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India Cements Ltd. vs. CEST & Customs – [2015] 56 taxmann.com 25 (Madras)

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MS Rod, Sheet, MS Channel, MS Plate, Flat etc. used for fabrication of structurals to support various machines like crusher, kiln, hoopers etc. and without which the machinery could not be erected and would not function are eligible for capital goods credit as ‘components, parts and accessories’.

Facts:
The Appellant, manufacturer of cement availed CENVAT credit in respect on MS Rod, Sheet, MS Channel, MS Plate, Flat etc. on the ground that, they are components, parts and accessories of the machineries and equipments. The Department denied the credit alleging that these are not capital goods, as they did not fall under any of the chapters or headings of the tariff mentioned in the definition of capital goods in Rule 2(a)(A) of the CENVAT Credit Rules, 2004. It was also contended that the goods were used for construction of plant and the term “plant” is not defined as capital goods in the Cenvat Credit Rules, 2004. Tribunal dismissed the appeal filed by the appellant relying upon decision of Larger Bench in the case of Vandana Global.

Held:
The High Court observed that it is not in dispute that the impugned goods were used for fabrication of structurals to support various machines like crusher, kiln, hoopers etc. and that without these structurals, the machinery could not be erected and would not function. It also observed that the decision of Apex Court in the case of Rajasthan Spg. And Wvg. Mills Ltd. would be squarely applicable to present case. The High court noted that decision of Saraswati Sugar Mills relied by the department has been distinguished by Madras High Court in assessee’s own case [The Commissioner of Central Excise vs. India Cements Ltd. – [C.M.A.No.1265 of 2014, dated 10-7- 2014]. In the absence of any change in the circumstances and issue remaining the same following the principles laid down in the decision Rajasthan Spg. & Wvg. Mills Ltd. (supra) and the earlier decisions of the Court in C.M.A. No.3101 of 2005, dated 13.12.2012 and India Cements Ltd. (supra), assessee’s appeal was allowed.

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2014 (34) STR 165 (Del.) Frankfinn Aviation Services P. Ltd. vs. Asst. Commr., Designated Authority, VCES, Service Tax

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Whether pendency of “any issue” or determination before any tax authorities or Tribunal would warrant Designated Authority to reject the declaration of tax dues made pursuant to service tax VCES, Scheme 2013? Held no.

Facts:
Appellant provided vocational training for Air Hostess/ stewards, hospitality and management sector and furnished declaration under the aforesaid scheme for the period from April – December, 2012 for availing immunity from prosecution and penalty. As per the condition of the scheme, no notice or order of determination should have been received previously by a person. Appellant filed an appeal in Tribunal for the notice/order concerning the past six year period between September – February, 2012. The designated authority rejected its declaration on the premise of existence of dispute in the previous periods before the CESTAT .

It was contended that the criteria for debarring the declaration provided in proviso to section 106 had limited application. In that, the ‘issue’ covered should be identical to the subject matter of declaration. It is contended that the subject matter of controversy pending before the Tribunal pertained to its eligibility to avail the exemption notification dated 10-09-2004 meant for vocational training institutes and entirely different from the issue covered by the declaration. More so, CBEC Notification issued dated 27- 02-2010 has laid down the criterion of vocational training institutes covered under service tax net and thereby petitioner was paying service tax for the period till 31-03-2012 but later on could not deposit the tax because of some unavoidable reasons. Petitioner prayed that recourse to the Scheme was available.

Held:
The Hon’ble High Court observed that, as per the principles of interpretation, a proviso prescribes an exception from the operation of the main provision. Thus, “any issue” mentioned must mean that, the issue for service tax liability or quantum of liability itself for a given period must be pending before any tax authority or Tribunal or issue should have been determined. In case of distinct period other than above wherein, the subject matter of declaration is not pending or determined earlier will not be covered by the above exception.

Allowing the petition, it was held that, pendency of distinct issue of Assessee’s liability for the past period could not bar the remedy as per the Scheme.

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2014 (34) STR 35 (Guj) Utkarsh Corporate Services vs. Comm. Ex & ST

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Whether new/additional legal grounds arising from existing facts on records can be taken first time at the stage of appeal? Held yes.

Facts:
Appellant provided security services and was registered under service tax. In the matter of three show cause notices, short payment of service tax was demanded and interest and penalty u/s. 76 was imposed. Appellant deposited the service tax and preferred appeal for challenging of penalty. Appellant had raised additional legal grounds in the appeal proceedings. The said authority after referring to provisions of Rule 5 of the Central Excise (Appeal) Rules 2001 did not consider these grounds and rejected the appeal. Thereafter Appellant preferred an appeal before Tribunal raising the same contentions. The Tribunal upheld the decision of the first appellate authority and rejected the Appellant’s appeal without considering the additional grounds. Appellant filed miscellaneous application for rectification of mistake before Tribunal. Tribunal rejected the said application for the reason that there was no mistake committed since appeal was dismissed by Tribunal as there were no apparent reasons to interfere with the order-in-original and order in appeal. Appellant preferred an appeal before the High Court challenging the said rejection by Tribunal.

Held:

High Court observed that:

• Appellant had raised new/additional grounds before the first appellate authority which were legal grounds based on the facts on the records which could be raised before an authority at any stage.

• First Appellate Authority has chosen not to adjudicate on any of these grounds raised before it and instead held that satisfactory reasons have not been provided by the Appellant while raising these grounds.

• First Appellate Authority and Tribunal have erred in not considering the additional grounds legal in nature and therefore there was a need to interfere with the orders passed.

• Setting aside both the orders, the First Appellate Authority was directed to examine all the grounds raised before it.

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2014 (34) STR 16 (Bom.) Kandra Rameshbabu Naidu vs. Superintendent (AE) ST, Mumbai-II

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For arrest of the assessee for non-deposit of service tax collected exceeding Rs.50 lakh as per amendment to section 89 (1)(d) (ii) w.e.f from 10-05-2013, whether service tax collected till the date of amendment is to be considered OR tax collected from the date of amendment is to be considered?

Facts:
Appellant (Director of two companies) was collecting service tax from its customers and collected Rs. 2.59 crore during the period 2010-11 to 2013-14 but did not deposit it except Rs.15 lakh. Appellant though registered under service tax law, never filed its service tax returns. Appellant was arrested under amended section 89(1)(d)(ii) as the service tax collected amount was exceeding Rs.50 lakh. Appellant filed Criminal Bail application before the Bombay High Court for obtaining bail and pleaded that the amendment in penal provision was not retrospective in nature and the service tax collection from the date of amendment till the initiation of investigation was less than Rs. 50 lakh and therefore section 89(1)(d) (ii) was not applicable to the case.

Held:
High Court observed that non-deposit of service tax collected from customers was a continuing offence and service tax collected till date of amendment exceeded Rs.50 lakh and therefore total arrears accrued as on date of amendment was exceeding Rs. 50 lakh and the investigation was not completed. Court dismissed the Bail application.

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DTAA: India-UK: Article 18(2): The assessee, an event management company, engaged the services of a non-resident agent to bring the foreign Artists to India. The assessee paid remuneration to the Artists and commission to the agent. It deducted tax on the remuneration paid to the Artists but did not deduct tax on reimbursements to Artists and the commission paid to the agents. The sum paid to agent could not be deemed to have arisen from the personal activities in a contracting State in status

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DIT vs. Wizcraft International Entertainment (P.) Ltd.; [2014] 45 taxmann.com 24 (Bom):

The assessee was an event management company. The assessee engaged the services of a non-resident agent to bring the foreign Artists to India. The assessee paid remuneration to the Artists and commission to the agent. It deducted tax on the remuneration paid to the Artists but did not deduct tax on reimbursements to the Artists and the commission paid to the agents. The Assessing Officer held that the assessee should have deducted tax on reimbursements and payments to the agent and accordingly treated the assesses as an assessee in default. CIT(A) and the Tribunal allowed the assessee’s claim.

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

“i) The Artists had performed in India and for that expenses have to be incurred and reimbursement of such expenses do not constitute income derived by these Artists from their personal activities so as to be taxable under Article 18 of the Indo-UK DTAA. Thus, the reimbursement of expenses is not taxable in India.

ii) The finding of fact is that the income of the agent is not arising from the personal activities in a contracting status of entertainer or athlete. The payment in relation thereto is not in terms of Clause (2) of Article 18. It is in these circumstances that the commission income of the agent cannot be said to be taxable in India. This Clause was not applicable to him.

iii) The appeal, therefore, does not raise any substantial question of law. It is accordingly dismissed.”

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Sale/Exchange/Works Contract

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Introduction
Various types of
transactions take place in a commercial world. A peculiar issue, which
arises is about the status of a transaction where the dealer receives
goods for repair, replaces the same with his own goods and receives his
charges for repair. The old one received from the customer is retained
with him for further replacement after repair. The issue is whether, on
receipt of money from the customer towards the repair charges, the
dealer can be liable to tax under Sales Tax Laws or it can be considered
as transaction of exchange thereby, not liable to Sales Tax or whether
it falls in the category of Works Contract.

Judgment of Hon. M. S. T. Tribunal
The above issue was dealt with by M. S. T. Tribunal in case of Kirloskar Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011).

In
this case, the appellant M/s. Kirloskar Copeland Ltd. was the
manufacturer and seller of compressors used in air-conditioners. It
accepted defective compressors outside the warranty period with certain
fixed repair charges from the customer and replaced them at the option
of the customer with another repaired compressor off the shelf. The
defective compressor was then sent for repairs. The said repaired
compressor was then available for replacement in lieu of the defective
compressor of another customer. The cycle continues on. The repairs
charges received were mentioned in the books as ‘repair charges.’ This
was treated by the Assessing Officer as ‘sale’ of old repaired
compressors under the BST Act, 1959 and levied tax on the same.

The
Tribunal held that in a transaction of cross transfer of property in
the defective compressor received from customer and giving the repaired
compressor off the shelf, there is no consensual agreement of sale
supported by the price or money consideration. Holding this as not a
‘sale’ transaction, the Tribunal set aside tax. Thus, the situation
developed is that such receipt of money is not liable to tax under the
Sales Tax Laws.

The Madras High Court
The Madras High Court had an occasion to deal with a similar issue in Sriram Refrigeration Industries Ltd. vs. State of Tamil Nadu (53 VST 382)(Mad).

The
assessee received defective compressors in its Tamil Nadu office. The
assessee gave him another repaired compressor and also charged repair
charges. The defective compressor was then transferred to the Hydrabad
workshop to repair and keep it in its rolling stock.

The Tamil
Nadu Sales Tax Authorities levied Sales Tax on the same, considering the
transaction as Works Contract. The Tribunal was of the same view and
the Hon. Madras High Court confirmed the above view of the Tribunal.
Thus, confirmed the levy of tax on above transaction as “Works
Contract”.

Recent judgment of the Hon. Bombay High Court
Kirloskar
Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011) A Reference
application was filed before the Tribunal by the Department to refer the
question of law to the Hon. Bombay High Court. The Hon. Tribunal
rejected the said application on the ground that no question of law
arises as the issue is decided based on precedent. The Department
thereafter filed a Reference Application before the Hon. Bombay High
Court. The said application has now been decided. (Sales Tax application No. 10 of 2012 dated 8th May, 2014). The Hon. Bombay High Court has confirmed the view of the Tribunal that in the given circumstances there is no sale.

The
reasoning of the Hon. Bombay High court is as under: “11. In the
present case, we find that there is no sale at all. As stated earlier, a
defective compressor is brought by the customer of the Respondent to
its Sales and Service Office. Thereafter, the customer is informed about
the normal time of repairs which is approximately 60 days. At that
time, on payment of the repair charges, the customer is given an option
either to wait for 60 days or to take another repaired compressor off
the shelf of the Respondent. If the customer opts for the latter, then a
delivery note cum debit advice as well as a repaired compressor is
handed over to the customer. It is therefore evident that there is no
sale of the repaired compressor. All that is done is that on payment of
repair charges, the customer is given an option not to wait for 60 days
and instead take another second hand repaired compressor immediately in
lieu of the defective compressor.

12. The MSTT, after
considering all the evidence in this regard, came to the conclusion that
in the present case, there was a transaction of cross transfer of
property between the defective compressor and the repaired compressor
and therefore, there was no consensual agreement of sale supported by
price or other monetary consideration. We are in full agreement with the
findings of the MSTT on this aspect. What is paid is only the repair
charges and not the price for purchasing the repaired compressor. This
is clear from the fact that even if the customer opted not to take a
repaired compressor off the shelf of the Respondent, it would still have
to pay the same repair charges for repairing its own compressor and
wait for 60 days to receive the same from the Respondent, after repairs.
This puts it beyond the realm of doubt that what is charged to the
customer by the Respondent is only repair charges and not a price for
the sale of the repaired compressor.

13. Ms. Helekar, learned
counsel appearing on behalf of the applicant submitted that repair
charges are fixed and uniform all over India. According to her,
therefore, that was the price at which the repaired compressor was being
sold by the Respondent to the customer.

14. We do not agree. If
the repair charges were really the price of the sale of the repaired
compressor, there would be no question of the customer having to return
his defective compressor and thereafter take the repaired compressor off
the shelf of the Respondent. In the scenario suggested by Ms. Helekar,
all that the customer has to do is simply pay the repair charges and
take the repaired compressor off the shelf of the Respondent. That is
not the case. It is an admitted position that the defective compressor
is handed over to the Respondent along with the repair charges and in
lieu thereof the customer is handed over a repaired compressor. We
therefore find no merit in this contention.”

Thus, the situation
which arises now is that, though in Tamil Nadu, a similar transaction
may be Works Contract in Maharashtra. It will not be liable to tax.

Conclusion
In light of different judgments of two different high courts, the issue will remain debatable.

As
per the reasoning given by the Hon. Bombay High Court, the judgment of
the Tribunal cited above will be correct to the extent that it is not a
‘sale.’ However, the position still remains is that whether it may be
liable to tax as ‘Works Contract’ as per the Madras High Court judgment.
It may be noted that before the Hon. Bombay High Court, the above
Madras High Court judgment was not cited as well as this was not a point
of argument. Therefore, so far as the MVAT Act is concerned, the issue
will still remain open, as Works Contract sale is also covered in the
MVAT Act, 2002.

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Charitable purpose: S/s. 2(15), 11 and 12: Effect of first proviso to section 2(15) inserted w.e.f. 01-04/-2009: A. Y. 2009-10: Income incidental to charitable activity would not disentitle trust to exemption: Trust for breeding and improving quality of cattle: Object charitable: Finding that income was incidental: Trust entitled to exemption:

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DIT(Exemption) vs. Sabarmati Ashram Gaushala Trust; 362 ITR 539 (Guj):

The assessee-trust was engaged in the activity of breeding milk cattle to improve the quality of cows and oxen and other related activities. For the A. Y. 2009- 10, the Assessing Officer found that the assessee had considerable income from the milk production and sale. He applied proviso to section 2(15) of the Income-tax Act, 1961 and held that the trust could not be considered as one created for charitable purposes. He therefore denied exemption u/s. 11 of the Act. The Tribunal noted that the objects were admittedly charitable in nature. The surplus generated was wholly secondary. Therefore, it held that the proviso to section 2(15) of the Act, would not apply and the assessee was entitled to the exemption.

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

i) M any activities of genuine charitable purposes which are not in the nature of trade, commerce or business may still generate marketable products, After settingoff of cost, for production of such marketable products from the sale consideration, the activity may leave a surplus. The law does not expect a trust to dispose of its produce at any consideration less than the market value. If there is any surplus generated at the end of the year, that by itself would not be the sole consideration for judging whether any activity is trade, commerce or business particularly if generating “surplus” is wholly incidental to the principle activities of the trust; which is otherwise for general public utility, and, therefore, of charitable nature.

ii) T he main objectives of the trust were to breed cattle and endeavour to improve the quality of cows and oxen in view of the need for good oxen as India is prominently an agricultural country. All these were objects of general public utility and would squarely fall u/s. 2(15) of the Act.

iii) Profit making was neither the aim nor object of the trust. It was not the principle activity. Merely because while carrying out the activities for the purpose of achieving the object of the trust, certain incidental surpluses were generated, that would not render the activity in the nature of trade, commerce or business. The assessee was entitled to exemption u/s. 11.”

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Judicial analysis: Taxability of Associations

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Synopsis
The article analyses a recent judicial pronouncement and analyses in detail:-
• Whether trade associations are charitable in nature?
• Whether they are covered by the principle of mutuality?
• Whether services rendered by the association to a member or non-member is a taxable service?

In a recent decision FICCI vs. CST, Delhi-2014-TIOL- 701-CESTAT -DEL wherein two separate appeals were filed by Federation of Indian Chambers of Commerce and Industry (FICCI) and by Electronic and Computer Software export Promotion Council (ECSEPC), while considering on the applications for Stay, since substantial issues were heard in both the cases, the appeals were disposed off. In the said appeals the substantial common issues which fell for the Hon. Tribunal’s consideration were:

• Whether FICCI and ECSEPC are engaged in activities having objectives which would amount to public service and of a charitable nature and consequently fall outside the ambit of Club or Association.

• Whether their services to the respective members and the consideration received therefor was liable to tax, in view of the principle of mutuality declared in several judgments including in Ranchi Club Limited vs. Chief Commissioner of Central Excise & Service Tax 2012 (26) STR 401 (Jhar) and whether service tax was leviable under Club or Association-service, in the light of the judgment of the Gujarat High Court in Sports Club of Gujarat Ltd. vs. Union of India 2013-TIOL-528-HCAHM- ST.

• Whether services provided by FICCI and ECSEPC to non-members was liable to be classified as Club or Association-service and whether demand of service tax on FICCI for the period subsequent to 01-05-2011 was sustainable.

• Whether ECSEPC is a body constituted by or under any law and therefore falls outside the purview of the definition of Club or Association, in view of clause (i) of section 65(25a) of the Act; and

Thus, the important question that the Tribunal considered was whether both, FICCI and ECSEPC carried out activities having objectives amounting to public service and therefore would be falling in the excluded part of the definition of club or association service in section 65(25aa) of the Finance Act, 1994. Clause (iii) of the said definition excludes from its scope any person or body of persons engaged in activities having objective in the nature of public service and are of charitable, religious or political nature. Referring to Law Lexicon, Income Tax 1961, Charitable Endowment Act and Foreign Trade (Regulations) Rules, 1993, the Tribunal observed that the term “charitable purpose” would include a trust having an object and scope of public utility and advancement of any other object of general public utility and that public service would imply a service performed for the benefit of public and specially by a non-profit organisation. The Hon. Bench also observed that in order to hold an activity as charitable, the other objects of an institution or a body need not necessarily be charitable. If such objects are incidental or ancillary to the dominant purpose of charity, it would not take away the character of the activity being a valid charity as observed by the Supreme Court in CIT Madras vs. Andhra Chamber of Commerce (1965) 55 ITR 733 (SC) and that the said principle was reiterated in Surat Art Silk Cloth Manufactures Association, Surat AIR 1980 SC 387. FICCI itself was held as charitable by the Supreme Court in CIT, New Delhi vs. FICCI AIR 1981 SC 1408. In the Andhra Chamber of Commerce (supra), it was explained that promotion of trade, commerce or industry involves an object of general public utility and such activity may lead to economic benefit for the entire society although prosperity would be shared by those in trade, commerce or industry. On this count, it cannot be held otherwise. The Tribunal observed that contours of what attributes to charitable purpose or what object qualify as of general public utility and what constitutes public purpose are considered and explained in several decisions including those by the High Courts. The list, interalia, included South India Hire Purchase Association (1979) 116 ITR 793 (Mad) and Western India Chambers of Commerce and Industry Ltd. (1982) 136 ITR 67 (Bom). The Hon. Bench thus concluded that FICCI and ECSEPC are institutions having public service objectives and of a charitable nature. The Tribunal also noted that the authority holding the FICCI’s activities as covered within the ambit of club or association service omitted to provide reasons for distinguish Supreme Court’s judgment in FICCI’s own case wherein it was treated as a charitable organisation under the provisions of the Income Tax Act which are pari materia the exclusionary provision in section 65(25aa) whereas the authority relied on the Board’s circular dated 28-04-2008 instead. The adjudication order thus suffered from the vice of gross judicial indiscipline. For similar reasons, ECSEPC was also held as engaged in the activities which had objective in the nature of public service and of charitable nature.

Whether principle of mutuality applicable:
The next issue that the Tribunal dealt with was the issue as to whether the services provided by the appellant organisations to their respective members amounted to rendition of taxable service of a club or association in view of the principle of mutuality despite invalidation of the relevant provisions vide the judgments in Ranchi Club Ltd. 2012-TIOL-1031-HC-Jharkhand-ST and Sports’ Club of Gujarat 2013-119L-528-HC-AHM-ST. It was examined by the Hon. Tribunal that based on the Full Bench decision of the Patna High Court in CIT vs. Ranchi Club Ltd. 1992 (1) PLJR 252 (Pat), in Ranchi Club Ltd. (supra) it was ruled that while sale and service may be two different and distinct transactions, the basic feature common to both the transactions is that they require existence of two parties – for sale, a seller and a buyer and for a service, service provider and service recipient. Similarly, in Sports Club of Gujarat Ltd. (supra), the High Court declared the provision to the extent these purport to levy service tax in respect of services provided by a club to its members, as ultra vires. The Tribunal also noted that based on the said decision in Ranchi Club Ltd. (supra), the Tribunal granted full waiver of pre-deposit to appeal preferred by the Federation of Hotel & Restaurant Association of India in Appeal No.57179 of 2013 and in another preferred by Delhi Gymkhana Club Ltd. In Appeal No.55225 of 2013 wherein reference was also made to the decision of the Gujarat High Court in Sports Club of Gujarat Ltd. (supra). For the appellants, it was also pleaded that when the relevant provisions were declared ultra vires by the Gujarat High Court and in absence of any contrary decision by any other High Court, it would imply that there is no operative statutory provision in the law to justify levy of service tax on the service of club to its members. Citing interalia Full Bench’s decision in Madura Coats vs. CCE, Bangalore 1996 (82) ELT 512 (Tri.), the Tribunal observed that where adjudication of vires of a provision of a statute or a Notification is outside the province of the Tribunal, the decision of a particular High Court, in absence of a contrary decision by another High Court would have to be followed by the Tribunal as the Tribunal does not enjoy the liberty to disregard the view of the High Court.

Based on the above analysis and on following precedential guidance, the Bench held that on application of principle of mutuality, the services of FICCI/ESCEPC to their members do not qualify to be considered club or association service in absence of operative legislative provisions whereby the levy of service tax could be justified.

Services to non-members & levy after 1st May, 2011:

Primarily, it is to be noted here that the scope of Club or association service was expanded to cover facilities or advantages provided by a Club or association to persons other than its members also, provided such facilities or advantages are primarily intended for members. in the scenario, the tribunal observed that the Show Cause notices in both the appeals covered the period prior to the amendment vide the finance act, 2011.  The notices for the period post amendment were issued as periodic notices reiterating allegation in the earlier notices. however, in both the cases since the Show Cause notices failed to indicate the effect of amendment, the tribunal held that services to non-members fell outside the ambit of Club or association service prior to 01-05-2011 and for the subsequent period, it will not attract service tax in absence of specific allegation that services to non-members fell within the expanded scope of the taxable service in terms of amended provisions.

ECSEPC: Whether a body constituted by or under any law:
The Tribunal noted that ECSEPC was constituted qua provisions of Export-Import Policy and its Articles of Association are subject to Foreign Trade Policy (FTP) and while examining this aspect in detail, the tribunal observed that Export Promotion Councils (EPCs) are non-profit organisations which are autonomous and competent to regulate their own affairs but subject to provisions of uniform byelaws to be framed by the Central Government periodically for constitution or business by EPCs and they are required to adopt byelaws that are approved by the Central Government and that ECSEPC is listed and recognised as an EPC in the Appendix to the FTP. To understand and analyse the scope of “body established or constituted by or under a law for the time being in force”, reliance was placed on the observations in the following judgments:

•    Dr. Indramani Pyarelal Gupta vs. W. R. NATHUY AND Ors. AIR 1963 SC 274….Para 22.
•    Finite Infratech Limited vs. IFCI and Ors. [2011] 161 Comp Case 257 (Delhi) … Para 22.
•    R. C. Mitter & Sons vs. CIT air 1959 SC 868 …
Para 22.
•    S. Azeez Basha vs. Union of India air 1968 SC 662 …
Para 22.
•    National Stock Exchange of India Limited vs. Central Information Commission (2010 100 SCl 464 (del) … Para 22.

After a detailed analysis, it was observed that ECSEPC though registered under Societies registration act, 1860 is notified to be an EPC and was chartered to function as EPC authorised to issue Registration cum Membership Certificate (RCMC) and it was concluded that ECSEPC was a body established or constituted under a law for the time being in force viz., foreign trade (development and Regulation) Act, 1992 read with FTP and as such is excluded from the scope of definition of Club or Association qua Clause (1) of section 65 (25a) of the act.

Conclusion:
thus, in conclusion, taxability of service tax on both the counts is decided in negative – the associations are held as charitable organisations and at the same time the concept of mutuality also is held applicable to them. this would apply to all cases for the period till 30-06-2012. Legal testing for the negative list based service tax law yet remains to be done. This decision pronounced by the Principal Bench of the CeStat, assumes particular importance for the fact that CeStat, mumbai in case of Vidarbha Cricket Association vs. CCE, Nagpur 2013-TIOL-1915-CESTAT- mum pronounced a majority decision (the matter was referred to a third member on account of difference in view, reported at 2013-TIOL-1404-CESTAT-MUM) holding that object of the association cannot be considered of charitable nature and that the activity of providing cricket cannot be considered an activity, charitable in nature. in this case, per majority it was also observed, contrary to the observation in fiCCi’s case (supra) above that the provisions of the income tax act, 1961 are not pari materia with Chapter V of the income tax act, 1994 or the said association is a charitable organisation because it is held to be a charitable organisation under the income tax, 1961. While the matter was referred to the third member, the plea was presented by the appellant’s counsel that the decision of Sports Club of Gujarat Ltd. vs. UOI (supra) had held the levy of service tax under Club and association service as ultra vires. however, the Bench held the view that the said issue was not raised before the referral Bench. (The decision was reported in July 2013 whereas the matter was heard by the division Bench on 14th June, 2013). The principle of mutuality however was not discussed in the said case of Vidarbha Cricket association (supra). having discussed this and considering that the decision in case of FICCI and ECSEPC above has been pronounced by the Principal Bench containing President CeStat, the pending litigation in similar matters achieves finality in the like manner.

[Note: Readers may note that the concept of mutuality and the decision  of  Jharkhand  high  Court  ranchi  Club  (supra)  were discussed at length earlier under this feature in July, 2012 and december, 2012 of BCaJ).

Capital gain: Short-term or long-term: Exemption u/s. 54EC: A. Y. 2008-09: Assessee paid 96% of consideration by October 1999: Got possession of land on 12-12-2005: Sold the land on 09-01- 2008 and invested in section 54EC Bonds: Capital gain is long-term capital gain: Assessee is entitled to exemption u/s. 54EC:

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CIT vs. K. Ramakrishnan; 363 ITR 59 (Del):

Under an agreement to purchase a land the assessee had paid 96% of the consideration by October 1999. The assessee got possession of the land on 12-12-2005. The assessee sold the land on 09-01-2008 and invested in section 54EC Bonds. The assessee claimed that the capital gain is a long term capital gain and is exempted u/s. 54EC of the Income-tax Act, 1961. The Assessing Officer held that the capital gain is a short-term capital gain and accordingly disallowed the exemption u/s. 54EC of the Act. The Tribunal allowed the assessee’s claim.

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

 “i) The assessee acquired the possession of the plot on 12th December, 2005, and sold through a registered sale deed dated 9th January, 2008. This Court is of the opinion that having regard to the findings recorded by the Tribunal, the assessee had acquired the beneficial interest to the property at least 96% of the amount was paid by 3rd October, 1999.

ii) In view of the reasons the court is satisfied that the Tribunal’s impugned order does not disclose any error calling for interference. The appeal is accordingly dismissed.”

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Appeal before Tribunal: Stay: Power of Tribunal and High Court: Section 254(2A) of I. T. Act, 1961 and Article 226 of Constitution of India: A. Y. 2007-08: Power of Tribunal to grant stay limited to 365 days: In case of delay on part of Department Tribunal at liberty to conclude hearing and decide appeal: Department can make a statement that it would not take coercive steps and Tribunal can adjourn matter: Assessee can file writ petition for stay and High Court can grant stay.

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CIT vs. Maruti Suzuki (India) Ltd.; 362 ITR 215 (Guj):

In an appeal by the assessee before the Tribunal for the A. Y. 2007-08, the Tribunal granted stay of recovery by an order dated 09-12-2011 which was extended by an order dated 15-06-2012. Thereafter, by an order dated 04-10- 2013, the Tribunal extended the stay by 180 days or till the disposal of the appeal whichever occurred first. The order recorded that after 15-06-2012, the case was listed thrice for hearing on 03-07-2012, 13-08-2012 and 08-09- 2012, but adjournments were taken by the Departmental representative. The Commissioner filed a writ petition and challenged the order of the Tribunal on the ground that the Tribunal did not have power to grant stay beyond the period of 365 days. The Delhi High Court held as under:

 “i) I n view of the third proviso to section 254(2A) of the Income-tax Act, 1961, the Tribunal cannot extend stay of recovery of tax beyond the period of 365 days from the date of the first order of stay.

ii) T he provision will ensure that the Tribunal will try and dispose of appeals within 365 days of the grant of stay order. If the default and delay is due to lapse on the part of the Revenue, the Tribunal is at liberty to conclude the hearing and decide the appeal, if there is likelihood that the third proviso to section 254(2A) would come into operation. The third proviso to section 254(2A) does not prohibit the Revenue or Departmental Representative from making a statement that they would not take coercive steps to recover the demand. It would be appropriate and necessary for the Officers of the Revenue to examine and in appropriate cases make a statement before the Tribunal that no coercive steps would be taken to recover the demand as the delay was attributable to their fault and lapse. On such statement being made, it will be open to the Tribunal to adjourn the matter at the Request of the Revenue. Section 254(2A) does not prohibit the Revenue from not enforcing the demand, even when there is no stay of the challenged demand.

iii) T he provision does not prohibit an assessee from approaching the High Court by way of a writ petition for continuation, extention or grant of stay. The powers of the High Court under Articles 226 and 227 form part and parcel of the basic structure of the Constitution and cannot be nullified. An assessee can file a writ petition in the High Court asking for stay and the High Court has power and jurisdiction to grant stay and issue directions to the Tribunal as may be required. Section 254(2A) does not prohibit the High Court from issuing appropriate directions, including granting stay of recovery. Thus, the High Court in appropriate matters can grant or extend stay even when the Tribunal has not been able to dispose of an appeal within 365 days from the date of grant of the initial stay.

 iv) If the appeal filed by the assessee has not been disposed of, it should be disposed of expeditiously and preferably within a period of two months. The demand shall remain stayed during the period in case the appeal has not yet been disposed off. However, in case the appeals were not disposed of within said period, it would be open to the assessee to file writ petition in the High Court for grant of stay of the demand. It will be also open to the Tribunal to proceed in accordance with law.”

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Capital gains vs. Business income: A. Y. 2006-07: Shares invested through Portfolio Management Scheme (PMS) resulted in capital gain and not business income:

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Radials International vs. ACIT; (Del); ITA No. 485 of 2012 dated 250-04-2014: For the A. Y. 2006-07, the assessee had offered longterm and short-term capital gains on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The Assessing Officer held that as the transactions by the PMS manager were frequent and the holding period was short, the gains were assessable as business profits. The Tribunal upheld the view taken by the Assessing Officer.

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

“i) The PMS Agreement in this case was a mere agreement of agency and cannot be used to infer any intention to make profit;

 ii) T he intention of an assessee must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing the money;

iii) A long with the intention of the assessee, other crucial factors like the substantial nature of the transactions, frequency, volume etc. must be taken into account to evaluate whether the transactions are adventure in the nature of trade.

iv) T he block of transactions entered into by the portfolio manager must be tested against the principles laid down, in order to evaluate whether they are investments or adventures in the nature of trade.

v) O n facts, the sources of funds of the assessee were its own surplus funds and not borrowed funds. About 71% of the total shares have been held for a period longer than six months, and have resulted in an accrual of about 81% of the total gains to the assessee. Only 18% of the total shares are held for a period less than 90 days, resulting in the accrual of only 4% of the total profits. This shows that a large volume of the shares purchased were, as reflected from the holding period, intended towards the end of investment.

vi) T he fact that an average of 4-5 transactions were made daily, and that only eight transactions resulted in a holding period longer than one year is not relevant because the number of transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of the transactions. Moreover, even if only a small number of transactions resulted in a holding for a period longer than a year, the number becomes irrelevant when it is clear that a significant volume of shares was sold/ purchased in those transactions.

vii) T his Court is thus of the opinion that the learned ITAT erred in holding the transactions to be income from business and profession. The order of the ITAT is consequently set aside and the appeal is answered in favour of the assessee.”

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Allowability of Corporate Social Responsibility (CSR) expenditure under the Income tax Act

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Synopsis
The Companies Act 2013,
mandates incurring of Corporate Social Responsibility (CSR) expenditure,
by a certain class of companies. While the accounting and auditing,
issues are significant, the deductibility of the expenditure under the
Income Tax Act is a matter of concern. In this article the author
analyses these aspects in detail.

Introduction of CSR under THE Companies Act, 2013
CSR
is a concept that has been discussed substantially in business and
professional circles. There could be two views on whether an expenditure
of this nature should be voluntary or be mandated by legislation.
However, the discussion would now be academic as provisions in relation
to CSR are now incorporated under the Companies Act, 2013 (‘2013 Act’)
and Rules thereof. The Central Government through Ministry of Corporate
Affairs (‘MCA’) in order to achieve the aforesaid objective has issued
back to back notifications dated 27th February 2014 prescribing
applicability from 1st April 2014 of relevant provisions, schedules and
rules thereof under the 2013 Act concerning CSR.

Section 135,
Schedule VII to the 2013 Act and CSR policy Rules, 2014 (‘CSRP Rules’)
[hereinafter they are together referred to as ‘CSR provisions’] govern,
operate and determine the scope of CSR initiative for the companies.
Before discussing the topic of the article, namely the allowability/
deductibility of CSR expenditure under the Income Tax Act 1961, it would
be appropriate to deal with the guiding principles of CSR, its
applicability, features and scope thereof as enshrined under the 2013
Act and rules thereof.

Guiding Principles of CSR
The
MCA has listed the following guiding principles concerning CSR, which
helps one to understand the intention of the Legislature as regard to
CSR activity:

• CSR is the process by which an organisation
thinks about and evolves its relationships with stakeholders for the
common good, and demonstrates its commitment in this regard by adoption
of appropriate business processes and strategies;

• CSR is not charity or mere donation;

• CSR is way of conducting business, by which corporate entities visibly contribute to the social good;

• CSR should be used to integrate economic, environmental and social objectives with the company’s operations and growth; and


CSR projects/ programmes of a company may also focus on integrating
business models of a company with social and environmental priorities
and processes in order to create shared value

Features and Scope of CSR activities under 2013 Act and rules thereof

• CSR activities does not include the activities undertaken in pursuance of normal course of business of a company;

• CSR activities as undertaken within India by a Company will only qualify as CSR under the 2013 Act and rules thereof;

• CSR activities will have to be undertaken with preference to the local area and areas from where the Company operates;


Projects or programmes of CSR as undertaken by a Company should include
activities and/or subjects as mentioned in Schedule VII to the 2013
Act;

• Only activities which are not exclusively for the benefit
of employees of the Company or their family members shall be considered
as CSR activity;

• The CSR activities can be undertaken by the
company either through itself and/or through a registered trust or a
registered society or a company established under Section 8 of 2013 Act
by itself, its holding or subsidiary company, or otherwise subject to
compliance of conditions mentioned therein and a cap of maximum 5 % of
total CSR expenditure of the Company in one financial year;
• CSR activities can also be undertaken in collaboration with other companies with compliance of conditions mentioned therein;

Contribution of any amount directly or indirectly to any political
party u/s. 182 of the 2013 Act, shall not be considered as CSR activity;
and
• Any surplus arising out of the CSR activity will not be part of the business profits of the Company.

 Applicability of CSR provisions under the 2013 Act and rules thereof

CSR
provisions are not applicable to all persons but are restricted to
companies. The provisions of Section 135 of the 2013 Act further
restrict the said applicability to only selected companies who fulfill
the following conditions:

• A Company having net worth of Rs. 500 crore or more during any financial year; or
• A Company having turnover of Rs. 1,000 crore or more during any financial year; or
• A company having net profit of Rs. 5 crore or more during any financial year;

The
CSRP Rules further provide that the CSR provisions are applicable to
all companies including a holding, subsidiary company and foreign
companies having project office or branch office in India, provided any
of the aforesaid conditions are fulfilled by the said companies. As
regard to applicability to foreign companies, the aforesaid conditions
viz, net worth, turnover and net profit will have to computed and
determined in light of the relevant provisions of 2013 Act.

So,
if a Company satisfies any of the aforesaid conditions in any of the
financial years, then the CSR provisions are applicable to the said
company and will have to be follow them year on year. However, the CSRP
rules relax the rigors of CSR provisions, if a company does not fulfill
any of the said conditions for a continuous period of 3 financial years.
The provisions will then apply once again in the year a company crosses
any one of the above thresholds.

Consequences upon applicability of the CSR provisions


The Board of Directors (‘Board’) of the concerned Company will have to
form from amongst themselves a Corporate Social Responsibility Committee
(‘CSRC’) containing at least 3 directors [including 1 independent
director];

This requirement is relaxed by the CSRP Rules, to
take care of specific situations, namely, non-requirement of independent
directors in regard to particular companies, applicability of
provisions to private company, foreign company, etc

• The CSRC
shall formulate a framework containing Corporate Social Responsibility
Policy (CSRP) of the Company, amount to be spent qua the CSR activities,
monitoring and transparency in implementation of the said activities,
etc; and give recommendations to the Board accordingly;

• The
Board is required to approve the CSRP of the Company alongwith ensuring
that the activities under the CSRP are undertaken accordingly;


In addition, the Board will be required to ensure that at least 2% of
average net profits of the concerned Company during the immediately 3
financial years shall be spent as per the CSRP approved by the Board of
the Company; and

• The Board’ Report should contain disclosure
of composition of the CSRC, details of CSRP [should also be published on
website of the company], alongwith reporting of other details in the
format as prescribed under the CSRP Rules including the amount of money
which was not spent as per the requirements of CSR provisions on CSRP
with reasons thereof.

Schedule VII to the 2013 Act duly amended
prescribes list of 10 specific subjects and/or projects of CSR,
recognised as CSR activities, which a Company needs to consider under
its CSRP. The said CSR activities are explained in detail in the ensuing
paragraphs during the course of discussion of allowability of CSR
expenditure under the Income-tax Act, 1961

Allowability of CSR expenditure under the Income-tax Act, 1961

With aforesaid background in place, it would be appropriate to discuss the allowability of CSr expenditure under the income-tax act, 1961.
The MCA mentions that tax treatment of CSR spends will be in accordance with the income-tax act, 1961 (‘the act’) as may be notified by the Central Board of Direct Taxes [‘CBDT’]. The CBDT till date of writing of this article has not notified any tax treatment as regard to allowability of CSr expenditure under the act. the newspaper articles and reports also are highlighting concerns for allowabil- ity of CSr expenditure under the income-tax act, on the ground that said expenditure may not be allowed to the Companies, since it is not wholly and exclusively for the purposes of the business of the assessee companies.

An issue which then requires to be analysed is, when the MCA requires for specific tax treatment on CSR spends, there seems to be an underlying assumption and/or un- derstanding that the present provisions of the act do not provide for allowability of said CSr expenditure under the act. however, on proper perusal of the provisions of the Act, one may find that CBDT may not be required to notify separate tax treatment for CSR spends, since the present provisions provide for allowability of said spending under various provisions of the act irrespective of whether the said expenditure is incurred wholly and exclusively for the purpose of business of assessee companies.

A chart explaining the specific CSR activities as prescribed under Schedule VII to the 2013 Act and simultaneous provisions of the income-tax act, 1961 which provide for allowability of expenditure qua the specific CSR activities are tabulated below:


Section 372A of the Companies Act, 1956 contained several exemptions which have been done away with by section 186 of the act. the differences in the exemptions are as follows:

Allowability of CSr Expenditure u/s. 35(2AA), 35AC, 35CCA and section 80G of the Act the provisions referred in above are not frequently dis- cussed or applied, while claiming deduction by assessee companies in computation of profits and gains from business or profession. the said provisions allow for deduction of expenditure in computation of profits and gains from business or profession irrespective of whether the expenditure incurred for the activities are related to business of the Company. however, the sine qua non for the purpose of claiming deduction u/s. 35AC is the Company should have income assessable under the head ‘Profit and gains from business or profession’, otherwise the Company shall have to claim deduction u/s. 80GGA of the act. further, there is also scope of claiming deduction u/s. 80G of the Act as regard to certain activities referred in above, however considering the direct coverage of the activities u/s. 35AC, the said provision of section 80G are not referred to. U/s. 35AC, the company can claim full deduction of the expenditure in computation of profit and gains from business of the Company.

With the onset of the CSR provisions under the 2013 Act, the aforesaid provision now will have greater applicability in computation of profits and gains from business of the assessee companies under the provisions of the act, unless otherwise prescribed by CBdt.

A brief overview of the aforesaid provisions of the act alongwith relevant rules under the 1962 rules are dis- cussed herein below:

Section 35AC of the Act provides for deduction of expenditure incurred by way of payment by an assessee of any sum to a public sector company or a local authority or   to an association or institution approved by the national Committee for carrying out any eligible project or scheme. the said provision further provides that the assessee may either make payment aforesaid to the entities referred in above or either directly make payment of any sum to the eligible project or schemes. in other words, the provisions of section 35AC recognise the features of CSR provisions i.e., of allowing the Company to either make contribution to the eligible organisations/entities that undertake eligible projects or schemes and/or incur expenditure directly by itself on eligible projects or schemes. the eligible projects or schemes as referred in section 35AC are recommended under Rule 11K of the 1962 Rules. On perusal of Rule 11K, one may find that the significant guidelines of activities as recommended are in consonance to the subjects as prescribed under Schedule VII to the 2013 Act. the aforesaid chart tabulating the activities as prescribed under Schedule VII to the 2013 Act and the allowability of expenditure incurred on the said activities under the act confirms the said understanding.

The national Committee as referred in above is the nodal agency to provide approval to the organisation/entities who undertake eligible projects or schemes and/or to the eligible projects or schemes. the complete procedure as regard to composition of national Committee, its place of operation, functions of the said committee, guidelines for approval of organisation/entities and/or eligible project or schemes, application forms, audit reports for verification and procedure to be followed by the national Committee in granting approvals are documented in rule 11f to rule 11o of the 1962 rules and forms prescribed thereof. One may want to refer the said provisions and rules thereof for better understanding of the subject.

Similarly, the provisions of section 35(2AA), section 35CCA and section 80G alongwith relevant rules pre- scribed thereof may be looked into for further and better understanding of the subject.

In light of above, one may find that provisions of the Act have  long  recognised  the  CSR  initiative  and  provided benefits accordingly by allowing expenditure in computa- tion of income from business of the assessees or deduction otherwise. however, considering the said initiative was not mandatory in nature until CSR provisions under the 2013 Act, therefore, one may not have had contribu- tions made by the corporate sector to the subject.

Allowability of CSr Expenditure u/s. 37(1) of the Act

A question which requires further consideration, is in case if the specific CSR activities as covered under Schedule VII to the 2013 Act are not allowable under the provisions of the act as referred in above, then can the said CSR expenditure could be allowed u/s. 37(1) of the Act.

On perusal of features of CSr provisions as reproduced in earlier paragraphs, one may find that the said provisions allow for activities to be undertaken  which are in furtherance of business activities of the assessee company, however with limitations that said activity should neither be undertaken in normal course of business of the Company nor exclusively for employees of the Company and their family members. the said CSr provisions also mention that such expenditure should not be a charity and/or donation.

Recently, the Karnataka High Court in the case of CIT and Anr. vs. Infosys Technologies Ltd. (2014)(360 ITR 714), has opined that CSr expenditure which facilitates the business of the assessee is allowable u/s. 37(1) of the act. the relevant facts of the said decision are as under:

infosys technologies ltd (‘infosys’) has an establishment in Bannerghata Circle in Karnataka, where nearly 500 em- ployees are working. There was severe traffic congestion near the said establishment and therefore, the employees including the general public had to wait for a long time. the  said  congestion  seriously  affected  the  free  movement of public including employees of infosys. infosys as  a  Corporate  Social  responsibility  initiative  installed traffic signal near the establishment which otherwise was responsibility of the State. a question arose as regard to allowability of said expenditure u/s. 37(1) of the Act. The high Court held that the said CSr expenditure incurred by infosys could be said to be laid out or expended wholly and exclusively for the business u/s. 37(1) of the Act and therefore, is allowable, for want of following reasons:

•    The said expenditure facilitates the employees of Infosys for free movement and allows them to reach the office in time, which otherwise was affecting the business of Infosys on account of delay in reaching office and thereby resulting in delay in completing projects; and

•    The Court further noted that just because the general public other than Infosys was also benefited by the said expenditure shall not come in way of deduction of said expenditure u/s. 37(1).

In view of the above decision, one may find that the if the CSr activity is undertaken in advancement of business of the assessee, then the said expenditure could be allowed u/s. 37(1) of the Act.

in addition to above, reliance could be placed on the fol- lowing decisions, wherein Courts have time and again held that contribution made by the assessee company in public welfare funds which are directly connected or related with the carrying on the business or which results in benefit to the business has to be regarded as allowable deduction u/s. 37(1) of the Act:

•    Sri Venkata Satyanarayna Rice Mills Contractors Co. vs. CIT (223 ITR 101) (SC);

•    Addl. CIT vs. Rajasthan Spinning and Weaving Ltd.
(274 ITR 463)(Raj);

•    Mehsana District Co-operative Milk Producer’s Union Ltd. (203 ITR 601)(Guj);

•    CIT vs. Kaira District Co-operative Milk Producers Union Ltd. (247 ITR 314)(Guj.);

•    Krishna Sahakari Sakhar Karkhana Ltd vs. CIT (229 itr 577); and

•    Surat Electricity Co. Ltd. vs. ACIT (125 itd 227)(ahd) in the same vein and for the sake of completeness,    it would also be necessary to mention that in the following decisions, the Courts have either held against and/or remanded the matter on expenditure similar to CSR activity claimed for deduction u/s. 37(1) of the Act:

•    CIT vs. Madras Refineries Ltd. (313 ITR 334)(SC) – The Supreme Court was hearing a plea for allowability of ex- penditure u/s. 37(1) of the Act on the CSR activity of providing drinking water and sanitation to residents in the vicinity of factory of the Company. the apex Court remanded the matter to the tribunal for denovo consideration as it was found that neither the madras high Court nor the Tribunal concerned had given specific finding to the effect that said CSr expenditure is allowable as business expenditure.

The madras high Court had earlier allowed for deduction of aforesaid CSr expenditure with the following relevant findings:

“The concept of business was not static. It has evolved over a period of time to include within  its fold the concrete expression of care and concern for the society at large and the people   of the locality in which the business is located,  in particular. Being known as a good corporate citizen brings goodwill of the local community,   as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measurewith the aid of such goodwill.”

•    CIT and Anr. vs. Wipro Ltd. (360 ITR 658)(Kar) – Wipro ltd (‘Wipro’) had incurred expenditure on community development near its factory which was located in backward area and claimed as business expenditure. The Court specifically found that Wipro was not able to provide any supporting documents to substantiate its claim for community development which was claimed to be in the nature of religious funds, charitable institutions, social clubs or charity, etc. the Court held that for want of limitation of documents, the expenditure on community do not stand to test of commercial expedi- ency and therefore, said expenditure will not be allow- able u/s. 37(1) of the Act.

The relevance of documentation in allowability of expen- diture u/s. 37(1) of the Act was succinctly brought in the decision of apex Court in the case of CIT vs. Imperial Chemical Industries Ltd. (74 itr 17). the Supreme Court held that burden of proving that particular expenditure has been laid out or incurred wholly and exclusively for purpose of business is entirely on assessee.

Based on the above decisions, one may find that it is too early to carve out specific rules determining allowability of CSR expenditure u/s. 37(1) of the Act and the facts and circumstances of the respective cases shall determine the deductibility of said expenditure.

Lastly, it would also necessary to highlight that on perus- al of the CSR provisions of the 2013 Act, one also finds that during the course of implementation one may find that there are still some bottlenecks in its implementation with following questions remaining unanswered and/or no clarifications provided by the MCA on the said issues, which are as under:

•    Whether, contribution of at least 2% of average net profit as prescribed under CSR provisions, is mandatory? the CSr provisions do not provide any advisory to that effect except for requiring a mere disclosure alongwith  reasons  thereof  for  non-spending  of  CSr expenditure in the Board’s report;

•    Further, the definition of ‘average net profit’ is referred to in 2013 Act, whereas the CSRP Rules prescribes definition of ‘net profit’, which is not in consonance with the definition as referred in 2013 Act. One may recon- cile the said differences in definition with interpreting the ‘net profit’ definition only relevant to determine the applicability of CSr provisions, whereas ‘average net profit’ definition is relevant to determine the amount of CSR expenditure by a Company;

•    In addition, the guiding principles to CSR provide for not  considering  the  CSR  expenditure  as  donation  or charity, whereas Schedule VII to the 2013 Act itself provides for activities viz, contribution to PM National relief fund, contribution to technology incubators, etc, which supports the concept of donations given to said institutions; etc

It appears that it is possible to take view that the expenditure incurred on CSR activities as prescribed under the 2013 Act and Rules thereof may be allowed under the present provisions of the act and the CBDT may not be required to prescribe any separate tax treatment.

Interest – Refund of excess of payment of tax paid u/s. 195(2) to the depositor – the assessee/ depositor is entitled to interest from the date of payment of such tax.

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Union of India vs. Tata Chemicals Ltd. [(Civil) Appeal vs. 6301 of 2011 dated 26-02-2014]

The respondent, a company, engaged in the manufacture of nitrogenous fertilizer had during the assessment year 1997-98, commissioned its naptha desulphurisation plant and to oversee the operation of the said plant it had sought the assistance of two technicians from M/s. Haldor Topsoe, Denmark. M/s. Haldor Topsoe had raised an invoice aggregating to $ 43,290/- as service charges for services of the technicians ($ 38,500/-) and reimbursements of expenses ($ 4,790/-).

The resident/deductor had approached the Incometax Officer u/s. 195 (2) of the Act, inter alia, requesting him determine as to what percentage of tax should be withheld from the amounts payable to the foreign company, namely, M/s. Haldor Topsoe, Denmark. The Assessing Officer/Income-tax Officer passed order u/s. 195 (2) of the Act directing the resident/deductor to deduct/withhold tax at the rate of 20% before remitting aforesaid amounts to M/s.Haldor Topsoe. Accordingly, the resident/deductor had deducted tax of Rs.1,98,878/- on the entire amount of $ 43,290/- and credited the same in favour of the Revenue.

After such deposit, the resident/deductor had preferred an appeal before the Commissioner of Income-tax (Appeals) against the aforesaid order passed by the Assessing Officer/Income-tax Officer u/s. 195 (2) of the Act. The appellate authority, while allowing the appeal so filed by the resident/deductor, had concluded that the reimbursement of expenses is not a part of the income for deduction of tax at source u/s. 195 of the Act and accordingly, directed the refund of the tax that was deducted and paid over to the revenue on the amount of $ 4,790/- representing reimbursement of expenses. After disposal of the appeal, the resident/deductor had claimed the refund of tax on $ 4,790/- (amounting to Rs. 22,005/-) with the interest thereon as provided u/s. 244A(1) of the Act.

The Assessing Officer/Income-tax Officer, while declining the claim made for interest, has observed that section 244A provides for interest only on refunds due to the assessee under the Act and not to the deductor and since the refund in the instant case is in view of the circulars viz. Circular No. 769 and 790 issued by the Central Board of Direct Taxes (for short, ‘the Board’) and not under the statutory provisions of the Act, no interest would accrue on the refunds u/s. 244A of the Act. Therefore, the Assessing Officer/Income-tax Officer while granting refund of the tax paid on the aforesaid amount refused to entertain the claim for interest on the amount so refunded.

Since the Assessing Officer/Income-tax Officer had declined to grant the interest on the amount so refunded, the resident/deductor had carried the matter by way of an appeal before the Commissioner of Income-tax (Appeals). The First Appellate Authority approved the orders passed by the Assessing Officer/Income-tax Officer and declined the claim of the deductor/resident on two counts: (a) that the refund in the instant case would fall under two circulars viz. Circular No. 769 and 790 issued by the Board which specifically provide that the benefit of interest u/s. 244A of the Act on such refunds would not be available to the deductor/resident and (b) that a conjoint reading of section 156 and the Explanation appended to section 244A (1)(b) of the Act would indicate that the amount refunded to the deductor/resident cannot be equated to the refund of the amount(s) envisaged u/s. 244A(1)(b) of the Act, wherein only the interest on refund of excess payment made u/s. 156 of the Act pursuant to a notice of demand issued on account of post assessment tax is contemplated and not the interest on refund of tax deposited under self-assessment as in the instant case.

The deductor/resident, aggrieved by the aforesaid order, had carried the matter before the Income-tax Appellate Tribunal (for short, ‘the Tribunal’). The Tribunal while reversing the judgment and order passed by the Commissioner of Income-tax (Appeals) has opined that the tax was paid by the deductor/resident pursuant to an order passed u/s. 195 (2) of the Act and the refund was ordered u/s. 240 of the Act. Therefore, the provisions of section 244A(1)(b) were clearly attracted and the revenue was accountable for payment of interest on the aforesaid refund amount. Accordingly, the Tribunal allowed the appeal of the deductor/resident and directed the Assessing Officer/Income-tax Officer to acknowledge the claim and allow the interest as provided u/s. 244A(1) (b) of the Act on the aforesaid amount of refund. The

Revenue being of the view that they were treated unfairly by the Tribunal had carried the matter by way of Income-tax Appeal before the High Court. The High Court refused to accept the appeal filed by the Revenue.

On further appeal by the Revenue, the Supreme Court held that the refund becomes due when tax deducted at source, advance tax paid, self-assessment tax paid and tax paid on regular assessment exceeds tax chargeable for the year as a result of an order passed in appeal or other proceedings under the Act. When refund is of any advance tax (including tax deducted/collected at source), interest is payable for the period starting from the first day of the assessment year to the date of grant of refund. No interest is, however, payable if the excess payment is less than 10% of tax determined u/s. 143(1) or on regular assessment. No interest is payable for the period for which the proceedings resulting in the refund are delayed for the reasons attributable to the assessee (wholly or partly). The rate of interest and entitlement to interest on excess tax are determined by the statutory provisions of the Act. Interest payment is a statutory obligation and non-discretionary in nature to the assessee. In tune with the aforesaid general principle, section 244A was drafted and enacted. The language employed in section 244A of the Act is clear and plain. It grants substantive right of interest and is not procedural. The principles for grant of interest are the same as under the provisions of section 244 applicable to assessments before 01-04-1989, albeit with clarity of application as contained in section 244A.

The Supreme Court further held that a “tax refund” is a refund of taxes when the tax liability is less than the tax paid. As per the old section, an assessee was entitled for payment of interest on the amount of taxes refunded pursuant to an order passed under the Act, including the order passed in an appeal. In the present fact scenario, the deductor/assessee had paid taxes pursuant to an order passed by the Assessing Officer/Income-tax Officer. In the appeal filed against the said order, the assessee had succeeded and a direction was issued by the Appellate Authority to refund the tax paid. The amount paid by the resident/deductor was retained by the Government till a direction was issued by the appellate authority to refund the same. When the said amount was refunded it should have carried interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and unauthorised retention of the money collected by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of section 244A, as that an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There was no reason to restrict the same to an assessee only without extending the similar benefit to a resident/deductor who had deducted tax at source and deposited the same before remitting the amount payable to a non-resident/foreign company.

According to the Supreme Court, providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery  provided  in  a  taxing  Statute.  refund  due and payable to the assessee is debtowed and payable by   the   revenue.   The   Government,   there   being   no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors lawful monies with the accrued interest for the period of undue retention of such monies. the State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The  obligation  to  refund  money  received  and  retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex aequo et bono ought to be refunded, the right to interest follows, as a matter of course.

The Supreme Court held that in the present case, it was not in doubt that the payment of tax made by resident/ depositor was in excess and the department chose to refund the excess payment of tax to the depositor. The interest is required to be paid on such refunds. The catch however was from what date interest was payable, since the present case did not fall either under clause (a) or
(b)    of section 244a of the act. the Supreme Court held that in the absence of an express provision as contained in Clause (a), it could not be said that the interest was payable from the 1st of april of the assessment year. Simultaneously, since the said payment was not made pursuant to a notice issued u/s. 156 of the Act, Explanation to Clause(b) had no application. In such cases, as the opening words of Clause(b) specifically referred to “as in any other case,” the interest was payable from the date of  payment  of  tax. the  sequel  of  the  above  discussion according to the Supreme Court was that the resident/ deductor is entitled not only the refund of tax deposited u/s. 195(2) of the Act, but has to be refunded with interest from the date of payment of such tax.

Note:     In  the  context  of  the  liability  of  the  revenue  to  pay interest u/s. 244A, reference may also be made to the judgment of the Apex Court (Larger Bench of 3 Judges) in the case of Gujarat Fluoro Chemicals [358 ITR 291] in which the Court has held that the assessee can claim only that interest which is provided under the act and no other interest can be claimed by the assessee on statutory interest for delay in payment thereof. We have analysed this judgment in our column ‘Closements’ in the november and december issues of this journal.

Treatment of expenditure incurred for development of roads/highways in BOT agreements – Circular No. 9 dated 23rd April, 2014

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CBDT has clarified that the cost of construction on development of infrastructure facility of roads/highways under BOT projects be amortised and claimed as allowable business expenditure under the Act. The amortisation is computed at the rate which ensures that the whole of the cost incurred in creation of infrastructural facility of road/highway is amortised evenly over the period of concessionaire agreement after excluding the time taken for the creation of such facility.

In the case where an assessee has claimed any deduction out of the initial cost of the development of infrastructure facility of roads/highways under BOT projects in the earlier year, the total deduction so claimed for the Assessment Years prior to the Assessment Year under consideration be deducted from the initial cost of infrastructure facility of roads/highways and the cost ‘so reduced’ be amortised equally over the remaining period of toll concessionaire agreement.Trade Circular VAT liability of developers – computation – Trade Circular 12T of 2014 dated 17-04-2014.

This Circular is applicable only to those infrastructure projects for development of road/highways on BOT basis where ownership is not vested with the assessee under the concessionaire agreement.

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Is It Fair To Ignore Prior Agreement For section 50C of Income-tax Act, 1961? [vis-a-vis section 43CA and section 56(2)(vii)(b)]

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Synopsis:

Section 43CA and Section 56 bring to tax incaome based on the concept of stamp duty value of the property transferred. The provisions contemplate the valuation as on the date of an agreement if the same is anterior to registration. There is no such saving in Section 50C, making it unfair.

This article attempts to examine whether amendments brought by Finance Act, 2013 has created anomaly, rendering section 50C of Income-tax Act, 1961 (“Act”) unfair or causing inequity.

Vide the Finance Act 2013, a new section viz. 43CA has been introduced in the Actto come into effect from 1st April, 2014. Section 43CA is similar to section 50C of the Act, (which came into effect from 1st April 2003). Section 50C provides for capital gains tax on deemed consideration as per the stamp duty valuation of capital asset at the time of its transfer. The newly introduced section 43CA creates a legal fiction, that in case of transfer of land and building by assessee, who held such asset not as a capital asset but as stock in trade. (eg. a builder), the market value decided by the Stamp authority shall be the deemed consideration received by the Transferor and income tax shall be charged on such deemed consideration notwithstanding the lesser consideration written in the deed of transfer. However, section 43CA carves out an exception to this legal fiction, where the consideration has been already fixed under an earlier Agreement for sale and when sale is completed subsequently in pursuance of such earlier Agreement for sale, the stamp duty value on the date ofprior Agreement for sale shall be taken into account and the legal fiction would operate with reference to such prior date of agreement for calculating the income tax liability under the head “profits and gains of business/profession”.

 By the Finance Act 2013, section 56 of the Act is also amended, which amendment is to come into effect from 1st April, 2014. Prior to the amendment section 56 provides that, in case of purchase of an immovable property, if consideration stated in the agreement, is less than the stamp duty value of the property, the differential amount, shall be deemed to be an income of the Purchaser, under the head “Income from other source” and accordingly, the purchaser shall be required to pay the income tax on such differential amount under the head “income from other source”. The amendment to section 56, however, provides for similar exception to the legal fiction by laying down that in cases in which the sale is completed subsequently in pursuance of an earlier agreement, the stamp duty value on the date of the earlier Agreement for sale shall be taken into consideration for income tax purpose and not the stamp duty value of property on the date of completion of transfer. In other words, the escalated market value of the property on the date of completion of transfer will not bring any additional tax liability for the purchaser.

The exceptions as aforesaid, introduced by Finance Act, 2013, to the deeming provisions are do not find a place in section 50C of Income Tax Act. The insertion of section 43CA and amendment to section 56 of the Act seem to have been brought in to provide for a remedy in several genuine situations, where under an earlier Agreement for sale the consideration is fixed and the completion of transfer is required to be postponed on account of transfer being conditional upon various statutory permissions and sanctions etc. and merely because in the meantime, the property prices have shot up, the assessee would not be required to pay additional taxes due to deeming provisions, although in fact the parties are bound by the consideration fixed under the earlier agreement and the boom in real estate market is of no help to seller for claiming higher consideration.

There seems to be no reason for not providing the similar exception in section 50C. The status of seller who is taxed u/s. 50C of the Act and the one u/s. 43CA of the Act is the same in almost all respect except that in the first case there is a transfer of capital asset and in the latter case, there is a transfer of immoveable property held as stock in trade. For the differential treatment to be valid, there has to be an intelligible differentia and reasonable nexus connected to the object of statute, which does not seem to be present in this case.

Section 50C and section 56 of Act seek to tax two sides of one transaction. The former seeks to tax the seller on a deemed to have incremental consideration on sale of capital asset and the latter seeks to tax the benefit that the purchaser is deemed to have received by paying consideration lesser than the stamp duty value. Amending only section 56 leads to an incongruous situation. The purchaser alone can rely on earlier Agreement for sale and successfully establish that the stamp duty valuation on the date of agreement is to be considered for testing the deeming fiction, however the seller in the same transaction cannot raise this contention. Further, having accepted in the assessment of purchaser a particular stamp duty valuation, it will be absurd for the department to contend in assessment of seller that a different stamp duty valuation is to be adopted.

Therefore, section 50C in its existing form is unfair and needs to be amended or read down by judicial forums.

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New SEBI Corporate Governance Requirements – vis-à-vis New Companies Act – Overlap and Contradictions

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Synopsis
Recently, after the Companies Act, 2013 came into force, the SEBI has substantially revised its existing requirements for corporate governance of the listed companies by replacing the earlier Clause 49 of the Listing Agreement with a new one and also by inserting a new Clause 35B.

Against this backdrop of the Companies Act, 2013 and the new SEBI provisions – the overlapping and at times contradictory new requirements, the hurdles of complying with them, the problem of separate penal provisions in the cases of non-compliance of the said two directives calls for a detailed discussion. The Author analyses in depth the new requirements…

SEBI’s new requirements from 1st October, 2014

SEBI has brought into effect the comprehensively revised requirements for corporate governance for listed companies. The earlier Clause 49 of the Listing Agreement is now replaced with the new one. Further, a fresh new Clause 35B has also been put into effect that requires companies to provide e-voting for all shareholders.

To give a brief background recently, several provisions of the Companies Act, 2013, (‘the 2013 Act’) relating to corporate governance were notified to come into effect from 1st April, 2014. At the time when the Bill was close to being passed, SEBI had issued a Concept Paper proposing revised corporate governance requirements based on this Bill. The objective was to comprehensively revise its existing requirements taking into account provisions in the Bill and to initiate debate on the proposed requirements. Thereafter, recently, shortly after the provisions of the 2013 Act were notified, SEBI too brought into effect the new Clauses 49/35B. However, unlike the provisions in the 2013 Act, the SEBI requirements will come into force from 1st October, 2014.

Importance/implications of the new requirements
The new requirements of the two provisions need discussion for several reasons. Firstly, the changes made are substantial. Secondly, for reasons best known to legislators, two sets of overlapping and at times contradictory requirements have been brought into force. Thirdly, the consequences of non-compliance of these two norms will be dealt with in different ways. The penal and other consequences of violations under the 2013 Act are different from those under the Listing Agreement.

The penal consequences under the 2013 Act vs. the Listing Agreement
The consequences of violating the Listing Agreement are generally stated, in the form of a penalty upto Rs. 25 crore. (Note: As I write this article, SEBI has circulated draft provisions that could provide stricter punishments for violations, if brought into effect). This would be levied on the Company. However, SEBI often takes a fairly strong action against other persons like Independent Directors, Audit Committee members, etc. who fail in their duties by debarring them or, as a recent case showed, requiring them to compensate the company for huge losses allegedly caused by their acts/omissions. Even otherwise, SEBI has exercised its powers over the Board, directors, officers and even the Auditors and Courts have upheld these powers in several cases. The action taken may be in a variety of ways including debarment, requirement to compensate, etc.

In comparison, the consequences of violating the provisions of the 2013 Act are usually a fine on the Company and a fine or imprisonment for the officers in default. In some cases, it is possible that there may be class actions too, which can result in compensation to those who suffered loss. Another important difference is that considering that the requirements are contained in different provisions and there are generally different types of penal consequences provided, violation of different provisions of the 2013 Act can have different consequences.

Overlapping provisions
As will be seen later on, there is overlapping and an element of duplication. However, the provisions are often different too. In such a case, the logical recourse for a company seeking scrupulous compliance would be to, where possible and to the extent possible, comply with the stricter or narrower of the two provisions. For example, the 2013 Act provides for a lower number of independent directors while SEBI provides a higher number for certain companies. Thus, those companies would have to comply with the SEBI requirements which would automatically ensure that the provisions of the 2013 Act are also complied with.

Let us now consider a few important requirements.

Applicability
The SEBI requirements apply to all listed companies and certain other specified entities. The requirements under the 2013 Act apply in a varied manner. Generally, they apply to all listed companies. In addition, they apply to certain other companies too. For example, the requirement to have one woman director applies to public companies having a paid up share capital of Rs. 100 crore or more or having a turnover of Rs. 300 crore or more. The requirement relating to Independent Directors applies to public companies having (i) paid up share capital of Rs. 10 crore or more (ii) turnover of Rs. 100 crore or more (iii) having total outstanding loans/debentures/deposits exceeding Rs. 50 crore. And so on.

Woman/Independent directors
SEBI companies require to have at least one woman director. It does not matter whether such director is part of the Promoter Group, an Independent Director, an executive or a non-executive director. The 2013 Act also has similar provisions.

SEBI requires at least one-third of the total number of directors to be Independent Directors. If the Chairman is an Executive Director or is a Promoter or related to the Promoter Group, then the Company 50% of the Board should constitute of Independent Directors. The 2013 Act requires companies to have at least one-third of the total number of directors to be Independent Directors. Any fraction would be rounded off to one. For specified nonlisted companies, there should be minimum two independent directors, irrespective of the size of the Board.

The definition of Independent Director under the two sets of provisions are substantially similar.

Tenure of Independent Director
This is one of the several contradictions between the requirements of SEBI Clause/the 2013 Act. The 2013 Act states that an Independent Director shall hold office for term of five consecutive years at a time and this term can be renewed, by a special resolution, for another period of five years. The SEBI Clause has substantially similar requirements.

The 2013 Act says that the tenure held as on 1st April, 2014 would not be counted. SEBI Clause, however, states that if an Independent Director has held tenure of five years or more as on 1st October, 2014, he shall be eligible for another tenure of five years only.

Audit Committee
The requirements under the 2013 Act and SEBI Clause are broadly similar. However, there are a few differences.

The 2013 Act requires that a majority of the Audit Committee should consist of Independent Directors, while SEBI has a higher requirement of two-thirds. SEBI, in addition, also requires that the Chairman of the Audit Committee should be an Independent Director.

The requirement under the 2013 Act is that a majority of the members of the Audit Committee should be “financially literate,” as defined. SEBI has extended this requirement to all the members. Thus, to ensure due compliance, the stricter requirement in such a case would apply and all the members of the Audit Committee of a listed company should be financially literate.

The  role  and  functions  of  the audit  Committee  as  prescribed by SEBI are far more elaborate and detailed. Considering the nature of the obligations, though, a listed company will have to ensure due compliance of both the sets of provisions.

Material    subsidiary    companies SEBI Clause has certain requirements relating to material, non-listed indian subsidiary companies and other subsidiaries. material subsidiaries are those subsidiaries incorporated in india,that are unlistedand whose income or net worth is more than 20% of the consolidated income or consolidated net worth respectively of the listed parent   company.   for   such   companies,   there   are certain at least one independent director of the parent company shall be a director of such subsidiary.

A statement of significant transactions and arrangements by an unlisted subsidiary shall be periodically brought to the attention of the Board of directors of the parent. “Significant,” in this context, means a transaction or arrangement that exceeds, or is likely to exceed 10% of total revenues/expenses/assets/liabilities of such subsidiary.

Selling, disposal or leasing of more than 20% of the assets of a material subsidiary shall require the approval of the shareholders by way of a special resolution. it is not clear whether such requirement would be attracted if such sale, disposal or lease, is in one transaction or in one financial year or cumulative.

further, to reduce the holding or control of the parent to less than 50% in a material subsidiary, the approval of the shareholders by way of a special resolution would be required.

The 2013 Act contains no corresponding requirements.

Related party transactions

SEBI Clause and the 2013 Act both have fairly detailed requirements relating to related party transactions. analy- sis of this topic even for one of the two sets would require a separate article by itself. however, there are some important features of difference between the two.

What constitutes a related party is defined in different manner under the two provisions. While the 2013 Act seeks to be specific and provides a defined set of relationship that would make a party a related party, the SEBI definition is qualitative. It includes all parties treated as related party under the 2013 Act and adds more.

As regards approval, the 2013 Act requires that the Board shall approve the specified related party transactions. Companies having paid up capital of at least rs. 10 crore, shall obtain the prior approval of the shareholders by way of a special resolution. further, transactions beyond the specified amount as per specified formula would also be covered. at such meeting, members who are related parties  cannot  vote.  the  provisions  do  not  apply  to  trans- actions in the ordinary course of business and at arm’s length, as defined.

SEBI however requires that the audit Committee should approve all related party transactions. however, in case of “material” related party transactions, special resolution shall be passed to take approval where the related parties should not vote. a transaction with a related party would be treated as “material” if such transaction individually  or taken together with previous transactions during the financial year exceed 5% of the annual turnover or 20% of the net worth, whichever is higher, of the company.

Further,  though  SEBI Clause  will  come  into  force  generally from 1st october, 2014, all those material related party transactions that are likely to extend beyond 31st march, 2015 are required to be placed for approval of the shareholders at the first meeting of shareholders after 1st october, 2014. a Company may even get such approval at a meeting prior to 1st october, 2014.

E-Voting
SEBI has introduced a new Clause 35B to make e-voting mandatory by listed companies for shareholder resolutions. all shareholder resolutions including resolutions to be passed by postal ballot should be capable of being voted  through  e-voting.  The  e-voting  would  be  through an agency that provides such platform and complies with conditions as prescribed by the ministry of Corporate affairs.

The 2013 Act/Rules framed thereunder require all listed companies and companies having at least one thousand shareholders to provide facility of e-voting.

Conclusion
these  are  just  some  of  the  new  requirements  relating to corporate governance in the 2013 Act/SEBI Clauses. While the 2013 Act does not give much of a transition period, SEBI has given some time to implement. however, considering the overlapping requirements, significant provisions have become applicable. Considering the punitive and other consequences of non-compliance, the first full year of 2014-15 will require serious efforts to be compliant. at the same time, considering the manner in which they are introduced, there are likely to be several unintended violations. this will only get worse considering poor/loose drafting particularly in the 2013 Act. The fact that the requirements create substantial new requirements and even hurdles, make it even more difficult. One hopes that SEBI and the MCA takes a liberal approach during the year, gives relaxations where possible and takes a lenient view of unintended violations during the first full year of applicability.

2014 (34) STR 225 (Tri.-Del.) Neelav Jaiswal & Brothers vs. CCEx.,Allahabad.

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Valuation: Whether the remittance of contribution towards Provident Fund should be included in gross amount charged for supply of manpower services? Held yes.

Facts:
The Appellants engaged in providing manpower supply agency services received provident fund contribution with respect to personnel deployed by the Appellants with M/s. Hindalco Industries Ltd. The Appellants contested that since provident fund contribution was separately paid and the same did not form part of consideration for providing taxable services, the amounts would not be leviable to service tax. Relying on the decision delivered by the Delhi High Court in case of Intercontinental Consultants & Technocrats Pvt. Ltd. vs. UOI 2013 (29) STR 9 (Del.), the Appellants argued that value of taxable services shall only be gross value received for providing taxable services and nothing more.

Held:
Though the Appellants had statutory obligation to contribute towards provident fund, M/s. Hindalco Industries Ltd. not only remitted the remuneration of the personnel but also remitted the contribution to provident fund. Therefore, both these amounts constituted gross amount charged for providing taxable services.

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2014 (34) STR 205 (Tri-Chennai) Faizan Shoes Pvt. Ltd. vs. Comm. Of ST, Chennai.

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In case of amendment in refund notification, whether provisions existing on the date of export of goods should be considered or provisions existing on the date of filing refund claim should be considered?Held provisions on date of claim should be considered.

Facts:
The Appellants exported goods and claimed refund of service tax paid vide Notification No. 41/2007-ST dated 06-10-2007. The department rejected refund claim on the ground that the exporter did not satisfy the following conditions of the said Notification, existing at the time of export which were modified at the time of filing refund claim:

• The exporter should not have availed drawback of service tax
• The refund claim should have been filed within 6 months and

Further, the amount of commission should have been declared on shipping bill.

The Appellants relied on the decision of Mumbai Tribunal in case of WNS Global Service Pvt. Ltd. vs. CCE, Mumbai 2008 (10) STR 273 (Tri.-Mum.) and contested that in case the refund claim is filed post the amendments of the notification and if the amended requirements are satisfied, refund claim cannot be rejected. Since the conditions were modified and there was no condition for non-availment of drawback and time limit was extended to 1 year at the time of filing refund claim, the Appellants were required to fulfil the amended conditions. Further, since SCN was silent with respect to non-declaration of commission amount on shipping bill, the order travelled beyond SCN and in any case, the same was a procedural lapse.

The revenue relied on the decision of Chennai Tribunal in case of CCE, Madurai vs. Shiva Tex Yarn & Others 2012 (25) STR 56 (Tri.-Chennai) wherein it was held that the amendments to notification has prospective effect only.

Held:
Decision cited by revenue is a Single Member Bench decision whereas decision cited by the Appellants is a Division Bench decision including the Single Member who had rendered the decision. Having regard to the objective of duty and tax free exports and Circular dated 12-03- 2009 clarifying that pending claims to be dealt with by applying amended provisions, it was held that the provisions as applicable on the date of filing refund claim needs to be followed. Non-mention of commission amount in shipping bill was a mere procedural lapse. Accordingly, if documentary evidence is available with respect to payment of service tax on commission, refund claim is to be granted.

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Reassessment: S/s. 147 and 148: A. Y. 1999-00: Note forming part of return mentioning and describing the nature of receipt under a noncompete agreement: Return accepted u/s. 143(1): Notice u/s. 148 on the basis of same material and nothing more: Not valid:

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CIT vs. Atul Kumar Swami; 362 ITR 693 (Del):

For the A. Y. 1999-00, in the note filed together with the accounts and the returns disclosed that he received a sum of Rs. 88 lakh as a one-time, non-compete fee. He concededly paid advance tax of Rs. 27,60,600/- on the same. He claimed that this is a one-time capital receipt. The return was processed u/s. 143(1) of the Income-tax Act, 1961. Subsequently, the Assessing Officer reopened the assessment by issuing notice u/s. 148 dated 09-01- 2002 and brought the said amount of Rs. 88 lakh to tax as business income. The Tribunal held that there was no tangible material and that it was under mere circumstance that the advance tax to the tune of Rs. 27.6 lakh was paid did not amount to admission by the assessee. The Tribunal allowed the assessee’s appeal and held that the reopening was not valid.

In appeal, the Revenue contended that having regard to Explanation 1 to section 147 read with section 143(1), the reopening in this case was justified. The Revenue also argued that the agreement entered into by the assessee under which the amount was paid had not been filed during the assessment stage. And this justified the reassessment proceedings.

The Delhi High Court upheld the decision of the Tribunal and held as under: “

i) A valid reopening of assessment has to be based only on tangible material to justify the conclusion that there is escapement of income.

ii) The note forming part of the return filed for the A. Y. 1999-00 clearly mentioned and described the nature of the receipt under the non-compete agreement. The reasons for Notice u/s. 147 nowhere mentioned that the Revenue came up with any other fresh material warranting reopening of assessment. Therefore, mere conclusion of the proceedings u/s. 143(1) ipso facto did not permit invocation of powers for reopening the assessment.

iii) We are satisfied that the Tribunal’s reasons are justified and do not call for any interference.”

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[2014] 44 taxmann.com 149 (Bombay) – Saswad Mali Sugar Factory Ltd. vs. CCE.

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Whether invocation of extended period and imposition of penalty u/s. 78 go hand-in-hand? Held yes.

Facts:
The Appellant is receiver of Goods Transport Agency (GTA ) service during April 2005, to October 2006. Adjudicating authority confirmed the demand and penalty. Commissioner (Appeals) upheld the service tax liability on the ground that there was suppression of facts but deleted the penalty u/s. 78 on the ground that the Appellant proved a reasonable cause for the failure. Thus the case is squarely covered by section 80 of the Act. Revenue did not contest deletion of penalty. Assessee’s appeal before Tribunal was dismissed for non-deposit of service tax.

Held
Hon’ble High Court held that the condition for invocation of extended period of limitation as provided in section 73 and the condition precedent to imposing penalty u/s. 78 are identical viz. there should be fraud, collusion or wilful misstatement or suppression of facts or contravention with intent to evade payment of service tax. Once the Commissioner (Appeals) has come to a finding that there was genuine cause for non-imposition of penalty then the same cause is also to be factored to conclude that extended period of limitation cannot be invoked. This finding will also apply to determine whether there was any intent to evade payment of service tax. High Court also observed that, revenue has not preferred appeal against deletion of penalty. High Court set aside the order of Tribunal and directed it to take up the matter on merits without requiring any pre-deposit.

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Interpretation – Three months – Does not mean 90 days – Bar of Limitation – Application filed on next day after limitation period due to holiday on the said date – Not barred by limitation.

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Subodh Chandra Dash vs. M/s. B. Engineers & Builders Ltd., Bhubaneswar AIR 2014 Orissa 50

An agreement was executed between the parties. The bills were submitted by the petitioner, but they were not settled. The Arbitrator was appointed and the award was passed by the Arbitrator in favour of the petitioner. On 28- 01-2008, the opposite party obtained copy of the award. On 29-04-2008, Arbitration Petition was filed by the opposite party before the learned District Judge, Bhubaneswar u/s. 34 of the Arbitration and Conciliation Act, 1996. The opposite party filed objection to the said petition. The impugned order was passed on 18-08-2011 holding that the application filed u/s. 34 of the Act is within time.

The sole question that arose for consideration in the application is, whether the limitation of three months as provided in section 34 proviso to s/s. (3) of the Act should be calculated as ninety days.

The Court observed that in the case of State of H.P. and another vs. Himachal Techno Engineers and another,: 2010 SAR (Civil) 711, wherein the Supreme Court held that to equate 90 days to the expression of “three months” mentioned in section 34(3)of the Act is erroneous. The Supreme Court further held that a ‘month’ does not refer to a period of 30 days, but refers to the actual period of a calendar month. If the month is April, June, September or November, the period of the month will be thirty days. If the month is January, March, May, July, August, October or December, the period of the month will be thirty-one days. The Supreme Court further held that if the month is February, the period will be twenty-nine days or twentyeight days depending upon whether it is a leap year or not. In the aforesaid case, the Supreme Court further held that section 12 of the Limitation Act, 1963 provides for exclusion of time in legal proceedings.

The Court further held that section 9 of General Clauses Act, 1897 provides that in any Central Act, when the word ‘from’ is used to refer to commencement of time, the first of the days in the period of time shall be excluded. Therefore, to apply the said principle to the present case, while calculating the date of limitation, the date on which the copy of the award has been received by the opposite party i.e., on 28-01-2008 shall be excluded from computation of the limitation.

Therefore, computing the period of limitation from 29-01-2008, 3 days of January, 29 days of February (as 2008 was a leap year), 31 days of March and 28 days of April shall be included in the limitation. Thus, a total period of 91 days is the period of limitation for the present opposite party to prefer an application u/s. 34 of the Act. However, it was not disputed that the period of limitation ended on 28-04-2008. However, the application was filed on 29-08-2008. Therefore, it is seen that there is delay of one day in preferring the application u/s. 34 of the Act. However, it is not disputed that 28-01-2008 was a holiday, because the same was Lawyer’s Day, it is a holiday observed in the State of Odisha. Therefore, the application was filed on 29-01-2008 and is not barred by limitation.

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Hindu Succession-Co-parcenary property – Rights of daughter – Section 6, Hindu Succession Act 1956

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Pratibha Rani Tripathy and Anr vs. Binod Bihari Tripathy & Ors. AIR 2014 Orissa 74

The Appellants had filed an appeal for partition of the immovable & movable properties as described in Schedules-‘ A’ & ‘B’ of the plaint and for recovery of possession of the Schedule-‘C’ properties.

The late Shri Durga Charan Tripathy was the son of the Defendants 1 & 2. He was married to Plaintiff No. 1 as per the Hindu rites and customs and the Plaintiff No. 2 was born out of their wedlock on 16-12-2000. Durga Charan Tripathy expired on 29-06-2002. The suit land, which was the ancestral property of the Defendant No. 1 & his deceased son, was never partitioned between them at any point of time. After the death of Durga Charan Tripathy, the Plaintiffs & Defendant No. 2 succeeded to the interest of Durga Charan Tripathy over the Schedule ‘A’ property i.e., the land.

During the course of the hearing of the appeal, the Defendant Nos. 5 & 6, who are daughters of Defendant Nos. 1 & 2 & sisters of late Durga Charan Tripathy, have filed a cross objection, inter alia, claiming that they have equal share in Schedule ‘A’ property with their late brother Durga Charan Tripathy to which they are entitled to in view of the amendment of the Hindu Succession Act, 1956 by the Hindu Succession (Amendment) Act 2005. Admittedly, the said amendment came into force with effect from 09- 09-2005 i.e., during pendency of the suit.

The moot question, therefore, arose as to whether after amendment of the Hindu Succession Act in the year 2005, the Court below should have held that the Defendant Nos. 5 & 6 (daughters) have equal share with their brother late Durga Charan Tripathy in the property along with their mother Defendant No. 2.

The Hon’ble Court observed that, by the date the suit was disposed of i.e., in the year 2007, the amendment had come into force. Hence, the amended provisions of section 6 of the Hindu Succession Act with regard to right of the daughter will operate in the instant case as there has been no partition effected prior to 20-12-2004 as per s/s. (5) of the said section. Thus, the Trial Court, while determining the share of the parties over the joint family property described in Scheduled ‘A’, should have considered the amendment brought into the Hindu Succession Act by the commencement of the Hindu Succession (Amendment) Act 2005. Applying the aforesaid provision of section 6 as well as the amendment to section 23 of the Act, it would be seen that late Durga Charan Tripathy along with Defendant Nos. 1 & 2 & Defendant Nos. 5 & 6 would have been entitled to equal share in Schedule ‘A’ property & therefore, each of them would have got 1/5th share. 1/5th Share of late Durga Charan Tripathy is succeeded by the Plaintiffs as well as Defendant No. 2.

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Evidence – Printout generated from computer seized not admissible for non fulfillment of statutory conditions: Section 138C customs Act:

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Agarvanshi Aluminium Ltd vs. Commr. Of Cus. (I) NHAVA Sheva; 2014 (299) ELT 83 (Tri. Mum)

The brief facts of the case are that the importer imported aluminium scrap during the period July, 2004 to June, 2006 through various ports. The total quantity of aluminium scrap imported was 3889.998 MTs and the value declared was Rs. 23,84,81,992/-. The DRI, which investigated the imports, came to the conclusion that the appellant had misdeclared the value of imports and the actual value of imports amounted to Rs. 28,40,85,648/- and accordingly issued a show cause notice dated 31-12-2007 demanding differential duty of Rs.1,40,76,571/-.

This demand of duty was based on the evidence unearthed from the indenting agents premises involving differential duty of Rs. 48,80,774/- contemporaneous value of imports involving duty of Rs. 42,06,213/- and on the basis of LME prices minus permissible discount involving a duty of Rs. 49,89,584/-.

The appellant submitted that the demands towards differential duty is based on computer printouts recovered from the premises of the indenting agent (Shri Purshottam Parolia) cannot be relied upon as per section 138C of the Customs Act, 1962. As per the said provisions, the computer printouts can be taken as evidence only subject to fulfilling the terms and condition specified in the section and same have not been complied with in the instant case. The Hon’ble Tribunal observed that in this case, demands have been confirmed against the importer on three counts:

(a) On the basis of computer printout and statement of the indenter and the partner of the importer.
(b) On the basis of contemporaneous imports and
(c) On the basis of LME price,

As per the panchnama, in the list of the documents seized, initially the list of document typed was till Sr. No. 99, thereafter five items were added in handwritten form and Sr. No. 103, it is mentioned that four computer units without any mouse, keyboard, monitor and other accessories i.e., peripherals is mentioned. In the panchanama, the description of the item i.e., make, model, serial no. of the CPU were not mentioned. Moreover, they are handwritten and other 99 items are typed. Further, it was found that as per the panchanama, 4 CPU were seized, but as per the report of Directorate of Forensic Science, computers are found to be five in number and printouts are taken from these five CPUs which has been relied on in the impugned order. Therefore, the veracity of the panchanama is doubtful.

From the above provisions, it was clear that for admissibility of computer printout there are certain conditions which have been imposed in section 138C. Admittedly, the condition of the said section has not been complied with.

The Tribunal relied on the decision in case of Premier Instruments & Control Ltd. (2005) 183 ELT 65 (Trib.) wherein it was held that “computer printout were relied on by the adjudicating authority for recording a finding of clandestine manufacture and clearance of excisable goods. It was found by the Tribunal that printouts were neither authenticated nor recovered under Mahazar. It was also found that the assessee in that case had disowned the printout and he was not even confronted. The Tribunal rejected the printouts and the revenues finding of clandestine manufacture and clearance. Thereafter, it was found that there is a strong parallel between the instant case and the case cited. Nothing contained in the printout generated by the PC can be admitted as evidence for non- fulfillment of the statutory condition”.

Therefore, the printout generated from the PC seized cannot be admitted into evidence for non-fulfillment of statutory condition of section 138C of the Customs Act, 1962.

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Development Agreement – Conditional sale – Suit by developer for specific performance – maintainable: Contract Act section 202 and 204, Transfer of property Act 1882, section 54

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Ashok Kumar Jaiswal vs. Ashim Kumar Kar AIR 2014 Calcutta 92 (FB)

A development agreement is in the nature of an agreement for sale subject to certain conditions. It is an agreement for a conditional sale. A suit at the instance of a developer (where the developer is the non-owner party to a development agreement) is not prohibited by section 14(3) (c) of the Specific Relief Act, 1963.

A contract between a developer and an owner would also consist of reciprocal rights and obligations. It would be preposterous to say that only the owner can maintain a suit against the developer for enforcing his rights and not vice versa. If the developer has a right under the contract, he must have a remedy in the form of approaching a forum for grievance redressal. This is not to say that the developer will necessarily succeed in such a legal action. A question of maintainability of a suit is completely different from the question of whether the suit will succeed or not on the facts of the case and in the light of the applicable law. Section 14(3)(c) of the Specific Relief Act can in no manner be interpreted as debarring a developer from approaching the legal forum for redressal of his grievance. To that extent, a suit at the instance of a developer is maintainable and not barred by section 14(3) (c) of the Specific Relief Act.

Ordinarily, a Power of Attorney executed by an owner in favour of the developer for effectuating the terms and conditions of the development agreement does not give a bare agency to the developer but it gives the developer an interest in the property which forms the subject-matter of the agency. However, merely because such a power of attorney gives the developer such an interest, it cannot be said that the agency cannot be revoked or terminated. Further, merely because such a power of attorney may be revoked, it would not imply that the development agreement can otherwise not be specifically enforced if the facts in a particular case so warrant

Section 53A of the Transfer of Property Act would suggest, if a proposed transferee of an immovable property under an agreement for sale is put in possession and continues in possession in part performance of the contract and does some act in furtherance of the contract and is willing to perform the balance part, his possession would be protected and the transferor would be debarred from dispossessing him other than under a right expressly provided by the terms of the contract. If a developer files a suit for specific performance of a contract and the owner files a suit for recovery of possession, one may have to dismiss both on different logic. A court of law is duty-bound to resolve the controversy that is brought before it, as far as practicable. The Court of law is not entitled to complicate the issue by making the controversy more complicated.

Section 202 of the Indian Contract Act 1872, provides that when the agent had interest in the property under the agency agreement in the absence of an express provision, the contract could not be terminated to the prejudice of such interest. Section 203 permits the principal to revoke the authority of his agent. However, when the agent partly exercised his authority, such revocation would not be permissible u/s. 204. If one reads these three provisions together, one would find that the Power of Attorney so revoked by the owner should not be looked at in an isolated manner. The Power of Attorney generally issued to the developer, is in continuation of the original agreement for development of the property, meaning thereby, that the developer who was entrusted to develop the property would be given authority to further act, as per the contract, including dealing with the property to the extent permissible under the contract. Hence, the Power of Attorney was nothing but an agency agreement executed in furtherance of the original contract.

If the original contract creates an interest in favour of the developer even if the Power of Attorney is revoked such interest would not evaporate.

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Intercorporate Investments: Changes Galore

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Synopsis
The 2nd phase of the provisions of the Companies Act, 2013 has been made operative w.e.f. 1st April, 2014. This includes provisions dealing with intercorporate investments. Substantial changes have been made in the law in this respect. It is time for Corporate India to unlearn and relearn all they know in this respect. This article examines the salient features of the new provisions on intercorporate investments.

Introduction
Part-II of the Companies Act, 2013 (“the Act”) has made about 183 further sections (after the initial 98) effective from 1st April, 2014 and a Part-III is pending. The Rules in respect of Part-II sections have also been notified. One of the sections notified in Part-II is section 186 which deals with “Loans and investments by a company”. Section 186 coupled with section 185 has caused maximum heartburn amongst corporate India. This section 186 is a modern day avatar of section 372A of the Companies Act, 1956 (which in itself was a modern day avatar of the erstwhile section 372 of the same Act), but it has undergone a transmutation as compared to the original section. As the heading of the section suggests, it deals with two legs ~ loans by a company and investments by a company. In addition, there are certain other sections of the Companies Act, 2013 which deal with intercorporate investments. Through this article, let us examine the provisions relating to investments by a company in another body corporate, i.e., intercorporate investments.

Applicability
One of the most distressing features of section 186 is that it even applies to private limited companies which are not subsidiaries of public limited companies. Section 372/372A had a blanket exemption for private limited companies. A similar exemption is not found u/s. 186. Thus, all private companies would now have to comply with the provisions of this section.

Limit on Investments
The overall limit for a company to invest in the securities of another body corporate u/s. 186(2) is the higher of the following two limits:
(a) 60% of paid-up share capital + free reserves + securities premium; or
(b) 100% of free reserves + securities premium

This limit applies to investment by way of fresh acquisition or purchase or otherwise of securities of another body corporate.

The term ‘Securities’ has been defined u/s. 2(81) of the Act to mean securities as defined u/s. 2(h) of the Securities Contract (Regulation) Act, 1956. Thus, they would include shares (equity, preference, convertible preference, non-voting rights shares), debentures, bonds, derivatives in securities, warrants, other marketable securities of a body corporate. The limit would apply to investment by a company in the securities of both listed as well as unlisted companies.

Next let us examine the definition of the term ‘body corporate’. Section 2(11) of the Act defines it as including a company incorporated outside India. However, it does not include a corporate sole, a co-operative society and any other body corporate so notified by the Government. The most important aspect of a body corporate is that it is an independent legal entity with a distinct identity which is separate from its partners/shareholders/members and has a perpetual succession. It can own property on its own accord and in its own name. Hence, investing in the securities of a foreign subsidiary/joint venture would also fall within the purview of these limits. However, a mutual fund structured as a trust is not a body corporate and hence, investment in the units issued by a mutual fund (structured as a trust) would not be within the purview of section 186.

Let us next look at the composition of the limits for considering the 100% or 60%:

(a) Section 2(64) of the Act defines the phrase ‘paid-up share capital’ to mean such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paidup in respect of shares of the company but does not include any other amount received in respect of such shares, by whatever name called.

(b) The phrase ‘free reserves’ is defined by section 2(43) to mean such reserves which are available for distribution as dividend. These reserves are to be reckoned as per the last audited balance sheet of a company. The following are however, not treated as free reserves:

(i) any amount representing unrealised gains, notional gains or revaluation reserve, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value.

(c) T he last component of the limits is ‘securities premium’ which is governed by section 52 of the Act and it states that where shares are issued at a premium, the amount of the premium received on those shares shall be transferred to a “securities premium account”.

What if Limits are to be exceeded?


In case the investment in another body corporate is to be in excess of the limits specified above, then the investor company must obtain a prior special resolution of its shareholders passed at a general meeting. The Rules notified u/s. 186 provide that this would not be required where a holding company proposes to invest (by way of subscription or acquisition) in shares of its wholly owned subsidiary. However, the resolution would be required if the subsidiary is not a 100% subsidiary. Thus, if any, only if, the entire share capital is held by the investor and/or its nominees, would a special resolution not be required. The resolution must specify the total amount up to which the Board is authorised to make such acquisition. Section 110(1) of the Act and the Rules notified therein specify the items which must be transacted through postal ballot. While giving of loans/guarantees/security in excess of limits u/s. 186 have been specified, investment in excess of the limits u/s. 186 has not been specified. Hence, such a resolution is not mandatorily to be passed via a postal ballot.

In addition, the requirements of the Companies (Management and Administration) Rules, 2014 as well as the revised Clause 35B of the Listing Agreement should be complied with by all listed companies. This requires that for all resolutions to be passed at General Meetings, evoting facility must be provided by the listed company.

Layers of Investment Companies


S/s. (1) of section 186 introduces a novel concept, i.e., any company can make an investment through not more than two layers of investment companies. Companies in India are accustomed to having a web of investment companies. This has often been criticised on the grounds that it gives rise to opacity and proves difficult for regulators to ascertain the ultimate owner of an investee company. Thus, any company desiring to make an investment, after the coming into force of section 186, can do so either directly or through an investment company or through one investment company followed by a 2nd layer of investment company. However, it cannot have a 3rd layer of investment company under the 2nd layer of investment company. This s/s. prohibits making any investment, unlike the limits u/s. 186(2)(c) (which apply only for investment in a body corporate) and this does not restrict the scope to investment in a body corporate. Hence, any investment by a company through more than 2 layers of investment companies is not allowed. Thus, investment in a company, LLP, body corporate, partnership firm, etc., would all be covered. Considering the way the s/s. is worded, one wonders whether this prohibition would also apply to investment by a company in other asset classes, such as, land. However, a harmonious reading with the other sub-sections does not seem to indicate so.

The restriction is on routing any investment through more than 2 vertical layers of investment companies as illustrated by the following diagram (illustration-1) which violates section 186:

Thus,  since aBC  has  routed  its  investment  in  XYZ  via 3 layers of investment companies, the prohibition u/s.
186(1) would apply.

It may be noted that the prohibition is on having more than 2 layers of investment companies and hence, we need to ascertain what constitutes an investment company? the section defines an ‘investment company’ to mean a com- pany whose principal business is acquisition of shares, debentures or securities. at the outset, it is very clear that the definition only applies to a company and not to any other body corporate or entity. A company is defined to mean a company incorporated under the act or under any previous company law. Hence, if an LLP is used as an investment vehicle then this prohibition u/s. 186 would not apply. Whether you can incorporate an investment LLP is another story altogether.

Secondly, it must be a company whose principal business is acquisition of securities. What is principal business has not been defined. In this context, the principal business tests  laid  down  by  the  reserve  Bank  of  india  to  determine what constitutes an nBfC (non-banking financial Company) may be helpful. according to these tests, a company will be treated as an NBFC if it satisfies both the following conditions as per its audited accounts:

(i)    Its financial assets as per the last audited Balance Sheet should be more than 50% of its total assets (netted off by intangible assets) and

(ii)    Its income from financial assets as per the last audited Profit & Loss Account should be more than 50% of its gross income.

It should be noted that both these tests should be sat- isfied in order to treat a company as an NBFC. A company whose principal business is acquisition of securities may generally also qualify as an NBFC unless it can be treated as a Core investment Company or a CiC or if it is a company exempted from nBfC provisions, e.g., stock brokers. in this respect, the decision of the madras high Court u/s. 372 of the Companies Act,1956 in HC Kothari, 75 Comp. Cases 688 (mad) may be referred to. this decision held that it is clear that the income derived from the business is not the criteria. the test would rather be, as to what is the principal business of the company? a balance- sheet should show as to what is the principal business of the company.

The  department  of  Company  affairs’  views  (dated  1st July, 1963) under the erstwhile section 372 may also be considered:

“In the Department’s opinion whether a company is or is not an investment company and the business which it should or should not transact to fall within the provision of the definition of an “Investment company” within the meaning of section 372(10) is actually a question of fact. The words used in the section are “whose principal business is the acquisition of shares.  ” These words imply that the company concerned is expected to hold the shares, etc., acquired by it for a reasonable time.”

The Department’s views (dated 23rd February, 1961 and 4th October, 1961) under the erstwhile section 372, in relation to a share trading company, were as follows:

“The question as to whether a particular share trading company which deploys its funds for short-term transaction in buying and selling shares is an investment company or not, is one of fact which has to be determined in relation to the actual business transacted by it. The Department is inclined to the opinion that a company should be treated as an investment company if the whole or substantially the whole of its business relates to shares, securities, stock and debentures, etc. A share trading company may take advantage of these provisions of section 372 if it can be classed as an investment company.”

The act expressly provides that the restriction on two layers of investment companies even applies to an NBFC whose principal business is acquisition of securities. CiCs are a class of NBFCs which invest 90% of their net assets in group companies’ securities and at least 60% of 90% of their net assets in group companies’ equity shares. thus, even NBFCs and CiCs are restricted from having only two layers of investment companies.

The investor company could be an investment or an operating company but it cannot route its investment via more than 2 layers of investment companies. if the investment is routed through an operating company or one whose principal business is not acquisition of securities, then the restriction u/s. 186 on 2 layers would not apply. The following diagram (illustration-2) would amplify this statement:

Thus, since PQR has routed its investment in XYZ via a mix of 2 layers of operating companies and 2 layers of investment companies, the prohibition u/s. 186(1) does not apply. as explained the prohibition is only on more than 2 layers of ‘investment’ companies. one additional factor to be borne in mind in structuring an investment through an investment company is the NBFC directions. it is quite possible that the investment company, i.e., one whose principal business is acquisition of securities may constitute either an NBFC or a CIC. if it is an NBFC-ND-SI/Systemically Important Non-deposit taking NBFC, i.e., one which has total assets of rs. 100 cr. and above, then the NBFC directions impose a restriction that it cannot lend and invest more than 40% of its owned funds to a single group of parties and more than 25% of its owned funds to a single party. thus, in such a case, the twin restrictions of the act as well as of the directions would have to be borne in mind.

Exemption:
The  prohibition  on  making  investments  only  through   a maximum of two layers of investment companies will not affect the following two cases:
(i)    a company from acquiring any other company incorporated in a country outside india if such other company has investment subsidiaries beyond two layers as per the laws of such country; or
(ii)    a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

Further, section 186(1) gives power to the Government to prescribe such companies which can invest via more than 2 layers of investment companies.

Thus, exceptions presently available are if the indian in- vestor company has acquired a foreign company which, in turn, has more than two layers as per the laws of its country or if the subsidiary of an investor company, in turn, has any investment subsidiary for meeting the requirements of any law.

When indian companies make overseas investments, several times they consider routing such overseas investments through an intermediate holding Company (IHC), regional holding Company (RHC), etc. it is a moot point whether the prohibition u/s. 186 can apply to an investment made in a foreign company via more than 2 layers of IHCs/RHCs? This is because a company is defined under the act to mean a company incorporated under the act or under any previous company law and an ihC or a RHC incorporated abroad is a body corporate but not a company within the meaning of the act. interestingly, under the fema regulations, the RBI is also known to frown upon the use of multi-layered SPVs for making an overseas direct investment.

   Other compliances
in addition to the above substantive provisions, section 186 also lays down several compliances for the investor company, such as, holding investments in its own name, board resolution to be passed by unanimous consent of all directors present at the meeting, maintaining a register of investments, obtaining prior approval of financial institutions in certain cases, etc.

except the provisions relating to two layers of investment companies, none of the other provisions of section 186 are applicable to the following cases of investments:

(a)    to any acquisition made by a registered NBFC whose principal business is acquisition of securities in respect of its investment activities. it may be noted that the exemption is only available to an nBfC which is registered with the rBi. under the CIC directions, a CiC is also a class of nBfCs. hence, this exemption should be available even to registered CICs. however, only CIC-nd-Si, i.e., those which have an aggregate asset size in excess of rs.100 crore need to be registered with the rBi. other CiCs are exempted from  registration  both  as  a  CiC  and  as  an  nBfC. hence, will such exempted CiCs be eligible for the exemption u/s. 186 is a moot point?
(b)    to  any  acquisition  made  by  a  company  whose  principal business is the acquisition of securities. Such companies could be NBFCs, CICs, stock/subbroking companies, Venture Capital Companies, alternative investment funds structured as companies, etc.
(c)    to any acquisition of shares allotted in pursuance of clause (a) of s/s. (1) of section 62, i.e., allotment under a rights issue.

A related compliance is laid down u/s. 187 of the Act which requires all investments made or held by a company to be held in its own name. however, it may hold shares in its subsidiary company in the name of its nominees if it’s required to ensure minimum number of members. unlike the earlier section 49 of the 1956 act, section 187 even applies to a company whose principal business consists of buying and selling of securities.

An  additional  compliance  is  incorporated  in  the  report of the Board of directors. it requires to give particulars   of investments u/s. 186. Further, the Audit Committee’s terms of reference includes scrutiny of intercorporate investments.

Further, section 179(3) states that the power to invest the funds of the company can be exercised by the Board of directors only at a meeting of the Board. hence, a Circu- lar resolution is not possible.

    Exemptions u/s. 372a Dropped

Section 372A of the Companies Act, 1956 contained several exemptions which have been done away with by section 186 of the act. the differences in the exemptions are as follows:

details

Section 372a of the 1956 act

Section 186 of the 2013 act

Applicability
to Private Companies

Entire
Section did not apply to Private Limited Companies

Entire
Section applies to Private Limited Companies. This is a major change

Companies
whose

Entire
Section did not

Restriction
on invest-

principal business

apply to a company

ment through 2 layers

is acquiring securi-

whose principal busi-

of investment com-

ties

ness was acquisition

panies even applies

 

of securities

to a company whose

 

 

principal business is

 

 

acquisition of securi-

 

 

ties. The remaining

 

 

s/s.s of section 186

 

 

do not apply to such a

 

 

company.

NBFCs

No
exemptions for

Restriction
on invest-

 

NBFCs

ment through 2 layers

 

 

of investment com-

 

 

panies even applies

 

 

to an NBFC but the

 

 

remaining sub-sections

 

 

of section 186 do not

 

 

apply to an NBFC.

Acquisition
by

Entire
Section did

Now the
exemption is

Holding Company

not apply to subscrip-

only available qua the

 

tion or purchase of

passing of a special

 

securities by a Holding

resolution by the Hold-

 

Company in its wholly

ing Company if the

 

owned subsidiary

limits u/s. 186 would

 

 

be exceeded by virtue

 

 

of such acquisition.

 

 

However, the other

 

 

s/s.s of section 186

 

 

continue to apply.

    Penalty
Section 186 imposes a heavy penalty for the violation of the provisions of this section. if a company contravenes the provisions of this section, the company shall be pun- ishable with fine which ranging from Rs. 25,000 to Rs. 5 lakh. Every officer who is in default shall be punishable with a term which may extend to 2 years and with fine ranging from rs. 25,000 to rs. 1 lakh.

  Layers of Subsidiaries
in addition to the restriction on layers of investment companies u/s. 186, there is also a restriction u/s. 2(87) of the act on the number of layers of subsidiaries which certain prescribed class of holding companies can have. a subsidiary includes a company as well as a body corporate, such as an LLP. Thus, in respect of prescribed holding companies they cannot have more than certain number of layers of subsidiaries. it may be noted that unlike the restriction on layers of investment companies, this restriction applies both to operating as well as investment subsidiaries and to subsidiaries which are companies or body corporates. Currently, no class of holding companies or number of layers have been prescribed.

one may compare the restrictions contained in section 186 vs. section 2(87) as follows:

 Compilance for The Investee company
The  investee  company  needs  to  pay  special  attention as to whether the issue of fresh securities to the investor company would constitute a private placement u/s. 42 read with the Rules notified thereunder and/or a preferential issue u/s. 62(1)(c) read with the Rules notified thereunder? Several substantive and procedural conditions have been laid down in this respect for the investee company.

Conclusion
The  law  relating  to  intercorporate  investments  is  one area which has witnessed a sea change under the Companies Act, 2013 as compared to the Companies Act, 1956! Corporate india is going to have to grapple with several intended and unintended consequences of these new  provisions  but  then,  who  said  law  and  logic  go together?

Gaps in GAAP

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Depreciation
Synopsis

In this article, the author has dismissed inconsistencies in the depreciation policy prevailing AS-6 on Depreciation Accounting and as per the Schedule II of the new Companies Act, 2013 with regard to the concepts of “Useful Life” and “Residual Value”. The author has addressed issues like Revenue-based amortisation, component accounting, revaluation of fixed assets, etc. along with the applicability of transitional provisions in different situations.

Background In the 1956 Act, Schedule XIV prescribed depreciation rates for various assets, both under the SLM method and WDV method. The purpose of prescribing minimum rates was to ensure that dividends are declared out of profits determined after providing for minimum depreciation. AS-6 on Depreciation Accounting laid out principles for depreciation for the purposes of financial statements. Under this standard, depreciation under Schedule XIV is counted as minimum. Higher depreciation was required to be provided for, if based on management’s assessment, the useful life of asset was lower than that laid out in Schedule XIV.

Initially, Schedule II of the 2013 Act laid out useful lives for assets, which were to be compulsorily used as minimum rates except by Ind-AS companies. Pursuant to an amendment to Schedule II this requirement was removed. Rather, the provision now reads as under:

“(i) The useful life of an asset shall not be longer than the useful life specified in Part ‘C’ and the residual value of an asset shall not be more than five per cent of the original cost of the asset:

Provided that where a company uses a useful life or residual value of the asset which is different from the above limits, justification for the difference shall be disclosed in its financial statement.”

From the use of word “different”, it seems clear that both higher and lower useful life and residual value are allowed. However, a company needs to disclose in the financial statements justification for using higher/lower life and/ or residual value.

Transitional provisions
With regard to the adjustment of impact arising on the first-time application, the transitional provisions to Schedule II state as below:

“From the date Schedule II comes into effect, the carrying amount of the asset as on that date:
(a) Will be depreciated over the remaining useful life of the asset as per this Schedule,
(b) A fter retaining the residual value, will be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.”

Proviso to Schedule II states that if a company uses a useful life or residual value of the asset which is different from limit given in the Schedule II, justification for the difference is disclosed in its financial statements. How is this proviso applied if notified accounting standards, particularly, AS 6 is also to be complied with?

AS 6 states that depreciation rates prescribed under the statute are minimum. If management’s estimate of the useful life of an asset is shorter than that envisaged under the statute, depreciation is computed by applying the higher rate. The interaction of the above proviso and AS 6 is explained with simple examples:

(i) T he management has estimated the useful life of an asset to be 10 years. The life envisaged under the Schedule II is 12 years. In this case, AS 6 requires the company to depreciate the asset using 10 year life only. In addition, Schedule II requires disclosure of justification for using the lower life. The company cannot use 12 year life for depreciation.

(ii) T he management has estimated the useful life of an asset to be 12 years. The life envisaged under the Schedule II is 10 years. In this case, the company has an option to depreciate the asset using either 10 year life prescribed in the Schedule II or the estimated useful life, i.e., 12 years. If the company depreciates the asset over the 12 years, it needs to disclose the justification for using the higher life. The company should apply the option selected consistently.

Similar logic will apply for the residual value.

Whether revenue based amortisation under Schedule II can be applied to intangible assets other than toll roads?

Amended Schedule II reads as follows “For intangible assets, the provisions of the accounting standards applicable for the time being in force shall apply except in case of intangible assets (Toll roads) created under BOT, BOOT or any other form of public private partnership route in case of road projects.” The amendment clearly suggests that revenue-based amortisation applies to toll roads. The same method cannot be used for other intangible assets even if they are created under PPP schemes, such as airport infrastructure.

Is component accounting under Schedule II mandatory? Is it applied retrospectively or prospectively? How are transitional provisions applied in the case of component accounting?

Component accounting requires a company to identify and depreciate significant components with different useful lives separately. For example, in the case of a building, the base structure or elevators or chiller plant may be identified as separate components. The application of component accounting is likely to cause significant change in the measurement of depreciation and accounting for replacement costs. Currently, companies need to expense replacement costs in the year of incurrence. This was causing a volatility. Under component accounting, companies will capitalise these costs as a separate component of the asset, with consequent expensing of net carrying value of the replaced part. Component accounting would comparatively result in a more stable P&L account.

Schedule II clarifies that the useful life is given for whole of the asset. If the cost of a part of the asset is significant to the total cost of the asset and the useful life of that part is different from the useful life of the remaining asset, the useful life of that significant part will be determined separately. This implies that component accounting is mandatory under Schedule II. In contrast, AS 10 gives companies an option to follow the component accounting; it does not mandate the same.

Materiality in the context of component accounting is decided on an asset by asset basis, and how significant the cost of component is, compared to cost of the total asset. This will call for judgement to be exercised. Component accounting is required to be done for the entire block of assets as at 1st April, 2014. It cannot be restricted to only new assets acquired after 1st April 2014.

If a component has zero remaining useful life on the date of Schedule II becoming effective, i.e., 1st April 2014, its carrying amount, after retaining any residual value, will be charged to the opening balance of retained earnings. The carrying amount of other components, i.e., components whose remaining useful life is not nil on 1st April 2014, is depreciated over their remaining useful life.

In case of revaluation of fixed assets, companies are currently allowed to transfer an amount equivalent to the additional depreciation on account of the upward revaluation of fixed assets from the revaluation reserve to P&L. What is the position under Schedule II?

Under Schedule XIV, depreciation was to be provided on the original cost of an asset. Considering this, the ICAI Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets allowed an amount equivalent to the additional depreciation on account of the upward revaluation of fixed assets to be transferred from the revaluation reserve to the P&L.

In contrast, schedule II to the 2013 Act requires depreciation to be provided on historical cost or the amount substituted for the historical cost. therefore, in case of revaluation, a company needs to charge depreciation based on the revalued amount. Consequently, the ICAI Guidance note, which allows an amount equivalent to the additional depreciation on account of upward revaluation to be recouped from the revaluation reserve, will not apply.

Schedule II to the 2013 Act is applicable from 1 April 2014. Section 123, which is effective from 1 April 2014, among other matters, states that a company cannot declare dividend for any financial year except out of (i) profit for the year arrived at after providing for depreciation in accordance with Schedule II, or
(ii)    … Given this background, is the applicability of Schedule II preponed to financial statements for even earlier periods if they are authorised for issuance post 1st April 2014?

As per MCA announcement, Schedule II is applicable from 1st april 2014.

Schedule II contains depreciation rates in the context of Section 123 dealing with “Declaration and payment of dividend” and companies use the same rate for the preparation of financial statements as well. Additional depreciation may be provided, based on assessment of useful life as per AS 6.

One view is that for declaring any dividend after 1st April 2014, a company needs to determine profit in accordance with Section 123. this is irrespective of the financial year-end of a company. Hence, a company uses Schedule ii principles and rates for charging depreciation in all financial statements finalised on or after 1st April 2014, even if these financial statements relate to earlier periods.

The second view is that based on the General Circular 8/2014, depreciation rates and principles prescribed in Schedule II are relevant only for the financial years commencing on or after 1st  april 2014. the language used in the General Circular 8/2014, including reference to depreciation rates in its first paragraph, seems to suggest that second view should be applied. For financial years beginning prior to 1st april 2014, depreciation rates prescribed under the Schedule XiV to the 1956 act will continue to be used.

In the author’s view, based on the clear intent of the regulator, second view is the preferred approach for charging depreciation in the financial statements.

How do the transitional provisions apply in different situations? In situation 1, earlier Schedule XIV and now Schedule II provide a useful life, which is much higher than AS 6 useful life. In situation 2, earlier Schedule XIV and now Schedule II provide a useful life, which is much shorter than AS 6 useful life.

In situation 1, the company follows aS 6 useful life under the 1956 as well as the 2013 Act. In other words, a status quo is maintained and there is no change in depreciation. hence, the transitional provisions become irrelevant. in situation 2, when the company changes from Schedule XiV to Schedule ii useful life, the transitional provisions would apply. for example, let’s assume the useful life of an asset under Schedule XiV, Schedule ii and as 6 is 12, 8 and 16 years respectively. the company changes the useful life from 12 to 8 years and the asset has already completed 8 years of useful life, i.e., its remaining useful life on the transition date is nil. in this case, the transitional provisions would apply and the company will adjust the carrying amount of the asset as on that date, after retaining residual value, in the opening balance of retained earnings. if, on the other hand, the company changes the useful life from 12 years to 16 years, the company will depreciate the carrying amount of the asset as on 1st April 2014 prospectively over the remaining useful life of the asset. this  treatment  is  required  both  under  the  transitional provisions to Schedule ii and AS 6.

How are tax effects accounted for adjustments made to retained earnings required by transitional provisions?

Attention is invited to the ICAI announcement titled, “Tax effect of expenses/income adjusted directly against the reserves  and/or  Securities  Premium  Account.”  the announcement, among other matters, states as below:

“… Any expense charged directly to reserves and/or Securities Premium Account should be net of tax benefits expected to arise from the admissibility of such expenses for tax purposes. Similarly, any income credited directly to a reserve account or a similar account should be net of its tax effect.”

Considering the above, it seems clear that the amount adjusted to reserves should be the net of tax benefit, if any.

[2014] 45 taxmann.com 282 (AAR – New Delhi) Oxford University Press., In re Dated: 30-04-14

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Article 14, India-Sri Lanka DTAA; section 9(1) (vii) the Act – payments for sales promotion services rendered by a Sri Lanka resident were not FTS under the Act and were also not taxable in terms of Article 14.

Facts:
The Applicant was the Indian branch of Oxford University press, which is a department of Oxford University, UK. The Applicant was engaged in publishing, printing and reprinting of educational books. The Applicant appointed an individual resident of Sri Lanka as Resident Executive for promotion of sale in Sri Lanka of books published by the Applicant. The Applicant paid certain remuneration to the Resident Executive by remitting it to her bank account in Sri Lanka. The Applicant approached AAR for its ruling on the taxability of such remuneration.

Ruling:

• On examining the scope of duties and responsibilities of Resident Executive, the services rendered by Resident Executives were promotion of brand name and sale of publications of the Applicant. The job description indicates that recipient is more a marketing executive.

• India-Sri Lanka DTAA does not define technical services and hence, definition thereof under the Act should be referred. The services rendered by Resident Executive were not covered within ‘managerial, technical or consultancy services’ mentioned in Explanation (2) to section 9(1)(vii) of the Act. Hence, the payment was not FTS, either under the Act or under India-Sri Lanka DTAA .

• The payment will be covered under Article 14 of India- Sri Lanka DTAA but is not taxable even under that provision.

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[2014] 44 taxmann.com 1 (Mumbai – Trib.) Viacom 18 Media (P) Ltd vs. ADIT A.Y: 2009-10 to 2011-12, Dated: 28-03-14

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Article 12, India-USA DTAA; section 9(1)(vi),
the Act – transponder service will be ‘process’ under Article 12 and
hence payment therefor will be ‘royalty’ under India-USA DTAA as well as
the Act.

Facts:
The taxpayer was engaged in
broadcasting of television channels from India and marketing advertising
airtime on these channels. The taxpayer had obtained round-theclock
satellite signal reception and retransmission service (‘transponder
service’) from an American company (“USCo”). USCo was a tax resident of
USA in terms of Article 4 of India-USA DTAA . The taxpayer had paid
transponder service fee to USCo during the relevant assessment years.

The
taxpayer approached the AO u/s. 195(2) for nil withholding tax
certificate in respect of transponder service fee. The AO did not issue
the certificate since, in his view, the payment was ‘royalty’ in terms
of Article 12 of India-USA DTAA , read with amended provisions of
section 9(1)(vi)

Held:

• The definition of “royalties”
in Article 12(3)(a) includes payments for “process”. The term “process”
is not defined in India-USA DTAA. Hence, its definition in explanation 6
to section 9(1)(vi) of the Act will apply. The use of transponder by
the taxpayer for telecasting/ broadcasting the programs involves
transmission by satellite, including uplinking, amplification,
conversion by downlinking of signals and is covered within the
definition of “process”.

• Hence, payments made for use/right to use of “process” is “royalty” in terms of India-USA DTAA as well as the Act.


The decision of Delhi High Court in Asia Satellite Telecommunications
Co. Ltd. vs. DIT [2011] 332 ITR 340 (Delhi) is not applicable since it
was rendered prior to the insertion of the explanation 6 to section
9(1)(vi) and explanation below section 9(2).

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ITA.No.276 /Hyd/2010 and ITA.No. 277/ Hyd/2010 DDIT vs. DQ Entertainment (International) P. Ltd (Unreported) A.Y: 2005-06 to 2007-08, Dated: 28-03-2014

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Section 9, 195 of the Act – on facts, as the source of income was outside India, exception carved in section 9(1)(vii)(b) of the Act applied and the payments made for services was not chargeable.

Facts:
The taxpayer was engaged in the production of 2D and 3D animation films for various clients. During the relevant years, the taxpayer entered into ‘Outsourcing Facilities Agreement’ for outsourcing some episodes or part of episodes to two sub-contractors – a Hong Kong entity and a Chinese entity. Under the agreement, both the entities were to provide production work/Production material to taxpayer by availing the necessary production premises, facilities, personnel, materials, services and expertise.

According to the taxpayer: the payment was made to the sub-contractors in the course of business; the subcontractors did not have any ‘business connection’ or PE in India; the income did not arise under the deeming provision of section 9(1)(vii) of the Act; and hence the payments were not taxable in India.

According to the AO since the production material was specifically created by sub-contractors for the taxpayer, the substance of contract was not supply of goods but was provisioning of services. Hence, the payments were FTS u/s. 9(1)(vii) of the Act and therefore, the taxpayer should have withheld the tax.

Held:
The production of animation films or part of certain episodes did not have any element of technical services. Delhi Tribunal3 as also Delhi HC4 held that utilisation of knowledge, information and expertise of party undertaking a job of another party is no reason to treat the services rendered as technical or consultancy services

• Section 9(1)(vii)(b) of the Act carves out an exception in case of resident utilising services in business carried on outside India or earning income from a source outside India. As per decision of Supreme Court5, contract is to be considered the source of income and since, as per the contract with the overseas clients, the jurisdiction was of the courts/arbitration at the place where overseas client was located (subjecting the taxpayer to foreign laws), ‘source of income’ was outside India. The viewership of the animation films was also located outside India.

• Thus, there was a direct nexus between the payments and earning of income from source outside India. Therefore, exception in section 9(1)(vii)(b) will be applicable and there was no liability to withhold tax u/s. 195.

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[2014] 43 taxmann.com 425 (Chennai – Trib.) DCIT vs. Velti India (P.) Ltd A.Y: 2009-10, Dated: 27-02-2014

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Article 12, India-South Africa DTAA; section 9, 40(a)(i), the Act – payments made to nonresident for transmission of bulk SMS were not FTS and hence withholding tax obligation did not arise.

Facts:
The taxpayer was an Indian company. The taxpayer availed services of a telecom carrier in South Africa (“SACo”) to transmit bulk SMS. For this service, the taxpayer made certain payments to SACo. The taxpayer did not withhold tax from such payments.

In the course of assessment of income, the AO concluded that the payments made by the taxpayer to SACo were FTS and accordingly, the taxpayer should have withheld tax from the said payments. Since the taxpayer had not withheld tax from the said payments, invoking provisions of section 40(a)(i) of the Act, the AO disallowed the payments.

Held:
• As per Article 12 of India-South Africa DTAA, FTS “means payments of any kind received as a consideration for services of a managerial, technical or consultancy nature”.

• The service provided by SACo was only transmission of bulk SMS, which was mere transmission of data and did not require any technical knowledge or skill. Delhi High Court has held1 that such services do not involve human intervention and therefore the payments cannot be regarded as FTS. Also, Madras High Court has held2 that collection of fees for usage of standard facility does not result in payment for providing technical services.

• The services were rendered outside India.

• Section 195 should be read along with sections 4, 5 and 9 as well as the tax treaties and unless the income is chargeable to tax in India, withholding tax obligation does not arise.

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Transfer Pricing – Inter – corporate Financial Guarantees

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In our previous Article, we studied transfer pricing implications of cross border inter-corporate loans. In this article, we shall look at transfer pricing implications of cross border corporate guarantees between two Associated Enterprises. Guarantees may be for loan, performance of contract or delivery of products etc. However, we shall restrict our discussion, primarily to loan guarantees though principles discussed herein below would be equally applicable to other types of guarantees. We have maintained the Questions and Answers format for elucidating relevant provisions/law more clearly.

Q What are the different types of Guarantees?
A    Meaning of the word Guarantee as per the Oxford Dictionary is:

“An undertaking to answer for the payment or performance of another person’s debt or obligation in the event of a default by the person primarily responsible for it.”

OECD’s Statistical Glossary defines Loan Guarantee as: “A legally binding agreement under which the guarantor agrees to pay any or all of the amount due on a loan instrument in the event of non payment by the borrower.”

Wikipedia defines Loan Guarantee as: “A loan guarantee, in finance, is a promise by one party (the guarantor) to assume the debt obligation of a borrower if that borrower defaults. A guarantee can be limited or unlimited, making the guarantor liable for only a portion or all of the debt.” A Guarantee may be implicit or explicit.

Implicit Guarantee
Implicit guarantee is one when the lender assumes that the borrower being part of a well known group or with financial backing of its parent company, its dues/debts are secured. In case of any unforeseen circumstances, the borrower will be rescued/bailed out by its parent or other group companies.

Implicit guarantees are informal and hence not enforceable in law. Implicit guarantees are not recognised by many countries and normally do not enter the transfer pricing arena.

Explicit Guarantee
Explicit guarantee is one where a formal guarantee agreement is executed whereby the guarantor undertakes to make good loss to the lender in case of default by the borrower. Guarantee commission on explicit guarantees between Associated Enterprises (AEs) needs to be benchmarked on an arm’s length basis applying provisions of the transfer pricing regulations.

Other types of guarantees are letter of comfort/letter of intent whereby the parent company assures the lender that it will safeguard the interest of its subsidiary. This type of guarantee may not have a legally binding force. At times, the parent may undertake to replenish capital in the event of continuing losses which may erode subsidiary’s net worth. Safe Harbour Rules in the Indian Transfer Pricing Regulations clearly define what types of guarantee is covered. The definition of the Corporate Guarantee as per said Rules is as follows:

“Corporate guarantee” means explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short-term or long term borrowing. (Emphasis supplied)

Explanation:
– For the purposes of this clause, explicit corporate guarantee does not include letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of a similar nature.

Provisions of the Safe Harbour Rules (SHRs) throw light on the following issues:

• SHRs are applicable for explicit corporate guarantees (Implicit Guarantees and other forms of guarantees are not covered);
• SHRs cover guarantees given by an Indian Company (i.e., only the outbound scenario);
• SHRs are applicable only when a guarantee is given to the Wholly Owned Subsidiary (WOS) and not otherwise;

Q. What are the regulations under FEMA for obtaining and issuing Guarantees by an Indian entity?
A. FEMA Regulations for issuing guarantees:
(Master Circular on Direct Investment by Residents in Joint Venture (JV)/Wholly Owned Subsidiary (WOS) Abroad Para B.1)

Indian entities can offer any form of guarantee – corporate or personal (including personal guarantee by indirect resident individual promoters of the Indian Party)/primary or collateral/guarantee by the promoter company/guarantee by group company, sister concern or associate company in India provided that:

i) All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e., currently within 100% of the net worth as on the date of the last audited balance sheet of the Indian party.
ii) No guarantee should be ‘open ended’ i.e., the amount and period of the guarantee should be specified upfront. In the case of performance guarantee, time specified for the completion of the contract shall be the validity period of the related performance guarantee.
iii) I n cases where invocation of performance guarantees breach the ceiling for the financial exposure of 100% of the net worth of the Indian Party, the Indian Party shall seek prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.

[Note: In case of invocation of a performance guarantee, which had been issued before 14th August, 2013, the limit of 400% shall be applicable and remittance on account of such invocation over and above 400% of the net worth of the Indian party shall require prior approval of the Reserve Bank.]

iv) A s in the case of corporate guarantees, all guarantees (including performance guarantees and Bank Guarantees/SBLC) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOS/JV outside India, and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

Note:
Specific approval of the Reserve Bank will be required for creating a charge on immovable/moveable property and other financial assets (except pledge of shares of overseas JV/WOS) of the Indian party/group companies in favour of a non-resident entity within the overall limit fixed (presently 100%) for the financial commitment subject to submission of a ‘No Objection’ by the Indian party and its group companies from its Indian lenders.

FEMA Regulations for obtaining overseas guarantees:
(Foreign Exchange Management (Guarantees) Regulations, 2000, Para 3A)

With prior approval of RBI:
A Corporate registered under the Companies Act, 1956 can avail of domestic rupee denominated structured obligations by obtaining credit enhancements in the form of guarantee by international banks, international financial institutions or joint venture partners.

Without prior approval of RBI:
A person resident in India may obtain without the prior approval of the Reserve Bank, credit enhancement in the form of guarantee from a person resident outside for the domestic debts raised by such companies through issue of capital market instrument like bonds and debentures subject to the following conditions:

• Eligibility:
– A person resident in India
– Other than branch or office in India owned or controlled by a person resident outside India
– I n accordance with the provisions of the

Automatic Route Scheme specified in schedule Automatic route scheme: (Foreign Exchange Management

(Borrowing or Lending in Foreign Exchange) Regulations, 2000, Schedule I, Regulation 6(1)] Borrowing (Guarantee) in Foreign Exchange up to $ 500 million or its equivalent:

Eligibility:
• Any company registered under the Companies Act, 1956, other than a financial intermediary (such as bank, financial institution, housing finance company and a nonbanking finance company)

•    The borrowing should not exceed in tranches or otherwise $ 500 million or equivalent in any one financial year (April – March)

End use purpose:
•    For investment in real sector – industrial sector including Small and medium enterprises (Sme) and infrastructure sector in india.

•    For first stage acquisition of shares in the disinvestment process and also in the mandatory second stage  offer to the public under the Governments’ disinvestment programme of PSU shares.

•    For direct investment in overseas Joint Ventures(JV)/ Wholly owned Subsidiaries (WoS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

Q. Whether Guarantee is an “international transaction” under the Indian Transfer Pricing regulations?

A. In one of the earlier rulings on the subject of guarantee, delivered on 9th September, 2011, the hyderabad Tribunal in case of Four Soft limited [(hyd. ITAT) – 62 DTr 308] ruled that:

“The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does  not  stipulate  any  guidelines in respect to guarantee transactions. In the absence of any charging provision, the lower authorities are not correct in bringing aforesaid transaction in the TP study. In our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution. In view of this matter, we hold that no TP adjustment is required in respect of corporate guarantee transaction done by the assessee company.”

However,  thereafter  the   Income   tax   Act, 1961 (“Act”) was amended vide Finance Act 2012 to bring guarantees and other financial transactions within the ambit of the Transfer Pricing regulations (TPrs). Explanation to section 92B was added to the definition of the term “International Transaction”, which reads as follows (only the relevant extract is reproduced):

“Explanation—For the removal of doubts, it is hereby clarified that—

(i) the expression “international transaction” shall include—

(c)    Capital financing, including any type of long-term  or  short-term  borrowing,   lending  or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;”

from the above, it is clear that loans and guarantees between AEs are covered under the TPRs of India  retrospectively
w.e.f. 1st april 2002.

Post the above amendment, divergent rulings of the tribunals have come which are enumerated hereunder:

i)    Bharati Airtel Ltd. vs. ACIT [2014] 43 Taxmann.com 150 (delhi – trib.)

In  this  case,  the  tribunal  held  that  “even  after  the amendment to Section 92 B, by amending explanation to section 92 B, a corporate guarantee issued for the benefit of the aes, which does not involve any costs to the assessee, does not have any bearing on profits, income, losses or assets of the enterprise and or therefore, it is outside the ambit of ‘international transaction’ to which ALP adjustment can be made.”

ii)    The  mumbai  tribunal,  in  cases  of  (a)  Everest  Kanto Cylinder Ltd. vs DCIT (ITA No. 542/Mum/2012) and (b) Technocraft Industries (India) Ltd. vs. ACIT (ITA No.7519/ Mum/2011), Mumbai (January 2014) held that post amendment of section 92B guarantee transactions are covered by the Transfer Pricing Regulations.

Safe harbor Provisions as applicable to Guarantee transactions [Notified on 18th September 2013 applicable for Five Assessment years beginning from Ay 2013-14]

Sr.

No.

Eligible
Interna- tional Transactions

Acceptable
Circumstances

Remarks

1

Providing
corpo- rate guarantee where the amount guaranteed does not exceed Rs.100
crore.

Guarantee
com- mission or the fee charged
should be minimum

2% per annum of the amount guaranteed.

Corporate
Guar- antee is defined to mean explicit corporate guaran- tee extended by a

company to
its WOS being a non-resident in respect of any short-term or long term
borrowing.

The Australian Taxation Office in its Discussion Paper on “Intra-group Finance Guarantees & Loans Application of Australia’s Transfer Pricing and Thin Capitalization Rules
 
Between AES be given without charging any commission?

A. Post amendment of section 92B of the Act, transactions of cross border Guarantees between two aes are covered under the transfer pricing regulations. however, we have divergent decisions from tribunals on this point. (Refer Ans. 3 supra)

OECD Guidelines on Transfer Pricing (Para 7.13) provide intra-group services are said to be rendered when an AE derives benefits from an active association in the form of explicit guarantee from a group member and/or global marketing and promotion of the group whereas no services are said to be rendered where there is incidental benefits due to passive association of the ae with its group members. in the former case, issuance of guarantee would demand charging whereas, in the later case there is no need of any charge as no services are said to be rendered.

Australian Discussion Paper (2008) (paragraph 31) on “intra-group  finance  Guarantees  and  loans”  states  that “incidental benefits from association with a larger group where the market accords those benefits without an associated company actually providing an economic service that confers a benefit on the recipient would not usually be a basis for imposing a charge.”

From the above discussion, one may conclude that in the following circumstances, intra-group guarantees may not carry any charge or commission and therefore, are out of ambit of the transfer pricing regulations:

i)    When the benefit  obtained  by an AE is on  account  of a passive association (something akin to implicit guarantee);

ii)    When the corporate guarantee is issued for the benefit of the ae, which does not involve any costs to the assessee and therefore does not have any bearing June 2008” (paragraph 181 on page 42 of the Paper)  has opined that where the provision of a guarantee relates exclusively to the establishment or maintenance of a parent company’s participation as an investor, the costs of such participation should not be allocated to the subsidiary and should not affect the allocation of profit between the parent and subsidiary. in such a circumstance it could be fair and reasonable to determine that the arm’s length consideration for the provision of the guarantee is nil. On profits, income, losses or assets of the Guarantor (Based on the
decision of the delhi tribunal in case of Bharati Airtel (I.T.A. No.
5816/Del/2012));

iii)    Where the guarantee is provided for the debt which is in lieu of equity or which is in the nature of equity.

At Paragraph 105 of the Paper it is reported that: “The pricing of a guarantee is calculated as a percentage or spread on the amount of the debt being guaranteed. no chargeable percentage or spread arises on any portion of the debt that serves the purposes of equity.”

Q. What are the provisions under the OECD Transfer Pricing Guidelines regarding cross border guarantees?

A. Paragraph 7.13 of the (Chapter VII- Intra-Group Services) OECD Guidelines on Transfer Pricing (July 2010) makes a distinction between an “active  association” and a “passive association”  between  aes.  according to the Guidelines, in case of a passive association, an AE would receive incidental  benefits  just  because  it is part of the  multinational  enterprise  Group.  in such a scenario, no services are said to be rendered even though it receives higher credit rating being affiliated to a larger group. however, in case of an active association, services are said to be rendered when the ae receives higher credit rating because of guarantee offered by another group member or benefit obtained from the group’s reputation deriving from global marketing and public relation campaigns.

Benefit on account  of  “passive  association”  is  akin to “implicit guarantee”  whereas,  benefit  on  account  of “active association” is akin to “explicit guarantee”. therefore, even oeCd supports the view that there is no need of any charge in the case of implicit guarantee whereas explicit guarantee needs to be charged and benchmarked under transfer pricing regulations.

Q. how does one benchmark guarantee fee?

a.    Benchmarking of guarantee fee is a complex issue in view of unavailability of comparable data and unique nature of the transaction.

Various methods or approaches can be used to benchmark a guarantee fee depending upon the facts of the case and availability of the comparable data. Various situations and appropriate methods/approaches are discussed in the Australian Discussion Paper (2008) (paragraphs 128 to 171) on “intra-group finance Guarantees and loans” as well as arising from different case laws, as follows:

i)    CUP Method
CUP Method is the most appropriate method where sufficient data for comparison are available.

Under this method, the guarantee fee is determined by comparing the arm’s length guarantee fee charged by an independent party for providing similar guarantee on similar terms and conditions. in this approach, quantum of risk, type of guarantee, period of guarantee, borrower’s standalone credibility etc. are considered for arriving at arm’s length guarantee fee.

There may be Internal CUP or External CUP. In the case of the former, the spread between guaranteed and non-guaranteed third party loans are compared and the guarantee fee charged is equivalent or more due to difference in interest rates between these two types of loans.

In case of External CUP the fees applicable to Letter of Credit or Collateral debt Securities data are used.

The CUP method would be ideal in cases where a creditworthy subsidiary that is able to raise the debt funding it needs on a stand-alone basis obtains better terms with the benefit of a parent guarantee.

ii)    Benefit/yield Approach
This  approach  is  also  known  as  “interest  Saving approach”. in this method, arm’s length guarantee fee is determined through the interest rate saving which the subsidiary earns due to explicit guarantee by its parent. Thus, this method/approach seeks to benchmark the guarantee fee from the perspective of the borrower.

Under this approach, uncontrolled interest  rates,  risk assessments and market indicators are used as indirect benchmarks for arriving at the arm’s length fee, rather than using uncontrolled guarantee fee as a benchmark.

In other words, an arm’s length fee is estimated as the spread between the interest rate the borrower would have paid without the guarantee and the rate it pays with the guarantee, less the arm’s length discount. the remaining spread, net of the discount, would have to be sufficient to make the deal attractive to an independent guarantor for the additional risk it would assume, if it provided the guarantee. if there is no additional risk, then consideration has to be given to the economic substance of the arrangement between the parties.

In the case of General electric Capital Canada inc.’s in  december  2009  (Ge  Capital),  the tax  Court  of Canada (TCC) (2009 TCC 563 Date: 20091204)
Upheld the yield approach for determination of arm’s length fee for the explicit guarantee provided to the Canadian subsidiary (GE Canada) by the US Parent Co. (Ge uSa).

In the case of Four Soft Ltd. vs. DCIT [(Hyd. ITAT)
– 62 DTR 308], the Tribunal, while upholding non charging of guarantee fees by the indian Company in respect of overseas aes observed that “the subsidiary company has not received any benefit in the form of lower interest rate by virtue of the corporate guarantee given by the assessee company and at the same time, the assessee company significantly benefited from such transaction”. Thus the Tribunal did look at the “benefit approach” in benchmarking guarantee fees.

iii)    Profit Split Method
this  method  is  useful  where  there  are  series  of transactions owing to special relationship between the parent company and its subsidiary.

For example, the parent may supply trading stock to a subsidiary, purchase outputs from the subsidiary and also provide debt funding and a guarantee. There may be benefits flowing from the parent to the subsidiary as well as from the subsidiary to the parent. Such cases require a careful analysis of benefit flows and their impacts on the respective parties in order to appropriately determine the share of profit each party should receive for its contribution to the profit channel.

iv)    Risk/Reward Based Approach or Cost Based approach

This approach takes into account the risk the parent would take in extending guarantee to its subsidiary/ ae in the event of default and reward it in terms of increased profitability and sustainability or viability of subsidiary’s business. the reward could also be based on the quantified risk and perceptions of the probability that the risk will not materialise compared to the probability that it will materialise.

This approach seeks to value the guarantee fee from the perspective of the guarantor by focussing on the actual and potential financial and other impacts of providing guarantee. The  benchmarking  is  done  as  if  such  guarantee transaction is entered into by two independent parties taking into account the circumstances of the borrower. The borrower’s creditworthiness [to be determined based on arm’s length, i.e., as if it is an independent enterprise] is of utmost importance as it has a direct bearing on its financial strength and the default risk.

v)    The  other  two  approaches  are,  namely:  (i)  option Pricing  Model  Approach  [Using  financial  model for valuing options where the guarantee fee is ascertained as equivalent to a premium chargeable for insuring the underlying loan asset] or (ii) Credit Default Swaps [which is akin to a financial guarantee where a parent would make a periodic fixed payment to a third party should the subsidiary default on its obligation].

Both the above approaches are not much in vogue and hence not discussed at length.

In actual practice, especially in complex cases a combination of various approaches may be used.

Q. What are the Judicial Precedents for benchmarking of cross border guarantees?

A.    Indian experience and judicial precedents (in addition to cases discussed hereinabove) on charging of guarantee fees are summarised as follows:

Indian Experience
Indian Transfer Pricing Administration prefers CUP method for benchmarking guarantee commission in cases of outbound guarantees (i.e., where indian company has given guarantee to its overseas ae). in most cases, interest rate quotes and guarantee rate quotes available from banking companies are taken as the benchmark rate to arrive at the ALP. The Indian tax administration also uses the interest rate prevalent in the rupee bond markets in india for bonds of different credit ratings. the difference in the credit ratings between the parent in india and the foreign subsidiary is taken into account and the rate of interest specific to a credit rating of indian bonds is also considered for determination of the arm’s length price of such guarantees.

In the above context, it is interesting to note the observations of the hyderabad tribunal in case of four Soft limited (supra) wherein the tribunal observed that “in our considered view, the corporate guarantee is very much incidental to the business of the assessee and hence, the same cannot be compared to a bank guarantee transaction of the Bank or financial institution.”

In case of M/s. Asian Paints Ltd. vs. ACIT (ITA No. 408/ Mum/2010), the Mumbai Tribunal upheld following observations of the Cit (a) which are worth noting:

“The TPO has collected data from the Website of Allahabad Bank,  hSBC  Bank  and  robo  india  finance  and  applied the flat rate of 3%. That is to say the TPO has adopted a ‘naked quote’ without factoring in the qualitative factors which determine the fees. a quotation given by a  third party e.g. a Banker does not constitute a CUP since it is quotation and not an actual uncontrolled “transaction”. the TPO has adopted a 3% rate or guarantee fees when the Citi Bank Singapore (the bank providing the loan amount) itself has charged interest at the rate of 1.625% only on the loan granted to its ae at Singapore. this makes the stand of the TPO unsustainable as guarantee fees can in no circumstances exceed the rate at which interest is charged on loan.”

From the above, two principles emerge which are as follows:

(i)    Banks’ quotes of “Guarantee Commission” cannot be applied blindly (naked quote) without factoring into qualitative factors thereunto
(ii)    Under no circumstances, guarantee fees can exceed the rate of interest charged on the underlying loan for which guarantee is given.

In the case of Reliance Industries Ltd. [I.T.A. No.4475/ Mum/2007], the Mumbai Tribunal held as follows:

(i)    Guarantee transactions do fall within the definition of the “International Transaction” under the Transfer Pricing regulations post retrospective amendment of section 92B of the act vide the finance act 2012;

(ii)    For benchmarking of guarantee fees, one cannot apply any naked bank rate, as guarantee fee largely depends upon the terms and conditions on which loan has been given, risk undertaken, relationship between bank and the client, economic and business interest etc.

In the case of Glenmark Pharmaceuticals Limited vs. ACIT [TS-329-ITAT-2013(Mum)-TP], the Mumbai Tribunal also held as follows:

(i)    CUP is the most appropriate method for benchmarking Guarantee transactions.

(ii)    There   is   a   conceptual   difference   between   Bank Guarantee and Corporate Guarantee. Bank Guarantee is a foolproof instrument of security for the customer and failure to honour the guarantee is treated as deficiency of services of the Bank under the Banking laws. on the other hand, the CG – Corporate Guarantee is provided by the Company either to the Customer or to the Bank for giving loans to the sister concerns/AEs of the said company; but it is not foolproof. failure to honour the guarantee may attract contract laws and it is however a legally valid document and the Customer/Bank can sue the company in Court if it does not pay up.

(iii)    Unless the ‘naked quotes’ of the  bank  guarantee  rates as given in the websites for public, are adjusted to various controlling factors, these rates are no good CUP.

(iv)    Conclusion:

From  the  above  discussion,  it  can  be  concluded  that guarantee given by an Indian Parent to its overseas subsidiary needs to be benchmarked as per transfer pricing regulations in India. The CUP method is ideal subject to availability of comparable data. in complex cases one or more methods/approaches can be used. Indian Safe harbour provisions provide considerably higher rate of guarantee commission/fees and therefore, less likely
to be opted by assesses in india.

Benchmarking of guarantee is never an easy task in view of commercial  exigencies  and  other  factors  involved. The Indian Transfer Pricing Administration (ITPA) should therefore adopt a comprehensive approach in arriving at arm’s length fees rather than adopting naked rates/fees as are quoted on the website of the Banks/Financial Institutions. It would be interesting to see whether the ITPA would be willing to allow as deduction guarantee commission/fee charged by the foreign parent to its indian subsidiary based on the bank rate.

Settlement Deed – Cancellation – Registered Settlement deed cannot be cancelled by executing cancellation deed: Transfer of Property Act, 1882, section 9:

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V. Ethiraj vs. S. Sridevi & Ors.; AIR 2014 Karnataka 58

Once, the settlement deed was executed by mother in favour of her daughter, mother lost her right, title and interest in the schedule property. Subsequently, on the day mother executed cancellation deed, she had no right in the property. The registered settlement deed cannot be cancelled by executing a cancellation deed. If at all the said document is to be canceled, it had to be done under the provisions of Specific Relief Act, by approaching a competent civil Court for cancellation of such document. If the fact of fraud, undue influence, mistake or any other ground which is alleged for cancellation of the said documents is proved, the Court may order for cancellation. That is the only mode known to law to cancel the registered settlement deed. Otherwise, the parties by consent have to annul the settlement by executing the document of reconveyance. Therefore, by execution of the cancellation deed, the registered settlement deed did not stand cancelled. Unilaterally, the settler cannot execute a cancellation deed of settlement.

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Eligibility of deduction u/s. 801A for the unexpired period – Circular No. 10 dated 6th May, 2014 [F. No. 178/84/2012/ITA.I]

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When an enterprise or undertaking develops an infrastructure facility, industrial park or Special Economic Zone, as the also may be, and transfers it to another enterprise or undertaking for operation and maintenance in accordance with the proviso to Clause (i) or Clause (iii) of s/s. (4) of section 80-1A of the Act and if this transfer is not by way of amalgamation or demerger, the transferee shall be eligible for the deduction for the unexpired period.

Amended Form 49A and 49AA notified – Notification No. 26 dated 16th May, 2014 [S.O.2045(E)] – Income-tax (5th Amendment) Rules, 2014 – The amended form gives an option to the applicant to get his mother’s name printed on the PAN card.

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VAT liability of developers – computation – Trade Circular 12T of 2014 dated 17-04-2014.

48. MVAT Trade Circular

 VAT liability of developers – computation – Trade Circular 12T of 2014 dated 17-04-2014.

By this trade circular, the Commissioner has clarified certain queries raised by the trade and associations in respect of computation of tax liability of developers.

Addl. CIT vs. Vinay Vasudeo Kulkarni Income-tax Appellate Tribunal Pune Bench “A”, Pune Before Shailendra Kumar Yadav (J.M.) and R. K. Panda (A. M.) ITA No. 2363 / PN / 2012 Asst. Year 2009-10 Decided on 29-04-2014 Counsel for Revenue/Assessee: P. L. Pathade/ Kishore Phadke

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Section 145 – Income is taxable in the year when right to receive accrues.

Facts:

The assessee, an individual, was in business. His main business was that of commission agent /dealer for Daikin Air-conditioning India Pvt. Ltd. As per the practice followed – on receipt of the order for air-conditioner placed by the assessee, Daikin used to credit the commission to the account of assessee irrespective of the supply of goods and deduct tax at source. The assessee had shown such commission as “Contingent Income” under the group “Current Liabilities” in the Balance Sheet. The balance in the said account on 31-03-2009 was Rs. 32,72,500. However, the assessee was advised by Daikin to raise invoice for commission only after the installation of the air-conditioner and collection of money from the air-conditioner sold. The assessee received the payment only thereafter. The assessee, who was following the mercantile method of accounting, recognised the income in the year when invoice was raised. The AO treated the sum of Rs. 32.72 lakh as the income of the current year. On appeal, the CIT(A) allowed the appeal filed by the assessee.

Held:

 The Tribunal observed that income accrues only when there is right to receive such income. It further observed that though the Schedule VI requires income accrued but not due as part of profit, for income tax purpose ‘income accrued but not due’ is a contradiction in terms, since what was not due could not have accrued. What is not due cannot be subjected to legal action to enforce recovery and hence, income in legal sense could not be treated as accrued, so as to require its inclusion in taxable income. The Tribunal relied on the decision of the Pune Tribunal in the case of Dana India Pvt. Ltd. (ITA No. 375 / PN / 09 dt. 09.02.2011). In the case of the assessee, the Tribunal noted that the work relating to erection and installation was completed in the subsequent years. Therefore, the income also accrued in the subsequent years. Relying on the decision of the Madras high court in the case of CIT vs. Lucas Indian Services Ltd. (315 ITR 273), the Tribunal dismissed the appeal of the revenue.

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T. Subramanian vs. Deputy Commercial Tax Officer, Ettayapuram, [2012] 50 VST 410 (Mad)

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Sales Tax – Interest-Tax Paid As per Order Of High Court- In a Writ Petition Filed- Against Recovery Proceedings- Demand For Interest – Not Permissible, section 24(3) of The Tamil Nadu Sales Tax Act, 1959.

Facts
The father of the petitioner had filed writ petition before the Madras High Court against the recovery action taken by the Department for recovery of assessed dues. The High Court directed him to pay the dues in six equal installments, which he paid without any default. Thereafter, the Department issued demand notice claiming interest as per section 24(3) of the act for the belated payment of due amount. The petitioner filed writ petition before the Madras High Court against such demand notice for payment of interest.

Held
Indeed, ordinarily, there is no discretion vested with the authority under the act to desist from levying interest or reducing the same. Also, no notice or providing reasonable opportunity to the assessee is no essential. In law, there is no estoppel against a statute. But in the present case, the High Court in the earlier writ had permitted the petitioner to pay due amount in installments. At that time, on both sides, no plea was raised for payment of interest for the delayed payment by the assessee and admittedly no writ appeal is filed against the said order of High Court. Hence, the order of High Court became final and binding between the parties. When the High Court had permitted to pay due amount by way of installments by exercising its judicial discretion, then the invocation of section 24(3) of the Act for payment of interest, for payment made as per order of the High Court, is neither justifiable, nor valid and not prudent one. The High Court accordingly allowed the writ petition and set aside the demand raised by the department for payment of interest to promote the substantial cause of justice.

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161 TTJ 283 (Del) Bharati Airtel Ltd. vs. Addl CIT ITA No. 5636/Del/2011 Assessment Years: 2007-08. Date of Order: 11.03.2014

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Section 5 – Non-refundable security deposits received by the assessee from landline subscribers and also activation fees received from them are in respect of services rendered by the assessee over the period in which the connection is in use and therefore are taxable over estimated customer churn period and not in the year of receipt.

Facts:

In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee has received Rs. 3,46,00,000 as non-refundable security deposits from land line customers. He noticed that the assessee has not regarded this amount as a revenue receipt but has amortised the same over estimated period of customer’s relationship, as derived from estimated customer churn period, in accordance with Generally Accepted Accounting Policies. For this treatment, the assessee had relied upon the exposure draft of technical guide on revenue recognition for telecommunication operators, as issued by ICAI. He also noted that the activation fees were also accounted on similar basis and direct activation cost was also deferred and amortised over the same period as activation revenue.

The AO was of the view that there is no specific recommendation in the said exposure draft with regard to non-refundable security deposit and that the activation fees cannot be treated as in parity with non-refundable security deposit since activation fees, according to him, were in the nature of joining fees for being eligible to use the services. He, charged to tax the entire amount of nonrefundable security deposits received by the assessee during the previous year. Aggrieved the assessee raised an objection before the DRP but without any success.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held :

Non-refundable security deposit received from landline subscribers was in respect of services rendered by the assessee over the period in which the connection would be in use, and, therefore, its being amortized over the estimated customer churn period is in accordance with generally accepted accounting principles in as much as it would indeed present a distorted picture of financial affairs when entire amount of non-refundable security deposit is treated as income relatable to the year in which it is received.

It noted that this practice has consistently been followed by the assessee and Revenue had accepted the same in other years. The Tribunal noted that the Supreme Court has in the case of CIT vs. Excel Industries Ltd. (358 ITR 295)(SC) reiterated that it would be inappropriate to allow reconsideration of an issue for a subsequent year when the same fundamental aspect permeates in the different assessment years.

The Tribunal deleted the addition made by the AO. This ground of appeal filed by the assessee was allowed.

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M/S. Frostees Exports (India) Pvt. Ltd. vs. DCCT, Corporate Division, Kolkata and Others, [2012] 50 VST 392

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Sale of Motor Vehicles- Recovery Of Road Tax,
Insurance Charges And Registration Cost- Post Sale- Not Forming Part of
Sale Price, section 2(30) and (31) of The West Bengal Sales Tax Act,
1994

Facts
The petitioner a private limited company
engaged in the business of selling motor vehicles sold motor vehicles
and collected, over and above price of motor vehicles, cost of
registration, insurance premium and road tax payable by the buyer under
the Motor Vehicles Act, 1989. The Company claimed collection of such sum
as not forming part of sale price being post sale services, whereas the
department treated it as forming part of sale price and levied tax
thereon. The Company filed appeal before the West Bengal Taxation
Tribunal against the order of appeal confirming the levy of tax by the
assessing authority on such sum.

Held
Under the Motor
Vehicles Act, delivery to the owner is a pre-condition of a sale and
sale was complete with the issue of sale certificate. Under the Act, it
is the liability of the owner to get it insured before registration.
Therefore, the registration of the motor vehicle is a post-delivery
event. The insurance premium is payable by the owner before
registration. Likewise, the owner of motor vehicles has to pay road tax.
So therefore, there is no scope for debate that the payment of road tax
is a post delivery event and hence it should not form part of sale
price.

Neither of the sides asserted whether after the sale the
physical possession of the goods was retained by the selling dealer.
Even if retained, it was retained by him as bailee for the purpose of
service of registration, insurance and payment of road tax. This
possession is a possession on behalf of the person to whom the goods
were sold. Any amount spent in respect of those retained goods during
such possession was spent on behalf of the buyer and as such it would
not form part of sale price as defined in section 2(31) of the Act.

The
Tribunal further held that it is settled law that, in the composite
transactions also, the value of service cannot be included in the sale
and taxing the service rendered by the Dealer after sale of the goods is
beyond the scope of Entry 54 of List II, Schedule VII read with Article
366(29A) of the Constitution of India. The Tribunal allowed the appeal
and held that the collection of sum by way of road tax, insurance
premium and registration cost not to be included in sale price of the
goods sold and not liable for tax.

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161 TTJ 742 (Mum) Jamsetji Tata Trust vs. JDIT(Exemption) ITA No. 7006/Mum/2013 Assessment Years: 2010-11. Date of Order: 26- 03-2014

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S/s. 10, 11 to 13 – Benefit of section 10 cannot be denied by invoking the provisions of s/s. 11 to 13. Therefore, dividend income on shares and mutual funds and long term capital gains on sale of shares which are exempt u/s. 10(34), 10(35) and 10(38), respectively cannot be brought to tax by applying s/s. 11 to 13.

When short term capital gain arising from sale of shares subjected to STT is chargeable to tax at 15% then the maximum marginal rate on such income cannot exceed the maximum rate of tax provided under the Act.

Facts I :

The assessee, a charitable trust, claimed dividend income on shares and units as well as long term capital gain on sale of shares to be exempt u/s. 10(34), 10(35) and 10(38) of the Act. The Assessing Officer (AO) denied the exemption on the ground that the income was derived from property held by the trust and not by any other person. According to him, section 11 exclusively deals with the income from property held under trust and not section 10(34), 10(35) and 10(38). He held that there is a violation under s. 13 and as a result he denied the exemption u/s. 11. He denied the alternative claim that the said income is exempt u/s. 10(34), 10(35) and 10(38) on the ground that these sections do not deal with property held under trust. He observed that if the income of the trust which is not held exempt under s/s. 11, 12 and 13 is allowed to be exempt under other s/s.of section 10, it will lead to open ground for trust to exercise (sic-earn) long term securities income and dividend income and claim exemption of the same under other s/s.s of section 10 of the Act.

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held I:

The exemption u/s.10 is income specific irrespective of the status/class of person whereas the exemption u/s. 11 is person specific though on the income derived from the property held under the trust. Further, the exemption u/s. 11 is subject to the application of income and modes or form of deposit and investment.

The Tribunal noted that the Delhi High Court in the case of CIT vs. Divine Light Mission (278 ITR 659) (Del) was dealing with a question whether agricultural income from property held under the trust can be denied exemption u/s.11 of the Act. The Court in that case held that the agricultural income shall not be included in the computation of total income of the previous year in view of section 10(1) of the Act. Therefore, this income was held not required to be considered for the purpose of section 11 of the Act. The Court noted that the Madras High Court in the case of His Holiness Silasri Kasivasi Muthukumara Swami Thambiran & Ors vs. Agrl. ITO & Ors. (113 ITR 889)(Mad) has held that agricultural income derived by charitable or religious trust is exempt u/s. 10 could not be said to be brought to tax under sections 11 to 13. It observed that a similar view has been taken in series of decisions where the question involved was allowability of exemption u/s/s. 10(22), 10(23) vs. sections 11 and 13.

The Tribunal held that exemption u/s.11 is available on the income of the public charitable/religious trust or institution which is otherwise taxable in the hands of other persons. Thus the income which is exempt u/s. 10 cannot be brought to tax by virtue of section 11 and 13 of the Act because no such pre-condition is provided either under sections 10 or 11 to 13 of the Act. Therefore, sections 11 to 13 would not operate as overriding effect to section 10 of the Act. The language of these provisions does not suggest that either section 10 is subject to the provisions of sections 11 to 13 or sections 11 to 13 has any overriding effect over section 10. Therefore, the benefit of section 10 cannot be denied by invoking the provisions of sections 11 to 13 of the Act. Once the conditions of section 10 are satisfied then no other condition can be fastened for denying the claim u/s. 10 of the Act.

The Tribunal held that dividend income on shares and mutual funds and long term capital gain on sale of shares are exempt u/s. 10(34), 10(35) and 10(38) respectively and cannot be brought to tax by applying sections11 and 13 of the Act. This ground of appeal filed by assessee was allowed.

Facts II:

The Assessing Officer (AO) while assessing the total income of the assessee, a charitable trust, denied exemption u/s. 11 of the Act and applied maximum marginal rate of tax to the entire income which included short term capital gains arising from sale of equity shares for which section 111A prescribes the rate to be 15 %. Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that the rate of tax on short term capital gain arising from sale of shares shall be the rate prescribed under the Act u/s.111A and not the maximum marginal rate.

Held :

The Tribunal noted that the rate of tax on short term capital gain arising from sale of equity shares is provided u/s. 111A as 15 %. However, relevant income which is derived from the property held under trust wholly for charitable or religious purpose is charged to tax as per provisions of section 164(2) which does not prescribe the rate of tax but mandates the maximum marginal rate as prescribed under the provisions of the Act. It observed that section 111A is a special provision for rate of tax chargeable on short term capital gain arising from sale of equity shares.

The Tribunal held that when the short-term capital gain arising from the sale of shares subjected to STT is chargeable to tax at 15 % then the maximum marginal rate on such income cannot exceed the maximum rate of tax provided under the Act. It held that the short term capital gain on sale of shares already subjected to STT, is chargeable to tax at maximum marginal rate which cannot exceed the rate provided u/s. 111A of the Act.

This ground of appeal was decided in favor of the assessee.

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State of Tamil Nadu vs. Karnataka Bank Ltd., [2012] 50 VST 93 (Mad)

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Sales Tax – Import of Goods by Bank – Under the Master Lease Agreement – Followed by Supplementary Lease Agreement-On Facts – Sale in The Course of Import – Not Taxable, section 5(2) of The Central Sales Tax Act, 1956 and section 3A(2)(a) of The Tamil Nadu General Sales Tax Act,1959

Facts
The assessee, a Bank entered into Master Lease Agreement with Hindustan Power Ltd., for importing and leasing of machinery on rental basis. The Bank accordingly ordered machinery as per the specification of the Company from the foreign manufacturers. While the goods were in transit, the Bank and the Company entered in to a Supplementary Lease Agreement which was stated to be a part of the Master Lease Agreement. Since, the Master Lease Agreement made no reference as to the purchase order placed with the foreign manufacturer, the revenue took the stand that the Supplementary Lease Agreement is un-connected with the Master Lease Agreement and rejected the claim of the assessee for exemption from payment of tax as sale in the course of import u/s. 5(2) of the CST Act, 1956. The first appellate authority as well as Tribunal allowed the claim and revenue filed revision petition before the Madras High Court.

Held
The bank had placed a purchase order on the manufacturer at the request of the lessee Company towards purchase of the specified equipment and in the event the lessee was unable to firm up with the manufacturer for the equipment to be leased within the stipulated time, it was open for the lessor bank to withhold for payment and canceled the same. Once the arrangement between the assessee and the lessee, as regards lease agreement, got finalised for the purpose of import of machinery, the subsequent documentation was merely a follow-up action and it is difficult to read each one of the documentation in isolation. When the first of the documents viz., the Master Lease Agreement got dovetailed into purchase order placed by the assessee with the foreign manufacturer, the subsequent documentation completes the balance of the transaction the assessee bank had with the lessee. On facts of the case, the High Court held that there was an inextricable link between the Master Lease Agreement and the Supplementary Lease Agreement on the one hand and the import of specific goods based on the purchase order on the other. Accordingly, the High Court rejected the revision petition filed by the revenue and allowed the claim of the assessee bank for exemption from payment of tax on the lease of the imported machinery to the Lessee company being sale in the course of import.

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2014] 44 taxmann.com 113 (Delhi) CST Delhi vs. Ashu Exports (P) Ltd

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Whether vocational education courses not recognised by Statute or Authority like AICTE etc. were liable to service tax prior to 27-02- 2010? Held, No.

Facts:
The Respondent – ran courses to impart procedural and practical skill based training in areas such as export import management, retail management and merchandising and claimed exemption vide Notification No.9/2003 as well as 24/2004 dated 10-09-2004 under “Commercial or Coaching Services” provided by vocational/recreational training institute. The courses provided by the assesse were not accredited or certified by any Central or State Government or statutory authority such as AICTE

The revenue alleged that, the exemption Notification applied in terms only to vocational training imparted by Institutes such as ITI and State sponsored or recognised educational training institute generally imparting technical and vocational skills immediately after the 10+2 grade and not to Assessee’s institution which imparts managerial and management skills akin to MBA.

Held:
Tribunal decided in favour of the assesse. On appeal by the Department, the Hon’ble High Court affirming the decision of the Tribunal held that, the term “vocational training institute” included the commercial training or coaching centres providing vocational coaching or training meant to “impart skills to enable the trainees to seek employment or to have self-employment directly after such training or coaching”. The notion of such training institute having been recognised or accredited to nowhere emerges from such a broad definition. Further, Notification 3/2010- ST dated 27-02-2010 substitutes the existing explanation to the term “vocational training institute” and narrowing it to those institutes affiliated to National Council for Vocational Training offering courses in designated trade in fact supports the assessee. Had the intention been to exempt only such class or category of institutions, the appropriate authority would have designed such a condition in the original Notification of 2003 and Notification No.10 of 2004 which had been relied upon in this case.

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[2014] 44 taxmann.com 287 (New Delhi – CESTAT)- New Okhla Industrial Development Authority vs. CCE&ST.

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Whether long-term lease of immovable property (99-years) is outside the purview of the definition of renting service in section 65(105) (zzzz)? Held, No.

Facts:
The Appellant, a statutory Development Authority, created by the provisions of the U.P. Industrial Area Development Act, 1976 had entered into long-term leases with third parties whereunder vacant lands were leased to such third parties, inter alia, for business or commercial purposes on long-term leases (of 99 years duration). The Appellant’s contention was that a long-term lease would not amount to renting of immovable property as such leases are substantially in the nature of transfer of ownership and consideration received on such transfers would not amount to consideration received for providing the taxable service enumerated in section 65(105)(zzzz).

Held:
Tribunal disagreeing with the argument of the Appellant held that, provision of section 65(105)(zzzz) neither marks nor accommodates any distinction between long-term and short-term leases. On a true and fair construction of this provision, it is clear that a service provided in relation to renting of immovable property for use in the course of or in furtherance of business or commerce is the taxable service. The provision does not restrict the ambit of the taxable service to only short-term leases nor identifies or classifies leases in terms of the duration. Tribunal further held that, in the absence of any restrictive signification in section 65(105)(zzzz), of a legislative intent to exclude long-term leases of immovable property from the purview of the taxable service defined and enumerated in the said provision, there is no authority to hold that long-term leases (so-called) are outside the purview of the taxable service-“renting of immovable property”. While coming to this conclusion, Tribunal also observed that what is a long-term and what is a short-term lease cannot be an open-ended, ambiguous and inchoate concept and that no authority, statutory or otherwise brought to the attention of the Tribunal which would provide a guidance to classify leases into long-term and short-term so far as section 65(105)(zzzz) is concerned.

b) Whether introduction of clause (v) in Explanation 1 to section 65(105)(zzzz) w.e.f. 01-07-2010 is prospective in nature? Held, Yes.

Held:
Tribunal held that, normally an inclusionary clause does not limit the plenitude of an enacting provision couched in broad terms. Thus the illustrations of what are “immovable property”, set out in the inclusionary clause in Explanation 1 would not derogate from “vacant land” being comprehended within the expression “renting of immovable property”. However, clause (zzzz) has an exclusionary clause as well, enumerating the subjects excluded from the ambit of “immovable property”. On a true and fair construction of the exclusionary clause, the legislative intent is compelling that vacant land whether having facilities clearly incidental to its use as such or otherwise does not constitute immovable property. As a consequence of the interplay between the enumeration of renting of immovable property as the taxable event read with the inclusionary and exclusionary clauses (in particular subclause (b) of the exclusionary clause) in section 65(105) (zzzz), renting of vacant land was clearly outside the purview of the taxable service, prior to 01-07-2010.
Tribunal also relied upon Clause 75 of the Finance Bill 2010. The Board Circular No. No.334/20I0-TRU, dated 26/02/2010 (in paragraph 3) and statement of objects and reasons accompanying the Finance Bill, 2010 to hold that, transactions covered by this sub-clause (v) of the Explanation have only the prospective operation.

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[2013] 147 ITD 41 (Jaipur – Trib.) (TM) Escorts Heart Institute & Research Centre Ltd. vs. DCIT(TDS), Jaipur A.Y. 2008-09 & A.Y. 2009-10 Order dated-3th November 2013

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I. When payment is made directly by the assessee’s clients to the third party and assessee merely deducted the said amount, paid by the client, from fees charged by it to its client and the assessee did not make any payment to the third party, the question of affixing the liability u/s. 194J upon the assessee does not arise.

Facts I:

The assessee company was running a multi-specialty hospital. At the relevant time, the assessee did not have a blood bank and, therefore, patients were required to arrange blood from outside.

For various operations, the assessee company charged a package fee to the patients. Since the facility of the blood bank was not available, the patients were required to procure blood from outside and whatever expenses the patients were required to incur at blood banks, the credit for the same was given to the patients from their package fee.

If the assessee charged a sum of Rs. 1,00,000/- as a package fee for performing one operation upon a patient, say ‘A’, and ‘A’ was required to take certain services of Rs. 1,000/- from the outside blood bank, then ‘A’ would directly make the payment of Rs. 1,000/- to the blood blank and assessee would later refund the same to ‘A’. In substance, the fee received by the hospital was only Rs. 99,000/- from the patient ‘A’ and Rs. 1,000/- was debited as blood processing charges by the assessee in its books of accounts.

Revenue held that the assessee had disclosed the payment made to the blood bank in its books of account and, therefore, the only inference that can be drawn is that the patients made the payment to the blood bank on behalf of the assessee and therefore assessee was required to deduct TDS u/s. 194J for the payments made to blood bank.

Aggrieved, the assessee filed appeal before Tribunal.

 It is to be noted, that it was not disputed, that all the charges received by the blood banks and were against the processing of the blood and/or conducting various tests on the blood and the blood banks were not charging anything against the cost of blood.

 Held I:

It was held, that it is settled law, that the entries in the books of account are not decisive. It is the substance of the transactions which is to be seen. In substance, it clearly emerged that the assessee had not made any payment to the blood banks and payments were made directly by the patients to blood banks, and hence the question of affixing the liability u/s. 194J upon the assessee does not arise.

II. When amount payable by assessee to retainer doctor was fixed, the retainer doctor was not allowed to take any similar assignment in any company engaged in similar business and the retainer doctor was also required to abide by general rules and regulations of the company, then it was held that there existed employer – employee relationship between assessee and the retainer doctor and the assessee was required to deduct tax u/s. 192.

Facts II:

The assessee had deducted tax from the payment made to retainer doctors u/s. 194J, treating the payment made to the doctors as professional charges. While, as per revenue, the payment made to the doctors should have been treated as salary and, accordingly, tax should have been deducted at source u/s. 192. Aggrieved, the assessee filed appeal before Tribunal.

As per retainership agreement, the following things were evident-

• The agreement initially was for fixed period and thereafter renewable, on mutually agreeable terms.

• The retainer doctor had to report to the Head of the Department.

• The retainer doctor was not allowed to act in a similar, or any capacity, for any other company engaged in a business similar to that of the company.

• Though a consolidated retainership fee of fixed amount was paid to retainer doctor, but he was required to raise a monthly bill for processing of his professional fees.

• This agreement could be terminated ‘by either party’ upon three months’ prior notice or payment of three months’ retainer fee in lieu to the other party.

• The retainer doctor must commit to work in the interests of the company and in accordance with its values and philosophy, abiding by the rules, regulations and policies, as applicable. The retainer doctor must also follow the work processes, technical standards, protocols and general instructions issued thereof, of the company, as are in force, or amended from time to time.

Held II:

On facts, it was held that the fixed monthly remuneration payable to retainer doctors is in the nature of salary liable for deduction of tax u/s. 192. It was also held that merely because a retainer doctor is required to raise a monthly bill, it cannot be accepted that he is an independent professional and the employer – employee relationship does not exist. While holding that there existed employer employee relationship between assessee and retainer doctor, the following distinctions were pointed out between facts of assessee’s case and some other cases wherein it was held that no employer-employee relation existed-

• In the case of CIT vs. Coastal Power Co. [2008] 296 ITR 433 (Delhi), consultant had agreed to indemnify the company against liabilities which it may suffer/ incur, arising out of or in connection with agreement with the consultant of the performance of services thereunder. Thus, an indemnity clause was the basis on which it was held that no employer-employee relation existed, because it is unlikely that any employee would indemnify his employer and other employees against all liabilities.

• In the case of Dr. Shanti Sarup Jain vs. First ITO [1987] 21 ITD 494 (Mum.), the doctor was not only in receipt of fixed salary of Rs. 1,000/- per month but was also entitled to 50% income from indoor patients and on visits. The doctor had also employed his own staff in his consulting room. Hence, it was held that the income received by Dr. Shanti Sarup Jain was income from profession.

• In the case of Dy. CIT vs. Ivy Health Life Sciences (P.) Ltd. [2012] 20 ITR (T) 179, the remuneration payable to the doctor was not a fixed amount but there was a fee sharing arrangement between the doctor and the hospital.

• In the case of ITO vs. Apollo Hospitals International Ltd. ITA NO. 3363/AHD/2008, it was pointed out that in the case of employee doctor, general service rules and regulations were made applicable but not in the case of consultant doctors. Judicial Member had upon certain findings concluded that there is no employer-employee relationship between assessee and retainer doctor. However the Third Member, while arriving at the conclusion that there exists employer-employee relationship, did not comment upon the following findings of the Judicial Member –

• An employee doctor is paid performance-linked bonus whereas a consultant doctor is not paid any such bonus.

• There is no retirement age for consultant retainers, whereas the same is defined for an employee as 58 years.

• The retainer doctor is required to report to the directors/ HOD of the appellant hospital. The retainer doctor is also bound by the general instructions/regulations of the company and also with the secrecy clause etc. However, these sorts of conditions would be always there in all types of employment arrangements, be it a regular, temporary or of consultancy in nature so as to ensure discipline and proper coordination in running an origination and this condition does not imply that there exists employer employee relationship.

•    The condition of the MOU with the retainer doctors, which restrict them not to work, for other hospitals, is a quite natural condition and would be there in such arrangement, especially in view of the nature of the service/expertise involved in the medical profession and this condition does not imply that there exists employer employee relationship.

•    The retainer doctors are engaged for the fixed period on temporary basis which may or may not be renewed as such. Similarly they are also not entitled for other benefits like PF contribution, retirement benefits, live benefits, HRA, LTA, terminal compensation etc., which are otherwise available to all the regular employee of the assessee.

III.    merely because the sale price is fixed as per the agreement between the parties, it cannot be said that the difference between the purchase cost and the sale price, i.e., the markup, is the commission for sale of medicines and consequently no tax is deductible u/s. 194h on the markup.

Facts iii:
The assessee had an agreement with FHWL.

the agreement had two aspects-
1.    With regard to sale of the medicines by FHWL to the assessee.
as per the agreement, FHWL had to sell the medicines at cost plus certain markup which had been fixed on the basis of turnover as under.
for turnover upto rs. 12 crore, 2% markup.
for turnover in excess of 12 crore, 1.5% markup. for turnover in excess of 15 crore, 1.25% markup.

2.    With regard to providing of the manpower by FHWL to the assessee
as per agreement fhWl would provide manpower to the assessee for smooth running of their pharmacy. however, as per the agreement, all expenses incurred by FHWL on the employees and the smooth running of pharmacy were to be reimbursed by the assessee to  FHWL  on  monthly  basis.  thus,  FHWL was  not charging anything over its actual labour cost on which the tax at source was being deducted by the assessee u/s. 194C.

Revenue  was  of  the  opinion  that  the  mark  up  paid  by the  assessee  to  FHWL on  medicines  sold  by  FHWL to assessee was commission chargeable to tax u/s. 194H.

Learned accountant  member  observed  that  FHWL was not charging anything over its actual labour cost to the assessee-company on which tax at source was being deducted u/s. 194C. The Learned Accountant Member was thus of the opinion that the mark-up on the turnover, under the given facts and circumstances, thus, represented neither business profit of FHWL nor commission allowed to it by the assessee, but a consideration toward the manpower services contracted to the assessee-company, exigible to TDS u/s. 194C.

Learned  Judicial  member  however  posed  a  question before third member that whether in the facts and circumstances of the case, the provisions of section 194C on the mark up/profits, be invoked by the Tribunal where neither this is a case of department nor of the assessee.

Held iii:
Merely because the sale price is fixed as per the agreement between the parties, it cannot be said that the difference between the purchase cost and the sale price, i.e., the markup, is the commission for sale of medicines. the sale price charged by FHWL i.e., cost plus markup is the price of the medicines sold by FHWL to the assessee and there was no element of principal and agent relationship, as assumed by the ao. Therefore, the stand of the revenue that the markup is the commission cannot be accepted and consequently no tax was deductible u/s. 194h on the markup.

Similarly, the view of the learned accountant member that the markup is a consideration for providing the manpower is also based upon the presumption and contrary to the express provisions of the agreement and hence provisions of section 194C is not applicable on mark ups/ profits.

[2014] 44 taxmann.com 18 (Ahmedabad – CESTAT)- Quintiles Technologies (India) (P.) Ltd vs. CST

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Whether, refund of CENVAT credit under Rule 5 of CCR is admissible even if some of the services exported are otherwise exempted from service tax by exemption notification? Held, Yes.

Facts:
Appellant engaged in providing I.T. enabled services included taxable as well as exempt services. All its services were exported and no service was provided in the DTA . While calculating refund of CENVAT as per formula mentioned in Rule 5(1) of CENVAT credit rules, 2004, the Appellant added all services exported, whether dutiable or exempted to both “Export Turnover” and “Total Turnover” as specified in Clause 5 of Notification No. 5/2006- CE (NT) dated 14-03-2006. The contention of the revenue was that, while calculating refund, although services exempted by exemption notification were to be included in “Total Turnover”, it should be deducted from “Export Turnover” on the ground that, no service tax credit is admissible against exempt services.

Held:
Tribunal held that as per Clause (D) of Rule 5(1) of CENVAT Credit Rules, 2004, in the definition of ”Export turnover of Services”, there is no distinction with respect to payments received from export of services. Further, there is no evidence on record that Appellant has taken any input service tax with respect to exempted services exported out of India. The logic of giving cash refund of taxes used, in relation to export of goods/services under Rule 5 of CENVAT Credit Rules, 2004, is to have ‘Zero rated’ exports and in case of the appellant, no exempted service is provided in the domestic tariff area.

Therefore it was held that even exempted services will be added to the “export turnover of services” and all the unutilized service tax credit pertaining to exported service (including otherwise exempt service) will be admissible as refund under Rule 5 of the CENVAT Credit Rules, 2004.

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2014 (34) STR 236 ( Tri-Del.) Commr. Of C.Ex., Allahabad vs. Shiv Engineering & Ors.

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Whether activity of repair/testing of transformers and replacement of coil, transformer oil and supply of other items could get benefit of Notification No.12/2003 prescribing deduction of value of material in valuation of service tax liability under Management, Maintenance or Repair service? Held yes.

Facts:
Respondent provided service of repair of old and damaged transformers under composite agreement with the customers and discharged service tax liability on the labour component under Management, Maintenance or Repair service and not on the value of various items replaced but the department challenged the orders contesting that the Respondent provided service of repair or maintenance of transformers under composite contract and was obliged to replace certain parts which were used/ consumed during the repair and that process of replacement was only ancillary to main work of repairs. Moreover, exemption claimed as per Notification 12/2003 was not applicable as replaced parts were not sold by them.

Held:
The Tribunal held that, the total repair cost constitutes cost of labour charges and cost of goods LV leg coil, transformer coil and other supply items. Value for parts were shown separately in the contract and thereby condition of documentary evidence indicating value of goods/ material as per the Notification No.12/2003 was fulfilled. VAT was paid on goods/materials value. Therefore, Revenue’s contention was rejected.

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2014 (33) STR 238 ( Tri-Del.) Commr. Of C.Ex., Ludhiana vs. Forgings & Chemicals Industries

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Whether commission paid to overseas agent for procuring orders from overseas is input service eligible for CENVAT credit? Held yes.

Facts:
The respondent had overseas agents for procuring export orders and claimed CENVAT credit of service tax paid on commission paid to them. The department has denied CENVAT credit. The First Appellate Authority held that the Business Auxiliary service of procuring export orders received from overseas agent has to be treated as an input service, as the definition of “input service” is to be interpreted in the light of requirement of business and it cannot be read restrictively so as to confine only upto factory or upto the depot of the manufacture and setaside the order. An appeal was filed by Revenue against that order.

Held:-
Rejecting revenue’s contention, the Hon’ble Tribunal held that the definition of ‘input service’ covered the activities of advertisement or sales promotion and also the activities related to business. The service of procuring export order is clearly covered in marketing and sales promotion services and it is also an activity related to manufacturing business of the applicant. Thus, it is input service eligible for CENVAT credit.

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2014 (34) STR 90 (Tri.-Mumbai) CCE, Goa vs. Asia Pacific Hotels Ltd.

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Whether CENVAT credit allowable signifies its availability or its utilisability?

Facts:
Respondent was engaged in the hotel business and provided services such as beauty parlour, health club & fitness centre, dry cleaning, internet cafe, mandap keeper services etc. Respondent also provided non-taxable services such as hotel accommodation, restaurant & bar services. Respondent availed CENVAT credit of service tax paid on certain services which were utilised for taxable and non-taxable services as per provisions of Rule 6(5) of CCR. Revenue contended that the said Rule permitted taking of the credit and not permitted its utilisation and accordingly the demand was raised to the extent of credit was utilised by the Respondent. In the appeal proceedings, Revenue had a single ground that Rule 6(5) of CCR allows assessee to take the credit and therefore ‘taking’ of credit is distinct from ‘utilisation’.

Held:
Tribunal held that the purpose and objective of CCR is to allow a manufacturer/service provider not only to take credit but also to utilise the same. Therefore, if Respondent is allowed only to ‘take’ the credit without allowing it to ‘use’, the basic objective of CCR would be defeated. The Revenue’s appeal was rejected.

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2014 (34) STR 58 (Tri.-Del.) DSCL Sugar vs. CCEx., Lucknow

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Whether a place where goods are stored after
clearance from the factory on the payment of duty can be considered as
“place of removal” for the purpose of “input service” definition and
therefore whether CENVAT credit is allowed in respect of services
consumed at such place of removal? Held yes.

Facts:
Appellant
manufacturing sugar paid excise duty at the specific rate as per
section 4A of Central Excise Act, 1944 (CEA). Appellant cleared sugar
from the factory and stored the same at its place of storage at Agra and
Farukhabad. Appellant availed CENVAT credit of service tax paid in
respect of godown rent of Agra and Farukhabad, sugar handling charges
and security charges at these godowns, for insurance of sugar and cash,
vehicle hire charges, vehicle insurance etc. Respondent was of view that
since the services availed were after clearance of goods from the
factory, these cannot be qualified to be “input services” within the
meaning specified in Rule 2(l) of the CENVAT Credit Rules 2004 (CCR

Held:
Tribunal after referring to the definition of “input service” under the
said Rule 2(l) and after referring to the definition of “place of
removal” as defined under CEA held as under:

CCR does not define
the expression “place of removal”. However as per Rule 2(p) of the said
Rule, the terms defined in the CEA or Finance Act 1994 will apply for
the purpose of the said Rules.

Section 4(c) of CEA defines the
“Place of removal” to include a depot, premises of consignment agent or
any other place, or premises from where the excisable goods are to be
sold after their clearance from the factory. Therefore the said premises
are to be considered as “place of removal” as also affirmed by the
Tribunal in case of L.G. Electronics (India) Pvt. Ltd. vs. CCE 2010 (19)
STR 340 and by Punjab & Haryana High Court in case of Ambuja
Cements vs. UOI 2009 (14) STR 3 (P&H). The credit was thus allowed
for godown rent of Agra and Farukhabad. Credit in respect of other
expenses were allowed considering them relating to manufacturing
activity and supported by a number of High Court decisions.

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TDS: Rent: Section 194-I: Petitioner was owner of network of telecom towers: Provides passive use to telecom service providers: The amounts received by petitioner is ‘rent for use of machinery, plant or equipment’: Tax is deductible u/s. 194-I(a):

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Indus Towers Ltd. vs. CIT; [2014] 44 taxmann.com 3 (Delhi):

The petitioner provided passive infrastructure services to its customers, i.e., major telecom service providers in the country which, inter alia included, tower, shelter, diesel generator sets, batteries, air conditioners, etc. Till 2012, it sought for issue of a lower tax deduction certificate, u/s. 194-I of the Income-tax Act, 1961, on its projected receipts and such lower deduction certificates were issued treating those receipts as rent. Subsequently, the petitioner applied for issue of a lower deduction certificate on its projected receipts u/s. 194C. The Assessing Officer however issued lower deduction certificate treating receipts u/s. 194-I.

Aggrieved by that certificate, petitioner filed a writ petition before Delhi High Court, which by its order directed the petitioner to prefer a revision petition before the Commissioner who was to dispose it of expeditiously. The Commissioner by its impugned order u/s. 197 declined its request for determination of lower rate of Tax Deduction at Source (TDS).

Being aggrieved, the petitioner filed another writ petition before the Delhi High Court. The petitioner urged that there was no intention to rent or lease the premises or facilities or equipment and what was contemplated by the parties was a service.

On the other hand the revenue contended that the use of the premises, and the right to access it, amounted to renting the premises. The High Court held as under:

“i) The crucial question to be decided in instant case was whether the activity, i.e., provision of passive infrastructure by the petitioner to the mobile operator constituted renting within the extended definition under Explanation to section 194-I or whether the activity was service, pure and simple without any element of hiring or letting out of premises.

ii) The dominant intention in these transactions between the petitioner and its customers is the use of the equipment or plant or machinery. The ‘operative intention’ here, was the use of the equipment. The use of the premises was incidental; in that sense there is inseparability to the transaction. Therefore, the submission of the petitioner, that the transaction is not ‘renting’ at all, is incorrect; equally, the revenue’s contention that the transaction is one where the parties intended the renting of land (because of the right to access being given to the mobile operators) is also incorrect. The underlying object of the arrangement or agreement (in the MSA) was the use of the machinery, plant or equipment, i.e., the passive infrastructure. That it is necessary to house these equipment in some premises is entirely incidental.

 iii) In view of the above conclusions, it is held that the writ petition is entitled to succeed to the extent that the tax deductions to be made by the petitioner are to be at the rate directed in section 194-I (a) for the use of any machinery or plant or equipment at the rate indicated for that provision, i.e., 2%. The revenue’s contentions to the contrary are rejected. The writ petition is allowed.”

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2014 (34) STR 47 (Tri-Del.) CCE, Bhopal vs. Sonali India

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Whether free material supplied by service receiver needs to be included in the value of taxable services provided by the service provider? Held no.

Facts:
Respondent entered into contract with IOCL for erection of tanks and pumps. The tanks and pumps were supplied by IOCL. Respondent supplied other materials and rendered erection service. Respondent discharged service tax liability after claiming the abatement of 67% on the gross amount charged under Notification No. 1/2006 dated: 01-03-2006. The dispute was while allowing the abatement of 67% whether the value of tanks and pumps were to be included in the taxable value.

Held:
Rejecting Revenue’s appeal held that, the gross amount charged by the service provider need to include the value of plant, machinery, equipment, parts etc., only when the same were sold by the service provider in the course of providing the service. Since nowhere it was alleged that the tanks and pumps were sold by the Respondent. In the course of rendering the service appeals filed by the Appellant (revenue) was dismissed.

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2014 (34) STR 235 (Tri.-Bang.) Esskay Shipping (P) Ltd. vs. CCE, Visakhapatnam

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Whether penalty is leviable u/s. 76 of the Finance Act, 1994 when service tax with interest is paid before issuance of SCN and the same is intimated to Central Excise officer? Held no.

Facts:
The Appellants paid service tax with interest for the period from October, 2010 to March, 2011 before issuance of SCN. Penalty u/s. 76 of the Finance Act, 1994 was imposed under SCN.

Held:
As per section 73(3) of the Finance Act, 1994, if the assessee has paid service tax and intimated to the Central Excise officer, Central Excise officer cannot issue SCN u/s. 73 (1) of the Act. Further, Explanation 2 to the said section provides that in a case of payment of service tax and intimation to Central Excise officer, no penalty is imposable. Therefore, the order was set aside.

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Reassessment: S/s. 147 and 148: A. Ys. 199-00 to 2002-03: Reasons for reopening recorded after issuing notice u/s. 148: Notice u/s. 148 and reassessment proceedings are invalid:

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CIT vs. Baldwin Boys High School; [2014] 45 taxmann. com 33 (Karn):

The assessee trust, was running educational institution. For the relevant assessment years, the assessee had declared income ‘Nil’, claiming exemption u/s. 10(23C) (vi) of the Income-tax Act, 1961. Assessments were completed allowing the claim. Subsequently, the assessments were reopened by issuing notices u/s. 148 of the Act dated 30-01-2004, on the ground that the assessee was not registered u/s. 12A nor had requisite approval u/s. 10(23C)(vi) of the Act. The Tribunal set aside reassessment proceedings taking a view that notices u/s. 148 to reopen assessment was issued without recording reasons as contemplated by s/s. (2) of section 148 which vitiated the whole proceedings.

On appeal by the Revenue, the following question was raised:

 “Whether on the facts and in the circumstances of the case and in law, the notice issued by the Assessing Officer u/s. 148 of the Income-tax Act, 1961 without recording reasons as contemplated by s/s. (2) of section 148 of the Act would vitiate the whole proceedings? In other words, whether the reasons as contemplated by s/s.(2) of section 148 of the Act, in the present cases, were recorded after issuance of notice u/s. 148 of the Act and, therefore, the whole proceedings are bad in law?”

The Karnataka High Court upheld the decision of the Tribunal and held as under:

 “i) F rom bare perusal of section 148, it is clear that the Assessing Officer is obliged to record reasons before issuing notice u/s. 148. It is true that in one of the files, there was a draft of reasons purportedly prepared by the Assessing Officer on 20-01-2004. It was not signed by the Assessing Officer. The reasons recorded by the Assessing Officer were typed, as is clear from the printout of the original reasons, on 04-02-2004. The typed date was struck off with pen and the date 30-01- 2004 was written by hand with the same pen. Though the original date (typed) was struck off with pen still the typed date is visible/could be read or is clearly seen, and it was typed as 04-02-2004.

 ii) Before the Tribunal, a controversy was raised that the printout of the reasons was computer generated and it was printed with the date of printing automatically by the Computer. Be that as it may, the fact remains that the typed date or the date of printout was 04-02-2004 and that it was changed to 30-01-2004 as the date of reasons recorded under s/s. (2) of section 148.

iii) Thus, the record was set right by showing that the date of the notice and the date on which the reasons were recorded was same. Why and how the date 04- 02-2004 is appearing on the original reasons recorded under s/s. (2) of section 148 is not explained by the Assessing Officer.

iv) On perusal of the original records, it is clear that the reasons were prepared on 04-02-2004 whereas the notice was sent on 30-01-2004. It is also pertinent to note that the contents of draft reasons and the original reasons recorded by the Assessing Officer do not tally.

v) Thus, from perusal of the order passed by the Tribunal and so also the other materials placed on record, it is clear that it is a finding of fact recorded by the Tribunal holding that notice was issued even before the reasons were recorded. In such circumstances, there was no reason to interfere with the finding of facts recorded by the Tribunal.”

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DTAA: India-Singapore: Royalty: Section 9(1) (vi)(c): PE: Assessee, resident of Singapore made payment to GCC in Singapore for acquiring rights of telecasting cricket matches from Singapore: Had no connection with the marketing activities carried out through alleged PE in India: Payments could not be deemed as royalty in view of Article 12(7) of India Singapore DTAA:

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DIT vs. Set Satellite (Singapore) Pvt. Ltd.; [2014] 45 taxmann.com 100 (Bom):

The assessee is a Singapore based company engaged in the business of acquiring rights in television programmes, motion pictures and sports events and exhibiting the same on its television channels from Singapore. The assessee is a tax resident of Singapore. The assessee entered into an agreement on 25th January, 2002 with Global Cricket Corporation Private Limited (GCC), also a tax resident of Singapore. Under that agreement, GCC granted rights to the assessee throughout the licence territory. The licence territory, inter alia, included India. The assessee paid consideration to GCC for acquisition of such rights. The Assessing Officer made an addition of the amount so paid to GCC by way of disallowance on the ground that the tax was not deducted at source on such payment. The Tribunal deleted the addition. On appeal by the Revenue, the following questions were raised: “

i) Whether the payment to GCC (a Singaporean Company)for acquisition of telecasting rights were in the nature of ‘royalty’ covered by Explanation 2 to section 9(1)(vi)(c)?

ii) Even if payments would be deemed as royalty, whether they would not be chargeable to tax as per Article 12(7) of India-Singapore DTAA ?

The Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The appellate authorities had already held that payment was made only for broadcasting operations carried out from Singapore, which had no connection with the marketing activities carried out through alleged Permanent Establishment (‘PE’) of assessee in India.

 ii) Thus, there was no economic link between the payments. The payer was not a resident of India and the liability to pay royalty had not been incurred in connection with and was not borne out by the PE of the payer in India.

iii) The absence of economic link was thus the foundation on which the Tribunal’s conclusions were based. Thus, the Appeal was to be dismissed as no substantial question of law was involved.

 iv) Once it does not raise any substantial question of law, then, the Appeal deserves to be dismissed. It is also dismissed because the view taken by the Tribunal in the given facts and circumstances cannot be said to be perverse or based on no material.”

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TDS on Premium Paid for Grant of Lease

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Synopsis U/s. 194-I of the Income Tax Act, 1961, an assessee is required to deduct tax at source from payment of rent made to a resident. In some lease transactions, particularly when land is taken on a lease for a long period of time, a one-time premium is paid for the grant of lease. In addition to the premium, an annual lease rent of a nominal amount may be charged. The issue is whether the payer needs to deduct tax at source from the one-time premium paid.

The issue has been the subject matter of adjudication in various cases and judgment largely depends on the facts of the case. In this article, the authors have analysed various judicial pronouncements in this regard and have made several observations that will help the reader understand the issue in its entirety.

Issue for Consideration

Section 194-I of the Income-tax Act, 1961 requires deduction of tax at source from payment of any income by way of rent to a resident. For this purpose, ‘rent’ has been defined to mean any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any, land, or building (including factory building), or land appurtenant to a building (including factory building), ……………….. whether or not any one or all of the above are owned by the payee.

Very often, when land is taken on lease for a long period of time, say for 30 years, 50 years or 99 years, a premium is paid for such grant of lease, particularly when the lease is being taken from a Government Authority, such as an Industrial Development Corporation or a Regional Development Authority. In addition to the premium, annual rent may also be charged, which at times may be a nominal amount. The payment of such a premium has been the subject matter of several controversies, under the tax laws, surrounding the liability of the payer to deduct tax at source u/s. 194-I and his eligibility to claim deduction for such payment in computing his total income.

One of the issues is whether such a premium is really in the nature of rent for the purposes of section 194-I, and whether tax is deductible at source from such premium, or whether such premium is in the nature of a capital expenditure for the grant of lease of the land and no tax is deductible from such payment. While the Chennai bench of the Tribunal has taken the view that tax is required to be deducted at source u/s. 194-I from the payment of lease premium, the Delhi and Mumbai benches of the Tribunal have taken a contrary view that payment for such premium is a capital expenditure and no tax is required to be deducted at source thereon.

Foxconn India’s case

The issue first arose before the Chennai bench of the tribunal in the case of Foxconn India Developer (P) Ltd. vs. ITO 53 SOT 213.

In this case, the assessee was engaged in the business of developing a Special Economic Zone (SEZ) and had taken on lease, a plot of land of 151.85 acre for a period of 99 years from SIPCOT Ltd., a Tamil Nadu State Government Corporation engaged in industrial development, which was the nodal agency for development of land for SEZ at Sriperumbudur. The assessee paid an amount of Rs. 28.41 crore as upfront charges for the lease. The annual lease rent was Rs. 1 per year for 98 years and Rs. 2 in the 99th year, such rent also being paid in advance. The upfront fee was non-refundable and consisted of Rs. 27.09 crore towards non-refundable upfront charges and Rs. 1.32 crore for payment towards provision of water and pipeline up to the boundary limit.

The Assessing Officer (TDS) took the view that such payment came within the definition of rent as per the explanation to section 194-I, and that the assessee had failed to deduct tax at source thereon. He therefore treated the assessee as in default for non-deduction of TDS and raised a demand for the amount of TDS and interest thereon.

The Commissioner (Appeals) was of the view that the upfront fee was nothing but advance rent, since the annual rent was very small. According to the Commissioner (Appeals), such upfront payment obviated the problem of SIPCOT in collecting the rent annually. He therefore held that the assessing officer was justified in applying section 194-I and holding that the assessee had failed to deduct TDS. However, since the lessor had included upfront and water connections charges received by it as its income and paid tax thereon, he held that the TDS could not be recovered from the assessee following the decision of the Supreme Court in the case of Hindustan Coca-Cola Beverages 293 ITR 226, but that interest could be levied u/s. 201(1A) up to the date of payment of final installment of advance tax by SIPCOT Ltd.

Before the Tribunal, it was argued that the upfront fee was a capital outgo, and that by such payment, the assessee derived the right of possession of the land for 99 years; that the right was an asset, giving rise to an enduring benefit; that the assessee had reflected this right acquired by such payment as an asset in its balance sheet; that no tax was deductible on a capital outgo. SIPCOT Ltd. had treated the entire amount received by it as a revenue receipt and part of its business income from the area development activity, and had accordingly treated the transaction as a deemed sale of land. Reliance was placed on the decision of the Patna High Court in the case of Traders and Miners Ltd. vs. CIT 27 ITR 341, for the proposition that lease of land was a transfer of a capital asset.

The Tribunal agreed with the assessee’s contention that it had received a benefit of enduring nature, that the outgo was on capital account and that it had acquired an asset by making such payment. It noted that the assessee had derived an interest in the property since leasehold interest was a valuable right.

However, according to the Tribunal, the question was not as to whether the outgo was capital or revenue, but as to whether the upfront fee fell within the definition of ‘rent’ under the Explanation to section 194-I. According to the Tribunal, section 194-I did not differentiate between a capital outgo and a revenue outgo. It rejected the assessee’s argument that the payment was made before the date of signing of the lease agreement, as not being relevant. According to the Tribunal, it was an accepted position that the payments were for the lease of the land, that the lease was already in contemplation and that the payment would not have been made unless the lease was at least orally agreed to between the parties. Therefore, according to the Tribunal, the payment, by whatever name called, was made under a lease agreement.

According to the Tribunal, the definition of rent would definitely include payments of any type under any agreement or arrangement for the use of land. For the purposes of section 194-I, the Tribunal was of the opinion that the normal meaning of the term rent could not be used, but that the specific definition of rent had to be applied, which, in the opinion of the Tribunal, would squarely cover the payment made by the assessee to SIPCOT Ltd.

The Tribunal therefore upheld the order of the Commissioner (Appeals), holding that tax was deductible at source. Having held that the tax was deductible at source, the Tribunal however proceeded to hold that such tax could not be recovered from the assessee as the relevant taxes had already been paid by SIPCOT Ltd., and that only interest u/s. 201(1A) could be recovered from the assessee.

Navi Mumbai SEZ’s case

 The issue again came up before the Mumbai bench of the Tribunal in the case of ITO vs. Navi Mumbai SEZ (P) Ltd., 147 ITD 261.
in this case, the assessee was a special purpose  vehicle constituted by the maharashtra Government Corporation, City and industrial development Corporation of maharashtra ltd. (CidCo) and dronagiri infrastructure Private Limited for developing and operating an SEZ at  navi  mumbai.  CidCo  was  the  town  development authority for navi mumbai, and had acquired privately owned lands in that area for development work. CidCo was also appointed as the nodal agency for setting up the SeZ at navi mumbai.

a development agreement, followed by the lease deed, was entered into between CidCo and the assessee, whereunder the assessee agreed for payment of lease premium, in respect of land acquired by CidCo and allotted to the assessee, from time to time. accordingly, the  assessee  paid  lease  premium  of  rs.  50  crore  in assessment year 2006-07, rs. 946.06 crore in assessment year 2007-08, Rs. 1,033.61 crore in assessment year 2008-09,  and  rs.  146.82  crore  in  assessment  year 2009-10.

By virtue of the lease, the assessee had acquired lease- hold rights in the land for the purpose of developing, designing, planning, financing, marketing, developing necessary infrastructure, providing necessary services, operating and maintaining infrastructure, and administering and managing the SEZ to be known as the navi mumbai SEZ. the assessee had also acquired the rights to determine, levy, collect, retain, and utilise user charges, fees for provision of services and/or tariffs under the lease deed. the lease deed and development agreement assigned to the assessee the right to develop, construct and dispose of residential and commercial spaces. the assessee was also entitled to grant a sub-lease in respect of portions of the lease land, in accordance with applicable laws and as per the lease deed. the assessee was granted the power to assign its rights, title or interest or create a security interest in respect of its right, either fully or in part thereof, in favour of lenders, including the grant of step in rights in the event of default under the financing arrangements for the purposes of obtaining finance for the SEZ. under the development agreement, the assessee acquired sole rights for marketing of the SEZ and the industrial/commercial projects to potential tenants.

The assessing officer took the view that the lease premium was ‘rent’ within the meaning of the said term u/s. 194-i and that the assessee ought to have deducted tax at source from such payment. according to the assessing Officer, almost any and every payment in relation to property under lease transactions was to be treated as rent for the purposes of section 194-i and hence lease premium partook of the character of rent. according to the ao, the various restrictive clauses in the lease agreement negated the assessee’s contention that it had acquired rights in the land and not merely rights to use the land. the ao therefore held that the assessee was in default for non-deduction of tax at source on such payment.

The  Commissioner  (appeals)  noted  that  the  assessee had been allotted land for a period of 60 years on the payment of lease premium and that the lease deed and the development agreement assigned to the assessee leasehold rights, which included a bundle of rights. he held that the payment of lease premium by the assessee was for acquiring the lease and it could not be equated with rent. The Commissioner (Appeals) noted that the definition of the term ‘rent’ specifically used the term ‘for the use of,’ and that the usage was of the utmost importance in any transaction for it to be treated as rent. according to the Commissioner (appeals), a transaction of lease might have stipulations which make it a transaction identical   to the transactions between a landlord and a tenant and that was why various terms like sub-lease, tenancy, etc. had been used in the section. however, in many cases, a lease transaction might not necessarily be similar or identical to a transaction between a landlord and tenant, and instead might indicate a sale transaction, in the sense that certain more valuable rights in the property were transferred.

The Commissioner (appeals) also drew a distinction be- tween a case where the tenant or lessee used the proper- ty for his own purposes or employed it for his own benefit, in which case the consideration would be in the nature  of rent, as against a situation where the property was exploited in a manner that its identity did not remain the same and thereafter it was sold, by the lessee, for a profit, which was the situation in the assessee’s case and hence could not be termed as a transaction between a landlord and a tenant. according to the Commissioner (appeals), the latter was a case where the lessee acquired a capital right to develop the land and exploit it. the Commissioner (appeals) therefore held that the assessee had acquired rights in land and had not paid for the use of the land, and that therefore the provisions of section 194-i were not attracted.

On further appeal by the revenue, the tribunal noted that the word ‘rent’ as defined u/s. 194-I had a wider meaning than that in common parlance. the tribunal also noted that the assessee however had paid the lease premium to acquire the leasehold land and that there was no provi- sion for refund of the lease premium paid by the assessee. it took note of the decision of the Supreme Court in the case of A. R. Krishnamurthy vs. CIT 176 itr 417, wherein the apex Court held that a lease of land was a transfer  of interest in the land, that involved a transfer of title in favour of the lessee, though the lessor had the right of reversion after the period of lease terminated. it also took note of the decision of the delhi high Court in the case  of Bharat Steel Tubes Ltd. vs. CIT 252 itr 622, wherein the court held that amount paid for acquiring leasehold rights was premium, which was capital in nature, and that periodical payments made for the continuous enjoyment of the benefits under the lease amounted to rent, which was revenue in nature.

The tribunal also noted the decision of the jurisdictional Bombay high Court in the case of CIT vs. Khimline Pumps Ltd. 258 itr 459, wherein it was held that the payment made for acquiring leasehold rights from a lessee was capital in nature, and could not be treated as an advance rent. according to the tribunal, in the assessee’s case, there was a transfer of substantive interest of the lessor in the leasehold land in favour of the assessee and that the lease premium was a capital expenditure to acquire a capital asset and not for the use of the land.

The  tribunal  observed  that  in  the  case  of  foxconn  in- dia developers (supra) the Chennai bench of the tribu- nal had observed that the payment was made under the lease agreement, and had held that the payment was for use of land and not for acquisition of leasehold land. the tribunal in navi mumbai SeZ’s case therefore, was of the view that the decision of the Chennai bench in foxconn’s case was not applicable to the case before it. the tribu- nal preferred to follow the decision of the delhi tribunal in ITO vs. Indian Newspapers Society 144 itd 668, wherein it was held that the payment of the lease premium was not liable to deduction of tax at source. it also took note of the ratio of the decision of the special bench of the tribunal at mumbai in the case of Jt. CIT vs. Mukund Ltd. 13 Sot 558, where the special bench had held that premium paid for acquiring leasehold rights in land was a capital expenditure.

The mumbai bench of the tribunal therefore held that the premium paid by the assessee did not attract the provisions of section 194-i, and that no tax was required to be deducted at source on such lease premium.

A similar view had been taken earlier by the mumbai bench of the tribunal in the case of ITO vs. Wadhwa & Associates Realtors (P) Ltd. 146 itd 694, in the context of lease of land from mumbai metropolitan regional development authority.

Observations
An immovable property comprises of a bundle of rights, each of them can be separately conveyed for varied consideration to different people. for example, right to own, right to use, right to mine, right to let, right to manage and control, etc. under the general law, sale consideration is received for conveyance of absolute rights in a property while a premium is received for transfer of the partial in- terest of the owner of the property and rent is received for grant of the right to use the property for a period. each of these transfers operate in different fields and the payments there under have different implications.the receipt of the rent is in the revenue field and of the premium is in the capital field. The payment of the rent is revenue expenditure and of the premium is a capital outlay. there may be cases where it may be difficult to draw a precise line between the premium and the rent. there may also be the cases that the parties for convenient reasons chose to use such nomenclatures that do not reveal the true nature of the transactions. the distinction between premium and rent and the norms for identifying each of them is noted by the Supreme Court in the case of CIT vs. Panbari Tea Co. Ltd. 57 itr 422 in the following words:

“The real test of a salami or premium is whether the amount paid, in a lump sum or in instalments, is the consideration paid by the tenant for being let into possession. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital receipt, and the latter are revenue receipts. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology.

This section (section 105 of the Transfer of Property Act), therefore brings out the distinction between the price paid for transfer of right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease is in the nature of rent. The former is a capital income and the latter a revenue receipt.

In some cases, the so-called premium is in fact advance rent and in others, rent is deferred  price. It is not the form, but the substance of the transaction that matters. The nomenclature used may not be decisive conclusion, but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties.”

It is therefore appropriate to hold that the issue that whether a payment is a premium or a rent is largely a question of fact. the facts will decide as to what has been paid is a premium or a rent, no matter what nomenclature the parties have chosen to use; the facts will decide the character of the payment, no matter it has been paid in one go or in installments. the facts that are relevant for deciding the character are whether the payer’s interest  in the property are transferred or whether the payment is for the limited purpose of use of the property for a period. Where the payment is for use of the property, the same would be on revenue account even where paid in one go for a period exceeding one year. in contrast where the payment is for acquiring a part of the interest of the owner, the same will be on capital account even where paid in installments.

Usually in the long lease, the transaction involves a transfer of interest of the owner in part and of the right to use the property as well as the separate payment being made for each of them. in such circumstances, it is fair for the parties and also for the authorities to respect the contents of the lease deed unless they do not reveal the facts but camouflage them.

An yardstick that can be safely used, in a case where the contents of the lease deed do not clearly reveal the true nature of the transaction and of the payment, is to look for the value of the property in the open market and if the premium matches such value, with a difference attributable to the limited title, it can be said that the payment was made for transfer of interest in the property.

An additional issue is whether the distinction between the two terms is to be ignored while interpreting section 194-i, given the specific definition contained in the Explanation to that section. On the first glance, one may be tempted to hold, like what was done by the Chennai bench in foxconn’s case, that any payment made under a lease, is subjected to the provisions of tax deduction at source as such payment should be termed as ‘rent’ within its extended meaning u/s. 194-I. We are afraid that the view  of the bench requires reconsideration in as much as the term ‘rent’, even u/s. 194-I, covers a payment only where it is for the use of the properties listed therein. The definition of rent in section 194-i uses the term “for the use of” clearly indicating that it is intended to cover the subsequent periodical payments, which are meant for continuous subsequent usage of the property, and not initial capital payment, meant for acquisition of the right to use the property. had section 194-i intended to also cover payments made for acquisition of the right to use property, it would have used the term “for acquisition of the right to use, or for the use of”.

The Chennai bench of the tribunal took the view that it did not matter as to whether the payment of premium was capital in nature or revenue in nature. it proceeded on the footing that the definition of ‘rent’ in section 194-I was broad enough to cover even capital payments. however, given the use of the term “for use of” in the definition, it is clear that what is covered by the definition is only a revenue expenditure, and not a capital expenditure. the distinction, as observed by the Supreme Court in Panbari tea’s case (supra), between rent (revenue) and premium (capital) also does not seem to have been taken into account by the Chennai bench of the tribunal.

In fact, if one takes the Chennai bench’s decision to its logical conclusion, even payment for outright purchase of land or building will be covered by section 194-i, as purchase of land or building includes acquisition of the right to use the land or building. this would be an absurdity, more particularly as there is a separate provision u/s. 194-ia for deduction of tax at source from payments for acquisition of immovable property.

As rightly analysed by the Special Bench of the tribunal in mukund’s case (supra), if the premium is non-refundable and there is a provision for termination of the lease prior to the end of the lease term, without refund of any part of the lease premium for the unexpired lease term, the payment of premium cannot be regarded as a payment of advance rent. unless the agreement shows that the amount of premium was paid as advance rent for all future years and that a lump sum payment of future years’ rent was paid to avail of some concession in rent, the premium paid is to be regarded as a price for obtaining the leasehold rights. in that case, the tribunal also relied upon the Supreme Court decision in the case of Durga Das Khanna vs. CIT 72 ITR 796, where the Supreme Court took a similar view in relation to a lease agreement for a cinema hall.

The delhi high Court, in the case of Krishak Bharati Co- Operative Ltd. vs. DCIT 350 ITR 24, has pointed out that payment of lease premium is a precondition for securing possession. Where the tenure of the lease is quite substantial and the lease virtually creates ownership rights in favour of the assessee, who is at liberty to construct upon the plot, and exclusive possession has been handed over to the assessee at the time of creation of the lease, the lease premium could not be regarded as advance rent to be amortised over the period of the lease.

In the case of R. K. Palshikar HUF vs. CIT 172 ITR 311 (SC), where the lease was for a long period, namely 99 years, the assessee had parted with an asset of an enduring nature, namely, the rights to possession and enjoyment to the properties leased for a period of 99 years subject to certain conditions on which the respective leases could be terminated, and a premium had been charged by the assessee in all the leases, the Supreme Court held that the grant of the leases amounted to transfer of the capital assets.

In Krishak Bharati’s case (supra), the delhi high Court observed that all the cases where the lease premium was held to be in the nature of advance rent were fact dependent. in the case of DCIT vs. Sun Pharmaceutical Industries Ltd. 329 ITR 479 (Guj), the lease premium was held to be deductible as the annual lease rent was a token amount of rs. 40. in CIT vs. Gemini Arts (P) Ltd. 254 itr 201 (mad), the rent was a nominal amount and there was no provision for increase in rent during the period of lease.

As observed by lord Greene m.r. in henriksen vs. Grafton Hotel Ltd. 24 TC 453:

“A payment of this character appears to me to fall into the same class as the payment of a premium of a lease, which is admittedly not deductible. in the case of such a premium, it is nothing to the point to say that the parties, if they had chosen, might have suppressed the premium and made a corresponding increase in the rent. no doubt they might have done so, but they did not do so in fact.” importantly, the Supreme Court in the case of durga das Khanna (supra) held that the onus is on the revenue to demonstrate that the advance rent has been camouflaged as premium and that the premium has been inflated. According to the Supreme Court, where an arm of the government is a party to the lease agreement, the burden on the Assessing Officer to prove such camouflage would be very heavy and onerous.

Therefore, in a situation where an assessee obtains substantial domain over the immovable property by payment of the lease premium, particularly where the lease premium is paid to a Government authority, the premium would be regarded as a payment for acquisition of the property for the lease period, and not as a payment for the user of the property. therefore, the provisions of section 194-I should not be attracted to such payment of lease premium. the ratio of the decisions of the mumbai and delhi benches of the tribunal, to the effect that no tax is deductible at source in respect of such premium, therefore seems to be the better view of the matter.

Dear members of BCAS family,

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The other day I was watching the swearing in ceremony of our 15th Prime Minister, Mr. Narendra Modi. Being from the corporate sector, I immediately wondered how the HR would communicate such news to the stakeholders of a company, were Mr. Modi be appointed as the CEO of a company. I began day dreaming and in my imagination, I visualised a letter which would probably read something like this:

 “Dear Stakeholders,

As you already know, as of 26th May 2014, we have on-boarded the new CEO for our Company, Mr. Narendra D. Modi (also famously known as NaMo). He was short listed for the role a few months back and the decision to induct him for the role was taken on 16th May 2014. We are fortunate that after ages, majority of the recruitment team members have concurred on the choice of our CEO. Happily, the stakeholders across interest groups have also lent their vote to Mr. Modi. By doing so, we have strengthened his hands to enable him to steer the fortune of our company with confidence and without bottlenecks.

The new CEO is a visionary, taskmaster, focused individual and master innovator. Having appointed him for the role, we can now step back from debating between ourselves as to how the company must run, so that he could do his job effectively. For those of you who have voted for his appointment, our request is to not crush him with a mountain of expectations. For those of you who did not want his appointment, our request is to accept the wishes of the majority and join hands with him to build our company.

 Having said that, we urge you not to disrupt the growth process and allow graceful functioning of his board. Make your points eloquently and forcefully, but you may want to avoid staging dharnas, walkouts or strikes. We have had enough of that in the last few years.

Mr. Modi has been chosen for the role because of his exemplary performance in our Gujarat branch. It is expected that he will carry that experience forward and upscale it to make our company a model for others to emulate. He has assured that the top lines will grow, costs will come down, productivity will rise, leakages will be plugged, resources will be optimally used, the treasury reserves will rise and the company will have funds for future investments and contingencies.

But it is expected that his biggest achievement would be the significant increase in our bottom-line and thus, the earnings per share. There has been wide discontent in the past on account of inequitable distribution of the company’s profits. It is hoped that each shareholder will benefit under the new management, both financially and socially. But you should also be mindful of the fact that all this cannot be achieved single-handedly. We all need to chip in. Our role would be to focus on our own jobs and roles in the company, share his vision, work our hearts out and be united in our efforts.

As you would have all witnessed, Mr. Modi has extensively travelled to most of our regions and branches before he was appointed. He has already interacted with numerous stakeholders and interest groups and is likely to have gained a deep understanding of and insights into the issues and problem areas.

The CEO is cognizant of the support he has from all quarters and will surely work in the interest of all stakeholders under the parent banner of Hindustan United Family. The stakeholders from the Middle Class Co-operative, the Poor People’s Collective, the Shetkari Sanghatna and Sons, the Youth Unlimited, the Women’s Equality Society, The India Inc. and others can be hopeful of having their grievances addressed this time round.

In return, you are just expected to be patient and give him space to work out his priorities. While he has hit the ground running and hit some home runs in building relations with other CEOs and has taken some phenomenal decisions, please do not expect the world to turn upside down in the first 100 days. The damage done by the weak management of his predecessor will take time to undo. The good days have begun and will only get better. Don’t parrot it, but believe in it.

He already has a plan in place. We have given him a free hand to choose his team and are confident he will select the best person for each job. The process has already been set in motion and from the looks of it, his team has already started taking visible actions. We are hopeful that his team will not only achieve their Key Result Areas but also enter into Service Level Agreements with all their stakeholders. We are sure he is aware that it is important that not only does he himself remain above board but more importantly that he is able to inculcate the same values in his team members. So much so that good governance becomes a culture and does not remain a mere virtue, in all of us. He has gained a reputation of a workaholic. He has no familial or outside pressures nor does he have any known material hobby, interest or greed (the reasons why we are confident he will neither waver, compromise nor succumb to temptations).

Our brand name has taken a serious beating in recent times. Interest of investors and clients was on the wane. It is here that we are very excited to see Mr. Modi not only regain lost ground but to rebrand our company such that others sit up and take notice with envy and awe.

Lastly, for those of you from the business and finance units, there’s a lot to cheer. We are aware that hopes are riding high on him urgently bringing in long awaited bills (e.g. GST), taking a relook at painful laws (e.g. Companies Act, 2013), improving tax administration (where honest tax payers are not penalised and defaulters don’t go scot free) and rationalising the indirect taxes (apply Pareto’s Principle for Service Tax and Excise so that 20% of items that fetch 80% of the revenue are retained and small items which don’t generate significant revenue are exempted).

We request you to join us in welcoming our new CEO and gear ourselves to work alongside him.
As someone famously said “Achche din aanewale hai”.

Yours truly Team HR”

Closer home, BCAS too has a new CEO in Nitin Shingala. An excellent human being, a fine professional and a devoted BCAS volunteer of many years. Having worked with him as my VP for a year I can assure you that 2014-15 will be a golden year in the journey of BCAS. Please join me in welcoming Nitin as the BCAS President for the year 2014-15.

Here’s wishing everyone happiness and love.

With Warm Regards

Naushad A. Panjwani

levitra

Create Opportunities and Not Entitlements

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The new Government is firmly in the saddle in Delhi. After 25 years, the people of India have given a clear mandate. Right from the swearingin ceremony, this Government has made a good beginning and as they say, “well begun is half done.” The Government will now have to meet the challenge of enhanced expectations.

Subsequent to the poll results, the parties that lost have started searching for reasons for their complete rout. A number of party spokesmen have said that even though the UPA Government took substantial steps to alleviate poverty, these did not get the necessary publicity and therefore, they were unable to convince the voters. This has been cited as the prime cause of defeat. During the course of debates and discussions in the media, the ‘Food Security‘ and the ‘Right to Education’ legislations have been brandished as path breaking achievements of the UPA Government. It is this aspect of the argument that one needs to consider carefully. There can be no two views about the right of an Indian citizen to have a square meal and to avail of good education. The question is how does one achieve this? Is creating ‘entitlements‘ the correct approach or in the era of globalisation, is creation of opportunity an alternative?

The left of the Centre parties, socialists and the few surviving communists have consistently argued that globalisation is one of the prime causes of increase in poverty. They believe that the underprivileged are against globalisation and economic reforms in the manner that it is being pursued in the last 20 years. This does not appear to be the truth. If one analyses the aspirations of those sections of the public who are living in poverty, or those from the lower middle class, who are trying to make their way up the ladder, the resentment is not about those who were enjoying the good things of life, but it is about the lack of opportunity to reach where others have. As Thomas Friedman, in his book “The World is Flat” argues that voters have not said, “Stop the globalisation train, we want to get off.” They have actually said,“Stop the globalisation train, we want to get on but someone needs to help
us by building a better step stool.” This election was about envy and anger. It was a classic case of revolution, happening when things are getting better but not fast enough for many people.

The reason why the people have given such an unequivocal mandate is that they have realised that governments, both at the Centre and at the State-level have been eaten away by corruption and mismanagement and they are simply unable to deliver. It is in this context that the new Government must look at the challenges ahead. Let us consider the “Food Security” legislation. While there is no quarrel about the sentiment that every Indian must be well fed, just creating an entitlement without substantial reform in agriculture, such legislation will lead us nowhere. It would probably substitute an existing inefficient system by another. We need to create opportunities for the Indian farmer to grow more food, to store it, if necessary process it and reach it to the consumer through efficient channels of distribution where he will get the best price. The farmer needs a window of opportunity. The Indian farmer does not need doles of free power and loan waivers. What he needs is an assured supply of quality inputs and access to affordable credit. If this infrastructure is created, channels of distribution will develop and food will reach the poor at reasonable prices. Then, a far smaller number of people who do not have the requisite purchasing power will have to be supported.

Let us look at education. A young lady has taken charge of this ministry and without giving her an opportunity to function there is a controversy being raised about her educational qualification. To succeed, what is needed is not a university degree but strong political will and the desire to act honestly and fairly. The Right to Education Act creates an entitlement, but without proper planning, it will increase pressure on the existing poor education infrastructure and result in further resentment. The need is to spend more, spend well and create more quality schools which can be accessed by the lower strata of society. We have had reservations for more than six decades, and there needs to be serious debate on how far it has benefited those for whom they were meant. Apart from increase in the number of institutions, there is a need to seriously rethink about the manner of imparting education. Vocational education must be given its due share. Let us hope that the promise to spend 6% of GDP on education translates into reality and does not remain on paper.

Finally, not only must opportunities be created, but these must be created quickly. The speed of decision-making must undergo a total transition. The new Government should not attempt to be “saviours” of the poor. The endeavour must be to empower all sections of the society, to create more opportunities for wealth creation and then ensure its equitable distribution. The Indian voter has delivered. It is now the turn of the Indian politician to do so!

Anil.J.Sathe

Editor

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Programme Conceived by: Narayan K. Varma Co-ordinators: Uday V. Sathaye and Pradip K. Thanawala

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A Senior Chartered Accountants’ Meet (SCAM) was organised by the Bombay Chartered Accountants’ Society (BCAS) at Hotel Dukes Retreat, Khandala on 24th & 25th May, 2014. This programme was conceived by past President, BCAS, Mr. Narayan Varma. The object was to bring together the Senior Chartered Accountants to share their experience and to discuss various non-technical subjects which was of interest to them. In a departure from the BCAS tradition, the members attended this meet with their spouses. The programme was designed keeping this in mind.

President, Mr. Naushad Panjwani welcomed all the delegates and highlighted the purpose of this programme. He categorically mentioned that, after 60 years of age, one needs to look at things differently. The Chairman of the 4i committee, Mr. Uday Sathaye felt that the BCAS is always ahead in organising different Residential Refresher Courses (RRC). He also mentioned that, for the first time, senior members were attending RRC with their spouses, to enjoy and understand subjects of common interest.


Lighting of Lamp. Seen L to R – Arvind P. Dalal, Uday V. Sathaye and Narayan K. Varma

Ms. Nidhi Thanawala, Assistant Professor and BMM Co-ordinator, H. R. College of Commerce and Economics , Mumbai, made an excellent presentation on the use of Mobile Phones, Computers etc. She demonstrated the use of various applications available in such electronic gadgets which could make life easier and enjoyable.

Mr. Anand Desai from DSK Legal presented his views on succession planning including drafting of a will. This session was interactive wherein everybody participated and shared their experiences.

Mr. Parindra Kadakia, an active member from the Chinmaya Mission, made a presentation on Spirituality. He dealt with the subject ‘Purpose of Life’ and elaborately discussed self-management for excellence.

In the evening, everybody participated in a musical programme. Mr. Mahesh Dube, Hasya Kavi, from Varanasi presented excellent poems composed by him with some of them based on the present scenario of our country. This programme was very refreshing.

The next morning, Dr. Vijaya Venkat, dealt with the health problems particularly related to diet. She explained in detail the need of change in habits to enjoy life more happily. She used the word “Wellness” to greet everybody at all times to emphasise the result of a more disciplined lifestyle.

Thereafter, Ms. Amruta Lovekar, a Gerontologist, made a presentation on the non-financial aspects of a retirement plan. She explained in detail about what a Senior Citizen can pass on to the next generation beyond wealth.

Mr. Shashank, a Yoga teacher from Kaivalyadham demonstrated exercises in yoga that are useful for the Senior citizens.

The SCAM concluded after lunch on a positive note to meet again. Everybody appreciated the innovative idea of bringing seniors together for non-academic subjects useful in day-to -day life.


Participants of SCAM

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Tax Terrorism: India Births a New Kind of Terrorism

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A recent move by the tax department has flummoxed corporates and businessmen who are calling it ‘tax terrorism’ — a phrase that has gained currency after it found its way into BJP’s manifesto. Hundreds of closely held firms, many owned by the country’s top business houses, have been questioned on the premium collected against the sale of shares. In notices served a day before the close of the last financial year, the Incometax (I-T) office, after collecting data from the registrar of companies (RoC), has told them to justify the premium, failing which the amount would be treated as income and therefore taxed. A senior tax official said the department was simply following a new rule that came into force from 2012-13. Its intention is to curb money laundering and bogus transactions where the premium an investor pays per share cannot be explained. But tax practitioners ET spoke to feared the department’s sweeping and hurriedly taken decision to beat the March 31 deadline could mean endless hassles for companies. “First, any such transaction prior to 2012-13 (when the new rule came) should not be taxed, but the department has, nonetheless, gone ahead with a fresh circular. This would be legally challenged. Second, one cannot question transactions simply on the basis of RoC data. There has been no evaluation and there is no evidence that income has escaped assessment.

According to tax circles, close to 200 companies have received notices from the tax office in connection with share premium charged by them. The unstated fear among companies is the possible outcome of reopening of assessment. “There is no guarantee that the I-T department would stop with the share premium issue. It’s very much possible that it may rake up other matters. At present, 2008-09 assessments have been reopened which would become time barred post March 31, 2014. But the department, we believe, is collecting data for subsequent years as well. So, it’s a matter of time more notices would be served. Companies issue shares to financial investors, JV partners, co-promoters and parent companies, and often these are influenced by shareholder agreements. The pricing is on the basis of either book value of the unlisted company or its discounted cash flow which estimates future earnings. All cases where the value of share premium is more than Rs.1 crore have come under the department’s scrutiny. The move to tax unexplained premium is aimed at plugging sham deals priced at bloated valuation to carry out shady transfer of funds. However, the department’s March 28 circular puts a question mark on genuine transactions as well.

(Source: The Economic Times of India, dated 25-04- 2014)

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Well-intentioned laws, courts cripple growth

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A key reason why India’s economic growth has halved from 9% to 4.5% per year is that, in search of inclusive growth, the courts and legislatures have increasingly made legitimate business difficult. It now takes 12 years to open a new coalmine. This is not inclusive growth but paralysis and stagnation.

The new land acquisition law aims at quick, fair acquisition. But the secretary of the department of industrial policy and production says the Act has made it “virtually impossible” to acquire land for roads, ports or other infrastructure. Higher compensation provided in the new law is welcome, but it also mandates a social impact assessment for each project, followed by expert group clearance, followed by an 80% vote of affected persons. Legal challenges are possible at each stage. Instead of quick, fair acquisition, we have dither and delay.

India has become a major global player in clinical trials for new drugs. But complaints have arisen against malpractices by some companies — not informing patients of the risks, not giving insurance cover or compensation, negligence leading to deaths. The obvious answer is to prosecute and jail the guilty, deterring further misdeeds.

But in India the courts take forever to conclude cases, so misdeeds are not deterred. Instead of focusing on quick justice, the Supreme Court has decreed lengthy new procedures for clinical trials, causing huge delays and costs for legitimate activity.

Our courts are under the illusion that good practices are created by a jungle of rules. Sorry, they are actually created by swift punishment that deters the guilty. That’s why clinical trials suffer from fewer malpractices in Europe or Japan.

The Supreme Court should focus on speedy convictions, not ever more regulations.

Despite having the world’s third biggest reserves of iron ore and coal, India has begun importing both. The courts have banned iron mining in some states, and court inquiries into corrupt coal block allocations have frozen fresh mining. Now, illegal mining surely should be stopped. But the right way is to nail the guilty, not stop all legitimate activity. No illegal miners have been convicted beyond appeals, but many legitimate miners have suffered huge losses.

Illegal sand mining is rampant. Sand is essential for making concrete for construction. But the courts have passed increasingly stringent rules, curbing mining from river beds on environmental grounds. This has created a huge shortage of sand, which in some states sells at Rs. 1,800/tonne, more than the price of coal some years ago. Cowed by court strictures and threats of prosecution, many Collectors are playing safe by simply not issuing new sand licenses or renewing old ones that expire.

Faced with public outrage over illegal mining, the Green Tribunal has mandated environmental clearance (and hence delays) for even the smallest patches of sand. Will this check illegal activity? No, but it will reduce legal mining, making India even more dependent on the sand mafia for supplies.

These examples are just the tip of the iceberg. Our courts are not designed for making policy: they are designed to judge whether actions are in accordance with the law. They are not experts in the essentially political function of balancing the needs of production and social protection.

Mis-Governance in India is not just the result of crooked politicians and businessmen. It is also the result of well intentioned but badly designed laws. Above all, it is the result of a dysfunctional police-judicial system. Unending legal delays encourage law-breakers in every walk of life. The solution is not policy takeover by the courts, but quick justice.

(Source: Extracts from an Article by Swaminathan S. Anklesaria Aiyar in the Times of India dated 27-04-2014)
(Comment: Court activism is due to gross Mis- Governance, Dysfunctional Administration and Criminals in Politics & Power, who have acquired effective control of the State!)

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Make anyone who indulges in endless litigation pay: SC After hearing arguments for countless hours for more than two years in the Sahara case, the Supreme Court sent a request to Parliament: please enact a ‘Code of Compulsory Compensation’ (CCC).

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“The suggestion to the legislature is to formulate a mechanism that anyone who initiates and continues litigation senselessly, pays for the same. It is suggested that the legislature should consider introduction of a ‘Code of Compulsory Cost’,” said a bench of Justices K. S. Radhakrishnan and J. S. Khehar.

Citing the Sahara case, the bench said Indian judiciary was grossly afflicted with frivolous litigation and the need was to find ways and means to deter litigants from their compulsive obsession towards senseless and illconsidered claims.

“What is sought to be redressed (through CCC) is a habituation to press illegitimate claims. This practice and pattern is so rampant that in most cases, disputes which ought to have been settled in no time at all before the first court of incidence, are prolonged endlessly, for years and years, from court to court, up to the highest court,” it said.

(Source: The Times of India, dated 07-05-2014)

(Comment: The functionaries of the State, particularly senior officials of the various Revenue Departments should be personally made to pay for frivolous litigation initiated and sanctioned by them)

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The New India We Want by Shri N. R. Narayana Murthy

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Whoever becomes the Prime Minister will be the Prime Minister for every citizen, every resident and every visitor of India. The new PM will have to heal the secular rupture that has taken place. No country can make stellar economic progress unless there is peace at its borders and harmony within. Therefore, the first duty of the new PM will be to create an environment where every dialogue, including those with our neighbours, is on a platform of civility, courtesy, harmony and facts. This is the only way to enthuse and energise Indians of all religious beliefs, political ideologies and social status.

The economy has suffered during the last four to five years. The reputation of India has taken a beating abroad during the last six to eight years. During 1999-2009, when China was mentioned three times in boardrooms abroad, India was mentioned at least once. Today, India is not mentioned even once when China is mentioned 30 times. Good governance rests on seven important attributes: equity, fairness, transparency, accountability, honesty, secularism and a robust, consistent and responsive legal system. Most public governance experts tell me that we have seen the steepest fall in these attributes during the last five years. Therefore, the first task for the new PM is to restore these attributes at least to the level they were during the 1990s.

If we want to raise the hope and confidence of the Indian youth, we have to create jobs for them — jobs with good disposable income. We have to create 150-200 million jobs during the coming decade. The only way we can spend more on social welfare programmes is by collecting more taxes that come from growth in corporate activities. The new PM has to articulate India’s commitment to the seven attributes. Our embassies, immigration and customs officials must be empowered to make the visit of every foreigner a pleasant experience. Our state governments must become active partners in this task.

A trusted and well-informed Cabinet group should visit the global capitals every three months and reiterate these messages and make sure that enough investments come in. We have excellent people to lead such groups on both sides of the aisles. These are modern, well-informed individuals who can raise the confidence of senior corporate leaders.

The new PM must accept that, at this stage of our development, jobs can be created only in urban and semi-urban areas. The need of the day is to make our cities more attractive not just for Indians but for foreigners too. We must keep our ego down and realise that the foreigners have umpteen global options for investment. The PM must make the visit and stay of foreigners hasslefree. It is amusing that the visa-on-arrival facility is not available for even one country that is among our top five trading partners in software. The PM must create a ministry of urban governance. An apolitical expert with a proven track record has to lead this ministry since this is essentially a Centre-state issue.

It is time that we made life better for our poor people. We have to focus on education, healthcare, nutrition and shelter. All programmes that provide such facilities must use Aadhaar identity to deliver services efficiently and without corruption through a voucher scheme. You cannot run any such directed schemes without strengthening Aadhaar. Therefore, the new PM must appoint a smart, modern and a results-oriented technocrat to run UIDAI. While continuing with the right to education ideology, the new government must provide full subsidy to the private sector players in these fields through vouchers without making these institutions debilitated.

Taking about education brings me to initiatives in higher education. The new PM must give top priority to pass Bills on welcoming foreign universities and starting innovation universities. Without adequate focus on research and higher education, India’s future is shaky.

Ever since the mid-1970s, population control has been given up. I have hardly seen any PM speak about it since then. It is time we resurrected this important initiative.

Peace at our borders is extremely important and the new PM must give priority to that task. We have not seen any major move with Pakistan since A B Vajpayee’s time. It is time we acted as the elder brother to Pakistan and helped that country overcome the trauma they are facing. A happy India requires a happy Pakistan.

(Source: Extracts from an article by Shri N. R. Narayana Murthy, Executive Chairman Infosys, in The Economic Times dated 29-04-2014)

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Poor Quality of Our Democracy

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This election season, in the midst of our self-congratulation over the vitality of Indian democracy, we should ask ourselves: What is the quality of our democracy? Democracy cannot simply be a plurality of parties, free elections, peaceful handovers of power, an independent judiciary, constitutional governance, and personal and group freedoms. A healthy democracy must also have and promote substantively rich debate on policy alternatives and choices.

It is striking that through the campaign there has been no debate, of any depth, on everyday policy issues. Indian politicians seemingly have neither the stomach nor the intellectual bandwidth for those kinds of debates. The media too cannot sustain any kind of sensible commentary on key policy choices facing us. You would look in vain for an analysis of hard policy tradeoffs as we confront economic and social challenges.

Nowhere is this more evident than in respect of election manifestos which promise all manner of things. Are the policies they enunciate desirable? And if desirable, are they feasible financially, socially, politically, and culturally? Our media should be trying to answer these questions. Instead, they are preoccupied with who will win the election, who did what during campaigning and what is the last thing Narendra Modi said.

The manifestos of the two major parties suggest both are agreed on a Goods and Services Tax (GST) and encouraging foreign investment. That is worth bringing to the attention of voters. Yet few in the media have bothered to do so. BJP’s opposition to allowing multibrand retailing and its espousal of simpler tax structures has had some mention. Can India repudiate its decision on multibrand retailing? How would foreign investors react to constant policy changes? And how should we simplify our tax structures?

Both parties want to do something for health. Congress wants to pass a right to health bill, increase health expenditures to 3% of GDP and create millions of jobs in that sector. How to define the right to health? How many rights-based bills can we work with (right to education, right to information, right to food)? Is 3% too much or too little, and what would we spend less on? What kinds of jobs does Congress want to create in health?

BJP wants to raise education expenditures to 6% of GDP, encourage online courses and boost vocational training. Is 6% affordable, what are the limitations of online learning and do we have the connectivity for it, and how to energies the moribund vocational sector?

Millions are migrating to towns and cities. Urban policy is therefore a huge challenge. Congress wants to build 100 urban clusters around older or emerging cities to take the pressure off existing conurbations. BJP wants to go further and create 100 completely new cities. Which way is better? Is either feasible given struggles around land rights, a new land acquisition bill and lack of supporting infrastructure?

Speaking of infrastructure, both parties want high-speed trains. Given the horrendous record of Indian railways in managing low-speed trains, how would we move to a different, more exacting system? High-speed trains require new tracks. That means dedicating a lot of land to the project. How will that be achieved when land is at such a premium? BJP thinks that we desperately need freight corridors, industrial corridors and a port-led development strategy. Has anyone weighed up what this would mean, how we would pay for it and where we would locate these installations?

We in India are obsessed with the most superficial, transitory and procedural elements of policy making and with quite a thin conception of democracy and good governance. We pat ourselves on the back for holding elections and over deep, elemental battles in our politics — the secularism debate, or human development versus growth-led development and a host of other relatively abstract, philosophical arguments. On the other hand, we shy away from hard-headed, rigorous engagement with everyday policy challenges. If we continue to neglect these everyday challenges in social and political life, we will see our bubbling democracy subside and then eventually be consigned to the dustbin of history.

(Source: An Article by Mr. Kanti Bajpai in the Times of India, dated 26-04-2014)

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Applicability of PAN requirement for Foreign Nationals

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The Ministry of Corporate Affairs has vide General Circular No. 11/2014 dated 22nd May 2014, has clarified that the PAN details are mandatory only for those foreign nationals who are required to possess “PAN” in terms of provisions of the Income Tax Act, 1961 on the date of application for incorporation while filing Form INC -7 for incorporation of Company. Where the intending Director who is a Foreign National is not required to compulsorily possess PAN, it will be sufficient for such a person to furnish his/her passport number, along with undertaking stating that provisions of mandatory applicability of PAN are not applicable to the person concerned. The form of Declaration is required to be made in the proforma given in the circular.

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Certification of forms under the Companies Act, 2013 by practicing professionals

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The Ministry of Corporate Affairs has vide General Circular No. 10 /2014 dated 7th May 2014, invited the attention of the professional bodies ( ICAI, ICSI, ICWAI) for authenticating the correctness and integrity of documents being filed by them with the MCA in electronic mode. It is required to examine e-forms or non e-forms attached and filed with general forms on MCA portal viz. to verify whether all the requirements have been complied with and all the attachment to the forms have been duly scanned and attached in accordance with the requirement of above said rules.

Where any instance of filing of documents, application or return or petition etc. containing false or misleading information or omission of material fact or incomplete information is observed, the Regional Director or the Registrar as the case may be, shall conduct a quick inquiry against the professionals who certified the form and signatory thereof including an officer in default who appears prima facie responsible for submitting false or misleading or incorrect information pursuant to requirement of above said Rules; 15 days’ notice may be given for the purpose.

The Regional Director or the Registrar will submit his/her report in respect of the inquiry initiated, irrespective of the outcome, to the Governance cell of the Ministry within 15 days of the expiry of period given for submission of an explanation with recommendation in initiating action u/s. 447 and 448 of the Companies Act, 2013 wherever applicable and also regarding referral of the matter to the concerned professional Institute for initiating disciplinary proceedings.

The E-Gov cell of the Ministry shall process each case so referred and issue necessary instructions to the Regional Director/ Registrar of Companies for initiating action u/s 448 and 449 of the Act wherever prima facie cases have been made out. The E-Gov cell will thereafter refer such cases to the concerned Institute for conducting disciplinary proceedings against the errant member as well as debar the concerned professional from filing any document on the MCA portal in future.

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Delegation of powers u/s 458 of Companies Act 2013 to the Regional Directors

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The Ministry of Corporate Affairs has vide notification dated 21st May 2014, delegated the powers and functions of the Central Govt to the Regional Directors at Mumbai, Kolkata, Chennai, Noida, Ahmedabad, Hyderabad and Shillong, for sections :

• Section 8(4)(i)(a) for alteration of Memorandum in case of conversion into another kind of Company

• Section 8(6) for revocation of license granted u/s. 8 in respect of companies with Charitable objects

• Section 13(4) and 13 (5) for shifting of registered office from one state to another

• Section 16 for rectification of name of company
• Section 87 for rectification in the register of charges • Section 111 (3) for circulation of members resolution
• Section 140 (1) for removal of auditor before the expiry of his 5 year term ;and
• Section 399 (1)(i) for inspection, production and evidence of documents filed with prospectus

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Delegation of powers u/s 153 and 154 of Companies Act, 2013 to Regional Director, Noida

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The Ministry of Corporate Affairs has vide notification dated 21st May 2014, delegated the powers and functions of the Central Government in respect of allotment of Director Identification Number (DIN) u/s.s 153 and 154 of the said Act to the Regional Director, Joint Director, Deputy Director or Assistant Director posted in the office of Regional Director at Noida.

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Delegation of Powers u/s. 458 to ROC

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The Ministry of Corporate Affairs has vide Notification dated 21st May 2014 delegated powers for the following sections of the Companies Act, 2013 to the Registrar of Companies

• Section 4(2)(a) – if the Name stated in the Memorandum is not undesirable
• Section 8(1)(b) – for Grant of License to Company on being incorporated with Charitable Objects
• Section 8(4)(i)(c) – For permission for alteration of the Memorandum and Articles of association of Companies incorporated with charitable objects etc. except for conversion into Company of other kind.
• Section 8 (5)- grant of license to existing companies for registration under this section
• Section 13(2)-for approval for change in the name of the Company

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A. P. (DIR Series) Circular No. 130 dated 16th May, 2014

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External Commercial Borrowings (ECB) from Foreign Equity Holder – Simplification of Procedure

This circular provides that, with immediate effect, approval under the Automatic Route will now be granted by the Bank of the borrower and not by RBI in the following cases where ECB has been availed of from FEH (direct holder as well as indirect holders) and group companies of FEH: –

1. ECB by companies belonging to manufacturing, infrastructure, hotels, hospitals and software sectors from indirect equity holders and group companies.

2. ECB by companies in miscellaneous services from direct/indirect equity holders and group companies. Miscellaneous services mean companies engaged in training activities (but not educational institutes), research and development activities and companies supporting infrastructure sector. Companies doing trading business, companies providing logistics services, financial services and consultancy services are, however, not covered under the facility.

3. ECB by companies belonging to manufacturing, infrastructure, hotels, hospitals and software sectors for general corporate purpose (which includes working capital financing) from direct equity holder.

4. Change of lender when the ECB is from FEH – direct/ indirect equity holder(s) and group companies.

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A. P. (DIR Series) Circular No. 129 dated 9th May, 2014

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External Commercial Borrowings (ECB) Policy – Refinance/Repayment of Rupee loans raised from domestic banking system

Presently, subject to certain terms & conditions, Indian companies are permitted to refinance/repay the Rupee loans, raised by them from the domestic banking system, by raising ECB from recognised lenders, subject to conditions.

This circular prohibits with immediate effect eligible Indian companies to raise ECB from overseas branches/ subsidiaries of Indian banks for the purpose of refinance/ repayment of the Rupee loans raised from the domestic banking system in respect of the following:

a. Scheme of take-out financing.
b. Repayment of existing Rupee loans for companies in infrastructure sector.
c. Spectrum allocation.
d. Repayment of Rupee loans.

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A. P. (DIR Series) Circular No. 128 dated 9th May, 2014

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External Commercial Borrowings (ECB) Policy: Re-schedulement of ECB – Simplification of procedure

Presently, prior approval of RBI is required for any elongation/ rollover in the maturity period of an existing ECB.

This circular now permits banks to grant elongation/ rollover of the maturity period of an existing ECB (but not FCCB) availed under the Automatic Route or the Approval Route, subject to the following conditions: –
i. Changes, if any, in all-in-cost (AIC) must only be on account of change in average maturity period (AMP) as a result of re-scheduling of ECB and post rescheduling the AIC and the AMP must be in conformity with the applicable guidelines.
ii. T here must not be any increase in the rate of interest and no additional cost (in foreign currency/Indian Rupees) must be involved due to the re-scheduling.
iii. R e-scheduling is permitted, only once, before the maturity of the ECB.
iv. I f the lender is an overseas branch of a domestic bank, prudential norms applicable on account of rescheduling have to be complied with. v. Changes on account of re-scheduling must be reported to DSIM through revised Form 83.
vi. E CB should be in compliance with all applicable guidelines related to eligible borrower, recognised lender, AIC, AMP, end-uses, etc.
vii. The borrower must not be in the default / caution list of RBI and should not be under investigation of the Directorate of Enforcement.

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A. P. (DIR Series) Circular No. 127 dated 2nd May, 2014

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Foreign Direct Investment (FDI) in India – Reporting mechanism for transfer of equity shares/fully and mandatorily convertible preference shares/fully and mandatorily convertible debentures

This circular states that: –
(a) In cases where the NR investor including an NRI, who has acquired and continues to hold control in an Indian company in accordance with SEBI (Substantial Acquisition of shares and Takeover) Regulations, acquires shares on the stock exchanges under the FDI scheme through a registered broker it is the duty of the investee company to file form FC-TRS with the bank within 60 of the transaction.

(b) Henceforth, banks have to approach the concerned Regional Office of RBI (as against the present system of approaching the Central Office of RBI) to regularise the delay in submission of form FC-TRS, beyond the prescribed period of 60 days.

(c) IBD/FED or the nodal office of the bank has to continue to submit a consolidated monthly statement in respect of all the transactions reported by their branches together with copies of the FC-TRS forms received from their branches to FED, RBI, Foreign Investment Division, Central Office, Mumbai in a soft copy (in MS- Excel).

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(2011) 38 VST 159 (P & H) M/s. Goyal Motor Parts v. State of Punjab

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Rate of tax — Sale of digital inverters with UPS facility — Information technology products — Taxable at 4% — Schedule Entry 60(27) of Punjab Vat Act, 2005 — Tribunal cannot brush aside reports of technical experts.

Facts:
The appellant sold microteck digital inverters, manufactured by M/s. Microteck International, as UPS-EB having extra facility of UPS (Uninterrupted Power Supply) to run computers and paid 4% rate of tax being covered by sub-entry (27) of entry 60 of Schedule B of the Punjab VAT Act, 2005. The designated authority held it taxable @12.5% being covered by residual entry. The Appellate Authority relying on report of certain laboratories allowed appeal, against which the Department filed appeal before the Punjab VAT Tribunal. The Tribunal allowed appeal filed by the Department and held that only such uninterrupted power supply (UPS) products which were information technology products were to fall in Entry 60 of Schedule B and any other product even if named UPS would be chargeable @12.5% tax. The appellant referred substantive question of law to the Court for determination arising out of the order passed by the Tribunal.

Held:
The product sold by the appellant is an electronic power source which stores the energy in batteries connected to it when the AC source is present and converts this energy automatically to AC power when the input AC source fails and automatically feeds so generated AC powers to load connected and returns to mains when the AC source comes back to the input side. As per certificate of IIT Delhi the product sold by the appellant is a UPS. This could be used both as inverter as well as in computers. The appellant sold the goods in the market through retailers and was not in a position to determine as to what use the goods would be put to, as the same would be entirely at the discretion of purchaser.

The Court following the decision of the Madras High Court in case of State of Tamil Nadu v. M/s. Vinyl Cable Industries, (1993) 88 STC 430 and decision of SC in case of M/s. Hindustan Poles Corporation, (2006) 145 STC 625 held that goods in question sold by the appellant fulfil all the conditions of an UPS and hence taxable at 4%. The Court further held that the Tribunal fell in error in brushing aside the reports of technical experts opining that goods in question were UPS.

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(2011) 38 VST 142 (P&H) M/s. Jaibharat Gum and Chemicals Ltd. v. State of Haryana and Others

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VAT — Quantification of refund as per appeal order — No power to consider merit of case.

Facts:
The petitioner, the manufacturer of ‘guar gum’, exported ‘guar gum’. The petitioner claimed refund of tax paid on purchase of raw material ‘guar’ which was disallowed in assessment but in appeal it was granted. Thereafter, while quantifying refund as per appeal order, the revisional authority disallowed the refund on merit. The Tribunal confirmed the order of revisional authority disallowing refund. The petitioner filed petition before the Punjab and Haryana High Court against the order passed by the Haryana Tax Tribunal.

Held:
The High Court, following its earlier order in case of Raghbar Dass Hukam Chand & Co v. State of Haryana, (2009) 25 VST 574, allowed the petition. The relevant observations of the Court in the said case are as under:

“Therefore, we are of the view that on principle as well as on precedent, it stands established that an officer exercising power of determining the amount of refund cannot exercise the power of review or appeal or revision. Such an officer has to respect the order of assessment and then is required to proceed to determine the amount of refund. The provisions of section 43 read with Rule 36 postulates limits of their power as already noticed and, therefore, the orders passed by the Deputy Excise and Taxation Commissioner are liable to be set aside.”

However, the Court made clear that this will not affect the merits of liability of the petitioner in pending appeal.

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(2011) 22 STR 56 (Tri.-Chennai) — SMP Steel Corporation v. CCE, Madurai.

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Power of revision not exercisable when an appeal is pending before the Commissioner (Appeals).

Facts:
The penalties were set aside by the Commissioner (Appeals) vide his order dated 25-2-2010. Since, a revised order was passed by the adjudicating authority in June 2010, subsequent to the order of the Commissioner (Appeals); the appellants were in appeal against the revised order.

Held:
Power of revision cannot be exercised in respect of any issue which is appealed before the Commissioner (Appeals). In the present case, the order was revised after the appeal before the Commissioner (Appeals) was decided. The revision was bad in law and appeal was allowed in favour of the appellants.

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(2011) 22 STR 20 (Tri.-Chennai) — Anil Kumar Yadav v. CCEx., Pondicherry.

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Section 80 of the Finance Act cannot be invoked to waive penalty under some sections and to impose penalty under some other sections.

Facts:
The original authority had imposed penalty u/s. 78 of the Finance Act, but had not imposed any penalty u/s. 76 and 77 of the Finance Act invoking section 80 of the Finance Act. On appeal against the order of the original authority for waiver of penalty u/s. 78, penalty amount was reduced to 25%. However, the appellant appealed that full penalty shall be waived as he had paid the entire Service tax amount along with interest, proving bona fide interest. The respondents appealed that since the penalty amount of 25% was not paid within one month, full penalty shall be imposable.

Held:
Section 80 is applicable in respect of penalties imposable u/s.s 76, 77 and 78 of the Finance Act. Once it is accepted that there was a reasonable cause for such failure to pay Service tax, penalties u/s.s 76, 77 and 78 all are to be waived. More so since the Department had not appealed against waiver of penalty u/s.s 76 and 77 r.w.s 80 of the Finance Act. Section 80 does not authorise authorities to waive the penalty under some sections and impose penalty under some other sections. Therefore, penalty imposed u/s. 78 could not be sustained.

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(2011) 22 STR 215 (Tri.-Bang.) — KPIT Cummins Infosystems Ltd. v. CCEx., Bangalore.

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Enhancement of penalty by the same authority cannot be permitted when adjudication order is already passed.

Facts:
The Commissioner issued a show-cause notice dated 18-6-2008 and after following the principle of natural justice, passed an order for enhancement of penalty. The appellants argued that the order being issued by the Commissioner, it cannot be reviewed by the Commissioner himself and the same is in violation of Appellate processes under the Finance Act. 

Held:
The Tribunal held that once an adjudication order is passed, show-cause notice issued by the same authority cannot hold good for the same issue and the Revenue should exercise other available alternative options in the statute.

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(2011) 22 STR 177 (Tri.-Mumbai) — Affinity Express India Pvt. Ltd. v. CCEx., Pune-I.

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Refund of Cenvat credit — Export of business auxiliary service — Service was taxable after May 2006 — Assessee entitled to take credit at the time of availment — Even prior to May 2006. Refund of Cenvat credit — Export of business auxiliary service — Service tax paid on local travel and medical insurance services, outdoor catering and meal coupons — Credit admissible.

Facts:
The appellants had filed a refund claim of Cenvat credit availed on input services used for export of business auxiliary service, for the period starting from April 2006. However, the claim for local travel and medical insurance was rejected by the lower authorities and the claim for outdoor canteen/meal coupons was allowed. Thereby, the appellants and the Revenue both were in appeal for disallowance and allowance of refund claim by the lower authorities.

The Revenue submitted that the services exported by the appellants had come under Service tax net with effect from 01-05-2006, therefore, any input service availed before 1-5-2006 is not eligible for credit.

However, as per the Cenvat Credit Rules, the appellants were entitled to take credit at the time of availment and not at the time of provision of service. This means that the appellants were entitled to avail the input service credit of services availed in the month of April 2006.

In support of availment of credit on local travel and medical insurance, reliance was placed on the Bombay High Court’s decision in case of Ultratech Cement, 2010 (20) STR 577 (Bom.) wherein it was held that the input service availed by the assessee in the course of business is entitled for Cenvat credit.

Apart from this, with regard to outdoor catering and meal service, the appellants stated that credit on outdoor catering service is available if the cost of food is borne by the employer. However, the appellants were denied credit on the amount recovered from employees against subsidised food.

Held:
The appeal was allowed to the appellants in respect of availment of credit for the month of April 2006 and for availment of credit of Service tax paid on local travel and medical insurance. On the other hand, the Revenue’s appeal was partly allowed by denying credit of Service tax paid on outdoor catering and meal service, for the amount which was recovered by the assessee from the employees.

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IFRS — FAULTY FRAMEWORK?

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In the UK, the House of Lords report on audit published in March this year created headlines on competition and choice in the audit market and on the audit of banks. While their Lordships made many of their remarks specifically in respect of bank auditing and bank accounting, there were criticisms that were more generic, stemming from the rules-based nature of IFRS and the evidence suggesting that IFRS was an ‘inferior system’, which limited auditors’ scope to exercise ‘prudent judgment’. They went on to recommend that the use of IFRS should not be extended until the ‘long and uncertain process’ of achieving general agreement on IFRS was complete.

Considering that all publicly-held companies in the UK are required to report using IFRS, these are damning criticisms and ones that bear wider examination. While there is a general agreement that IFRS is a theoretically sound framework for financial reporting, practice suggests that all is not well. The reality is that companies are effectively using their own individual financial reporting frameworks when they communicate with the market. GAAP measures tend not to be broadcast, but frequent reference is made to ‘adjusted (EBITDA) (Earnings Before Interest, Taxes, Depreciation and Amortisation)’. The more cynical might suggest that everyone adjusts their EBITDA to suit themselves and that it forms a sort of ‘earnings before the bad stuff’. However, many auditors insist that GAAP figures have equal prominence with non- GAAP measures, the reality is that analysts and the media reflect other measures, such as free cashflow and maintainable earnings.

There are also a number of areas where business people intuitively distrust IFRS and those tend to relate to areas where the economics implicit in accounting judgments fail to reflect the business decisions behind them.

For instance, in IFRS, the excess of the acquisition cost over the individual net tangible asset values of a business acquired represents a number of intangible assets, whereas under UK GAAP it was all bundled together as goodwill. The values attributed to brands, customer lists and other such intangible assets, all require separate valuation exercises using theoretical models and a number of variable inputs.

The resulting values can vary greatly, depending on the inputs used. I have rarely met anyone in business who ascribes values to intangible assets in such a way, when considering a business acquisition or otherwise, and it is hardly surprising that doing so for accounting purposes causes a degree of the financial reporting outputs to be distrusted.

This distrust of formal financial reporting has contributed to the annual report becoming more a document of record than a live source of information. Companies are now more sophisticated and have a number of channels through which information is given to the market. When taken in conjunction with the blandness and sheer volume of narrative reporting and disclosures in annual reports, it is little wonder that some now see them as anachronistic.

What is to be done? On IFRS, I remain convinced that it is the nearest thing to a conceptual framework that can work globally and scalably for different sizes of companies. However, there are areas where it has become overly complex and produces results that just do not make sense to people in business. These need a long hard look, particularly around asset and liability valuation, impairment, intangibles, share options and deferred taxation. It should be fundamental that an accounting framework is scalable so that we can actually have comparability between companies that have different ownership characteristics, but which might otherwise be identical. IFRS can be put in this position if its complexities are resolved and if its rebalances use fundamental principles to give weight to prudence, comparability, reliability and understandability.

If the Lords’ report can start a sensible debate around IFRS and financial reporting more generally, it will have been worthwhile, irrespective of its sharp analysis of the competitive framework of audit.

[Source : James Roberts, Accountancy, May 2011 (excerpted)]

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Harness IT, collaborate and grow !

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Information technology (IT) is a term we read,
write and hear every day, but one has to wonder whether we have truly
understood its potential. Two recent news items have got me thinking.
The first is the enormous embarrassment caused to India, when two
persons out of the ‘50 most wanted list’ submitted by us to our
neighbouring country were found to be in our own backyard. This was the
result of Indian investigating agencies not sharing information. The
consequence was a serious dent to their credibility in the eyes of the
public.

The second news item was about the judge, who permitted
the use of an iPad by an accused in the 2G scam case, to process the
85,000 pages he was expected to read, to prepare for his defence. The
learned judge was of the opinion that without the use of technology this
was impossible.

What do these two events indicate? We are ready
to accept technology which will enable the processing and disseminating
of information, but are simply not willing to share that information.
What are the reasons that compel people to withhold information and
treat it as secret? The first and the most obvious is that its
disclosure will affect or damage vested interests. Withholding
information that should rightfully be in the public domain is a crime.
This is done when the person withholding the information desires illegal
gratification or gain. To counter this, we have measures like the Right
to Information (RTI), Act. A vigilant media has already exposed a
number of scams. One hopes this will help in cleansing public life and
result in reducing, if not removing corruption.

Even more
disturbing is the mindset of bureaucrats and other public authorities.
They believe if information, however trivial, is made public, it will be
misused. This could possibly be coming from their belief, that they are
the rulers, and the public their subjects. The creators of data, the
gatherers or possessors of information, are of the view that such data
or information is their source of power, and by not sharing it they
would continue to be powerful. What they fail to realise is that by not
sharing this information, they become vulnerable to public criticism. It
is quite possible that the non-disclosure of information is not always
with the intent of making money, rather it is to do with the lack of
transparency in the system.

It is this mindset that has to
change. I am conscious that certain categories of information cannot be
shared, because they may involve national security. But such categories
would be very few. Non-disclosure of information must be an exception
and not the rule. If this is not done, information finds its way to the
public fora through unofficial channels, which can lead to
misinformation campaigns, some of them, vicious. To illustrate, one must
look at the impact of the Wikileaks cables that have been doing the
rounds in the press. Much of what is being circulated is the opinion of
the person who sent those cables. However, since those in power and in
public life have been so averse to sharing information , the public
tends to believe everything that is now appearing in the press. Thus,
non-disclosure of information at the appropriate time has caused more
damage than benefit. Those holding public office must learn to be
transparent in their dealings. It is only then that the confidence of
the public, which has been shattered by all these scams, will be
restored to some extent atleast. For this purpose the power of
technology can be harnessed.

What is true of governments is
equally true in the commercial world. In today’s world, information
which is the source of knowledge, and at times knowledge itself, will
have to be shared and placed in the public domain. This is because the
problems that face the world are of such magnitude, it will require a
global effort to solve them. In an era when corporates pay huge sums of
money to acquire intellectual property rights, and incur enormous
expenditure to protect them, readers will doubt the validity of the
statement. An illustration from the book, Macrowikinomics, by Don
Tapscott and Anthony Williams will possibly prove this point. In 2007,
after investing millions of dollars and three years to unlock the
genetic basis of type 2 diabetes, which poses one of the most costly
challenges in the industrialised world, Novartis posted its raw research
data on the internet. In the fiercely competitive world of drug
manufacturers, people wondered if the company had lost its mind. The
president of the company thought otherwise. In his words, “To translate
this study’s provocative identification of diabetes-related genes into
the invention of new medicines will require a global effort”. By placing
its data in the public domain, the company hoped to leverage the
talents of the global research community, well beyond its employees. It
should be noted that Novartis did not share everything. It did not share
its own notes or commentary, thereby retaining its lead to some extent.
It, however, felt that sharing its initial research would be more
beneficial than hoarding it behind a wall of patent protection.

There
are lessons to be learnt by our profession from the narrative in the
preceding paragraph. In times where complexities of business and
regulation are multiplying, and the expectations from the users of our
services are increasing, we need to collaborate with members from our
profession, as well as other sister professions and disciplines. With
technology being what it is, I think geography is no barrier. To use a
popular phrase, geography is now history! I find the young generation is
already using technology to communicate and interact. The growth of
networking sites is testimony to this fact. Two hurdles need to be
overcome. The first is the attitude of some who believe that protection
of their knowledge base is their ticket to prosperity. The second is the
aversion of some of the jewels in our profession, to the use of
technology to share their wisdom. If these obstacles can be overcome,
and I am sure they will, our profession has a great future!

Anil J. Sathe
Joint Editor
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Learning to work

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“The Greatest Waste in the world is the difference between what we are and what we are capable of becoming”

— Ben Herbster

Sounds strange, but all of us have to learn to work. Most of us are working far below our capacity. Our abilities and energies are underutilised. We are like an industrial organisation with the installed capacity of 1000 units, but just producing 200 units. If we can substantially reduce the gap between what we are capable of producing and what we actually are producing, we can work wonders. Sounds strange, but it is true. One is reminded of the words of Thomas Alva Edison:

“If we all did the things we are capable of doing, we would literally astound ourselves”

Why should one work?
Gandhiji has described ‘Wealth without Work’ as one of the seven deadly social sins. We do not have to look very far to see what happens, when people inherit large chunks of wealth and who, because they have much more than they need, stop doing any productive work and wile away their time. Wealth without work not only kills their desire to work, but makes them spend their money on luxuries, wine, women and what not. Therefore one has to work, and teach one’s children also to work, in spite of the wealth that one possesses.

Even Lord Krishna in the Bhagavad Gita advises Arjuna to work:

“There is nothing in the three worlds, Partha, that should be done by Me, nor anything unattained that might be attained, yet I mingle in action.”
“For if I mingled not ever in action unwearied, men all around would follow my path, son of Pritha”

Krishna in other words says: If leaders in our society, who are occupying high positions do not work, they set an example to the rest of the society. It is therefore necessary that we work, and work to our fullest capacity.

How should we work?
Having concluded that we should work, one should also learn to work efficiently. People have the tendency to spread work over available time. We should not spend the whole day on work which can be finished in a couple of hours, and feel that we have been working hard for the full day.

What should be the manner of our working?
People have to work for earning a livelihood. The question is how should one earn. Let us remember what our scriptures tell us:

“Without causing any torment to others, without going to the place of villainous people, without causing any unhappiness to your soul, even if you earn a little, that should be considered to be more than enough.”

What should be the purpose of our work?
Working hard and making an honest living is not enough. We should work with a purpose, a noble cause. There is a difference between just breaking stones and working to make a temple. Working for a good cause brings a special kind of happiness and a sense of fulfilment, a joy which is difficult to describe. If we can bring a smile to the face of the poorest of the poor, and wipe a tear from the eyes of a person undergoing pain and suffering, we would have done something worthwhile. It is this small act of kindness and grace that really matters. In the words of Mother Teresa:

“We cannot do great things on this Earth, only small things with great love.”

What should be the ultimate goal of our work?

Ultimately we have to reach a stage where we realise we are working for God, as per His wish. We must then understand that it is not we who are working, but it is God who is working through us. We are just His chosen instruments. In words of Shri Haribhai Kothari.

Let us then work, work to our fullest capacity, work for noble causes and work understanding that it is God who is working through us. It will make our lives truly worthwhile.

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(2011) 137 TTJ 508 (Coch.) F.C.I. Technology Services Ltd. v. ACIT ITA No. 616 (Coch.) of 2008 A.Y.: 2003-04. Dated: 4-6-2010

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Section 10A — While computing deduction u/s.10A of an eligible unit, loss of non-eligible and other eligible unit cannot be set off against profit of such eligible unit.

The assessee was rendering services from its three units located at Chennai, Bangalore and Kochi. It claimed exemption of Rs.58.68 lakh u/s.10A in respect of income from the Bangalore unit. The Assessing Officer held that the loss from the other two units had to be set off first against the income of the Bangalore unit and since this set-off left the assessee with no positive income, the assessee was not entitled to any exemption u/s.10A. The CIT(A) upheld the order of the Assessing Officer.

The Tribunal, following the Special Bench decision of ITAT Chennai in the case of Scientific Atlanta India Technology (P.) Ltd. v. ACIT, (2010) 129 TTJ 223 (Chennai) (SB)/(2010) 37 DTR 46 (Chennai) (SB)/(2010) 2 ITR 66 (Trib.) (Chennai) (SB), held as under:

(1) The business loss of non-eligible unit(s) cannot be set off against the profits of undertaking(s) eligible for deduction u/s.10A.

(2) Any other income, including the losses arising to the assessee from other concerns, shall be computed as per the regular provisions of the Act, and, consequently, carried forward under and in terms of the regular provisions of the Act.

(3) That the unabsorbed claim u/s.10A, i.e., the income after deduction, having arisen from an eligible unit, cannot be carried forward in the like manner as a business loss or unabsorbed depreciation and would, therefore, be subject to tax.

(4) Deductions u/s.10A and u/s.10B, and also those u/s.80HH, u/s.80HHA, u/s.80-I, u/s.80-IA, etc. are unit-specific in contradiction to being assessee-specific.

(5) There is nothing in the section that suggests aggregation of profits from two or more undertakings so that the profit derived from each is to be considered separately i.e., as if it were the only income of the assessee, for the purpose of computation of deduction thereunder.

(6) In other words, the qualifying amount and, consequently, the deduction in its respect are to be worked out on a stand-alone basis, independently for each eligible unit.

(7) Loss of any other unit is not to be set off while computing deduction u/s.10A.

(8) Income that remains after the deduction u/s. 10A or the unabsorbed claim u/s.10A would stand to be taxed as such i.e., shall not be set off against any other loss or be carried forward.

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(2011) 137 TTJ 249 (Jab.) (TM) ACIT v. Smt. Mukta Goenka IT (SS)A No. 23 (Jab.) of 2007 A.Ys.: 1-4-1996 to 12-12-2002 Dated: 28-5-2010

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Section 158BD — Satisfaction recorded u/s.158BD before initiation of block assessment proceedings of the person searched does not satisfy the requirement of law — Further, so-called satisfaction recorded by the Assessing Officer in the order sheet without even stating that undisclosed income pertaining to the assessees has been detected from the seized record of the persons searched was not in accordance with the provisions of section 158BD —Therefore, the block assessments of the assessees u/s.158BD are not valid.

During the search and seizure operations at the premises of SGL Ltd. and its director A, certain incriminating documents were found. Investigations revealed that SGL Ltd. had received large amount in the form of share capital from sister concerns through bogus shareholders and from agricultural income. Since assessee-trusts also made investment in SGL Ltd., the Assessing Officer framed block assessment u/s.158BD r.w.s 158BC. So-called satisfaction in the order sheet dated 4th September 2003 was recorded before the commencement of block assessment proceedings of the persons searched on 5th September 2003.

The assessees challenged the block assessment orders u/s.158BD before the learned CIT(A). The learned CIT(A) accepted the contention of the assessee and quashed the proceedings u/s.158BD because such notices were issued without any basis. The CIT(A) held that there is no satisfaction recorded objectively and that the same is without application of mind and, accordingly, annulled the block assessment orders u/s.158BD.

There was a difference of opinion between the members of the Tribunal. The Third Member, relying on the decisions in the following cases, upheld the CIT(A)’s order in favour of the assessee:

(a) Manish Maheshwari v. ACIT & Anr., (2007) 208 CTR 97 (SC)/(2007) 289 ITR 341 (SC)

(b) Manoj Aggarwal v. Dy. CIT, (2008) 117 TTJ 145 (Del.) (SB)/(2008) 11 DTR 1 (Del.) (SB) (Trib.)/ (2008) 113 ITD 377 (Del.) (SB).

The Tribunal noted as under:

(1) The so-called satisfaction in the order sheet dated 4th September 2003 has been recorded before the commencement of the block assessment proceedings of the persons searched on 5th September 2003. This satisfaction is not in accordance with the provisions of section 158BD. The satisfaction recorded u/s.158BD on 4th September 2003 i.e., before the initiation of block assessment proceedings of the person searched does not satisfy the requirement of law. The observation that the Assessing Officer has taken simultaneous action in the case of persons searched and in the cases of these assessee-trusts is factually incorrect, because in the cases of assessee-trusts the satisfaction was recorded on 4th September 2003, whereas the block assessment proceedings of the person searched were started subsequently on 5th September 2003.

(2) Similarly, the observation of the AM that it is immaterial whether the satisfaction was recorded in the file of the persons searched or in the case of assessee-trusts is legally incorrect and is not according to the provision of law. Similarly, the reason given by the AM that the Assessing Officer in the case of assessee-trusts and the persons searched is the same and, hence, it is immaterial whether the reasons recorded were in the file of the persons searched or in the case of assesseetrusts is incorrect and is contrary to law.

(3) Satisfaction should be recorded by the Assessing Officer of person searched as per the provisions of section 158BD. It is well-settled law that satisfaction recorded has to be objective/ judicious satisfaction and the order sheet dated 4th September 2003, in the cases of the present assessees, does not fulfil this condition, because the block assessment proceedings of the persons searched were started by issuing notice u/s.158BC on 5th September 2003 and hearing of the case of the persons searched was started on 13th October 2003.

(4) Hence, in no case, the Assessing Officer of the persons searched can examine the seized record on 4th September 2003 and ask the assessees’ explanation in respect of seized record of the persons searched.

(5) The so-called satisfaction recorded on 4th September 2003 by the Assessing Officer is based on assumption and presumption and is not based on seized record and is not a judicious satisfaction and, hence, the order sheet dated 4th September 2003 does not fulfil the requirement of section 158BD.

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IMPORTANT RECENT AMENDMENTS UNDER MVAT ACT, 2002

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While presenting the Budget for 2011-12 the Finance Minister of Maharashtra proposed certain amendments in the MVAT Act, 2002. Accordingly, L. A. Bill No. XVII of 2011, dated 8-4-2011 was introduced in the Assembly. The said Bill has become law namely, Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 2011 (Mah. Act. No. XV of 2011) dated 21-4-2011. The amendments have come into operation from 1-5-2011 as Notification to that effect is issued bearing no. VAT.1511/CR-63/ Taxation 1 dated 28-4-2011. The important changes brought in by the above Amendment Act can be briefly noted as under:

1. Amendments in respect of Voluntary Registration:

As on today, the Registration under Voluntary Registration Scheme (VRS) is granted on the basis of advance payment of Rs.25,000. The said amount is adjustable against the liability which may be payable in the returns to be filed after registration.

However, now as per amendment in section 16(2) of the MVAT Act, 2002, the advance payment of Rs.25,000 will be treated as Security Deposit with the Government. It will not be allowed to be adjusted against liability. It will be refunded back after certain period, if there is no breach of any of the conditions which are laid down in this regard. As per newly inserted section 16(2A) of the MVAT Act, 2002, the Government can prescribe conditions for refund of deposit. The said conditions are prescribed by way of Rule 60A.

As per Rule 60A, it is the dealer who has to apply for refund of deposit. The application of refund can be made after 36 months from the end of month in which registration is granted but before 48 months from the said month. In case of cancellation of Registration Certificate (RC) before above period of 36 months, the application is to be made within six months from such date of cancellation. The application is to be made to registration authority and such authority should grant the refund within 90 days from receipt of application, subject to the dealer filing all returns as well as paying taxes as per the said returns.

2. Revised returns:

It is obligatory upon the dealers to file correct and complete returns by prescribed time. There are a number of events which may require correction in the original return or earlier revised returns. Therefore, the law permits dealers to file revised returns. This gives him opportunity of clearing himself of any charge of concealment or to prefer an additional claim, if any.

Up till now, there were no restrictions on the number of revised returns which can be filed by the dealers. In other words, a dealer could file more than one revised returns to correct the mistakes committed in the original returns or earlier revised returns.

However, now by the amendment a tab is put on the number of revised returns which can be filed by a dealer. As per section 20(4)(a), (b) and (c), there are three kinds of revised returns. A revised return can be filed suo motu or it can be to give the effect to VAT audit findings or it can be to give effect to findings of the business audit. The amendment seeks to allow only one revised return in each of the above categories. Though the amendment provides as above, a view can be taken that the dealer can file more than one revised returns to put up his position and in course of assessment such returns are also expected to be considered.

A dealer will now have to be very careful about filing revised return. He has to be certain that all the corrections are included in the particular one revised return. Allowing more than one revised return could not have caused any difficulty to the Department, but the curtailment will certainly cause great difficulty to the trading community.

It may be mentioned that in the category of suo motu revised return, the time limit was nine months from the end of concerned period/year. It is now enhanced to ten months.

This is an amendment about procedural law and the Department will take a view that the restriction operates from 1-5-2011. Therefore even for the returns for period prior to the above effective date, the restriction will be applied and accordingly after the above effective date the dealer may be permitted to file only one revised return relating to the said prior period.

3. No appeal against order levying interest:

The trend of amendments appears to be against the dealer community. The Government has debarred dealers from getting justice in case of levy of interest. The appeals against interest leviable u/s.30(2) and 30(4) are already prohibited by an amendment in 2010. However, appeals against interest u/s.30(1) (interest on URD) and 30(3) (differential dues) were allowed. Now section 26(5) is amended, whereby clause (c), which gave power to the Appellate Authority to deal with interest orders is deleted. Indirectly, the appeals will not be maintainable against the above interest u/s.30(1) and 30(3). Thus, one more beneficial provision is being done away with to the detriment of the dealer community. There will not be an opportunity to get justice in case of wrong levy.

It may be noted that appeals against orders levying interest u/s.30(1) and 30(3) themselves are not debarred. Therefore, it is possible to argue that the said appeals can be filed and the Appellate Authority can decide the matter under clause (d) of section 26(5) which covers appeal against any other order. Therefore, it appears that the dealers can still take an opportunity u/s.26(5)(d).

4. New taxation scheme for liquors:

Uptill now the liquors were taxed as per normal VAT chain. Every dealer was getting set-off and was liable to tax on sales.

Now from 1-5-2011 the system is changed. Wine is continued to be taxed as per the old system. Change is brought in taxation of IMFL, foreign liquors and country liquors by issue of Notification dated 30-4-2011 as per newly inserted section 41(5). The brief features of the new system can be noted as under:

(a) Manufacturer of liquors holding licence in PLL, BR-L and CL-I will be liable to tax @ 50% of sale price subject to limit of tax amount calculated as per Formula MRP x 25/125. They will be required to mention MRP on sale bills.

(b) Wholesalers holding licence in FL I, CL II will be exempt from tax if liquor is purchased from registered dealer in Maharashtra. No set-off is available to a wholesaler. If wholesaler has imported liquor from other State/country he will be required to discharge tax liability like a manufacture i.e., 50% of sale prices subject to limit of tax calculated as per formula MRP x 25/125.

(c) Retailer holding licence in FL IT, FL-BR-H, CL/ FL/TOD-III and CL-III will also be exempt from tax if liquor is purchased from registered dealers in Maharashtra. No set-off to them.

(d) Hotel, bars, restaurants and clubs (3-star and below):

Bars, restaurants and clubs holding licence in FL-III or FL-IV or E with grading of 3-star and below will be required to pay tax at 5% on the actual sale price of liquor which is purchased from registered dealers within the State and on which tax is paid or has become payable at earlier stage.

They can collect tax separately. No set-off is available on purchases.

(e) Hotels, bars, restaurants and clubs (4-star and above):

Hotels, bars and restaurants with grading of 4-star and above will be required to pay tax at 20% of their actual sale price, if the liquor is purchased from registered dealers within the State and on which tax is paid or has become payable at earlier stage.

If liquor is imported from other States or from outside the country, then in addition to 20% as above, they will be required to pay tax at Schedule rate subject to the limit of MRP x 25/125 of such liquor sold.
They can collect tax in the sale bills. No set-off is available on purchases of liquor.

(f) Taxation of stock as on 30-4-2011:

The tax on sale of liquors in stock as on 30-4-2011 will be as per the new system, discussed above i.e., at 50% of sale price limited to calculation made as per formula of MRP x 25/125. Hotels/ bars, in addition to the above, will be required to pay 5% or 20% as the case may be. In this case set-off will remain available on stock subject to submission of stock statement.

All the dealers, except manufacturers, shall furnish a statement of closing stock of goods mentioned in Entry 1, 2 and 3 of Schedule D to the MVAT Act, 2002 as on 30th April, 2011, in the Proforma appended to the Notification by 31st May, 2011.

5.    Refunds — Unwarranted and unreasonable curtailment:

Section 51 of the MVAT Act deals with refunds as per returns. Few important changes can be noted as under:

(a)    At present there is time limit on the Department to call for additional information. That could be called within one month of filing of the application.

However the time limit of one month is deleted by present amendment to section 51(2)(a). The result is that the Department will have open ground to call for additional information at any time.

(b)    Refund to newly registered dealer:

Clause 51(2)(b) provides that the newly registered dealer can apply for refund after expiry of one year from the end of first year. This provision is sought to be deleted with the effect that they will be able to claim the refund on expiry of year, as any other normal dealer. This can be said to be beneficial to the newly registered dealers.

(c)    Inter-state seller — Removal from preferred category:
With a view to give early refunds to the dealers involved in inter-state sales, they were put in preferred category by way of section 51(3)(a)(iv)    . Therefore, these dealers could file refund applications as per return period and had not to wait till the end of full year. Now this category is removed with the result that such dealers will be required to claim refunds after the end of year. This will delay refund claims for them.

(d)    Exporter — Defined:

Preferred category u/s.51(3)(a) includes exporter. They can file refund application as per the return period. However, the term ‘Exporter’ was not defined and hence a dealer having one export transaction could also file application as exporter. This liberal provision is now sought to be tight-ened. The term ‘Exporter’ is defined by inserting the following explanation.

“Explanation — For the purposes of sub-clause (i), the expression ‘Exporter’ shall mean a registered dealer whose turnover of exports during such period as may be prescribed, is not less than such percentage of the total turnover of his sales as may be prescribed in this behalf.”

The said percentage is prescribed by insertion of Rule 55A(3). According to the said Rule, if export turnover is not less then 50% in previous year or in concerned return period, then the dealer will be considered to be exporter.

(e)    Bank guarantee:

Section 51(3)(b) provides for requirement of bank guarantee for granting refund. It also gave power to call for additional information. The clause for calling additional information is deleted and calling for bank guarantee is retained.

(f)    Period for grant of refund — Extended:

Section 51(4) provides time limit for grant of refund. At present the limit is six months from the month of receipt of refund application. The said limit is extended to 18 months from the end of the month in which application is received. At present the dealer can get interest u/s.53(1) for delay in grant of refund after expiry of the above time limit of six months. Now this can take place after 18 months. Thus more time to retain the dealer’s money without interest.

The proviso to section 51(4) provides time limit for disposal of applications pending at present. It is sought to be provided that the applications filed up to 31-3-2011 for period up to 31-3-2010 will be disposed of by 30-9-2011. The applications filed up to 31-3 -2011 for period from 1-4-2010 to 31-3-2011 will be disposed of by 30-6-2012.

(g)    Time limit for filing refund application — Section 53(7):

As per section 53(7) refund application can be filed within three years from the end of concerned year. Now the time limit is reduced to 18 months. Thus one more curtailment of the dealer’s right. Whereas time for grant of refunds by the Department is enhanced to 18 months from six months, the time limit for dealer is curtailed. This cannot be said to be a fair treatment. There will be many adverse effects on dealers.

The above provision will apply from 2009-10 and the refund applications for 2009-2010 will be required to be filed before 30-9-2011.

6.    VAT Audit report — heavy ‘weight’ on dealers:

VAT Audit provision is becoming more and more stringent for dealers. Up till now there is penalty for late filing of report, to be calculated at 0.1% of turnover.

Now section 61(1) is amended to provide that the audit report should be ‘complete’ report.

By Explanation it is provided that the audit report will be deemed to be complete, if all items, certifications, tables, schedules and annexures are filed appropriately and are arithmetically self-consistent. If the report is found to be incomplete, then dealer will be subject to penalty at 0.1% of turnover, as per section 61(2A).

7.    Prosecution for false tax invoice:

Sub-sections (1A)(i) and (ii) are inserted in section 74 to provide punishment by way of imprisonment for two years for issuing/producing false tax invoice to defraud revenue. The provision is extended to person who abates aforesaid offence.

In addition to above, there are changes in rate of taxes, few changes in composition schemes, etc. The same are not referred to here for sake of brevity.

(2011) 38 VST 168 (Bom.) M/s. Zenith Computers Ltd. v. State of Maharashtra

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Sales Tax — Power of Appellate Authority — Penalty — Cannot be levied for the first time by Appellate Authorities — Section 36(2)(C), 55 and 57 of BST Act — Section 9(2A) of CST Act.

Facts:
The appellant, manufacturer of computers, was assessed for the period from 1st May, 1986 to April 30, 1987 under the CST Act, 1956. The appellant filed appeal against the assessment order before the Deputy Commissioner of Sales Tax (Appeal) who allowed the appeal partly and imposed penalty u/s.9(2A) of the CST Act r.w.s. 36(2)(C), Explanation (2) of the BST Act, after giving opportunity of hearing to the appellant, for failure to file returns in time, by passing separate order. The appellant filed appeal before the Tribunal against such penalty order. The Tribunal confirmed the order of penalty passed by the DC (Appeal). The Tribunal, at the instance of the appellant and as per direction of the Court, referred substantial question of law before the Bombay High Court.

Held:
The High Court, considering provisions of section 36(2)(C) and section 55 of the Act, held that as per section 55(6)(a) and (b) of the Act, the Appellate Authority concerned did not have any power of imposing penalty for the first time and expression ‘confer or cancel such order or very it, so as to either enhance or to reduce the penalty’ employed in section 55(6)(b), neither covered the power to impose a fresh penalty for the first time nor did it confer any power upon the Appellate Authority to pass any order of penalty while deciding the appeal. Further it held that on the correct interpretation of section 36(2)(c) of the Act the Tribunal was not justified in holding that the DC (Appeal) in exercise of Appellate power had jurisdiction to initiate action for imposing penalty for the first time.

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(2011) 137 TTJ 188 (Mumbai) Inter Gold (India) P. Ltd. v. JCIT ITA No. 441 (Mum.) of 2004. A.Y.: 1998-99. Dated: 5-1-2010

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Sections 4 and 28(i) of the Income-tax Act, 1961 — Compensation received for loss of goodwill/ reputation is a capital receipt.

The assessee received a sum of Rs.41.58 lakh from Union Bank of Switzerland (UBS) towards loss of reputation and goodwill and claimed the same as capital receipt not chargeable to tax. The Assessing Officer and the CIT(A) held the said amount as revenue receipt chargeable to tax.

The Tribunal, relying on the decision of the ITAT Pune in the case of Serum Institute of India Ltd. v. Dy. CIT, (2007) 12 TTJ (Pune) 174/111 ITD 259 (Pune), upheld the assessee’s claim.

The Tribunal noted as under:

(1) It is evident that the compensation was awarded to the assessee ‘against loss of reputation and goodwill’. It was not on account of the failure on the part of UBS to supply the quantity ordered or some loss caused to the assessee in a particular trading transaction.

(2) It was on account of injury caused to the reputation of the assessee, albeit such injury was caused due to some business transaction.

(3) Had the amount been awarded to make good the loss caused due to excess or short supply of the material or some other trading deficiency, it would certainly have been regarded as a revenue receipt.

(4) Since the nexus of the compensation is with reputation and goodwill and not with the trading operations, it cannot be held to be a revenue receipt.

(5) The main criterion to judge as to whether the compensation is capital or revenue is to ascertain the purpose for which such compensation is awarded. If the compensation is to recoup the loss suffered by the assessee in its business activity, then it will be a revenue receipt. If, however, the purpose is unrelated to the trading activity of the assessee, it will be in the nature of a capital receipt.

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(2011) 128 ITD 108/ (2010) 8 taxmann.com 209 (Delhi) Escorts Heart Institute & Research Centre Ltd. v. ACIT A.Y.: 2005-06. Dated: 9-10-2009

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Section 37(1) — Key personnel, on whose life keyman insurance policy is taken must include, not only the person responsible for the turnover of the business (Chief Cardiac Surgeon), but also the person responsible for managing the business and to make the same profitable (Chairman and Managing Director). Accordingly the premium paid on their policy is allowable.

Facts:
The assessee was a super-specialty hospital dealing with cardiac and cardio vascular diseases. It had taken insurance policies on life of its key personnel — Chief Surgeon, Chairman and Managing Director, the premium on which was claimed as deduction.

The Assessing Officer disallowed the deduction on grounds that the benefit of policy was assigned to key personnel and therefore was not incurred wholly for business purpose.

On appeal, the learned CIT(A) held that since the surgeon had the requisite skill and knowledge of the field, therefore he was responsible for the turnover of the company and accordingly only the premium paid on his policy is deductible and that on the policy of the Chairman and the Managing Director is not.

Held:
(1) The assessee’s activity cannot be said to be solely depending on the surgeon. Though, he may be responsible for the turnover of the company, he may not be responsible for the profits of the company, due to lack of competence necessary for a businessman.

(2) Further, since the business is carried on with the ultimate motive of earning profits, it cannot be said that profits could not be taken as guiding factor to analyse the business.

(3) It was also not argued that the salaries paid to these persons were not allowable.

(4) Further, on their resignation in the subsequent year, the profits of the assessee reduced substantially.

(5) All the above factors led to the conclusion that the Chairman and the Managing Director were key personnel and accordingly the premium paid on their policy is allowed.

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Anil G. Puranik v. ITO ITAT ‘A’ Bench, Mumbai Before R. S. Syal (AM) and R. S. Padvekar (JM) ITA No. 3051/Mum./2010 A.Y.: 2006-07. Decided on: 13-5-2011 Counsel for assessee/revenue: Soli Dastur/ Rajeev Agarwal

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Section 49(1), section 50C — Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred — Section 50C applies to a capital asset being ‘land or building or both’ and not to ‘any right in land or building or both’ — Leasehold rights in plot of land is not ‘land or building or both’ — Section 50C does not apply to leasehold rights.

Facts:
On 16-8-2004, the assessee was allotted leasehold rights in a plot of land for a period of 60 years under ‘12.50% Gaothan Expansion Scheme’. The allotment was in lieu of agricultural land owned by the assessee’s father which land was acquired by the Government of Maharashtra. The lease agreement, in favour of the assessee, was executed on 8-8-2005. On 25-8-2005, the assessee transferred its rights in the said plot for a consideration of Rs.2.50 crore. In the return of income, the assessee took the stand that since the plot which was transferred by the assessee was received in consideration for agricultural land which was not a capital asset, this plot is also not a capital asset and hence gain on its transfer is not chargeable u/s.45 of the Act. Alternatively, it was contended that the market value of the plot on the date of its allotment to the assessee be taken to be its cost of acquisition. The Assessing Officer (AO) held that though the original land was agricultural, the allotted land was not agricultural and therefore the land transferred was capital asset. He held that by virtue of section 49, the cost of acquisition of original land in the hands of the assessee’s father has to be regarded as the cost of acquisition of the land transferred by the assessee. Also, he invoked the provisions of section 50C and considered the market value of land as per stamp valuation authorities to be full value of consideration.

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.

Held:
(1) There were two distinct transactions — the first was the acquisition by the Government of land belonging to the assessee’s father, against which the assessee, as legal heir, was given lease of plot on 16-8-2004. This transaction got completed when the assessee got the leasehold rights viz. on 16-8-2004. The second transaction was transferring, on 25-8-2005, leasehold rights in the plot for a consideration of Rs.2.50 crores. The second asset i.e., leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act.

(2) The sole criteria for considering whether the asset transferred is capital asset u/s.2(14) or not is to consider the nature of asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired. The second asset i.e., the leasehold rights in the plot cannot be categorised as agricultural land within the meaning of section 2(14)(iii) of the Act. Hence, gains arising on transfer of leasehold rights were chargeable to tax u/s.45 of the Act.

(3) Section 49(1) provides that where a capital asset becomes the property of the assessee by any of the modes specified in clauses (i) to (iv), such as gift or will, succession, inheritance or devolution, etc., the cost of acquisition of such capital asset in the hands of the assessee receiving such capital asset shall be deemed to be the cost for which it was acquired by the person transferring such capital asset in the prescribed modes. In order to apply the mandate of section 49(1), it is a sine qua non that the capital asset acquired by the assessee in any of the modes prescribed in clauses (i) to (iv) should become the subject matter of transfer and only in such a situation where such capital asset is subsequently transferred, the cost to the previous owner is deemed as the cost of acquisition of the asset. Once such capital asset is transferred and another capital asset is acquired, there is no applicability of section 49(1) to such converted asset. The lower authorities erred in applying the provisions of section 49(1) to transfer of leasehold rights.

(4) Since the market value of the leasehold rights, on the date of allotment, constituted full value of consideration for transfer of lands belonging to the assessee’s father, the cost of acquisition of leasehold rights will be its market value on the date of allotment. Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred.

(5) Section 50C is a deeming provision which extends only to land or building or both. Deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. The distinction between a capital asset being ‘land or building or both’ and any right in land or building or both is well recognised under the Income-tax Act. The deeming fiction in section 50C applies only to a capital asset being land or building or both, it cannot be made applicable to lease rights in land. As the assessee had transferred lease rights for sixty years in the plot and not land itself, the provisions of section 50C cannot be invoked.

The appeal filed by the assessee was allowed.

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ITO v. Radha Birju Patel ITAT ‘D’ Bench, Mumbai Before N. V. Vasudevan (JM) and Pramod Kumar (AM) ITA No. 5382/Mum./2009 A.Y.: 2006-07. Decided: 30-11-2010 Counsel for revenue/assessee: Jitendra Yadav/Shalin S. Divatia

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Section 14 — Heads of income — Income out of investments in shares of listed companies through Portfolio Management Scheme —Whether the AO was justified in taxing income under the head business income — Held that the income was taxable as capital gains.

Facts:
The assessee had made investment in shares through the Portfolio Management Scheme. She had disclosed a short-term capital gain of Rs.11.61 lakh and short-term capital loss of Rs.0.5 lakh in respect of purchase and sales of shares of various companies. According to the AO based on CBDT Circular No. 4 of 2007, dated 15-6-2007, the case of the assessee falls in the case of trading in shares. A reference was also made to the Supreme Court decision in the case of G. Venkataswami Naidu & Co v. CIT, (35 ITR 594), wherein the had laid down a principle that where purchases had been made solely and exclusively with intention to resell at a profit and the purchaser had no intention of holding property for himself or otherwise enjoying or using it, presence of such an intention was a relevant factor and unless it was offset by presence of other factors, it would raise a strong presumption that the transaction was in the nature of trade. He also noted that dividend earned during the year amounted to Rs.0.94 lakh, which according to him indicated that the intention of the assessee was to hold shares only for such period as may enable her encashing the appreciation in its value. On appeal by the assessee, the CIT(A) held in favour of the assessee. Being aggrieved, the Revenue appealed before the Tribunal and relied on the order of the AO.

Held:
The Tribunal noted that the assessee was doing investment activities through the Portfolio Manager. Such activities were for maximisation of wealth rather than encashment of profits on appreciation in value of shares. It further noted that the very nature of the Portfolio Management Scheme was such that the investments made by the assessee were protected and enhanced. Therefore, according to it, in such a circumstance, it cannot be said that Portfolio Management was a scheme of trading in shares and stock. Accordingly, it upheld the order of the CIT(A).

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(2011) 52 DTR (Jab.) (TM) (Trib.) 346 DCIT v. Vishwanath Prasad Gupta A.Y.: 2004-05. Dated: 15-6-2010

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Merely on the basis of non-maintenance of stock register it cannot be inferred that the account books are false — Also mere low Gross Profit (GP) rate by itself cannot justify an addition. Gifts received by cheques which have been confirmed by the donors in affidavits and disclosed in their respective returns could not be treated as non-genuine gifts.

Facts:
The assessee derives income from sale of motor parts, tractor parts, tyres, etc. The assessee had shown GP at 10.84% which was less than previous year GP of 14.17%. To support the reduction in GP, the assessee submitted regular books of accounts which were audited. As no quantitative details of  purchases, sales, closing stock, etc. were maintained, the book results were rejected by the AO applying provisions of section 145. The AO thereafter added an estimated amount of Rs.50,000 to total income.

Held:
The assessee had maintained inventory of opening and closing stock and vouchers for purchases and sales which were also audited. Mere non-maintenance of stock register cannot mean that the books of accounts maintained are false. Also, low GP may justify an enquiry but cannot justify an addition to the profit shown. In the present case, the AO had not shown any mistake in books of accounts. Furthermore, rate of GP in a particular year depends on many factors and the same need not be constant from year to year. Therefore addition to income is not justified.

Facts:
The assessee received gift from two parties vide cheques. To prove the gifts are genuine, the assessee submitted affidavits of donors. However, the assessee’s claim was rejected as the AO was also not satisfied with the relationship between donor and donee. Further the AO observed that the assessee did not produce donors for verification and also did not prove financial capacity. The CIT(A), however, upheld the contention of the assessee.

On Revenue’s appeal, there was a difference of opinion between the members, and the matter was referred to the Third Member.

Held II:
The gifts received by the assessee were to be considered genuine as the gift was made through cheque and also disclosed in the books of accounts of the donees. Also the donees have admitted the gift given in their respective affidavits and hence there was no reason in disbelieving the genuineness of the gift.

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(2011) TIOL 266 ITAT Mum.-SB ITO v. United Marine Academy ITA No. 968/Mum./2007 A.Y.: 2003-2004. Dated: 25-4-2011

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Sections 48, 50, 50C, Circular 8 of 2002 — Provisions of section 50C can be invoked in case of depreciable assets where the provisions of section 50 are applicable.

Facts:
The assessee, a partnership firm, engaged in business of running a marine training institute, filed its return of income declaring the total income of Rs.1,86,466. During the previous year relevant to the assessment year under consideration the assessee sold a building, on which depreciation was claimed in earlier years, for a consideration of Rs.49,43,525. Since the amount of consideration was the same as its WDV, the assessee did not offer short-term capital gains on sale of the building. The value of this building as per stamp valuation authorities was Rs.76,49,000. The Assessing Officer (AO) was of the view that one of the office building i.e., office No. 101 having a WDV of Rs.13,14,425 was not sold by the assessee during the year under consideration. The Assessing Officer (AO) held that in view of the provisions of section 50 r.w.s 50C, the value of the building adopted by the stamp valuation authorities needs to be taken as full value of consideration. He, accordingly, made an addition of Rs.20,44,900, being the difference between value of the office sold (excluding office No. 101) as per stamp valuation authorities (Rs.56,74,000) and the WDV of the said office (Rs.36,29,100), to the total income of the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A), where it contended that the provisions of section 50C cannot be invoked in the case of an assessee wherein section 50 is applicable. It contended that it is not permissible to impose a supposition on a supposition of law. The CIT(A) held that the deeming provisions of section 50C could not apply to depreciable assets. He also held that the block of assets had ceased to exist. He deleted the addition made by the AO.

Aggrieved the Revenue preferred an appeal to the Tribunal.

The President, ITAT constituted a Special Bench to consider the following question:

“On a proper interpretation of sections 48, 50 and 50C of the Income-tax Act, 1961, was the Assessing Officer right in law in applying section 50C to capital assets covered by section 50 (depreciable assets) and in computing the capital gains on the sale of depreciable assets by adopting the stamp duty valuation?”

Held:
(1) There are two deeming fictions created in section 50 and section 50C. The first deeming fiction modifies the term ‘cost of acquisition’ used in section 48 for the purpose of computing the capital gains arising from transfer of depreciable assets, whereas the deeming fiction created in section 50C modifies the term ‘full value of the consideration received or accruing as a result of transfer of the capital asset’ used in section 48 for the purpose of computing the capital gains arising from the transfer of capital asset being land or building or both.

(2) The deeming fiction created in section 50C operates in a specific field which is different from the field in which section 50 is applicable. It is not a case where a supposition has been sought to be imposed on other supposition of law. Going by the legislative intentions to create the said fictions, the same operate in different fields.

(3) The harmonious interpretation of the relevant provisions makes it clear that there is no exclusion of applicability of one fiction in a case where other fiction is applicable.

(4) The assessee’s alternate argument that as the AO had held that the block of asset had not ceased to exist in the year and was in existence, section 50C could not apply as held in Roger Pereira Communications 34 SOT 64 was not acceptable, since the assessee itself had considered the entire block of buildings as having been sold/transferred during the year and the same was upheld by the CIT(A). The assessee is not entitled to take a stand with regard to facts, inconsistent with the stand that he had taken before the Revenue Authorities to obtain a decision in his favour. He cannot be heard to say that the stand on facts so taken by him is not correct just to raise a new legal plea.

The question referred to the Special Bench was answered in the affirmative i.e., in favour of the Revenue and against the assessee. The appeal filed by the Revenue was allowed.

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(2011) TIOL 262 ITAT-Mum. Purvez A. Poonawalla v. ITO ITA No. 6476/Mum./2009 A.Y.: 2006-07. Dated: 9-3-2011

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Section 56(2)(v) — ‘Consideration’ referred to in the provisions of section 56(2)(v) has to be understood as per the definition of consideration as given in section 2(d) of The Indian Contract Act, 1872 — Amount received in consideration of the assessee abstaining from contesting the will is not covered by section 56(2)(v).

Facts:
One Mrs. Mani Cawas Bamji (the deceased) was a childless widow who died in Mumbai on 6-1-2001. She possessed considerable movable properties in the form of shares, debentures and fixed deposits and immovable property known as Avasia House in her sole name at Nepean Sea Road, Mumbai. During her lifetime, she had allegedly executed a will dated 2-5- 1997. The only legal heirs entitled to her property in the event of her intestacy were the assessee, being the son of a pre-deceased sister of the deceased, and Mr. Dinshaw Jamshedji Mistry, being brother of the deceased. Under her will dated 2-5-1997, the deceased had bequeathed all her properties to her brother Mr. Dinshaw Jamshedji Mistry (DJM), who was also appointed as one of the executors in the will. There were three executors to the will but the other two (other than Mr. Dinshaw Mistry) renounced their executorship. DJM filed a petition before the Bombay High Court for grant of probate of the last will of the deceased. The assessee, as a legal heir of the deceased, received a citation from the Bombay High Court in the petition for grant of probate in respect of the last will of the deceased. The assessee filed a caveat against the grant of probate in respect of the last will of the deceased. In the affidavit filed in support of the caveat the assessee set out reasons as to why the alleged will was not valid. On such objection, the petition for grant of probate was converted into a testamentary suit. The Bombay High Court restrained DJM from dealing with the properties of the deceased. On 28-9-2002, DJM died leaving behind his will dated 29-10-2001 appointing Mr. Rajesh K. Bhavsar (RKB) as the sole executor and legatee. RKB got himself impeded as plaintiff in place of DJM in the testamentary suit for grant of probate of the last will of the deceased.

RKB and the assessee entered into a compromise agreement dated 22-11-2002, whereby the assessee agreed to receive a sum of Rs.5,08,80,000 in consideration for agreeing to the Court granting probate in respect of the last will of the deceased. This sum of Rs.5,08,80,000 was later reduced by Rs.30,00,000 and the sum of Rs.4,78,80,000 was received by the assessee in the following manner:

F.Y. 2003-04 : Rs.1,04,77,032 by various cheques
F.Y. 2005-06 : Rs.3,73,95,335 by various cheques
F.Y. 2006-07 : Rs.7,633 by cash

RKB and the assessee had on 12-12-2002 signed consent terms which consent terms were identical to the agreement dated 22-11-2002. The Court recorded the consent terms and modified the earlier order restraining DJM from alienating any part of the estate of deceased and permitted RKB to alienate some of the properties to enable him to raise funds to discharge the obligation to pay the assessee. The assessee on receipt of the agreed sum was to withdraw his caveat to enable issue of letters of administration with the Will annexed in respect of the estate of the deceased.

The assessee did not offer these amounts for taxation in the A.Y. 2006-07. The AO taxed on substantive basis the sum of Rs.3,73,95,335 (in the year of receipt) and the sum of Rs.1,04,77,032 (received in previous year relevant to A.Y. 2004-05 on a protective basis).

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

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted section 56(2)(v) has been introduced w.e.f. 1-9-2004. Thus, prior to 1-9-2004, receipts of any sum of money would not be income u/s.56(2)(v). A sum of Rs.1,04,77,032 was received between 3-4-2003 to 14-10-2003. Therefore, these receipts could not be taxed as income u/s.56(2)(v). As regards the sum of Rs.3,73,95,334, the Tribunal held that the sum in question was received by the assessee in consideration of giving up his rights to contest the will of late Mrs. Mani Cawas Bamji. The consideration referred to in the provisions of section 56(2)(v) of the Act have to be understood as per the definition of consideration as given in the Indian Contract Act, 1872 in section 2(d). The assessee has abstained from contesting the will and this constitutes the consideration for payment by RKB to the assessee. Thus, the amount received by the assessee is not without any consideration. Therefore the provisions of section 56(2)(v) were not applicable. The additions made by the AO were directed to be deleted.

The appeal filed by the assessee was allowed.

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(2011) TIOL 251 ITAT-Mum. Capgemini Business Services (India) Ltd. v. DCIT ITA No. 1164/Mum./2010 A.Y.: 2006-07. Dated: 26-11-2010

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Section 246A — The expression ‘amount of tax
determined’ in section 246A(1)(a) refers also to the determination of
the sum finally payable by the assessee and not merely to calculation of
incometax on the amount of total income by applying the rates of tax.

Facts:
The
assessee company, engaged in the business of providing IT-enabled
services and BPO services, e-filed its return of income declaring total
income of Rs.98,90,146 and claiming therein a refund of Rs.22,76,152.
The Assessing Officer in an order passed u/s.143(3) assessed the total
income to be Rs.98,90,146. While calculating the amount of tax payable
by the assessee/refund due to it, the AO in form ITNS 150A granted
credit for TDS and advance tax as claimed by the assessee, but did not
grant credit of Rs.8,38,764 claimed by the assessee u/s.90 and u/s.91 of
the Act.

Aggrieved, the assessee preferred an appeal to the
CIT(A) who held that the appeal was not maintainable since he was of the
view that section 246A did not permit such issues within its ambit.
Referring to the provisions of section 246A(1) (a), he held that the
reference to ‘tax’ is only for calculation of tax on total income and
not beyond that. He also made a reference to the definition of ‘tax’
u/s.2(43) and held that since the assessee was not challenging the
calculation of tax on total income, the grounds raised were several
steps beyond this calculation. He held that the issue of granting of
credit for advance tax or TDS could not be agitated in an appeal.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The
Tribunal noted that the AO had in form ITNS 150A not granted credit of
withholding tax of Rs.8,38,764 u/s.90/91 and also that he had left the
column 18 of ITNS-150A, which specifically provides for DIT relief
u/s.90/91, blank. Upon going through the provisions of section
246A(1)(a) of the Act, the Tribunal observed that the assessee’s case
can be considered only under the second part of section 246A(1)(a) viz.
‘to the amount of tax determined’ and not under the remaining parts as
non-granting of benefit in respect of withholding tax u/s.90 /91 can
neither be considered as ‘the income assessed’, nor ‘the loss computed’,
nor ‘the status under which he is assessed’. Having so observed the
Tribunal proceeded to examine whether non-granting of refund in respect
of withholding tax u/s.90/91 can be considered under the expression
‘amount of tax determined’ and held:

(1) From the ratio
decidendi of the decisions of SC, in the case of Auto and Metal
Engineers and Others v. Union of India and Others, 229 ITR 399 (SC) and
Kalyankumar Ray v. CIT, 191 ITR 634 (SC), it is discernible that the
‘determination of tax’ refers to finding out the amount finally payable
by the assessee for which notice of demand is issued.

(2) The
expression ‘amount of tax determined’ in section 246A(1)(a) also refers
to the determination fo the sum finally payable by the assessee. Not
only the calculation of tax on the total income but also the adjustment
of taxes paid by or on behalf of the assessee is also covered within the
determination of sum payable by the assessee u/s.156 of the Act.

(3)
The expression ‘amount of tax determined’ as employed in section
246A(1)(a) encompasses not only the determination of the amount of tax
on the total income but also any other thing which has the effect of
reducing or enhancing the total amount payable by the assessee. As the
question of not allowing relief in respect of withholding tax u/s.90/91,
has the direct effect of reducing the refund or enhancing the amount of
tax payable, such an issue is squarely covered within the ambit of
section 246A(1)(a).

(4) Accepting the view-point of the CIT(A)
that the appeal is not maintainable in respect of non-allowing of relief
for tax withheld u/s.90/ 91 would amount to violating the language of
section 246A, which has otherwise given the right to the assessee to
appeal broadly against on any aspect of the ‘amount of tax determined’.

(5)
The CIT(A) was not justified in dismissing the appeal of the assessee
as not maintainable on the aspect of not allowing of credit by the AO of
tax withheld on behalf of the assessee u/s.90 and 91. The AO was
directed to modify ITNS 150A and grant the consequential refund due,
which has not been allowed.

The appeal filed by the assessee was allowed.

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(2011) 137 TTJ 741 (Del.) ACIT v. Bulls & Bears Portfolios Ltd. ITA No. 2727 (Del.) of 2008 A.Y.: 2005-06. Dated: 28-1-2011

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Sections 28(i) and 45 of the Income-tax Act, 1961 — If the assessee has maintained the investment portfolio separately and income from which was offered as capital gains and was also assessed as capital gains in successive assessments, then the income will be assessed as capital gains and not as business income.

For the assessment years 2005-06 and 2006-07, the Assessing Officer treated income from sale of shares as business income as against income from capital gains. The CIT(A) held in favour of the assessee.

The Tribunal also held in favour of the assessee. The Tribunal noted as under:

(1) The assessee is a broker as well as an investor. It has maintained the investment portfolio separately, income from which was liable to be taxed as capital gains, since the intention in respect of this was to hold the investment as investment only and was shown as such in the books of account and income therefrom was shown and treated as capital gains in the successive assessments.

(2) The schedule of investments was duly appended in the balance sheet.

(3) The assessee has also maintained separate D-mat accounts for investment and for trading. Therefore, the assessee has distinctly maintained investment account and trading account.

(4) The assessee was holding certain stock for the purpose of doing business of buying and selling and at the same time it was holding other shares as its capital for the purpose of dividend income.

Therefore, the CIT(A) has rightly held that the income is to be treated as capital gains and not as business income.

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(2011) 137 TTJ 573 (Mumbai) ACIT v. Safe Enterprises Misc. Application No. 413 (Mum.) of 2010 in ITA No. 2278 (Mum.) of 2009 A.Y.: 2005-06. Dated: 4-11-2010

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Section 254(2) of the Income-tax Act, 1961 — Where the Tribunal specifically observed that it was in agreement with the reasons given by CIT(A), mere non-production of the reasons and the conclusions of the CIT(A) in the body of the order of the Tribunal does not give rise either to a mistake of law or fact, nor can it be considered as an irregular order for being rectified u/s.254(2).

For the relevant assessment year, certain additions were made by the Assessing Officer against which the assessee filed an appeal. The CIT(A) considered the issue in great detail and passed an elaborate order in favour of the assessee. Aggrieved by this, the Department preferred an appeal before the Tribunal. The Tribunal passed a short order since it was in agreement with the CIT(A)’s order.

The Department filed a miscellaneous application on the ground that the Tribunal was not justified in passing a short order without elaborating on the issues and, thus, it gives rise to a ‘mistake apparent from record’ since it has to be presumed that the Tribunal has not applied its mind on the contentions and issues raised by the Department. In this regard, the applicant has taken a support from para 11 of the guidelines issued by the then President of the Tribunal.

Rejecting the miscellaneous application, the Tribunal observed as under:

(1) Internal guidelines issued by the then President were only to prod the Members to give detailed reasons, as far as practicable, implying thereby that whenever an order of the lower forum is based on two reasons out of which an Appellate Authority agrees only with one reason which would ultimately have an effect of upholding the order of the lower authority, it is the duty of the Tribunal to give detailed reasons to satisfy as to the basis for coming to such conclusion. In a given case, where the appellant raises some additional issues and relies upon some additional case laws which were not considered by the lower authority, even though they are not applicable to the facts of the instant case, the Tribunal may have to give its reasons rejecting such arguments while upholding the order of the CIT (A).

(2) However, when the facts and circumstances are not disputed before the Tribunal and no additional arguments were advanced by the learned Departmental Representative and, in addition to that, when the Tribunal is fully agreeing with the reasons given by the learned CIT(A), as rightly observed by the Apex Court in the case of K. Y. Pilliah & Sons (1967) 63 ITR 411 (SC), it may not be necessary to repeat the reasons given by the first Appellate Authority and an order passed by the Tribunal under such circumstances cannot be said to be illegal.

(3) In para 3 of the order of the Tribunal this Bench has specifically observed that it was in agreement with the reasons given by the CIT (A). Thus, mere non-production of the reasons and the conclusions of the CIT(A) in the body of the order of the Tribunal do not give rise either to a mistake of law or fact, nor can it be considered as an irregular order.

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(2011) 22 STR 201 (Tri.-Del.) — Amity Thermosets Pvt. Ltd. v. CCEx., Vapi.

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Use of incorrect form — Rebate claim filed in form ASTR 2 in respect of GTA service which is an input service and not exports of service — Rebate claim wrongly filed instead of refund claim — Error rectifiable — Case remanded.

Facts:
The appellants had filed rebate claims under the Export of Service Rules, claiming rebate of Service tax paid on input service used for export of GTA service. The claims were rejected since the rebate was claimed on GTA service which was an input service and there was no export of any service. The appellants contended that they had inadvertently filed rebate claim instead of refund claim for Service tax paid on input services used in relation to export of goods. The appellants agreed that the refund claim was filed in wrong form.

Held:

During the period when the rebate claim was filed by the appellants there was no form prescribed for filing the refund claim. Therefore, filing of a letter with relevant details would have been sufficient. Thus, the appellants have made a clerical error which is a rectifiable error. Therefore, appeal was allowed.

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(2011) 22 STR 253 (Tri.-Bang.) — Kunj Behari Dye Chem Pvt. Ltd. v. CCE (Appeals II), Bangalore.

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Refund of pre-deposit — On a favourable decision pre-deposit should be refunded suo motu by the Department without much delay — Time limit for claiming refund not to apply for refund of pre-deposit — Appeal allowed.

Facts:
The appellants were entitled for refund of predeposit amount of Rs.50,000 in view of favourable order of the Commissioner(A). The refund accrued in the year 2001 but the appellants filed a refund claim in the year 2007. Hence, by applying the law of limitation, the refund claim was rejected.

The appellants relied on Board’s Circular dated 2-1-2002, wherein it was clarified that claim for refund of pre-deposit is not required to be filed by appellants and a mere letter would be sufficient. Apart from this, time limit u/s. 11B of Central Excise Act for claiming refund was held inapplicable to refund of pre-deposit implying that the Revenue ought to have suo motu refunded the same.

Held:
Refund claim of pre-deposited amount cannot be rejected by applying the General Limitation Act. The pre-deposit amount should be refunded by the Department suo motu without much delay.

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(2011) 22 STR 252 (Tri.-Ahmd.) — Bock India Pvt. Ltd. v. CCEx, Vadodara

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Refund of pre-deposit on a favourable decision suo motu credit taken by appellants under intimation to Revenue — No objection can be raised by Revenue — Appeal allowed.

Facts:
The appellants had deposited an amount of Rs.40,000 in terms of stay order passed by the Tribunal. At a later stage, the same was refundable to them as the order was passed in favour of the appellants. Consequently, the appellants took the credit suo motu by intimating the Revenue.

However, proceedings were initiated against the appellants on the argument that they should have applied for refund instead of taking credit suo moto. As a result, penalty of Rs.5,000 in addition to the amount mentioned supra was confirmed against the appellants.

Held:
Refund of pre-deposit accrued to the appellants immediately on passing of the Tribunal’s order allowing the appeal. It was held that Revenue cannot raise any objection for granting of Cenvat credit since the same was intimated to the Revenue and provisions of unjust enrichment do not apply to such refund of pre-deposit. Hence, appeal was allowed in favour of the appellants.

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(2011) 22 STR 41 (Tri.-Ahmd.) — Aditya Birla Nuvo Ltd. v. CCEx., Vadodara.

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Marketing of goods manufactured by client — Taxable under business auxiliary service — Not a commission agent, therefore not entitled for exemption.

Demand and penalty — Time-barred for part period — As bona fide intention proved — Matter remanded for quantification.

Facts:
The appellants had entered into a ‘Marketing agreement’ with its joint venture to sell, distribute, market, advertise and promote the products of joint venture. The appellants had a belief that the services rendered by them during the period 1-7-2003 to 8-7-2004 were of a commission agent and were fully exempt under Notification No. 13/2003-S.T., dated 20-6-2003. Therefore, they did not pay any Service tax on the services rendered by them. However, the said Notification was withdrawn w.e.f. 9-7-2004 and as a consequence of which the appellants got themselves registered with the Service Tax Department in August 2004.

The Revenue contended that the services provided by the appellants were taxable under business auxiliary service and benefit of exemption Notification cannot be availed as the appellants were not the commission agents. Commission agent meant a person who causes sale or purchase of goods on behalf of another person for a consideration. The commission agents usually charge a fixed percentage of sale price, but the appellants were not charging a fixed percentage. Additionally, the scope of activities undertaken by the appellants is far beyond the activities of commission agent and fall within the purview of definition of business auxiliary service.

The extended period of limitation was invoked. However, the appellants contended that the limitation of five years cannot be invoked as the intention of the appellants was bona fide since they had immediately registered themselves when the relevant exemption Notification was withdrawn.

Held:
The services were to be taxable under business auxiliary service. However, due to reasonable cause for failure to pay Service tax, the penalties levied on the appellants were set aside. Further, the matter was remanded for quantification of demand within the period of limitation.

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(2011) 22 STR 203 (Tri.-Delhi) CCEx, Ludhiana v. Deluxe Enterprises.

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Cash found in business premises as unaccounted income — Treated as receipts towards business auxiliary service as no other activity except for sale of sim cards and recharge coupons of mobile phone service provider was undertaken by the respondent — Evidence not sufficient — Appeal dismissed.

Facts:
The respondents were in the business of selling sim cards, recharge coupons, mobile phones, etc. On 17-10-2003, they declared unaccounted income, to the Income-tax Officers on survey, of Rs.4,00,000. Since the respondents were engaged in providing business auxiliary services, the unaccounted income was treated to be income from business auxiliary services.

The respondents contended that the entire income of Rs.4,00,000 cannot be attributed to business auxiliary service since the service had become taxable from 1-7-2003, whereas the visit of survey team was on 17-10-2003. Moreover, for generating income of Rs.4,00,000 during the period of three months, a turnover of Rs.2,50,00,000 would be required, which is practically not possible for a small business man. Apart from this, no inquiry was made with the respondent for ascertaining the source of unaccounted income. In absence of any evidence, the income cannot be attributed to taxable services provided by them.

Held:
Since no inquiry was undertaken by the Department as to whether the respondent’s turnover during the period of three months was to the tune of Rs.2,50,00,000 plus the evidence gathered by the Department was insufficient to establish even the prevalence of probability, the Revenue’s appeal was dismissed.

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(2011) 22 STR 126 (Tri.-Bang.) — CCEx., Visakhapatnam v. Andhra Pradesh Paper Mills Ltd.

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Cenvat credit of service tax paid on rent-a-cab service, telephone service and professional service of Chartered Accountant is admissible.

Facts:
The respondents had availed credit of Service tax paid on rent-a-cab service which was used by officials of the company for timely completion of their jobs, telephone service as landline phones were installed at residences of officials and bills were paid by the respondents, and professional service of Chartered Accountant which was directly related to the business of the respondents.

The Revenue was in appeal against allowance of credit on above-mentioned service as it contended that conveyance offered to officials was for their personal comfort and welfare purpose which was in no way connected to the respondent’s business activity.

Held:
By relying on various judgments, issue regarding eligibility of Cenvat credit on rent-a-cab service, telephone service and professional service of Chartered Accountant was settled in favour of the respondents as the services were connected with their business activity and accordingly the Revenue’s appeal was rejected.

Comment:
With the recent changes in the CENVAT Credit Rules, taking credit on such items could be a challenge.

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