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Month: March

Reassessment: TDS: S/s. 143(3), 147 proviso and 148: A. Y. 2005-06: Disclosure in return of cancellation of assessee’s banking licence: Assessment u/s. 143(3): Reopening of assessment beyond four years on the ground that the assessee was no longer in the banking business is not valid: No failure to disclose truly and fully material facts:

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Charotar Nagrik Sahakari Bank Ltd. vs. Dy. CIT; 360 ITR 373 (Guj):

The petitioner is a co-operative bank in liquidation. For the A. Y. 2005-06, the petitioner had filed its return of income on 31-10-2005, declaring a total loss of Rs. 7,95,82,108/-. Assessment was completed u/s. 143(3) of the Income-tax Act, 1961 by an order dated 27-12-2007 accepting the returned loss. On 15-03-2012, the Assessing Officer issued notice u/s. 148 for treating the loss of Rs. 7,95,82,108/- as non-business loss on the ground that the assessee’s banking licence was cancelled by the RBI on 30-07-2003.

The Gujarat High Court allowed the writ petition filed by the assessee challenging the validity of notice u/s. 148 and held as under:

“i) The fact that the assessee’s licence had been cancelled by the RBI was clearly and in no uncertain terms was brought on record in the return filed by the assessee. The assessee, in fact, asserted that in view of such cancellation of the licence, the banking activities of the assessee were carried out only for the purpose of recovery of advances and payment to the depositors. It was further conveyed that in view of such facts, the profit and loss account was prepared on certain conditions and guidelines indicated therein.

ii) Apart from the declaration and disclosure on the part of the assessee, in the reasons recorded by the Assessing Officer also, he started with the narration, “on verification of the case records, it was found that the assessee’s banking licence was cancelled by the RBI on 30-07-2003”. Thus the Assessing Officer gathered this fact from the verification of the case record and not from any other source.

iii) The crucial fact that the banking licence of the assessee had been cancelled by the RBI was disclosed in the original return itself. Thus, there was no failure on the part of the assessee to disclose truly and fully all material facts. The averment of the Revenue that despite such cancellation of the banking licence, the assessee lodged a false claim, even if it were to be corrected, would not per se indicate that there was any failure on the part of the assessee to disclose truly and fully all material facts. As long as this requirement was satisfied, it was simply not open for the Assessing Officer to reopen the assessment beyond the period of four years from the relevant assessment year.

iv) In the result, the impugned notice is quashed and set aside.”

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Method of accounting: System of accounting: Cash basis: Section 145: Block period 1987-88 to 1995-96: Assessee maintaining accounts on actual receipt basis: Interest income must be taken on receipt basis:

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CIT vs. Dr. K. P. Singh; [2014] 41 taxmann.com 406 (All):

The assessee was following the cash method of accounting. Accordingly, he offered the interest income on FDRs on receipt basis. The Assessing Officer assessed the interest on accrual basis. The Tribunal allowed the assessee’s claim and directed the Assessing Officer to assess the interest on receipt basis.

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

“i) We find no infirmity in the Tribunal’s order, where the Tribunal observed that the interest income must be taken on receipt basis shown by the assessee from the F.D.Rs., Sahara and L.I.C. mutual funds. The assessee is maintaining the accounts on actual receipt basis and he is not maintaining any account on mercantile basis, as appears from the record.

ii) When it is so, then the answer to the substantial question of law is in favour of the assessee and against the Department.”

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Income: Capital or revenue: A. Y. 1985-86: Subsidiary of Government company receiving subsidy from holding company to protect capital investment of parent company: Subsidy is capital receipt and not income:

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CIT vs. Handicrafts and Handlooms Export Corporation of India Ltd.; 360 ITR 130 (Del):

The assessee, a Government company was a subsidiary of the State Trading Corporation of India. It operated as channelising agency for sale of handicrafts and handlooms abroad. In the relevant year, it received subsidy of Rs. 25 lakh from its holding company. The Assessing Officer rejected the claim of the assessee that the receipt is a capital receipt and not income. He held that it is income assessable to tax. The Tribunal held that it was a capital receipt.

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

“i) The sum of Rs. 25 lakh was not paid by a third party or by a public authority but by the holding company. It was not on account of any trade or a commercial transaction between the subsidiary and the holding company. The holding company was a shareholder and the shares were in the nature of capital. Share subscription received in the hands of the assessee was a capital receipt.

ii) The intention and the purpose behind the payment was to secure and protect the capital investment made by the holding company in the assessee. The payment of the grant by the holding company and receipt thereof by the assessee was not during the course of trade or performance of trade, and could be categorised or classified as a gift or a capital grant and did not partake of the character of trading receipt.”

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Interest on refund of tax: Section 244: A. Ys. 1982-83 to 1990-91: Whether whole of interest taxable in the year of grant – No: Has to be spread over the respective AYs to which it relates:

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Shri M. Jaffer Saheb(Decd) vs. CIT (AP); R. C. No. 127 of 1997 dated 19-12-2013:

For the A. Y. 1982-83 the Assessing Officer made additions and raised a demand which the assessee paid. The Tribunal deleted the additions. The Assessing Officer gave effect to the order of the Tribunal and refunded the tax paid by the assessee together with interest of Rs. 79,950/- for the period from 30- 10-1985 to 31-08-1989. The Assessing Officer brought to tax the whole of the interest amount in the A. Y. 1990-91 ignoring the claim of the assessee to spread over the said amount over the respective years. The CIT(A) allowed the assessee’s claim but the Tribunal upheld the decision of the Assessing Officer.

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

“i) The stand of the Department that interest u/s. 244(1A) accrues to the assessee only when it is granted to the assessee along with the order issued u/s. 240 is not correct. Interest accrues on a day to day basis on the excess amount paid by the assessee.

ii) The entitlement of interest is a right conferred by the statute and it does not depend on the order for the refund being made. An order for the refund is only consequential order which in law is required to be made more in the nature of complying with the procedural requirement, but the right to claim interest of the assessee is statutory right conferred by the Act. Accordingly, interest has to be spread over and taxed in the respective years.”

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TDS UNDER SERVICE TAX?

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A proposal of the Government:

A Study Group was appointed by the Government to examine the feasibility of introducing TDS provisions under service tax law. Comments were invited on the following aspects from the affected parties:
  • The feasibility of the introduction of TDS as a method of tax collection in service tax.
  • Whether this method should be applied uniformly to all taxable services or to certain specific/sensitive taxable services, and if only selectively, then to which categories of service providers/services receivers.
  • The extent to which service tax collections would be augmented by adopting the TDS method of tax collection.
  • The modalities of implementation of TDS method of tax collection.
  • The changes necessary in the present legal and administrative framework, to adopt the TDS method of service tax collection.
Government’s rationale behind the proposal:
Some of the reasons, for the introduction of TDS under service tax cited by the Government are as under:
  • Despite the fact that there are 14 lakh registered service providers, only 6 lakh service providers are paying tax.
  • According to a study carried out by the Directorate General of Central Excise Intelligence, there is a 70% increase in the service tax evasion in the last two years; and
  • TDS system followed under Income tax is found to be a very efficient way of collecting tax. Hence, the same needs to be replicated for service tax to achieve efficient tax collections.

TDS provisions under service tax neither desirable nor administratively feasible:
It would neither be desirable to introduce TDS provisions under the service tax law, nor would it be administratively feasible to do so for various reasons set out hereafter.
No justification for introducing TDS provisions after introduction of Point of Taxation Rules, 2011 (POT Rules):
Hitherto, service providers had to deposit the service tax only after receipt of payment from the service receiver. As a result, the payment of service tax to the Government was postponed until and contingent upon the actual receipt of payment from the service receiver. However, after the introduction of POT Rules, the trigger for payment of service tax has shifted to the point of taxation as specified in the POT Rules, irrespective of realisation from clients. Thus, once an invoice is issued, the service provider has to deposit the tax with the Government by the 5th day of the following month/quarter, whether he receives the payment from the service receiver or not.
It is pertinent to note that despite the introduction of POT Rules, unlike income tax, there are no provisions under the service tax law permitting adjustments in case of bad debts (either fully or partly). This has an adverse impact on the service providers who have to bear the burden of tax in addition to the loss caused due to non-realisation.
Further, in cases where advances are received by a service provider, service tax is to be collected at the point of receipt of advance. This position continues even after introduction of POT Rules.
Therefore, there is no postponement in payment of tax to the Government in the existing structure. However, this appears to be one of the principal objectives behind the proposal.
As a matter of fact, the proposed introduction of TDS provisions would only bring about unnecessary complications and hardships for service providers as well as service receivers without any corresponding increase in Government collections.
Adequate powers under the service tax law to enforce recovery:
Under the present service tax law, there are stringent provisions to penalise tax evasions, delay in payment of tax to Government by a service provider and recovery of tax. Some of the more important provisions are as under:

Provision under service tax law

Section

 

of
the Finance

 

Act,
1994

 

 

Recovery of service tax not levied/

 

paid or short-levied/short-paid

 

or erroneously refunded.

73

 

 

Service tax collected
from any

 

person required to be deposited

 

with the Government.

73A

 

 

Interest on amount collected

 

in excess.

73B

 

 

Provisional
attachment to protect

 

revenue in certain cases.

73C

 

 

Interest on delayed
payment of

 

service tax to Government

 

at 18% p.a.

75

 

 

Penalty for failure to pay service

 

tax.

76

Penalty for suppressing value of

 

taxable services.

78

 

 

Power to search premises.

82

 

 

Recovery of any
amount due to

 

Government.

87

 

 

Prosecution provisions.

89

 

 

Further, the service tax registration (which is PAN-based) and filing of returns in all cases is now required to be carried out electronically. This is introduced essentially to bring efficiency in tax administration under service tax.

In light of the foregoing, there is no justification whatsoever for introduction of TDS provisions under service tax, on the ground that there is a widespread evasion. Instead, efforts ought to be made by the Government to bring efficiency in tax administration and strengthen intelligence machinery.

TDS provisions have no place in the context of a Value Added Tax (VAT) such as service tax:

Service tax, like VAT levied on the sale of goods, is an indirect tax, meaning that the ultimate burden of the tax is to be borne by the consumer, i.e., the service receiver. This fact marks a crucial distinction between the service tax and income tax, which is the only tax under which TDS provisions are applicable. In the case of other indirect taxes such as Central Excise, VAT, etc., TDS provisions are not generally prevalent.

However, under some of the State VAT laws in India, there are TDS provisions in regard to payments made to contractors for works contracts. These provisions are essentially made, considering the fact that under the peculiar nature of the business, sub-contractors are existing in large numbers in the unorganised sector and are scattered and widespread across the country.

In the context of service tax, it has been clarified by the Government and it is reasonably settled that sub-contracted service providers are to be treated as independent service providers and their taxability determined accordingly. Further, with CENVAT credit mechanism in place, service tax charged by a sub -contractor can be availed as credit by the main contractor subject to satisfaction of conditions. Hence, large section of sub-contractors are now charging service tax to avoid possibilities of demands in future with interest and penalties.

Since service tax is an indirect tax, the ultimate burden is borne by the service receiver. If the liability of depositing the same is also imposed on service receivers, there will be a dual burden of compliance on trade and industry, in that both service receivers and service providers will have to face the burden of procedural formalities in relation to service tax simultaneously for the same transactions.

Especially in those cases in which the price is cum duty, service receivers will also be hard put to arrive at the stand -alone value of the services for the purposes of complying with TDS provisions, which will result in additional administrative difficulties.

Furthermore, since service tax is leviable at each level of value addition, this will result in a duplication of work for the Government and the assessees.

International practices:
The VAT/GST regimes in most progressive countries worldwide do not contain TDS provisions. Given that the transition to GST is in the offing, the Indian indirect tax regime should be aligned as far as possible with international practices which have been developed over decades of experience. On this ground, introduction of TDS provisions under service tax does not appear to be meaningful.

CENVAT Scheme is a self-policing mechanism:
In the context of service tax, it is wholly unnecessary to introduce TDS, considering that in view of the CENVAT credit mechanism in place, the payment of service tax has a self-policing mechanism. There is a clear and established paper trail required to be maintained for each and every transaction and it is already in the interest of service providers as well as service receivers to charge the service tax as applicable and have it paid to the Govern-ment so that credit can be availed.

There are stringent provisions of interest, penalties and prosecution for wrong availment/utilisation of CENVAT credit. Further there is regular scrutiny/ audits by the Service Tax Department as well. Hence, mechanism itself ensures that onus is clearly on the persons availing credits to establish entitlement/correctness should the need arise.

Under this backdrop, introduction of TDS system under service tax is totally unjustified and unwarranted.

TDS provisions with a CENVAT credit mechanism will result in huge accumulations of credit:

As TDS will be calculated on gross turnover, this will create an additional pool of tax credit for service providers. As the actual tax payable by a service provider is to the extent of value addition made by him which is ensured by the CENVAT credit mechanism, which permits a service provider to avail credit on his input side and utilise the credit to pay tax on his output liability.

TDS provisions will result in accumulation of huge credits and consequent blockage of funds. This will increase costs of businesses and hence, have adverse impact on the trade and industry generally.

Refunds:
Presently, there is a threshold limit of 10 lakh under service tax. This is basically done to ensure that efforts of tax administration are focussed on high tax potential taxpayers. If TDS provisions are introduced, service providers availing threshold exemption would get covered in the tax net. They would have to get registered to claim refunds. This would adversely impact small-scale services sector.

TDS system would result in a service provider availing credit of taxes paid on inputs/input services as well as TDS credits. In cases where the value addition is low, depending on the TDS rate, it would result in large refund claims by service providers.

After the introduction of POT Rules as stated earlier, since the entire tax would have already been paid before the TDS is made, the same would lead to anomalous situations and service providers will have to seek for refunds in large number of cases.

As seen in the case of income tax, claiming refunds from the Tax Department invariably creates hardships/difficulties to taxpayers. If TDS provisions are introduced under service tax, service providers will have to face severe hardships in getting their refunds, which involves cumbersome procedural compliances. This would again result in blockage of funds and increase business costs.

Administrative difficulties, procedural compliances and increase in transaction costs:

Many service recipients are individuals/households/ small businesses who are not conversant with tax compliance. Introduction of TDS provisions will result in unnecessary administrative difficulties, especially for such service recipients, without any increase in revenue to the Government.

As seen in the case of income tax, assessees are required to file TDS returns, thereby requiring each business to make the deductions and deposit the tax, as well as complete other related formalities. Even thereafter, assessees often face difficulties in terms of objections raised for technical infractions. If TDS provisions are introduced under service tax law, all these issues would come into play for service receivers as well.

Hence, TDS provisions would substantially increase additional compliances for all the three parties i.e., service providers, service recipients and the tax authorities without any benefit as is being perceived by the Government.

Further, introduction of TDS provisions under service tax would increase transaction costs of conducting business.

Potential for tax evasion:

Given the extent of paperwork that would be generated due to the introduction of TDS, administrative difficulties may pose a risk to the revenue, as there is possibility of evasion of service tax through false TDS credits being claimed. These risks could substantially outweigh the benefits of speedy tax recovery as perceived by the Government.

Additional litigations:

If TDS provisions are introduced, both service providers and service recipients will be required to analyse whether the service rendered is a taxable service, classification thereof, etc. This will result in multiple litigations which will increase costs for businesses and for the Revenue.

Reverse-charge mechanism:

There are provisions under the present service tax law, wherein the service recipient/person making the payment is made liable to comply service tax provisions instead of the service provider. The aforesaid provisions are existing in the following cases:

  •     All instances of services provided from outside India.
  •    Commission payments to agents by insurance companies.
  •    Specified persons making payment to a Goods Transport Agency (GTA).
  •    Mutual fund or asset management company making payments to mutual fund distributors or agent.
  •     Payments made by body corporate of firms availing sponsorship service.

These provisions were specifically introduced for GTA, keeping in mind the high potential of tax evasion, inasmuch as the said services providers exist in large numbers in the unorganised sector across the country.

Compared to TDS system, reverse-charge mechanism is an easier system to administer inasmuch as under reverse charge only the service receiver is liable for tax compliances, whereas under TDS system both the service providers as well as service receivers would be saddled with compliances and paperwork associated therewith.

Since, reverse charge mechanism is already in place under the present service tax law, instead of introducing TDS provisions, it may be desirable to consider expansion in the scope of this mechanism in regard to services where tax evasion is apprehended by the Government.

Conclusion:

If TDS provisions are introduced under service tax, it would substantially increase compliance burdens at the end of service providers/service recipients, increase transactions costs, result in blockage of funds and generally have adverse impact on trade and industry without any benefit as perceived by the Government.

All trade and professional bodies need to collectively voice their protest, in case the Government decides to go ahead with the introduction of TDS provisions under service tax, either fully or partially.

Annual Statement to be filed by liaison offices — Notification No. 5/2012, dated 6-2-2012.

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The Finance Act, 2011 has directed all liaison offices to submit an annual statement to the Tax Department in the prescribed form and manner. The CBDT has inserted a new Rule 114DA vide Income-tax (2nd Amendment) Rules, 2012 wherein a Form 49C has been prescribed for filing such annual statement within 60 days from the end of the financial year. This Form needs to be verified by a CA or a person authorised by the non-resident to sign such form. It needs to be furnished electronically, digitally signed and the related rules shall be formed by the DGIT (Systems).

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Direct Tax Instruction No. 1/2012, dated 2-2- 2012 — F.No. 225/34/2011-ITA.II — Instructions for processing returns for A.Y. 2011-12 (reproduced).

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The issue of processing of returns for the A.Y. 2011- 12 and giving credit for TDS has been considered by the Board. In order to clear the backlog of returns, the following decisions have been taken:

(i) In all returns (ITR-1 to ITR-6) where the difference between the TDS claim and matching TDS amount reported in AS-26 data does not exceed Rs.1 lac, the TDS claim may be accepted without verification.

(ii) Where there is zero TDS matching, TDS credit shall be allowed only after due verification. However, in case of returns of ITR-1 and ITR-2, credit may be allowed in full, even if there is zero matching, if the total TDS claimed is Rs.5000 or lower.

(iii) Where there are TDS claims with invalid TAN, TDS credit for such claims are not to be allowed.

(iv) In all other cases, TDS credit shall be allowed after due verification.

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Akber Abdul Ali v. ACIT ITAT ‘B’ Bench, Mumbai Before J. Sudhakar Reddy (AM) and V. Durga Rao (JM) ITA No. 5538/Mum./2008 A.Y.: 2005-06. Decided on: 28-12-2011 Counsel for assessee/revenue: N. R. Agarwal/P. K. B. Menon

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Section 40(a)(ia) r.w. section 194A — Disallowance of interest for failure to deduct tax at source — Payment of disputed amount with interest as per the Court order — Interest paid without deduction of tax at source — Whether AO justified in disallowing the same — Held, No.

Facts:
The assessee was liable to pay the sum of Rs.68.54 lakh to one of its creditors. On account of his failure to pay, the suit for recovery was filed by the said creditor. The Court passed the decree settling the amount at Rs.55 lakh, which also included the sum of Rs.18.5 lakh towards interest.

In the return of income filed by the assessee, the amount paid by way of interest was claimed as deduction. Since the assessee had not deducted tax at source, the AO disallowed the claim u/s.40(a)(ia). The CIT(A) on appeal upheld the order of the AO.

Before the Tribunal, the assessee contended that the amount was paid in accordance with the decision of the High Court. The interest payable under the decree of the Court was a judgment debt, therefore, he was not obliged to deduct tax at source.

Held:
In view of the ratio laid down by the Bombay High Court in the case of Madhusudan Shrikrishna v. Emkay Exports, (188 Taxman 195), the Tribunal agreed with the assessee and held that the assessee had no obligation to deduct tax at source on the interest amount of Rs.18.5 lakh paid to the creditor.

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HV Transmissions Ltd. v. ITO ITAT ‘H’ Bench, Mumbai Before R. V. Easwar (President) and P. M. Jagtap (AM) ITA No. 2230/Mum./2010 A.Y.: 2001-02. Decided on : 7-10-2011 Counsel for assessee/revenue: Dinesh Vyas/ Goli Sriniwas Rao

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Section 147 — Even an assessment completed u/s.143(1) cannot be reopened unless there is fresh material

Facts:
The assessee company, engaged in the business of manufacturing heavy gear boxes, filed its return of income, on 31-10-2001, declaring a loss of Rs. 73,57,95,273. This return of income was processed u/s.143(1) on 28-1-2003. The assessee filed a revised return of income on 27-3-2003 declaring a loss of Rs.74,22,78,281 after revising its claim u/s.35DDA in respect of employee separation cost. The AO, from the balance sheet filed by the assessee along with its return of income observed that the assessee had incurred expenses towards ERP software amounting to Rs.95,14,000 and although 20% of the said expenses were only debited in P&L account, the entire amount of Rs.95,14,000 was claimed as a deduction in computation of total income. He, accordingly, entertained a belief that to this extent income has escaped assessment and the assessment was reopened by issuing a notice u/s.148 on 3-3- 2006.

In an order passed u/s.143(3) r.w.s. 147, the AO assessed the loss to be Rs.50,17,47,153 after making addition inter alia on account of disallowance of expenses incurred on ERP software treating the same as of capital nature. He also disallowed claim for depreciation at 100% in respect of pollution control and energy saving devices at 100% valued at Rs.29.27 crore holding that the same had been earlier used by sister concern of the assessee-company.

Aggrieved the assessee preferred an appeal to the CIT(A) challenging the validity of the said assessment and also the various additions/disallowances made therein. The CIT(A) upheld the validity of reassessment proceedings and also the addition on account of disallowance of expenses incurred on ERP software treating the same as capital in nature. He, however, allowed relief in respect of depreciation at the rate of 100% on pollution control and energy saving devices.

Aggrieved, the assessee preferred an appeal to the Tribunal challenging inter alia the validity of the assessment on the ground that initiation of reassessment proceedings was bad in law.

Held:
The Tribunal on perusal of the reasons recorded by the AO noted that there was no new material coming to the possession of the AO on the basis of which the assessment completed u/s.143(1) was reopened. The Tribunal also noted that in the case of Telco Dadaji Dhackjee Ltd. v. DCIT, (ITA No. 4613/ Mum./2005, dated 12th May, 2010) (Mum.) (TM), the Third Member, had relying on the decision of the Supreme Court in the case of CIT v. Kelvinator of India, (256 ITR 1) (SC), held that while resorting to section 147 even in a case where only an intimation had been issued u/s.143(1)(a), it is essential that the AO should have before him tangible material justifying his reason that income has escaped assessment. The Tribunal held that the TM decision of the Tribunal in the case of Telco Dadaji Dhackjee Ltd. (supra) is squarely applicable to the present case. Following this decision, it held that the initiation of reassessment proceedings by the AO itself was bad in law and reassessment completed in pursuance thereof is liable to be quashed being invalid.

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DCIT v. Pioneer Marbles & Interiors Pvt. Ltd. ITAT ‘A’ Bench, Kolkata Before Mahavir Singh (JM) and C. D. Rao (AM) ITA No. 1326/Kol./2011 A.Y.: 2008-09. Decided on: 17-2-2012 Counsel for revenue/assessee: Amitava Roy/ J. N. Gupta

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Section 271AAA — Immunity u/s.271AAA cannot be denied only because entire tax, along with interest, was not paid before filing of income-tax return or, for that purpose, before concluding the assessment proceedings.

Facts:
The assessee was subjected to search u/s.132 of the Act on 30-8-2007. During the course of the search, the assessee declared Rs.50,00,000 as undisclosed income. This sum was included in the return filed by the assessee after the search. The Assessing Officer (AO) initiated penalty proceedings while finalising the assessment u/s.143(3) on the ground that the assessee has not paid full taxes and interest on disclosure made u/s.132(4).

In the penalty proceedings, the assessee submitted that while filing the return of income due to an inadvertent error, the assessee had not computed interest u/s.234C, as a result self-assessment tax was underpaid by Rs.46,132 and this shortfall was paid within the time mentioned in notice of demand issued u/s.156 of the Act. This contention was rejected by the AO. He levied penalty u/s.271AAA.

Aggrieved the assessee preferred an appeal to the CIT(A) who deleted the penalty levied by the AO.

Aggrieved the Revenue preferred an appeal to the Tribunal.

Held:
The Tribunal noted that under the scheme of section 271AAA there is a complete paradigm shift so far as penalty in respect of unaccounted income unearthed as a result of search operation carried out on or after 1st June, 2007 is concerned. Section 271AAA levies penalty @ 10% of undisclosed income. This levy, unlike section 271(1)(c), is without any reference to findings or presumptions of concealment of income or the findings or presumptions of furnishing of inaccurate particulars. S.s (2) grants immunity from levy of penalty u/ss (1), subject to satisfaction of conditions mentioned therein. While payment of taxes, along with interest, by the assessee is one of the conditions precedent for availing the immunity u/s.271AAA(2), there is no time limit set out for such payments by the assessee. Once a time limit for payment of tax and interest has not been set out by the statute, it cannot indeed be open to the AO to read such a time limit into the scheme of the section to infer one. The Tribunal held that there is no legally sustainable basis for the stand of the AO that in a situation in which due tax and interest has not been paid in full before filing of the relevant income-tax return, the assessee will not be eligible for immunity u/s.271AAA(2).

Section 271AAA does not require any subjective satisfaction of the AO to be arrived at during the assessment proceedings, and, therefore, the outer limit of payment before the conclusion of assessment proceedings will not come into play.

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Vijay Corporation v. ITO ITAT ‘F’ Bench, Mumbai Before N. V. Vasudevan (JM) and R. K. Panda (AM) ITA No. 1511/Mum./2010 A.Y.: 2005-06. Decided on : 20-1-2012 Counsel for assessee/revenue: Ashok J. Patil/ Shantam Bose

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Section 143(3), section 292B — Assessment order without AO’s signature is void. The omission to sign the order of assessment cannot be explained by relying on the provisions of section 292B of the Act.

Facts:
The assessment of total income of the assessee-firm was completed u/s.143(3) of the Act by making various additions. While the notice of demand, computation form, etc. attached with the assessment order were signed, the assessment order was not signed by the AO.

The assessee filed an appeal before the CIT(A) challenging the additions and also raised a ground that the order of assessment is not valid in law since the AO did not sign the same. On this objection the CIT(A) called for the remand report from the AO. The AO did not dispute the fact that the assessment order was not signed. The CIT(A) observed that the notice of demand, computation form, etc. attached along with the assessment order were signed and carried proper stamp and seal of the AO. He held that the omission in signing the order cannot invalidate the order and the irregularity is curable in terms of the provisions of section 292B of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The case of the assessee is squarely covered by the decision of the Apex Court in the case of Smt. Kilasho Devi Burman (219 ITR 214) (SC), in favour of the assessee. In the absence of a signed order of assessment, the assessment is invalid. The provisions of section 292B cannot come to the rescue of the Revenue. Provisions of section 143(3) contemplate that the AO shall pass an order of assessment in writing. The requirement of signature of the AO is therefore a legal requirement. The omission to sign the order of assessment cannot be explained by relying on the provisions of section 292B of the Act. Tax computation is a ministerial act as observed by the SC in the case of Kalyankumar Ray v. CIT, (191 ITR 634) (SC) and can be done by the office of the AO if there are indications given in the order of assessment. But the notice of demand signed by the office of the AO without the existence of a duly signed order of assessment by the AO cannot be said to be a omission which was sought to be covered by the provisions of section 292B of the Act. If such a course is permitted to be followed, then that would amount to delegation of powers conferred on the AO by the Act. Delegation of powers of the AO u/s.143(3) of the Act is not the intent and purpose of the Act. An unsigned order of assessment cannot be said to be in substance and effect in conformity with or according to the intent and purpose of the Act. The Tribunal held the order of assessment to be invalid.

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Introduction to the New Revenue Recognition Standard Issued by IASB

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The IASB issued the first exposure draft of the new revenue recognition standard in June 2010. This new standard is a joint project of the IASB and FASB to clarify the principles for recognising revenue from contracts with customers. It intends to provide a single revenue recognition model which integrates the numerous revenue recognition guidances under US GAAP and the broader principles provided under IFRS to improve comparability over a range of industries, companies and geographical boundaries. The revenue recognition model under this exposure draft is a step-by-step analysis of contracts focussing on control i.e.,

  • identify the contract with the customer;

  • identify separate performance obligations in the contract;

  • determine and allocate the transaction price; and

  • recognise revenue when or as each performance obligation is satisfied by transferring control of a good or service to the customer.

Nearly thousand comment letters were received in response to this exposure draft. Considering the representations, the IASB issued a revised exposure draft in November 2011. One of the principles that the revised draft clarifies is on distinguishing when control of a good or service is transferred over a period of time or at a point in time. This article focusses on this aspect of the revised exposure draft in relation to its implications on revenue recognition for real estate companies.

Implications of IASB’s revised revenue recognition exposure draft for real estate companies

One of the most debated matter in India’s convergence with IFRS was point of revenue recognition from sale of real estate, more commonly known as the application of IFRIC 15 principles. The assessment of IASB’s IFRIC 15 principles which deals with agreements for the construction of Real Estate would lead to most real estate companies in India accounting for sale of apartments/flats as sale of goods and recognising revenue on completion of the contract i.e., transfer of physical possession of the units to the customer as opposed to accounting for these as construction contracts using the percentage completion method. This would have a major impact on the performance measures of real estate companies. Consequently, when Ind AS were issued in February 2011, the Ind AS on construction contracts had a carve-out from the IASB principles to include development of real estate as a construction contract and accrue revenues using the percentage completion method.

IFRIC 15 principles have been debated internationally. Malaysia and Philippines had also deferred applicability of IFRIC 15 when they adopted IFRS while Singapore decided to issue a modified IFRIC 15 providing specific guidance in the context of legal situations prevailing in that country. The issue under debate was that IFRIC 15 principles were leading to a completed contract method of accounting sometimes due to the legal framework of a country for instance, continuous transfer of legal title of the work in progress was legally not allowed in many jurisdictions and hence leading to a completed contract method of accounting although that was not the substance of these transactions. In that case, the profit and loss account of the developers will not truly reflect the performance of the business, as during the years the real estate project development continues, no revenue will be recognised and all revenue will be recognised in the year when possession is given.

IFRIC 15 principles were incorporated in the original exposure draft of revenue recognition standard. However, based on the representations and comment letters received, the IASB in its revised exposure draft has changed criterion for determining whether performance obligations are being satisfied over a period of time impacting the timing of revenue recognition from the sale of real estate.

The earlier principles of IFRIC 15 allowed the percentage completion method when either the unit is based on a customer-specific design or it could be demonstrated that there is a continuous transfer of units while construction progresses which is evidenced:

— if construction activity takes place on land owned by the buyer;
— the buyer cannot put the incomplete property back to the developer;
— on premature termination the buyer retains the work in progress and the developer has the right to be paid for the work performed; or
— the agreement gives the buyer the right to take over the work in progress during construction.

These criterions have been changed significantly under the revised exposure draft. Under the revised exposure draft, performance obligations of the company can be met over a period of time if the entity:

(a) creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced. Or

(b) does not create an asset with an alternative use to the entity and at least one of the following criteria is met:

(i) the customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs or

(ii) another entity would not need to substantially re-perform the work the entity has completed to date if that other entity were to fulfil the remaining obligation to the customer, or

(iii) the entity has a right to payment for performance completed to date and it expects to fulfil the contract as promised.

Most typical Indian real estate contracts for sale of apartments are for specific unit sales to customers, require progress payments based on completion of work and are intended to be fulfilled which would fall under the above criterion of satisfying performance obligations over time.

The following example illustrates the above criterion:

Example 1: 

Company Z is developing residential real estate and starts marketing individual units (apartments). Z has entered into the minimum number of contracts that are needed to begin construction. A customer enters into a binding sales contract for a specified unit that is not yet ready for occupancy. As per the contract, the customer pays a non-refundable deposit at inception of the contract and agrees to make progress payments throughout the contract. Those payments are intended to at least compensate Z for performance completed to date and are refundable only if Z fails to deliver the completed unit.

Z receives the final payment on delivery of possession of the unit to the customer. To finance the payments, the customer borrows from a financial institution that makes the payments directly to Z on behalf of the customer. The lender has full recourse against the customer. The customer can sell his or her interest in the partially completed unit, which would require approval of the lender but not Z. The customer is able to specify minor variations to the basic design, but cannot specify or alter major structural elements of the unit’s design. The contract precludes Z from transferring the specified unit to another customer.

The apartment created by the Z’s performance does not have an alternative use to Z, because it would lead to breach of contract with the customer. Z concludes that it has a right to payment for performance completed to date, because the customer is obliged to compensate Z for its performance rather than only a loss of profit if the contract is terminated. In addition, Z expects to fulfil the contract as promised. Hence, Z has a performance obligation that it satisfies over time.

The new rules are more pragmatic and will enable percentage completion method for real estate where the criterions are met. This essentially means that Indian real estate companies need to reassess the implications of revenue recognition under the revised exposure draft to understand whether their contracts would meet the conditions of satisfying performance obligations over time. It is important to analyse in which exact cases the new principles would allow percentage completion method. This would also then eliminate the need for a carve-out under Ind AS. Comment period for this exposure draft is open until 13 March 2012. This should be regarded as an opportunity to voice out any concerns or clarifications to the IASB so that the standard achieves global acceptance.

DAY 4

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After breakfast participants discussed the paper written by Himanshu Kishanadwala on Case studies in Accounting and Auditing. The Group Discussion was followed by a precise presentation on the subject. He dealt with some burning issues affecting the CA’s in practice as well as industry. He analyzed all issues in great detail. His command over the topic and flawless analysis resulted in participants giving him a very patient hearing.

This session was chaired by K. C. Narang, Past President of the Society.

In concluding session Uday Sathaye, Chairman Seminar Committee took an overview of the RRC and recognized the contribution made by everybody, Pradip Thanawala, President of Society thanked everybody for making the RRC memorable. Participants departed after lunch to their respective destinations with a promise to meet again next year at the 46th RRC.


K.C. Narang, Chairman Addressing Participants. Also seen from L to R – Yatin Desai, Himanshu Kishnadwala, Paper Writer and Nitin Shingala

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DAY 3

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After the breakfast the participants discussed the paper written by S. Thirumalai on “Important Aspects of CENVAT credit & POT Rules.”

Thereafter Yogesh Thar Chartered Accountant presented paper on “TDS- Some important issues”. His liking and mastery over the subject made his presentation very informative and useful.


Yogesh Thar, Paper Writer Addressing Participants. Also seen from L to R – Bharat Oza, Rajesh Shah, Chairman and Krishna Kumar Jhunjhunwala.

This session was chaired by Rajesh Shah, Past President of the Society

Shri S. Thirumalai dealt with his paper and made his presentation very interesting and satisfied the participants by resolving issues raised during Group Discussion. Service Tax today is gaining importance with more services being added under the Service Tax net. Issues raised by him were of real significance to all. His depth of knowledge in Service Tax and masterly analysis was indeed a treat for the participants

This session was chaired by in his unique style by Govind Goyal, Past President of the Society.


S. Thirumalai, Paper Writer Addressing Participants. Also seen from L to R – Narayan Pasari, Govind Goyal, Chairman and Naresh Sheth.

The day ended with Gala Dinner and Musical Evening.

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DAY 2

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The
participants discussed the paper written by Dr. Pravin P. Shah on
Business Structuring/ Restructuring some important issues. The Group
Discussion was followed by a marvelous presentation paper by
Chandrashekhar N. Vaze who presented his views on Code of Ethics –
Practical Issues. His command over subject and presentation skills made
the session very lively. This session was chaired by Padamshri Shri T. N
Manoharan, Past President of the ICAI. The salient features of the
paper were explained by rapporteur Shri Jayant Gokhale member of the
central council of ICAI.


Padmashree T.N. Manoharan Addressing Participants. All seen from L to R – Manmohan Sharma, Chandrashekhar Vaze, Paper Writer, Jayant Gokhale, Rapertoire and Rajeev Shah.

Thereafter Dr. Pravin P. Shah dealt
with his paper and analyzed the implications and rationale of various
Tribunal, High Court, and Supreme Court Judgments. He explained that
every decision of the judgment forum is with respect to a set of facts
and it is important for reader to appreciate these facts before using
the judgment for any purpose. He answered brilliantly all the queries
raised by the participants.

Dr Pravin Shah, Paper Writer Addressing Participants. Also seen from L to R – Ashok Dhere, Chairman, Saurabh Shah and Mukesh Trivedi.

This session was chaired by Ashok Dhere,
Past President of the Society. In the afternoon participants visited
Ramoji Film City. Participants were made aware about the technicalities
in making the Film. Participants took keen interest and enjoyed the
unique experience. In the evening an additional session was held for the
benefit of all the participants on the burning topic “Revised
schedule-VI” Himanshu Kishanadwala did a masterly analysis of the
important changes which are relevant to a Chartered Accountant , whether
he is performing the accounting or audit function. The session was
effectively chaired by Uday Sathaye, Past President of the Society.

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DAY 1

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The RRC began with the Group Discussion on paper written by T. S. Ajai on Case Studies in Taxation.

In
the inaugural function which was held in the evening, Pradip Thanawala
President of the Society welcomed the members. For the benefit of the
outstation members attending RRC he gave an overview of Society’s
activities which are conducted through out the year.

Uday
Sathaye Chairman of Seminar Committee highlighted activities of the
Seminar Committee which are gaining popularity , like study tours in the
form of interactive meetings with Industries all over the Country. He
mentioned about the rationale behind the subjects chosen for the RRC and
thanked all paper writers for giving justice to the subjects and
delivering the papers well within committed time frame.

RRC was
inaugurated by Chief guest Shri N. Chandra Babu Naidu, Leader of
opposition, Andhra Pradesh, Guest of Honour G. Ramaswamy, President ICAI
and Jaydeep Shah, Vice-President ICAI, by lighting of lamp. Shri. N.
Chandrababu Naidu is a very acclaimed, learned and senior professional
politician. He expressed his views in regard to various issues which
have arisen on account of the current trend of giving importance to
technological changes, Governance

Uday Sathaye, Chairman, Seminar Committee delivering Welcome Address. Also seen from L to R – Krishna Kumar Jhunjhunwala, Pradip Thanawala, N. Chandrababu Naidu, G. Ramaswamy, Jaydeep Shah, Deepak Shah and Rajeev Shah.

and values in life. He felt that even
though change is an accepted part of life, departure from certain age
old principles is unwarranted. In his opinion, while one should welcome
the good things from the new generation,


T.S. Ajai, Paper Writer Addressing Participants. All seen from L to R – Mandar Telang, Anil Sathe, Chairman and Manish Sampat.

one should also respect Indian
Ethos. His views on Indian Economy impressed everyone present . Shri G.
Ramaswamy, President ICAI updated members about the development and
initiatives taken by the ICAI for the benefit of members. Shri Jaydeep
Shah, Vice President ICAI addressed the participants about the various
programs run by ICAI.

Krishna Kumar Jhunjhunwala Convenor of the Seminar Committee proposed a hearty Vote of Thanks.

After
the inaugural session T. S. Ajai covered in his presentation all the
case studies.. His clinical analysis on the controversies and his
forthright views were unique and of immense benefit to the participants.

This session was ably chaired by Anil Sathe, Past President of the Society.

The day ended with tasty dinner being served

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What happens when one spends beyond one’s means?

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If you have Rs.100 in your pocket, then you cannot spend Rs.200. It’s very logical, right? The good news is that today’s world is no longer logical! It’s indeed very easy to spend more than what you have. But it’s equally important to analyse the cost of this extravagance.

A country spending way beyond its means will surely have a far greater impact than a school kid overshooting his pocket money. As the scale of this lavishness increases, the following two distinct trends are observed:

(1) The system of financing the gap becomes more and more complex

(2) The person spending gets more and more distant from the one paying for it.

Let us now see a few examples to understand fully how this evil system works.

A child and his pocket money
A school-going child has Rs.1,000 as pocket money savings and wishes to buy a video game DVD worth Rs.2,000. In a normal scenario, the child will comfortably make a gullible puppy face in front of the elders (technically may be called ‘financers’) and get the money. The advantage of being a child is that he rarely has to return it back. The amount involved is relatively negligible and the ones affected are close family members, pretty harmless.

Credit card — The prodigal’s best friend
Generally, anyone who wants to spend, what he is yet to earn uses a credit card. No doubt, when used wisely, a credit card is a wonderful source of free credit, but sadly, not all are wise. According to RBI, 1 in every 10 credit card holders defaults on payment. As of March 2011, there were 1.8 crore credit cards with average spending of Rs.41,862. Thus, we can estimate the defaults, at 10% of spending, to be Rs.7,536 crore.

Now, who pays for these? For the defaults made good by the customers, he pays a whopping 36% interest. But if he is unable to pay, the bank has to write them off. The real pinch is felt by the private shareholders of these banks and the government in case of nationalised banks. Not to forget, the management where the remuneration is linked to the profits, also feels the heat.

I owe you money? . . . Oh! Sorry, it just went down the drain . . .

Jean Paul Getty said, “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”

No statement explains the paradox better! When huge corporations do business with others’ money, it’s not them but the lenders who have to worry about the state of business. One of the most recent examples is of a ‘reputed’ airline company. According to a leading broker’s estimate, the debt exposures of that particular airline company maybe a whopping Rs.10,000 crore. Using the corporate veil, the management will safely escape from the liability they have created. So, the ones ultimately shelling out Rs.10,000 crore may include banks, shareholders and creditors. Imagine thousands of crores going down the drain, in times of monstrous rise in cost of living and record high interest rates!

Banks going bust!
It’s not always that the banks that are on the losing side. Some clever devils in dark suits manage to pass on their mistakes to unsuspecting investors. Since banks are traditionally considered conservative, and people like you and me, easily fall for such dud schemes. And soon the bubble bursts, in turn, making everyone burst into tears. Take the example of the most monumental fall of recent times, the Lehman Brothers. With a debt equity ratio of 35 to 1, it was a ticking time bomb. Its debt was close to US $613 billion at the time of default. The damage does not end there. Bail-outs and stimulus packages followed the 2008 crisis from which the world has still not fully recovered. The total impact of the whole global economic crisis has cost trillions of dollars, millions of jobs and countless hungry stomachs. Consider this; the family of a jobless daily labourer has to go hungry while the ones responsible for overshooting their means enjoy barbeque parties in lavish bungalows! The ones suffering include creditors, shareholders, governments, taxpayers, citizens and the list goes on.

What is bigger? Bankrupt countries!
Greed has no limit. What happens when governments spend beyond their means? Countries go bankrupt! Some casualties include Argentina, Zimbabwe and the latest one, Greece. Greece had pushed very hard to enter the European Union so that it could use the Euro to borrow cheaply. The interest rate it used to pay on its borrowings before joining EU was 10-11% which fell to 3-4% immediately after adopting Euro. So, it kept mounting debt. Before it could repay the old one, it took a new, bigger loan. The proceeds were not always used to repay the old loan, but to fund their spending spree. It should be noted that the pension entitlement in Greece is around 92% of last salary that too at a time when Greece has a very fast ageing population. Since the adoption of Euro, the average wage of public sector workers doubled. These, along with large-scale tax evasion are some of the reasons for the mess this country finds itself in. Portugal, Spain and Italy too are sitting ducks. The impact of this looming crisis shall be more than anyone can ever fathom. Ripples of this crisis shall affect billions of people and deeply hurt the global economy.

Conclusion
Credit is the reason any business or economy runs. However, if you cross your limits, the impact will be felt at places and by people beyond your imagination. The only way to prevent such damage is by knowing your limits. We should not confuse limits with restrictions, no one likes restrictions! However, by setting budgetary limits we can ensure no one suffers. For articles like us, it has to start by managing the whole month’s expenses within the stipend earned. Being a disciplined money manager is not the job of the faint hearted! The whole marketing world is conspiring to raid our wallets. It is for us to protect it and keep the spending within limits. Yes, tough task!!

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Sanction for prosecution: SC order brings cheer to beleaguered CVC.

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The Central Vigilance Commission welcomed Supreme Court order setting a timeline for giving prosecution sanction in cases against public servants.

“Sanctioning of prosecution by competent authority within a timeframe of four months will be a big help in fighting corruption, and will expedite action against corrupt public officials,” CVC Pradeep Kumar told TOI.

The CVC’s response came in the wake of the Supreme Court saying that “delay in granting such sanction has spoilt many valid prosecution and is adversely viewed in public mind that in the name of considering a prayer for sanction, a protection is given to a corrupt public official as a quid pro quo for services rendered by the public official in the past or may be in the future and the sanctioning authority and the corrupt officials were or are partners in the same misdeeds”.

The CVC has been at the receiving end of delaying tactics adopted by various departments to stall prosecution of officials against whom corruption proceedings are pending. As of December 2011, prosecution sanction was pending in at least 24 cases for more than four months.

In November, there were 28 cases pending with 17 ministries for over four months. The highest, of 10 pending cases, was with the Finance Ministry — four of them before the Central Board of Direct Taxes and four of them before the Central Board of Excise and Customs.

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Their birth right! (right or wrong?) judge for yourself!

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Patrick French’s recent book, India: A Portrait, offered this startling revelation about the Indian Parliament: “Every MP in the Lok Sabha under the age of 30 had in effect inherited a seat, and more than two-thirds of the 66 MPs aged 40 or under were HMPS (Hereditary Members of Parliament). In addition, this new wave of Indian lawmakers would have a decade’s advantage in politics over their peers, since the average MP who had benefited from family politics was almost 10 years younger than those who had arrived with ‘No Significant Family Background’. In the Congress, the situation was yet more extreme: every Congress MP under the age of 35 was an HMP. If the trend continued, it was possible that most members of the Indian Parliament would be there by heredity alone, and the nation would be back to where it had started before the freedom struggle, with rule by a hereditary monarch and assorted Indian princelings.”

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Majority wins: Bombay High Court paves way for redevelopment.

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Dissenting members who deliberately skipped housing society meetings have ‘no right’ to object to a resolution favouring redevelopment passed by majority of the members, observed a Cooperative Court recently. The Court upheld a resolution passed by majority of the members to redevelop a four-storey building in Khar (W).

The ruling is significant as it seals the fate of the dissenting few and holds that the resolution, if passed at a meeting held legally, will be binding on all members of a cooperative housing society.

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Schooling not enough.

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Higher spending on education is not improving dismal outcomes India came 72nd of 73 nations in the Programme for International Student Assessment (PISA) competition, despite fielding students from its best states, Himachal Pradesh and Tamil Nadu. The dismal quality of Indian education is confirmed by the latest Annual Status of Education Report (ASER). Throwing money (Sarva Shiksha Abhiyan) and legislation (Right to Education Act) at education has produced no quality gains at all. Abhiyan spending is up from Rs.7,166 crore in 2005-06 to Rs.21,000 crore last year, yet parents are shifting wholesale from free government schools to private options (schools and tuition). In the last five years, private school enrolment has gone from 18.7% to 25.6% of the total, with Kerala already at 54%. The shift has not, however, improved dismal learning outcomes. Half the Class V children cannot read Class II texts, and 40% of Class V children cannot solve a two-digit subtraction. This represents a fall in outcomes, especially in Government schools in the Hindi belt. Higher spending by the Government and parents has not yielded better outcomes. Many studies suggest that private schools have better outcomes, but the shift to private education has not achieved that at a macro-level. In 13,000 schools visited by surveyors, student absenteeism was 50% and teacher absenteeism 45%: neither seem motivated.

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SC tells HCs not to stay corruption probes unnecessarily.

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Expressing serious concern over High Courts staying investigations in criminal cases, the Supreme Court has directed the Higher Courts to exercise such powers with due caution and circumspection.

“Unduly long delay has the effect of bringing about blatant violation of the rule of law and adverse impact on the common man’s access to justice,” said a Bench comprising Justice A. K. Ganguly and Justice T. S. Thakur in its judgment.

The Bench said, “a person’s access to justice is a guaranteed fundamental right under the Constitution and particularly Article 21. Denial of this right undermines public confidence in the justice delivery system and incentivises people to look for shortcuts and other fora where they feel that justice will be done quicker. In the long run, this also weakens the justice delivery system and poses a threat to Rule of Law”.

Taking into account that such pendency were related to HC orders putting on hold the trial/ investigations into the criminal cases, the SC said, “the power to grant stay of investigation and trial is a very extraordinary power given to High Courts and the same power is to be exercised sparingly only to prevent an abuse of the process and to promote the ends of justice”.

The Bench passed a slew of directions to the HCs to reduce such pendency like disposing of such proceedings as early as possible, preferably within six months from the date its stay order, etc. The SC also asked the Law Commission to inquire into the issue and submit a report on it.

The Bench took into account that the pendency in criminal cases related to murder, rape, kidnapping and dacoity in different High Courts, varies from 1 to 4 years. Out of 201 cases, 34 such cases out were pending in Patna High Court and 33 out of 653 cases in Allahabad High Court were pending for eight or more years.

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Sting of Transfer Pricing

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The philosophy of transfer pricing is fairly old under which a country attempts to tax a fair share of revenue arising in the course of cross-border transactions. The Organisation for Economic Cooperation and Development (OECD), of which the United States and other major developed countries are members, had formulated some guidelines about transfer pricing by 1979. The US led the development of the detailed comprehensive transfer pricing guidelines with a White Paper in 1988 and with proposals in 1990-1992, which ultimately became regulations in 1994. In India, The Finance Act, 2001 substituted section 92 with new sections 92 to 92F with effect from 1st April, 2002, Rules 10A to Rule 10E of the Income Tax Rules were notified and that marked the beginning of the transfer pricing era. Over the last 10 years, the interpretation of the relevant provisions has gradually evolved in India. In the last few years the tax administration has suddenly become very aggressive in respect of transfer pricing additions termed as adjustments, as they find it to be a very lucrative tool for meeting their ever-increasing revenue targets. The provisions on transfer pricing are fairly subjective and can be interpreted and implemented with flexibility. There are no safe harbour rules for transfer pricing in India. As the provisions in the Act are subjective and open to diverse interpretations, the tax authorities interpret them in a way beneficial to the Revenue and thereby demand higher taxes from assessees who have entered into international transactions with their associate enterprises. This is posing a major risk to foreign multinationals doing business in India, as well as Indian multinationals having businesses in foreign countries.

The Income-tax Act has given a liberal time frame of 31 months to the tax authorities to determine the Arm’s- Length Price (ALP) from the end of a financial year. By 31st October, 2011, the tax authorities determined the ALPs for the year ended 31st March, 2008. For the year ended 31st March, 2008, they have assessed transfer pricing additions of a staggering amount of Rs.44,500 crore. Such additions were only to the tune of around Rs.22,000 crore for the F.Y. 2006-07 and just around Rs.10,000 crore for the F.Y. 2005-06. The phenomenal increase in the adjustments over the last few years clearly indicates how eager and aggressive the Tax Department is to mop up revenues on account of transfer pricing additions. The Finance Ministry also seems to be very supportive to these efforts of the income-tax authorities as it is usually lagging on controlling budgetary deficits and wants to be innovative in its efforts of mopping up more tax without apparently affecting the common man. However, a balanced approach is the need of the hour.

Multinational companies having presence in various parts of the world with different tax laws and tax rates, try to take advantage of those differences to boost their post-tax profits for maximising shareholders’ value. Transfer pricing mechanism was initially introduced by the developed countries for enhancing their tax revenues from such multinationals. These countries realised that tax on some part of the revenues which could have been taxed in their jurisdiction was being siphoned off to low-tax jurisdictions by such companies. They made various laws for protecting the tax on these revenues. Encouraged by the revenue gains realised by these countries pioneering transfer pricing regulations, many other countries gradually introduced transfer pricing provisions in their tax laws. Over the years, their implementation is becoming aggressive and at times beyond justification.

The multinational companies, who had great moneymaking run till the end of the 20th century, have realised that the times are changing. Their global presence makes them deal with number of countries and their respective diverse laws. There is an increased possibility that two or more countries may tax the same profit by trying to justify that it was earned in their respective jurisdiction or such profit being even otherwise taxable under their tax laws. In such a situation, a multinational entity faces grave risk of being subject to duplicity of taxation.

Today, many multinationals are encouraged to come to India considering the huge market, skilled labour and technical and managerial talent that India offers. Multinationals already present in India are further encouraged by the growth of their businesses in India, in spite of the worldwide recession. Many of these companies are today suffering due to the aggressive stands on issues regarding transfer pricing by the Income Tax authorities. The Government needs to be mindful and cannot be oblivious to the fact that these multinationals can create employment and can also increase exports, which are the two critical needs of Indian economy. In the zeal of increasing the revenue, one should not slay the hen that lays golden eggs. India should not just copy the attitude of some developed countries in respect of transfer pricing as it may harm the economy and destroy some stable sources of revenue.

The brunt of transfer pricing provisions in India is equally faced by Indian companies expanding their business footprints outside India. The regime is also affecting the ambitions of Indian industry to set up Greenfield operations abroad or to acquire foreign businesses. They are not able to support the operations of their foreign subsidiaries through interest-free lending or giving bank guarantees for their borrowings, which is extremely important for the survival and sustainability of their operations. Genuine business efforts are adversely affected by the aggressive transfer pricing additions. The action of the tax authorities may be within the provisions of law but can be very harmful for a developing country like India. Indian policy makers as well as the policy implementers need to take the cognizance of the facts before it is too late. It also needs to urgently notify and implement the ‘safe harbour rules’.

Some of the major reasons of additions made on account of transfer pricing provisions in India are as follows:

  • Recommendation of higher margin at net operating level.

  • Disallowance of fees paid to associate enterprises for use of intangibles.

  • Payment for inter-company services to associated enterprises disallowed.

  • Indian company treated as creator of intangible assets owned by associated enterprises, thereby making addition on account of notional income.

  • Notional fees being attributable to corporate guarantees given by Indian companies.

  • Notional interest on advances given or outstanding of recoverable reimbursements by an Indian company to its associated enterprises.

  • Notional fees being attributable to pledge of shares given as security to lender by Indian companies for the borrowings made by its associated enterprises.

The list is not exhaustive but only indicative and it is expanding year after year with the novel ideas of the income-tax authorities.

Newly set up businesses outside India have their own teething problems like a new-born child. They are subjected to brutal global competition and need to withstand it in order to survive. They need to be aptly supported by their parents till they take off and are able to sustain on their own. The support given by the parent in the form of interest-free/low-interest loan, corporate guarantees, preferential pricing, longer credit period, technology support and even manpower support is looked at by the transfer pricing authority as unfair practices and notional income from such practices are added as adjustments. While doing so, adequate cognizance of the gain that the parent makes by being full or part owner or being an economic beneficiary of the associated enterprise is not taken.

It seems that the time has come for the Government to review the provisions of transfer pricing in India and also to do introspection of the methodology of the implementation of the provisions for the health and faster growth of Indian businesses. The current attitude will not only dampen the interest of foreign multinationals to do business in India, but it will also damage the enthusiasm of Indians to fare overseas in search for opportunities. India is trying to project herself as a service hub to the global community. It is trumpeting the skill of its manpower and its cost advantage to the developed world in service-orientated businesses. If the aggression in implementation of transfer pricing does not subside to a reasonable level, India will fast gain a reputation of being an unfriendly and high-risk tax jurisdiction. The advantage which India gathered over the last couple of decades in the service sector may vanish overnight. In case of such an unfortunate situation, other developing nations who are waiting in the wings to compete with India in the service sector will have the last laugh and India may have one more story of a lost opportunity to tell.

Though various countries may have their points of view and justification for taxing an income which is also taxed in the other country, it can make the taxpayer suffer. To give respite to such a harassed taxpayer, Double Taxation Avoidance Agreements (DTAA) between many countries provide for ‘Mutual Agreement Procedures’. A taxpayer who gets torn between the taxation laws and transfer pricing regimes of two countries in respect of the same income, may make an application under the procedure. In such cases, the authorities of the two countries try to provide a solution which is acceptable to both the countries so that the taxpayer does not get into a double jeopardy of being made liable to pay double tax on the same income. However, if they fail to agree, the poor taxpayer may suffer tax in both the countries.

For the speedy resolution of transfer pricing disputes between the tax authorities and taxpayers in India, the Finance Act, 2009 introduced the provisions relating to Dispute Resolution Panel (DRP). Though the process was expected to speedily resolve the transfer pricing disputes, the response of the taxpayers, based on their recent experience of the panel is not very encouraging. Today, many taxpayers stung by the transfer pricing additions are not inclined to take advantage of these provisions as they are fairly certain of not getting relief, even in deserving cases. Such thinking amongst the taxpayers is harmful for speedy settlement of tax disputes, as the normal appeal process takes a long time. The delays increase the uncertainty of the taxpayers and also negatively affect the due tax collections by the authorities. To make DRP more assessee-friendly and meaningful, it is essential that the members of DRP are assigned the duty on a full-time basis and they should be as independent as possible.

The methodology used for implementation of transfer pricing regulations has far-reaching ramifications on an economy. The Indian Government as well as the authorities should not lose sight of the fact that business in India needs support and encouragement to achieve the targeted growth rate. They need to take a holistic view. At the same time businesses have to realise that attempt to artificially accrue income in low-tax jurisdiction is not beneficial in the long term.

Further extension for filing half-yearly return —Order No. 1/2012 — Service Tax dated 9-1-2012.

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By this Order due date for submission of half yearly return for the period from April 2011 to September 2011, has been further extended from 6th January, 2012 to 20th January, 2012

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Further extension of last date for filing of e-return and e-refunds application — Trade Circular No. 2T of 2012, dated 24-1-2012.

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Due to non-availability of website from 27-12-2011 to 30-12-2011, due date for filing monthly return for the month of November 2011 and refund application in Form e-501 for the period from 1-4-2009 to 31-3-2010, earlier extended up to 31-12-2011 is further extended to 7-1-2012.

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(2011) 40 VST 240 (SC) Commissioner of Trade Tax, U.P. v. Varun Beverages Ltd.

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Exemption certificate — Fixed capital investment — Essential apparatus, equipment or components — For establishing and running factory — Bottles are essential for manufacturer of soft drinks — But not crates — Sections 4A and 4B of U.P. Trade Tax Act (15 of 1948).

Facts:
The dealer was engaged in manufacture and sale of soft drinks and beverages, and applied for an eligibility certificate u/s.4A of the U.P. Trade Tax Act, 1948, in relation to inclusion in fixed capital investments also of amounts invested towards purchase of bottles and crates. The Department filed appeal before Supreme Court against judgment of the High Court allowing writ petition filed by the dealer to include purchase of bottles and crates in fixed capital investment.

Held:
So far as bottles were concerned, they were an essential part of the components and equipment necessary for the running of the factory. Therefore the value of such investment would form part of the fixed capital investment and would be entitled to the exemption.

Whereas crates were used by the dealer only for the purpose of marketing, as such the value of crates would not form part of ‘fixed capital investment’ as defined u/s.4A of the U.P. Trade Tax Act, 1948.

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Reassessment: Sections 143(2), 143(3), 147 and 148 of Income-tax Act, 1961: A.Y. 2003- 04: Assessment u/s.147 cannot be made within the time available for issuing notice u/s.143(2) and for completion of assessment u/s.143(3).

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[CIT v. ABAD Fisheries, 246 CTR 513 (Ker.)]

For the A.Y. 2003-04, the Assessing Officer accepted the returned income u/s.143(1) of the Income-tax Act, 1961. Subsequently, even before the expiry of the period for issuing the notice u/s.143(2) for completing the assessment u/s.143(3) the Assessing Officer issued notice u/s.148 holding that income chargeable to tax has escaped assessment and passed an assessment order u/s.147. The Tribunal allowed the assessee’s claim and cancelled the assessment and held that within the time provided for regular assessment u/s.143(3) after issuing notice u/s.143(2), no reassessment u/s.147 is permissible under the Act.

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

“(i) Reassessment u/s.147 cannot be completed within the time available for issuing notice u/s.143(2) and for completion of assessment u/s.143(3).

(ii) Similar view taken by the Madras and the Delhi High Courts remains unchallenged by the Department. The Departmental appeal is dismissed.”

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(2012) 25 STR 184 (SC) — Union of India v. IND-SWIFT Laboratories Ltd.

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The company, a manufacturer availed CENVAT credit on duty paid on material — Investigation indicated that CENVAT was taken on fake invoices — The company filed for settlement of proceedings — Paid entire duty/demand on wrongful availment. Consequently, appropriate interest liability under Rule 14 also was calculated by the revenue — The assessee contended that interest even if calculated cannot be from the date of availment of the credit but from the date of utilisation of the same — Held, No relief be given to the assessee — Interest be charged from the date of wrong availment — Orders passed by the Settlement Commission should not be intervened by High Court.

Facts:
The assessee-company was engaged in manufacture of bulk drugs, and availed CENVAT credit on the duty paid on inputs and capital goods. However, investigation conducted determined that such credits were availed on fake invoices and hence, duty was payable with interest. The duty was paid as directed by the settlement commission. However, the assessee objected to pay interest levied from the date of availment contending that interest if at all leviable, be levied from the date of utilisation. In short, interpretation of Rule 14 of the CENVAT Credit Rules, 2004 (Credit Rules) was the issue involved for determining the date from which the interest was leviable.

Held:
It was held that interest be levied from the date of availment of credit because once the credit is taken, the beneficiary is at liberty to utilise the same immediately thereafter, subject to rules. Also, it was held that the High Court had no authority to reject the order issued by the settlement commission and hence, the High Court should not have substituted its own opinion against the opinion of the Settlement Commission. As regards interpretation of Rule 14 of Credit Rules, the Apex Court observed that the High Court proceeded by reading down Rule 14 to interpret that interest cannot be claimed simply for the reason that CENVAT credit was wrongly taken, as such availment by itself does not create any liability of payment of excise duty. The Court further observed that it is not permissible to import provisions in a taxing statute so as to supply any assumed deficiency. Rules of reading down to be used for limited purpose of making particular provision workable and to bring it in harmony with other provisions of the statute. In the instant case, the attempt of the High Court is erroneous. The Revenue’s appeal was thus allowed.

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(2012) 25 STR 78 (Tri-Mum.) — Indoworth (India) Ltd. v. Commissioner of Central Excise, Nagpur.

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Appellant engaged in manufacture — Exported such goods to various countries — Filed refund under port services — Refund was rejected on ground that service provider registered under Business Auxiliary Services — Held, Once service tax is paid, the same cannot be disputed — Revenue cannot withdraw the refund — Refund allowed.

Facts:
The appellant engaged in manufacture of various types of textile worsted yarn and also exported the said products to various countries. By seeking benefit under Notification 41/2007-ST, the appellant claimed refund of the service tax paid by them on various specified services used in relation to export of goods. The refund claim so filed was rejected on the ground that when tax is collected considering the services as port service, refund cannot be granted considering it otherwise.

Held:
It was held that once the service tax paid on the eligible specified services and used the same for export, verification of registration certificate would not be required. Hence, the Revenue cannot withdraw the refund and appeal was allowed with consequential relief.

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(2011) 25 STR 68 (Tri.-Del.) — Em Pee Motors v. Commissioner of Central Excise, Chandigarh.

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Em Pee Motors provided BAS services — Promoted vehicle loans provided by ICICI — Commission received for the same — Out of commission received, appellant distributed incentives to customers opting for loan (subventions). Books of account reflected total of receipts against which payment is shown — This procedure followed due to inconvenience caused to banks as then they would have to issue TDS certificates to every customer — Credit of total amount claimed by appellant — However, service tax paid only on amount net of subventions — Held — Procedure followed to pay less tax — Service tax payable on gross amount.

Facts:
The appellant acted as an agent for ICICI bank and provided BAS services by promoting vehicle loan given by ICICI bank. Bank paid commission for the same. Out of the said commission, the appellant gave incentives to the customers for opting for the said loan scheme; this incentive is known as subvention. The appellant paid service tax on the amount net of subvention. The appellant argued that banks directly paid the incentive to the customers and the appellant never received the same. They contended that it was unjustified to pay service tax on the amount they never received. At the same time, banks did not issue TDS certificates to the customers opting for loans, rather issued it to the appellant. As a consequence of which the appellant could claim credit of the total amount from the Income-tax authority and paid service tax on the amount net of subvention.

Held:
Mere fact that the appellant chose to make payment out of the gross receipts cannot alter the gross amount received by them. It was held that service tax has to be paid on the gross amount received and reflected in the books. Hence, the order of the lower authorities was upheld.
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(2012) 25 STR 46 (Tri.-Ahmd.) — Parekh Plast (India) Pvt. Ltd. v. Commissioner of Central Excise, Vapi.

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CENVAT credit of the service tax on invoices raised in the name of head office — Head office not registered as input service distributor — Defect in invoices — Procedural defect — Totally curable and condonable — Denial not justified — Also demand barred by limitation — Appellant cannot be impeached alleging misstatement or suppression of fact when no column for the fact to be disclosed in ER 1 itself.

Facts:
The assessee engaged in manufacture of excisable goods availed CENVAT credit of Rs.5,43,200. The Revenue contended that invoices issued by the service provider were in the name of head office. Such availment of credit was held unjustified as head office was not registered as input service distributor. The authority also alleged suppression for the fact that the information was not disclosed in ER 1 Form in order and justified invocation of longer period of limitation.

Held:
It was held that since the law itself does not require the assessees to disclose the above facts, failure to disclose the same cannot be equated with any suppression or misstatement. Invoices issued by the service provider in the name of head office are eligible documents for the purpose of claiming credit.

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(2012) 25 STR 39 (Tri.-Del.) — Bhootpurva Sainik Society v. Commissioner of Central Excise, & Sales Tax, Allahabad.

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Appellant an association of ex-servicemen — Registered under Societies Registration Act, 1860 — Engaged in welfare of ex-servicemen — E.g., assisting them in finding employment, etc. — Entered into an agreement with Bharat Sanchar Nigam Ltd. — Whereby monthly amount was paid by them for services of security guards — Revenue demanded service tax on the security agency services provided by appellant prior to 18-4-2006 — Old definition in force with term ‘commercial concern’ — Reference of various judgments considered — Held, Appellant not a commercial concern — Service tax not payable.

Facts:
The appellants were registered under the Societies Registration Act, 1860 acting for the welfare of ex-servicemen who were members of the society. They were engaged in various causes like helping ex-servicemen to get a job, assist them and make efforts to help families of deceased ex-servicemen, etc. For the said purpose, the society entered into an agreement with Bharat Sanchar Nigam Ltd. for the services of security guards. The Revenue issued a show-cause notice on 21-9-2004 demanding service tax of Rs.26,494 for the period April, 1999 to December, 2003. The appellants pleaded that the old definition of security agency services was applicable to them and not being a commercial concern they were not covered. However, as the term ‘commercial concern’ was not defined in the Finance Act, 1994 the Revenue applied the popular meaning of commercial concern. Decisions in Sikar Ex-Servicemen Welfare Co-op. Ltd., (2006) 4 STR 303 (Tri.) and BCCI v. CST, Mumbai (2007) 7 STR 384 (Tri.) were relied upon by the appellants and hence, it was contended that they cannot be referred to as a commercial concern.

Held:
It was held that the appellant did not carry any of its activities with an intention of earning profits, nor were they considered as commercial concern and hence, were not liable to pay service tax.

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(2012) 25 STR 36 (Tri.-Del.) — Hind Tele Links v. Commissioner of Central Excise, Jalandhar.

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Appellant providing promotion and marketing services to M/s. Bharti Cellular Ltd. — Taxable as BAS — Failed to pay service tax — Did not contest the demand and paid it as soon as it was brought to notice — Penalties imposed u/s.76, u/s.77 and u/s.78 for the non-compliance — Prayed for reduction in penalties imposed under different sections for the same offence — The option to deposit 25% of penalty within a period of 30 days granted — Penalty u/s.76 set aside.

Facts:
he appellant provided services relating to marketing and promotion to M/s. Bharti Cellular Ltd. taxable under the category of business auxiliary services. It was noted that the appellant did not contest the amount of service tax confirmed by the authority. However, the appellant prayed for reduction in the penalties imposed u/s.76, u/s.77 and u/s.78. Appellant pleaded for the option of payment of 25% of penalty within 30 days, which was not made available to the them before.

Held:
It was observed that penalties under two different sections for the same offence were not justified and hence, penalty u/s.76 was set aside. Penalty imposed u/s.78 was upheld with modification that only 25% of the amount to be deposited only if paid within 30 days from the receipt of the order. Lastly, penalty for non-filing of the return etc. u/s.77 was not interfered with.

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(2012) 25 STR 30 (Tri.-Delhi) — Agrim Associates Pvt. Ltd. v. Commissioner of Sales Tax, Delhi.

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Appellant engaged in provision of service classifiable as ‘Commercial or industrial construction service’ from time to time and availed benefit under Notifications No. 15/2004-ST and 1/2006-ST and availed abatement of 67% — Revenue of the opinion that the value of Free of Cost (FOC) materials should be included in the gross value before availing such abatement — Held that only value of materials supplied should be included and value of FOC material not to be included in gross value on which abatement of 67% is granted — Stay of pre-deposit granted.

Facts:
The appellant provided ‘Construction service’/ ‘Commercial or industrial construction service’ and availed benefit under Notification No. 15/2004-ST and Notification No. 1/2006-ST for respective period of time. The Revenue contested that appellant provided completing and finishing services and hence abatement under Notification 1/2006-ST could not be availed. Also, it was argued that in order to avail such abatement, the gross value of revenue should include Free of Cost (FOC) materials before availing abatement of 67%.

Held:
It was held that the appellant was eligible to claim exemption under the said Notification and a complete waiver of the demand before the appeal was allowed and a stay order was sustained on collection of all demands arising out of the order during the pendency of the appeal.

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(2012) 25 STR 24 (Tri.-Del.) — Fiitjee v. Commissioner of Sales Tax, Delhi.

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Valuation of study material for commercial training or coaching services — Appellant denied exemption claimed under Notification No. 12/2003 — Held that study material issued forms integral part of the coaching services — Notification No. 12/2003 relates to works contract — Commercial coaching cannot be brought under definition of works contract — Appellants were directed to make a pre-deposit of 13 lakh — Partial stay granted.

Facts:
The appellant provided commercial training or coaching services. Along with such services, a consideration for the study material issued to the enrolled students was also collected and claiming exemption under Notification No. 12/2003, no service tax was paid thereon. According to the Revenue, the study material is integral part of the coaching which becomes meaningful and complete only with the aid of such study material. They also pointed out the decision in Cerebral Learning Solutions Pvt. Ltd. v. CCE, (2009) 15 STR 343 (Tri.) wherein pre-deposit was ordered.

Held:
It was held that the issue of study material and the coaching services are inseparable. Also, no evidence brought to the notice of the authority to suggest that the study material could be sold as text books to the book sellers. At the same time holding that the exemption Notification relied upon by the appellant related to works contract and commercial coaching could not be called as works contract, the appellant was directed to make a pre-deposit of Rs.13 lakh.

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(2012) 25 STR 122 (P&H) — Punjab Ex- Servicemen Corporation v. Union of India.

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Appellant is a security agency service provider — Refused to pay tax on the ground that profit is not the motive behind the business – respondent disagreed and contended that service tax would be payable — Absence of profit motive was not a valid reason for non-payment.

Facts:
The appellant a statutory corporation under the provisions of the Punjab Ex-Servicemen Act, 1978 is providing Security Agency Service. Accordingly, the appellant contended that it was not liable to pay service tax as there was no profit motive to carry on the business. Further, since the notice was not sent within 1 year, dispute was also raised on limitation ground. The Revenue contended that service tax was payable as absence of profit motive is not a determinant factor for imposition of liability.

Held:
U/s. 65(94) service provider should be engaged in the business rendering specified service. There is no warrant for reading therein requirement of profit motive. Applicability of limitation law — Statutes of limitation are retrospective in so far as they apply to all legal proceedings brought after their operation for enforcing causes of action accrued earlier — But they neither have the effect of reviving a right of action which is already barred on the date of their coming into operation nor do they have the effect of extinguishing a right of action subsisting on that date — Assessee’s appeal is dismissed.

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(2012) 25 STR 16 (Kar.) — Essar Telecom Infrastructure Pvt. Ltd. v. Union of India.

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Appellant providing infrastructure services of erection and construction of towers to cellular telephone companies — Inclusive of operating and maintenance — Registered with service tax authority for the payment of service tax — Amounted to transfer of right to use the erected telecom network towers and other related equipments — VAT authority opined — The appellant liable to pay VAT as there is transfer of right to use the said goods — Mere fact that equipments are attached to earth in order to enable it to function does not detract the applicability of VAT — Treated as movable — Held appellant bona fide believed activity to be service — Paid service tax regularly — State directed to recover it through separate proceeding — VAT payable for subsequent period — No liability to pay penalty and interest.

Facts:
The petitioner was engaged in erecting and constructing tower sites and leased the same to various telecom operators such as BSNL, Airtel, and Vodafone, etc. According to the petitioner, the said structure was considered as immovable, as they are embedded in the earth and cannot be shifted without damage. Further, the act of dismantling the structure from the site would render them non-saleable. However, after the study of the agreement entered by them with various operators, the Revenue opined that there was a transfer of right to use the leased capacity and the consideration received by them was in the nature of monthly lease rentals.

Held:
It was held that the structure erected by the appellant was movable for the reason that on the expiry of the agreement or the termination of it, the same could be detached and fixed somewhere else. Having concluded that, it was held to attract VAT. However, the petitioner bona fide believed impugned activity to be service and paid service tax regularly on the same. In para 22 of the judgment, the Court held to the effect that upon the determination of VAT liability, the amount previously paid as service tax would be adjusted and it is for the State to seek recovery of the amount paid by the petitioner to the Central Government through a separate proceeding based on this judgment. However. No penalty or interest would be imposed.

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(2012) 17 Taxmann.com 47 (Kar.) — CCE v. Tata Advanced Material Ltd.

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Assessee availed CENVAT credit of duty paid on capital goods on clearing goods — Capital goods destroyed in fire — Insurance company compensated assessee for the loss including duty — Revenue directed assessee to reverse the credit in respect of lost goods and confirmed demand — Issue, whether payment by insurance company renders regular credit as irregular — Held, No provision in Rules which empower reversal except in the cases when credit is taken irregularly.

Facts:
The assessee availed CENVAT credit of excise duty paid on capital goods bought and used in manufacturing excisable goods. About five years later, they were destroyed in a fire accident. Based on purchase invoice of new capital goods, a claim was put before the insurance company for reimbursement in terms of the policy taken. The reimbursed amount also included excise duty paid on the newly bought capital goods. The Department on getting such information directed the assessee to reverse the credit taken earlier on the lost goods. The assessee challenged it. The Tribunal held that the assessee had legally availed CENVAT credit. There is no legal provision which empowers the authorities to reverse CENVAT credit otherwise than in case of wrongful availment. The claim of the Department that assessee attained double benefit was also found without basis. The substantial question of law before the Court therefore was whether the impugned order amounted to encouraging unjust enrichment and whether or not credit can be claimed on goods lost in fire and for which they received compensation.

Held:
There is no provision in the Rules providing for reversal of credit except when it is irregularly taken and that was not the Revenue’s case. Merely because the assessee was compensated by the insurance company would not render legally taken credit irregular and it does not confer right on the authorities to demand reversal of credit. The assessee paid premium and covered the risk. It is not the case of double payment and the Department has no say in the matter.

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(2011) 40 VST 141 (MP) Fairdeal Corporation v. Commissioner of Commercial Tax, Madhya Pradesh and Others

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Sales Tax — Rate of tax — Entries in Schedule — ‘Fan covers’ and ‘Terminal Boxes’ — Used for manufacture of monoblock pump sets — Accessories of pump sets — Not an accessories to electric motors — Sch. I — Entry 89, Sch. II, — Part IV — Entry 7 of Madhya Pradesh Vanijya Kar Adhiniyam, 1994 (5 of 1995).

Facts:
The dealer manufactured and supplied fan covers and terminal boxes according to specification for use as accessories in monoblock pumps. The question before the High Court was whether the fan covers and terminal boxes, manufactured and supplied by the dealer, to be used for manufacture of monoblock pump sets used for irrigation purposes, were covered by Entry 7 of Part IV of Schedule II to the Madhya Pradesh Vanijya Kar Adhiniyam, 1994 as parts and accessories of the electric motor, or under Entry 89 of Schedule I to the Act as accessories of pumping sets.

Held:
The electric motors on which these two items were fixed are an integral part of the monoblock pump and not separable from the pump. The items in question could be used as accessories to the electric motor, but when the electric motor itself was an integral part and inseparable from the monoblock pump, the items in question would not be accessories of the electric motor but accessories of the monoblock pump.

In the monoblock pump the electric motor has no separate existence as independent item, therefore, the items in question could not be said to be an accessories to electric motor when used in monoblock pump.

When these items are used as accessories to the monoblock pump sets of less than 10 horse-power capacity they are covered by Entry 89 of Schedule I and not by Entry 7 of Part IV of Schedule II which is a general entry in respect of electric machine, its part and accessories. However, if the same items were sold by the petitioner for use as accessories or otherwise to some other main item, then they would be taxed according to the relevant entry covering such items and accessories.

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(2011) 16 Taxmann.com 209 (Chennai-CESTAT) — Safety Retreading Co. P. Ltd. v. Commissioner of Central Excise, Salem.

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Appellant retreaders of tyres — Paying service tax under maintenance and repair services on labour charges — Material cost benefit under Notification No. 12/2003-ST, dated 20-8-2003 claimed — As per Revenue, under the notification benefit available for actual sale of material and not raw material consumed during course of provision of service available — Held, There is no evidence of sale of material in rendering maintenance and repair service — ‘Deemed sale’ relevant only in case of services under works contract and not in respect of maintenance and repair service — Satisfaction of conditions under Notification 12/2003-ST not proven — Hence benefit denied.

Facts:
The appellant is engaged in retreading of used tyres and thus providing repairs and maintenance service and paying service tax on the component labour charges involved. The tread rubber patches, bonding gum, etc. are purchased and used for redoing treading on them. The invoices for this job are prepared by indicating separately the actual cost of material used. Due VAT as per the Tamil Nadu VAT Act, 2006 is paid on this. Also filed returns with sales tax authorities which are duly assessed. The Revenue held that only in the case of actual sale of material, benefit of Notification 12/2003 is available and not in case of consumption of raw material during the course of providing service.

The Bench referred to many relevant decisions on the subject matter which inter alia included Bharat Sanchar Nigam Ltd. v. UOI, (2008) 200 STR 161 (SC), Rainbow Colour Lab. v. State of MP, (2000) 2 SCC 385, Shilpa Colour Lab, (2007) 5 STR 423 (Tri.-Bang.), Speedway Tyre Service v. CCE, (2009) 18 STT 293 (Delhi), PLA Tyre Works v. CCE, (2009) 19 STT 362 (Chennai), Idea Mobile Communication Ltd., (2011) 23 STR 433 (SC) and Aggarwal Colour Advance Photo System (2011) 23 STR 608 (Tri.-LLB), etc.

The two Members of the Bench differed in their views. The points of difference placed before the Third Member.

The Third Member recognised that the issue related to interpretation of Notification 12/2003-ST as well as benefit of deduction of cost of raw materials available considering the tread rubber patches and bonding gum used as ‘deemed sale’ on which VAT is paid.

Held:
There is no evidence of sale of material in rendering service of maintenance and repair.

The concept of ‘deemed sale’ relevant only in respect of services under the category of ‘works contract’ for service tax purpose.

‘Maintenance and repairs’ being a specific service cannot be treated as service under ‘works contract’ for service tax purpose.

The assessee did not prove that conditions under Notification 12/2003-ST were satisfied and therefore they are not entitled to the benefit under the said Notification.

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(2012) 25 STR 206 (Tri-Bang.) — Lanco Industries Ltd. v. Commissioner of Central Excise, Tirupathi.

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CENVAT credit availed and utilised on irregular basis — Such credit reversed before issuance of show-cause notice — Interest charged from the date of availment up to the date of reversal — Argued that interest if at all leviable — Should be from date of utilisation — Penalty — Imposed for suppression of facts in order to avail inadmissible credit — Penalty for irregular availment of inadmissible credit — Held, Appellant liable to pay interest on CENVAT credit irregularly availed — Penalty for suppression of facts set aside — Penalty for availment of inadmissible credit upheld.

Facts:
The appellant made wrongful/irregular availment and utilisation of CENVAT credit and voluntarily reversed the same. However, they were directed to pay interest under Rule 12/14 of the CENVAT Credit Rules, 2002/2004 for the period till the date of reversal. The appellant pleaded that the major part of the credit was not utilised. According to the appellant, interest was not payable for the fact that they had already reversed the credit before the issuance of the show-cause notice and against the allegation of suppression, the appellants argued that they had already disclosed all the material facts to Department through ER-1.

Held:
With regards to the interest payable on the wrong availment of credit it was held that reversal of credit before issuance of show-cause notice cannot take away the liability. Hence, appellant was held liable to pay the interest. However, it was concluded that there was no suppression of facts by the appellant and penalty on this count was withdrawn thus retaining penalty for wrong availment of credit.

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(2012) 25 STR 196 (Tri-Del.) — Praveen Jain & Co. Pvt Ltd. v. Commissioner of Service Tax, Delhi.

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Appellant availed CENVAT credit prior to making payment to service provider — Order confirming demand of duty by denying CENVAT credit of Rs.25,51,699 and imposition of penalty of Rs.10,000 — Appellant contended that it was mistake that happened and payment subsequently made to service providers — Denial of credit and demand of duty not justified — Claimed that it was clear violation of the CENVAT Credit Rules, 2004 — However taking into account subsequent payment, denial of the credit was set aside — However, interest was held payable for the period of wrong availment along with penalty of Rs.10,000.

Facts:
The appellant availed credit on input services prior to making payments to the service provider. However, it made payments before the issuance of the show-cause notice. The appellants argued that it was a mistake from their end and subsequent regularisation of the deficiency of the documents can be condoned. As per the Revenue, the payment of price and duty to the supplier of inputs and input services is different. Making the payment to the supplier of inputs was not a pre-condition for availing the credit. However, credit of the input services cannot be availed unless and until payment has been made to the service provider.

Held:
Held that the appellant had enjoyed monetary benefit and hence, was liable for the payment of interest and penalty. On the other hand, taking into account the subsequent payment made to the service provider denial of the credit was set aside.

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(2012) 25 STR 178 (Tri-Ahmd.) — Rahul Trade Links v. Commissioner of Central Excise, Rajkot.

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Penalty — Non-payment of service tax — Separate penalties imposed u/s.76 and u/s.78 — Finding that assessee not having requisite mens rea — Tax paid with interest and penalty — Commissioner rightfully reduced penalty — No infirmity in the impugned order.

Facts:
The appellant was inter alia engaged in distribution for Tata Teleservices Ltd. on a commission basis. The assessee failed to pay service tax for the services rendered. The adjudicating authority confirmed the penalty and interest u/s.76 and u/s.78, but reduced the penalty. The appellant challenged the order and vehemently argued that equivalent penalty u/s.78 is not attracted.

Held:
The Tribunal observed that the penalties imposed under the abovementioned sections are clearly distinct even if the offences are carried out in the same transaction. The Tribunal dismissing the appeal held that the finding of the adjudicating authority was not shown to be perverse in any manner.

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(2012) 25 STR 167 (Tri-Mum.) — Maharashtra Seamless Ltd. v. Commissioner of Central Excise, Raigad.

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Appellants manufacturing unit located in Raigad District — Input services for the maintenance of windmill located in Satara District — Electricity so generated was consumed for the manufacture of the final product — Such credit rendered ineligible — Proceedings initiated against appellant —As per appellant, there was no mandate in definition of input service that services be used in manufacturing factory alone — Maintenance of windmills — Eligible input credit — Appeal allowed.

Facts:
The appellant was a manufacturing unit engaged in manufacture of excisable good situated at Raigad. They took credit on maintenance services received for their windmill situated in Satara District and consumed electricity generated out of it for the production of final product. The credit taken for above-mentioned input service was disallowed. According to the revenue there was no nexus between the said input services and the final product manufactured by them and they placed reliance on the Tribunal’s decisions in the case of Rajhans Metals Pvt. Ltd. v. CCE, Rajkot, (2007) 8 STR 498 (Tri.-Ahd) and Indian Rayon Industries Ltd., (2006) 4 STR 79 (Tri.) wherein it was held that services used at the site of windmills cannot be considered as input services by unit situated at some other place.

Held:
Held that the input services were rendered for the maintenance of windmills for generation of electricity cannot be brought into dispute. Further, after the study of the input service definition, it was concluded that the said service falls under the definition of input service. As regards input service used at different place was concerned, it was pertinent that there was no mandate in law that it should be used in the factory. The cited decisions were distinguished stating that the decision in the case of CCE, Nagpur v. Ultratech Cement Ltd., (2010) 20 STR 577 (Bom.) was not available before the Tribunal including in the case of Rajhans (supra). Hence, appeals allowed.

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(2012) 25 STR 136 (Tri-Bang.) — Sobha Developers Ltd. v. Commissioner of Central Excise, Bangalore.

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CENVAT credit — Appellant service provider to SEZ units/developer — Issue — Appellant of the opinion that provision of service to SEZ units is export of service and cannot be considered as exempted service — Demand raised on ground that service provided was exempted service and the availment of CENVAT credit of input service credit would fall under restriction/ demand under Rule 6 of CENVAT Credit Rules, 2004 — Noted that supplies to SEZ were free of all the taxes considering them at par with exports — Appeal allowed with consequential relief.

Facts:
The appellant provided services to SEZ units/ developers and contended that services provided should be considered as export of service and the demand raised through impugned orders should be set aside. Whereas, according to the Revenue the two basic conditions to hold a service as exports are that service should be provided outside India and payment for such services be received in convertible foreign exchange are not fulfilled. The appellant relied upon the decision in the case of Shyamraju & Co (I) Pvt. Ltd. V. UOI, 2010 (256) ELT 193 (Kar) wherein it was clearly noted that provision of services to SEZs are free of all taxes and this could be done by treating them at par with exports. In this case the issue does not, relate to whether the tax is to be levied or not but to decide whether the appellant is eligible to utilise CENVAT credit and whether they are eligible to pay an amount equal to 8% for the period prior to 1-4-2008.

Held:
By applying ratio of the decisions laid down in the various cases cited which inter alia included Bajaj Tempo Ltd. v. Collector, (1994) 69 ELT 122 and Steelite Industries Ltd., (2009) 244 ELT A89 (Bom.), it was held that the provisions of service to SEZ units were to be made applicable either on payment of tax or without tax and which cannot be equated with exempted services. Also, that services provided to SEZ units were covered by Rule 6 of the CENVAT Credit Rules, 2004, and hence, there stood no inconsistency between the Special Economic Zones Act, 2005 and the Finance Act, 1994. Therefore, considering all the arguments it was held that the restriction under the CENVAT Credit Rules, 2004, would not apply and services would be considered at par with exports and all the appeals were allowed.

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Non-availability of information from foreign branches

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Punj Lloyd Ltd. (31-3-2012)

From Notes to Accounts The company’s branch at Libya has fixed assets (net) and current assets aggregating to Rs. 9,909,622 thousand as at March 31, 2011 in relation to certain projects being executed in that country. Due to civil and political disturbances and unrest in Libya, the work on all the projects has stopped, the resources have been demobilised and necessary intimation has been given to the customers. The company has also filed the details of the outstanding assets with the Ministry of External Affairs, Government of India. Pending the outcome of the uncertainty, the aforesaid amounts are being carried forward as realisable.

From Auditors’ Report 6. As stated in Note 19 of schedule ‘M’ to the financial statements, due to civil and political disturbances and unrest in Libya, the work on all the projects in Libya has stopped. There are aggregate assets of Rs.9,909,622 thousand, aggregate revenues of Rs.1,954,565 thousand, profits before tax of Rs.96,816 thousand and cash flows of Rs.1,803,620 thousand for the year then ended in Libya Branch, which have been audited by another auditor in Libya. However, we were unable to perform certain procedures that we considered necessary under the requirements of Statement on Auditing SA600 (Using the work of another auditor) issued by the Institute of Chartered Accountants of India, including obtaining corroborative information and/or audit evidence, in relation to certain components of financial statements of Libya Branch. The ultimate outcome of the above matters cannot presently be ascertained in view of the uncertainty as stated above. Accordingly, we are unable to comment on the consequential effects of the foregoing on the financial statements.

In our opinion, proper books of account as required by law have been kept by the company so far as appears from our examination of those books and proper returns adequate for the purposes of our audit have been received from branches and unincorporated joint ventures not visited by us except to the extent stated in paragraph 6 above. The branches and unincorporated joint ventures auditors’ reports have been forwarded to us and have been appropriately dealt with;

Without considering our observations in paragraph 6 above, the impact whereof on the Company’s profits is not presently ascertainable, in our opinion and on consideration of reports of other auditors on separate financial statements and on the other financial information and to the best of our information and according to the explanations given to us, the said accounts give the information required by the Companies Act, 1956, in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India . . . .

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Issues arising on migration to an ERP software.

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Shipping Corporation of India Ltd. (31-3-2011)

From Notes to Accounts
The Company being a shipping company, its activities are based both in shore and in floating ships. The Company has implemented three different ERP packages to take care of both shore and the ship-related transactions and they have gone live from 28-2-2011. The accounts for the period 1-4-2010 to 31-1-2011 (i.e., for ten months) are prepared in the legacy system and for the period 1-2-2011 to 31-3-2011 (i.e., for two months) are prepared in the new system. With all efforts, the system has been implemented and the accounts for the 4th quarter and year ending 31-3-2011 are for the first time prepared under the new system.

In addition to the above, supporting documents for income and expenses are not received by the Company from the agents and transactions have been recorded based on the amount of the advance released/data received from the agents for the month of March 2011.

Necessary accounting effects to rectify the migration errors have been carried out by the management wherever the instances have been observed and the exercise is continuing and the necessary rectification will be made appropriately.

Further to the above, the company is unable to make certain adjustment in respect of the following due to issues arising on migration and uploading of data in the new system:

(i) Translation of certain balances as per policy No. 8(c), wherever rectification entries have been passed post revaluation of the balances of the assets and liabilities,

(ii) The segmental results disclosed segment report may consist certain inter-segment compensating issues,

(iii) In some of the assets, depreciation is accounted where instances of classification in inter-assets class is noticed and date of capitalisation is taken based on best available information,

(iv) Certain transactions relating to payments, etc. reflected in the bank reconciliation statements could not be incorporated,

(v) During the current year aggregate Net Credit balance of Rs.25375.49 lakhs in vendor and accounts payable are shown as Sundry creditors and other liabilities, which up to previous year were disclosed vendor-wise debit and credit separately,

(vi) The foreign currency revaluation effects of various assets and liabilities are included in the debtors, instead of grouping the same with the respective assets and liabilities,

(vii) The second phase of audit by the Comptroller & Auditor General of India, has not been completed due to limitation of time.

The impact of items stated in para (i) to (iv) is not material on the result of the Company. Further the matters stated in para (iv) to (vi) relates to assets and liabilities and grouping thereof under the various heads of the Balance sheet.

From Auditors’ Report

(f) Attention is invited on:

Note. No. 1, Schedule-25 Notes on Accounts, regarding various errors and omissions have been made by the Company during the process of migration/uploading of data post migration in the new accounting software ERP-SAP, in respect of accounting of the income and expenses, assets and liabilities for which necessary rectification has been carried out by the Company.

Further there remain certain items where the company is unable to make appropriate adjustments and the effects of errors and adjustments, if any, as might have been determined to be necessary in the data migrated/uploaded in the accounting software post migration.

It has been further noticed that the Company has:

(i) Not accounted the income and expenditure in respect of unfinished voyages as per accounting policy No. 2(c), having no impact on the profit for the year.

(ii) Non-accounting of foreign currency transactions at the rates as stipulated in accounting policy No. 8(a) for the months of January 2011 and February 2011, instead the same have been accounted at the exchange rates applicable for the month of March 2011.71

(g) Note No. 17 of Schedule-25 ‘Notes to the Accounts’ in respect of balances of Sundry Creditors, Debtors, Loans & Advances and Deposit which are subject to confirmation.

In our opinion and to the best of our information and according to the explanations given to us, subject to our comments in para 4(f) above, the said accounts.

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Disclosure regarding support/comfort letters given for subsidiaries.

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Tata Communications Ltd. (31-3-2011)

From Notes to Accounts

Note 4: As on 31 March 2011, the Comfort for the credit facility agreement in respect of various subsidiaries:

The Company has undertaken to the lenders of TCTSL and TCIPL that it shall retain full management control so long as amounts are due to the lenders.

Note 5: The Company has issued a support letter to Tata Communications International Pte. Limited (TCIPL), regarding providing financial support enabling, in turn, TCIPL to issue such support letter to certain subsidiaries having negative net worth as at 31 March 2011 aggregating Rs.1,245.71 crore (2010: Rs.1,508.41 crores) in various geographies in order that they may continue to be accounted for as going concern.

The letters of comfort/support mentioned in 4 and 5 above have been provided in the ordinary course of business and no liability on the Company is expected to materialise in these respect.

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Interest on refund: Section 244A of Incometax Act, 1961: A.Y. 1998-99: Period for interest: Period of delay caused by assessee: Assessee’s belated claim for deduction allowed by CIT(A): No delay caused by assessee: Interest payable from beginning of relevant A.Y.

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[CIT v. South Indian Bank Ltd., 340 ITR 574 (Ker.)]

For the A.Y. 1998-99, the assessee’s belated claim for bad debts was rejected by the Assessing Officer for failure to establish the claim. The claim was allowed by the CIT(A). The Assessing Officer denied interest on refund u/s.244A of the Income-tax Act, 1961 on the ground that the delay was attributable to an additional claim of deduction which was allowed by the CIT(A). The Tribunal held that the assessee was entitled to interest from 1-4-1999.

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

“The Assessing Officer had not established that the assessee had caused any delay in issuing the refund order. There was no decision by the Commissioner or Chief Commissioner on this issue. The assessee was eligible to get interest from 1-4-1999, till the date of refund.”

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Falling BRIC — India’s macro numbers are harming its global image.

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It has been more than ten years since the term ‘Bric’ was coined. The Bric nations — Brazil, Russia, India and China — were supposed to be the engines of global growth, the new poles of the world economy as Europe and North America slipped slowly into twilight. Yet Jim O’Neill of Goldman Sachs, the man leading the team that coined the phrase in 2001, has been quoted as saying that “there are important structural issues about all four, and as we go into the 10-year anniversary, in some ways India is the most disappointing”.

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BMC elections — Dance of democracy

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1. I am very disappointed that the voter turnout in the city is so low. We have no right to call ourselves educated and enlightened if we don’t come out to vote. We cannot expect things to change then. Voting is not just a fundamental right, it is our duty. If we fail to vote, we have no right to make comments about the state of affairs in the city. The quality of life is deteriorating and desperate measures are needed. Mumbai is the most important city in the country and generates a huge amount of revenue. It also has the largest number of urban problems. We want the elected leaders to fight for the city and get funds.

— Deepak Parekh, HDFC Chairman

2. The BMC is one of the richest corporations in the country. Despite this, the condition of Mumbai is pitiable. People should not consider voting day as a holiday, but as a day to do their duty. We can talk about responsibility only when we talk about duty. People should cast their vote. Not casting your vote is a crime.
— Anupam Kher, Actor 3.

It is very sad that a lot of people have not come out to vote. If you don’t vote, you have no right to complain. They are not contributing to the society. You are getting what you deserve . . . you are harming society and the country.

— Priya Dutt, Congress MP,

Mumbai North-Central 4. Times View — Another election, another low turnout in Mumbai. Is it apathy, or cynicism? Do we not care? Or do we believe that both sides are equally unworthy of our vote, that there’s nothing to choose from? Either which way, it doesn’t bode well for the city. The more affluent, it would appear, have mentally seceded from the city.

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FDI — The cost of caprice

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Serious economies cannot behave irresponsibly. That is the lesson to be drawn from the international fallout of our domestic telecom scandal. Within a week of the Supreme Court cancelling 122 telecom licences because of how they were issued, Bahrain Telecommunications Company has pulled out its investment in S Tel, and Etisalat of the UAE has written off investment of $ 827 million in Etisalat DB, in which it holds a 45% stake. A Norwegian Minister has come calling, to protect the interests of Telenor (which is majority-owned by the Norwegian Government), and you can rest assured that the Russians are not going to meekly accept the loss of Sistema’s majority stake in Sistema Shyam TeleServices, especially when Sistema owner Vladimir Yevtushenkov is closely linked to Prime Minister Vladimir Putin. So how much damage has been done internationally to the country’s standing and goodwill, because Mr. Raja was allowed to get away with his antics while the Prime Minister and Finance Minister fiddled?

Our capricious politicians are only dimly aware of the international fallout of their domestic dance. All too often, the operating assumption within the country is that the Government can do pretty much what it wants since most serious businessmen don’t want to be in court against it. That is not how it works around the world. So Devas has dragged Antrix to arbitration in Paris, after the government woke up one day and cancelled their contract. Cairn has accepted the Government’s unilateral rewriting of its contract with the Oil and Natural Gas Corporation, but only because it needed the Government’s approval for a change in shareholding control, and you can be sure that others in the energy space have been watching. Indeed, who is to tell how much damage was caused by the Enron-Dabhol fiasco in the 1990s, in terms of lost investment? While the collapse of Enron saved India some blushes, subsequent overseas investment in Indian power generation has been barely $ 5 billion (about the cost of one ultra-mega power project).

As it is, the country makes life hard for businesses, or it would not figure embarrassingly low in the World Bank’s list of countries ranked on the ease of doing business (132nd in a list of 183 countries; six years ago it was 116th out of 155 countries). Why add to the headaches with poor contractnegotiation, then second thoughts and unilateral action? This is not to argue that the country should not get out of bad deals; rather, the issue is of avoiding capricious conduct in an economy that hopes to be the fourth largest in the world by the end of the decade. If you want to get there, you have to start behaving like a serious economy, not invite comparisons with banana republics.

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Clarifications on filing of conflicting returns by contesting parties.

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The Ministry of Corporate Affairs has vide General Circular No. 1/2012, dated 10th February 2012 issued clarification to Circulars No. 19 and 20 issued on 2-5-2011 regarding the filing of conflicting returns pertaining to the change of directors or their appointment.

In order to avoid such eventualities wherever there is a management dispute, the company is now required to mandatorily file the attachment relating to the cause of cessation along with Form 32 with the ROC concerned irrespective of the ground of cessation viz.

(a) Retirement
(b) Disqualification
(c) Death
(d) Resignation
(e) Vacation of office u/s.283 or 313 or 260
(f) Removal u/s.284 or withdrawal of nomination by appointment authority
(g) Absence of reappointment

Aggrieved director can file complain in ‘Investor Compliant Form’ and ROC will take efforts to settle the same amicably. Till such dispute is settled, the documents filed by the company and by the contesting groups of directors will not be approved/ registered/recorded and will thus not be available in the registry for public viewing. Full Circular can be viewed on http://www.mca.gov.in/Ministry/pdf/ General_Circular_No_01_2012.pdf

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A.P. (DIR Series) Circular No. 80, dated 15-2-2012 — Export of goods and services — Simplification and revision of Softex procedure.

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This Circular has revised the procedure for submission of SOFTEX Forms for software exporters having annual turnover of Rs.1,000 crore or who file at least 600 SOFTEX forms annually. The new form and revised procedure for submitting the same are annexed to this Circular.

As per the revised procedure, the eligible software exporter has to

(1) File a statement in Excel format giving all particulars along with quadruplicate set of SOFTEX form to the nearest STPI.

(2) STPI will then verify the details and decide on a percentage sample check of the documents in details.

(3) Software companies will have to submit all the documents on demand to STPI within 30 days of their advice or any reasonable/ extended time.

(4) STPI will certify the statement and SOFTEX forms in bulk on the ‘Top Sheet’ regarding the values, etc.

(5) STPI will forward the first copy of the revised SOFTEX format to the concerned Regional Office of RBI, the “duplicate copy along with bulk statement in Excel format to Authorised Dealers for negotiation/collection/settlement. The third copy to the exporter and the last copy will be retained by STPI for its own record”.

(6) Exporters, using the revised procedure, will have to provide information about all the invoices including the ones lesser than US $ 25,000, in the bulk statement in Excel format.

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A.P. (DIR Series) Circular No. 79, dated 15-2- 2012 — Clarification — Purchase of immovable property in India — Reporting requirement

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A non-resident who has set up a branch, office or other place of business In India (other than a liaison office), and who has acquired any immovable property in India has to file a declaration in form IPI with RBI within 90 days from the date of such acquisition. However, no such declaration has to be filed by an NRI or PIO when he acquires any immovable property in India.

Form IPI has been modified to reflect this position and the amended Form IPI is annexed to this Circular.

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A.P. (DIR Series) Circular No. 76, dated 9-2-2012 — Clarification — Establishment of project offices in India by foreign entities — General permission.

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Presently, general permission has been granted to a foreign entity for setting up a Project office in India, subject to certain conditions.

This Circular clarifies that despite the general permission, citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, cannot establish in India, a branch office or a liaison office or a project office or any other place of business by whatever name called, without the prior permission of RBI.

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A.P. (DIR Series) Circular No. 75, dated 7-2- 2012 — External Commercial Borrowings — Simplification of procedure.

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Presently, approval of RBI is required for:

(a) Reduction in amount of ECB.
(b) Changes in the drawdown schedule where the original average maturity period is not maintained.
(c) Reduction in the all-in-cost of the ECB after obtaining LRN. This Circular has granted powers to banks to approve changes in respect of the above i.e., reduction in all-in-cost, subject to certain conditions and changes in the drawdown schedule when original maturity period is not maintained.

(a) Reduction in amount of ECB

Banks can approve reduction in loan amount in respect of ECB availed under the Automatic Route, provided

(i) Consent of the lender for reduction in loan amount has been obtained;

(ii) Average maturity period of the ECB is maintained;

(iii) Monthly ECB-2 returns in respect of the LRN have been submitted to the Department of Statistics and Information Management (DSIM); and

(iv) There is no change in the other terms and conditions of the ECB.

(b) Changes/modifications in the drawdown schedule when original average maturity period is not maintained

Banks can approve requests for changes/modifications in the drawdown schedule resulting in the original average maturity period undergoing change in respect of ECB availed both under the Automatic and Approval Routes. However, any elongation/ rollover in the repayment, on expiry of the original maturity of the ECB, will continue to require the prior approval of RBI.

The approval can be granted provided:

(i) There are no changes/modifications in the repayment schedule of the ECB;
(ii) Average maturity period of the ECB is reduced as against the original average maturity period stated in the Form 83 at the time of obtaining the LRN;
(iii) Reduced average maturity period complies with the stipulated minimum average maturity period as per the extant ECB guidelines;
(iv) Change in all-in-cost is only due to the change in the average maturity period and the ECB complies with the extant guidelines; and
(v) Monthly ECB-2 returns in respect of the LRN have been submitted to DSIM.

(c) Reduction in the all-in-cost of ECB Banks can approve requests for reduction in allin- cost, in respect of ECB availed both under the Automatic and Approval Routes, provided

(i) Consent of the lender has been obtained and there are no other changes in the terms and conditions of the ECB; and

(ii) Monthly ECB-2 returns in respect of the LRN have been submitted to DSIM.

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A.P. (DIR Series) Circular No. 74, dated 1-2-2012 — Deferred Payment Protocols dated April 30, 1981 and December 23, 1985 between Government of India and erstwhile USSR.

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With effect from January 20, 2012 the Rupee value of the Special Currency Basket has been fixed at Rs.71.456679 as against the earlier value of Rs. 73.923372

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A.P. (DIR Series) Circular No. 73, dated 21-1- 2012 — Opening of Diamond Dollar Accounts (DDAs)

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Presently, banks are permitted to open and maintain Diamond Dollar Accounts (DDA) of eligible firms and companies, subject to certain terms and conditions.

This Circular requires banks to submit a statement giving the data on the DDA balances maintained by them on a fortnightly basis within 7 days of close of the fortnight to which it relates, to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Trade Division, 5th Floor, Amar Building, Mumbai-400001.

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A.P. (DIR Series) Circular No. 70, dated 25- 1-2012 — External Commercial Borrowings (ECB) Policy — Infrastructure Finance Companies (IFCs).

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Presently, Non-Banking Finance Companies (NBFC) categorised as Infrastructure Finance Companies (IFC) by RBI are permitted to avail of ECB, including the outstanding ECB, up to 50% of their owned funds under the Automatic Route. ECB by IFC above 50% of their owned funds are considered by RBI under the Approval Route.

This Circular requires banks to certify the leverage ratio (i.e., outside liabilities/owned funds) of IFC desirous of availing ECB under the Approval Route at the time of forwarding the proposal to RBI.

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A.P. (DIR Series) Circular No. 69, dated 25- 11-2012 External Commercial Borrowings — Simplification of procedure.

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Presently, approval of RBI is required for:

(a) Cancellation of Loan Registration Number (LRN); or
(b) Change in permissible end-use for an existing ECB

This Circular has granted powers to banks to approve changes in respect of the above i.e., cancellation of LRN and change in permissible end-use, subject to certain conditions.

(a) Cancellation of LRN

Banks can directly approach DSIM for cancellation of LRN for ECBs availed, both under the automatic and approval routes, provided

(i) No draw-down for the said LRN has taken place; and
(ii) Monthly ECB-2 returns till date in respect of the LRN have been submitted to DSIM.

(b) Change in the end-use of ECB proceeds

Banks can approve requests for change in end-use in respect of ECB availed under the Automatic Route, provided

(i) The proposed end-use is permissible under the automatic route;
(ii) There is no change in the other terms and conditions of the ECB;
(iii) ECB is in compliance with the extant guidelines; and
(iv) Monthly ECB-2 returns till date in respect of the LRN have been submitted to DSIM.

However, RBI approval will be required for change in the end-use of ECB availed under the Approval Route.

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REPORTING OF HOLDINGS OF PROMOTERS — SAT Decides on The Recurring Issue of Non-Compliance of Reporting

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Reporting of Promoters’ shareholding under various SEBI regulations seems to be a chore that is best done away quickly. Most of it is routine since Promoters shareholding often remains static. Even where there are changes, the milestones of reporting are seemingly well defined. Nevertheless, issues often crop up and SEBI initiates proceedings for non-compliance. The penalties for noncompliance are, as is well known, substantial and hence an area of concern. SEBI’s consistent stand, based on certain Court decisions including that of the Supreme Court, is that non-compliance of reporting does not require mens rea to be proved and once there is a simple failure to comply, levy of penalty logically follows.

The law relating to reporting of shareholding is complicated as it is spread out over several overlapping and at times contradictory regulations or having differing requirements. For example, reporting is required under the Takeover Regulations, the Insider Trading Regulations, the Listing Agreement, etc. The timing, the persons who have to report, the information to be disclosed and the prescribed form for reporting, etc. tend to differ.

For concerns that are understandable, the definition of terms under certain regulations is fairly broad and/or are defined in a broad way prescribing other parameters under different regulations. For example, the Takeover Regulations define acquirer in a fairly broad way and the acquisitions by an acquirer mandate reporting under certain circumstances. Under the Insider Trading Regulations, however, the reporting is by a slightly different group of people and at different times.

The point is that though the reporting may be made under one set of Regulations or even by one or more persons, it may not be strictly in conformity with the provisions of other regulations. This is despite the fact that the information that is required to be placed in the public domain is duly placed, though not exactly in the manner required by law. In such a case, the issue of penalty may arise. Similarly, even though such information may be duly reported by one person, the question may remain whether non-furnishing by another person of the same information tantamounts to a violation.

A recent decision of the Securities Appellate Tribunal [O. P. Gulati v. SEBI, (2012) 111 SCL 454] highlights such a concern even though the decision is in favour of the promoters. It shows the vagaries not only of law but of practice of SEBI. Hence, there is need to take a pragmatic approach to avoid needless proceedings and litigation.

The facts as provided in the decision can be quickly summarised as follows. The promoters of a listed company consisting of husband/wife had acquired certain shares beyond the minimum percentage and thus an obligation to report arose. It may be mentioned that the acquisition was over a long period of time. It was accepted that in the initial several years, there was no requirement to report and the issue before the Tribunal was only acquisition during the later years and hence this discussion focusses on the reporting for the later years.

Regulation 7(1A) of the Takeover Regulations (‘the Regulations’) requires that if an acquirer acquires 2% or more shares, he shall report the same in the prescribed manner and within the prescribed time. The acquirer admittedly had acquired more than 2% shares and this acquisition was not reported in the prescribed manner. SEBI initiated proceedings against the acquirer and persons acting in concert which as stated above consisted of the husband and wife. The interesting point was that though the husband and wife were acting in concert, only the husband had acquired the shares while the wife had not acquired even a single share. SEBI initiated proceedings against both of them based on the finding that the prescribed reporting was not made and levied a penalty of Rs.1 lakh on each of them.

The acquirers appealed to the SAT essentially making two sets of contentions. As regards nonreporting by the husband, it was contended that it was inadvertent and a technical error and deserves condonation. However, as regards the wife, the issue raised was that though the wife was a person acting in concert with the acquirer, since she had not acquired any shares, there was no requirement of reporting by her.

The SAT rejected the argument stating that inadvertent/technical errors in reporting do not deserve to be condoned and upheld the penalty of Rs.1 lakh on the husband. As regards the wife, SAT noted that:

(1) the husband and wife fell within the definition of acquirer,
(2) the wife had not acquired any shares, and
(3) the reporting requirement was on the acquirer.

Hence, it was held that as there was no rationale in double reporting, particularly by a person who did not acquire any shares. The levy of penalty on the wife was not warranted and reversed.

It is worth considering the observations of the SAT before further comments and conclusions can be made.

“The appellant-acquirers had contended that:

(1) disclosures were made with bona fide intention though late
(2) there was no suppression of fact
(3) there was no intention to violate
(4) default, if any, was purely technical in nature, and
(5) deserves to be accepted as a bona fide inadvertent mistake.”

Against this contention, SEBI “supported the orders passed by the adjudicating officer stating that any acquirer, whether he has acquired the shares or voting rights of the company or not, if he falls within the definition of the acquirer under Regulation 2(b) of the takeover code or is a ‘person acting in concert’ within the meaning of Regulation 2(e), is required to file a declaration under Regulation 7(1A) of the takeover code. Indra Gulati, being wife of O. P. Gulati and also a promoter of the company, falls within the definition of ‘person acting in concert’ and hence an ‘acquirer’ within the meaning of Regulation 2(b) of the takeover code”.

Whilst annulling the penalty on the wife, SAT observed:

‘A person who may fall within the definition of acquirer under the takeover code but has not acquired the shares and is not a person acting in concert with the person acquiring the shares is not obliged to make disclosure under Regulation 7(1A) of the takeover code. In a given case, suppose there are 20 persons in a target company who may fall within the definition of ‘acquirer’ under the takeover code and say only two of them have purchased or sold shares aggregating two per cent or more of the share capital of the target company and these two persons are not acting in concert with any of the other eighteen persons. If the argument of learned counsel for the respondent Board is accepted, then all the twenty persons who fall within the definition of ‘acquirer’ are required to make disclosure to the company as well as to the concerned stock exchanges. Such additional disclosure by eighteen persons who have neither purchased nor sold shares, nor are persons acting in concert with the two acquirers, serves no purpose.

The fact that Indra Gulati did not acquire any share of the target company during the period in question is not in dispute. The adjudicating officer has not recorded any finding that there was any understanding or agreement, direct or indirect between O. P. Gulati and Indra Gulati to acquire the shares of the target company. In the absence of any such finding or material on record, we are of the view that the adjudicating officer erred in holding Indra Gulati guilty of violating Regulation 7(1A) of the takeover code.”

The following conclusions can be drawn from the above decision:

Firstly, the concern over multiple reporting under various regulations of information that is essentially the same though required of different people, at different stages and of different nature is justified. It is presumably settled by the observation that such multiple reporting does not serve a point except that SEBI may be obliged to initiate action. One hopes that this decision helps in a case where a person has reported under one regulation but inadvertently failed to report under another regulation would not be burdened with dual consequences.

Secondly, this decision gives some clarity on the issue that often comes up, viz., when there are numerous persons in a Promoter Group, who should report and whether all should report or whether reporting is required by only those who acquire. The above decision should be the basis for arguing that if the lead promoter reports the information required, on behalf of all those who have acquired multiple reporting is not required.

Thirdly, this case highlights the point that unlike other laws, SEBI has powers to levy huge penalties for seemingly routine and unintended non-compliances. The author believes that whilst using this power SEBI should have a pragmatic approach.

PART D: RTI & SUCESSS STORY

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RTI success story of Vinita Deshmukh, Pune:

The controversial Dow Project in Pune — at Shinde- Vasuli village in Chakan came to a grinding halt in 2010. In fact, unable to sustain vociferous local protest against the establishment of its chemical plant in the heart of the village, Dow voluntarily walked out of Pune district. I couldn’t believe what I heard . . . .

Since then, the site wears a deserted look. Much of the construction material too has been lifted by the Dow people, say villagers. cement bags lie torn, construction pillars with jutting out iron rods wait hopelessly and most of the makeshift offices too have been flattened. Two security guards stroll around and dare not defy clicking photographs. The land still belongs to Dow confirms the MIDC official in Pune and MPCB Pune says no directive has been given by it to the shift base. According to news reports, Dow has voluntarily decided to move out, stung by the hostility of the local residents. Well, but there are no sympathies for this turn of events.

Like they say, as you sow, so shall you reap.

When I called up the then District Collector Chandrakant Dalvi, he confirmed that “Dow is now out of Pune district.’’ It is the intense campaign by villagers taken forward by the Warkari community of entire Maharashtra that eliminated Dow from Pune. I, in the capacity of the editor of ‘Intelligent Pune’, a weekly tabloid, played a pivotal role in accessing crucial information under RTI. Inspection of files u/s.4 of the RTI Act at the Maharashtra Pollution Control Board (MPCB), Maharashtra Industrial Development Corporation (MIDC) and Secretary, Environment office at the Mantralaya, Mumbai revealed shocking details.

When Dow was given a whopping 100 acres of land, it began construction sometime late 2007. Villagers were in the dark about it, they were not even told the name of the company. Former Sarpanch Panmant recollects that suddenly a 4,000 strong labour force was put to work day and night. When they tried getting information from the collector’s office, they were stonewalled. It was only in January 2008 that the company put up the board on site, namely, ‘Dow Chemicals International Ltd.’.

Sometime in January 2008 Justice (retd.) B. G. Kolshe Patil visited the village for a public programme. When he found the name ‘Dow Chemicals International Ltd.’ on the board, he asked the villagers whether they were aware of what was coming to their village. He enlightened them that it is the same company which was responsible for the Bhopal Gas Tragedy and that villagers should not allow this company to set up home here.

Thus, villagers began their agitation. They first stopped the water connection that they had willingly given to the company premises and then halted any company vehicle from entering their village. For this, they dug up superficial trenches. Newspapers reported about the warpath taken by the villagers.

I decided to find out more about permissions given to Dow. When I called up Member Secretary, MPCB, he answered that, “I have no documents. If you want, you can invoke the RTI Act.’’

I did so and literally opened up a Pandora’s Box. I broke the story in ‘Intelligent Pune’ in the 7th March cover story. It shocked Puneites and armed villagers of Shinde-Vasuli where the Dow Chemicals plant was coming up, with hardhitting ammunition in the form of the truth in black and white.

The Maharashtra Pollution Control Board (MPCB) is the prime body to give environmental clearance for such a project. The Maharashtra Industrial Development Corporation (MIDC) is the body which provides land. Both are required to scrutinise the proposal of this nature thoroughly since the outfit, even if it is an R&D centre, is of a chemical nature. I carried out inspection of files u/s.4 of the RTI Act at the MIDC, Pune office. I also invoked the RTI at the MPCB office to know what kind of consent DOW had applied for and what kind of consent had the MPCB given.

Though we procured crucial correspondence, which took off the lid of DOW’s claim that it was primar-ily a research and development centre and not a manufacturing unit, vital documents pertaining to NOCs from the Ministry of Environment & Forests (MOEF) and Industrial Entrepreneurs Memorandum (IEM) — both mandatory for establishment of a chemical plant were either missing or not submitted at all. “We do not have these documents in Pune — you may try in Mumbai’’ was the chorus of the regional officers of the MIDC and MPCB.

Inspection of files at MIDC, Pune on 28th February, 2008:

Information was gathered u/s.(4) of the RTI Act wherein this writer and RTI activist, Vijay Kumbhar, undertook inspection of the file containing correspondence between MIDC and DOW. Some of the file notings reveal the hurry in which the proposal was given a green signal. The correspondence also reveals that what DOW was setting up was not primarily a research and development centre. Many files were inspected. Hereunder are the observations:

19th October, 2007: In his letter dated 19th October, 2007, Sanjay Khandare, member secretary of the MPCB has granted Dow Chemicals International Pvt. Ltd. (plot no A-1, MIDC Chakan, Phase II, Taluka Khed, District. Pune) the consent for the manufacture of the following chemical products: Polymers — 2,000 kgs per month; Catalyst organic/inorganic — 1,000 kgs per month; Surfactants — 200 kgs per month; Aliphatic organic compounds — 500 kgs per month; Aromatic organic compounds — 500 kgs per month; Inorganic salts — 500 kgs per month.

In case of accidents, the MPCB expects DOW to do a clerical post-accident action — “Whenever due to any accident or any other unforeseen act or even, such emissions occur or apprehended to occur in excess of standards laid down, such information shall be forthwith reported to Board, concerned police station, officer of director of health services, Department of Explosives, Inspectorates of factory and local body. In case of failure of pollution control equipments, the production process connected to shall be stopped.’’

Maj. Gen. SCN Jatar (retd.), a petrochemical expert and RTI activist stated that, “The authorities should not have given final approval until the environmental impact assessment (EIA) report is made. The report should be made by a well-known agency and local representatives of the citizens should be associated with its preparation.”

Pollution control board experts who scrutinised the consent by the MPCB, commented:

“The list of chemicals given which are likely to be used at the Chakan plant includes hazardous and dangerous gases as well as chemicals such as (1) gases — SO2, Acetylene, HCL. (2) Solvents — Acetone, ether, nitrite compounds, halogenetic solvents, and inorganic acids. Thus the safety-related issues arising out of handling, accidents and incidents involving above chemicals require proper storage, handling and emergency procedures. For this an environmental management plan should have been asked by the Board of Government of India’s MSIHC (manufacturing, storage, import and handling of hazardous chemicals rules 1989) as notified in the EPA Act same does not seem to have been adhered to. There does not seem to be adherence of the Chemical Accidents & Emergency Preparedness (Rules 2000) for which the company needs to submit onsite and off site disaster management plan and that includes education to the neighbourhood residents. It is the fundamental right to know what is happening in the neighbourhood.”

As a precautionary principle, environmental impact analysis should have been done by the company on its own when they claim they are a responsible corporate. Neither the board has asked for it.

I informed the villagers regarding the kind of chemical manufacturing plant and that it was not just a research centre which was coming in their neighbourhood. Bandya Tatya Kharadkar, the Warkari leader successfully led a state-wide agitation as the Indrayani river is close to the heart of this community. What makes me feel overwhelmed is the fact that it was RTI that could move a colossal multinational company which flexes its muscles in countries like India based on money power. RTI can even drive away such a powerful business enterprise!

PART A : Decision of the CIC

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Public Authority u/s.2(h) of the RTI Act: Public-Private Partnership
A very important order is made by CIC, Shailesh Gandhi on above subject i.e. bodies under publicprivate partnership (PPP).

The applicant had sought information from the Public Health Foundation of India, New Delhi (PHFI). While PHFI provided all the information sought, it stated that it is not a ‘public authority’ as defined under the RTI Act and it is a completely autonomous institution.

The applicant wanted the Commission to rule on this point, i.e., whether PHFI, (a PPP body) is covered under the RTI Act or not.

The Commission noted as under: “From a plain reading of the section 2(h), it appears that PHFI is not covered under clauses (a), (b), (c) & (d)(ii) of section 2(h) of the RTI Act. Therefore, the issue which remains to be determined is whether PHFI gets covered under clause (d)(i) of section 2(h) or not. The said clause reads: body owned, controlled or substantially financed directly or indirectly by funds provided by the appropriate Government.”

It appears that PHFI is not ‘owned’ by the appropriate Government. As regards being ‘controlled’ by the appropriate Government, the said term has not been defined under the RTI Act. There are various forms in which the Government exercises control over an entity, which is relevant in determining whether the latter is a public authority. On perusal of the information about PHFI’s governing board, the Commission noted that amongst its 30 Board members are:

1. Dr. Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, Government of India;

2. P. K. Pradhan, Secretary, Ministry of Health and Family Welfare, Government of India;

3. Vishwa Mohan Katoch, Secretary, Department of Health Research, Ministry of Health and Family Welfare and Director General, Indian Council of Medical Research;

4. T. K. A. Nair, Principal Secretary to the Prime Minister of India; and

5. Dr. R. K. Srivastava, Director General Health Services, Ministry of Health and Family Welfare, Government of India.

Thus, at least one-sixth of the members of the governing board of PHFI consist of senior public servants. At the hearing held on 24-1-2012, the respondent claimed that most of the Government officials on the board of PHFI were occupying such positions in ‘private capacity’.

This Bench is of the view that such a claim is untenable. It is difficult to assume that senior public servants can be on the board of an organisation like PHFI — which has numerous interactions with the Government, in private capacity. In fact, this would necessarily imply a conflict of interest. The Commission can only assume that such public servants must necessarily be acting on behalf of the Government — when they are required to take executive decisions as members of the board in a public-private partnership (PPP) such as PHFI. Any other conclusion would be an improper slur on their integrity. It is not possible that India’s leading public servants could be acting in any manner, but as representatives of the Government when they are on the board of PHFI. It is also true that significant funding is provided by the Government to PHFI. Hence, it is presumed that the five officials on the board of PHFI are discharging their duties as public servants.

The RTI Act does not specify ‘complete control’ in section 2(h). As per P. Ramanatha Aiyar’s, ‘The Law Lexicon’ (2nd Ed., Reprint 2007 at p. 410), the term ‘control’ means — ‘power to check or restrain; superintendence; management . . . . . . .”. It appears that the presence of senior Government servants on the board may check or ensure that decisions taken in PHFI are in consonance with the Government’s avowed objectives. Therefore, the presence of a fair degree of Government control on the decisions of PHFI cannot be ruled out. It follows that PHFI is ‘controlled’ by the appropriate Government. This may not be complete control, but five top public servants would exercise some degree of control, which would be significant.

The respondent had doing the hearing also admitted receiving Rs.65 crore from the Government. In this regard, reliance may also be placed on the complainant’s contention that in the 20th Report of the Department-Related Parliamentary Standing Committee on Health and Family Welfare submitted to the Rajya Sabha (2007), it was noted that “The Government of India is contributing Rs.65 crore, approximately one-third of the initial seed capital required for kickstarting the PHFI and for establishment of two Schools of Public Health. The remaining amount (approximately Rs.135 crore) is being raised from outside the Government, namely, Melinda & Bill Gates Foundation (Rs.65 crore) and from high net-worth individuals. PHFI is managed by an independent governing board that includes 3 members from the Ministry of Health and Family Welfare viz. Secretary (H&FW); DG ICMR and DGHS. T. K. A. Nair, Principal Secretary to Prime Minister, Dr. M. S. Ahluwalia, Vice-Chairman, Planning Commission; Sujata Rao, AS&PD, NACO, Ministry of Health; Dr. Mashelkar, DG CSIR are also members of the governing board. The presence of the officials from Government would ensure that the decisions taken in PHFI are in consonance with the objectives for which PHFI has been supported by Government of India. It is expected that all members of the Governing Board would ensure the functioning of the Foundation as a professional organisation and with complete transparency.” (emphasis added). Thus, the Parliamentary Standing Committee also assumed that the Vice- Chairman of the Planning Commission, Principal Secretary to the Prime Minister and other public servants were ensuring that decisions of PHFI were in consonance with the Government’s objectives and complete transparency. PHFI’s refusal to accept it is coverage by the RTI Act seems at variance with this.

Further, though the term ‘financed’ is qualified by ‘substantial’, section 2(h) of the RTI Act does not lay down what actually constitutes ‘substantial financing’. It is akin to ‘material’ or ‘important’ or ‘of considerable value’ and would depend on the facts and circumstances of the case. The funding sources of PHFI are foundations, private donors and the Ministry of Health and Family Welfare, Government of India (MH&FW). At the hearing held on 24-1-2012, the respondent stated that PHFI was set up in 2006 with an initial fund corpus of Rs.200 crore (at present Rs.219 crore), out of which Rs.65 crore were provided as grant by MH&FW. It follows that Government funding in PHFI is to the tune of 30%, which cannot be considered as insubstantial. Moreover, even if taken on absolute terms, a grant of Rs.65 crore given by the Government from its corpus of public funds cannot be considered as insignificant and would render PHFI as being ‘substantially financed’ by funds from the Government.

Citizens have a right to know about the manner, extent and purpose for which public funds are being deployed by the Government. Having said so, not every financing of an entity in the form of a grant by the Government would qualify as ‘substantial — but certainly a grant of over Rs.1 crore would constitute ‘substantial financing’ rendering such entity a public authority under the RTI Act.

Furthermore, the respondent also stated that PHFI is a public-private partnership. It is relevant to mention that PPPs are in the nature of legally enforceable contractual agreements between public authorities and private organisations with clearly laid out terms and conditions, and rights and obligations. PPPs, by their very nature, stipulate certain contributions by the Government such as giving land at a concessional rate, grants, mo-nopoly rights, etc. In cases such as grants, direct funding by the Government can be easily calculated. In cases such as giving monopoly rights or land at a concessional rate, etc., value(s) must be attached and the same would tantamount to indirect financing by the Government. In other words, PPPs envisage a partnership with public funds — directly or indirectly — and therefore citizens have a right to know about the same.

As a consequence of being a public-private partnership, PHFI has received a substantial grant of Rs.65 crore from the Government initially. Further, as per the complainant’s contention — PHFI has been receiving free land and handsome financial grants from state governments for setting up ‘Indian Institutes of Public Health’ (IIPHs) as part of the public-private partnership. For instance, the Andhra Pradesh Government provided PHFI with 43 acres of land in Rajendra Nagar area of Hyderabad free of cost and Rs.30 crore in financial grant for setting up IIPH. The Gujarat Government provided 50 acres in Gandhinagar and Rs.25 crore as grant. The Orissa Government provided 40 acres near Bhubaneswar and the Delhi Government spent Rs.13.82 crore on acquiring 51.19 acres of Gram Sabha land in Kanjhawala village for PHFI to set up IIPH. Hence, there appears to be substantial financing both directly and indirectly by the Government. It follows from the above that PHFI is controlled and substantially financed by the Government.

Therefore, this Commission rules that PHFI is a public authority u/s.2(h) of the RTI Act.

I may note that PHFI subsequent to the hearing, itself agreed to submit itself to the jurisdiction of the RTI Act and the Commission further noted as under:

“It may not be out of place to mention that in recent years, there has been an emergence of multitude of public-private partnerships in different sectors. As described above, PPPs envisage an arrangement between the Government and private entities with clearly laid down rights and obligations. By their very nature, PPPs stipulate certain contributions from the Government, which may be monetary as well as non-monetary — to which values can be attributed. Moreover, PPPs envisage a certain degree of Government control in their functioning so that the decisions taken are in accordance with the objectives for which the partnership was set up. Given the above, PPPs would come within the ambit of ‘public authorities’ as defined in the RTI Act, thereby enabling citizens to know/obtain information about them. At present, most PPPs do not even accept the applicability of the RTI Act to them and wait for the issue to be adjudicated upon at the Commission’s level. For this some citizen has to pursue this matter. Such practices are required to be brought to a minimum and PPPs must comply with the provisions of the
RTI Act.”

In this instance the Commission notes with some dismay that the highest levels of public servants in India did not accept the citizen’s enforceable Right to Information in PHFI, despite the Government substantially funding it and exercising some control.

This strengthens the plea by the Commission that all public-private partnership agreements must have a clause that they are substantially funded by the appropriate Government and hence accept that they are public authorities as defined in the RTI Act. Without this, even an Institution like PHFI which has a distinguished board tries to refuse the Indian citizen his enforceable fundamental right. Finally, the Commission ruled:

“PHFI is public authority u/s.2(h) of the RTI Act and directed the chairman of PHFI to appoint a Public Information Officer and a First Appellate Authority — as mandated under the RTI Act before 15 March 2012 and also ensure compliance with section 4 of the RTI Act.”

[Kishan Lal v. Director (Development & Strategy) Public Health Foundation of India, New Delhi, decision No. CIC/SG/C/2011001273/17356 complaint No. CIC/SG/C/2011/001273, decided on 14-2-2012]

Gaming or Gambling?

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Introduction

“What’s in a name?” asks Shakespeare.

Apparently a lot, if you are considering whether a particular venture is a ‘gaming venture’ or a ‘gambling venture’. While the two terms sound similar, there is a world of a difference between the two. With India’s online gaming market growing by leaps and bounds, there is a keen interest in setting up gaming ventures and investing in/acquiring Indian gaming companies. Several venture funds/large corporations have invested in gaming ventures in India. For instance, recently Walt Disney Company has acquired 100% stake in Indiagames Ltd. by buying out 42% stake held by the promoters and others for around $ 80 million. Games2Win, one of India’s oldest gaming portals has raised over $ 11 million from various venture funds. Thus, to say that the interest in this sector is large would be an understatement.

In India, gaming is a permissible activity, but gambling is either prohibited or heavily regulated. There are several laws which are relevant when one considers the nature of a venture. This Article gives an overview of this interesting subject.

Legal ecosystem

Let us first understand the various laws which deal with this subject:

(a) Under the Constitution of India, the Union Government is empowered to make laws regulating the conduct of lotteries.

(b) Under the Constitution, the State Governments have been given the responsibility of authorising/ conducting lotteries and making laws on betting and gambling.

(c) Hence, we must look at the Acts of each of the 28 States and 7 Union Territories regarding gambling/gaming.

(d) The following are the various laws which regulate/ restrict/prohibit gambling in India:

  • Public Gambling Act, 1867: This Central legislation provides for the punishment for public gambling in certain parts of India. It is not applicable in Maharashtra and other States which have repealed its application.

  • Bombay Prevention of Gambling Act, 1887 applies in Maharashtra and regulates gaming in the State.

  • Other State legislations: Acts of other States, such as the Delhi Public Gambling Act, 1955, Madras Gambling Act, etc. These Acts are more or less similar to the Public Gaming Act as the object of these Acts is to ban/restrict gambling. The State Acts repeal the applicability of the Public Gambling Act in their respective States.

  • Section 294-A of the Indian Penal Code, 1860: This Section provides for a punishment for keeping a lottery office without the authorisation of the State Government.

  • Section 30 of the Indian Contract Act, 1872: This Section prevents any person from bringing a suit for recovery of any winnings won by way of a ‘wager.’

  • The Lotteries (Regulation) Act, 1998: This Central legislation lays down guidelines and restrictions in conducting lotteries.

  • The Prevention of Money Laundering Act, 2002 which requires maintenance of certain records by entities engaged in gambling. ?
  • States which expressly permit gambling:

Sikkim: The Sikkim Casino Games (Control and Tax) Rules, 2002 permit setting up of casinos in Sikkim.

The Sikkim Online Gaming (Regulation) Act, 2008 + Sikkim Online Gaming (Regulation) Rules, 2009 provide for licences to set up online gaming websites (for gambling and also betting on games like cricket, football, tennis, etc.) with the servers based in Sikkim. Other than this law, India does not have any specific laws targeting online gambling or gaming.

Goa: An amendment to the Goa, Daman and Diu Public Gambling Act, 1976 allows casinos to be set up only at fivestar hotels or offshore vessels with the permission. That is the reason Goa has floating casinos or casinos at fivestar hotels.

West Bengal: The West Bengal Prize Competition and Gambling Act, 1957 excludes ‘skill-based’ card games like poker, bridge, rummy and nap from its operation. Thus, in the State of West Bengal, a game of poker is expressly excluded from the definition of gambling.

Public Gambling Act

Since this is a Central Act on which several State Acts have been based, we may examine this Act. Section 1 of this Act has laid down three conditions and all three must be fulfilled in order that a place is treated as a common gaming house:

(a) It must be a house, walled enclosure, room or place;
(b) cards, dice, tables or other instruments of gaming are kept in such place; and
(c) these instruments are used for profit or gain of the occupier whether by way of charging for the instruments or for the place.

It is a moot point whether these definitions can be extended to online gaming ventures.

Section 3 of the Act levies a penalty for owning or keeping or having charge of a common gaming house. The penalty is a fine not exceeding Rs.200 or an imprisonment for a term up to 3 months. It may be noted that the public gaming house concept can even be extended to a private residence of a person if gambling activities are carried on in such a place. Thus, casual gambling at a house party may be treated, if all the conditions are fulfilled, as gambling and the owner of the house may be prosecuted.

Exception u/s.12: Even if all the above-mentioned 3 conditions are fulfilled, if it is a game of mere skill, the penal provisions do not apply. What is a game of skill is a question of fact and has been the subject-matter of great debate. In Chamarbaugwalla v. UOI, AIR 1957 SC 628, it was held that competitions which involve substantial skill are not gambling activities.

In State of AP v. K. Satyanarayana, 1968 AIR 825 (SC), the Court analysed whether a game of rummy was a game of skill. It held as follows:

  • Rummy was not a game of mere chance like three cards;

  • It requires considerable skill as fall of cards is to be memorised;

  • The skill lies in holding and discarding cards;

  • It is mainly and preponderantly a game of skill; and

  • Chance is a factor, but not the major factor.

  • Held, that rummy is not a game of chance, but a game of skill.
In Dr. K. R. Lakshmanan v. State of TN, 1996 2 SCC 226 the Court analysed whether betting on horses is a game of chance or mere skill:

  • Gambling is payment of a price for a chance to win. Gaming may be of skill alone or skill and chance.

  • In a game of skill chance cannot be entirely eliminated, but it depends upon superior knowledge, training, attention, experience and adroitness of players.

  • A game of chance is one in which chance predominates over the element of skill and a game of skill is one in which the element of skill dominates over the chance element.

  • It is the dominant element which determines the character of the game.

  • In horse-racing the person betting is supposed to have full knowledge of horse, jockey, trainer, owner, turf, race system, etc.

  • Horses are given specialised training.

  • Books are printed giving details of the above which persons betting study.

Hence, betting on horse-racing is a game of skill since skill dominates over chance. In Bimalendu De v. UOI, AIR 2001 Cal. 30, Kaun Banega Crorepati aired on Star TV was held not to be a game of chance, but was held to be a game of skill. Elements of gambling, i.e., wagering and betting are missing from this game. Only a player’s skill is tested. He does not have to pay or put any stake in the hope of a prize.

In M. J. Sivani v. State of Kar, AIR 1995 SC 1770, video games parlours were held to be common gaming houses. Video games are associated with stakes of money or money’s worth on the result of a game, be it a game of pure chance or a mixed game of skill or chance. For a commoner it is difficult to play a video game with skill. Hence, they are not games of mere skill.

Thus, the facts and circumstances of each game would have to be examined as to whether it falls within the domain of mere skill and hence, is a game or is it more a game of chance and hence, gambling.

Bombay Prevention of Gambling Act, 1887
This Act is similar to the Public Gambling Act in its operation, but has some differences. It defines the term ‘gaming’ to include wagering or betting except betting or wagering on horse-races and dog-races in certain cases.

‘Instruments of gaming’ are defined to include any article used as a subject-matter of gaming or any document used as a register or record for evidence of gaming/proceeds of gaming/winnings or prizes of gaming.

The definition of common gaming house includes places where the following activities take place:

  •     Betting on rainfall

  •     Betting on prices of cotton, opium or other commodities

  •     Betting on stock-market prices

  •     Betting on cards.

The punishment under this Act is imprisonment up to two years. Police officers have been given sub-stantial powers to search and seize and arrest under this Act.

Indian Penal Code

Section 294A of the Indian Penal Code provides that whoever keeps any office or place for drawing any lottery not authorised by the Government is punishable with a fine up to Rs.1,000. What is a lottery has not been defined. Courts have held that it includes competitions in which prizes are decided by mere chance. However, if the game requires skill, then it is not a lottery. A newspaper contained an advertisement of a coupon competition which included coupons to be filled by the newspaper buyers with names of horses selected by them as likely to come 1st, 2nd, 3rd in a race. The Court held that the game was one of skill, since filing up the names of the horses required specialised knowledge about the horses and some element of skill — Stoddart v. Sagar, (1895) 2 QB 474.

Prevention of Money Laundering Act, 2002

The PMLA covers any designated business or profession carrying on activities of playing games of chance for cash or kind. Such a business must maintain for 10 years a record of all transactions between it and the clients.

Further, it must verify and maintain the records of the identity of all its clients/customers.

FEMA/Foreign Direct Investment Policy

Remittance abroad out of lottery winnings, out of income from racing/ridding or for purchase of lottery tickets, sweepstakes is prohibited under the Foreign Exchange Management Act.

The FEMA Regulations (FEMA 20/2000-RB) and the Consolidated FDI Policy of 2011 issued vide Circular 2/2011, state that Foreign Direct Investment of any sort is prohibited in gambling and betting including casinos. Thus, FDI is not allowed in any gambling ventures, whether online or offline. Further, foreign technology collaboration in any form, including licensing for franchise, trademark, brand name, management contract is prohibited for lottery businesses and betting/gambling activities.

However, if the ventures are gaming ventures, then there are no sectoral caps or conditions for the FDI and there are no restrictions for foreign technology collaboration agreements. 100% FDI is allowable in gaming ventures, online and offline. Thus, one comes back to the million dollar question — is the venture one of gambling or gaming? The tests explained above would be applicable even to determine whether FDI is permissible in the venture.

Role of a CA
Looking at the raging controversy over gaming versus gambling, a CA should alert his clients about the potential dangers of setting up a gambling venture or a venture where there is no clarity over whether it falls under gambling or gaming. Similarly, if he is associated with a fund/investor investing in such a doubtful venture, he should red flag the transaction for his client’s notice. He should recommend that a well-reasoned legal opinion on this aspect should be obtained and only then the transaction should be proceeded with. The risks involved with getting into a gambling venture are very high and could even lead to the arrest/prosecution of the persons involved with it. The old adage of ‘better safe than sorry’ should be the mantra in such a case.

Finally, I have to say that the most surprising aspect has been the speed at which the folks in India adapt to Western practices. They learn fast, really, really fast.

— Sanjay Kumar

Is it fair to Initiate Recovery Proceedings When Tax is Already Deducted?

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The Income-tax Act, 1961 (‘the Act’) provides for two modes of collection and recovery of income taxes under Chapter XVII.

One and major mode of collection of tax preferred by the Department is through Tax Deduction at Source — TDS. The other mode is to collect taxes directly from the assessee — this is used where tax deduction is not provided for or TDS is not enough to meet the tax liability — advance tax and other modes of collection prescribed in Chapter XVII. In the recent years the Income Tax Department has pursued vigorously the TDS mode of collection of taxes by extending the areas of Tax Deducted at Source — refer section 192 to section 206 of the Act.

Section 205 grants protection to the deductee assessee. This is a logical step on having adopted ‘Tax Deducted at Source’ mechanism. The section reads as under:

“205. Bar against direct demand on assessee. — Where tax is deductible at the source under (the foregoing provisions of this Chapter), the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.”

The Plain reading of this section makes it clear that whenever and wherever tax is deductible under the provisions of this Chapter and where the tax has been so deducted, no direct demand can be raised on the deductee. This implies that to the extent of TDS, demand cannot be raised on the deductee. For raising demand on the deductor a suitable provision has been inserted in section 201 of the Act. Under this provision whenever there is a default in deducting either the whole tax or part of the tax the deductor is deemed to be an ‘assessee in default’.

Thus there are self-contained foolproof provisions in the Act to protect the deductee under Chapter XVII.

The Act provides for filing of returns of income by individuals, trusts and businesses wherein the assessee has to provide detailed information regarding the name and address of the deductor, along with the TAN of the deductor and the amount of tax deducted at source based on the certificate issued by the deductor in Form 16A. Under the previous rules these certificates were to be attached with the return of income. However, in the present era of computerisation, the tax credits can be viewed under Form 26AS online. These returns of income are also affirmed by the assessee by verification provided in the form of return of income. Thus he is held responsible for claims of tax credits he is making.

After the deductee has filed the return and complied with all the formalities, no demand can be raised against the assessee for the amount of Tax Deducted at Source.

Reality

Having made such a foolproof scheme, in reality the income-tax authorities all over the country are blatantly practising something which is not provided under the Act. This was revealed in the two decisions of the Bombay High Court. The first decision is reported in (2007) 293 ITR 539 (Bom.) in the case of ACIT v. Yashpal Sahani.

In this case the assessee was a salaried employee and the tax deducted at source by his employer was not paid to the Government. Hence even Form No. 16 was not issued to the employee. At the time of assessment the employee produced all the proofs including salary slips to prove that ‘tax was deducted’. The Assessing Officer without paying any attention to the legal provisions u/s. 205 referred above, raised a demand on the employee and even issued order for attaching employee’s bank account. The employee-assessee even wrote letters to Income-tax Officer, TDS circle of the employer to initiate necessary proceedings against the employer. The employee challenged the action of Assessing Officer of attaching his bank account. The Court rightly held that the action of the Assessing Officer was not as per law and even if the credit of the TDS is not available to the petitioner-assessee for want of TDS certificate, the fact that the tax has been deducted at source from salary income of the petitioner would be sufficient to hold that u/s.205 of the Act, the Revenue cannot recover the TDS amount with interest from the employee. While dealing with this judgment the Court also referred and relied upon decisions reported in 242 ITR 638 (Gauhati) and 278 ITR 206 (Kar.).

Without paying any heed to such crucial decisions the Department continues its unlawful actions against thousands of assessees, mostly salaried. As a result, assessees having salary income continue to receive intimations under the section 143(1) with demands calculated along with interest and have to file rectification applications either themselves or through their chartered accountants or lawyers or ITP’s. As is the practice, the Department does not act on these rectification applications and keep on sending illegal demand notices to the employee-assessees, irrespective of the fact that there is bar against raising direct demand on the employee. Unfortunately, at times the professionals involved also do not point out the provisions of section 205. This unlawful practice continues unabated leading to harassment of the assessee and results in corruption. This author has not seen any indirect demand on the employer deductor raised by the Income-tax Department under such circumstances. However, the employees are made to dance to the tune of recovery officers and at times suffer at the half-baked computer system of the Department.

Very recently the matter again came up before the Bombay High Court in writ petition No. 6861 of 2011. The Court vide its order clearly held that the intimation demand is not correct and hence set aside the same.

Although procedural, section 205 grants protection to the employee (deductee) whose tax is fully deducted but unfortunately they are still made to visit incometax offices for no fault of theirs and in blatant violation of the legal provisions. The irony is that even the newly created CPC Bangalore has continued this unlawful practice.

This author has drawn the attention of the regulator i.e., the CBDT to stop this harassment. This step will be in the interest of the Department because of its avowed objective of being ‘assessee friendly’.

In all fairness the author advocates and expects the CBDT to issue proper instructions urgently to its officers to:

  • desist from attaching assets of the deductee.
  • take action against the deductor.
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Judiciary — Maintenance of highest standard of propriety and probity — Rule of Law — Constitution of India Arts. 235 and 233.

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[ Arundhati Ashok Walavalkar v. State of Maharashtra, (2011) 11 SCC 324]

The issue that was raised in the appeal by the appellant was whether the Disciplinary Authority was justified in imposing on the appellant the punishment of compulsory retirement in terms of Rule 5(1)(vii) of the Maharashtra Civil Services (Discipline & Appeal) Rules, 1979 on the ground that the appellant-Magistrate was found travelling without ticket in a local train thrice and on each occasion, the behaviour of the appellant-Magistrate with the railway staff in asserting that the Magistrates need not have a ticket was improper and constituted a grave misconduct.

The inquiry officer held that the appellant was found travelling without ticket at least thrice and her behaviour on each occasion was far from proper and not commensurate with the behaviour of a judicial officer. The disciplinary authority considered her case and took a decision that she was guilty of misconduct and therefore decided to impose the penalty of compulsory retirement which was accepted by the State Government and consequently the impugned order of compulsory retirement was issued against the appellant.

It was submitted by the appellant that the aforesaid punishment awarded was disproportionate to the charges levelled against her and that she should at least be directed to be paid her pension which could be paid to her if she was allowed to work for another two years. It was submitted that the appellant had completed 8 years of service and if she would have worked for another two years, she would have been entitled to pension.

The Court held that it was unable to accept the aforesaid contention for the simple reason that the Court could probably interfere with the quantum of punishment only when it was found that the punishment awarded was shocking to the conscience of the Court. The case was of judicial officer who was required to conduct herself with dignity and manner becoming of a judicial officer. A judicial officer must be able to discharge his/ her responsibilities by showing an impeccable conduct. In the instant case, she not only travelled without tickets in a railway compartment thrice but also complained against the ticket collectors who accosted her, misbehaved with the railway officials and in such circumstances, how could the punishment of compulsory retirement awarded to her be said to be disproportionate to the offence alleged against her. In a country governed by rule of law, nobody is above law, including judicial officers. In fact, as judicial officers, they have to present a continuous aspect of dignity in every conduct. If the rule of law is to function effectively and efficiently under the aegis of our democratic setup, Judges are expected to, nay, they must nurture an efficient and enlightened judiciary by presenting themselves as a role model. A Judge is constantly under public glaze and society expects higher standards of conduct and rectitude from a Judge. Judicial office, being an office of public trust, the society is entitled to expect that a Judge must be a man of high integrity, honesty and ethical firmness by maintaining the most exacting standards of propriety in every action. Therefore, a Judge’s official and personal conduct must be in tune with the highest standard of propriety and probity. Obviously, this standard of conduct is higher than those deemed acceptable or obvious for others. Indeed, in the instant case, being a judicial officer, it was in her best interest that she carries herself in a decorous and dignified manner. If she has deliberately chosen to depart from these high and exacting standards, she is appropriately liable for disciplinary action.

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Public document — Annual return — Liability of directors — Companies Act, 1956 sections 159, 163 and Indian Evidence Act, 1872, section 74.

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The appellant, who was a non-executive Director on the Board of M/s. Lapareil Exports (P) Ltd., resigned from the directorship w.e.f. 31-8-1998. On 20-11-1998, recording the resignation of the appellant, the company filed statutory Form 32 with the Registrar of Companies. A notice dated 10-12-2004 was issued to the appellant regarding dishonour of alleged cheques u/s.138 of the Negotiable Instruments Act (the Act) by the respondents. The appellant, replied to the said notice informing the respondents that she had resigned from the directorship of the company long back in 1998.

The respondents filed a complaint u/s.138 of the Act against the company arraying the appellant as an accused. It was stated in the complaint that the appellant and the other accused were the directors of the company and were responsible for the conduct of the business and also responsible for the day-to-day affairs of the company and that all the accused persons, who were in charge of and were responsible to the company for the conduct of its business at the time the offence was committed shall be deemed to be guilty of the offence. The appellant filed a petition before the High Court for quashing the complaint. The High Court held that the annual return dated Sept. 30, 1999, filed by the company was not a public document, and dismissed the petition.

The Supreme Court allowing the appeal held that inasmuch as the appellant’s reply to the statutory notice contained specific information that the appellant had resigned from the company in 1998, the respondent was not justified in not referring to it in the complaint and arraying her as accused in the complaint filed in the year 2005.

Further though the appellant was unable to produce a certified copy of Form 32, as it was not available with the Registrar of Companies, a copy of Form 32 was placed before the High Court. A reading of sections 159, 163 and 610(3) the Companies Act, 1956, makes it clear that there is a statutory requirement u/s.159 of the Companies Act, that every company having a share capital shall file with the Registrar of Companies an annual return which includes details of the existing directors. Section 163 requires the annual return to be made available by a company for inspection and section 610 which entitles any person to inspect the documents kept by the Registrar of Companies. The High Court committed an error in ignoring section 74 of the Indian Evidence Act, 1872 which refers to public documents and s.s (2) thereof which provides that public documents include ‘public records kept in any state of private documents’. A conjoint reading of sections 159, 163 and 610(3) of the 1956 Act, read with s.s (2) of section 74 of the Indian Evidence Act, 1872, makes it clear that a certified copy of the annual return is a public document and the contrary conclusion arrived at by the High Court could not be sustained.

In view of the fact that the appellant had established that she had resigned from the company as a director in 1998, well before the relevant date, namely, in the year 2004, when the cheques were issued, the criminal complaint in so far as the appellant was concerned was to be quashed.

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Order — Reasons — Failure to give reasons amounted to denial of justice — Karnataka Sales Tax, 1957

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[ Dishnet Wireless Ltd. v. ACCT, Bangalore & Ors., (2011) 45 VST 255 (Karn.)]

The petitioner, an Internet service operator extending services of broadband, web hosting, etc., provided a CD-ROM to its customers in order to access the services and recovered service charges from them. The assessment order passed on the petitioner under the Karnataka Sales Tax Act, 1957, was challenged in appeal before the Appellate Authority who dismissed the appeal. The proceedings were remitted to the Assessing Officer by the Appellate Tribunal. The Assessing Authority rejected the contention of the petitioner that the internet services did not involve sale of CD-ROM and that the services were subjected to service tax and passed orders of assessments. The said order was challenged in writ petition before the High Court.

The Court observed that the orders impugned ex facie animate non-application of mind, as the Assessing Officer without adverting to the contentions advanced by the petitioner in the objections and recording findings over the same, held the objections untenable. Application of mind means consideration of the contentions advanced by the parties with reference to proved facts and the law applicable to the said facts. It is for the AO to consider all relevant material and eschew irrelevant material to record findings, and conclusions. Recording of reasons is a part of fair procedure. Reasons are harbinger between the mind of the maker of the decision in the controversy and the decision or conclusion arrived at. They substitute subjectivity with objectivity.

Giving of reasons in support of their conclusion by judicial and quasi-judicial authorities when exercising initial jurisdiction is essential for various reasons. First, it is calculated to prevent unconscious or arbitrariness in reaching the conclusions. The very search for reasons will put the authority on the alert and minimise the chances of unconscious infiltration of personal bias or unfariness in the concusion. It is part of fair procedure and failure to give reasons amounted to denial of justice.

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Foreign currency more than US $ 5000 — Legal requirement to make a declaration — Customs Act, 1962 sections 77, 113 and 114.

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[In re: Kanwaljit Singh Bala 2012 (275) ELT 272 (GOI)]

Brief facts of the case are that the appellant was leaving for London on 11-2-2009 from Kolkata Airport. After completing immigration formalities while the appellant was proceeding towards the security area, one of the AIU officers intercepted him. On being asked the appellant declared of having 1500 Euro and IC Rs.5200. Not being satisfied, the person was searched which resulted in the recovery of 5200 Euro, 1000 UK Pounds, and 98 US$, collectively valued at Rs.3,73,609, kept concealed inside the brief worn by him. The appellant could not produce any licit document in support of his legal acquisition, possession and/or exportation of the said currency. Accordingly, the said currency was seized on the reasonable belief that the same was being smuggled out of the country in contravention of the provisions of the Customs Act, 1962 read with FEMA, 1999 rendering the same liable to confiscation under the relevant provisions of the Customs Act, 1962.

The said seized currency was confiscated u/s. 113(d)(1) of the Customs Act, 1962 with an option to redeem the same on payment of redemption fine of Rs.1,50,000. A penalty of Rs.75,000 was also imposed. The applicant preferred an appeal before the jurisdictional Commissioner of Customs (Appeals) who upheld the action taken by the lower authorities but reduced the redemption fine to Rs.1 lakh and penalty to Rs.50,000 only.

The appellant submitted that the foreign currency carried by him was a part of the foreign currency drawn from M/s. Clarity Financial Service Ltd. (RBI authorised money exchange), Kolkata. Due to sudden return to India, the appellant again converted the Malaysian currency into Euro & UK Pound at airport for utilising the same for subsequent visit to UK. In a hurry no money exchange receipt was obtained.

The Revisionary Authority observed that that as per Foreign Exchange Management (Import and Export of Currency) Regulations 2000, Indian National can bring any amount of foreign currency and declaration before the customs is required only if the money value exceeds US $ 5000. The money value of the unspent amount is equivalent to US $ 8500 (approx.) and non-declaration of the same has been due to impression that no declaration is required for unspent money (procured legally in India) on return.

On perusal of Regulations 5, 6 and 7 (with relevant RBI Notifications) as above, it is evident that a compulsory requirement of making a Custom Declaration Form (CDF) is the legal requirement specifically when the impugned foreign currency involved is more than US $ 5000 (or equivalent). In this case the applicant has not made any declaration in CDF. Therefore, any of the plea as made herein that impugned foreign currency is a part of his legally acquired money which was 1st taken out and then brought in after his visit abroad cannot be ‘Independently verified’. Only a proper CDF could be the connecting legal document which is very much missing in this case. In the absence of such a vital link the entire theory/submissions appears to be an after thought and excuse. Therefore taking into account a settled principle of law that ignorance of law is no excuse, the Govt. is of the opinion that the applicant(pax) had not declared the impugned foreign currency to the customs officers in contravention of section 77 of the Customs Act, 1962 and had intentionally attempted to export the same illegally.

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Award — International Commercial Arbitration — Enforcement of Arbitral award in India.

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[ Phulchand Exports Ltd. v. O.O.O. Patriot, (2001) 10 SCC 300

The question raised was whether enforcement of the award given by the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of Russian Federation, Moscow in favour of the Respondent was contrary to public policy of India u/s.48(2)(b) of the Arbitration and Conciliation Act, 1996.

By a contract between PE Ltd. India and 0.0.0. Patriot Moscow Russia, a transaction relating to sale of India long grain was entered. It so happened that the vessel carrying the goods suffered an engine failure, as a result of which it was declared ‘General Average’ by the Master of the vessel. The entire cargo was sold out to compensate the cost of rescue of the vessel. The buyers lodged claim against the sellers for recovery of amount of USD 285,569.53 in the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation. The Arbitral Tribunal did not find any merit in the defences set up by the sellers. It held that the sellers broke the terms of the contract and shipped goods 16 days later than the stipulated time and the vessel freighted by the sellers left the port of Kandla (India) 38 days later than the time of departure stipulated in the contract. The vessel with the cargo had not arrived at the port of Novorossiysk on the date of lodging the claim (as a matter of fact the vessel never reached the port of destination). The Arbitral Tribunal therefore held that there was clear term about the commitment of the sellers to reimburse the amount paid towards goods in case of non-arrival.

The Arbitral Tribunal, therefore, split the amount of losses between the parties — buyers and sellers — in equal parts.

The buyers filed Arbitration Petition before the High Court of Bombay for enforcement of the above award. The sellers contested the petition on the ground that subject award was contrary to the principles of public policy and, therefore, the award was unenforceable. The Court did not find any merit in the objections raised by the sellers; and held that the award dated October 18, 1999 could be enforced as a decree of the Court.

On further appeal, the Supreme Court observed that a plain reading of section 74 of the Contract Act would show that it deals with the measure of damages in two classes of cases (i) where the contract names a sum to be paid in case of breach and (ii) where the contract contains any other stipulation by way of penalty. The stipulation for reimbursement in the event stated in last para of clause 4 of the contract is not in the nature of penalty; the clause is not in terrorem. It is neither punitive nor vindictive. Moreover, what has been provided in the contract is the reimbursement of the price of the goods paid by the buyers to the sellers. The clause of reimbursement or repayment in the event of delayed delivery/arrival or non-delivery was not to be regarded as damages. Even in the absence of such clause, where the seller has breached his obligations at threshold, the buyer is entitled to the return of the price paid and for damages.

The transactions covered by section 23 are the transactions where the consideration or object of such transaction is forbidden by law or the transaction is of such a nature that if permitted would defeat the provisions of any law or the transaction is fraudulent or the transaction involves or implies injury to the person or property of another or where the Court regards it immoral or opposed to public policy. Whether particular transaction is contrary to a public policy would ordinarily depend upon the nature of transaction. Where experienced businessmen are involved in a commercial contract and the parties are not of unequal bargaining power, the agreed terms must ordinarily be respected as the parties may be taken to have had regard to the matters known to them. The sellers and the buyers in the present case are business persons having no unequal bargaining powers. They agreed on all terms of the contract being in conformity with the international trade and commerce. It is the precise sum which the sellers are required to reimburse to the buyers, which they had received for the goods, in case of the non-arrival of the goods within the prescribed time.

The appeal was dismissed.

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Sale in course of import vis-à-vis sale from duty-free shop

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As per Article 286 of the Constitution of India, transactions taking place in the course of import and export are made immune from levy of sales tax. In pursuance of the said Article the transactions of sale/ purchase in course of import/export are defined in section 5 of the CST Act, 1956. The transaction of sale in course of import is defined in section 5(2) of the CST Act, 1956. The said sub-section is reproduced below.

“S. 5. When is a sale or purchase of goods said to take place in the course of import or export.

(2) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the Customs frontiers of India.”

It can be seen, from the above, that there are two limbs. As per the first limb, the sale/purchase occasioning the movement of goods from foreign country is considered to be in the course of import. Therefore, the transaction of direct import is covered by this category. In addition to the above, there is scope to cover further transaction also as in the course of import under this limb.

The second limb covers transactions which are effected by transfer of documents of title to goods before the goods cross the Customs frontiers of India.

In a recent judgment, the Supreme Court had an occasion to specify the scope of the above section. Reference can be made to the judgment in the case of M/s. Hotel Ashoka v. Assistant Commissioner of Commercial Taxes & anr., (Civil Appeal No. 2560 of 2010 decided on 3-2-2012).

Facts of the case

The assessee (appellant) was M/s. Hotel Ashoka, a hotel managed by India Tourism Development Corporation Limited (ITDCL). The assessee had duty-free shops at international airports in India. At duty-free shops, the assessee sold several articles including liquor to foreigners and also to Indians going abroad or coming to India by air. The issue arose, under Karnataka Sales Tax Act, in respect of dutyfree shop at international airport at Bengaluru. For sales effected at the said place, the assessee took a stand that no tax was payable under the sales tax laws, as the goods were sold before importing the goods or before the goods had crossed the Customs frontiers of India. The sales tax authorities levied sales tax and raised demand. A writ petition was filed before the Karnataka High Court. However, the High Court rejected the writ petition holding it to be not maintainable on the ground of availability of alternative remedies. The matter came before the Supreme Court.

In respect of maintainability the Supreme Court observed that since the SLP was already admitted and the matter pertained to the year 2004-05, it would not be in the interest of justice to relegate the assessee to statutory authorities especially when the legal position is very clear and the law is also in favour of the appellant.

Judgment on merits
On merits, the Supreme Court examined the legal position. In para-18, the Supreme Court observed as under:

“18. It is an admitted fact that the goods which had been brought from foreign countries by the appellant had been kept in bonded warehouses and they were transferred to duty-free shops situated at international airport of Bengaluru as and when the stock of goods lying at the duty-free shops was exhausted. It is also an admitted fact that the appellant had executed bonds and the goods, which had been brought from foreign countries, had been kept in bonded warehouses by the appellant. When the goods are kept in the bonded warehouses, it cannot be said that the said goods had crossed the Customs frontiers. The goods are not cleared from the Customs till they are brought in India by crossing the Customs frontiers. When the goods are lying in the bonded warehouses, they are deemed to have been kept outside the Customs frontiers of the country and as stated by the learned senior counsel appearing for the appellant, the appellant was selling the goods from the duty-free shops owned by it at Bengaluru international airport before the said goods had crossed the Customs frontiers.”

Further in para 23 and 24 the Supreme Court has observed as under:

“23. Looking to the aforestated legal position, it cannot be disputed that the goods sold at the duty-free shops, owned by the appellant, would be said to have been sold before the goods crossed the Customs frontiers of India, as it is not in dispute that the duty-free shops of the appellant situated at the international airport of Bengaluru are beyond the Customs frontiers of India i.e., they are not within the Customs frontiers of India.”

“24. If this is the factual and legal position, in our opinion, looking to the provisions of Article 286 of the Constitution, the State of Karnataka has no right to tax any such transaction which takes place at the duty-free shops owned by the appellant which are not within the Customs frontiers of India.”

The Sales Tax Department contented that the sale, to be in course of import, should take place beyond the territories of India and not within the geographical territory of India. Further, it was also contented that there was no evidence about sale by transfer of documents of title to goods for effecting the sales before the goods have crossed Customs frontiers of India. Both the objections were rejected by the Supreme Court observing as under:

“30. They again submitted that ‘in the course of import’ means ‘the transaction ought to have taken place beyond the territories of India and not within the geographical territory of India’. We do not agree with the said submission. When any transaction takes place outside the Customs frontiers of India, the transaction would be said to have taken place outside India. Though the transaction might take place within India but technically, looking to the provisions of section 2(11) of the Customs Act and Article of the Constitution, the said transaction would be said to have taken place outside India. In other words, it cannot be said that the goods are imported into the territory of India till the goods or the documents of title to the goods are brought into India. Admittedly, in the instant case, the goods had not been brought into the Customs frontiers of India before the transaction of sales had taken place and, therefore, in our opinion, the transactions had taken place beyond or outside the Customs frontiers of India.”

“31. In our opinion, submissions with regard to sale not taking effect by transfer of documents of title to the goods are absolutely irrelevant. Transfer of documents of title to the goods is one of the methods whereby delivery of the goods is effected. Delivery may be physical also. In the instant case, at the duty-free shops, which are admittedly outside the Customs frontiers of our country, the goods had been sold to the customers by giving physical delivery. It is not disputed that the goods were sold by giving physical possession at the duty-free shops to the customers. Simply, because the sales had not been effected by transfer of documents of title to the goods and the sales were effected by giving physical possession of the goods to the customers, it would not mean that the sales were taxable under the Act. Thus, we do not agree with the aforestated submissions made by the learned counsel appearing for the Revenue.”

Thus, the Supreme Court has finally decided the scope of section 5(2) of the CST Act, 1956.

Conclusion
This judgment can be said to be a comprehensive judgment deciding the scope of section 5(2) of the CST Act, 1956. It has resolved the issue once for all. The judgment will also be useful in respect of sale effected from bonded warehouses.

Dy. Commissioner v. MTZ Polyfilms Ltd. ITAT ‘B’ Bench, Mumbai Before N. V. Vasudevan (JM) and Pramod Kumar (AM) ITA No. 5015/Mum./2009 A.Y.: 2004-05. Decided on: 30-12-2011 Counsel for revenue/assessee: P. C. Mourya/ Jitendra Jain

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Section 36(1)(iii), section 37(1) and section 43B — Interest paid on unpaid purchase consideration — It was held that such interest is governed by the provisions of section 37(1) and not by section 36(1) (iii) — Further held that the provisions of section 43B are not applicable to such interest.

Facts:
The assessee was engaged in the business of manufacturing of polyester films. It had its manufacturing facilities at GIDC, Gujarat. It was allotted plot of land by GIDC. As per the terms of allotment the assessee was required to pay the purchase consideration of the land in instalments with interest. For the year under consideration the assessee had paid the sum of Rs.99.97 lakh as interest to GIDC and the same was claimed as business expenditure. According to the AO the expenditure was of capital in nature. On appeal the CIT(A) allowed the appeal and held that the expenditure was of revenue in nature.

Before the Tribunal the Revenue supported the order of the AO and further contended that since the interest to GIDC was unpaid, it is not allowable u/s.43B.

Held:
The Tribunal, as per the order of the CIT(A), noted that the fact that the production by the assessee had commenced in October, 1988 was not controverted. Accordingly, it held that the interest paid during the year cannot be considered as capital expenditure. Further, it referred to the decision of the Supreme Court in the case of Bombay Steam Navigation Co. Pvt. Ltd. v. CIT, (1953) (56 ITR 52), where the interest paid on purchase consideration of the assets by the amalgamated company was held as allowable as business expenditure u/s. 10(2)(xv) of the 1922 Act (equivalent to section 37(1) of the 1961 Act) According to the Apex Court, the expression ‘capital’ used in section 10(2)(iii) of the 1922 Act (equivalent to section 36(1)(iii) of the 1961 Act), in the context in which it occurred, meant money and not any other asset. The Apex Court further observed that an agreement to pay the balance consideration due by the purchaser did not in truth give rise to a loan. On that basis the Apex Court held that the interest paid was not allowable as deduction u/s.10(2)(iii) of the 1922 Act, but as business expenditure u/s.10(2) (xv) of the 1922 Act. Applying the above ratio, the Tribunal held that the interest paid to GIDC by the assessee was allowable u/s.37(1). It further agreed with the assessee that the provisions of section 43B would also not apply to the facts of the present case, since unpaid sale consideration cannot be said to be monies borrowed.

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(2012) 49 SOT 387 (Delhi) Harnam Singh Harbans Kaur Charitable Trust v. DIT (Exemption) Dated: 16-12-2011

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Section 80G of the Income-tax Act, 1961 — After omission of proviso to clause (vi) of section 80G(5), existing approval expiring on or after 1-10- 2009 would be deemed to have been extended in perpetuity unless specifically withdrawn.

The assessee-charitable trust’s recognition for exemption u/s.80G expired on 31-3-2011. The assessee made an application in Form No. 10G seeking exemption for the period after 31-3-2011. The Director of Income-tax (Exemption) rejected this application for renewal of exemption and also held that assessee was earning huge money/fees in the name of medical treatment which was nothing but income from commercial activity carried out under the name of medical relief and, accordingly, invoked section 2(15) for withdrawing exemption.

The Tribunal held in favour of the assessee. The Tribunal noted as under:

(1) Proviso to clause (vi) of section 80G(5) has been omitted by the Finance Act, 2009 with effect from 1-10-2009. This proviso imposing the limitation of five years was omitted by the Finance Act, 2009 with effect from 1-10-2009 to provide that the approval once granted shall continue to be valid in perpetuity.

(2) The impact and scope of the omission of proviso to clause (vi) of s.s (5) of section 80G has been explained by the Board in its Circular No. 5, dated 3-6-2010 clarifying that the existing approval expiring on or after 1-10-2009 will be deemed to have been extended in perpetuity unless specifically withdrawn.

(3) Therefore, in the instant case, the filing of an application for renewal of exemption after the expiry of the same on 31-3-2011 by the assessee was not required. Once the exemption granted stands extended in perpetuity by operation of law, merely moving an application by the assessee would not divest it of the assessee’s right to treat the exemption to have been extended in perpetuity, which right had accrued to the assessee in view of the aforesaid Circular and the amendment made in the Act.

(4) Proviso to section 2(15) inserted w.e.f. 1-4-2009, provides that the advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application or retention of the income from such activity.

(5) It is clear that this proviso is applicable in respect of charitable institutions engaged in the activity of advancement of any other object of general public utility i.e., the 4th limb of section 2(15). The first three limbs i.e., relief of the poor, education and medical relief are outside the purview of the aforesaid proviso inserted to section 2(15). It has been admitted by the Director of Income-tax (Exemption) himself that the assessee-society has been registered u/s.12A as charitable trust and is running dispensary and health centre, which makes it clear that the charitable purpose for which the assessee-society is established includes medical relief and it is not a case of advancement of any other object of general public utility. Therefore, applying the provisions of proviso to section 2(15) to the instant case by the Director of Income-tax (Exemption) is also totally misplaced and for that reason, the assessee cannot be said to be not eligible for exemption u/s.80G.

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(2012) 49 SOT 312 (Delhi) Dhoomketu Builders & Developers (P.) Ltd. v. Addl. CIT A.Y.: 2006-07. Dated: 30-11-2011

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Section 28(i) r.w.s. 56 of the Income-tax Act, 1961 — Participation in tender for sale of land demonstrates that business of real estate development is set up during the year.

For the relevant assessment year, the assessee, which was a 100% subsidiary of DLF Ltd., filed its return of income declaring a loss. The assessee company borrowed Rs.186 crore from DLF Ltd. and the paid the same amount as earnest money deposit for a tender for sale of land. This deposit was received back along with interest of Rs.0.62 crore and the assessee, in turn, returned the amount to DLF Ltd. and paid interest of Rs.1.79 crore, resulting in a net loss of Rs.1.17 crore. The Assessing Officer disallowed the loss on the ground that the assessee had not commenced any business activity and, therefore, it was not entitled for interest expenses as claimed by it. Similarly, the interest income received by the assessee deserved to be assessed as an ‘income from other sources’ and not as a business income.

The CIT(A) allowed the adjustment of interest received against the interest paid and determined the net loss of Rs.1.17 crore under ‘Income from Other Sources’, but did not allow carry forward of this loss.

The Tribunal allowed the assessee’s claim. The Tribunal noted as under:

(1) Participation in the tender was starting of one activity which enabled the assessee to acquire the land for development. The actual development of the land is immaterial for construing that business of the assessee has been set up.

(2) The investment of Rs.186 crore was not as a deposit out of surplus funds; rather it was earnest money paid by the assessee for the purchase of land. Thus, the assessee had demonstrated that its business was set up during the accounting period relevant for this assessment year.

(3) Therefore, income of the assessee had to be assessed under the head ‘business income’ and consequently loss computed by the first appellate authority at Rs.1.17 crore deserved to be permitted for carry forward.

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(2012) TIOL 64 ITAT-Bang. Shakuntala Devi v. DCIT A.Y.: 2007-08. Dated: 20-12-2011

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Section 22, section 23(1)(a), section 23(1)(c) — Annual value of property which could not be let out throughout the previous year needs to be taken as ‘nil’ in accordance with the provisions of section 23(1)(c).

Facts:
The assessee, a non-resident Indian, owned eight properties in India. During the relevant previous year, four properties were let out, whose annual value was offered for taxation under the head ‘Income from House Property’. Annual value of one property was claimed to be ‘nil’ on the ground that it be regarded as self-occupied property. For the other 3 properties in Mumbai annual value was regarded as ‘nil’ under the provisions of section 23(1)(c) of the Act. Before the AO it was submitted that of these 3 properties — one was old and was not in a habitable condition. The second property was let out in the earlier year and also in the subsequent year. It was contended that despite the best efforts, the assessee could not find a tenant for this property. As for third property it was purchased during the year and was let out in subsequent year. The AO held that since the assessee had not shown any proof regarding the efforts made to let out these three properties, it was quite inconvincible that there can be any hardship faced in letting out since these properties were located in prime localities like Bandra and Andheri (East) in Mumbai. He considered 70% of the rent received in subsequent year for each of the two properties to be their annual value. Accordingly, he added Rs.6,95,555 to the total income of the assessee.

Aggrieved the assessee preferred an appeal to the CIT(A) who held that the annual value of these properties needs to be computed u/s.23(1)(a) of the Act.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the Lucknow ‘B’ Bench has, in the case of Smt. Indu Chandra v. DCIT, (ITA No. 96 (Lkw)/2011, dated 29-4-2011, for A.Y. 2004- 05), following the decision of the Mumbai Bench in the case of Premsudha Exports (P) Ltd. v. ACIT, [110 ITD 158 (Mum.)] decided the issue in favour of the assessee. The Tribunal also noted that the facts involved in the present case are similar to the facts before the Lucknow Bench in the case of Smt. Indu Chandra. Accordingly, following the decision of the Lucknow Bench, the Tribunal deleted the addition made by the AO and sustained by the CIT(A).

The appeal filed by the assessee was allowed.

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(2012) TIOL 63 ITAT-Mum. Savita N. Mandhana v. ACIT A.Y.: 2006-07. Dated: 7-10-2011

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Section 28(va), section 55(2)(a) — Consideration received by a shareholder of a company, for transfer of shares of the company, under a share transfer agreement which includes non-compete covenant and the assessee is not actively engaged in business, is chargeable to tax as capital gains.

Facts:
The assessee along with other shareholders of Mandhana Boremann Industries Pvt. Ltd., who were all family members of the assessee, transferred their shares to Paxar BV, a Dutch Company. The shares were acquired by Paxar BV for a consideration of Rs.570 per shares which worked out to Rs.45.60 crore for the shares held by Mandhana family. All the shareholders in Mandhana family entered into an agreement with Paxar BV for the purpose of this transfer of shares, and one of the clauses in the agreement also provided that the transferor shall not carry on, or be interested in, any business which competes with the business of Mandhana Boremann. The AO held that a part of the sale consideration of Rs.570 is attributable to the non-compete covenant and is liable to be taxed in the hands of the assessee u/s.28(va). The AO computed the value of shares, by break-up method, at Rs.365. Accordingly, the balance amount of Rs.205 per share was treated as towards non-compete fee and brought to tax u/s.28(va) in the hands of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO in principle, but held that only Rs.41 per share can be attributed to non-compete fees. He also held that the decision of a Co-ordinate Bench in the case of Homi Aspi Balsara v. ACIT, (2009 TIOL 789 ITAT-Mum.) does not help the assessee as there is specific mention of non-compete obligations in the share sale agreement, and therefore, part of the sale consideration of shares is attributable to the non-compete obligations.

Aggrieved, the assessee preferred an appeal to the Tribunal and contended that no part of consideration can be attributed to non-compete fees.

Held:
The Tribunal noted that the even in the case of Homi Aspi Balsara there was a specific non-compete obligation and yet the Co-ordinate Bench had taken a view that no part of sale consideration of shares could be attributed to be taxed in the hands of the assessee as business income u/s.28(va).

Following the ratio of the decision of the Mumbai Tribunal in Homi Balsara the amounts held to be attributable to non-compete obligations are taxable as capital gains and not as business income. To this extent it reversed the order of the CIT(A). It observed that since the entire consideration was already offered for taxation as capital gains, the bifurcation between consideration attributable to sale of shares and for non-compete obligations is rendered academic and infructuous. It also noted that since it was uncontroverted position that the assessee was not actively engaged in the business it was not necessary to examine the matter any further. The Tribunal upheld the stand of the assessee in treating the entire consideration received on sale of shares as taxable under the head ‘capital gains’.

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(2012) TIOL 65 ITAT-Mum. Tanna Agro Impex Pvt. Ltd. v. Addl. CIT A.Y.: 2007-08. Dated: 29-7-2011

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Section 40(a)(ia), section 194H — Hedging transactions of commodities, if in the nature of derivatives transactions, do not attract the provisions of section 194H.

Facts:
The assessee was engaged in export, import and wholesale trade of agro products. Since the assessee had not deducted tax at source from payments of Rs. 4,61,769 made towards brokerage on commodities hedging transactions, the AO disallowed the same u/s.40(a)(ia).

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the order of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal noted that the payment towards commission or brokerage in respect of transactions in ‘securities’ is not covered by the scope of tax deduction at source requirements and as per Explanation (iii) to section 194H the meaning assigned to the expression ‘securities’ is the same as assigned to it in clause (h) of section 2 of Securities Contracts (Regulations) Act, 1956 which covers transactions of derivatives. It held that hedging transactions of commodities, if in the nature of derivatives transactions, will be outside the ambit of transactions on which TDS requirements come into play. Since this aspect of the matter was not clear from the material on record, the Tribunal remitted the matter to the file of the AO for fresh adjudication in the light of the abovementioned observations. The Tribunal also clarified that except in the abovementioned situation, commission paid on transactions of sales and purchases of commodities through commodities exchange are clearly covered by the scope of section 194H.

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(2011) 130 ITD 137/9, Chennai Bench D ACIT v. Harshad Doshi A.Y.: 2006-07. Dated: 23-4-2011

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Section 2(22)(e) — Advance which carries with an obligation of repayment is covered u/s.2(22) (e). Trade advance/advance given for effecting commercial transaction did not fall under the ambit of section 2(22)(e). Amount advanced by company to its directors under board resolution, for specific business purpose would not fall under the mischief of section 2(22)(e) of the Act.

Facts:
The assessee was managing director in DHL Ltd. The company was engaged in the business of development of property. The company advanced funds to purchase plot of lands in the name of the assessee on understanding that land is to be given to DHL for development. The AO on scrutiny of books of DHL Ltd., discovered that there is advance of Rs.3.59 crore and rental advance of Rs.19.89 lakh issued to the assessee. The AO applied provisions of deemed dividend u/s.2(22)(e) on these advances. In order to support its contention the AO also relied on the capital gain shown by the assessee in his books.

Appeal was filed by the assessee to the CIT(A). The assessee contended that advance of Rs.3.59 crore was taken to acquire land which was to be developed by DHL. The main intention behind bifurcating ownership of land and development rights was to reduce the cost of stamp duty so that they remain competitive in this fierce market. The CIT(A) deleted the above addition except sum of Rs.39.62 lakh accepting the fact that transaction was motivated by business consideration and commercial expediency.

The CIT(A) also deleted the addition of lease advance of Rs.19.89 lakh accepting holding it to be advance given for lease of building to be used as office by DHL Ltd.

Aggrieved by the order of the CIT(A), the AO filed appeal before the ITAT.

Held:
Trade advance and monies given for business expediency could not be taxed as dividend. In order to bring any advance within the four corners of section 2(22)(e), advance should carry an obligation of repayment.

Advance given by the company to managing director to purchase the land in its name and then transfer the development rights to the company was a business arrangement made with a view to avoid payment of stamp duty twice, first on land and then on proposed construction of flats.

The assessee was well within the law to adopt such practice which would reduce the cost incidence to the ultimate customer. The AO’s contention that bifurcation was done with an intention to circumvent provisions of the Tamil Nadu Stamp Act could not be accepted being for an unlawful purpose.

Also, the project executed by DHL Ltd. does not appear in the capital gain computation of lands as disclosed by the assessee. So there was no direct nexus as alleged by the AO.

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Interest on refund: Section 244A of Incometax Act, 1961: A.Y. 2002-03: Interest u/s.244A is to be calculated from the date of payment of tax till the date of refund and not from the 1st of April of the assessment year or from date of regular assessment.

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[CIT v. Vijaya Bank, 246 CTR 548 (Kar.)]

For the A.Y. 2002-03, the Assessing Officer granted interest u/s.244A of the Act from the date of regular assessment. The CIT(A) and the Tribunal held that interest should be calculated from the date on which the self-assessment tax was paid by the assessee.

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

“Where the assessee is entitled to refund of self-assessment tax, interest u/s.244A is to be calculated from the date of payment of tax till the date of refund and not from the 1st of April of the assessment year or from the date of regular assessment.”

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Export profit: Deduction u/s.10BA of Incometax Act, 1961: A.Y. 2005-06: DEPB is a profit derived from export business for the purpose of deduction u/s.10BA.

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[CIT v. Arts & Crafts Exports, 246 CTR 463 (Bom.)]

The Tribunal held that DEPB is a profit derived from export business for the purposes of deduction u/s.10BA of the Income-tax Act, 1961. In appeal by the Revenue, the following question was raised:

“Whether on the facts and circumstances of the case, the Tribunal erred in law in holding DEPB as a profit derived from export business for the purpose of deduction u/s.10BA ignoring the ratio of decision in the case of Liberty India v. CIT, (2009) 225 CTR (SC) 233; (2009) 28 DTR (SC) 73; (2009) 317 ITR 218 (SC) having binding force on facts and circumstances of the case?”

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

“The Counsel for the Revenue fairly states that though the question has been raised by relying upon the decision of the Apex Court in the case of Liberty India v. CIT, the said decision has no relevance to the facts of the present case. In this view of the matter, the question raised by the Revenue cannot be entertained.”

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Deemed income: Remission or cessation of trading liability: Section 41(1) of Incometax Act, 1961: A.Y. 1995-96: Explanation 1 to section 41(1) is prospective and not retrospective: Applies w.e.f. A.Y. 1997-98: Not applicable to A.Y. 1995-96: For A.Y. 1995-96 mere writing back of amounts in relation to unclaimed salaries, wages and bonus and unclaimed suppliers’ and customers’ balances could not amount to cessation of liability: Amounts (uncashed cheques, dividend paid to shareholders, provision<

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[CIT v. Mohan Meakin Ltd., 18 Taxman.com 47 (Del.)]

In the A.Y. 1995-96, the assessee had written back certain amount representing (a) unclaimed salaries, wages and bonus; (b) credit balances unclaimed by the suppliers; (c) credit balances unclaimed by the customers; (d) uncashed cheques; (e) excess dividend; and (f) excess provision made for doubtful debts in its books of account. The Assessing Officer added these amounts as deemed income relying on the provisions of section 41(1) of the Income-tax Act, 1961. The Tribunal deleted the additions.

On appeal by the Revenue, the Delhi High Court upheld the deletion and held as under:

“(i) Salaries, wages and bonus

The contention of the assessee was that there was no cessation or remission of the liability and, therefore, by merely writing back the credit balances in the books of account, which is an unilateral action of the assessee, the liability cannot be said to have ceased.

The concerned assessment year was 1995-96. Explanation 1 to section 41(1) was added by the Finance (No. 2) Act, 1996 with effect from 1-4-1997. The Explanation provides that the unilateral act of the assessee by way of writing off such liability in its accounts would be considered as remission or cessation of the liability. In Circular No. 762, dated 18-2-1998, which is reported in (1998) 230 ITR (St.) 12, the CBDT has explained the reason behind insertion of the above Explanation. In paragraph 28.3 of the Circular it has further been stated that the amendment will take effect from 1-4-1997 and will, accordingly, apply in relation to A.Y. 1997-98 and subsequent years. The Explanation, therefore, does not have any retrospective effect. It does not, therefore, apply to the A.Y. 1995-96. For this reason, the mere writing back of the loan in relation to unclaimed salaries, wages and bonus cannot amount to cessation of the liability.

(ii) Suppliers’ credit balances and customers’ credit balances

So far as the suppliers’ credit balances and the customers’ credit balances are concerned, the same reasoning is applicable for the year under consideration. Accordingly, those two additions made by the Assessing Officer are also not in accordance with law.

(iii) Uncashed cheques

In the case of the uncashed cheques, the finding of the Tribunal is that there was no claim for deduction in any of the earlier years and, therefore, the amount cannot be added u/s.41(1). It is not in dispute, as it cannot be, that the amount of uncashed cheques was not allowed as deduction in any of the earlier assessment years. As per the assessee this represents the cheques received and remaining on hand on the last day of the accounting period. The Tribunal has accepted this stand. The Assessing Officer and the Commissioner (Appeals) have not stated why the stand of the assessee was not acceptable. The Revenue has also not stated and averred that in the assessment order now passed, this aspect was not considered and examined. In these circumstances, section 41(1) can hardly have any application. Accordingly, the decision of the Tribunal deleting the addition is to be upheld.

(iv) Excess dividend

Dividend paid by a company to its shareholders is not an allowable deduction under the Income-tax Act as it represents an appropriation of the profits after they have been earned. If the dividend is not allowable as a deduction, the excess written back cannot also be assessed as income u/s.41(1).

(v) Excess provision for doubtful debts

The finding of the Commissioner (Appeals) is that the provision was never allowed as a deduction in the earlier years. Since the finding that the provision was not allowed in the earlier year as a deduction is not under challenge, the amount cannot be added u/s.41(1) when it is written back in the accounts. The decision of the Tribunal is to be upheld.”

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Capital or revenue expenditure: Section 37 of Income-tax Act, 1961: A.Y. 1998-99: Airport authority: Expenditure towards removal of encroachments in and around technical area of airport for safety and security: Is revenue expenditure.

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[Airport Authority of India v. CIT, 340 ITR 407 (Del.) (FB)]

The assessee is the Airport Authority managing the airports in India. The assessee incurred expenditure towards removal of encroachments in and around technical area of the airport for safety and security. The assessee’s claim for deduction of the expenditure was disallowed by the Assessing Officer and the disallowance was confirmed by the Tribunal.

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

“The land belonged to the assessee. In the scheme formulated by the Government for removal of encroachers and their rehabilitation amount was not for acquisition of new assets. The payment was made to facilitate its smooth functioning of the business in a profitable manner and, therefore, such an expenditure was revenue in nature.”

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Deduction u/s.80IB Manufacture: Production of perfumed hair oil by using coconut oil and mineral oil is manufacture: Assessee entitled to deduction u/s.80IB.

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The assessee was engaged in the business of production of perfumed hair oil using coconut oil and mineral oil as per the requirement of M/s. Hindustan Lever Ltd. The assessee’s claim for deduction u/s.80IB was rejected by the Assessing Officer holding that the activity did not amount to manufacture for the purposes of section 80IB. The Tribunal allowed the assessee’s claim.

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

“(i) The finding of fact recorded by the ITAT is that the production of the perfumed hair oil as per the requirement of Hindustan Lever Ltd. constituted manufacture of a product distinct from the inputs used and on the said manufactured product the Central Excise Duty has been paid. The Apex Court in the case of CCE v. Zandu Pharmaceutical Works Ltd., reported in (2006) 12 SCC 453 has held that addition of perfume to coconut oil to produce perfumed oil constitutes a manufacturing process.

(ii) Moreover, in the present case it is not in dispute that the deduction u/s.80IB of the Act has been allowed to the assessee in the first year of manufacture and that order has attained finality.

(iii) In these circumstances, the decision of the ITAT in holding that the assessee is engaged in manufacturing activity and hence entitled to avail deduction u/s.80IB cannot be faulted.”

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Capital gain: Computation: Section 2(42A) and section 48 Indexed cost: A.Y. 2001-02: Acquisition of capital asset by gift, will, etc.: Indexed cost to be determined w.r.t. the holding of the asset by the previous owner.

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The settler of the assessee-trust had acquired the property before 1-4-1981 and he settled it on trust on 5-1-1996. The assessee-trust sold the property and computed the indexed cost of acquisition on the basis that it ‘held’ the property from the time the settler had held it. The Assessing Officer accepted that the settler’s cost of acquisition had to be treated as the assessee’s cost of acquisition but held that the settler’s period of holding could not be treated as the assessee’s period of holding. The Tribunal upheld the decision of the Assessing Officer.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal, followed the judgment of the Bombay High Court in the case of CIT v. Manjula J. Shah, 16 Taxman.com 42 (Bom.) and held as under:

“(i) The Department’s contention that in a case where section 49 applies the holding of the predecessor has to be accounted for the purpose of computing the cost of acquisition, cost of improvement and indexed cost of improvement but not for the indexed cost of acquisition will result in absurdities. It leads to a disconnect and contradiction between ‘indexed cost of acquisition’ and ‘indexed cost of improvement’.

(ii) This cannot be the intention behind the enactment of section 49 and Explanation to section 48. There is no reason why the Legislature would want to deny or deprive an assessee the benefit of the previous holding for computing ‘indexed cost of acquisition’ while allowing the said benefit for computing ‘indexed cost of improvement’.

(iii) The benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gains tax on the ‘real’ or actual ‘gain’ and not on the increase in the capital value of the property due to inflation.

(iv) The expression ‘held by the assessee’ used in Explanation (iii) to section 48 has to be understood in the context and harmoniously with other sections and as the cost of acquisition stipulated in section 49 means the cost for which the previous owner had acquired the property, the term ‘held by the assessee’ should be interpreted to include the period during which the property was held by the previous owner.”

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Double Taxation Avoidance Agreement — While India is not a party to the Vienna Convention, it contains many principles of customary international law, and the principle of interpretation of Article 31 of the Vienna Convention, provides a broad guide-line as to what could be an appropriate manner of interpreting a treaty in Indian context also.

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In a petition filed before the Supreme Court by an organisation called Citizen India based upon media and scholarly reports alleged that various individuals, mostly citizens, but may also include non-citizens, and other entities with presence in India, have generated and secreted away large sums of monies, through their activities in India or relating to India, in various foreign banks, especially in tax havens and jurisdiction that have strong secrecy laws with respect to the contents of bank accounts and the identities of individuals holding such accounts and that the Government of India and its agencies have been very lax in terms of keeping an eye on the various unlawful activities generating unaccounted monies; the consequent tax evasion and such laxity extends to efforts to curtail the flow of such funds out and into, India and seeking the Court’s intervention to order proper investigations and monitor continuously, the action of the Union of India, and any and all governmental departments and agencies in these matters.

In deciding the matter, the Supreme Court had an occasion to consider the Double Taxation Avoidance Agreement with Germany and the Vienna Connection and it made certain observations with respect to the same.

The Supreme Court noted the relevant portions of Article 26 of the Double Taxation Avoidance Agreement with Germany, which reads as follows:

“1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of or the determination of appeals in relation to, the taxes covered by this Agreement. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

2. In no case shall the provisions of paragraph 1 be construed so as to impose on Contracting State the obligation:

(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process or information, the disclosure of which would be contrary to public policy (order public).”

The Supreme Court observed that the above clause in the relevant agreement with Germany would indicate that there is no absolute bar or secrecy. Instead the agreement specifically provides that the information may be disclosed in public court proceedings which the instant proceedings are. The proceedings before it, relate both to the issue of tax collection with respect to unaccounted monies deposited into foreign bank accounts, as well as with issues relating to the manner in which such monies were generated, which may include activities that are criminal in nature also. Comity of nations cannot be predicated upon clauses of secrecy that could hinder constitutional proceedings such as these, or criminal proceedings.

The Supreme Court noted that the claim of the Union of India is that the phrase ‘public court proceedings’, in the last sentence in Article 26(1) of the Double Taxation Avoidance Agreement only relates to proceedings relating to tax matters. The Union of India claims that such an understanding comports with how it is understood internationally. In this regard, the Union of India cited a few treatises. According to the Supreme Court, however, the Union of India did not provide any evidence that Germany specifically requested it to not reveal the details with respect to accounts in the Liechtenstein even in the context of proceedings before it.

The Supreme Court held that in Article 31, ‘General Rule of Interpretation’, of the Vienna Convention of the Law of Treaties, 1969, provides that a “treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” While India is not a party to the Vienna Convention, it contains many principles of customary international law, and the principle of interpretation of Article 31 of the Vienna Convention, provides a broad guideline as to what could be an appropriate manner of interpreting a treaty in Indian context also.

The Supreme Court said that in Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706; (2004) 10 SCC 1, it approvingly had noted Frank Bennion’s observations that a treaty is really an indirect enactment instead of a substantive legislation, and that drafting of treaties is notoriously sloppy, whereby inconveniences obtain. In this regard this Court further noted that the dictum of Lord Widgery C.J. that the words “are to be given their general meaning, general to lawyer and layman alike . . . . The meaning of the diplomat rather than the lawyer.” The broad principle of interpretation, with respect to treaties, and the provisions therein, would be that the ordinary meanings of words be given effect to, unless the context requires or otherwise. However, the fact that such treaties are drafted by diplomats, and not lawyers, leading to sloppiness in drafting also implies that care has to be taken to not render any word, phrase, or sentence redundant, especially where rendering of such word, phrase or sentence redundant would lead to a manifestly absurd situation, particularly from a constitutional perspective. The Government cannot bind India in a manner that derogates from constitutional provisions, values and imperatives.

The last sentence of the Article 26(1) of the Double Taxation Avoidance Agreement with Germany, “They may disclose this information in public court proceedings or in judicial decisions,” is revelatory in this regard. It stands out as an additional aspect or provision, and an exception, to the proceeding portion of the said Article. It is located after the specification that information shared between the Contracting Parties may be revealed only to “persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to taxes covered by this Agreement.” Consequently, it has to be understood that the phrase ‘public court proceedings’ specified in the last sentence in Article 26(1) of the Double Taxation Avoidance Agreement with Germany refers to court proceedings other than those in connection with tax assessment, enforcement, prosecution, etc., with respect to tax matters. If it were otherwise, as argued by the Union of India, then there would have been no need to have that last sentence in Article 26(1) of the Double Taxation Avoidance Agreement at all. The last sentence would become redundant if the interpretation pressed by the Union of India is accepted. Thus, notwithstanding the alleged convention of interpreting the last sentence only as referring to proceedings in tax matters, the rubric of common law jurisprudence, and fealty to its principles, leads us inexorably to the conclusion that the language in this specific treaty, and under these circumstances cannot be interpreted in the manner sought by the Union of India.

The Supreme Court while agreeing that the language could have been tighter, and may be deemed to be sloppy, to use Frank Bennion’s characterisation, negotiation of such treaties are conducted and secured at very high levels of Government, with awareness of general principles of interpretation used in various jurisdictions. It is fairly well known, at least in common law jurisdictions, that legal instruments and statutes are interpreted in a manner whereby redundancy of expressions and phrases is sought to be avoided.

The Supreme Court inter alia constituted Special Investigation Team to take over the matter of investigation of the individuals whose names had been disclosed by Germany as having accounts in Liechtenstein; and expeditiously conduct the same.

OffShore Transfer of Shares Between Two NRs Resulting in Change in Control OF Indian Company — Withholding Tax Obligation and Other Implications

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Part-I

Introduction
1.1 With the liberalisation and the history of strong economic growth in the last few years and with the prospects of reasonably sound economic growth, India has become one of the major attractive destinations for Foreign Direct Investment (FDI) for carrying on business by Multinational Companies (MNC). 1.2 Large amount of FDI has flown to India through Mauritius for various commercial purposes including the tax advantage under Double Taxation Avoidance Agreement entered into by India with Mauritius (Mauritius Tax Treaty).

1.2.1 Under the Mauritius Tax Treaty, one major advantage is with regard to non-taxability of capital gain arising on alienation of shares of the Indian companies. Under the Mauritius Tax Treaty, the right to tax such a gain is only with Mauritius (with some exception with which we are not concerned in this writeup) and as such, the same cannot be taxed in India. For this purpose, Mauritian Company is required to establish that it is tax resident of Mauritius and which can generally be established by producing Tax Residency Certificate (TRC) issued by the Tax Department of Mauritius. Such TRC issued by the Mauritius tax officer is generally regarded as sufficient evidence for that purpose by virtue of the CBDT Circular No. 789, dated 13-4-2000. This legal position is also confirmed by the judgment of the Apex Court in Azadi Bachao Andolan (263 ITR 507). There is a historical background to this position, with which also we are not concerned in this write-up.

1.3 For the purpose of withholding tax from the taxable income received by a Non-Resident (NR), section 195(1) of the Income-tax Act, 1961 (the Act) provides that any person responsible for paying (Payer) to NR (Payee) any sum chargeable under the Act is liable to deduct tax (TDS) as provided therein. There are some exceptions to this, with which we are not concerned in this write-up. Effectively, under these provisions, the Payer is liable to deduct tax at source (TAS) in such cases and pay the amount so deducted to the Government. Procedural provisions are also made for compliance of these provisions and consequences are also provided for default in compliance of these provisions, with which also we are, effectively, not concerned in this write-up.

1.4 Multinational Groups (MNG) generally operate through various companies in different jurisdictions where such operating companies are directly or indirectly controlled through downstream subsidiaries set up by the main holding company of the MNG. Such holding and subsidiary structures are common in commercial world for various business needs. One of the objectives of putting-up overseas holding and downstream subsidiary structure for FDI is also to provide for easy exit at a later stage when it is decided to withdraw from a business carried on in India through Special Purpose Vehicle (SPV) created in India. At the time of exit, in such cases, generally shares of overseas company are transferred to the buyer who, in the process, acquires control and management of Indian SPV. Such overseas transaction, many times, takes place between two NR entities.

1.5 In case of a transaction of the nature referred to in 1.4 above, of late, the Revenue Department has taken a stand that on account of transfer of shares of such overseas holding company, there is indirect transfer of underlying assets of the Indian company as the control and management of the Indian company gets indirectly transferred in such cases. Therefore, the capital gain arising in such offshore transaction between two NRs is liable to tax in India by virtue of provisions of section 9(1)(i) which, inter alia, provides that all income accruing or arising, whether directly or indirectly through the transfer of capital asset situate in India shall be deemed to accrue or arise in India. According to the Revenue, indirect transfer of capital asset situated in India is covered within the scope of this provision.

1.5.1 In view of the above stand of the Revenue, further stand is taken by the Revenue that the Payer NR entity is also required to deduct TAS u/s.195(1) while making payment to the transferor of the share, which is also another NR entity. If such obligation of TDS is not discharged, then the Payer is regarded as ‘assessee in default’ u/s.201 and he would be liable to pay the amount of such tax with interest and will also be subject to other consequences such as penalty, etc. The Payer could also be considered as representative assessee of the Payee u/s.163.

1.6 The issues referred to in paras 1.5 and 1.5.1 are under debate currently in many cases and different views were being taken. The issue became more vital in view of the judgment of the Bombay High Court in the case of Vodafone International Holdings B. V. (VIH) reported in 329 ITR Page 126.

1.6.1 Recently, the issues referred to in para 1.6 above, came up for consideration before the Apex Court in the case of VIH and this hotly debated issue got finally decided. Relevant principles of law have been decided/re-iterated in this case and therefore, the judgment becomes more relevant.

1.7 Now, since the Revenue has filed a review petition before the Apex Court for recalling the judgment in Vodafone‘s case, it would also be useful to consider the judgment of the High Court in little greater detail. Various contentions were raised by both the parties before the High Court, as well as Supreme Court. Both the judgments are very long. For the sake of brevity and space constraints, only some of the main contentions are referred to in this write-up. For the same reasons, even the facts of the case are very broadly given in brief. For the sake of convenience, the percentages of shareholding referred to herein at different places are rounded off.

Vodafone International Holdings B.V. v. UOI — 329 ITR 126 (Bom.)

Facts in brief
2.1 In 1992, Hutchison group of Hong Kong (HK) acquired interest in Mobile Telecommunication Industry in India, through a joint venture Company in India (JV Co.), Hutchison Makes Telecom Ltd., [subsequently renamed Hutchison Essar Ltd. (HEL)] through its overseas group of companies. In 1998, CGP Investment Holdings Ltd., (CGP) was incorporated in Cayman Islands (CI) of which the sole shareholder was Hutchison Telecommunication Ltd., HK (HTL). The CGP had set up two Wholly-Owned Subsidiaries (WOS) in Mauritius viz. Array Holdings Ltd. (Array) and Hutchison Telecommunication Services India Holdings Ltd., (HTI-MS).

Array, through its various downstream subsidiaries in Mauritius held 42% shareholdings interest in HEL. Further, 10% shareholding interest in HEL was held by CGP through certain overseas JV companies. HTL-MS had set up WOS in India, namely, 3 Global Services Pvt. Ltd. (3GSPL). The shareholding of HTL in CGP got transferred to another group com-pany [HTI (BVI Holding Ltd.) HTIHL (BVI)], a company incorporated in British Virgin Island (BVI). The HTIHL (BVI) was indirectly WOS of Hutchi-son Telecommunication International Ltd. (HTIL), a company incorporated in CI. HTIL was listed on stock exchange of New York and Hong Kong. As part of group restructuring and consolidation, the structure was further evolved with certain arrangements/ agreements and finally in 2006, the Hutchison group held 52% shareholding in HEL through structural arrangement of holding and subsidiary companies and it had also options to acquire through 3GSPL, a further 15% shareholding interest in HEL from certain Indian companies, subject to relaxation of FDI norms as the Essar group, JV partner, was already hold-ing 22% shareholding through Mauritius companies. Effectively, CGP through its downstream overseas subsidiaries held 42.43% (42%) interest in HEL and it had indirect interest of 9.62% (10%) in the equity of HEL through its pro rata shareholding (indirect) in some Indian companies which had direct/indirect equity interest in HEL. These Indian companies [viz., Telecom Investment India Pvt. Ltd. (TII) and Omega Telecom Holding P. Ltd. (Omega)] belong to (with majority shareholding) its Indian Partners (viz. Mr. Asim Ghosh, Mr. & Mrs. Analgit Singh and IDFC). The structure created was very complex and various commercial arrangements were made between group companies and others for that purpose. The detailed chart of the structure is appearing in the judgment of the High Court at pages 134/135.

2.2 Vodafone International Holdings B. V., Netherlands (VIH) is a company controlled by Vodafone group, UK (Vodafone) . The said VIH acquired the entire shareholding of CGP from HTIHL (BVI) vide transaction dated 11 -2-2007, as a result of which the Vodafone group indirectly acquired the interest of Hutchison group in HEL which that group held through structural arrangement of holding and subsidiary companies (referred to in para 2.1) either through Mauritius-based companies having Tax Residency Certificates (TRCs), or through other entities in which the interest of Hutchison group was held by Mauritius companies. On these facts, the Revenue took a stand that it was a case of acquisition of 67% controlling interest in HEL by VIH from HTIL and since HEL is a company resident in India, such controlling interest is an asset situated in India. Therefore, the capital gain arising from this transaction is taxable in India on the basis that though CGP is not a tax resident in India, it indirectly also holds underlying Indian assets of HEL. The transaction results into indirect transfer of capital assets situated in India. As such, VIH was also under obligation to deduct TAS u/s. 195 from the payment made for acquiring 67% interest of Hutchison group. This was disputed by VIH saying that it agreed to acquire share of CGP and as a consequence, it has direct/indirect control of 52% shareholding of HEL with call options to further acquire 15% shareholding.

2.3 Prior to the above arrangement of transfer of direct and indirect interest of Hutchison group to Vodafone group, certain events took place such as: in December 2006, HTIL had issued a statement stating that is has been approached by various potential-interested parties regarding possible sale of its equity interest in HEL; in December 2006, Vodafone group had made non-binding offer to HTIL for its direct and indirect shareholding in HEL; in February 2007, the offer was revised with binding offer on behalf of VIH for ‘HTIL’s shareholdings in HEL together with inter-related company loans; in February 2007, Bharti Infotel Pvt. Ltd. had also given a letter stating it has no objection to the proposed transaction (as Vodafone had some shareholding in the said company). Ultimately, final binding offer was made by Vodafone group on February 10, 2007 of US $ 11.076 billion.

2.3.1 On 11th February, 2007, Share Purchase Agreement (SPA) was entered into with HTIL [and not with HIHL (BVI) which was holding share of CGP] under which HTIL agreed to procure and transfer to VIH the entire issued share capital of CGP by HTIHL (BVI), free from all encumbrances together with all rights attaching or accruing, and together with as-signment of its loan interests. This was followed by announcement of Vodafone group on February 12, 2007 stating that it had agreed to acquire a controlling interest in HEL via its subsidiary VIH. On February 28, 2007 Vodafone group, on behalf of VIH, addressed a letter to Essar group for purchase of Essar’s entire shareholding in HEL under ‘Tag along rights’ of Essar group under its joint venture with Hutchison group in HEL and so on.

2.3.2 On 28th February, 2007, VIH filed an application with the Foreign Investment Promotion Board (FIPB) of the Union Ministry of Finance in which, effectively, it was requested to take note and grant approval under Press Note 1 to the indirect acquisition of 51.96% stake in HEL through an overseas acquisition of the entire shareholding of CGP from HTIHL (BVI). HTIL in its filing before US SEC had, inter alia, stated that a combined holding of the HTIL group was 61.88%, which is sought to be transferred. Therefore, on a query being raised by FIPB in regard to the difference in percentage of shareholding mentioned in the application and in the filing with US SEC, it was clarified that the variation is because of the difference in the US GAAP and Indian GAAP declarations that the com-bined holding for US GAAP purpose was 61.88% and for the Indian GAAP purpose it is 51.96% and the Indian GAAP number reflects accurately a true equity ownership and control position. Based on this clarification, FIPB granted a requisite approval. On 15th March, 2007, a settlement was also arrived at between HTIL and set of companies belonging to the Essar group on certain payments on the basis of which the Essar group indicated its support to the proposed transaction between Hutchison group and Vodafone group. For the purposes of running the business of JV with Essar Group, a term sheet agreement between VIH and Essar Group of companies was entered into for regulating various affairs of the HEL and the relationship of shareholders of the HEL. In this term sheet, it was, inter alia, stated that VIH had agreed to acquire the entire indirect shareholding of HTIL in HEL, including all rights, contractual or otherwise, to acquire directly or indirectly shares in HEL owned by others, which shares shall, for the purposes of the term sheet, be considered to be part of holding acquired by VIH.

2.3.3 In respect of the above transac-tion, a show- cause notice u/s.163 of the Income-tax Act, 1961 (the Act) was issued by the Revenue to HEL in August 2007 asking it to explain why it should not be treated as a representative assessee of VIH. A notice was issued u/s.201(1) and 201(1A) of the Act to VIH in September 2007 asking it to show cause as to why it should not be treated as an ‘assessee in default’ for failure to withhold tax. This action of the Revenue was challenged by VIH before the Bombay High Court in a writ petition in which the jurisdiction of the Revenue over the petitioner for issuing such a notice was challenged. The petition was dismissed by the Bombay High Court (311 ITR 46) declining to exercise its jurisdiction under Article 226 in a challenge to the show-cause notice. Against this, a Special Leave Petition (SLP) was filed by the petitioner before the Supreme Court which was also dismissed with a direction to Revenue to determine the jurisdictional challenge raised by the petitioner and the right of the petitioner to challenge the decision of the Revenue (if, determined against the petitioner) on this issue was reserved keeping all the questions of law open (179 Taxman 129).

2.3.4 Subsequent to the above events, another show-cause notice u/s.201 was issued by the Revenue in October 2009 on the basis of which, after considering the assessee’s reply, the order was passed u/s.201 upholding jurisdiction of the Revenue on 31st May, 2010. On the same date, a show-cause notice was also issued u/s.163 to VIH as to why it should not be treated as an agent/representative assessee of HTIL. These were challenged by the assessee before the Bombay High Court by a writ petition.

Basic contentions from both the sides

2.4 Before the High Court, on behalf of the petitioner, it was pointed out that the CGP through its downstream subsidiaries, directly or indirectly controlled equity interest in HEL. The transfer of share of CGP has resulted in the petitioner acquiring control over the CGP and its downstream subsidiaries including ultimately HEL and its downstream operating companies. On the passing of downstream companies, commercial arrangements common to such transaction were put in place. The transaction represents a transfer of a capital asset (i.e., share of CGP) situated outside India and hence, any gain arising on such transfer is not taxable in India. Accordingly, there was no obligation on the part of the petitioner to deduct tax u/s.195. It was also pointed out that if the shares held by the Mauritian companies were sold in India, the capital gain, if any arising on such transaction would not be taxable in India in view of the Mauritius Tax Treaty. Section 195 is inapplicable to foreign entity which has no presence in India, not even a branch office, as such entity cannot be subjected to obligation to deduct tax in respect of offshore transaction. It is the recipient who is the potential assessee as he has received the sum chargeable, if any. This by itself, does not create nexus with the Payer who has neither taxable income nor any presence in India. In support of this stand, various submissions were made.

2.5 On behalf of the Revenue, primarily it was pointed out that SPA and other documents establish that the subject-matter of the transaction between HTIL and VIH was a transfer of 67% interest (direct as well as indirect) in HEL. The CGP share is only one of the means to achieve this object. The transaction constitutes a transfer of composite rights of HTIL in HEL as result of the divestment of HTIL’s rights which paved way for VIH to step in the shoes of HTIL. The transaction in question has a sufficient territorial nexus to India and is chargeable to tax under the Act. This is evident from various arrangements made to give an effect to the understanding between the parties including the fact that SPA was entered in to with HTIL and not HTIHL (BVI). The consideration paid was a package for composite rights and not for a mere transfer of a CGP share. It was also pointed out that there is a distinction between proceedings for deduction of tax and regular assessment proceedings. The jurisdiction issue should be legitimately confined to obligation of VIH u/s.195 to withhold tax. Nonetheless, the Revenue made various submissions before the Court with regard to chargeability to tax arising out of the transaction.

2.5.1 The view of the Revenue that the real nature of transaction is with regard to transfer of 67% interest of HTIL in HEL to VIH and not only transfer of one CGP share was based on the premise that on interpretation of SPA and other agreements/documents, it is clear that the form of the transaction is reflected therein. Several valuable rights which are property rights and capital assets of HTIL stand relinquished in favour of VIH under these agreements. These rights are property and constitute capital assets which are situated in India. But for these agreements, the HTIL would not have been able to effectively transfer to VIH, its controlling inter-est in JV Co., HEL, to the extent of 67%. The HTIL’s interest in HEL arose by way of indirect equity shareholding upon agreements; finance agreements, shareholdings agreements, call options agreements, etc. aggregate of which confers a controlling interest of 67% in HEL. All these varied interests did not emerge only from one share of CGP and could not have been conveyed by the transfer of only one equity share of CGP. The parties themselves have treated the transaction as acquisition of one share of CGP, as well as other assets in the form of various rights, and entitlements, which are situated in India.

Settled principles acknowledged

2.6 For the purpose of considering the submissions made by both the parties and the principles on which they have relied, the Court referred to various judicial precedents and the principles emerging therefrom and acknowledged various settled principles in that regard such as: in interpretation of fiscal legislation, the Court is guided by the language and the words used; a legal relationship which arises out of the business transaction cannot be ignored in search of substance over form or in pursuit of the underlying economic interest; the tax planning is legitimate so long as the assessee does not resort to colourable device or a sham transaction with a view to evade taxes; incorporated corporation has a distinct juristic personality and its business is not the business of its shareholders; during the subsistence of corporation, its shareholders have no interest in its assets; a share represents an interest of a shareholder which is made up of various rights; shares, and rights which emanate from them, flow together and cannot be dissected; a controlling interest is an incident of the ownership of the shares in a company and the same is not an identifiable or distinct capital asset independent of the holding of shares; control and management is one facet of the holding of shares; the jurisdiction of a State to tax NRs is based on the existence of nexus connecting the person sought to be taxed with the State which seeks to tax; in certain instances, a need for apportioning income arises where the source rule applies and the income can be taxed in more than one jurisdiction, etc.

2.6.1 Evaluating the contentions of the petitioner with regard to obligation to withhold tax, the Court dealt with the provisions of section 195(1) as well as the relevant precedents and then, the Court formulated the principles governing the interpretation of section 195 which, inter alia, include the position that the Parliament has not restricted the obligations to deduct TAS on a resident and the Court will not imply a restriction not imposed by the legislation.

Analyses of facts and tax implications

2.7 The Court, then, proceeded to analyse the fact of the case on hand to determine the issues raised on the basis of settled principles referred to hereinbefore. For this purpose, the Court noted that essentially the case of VIH is that the transaction was only in respect of the purchase of one share of CGP and that being a capital asset situated outside India, no taxable income arises in India. On the other hand, the case of the Revenue is that the subject-matter of the transaction on a true construction of SPA and other transaction documents is a composite transaction involving transfer of various rights in HEL by HTIL to VIH, which resulted into deemed accrual of Income for HTIL from a source of income in India or through transfer of capital assets situated in India.

2.7.1 To decide the issue, the Court first considered as to how both the parties have construed the transaction. The Court noted that it is revealed from both the interim and final reports of HTIL that the transaction represented discontinuation of its operations in India upon which, it had generated a profit of HK $ 70,502 million. From the proceeds of the transaction, the HTIL also declared special dividend to its shareholders. Accordingly, from HTIL’s perspective, it had carried on in India Mobile Telecommunications Operations, which were to be discontinued as a result of the transaction.

On the other hand, VIH also perceived the transaction as acquisition of 67% interest in Indian JV Co., for an agreed consideration. This is evident from various announcements made by VIH, as well as the arrangements entered into between the parties. The equity value of HTIHL (BVI)’s 100% stake in CGP was computed on the basis of the enterprise value of HEL at US $ 18,250 million and by computing 67% of equity value on that basis. The entire value that was ascribed to its stake in CGP was computed only on the basis of enterprise value of HEL.

The Court then noted that it is in the above background, various documents should be considered and analysed and the effect thereof should be determined.

2.7.2 After considering various clauses of the SPA and the relationship of shareholders of the Company, the Court observed as under (Page 207):

“The diverse clauses of the SPA are indicative of the fact that parties were conscious of the composite nature of the transaction and created reciprocal rights and obligations that included, but were not confined to the transfer of the CGP share. The commercial understating of the parties was that the transaction related to the transfer of a controlling interest in HEL from HTIL to VIH BV. The transfer of control was not relatable merely to the transfer of the CGP share.

Inextricably woven with the transfer of control were other rights and entitlements which HTIL and/or its subsidiaries had assumed in pursuance of contractual arrangements with its Indian partners and the benefit of which would now stand transferred to VIH BV. By and as a result of the SPA, HTIL was relinquishing its interest in the telecommunications business in India and VIH BV was acquiring the interest which was held earlier by HTIL.”

2.7.3 The Court also further noted various other agreements/arrangements made between the parties such as: the term sheet agreement with Essar group to regulate the affairs of HEL and relationship of the shareholders of both the groups, put option agreement with Essar group of companies, a tax deed of covenant for indemnifying various companies in respect of taxation and transfer pricing liabilities, the brand licence agreement, the loan assignment agreements, the arrangement with the existing Indian partners of HTIL (viz. Asim Ghosh, Analjeet Singh and IDFC), etc.

2.7.4 The Court then observed that the facts which have been disclosed before the Court support the contention of the Revenue that the transaction between HTIL and VIH took into consideration various rights, interests and entitlements which, inter alia, include: direct and indirect interest of 52% equity shares of HEL; indirect interest of 15% in HEL through call options held by Indian partners of Hutchison group; right to carry on business through telecom license in India; non-compete in India; management rights of HEL under SPAs; right to use Hutchison brand for a specified period, etc. (the complete details of rights, etc. are appearing on pages 211/212 of the judgment).

2.7.5 The Court then also referred to the FIPB process in the transaction, wherein various queries were raised and clarifications were given by VIH. Referring to one of the clarifications of VIH dated 19th March, 2007, the Court noted that VIH had stated that it had agreed to acquire from HTIL for US $ 11.08 billion interest in HEL, which included 52% equity shareholding (direct/indirect). This price included a control premium, use and rights to use the Hutch brand in India, a non-compete agreement, loan obligations and entitlement to acquire further 15% indirect interest in HEL, subject to the FDI rules, etc. These elements together equated to about 67% of the equity capital.

2.7.6 The above facts clearly establish that it will be simplistic to assume that the entire transaction between HTIL and VIH was only related to transfer of one share of CGP. The commercial and business understanding between the parties postulated what was being transferred was controlling interest in HEL from HTIL to VIH. In its due diligence report, Earnst & Young have also stated that the target structure now also includes CGP which was originally not within the target group. The due diligence report emphasises that the object and intent of the parties was to achieve the transfer of control over HEL and transfer of solitary share of CGP was put in place at the behest of HTIL, subsequently as a mode of effectuating the goal.

2.7.7 The Court further observed that the true nature of the transaction as it emerges from the transactional documents is that the transfer of solitary share of CGP reflected only a part of the arrangement put into place by the parties in achieving to object of transferring control of HEL to VIH. T h e Court, then, held as under (pages 213/214):

“The price paid by VIH BV to HTIL of US $ 11.01 billion factored in, as part of the consideration, diverse rights and entitlements that were being transferred to VIH BV. Many of these entitlements were not relatable to the transfer of the CGP share. Indeed, if the transfer of the solitary share of CGP could have effectuated the purpose it was not necessary for the parties to enter into a complex structure of business documentation. The transactional documents are not merely incidental or consequential to the transfer of the CGP share, but recognised independently the rights and entitlements of HTIL in relation to the Indian business which were being transferred to VIH BV.”

2.7.8 According to the Court, intrinsic to the transaction was a transfer of other rights and entitlements. These rights and entitlements constitute in themselves capital assets within the meaning of section 2(14) of the Act.

2.7.9 After concluding that the transaction should be dissected in to various rights and entitlements for which the consideration is paid, the Court, dealing with the issue of apportionment of consideration to such rights and entitlements to determine the taxability thereof, further held as under (page 215):

“The manner in which the consideration should be apportioned is not something which can be determined at this stage. Apportionment lies within the jurisdiction of the Assessing Officer during the course of the assessment proceedings. Undoubtedly, it would be for the Assessing Officer to apportion the income which has resulted to HTIL between that which has accrued or arisen or what is deemed to have accrued or arisen as a result of a nexus within the Indian taxing jurisdiction and that which lies outside. Such an enquiry would lie outside the realm of the present proceedings ……..”

2.8 The Court then considered the issue with regard to jurisdiction of the Revenue to initiate pro-ceedings u/s.195 in the case of VIH. In this context, after referring to the provisions of section 195(1) and the relevant judicial precedents, the Court concluded as under (page 221):

“Chargeability and enforceability are distinct legal conceptions. A mere difficulty in compliance or in enforcement is not a ground to avoid observance. In the present case, the transaction in question has significant nexus with India. The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements. The petitioner by the diverse agreements that it entered into has nexus with India jurisdiction. In these circumstances, the proceedings which have been initiated by the income-tax authorities cannot be held to lack jurisdiction.”

2.8.1 The Court finally stated that the issue of juris-diction has been correctly decided by the Revenue for the reasons already noted above and the VIH was under an obligation to deduct TAS while making payment to HTIL.

2.8.2 This judgment of the High Court is now reversed by the Apex Court (of course, subject to outcome of the review petition filed by the Revenue) which we will consider in the next part of this write-up.
(To be continued)

Aplicability of Explanation to Section 73

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Section 73 of the Income-tax Act prohibits set-off of losses of speculation business except against profits and gains of another speculation business. The Explanation to section 73 extends the meaning of speculation business for the purposes of such set-off, by deeming any part of the business of a company which consists in the purchase and sale of shares of other companies to be a speculation business.

There are however two exceptions to this deeming fiction — one is for a company whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on Securities’, ‘Income from House Property’, ‘Capital Gains’ and ‘Income from Other Sources’ and the second is for a company the principal business of which is the business of banking or the granting of loans and advances.

The Explanation to section 73 reads as under:

“Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads ‘Interest on Securities’, ‘Income from House Property’, ‘Capital Gains’ and ‘Income from Other Sources’, or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carried on a speculation business to the extent to which the business consists of the purchase and sale of such shares.”

Two issues have arisen before the Courts, in the context of the first fiction, above, as to how the composition of the gross total income is to be looked at for the purpose of considering the applicability of this Explanation. One issue has been as to how negative income (loss) has to be considered — whether in absolute terms ignoring the negative sign, or to be taken as lower than a positive figure, for determining the majority composition of the gross total income. The second issue has arisen as to whether, for considering the applicability of this Explanation, the deemed speculation business loss is to be set off first against the other business profits, and only the net business income after such set-off is to be considered as ‘included’ in the gross total income and that it is such net business income, so included, that is to be compared with the income from the other heads of income to determine the composition of the gross total income. Naturally, the income under the other heads of income shall gain a higher share in composition of the gross total income where the business income is first set off against the losses of the deemed speculation business.

Considering the second issue, the Calcutta High Court has taken the view that for considering the applicability of the Explanation, the share trading loss is not to be set off against other business profits by adopting the ratio of its earlier decisions in the context of the first issue, the Bombay High Court has held that only the net business income after setting off the share trading loss against other business profits is to be considered as included in the gross total income.

Park View Properties’ case
The issue first came up before the Calcutta High Court in the case of CIT v. Park View Properties P. Ltd., 261 ITR 473.

In this case, the assessee-company had incurred a loss of Rs.8,98,799 in share trading, and had other business profits of Rs.12,32,469, the net business profits being Rs.3,33,670. The assessee had income from other sources and dividend income (which was taxable at that point of time) of Rs.5,73,701. The gross total income, determined after set-off of the share trading loss, was therefore Rs.9,07,371.

The Assessing Officer denied the benefit of the exception to the Explanation to section 73, denying set-off of share dealing loss on the ground that such losses were to be deemed as the loss of a speculation business, on application of the said Explanation. The Commissioner (Appeals) allowed the appeal of the assessee, holding that the main source of income of the assessee consisted of income from interest on securities and income from house property. The Tribunal upheld the order of the Commissioner (Appeals), allowing set-off of the share trading business loss without treating the same as a speculation loss.

The Calcutta High Court noted that the Tribunal had allowed the benefit of the exception to the Explanation to section 73 by setting off the share trading loss against the profits of other business for the purposes of determining whether the said Explanation was applicable or not. The Court did not approve the approach of the Tribunal. According to the Calcutta High Court, in order to ascertain whether an assessee would be covered by the Explanation to section 73, it had to be first examined whether the assessee came within the exception provided to the Explanation. This, according to the Court, was to be done by taking into consideration only the business profits, excluding the share trading loss, as could be gathered from the expression ‘gross total income consists mainly of income chargeable under the heads . . . . .’ used in the Explanation that was clear and unambiguous, and reflected the intention of the Legislature.

The Calcutta High Court noted that while computing the gross total income, loss was also to be taken into account, since loss was treated as a negative profit. The Calcutta High Court noted that in the case of Eastern Aviation and Industries Ltd. v. CIT, 208 ITR 1023, the Calcutta High Court had held that the explanation to section 73 could be applied before the principle of deduction was applied, namely, after computing the gross total income.

Applying this principle, the Court observed that if the loss in the share dealing account of Rs.8,98,799 was treated as a negative profit, then definitely the income from other sources and dividend income of Rs.5,73,701 was lower. Therefore, according to the Calcutta High Court, the main income consisted of the business of share trading, which was the main object of the assessee. The Calcutta High Court expressed the view that the business income computed after setting of the loss in share trading of Rs.3,33,670 did not represent the business income, since it was arrived at after applying the benefit of the explanation to section 73, namely, setting off the speculative income.

The Calcutta High Court therefore held that the case did not fall within the exception in the explanation to section 73, and the loss incurred on share trading was to be treated as speculation loss and could not be set off against other income.

Darshan Securities’ case
The issue again recently came up before the Bombay High Court in the case of CIT v. Darshan Securities Pvt. Ltd., (ITA No. 2886 of 2009, dated 2-2-2012 — available on www. itatonline.org).

In this case, the assessee had an income from service charges of Rs.2,25,04,588, and share trading loss of Rs.2,23,32,127, besides a taxable dividend income of Rs.4,79,325. The assessee claimed that in computing the gross total income for the purposes of the Explanation to section 73, the share trading loss had to be first adjusted against the income from service charges.

The Assessing Officer disallowed the set-off of the share trading loss, holding it to be a speculation loss. The Commissioner (Appeals) accepted the assessee’s claim that the case of the company was covered by the first exception to the said Explanation to section 73, as did the Tribunal.

On behalf of the Revenue, it was argued before the Bombay High Court that in computing the gross total income for the purposes of the Explanation to section 73, income under the heads of profits and gains of business or profession must be ignored. Alternatively, it was urged that where the income from business included a loss in trading of shares, such loss should not be allowed to be set off against income from any other source under the head of profits and gains of business or profession.

The Bombay High Court analysed the provisions of section 73 and the Explanation thereto. It noted that the Explanation to section 73 was a deeming fiction applying only to a company and extending only for the purposes of that section. It noted that the bracketed portion of the Explanation carved out an exception.

The Bombay High Court noted that ordinarily income which arose from one source, which fell under the head of profits and gains of business or profession could be set off against the loss, which arose from another source under the same head. Section 73(1) however set up a bar to setting off a loss which arose in respect of a speculation business against the profits and gains of any other business. Consequently, such speculation loss could be set off only against the profits and gains of another speculation business.

According to the Bombay High Court, the explanation provided a deeming fiction of when a company is deemed to be carrying on a speculation business. If the Department’s submissions were accepted, it would lead to an incongruous situation, where in determining as to whether a company was carrying on a speculation business within the meaning of the explanation, section 73(1) would be applied in the first instance. According to the Bombay High Court, this would not be permissible as a matter of statutory interpretation, as the explanation was designed to define a situation where the company was deemed to carry on speculation business. It is only thereafter that section 73(1) can apply. Applying the provisions of section 73(1) to determine whether a company was carrying on speculation business would reverse the order of application, which was impermissible and not contemplated by Parliament.

The Bombay High Court observed that in order to determine whether the exception carved out by the Explanation applied, the Legislature had first mandated a computation of the gross total income. Further, the words ‘consists mainly’ were indicative of the fact that the Legislature had in its contemplation that the gross total income consisted predominantly of income from the 4 heads referred to therein. Obviously, according to the Bombay High Court, in computing the gross total income, the normal provisions of the Act must be applied, and it was only thereafter that it had to be determined as to whether the gross total income so computed consisted mainly of income which was chargeable under the heads referred to in the Explanation.

The Bombay High Court followed the ratio of its earlier decisions in the cases of CIT v. Hero Textiles and Trading Ltd. , (ITA No. 296 of 2001 dated 29-1-2008) and CIT v. Maansi Trading Pvt. Ltd., (ITA No. 47 for 2001 dated 29-1-2008). It also noted that it had dismissed Notice of Motion No. 1921 of 2007 in ITA (Lodging) No. 852 of 2007 for condonation of delay against the Tribunal Special Bench decision in the case of Concord Commercial Pvt. Ltd., which decision had been followed by the Tribunal in this case.

The Bombay High Court therefore held that since the net business income of Rs.1,72,461 was less than the dividend income of Rs.4,79,325, the assessee was covered by the exception carved out in the Explanation to section 73, and would not be deemed to be carrying on a speculation business for the purposes of section 73(1).


Observations

The Calcutta High Court seems to have placed reliance on its decision in the case of Eastern Aviation and Industries Ltd. (supra) in arriving at its conclusion. In particular, it followed the view taken in that case that negative profits are also income and are to be considered in the absolute sense (ignoring the positive or negative signs) for the purpose of the exception carved out in explanation to section 73(1). The Calcutta High Court, however, failed to appreciate that Eastern Aviation’s case dealt with a situation where there was a negative speculation income and negative share trading income, but no other profits from any other business. The question of set-off of share trading loss against any other business profit, therefore, did not arise for consideration in that case. In that case, the gross total income itself also was a negative figure. The reliance placed on the ratio of that decision, therefore, seems to have been misplaced.

Even assuming that the ratio of Eastern Aviation’s case that even negative incomes should be considered in the absolute sense were correct, what needs to be considered is the net position of the income under each head of income, and not the net position of each source of income. In Darshan Securities’ case, the net position of the income under the head business or profession was a positive figure, which was lower than the income under the head ‘Income from Other Sources’. Therefore, even applying Eastern Aviation’s case, the ratio of Darshan Securities’ case seems justified.

As rightly observed by the Bombay High Court, one cannot start with a presumption that the explanation applies and that the loss is a loss from speculation business for determining whether the explanation applies. One would therefore have to compute the gross total income without applying the explanation for finding out the applicability of the explanation. In doing so, one would have to apply the normal provisions for computation of gross total income ignoring the explanation to section 73, i.e., by setting off the share trading loss against other business profits, which would normally have been the position in the absence of the explanation. It is only then if it is determined that the explanation applies, as the case falls outside the exception to the explanation, that the prohibition on set-off of the loss would apply.

The view taken by the Bombay High Court that the share trading loss is to be set off against other business income for determining whether explanation to section 73 applies, is therefore the better view of the matter.

War Against Offshore Tax Evasion — Will Tax Information Exchange Agreements Work?

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In the recent crackdown against errant taxpayers, the Income-tax Department has initiated action against many Indians who had stashed their wealth in the HSBC bank in Geneva. This is similar to the action it had taken earlier against the Indian account holders in LGT Bank in Lichtenstein. Similarly, proceedings are also expected to be initiated against many tax evaders on the basis of more than 10,000 pieces of information reportedly received from the different countries. This news may be comforting to the majority of taxpayers who honestly pay their taxes and believe that the Government ought to severely punish tax evaders.

This development gives hope that such trickle would turn into a flow of information to bring back Indian black money stashed abroad after the Indian Government has entered into Tax Information Exchange Agreements (TIEAs) with the tax havens. India has so far signed TIEAs with Bermuda, Bahamas, Isle of Man, British Virgin Island, Cayman Island, Liberia, and Jersey and more TIEAs are under negotiation. India is also seeking to amend its 75 existing Double Taxation Agreements with the countries to provide for effective exchange of tax information.

However, sceptics feel that Tax Information Exchange Agreements are unlikely to make any meaningful contribution in fight against tax evasion, more particularly against offshore tax evasion. Their scepticism is because of several reasons. However, before discussing their views it may be necessary to go through a bit of background to understand the issues involved in TIEAs.

Background
The global financial crisis triggered TIEA drive. One of the fallout of the global financial crisis was that of growing realisation among the governments on the menace of tax evasion, particularly offshore tax evasion, which has resulted in massive revenue loss hitting developing countries harder, which need more funds for their development and poverty eradication. Various agencies and organisations have estimated the magnitude of the problem. For example, a non-profit organisation, ‘Global Financial Integrity’ in its report published in January 2009, has estimated that the developing countries lost between $ 858 billion to $ 1.06 trillion in illicit financial outflows in 2006. ‘Oxfam’, another non-profit organisation in a study carried out in March 2009 found that at least $ 6.2 trillion wealth of the developing countries is held offshore, depriving them annual tax receipts between $ 64-124 billion. Therefore, considering the sheer size of the revenue loss, the governments are looking to collect tax from the funds deposited in the offshore accounts, on which tax was not paid.

Role of a tax haven

Critical role played by tax havens in offshore tax evasion is well known, which often ignore and many a time aid tax evasion taking place in their jurisdiction. Tax evaders find tax havens attractive because many tax havens have developed ‘liberal’ systems, such as simple registration of a company with bearer shares, minimum capitalisation, nominal reporting requirements, provide ease of funds transfer and offer possibility of keeping ownership anonymous. Such rules make tax evasion easier. More importantly, tax havens are attractive to tax evaders because of lack of transparency and little exchange of information apart from the fact that it levies nominal tax or no tax on them. On the other hand, for a tax haven, on-going financial activity in its jurisdiction is beneficial for its survival and prosperity. It is win-win situation for both: the tax haven and the tax evaders.

OECD response
Tax administrations cannot function beyond their country’s jurisdiction, although globalisation of economy and growing international business require tax administrations to operate internationally. Tax administrations find it difficult to detect tax evasion involving tax haven because of the lack of adequate information on such transactions. Therefore, ‘Organisation of Economic Cooperation and Development’ (OECD) decided to tackle two critical elements — which make a jurisdiction a tax haven — lack of transparency and lack of or little exchange of information. The OECD, strongly supported by the G20 Nations, has aggressively promoted international co-operation in tax matters through exchange of information by promoting TIEAs with tax havens.

The OECD started its campaign in 1998 with the publication of the report ‘Harmful Tax Competition: Emerging Global Issue’ emphasising the need for effective exchange of information. Subsequently, the OECD developed a model ‘Tax Information Exchange Agreement’ which is largely followed by all nations. The OECD also devised a compliance standard for the tax havens to ensure that each of them sign and effectively implement TIEAs. This compliance standard required each tax haven to sign TIEAs with minimum 12 nations other than tax havens. As standards for monitoring their compliance, the OECD also calls for willingness on part of the tax haven to continue to sign agreements even after reaching threshold and insists on effective implementation of the TIEAs.

The ‘Global Forum’ created by the OECD member countries has devised a system to monitor jurisdiction’s standards on transparency and exchange of tax information by carrying out phase-wise peer reviews by other jurisdictions. Peer review assesses jurisdiction’s legal and regulatory framework on criteria of 10 key elements in 1st Phase of review and in Phase 2 review, examines effective implementation of exchange of tax information after a jurisdiction removes deficiencies identified in its legal and regulatory framework. The peer reviews assess the availability of ownership, accounting and bank information and authorities’ power to access as well as capacity to deliver information along with rights and safeguards and provisions of confidentiality.

So far various countries world over have signed more than 700 TIEAs. The tax havens have signed these agreements to come out of the OECD’s ‘grey list’ to avoid possible sanctions imposed on them if they fail to comply with the stipulated standard of signing minimum 12 TIEAs with the countries other than tax havens.

TIEA
TIEAs provide for exchange of requested information even in the cases in which the conduct of the taxpayer does not constitute crime in the jurisdiction of the requested country (Tax haven). The country is also required to provide requested information which is not in its possession by gathering it. Most importantly, the TIEAs provide for obtaining information from the banks and the financial institutions regarding ownership of companies, partnerships, trusts including ownership information of the persons in the ownership chain and also information on the settlers, trustees, and beneficiaries. This is one of the most important provisions of the agreement, which make it possible, at least theoretically, to unravel ultimate beneficiaries of the tax haven bank accounts. It is too well known that beneficiaries of the tax haven bank accounts are often shielded by a deliberately created complex ownership structure consisting of a maze of entities. It is also important to note that TIEA does not place any restrictions on information exchange caused by the bank secrecy or domestic tax interest requirements.

Why TIEAs cannot be effective

Despite having the well-designed provisions in the TIEA and seriousness of the OECD and governments in dealing with tax evasion, many professionals believe that the TIEAs will not work. There are various reasons for this negative sentiment.

Firstly, there is a conflict of interests among tax haven and non-tax haven countries. Secrecy jurisdictions are hardly interested in sharing information about their customers.

In many jurisdictions, ownership and beneficial ownership information is protected by domestic law.

From the OECD’s Progress Report Tax Transparency of 2011, it becomes clear that making legal and structural changes in secrecy jurisdictions is going to be a time-consuming affair. So far, out of total 81 peer reviews launched, Global Forum has adopted 59 reports. Out of the 59 reviews completed, 42 are Phase 1 reviews and 17 are combined reviews (reviews of both the Phases conducted simultaneously). Nine Jurisdictions will move to Phase 2 after they fix the deficiencies pointed out in the peer reviews. Thus, jurisdictions have to do considerable work to enable them to exchange tax information effectively. Moreover, one of the conclusions of the Report is that the information exchange is too slow.

Secondly, there is no automatic exchange of information. The TIEA requires that for getting information on a taxpayer, the applicant country has to provide specific information of the taxpayer such as (a) the identity of the taxpayer under examination or investigation; (b) the period for which information is requested; (c) the nature of the information requested and the tax purpose for which the information is sought; (d) grounds for believing that the requested information is present in the requested country or is in the possession of a person within the jurisdiction of the requested country; (e) to the extent known, the name and address of any person believed to be in possession of the requested information; (f) a statement that the request is in conformity with the law and administrative practices of the applicant country, that if the requested information was within the jurisdiction of the applicant country, then the applicant country would be able to obtain the information under the laws of the applicant country or in the normal course of administrative practice and that it is in conformity with this agreement; (g) a statement that the applicant country has pursued all means available in its own territory to obtain the information, except which would give rise to dispro-portionate difficulties. Thus, very high amount of information is required to be furnished for making a request meaning that the tax administration should already have substantial evidence against the taxpayer rather than gathering evidence against a taxpayer to make a case of tax evasion. Very often, furnishing such information before the completion of investigation is like putting a cart before the horse.

Thirdly, a taxpayer can move his deposits from the bank account of one tax haven to another before developing of an enquiry making tax administration’s efforts futile. Lastly, experiences of some of the countries indicate little usefulness of TIEAs as they have sparingly used it for the information exchange.

It may be recalled here that the information on the basis of which the Income-tax Department has recently initiated action was not received under the TIEA. The information on Indian account holders in LGT bank Lichtenstein was provided by Germany, which in turn had bought it from the disgruntled employee of the Bank, whereas France reportedly passed on the information on the account holders of the HSBC Bank, Geneva.

Responses by other countries

Probably considering the limitations of the TIEA, some of the countries have adopted multi-pronged strategy to counter offshore tax evasion. On the one hand, US, Germany and Australia had offered Voluntary Income Disclosure Scheme and on the other, some of them have enacted specific legislations to deal with it.

The US has strengthened domestic legislation by enacting specific laws to counter offshore tax evasion by creating additional sources of information gathering.

The US introduced ‘Hiring Incentives to Restore Employment Act’ (HIRE) providing tax incentives for hiring and retaining unemployed workers also imposes 30% withholding on payment made to foreign financial institution, unless such institution agrees to adhere to certain reporting requirements with respect to US account holders. It has also enacted legislation — FATCA (the Foreign Account Tax Compliance Act) which is to be implemented from 2013 requiring non-US banks to report the accounts of US clients to the US Internal Revenue Service. There is also a proposal in the US for enacting additional law, ‘Stop Tax Haven Abuse Act’ strengthening FATCA and plugging specific offshore tax evasion schemes. Similarly, UK’s new law introduced in 2010 provides for higher penalty at 200% on offshore tax evasion.

In addition, many countries have stepped up their counter offensive by allocating more work force to investigate the cases of offshore tax evasion. It is reported that the IRS of the US had placed more than 1400 agents on a project to investigate the merchants who were directly depositing credit card sales in their offshore accounts.

Conclusion

The real challenge to willingness to exchange of information comes from the difference in the tax laws and law on confidentiality along with conflicting interests among countries. Therefore, there is a need to take additional measures along with the TIEAs. However, the measures for information gathering which may work for the countries such as the US, Germany or the UK because of their political and economic clout may not work for India. India will have to supplement its measures — legislative as well as administrative — for information gathering in its battle against tax evasion leveraging at the international level its position of a giant emerging market.

On a positive note, the biggest contribution of the TIEAs is providing legal instrument in an environment against tax evasion. With the result, tax evaders are now increasingly realising that there will be no safer havens in near future for their tax evaded funds, which is the fundamental requirement in a fight against tax evasion.

(2011) 130 ITD 219 (Cochin) (TM) Dy. CIT, Circle 2(1), Range-2, Ernakulam v. Akay Flavours & Aromatics (P.) Ltd. A.Y.: 2004-05. Dated: 20-9-2010

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Section 10B, r.w.s. 32 and section 72 — For hundred percent export-oriented unit eligible for deduction u/s.10B, set-off of unabsorbed depreciation and business loss brought forward from relevant assessment year in which deduction was so claimed for the first time up to A.Y. 2000-01, will be allowed against business income or under any other head of income including ‘income from other sources’, for all assessment years up to assessment year in which deduction was last claimed (i.e., during the tax holiday period).

Facts:
The assessee is a hundred percent export-oriented unit and is eligible for deduction u/s.10B of the Income-tax Act. The first relevant assessment year for which deduction u/s.10B claimed was A.Y. 1996- 97 and therefore the last assessment year for which the deduction will be available to assessee will be A.Y. 2005-06. During the assessment of return of income for A.Y. 2004-05, the AO noticed that the assessee had claimed set-off brought forward unabsorbed depreciation up to A.Y. 2000-01 against income computed under the head ‘Income from other sources’. The AO disallowed the claim of deduction under grounds of provision of section 10B(6) and while computing the income of the assessee during the assessment, the AO, first set off the brought forward business loss and unabsorbed depreciation against the income from the export unit and balance income was considered for deduction u/s.10B. Thus the AO neutralised the claim of deduction u/s.10B by setting off the brought forward loss and unabsorbed depreciation first and disallowed the assessee’s claim of set-off against income under the head ‘Income from other sources’.

The assessee, against said order of the AO, preferred an appeal to the CIT(A). The CIT(A) reversed the order of the assessing officer and upheld the claim of the assessee. The CIT(A) opined that reading of provision u/s.10B(6)(ii) clearly states that set-off of unabsorbed depreciation and business loss brought forward up to A.Y. 2000-01 will not be allowed to be carried forward beyond the tax holiday period. In the instant case, the last year of claim of deduction u/s.10B was A.Y. 2005-06, whereas the assessment year for which appeal was referred is A.Y. 2004-05, therefore the view of AO could not be upheld and the assessee’s claim was allowed.

Aggrieved the Revenue appealed before the ITAT.

Held:
(1) On simple reading of section 32 with section 72, it is apparent that unabsorbed depreciation can be set off against business income or under any head of income including ‘Income from other sources’. There is no provision in law which prohibits set-off of unabsorbed depreciation from income computed under head ‘Income from other sources’.

(2) The benefit given u/s.10B is deduction and not an exemption and is evident from the wordings of the said provision which states that only 90% of the business profits are allowed as deduction. Thus the balance 10% has to be treated only as business income. The perusal of section 10B(1) clearly reveals that deduction under the section from profits and gains derived by undertaking from the export has to be made first while computing income under the head ‘Income from business’ and not at a later stage of computation of the gross total income of the assessee.

(3) Provision of section 10B(6)(ii) states that no loss insofar as it relates to the business of the undertaking including unabsorbed depreciation, so far it relates to any relevant assessment year up to A.Y. 2000-01 shall be carried forward for set-off while computing income for any assessment year subsequent to the last relevant assessment year in which deduction under this section is claimed i.e., after the tax holiday period. Therefore, setoff of such brought forward business loss or unabsorbed depreciation can be made in accordance with provisions of section 32, section 71 and section 72 while computing the total income of the assessee for assessment year within the tax holiday period.

(4) Thus, set-off of brought forward business loss and unabsorbed depreciation up to A.Y. 2000-01 cannot be disallowed for A.Y. 2004- 05, where the last year of claim for deduction u/s.10B was A.Y. 2005-06 as the assessment year in consideration falls within the tax holiday period. Thus Revenue’s appeal stood dismissed and the view taken by the CIT(A) was upheld.

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TDS: Interest: Section 2(28A) and section 194A of Income-tax Act, 1961: Interest on amount deposited by allottees on account of delayed allotment of flats: Interest on account of damages: Tax need not be deducted at source.

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[CIT v. H. P. Housing Board, 340 ITR 388 (HP)]

The assessee, the Himachal Pradesh Housing Board, floated a self-financing scheme for sale of house/ flats wherein the allottees were required to deposit some amount with the assessee and construction was to be carried out out of these amounts. One of the conditions of the terms of allotment was that in case the possession of the house/flat was not given to the allottee within a particular time frame, the assessee was liable to pay interest to the allottees on the money received by it. There was a delay in construction of the houses and thereafter the assessee paid interest at the agreed rate to the allottees in terms of the letter of allotment. The Assessing Officer held that the assessee was liable to deduct tax at source on payment of such interest u/s.194A of the Income-tax Act, 1961. The CIT(A) and the Tribunal held that section 194A was not applicable.

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

“(i) The amount which was paid by the assessee was not payment of interest, but was payment of damages to compensate the allottee for the delay in the construction of his house/ flat and the harassment caused to him.

(ii) Though compensation had been calculated in terms of interest, this was because the parties by mutual agreement agreed to find out a suitable and convenient system of calculating the damages, which would be uniform for all the allottees. The allottees had not given the money to the assessee by way of deposit, nor had the assessee borrowed the amount from the allottees.

(iii) The amount was paid under a self-financing scheme for construction of the flats and the interest was paid on account of damages suffered by the claimant for delay in completion of the flats.”

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GAPs in GAP — Foreign Exchange Differences — Capitalisation/Amortisation

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The Central Government has notified two amendments dated 29 December 2011 to AS-11 The Effects of Changes in Foreign Exchange Rates. Given below is a brief overview of these two amendments, practical issues arising thereon and the author’s perspective.

Overview of the first amendment The first amendment extends the sunset date for the use of option given in paragraph 46 of AS-11 whereby a company can opt to capitalise/amortise exchange difference arising on longterm foreign currency monetary items. It substitutes the words ‘in respect of accounting period commencing on or after 7 December 2006 and ending on or before 31 March 2012,’ in paragraph 46, by the words ‘in respect of accounting periods commencing on or after 7 December 2006 and ending on or before 31 March 2020.’

Overview of the second amendment The second Notification inserts a new paragraph, viz., paragraph 46A, in AS-11. This paragraph deals with accounting for both companies which had exercised option given in paragraph 46 of AS-11 as well as any other company which had not exercised that option. According to this paragraph, a company may choose to adopt the following treatment in respect of accounting periods commencing on or after 1 April 2011:

(i) Foreign exchange differences arising on longterm foreign currency monetary items related to acquisition of a fixed asset are capitalised and depreciated over the remaining useful life of the asset.

(ii) Foreign exchange differences arising on other long-term foreign currency monetary items are accumulated in the ‘Foreign Currency Monetary Item Translation Difference Account’ and amortised over the remaining life of the concerned monetary item.

The option once elected is irrevocable. Like paragraph 46, paragraph 46A also does not apply to exchange differences arising on long-term foreign currency monetary items that in substance form part of a company’s net investment in non-integral foreign operation.

Main issues There are numerous questions on the interplay of these two amendments and the manner in which they would work in consonance with each other. Lets us understand what is clear and what is confusing.

What is clear?
(1) Those companies that were hitherto amortising/ capitalising exchange differences can continue to do so till 2020.

(2) Those companies that were hitherto not amortising/capitalising exchange differences can avail of the new option in paragraph 46A. Such an option is available on a prospective basis for the remaining life of the loan and is not restricted to 2020.

What is confusing?
(1) Those companies that were hitherto amortising/capitalising exchange differences can continue to do so till 2020 under paragraph 46. The amortisation was done restricting the amortisation period to 2012. If the company wishes to continue with paragraph 46, the amortisation period is extended because of the extension from 2012 to 2020. It is not clear whether the amortisation on the loan is calculated on a retrospective basis or on a prospective basis over the balance amortisation period.

(2) Can a company, which had earlier exercised the option given in paragraph 46, now opt out of that exemption on the grounds that it chose the option because it was restricted to 31-3-2011 and not 31- 3-2020? Hence, can it start recognising exchange differences on foreign currency monetary items, including long-term items, immediately in profit or loss?

(3) It is not clear if companies that were amortising/ capitalising exchange differences under paragraph 46 can switch over to paragraph 46A. How the two paragraphs (46 & 46A) will work in consonance with each other? Let us assume that a company has taken a foreign currency loan, not related to acquisition of fixed asset, whose term extends till 31 March 2025. Will the company amortise exchange differences arising on such loan till 31 March 2020 or till 31 March 2025? The manner in which paragraph 46A is drafted appears to allow both existing option users and new option users to capitalise/amortise exchange differences on a prospective basis. If that is true, what is the relevance of paragraph 46?

(4) In paragraph 46, the sunset date has been used at two places: one for the date range during which the option given can be used and the second to specify the period up to which the balance in the ‘Foreign Currency Monetary Item Translation Difference Account’ needs to be amortised. The Notification dated 29 December 2011 has extended the sunset date to 31 March 2020 at the first place. However, a similar change has not been made with regard to the second date. The strict legal and technical interpretation of the paragraph suggests that a company can continue using the option given in paragraph 46 till accounting periods ending on or before 31 March 2020. However, there cannot be any balance in the ‘Foreign Currency Monetary Item Translation Difference Account’, created for exchange differences arising on long-term monetary items not related to acquisition of a depreciable capital asset, post 31 March 2011. In practical terms, this means that after 31 March 2011, a company will be able to use the option given in paragraph 46 only for capitalisation of exchange differences arising on long-term monetary item related to acquisition of a depreciable asset. Other exchange differences will be immediately recognised in the P&L Account. Whilst this may be the strict legal interpretation of the paragraph, certain companies may question whether it really reflects the intention of the regulator. They may also argue that the amendment intends to extend the option given in its entirety. Hence, they can also amortise any balance in the ‘Foreign Currency Monetary Item Translation Difference Account’ till 31 March 2020. Many companies are taking this approach.

The MCA or the Institute of Chartered Accountants of India, will need to clarify the above issues.

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Crowdsourcing

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About this article:
This write-up is (in a manner of speaking) a continuation of the previous write-up on mass collaboration. The basic idea remains the same: there is a large problem, capable of being broken into several small manageable parts. The task, though simple to humans, is difficult for computers to achieve (as yet). This idea is applied differently to achieve a variety of objectives. Some are commercial and then there are others which contribute to the growth of society as a whole.

Background:
The term ‘crowdsourcing’ as you may have already guessed, is a derivative of the words ‘crowd’ and ‘sourcing’. While this phrase was first coined by Jeff Howe in June 2006 Wired magazine article, you may be surprised to know that this concept was being commonly applied for several years before that. Few examples which have become huge:

  • Wikipedia
  • Captcha and recaptcha

Some lesser known examples:

  • Brooke Bond/Lipton runs a slogan contest, the winner of the slogan gets a cash reward (and Brook Bond gets 1000+ new catchy slogans for future marketing — virtually for free);

  • An ad agency organises photography contest. Contestants use their own cameras and film. They are given themes/concepts and come up with innovative ideas/snaps. The ad agency spends on promoting the event and some refreshments for the contestants. Post the contest the ad agency retains all the photos (1000’s of ideas — virtually for free);

  • Very recently, two leading business houses in India announced in newsprint and media that they would invest in start ups. They invited entrepreneurs all over the country (and abroad) to register and share their ideas (basic idea, sample model, estimates for commercials). Everyone would be given the opportunity to make an ‘elevator’ pitch. Once again 1000+ ideas virtually for free.

And then there are some blacksheep . . . . . .

  • Remember Speak Asia . . . . if you do some digging you may find that similar schemes were floated in the African continent . . . . very successful . . . . all stakeholders made money. Somehow the idea didn’t click in India.

  • If you have seen Die Hard 4 — the villan uses the skill of amateur hackers to develop a code, this code is used to disrupt systems.

If you look at any of the above-mentioned ideas, you may agree that all of them were simple ideas, brilliantly executed.

What is crowdsourcing and how does it work:

Simply put, crowdsourcing is a distributed problem solving and production model. Typically, a problem is broadcast to an unknown group of solvers in the form of an open call for solution. The ‘users’ or the crowd (i.e., the online community) comes together and submits solutions. Yet another crowd sifts through these solutions and finds the more acceptable/better solutions. These solutions are then owned by the broadcasting agency (i.e., the crowdsourcer). The winning solutions are sometimes rewarded, sometimes monetarily, sometimes with a prize or recognition (i.e., the contributors are paid crumbs and the broadcaster keeps the cake).

Advantages of crowdsourcing:
Without getting in to the ethical aspect of the subject, one needs to appreciate that there are certain advantages that crowdsourcing can offer :

  • Problems can be explored at a comparatively small cost, often very quickly.

  • Possible to achieve a win-win proposition sans monetary compensation — best example is Luis von Ahn’s Recaptcha and the efforts to translate wikipedia’s German version.

  • Crowdsourcing makes it possible to tap a wider range of talent (or prospective customers) than normally feasible — best example — auto industry has been using social media to source ideas from prospective customers — ideas about car design, features, accessories, etc.
  • Resultant rewards have potential of spurring activities — more entrepreneurship, growth in business, investments, employment, etc.

Criticism about crowdsourcing:

  • Once the crowd starts contributing, somebody has to sort and sift through the information. This is a costly affair, unless the right resources are used the costs outweigh the benefits;

  • Given that there is no monetary compensation, increases the likelihood of the project failing. Without money one may face problems with fewer participants, lower quality of work, lack of personal interest in the project/results, etc.;

  • Barter may not always be possible;

  • Risks mitigation through contracts may not be possible since there are no written contracts, non-disclosure agreements or for that matter non-transparency about how the information will be used;

  • Difficulty in managing and maintaining a working relationship with the crowd throughout the duration of the project;

  • Susceptibility to faulty results and failure is still too high.

Though there are several pros and cons, so far the perception has been positive. With the success of ideas like recaptcha and the translation project, people have started believing in crowdsourcing’s potential to balance global inequalities. A rather tall statement, but its still a wait-and-watch situation.

I would like to end this write-up by sharing my experience with crowdsourcing. Sometime ago, I downloaded a free app on my phone called Waze. At the time I didn’t know that it was a crowdsourcing app. However after using the app, I have (kind of) started leaning in favour of crowdsourcing and hope to see more developments in this field.

Waze app:

Waze is a free iPhone app which tries to crowdsource real-time traffic and navigation data. The application has advantages because it provides information which is ‘almost’ real-time and updated. It is quite different from your navigation/GPS systems because apart from providing you information about routes, Waze also provides information about traffic, speed at which the traffic is moving (it’s been a mixed experience for me), information about roads under construction (this is based on user inputs and quite accurate) — if there is a obstruction or an accident and the road gets blocked, users can send an instant update and all users will be pinged instantly.

The best part is that most of the time the user simply has to switch on the application and leave it on. The software keeps tracking your speed (using GPS and your GPRS/3G bandwidth) and broadcasts this information to other users. If your car slows down the app sends you a prompt asking if you are stuck in traffic. The information is broadcast almost instantly (have noted that it is broadcast in 5-10 seconds).

I have been using the app intermittently and have found it quite useful to avoid traffic. Have benefitted from updates quite a few times and that’s why I rate it as a pretty good ‘time-saving app’. While the app is free, there is a downside — the constant tracking can drain your battery and unless you have a good data plan, it will also drain your wallet.

That’s all for this month. Next month is likely to be dominated with the budget proposals, but I promise that I will have some interesting ideas and stories to share with you.

Cheers.

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MTV Asia LDC v. DDIT ITA No. 3530/Mum/ 2006 (unreported) A.Ys.: 2002-03 to 2005-06. Dated: 31-1-2012 Before P. M. Jagtap (AM) & N. V. Vasudevan (JM) Counsel for taxpayer/revenue: A. V. Sonde/ Malathi Sridharan

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Article 7 of India-Singapore DTAA

Despite payment of arm’s-length remuneration to the agent, further profit could be attributable to the PE in India.

Facts:
The taxpayer was a company incorporated in Cayman Islands and conducted its business operations from Singapore. Singapore tax authority had issued tax residency certificate to the taxpayer confirming that its control and management was exercised from Singapore. During the relevant years, the taxpayer was conducting its entire TV channel activities for Asia-Pacific Region from Singapore.

During the course of assessment proceedings, the AO noted as follows.

  • The taxpayer had appointed an Indian company (‘IndCo’) as its agent in India.

  • IndCo was entitled to 15% commission on the gross advertisement revenue from India.

  • The income of the taxpayer comprised only the advertising time sold by IndCo.

  • IndCo also collected the payments and remitted them to Singapore.

The AO, therefore, held that the taxpayer had an agency PE in India. The AO further held that even if the taxpayer paid arm’s-length remuneration to the agent, further profits could be attributed to the agency PE. The AO, accordingly, attributed profits at 40, 30, 25 and 25% for the relevant years. The CIT(A) upheld the further attribution of profits, but reduced the quantum.

The issue before the Tribunal was about proper profit attribution to the PE in India. Held:

The Tribunal held as follows:

  • The audit of the accounts of the taxpayer was completed subsequently. Further, the taxpayer had not maintained separate accounts for the Indian operations. Hence, application of Rule 10(i) read with Rule 10(iii) was proper.

  • The tax computation filed by taxpayer with the Singapore tax authority in respect of its global operations reflected losses. Hence, margin attributed by the AO was on the higher side.

  • Transponder charges and programme charges cannot be said to be only for Indian operations since the satellite footprint also covered neighbouring countries.

  • The erstwhile CBDT Circular No. 742 of 1996 provided for presumptive taxation of 10% of the advertisement revenue of foreign telecasting companies as their income. Hence, even though the said Circular was withdrawn, as there was no change in the business model of the taxpayer, attribution of 10% of the advertisement revenue earned by the taxpayer from India was reasonable.
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SEPCO III Electric Power Construction Corporation, In re AAR No. 1008 of 2010 (unreported) Dated: 31-1-2012 Before P. K. Balasubramanyan (Chairman) & V. K. Shridhar (Member) Counsel for applicant/revenue: N. Venkataraman, Satish Aggarwal, Akil Sambhar, Nageswar Rao & Atul Awasthi/Vivek Kumar Upadhyay

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Article 7 of India-China DTAA Section 9 of Income-tax Act On facts, since the sale transaction was concluded outside India, payment made for offshore supplies was not taxable in India.

Facts:
The applicant was a Chinese company engaged in the business of supplying equipment for electric power projects. An Indian company awarded contract to the applicant for offshore supply. The scope of the work required the applicant to carry out design, engineering, procuring and transportation of the equipment for a thermal power plant to the port of loading.

The applicant contended that the supply of the equipment was made outside India and hence, the payment received by it was not taxable under Income-tax Act or India-China DTAA. In support of its contention, the applicant claimed:

  • As per the contract, title to the equipment was passed at the port of loading, which was located outside India.

  • The shipping documents showed the Indian company as the owner of the equipment.

  • The transit insurance was obtained in the name of the Indian company.

  • The payment was to be made in foreign currencies.

  • The payment was to be received outside India by the applicant by electronic funds transfer.

The applicant also relied on the Supreme Court’s decision in Ishikawajima-Harima Heavy Industries v. DIT, (2007) 288 ITR 408 (SC) and AAR’s ruling in LS Cable Ltd., In re (2011) 337 ITR 35 (AAR).

The tax authority contended that the contract was not merely a supply contract and the applicant had done considerable work in India, such as testing of equipment during project commissioning, coordination with other contractors for precommissioning activities, etc. Further, the applicant was required to provide assistance and support to the other contractors for 90 days after provisional completion of the unit. Also, the contract was indivisible. Therefore, the applicant had PE in India and consequently, the payment was taxable in India.

Held:
The AAR held as follows:

The question raised is only on offshore supply of equipments and not on other activities. On perusal of the contract, the conduct of the parties which is apparent from the shipping documents and taking of transit insurance in the name of the Indian company, the transaction is that of an offshore sale. In light of the Supreme Court’s decision in Ishikawajima-Harima Heavy Industries v. DIT, (2007) 288 ITR 408 (SC), the transaction cannot be considered as one and indivisible. Hence, the tax authority does not have the jurisdiction to tax payment made outside India for offshore supplies.

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Shell India Markets Pvt. Ltd. AAR No. 833 of 2009 (unreported) Dated: 17-1-2012 Before P. K. Balasubramanyan (Chairman) & V. K. Shridhar (Member) Counsel for applicant: Rajan Vora, G. V. Krishna Kumar and Gaurav Bhauwala

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Article 13.4 of India-UK DTAA; Section 9 of Income-tax Act

(i) Since provision of services required special knowledge and human intervention, they were consultancy services.

(ii) As the applicant was free to utilise the knowhow/ intellectual property generated from services and independent of service provider, service can be regarded as ‘made available’.

(iii) Even if the provision of services does not have any element of profit, the consideration was taxable, both under Income-tax Act and under India-UK DTAA.

Facts:
The applicant was an Indian company and a member of Shell Group. The applicant entered into Cost Contribution Agreement (‘CCA’) with a Shell Group Company in UK (‘UKCo’) for providing Business Support Services (‘BSS’). BSS were primarily in the nature of management support services. UKCo was providing BSS to other Shell Group Companies also. Under CCA, UKCo provided services at cost and without charging markup.

Before the AAR, the applicant contended as follows:

The services excluded R&D, technical advice and services. Hence, they were only managerial services, which were excluded from Article 13.4(c) of India-UK DTAA.

Services were provided at cost, which was reimbursed by Group Companies. Hence, no income had arisen to UKCo in terms of certain judicial decisions1.

Due to cost contribution, the contributing companies became economic owners of knowhow/ intellectual property. Hence, question of UKCo granting right to use such intellectual property to applicant did not arise.

UKCo did not have a PE in India. In absence of any chargeable income, payment received by UKCo should not be taxable in India.

The issues before the AAR pertained to the nature of services provided by UKCo; whether the services were ‘made available’ in the context of India-UK DTAA; and whether any income accrued even if there was no element of profit.

Held:
The AAR ruled as follows:

Nature of services:
Advice given for taking a commercial decision is technical or consultancy services. The services provided by UKCo were of specialised nature. Consultancy services require special knowledge or expertise and human intervention. Provision of services through staff visits and interchanges was important ingredient under CCA which indicated that they were consultancy services. Certain services may not have been such services. However, since all the services were bundled and cannot be segregated, services as a whole would be consultancy services.

Make available under India-UK DTAA:

In Perfetti Ven Melle Holding BV (AAR No. 869 of 2010), the AAR has held that ‘make available’ means recipient should be in a position to derive enduring benefit and to utilise the knowledge or know-how in future on its own. In case of BSS, UKCo closely works with employees of the applicant and advises them. Further, as the applicant’s own averment, the applicant is able to use know-how/intellectual property generated from BSS independent of the service provider and hence services can be regarded as ‘made available’ to the applicant. Also, since a DTAA relates only to the rights and duties of subjects/citizens of respective States, one cannot rely on the meaning assigned to ‘make available’ under India-USA DTAA.

Income accruing and CCA:

The AAR held2 that even if the provision of services do not have any element of profit, the consideration would be taxable. Hence, the consideration was taxable as FTS, both under the Income-tax Act and India-UK DTAA and the applicant was obliged to deduct tax at source.
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ADIT v. Ballast Nadam Dredging ITA No. 999/Mum./2008 (unreported) A.Y.: 2004-05. Dated: 30-12-2011 Before B. R. Mittal (JM) & Pramod Kumar (AM) Counsel for taxpayer/revenue : Kanchan Kaushal & Dhanesh Bafna/Malati Sridharan

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Retention money received pursuant to furnishing of bank guarantee is not taxable until successful completion of the contract and expiration of the guarantee.

Facts:
The taxpayer was a Dutch company. The taxpayer was engaged in execution of a contract awarded by the Government of India. The contract pertained to the construction of breakwaters, dredging and land reclamation. As per the contract, 5% of the amount was to be held as retention money. When retention money reached 2% of the contract price, the taxpayer could ask for release of 1% of the retention money by furnishing bank guarantee.

The taxpayer received certain payments by way of release of retention money by furnishing bank guarantee. The taxpayer did not offer the same for taxation in the year of release. It contended that the payments would be taxable in the year when the taxpayer satisfactorily completed the work and removed the defects. However, the AO held that the payments had accrued to the taxpayer and accordingly, taxed the same.

The CIT(A) held that since the taxpayer did not have an absolute right over the payments, they were not taxable.

Held:
The Tribunal held as follows: As long as performance guarantee remains and is enforceable without notice to the taxpayer, the retention money received cannot be recognised as income and have to be excluded while computing the income until successful completion of the contract and expiration of the guarantee.

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Taxation of Commission Payments to Non-Residents

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Taxability of commission paid to a non-resident agent has become a contentious issue especially after withdrawal of the celebrated CBDT Circular No. 23 of 1969, dated 23rd July 1969 and Circular No. 786, dated 7th February 2000 on 22nd October 2009. Many issues arise in characterisation as well as taxability of commission income in light of provisions under the Income-tax Act, 1961 and under the provisions of a Tax Treaty. This Article discusses various such issues.

1. Provisions under the Income-tax Act, 1961 (the ‘Act’)

Indian exporters and/or businessmen avail services of foreign agents for a variety of purposes, such as securing export orders, sourcing of raw materials and plant & machinery, participation in exhibitions, buying or selling of properties and so on. When a non-resident receives commission for rendering such services outside India, from an Indian payer, whether it is taxable in India? Whether resident payer needs to deduct tax at source u/s.195 of the Act?

We will discuss various issues arising in this context such as:

  • Whether taxability of the commission income received by a non-resident depends upon the nature of the underlying transaction?

  • Whether commission income of a non-resident agent is taxable u/s.5 or u/s.9(1)(i), being source of income in India or u/s.9(1)(vii) as Fees for Technical Services (FTS)?

  • What is the impact of withdrawal of CBDT Circulars (No. 23 of 1969 and 786 of 2000) dealing with taxability of commission income of foreign agents of Indian exporters?

  • Whether the payment of commission to non-resident agent be taxed as ‘Other Income’ under Article 21 of a Tax Treaty relating to Other Income?

Let us first examine provisions of the Act in this regard.

(i) Section 5 r.w. Section 9 of the Act deals with this situation. Section 5 defines the scope of total income according to which, income of a nonresident is taxed in India if it is received, accrue or arise or deemed to be received, accrue or arise in India. Section 9 of the Act deals with Income deemed to accrue or arise in India. Inter alia it covers any income accruing or arising to a non-resident, directly or indirectly, through or from (i) any business connection (BC) in India and (ii) any asset or source of income in India.

(ii) Explanation to 2 to section 9(1)(i) defines the term ‘business connection’ (BC). The analysis of the said Explanation would show that any business activity in India carried out by a broker, general commission agent or any other agent having an independent status in his ordinary course of business will not constitute a BC in India and conversely that of a dependent agent will constitute a BC.

Thus, commission income of a foreign agent will not be taxed in India unless that agent has a BC in India. In absence of a BC, can it be construed that ‘source’ of commission income is in India as the payer is a tax resident of India?

(iii) In this connection, it is interesting to note the relevant contents of the CBDT Circular 23 of 1969 (since withdrawn), which is as follows:

“. . . . . . (4) Foreign agents of Indian exporters — A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India. Such an agent is not liable to income-tax in India on the commission.” (Emphasis supplied)

The above position was reaffirmed by the CBDT vide its Circular No. 163, dated 29-5-1975.

(iv) In this connection, it is interesting to note the observations of the AAR in case of SPAHI Projects (P.) Ltd. (2009) 183 Taxman 92 (AAR), wherein it held that “irrespective of the existence or otherwise of the business connection of ‘Z’, in India, since no business operations are carried out in India by ‘Z’, the attribution in terms clause (a) of the Explanation 1 is not possible and, therefore, no income can be deemed to accrue or arise in India merely because ‘Z’ promotes the business of the applicant in South Africa.”

Here the AAR held that even if it is assumed that there exists a BC in India, only so much of income as is attributable to that BC in India would be taxable in India as provided in Explanation 1 to section 9(1) of the Act, which reads as follows:

“Explanation 1 — For the purposes of this clause

— (a) In the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;”

Therefore, in a case where there exists a BC, but commission is paid in respect of services which are rendered outside India only, then no income can be said to accrue or arise in India.

(v) The Supreme Court in the case of Carborandum Co. v. CIT, (1977) 108 ITR 335, has held that “the carrying on of activities or operations in India is essential to make the non-resident have business connection in India in order that he may be liable to tax in respect of the income attributable to that business connection”.

(vi) In case of CIT v. Toshoku Ltd., (1980) 125 ITR 525 the Apex Court, while dealing with the issue of taxation in India of commission paid to a nonresident agent, held that “the assessees did not at all carry on any business operations in the taxable territories and as such the receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by purchasers from abroad, did not amount to an operation carried by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i). The impugned commission could not, therefore, be deemed to be income which had either accrued or arisen in India”.

1.1 Applicability of TDS provisions u/s.195 on commission paid to non-resident

The Income-tax Department vide its Circular No. 786, dated 7-2-2000 clarified that “the deduction of tax at source u/s.195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23, dated 23rd July, 1969 is drawn where the taxability of ‘Foreign Agents of Indian Exporters’ was considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely, section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible u/s.195”.

Many decisions wherein taxability of Commission paid to foreign agents was examined are rendered in the context of deductibility of tax at source u/s.195 of the Act.

The Tribunals, AAR and Courts in following cases held that provisions of section 195 of the Act are not applicable in case of commission payments to foreign agents of Indian entities as the said income is not taxable in India in the hands of the recipient.

(i) CIT v. Cooper Engineering Ltd., (1968) 68 ITR 457 (Bom.)

(ii) CIT v. Toshoku Ltd., (1980) 125 ITR 525 (SC)

(iii) Ceat International S.A. v. CIT, (1999) 237 ITR 859 (Bom.)

(iv) Indopel Garments Pvt. Ltd. v. DCIT, (2001) 72 TTJ 702

(v) Ind. Telesoft (2004) 267 ITR 725 (AAR)

(vi) DCIT v. Ardeshir B. Cursetjee & Sons Ltd., (2008) 24 SOT 48 (Mum.) (URO)

(vii) Jt. CIT v. George Williamsons (Assam) Ltd., (2009) 116 ITD 328 (Gau.)

(viii)    Dr. Reddy Laboratories Ltd. v. ITO, (1996) 58 ITD 104 (Hyd.)

(ix)    SOL Pharmaceutical Ltd. v. ITO, (2002) 83 ITD 72 (Hyd.)

(x)    Eon Technology (P) Ltd. v. DCIT, (2011) 11 tax-mann.com 53 (Del.)

(xi)    ACIT v. Meru Impex, (2011) 16 Taxmann.com 219 (Mumbai ITAT)

(xii)    ITO v. Asiatic Colour Chem Ltd., (2010) 41 SOT 21 (Ahd.) (URO)

(xiii)    ACIT v. Tamil Nadu Newsprints and Papers Limited, (2011 TII 215 ITAT Mad.-Intl.)

(xiv)    DCIT v. Divi’s Laboratories Ltd., (2011 TII 182 ITAT Hyd.-Intl.)/(2011) 12 taxmann.com 103

(xv)    ADIT (IT) v. Wizcraft International Entertain-ment (P.) Ltd., (2011) 43 SOT 470 (Mum.)

(xvi)    DCIT v. Mainetti (India) (P.) Ltd., (2011) 12 tax-mann.com 60 (Chennai)

All controversies arising in respect of interpretation of section 195 regarding non-deduction of tax at source were put to rest by with decision of the Supreme Court in the case of GE India Technology Centre P. Ltd. v. CIT, (2010) 327 ITR 456 wherein the Apex Court following Vijay Ship Breaking Corporation v. CIT, (2009) 314 ITR 309 (SC) held that “The payer is bound to deduct tax at source only if the tax is assessable in India. If tax is not so assessable, there is no question of tax at source being deducted”.

The decision of GE India Technology Centre P. Ltd. (supra) assumes special significance as it explained the decision of the Supreme Court in case of Transmission Corporation of A. P. Ltd. v. CIT,(1999) 239 ITR 587 (SC) in proper perspective. The said decision is often invoked by the Income-tax Department to fasten TDS obligation on the payer on a gross basis and even when the income is not chargeable to tax in the hands of the recipient thereof. The Apex Court stated that in the case of decision of the Transmission Corporation (supra), the issue was of deciding on what amount of tax is to be deducted at source, as the payment was in respect of a composite contract. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India.

With the above-mentioned correct interpretation of the decision in the case of Transmission Corporation (supra), the Apex Court set aside the decision of the Karnataka High Court in the case of CIT v. Samsung Electronics Co. Ltd. (2010) 320 ITR 209 wherein it was held that resident payer is obliged to deduct tax at source in any type of payment to a non-resident be it on account of buying/purchasing/ acquiring a packaged software product and as such a commercial transaction or even in the nature of a royalty payment. Applying the ratio of this decision the Income-tax Department used to disallow any payment to a non-resident where tax was not withheld, irrespective of the fact that the corresponding income was not chargeable to tax in the hands of a non-resident.

The CBDT vide circular 7/2009 [F. No. 500/135/2007-FTD-I], dated 22-10-2009 withdrew all three Circulars, namely, (i) 23 dated 23-7-1969 (ii) 163 dated 29-5-1975 and (iii) 786 dated 7-2-2000 which is giving rise to many controversies.

1.2    What is the impact of withdrawal of CBDT Circulars mentioned above?

Even though the above Circulars stand withdrawn, principles contained therein still hold the ground. Circular 23 of 1969 provided certain clarification regarding taxability in India in respect of certain transactions by a non-resident with an Indian resident, for example, sale of goods to India by a non-resident exporter, commission income of foreign agents of Indian exporters, purchasing of goods by a non-resident from India, sale of goods by non-resident in India either directly or through agents, etc. The Circular clarified about various situations that would not result in any business connection in India. One of the clarifications pertained to commission income earned by foreign agents of Indian exporters where the Circular clearly stated that no income shall deem to accrue or arise in India. In essence the said Circular interpreted provisions of section 9 of the Act whereby the underlying principles propounded were that the commission income of a foreign agent cannot be taxed in India if there exists no business connection in India and the income is not received in India. The subsequent amendments to section 9 of the Act, which relates to clarification of business connection in case of dependent/independent agent and taxability of Fees for Technical Services, do not alter the legal position. Therefore, even post withdrawal of impugned CBDT Circulars, commission earned by foreign agents of Indian exporters would not be taxable in India provided all services are rendered outside India (i.e., the foreign agent does not have any BC in India) and the income is not received in India.

This position has been upheld in DCIT v. Divi’s Laboratories Ltd., 2011 TII 182 ITAT Hyd.-Intl./(2011) 12 taxmann.com 103, wherein the Tribunal held as follows:

“We have considered the submissions of both the parties and perused the relevant material available on record. The moot question that arises out of these appeals is whether the payment of commission made to the overseas agents without deduction of tax is attracted disallowance u/s.40(a)(ia) of the Act or not. Whether the payment in dispute made by way of cheque or demand draft by posting the same in India would amount to payment in India and consequently whether mere payment would be said to arise or accrue in India or not? First we will take up the issue whether the payment of commission to overseas agents without deduction of tax is attracted disallowance u/s.40(a)(ia) of the Act or not. We find that the CBDT by its recent Circular No. 7, dated 22-10-2009 withdrawn its earlier Circular Nos. 23, dated 23-7-2009, 163 dated 29-5-1975 and 786, dated 7-2-2000. The earlier Circulars issued by the CBDT have clearly demonstrated the illustrations to explain that such commission payments can be paid without deduction of tax. Thus, the main thrust in such a situation is whether the commission made to overseas agents, who are non-resident entities, and who render services only at such particular place, is assessable to tax. Section 195 of the Act very clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax. Now, in order to determine whether the income could be deemed to be accrued or arisen in India, section 9 of the Act is the basis. This section, in our opinion, does not provide scope for taxing such payment, because the basic criteria provided in the section is about genesis or accruing or arising in India, by virtue of connection with the property in India, control and management vested in India, which are not satisfied in the present cases. Under these circumstances, withdrawal of earlier Circulars issued by the CBDT has no assistance to the Department, in any way, in disallowing such expenditure. It appears that an overseas agent of Indian exporter operates in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of TT or posting of cheques/demand drafts in India and therefore the same is not received by him or on his behalf in India and such an overseas agent is not liable to income-tax in India on these commission payments. This view is fortified by the judgment of Apex Court in the case of Toshoku Ltd. (supra).”

Thus, in respect of payment of commission to non-resident agent by a resident in respect of services rendered outside India, it is clear that withdrawal of the aforesaid CBDT Circulars would not affect the existing settled position in law that the same would not be taxable in India.

1.3    Can the withdrawal of aforesaid CBDT Circulars have retrospective effect?

In Satellite Television Asia Region Advertising Sales BV v. ADIT, (2010 TII 58 ITAT Mum.-Intl.) the Mumbai Bench, in the context of payment for sale of advertising time, held that though the Circular No. 23, dated 23rd July, 1969 was withdrawn on 22nd October, 2009, the withdrawal is prospective in nature. Since for the year under consideration, the Circular was in force, the Circular was still applicable to the case under consideration.

The Mumbai ITAT reiterated the same view in the case of DDIT v. Siemens Aktiengesellschaft, 2010 TII 09 ITAT Mum.-Intl.

1.4    Can commission paid to an individual be classified as salaries?

Can a commission payment be classified as salaries if the same is paid to a non-resident individual who represents an Indian entity was a question examined by the Mumbai Tribunal in case of ACIT v. Meru Impex, (2011) 16 Taxmann.com 219. In this case the Assessing Officer held that the appointment as agent to represent the assessee before foreign buyer was sham and not genuine; and that even assuming said payment to be genuine, the same was in nature of salary. However, the Tribunal ruled that the said payment cannot be classified as salaries in absence of employer-employee relationship.

1.5    Can commission be classified as fees for technical services?

In the case of Wallace Pharmaceuticals P. Ltd. (2005) 278 ITR 97 (AAR), on the facts of the case the AAR held that “though Penser is a tax resident of USA, it has rendered consultancy services in India and as the consultancy fee payable in respect of services utilised is not in connection with a business or profession carried on by the applicant outside India for the purposes of making or earning any income from any source outside India, the consultancy fee would be deemed income of Penser in India. In addition to the monthly consultancy fee under the agreement, Penser is also entitled to 10% commission on the orders procured by it. The commission will also be deemed income arising to Penser in India.”

It appears that since the commission was linked to monthly consultancy fees, the AAR considered it at par with the consultancy fees, notwithstanding the fact that services, inter alia, included promotion of Wallace’s products in the USA. Ironically, provisions of India-US DTAA were not considered/applied in this case. If the provisions of India-US DTAA were considered, probably the conclusion of the AAR would have been different due to existence of ‘Make Available’ clause in Article 12(4)(b) of the DTAA. Also if Penser had no PE in India, it would also not be taxable under Article 7 of the DTAA.

The AAR in case of SPAHI Projects (P.) Ltd. (2009)183 Taxman 92 (AAR) held that there could possibly be no controversy that the non-resident will not be rendering services of a managerial, technical or consultancy nature and, therefore, the liability to tax cannot be fastened on it by invoking the provisions dealing with fee for technical services.

However, in case of DCIT v. Mainetti (India) (P.) Ltd., (2011) 12 taxmann.com 60 the Chennai Tribunal held that “No doubt technical service would definitely include managerial services. However, canvassing of orders abroad could not be regarded as managerial services, nor could it be said to be for any consultation. Thus, definitely technical services as per Explanation 2 to section 9(1)(vii) of the Act would have no application.”

2.    Taxability under a tax treaty

Under the provisions of a tax treaty, the income is taxed under different sub-heads with each having a separate set of distributive rules and definition. For example, profits from operation of ships and aircrafts, royalties and Fees for Technical Services (FTS) are dealt by separate articles though essentially they are all part and parcel of business activities. Under domestic tax law, they are all taxed under the same head of business profits. Therefore, difficulty arises about characterisation of income under a treaty scenario.

Under a tax treaty, business profits earned by an enterprise resident of one country are taxed only in its country of residence unless it has a Permanent Establishment (PE) in the source country. However, royalties and FTS can be taxed in a source country even if there is no PE.

Another difference is that whereas business profits are taxed on a net basis (that too only to the extent they are attributable to the PE in the source country), royalties and FTS are taxed on gross basis, albeit at a concessional rate.

In the treaty context the following situations arise:

2.1    Commission income treated as business income

Ideally, commission income should be classified as business income as it is neither royalty nor fees for technical services. In such a scenario, taxability in India would depend upon whether the foreign agent has a PE in India or not. If the foreign agent has a PE in India, then commission income which is attributable to it would be subject to tax in India. Usually, foreign agents of Indian exporters operate outside India and therefore there will not be a PE in India. In such a scenario, commission earned by them would not be taxed in India.

In SPAHI Projects (P.) Ltd. (supra), the AAR held that income received by the non-resident on account of commission paid by the resident is not chargeable to tax in India by virtue of Article 7 of the India-South Africa Tax Treaty and therefore the payer is not obliged to deduct tax at source u/s.195 of the Act.

2.2    Can commission paid to a non-resident be classified as Professional Fees?

In case of ACIT v. Meru Impex (supra) the assessee claimed benefit of Article 15 of the India-USA Tax Treaty which provides that income of a USA tax resident from the performance in India of professional services or other independent activities of a similar character shall be taxable only in the USA as the non-resident agent did not have a fixed base in India, nor did his stay in India exceeded 90 days. Incidentally India-USA treaty requires two conditions to be satisfied to claim exemption from tax in the State of source, which are:

(i)    non-existence of fixed base, and
(ii)    stay of 90 days or less in the relevant taxable year, in the State of Source.

The assessee relied on the term ‘other independent activities of a similar character’ to classify commission income into professional income and claimed exemption in India. However, the Mumbai Tribunal rightly observed that though the definition of ‘Professional Services’ is not exhaustive, it contemplates existence of professional skill and performance of such professional skill for which they receive payments. In absence of relevant details, the matter was remanded back to the AO for fresh determination. Interestingly, the CIT (Appeals) had granted benefit of Article 15 to the NR agent on the ground that he did not have a fixed base in India.

2.3    Can commission paid to a non-resident be classified as ‘Other Income’ falling under Article 21?

Almost every tax treaty contains a residuary clause, namely, ‘Other Income’ which gives right of taxation to both the countries (as per majority of Indian tax treaties). This Article covers income not dealt with in any other Articles of the concerned tax treaty.

In Rajiv Malhotra’s case (2006) 284 ITR 564 (AAR) the overseas agent rendered services abroad in respect of an exhibition to be organised in India. On the facts of the case, the AAR held that “though the agent rendered services abroad and pursued and solicited exhibitors there, the right of the agent to receive the commission arose in India only when the exhibitor participated in the Food and Wine Show to be held in India and made full payment to the applicant in India. The commission income would, therefore, be taxable in India, as income arising from a ‘source of income’ in India in view of the specific provisions of section 5(2)(b) read with section 9(1) of the Income-tax Act, 1961. The facts that the agent rendered services abroad in the form of pursuing and soliciting participants and that the commission was to be remitted to him abroad were wholly irrelevant for the purpose of determining the situs of the income”.

Surprisingly, AAR applied Article 23 on ‘Other Income’ to commission income instead of Article 7 on Business Profits and held that “paragraph 3 of Article 23 of the Agreement for the Avoidance of Double Taxation between India and the French Republic was at par with the provisions of section 5(2) read with section 9(1) and did not grant any further benefit”.

In our humble opinion, with due respect, this decision needs reconsideration. In any case, being advance ruling, it is case specific and therefore it does not render any binding precedent.

2.4    Taxability of commission paid to a non-resident for events held in India

CBDT Circular Nos. 23 of 1969 and 786, dated 7-2-2000 dealt with commission paid to foreign agents of Indian exporters. Therefore, a question often arises as to their applicability to payment of commission otherwise than for exports. However, in the case of ADIT(IT) v. Wizcraft International Entertainment Pvt. Ltd., (2011) 43 SOT 470 (Mum.), the Mumbai Tribunal held that “Though, the above Circular (i.e., Circular No. 786, dated 7-2-2000) is issued in the context of commission paid to foreign agent of Indian exporters, it applies with equal force to commission paid to agents for services rendered outside India”.

In this case one Mr. Colin Davie, a resident of UK earned commission from co-ordinating an entertainment event which was performed in India. The Mumbai Tribunal held that no income is deemed to accrue or arise in India in view of the fact that the services were rendered outside India. The Tribunal also rejected the argument of the Income-tax Department that the income of Mr. Davie be taxed under Article 18 of the India-UK Tax Treaty (dealing with income of ‘Artists and Athletes’) as Mr. Davie neither took part in events during the dates of engagements, nor did he exercise any personal activities in India. It further observed that the income of Mr. Davie by way of commission does not relate to the services of entertainer/artiste. The Tribunal held that the commission income was in the nature of Business Income and was not taxable in India in absence of a PE.

3.    Whether written agreement is crucial to establish commission payment and to get deduction thereof

In ACIT v. Meru Impex, (2011) 16 taxmann.com 219, the Mumbai Tribunal held that “if the services rendered are established, then the assessee would be entitled to claim deduction on account of commission paid. The existence or non-existence of written agreement would not be fatal to claim deduction on account of expenditure on account of commission. Therefore, the finding of the Assessing Officer with regard to the agreement being a sham document cannot be sustained and in any event, they are irrelevant”.

4.  Conclusion

The law on taxability of commission income of foreign agents of Indian exporters does not seem to have altered with withdrawal of the CBDT Circulars. In view of the clear provisions of the Act as well as decisions of Tribunals, Courts and AAR one can conclude that carrying on of business operation in India is crucial to result in a BC and in case of foreign agents where services are rendered outside India, commission cannot be said to be accruing or arising in India [refer the Supreme Court’s observations in case of Carborandum Co. at para 1.1 (v) (supra)]. In fact, even in a case where the event had taken place in India [refer the decision of the Mumbai Tribunal in the case of Wizcraft International Entertainment Pvt. Ltd. at para 2.4 (supra)], no income was deemed to accrue in India as long as services were rendered outside India.

The AAR has recently rendered a Ruling dated 22.02.2012, in the case of SKF Boilers and Driers Pvt. Ltd. (AAR No. 983-983 of 2010), wherein the AAR has held that such Export Commission is taxable in India u/s 5(2)(b) r/w Section 9(1)(i) of the Act. As the Applicant was not present and the Ruling was rendered in absentia, the correct position in Law as discussed above and the catena of decisions favourable to the Assessee (listed in Para 1.1 above) could not be presented and considered by the AAR, which followed its own Ruling in Rajiv Malhotra [284 ITR 564 (AAR) refer Para No. 2.3 above] but ignored its Ruling in SPAHI Projects (P.) Ltd. [2009] 183 TAXMAN 92 (AAR) discussed in Para Nos. 1(iv) and 1.5 above. In our humble opinion, if the correct position in Law and the relevant favourable case laws were presented and considered by the AAR, the Ruling could have been different.

As far as applicability of provisions of section 195 are concerned, the Supreme Court [in the case of GE India Technology, para 1.1 (supra)] has held that they are applicable only if income is chargeable to tax. The taxpayer can refrain from deducting tax at source if according to him the income is not chargeable to tax in India in the hands of the non-residents.

Acountability in governance

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As the financial year draws to a close, bureaucrats, entrepreneurs, institutions, push themselves to achieve targets. This year is no different. Normally targets are quantitative and not qualitative, and very rarely does one look at the manner in which these goals are achieved.

The Vodafone judgment was a huge jolt to the government and the already elusive direct tax target now looks impossible. Pressure from the ministry coupled with statements that future postings of taxmen would depend on the collection they achieved, galvanized them into action. In the past month or so, we have seen stringent , at times coercive action for recovery of taxes. While one accepts that the government must collect the tax that is due, and it is the duty of every citizen to pay the same, it cannot be forgotten that the law prescribes a process for ascertaining what tax is “due”. Much before the first appeal is heard an assesse is expected to pay 50% of the tax as per the assessment order. It is a well established judicial principle that when collecting such tax before the final stage of its determination one has to see the balance of convenience. This is very rarely done. Going by the number of cases that go in the assessee’s favour at the various stages of appeal, particularly at the tribunal, this interim collection becomes refundable. In these situations collecting officials must take responsibility and be accountable for coercive collection of taxes. What is required is humane approach in recovery matters.

While this form of active recovery is not new to tax payers, the “indirect” recovery by way of adjustment of refunds, is like an epidemic that has spread to all parts of the country. The culpability for this lies entirely with the Income tax department. The computerized processing centre ‘CPC’ where all electronically filed returns are processed is accessing a data base which is totally different from the one being used by assessing officers in the field. In these cases the errors in assessment orders have been rectified or effects of appeal have been given by the assessing officers and in some cases consequential refunds have also been issued. However the data base furnished to the CPC has not been updated. The result is an unwarranted adjustment of refunds due against non-existing demands. When one tries approaching one authority to get the error committed by the other rectified, the blame game starts with each justifying its action. It is like two different doctors prescribing two different therapies based on two distinct reports pertaining to the same patient. The consequence is unbearable pain and anguish for the patient. It will be of little solace to him that it was the two different reports and not the skill or ability of the medico that was to blame. It is here that those responsible must be held accountable.

The illustration in the paragraphs above is regarding tax authorities because we, as professionals, interact with them every day. However, this attitude of those who enjoy power either as government officials or as elected representatives of the people pervades every walk of life. When one complains of the poor state of roads, we find one authority blaming the other. When a pedestrian falls into a ditch and loses a limb it is of little concern to him whether the Mumbai Municipal Corporation or the Mumbai Metropolitan Road Development Authority is responsible. What he requires are walkable and motorable roads.

In this context one really envies the position of the Indian bureaucrat. This is because once he joins the service he enjoys virtual immunity from any punitive or disciplinary action. Even when such action is taken it takes an unduly long time for any disciplinary action to reach its logical conclusion. We tend to criticise politicians but they have to face the public in every election and can be held accountable at that time. While saying that one must hold the politicians responsible, it is necessary that citizens do their mite. It was extremely disappointing to note that after a campaign by the government as well as efforts by NGOS, the voting percentage in the recently concluded municipal election in Mumbai was approximately, an abysmal 50%. During a number of discussions and debates the refrain of a large number of educated voters was that they did not vote because they did not find any candidate worthy of their vote. Though I personally do not subscribe to this thought process, I think it will be worthwhile to give the voter the option of rejecting all the candidates. This will enable the electorate to express their disapproval of the candidates put up by political parties.

If this situation is to undergo a change the process of investigation must become transparent and that of dispensing justice must be expedited. It is only when citizens demand from authorities an account of their performance and erring authorities are held accountable, will democracy be strengthened. It is disturbing to note that many a relevant document or paper which will be material evidence goes “missing“ from government records. This has become a regular feature with the missing papers in the Adarsh scam being a recent example. Even if a person does not get justice on this planet he can expect it in life beyond. One only hopes that the greatest accountant of them all Chitragupt, keeps his books and record safe and secure, for no one can underestimate the reach of the wily Indian politician and bureaucrat!

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Standards and Structures

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Order in Society exists because of ‘standards and structures’. Without standards we would be in chaos and anarchy will rule. We accountants are aware of the importance of standards. Accounting standards are required to usher in clarity, comparison and accountability — the three ingredients fundamental to economic decisions. We accountants also have our ‘code of conduct’. Violation of the code leads to censure and punishment.

Similarly, social conduct has its own code. Our social code of conduct is not codified though laws are nothing but codification of behaviour — violation of which leads to punishment. All religions and religious practices are also nothing else but codes of behaviour — though non-observance or violation of these normally do not in today’s environment entail even social censure.

‘Standards and structures’ are in the interest of both the rulers and the ruled. They bring into focus accountability and these should be the basis of our decisions and actions. ‘Standards and structures’ build society. On the other hand lack of standards destroy and cut at the very roots of stable society. The basis of the French revolution was moving away from normal standards. The current LokPal crisis in India is because our rulers have probably unwittingly moved away from ethical standards and encouraged actions which have increased corruption — Satyam happened because standards were violated.

The issue is: Are standards immutable? Except for certain standards like living in truth with love, having compassion and living an ethical life, no standards are immutable. They are nothing but hypotheses and represent the current environment. We must never forget that the present keeps changing hence the social standards also keep changing — for example — live-in relationships were not accepted — today they are accepted and even the courts have approbated this relationship.

Another issue is: What is the duty of doubt in establishing standards and creating structures? Doubt plays an important role in establishing standards. It is to avoid doubt, unpredictability, uncertainty and unaccountability that standards are required. Doubt is the basis of all standards with the object of bringing clarity — clarity in our thinking and behaviour.

To live a happy life — whether social or professional, let us respect ‘standards and structures’ and live by and within them.

I would conclude by quoting Reinhold Wiebuhur:

“Grant me the serenity to accept the things I cannot change; the courage to change the things I can, and the wisdom to know the difference”.

If we practice this, there will be no anxiety and peace and happiness will prevail and pervade our lives.

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