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Month: March

Desire: The Motivator – The Destroyer

‘Conquer this
formidable enemy called desire’.

        Gita.

1.1     There isn’t a living human being who does
not `desire’. `Desire’ is a great motivator. It spurs us to action. Desire to
leave imprints on sands of time brought Alexander the Great to India. Desire to
conquer and rule Europe took Napoleon to Russia. `Desire’ to achieve
independence made an average person like Mohandas Karamchand Gandhi attain the
status of Mahatma and Father of the Nation. Desire to succeed is the basis of
all success. Without desire, there would be no innovation / progress in
society. `Desire’ creates a leader and there has never been a leader without
desire – nay – burning desire.

          Napolean Hill says: `the starting
point of all achievement is desire’.

1.2     Desire is a great motivator.
However, desire for power also blinds and leads to destruction. Hence, where
desire builds, it also destroys. Desire at times is invincible and consumes the
individual.  For example – desire for
one’s beloved makes an individual blind to consequences – for instance – Romeo
and Juliet, Heer Ranja, and others sacrificed their lives and embraced death
over life. Above all the desire to seek God within and without is elevating and
causes communion between the created and the Creator.

1.3     R.B. Athreya says :

       `I cannot desire something about which
I have no idea. I cannot work for something for which I have no desire’. Hence,
knowledge – nay – awareness is necessary of what one desires.

2.1     As normal mortals, in addition to the
desire to succeed at work we have several desires, some of these are: desire to
be a good family person, child, spouse, parent and friend. We also desire to be
constructive contributors to Society. Whereas desire to accumulate is
self-serving desire to serve in self-sharing. Above all, we have `desire’ to
love and be loved.

2.2     The fact of life is that one cannot and
does not live without `desire’ till one’s last breath. Mind is always in the
state of `desire’. Hence, the problem is `desire’ and we seek freedom from
desire.

          J. Krishnamurti states, for freedom
from desire – `it is essential to understand the problem for the answer is in
the problem’.

3.       Desire is equally a destroyer if the
means are not correct. Hitler had the desire of uniting Europe – a desire and
dream which was realised by the creation of EU – but his means were not
correct. It led to the world war, which devasted Europe, impacted five
continents, led to death of thousands and Hitler himself. Desire to learn the
truth about weapons of mass destruction led to atrocities of Abu Ghraib in Iraq
which tarnished the image of the ‘liberator’ U.S.A. Again, desire for Monica
scarred Clinton’s presidency and nearly destroyed his family life. Duryodhan’s
desire to deprive Pandvas of what was their’s led to Mahabharat and destroyed a
lineage. On the other hand, Arjun’s desire to understand human behaviour gave
the world knowledge of all times – Gita.

3.1     Desire makes or mars a man. Desire is like
breath – it is neither good nor bad – but its character depends on our thoughts
as our actions are based on our thoughts. Hence, change the character of desire
from revenge to forgiveness, from hate to love and from accumulation to sharing
from me and mine to us.

3.2     ‘Desire’ for peace led to the establishment
of ‘United Nations’. UNO provides a platform for leaders of nations to voice
their views, avoid war and discuss and resolve issues. Though strife continues,
nations play cold war but UNO has one achievement to its credit: there has been
no war between the acknowledged powers of the world.

3.3     Desire dominates and imprisons us. The
irony is that we accept it consciously or unconsciously. Desire makes us live
in the past or future. Thus we forget and forgo pleasures of the present
without realising that present is all we have. Desire creates a veil
between man and God. Unfulfilled desire leads to despair and desperation. We
are consumed by desires. Hence the issue is: Is ‘desire’ bad! The answer
is No because nothing good or bad happens without desire’. All
actions are motivated by desire.

          Emerson advises : ‘Be aware of what
you want for you will get it’.

3.4     Sadhu Vaswani says ‘dance of desires is the
dance of death’. He is right because when man, men or nations harbour the
desire to dominate others it leads to conflict. When we seek revenge, are
jealous or envious, our actions are based on self-aggrandisement. However, the
desire to serve, to love, to convert strife into harmony, to educate and uplift
others are ‘desires’ which elevate a human being into a saint and brings him
close to God. These desires backed by action will bring peace and harmony in
family and society. The author reiterates that ‘desire’ per se is not
bad but it is the nature of desire we harbor that matters. It is the intent
from which desire emanates and the action based thereon that is relevant to
living a happy life and happiness is all we seek – so let us convert our ‘self
– centered’ desires into desires to serve and share. I am fully conscious
of the good old metaphor that ‘charity begins at home’– so let us start with
sharing in the family and convert sharing with kutambh into ‘vasudev
kutambh’.

4.1     According to ‘Gita’: desire is the basis of
attachment, anger, infatuation, loss of reason and destruction. It is only by
giving up desire one    achieves
salvation.

5.1     The sage in Ashtavakra Gita says :

          ‘One who desires worldly pleasures and
the one who desires to renounce them stand on the same footing, for they both
nurture desire’.                                                   

5.2     What a contradiction – a paradox and an
enigma – because desire for salvation – nirvana – is also a desire. In other
words, even desire not to have desire is desire. However, Rousseau advises :

           ‘that man is truly free who desires what he is able to perform, and does what he
desires.’

6.1     The issue is : can desires be
satisfied.

          Desire creates longings for
possessions and can never be satisfied. Desires make beggars of ‘man’. There is
always longing for more. But it can be managed – and by His grace
eliminated.

6.2     The question which arises is :

          Can
desire for good also be given up !

7.1     The answer is yes – because
according to our scriptures even desire for Nirvana binds – and that is why
Gita calls desire a great enemy because      ultimate
freedom  comes from a mind free from
‘desires’.

7.2     I would conclude by quoting Steve Allen’s
answer  to the question –

          ‘If you were given a
wish fulfilling well, what would you wish for !

          ‘To stop wishing’

Author’s note :

The issues are: Does the author believe that a stage of no desire
can be achieved and has he achieved it. The answer is that he believes that the
stage of no desire can be achieved. He has not attained it but the effort is on
because he is still caught in the web of `desire for no desire is also
desire.

52. Notice – Validity- Service of notice- Reassessment- Sections 148 and 282 – A. Y. 1996-97- Service of notice on accountant of assessee company- Power of attorney given to accountant to conduct assessment proceedings does not include authority to accept any fresh notice- Notice not validly served on assessee- Reassessment proceedings vitiated

CIT vs. Kanpur Plastipack Ltd.; 390 ITR 381 (All):

The managing director of the assessee company had executed a
power of attorney in favour of the company’s accountant to represent the
company in the assessment proceedings. Notice u/s. 148 of the Act, was served
on him. The Appellate Tribunal held that the assessment proceedings were
invalid and quashed the assessment order on the ground that the notice u/s. 148
was not validly served on the assessee.

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

“i)   The power of attorney had confined the
authority to representation to conduct the case. It did not include in it any
authority to accept any fresh notice.

ii)   The
person on whom the notice u/s. 148 of the Act was served was not the principal
officer of the assessee nor was there any material to show that he had been
authorized by the assessee to accept any notice. The Appellate Tribunal was
correct in concluding that the reassessment proceedings, which were initiated
on the basis of the notice u/s. 148 dated 28/05/2002 were vitiated.”

51. Income- Transport subsidy – whether income or capital- A. Y. 2001-02 – Transport subsidy to stimulate industrial activity in backward region is capital receipt and not income

Shiv Shakti Floor Mills P. Ltd. vs CIT; 390 ITR 346
(Gauhati):

For the A. Y 2001-02, the assessee had claimed the transport
subsidy received by it to stimulate industrial activity in backward region to
be capital receipt and not income. The Assessing Officer treated the subsidy as
income and made addition to the total income. The Tribunal upheld the addition.

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

“The transport subsidy received by the assessee was intended
to stimulate industrial activity in the backward region, to generate employment
opportunities and bring about development in the North Eastern States and it
was not meant to provide higher profit for the entrepreneur. It was intended to
encourage investment in difficult and far flung states and the sum received as
subsidy could not be treated as revenue receipt.”

50. DTAA between India and Singapore- Shipping corporation in Singapore earning income from operations in India – Article 8 of DTAA stating that such income would be taxable in Singapore-Article 24 of DTAA stating that if income were taxed by contracting state on basis of remittance clause 8 would not apply – Certificate by Internal Revenue of Singapore that income accrued and was taxable in Singapore – Fact that freight receipts were remitted to UK not relevant – Income not taxable in India

M. T. Maersk Mikage vs. DIT( Int. Taxation); 390 ITR 427
(Guj):

ST was a shipping and transport company based in Singapore.
It was taxed as a resident of Singapore. During the period relevant to the A.
Y. 2011-12, ST had through ships owned or chartered by it, undertaken voyages
from various Indian ports and earned income from exporters and out of other
such business. ST through the assessee, filed return of income u/s. 172(3) of
the Act, declaring the gross profit calculations, but claiming Nil income
relying on article 8 of the DTAA between India and Singapore. According to ST
such income was taxable only in Singapore and therefore, was exempt from tax
under the Indian Income-tax Act. It produced a certificate issued by the
Internal Revenue Authority of Singapore dated 09/01/2013 which stated that the
income in question derived by ST would be considered as income accruing in or
derived from the business carried on in Singapore and such income therefore,
would be assessable in Singapore on accrual basis. The Assessing Officer held
that ST was not entitled to the benefit of article 8 of the DTAA by virtue of
the provisions contained in article 24 therein. He noted that the freight
receipts were remitted to London and not to Singapore. The assessee filed a
revision petition u/s. 264 of the Act which was rejected.

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

“i)   Article 8 of the DTAA between India and
Singapore states that with reference to shipping and air transport profits
derived by an enterprise of a contracting state from the operation of ships or
aircraft in international traffic shall be taxable only in that state. Article
24 of the Agreement pertains to limitation of relief. The essence of article
24.1 is that in case certain income is taxed by a contracting state not on the
basis of accrual, but on the basis of remittance, the applicability of article
8 would be ousted to the extent such income is not remitted. This clause does
not provide that in every case of non-remittance of income to the contracting
state, article 8 would not apply irrespective of tax treatment of such income
is given.

ii)   In the absence of any rebuttal material
produced by the Revenue, one would certainly be guided by the factual
declaration made by the Internal Revenue Authority of Singapore in the
certificate and this declaration was that the income would be charged at
Singapore considering it as an income accruing or derived from business carried
on in Singapore. In other words, the full income would be assessable to tax on
the basis of accrual and not on the basis of remittance. The amount was not
taxable in India.”

49. DTAA between India and Germany – Amount received by assessee – international airlines as IATP members by rendering technical facilities i.e. line maintenance facilities to other member airlines at various Indian airports being covered under Article 8(4) of DTAA between India and Germany and article 8(1) and 8(3) of DTAA between India and Netherlands respectively, was not liable to tax in India

DIT vs. KLM Royal Dutch Airlines; 2017] 78 taxmann.com 1
(Delhi):

The assessees namely ‘Lufthansa’ and ‘KLM’, were
international airlines with headquarters and controlling offices in Cologne,
Germany and Amsterdam, Netherlands respectively and branch offices in India.
They operated aircraft in the international traffic business; these activities
were also carried out in India inasmuch as they operated aircraft in
international traffic from, and to, various Indian airports. Both the assessees
were members of the International Airlines Technical Pool (‘IATP’ or the
‘Pool’). As IATP members they extended minimal technical facilities (line
maintenance facilities) to other International Air Transport Association
(‘IATA’) member airlines at Indian airports. The assessees claimed that the
amounts received from various IATP member airlines for the above services
rendered in India were not taxable in India. The Assessing Officer held that
such amounts received by them in India were taxable, holding that these
activities were not covered under the term ‘Air Transport Services’. He held
that the assessees’ branch offices in India constituted permanent
establishments and, therefore, the income relating to the engineering and
traffic handling was taxable in India, as the same was not covered under
article 7 of DTAA. The Tribunal held that the assessees profit due to participation
in a pool was covered under article 8(4) of the DTAA between India and Germany
and by articles 8(1) and 8(3) of DTAA between India and Netherlands and such
profit could not be brought to tax in India.

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

“i)   While interpreting tax treaties and
conventions, the emphasis is upon the context in the instrument itself, and
‘any subsequent agreement between the parties’ as to the interpretation of the
treaty or the application of its provisions. The expression ‘profit from the
operation of ship or aircraft in international traffic’ has not been defined in
the Indo-Dutch DTAA, or in the Indo-German DTAA.

ii)   The Tribunal while explaining the meaning of
profit from the operation of ships or aircraft in international traffic in both
Lufthansa and the KLM cases took into consideration the bye-laws of IATP,
because this organisation authorised its members to share aircrafts, aircrafts
pooling, ground handling equipment and manpower all over the world. The
Tribunal also considered the relevant clauses of the IATP manual and held that
any receipt by the assessee due to participation in the IATP pool as provided
in its manual and dealt with in article 8(4) of Indo-German DTAA will not be
taxable in India under article 8(1); a similar finding was rendered in the case
of KLM too.

iii)   The assessees participated in the IATP pool
and earned certain revenues from such activities and also incurred expenditure.
There is, clear reciprocity as to the extension of services; IATP membership is
premised upon each participating member being able to provide facilities for
which it was formed (line services, OMR services, etc.) of a required mandate
standard. As there was reciprocity in the rendering and availing of services,
there was clearly participation in the pool; in terms of the two DTAAs
(Indo-German and India-Netherlands) the profits from such participation were
not taxable in India.”

48. Demonetisation – PMGKY deposit scheme – Where person from whom cash was seized during demonetisation 2016 and he was not tried under any provision of law, he would be eligible to deposit amount in PMGKY deposit scheme on or before 30-3-2017

Vishal Jain vs. State of Punjab; [2017] 78 taxmann.com 172
(P&H):

The assessee was travelling in a cab from Delhi carrying Rs.
30 lakh. The cash amount was seized by police officials and handed over to
Income-tax Officers. The assessee filed a writ petition seeking declaration
against action of respondents in depriving him of cash amount, unconditional
release of amount to petitioner; with a further prayer to permit him to have
his advocate present during his interrogation. He further seeked refrain of any
coercive action against him alleging to the aforesaid dispute; with a liberty
to avail the remedy under ‘Pradhan Mantri Garib Kalyan Yojana, 2016’ by
depositing the aforesaid amount, tax, surcharge and penalty.

The Punjab and Haryana High Court allowed the petition and
held as under:

“i)   The case of the petitioner has to be examined
as per the aforementioned Scheme, in view of the amendment Act, notification
and circular. Though he is eligible yet cannot be deprived of the statutory
entitlement to declare and deposit his undisclosed income or pay tax, surcharge
and penalty. The aforementioned scheme has been promulgated for a limited
period with effect from 17-12-2016 to 31-3-2017.

ii)   From the provisions of the scheme, it is
evident that a person can avail the remedy of declaration. Last date for
submitting the Form 1 as prescribed in the rules may be made at anytime on or
before 31-3-2017. The explanation is in tune of section 199 (o) of the Finance
Act as the petitioner has made a categoric statement that he is not involved in
any of the offences as referred above.

iii)   The use of the words “in relation of
prosecution of any offence” instead of “in relation to investigating
for any of the offence” clearly shows legislative intent of provisions
would apply only if the charge sheet or complaint is filed for prosecuting any
person under any of the aforementioned provisions of Act and not merely when
investigations are going on.

iv)  In the instant case, as per the petitioner’s
claim, no complaint or charge sheet is pending against him. The alleged
undisclosed seized income of the petitioner, as per the statement of Yatinder
Sharma, has been handed over to Income-tax department and summons, has already
been served upon the petitioner.

v)   The petitioner is not, thus, trying to
falsify to project undisclosed income as duly accounted for availing the
remedy. Since the petitioner is not amongst the persons mentioned in paragraph
8 of the circular No. 43 of 2016, being not eligible for availing the PMGKY
Deposit Scheme, therefore, the Income-tax Officer cannot, deny the petitioner
adjustment from his cash account seized by the department, tax charge and
penalty.

vi)  Economic offences are very serious and have a
wider ramification. The statutory investing scheme appears to be positive
process for not only enhancing the revenue collection but at the same time, it
is an opportunity for reforming those who had earlier failed to make true and
correct disclosure of income in normal course by taking into consideration the
provisions of the aforementioned Scheme.

vii)  The prayer of the petitioner of taking any
coercive steps appears to be genuine. The writ petition can be disposed of with
a direction to respondents not to take any coercive action against the
petitioner and he may be granted a permission to take the assistance of a
lawyer to be present at visible but not audible distance during his
interrogation and recording of statement in connection with said seizure in the
instant case or any proceedings consequential thereto.

viii) However, prayer of the petitioner for directing
unconditional return of the seize amount is hereby rejected. In case, the
petitioner submits any application to the Income-tax Department, the
authorities can look into matter for the purpose of declaration of undisclosed
income by availing the remedy under the PMGKY Scheme. They shall consider the
same and pass an appropriate order thereon as it enables the Government to earn
straightway 50 per cent of the amount, 25 per cent for depositing of the bonds
and 25 per cent to be deposited in the account which shall be released only
after 4 years. While releasing the amount after 4 years, the Income-tax
Authorities can release the same only when there is no outstanding amount due
towards them from the petitioner.”

47. Business expenditure- Disallowance u/s. 14A – A. Y. 2008-09- Where securities in question constituted assessee’s stock-in-trade and assessee did not hold securities to earn dividend or interest but traded in them and dividend or interest accruing thereon was only a by-product thereof or an incidental benefit arising therefrom, same would not be subject to provisions of section 14A

Principal CIT vs. State Bank of Patiala; [2017] 78
taxmann.com 3 (P&H):

The assessee held shares and securities as stock-in-trade and
not for earning dividend. Incidentally, the assessee earned dividend which was
exempt from tax. For the A. Y. 2008-09, the assessee claimed that no
disallowance was warranted u/s. 14A of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”), as the shares were
held as stock-in-trade and not as investment for earning dividend. The learned
Assessing Officer rejected the claim and made disallowance u/s. 14A applying
Rule 8D. The Tribunal allowed the assessee’s claim and deleted the addition.

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

“i)   What is of vital importance in the above
judgment are the observations emphasised by us. Each of them expressly states
that what is disallowed is expenditure incurred to “earn” exempt
income. The words “in relation to” in section 14A must be construed
accordingly. Thus, the words “in relation to” apply to earning exempt
income. The importance of the observation is this.

ii)   We have held that the securities in question
constituted the assessee’s stock-in-trade and the income that arises on account
of the purchase and sale of the securities is its business income and is
brought to tax as such. That income is not exempt from tax and, therefore, the
expenditure incurred in relation thereto does not fall within the ambit of
section 14A.

iii)   Now, the dividend and interest are income.
The question then is whether the assessee can be said to have incurred any
expenditure at all or any part of the said expenditure in respect of the exempt
income viz. dividend and interest that arose out of the securities that
constituted the assessee’s stock-in-trade. The answer must be in the negative.
The purpose of the purchase of the said securities was not to earn income
arising therefrom, namely, dividend and interest, but to earn profits from
trading in i.e. purchasing and selling the same. It is axiomatic, therefore,
that the entire expenditure including administrative costs was incurred for the
purchase and sale of the stock-in-trade and, therefore, towards earning the
business income from the trading activity of purchasing and selling the
securities. Irrespective of whether the securities yielded any income arising
therefrom, such as, dividend or interest, no expenditure was incurred in
relation to the same.

iv)  In CCI Ltd. vs. JCIT [2012] 250 CTR 291
(Karn), the Karnataka High Court held that when the assessee has not
retained shares with the intention of earning dividend income and that the
dividend income is incidental to the business of sale of shares it cannot be
said that the expenditure incurred in acquiring the shares has to be
apportioned to the extent of dividend income and that should be disallowed from
deduction.

v)   A financial decision of an assessee that
trades in securities may and, in fact, would factor in the dividend or interest
that the securities it acquires as its stock-in-trade yields or is likely to
yield. Such a decision would be taken for acquisition, retention and disposal
of the securities. That, however, is a financial consideration not with a view
to earning the dividend or interest but with a view to assessing the price at
which the security ought to be acquired, retained and sold. In other words,
such dividend or interest is an aspect that the assessee takes into
consideration for incurring the expenditure for the purpose of acquiring the
stock-in-trade and dealing with it thereafter as well as for the sale thereof.
This is entirely different from saying that the expenditure is incurred for
earning the dividend or interest. Once it is found that no expenditure was
incurred in earning this income, there would be no further expenditure in
relation thereto that falls within the ambit of section 14A.”

53. TDS- Fees for technical services or for execution of contract-Sections 9(1)(vii), 194C, 194J and 201(1) – A. Y. 2011-12- Deployment of technical personnel not for and on behalf of customer but for and on behalf of contractor for execution of contract- Consideration paid not for professional or technical services rendered to assessee- Section 194C is applicable and not 194J

Principal CIT(TDS) Vs. BHEL; 390 ITR 322 (P&H):

For the A. Y. 2012-13, the Assessing Officer found that the
assessee had made payments to five contractors in respect of various contracts
and deducted tax in respect thereof u/s. 194C Act, at the rate of 2% and paid
to the Government treasury. He found that all the contracts involved the
provision of professional and technical services which fell within the ambit of
the provisions of section 194J and not u/s. 194C. The Assessing Officer held
that the contracts were not only for the erection and installation work, but
also for the commissioning, testing and trial operation of the various
equipment and other related machinery and that under the terms of the contract
it was the duty of the contractor to provide all types of labour, supervisors,
engineers, inspectors, measuring and testing equipments, testing and
commissioning for the execution of the project in accordance with the
specifications of the assessee. He held that the level of human intervention
was high and sophisticated and accordingly held the assessee to be in default
u/s. 201(1A) of the Act for not deducting tax at source u/s. 194J. The
Commissioner (Appeals) held that the scope of the work given to the
sub-contractors involved construction work, welding, erection, alignment,
transportation of equipment and materials with the help of machines which did
not fall within the scope of technical services as defined in Explanation 2 to
section 9(1)(vii). He also held that merely because technical personel were
employed in the execution of contract it did not follow that the contract was
one for technical services. He allowed the appeal filed by the assessee. The
Tribunal upheld the decision of the Commissioner (Appeals).  

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

“i)   The contract entered into between the
assessee and each of the contractors did not involve supply of professional and
technical services at least within the meaning of section 194J Act. Therefore,
considerations paid under the contracts were not for professional or technical
services rendered by the contractors to the assessee and section 194J was not
applicable.

ii)   The technical personel were deployed not for
and on behalf of the customer, but for and on behalf of the contractor itself
with a view to ensuring that the contractor supplied the equipment in
accordance with the contractual specifications. The nature of human
intervention is reflected in the terms and conditions of the agreement itself.

iii) Questions are decided in favour of the
assessee. The appeal is, therefore, dismissed.”

Don’t demonize, the US President Donald Trump, analyse Trump. He represents a thought process. Its not a momentary expression – Shri S. Jaishankar, Foreign Secretary.

11. HC dubs tree felling for Metro a tsunami

The Bombay high court on Friday said it will not immediately
vacate the interim stay on cutting of trees for Metro III unless shown that
there is nothing illegal or improper in the procedure adopted.

A bench of Chief Justice Manjula Chellur and Justice Girish
Kulkarni were categorical while granting time to Mumbai Metro Rail Corporation
Ltd (MMRCL) to place on record information regarding the survey done before the
firm proceeded with the cutting of over 5,000 trees for the Colaba
Andheri-Seepz corridor. Justice Chellur said, “Even then I will not immediately
vacate the stay. You can’t cut trees like that.“

The judges said that “maybe, if required“ they will ask
another committee to oversee the removal of trees. The stay will be vacated “if
nothing is (found) illegal or improper (in the procedure adopted)“, said
Justice Chellur. The bench said MMRCL must state what assessment was done for
tree cutting, including a list of trees, their kind and age, and whether there
is any plan for replantation.

The court questioned the BMC and told it “to justify how all
permissions are granted“.“Look at the photographs. Like a tsunami… tsunami as
far as trees are concerned,“ said Justice Chellur.

(Source: The Times of India, February 11, 2017)

12. Looking the Part

Say you had the choice between two surgeons of similar rank
in the same department in some hospital. The first is highly refined in
appearance; he wears silver-rimmed glasses, has a thin built, delicate hands, a
measured speech, and elegant gestures. His hair is silver and well combed. He
is the person you would put in a movie if you needed to impersonate a surgeon.
His office prominently boasts an Ivy League diploma, both for his undergraduate
and medical schools.

The second one looks like a butcher; he is overweight, with
large hands, uncouth speech and an unkempt appearance. His shirt is dangling
from the back. No known tailor in the East Coast of the U.S. is capable of
making his shirt button at the neck. He speaks unapologetically with a strong
New Yawk accent, as if he wasn’t aware of it. He even has a gold tooth showing
when he opens his mouth. The absence of diploma on the wall hints at the lack
of pride in his education: he perhaps went to some local college. In a movie,
you would expect him to impersonate a retired bodyguard for a junior
congressman, or a third-generation cook in a New Jersey cafeteria.

Now if I had to pick, I
would overcome my suckerproneness and take the butcher any minute. Even more: I
would seek the butcher as a third option if my choice was between two doctors
who looked like doctors. Why? Simply the one who doesn’t look the part,
conditional of having made a (sort of) successful career in his profession, had
to have much to overcome in terms of perception. And if we are lucky enough to
have people who do not look the part, it is thanks to the presence of some skin
in the game, the contact with reality that filters out incompetence, as reality
is blind to looks.

When the results come from
dealing directly with reality rather than through the agency of commentators,
image matters less, even if it correlates to skills. But image matters quite a
bit when there is hierarchy and standardized “job evaluation”. Consider the
chief executive officers of corporations: they not just look the part, but they
even look the same. And, worse, when you listen to them talk, they will sound
the same, down to the same vocabulary and metaphors. But that’s their jobs: as
I keep reminding the reader, counter to the common belief, executives are
different from entrepreneurs and are supposed to look like actors.

Now there may be some correlation between looks and skills;
but conditional on having had some success in spite of not looking the part is
potent, even crucial, information.

(Source: Nassim Nicolas Taleb, February 24th, 2017, from
INCERTO)

13. Checks and balances: Permitting tax authorities to
conduct raids without due process will be disastrous

Having elections to decide who is to govern us meets only the
most basic definition of a democracy. But at a deeper level, democracies
require checks and balances in governance. Otherwise, no matter how free and
fair the elections, they would be autocracies with periodic changes of
leadership.

The proposal in this year’s budget to amend Section 132 of
the Income Tax (IT) Act is an example. The amendment would do away with the
requirement for IT officials to demonstrate they had “reason to believe” that
violations existed, or that the assessee would not comply, before conducting a
search and seizure “raid”.

The danger in this is obvious. Without having to show they
had good reasons for raids, there is nothing to prevent IT officials from
conducting them arbitrarily. Harassment and rent seeking – the term economists
use for corruption – are sure to follow.

Nevertheless, it is worth taking stock of the opposite
arguments as well. Checks and balances are meant to prevent the autocratic,
mindless, or subjective exercise of authority, but not to block its legitimate,
justifiable application.

So where does the Indian government’s crackdown on IT evaders
stand? The statistics clearly show that the pace has been considerably stepped
up in the past two years. For instance, the number of raids in the first half
of 2016, at 148, was nearly triple of the 55 in the first half of 2015.

Similarly, cash, jewellery and other assets seized during
raids in the first seven months of 2016, at Rs 330 crore, was more than 300% of
the same period in 2015. And unpaid taxes surrendered by assessees in 2016 were
Rs 3,360 crore, a more than 50% increase over 2015.

However, it was never going to be easy to rapidly scale up
such scrutiny or, indeed, conduct raids. It is not simply a matter of
allocating more resources for it, but also having to deal with judicial
hurdles. As the Finance Bill explains, “certain judicial pronouncements have
created ambiguity in respect of the disclosure of ‘reason to believe’ or
‘reason to suspect’ recorded by the income tax authority to conduct a search
under Section 132.”

But therein lies the rub. If judges have imposed constraints
on raids because of unconvincing reasons to believe they were justified, then
it is almost inevitable they will find fault with altogether doing away with
all justification! Though the executive and legislative branches may decide to
abjure cumbersome procedural requirements in the interest of efficiency, that
must pass the test of natural justice and constitutional guarantees in order to
deter the judicial branch from overturning it.

Using the principles of checklist management, IT officials
could be given an objective list of items to be ticked off that would serve as
a record of due process having been followed prior to a raid. And surely the
finance ministry has the expertise to craft such a checklist that would pass
judicial muster.

(Source: Article by Shri Baijyant ‘Jay’ Panda, BJD Lok
Sabha MP, in The Times of India dated 15.02.2017)

14. Vyapam scam: Supreme Court cancels degrees of 634 doctors

Coming down hard on corruption in MBBS admissions in Madhya
Pradesh between 2008 and 2012, the Supreme Court cancelled the degrees of 634
doctors on Monday and said admissions obtained through a mass fraud called
“Vyapam scam”+ could not be condoned.

“The actions of the appellants are founded on
unacceptable behaviour and in complete breach of rule of law. Their actions
constitute acts of deceit… National character, in our considered view, cannot
be sacrificed for benefits – individual or societal,” a bench of Chief
Justice J S Khehar and Justices Kurian Joseph and Arun Mishra said in an
83-page judgment.

“If we desire to build a nation on the touchstone of
ethics and character, and if our determined goal is to build a nation where
only rule of law prevails, then we cannot accept the claim of the appellants
(students) for suggested societal gains (by allowing them to keep the degrees
on the condition of doing social service free of cost for some years),”
the bench said.

Writing the unanimous judgment, Justice Khehar said, “We
have no difficulty in concluding in favour of rule of law… Fraud cannot be
allowed to trounce, on the stratagem of public good.”

All these admissions to MBBS courses between 2008 and 2012
were cancelled by the MP Professional Examination Board. A bench of Justices J.
Chelameswar and A. M. Sapre had found them to be illegal on May 12, 2016.

While Justice Sapre had ordered cancellation of the
admissions and annulling of the degrees, Justice Chelameswar had said since the
students had completed their courses, it would be a national waste to annul the
degrees.

Instead, Justice Chelameswar allowed them to keep their
degrees provided they did social service for a certain period. Given the split
verdict, the matter was placed before a three-judge bench of Chief Justice J S
Khehar and Justices Joseph and Mishra. Writing the unanimous judgment, Justice
Khehar agreed with the view taken by Justice Sapre and annulled the degrees
obtained by these 634 students, who had got admission into medical colleges on
the back of influence peddling.

(Source: The Times of India dated 14.02.2017)

15. ‘Cashless economy an invitation to online fraudsters’

The international standards body for the payments industry
has called for a cybersecurity breach notification law to raise awareness of
online criminals. According to the Payment Card Industry (PCI) Security
Standards Council, the move towards a cashless economy post-demonetisation has
also sent an invitation to online fraudsters of a new market opening up. In
information security circles, any unauthorised access to an individual’s data
is called a breach.

Jeremy King, international director, PCI Security Standards
Council, said that while the migration to a cashless society will be beneficial
to a wider population in India and provide greater opportunity to merchants and
banks, the biggest challenge is that online criminals have become very
organised and global.

Without a breach notification, we pretend we have never been
breached, and banks and organisations accept the loss. That means that people
think there is no fraud happening when there is a lot of fraud happening,”
he said.

The risk to banks were not just in the payments business but
wherever personal data was stored. There have been instances when telecom data
was hacked to access bank details. While the demand for auditing payments
infrastructure has gone up, India is facing a shortage of IT security auditors.
The RBI wants more approved assessors in India to support the large base of
merchants and banks. We are working on that. We need more security
professionals and we need more organizations.

Criminals are also learning to work around security features.
For instance, with card analytics now identifying unusual patterns based on
transactions being done in different pin codes, fraudsters are now selling
cards on the Dark Net — an underground network with restricted access used to
sell stolen content — based on pin code of the issuer so that the frauds do not
ring alarm bells.

Another challenge for the council is that countries are
moving away from cards to newer form factors like account-to-account transfers.
While people were looking at ways of making new form factors work in a
frictionless and secure manner, there were trade-offs. The balance between risk
and security is where we live. You can make something very, very secure, but
it’s of no use. So you know that there is a level of risk that you are willing
to accept in order to make the process work smooth enough so that people will
use it.

(Source: The Times of India dated 21.02.2017)

16. India Inc is better
off avoiding the flawed US practice of unrealistically high CEO compensation.

The debate between Infosys’ founders and the current
management and board about senior management compensation can be an important
signpost for corporate governance in the country.

The key question is, should shareholders, corporate
governance activists and policymakers allow India Inc to transplant some of the
ugly corporate governance practices from Corporate America? While the moral
aspects to mimicking such ugly features in a country significantly poorer than
the US remain open to debate, I will focus on economic aspects.

Between 1992 and 2000, following the Bull Run in US stock
markets, the average real (inflation-adjusted) pay of chief executive officers
(CEOs) of S&P 500 firms more than quadrupled, climbing from $3.5 million to
$14.7 million. This growth of executive compensation far outstripped
compensation for other employees. In 1991, the average large-company CEO in the
US received about 140 times the pay of an average worker; in 2003, this ratio
was about 500:1.

When compared to the value added by an average employee, did
the value add by the CEO of an S&P 500 firm quadruple in just eight years?
What super-diet did the CEOs of S&P 500 firms consume from 1992 to 2000 to
quadruple their relative contribution? Did such a super-diet quadruple a CEO’s
strategic thinking abilities?

Since none of us has heard about any such super-diet hitting
retail outlets, it is safe to conclude that such quadrupling represented the
outcome of a game that gets fixed between the CEO and pliant board. Academic
research, summarised in Bebchuk (2004), has provided robust evidence of such
match-fixing. “In judging whether Corporate America is serious about reforming
itself, CEO pay remains the acid test. To date, the results aren’t encouraging,
Warren Buffett said.

In an ideal world, a CEO would get paid commensurate to the
value he or she adds to the firm. The board would design the compensation to
provide strong incentive to the CEO to contribute to shareholder value. But
this represents a Utopian concept. First, for various reasons, directors in a
firm support arrangements favourable to the company’s top executives. Social
and psychological factors contribute to this phenomenon.

Second, limited time and resources often make it difficult
for even well intentioned directors to do their pay setting job properly. When
not well prepared for the ensuing battle, directors can often choose peace within
the boardroom.

Finally, CEOs exert considerable power in shaping their pay
packages and those directly reporting to them.

Research shows that CEOs’ influence over directors enables
them to obtain “rents” — benefits greater than those commensurate to the true
estimate of the value they add to the company.

These findings followed research on CEO pay in the US after
the spate of corporate scandals that began in late 2001and shook confidence in
the performance of public company boards.

Research now recognises that many boards have employed
compensation arrangements that do not serve shareholders’ interests. Flawed
compensation arrangements have been widespread, and systemic, stemming from
defects in the underlying governance structure.

For instance, oil company
CEOs get paid significantly more when the crude oil price increases — an
outcome in which the oil company CEO had no role. Most CEOs get paid more when
the average stock market performs well; again, the CEO had no role to play in
the stock market’s performance.

A large portion of CEO pay comes in forms other than equity,
such as generous severance packages, salary and bonus, which correlate weakly
with firms’ industry-adjusted performance.

Thus, academic research underlines the fact that CEO pay is
the outcome of a game that gets fixed between the CEO and pliant boards. Given
this evidence in the US, Sebi and corporate governance activists must watch the
developments at Infosys carefully and ensure that some rotten governance
practices in the US do not develop root in India.

(Source: Extracts from Article by Krishnamurthy
Subramaniam, Associate Professor of Finance, at Indian School of Business,
Hyderabad, in the Economic Times dated 17.02.2017)

One Republic

When you call yourself an Indian, Muslim, Christian, European
or anything else, you are being violent. Because you are separating yourself –
by belief, by nationality, by tradition – from the rest of mankind. This breeds
violence.

 – J.
Krishnamurti
(From Sacred Space)

New Requirements for Profit Sharing Arrangements by Promoters, Directors & Others

Introduction

SEBI has finally issued amendments requiring that profit
sharing/compensation agreements by certain persons shall require board as well
as public shareholders approval of the listed company. These provisions
effectively have retrospective effect
of three years. The agreements covered are those that are entered into by
specified persons such as promoters, directors, key managerial personnel with
shareholders or even third parties. Such agreements would provide for
compensation/profit sharing in relation to dealings in securities. Vide
amendments made by notification dated 4th January 2017, such
agreements would require prior approval of Board and shareholders. Agreements
entered into in preceding three years, whether subsisting or expired, would
also require approvals and/or disclosures.

Background

Readers may recall that SEBI had, on 4th October
2016, issued a consultation paper on such agreements and invited public
comments. This was discussed in an earlier column of this Journal.

SEBI had expressed concerns about certain agreements in as
much as though the listed company itself may not be a party to or directly
affected by such agreements, they resulted in certain concerns about good
corporate governance. SEBI gave an example of the Promoters of a listed company
having entered into an agreement with a private equity investor. This agreement
provided for sharing of profits on appreciation earned by such investor in the
shares of the company. SEBI observed:-

“It has come to the notice of
SEBI that certain Private Equity (PE) firms have entered into side agreements
with top personnel and key managerial personnel (KMPs) of a listed entity by
which such PE firms (who were allotted shares on a preferential basis) would
share a certain portion of the gains above a certain threshold limit made by
them at the time of selling the shares and also subject to the conditions that
the company achieves certain performance criteria and the employee continues
with the company for a certain period.” ?

It was felt that such practice may be quite common. The
beneficiary of such agreement could be a promoter, director, key managerial
personnel etc of the company. The private equity investor would have invested
in the shares of the company. The agreement would provide that if the investor
earns profit on sale of the shares beyond a specified amount/rate of return, a
part of such excess would be shared with such persons. Such persons would thus
benefit by way of gains beyond what they would otherwise earn as shareholders,
key managerial personnel, directors, etc.

It was obvious that the company concerned was not directly
affected by such agreement. The company does not bear any of such costs. It is
the investor who, for  motivating such
persons, bears the cost out of his gains. Hence, such agreements would not come
before the board or shareholders of the company for approval. Indeed, it is
possible that the company and the public shareholders may not be even aware of
such agreements.

However, the concerns over such agreements are easy to see.
The directors or key managerial personnel may have at least a perceived
conflict of interest in view of such agreements. Such persons also have
restrictions over their remuneration under the Companies Act, 2013 but yet they
may get further remuneration under such agreements. The tying of the Promoters
with such investors is also an area of concern.

Hence, SEBI, after due consultation, has provided for certain
requirements by introducing certain provisions in the SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015.

To summarise, these provisions require that any new
agreement should receive prior approval from the Board of the
listed entity and from its public shareholders by way of a
resolution. In case of agreements entered into in the preceding three
years and still subsisting, approval of the board and the public shareholders
needs to be obtained at their respective forthcoming meetings. Further,
such agreements and also agreements that have expired should be disclosed to
stock exchange for public knowledge.

The following agreements analyse the new requirements in more
detail.

Regulations amended

The SEBI LODR Regulations 2015 have been amended by inserting
sub-regulation (6) in Regulation 26. These amendments have been made vide
notification dated 4th January 2017 and will also apply to
agreements entered into the preceding three years from the date when the
amendments came into effect.

To whom do they apply

The provisions apply to agreements between two sets of
parties.

On one side are employees including key managerial personnel,
directors or promoters of a listed entity. They may be acting on their own
behalf or on behalf of any other person.

On the other side are shareholders or even any other third
party.

The scope thus has been made quite wide, and it is wider even
than the proposed amendments as per the consultation paper. The party on one
side can be any employee and not merely a key managerial personnel. An apparent
ambiguity/loophole in wording the consultative paper was corrected and hence
the party can be any director and not merely directors who are employees.
Further, the promoter may be a director or employee or otherwise and can even
be a limited company.

On the other side would be any shareholders or even
non-shareholders. 

The nature of the agreement

The agreement should be “with regard to compensation or
profit sharing in connection with dealings in the securities of such listed
entity”.

Prior approvals required of Board/public shareholders

Such agreements require prior approval of the
Board of Directors of the listed company.

Further, prior approval is also required of the public
shareholders of the listed company by way of an ordinary resolution. The
term “public shareholders” has been defined in Regulation 2(1)(y) of the
Regulations as ”public shareholding” means public shareholding as
defined under clause (e) of rule 2 of the Securities Contracts (Regulation)
Rules, 1957. Effectively, subject to certain further adjustments where
required, it means shareholders who are other than the promoters or promoter
group of the company or the subsidiaries/associates of the Company. However,
non-public shareholders by this definition could include directors, employees,
etc. who are not part of promoters, etc. To ensure that the voting
remains unbiased, apart from the promoters, etc. even “interested parties” are
not allowed to vote, as explained later herein.

Interested parties not to vote

It is seen earlier that the agreement would require the
approval of the public shareholders and thus promoter shareholders would not be
eligible to vote. However, there are certain other persons who also are
debarred from voting. These are “interested persons involved in the
transaction”. This term has been defined as “any person holding voting rights
in the listed entity and who is in any manner, whether directly or indirectly,
interested in an agreement or proposed agreement”.

Thus, it is not merely the parties to the agreement but
persons even otherwise interested in such agreement would be debarred from
voting.

Agreements entered into preceding three years

The new provisions also cover agreements entered into
preceding three years. For this purpose, such agreements are categorized into
those that are subsisting and those that have expired.

If such an agreement has expired, then it shall be disclosed
to the stock exchanges for public dissemination.

If such an agreement is subsisting then the following needs
to be done:-

(i)  It shall be disclosed to the stock exchanges
for public dissemination.

(ii) It
shall be placed before the forthcoming Board meeting for approval.

(iii) If the
Board approves, it shall be placed before the forthcoming general meeting for
approval by the public shareholders. 

Consequences of non-compliance

SEBI has wide powers to take action in case there is
non-compliance. There can be penalties, debarment, disgorgement, prosecution,
etc.

A critique

The concerns as regards such agreements are obvious – the
conflict of interest that it creates that may place self-interest over company
interest and even a special relation with certain shareholders over relation
with all shareholders generally. On other hand, considering that the profit
that is shared arises from sale of shares and not from the company or paid by
it or even the shareholders, it seems harsh that such agreements are so restricted.
Arguably, a disclosure ought to be enough. Of course, if such agreements are
entered into by Independent Directors, then the concerns may be justified.

Comparison with approval for related party transactions

The SEBI LODR Regulations also require approval under certain
circumstances of related party transactions by the shareholders. For such
approval too, there is restriction on voting by persons who have interest or
concern in the transactions. It is worth contrasting the requirements of shareholder
approval in case of related party transactions with such profit sharing
agreements.

As seen above, in case of such agreements, (i) resolution is
placed before public shareholders only (ii) approval is by way of an ordinary
resolution and (iii) persons interested in such agreements are also debarred
from voting.

In case of specified related party transactions, (i)
resolution is placed before all shareholders and not just public shareholders
(ii) approval is by way of special resolution (iii) all related parties are
debarred from voting.

Conclusion

The requirements will introduce a level of
transparency in dealings by Promoters and other persons connected with the
Company. The public shareholders and even the Board of Directors generally will
have a say in such matters and can veto it. Considering the retrospective
applicability, there are likely to be many such arrangements that would not
only require public disclosure but in case of subsisting agreements would
require the two level approval.

Deficient Stamp Duty – Cause for Imprisonment?

Introduction

Stamp Duty is the 2nd largest
source of revenue for the Maharashtra Government. The fact that the Government
is becoming very vigilant to check stamp duty evasion is a good move so as to
ensure that there is no revenue leakage. However, having said that, does every
case of deficient stamp duty justify an imprisonment on the ground that there
was a fraudulent act or a forgery or a case of corruption between the assessee
and the Sub-Registrar? Shooting from the hip and arresting people at a drop of
the hat is something which should be avoided by the authorities at all costs!
There exist enough safeguards in all revenue statutes to tackle cases of tax
evasion. Let us consider one such case which travelled all the way up to the
Supreme Court – State of Maharashtra vs. Ravindra Babulal Jain, SLP (Cr.)
No. 1881/2016.

Facts of the case

Ravindra Jain and others,
respondents in the case, purchased a piece of land admeasuring 8 acres 4
gunthas situated at Aurangabad by way of a public auction and by following a
tender process. The consideration paid by them of Rs. 3.60 crore was the
highest of several bidders. Since the property fell within the green zone, the
price paid by them was optimum. They got a sale deed registered in respect of
the land by showing a market value of the said property as Rs.3,500/- per
square meter at a time when the market value of the said property was
Rs.4,100/- per square meter. Based on this fact, the Anti Corruption Bureau,
acting on a private complaint, lodged a case against them as well as the
concerned Sub-Registrar alleging that all of them in connivance caused a
revenue loss to the tune of Rs.12,76,000/- to the State Government. It was also
alleged that they completed the aforesaid transaction by preparing false
documents, false records and fraudulently and dishonestly used the said records
as genuine ones. The cases were registered under the Indian Penal Code read
with section13(2) of the Prevention of Corruption Act as well as sections 59
and 62 of the Maharashtra Stamps Act, 1958. Accordingly, all the accused in
this case as well as the Sub-registrar and his assistant were arrested and
later released on bail. Subsequently, the accused moved the Bombay High Court
for quashing the FIR lodged against them by filing Cri. Appln. No.
4614/2012. 

Allegations against the Accused

The Prosecution argued before the
Bombay High Court that the accused purchased the land for a consideration of
Rs. 3.60 crore. While presenting the sale deed for its registration in December
2008, they did not disclose the true market value of the aforesaid land which,
according to the prosecution, was Rs.4100/- per square meter as per the Ready
Reckoner rates declared by the Government in the year 2008. It was alleged that
the applicants showed the market value of the said property as Rs.3,500/- per
square meter which was the Ready Reckoner rate of the earlier year, i.e., of
2007.

According to the Prosecution, as
per Ready Reckoner rates of the year 2008, the market value of the subject
property was Rs.7.05 crore and the stamp duty payable on the same was Rs.35.26
lakh. The accused, declared the market value of the subject property as Rs.4.50
crore based on the Ready Reckoner rates of 2007 and accordingly paid stamp duty
of Rs.22.50 lakh only. Hence, it was alleged that the purchasers of the said
land paid less stamp duty to the extent of Rs.12.76 lakh and caused a revenue
loss to the Government to that extent.It was also alleged that while
registering the subject instrument, the accused used false and forged documents
as genuine one and conniving with the then in charge Assistant Sub Registrar,
cheated the Government by causing loss of Rs.12.76 lakh. It was further alleged
that not mentioning the zone number within which the property fell clearly
indicated the malafide intention of cheating the Revenue. Consequently, the
Prosecution invoked various provisions of the Indian Penal Code, 1860,
viz, section 119 (Public Servant concealing design to commit offence which
it is duty to prevent), section167 (Public Servant framing an incorrect
document with an intent to cause injury), section 418 (Cheating with
knowledge that wrongful loss may ensue to person whose interest offender is
bound to protect), section  468
(Forgery for purposes of Cheating), section 471 (Using as genuine a
forged document); section 13(2) of the Prevention of Corruption Act,
1988 (criminal misconduct by public servant) as well as section 59 (Penalty
for executing instrument not duly stamped) and section 62 (Penalty for
failure to set forth facts affecting duty in the instrument) of the Maharashtra
Stamp Act, 1958.

High Court’s Verdict

The Bombay High Court considered
the facts of the case. At the outset it noted that section 119 and section 167
of the Indian Penal Code (IPC), as well as section 13(2) of the
Prevention of Corruption Act can only be attracted against public servants. The
accused in the present case were private individuals (separate proceedings were
launched against the sub-registrar) and hence, these sections automatically
failed. Thus, the Court was only concerned whether a fit case against the
accused under sections 418, 471 and 468 of the Indian Penal Code survived?

It held that section 418 of the
IPC dealt with Cheating with knowledge that wrongful loss may ensue to person
whose interest offender is bound to protectand no such case was apparent from
the material on record. Hence, even that section did not survive.

It next considered the offences of
section 468 (Forgery for purposes of Cheating) and section 471 (Using as
genuine a forged document). In this respect, it observed that the Prosecution
had made the following specific accusations:

(i)   The applicants submitted the
in-put form which was not correctly filled.

(ii)  The applicants intentionally
did not mention the zone number within which the subject property was situated.

(iii) The ready reckoner rate and
zone number were not mentioned at the top of the document of sale deed.

(iv) The market value of the
subject property was deliberately shown less.

(v) The market value of the
property was fraudulently assessed as per the ready reckonerrates prevailing in
2007 when the same ought to have been assessed at the ready reckoner rates of the
year 2008. This was done with a view to confer pecuniary advantage to the
accused which resulted in wrongful loss to the Government.

(vi) The accused and the other two
accused officials had a common intention to cheat the Government.

The High Court observed that no
offence could be made under the IPC in the present case. Even if the in-put
form was incorrectly filed or the zone number was not mentioned or the market
value was incorrect it was not a case of using a false document or one of
forgery! Merely making a false claim in a document does not make the
document a false one. Further, making a false statement cannot amount to
forgery. It gave a precise definition of a forged document as meaning only one
which purports to be signed or sealed by a person who in fact never did so.
Thus, it quashed the allegations u/ss. 468 and 471 of the IPC also.

Lastly, the High Court analysed
the correctness and the legality of the allegation that the accused
deliberately, showed the market value of the property less with a view to make
a wrongful gain for them and cause wrongful loss to the Government. It stated
that there was a specific allegation against the accused that, they with a
fraudulent and dishonest intention did not disclose the true market value of the
subject property while presenting the deed of sale of the said property for its
registration before the Sub Registrar and thereby cheated the Government by
causing revenue loss. It considered the definition of market value u/s.2(na) of
the Stamp Act Market Value to mean in relation to any properly which is the
subject matter of any instrument means the price which such property would have
fetched if sold in open market on the date of execution of such instrument or
the consideration stated in the instrument whichever is higher.

Accordingly, the High Court held
that the whole approach adopted as by the Prosecution in determining the market
value of the subject property appeared erroneous. It relied on Jawajee
Nagnatham vs. Revenue Divisional Officer, Adilabad, A.P. (1994) 4 S.C.C. 595,
which held that the Ready Reckoner prepared and maintained for the purpose of
collecting stamp duty had no statutory base or force and it could not form a
foundation to determine the market value mentioned thereunder in instrument
brought for registration.

It further considered R.
SaiBharathi vs. J. Jayalalitha, 2003 AIR S.C.W. 6349 where the Supreme
Court held that, “… the guideline value will only afford a
prima-facie base to ascertain the true or correct market value. Guideline value
is not sacrosanct, but only a factor to be taken note of if at all available in
respect of an area in which the property transferred lies. In any event, for
the purpose of Stamp Act guideline value alone is not a factor to determine the
value of the property and the authorities cannot regard the guideline valuation
as the last word on the subject of market value.”

Similar Supreme Court decisions
not considered by the Bombay High Court but which are on the same lines
include, Mohabir Singh (1996) 1 SCC 609 (SC), Chamkaur Singh, AIR 1991
P&H 26.

Hence, the High Court concluded
that the very foundation of the charges that the market value was deliberately
shown less got uprooted. It went on to state that even if the market value was
shown less, the Sub-registrar could have referred the instrument for
adjudication to the Collector u/s. 32A(2) of the Stamp Act. Since this was not
done, it was implied that the Sub-registrar accepted the value. Considering
that the said property was bought under a public auction and tender process and
by paying the highest price, the Sub-registrar may have considered all these
facts in accepting the stated value.

The Court held that prima facie
it found no fault with the Sub-registrar’s approach. It noted that in any event
the Collector had suo moto powers of revision u/s. 32A(5) of the Stamp Act.
Further, this section empowered the Collector to levy a penalty of 2% per
month. This power was already exercised by the Collector in the present case.
The Court wondered that when this action was already availed, where was the
propriety in launching criminal proceedings under the IPC and more so when
there did not seem any cogent, concrete and sufficient material against the
accused. A similar case of alleged cheating was considered by the Bombay High
Court in Sanjay Shivaji Dhapse vs. State of Maharashtra (2014 All M.R.
(Cri.) 3617). There the Division Bench of the Court held that not
affixing stamp of adequate amount would amount to irregularity and it is always
subject to verification / check by the concerned Government Officer. However,
it held that a criminal complaint could not lie against such an irregularity.

Hence, on a holistic view, the
Court in Ravindra’s case concluded that there was no offence under any section
of the IPC. The only guilt if at all which could be attributed would be that of
applying the reckoner rates of 2007 instead of 2008. However, the correct
sections to penalise that offence would be sections 59 and 62 of the Stamp Act
and not the IPC. Section 59 provides a fine and an imprisonment for any person
who with the intention to evade duty executes any instrument. Further, section
62 levies a fine for not setting forth all facts and circumstances in the
instrument which affect the chargeability of stamp duty. It was pleaded by the
accused that even those offences might not be attracted in the instant case in
light of section 59A of the Stamp Act which provided that no person could be
prosecuted u/s. 59 for an instrument which was admitted in Court. In Ravindra’s
case, the instrument was admitted before the Civil Judge. However, the Bombay
High Court did not go into merits of the case and instead only focused on the
fact that there was no offence under the IPC.

Hence, the High Court dropped all
criminal complaints in the instant case.

SLP to Supreme Court

Aggrieved by the above order, the
State preferred an SLP before the Supreme Court. The Supreme Court dismissed
the SLP by stating that it did not find any legal and valid ground for
interference with the Bombay High Court’s Order.

Conclusion

The Stamp Duty Reckoner is fast
becoming a single point linkage for several revenue statutes. The 1% VAT
composition Scheme, the Fungible FSI Premium, the deemed sales consideration
u/s. 50C and section 43CA of the Income-tax Act, the buyer’s Income from Other
Sources u/s. 56(2)  of the Income-tax
Act, etc., are all connected with the stamp duty ready reckoner
valuation. At a time like this, treating every irregularity in computing stamp
duty as a criminal offence would have drastic consequences.

India is not a Banana Republic where people can
be arrested on a mere difference in the stamp duty reckoner rate and the actual
value on which duty is paid. There could be several explanations for the
difference and even if there are none, arrest should be the last frontier which
should be resorted to. There are enough anti-abuse provisions, penalties which
the authorities can avail of under the Stamp Act. One hopes that after this
rationale decision, tax and other authorities would adopt a more genteel
approach towards taxpayers!

Impact on Mat from First Time Adoption (FTA) Of Ind As

As the book profit based on Ind AS
compliant financial statement is likely to be different from the book profit
based on existing Indian GAAP, the Central Board of Direct Taxes (CBDT)
constituted a committee in June, 2015 for suggesting the framework for
computation of minimum alternate tax (MAT) liability u/s. 115JB for Ind AS
compliant companies in the year of adoption and thereafter. The Committee
submitted first interim report on 18th March, 2016 which was placed
in public domain by the CBDT for wider public consultations. The Committee
submitted the second interim report on 5th August, 2016 which was
also placed in public domain. The comments/ suggestions received in respect of
the first and second interim report were examined by the Committee. After
taking into account all the suggestions/comments received, the Committee
submitted its final report on 22nd December, 2016. Based on the
final recommendation of the committee, the Finance Bill, 2017 prescribes
framework for levy of MAT on Ind-AS companies.

Reference Year for FTA  adjustments

Among other matters, the reference
year for FTA adjustments is clarified in the proposed final provisions. In the
first year of adoption of Ind AS, the companies would prepare Ind AS financial
statement for reporting year with a comparative financial statement for
immediately preceding year. As per Ind AS 101, a company would make all Ind AS
adjustments on the opening date of the comparative financial year. The entity
is also required to present an equity reconciliation between previous Indian
GAAP and Ind AS amounts, both on the opening date of preceding year as well as
on the closing date of the preceding year. It is proposed that for the purposes
of computation of book profits of the year of adoption and the proposed
adjustments, the amounts adjusted as of the opening date of the first year of
adoption shall be considered. For example, companies which adopt Ind AS with
effect from 1st April 2016 are required to prepare their financial
statements for the year 2016-17 as per requirements of Ind AS. Such companies
are also required to prepare an opening balance sheet as of 1st April
2015 and restate the financial statements for the comparative period 2015-16.
In such a case, the first time adoption adjustments as of 31st March
2016 shall be considered for computation of MAT liability for previous year
2016-17 (Assessment year 2017-18) and thereafter. Further, in this case, the
period of five years proposed above shall be previous years 2016-17, 2017-18,
2018-19, 2019-20 and 2020-21.

The above provisions are slightly
confusing because, the FTA adjustments are made at 1st April 2015,
whereas the final provisions allude to FTA adjustments at 31 March 2016 to be
considered for computation of MAT. Does that mean that the FTA adjustments made
at 1st April, 2015 are trued up for any changes upto the end of the
comparative year, i.e, 31st March 2016?

This article provides
clarification on how this provision needs to be interpreted.

Impact of Ind AS FTA Adjustments on MAT

The accounting policies that an
entity uses in its opening Ind AS balance sheet at the time of FTA may differ
from those that it previously used in its Indian GAAP financial statements. An
entity is required to record these adjustments directly in retained
earnings/reserves at the date of transition to Ind AS. The Committee noted that
several of these items would subsequently never be reclassified to the
statement of P&L or included in the computation of book profits.

The final provisions on MAT for
FTA adjustments in Ind AS retained earnings on the opening balance sheet date
that are subsequently never reclassified to the statement of P&L are
summarised below. It may be noted that those adjustments recorded in other
comprehensive income and which would subsequently be reclassified to the profit
and loss, shall be included in book profits in the year in which these are
reclassified to the profit and loss.

Items

The point of time it will be
included in book profits

Changes in revaluation surplus of Property, Plant or Equipment
(PPE) and Intangible assets (Ind AS 16 and Ind AS 38). An entity may use fair
value in its opening Ind AS Balance Sheet as deemed cost for an item of PPE
or an intangible asset as mentioned in paragraphs D5 and D7 of Ind AS 101.

This item is completely kept MAT neutral based on the existing
principles for computation of book profits u/s. 115JB of the Act.  It provides that in case of revaluation of
assets, any impact on account of such revaluation shall be ignored for the
purposes of computation of book profits.

 

Therefore changes in revaluation surplus will be included in
book profits at the time of realisation/ disposal/ retirement or otherwise
transfer of the asset. Consequently, depreciation shall be computed ignoring
the amount of aforesaid retained earnings adjustment.  Similarly, gain/loss on realisation/
disposal/ retirement of such assets shall be computed ignoring the aforesaid
retained earnings adjustment.

Investments in subsidiaries, 
joint ventures and associates at fair value as deemed cost

An entity may use fair value in its opening Ind AS Balance Sheet
as deemed cost for investment in a subsidiary, joint venture or associate in
its separate financial statements as mentioned in paragraph D15 of Ind AS
101. In such cases retained earnings adjustment shall be included in the book
profit at the time of realisation of such investment.

 

Therefore this item is also completely kept MAT neutral from the
perspective of existing treatment.

Cumulative translation differences

An entity may elect a choice whereby the cumulative translation
differences for all foreign operations are deemed to be zero at the date of
transition to Ind AS. Further, the gain or loss on a subsequent disposal of
any foreign operation shall exclude translation differences that arose before
the date of transition to Ind AS and shall include only the translation
differences after the date of transition.

 

In such cases, to ensure that such Cumulative translation
differences on the date of transition which have been transferred to retained
earnings, are taken into account, these shall be included in the book profits
at the time of disposal of foreign operations as mentioned in paragraph 48 of
Ind AS 21.

 

Therefore this item is also completely kept MAT neutral from the
perspective of existing treatment.

Any other item such as remeasurements of defined benefit plans,
decommissioning liability, asset retirement obligations, foreign exchange
capitalisation/ decapitalization, borrowing costs adjustments, etc

To be included in book
profits equally over a period of five years starting from the year of first
time adoption of Ind AS.

 

Section 115JB of the Act
already provides for adjustments on account of deferred tax and its
provision. Any deferred tax adjustments recorded in Reserves and Surplus on
account of transition to Ind AS shall also be ignored.

Examples clarifying how the MAT
adjustments will be made

The Company is in Phase 1. It’s
transition date is April 1, 2015. The year of Ind AS adoption is financial year
2016-17 and the comparative period is financial year 2015-16. On the transition
date the company makes the following adjustments in the opening retained
earnings.

1.  The Company applies the fair
value as deemed cost exemption and revalues the fixed assets from Rs 100
million to Rs. 150 million. On a go forward basis the Company will apply the
cost measurements basis for accounting purposes and the opening cost of fixed
assets will be Rs.150 million under Ind AS.

2.  The Company has investment in two
subsidiaries, whose cost at  April 1,
2015 is Rs. 60 million (Subsidiary 1) and 70 million (Subsidiary 2). On the
transition date the Company records the investments at fair value, Rs. 80
million and Rs. 85 million, respectively, which is the new deemed cost. On a go
forward basis, the investments will be recorded at the deemed cost. During the
financial year, 2015-16, the Company sells Subsidiary 1 at Rs. 82 million.

3.  The Company has investments in
equity mutual funds. Under Ind AS, investments in equity mutual funds are
marked to market and the gains/losses are recognized in P&L. Under Indian
GAAP, the book value of investments in the mutual funds is Rs. 215 million. The
fair value at transition date (1st April, 2015) is Rs. 220 million
and at the end of comparative period (31st March 2016) is Rs 225
million.

4.  The fair value of the above
equity mutual fund at end of 31st March 17 increased by Rs. 7
million and at end of 31st March 18 decreased by Rs. 3 million.

Solution

1.  The fair value uplift of fixed
assets of Rs. 50 million will be completely MAT neutral. For MAT purposes, the
same will be ignored for computing future book depreciation, as well as
gains/losses on sale or final disposal of the fixed assets.

2.  With respect to Subsidiary 2, there
is a fair value uplift of Rs. 15 million. The adjustment to retained earnings
is completely MAT neutral vis-à-vis existing provisions. For the purpose
of MAT, retained earnings adjustment of Rs. 15 million shall be included in the
book profit at the time of realisation of such investment.

3.  With respect to Subsidiary 1,
there is a fair value uplift of Rs. 20 million. However, it is sold in the
comparative period. For the purpose of MAT, retained earnings adjustment of Rs.
20 million as well as fair value uplift of Rs. 2 million in the comparative
period are completely ignored, since the same has already been realised in the
comparative period, on which MAT was applied under Indian GAAP.

4.  The fair value uplift on the
mutual fund of Rs. 5 million is to be included in the book profits for purposes
of determining MAT over the next five years. However, firstly this needs to be
trued up at 31st March ’16. The trued up uplift is Rs. 10 million. For the next five years, Rs. 10 million
would be equally spread, for determining book profits for MAT, in accordance
with the Table below.

           

Previous year

Assessment year

Amount to be added to book profits

 

 

Rs (million)

2016-17

2017-18

2

2017-18

2018-19

2

2018-19

2019-20

2

2019-20

2020-21

2

2020-21

2021-22

2

 5.  The upward fair
valuation in the mutual fund of Rs. 7 million for the year 16-17, will be
included in the Ind AS book profits and MAT profits as well. The downward fair
valuation of Rs. 3 million will be included as loss in the Ind AS book profits.
However, in accordance with the requirements of 115 JB, the same will be added
back to the Ind AS book profits, for purposes of calculating MAT book profits.
This results in a double whammy for companies.

23. TS-34-ITAT-2017(DEL) GE Energy Parts Inc. vs. ADIT A.Y.: 2001-02, Date of Order: 27th January, 2017

Article 5 and 7 of India USA DTAA – LO of Taxpayer from
where core sales activities of the taxpayer as well as other foreign group
entities are carried on by the expatriates (employed by some of the foreign
group entities) constitute a fixed place PE in India for the Taxpayer as well
as other group entities. An agent who works for more than one entity related to
each other cannot be treated as independent. Such agent who carries on core
sales activities in India constitutes Dependent Agency Permanent Establishment
(DAPE) in India – profit attribution has to consider all the functions performed
and risk taken by the PE

Facts

The Taxpayer was a USA company and tax resident of USA. The
Taxpayer was part of a group engaged in the business of sale of equipment
relating to oil and gas, energy, transportation and aviation business to
customers in India.

Taxpayer had set up a liaison office (LO) in India with the
approval of Reserve Bank of India (RBI), to carry out liaison activities in
India. Taxpayer entered into a service agreement with one of its Indian
affiliate in terms of which the Indian affiliate was required to act as a
communication link with regulatory authorities, provide information of customer
needs, and trends relating to group’s products in India, etc. A survey
under the Act was conducted at the premises of the LO followed by further post
survey enquiry. Following evidences were examined by the Assessing Officer
(AO). 

–   MOU signed with the customers

–   E-mail chains between the employees of
various group entities

–   Commercial proposals to customers and
purchase orders

–  Visa of expatriates

–   Linkedin profiles of personnel in India

–  Letter of awarding of contracts

–   Details of employees working in the liaison
office – like name, job description, self-appraisal report, employment letter

–  Lease deed of liaison office

–  Bank statements

–  Letters filed to RBI

–   Lease agreement in respect of residence of
expatriates

–   Power of attorney granted to expatriates for
issue of cheques

–   Statutory audit report

–   Attendance sheet of employees working in the
LO

Based on the
evidences, following facts were noted

– Various expatriates of foreign group entities
were working in India in leadership roles along with support by team of persons
employed by other group entities (ICo)

–  The expatriates as well as the employees of
ICo (group personnel) undertook various sales and marketing function including
price negotiation, supervision, administration and after sales activities of
the overall lines of businesses of the group irrespective of any specific
entity in India. These activities were carried out from the LO in India.

–   Group personnel managed the business of
foreign group entities, secured orders and did everything possible that could
be done qua the Indian operations of the overseas group in India.

–  Group personnel were fully involved in negotiating
the deal with the customers in India and were not merely acting as
communication channel

•    They made direct offers and entertained
requests of the customers for revision of the offers.

•   They were empowered to change/finalise the
terms and conditions of the customer contracts and hence decision making in
relation to the customer contracts was also done in India.

•    They were in full command of the sales
activities in India and did not tolerate the interference of the overseas group
in deciding the terms to be agreed with the customers or for modifying customer
contracts.

•    Entire correspondence with customers was
done in India by expatriates.

•    They advised overseas group about the manner
in which a proposal is to be sent to customer and this indicated that they
acted as a sales team in India.

–  Specific rooms/chambers in the LO were
allotted to the expatriates at the premises of the LO. Their computer, laptops
and business related documents were all stored in such allotted rooms.

–   Further the group personnel also occupied the
premises of the LO which was evident from the attendance sheet maintained for
people working at the LO premises.

AO contended that in terms of Article 5 of India-USA DTAA, a
sales outlet used for receiving or soliciting orders also constitutes a PE.
Thus the LO from where the sale related activities were carried out and which
was at the disposal of the expatriates resulted in a fixed place PE in India
for the Taxpayer.

Moreover, group personnel, who habitually concluded contracts
and secured orders in India wholly or almost wholly for the overseas group as
well as participated in the price negotiations.

Furthermore, the expatriates and employee also created
Dependent Agency Permanent Establishment (DAPE) in India. Consequently, profits
of Taxpayer making sales in India are liable to be taxed as business income in
India as per Article 5 and 7 of the India-USA DTAA .

Taxpayer argued that the sale consideration in relation to
sale of equipment was not taxable in India since the title in respect of these
equipment was transferred outside India as well as payment was also received
outside India. Moreover, the activities in India were limited to LO activities
as approved by RBI and this is evident by the fact that the RBI approval was
not revoked. Nonetheless, the activities carried out in India were of
preparatory or auxiliary character.

Held

ITAT while upholding the AO’s contention provided the
following justification:

On Fixed place PE

–   Core sales activities of finding the
customers and finalizing the deals with customers including the pre-sale and
post sales activities were done by the expatriates and employees in India. Such
activities being the core activities does not qualify as P&A.

–  The expatriates were constantly using the
premises of the LO, specific chambers/rooms were allotted to them in the LO
premise with their name plates affixed. Though the expatriates were on the
payroll of foreign group entity, they constantly occupied the premises of the
LO and carried out the activities on behalf foreign group entities.

–   Further the employees of ICo also occupied
the premises of LO and worked under the control and supervision of the
expatriates, who in turn worked for the foreign group entities. Evidences found
during the course of survey like attendance sheet maintained at the LO premises
also supported the fact that the premise was used by expatriates and employees
of ICo.

–   Marketing and sales are income generating
activities in themselves, since the core activities in relation to sales and
marketing is carried on in India through the LO, it constitutes a fixed place
PE. 

On Agency PE

–   In the facts of the case expatriates were
working for the foreign group entities who are related to one another. The mere
fact that expatriates work for more than one entity does not make them
independent. The related entities are to be treated as a single unit.

–   Article 5 of the DTAA does not require
negotiating ‘all elements and details of a contract for constitution of a PE it
only requires habitual exercises of an authority to conclude contracts so long
as agent’s activities are not in the nature of P&A

–   Since the activities of the expatriates are
not in the nature of P&A, they clearly have an authority to conclude
contract and hence constitute DAPE.

On attribution of income

–  As espoused by SC in DIT vs. Morgan
Stanley [292 ITR 416], there is no need of any further attribution to PE if
it has been remunerated at ALP.

However, if TP analysis does not adequately
reflect functions performed and risks assumed, there would be a need to
attribute further profits to the PE for those functions/risks which have not
been considered.

– In
the facts of the case, the survey revealed that the activities carried on by
group personnel was not merely liaison activities but extended to commercial
activities however the ALP was determined only on basis the liaison and not the
commercial activities undertaken in India. Since the commercial activities
resulted in a PE in India and such services have not been remunerated at all, there will be
need for further profit attribution to the PE.

22. [2017] 78 taxmann.com 123 (Mumbai – Trib.) Goldberg Finance (P.) Ltd. vs. ACIT ITA No. : 7496 (Mum) of 2013 A.Y.: 2009-10 Date of Order: 19th January, 2017

Section 115JB – Clause (iic) inserted in Explanation 1 to
section 115JB by the Finance Act, 2015 is remedial and curative in nature and
is to be reckoned as retrospective. It was never the purpose of the Act to tax
any income or receipts which is otherwise not taxable under the Act.

FACTS 

During the previous year relevant to AY 2009-10 the assessee
company was a member of two AOPs viz. Cosmos Estate and Cosmos Properties. The
assessee received share of income amounting to Rs. 54,58,717 from Cosmos
Properties. This amount was credited to Profit & Loss Account. Since the
amount was credited to P & L Account, the Assessing Officer (AO) charged it
to tax u/s. 115JB of the Act. 

Aggrieved, the assessee preferred an appeal to CIT(A) who
confirmed the action of the AO by relying on the order of the Tribunal, for
earlier year, in case of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it contended that Clause (iic) inserted by the Finance Act, 2015 w.e.f.
1.4.2016 provides that the amount of income being share of the assessee in the
income of the AOP on which no income tax is payable in accordance with the
provisions of section 85 and any such amount is credited to P&L account,
then same shall be reduced while computing the book profit is curative in
nature and should be applied retrospectively. It was also contended that this
amendment is subsequent to the decision of the Tribunal, in the case of
assessee, for earlier year.

HELD 

The intention of the legislature which can be gauged by the
Explanatory notes to the amending Act, was to provide similar remedy which was
applicable to the partners whose share income from the profit of the firm was
not liable to MAT. If an amendment in law has been brought by the legislature
in the statute which is curative in nature, to avoid unintended consequences
and to provide similar benefit to other class of assessee, then it has to be
treated as retrospective in nature even though it has not been stated
specifically by the amending Act. Clause (iic) inserted in Explanation 1 to
section 115JB by the Finance Act, 2015 is remedial and curative in nature as it
was brought in the statute to provide similar benefit to the member of the AOP
which was earlier applicable to the partner of the firm, therefore, it is to be
reckoned as retrospective. 

The legislature by this amendment has thus removed this
imparity between two classes of assessees so that mischief or prejudice caused
to other class of assessees should be removed. The mischief which has been
sought to be remedied is that the share income of the member of the AOP which
was not taxable in terms of section 86 was getting taxed under MAT while
computing the book profit. This was also never the purpose of section 115JB to
tax any income or receipts which is otherwise not taxable under the Act. Any
remedy brought by an amendment to remove the disparity and curb the mischief
has to be reckoned as curative in nature and hence, is to be held
retrospectively.

This ground of appeal
filed by the assessee was allowed by the Tribunal.

21. [2017] 78 taxmann.com 152 (Kolkata – Trib.) Twenty First Century Securities Ltd. vs. ITO ITA Nos. 464 & 465 (Kol) of 2014 A.Ys.: 2008-09 & 2009-10Date of Order: 3rd February, 2017

Sections 197, 201(1A) – Certificate u/s. 197 is with
reference to the person to whom the income is paid and is not with reference to
any sum as may be specified in the certificate. Levy of interest u/s. 201(1A)
cannot be sustained on the amount of tax not deducted on difference between the
amount paid to the assessee and the amount stated in the certificate.

FACTS 

The assessee company paid interest to two persons who had
obtained certificate u/s.197 of the Act authorizing the assessee to deduct tax
at lower rate. The amount of interest paid by the assessee to these two persons
exceeded the amount mentioned in the certificate issued u/s. 197. The assessee,
however, deducted tax at a lower rate on the entire amount paid. The Assessing
Officer (AO) held that the assessee ought to have deducted tax at normal rate
on the amount of interest in excess of what was stated in the certificate
issued u/s. 197. The AO levied interest u/s. 201(1A) on amount of tax short
deducted.

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 

The Tribunal after going through the provisions of section
197, section 201(1) & 201(1A) and Rule 28AA held that the statutory
provision of deduction of tax at source at lower rate is “person specific” and
cannot be extended to the amounts specified by the recipient of the payment
while making an application for grant of certificate u/s. 197 of the Act in
Form No. 13. The Tribunal observed that the AO has annexed the details in
Schedule II of Form No. 13 to the certificate issued u/s. 197 of the Act. It
held that by doing so, the AO cannot treat the assessee as a person who has not
deducted tax at source to the extent of payments made by the assessee over and
above the sum specified in the certificate u/s. 197 of the Act. It concurred
with the arguments on behalf of the assessee that the certificate u/s. 197 of
the Act is with reference to the person to whom the income is paid and not with
reference to any sum as may be specified in the certificate. It held that,
therefore, the assessee cannot be treated as a person who has not deducted tax
at source on the difference between the amounts specified in the certificate
issued under s.197 of the Act and the amounts actually paid by the assessee.
Consequently, the levy of interest u/s. 201(1A) of the Act was held to be
unsustainable and directed to be deleted.

The appeals filed by
the assessee were allowed.

18. Transfer Pricing – Once comparable companies have been found functionally non comparable – then the same should be excluded – the same cannot be include merely on the basis of assessee’s inclusion in the transfer pricing study report – There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee

Commissioner of Income Tax vs. M/s. Tata Power Solar
Systems Ltd. [ Income tax Appeal no 1120 of 2014 dt : 16/12/2016 (Bombay High
Court)].

[M/s. Tata Power Solar Systems Ltd v Dy. CIT. [ ITA NO.
6657/MUM/2012;  Bench : K ; dated
15/01/2014 ; A Y: 2008-09. Mum.  ITAT ]

The Assessee is engaged in design, development and
manufacture and sale of Solar Modules and Systems. During the year, the
Assessee had reported International Transaction with its Associated Enterprises
(AE). In the Transfer Pricing Study submitted by the Assessee to the Revenue,
it had included M/s. Indowind Energy Ltd. and B. F. Utilities Ltd. in the list
of two comparables for the purpose of arriving at Arms Length price (ALP) in
respect of its transactions entered into with its AE. However, before the Transfer
Pricing Officer (TPO) itself, the Assessee sought to withdraw the two companies
from the list of comparables. This, inter alia on the ground of
functional differences. However, the same was not permitted by the TPO and was
taken into consideration while determining the ALP. This resulted in a draft
Assessment Order based on ALP arrived at on a comparability study inclusive
of  the two companies.  The Draft Resolution Panel (DRP) on an
application made to it by the Assessee did not disturb the said inclusion  among the list of comparables to determine
the ALP as reflected in the draft Assessment Order. This was essentially on the
ground that the Assessee had itself relied upon the two companies as
comparables. Therefore, it was not permissible for the Assessee now to withdraw
the two companies from comparability analysis. 

The Tribunal allowed the Assessee’s appeal. The Tribunal
found that the ultimate aim of the transfer pricing provisions is to determine
the appropriate ALP, which can be done only by bench marking with the proper
comparables based on FAR analysis and under the prescribed methods. If in the
course of the proceedings, it is found that certain comparables do not stand
the test of functional analysis or for some reason, then the same should be
excluded and  they should not continue to
be included simply because the assessee had included the same initially. If the
cogent reasons have been given by the assessee for excluding the same, the same
should be considered. The initial onus or duty is cast upon the assessee to
carry out the selection of proper comparables based on FAR analysis and by
adopting suitable transfer pricing method and then analyse its transaction to
show the correct arm’s length result. Thereafter, it is axiomatic that the
taxing authorities / TPO, should scrutinise the assessee’s report on arm’s
length result and the entire process of arriving at the ALP, whether they are
based on transfer pricing principles and statutory provisions or not. If he
himself finds some irregularity or mistake in any of the process or the steps
undertaken, then he is bound to correct in accordance with the settled
principles and law.

If the assessee points out some mistake or any irregularity
in the arm’s length result, then it is incumbent upon the TPO to examine and
consider the same and if the assessee’s contentions are found to be correct or
tenable, then he has to accept the same. There cannot be estoppel against
correct procedure of law and principles solely on account of acquiescence or mistake
of the assessee. The TPO is required under law to analyze every comparableand
then only determine the correct ALP based on proper comparability analysis.
Thus, there is no  merit in the
contention of the Revenue that simply because the assessee has included these
two companies then the assessee is debarred from objecting to the same, if
there are strong and cogent reasons.

It was observed  that
the  two companies Indo Wind Energy Ltd.
and B.F. Utilities Ltd. are engaged in the business of generation of Wind
Energy Ltd., whereas the assessee is Tata Power Solar Systems Ltd. engaged in
the business of manufacture and sale of solar cells, photo voltaic modules and
systems which are used for solar energy. The assessee is not into generation of
energy. These two functions are 
different. The assessee before the TPO / DRP has placed the key
difference between the functions carried out by the assessee and the functions
required for generation of wind energy. These have not been rebutted either by
the TPO or by the DRP but have been rejected mainly on the ground that the
assessee has included the same initially in its transfer pricing study report.
It is also seen from the record that in the subsequent year, the TPO has
specifically issued a show cause notice for inclusion of these two companies,
however, on the assessee’s objection based on functional difference, the TPO
has excluded these two companies.

Thus, accordingly, Indo Wind Energy Ltd. and B.F. Utilities
Ltd., were to be excluded from the list of final comparables.

Being aggrieved, the Revenue carried the issue in appeal to
the High Court. The High Court observed that the Transfer Pricing Mechanism
requires comparability analysis to be done between like companies and
controlled and uncontrolled transactions.

This comparison has to be done between like
companies and requires carrying out of FAR analysis to find the same. Moreover,
the Assessee’s submission in arriving at the ALP is not final. It is for the
TPO to examine and find out the companies listed as comparables which are, in
fact comparable. The impugned order has on FAR analysis found that the two
companies are not comparable. They are in a different area i.e. wind energy
while the Assessee is in the field of solar energy. The issue raised herein is
concluded against the Revenue and in favour of the Assessee by the decision of
this Court in CIT vs. Tara Jewellers Pvt. Ltd., 381 ITR 404. In
view of the above, Appeal of the revenue was 
dismissed.

17. TDS – The liability to deduct tax at source arose – when the amount payable stood credited in the books of Assessee – Even in respect of services received earlier : There can be no estoppel against the statute

Commissioner of Income Tax vs. Underwater Services Company
(Dissolved). [ Income tax Appeal no 1240 of 2014, dt : 20/12/2016 (Bombay High
Court)].

[Underwater Services Company (Dissolved). vs. Assistance
Commissioner of Income Tax,. [ITA No. 
5828/MUM/2012;  Bench : F ; dated
30/07/2012 ;  Mum.  ITAT ]

The Assessee was engaged in providing underwater services,
such as diving, towing, salvaging, underwater marine repair and maintenance.
For the aforesaid purpose, it chartered two vessels belonging to M/s.Samsung
Maritime Ltd. (a sister concern) and claimed charter hire expenses for the year
at Rs.441.37 lakh. The same was liable for deduction of tax at source u/s.
194-I of the Act. The recipient/payee of the hire charges i.e. M/s. Samsung
Maritime Ltd. had applied to the department for waiver of tax deducted at
source u/s. 197 of the Act. The Income Tax Officer (TDS) by a communication
dated 7th May, 2008 granted a certificate u/s. 197(1) of the Act and
directed the Assessee that charter hire paid or credited to M/s.Samsung
Maritime Ltd. would be after deduction of tax at the rate of 2.02% (net) instead of 10%.

During the assessment proceedings, the assessee  urgedthat the amounts on account of charter
hire charges were paid and also credited to the account of M/s.Samsung Maritime
Ltd. after 7th May, 2008. Thus the deduction of tax was at the
concessional rate of 2.02%. Without prejudice it was pointed that the amount
which could be disallowed at the highest was Rs.86.40 lakh on account of
services received prior to 7th May, 2008. The AO passed the order
and disallowed the amount of Rs.86.40 lakh which according to him was an amount
payable prior to date of certificate dated 7th May, 2008. This on
the ground that the certificate was operative only from the date of issue i.e.
7th May, 2008 and coupled with his undertaking that the assessee has
itself offered the disallowance of Rs.86.40 lakh. 

Being aggrieved, the Assessee had filed an appeal before the
CIT (A). The CIT (A) dismissed the assessee’s appeal. It upheld the
disallowance of Rs.86.46 lakhs for non deduction of tax at the rate of 10% as
done by the AO.

Being aggrieved, the Assessee carried the issue in appeal to
the Tribunal. The Tribunal held that amount payable for month of April 2008 in
respect of two vessels taken on hire from M/s. Samsung Maritime Ltd. stood
credited in the books of Assessee only after 7th May, 2008 and
admittedly paid thereafter. In the above view the Tribunal  held that the liability to deduct tax at
source only arose post 7th May, 2008 even in respect of services
received earlier. Consequently, the tax deducted on such credit/payment would
be on lower rate of 2.02% (net) as allowed by the certificate u/s. 197(1) of
the Act. The Tribunal also relied upon its earlier order for the Assessment
Year 2007-08 which accepted the Assessee’s contention, that is, as date of
credit and date of payment were as in the present facts both after the issuance
of certificate u/s. 197(1) of the Act the tax will be deducted at lower rate.

The grievance of the Revenue before High Court is two fold,
one that the Assessee has itself accepted the liability to deduct tax at the
rate of 10% prior to 7th May, 2008 and offered to disallow
expenditure of Rs.86.40 lakh. Therefore, it is not now open to the Assessee to
urge before the Appellate Authorities that the amount of Rs.86.40 lakh cannot
be disallowed as now contended. Secondly, it is submitted that entries are made
in the books by the Assessee only to circumvent the provisions of Act coupled
with the fact that the payee M/s. Samsung Maritime Ltd. and Assessee belong to
same group. Therefore, the Assessee’s claim made before and allowed by the
Tribunal is incorrect. 

The High Court noted that the Tribunal  on examination of the ledger account of the
Assessee noted that the date of credit for the charter hire charges payable to
its sister company M/s.Samsung Maritime Ltd. was credited only after 7th
May, 2008. The payment was also made by the Assessee after crediting of the
amount in its books of account. Moreover, the ledger account was produced
before the Tribunal as the same was produced even before the AO. Moreover,
there can be no estoppel against the statute. Therefore, even if it is
assumed that the Assessee had suggested that Rs.86.40 lakh be disallowed for
not deducting tax at 10% then the same would be contrary to the deduction of
tax to be done u/s. 197 of the Act. The Authorities under the Act were obliged
to apply the law to the facts existing and grant relief to the Assessee
wherever available. In view of above, the view taken by the Tribunal in the
impugned order on the available facts is a possible view. Appeal of revenue was
dismissed.

16. Business set up – when the business is established and is ready to commence the business – there may be an interval between the setting up of the business and the commencement – Section 3 of the Act

CIT vs. M/s. Conde Nast (India) Pvt. Ltd. [ Income tax
Appeal no 1083 of 2014, dt : 16/12/2016 (Bombay High Court)].

[M/s. Conde Nast (India) Pvt. Ltd. vs. DCIT. [ITA
No.1819/MUM/2013; Bench: SMC; dated: 04/09/2013;  A Y: 2007- 2008. MUM.  ITAT ]

The assessee was engaged in the business of printing,
publishing, circulating, marketing and distributing publications. During the
assessment proceeding, the AO noticed that the assessee had claimed that its
business had been set up w.e.f. 20-11-2006 and expenditure incurred after
20-11-2006 had been claimed as revenue expenditure at Rs.3,56,33,431/-.The
assessee was asked to substantiate its claim with necessary evidence. After
considering various details, the AO found that the business of the assessee has
not been set up as the assessee has appointed only executives along with
editors. No issue of the magazine is published during the year. The AO found
that the magazines have been published in FY: 2007-08 relating to AY: 2008-09.
Accordingly, he held that the business was not set up in the year under
consideration. Hence, he disallowed the claim of expenditure.

The assessee preferred appeal before the CIT(A). It was
submitted that the editor, who is at the helm of affairs in the editorial
department in publishing organisation, decides what shall and what shall not go
into his publication on the basis of what he conceives to be the publications
mission and philosophy. Thereafter the functions of the editorial as well as
the activities taken by the assessee during the year under consideration were
filed and explained  before him. The Ld
CIT(A) noted that the first issue of the magazine, namely, VOGUE, published by
the assessee, came on October, 2007 and accordingly the business was set up
only on October, 2007 and not during the year under consideration. Accordingly,
the  CIT(A) confirmed the order of the
AO.

The Tribunal observed that there is a well-marked distinction
between a business being set up and the commencement of the business. It is the
setting up of the business that has to be considered and not the commencement.
It is only when the business is set up that the previous year for that business
commences and expenses incurred prior to the setting up are not a permissible
deduction. It has further observed  that
when the business is established and is ready to commence the business, then it
can be said that the business is set up. Before the assessee is ready to
commence business, the business is not set up. There may be an interval between
the setting up of the business and the commencement thereof and all expenses
incurred during the interval would be permissible deductions.

The Tribunal after going through the chart and  various details along with supporting
evidence, observed that  it is amply
proved that major activity has started during the year under consideration.
Some orders have been placed, photographer is engaged, some technical staff
were also employed, business premises has been taken from where all these
activities are conducted. Even trial production was also started. From all
these facts, it is seen that the assessee has started its activity for
publishing its magazines. The question is not generating of revenue, the
question comes for consideration as to whether any activity has been started or
not. The Tribunal relied on the decision 
of HSBC Securities India Holdings Pvt. Ltd. dated 20th
November, 2001 (ITA No.3181/M/1999). The Tribunal held  that the business of the assessee was set up,
therefore, the expenditure incurred by the assessee are allowable. However,
since the nature of expenditure was not examined therefore, to this limited
purpose the matter was remanded back to the file of the AO to examine the
genuineness of the expenditure and then allow them as per provision of law. In the
result, appeal of the assessee was allowed.

On appeal by the revenue before the High Court
it was observed that the impugned order of the Tribunal had relied on an order
of its Coordinate Bench in HSBC Securities India Holdings Pvt. Ltd.,
decided on 20th November, 2001 (ITA No.3181/M/1999). The impugned
order finds that the test laid down by the Tribunal in HSBC Securities (India)
Holdings (P) Ltd., to determine whether or not the Assessee’s business has been
set up, were satisfied on the present facts. It was found  from the record of the High Court that the
order of the Tribunal in HSBC Securities India Holdings Pvt. Ltd., (supra)
has been accepted by the Revenue as the memo of appeal does not indicate any
challenge by the Revenue to the above order. It is also not disputed in the
memo of appeal that the order in HSBC Securities (India) Holdings (P) Ltd., (supra)
applies to the present facts. Thus, no grievance is made in respect of the
impugned order following the order of the Coordinate Bench in HSBC Securities
(India) Holdings (P) Ltd., (supra). Thus the Court held that the
question as framed did not give rise to any substantial question of law.
Accordingly, Appeal of revenue was dismissed.

54. Search and seizure- Block assessment- Sections 132 and 158BC – B P. 1990-91 to 2000-01 – Undisclosed income-corroborative evidence needed in case of statement- Finding that additions were not sustainable – Justified

CIT vs. Smt. S Jayalaxmi Ammal; 390 ITR 189 (Mad):

The assessee was a jeweler. On 29/12/1999, a search u/s. 132
of the Act, was conducted in the residential and business premises of the
assessee. Based on the materials collected during search, a notice u/s. 158BC
of the Act was issued. The assessee filed a Nil return. The Assessing Officer
completed the block assessment making the following additions (i) Rs. 31,00,000
being the value of immovable properties purchased in the name of daughter in
law of the assessee; (ii) Rs 80,000 towards excess stock of 215 gms. of gold
jewellery found in the business premises; (iii) Rs. 2,90,000 towards excess
stock of 39 kgs of silver articles; (iv) difference in cost of construction of
Rs. 83,700; (v) Rs. 3,00,000 towards inadequate drawings, and (vi) Surcharge of
Rs. 2,10,360 The Commissioner (A) substituted a figure of Rs. 5,00,000 in the
place of Rs. 31,00,000 and reduced the addition of Rs. 3,00,000 to Rs. 2,00,000
He deleted the additions of Rs 80,000 and Rs. 83,700 and confirmed the other additions.
The Tribunal held that in the absence of any material found during the course
of search operation the addition of Rs. 5,00,000 cannot be sustained as
undisclosed income. The Tribunal also upheld the deletion of Rs. 80,000 and Rs.
86,700 by the Commissioner (Appeals).

The Madras High Court dismissed the appeal filed by the
Revenue and held as under:

“i)   In case of a block assessment for deciding
any issue against the assessee, the authorities under the Income-tax Act, 1961
have to consider, whether there is any corroborative material evidence. If
there is no corroborating documentary evidence, then the statement recorded
u/s. 132(4) of the Income-tax Act, 1961 alone should not be the basis for
arriving at any adverse decision against the assessee.

ii)   On the facts and circumstances of the case, a
mere statement without any corroborative evidence, should not be treated as
conclusive evidence against the maker of the statement. The deletions of
additions by the Tribunal were justified.”

A. P. (DIR Series) Circular No. 46 [(1)/9(R)] dated February 4, 2016

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Notification No. FEMA.9(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 9/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2000.

A. P. (DIR Series) Circular No. 45 [(1)/6(R)] dated February 4, 2016

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Notification No. FEMA.6(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Export and Import of Currency) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 6/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Export and Import of Currency) Regulations, 2000.

A. P. (DIR Series) Circular No. 44 [(1)/10(R)] dated February 4, 2016

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

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

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

A. P. (DIR Series) Circular No. 43 [(1)/7(R)] dated February 4, 2016

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Notification No. FEMA 7(R)/2015-RB dated January 21, 2016 Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 7/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations, 2000.

A. P. (DIR Series) Circular No. 42 dated February 4, 2016

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Settlement of Export/Import transactions in currencies not having a direct exchange rate

This circular provides that in respect of export and import transactions where the invoicing is in a freely convertible currency and the settlement takes place in the currency of the beneficiary which does not have a direct exchange rate, banks can permit settlement of such export and import transactions (excluding those put through the ACU mechanism), subject to the following: –

a) Exporter / Importer must be a customer of the Bank.
b) Signed contract / invoice must be in a freely convertible currency.
c) The beneficiary is willing to receive the payment in the currency of beneficiary instead of the original (freely convertible) currency of the invoice / contract / Letter of Credit as full and final settlement.
d) Bank is satisfied about the bonafide of the transactions.
e) The counterparty to the exporter / importer of the bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non Cooperative Jurisdictions on which FATF has called for counter measures.

A. P. (DIR Series) Circular No. 40 dated February 1, 2016

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Foreign Direct Investment – Reporting under FDI Scheme, Mandatory filing of form AR F, FCGPR and FCTRS on e-Biz platform and discontinuation of physical filing from February 8, 2016

Presently, there is an option given to the investee entity / transferors / transferees to submit Advance Remittance Form, Form FCGPR and Form FCTRS either online or by way of physical filing.

This circular provides that on and from February 8, 2016 it will be mandatory for all concerned to submit Advance Remittance Form, Form FCGPR and Form FCTRS online through the e-Biz portal as physical filing of these forms will no longer be accepted.

Insider Trading – Impact of a Recent Decision

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Background
A recent SEBI order on insider trading is worth considering for certain reasons. It is a case concerning Promoters of a listed company and persons connected with them who have allegedly engaged in insider trading. The case is a good case study on how SEBI investigates into and determines the connections between the parties. Interestingly, for one of the persons, the fact that he was connected with another through Facebook, even if indirectly, was considered a relevant factor to establish connection between them. Further, the manner in which the pattern of investments and their funding were scrutinized, even if fairly basic, is also illuminating. Finally, the recent trend of how SEBI takes quick interim action in this regard is also noteworthy. SEBI is increasingly into passing interim orders whereby the illegal profits made, along with interest till date of order, are impounded and required to be deposited till final orders are passed. Till they deposit such amounts, their bank and demat accounts are effectively frozen.

This case is under the regulations relating to insider trading of 1992, which have since been replaced by the Regulations of 2015. However, the case has full relevance since the findings and conclusion would not have been different under the new law.

Brief summary of the case
The case concerns a software company (Palred Technologies Limited or “Palred”) that had run into financial difficulties from which it recovered and achieved some stability. Thereafter, it decided to sell its business on a slump sale basis to another party. The price of the shares of the Company was low following the period of recovery. However, the proposed restructuring would enable the Company to raise substantial cash and value. The Company had, following such a deal, decided to declare a hefty special dividend and/or also carry out a buyback of shares. The dividend itself would have resulted in the shareholders receiving an amount far higher than the then ruling market price. The price of the shares thus rose substantially.

It later came to light that insiders consisting of the Promoters and certain persons allegedly connected with them had purchased the shares of the Palred at the earlier low ruling price. While they held on to most of the shares so purchased, obviously they benefitted from the very significant appreciation in the market price.

SEBI investigated the matter, examined the direct and indirect connections between such parties and Palred and the nature of their transactions in the shares of Palred. SEBI listed the transactions of such persons and the notional profits made by them considering the appreciation in the price of the shares of the Company. It then passed an interim order impounding such notional profits with interest. SEBI also issued orders effectively freezing the bank and demat account of such parties till they deposited such amount.

In the following paragraphs, some interesting features of this Order have been discussed in detail.

Date from which unpublished price sensitive information can be said to have arisen
A core component of any case of profiting from insider trading is that there should be unpublished price sensitive information (UPSI). UPSI, simply stated, is that information which is not yet made public by the Company but which, if published, would materially affect the ruling market price of the shares of the Company. In the present case, the UPSI obviously related to (i) the slump sale of the business of the Company and (ii) proposal to distribute, thereafter, substantial special dividend/return of money through buyback.

It was noted that the first board meeting of Palred held to formally approve the slump sale of business and consider declaration of special dividend was on 10th August 2013, which was reported to the stock exchanges two days later. However, the discussions relating to the slump sale of business with the proposed buyer was initiated almost a year earlier on 5th September 2012. The Nondisclosure Agreement with the buyers was signed on 18th September 2012. Thus, SEBI considered this date of 18th September 2012 as the date on which the UPSI had come into being. As will be seen later, transactions of the parties on and from this date till the date when the UPSI was made public were held to be insider trading in violation of the law.

SEBI observed:-

“The PSI regarding the ‘slump sale of software solutions business to Kewill group’ came into existence on September 18, 2012, i.e. when the non-disclosure agreement was executed between Kewill group and PTL. The non-disclosure agreement (having a confidentiality clause) was a binding contract on both the sides. Disclosure of the agreement would certainly have an impact on the deal. Therefore, the same can be considered to be an ‘unpublished price sensitive information’ (hereinafter referred to as ‘UPSI’) which had definitely originated on September 18, 2012 and the same had remained unpublished till August 10, 2013 at 13:01 hrs., in terms of the Regulation 2(ha)(vi) of the PIT Regulations. The period of such UPSI was from September 18, 2012 to August 10, 2013.”

It is noteworthy that the price of the shares of the Company on 5th November 2012, from which date an insider was found to have acquired shares, was Rs. 10.71. The price thereafter rose to Rs. 39.20 on the day when the UPSI was made public.

Similarly, the date when the UPSI relating to declaration of special dividend/buyback was also determined and transactions from that date were considered.

Determination of parties found connected for purposes of insider trading
The connections between the parties who had traded from the time when the UPSI came into being were considered.

Mr. Palem Srikanth Reddy, the Chairman and Managing Director of Palred, was a connected person under the Regulations and the Company accepted that he, along with two other persons, were privy to the UPSI relating to slump sale. Mr. Reddy was also accepted to be privy to the UPSI relating to special dividend.

Connections with the other parties were found on various grounds. One person – Ameen Khwaja – was found to be common director/promoter with the Chairman on another company which incidentally had also provided services to the Palred. This company was also proposed to be merged with Palred. It was found that while Ameen himself did not deal in the shares of Palred during the relevant period, several of his family members did and thus such dealing was held to have carried out insider trading.

Common friends on Facebook as basis of determination of “connection”
Perhaps for the first time in my recollection, SEBI considered connections on social media on internet between the parties and in this case, the social media was Facebook. SEBI observed that, “Mr. Pirani Amyn Abdul Aziz is also found to be connected to Mr. Ameen Khwaja through mutual friends on ‘Facebook’”. While this was not the only basis for alleging connection, it is still noteworthy.

It is strange though that having “mutual friends” on Facebook is treated as a relevant factor. Facebook is a relatively open social media network and “friends” are often made (and removed) without knowing in detail the background of parties. Such “friends” are often strangers with whom there are no other connection and sometimes not even offline contact. Having common mutual friends (which is what seems to be meant from the slightly unclear sentence in the Order) makes the connection even less strong. Nevertheless, it is safe to say that SEBI would resort in the future to examine social media connections of parties in its investigation for insider trading and even other purposes. Prominent social media networks include Facebook, Linkedin, Twitter, etc.

Consideration for determining whether the dealing was insider trading
An argument is often put forth by a person alleged to have committed insider trading that his dealing was in ordinary course of business. SEBI examined the background of trading by the parties in the shares of Palred and other scrips and generally other relevant factors to determine whether the dealings were in the ordinary course of business. It was found, for example, that some of the parties had dealings in the shares of Palred either as their only trading or the main one. In some cases, the parties had opened trading accounts just prior to dealing in shares of Palred. In another case, it was found that cash deposits were made in the bank account to make payments for purchase of the shares of Palred during the relevant period. These factors were held by SEBI to be sufficiently indicative of the trading in shares of Palred being in nature of insider trading and not regular trading by the parties.

Interim order of impounding
Such orders impounding profits are of course not wholly new. But they seem to have been used in a particular way in recent times by SEBI and hence some aspects of such orders need emphasis. Such orders are interim orders, in the sense that they are made in the interim pending further investigation. More importantly, they are made not only without giving any hearing to parties but even without giving them any notice. Thus, they often come as a bolt from the blue. The parties wake up one morning to find that their bank and demat accounts are frozen and they cannot operate them. They are of course given postorder opportunity to present their case, including, if they so desire, by way of a personal hearing. The objective is that certain preventive action is taken so that parties are not forewarned and thus they do not take any steps such as diversion of funds.

Manner of determination of profits made in the interim order
The Interim Order makes a finding, which is provisional pending final order, of the amount of profits from insider trading said to have made. In this case, SEBI has determined the purchase price of the shares during the relevant period. Since most of the shares were continued to be held till the date when the UPSI was made public, the price of the shares at the end of such relevant period is noted. The notional profits were then calculated which is the difference between such closing price and the purchase price. To that, simple interest @12% per annum has been added. The total amount is thus held to be the profits form insider trading.

Order of impounding of unlawful gains from insider trading
SEBI thus made this interim order impounding the unlawful profits made along with interest. For this purpose, it froze the bank and demat accounts of the parties whereby no debits to such accounts were permitted. The parties were also ordered not to alienate any of their assets till the amount impounded was duly deposited in an escrow account.

Conclusion
Such decisions over a period have displayed not just the development of the law and the improved detection and investigation of acts of insider trading by SEBI, but also the effective measures to ensure disgorgement of unlawful profits, and also the deterrent punishment being meted out.

The End of Male Exclusivity as HUF kartas

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Introduction
Quick quiz – when you hear the word ‘karta’, signifying a manager of a Hindu Undivided Family (“HUF”) what is the first thing which comes to mind? In most cases, the answer would be that it signifies a male descendant of the joint family who is the manager of the joint family business or estate. This has been the norm for several hundreds of years, i.e., only a male relative can be a karta. This is because under the Hindu Law, only men could be coparceners of an HUF. Women could be members but not coparceners. However, an epic amendment in September 2005 to the Hindu Succession Act, 1956 (“the Act”) changed all of that. The repercussions of that amendment are being felt even today and are the subject matter of various novel legal issues.

The 2005 amendment provided that a daughter has an equal right as that of a son in an HUF. One of the questions which has arisen as a result of this amendment is that can a daughter also be a karta of an HUF? While there has been a strong opinion in favour of this view, it is only now that this issue was tested before a judicial forum and the Delhi High Court has given its favourable view. Let us analyse this interesting question and some more questions emanating from the same.

Concept of an HUF
The Act governs the law relating to intestate succession among Hindus. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew.

Traditionally speaking, an HUF was a joint family belonging to a male ancestor, e.g., a grandfather, father, etc., and consisted of male coparceners and other members. Thus, the sons and grandsons of the person who was the first head of the HUF would automatically become coparceners by virtue of being born in that family. A unique feature of an HUF is that the share of a member is fluctuating and ambulatory which increases on the death of a member and reduces on the birth of a member. A coparcener is a person who acquires an interest in the joint family property by virtue of being born in the family. Earlier, only men could be coparceners. A wife and a mother of a person also could not become a coparcener in an HUF.

The Watershed Amendment which started the Revolution
Under section 6 of the Act, on the death of a Hindu, his interest in an HUF devolves by Will or by intestate succession and not by survivorship. This is contrary to the position prior to 2005 when the interest devolved by survivorship. Thus, under survivorship, if a father died, his interest in the HUF devolved upon the other surviving HUF members. Now the position is that his interest would go either as per his Will or in cases where he has not made a Will, then as per the intestate succession pattern laid down under the Act.

To neutralise gender biases existing prior to 2005, the Central Government amended the Hindu Succession Act, 1956 by the 2005 Amendment Act which was made operative from 9th September 2005. This marked a watershed in the Hindu Law History because covenants laid down by Manusmriti where done away with. The amendment not only altered the succession pattern, but also changed the way HUFs were hitherto managed.

Section 6 of the amended Hindu Succession Act, 1956 provides that a daughter of a coparcener shall:
a) by birth become a coparcener in her own right in the same manner as the son;
b) have the same rights in the coparcenary property as she would have had if she had been a son; and
c) be subject to the same liabilities in respect of the said coparcenary property as that of a son.

Thus, the amendment, by one stroke, put all daughters at par with sons and they could now become a coparcener in their father’s HUF by virtue of being born in that family. In Ram Belas Singh vs. Uttamraj Singh, AIR 2008 Patna 8, the High Court held that the daughter of a coparcener shall by birth become a coparcener in her own right in the same manner as the son and will have the same rights in the coparcenary property as she would have if she had been a son and shall also be subject to the same liabilities in respect of the said coparcenary property as that of a son and any reference to a Hindu Mitakshara coparcener shall be deemed to include a reference to a daughter of a coparcener. It held that the Act makes it very clear that the term “Hindu Mitakshara coparcener” used in the Act now includes daughter of a coparcener, also giving her the same rights and liabilities by birth as those of the son.

In Ganduri Koteshwaramma vs. Chakiri Yanadi, (2011) 9 SCC 788, the Court held that the effect of the amendment was that the daughter of a coparcener had the same rights and liabilities in the coparcenary property as she would have been a son and this position was unambiguous and unequivocal. Thus, on and from September 9, 2005, the daughter was entitled to a share in the ancestral property and was a coparcener as if she had been a son.

A daughter, thus, has all rights and obligations in respect of the coparcenary property, including testamentary disposition. Importantly, this position continues even after her marriage. Hence, all though she can only be a member in her husband’s HUF, she can continue to remain a coparcener in her father’s HUF.

Meaning of a Karta
A karta of an HUF is the manager of the joint family property. Normally, the father and in his absence the senior most member acts as the karta of the HUF. It is the karta who takes all decisions and actions on behalf of the family. He is vested with several powers for the operation and management of the HUF.

In the case of CIT vs. Seth Govindram Sugar Mills, 57 ITR 510 (SC), the Supreme Court held that the managership of a joint Hindu family is a creature of law and in certain circumstances, could be created by an agreement among the copartner of the joint family.

The Supreme Court in Tribhovandas Haribhai Tamboli vs. Gujarat Revenue Tribunal, 1991 SCR (2) 802 held that the managership of the Joint Family Property went to a person by birth and was regulated by seniority and the Karta or the Manager occupied a position superior to that of the other members. It further held that the father’s right to be the manager of the family was a survival of the patria potastas (Latin for power of the father) and he was in all cases, naturally, and in the case of minor sons, necessarily, the manager of the joint family property. In the absence of the father, or if he resigned, the management of the family property devolved upon the eldest male member of the family provided he is not wanting in the necessary capacity to manage it.

In Varada Bhaktavatsaludu vs. Damojipurapu Venkatanarasimha (1940) 1 MLJ 195, the Madras High Court held that when there was an eldest member of an HUF, the presumption was that under the Hindu Law he was the manager of the family.

Can a Female be a Karta – Position till 2005
Till 2005, the unanimous opinion was that only a male descendant of an HUF could become a karta. Let alone a karta, a female could not even become a coparcener. In CIT vs. Seth Govindram Sugar Mills, 57 ITR 510 (SC), the Supreme Court held that coparcenership is a necessary qualification for managership of a joint Hindu family. The Court further held that even the senior most female member of an HUF could not be a karta. She would be a guardian of her minor sons till they become major but never the karta because of the fact that she was not a coparcener. Similarly, various decisions have held that a wife cannot be a karta of her husband’s HUF.

Delhi High Court’s Decision
In Mrs. Sujata Sharma vs. Shri Manu Gupta, CS(OS) 2011/2006, Order dated 22nd December, 2015, the Delhi High Court was faced with the crucial decision of whether a lady who was the eldest child of all the coparceners of the HUF could be a karta or would the eldest son instead be the karta? It was contended by the son that the amendment to the Act only dealt with succession issues and did not expressly deal with the managership of an HUF.

However, the daughter countered this argument by relying on the Supreme Court’s observations in the case of Seth Govindram Sugar Mills (supra). According to the Supreme Court, being a coparcener was a necessary qualification for becoming a karta and since a female was not a coparcener she could not become a karta. She further contended that after the 2005 amendment, this impediment has been removed and a daughter is now statutorily recognised as a coparcener. Hence, reading the aforesaid Supreme Court judgment and the 2005 amendment together, she could become a karta. The 174th Report of the Law Commission of the India, dated 5th May 2000 was also relied upon which recommended that the eldest daughter can become a karta. The Delhi High Court found favour with the arguments raised on behalf of the daughter and held that it would indeed be odd if a daughter had equal rights of inheritance in an HUF property but could not become a karta of the same HUF. It further held that the Act was a socially beneficial legislation which gave equal rights of inheritance to both males and females. It held that the Act recognised the rights of females to be coparceners and provided for gender equality. In such a scenario, there was no reason why a daughter could not be a karta. It even added that this would be the case even after her marriage. Thus, the High Court declared the eldest daughter to be the karta of her father’s HUF.

Some More Questions
Is it not paradoxical that a married daughter can be a karta of the HUF of her father but not of the HUF of her husband? Is that not a classic case of there yet being a gender bias? There is a lady who is good enough to be a coparcener in her father’s HUF but not fit enough to be a coparcener of her own husband’s HUF? Indeed, this is an area which needs immediate rectification. Unfortunately, in this case, the remedy cannot be judicial since it would have to be through an amendment to the Act.

Further, since a daughter can now become a coparcener in her father’s HUF, do her children automatically become coparceners in their maternal grandfather’s HUF? The answer seems to be yes since the amendment Act clearly provides that the daughter would have the same rights as a coparcener as those of a son! Thus, if the daughter’s son or daughter is the eldest amongst the cousins, would he /she become the coparcener in their maternal grandfather’s HUF, in precedence to the son’s children? The answer, again, seems to be yes! So there could be a scenario where the daughter’s daughter is a karta of an HUF?

Inspite of the 2005 amendment, several HUFs have yet continued with the son as the karta even in cases where his sister is elder to him. What happens in such cases? Does the karta get automatically replaced or does the sister in all cases need to move Court? What happens to the transactions carried out by the son post September 2005 as karta of the HUF? Can the other members of the HUF /the sister challenge them for want of authority? These are some of the interesting questions which come to mind. One wishes that the amendment was more holistic and far sighted in nature.

Conclusion
With this judgment, another male bastion falls… and it’s about time. One wishes that the Legislature had expressly clarified this issue of managership when it carried out the 2005 amendment. Maybe it is time for an altogether new Hindu Succession Act, instead of carrying out another ad-hoc amendment to the present Act which is already celebrating its 60th anniversary. HUFs yet constitute entity for owning properties and businesses in India and hence, the Act urgently needs a Version 2.0. On a lighter vein, one wonders, whether, in case of a female manager, the term karta should now be joined by the term ‘Karti’?

Precedent – Judgement delivered earlier in point of time – Must be respected and followed – Constitution of India, Article 141.

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New India Assurance Co. Ltd. vs. Hill Multi purpose Cold Storage P. Ltd. AIR 2016 SC 86

While considering the interpretation of section 13(2)(a) OF The Consumer Protection Act, 1986 the Court observed that in Central Board of Dawoodi Bohra Community and Anr. vs. State of Maharashtra and Anr. [(2005) 2 SCC 673], wherein a question had arisen whether the law laid down by a Bench of a larger strength is binding on a subsequent Bench of lesser or equal strength. After considering a number of judgments, a five-Judge Bench of the Supreme Court, opined as under:

“12. Having carefully considered the submissions made by the learned senior Counsel for the parties and having examined the law laid down by the Constitution Benches in the above said decisions, we would like to sum up the legal position in the following terms:

(1) The law laid down by this Court in a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or co-equal strength.

(2) A Bench of lesser quorum cannot disagree or dissent from the view of the law taken by a Bench of larger quorum. In case of doubt all that the Bench of lesser quorum can do is to invite the attention of the Chief Justice and request for the matter being placed for hearing before a Bench of larger quorum than the Bench whose decision has come up for consideration. It will be open only for a Bench of coequal strength to express an opinion doubting the correctness of the view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted.

(3) The above rules are subject to two exceptions: (i) The above rules do not bind the discretion of the Chief Justice in whom vests the power of framing the roster and who can direct any particular matter to be placed for hearing before any particular Bench of any strength; and

(ii) In spite of the rules laid down here in above, if the matter has already come up for hearing before a Bench of larger quorum and that Bench itself feels that the view of the law taken by a Bench of lesser quorum, which view is in doubt, needs correction or reconsideration then by way of exception (and not as a rule) and for reasons given by it, it may proceed to hear the case and examine the correctness of the previous decision in question dispensing with the need of a specific reference or the order of Chief Justice constituting the Bench and such listing. Such was the situation in Raghubir Singh and Hansoli Devi.”

In view of the aforestated clear legal position depicted by a five-Judge Bench, the subject is no more res integra. Not only this three-Judge Bench, but even a Bench of coordinate strength of this Court, which had decided the case of Kailash (supra), was bound by the view taken by a three-Judge Bench in the case of Dr. J.J. Merchant(supra)

Precedent – Binding precedent – Judicial propriety – Single Judge is bound by opinion of Division Bench: Constitution of India, Article 226

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Farooq Mohammad vs. State of M.P. & Others AIR 2016 AIR MP 10 (FB)

The petitioner filed writ petition before the High Court challenging the entire action of election on the ground that the notice period for convening the first meeting after general election was not in conformity with section 56 (3) of the Act. The sole ground was that the notice was dated 1.1.2015 and was dispatched to the Councillors only on 2.1.2015 for convening meeting on 6.1.2015. As a result, the entire action including election of Vice President and two members of Appeal Committee be declared as vitiated in law. The writ petitioner had relied on the decision of the Division Bench of our High Court in the case of Awadh Behari Pandey vs. State of Madhya Pradesh and others 1968 MPLJ 638. The learned Single Judge, however, doubted the correctness of the view taken by the Division Bench that requirement of dispatching the notice to convene first meeting after general election of the Council as per section 56 (3) of the Act, of seven (7) clear days before the first meeting is mandatory.

The Court observed that it was also not open to be doubted on the principles of stare decisis, in particular by the Single Judge. The Constitution Bench of the Supreme Court in the case of Central Board of Dawoodi Bohra Community and another vs. State of Maharashtra and another, (2005) 2 SCC 673 had laid down the law that a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or co-equal strength. A Bench of lesser quorum cannot disagree or dissent from the view of the law taken by a Bench of larger quorum. In case of doubt all that the Bench of lesser quorum can do is to invite the attention of the Chief Justice and request for the matter being placed for hearing before a Bench of larger quorum than the Bench whose decision has come up for consideration. It will be open only for a Bench of co-equal strength to express an opinion doubting the correctness of the view taken by the earlier Bench of coequal strength, whereupon the matter may be placed for hearing before a Bench consisting of a quorum larger than the one which pronounced the decision laying down the law the correctness of which is doubted.

By now it is well established position that the Single Judge is bound by the opinion of the Division Bench and more so, on legal position which has been in vogue for such a long time if not time immemorial. Merely because some other view may also be possible, cannot be the basis to question the settled legal position. Such approach is not only counterproductive but has been held to be against the public policy.

Partition – Only partition effected by way of registered deed prior to 20/12/2004 debars daughter from staking an equal share with son in co-parcenary property : Hindu Succession Act 1956, section 6.

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Smt. Lokamani & Ors vs. Smt. Mahadevamma & Ors. AIR 2016 Karnataka 4

The Suit was in respect of four landed properties and one house property. The case of the plaintiffs was that they along with defendants 1 to 4 constituted undivided Hindu Joint Family owning ancestral agricultural lands and house property.

The Trial Court held that the plaintiffs had proved that the suit properties were joint family properties; the suit was maintainable and that it was not a suit for partial partition as contended by the defendants; the plaintiffs and Mahadevappa being Class-I heirs of the deceased Sannamadiah, were entitled to equal share in the suit properties as per section 8 of the Hindu Succession Act, 1956 (the Succession Act).

On appeal, the Hon’ble Court observed that the Explanation to sub-section (5) of section 6 of the Succession Act categorically declares that nothing contained in section 6 applies to a partition, which has been effected before 20th day of December 2004. In other words, if a partition had taken place in the family before 20th December 2004, a daughter cannot claim share in the co-parcenary property by virtue of the amendment to the Succession Act.

Further Explanation to sub-section (5) explains the meaning of partition for the purpose of section 6 as below: “Explanation: For the purposes of section 6, “partition” means any partition made by execution of a deed of partition duly registered under the Registration Act, 1908 or partition effected by a decree of a Court.”

Thus, oral partition, palu-patti, unregistered Partition Deed are excluded from the purview of the word “partition” used in section 6. It is only the partition effected by way of a registered Deed prior to 20th December 2004, which debars a daughter from staking an equal share with a son in a co-parcenary property.

The High Court held that in the case on hand, admittedly there was no registered Partition Deed between Sannamadaiah and Mahadevappa, evidencing the alleged partition that took place in the year 2000. Even if there was a partition, oral or by an unregistered Partition Deed of the year 2000 as contended by the defendants, it could not be treated as a partition for the purpose of Section 6 and the rights of the daughters to claim an equal share as coparceners along with Sannamadaih’s son Mahadevappa remained unaffected. The trial Court was fully justified in rejecting the contention of the defendants and holding that the plaintiffs were entitled to equal share with the son of Sannamadaiah in the suit properties, which were admittedly co-parcenary properties.

The court further observed that the Repealing and Amending Act, 2015 does not disclose any intention on part of Parliament to take away status of a co-percener conferred on a daughter giving equal rights with the son in co-parcenary property. Similarly, no such intention can be gathered with regard to restoration of sections 23 and 24 of Principal Act which were repealed by Hindu Succession (Amendment) Act, 2005. On the contrary, by virtue of Repealing and amending Act, 2015, the amendments made to the Succession Act in the year 2005, became part of the Act and the same is given retrospective effect from the day the Principal Act came into force in the year 1956, as if the said amended provision was in operation at that time. Thus, equal rights conferred on the daughter by the Amending Act have not been taken away by the Repealing Act. The main object of the Repealing and Amending Act is not to bring in any change in law, but to remove enactments which have become unnecessary.

Mortgage debts – Priority of charge recovery certificate in favour of bank cannot effect prior charge of mortgage : Transfer of Property Act – Section 48.

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Punjab & Sind Bank vs. MMTC Ltd & Ors. AIR 2016 Del. 15

The Debt Recovery Appellate Tribunal vide order dated 23.03.2011 accepted the First Respondent’s Minerals and Metals Trading Corpn’s. (MMTC) plea that the mortgage inuring in its favour had to prevail over the PSB’s claim in execution of a money decree and directing that proceeds from the sale of a property by the Recovery Officer be used first to satisfy MMTC claim. The Punjab and Sind Bank aggrieved by the order approached the Hon’ble Court.

The Hon’ble High Court observed that if the mortgage exists, it will create a prior charge over the property, being prior in time vide section 48 of Transfer of Property Act, 1982 (the TP Act). In the instant case, prior mortgage was created by deposit of title deeds in favour of MTC) Subsequently, the mortgagor also obtained cash credit facilities from Bank and defaulted in payment. MMTC invoked arbitration clause and procured award in its favour. The Bank initiated recovery proceedings under The Recovery of Debts Due to banks and Financial Institutions Act, 1993 (the RDDBFI Act). The award of arbitrator was sought to be executed as decree of Civil Court. The fight was between the two lenders over the priority of claims.

The Court held that the non obstante clause in section 34 of the RDDBFI Act would not override the prior charge. The non obstante clause would operate only where there is a conflict. The applicable rules themselves envision a situation where the Recovery officer is confronted with a property that is already charged. If an earlier mortgage existed it would take prior claim by virtue of section 48 of the TP Act.

The fact that the mortgage debt must be enforced by sale through a separate civil suit does not obviate the mortgage itself. So far as the Debt Recovery Officer concerned, Rule 11 merely requires him to investigate if evidence of a prior charge on the property exists, and then proceed accordingly. His task is not to finally give effect to the mortgage debt, nor is to deny its existence in law. His determination is not final and is subject to a civil suit that may be filed in that regard.

Nominee-Right of Nominee–Existence of Joint Family-Hindu widow is not coparcener in HUF of her husband: Hindu law Prior to amendment of the Hindu Succession Act, 2005.

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Shreya Vidyarthi vs. Ashok Vidyarthi and Ors. AIR 2016 SC 139

In the year 1937, one Hari Shankar Vidyarthi married Savitri Vidyarthi, the mother of the Respondent – Plaintiff. Subsequently, in the year 1942, Hari Shankar Vidyarthi was married for the second time to one Rama Vidyarthi. Out of the aforesaid second wedlock, two daughters, namely, Srilekha Vidyarthi and Madhulekha Vidyarthi (Defendants 1 and 2) were born.

The dispute in the present case revolves around the question whether the suit property, purchased by sale deed dated 27.9.1961 by Rama Vidyarthi was acquired from the joint family funds or out of her own personal funds.

The Hon. Court held that though the claim of absolute ownership of the suit property had been made by Rama Vidyarthi in the affidavit, she had also stated that she received the insurance money following the death of Hari Shankar Vidyarthi and the same was used for the purchase of the suit property along with other funds. The claim of absolute ownership is belied by the true legal position with regard to the claims/entitlement of the other legal heirs to the insurance amount. Such amounts constitute the entitlement of all the legal heirs of the deceased though the same may have been received by Rama Vidyarthi as the nominee of her husband. The above would seem to follow from the view expressed by this Court in Smt. Sarbati Devi and Anr. vs. Smt. Usha Devi : 1984 (1) SCC 424.

The facts that the family was peacefully living together at the time of the demise of Hari Shankar Vidyarthi; the continuance of such common residence for almost 7 years after purchase of the suit property in the year 1961; that there was no discord between the parties and there was peace and tranquility in the whole family were also rightly taken note of by the High Court as evidence of existence of a joint family. The execution of sale deed dated 27.9.1961 in the name of Rama Vidyarthi and the absence of any mention that she was acting on behalf of the joint family has also been rightly construed by the High Court with reference to the young age of the Plaintiff -Respondent (21 years) which may have inhibited any objection to the dominant position of Rama Vidyarthi in the joint family, a fact also evident from the other materials on record. The Court, therefore, held that there can be no justification to cause any interference with the conclusion reached by the High Court on the issue of existence of a joint family.

Issue also arose as to how could Rama Vidyarthi act as the Karta of the HUF in view of the decision of this Court in Commissioner of Income Tax vs. Seth Govindram Sugar Mills Ltd. : AIR 1966 SC 24 holding that a Hindu widow cannot act as the Karta of a HUF which role the law had assigned only to males who alone could be coparceners (prior to the amendment of the Hindu Succession Act in 2005).

While there can be no doubt that a Hindu widow is not a coparcener in the HUF of her husband and, therefore, cannot act as Karta of the HUF after the death of her husband, the two expressions i.e. Karta and Manager may be understood to be not synonymous and the expression “Manager” may be understood as denoting a role distinct from that of the Karta. Hypothetically, we may take the case of HUF where the male adult coparcener has died and there is no male coparcener surviving or as in the facts of the present case, where the sole male coparcener (Respondent – Plaintiff Ashok Vidyarthi) was a minor. In such a situation obviously the HUF does not come to an end. The mother of the male coparcener can act as the legal guardian of the minor and also look after his role as the Karta in her capacity as his (minor’s) legal guardian. Such a situation has been found, and rightly, to be consistent with the law by the Calcutta High Court in Sushila Devi Rampuria vs. Income Tax Officer and Anr.: AIR 1959 Cal 697 rendered in the context of the provisions of the Income Tax Act while determining the liability of such a HUF to assessment under that Act. Coincidently the aforesaid decision of the Calcutta High Court was noticed in Commissioner of Income Tax vs. Seth Govindram Sugar Mills Ltd.

Net Neutrality

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A lot has been written and spoken about Net Neutrality in the recent
past. We have also seen full page advertisements in our newspapers by
FaceBook exhorting Indians to support Free Basics which is Mark
Zuckerberg’s version of Face Book for the poor. So, what is Net
Neutrality? And what is the big controversy around it that has suddenly
made it the centre of such a roaring debate?

Net neutrality is
the concept of treating the Internet Services as a Public Utility
similar to electricity, water or gas supply.

Net neutrality is
endorsing a view to treat all data on the Internet at par without
discriminating or charging differentially irrespective of user, content,
site, platform, application or instrument

The term “Net
Neutrality” was coined way back in 2003 by Timothy Wu, a professor at
Columbia Law School in his paper “Network Neutrality, Broadband
Discrimination”. The Paper by Tim Wu rooted for neutrality among
applications, data, quality of service and also proposed some sort of
legislation to deal with these issues.

Though this concept was
coined in 2003 and has become part of legislation in many countries
since 2010. In India, the hue and cry began only in December 2014, when
one of the telecom operators announced additional charges for making
voice calls on its network using apps like WhatsApp, Skype, etc.

To
clear the prevailing confusion, in March 2015, TRAI released a
consultation paper on Regulatory Framework for Over-the-Top (OTT)
Services. The consultation paper was heavily criticised in all quarters
for being one sided and not having clarity in many areas.

Let’s
understand what this hue and cry is and how it is affecting content
companies like YouTube, Facebook, Skype etc., Vis network providers,
telecom operators, etc.

Though this concept was discussed all
these years, there was no pressure on either internet service providers
or telecom operators. However, with the advance of YouTube and other
video content companies, load on the network increased tremendously.
Similarly, photos and video on Facebook and other popular social media
sites too became all pervasive and miilions of MBs of content is now
being uploaded every day onto these sites. As a result, the internet
network started feeling the heat of overburden of content over
internet/telecom highway.

Most of the telecom companies argue
that they are investing heavily in internet highway and hence those
using this highway should either pay charges or share their revenue with
telecom/internet companies.

A major factor that has raised this
storm is the fact that social media companies with low investment draw
huge traffic and huge revenue from advertisements, etc., and as compared
to that, telecom/internet companies who invest heavily into
infrastructure and enable all those users to reach particular content
site get hardly anything.

One more factor which led to a dent in
telecom companies’ margins was the heavy fall in the number of sms
messages after evolvement of many free messenger apps. This was further
worsened by voice over internet protocol (VOIP) calls provided by
various apps, which has directly impacted the telecom companies earning
revenues from STD / ISD calls. This stream of revenue has literally
vanished after evolvement of these messenger apps.

Video content
sharing on almost all the social media platforms has put tremendous
pressure on all the carriage providers who are now reluctant to upgrade
their network capacity unless cost for the same shared by such content
companies.

In some quarters, arguments in favour of Net
Neutrality are cracking down as attempt to differentiate content from
network is not able to sail through.

Let’s understand this
problem from another angle. What if concept of Net Neutrality is not
there? Let us assume a life without Net Neutrality. In that scenario,
telecom companies will start charging content companies and will in turn
offer Sponsored Data or Free Data for such content companies over its
network.

Real trouble will start here when those content
companies with very little start up who are not able to share either
cost or revenue with internet/telecom companies will see lesser traffic
as these infrastructure companies will be partial to content companies
sharing cost/revenue as against those who are using their information
highway free of cost.

Recently, we are seeing free Facebook
plans by various telecom companies which are nothing but some type of
similar arrangement wherein telecom companies will be compensated by
content companies.

Now let’s analyse the entire scenario to understand as to who will gain and who will lose from this concept of Net Neutrality.

Presently,
without Net Neutrality, those content companies which don’t have to
share cost or revenue with infrastructure companies (which are heavily
burdened) are benefitted as compared to the infrastructure companies
which have to provide hassle free info highway which in turn pushes them
to invest more and more into towers and related infrastructure without
any corresponding increase in the revenue.

With Net Neutrality,
telecom companies will be further burdened to provide better information
highway which will require them to invest more and this concept won’t
allow telecom companies to enter into any arrangement of sharing cost
with or revenue from content companies for any sponsored data type
packages.

Now in last limb, let us understand how things will
worsen without this concept. In absence of any regulation of internet
highway, most telecom companies will enter into arrangement with content
companies for sponsored data and will not charge end users any fees for
usage of visit to such content companies. E.g., Reliance offering free
internet for Facebook or Airtel offering free internet for Flipkart.

Any
such arrangement will simply push users towards content companies which
are providing free access at the cost of new or low funded start-up
companies which many not be able to share cost or revenue with telecom
companies.

This can lead to a very big negative impact affecting
the whole internet revolution which started with free world wide web.
With all such sponsored data packages, telecom companies and content
companies can drive and decide as to what end user should read, watch or
listen.

To conclude, we can summarize that this subject is not
that easy to tackle. Implementing Net Neutrality can either kill
efficiency of telecom operators or their financial /economic viability.
With regulators and consumer forum just focussing on better quality and
better network and not addressing fallacy in revenue models of telecom
operator will hurt economy in long term.

On the other hand, the
risk of not implementing or regulating Net Neutrality may leave business
in the hands of large content companies and telecom operators, who will
mould, drive and drag users in the way they want. Such laissez faire in
the long term will choke the growth of any small content company whose
financial health cannot allow it to bear the cost or share the revenue
with telecom operators. Without Net Neutrality, users will lose the real
benefit of information technology revolution as they will be at mercy
of partial or biased approach of internet highway operators, i. e.
internet/telecom companies.

The whole world is exploring various
options for striking a balance between the two extremes. Most of the
western or developed countries which have implemented Net Neutrality are
facing tremors as veneer of this concept is cracking in the tussle of
carriage and content.

In long term, government, regulators and
industry bodies will have to come together and work for balance between
Net Neutrality along with reasonable compensation for telecom companies
who will keep pumping money into establishing and improving better and
better information highway. The next few months will prove very
interesting as the debate continues and the haze begins to clear.

WRIT POWER OF THE HIGH COURT IN A COMMERCIAL MATTER

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Introduction
Article 226 of the Constitution of India (Constitution) confers a writ jurisdiction on a High Court. This is an extra ordinary jurisdiction and extends to the action of the State or any authority endowed with State authority and empowers the High Court to issue direction to the State and the authorities to act in accordance with those directions. Courts have time again emphasised that this extra ordinary power must be exercised sparingly, cautiously and in exceptional situations only.

Can a writ jurisdiction be exercised when the State is not acting in an administrative capacity but acting only as a party to a contract i.e in a contractual capacity? The Supreme Court of India (SC) had the occasion to reiterate some of the basic principles governing the subject recently in the case of Joshi Technologies International Inc vs. UOI in the context of section 42 of the Income-tax Act, 1961(the Act).

FACTS IN BRIEF
Joshi Technologies (Petitioner/appellant) had entered into two contracts dated 20.02.1995 with the Union of India, through Ministry of Petroleum and Natural Gas (MoPNG) relating to exploration of certain oil fields. These contracts were on production sharing basis (Production Sharing Contracts,i.e PSC). It started production after entering into the contract and submitted its return of income on the income generated from the aforesaid production. The appellant claimed benefit of section 42 of the Act in the return of income.

Section 42 is a special provision for deductions in the case of business for prospecting, etc. for mineral oil. It provides for certain additional deduction of expenditure as specified in the PSC. It may be noted that such allowances, as stipulated in the section, are to be specifically mentioned in the PSC as well, which is entered into with the Central Government and it is also necessary that such an agreement has been laid on the Table of each House of Parliament.

It may be noted that Article 16 of the Model Production Sharing Contract (MPSC) contained a specific provision, which provided certain financial benefits and deductions in relation to taxes etc. that would be allowed to contractors/developers, as per the requirements of section 42 of the Act. According to the appellant, since no amendments to Article 16 of MPSC had been suggested nor contemplated by the Union of India, it was (and is) the belief and legitimate expectation of the appellant that all the benefits, financial or otherwise, offered in Article 16 of the MPSC to the prospective bidders were duly included in the above two PSCs.

The Assessing Officer (AO) granted deductions u/s. 42 of the Act from the assessment year 2001-02 onwards. However, while making assessment for the Assessment Year 2005-06, the AO observed that there were no such provisions in the PSC/Agreements which were signed between the Central Government and the appellant and in the absence of such stipulation in the agreements, the appellant was not entitled to deductions u/s. 42 of the Act.

It is worth noting that the Union of India signed many PSC’s with the private developers at the relevant period of time and there were 13 PSCs which did not contain the provisions for the deduction as envisaged under Article 16 of MPSC read with section 42 of the Act. A Joint Secretary of the MoPNG vide his communication dated 11.04.2007 wrote to the MoF specifically admitting that in certain PSCs, a reference to section 42 deductions had been omitted by oversight. The MoF was, accordingly, requested to extend the benefits of section 42 to the 13 PSCs (including the appellant’s two PSCs) in line with all other signed PSCs.

Realising that the Agreements did not contain such a provision, the appellant wrote to the MoPNG stating that there was an arrangement agreed to as per the understanding between the two parties to grant deduction as envisaged u/s. 42, non-inclusion thereof was an inadvertent omission in the agreements that were signed.

The MoPNG wrote to Ministry of Finance (MoF) accepting the aforesaid omissions and requested the MoF to give clarification in this behalf. However, no clarification came from the MoF and hence, the AO disallowed the claim for deduction u/s. 42of the Act.

At this stage, the appellant preferred writ petition under Article 226 of the Constitution in the High Court of Delhi.

In this background, the petitioner prayed among other prayers that a writ, order or direction be issued that considering the total facts of the case the petitioner is entitled to the benefit of the said deductions u/s. 42 of the Act, from the date of these Production Sharing Contracts. The prayer did not include a specific prayer to direct the authorities to amend the PSC.

The High Court examined the notice inviting the tender (Bid documents), MPSC and other relevant documents. It noted that, no statement or promise, that advantage u/s. 42 would be available to the successful bidder, was promised or made. It concluded that appellant was fully aware of Clause 16.2 of MPSC which specifically makes reference to benefit u/s. 42 of the Act, but did not advert to and refer to the same in their tender bid and did not ask for this benefit. Therefore, it was not possible to accept the contention of the appellant that benefit u/s. 42 of the Act was inadvertently missed out, or due to an act of oversight, not included in the contract.

The High Court accepted the explanation put forth by the respondents that 13 PSCs formed a different class in as much as their contract was in respect of small oil fields which had already been discovered and, therefore, the risk factor was less. On the other hand, other PSCs were in respect of undiscovered oil fields and for this reason benefit u/s. 42 had been granted to them.

The High Court dismissed the writ petition vide its judgment dated 28.05.2012 holding that the appellant is not entitled to any deductions u/s. 42 of the Act in the absence of stipulations to this effect in the Contracts signed between the parties. The matter went to the SC.

PROCEEDINGS BEFORE SUPREME COURT
One of the submissions of the counsel for the petitioner was that a writ of Mandamus be issued for amending the contract and including the clause for granting the benefit of section 42 of the Act. It was also submitted that when the other contracting parties, namely, MoPNG specifically admitted that this provision was left out inadvertently, the Court should have given a direction for amendment of the Contract and that such a direction can be issued by the High Court in exercise of its powers under Article 226 of the Constitution. In support of his submission the counsel relied on various judicial precedents.

Opposing the said prayer for issue of a writ, the counsel for the respondent submitted that in the realm of contractual relationship between the parties, this plea was inadmissible. He pleaded that PSCs are in the nature of contract agreed to between two independent contracting parties and each of the PSCs are distinct from the other and is not a copy of MPSC. He also pointed out that before signing the PSC, the approval of the Cabinet was obtained, which meant that the PSCs as submitted to the Cabinet, had the approval of one of the contracting parties, i.e. Government of India and when signed by the other party it became a binding contract.

Therefore, the appellant could not claim to be oblivious of the provisions of law or the contents of the contract at the time of signing and was precluded from seeking retrospective amendment as a matter of right when no such right was conferred under the contract. He submitted that the doctrine of fairness and reasonableness applies only in the exercise of statutory or administrative actions of a State and not in the exercise of a contractual obligation and that the issues arising out of contractual matters will have to be decided on the basis of the law of contract and not on the basis of the administrative law. He also relied on the various precedents in support of his submissions.

The SC took note of the Article 32 of the PSC entered into between the parties and observed that Article 32.2 categorically provided that the PSC shall not be amended, modified, varied or supplemented in any respect except by an instrument in writing signed by all the parties, which shall state the date upon which the amendment or modification shall become effective. Thus, even if it is presumed that there was an understanding between the parties before entering into an agreement to the effect that benefit of section 42 shall be extended to the appellant, the understanding vanished into thin air with the execution of the two PSCs. Now, for all intent and purpose, it was only the PSCs signed between the parties, which could be looked into. Thus, unless respondents agreed to amend, modify or vary/supplement the terms of the contract, no right accrued to the appellant in this behalf.

The SC noted that the PSCs in question were governed by the provisions of Article 299 of the Constitution. These were formal contracts made in the exercise of an executive power of the Union (or of a State, as the case may be) and are made on behalf of the President (or by the Governor, as the case may be). Further, these contracts are to be made by such persons and in such a manner as the President or the Governor may direct or authorise. Thus, when a particular contract is entered into, its novation has to be on fulfillment of all procedural requirements.

Whether, in such a case, can the Court issue a Mandamus?

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court among other questions framed the question whether mandamus can be issued by the Court to the parties to amend the contract and incorporate provisions to this effect? In other words, whether the Court has the power to issue a writ of mandamus or direction to the Government?

The Supreme Court observed that in pure contractual matters extraordinary remedy of writ under Article 226 or Article 32 of the Constitution cannot be invoked. However, in a limited sphere, such remedies are available only when the non-Government contracting party is able to demonstrate that it is a public law remedy which such party seeks to invoke, in contradistinction to the private law remedy.

The Supreme Court examined various judicial precedents in this regard and observed that under the following circumstances, ‘normally’, the Court would not exercise such discretion to issue a writ:

a) the Court may not examine the issue unless the action has some public law character attached to it.

(b) Whenever a particular mode of settlement of dispute is provided in the contract, the High Court would refuse to exercise its discretion under Article 226 of the Constitution and relegate the party to the said mode of settlement, particularly when settlement of disputes is to be resorted to through the means of arbitration.

(c) If there are very serious disputed questions of fact which are of complex nature and require oral evidence for their determination.

(d) Money claims per se particularly arising out of contractual obligations are normally not to be entertained except in exceptional circumstances.

The Supreme Court examined various case laws on the subject and legal position emerging from them. The same are summarised as under:

(i) At the stage of entering into a contract, the State acts purely in its executive capacity and is bound by the obligations of fairness. In its executive capacity, even in the contractual field, the state cannot practice discrimination. It has an obligation in law to act fairly, justly and reasonably which is the requirement of Article 14 of the Constitution of India. Therefore, if State or instrumentality of the State has acted in contravention of the above said requirement of Article 14 then a writ court can issue suitable directions to set right the arbitrary actions.

(ii) In cases where question is of choice or consideration of competing claims before entering into the field of contract, facts have to be investigated and found. If those facts are disputed and require assessment of evidence, the correctness of which can only be tested satisfactorily by taking detailed evidence, examination and crossexamination of witnesses, the case could not be decided in proceedings under Article 226 of the Constitution. In such cases court can direct the aggrieved party to resort to alternate remedy of civil suit etc.

(iii) Writ jurisdiction of the High Court under Article 226 cannot be used to avoid voluntarily obligation undertaken. Occurrence of commercial difficulty, inconvenience or hardship in performance of the conditions agreed to in the contract cannot provide justification in not complying with the terms of contract which the parties had accepted with open eyes. Writ petition cannot be maintained in such cases.

(iv) Ordinarily, where a breach of contract is complained of, the party complaining of such breach may sue for specific performance of the contract, if contract is capable of being specifically performed. Otherwise, the party may sue for damages.

(v) Writ can be issued where there is executive action unsupported by law or there is denial of equality before law or equal protection of law or it can be shown that action of the public authorities was without giving any hearing and violation of principles of natural justice after holding that action could not have been taken without observing principles of natural justice.

(vi) If the contract between private party and the State/ instrumentality and/or agency of State is under the realm of a private law and there is no element of public law, writ jurisdiction generally would not survive .In such cases the aggrieved party should invoke the remedies provided under ordinary civil law.

(vii) The distinction between public law and private law element in the contract with State is getting blurred. However, it has not been totally obliterated. Dichotomy between public law and private law, rights and remedies would depend on the factual matrix of each case and the distinction between public law remedies and private law, field cannot be demarcated with precision.

Once on the facts of a particular case, it is found that the nature of the activity or controversy involves public law element, then the matter can be examined by the High Court under Article 226 of the Constitution to see whether action of the State and/or instrumentality or agency of the State is fair, just and equitable or that relevant factors are taken into consideration and irrelevant factors have not gone into the decision making process or that the decision is not arbitrary.

(viii) Failure to consider and give due weight to reasonable or legitimate expectation of a citizen, may render the decision of the state or its instrumentality arbitrary, and this is how the requirements of due consideration of a legitimate expectation be made part of the principle of non-arbitrariness.

(ix) If the rights are purely of private character, no mandamus can be issued. The condition which has to be satisfied for issuance of a writ of mandamus is the public duty. In a matter of private character or purely contractual field, no such public duty element is involved and, thus, mandamus will not lie.

(x) Where an authority appears acting unreasonably, a writ of mandamus can be issued for enforcing it to perform its duty free from arbitrariness or unreasonableness.

(xi) when an authority has to perform a public function or a public duty if there is a failure a writ petition under Article 226 of the Constitution is maintainable.

Keeping in mind the aforesaid principles and after considering the the facts of the case, the SC held that this was not a fit case where the High Court should have exercised discretionary jurisdiction under Article 226 of the Constitution. According to the court, the matter is in the realm of pure contract and it is not a case where any statutory contract is awarded. The SC confirmed the order of the High Court that the appellant is not entitled to benefit of deduction u/s. 42 of the Act.

CONCLUSION
It is clear from the above that the scope of judicial review in respect of disputes falling within the domain of contractual obligations may be limited. The power to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provisions of the Constitution. The High Court having regard to the facts of the case, has a discretion to entertain or not to entertain a writ petition. The Court has imposed upon itself certain restrictions in the exercise of this power. This plenary right of the High Court to issue a writ will not normally be exercised by the Court to the exclusion of other available remedies unless such action of the State or its instrumentality is arbitrary and unreasonable so as to violate the constitutional mandate of Article 14 or for other valid and legitimate reasons, for which the court thinks it necessary to exercise the said jurisdiction.

The reiteration of the aforesaid principles by the Supreme Court is very important today, especially when the Government is entering into partnership with private parties for various infrastructure projects under PPP model.

It is very clear from the above that the real challenge will lie in demarcating and identifying the line between the public law domain and the private law field, identifying the public duty, public cause. It is impossible to draw the line with precision and lay down in black and white the principles governing such demarcation. The question must be decided in each case with reference to the particular action, the activity in which the State or the instrumentality of the State is engaged when performing the action, the public law or private law character of the action and a host of other relevant circumstances.

49TH RESIDENTIAL REFRESHER COURSE (RRC ) OF BOMBAY CHARTERED ACCOUN TANTS SOCIETY (BCAS)

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49th Residential Refresher Course (RR C) of Bombay Chartered Accountants Society (BCAS) was held between 22nd January, 2016 and 25th January, 2016 at Novotel Imagica, Khopoli.

Mr. Raman Jokhakar, President of BCAS welcomed the participants and highlighted the activities of BCAS.

Mr. Uday Sathaye, Chairman, Seminar Committee gave an idea, to the participants about the 49th RRC and then introduced the Chief Guest Mr. Narendra Sarda, Past President of ICAI.
After lighting of lamp, the inaugural speech was delivered

by Narendrabhai. He dealt with the subject “Identifying, Evaluating & Mitigating Risk in CA Profession”. He presented his views considering the present scenario particularly, the extensive regulations imposed by regulators which were required to be followed by Chartered

Accountants. He explained the need for more planning and elaborate reporting to minimize risk. He emphasized the adoption of technology for survival. Both Internal and External risks were explained by him. His extempore speech in his unique style of presentation without referring to a paper was appreciated by the audience. It was indeed a great experience to learn from Mr. Narendra Sarda.

Mr. Rajesh Kadakia then replied to the issues raised by the group leaders during the course of discussion on his paper Charitable Institutions-Tax issues. He explained in his very lucid style, the various nuances of the provisions of section 11 to 13 of the Incometax Act. He pointed out that these provisions were virtually a self-contained code, and it was necessary to understand them thoroughly before dealing with taxation of charitable trusts.

The session was chaired by Mr. Pranay Marfatia, Past President of BCAS.

23rd January 2016


On 23rd January, 2016 Advocate Shailesh Sheth presented his paper on “Goods and Services Tax (GST)”. He dealt with the subject in depth and voluntarily continued the session in the evening to clarify the doubts of the members.

The session was chaired by Mr.. Govind Goyal, Past President of BCAS.

Mr. Jayesh Gandhi then elaborated “Audit Issues under Companies Act, 2013”. His Audit experience and knowledge added value to his presentation. He dealt with the various controversies arising out of the provisions of the Companies Act 2013. He pointed out that the new provisions had increased the responsibilities on auditors.

The session was chaired by Mr. Ashok Dhere, Past President of BCAS.

24th January 2016


On 24th January, 2016 Mr. Sanjeev Pandit, Past President of the Society made a presentation on “ICDS – Ease of Doing Business”. He explained the various controversies arising out of the new computation standards. He felt that the mandatory compliance with these standards would increase litigation rather than reducing it.

The session was chaired by Mr. Rajesh Shah, Past President of BCAS.

Thereafter, Mr. Jayant Gokhale dealt with “Issues and Pitfalls in Audit as per SAs (Standards on Auditing)”. His presentation on the subject was really an eye opener. Being an Auditor, many times, we miss Auditing Standards while reporting. The points discussed by him based on his experience as Former Central Council Member and Member on Accounting Standard Board was beneficial to the members. His presentation will be remembered in times to come.

The session was chaired by Mr. Rajesh Muni, Past President of BCAS. The evening was made special by Shri Mahesh Dubey. He presented Hindi Poetry. He covered many issues in a poetic manner to convey the feelings of people at large about politicians etc. Not only his presentation but the composition of poetry was also superb & meaningful.
 
25th January 2016


On 25th January, 2016 Mr. Gautam Nayak, presented his views on “Issues under Section 14A 56(2) (vii) (viia) and (viib) of Income-tax Act, 1961”. He replied to the queries raised by members during group discussion. Though the provisions of section 14A and section 56 have been on the statute book for some time the controversies and litigation showed no sign of abating. He explained to the members as to what care one needed to take to mitigate tax risks arising out of these provisions.

The session was chaired by Mr. Anil Sathe, Past President of BCAS.

Some of the members who attended the RRC for the first time gave an encouraging feedback and made suggestions about the 50th RRC to be organized next year.

RRC concluded with some of the enthusiastic members visiting the theme park adjacent to the venue. Overall, it was a very successful programme, like every year

Observations and Suggestions on GST Business Process

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22nd February 2016

To
Shri Arun Jaitley
The Finance Minister
Government of India
New Delhi

Respected Sirs,

Sub: Observations and Suggestions on GST Business Process

This is with reference to various Reports on draft business process of GST, hosted on the Website of DOR inviting comments from stake holders and public at large, we could like to take this opportunity to present before you some of the views of our members.
May we request your good selves to kindly consider the same appropriately while finalizing the actual business process on proposed Goods and Services Tax (GST).

Yours Sincerely
For Bombay Chartered Accountant’s Society

Raman Jokhakar
President
Bombay Chartered Accountants’ Society

Govind G. Goyal
Chairman
Indirect Taxes Committee

China avalanche stokes fears of global recession

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An avalanche of dollars exiting China threatens to smother all emerging markets (EMs), including India, and cause a global recession. Almost $ 600 billion have exited China in the last six months, a mammoth $100 billion per month. This would have emptied the forex reserves of almost any other country , but China still has $3.3 trillion left. However, it cannot afford a continuing outflow at this rate.

Its government placed curbs on stock markets to combat crashing values, but withdrew these when they proved ineffective. It is committed to making the yuan a reserve currency like the dollar. But this obliges it to allow capital to enter and exit reasonably freely, and hence risks further capital flight. For decades the Communist Party has firmly controlled the economy . But no more.

The Chinese avalanche has helped accelerate dollar outflows from all EMs (emerging markets). The Sensex is down from 30,000 to 24,400. The rupee has gone from Rs 62 to Rs 67.70 to the dollar. Yet India is the best EM performer: others are truly battered. Worse, the prices of oil and other commodities keep falling, a recessionary portent.

China has been slowing for two years. Pessimists like Ruchir Sharma of Morgan Stanley have long worried that total debt in China, induced by government stimuli, has shot up from 150% of GDP to 250%. History suggests that this will end in tears. The pessimists sneer at official Chinese figures showing almost 7% growth. Using alternative indicators like electricity consumption and rail freight, they argue that true growth could be just 4-5%.

However, optimists like Nicholas Lardy of the Peterson Institute say China is simply rebalancing its economy. Earlier, growth was driven by industrial exports and investment. But now China wants, correctly, to switch to an economy driven more by domestic consumption and services. This means slower GDP, but 6-7% growth is very respectable for an economy that in PPP terms is now the largest in the world. The optimists say indicators like rail freight and electricity may suggest slowing industry, but that is exactly what the Chinese government aims for by emphasizing services. So, the optimists say, there is no crisis, just sensible rebalancing.

Six months ago, one could take either view. But now the Chinese are voting for the pessimist’s version through capital flight. Individuals can remit $50,000 a year abroad. Some Chinese companies are investing abroad. But over half the outflow has a political explanation.

The fleeing billions are probably the ill-gotten gains of former Communist Party officials and their super-brats (often called “princelings”). They are being targeted by Communist Party chief Xi Jinping for corruption. Former security chief Zhou Yonkang and his colleagues have been arrested. Xi’s predecessor, Jiang Zemin, and his two sons have been placed “under control”, suggesting they may eventually be arrested. Xi is perhaps targeting the entire top leadership of the Jiang era. The resulting political struggle could have serious economic consequences.

Meanwhile Global Economic Prospects (GEP), the World Bank report on the world economy , has flagged the risk of a coming recession. The bank is too political (all its members are governments) to actually predict a recession. So, GEP forecasts world GDP growth rising from 2.4% in 2015 to 2.9% in 2016, and says the chances of a recession are low.But it then admits that EM growth has fallen below forecast levels for years. It says that if in 2016 the EMs underperform as much as in 2010-14, and if financial panic like the “taper tantrum” of summer 2013 recurs, then global growth could collapse to just 1.8%. This will be below the 2% widely used to benchmark a global recession.

Ultra-low interest rates in advanced economies have in recent years led trillions of dollars to flow to EMs in search of higher yields. A return to normal interest rates in advanced countries could induce a huge reverse flow out of EMs. That process seems to have begun with the raising of US interest rates.

In the 2000s, China accounted for half of all incremental world demand for commodities. Its slowing has caused the global demand for -and price of -commodities to collapse. Oil is now under $30barrel, one-third of its rate in 2014. Commodity exporting economies are in dire straits.Brazil and Russia are in recession. Many Asian manufacturing economies are part of global value chains using China as an assembler, and have also been hard hit by China’s slowdown. India has been a resilient exception since it is a net commodity importer, and is not part of world value chains. But if the world falls into recession, India will be dragged down too.

(Source: Article by Swaminathan S Anklesaria Aiyar in The Times of India dated 17-01-2016.)

A carrot and stick approach to reform bureaucracy is essential to improve governance

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A palpable reality for all Indian citizens is the extraordinary power the bureaucracy has over our lives. It is therefore essential for the bureaucracy to function effectively, and for the political executive to get it to do so. Prime Minister Narendra Modi’s initiative, Pragati, is a stab in this direction. During a recent review, he called for tough action against officials facing repeated complaints. Modi’s approach deserves support. If his government is to fulfil its promise of better governance, bureaucracy needs to do better.

Existing laws provide the political executive with the means to make bureaucrats more accountable and efficient. To illustrate, the All India Service Rules provide for compulsory retirement of substandard bureaucrats after 15 years of service. This provision rules out the pitfalls which come with a guaranteed job for life, but unless it is utilised deadwood will stay on. A government which utilises this provision can invoke the support of the judiciary. The Supreme Court concluded, as far back as 1980, that compulsory retirement “is undoubtedly in the public interest and is not passed by way of punishment”. Similarly, successive pay commissions have pointed out that performance must influence pay for bureaucrats. The Seventh Pay Commission recommended the introduction of performance related pay for all categories of government employees.

If lifetime guarantees of a job and pay make for poor incentives, so do threats of prosecution for the wrong reasons. A considerable extent of developmental activity initiated by government is carried out through the private sector. Presumably, no private firm will bid for a contract unless there is profit. In this background, the existing law to prevent corruption needs an overhaul. According to the Prevention of Corruption Act, taking a decision which benefits somebody can be deemed an act of corruption even in the absence of evidence of a quid pro quo. This is a draconian provision which deters decision making and incentivises inaction. Bureaucrats who pursue their task with sincerity are not protected from irresponsible investigations long after retirement.

Since 2013, governments have tried to amend the law by bringing it into consonance with contemporary reality. It should not be difficult to pass this amendment as Congress and BJP are on the same page. Today there are sticks for good performance and carrots for poor performance. Turn babudom around by ensuring just the reverse is the case.

(Source: Editorial in The Times of India dated 29-01-2016)

India’s SEZs need top-class facilities, not tax breaks

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India’s exports have been declining for 13 months.

To reverse the trend, the commerce ministry wants to exempt exporters in special economic zones (SEZs) from all corporate taxes, including the minimum alternative tax (MAT). This is a bad idea. It goes counter to finance minister Arun Jaitley’s welcome proposal to abolish most tax exemptions, and have a uniform low rate that does not arbitrarily favour this unit or that region.

Favouring SEZs leads to not just a big loss of tax revenue but to cronyism (several SEZ land allocations became scams), and waste (units will shift to SEZs despite big expense and loss of productivity, just to get the tax break). Many companies that would be exporting from traditional bases anyway will shift to SEZs for the tax break. SEZ exports may look big, but may not represent additional exports or policy success. They may simply represent policy failure through export diversion and revenue loss.

India has an export problem right now but not a balance of payments problem. So there’s no need for panic or emergency measures. The current account deficit is well under control at barely 1% of GDP, since imports have fallen along with exports. China’s slowdown has led to a global export slowdown. Almost all Asian countries are suffering from falling exports, and many have suffered steeper declines than India.

In such dismal global conditions, tax breaks are irrelevant for export buoyancy. We must instead raise our competitiveness through better logistics, skills and procedures. Only then will exports boom sustainably. We cannot have lousy facilities and yet become world-class exporters through tax breaks. Ideally, the whole of India should have world-class facilities. Since resources are limited, a start can be made in SEZs.

Between 1965 and 2005, India built eight tiny export processing zones, with very limited success. By contrast, China and some other countries succeeded by creating massive SEZs. Shenzen in China covers four small districts. Chinese SEZs have world-class power, water, ports and airports, and have become world-class manufacturing clusters.

India in 2006 adopted a new SEZ policy. Units in SEZs would pay no tax for five years (not even MAT), get a 50% tax break for the next five years, and a further five-year tax break for reinvested profits. SEZ developers would also get a tax holiday for 10 years.

Instead of creating massive SEZs, this policy encouraged hundreds of small SEZs in every state. These amounted to tax shelters and a grab for land rather than world-class enclaves. No less than 564 proposals for SEZs were approved, but of these only 204 are actually functioning. Mukesh Ambani’s giant SEZ in Navi Mumbai is largely vacant. Most operating SEZs are small IT establishments that are little more than tax havens.

The 2006 Act provided that the minimum size for information technology, jewellery and biotech parks should be just 10 hectares, smaller than even some schools. Size limits were kept especially low for hilly areas, where flat land is scarce. This was a classic case of making SEZs an end in themselves rather than a means to improve competitiveness. China does not create tiny SEZs in the Gobi desert or Tibetan mountains: it creates large ones in areas with the best logistics, infrastructure, financial and transport facilities.

Exports from Indian SEZs rose from $5 billion in 2005-06 to $81 billion in 2013-14. This looks very impressive. But a lot of it is simply trade diversion. Many top IT and jewellery companies shifted their operations to SEZs for the tax break. Since units outside the SEZs continued exporting at a good rate, it is unclear whether the SEZs achieved additional exports or just diverted exports.

Because of such factors, MAT and the dividend distribution tax was imposed on SEZs in 2011-12. Industries protested that this discouraged additional investment. True, but would this fresh investment have been for export diversion or export addition? The operating profit margins of software companies often exceed 20%, so they hardly need tax breaks. Old export units in areas from textiles to engineering, many having very slim operating margins, get no tax breaks. Why should they be discriminated against?

To be competitive, India needs both competitive facilities (in and outside SEZs) plus competitive tax rates with very few exemptions. India has a corporate tax rate of 30%, and with cess and surcharge this comes to 34.5%, one of the highest in Asia. Finance minister Jaitley rightly seeks to cut this to a competitive 25 %, while removing today’s myriad exemptions so that he does not lose tax revenue. This is a laudable, far-sighted reform. It should not have holes punched in it by demands for tax breaks from SEZs or other interest groups.

(Source: Article by Shri Swaminathan S. Anklesaria Aiyar in The Times of India dated 30-01-2016.)

Reinventing Indian secularism – The old consensus on majority and minority communities no longer fits reality

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Should 21st century citizens of the world’s largest democracy live in
fear of committing the medieval crime of blasphemy? This is the question
raised by the violent rampage earlier this month in West Bengal’s
Muslimmajority district of Malda, where an enraged mob ransacked a
police station, torched two dozen vehicles, and burned shops and homes.

The
mob was protesting an obscure Hindu activist’s allegedly derogatory
comments about the Prophet Muhammad a month earlier in Uttar Pradesh.
Though UP police quickly arrested the activist, Kamlesh Tiwari of the
Hindu Mahasabha, this did not stop demonstrations from erupting across
the country. At times numbering tens of thousands, protests have roiled,
among other places, Rampur, Bhopal, Purnea and Bengaluru. Many
protestors demanded the death penalty for Tiwari.

Such
bloodcurdling displays of piety belong in a theocracy, not in a
pluralistic democracy. Their scale, spread and intensity ought to
concern anyone who cares about Indian pluralism. So must the backgrounds
– engineers, software developers, corporate executives – of many of
those arrested recently for alleged links with Islamic State.

Bluntly
put, the Indian model of secularism is floundering. It needs to be
replaced by an approach that relies less on the well-worn pieties of the
past and more on the reality of the world we live in today. The answer
does not lie with Hindu extremists, who cannot distinguish between
ordinary and radicalised Muslims. It lies in an updated secularism based
on individual rights and equality before the law.

Traditional
Indian secularism implicitly rests on three assumptions that may have
made sense 60 years ago, but are hopelessly outdated today. First, that extremists from the Hindu majority pose a greater threat than those from the Muslim minority. Second, that Indian Muslims are always victims and never victimisers. Third, that only Muslims can legitimately champion legal, social and cultural reform within their community.

In
the 1950s, the heyday of the Nehruvian project, each of these
assumptions was easily defensible. At the time, only one in ten Indians
was Muslim. The secular impulse – to protect a small community in a
defensive crouch after Partition – appealed to the best instincts of a
newly independent nation. In a rapidly modernising world, the bet that
over time Muslims would discard obscurantist ideas such as blasphemy,
and would themselves demand an end to practices such as polygamy and
triple talaq divorce appeared reasonable.

Today’s reality is
starkly different. According to the Pew Research Center, today about one
in seven Indians is a Muslim. And though the vast majority of Indian
Muslims are peaceful, the hoped for march towards secularisation
–replacing attitudes rooted in religion with those rooted in reason –
has stalled. Where once a uniform civil code for all Indians was delayed
by the majority’s forbearance, today it is blocked as much by the
minority’s intransigence.

The consequences of both shifting
demographics and patchy secularisation play out every day in public
life. Often supposedly secular politics boils down to pandering to the
most fundamentalist elements of Muslim society. Think of Mamata
Banerjee’s concerted bid to woo clerics in West Bengal, or Digvijaya
Singh’s ugly insinuation that the Rashtriya Swayamsevak Sangh plotted
the 26/11terrorist attacks in Mumbai.

Meanwhile, for the first
time since Partition, an aggressive new breed of Muslimfirsters has
risen to prominence. To differing degrees, Azam Khan in Uttar Pradesh,
Badruddin Ajmal in Assam and Hyderabad’s Owaisi brothers represent this
trend. Both the panderers and the Muslimfirsters share a commitment to
defending Muslim personal law and extending special rights for the
community to new areas such as reservations in government jobs.

At
the same time, the international landscape has changed dramatically. In
the 1950s, secularists dominated the Muslim world – Sukarno in
Indonesia, Shah Reza Pahlavi in Iran and Kemal Ataturk’s heirs in
Turkey. But over the past 40 years a fountain of Gulf petrodollars,
tenacious religious movements such as the Muslim Brotherhood, and the
Cold War American policy of pitting hardline Islam against communism,
tipped the balance of ideological power towards Islamists, those
striving to impose sharia law on both the state and society.

Closer
to home, Pakistan evolved in a way few would have predicted in the
1950s when a relatively Westernised elite held sway. The journalist
Zahid Hussain estimates that the number of madrassas shot up from 137 in
1947 to more than 13,000 today. In the Pakistan army and its notorious
spy agency –Inter-Services Intelligence – India faces a foe long
committed to using jihadist terrorism to keep India off balance.

What
is to be done? For starters, India should replace the shaky pillars of
the traditional secular consensus with something sturdier.

First, this means accepting that all extremists – not only the Hindu variety – threaten pluralism. Second,
it requires recognising the complexity of inter-religious conflict.
Sometimes – such as in the awful murder of Mohammad Akhlaq in Dadri –
Muslims are indeed victims. At other times, such as in Malda or the
Srinagar valley, they are the victimisers. Third, Indian
political and intellectual elites need to start treating the reform of
ideas rooted in sharia – such as a violent response to so-called
blasphemy – as a national concern, not just a narrowly Muslim concern.

In
the end, secularism makes India stronger. To save it, India needs an
updated approach rooted not in sentimentalism but in reality.

(Source:
Article By Shri Sadanand Dhume, a resident fellow at the American
Enterprise Institute, Washington DC, in The Times of India dated
29-01-2016.)

A. P. (DIR Series) Circular No. 52 dated February 11, 2016

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Regulatory Relaxations for Startups – Clarifications relating to Issue of Shares

This circular, with respect to facilities available to start-ups, clarifies as follows: –

1. Issue of shares without cash payment through sweat equity

Indian companies can issue sweat equity under a scheme drawn either in terms regulations issued under: –

a. The Securities Exchange Board of India Act, 1992 in respect of listed companies; or
b. The Companies (Share Capital and Debentures) Rules, 2014 notified by the Central Government under the Companies Act 2013 in respect of other companies.

2. Issue of shares against legitimate payment owed

Indian companies can issue equity shares against any other funds payable by the investee company (e.g. payments for use or acquisition of intellectual property rights, for import of goods, payment of dividends, interest payments, consultancy fees, etc.), remittance of which does not require prior permission of the Government of India or RBI under FEMA, 1999 and complies with the FDI policy and applicable tax laws.

A. P. (DIR Series) Circular No. 51 dated February 11, 2016

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Regulatory relaxations for start-ups – Clarifications relating to acceptance of payments

This
circular clarifies that a start-up with an overseas subsidiary, which
has a appropriate contractual arrangement between itself, its overseas
subsidiary and the customers concerned, is permitted to: –

1. O pen foreign currency account abroad to pool the foreign exchange earnings out of the exports / sales made by it.

2.
Pool its receivables arising from the transactions with the residents
in India as well as the transactions with the non-residents abroad into
the said foreign currency account opened abroad in its name.

3.
Avail of the facility for realising the receivables of its overseas
subsidiary or making the above repatriation through Online Payment
Gateway Service Providers (OPGSPs) for value not exceeding US $ 10,000
or such limit as may be permitted by RBI from time to time.

Balances
in the said foreign currency account that are due to the Indian
start-up must be repatriated to India within a period as applicable to
realisation of export proceeds (currently nine months).

A. P. (DIR Series) Circular No. 50 dated February 11, 2016

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Compilation of R-Returns: Reporting under FETERS This circular proposes the following changes, which have to be implemented not later than April 1, 2016: –

1. Web-based data submission by AD banks
With regards to reporting under the Foreign Exchange Transactions Electronic Reporting System (FETERS) the following changes will come into effect with respect to transactions that are to be reported from April1, 2016: –

a. The present email-based submission will be replaced by web-portal based data submission.
b. Nodal offices of banks will have to access the webportal https://bop.rbi.org.in with the RBI-provided login-name and password, to submit the required data.
c. Banks have to download RBI-provided validator template from this portal on their computer and perform off-line check of their FETERS data-file for error, if any, before its submission on the portal.
d. On uploading validated files, banks will get acknowledgment.
e. Banks can report addition of AD code and update AD category for incorporation in the AD-master database with RBI.
f. With the discontinuation of ENC.TXT and SCH3to6. TXT files in FETERS, the purpose codes P0105 [Export bills (in respect of goods) sent on collection – other than Nepal and Bhutan] and P0107 [Realization of NPD export bills (full value of bill to be reported) – other than Nepal and Bhutan] have become defunct and are, therefore, discontinued.

2. Revision in Form A2

Transactions relating to the Liberalized Remittance Scheme (LRS) in FETERS and On-line Return Filing System (ORFS), must now be reported under their respective FETERS purpose codes (e.g. travel, medical treatment, purchase of immovable property, studies abroad, maintenance of close relatives; etc.) instead of reporting collectively under the purpose code S0023. The revised purpose codes are as under: –

Revised Form A2 introducing a check-box for LRS transactions as well as clubbing the ‘Application cum Declaration for purchase of foreign exchange under the Liberalised Remittance Scheme of USD 250,000’ is Annexed to this circular.

3. Online submission of Form A2 by the remitter

Banks offering internet banking facilities to their customers must allow online submission of Form A2 and also enable uploading/submission of documents, if and as may be necessary, to establish the permissibility of the remittances. Remittances that do not require any documentation (e.g. certain transactions under the LRS) must be put through on the basis of Form A2 alone.

To start with, remittances on the basis of online submission alone will be available for transactions with an upper limit of USD 25,000 (or its equivalent) for individuals and USD 100,000 (or its equivalent) for corporates.

A. P. (DIR Series) Circular No. 49 [(1)/18(R)] dated February 4, 2016

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Notification No. FEMA. 18(R)/2015-RB dated December 29, 2015

Post Office (Postal Orders / Money Orders), 2015

This Notification repeals and replaces the earlier Notification No. FEMA 18/2000-RB dated May 3, 2000 pertaining to Post Office (Postal Orders / Money Orders).

A. P. (DIR Series) Circular No. 48 [(1)/15(R)] dated February 4, 2016

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Notification No. FEMA.15(R)/2015-RB dated December 29, 2015

Definition of “Currency”, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 15/2000-RB dated May 3, 2000 pertaining to the Definition of “Currency”.

A. P. (DIR Series) Circular No. 47 [(1)/11(R)] dated February 4, 2016

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Notification No. FEMA.11(R)/2015-RB dated December 29, 2015

Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2015

This Notification repeals and replaces the earlier Notification No. FEMA 11/2000-RB dated May 3, 2000 pertaining to Foreign Exchange Management (Possession and Retention of Foreign Currency) Regulations, 2000.

DIGITAL TRENDS IN HIGHER EDUCATION

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Let me begin by quoting a few statistics from a recently published report of the Ministry of Human Resource Development (HRD).

Gross Enrolment Ratio (GER), which is the ratio of total enrolment in Higher Education in the 18-23 years age group, as a percentage of the eligible population in that age group, has moved up to 23.5 % in 2014-15 from 21.5 % in 2012-13. For men, the ratio is 24.5 % and it is 22.7 % for women.

There were 33.3 million students enrolled in 757 universities in 2014-15, as against 32.3 million enrolled in 723 universities in 2013-14.

While the numbers can become overwhelming, it is easy to see that these statistics augur well for the country. If this trend continues, it is possible for the country to achieve the target of 30 % GER by 2020. The next target would be a GER of around 45 per cent, which is prevalent in most developed countries.

The target may be ambitious, but there are a host of issues, which need to be addressed as well – access, quality, shortage of teachers, outdated curriculum etc. In this maelstrom, will digital technology make a significant impact?

There has been a paradigm shift in the thinking process of the role of digital technology in higher education. Traditionally, it was meant to provide IT infrastructure and support all the process and routine functions. Its role has changed and it is now seen as critical for providing a digital learning experience to students.

“Student-centricity” and “delighting the student” with an amazing learning experience in the lifecycle of higher education are the new mantras of digital solutions and service providers. This fundamentally means that technology is no longer in the foreground and the centre of attention is the “learner”.

With this rapidly shifting landscape, there are three broad trends, which will make a significant impact on higher education:

1. Personalisation
2. Big Data
3. Mobility

PERSONALISATION
The traditional learning methodology was by prescription and adherence. Students were given a prescribed curriculum and had to study within the boundaries of the path laid down by the various subjects to ultimately obtain a degree.

With the use of digital resources, personalisation allows creation of custom pathways for learning. Massachusetts Institute of Technology (MIT) has experimented with breaking its courses down into modules and then enabling students to reassemble the modules into a personalised educational pathway.

It is akin to creating a “playlist” in iTunes.

Before the opening of the iTunes store on April 28, 2003 the only choice for a music lover was to buy an entire CD of songs, even if the music lover wanted to listen to only one song. iTunes allows music lovers to pick and choose songs from various albums, to create a personalised playlist. Within a decade of its launch, Apple had announced that more than 25 billion songs were downloaded and by now, probably, more than 50 billion songs have been downloaded. This is a staggering number and has truly shaken up the music industry, giving consumers a unique listening experience. One of the clear indications of this churn is the recent press report suggesting that the iconic music store of Mumbai, “Rhythm House” will shut down soon.

Like a playlist, why can’t a student formulate a customised, multi-institutional pathway to a degree? Can a student do one subject from H.R. College, another from N.M. College and a third from St. Xaviers’ College? Or, can a student do one subject from Mumbai University, another from Delhi University and a third from Bengaluru University? And, eventually, can a student do multiple subjects from universities across the world?

Traditionally, the learning process and the eventual conferring of a degree happened in a single institution. But now, with all the digital possibilities, students should have the ability to aggregate and disaggregate subjects and courses. And more importantly, they should be able to control the pace of learning by accelerating or decelerating, depending on their individual requirements. When all of this coalesces, a student will have complete “personalisation” of his learning path to a degree.

BIG DATA
Big Data is large volume of data, structured and unstructured, which is difficult to process using traditional databases and software. A lot of IT investment in the corporate sector is going into Big Data computing, which reveals patterns, trends and associations.

There is an enormous amount of data, which gets generated in higher education institutions and the time is ripe to use Big Data techniques to mine this information and come up with meaningful patterns and trends.

Big Data can create customised reports for all the stakeholders in higher education – personalised assistance to students, dashboards to the teachers on the learning paths, reports to the heads of institutions and compliance charts to the regulators. The broad institutional goals and targets can be measured and analysed periodically. Importantly, analytics of a student’s learning path can enable intervention at an early stage.

Big Data can do the unthinkable – homework assignments that learn from students; courses tailored to fit individual students and textbooks that talk back. This is beyond online courses and MOOCs that are currently on offer. We are now looking at the education landscape of tomorrow, powered by Big Data.

A seminal work on the power of Big Data is a book written by Viktor Mayer-Schonberger and Kenneth Cukier, titled “Learning with Big Data – The Future of Education”. The authors have articulated how the ever-increasing amounts of data and its analysis will have an influence on the conduct of higher education. They have also stated how the fascinating changes are happening in measuring students’ progress and how data can be used to improve education for everyone, in real time, both online and offline.

MOBILITY
The mobile phone is now a ubiquitous device. It is with everyone and everywhere, doing multiple tasks from listening to songs to taking pictures. Talking on phone is only one of its myriad functions, and certainly not the main one.

In India, the number of mobile phone subscribers has crossed 1 billion, making it only the second country after China to have achieved this landmark. The launch of cheaper smartphones, low call rates and intense competition has accelerated the pace of growth. Interestingly, the number of smartphones has crossed 170 million and is growing at 26 per cent CAGR.

Technology, which immerses the mobile phone as its centerpiece, will become a key piece of technology in learning and teaching. Mobile technology gives unprecedented freedom to students and teachers from the constraints of the IT campus of the Institution. Now learning can happen beyond the precincts of the institution at a time and pace convenient to the learner.

There is an enormous amount of online content now available on the Internet. A teacher can make available a properly curated content to a learner and then measure and track progress. Similarly, the learner can supplement or even substitute his classroom learning, collaborate with other learners and communicate with the teacher – all of this without the constraint of time and place – on his mobile phone.

With the advent of 4G and deeper penetration of smartphones, mobile based learning is likely to make a big impact on higher education. Starting with a blended model, it will eventually keep increasing its sphere of impact and influence.

An interesting case study on the application of digital technology to higher education is the launch of the Minerva Project by Ben Nelson. Minerva Project (www. minerva.kgi.edu) is a for-profit company founded by Ben Nelson, whose goal is to provide Ivy League education at a faction of the price. The tuition fee at Minerva for an undergraduate course (called “graduate” course in India) is USD 10,000, which is a fourth of the tuition fees at Ivy League Institutions like Harvard and Columbia.

In this four-year course, the first year is at San Francisco, followed by the other years in seven cities across the world. There is no physical campus for learning. Each class has less than 20 students and lessons are delivered online in an interactive manner and are recorded. All students are visible onscreen. Professors are prohibited from droning for more than 5 minutes. Students are evaluated not only on how they participate, but also how effectively they think. There are no exams.

Ben Nelson has proclaimed, “We are building a perfect university. That’s our goal” .

Digital trends have made a huge impact on the corporate world. Sectors like banking have embraced the digital medium like a “fish takes to water”. In contrast, the education sector has been a laggard, particularly higher education. With the rapid pace of change, it is an opportune time for higher education to leapfrog its adoption and make a significant impact on the learning process and the learner.

ACCOUNTING FOR COURT SCHEMES UNDER IND-AS & ON TRANSITION DATE

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Accounting for business combinations under Indian GAAP is significantly different to that under Ind-AS. Retrospective application of Ind-AS 103 Business Combinations may be difficult and in certain cases impossible, for past business combinations. Against this background, the business combinations exemption in Ind-AS 101 First Time Adoption of Indian Accounting Standards is probably the most important exemption, as it provides a firsttime adopter of Ind-AS an exemption from restating business combinations prior to its date of transition to Ind-AS, subject to certain requirements.

A first-time adopter choosing to apply this exemption is not required to restate business combinations to comply with Ind-AS 103, if control was obtained before the transition date. A first-time adopter taking advantage of this exemption will not have to revisit past business combinations to establish fair values and amounts of goodwill under Ind-AS. However, the application of the exemption is complex, and certain adjustments to transactions under Indian GAAP may still be required.

A first-time adopter may also choose not to use the exemption and restate previous combinations in accordance with Ind-AS 103. If a first-time adopter restates any business combination prior to its date of transition to comply with Ind-AS 103, it must restate all business combinations under Ind-AS 103 which occur after the date of that combination. In simple words, a first time adopter may choose a date and restate all business combinations from that date. Business combinations before that date are not restated by using the exemption.

Using the exemption not to restate business combinations under Ind-AS 103, does not mean that the entire accounting under Indian GAAP is kosher. The exemption is only with respect to fair value accounting. Thus, if a proper asset or liability was not recognised or written off in Indian GAAP, then the same will have to be properly accounted at the transition date and on a go forward basis in the Ind AS financial statements.

On 16th February 2015, the Ministry of Corporate Affairs (MCA) notified the Companies (Indian Accounting Standards) Rules, 2015 laying down the roadmap for application of IFRS converged standards (Ind-AS). As per general instructions in the MCA notification, notified Ind AS’s are intended to be in conformity with the provisions of applicable laws. However, if due to subsequent amendments in the law, a particular Ind AS is found to be not in conformity with such law, the provisions of the said law will prevail and the financial statements will be prepared in conformity with such law. Therefore, as per the Framework, law shall override the provisions of Ind-AS, unless clarified otherwise.

With the above background, let us consider two simple scenarios, for an acquirer company that is in phase 1, and has a transition date of 1st April, 2015. Prior to this transition date, the acquirer has made three acquisitions of businesses. Only Acquisition 2 was under a court scheme, in which two accounting concessions were made by the court. Acquisition 2 happened in 2009; when SEBI requirement to comply with accounting standards in a court scheme was not yet legislated. Since those acquisitions were of business divisions, rather than acquisition of an investment, those were accounted in the separate financial statements of the acquirer. The two scenarios are as follows:

1. Acquirer does not wish to restate past business combinations.

2. Acquirer wants to restate business combinations starting from acquisition 1.

Commentary on Scenario 1: Acquirer does not wish to restate past business combinations There is no issue with Acquisition 1 & 3. However, the question is with respect to Acquisition 2. Can the accounting ordered by the court be retained as it is both at the transition date and on a go forward basis? View 1 Yes, the court order is supreme and therefore it will trump the requirements of Ind-AS 101 and Ind-AS 103. Thus indefinite life intangible assets will not be resurrected in Ind-AS financial statements and impairment losses will be adjusted against reserves under Ind-AS on transition date and on a go forward basis. The court order is applicable to all statutory financial statements prepared under Indian law; and would be applicable to both Indian GAAP and Ind-AS financial statements. View 2 The court scheme was applicable to Indian GAAP financial statements and hence is not relevant for the purposes of preparing Ind AS financial statements. Therefore, on transition date the company will have to recognize intangible assets under Ind AS. Further any future impairment losses will be adjusted to P&L a/c rather than directly to reserves.

Commentary on Scenario 2: Acquirer wants to restate business combinations starting from acquisition 1

View 1
The acquirer can restate Acquisitions 1, 2 & 3. Though acquisition 2 was under a court scheme it can be restated under Ind-AS. This is on basis that the court scheme applied to Indian GAAP financial statements and not Ind-AS financial statements. When Acquisition 2 is restated in accordance with Ind AS 103, the accounting concessions provided by the court will have to be disregarded.

View 2
The acquirer can restate Acquisitions 1 & 3. However, Acquisition 2 cannot be restated because it is under a court scheme, and the court mandated accounting cannot be changed. This is on the basis that the court scheme is applicable to all statutory financial statements, and it does not matter whether those are prepared under Indian GAAP or Ind-AS.

View 3
The acquirer cannot restate acquisition 2, because it is under a court scheme. As a result, restating of Scquisition 1 is also tainted. This is because under Ind AS 101, if a first-time adopter restates any business combination prior to its date of transition to comply with Ind-AS 103, it must restate all business combinations under Ind-AS 103 which occur after the date of that combination. Therefore the acquirer can only restate acquisition 3. Acquisition 1 & 2, along with the court concession on the accounting will have to be retained under Ind AS.

Conclusion
The author believes that the current drafting of Ind AS and the MCA circular, provides a flexibility in the views that can be taken. However, the ICAI along with MCA may provide a more clear guidance and way forward on this major dilemma.

TS-724-ITAT-2015(DEL) ITO vs. Santur Developers P. Ltd. A.Y.: 2006-07, Date of Order: 24.07.2015

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Article 26(4) of India USA DTAA – In absence of similar provision for withholding taxes on payment to a resident Taxpayer on sale of land, there is no requirement to withhold taxes on sale consideration paid to Non-resident (NR) pursuant to non-discrimination Article of India- USA DTAA .

Facts
The Taxpayer, an Indian company, entered into an agreement to purchase a piece of land jointly owned by three parties. One of the co-owner of the land was a citizen of USA and a NR in India. The agreement was executed by an Indian resident who was holding the general power of attorney for the other owners.

The sale consideration was paid to the Indian resident constituted attorney in Indian rupees. The Taxpayer did not withhold taxes on such payment. The Tax authorities contended that the Taxpayer was required to withhold taxes u/s. 195 of the Act and hence, levied penalty for failure to withhold taxes.

The Taxpayer contended that since the agreement as well as payment was made to a resident in India, provision of section 195 of the Act did not apply. Further, section 195 applies only to remittance made in foreign currency, whereas in the present case since payment was made in Indian currency, tax was not required to be withheld under Act. Without prejudice to the aforesaid, it was contended that in absence of any provision relating to withholding of taxes where sale proceeds of an immovable property are paid to a resident person, there should not be any withholding requirement on payments to NRs applying the non-discrimination clause of India-USA DTAA

Held
The Tribunal did not rule on the applicability of section 195 as it was not contested before it.

In absence of a provision requiring Taxpayer to withhold tax on payment of sale proceeds to a resident, pursuant to non-discrimination article of the DTAA, Taxpayer was not required to withhold taxes on payment made to NRs.

TS-28-ITAT-2016(DEL) ACIT vs. NEC HCL System Technologies Ltd. A.Y.: 2008-09, Date of Order: 22nd January, 2016

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Section 9(1)(vii) of Act – Outsourcing fees paid by Japanese branch office of an Indian company to a non-resident (NR) and used for business development activities outside India, cannot be deemed to accrue or arise in India

Facts
The Taxpayer is a joint venture between an Indian Company (Indian JV Partner) and a Japanese Company (Japan JV Partner). The Taxpayer was engaged in the business of providing offshore software engineering services and solutions to F Co and its group companies.

The Taxpayer set up a branch office in Japan (Japan BO). The Japan BO was engaged in undertaking extensive sales and marketing activities in addition to bidding for projects and obtaining work from the customers from Japan and outside Japan (business development activities).

The Taxpayer entered into a framework agreement with Indian JV Partner and its group entity in Japan. The framework agreement was to facilitate sub-contract of software development work by Japan BO if the same could not be serviced by the taxpayer or Japan BO. During the relevant financial year, Japan BO paid certain outsourcing fee to another Japanese Company, which was group entity of Indian JV partner, without withholding taxes thereon.

The Tax authority contended that Japan BO was merely an extension of The Taxpayer and the outsourcing was undertaken by Taxpayer from India. Thus, outsourcing fee paid to Japanese Company is deemed to accrue or arise in India and the payment is therefore taxable in India. Hence, it is liable to tax withholding. Consequently, tax authority disallowed such payments made to Japanese Company in the hands of the Taxpayer for failure to withhold taxes on outsourcing fee.

The Taxpayer contended that Japan BO has an independent existence and carries on independent business in Japan. Thus, the outsourcing services are utilised by Japan BO in business carried on in Japan. Therefore, fee for such services cannot be deemed to accrue or arise in India u/s. 9(1)(vii)(c) and hence, no withholding is to be done on the payment of outsourcing fees.

Held
Taxpayer has a BO in Japan which carries on business outside India. Therefore, Japan BO creates a permanent establishment (PE) of the Taxpayer in Japan.

Japan BO had five employees as sales manager for carrying out sales and marketing activities and two managers for general administrative affairs of the company who possessed the technical skills required to understand the requirements of the projects. From the details provided about the employees in Japan and their job profile, it was clear that such employees were engaged in business development activities of Japan BO in Japan. Some of the projects obtained by Japan BO were outsourced by Japan BO as per its own business needs.

Merely because the financial statement of Japan BO is incorporated in the financial statements of the Taxpayer, the same does not conclude that the expenses are borne by the Taxpayer and not it’s Japan BO.

Payments for fee for technical services borne by the Japan BO shall not be deemed to accrue or arise in India and hence was not taxable in India. Therefore, there was no liability to withhold taxes on such outsourcing fees.

TS-72-ITAT-2016(Mum) Goldman Sachs (India) Securities Pvt. Ltd. vs. ITO (IT) A.Y.: 2011-12, Date of Order:12th February, 2016

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Article 13 of India Mauritius DTAA – Buyback transaction cannot be treated as colorable device for avoidance of tax – Buyback results in capital gain and is exempt from taxes in India under Article 13 of India-Mauritius DTAA .

Facts
The Taxpayer, an Indian resident company, is a whollyowned subsidiary of a Mauritian company (FCo). The Taxpayer undertook a buyback on account of which shares were bought back at a value higher than its face value.

The Tax Authority contended that the buyback transaction was a colorable transaction to avoid payment of dividend distribution tax (DDT). Therefore, Tax authority regarded such buyback as capital reduction and considered the excess payment over face value of shares as distribution of accumulated profits to shareholders i.e., F Co. It was further held that, since the Taxpayer had not paid DDT, dividend received by FCo would not be eligible for exemption under the Act. Accordingly, Taxpayer was held liable to withhold taxes at the rate of 5% on gross payment to FCo under Article 10 of the DTAA. Since the Taxpayer had failed to withhold taxes, the Taxpayer was held to be an assessee in default and interest was also levied for such failure apart from recovery of tax.

The Taxpayer however contended that the amount remitted under the buyback transaction was in the nature of capital gains which was exempt from taxation in India under India-Mauritius DTAA. Accordingly, neither any tax was deductible nor was there any default in withholding of tax.

Held
Buyback of shares cannot be equated with capital reduction as they are two entirely different concepts as discussed and held in the Bombay High Court (HC) decision of Capgemini India Pvt. Ltd. (Company Scheme Petition No. 434 of 2014).

CBDT Circular No. 779 dated 14th September 1999 specifically states that shareholders would not be subjected to dividend tax but taxed under capital gains provisions upon buy back of shares.

It is true that buyback transactions are subject to Income distribution tax pursuant to amendment by the Finance Act 2013. However, as the transaction under consideration pertained to a period prior to this amendment, there is no ambiguity that those provisions will not apply for buyback under consideration. Hence, the said transaction could not be regarded as deemed dividend but should be subjected to tax as capital gains.

Since Article 13 of the DTAA specifically exempts such transaction from tax in India, the Taxpayer is not liable to withhold tax under the Act. Even if the payment was considered as dividend, the requirement to pay DDT would make the payment exempt in the hands of the shareholder. Accordingly, withholding tax provisions should not apply.

By placing reliance on the observations of the Bombay HC ruling of Capgemini (supra), the Tribunal ruled that if the Taxpayer entered into a transaction which did not violate any provision of the Act, the transaction cannot be termed as a colorable device just because it results in non-payment or lesser payment of taxes in that particular year. The whole exercise should not lead to tax evasion. Non-payment of taxes by an assessee in given circumstances could be a moral or ethical issue.

2016 (41) STR 183 (Chattisgarh) CCE & C., Raipur vs. General Manager, Telecom District, BSNL

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If both the parties have preferred appeal, the Tribunal should pass a reasoned and speaking order and should discuss reason of acceptance of one appeal and rejection of appeal of another.

Facts
Appeal before the Tribunal was made by both i.e. the assessee and the department against the order of Commissioner. The Tribunal considered and discussed the contentions of the assessee only and no consideration or discussion was made whatsoever of the appeal filed by the department.

Held
Though both the appeals were disposed of, there was no discussion on department’s appeal while allowing the appeal of the assessee. Consequently, the matter was remanded back to the Tribunal to pass a reasoned and speaking order after hearing both the parties and without taking into consideration the earlier order passed by the Tribunal but discussing both appeals and the reasons for acceptance of one and the rejection of the other.

2016 (41) STR 11 (Bom) Quality Fabricators and Erectors vs. Dy. Dir. DGCEI, Mumbai

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Demand alleged to be due as per SCN without its adjudication cannot be recovered by issuing notice to banks and debtors

Facts
On the basis of investigation, a Show Cause Notice (SCN)was issued which was replied to by the Appellant denying the allegation. Without giving an opportunity of personal hearing and passing the adjudicating order, recovery proceeding was initiated by sending account freezing notices to banks. On initiation of said action, partial service tax was deposited and the said action was challenged before the High Court.

Held
The High Court observed that until and unless there is crystallisation of demand by proper adjudication, recovery action cannot be initiated when all allegations were denied in the reply filed. Accordingly, the recovery notices were set aside.

2016(41) STR 3 (All) Kunj Power Project Pvt. Ltd. vs. Union of India.

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The action of attaching bank accounts without giving opportunity of hearing is gross violation of prescribed rules and such order is required to be quashed

Facts
The Appellant engaged in fabrication, erection and installation of power sub-stations availed CENVAT credit for discharging service tax. The Respondent during an enquiry gave an oral direction to reverse the credit which was not adhered to. Therefore, a Show Cause Notice was issued. Before submission of the reply, bank accounts were attached and this action is challenged before the High Court.

Held
The High Court observed that while proceeding for attachment of property, procedure specified in Service Tax (Provisional Attachment of Property) Rules, 2008 and C.B.E. & C. Circular No. 103/6/2008-S.T. dated 01/07/2008 should be followed. It was further noted that as per Rule 3(2) of the said Rules, prior notice is required to be given specifying the reasons for initiation of action of attachment and details of property to be attached and opportunity for hearing is required to be provided within 15 days from service of notice. Since the Respondent has failed to issue such notice and grant an opportunity of hearing before attaching the accounts and also no cogent reasons were provided justifying the said action, the order attaching bank accounts was quashed and cost of Rs.25,000/- was ordered to be paid to Appellant.

2016 (41) STR 168 (Mad) CCE, Chennai- III vs. Visteon Powertrain Control Systems (P) Ltd.

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CENVAT credit of outdoor catering services, cost of which is borne by the assessee, shall be allowed for the period upto 31st March, 2011.

Facts
CENVAT credit was availed on outdoor catering services provided in the factory premises to its employees during the period prior to 1st April, 2011. The department contended that the service could not be treated as “input service” as it was neither used in or in relation to manufacture or clearance of final product nor is an activity relating to business. Adjudicating authority allowed CENVAT credit considering the services to be in relation to manufacture. Following Larger Bench decision in GTC Industries Ltd. 2008 (12) STR 468 (Tri.-LB), the Tribunal in the department’s appeal allowed CENVAT credit considering the services to be relating to business. In some cases, the Tribunal relied upon the Hon’ble Supreme Court’s decision in Maruti Suzuki Ltd. vs. CCE 2009 (240) ELT 641 (SC) and disallowed CENVAT credit. The department argued that Notification No. 3/2011-ST dated 1st March, 2011 has substituted the definition of input service and therefore, should be applied retrospectively and therefore outdoor catering services were excluded from the definition of “input service” even for the period prior to such substitution. Relying upon Bombay High Court’s decision in Ultratech Cement Ltd. 2010 (260) ELT 369 (Bom), the Appellants pleaded that CENVAT credit be allowed on the ground of mandatory statutory requirement to provide canteen facility to employees. It was also argued that the effective date of notification was 1st April, 2011 only and therefore, for prior period, CENVAT credit should be available.

Held
All contentions raised by the revenue have been elaborately considered by the Bombay High Court in case of Ultratech Cement Ltd. (supra), including Hon’ble Supreme Court’s decision of Maruti Suzuki Ltd. (supra), wherein CENVAT credit was allowed except in case the cost of food is borne by the employee. Further the plea of retrospective application of exclusion to definition of “input service” was rejected on account of amendment clearly specifying the date of its enforcement to be 1st April, 2011. Thus, relying on the aforesaid decisions CENVAT credit on outdoor catering services prior to 1st April, 2011 was allowed.

Inter-State Transfer for Job work vis-à-vis Requirement of ‘F’ forms

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Introduction
Section 6A of Central Sales Tax Act, 1956 (CST Act) requires that, if there is any inter-state transfer to branch or agent or principal, as the case may be, then ‘F’ form is required to be obtained from transferee. If such form is not obtained, it will be deemed to be inter-state sale for all purposes of CST Act.

Section 6A refers to inter-state branch transfer or to agent/ principal (collectively referred to as ‘branch transfer’). However, in addition to branch transfer of stock, there is also inter-state branch transfer for job work. Like, a dealer in Gujarat may send his goods for processing to its job worker in Maharashtra. Job worker will complete the processing and send processed goods to its employer i.e. the dealer who had sent him goods for process.

In this case, there are two transfers, one from Gujarat to Maharashtra and again from Maharashtra to Gujarat.

Difference between Branch Transfer and Job Work Transfer
The stark difference between branch transfer and job work transfer is that the branch transfer is to oneself. However, in case of job work transfer the transfer is to independent job worker. The relationship is of principal to principal and job worker charges its own processing charges for the same. In other words, the relationship in job work transactions is like seller and buyer. If any goods are involved in the process, which gets transferred to principal then job worker may be liable to discharge works contract liability on such processing charges.

Though ‘F’ form is required for inter-state branch transfers, it was not contemplated in relation to job work transfer. In fact the Commissioner of Sales Tax, Maharashtra State has issued circular bearing no.16T of 2007 dated 20.2.2007 explaining the above position and stating that F forms not required for job work transfers.

Judgment of Hon. Allahabad High Court in case of Ambica Steel Ltd . (12 VST 216)(All).
The requirement of obtaining of F forms again came in light when the Hon. Allahabad High Court had an occasion to decide a similar issue. In that case, the dealer challenged the requirement of ‘F’ forms for job work transfer.

The Hon. Allahabad High Court ruled that F forms are necessary for job work transfer and also upheld validity of the requirement.

The Commissioner of Sales Tax, Maharashtra State, again issued circular bearing no.5T of 2009 dated 29.1.2009 reiterating its earlier view that inspite of above judgment of the Hon. Allahabad High Court, legally F forms are not required for job work transfer.

However, M/s. Ambica Steel Ltd. went to the Supreme Court against the Allahabad High Court judgment. In the Supreme Court, the dealer did not contest the legality of requirement of F forms as per section 6A but got case remanded back on premises that it will be producing forms before assessing authority.

The Hon. Supreme Court accordingly disposed of the matter vide judgment reported in case of Ambica Steel Ltd. (24 VST 356)(SC).

Based on the above Supreme Court judgment, the Commissioner of Sales Tax, Maharashtra State, again issued circular bearing no.2T of 2010 dated 11.1.2010 withdrawing earlier circulars and advising for obtaining ‘F’ forms for job work transfers also. One more circular bearing no.12T of 2010 dated 22.3.2010 was issued stating that the withdrawal is prospective i.e. from 11.1.2010.

Based on the above circulars, the sales tax authorities have started levying tax under CST Act when F forms are not available for inter-state job work transfers.

The Bombay High Court on the above issue
Based on one such assessment order, the issue was contested before the Hon. Bombay High Court in case of Johnson Matthey Chemicals India Pvt. Ltd. vs. State of Maharashtra (W.P.No.7400 of 2015 along with W.P.No.7934 of 2015). The said writ petition was decided vide judgment dated 16.2.2016.

The facts in case of this writ petition are narrated by the High Court as under:

“4) The Petitioner holds a registration number as set out in para 4 of the Petition. It is claimed that the Petitioner is manufacturer and job worker, engaged in the manufacture of different grades of support catalyst, including activated charcoal support. It is stated that this is predominantly a process resulting in the production of recharged catalyst from spent catalyst. It is stated that the Petition relates to job work transactions. The Petitioner receives a specified quantity of spent catalyst from its customers from within as well as outside the state of Maharashtra. The Petitioner undertakes job work of converting the spent catalyst received from the customers into support catalyst and sends back the recharged support catalyst to such customers.”

The basic arguments of the petitioner were as under:
i) The intention of insertion of section 6A was to refer to branch transfers, as there were chances of evasion.
ii) Only branch transfers are covered by Section 6A as clear from language used in section 6A.
iii) No provision in Act/Rules to obtain ‘F’ forms where transactions are between principal to principal.
iv) Section 6A(1) will operate when there is actual interstate sale and failure to bring F form, and not otherwise.
v) Section 6A will aid section 6 to levy tax on otherwise completed inter-state sale, but not otherwise.

The Respondents argued that section 6A applies to all non sale inter- state movements and it is merely rule of evidence.

Having noted arguments from both sides, the Hon. Bombay High Court has concurred with the judgment of the Allahabad High Court in case of Ambica Steel Ltd. (12 VST 216)(All). The observations of the Hon. Bombay High Court are as under:

“46) We do not think that there is any ambiguity in the legal position. Further, we do not see anything ambiguous or vague in the circular issued by the State of Maharashtra after this judgment in the case of Ambica Steels Limited (supra) by both, the Allahabad High Court and the Hon’ble Supreme Court of India. We are of the firm view that furnishing and scrutiny/verification of the declaration in that form is a requirement in law and if that is fulfilled, the burden on the dealer is taken to be discharged. If that declaration is not furnished, then, the consequences follow. The goods might have been dispatched for job work and not as and by way of sale, but that is the plea or case of the dealer. If that is the case and the burden is on him to prove it, then, he has to obtain the declaration. If the declaration is not being issued by some States in the form prescribed, namely form ‘F’ and the dealer made all the efforts to obtain it but failure to produce it is not his fault, then, he may, as the Hon’ble Supreme Court of India clarifies, request the Assessing Officer to take that circumstance into consideration. If that request is made, the Assessing Officer can, depending upon the facts and circumstances of a particular case, pass such orders as are permissible in law. Therefore, we do not agree that the circular of 2010 misinterprets the order of the Hon’ble Supreme Court of India. It neither misreads nor misinterprets the judgment of the Allahabad High Court.

Throughout ,the understanding is that the burden is on the dealer and he has to discharge it in the manner prescribed in law. If the burden has to be discharged in the manner set out, then, no other mode or manner is permissible. Therefore, all that the Hon’ble Supreme Court clarifies is that if some States are not issuing ‘F’ form, then, that approach of a particular State should be brought to the notice of the Assessing Officer in the dealer’s State. That the Assessing Officer should be convinced that the dealer made all efforts, but for no fault of his, he could not obtain the ‘F’ form. Thereupon and pursuant to the liberty given by the Hon’ble Supreme Court of India and the dealer raising the plea, the Assessing Officer, while taking note of it, would consider the peculiar facts and circumstances and may pass requisite orders.

Even that is not the rule but an exception. The requirement is not displaced necessarily and as urged. We do not, therefore, see any merit in the contentions of Mr. Sridharan and while challenging the circular of 2010.” (underlining ours)

TRANSFER OF USE OF INTANGIBLES: IS RIGHT TO USE ALWAYS TRANSFERRED?

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Introduction:
Intangible or incorporeal rights such as patents, trademarks, computer software etc. are characterised as goods. It was observed in Vikas Sales vs. Commissioner of Commercial Taxes (1996) 102 STC 106 (SC) that since incorporeal rights are capable of transfer and transmission they are movable property and therefore included in the ambit of goods. In Commissioner of Sales Tax vs. Duke & sons Pvt. Ltd. (1999) 112 STC 370 (Bom), upholding applicability of sales tax, the Court held, “the manner of transfer of the right to use the goods to the transferee would depend upon the nature of the goods…… For transferring the right to use the trademark it is not necessary to handover the trademark to the transferee or give control and possession of trademark to him, it can be done merely by authorizing the transferee to use the same in the manner required by the law as has been done in the present case. The right to use the trademark can be transferred simultaneously to any number of persons” Also in SPS Jayam & Co. vs. Registrar, Tamil Nadu Taxation Special Tribunal & Others (2004) 137 STC 117, it was held that trademark is intangible goods which is subject matter of transfer. Giving permission to use trademark for a particular period while also retaining this right to use such trademark for self-use or to be able to grant license to some other person simultaneously is only a transfer of right to use and not merely a right to enjoy. It was observed that simply by retaining the right for oneself to use the trademark while granting permission to others to use the trademark, it would not take away the character of the transaction as one of transfer of right to use. This view was also echoed by the Andhra Pradesh High Court in G.S. Lamba & Sons vs. State of A.P. 2012-TIOL-49-HC-AP-CT that levy of tax under Article 366-(29A)(d) of the Constitution of India is not on the use of goods but on the transfer of right to use goods which accrues only on account of transfer of such right. Transfer of Right is sine qua non for the right to use any goods and such transfer takes place when a contract is executed under which the right is vested in the lessee. G.S. Lamba (supra) however involved providing tangible goods on hire.

Nevertheless, considering a significant tax potential in the transactions involving intangible goods, the Central Government incorporated section 66(55b) in the Finance Act, 1994 from September 10, 2004 in terms of which “intellectual property service” was defined as one which means a) transferring whether (permanently or otherwise) amended from 16/06/2005 as temporarily or (b) permitting the use or enjoyment of any intellectual property right”. This category of service in its new version under the negative list based taxation in force from 01/07/2012 appears as declared service in section 66E(c) as “temporary transfer or permitting the use or enjoyment of any intellectual property right.”

At this point, it must be noted that mutual exclusivity of VAT and service tax has been envisaged in Imagic Creative P. Ltd. vs. CCE 2008 (9) STR 337 (SC) by the Supreme Court. So also, in Bharat Sanchar Nigam Ltd. & Anr. vs. UOI & Others 2006 (2) STR 161 (SC), it was held that value of service cannot be included in the sale of goods or the price of goods in the value of service. Further, in the case of Bharat Sanchar Nigam Ltd. (supra), a test was laid down to determine whether a transaction is for transferring right to use goods as provided below:

“Para 97
To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:

(a) There must be goods available for delivery;

(b) There must be a consensus ad idem as to the identity of the goods;

(c) The transferee should have a legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;

(d) For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statue – viz. a “transfer of the right to use” and not merely a license to use the goods;

(e) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others”. (emphasis supplied)

Thus the test of exclusivity is laid down by the Supreme Court. This criteria is followed in a large number of decisions. However, the Courts have distinguished in a few others leading to a controversy whether the transaction involves transfer of right to use and thus a deemed sale liable for sales tax/VAT tax or a service liable for service tax.

Key Rulings of the Courts: Test of Exclusivity
In the case of Nutrine confectionary Co. Pvt. Ltd. vs. State of Andhra Pradesh (2012) 21Taxmann.com 555 (Andhra Pradesh), the petitioner allowed the right to use a trademark on non-exclusive basis, against payment of royalty. The dispute related to whether or not there was transfer of right to use goods. Relying on State of Andhra Pradesh vs. Rashtriya Ispat Nigam Ltd. (2002) 126 STC 114 (SC) it was observed that ‘assignee’ was free to make use of the trademark and logo and had full control over such use. The petitioner did not in any manner regulate the use of trademark or logo by the assignee and also used trademark for its own use. These facts did not mitigate in favour of the petitioner. Distinguishing the BSNL’s case, the Court observed, “BSNL dealt with a case of mobile connections. It is not a case of transfer of trademark or logo. The contract for providing a mobile connection invariably contains a clause that the licensee shall use a mobile connection exclusively for himself/herself and nobody else would use. In the case of trademark, the same can be used by an assignee without any exclusive right. This itself does not remove the transaction under the agreement outside the purview of section 5E” and therefore liable for sales tax (VAT). (Note: Section 5E of the GST Act overrides all other provisions of the said Act when it is the case of transfer of right to use any goods). Not in line with this, a Division Bench of Kerala High Court in Malabar Gold Pvt. Ltd. vs. Commercial Tax Officer (2013) 35 Taxmann. com 569 (Kerala) while analysing an agreement for franchise followed the dictum of Bharat Sanchar Nigam Ltd.’s case (supra) after considering various cases including Rashtriya Ispat Nigam (supra), Duke & Sons Pvt. Ltd. (supra), SPS Jayam & Co. (supra) and even the above Nutrine’s case (supra). In this case, the assesse engaged in the business of marketing, trading etc. of gold and diamond jewelery under the brand “Malabar Gold”, received royalty under a franchise agreement containing various clauses including permitting the use of trademark. The assessee paid service tax on royalty receipts under franchise service. The VAT department considering the use of trademark as transfer of right to use trademark demanded VAT . The clauses in the franchise agreement were examined in detail by the Court. In spite of the revenue’s heavy reliance interalia on the above Nutrine’s case (supra), the facts were distinguished observing that Nutrine’s case was decided because of applicability of section 5E of the Andhra Pradesh General Sales Tax Act and the Court held that the test laid down in BSNL’s case (supra) squarely applied as there were no deliverables at any stage and the right was not transferred to the exclusion of the franchisor, who could transfer the same right simultaneously to others and thus the test laid down in BSNL judgment was not satisfied. The Court also distinguished two earlier decisions of Kerala High Court itself viz. Jojo Frozen Foods Pvt. Ltd. vs. State of Kerala (2004) 24 VST 327 (Ker) and Kareem Foods Pvt. Ltd. vs. State of Kerala (2009) 24 VST 333(Ker.) on the ground that in these cases, there was no occasion to consider either Entry 97 of LIST-I under the 7th Schedule of the Constitution or the service tax provision u/s. 65(105)(zze) of the Finance Act,1994 in respect of franchise service brought in the law from 2003, as the cases were of pre-2003 period and service tax is correctly paid as the transaction is of franchise service. Yet in another case relating to franchise viz. Vitan Departmental Stores & Industries Ltd. vs. The State of Tamilnadu 2013-TIOL-897-HC-MAD-CT, the agreement related to granting exclusive right to operate departmental store for a specified period. The High Court held that the transaction was not a mere license or mere right to enjoy but a transfer of right to use intangible goods as the right was provided to operate the store on exclusive basis. In a recent decision of Tata Sons Limited & Another vs. The State of Maharashtra 2015-TIOL-345-HC-MUMCT, the decision in Bharat Sanchar Nigam Ltd. (supra) was distinguished observing that the controversy dealt with in this case related to telephone service and not similar to issue of trademarks and held that in relation to intangibles such as trademarks, the transfer of right to use need not be exclusive and unconditional and such transaction is capable of multiple transfers and transferor continuing to use goods such as trademarks would constitute sale exigible to the State value added tax.

Thus the question that arises is whether the test laid down by the Supreme Court in BSNL’s case (supra) is required to be followed even in the case of intangible goods or whether it applies only to the transfer of right to use tangible goods and distinguishable for determination of transfer of right to use intangible goods. Consequently, the issue is whether it is simply on account of the inherent nature of the intangible goods which allows simultaneous use by multiple persons that a transaction cannot be treated as sale or simply because the service tax law now contains provisions to tax the transaction as ‘service’, the transaction is held as service and not as deemed sale. In this context, it is apposite to discuss one more decision in AGS Entertainment Pvt. Ltd. vs. Union of India 2013 (32) STR 129 (Mad) wherein validity of provisions of section 65(105)(zzzzt) of the Finance Act,1994 (dealing with the service of temporary transfer or permitting the use or enjoyment of any copyright) was examined. In this case, a service provided by producer/distributor/exhibitor was challenged on the ground that transfer of right to use the goods amounted to sale and not service. The High Court followed BSNL’s case (supra) to contend that ”the temporary transfer of copyright did not satisfy principles laid down in BSNL’s case (supra) and it is neither a sale nor a deemed sale. Service tax is a levy on “temporary transfer” or “permitting the use or enjoyment” of the copyright as defined under the Copyright Act, 1957. In the case of Sales Tax Act, there would be “transfer of right to use goods” whereas under the Service Tax Act what is levied is temporary transfer/ enjoyment of the goods. The pith and substance of both enactments are totally different. “Temporary Transfer” or “permitting the use or enjoyment of the copyright is not within the State’s exclusive power under Entry 54 of List-II.”

Conclusion:
The issue thus remaining open is whether the test of exclusivity laid down in BSNL’s case is applicable to intangibles or is the decision distinguishable for transfer of right to use intangibles. Also whether there is a difference between granting permission to use and transfer of right to use. If transfer of use necessarily involves transfer of right to use whether the goods are tangible or intangible, the levy of service tax has no place. When any of the matters reaches Supreme Court, it would have to decide these issues among others. In the interim, the Courts would have other cases to decide with new perspective to the controversy when the facts are different and therefore in spite of paying one of the two taxes, the assessee may have to face litigation initiated by the other authority.

Welcome GST VAT (GST) in the European Union (Part II)

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[This is the second and concluding part of write up on VAT in the European Union (‘EU’)]

The previous write up discussed the background of Value Added Tax (‘VAT’) regime currently in force in the European Union (EU). It briefly described inter alia the authority and scope of the tax, the internal coordination between various Member States, the value added tax principles and the mechanics of tax regime. The current write up deals with some important concepts and procedural aspects of the EU VAT .

Branch Transfer (also known as intra-community acquisitions):

Generally, a transfer of goods between branches of the same legal entity (i.e. transfer of goods from a factory to a warehouse owned by the same company within the same Member State) is not considered as a supply for VAT purposes. However, this general rule will not apply in situations where an entity transfers its own goods across borders within the EU. Such transfers are also known as intra-community supplies / acquisition. A taxable person is deemed to make an intra-community supply and an intra-community acquisition if the person transfers goods between different parts of a single legal entity located in different Member States. In such cases, the transferring entity may need to register for VAT in both i.e. the Member State of dispatch and the Member State of arrival. Member States are authorised to prescribe their own registration requirement and business entities need to refer to the relevant Member State’s requirements before transferring goods across borders.

Exceptions to the above (Transfers deemed not to be acquisitions).
It is pertinent to note that not all intra-community movements of own goods are treated as acquisitions.The following cross border transfers are not treated as intracommunity transfers:

Goods to be installed or assembled for a customer in another Member State
Goods transported to another Member State under the distance selling rules
Goods meant for export outside the EU from another Member State or dispatched to another Member State (i.e. the goods are temporarily transferred from one Member State to another and thereafter exported from the second Member State)
Goods sent to another Member State for processing (provided that the goods are returned after processing)
Goods temporarily used in another Member State for a supply of services made there
Goods used temporarily (i.e. for less than two years) in another Member State

Taxable person:
The EU VAT directive defines ‘Taxable person’ to mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Such a person may be an individual, partnership, company or other forms of business which supplies taxable goods and services in the course of business.

Economic activity conducted ‘independently’ shall exclude activities of employee and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.

Exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis is regarded as an economic activity. In addition to this, any person who, on an occasional basis, supplies a new means of transport, which is dispatched or transported to the customer by the vendor or the customer, or on behalf of the vendor or the customer, to a destination outside the territory of a Member State but within the territory of the Community, shall be regarded as a taxable person.

States, regional and local government authorities and other bodies governed by public law are not regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities. This is so, even where they collect dues, fees, contributions or payments in connection with those activities or transactions. However, as an exception to the general rule, when State / regional / local government authorities engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition. Annexure I appended to the EU VAT directive provides a list of activities (i.e. supply of water / electricity / gas, warehousing, organisation of public fares and trade exhibitions, etc.), in respect of which bodies governed by public law are regarded as taxable persons, provided that those activities are not carried out on such a small scale as to be negligible.

VAT rates:
The EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (for supplies of goods and services referred to in an exhaustive list). Actual rates applied for this purpose may vary between Member States and between certain types of products. There is a provision for super reduced rate also.

The most reliable source of information on current VAT rates for a specified product in a particular Member State is that country’s VAT authority. Nevertheless, it is possible to get an overview of the different rates applied from the VAT rates in the European Union information document.

Valuation:
For the purpose of levy of VAT on supply of goods or services, the taxable amount includes everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the said supply.

Inclusions:
The taxable amount shall include the following factors:

(a) taxes, duties, levies and charges, excluding the VAT itself;

(b) incidental expenses such as commission, packing, transport and insurance costs, charged by the supplier to the customer.

For the purposes of incidental expenses, Member States are allowed to regard expenses covered by a separate agreement as incidental expenses.

Exclusions:
The taxable amount shall not include the following factors:
(a) price reductions by way of discount for early payment;
(b) price discounts and rebates granted to the customer and obtained by him at the time of the supply;
(c) amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer, and entered in his books in a suspense account.

The taxable person must furnish proof of the actual amount of the expenditure in respect of reimbursements claimed and may not deduct any VAT which may have been charged.

Packing material:
As regards the costs of returnable packing material, Member States may take one of the followings:
(a) exclude them from the taxable amount and take the measures necessary to ensure that this amount is adjusted if the packing material is not returned;
(b) include them in the taxable amount and take the measures necessary to ensure that this amount is adjusted if the packing material is in fact returned.

EXEMPTIONS:
Member States grant exemptions in respect of certain activities in the interest of public at large. A snapshot of activities which are currently exempted from EU VAT is given below:

Supply by the public postal services, of services and the supply of goods incidental thereto.

Hospital and medical care and closely related activities undertaken by bodies governed by public law.

Provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned.

Supply of human organs, blood and milk.

Supply of services by dental technicians in their professional capacity and the supply of dental prostheses by dentists and dental technicians.

Supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition

Supply of services and of goods closely linked to welfare and social security work, including those supplied by old people’s homes, by bodies governed by public law or by other bodies recognised by the Member State concerned as being devoted to social wellbeing.

Supply of services and of goods closely linked to the protection of children and young persons, by bodies governed by public law or by other organisations recognised by the Member State concerned as being devoted to social wellbeing.

Provision of children’s or young people’s education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects.

Tuition given privately by teachers covering school or university education.

Supply of staff by religious or philosophical institutions with a view to spiritual welfare.

Supply of services, and the supply of goods closely linked thereto, to their members in their common interest in return for a subscription fixed in accordance with their rules by non-profit-making organisations with aims of a political, trade union, religious, patriotic, philosophical, philanthropic or civic nature, provided that this exemption is not likely to cause distortion of competition.

Supply of certain services closely linked to sport or physical education by non-profit-making organisations to persons taking part in sport or physical education.

Supply of certain cultural services and the supply of goods closely linked thereto, by bodies governed by public law or by other cultural bodies recognised by the Member State concerned.

Supply of services and goods, by organisations whose activities are exempt in connection with fund-raising events organised exclusively for their own benefit, provided that exemption is not likely to cause distortion of competition.

Supply of transport services for sick or injured persons in vehicles specially designed for the purpose, by duly authorised bodies.

Activities, other than those of a commercial nature, carried out by public radio and television bodies.

Certain financial services / transactions such as insurance / reinsurance transactions and related broking services, granting and negotiation of credit, negotiating of or dealings in credit guarantees and management of credit guarantees, acceptance of deposit / current accounts, banking transactions: payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection, transactions in money, etc.

Invoicing:
Taxable persons doing business in the EU are subject to a single set of basic EU-wide invoicing rules1 , and in certain areas, national rules set by the individual EU country. Businesses are free to issue electronic invoices subject to acceptance by the recipient. National tax authorities cannot require businesses to provide any notification or to receive authorisation. However, e-invoicing will become obligatory in public procurement. Businesses can outsource invoicing operations to a third party or to the customer (i.e. self-billing), in some circumstances.

Businesses are generally free to store invoices where and how they like (paper/electronic, in a different EU country to where they are based, etc.).

An ‘invoice’ is required for VAT purposes, under EU rules, in case of business-to-business (B2B) supplies and certain business-to-consumer (B2C) transactions. In some cases, there are specific national rules on transactions which require businesses to issue an ‘invoice’.

Apart from the usual Information required in an Invoice such as date of invoice, serial number, customer’s VAT identification number, supplier’s and customer’s full name and address, description of quantity & type of goods supplied or type & extent of services rendered, VAT rate applied, VAT amount payable, breakup of VAT amount payable by VAT rate or exemption unit price of goods or services – exclusive of tax, discounts or rebates (unless included in the unit price), some extra information is also required in some cases. Specific instance of the same are as follows:

Exempt transactions – a reference to the appropriate (EU or national) legislation exempting it, or any other reference indicating it is exempt (at the choice of the supplier).

Customer liable for the tax (i.e. under the reversecharge procedure) – the words ‘Reverse charge’.

Intra-EU supply of a new means of transport – the details specified in Article 2(2)(b) of the VAT Directive (e.g. for a car, its age and mileage).

Applicability of margin scheme – a reference to the particular scheme involved (e.g. ‘Margin scheme — travel agents’).

Self-billing (customer issues invoice instead of supplier) – the words ‘Self-billing’.

Person liable for tax is a tax representative – their VAT identification number, full name and address.

Supplier is operating a cash-accounting system – the words ‘Cash accounting’.

Once an invoice includes all the required information (depending on the case, and the EU country), it serves as sufficient proof to allow a right to deduct VAT in whichever EU country the person is concerned. No EU country will prevent this by requiring any extra information, prior confirmation, etc.

EU filings:

Intrastat
Intrastat is a system for reporting intra-community transactions made by taxable persons. This system was first introduced on 1st January 1993 with a view to allow the collection of statistical information on intra-community trade in the absence of customs controls at the borders. EU businesses are required to submit information on a periodic basis to the VAT authorities if they make either intra-community supplies or acquisitions of goods in excess of specified limits.

Taxable persons making intra-community supplies are also required to submit EU Sales Lists (ESLs) to the VAT authorities on a quarterly basis. Failure to comply (delays, errors or omissions) can lead to penal consequences. Effective from 1st January 2010, a new requirement has been introduced whereby businesses are also obligated to file Intrastat returns for cross-border services provided to business customers in other EU Member States.

VAT returns:
Currently, all business registered for EU VAT purposes are obligated to file VAT returns as per their respective counties requirements i.e. National VAT returns. As a result, business intra- community supply / acquisition are required to file VAT returns in more than one jurisdiction (in different forms and with varying reporting requirements) and leads to an extra administrative burden on the business. A proposal has been moved by the European Commission (on 23rd October 2013) whereby all business within the EU will be required to file a standard VAT return. The standard VAT return, which will replace national VAT returns, will ensure that businesses are asked for the same basic information, within the same deadlines, across the EU.

The purpose of the standard VAT return is to reduce administrative burdens for businesses, ease of tax compliance and make tax compliances across the EU more efficient. The proposal also envisages a simplified and uniform set of information that businesses will have to provide to tax authorities when filing their VAT returns, regardless of the Member State of submission. The Commission envisages that once the proposed directive is adopted by the Council, after consultation with the European Parliament, it will enter into force on 1st January 2017.

Parting words:
Undoubtedly, the EU VAT legislation is unique in many ways when compared to the VAT legislations of other countries. Success of the EU VAT regime rests largely on the effectiveness of the European Commission and co-operation of the Member States. They are indeed a fine example to emulate (various countries, having diverse political and economic interest, coming together and administering the tax laws with such a smooth and satisfactory procedure).

Our country, which has borrowed several concepts from the EU VAT legislation while designing the ‘place of supply rules’ and the ‘point of taxation rules’, etc., can also take some inspiration from the Member States and their spirit of co-operation and trust while designing Indian Goods and Services Tax system.

Mangal Keshav Securities Limited vs. ACIT ITAT “B” Bench, Mumbai Before Joginder Singh (J. M.) and Ashwani Taneja (A. M.) ITA No.: 8047/Mum/2010 A.Y.:2006-07, Date of Order:29th September, 2015 Counsel for Assessee / Revenue: Nishan Thakkar & Prasant J. Thacker / J. K. Garg

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Explanation to Section 37(1) – Fines, penalties paid for procedural non-compliances to regulatory authorities are compensatory in nature hence allowable as business expenditure.

Facts
The assessee is a closely held company engaged in the business of share/stock broking and is a member of BSE, NSE and is a DP for CDSL & NSDL and Mutual Fund Distribution.

During the course of assessment proceedings, it was noted by the AO from the Tax Audit Report that the assessee had paid penalty/fine levied by the Stock Exchange amounting to Rs.9.08 lakh. According to the assessee the fines, penalty etc. were paid for some procedural non-compliances, inadvertently done by the assessee and it had neither undertaken any activities which were in ‘violation’ or ‘offence’ of any law, nor has conducted any activities which were prohibited by law. But the AO was not satisfied and he disallowed the said amount by invoking Explanation to section 37. On appeal the CIT(A) confirmed the order of the AO.

Held
The Tribunal noted that the impugned amount was paid on account of minor procedural irregularities, in day- today working of the assessee. The assessee’s business involved substantial compliance requirements with various regulatory authorities e.g. BSE, NSE, CDSL, NSDL, & SEBI etc. According to it, in the regular course of the assessee’s business certain procedural non-compliances were not unusual, for which the assessee is required to pay some fines or penalties.

It further observed that these routine fines or penalties were “compensatory” in nature; these were not punitive. These fines were generally levied to ensure procedural compliances by the concerned authorities. Their levy depended upon the facts and circumstances of the case, and peculiarities or complexities of the situations involved. It further observed that under the income tax law, one is required to go into the real nature of the transactions and not to the nomenclature that may have been assigned by the parties. Further, relying upon the judgment of the Tribunal in assessee’s own case for A.Y. 2007-08 in ITA No.121/Mum/2010 dated 04.11.2010, the Tribunal allowed the appeal of the assessee.

Neela S. Karyakarte vs. ITO ITAT “B” Bench, Mumbai Before Joginder Singh (J. M.) and Ashwani Taneja (A. M.) ITA No.: 7548/Mum/2012 A.Y.: 2005-06, Date of Order:28th August, 2015 Counsel for Assessee / Revenue: Dr. K. Shivaram / Vijay Kumar Soni

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Section 54EC: The period of six months available for making investment means six calendar months and not 180 days. Payment by cheque dates back to date of presentation & not date of encashment

Facts
The assessee sold a row house on 27.04.2004 for Rs.18,50,000/-. After indexation, the assessee earned long term capital gain of Rs.10,90,176/-. The assessee invested this capital gain in NHB Capital Gain Bonds 2006 on 31st December, 2004 and claimed exemption u/s 54EC. However, the AO found that the assessee was not eligible for exemption u/s 54EC, since the investment was not made by the assessee within six months from the date of transfer of original asset, as per requirement of section 54EC. The AO observed that the sale of row house was executed on 27.04.2004, as per the registered sale agreement, whereas the assessee has invested the amount in NHB Bonds on 31.12.2004. Thus, as per AO, it was beyond the period of six months as stipulated in section 54EC. Accordingly, it was held by the AO that benefit of deduction u/s. 54EC was not allowable to the assessee.

Being aggrieved, the assessee filed appeal before the CIT(A) who after considering all the submissions and evidences placed by the assessee held that going by the date of full and final settlement, the date of transfer would be 29th June, 2004. However, according to him, since the assessee made investment in the bonds on 31.12.2004, it fell beyond the period of six months from the date of transfer and therefore, the assessee was not eligible for deduction u/s. 54EC.

Held
The Tribunal noted that the CIT(A) has held that the date of transfer of the original asset was 29th June, 2004 and the same is not disputed by the revenue. The Tribunal further took note of the decisions of the Special Bench of Ahmedabad in the case of Alkaben B. Patel (2014) (148 ITD 31) and the Mumbai Bench of Income Tax Tribunal in the case of M/s. Crucible Trading Co. Pvt. Ltd. (ITA No. 5994/Mum/2013 dated 25.02.2015) where the term “6 months” have been interpreted to mean 6 calendar months and not 180 days. Further, it also took note of the decision of the Supreme Court in the case of Ogale Glass Works Ltd. (1954) 25 ITR 529, where it was held that the cheques not having been dishonoured but having been cashed, the payment relates back to the dates of the receipt of the cheques and as per the law the dates of payments would be the date of delivery of the cheques. As per the facts, the assessee had filed an application with National Housing Bank on 23.12.2004 along with the cheque of even date. Thus, it was held that the assessee had clearly made investment within the period of 180 days also. Thus, the Tribunal held that viewed from any angle it can be safely said that the assessee has made investment within the period of six months. In the result, the appeal of the assessee was allowed.

2016-TIOL-303-ITAT-KOL Apeejay Shipping Ltd. vs. ACIT ITA No. 761/Kol/2013 A.Y.: 2004-05, Date of Order: 20th January, 2016

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Sections 153(2A), 153(3), 254 – If the Tribunal has set aside or cancelled the assessment, then the fresh order of assessment by the AO shall be passed within the period as prescribed u/s. 153(2A). The provisions of section 153(2A) are absolute and they impose a fetter on income-tax authorities to make a set-aside assessment after the expiry of periods mentioned in this sub-section. This is a statutory fetter which is not for the assessee to relax or waive or vice-versa. The power to make assessment lapses complete upon the expiry of the periods mentioned in the section.

Facts
The assessee company filed its return of income for assessment year 2004-05 on 29.10.2004. The original assessment u/s. 143(3) of the Act was completed by the AO on 15.12.2006 rejecting the claim of the assessee u/s 33AC of the Act on the ground that the assessee had not specified the amount transferred to reserve in the P & L Account for the relevant year.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the claim of the assessee vide his order dated 29.8.2007.

Aggrieved, the revenue preferred an appeal to the Tribunal. The Tribunal vide its order dated 25.7.2008 set aside the issue and restored the matter back to the file of the AO to decide the same afresh.

The AO while giving appeal effect, framed assessment u/s. 254/143(3) and also u/s. 263/143(3) vide order dated 8.12.2011 and disallowed the deduction u/s. 33AC of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it contended that the order dated 8.12.2011, passed by the AO, was beyond the period of limitation. The CIT(A) dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal noted that it had vide its order dated 25.7.2008 set aside the appeal and restored the matter back to the file of the AO to decide the matter afresh. It also noted that the order dated 8.12.2011 passed to give effect to the order of the Tribunal read as under:

“In pursuance of the Hon’ble ITAT, `A’ bench, Kolkata’s order in ITA No. 98/Kol/2008 dated 28.7.2008, a notice u/s. 142(1) was issued to the assessee on 16.11.2010, requiring clarification on the details of Reserves & Surplus as on 31.3.2004 …..”

The Tribunal noted the decision of the co-ordinate bench of the Tribunal in the case of McNally Bharat Engineering Co. Ltd. vs. DCIT in CO No. 12/Kol/2011, arising out of ITA No. 98/Kol/2011 for AY 2002-03 dated 9.10.2015 on identical proposition of law.

Following the ratio of the decision of the Kolkata Bench of the Tribunal in the case of McNally Bharat Engineering Co. Ltd. vs. DCIT (supra), the Tribunal held that no assessment is possible after the expiry of period of limitation, the provisions of section 153(2A) are absolute and they impose a fetter on income-tax authorities to make a set-aside assessment after the expiry of the periods mentioned in this sub-section. This is a statutory fetter which is not for the assessee to relax or waive or vice-versa. The power to make assessment lapses completely upon the expiry of the periods mentioned in the section. It observed that in the present case, the Tribunal had completely set aside the assessment on the abovementioned issue and directed the AO to reframe the assessment afresh. It held that the assessee’s case fell in 2nd proviso to section 153(2A) of the Act.

The Tribunal set aside the assessment and held that the assessment made after expiry of limitation in terms of section 153(2A) of the Act is invalid.

This ground of appeal filed by the assessee was allowed.

2016-TIOL-306-ITAT-MAD ACIT vs. Encore Coke Ltd. ITA No. 1921/Mds/2015 A. Y.:2010-11.Date of Order: 22nd January, 2016

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Sections 28, 40(a)(ia) – Prior period expenses can be allowed as a deduction in the previous year in which tax is actually deducted and remitted to the Government.

Facts
The assessee company had incurred certain expenditure in earlier years but the actual payments were made to the parties in the financial year relevant to the assessment year under consideration after deducting and remitting necessary TDS. The assessee had, in its accounts, reflected this expenditure as prior period expenditure since it had not claimed this expenditure in the earlier years when it was incurred.

In the course of assessment proceedings, the Assessing Officer (AO) disallowed this expenditure on the ground that it was prior period expenditure.

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

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held
The Tribunal observed that in the present case though the expenditure related to earlier period, actually TDS was paid in the assessment year under consideration and therefore, in view of the second limb of section 40(a) (ia), since the tax was deducted and paid during the previous year relevant to the assessment year under consideration, the same is allowable in the assessment year under consideration.

The Tribunal noted that the same view has been taken by the Cochin Bench in ITA No. 410/Coch/2014 dated 12.12.2014 in the case of M/s. Thermo Penpol Ltd. vs. ACIT.

Following the decision of the Cochin Bench of the Tribunal as well as considering the provisions of the Act, the Tribunal dismissed the ground of appeal filed by the Revenue.
The appeal filed by the Revenue was dismissed.

TDS – Sections 194C and 194J

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i) Supply of material under turn key project – Section 194C would not apply in respect of payment made against the supply of materials included in composite contracts for executing turn key projects
ii) Bill management services are not professional or technical services – It is a service contract – Section 194C will apply and not 194J

CIT vs. Executive Engineer, O&M Division(GESCOM); 282 CTR 138 (Karn):

The following two questions were raised by the Revenue in the appeal filed before the Karnataka High Court:

“i) Whether the provisions of section 194C would be attracted on the payments made against the supply of materials included in composite contracts for executing turn key projects?

ii) Whether bill management services are professional or technical services? Whether section 194J would apply or section 194C?”

The High Court held as under:

“i) In respect of payments made in respect of supply of materials included in composite contracts for executing turn key projects, provisions of section 194C would not apply.
ii) Services rendered by the agencies towards bill management services are not professional services and section 194J is not attracted. The contract was rightly held to be service contract by the Tribunal. Section 194C is attracted.”

Reassessment – Sections 147 & 148 – A.Y. 2002- 03 – Information received from ED – AO set out information received from ED – He failed to examine if that information provided the vital link to form the ‘reason to believe’ that income of the assessee has escaped the assessment for the A.Y. in question – Reopening of the assessment is not valid

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CIT vs. Indo Arab Air Services: 283 CTR 92 (Del):

The assessment for the A. Y. 2002-03 was reopened on the basis of the information received from the enforcement directorate. The Tribunal held that the reopening is not valid.

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

“i) The Assessing Officer set out the information received from the Enforcement Directorate but he failed to examine if the information provided the vital link to form the ‘reason to believe’ that the of the income of the assessee had escaped assessment for the assessment year in question.

ii) While the Assessing Officer had referred to the fact that the Enforcement Directorate gave the information regarding cash deposits being found in the books of the assessee, the Assessing Officer did not state that he examined the returns filed by the assessee for the said assessment year and detected that the said cash deposits were not reflected in the returns.

iii) Further, information concerning payments made to third parties, which were unable to be verified by the Enforcement Directorate, also required to be assessed by the Assessing Officer by examining the returns filed to discern whether the said transaction was duly disclosed by the assessee.
iv) Consequently, no error was committed by the Tribunal in the impugned orders in coming to the conclusion that the reopening of the assessment was bad in law.”

Presumptive tax – Section 44BB – A. Y. 2008- 09 – Assessee non-resident – Prospecting for or production of mineral oils – Service tax collected by the assessee is not includible in gross receipts for the purposes of computation of presumptive income

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DIT vs. Mitchell Drilling International Pvt. Ltd.; 380 ITR 130 (Del):

Assessee is a non resident. For the A. Y. 2008-09, the income of the assessee was assessable u/s. 44BB. For computing the income the assessee did not include the service tax received by it. The Assessing Officer included the service tax. 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) For the purpose of computing the presumptive income of the assessee for the purpose of section 44BB the service tax collected by the assessee on the amount paid to it for rendering services was not to be included in the gross receipts in terms of section 44BB(2) r.w.s. 44BB(1).

ii) The service tax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee only collected the service tax for passing it on to the Government.”

Manufacture – Exemption u/s. 10B – A. Ys. 2003- 04 and 2004-05 – Assembling of instruments and apparatus for measuring and detecting ionizing radiators amounts to manufacture – Assessee entitled to exemption u/s. 10B –

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CIT vs. Saint Gobain Crystals and Detectors India P. Ltd.; 380 ITR 226 (Karn):

The assessee was in the business of assembling instruments and apparatus for measuring and detecting ionizing radiators. The assessee claimed deduction u/s. 10B. For the relevant years, the Assessing Officer disallowed the claim on the ground that the assessee had not manufactured or produced articles or things as required u/s. 10B(1). The Tribunal allowed the assessee’s claim and held that the process carried out by the assessee in getting the final product, showed that the assessee was engaged in manufacture or production of an article or thing.

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

“The finished product which was sold by the assessee, was different from the materials which were procured for making such a finished product. A series of processes were carried out and a new product emerged. The assessee was entitled to exemption u/s. 10B.”

Limitation – Amendment – Increased limitation period of 7 years u/s 201(3) as amended by Finance (No.2) Act, 2014 w.e.f.1.10.2014 shall not apply retrospectively to orders which had become timebarred under the old time-limit (2 years/6 years) set by the unamended section 201(3). Hence, no order u/s. 201(i) deeming deductor to be assessee in default can be passed if limitation had already expired as on 1-10-2014 –

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Tata Teleservices vs. UOI; [2016] 66 taxmann.com 157 (Guj)

Pursuant to the amendment of section 201(3) by the Finance (No.2) Act, 2014 w.e.f.1.10.2014, extending the period of limitation to 7 years the Assessing Officer issued notices u/s. 201(1) for the A. Ys. 2007-08 and 2008-09. The notices were challenged by the assessee by filing writ petitions. The Gujarat High Court allowed the writ petitions, considered the retrospectivity and the applicability of the amendment of section 201(3) and held as under:

“i) Considering the law laid down by the Hon’ble Supreme Court, to the facts of the case on hand and more particularly considering the fact that while amending section 201 by Finance Act, 2014, it has been specifically mentioned that the same shall be applicable w.e.f. 1/10/2014 and even considering the fact that proceedings for F.Y. 2007-08 and 2008- 09 had become time barred and/or for the aforesaid financial years, limitation u/s. 201(3)(i) of the Act had already expired on 31/3/2011 and 31/3/2012, respectively, much prior to the amendment in section 201 as amended by Finance Act, 2014 and therefore, as such a right has been accrued in favour of the assessee and considering the fact that wherever legislature wanted to give retrospective effect so specifically provided while amending section 201(3) (ii) as was amended by Finance Act, 2012 with retrospective effect from 1/4/2010, it is to be held that section 201(3), as amended by Finance Act No.2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(i) of the Act can be passed for which limitation had already expired prior to amended section 201(3) as amended by Finance Act No.2 of 2014.

ii) Under the circumstances, the impugned notices / summonses cannot be sustained and the same deserve to be quashed and set aside and writ of prohibition, as prayed for, deserves to be granted.”

Depreciation – Additional depreciation – Section 32(1)(iia) – A. Ys. 2007-08 and 2008-09 – Plant and machinery set up after 1st October 2006 but before 31st March 2007 – Half of additional depreciation of 20% is allowable in A. Y. 2007-08 and the balance half allowable in A. Y. 2008-09

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CIT vs. Rittal India Pvt Ltd.; 380 ITR 423 (Karn): 282 CTR 431 (Karn):

The assessee acquired and installed new plant and machinery in the F. Y. 2006-07 after 1st October 2006. The assessee therefore claimed additional depreciation of 10%, in the A. Y. 2007-08, being half of the 20% allowable u/s. 32(2)(iia) and the same was allowed. The balance half was claimed in the A. Y. 2008-09 which was disallowed by the Assessing Officer. The Tribunal allowed the assessee’s claim.

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

“i) The beneficial legislation should be given liberal interpretation so as to benefit the assessee. The intention of the legislature is absolutely clear that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to half being granted in one assessment year, if certain condition was not fulfilled. But that would not restrain the assesee from claiming the balance of the benefit in the subsequent assessment year.
ii) The Tribunal had rightly held that the additional depreciation allowed u/s. 32(1)(iia) is a onetime benefit to encourage industrialisation and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. Appeal is accordingly dismissed.”

[2016-TIOL-374-CESTAT-DEL] M/s Umax Packaging Ltd vs. Commissioner of Central Excise & Service Tax, Jaipur-II

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In absence of any proof of evidence of any suppression, misstatement and collusion with intent to evade payment of duty invocation of longer period of limitation and penalties for normal period not justified.

Facts
Appellant, a manufacturer of excisable goods availed CENVAT credit on certain disputed goods which was objected by the department and was confirmed by the Commissioner (Appeals) by invoking extended period of limitation.

Held:
The Tribunal noted that the dispute regarding eligibility of CENVAT credit of the goods had not attained finality and there were conflicting decisions on the issue and therefore the Appellant could have entertained a reasonable belief that credit was allowable. Further in absence of any evidence brought on record to prove suppression, misstatement, collusion etc. extended period cannot be invoked. The demand is confirmed for the normal period along with interest setting aside penalty.

[2016-TIOL-400-CESTAT-MUM] PrecisionMetals vs. Commissioner of Central Excise, Raigad

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The goods manufactured on job work basis is exempted under notification 214/86 on the ground that the excise duty is charged on the full value of the final product including the value of job work goods, the job work goods cannot be said to be exempted goods.

Facts
The Appellant, a job worker availed CENVAT credit on the inputs used in the manufacture of goods on job work basis. Exemption of excise duty was availed under Notification No. 214/86-CE as the principal supplier had undertaken to discharge excise duty either on the job work goods or on the final product in which job work intermediate goods is used. The adjudicating authority confirmed the demand @ 10% of the value of the goods manufactured for reversal of credit in terms of Rule 6 of the CENVAT Credit Rules, 2004 on the ground that exempted goods were manufactured.

Held
The Tribunal relying upon various judicial pronouncements held that Notification No. 214/86 provides that the principal supplier of raw material undertakes to discharge excise duty either on the job work goods or on the final product in which the job work goods is used. Accordingly, it cannot be said that the job work goods are exempted from payment of excise duty. Even if any duty is charged at the job worker’s end the same shall be available as CENVAT credit to the principal supplier and only for procedural convenience, Notification was issued. Therefore, Rule 6(3)(b) which is applicable only on the clearance of exempted goods shall not apply and accordingly the demand is set aside.

[2016-TIOL-399-CESTAT-MUM] Arbes Tools P. Ltd vs. Commissioner of Central Excise, Mumbai-II

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When the imported material was used for manufacturing final product, credit taken on a photocopy of courier bill of entry was allowable.

Facts
The Appellant imported inputs and utilized the same in manufacture of the final product which was cleared on payment of duty. The lower authorities denied the benefit of CENVAT credit stating that original bill of entry was not produced and photocopy of a courier bill of entry is not a valid document under Rule 9 of the CENVAT Credit Rules, 2004.

Held
The Tribunal noted that there is no dispute that the material on which credit is taken was imported and used for manufacturing the product. Therefore CENVAT credit cannot be denied on mere technical grounds and the appeal was allowed.

[2016] 65 taxmann.com 88 (Ahmedabad-CESTAT) Commissioner of Central Excise & Service Tax, Surat vs. Miranda Tools

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Mobile services and courier services are entitled to CENVA T credit, since they are used in different ways in relation to manufacture of final product.

Facts
The Issue before the Hon’ble Tribunal was whether mobile services and courier services availed by the manufacturer for the period April 2008 to June 2011 would be available as input services in term of Rule 2(I) of CCR, 2004 so as to enable CENVAT credit thereof.

Held
The Tribunal concurred with the view taken by Commissioner (Appeals) and decided the matter in favour of the assessee. Commissioner (Appeals) had decided that mobile phones were provided by the company to its senior executives so that they can carry out business activities/job performance easily. The mobile services were utilised/consumed in or in relation to performance of their duties such as purchasing/procurement of inputs or capital goods or consumables, accounting of materials, manufacture of the finished goods, clearance of finished goods, export of finished goods, marketing of goods manufactured, sales promotion etc. Further, the mobile connections were also in the name of the company and hence the bills were raised by the service providers in the name of the company which paid such bills. Therefore, CENVAT credit of mobile services was allowed. As regards, courier services, it was found that assessee received courier services for dispatch of various business correspondence to the supplier/customer/branch office/ agents office etc. including sending various bills and other related documents to the head office for accounting and internal audit purposes and also for procurement of raw materials, export of the finished goods and for domestic sale and for sending samples of the finished goods to the customers. Commissioner (Appeals) therefore held that in different ways, the courier services were used in or in relation to manufacture of the final products. Therefore, CENVAT credit of courier services was also allowed.

2016] 65 taxmann.com 196 (Mumbai-CESTAT) Commissioner of Service Tax, Mumbai-II vs. MMS Maritime (India) (P.) Ltd

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After 01/04/2011, CENVA T credit of “rent-acab” service is not allowed due to specific exclusion of the same from definition of input services in terms of Rule 2(I)(B) of CENVA T Credit Rules, 2002, although it is essential for providing output services, but all other services essential for providing output services are to be allowed.

Facts
The Appellant is the provider of manpower supply services to foreign clients which is export of service. It filed refund claim for unutilised CENVAT credit in respect of input services, which was used in respect of export of output services. Such services included inter-alia rent-acab services used for conveyance of employees, courier services, communication services, renting of immovable property services and short term accommodation services used in relation to training. The refund claim was rejected on the ground that such services do not qualify as input services for providing output services.

Held
The Tribunal held that any service whether it is used for providing output services or otherwise, cannot be decided in isolation but it is necessary to see what the output service is and accordingly it can be decided whether the service is input service for providing a particular output service. Having regard to nature of output service i.e. manpower supply service, it was held that, all the services mentioned above, are essential for providing output service and hence would qualify as input services and CENVAT credit of the same are allowable/refundable. However, in light of amendment to Rule 2(I)(B) of CENVAT Credit Rules, 2004 with effect from 01/04/2011, on account of specific exclusion, “rent-a-cab” services would not qualify as input services even though the same are used for conveyance of staff.

[2016-TIOL-403-CESTAT-MUM] Applied Micro Circuits India Pvt. Ltd vs. Commissioner of Central Excise, Pune-III

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Credit of service tax paid on outdoor catering services, life insurance services after 01/04/2011 being services received for personal use of employees cannot be allowed.

Facts
CENVAT credit is denied to the Appellants on service tax charged on outdoor catering and life insurance services received after 01/04/2011 contending that after the amendment to the definition of input service, services used primarily for personal use or consumption of any employee are specifically excluded and therefore credit cannot be allowed. It was argued that such services were in relation to the business activity and were included in the value of service rendered by them. Reliance was placed on the decision of Hindustan Coca Cola Beverages Pvt. Ltd vs. Commissioner of Central Excise [2014]-TIOL-2460-CESTAT-MUM] (digest provided in BCAJ February 2015).

Held
The Tribunal however, distinguished the decision of Hindustan Coca Cola (supra) by holding that the services of outdoor catering and life insurance are essentially for the personal use or consumption of the employees and therefore could not be allowed. It was also categorically provided that if outdoor catering services are used for an annual conference of dealers or shareholders meet etc., it would be eligible for credit since then it is not primarily for personal use of employees. Similarly, life insurance is also for the personal use of the employee as its benefit goes to the employee or his family. Accordingly the appeal was dismissed.

[2016-TIOL-382-CESTAT-MUM] DSP Meryll Lynch Ltd. vs. Commissioner of Service Tax, Mumbai

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Introduction of new entry and inclusion of certain services in that entry would presuppose that there was no earlier entry covering the said services and accordingly merchant banking and advice on mergers and acquisition can be taxed only under Banking and Financial Services with effect from 16/07/2001 and are not covered under management consultancy service.

Facts
The Appellant provided various financial services viz. advisory services, retainership for providing opinions, advisory for mergers and acquisitions, merchant banking services etc. Their income included fees for these services as well as management fees earned by their subsidiary, fees for underwriting Government securities and other miscellaneous income. The department contended that all services except underwriting services are covered under “management consultancy service”. However it was argued that interalia as regards M&A services the entry of management consultancy should be interpreted in contextual manner and M&A advisory is technical and restrictive and does not relate to running of an organization. Merchant banking services are regulated under SEBI Rules and Regulations and that the services rendered were liable only from August 2001 under the category of “banking and financial services” which was brought into the service tax net from 16/07/2001. In the present case the period involved is April 2000 – December 2001.

Held
The Tribunal relying on the decision of Indian National Shipowners Association [2008-TIOL-633-HC-MUM-ST] wherein the High Court held that introduction of a new entry and inclusion of certain services in that entry would presuppose that there was no earlier entry covering the said services held that the service of banking and financial service was introduced with effect from 16/07/2001 incorporating the various entries viz. merchant banking, mergers and acquisition etc. and thus the services were not liable under management consultancy service prior to the said date. It was noted that the definition of management consultancy remained the same even after introduction of banking and financial service and thus the service was brought to tax only after introduction of the new entry. Further, it was held that the term management consultancy refers to consultancy regarding the affairs of an organisation and does not relate to activities of mergers and acquisition which is highly technical and restrictive term. Accordingly, the demand of fees received in relation to mergers and acquisition, merchant banking and retainership was set aside. As regards fees received by the subsidiary company it was held that the same related to services provided by the subsidiary which was a separate legal entity and cannot be considered as income of the Appellant merely because the income is shown in the consolidated financial statement which is a mere statutory requirement. Further, it was held that underwriting of Government securities was not taxable by virtue of Board Circular No. 126/8/2010 dated 10/08/2010. Further in relation to the miscellaneous income, it was held that the same are in the nature of adjustments of expenses/debt etc. and there is no service involved in these activities. Thus the entire demand was set aside.

[2016-TIOL-105-HC-MUM] Mercedes Benz India Pvt. Limited vs. The Commissioner of Central Excise, Pune

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To determine the method of apportionment of input credit on common input services attributable to manufacturing and trading activities prior to 01.04.2011, the matter remanded to the Tribunal.

Facts
The Appellant, a manufacturer of motor vehicles also imported motor vehicles and sold them in domestic markets and therefore was a manufacturer as well as a trader. The Revenue contended that credit of service tax paid on common input services attributable to the activity of import and sale of cars viz. trading activity which is an exempted service is not available which is not contested. The question is about the true and correct method of quantifying the credit relatable to the trading activity for reversal. The Tribunal held that the method prescribed for arriving at the value of trading of goods vide clause (c) of Explanation-1 for the purpose of reversal under rule 6(3) of the CENVAT credit Rules, 2004 being the difference between sale price and cost of goods sold or 10% of the cost of goods sold, whichever is more is not retrospective in nature since the same was issued on 01/03/2011 and it came into force on 01/04/2011. Accordingly, it was held that service tax paid on common input services should be apportioned in the ratio of trading turnover to total turnover (trading as well as manufacturing turnover). Aggrieved by the same the present appeal is filed.

Held
The High Court held that the Tribunal has misdirected itself completely when it has concluded that clause (c) of Explanation 1 inserted w.e.f. 01/04/2011 has been adopted to encourage the trading of the goods rather than the manufacturing of the goods (otherwise criterion should have been same viz. Based upon turnover or value addition) and thus the common input services before such date should be apportioned in the same ratio as the turnover of manufactured and traded cars. The court held that firstly the Tribunal should refer to the substantive Rule as operative prior to 01/04/2011 and then arrive at a conclusion in relation to the explanation introduced with sub-clauses with effect from 01/04/2011. Accordingly for determination of the fraction/percentage to be applied to apportion the input credit relatable to the trading activity, the matter was remanded to the Tribunal.

ITA No. 1625/Mum/2014 Morgan Stanley Mauritius Company v. DCIT (IT) A.Y.: 2007-08, Date of Order – 29th January, 2016

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Article 13 of India-Mauritius DTAA – Additional consideration received for delay in making open offer, being an integral part of share transfer is a part and parcel of sale consideration, is covered by Capital Gains Article of the DTAA . Such payment does not constitute interest income in absence of a debtor- creditor relationship.

Facts
The Taxpayer, a company incorporated in Mauritius held the shares of an Indian Company (ICo). The Taxpayer transferred ICo’s shares to a Mauritius Company (FCo) under a scheme of open offer.

Together with the consideration for sale of shares, the Taxpayer also received additional consideration for delay in processing of open offer by FCo. As per the letter of open offer, it was clear that the initial offer price of the shares for transfer of each share was increased due to the delay in making the open offer. The Tax authority contended that such consideration was received for delay in making payment. Hence, it represented interest and was not part of sale consideration for the open offer. Accordingly, such additional payment would qualify as interest under the India-Mauritius DTAA and liable to source taxation in India.

However, the Taxpayer argued that as FCo had not provided any loan to Taxpayer, additional consideration cannot be said to be received in respect of any monies borrowed or for use of money. In absence of a debtorcreditor relationship between the Taxpayer and FCo, such additional consideration cannot be treated as interest.

Held
It is a fact that the regulatory authority i.e., SEBI, had approved the transaction. Further, since the transaction could not be completed in time due to certain reasons, FCo revised the offer price. The Taxpayer had no control over the decisions of FCo. Business decisions are governed by their own rules and laws and if considering the time factor, FCo agreed to increase the share price, it has to be taken as part of sale.

The Taxpayer owned shares of ICo and in response to the open offer by FCo, the Taxpayer agreed to sell the shares of ICo. It was a pure and simple case of selling of shares by the Taxpayer. The Taxpayer did not enter into any negotiations with FCo and transferred shares as per a scheme approved by SEBI.

Further, there was no debtor-creditor relationship between the Taxpayer and FCo. The Taxpayer had not advanced any sum to FCo and has not received any interest for the delayed repayment of principal amount. Reliance in this regard was placed on the Tribunal decision in the case of Genesis Indian Investment Company (ITA /2878/Mum/2006 dated 14th August 2013) wherein it was held that where the interest is received for delay in processing of buy back of shares in open offer after announcement of the intention of acquiring shares, such additional amount shall form part of consideration towards shares tendered in open offer.

Thus, the additional consideration received is part and parcel of total consideration and cannot be segregated under the head ‘original sales consideration’ and ‘penal interest’. Such additional consideration is not taxable in India by virtue of Article 13 of India-Mauritius DTAA .

TS-15-AAR-2016 Dow AgroSciences Agricultural Products Date of Order : 11th January, 2016

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Article 13(4) of India-Mauritius Double Taxation Avoidance Agreement (DTAA ) -Transfer of shares of an Indian company (ICo) by the applicant to its Singapore group entity (SCo) upon re-organisation, not a tax avoidant transaction

Facts
The Applicant is part of a large MNE group (Group) and a company resident and incorporated in Mauritius. The Applicant held majority (nearly 99.99%) of the shares of Indian Co (ICo) which was acquired by it in various tranches over a period of 10 years from 1995 to 2005.

The Group had presence all over the world and was divided into various regions based on their geographical locations. The Applicant belonged to the European region, while ICo belonged to the India, Middle East and Africa (IMEA) region. In the past, the IMEA region was dismantled and entities were realigned with other regions as per the geographical convenience. As a result of this realignment, ICo became a part of the focused Asia-Pacific region.

In order to achieve the objective of operational excellence, better control and administrative convenience, it was proposed to realign the holding of ICo and shift it to an entity in the Asia- Pacific region. Accordingly, it was proposed that Applicant would transfer the shares of ICo to its group entity in Singapore i.e., SCo.

Issues before the AAR were as follows:
Whether the entire arrangement of transfer of ICo’s shares in favor of SCo was a scheme to avoid taxes in India?

Whether the Applicant had a Permanent Establishment (PE) in India?

Whether income arising from such a transfer was taxable in India?

Held
On the issue of whether the arrangement was a tax avoidance transaction For the following reasons, it was held that the transaction of transfer ICo’s shares to SCo by the Applicant was not a tax avoidance transaction –

The Applicant had acquired shares of ICo in various tranches over a 10 year period. Such share acquisition which was carried out around 20 years ago for a substantial cost cannot amount to a scheme to avoid payment of taxes in India. ? T he Applicant had been operating for more than 10 years in Mauritius and hence, it cannot be said to be a shell company. Investment in ICo’s shares was carried out with prior approval of the Department of Industrial Policy and Promotion and Reserve Bank of India. In these circumstances, it cannot be said that shares were acquired with a view to sell them in future.

The need for realignment of the Group arose upon dismantling of the IMEA group in 2010. As a result, and in order to ensure better control, ICO’s holding was shifted to Asia-Pacific region. SCo was an upcoming entity in the Asia-Pacific region and, hence, it was proposed to realign the holding of shares of ICo from the Applicant to SCo. Additionally, all the shares of ICo were acquired five years prior to the present proposed re-organisation of the group. Hence, the proposed transaction is for sound business consideration.

On the issue of PE
It was a stated fact that the Applicant did not have an office or employees or agents in India. Neither did it have any activities in India. A tax residency certificate from Mauritius was also furnished by the Applicant. Further nothing was brought on record to show that Applicant had a PE in India. Therefore, it was held that the Applicant does not have a PE in India. On the taxability of transfer of shares of ICo

Considering the accounting treatment, intention, as also quantum of the transaction, the equity shares held by the Applicant in ICo should be considered as capital asset and not stock-in-trade.

The shares of ICo were held for a very long period of time (10-20 years). The objective of acquiring ICo’s shares as stated by the Applicant was not to trade in them but to hold them as investments. In fact, there was no trading in ICo’s shares by the Applicant, except for the proposed transfer. Hence, the shares of ICo would constitute capital asset in the hands of Applicant. Consequently gains from transfer of shares of ICo would result in capital gains in the hands of the Applicant. Such capital gains are taxable in India under the provisions of the Act

Gains on transfer of ICo’s shares would be covered by Article 13(4) of the DTAA which exempts gains from tax in India.

Taxation of Artistes and Sportsmen

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1. Overview
In recent years, it has been observed that various
International sporting events like Formula 1 Race, Indian Premier
League (IPL), Indian Super League (ISL) and I-League etc. are being
successfully held in India year after year. It is worth noting that
India has largest number of very keen cricket fans in the world viewing
various cricket matches. Similarly, there are various Indian films &
advertisements where international artistes are featuring. Many foreign
filmmakers have been shooting films in India such as Life of Pi, The
Bourne Supremacy, Slum Dog Millionaire etc. On various occasions,
concerts by non-resident entertainers are regularly held in India e.g.
concerts/performances by Metallica, Lady Gaga, Katy Perry etc. In
addition, performances by International Artistes & entertainers are
increasingly becoming a part of big Indian theme parties, wedding
extravaganzas and Reality shows etc.

Taxation of such
non-resident Artistes and Sportsmen, corporates and sports
associations/bodies involved in organising, managing and regulating such
events, concerts or performances is gaining increasing importance in
view of huge sums by way of fees and other contract amounts involved. In
this Article, we have attempted to give an overview of the taxation
provisions under the Income-tax Act and various model Tax Treaties.

2. Taxability under the Domestic Law

The relevant provisions and circulars under the Income-tax Act, 1961 [the Act] are as follows:
Section 5 r.w.s. 9 will determine taxability of income of Artistes etc. in India
Section 115BBA – Tax on non-resident sportsman or sports association
Withholding tax provisions u/s. 194E
CBDT Circular No. 787 dated 10.02.2000

2.1 Section 115BBA of the Act reads as follows:
“Tax on non-resident sportsmen or sports associations. 115BBA. (1) Where the total income of an assessee, –

a) being a sportsman (including an athlete), who is not a citizen of India and is a non-resident, includes any income received or receivable by way of –
i. participation in India in any game (other than a game the winnings wherefrom are taxable under section 115BB) or sport; or
ii. advertisement; or
iii. contribution of articles relating to any game or sport in India in newspapers, magazines or journals; or

b) being a non-resident sports association or institution, includes any amount guaranteed to be paid or payable to such association or institution in relation to any game (other than a game the winnings wherefrom are taxable u/s. 115BB) or sport played in India; or

c) being an entertainer, who is not a citizen of India and is a non-resident,
includes any income received or receivable from his performance in
India, the income-tax payable by the assessee shall be the aggregate of —

i. the amount of income-tax calculated on income referred to in
clause (a) or clause (b) or clause (c) at the rate of twenty per cent;
and
ii. the amount of income-tax with which the assessee would have
been chargeable had the total income of the assessee been reduced by the
amount of income referred to in clause (a) or clause (b) or clause (c):

Provided that no deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the income referred to in clause (a) or clause (b) or clause (c).

2) It shall not be necessary for the assessee to furnish under sub-section (1) of section 139 a return of his income if—
(a)
his total income in respect of which he is assessable under this Act
during the previous year consisted only of income referred to in clause
(a) or clause (b) or clause (c) of sub-section (1); and

(b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.”

(Emphasis supplied)
2.2 Analysis of Section 115BBA
It applies only to a non-resident and a person who is not a citizen of India

Who is a sportsman (including athlete) and

Earns income from
• Participation in India in any game or sports
• Advertisement
• Contribution of article in newspaper, magazine or journals relating to any game or sport in India

Applies to a non-resident sports association or institution

Who earns income from
• Guarantee money in relation to any game or sport played in India
• Except games referred to in section 115BB

Applies only to a non-resident and a person who is not a citizen of India
• Who is an entertainer and
• Earns income from his performance in India
• Applicable tax rate is 20% on gross income
• Deduction of any expenditure incurred for earning such income is not allowed
• No need to file return if tax deductible at source has been deducted from such income.

3. CBDT Circular No. 787 dated 10-02- 2000 – Income of artists, entertainers, sportsmen etc.

The salient features of the said circular are as under:

Income derived from event or show for entertainment or sports includes:
• Sponsorship money;
• Gate money;
• Advertisement revenue;
• Sale of broadcasting or telecasting rights;
• Rents from hiring out of space, etc.
• Rent from caterers.

Article on “Artistes and Sportsman” will apply to
• Income from personal activities of sportsman or artist in India
• Advertising income and Sponsorship income, if it is related directly or indirectly to performance or appearance in India.

Article on “Royalty” will apply to
• Royalty payment for recorded performance

Article on “Other income” will apply to
• Guarantee money earned by Sports association
• E.g. Tax treaty with U.S, U.K., Japan, Australia, New Zealand, Sri Lanka, France etc.

Illustrations given in the Circular
Income not taxable in India
• Artist performing in India gratuitously without consideration.
• Artist performing in India to promote sale of his records without consideration.
• Consideration paid to acquire the copyrights of performance in India for subsequent sale or broadcast or telecast abroad.

Income taxable in India
• Consideration for the live performance or simultaneous live telecast or broadcast in India.
• Consideration paid to acquire the copyrights of performance in India for subsequent sale or broadcast or telecast in India.
• Endorsement fees (for launch or promotion of products, etc.) which relates to the artist’s performance.

4. Relevant Case Laws – Section 115BBA and 194E
Some of the important case laws are as under:

4.1 International Merchandising Corporation vs ADIT [2015] 57 Taxmann.com 179 (Delhi-Trib)

Issues:
i. Payment made to Association of Tennis Professionals (ATP), whether liable to Tax u/s. 115BBA?
ii. Whether section 194E does not apply as AT P is just a governing body of sport and not a sports association?

Held:
a) 194E read with section 115BBA apply to payments made to a non-resident sports association or an institution.
b)
ATP is undisputedly a governing body of the world wide men’s
professional Tennis Circuit responsible for ranking of its players and
co-ordinating the Tennis tournament in the world.
c) ATP is a
non-resident sports institution and therefore section 194E applies to
the payments made by the assessee to the AT P.

4.2 PILCOM vs. CIT [2011] 198 Taxman 555 (Cal.)
In this case, it was held as follows:
a)
Section 115BBA is completely independent from other sections such as
section 5(2) or section 9 and it has got nothing to do with the accrual
or assessment of income in India as mentioned in section 9.
b) Non-resident individual has to pay the tax, the moment he participates in India in any game or sport.
c)
Once the payment is made to non-resident sports association or
institution or it becomes payable in relation to any game or sports
played in India, there is accrual of income in India.
d) Section 115BBA is to be applied irrespective of place of making payment.
e)
Payment received by any sports association or personalities for the
matches not played in India is not taxable or liable for withholding
tax.
f) Department’s contention that source of payment is from India irrespective of place of game is overruled.

4.3 Indcom vs. CIT (TDS) [2011] 11 taxmann.com 109 (Cal.)

Issues:
Whether
tax will be deductible on amounts paid to foreign teams for
participation as prize money or administrative expenses, is deemed to
accrue in India u/s. 115BBA?

Whether the match referees and umpires will be considered as sportsmen?

Held:
The
amount paid to the foreign team for participation in the match in India
in any shape, either as prize money or as the administrative expenses,
was the income deemed to have accrued in India and was taxable u/s.
115BBA and, thus, section 194E was attracted.

The payments made
to the umpires or match referees do not come within the purview of
section 115BBA because the umpires and match referee are neither
sportsmen (including an athlete) nor are they non-resident sports
association or institution so as to attract the provisions contained in
section 115BBA. Therefore, although the payments made to them were
‘income’ which had accrued in India, yet, those were not taxable under
the aforesaid provision and thus, the liability to deduct u/s. 194E
never accrued.

The umpires and the match referee can, at the
most, be described as professionals or technical persons who render
their professional or technical services as umpire or match referee. But
there is no scope of deducting any amount u/s. 194E for such payment.

The
reader may also refer to the decision in the case of Board of Control
for Cricket in India vs. DIT (Exemption) [2005] 096 ITD 263 (Mum), on
the subject.

5. Scope of the Article 17 of OECD Model Tax Convention

Salient features of Article 17 are as under:
• Primary taxing rights is with the State of Source / State of performance
• It overrides Article 7, 14 and 15.
• It applies to entertainer, sportsperson or any other person

6. Article 17 (1)

6.1 Model Conventions – A Comparison

6.2 Scope of Article 17(1)
a. A pplies to Individual resident of one of the contracting state.
b. I ndividual is either an entertainer or a sportsperson.
c. He derives income from personal activities.
d. Word “personal activities” suggests “public appearance” is necessary.
e. Personal activities/performance are exercised in the source State i.e. country of performance.
f. Performance should be in public or recorded and later produced for an audience.
g. Performance must be artistic and entertaining.
h. Entertainer or sportsperson must be present in the state of source during the performance.
i. It is not necessary to remain present in the Source State for any minimum period.
j. Person performing even for a single event is covered.
k. Person involved in a political, social, religious or charitable nature is covered, if the entertaining character is present.
l. It covers both professional activities and occasional activities.
m. Source State gets right to tax income earned in that state.

6.3 Meaning of ‘Entertainer’
a. There is no precise definition of the term in Model convention or in treaty.
b. Dictionary meaning of “Entertainer”
i.
“A person whose job is amusing or interesting people, for example, by
singing, telling jokes or dancing” – Oxford Advanced Learner’s
Dictionary
ii. “A person, such as a singer, dancer, or comedian, whose job is to entertain others” – Oxford Dictionary of English
iii. “A person who entertains; a professional provider of amusement or entertainment” – Shorter Oxford Dictionary
c.
Term ‘Entertainer’ includes the stage performer, film actor or actor
(including for instance a former sportsperson) in a television
commercial.
d. Entertainer or sportsperson includes anyone who acts as such even for a single event.

6.4 Meaning of “artiste” and “artist”
a. There is no precise definition in Model convention or in treaty.
b. Dictionary meaning of “Artiste” is:
i. “An artist, especially an actor, singer, dancer, or other public performer” Random House Webster’s Dictionary
ii.
“A public performer who appeals to the aesthetic faculties, as a
professional singer, dancer, etc. also one who makes a ‘fine art’ of his
employment, as an artistic cook, hair dresser, etc. Oxford English
Dictionary
iii. “A professional entertainer such as singer, a dancer or an actor” Oxford Advanced Learner’s Dictionary

c. Difference between the word “artiste” and “artist”:
i. “Artist” has a broader meaning compared to “artiste”
ii. Artist includes those who create work of art, such as painter, sculptors etc.
iii. Artist is a person whose creative work shows sensitivity and imagination
iv. A rtiste is restricted to performing arts.
v. Artiste is a person who is a public performer or skilled performer.
vi. A rtiste is the one who has an entertaining character
vii. The word “entertainer” seems to cover the lighter versions of the performing arts.

6.5 Relevant decisions regarding meaning of ‘Artist’ given in the context of Section 80-RR of the Act

a. Sachin Tendulkar vs. CIT [2011] 11 taxmann. com 121 (Mum).
The
Mumbai Tribunal in case of Sachin Tendulkar held that Sachin should be
regarded as an artiste while appearing in advertisements and
commercials, modeling etc. and hence is entitled to deduction u/s. 80RR.

b. Amitabh Bachchan vs. CIT [2007] 12 SOT 95 (Mum)
The
Mumbai Tribunal held that both Amitabh Bach chan receiving income for
acting as an anchor for a TV programme and Shahrukh Khan receiving in
come from endorsement of performance where he has to give photographs,
attend photo sessions, video shoots, etc. are entitled to deduction u/s.
80RR.

The reader may also refer to the following decisions on the subject:

Tarun Tahiliani-[2010] 192 Taxman 231(Bom)
Harsha Ahyut Bhogale vs. ACIT – [2008] 171 Taxman 108 (Mum) (Mag)
David Dhawan vs. DCIT – [2005] 2 SOT 311 (Mum)
Anup Jalota – [2003] 1 SOT 525 (Mum)

6.6 Meaning of ‘Sportsperson’
a. There is no precise definition is given of the term “sportspersons”.
b.
N ot restricted to participants in traditional athletic events (e.g.
runners, jumpers, swimmers). Also covers e.g. golfers, jockeys,
footballers, cricketers and tennis players, as well as racing drivers.
c.
A lso includes activities usually regarded as of an entertainment
character such as billiards, snooker, chess and bridge tournaments
d.
Since sportsperson is grouped with entertainer, Article 17 will apply
only to those who perform in public. Therefore, mountaineers or scuba
divers are not covered.
e. Sportsperson also covers the one whose
activities includes advertising or interviews that are directly or
indirectly related to such an appearance.
f. Sportsperson does not include managers or coaches of the sports team.
g.
Merely reporting or commenting on a sports event in which the reporter
does not participate is not an activity as a sportsperson.
h. Owner
of a horse or a race car is not covered under Article 17 unless the
payment is received on behalf of the jockey or car driver.

6.7 Meaning of “Athlete”
A person who is trained or skilled in exercises, sports, or games requiring physical strength, agility or stamina

Dictionary meaning is one who is engaged in sport more specifically in the field and track events

6.8 Persons covered under Article 17 and regarded as performing entertainers or artistes

6.9 Persons not covered under Article 17 and not regarded as performing entertainers or artistes

6.10 Article 17(1) – Illustrative types of Income covered:

a. Income derived from performance.

b. Income connected with performance such as awards
i. Payment received by a professional golfer for an interview given during a tournament in which he participates.
ii. Payment made to a star tennis player for the use of his picture on posters advertising a tournament in which he will participate.

c. Advertising and sponsorship fee directly or indirectly related to performance in source country

i. Payments made to a tennis player for wearing a sponsor’s logo, trade mark or trade name on his tennis shirt during a match.

d. Income generated from promotional activities of the entertainer during his presence in source country.

e. Payments for the simultaneous broadcasting of a performance by an entertainer or sportsperson made directly to the performer or for his or her benefit (e.g. a payment made to the star-company of the performer).

f. Income from combined activities (for e.g. Steven Spielberg directing and acting in a movie – Predominantly performing nature – Article 17 would apply – Performing element negligible – entire income out of Article 17).

g. Performance based fees/remuneration such as participation fees, share in gate receipts.

h. Income from writing a column in daily newspaper or journals related to performance.

i. Salary income of a member of an orchestra or troupe for his performance.

j. Entertainer earning salary as an employee is liable to pay tax in source country in proportion to his salary which corresponds to his performance.

k. Income of one person company belonging to entertainer if domestic law of Source State permits “look through” approach.

l. Illustration:
• Film actor is performing in India where a film is shot. Article 17 will apply to the income of the film actor.
• If the film is released worldwide except India, Article 17 will apply to the income of Film actor irrespective of where the film is released.

6.11 Article 17(1) – Illustrative types of Income not covered

a. Payments received upon cancellation of a performance are not taxable under Article 17(1).

b. Royalties for intellectual property rights will normally be covered under Article 12 i.e. Income to third party holding IPR for broadcasting rights.

c. Income received by impresarios etc. for arranging the appearance of an entertainer or sportsperson is outside the scope of the Article, but any income they receive on behalf of the entertainer or sportsperson is of course covered by it.

d. Income received by administrative or support staff (e.g. cameramen for a film, producers, film directors, choreographers, technical staff, road crew for a pop group, etc.

e. Income from speaking engagement in conferences.

f. Income as reporter or commentator h. Promoters involved in production of event i. Guest judge in singing competition

j. Income not attributed to performance in source state.

6.12 Items of Income Covered by Other Articles

Taxation of the following types of income is governed by other Articles of a Tax Treaty:

a. Income for Image rights not closely connected with performance

b. Sponsorship and advertising fees not related to performance

c. Merchandising income from sale which is not related to performance

d. Income against the cancellation of performance, since it is compensation for income lost due to cancellation of performance and not associated with performance.

e. Income from restrictive covenants

f. Income earned by a former sportsperson providing commentary during the broadcast of a sport event or reporting on sport event in which he is not participating.

g. Income from repeat telecast

h. Fees for interview with music channel not closely connected with performance.

6.13 Aspects which are not relevant while applying Article 17

a. Location or residence of Payer

b. Number of days stay in the source country

c. Having PE or fixed base of the entertainer in the source country

d. Entertainer or sportsperson performing as an employee or independently on contract

e. Entertainers present directly on the stage or through radio or TV.

f. One time performance or regular performance

g. Indian Treaty examples
i. India-Egypt tax treaty provides time threshold of 15 days during the relevant fiscal year.

ii. India-USA tax treaty – Exception provided where net income derived does not exceed USD 1,500.

6.14 Foreign Judicial Precedents

a) Agassi vs. Robinson – UK Judicial Precedent
• Mr. Andre Agassi, a US-tax resident visited UK for short duration to play in various tournaments and in particular at Wimbledon.

• He controlled a US corporation (Andre Agassi Enterprises Inc) through which he negotiated endorsement contracts with manufacturers of sporting equipment including Nike and Head, neither of which had a tax presence in UK.

• Revenue authorities assessed Andre Agassi for tax in connection with the sponsorship income received by the non-resident corporation.

• UK House of Lords upheld the extra-territorial applicability of the UK domestic tax law provisions and held that endorsement income paid by non-resident UK sponsors to non-resident corporation is liable to tax in UK.

b) Canadian decision in Cheek vs. The Queen (2002 DTC 1283 (Tax Court of Canada))

• Issue: Whether a “radio broadcaster” of baseball games would fall under Article XVI (Artistes and Athletes) of the 1980 Canada–United States Income Tax Convention?

• The radio broadcaster Thomas Cheek, had been the commentator of the Toronto Blue Jays together with a partner-commentator.

• Thomas Cheek was resident in the United States, was not an employee and did not have a fixed base in Canada that would have made him taxable under Article XIV (Independent Personal Services).

• In a baseball game of three hours, only 16-18 minutes are actual “motion”, the rest is “down time”. The challenge facing the broadcaster is to hold the attention of the radio audience, even when there is no activity on the field.

• The court stated that professional sports in itself is entertaining, but doubted whether the broadcaster could be seen as an entertainer, that is, as a “radio artiste”, such as for example the late Bing Crosby. The baseball fan who turns on the radio to hear a particular baseball game wants to know how the players are performing on the field.

• The broadcaster may be able to hold the attention of the fan with his “down time” commentary but he is not the reason why the fan turns on the radio. Therefore the court decided that Thomas Cheek was not a radio artiste, although he was a very skilful and experienced radio journalist.

c) NL: HR, 7 May 2010, 08/02054 (Tax Treaty Case Law IBFD)

• A football player who was resident in Sweden was transferred by a Swedish club to a team resident in the Netherlands.

• He took up residence in the Netherlands after the transfer.

• Pursuant to the terms of his contract with the Swedish club, he received a share of the transfer price paid by the Dutch club;

• He received this payment when he had already become a resident of the Netherlands.

• The taxpayer claimed that this payment related to his past employment activity with the Swedish club and was covered by Article 15 (Income from employment) of the treaty.

• Conversely, the Dutch tax authorities maintained that the payment was within the scope of Article 17 (allowing Sweden the primary right to tax and double taxation should in that case be relieved in the Netherlands via a credit under Article 24(4).

• Held – The payment was clearly related to the past activities of the taxpayer as football player for the Swedish team and that, therefore, Article 17 doubtlessly applied. As a consequence, the taxpayer had to include this payment in his income for Dutch tax purposes and then ask a credit for the taxes paid to Sweden upon that same income.

7.2 India’s DTAA s – Article 17 (2)

• India’s treaties with Egypt, Libya, Syria and Zambia provide that income accrued to another person is not taxable in source country.

• India’s treaty with Zambia provides for deemed PE if the enterprise carries on business of providing the services of public entertainer

• India’s treaty with USA provides that income accrued to another person is not taxable if entertainer establishes that neither the entertainer or athlete nor persons related thereto participate directly or indirectly in the profits of that other person in any manner, including the receipt of deferred remuneration, bonuses, fees, dividends, partnership distributions, or other distributions.

• Paragraph applies when income from personal activities exercised by an entertainer or a sportsperson accrues to another person and not to an entertainer or sportsperson.

• Another person could be a corporate or non-corporate entity

• Such entity may be owned by the performer himself

• Even if another person and entertainer are tax resident of different countries, paragraph applies

• Source state may tax such income.

• It overrides the provisions of Article 7 (Business profit) and 15 (Income from employment).

7.3 Article 17 (2) – Anti Avoidance Rule
• Another person i.e. entity could be a Management Company, team, troupe, orchestra or “renta- star” company.

• “Rent a star” company is controlled by the performer or artist and performer would be the beneficiary of maximum profit of the company

• Income for the performance of entertainer in the source state is received by such entity and not by the entertainer.

• An entertainer or sportsperson is either hired or employed by such entity for the entertainment program to be held in Source State.

• Such entity may pay nominal amount or modest salary to the performer.

• Such entity, in the absence of Permanent Establishment or business connection, may avoid tax in the Source State.

• Income does not accrue to the performer, hence paragraph 1 of Article 17 will not apply.

• Individual performer/entertainer may avoid tax for non-application of Article 15 or may pay tax on modest salary.

• Paragraph 2 deal with such an arrangement and gives taxing rights to the Source State.

7.4 Article 17(2) – Important Points

a. Para 2 does not apply to Prize money that the owner of a horse or the team to which a race car belongs, derives from the results of the horse or car during a race or during races, taking place during a certain period.

b. Does not cover the income of all enterprises that are involved in the production of entertainment or sports events, e.g.:

i. income derived by the independent promoter of a concert from the sale of tickets; and

ii. allocation of advertising space is not covered by paragraph 2.

c. Computation Mechanism – as per the domestic laws of the Source country.

7.5 Computation and rate of tax
Approach for computing income
• Treaty does not provide for method of computing income

• Income is to be computed as per domestic law of the source state (e.g. section 115 BBA of the Act)

• Domestic law may tax only company or the entertainer or both on their respective income

• Non-resident may choose to be governed by the treaty law or the domestic law.

Rate of tax
• Rates are generally not provided in the treaty

• Domestic law may provide for tax on gross income or give an option to be taxed on net income (@20% u/s. 115 BBA of the Act).

7.6 Taxation of Team Performance

A team performance is defined as the exercise of personal activities by more than one entertainer or sportsperson who come together as a group ? Group entity may or may not be a resident or have a permanent establishment in the state of source ? Each team member is classified as entertainer or sportsperson or support staff based on the nature of services rendered

Entertainer or sportsperson of the team are taxed in the state of performance

Support staff, technical personnel and all employees other than artistes or sportsmen are governed by Article 15.

Tax treatment in the state of source is as under:

Payments attributable to entertainer and sportsperson is taxed under Article 17(1)

• Profit earned by the team is apportioned between profit attributable to the performance of entertainer or sportsperson and profits attributable to activities of non-performing members

• Profit attributable to the performance of entertainer or sportsperson is taxed under Article 17(2)

7.7 Relevant Case Law re Article 17(2)

Wizcraft International Entertainment Private Limited vs. ADIT [2014] 45 taxmann.com 24 (Bombay)

• Commission paid to the UK agent was not for services of entertainers/artists.

– The UK agent had not taken any part in the events, nor performed any activities in India. Hence, it was not covered by Article 18 of India- UK DTAA .

• The UK agent did not have any PE in India [Carborandum Co. vs. CIT, (1977) 108 ITR 335 (SC) and CBDT Circular Nos. 17 dated 17.07.1953 and 786 dated 07.02.2000], commission paid to the UK agent was not taxable in India and no obligation on Indian Co to deduct tax at source.

• Reimbursement of expenses – The law is well settled that reimbursement of expense not chargeable to tax and hence, no obligation to deduct tax at source [DIT (IT) vs. Krupp UDHE Gmbh (2010) 38 DTR (Bom) 251 following own decision in CIT vs. Siemens Aktiongesellschaft 220 CTR (Bom) 425].

• Reliance was placed on Circular No. 786 dated 7 February 2000 in respect of non-taxability in India of export commission payable to non-resident agents rendering services abroad.

Note: The aforementioned Circular No. 786 dated 7 February 2000, is withdrawn by Circular No. 7/2009 dated 22nd October, 2009. However, the ITAT and the courts in various cases have held that even after the withdrawal of said circular, export commission payable to non-resident agents rendering services abroad, is not taxable in India.

8. Additional Consideration relating to paragraph 1 & 2 of Article inserted as Article 17(3) in many India’s DTAAs

Article 17 ordinarily applies when the entertainer or sportsperson is employed by a Government and derives income from that Government. However, certain conventions contain provisions excluding entertainers or sportspersons employed in organisations which are subsidised out of public funds from the application of Article 17.

Some countries may consider it appropriate to exclude from the scope of the Article events supported from public funds.

This has been provided as additional consideration in Commentary to Model Convention July 2014 with modifications.

8.1 Such provisions are existing in most of India’s DTAA s and are inserted as paragraph (3) or (4) of Article 17.

8.2 A rticle 17(3) in some of the India’s DTAA s
India – Armenia and India – Japan tax treaty Income taxable only in the resident state, if the event is for approved cultural or sports exchange program.

India – Australia, India – Belgium, India – Indonesia, and India – Mauritius tax treaty Income taxable only in the resident state, if the event is supported by public funds of resident state.

India-Brazil and India – Bangladesh Tax Treaties

Paragraph 1 and 2 will not apply if the activity is wholly or mainly or substantially supported from the public funds of the other contracting state.

9. Conflicts

It is important to note that all the income of the Artistes and Sportsmen may not in all cases be covered by Article 17. It is nature of income which will determine whether the same would fall within the scope of Article 17 or the same would be covered by Article 18 relating to Pensions or Article 19 relating to remuneration in respect of government service.

Conflicts between Article 17 and 18
• Remuneration derived from the entertainment show is governed by Article 17.

• Pension received after termination of performance activity will fall under Article 18.

• Golden handshakes are payment linked to employment and not to the performance, hence does not fall under Article 17.

Conflicts between Article 17 and 19

In case Artists or Sportsperson renders service to Government and receives remuneration then normally Article 17 applies if the activity of the Government is in the nature of business, otherwise Article 19 will apply.

The above article provides just a bird’s eye view of the subject. To gain an in-depth understanding of the subject, the reader would be well advised to study the commentaries on Article 17 of various model conventions and the relevant judicial pronouncements.

AMP: A CONTROVERSY FAR FROM OVER

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Background
Over the past decade, Indian Revenue has been the centre of global attention for its positions on controversies surrounding tax and transfer pricing. In the last few rounds of Transfer Pricing assessments, taxpayers promoting international brands in India have been scrutinised for the level of Advertising, Marketing and Promotion (‘AMP’) expenses incurred by them. These issues largely affected multinational enterprises (‘MNEs’) in consumer durables, electronics, automotive and media sectors. The controversy snowballed, leading to constitution of a three-member Special Bench of the Income-tax Appellate Tribunal (‘Appellate Tribunal’), for expert examination of the issues involved. Dissatisfied taxpayers later escalated the issue to the High Court and the same is now pending with the Indian Supreme Court. The most interesting aspect of the AMP controversy is the manner in which this issue has evolved in the judicial hierarchy. While some contentious issues are gradually dwindling as they move up the appellate forums, some issues remain unresolved and with each resolution come new challenges in practical implementation. In the next few paragraphs, we have attempted to summarise the controversy, the evolving judicial elucidation and some unresolved issues.

AMP in the Indian landscape
Under a typical license/distributor arrangement, the Indian entity of a MNE group uses the international brand/ trademark to sell its products in India. For doing so, the Indian entity would pay royalty for using such brand/ trademark. In order to spread awareness of the products and increase/maintain the market share of the products manufactured or distributed by them in India, the Indian entity would incur expenses on advertising, marketing and promotion of such brand/trademark.

During the course of Transfer Pricing assessments, the Indian Revenue has consistently been taking a position that the Indian entity of the MNE group provides assistance to the overseas affiliate, legal owner of the brand/trademark, by enhancing or building the international brand/trademark in India. According to the Revenue, AMP expense beyond the level of expense incurred by comparable businesses (termed as ‘Bright Line Test’ or ‘BLT ’) is non-routine and the same results in creation of marketing intangibles for the legal owner of the brand. Transfer Pricing adjustments have been made on the premise that the Indian entity ought to recover the excess costs along with an appropriate mark-up for such assistance.

Advent of the AMP controversy
The issue of AMP came to limelight in 2010, when the Delhi High Court pronounced a ruling in response to a writ petition filed by Maruti Suzuki1 challenging the show cause notice issued by the Transfer Pricing Officer. The High Court remarked that if the intensity of AMP expenses (defined by a ratio of AMP expense to sales) by the Indian taxpayer is more than what a comparable company would incur, the Indian taxpayer should be compensated at arm’s length, particularly when the use of trademark or logo of the foreign affiliate is obligatory on the part of the Indian taxpayer. With a shot in the arm, the Revenue Authorities made several transfer pricing adjustments in cases of distributors, licensed manufacturers, service providers, etc. using international brands. Without appreciating the difference in functional characterisation, business model and industry life-cycle of the Indian taxpayers, the Indian Revenue painted everyone with the same broad brush and made transfer pricing adjustments for excess AMP expenses.

The Indian Revenue seems to have taken inspiration from the US Tax Court ruling in the year 1998 in the case of DHL2, which was subsequently reversed by Ninth Circuit US Court of Appeal3. In the case of DHL, the Tax Court asked the taxpayer to prove that it incurred more than routine AMP expenses outside US, in order to substantiate that it was the developer of the non-US rights of trademark/brand. However, the Ninth Circuit Court of Appeal rejected the approach of the Tax Court holding that there was no such requirement of comparing the AMP expenses incurred by the taxpayer with comparable companies under 1968 Regulations.

Evolution of Transfer Pricing Jurisprudence on AMP in India:
As the Delhi High Court ruling on Maruti Suzuki’s writ petition led to a plethora of transfer pricing adjustments for AMP spends, affected taxpayers filed appeals to challenge their legality. The Appellate Tribunal, in one such case, deleted the transfer pricing adjustment on the technical ground that the Transfer Pricing Officer had no jurisdiction to assess any transaction which was not specifically referred by the tax officer assessing the case. The Revenue challenged this technical ground before the High Court but failed, with no discussion being recorded on merits of the transfer pricing adjustment. To overturn this defeat in 2012, the Indian Government amended the transfer pricing provisions through Finance Act, 2012. In the amended provisions, the term ‘intangible property’ was defined to include, inter alia, ‘marketing related intangible assets’, such as trademarks, trade names, brand names, logos, etc. Further, Transfer Pricing Officers were bestowed with the right to test transactions even if not specifically referred by the tax officer. After these amendments, the Appellate Tribunals started adjudicating the AMP issue on merit. However, a disparity in the decisions in different cases created uncertainty around the transfer pricing implication of AMP expenses. Considering the conflicting decisions, the importance and the complexity of the issue, a three-member special bench was constituted by the Appellate Tribunal to adjudicate on the transfer pricing aspects of AMP expenses.

Special Bench Ruling in the case of LG Electronics India Private Limited4 (LG India):

The appeal before the Special Bench of the Appellate Tribunal was led by LG India, while other Indian taxpayers5 also affected by the issue joined as interveners to the case. The key findings of the Special Bench were as under:

AMP expenses incurred by an Indian taxpayer result in creating and improving marketing intangibles for the overseas affiliates

Expenses for the promotion of sales directly lead to brand building, the expenses incurred directly in connection with sales are only sales specific

In addition to promoting its products through advertisements, LG India simultaneously promoted the foreign brand

The concept of economic ownership does not find place under the Indian tax law. It is the legal owner of the brand who is benefitted

If the level of AMP expenses incurred by the Indian taxpayer is in excess of that of comparables, the excess AMP ought to be recovered by the Indian taxpayer from the overseas affiliate along with appropriate mark up

Selling expenses which do not lead to brand promotion do not form part of AMP expenses and hence to be excluded for the purpose of benchmarking.

Subsequent to the decision of the Special Bench, most cases pending before the Appellate Tribunal were sent back to the Transfer Pricing Officers with specific direction to follow the principles laid down by the Special Bench in the LG India case. This resulted in transfer pricing adjustments in many cases, barring some relief on account of exclusion of routine sales expenses from the ambit of AMP spends.

Delhi High Court rulings

In the case of Sony Ericsson:
Aggrieved by the order of the Appellate Tribunals following the decision in LG India, taxpayers (including consumer electronics and consumer durables giants like Daikin, Haier, Reebok, Canon and Sony) appealed before the High Court. While adjudicating the case of Sony Ericsson, the High Court laid out the following broad principles:

Upholding the decision in LG India, AMP expenses were treated as an international transaction with associated enterprise (‘AE’) and thus subject to Transfer Pricing Regulations in India

Excess AMP expenses incurred by Indian taxpayers warrant a compensation, but BLT is not well suited for computing the same

Distribution and marketing are intertwined functions and should be analysed in a bundled manner for determining arm’s length remuneration, unless need for de-bundling is adequately demonstrated

If under bundled approach, the gross margins or net margins of the Indian taxpayers are sufficient to cover the excess AMP expenses, then a separate remuneration for such excess from the foreign affiliate is not required

If the distribution and marketing functions are to be debundled then the taxpayer should be allowed a set-off for additional remuneration in one function against a shortfall in the other function

In order to apply bundled approach using an overall Transactional Net Margin Method (‘TNMM’) / Resale Price Method (‘RPM’), it must be ensured that the level of AMP functions in comparables should be similar to that of the Indian taxpayer or the tested entity

An attempt be made to find comparables with similar level of AMP functions and if such comparables cannot be found then proper adjustment be made to even out the differences

All the AMP may not necessarily result in brand building

The concept of economic ownership of intangibles was recognised.

The High Court also suggested that the Appellate Tribunals try to adjudicate the pending cases (rather than remitting the same to the Transfer Pricing Officer) following the broad principles laid down in the case above. However, the Appellate Tribunals have been remitting the issue back to the Transfer Pricing Officer on the ground that no analysis has been carried out in respect of comparability in the level of AMP functions.

In the case of Maruti Suzuki
The case of Maruti Suzuki was also made a part of the appeals heard by the Delhi High Court along with that of Sony Ericsson (supra). However, as against the other appellants alongside Sony Ericsson, who were primarily distributors of their AEs’ products, Maruti Suzuki was a manufacturer. The appeal of Maruti Suzuki was thus de-linked and heard separately by the High Court. In its ruling, the High Court clearly distinguished the facts of the case from its earlier decision in Sony Ericsson. The High Court’s observations were made taking into consideration the specific profile of a manufacturer in the AMP scenario. Further, the High Court re-examined the applicability of Chapter X of the Income-tax Act, 1961 (‘Act’) to the AMP issue, since the existence of an international transaction was specifically questioned by the taxpayer. The observations of the High Court were as under:

The Court noted that Chapter X of the Act makes no specific mention of AMP expenses as one of the items of expenditure which can be deemed to be an international transaction.

Even if the same is considered to be covered under “any other transaction having a bearing on its profits, incomes or losses”, for a transaction to exist there has to be two parties. Therefore, the onus is on the Revenue authorities to show that there exists an ‘agreement’ or ‘arrangement’ or ‘understanding’ between Maruti Suzuki and its AE, whereby Maruti Suzuki is obliged to spend excessively on AMP in order to promote its AE’s brand8.

A transfer pricing adjustment envisages substitution of price of an international transaction with ALP. An adjustment is not expected to be made by deducing that an international transaction exists based on difference between AMP expenses of the taxpayer and comparable entities.

By applying BLT , the Revenue Authorities had deduced the existence of an international transaction on excessive AMP spend of Maruti Suzuki, and then added back the excess expenditure as transfer pricing adjustment. This was contrary to the High Court’s approach, which required the Revenue Authority to examine an international transaction. The High Court observed that the very existence of an international transaction cannot be matter for inference or surmise.

 In the absence of international transaction involving AMP spend with an ascertainable price, neither the substantive nor machinery provisions of Chapter X of the Act are applicable to the transfer pricing adjustment exercise.

In the cases of Honda Siel9 and Whirlpool10

The Maruti Suzuki ruling has apparently set the precedence for the interpretation of AMP spend in the case of manufacturers. Subsequent rulings have followed the distinct perspective of the High Court and questioned the existence of an international transaction merely on account of excessive AMP expenditure:

In the case of Honda Siel:

  •  The High Court observed that the Revenue Authorities ascertained existence of an International transaction only by applying the BLT. Accordingly, the High Court distinguished the case from its earlier Sony Ericsson ruling.

  • The High Court also observed that mere existence of a license for use of the AE’s brand name would not ipso facto imply any further understanding or arrangement between the taxpayer and its AE regarding the AMP expense for promoting the brand of the foreign AE.

  • Further, the High Court also noted that since the taxpayer was an independent manufacturer, it was incurring AMP expenses for its own benefit and not at the behest of the AE.

  • In the absence of any categorical evidence provided by the Revenue Authorities, the High Court followed the Maruti Suzuki decision and ruled out the existence of an International transaction.

In the case of Whirlpool:

  • The High Court observed that the provisions under Chapter X of the Act do envisage a ‘separate entity concept’. Therefore, there cannot be a presumption that since the taxpayer is a subsidiary of the foreign AE, its activities are dictated by the AE.

  • Once again, the High Court put the onus on the Revenue Authorities to factually demonstrate through some tangible material that the two parties acted in concert, and further, that there was an agreement to enter into an International transaction concerning AMP expenses.
  • Regarding the deductibility of AMP expenses u/s. 37 of the Act, the High Court ruled in favour of the taxpayer and held that merely because the AE is also benefitted by the AMP expenses, their allowability is not precluded.


Subsequent cases

The Delhi High Court as well as the Appellate Tribunal have been speedily disposing cases covering AMP issues by following the ratio laid down in the Sony Ericsson and Maruti Suzuki rulings. An unspoken trend seems to have been set in the pattern of disposal – while the Sony Ericsson ruling is being followed in the case of appellant who are distributors, the Maruti Suzuki ruling is being followed in the case of manufacturers.

  • In the case of Haier Appliances11, the Appellate Tribunal observed that for application of RPM, it is necessary to examine the comparability of the AMP functions performed by the Appellant with those of the comparables. In the absence of adequate information to this effect, the case was remanded back to the Revenue Authorities for fresh consideration. However, the Appellant being a distributor, the presence of an international transaction was not negated (following the ruling in Sony Ericsson case).

  •  Similarly, in the case of Johnson & Johnson12, the Appellate Tribunal held that the Revenue Authorities are duty bound to apply the existing methods under the Act (as against BLT, which has been rejected in the Sony Ericsson ruling).

  • The case of Yum Restaurants13, was remitted back by the High Court for further examination of the franchise marketing model in question. The Sony Ericsson ruling was followed in this case as well. However, here the High Court held that once a transfer pricing adjustment has been made for AMP expenses, the said expenses cannot be disallowed again u/s.40A(2)(b) of the Act.
The case of Bausch & Lomb14 involved manufacturing as well as trading activities. Here, the High Court ruled out the existence of an international transaction, following the Maruti Suzuki ruling. Further, the High Court also observed that ‘function’ needs to be distinguished from ‘transaction’ and that every expenditure forming part of a function cannot be construed as a ‘transaction’.

Is It The End Of The AMP Controversy?
The year 2015 witnessed disposal of several cases by the Delhi High Court and various benches of the Appellate Tribunal. While moving steadily ahead in its appellate journey, the AMP controversy still seems to be far from over.

A special leave petition (‘SLP’) has been filed before the Indian Supreme Court by affected taxpayers challenging the ruling of the Delhi High Court in the case of Sony Ericsson. The coming months are likely to reveal the taxpayers’ and Revenue’s responses to the other rulings of the High Court.

The High Court has not negated the existence of an international transaction where there is excessive AMP spend by Indian distributors. In such cases, the High Court has emphasised the need for comparability of the level of AMP function between the taxpayer and the independent comparable companies. If companies with comparable AMP functions cannot be found, the High Court directed necessary adjustment to even out the difference in the AMP functions. However, neither the High Court nor the Appellate Tribunals have provided any guidance on determining the level of AMP function or computing adjustment for difference in AMP functions. In absence of clear guidance, another round of litigation seems inevitable.

In the case of manufacturers, the existence of an International transaction has been ruled out in absence of specific provisions under Chapter X of the Act. The High Court has also explicitly expressed the need for a clear statutory scheme to check arbitrariness and address existing loopholes. In view of the same, one could expect some legislative amendments in the transfer pricing provisions in the upcoming budget.

The key issue that needs consideration and deliberation is whether the Indian taxpayers have incurred the AMP expenses in their capacity as service providers or as entrepreneurs on their own account. The issue of compensating for AMP function at arm’s length would arise only in case where the Indian taxpayer is incurring AMP expenses in the capacity of a service provider. The answer to this may lie in the functional analysis and conduct of the Indian tax payer and the overseas affiliate. Further, indicative facts like exclusivity, longevity of contract, premium pricing and increase in the market share, etc. could be used to demonstrate the economic ownership of the brand. Documentation by the MNE group would play the key role in helping the MNE find answers, determine the course of action and/or build appropriate defense.

Consideration also needs to be given to the mode of remunerating such service. In place of recovering the AMP expenses from the overseas affiliates, MNEs could consider remunerating the Indian taxpayers by way of higher gross margin to cover the AMP expenses. Lastly, while the MNE groups evaluate their value chains in the wake of BEPS, it may be worthwhile to consider the above implications while aligning ownership of intangible property, compensation and related structures.

1. Maruti Suzuki India Limited vs. Addl. CIT TPO [W.P.(C) 6876/2008] [2010] 328 ITR 210 (Del)

2. DHL Corporation & Subsidiaries vs. Commissioner of Internal Revenue (T.C. Memo.1998-461, December 30, 1998)

3. DHL Corporation & Subsidiaries vs. Commissioner of Internal Revenue (Ninth Circuit Court ruling, April 11

4. L.G. Electronics India Private Limited vs. Asstt. Commissioner of Income Tax (ITA No. 5140/Del/2011)

5. Haier Telecom Pvt. Ltd; Goodyear India; Glaxo Smithkline Consumer India;
Maruti Suzuki India; Sony India; Bausch & Lomb; Fujifilm Corporation; Canon
India; Diakin India; Amadeus India; Star India; Pepsi Foods India

6. Sony Ericsson Mobile Communication India Pvt. Ltd vs. Com-missioner of Income-tax (ITA No. 16/2014) (Del)

7. Maruti Suzuki India Limited vs. Commissioner of Income-tax (ITA 110/2014; ITA 710/2014) (Del)

8. With reference to meaning of ‘international transaction’ u/s. 92B(1) if the Act and meaning of ‘transaction’ u/s. 92F(v) of the Act

9. Honda Siel Power Products Limited vs. Deputy Commissioner of Income-tax [2015] 64 taxmann.com 328 (Delhi)

10. Commissioner of Income-tax – LTU vs. Whirlpool of India Limited [2015] 64 taxmann.com 324 (Delhi)

11. Haier Appliances India Limited vs. DCIT, OSD, CIT-IV [2016] 65 taxmann.com 74 (Delhi – Trib.)

12. Johnson & Johnson Limited vs. Addl. CIT – LTU (ITA No. 829/M/2014)

13. Yum Restaurants (India) (P.) Ltd. vs. Income-tax Officer [2016]
66 taxmann.com 47 (Delhi)

14. Bausch & Lomb Eyecare (India) (p.) Ltd. vs. Addl. CIT [2016] 65 taxmann.com 141 (Delhi)

M/s. Southern Refineries Ltd. vs. State of Kerala and others, [2013] 64 VST 25 (Ker)

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Sales Tax – Scheme of Rehabilitation – Directing State to Grant Exemption From Payment of Tax- State not Granting It – Dealer Relying on Scheme and Not Collecting Tax – State Directed to Consider the Matter for Exemption, The Sick Industrial Companies (Special Provisions) Act, 1985.

FACTS
The appellant company, a Medium Scale Industries fell sick due to initial problems, could not avail one third of the sales tax exemption limit. BIFR declared the company sick and approved the rehabilitation scheme which provided for specific relief to the company in the form of sales tax exemption and concessional rate of CST.

This was circulated to all concerned. Accordingly the company had claimed exemption from payment of tax and not collected any tax. At the same time, CST was paid at concessional rate of 2%. The company approached the Government to extend the exemption of KGST and concessional rate of CST till March, 31, 2005 as contemplated in the Sanctioned Scheme. However, the tax department issued pre-assessment notices and demanded tax without extending the benefits of exemption under SRO as also the concessional rate of CST at the rate of two per cent. The company filed writ petition before the Kerala High Court to quash the order passed by the Government, as well as, notices and also soughtfor the benefit of exemption and concessions as per sactioned scheme by the BIFR.

HELD
In the present case, the respondent State participated in the proceedings before the BIFR. Taking note of the reluctance by the sales tax authorities to extend the relief envisaged by the sanctioned scheme, BIFR, issued revised directions u/s. 22A of the Act. The State did not prefer any appeal u/s. 25 of the Act. If order and notices allowed to stand, the same would put things out of gear and the entire efforts taken so far by the BIFR for reviving the appellant company from sickness would terribly be watered down, The burden is heavily on the Government to establish that it would be inequitable to hold the Government bound by the promise on account of public interest. The State was unable to establish overriding public interest which made it inequitable to enforce the estopple against them.

The High Court upheld the plea of promissory estoppels raised by the appellant company. The High Court allowed the appeal and order as well as notices were quashed and directed the respondent State to reconsider the matter and guided by the directions in Sanctioned Scheme by BIFR.

State of Kerala vs. Balsara Hygiene Products [2013] 63 VST 535 (Ker) Sales Tax “Odonil” – Room /Cup Board Freshener Not Taxable As “Shampoo Talcum Powder, Perfumeries and Cosmetics” or As “Repellent”- Taxable Under Residuary Entry.

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Sales Tax – Second Sale by Holder of TradeMark – Not a Resale – Taxable as First Sale, Section 5(2) and Entry 85 and 127 of Schedule I of The Kerala General Sales Tax Act, 1963.

FACTS
The Company engaged in sale of consumer products like toothpaste, Moth repellants, etc. within the State and also holder/owner of trademark claimed second sale in respect of sale of its products like “Promise” “Meswak” “Odonil” etc. being purchased from registered dealer. The company paid tax @8% on sale of “Odonil” moth repellant under entry 85 of Schedule I the Act. The assessing authority disallowed the claim of resale u/s. 5(2) of The Act being sale of goods by trade mark Holder/Owner and levied tax thereon.

Further, the assessing authority levied tax @20% on sale of “Odonil” as the same is an “Air Freshener” would be classified as “perfumery” coming within entry 127 of the schedule I of the Act.

The Tribunal held in favour of the company for levy of tax @8% on sale of “Odonil”. The Tribunal also allowed the claim of resale of the assessee company. The State filed appeal before the Kerala High Court against the said decision of Tribunal.

HELD
The entry 127 of Schedule I covers goods like “shampoo”, “Talcum Powder” etc. The item so specifically mentioned are all relating to items which are used on the human body for beautification, grooming and having cosmetic qualities or properties. By including the specific items, the expansions to include other perfumeries and cosmetics would also be restricted to such items which would answer the description of the specific items mentioned in the entry. The principle of “ejusdemgeneris” would compel to understand the meaning of a word from the meaning of the works employed together with it. The product “Odonil” which is admittedly a room/ cup-board fresher cannot be brought under the description of perfumery in entry 127. As regards claim of the company for levy of tax at 8% under entry 85 of Schedule-I, as “Mosquito Repellents”, the court held that the predominant function is not descernible from the records. The wrapper of products indicates that it is an air freshener and also a moth repellant. The fragrance provided is projected as masking the bad odour of chemical and also avoiding bad odour in rooms /covered space. In such circumstances, it cannot be said that the dominant use of the product is that of a moth repellant and the same would fall under residuary entry of schedule I of The Act. Accordingly, the High Court held it covered by residuary entry of the Schedule I of the Act.

In respect of the second issue of claim of resale, the High Court held that u/s. 5(2) of the Act sale of goods under a trademark or name, by the brand name holder or trademark holder within the State shall be the first sale for the purpose of this Act. In this case, the company is a trademark/brand name holder of certain products more specifically tooth paste and toothbrush sold in the trade name “Promise” and “Meswak”. The company had purchased the said goods from M/s. Besta Cosmetics Limited who manufactured said goods under grant of license by the assessee company to manufacture under the said trade name. Section 5(2) of the act is an anti evasion measure and it contemplates the liability to be at that point of sale in case sale of manufactured goods other that tea, within the State:-

i) Made under a trademark or brand name,
ii) By a trademark / brand name holder

The sale hence would be not only by a trademark / brand name holder, but it should also be under trademark / brand name. The first sale by the manufacturer to the assessee company is of course sale by a trademark/brand name holder but, not a sale under trademark/brand name. Hence the second sale effected by the assessee company being again a sale by a trade mark / brand name holder and also a sale under trademark / brand name, is liable to tax u/s. 5(2) of the Act. Accordingly, the order of Tribunal allowing the claim of resale of the assessee company was set aside and the order of first appellate authority levying tax was confirmed.

2016 (41) STR 191 (Tri.-Ahmd.) Gujarat State Fertilizers & Chemicals Ltd. vs. CCE & ST, Surat –II.

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Commission paid to distributors for selling goods does not amount to sales promotion. Therefore, CENVA T credit was held inadmissible.

Facts
Adjudicating authority disallowed CENVAT credit on commission charges paid to the distributors/consignment stockist following Hon’ble Gujarat High Court’s decision in Cadila Healthcare Limited 2013 (30) STR 3 (Guj). It was contested that the case was factually different as the agreement was not only for sale of the products but it also included sales promotion activities. Department contested on the ground that the contract did not provide for any monetary consideration for the sales promotion activity and therefore, the entire consideration was held to be for sale of goods based on the value of the goods sold.

Held
After analysing the agreement, the Tribunal observed that sales promotion activity was not required to be carried out by distributors on behalf of the appellant. Even though display photographs, brochures and sales promotion material were provided, no consideration was towards such activity. Relying upon jurisdictional High Court’s decision in Cadila Healthcare Ltd. (supra), it was held that activities undertaken by the distributors of the appellant were purely distribution/ sales and had no element of sales promotion and hence, CENVAT credit was held inadmissible. However, since it was a debatable issue, penalty was set aside.

2016 (41) STR 123 (Tri-Chennai) SRF Ltd vs. CCEx., Trichy

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Penalty u/s. 77 cannot be imposed on the ground of non-endorsement of new service in registration certificate.

Facts
The Appellant was registered under category of GTA as a receiver of service for payment of service tax and was paying tax under that category. Subsequently, it has received BAS services from abroad and accordingly discharged service tax under BAS. However penalty u/s. 77 of the Finance Act, 1994 was imposed for not amending its registration certificate which is challenged before the Tribunal.

Held
The Appellant was a registered assessee and there was no default in payment of tax under the new category though endorsement was not done at that point of time. Since there was no deliberate default to evade the tax, penalty was waived.

[2016] 65 taxmann.com 282 (Mumbai-CESTAT) Lupin Ltd. vs. Commissioner of Central Excise & Service Tax, Mumbai

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Even if exemption to education cess or secondary & higher secondary education cess are not specifically mentioned in notification, they are also eligible for exemption/refund in addition to basic excise duty.

Facts
Refund of Education Cess (EC) and Secondary & Higher Education Cess (SHEC) paid in cash claimed under Notification No. 56/2002-CE dated 14/11/2012 (area based exemption) was denied to the appellant on the ground that said notification exempts only basic excise duty. Appellant’s plea that its issue was squarely covered by Bharat Box Factory Ltd. vs. CCE 2007 (214) ELT 534 which was initially rejected by Commissioner (Appeals) on the ground that revenue has filed SLP in Hon’ble Supreme Court.

Held
The Tribunal held that since revenue could not obtain stay from Hon’ble Supreme Court and status of case is still shown as pending, mere filing of SLP should not result in denial of applying the ratio of a case which is in favour of appellant. In Bharat Box Factory Pvt. Ltd. (supra), the Tribunal had held that when for operationalizing exemption, exempted amount of duty is required to be refunded, there was no question of levying education cess and hence it is also required to be refunded. Following the same, it was held that appellant should be entitled to refund of EC & SHEC paid on clearances of goods under Notification No. 56/2002-CE. Decision of Cyrus Surfactants (P.) Ltd. vs. CCE 2007 taxmann.com 806 (New Delhi – CESTAT) was also relied upon.

[2016] 65 taxmann.com 128 (Ahmedabad-CESTAT) Commissioner of Central Excise, Ahmedabad- II vs. Nova Petrochemicals Ltd.

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Recovery under Rule 14 of CENVA T credit Rules cannot be initiated merely because instead of making transfer through ST-3 return, manufacturer-cum-service provider assessee availed input service tax credit directly in ER-1 return.

Facts
The Assessee, a manufacturer availed service tax credit which was utilised for making payment of excise duty. The credit was directly claimed in ER-1 return without reflecting the same in ST-3. Department issued SCN for recovery of alleged wrong utilisation of CENVAT credit by invoking Rule 14 of CENVAT Credit Rules read with proviso to section 11A(1) of the Central Excise Act, 1944 and confirmed by adjudication. Commissioner (Appeals) decided the matter in favour of assessee, relying upon verification report of the department where the credits taken were verified and found in order. Aggrieved by the same, the department filed appeal before the Tribunal.

Held
The Tribunal observed that assessee was required to enter the credit of said amount in relevant ST-3 return and put a remark of transfer of the said credit in the ER-1 return utilised for payment of excise duty. Instead, input service tax credit was debited from the CENVAT account register and utilised in ER-1 return and it was not reflected in ST-3 return. However, it was noted that amount taken and utilised in ER-1 return of the respective month was deducted from total credit balance and only the balance amount was shown in respective column of ST-3 return and therefore the department’s appeal was dismissed.

Capital or revenue receipt – A. Y. 2009-10 – Money to be used in purchase of plant and machinery temporarily placed in fixed deposits – Inextricably linked with setting up of plant – Interest on fixed deposits is capital receipt

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Princ. CIT vs. Factor Power Ltd.; 380 ITR 474 (Del):

In the A. Y. 2009-10, the assessee received an amount of Rs. 70,75,843/- from the bank as interest on fixed deposits but did not declare that amount in the return. Instead the assessee reduced the interest amount from the capital work-in-progress. The assessee claimed that it is a capital receipt and not income. The Assessing Officer rejected the claim of the assessee and made an addition of Rs. 70,75,843/- as “income from other sources”. The Tribunal allowed the assesee’s claim and deleted the addition.

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

“i) The test that is required to be employed is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the business.

ii) The findings of fact had been returned by the Commissioner(Appeals) and had been confirmed by the Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The Revenue had also not been able to point out any perversity in such finding and, therefore, the factual findings had to be taken as those accepted by the Tribunal which is the final fact finding authority in the income-tax regime.

iii) Thus, the revenue generated on account of interest on the fixed deposits would be in the nature of capital receipt and not a revenue receipt.”

Business expenditure – Section 37 – A. Y. 2003-04 – Year in which allowable – Project abandoned as unviable at capital-work-in-progress stage – No claim made in earlier year – Expenses allowable in the year of write-off

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Binani Cement Ltd. vs CIT; 380 ITR 116 (Cal):

In the A. Y. 2003-04, the assessee claimed deduction of the expenditure on a project which had been abandoned when it was found to be unviable. The expenditure was not claimed or allowed earlier as business expenditure and was written off as capital-work-in-progress in the relevant year. The Commissioner (Appeals) held that when construction/acquisition of a new facility was abandoned when it was found to be unviable at the work-in-progress stage, the expenditure did not result in an enduring advantage and such expenditure, when written off, had to be allowed u/s. 37. The Tribunal reversed the order of the Commissioner(Appeals) holding that the expenditure incurred in the earlier years could not be deducted in the A. Y. 2003-04.

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

“There was no challenge on the finding of the Commissioner(Appeals) on the facts before the Tribunal or even the appeal. There would have been no occasion to claim the deduction if the work-in-progress had completed its course. Because the project was abandoned the workin- progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction. The decision was taken in the relevant year. Thus the expenditure arose in the relevant year. The question is answered in favour of the assessee.”

ALP – International transaction – Sections 92CA and 144C – A. Y. 2012-13 – Amount in dispute exceeding Rs. 5 crore – Matter has to be referred to TPO

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Carrier Race Technologies Pvt. Ltd. vs. ITO; 380 ITR 483 (Mad):

For the A. Y. 2012-13, the assessee had entered into international transactions. The international transactions were certified to be at arm’s length, based on the transactional net margin method as defined. The transfer pricing report and the transfer pricing documentation had been filed. The Assessing Officer computed the arm’s length price on his own and completed the assessment which resulted in an addition of more than Rs. 5 crore.

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

“i) Under the CBDT Instruction dated 20/05/2003, once the disputed value crosses a sum of Rs. 5 crore, necessarily the assessing authority has to refer the matter to the Transfer Pricing Officer so as to proceed further.
ii) Since the provisions of the Act make it clear that u/s. 92CA the only option was to place the matter before the Transfer Pricing Officer, and that option had not been followed, the assessment order was not valid and had to be set aside.”

Business Income – Special Deduction – Proceeds generated from sale of scrap not includable in “Total turnover” for the determining the admissible deduction u/s. 80HHC.

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Mahavira Cycle Industries vs. CIT & Anr. [2015] 379 ITR 357 (SC)

The assessee-firm was dealing in trading and manufacturing of cycle parts. It claimed that the scrap was bi-product of manufacturing which was not part of the total turnover. On November 29, 1999, the assessee filed its original return for the assessment year 1999-2000 declaring a total income as nil. The assessee claimed deduction of Rs.1,73,53,957 u/s. 80HHC of the Act. The return was processed u/s. 143(1)(a) on March 21, 2001. The case was reopened u/s. 148 of the Act. During the assessment proceedings, it was found that the assessee had made sale of scrap amounting to Rs.79,25,489. According to the view point of the Revenue, the sale proceeds of the scrap was a part of the total turnover though the assessee had ignored to include the amount of sale of scrap while computing the deduction u/s. 80HHC of the Act. At the same time, the Assessing Office excluded the profit on sale of scrap from the profit of the business on proportionate basis for the purposes of calculation of deduction u/s. 80HHC. The Assessing Officer, thus, vide order dated July 10, 2006, modified the deduction admissible u/s. 80HHC.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) (for short “the CIT(A)”). The Commissioner of Income Tax (Appeals) held that the Assessing Officer fell in legal error by including the sale of scrap in the total turnover for the purpose of computation of deduction u/s. 80HHC. It was also clarified that the sale of scrap shall not be considered while computing the profits of the business and, accordingly, by its order dated September 25, 2006, the Commissioner of Income Tax (Appeals) allowed the appeal.

The order giving effect to the order of the Commissioner of Income Tax (Appeals) was passed on October 3, 2006 by the Assessing Officer wherein the total income was assessed at nil. However, later on the Assessing Officer was of the opinion that while giving effect to the order of the Commissioner of Income Tax (Appeals), a mistake apparent on the face of the record had occurred as the scrap sales amounting to Rs.79,25,489 had to be excluded from the total turnover as well as from the profits of the business for computing deduction u/s. 80HHC. The Assessing Officer rectified its earlier order giving appeal effect by exercise of the powers under section 154 of the Act, vide order dated November 28, 2006 and recomputed the deduction by excluding the entire turnover of sale of scrap from the profits of the business. The assessee again filed an appeal before the Commissioner of Income Tax (Appeals) challenging the order dated November 28, 2006 of the Assessing Officer. The Commissioner of Income Tax (Appeals), however, dismissed the appeal, vide order dated December 28, 2007, in the light of its earlier order dated September 25, 2006, holding that u/s.154 the Assessing Officer was competent to initiate proceedings to exclude the turnover of sale of scrap from the profit of business for the purpose of computation of deduction u/s. 80HHC. The assessee further took the matter in appeal before the Tribunal, impugning the orders passed by the Commissioner of Income Tax (Appeals) dated December 28, 2007, and September 25, 2006. The main submission that was raised on behalf of the assessee was that the Commissioner of Income Tax (Appeals) had erred in holding that the entire turnover of sale of scrap was to be excluded from profits of business while computing the deduction u/s. 80HHC.

The Tribunal vide order dated September 29, 2008, held that the deduction u/s. 80HHC of the Act should be computed after excluding the profit on sale of scrap from the profit of business and the sale of scrap also would not form part of the total turnover, for the purpose of calculation of deduction u/s. 80HHC and dismissed both the appeals of the assessee.

The High Court held that the question regarding the inclusion of profit on sale of scrap in calculating business profit u/s. 80HHC had come up for consideration before the Kerala High Court in CIT vs. Kar Mobiles Ltd.’s case (311 ITR 478) where after examining the provisions of section 80HHC and Explanation (baa)(1) attached thereto, it was held that the profits arising from the sale of scrap shall form part of business profits referred to in the formula for determining admissible deduction u/s. 80HHC of the Act. It was also recorded that the sale of scrap shall also form part of the total turnover of the assessee.

Before the Supreme Court, the Revenue acknowledged that the controversy in hand has been adjudicated upon by the Supreme Court in CIT vs. Punjab Stainless Steel Industries (364 ITR 144), in which it was held that sale proceeds of scrap were not includible in turnover.

The Supreme Court therefore allowed the application of the assessee and disposed of the civil appeals in terms of the judgment in CIT vs. Punjab Stainless Steel Industries.

Penalty u/s. 271E -When the original assessment is set aside, the satisfaction recorded therein for the purpose of initiation of penalty proceeding would not survive – Penalty imposed on the basis of original order cannot be sustained.

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CIT vs. Jai Laxmi Rice Mills (2015) 379 ITR 521 (SC)

In respect of the assessment year 1992-93, assessment order was passed on February 26,1996, on the basis of the CIB information informing the Department that the assessee was engaged in a large scale purchase and sale of wheat but it was not filing income–tax return. Ex parte proceedings were initiated, which resulted in the aforesaid order, as per which the net taxable income of the assessee was assessed at Rs. 18,34,584. While framing the assessment, the Assessing Officer also observed that the assessee had contravened the provisions of section 269SS of the Act and because of this, the Assessing Officer was satisfied that penalty proceedings u/s. 271E of the Act were to be initiated.

The assessee carried out this order in appeal. The Commissioner of Income-tax (Appeals) allowed the appeal and set aside the assessment order with a direction to frame the assessment de novo after affording adequate opportunity to the assessee.

After remand, the Assessing Officer passed a fresh assessment order. In this assessment order, however, no satisfaction regarding initiation of penalty proceedings u/s. 271E of the Act was recorded.

It so happened that on the basis of the original assessment order dated February 26, 1996, show-cause notice was given to the assessee and it resulted in passing the penalty order dated September 23, 1996. Thus, this penalty order was passed before the appeal of the assessee against the original assessment order was heard and allowed thereby setting aside the assessment order itself. It is in this backdrop, a question arose as to whether the penalty order, which was passed on the basis of the original assessment order and when that assessment order had been set aside, could still survive.

The Tribunal as well as the High Court held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceeding u/s. 271E would also would not survive. According to Supreme Court this was the correct proposition of law stated by the High Court in the impugned order.

The Supreme Court observed that, in so far as the fresh assessment order was concerned, there was no satisfaction recorded regarding the penalty proceeding u/s. 271E of the Act though in that order the Assessing Officer wanted penalty proceeding to be initiated u/s. 271(1)(c) of the Act. The Supreme Court thus held that in so far as penalty u/s. 271E was concerned, it was without any satisfaction and, therefore, no such penalty could be levied. The Supreme Court accordingly dismissed the appeals filed by the Revenue.

Business Expenditure – Interest on borrowed capital cannot be disallowed in a case where advances are made to subsidiary out of such borrowed capital due to business expediency.

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Hero Cycle P. Ltd. vs. CIT (2015) 379 ITR 347( SC)

In the income-tax return filed by the assessee for the aforesaid assessment year, the assessee, inter alia, claimed deduction of interest paid on borrowed sums from bank under the privisions of section 36(1)(iii) (hereinafter referred to as “the Act”). The aforesaid deduction was disallowed by the Assessing Officer, vide his assessment order dated March 26, 1991, on the following two points:

(1) The assessee had advanced a sum of Rs. 1,16,26,128 to its subsidiary company known as M/s. Hero Fibres Ltd. and this advance did not carry any interest. According to the Assessing Officer, the assessee had borrowed the money from the banks and paid interest thereupon. Deduction was claimed as business expenditure but substantial money out of the loans taken from the bank was diverted by giving advance to M/s. Hero Fibres Ltd. on which no interest was charged by the assessee. Therefore, he concluded that the money borrowed on which interest was paid was not for business purposes and no deduction could be allowed.

(2) In addition, the assessee had also given advances to its directors in the sum of Rs. 34 lakh on which the assessee charged from those directors interest at the rate of 10%, whereas interest payable on the money taken by way of loans by the assessee from the banks carried interest at the rate of 18%. On that basis, the Assessing Officer held that charging of interest at the rate of 10% from the abovementioned persons and paying interest at much more rate, i.e., at the rate of 18% on the money borrowed by the assessee could not be treated for the purposes of business of the assessee.

The assessee had claimed deduction of interest in the sum of Rs. 20,53,120. The Assessing Officer, after recording the aforesaid reasons, did not allow the deduction of the entire amount and re-calculated the figures, thereby disallowed the aforesaid claim to the extent of Rs. 16,39,010.

The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals).

In so far as the advance given to M/s. Hero Fibres Ltd. was concerned, the case put up by the assessee even before the Assessing Officer was that it had given an undertaking to the financial institutions to provide M/s. Hero Fibres Ltd. the additional margin to meet the working capital for meeting any cash losses. It was further explained that the assessee-company was the promoter of M/s. Hero Fibres Ltd. and since it had the controlling share in the said company that necessitated giving of such an undertaking to the financial institutions. The amount was, thus, advanced in compliance with the stipulation laid down by the three financial institutions under a loan agreement which was entered into between M/s. Hero Fibres Ltd. and the said financial institutions and it became possible for the financial institutions to advance that loan to M/s. Hero Fibres Ltd., because of the aforesaid undertaking given by the assessee. No interest was to be paid on this loan unless dividend was paid by that company.

On that basis, it was argued that the amount was advanced by way of business expediency. The Commissioner of Income-tax (Appeals) accepted the aforesaid plea of the assessee.

In so far as the loan given to its own directors at the rate of 10 % was concerned, the explanation of the assessee was that this loan was never given out of any borrowed funds. The assessee had demonstrated that on the date when the loan was given, that is on March 25,1987, to these directors, there was a credit balance in the account of the assessee from where the loan was given. It was demonstrated that even after the encashment of the cheques of Rs. 34 lakh in favour of those directors by way of loan, there was a credit balance of Rs. 4,95,670 in the said bank account. The aforesaid explanation was also accepted by the Commissioner of Income-tax (Appeals) arriving at a finding of fact that the loan given to the directors was not from the borrowed funds. Therefore, the interest liability of the assessee towards the bank on the borrowing, which was taken by the assessee had no bearings because otherwise, the assessee had sufficient funds of its own which the assesse could have advanced and it was for the Assessing Officer to establish the nexus between the borrowings and advancing to prove that the expenditure was for non-business purposes which the Assessing Officer failed to do.

The Revenue challenged the order of the Commissioner of Income-tax (Appeals) before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal upheld the aforesaid view of the Commissioner of Income-tax (Appeals) and, thus, dismissed the appeal preferred by the Revenue.

The appeal of the Revenue before the High Court filed u/s. 260A of the Income-tax Act, however, was allowed by the High Court, by simply following its own judgment in the case of CIT vs. Abhishek Industries Ltd. (286 ITR 1).

The Supreme court applying the ratio of its decision in S. A. Builders vs. CIT (288 ITR 1) to the facts of this case and referring to the decision of the Delhi High Court in CIT vs. Dalmia Cement (B) Ltd. (254 ITR 377) which was approved in S. A. Builders (supra), held that it was manifest that the advance to M/s. Hero Fibres Ltd. became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to meet working capital for cash losses.

The Supreme Court noted that, subsequently, the assessee-company had off-loaded its shareholding in the said M/s. Hero Fibres Ltd. to various companies of the Oswal group and at that time, the assessee-company not only got the back the entire loan given to M/s. Hero Fibres Ltd. but this was refunded with interest. In the year in which the aforesaid interest was received, the same was shown as income and offered to tax.

In so far as the loans to the directors was concerned, the Supreme Court observed that it could not be disputed by the Revenue that the assessee had a credit balance in the bank account when the said advance of Rs. 34 lakh was given. Further, as observed by the Commissioner of Income-tax (Appeals) in his order, the company had reserve/surplus to the tune of almost 15 crore and, therefore, the assessee-company could in any case, utilise those funds for giving advance to its directors.

In view of above, the Supreme Court allowed the appeal thereby setting aside the order of the High Court and restoring that of the Income-tax Appellate Tribunal.

Note:- The judgment of the Apex Court in the case of S. A. Builders was analysed in the column ‘ Closements’ of BCAJ in the month of February, 2007.

Obligation of Foreign Company to File Return of Income where Income Exempt under DTAA

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The obligation to file a return of income under the Income -tax Act, 1961 arises by virtue of section 139 of that Act. Section 139(1) provides that every person, being a company or a firm, or being a person other than a company or a firm, having total income exceeding the maximum amount not chargeable to income tax during the previous year, shall file a return of income in the prescribed manner. The provisos to this s/s. and s/s.s (4A) to (4F) of this section, require filing of returns of income by various entities, even where these entities’ income may not be chargeable to tax.

The 3rd proviso to section 139(1) provides that every company or firm shall furnish its return of income or loss before the due date in every previous year. The 4th proviso further requires every person, who is resident and ordinarily resident and who otherwise is not required to furnish a return of income, and who holds any foreign asset as a beneficial owner or otherwise, or who is a beneficiary of any foreign asset, to file a return of income. Sub-section (4A) applies to charitable or religious institutions claiming exemption u/s.s 11 and 12, s/s. (4B) applies to political parties, s/s. (4C) applies to research associations, news agencies, profession regulatory bodies, educational institutions, hospitals, mutual funds, securitisation trusts, venture capital funds, trade unions, infrastructure debt funds, etc., s/s. (4D) applies to research organisations, s/s. (4E) applies to real estate investment trusts and infrastructure investment trusts, while s/s. (4F) applies to alternative investment funds.

A foreign company may at times have income which is chargeable to tax in India under the provisions of the Act, but which may be exempt from tax by virtue of the provisions of a Double Taxation Avoidance Agreement (“DTAA”). The issue has arisen before the Authority for Advance Rulings (“AAR”) as to whether such a foreign company, whose entire Indian income is not taxable in India by virtue of a DTAA, is required to file its return of income in India. There have been conflicting rulings of the AAR on this issue, at times holding that there is no such obligation to file a return of income in India, while at times holding that a return of income has necessarily to be filed in India by a foreign company, irrespective of the fact that its income is not liable to tax in India.

Castleton Investment Ltd ’s case
The issue had arisen before the AAR in the case of Castleton Investment Ltd, in re, 348 ITR 537.

In this case, the assessee was a Mauritius company, part of a multinational group, which held shares of a listed company in India, amounting to 3.77% of the paid-up capital of the listed company. As a part of the reorganisation of the group structure, it proposed to transfer the shares held by it in the listed company in India to another group company based in Singapore, either through a transaction on a recognised stock exchange on which the shares were listed, or through an off market sale.

It filed an application for a ruling before the AAR, as to whether the capital gains arising from transfer of the shares of the listed company would be subjected to tax in India, or whether such capital gains would be exempt from tax by virtue of paragraph 4 of Article 13 of the India Mauritius DTAA . It also raised the question as to whether the provisions of section 115JB, relating to Minimum Alternate Tax (MAT) was applicable to it. One of the other questions raised by it in the application was that if the transfer of shares of the listed company was not taxable in India, whether it was required to file any return of income u/s. 139.

The authority held that the capital gains arising to the assessee was not chargeable to tax in India by virtue of paragraph 4 of Article 13 of the DTAA between India and Mauritius. As regards the issue of whether the assessee was under an obligation to file the return of income, it was argued on behalf of the assessee that since the income was not taxable in India under the Act read with the DTAA, there was no obligation on the assessee to file a return of income u/s. 139. On behalf of the revenue, it was argued that whatever may be the position under the DTAA , the applicant was bound to file a return of income as mandated by section 139.

The AAR, analysing the provisions of section 139, observed that every person, being a company, firm or a person other than a company or firm, had to file a return of income if its/his total income exceeded the maximum amount which was not chargeable to income tax. If an assessee had income which was chargeable under the Act, or after claiming the benefit of a DTAA, if it had chargeable income exceeding the maximum amount not chargeable to tax, it was bound to file a return as per the language of section 139.

The Authority observed that a person claiming the benefit of the DTAA could do so by invoking the provisions of section 90(2) of the Income-tax Act to claim such benefit. In other words, a person earning an income that was otherwise chargeable to tax under the Act had to make a claim by invoking section 90(2) of the Act for getting the benefit of a DTAA in order to enable him to be not liable to payment of tax in India. According to the AAR, even if a person was entitled to a relief under the DTAA , he had to seek it, and that would be during the consideration of his return of income or at best, while filing the return of income. The AAR accordingly was of the view that the obligation u/s. 139 did not simply disappear merely because a person was entitled to claim the benefit of a DTAA.

Addressing the argument that a DTAA overrides the Act, and was not the same as claiming an exemption under the Act, the AAR observed that surely, in terms of section 90(2), it had to be shown that the benefit of a DTAA was being claimed, that the claimant was eligible to make that claim, and that the DTAA was more beneficial to the claimant than the Act. According to the AAR, that had to be shown before the assessing authority, and this emphasised the need to file a return of income to claim such a relief. The AAR therefore held that the assessee had an obligation to file a return of income in terms of section 139. Incidentally, in this case, the AAR also held that the provisions of section 115JB relating to MAT on book profits, applied to the assessee.

A similar view had been taken by the AAR in the cases of VNU International BV, in re 334 ITR 56, SmithKline Beecham Port Louis Ltd., in re 348 ITR 556, ABC International Inc., in re 199 Taxman 211, and XYZ/ABC Equity Fund, in re 250 ITR 194, in all of which cases, the income was taxable in India under the Act, but exempt under the DTAA . In XYZ/ABC Equity Fund’s case, a case where business profits earned in India were held not liable under the DTAA in absence of a permanent establishment in India, a view has been taken that:

“‘Total income’ is to be computed in accordance with the provisions of the Income-tax Act. According to section 5, total income of a non-resident includes all income from whatever source derived which is received or is deemed to be received in India in a given year or accrues or arises or is deemed to accrue or arise to the non-resident in India during such year. Therefore, if the income received by or on behalf of the non-resident exceeds the maximum amount which is not chargeable to income-tax, a return of income has to be filed. It may be that in the final computation after all deductions and exemptions are allowed, it will turn out that the assessee will be not liable to pay any tax. The exemptions and deductions cannot be taken by the assessee on his own. He is obliged to file his return showing his income and claiming the deductions and exemptions. It is for the Assessing Officer to decide whether such deductions and exemptions are permissible or allowable. The assessee cannot be allowed to pre-judge the issues and decide for himself not to file the return, if he is of the view that he will not have any taxable income at all.”

Even in the case of Deere & Co, in re 337 ITR 277 (AAR), where the transaction of gift of shares to another group company was not chargeable to capital gains tax at all even under the Act, as well as under the DTAA , the AAR has taken the view that the assessee was under an obligation to file its return of income, following its earlier rulings.

FactSet Research System’s case
The issue had also come up before the AAR in the case of FactSet Research Systems Inc, in re 317 ITR 169.

In this case, the assessee was a US company, which maintained a database of financial and economic information, including fundamental data of a large number of companies worldwide, at its data centres located in the USA. The databases contained the published information collated, stored and displayed in an organised manner, which facilitated retrieval of publicly available information in a shorter span of time and in a focused manner by its customers, who were mostly financial intermediaries and investment banks. The customers paid a subscription to access the database.

Besides seeking a ruling from AAR as to whether such subscription received from customers in India would be taxable in India under the Income-tax Act or under the DTAA between India and the USA, the assessee also raised the question of whether it was absolved from filing a tax return in India under the provisions of section 139 with regard to the subscription fees, assuming that it had no other taxable income in India.

The AAR held that the payment of the subscription fees did not constitute royalty either under the Act [as it then stood before the retrospective amendment to section 9(1)(vi)] or under the India USA DTAA. While examining whether the subscription fees was taxable as business income under the DTAA , the AAR took note of the assessee’s submissions that the Mumbai office of a group subsidiary provided marketing and support services to its customers in India, but that, after initial discussions with the prospective customers, the contract was signed by the customer and by the assessee, and that the Mumbai office did not have the authority to conclude contracts with customers. The AAR accepted the assessee’s submission, but left it open to the Department to make enquiry as to the existence or otherwise of an agency PE, and as to the attribution of income to such PE.

As regards the question of obligation to file a return of income, based on its finding that there was no royalty income and on the facts stated by the assessee that there was no PE in India, the AAR held that there was no obligation on the assessee to file the return of income in India.

A similar view had been taken by the AAR in the case of Venenburg Group BV, in re (2007) 289 ITR 462, where the AAR observed that the liability to pay tax was founded upon sections 4 and 5 of the Act, which were the charging sections. Section 139 and other sections were merely machinery sections to determine the amount of tax. According to the AAR, relying on the decision in the case of Chatturam vs. CIT (1947) 15 ITR 302, there would be no occasion to call a machinery section to one’s aid, where there was no liability at all. Therefore, the assessee was not required to file any tax returns, though the capital gains from the proposed transaction would be chargeable to tax under the Act, but would be exempt under the DTAA .

Observations
Section 139(1) requires a filing of return of income by a person other than a company or a firm if income exceeds the maximum amount which is not chargeable to income tax. Clause(a) provides for filing of return of income by a company or a firm and in doing so does not expressly limit the requirement to the cases of income exceeding the maximum amount not chargeable to tax. This may be on account of the fact that a company or a firm does not have any maximum amount which is not chargeable to income tax, since it is liable to pay tax on its entire chargeable income at a flat rate of tax.

The definition of “company” u/s. 2(17) includes a body corporate incorporated by or under the laws of the country outside India and a foreign company would be subjected to the provisions of the Act provided its activities has some connection with India. Obviously, every company in the world cannot be required to file its return of income in India, if it does not have any source of income in India keeping in mind the fact that the scope of the Act as envisaged in section 1(2) is restricted to India and the intention is to charge income, which has some connection with India.

Section 5 of the Act in a way spells out the connection with India which creates a charge to tax, when read with section 4. For a non-resident, the charge to tax is of income received or deemed to be received in India, or income accruing or arising or deemed to accrue or arise in India.

Section 90(2) of the Act spells out the overriding nature of DTAA s. It provides that where a DTAA has been entered into by the Central Government with the Government of any country outside India for granting relief of tax or avoidance of double taxation, in case of an assessee to whom the DTAA applies, the provisions of the Act will apply to the extent that they are more beneficial to the assessee. Therefore, the provisions of the DTAA or the Act, whichever is more beneficial to the assessee, would apply. The DTAA would therefore override all the provisions of the Act, except chapter X-A relating to General Anti-Avoidance Rules, as provided in section 90(2A).

It must be remembered that the charge to tax u/s. 4 is on the total income, and the total income is computed under the Act, after various exemptions and deductions, including those available under the DTAA . If income of an assessee is completely exempt from tax, there is no charge to tax at all. Similarly, if the income does not accrue or arise or is not deemed to accrue or arise or is not received or deem to be received in India, it does not fall within the scope of total income, and there is no charge to tax of such income. Given the fact that there is no charge to tax, can the other machinery provisions relating to filing of return, computation of tax, etc. apply?

The AAR in Venenburg Group’s case (supra) rightly referred to the decision of in Chatturam’s case. In that case, the assessee was a resident of a partially excluded area, and received a notice to furnish his return of income. His assessment was completed, and his appeals to the tribunal were dismissed. A notification was issued after he had filed his return, but before completion of his assessment, directing that certain income tax laws would apply to that area where the assessee was a resident retrospectively. The Court, while holding that the assessments were validly made on the assessee, observed as under:

“The income-tax assessment proceedings commence with the issue of a notice. The issue or receipt of a notice is not, however, the foundation of the jurisdiction of the Income-tax Officer to make the assessment or of the liability of the assessees to pay the tax. It may be urged that the issue and service of a notice under Section 22(1) or (2) may affect the liability under the penal clauses which provide for failure to act as required by the notice. The jurisdiction to assess and the liability to pay the tax, however, are not conditional on the validity of the notice. Suppose a person, even before a notice is published in the papers under Section 22(1), or before he receives a notice under Section 22(2) of the Income-tax Act, gets a form of return from the Income-tax Office and submits his return, it will be futile to contend that the Income-tax Officer is not entitled to assess the party or that the party is not liable to pay any tax because a notice had not been issued to him The liability to pay the tax is founded on Sections 3 and 4 of the Income tax Act, which are the charging sections. Section 22 etc are the machinery sections to determine the amount of tax. Lord Dunedin in Whitney v. Commissioners of Inland Revenue [1926] AC 37; 10 Tax Cas 88 stated as follows:—”Now, there are” three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment, that ex hypothesi has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery if the person taxed does not voluntarily pay”. In W.H. Cockerline & Co. v. Commissioners of Inland Revenue [1930] 16 Tax Cas 1, at p. 19, Lord Hanworth, M.R., after accepting the passage from Lord Dunedin’s judgment quoted above, observed as follows:—”Lord Dunedin, speaking, of course, with accuracy as to these taxes was not unmindful of the fact that it is the duty of the subject to whom a notice is given to render a return in order to enable the Crown to make an assessment upon him; but the charge is made in consequence of the Act, upon the subject; the assessment is only for the purpose of quantifying it He quoted with approval the following passage from the judgment of Sargant, L.J., in the case of Williams Not reported: —” I cannot see that the non-assessment prevents the incidence of the liability, though the amount of the deduction is not ascertained until assessment. The liability is imposed by the charging section, namely, Section 38 (of the English Act) the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the material for ascertaining it are available immediately”. In Attorney-General v. Aramayo and Others [1925] 9 Tax Cas 445, it was held by the whole Court that there may be a waiver as to the machinery of taxation which inures against the subject. In India these well-considered pronouncements are accepted without reservation as laying down the true principles of taxation under the Income-tax Act.”

These observations of the Court, when applied to provisions of section 139, clarifies that the machinery provisions cannot be divorced from the charging provisions.

There are various persons whose income is exempt from tax, and which were earlier not required to file a return of income u/s. 139, on account of the fact that the total income was exempt from tax. Wherever the legislature thought fit that such persons should file their returns of income, the law has been amended by insertion of various sub-sections to section 139, from time to time, being s/s.s (4A) to (4F) referred to earlier. There has been no such amendment requiring foreign companies whose total income is exempt under a DTAA to file their returns of income, in spite of the fact that the AAR has held as far back as 2007 that foreign companies need not do so.

As regards the argument that the availability of the exemption under the DTAA needs to be examined, and therefore the return of income needs to be filed, taking the argument to its logical conclusion, can one say that every agriculturist in India is required to file his return of income, even though he has only agricultural income, on account of the fact that, whether his income is agricultural or not and whether the exemption u/s. 10(1) is available or not, needs to be examined by the assessing officer?

Interestingly, this aspect of examination of the availability of exemption has also been a matter of controversy between the High Courts in the context of assessees exempt u/s. 10(22), with the Bombay High Court holding, in the case of DIT(E) vs. Malad Jain Yuvak Mandal Medical Centre (2001) 250 ITR 488, that the return of income was required to be filed for such examination of whether exemption was available, and the Delhi High Court, in the case of DIT(E) vs. All India Personality Enhancement & Cultural Centre For Scholars Aipeccs Society 379 ITR 464, holding that there was no such requirement to file return of income if the income was exempt u/s. 10(22).

A DTAA cannot be read in exclusion, but has to be read in conjunction with the Act. In particular, a DTAA does not create a charge to tax, but modifies the charge to tax created by the Act. The fact that DTAAs override the Act implies that, by virtue of the provisions of a DTAA , an income which would otherwise have been chargeable to tax under the Act, may not be chargeable to tax on account of the beneficial provisions of the DTAA. In such a case, one cannot take the view that the income is chargeable to tax in India under the Act, even though it is exempt from tax, since the DTAA takes such income outside the purview of sections 4 and 5 of the Act.

Given this background, the liability to file returns by a foreign company can perhaps be viewed by looking at the different possible situations relating to tax liability of a foreign company in India.

The first would be a situation where the income is chargeable to tax under the Act, as well as under the DTAA . In such a case, there is no doubt that the foreign company is liable to file its income tax return in India.

The second would be a situation where the income is exempt under the Act, as well as under the DTAA. In such a case, since even under the Act, there is no income chargeable to tax, the machinery section, section 139, cannot be brought into play, since it would serve no purpose. Therefore, in such a case, there would be no obligation to file the return of income in India.

The third will be the situation where the income is chargeable to tax under the provisions of the Act, but is exempt from tax by virtue of the DTAA beneficial provisions. In such a case, as discussed above, the better view would be that there is again no obligation to file the return of income in India, in the absence of a specific provision containing such requirement.

The fourth will be the situation where the foreign company has no activity in India and its income cannot be taxed in India under the Act and therefore, it is under no obligation at all to file its return of income under the Act, in India.

A House divided

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As this issue reaches you, the Finance Bill 2016 would have been tabled in the Parliament. Before the presentation of the budget, Parliament has seen a heated debate on the concept of nationalism. It has been triggered by two unfortunate events occurring in two universities in the country. The first was a suicide by a Dalit student, and the second was the agitation in the Jawaharlal Nehru University (JNU). The way the politicians of all hues have attempted to take benefit of the situation, and politicise both the events causes deep anguish.

One must note that 68 years after we became an independent nation the Parliament is debating the concept of nationalism. Expectedly most of the speeches were politically motivated though some were really thought provoking. In many of the speeches persons were criticised for what they had said at some point of time but the context was not explained. All of us tend to label, very quickly a person by the thoughts, beliefs and sentiments that he echoes. We treat him as national, antinational, patriotic, traitor, secular, pseudo secular, etc. What we must appreciate is that the person may and is entitled to hold various beliefs. We may not agree with all of them. The right to express dissent has been the cornerstone of any democracy. We have had a number of transitions of power in the recent past, which have taken place in a virtually non-violent manner due to this strong foundation of democratic beliefs.

It is in this context that, the events in both educational institutions are disturbing. The entire world is talking of the demographic dividend that India will enjoy on account of its young population. It is in these universities that, the youth of India develop their academic skills which they will use when they step out to earn their bread in this highly competitive world. The diversity of thought makes them mature, and discerning. They learn to accept that there would be people of their own breed who hold different views; at times the diametrically opposite from theirs. Healthy debate and exchange of thoughts shapes their destiny.

It is equally true that, events in these institutions need to be looked at carefully. The youth who are the future do have impressionable minds and therefore one needs to tread with caution. One feels that meeting verbal violence, with some strong action like arrests, detention could have been avoided. Instead it may be more appropriate to reason with the students. They are after all our future. It was painful to see that fisticuffs were exchanged in an arena where thoughts should be.

As for nationalism, it has many hues. History tells us that those who fought in the freedom struggle had serious differences amongst them over the manner in which freedom was to be achieved. All of them contributed their mite, and it would be unfair calling one more patriotic and the other one less.

The same holds good for the array of thoughts and expressions of the youth. It is not necessary that one has to be in total agreement with all the thoughts of the other person. It is possible that one may have serious differences with some of his beliefs. Educational institutions are the ideal place where after a stirring debate, one may be able to change the other person’s beliefs or come around to accepting them. If they are suppressed, this process can never happen.

We as responsible citizens must try and ensure that, purity and sanctity of these educational institutions should be protected. Politicians and other elements will always try to take advantage of the situation and score some brownie points. It would be better if, the discontent is permitted to be expressed. Let the powers that be, give the youth the freedom to commit mistakes as long as those are not fatal to our national fabric. I believe that we have a rich heritage and our nationalism is strong and not brittle, and it will not crumble with a few slogans or posters.

Many times when we interact with youth we find a degree of disappointment with a number of issues. They are restless with the slow pace of development, decision-making etc. It is their youthful energy that makes them restive. Let Parliament debate as to how these expectations can be met rather than making an attempt to define nationalism. I hope this happens. Otherwise, we might be left with the lines of a soulful melody of Guru Dutt’s film “ Jinhe naaz hain hind par woh kahan hain!”

DUTY

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‘He only thought of duty done’ —Sadhu Vaswani

1. Right from our childhood our parents talked of `Duty’. So did our leaders like Tilak, Gandhi and others. The only `right’ Tilak talked about was our right to `swaraj’. Let us look at how society looks at `duty’. To list a few: there is duty to parents, teachers, spouse, children, society, country and above all duty to `oneself’ – because unless one looks after oneself it would not be possible – nay impossible – to discharge any or all other duties.

2. Further :

Business owes a duty to its customers and suppliers. Corporates owe a duty to all its stakeholders and society as society is one of the stakeholders – it is for the first time in the world that duty to society has been codified in India. Corporates are now expected to spend 2% of their net profits in the discharge of their `social responsibility’.I believe this is a mandate, though initially it is being treated as somewhat optional.

We professionals owe a duty to our clients – to render a service to the best of our ability and never feel shy of seeking help where we need it. We also have a duty to those articled with us to train them to be good professionals.

The government owes a duty towards its citizens for being fair and transparent and citizens have a corresponding duty of living according to the code of conduct and paying our taxes. There is a good old saying `yield to ceaser what is due to him’.

The sage owes a duty to the seeker as much as the seeker owes a duty to the sage by following his preceptor with faith.

3. Moreover, in life `following’ is as much a duty as the `duty’ to lead – for every one of us without exception is both a leader and a follower.

4. Duty to society, per se, includes duty to obey laws, both natural and manmade. Hence, if one discharges one’s duties – he favours no one as doing one’s duty is discharging an obligation. As a matter of fact, one should not even seek appreciation or a `thank you.’ If it comes it comes as a `bonus’ in accounting language.

5. Duty to oneself is not only looking after one’s body but includes taking care of our mind and emotions. Hence in management parlance, it is in this sense that it is said that E.Q. is as important as I.Q. if not more – because if one cannot take care of one’s emotions – how will one discharge one’s duty with care and compassion. However, doing one’s duty is not easy – difficulties will arise but difficulties don’t deter the doer of duties. He faces the difficulties with faith and courage – faith in himself – and overcomes them with the guidance of his preceptor and help of God. Living upto one’s duty, though not easy, develops harmony.

6. However, the irony is that we have moved from `duties’ to `rights’ and the result is–strife, commotion, intolerance and uneasiness prevails at home, workplace and in society. We have forgotten that if all of us discharge our duty, there would be peace and harmony. Mahatma Gandhi advises :

  • The true source of rights is duty; if we all discharge our duties, rights will not be far to seek’.
Maulana Wahiduddin Khan opines :

  • The best society is a duty-conscious society,

           the worst society is a rights-conscious society’.

7. The issue is, can we once again live by the concept of duty’.

8. I believe we can and it will happen, for it is the only way to bring peace, harmony and happiness in one’s life and in society. Doing our duty sets us free. Charles Bandclair declares :

  • the habit of doing one’s duty drives away fear’.
Let us not forget that it is the individual who creates the environment at home and in the society. In conclusion I would say, let us understand what Mark Twain says on duty :

Duties are not performed for duty’s sake,
but because their neglect would make
us uncomfortable’.
So to have a happy life – let us think and do our duty.

[2016] 65 taxmann.com 130 (Ahmedabad-CESTAT) Sunflag Filaments Industries vs. Commissioner, Central Excise & Service Tax, Vapi

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Where exemption is granted subject to nonavailment/ non-utilisation of CENVA T credit, utilisation of CENVA T credit which was to lapse in terms of Rule 11(3) of CENVA T Credit Rules would not result in denial of exemption, but would only result in action under Rules 14 & 15.

Facts
The Appellant opted for Exemption Notification No. 30/2004-CE for duty free clearances of their finished product on 01/08/2005 which was on the condition of nonavailment of CENVAT credit of duty on inputs or capital goods. Therefore, credit on inputs available in stock on that date was reversed and duty was paid on clearance of finished goods in stock on 01/08/2005. However, they also had excess credit in CENVAT account which pertained to the credit of duty on inputs which were already utilised in the manufacture of the finished goods which were cleared on payment of duty before the said date. In the absence of any clarification regarding treatment for such excess, the same was not reversed.

Subsequently, Rule 11(3) of CENVAT credit Rules, 2004 was inserted from 01/03/2007 providing lapsing of such excess CENVAT credit available on date of opting exemption notification. The Appellant did not allow such credit lying in their account as on 01/03/2007 to lapse and utilised portion of it for payment of duty for some other purposes. The Adjudicating authority held that because of this utilisation of excess credit as on 01/03/2007, the benefit of exemption notification was not available.

Held
The Tribunal observed that the Appellant fulfilled the conditions of the notification on the date of their opting for the same and thereafter. However, the only lapse was that they had not expunged the excess credit they had in their account when Rule 11(3) of the CENVAT Credit Rules 2004 was introduced on a subsequent date. In such circumstances violation of Rule 11(3) should invite necessary action under Rules 14 & 15 of CENVAT Credit Rules 2004 only and cannot be extended to the extent of denying the benefit of the substantial notification for that mere reason.

A. P. (DIR Series) Circular No. 79 dated February 18, 2015

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Guidelines on Import of Gold by Nominated Banks / Agencies This circular clarifies the operational aspects of the guidelines on import of gold consequent upon the withdrawal of 20:80 scheme as under: –

1. The obligation to export under the 20:80 scheme will continue to apply in respect of unutilised gold imported before November 28, 2014, i.e., the date of abolition of the 20:80 scheme.

2. Nominated banks are now permitted to import gold on consignment basis. All sale of gold domestically will, however, be against upfront payments. Banks are free to grant gold metal loans.

3. Star and Premier Trading Houses (STH / PTH) can import gold on DP basis as per entitlement without any end use restrictions.

4. While the import of gold coins and medallions will no longer be prohibited, pending further review, the restrictions on banks in selling gold coins and medallions are not being removed.

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A. P. (DIR Series) Circular No. 78 dated February 13, 2015

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Risk Management and Inter Bank Dealings: Foreign Currency (FCY) – INR Swaps

Presently, eligible residents who have entered into FCY-INR swaps to hedge their exchange rate and / or interest rate risk exposure arising out of long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability are not permitted to rebook or reenter into the swap once it is cancelled.

This circular permits residents borrowing in foreign currency to re-enter into a fresh FCY-INR swap to hedge the underlying after the expiry of the tenor of the original swap contract that had been cancelled, in cases where the underlying is still surviving.

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A. P. (DIR Series) Circular No. 77 dated February 12, 2015

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Foreign Direct Investment – Reporting under FDI Scheme on the e-Biz platform

This circular states that on and from February 19, 2015 recipients of FDI can now file the following returns using the e-Biz portal with RBI: –

1. Advance Remittance Form (ARF) – used by the companies to report the foreign direct investment (FDI) inflow to RBI.

2. FCGPR Form – which a company submits to RBI for reporting the issue of eligible instruments to the overseas investor against the above mentioned FDI inflow.

This online reporting on the e-Biz platform is an additional facility provided to Indian companies to undertake their ARF and FCGPR reporting and the manual system of reporting will also continue till further notice.

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A. P. (DIR Series) Circular No. 76 dated February 12, 2015

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Foreign Exchange Management Act, 1999 – Import of Goods into India

This circular states that importers are henceforth not required to submit Form A-1 to their banks at the time of making payments to their overseas suppliers for imports into India. However, banks need to obtain all the requisite details from the importers so as to satisfy themselves about the bonafides of the transactions before effecting the remittance.

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