“DenCo”). DenCo was ‘disponent owner’ and another company (“FCo”) was
charterer of ship which carried cement to ports in India. Freight was payable
by FCo to DenCo.

The Taxpayer filed return of income under section 172(8) and
claimed that since DenCo was beneficiary of freight, it was entitled to benefit
of India- Denmark DTAA. Hence, DenCo was not liable to pay tax on fright in
India.

Held

   According to section 172, income of owner or
charterer which receives freight is chargeable to tax. In this case, freight is
received by DenCo which has also earned the freight. Hence, income of DenCo is
chargeable to tax in India.

   As per the tax residency certificate issued
by Danish tax authority, DenCo is resident of Denmark. Hence, DenCo can avail
of the benefit of India-Denmark DTAA.

  As per article 9 of India-Denmark DTAA,
profits derived from operation of ships in international traffic shall be
taxable only in the State where the ‘place of effective management’ of the
enterprise is situated.

  The Taxpayer has furnished several documents
showing that: the Director of DenCo was resident of Denmark; he was operating
business wholly from Denmark; all the important decisions were taken in the
meeting in Denmark. Therefore, the place of effective management and control of
DenCo was in Denmark.

–     DenCo was resident of Denmark and its ‘POEM’
was in Denmark. Therefore ‘head and brain’ of DenCo was situated in Denmark.
Accordingly, in terms of article 9 of India-Denmark DTAA, the profits derived
from operation of ship were not taxable in India.

Section 9 of the Act; Article 12 of India-USA DTAA – since professional fee paid to a US company for global biopharmaceutical strategic counselling and advisory services was for rendition of services and not for right to use information concerning industrial, commercial or scientific experience, it was not covered within definition of ‘royalty’ under article 12(3)(a) notwithstanding that in process of availing these services Taxpayer benefited from rich experience of service provider.

11.
[2017] 80 taxmann.com 275 (Ahmedabad – Trib)

Marck Biosciences Ltd. vs. ITO

A.Y.: 2009-10, Date of Order: 28th March, 2017

Facts

The Taxpayer was an Indian company. It paid professional fee
to a US company (“USCo”) for global biopharmaceutical strategic counselling and
advisory services, which comprised (a) business promotion; (b) marketing; (c)
publicity; and (d) financial advisory. In the agreement, the services were
termed as ‘Strategic and Financial Counselling Services”. According to the
Taxpayer, income embedded in professional fee paid for the said services was
not taxable in India in terms of India-USA DTAA. Hence, it did not withhold tax
from the said payment.

According to the AO, however, the rendition of services by
USCo constituted parting with the “information concerning industrial,
commercial and scientific experience”. Hence, the services rendered by
USCo were covered within the definition of “royalty” under Explanation 2 to
section 9(1)(vi) as also under article 12(3)(a) of India-USA DTAA.

Held

   The payments made by the Taxpayer were for
rendition of the services, which comprised (a) business promotion; (b)
marketing; (c) publicity; and (d) financial advisory. The payments were not for
use of any information concerning industrial, commercial or scientific
information’.

   The nature of payment should be characterized
from the activity in consideration of which the payment was made. The payment
was made for rendition of services and not for right to use any information
concerning industrial, commercial or scientific experience that was in
possession of the service provider.

   The fact that in the process of availing
these services, the Taxpayer benefits from rich experience of the service
provider is wholly irrelevant. Accordingly, the impugned payment was not
covered within the definition of “royalty” under article 12(3)(a) of India-USA
DTAA.

Sections 9, 115A of the Act; Article 12 of India-Italy DTAA – on facts, since the new agreement executed by Indian company with foreign company had different terms from the earlier agreement, it could not be regarded as extension of old agreement; hence, royalty was taxable in terms of section 115A @10.5 per cent.

10. [2017] 80 taxmann.com 100 (Pune – Trib)

Piaggio & CSpA vs. DCIT

A.Ys.: 2010-11 and 2011-12,

Date of Order: 21st March, 2017

Facts

The Taxpayer was a company based in Italy. It was
manufacturing motorised two, three and four wheelers. It had a subsidiary in
India (“ICo”). The Taxpayer entered into agreement with ICo on 31-10-2003 for
grant of license of technology to manufacture three wheelers for goods
transportation in consideration for payment of royalty (“the old agreement”).
In terms of India-Italy DTAA, royalty was taxed @20 %.

Subsequently, on 1-8-2008, the Taxpayer and ICo entered into
another agreement (“the new agreement”). The Taxpayer offered the royalty
received in terms thereof for taxation @10.55 % as per section 115A of the Act.

According to the AO, the new agreement was merely an
extension of the old agreement. He, therefore, concluded that even in terms of
new agreement, royalty was chargeable to tax @20 %.

Held

   Comparison of the terms in the old agreement
and the new agreement showed one main material difference. While the old
agreement mentioned two specific models, the new agreement mentioned class of
vehicles. Pursuant to the new agreement, ICo launched different models which
became possible because of the new agreement.

  Another difference was that the old agreement
granted license only for sale in India, whereas the new agreement granted
license also for sale to any other country as may be agreed between the
Taxpayer and ICo.

On the expiry of the old agreement, the
Taxpayer and ICo had renegotiated certain terms which culminated into the new
agreement. Accordingly, the new agreement was not an extension of the old
agreement but an independent legally enforceable agreement.

  Therefore, the applicable tax rate on the
royalty income as per section 115A was 10 %.

Investment Opportunities in Cambodia: India’s Advantages Tax & Legal

1.      Introduction

1.1.    Cambodia’s economy grew with a GDP of 7.1%
in 2016 and expects growth of 7.3% for FY 2017-18. The expected growth in GDP
resulted rapid in development in various sectors, namely retail, technology,
e-commerce, infrastructure projects etc. Cambodia’s strategic location
in the heart of ASEAN between Vietnam, Thailand, Laos along with coastline
having an easy regional accessibility makes it an attractive investments
destination. By treating foreign investors and local investors equally it gives
an access to ASEAN’s 600-million-strong consumer market. The present foreign
policy allows a foreign investor to incorporate or establish with 100 % foreign
ownership an entity any kind. The only restrictions are in respect of land
ownership. Further, there are no restrictions on repatriation of money. 

2.      Structuring of entity

2.1     For establishing a business in Cambodia, a
Private Limited Company (“PLC”) is always advisable and to process the
incorporation, the Ministry of Commerce (“MoC”) is the regulatory authority and
it takes approximately 7 days, after the necessary documents are submitted for
incorporation. After obtaining the approval from MoC within 15 days, the
documents along with the certificate of incorporation must be submitted to
General Department of Taxation (“GDT”) to obtain Value Added Tax Certificate
(“VAT”) and Patent Tax Certificate (PTC) which can be obtained within 30 days
from the date of submission of documents. The Patent Tax Certificate is issued
for a specific business activities only and need to be renewed on an annual
basis.

3.      Taxation in Cambodia

3.1     The Law on Taxation (“LoT”) in Cambodia is
very simple. The only chargeable tax is the withholding tax and value added
tax, while there is no capital gain tax but tax on profits are applicable.

4.      Structure of entities

4.1     The following are the entities recommended
for doing business in Cambodia

a)  Private Limited Company

     The number of shareholders in the private
limited company ranges between 2 to 30 shareholders. The shares or securities
cannot be offered to the public but can only be offered to the shareholders,
family members and managers.

b)  Public Limited Company

     Unlike Private limited companies, it can
have more than 30 shareholders and the shares or securities can be offered to
the public. In Cambodia, only Public Limited Companies can conduct banking
business, insurance business or be a financial institution.

c)  Representative Office:

     An eligible foreign investor may establish
a Representative Office to facilitate the sourcing of local goods and services
and to collect information for its parent company.

d)  Branch Office:

     A Branch Office is an office opened by a
company for conducting a commercial activity. All activities of the Branch
office are like that of Representative office but in addition, it may purchase,
sell or conduct regular professional services or other operations engaged in
production or construction in the country.

e)  Subsidiary Company: 

     A subsidiary is a company that is
incorporated with either 100% or at least 51% percent of its capital being held
by a foreign company.

5.      Tax System in Cambodia:

5.1     Previously, the Cambodian tax system was
divided into three regimes: real regime, simplified regime and estimated
regime. Recently, all the three regimes have been merged into one regime called
the “Real Regime” and divided into three categories (a) Small Taxpayers (b)
Medium Taxpayers and (c) Large Taxpayers.

5.2     The following are the categories that are
sub categories under which an individual or an entity can be taxed.

   Tax on Salary

          An individual resident in Cambodia is
liable for tax on salary on both foreign as well as Cambodian source, while a
non-resident person is liable to the tax on salary only on Cambodian source.

   Withholding Tax (“WHT”)

          The general withholding tax shall be
determined as follows:

          Any resident taxpayer carrying on
business makes any payment to a resident taxpayer shall withhold 15% on
management, consulting, and similar services and royalties for intangibles and
interest in minerals, Income from movable and immovable 10%. Interest paid by a
domestic bank or saving institutions for fixed term 6% and non-fixed term 4%.

          Any
resident taxpayer to a non-resident taxpayer shall withhold, 14 % on interest,
royalties, rent, and other income connected with the use of property;
compensation for management or technical services and dividends.

6.      Fringe Benefits Tax(“FBT”)

          The employer is required to withhold
and pay tax at the rate of 20% of the total value of FB given to all the
employees.

7.      Value Added Tax (“VAT”)

7.1     VAT is only a charge on taxable supply i.e.
supplies of good for tangible property and supply of services for something of
value other than goods, land or money.

7.2     The rates of VAT are as follows:

i)   0% for any goods exported from the Kingdom of
Cambodia and services consumed outside Cambodia

ii)  10% is the standard rate which applies to all
supplies other than exports and non-taxable supplies.

8.      DTAA Singapore – Cambodia (yet to be
ratified):

8.1     On May 20, 2016, an agreement was entered
into between Government of Republic of Singapore and the Royal Government of
Cambodia for prevention of evasion of taxes on income and to avoid any resident
being taxed twice on the income earned. This agreement applies to taxation of a
resident of Cambodia, in respect to taxes on profit including Tax on Salary,
Withholding Tax, Additional Profit Tax on Dividend Distribution and Capital
Gains Tax, while in terms of Singapore applies to the Income Tax.

8.2    Resident (Art. 4)

          Under Article 4 of the DTAA,
“resident” means any person or individual or entity liable to pay tax based on
their domicile, place of incorporation, place of management, principal place of
business or any other activities of similar nature but
also includes State and any local authority or statutory body.

          The article further defines the term
“resident”, by prescribing the following conditions:

a)  only of the state where he has a permanent
home available; or

b)  If there is a permanent home in both the contracting
states, then it is to be determined based on personal and economic relations
are closer i.e. centre of vital interest; or

c)  In the absence of centre of vital interest,
then the place where he has a habitat abode; or

d)  If habitat abode of both the states, then to
be determined based on nationality; or

e)  If otherwise, then the competent authorities
of the contracting states shall settle by agreement mutually.

8.3    Permanent Establishment (Art. 5)

          The term Permanent Establishment “PE”
is defined under Article 5 includes place of management; branch; an office;
factory; workshop; warehouse; mine, an oil or gas well, a quarry or any other
place of extraction of natural resources; and (h) farm or plantation.

          The terms have been further elaborated
by including:

(a) Any activities that last for more than 6 months
in terms of a building site, a construction, assembly or installation project,
or supervisory activities in connection;

(b) Any activities that last for more than 183 days
within any period of twelve months about any furnishing of services, including
consultancy services, by an enterprise of a Contracting State through employees
or other personnel engaged by the enterprise for such purpose, but only if
activities for same or connected project within the other Contracting State;

(c) The carrying on of activities (including the
operation of substantial equipment) for more than 90 days in any twelve months’
period in the other Contracting State for the exploration or for exploitation
of natural resources.

          The Law on Taxation in Cambodia
defines PE under Article 3 (4).

8.4    Immovable Property (Art. 6)

          The term “immovable property”,
shall be defined under the law of the Contracting State in which the property i
is situated. But also, includes property accessory to immovable property,
livestock and equipment used in agriculture and forestry, but not include
ships, boats and aircrafts.

          In addition, any income earned by a
resident from immovable property including agriculture or forestry and applies
to income from the direct use, letting, or use in any other form of immovable
property situated in the other Contracting State may be taxed in that other
State.

          There is no specific provision under
the Law on Taxation for immovable property.

8.6    Dividends (Art. 10)

          The terms as defined under this
agreement means income from shares, mining shares, founders’ shares or other
rights, but does not include debt claims, participating in profits, as well as
income from other corporate rights and be taxed to a resident of other
contracting state. .

          If beneficial owner of the dividend is
a resident of other contracting state, then tax on dividend not to exceed 10%
of the gross amount.

          Under Cambodian law, there is Tax on
Profit and Article 3 (8) defines the term dividends. Recently a new regulation
with respect to dividend distribution from a resident taxpayer in Cambodia to
their non-resident shareholders.

8.7    Capital Gains (Art. 14)

          Any gains derived by the resident of
the Contracting State to be taxable:

a)  Alienation of Immovable property in other
contracting state taxable in other state unless it is related to the Permanent
Establishment of the enterprise situated or any independent personal service to
be taxed in other state.

b)  Alienation of ships or aircrafts or movable
property pertaining to such operation of ships or aircraft shall be taxable in
the state where it is alienated.

c)  Alienation of Shares of more than 50 % of
their value directly or indirectly from immovable property situated in other
state, to be taxable in the other state.

d)  Alienation of any other property other than
above, to be taxable in the contracting state of which the alienator is a
resident.

          Under Cambodian Law on Taxation, no
specific provisions but 0.1 % tax is to be paid on transfer of shares.

8.8    Associated Enterprise (Art. 9)

          The term “associated” means an
enterprise that participates directly or indirectly in the management, control
or capital of other enterprise or a person or individual directly or indirectly
in the management, control or capital of an enterprise of a Contracting State
and an enterprise of the other Contracting State,

          The term associated enterprise has not
been defined but the “related person” under Article 3(10) which includes
families or any enterprise which controls or is controlled or is under the
common ‘control’. The term control means ownership of 51% or more in value or
voting rights. Article 18 of the Law on Taxation (“LoT”) provides, subject to
certain conditions, a wide power to the General Department of Taxation (“GDT”)
in Cambodia to adjust the allocation of income and expenses between related
enterprises. According to the applicable law, two or more enterprises are under
common ownership, if a person owns 20% or more of the equity interests of each
enterprise. In the event, a parent company provides either services, a loan or
any other transaction that will result in remuneration from the owned company,
the GDT will usually verify that the so-called transactions are real.

8.9    Royalties (Art.12)

          The term ‘royalties’ means payments of
any kind received as a consideration for the use of, or the right to use, any
copyright of literary, artistic or scientific work including cinematograph
films, or films or tapes used for radio or television broadcasting, any patent,
trade mark, design or model, plan, secret formula or process, or for the use
of, or the right to use, industrial, commercial, or scientific equipment, or
for information concerning industrial, commercial or scientific experience.

          Any income arising in a Contracting
State, paid to a resident of the other Contracting State may be taxed in that
other State and be taxed in the contracting state as per the local laws, if the
beneficial owner is a resident of the other then the tax not to exceed 10% of
the gross amount.

          Otherwise, if the beneficial owner of
the royalties carries a business through a permanent establishment or has a
fixed place of business in the other contracting state in which the royalties
arise, the same is to be treated as an income earned from the connected PE or
fixed place.

          In case the amount of royalties
exceeds the amount that was agreed by the payer or beneficial owner, the amount
of tax shall not exceed 10 % of the gross amount. Any excess amount is to be
taxed as per the local laws in which the income accrued.

          There is no specific provision about
royalties, but as defined in the Intellectual Property Laws.

9.         DTAA
India – Singapore (1994) 209 ITR 1 (St)

9.1     Immovable properties (Art. 6)

          The term “immovable
property” shall mean the term as defined under the law of the contracting
state and shall also include property accessory to immovable property,
livestock and equipment used in agriculture and forestry, rights to which the provisions
of general law respecting landed property apply usufruct of immovable property
and rights to variable or fixed payments as consideration for the working of,
or the right to work, mineral deposits, sources and other natural resources.
Ships and aircraft shall not be regarded as immovable property. Income from the
direct use of or letting or any other form of use of immovable property is
taxed in the country where the property is located, including real-estate
enterprises.

9.2    Dividends (Art. 10)

          The term “dividends” means
income from shares or other rights not being debt-claims, participating in
profits, as well as income from other corporate rights of which the company
making the distribution is a resident. Any dividends paid to a recipient’s
country of residence from the other country to be taxed in the country
received. The dividend taxed in the source country is as follows:

a)       15% of the gross amount of the dividends
only while the tax rate reduced to 10 % of the gross amount the 25% of the
shares are owned by the recipient’s company.

b)       No dividend tax to be paid by Indian
resident shareholders who derive any profit from the Singapore or Malaysian
resident company in Singapore.

          The dividend income article does not
apply if the company paying is a resident or performs independent personal
services from a fixed base situated in the country and will be treated as
income of the permanent establishment.

Case Laws Referred:

1] Roop Rasyan Industries (P.) Ltd. vs. ACIT [2014] 150
ITD 193 (Mum.) (Trib.).

Dividend was not taxable in Singapore of which company paying
dividend was resident and, therefore, para 2 of article 10 of DTAA was not at
all relevant. Moreover, in terms of Article 10 of DTAA, dividend received by an
Indian company from a Singapore based company was subjected to tax at normal
rate of 30 %.

9.3    Capital gains (Art. 13)

          A resident of one contracting state
from the alienation of immovable property situated in other contracting state
to be taxed in that state. A resident with PE or fixed base in other
contracting state to be taxed for any gains derived from alienation of movable
property. Recently India and Singapore signed the third protocol on December
30, 2016 to amend the DTAA and the amendment is along the lines of India and
Mauritius DTAA that was also recently entered. The Protocol amends the
prevailing residence based tax regime under the Singapore Treaty and gives
India a source based right to tax capital gains which arise from the alienation
of shares of an Indian resident company owned by a Singapore tax resident.

(i) Taxation
of capital gains on shares

Under 2005 Protocol any capital gains derived by a Singapore
resident from alienation of share of Indian resident company to be taxable only
in Singapore after complying with limitation of benefit “LOB” clause. However,
the Protocol marks a shift from residence-based taxation to source-based
taxation. Consequently, capital gains arising on or after April 01, 2017 from
alienation of shares of a company resident in India shall be subject to tax in
India. The change is subject to the following qualifications: –

(a) Grandfathering Clause

Any capital gains arising from sale of shares of an Indian
Company acquired before April 01, 2017 shall not be affected by the Protocol
and would enjoy the treatment available under the Treaty.

(b) Transition
period

The Protocol provides for a relaxation of capital gains
arising to Singapore residents from alienation of shares acquired after April
1, 2017 but alienated before March 31, 2019 (“Transition Period”). The tax rate
on any such gains shall not exceed 50% of the domestic tax rate in India (“Reduced
Tax Rate”).

(c) Limitation of benefits

The Protocol provides that grandfathered investments i.e.
shares acquired on or before 1 April 2017 which are not subject to the
provisions of the Protocol will still be subject to Revised LOB to avail of the
capital gains tax benefit under the Singapore Treaty, which provides that:

   The benefit will not be available if the
affairs of the Singapore resident entity were arranged with the primary purpose
to take advantage of such benefit;

   The benefit will not be available to a shell
or conduit company, being a legal entity with negligible or nil business
operations or with no real and continuous business activities.

Case Laws: 

1] Praful
Chandaria vs. ADDIT [2016] 161 ITD 153 (Mum.) (Trib.)

Capital gain could not be held to be taxable in India in
terms of para 6 of article 13 of India-Singapore DTAA under which taxing right
has been given to resident State, that is, State of alienator, which in this
case was Singapore.

2]  Credit Suisse (Singapore) Ltd. vs. Asstt
DIT. [2012] 53 SOT 306 (Mum.)(Trib.)

Gain earned on cancellation of foreign exchange forward
contracts is a capital receipt and must be treated as capital gains.

The Indian companies/ enterprise can look forward for
investment in emerging sectors like Information Technology & Ecommerce,
Infrastructure, venture capital, health care for supply of medical equipment’s,
tourism, education, technology transfer etc. 

11.    Conclusion

          To encourage India’s Act East Policy,
India and Cambodia signed a Bilateral Investment Treaties (BIT) to promote and
protect investments. In the absence of any such bilateral agreements or DTAA,
by incorporating company in Singapore. Indian entities could make an entry into
ASEAN Market or Cambodia and would be able to obtain the reliefs available
under the DTAA between Singapore – Cambodia DTAA using either of the countries as
a PE. In addition, the Cambodia grants tax holiday up to nine (9) years and
also 100 % exemption on export.

Section 54 – Assessee is entitled to deduction u/s. 54 in respect of the entire entire payment for purchase of new residential house though the new residential house is purchased jointly in the name of the assessee and his brother.

10.  [2017] 81 taxmann.com 16
(Mumbai – Trib.)

Jitendra V. Faria vs. ITO

A.Y.:2010-11
Date of Order: 27th April, 2017

FACTS 

The assessee jointly with
his wife was the owner of a flat in Jai Mahavir Apartment at Andheri (West).
During the previous year relevant to the assessment year under consideration,
the said flat was sold for Rs.1,02,55,000/-.The assessee computed long term
capital gains at Rs. 43,01,665/- being 50% share in the property. The assessee
invested Rs. 42,01,665/- (sic Rs. 42,65,858) in another residential property
i.e., flat in “Parag” at Andheri (West). The assessee claimed
exemption u/s. 54 of Rs. 42,01,665/- (sic Rs. 42,65,858) plus stamp duty and registration
charges and offered capital gains at Rs. 35,809/-. The name of the assessee’s
brother was added in the Agreement of new property purchased, for the sake of
convenience. However, the entire investment for the purchase of new property
i.e. Parag, along with stamp duty and registration charges were paid by the
assessee.  Since, the new house was
purchased by the assessee by incorporating name of his brother, the Assessing
Officer (AO) restricted deduction u/s.54 to the extent of 50% of the value of
new property. He restricted exemption u/s. 54 to Rs.21,32,929/- i.e., 50% of
the cost of the new flat.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who directed the AO to tax the entire capital
gains in assessee’s hands by disregarding the fact that 50% of the old house
was owned by his wife.

Aggrieved, the assessee
preferred an appeal to the Tribunal.

HELD 

The Tribunal noted that
the wife has already offered her share of capital gains in her return of income
filed with the Department. Thus, there is no justification in the order of
CIT(A) for taxing the entire capital gains in the hands of the assessee. It
held that only 50% of the capital gain is chargeable to tax in the hands of the
assessee.

As regards the allegation
of the AO that since assessee has incorporated name of his brother, he is
entitled to only 50% of the investment so made in the new house, the Tribunal
noted that the AO has in the assessment order categorically stated that the
entire cost of the new property was borne by the assessee though the property
was purchased in joint name of the assessee with his brother. The Tribunal
observed that the issue is covered by the decision of Hon’ble Delhi High Court
in the case of CIT vs. Ravinder Kumar Arora [2012] 342 ITR 38/[2011] 203
Taxman 289/15 taxmann.com 307 (Delhi)
wherein the High Court held that the
assessee was entitled to full exemption u/s. 54F when the full amount was
invested by the assessee even though the property was purchased in the joint
names of the assessee and his wife. It noted that this decision of the Delhi
High Court was subsequently followed by Delhi High Court itself in case of CIT
vs. Kamal Wahal [2013] 351 ITR 4/214 Taxman 287/30 taxmann.com 34 (Delhi)
.
Following the ratio of the decision of the Delhi High Court in the case of CIT
vs. Ravinder Kumar Arora (supra)
, the Tribunal held that the AO was not
justified in restricting the exemption u/s. 54 to 50% of the investment in
purchase of new residential house.

The Tribunal allowed the
appeal filed by the assessee.

Section 145 – An assessee who follows mercantile system of accounting can, at the time of finalisation of accounts of any relevant assessment year, claim deduction of actual figure of loss on account of short realisation of export proceeds even though such export proceeds are outstanding as receivable as on the end of the relevant year and are actually realised in the subsequent assessment year.

9. [2017] 163 ITD 56 (Mumbai – Trib.) Assistant CIT vs.
Allied Gems Corporation (Bombay)A.Y.: 2009-10         Date
of Order: 20th January, 2017     

FACTS

The assessee was a
partnership firm engaged in the business of dealing in cut & polished
diamonds and precious & semi-precious stones.

In the course of
assessment proceedings, it was noticed that assessee had claimed a loss of Rs.
49,64,937/- on account of realisation of export proceeds, which was outstanding
as on 31.03.2009.

The AO disallowed the
aforesaid claim of loss on the ground that the realisation of outstanding
export receivables was an event which took place in the subsequent assessment
year i.e. AY 2010-11 and, therefore, such loss could not be allowed while
computing the income for the relevant assessment year.

The CIT-(A) noted that the
AO had not doubted the short realisation of the debtors and, hence, following
the principle of prudence, CIT-(A) allowed assessee’s claim of loss.

On appeal by the revenue
before the Tribunal.

HELD

The dispute relates to the
income chargeable under the head ‘profits and gains of business or profession’;
which is liable to be computed in accordance with the methodology prescribed in
section 145(1) of the Act i.e. either in terms of cash or mercantile system of
accounting regularly employed by the assessee. The claim of the assessee is
that the mercantile system of accounting adopted by the assessee justifies
deduction of loss of Rs. 49,64,937/- and for that matter, reference is made to
the principle of prudence, which has been emphasised in the Accounting
Standard-1 notified u/s. 145(2) of the Act also. The principle of prudence
seeks to ensure that provision ought to be made for all known liabilities and
losses even though there may remain some uncertainty with its determination.
However, it has to be appreciated that what the principle of prudence signifies
is that the probable losses should be immediately recognised. In the present
context, the stand of the assessee is that though realisation of export receivables
took place in the subsequent period, but the loss could be accounted for in the
instant year itself as it would be prudent in order to reflect the correct
financial results.

Factually speaking,
Revenue does not dispute the short realisation from debtors to the extent of
Rs. 49,64,937/- and, therefore, insofar as the quantification of the loss is
concerned, the claim of the assessee cannot be assailed on grounds of
uncertainty.

In the case of U.B.S.
Publishers and Distributors [1984] 147 ITR 144; the assessee following
mercantile system of accounting, for AY 1967-68 (previous year ending on
31/05/1966), had claimed an expenditure by way of purchases of a sum of Rs.
6,39,124/- representing additional liability towards foreign suppliers in
respect of books imported on credit up to the end of 31.05.1966. The said
additional claim was based on account of devaluation of Indian currency, which
had taken place on 06.06.1966 i.e. after the close of the accounting year. The
Hon’ble Allahabad High Court noted that liability to pay in foreign exchange
accrued with the import of books and was not as a result of devaluation.
According to the High Court, since the actual figure of loss on account of
devaluation was available when the accounts for 31/5/1966 ending were
finalized, the same was an allowable deduction in assessment year 1967-68
itself. The parity of reasoning laid down by the Hon’ble Allahabad High Court
is squarely applicable in the present case. In the present case also, short
realization of export proceeds to the extent of Rs. 49,64,937/-, took place in
next year but it related to export receivable for the relevant assessment year,
and at the time of finalisation of accounts for the relevant assessment year,
the actual figure was available, and therefore, the assessee made no mistake in
considering it for the purposes of arriving at the taxable income.

Even otherwise, it has to
be appreciated that income tax is a levy on income and that what is liable to
be assessed is real income and while computing such real income, substance of
the matter ought to be appreciated. Quite clearly, the assessee was aware while
drawing up its accounts for the previous year relevant to the assessment year
under consideration that the export receivables, outstanding as at the year-
end were short recovered by a sum of Rs. 49,64,937/-and, therefore, the real
income for the instant year could only be arrived at after deduction of such
loss.

Therefore, considering the
entirety of facts and circumstances, the Tribunal held that the CIT (A) had
made no mistake in allowing the claim of the assessee and appeal of the revenue
was dismissed.

Special Leave Petitions – An Update

 1.      
Income deemed
to accrue or arise in India – Agent of the assessee in India carried out only
incidental or auxiliary/ preparatory activity under the direction of principal
– will not be considered as independent agent – It is dependent agent –
Remuneration at arm’s length – : SLP Granted
 

Director of Income Tax (IT) – II vs. M/s. B4U
International Holdings Limited (2016) S.L.P.(C). No.16285 of 2016; [ (2016) 385
ITR (Statutes) 46]

[ SLP Granted in respect of Director of Income Tax (IT) –
II vs. M/s. B4U International Holdings Limited, [(2015) 374 ITR 453 (Bom)(HC)]

Assessee is a Mauritius based company. The Revenue proceeded
against it on the footing that it is engaged in the business of telecasting of
TV channels such as B4U Music, MCM etc. It is the case of the Revenue
that the income of the assessee from India consisted of collections from time
slots given to advertisers from India through its agents. The assessee claimed
that it did not have any permanent establishment in India and has no tax
liability in India. The AO did not accept this contention of the assessee and
held that affiliated entities of the assessee are basically an extension in
India and constitute a permanent establishment of the assessee within the
meaning of Article 5 of the Double Taxation Avoidance Agreement (DTAA).

The CIT(A) held that the entity in India cannot be treated as
an independent agent of the assessee. Alternatively, and assuming that it could
be treated as such if a dependent agent is paid remuneration at arm’s length,
further proceedings cannot be taxed in India.

The Revenue preferred an appeal to the Tribunal. The Tribunal
having dismissed the Revenue’s appeals, the matter was carried before High
Court. The Revenue urged that Tribunal misapplied and misinterpreted the
decision of the Hon’ble Supreme Court in the case of Director of Income Tax
(International Taxation) vs. Morgan Stanley & Company Inc. (2007) 292 ITR
416
. The Revenue submitted that the transfer pricing analysis was not
submitted and mere reliance on a circular of the Revenue / Board would not
suffice. If the transfer pricing analysis did not adequately reflect the
functions performed and the risks assumed by the agent in India, then, there
would be need to attribute profits of the permanent establishment for those
functions/risks. That had not been considered and also submitted that the B4U,
MCM etc. were erroneously assumed to be the agents but not dependent on
the assessee. Alternatively, they have also been erroneously held to be paying
the remuneration at arm’s length. All this has been assumed by the Tribunal
though there was no relevant material. The AO had rightly held that the payment
made towards purchase of films for which no details were submitted as to what
are the costs incurred were treated as royalties. The exhibition and telecast
price were intangible and could not be termed as goods and merchandise in respect of export of advertisement films.

The Hon. High Court noted that the details filed by the
assessee revealed that there is a general permission granted by the Reserve
Bank of India to act as advertisement collecting agents of the assessee. The
permissions were granted to M/s. B4U Multimedia International Limited and M/s.
B4U Broadband Limited. In the computation of income filed along with the
return, the assessee claimed that as it did not have a permanent establishment
in India, it is not liable to tax in India under Article 7 of the DTAA between
India and Mauritius. The argument further was that the agents of the assessee
have marked the ad-time slots of the channels broadcasted by the assessee for
which they have received remuneration on arm’s length basis. Thus, in the light
of the CBDT Circular No.23 of 1969, the income of the assessee is not taxable
in India. The conditions of Circular 23 are fulfilled. Therefore, Explanation
(a) to section 9(1)(i) of the IT Act will have no application.

The Hon. High Court further observed that the Tribunal had
recorded a finding that the assessee carries out the entire activities from
Mauritius and all the contracts were concluded in Mauritius. The only activity
which is carried out in India is incidental or auxiliary / preparatory in
nature which is carried out in a routine manner as per the direction of the
principal without application of mind and hence, B4U is not an dependent agent.
Nearly 4.69% of the total income of B4U India is commission / service income
received from the assessee company and, therefore, also it cannot be termed as
a dependent agent.

The Hon. High Court further observed that the Supreme Court
judgment in the case of Morgan Stanley & Co. (supra) held
that there is no need for attribution of further profits to the permanent
establishment of the foreign company where the transaction between the two was
held to be at arm’s length but this was only provided that the associate
enterprise was remunerated at arm’s length basis taking into account all the
risk taking functions of the multinational enterprise.

Thus the Tribunal, rightly concluded that the judgment of the
Hon’ble Supreme Court in Morgan Stanley & Co. and the principle
therein would apply. Also relied on the Division Bench judgment in the case of Set
Satellite (Singapore) Pte. Ltd. vs. Deputy Director of Income Tax (IT) &
Anr. (2008) 307 ITR 265
on this aspect. The Revenue Appeal was dismissed.

Against the aforesaid Bombay High Court decision the Revenue
filed SLP before Supreme Court, which was granted.

2.       Penalty
u/s. 271(1)(c) – the assessee had agreed to be assessed on 11% of the gross
receipts – on the condition that no inference of concealment of income would be
drawn from such concession – Penalty confirmed by High Court – SLP granted

Kalindee Rail Nirman (Engineers) Ltd vs. CIT-;
S.L.P.(C).No.20662 of 2014. [ (2016) 386 ITR (Statutes) 2]

[CIT vs. Kalindee Rail Nirman Engg. Ltd, [ (2014) 365 ITR
304 (Del)(HC)]

The assessee, a contractor undertaking projects of Indian
Railways on turnkey basis, filed its return of income for the AY 1995-96 on
29.11.1995 declaring a total income of Rs.88,91,700/-. On the basis of the
materials gathered by the income tax authorities in the course of a search
carried out in the assessee’s premises on 14.03.1995 as well as in the premises
of the directors and trusted persons, the AO referred the matter to a special
audit in terms of Section 142(2A) of the Act. The assessee was supplied
photocopies of the seized records. Despite such opportunity, no convincing
reason was given by the assessee to the query of the AO as to why the results
declared by the books of accounts could not be rejected and the profit from the
contracts be not estimated at a rate exceeding 11% of the gross receipts. Not
convinced by the assessee’s explanation to the show-cause notice, the AO
proceeded to estimate the net profit of the assessee at 11% of the gross
receipts from the contracts amounting to Rs.20,30,74,024/-, which came to
Rs.2,23,38,143/-. The AO also found that some income from business activities
was not included in the aforesaid receipts and the profit from such activity
was taken at Rs.13,34,308/-. The total business income was thus taken at
Rs.2,36,72,451/-.

The assessee carried the matter in appeal to the Tribunal
where the income was reduced by adopting the profit rate of 8% on the gross
receipts subject to allowance of depreciation and interest. The separate
addition of Rs.13,34,308/- was deleted.

Penalty proceedings were initiated by the AO for concealment
of income and after rejecting the assessee’s explanation, a minimum penalty of
Rs.24,00,977/- was imposed for concealment of income u/s. 271(1)(c) of the Act.
The CIT (A) deleted the penalty . The revenue’s appeal to the Tribunal was
dismissed,

It is in further appeal
before the High Court the revenue assailed the order of the Tribunal on the
ground that after the judgment of the Supreme Court in the case of MAK Ltd.
Data P. Ltd. vs. CIT, (2013) 358 ITR 593,
there is no question of the
assessee offering income “to buy peace” and that in any case the seized
material and the special audit report disclosed several discrepancies, to cover
which a higher estimate of the profits was resorted to. The assessee vehemently
contended that the Tribunal committed no error in upholding the order passed by
the CIT (A) cancelling the penalty. It was contended that it was a mere case of
different estimates of income being adopted by different authorities which
itself would show that there is no merit in the charge of concealment of
income. He also emphasised that the assessee had agreed to be assessed on 11%
of the gross receipts only on the condition that no inference of concealment of
income would be drawn from such concession and in such circumstances, where the
offer was conditional and to buy peace, there can be no levy of penalty for
alleged concealment of income.

The High Court held that the penalty proceedings were
justified. The High Court held that number of discrepancies and irregularities
listed by the special auditor in his report which are reproduced in the
assessment order bear testimony to the fact that the books of accounts
maintained by the assessee were wholly unreliable. If they were so, there can be
no sanctity attached to the figure of gross contract receipts of
Rs.20,30,74,024/- on which the assessee estimated 3% as its income. It is true
that the AO did not enhance the figure of gross receipts but that is not
because he gave a clean chit to the books of accounts allegedly maintained by
the assessee; he could not have given a clean chit in the face of the defects,
discrepancies and irregularities reported by the special auditor. In order to
take care of those discrepancies he resorted to a much higher estimate of the
profits by adopting 11% on the gross contract receipts. In these circumstances,
the mere fact that the estimate was reduced by the Tribunal to 8% would in no
way take away the guilt of the assessee or explain its failure to prove that the
failure to return the correct income did not arise from any fraud or any gross
or wilful neglect on its part. The Court observed that the assessee was taking
a chance sitting on the fence despite the fact that there was a search towards
the close of the relevant accounting year in the course of which incriminating
documents were found. The plea accepted by the Tribunal that the assessee
agreed to be assessed at 11% of the gross receipts only “to buy peace” and
“avoid litigation” cannot be accepted in view of the judgment of the Supreme
Court in MAK Data P. Ltd. (supra). The High Court accordingly
decided against the assessee and in favour of the revenue. 

The Assessee filed SLP before Hon. Supreme Court which was
Granted.

3.       Interest
payable – Non renewal of the deposits, Kishan Vikas Patras etc. Seized
and retained by department even after conclusion of the assessment proceeding –
Revenue must compensate for pecuniary loss due to non renewal – the same is not
payment of interest on interest.

CIT vs Chander Prakash Jain-;S.L.P.(C).No.23467 of 2016.
[(2016) 386 ITR (Statutes) 14]

[CIT vs Chander Prakash, [Writ Tax No. 566 of 2011 dt
:28/04/2015 (All)(HC)]

On 16th November, 1994, a search u/s. 132 (1) of
the Act, 1961 was conducted at the residential premises of the assessee. Again
on 22nd November, 1994 a search was made at Bank of the assessee
where some cash along with certificates of investments/deposits worth Rs. 3,45,997/- were seized u/s. 132 (1) (iii) of the Act. An order u/s. 132 (5)
of the Act was passed by the AO for retaining the aforesaid assets on 13th
March, 1995.

In response to the notice u/s. 148 of the Act return of
income showing an income of Rs. 3,466/- was filed. Assessment order was made
u/s. 143/148 of the Act, income was determined at Rs. 84,959/- under the head
income from other sources and Rs. 16,50,000/- under the head of long term
capital gains. No credit was given to the assessee by the AO for the money
retained u/s. 132 (5) of the Act, 1961. Assessee filed an appeal before the
CIT(A), which was allowed and the demand was reduced to nil. The department
being not satisfied with the order of the appellate authority, filed an appeal
before the Tribunal. The appeal was partly allowed by the Tribunal.

On 18th January, 2007, an intimation was given by
the AO about the seized money. Assessee also made an application before the
CIT, Meerut for release of the seized assets, with a further prayer that the
assessee be compensated for pecuniary loss due to non renewal of the deposits
and interest u/s. 132B (4) of Act, 1961. Since the said application was not
considered, assessee filed a Writ Petition.

The High Court disposed of the writ petition with a direction
upon AO to decide the application of the assessee within the time permitted by
the High Court. The AO has refused to release the seized assets and to make
payment of the interest as claimed by the assessee. Not being satisfied, the
assessee again approached the Court by filing a writ petition. The High Court
after hearing the learned counsel for the parties recorded that prima facie
there is no justification for seized assets being not released. The High Court
recorded the statement of the department that the department is ready to
release the seized assets and assessee may collect the same. It is not in
dispute that the assets have been released in favour of the assessee, which
include the Kishan Vikas Patras, Indira Vikas Patras, Bank Fixed Deposit
Receipts, etc., these could not be encashed by the assessee as the
maturity date had expired and the value has been transferred to unclaimed
account. However, there is no issue in that regard before this Court as the
department has assured the petitioner to do the needful so that certificates
are encashed.

The dispute between the parties before the High Court is
confined to the payment of interest on the money seized on 22nd November,
1994 till the date the tax liability of capital gains of Rs. 3,71,653 for the
A.Y. 1992-1993 was adjusted and on the remaining assets till the date they were
released. In the alternative, the assessee has prayed for a direction for
renewal of seized investments in shape of Indira Vikas Patras and Kishan Vikas
Patras and deposits with the banks with interest on the prevailing rates on the
maturity value till the assets were appropriated/released.

It is the case of the assessee that during all these period,
the money would have augmented by nearly four times of its value in the year
1994. The assessee submitted that as per the order of retention u/s. 132 (5) of
Act, 1961, the seized assets comprise of cash, Indira Vikas Patras, Kishan
Vikas Patras etc. of Rs. 3,45,997/-, they were retained against the
liability of Rs. 5,81,133/- treating them as undisclosed income and Rs.
67,038/- against existing liability.

The retention of seized assets beyond the date of regular
assessment is without authority of law. The Revenue has retained the assets for
more than 19 years without authority of law, therefore, the assessee must be
compensated for loss of interest. In the alternative, it is submitted that the
Revenue could have appropriated the seized amount in April, 1996 against the demand
notice dated 29th March, 1996, no interest u/s. 220 (2) of Act, 1961
could have been levied. The Revenue is liable to pay statutory interest under
Sections 132B (4) and 244A of the Act, 1961. He explained that the Revenue
cannot indirectly keep the money on the plea that there will be a demand and
therefore, the money should be allowed to be kept with the Revenue. It is
further explained that due to failure of the Revenue either to release the
seized assets retained without authority of law/ failure to get the Indira
Vikas Patras, Kishan Vikas Patras etc. renewed on the date of maturity
in the year 1999, the assessee suffered pecuniary loss.

The asssessee has relied upon the judgment of the Apex Court
in the case of Chironjilal Sharma Huf vs. Union of India & Others reported
in (2014) 360 ITR 237 (SC) for the proposition that liability as
per the order of the AO on being overturned by the Tribunal, the assessee
becomes entitled to interest for pre-assessment period also u/s. 132B (4) (b)
of Act, 1961. It has also been explained that interest on post assessment
period is to be dealt with in accordance with Section 240 or Section 244A of
Act, 1961. Reference has also been made to the judgment of the Apex Court in
the case of Sandvik Asia Ltd. vs. Commissioner of Income Tax, Pune &
Others
reported in (2006) 2 SCC 508, wherein it has been
held that if a person can be taxed in accordance with law and hence, where
excess amount is collected or any amounts are withheld wrongfully, the revenue
must compensate the assessee and any amount becoming due to the assessee u/s.
240 of the Act, 1961 would encompass interest also.

Revenue disputed the correctness of the stand so taken on
behalf of the assessee. It is submitted that no interest is payable to the
assessee in respect of the assets not sold or converted into money and that the
cash which was seized from the assessee, has already been utilised, hence there
is no cash, is lying unutilised in the P.D. Account. It is further stated that
interest has been charged strictly as per the order of the CIT, therefore, the
relief for refund of the same, as prayed, appears to be misconceived.

The High Court said that, it is not in dispute nor any
explanation from the side of the department as to why these Kishan Vikas Patras,
Indira Vikas Patras, Fixed Deposit Receipts etc. were retained by the
department even after the assessment proceedings had been completed in the year
1996 and as to why the same were not encashed/renewed. According to the Court,
the money invested in the shape of Kishan Vikas Patras, Indira Vikas Patras etc.
continued to be the money available with the Union of India all along. This
money was utilised by the Government for its own purposes, which fact can be
inferred as the Vikas Patras etc. were never encashed. The issue as to
whether the assessee is to suffer in respect of loss of interest on these
Kishan Vikas Patras, Indira Vikas Patras etc. for the inaction on the
part of the department especially when the money lay with the Union of India
itself. According to the Court the facts of this case are more or less
identical to those in the case of Chironjilal Sharma Huf , Sandvik Asia
Ltd. (supras) and Commissioner of Income-Tax vs. Gujarat Fluoro Chemical
(2013)
358 ITR 291 (SC
). In the case of South Eastern Coalfields Ltd. vs.
State of M.P. & Others
reported in (2003) 8 SCC 648,
the Apex Court has laid down as follows: “Once the doctrine of restitution
is attracted, the interest is often a normal relief given in restitution. Such
interest is not controlled by the provisions of the Interest Act of 1839 or
1978.”

Thus it was held that the order of the ACIT refusing to make
payment of interest u/s. 132B of the Act, 1961 on the ground that Kishan Vikas
Patras, Indira Vikas Patras, Fixed Deposit Receipts etc. had not been
encashed, cannot be legally sustained and was quashed. The ACIT was directed to
redetermine the interest in light of the judgment of the Apex Court in the
cases of Chironjilal Sharma Huf, Sandvik Asia Ltd. (Supras) strictly
in accordance with the provisions of the Act.

The Revenue filed SLP before Supreme Court which was
dismissed.

4.       Book
profit – Accounts prepared in accordance with the provisions of part II and III
of Schedule VI to the Companies Act – it was not open to the AO to embark upon
a fresh inquiry in regard to the entries made in the books of account of the
company.: U/s. 115J

IT. vs. M/s J.K.Synthetics Ltd. Kamla Tower, (2016)
S.L.P.No.23617 of 2016 ; [ (2016) 387 ITR(Statutes) 2 ]

CIT. vs. M/s J.K.Synthetics Ltd. Kamla Tower, [ ITA No 451
of 2009 dt :01/10/2015 (All)(HC).]

The assessee is a public limited company engaged in the
manufacture of synthetic yarn and cement. For the AY: 1988-89, the assessee
filed a return declaring a loss. The assessee claimed depreciation after
revaluing its fixed assets. The AO found that as per section 115J of the Act,
net profit shown in the profit & loss account was in accordance with the
provisions of part II and III of Schedule VI to the Companies Act, 1956. The AO
however, was of the opinion that the method of computation of profit & loss
was not in consonance with the provisions of section 350 of the Companies Act,
and, consequently, disallowed the excess depreciation and added that amount in
the profit & loss account.

The AO passed an assessment order u/s. 143(3) of the Act
after making certain additions and disallowances under various heads.

Being aggrieved, the assessee filed an appeal, which was
partly allowed. The matter was taken to the Tribunal. The Tribunal allowed the
appeal against which the Department filed the appeal before High Court.

The assessee’s appeal was accepted by the Tribunal relying
upon the decision of the Supreme Court in the case of Apollo Tyres Ltd.
vs. Commissioner of 3 Income-Tax, (2002) 255 ITR 273 (SC)
. The Tribunal
held as under: “We have considered the rival submission and the decisions
relied upon by the ld. A.R. Since the Revenue has not brought to our notice any
other decision contrary to the decisions relied upon by the led. Counsel, we
decide this issue in assessee’s favour as covered by the decision of the
Hon’ble Supreme Court in the case of Apollo Tyres Ltd. (supra). This ground of
the assessee is allowed.”

Before the High Court, the Department submitted that since
the profit & loss account was not prepared in accordance with the
provisions of part II and III of Schedule-VI to the Companies Act, the AO was
justified in revising the net profit u/s.115J of the Act.

The Supreme Court in Apollo Tyres (Supra) considered
the question as to whether the AO while assessing a Company for income-tax
u/s.115J of the Income-tax Act could question the correctness of the profit and
loss account prepared by the assessee and certified by the statutory auditors
of the company as having been prepared in accordance with the requirements of
Parts II and III of Schedule VI to the Companies Act. The Supreme Court held
that the AO was bound to rely upon the authentic statement of accounts of the
company and had to accept the authenticity of the accounts with reference to
the provisions of the Companies Act, which obligates the company to maintain
its account in a manner provided by the Companies Act.

The Supreme Court had held that the AO while computing the
income u/s. 115J had only the power of examining whether the books of account
were certified by the authorities under the Companies Act as having been
properly maintained in accordance with the Companies Act. The AO thereafter had
a limited power of making increases or reductions as provided for in the
Explanation to the said Section. The Supreme Court, consequently, held that the
AO did not have the jurisdiction to go behind the net profit shown in the
profit and loss account except to the extent provided in the Explanation to
Section 115J. The said decision was reiterated by the Supreme Court in Malayala
Manorama Co. Ltd. vs. Commissioner of Income-tax, (2008) 300 ITR 251 (SC).

Once the finding has been given, the AO could not go behind
the net profit shown in the profit and loss account except to the extent
provided in the Explanation to section 115J of the Act. The High Court held
that the provision of section 115J does not empower the AO to embark upon a
fresh inquiry in regard to the entries made in the books of account of the
company.

The High Court dismissed the revenue’s appeal.

The Revenue filed SLP before Supreme Court which was
dismissed.

5.       Depreciation
– on the fixed assets acquired by considering the present-day value of gratuity
as well as the leave salary liability – as forming part of the cost of these
assets. – SLP Granted

CIT vs. Hooghly Mills Ltd, S.L.P.No.16674 of 2015; [
(2016) 387 ITR (Statutes) 22]

(Hooghly Mills Ltd vs. CIT [ ITA no. 120 of 2000 ; dt
:09/02/2015(Cal)(HC))

The assessee acquired fixed assets like land, building and
also plant & machinery, for which the price had to be paid partly in cash
and partly by way of taking over the accrued liability in respect of the gratuity
and leave salary payable to the workers. For the purpose of computing the cost
of the assets, only the present-day value of these accrued liabilities was
taken into consideration by the assessee. Tribunal reversed the orders of the
lower authorities and directed the AO to allow the claim of the assessee
towards depreciation on the fixed assets acquired by it by considering the
present-day value of the gratuity as well as the leave salary liability as
forming part of the cost of these assets.

Aggrieved by the order of the Tribunal the Revenue filed an
appeal before High court . Revenue submitted that the question is no longer res
integra
since the point has already been decided in favour of the Revenue
by the Supreme Court in the case of the assessee itself in the case of Commissioner
of Income Tax vs. Hooghly Mills Co. Ltd.
reported in (2006) 287
ITR 333 (SC)
wherein it was held that the expenditure on taking over
the gratuity liability is a capital expenditure, yet no depreciation is
allowable on the same because section 32 of the Income-tax Act states that
depreciation is allowable only in respect of buildings, machinery, plant or
furniture, being tangible assets, and know how patents, copyrights, trade
marks, licences, franchises or other business or commercial rights of similar
nature being intangible assets. The gratuity liability taken over by the
company does not fall under any of those categories specified in section 32. No
depreciation can be claimed in respect of the gratuity liability even if it is
regarded as capital expenditure. The gratuity liability is neither a building
machinery, plant or furniture nor is it an intangible asset of the kind
mentioned in section 32(1)(ii). Had it been a case where the agreement of sale
mentioned the entire sale price without separately mentioning the value of the
land, building or machinery, we would have remitted the matter to the Tribunal
to calculate the separate value of the items mentioned in section 32 and grant
depreciation only on these items. Hence, it was held that no depreciation can
be granted on the gratuity liability taken over by the assessee.

The assessee has submitted that the Apex Court was
considering the matter in the light of the agreement dated 24th
March, 1988 entered into between the assessee and M/s. Fort Gloster Industries
Ltd. whereas the case before us arose out of an agreement dated 30th August,
1994 entered into between the assessee and India Jute & Industries Ltd.
Assessee added that the present agreement contained a stipulation which was
conspicuous by its absence in the earlier agreement. The following lines
appearing in clause 2 of the agreement “at or for the price of Rs. 410.-
lakhs only free from all encumbrances and liens and liability save and except
those which have been assumed and taken over by the purchaser as hereinafter
mentioned and subject to the terms and conditions hereinafter appearing.”

Assessee has contended that this stipulation was not there in
the agreement dated 1988. Therefore, the facts and circumstances of the case
are different. The clause 4 of the agreement which shows that money
consideration has also been differently apportioned than what was in the
earlier agreement. Assessee has contended that when the facts and circumstances
are different, the question of the application of the judgment of the Supreme
Court to the case in hand, does not arise.

Assessee further contended that in any case there can be no
denial of the fact that the cost of acquisition of the assets is both money
paid and money promised. Assessee has submitted that neither principle nor law
can assist the revenue in contending that they shall permit depreciation only so
far as the money paid is concerned, but omit to do so with respect to the money
promised. The assets were purchased at a price which is aggregate of the amount
paid and promised. Therefore, the depreciation shall take place of the combined
value of the assets and not in respect of the money paid only. Assessee
submitted that the Hon’ble Apex Court’s attention was not drawn to the fact
that liability on account of gratuity taken over by the purchaser lost the
character of outstanding gratuity and partook the character of consideration in
the hands of the assessee. Once it partook the character of consideration,
there is no reason why the depreciation should not be allowed. The liability on
account of gratuity was in the hands of the seller. The buyer did not enjoy any
service of the employee nor could have been in law liable for payment of any
gratuity to the employees of the seller. The buyer became liable because the
buyer undertook to pay the debt due by the seller. Therefore, the liability is
on account of consideration. Assessee submitted that the case is illustrated by
sub-section 2 of section 43 which provides that paid means, actually paid or
incurred according to the method of accounting. Assessee contended that there
cannot be any dispute that the liability was incurred and it was incurred on
account of acquisition of the assets.

The High Court said that they were bound by the views
expressed by the Apex Court. Therefore, re-consideration, if any, can only be
by Supreme Court and not by the High Court. However the court felt that the
matter needs re-consideration by Supreme Court.

The Assessee filed SLP before Supreme Court
which was granted.

22. Revision – Section 263 – A. Y. 2007-08 – Assessee changing method of accounting in accordance with accounting standard 7 – Known and recognised method of accounting and approved as proper – Not erroneous and prejudicial to Revenue – Revision not warranted

Princ. CIT vs. A2Z Maintenance and Engineering Services
Ltd.; 392 ITR 273(Del):

The assessee was engaged in the construction business. For
the A. Y. 2007-08, the transactions in its return were accepted in the scrutiny
assessment u/s. 143(3) of the Act. The Assessing Officer noted that the
assessee provided maintenance services such as housekeeping and security
services and accepted the returned income without any disallowance. The
Commissioner issued notice u/s. 263 of the Act taking the view that Rs. 11.98
crore shown as deferred revenue income by changing the method of accounting in
accordance with Accounting Standard (AS)-7 resulted in lowering of profit. The
Commissioner finally made the order revising the assessment as erroneous and
prejudicial to the Revenue and remitted the matter for consideration to the
Assessing Officer. The Tribunal set aside the order of the Commissioner.

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

“i)  The ruling of the Tribunal is largely based
upon the recognition of Accounting Standard-7 in the given facts and
circumstances of the case and that in fact the matter had received scrutiny by
the Assessing Officer at the stage of original assessment. Besides this method
was a known and recognised method of accounting and approved as a proper one.

ii)   Therefore,
the Tribunal was right in holding that the exercise of power u/s. 263 of the
Act was not warranted.”

21. Transfer pricing – A. Y. 2006-07 – International transaction – Arm’s length price – Selection of comparables – Company outsourcing major parts of its business cannot be taken as comparable for company not outsourcing major part of its business

Princ. CIT vs. IHG IT Services (India) P. Ltd.; 392 ITR 77
(P&H):

For the A. Y.  2006-07,
the Tribunal excluded the companies N and G from the list of comparables on the
ground that a substantial part of their business was outsourced and outsourcing
exceeded 40%, which was not so in the case of the assessee. In the case of N,
the Tribunal held that it was not a valid comparable also on the ground that
another company had been merged into it.

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

“i)  Both the companies were not appropriate
comparables, since a major part of their business was outsourced, whereas the
major part of the assessee’s business was not outsourced.

ii)  Moreover, the company V had a low employee
cost of Rs. 1.25% of operating revenue. The assessee’s wages to sales was 53%
which was not comparable to V. Thus the exclusion of N and V was justified.”

20. Return – Belated revised return for claiming exemption in terms of Supreme Court decision and CBDT circular – High Court has power to direct condonation of delay and granting of exemption

S. Sevugan Chettiar vs. Princ. CIT; 392 ITR 63 (Mad):

The assessee, an employee of ICICI Bank, retired under the
Early Retirement Option Scheme, 2003. For the year of retirement the assesee
filed the return of income and the assessment was finalised. Subsequently, the
assessee came to know that the Supreme Court, in the case of S. Palaniappan
vs. ITO (2015) 5 ITR-OL 275
(SC) held that a person, who has opted
for voluntary retirement under the Early Retirement Option Scheme shall be
entitled to exemption u/s. 10(10C) of the Act. Following the decision, the CBDT
issued a circular dated 13/04/2016 stating that the judgment of the Supreme
Court be brought to the notice of all officials in the respective jurisdiction
so that relief may be granted to such retirees of the ICICI Bank under Early
Retirement Option Scheme 2003. On coming to know of this, the assessee filed a
revised return claiming the benefit u/s. 10(10C) of the Act, referring to the
said decision and the circular. The Assessing Officer rejected the claim on the
ground that the revised return was filed beyond the time stipulated u/s. 139(5)
of the Act.

The Madras High Court allowed the assesee’s writ petition and
held as under:

“i)  Clause (c) of sub-section (2) of section 119
of the Income-tax Act, 1961 states that the CBDT may, if it considers as
desirable or expedient so to do for avoiding genuine hardship in any case or
class of cases, by general or special order, relax any requirement contained in
any of the provisions contained in Chapter IV or Chapter VI-A of the Act. Thus
if the default in complying with the requirement was due to circumstances
beyond the control of the assessee, the Board is entitled to exercise its power
and relax the requirement contained in Chapter IV or Chapter VI-A. If such a
power is conferred upon the Board, this Court, while exercising jurisdiction
u/s. 226 of the Constitution of India, would also be entitled to consider
whether the assessee’s case would fall within one of the conditions stipulated
u/s. 119(2)(c).

ii)  The Board issued a circular on 13/04/2016 with
a view to grant relief to retirees of the ICICI Bank under the Early Retirement
Option Scheme. The circular issued by the CBDT was in exercise of powers
conferred u/s. 119.

iii)  The assesee being a senior citizen could not
be denied the benefit of exemption u/s. 10(10C) of the Act and the financial
benefit that had accrued to him, which would be more than a lakh of rupees. The
Respondent is directed to grant the benefit of exemption u/s. 10(10C) of the
Act and refund the appropriate amount to the petitioner, within a period of
three months from the date of receipt of a copy of this order.”

19. Penalty – Concealment of income – Sections 92CA and 271(1)(c) – Recomputation of arm’s length price of specified domestic transaction not carried out at arm’s length – Transactional net margin method or comparable uncontrolled price method – difference in method leading to rejection of loss claimed in respect of genuine new line of business – Penalty cannot be imposed –

CIT vs. Mitsui Prime Advanced Composites India Pvt. Ltd.;
392 ITR 280 (Del):

Based upon the Transfer Pricing Officer’s Determination of
the arm’s length price, the Assessing Officer rejected the assessee’s claim
that the transactional net margin method was applicable and adopted the
comparable uncontrolled price method u/s. 92CA of the Act, where the difference
in the method led to the rejection by the Assessing Officer of the losses
claimed by the Assessee. The assessee did not appeal as it had consistently
incurred losses. The Assessing Officer initiated penalty proceedings on the
ground that an adverse order u/s. 92C attracted the Explanation 7 to section
271(1)(c). The Assessing Officer was of the opinion that the explanation
offered by the assessee was not satisfactory and did not display good faith,
which was a prerequisite under Explanation 7. He therefore imposed penalty u/s.
271(1)(c) of the Act. The Tribunal found that the assessee had acquired
business from one GSC for supply of products as well as availing the
engineering services to set up a plant for manufacturing the designated
products which included the manufacturing facility and resulted in the sale of
goods and which indicated the benefit derived by the assessee from the three
international transactions with its associate enterprises. The Appellate
Tribunal held that to say that the assessee did not avail of any services at
all was incorrect. It also held that the assessee had not only acquired the new
business but also had availed of the services to set up a plant, the details of
which were disclosed to the Transfer Pricing Officer by a letter, which was
sufficient elaboration of the nature of services availed of by the assessee
under the three international transactions. It also held that since no
manufacturing activity was done by the assessee, in the past as it was simply a
trader, acquiring of “business” and availing of the services under the three
agreements with its associated enterprises could not be characterised as
duplication of services. The Tribunal deleted the penalty.

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

“i)  The Appellate Tribunal did not in any manner
deviate from Explanation 7 to section 271(1)(c) of the Act. Furthermore having
regard to the fact that the assessee’s claim was in respect of a new line of
business of manufacturing introduced for the first time in the given year, its
failure per se could not have trigged the automatic presumptive
application of Explanation 7 of section 271(1)(c) as perceived by the
authorities.

ii) The
application of the exception had to be based on the facts of each case and no
generalisation could be made. The Appellate Tribunal had elaborately dealt with
the rationale in rejecting the imposition of penalty by the Assessing Officer
and had not committed any error of law.”

18. Co-operative society – Deduction u/s. 80P(2)(a)(i) – Society providing credit facilities to members – Finding that assessee not a co-operative bank and its activities confined to its enrolled members in particular area – Class B members enrolled for purpose of availing of loans and not participating in administration are also members – Benefit of exemption cannot be denied to assessee

CIT vs. S-1308 Ammapet Primary Agricultural Co-operative
Bank Ltd; 392 ITR 55 (Mad):

The assessee was a co-operative society involved in banking
and trading activities. It filed a Nil return after claiming deduction u/s.
80P(2)(a)(i) of the Act. The Assessing Officer disallowed the claim of the
assessee on the ground that the assessee had lent monies to the members, who had
undertaken non-agricultural/non-farm activities and had received commercial
interest, that since interest was received, the non-farm sector loans did not
qualify for deduction u/s. 80P(2)(a)(i), that the activity of the assessee was
in the nature of commercial banking activity, that u/s. 80P(2)(a)(i), deduction
was available only if primary agricultural credit societies were engaged with
the primary object of providing financial assistance to its members for
agricultural activities. The Commissioner (Appeals) allowed the assessee’s
claim. The Tribunal perceived that in the definition of “member” u/s. 2(16) of
the Co-operative Societies Act, 1983, the associate member under clause 2(6)
was also included. It held, that therefore, the enrolled class B members who
had availed of loans from the assessee could not be treated as non-members and
consequently held that the assessee was entitled to deduction u/s. 80P(2)(a)(i)
of the Act.

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

“i)  The appellate authorities had clearly
perceived that the assessee was not a co-operative bank and that the activities
of the assessee were not in the nature of accepting the deposits, advancing
loans, etc., but was confined to its members only and that too in a
particular geographical area.

ii)  Exemption u/s. 80P(2)(a)(i) could not be
denied on the ground that the members of the assessee society were not entitled
to receive any dividend or have any voting right or right to participate in the
general administration or to attend any meeting etc., because they were
admitted as associate members for availing of loans only and were also charged
a higher rate of interest.

iii)   The
assessee society was entitled to deduction u/s. 80P(2)(a)(i) of the Act.”

17. Charitable purpose – Registration u/s. 12AA – A. Y. 2009-10 – Cancellation of registration- Assessee a housing development authority constituted under Act of Legislature – No activity demonstrating that assessee not genuine trust – No material indicating that assessee or its affairs not carried out in accordance with object of trust – Registration cannot be cancelled

DIT(E) vs. Maharashtra Housing and Area Development
Authority; 392 ITR 240 (Bom)

The assessee is a housing development authority registered
u/s. 12AA of the Act. The Director of Income-tax (Exemption) received a
proposal from the Assistant Director stating that the assessee had been
carrying on activities in the nature of trade, commerce or business, and had
gross receipts therefrom in excess of Rs. 10 lakh and that the proviso
to section 2(15) of the Act, would be attracted and therefore requested to
consider the withdrawal of registration. The Director referred to the details
of income in income and expenditure account and profit of Rs. 114.48 crore out
of sale of housing and income by way of lease rent, tenancy deposits, and based
on that issued a show cause notice to the assessee. The assessee pointed out
that its activities were in furtherance of the Maharashtra Housing and Area
Development Act, 1976, it had no profit motive, far from indulging in any trade
or commerce and it gave houses to middle class families at affordable rents,
that the income was on account of sale of housing stock and not from a
systematic commerce and business activities. The Director (Exemption) cancelled
the registration. The Tribunal held that the assessee was entitled to
registration and set aside the order of cancellation of registration.

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

“i)  There was nothing referred to by the Director
(Exemption) which could show that the assessee was undertaking any activity
which would demonstrate that it was not a genuine trust or institution. There
was no material which would indicate that the assessee or its affairs were not
being carried out in accordance with the object of the trust or institution.

ii)  These
two aspects referred to in subsection(3) of section 12AA of the Act, and the
materials in that behalf were completely lacking. Therefore, there was no
reason for the Director (exemption) to exercise the power which he purported to
exercise.”

16. Capital gain – Exemption u/s. 54F – Investment of capital gain in purchase of residential house outside India before amendment by Finance No. 2 Act, 2014 – Assessee entitled to exemption u/s. 54F

Leena Jugalkishor Shah vs. 392 ITR 18 (Guj):

The assessee, a non-resident Indian, disposed of property
situated in India and purchased a residential house in United States. The
assessee claimed exemption u/s. 54F of the Act, in respect of the investment of
capital gain in the residential house in United States. The Assessing Officer
held that the residential house purchased outside India was not subject to tax
in India within the meaning of section 54F of the Act, and thus disallowed the
claim for exemption u/s. 54F of the Act. The Tribunal confirmed the
disallowance.

On appeal by the assessee, the Gujarat High Court reversed
the decision of the Tribunal and held as under:

“i)  The assessee had purchased a residential house
in the United States out of the capital gains on sale of plot in India and thus
she had fulfilled the conditions stipulated in section 54F of the Act. The
assessee invested the capital gains in a residential house within the
stipulated time.

ii)  There was no condition in section 54F of the
Act at the relevant time that the capital gains arising out of transfer of
capital asset should be invested in a residential house situated in India. The
language of section 54F of the Act before its amendment was that the assessee
should invest capital gains in a residential house. It was only after the
amendment to section 54F of the Act, by the finance (No. 2) Act, 2014, which
came into force w.e.f. April 1, 2015 that the assessee should invest the sale
proceeds arising out of sale of capital asset in a residential house situated
in India within the stipulated period.

iii)  When section 54F was clear and unambiguous,
there was no scope for importing into the statutes words which were not there.
Moreover, when the language of a taxing provision was ambiguous or capable of
more meanings than one, then the court had to adopt the interpretation which
favoured the assessee.

iv)   The
benefit of section 54F before its amendment could be extended to a residential
house purchased outside India and hence the claim of exemption was to be
allowed.”

15. Appellate Tribunal – Order to be passed within 90 days – Section 254(1) and ITAT Rules 34(5)(c) and 34(8) – A. Y. 2009-10 – Rule requiring order to be pronounced within 90 days of conclusion of hearing – Tribunal passing order beyond period of 90 days – Assessee applying rectification on ground delay operated to its prejudice – Rejection not justified – Tribunal to consider rectification application afresh

Otters Club vs. DIT(Exemption); 392 ITR 244 (Bom):

The Tribunal passed the order dated 03/02/2016 u/s. 254(1) of
the Income-tax Act, (hereinafter for the sake of brevity referred to as the
“Act”) 1961 beyond the period of 90 days from the date of conclusion
of its hearing on 22/09/2015 for the A. Y. 2009-10. The assessee’s application
for rectification of the order on the ground that this delay resulted in
prejudice to the parties as binding decisions of co-ordinate Benches though
referred to were ignored, was dismissed.

The Bombay High Court allowed the assessee’s writ petition
and held as under:

“i)  The Tribunal while rejecting the rectification
application did not dispute the fact that the order dated 03/02/2016 was passed
beyond the period of 90 days from the date of conclusion of its hearing.
However, it recorded that administrative clearance had been taken to pass such
an order beyond the period of 90 days.

ii)  The meaning of “administrative clearance” was
not clear in the face of rule 34(5)(c) read with rule 34(8) of the
Income-tax(Appellate Tribunal) Rules, 1963. The provisions mandated the
Tribunal to pronounce its order at the very latest on or before the 90th day,
after the conclusion of the hearing. Therefore, the order was not sustainable.

iii)  The
Tribunal was to consider the rectification application afresh.”

Expenditure by Pharmaceutical Companies On Doctors

Issue for Consideration

Explanation 1 to section 37(1) declares, for the removal of
doubts, that any expenditure incurred for a purpose which is an offence or
which is prohibited by law shall not be deemed to have been incurred for the
purpose of business or profession and no deduction shall be allowed for such an
expenditure.

It is the usual industry practice for companies, engaged in
the business of manufacturing pharmaceutical products, to distribute their
products amongst the medical practitioners by way of free samples and gift
articles; to conduct and sponsor seminars and lectures in and outside India; to
hold dinner and parties; to sponsor holidays and pay for travel and
accommodation of doctors and their spouses and incur such other expenses.

The expenditures so incurred is usually classified as the
advertisement and sales promotion expenses and is claimed as a business
expenditure. The validity of such claim is examined by the Supreme Court in the
case of Eskayef Pharmaceuticals Ltd, 245 ITR 116 (SC), in the context of section
37(3A)
, now omitted. A controversy has arisen, on account of the
conflicting decisions of the Tribunal, in the recent years, on the subject of
allowance or otherwise of the deduction of such expenditure, post issue of a
circular No.5 dt. 1.08.2012 by the CBDT in pursuance of the amendments of 2009
in the Indian Medical Council (Professional Conduct, Etiquette & Ethics)
Regulations, 2002
( ‘Regulations’).

Liva Healthcare Ltd’s case.

The issue had first arisen in the case of Liva Healthcare
Ltd. vs. DCIT, 161 ITD 63
. In the said case, the company for assessment
year 2009-10 had incurred expenditure on travel and accommodation of doctors
and their spouses to Istanbul and Hongkong and towards distribution of free
samples to the physicians. The tours were conducted to promote the products and
samples were distributed free of cost as a necessity of business requirement of
the assessee. The company had submitted before the AO that the expenditures
were incurred, including on samples given free of cost to doctors, to obtain
information regarding efficacy of the medicine and for the purposes of
advertisement, publicity and sales promotion; that samples were given free of
cost to the doctors so that they could try the same on patients and inform the
medical representative of the assessee about their results and their
experiences; that the nature of the product sought to be sold was such that it
could be done through the doctors alone and as such promoted sales also; that
when such expenditure was incurred on doctors and samples were given to
doctors, certain amount of good relationship was created with them who might
then buy or prescribe those medicines in preference to other similar products.
In a nutshell, it was explained that the twin purpose of such expenditures was
to test the efficacy of the products as well as for advertisement, publicity or
sales promotion. It was also submitted that the samples were manufactured as
“physician samples not for sale” and the suppliers invoices were
marked as “physician samples” only. The assessee relied upon a few
decisions including the decision in the case of Eskayef Pharmaceuticals
(India) Ltd., (supra) :

In assessing the total income, the A.O. disallowed the
expenditure incurred on travel and accommodation in full and also disallowed
25% of the expenditure claimed on distribution of free samples by applying
Explanation 1
to section 37(1) of the Act. The CIT(A) upheld the
disallowance of the travel and accommodation expenditure but deleted the
addition on account of disallowance of the expenditure in part of distribution
of the free samples by allowing the appeal of the assessee company, in part.

In cross appeals to the Tribunal, the revenue relied upon the
order of the A.O. while the assessee company reiterated its stand taken before
the A.O. Significantly, it brought to the notice of the Tribunal the order
passed by the Tribunal in its own case for assessment year 2008-09. The
Tribunal examined the provisions of the said Regulations of 2002 and in
particular clauses 6.4 and 6.8 as also the then newly amended clause
6.8
. It also took into consideration the decision of the Himachal Pradesh
High Court in the case of the Confederation of Pharmaceutical Industry vs.
CBDT, 355 ITR 388
wherein validity of the said CBDT circular No. 5 of
2012
and the said Regulations of 2002 governing professional ethics
of doctors was challenged and was found by the court to be as per the law and
salutary and issued in the interest of public and patients. The Tribunal also
took note of the decision of the Punjab and Haryana High Court in the case of CIT
vs. Kap Scan and Diagnostic Centre (P.) Ltd., 344 ITR 478
, wherein the
court had confirmed the disallowance of commission paid to the doctors, as not
allowable u/s. 37(1) of the Act, being against public policy and
prohibited by law.

The Tribunal at the outset expressed their agreement, in
principle, with its decision in assessee’s own case for assessment year
2008-09, so far as the expenditure incurred on distributing free samples to
test the efficacy of the pharmaceutical products, in accordance with the ratio
of the case of Eskayef Pharmaceuticals (India) Ltd. (supra), at the
initial stage of introduction of the products to get the feedback of the users
and held that such expenses could be said to be incurred wholly and exclusively
for the purposes of business satisfying the mandate of section 37 of the Act.
The Tribunal held that the physicians’ samples were necessary to ascertain the
efficacy of the medicine and for introduction of a new product in the market,
it was only by distributing the free samples that the purpose was achieved.

The Tribunal however proceeded to hold that where a
particular medicine had already been introduced into the market, in the past,
and its uses were established, giving of free samples could only be as a
measure of sales promotion and advertisement and that the ratio of the said
decision in the case of Eskayef Pharmaceuticals (India) Ltd.(supra),
delivered in the context of section 37(3A) of the Act, did not apply due to the
fact that the Finance Act, 1998 had thereafter, introduced an Explanation to
section 37
(1) of the Act which required that an expenditure, the purposes
which was an offence or prohibited under the law, was disallowed.

The Tribunal noted that the purpose for incorporation of the
said Explanation to section 37(1) had been explained by the CBDT in Circular
No. 772
, dated December 23, 1998. It further noted that the said Regulations
of 2002
prohibited, vide regulation 6.4.1, a physician from receiving any
gifts, gratuity, commission or bonus in consideration or return for referring
the patients for medical, surgical or other treatment.

It held that once the pharmaceutical products were
distributed after the products were introduced in the market and its uses were
established, giving of free samples to doctors and physicians would be a measure
of sales promotion which would be hit by regulation 6.4.1 of the said Regulations
of 2002
. It further held that the said regulation had a force of law and
the receipt of free samples amounted to receipt in consideration of or return
for referring patients and that such receipts were prohibited under regulation
6.4.1
of the said Regulations of 2002 inasmuch as the stated
objective of giving free samples to the doctors and physicians was to induce
them to write prescriptions of the said pharmaceutical products. It held that
the expenses could not be allowed as deduction while computing income from
business or profession.

The Tribunal drew support from the decision in the case of Eskayef
Pharmaceuticals (India) Ltd. (supra)
to hold that the test laid down by the
court, read in conjunction with Explanation to section 37 of the Act and
regulation 6.4.1. of the said Regulations of 2002, made it clear
that the expenditure on such free samples was hit by the Explanation to
section 37
of the Act and was not allowable as deduction.

In conclusion, the Tribunal held that the expenditure on
foreign travel and accommodation of doctors and their spouses was incurred with
the intent and the objective of profiting from the distribution and
entertainment and had a direct nexus with promoting the sales and
profitability, all of which made such expenditure violate the provisions of the
said Regulations of 2002. It held that the expenditure was incurred to
seek favours from the doctors by way of recommendation of the company’s
products which was an illegal gratification, was against public policy, was
unethical and was prohibited by law. Accordingly, the expenditure in question
was liable for disallowance in full as was held by the A.O. and the CIT(A).

PHL Pharma (P) Ltd.

The issue had again arisen in the case of PHL Pharma (P)
Ltd. vs. ACIT, 163 ITD 10(Mum. )
. In this case, the assessee company had
debited an amount aggregating to Rs. 83.93 crore to the Profit & Loss
Account towards advertisement and sales promotional expenses, for the year
ending on 31.03.2010. The said expenditure included expenses on distribution of
free samples and gift articles to medical practitioners and doctors, besides
the expenditures on conducting seminar and lecture meetings, journals and
books, travel and accommodation and such other items and things. The A.O.
disallowed an amount of Rs. 23 crore being that part of the expenditure that
was incurred on or after 10.12.2009, i.e. the date of notification of the said
amendments in the said Regulations of 2002. On appeal, the CIT(A) agreed
with the case of the assessee company and allowed the appeal.

On appeal by the Income tax Department to the Tribunal, it
was held as under:

   The said Regulations of 2002 dealt
with the professional conduct, etiquette and ethics for the registered medical
practitioners, only; it requires that they shall not aid or abet or commit any
of the prescribed unethical acts; it laid down the code of conduct for doctors
in their relationship with pharmaceutical and allied health sector industry.

   The CBDT Circular No. 5 of 2012 had
heavily relied upon the said Regulations of 2002.

   The code of conduct has meant to be followed
and adhered to by the medical practitioners and doctors alone and did not apply
any manner to pharmaceutical companies and the Delhi High Court in the case of Max
Hospitals vs. MCI had confirmed this position in WPC 1334 of 2013 dt.
10.01.2014.

   The Indian Medical Council did not have any
jurisdiction nor had any authority upon the pharmaceutical companies and could
not have prohibited such companies in conduct of their business.

   As far as the company was concerned, there
was no violation of any law or regulation. The provisions of section 37(1)
applied to a company claiming the expenditure and the violation of section
37(1) was to be examined w.r.t the company incurring the expenditure and not
the doctors who were the beneficiary of the expenditure. Even the additional
prohibition prescribed on 01.12.2016 applied only to the medical practitioners
and not to the pharmaceutical companies .

   The punishments or penalties prescribed in
the said Regulations applied only to the medical practitioners and not to the
companies.

   The CBDT in issuing the said circular No.
5
had enlarged the scope of the said Regulations by applying it to
the pharmaceutical companies without any enabling provisions to do so. It had
no power to create a new impairment adverse to an assesee or a class of
assessees, without any sanction of law. The circular issued should have
confirmed with the tax laws and should not have created a new burden by
enlarging the scope of a different regulation.

   The circular in any case could not be
reckoned retrospectively i.e., it could not be applied before the date of its
issue on 01.08.2012.

   The expenditure incurred by the assessee
company was in the nature of sales and business promotion and was to be
allowed; the gift articles bore the logo of the assessee and could not be held
to the freebies; the free samples proved the efficacy of the products of the
company and again were not in violation of the said Regulations framed
by the Medical Council of India.

   The decision in the case of Confederation
of Indian Pharmaceutical Industry (supra)
upheld the validity of the said
circular with a rider that no disallowance should take place where the assessee
satisfied the authority that the expenditure was not in violation of the Regulations
framed by the Medical Council of India.

–    The assesseee company, in the opinion of the
CIT(A),  in the case had proved that the
expenditure were not in violation of the said Regulations.

   The action of the CIT (A) was upheld and the
expenditure claimed was allowed by the Tribunal.

Observations

The conflicting decisions have brought out a very interesting
issue wherein all the sections of the society are required to address a few
pertinent questions; whether one can participate in an offence, even trigger
it, and still not be accused of the offence? For example, can one give a bribe
to a government official and still plead that he cannot be punished or can one
pay a ransom and plead that he cannot be punished? Can one be a party to illcit
activities and plead that not him but the other person be punished for the
crime? Can one be an abettor or instigator of a crime or an offence and plead
innocence?

It may be possible to legally resolve the controversy by
holding, that in the absence of a provision of law that expressly provides for
the conviction, in explicit words, of both the parties to an offence, one of
the parties to an offence, though found to be abetting the offence, will go
scot free. The apparently simple answer may not remain so when the facts are
tested on the touchstone of public policy and ethics and importantly the
questions raised. In our view, these are the questions and the factors that
were relevant for deciding an issue of allowance of an expenditure even before
the Explanation to section 37 was issued in the year 1998. The courts, in scores
of the decisions, had occasion to address this issue even before the issuance
of the said Explanation and had largely held that an expenditure that was
against the public policy was not deductible. It is this aspect of the issue
that was partly touched in Liva Healthcare’s case and with
respect could have been explored in depth in the PHL Pharma’s case.

Medical Council of India is constituted under the Medical
Council Act, 1956 with the object of governing and regulating the practice of
medicines in India. It has been empowered to formulate rules and regulations
for effectively carrying out its objectives. The said council, empowered under
the said Act, has formulated The Indian Medical Council (Professional
Conduct, Etiquette and Ethics) Regulations
, 2002 which was amended in 2009
and the amendment was notified on 10-12-2009 by the council. The said Regulations
vide amended clauses 6.4 and 6.8 provide for rules that prohibit receipt of the
freebies and many related acts and items and things by the medical
practitioners. Vide regulation 6.4.1, a physician is prohibited to
receive any gifts, gratuity, commission or bonus in consideration or return for
referring the patients for medical, surgical or other treatment. It reads as:
“6.4 Rebates and Commission: 6.4.1 A physician shall not give, solicit, or
receive nor shall he offer to give solicit or receive, any gift, gratuity,
commission or bonus in consideration of or return for the referring,
recommending or procuring of any patient for medical, surgical or other
treatment. A physician shall not directly or indirectly, participate in or be a
party to act of division, transference, assignment, subordination, rebating,
splitting or refunding of any fee for medical, surgical or other
treatment.”

Subsequent to the
notification of the said regulations, the CBDT has issued the Circular No. 5
dated 1-8-2012
directing the Income-tax authorities to disallow the expenditure
incurred on distribution of freebies on application of Explanation 1 to section
37(1) of the Income-tax Act. The relevant part reads as under; “It has been
brought to the notice of the Board that some pharmaceutical and allied health
sector Industries are providing freebees (freebies) to medical practitioners
and their professional associations in violation of the regulations issued by
Medical Council of India (the ‘Council’) which is a regulatory body constituted
under the Medical Council Act, 1956. 2. The council in exercise of its
statutory powers amended the Indian Medical Council (Professional Conduct,
Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009
imposing a prohibition on the medical practitioner and their professional
associations from taking any Gift, Travel facility, Hospitality, Cash or
monetary grant from the pharmaceutical and allied health sector Industries. 3.
Section 37(1) of Income Tax Act provides for deduction of any revenue
expenditure (other than those failing under sections 30 to 36) from the
business Income if such expense is laid out/expended wholly or exclusively for
the purpose of business or profession. However, the explanation appended to
this sub-section denies claim of any such expense, if the same has been
incurred for a purpose which is either an offence or prohibited by law. Thus,
the claim of any expense incurred in providing above mentioned or similar
freebees in violation of the provisions of Indian Medical Council (Professional
Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under
section 37(1) of the Income Tax Act being an expense prohibited by the law.
This disallowance shall be made in the hands of such pharmaceutical or allied
health sector Industries or other assessee which has provided aforesaid
freebees and claimed it as a deductable expense in its accounts against
income.”

The validity of the said circular has been examined by the
Himachal Pradesh High Court in the case of Confederation of Indian
Pharmaceutical Industries,
353 ITR 388. The Punjab and Haryana High Court
in the case of KAP Scan and Diagnostics, 343 ITR 476 has examined the
issue of allowance of expenditure incurred on payment of commission to the doctors
by the diagnostic company. Recently, the Chennai Tribunal examined the issue of
allowance of deduction of an expenditure incurred by the pharmaceutical
manufacturers on distribution of freebies to the medical practitioners in the
case of Apex Laboratories (P) Ltd, 164 ITD 81 to hold that such an
expenditure was not allowable as deduction in view of the said Regulations of
2002 issued by the MCI.

 The same CBDT circular
had come up for consideration in the case of Syncom Formulations (I) Ltd. IT
Appeal Nos. 6429 & 6428 (Mum.) of 2012, dated 23-12-2015
, wherein the
Tribunal held that CBDT circular was not be applicable in the A.Ys. 2010-11 and
2011-12 as it was introduced w.e.f. 1.8.2012. Similar issue of allowance of
such expenditure in the case of pharmaceutical companies had been decided in
favour of the assessee, in the case of UCB India (P.) Ltd. v. ITO, IT Appeal
No. 6681 (Mum.) of 2013, dated 13-05-2016
, wherein it was held that the
CBDT circular could not have a retrospective effect.

The question is, can a person participating in an act, which
is considered as an offence in the hands of other party, be held to have not
offended the law? Can he not be said to have abetted an offence? Can he be
treated as a conspirator? Can he be said to have triggered the offence? Can he
not be punished for exploiting the weakness of the week? The answers in our
opinion may or may not be available in the express provisions of a statute but
will have to be found from the understanding of the public policy which is one
of the important pillars of the jurisprudence, civil or criminal. It may be
simple to hold that once an act is an offence for one party it shall equally be
an offence for anothers party whether expressly provided for in a statute or
not and the other party shall not be allowed to reap the benefits of such an
act, however, this apparently simple solution in our opinion, may not really
hold water in all cases and may not even be judicious. For example, in cases
involving ransom or protection money. The issue requires an in-depth debate
involving conscience of the society and perhaps cannot be adjudicated by only
interpreting one of the provisions of a statute in isolation.

Interestingly, the said circular vide paragraph
4 encourages the AO to tax the sum equivalent to value of freebees enjoyed by
the medical practitioner as business income or income from other sources as the
case may be depending on the facts of each case. The AO of such medical
practitioner or professional associations are directed to examine the facts and
take an
appropriate action.

30 days to GST: Many States, Many Rates, Many Credits, Many Dates

The GST journey, a concoction of ordeal, delay,
collaboration, negotiation, federalism, and convergence has come to its
conclusion. The leg of journey that laid the foundations of GST has culminated;
and a new journey will begin on 1st July, 2017. The SURPRISE of what
it will be is over. The IDEALISM of what it should be is also concluded. With
the law in place, we are about to see the how REALISM plays out and how the
nation copes with it.

Indian laws generally present a process larger than their
purpose. Bridging that difference has been a blind spot for Indian lawmakers.
While GST is projected as One nation, One tax; is that really so? While every
taxing apparatus of every state wants its powers to tax intact, we have ended
up with a GST that in substance is – Many states, Many rates. The spread of
compliances covering dates, rates, credits, invoicing, reverse charge and
filings; one feels that along with the states, the tax payer should also be
given compensation for going through this turbulence.

Some bigger and worrisome questions seem to hover
around the following:

a.  Will GST succeed in including the unorganised
sector in the tax base effectively and swiftly?

b.  Will GST be able to deal with the chasm
between the capabilities of medium sized businesses to deal with over sized
compliances vs. the exposure to the risk of non compliance?

c.  Will the entire chain get seamless credit of
taxes as they are meant to be? Will it not result in ‘unjust impoverishment’
considering the stringent sections such as 16(2) of IGST?

d.  Will GST make supply chain more fragile,
especially for those at the end of that chain?

e.  Will place of supply and time of supply
regulations not violate the principles of equity, certainty, convenience and
economy of collection?

f.   Will 3 phase monthly schedule of compliances
shift energies of business towards compliance?

g.  Lastly, what are the repercussions of
destination based consumption tax? Will the shift of focus from origin to
consumption dissuade production and related economic activities in states?

While GST does remain a bold attempt to unify the
multitudinous taxes that dissipate focus and energies of the nation, we have a
lot more ground to cover even after the GST rollout. While an economic and tax
union is achieved through GST, will we be able to integrate the poorest of
states into the economic benefits the richest states presently enjoy. It is
reported that three richest states are three times richer than the three
poorest states. Four richest states account for interstate trade of the
remaining twenty five states. While uniformity reduces level of differences at
an operational level, it does not necessarily bring result in real economic unity.
While we are jubilant about singularity of one indirect tax, we have some
larger concerns to face. We would not achieve much if we do not close in on the
economic unity, through massive reduction of disparities of income and wealth.
The words of C. Rajagopalachari sum it up – “you cannot achieve unity of this
country by imposing uniformity”.

One World, One Tax (Avoidance) Regime?

While most of us in India are engrossed and entangled in the
roll out of One Nation, One Tax regime, a major shift is getting concluded
globally. Nearly 100 jurisdictions will sign off on conclusions on Multilateral
Instruments (MLI). MLIs will be signed in Paris this month and will result in
‘transposing’ of BEPS projects results into more than 2000 Tax Treaties
worldwide. Upon signing the MLI, each country will apply the provisions of MLI
chosen by it into all the treaties or CTA (Covered Tax Agreements) listed by
them upon signing. MLI will result in amendment to the CTA if listed by both
countries. Of course each country will then ratify and notify those changes.
Some countries, who may not adopt MLI in toto, may only go for ‘minimum
standards’.

In the sphere of international tax, this scale of change is
unheard of, and is a huge milestone towards thwarting Base Erosion and Profit
Shifting in a concerted manner at this level. India is likely to express its
consent to be bound by the convention at the Paris meeting to be held in June
2017. The signing of international treaties being a delegated legislation, the
power to sign and implement MLI falls within the ambit of the Government and
therefore parliament approval is not required as such. The cabinet has already
given its approval last month.

Some of the likely impact will be:

a.  Principal Purpose Test may well become the default
anti-abuse measure;

b.  Avoidance of PE will be tackled by broadening
the definition and introduction of Specific Anti-Avoidance measures;

c.  Hybrid Mismatches caused by Transparent or
Dual-resident entities will be tackled with introduction of specific rules;

d.  Emphasis will be on the ‘place where the
activity is conducted’ and not just ‘rights to earn’;

e.  Consistency, Certainty and Predictability will
be known only as and when MLI is implemented by
all countries;

f.   A monitoring forum is set up for minimum
standards implementation;

g.  Signature, ratification and implementation by
countries will be the next step and the success of the entire process will
depend on how speedily the signatories will adopt the recommended measures.

At the ministerial level conference starting from 5th June,
we can expect a silent beginning to Global Tax Turmoil. MLI will close the
highways of Treaty Shopping and shelters like Azadi Bachao Andolan1 will
no longer be freely available. On reading the text, one will realise that it
will be very difficult to differentiate between evasion, avoidance and planning
as they all could be equated on the same lines. Credible deterrence is the
theme that runs through the script of MLI and BEPS actions. One of the
paragraphs from MLI preamble reads as under:

____________________________________________________________________________________

1   Union of India vs. Azadi Bachao Andolan and
Ors – 263 ITR 706 (SC)

Noting the need to ensure that existing agreements for the
avoidance of double taxation on income are interpreted to eliminate double
taxation with respect to the taxes covered by those agreements without creating
opportunities for non-taxation or reduced taxation through tax evasion or
avoidance (including through treaty-shopping arrangements aimed at obtaining
reliefs provided in those agreements for the indirect benefit of residents of
third jurisdictions);

We can hope that the disappearing of profits or shifting of
profits to low / no tax environments where there are little/no economic
activities will not be a legitimate/legal option anymore. In a lighter vein,
various forms of ‘sandwiches’ will now officially get the status of ‘junk’
food. Some estimates foresee saving of revenue loss of $100-240 billion or 4-10%
of global tax revenues. While BEPS seemed impossible, like GST, MLI signing
could well be a milestone towards achieving that impossible goal. A Bahubali
effect of sorts!

July 2017 Annual issue on GST

The Annual issue of the BCA
Journal (July 2017) is dedicated to GST. What a coincidence it will be that the
inauguration of GST and date of Journal publication both fall on the same day
which is also the CA day. The next issue will be a rich collection of about 20
articles on GST themes. Those who wish to circulate it to clients and friends;
you may please book additional copies in advance as per the information given
in this journal.

Insertion of Explanation in Entry Vis-à-Vis Effective Date

Introduction

Under the scheme of
Indirect Taxation, tax is attracted if the concerned goods are classified under
the taxable entry. There are instances when the entry is interpreted in a
particular manner. Subsequently the Government adds Explanation in the entry
for making its intentions clear. The dispute arises when such Explanation/s
have retrospective or prospective effect.

Taxation of Unmanufactured
Tobacco

Under Maharashtra Value
Added Tax Act, 2002 (MVAT Act), Entry A-45A exempts sale of unmanufactured
tobacco from levy of tax. However, an Explanation was added in said entry from
1.4.2002 stating that unmanufactured tobacco will not include the tobacco sold
in packages under a brand name. A dispute arose between assessees and Sales Tax
Department as to effective date of the Explanation. The view of Sales Tax
Department was that Explanation is clarificatory and it is effective
retrospectively from 1.4.2007 itself (since when the entry was existing) and
hence, liability arises retrospectively. The assessees were insisting that the
Explanation is substantive, hence effective from 1.4.2012 (i.e. from date of
insertion of such explanation) and hence no liability till 31.3.2012. In other
words, the issue was whether the given Explanation is clarificatory or
substantive.

The matter went to the
Bombay High Court, Aurangabad Bench in case of Amar Agencies (W.P. No.4944
of 2013) and others
which was decided on 5.5.2017    

Relevant Entry

The Hon. High Court has
reproduced the controversial entry and also given verdict on dispute as under:

“7. Upon consideration of
the arguments canvassed by learned counsel for respective parties, it is
manifest that we will have to deal with Entry 45A, it’s explanation, so also
entry 2401. For the sake of convenience, the same are reproduced below.

MAHARASHTRA VALUE ADDED TAX
ACT 2002

SCHEDULE A

1. ………

Before amendment

45A (a)       unmanufactured tobacco covered 
   Nil       1.4.2007

under tariff heading No.
2401                                                     
to

of the Central Excise Tariff Act,
1985.                            31.3.2012

After amendment

45A (a)       unmanufactured tobacco covered     Nil
      1.4.2012

                   under
tariff heading No. 2401                              to date

                   of
the Central Excise Tariff Act, 1985.

Explanation. For the removal of the doubts, it is hereby
declared that, the unmanufactured tobacco shall not include unmanufactured
tobacco when sold in packets under the Brand name.

8. The moot question would
be reading the explanation, as a substantive amendment or clarificatory.

9. Entry 45A of the Act of
2002 was amended by notification dated 31.03.2012 by the Government exercising
its powers u/s. 09 of the Act of 2002. Entry 45A as it stood prior to amendment
of 31.03.2002, it contained Clause B with no explanation. Vide notification
dated 31.03.2012 Clause B which dealt with biris is deleted and an explanation
is added. The bone of contention between the parties is the date of
applicability of amendment.

By the explanation, it is
declared that the unmanufactured tobacco shall not include unmanufactured
tobacco when sold in packets under the brand name. Prior to 31.03.2012, the
legislature did not make any distinction between unmanufactured tobacco sold in
brand name or otherwise. The Entry 45A is part of Schedule A, which details the
list of goods for which the rate of tax is nil. The unmanufactured tobacco
covered under tariff heading No. 2401 of the Central Excise Tariff Act, 1985 is
not taxable i. e. it’s tax is nil as per Entry 45A(a).

10. The Trade Circular,
under challenge, lays down that the said explanation is clarificatory in
nature. If the explanation is interpreted as a mere clarificatory, then the
question of its applicability prospectively or retrospectively may not arise.
When the explanation serves the purpose of clarification of the existing law,
there is no question of its prospective or retrospective operation, as the said
explanation would only explain and clear any mental cobwebs surrounding meaning
of statutory provision and to prevent controversial interpretation.
Explanations generally are intended more as a legislative exposition or
clarification of the existing law than as a change in it. If we go to the
literal words employed in the explanation, then the said explanation is
introduced for the removal of the doubts. The language of the explanation
depicts such intention. If the explanation is interpreted as merely clarificatory,
then the trade circular cannot be held to be erroneous.

11. Yet, we will have to
bear in mind that, the taxing statutes have to be interpreted strictly. We will
have to consider whether the incorporation of explanation to Entry 45A of the
Act of 2002 has altered the law as existing prior to the amendment dated
31.03.2012. While adding the said explanation, the entry 12 to Schedule D is
also amended.

12.  As per section 9(1A) of the Act, the State
Government has the powers to amend the Schedule by adding or modifying any
entry in the Schedule. The notification dated 29.03.2007 was in force upto 31st
March, 2012. Item B in the entry 45A is deleted with effect from 01.04.2012,
that would be interpretation of the fact that, notification dated 31.03.2012
operates prospectively. The trade circular dated 30th March, 2007
clarifies that the unmanufactured tobacco cleared under Chapter Head 2401 of
the Central Excise and Tariff Act will be exempted from tax. The trade circular
dated 6th August, 2009 also clarifies the same. Incorporation of
explanation has amendatory implication with effect from 1st April,
2012. The explanation in the notification dated 31st March, 2012
will have to be held as amendatory and not clarificatory. We are only concerned
with the position prior to 31.03.2012. As from 1st April, 2012, the
unmanufactured tobacco sold in brand name is taxable. We are only concerned
with unmanufactured tobacco covered under heading 2401 of CETA.

13. Considering the trade
circular dated 30th March, 2007 and 6th August, 2009, it
would be clear that the Department considered the unmanufactured tobacco
covered under Chapter Head 2401 of the Central Excise and Tariffs Act exempted
from tax. The said position subsisted till 31.03.2012. It would appear that, no
distinction was made between sale of unmanufactured tobacco in packet or in
retail or whether branded or not branded. For the first time, the said
distinction is made by virtue of explanation to Entry No. 45A of the
Maharashtra Value Added Tax Act 2002.

14. The explanation no
doubt begins with the expression “for removal of doubts”. However,
the same does not appear to be plain and conclusive in nature. The operative
implication of the expression “for removal of doubts” in the explanation
does not show nexus to legislative intent of taxing liability. By virtue of
explanation, a particular class is created. By inserting explanation to Entry
No. 45A,  new class is created i. e.
‘unmanufactured tobacco sold in packets under a brand name’. A distinction is
made for the first time by insertion of said explanation between the
unmanufactured tobacco sold in retail, loose and those unmanufactured tobacco
sold in packets under a brand name. The said distinction has been introduced by
way of an explanation. By reason of explanation a substantive law is introduced
and if a substantive law is introduced, wherein a class is created thereby
making it liable for tax, the explanation will have to be held amendatory to
operate prospectively and not retrospectively.

15. In the light of the
above, it will have to be held that the addition of explanation to Entry No.
45A under notification dated 31.03.2012 is substantive provision and it is not
merely clarificatory, as such would operate prospectively. It will have to be
held that, unmanufactured tobacco sold in packets under a brand name would not
be taxable from 01.04.2007 to 31.03.2012. The impugned trade circular 9T dated
30.06.2012 stating that explanation is merely clarificatory is held to be
erroneous to that extent.”

Conclusion

The judgment clears the
legal position. It is expected that the government will appreciate substance of
the judgment.

It is expected that there
should not be retrospective burden on tax payers by way of inserting an
explanation/s which when earlier it was understood that the goods / commodities
concerned were understood to be under an exempt category. We hope that under
GST era, there will be much better clarity of law and no ambiguous situations
will arise.

Privatisation Of Airports: Whether A Franchise Service By Airport Authority?

Introduction:

Under selective approach of service tax litigation often
centered around whether a given transaction was one of service apart from the
issue of appropriate classification entry. When the said issue requires
determination based on terms of contract, the importance of reading the terms
of contract as a whole hardly requires any debate. A recent decision covering
this aspect is analysed below:

Facts in brief

In a recently decided set of writ petitions, a division bench
of Hon. Delhi High Court in the case of Delhi International Airport P. Ltd.
vs. UOI 2017 (50) STR 275 (Del)
had to examine whether privatisation of
airports done by Airports Authority of India (AAI) under long term Operations,
Management and Development Agreements (OMDA for short) entered into with
consortium led by GMR group and GVK group for Delhi and Mumbai airports
respectively was an arrangement of franchise service. In this case, the dispute
arose when the revenue claimed that upfront fee and an annual fee received by
AAI from the petitioners, Delhi International Airport P. Ltd. (DIAL) and Mumbai
International Airport P. Ltd. (MIAL) was liable for service tax as franchise
service. Under OMDA, DIAL and MIAL undertook the task to design, construct,
operate, upgrade, modernize, finance, manage and develop the respective
airports and in lieu of which AAI granted them various rights interalia,
long term rights to provide aeronautical and non-aeronautical services to
various consumers for a charge. As per the said OMDA, DIAL and MIAL had to pay
an upfront fee as well as revenue share termed as annual fee to AAI. Consequent
upon OMDA, AAI simultaneously leased out all the land along with buildings,
constructions or immovable assets to the petitioners under separate lease deeds
with each petitioner. AAI informed the petitioners post Finance Act, 2007 that
annual fee payable under OMDA was liable for service tax under the
classification entry renting of immovable property service, the annual fee
being consideration for the leasing of immovable property. However, according
to DIAL and MIAL, they had entered into OMDA primarily for grant of various
rights for better operation and management of airports whereas the lease deeds
were separately entered into and only consequent upon OMDA and therefore no
service tax could be paid by them to AAI over and above the amount paid as annual
fee. AAI therefore instructed escrow bankers of the petitioners to block an
amount equivalent to service tax chargeable on the said annual fee. According
to the petitioners, AAI did not render any service to them and annual fee
payable was under OMDA towards grant of rights to develop, finance, operate,
manage and modernize airports. If at all service tax was chargeable on the
annual fee, it would be the liability of AAI from their own revenue share.
Though no notice was issued to DIAL and MIAL, aggrieved by the order of
adjudication passed against AAI wherein liability of service tax was confirmed
under franchise service, DIAL and MIAL filed writ petitions in the High Court
of Delhi.

Case of petitioners, DIAL and MIAL

As per petitioners, upfront fee and annual fees were paid to
AAI as revenue share and not as consideration for any service. OMDA was not a
franchise agreement but a statutory divestation of right in favour of DIAL and
MIAL respectively to build, operate and maintain the airports. Further, both
DIAL and MIAL are joint venture companies wherein AAI itself holds 26% shares.
Also, since there was complete divestation of rights, it could never be a
considered franchise. Both the petitioner companies had to invest their own
funds to build, operate and maintain the airports and consequently get right to
charge various customers for availability of services liable under service tax
as “airport service” and they paid service tax on this service. They ran their
own operation and did not act as franchisee of AAI. They had to pay AAI
specified percentage of gross revenue termed as “annual fee” in addition to an
upfront fee of Rs.150 crore by each DIAL and MIAL. Thus annual fee was not a
consideration for any service but an appropriation of revenue by AAI before
petitioners received any part of the revenue. In order to be attracted under
service tax, the franchisee should be granted representational right and they
did not perform the activity on behalf of AAI. Alternatively if at all service
tax was payable, it would have to be paid by AAI.

Case of AAI

AAI also contended that there was no franchise agreement in
place and factually DIAL and/or MIAL never claimed that they represented AAI.
The arrangement only allowed private parties to do an activity of profit under
the rights granted by the State. Since the revenue’s case was to bring OMDA
under franchise service, there was no question of examining whether the
arrangement could be construed renting of immovable property as defined u/s.
65(90)(a) of the Finance Act, 1994 (the Act). In response to petitioner’s
contention that if any service tax liability was to be fastened, it would be
that of AAI, they contended that it was a contractual dispute and writ petition
in respect thereof would not be maintainable and more so when there was an
arbitration clause formed part of the contract.

Case of Revenue

Revenue in turn had a case that writ was primarily not
maintainable since alternate remedy was available by filing an appeal with
CESTAT. Further, on merits OMDA reflected relationship between the parties
which squarely falls within the term ‘franchise’ as used in service tax law and
since the term “representational right“ is not given specific meaning in the
Finance Act, 1994 it should be understood in common parlance meaning. OMDA had
various elements of franchise agreement wherein although responsibility of
operating, maintenance and development was with the petitioners, strict
standards were prescribed for performance and the control was retained by the
franchisor. The functions of AAI are so unique that even without any use of
logo or trademark, the function of airport operation remains identifiable with
AAI. Further, on assuming that the transaction between the parties is of lease
of immovable property for carrying out specific purpose, it actually led to
value addition. In such a case, it would be exigible to service tax. The term
‘service’ therefore must be construed in broad sense. In the case where AAI
entered into a franchise agreement for operation, development and maintenance
of airports, there is a significant amount of value addition to the overall
services offered at the airports. Therefore also service tax was attracted on
the annual fees.

Analysis

The Hon. High Court limited its examination to whether or not
upfront fee and annual fee were exigible to service tax under the
classification of franchise service and not renting of immovable property
service since the revenue so contended. Thus, for OMDA to be construed a
franchise, it would have to satisfy requirement of section 65(47) of the Act as
reproduced below:

“Franchise means an agreement by which the franchisee is
granted representational right to sell or manufacture goods or to provide
service or undertake any process identified with franchisor, whether or not a
trade mark, service mark trade name or logo or any such symbol as the case may
be, is involved.”

The above interalia requires that ‘DIAL’ and ‘MIAL’
should have been granted representational right by AAI. The said right would
envisage the franchisee to represent as franchisor and the franchisee could
lose its individual identify. For this, the Court perused in detail certain
relevant clauses of OMDA to ascertain as to what kind of operational rights
were granted by AAI and whether AAI provided any service to DIAL and MIAL.
Reading OMDA as a whole, the Court essentially found as follows:

At the end of the transition phase, the petitioners had to
operate and maintain airports independently and to employ in a phased manner,
increasing number of senior management personnel during transition period so
that at the end of the said period, no employees would continue at the airport.
Joint Ventures were in fact entered into so that functions of AAI under
Airports Authority of India Act could be effectively carried out with AAI to
have 26% stake in the said joint ventures. Petitioners had to prepare a master
plan of development for over 20 year time frame. Petitioners were also given
right to sub-lease or license any part of the airport site to third parties for
the purpose of fulfillment of their obligation under the OMDA. Petitioners
spent their own money for the design, development, construction and
modernisation etc. of the airports. Operation, maintenance and
development is carried out by them in their own right. They have “exclusive
right and authority”
to undertake various listed functions and to provide
aeronautical and non-aeronautical services at the airports. Thus it is clear
that the petitioners did not undertake any process identified with AAI. The
sole responsibility is theirs and they perform their operation using their own
policies, techniques and processes. Once the functions of AAI are completely
divested and assigned to petitioners, there does not remain any representation
of AAI by the petitioners.
There is no representation right assigned to the
petitioners under OMDA. Annual fee was paid to AAI not because any service was
provided by AAI to petitioners. For the transaction to be taxable there should
be a service provided by AAI to the petitioners. What AAI has done is
entrusting petitioners with some of its functions under the Airports Authority
of India Act. Therefore OMDA does not constitute franchise service.

The Court however left open the issue raised by DIAL and MIAL that
the annual fee was inclusive of service tax or whether the said issue was a
contractual dispute. However, the action of AAI to block the escrow account was
found unsustainable as the categorical stand of revenue was to treat the
transaction as exigible to service tax under franchise service alone.

Conclusion

The
judgment provides guiding principles to interpret a contract for determining
both taxability and classification and when not correctly applied, it indicates
how the revenue missed to collect a large amount of revenue for most of the
relevant period of time.

Welcome GST Reverse Charge Mechanism under Goods and Services Tax (GST)

Preamble:

Usually a supplier of goods or service is a taxable person liable to
discharge tax liability under Goods and Service Tax Act (‘GST Act’). However in
exceptional cases, GST legislation stipulates discharge of tax liability by
recipient instead of supplier of goods or services. This is popularly known as
reverse charge mechanism (‘RCM’).

Neither excise nor VAT legislation presently provides for RCM. It is a
well- founded concept in service tax legislation and same is adopted in GST
also.

Administrative convenience and ease of tax collection are prime
objectives of RCM. The tax authorities prefer to collect tax from small number
of assessees from organised sector instead of chasing large number of small and
unorganised tax payers. Broadening tax base could be another purpose of RCM.

Basics of RCM:

Reverse charge applies only when there is a charge on supply. If supply
is exempted, nil rated or non-taxable, RCM does not apply in such a case.

Recipient of goods or services discharges GST under RCM as if he is the
person liable for paying the tax on supply procured by him. All provisions of
the Act including the collection, recoveries and penal provisions apply to the
recipient.

Recipient is required to pay applicable tax i.e. CGST and SGST, CGST and
UGST or IGST depending on location of supplier and place of supply. The tax
liability needs to be discharged under RCM at applicable rate of tax.

Recipient makes payment on his own account. It is paid under recipient’s
GSTIN number and is declared in his GST Returns as taxable supplies on which
tax liability is discharged.

Payment made under RCM is not a Tax Deducted at Source (‘TDS’) paid by
recipient on behalf of supplier. The supplier does not get credit of tax paid
under RCM by the recipient.

Tax paid under RCM by the recipient is an input tax and not output tax.
The recipient (payer of tax under RCM) is entitled to avail Input Tax Credit
(‘ITC’) thereof subject to other provisions contained in Chapter V of CGST Act
and Input Tax Credit Rules.

Relevant Legal Provisions:

Section 9 of Central Goods and Services Tax Act, 2017 (‘CGST Act’)
provides for levy and collection of Central Goods and Service Tax (‘CGST’). The
power to collect tax under RCM from recipient is derived by government u/s.
9(3) and 9(4) of CGST Act which reads as under:

“Section 9(3) – the Government, on recommendation of the Council, by
notification, specify categories of supply of goods or services or both, tax on
which shall be paid on reverse charge basis by recipient of such goods or
services or both and all the provision of this Act shall apply to such
recipient as if he is the person liable for paying the tax in relation to the
supply of such goods or services or both.

Section 9(4) – the central tax in respect of the supply of taxable goods
or services or both by a supplier who is not registered, to a registered person
shall be paid by such person on reverse charge basis as the recipient and all
the provisions of GST legislation Act shall apply to such recipient as if he is
the person liable for paying the tax in relation to the supply of such goods or
services or both.”

Section 5 of Integrated Goods and Services Tax Act, 2017 (‘IGST Act’),
section 7 of Union Territories Goods and Services Tax Act, 2017 (‘UGST Act’)
and respective section of State Goods and Services Tax Act, 2017 (‘SGST Act’)
also provide for RCM on a similar pattern to that of CGST Act.

Reverse Charge Mechanism (‘RCM’) in brief:

RCM on notified goods or services:

Recipient of notified goods or services or both is liable to pay CGST
under RCM on supply of notified goods or services u/s. 9(3) of CGST Act.

Recipient is liable to discharge GST liability under RCM irrespective
of:

   Recipient being registered person or
unregistered person; or

   Supplier of notified goods or services is
registered person or unregistered person.

Notified goods under RCM

GST Council has recommended only tobacco leaves as notified goods
for the purpose of RCM. Any person buying tobacco leaves will be liable to
discharge GST under RCM on purchase of tobacco leaves.

The Government, on the recommendation of GST Council, may in future
expand the list of goods liable under RCM.

Notified services under RCM

GST Council has recommended following services on which tax will be
payable on RCM:

Nature of Service

Service Provider (‘SP’)

Service Recipient (‘SR’)

% of GST payable by SR

Import
of Services

Any
person who is located in non-taxable territory

Any
person located in taxable territory other than non-assessee online recipient
(Business Recipient)

100%

Goods Transport
Agency Services in respect of transportation of goods by road

Goods
Transport Agency

a.     Factory

b.     Society

c.     Co-operative society

d.     Person registered under GST Act

e.     Body corporate

f.      Partnership Firm

g.     Casual taxable person

100%

Legal Services

Individual
advocate or firm of advocate

Any
business entity

100%

Arbitration
Services

Arbitral
Tribunal

Any
business entity

100%

Sponsorship
Services

Any
person

Body
corporate or partnership firm

100%

Services
by Government or local authority excluding:

u   Renting of immovable property

u   Services by department of posts

u   Services in relation to aircraft or vessel
inside or outside precincts of port / airport

u   Transport of goods or passengers

Government
or local authority

Any
business entity

100%

Director’s
service

Director
of company or body corporate

Company
or body corporate

100%

Insurance
agency service

Insurance
agent

Any
person carrying on insurance business

100%

Recovery
agency service

Recovery
agent

Banking
company,
financial institution , NBFC

100%

Transportation
of goods by a vessel  from a place
outside India up to customs station of clearance in India

Person
located in non-taxable
territory to a person located in non-taxable territory

Importer
as defined under Customs Act, 1962

100%

Transfer
or permitting use or enjoyment of Copyright relating to original literary,
dramatic, musical or artistic works

Author
or music composer, photographer, artist, etc.

Publisher,
Music Company, Producer

100%

Rent-a-cab
service through e-commerce operator

Taxi
driver or
rent-a-cab operator

Any
person

100% by e-commerce operator

Under service tax, partial reverse charge is prescribed on
few services wherein certain portion of tax liability is to be discharged by
service provider and balance to be discharged by service recipient under RCM.

There is no concept of partial reverse charge in GST.

RCM on procurement of goods or services from unregistered
persons:

Registered person is liable to pay tax under RCM on any goods
or services or both procured by him from an unregistered person. Following may
be the unregistered person:

  Person not carrying on any business or
profession; or

   His aggregate turnover is below the threshold
limit; or

  He is located in Jammu & Kashmir; or

   He is located outside India; or

   He is not registered though obliged to get
registered

Following are a few illustrations to demonstrate the
circumstances in which RCM triggers:

   An unregistered architect (whose turnover is
Rs. 15 lakh) raises an Invoice of Rs. 1 lakh on builder. In such a case,
builder being registered person will be liable to pay GST on Rs. 1 lakh under
RCM.

–    An item of stationery is bought by registered
business entity from small unregistered shop. In such a case, such business
entity will have to discharge GST under RCM.

Time of supply for RCM:

Due date of payment of tax under RCM is linked to the time of
supply as prescribed u/s. 12 and 13 of CGST Act.

Time of Supply for goods:

It shall be earliest of following:

   Date of receipt of goods; or

   Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

  Date immediately after 30 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice

Receipt of goods

Date of

payment

31st day
from date of invoice

Time of Supply

30/09/17

30/09/17

15/10/17

31/10/17

30/09/17

30/09/17

15/11/17

30/11/17

31/10/17

31/10/17

30/09/17

15/11/17

16/08/17

31/10/17

16/08/17

Time of supply for services:

It shall be earliest of following:

  Date of payment entered in books of accounts
or date of debit in bank, whichever is earlier; or

  Date immediately after 60 days from date of
invoice

Where it is not possible to determine time of supply as
above, time of supply shall be date of entry in books of accounts of recipient
of supply.

Illustration:

Date of Invoice

Date of payment

61st day
from date of invoice

Time of Supply

30/09/17

15/10/17

30/11/17

15/10/17

30/09/17

10/12/17

30/11/17

30/11/17

Mandatory registration for person liable to pay GST under RCM:

Section 24(iii) of CGST Act mandates compulsory registration
for persons liable to pay tax under RCM. Threshold limit is not applicable to
persons liable to pay under RCM. Person having less than 20 lakh turnover or
supplier of exclusively exempt or non-taxable goods / services will also be
liable for GST registration if he is obliged to discharge tax under RCM.

Illustration: Co-operative society availing goods
transport agency (‘GTA’) services of nominal value will be liable to pay GST
under RCM and consequently liable to get itself registered irrespective of the
fact that such a society is not making any taxable supply or their aggregate
turnover is below the threshold limit.

Documentation:

Section 31(3)(f) mandates registered person liable to pay GST
under RCM to issue an invoice in respect of goods and services received by him
from un-registered supplier. Such invoices should contain all particulars as
prescribed u/s. 31(1) and 31(2) read with GST Invoice Rules to the extent
applicable. This would mean registered person procuring goods and services and
paying tax under RCM is obliged to mention HSN Codes and Service Accounting
codes of goods or services procured by him.

Rule 1 of Input Tax Credit Rules provides that a registered
person shall avail input tax credit on the basis of an invoice raised in
accordance with provisions of section 31(3)(f).

Further registered person liable to pay GST under RCM shall
issue a payment voucher at the time of making payment to supplier.

Conclusion:

The person paying tax under RCM is entitled to tax credit in
most of the cases. The Government may not be getting substantial revenue from
RCM. In the past, most of the State legislations for sales tax were having
concept of ‘purchase tax’ to be paid by registered dealer on purchases from
unregistered dealers. However, it was found to be a futile exercise (not
resulting into any substantial revenue to Government), and therefore, in most
of the State VAT legislations, the concept of URD tax (purchase tax) was
scrapped.

RCM has inherent disadvantage of being obstacle in free flow
of tax credits across the businesses and nation. It also raises the question
whether it is fair on the part of government to put more burden of compliance
on law abiding organised sector of the economy.

It would be too cumbersome for majority of the assessees to
comply with such a rigid compliance requirement. Moreover, it is difficult for
assessee to reconcile their expenses as per financial statements with tax paid
under RCM as per returns. It is indeed a pain for any organisation to reconcile
such figures and satisfy the authorities in course of scrutiny, assessment,
audit and investigations, etc.

RCM provisions, as stated in the CGST Act as on
today, may be described as totally against the concept of ease of doing
business. One may feel that Government should not have brought the concept of
RCM (in this manner) under GST. The GST legislation, without RCM, would be much
more tax-payer friendly law.

Sections 2(42A), 54 – Date of letter of allotment can be considered to compute the period of holding to assess the entitlement of exemption u/s. 54.

12. Nandita Patodia vs. ITO (Mumbai)

Members : G. S. Pannu (AM) and Amarjit Singh (JM)

ITA No.: 5982/Mum/2013

A.Y.: 2010-11.     
Date of Order: 31st March, 2017

Counsel for assessee / revenue: Anuj Kishnadwala / Pradeep
Kumar Singh

FACTS 

The assessee, an individual, filed return of income declaring
total income of Rs. 11,16,013. In the return of income, the assessee claimed
exemption u/s. 54 in respect of long term capital gain of Rs. 45,58,478 arising
on sale of two flats being flat nos. 801 and 802 in Neelkanth Palm Realty. The
exemption was claimed on the ground that the assessee has purchased a new
residential house for Rs. 68,26,400 being Flat No. 701 in Neelkanth Palm Thane.

In the course of assessment proceedings, the Assessing
Officer (AO) found that the agreements for purchase of the flats sold were
dated 26.3.2009 and 27.3.2009. Considering the holding period by adopting these
dates, the gain would be short term capital gain. The assessee had adopted
30.3.2005, being the date of letter of allotment, to be the date of acquisition
of these flats. The AO finalised the assessment by regarding the date of the
agreement as the date of acquisition of flats sold and charged to tax the
capital gain as short term capital gain. He denied exemption claimed u/s. 54 of
the Act.

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

Aggrieved, the assessee preferred an appeal to the Tribunal
where it was contended that the Mumbai Tribunal in the case of Anupama
Agarwal vs. DCIT [ITA No. 472/Mum/2015
dated 23.9.2016], the assessee’s
sister has considered the holding period from 30.03.2005 being the date of
letter of allotment.

HELD

The Tribunal observed that from the order passed by the
Tribunal in the case of Anupama Agarwal (supra) it is quite clear that
in the case of the sister of the assessee the date of allotment and payment of
first installment was considered by ITAT for assessing whether the gain arising
on sale was short term gain or a long term gain. It held that –

(i)   the case of the assessee is squarely covered
by the case of Anupama Agarwal (supra); and

(ii)  the ratio given in the case of Madhu Kaul
vs. CIT and another [363 ITR 54 (Punj. & Har.)]
and CIT vs. S. R.
Jeyshankar [373 ITR 120 (Mad)]
are also quite applicable to the facts of
the present case in which the date of allotment letter was considered to assess
the holding period to ascertain the entitlement of exemption u/s. 54 of the
Act.

The Tribunal set aside the finding of the CIT(A) and directed
the AO to consider the allotment letter dated 30.3.205 to determine the long
term / short term capital gain and accordingly the entitlement of exemption
u/s. 54 of the Act.

The appeal filed by
the assessee was allowed.

Section 271(1)(c) – Taxability of compensation received by the assessee on account of hardship faced due to delay in delivery of flat is a debatable issue and therefore penalty cannot be levied.

11. Shri Laxmankumar R. Daga vs. ITO (Mumbai)

Members : Mahavir Singh (JM) and N. K. Pradhan (AM)

ITA No.: 3326/Mum/2014

A.Y.: 2004-05.     Date
of Order: 15th March, 2017

Counsel for assessee / revenue: Ms. Nikita Agarwal / Maurya
Pratap

FACTS  

In the course of assessment proceedings, the Assessing
Officer (AO) noticed that the assessee had received compensation of Rs.
16,50,000 on account of hardship faced due to delay in delivery of flat at
Suraj Apartments from the developer.  He
taxed this amount as compensation received on surrender of tenancy rights and
charged it to tax as long term capital gains. He levied a penalty of Rs.
4,80,725 u/s. 271(1)(c) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where it contended that he had disclosed the receipt on account of compensation
on the face of the balance sheet and the said balance sheet was a part of
return of income and the auditor in Form 3CD had specifically mentioned this
amount as a capital receipt. Reliance was also placed on the decision of Mumbai
Tribunal in the case of Kushal K. Bangia vs. ITO [ITA No. 2349/Mum/2011
dated 31.1.2012 for AY 2007-08], wherein the Tribunal has held that `receipts
during redevelopment are capital receipts and not revenue and such receipts
reduce the cost of assessee and should be taken into account when such
redeveloped properties are sold’. However, the CIT(A) upheld the action of the
AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD  

The Tribunal noted that the amount of compensation was duly
reflected in the balance sheet filed along with the return of income as
compensation / damage received from M/s MR & DR Thacker and was added to
the proprietor’s capital. Having noted the decision of the Tribunal in the case
of Kushal K. Bangia (supra), it held that the taxability of compensation
of Rs. 16,50,000 received by the assessee as long term capital gain by the AO
is a debatable issue. It held that an analogy may be drawn here from the decision
of the Delhi High Court in CIT vs. Mushashi Autoparts India Pvt. Ltd. [330
ITR 545 (Del)]
where the court held that penalty cannot be levied in a case
where the assessee, prior to commencement of business had received interest,
which was capitalised as pre-operative expenses. In the assessment, the amount
was regarded as taxable. The Court held that treating the amount as taxable
income cannot by itself justify levy of penalty. The Tribunal deleted the
penalty levied by the AO u/s. 271(1)(c) of the Act.

The appeal filed by the assessee was allowed.

Section 251 – An order enhancing the assessment made, passed by CIT(A), without giving an opportunity of being heard to the assessee, violates the principles of natural justice and is bad in law and cannot be sustained.

10. Jagat P. Shah (HUF) v.
ACIT (Mum)

Members : Mahavir Singh
(JM) and Rajesh Kumar (AM)

ITA No.: 2584/Mum/2015

A.Y.: 2009-10.  Date of Order: 21st March, 2017

Counsel for assessee /
revenue: Rahul Hakani / M. C. Om Ningshen

FACTS  

The assessee disclosed net income in F & O transactions
amounting to Rs. 90,017. According to the assessee, the unexpired future &
option contract as on 1.4.2008 was Rs. 50,93,939 which was added to the
business loss of Rs. 5,82,655 thereby reducing the said loss to be carried forward. 

The AO in the remand report changed the valuation of
unexpired contract and came to the conclusion that the net profit should be
calculated at Rs. 6,48,780 by way of enhancement or net profit should be
sustained at Rs. 40,89,667 instead of Rs. 50,93,939 as made by the AO while
framing the original assessment.

The CIT(A), without giving any notice of enhancement u/s. 251
of the Act passed an order enhancing the net profit to Rs. 66,48,780.

Aggrieved, the assessee preferred an appeal to the Tribunal
where as an additional ground it was contended that the action of CIT(A) in
enhancing the assessment without giving an opportunity to the assessee violated
the principles of natural justice.

HELD  

The Tribunal noted that the CIT(A) has passed the order on
the basis of remand report of the AO enhancing the assessment by taking net
profit to Rs. 66,48,780 without issuing any show cause notice u/s. 251 of the
Act. The Tribunal held that CIT(A) should have given opportunity to the
assessee to present his case which was not given and therefore violated the
principles of natural justice. It held that, the order passed by CIT(A) without
giving opportunity to the assessee is bad in law and cannot be sustained. The
Tribunal set aside the order passed by CIT(A) and restored the matter back to
the file of the AO to decide the same as per law after providing fair and
reasonable opportunity to the assessee.

Compiler’s note: The amounts stated under the caption “Facts”
are not reconciling / clear but the same are as mentioned in the order of the
Tribunal.

Sections 10(38), 28(i), 45 and CBDT Circular No. 6 of 2016 – If the assessee so desires, the Assessing Officer has to treat the capital gain earned on listed shares and securities held for a period of more than 12 months, as income from capital gains. However, once such a stand is taken by the assessee it shall remain applicable in subsequent assessment years also.

11. [2017] 81 taxmann.com
220 (Chandigarh – Trib.)

Emm Bee Fincap (P.) Ltd.
vs. DCIT

A.Ys.: 2005-06, 2006-07
and 2008-09                           Date of Order: 17th April, 2017

FACTS

In the return of income, the assessee had declared Long Term
Capital Gain of Rs. 1,14,77,193 as exempt u/s 10(38) of the Act. In the course
of assessment proceedings, the Assessing Officer (AO) found that the assessee
was involved in no other business activities other than transactions in shares.
He further observed that this was its primary business since its inception. The
AO noted that the transaction of shares were being continuously and
systematically undertaken year from year since inception, involving tremendous
volume which pointed out to a profit motive. The AO held that the entire share
transactions were business activity. While coming to this conclusion, the AO
mentioned that neither the details of purchase and sale of shares nor proof of
the same being in the nature of investment or stock-in-trade (referred to CBDT
Circular No. 4 of 2007, dated 15.6.2007) as also the manner and mode of the
transactions were provided nor were books of account for any of the years under
assessment were produced for verification. The AO held the entire share
transactions as business activity and treated the gains earned thereon as the
business income of the assessee and added back the same to the taxable income
of the assessee making an addition of Rs. 1,14,77,193/- in the process.

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

Aggrieved, the assessee preferred an appeal to the Tribunal
where attention of the Tribunal was drawn to Circular No. 6 of 2016 issued by
CBDT and pointed out that CBDT in the said circular had given instructions that
in respect of listed shares and securities held for a period of more than 12
months immediately preceding the date of its transfer, the assessee, at its
option can treat the income derived therefrom as capital gain which shall not
be disputed by the AO.

HELD

The Tribunal found that
CBDT in the said circular, has laid down further guidelines to be followed by
AO while deciding the issue, the objective being reducing litigation on an
issue where there is lot of uncertainty and hence tremendous litigation. The
Tribunal held that it is evident from the said circular that the CBDT has given
instruction to the AO to treat the capital gain earned on listed shares and
securities held for a period of more than 12 months, as income from capital
gains if the assessee so desires. It noted that the said instructions states
that once such a stand is taken by the assessee, it shall remain applicable in
subsequent assessment years also.

In the light of the said
circular, the Tribunal restored the issue of determining the nature of the
gains earned by the assessee on the transactions of purchase and sales of
shares, back to the file of the AO and directed the AO to decide the issue
afresh in the light of the aforesaid circular of the CBDT after taking into
consideration the facts of the case in hand.

BCAS Managing Committee Elected Members for 2017-2018

In accordance with Clause No.18 of the Memorandum of
Association of the Bombay Chartered Accountants’ Society, the names of members
who have filed their nomination for Managing Committee are to be exhibited.
Since the number of nominations are equal to that of the number of posts, no
election is necessary. At the Special Committee Meeting held on 10th May,
2017, in addition to the members elected unopposed, 6 other members have been
co-opted to the Managing Committee. The list of elected members and co-opted
members is as under:

President

Narayan R.
Pasari

Vice President

Sunil B.
Gabhawalla

Hon. Joint
Secretary

Manish P.
Sampat

Hon. Joint
Secretary

Abhay R. Mehta

Treasurer

Suhas S.
Paranjpe

Elected Member

Anil D. Doshi

Elected Member

Bhavesh P.
Gandhi

Elected Member

Chirag Himat
Doshi

Elected Member

Divya B.
Jokhakar

Elected Member

Kinjal M. Shah

Elected Member

Mayur B. Desai

Elected Member

Rutvik R.
Sanghvi

Elected Member

Samir L.
Kapadia

Co-Opted  Member

Anand Bathiya

Co-Opted  Member

Devendra H.
Jain

Co-Opted  Member

Ganesh
Rajgopalan                     

Co-Opted  Member

Mandar U.
Telang

Co-Opted  Member

Mihir C. Sheth                    

Co-Opted  Member

Pooja J.
Punjabi

Ex-Officio
Member

Chetan Shah

Member
(Publisher)

Raman H.
Jokhakar

 

The committee will
assume office at the conclusion of the Annual General Meeting on 6th July,
2017.

BCAS In 2016-17. Part – 3

As promised, this is the third and last part on the captioned
subject. The Annual Report for the year will be published soon and you will be
able to see complete details of the happenings throughout the year. As a
member, we urge you to go through the Annual Report and do share your feedback
with us. In this issue, we will cover knowledge sharing through our
publications and various other activities held at the Society.

BCAS Publications:
The year has been eventful with knowledge sharing at the forefront. The Society
released publications on various topics of professional significance.

At the last AGM held in July 2016, the Society released 2
publications. One on “Internal Audit – Practical Case Studies” by CA. Deepjee
Singhal and CA. Manish Pipalia. Internal Audit has been an area that is under
explored by Chartered Accountants. Its potential to add value remains a key
driver looking at the need, utility and the possible revenue to chartered
accountants. Unlike Statutory Audit, the scope of Internal Audit can be as wide
as business. The irony is that businesses do not adequately recognise the value
of Internal Audit. The Companies Act, 2013 has brought new impetus on Internal
Audit for Companies.

The second publication was on “Non-Banking Financial
Companies – A Treatise” by CA. Bhavesh Vora, CA. Zubin Billimoria, CA. Hardik
Chokshi, CA. Gautam V. Shah & CA. Heneel Patel. Today, NBFCs are regulated
entities and are under the supervision of the Reserve Bank of India . The
growth of this sector must be balanced with the objectives of financial
stability, depositor protection and ensuring adequate compliance with
regulations. Considering the role of NBFCs in the economic development and to
ensure systematic and structured growth in this sector, the NBFC regulations
are made over-arching. The compliances are layered and multiple, depending on
the type of NBFC. The deposit accepting NBFCs have the most rigorous guidelines
to adhere to stringent reporting requirements.

BCAS released the 3rd Edition of “Gita for Professionals” by
CA. Chetan Dalal in August 2016. This book received an overwhelming response.
The book has always caught the attention of the young and experienced as it
throws light on aspects of professionalism from the Holy Bhagwat Gita. A Hindi
edition of the book was also simultaneously released which was also well received
by our Hindi reading professionals

BCAS, which had been in the forefront to organise several
workshops on the ICFR came out with a publication in the month of August 2016
called the “Internal Control Over Financial Reporting” by CA. Nandita Parekh.
This book discussed the subject in a simple and lucid language and assisted
such companies to adhere with the requirements of the Companies Act, 2013 and
their auditors to effectively discharge their duties. The Publication contained
ready to use drafts and formats which can be used with some modifications to
design and document the internal controls over financial reporting.

BCAS supported the Government in sharing knowledge on Income
Disclosure Scheme 2016 and came out with a publication on the said subject in
August 2016 called the “Income Disclosure Scheme, 2016” by CA. Bhadresh Doshi.
There had been numerous public meetings addressed by various Principal
Commissioners of Income-tax across the country exhorting people to come clean.
BCAS had the opportunity to attend one such meeting which was jointly held by
ICAI & FICCI. The author along with the BCAS President CA. Chetan Shah had
the honour to hand over a copy of the publication to the hon’ble Finance
Minister, Shri Arun Jaitley on this occasion.

Another publication released was by two young authors from
Ahmedabad CA. Viren Shah & CA. Jeyur Shah on the “Reporting under CARO
2015/2016 (a compilation)“. The book was released in Ahmedabad at the BCAS
Event on the said topic. The book received good response across the country.

Deduction of tax at source from non-residents has always been
a complex subject since the payer effectively needs to determine the tax
liability of the payee in India. The changes brought from time-to-time, and
recently in 2016, including the requirement of e-filing, have added to the
complexities of the procedures. With business boundaries extending globally,
transactions with non-residents are common place. A very important
consideration in any jurisdiction that claims to be business friendly is the
tax regime. After the opening of the Indian economy, there has been a paradigm
shift in cross-border transactions. Thus, BCAS thought of the publication on
International Tax on “Payments to Non – Residents – A Guide on Reporting Tax Deduction
at Source under Section 195” by CA. N. C. Hegde, CA. Mallika Apte, and CA.
Risha Gandhi. This was one of the very fast selling publications and was out of
stock within a short time of 2 months.

The most awaited publication year on year “BCAS Referencer
2016-17” again sold around 5000 copies. This year the Referencer came with an
app with a unique password for users to view it on Windows, Android & IOS
phones. The technological addition to the traditional Referencer received a
very encouraging response. This year’s “BCAS Referencer 2017-18” was released
in April 2017 and is available for sale.

As a tradition, BCAS comes out every year with the
publication “Union Budget – An Analysis” which articulates the various
amendments post budget. This year, post budget in February 2017, the said BCAS
publication which was printed in 2 languages English and Gujarati, crossed a
sale of 35000 copies of English and 3500 copies of Gujarati.

With technology at the forefront BCAS this year came out with
2 e-Publication in flipbook format. One was an e-Publication on “Rules of
Interpretation of Tax Statutes” by Senior Advocate Mr. N. M. Ranka. The book is
a compilation of Mr. Ranka’s authored articles on “Rules of Interpretation of
Tax Statutes” in the Bombay Chartered Accountants’ Society Journal (BCAJ). The
said articles were published in four parts from April 2016 to July 2016. This
e-Publication received 4252 views till date.

The second e-Publication was on “The Direct Tax Dispute
Resolution Scheme 2016 – An Analysis” by CA. Saroj Maniar. This publication has
received 3203 views till date.

A few other publications which are lined up for release
shortly include the “Monograph Series” a set of 5 publications on various legal
aspects, “FAQ on Accounting Standards”, “Audit Checklist”, “Publication on
Equalisation Levy” and others. Do keep in touch with the BCAS knowledge
management portal to know more on the upcoming list.

Other Activities:
Amongst various other activities at BCAS; we are glad to inform you that the
various study circles have been doing exceptionally well with enthusiastic
participation. Study Circles at BCAS have always seen great engagement on
knowledge development by its members. This year too, the response has been good
and an overall of 20 study circle sessions were conducted. A new venture here
was the commencement of BEPS (Base Erosion & Profit Sharing) Study Circle
in December 2016. Since its first meeting in December this Study Circle has
been receiving good participation and has successfully completed 7 sessions
till March 2017.

Some of the key highlights this season without which this
year cannot be called complete are as follows:

One was the Grand 50th Golden Jubilee Residential Refresher
Course. The event details are covered in Part 1 however one cannot miss the
publication which the Society came out during this celebration in January 2017
which is called “Golden Jubilee Residential Refresher Course Nostalgia -A
Collection of memories.” This publication is a golden collection of lasting
memories of the last 50 RRCs in a glimpse. The Journey has been sentimental and
nothing can tarnish the nostalgic experience. At BCAS; the affection shines, as
we scroll through the past. This publication gives access to the enchanting
memories of 50 RRCs and has various eminent authors penning articles on topics
of professional significance.

Another significant activity of the Society is on the most current
topic of GST. Though part 1 on events covered the various seminars on the said
topic we would like to inform you that BCAS is one of the Approved Training
Partners(ATPs) to impart GST Training by NACEN (National Academy of Customs,
Excise and Narcotics). We have 10 certified trainers on board to impart this
training. BCAS has commenced trainings designed and conceptualised as per the
NACEN guidelines prescribed by the government. 

On the technology front BCAS took various steps, starting with
making available sale of publication and events online. BCAS online portal
facilitates its members to purchase publications, enrol for an event or even
pay their membership fees online. The BCAS Lecture meetings held at the BCAS
Hall are now live streamed through its YouTube Channel and today the channel
has moved from 500 subscribers to 3058 as on 31st of May. This has been another
landmark change through which the Society has tried to reach out to various
locations. BCAS website and the BCAJ website both have been given a new look
which is more user friendly and easy to access, at the same time informative.

Finally,
we conclude this year by stating that BCAS is now much vocal, much known and
more approached by professionals. As the saying goes “Changes call for
innovation, and innovation leads to progress.” Thus, every year will have its
own story to tell. All we do is facilitate that change and make it more
glamorous so that all members benefit from it. Keep a look out for our Annual
Report for complete details.

Representation on FEMA provisions

Shri B. P. Kanungo,

Deputy Governor,

Reserve Bank of India,

Mumbai.

Dear Sir,

Sub: Representation on
FEMA provisions

We submit herewith a representation for some provisions under
FEMA which are causing difficulties and injustice for bonafide transactions.

We request for a personal meeting to explain  the matter.

Thanking you,

Yours faithfully,

 

Bombay
Chartered Accountants’ Society,             The
Chamber of Tax Consultants

Chetan
Shah                                                                              Hitesh
Shah                    

President                                                                                       President

 

Cc:
  Smt. Malvika Sinha, Executive  Director

        Shri Shekhar Bhatnagar, Chief
General  Manager-in-charge

        Shri
Jyoti Kumar  Pandey, Chief General  Manager

Representation under FEMA

Background for representation:

1.     FEMA objective and reintroducing
prosecution
– FEMA and the regulations were enacted in the year 2000. The
objective was to liberalise the law. The rules are provided and one has to
interpret and follow the same. Prosecution provisions were removed. In 2005,
Compounding rules were enacted “to provide comfort
to the citizens and corporate community by minimizing transaction costs
,
while taking severe view of wilful, malafide and fraudulent transactions.”

          However in 2015, prosecution has been
brought back in FEMA. Under sections 13(1A) and 37A, if an Indian resident is
found to have foreign assets in contravention of law, then based on mere
suspicion, equivalent Indian assets can be seized. Further there is
prosecution. Thus a civil law has become semi-criminal law. Under these provisions, even procedural violations
come within the semi-criminal scope.

2.       Change
in interpretation by RBI without change in law
– Another issue that we as
practitioners face is interpretation changes that occur when officials change.
This is often on account of the legal language used in the country. Over the
years however this is causing hardship to the people who have undertaken
bonafide transactions. And hardship is compounded when a view is changed all of
a sudden without a clear statutory document. One possible solution to this
problem is creating a library where interpretations of provisions are offered
at any level within the RBI.

          We appreciate that changing
circumstances can change policies and regulations. It is RBI’s
prerogative to change policies. However the
change
has to be prospective. We find that
today’s interpretations are being applied to past transactions.
This is
causing grave injustice to people.

          Further the change has to be spelt out
clearly in the law- especially if it restricts any facility. It cannot be just
a small phrase inserted somewhere in a regulation. The change in the policy has
to be made abundantly clear. We have given more details and illustrations
later.

3.       In our submission, if there is any
ambiguity in the law, the interpretation has to be in favour of the investor.
If at all RBI considers that compounding is required, then a token penalty
should be levied.

          Due to amendments in FEMA in 2015
wherein prosecution has been brought back, it is all the more necessary that a
liberal interpretation is taken by RBI.

4.     Another issue is absence of definition for
certain terms and different interpretations adopted. By way of illustration,
meaning of some of the common terms like “portfolio investment”,
“acquiring” etc, as interpreted by RBI are different from the
meanings ascribed as per Company Law. The accepted market convention is that if
a meaning is not specified, then normally the meaning under the law closest to
the term (e.g. Company Law) will apply.

5.       Our humble suggestion is that change in
interpretation of law without declaring the change in law – should be
minimised. This is of course a massive work. In
the meantime, past innocent transactions should not be considered as
violations.

          If at all these are procedural lapses,
only a token Compounding fee should be levied. Ideally a general amnesty should
be declared for procedural breaches not involving black money.

          For future transactions, abundant clarity
should be provided.

6.       We clarify that our representation is for
bonafide transactions. In a society there will always be some people who will
deliberately violate the law. We are not representing their matters. Let the
law take its course.

         However we submit that if some people
have violated the law, it cannot be a reason to have a blanket ban on everyone.

 Executive summary of the representations 

A.    Liberalised
Remittance Scheme (LRS):

1.       Investment in unlisted companies made
prior to 5th August 2013 should not be considered as a violation. The investor
should not be asked to unwind the investment and bring back the proceeds. At
the most, a token penalty may be levied.

2.       Holding funds in foreign bank accounts
which are remitted under LRS, should not be considered as a violation.

3.     Remittance made for any foreign asset like
Gold and loan should not be considered as a violation.

4.      There should be no restriction under
Current Account transactions as stated in clause (ix) of Schedule III.

5.      If a person has acquired any assets
outside India under LRS / ODI, he should be permitted to gift the same to
anyone.

B.    Principal(?)
issues:

6.     To route all applications and compliances
through the Authorised Dealer is not working out well. We suggest that one
should be able to file all applications or reports online. The AD should
provide his comments within a specified time limit. If AD does not respond, RBI
should consider the case on merits. Or if the matter is just compliance, it
should be accepted.

7.      In case of violations, RBI should not
insist on unwinding a transaction without considering other laws. Only if the
transaction is fundamentally not permitted (e.g. foreign investment in
agricultural activities), then unwinding may be directed.

8.       RBI prefers to meet the investor but not
the representatives. As a regulator, RBI should meet the bonafide
representatives based on authorisation if so desired.

C.    Real Estate
leasing:

9. A
clarification may be issued that investment in Real estate leasing business is
permitted. The meaning of real estate business can be same for Foreign
investment and overseas investment

Whither Informal Guidance Scheme? – Whether An Obituary Is Due !

Background

When the scheme for informal
guidance was released by SEBI in 2003, it was expected that this will become a
form of advance ruling. More importantly, it would add to the interpretation of
Securities Laws. It would also serve as guidance for future transactions as
parties would know SEBI’s view on a particular issue. To be clear, Informal
Guidance was not at all meant to be the final view of SEBI. However, I submit
the expectations that this will help clarify the law, have been belied. A
recent decision of the Securities Appellate Tribunal (Arbutus Consultancy
LLP vs. SEBI
, dated 5th April 2017) has raised questions on the
reliance one could place on the informal guidance.

What is the Scheme for Informal
Guidance?

Often parties undertake
transactions that have implications under the Securities Laws. The consequences
of violation of Securities Laws are severe and could result in SEBI taking
adverse action – for example – penalty, prosecution and debarring those
involved from approaching or dealing in the financial market. Ignorance of law,
as the proverb goes, is no excuse. However, needless to say, a clear
interpretation from the regulator itself should bring clarity and resolve
doubts.

Hence, when SEBI introduced the
Informal Guidance Scheme in 2003, it was seen as a market friendly initiative.
It allowed several categories of persons associated with the securities markets
to approach SEBI to get interpretation on almost any aspect of Securities Laws.

This was expected to avoid
litigation and enhance compliance. The queries and their replies were
specifically intended to be published for public knowledge with the intent of
having universal applicability where facts and issues
were same.

Informal Guidance is of two types.
One is a no-action letter. When a party proposes to undertake a
particular transaction in a particular manner, it may want to know how would
SEBI treat it under a specific provision of Securities Laws. A good example of
this is the subject matter of the SAT decision. The issue is : whether
exemption to inter promoter transfers from requirement of open offer under the
Takeover Regulations would be available on a particular set of facts. The
applicant is required to submit to SEBI the facts and also state the specific
provision on which it requires clarification. SEBI may then, take a view that
such exemption would be available and it would not take any action if the
applicant carries out the transaction exactly as per the proposal placed before
SEBI.

The other is an interpretative
letter. In this case, SEBI is asked to give an interpretation on
a particular provision in the context of a certain set of facts and
transaction.

SEBI gives limited protection to
the person who has received such guidance. It is provided that, in case of
no-action letters, the concerned department of SEBI would (or would not)
recommend any action under the Securities Laws if the transaction is carried
out in the manner put forth. However, in the letter it is clarified that such
guidance “constitutes the view of the Department but will not be binding on the
Board, though the Board may generally act in accordance with the view”.

Interestingly, SEBI will not
respond to a request for Informal Guidance “where a no-action or interpretive
letter has already been issued by any other Department on a substantially
similar question involving substantially similar facts as that to which the
request relates”. This, in my submissions, creates an impression that SEBI may
follow such interpretation in similar cases and hence a fresh informal guidance
is not needed.

Facts of the matter before SAT

In the case before SAT, there was
a complex restructuring transaction that involved inter-se transfers amongst
the promoters of a listed company. In ordinary course, any acquisition of
shares in a listed company would have implications under the SEBI Takeover
Regulations 2011 – for example – if the acquisition is beyond the specified
percentage, it may attract an open offer. However, exemption from open offer is
given for restructuring where the transfer is within the promoters. However,
such exemption is given provided certain conditions are met. One of such
conditions is that the transferor and transferee promoters should have been
disclosed as promoters in the filings with the stock exchange for the preceding
three years. In the present case, to simplify as the listed company was
recently listed, there was a peculiar situation. The transferor and transferee
both were promoters for more than 3 years. However, since the listing had taken
place less than two years back, the condition of three years were not complied
with. Hence, the inter se transfer apparently did not qualify for exemption
from open offer. The acquirer did make an open offer because of certain latter
transactions but at a lesser price based on latter transactions. However, since
the earlier transactions were treated as not exempt, the open offer price
computed by SEBI was higher than offered by the acquirer, hence, SEBI ordered
the acquirer to pay such higher price plus interest.

Before SAT, the acquirer pursued
the argument on merits that the three years post-listing disclosure was not a
strict condition and in reality the promoters were promoters for more than
three years. However, this was an interesting issue as in an earlier `Informal
Guidance’, the view propagated by the acquirer was approved. The informal
guidance had held that if the parties were promoters for more than three years
including in the period before listing, the requirement that there should still
be such three years of disclosure as promoters post listing need not be
complied with.

However, unfortunately, this was
not all. It appeared that in a subsequent Informal Guidance on similar facts,
an opposing view was said to have been expressed. It was even argued/conceded
by SEBI itself that the earlier Informal Guidance was actually incorrect! The
question was whether the earlier Informal Guidance would be helpful to the
acquirer.

Decision of SAT

To begin with, on the
interpretation of the provision itself, SAT was not in agreement with the
acquirer. According to SAT, the requirement of the law was clear. There has to
be at least three years of post listing filing of the parties as promoters with
the stock exchanges. Only if this condition is strictly complied with that the
benefit of exemption to inter se transfers between them would be available.

Then SAT dealt with several issues
relating to Informal Guidance – for example – what is the binding nature of
informal guidance? Does it help persons who were not the original applicant,
even if the facts were similar? Does it bind SEBI? What will be the situation
if there is another contradictory guidance on similar facts? Can a party claim
that the one beneficial to it should be applied?

The acquirer also argued that the
guidance was in the nature of a circular and thus binding on SEBI.

SAT discussed the Informal
Guidance scheme. It noted that the requirement of the provision was clear and
against the view advocated by the acquirer. SAT observed that, “…a wrong
interpretation given by an official cannot be used as a shelter in interpreting
provisions of law.” In my opinion, this by itself would reduce the value of the
original guidance relied on by the acquirer. SAT in any case pointed out that
there was already a subsequent guidance holding a different view.

It reiterated that “…an interpretation
provided under the Scheme by an official of department of SEBI cannot be used
against the correct interpretation of law (in the instant matter SAST/Takeover
Regulations, 2011)”. It also relied on its earlier decision in the case of Deepak
Mehra vs. SEBI ((2010) 98 SCL 216 (SAT
). The following observations of the
SAT in Deepak Mehra’s case are relevant and illuminating:-

“The
impugned communication is only an interpretative letter providing under the
scheme an interpretation of the provisions of the Takeover Code as was sought
by Bharti pending finalization of the proposal which may or may not come
through. Clause 12 of the scheme makes it clear that an interpretative letter
issued by a department of the Board constitutes the view of the department but
will not be binding on the Board, though the Board may generally act in
accordance with such a letter. Clause 13 thereof also makes it clear that a
letter giving an informal guidance by way of interpretation of any provision of
law or fact should not be construed as a conclusive decision or determination
of those questions and that such an interpretation cannot be construed as an
order of the Board under section 15T of the Act. While giving its informal
guidance to Bharti, the general manager of the Corporation Finance Department
of the Board had also made it clear that the view expressed therein is not a
decision of the Board on the questions referred to by Bharti. It is, thus,
clear that the views expressed in the impugned communication are the views of
the corporate finance division of the first respondent and they shall not bind
the said respondent. It is further clear that the first respondent has not
taken any final decision in the matter and has passed no order which could said
to be adversely affecting the rights of the appellant or any other shareholder
of Bharti. The informal guidance given by the general manager is not an
“order” which could entitle anyone to file an appeal. The word
“order” is defined in Black’s Law Dictionary (Eighth Edition) as
“1. A command, direction, or instruction. 2. A written direction or
command delivered by a Court or Judge. The word generally embraces final
decrees as well as interlocutory directions or commands.” In the case
before us, the first respondent has not issued any command or direction. An
occasion to issue a direction or pass an order may arise, if and when, the
proposal that is being discussed between the two companies is finalized. If and
when, such a direction is issued or any order passed, it shall be open to any
person who feels aggrieved by that order or direction to come in appeal before
the Tribunal.”
 

Conclusion

The decision of SAT, while
confirming to some extent how the Informal Guidance Scheme is viewed, I submit,
reduces the usefulness of the Scheme.

In any case, parties ought not
rely on the `informal guidance’ even for identical transactions. Hence, parties
involved will have to seek specific guidance. It is curious that the Scheme
itself provides that SEBI may refuse giving guidance if a guidance has already
been given on a similar issue!

There can be another interesting
situation. A party may approach SEBI for an informal guidance on a set of
facts. SEBI may give an interpretation that is not acceptable to the party and
it is legally advised that SEBI’s view is not correct in law. What would happen
if the party still goes ahead with the transaction? The Informal Guidance is
surely not binding on the party but there would still be an adverse view of
SEBI on record.

In conclusion, while the Informal Guidance
Scheme may continue to be used, even if sparingly and it should be treated with
a degree of wariness by others. I believe that SEBI should come out with a
clarification on the effectiveness of the `informal guidance’ to clear the confusion
that investors, implementators and advisors are likely to experience. In my
view, the guidance should take the character of a circular issued by the CBDT
under the Income Tax Act. This would reduce litigation and grant certainty. In
the alternative the informal guidance should be treated on par with the
decision of AAR.

Maintenance of Parents

Introduction

Ageing is a natural phenomenon!
But what if in one’s twilight years one’s own children don’t take care of a
person or even worse subject him / her to mental and physical abuse and agony?
There have been cases where the children have not provided even for basic
maintenance and daily needs of their parents. In such a scenario, the
Government of India thought it fit to introduce a legislation to provide
simple, inexpensive and speedy provisions which would enable the suffering
parents to claim maintenance from their children. Accordingly, “The
Maintenance and Welfare of Parents and Senior Citizens Act, 2007”
was
enacted on 31st December, 2007 as a Central Act to provide for more
effective provisions for the maintenance and welfare of parents and senior
citizens guaranteed and recognised under the Constitution of India. Let us
consider some of the provisions of this social welfare statute.

Maintenance of Parents and Senior
Citizens

The Act provides for the setting
up of a Maintenance Tribunal in every State which shall adjudicate all matters
for maintenance, including provision for food, clothing, residence and medical
attendance and treatment. The following persons can make an application to the
Tribunal for maintenance of such needs so that he can lead a normal life:

(a) A parent (whether biological,
adoptive or step) or a grandparent can make an application against one or more
of his major children. Interestingly, the parents need not be senior citizens,
i.e., they can be less than 60 years of age.

(b) A childless senior citizen (an
Indian citizen who is at least 60 years of age) can make an application against
his major relative who is legal heir and who is in possession of the senior’s
property or who would inherit his property after the senior’s death. Any person
who is a relative of the senior and who has sufficient means shall maintain him
provided he is in possession of the property of the senior or would inherit his
property. If more than one such relatives are entitled to inherit his property,
then the maintenance would be proportionate to their inheritance.  

     While the senior must be an
Indian and at least 60 years of age, there is no such condition in respect of a
parent. In fact, the Act provides that it applies to citizens of India residing
abroad. How the Act would enforce its jurisdiction in a foreign land is a moot
point.

The application to the Tribunal
can be made by the senior citizen / parent himself, any other person or NGO
authorised by him. The Tribunal can even take suomoto cognisance of the
issue.

After inquiry, the Tribunal would
pass an order for maintenance and failure to comply with its order can lead to
penal action and imprisonment. The maximum maintenance allowance which may be
ordered by the Tribunal shall be such as may be prescribed by the respective
State Governments but not exceeding Rs. 10,000 per month. A claim for
maintenance can alternatively be made by the applicant under Chapter IX of the
Code of Criminal Procedure, 1973 but he cannot make it under both.

The Act also provides for the
constitution of an Appellate Tribunal before whom an appeal against orders of
the Maintenance Tribunal can be filed. Interestingly, the Act only gives the
right of appeal to a senior citizen or a parent aggrieved by the order of the
Maintenance Tribunal. It contains no provision for an appeal by the relative
aggrieved by the order of the Maintenance Tribunal! This is rather strange.
Another interesting facet is that the Act provides that a lawyer cannot
represent either party before the Maintenance Tribunal or the Appellate
Tribunal. However, if a parent so desires, then he can ask the State
Government’s District Social Welfare Officer to represent him. Why should an
Act deprive an old person from availing of legal representation? What if the
senior is a person who is unable to attend proceedings owing to ill-health,
incapacitation? He would then be forced to find some person / NGO who would
appear for him. Is it that easy to find someone? 

Abandoning Seniors

If any person who has been given
the care or protection of senior citizens, leaves them in any place with the
intention of wholly abandoning them, then he shall be punishable with
imprisonment for a term of up 3 month and / or fine of Rs. 5,000. Intention of
wholly abandoning would be demonstrated only through circumstantial evidence
and actual conduct and the onus would be on the person who alleges abandonment.
Such a case would be tried before a Magistrate Court and not by the Maintenance
Tribunal.

Protection of Life and Property

Section 22(2) of the Act mandates
that the State Government shall prescribe a comprehensive action plan for
providing protection of the life and property of senior citizens. To enable
this, section 32 empowers it to frame Rules under the Act. Accordingly, the
Maharashtra Government has notified the Maharashtra Maintenance and
Welfare of Parents and Senior Citizens Rules, 2010
. Rule 20 which has
been framed in this regard, provides that the Police Commissioner of a city
shall take all necessary steps for the protection of the life and property of
senior citizens. Some of the important steps laid down under the Action Plan
under Rule 20 are as follows:

(a) Every police station must
maintain an up-to-date list of seniors living within its jurisdiction, especially
those living by themselves. One wonders whether this is being done in practice?

(b) A police officer with a social
worker should visit all seniors at least once a month and as soon as possible
on requests of assistance.

(c) Volunteers’ committees must be
formed for interaction between the police station and seniors.

(d) Every station must maintain a
register of all offences committed against seniors.

(e) Antecedents of servants working
for seniors must be promptly verified by the police on request from seniors.

(f)  A monthly report must be
submitted to the District Magistrate / Director General of Police about crimes
against seniors and the status of complaints and preventive steps taken.

(g) Every Police Commissioner must
start a toll-free help line for seniors. Mumbai police has set up an Elder Line
at 1090. 

Void Transfers

Section 23 of the Act introduces
an interesting provision. If any senior citizen who, after the commencement of
this Act, has transferred by way of gift or otherwise, his property, on the
condition that the transferee shall provide the basic amenities and basic
physical needs to the transferor and such transferee refuses or fails to
provide such amenities and physical needs, then the transfer of property shall
be deemed to have been made by fraud or coercion or under undue influence and
shall at the option of the transferor be declared void by the Tribunal. This
negates every conditional transfer if the conditions subsequent are not
fulfilled by the transferee. Property has been defined under the Act to include
any right or interest in any property, whether movable/immovable/ancestral/self
acquired/tangible/intangible.

In Promil Tomar vs. State of
Haryana, (2014) 175 (1) PLR 94,
the Punjab and Haryana High Court has
held that the words ‘gift or otherwise’ in the section would include the
transfer of possession of a property or part thereof. It would cover a transfer
by way of lease, mortgage, gift or sale deed. Even a transfer of possession to
a licencee by a senior citizen would be covered. In Sunny Paul vs. State
NCT of Delhi, WP(C) 10463/2015 (Del),
the Delhi High Court has held
that interest of the senior citizen as tenants/licencees of the property is
also covered under the section even though they are not owners of the property.
It further held that a claim for maintenance under the Act and an application
for setting aside a void transfer u/s. 23 of the Act are separate and different
remedies and one is not a pre-condition for the other

In Rajkanwar vs. Sita Devi,
AIR 2015 Raj 61
, the Rajasthan High Court has held that a Will would
not be covered under the above provision since it is not a transfer inter vivos
and does not involve any transfer. A Will is only a legal expression of the
wishes of the testator. 

Eviction from House

One of the most contentious and
interesting facets of the Act has been whether the senior citizen / parent can
make an application to the Tribunal seeking eviction from his house of the
relative who is harassing him? Can the senior citizen / parent get his son /
relative evicted on the grounds that one has not been allowing him to live
peacefully? Different High Courts have taken contrary views in this respect.
The Kerala High Court in CK Vasu vs.The Circle Inspector of Police, WP(C)
20850/2011
has taken a view that the Tribunal can only pass a
maintenance order and the Act does not empower the Tribunal to grant eviction
reliefs. A Single Judge of the Delhi High Court in Sanjay Walia vs. Sneha
Walia, 204(2013) DLT 618
has held that for an eviction application, the
appropriate forum would be a Court and not the Maintenance Tribunal.

However, another Single Judge of
the Delhi High Court in Nasir vs. Govt. of NCT of Delhi & Ors., 2015
(153) DRJ 259
has held that while interpreting the provisions, the
object of the Act had to be kept in mind, which was to provide simple,
inexpensive and speedy remedy to the parents and senior citizens who were in
distress, by a summary procedure. The provisions had to be liberally construed
as the primary object was to give social justice to parents and senior
citizens. Accordingly, it upheld the eviction order by the Tribunal. A similar
view was taken in Jayantram Vallabhdas Meswania vs. Vallabhdas Govindram
Meswania, AIR 2013 Guj 160
where the Court held that setting aside of
void transfers u/s. 23 would even include cases where only possession of
property has been given instead of an actual legal transfer. It thus upheld the
vacation of the premises as directed by the Tribunal. A very interesting
judgment was delivered by the Division Bench of the Punjab & Haryana High
Court in J. Shanti Sarup Dewan, vs. Union Territory, Chandigarh, LPA
No.1007/2013
where it held that there had to be an enforcement
mechanism set in place especially qua the protection of property as
envisaged under the said Act.It held that the son was thus required to move out
of the premises of his parents to permit them to live in peace and civil
proceedings could be only qua a claim thereafter if the son so chose to make
but that too without any interim injunction. It was not the other way round
that the son and his family kept staying in the house and asked his parents to
go to the Civil Court to establish their rights knowing fully well that the time
consuming civil proceedings may not be finished during their life time.

The Court held that it did not
have the slightest of hesitation in coming to a conclusion that all necessary
directions could thus be made under the said Act to ensure that the parents
lived peacefully in their own house without being forced to accommodate their
son.

Recently, a Single Judge of the
Delhi High Court had an occasion to consider all the aforesaid judgments on the
power of eviction of the Tribunal. It held that the requirement that the
children or relatives must be in line to inherit the property was mandated only
for issuing direction with regard to maintenance. To invoke jurisdiction for
protection of life of the senior citizen or setting aside void transfers no such
pre-condition had to be satisfied. Further, directions to remove the children
from the property was necessary in certain cases to ensure a normal life of the
senior citizens. After considering all decisions on the issue, the Court held
that it was in agreement with the view expressed in the case of Nasir (supra)
that the provisions of Act, 2007 have to be liberally construed as one of the
primary objects of the Act is to protect the life and property of senior
citizens. Consequently, it held that u/s. 23 of the Act, the Maintenance
Tribunal could issue an eviction order to ensure that senior citizens live
peacefully in their house without being forced to accommodate a son who
physically assaults and mentally harasses them or threatens to dispossess them.

Since the Act conferred on the
Maintenance Tribunal the express power to declare a transfer of property void
at the option of the transferor u/s. 23, it had to be presumed that the intent
of the Legislature is to empower the Maintenance Tribunal to pass effective and
meaningful orders including all consequential directions to give effect to the
said order. The direction of eviction was a necessary consequential relief or a
corollary to which a senior citizen would be entitled upon a transfer being
declared void. It accordingly directed the Police Station to evict the son.

Conclusion

This is an interesting
social welfare statute designed to provide speedy redressal to parents and
seniors. While there continue to be judicial debates on whether eviction is possible,
one tends to think that the decisions upholding eviction would ultimately
prevail. The Delhi High Court, in a somewhat similar case of Sachin vs.
Jhabbu Lal, RSA 136/2016(
analysed in detail in this Feature in the
BCAJ of January 2017)
has held that in respect of a self acquired
house of the parents, a son had no legal right to live in that house and he
could live in that house only at the mercy of his parents up to such time as
his parents allow. That decision was not rendered under the context of this Act
but yet the ratio was the same. To conclude one only wonders, do we need a law
or a Court to tell us to take care of our parents? The times, truly have
changed!

Section 92C of the Act – As maximum international transactions were undertaken by Taxpayer with its AEs in Canada and USA where ALP was determined through MAP, and as only two transactions were undertaken with AEs in Australia and UK, margin determined through MAP with respect to major international transactions should be applied for remaining transactions also.

14.  [2017] 81
taxmann.com 169 (Bangalore – Trib)

CGI Information System & Management Consultants (P) Ltd
vs. DCIT

A.Y:2005-06, Date of Order: 21st April, 2017

Facts

The Taxpayer had rendered software development services to
its AEs in US, Canada, Australia and UK. AEs of Taxpayer in USA and Canada had
approached respective competent authorities for resolution of TP adjustment
dispute insofar as it related to software development services provided by the
Taxpayer with regard to international transactions through MAP under DTAA.
Under MAP, arm’s length price was determined at 117.5%. The Taxpayer had
maximum international transactions with its AEs in USA and Canada while those
with its AEs in UK and Australia were minimal.

In respect of International transactions of the Taxpayer with
AEs in Australia and UK, the AO adopted 25.32 % profit margin.

Held

  In J. P. Morgan Services (P) Ltd vs. Dy
CIT [2016] 70 taxmann.com 228 (Mum. – Trib)
held that whatever margin has
been applied through MAP with respect to major international transactions, the
same should be applied for the remaining transactions.

  The maximum international
transactions were undertaken by the Taxpayer with its AEs in Canada and USA.
Only two transactions were undertaken with AEs in Australia and UK. Therefore,
the same ALP of 117.50 % should be applied with respect to remaining two
international transactions.

Imprisonment And Penalty Under Rera Realty Firm’s Directors, Partners And Officers, Beware!

BACKGROUND OF REAL ESTATE LAW

Real estate business, perceived to be non-transparent, is now
required to fall in line with stringent requirements of the Real Estate (Regulation
and Development) Act, 2016 (“RERA”)
.

Under RERA, real estate companies are required to furnish
exhaustive particulars to the regulator. Some of these are:

  Promoters to do prior registration of
projects with the regulator before advertising, booking or selling apartments;

   Each phase of a project must be registered
separately as a standalone;

   Every application for completion certificate
should have minute details, including past project details, delivery status and
legal cases pending against the promoter;

   Developer must be ready with approval and
commencement certificate, sanctioned plan and project details at all times.

Offences under RERA will attract serious consequences
including imprisonment in some cases. This is intended to deter promoters,
directors, partners and officers of the real estate concerns from indulging in
financial malpractices and cheating.

Recently, promoters of a well-known realty company were
arrested by the Economic Offences Wing (EOW) of the Delhi Police for alleged
fraud in their real estate project in which Rs. 363 crore were collected from
customers. It is alleged that the promoters siphoned Rs. 200 crore off their
project and stashed the same abroad. They have also been accused of duping
buyers who booked flats in their residential project.  

Nearing 1 May 2017, the implementation date of RERA,
the government notified the remaining sections of RERA on 19 April 2017. This
has put an end to the speculation about extension of implementation deadline.
Thus, RERA is viewed as a positive step and shows the government’s firm resolve
to protect home buyers’ interest.

RERA – A NEW LAW

RERA is a new legislation. Most of its provisions came into
force on 1 May 20161. Remaining provisions came into force on 1 May
20172. Thus, now all provisions are notified and the entire Act has
come into force by 1 May 2017. The following are the provisions that were
notified on 19 April to come into force on 1 May 2017. [The others were earlier
notified and came into force a year earlier on 1 May 2016].

(i)   Sections 3 to 10: Registration of real estate
projects and registrationof real estate agents.

(ii)  Sections 11 to 18: Functions and duties of
promoter.

(iii)  Section 19: Rights and duties of allottees

(iv) Section 40: Recovery of interest or penalty or
compensation and enforcement of order

(v)  Sections 59 to 70: Offences, penalties and
adjudication

(vi) Section 79: Bar of jurisdiction

(vii) Section 80: Cognisance of offences.

Section 69 of RERA which [has come into force on 1 May 2017]
deals with the liability of promoters, directors, partners and officers of the
realty companies, firms and other non-individual entities, came into force on 1
May, 2017.

Since RERA is new, its provisions including section 69 would
need to be interpreted on the basis of similarly worded provisions of other
legislations. For example, section 42 of the Foreign Exchange Management
Act, 1969 (FEMA
) shows that the same is identically worded and corresponds
to section 69 of RERA. Accordingly, provisions of section 69 may be interpreted
by relying on the propositions concluded in the decisions rendered u/s. 42 of
FEMA or similarly worded sections in other laws.

 

1   See Notification
No. SO 1544 (E) [F No. O-17034/18/2009-11] dated
26 April, 2016

2   See
Notification No. 1216(E) [F No. O-17034/275/2017-H] dated
19 April, 2017

Offences under RERA are punishable under Chapter VIII thereof
(sections 59-68). The gist of the penal provisions is given below.

Sr

Description of offence

Penal consequence

1

Violation of section
3 requiring prior registration of the real estate project

Penalty upto 10% of
the estimated project cost

2

Continuing violation
of section 3

Imprisonment upto 3 years and/or
fine upto further 10% of the estimated project cost

3

Providing false
information or failure to apply for registration alongwith documents
specified under section 4

Penalty upto 5% of
the estimated project cost

4

Failure to comply
with other provisions (i.E. Other than section 3 and 4)

Penalty upto 5% of
the estimated project cost

5

Real estate agent’s
failure to do prior registration or comply with the functions specified in
section 10(2)

Penalty @10,000/-
per day of default with the ceiling of 5% of cost of apartment / land /
building

6

Promoter’s failure
to comply with orders of Authority

Penalty upto 5% of
the estimated project cost

7

Promoter’s failure
to comply with Tribunal’s Order

Imprisonment upto 3 years and/or
fine upto 10% of the estimated project cost

8

Real estate agent’s
failure to
comply with orders of the Authority

Penalty upto 5% of
the estimated cost of plot/apartment/building

9

Real estate agent’s
failure to comply with Tribunal’s order

Imprisonment upto 1 year and/or
fine upto 10% of the estimated cost of plot/apartment/building

10

Allottee’s failure
to comply with orders of Authority

Penalty upto 5% of
estimated cost of the plot/apartment/building

11

Allottee’s failure
to comply with Tribunal’s Order

Imprisonment upto 1 year and/or
fine upto 10% of the estimated cost of the plot/apartment/building

The persons liable to punishment would often involve
companies, partnership firms and association of individuals. As will be seen
from the abovementioned gist, the punishment is by way of stiff fine and in
four cases, also by way of imprisonment.

A partnership firm is merely a compendious description of its
partners. However, a company is a juristic entity distinct from its
shareholders1. In case of a partnership, it may also be difficult to
link any partner directly with the offence committed by the firm. For this
reason, in the provisions of a statute dealing with offences, partnership firms
are treated as companies. In section 69, this is evident from the Explanation
which is extracted here:

________________________________________

1   Bacha F. Guzdar vs.
CIT (1955) 27 ITR 1 (SC)

Explanation
— For the purpose of this section—

(i)  “Company” means any body corporate and
includes a firm or association of individuals; and

(ii) “Director”, in relation to a firm, means a
partner in the firm.”

In terms of the Explanation to section 69, a company
means a body corporate and includes a firm or association of individuals; and a
director in relation to a firm, means a partner in the firm. A firm is not a
distinct legal entity and, prima facie, proceedings cannot be initiated
against a firm. Under the Explanation, however, a firm is regarded as a
company for the purposes of this section and therefore, proceedings against a
firm would be valid.

It may be noted that the definition of “company” is inclusive
in nature and could be interpreted in wider manner so as to include even other
entities and persons.

GIST OF SECTION 69 OF RERA

Before section 69 is analysed in detail, it would be better
to review the gist of its provisions.

Section 69 deals with the offences committed by firms,
companies and association of individuals. A company has been defined to include
a firm or association of individuals for the purposes of this section. In terms
of section 69(1) and 69(2), therefore, the persons who are liable to be charged
with the offence committed by the company, firm, association, etc. would
include the following persons:

  A person in charge of the business of the
company, firm, association, etc.;

   A person who is responsible to the company,
firm, association, etc. for the conduct of its business;  

   Director of the company;

   Partner of the firm;

   Secretary of the company;

   Manager of the company, firm, association, etc.;

   Any other officer of the company, firm,
association, etc.

If an offence under RERA is committed by a company, firm,
association, etc., both, the person in charge of the company firm,
association, etc. and the company, firm, association, etc. are
deemed to be guilty of such offence. The person charged with the offence,
however, will not be liable to punishment if he proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent commission of such offence. Where the offence has been committed by a
company with the consent or connivance of, or is attributed to any neglect of
secretary, director, manager or any other person in charge of the business of
the company, such person will also be deemed to be guilty of the offence and
liable to be proceeded against and punished accordingly.

RATIONALE UNDERLYING SECTION 69

Since a company is not a physical person, the pain of
punishment cannot be inflicted on it. Unlike an individual, the company does
not have mind that can be guilty of criminal intent. Hence, for a company,
punishment under RERA is not practical. It is, therefore, necessary to punish
the functionaries of the company, association, etc. whose duties,
responsibilities and conduct represent the policy of the company.

The Joint Committee of Parliament had also discussed the
spirit and content of the various clauses in the Bill (which was eventually
enacted into the repealed FERA) pertaining to vicarious liability of the
functionaries of company, etc. The following observations made by the
Joint Committee are enlightening:

“…..in corporations also, extent
of vicarious liability cannot be extended beyond the acts which are punishable
with fines. First, a clear distinction should
be made between vicarious liability of the master for acts of the servant, and
imputation of the actions of a person in the employment, or acting on behalf of
the Corporation
which are properly imputable to the latter. Imputed liability is not vicarious but original
liability.
The principles of vicarious responsibility has been developed in
the law of tort, because it has seemed socially and economically necessary to
hold the master – and that it is in many cases a corporation liable vis-à-vis
third parties for acts committed within his sphere of operations. The master is held liable to recover against his
servant.
The law of tort is, however, concerned with the economic
adjustment of burdens and risks, and the principle of vicarious liability is
applicable to the criminal law only in so far as the criminal law is
approximated to the objectives of the law of tort i.e. where the law is
essentially concerned with the enforcement of certain objective standards of
conduct, through the imposition of fines, rather than with the individual guilt
of a person. This point to the area of strict responsibility which is largely,
though not entirely, co-extensive with the area of so-called public welfare
offences”. [Emphasis supplied]

PERSONS LIABLE TO IMPRISONMENT AND/OR FINE

A reference to the Explanation to section 69 of RERA
shows that the provisions of section 69 are applicable to the persons in charge
of the business of or responsible to the companies, partnership firms, body
corporates and any other associations of individuals. The word “includes”
in the definition of the “company” given in the Explanation seems to
expand the sweep of section 69 so as to also cover the other non-individual
entities, such as, trust, society, etc. Directors, partners, managers,
secretaries and other officers of the company, body corporate, associations of
individuals, trusts, societies, etc. would be covered by section 69 provided
any such person was regarded as “in charge of” or “responsible to”
the company for the conduct of its business. While the company would be primarily
liable for the consequences of the offence committed by it under RERA, the
director, partner, manager, secretary, other officer and functionaries of the
company, partnership, associations of persons, trust, society, etc.
would be vicariously liable for the offences committed under RERA by the
primary offender. Indeed, the charge of vicarious liability u/s. 69 can be
fastened on such functionary only after establishing that he was in charge of
or responsible to the company for the conduct of its business at the time
when the offence
was committed by the company. A review of various
provisions of RERA shows that the business in real estate sector conducted in
the form of non-individual entities, such as, a company, a partnership firm,
AOP, trust, society, etc. would attract the vicarious liability provided
u/s. 69. Thus, the following persons connected with the real estate business
would be covered under the wide sweep of the vicarious liability provided u/s.
69 of RERA and would be punishable with fine and/or imprisonment, as the case
may be.

   Promoters, directors, partners and officers
of realty companies, firms, etc., and builders, developers, etc.
engaged in the real estate business

   Companies, firms and association, etc.
in the business of Real estate agents

   Allottees of the plots, apartment, and
buildings

   Architects

   Engineers

   Various entities defined as “person
in section 2 [zg]

All the abovementioned persons concerned with or engaged in
the real estate business in the form of company, partnership firm, AOP,
society, trust and other non-individual entities and the functionaries of such
entities are covered under the wide sweep of section 69 of RERA and would be
punishable with fine and/or imprisonment, as the case may be.

Accordingly, show cause notices for the offence under RERA
may be issued to such functionaries in addition to the show cause notice issued
to the non-individual entities, i.e., company, partnership firm, AOP, trust,
society, etc.

LIABILITY OF THE PERSON-IN-CHARGEOF THE COMPANY, FIRM, ETC.

Section 69(1) deals with the directors, senior executives and
employees of the company and partners and key officers of partnership firms,
associations of individuals, etc. who are in charge of or responsible to
the company, firm, etc. for the conduct of its business. Where an
offence has been committed by a company under RERA, apart from the company
being liable for such offence, the person who was in charge of or was responsible
to the company for the conduct of its business at the time of such offence
is also liable to the penal consequences of the offence. The offence may be of
any provision of RERA. Indeed, the deeming provision that the offence has been
committed by such person is a matter of presumption. Such presumption can be
rebutted by establishing that the offence was committed without the knowledge
of the person or that he had exercised all due diligence to prevent the
commission of such offence. It is settled law1 that a person, who
has failed to carry out a statutory obligation, cannot be punished unless he
either acted deliberately in defiance of law or was guilty of conduct
contumacious or dishonest or that he acted in conscious disregard of his
obligations.

In Girdharilal Gupta vs. D. N. Mehta2, a
leading case on vicarious liability, it has been held by the Supreme Court that
such provision [Corresponding to section 69(1)] is a highly penal provision
since it makes the person in charge of or responsible to the company for the
conduct of its business, vicariously liable for the offence committed by the
company. Therefore, this section must be construed strictly. In other words, to
charge a person with vicarious liability for the impugned offence committed by a
company, it is necessary for the Department to establish the following:

__________________________________________________________

1   Hindustan Steel Ltd
v. State of Orissa (1972) 83 ITR 26 (SC).

2    AIR
1971 SC 28

   at the time the offence was committed by the
company, the person was in charge of or was responsible to the company for the
conduct of the business of the company; or

   the offence was committed with the consent or
connivance of the person; or

  the offence was attributable to the neglect
of the person.

“PERSON-IN-CHARGE” –
CONNOTATION OF

The material expression in section 69(1) is the “person
in-charge of”
. Connotation of this expression was examined by the Supreme Court in Girdharilal Gupta vs.
D. N. Mehta3.
This expression has been explained by the
Supreme Court in following words.

“A person ‘in-charge’ must mean the person in overall control of the
day-to-day business of the company
. This inference follows from the
wordings of s/s. (2). It mentions director, who may be a party to the policy
being followed by the company and yet not be
in-charge of the business of the company
. Further, it mentions manager, who
usually is in charge of the business but not in overall charge. Similarly, the
other officers may be in charge of only some part of business”. (Emphasis
supplied)

In this connection, one may also note the decision of the
Delhi High Court in Umesh Modi vs. Dy Director4 in which
distinction has been drawn between the directors in charge of day to day
affairs of the company’s business and other directors who are not.

A person cannot be convicted of the offence merely because
he, as a partner, has a right to participate in the firm’s business under the
terms of the Partnership Deed5. When a person in charge of business
goes abroad, it would not mean that he ceases to be in charge, unless it is
established that he gave up the charge in favour of another person.

Similarly, it is only that partner/director who is in charge
of or responsible to the firm/company who could be made liable u/s. 69 and,
therefore, those partners who had not signed the relevant documents, say,
regarding exports, could not be visited with penalty concerning the offence
pertaining to export transactions6.

__________________________________________________

3   AIR 1971 SC 2162

4   [2015] 130 SCL 621
(Del)

5   State of Karnataka
vs. Pratap Chand (1981) 128 ITR 573 (SC).

6   Sofi
Carpets vs. Directorate of Enforcement (1990) 50 Taxman 439 (FERAB).

In the undernoted case1, a company was found
guilty of contravention of FERA. Adjudication proceedings were initiated
against the company and also against the appellant in his capacity as a
director. On investigation, it was found that the bank certificate furnished
during the investigation showed that another director was exclusively in charge
of the company’s accounts. This certificate was, however, not brought on
record. The matter was remanded for identifying the director who was in charge
of and was responsible to the company for the conduct of its business. The
expression “person in charge of and was responsible to the company”, was
interpreted threadbare in the undernoted case2 in which it was held
that the expressions “in charge of” and “responsible to” are
synonymous. A person in charge of the business was, thus, always responsible
therefor3.

DISTINCTIVE FEATURE OF SECTION 69

However, the said proposition is not applicable to section 69
of RERA because of the word “or” between the two expressions “was in charge
of
” and “was responsible to” in section 69(1). To this extent, section
69 is different from the corresponding provisions in other laws, such as,
section 42 of FEMA, section 62 of Prohibition of Benami Property
Transactions Act, 1988
. In those Acts, the word between the said two
expressions is “and” whereas in section 69 of RERA, it is “or” between the said
two expressions.

JOINT AND SEVERAL LIABILITY OF THE COMPANY AND THE PERSON-IN-CHARGE

The words “as well as” in section 69(1) clearly suggest that
the liability for the offence committed by the company is joint and several as
between the company and its director, partner or functionary who, at the time
the offence was committed, was in charge of and responsible to the company,
firm, etc. for the conduct of its business.

Accordingly, it would not be proper for the person charged
with the offence u/s. 69(1) to argue that the company should be charged first
and that his being charged for the same offence was conditional upon the
company being first so charged. This argument does not appear tenable because
the section does not lay down any condition that the person-in-charge of the
company cannot be separately charged for the offence committed by the company
when the company itself was not prosecuted. From the words “as well as”, it is
clear that each such person or any one of them may be charged separately or
alongwith the company, the only requirement for the same being that there
should be a finding that the offence was committed by the company4.

______________________________________________________

1   Biren N. Shah v. DE
(1999) 104 Taxman 496 (FERAB).

2   N. Sasikala v.
Enforcement Officer (1998) 93 CC 355 (Mad).

3   ANZ
Grindlays Bank, Bombay v. Directorate of Enforcement (1999) Cr LJ 2970 (Bom).

In the undernoted case5, the appellant was
mother–general of a registered society running a convent. She was charged with
contravention of certain FERA provision. On appeal, it was held that the
appellant could not be proceeded against for transactions made on behalf of a
registered society unless the society was found guilty of the contravention.
Similarly6, if the charge against the company itself was not
established, none of the directors of the company could be held liable.Thus, it
would be irrational to charge a person mentioned in that section with vicarious
liability independent of the proceedings to first charge the company for the
offence.

In Raman Narula vs. Director7, the Delhi
High Court has held that where no factual basis was laid by the Directorate for
alleging that the noticee was in-charge of and responsible to the company for
conduct of its business, he could not be held vicariously liable for the
alleged contravention by the company.

BURDEN OF PROOF – ON THE DEPARTMENT

A reading of section 69(1), the Proviso to section
69(1) and section 69(2) offers an interesting review of “burden of proof”.

Section 69(1) shows that the burden of proof is on the
Department to establish the following:

  The company, firm, etc. has committed
offence of any provisions of RERA.

  At the time the offence was committed, the
person charged with the offence was in charge of the company, firm, etc.
or

   At the time the offence was committed, the
person was responsible to the company, firm, etc. for the conduct of its
business.

__________________________________________________________________________________________________

4   Sheoratan Agarwal
v. State of M P AIR 1984 SC 1824 (rendered in the context of the analogous
provisions of section 10 of the Essential Commodities Act, 1955). Per contra:
Union of India v. Annamalai (1987) 11 ECC 240 (Mad).

5   Nambibai Mary v.
Directorate of Enforcement (1990) 50 Taxman 534 (FERAB).
11          N Sasikala v. Enforcement Officer
(1998) 93 CC 355 (Mad).

6   Shirin Sabbir
Rangwala (Mrs) v. Directorate of Enforcement (1991) 55 Taxman 39 (FERAB);
Nowrosjee Wadia Sons (P) Ltd v. Directorate of Enforcement (1999) 106 Taxman
551 (FERAB); Rakesh Jain v UoI [2015] 53 Taxmann.com 133 (Del).

7     [2014] 216 SCL
120 (Del)

Unless the Department discharges the burden of proving the above
facts, the Department’s action u/s. 69(1) would be ab initio void1.

As regards the nature of
the burden of proof under the Proviso to section 69(1) and u/s. 69(2), a
reference may be made to the relevant synopsis headings (infra).

In the undernoted case2,
Special Director called the petitioner for personal hearing. Petitioner filed
writ petition contending that he had no role with regard to remittances and
receipts of foreign exchange in the conduct of IPL in 2009 in South Africa and
that a separate committee was set up to administer IPL with a separate bank
account to be operated by the Treasurer. On these facts, it was held that as
far as opening and operating bank account of IPL and obtaining permission of
Reserve Bank for making remittances or receipts of foreign exchange was
concerned, the petitioner was not in charge of and responsible for such
operational matters. Accordingly, it was considered necessary for adjudicating
authority to form the opinion whether the petitioner was at all covered by the
substantive part of section 42(1) of FEMA [section 69(1)].

Likewise, in the undernoted case3, the appellant
contended that he was not aware of the transaction in question as he was not
looking after day to day affairs of the company. The Department failed to prove
that the appellant was in charge of affairs of the company and he was also
looking after day to day affairs of the company including the transaction in
question. It was also noted that similar penalty on other directors was set
aside by the High Court. Accordingly, the penalty imposed on the appellant was
also set aside.

PRIVATE AGREEMENT – CANNOT OVERRIDE THE STATUTORY PROVISION

In the undernoted case4, there was a change in
ownership and management of a company pursuant to an agreement. The agreement
provided that all personal liabilities attached to the office of the managing
director or director will continue to be the personal liabilities of the
directors under whose charge the offence was committed and the incoming
directors were not responsible for the offence committed prior to the takeover.
On appeal by the incoming directors who contested the charge, it was held that
such term in the agreement cannot absolve the company and the present
management merely because the offence was committed before the present
management took over. It was held that the terms of the agreement could not
override statutory provisions as there is no estoppel against statute.

_____________________________________________________________________________________________________________________________

1   See Sayed Wahid vs.
Director of Enforcement (1988) 37 Taxman 16 (FERAB); See Also: Kavita Dogra vs.
Director (2014) 126 SCL 182 (Del).

2   Shashank Vyanktesh
Manohar vs. Union of India (2013) 122 SCL 317 (Bom)

3   Sanjay Dalmia vs.
Special Director (2014) 123 SCl 311 (ATFFE).

4   Iyer & Sons Pvt
Ltd vs. Directorate of Enforcement (1990) 53 Taxman 160 (FERAB).

EXERCISE OF DUE DILIGENCE – PROVISO GIVES BENEFIT OF DOUBT

In the undernoted case5, the Chairman of the appellant
company had given power-of-attorney to conduct the company’s business at the
time when contravention of a FERA provision took place. It was held that though
the Chairman would come within the meaning of “a person in charge of and
responsible to the company
” for the conduct of its business at the time of
the contravention, he was entitled to the benefit of the Proviso to
section 68(1) [corresponding to the Proviso to section 69(1)] since he
had exercised all due diligence to prevent the contravention.

LIABILITY UNDER SECTION 69 IS NOT ABSOLUTE

In the undernoted case6 , the Supreme Court has
once again observed that while deciding the matter, it is open for the Court to
consider that the liability of the person is vicarious or that the offence was
committed without his knowledge or neglect.

Thus, even if the documents relied upon indicate that the
offence was committed, it would not be a ground for denying a person inspection
of all such documents7 .

ILLUSTRATIVE CASES

Having regard to the principles discussed above, some
illustrative cases may be reviewed in which the person-in-charge argued on
various grounds that he cannot be charged for the offence committed by the
company.

DIRECTOR

Director of a company may
be held liable by virtue of section 69(2) if the offence was committed with his
connivance and he had actively acquiesced in the commission of the offence1.
Likewise, where the Director was duty-bound to supervise the sale of foreign
currency which was physically handled by his subordinate, the director can be
held liable for the offence arising from such sale2.

_____________________________________________________________________

5   Pheroze Kudianavala
Pvt Ltd vs. Directorate of Enforcement (1991) 54
Taxman 164 (FERAB)

6   AIR 1971 SC 2162;
see also: Lalit Kumar Modi vs. Special Director (2014) 125 SCL 330 (Bom).

7   Lalit
Kumar Modi vs. Special Director  (2014)
125 SCL 330 (Bom); Shashank Vyanktesh Manohar vs. Union of India (2013) 122 SCL
317 (Bom)

The nature of liability of a director is merely vicarious.
Accordingly, a director cannot be held guilty3 without first, the
company being held guilty and that, too, after adducing reasons for invoking
his vicarious liability.

Section 69(1) extends the liability, by a deeming fiction,
only to such directors who, at the relevant time, were in charge of or were
responsible to the company for the conduct of its business. In the undernoted
case4, petitioners had ceased to be directors by the company on 14
November, 1997. This was disclosed in Form No. 32 filed with the Registrar of
Companies. The export proceeds were to be realised by the company for the year
ended 31 March 2008. It was held by the Delhi High Court that the contravention
in respect of such export receivable could take place only after 31 March 2008
by which time the petitioners ceased to be directors of the company. On this
ground, the submission of the petitioners (that the proceeding against them was
not sustainable in law), was accepted by the Delhi High Court by relying on the
decision of the Supreme Court in S.M.S. Pharmaceuticals Ltd vs. Neeta Bhalla5.

However, in ANZ Grindlays Bank Ltd vs. Director6,
the Supreme Court has held that even if the company cannot be punished, it does
not mean that the persons referred to u/s. 68(1), (2) of FERA [section 69(1),
(2)] cannot also be punished. Indeed, a Director who had ceased to be a
director as evidenced by form No. 32, cannot be said to be in charge of the
affairs of the company or responsible for the conduct of its business in
respect of the transactions after he ceased to be a director7.

_____________________________________________________________________________

1   Directorate of
Enforcement v. South India Viscose Ltd (1990) 50 Taxman 501 (FERAB).

2   Travels &
Rental (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

3   C R Das Gupta v.
Special Director (2000) 112 Taxman 608 (FERAB); Eupharma Laboratories Ltd v.
Enforcement Directorate (2000) 110 Taxman 469 (FERAB); Nowrosjee Wadia &
Sons P Ltd v. Director of Enforcement (1999) 106 Taxman 55‘; S P Singh v.
Director of Enforcement (1990) 104 Taxman 503 (FERAB).

4   Bhupendra V. Shah v.
Union of India – WP(C) 19881 of 2004, WP(C) 26 and WP(C) 1038 of 2005 decided
by Delhi High Court on 26 March 2010; M M Shah v. Dy Director (2010 104 SCL 79
(Bom)

5   (2005) 8 SCC 89.

6   (2005) 58 SCL 350
(SC).

7   Bhupendra
V. Shah v. Union of India (WP/C 19881/04 decided on 26-3-2010 by Delhi High
Court); M. M. Shah v. Dy Director (2010) 104 SCL 79 (Bom)

It is possible in some cases that a director is merely
concerned with laying down the policy for the company’s business and is not
concerned with the day to day or operational matters of the company. This
aspect was examined by the Allahabad High court in R. K. Khandelwal vs.
State
8. In this decision, Allahabad High Court has observed that
there can be directors who merely lay down the policy and are not concerned
with the day to day working of the company.

Accordingly, the mere fact that a person is a director of the
company does not automatically make him liable for the offence committed by the
company particularly when the other ingredients of section 69(1) are not
established so as to make him vicariously liable. In this respect, a reference
may also be made to the Supreme Court decision in S M S Pharmaceuticals Ltd
vs. Neeta Bhalla9
. In this case, the Supreme Court has
categorically held that the vicarious liability is cast on persons who may have
something to do with the transaction complained of and not on the basis of
merely holding a designation or office. It would depend on the role he plays
and not on his designation or status. The said decision was rendered in respect
of section 141 of the Negotiable Instruments Act but was held by the Bombay
High Court as applicable to section 42 of FEMA [section 69] as the wordings of
both the provisions are in pari uthoriz [see: Shashank Vyanktesh
Manohar vs. Union
10 ].

MANAGING DIRECTOR

Normally, managing director is appointed by an agreement with
the company or by a resolution of the company or by the company’s Memorandum and
Articles of Association. These are the sources from which the managing director
derives the powers of management entrusted to him. Thus, if the managing
director is to be charged for the offence committed by the company, it would
not be sufficient for the Department to merely make an allegation to that
effect without anything more. For charging the managing director with the
vicarious liability u/s. 69(1), first of all, the burden of proof must be
discharged by the Department by adducing appropriate evidence. If, however, the
Department fails to bring sufficient evidence to discharge such burden, the
managing director cannot be charged for the offence committed by the company11.
Where, however, the Managing Director was dutybound to supervise the sale of foreign
currency which was physically handled by his subordinate, the Managing Director
can be held liable for the offence concerning such sale1 .

_______________________________________________________

8   [1964] 62 A L J 625

9   [2005] 63 SCL 93
(SC)

10  [2013] 37
taxmann.com 151 (Bom), para 35]

11   E
Merck (I) Ltd v. Director of Enforcement (1988) 39 Taxman 47 (FERAB).

However, a reference may be made to another decision2 in
which managing directors of two companies which were charged with contravention
of FERA were deemed guilty of such contravention in terms of section 68(1)
[section 69(1)].

EX-DIRECTOR

In the undernoted case3, the company and its
ex-director were charged for failure to repatriate export proceeds. On appeal
by the ex-director, it was held that penalty on ex-director was justified since
he did not take reasonable steps to repatriate export proceeds. It was
particularly observed that he had not sought intervention of Indian and Russian
diplomatic authorities in time in respect of export proceeds receivable from
Russia.

In a similar situation, it was held by the Delhi High Court4
that the ex-director was not vicariously liable where there was no evidence to
show in what manner she was responsible to the company for the conduct of its
business. Where the show cause notice on the ex-director was served at the
address of the company at the time when he had ceased to be a director, it was
held that such service was not proper service and the Order based on such
improper service was unsustainable in law5.

NON-EXECUTIVE DIRECTOR

Can a director of the company who is not in full time
employment and who is not involved in the day-to-day management of the company
be charged with contravention by invoking section 69(2)? Having regard to the
aforesaid discussion on the principles of the burden of proof u/s. 69(2), the
answer is ‘no’. This answer has greater relevance to the professional
directors, independent directors and the nominees of the financial
institutions. The proposition that such director, simpliciter cannot be charged
with the offence committed by the company is fortified by the undernoted
decision of the Calcutta High Court6.

PROFESSIONAL/NOMINEE DIRECTOR

In the undernoted case7, the Bombay High Court
held that nominee/professional director cannot be vicariously held liable for
acts of commission or omission of subordinates.

1   Travels &
Rentals (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

2   Telco
Ltd v. Special Directorate of Enforcement (1991) 55 Taxman 85 (FERAB).

3   Dheklapara Tea
Company Ltd v. DE (1998) 100 Taxman 470 (FERAB).

4   Kavita Dogra v DoE
[2014] 126 SCL 182 (Del)

5   Shailendra Swarup v
Special Director [2015] 54 taxmann.com 79 (Del)

6   Bhagwati Prasad Khaitan v.
Special Director of Enforcement (1977) CrLJ 1821 (Cal).

PROPRIETOR

Business concerns are often floated in the names which may
not contain proprietor’s name. Ostensibly, therefore, the show cause notice may
be issued in the name of the concern as also in the name of the proprietor. The
moot point, however, is whether it was in order to invoke section 68(1) of FERA
[corresponding to 69(1)] at all? This question has been examined in the
undernoted case8 in which it was held that a proprietary concern and
its proprietor both are same. Hence, section 68(1) [section 69(1)] cannot be
invoked in case of a proprietary concern.

PARTNER

Can a partner be charged for the offence committed by the
firm? The answer appears to be ‘yes’. In principle and by analogy, vicarious
liability could be extended to contravention by partnership firms2.
However, having regard to the Explanation defining the “company” and
“director”, coupled with the Proviso to section 69(1), a partner cannot
be charged unless the following two conditions are fulfilled.

Firstly, the Department has discharged the following
triple-burden of proof.

  The partnership had committed offence of any
provision of RERA;

   At the time when the offence was committed,
the partner was in charge of the business of partnership; or

   At the time the offence was committed, the
partner was responsible to the partnership firm for the conduct of its
business.

Secondly, the partner was unable to prove that the
offence was committed without his knowledge or that he had exercised all due
diligence to prevent commission of the offence. Thus, where the non-resident
partners were fully aware of the affairs of the appellant firm as also the
affairs of the foreign buyers who were related to them, such non-resident
partners can be held vicariously liable for the offence10. On the
other hand, where the non-resident partner was employed abroad and had not
taken part in the day to day affairs of the firm, he could not be held liable
for the offence committed by the firm1

_____________________________________________________________________________________________

7   M M Shah v. Dy
Director (2010) 104 SCL 79 (Bom)

8   Apex Exports &
Baljeet Singh v. DE (1997) 92 Taxman 452 (FERAB).

9   Brij Trading Co. v
Enforcement Directorate (2014) 126 SCL 118 (Del)

10  Simertex v.
Director (2006) 69 SCL 177 (ATFE).

.

Assuming that the Department succeeds in discharging such
triple-burden of proof, still if the partner is able to rebut the charge in
terms of the Proviso, he cannot be punished2. Thus, penalty cannot
always be imposed on managing partner3.

However, where the firm is penalised for the offence, the
partners of the firm cannot be penalised again for the same offence since
partnership firm is just a compendious description for the partners
constituting the firm and the firm does not exist independently of the partners
particularly for the purposes for imputing the penal liability4.

In the undernoted case5, a partnership firm was
charged with failure to repatriate export proceeds. On investigation, it was
found that the partner in charge had taken “reasonable steps” to repatriate
export proceeds. On appeal, it was confirmed that reasonable steps were taken
to repatriate the export proceeds. It was held that reasonable steps taken by the
partner should be regarded as reasonable steps taken by the firm. It was also
held that, once the finding was reached that one partner had taken reasonable
steps to repatriate export proceeds, the charge cannot be sustained either
against the firm or against any other partner. The fact that the firm was
already penalised is also a factor to be weighed while deciding the liability
of partners under this section6.

In the last-mentioned case, the Court examined the
phraseology of section 140 of the Customs Act which was in pari uthoriz
with the relevant FERA provision (corresponding to section 69).

_____________________________________________________________________________

1   United Enterprises
v. Special Director (2002) 35 SCL 273 (ATFE)

2   Agarwal Trading Co
v. Asst Collector of Customs AIR 1972 SC 648; Girdhari Lal Gupta v. D N Mehta
AIR 1971 SC 28.

3   SRC Exports (P) Ltd
v. Director of Enforcement (2000) 112 Taxman 142
(FERAB); See also: Chhabra Handicrafts v. Deputy Director (2000) 111 Taxman 138
(FERAB).

4   K B.S.H. Export
House v. Director of Enforcement (1988) 41 Taxman 138 (FERAB). Tarak Nath Sen
v. Union of India AIR 1975 CAL 337; Mohan, Prop. Kandan Mohan Exports v.
Director (2009) 95 SCL 58 (ATFE);

     Jagmohan Tandon v.
Director (2003) 46 SCL 273 (ATFE); Garments India Exporters v. Director (2005)
62 SCL 276 (ATFE); Hathibhai Bulakhidas v. Director (2002) 36 SCL 764 (FERAB).

5   Lakshmi Garments v.
DE (1996) 86 Taxman 259 (FERAB).

6   Tarak Nath Sen v.
Union AIR 1975 Cal 337.

It may be noted that the nature of liability of a partner is
merely vicarious. Accordingly, a partner cannot be held guilty without the firm
being held guilty and that, too, after adducing proper reasons for invoking the
vicarious liability7.

SLEEPING PARTNER

Sleeping partners cannot be held liable for the offence
committed by the firm and penalties cannot be imposed on them8.

POWER-OF-ATTORNEY HOLDER

In case of proprietary concerns, it is usual for the
proprietor to delegate certain functions of business to others who are not his
employees but who act as his agents and act on his behalf in terms of the
power-of-attorney executed by the proprietor in their favour.

All acts of the holder of the power-of-attorney are done by
him in his capacity as mere agent of the proprietor. The responsibility for all
acts done by the agent rests on the proprietor. Accordingly, the concept of
joint and several liability cannot be invoked in such cases to fasten vicarious
liability u/s. 69(1) on the power-of-attorney holder9. However,
where the power-of-attorney holder is in full control of business of a
non-resident, he would be vicariously liable for the offence10.

EXPORT MANAGER – NOT A PERSON IN-CHARGE OF THE COMPANY

Generally, the show cause notice alleging non-repatriation of
export proceeds is issued to the export manager on the premise that he was the
person in charge of the export business. Is it possible for the export manager
to argue that he was not the person in charge of the business? This question
was considered in the undernoted case11. In that case, a company
applied for permission to export certain machinery for participating in an
exhibition in USA. The permission was given on the condition that the machinery
will be re-imported. The company failed to re-import the machinery pursuant to
which the show cause notice was issued charging the company, its director and
the export-manager for the alleged contravention. Penalty was imposed on all
the three. While the company and its director paid the penalty, the
export-manager contended that he was not the person in charge of the company’s
affairs and accordingly, he could not be considered guilty even for abetment.

It was observed that in view of the provisions of section
68(2) of RERA [section 69(2)] the export manager could be held guilty only
if
it was proved that the offence was committed with his consent or
connivance or was attributable to neglect on his part. It was also observed
that when the company had a managing director in charge of the company’s affairs,
the other functionaries could not be considered to be in-charge of the
company’s affairs. Accordingly, the penalty levied on the export manager was
set aside.

________________________________________________________________

7   Sumangal Enterprises
v. DE (1999) 104 Taxman 489 (FERAB).

8   Chhabra Handicrafts
v. Dy Director (2000) 111 Taxman 138 (FERAB).

9   Rajathi Agencies v.
Director of Enforcement (1988) 39 Taxman 56 (FERAB).

10  Simertex v. Director
(2006) 69 SCL 177 (ATFE)

11  R K Caprihan v.
Director of Enforcement (1988) 38 Taxman 23 (FERAB).

LEGAL REPRESENTATIVE

The liability u/s. 69(1) is on the person who, at the time
the offence was committed, was in charge of or was responsible to the company
for the conduct of its business. It is extremely arguable whether the legal
representatives of such person can be held liable by imputing such vicarious
liability. The tenor of section 69 also does not appear to suggest that if
there is any offence of any provisions of the Act by father, his legal
representatives would be vicariously liable for the same. This issue was
examined by the Madras High Court1 where a sole proprietor was
charged for some offence. The proprietor’s sons had no interest in the
proprietary business of their father and had never taken part in its management
or control during the lifetime of their father. Accordingly, they argued that
they cannot be regarded as “the person in charge of and responsible for the
conduct of the business of” the proprietary concern. The lower authorities held
the sons liable for the offence which was alleged to have been committed by
their father. While deleting the penalty, the Court made the following
observations:

“There
is no provision in the Foreign Exchange Regulation Act that, if there is any
contravention of the provisions of the Act by the father, his legal
representatives would be vicariously liable and responsible for the same. The application of the doctrine of vicarious
liability in the criminal law may be described as actuated by necessity rather
than desirability.
Criminal responsibility is generally regarded as being
essentially personal in character and it is with considerable diffidence that
the principle is accepted whereby a man may be found guilty and punished for an
offence which is actually committed by another.

One
member of a family is not vicariously liable for acts of another member merely
because of the family relationship
. Thus one spouse is not liable for the
torts of the other, nor the parent for the
torts of the child if nothing more than relationship appears in the case.

 

___________________________________________________________________________________________________

1   P N P Thulkarunai
& Co v. Director, Enforcement Directorate (1969) 39 CC 101 (Mad).

 

Thus, the doctrine of vicarious
liability is not of general application in the field of statutory crimes.

They are no doubt heirs of their
father. But when they succeeded to the estate of their father, they formed
themselves into a partnership business. They never partook of any interest in
the sole proprietorship concern of their father. [Emphasis supplied]

WHEN DOES THE BURDEN OF PROOF SHIFT FROM THE DEPARTMENT?

The Proviso to section 69(1) deals with this issue.
Its language signifies two things.

Firstly, for invoking the Proviso, the
Department must discharge the initial burden of proof in terms of section
69(1). Thus, where there was no evidence to show in what manner the director
was responsible to the company for the conduct of its business and the facts
relevant to the director were not discussed in the Order, it was held that the
Department had failed to make out a case for vicarious liability2. Secondly,
only after the Department discharges the burden of proof, the same would shift
to the person charged. The burden of proof so shifted is, however, rebuttable
and hence it is open to the person charged to prove the existence of any of the following two facts:

  The offence was committed without his
knowledge; or

  He had exercised due diligence to prevent the
commission of the offence.

It has been held3 that a mere averment that the
company had exercised due diligence or that the offence was committed without
the knowledge of the company or the officers responsible for the conduct of the
business would not suffice to establish a defence under the Proviso to
section 42(1) of FEMA [corresponding to Proviso to section 69(1)]. In
the absence of proper disclosure of the internal arrangements made by the
company to ensure proper conduct of the business according to the guidelines
framed, it was held that there indeed was failure to discharge the burden under
the Proviso to section 42(1) of FEMA [corresponding to Proviso to
section 69(1)].

__________________________________________________________

2   Kavita Dogra v. DoE
[2014] 126 SCL 182(Del)

3    V.
S. Ubhaykar v. Special Director (2012) 112 SCL 114 (Bom)

CONSIDERATIONS RELEVANT FOR SHIFTING THE BURDEN

What considerations should weigh the authorities for
ascertaining whether the person has discharged the burden which shifted to him
in terms of the Proviso? This question was considered by the Supreme
Court1.

The Supreme Court held, among others, that in case of a
partnership firm, acting partner would be liable for the offence committed by
the firm and unless the acting partner proves that he was not aware of the
offence or that he had exercised due diligence to prevent it and the fact that
when the offence was committed, he was out of India would be of no avail.

MITIGATING FACTORS-MAY RESCUE PROMOTER, DIRECTOR, PARTNER,
ETC.

In the undernoted case2, the appellant guest-house
had accepted rupees from foreigners in contravention of FERA. The partner and
manager of the guest-house were penalised u/s. 68(1), (2) of FERA [section
69(1), (2)]. The appellant pleaded that there was no mala fide
intention. The penalty against the partner was set aside in terms of the Proviso
to section 68(1) of FERA [Proviso to section 69(1)] on the ground
that he was not aware that the contravention was committed. Penalty on the
manager, too, was set aside on the basis of the following mitigating factors.

  Contravention occurred unwittingly and
without awareness of the contravention.

  The Department did not dispute that the
appellant fully co-operated with the Department.

  There was no past history of contravention,
this being the first and the only one.

   Appellant had not benefitted from the
contravention.

  Appellant’s averment – that had he known the
correct legal requirement, he would have certainly complied with the same – was
not disputed by the Department.

It was observed that if all offenders are treated alike
without giving due weightage to the honest conduct of some of them, it may make
even honest persons dishonest.

______________________________________________________________________

1   Giridharilal Gupta
vs. D N Mehta AIR 1971 SC 28.

2   Sangam Guest House
vs. Dy Director [2002] 35 SCL 20 (ATFE)

Delhi High Court3 has held that mere fact that in
the opportunity notice given to the appellant, it was stated that the appellant
was in charge of and responsible for the day to day functioning is not enough
to discharge the initial burden cast on the Department to prove so. In that
case, neither in the order of Special Director nor of the Appellate Tribunal,
there was any finding that the appellant was in charge of and was responsible
for the day to day working of the company.

OFFENCE COMMITTED WITH CONNIVANCE OF PROMOTER, DIRECTOR,
PARTNER OR OFFICER

While section 69(1) deals with the persons who, at the time
of contravention, are in charge of or responsible to the company for the
conduct of its business, section 69(2) imposes liability on a functionary who
is a director, partner, manager, secretary or other officer. However, the
Department is required to prove not only the fact that the functionary
proceeded against was a director, partner etc. but also the fact that the
offence was committed either with the consent or connivance of such functionary
or is attributable to any neglect on his part. Unless both these facts are
established, the functionary would not be liable for punishment. Thus, in the
undernoted case4, a company was found guilty of receiving payment in
rupees from non-resident. The investigation showed that the payment was
received by the appellant. The adjudicating officer charged the appellant u/s.
68(2) of FERA [section 69(2)] on the ground that contravention took place with
his consent. On appeal, the finding of the adjudicating officer was confirmed
that the contravention took place with his consent so as to attract section
68(2). [section 69(2)].

NATURE OF BURDEN OF PROOF ON THE DEPARTMENT

The language of section 69(2) suggests that the burden of
proving the consent, connivance or neglect of the functionary lies on the
Department.

HOW WILL THE DEPARTMENT DISCHARGE SUCH BURDEN?

As regards “connivance”, it would be necessary for the
Department to establish that the offence was committed in the circumstances
showing that but for the reticence of the functionary, it was possible for him
to prevent the commission of such offence.

____________________________________________________________________________________

3   Parag Dalmia vs.
Special Director (2012) 115 SCL 57 (Del)

4   Bhupinder Singh vs.
DE [1997] 95 Taxman 315 (FERAB)

As regards “neglect”, the Department must first
ascertain as to what is the spectrum of the duties of director, partner,
officer, etc. This can be done by examining the letter of his appointment,
agreement, the resolution, etc. from which he derived the powers
exercised by him in discharge of his duties. Thereafter, the Department will
have to adduce evidence that it was possible for the functionary to do an act
in discharge of the duties assigned to him which in fact he did not.

SUMMATION : TWO ISSUES

While summing up the discussion on the liability of
promoters, directors, partners and officers of the realty companies, firms,
association, etc. following two issues deserve some further thought.

First, what is the distinction between the provisions
of section 69(1) and section 69(2)?

Second, is there any possibility of the peculiarly
structured real estate transactions triggering the provisions of Prohibition of
Benami Property Transactions Act, 1988 that came into force
retrospectively from 19 May 1988 ?

As regards the first issue, the principal distinction is that
u/s. 69(1), the burden of proof lies on the Department. Once the Department
discharges it, the Proviso shifts the burden to the person vicariously
charged with the offence.

On the other hand, section 69(2) casts the burden of proof on
the Department without the opportunity of shifting the same to the functionary
of the company vicariously charged thereunder.

As regards the
applicability of Prohibition of Benami Property Transactions Act, 1988,
one may note the following.

Real estate developers across India are currently in a
quandary over how to deal with properties they have aggregated over the years through
proxies.

Because of restrictive land ceiling laws, it was common for
real estate developers to amass land holdings through proxies—normally through
firms not directly controlled
or owned but funded by way of loan or subscription to share capital.

Despite the Benami Transactions (Prohibition) Act being
in force from 1988, not much attention was paid to the parcels of land acquired
by developers through proxies because the law had no implementing agency until
now and hence was rarely applied.

With the income-tax department now starting to crack the whip
on the transactions in which the actual beneficiary is different from the
registered owner, many real estate developers across India who have structured
the transactions through land aggregators are in a quandary.

In the run-up to 2016 November amendment to the benami law,
many real estate developers hurriedly “reversed” benami transactions by
transferring properties back to themselves from their proxies who previously
held them. But under the amended law, such ‘re-transfers’ are banned with
retrospective effect.

Of the 72 sections of the amended Benami Act, only
three came into force last year; the rest were made effective from 19 May 1988
through the 2016 November amendment.

Real estate developers claim that their acquisitions through
proxies should not be treated in the same manner as any other transaction aimed
at tax evasion or concealment of wealth. According to them, proxies were used
only to get past restrictive land ceiling laws.

Under the amended Benami law, people involved in benami
transactions face up to seven years in jail and confiscation of properties
without compensation.

The aim of the Benami Act is to curb black money. Real
estate developers will be in difficulty if it is used to take on land
aggregation through proxies.

If it can be established that the motive for
creating multiple ownership in land aggregation was not to avoid tax, hopefully
the government may not bracket such transactions with benami transactions.

Clarifications on Security Deposits And Key Management Personnel

Presentation of Security
Deposits

An
electricity distribution company collects security deposit at the time of issue
of electricity connection, which is refundable when the connection is
surrendered. The entity expects that most of the customers will not surrender
their connection. A question was raised to the Ind AS Transition Facilitation
Group (ITFG) whether such a security deposit shall be classified as a ‘current
liability’ or a ‘non-current liability’ in the books of the electricity
company?

The
ITFG at the first instance concluded that the security deposit should be
presented as current liability on the basis of Paragraph 69 of Ind AS 1,
Presentation of Financial Statement, which states as under:

“An
entity shall classify a liability as current when:

a)  it
expects to settle the liability in its normal operating cycle;

b)  it
holds the liability primarily for the purpose of trading;

c)  the
liability is due to be settled within twelve months after the reporting period;
or

d)  it
does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period”

The
ITFG opined “Although it is expected that most of the customers will not
surrender their connection and the deposit need not be refunded, but
surrendering of the connection is a condition that is not within the control of
the entity. Hence, the electricity company does not have a right to defer the
refund of deposit. The expectation of the company that it will not be settled
within 12 months is not relevant to classify the liability as a non-current
liability. Accordingly, the said security deposits should be classified as a
current liability in the books of the electricity company.”

However,
subsequently the ITFG withdrew the above guidance. Among other matters, the
ITFG stated that the concept of current and non-current classification already
existed under Indian GAAP and is not new to Ind AS. Hence, there is no need for
transition group guidance on the matter. Rather, the classification should be
based on Ind AS 1 and Ind AS compliant Schedule III principles. Some may argue
that by withdrawing the guidance, ITFG is permitting electricity companies to
present the security deposit as non-current. The supporters of this view
believe that in withdrawing the guidance, the ITFG must have focussed on the
substance of the arrangement, and the redemption pattern, which indicates that
the security deposit was non-current.

Author’s
View on some related matters

Pursuant
to the above change, electricity and similar companies, for example, a company
that provides gas connection or water supply, would classify security deposits
received from the customers as current or non-current liability based on
estimated redemption pattern. This view would generally apply in limited
circumstances such as in monopolistic or oligopolistic situations where choices
available to the consumer to change the service provider are highly limited.
This view should not apply by analogy in all cases. For example, in the case of
security deposit received by a consumer goods company from
retailers/distributors, the classification of security deposits would continue
to be current.

The
other question not addressed by the ITFG is whether the security deposits, once
presented as non-current needs to be discounted to its present value followed
by subsequent unwinding of the discount. One view is that discounting would be
required. On initial discounting, the security deposit would be stated at its
present value. The difference between the amount of security deposit received
and the present value will be treated as deferred income. The deferred income
will be credited to the P&L income, generally on a straight line basis to
reflect the true value of the goods or services provided to the customer. On
the other hand, the unwinding of the discounting will result in the security
deposit being reflected at its original value just before redemption. The
unwinding will be done on an effective interest rate method and the consequent
financial expense will be debited to P&L. The accounting will result in a
mis-match in the P&L as the deferred income is recognised on a straight
line basis whereas the financial expense is recognised on an effective interest
rate basis.

The
author’s view is that the new guidance (viz., non-current presentation of
deposit by electricity and similar companies) arising from withdrawal of old
ITFG view is relevant only for presentation in the balance sheet. Recognition
and measurement of security deposits, including those accepted by the
electricity and similar companies, would continue to be governed by Ind AS 109 Financial
Instruments
principles. Consequently, the author believes that there is no
need to discount the security deposits.

WHETHER INDEPENDENT DIRECTORS ARE KEY MANAGEMENT
PERSONNEL?

Whether
independent directors should be considered as key management personnel (KMP)
under Ind AS 24 Related Party Disclosures?

Authors’
View

Ind
AS 24 defines the term ‘key management personnel’ as “the persons having
authority and responsibility for planning, directing and controlling the
activities of the entity directly or indirectly, including any director (whether
executive or otherwise
) of that entity.”

Under
Indian GAAP, AS 18 Related Party Disclosures excludes non-executive
directors from the definition of KMP. However, under Ind AS, it is quite clear
that all directors  whether  Executive or Non-executive will generally be
considered as KMP. Furthermore, the Companies Act, 2013, prescribes very
onerous responsibilities for independent directors. These responsibilities
include taking executive responsibilities. This includes authority and
responsibility for planning, directing and controlling the activities of the
entity. Hence, independent directors are KMP under Ind AS 24.

ITFG may provide
appropriate guidance on this matter.

[2016] 68 taxmann.com 147 (New Delhi-CESTAT) – Commissioner of Central Excise, Delhi- III vs. Fiamm Minda Automotive Ltd.

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The manufacturer is eligible to take CENVAT credit of service tax, inadvertently paid by job worker whose activities are exempt from service tax.

Facts
The Respondent Manufacturer availed CENVAT credit of service tax charged and collected by the job workers. CENVAT credit was denied contending that such services were not liable to service tax.

Held
Tribunal observed that job workers were registered with service tax department and paid service tax which was accepted and retained as statutory dues by department. Also proper invoices evidencing service tax payment were issued. It was therefore held that when service tax is paid by the service provider and the CENVAT credit thereof is availed by recipient of service in conformity with statutory provisions, such credit cannot be denied at recipient’s end merely on the ground that activities were exempt from service tax.

2016 (42) STR 247 (All.) Prosper Build Home Pvt. Ltd. vs. Union of India

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Department cannot initiate proceedings for recovery of disputed dues without adjudication.

Facts
The petitioner admitted liability of service tax on specified transactions during the recording of statement. Consequently, the petitioner was arrested for non-deposit of service tax vide section 89(1)(d) of the Finance Act, 1994 i.e. for failure to deposit service tax collected beyond a period of six months from the due date. After the due process of prosecution, bail was granted and an interim order was passed directing a deposit of 25% of entire outstanding. On obtaining legal advice post prosecution it was known that service tax was not liable on material supplied free of cost. The said fact was represented to the department. However, ignoring the submissions and on the basis of statements recorded, department started adopting coercive methods to recover disputed dues. Therefore the present writ petition is filed objecting recovery of service tax by department without formal adjudication u/s. 73 of the Finance Act, 1994. The revenue contended that the matter is still under investigation and the process to issue SCN was under contemplation.

Held
The High Court held that since there was no assessment order against the petitioner, he cannot be forced to pay an amount merely because he admitted the service tax liability in statements recorded. Department has the liberty to initiate appropriate action for recovery only after service tax liability is confirmed vide adjudication order and is not deposited. In case the petitioner misuses or does not comply with the terms of bail order or interim order, department can apply for cancellation of the bail order or vacation of the interim order.

[2016-TIOL-1105-CESTAT-HYD] Commissioner C& CE & ST, Hyderabad vs. State Bank of Hyderabad

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When excess payment made is not in dispute, denial of adjustment against subsequent liability on a mere procedural lapse and strict interpretation is not justified.

Facts
The Assessee made an excess payment of service tax in the month of October 2007, June and September, 2008 and adjusted the same in the months of April, July and October 2008 without following the procedure provided under Rule 6(4A) and 6(4B) of the Service Tax Rules, 1994. The department contended that since the amount was adjusted suo-motto without intimating and being in excess of the prescribed limit, the same was recoverable with interest and penalties. Commissioner (Appeals) dropped the demand and the Revenue is in Appeal.

Held

The Tribunal noted the undisputed fact of excess payment of service tax which is required to be adjusted against the liability for subsequent period. It was held that Rule 6(1A) of the Service Tax Rules, 1994 provides for adjustment of service tax paid in advance. Similarly Rule 6(3) of the said rules cannot be given a narrow interpretation of adjustment only at the time of refund to the client. Thus non-observance of a procedure is only technical lapse and therefore condonable. It was further held that refund can be claimed of the excess paid in which case interest is also payable to the assessee. When one opts for adjustment so as to eliminate the hassles of refund by foregoing the interest, strict interpretation and denying adjustment would result in unjust enrichment of the revenue which can never be the intention of the Rule.

[2016-TIOL-947-CESTAT-MUM] M/s Electronica Finance Ltd. vs. Commissioner of Central Excise, Pune-III

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In case of a Hire-Purchase contract the taxable event is the date of entering into the contract, installment payments are only obligations of the hirer.

Facts
The Appellant is engaged in lease financial business and has discharged service tax at the applicable rate prevailing on the date of entering into the hire purchase agreement. The department contends that service tax is payable at the rate prevalent when the lease rental is being paid and accordingly there is a demand for the differential service tax liability. It was argued that service tax liability is factored in the EMI that is fixed for their client and therefore the applicable rate is the rate prevailing on the date of the agreement only.

Held
The Tribunal relied upon the decision in the case of Art Leasing Ltd vs. CCE [2007 (8) STR 162 wherein it is held that the installment payments are only obligations of the hirer whereas the taxable event occurs when the contract is entered into. Therefore the contention that service is continued to be provided during the payment of installments is not correct. Accordingly it was held that rate of service tax will be the rate prevalent on the date of contract and the demand for differential liability is set aside.

(Note: The ratio of the aforesaid decision may be applied to the applicability of Rule 5 of the Point of Taxation Rules, 2011 wherein, in case of new services and new levies where the payment is received after the applicability of the new levy, the new rate is made applicable. As per the aforesaid decision, if the taxable event occurs prior to the applicability of the new levy, new rate cannot be made applicable merely because the payment is received later.)

[2016-TIOL-1035-CESTAT-HYD] M/s Aster Pvt. Ltd vs. CC & CE, Hyderabad-III

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II. Tribunal

Failure to intimate the department under Rule 6(3A) of the CENVAT Credit Rules is a mere procedural lapse and denial of benefit of proportionate reversal of credit is not justified.

Facts
The Appellant is a manufacturer availing the benefit of Notification No. 6/2006-CE and clearing goods at a NIL rate of duty. A show cause notice was issued demanding 10%/5% of the value of exempted goods under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 (CCR) on the contention that common inputs and input services were used in the manufacture of exempted and dutiable goods and no separate accounts were maintained. It was argued that assessees not maintaining separate accounts have two options under the CCR i.e. either pay 5% or 10% of the value of exempted goods or do a proportionate reversal of CENVAT credit on inputs and input services attributable to manufacture of exempted goods as per the formula prescribed under Rule 6(3A) of CCR. The second option being beneficial was chosen and credit was reversed. The department argued that no intimation was provided as required under Rule 6(3A) of the CCR and therefore they were bound to pay as per the first option.

Held
The Tribunal observed that sub-rule 6(3) provides for two options and it was noted that Rule 6(3A) of the CCR did not provide that failure to intimate would make the assessee lose the choice of a proportionate reversal of credit. It was held that failure to intimate would not automatically result in application of Rule 6(3)(i) and such a procedural lapse was condonable and denial of a substantive right was unjustified. Further the revenue’s plea of remanding the matter was also rejected on the ground that the amount of credit proportionately reversed along with interest formed a part of the reply to the show cause notice and the same was never disputed.

(Note: Readers may note that Notification No. 13/2016-CE(N.T) has inserted a new sub-rule (3AA) in the CENVAT Credit Rules, 2004 effective from 01/04/2016 providing that on failure to exercise the option under sub-rule 6(3) and follow the procedure provided under sub-rule 6(3A), the Central Excise officer may allow the assessee to follow the procedure and pay the proportionate amount on payment of interest @ 15% from the due date of payment, till the date of payment thereof. Accordingly intimation to the department now appears mandatory.)

2016 (42) S.T.R. 6 (Kar.) C.C.E. & S.T. vs. Mangalore Refinery & Petrochemicals Ltd.

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The Court is bound by an earlier decision of its co-ordinate Bench even if such decision was not challenged by Revenue due to its policy decision

Facts
Facts In a dispute relating to availment of CENVAT credit on certain services, the Respondent assessee relied on the earlier judgement of co-ordinate Bench of the Court which upheld the availability of credit. The department contended that since the amount involved in the said judgement was below the monetary ceiling prescribed, no appeal was filed against it. Therefore the said judgement has no value of precedence and the Court should decide the present dispute afresh.

Held
The Court rejected the argument of the department and held that a decision attains finality in absence of any challenge before higher Court. Reason for nonchallenging has no relevance and accordingly dismissed the appeal filed.

[2016] 68 taxmann.com 180 (Madras HC) – Eveready Industries India Ltd. vs. CESTAT

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Once refund is granted under section 11B, it cannot be said to be “erroneous refund” in terms of section 11A of Central Excise Act and recourse available for recovery of such refund is only by way of following procedure laid down in section 35E of the Act and not section 11A.

Facts
The final assessment was completed and refund was determined. The assessee filed application for refund but was granted refund under section 11B only for part of the amount. However, thereafter, by invoking section 11A of the Central Excise Act, 1944, the very same Assistant Commissioner, who sanctioned refund earlier, issued Show Cause Notice followed by order directing recovery of refund sanctioned. This order for recovery of refund was confirmed by Commissioner (Appeals) as well as the Tribunal. Before the High Court, it was contended that refund application is allowed under section 11B and department has not followed procedure laid down by section 35E (2) of Central Excise Act, 1944 therefore it is not open for department to take recourse u/s. 11A. The department contended that where there is erroneous refund, the same can always be recovered by initiating proceedings u/s. 11A without taking recourse to section 35E.

Held

The High Court held that a careful look at the scheme of sections 11A, 11B and 35E would show that an application for refund is not to be dealt with merely as an administrative act. Section 11B is a complete code in itself. Hence, power exercised u/s. 11B is that of an adjudicating authority and order passed is certainly one of adjudication. Therefore, it must be presumed that before according sanction for refund, an adjudicating authority had actually followed the procedure under section 11B and passed an order of adjudication. Section 11A(1) prescribes the procedure for recovery of any duty of excise, which is erroneously refunded. The power u/s. 35E is not actually to correct any error directly on the part of an adjudicating authority. This power is available only for directing the competent authority to take the matter to the Commissioner (Appeals).

Hon’ble High Court made reference to its own judgment in case of Madurai Power Corpn. vs. Dy. CCE 2008 (229) ELT 521, where Court had occasion to consider interplay between section 11A and section 35E of Central Excise Act, 1944. It held that no one can have a quarrel with the proposition that sections 35E and 11A operate in different fields and are invoked for different purposes. However if the department’s interpretation of section 11A is accepted, it would lead to a situation of recognizing power of recovery in a subordinate authority when refund is already granted by a superior authority after adjudication, which is obviously not the legislative intent. It was held that harmonious reading of provisions of sections 11A and 35E indicates that section 11A does not contemplate overriding section 35E. Hence once refund application is allowed u/s. 11B, such refund cannot be said to be erroneous refund in terms of section 11A (1). The recourse available for recovery of refund sanctioned in terms of section 11B is therefore to follow procedure laid down in section 35E and not section 11A.

[2016] 68 taxmann.com 156 (Madras HC) – S. L. Lumax Ltd. vs. Commissioner of Central Excise, Chennai-IV Commissionerate

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Benefit of CENVAT credit cannot be denied to assessee once the depreciation mistakenly claimed under income tax law on same duty component is given up by assessee. Tribunal cannot modify the Order-in-Original to the extent it is not appealed by the department before Commissioner (Appeals).

Facts
Appellant utilised MODVAT credit of duty paid on import of machinery in 1999 and also claimed depreciation in respect of same duty component in their income tax returns for that year and subsequent years. After detection of this mistake in 2002, all income tax returns were revised but for one year in which the time limit for filing of revised return had expired. Therefore, in the said year, a rectification application was made u/s. 154 of the Income Tax Act along with revised computation and depreciation claim was given up. Income Tax Department accepted the revised return for other years, but rejected the rectification application. The attempt of filing a rectification application was allowed by Commissioner Income Tax (Appeals) on 30/04/2005, but on further appeals by aggrieved parties, it failed upto the Supreme Court. In the proceedings under central excise law, show cause notice was issued denying claim of MODVAT credit. However, in the Order-in-Original, it was held that they would be eligible for credit after the date of acceptance of withdrawal of depreciation by the department i.e. filing of revised return or as the case may be date of order of Commissioner Income Tax (Appeals) accepting the claim for rectification application u/s. 154 (30/04/2005) and ordered recovery of credit accordingly. No appeal was preferred by the Excise Authorities against the said Order-in-Original. However, against the recovery of MODVAT credit, appellant filed the appeal. The appeal was allowed by Commissioner (Appeals), but department preferred an appeal before Tribunal. The Tribunal allowed the department’s appeal and restored the Order-in-Original and also modified the portion by which assessee was held as entitled to CENVAT credit from 30/04/2005. The Appellant preferred appeal before High Court raising a substantial question of law as to whether the Tribunal was justified in restoring Order-In-Original directing recovery of MODVAT credit by disregarding the admitted fact that claim for depreciation was given up under income tax law.

Held
Hon’ble High Court observed that the appellant started up with a claim for two benefits and ended up losing both the benefits. It is only after the detection by the department, an attempt was made to withdraw one of the two benefits. The mistake was explained on the ground that its head office and factory are located in different States. It was held that once the claim for depreciation under Income Tax Act was given up, the benefit of MODVAT credit cannot be denied. It further held that order of Tribunal modifying the Order-in-Original to the extent it allowed credit after 30/04/2005 is also not correct as the said order was not appealed against by the department before Commissioner (Appeals). As regards the year in which appellant gave up depreciation but lost legal battle with Income Tax Department, the Original Authority is directed to work out the amount of depreciation given up for the purpose of finding out the extent to which benefit is available.

[2016] 68 taxmann.com 286 (Kerala HC) – Kanjirappilly Amusement Park & Hotels (P.) Ltd. vs. Union of India.

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Removal of sub-clause (j) of section 66D i.e. Negative List resulting in levy of service tax on “access to amusement facilities and admission to entertainment events” does not amount to parliament encroaching upon Entry 62 of List II of Constitution.

Facts
The issue before the High Court was whether the removal of “admission and access to entertainment event and amusement facilities” [section 66D(j) of the Finance Act, 1994] from the Negative List of ‘Services’ by an amendment made by Finance Act 2015 and the consequent levy of service tax on such activity would result in the Union Parliament trenching upon the exclusive field assigned to the State, under Entry 62 List II of the Seventh Schedule of the Constitution of India. It was argued that resort to the residuary entry can be had only when it is found that the object of tax is not available in any of the other entries in List II and List III. Further there can be no service element found, since what the petitioners offer is amusement and entertainment and what the recipients get is also amusement and entertainment, which clearly is covered by Entry 62. Under Kerala Local Authorities Entertainments Tax Act, 1961 the levy of tax is with reference to the price for admission to any entertainment at the prescribed rates. The measure applicable to amusement parks is also provided based on the investment and area in which such park is situated at the rates fixed by the local authority within the range of rates provided in the table. Hence the activity is already taxed by the States. Further before legislative competence of the Parliament can be traced to the residuary entry, the legislative incompetence of the State Legislature has to be clearly established. The Petitioners broadly relied upon the following decisions:

a. Single Judge of this Court in Kerala Classified Hotels & Resorts Association vs. Union of India [2013] 35 taxmann.com 568 (Ker.), which was affirmed by a Division Bench in Union of India vs. Kerala Bar Hotels Association [2014] 51 taxmann.com 365 (Ker.).

b. Decision of the High Court of Madras in Mediaone Global Entertainment vs. Chief CCE [2013] 36 taxmann.com 57. The respondents sought dismissal of the writ petitions on the ground of “aspect theory” and there being two distinguishable aspects involved, one the services offered by the petitioners and the other the amusements and entertainments enjoyed by the entrants.

Held

The fact that admission/access to entertainment events and amusement facilities are included in the negative list itself is a pointer that the same partakes a service and the Parliament initially exempted it from the levy. When it is argued that the amusement and entertainment is offered, the corollary is that what is offered for amusement for a fee is essentially a service offered for consideration. There is also definitely an element of service in providing a facility, which would result in the enjoyment of an activity capable of being termed as an amusement or entertainment for a fee. Union Parliament therefore has the legislative competence to tax the aspect of service in an amusement park. The argument that the field being entirely occupied by Entry 62 List II, as the Entertainments Tax Act of the State provides a measure of tax based on the investment made and the area covered; which takes in the entire facilities offered and the same having been taxed by the State and therefore there could be no further tax levied on the service i.e. the provision of such facilities, was not accepted by the Court. Relying upon State of W.B. vs. Kesoram Industries Ltd. [2004] 10 SCC 201, the Court held that the Courts have been cautioned not to mix up the object of taxation and the measure employed. Further Relying upon All-India Federation of Tax Practitioners vs. Union of India [2007] 7 SCC 527 and Federation of Hotel & Restaurant Association of India vs. UOI [1989] 46 Taxman 47 (SC,) the Court held that the Supreme Court has time and again, after the Finance Act, 1994 came into force, upheld the tax levied on ‘services’ as being available to the Parliament under the residuary clause. In such circumstances, it cannot at all be said that the field is entirely covered by Entry 62 List II. Amusements are covered by Entry 62 List II and the aspect of ‘service’ involved when the facilities for amusement are offered for a price cannot be ignored. The Decision of Single Bench and Division Bench in the case of Kerala Classified Hotels & Resorts Association (supra) to the extent they dealt with constitutional validity of service tax on supply of food in restaurant by way of service in the context of Article 366(29A)(f) was distinguished on the ground that there is no question of a deeming provision being employed in the present case. Also the Court did not concur with Madras High Court to the extent it expressed a view in Mediaone Global Entertainment’s case (supra) that what is not taxable under section 66B is “tax on admission to entertainment events or access to amusement facilities”, the reason being, “tax on admission or entry of such events is covered in the State List, which is subjected to Entertainment Tax”. In this regard the Court held that Parliament is quite aware of their power. This is because even dehors inclusion in the Negative List the Parliament would not be able to trench upon the field specifically set apart for the States under List II. Therefore, the Negative List also did not refer to ‘amusement’ but tax on admission on entry of such events quite understanding the power to levy service tax on such facilities offered by one to another for a consideration. However, the High Court refrained from referring the matter to a Division Bench on the ground that the issue dealt with in the said case and in the instant cases is on different subjects and distinct transactions.

Note:
In Godfrey Philips India Ltd., the Apex Court held that luxuries is an activity of enjoyment. It further held that tax on luxury could only be levied on an activity and cannot be on goods or items of luxury. ‘Service’ also refers to “an activity”. In the present case also, the High Court expressed a view that ‘amusements’ refer to ‘activities’. However, apparently it did not examine the proposition as to whether, activities of amusement can be said to fall under Entry 62 List II, on the same reasoning as given by Supreme Court in Godfrey’s case, stating that no such ground was raised before it.

[2016-TIOL-824-HC-MAD-ST] N Bala Baskar vs. Union of India and Others

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I. High Court

The service receiver to whom the burden of tax is ultimately passed on is not entitled to challenge the levy as the liability is imposed on the service provider. Further in case of a joint development agreement, the land owner and the third parties avail of construction services from the builder.

Facts
The petitioner has entered into a joint development agreement with one of the Respondents for the property owned by him and his siblings for construction of a Residential Complex. 65% of the built up area is to be handed over to the petitioner against conveyance of 35% of undivided share of land. In terms of the agreement, the builder viz. one of the respondents issued a letter demanding service tax and VAT. A writ petition is filed challenging the payment of service tax on a mere exchange of property and the provisions of section 66B and 66E(b) of the Finance Act, 1994 and thereafter the prayer was modified to challenge only the circular No 151/2/2012 dated 10/02/2012 and the recommendations of the TRU dated 20/01/2016.

Held
The Hon. High Court held that the writ petition is not maintainable as the law makes the service provider liable to pay service tax and it is open for him to either pass on the burden or not. After having entered into an agreement for development and accepting the burden of service tax to the extent liable, the petitioner cannot now challenge the circulars imposing an obligation upon persons who have entered into such contracts. If the person to whom the burden is ultimately passed is allowed to challenge a levy, the same will lead to a disastrous consequence considering the number of consumers. Further it was also noted that the agreement for development gave rise to a bouquet of rights for the builder, one was construction of an area, a part of which could be sold to third parties along with undivided share of land. The petitioner did not stand on a different footing than those persons except that the consideration was paid in the form of undivided share of land and not by cash and therefore the petition was dismissed.

“Glass wall” vis-à-vis Construction Contract

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 Introduction

Under Sales Tax Laws, there are certain
provisions whereby a dealer can discharge his tax liability by way of a
simple method, called ‘composition scheme’, instead of the regular
method of working out liability to pay tax. Such ‘composition scheme/s’
are normally designed for smooth sailing, particularly in relation to
works contracts.

However, sometimes a method, which looks simple
and easy, may become very heavy and burdensome, just because of its
interpretation. Dealer/s opting for compositions scheme/s have to be
very careful. One recent judgment on interpretation of a ‘construction
contract’ may be an example.

Construction Contract

Under
erstwhile Maharashtra Works Contract Act,1989, a composition scheme of
5% was announced for ‘Construction Contract/s’. In other words, if the
contract executed by the contractor was covered by a notified
construction contract, then the contractor could adopt this composition
scheme, attracting a composition rate of 5%.

Notification

The
relevant notification, notifying ‘construction contract’ under Works
Contract Act, was dated 8.3.2000, which is reproduced below for ready
reference:

“Notification No.WCA -25.00/C.R.-39/Taxation-1 dated the 8 th March,2000.

In
exercise of the powers conferred by sub-section (1) of Section 6A of
the Maharashtra Sales Tax on the Transfer of Property in Goods involved
in the Execution of Works Contracts (Re-enacted) Act, 1989 (Mah.XXXVI of
1989), the Government of Maharashtra hereby notifies the following
contracts to be the construction contracts for the purpose of
sub-section (1) of the said section 6A, namely: –

A. Contracts for construction of –

 (1)
Building, (2) Roads, (3) Runways, (4) Bridges, Flyover bridges, Railway
overbridges, (5) Dams, (6) Tunnels, (7) Canals, (8) Barrages, (9)
diversions, (10) Rail tracks, (11) Causeways, Subways, Spillways, (12)
Water supply schemes, (13) Sewerage Works, (14) Drainage works, (15)
Swimming pools, (16) Water purification plants.

B. Any
contract incidental or ancillary to the contracts mentioned in paragraph
A above, if such contracts are awarded and executed before the
completion of the said contracts mentioned in A above.”

A look
at the above notification shows that two categories of transactions were
covered by above notification. One category was Part (A), which was
relating to main activity of construction, and, the other category i.e.
Part (B) covered incidental contracts to above main contract, subject to
the condition that they should be executed prior to completion of main
contract.

Controversy in case of Permasteelisa (India) Pvt. Ltd. (Sales Tax Reference No.55 of 2014 dated 6.5.2016) (BHC)

The facts leading to above judgment are noted by the Hon. High Court in para (4) of judgment as under:

“4
The Applicant is a Private Limited Company incorporated under the
Companies Act, 1956. It is also a registered dealer under the MVAT Act.
The Applicant is engaged in activity of fixation of glass walls. It is
the case of the Applicant that these glass walls also known as curtain
walls are used in the construction of modern buildings. These glass
walls are permanent walls and are constructed instead of usual brick
walls. In the modern age of architecture these glass walls have replaced
the traditional brick walls and many buildings are constructed and
developed using glass walls. If the glass walls are erected for a
building, then brick walls are not required as these glass walls have
all the characteristics of traditional brick walls as a result of which
there are modern high rise buildings and skyscrapers. In applying the
rates as applicable under the Work Contracts Act, the Applicant has
relied upon the Notification dated 8 March 2000 in terms of which
certain contracts specified therein are identified as construction
contract eligible for beneficial rate of tax. According to the
Applicant, the activities it undertakes are in respect of construction
contracts or contracts incidental or ancillary to the construction
contracts as set out in the Notification dated 8 March 2000 and it has
raised invoices and filed returns accordingly.”

Contention of dealer

As
the Maharashtra Sales Tax Appellate Tribunal, held that the activity
undertaken by the dealer did not fall within the said notification of
‘construction contract’, the dealer preferred a reference to Bombay High
Court and submitted that the glass walls are replacing traditional
bricks walls.

The arguments were two fold. One, it was a
contract for construction of building covered by Part A. In the
alternative, it was argued that it was covered by Part B as an
incidental contract. The meaning of ‘building’ in Development Control
Regulation for Greater Mumbai,1991 (DCR) was cited. Further literature
was submitted explaining the “glass walls” concept. On behalf of
department the submission was that the contract for glass walls was
neither a building construction contract nor incidental contract.

Observation of High Court

Hon. High Court referred to the contract terms for given transaction. In para 12 the Hon. High Court observed as under.

“12.
We are of the view that the contracts for construction of glass walls
executed by the Applicant would not constitute ‘contracts for
construction of buildings’ as mentioned in paragraph ‘A’ of the
Notification dated 8 March 2000 nor would they constitute contracts
incidental or ancillary to any contract as mentioned in paragraph ‘B’ of
the Notification dated 8 March 2000 issued under section 6A(I) of the
Works Contract Act and would not be covered by the said Notification. In
the judgment and order dated 9 July 2010 of the Tribunal in Second
Appeal No.106 of 2007, the case of the Applicant is interalia recorded.
In paragraph 3 it is stated as follows: “…

The work is carried out as under:

“i) Contract for structural glazing is entered into on completion of foundation and plinth.

ii) O n signing of the contracts intensive planning and designing is undertaken by Architect and Structural Engineers.

 iii) A luminum, silicon and glass of the desired prescription is ordered.

iv) U pon completion of 5th Slab, structural glazing commences from the bottom i.e. first slab.

v) Structural glazing gets completed along with concrete construction.

vi) I nstead of convention brick wall, glass walls are used.

vii)
Structural glazing of the building is something without `brick walls’.
Instead of “brick wall” a “glass wall” is constructed.

It is
further recorded in paragraph 4 that in respect of the assessment, the
Applicant’s case was that it had undertaken the contract of fabrication
and erection of structural glazing works and the work of aluminum
glazing contract would qualify as a construction contract made for
building liable to composition rate of tax. Being aggrieved by the
Assessment Order passed by the Sales Tax Officer, the Applicant had
filed an Appeal before the Deputy Sales Tax Commissioner (Appeals) and
in the order dated 1 November 2006, the Commissioner of Sales Tax
(Appeals) has recorded that the Applicant contended that “he is a dealer
dealing in structural glazing aluminum cladding, doors and windows and
doors of buildings in Corporate Offices.”

After referring to
further judgments cited and an order of Advance Ruling in Karnataka on
the very same activity, in para 17 the Hon. High Court concluded its
decision as under:

“17 The fabricated structural glazings
prepared by the Applicant are transported to the site by the Applicant
and affixed on the exterior portion of the building, which building is
constructed by the building contractor who is a third party. There is no
dispute that Applicant is not a building contractor, in that, it is not
in the business of construction and erection of buildings. The activity
of affixing glass and erecting glass walls with aluminium frame work
requires an altogether different expertise, and is ordinarily
sub-contracted by the building contractor. The contention that some of
the walls in the building are not required to be constructed by laying
bricks and they are substituted by affixing the glass would not carry
the case of the Applicant further. We are also unable to accept the
contention that the work of the Applicant would be covered under the
term “incidental or ancillary activity to the construction of the
building” as that would have to have a direct nexus to the construction
of the building itself. Therefore, the alternative argument that the
contract would get covered by paragraph B of the said Notification which
includes incidental or ancillary contract to the contract of
construction also cannot be accepted. What meaning is to be attached to
the word “building” as mentioned in the Notification would have to be
determined considering the facts and circumstances of each case. In our
view, the reliance on the definition of ‘building’ in the Regulation
2(3)(11) of DCR is misplaced and would not assist the Applicant in any
manner. That definition is in the context and purposes of DCR and cannot
be imported and applied in the facts and circumstances of the present
case.”

The Hon. High Court has rejected the plea of the dealer about its contract being covered by category of Construction contract.

Conclusion

While
effecting the transaction, a dealer contemplates liability by making
reference to available provisions. The composition schemes are meant for
easy method of working of tax liability on works contracts. The dealer
may not be seeking any tax saving, but basically looks at an easy and
smooth method of working.

Under above circumstances, if the
dealer is caught in litigation in regard to interpretation litigation,
it may cost him heavily as the tax liability may exceed even his profit
margin.

It is pertinent to note that under present MVAT Act also
there is almost a similar notification for ‘construction contracts’.
Dealers will have to interpret its scope in terms of this judgment. It
may be suggested that the Government should clarify the scope of such
notifications in more specific terms so that dealers (contractors) can
compute their liability with certainty.

WITHDRAWAL OF AN APPEAL

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Right of Appeal

It has been clearly laid down by the Apex Court from time to time that the right of appeal is a matter of substantive right and this right becomes vested in a party when the proceedings are first initiated, even before a decision is given in the matter. Such a right cannot be taken away except by express enactment or necessary intendment.

In this regard, some judicial considerations are as under :

  • In Janaradan Reddy vs. The State, AIR 1951 SC 124 and in Ganpat Rai vs. Agarwal Chamber of Commerce Ltd, AIR 1952 SC 409, Supreme Court upheld the principle that a right of appeal is not merely a matter of procedure but it is a matter of substantive right.
  • An intention to interfere with or to impair or imperil such a vested right cannot be presumed unless such intention is clearly manifested by express words or necessary implication [Hoosein Kasam Dada (India) Limited vs. State of Madhya Pradesh & Others (1983) 13 ELT 1277 (SC)].
  • At various instances different courts including the Apex Court has decided that if the right of appeal is vested and the assessee chooses not to exercise that right and later on files a special leave petition, then in such a case the authority may refuse to undertake the matter and reject the case and instruct the assessee to proceed only through the appeal route [Alembic Glass Industries Ltd. vs. UOI (1998) 97 ELT 28 (SC)]
  • Right of appeal is creature of the statute and can never be termed as an inherent right. Example of inherent right is filing a suit provided the same is not barred by limitation. Appeal right is conferred by the statute but one thing important here is that while conferring the right of appeal, the statute may impose certain restrictions such as limitation or pre – deposit of penalty or limiting the area of appeal to questions of law etc. Such limitations as specified in the statute shall be strictly followed [Raj Kumar Shivhare vs. Asstt. Director, Directorate of Enforcement (2010) 253 ELT 3 (SC)] ? R ight of appeal is a substantive right that is provided by the statute and it automatically vests in the aggrieved party. Therefore all the rights it carries with it that in itself means that such a right cannot be negated or taken away. [CCE & CU vs. Met India Ltd. (2010) 20 STR 560 (GUJ)]
  • Though right of appeal is statutory right under the Central Excise Act 1944 but it is not an absolute right and hence is bound by the provisions of section 35F. [Vibha Fluid Systems Engineering Pvt. Ltd. vs. UOI (2013) 287 ELT 29 (GUJ)]

The result of an appeal filed by an aggrieved person can be:

  • Affirmed: where the reviewing court agrees with the result of the lower court’s ruling(s) or
  • Reversed: Where the reviewing court disagrees with the result of the lower court’s rulings(s), and overturns their decision or
  • Remanded: where the reviewing court sends the case back to the lower court.

Can an appeal once filed be withdrawn?

Though, it is generally well settled that right of appeal by an aggrieved person is to be construed liberally, there is very limited clarity on the issue as to whether an appeal once filed by an aggrieved person can be withdrawn.

Neither the Central Excise Act 1944 / Customs Act, 1962 / Finance Act, 1994 nor the Rules made under therespective statutes nor the CEGAT (Procedure) Rules, 1982 contain any specific provision to permit an aggrieved person to withdraw his appeal, either with the permission of the appellate authority or without such permission. This issue becomes very important inasmuch appellate authorities are vested with powers of enhancement of demands and hence usually due caution is exercised by appellate authorities while entertaining such requests, from aggrieved persons.

One would wonder as to why an aggrieved person would want to withdraw an appeal after it is filed. Some examples / situations are given hereafter for ease of understanding:

a) Cases where there are mistakes apparent for record in an order passed by adjudicating authority / appellate authority against which an application for rectification is filed but the same is not disposed off. Hence, an appeal is filed, to protect the interest of the aggrieved person. Subsequent to the filing of appeal, relief is granted in rectification.

b) A services exporter has substantial unutilised CENVAT credit and is uncertain as to its utilisation against service tax payable on taxable services that may be provided in future. Hence, refund for unutilised CENVAT credit is applied for, which is rejected. In order to protect his interest, an appeal is filed. However, subsequent to the filing of appeal, the said services exporter has local transactions where service tax is payable. Issues arise in such cases as to whether an appeal filed can be withdrawn and service tax payable on local transactions be set off against unutilised CENVAT credit.

Some Judicial Considerations under Indirect Taxes

  • When this question came up in Mahindra Mills Ltd. vs. CCE (1987) 31 ELT 295 (Special Bench – New Delhi),] the Tribunal held that while the parties have no absolute right of withdrawal of the appeal, the request therefor was being allowed in the circumstances of that case.
  • When a similar request came from the appellant in another case (after considerable arguments had been heard for the appellant) a majority of the members held in the case of MRF Ltd vs. CCE (1987) 32 ELT 588 (Special Bench – New Delhi) that in the circumstances of that case the request for withdrawal must be declined, while the minority opinion was that it may be granted.
  • In a later decision in Jenson and Nicholson (India) Ltd. vs. CCE (1989) 41 ELT 665 (Special Bench – New Delhi), the Tribunal held that the powers of the Appellate Tribunal are similar to the powers of an Appellate Court in the Code of Civil Procedure. Hence the Tribunal has the right (though under no specified rule) to grant permission to the appellant to withdraw his appeal. [in this regard reliance was placed on Hukumchand Mills vs. IT Commissioner Bombay – AIR 1967 SC 455 and New India Life Assurance Co. Ltd. vs. IT Commissioner, Bombay – AIR 1958 Bombay 143].
  • The facts in Ramakrishnan Steel Industries Ltd. vs. Superintendent – (1993) 66 ELT 563 (MAD) were rather unusual. When the appeal by the department before the Tribunal was pending the department intimated the assessee that it had been decided to withdraw the appeal and directing the assessee to pay in accordance with the order of the Collector (Appeals) against which order the appeal to the Tribunal had been preferred by the department. The assessee duly complied and intimated the Tribunal also of the same and intimated they have no objection to the appeal being allowed to be withdrawn. But somehow the department had failed to intimate the Tribunal of its decision to withdraw the appeal. Hence, the Tribunal decided the appeal on merits by allowing the appeal of the department. The High Court set aside the order of the Tribunal holding that the decision to withdraw the appeal having been taken by the authority who had earlier ordered the filing of the appeal, the department was stopped from going back on the decision to withdraw when the assessee had, in pursuance of the communication, taken the necessary action to comply with the request therein about payment of duty.
  • In Ralson Carbon vs. CCE (1999) 108 ELT 608 (CEGAT – New Delhi) the Tribunal permitted withdrawal on the basis of declaration under Kar Vivad Samadhan Scheme (KVSS).

A peculiar situation arose for consideration in Shiv Herbal Research Lab. P. Ltd vs. CCE & CU (2002) 139 ELT 133 (Tri – Mumbai). In that said case the appellant intimated the Tribunal that they had filed a declaration under KVSS and the appeal may be treated as withdrawn. Accordingly the Tribunal permitted withdrawal of the appeal. Evidently the appeal was dismissed as withdrawn. Later the appellant applied for restoration of the appeal pointing out that “an order u/s. 90(4) of the Finance Act 1998 for full and final settlement under the KVSS has not been passed”. The Tribunal declined to restore the appeal though the factual situation of certificate u/s. 90(2) not having been issued does not appear to have been controverter or disbelieved.

Judicial Considerations under Income Tax
In respect of proceedings under the Income Tax Act, it was held by the Supreme Court, in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 433 (SC) that an appellant having once filed an appeal, cannot withdraw the same. In fact the Calcutta High Court held in Bhartia Steel and Engineering Co. P. Ltd. vs. ITO (1974) 97 ITR 154 (CAL) that even if the Tribunal had dismissed an appeal as withdrawn, the said order would be a nullity as having been passed without jurisdiction and the appeal will have to be treated as pending.

Conclusion

In the absence of specific provisions for withdrawal of an appeal under the Indirect Tax Laws (Service tax, Central Excise & Customs), practical issues / difficulties are faced by aggrieved persons, in particular. This issue needs to be addressed through amendments, in the Indirect Tax statutes / CESTAT (Procedures) Rules, 1982, as considered appropriate.

Income Tax Officer vs. Kondal Reddy Mandal Reddy ITAT ‘B’ Bench, Hyderabad Before P. Madhavi Devi (JM) and B. Ramakotaiah (AM) ITA No. 848/Hyd/2015 A.Y.: 2010-11. Date of Order: 13th May, 2016 Counsel for Revenue / Assessee: B.R. Ramesh / K.C. Devdas

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Section 50C and 54F – For the purpose of exemption u/s. 54F the consideration determined as per section 50C is to be adopted – For exemption entire investment in new house to be considered irrespective of source of funds
Facts

The issue before the Tribunal was whether the actual sale consideration mentioned in the sale deed or the deemed sale consideration u/s. 50C is to be adopted for allowing the deduction u/s. 54F.

During the assessment proceedings under section 143(3) of the Act, the A.O. observed that the assessee had sold a plot of land for a consideration of Rs.20 lakh as per sale deed while vendees had paid the stamp duty, registration charges etc., on the value of Rs.89.6 lakh. Therefore, he invoked the provisions of section 50C and brought the difference of Rs.69.6 lakh to tax as the capital gains. Against the same, the assessee claimed deduction u/s. 54F qua the investment of Rs.1.37 crore made by him for construction of a residential house. The A.O. however, held that the sale consideration of Rs.20 lakh mentioned in the sale deed alone was eligible for exemption under section 54F and not deemed consideration arrived at by invoking the provisions of section 50C. On appeal, the CIT(A) agreed with the assessee.

Being aggrieved, the revenue appealed before the Tribunal and placed reliance upon two court decisions in support of its contention that the “full value of the sale consideration” as mentioned in Section 54F refers to the “consideration” actually received by the assessee and not the deemed consideration received under section 50C. The cases relied upon were as under
• CIT vs. George Henderson & Co. Ltd. 66 ITR 622 (SC);
• CIT vs. Smt. Nilofer L Singh 309 ITR 233 (Del.)

Held

The Tribunal relied on the decision of the Mumbai tribunal in the case of Raj Babbar vs. ITO (56 SOT 1) and of the Karnataka High Court in the case of Gouli Mahadevappa vs. ITO (356 ITR 90). As held in the said decisions, the Tribunal observed that when the capital gain is assessed on notional basis, the entire amount invested, should get benefit of deduction irrespective of the fact that the funds from other sources were utilised for new residential house. Thus, in the case of the assessee, the sum of Rs. 1.37 crore invested was eligible for benefit u/s 54F and not the sum of Rs. 20 lakh as contended by the revenue. According to the Tribunal, the decision relied upon by the revenue in the case of George Henderson & Co. Ltd. and Nilofer L Singh were distinguishable on facts. Accordingly, the appeal filed by the revenue was dismissed and the order of the CIT(A) was upheld.

Baberwad Shiksha Samiti vs. CIT (Exemption) ITAT Jaipur Bench Before T. R. Meena (AM) and Laliet Kumar (JM) ITA No. 487/JP/2015 A.Y.: 2010-11. Date of Order: 12th February, 2016 Counsel for Assessee / Revenue: Mahendra Gargieya / D. S. Kothari & Ajay Malik

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Section 263 – Where the AO has accepted the claims by the assessee after making proper inquiry, the CIT cannot proceed to revise the order by holding another possible view.
Facts

The assessee, running educational institutes, had filed its return of income on 25.01.2011 declaring nil income. It had claimed exemption under section 10(23) (iiiad) and section 11. The assessment was completed under section 143(3) by the AO at the returned income. According to the CIT (Exemption) the order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons:

a) The assessee had applied for registration u/s 12A on 04.02.2011 and it was not registered u/s 12AA before completion of assessment;

b) The assessee had not included in its gross receipt the sum of Rs. 51.05 lakh received from the State Government on account of students’ scholarship. If the said amount is added to the total receipts declared by the assessee, the gross receipts were more than Rs. 1 crore and thus, the assessee won’t be eligible to claim exemption u/s 10(23)(iiiad);

c) The assessee was not entitled to depreciation of Rs. 7.62 lakh as the capital expenditure incurred by the assessee was already allowed in the year of purchase of assets as application of income;

The assessee claimed that the order passed by the AO was not erroneous and prejudicial to the interest of the revenue for the following reasons:

a) Proviso to section 12A(2) inserted w.e.f. 01.10.2014 provides that where registration has been granted to the trust u/s 12AA, then the provision of section 11 and 12 shall apply in respect of any income derived from the property held under trust of any assessment years for which assessment proceedings are pending before the AO as on the date of such registration. The assessee claimed, since it is a beneficial proviso which is to remove the un-intended hardship, the proviso has a retrospective effect;

b) Scholarship amount was received for disbursement to the students whose names were given by the Government. The assessee cannot retain any part of the scholarship for its benefit and any amount remaining unclaimed has to be returned back to the Government. The assessee was merely acting as a conduit. After examination of this issue the AO had allowed exemption u/s 10(23)(iiiad);

c) The assessee had not claimed any capital expenditure as application of income in as much as in all earlier years, the assessee had claimed exemption u/s 10(23) (iiiad). Even otherwise also, the assessee claimed that u/s 11, both, depreciation as well as capital expenditure are allowable citing several decisions;

However, the CIT(Exemption) did not agree with the assessee and restored the matter back to the AO for making proper enquiry. According to him the benefit under proviso to section 12A(2) inserted w.e.f. 01.10.2014 cannot be given to the assessee who has filed application for registration on 04.02.2011. As regards scholarship – according to him since the assessee had not fully disbursed the scholarship amount by the year end, the said receipt was includible in the gross receipts of the assessee. Thus, according to him, the assessee was not entitled to claim exemption u/s 10(23)(iiiad) as its gross receipt exceeded Rs. 1 crore. As regards depreciation, the CIT(Exemption) relied on the Supreme Court decisions in the cases of Escorts Ltd. vs. Union of India (199 ITR 43) and Lissie Medical Institutions vs. CIT (348 ITR 43) and held that it was a double deduction on the same assets.

Held

The Tribunal noted that before assessing the income of the assessee u/s 143(3 )a detailed questionnaire was issued by the AO and the assessee had furnished requisite details / information / accounts, etc. Thus, according to the Tribunal, the AO had concluded the matter after making detailed inquiry. Further, the Tribunal noted that on the issues raised by the CIT, there are decisions by the courts as well as the ITAT which have decided the matter in favour of the assessee. Thus, according to the Tribunal, the AO had formed one of the views while the CIT (Exemption) had formed another view on same facts and circumstances and therefore, change of opinion was not permissible under the law. Hence, the Tribunal set aside the order of the CIT(Exemption) and allowed the appeal of the assessee.

[2016] 157 ITD 626 (Delhi Trib.) Chander Shekhar Aggarwal vs. Asst. CIT A.Y. 2011-12. Date of Order:11th January, 2016

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Section 199, read with Section 198 and rule 37BA of the Income-tax Rules, 1962 – Clause (ii) of Rule 37BA(3) has no applicability where assessee follows cash system of accounting. Consequently the said assessee, following cash basis, is entitled to credit of entire amount of TDS being offered as income even though the amount in respect of which tax is deducted is not received and therefore not offered as income.

Facts

The assessee was following cash method of accounting. The assessee had declared income of about Rs. 9 crore in the return filed for the relevant assessment year. The assessee had claimed credit of tax deducted at source (TDS) of Rs. 80 lakh.

The AO allowed the credit of TDS of Rs. 71 lakh only and disallowed the credit of balance TDS even though the balance TDS was offered as income by the assessee.

The CIT-(A) upheld the order of the AO. She held that the credit of TDS was to be allowed in terms of rule 37BA(2) and as such, the credit would be allowable on pro rata basis in the year in which the certificate was issued and also in future where balance of such income was found to be assessable as per the mandate of section 199. Any amount which had not been assessed in any year but referred in the TDS certificate could not be claimed u/s. 199.

On second appeal before the Tribunal, the following was held

Held

Sub-section (1) of section 199 provides that any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income tax deduction was made. Also, section 198 provides that all sums deducted in accordance with Chapter XVII-B shall, for the purposes of computing the income of an assessee, be deemed to be income received. The admitted facts of the instant case are that the TDS has been offered as income by the assessee in his return of income.

The tax deducted by the deductor on behalf of the assessee and offered as income by the assessee in his return of income is to be allowed as credit in the year of deduction of tax. Rule 37BA provides that credit for TDS should be allowed in the year in which income is assessable. Further clause (ii) of rule 37BA(3) provides that where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax. This rule is only applicable where entire compensation is received in advance, but the same is not assessable to tax in that year and is assessable in a number of years. However, such rule has no applicability, where assessee follows cash system of accounting.

This can be supported from the illustration that suppose an assessee, who is following cash system of accounting, raises an invoice of Rs. 100 in respect of which deductor deducts tax of Rs. 10 and deposits to the account of the Central Government. Accordingly the assessee would offer an income of Rs. 100 and claim TDS of Rs. 10. However, in the opinion of the revenue, the assessee would not be entitled to credit of the entire TDS of Rs. 10 but would be entitled to proportionate credit only. Now assume that Rs. 90 is never paid to the assessee by the deductor. In such circumstances, Rs. 9 which was deducted as TDS by the deductor would never be available for credit to the assessee though the said sum stands duly deposited to the account of the Central Government.

Rule 37BA(3) cannot be interpreted so as to say that tax deducted by the deductor and deposited to the account of the Central Government is though income of the assessee but is not eligible for credit of TDS in the year when such TDS was offered as income. This view is otherwise also not in accordance with the provisions contained in sections 198 and 199. The proposition as laid out by the Commissioner (Appeals), therefore, cannot be countenanced.

In view of the aforesaid, the assessee would be entitled to credit of the entire TDS offered as income by him in his return of income.

(2016) 134 DTR 113 (Mum) Sunil Gavaskar vs. ITO A.Ys.: 2001-02 & 2002-03 Date of Order: 16th March, 2016

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Section 80RR : Income earned as a cricket commentator by the assessee is income earned from the exercise of profession of sportsman.
Facts

The assessee had received income in the form of foreign remittances, on which deduction was claimed u/s 80RR, in pursuance to an agreement, dated 10th May, 1999 with M/s ESPN Star Sports for rendering services on an exclusive basis as a presenter, reporter and commentator and various other allied services described in the said agreement. The CIT(A) rejected the claim of the assessee on the ground that this deduction is available to a person who is sportsman or a person belonging to any one of the categories as mentioned in the said section and the income must be derived as a result of carrying out that very activity only. But in the case of assessee, since assessee was no more a sportsman or a cricketer and in any case since the impugned income was not earned as a result of playing cricket, and therefore, the assessee was not eligible to claim the deduction u/s 80RR.

Held

Since, the term sportsman has not been defined in the Act and the impugned provisions are beneficial provisions intending to provide the benefits to the public at large, therefore, it would be appropriate to analyse the expression sportsman as is used commonly by the society in generic sense. The Tribunal referred to the meaning of the term sportsman in Wikipedia and from that definition, it noted that the term sportsman may also be used to describe a former player who continues to remain associated and engaged, for the promotion of the related sport activities. The facts of the case are that the assessee has been undoubtedly a cricketer of international stature. It has been shown before the Tribunal that the assessee has been playing cricket matches in India and abroad, even after he had stopped playing tournaments of international and national levels.

Thus, the term sportsman includes not only persons who actively played in the field in the impugned year but also a person who had been actively playing in the field in earlier years and thereafter, he continued to remain associated with the related sport and promoted the same sport, but from outside the field. The Tribunal relied on the fact that in section 80RR, it has been no where mentioned that the sportsman should be the person who is currently playing in the field or the person earning income directly from playing in the field only. Thus, the broader objective of section 80RR is met if the term sportsman is defined in a wider sense, as seems to have been intended by the legislature also. In this backdrop, it can certainly be said that the assessee was a sportsman during the year for the purpose of section 80RR.

Any income derived by the sportsman during the course of his profession which arise out of core activity (i.e. activity of playing in the field), and also other subsidiary & allied activities which are linked to and have nexus with the core activity of the sports, should also be included in the scope of the income eligible for deduction u/s 80RR. The Tribunal proceeded to clarify that any type of income which has remote or no connection with or which is independent of the core activity would not be covered in this section. Further, those activities which go beyond the parameters of profession and take the shape of business activities shall also not fall in the scope of income derived during the course of profession in the context of section 80RR. The

Tribunal concluded that the impugned income had been derived by the assessee in the exercise of his profession as a ‘sportsman’ and allowed the claim of the assessee

[2016] 69 taxmann.com 122 (Kolkata – Trib.) New Alignment vs. ITO ITA No. 504/Kol/2014 A.Y.: 2010-11 Date of Order: 6th April, 2016

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Section 40(a)(ia) – Second proviso to section 40(a)(ia) inserted by Finance Act, 2012 is declaratory and curative in nature, and therefore, should be given retrospective effect from the date from which sub-clause (ia) of section 40(a) was inserted by the Finance Act, 2004.

Facts

The assessee firm, engaged in business as civil contractor, paid labour charges amounting to Rs. 1,27,44,615 without deducting tax at source u/s. 194C of the Act. Since the income-tax was not deducted at source, the Assessing Officer (AO) invoked the provisions of section 40(a)(ia) of the Act and disallowed the sum of Rs. 1,27,44,615.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that in view of the amendment to the provisions of section 40(a)(ia) of the Act by insertion of the second proviso, the AO be directed to verify if the payees have declared the receipt from the assessee in their return of income and if they have so declared then the addition u/s. 40(a)(ia) of the Act be deleted by the AO.

Held

The Tribunal having noted the provisions of section 201, second proviso inserted to the section 40(a)(ia) and the justification of the amendment of section 40(a)(ia) as given by the Explanatory Memorandum while introducing the Finance Bill, 2012 observed that the provisions of section 40(a)(ia) of the Act are meant to ensure that the assessees perform their obligation to deduct tax at source in accordance with the provisions of the Act. Such compliance will ensure revenue collection without much hassle. When the object sought to be achieved by those provisions are found to be achieved, it would be unjust to disallow legitimate business expenses of an assessee. Despite collection of taxes due, if disallowance of genuine business expenses is made then that would be unjust enrichment on the part of the Government as the payee would have also paid the taxes on such income. In order to remove this anomaly, this amendment has been introduced. The Tribunal noted that the disallowance is not to be made subject to satisfaction of the conditions mentioned in the second proviso.

Keeping in view the purpose behind the introduction of the second proviso, the Tribunal held that the second proviso can be said to be declaratory and curative in nature and therefore, should be given retrospective effect from 1st April, 2005 being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004. The Tribunal also observed that the Delhi High Court has in the case of CIT vs. Ansal Land Mark Township (P.) Ltd. [2015] 61 taxmann.com 45 has taken a view that the insertion of the second proviso to section 40(a)(ia) of the Act is retrospective and will apply from 1.4.2005.

The alternative prayer made on behalf of the assessee to remain the issue to the AO for verification as to whether payees have included the receipts from the assessee in their returns of income in terms of the decision referred to above was accepted.

This ground of the appeal filed by the assessee was allowed.

[2016] 69 taxmann.com 244 (Pune – Trib.) Cooper Corporation (P.) Ltd. vs. DCIT A.Y.: 2008-09 Date of order: 29th April, 2016

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Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view to save interest costs, is an allowable revenue expenditure.to save interest costs, is an allowable revenue expenditure.

Facts

The assessee company was engaged in foundry business, manufacturing cylinder liners/heads, flywheels and other automobile components, etc. The assessee had in earlier years taken loans from Corporation Bank, IDBI Bank and Bank of Maharashtra in Indian currency for the purposes of acquisition of fixed assets and windmills, etc. which were purchased in India. These loans were bearing interest @ 12% to 14% p.a. In order to save on interest costs, these term loans were converted over a period of years into foreign exchange loans where interest rate was chargeable from 6% to 7% p.a.

In the return of income the assessee had claimed a deduction of Rs. 1,39,98,945 on account of devaluation of Indian currency qua foreign currency on outstanding foreign currency loans u/s. 37(1) of the Act. The Assessing Officer (AO) disallowed this sum of Rs. 1,39,98,945 on the ground that it was merely a notional loss and not an actual loss incurred by the assessee. The AO further observed that even presuming that increased liability for repayment of foreign currency loans have been saddled on the assessee, still the same will be capital in nature since the impugned loans were obtained for acquiring capital assets.

Aggrieved, the assessee preferred an appeal to the CIT(A) who granted partial relief of Rs. 37,92,087 on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items like bill discounting, debtors, etc. Foreign exchange fluctuation loss in respect of loan taken for purpose of acquiring capital assets was not allowed as a deduction.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that – (i) the assessee entered into the agreement with lenders to convert the loan in foreign currency to gain advantage of savings in interest; (ii) there is no dispute that the acquisition of capital assets / expansion of projects, etc from the term loans taken are already complete and the assets so acquired have been put to use; (iii) there is no adverse finding from the Revenue about the correctness of accounts or the assessee on the touchstone of section 145 of the Act – in other words, the profits / gains from the business have admittedly been computed in accordance with the generally accepted accounting practices and guidelines notified; (iv) loss occasioned from foreign currency loans so converted is a post facto event subsequent to capital assets having been put to use. The Tribunal observed that the assessee had applied Accounting Standard-11 which it was mandatorily required to follow. It also noted that the provisions of section 43A would not apply since the assets were not acquired from out of India.

The Tribunal held that in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the assessee in accordance with the generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. In the light of the fact that conversion in foreign currency loans which led to impugned loss, were dictated by revenue consideration towards saving interest costs, etc., the Tribunal stated that it had no hesitation in coming to the conclusion that loss being on revenue account was an allowable expenditure u/s. 37(1) of the Act.

This ground of appeal filed by the assessee was allowed.

The Commissioner of Income Tax I, Pune vs. Gera Developments Private Limited, Pune. [INCOME TAX APPEAL NO. 2171 OF 2013 dt 29/2/2016 Bombay High court.]

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[Gera Developments Private Limited, Pune vs. CIT -I, Pune . ITA No. 33/PN/2012 ; Bench : A ; dated 08/03/2013 ; A Y: 2007- 2008. Pune ITAT ]

Revision – Erroneous and Prejudicial to the Revenue – Application of mind is important – No discussion in asst order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind : Section 263

The assessee filed its return of income declaring total income of Rs.19.97 crore. Amongst the issues which arose for consideration during the assessment proceedings were:

i) whether the consideration of Rs.41 Crore received on transfer of development right is to be taxed in the subject assessment year or not;

ii) whether an amount of Rs.68.24 lakh should be allowed as warranty expenses.

The Assessing Officer on issue of transfer of development right held that the amount of Rs. 41 crore received by the assessee was subject to performance of certain obligation relating to environmental clearance and in the absence of performing the obligation, the amounts had to be returned. On consideration of facts, the Assessing Officer held that an amount of Rs. 5.86 crore could alone be taxed in the subject assessment year and the balance amount of Rs. 35.14 crore were considered as deposit. So far as the warranty expenses are concerned, the Assessing Officer called for various details and justification for claiming warranty expenses. The assessee to this by filing a reply and on satisfaction, the Assessing Officer allowed the warranty expenses as claimed in the assessment order.

The CIT in exercise of his power u/s. 263 of the Act, held that the conclusion of the Assessing Officer on the above 2 issues namely transfer of development right and warranty expenses is erroneous and prejudicial to the interest of the Revenue. Moreover, the Commissioner also held that set off of short term capital loss without taking into account Section 94 of the Act was also erroneous and prejudicial to the interest of the Revenue. The CIT directed the Assessing Officer to complete the assessment proceedings in accordance with law as discussed in his order.

Being aggrieved, the assessee appealed to ITAT . The grievance of the assessee was that the asst order of the Assessing Officer was not erroneous nor prejudicial to the interest of the Revenue on the following three issues.

(a) Consideration received as transfer of Development Right.

(b) Warranty expenses and

(c) Set off of short term capital loss.

So far as issue (a) above is concerned the Assessment Order, on consideration of all facts, records the conclusion that out of an amount of Rs.41 crore received, an amount of Rs.35.14 crore was in the nature of deposit as the receipt was subject to environmental clearance. Only Rs. 5.86 crore could be treated as income for the subject assessment year. In view of above, the ITAT held that asst. order cannot be treated as erroneous. So far as the issue (b) above with regard to warranty expenses is concerned, the ITAT held that the questions were posed during the assessment proceedings to the assessee. The same were responded to by the assessee justifying the warranty expenses claimed. On satisfaction, the Assessing Officer accepted the claim of expenditure made by assessee. Thus a view was taken that it cannot be said to erroneous.

So far as issue (c) above with regard to the set off of the short term capital loss is concerned, the ITAT upheld the order dated 31/10/2011 of the Commissioner of Income Tax holding the same is erroneous and prejudicial to the Revenue. The Revenue being aggrieved by the order of the ITAT insofar as it set aside the order dated 31/10/2011 of the Commissioner of Income Tax i.e. on issues (a) and (b) above viz. taxability of consideration received on transfer of development right and allowing of warranty expenses.

The Hon’ble Court observed with regard to issue (a) i.e. taxability of the transfer of development right, that the ITAT records findings of Assessing Officer in detail from which it is evident that the Assessing Officer applied his mind to the above claim and on the basis of the facts before him, came to the conclusion that an amount of Rs.5.86 crore out of Rs. 41 crore received could alone be subjected to the tax as income during the subject assessment year. The balance amount Rs.35.14 crore has to be treated as deposit as the same is subject to being refunded in the absence of the environmental clearance. Thus, the Assessing Officer has taken a view/formed an opinion on the facts before him and such a opinion cannot be said to be an erroneousas it does not proceed on the incorrect assumption of facts or law and the view taken is a possible view. Therefore, as held by the Apex Court in Malabar Industrial Co. Ltd vs. Commissioner of Income Tax, 243 ITR page 83 where two views are possible and the Income Tax Officer has taken one view with which the Commissioner of the Income Tax does not agree, cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is itself unsustainable in law.

So far as issue (b) i.e. warranty expenses claimed by the assessee is concerned, the court observed that the ITAT has recorded the fact that a specific query with regard to the same was made by the Assessing Officer during the assessment proceedings. This query was responded to by the assessee justifying the warranty expenses. The Assessing Officer being satisfied with regard to the justification offered, allowed the claim of warranty expenses as made by the assessee. It was thus clear that the Assessing Officer had considered the issue by raising questions during the assessment proceedings. The mere fact that it does not fall for discussion in the assessment order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind. It is clear that if the Assessing Officer is satisfied with the response of the assessee on the issue and drops the likely addition, it cannot be said to be non application of mind to the issue arising before the Assessing Officer. In fact this issue was a subject matter of the consideration by the Court in the Commissioner of Income Tax 8 V/s. M/s. Fine Jewellery (India) Ltd., Income Tax Appeal No. 296 of 2013 dt 03rd February, 2015. Thus to hold that if a query is raised during the assessment proceedings and responded to by the assessee, the mere fact that it has not been dealt with in the assessment order would not lead to a conclusion that the Assessing Officer has not applied his mind to the issues.

Thus on the issues (a) and (b) viz. consideration received on transfer of development right and warranty expenses are concerned, the impugned order of the ITAT has applied the principle of law laid down in Malabar Industrial Co. Ltd (supra) and M/s. Fine Jewellery (India) Ltd. (supra). Thus, appeal is dismissed.

Director of Income Tax(IT)-I vs. M/s Credit Lyonnais [Income Tax Appeal No.2120 of 2013 dt 22/2/2016; Bombay High Court.]

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[M/s.Credit Lyonnais (through their successors : Calyon Bank) vs. The Asstt. Director of Income-tax (IT ) – 1(2) Mumbai. ITA no. 9596/Mum/2004 & 214/ Mum/2005: Asst.Year 2001-2002]

TDS – Sub arranger fees and commission paid to non resident – nature of commission / brokerage – Circular No.786 dated 7th February 2000 – Not liable to deduct TDS u/s. 195 :

Amortization of expenditure – Entries in books of account are not determinative or conclusive :

During the A Y: 2001-02, the Assessee was appointed by State Bank of India (SBI) as an arranger for mobilizing deposits in its India Millennium Deposits Scheme (IMDS). In turn, Assessee was entitled to appoint sub-arrangers for mobilizing IMDs both inside and outside India. The assessee explained that it mobilized deposits worth Rs.1235.8 crore and SBI accordingly provided it a long term deposit of Rs.617.9 crore for a period of 5 years. Besides, the assessee received a sum of Rs.22.19 crore from SBI as arranger fees and commission. It in turn paid an amount of Rs.37.07 crore to the sub-arrangers by way of sub-arranger fees and commission. An amount of Rs.26.75 crore out of Rs.37.07 crore was paid by way of sub-arranger fees and commission to non-residents. However, the assessee had failed to deduct tax at source on Rs.26.75 crore paid to non-residents as sub-arranger fees and commission. Therefore, the Assessing Officer invoked section 40(a)(i) of the Act for failing to deduct tax u/s. 195 to disallow the expenditure on the ground that this payment to non-resident sub-arranger was in the nature of fees for technical services u/s. 9(1)(vii) of the Act.

In Appeal, the CIT(A) held that the amount paid to the nonresident sub-arranger was in the nature of commission / brokerage and not fees for technical services in terms of section 9(1)(vii) of the Act.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal. The Tribunal by relying upon the Circular No.786 dated 7th February, 2000 held that the amount paid to the non-resident sub-arrangers is in the nature of commission / brokerage and was not chargeable to tax in their hands. Consequently section 195 of the Act would have no application, thus upheld the deletion of the disallowance u/s. 40(a)(i) of the Act passed by the CIT(A).

The Tribunal further analyzed the nature of services being rendered by the sub-arrangers to the assessee and in the context of section 9(1)(vii) of the Act viz. whether these services are managerial, technical and consultancy services. whether these services are managerial, technical and consultancy services. The services could not be sort technical. So far as the managerial services are concerned, the impugned order relied on the decision of the Apex Court in the case of R. Dalmia vs. CIT, New Delhi, 106 ITR 895 wherein the Apex Court has held that the words “person concerned in the management of the business” would mean a person not only directly participates or engages in the management of the business but also one who indirectly controls its management through the managerial staff, from behind the scenes. Management includes the act of managing by direction, or regulation or administration or control or superintendence of the business. In the present case, the Tribunal, on examination of the services rendered by the sub-arrangers to the assessee concluded that the services rendered in obtaining deposits of IMD Scheme could not be considered to be management services. In the above view, the Tribunal upheld the order of the CIT(A) and held that there could be no application of provisions of section 40(a)(i) read with section 195 of the Act in the present facts

The Revenue filed an appeal before the High Court challenging the order of ITAT . The Hon’ble court observed that section 195 of the Act obliges a person responsible for paying to non-resident any sum chargeable to tax under the Act, to deduct tax at the time of payment or at the time of credit to such non-resident. In terms of section 5 of the Act, a non-resident is chargeable to tax received or deemed to be received in India or accrued or arising in India. Section 9 of the Act describes income which is deemed to accrue or arise in India. The impugned order examined the nature of fees in the context of section 9(1) (vii) of the Act to hold that it is not a technical service as defined therein. This view of the Tribunal in the context of the services being rendered by the sub-arrangers is a factual determination and is a possible view, not shown to be perverse or arbitrary. Moreover, the services are admittedly rendered by the non-resident sub-arrangers outside India. In such a case, there is no occasion for any income accruing or arising to the non-resident in India. The services of the non-resident sub-arrangers of attracting deposit to IMDS Scheme is carried out entirely outside India. As held by the Apex Court in the case of CIT, A.P. vs. Toshoku Ltd., 125 ITR 525, no income can be said to accrue or arise in India where payment is made for service by non-resident outside India. The CBDT had issued a Circular No.786 of 2000 dated 7th February 2000 reiterating the view of the Apex Court in Toshoku Ltd.’s case (supra). In the above view, as no income has accrued or arisen to the non-resident sub-arrangers in India, the question of deduction of tax u/s. 195 of the Act will not arise. Question of law raised on this issue was accordingly dismissed.

The other question of law raised was in regards to amortization of expenditure . Assessee received a sum of Rs.22.19 crore as fees and commission from SBI for services rendered as arranger. The Assessee had in turn paid an amount of Rs.37.07 crore by way of sub-arranger fes and commission to the subarrangers appointed. In the above view, the Assessee claimed as expenditure an amount of Rs.14.87 crore to determine its taxable income for the subject Assessment Year. However, in its books of account, the Assessee amortized the above expenditure of Rs.14.87 crore over a period of five years and for the subject A Y, only debited Rs.99.16 lakh to its profit and loss account. The Assessing Officer did not dispute that expenditure had been incurred for business purposes. However, in his assessment order it was held that the expenditure of Rs.14.87 crore had been amortized over a period of five years in the books of account i.e. in line thereto, a deduction only to the extent of Rs.99.16 lakh was allowable in the subject Assessment Year.

Being aggrieved, the Assessee carried the issue in appeal to the CIT(A). The CIT(A) upheld the order of the Assessing Officer . Being aggrieved, the Assessee carried the issue in Appeal to the Tribunal. The Tribunal, considered the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. v/s. CIT, 225 ITR 802 and earlier decision of the Supreme Court in the case of India Cements Ltd. vs. CIT, 60 ITR 52 to conclude that the expenditure incurred by making payment to sub-arrangers was the amounts spent in collecting deposits under the IMD Scheme and it was deductible in its entirety in the year of expenditure.

The Hon’ble court observed that the issue is no longer res integra in view of the decision of the Apex Court in Taparia Tools Ltd. vs. Joint CIT, 372 ITR 605 (SC). In the aforesaid case, the issue for consideration was whether the liability to pay interest is allowable as deduction in the first year itself or it be spread over for a period of five years. The High Court had on application of the principle of matching concept upheld the view of the Assessing Officer to spread the interest paid in the very first year over a period of five years because the term of the debt was five years and the Assessee therein had itself in its books of account amortized the interest over a period of five years. In Appeal, the Apex Court while reversing the decision of High Court held that normally the ordinary rule is that the Revenue expenditure incurred in a particular year is to be allowed in the year of expenditure and the Revenue cannot deny a claim for entire expenditure as deduction made by the Assessee. However, the apex Court also held that in case the expenditure is shown over a number of years and so claimed while determining its income, then it would open to Revenue only on the principles of matching concept to deal with the submission as the Assessee. It is not so in this case. The Apex Court held that once the return has been filed making a particular claim, then the Assessing Officer was bound to carry out assessment by applying provisions of the Act and he could not go beyond the return. The Apex Court made reference to the decision in the case of Kedarnath Jute Manufacturing Co.Ltd. vs. CIT, 82 ITR 363 to hold that entries in books of account are not determinative or conclusive for the purpose of determining whether or not a particular income is chargeable to tax under the Act. This had to be determined only on the basis of the provisions contained in the Act. In this case, in its return of income the Assessee had claimed the entire expenditure of Rs.14.87 crores in the subject assessment year. The expenditure was to be allowed.

The Commissioner of Income-Tax-3 vs. M/s. Parrys (Eastern) Pvt Ltd [Income Tax Appeal No. 2220 OF 2013; dt 18/2/2016 (Bombay High court )]

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(The IT O 3(2)(4), vs. Parrys (Eastern) P.Ltd. I.T.A. No. 26/Mum/2011; Bench: C ; A Y: 2005-06 ; dt : 13.2.2013)

Capital gain -Deeming fiction u/s 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49 of the Act.

The assessee had disclosed an amount of Rs.7.12 crore as deemed short term capital gain u/s. 50 of the Act. This deemed short term capital gain arose on account of the sale of depreciable assets. This deemed short term capital gain was set off against brought forward long term capital losses and unabsorbed depreciation. The Assessing Officer passed an order u /s 143(3) of the Act holding that in view of section 74 of the Act, such set off on short term capital gain against the long term capital gain is not permitted. Thus, he disallowed the set off of brought forward long term capital loss and unabsorbed depreciation against the deemed short term capital.

In appeal, the CIT[A] allowed the assessee’s appeal holding that the issue stand concluded by the decision of High Court in the case of CIT vs. ACE Builders(P) Ltd reported in 281 ITR 210(Bom).

On further appeal by the Revenue, the Tribunal by the impugned order upheld the order passed by the CIT(A) by placing reliance upon the decision of this Court in the case of ACE Builders(P) Ltd(supra) and by following its own order in the case of Komac Investments and Finance Pvt Ltd vs. Income Tax Officer 132 ITD 290. On further appeal the Revenue contended that in view of the clear mandate of Section 74 of the Act, no set off of the carry forward long term capital loss against the deemed short term capital gain u/s. 50 of the Act is permissible..

The Hon. High Court, observed that the issue stands concluded by the decision of this Court in ACE Builders(P) Ltd (supra) in favour of the Assessee. The deeming fiction u/s. 50 is restricted only to the mode of computation of capital gains contained in Sections 48 and 49 of the Act. It does not change the character of the capital gain from that of being a long term capital gain into a short term capital gain for purpose other than Section 50 of the Act. Thus, the assessee was entitled to claim set off as the amount of Rs.7.12 Crore arising out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long term capital gain apply. Thus for purposes of Section 74 of the Act, the deemed short term capital gain continues to be long term capital gain. It was also observed that the Revenue has accepted the decision the Tribunal in Komac Investments and Finance Pvt Ltd (supra), as no information was provided as to whether any appeal being filed from that order. Therefore, no substantial questions of law arise for consideration , Appeal was dismissed.

TDS: DTAA- Business expenditure- Disallowance u/s. 40(a)(i)- A. Y. 2001-02- Assessee paid administrative fee to its US-AE- Assessing Officer disallowed same for not deducting TDS- As condition of TDS-deduction was only applicable on payment to non-resident and not applicable on payment to resident for relevant period, it created discrimination- consequently, assessee would get benefit of DTAA and, therefore, action of Assessing Officer was not justified-

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CIT vs. Herbalife International India (P.) Ltd.; [2016] 69 taxmann.com 205 (Delhi)

Assessee paid administrative fee to its US-AE for availing various services like data processing services, accounting, financial and planning services etc. In the A. Y. 2001-02, the Assessing Officer disallowed said payment on ground that said payment was fee for technical service warranting deduction of TDS which assessee did not deduct. The Tribunal allowed the assessee’s claim. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) A rticle 26(3) of India-USA DTAA states that for the purpose of determining the taxable profits of a resident of a contracting state (India), the payment of interest, royalty and other disbursements paid to resident of other contracting state (USA) shall be deductible under the same conditions that apply to such payment being made to a resident of India. The expression other disbursements occurring in said article 26(3) is wide enough to encompass the administrative fee paid by the assessee to its US-AE.

ii) Section 40(a)(i), as it was during the assessment year in question i.e. 2001-02, did not provide for deduction of TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of clause (ia) to section 40(a) with effect from 1st April 2005.
 
iii) A s far as payment to a non-resident is concerned, section 40(a)(i) as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of section 40 (a)(i) as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under article 26(3). The object of article 26(3) was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua nonresident by requiring the TDS to be deducted while making payment of FTS.

iv) As per section 90(2), the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision.

v) In view of above, it is held that section 40(a)(i) is discriminatory and, therefore, not applicable in terms of article 26(3) of the Indo-US DTAA . Consequently, the administrative fee paid by the assessee to its AE is allowed.”

TDS: Business expenditure- Disallowance u/s. 40(a)(i)- A. Ys. 2007-08 and 2008-09- Payment of commission to non-resident agent- Commission not income deemed to accrue or arise in India- Tax need not be deducted at source- Disallowance of expenditure u/s. 40(a)(i) not justified-

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CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

In the A. Ys. 2007-08 and 2008-09, the assessee had made payment of commission to non-resident agents in respect of sales made outside India. The Assessing Officer disallowed the claim for deduction u/s. 40(a)(i) of the Income-tax Act, 1961 for failure to deduct tax at source. The basis of disallowance was that Circular No. 23 of 1969 and 786 of 2000 issued by the CBDT which had clarified that commission paid to non-resident agent for sale does not give rise to income chargeable to tax in India had been withdrawn by Circular No. 7 dated 22/10/2009. The Tribunal allowed the assesee’s claim and held that the provisions of section 40(a)(i) would have no application for the two assessment years under consideration. On appeal filed by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The circular of 1969 was admittedly in force during the two assessment years. It was only subsequently i.e. on 22/10/2009 that the circular of 1969 and its reiteration as found in Circular No. 786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier circular cannot have retrospective operation.

ii) Hence no tax was deductible at source and no disallowance of expenditure could be made u/s. 40(a)(i).”

Housing Project- Deduction u/s. 80-IB(10) – A. Y. 2010-11- Two flats in project exceeding specified dimension- Assessee entitled to deduction in respect of other flats not exceeding specified dimension-

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CIT vs. Elegant Estates; 383 ITR 49 (Mad);

In the A. Y. 2010-11, the assessee had claimed deduction u/s. 80-IB(10) of the Act in respect of the housing project. The Assessing Officer found that the assessee had built two flats measuring 1572 sq. ft. and 1653 sq. ft. respectively. Therefore he disallowed the entire claim for deduction. The Tribunal held that the assessee would be disqualified for the deduction proportionately, only in respect of the two flats of area exceeding 1500 sq. ft. but would be entitled to deduction in respect of the other flats which measured less than 1500 sq. ft.

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

“i) The language used in section 80-IB(10) does not bar a deduction claim altogether if some of the units sold exceed the specified dimensions.

ii) The Tribunal was right in holding that the assessee was entitled to deduction u/s. 80-IB(10) with respect to income from flats measuring less than 1500 sq. ft. limit and would not be entitled to deduction with respect to the income from the two flats exceeding the limit of 1500 sq. ft. when the assessee had considered all the flats as forming part of a single project on interpretation of the provisions of section 80-IB(10)(c).

iii) The order passed by the Appellate Tribunal was correct in the eye of law and the contentions raised on behalf of the Department could not be countenanced.”

Tea Development allowance- Section 33AB- A. Y. 2000-01- Composite income: Deduction to be allowed from total composite income derived from growing and manufacturing tea- Rule 8 shall apply thereafter to apportion resultant income-

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Singlo (India) Tea Ltd. vs. CIT; 382 ITR 537 (Cal):

The assessee company was engaged in the business of growing, manufacturing and selling tea. In the A. Y. 2000-01, the assessee had claimed deduction of tea development allowance u/s. 33AB of the Act at the rate of 20% on the composite income of Rs. 25,54,855/-. The Assessing Officer held that the deduction u/s. 33AB has to be allowed only from the non-agricultural component of the composite income determined under rule 8. The Tribunal upheld the decision of the Assessing Officer.

On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:

“The deduction u/s. 33AB is to be allowed from the total composite income derived from growing and manufacturing tea and only after such deduction is made, shall rule 8(1) be applied to apportion the resultant income into 60% agricultural income, not taxable under the Act and balance 40% taxable under the Act.”

Charitable purpose- S/s. 2(15), 12A of I. T. Act 1961- A. Y. 2009-10- Premises let for running educational institutions- Auditorium let out to outsiders for commercial purpose- Incidental to principal object of promotion of educational activities- Will not fall in category of “advancement of any other object of general public utility” in section 2(15)- Cancellation of registration not justified-

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DIT vs. Lala Lajpatrai Memorial Trust; 383 ITR 345 (Bom)

The assessee is a charitable trust with the object of “advancement of education” and was registered u/s. 12A of the Income-tax Act, 1961. The main object of the trust was promotion of education. The assessee trust owned a plot of land having a building consisting of an auditorium on the ground floor and class rooms from second to seventh floors. This building was let out to an educational institute which conducts junior college, senior college, law college, etc., and sixth and seventh floors were let out to run a management institute. The assesee claimed exemption of the income received by it from letting out the premises. A show cause notice was issued calling upon the assessee to explain why the rents received should not be treated as falling under the category of “any other object of general public utility” attracting the first proviso to section 2(15) of the Act. The assessee trust claimed that the object of its establishment was “advancement of education” which fell within the definition of charitable purpose as defined u/s. 2(15) of the Act. The assessee relied on Circular No. 11 of 2008 dated 19/12/2008 contending that the first proviso to section 2(15) would not be attracted to its case. The Director of Income-tax withdrew the registration of the assessee. The Appellate Tribunal set aside the order withdrawing the registration.

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

“i) The letting out of the premises was in consonance with the objects of the trust which was to conduct colleges and schools and achieve advancement of education.

ii) Admittedly, the premises were let out on a nominal rent. The Director of Income-tax had overlooked that the principal purpose for which the premises was let out was for conducting educational activity. There was no material before the authority to show that the sixth and seventh floors were used for any other purpose which was not an educational purpose. The service charges received in respect of the sixth and seventh floors were on account of educational purpose.

iii) Letting out of the auditorium was not the dominant object of the assessee and admittedly, the auditorium was incidentally let out to outsiders for commercial purposes. Letting out was incidental and not the principal activity of the assesee. The first proviso to section 2(15) would not be attracted. In the course of letting out, the assessee had incurred expenses for electricity and air conditioners.

iv) Under these circumstances, separate books of account could not be insisted upon as the activity became part and parcel of the educational activities carried out by the assessee and the benefit of exemption u/s. 11(4A) could not be denied. There was no fault with the order passed by the Appellate tribunal.”

Capital gains- Transfer- S/s. 45(1), (4) – A. Y. 1992- 93- Conversion of firm to company- Takeover of business of firm with assets by private limited company with same partners as shareholders in same proportion: Subsequent revaluation of assets- No dissolution of partnership- No consideration accrued or received on transfer of assets: Transaction not transfer giving rise to capital gains-

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CADD Centre vs. ACIT; 383 ITR 258 (Mad)

The assessee was a firm with two partners having equal shares. A private limited company was formed on 21/11/1991 and took over the business of the firm and its assets. The assets were revalued on 30/11/1991. The partners immediately before succession became the shareholders in the same proportion as in the capital account of the firm on the date of succession. For the A. Y. 1992-93, the Assessing Officer concluded that the transfer of the business assets of the firm to the company constituted distribution of assets which gave rise to capital gains taxable u/s. 45(4) of the Income-tax Act, 1961. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) When firm is transformed into a company, there is no distribution of assets and no transfer of capital assets as contemplated by section 45(1) of the Income-tax Act, 1961.

ii) There is no authority for the proposition that even in cases where the subsisting partners of a firm transfer assets to a company, there would be a transfer, covered under the expression “or otherwise in section 45(4). When a firm is transformed into a company with no change in the number of partners and the extent of property, there is no transfer of assets involved and hence there is no liability to pay tax on capital gains.

iii) There was no transfer of assets because
(a) no consideration was received or accrued on transfer of assets from the firm to the company,
(b) the firm had only revalued its assets which did not amount to transfer,
(c) the provision of section 45(4) of the Act, was applicable only when the firm was dissolved. The vesting of the property in the company was not consequent or incidental to a transfer.”

Appeal to High Court- Section 260A- Competency of appeal- Decision of Tribunal following earlier decision- No appeal from earlier decision- No affidavit explaining reasons: Appeal not competent-

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CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

Dealing with the competency of the Appeal before the High Court u/s. 160A of the Income-tax Act, 1961, the Bombay High Court held as under:

“i) Where the issue in controversy stands settled by decisions of High Courts or the Tribunal in any other case and the Department has accepted that decision the Department ought not to agitate the issue further unless there is some cogent justification such as change in law or some later decision of a higher forum.

ii) In such cases appropriately the appeal memo itself must specify the reason for preferring an appeal failing which at least before admission the officer concerned should file an affidavit pointing out the reasons for filing the appeal. It is only when the court is satisfied with the reasons given, that the merits of the issue need be examined of purposes of admission.”

Appeal to Appellate Tribunal- No appearance by assessee’s counsel on date of hearing due to death in family- Refusal by Tribunal to grant adjournment and matter decided on merits: Violation of principles of natural justice- Order of Tribunal quashed and direction to decide matter on merits after hearing parties-

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Zuari Global Ltd. vs. Princ. CIT; 383 ITR 171(Bom):

In an appeal before the Tribunal filed by the assessee, the assessee’s counsel could not appear on the date of hearing owing to a death in his family. The Tribunal refused to grant an adjournment and proceeded to decide the matter on merits. On appeal by the assessee, the Bombay High Court set aside the decision of the Tribunal and held as under:

“i) Considering that the assessee was not unnecessarily delaying the matter and as on the relevant date there was justifiable reason which prevented counsel for the assessee from being present before the Tribunal, the Tribunal was not justified to refuse an adjournment. Failure to grant a short adjournment has resulted in passing the order in breach of the principle of natural justice.

ii) The order of the Tribunal is quashed and set aside. The tribunal is directed to decide the appeals afresh after hearing the parties in accordance with law.”

Business Expenditure – Provision for interest in terms of compromise agreement with bank is an ascertained liability.

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CIT v. Modern Spinners Ltd. (2016) 382 ITR 472 (SC)

The assessee filed a return for the assessment year 1995- 96 on Novembr 24, 1995, declaring a loss of Rs.57,99,781. During the course of the assessment proceedings, the Assessing Officer specifically required the assessee to show cause why the provision of interest of Rs.49.23 lakh should not be disallowed as the provision amounted to unascertained liability. After granting opportunity to the assessee, the deduction for the said amount of interest was disallowed by the Assessing Officer. Against this order, the assessee preferred an appeal which was also dismissed by the Commissioner of Income Tax (Appeals). The view taken by the Assessing Officer as well as the Commissioner of Income Tax (Appeals), was set aside by the Income-tax Appellate Tribunal upon appeal by the assessee.

The Tribunal held that the assessee had provided interest liability only at the rate of 10 per cent which was as per the compromise agreement with the bank and not as per the original terms and conditions of loan. Therefore, it could not be treated to be a contingent liability, rather it was an ascertained liability. According to the Tribunal the assessee could not be penalized for claiming less interest liability.

The High Court dismissed the appeal of the Revenue holding that it was not an unilateral act on the part of the assessee but was a bilateral consented action on behalf of the parties which was of binding in terms of the agreement and as such it could not be termed as an unascertained liability.

On further appeal by the Revenue to the Supreme Court it was held that the matter was covered against the Revenue by the judgment of the Supreme Court in Taparia Ltd. vs. Joint CIT [2015] 372 ITR 605 (SC).

Export – Special Deduction – Computation of deduction u/s. 80HHC – 90% of the net commission (and not gross) has to be reduced from the profits of the business for determining deduction under section 80HHC.

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Veejay Marketing vs. CIT [2016] 382 ITR 395 (SC)

While completing the assessment for the assessment years 1993-94 and 1994-95 u/s. 143(3) of the Act, the Assessing Officer found that the assessee had reduced 90 per cent of the net commission while working out the profits of business under the Explanation (baa) to section 80HHC of the Act.

The Assessing Officer held that 90 per cent of gross commission receipts had to be deducted from the profits of the business and accordingly, allowed deductions under section 80HHC for the said assessment years on that basis.

Aggrieved against the said orders of the Assessing officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals). The Appellate authority held that only 90 per cent of the net commission had to be deducted from the profit of the business and accordingly, directed the Assessing Officer to redo the exercise.

Against the said orders of the Commissioner of Income Tax (Appeals), the Revenue preferred appeals before the Income-tax Appellate Tribunal.

The Income-tax Appellate Tribunal, by following the decision of the Income-tax Appellate Tribunal, Delhi Bench ‘E’ (Special Bench) in Lalsons Enterprises vs. Deputy CIT [2004] 89 ITD 25 (Delhi) [SB], held that only 90 per cent of the net commission had to be reduced from the profit of the business for determining deduction under section 80HHC of the Act.

Against the said order of the Tribunal, the Revenue filed the appeals before the High Court.

By following the ratio laid down in the CIT vs. Chinnapandi [2006] 282 ITR 389 (Mad), in which it was held that 90% of the gross interest had to be reduced from the profits of the business for determining deduction under section 80HHC, the High Court held that the reasons given by the Tribunal in the impugned order were not sustainable. Accordingly, the order of the Tribunal was set aside.

On appeal to the Supreme Court, it was held that these cases were covered by the decision in ACG Associated Capsules Private Ltd. (Formerly Associated Capsules Private Ltd.) vs. CIT [2012] 343 ITR 89 (SC). Accordingly, the issue arising in the appeal was answered in favour of the assessee and against the Revenue. The Supreme Court allowed the appeals and the order of the High Court was set aside and the matter was remanded to the Assessing Officer for a fresh consideration.,

Refund –When an amount though found refundable to the assessee is utilised by the Department, interest is payable u/s. 244(1A) for the period of such utilization.

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CIT v. Jyotsna Holding P. Ltd. [2016] 382 ITR 451 (SC)

The
Supreme Court took note of the facts in respect of the assessment year 1987-88
(similar fact situation appeared in respects of all three assessment years viz.
1985-86, 1986-87 and 1987-88.) For the assessment year 1987- 88, the respondent
filed its return on the basis of self tax assessment made by it and paid a sum
of Rs.3,23,68,834 on September 12, 1987. The assessment was made u/s. 143(3) by
the assessing authority on March 28, 1988, as per which an amount of
Rs.2,03,29,841 was found refunable to the respondent/assessee. Instead of
immediate refund of this amount, the assessing authority ordered that the same
would be adjusted against the demand for the year 1986-87. It was ultimately
adjusted on July 25, 1991. The question that arose, in these circumstances, was
as to whether the assessee would be entitled to interest on the aforesaid
amount which was kept by the Revenue for the period from March 28, 1988 to July
25, 1991. The assessee claimed the interest, which request was rejected by
Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed
the appeal of the assessee against the order of the Assessing Officer by
invoking the provisions of section 244(1A) of the Income-tax Act and held that
the interest was payable on the aforesaid amount. This order was upheld by the
Income-tax Appellate Tribunal as well as by the High Court.

On appeal, the
Supreme Court after going through the order of High Court did not find anything
wrong with the same. According to the Supreme Court the amount in question,
though found refundable to the assessee, was utilized by the Department and,
therefore, interest was payable u/s. 244(1A) of the Income-tax Act.

WRITE – BACK OF LOANS – SECTIONS 41 (1) & 28 (iv)

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ISSUE FOR CONSIDERATION

On account of the inability to repay a borrower, may write-back a part of the
amount due or the full amount so due, in pursuance of the negotiations with the
lender or otherwise. It is usual to come across cases of write back of
liability towards repayment of loans taken by an assesssee in the course of his
business. The amount so written back is credited to the profit & loss
account of the year of write back or is credited to the reserves.

Important issues arise, under the income-tax law, concerning the treatment and
taxability of the amount written back. Will such a write back attract the
provisions of section 41 (1) of the Act and be taxed in the hands of the
assesssee in the year of write back? Alternatively, will the write back attract
the provisions of section 28 (i) or (iv) of the Act and be taxed in the hands
of the assesssee? Whether the fact that the borrowings were made for the
purposes of acquiring a capital asset, make any difference to liability for
taxation? Whether it can be said that the write back does not represent any
benefit or a perquisite for the assessment and is hence not taxable?

Conflicting decisions are rendered by the courts over a period of years
requiring us to take a fresh view of the issues on hand. Recently, the Madras
High Court has taken a view that the amount of loan written back by the
borrower is taxable in his hands in contrast to its own decision delivered a
few years ago.

Iskraemeco Regent Ltd ‘s case.

The issue arose in the case of Iskraemeco Regent Ltd. vs. CIT, 331 ITR 317
(Mad.). In that case the assessee, engaged in the business of manufacturing
energy meters, obtained a term loan from State Bank Of India for the purchase
of capital assets, both by way of import as well as in the local market. The
company also procured credit facility, through cash credit account, for import
of capital assets as well as for meeting the working capital requirements.

The assessee was declared a sick industrial company by the BIFR, which had
sanctioned a scheme for its revival, and in pursuance thereto, the State Bank
of India waived the outstanding dues of principal amount of about Rs.5 crores
and the interest outstanding for a sum of about Rs. 2 crores under the one time
settlement scheme. The assessee credited the waiver of principal amount to the
“Capital Reserve Account” in the balance sheet treating it as capital
in nature and the waiver of interest was credited to its “Profit and Loss
Account” for the financial year ending 31.03.2001 corresponding to the
assessment year 2001-02.

The assessee filed its return declaring its total income assessable at Rs.
45,160 after setting off the carried forward business losses and unabsorbed
depreciation. The AO in assessing the total income added the amounts of loan
and interest waived under the head business income by applying the provisions
of section 41(1) and section 28(iv) of the Act.

The appeals filed by the
assessee, before the Commissioner of Income Tax (Appeals) and the Tribunal,
were dismissed on the ground that the issue in appeal was no longer res integra
in as much as the same had already been concluded by the judgment in CIT vs.
T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344(SC). Aggrieved by the order
of the tribunal, the assessee preferred an appeal to the high court by raising
the following substantial questions of law;

  • “Whether the learned
    Tribunal misdirected itself in law, and it adopted a wholly erroneous
    approach, in interpreting the provisions of Section 28(iv) of the
    Income-tax Act, 1961, to hold that the sum of Rs.5,07,78,410/-
    representing the principal loan amount, waived by the bank under the One
    Time Settlement Scheme (OTS), and credited by the appellant assessee to
    its Capital Reserve Account, in its Balance Sheet drawn as at 31st March,
    2001, is assessable to tax as a revenue receipt in the assessment for the
    assessment year 2001-02; and whether the findings of the learned Tribunal
    to this effect were wholly unreasonable, based on irrelevant
    considerations, contrary to the facts and evidence on record and/or
    otherwise perverse?
  • Whether the decision of the
    Hon’ble Supreme Court in CIT vs. T.V.Sundaram Iyengar & Sons Ltd.
    [1996] 222 ITR 344, applied by the learned Tribunal in passing its said
    impugned order dated 26th March, 2010, has any application whatsoever, in
    the facts and circumstances of the instant case, and particularly in
    relation to section 28(iv) of the said Act?
  • Whether on a correct
    interpretation of section 28(iv) of the Income Tax Act, 1961, the Tribunal
    ought to have held that the principal amount of loan waived by the Bank
    under the OTS, not being a trading liability and also not being a
    “benefit or perquisite, whether convertible into money or not”,
    the expression used in the said section, did not constitute revenue
    receipt and/or business income of the appellant assessee assessable to tax
    in its assessment for the assessment year 2001-02?
  • Whether ………….
  • Whether
    …………….. 

On behalf
of the assessee it was submitted that:—

  • it was not in dispute that
    the assessee had obtained loan from the State Bank of India for the purchase
    of fixed assets, both within the country and outside the country, which
    were admittedly capital assets. It was a pure loan transaction and the
    same could never be termed as a trading transaction.
  • the loan was obtained for
    the purchase of capital assets and the waiver amounted to a capital
    receipt and not a revenue receipt.
  • it was not involved in any
    business involving the transaction of money lending .
  • the AO had not gone behind
    the loan arrangement and the loan arrangement in its entirety was not
    obliterated by the waiver, considering the fact that the assessee had paid
    a sum of Rs. 5 crores from the date of receipt of the loan.
  • a grave error was committed
    in mechanically applying the judgment rendered by the apex court in T.V.
    Sundaram Iyengar & Sons Ltd.’s case (supra ) without appreciating the
    factual scenario that the loan had been obtained towards the purchase of
    capital assets and not for a business transaction. The facts involved in
    the judgment referred above disclosed that the transaction therein was a
    trading transaction as against the facts involved in the assessee’s case.
  • reliance was placed on the
    decisions in the cases of Mahindra & Mahindra Ltd. vs. CIT, 261 ITR
    501(Bom.), CIT v. Alchemic (P.) Ltd., 130 ITR 168 and CIT vs. Mafatlal
    Gangabhai & Co. (P.) Ltd.219 ITR 644 (SC).
  • relying on the decision in
    the case of Solid Containers Ltd. vs. Dy. CIT, 308 ITR 417 it was
    submitted that, in a case where a transaction involved a purchase related
    to capital assets, a waiver made of the loan taken for the said purchase
    would not constitute a business receipt.
  • the reasoning of the
    authorities that, section 28(iv) of the Act was applicable to a money
    transaction was totally misconceived and contrary to the provision itself.
    Section 28(iv) provided for chargeability of profits and gains of business
    or profession with relation to the value of any benefit or perquisite
    arising out of business or the exercise of profession and therefore the
    same would not include a money transaction. Since in the present case on
    hand, the transaction involved a loan transaction, being a transaction of
    money, section 28(iv) had no application.
  • Section 41(1) also did not
    apply as it mandated that there had to be an actual allowance or deduction
    made for the purpose of computing under the said section. In as much as
    there was no allowance or deduction in the present case on hand, the
    question of application of section 41(1) also did not arise for
    consideration.
  • in support of the
    contentions, the company placed reliance on the following judgments, CIT
    vs. P. Ganesa Chettiar, 133 ITR 103 (Mad.), CIT vs. A.V.M. Ltd., 146 ITR
    355 , Alchemic Pvt. Ltd.’s case (supra), Mafatlal Gangabhai & Co. (P.)
    Ltd.’s case (supra ) and Dy. CIT v. Garden Silk Mills Ltd., 320 ITR 720
    (Guj.) to submit that section 28(iv) had no application to a money
    transaction. In so far as the scope of section 41(1) was concerned, the
    judgments in Polyflex (India) (P.) Ltd. vs. CIT, 257 ITR 343 (SC) and
    Tirunelveli Motor Bus Service Co. (P.) Ltd. vs. CIT, 78 ITR 55 (SC) were
    relied upon by the company. the combOn behalf of the Revenue it was
    submitted that:—ined reading of section 41(1) and section 28(iv) showed
    that the words “whether in cash or any other manner” as found in
    s. 41(1) had not been incorporated in section 28(iv) which was indicative
    of the fact that section 28(iv) did not cover a cash transaction.

On behalf
of the Revenue it was submitted that:

  • the appellate authorities
    had not rejected the company’s appeal on application of section 28(iv) but
    was on application of section 28(i)of the Act and therefore, the findings
    rendered by the authorities below had to be seen in the context of the
    provisions contained in section 28(i) of the Act.
  • the ratio laid down by the
    apex court in T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), held
    good and had been followed in CIT vs. Rajasthan Golden Transport Co. (P.)
    Ltd., 249 ITR 723, CIT v. Sundaram Industries Ltd., 253 ITR 396, CIT vs.
    Aries Advertising (P.) Ltd., 255 ITR 510 and the authorities below had
    rightly applied the same in rejecting the case of the assessee.
  • it was not in dispute that
    the amount had been borrowed by the assessee for the purpose of his
    business and once the said amount was used for business, the question as
    to whether it had been used for the purchase of capital assets or revenue
    receipts was immaterial. The assessee having become richer by the
    settlement, the said transaction would partake the character of the income
    assessable to tax. Even assuming an amount was utilised towards the
    capital assets, it would take the character of a revenue receipt,
    subsequently. The borrowal and waiver were in the course of business
    during carrying on of which the benefit accrued to the assessee and hence
    was taxable. If the amount was received in pursuance to a business or a
    contractual liability, then it was taxable as income.
  • relying on Jay Engg. Works
    Ltd. v. CIT, 311 ITR 299 it was submitted that the facts involved in the
    cases relied upon by the assessee company were different and that some of
    the judgments had been rendered prior to the decision in the case of T.V.
    Sundaram Iyengar & Sons Ltd.’s (supra). The Madras high court after
    considering the submissions of the parties to the dispute observed and
    held that;-
  •  the assessee was not
    trading in money transactions. A grant of loan by a bank could not be
    termed as a trading transaction and it could not also be construed to be
    in the course of business. Indisputably, the assessee obtained the loan
    for the purpose of investing in its capital assets. The facts involved in
    the present case were totally different than the facts involved in T.V.
    Sundaram Iyengar & Sons Ltd.’s case (supra). What had been done in the
    present case was a mere waiver of loan. There was no change of character
    with regard to the original receipt which was capital in nature into that
    of a trading transaction. There was a marked difference between a loan and
    a security deposit.  
  • every deposit of money would
    not constitute a trading receipt. Even though a receipt might be in
    connection with the business, it could not be said that every such receipt
    was a trading receipt. Therefore, the amount referable to the loans
    obtained by the assessee towards the purchase of its capital asset would
    not constitute a trading receipt. The finding of the court had been
    fortified by the judgment of this Court in A.V.M. Ltd.’s case (supra).
  • the same contention had been
    raised on behalf of the revenue before the Bombay High Court in Solid
    Containers Ltd.’s case (supra), by relying upon the judgment rendered in
    T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), however, in the said
    case, a finding was given that the money was received by the assessee in
    the course of carrying on his business and the agreement was completely
    obliterated and the loan in its entirety was completely waived and the
    loan itself was taken for a trading activity and on waiving it was
    retained in business by the assessee. In the said judgment, the court had
    distinguished its earlier judgment rendered in Mahindra & Mahindra
    Ltd.’s case (supra) by highlighting that in the facts of the Solid
    Container’s case, there was a trading transaction and the money received
    was used towards a business transaction and accordingly the ratio laid
    down in. T.V. Sundaram Iyengar & Sons Ltd.’s case (supra) was
    applicable.
  • therefore, the above said
    facts indicated that the ratio laid down in T.V. Sundaram Iyengar &
    Sons Ltd.’s case (supra) had no application at all to the facts and
    circumstances of the present case on hand. Hence, the authorities below
    had wrongly applied the ratio laid down in T.V. Sundaram Iyengar &
    Sons Ltd.’s case (supra) and the orders passed by them could not be
    sustained. In the matter of applicability or otherwise of section 28(iv)
    and 41(1), the court deemed it fit to give its views even though the
    Revenue had conceded that the said provisions did not apply to the present
    case. It observed that;-
  • Section 28(iv) of the Act
    dealt with the benefit or perquisite received in kind. Such a benefit or
    perquisite received in kind other than in cash would be an income as
    defined u/s. 2(24) of the Act. In other words, to any transaction which
    involved money, section 28(iv) had no application.
  • the transaction in the
    present case being a loan transaction having no application with respect
    to section 28(iv), the same could not be termed as an income within the
    purview of section 2(24) of the said Act. In other words, in as much as
    section 28(iv) was not applicable to the transactions on hand, it could
    not be termed as income which could be made taxable as receipt. A receipt
    which did not have any character of an income being that of a loan could
    not be made eligible to tax. 

Section 41(1) could apply only to
a trading liability. A loan received for the purpose of capital asset would not
constitute a trading liability.

Ramaniyam Homes P Ltd .’s case,

The issue once again arose recently before the Madras High Court, in the Tax
Case (Appeal) No.278 of 2014, in the case of CIT v. Ramaniyam Homes P Ltd., in
an appeal filed u/s 260-A of the Act. In that case, the assessee filed a return
of income for the assessment year 2006-07 admitting a total loss of
Rs.2,42,20,780. It was found by the AO that the assessee was indebted to the
Indian Bank which bank, vide a letter dated 15.2.2006, had mooted a proposal
for a one time settlement requiring the company to pay Rs.10.50 crore on or
before 30.4.2006 against which the company paid only a sum of Rs.93,89,000 by
that date.

The AO appears to have held that the One Time Settlement Scheme was accepted by
the assessee during the year and the interest waived was taxable u/s 41(1) of
the Act and the balance was taxable u/s 28(iv) of the Act. The CIT(Appeals)
held that the mere acceptance of the conditional offer of the bank under the
One Time Settlement Scheme, without complying with the substantive part of the
terms and conditions, would not give a vested right of waiver and therefore,
interest waived to the extent of Rs.1.68 Crores was not exigible to tax u/
s.41(1) and consequently, he deleted the addition of Rs.1,67,74,868. On the
issue of addition u/s 28(iv), he followed the decision in the case of Iskraemeco
Regent Limited vs. CIT, (supra) and held that Section 28(iv) had no application
to cases involving waiver of principal amounts of loans. In the appeal of the
Revenue, on the issue of the deletion of the principal portion of the term loan
waived by the bank, the Tribunal held in para 12 of its order that the term
loan had admittedly been used by the assessee for acquiring capital assets and
following the decision of the jurisdictional Madras high court in the case of
Iskraemeco Regent Limited(supra) it confirmed the order of the first appellate
authority.

In the appeal by the revenue to the high court, the following substantial
questions of law were raised therein:-

• ” Whether on the facts and in the circumstances of the case, the Income
Tax Appellate Tribunal was right in holding that the amount representing the
principal loan amount waived by the bank under the one time settlement scheme
which the assessee received during the course of its business is not exigible
to tax?
• Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal ought to have seen that the waiver of principal amount would
constitute income falling under Section 28(iv) of the Income Tax Act being the
benefit arising for the business?”

The Revenue invited attention to the definition of the expressions
“income” and “total income” u/s. (24) and (45) of section 2
and the provisions of the charging section 4 as well as the relevant provisions
of sections 28(iv), 41(1) and 59. It was contended that the principal amount of
loan waived by the bank under the one time settlement was a taxable receipt
coming within the definition of the expression “income” by relying
upon the decisions in cases of CIT vs. T.V.Sundaram Iyengar & Sons Ltd. 222
ITR 344(SC), Solid Containers Ltd. vs. DCIT, 308 ITR 417 (Bom.), Logitronics P
Ltd. v. CIT,333 ITR 386 and Rollatainers Ltd. vs. CIT, 339 ITR 54.

In so far as the decision in Iskraemeco Regent Limited was concerned, it was
submitted that the Supreme Court had already granted leave to the Department
and the decision was the subject matter of Civil Appeal No.5751 of 2011, on the
file of the Supreme Court, and the Court was entitled to consider the issue
independently. At the outset, the Madras high court examined the decision in
Iskraemeco Regent Limited, since the appellate authorities had merely followed
the said decision. The court found that in the said decision it was held that a
loan transaction had no application with respect to s.28(iv) of the Act and
that the same could not be termed as an income within the purview of section
2(24).The Madras high court thereafter examined the statutory provisions and
also the decisions relied upon by the contesting parties in support of their
respective submissions. The Madras high court in particular examined the
decisions in the cases of T.V. Sundram Iyengar & Sons Ltd. (SC), Solid
Containers Ltd.(Bom), Mahindra & Mahindra (Bom.) and Logitronics P.
Ltd.(Del.) and Rollatainers Ltd. (Del).

The court noted that the law as expounded by the Delhi High Court appeared to
be that if a loan had been taken for acquiring a capital asset, waiver thereof
would not amount to any income exigible to tax and if the loan was taken for
trading purposes and was also treated as such from the beginning in the books
of account, the waiver thereof might result in the income, more so when it was
transferred to the profit and loss account. Having noted so, the court observed
that;

  • the Delhi High Court, both in
    Logitronics as well as in Rollatainers cases, did not take note of one fallacy
    in the reasoning given in paragraph 27.1 of the decision of the Madras high
    court rendered in Iskraemeco Regent Limited’s case.
  • in paragraph 27.1 of the
    decision in Iskraemeco Regent Limited’s case, it was held that s.28(iv)
    spoke only about a benefit or perquisite received in kind and that
    therefore, it had no application to any transaction involving money which
    was actually based upon the decision of the Bombay High Court in Mahindra
    & Mahindra Ltd.(supra), which, in turn, had relied upon the decision
    of the Delhi High Court in the case of Ravinder Singh vs. C.I.T.205 I.T.R.
    353.
  • with great respect, the
    above reasoning did not appear to be correct in the light of the express
    language of section 28(iv). What was treated as income chargeable to
    income tax under the head ‘profits and gains of business or profession’
    u/s 28(iv), was “the value of any benefit or perquisite, whether
    convertible into money or not, arising from business or the exercise of a
    profession.”
  • therefore, it was not the
    actual receipt of money, but the receipt of a benefit or perquisite, which
    had a monetary value, whether such benefit or perquisite was convertible
    into money or not, which was what was covered by section 28(iv). For
    instance, if a gift voucher was issued, enabling the holder of the voucher
    to have a dinner in a restaurant, it was a benefit or perquisite, which
    had a monetary value. If the holder of the voucher was entitled to
    transfer it to someone else for a monetary consideration, it became a
    perquisite, convertible in to money. Irrespective of whether it was
    convertible into money or not, to attract section 28(iv) it was sufficient
    that it had a monetary value.
  • a monetary transaction, in
    the true sense of the term, can also have a value.
  • we do not know why it should
    not happen in the case of waiver of a part of the loan. Therefore, the
    finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent
    Limited that Section 28(iv) had no application to any transaction, which
    involved money, was a sweeping statement and might not stand in the light
    of the express language of section 28(iv).
  • in our considered view, the
    waiver of a portion of the loan would certainly tantamount to the value of
    a benefit. The benefit might not arise from “the business” of
    the assessee. But, it certainly arose from “business”.
  • the absence of the prefix
    “the” to the word “business” made a world of
    difference. The Madras high court thereafter dealt with the issue of the
    distinction, sought to be made, between the waiver of a portion of the
    loan taken for the purpose of acquiring capital assets on the one hand and
    the waiver of a portion of the loan taken for the purpose of trading
    activities on the other hand. In the context, it held that;-
  • in so far as accounting
    practices were concerned, no such distinction existed. Irrespective of the
    purpose for which, a loan was availed by an assessee, the amount of loan
    was always treated as a liability and it got reflected in the balance
    sheet as such. When a repayment was made in monthly, quarterly, half
    yearly or yearly installments, the payment was divided into two
    components, one relating to interest and another relating to a portion of
    the principal. To the extent of the principal repaid, the liability as
    reflected in the balance sheet got reduced. The interest paid on the
    principal amount of loan, would be allowed as deduction, in computing the
    income under the head “profits and gains of business or
    profession”, as per the provisions of the Act.
  • Section 36(1)(iii) made a
    distinction where under the amount of interest paid in respect of capital
    borrowed for the purpose of business or profession was allowed as
    deduction, in computing the income referred to in section 28. But, the
    proviso there under stated that any amount of interest paid in respect of
    capital borrowed for acquisition of an asset for extension of existing
    business or profession, whether capitalised in the books of account or not
    for any period beginning from the date on which the capital was borrowed
    for the acquisition of the asset, till the date on which such asset was
    put to use, should not be allowed as deduction.
  • therefore, it was clear that
    the moment the asset was put to use, then the interest paid in respect of
    the capital borrowed for acquiring the asset, could be allowed as
    deduction. When the loan amount borrowed for acquiring an asset got wiped
    off by repayment, two entries were made in the books of account, one in
    the profit and loss account where payments were entered and another in the
    balance sheet where the amount of un repaid loan was reflected on the side
    of the liability.
  • when a portion of the loan
    was reduced, not by repayment, but by the lender writing it off (either
    under a one time settlement scheme or otherwise), only one entry got into
    the books, as a natural entry. A double entry system of accounting would
    not permit of one entry. Therefore, when a portion of the loan was waived,
    the total amount of loan shown on the liabilities side of the balance
    sheet was reduced and the amount shown as capital reserves, was increased
    to the extent of waiver. Alternatively, the amount representing the waived
    portion of the loan was shown as a capital receipt in the profit and loss
    account itself.
  • these aspects had not been
    taken note of in Iskraemeco Regent Ltd.
  •  
  • In view of the above, the
    Madras High court decided the issue in favour of the Revenue and the
    appeal filed by the Revenue was allowed without any costs.

Observations

The issue
under consideration, of the write back of loans, has over the years turned
rotten and worse, has produced many off shoots. The sheer size of the quantum
involving this issue is another reason for addressing it at the earliest.
Settlement between the lenders and the borrowers is an everyday phenomenon and
the issues arising there from require to be handled with care importantly, due
to the fact that the borrower involved is admittedly in a precarious financial
health that can be worsened by the additional tax borrowings that may not have
been intended by the legislature.

It is time proper that a clear guideline is provided by the CBDT as regards the
Revenue’s understanding of the subject and its desired tax treatment. This
clarification is necessary in view of the fact that varied stands have been
taken by the Revenue before the courts in different cases. It is also most
desired that the apex court addresses the issue, at the earliest, in view of
the conflicting stands of the high courts, sometimes of the same high court, as
is seen by the conflicting decision of the Madras High Court and to an extent
of the Bombay High Court.

A classic case is the case of a company which has
been declared sick, under a statue, by the Board of Industrial & Financial
Reconstruction. The Board on one side mandates the lenders to compromise their
dues, in the interest of the financial health of the company, but, on the other
side, rests on the fringe when it comes to saving a sick company from
consequences of tax, directly arising out of the reliefs granted by it. We are
of the firm view that the relief from taxation should be granted in respect of
a sick company as has been done by some courts even where the CBDT has resisted
the tax relief before the BIFR.

Section 41(1) of the Act brings to tax the value of a benefit in respect of a
trading liability accruing to an assesssee by way of remission or cessation
thereof. The said section also seeks to tax the amount obtained by an
assesssee, in cash or otherwise in respect of a loss or an expenditure. In both
the cases, the charge of tax is attracted provided an allowance or deduction
has been granted to the assesssee. A charge once attracted, is placed in the
year of relief. By and large, the issues about the applicability of section
41(1) are settled. An understanding seems to have been reached that no
liability to tax arises unless an allowance or deduction has been granted to an
assesssee and subsequent thereto a relief has been obtained by him or a benefit
has accrued to him. Obviously in a case of a loan taken, the provisions of
s.41(1) should not be attracted unless the issue involves the settlement of an
interest, on the loan taken, for which a deduction was allowed.

Section 28(i) provides that the profits or gains of any business or profession
which was carried on during the year shall be chargeable to income tax under
the head “profits and gains of business or profession”. Section
28(iv) brings to tax the value of any benefit or perquisite, whether
convertible into money or not arising from business or the exercise of a
profession. The issue of taxation of a write back of a loan mainly revolves
around application of section 28. The questions that arise, in addressing the
issue are;

  •  Whether a relief from
    repayment of loan taken can be held to be profits or gains of business
    carried on during the year? In other words, can a loan be said to have
    been taken by the person in the ordinary course of his business where he
    is not engaged in the business of granting of loans and advances? Will
    such a transaction be treated as a trading transaction?
  • Will it make any difference
    whether the loan was taken for the purpose of acquiring a capital asset or
    was taken for meeting the working capital requirements of the business?
  • Will the relief, if any,
    resulting on settlement be construed as a benefit or a perquisite arising
    from the business?
  • Has the apex court in the
    case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a write back
    of loan shall be liable to be taxed as business income and that too only
    where it was taken for the purposes of meeting a trading liability?

For the sake of brevity, we place our views on each of the above issues,
so identified, instead of referring and analyzing the entire case law on the
subject including the facts of the said T.V.Sundaram Iyengar & Sons Ltd
(supra)’s case . A reader however is advised to do so.

Section 28(i) brings to tax profits or gains from business carried on during
the year. Unless the profits arise from the business that was carried on during
the year, a charge under section 28(i) fails. An ordinary businessman, not
engaged in the business of money lending, etc, cannot be said to be engaged in
the business of receiving or granting loans and therefore no profits can be
said to have arisen from such a business. The Act makes a clear distinction
between an ordinary business and the business of granting any loans or advances
for the purposes of section 36(2) and section 73, for example. Accordingly, a
waiver of loan and it’s consequential write back cannot be said to be
representing any profits and gains arising from the business carried on during
the year. This finding should hold true in respect of all businessmen other
than the one engaged in the business of receiving and granting loans. The
transactions of loans are on capital account only and holding it otherwise will
lead to a situation where under a write off of an irrecoverable loan, advanced
in the past, will have to be allowed as a deduction in all cases. A loan taken
is a thing with which a person does his business; he carries on his business
with the funds borrowed. He does not deal in them; his business is that of
dealing in things other than the funds borrowed. He is a user of funds and not
a dealer of funds. He does not derive any profits from such funds nor is he
expected to derive any and rather derives profits from optimum use of such
funds in his business.

Once it is accepted that an ordinary businessman obtains a loan for the purpose
of carrying on his business, it is natural to accept that the purpose of loan
would not make any difference. Unless a loan is inextricably linked to the
regular business and its customers, it is not possible to hold that a purpose
for which a loan was taken will have any material bearing on its eventual
transaction. With great respect, we beg to differ with the view which seeks to
make a distinction, for the purposes of taxation, on the basis of the purpose
for which a loan is taken. In our opinion, the purpose for which a loan is
taken is immaterial unless the assesssee is in the business of dealing in loans
or the loan taken is inextricably linked to his business deal. The Madras high
court is spot on in the case of Ramaniyam Homes P.Ltd. (supra) when it
concludes on this aspect of the issue by holding that there is no difference
between a loan taken for the purpose of a capital asset or for meeting working
capital requirements.

Section 28(iv) reads as: “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.” From a reading, it is noticed that a benefit or a perquisite
should arise from business and if so it would be taxable whether its value can
be converted into money or not. The twin conditions are cumulative in nature
and both of them require satisfaction before a charge of taxation is attracted.
The use of the expression “whether convertible into money or not”
clearly indicate that the benefit or perquisite is the one which is capable of
being converted into cash but is certainly not the cash itself. Had it been so
then the expression would have been “whether received in cash or in
kind”. Section 41(1) explicitly uses the expression ‘whether in cash or in
any other manner”. The intention of the legislature is adequately
communicated by the use of appropriate expression; the intention being to bring
to tax such benefit or perquisite i.e. received in kind irrespective of its
possibility to convert in money or not. Again, the use of the term ‘value’,
supports such an interpretation in as much as cash carries the same value and
therefore does not require any prefix. Even otherwise can a remission in a loan
liability ever be construed as a benefit or perquisite and be considered to
have arisen from a business are the questions that remain open for being
addressed before a charge u/s 28(iv) is completed.

An interesting aspect of section 28(iv) is brought out by the Madras High Court
in paragraph 39 of the decision in the case of Ramaniyam Homes P Ltd.’s
(supra). The Madras High Court, in the context of applicability of section
28(iv), held that a benefit might not arise from “the business” of
the assesssee but it certainly arose from “business” and the absence
of the prefix “the” to the word “business” made a world of
difference. It seems that the court would have taken a different view had the
prefix “the” before the word “business” been placed in
section 28(iv). Had that been so the court would have concluded that the waiver
of loan did not attract the provisions of section 28(iv)!! In our very
respectful opinion, the logic supplied requires a reconsideration. The court
has failed to appreciate that the benefit or perquisite, for application of
section 28(iv), has to be from a business even though not from the specific business.
In the absence of any other business, the question of attracting section 28(iv)
does not arise at all. Even otherwise the legislative intent does not seem to
support such an interpretation which is evident from a bare reading of section
28(i) and section 28(va) which has consciously used the prefix “any’
before the term expression “business” to convey the wider scope of
the provisions.

 The apex court in the case of T.V.Sundaram Iyengar & Sons Ltd (supra)
has neither, explicitly nor implicitly, stated that a loan on being written
back would attain the character of income. It was a case wherein the assessee
had received deposits from it’s customers for the purposes of the trading
transactions carried on with the customers . The said deposits or a part of it
got adjusted against regular trading transactions and the excess balance
remaining with the assessee was carried in the balance sheet as the liability
to creditors. On a later day it was found that the said excess balance so
obtained from the customers was not repayable and the company wrote back the
said liability by crediting the same to the profit & loss account. It is in
such facts that the Supreme Court held that a write back of such non-repayable
deposits were to be treated as business income.

It is a settled position of law that every receipt need not be an income even
though the amount may be received as a part of the business activity of the
assesssee. It is also a settled position in law that a receipt, originally of a
capital nature, will not change its character merely by a lapse of time subject
to an exception in respect of an amount received in the course of a trading
activity, for example, advances received from a customer or a deposit received
from a contractor or a customer or a supplier or margin money received for
security of performance by the customer. An act of borrowing a loan is not a
trading transaction in that manner.

In exceptional cases a receipt originally of a capital nature would, with lapse
of time, attain the character of an income. It is this principle of law which
was propounded in the case of Jay’s- The Jewellers Ltd, 1947 (29 TC 274) (KB)
that was followed by the Supreme Court in the case of Karamchand Thapar Sons
222 ITR 112 (SC) and was reconfirmed in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra). The Supreme Court in the said case of T.V.Sundaram Iyengar
& Sons Ltd (supra) had clearly restricted the application of the exception
to the case of an amount received as a part of the trading operations where a trading
liability was incurred out of an ordinary trading transaction. In our opinion,
a transaction of a loan borrowed for the purposes of funding a trading activity
can never be considered as a transaction that could be covered by the above
mentioned tests laid down by the Supreme Court. An ordinary loan, at its
inception, is of a capital character and retains its character even with the
flux of time it does not change even where it was later on waived.

Another important part of the facts in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra) was that in the said case the unclaimed deposit representing
excess balance was credited to the profit & loss account of the company and
it is this fact which had influenced the Supreme Court when it observed that
“when the assessee itself had treated the money as its own money and taken
the amount to its profit & loss account then the amounts were assessable in
the hands of the assessee”. It appears that all those decisions of the
courts require a reconsideration wherein the courts relying on the ratio of the
decision in the case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a
waiver of an ordinary loan was to be treated as income. The high courts had
failed to notice that in all such cases before them the amount received did not
have any trading character which was so in the case of T.V.Sundaram Iyengar
& Sons Ltd (supra).

 Attention of the reader is invited to the following pertinent
observations of the author on page 1095 of the 10th edition of Kanga &
Palkhivala’s The Law and Practice of Income Tax in the context of the ratio of
the decision in the case of T.V. Sundaram Iyengar & Sons Ltd (supra).

“The Supreme Court erroneously held that crediting deposits that had been
given by the parties to a profit and loss account after they had reminded
unclaimed for a long period of time, would definitely be trade surplus and part
of assessee’s taxable income. Surprisingly, the court did not even refer to the
statutory provisions of section 41(1). It failed to note that unless the
assesssee had claimed an allowance or deduction in respect of a loss of
expenditure or trading liability, the subsequent cessation of liability would
not attract section 41(1)”. Also see the later decision of the Supreme
Court in the case of Kesaria Tea, 254 ITR 434.

The Supreme Court in a later decision in the case of Travancore Rubber, 243 ITR
158 has reconciled the legal position and reemphasised that unless a different
quality is imprinted on the receipt by a subsequent event, a receipt which is
not in the first instance a trading receipt cannot become a trading receipt by
any subsequent process. Under the circumstances it is very respectfully
observed that the decisions delivered by different high courts simply relying
on the ratio of the decision in the case of T.V.Sundaram Iyengar & Sons Ltd
(supra) require a fresh application of mind.

RULES FOR INTERPRETATION OF TAX STATUTES – PAR T – III

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

1. Rules of Consistency, Resjudicata & Estoppel :

The principle of consistency is a principle of equity and would not override
the clear provisions of law. It is well accepted that each assessment year is
separate and if a particular aspect was not objected to in one year, it would
not fetter the Assessing Officer from correcting the same in a subsequent year
as the principles of res judicata are not applicable to tax proceedings. In Radhasaomi
Satsang the Supreme Court held that (page 329 of 193-ITR) : “where a
fundamental aspect permeating through the different assessment years has been
found as a fact one way or the other and parties have allowed that position to
be sustained by not challenging the order, it would not be at all appropriate
to allow the position to be changed in a subsequent year”. As is apparent
from the said decision, the rule of consistency has limited application – where
a fundamental aspect permeates through several assessment years; the said
aspect has been found as a fact one way or the other; and the parties have not
challenged the said finding and allowed the position to sustain over the years.
Clearly, the said principle will have no application where the position
canvassed militates against an express provision of law as held by Delhi High
Court in Honey Enterprises vs. C.I.T. (2016) 381-ITR-258 at 278.

 1.1. In Radhasaomi itself, the Supreme Court acknowledged that there is
no res judicata, as regards assessment orders, and assessments for one year may
not bind the officer for the next year. This is consistent with the view of the
Supreme Court that there is no such thing as res judicata in income-tax
matters’ (Raja Bahadur Visheshwara Singh vs. CIT (1961) 41-ITR- 685 (SC); AIR
1961 SC 1062). Similarly, erroneous or mistaken views cannot fetter the
authorities into repeating them, by application of a rule such as estoppel, for
the reason that being an equitable principle, it has to yield to the mandate of
law. A deeper reflection would show that blind adherence to the rule of
consistency would lead to anomalous results, for the reason that it would
endanger the unequal application of laws, and direct the tax authorities to
adopt varied interpretations, to suit individual assessees, subjective to their
convenience – a result at once debilitating and destructive of the rule of law.
The rule of consistency cannot be of inflexible application.

1.2. Res judicata does not apply in matters pertaining to tax for different
assessment years because res judicata applies to debar courts from entertaining
issues on the same cause of action whereas the cause of action for each
assessment year is distinct. The courts will generally adopt an earlier
pronouncement of the law or a conclusion of fact unless there is a new ground
urged or a material change in the factual position. The reason why courts have
held parties to the opinion expressed in a decision in one assessment year to
the same opinion in a subsequent year is not because of any principle of res
judicata but because of the theory of precedent or precedential value of the
earlier pronouncement. Where the facts and law in a subsequent assessment year
are the same, no authority whether quasi-judicial or judicial can generally be
permitted to take a different view. This mandate is subject only to the usual
gateways of distinguishing the earlier decision or where the earlier decision
is per incuriam. However, these are fetters only on a co-ordinate Bench, which,
failing the possibility of availing of either of these gateways, may yet differ
with the view expressed and refer the matter to a Bench of superior
jurisdiction. In tax cases relating to a subsequent year involving the same
issues as in the earlier year, the court can differ from the view expressed if
the case is distinguishable as per incuriam, as held by the Apex Court in
Bharat Sanchar Nigam Ltd. vs. Union of India (2006) 282-ITR-273 (SC) at
276-277.

1.3. Estoppel normally means estopped from re agitating same issue. However,
it is settled position in law that there cannot be an estoppel against a
statute. There is no provision in the statute which permits a compromise
assessment. The above position was indicated by the apex court in Union of
India vs. Banwari Lal Agarwal (1999) 238-ITR-461 (S.C.).

2. Actus Curiae Neminem gravabit :

An act of the Court should not prejudice anyone and the maxim actus curiae
neminem gravabit is squarely applicable. It is the duty of the Court to see
that the process of the court is not abused and if the court’s process has been
abused by making a statement and the same court is made aware of it, especially
a writ court, it can always recall its own order, for the concession which
forms the base is erroneous. It is a well settled proposition of law that no
tax payer should suffer on account of inadvertent omission or mistake of an
authority, because to do justice is inherent and dispensation of justice should
not suffer. It is equally well settled that any order on concession has no binding
effect and there is no waiver or estoppel against statue.

3. Same word in different statues :

In interpreting a taxing statute, the doctrine of “aspect”
legislation must be kept in mind. It is a basic canon of interpretation that
each statute defines the expressions used in it and that definition should not
be used for interpreting any other statute unless in any other cognate statute
there is no definition, and the extrapolation would be justified as held by
Kerala High Court in All Kerala Chartered Accountants’ Association vs. Union of
India & Others (2002) 258-ITR-679 at 680. “A particular word occurring
in one section of the Act having a particular object, cannot carry the same
meaning when used in a different section of the same Act, which is enacted for
a different purpose. In other words, one word occurring in different sections
of the same Act can have different meanings, if the objects of the two sections
are different and they operate in different fields as held by the Supreme Court
in J.C.I.T. vs. Saheli Leasing and Industries Ltd. (2010) 324-ITR-170 at 171.

 “The words and expressions defined in one statute as judicially
interpreted do not afford a guide to the construction of the same words or
expressions in another statute unless both the statutes are pari materia
legislations or it is specifically provided in one statute to give the same
meaning to the words as defined in another satute as held in Jagatram Ahuja vs.
C.I.T. (2000) 246-ITR-609 at 610 (SC).

4. Rules to yield to the Act :

Rules are made by the prescribed authority, while Act is enacted by the
Legislature, hence rules are subservient to the Act and cannot override the
Act. If there is conflict the Act would prevail over the rules. Rules are
subordinate legislation. Subordinate legislation does not carry the same degree
of immunity as enjoyed by a statute passed by a competent Legislature.
Subordinate legislation may be questioned on any of the grounds on which
plenary legislation is questioned; in addition, it may also be questioned on
the ground that it does not conform to the statute under which it is made. It
may further be questioned in the ground that it is inconsistent with the
provisions of the Act, or that it is contrary to some other statute applicable
in the same subject-matter. It may be struck down as arbitrary or contrary to
the statute if it fails to take into account vital facts which expressly or by
necessary implication are required to be taken into account by the statute or
the Constitution. Subordinate legislation can also be questioned on the ground
that it is manifestly arbitrary and unjust. It can also be questioned on the
ground that it violates article 14 of the Constitution of India as held in J.
K. Industries Ltd. and Another vs. Union of India (2008) 297-ITR-176 at
178-179.

5. Literal Interpretation & Casus Omissus :

The principles of interpretation are well-settled :
(i) a statute has to be read as a whole and the effort should be to give full
effect to all the provisions;
(ii) interpretation should not render any provision redundant or nugatory;
(iii) the provisions should be read harmoniously so as to give effect to all
the provisions;
(iv) if some provision specifically deals with a subject-matter, the general
provision or a residual provision cannot be invoked for that subject as held in
C.I.T. vs. Roadmaster Industries of India (P) Ltd. (2009) 315-ITR-66 (P&H).
Except where there is a specific provision of the Income-tax Act which
derogates from any other statutory law or personal law, the provision will have
to be considered in the light of the relevant branches of law as held in C.I.T.
vs. Bagyalakshmi & Co. (1965) 55-ITR-660 (SC).

5.1. When the language of a statute is clear and unambiguous, the courts are to
interpret the same in its literal sense and not to give a meaning which would
cause violence to the provisions of the statute, as held in Britania Industries
Ltd. vs. C.I.T. (2005) 278-ITR-546 at 547 (SC). It is a well settled principle
of law that the court cannot read anything into a statutory provision or a
stipulated condition which is plain and unambiguous. A statute is an edict of
the Legislature. The language employed in a statute is the determinative factor
of legislative intention. While interpreting a provision the court only
interprets the law and cannot legislate it. If a provision of law is misused
and subjected to the abuse of process of law, it is for the Legislature to
amend, modify or repeal it, if deemed necessary. Legislative casus omissus
cannot be supplied by judicial interpretative process.

A casus omissus ought not to be created by interpretation, save in some case of
strong necessity” as held in Union of India vs. Dharmendra Textiles
Processors and Others (2008) 306-ITR-277 at page 278 (SC).

5.2. I f the construction of a statutory provision on its plain reading leads
to a clear meaning, such a construction has to be adopted without any external
aid as held in C.I.T. vs. Rajasthan Financial Corporation (2007) 295-ITR-195
(Raj F.B.). A taxing statute is to be construed strictly : in a taxing statute
one has to look merely at what is said in the relevant provision. There is no
presumption as to a tax. Nothing is to be read in, nothing is to be implied.
There is no room for any intendment. There is no equity about a tax. In
interpreting a taxing statute the court must look squarely at the words of the
statute and interpret them. Considerations of hardship, injustice and equity
are entirely out of place in interpreting a taxing statute as held in Ajmera
Housing Corporation and Another vs. C.I.T. (2010) 326-ITR-642 (SC).

5.3. In construing a contract, the terms and conditions thereof are to be read
as a whole. A contract must be construed keeping in view the intention of the
parties. No doubt, the applicability of the tax laws would depend upon the
nature of the contract, but the same should not be construed keeping in view
the taxing provisions as held in Ishikawajima – Harima Heavy Industries Ltd.
vs. Director of Income-tax (2007) 288-ITR-408 (SC). The provisions of a section
have to be interpreted on their plain language and not on the basis of
apprehension of the Department. A statute is normally not construed to provide
for a double benefit unless it is specifically so stipulated or is clear from
the scheme of the Act as held in Catholic Syrian Bank Ltd. vs. C.I.T. (2012)
343-ITR-270 (SC). Where any deduction is admissible under two Sections and
there is no specific provision of denial of double deduction, deduction under
both the sections can be claimed and deserves to be allowed.

5.4. It is cardinal principle of interpretation that a construction resulting
in unreasonably harsh and absurd results must be avoided. The cardinal
principle of tax law that the law to be applied has to be the law in force in
the assessment year is qualified by an exception when it is provided expressly
or by necessary implication. That the law which is in force in the assessment
year would prevail is not an absolute principle and exception can be either
express or implied by necessary implication as held in C.I.T. vs. Sarkar
Builders (2015) 375-ITR-392 (SC)

5.5. The cardinal rule of construction of statutes is to read the statute
literally that is, by giving to the words used by legislature their ordinary
natural and grammatical meaning. If, however, such a reading leads to absurdity
and the words are susceptible of another meaning the Court may adopt the same.
But if no such alternative construction is possible, the Court must adopt the
ordinary rule of literal interpretation. It is well known rule of
interpretation of statutes that the text and the context of the entire Act must
be looked into while interpreting any of the expressions used in a statute The
Courts must look to the object, which the statute seeks to achieve while interpreting
any of the provisions of the Act. A purposive approach for interpreting the Act
is necessary.

5.6. It is a settled principle of rule of interpretation that the Court cannot
read any words which are not mentioned in the Section nor can substitute any
words in place of those mentioned in the section and at the same time cannot
ignore the words mentioned in the section. Equally well settled rule of
interpretation is that if the language of statute is plain, simple, clear and
unambiguous then the words of statute have to be interpreted by giving them
their natural meaning as observed in Smita Subhash Sawant vs. Jagdeshwari
Jagdish Amin AIR 2016 S.C. 1409 at 1416.

6. Interpretations – favourable to the tax payer to be adopted.

It is
well settled, if two interpretations are possible, then invariably the court
would adopt that interpretation which is in favour of the taxpayer and against
the Revenue as held in Pradip J. Mehta vs. C.I.T. (2008) 300-ITR-231 (SC).
While dealing with a taxing provision, the principle of ‘strict interpretation’
should be applied. The court shall not interpret the statutory provision in
such a manner which would create an additional fiscal burden on a person. It
would never be done by invoking the provisions of another Act, which are not
attracted. It is also trite that while two interpretations are possible, the
court ordinarily would interpret the provisions in favour of a taxpayer and
against the Revenue as held in Sneh Enterprises vs. Commissioner of Customs
(2006) 7-SCC-714.

7. Doctrine of Ejusdem generis :

Birds of the same feather fly to-gether. The rule of ejusdem generis is applied
where the words or language of which in a section is in continuation and where
the general words are followed by specific words that relates to a specific
class or category. The Supreme Court in the case of C.I.T. vs. Mcdowel and
Company Ltd. (2010 AIR SCW 2634) held : “The principle of statutory
interpretation is well known and well settled that when particular words
pertaining to a class, category or genus are followed by general words are
construed as limited to things of the same kind as those specified. This rule
is known as the rule of ejusdem generis. It applies when :

(1) the statute contains an enumeration of specific words;
(2) the subjects of enumeration constitute a class or category;
(3) that class or category is not exhausted by the enumeration;
(4) the general terms follow the enumeration; and
(5) there is no indication of a different legislative intent. The maxim ejusdem
generis is attracted where the words preceding the general words pertain to
class genus and not a heterogeneous collection of items as held in the case of
Housing Board, Haryana (AIR 1996 SC 434). Same view has been iterated in Union
of India vs. Alok Kumar AIR 2010 S.C. 2735.

7.1. General words in a statute must receive general construction. This is,
however, subject to the exception that if the subject-matter of the statute or
the context in which the words are used, so requires a restrictive meaning is
in permissible to the words to know the intention of the Legislature. When a
restrictive meaning is given to general words, the two rules often applied are
noscitur a sociis and ejusdem generis. Noscitur a sociis literally means that
the meaning of the word is to be judged by the company it keeps. When two or
more words which are susceptible of analogous meaning are coupled together,
they are understood to be used in their cognate sense. The expression ejusdem
generis – “of the same kind or nature” – signifies a principle of
construction whereby words in a statute which are otherwise wide but are
associated in the text with more limited words are, by implication given a
restricted operation and are limited to matters of the same class of genus as preceding
them.

8. “Mutatis Mutandis” & “As if” :

Earl Jowitt’s ‘The Dictionary of English Law 1959) defines ‘mutatis mutandis’
as ‘with the necessary changes in points of detail’. Black’s Law Dictionary
(Revised 4th Edn, 1968) defines ‘mutatis mutandis’ as ‘with the necessary
changes in points of detail, meaning that matters or things are generally the
same, but to be altered when necessary, as to names, offices, and the like…..
‘Extension of an earlier Act mutatis mutandis to a later Act, brings in the idea
of adaptation, but so far only as it is necessary for the purpose, making a
change without altering the essential nature of the things changed, subject of
course to express provisions made in the later Act. It is necessary to read and
to construe the two Acts together as if the two Acts are one and while doing so
to give effect to the provisions of the Act which is a later one in preference
to the provisions of the Principal Act wherever the Act has manifested an
intention to modify the Principal Act.

8.1. “The expression “mutatis mutandis” itself implies
applicability of any provision with necessary changes in points of detail. The
phrase “mutatis mutandis” implies that a provision contained in other
part of the statute or other statutes would have application as it is with
certain changes in points of detail as held in R.S.I.D.I. Corpn. vs. Diamond
and Gen Development Corporation Ltd. AIR 2013 SC 1241.

8.2. The expression “as if”, is used to make one applicable in
respect of the other. The words “as if” create a legal fiction. By
it, when a person is “deemed to be” something, the only meaning
possible is that, while in reality he is not that something, but for the
purposes of the Act of legislature he is required to be treated that something,
and not otherwise. It is a well settled rule of interpretation that, in
construing the scope of a legal fiction, it would be proper and even necessary,
to assume all those facts on the basis of which alone, such fiction can
operate. The words “as if”, in fact show the distinction between two
things and, such words must be used only for a limited purpose. They further
show that a legal fiction must be limited to the purpose for which it was
created. “The statute says that you must imagine a certain state of affairs;
it does not say that having done so, you must cause or permit your imagination
to boggle when it comes to the inevitable corollaries of that state of
affairs”. “It is now axiomatic that when a legal fiction is
incorporated in a statute, the court has to ascertain for what purpose the
fiction is created. After ascertaining the purpose, full effect must be given
to the statutory fiction and it should be carried to its logical conclusion.
The court has to assume all the facts and consequences which are incidental or
inevitable corollaries to giving effect to the fiction. The legal effect of the
words ‘as if he were’ in the definition of owner in section 3(n) of the
Nationalisation Act read with section 2(1) of the Mines Act is that although
the petitioners were not the owners, they being the contractors for the working
of the mine in question, were to be treated as such though, in fact, they were
not so”, as held in Rajasthan State Industrial Development and Investment
Corporation vs. Diamond and Gem Development Corporation Ltd. AIR-2013-1241 at
1251.

9. Approbate and Reprobate :

A party cannot be permitted to “blow hot-blow cold”, “fast and
loose” or “approbate and reprobate”. Where one knowingly accepts
the benefits of a contract, or conveyance, or of an order, he is estopped from
denying the validity of, or the binding effect of such contract, or conveyance,
or order upon himself. This rule is applied to ensure equity, however, it must
not be applied in such a manner, so as to violate the principles of, what is
right and, of good conscience. It is evident that the doctrine of election is
based on the rule of estoppel the principle that one cannot approbate and
reprobate is inherent in it. The doctrine of estoppel by election is one among
the species of estoppels in pais (or equitable estoppel), which is a rule of
equity. By this law, a person may be precluded, by way of his actions, or
conduct, or silence when it is his duty to speak, from asserting a right which
he would have otherwise had.

10. Legal Fiction – Deeming Provision :

Legislature is competent to create a legal fiction, for the purpose of assuming
existence of a fact which does not really exist. In interpreting the provision
creating a legal fiction, the Court is to ascertain for what purpose the
fiction is created and after ascertaining this, the Court is to assume all
those facts and consequences which are incidental or inevitable corollaries to
the giving effect to the fiction. This Court in Delhi Cloth and General Mills
Company Limited vs. State of Rajasthan : (AIR 1996 SC 2930) held that what can
be deemed to exist under a legal fiction are facts and not legal consequences
which do not flow from the law as it stands. When a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the Court is entitled and bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to.

10.1. It would be quite wrong to carry this fiction beyond its originally
intended purpose so as to deem a person in fact lawfully here not to be here at
all. The intention of a deeming provision, in laying down a hypothesis shall be
carried so far as necessary to achieve the legislative purpose but no further.
“When a Statute enacts that something shall be deemed to have been done,
which, in fact and truth was not done, the Court is entitled and bound to
ascertain for what purposes and between what persons the statutory fiction is
to be resorted to”. “If you are bidden to treat an imaginary state of
affairs as real, you must surely, unless prohibited from doing so, also imagine
as real the consequences and incidents, which, if the putative state of affairs
had in fact existed, must inevitably have flowed from or accompanied it…. The Statute
says that you must imagine a certain state of affairs; it does not say that
having done so, you must cause or permit your imagination to boggle when it
comes to the inevitable corollaries of that state of affairs”. In The
Bengal immunity Co.Ltd. vs. State of Bihar and Others AIR 1955 SC 661, the
majority in the Constitution Bench have opined that legal fictions are created
only for some definite purpose.

10.2. In State of Tamil Nadu vs. Arooran Sugars Ltd. AIR 1997 SC 1815 : the
Constitution Bench, while dealing with the deeming provision in a statute,
ruled that the role of a provision in a statute creating legal fiction is well
settled, and eventually, it was held that when a statute creates a legal
fiction saying that something shall be deemed to have been done which in fact
and truth has not been done, the Court has to examine and ascertain as to for
what purpose and between which persons such a statutory fiction is to be
resorted to and thereafter, the courts have to give full effect to such a statutory
fiction and it has to be carried to its logical conclusion. The principle that
can be culled out is that it is the bounden duty of the court to ascertain for
what purpose the legal fiction has been created. It is also the duty of the
court to imagine the fiction with all real consequences and instances unless
prohibited from doing so. That apart, the use of the term ‘deemed’ has to be
read in its context and further the fullest logical purpose and import are to
be understood. It is because in modern legislation, the term ‘deemed’ has been
used for manifold purposes. The object of the legislature has to be kept in
mind.

Need to show urgency and build consensus

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The GST Bill, India’s biggest indirect tax reform since independence is awaiting a nod, from the Rajya Sabha. The Bill which seeks to replace a slew of Central and State levies, will really transform a country of 1.3 billion people into an Indian union at least as far as trade and commerce is concerned.

This government came to power on the promise of substantial economic reforms. It has completed two years in office and while there is intent not much has been achieved in terms of “ease of doing business” on the ground. The Finance Act, 2016, which received the assent of the President on 14th May, is a mixed bag.There are quite a few amendments in the said Act which will increase problems for the taxpayer as well as litigation, both of which the Prime Minister had vowed, to reduce if not eliminate. In regard to its promise to curb the menace of black money, the record of this government is not very encouraging. Its effort at bringing black money stashed abroad into India by way of the Black Money Act did not succeed, and the Income Declaration Scheme, contained in the Finance Act, 2016 might meet the same fate.

The disappointment of trade and industry caused by the failure to meet expectations in regard to direct taxes can totally be obliterated by the Rajya Sabha passing the GST Bill. The Lok Sabha passed this Bill in May 2015, and it is absolutely imperative that the upper house of the Parliament gives its assent to this Bill as well as the Constitution Amendment Bill. For GST to become a reality, it needs to be ratified by half of the 29 states, which in itself will be a huge task.

 It is widely accepted that GST will reduce costs of production, logistics costs, and transaction costs and thereby make Indian goods far more competitive. On account of the complex structure of indirect taxes where the power to legislate is with the states, it results in huge bottlenecks affecting movement of goods. This can change to a great extent with GST.

Initially, the States opposed the Bill on account of possible loss of revenue. The government has already agreed to compensate the states and this issue would no longer be a hindrance. Many of the issues raised were only with an object to stall the passage of the bill. Primarily, there were three issues raised by the major opposition Party in the Rajya Sabha. These were abolition of the 1% tax on the interstate movement of goods, the constitution of the dispute resolution body, and setting a cap in the Constitution on the tax rate.

These appear now to have been largely met. The standard rate of 18% which would apply to a majority of goods and the concessional rate of 12% would meet the principal objections of the Congress. An absolute cap on rate of GST is not very easy to accept. Except for profession tax, the Constitution does not fix a limit on any other tax, including the large number of taxes that the GST will replace. Other objections, if any, are not insurmountable.

With everyone in agreement with the fact that the GST Bill will benefit the consumer, it is time that political parties rose above political posturing, attempts to score brownie points over each other and put national interest to the forefront. It is obvious that a bill with the magnitude of implications that the GST Bill has, is bound to face some teething problems. The wrinkles can certainly be ironed out as the GST Act gets implemented.

On its part, the government must make a very sincere attempt to bring all political parties on board. It must strive to build consensus. The recent assembly results would probably serve as a shot in the arm for the ruling Party.

The regional parties, while they would always strive to protect their regional interest, will also probably realise that it is advisable for them to do business with the ruling combine. It is likely that with deft political management,the regional parties will support the passing of the Bill. Even if their support comes with a political price the government must endeavour to pass the GST Bill in the Rajya Sabha. According to experts, a simplified single tax regime will improve compliance and can certainly improve revenue collections over a period of time. This Bill is the litmus tests for the Modi government. Its passage will make the Indian citizen believe that the government means business and will also send a signal to investors all over the globe that this government has the will to convert intent into reality. “Acche din” may then truly be here.

Awareness

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In every person, there is an inherently present ‘awareness’. In fact an
element of ‘awareness’ is there in everything in this universe. However,
in every one, the degree of ‘awareness’ differs widely. Awareness at
its very basic level is crude and gross. As we go higher on the
evolution graph, the level of awareness increases. A tree is more aware
than a stone and an animal is more aware than a tree. In the human
being, who is at the top of the evolution graph, this awareness is the
highest. However, between one human being and another human being, there
is always a difference in the degree of awareness. In every individual
also, his or her level of awareness is different at different age and
time. As the level of awareness increases, an individual becomes
sensitive towards finer aspects of life. At the lower level, the
awareness is mostly physical like that of hunger, thirst, sex impulse
etc. As awareness increases, and becomes more subtle an individual
becomes :

  • more sensitive and perceptive
  • leans more towards finer aspects of life like music, art and natural beauty, etc.
  • Compassionate and practices empathy and
  • Perceives and experiences sublime emotions of love, surrender and oneness.

When
an individual reaches a higher level of awareness which is possible
only for a human being, he or she actually touches the shores of
Divinity. The greatness of men like Swami Vivekananda, Mahatma Gandhi
and Albert Einstein was due to their higher level of awareness compared
to that of a normal human being.

This Divine Awareness is the
power that protects us, shows us the way, and lights our path. It is our
best friend, philosopher guide and well wisher. Being ‘aware’ of this
‘awareness’ is the key to a happy life.

One experiences this
awareness only when the mind that is pure, calm and stable. Only in such
a state of mind, one can intensely feel the presence of that Supreme
Power we call `Divinity’. The degree or the intensity of the experience
of this Divine Awareness varies according to the state of one’s mind
which changes all the time. However, having felt it’s presence, one
should then try not to ever lose or let it dim. Whenever, one feels that
this Awareness is dimming, one needs to contemplate and seek reason for
the change and take conscious steps to restore the experienced
awareness. We need to give the experience of Divine Awareness, the
utmost importance and create a conducive environment for Awareness to
continuously improve its intensity. The means of doing this may differ
from person to person. Some may find swadhyaya, satsang etc. helpful,
for others music or meditation may be useful. Whatever the means be, our
purpose should be to increase our level of awareness in our life.

For
professionals like us, this awareness is of utmost importance. It
prevents us from making mistakes, it shows us the way to avoid pitfalls
and achieve success and happiness in every walk of life.

Awareness gives meaning to our life and yields liberation. Salutations to ‘Awareness’ residing in every being.

THE FINANCE ACT, 2016

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1. Back ground:

The Finance Minister, Shri Arun Jaitley, presented his third Budget with the Finance Bill, 2016, in the Lok Sabha on 29th February, 2016. After some discussions, the Parliament has passed the Budget with some amendments. The President has given his assent to the Finance Act, 2016, on 14th May, 2016. There are in all 241 Sections in the Finance Act, 2016, which include 115 sections which deal with amendments in the Income tax Act, 1961. The Finance Minister has divided his tax proposals in nine categories such as (i) Relief to small tax payers (ii) Measures to boost growth and employment generation (iii) Incentivising domestic value addition to help Make in India (iv) Measures for moving towards a pensioned society (v) Measures for promoting affordable housing (vi) Additional resource mobilization for agriculture, rural economy and clean environment (vii) Reducing litigation and providing certainty in taxation (viii) Simplification and rationalization of taxation and (ix) Use of Technology for creating accountability.

1.1 It will be noticed that one of the objectives stated above is “Reducing Litigation and providing certainty in taxation.” In this context, Paragraphs 163 to 165 of the Budget Speech outline his “Dispute Resolution Scheme”.

1.2 One of the important features of this year’s Budget is that a “Income Declaration Scheme, 2016,” has been announced in Sections 181 to 199 of the Finance Act, 2016. .

1.3 In Para 187 of the Budget Speech he has stated that the Direct Tax Proposals will result in revenue loss of Rs.1,060 Cr., and Indirect Tax Proposals will yield additional revenue of Rs.20,670 Cr. Thus the net revenue gain from this year’s proposals will be of Rs.19,610 Cr.

1.4 In this article some of the important amendments made in the Income tax Act by the Finance Act, 2016, have been discussed. These amendments have only prospective effect.

2. Rates of taxes:

2.1 There are no changes in the tax slabs, rates of Income tax or rates of education cess for all categories of assesses, other than companies. As per the announcement made earlier, in this Budget a beginning to reduce the corporate rates in a phased manner has been made. In the case of an Individual, HUF, AOP and BOI whose total income is more than Rs. 1 crore, the surcharge has been increased from 12% to 15%. This has been done to tax the super rich Individuals, HUF etc. There is no change in rate of surcharge in other cases.

In the case of a Resident Individual having total income not exceeding Rs. 5 Lakh Rebate Upto Rs. 2,000/- or tax payable whichever is less is allowable upto A.Y. 2016- 17. This Rebate in now increased upto Rs. 5,000/- or tax payable, whichever is less, for A.Y. 2017-18.

2.2 The surcharge on income tax will be as under in A.Y. 2016-17 and 2017-18:

Note: The rate of surcharge on Dividend Distribution Tax u/s 115- 0, Tax payable on Buy back of Shares u/s 115-QA and Income Distribution tax payable by M.F u/s 115R is 12% as in earlier years.

The existing rate of 3% of Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and Surcharge will continue in A.Y. 2017-18.

2.3 In view of the above, the effective maximum marginal rate of tax
(including Surcharge and Education Cess) will be as under in A.Y. 2017 – 18:




2.4 I n the case of a Domestic Company, which is newly set up on or after 1.3.2016, engaged in the business of Manufacture or Production and Research in relation to, or distribution of articles manufactured or produced by it, the rate of Income tax for A.Y. 2017-18 will be 25% plus applicable surcharge and education cess. This will be subject to following conditions stated in new section 115 BA

(i) Such company shall not be entitled to claim deduction u/s 10AA, 32(1)(iia), 32 AC, 32AD, 33AB, 33ABA, 35(1)(ii), (iia), (iii), (2AA), 2(AB), 35AC, 35AD, 35CCC, 35CCD as well as under Chapter VIA Part C i.e. sections 80H, to 80RRB (excluding section 80 JJAA).

(ii) Such company will not be entitled to claim set off of loss carried forward from earlier years if the same is attributed to the above deductions. Such carried forward loss shall be deemed to have been allowed and will not be allowed in any subsequent year.

(iii) Depreciation u/s 32 {other than u/s 32(1)(iia)} shall be deducted in the manner as may be prescribed.

(iv) The above concessional rate u/s 115 BA will be available at the option of the assessee company. Such option is to be exercised before the due date for filing Return of Income for the first year after incorporation of the company. Further, such option once exercised, cannot be withdrawn by the company in any subsequent year.

2.5 A new section 115 BBDA has been inserted w.e.f. A.Y. 2017-18 (F.Y 2016-17). This section provides that in the case of any resident individual, HUF or a Firm (including LLP) if the total income for A.Y. 2017-18 and onwards includes Dividend from domestic company or companies, in excess of Rs. 10 Lakh, the dividend upto Rs 10 Lakh will be exempt u/s 10(34) but the excess over Rs 10 Lakh will be chargeable to tax at the rate of 10% plus applicable surcharge and education cess. It is also provided that no deduction in respect of any expenditure or allowance or set off of loss shall be allowed under any provision of the Income tax Act against such dividend.

2.6 Section 115JB is amended from A.Y:2017-18 to provide that in the case of a Company located in International Financial Services Centre and deriving its income solely in convertible Foreign Exchange, the MAT u/s 115JB shall be chargeable at the rate of 9% instead of 18.5%.

3. Tax deduction at source:

3.1 The Income tax Simplification Committee, under the Chairmanship of Justice R.V. Easwar, has suggested in its Interim Report that the provisions relating to tax deduction at source (TDS) should be simplified.

The committee has suggested higher threshold limits and lower rates for TDS in respect of payment u/s 193 to 194 LD. The Finance Minister has accepted this recommendation only partially and amended various sections of the Income tax Act for TDS w.e.f. 1.6.2016 as under:

(i) Revision in Threshold Limit for tds unde r variou s sections.

(ii) Revision in Rates of tds under various Sections

(iii) Provision for TDS under Section 194 K (Income in respect of Units) and section 194L (Payment of compensation on acquisition of capital Asset) deleted w.e.f. 1.6.2016.

3.2 The provisions for issue of certificates for lower or non-deduction of tax at source by an assessing officer u/s 197 have been extended with effect from 1st June, 2016, to cover income payable to a unit holder in respect of units of alternate investment funds (AIFs Category I or II), which is subject to TDS u/s 194LBB, and income payable to a resident investor in respect of investment in a securitization trust, which is subject to TDS u/s 194LBC.

3.3 The provision for non- deduction of TDS on issue of a declaration u/s 197A, has been extended to cover payments of rent, on which tax is deductible u/s 194-I, with effect from 1st June, 2016.

3.4 Section 206AA provides for higher rate of TDS at either the prescribed rate or at the rate of 20%, whichever is higher, if the payee does not furnish his Permanent Account Number to the payer. There has been litigation as to whether this provision applies to foreign companies and non-residents. With effect from 1st June, 2016, the provisions of this section will not apply to a foreign company or to a non-resident in respect of payment of interest on long-term bonds referred to in Section 194 LC or any other payment subject to prescribed conditions. The Finance Minister has announced that any payment to Non-Resident will not attract the higher rate of TDS (i.e 20%) u/s 206AA if any alternate document, as may be prescribed, is furnished.

3.5 TAX COLLECTION AT SOURCE (TCS ): Section 206C has been amended w.e.f. 1.6.2016 to provide as under:

(i) u/s 206C (1D), at present, tax is to be collected by seller of bullion or jewellery at 1% if the payment is made by the purchaser of bullion (exceeding Rs 2 Lakh) or Jewellery (exceeding Rs. 5 Lakh).

(ii) The above requirement of TCS is now enlarged from 1.6.2016 to the effect that the seller will have to collect tax @ 1% if purchase of any other goods or services for amount exceeding Rs 2,00,000/- is made and the purchaser / service receiver makes payment for the same in cash. It may be noted that this provision will not apply to payments by such class of buyers who comply with the conditions as may be prescribed. It is also provided that the above requirement of TCS will not apply where tax is required to be deducted at source by the payer under chapter XVII-B of the Income tax Act.

(iii) New clause (IF) added in this section provides that w.e.f. 1.6.2016 seller of a Motor Vehicle of the value exceeding 10 Lacs will have to collect from the buyer tax @ 1% of the sale consideration. This provision for TCS will apply even if payment for purchase of Motor vehicle is made by cheque.

(iv) The above provisions have been made to enable the Government to bring high value transactions in the tax net.

4. Exemptions and Deductions:

In order to give benefit to assessees certain amendments are made in the Income tax Act as under:

4.1 Section 10 – Income not included in total income: This section is amended from A.Y. 2017-18 (F.Y. 2016-17) as under:

(i) SECTION 10(12A) – This is a new provision. At present deduction is available for contribution made to National Pension Scheme (NPS) u/s 80 CCD. Withdrawal of such contribution along with the accumulated income from the NPS on account of closure or opting out of NPS is taxable in the year of withdrawal if deduction was claimed in the earlier years.

It is now provided that out of any such withdrawal from NPS, 40% of the amount will be exempt u/s 10(12A). However, the whole amount received by the nominee on death of the assessee under the circumstances referred to in section 80CCD (3) (a) shall be exempt from tax. Section 80CCD (3) is also amended for this purpose.

(ii) SECTION 10(13) – At present, any payment from an approved superannuation fund to an employee on his retirement is exempt from tax. The scope of this exemption is now extended by new subclause (v) to transfer of an amount to the account of the assessee under NPS as referred to in section 80CCD and notified by the Government.

(iii) SECTION 10(15) – At present, interest on Gold Deposit Bonds issued under Gold Deposit Scheme 1999 is exempt. It is now provides that interest on Deposit Certificates issued under the Gold Monetization Scheme, 2015, will also be exempt from tax.

A consequential amendment is made in section 2(14) that such Deposit Certificates issued under the above scheme will not be considered as a Capital Asset. Therefore, any gain on transfer of such Deposit Certificates will also be exempt from Capital Gains tax.

(iv) SECTION 10(23FC) – At present interest received by a Business Trust from a Special Purpose Vehicle is exempt from tax. It is now provided that Dividend received by such Trust from a Specified Domestic Company as referred to in the newly inserted clause (7) of section 115-0 will also be exempt from tax.

(v) SECTION 10(38) – This section grants exemption from tax in respect of long – term capital gain from transfer of equity share where STT is paid. It is now provided that in respect of long term capital gain arising from transfer of equity shares through a recognized Stock Exchange Located in International Financial Service Centre (IFSC), where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

(vi) SECTION 10(48A) – This is a new provision. It is now provided that income of a Foreign Company on account of storage of Crude Oil in India and sale of such Crude Oil to any person resident in India will not be taxable. This is subject to terms and conditions of the agreement entered into with the Central Government.

(vii) SECTION 10(50) – This is a new provision. It provides that income arising from specified services as stated in chapter VIII (Sections 160 to 177) of the Finance Act, 2016, shall be exempt from tax. Chapter VIII deals with “Equalization Levy”. This provision will be applicable after the above Chapter VIII of the Finance Act, 2016 comes into force.

4.2 SECTION 10AA – DEDUCTION TO SEZ UNITS : This section grants 100% deduction to income of newly established units in SEZ (i.e eligible business) which begin activity of manufacture, production or rendering services on or after 1.4.2006. This is subject to conditions provided in section 10AA. Now a sun-set clause is added in this section whereby such Units which commence such eligible business on or after 1.4.2021 will not be able to claim deduction under section 10AA.

4.3 SECTION 17 – PERQUISITES: At present, u/s 17(2)(vii) contribution to approved Superannuation Fund by the employee upto Rs. 1 Lakh is exempt from tax. This limit is now increased to Rs.1.5 Lakh from A.Y. 2017 – 18.

4.4 SECTION 80EE – DEDUCTION FOR INTEREST ON LOAN FOR RESIDENTIAL HOUSE: The existing section 80EE granted deduction for interest on housing loan to a limited extent. This section is replaced w.e.f. A.Y. 2017-18 to provide for deduction upto Rs. 50,000/- in respect of interest on Housing Loan taken by an individual from the Financial Institution or Housing Finance Company if the following conditions are complied with.

(i) Loan should be sanctioned during 1.4.2016 to 31.3.2017.

(ii) Loan amount should not exceed Rs.35 Lakh and the value of the Residential House should not exceed Rs 50 Lakh.

(iii) The assessee should not own any other Residential House on the date of sanction of the Loan.

(iv) The above deduction can be claimed in A.Y. 2017- 18 and in subsequent years.

It may be noted that the above deduction can be claimed even if the Residential House is not for self occupation and is let out. Further, the above deduction can be claimed in addition to deduction of interest upto Rs. 30,000/- (Rs 2 Lakh in specified cases) allowable for interest on housing loan for self-occupied residential house property.

4.5 SECTION 80GG – DEDUCTION FOR RENT : At present, an assessee can claim deduction for expenditure incurred on Rent for Residential House occupied by himself if he is not in receipt of House Rent Allowance from his employer subject to certain conditions. This deduction is limited to Rs 2,000/- P.M. or 25% of total income or actual rent paid in excess of 10% of total income whichever is less. The above limit of Rs 2,000/- P.M. is now increased to Rs 5,000/- P.M. effective from A.Y. 2017-18.

4.6 SECTION 80-IA – DEDUCTION TO INFRASTRUCTURE UNDERTAKINGS: Section 80 – 1A(4) grants exemption to infrastructure undertakings subject to certain conditions. It is now provided that this exemption will not be available to an undertaking which starts the development or operation and maintenance of the infrastructure facility on or after 1.4.2017.

4.7 SECTION 80 – IA B – DEDUCTION TO INDUSTRIAL UNDERTAKING: By amendment of this section it is provided that the provisions of Section 80-IAB shall not apply to an assessee, being a Developer, where the development of SEZ begins on or after 1.4.2017.

4.8 SECTION 80 – IAC – THE INCENTIVES FOR START UPS:

(i) With a view to providing an impetus to start-ups and facilitate their growth in the initial phase of their business, this new section is inserted w.e.f. A.Y. 2017-18. It provides for 100% deduction of the profits and gains derived by an Eligible Start-UP (Company or LLP) from a business involving Innovation, Development, Deployment or Commercialization of new products, processes or services driven by technology or intellectual property. This deduction is available at the option of the assessee for any three consecutive assessment years out of five years starting from the date of incorporation.

(ii) Eligible start-up means a company or LLP incorporated between 1.4.2016 to 31.3.2019. The turnover of the business should be less than Rs 25 Crores in any of the years between 1.4.2016 to 31.3.2021. Further, such company / LLP should hold a certificate for eligible business from the Inter Ministerial Board of Certification.

(iii) It is necessary to ensure that such start-up is not formed by splitting up or reconstruction of a business already in existence or by transfer of machinery or plant previously used for any other purpose, subject to certain exceptions provided in the section.

(iv) With a view to encourage an Individual or HUF to invest in such a start-up company or LLP, section 50 GB has been amended to grant exemption from Capital Gain Tax if the capital gain on sale of Residential House is invested in such a company or LLP. Similarly, a new section 54 EE has been inserted to grant deduction upto Rs. 50 Lacs if investment is made in such a company or LLP out of capital gain arising on transfer of long term specified asset.

4.9 SECTION 80 – IB – DEDUCTION TO CERTAIN INDUSTRIAL UNDERTAKINGS:
The deduction granted to certain specified Industrial Undertakings stated in Section 80 – 1B(9)(ii),(iv) and (v) will be discontinued in respect of Industrial undertakings started on or after 1.4.2017.

4.10 SECTION 80 – IBA – DEDUCTION TO CERTAIN HOUSING PROJECTS

This is a new section which provides for 100% deduction in respect of profits and gains of eligible Housing Projects of Affordable Residential Units from A.Y. 2017-18. The section applies to assessees engaged in developing and building Housing Projects approved by the competent Authority after 1.6. 2016 but before 1.4.2019. This deduction is subject to following conditions:

(i) The project is completed within a period of three years from the date on which the building plan of such project is first approved and it shall be deemed to have been completed only when certificate of completion of project is obtained from the Competent Authority.

(ii) The built-up area of the shops and commercial establishments does not exceed 3% of the aggregate built up area.

(iii) If the project is located in Delhi, Mumbai, Chennai or Kolkata or within 25 km from the municipal limits of these cities:

(a) It is on a plot of land measuring not less than 1000 sq. meters

(b) The residential unit does not exceed 30 square meters and

(c) The project utilizes not less than 90% of the floor area ratio permissible in respect of the plot of land.

(iv) If the project is located in any other area:

(a) It is on a plot of land measuring not less than 2,000 sq. meters

(b) The residential unit does not exceed 60 square meters and

(c) The project utilizes not less than 80% of the floor area ratio permissible in respect of the plot of land.

(v) In both above cases the project is the only project on the land specified above.

(vi) The assessee maintains separate books of account.

(vii) If the housing project is not completed within the specified period of three years, deduction availed in the earlier years will be taxed in the year in which the period of completion expires. The definitions, of certain terms such as ‘housing project’, ’ built-up area’ etc. are also given in section 80-IBA(6)

(viii) The benefit under this section is not available to a person who executes the Housing Project as a works contract awarded by any other person (including any state or Central Government)

4.11 SECTION 80JJAA – INCENTIVE FOR EMPLOYMENT GENERATION:

At present, an assessee engaged in manufacture of goods in a factory can claim deduction of 30% of additional wages paid to new regular workmen for 3 assessment years. This deduction can be claimed in respect of additional wages paid to a workman employed for 300 days or more in the relevant year. Further, there should be an increase of at least 10% in the existing workforce employed on the last date of the preceding year. The existing section will apply in A.Y. 2016-17 and earlier years. New Section 80JJAA has been inserted w.e.f. AY 2017-18.

This new section applies to all assesses who are required to get their accounts audited u/s 44AB. The deduction allowable is 30% of additional employee cost for a period of 3 assessment years from the year in which such additional employment is provided. This deduction is subject to the following conditions:

(i) The business should not be formed by splitting up, or the reconstruction of an existing business.

(ii) The business should not be acquired by the assessee by way of transfer from any other business or as a result of any business reorganization.

(iii) Additional employee cost means total emoluments paid to additional employees employed during the year. However, in the first year of a new business, emoluments paid or payable to employees employed during the previous year shall be deemed to be the additional employee cost. Accordingly, deduction will be allowed on that basis in such a case.

(iv) No deduction will be available in case of existing business, if there is no increase in number of employees during the year as compared to number of employees employed on the last day of the preceding year or the emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system.

(v) Additional employee would not include employee whose total emoluments are more than Rs. 25,000 per month or an employee whose entire contribution under Employees’ Pension Scheme notified in accordance with Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, is paid by the Government or if an employee has been employed for less than 240 days in a year or the employee does not participate in recognized provident fund.

(vi) Emoluments means all payments made to the regular employees. This does not include contribution to P.F., Pension Fund or other statutory funds. Similarly, it does not include lump-sum payable to employee on termination of service, Superannuation, Voluntary Retirement etc.

(vii) The assessee will have to furnish Audit Report from a Chartered Accountant in the prescribed form.

4.12 FOURTH SCHEDULE – PART A: Rule 8 of this Schedule is amended from A.Y:2017-18 to grant exemption to the employee if the entire balance standing to the credit of the employee in a recognized Provident Fund is transferred to his account in the National Pension Scheme referred to in Section 80CCD.

5. CHARITABLE TRUSTS:

5.1 A new chapter XII – EB (Sections 115 TD, 115 TE and 115TF) has been inserted in the Income tax Act effective from 1.6.2016. The provisions of these sections are very harsh and are likely to create great hardship to trustees of charitable trusts. In the Explanatory Memorandum to Finance Bill, 2016, it is explained that “there is no provision in the Income tax Act which ensure that the corpus and asset base of a trust accreted over a period of time, with promise of it being used for charitable purpose, continues to be utilized for charitable purposes. In the absence of a clear provision, it is always possible for charitable trusts to transfer assets to a non-charitable trust. In order to ensure that the intended purpose of exemption availed by the trust or institution is achieved, a specific provision in the Act is required for imposing a levy in the nature of an Exist Tax which is attracted when the charitable organization is converted into a non-charitable organization”. It appears that the stringent provisions in section 115TD to 115 TF have been inserted to achieve this objective. This is another blow to charitable trusts. Since these sections apply to all trusts and institutions registered u/s 12A/12AA which claim exemption u/s 10(23C) or 11, they will apply to all charitable or religious trusts claiming exemption u/s 11 and education institutions, hospitals etc., claiming exemption u/s 10(23C).

5.2 Broadly stated these sections provide as under:

(i) A trust or an institution shall be deemed to have been converted into any form not eligible for registration u/s 12AA in a previous year, if,

(a) The registration granted to it u/s 12AA has been cancelled; or

(b) It has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it has not applied for fresh registration u/s 12AA in the said previous year; or has filed application for fresh registration u/s 12AA but the said application has been rejected.

(ii) Under the Section 115TD, it has been provided that the accretion in income (accreted income) of the trust or institution will be taxable on

(a) Conversion of trust or institution into a form not eligible for registration u/s 12 AA, or

(b) On merger into an entity not having similar objects and registered u/s 12AA, or

(c) On non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved u/s 10(23C) within a period of twelve months from end of month of dissolution. The accreted income will be the amount of aggregate of total assets as reduced by the liability as on the specified date.

(iii) The assets and the liability of the charitable organization which has been transferred to another charitable organization within specified time would be excluded while calculating the accreted income. Similarly, any asset which is directly acquired out of Agricultural Income of the Trust or institution will be excluded while computing accreted income. It is not clear whether Agricultural Land Settled in Trust or received by the Trust by way of Donation will be excluded from such computation.

(iv) Any asset acquired by the Trust or Institution during the period before registration is granted u/s 12A / 12AA and no benefit u/s 11 has been enjoyed during this period, will be excluded from the above computation of accreted income.

(v) The method of valuation of such assets / liability will be prescribed by Rules.

(vi) The accreted income will be taxable at the maximum marginal rate (i.e. 30% plus applicable surcharge and education cess) in addition to any income chargeable to tax in the hands of the entity. This tax will be the final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it will be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.

(vii) The principal officer or trustee of the trust has to deposit the above tax within 14 days of the due date as under:

(a) Date on which the time limit to file appeal to the Tribunal u/s 253 against order cancelling Registration u/s 12AA expires if no appeal is filed.

(b) If such appeal is filed but the Tribunal confirms such cancellation, the date on which Tribunal order is received.

(c) Date of merger of the trust with an entity which is not registered u/s 12A / 12 AA

(d) When the period of 12 months end from the date of dissolution of trust if the assets are not transferred to an entity registered u/s 12A / 12AA.

(viii) Section 115 TE provides that if there is delay in payment of the above Exist Tax, the person responsible for payment of such tax will have to pay interest at the rate of 1% P.M. or part of the month.

5.3 Section 115TF provides that the principal officer or any trustee of the trust will considered as assessee in default if the above tax and interest is not paid before the due date. In other words, they can be made personally responsible for payment of such tax and interest. It is also provided that the non-charitable entity with which the trust has merged or to whom the assets of the trust are transferred will also be liable to pay the above exist tax and interest. However, the liability of such an entity will be limited to the value of the assets of the trust transferred to such entity.

6. INCOME FROM HOUSE PROPERTY:

6.1 Under Section 24 (b) interest paid on loan taken on or after 1-4-1999 for acquiring or constructing a residential house for self occupation is allowed as deduction subject to the limit of Rs.2 Lakh. This deduction is available provided the acquisition or construction is completed within 3 years from the end of the financial year in which loan was taken. By amendment of this section this period is now extended to 5 years from A.Y. 2017-18.

6.2 Existing Sections 25A, 25AA and 25B dealing with taxation of unrealised rent are now consolidated into a new section 25A from A.Y. 2017-18. The new section provides that arrears of rent or amount of unrealised rent which is received by the assessee in subsequent years shall be chargeable to tax as income of the financial year in which such rent is received. This amount will be taxable in the year of receipt whether the assessee is owner of the property or not. The assessee will be entitled to claim deduction of 30% of such arrears of rent which is taxable on receipt basis.

7. INCOME FROM BUSINESS OR PROFESSION:

7.1 INCOME-SECTION 2(24)(XVIII ): The definition of “income” u/s 2(24) was widened by insertion of clause (xviii) last year. Under this definition any receipt from the Government or any authority, body or agency in the form of subsidy, grant etc., is considered as income. However, if any subsidy, grant etc., is required to be deducted from the cost of any asset under Explanation (10) of section 43(1) is not considered as income. Amendment in the section, effective from A.Y.2017-18, now provides that any subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or the State Government will not be considered as income. It may be noted that u/s 2(24) (xviii) no destinction is made between Government Grants of a capital nature and revenue grants. From the wording of the section it is not clear as to whether subsidy or grant received to set up any business or to complete a project will be exempt as held by the Supreme Court in the case of Sahney Steel and Press Works Ltd vs. CIT (228 ITR 253). Further, from the amendment made this year, it is not clear whether subsidy or grant by a State Government for the purpose of corpus of a trust or Institution established by the Government will be exempt.

7.2 NON-COMPETE FEES RECEIVABLE BY A PROFESSIONAL – SECTION 28(VA): At present a Noncompete Fees receivable in cash or kind is chargeable to tax in the case of a person carrying on a Business u/s 28(va). This section is amended w.e.f. A.Y. 2017-18 to extend this provision to a person carrying on a profession. Consequential amendment is also made in section 55 to treat cost of acquisition or cost of improvement as ‘NIL’ in the case of right to carry on any profession. In view of this, any amount received on account of transfer of right to carry on any profession will be taxable as capital gains.

7.3 ADDITIONAL DEPRECIATION – SECTION 32(1)(IIA ) : At present benefit of Additional Depreciation at 20% of actual cost of new plant and machinery is available to the assessee engaged in generation or generation and distribution of power. It is now provided that from A.Y. 2017-18 the benefit can be claimed also by an assessee engaged in Generation, Transmission or Distribution of power.

7.4 INVESTMENT ALLOWANCE – SECTION 32 AC : This section was amended by the Finance (No.2) Act, 2014 w.e.f. A.Y 2015-16. At present it provides for deduction of 15% of cost of new plant and machinery acquired and installed during the year if the total cost of such plant & machinery is more than Rs.25 crore. From reading the section it was not clear whether the benefit of the section can be claimed only if the plant or machinery is purchased and installed in the same year. By amendment of this section, effective from A.Y. 2016-17, it is now provided that even if the plant or machinery is acquired in one yare but installed in a subsequent year, the benefit of deduction can be claimed in the year of installation. Therefore, if the new plant or machinery is acquired in an earlier year but installed on or before 31.3.2017, deduction can be claimed in the year of installation.

7.5 WEIGHTED DEDUCTION FOR SPECIFIED PURPOSES:

In line with the Government policy for reduction of rates of taxes in a phased manner and reduction of incentives provided in the Income tax Act, section 35,35AC, 35AD, 35CCC and 35CCD have been amended w.e.f. A.Y 2018- 19 as under:

7.6 EXPENDITURE FOR OBTAINING RIGHT TO USE SPECTRUM – SECTION 35ABA: (i) This is a new section inserted w.e.f. A.Y. 2017-18. It provides for deduction for capital expenditure incurred for acquiring any right to use spectrum for telecommunication services. The actual amount paid will be allowed to be spread over the period of right to use the license and allowed as a deduction in each year. This deduction will be allowed starting from the year in which the spectrum fee is paid. If such fee is paid before the business to operate telecommunication services is started, deduction will be allowed from the year in which business commences. It is also provided that provisions of section 35ABB(2) to (8) relating to transfer of licence, amalgamation and demerger will apply to spectrum also.

(ii) It is also provided that if deduction is claimed and granted for part of the capital expenditure, as stated above, in any year, the same will be withdrawn in any subsequent year if there is failure to comply with any of the provisions of this section. Such withdrawal can be made by rectification of the earlier assessments u/s 154.

7.7 DEDUCTION FOR EXPENDITURE ON SPECIFIED BUSINESS – SECTION 35AD: (i) At present, deduction of 100% of capital expenditure is allowed in the case of an assessee engaged in certain

specified business listed in section 35AD(8). In respect of business listed in section 35AD (i),(ii),(v), (vii) and (viii) such deduction is allowed at 150% of the capital expenditure. From A.Y. 2018-19 such expenditure will be allowed at 100% only.

(ii) Further, the list of specified business in section 35AD(8) has been expanded. By this amendment, effective from A.Y. 2018-19, capital expenditure in the business of “Developing or Maintaining and Operating or Developing, Maintaining and Operating a new Infrastructure facility” which commences operation on or after 1.4.2017 will be entitled to the benefit u/s 35AD. This is subject to the condition that such business is owned by (i) an Indian Company or a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act and (ii) such entity has entered into an agreement with the Central or State Government or Local authority or any Statutory body Developing, Maintaining etc., of the new Infrastructure facility.

7.8 NBFC – DEDUCTION FOR PROVISION FOR DOUBTFUL DEBTS – SECTION 36(1),(VIIIA )
Deduction for provision for Bad and Doubtful Debts is allowed at present to Banks u/s 36(1)(viiia) subject to certain conditions. This benefit is now extended to a NBFC also. This amendment is effective from A.Y. 2017- 18. This deduction cannot exceed 5% of the total income computed before making deduction under this section and deduction under Chapter VI A.

7.9 DISALLOWANCE OF EQUALISATION LEVY – SECTION 40(a): This is a new provision which is effective from 1.6.2016. Chapter VIII of the Finance Act, 2016, provides for payment of Equalisation Levy on certain payments to Non-Residents for specified services. Now, section 40(a)(ib) provides that if this Levy is not deposited with the Government before the due date for filing Return of Income u/s 139(1), deduction for the payment to Non- Resident will not be allowed to the assessee. If the above Levy is deposited after the such due date for filing Return of Income, the deduction for the payment to Non-Resident will be allowed in the year of deposit of this Levy with the Government.

7.10 DEDUCTION ON ACTUAL PAYMENT – SECTION 43B: This section is amended w.e.f. A.Y. 2017- 18 to provide that any amount payable to Indian Railways for use of Railway Assets will be allowed only in the year in which actual payment is made. However, if such actual payment is made before the due date for filing the Return of Income u/s 139(1), for the year in which it was payable, deduction will be allowed in the year in which the amount was payable. This provision will apply to rent payable in premises of Indian Railways taken on rent or such similar transactions.

7.11 TAX AUDIT – SECTION 44AB: At present a person carrying a profession is required to get his accounts audited if his gross receipts exceed Rs.25 Lakh in any Financial Year. This limit is increased to Rs.50 Lakh from A.Y. 2017-18. In a case where the profits are not declared in accordance with provisions of section 44AD (Business) or 44ADA (Profession) the assessee will have to get the accounts audited u/s 44AB irrespective of the amount of turnover or gross receipts.

7.12 PRESUMPTIVE BASIS OF COMPUTING BUSINESS INCOME – SECTION 44AD:

(i) This section provides for computation of Business Income in the case of an eligible assessee engaged in eligible business at 8% of total turnover or gross receipts in any financial year. For this purpose the limit for turnover or gross receipts was Rs. 1 Cr. This has now been increased to Rs. 2 Cr., from A.Y. 2017-18.

(ii) Section 44AD (2) provides that in the case of a Firm / LLP declaring profit on presumptive basis, deduction for salary and interest paid by the Firm / LLP to its partners is allowable. This provision is deleted w.e.f. AY. 2017-18. Hence no such deduction will be allowed. It may be noted that the partner will have to pay tax on such salary or interest received from the Firm/LLP.

(iii) Section 44AD(4) is replaced by another section 44AD(4) from A.Y. 2017-18. It is now provided that any eligible person who carries on eligible business and declares profit at 8% or more of total turnover or gross receipts for any year in accordance with this section, but does not declare profit on such presumptive basis in any of the five subsequent years, shall not be eligible to claim the benefit of taxation on presumptive basis under this section for 5 subsequent assessment years. In view of this, such assessee will be required to maintain books as provided in section 44AA and get the accounts audited u/s 44AB.

7.13 PRESUMPTIVE BASIS OF COMPUTING INCOME FROM PROFESSION – SECTION 44ADA:

(i) This is a new provision which will come into force from A.Y. 2017-18. This provision will benefit resident professionals who carry on the profession on a small scale and the yearly gross receipts are less than Rs. 50 Lacs. Broadly stated the provisions of the new section 44ADA are as under:

a) The section is applicable to every resident assessee who is engaged in any profession covered by section 44AA(1) i.e. legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession as is notified by the Board in the Official Gazette. The Explanatory Memorandum states that this section is applicable only to individuals, HUF and partnership firms (excluding LLPs). However the wording of the Section makes it clear that it applies to all resident assesses.

b) Presumptive profit shall be 50% of the total gross receipts or sum claimed to have been earned from such profession, whichever is higher.

c) Deductions under sections 30 to 38 shall be deemed to have been allowed and no further deduction under these sections will be allowed.

d) The written down value of any asset used for the purpose of profession shall be deemed to have been calculated as if the depreciation is claimed and allowed as a deduction.

e) The assessee is required to maintain books of account and also get them audited if he declares profit below 50% of the gross receipts.

(ii) It may be noted from the above that there is no provision in Section 44ADA for deduction of salary and interest paid by a Firm or LLP to its partners. Therefore, if a professional Firm/LLP offers 50% of its gross receipts for tax under this section, the partners will have to pay tax on salary and interest received by the partners.

(iii) It may be noted that Justice Easwar Committee has suggested in its report that taxation of income on presumptive basis is popular with small business entities as they are not required to maintain books or get their accounts audited. The committee has, therefore, suggested that this scheme should be extended to persons engaged in the profession. In para 5.1 of their report it is stated that “the committee recommends the introduction of a presumptive income scheme whereby income from profession will be estimated to be thirty three and one-third (33 1/3%) of the total receipts in the previous year. The benefit of this scheme will be restricted to professionals whose total receipts do not exceed one crore rupees during the financial year”. From the provisions of new section 44ADA it will be noticed that the above recommendation has been partly implemented.

(iv) A question for consideration is whether remuneration and interest on capital received by a partner of a firm or LLP engaged in any profession can be considered as income from the profession within the meaning of section 44 ADA. It is possible to take a view that this is income from profession as section 28(v) provides that “any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm” shall be chargeable under the head “Profits and gains of Business or Profession”. Even in the Income tax Return Form such Interest and Remuneration received by a partner from the firm is to be shown under the head profits and gains from business or profession. Therefore, if a professional has received total interest and remuneration of Rs.25 Lakh and Rs.15 lakh as share of profit from the professional firm in which he is a partner and he has no other income under the head profits and gains from business or profession, he can offer Rs.12.5 Lakh for tax u/s 44ADA.

7.14 INCOME FROM PATENTS – SECTION 115BBF:

This is a new section which provides for taxation of Royalty from Patents at a concessional rate of 10% from A.Y. 2017-18. The new section provides as under:

(i) If the total income of the eligible assessee includes any income by way of Royalty in respect of Patent developed and registered in India, tax on such Royalty shall be payable at the Rate of 10% plus applicable surcharge and education cess.

(ii) Such tax will be payable on the gross amount of Royalty. No expenditure incurred for this purpose shall be allowed against the Royalty Income or any other income.

(iii) For this purpose the Eligible assessee is defined to mean a person resident in India who is the true and first Inventor of the invention and whose name is entered on the Patent Register as a Patentee in accordance with the Patents Act. Further, a person being the true and first Inventor of the invention will be considered as an eligible assessee, where more than one persons are registered as Patentees under the Patents Act in respect of the Patent.

(iv) Explanation to the section defines the expressions Developed, Patent, Patentee, Patented Article, Royalty etc.

(v) The eligible assessee has to exercise option, if he wants to take benefit of this section, in the prescribed manner before the due date for filing Return of Income u/s 139(1) for the relevant year.

(vi) If the eligible assessee who has opted to claim the benefit of this section does not offer for taxation such Royalty income in accordance with this section, he will not be able to take benefit of this section in subsequent 5 assessment years.

(vii) The above Royalty Income shall not be included in the “Book Profit” computation u/s 115JB. Similarly, any expenditure relatable to Royalty income will not be deductible from such “Book Profit”.

7.15 CARRY FORWARD OF LOSS – SECTIONS 73A(2) AND 80: At present Section 73A (2) provides that carry forward of Loss incurred in any business specified in section 35AD(8)(C) is allowable for set-off against income of any specified business in subsequent year. Section 80 is amended w.e.f. A.Y. 2016-17 to provide that such carry forward of Loss u/s 73A(2) will be allowed only if the Return of Income for the year in which loss is incurred is filed before the due date u/s 139(1).

8. INCOME FROM OTHER SOURCES – SECTION 56(2)(vii):
Section 56(2)(vii) provides for levy of tax an Individual or HUF in respect of any asset received without consideration or for inadequate consideration. Second Proviso to this section provides for certain exceptions whereby the said section does not apply to certain transactions. The scope of this proviso is now extended w.e.f. A.Y. 2017-18 to receipt by individual or HUF of shares of-

(i) A successor Co-op. Bank in a business reorganization in lieu of shares of a predecessor co-op. Bank (Section 47(vicb).

(ii) A resulting company pursuant to a scheme of Demerger (Section 47(vid).

(iii) An amalgamated company pursuant to a scheme of amalgamation (Section 47 (vii).

9 CAPITAL GAINS:

9.1 DEFINITIONS – SECTION 2 (14) AND 2(42A):

(i) Section 2(14) defining “Capital Asset” is amended from A.Y. 2016-17 to state that Deposit Certificates issued under Gold Monetization Scheme, 2015, will not be considered as Capital Asset for fax purposes.

(ii) Section 2(42A) defines the term “Short-term Capital Asset”. This definition is amended from A.Y. 2017-18 to provided that shares (equity or preference) of a non-listed company will be treated as short-term capital asset if they are held for less than 24 Months. It may be noted that prior to 10.7.2014, this period was 12 months. It was increased to 36 months by the Finance (No.2) Act, 2014 w.e.f. 11.7.2014. Now, this period is reduced to 24 Months from 1.4.2016.

9.2 SOVEREIGN GOLD BONDS – SECTION 47 (VIIC ):
It is now provided from A.Y. 2017-18 that any gain made by an Individual on redemption of Sovereign Gold Bonds issued by RBI shall not be chargeable as capital gains.

9.3 CONVERSION OF A COMPANY INTO LLP – SECTION 47(XIII B):
The exemption from capital gains given to a private or a public unlisted company u/s 47 (xiiib) is subject to several conditions. One of the conditions, at present, is that the total sales, turnover or gross receipts in a business of the company in any of the three preceding years does not exceed Rs. 60 Lacs.

Instead of removing this condition or increasing the limit of turnover, a new condition is now added from A.Y. 2017- 18. It is now provided that total value of the assets, as appearing in the books of account of the company, in any of the three preceding years, does not exceed `5 Crores. This will prevent many small investment or property companies from converting themselves into LLP.

9.4 UNITS OF MUTUAL FUNDS – SECTION 47(XIX): Capital Gain arising on transfer of units in a consolidated plan of a M.F. Scheme in consideration of allotment of units in consolidated plan of that scheme will not be chargeable to tax from A.Y. 2017-18.

9.5 MODE OF COMPUTATION OF CAPITAL GAIN – SECTION 48: This section which deals with computation of capital gain is amended from A-Y 2017-18 as under:

(i) For computing long term capital gain on transfer of Sovereign Gold Bonds issued by RBI it will now be possible to consider indexed cost as cost of acquisition.

(ii) In the case of a non-resident assessee, for computing capital gain on redemption of Rupee Denominated Bond of an Indian company subscribed by him, the gain arising on account of appreciation of Rupee against a Foreign Currency shall be ignored.

9.6 COST OF CERTAIN ASSETS – SECTION 49: Section 49 provides for determination of cost of acquisition of certain Assets. By amendment of this section it is provided, from A.Y. 2017-18, that in respect of any asset declared under the “Income Declaration Scheme, 2016” Under Chapter IX of the Finance Act, 2016, the fair market value of the Asset as on 1.6.2016 shall be deemed to be the cost of acquisition for the purpose of computing capital gain on transfer of that asset.

9.7 FULL VALUE OF CONSIDERATION – SECTION 50C: This section is amended from A.Y.2017-18 to bring it in line with the provisions of section 43CA. This amendment is based on the recommendation of Justice R. Easwar Committee Report (Para 6.2). At present, Stamp Duty valuation as on the date of transfer of immovable property is compared with the consideration recorded in the transfer document. It is now provided that if the date of the agreement for sale and the date of actual transfer of the property is different, the stamp duty valuation on the date of Agreement for sale will be considered for the purpose of section. This is subject to the condition that the amount of the consideration or a part there of has been received by the seller by way of an account payee cheque or draft or by use of electronic clearing system through a bank on or before the date of the Agreement for sale.

9.8 EXEMPTION ON REINVESTMENT OF CAPITAL GAIN – SECTION 54 EE AND 54 GB: As discussed in Para 4.8 above, new section 54EE and amendment in section 54GB provides for exemption upto `50 Lacs if the capital gain on transfer of specified assets are invested in startup company or LLP. These provisions come into force from A.Y. 2017-18. Broadly stated these provisions are as under:

(i) Section 54EE Provides that if whole or part of capital gain arising from transfer of a long term capital asset (original asset) is invested within 6 months, from the date of such transfer, in a longterm Specified Asset, the assessee can claim exemption in respect of such capital gain. For this purpose the “Specified Asset” is defined to mean unit or units issued before 1.4.2109 by such Fund as may be notified by the Central Government. The Explanatory Memorandum to Finance Bill, 2016, states that it is proposed to establish a Fund of Funds to finance the start-ups. The following are certain conditions for claiming this exemption.

(a) Investment in long term specified asset should not exceed `50 lakh during a financial year. In case where the investment is made in two financial years, for the capital gains of the same year, the aggregate investment which qualifies for exemption from capital gain will not exceed Rs. 50 lakh.

(b) The long term specified asset is not transferred by the assessee for a period of three years from the date of its acquisition. The assessee does not take any loan or advance against the security of such long term specified asset. In a case where the assessee takes a loan or an advance against security of long term specified asset, it shall be deemed that the assessee has transferred the long term specified asset on the date of taking the loan or an advance.

(e) If the assessee, within a period of three years from the date of its acquisition, transfers that long term specified asset or takes a loan or an advance against security of such long term specified asset, the amount of capital gain which is allowed as exempt u/s 54EE will be charged to tax under the head “Capital Gains” as gain relating to long term capital asset of the previous year in which the long term capital asset was transferred.

(ii) Section 54GB, at present, grants exemption to an Individual or HUF in respect of long term capital gain arising on transfer of a Residential property (House or a Plot of Land) if the net consideration is utilized for subscription in equity shares of an eligible company. This provision will not apply to transfer of a residential property after 31.3.2017. By amendment of this section it is now provided that this exemption will be available to an Individual or HUF if net consideration on transfer of Residential property (Land, Building or both) is invested in an “Eligible Start Up” company or LLP. The term “Eligible Start-up” has been given the same meaning as in Explanation below section 80-IAC(4). (Refer Para 4.8 above). The above investment is to be made before the due date for filing the Return of Income. The above concession is not available if the transfer of Residential property is made after 31.3.2019. It may be noted that other conditions in existing section 54GB will apply to the above Investment also.

(iii) It may be noted that an Individual or HUF who is claiming exemption u/s 54 or 54F on transfer of a long term Capital Asset (including a Residential House) can claim deduction u/s 54EC (Investment in Bonds upto Rs. 50 Lakh) as well as u/s 54EE Investment in specified units (upto Rs. 50 Lakh) and u/s 54GB (Investment in eligible start up without any limit). If we read sections 54EC, 54EE and 54GB it will be noticed that no restriction is put in any of these sections that claim for deduction on reinvestment can be made under any one section only. Therefore, if an individual / HUF sells his Residential House, he can claim deduction u/s 54EC (upto Rs. 50 Lakh), u/s 54EE (up to Rs. 50 Lakh), u/s 54GB (without limit) as well as u/s 54 for purchase of another Residential House.

9.9 TAX ON SHORT -TERM CAPITAL GAIN – SECTION 111A: At present, this section provides for levy of tax on short-term Capital Gain at 15% from transfer of equity shares where STT is paid. By amendment of this section from A.Y. 2017-18 it is provided that in respect of short-term capital gain arising from transfer of equity shares through a Recognized Stock Exchange located in International Financial Service Centre (IFSC) where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

9.10 TAX ON LONG – TERM CAPITA L GAIN – SECTION 112: At present, the tax on long – term capital gain on transfer of unlisted securities in the case of nonresident u/s 112 (1)(a) (iii) is chargeable at the rate of 10% if benefit of first and second proviso to section 48 is not taken. There was a doubt whether the word “Securities” include shares in a company. In order to clarify the position this section is amended from A.Y. 2017-18 to provide that long term Capital Gain from transfer of shares of a closely held company (whether public or private) shall be chargeable to tax at 10% if benefit of first and second proviso to section 48 is not claimed.

10. MINIMUM ALTERNATE TAX (MAT) – SECTION 115JB:

Applicability of MAT to foreign companies has been a burning issue. In line with the recommendations of the Justice A.P. Shah Committee, section 115JB is amended to provide that the provisions of section 115JB shall not be applicable to a foreign company if

(i) The assessee is a resident of a country or a specified territory with which India has an agreement referred to in section 90(1) or an agreement u/s 90A(1) and the assessee does not have a permanent establishment in India in accordance with the provisions of the relevant Agreement; or

(ii) The assessee is a resident of a country with which India does not have an agreement under the above referred sections and is not required to seek registration under any law for the time being in force relating to companies.

This amendment is made effective retrospectively from A.Y. 2001-02.

11. DIVIDEND DISTRIBUTION TAX (DDT) – SECTION 115-O:

(i) At present, under the specific taxation regime for business trusts, a tax pass through status is given to Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (INVITS). However, a Special Purpose Vehicle, being a company, which is held by these business trusts, pays normal corporate tax and also suffers dividend distribution tax (DDT) while distributing the income to the business trusts being a shareholder.

(ii) It is now provided by amendment of section 115-0 w.e.f. 1.6.2016 that no DDT will be levied in respect of distribution of dividend by an SPV to the business trust. The exemption from levy of DDT will only be in the cases where the business trust holds 100% of the share capital of the SPV excluding the share capital other than that which is required to be held by any other person as part of any direction of the Government or any regulatory authority or specific requirement of any law to this effect or which is held by Government or Government bodies. The exemption from the levy of DDT will only be in respect of dividends paid out of current income after the date when the business trust acquires the shareholding of the SPV as referred to above. Such dividend received by the business trust and its investor will not be taxable in the hands of trust or investors as provided in the amended sections 10(23FC) & 10(23FD). The dividends paid out of accumulated and current profits upto this date will be liable for levy of DDT as and when any dividend out of these profits is distributed by the company either to the business trust or any other shareholder.

(iii) It is further provided in section 115-0(8) that no DDT will be levied on a company, being a unit located in an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount of dividend declared, or paid by such company on or after 1 April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend.

12. TAX ON BUY BACK OF SHARES:

(i) At present section 115QA of the Act provides that income distributed on account of buy back of unlisted shares by a company is subject to the levy of additional Income-tax at 20%. The distributed income has been defined in the section to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company, for issue of such shares. Buy-back has been defined to mean the purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956.

(ii) It is now provided w.e.f. 1.6.2016 that section 115QA will apply to any buy back of unlisted shares undertaken by the company in accordance with the law in force relating to companies. Accordingly, it will also cover buy-back of shares under any of the provisions of the Companies Act, 1956 and the Companies Act, 2013. It is further provided that for the purpose of computing distributed income, the amount received by a company in respect of the shares being bought back shall be determined in the prescribed manner. These Rules may provide the manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganizations and in different tranches as stated in the Explanatory Memorandum.

13. SECURITIZATION TRUSTS – CHAPTER XII EA :

(i) Chapter XII EA was added by the Finance Act, 2013, effective from A.Y. 2014-15. Under these provisions it was provided that: (a) A ny income of Securitisation Trust will be exempt u/s 10 (23DA), (b) Income received by the Investor any securitized debt instrument or securities issed by such trust will be exempt u/s 10(35A), and (c) The Trust was required to pay additional Income tax on distributed income u/s 115TA (25% in the case of Individual / HUF and 30% in case of others). There were other procedural provisions in sections 115TA to 115TC.

(ii) Section 115 TA is amended w.e.f 1.6.2016. New Section 115TCA has been inserted from A.Y. 2017-18. It is now provided that the current tax regime for Securitization Trust and its investors, will be discontinued for the distribution made by Securitisation Trust with effect from 1 June, 2016, and will be substituted by a new regime with effective from A.Y 2017-18. This effectively grants pass through status to the Securitisation Trust. The new regime will apply to a Securitisation Trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitization of standard assets issued by RBI or a trust setup by a securitization company or a reconstruction company in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or guidelines or directions issued by the RBI (SARFAE SI Act).

(iii) The income of Securitisation Trust will continue to be exempt section under 10(23DA) which is also amended to effectively define the term securitization. The income accrued or received from the Securitisation Trust will be taxable in the hands of investor in the same manner and to the same extent as it would have happened had the investor made investment directly in the underlying assets and not through the trust. Consequential amendment is made in section 10(35A). The payment made by Securitisation Trust will be subject to tax deduction at source u/s 194LBC at the rate of 25% in case of payment to resident investors who are individual or HUF and @ 30% in case of others. In case of payments to non-resident investors, the deduction of tax will be at rates in force. The facility for the investors to obtain lower or nil deduction of tax certificate will be available. The trust will also provide breakup regarding nature and proportion of its income to the investors and also to the prescribed income-tax authority.

14. TAXATION OF NON-RESIDENTS:

(i) PLACE OF EFFECTIVE MANAGEMENT (POEM) – SECTION 6:

(a) The concept of treating a foreign company as resident in India if its place of effective management is in India was introduced by the Finance Act, 2015 and was to become effective from Assessment Year 2016-17. Under this concept, foreign companies will be considered as resident in India if its POEM is in India. The Finance Minister has now recognized that before introducing this concept, its ramifications need to be analyzed in detail. Accordingly, the implementation of concept of POEM has been deferred by one year and the same will now be applicable from Assessment year 2017-18.

(b) A new section115JH is inserted to empower the Government to issue notification to provide detailed transition mechanism for companies incorporated outside India, which due to implementation of POEM, will be assessed for the first time as resident in India. The notification will be issued to bring clarity on issues relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, applicability of transfer pricing provisions, etc., applicable to such foreign companies considered to be resident in India.

(ii) INCOME DEEMED TO ACCRUE OR ARISE IN INDIA – SECTION 9(1)(I)

A new clause has been inserted in Explanation 1, providing that no income shall be deemed to accrue or arise in India to a foreign company engaged in mining of diamonds, through or from activities confined to display of uncut and unassorted diamonds in any notified special zone. This amendment is effective from Assessment Year 2016-17.

(iii) FUND MANAGER’S ACTIVITIES – SECTION 9A:

(a) This section lays down the conditions under which a fund manager based in India does not constitute a business connection of the foreign investment fund. One of the conditions is that the fund is a resident of a country or a specified territory with which India has entered into a double taxation avoidance agreement. This condition is now modified effective from A.Y. 2017-18 by extending it to funds established, incorporated or registered in a notified specified territory.

(b) Another condition is that the fund should not carry on or control and manage, directly or indirectly, any business in India or from India. This condition is now modified to apply only to a fund carrying on, or controlling and managing, any business in India.

(iv) REFERENCE TO TRANSFER PRICING OFFICER (TPO) – SECTION 92CA : At present where a reference has been made by the A.O. to a TPO, the TPO has to pass the order at least 60 days prior to the date of limitation u/s 153/153 B for passing the assessment or reassessment order. Section 92CA has been amended w.e.f. 1.6.2016 to extend this period in cases where the period of limitation available to the TPO for passing the order is less than 60 days, to a period of 60 days, if the assessment proceedings were stayed by an order or injunction of any court, or a reference was made for exchange of information by the Competent Authority under a double taxation avoidance agreement.

(v) MAINTENANCE OF RECORDS – SECTION 92D: This section requires every person who has entered into an international transaction to keep and maintain such information and documents in respect thereof as may be prescribed. A requirement is now introduced for a constituent entity of an International Group to keep and maintain such information and documents in respect of an international group as may be prescribed, and to furnish such information and documents in such a manner, on or before the date, as may be prescribed. Failure to furnish such information and documents will attract a penalty of Rs. 5,00,000 u/s 271AA unless reasonable cause is shown u/s 273B.

15. REPORT RELATING TO INTERNATIONAL GROUP :

(i) Section 286 is a new section inserted from A.Y. 2017-18. The OECD in Action Plan 13 of the BEPS Project has recommended a standardized approach to transfer pricing documentation to be adopted by various Countries. Pursuant to this recommendation, this section is inserted to provide for a specific reporting system in respect of country- by country (CbC) reporting. This system is a three-tier structure with (i) a master file containing standardized information relevant for all members of an International Group; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a CbC report containing certain information relating to the global allocation of the International Group’s income and taxes paid together with certain indicators of the location of economic activity within the group.

(ii) This section provides that every Constituent Entity, resident in India if it is constituent of an International Group and every parent entity or the alternate reporting entity, resident in India, has to furnish report in the prescribed form to the prescribed authority before the due date for filing return of Income u/s 139(1). The manner in which report is to be submitted is provided in the section.

(iii) Penalties are prescribed in section 271GB for nonfurnishing of the information by an entity which is obligated to furnish as also for knowingly providing inaccurate information in the report.

16. EQUALIZATION LEVY:

Chapter VIII (Sections 163 to 180) of the Finance Act, 2016, provides for Equalization Levy on Non-Residents. This Chapter will come into force on the date to be notified by the Central Government. In order to overcome the challenges of typical direct tax issues relating to e-commerce i.e characterization of nature of payments, establishing a nexus between a taxable transaction, activity and a taxing jurisdiction and keeping in view the recommendations of OECD in respect of Action 1 – Addressing the Tax Challenges of Digital Economy, of the BEPS Project, this new chapter is inserted. The chapter is a complete code for charge of Equalisation Levy, its collection, recovery, furnishing statements, processing Statements, Rectification of Mistakes, charge of interest for delayed payment, penalty for non-compliance with the provisions, Appeals to CIT(A) and ITA Tribunal, Prosecution, Power of Government to frame Rules etc. The provisions for Equalisation Levy can be briefly stated as under:

(i) The Equalisation Levy is at 6% of the amount of consideration for specified services received or receivable b y a non-resident (not having a PE in India) from a resident carrying on a business or profession or from a non-resident having a PE in India (Payer).

(ii) The specified services are (a) Online advertisement; (b) Any provision for digital advertising space; (c) Any other facility or service for the purpose of online advertisement; and (d) Any other services as may be notified.

(iii) Simultaneously with the introduction of this chapter for Equalisation levy, section 10(50) has been inserted to provide exemption to income arising from the above-mentioned specified services chargeable to Equalisation Levy.

(iv) The payer is obliged to deduct the Equalisation Levy from the amount paid or payable to a nonresident in respect of such specified services at 6% if the aggregate amount of consideration for the same in a previous year exceeds Rs.1 lakh.

(v) In addition, section 40(a)(ib) is inserted to provide that the expenses incurred by a payer towards specified services chargeable to Equalisation Levy shall not be allowed as deduction in case of failure to deduct and deposit the same to the credit of Central Government before the due date as explained in Para 7.9 above.

(vi) This Chapter extends to the whole of India except the State of Jammu and Kashmir.

17. ASSESSMENTS AND REASSESSMENTS:

(i) JURISDICTION OF ASSESSING OFFICER – SECTION 124: This section is amended from 1.6.2016. It is now provided that u/s 124(3) no person will be entitled to call into question the jurisdiction of A.O. after the expiry of one month from the date on which notice u/s 153A(1) or 153C(2) is served or after completion of assessment whichever is earlier. This provision is in line with the existing provision in section 124(3) which applies to objection to jurisdiction of A.O. when return u/s 139 is filed or notice u/s 142(1) or 143(2) is issued.

(ii) POWER TO CALL FOR INFORMATION – SECTION 133C: This section is amended from 1.6.2016. It is now provided that when information or document is received in response to any notice u/s 133C(1) the prescribed authority can process the same and available outcome will be forwarded to A.O.

(iii) HEARING BY A.O. – SECTION 2 (23C): This clause is inserted from 1.6.2016 to provide that notices for hearing can be given by electronic mode and communication of data and Documents can be made by electronic mode.

(iv) FILING INCOME TAX RETURN – SECTION 139: At present an Individual, HUF, AOP and BOI is required to file return of income before the due date if the total income, without considering deductions under Chapter VI-A, exceeds the maximum amount which is not chargeable to tax. It is now provided in the sixth proviso to section 139 (1) that income from long term capital gains exempt u/s 10(38) shall also be added to the total income for determining the threshold limit for determining whether the assessee is required to file the return of income.

(v) BELATED FILING OF RETURN OF INCOME – SECTION 139(4): The existing section 139(4) is replaced by new section 139(4) from A.Y. 2017- 18. It is now provided that if an assessee has not furnished his Return of Income before due date u/s 139(1), he can file the same at any time before the end of the relevant assessment year or before completion of assessment whichever is earlier.

(vi) REVISED RETURN – SECTION 139(5): The existing Section 139(5) is replaced by new section 139(5) from A.Y. 2017-18. At present a revised return can be filed u/s 139(5), only if the return originally filed is before the due date u/s 139(1). Such a revised return can be filed before the expiry of one year from the end of the relevant assessment year or completion of assessment, whichever is earlier. It is now provided that a belated return filed pursuant to section 139(4), can also be similarly revised within the time limit given above.

(vii) DEFECTIVE RETURN – SECTION 139(9): This section is amended from A.Y. 2017 – 18. At present a return of income will be treated as defective if self-assessment tax and interest payable u/s 140A is not paid before the date of furnishing the return. Now clause (aa) of the Explanation to section 139(9) has been deleted and hence a return will now not be treated as defective merely because self-assessment tax and interest thereon is not paid before the date of furnishing the return.

(viii) ADJUSTMENT TO RETURNED INCOME – SECTION 143(1): This section is now amended from A.Y. 2017-18. The scope of adjustments that can be made at the time of processing the Return of Income u/s 143(1) has been expanded to cover the following items:

(a) Disallowance of loss claimed, if return for the year for which loss has been claimed was furnished beyond the due date specified in section 139(1).

(b) Disallowance of expenditure indicated in tax audit report but not considered in the Return of Income

(c) Disallowance of deduction claimed u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if the return has been filed beyond the due date specified in section 139(1).

(d) Addition of income due to mismatch in income as reflected in the return of income and as appearing in Form 26AS or Form 16A or Form 16.

The above adjustments will be made based on information available on the record of the tax department either physically or electronically. However, no adjustment will be made without intimating the assessee about such adjustment in writing or in electronic mode and giving him a time of 30 days to respond. The adjustment will be made only after considering the response received or after the lapse of 30 days in case no response is received.

(ix) PROCESSING OF RETURN OF INCOME – SECTION 143(ID): This section is amended w.e.f. A.Y. 2017-18. It is now provided that the processing of the Return of Income u/s 143(1) will not be necessary within one year if notice u/s 143(2) is issued. However, such Return of Income shall be processed u/s 143(1) before assessment order u/s 143(3) is passed.

(x) INCOME ESCAPING ASSESSMENT – SECTION 147: This section has been amended from 1.6.2016. New clause (ca) has been added in Explanation 2 to section 147. The amendment provides that income shall be deemed to have escaped assessment if, on the basis of the information received u/s 133C(2), it is noticed by the A.O that the income exceeds the maximum amount not chargeable to tax or where the assessee had understated the income or has claimed excessive loss, deduction, allowance or relief in the return.

(xi) LIMITATION FOR COMPLETING ASSESSMENT OR REASSESSMENT – SECTION 153
The existing section 153 has been replaced by a new section 153 from 1.6.2016. This new section provides as under:

(a) The time limit for completion of assessment has now been reduced as under:
• For order u/s 143 and section 144 – from the existing two years to twenty one months from the end of the assessment year in which the income was first assessable.
• For order u/s 147 – from the existing one year to nine months from the end of the financial year in which the notice u/s 148 was served.
• For giving effect to order passed u/s 254, 263, 264, setting aside or cancelling an assessment – from the existing one year to nine months from the end of the financial year in which the order is received or passed by the designated Commissioner.

(b) The period for completing the assessment shall be extended by one year where reference has been made to the Transfer pricing Officer u/s 92CA,

(c) At present, there is no time limit for giving effect to an order passed u/s 250 or 254 or 260 or 262 or 263 or 264. Now it is provided that action under the above section shall be completed within three months from the end of the month in which order is received or passed by the designated Commissioner. Additional time of six months may be granted to the Assessing Officer by the Principal Commissioner or the Commissioner, based on reasons submitted in writing, if the Commissioner is satisfied that the delay is for reasons beyond the control of the Assessing Officer.

(d) At present there is no time limit for completion of assessment, reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order under the above mentioned sections or in an order of any court in a proceeding otherwise than by way of appeal or reference under the Act. Now such order giving effect should be passed on or before the expiry of twelve months from the end of the month in which such order is received by the designated Commissioner.

(e) Similarly, in case of assessment made on a partner of a firm in consequence of an assessment made on the firm u/s 147, the time limit is now introduced. Accordingly, the assessment of the partner shall be completed within twelve months from the end of the month in which the assessment order in case of the firm is passed.

In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153(9) shall be excluded.

(f) For cases pending on 1st June, 2016, the time limit for taking requisite action (in case of (c), (d) and (e) above will be 31st March, 2017 or twelve months from the end of the month in which such order is received, whichever is later.

(g) The existing Section 153 shall aply to any order of assessment, reassessment or recomputation made before 1/6/2016.

(xii) LIMITATION FOR COMPLETION OF ASSESSMENT IN SEARCH CASES – SECTION 153B:

The existing Section 153B is replaced by new Section 153B w.e.f. 1.6.2016. The old section 153B shall apply in relation to any order of assessment, reassessment or re-computation is made on or before 31.5.2016. The new section 153B provides for reduction in time limit for completion of assessment, reassessment etc., in case of a search u/s 153 A or 153C as under:

(a) In each assessment year falling within the six years referred to in section 153A(1)(b) or assessment year in which search is conducted u/s 132 or requisition is made u/s 132A – from two years to twenty one months from the end of the financial year in which the last of the authorization for search or requisition was executed:

(b) In case of other persons referred to in section 153C, to twenty one months (from the existing two years) from the end of the financial year in which the last of the authorization for search or requisition was executed or nine months (from the existing one year) from the end of the financial year in which the books of account or documents or assets seized or requisitioned are handed over u/s 153C to the Assessing Office having jurisdiction over such person, whichever is later.

(c) In case where reference is made to the Transfer Pricing Officer u/s 92CA, the period of limitation as given above will be extended by a period of twelve months.

(d) In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153B(3) shall be excluded.

18. PAYMENT OF TAXES AND INTEREST:

18.1 ADVANCE TAX PAYMENT – SECTION 211: (i) The provisions of Section 211 have been amended from 1.6.2016. Now, all non-corporate assesses, who are liable to pay advance tax, will have to pay such tax in 4 installments as applicable to corporate assesses instead of 3 installments. The installments for advance tax payment are as follows:

(i) Eligible assesses referred to in section 44AD opting for computation of profits and gains of business on presumptive basis are required to pay the entire advance tax in one installment on or before 15th March of the financial year. No similar exception has been given for eligible professionals covered under presumptive taxation u/s 44ADA.

(ii) The provisions of section 234C in respect of interest payable for deferment of advance tax have been amended to bring them in line with the provisions of section 211 of the Act. Interest u/s 234C will be levied at 1% p.m. for 3 months on shortfall of advance tax paid as compared with the amount payable as per the above installments in case of all assesses (except the eligible assesses u/s 44AD). However, no interest will be levied if the advance tax paid is more than 12% (For 15th June instalment) and more than 36% (For 15th September instalment).

(iii) A new exception is now provided that interest u/s 234C will not be levied in case of assesses having income chargeable under the head ‘profits and Gains of business or Profession’ for the first time. These assesses will be required to pay the whole amount of tax payable in the remaining installments of advance tax which are due after they commence business or by 31st March of the financial year if no installments are due.

18.2 INTEREST ON REFUNDS – SECTION 244A:

(i) Section 244A granting interest on refunds to assesses has been amended w.e.f. 1.6.2016 to provide that in case where the return of income is filed after the due date as per section 139(1), then interest on refund out of TDS, TCS and advancetax will be granted only from the date of filing the return and not from 1st April of the assessment year.

(ii) It is further provided that an assessee will be entitled to interest on refund of self-assessment tax paid u/s 140A of the Act from the date of payment to tax or date of filing the return, whichever is later up to the date on which the refund is granted.

(iii) It is also provided that an assessee will be entitled to additional interest on refund arising on giving effect to an appellate / revisionary order which has been passed beyond a time limit of 3 months from the end of the month of receipt of the appellate / revisionary order by the Commissioner. It is further clarified that if an extension is granted by the Principal Commissioner / Commissioner for giving effect to the appellate/ revisionary order, then the additional interest will be granted from the expiry of the extended period. The Principal Commissioner / Commissioner may extend the period for giving effect to the appellate / revisionary order up to 6 months. The additional interest on such refunds will be calculated at the rate of 3% p.a. from the date following the date of expiry of the specified time limit upto the date of granting the refund. Effectively, the assessee will be entitled to interest in such cases at the rate of 9% p.a. against the normal rate of 6% p.a for delay in giving effect to an appellate order beyond the specified time limit.

18.3 RECOMMENDATION OF JUSTICE R. EASHWAR COMMITTEE: It may be noted that this committee had made two recommendations as under

(i) The tax payer should be allowed automatic stay on payment of 7.5% of disputed taxes till the first appeal is decided. In cases of High-Pitched assessments, it may be difficult for the assessee to pay even 7.5% of the disputed demand. In such cases he can approach the CIT(A) and request stay of the entire demand. No such amendment is made in the Act. However, CBDT has modified the Instruction No. 1914 of 21.3.1996 on 29.2.2016 directing assessing officers to grant stay till the disposed of first appeal on payment of 15% of disputed tax subject to certain conditions.

(ii) As regards interest on delayed refunds the committee has suggested that section 244A may be amended to provide that interest of 1% P.M. should be paid if the refund is delayed up to 3 months and interest at 1.5% P.M. should be paid if the delay is more than 3 months. It will be noticed that this recommendation is only partly accepted while amending section 244A.

19. APPEALS AND REVISION:

19.1 APPEAL BY DEPARTMENT – SECTION 253(2A): Section 253(2A) has been amended from 1.6.2016. Now, it will not be possible for the Department to file appeal before ITA Tribunal against the order passed pursuant to the directions of Dispute Resolution panel (DRP).

19.2 RECTIFICATION OF ORDER OF ITA TRIBUNA L – SECTION 254: At present the ITA Tribunal can rectify any mistake in its order which is apparent from the records within 4 years of the date of the order. This period is now reduced to 6 months from the end of the month in which the order is passed. This amendment is effective from 1.6.2016. Although it is not clarified in the Finance Act, 2016, it is presumed that this amendment will apply to orders passed on or after 1.6.2016.

19.3 SINGLE MEMBER CASES – SECTION 255(3): This section is amended from 1.6.2016 to provide that a Single Member Bench of ITA Tribunal may dispose of any case where assessed income does not exceed Rs. 50 Lacs. At present, this limit is Rs. 15 Lakh which has now been increased to Rs. 50 Lakh.

20. DISPUTED TAX SETTLEMENT SCHEME – SECTIONS 197 TO 208 OF THE FINANCE ACT, 2016:

20.1 The Finance Minister has, in his Budget speech on 29th February 2016, stated that the tax litigation in our country is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the tax payer and administrative cost of the Government. He has also stated that there are over 3 Lac tax cases pending with the commissioner of Income tax (Appeals) with disputed amount of tax of about 5.5 Lac Crores. In order to reduce these appeals before the first appellate authority he has announced a new scheme called “ Dispute Resolution Scheme -2016” Two separate Schemes are announced in this Budget, one for settlement of disputed taxes under Income tax and wealth tax Act and the other for disputed taxes under Indirect Tax Laws.

20.2 In chapter X of the Finance Act, 2016, (Act), Sections 201 to 211 Provide for “The Direct Tax Dispute Resolution Scheme – 2016”. Similarly, Chapter XI (Sections 212 to 218) of the Act provides for “The Indirect Tax Dispute Resolution Scheme – 2016”.

20.3 THE SCHEME:

(i) The Direct Tax Dispute Resolution Scheme 2016 (Scheme) will come into force on 1st June, 2016. This scheme will enable all assesses whose assessments under the Income tax Act or the wealth tax have been completed for any assessment year and whose appeals are pending before the Commissioners of Income tax (Appeals) as on 29.2.2016 to settle the tax dispute. The scheme also applies to those assesses in whose case any disputed additions are made as a result of retrospective amendments made in the Income tax or wealth tax Act and whose appeals are pending before the CIT(A), ITA Tribunal, High Court, Supreme Court or before any other authority.

(ii) Section 202 of the Finance Act provides that the assessee who wants to settle the tax dispute pending before the concerned appellate authority as on 29.02.2016, can make a declaration in the prescribed Form on or after 01.06.2016 but before the date to be notified by the Central Government. In the case of an assessee in whose case the assessment or reassessment is made in the normal course and not due to any retrospective amendment, and the appeal is pending before CIT (A) as on 29.02.2016, the tax dispute can be settled as under:-

(a) If the disputed tax does not exceed `10 Lacs for the relevant assessment year, the assessee can settle the same on payment of such tax and interest due upto the date of assessment or reassessment.

(b) If the disputed tax exceeds ` 10 Lacs for the relevant assessment year, the dispute can be settled on payment of such tax with 25% of minimum penalty leviable and interest upto the date of assessment or reassessment. It is difficult to understand why minimum penalty is required to be paid when the disputed addition may not be for concealment or inaccurate furnishing of particulars of income.

(c) In the case of appeal against the levy of penalty, the assessee can settle the dispute by payment of 25% of minimum penalty leviable on the income as finally determined.

(iii) In a case where the disputed tax demand relates to addition made in the assessment or reassessment order made as a result of any retrospective amendment in the Income tax or wealth tax Act, the dispute can be settled at the level of any appellate proceedings (i.e. CIT(A), ITA Tribunal, High Court etc.) by payment of disputed tax. No interest or penalty will be payable in such a case.

20.4 PROCEDURE FOR DECLARATION:

(i) The declaration for settlement of disputed tax for which appeal is pending before CIT(A) is to be filed in the prescribed form with the particulars as may be prescribed to the Designated Authority. The Principal Commissioner will notify the Designated Authority who shall not be below the rank of commissioner of Income tax. Once this declaration is filed for settlement of a tax dispute for a particular year, the appeal pending before the CIT (A) for that year will be treated as withdrawn.

(ii) In the case where the tax dispute is in respect of any addition made as a result of retrospective amendment, the assessee can file the declaration in the prescribed form with the designated authority. The assessee will have to withdraw the pending appeal for that year before CIT (A), ITA Tribunal, High Court, Supreme Court or other Authority after obtaining leave of the Court or Authority whereever required. If any proceedings for the disputed tax are initiated for arbitration, conciliation or mediation or under an agreement entered into by India with any other country for protection of Investment or otherwise, the assessee will have to withdraw the same. Proof of withdrawal of such appeal or such other proceedings will have to be furnished by the assessee with the declaration. Further, the declarant will have to furnish an undertaking in the prescribed form waiving his right to seek or pursue any remedy or any claim for the disputed tax under any agreement.

(iii) It is also provided that if (a) any material particulars furnished by the declarant are found to be false at any stage, (b) the declarant violates any of the conditions of the scheme or (c) the declarant acts in a manner which is not in accordance with the undertaking given by him as stated above, the declaration made under the scheme will be considered as void. In this event all proceedings including appeals, will be deemed to be revived.

20.5 PAYMENT OF DISPUTED TAX:

(i) On receipt of the declaration from the assessee the Designated Authority will determine the amount payable by the declarant under the scheme within 60 days. He will have to issue a certificate in the prescribed form giving particulars of tax, interest, penalty etc., payable by the Declarant.

(ii) The Declarant will have to pay the amount determined by the Designated Authority within 30 days of the receipt of the Certificate. He will have to send the intimation about the payment and produce proof of payment of the above amount. Upon receipt of this intimation and proof of payment, the Designated Authority will have to pass an order that the declarant has paid the disputed tax under the scheme. Once this order is passed it will be conclusive about the settlement of disputed tax and such matter cannot be re-opened in any proceedings under the Income tax or Wealth tax Act or under any other law or agreement.

(iii) Once this order is passed, the Designated Authority shall grant immunity to the declarant as under:

(a) Immunity from instituting any proceedings for offence under the Income tax or Wealth tax Act.

(b) Immunity from imposition or waiver of any penalty or interest under the income tax or wealth tax Act. In other words, the difference between interest or penalty chargeable under the normal provisions of the Income tax or wealth tax Act and the interest or penalty charged under the scheme cannot be recovered from the declarant.

It is also provided that any amount of tax, interest or penalty paid under the Scheme will not be refundable under any circumstances.

20.6 WHO CAN MAKE A DECLARATION:

(i) Section 208 of the Finance Act provides that in the following cases declaration under the Scheme for settlement of disputed taxes cannot be made.

(a) In relation to assessment year for which assessment or reassessment under Section 153A or 153C of the Income tax Act or Section 37A or 37B of the Wealth tax Act is made.

(b) In relation to assessment year for which assessment or reassessment has been made after a survey has been conducted under section 133A of the Income tax Act or 38A of the Wealth tax Act and the disputed tax has a bearing on findings in such survey.

(c) In relation to assessment year in respect of which prosecution has been instituted on or before the date of making the declaration under the scheme.

(d) If the disputed tax relates to undisclosed income from any source located outside India or undisclosed asset located outside India.

(e) In relation to assessment year where assessment or reassessment is made on the basis of information received by the Government under the Agreements under section 90 or 90A of the Income tax Act.

(f) Declaration cannot be made by following persons.

• If an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

• If prosecution has been initiated under the Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985. The Prevention of Corruption Act, 1988 or for purposes of enforcement of any civil liability.

(g) Declaration cannot be made by a person who is notified u/s. 3 of the Special Court (Trial or Offences Relating to Transactions in Securities) Act, 1992.

20.7 GENERAL:

(i) The Act authorizes the Central Government to issue directions or orders to the authorities for the proper administration of the scheme. The Act also provides that if any difficulty arises in giving effect to any of the provisions of the scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after expiry of 2 years i.e after 31.5.2018. Central Government is also authorized to notify the Rules for carrying out the provisions of the scheme and also prescribe the Forms for making Declaration, for certificate to be granted by the Designated Authority and for such other matters for which the rules are required to be made under the scheme.

(ii) In 1998 similar attempt was made to reduce tax litigation through “Kar Vivad Samadhan Scheme” which was introduced by the Finance (No:2) Act, 1998. This year, similar attempt is made to reduce tax litigation through this Scheme. One objection that can be raised is with regard to levy of penalty when the disputed tax is more than Rs.10 Lakh. There is no logic in levying such a penalty. Even if the assessee is not successful in the appeal before CIT(A), his liability will be for payment of disputed tax and interest. Penalty is not automatic. The disputed addition or disallowance may be due to interpretation of some provision in the tax law for which no penalty is leviable. Therefore, in case where disputed tax is more than Rs.10 Lakh, the assessee will not like to take benefit of the scheme and to that extent litigation will not be reduced.

(iii) As stated earlier, section 202 of the Finance Act provides that declaration can be filed for settlement of disputed taxes only in respect of an appeal pending before CIT (A). There is no reason for restricting this benefit to appeal pending before the first appellate authority. This scheme should have been made applicable to appeals filed by the assessee before ITA Tribunal, High Court or the Supreme Court which are pending on 29.02.2016. If this provision had been extended to all such appeals, pending litigation before all such judicial authorities would have been reduced.

(iv) The provision in section 202 of the Finance Act relating to settlement of disputed taxes levied due to retrospective amendment in the Income tax and Wealth tax Act is very fair and reasonable. In such cases only tax is payable and no interest or penalty is payable. This provision is made with a view to settle the disputed taxes levied due to retrospective amendment made in section 9 by the Finance Act, 2012. This related to taxation as a result of acquisition of interest by a Non-Resident in a company owning assets in India. (Cases like VODAFONE, CAIRN and others). However, there are some other sections such as sections 14A, 37, 40 etc., where retrospective amendments have been made. It appears that it will be possible to take advantage of the scheme if appeals on these issues are pending before any Appellate Authority or Court as on 29.2.2016.

(v) It may be noted that last year the CBDT had made one attempt to reduce the tax litigation by issue of Circular No. 21/2015 dated 10/12/2015 whereby appeals filed by the Income tax Department where disputed taxes were below certain level were withdrawn with retrospective effect. This year the Government has issued this scheme whereby assesses can settle the demand for disputed taxes and thus reduce the tax litigation.

21. PENALTIES AND PROSECUTION:

21.1 Sections 98 to 110 of the Finance Act, 2016, make major amendments in Penalty provisions under the Income tax Act. In Para 166 of his Budget Speech the Finance Minister has explained the new Scheme for levy of penalty.

21.2 EXISTING PENALTY PROVISIONS FOR CONCEALMENT .

(i) At present, Section 271 of the Income tax Act (Act) provides for levy of penalty for concealment of income or for furnishing inaccurate particulars of income at the rate of 100% of tax which may extend to 300%. The Assessing Officer (AO) has discretion in the matter of levy of penalty. There are 8 Explanations in the Section to explain the circumstances under which a particular income will be considered as concealment of income or when the assessee will be deemed to have furnished inaccurate particulars of Income. Various clauses of this section have been considered and interpreted by the various High Courts and the Supreme Court in various judgements. The law relating to levy of penalty appeared to be more or less settled by now. How far these judgements will apply to the new Scheme for levy of penalty will depend on the manner in which officers administer the new provisions.

(ii) Recently, Income tax Simplification Committee (Justice Eashwar Committee) has submitted its Report. In para 26.1 of its Report the committee has considered the provisions of sections 271 and 273B and made certain suggestions. These suggestions have been made with a view to reduce tax litigation. If we consider the amendments made by the Finance Act, 2016, it will become evident that these suggestions are only partly implemented.

21.3 NEW SECTION 270A (UNDER REPORTING OF INCOME)

(i) It is now provided that existing Section 271 shall apply upto Assessment Year 2016-17. For A.Y. 2017-18 and onwards new sections 270A and 270AA have been added. The provisions of these sections are as under.

(ii) Section 270A authorizes an Assessing Officer, CIT (A), Commissioner or Principal Commissioner to levy penalty at the rate of 50% of tax in case where the assessee has “Under Reported” his income. In cases where the assessee has “Misreported” his income the penalty of 200% of tax will be levied. It may be noted that u/s 271, although the minimum penalty was 100% of tax and maximum penalty was 300% of tax, in most of the cases only minimum penalty of 100% was levied.

(iii) Section 270A(2) provides that the assessee will be considered to have “Under Reported” his income (a) If Income assessed is greater than income determined under section 143(1) (a) i.e Income as per Return of Income, or if Income assessed is greater than the maximum amount not chargeable to tax, if Return of Income is not filed by the assessee, (b) If Income assessed or deemed book profit u/s 115JB/115JC is greater than the income assessed or reassessed immediately before such assessment, (c) If Book Profit assessed u/s 115JB / 115 JC is greater than Book Profit determined u/s 143(1)(a) or Book Profit assessed u/s 115JB/115JC, if no return of income is filed by the assessee or (d) If Income assessed or reassessed has the effect of reducing loss declared or such loss is converted into income.

(iv) In all the above cases the difference between the income assessed or reassessed and the income computed u/s 143(1)(a) will be considered as Under Reported income and penalty at 50% of tax will be levied. If the loss declared by the assessee is reduced or converted into income the difference will be liable to penalty @ 50% of tax. The concept of income concealed or furnishing of inaccurate particulars of income, which existed u/s 271, is now given up under the new section 270A.

(v) In a case where Section 115JB / 115JC is applicable the amount of Under Reported income will be worked out by applying the formula given in the section. This can be explained by the following illustration.

In the above case Under Reported Income u/s 270A will be Rs. 3,00,000/- (Rs. 2,00,000+ Rs.1,00,000/-)

(vi) Section 270A(4) provides that where any addition was made in the computation of total income in any earlier year and no penalty was levied on such addition in that year, and the assessee contends that any receipt, deposit or investment made in a subsequent year has come out of such addition made in earlier year, the assessing officer can consider such receipt, deposit or investment as under reported income. This provision is on the same lines as existing Explanation (2) of Section 271.

(vii) Section 270A (6) provides that no penalty will be levied in respect of any Under Reported Income where (a) the assessee offers an explanation and the Income tax Authority is satisfied that the explanation is bona fide and all material facts have been disclosed, (b) Such Under Reported income is determined on the basis of an estimate, if the accounts are correct and complete but the method employed is such that the income cannot be properly deduced there from (c) The addition is on the basis of estimate and the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance, (d) Addition is made under Transfer pricing provisions but the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X and disclosed all material facts relating to the transaction or (e) The undisclosed income is on account of a search operation and penalty is leviable under section 271 AAB.

21.4 NEW SECTION 270A (MISREPORTIN G OF INCOME):

(i) A s stated earlier, the penalty on Unreported Income in consequence of Misreporting of Income will be 200% of the tax on such Misreported Income. Section 270A (9) provides that the assessee will be considered to have Misreported his income due to (a) Misrepresentation or suppression of facts (b) Failure to record investments in the books of account (c) Claim of expenditure not substantiated by any evidence (d) Recording of any false entry in the books of account, (e) Failure to record any receipt in books of account having a bearing on total income or (f) Failure to report any International transaction or any transaction deemed to be an International transaction or any specified domestic transaction, to which provisions of Chapter X apply.

(ii) It may be noted that disputes may arise due to the wording of the above clauses in Section 270A(9). Clause (b) refers to Investments not recorded in books of account. In the case of an Individual or HUF it may so happen that certain genuine Investments may have been debited to personal Capital Account and may not appear separately in the books of account. If the assessee is declaring income from such Investments regularly, there is no reason to consider cost of Investments not recorded in books as Misreporting of Income. If the income from such Investment is declared, there is no Under Reporting much less Misreporting of Income. Moreover, when the Investment is debited to Capital Account it cannot be said that the same is not recorded in the books.

(iii) Similarly, clause (c) above states that expenditure claimed for which there is no evidence will be treated as Misreporting of Income. It is not clear as to what will be considered as an adequate evidence for this purpose. Disputes will arise on the question about adequacy of the evidence for this purpose.

(iv) Section 270A (10) provides that for the purpose of levy of penalty as a result of Under Reporting or Misreporting of income amount of tax on such income will be calculated on notional basis according to the Formula given in that Section.

(v) It is pertinent to note that there is no provision similar to Section 270A(6), as discussed in Para 21.3 (vii) above, whereby the assessee can offer an explanation about his bona fides for omission to disclose any amount of income which the tax authority wants to consider as Misreporting of Income . In other words, before the A.O. comes to the conclusion that there is misreporting of income on any of the grounds stated in Para (i) above, there is no provision to give an opportunity to the assessee to offer explanation as provided in section 270A(6). The assesses will have to litigate on such matters as absence of such a provision is against principles of the natural justice.

21.5 IMMUNITY FROM PENALTY AND PROSECUTION (SECTION 270AA ):

(i) New Section 270AA has been inserted in the Income tax Act w.e.f. assessment year 2017-18 to grant immunity from imposition of penalty and initiation of prosecution in certain circumstances. Under this section an assessee can make an application to the A.O. to grant immunity from imposition of penalty under Section 270A and initiation of prosecution proceedings under Section 276C. or 276CC. For this purpose the following conditions will have to be complied with by the assessee:-

(a) Tax and Interest payable as per the assessment order u/s 143(3) or reassessment order u/s 147 should be paid before the period specified in the Notice of Demand.

(b) No Appeal against the above order should be filed before CIT(A).

(c) The application for immunity should be filed within one month of the end of the month in which the above assessment order is received. This application is to be made in the prescribed form.

(ii) It may be noted that the power to grant immunity under this section is given to the AO only with reference to penalty leviable u/s 270A (7) @ 50% of Tax for Under Reporting of Income. If the addition or disallowance is made in the assessment or reassessment order on the ground of Misreporting of Income as explained u/s 270A(9) and where penalty is @ 200% of Tax, no such immunity u/s 270AA can be granted. To this extent this provision in section 270AA is very unfair.

(iii) After the A.O. receives the application for grant of immunity, he will have to pass an order accepting or rejecting the application within one month from the end of the month when such application is received. If he accepts the application, no penalty u/s 270A will be levied and no prosecution u/s 276C or 276CC will be initiated. If the A.O. wants to reject the application he will have to give an opportunity to the assessee of being heard. If the A.O. rejects the application, the assessee can file an appeal before CIT(A) against the assessment / reassessment order. For this purpose the time taken for making the application to the AO and the time taken by A.O. in passing the order for rejection of the application will be excluded in computing the period of limitation u/s 249 for filing appeal to CIT(A).

(iv) The order passed by the A.O. accepting or rejecting the application shall be treated as final. If the A.O. has accepted the application by his order u/s 270AA(4), no appeal before CIT(A) or revision application before CIT can be filed against the assessment or reassessment order.

(v) It may be noted that the A.O. is given discretion to accept or reject the application. This appears to be an absolute power given to the same officer who has passed the assessment order. There are no guidelines as to when the application can be rejected. There is no provision for appeal against the order rejecting the application for immunity. To this extent this provision is unfair.

(vi) As stated in (ii) above the above application for immunity can be filed only in respect of additions / disallowances made due to Under Reporting of Income where penalty is of 50% of Tax. No such application can be made if the additions/ disallowances are for Misreporting of Income where penalty is of 200% of Tax. There is no clarity in Section 270AA about a situation where in any assessment / reassessment order some additions / disallowances are for Under Reporting of Income and some additions / disallowances are for Misreporting of Income. Question arises whether the application for immunity u/s 270AA can be made in such a case for getting immunity. If so, whether such application will be for items added/ disallowed for Under Reported Income only and whether the assessee can file appeal to CIT(A) only with reference to items added / disallowed on the ground of Misreporting of Income. If this is the position, then a question will arise whether the assessee will have to revise the appeal petition later on in respect of addition / disallowance made for items of Under Reported Income if the application for immunity is rejected. If the intention of the Government is to reduce litigation and grant immunity from penalty and prosecution the benefit of Section 270 AA should have been given to all assessee where additions / disallowances are made for Under Reporting or Misreporting of Income.

21.6 PENALTY FOR FAILURE TO MAINTAIN INFORMATION AND DOCUMENTS (SECTION 271 AA ): This section has been amended w.e.f. A/Y: 2017-18 to provide that if the assessee fails to furnish the information and documents as required under Section 92D(4), the prescribed authority can levy penalty of Rs.5 Lakh. It may be noted that Under Section 92D(4) a constituent entity of an International Group is required to maintain certain information and documents in the prescribed manner and furnish the same to the prescribed authority before the due date as provided in that section.

21.7 PENALTY WHERE SEARCH HAS BEEN INITIATED (SECTION 271AA B):

Section 271AAB provides for levy of penalty in which search has been conducted on or after 1.7.2012. Specific rates are provided u/s 271AAB(1) (a),(b) and (c). Amendment made in this section, effective from A.Y. 2017-18, is in clause (c). Here the rate of minimum penalty is 30% and maximum penalty is 90% of the Undisclosed Income. This will now be a flat rate of 60% of Undisclosed Income from A.Y. 2017-18. Further, it is also provided that no penalty u/s 270 A shall be levied on undisclosed income where penalty u/s 271 AAB (1) is leviable.

21.8 PENALTY FOR FAILURE TO FURNISH REPORT U/S. 286 (NEW SECTION 271 GB): A new Section 286 has been added from A.Y 2017-18 providing for furnishing of report in respect of International Group. New 271 GB has been added effective from A.Y. 2017-18 to provide for penalty for non compliance of Section 286 as under.

(i) If any Reporting Entity referred to in section 286 fails to furnish report referred to in Section 286(2) before the due date, the Prescribed Authority can levy penalty at Rs.5,000/- per day if the delay in upto one month and at Rs.15,000/- per day if the failure continues beyond one month.

(ii) If any Reporting Entity fails to produce the information or documents within the period allowed u/s 286(6), the prescribed authority can levy penalty at Rs.5,000/- per every day when the default continues. If this default continues even after the above order levying penalty is passed, the prescribed authority can levy penalty at the rate of Rs.50,000/- per day if the default continues even after service of the first penalty orders.

(iii) If any Reporting Entity Knowingly furnishes inaccurate information in the Report required to be furnished u/s 286(2) the prescribed authority can levy penalty of Rs.5 Lakh.

21.9 PENALTY FOR FAILURE TO FURNISH INFORMATION, STATEMENTS ETC (SECTION 272A): Section 272 A provides for levy of penalty of Rs. 10,000/- for each failure or default to answer the questions raised by an Income tax Authority, refusal to sign any statement or failure to attend and give evidence or produce books or documents as required u/s 131(1). The scope of this section is now extended by amendment of the section from A.Y. 2017-18. It is now provided that penalty of Rs. 10,000/- for each default or failure to comply with a notice issued u/s 142(1), 143(2) or 142(2A) can be levied by the Income tax Authority.

21.10 POWER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES (SECTION 273A):

This section empowers the Principal Commissioner or the commissioner of Income tax to reduce or waive penalty levied u/s 271 of the Income tax Act. This power is extended to penalty levied u/s 270A also w.e.f. A.Y. 2017-18. Further, new subsection (4A) has been added in this section from 1/6/2016 to provide that the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application for waiver or reduction of penalty within a period of one year from the end of the month when application is made by the assessee. As regards all applications for waiver or reduction of penalty pending as on 1.6.2016, the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application on or before 31.5.2017. The Principal Commissioner or the Commissioner shall have to give hearing to the assessee before passing the above order.

21.11 POWER TO GRANT IMMUNITY FROM PENALTY BY PRINCIPAL COMMISSIONER OR COMMISSIONER (SECTION 273 AA ): This section has been amended w.e.f. 1.6.2016. As in section 273A, the Principal Commissioner or the Commissioner is now required to pass the order accepting or rejecting the application for grant of immunity from levy of penalty within one year from the end of the month in which the assessee has made the application for such immunity. As regards pending applications as on 1.6.2016, the Principal Commissioner or the Commissioner has to pass orders accepting or rejecting the application on or before 31.5.2017.

21.12 GENERAL:
(i) From the above discussion it is evident that the existing concept of levying penalty u/s 271 for concealment of income or furnishing of inaccurate particulars of income is now given up. New Section 270A, which will replace Section 271 from 1.4.2016, introduces a new concept of “Under Reporting of Income” and “Misreporting of Income”. Considering the way these two terms are explained in the new Section 270A, it appears that there will be a thin line of distinction between the two in respect some of the items of additions and disallowances. Since the penalty with respect to Under Reporting of Income is 50% and the penalty with respect of Misreporting of income is 200%, the A.O. will try to bring as many items of additions / disallowances under the head Misreporting of Income. Questions of interpretation will arise and tax litigation on this issue may increase.

(ii) As stated earlier, the recommendation of Justice Eshwar Committee has not been fully implemented while drafting the new Section 270A. The committee has specifically stated that no penalty should be levied where the A.O. takes a view which is different from the bona fide view adopted by the assessee on any issue involving the interpretation of any provision and is supported by any judicial ruling. It is unfortunate that this concept is not introduced in the new section 270A.

22. OTHER PROVISONS :

22.1 TAX ON DEEMED INCOME U/S 68 – SEC 115 BBE

Section 115 BBE is amended w.e.f. A.Y 2017-18. At present this section provides that deemed income u/s 68, 69, 69A, 69B, 69C and 69D is taxable at the rate of 30%. Further, no deduction for any expenditure or allowance relatable to such income is allowed. It is now provided that no set off of any loss shall be allowable from such deemed income u/s 68, 69, 69A to 69D.

22.2 ASSESSEE DEEMED TO BE IN DEFAULT – SECTION 220: Section 220 provides that an assessee shall be deemed to be in default if the taxes due are not paid. Interest is payable u/s 220(2) for the delay in payment of tax. If the assessee applies for waiver or reduction of interest to the Commissioner u/s 220(2A), the same can be waived or reduced. Section 220(2A) is now amended, effective from 1.6.2016, to provide that the commissioner should pass the order accepting or rejecting such application within a period of 12 months of the end of the month when application for waiver or reduction of interest is made. In respect of all pending applications, the order will have to be passed by the commissioner on or before 31.5.2017.

22.3 PROVISION TO GIVE BANK GUARANTEE – SECTION 281B:

(i) At present, the AO may provisionally attach an assessee’s property if he considers it necessary for protecting revenue’s interest during the pendency of assessment or reassessment proceedings. Section 281B is amended w.e.f. 1.6.2016.

(ii) Based on Justice Easwar Committee’s recommendation, this amendment provides that the assessee may provide bank guarantee of sufficient amount. In such a case the AO has to revoke the provisional attachment if the guarantee is for more than the fair market value of the property attached or it is sufficient to meet the revenue’s interest. The AO may refer to the Valuation Officer for valuing the property. The AO should pass an order revoking provisional attachment within 15 days from the date of receipt of the bank guarantee or within 45 days if reference is made to Valuation Officer. The AO may invoke the bank guarantee if the assessee fails to pay tax demand or if he fails to renew or furnish new bank guarantee at least 15 days prior to the expiry of the bank guarantee.

22.4 AUTHENTICATION OF NOTICE – SECTION 282A: To facilitate e-assessment, it has now been provided from 1.6.2016 that the notice and other documents issued by the department can be either in paper form or in electronic form. The detailed procedures for this purpose will be prescribed.

22.5 SECURITIES TRANSACTION TAX (STT ): Section 98 of the Finance (No.2) Act, 2004 has been amended w.e.f. 1.6.2016. The present rate of 0.017% STT on sale of option on securities, where option is not exercised, is increased to 0.05%. It is also provided that STT will not be payable on securities transactions entered into on a recognized Stock Exchange located in International Financial Service Centre.

23. THE INCOME DECLARATION SCHEME – 2016:

23.1 As stated by the Finance Minister in Para 159 to 161 of his Budget Speech, in Chapter IX (Sections 178 to 196) of the Finance Act, 2016, “The Income Declaration Scheme, 2016”, has been announced. This scheme is akin to a Voluntary Disclosure Scheme. The scheme will come into force on 1st June, 2016. The declaration for undisclosed domestic income or assets can be made in the prescribed form within 4 months i.e on or before 30th September, 2016. The tax at the rate of 30% of the disclosed income will be payable with surcharge called Krishi Kalyan Surcharge at 7.5% and penalty at 7.5%. Hence, total amount payable will be 45% of the income declared by the assessee under the scheme. This tax, surcharge and penalty will be payable within two months (i.e. on or before 30th November, 2016)

23.2 WHO CAN MAKE DECLARATION UNDER THE SCHEME:

Any Individual, HUF, AOP, BOI, Firm, LLP or company can make a declaration of undisclosed income or assets during the specified period (1.6.2016 to 30.09.2016). However, Section 193 of the Finance Act, Provides that the provisions of the Scheme shall not apply to following persons.

(i) Any person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

(ii) Any person in respect of whom prosecution has been launched for an offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act 1967 and the Prevention of Corruption Act, 1988.

(iii) Any person who is notified u/s 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

(iv) The scheme is not applicable in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

(v) Any undisclosed income chargeable to tax under the Income tax Act for any previous year relevant to Assessment Year A. Y. 2016-17 or earlier years where (a) N otice u/s 142, 143(2), 148, 153A or 153C of the Income tax Act has been issued and the assessment for that year is pending (b) Search u/s 132 or requisition u/s 132A or survey u/s 133A of the Income tax Act has been made in the previous year and notices u/s 143(2), 153A or 153 C have not been issued and the time limit for issue of such notices has not expired and (c) Information has been received by the competent authority under an agreement entered into by the Government u/s 90 or 90A of the Income tax Act in respect of such undisclosed asset.

23.3 WHICH INCOME OR ASSETS CAN BE DECLARED:

Section 180 of the Act provides that every eligible person can make declaration under the Scheme in respect of the undisclosed income earned in any year prior to 1.4.2016. For this purpose income which can be disclosed will be as under.

(i) Income for which the person has failed to furnish return of income u/s 139 of the Income tax Act.

(ii) Income which the person has failed to disclose in the return filed before 1.6.2016.

(iii) Income which has escaped assessment by reason of the failure on the part of the person to furnish return of income or to disclose fully and truly all material facts.

(iv) Where such undisclosed income is held in the form of investment in any asset, the fair market value of such asset as at 1.6.2016 shall be deemed to be the undisclosed income. For the purpose of determination of Fair Market Value of such assets, CBDT has been authorized to prescribe the Rules.

(v) No deduction for any expenditure or allowance shall be allowed against the income which is disclosed under the Scheme.

23.4 MANNER OF DECLARATION:

(i) The declaration under the Scheme is to be made in the prescribed Form. The same is to be submitted to the Principal Commissioner of Income tax or the Commissioner of Income tax who is authorized to receive the same. The declaration is to be signed by the authorized person as provided in Section 183 of the Finance Act. A person who has made a declaration under the scheme cannot make another declaration of his income or income of any other person. If such second declaration is made it will be considered as void. It is also provided that if a declaration under the scheme has been made by misrepresentation or suppression of facts, such declaration shall be treated a void.

(ii) As stated earlier, the tax (including Surcharge and penalty) of 45% of the income declared is to be paid on or before 30.11.2016. The proof of such payment will have to be filed before the due date. If this payment is not made, the declaration will be considered as void. In this case, if any tax is deposited, the same will not be refunded. If the declaration is considered as void, the amount declared by the person will be deemed to be income of the declarant and will be added to the other income of the declarant and assessed under the Income tax Act. If the declarant has paid the tax, Surcharge and penalty due as per the declaration before the due date, the income so disclosed will not be added to the income of any year. There will be no scrutiny or enquiry regarding such income under the Income tax or the Wealth tax Act.

(iii) The declarant shall not be entitled to reopen any assessment or reassessment made under the Income tax or Wealth tax Act or claim any set off or relief in any appeal, reference or other proceedings in relation to such assessment or reassessment. In other words, declaration under the scheme shall not affect the finality of completed assessments.

23.5 IMMUNITY:

(i) The scheme provides for immunity from proceedings under other Acts as under:

(a) Provisions of Benami Transactions (Prohibition) Act, 1988, shall not apply in respect of the assets declared even if such assets exist in the name of ‘Binamidar’.

(b) No Wealth tax shall be payable under the Wealth tax Act in respect of any undisclosed cash, Bank Deposits, bullion, jewellery, investments or any other asset declared under the scheme.

(c) No prosecution will be launched against the declarant under the Scheme in respect of any income/asset declared under the Income tax or Wealth tax Act.

(iii) It is also provided that nothing contained in the declaration made under the Scheme shall be admissible as evidence against the declarant under any other law for the purpose of any proceedings relating to imposition of penalty or for the purposes of prosecution under the Income tax or Wealth tax Act.

(iv) It may be noted that no immunity is provided in the scheme from proceedings under the Foreign Exchange Management Act, Money Laundering Act, Indian Penal Code or any other Act.

23.6 GENERAL:

(i) Section 195 of the Finance Act provides that if any difficulty arises in giving effect to the provisions of the Scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after the expiry of 2 years i.e. after 31.5.2018. Section 196 of the Finance Act authorizes the Government to notify the Rules for carrying out the provisions of the scheme and also prescribe the Form for making the declaration under the scheme.

(ii) Last year an Amnesty Scheme under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, was announced. Under this Scheme it is reported that 644 persons declared income of about Rs.4,164 crore, and paid tax of about Rs.2,428.40 crore.

(iii) In the Finance Act, 2016 in order to give one time opportunity to persons to declare undisclosed domestic income and assets this disclosure scheme has been announced. It appears that under this Scheme the declarant will have to disclose income and specify the year in which it was earned. Further, there is a provision in the scheme that any person in whose case notice u/s 142(1), 143(2), 148, 153A or 153C is issued for any year, and assessment is pending, such person cannot declare undisclosed income of that year. This will be a great impediment in the success of the scheme. It appears that the scheme is announced by the Government with all good intentions. It will be advisable for the persons who have not complied with the provisions of the Income tax Act or the Wealth tax Act to come forward and take advantage of the scheme and buy peace.

24. TO SUM UP:

24.1 The Finance Minister has taken some steps towards his declared objective of granting relief to small tax payers, granting incentives for promotion of affordable housing, reducing tax litigation, affording onetime opportunity to declare undisclosed domestic income and assets etc. In some of the areas the efforts are half hearted and the assessees may not get full advantage from the provisions made in the Financial Act.

24.2 Justice Easwar Committee appointed to make recommendations for simplification of Income tax provisions has submitted its report. Some of the amendments made in the Income tax Act are based on these recommendations. It is rather unfortunate that these recommendations are only partly implemented in this Budget.

24.3 Last year the Government made an attempt to address the issue relating to undisclosed income and assets in Foreign Countries. A “Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015” was passed. This year the Finance Act contains “The Income Declaration Scheme, 2016”. Under this Scheme one time opportunity is given to those persons who have not declared their domestic income or assets in the past. 45% tax (including surcharge and penalty) is payable on such undisclosed income. There are some conditions in the scheme which may be difficult to comply with. CBDT has issued some clarifications on various issues. It is reported that the last year’s scheme for declaration of undisclosed Foreign Income and Assets did not get adequate response. Let us hope that the scheme announced this year for declaration of undisclosed domestic income and assets gets adequate response.

24.4 Another step taken by the Finance Minister relates to reduction in tax litigation. For this purpose “Dispute Resolution Scheme – 2016” has been announced. This scheme is similar to “Kar Vivad Samadhen Scheme”, which was introduced in 1998. This scheme is limited to settlement of tax disputes pending on 29.2.2016 before CIT (A). It does not cover tax disputes before ITA Tribunal, High Court or the Supreme Court. Here also the provision for payment of notional penalty @ 25% where disputed tax exceeds Rs. 10 Lakh will be an impediment in the success of the scheme. This Scheme covers Settlement of tax disputes due to retrospective amendments made in the Income tax Act. For such cases tax disputes pending before any appellate authority can be settled on payment of only disputed tax. Interest and penalty will be waived. It will be possible for assessees to settle tax disputes relating to retrospective amendments made in section 9, 14A, 37, 40, etc.

24.5 The introduction of a new chapter XII – EB (Section 115 TD to 115 TF) effective from 1.6.2016 to levy ‘Exit Tax’ on Charitable Trusts is a big blow on Charitable Trusts. In our country Charitable Trusts are working to supplement the work of the Government in the field of education, medical relief, eradication of poverty, relief during calamities such as drought, earthquake etc. For this reason, exemption is given to such charitable trusts: In recent years it is noticed that the provisions relating to the exemption to such trusts are being made more complicated. The attempt of the tax administration is to see how best this benefit to charitable trusts is denied. By levy of “Exit Tax” on cancellation of registration u/s 12AA is one such step. It is the general experience of such trusts that section 12AA Registration is being cancelled on some technical grounds and the trusts have to litigate on this issue. If, ‘Exit Tax’ is levied on cancellation of Registration u/s 12AA, the trustees of such trusts will be put to great hardship.

24.6 Another major amendment made this year is about change in the concept for levy of penalty. The concept of concealment of Income or furnishing of inaccurate particulars of income for levy of penalty is now given up. Now, penalty will be leviable if there is a difference between the assessed income and declared income. Such difference will be divided into two parts viz. “Under Reporting” and “Misreporting” of income. There is a thin line of distinction between the two. This new concept will invite litigation about interpretation whether there is “Under Reporting” where penalty is 50% of tax or “Misreporting” where penalty is 200% of tax. The old concept of concealment or furnishing of inaccurate particulars of income for levy of penalty has been interpreted in several judgments of the High Courts and the Supreme Court in last more than 6 decades. The law on the subject was well settled. This new concept of “Under Reporting” and “Misreporting” introduced this year will unsettle the settled law and assessees will have to face fresh litigation.

24.7 Welcome provision introduced this year on the recommendation of Justice Easwar Committee relates to extension of concept of presumptive taxation in cases of small professionals earning gross receipts not exceeding Rs. 50 Lakh. They will not be required to maintain accounts if they offer 50% of Gross Receipts as their income. Justice Easwar Committee had suggested limit of gross receipts at Rs. 1 Crore and presumptive income at 33 1/3%. This suggestion is only partly implemented. This provision will go a long way in resolving tax disputes in cases of small professionals.

24.8 Taking an overall view of the amendments made this year in the Income tax Act, one can compliment the Finance Minister for his sympathetic approach to the tax payers. Some of the amendments are really tax payer friendly as they grant relief to small tax payers. He has taken measures to promote affordable housing and to boost growth and employment generation.

24.9 While concluding his Budget Speech he has observed in Para 188 and 189 as under:

“188. This Budget is being presented amidst global and domestic headwinds. There are several challenges. We see them as opportunities. I have outlined the agenda of our Government to “Transform India” for the benefit of the farmers, the poor and the vulnerable.

“189. It is said that “Champions are made from something they have deep inside of them – a desire, a dream, a vision. We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor, and the vulnerable; we have a dream to see a more prosperous India, and vision to “Transform India”.

Let us hope he is able to achieve his goal with the cooperation of all citizens of the country.

Advance Tax – Interest – Under the provisions of section 234B, the moment an assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by such an assessee is less than 90 per cent of the assessed tax, the assessee becomes liable to pay simple interest at the rate of one per cent for every month or part of the month – Form No.ITNS150 which is a form for determination of tax payable including interest is to be treated as a part of the assessment order.

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CIT vs. Bhagat Construction Co. Pvt. Ltd.. [2016] 383 ITR 9 (SC)

The
Supreme Court noted that on the facts of the case, it was an admitted
position that the assessment order dated March 29, 1995 of the Assistant
Commissioner of Income –Tax , New Delhi, did not not contain any
direction for the payment of interest. The appellate order merely stated
that interest was payable u/s. 234B of the Income-tax Act, 1961. In the
first round, before the Income-tax Appellate Tribunal, the Income-tax
Appellate Tribunal’s attention was not drawn to the payment of interest
at all.

On an application made, the Income-tax Appellate
Tribunal by its order dated November 12, 2002, specifically held that
since no direction had actually been given in the assessment order for
payment of interest, the assessee’s case would be covered by the
decision of the Supreme Court reported in CIT vs. Ranchi Club Ltd.
[2001] 247 ITR 209 (SC).

In an appeal to the High Court of Delhi
u/s. 260A of the Act, the impugned judgment dated July 23, 2003 merely
reiterated that the issue involved in the appeal had been decided by the
judgment in CIT vs. Ranchi Club Ltd. [2001] 247 ITR 209 (SC) referred
to above.

Before the Supreme Court the Revenue relied upon the
decision in Kalyankumar Ray vs. CIT (1991) 191 ITR 634 (SC) to contend
that the interest u/s. 234B is, in any case, part of Form I.T.N.S. 150
which is not only signed by the Assessing Officer but is really part of
the assessment order itself. It was submitted that the judgment in
Ranchi Club Ltd.’s case (supra) was distinguishable inasmuch as it arose
only in a writ petition and arose in the context of best judgment
assessment whereas on the facts of the present case, there was a
shortfall of advance tax that was paid, which, therefore, led to the
automatic levy of interest u/s. 234B. In addition, it was argued that
not only was section 234B a provision which was parasitic in nature, in
that, it applied the moment there was shortfall of advance tax or income
tax payable under the Act but that it was compensatory in nature.
Countering this submission, the counsel appearing for the respondent
assessee, supported the judgment of the Income-tax Appellate Tribunal
and the High Court by stating that the judgment in Ranchi Club Ltd.’s
case (supra) squarely covered the facts of this case.

According
to the Supreme Court, there was no need to go into the various
submissions made by Revenue as the appeal could be disposed of on a
short ground. The Supreme Court noted that In a three-judges Bench
decision, viz., Kalyankumar Ray v. CIT (supra) it took note of a similar
submission made by the assessee in that case and repelled it as
follows:

“In this context, one may take notice of the fact that
initially, rule 15(2) of the Income-tax Rules prescribed Form 8, a sheet
containing the computation of the tax, though there was no form
prescribed for the assessment of the income. This sub-rule was dropped
in 1964. Thereafter, the matter had been governed by Departmental
instructions. Under these, two forms are in vogue. One is the form of,
what is described as, the ‘assessment order’, (I.T. 30 or I.T. N.S. 65).
The other is what is described the ‘Income Tax Computation Form’ or
‘Form for Assessment or Tax/Refund’ (I.T.N.S. 150). The practice is that
after the ‘assessment order’ is made by the Income-tax Officer, the tax
is calculated and the necessary columns of I.T.N.S. 150 are filled up
showing the net amount payable in respect of the assessment year. This
form is generally prepared by the staff but is checked and signed or
initialed by the Income-tax Officer and the notice of demand follows
thereafter. The statute does not in terms require the service of the
assessment order or the other form on the assessee and contemplates only
the service of a notice of demand. It seems that while the ‘assessment
order’ used to be generally sent to the assessee, the other form was
retained on file and a copy occasionally sent to the assessee. I.T.N.S.
150 is also a form for determination of tax payable and when it is
signed or initialed by the Income-tax Officer it is certainly an order
in writing by the Income-tax Officer determining the tax payable within
the meaning of section 143(3). It may be, as stated in CIT vs. Himalaya
Drug Co. [1982] 135 ITR 368 (All), is only a tax calculation form for
Departmental purposes as it also contains columns and code numbers to
facilitate computerization of the particulars contained therein for
statistical purposes but this does not detract from its being considered
as an order in writing determining the sum payable by the assessee. We
are unable to see why this document, which is also in writing and which
has received the imprimatur of the Income-tax Officer should not be
treated as part of the assessment order in the wider sense in which the
expression has to be understood in the context of section 143(3). There
is no dispute in the present case that the Income-tax Officer has signed
the form I.T.N.S. 150. We therefore, think that the statutory provision
has been duly complied with and that the assessment order was not in
any manner vitiated.”

The Supreme Court also noted that its judgment in the Ranchi Club Ltd.’s case (supra) was a one line order which merely stated:

“We
have heard learned counsel for the appellant. We find no merit in the
appeals. The civil appeals are dismissed. No order as to costs”.

The
Supreme Court observed that the High Court judgment which was affirmed
by it as aforesaid arose in the context of a challenge to the vires of
sections 234A and 234B of the Act. After repelling the challenge to the
vires of the two sections, the High Court found that interest had been
levied on tax payable after assessment and not on the tax as per the
return. Following this court’s judgment in J.K. Synthetics Ltd. vs.
Commercial Taxes Officer [1994] 94 STC 422 (SC), the High Court had held
that the assessee was not supposed to pay interest on the amount of tax
which may be assessed in a regular assessment u/s. 143(3) or best
judgment under section 144 as he was not supposed to know or anticipate
that his return of income would not be accepted. The High Court further
held that interest was payable in future only after the dues were
finally determined.

The Supreme Court further observed that
under the provisions of section 234B, the moment an assessee who is
liable to pay advance tax has failed to pay such tax or where the
advance tax paid by such an assessee is less than 90 per cent of the
assessed tax, the assessee becomes liable to pay simple interest at the
rate of one per cent for every month or part of the month.

The
Supreme Court therefore held that the counsel for the Revenue was right
in stating that levy of such interest was automatic when the conditions
of section 234B were met.

According to the Supreme Court, the
facts of the present case were squarely covered by the decision
contained in Kalyankumar Ray’s case (supra) inasmuch as it was
undisputed that Form I.T.N.S. 150 contained a calculation of interest
payable on the tax assessed. This being the case, it was clear that as
per the said judgment this Form must be treated as part of the
assessment order in the wider sense in which the expression had to be
understood in the context of section 143, which was referred to in
Explanation 1 to section 234B.

This being the case, the Supreme Court set aside the judgment of the High Court and allowed the appeal of the Revenue.