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Month: May

[2014] 43 taxmann.com 363 (Madras) CST vs. Sangamitra Services Agency

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Whether, reimbursement of expenses paid by Principal to C&F Agent on actual basis are includible in the value of clearing and forwarding service? Held, no.

Facts:
The issue before the High Court was, whether various charges towards freight, labour, electricity, telephone etc, which were reimbursed by the principal to the C & F Agent on the basis of actuals, were required to be added to the value of the taxable service in relation to the clearing and forwarding services provided by a C&F agent of the Principal.

On behalf of the respondent, nobody represented the matter. The Revenue contended that, in terms of the provisions of Rule 6(8) of the Service Tax Rules, 1994, the value of taxable service in relation to the services provided by the Clearing and Forwarding Agent to the client for rendering services of the Clearing and Forwarding operations, in any manner, shall be deemed to be the gross amount of remuneration or commission (by whatever name called) paid to such agent by the client, engaging such agent and considering this, the charges collected towards freight, labour, electricity, telephone etc., in connection with the Clearing and Forwarding Services, would form part of the remuneration/commission.

Held
Rejecting the revenue’s contention, the Hon’ble High Court held that the gross amount referred to in Rule 6(8) of the Service Tax Rules, 1994 would apply to receipts of such sum, which would bear the character of remuneration or commission in that. In the absence of any material to show the understanding between the Principal and the Client that the commission payable by the principal was all inclusive, it is difficult to hold that the gross amount of remuneration/commission would nevertheless include expenditure incurred by the assessee providing the services; that all incidental charges for running of the business would also form part of the remuneration or commission (by whatever name called). The phrase “by whatever name called” must necessarily have some link or reference with the nature of the receipt of remuneration or commission. Thus, if a receipt is for reimbursing the expenditure incurred for the purpose per se, would not justify that the same had the character of the remuneration or commission.

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2014 (33) STR 621 (Guj) Comm. Of C. Ex & Cust. Ahmedabad-III vs. Fine Care Biosystems

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Whether CBEC Circulars/Instructions which are administrative in nature are binding on the department? Held, yes.

Facts:
The department preferred an appeal against an Order of CESTAT dated 14-07-2007 rejecting appeal filed by the department. The issue involved was the demand of refund of Rs. 89,476/- sanctioned by the Tribunal under Rule 5 of the CENVAT Credit Rules, 2004.

The department filed this appeal challenging the order passed by the CESTAT and on 25-02-2010 by way of an order the High Court formulated questions on the issue. The CBEC on 20-10-2010 issued Circular/ Instruction F. No. 390/Misc./163/2010-JC providing for monetary limits in respect of filing of appeals by the department in the Tribunal, High Court and Supreme Court. The said instruction had prescribed monetary limit of Rs. 10 lakh of tax and penalty in case appeal to be preferred by the department to the High Court. The respondent argued that, though the said Instruction was issued after the formulation of questions by the High Court in the present case, the department could not violate the CBEC instructions and since the present case is below prescribed monetary limits, department’s appeal should be dismissed.

Held:
The High Court held that the department was not authorised to prefer an appeal where the same is the below prescribed monetary limit. Though questions were framed in an earlier hearing, the High Court refrained from considering the merits of the case and dismissed the appeal as it was in violation to CBEC instructions.

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2014 (33) STR 619 (Uttarakhand) Commissioner of Central Excise, Meerut –I vs. Usha Breco Ltd.

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Whether provision of transportation service which is an ancillary to main business activity would be classified as “Tour Operator’s Service”? Held, no.

Facts:
The appellant was operating two ropeways at Haridwar at two different places. The appellant was charging fees from pilgrims for the use of the said ropeways. The distance between these two ropeways was about 3.75 kms. For those interested in using the ropeways at both places, the appellant provided transportation from one ropeway to the other by road against consideration of separate fees. The department demanded Service Tax on these fees charges for transporting pilgrims from one place of ropeway to another under “Tour Operator Service.” The appellant contended that the said service was not exigible to tax under ‘Tour Operator service’ and the appellant was not a tour operator. The Tribunal held that the appellant could not be regarded as tour operator as the transportation was not a main business of the appellant.

Held:
Since there was no change in the facts and these were considered by the Tribunal, the High Court declined to interfere and dismissed the appeal filed by the department.

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2014 (33) STR 609 (All) A C L Education Centre (P) Ltd vs. UOI

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Is Rule 5A(2) of STR 1994 which prescribes for an access by authorised officer for verification etc. and for submission of records by assessee for Service Tax Audit ultra vires? Held, no.

Facts:
The Excise Department had issued intimations on various dates under Rule 5A(2) of STR 1994 calling for certain documents for conducting the EA-2000 audit. The appellant challenged the said intimations on the vires/legality of the said intimations under the ground that the same were contrary to the provisions of section 72 of the Finance Act. The appellant further argued that, the said Rule was arbitrary and it did not provide for details like the period of audit, the qualification and manner in which the said audit will be conducted, no provisions to furnish audit report to the assessee etc. The appellant also brought to the notice of the High Court that, in an identical case, the Delhi High Court in the case of Travelite India vs. UOI WP 3774 of 2013 had passed an interim order to maintain status quo.

Held:
The High Court observed that, section 72A of the Act is applicable when the assessee is not maintaining the books of accounts properly to ascertain the Service Tax liability and to determine the correct tax, the books will have to be examined and if need be, be audited by a qualified Chartered Accountant. Rule 5A only facilitates the provisions of section 72A, as Rule 5A( 2) states that every assessee shall on demand make available records, trial balance, income tax audit report to the audit party and audit will be conducted by the qualified Chartered Accountant/Cost Accountant as deputed by the Deputy Commissioner.

In view of this, it was held that, Rule 5A of STR 1994 is not ultra vires and it is in consonance to section 72A of the Finance Act and accordingly the High Court dismissed the Writ Petitions.

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2014 (33) STR 501 (Guj.) Commissioner of C. Ex. & Customs vs. Ultratech Cement Ltd.

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Whether Service Tax paid on insurance of vehicles used for the residents of worker’s residential colony is eligible input service for availment of the CENVAT Credit? Held, no.

Facts:
The respondents, cement manufacturers availed the CENVAT Credit of Service Tax paid on insurance services for the residential colony and of the vehicles specially used for travelling of workers from their colony to the factory. Placing reliance on the decision of the Delhi Tribunal in the case of M/s. Triveni Engg & Industrial Ltd. vs. CCC, Meerut, 2008 (12) S.T.R. 330, the Tribunal had upheld the assessee’s contention that the phrase “activities in relation to business” used in the inclusive part of the definition of input services was wide enough to cover such services.

Held:
The Hon’ble High Court observed the case of Commissioner vs. Gujarat Heavy Chemicals Ltd. 2011 (22) S.T.R. 610 (Guj), wherein the Hon’ble Gujarat High Court had analysed various decisions and had held that if providing residential quarters and security services was voluntary, the activities were not covered within the definition of input services and therefore, the CENVAT Credit was not available. Relying on this, the CENVAT was not allowed as not in relation to business.

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Stainless Steel vis-à-vis Rate of Tax Under MVAT Act, 2002

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Introduction

The Commissions of Sales Tax, Maharashtra, has recently issued a Circular bearing No. 11T of 2014 dated 04-04-2014, by which it is informed that the sale of stainless steel wires will be liable to tax as non-declared goods i.e., at 12.5% in residual category, due to the judgment of the Supreme Court in the case of M/s. Bansal Wire Industries Ltd. (42 VST 372). The declared goods are covered by entry C-55 of the MVAT Act, 2002. If the goods are so covered, the tax is 5%. However, if they get excluded from above entry, the rate becomes 12.5%. Therefore, it is necessary to see the implication of above judgment and circular.

Background
The facts in this case are that the issue arose under the UP Trade Tax Act, 1948. Originally, the dealer was assessed to tax at 4% on the sale of stainless steel wires on the grounds that it is declared goods. However, the said assessment was revised, so as to levy tax on the sale of stainless steel wires at a higher rate, considering that it is not sale of declared goods.

The Hon’ble Allahabad High Court confirmed the view of the department. Therefore, the issue was raised before the Hon’ble Supreme Court.

The question which was referred to the Hon’ble Supreme Court is reproduced in the judgment as under:

“Whether stainless steel wire, a product of the appellant, on a proper reading of section 14 of the Central Sales Tax Act along with the qualifying words ’that is to say’ would fall under the category ’tool, alloy and special steels of any of the above categories’ enumerated in entry (ix) of Clause (iv) or under entry (xv) of same Clause (iv)?”

Consideration by Supreme Court

Hon’ble Supreme Court has analysed the position about declared goods. The Hon’ble Supreme Court has reproduced section 14(iv) of the CST Act, 1956 which enumerates declared goods. The said section is reproduced below for ready reference.

“14. Certain goods to be of special importance in inter-State trade or commerce.—It is hereby declared that the following goods are of special importance in inter-State trade or commerce,—

. . .

(iv) iron and steel, that is to say,—

(i) pig iron and cast iron including ingot moulds, bottom, plates, iron scrap, cast iron scrap, runner scrap and iron skull scrap;

(ii) steel semis (ingots, slabs, blooms and billets of all qualities, shapes and sizes);

(iii) skull bars, tin bars, sheet bars, hoe-bars and sleeper bars;

(iv) steel bars (rounds, rods, squares, flats, octagons and hexagons, plain and ribbed or twisted, in coil form as well as straight lengths);

(v) Steel structurals (angels, joists, channels, tees, sheet piling sections, Z sections or any other rolled sections);

(vi) sheets, hoops, stripe and skelp, both black and galvanised, hot and cold rolled, plain and corrugated, in all qualities, in straight lengths and in coil form, as rolled and in riveted condition;

(vii) plates both plain and chequered in all qualities; (viii) discs, rings, forgings, and steel castings;

(ix) tool, alloy and special steels of any of the above categories;

(x) steel melting scrap in all forms including steel skull, turnings and borings;

(xi) steel tubes, both welded and seamless, of all diameters and lengths, including tube fittings;

(xii) tin-plates, both hot dipped and electrolytic and tin-free plates;

(xiii) fish plates bars, bearing plate bars, crossing sleeper bars, fish plates, bearing plates, crossing sleepers and pressed steel sleepers, rails-heavy and light crane rails;

(xiv) wheels, tyres, axles and wheel sets;

(xv) wire rods and wires-rolled, drawn, galvanised, aluminised, tinned or coated such as by copper;

(xvi) defectives, rejects, cuttings or end pieces of any of the above categories.”

The Hon’ble Supreme Court has discussed the back ground of the above entry. The Supreme Court held that each sub-group in above section 14(iv) exhaustively enumerates the kinds of goods covered by each sub-group. In this respect, the Hon’ble Supreme Court referred to its earlier judgment viz; State of Tamil Nadu vs. M/s. Pyare Lal Mehrotra (1976)(1 SCC 834).

The Hon’ble Supreme Court observed that the stainless steel can be covered by sub-entry (ix) and therefore the items covered by (i) to (viii), if of stainless steel, they can be covered. However, the wires are mentioned in sub-entry (xv) and said entry is separate. The sub-entry (ix) being not applicable to entry (xv), the stainless steel wires cannot be covered by any of the entries in section 14(iv). The reasoning of the the Hon’ble Supreme Court is contained in para-28 of the judgment and further elaborated in para-33. Both paras are reproduced below for ready reference.

“28. The expression “of any of the above categories” appearing in entry Nos.

(ix) and (xvi) of Clause (iv) of section 14 of the Central Act would indicate that they would each be items referred in the preceding items. Therefore, even the expression “of any of the above categories” in entry No. (ix) of Clause (iv) would only relate to steel and alloy produced for any of the materials mentioned in item Nos. (i) to (viii). Thus, “stainless steel wire” produced by the appellant cannot be read into item No. (xv) which reads as “wire rods and wires-rolled, drawn, galvanised, aluminised, tinned or coated such as by copper”.

33. It is thus clear, that the language used in entry No. (ix) is plain and unambiguous and that the items which are mentioned there are “tool, alloy and special steels”. By using the words “of any of the above categories” in entry No. (ix) would refer to entries (i) to (viii) and it cannot and does not refer to entry No. (xv). However, entry (xvi) of Clause (iv) would be included in entry (xvi) particularly within the expression now therein any of the aforesaid categories. Therefore, the specific entry “tool, alloy and special steels” being not applicable to entry (xv), the contention of the counsel for the appellant has to be rejected. It is, therefore, held that the stainless steel wire is not covered within entry (ix) of Clause (iv) of section 14 of the Central Sales Tax Act.”

Conclusion
The above referred circular has taken into account above mentioned observations of the Hon’ble Supreme Court. Accordingly, it is clarified that the items made from stainless steel mentioned in subentries (x) to (xv) will not be covered u/s. 14(iv) of CST Act, 1956 i.e., they will not be considered as ‘declared goods’ and will also not be covered by entry-C-55 of the MVAT Act, 2002.Thus, the same are liable to tax at 12.5%. Some of the items affected by the above interpretation are melting scrap, skull, turnings, borings, specified tubes and tube fittings etc., if they are of the stainless steel. The stainless steel pipes will also get excluded from entry C-55 but they will be eligible to be covered by entry C-72 which is regarding pipes of all varieties. Therefore, for stainless steel pipes, the rate will still remain 5%. However, for stainless steel tubes, the rate will be 12.5%.

The judgment of the Hon’ble Supreme Court is binding. However, an issue still remains about interpretation of the scope of the main heading of section 14(iv) i.e., ‘iron & steel’, whether it covers stainless steel itself? Steel is not qualified by any particular quality. Therefore, it can be argued that the above heading itself covers stainless steel also. This issue is not considered in the above judgment. Therefore, the dealer community will be required to wait till some more light is thrown on the above aspect from none other than the Supreme Court itself in some future  judgment.  Till  then,  the law will be guided by the above judgment of the Supreme Court and the circular issued by the Commissioner  of  Sales  Tax  of  Maharashtra State.

In  the  circular  the  position  as  per  the  above  judg- ment  in  the  case  of  M/s.  Bansal  Wire  Industries Ltd.  (42  VST  372)  is  sought  to  be  applied  from the  date  of  judgment  i.e.,  26-04-2011.  Therefore, dealers  will  be  liable  to  pay  a  higher  rate  from the  said  date,  which  may  attract  an  unforeseen liability  for  the  past  period  from  26-04-2011.  In fact,  the  impact  of  the  above  judgment  may be  from  the  inception  of  the  section  14(iv)  and hence  revised  rate  can  apply  even  prior  to  26-04- 2011.  However,  it  is  stated  in  the  circular  that  the matter  is  referred  to  government  for  period  prior to  26-04-2011.  It  is  common  experience  that  the dealers  have  collected  tax  at  4%  and  5%  in  respective  periods,  considering  the  impugned  goods  as ‘declared  goods’.  They  are  also  assessed  accordingly.  Therefore,  it  is  genuinely  felt  that  in  spite of  the  above  judgment,  the  government  should give necessary relief by administrative measures or by  introducing  changes  in  the  entries  and  should apply  the  law  prospectively  i.e.,  from  the  current date after giving sufficient time to the dealer com- munity  to  adjust  to  new  tax  rate.  In  fact,  by  looking  at  the  importance  of  goods,  the  rate  should be  continued  at  5%  by  introducing  new  entries as  they  are  getting  out  of  the  entry  C-55  only because  of  technical  interpretation  of  the  entry. We  expect  that  the  government  will  consider  the above  situation  and  grant  necessary  relief.

Controversy: Interest on Cenvat Credit Wrongly Taken and (or) Utilised

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Background

The issue whether interest is leviable at the point of time when the CENVAT Credit is wrongly taken or at the point of utilisation has been a matter of extensive judicial considerations. Further, an important amendment was made in Rule 14 of the CENVAT Rules through Notification dated 17-03-2012. This subject was discussed in the June 2012 issue of the BCAJ in the backdrop of an important ruling of the Karnataka High Court. However, subsequent to the said ruling, divergent views have been expressed by different judicial authorities (in particular recent ruling of CESTAT – Mumbai). Hence, since the issue has become highly controversial, the same is being discussed hereafter in the backdrop of divergent judicial rulings.

Relevant Statutory Provisions

• Rule 14 of CENVAT Credit Rules, 2004 (“CCR”)

” Where the CENVAT Credit has been taken or utilised wrongly or has been erroneously refunded, the same along with the interest shall be recovered from the manufacturer or provider of the output service and the provisions of the sections 11A and 11AB of the Excise Act, or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”

[Note – The words “taken or utilised wrongly” have been substituted by the words “taken and utilised wrongly vide Notification No. 18/2012 – CE(NT) dated 17-03-12]

• Rule 4(1) of CCR

“The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in factory of the manufacturer or premises of provider of output service………..”

• Rule 4(2) (a) of CCR

“The CENVAT Credit in respect of capital goods …….. at any point of time in a given financial year shall be taken only for an amount not exceeding 50 % of duty paid on such capital goods in the same financial year.“

• Rule 4(7) of CCR

“The CENVAT Credit in respect of input service shall be allowed, on or after the day on which payment is made of the value of input service and service tax paid or payable as indicated in Invoice…………”

Analysis of Credit ‘wrongly’ ‘taken’ / ‘utilised’

To understand the difference (if any) between the terms ‘wrongly’ ‘taken’ and ‘utilised’, the meanings attributed to these words used in Rule 14 of CCR is given hereafter for ready reference :

• ‘Taken’ means “to gain or receive into possession, to seize, to assume ownership” (Black’s Law Dictionary).
• ‘To take’, signifies “to lay hold of, grab, or seize it, to assume ownership etc.” (Advance Law Lexicon – 3rd Edition).
• ‘Utilise’ means “to make practical and effective use of” (Compact Oxford Dictionary Thesaurus).
• ‘Utilise’ means “to make use of, turn to use” (The Chambers Dictionary).
• ‘Wrongful’ – “characterised by unfairness of injustice, contrary to law” (Concise Oxford Dictionary)
• ‘Wrong’ – “any damage or injury, contrary to right, violation of right or of law” (P. Ramanatha Aiyer’s Law Lexicon)

Reversal of CENVAT Credit before Utilization – Settled Position

• In a landmark ruling in Chandrapur Magnet Wires (P) Ltd. vs. CCE (1996) 81 ELT 3 (SC), it has been held by the Supreme Court that, when the MODVAT Credit taken is reversed, it would mean that the MODVAT Credit has not been taken at all. This principle is relevant for the CENVAT Credit as well. Relevant observations of the Supreme Court are reproduced hereafter :

Para 7

In view of the aforesaid clarification by the department, we see no reason why the assessee cannot make a debit entry in the credit account before removal of the exempted final product. If this debit entry is permissible to be made, credit entry for the duties paid on the inputs utilised in manufacture of the final exempted product will stand deleted in the accounts of the assessee. In such a situation, it cannot be said that the assessee has taken credit for the duty paid on the inputs utilised in the manufacture of the final exempted product under Rule 57A. In other words, the claim for exemption of duty on the disputed goods cannot be denied on the plea that the assessee has taken credit of the duty paid on the inputs used in the manufacture of these goods.

The above stated principle laid down by the Supreme Court has been followed in a large number of cases. [For e.g. CCE vs. Ashima Dyecot Ltd. (2008) 232 ELT 580 (GUJ)].

Similarly, the said principle was also asserted by the Hon. Supreme Court in CCE, Mumbai vs. Bombay Dyeing & Mfg. Co. Ltd. 2007 (215) ELT 3 (SC) wherein it was held “whenever duty is paid on the input, the assessee is entitled to credit under CENVAT Credit Rules, 2002 however availment of credit takes place later on when the assessee makes adjustments of duty paid on input against duty paid on final product. In the present case, before the account could be debited and before the assessee could avail CENVAT Credit, assessee has reversed CENVAT Credit which would amount to the assessee not taking credit for duty paid on input. Learned counsel submitted that the assessee was free to reverse the credit before utilization of such credit.” This decision was also accepted by the Gujarat High Court in CCE vs. Dynaflex Ltd. 2011 (266) ELT 41 (Guj).

Department clarification

The CBEC had vide Circular No. 897/17/2009 – CX, dated 03-09-2009 has clarified as under:

“The Tribunal decision and the High Court judgment referred to above, was delivered in the context of erstwhile Rule 57 I of the Central Excise Rules, 1944 and that the Supreme Court order under reference is only a decision and not a judgment. Since, the Rule 14 of the CENVAT Credit Rules, 2004, is clear and unambiguous in the position that interest would be recoverable when CENVAT Credit is taken or utilised wrongly, it is clarified that the interest shall be recoverable when credit has been wrongly taken, even, if it has not been utilised, in terms of wordings of the present Rule 14.”

It may be noted that erstwhile Rule 57 I of the Central Excise Rules, 1944 did not specifically provide for any interest payment along with reversal of wrongly taken credit while present Rule 14 of CCR provides for payment of interest along with the reversal of wrongly taken credit.

Interest on Credit taken but not utilized – Judicial Views

• In CCE vs. Maruti Udyog Ltd. (2007) 214 ELT 173 (P & H)], the Hon’ble Punjab & Haryana Court agreed with the views of the Hon’ble CESTAT that the assessee was not liable to pay interest as the credit was only taken as entry in the MODVAT record and was in fact not utilised. The SLP filed by the revenue against this order of the Hon’ble Punjab & Haryana High Court was dismissed by the Hon’ble Supreme Court (2007) 214 ELT A 50 (SC) on 10-10-2006.

In the case of Maruti Udyog, the assessee claimed the Modvat credit which was not allowable in the absence of the requisite certificate under Rule 57E of the Central Excise Rules, 1944 being produced within six months but still the assessee claimed the same and credited the amount in RG – 23A Part II. The authorities disallowed the Modvat credit relying upon judgment of the Hon’ble Supreme Court in Osram Surya (P) Limited vs. Commissioner of Central Excise, Indore (2002) 142 ELT 5 (SC).

The Tribunal, however, had held that the assessee was not liable to pay interest as the credit was only taken as an entry in the Modvat record and was not in fact utilised. The Tribunal held that in absence of utilisation of credit, the assessee was not liable to pay interest.

The P & H High Court held as under :

“Learned Counsel for the appellant is unable to show as to how the  interest  will  be  required to be paid when in absence of availment of Modvat Credit in fact, the assessee was not liable to pay any duty. The Tribunal has clearly recorded a finding that the assessee did not avail of the Modvat Credit in fact and had only made an entry.

In view of this factual position, we are unable to hold that any substantial question of law arises”.

•    Attention is particularly drawn to the ruling of the Punjab & Haryana High  Court  in  the  case of Ind – Swift Laboratories Ltd. vs. UOI (2009) 240 ELT 328 (P & H), relevant extracts from which, are reproduced hereafter for reference:

Para 9

•    The Scheme of the Act and the CENVAT Credit Rules framed thereunder permit a manufacturer or producer of the final products  or a provider  of taxable service to  take  the  CENVAT  Credit in respect of duty of excise and such other duties as specified. The conditions for allowing the CENVAT Credit are contained in Rule 4 of  the Credit Rules contemplating that the CENVAT Credit can be taken immediately on receipt of the inputs in the factory of  the  manufacturer or in the premises of the provider of output service. Such CENVAT Credit can be utilised in terms of Rule 3(4) of Credit Rules  for payment of any duty of excise on any final product  and  as contemplated in the aforesaid sub-rule. It, thus, transpires that the CENVAT credit is the benefit of duties leviable or paid as specified in Rule 3(1) used in the manufacture of intermedi- ate products etc. In other  words,  it  is  a  credit of the duties already leviable or paid. Such credit in respect of duties already paid can be adjusted for payment of duties payable under the Act and the Rules framed thereunder. U/s. 11AB of the Act, liability to pay interest arises     in respect of any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded from the first day of the month in which the duty ought to have been paid. Interest is leviable if duty of  excise has not been levied or paid. Interest can be claimed or levied for the reason that there is delay in the payment of duties. The interest is compensatory in nature as the penalty is charge- able separately.

Para 10

•    In Pratibha Processors vs. Union of India, 1996
(88)  ELT  12  (SC)  =  (1996)  11  SCC  101,  it  was  held that  interest  is  compensatory  in  character  and is  imposed  on  an  assessee  who  has  withheld payment  of  any  tax  as  and  when  it  is  due  and payable.  Similarly,  in  Commissioner  of  Customs vs.  Jayathi  Krishna  &  Co.  –  2000  (119)  ELT  4(SC) (2000)  9  SCC  402,  it  was  held  that  interest  on warehoused goods is merely an accessory to the principal  and  if  the  principal  is  not  payable,  so is  it  for  interest  on  it.  In  view  of  the  aforesaid principle,  we  are  of  the  opinion  that  no  liability of  payment  of  any  excise  duty  arises  when  the petitioner availed the CENVAT Credit. The liability to pay duty arises only at the time of utilisation. Even  if  the  CENVAT  Credit  has  been  wrongly taken, that does not lead to the levy of interest as a liability of payment of excise duty does not arise  with  such  availment  of  the  CENVAT  Credit by an assessee. Therefore, interest is not payable on  the  amount  of  the  CENVAT  credit  availed  of and  not  utilised.

Para 11

•    Reliance of respondents on Rule 14 of the Credit Rules that interest u/s. 11AB of the Act is payable even if the CENVAT Credit has been taken.  In our view, the said Clause  has to be read down  to mean that where the CENVAT Credit taken and utilised wrongly. Interest cannot be claimed simply for the reason that the CENVAT  credit has been wrongly taken as such availment by itself does not create any  liability  of  payment of excise duty. On a conjoint reading of section 11AB of the Act and that of Rules  3  and  4  of the Credit Rules, we hold that interest cannot  be claimed from the date of wrong availment   of the CENVAT Credit. The interest shall be pay- able from the date the CENVAT Credit is wrongly utilised.

•    In an important ruling the Supreme Court,  in  the case of Ind-Swift Laboratories Ltd. (2011)  265 ELT 3 (S.C.)], set aside the order passed by the  Punjab  &  Haryana  High  Court  (2009)  240 ELT  328  (P  &  H)]  on  the  question  of  charging interest  on  the  CENVAT  Credit  wrongly  taken, but  not  utilised.  By  interpreting  the  expressions and  words  used  in  the  provisions  of  Rule  14  of CCR,   the Supreme Court concluded that interest is  payable  on  the  CENVAT  Credit  wrongly  taken even  if  such  Credit  has  not  been  utilised.

The issue for consideration is whether an assessee can be made liable to pay interest for taking wrong credit if such credit has not been utilised inasmuch he has not derived any  benefit  out  of his wrong action.

The more important observations of the Supreme Court are reproduced hereafter for ready reference:

“17. Xxxxxxxxxx In our considered opinion, the High Court misread and misinterprets the aforesaid Rule 14 and wrongly read it down without properly appreciating the scope and limitation thereof. A statutory provision is generally read down in order to save the said provision from being declared un- constitutional or illegal. Rule 14 specifically provides that where the CENVAT Credit has been taken or utilised would be recovered from the manufacturer or the provider of the output service.  The issue is  as to whether the aforesaid word “OR”  appear- ing in Rule 14, twice,  could  be  read  as  “AND” by way of reading it down as has been done by    the High Court. If the aforesaid provision is read    as a whole we find no reason to read the word “OR” in between the expression ‘taken’ or ‘utilised wrongly’ or has been erroneously refunded’ as the word “AND”. On the happening of any of the three aforesaid circumstances such credit becomes recoverable along with interest.

18. We do not feel that any other harmonious con- struction is required to be given to the aforesaid expression/provision which is clear and unambigu- ous as it exists  all by itself. So far as section  11AB    is concerned, the same becomes relevant and ap- plicable for the purpose of making recovery of the amount due and payable. Therefore, the High Court erroneously held that interest cannot be claimed from the date of wrong availment of the CENVAT Credit and that it should only be payable from the date when the CENVAT Credit is wrongly utilised. Besides, the rule of reading down is in itself  a Rule of harmonious construction in a different name. It is generally utilised to straighten the crudities or ironing out the creases to make a statue workable. This court has repeatedly laid down that in the  garb of reading down a  provision  it  is  not  open to read words and expressions not found in the provision statute and thus venture into a kind of judicial legislation. It is also held by this Court that the Rule of reading down is to be used for the limited purpose of making a particular provision workable and to bring it in harmony with other provisions of the statute.

The interpretation made by the Honorable Supreme Court considering the specific circumstances of a case involving evasion of duty,  has been a matter  of extensive deliberation by the experts and rightly so inasmuch as, if the same is applied generally, it would mean unsettling the settled law.

•    Important judgment of Karnataka High Court in CCE & ST vs. Bill Forge  Pvt. Ltd. (2012) 26 STR 204 (KAR) [Bill Forge Case]

?  However, observations of the Karnataka High Court  in  the  Bill  Forge  case  are  very  impor- tant,  inasmuch  not  only  has  it  distinguished facts  of  the  case  of  UOI  vs.  Ind-Swift  Labo- ratories  Ltd.  (2011)  265  ELT  3  (SC)  but  it  has made  a  fine  distinction  between  making  an entry in the register and credit being ‘taken’ to  drive  home  the  point  that  interest  is  pay- able  only  from  the  date  when  duty  is  legally payable  to  the  Government  and  the  Govern- ment  would  sustain  loss  to  that  extent.

? In the Bill Forge case, the High Court referring to the Apex Court’s judgment in case of UOI vs. Ind-Swift Laboratories Ltd. observed as under:

Para 18

“In fact, in the case before the Apex Court, the assessee received inputs and capital goods from various manufacturers/dealers and availed the CENVAT Credit on the duty paid on such  materi- als. The investigations conducted indicated that the assessee had taken the CENVAT Credit on fake invoices. When proceedings were initiated, the assessee filed applications for settlement of proceedings and the entire matter was placed before the Settlement Commission. The Settlement Commission held that a sum of Rs. 5,71,47,148.00 is the  duty  payable  and  simple  interest  at  10%  on  the CENVAT  Credit  wrongly  availed  from  the  date  the duty became payable as per section 11AB of the Act till  the  date  of  payment.  The  Revenue  calculated the said interest upto the date of the appropriation of  the  deposited  amount  and  not  upto  the  date  of payment.  Therefore,  it  was  contended  that  inter- est  has  to  be  calculated  from  the  date  of  actual utilisation  and  not  from  the  date  of  availment. Therefore,  an  application  was  filed  for  clarification by  the  assessee.  The  said  application  was  rejected upholding  the  earlier  order,  i.e.  interest  is  payable from  the  date  of  duty  becoming  payable  as  per section  11AB.  Therefore,  the  Apex  Court  interfered with the judgment of the Punjab and Haryana High Court  and  rightly  rejected  by  the  Settlement  Com- mission  as  outside  the  scope  and  they  found  fault with  the  interpretation  placed  on  Rule  14.”

“It is also to be noticed that in the aforesaid  Rule, the word ‘avail’ is not used. The words used are ‘taken’ or “utilised wrongly”. Further the said provision makes it clear that the interest shall be recovered in terms of section 11A and 11B of the Act………”

Para 20

From the aforesaid discussion what emerges is that the credit of excise duty in the register maintained for the said purpose is only a book entry.  It might  be utilised later for payment of excise duty on the excisable product……… Before utilisation of such credit, the entry has been reversed, it amounts to not taking credit.”

para 22

“Therefore interest is payable from that date though in fact by such entry the Revenue  is  not put to any loss at all. When once the wrong entry was pointed out, being convinced, the assessee has promptly reversed the entry. In other words,  he did not take the advantage of wrong entry. He did not take the CENVAT Credit or utilised the CENVAT credit. It is in those circumstances that the Tribunal was justified in holding that, when the  assessee has not taken the benefit of the CENVAT Credit, there is no liability to pay  interest.  Before  it  can be taken, it had been reversed. In other words, once the entry was reversed, it is as if that the CENVAT credit was not available. Therefore, the said judgment of the Apex Court* has no application to the facts of this case It is only when the assessee  had taken the credit, in other words by taking such credit, if he had not paid the duty which is legally  due to the Government, the Government would have sustained loss to that extent. Then the liability to pay interest from the date the amount became due arises u/s. 11AB, in order to compensate the Government which was deprived of the duty  on  the date it became due.”

•    The ruling of Karnataka High Court in Bill Forge case, has been followed in large number of subsequent decided cases For e.g.:

?  CCE  vs.  Pearl  Insulation  Ltd.  (2012)  27  STR  337 (KAR)

?  CCE vs. Gokuldas Images (P) Ltd. (2012) 28 STR 214  (KAR)

?  Sharvathy  Conductors  Pvt.  Ltd.  vs.  CCE  (2013) 31  STR  47  (Tri  –  Bang)

?  CCE  vs.  Sharda  Enargy  &  Minerals  Ltd.  (2013) 291  ELT  404  (Tri  –  Del)

?  Gary Pharmaceuticals (P) Ltd vs. CCE (2013) 297 ELT  391  (Tri  –  Del)

?  CCE  vs.  Balrampur  Chinni  Mills  Ltd.  (2014)  300 ELT  449  (Tri  –  Del)

However, in many cases, [For e.g., CCE vs. Kay Bouvei Engineering Pvt. Ltd.  (2014)  301  ELT 100  (Tri –  Mum- bai)], the Bill Forge case has not been followed and instead,  the  position  held  by  the  Supreme  Court  in Ind  Swift  case  followed.

Important amendment in Rule 14 of CCR

In  a  very  significant  amendment  in  Rule  14  of  CCR, with  effect  from  17-03-2012,  the  words  CENVAT Credit  has  been  “taken  or  utilised  wrongly”  has been  substituted  by  the  words  “taken  and  utilised wrongly”.

This amendment strongly reinforces the interpreta- tion placed by the  Punjab  &  Haryana  High  Court in Maruti Udyog & Ind Swift Laboratories and Karnataka High Court in the Bill Forge case to the effect that, no interest can be recovered in cases where the CENVAT Credit has been wrongly taken but not utilised by an assessee.

Recent  Tribunal  Ruling  in  Balmer  Lawrie  &  Co.  Ltd vs.  CCE  (2014)  301  ELT  573  (Tri  –  Mumbai)

This  ruling  is  very  important  inasmuch  as,  it  not only  distinguishes  the  Karnataka  High  Court  ruling in  the  Bill  Forge  case,  but  it  also  discusses  the applicability  of  the  amendment  in  Rule  14  of  CCR vide  Notification  dated  17-03-2012.

In  this  case,  the  appellant  is  a  manufacturer  of lubricating  oil  availing  the  Cenvat  Credit  on  various inputs  and  capital  goods  as  provided  for  under (CCR).  They  availed  the  Cenvat  Credit  amounting to  Rs.  1,61,04,675/-  of  the  CVD  paid  on  imported base  oil.  The  base  oil  so  obtained  on  which  credit was  taken,  was  returned  by  the  appellant  to  M/s. VCL  and  M/s.  Ultraplus  Lube  Pvt.  Ltd.  and  the  ap- pellant  paid  excise  duty  equivalent  to  the  credit taken  on  such  base  oil  returned.  The  department was  of  the  view  that  the  taking  of  credit  by  the appellant  was  not  permitted  under  law  inasmuch as  the  goods  were  not  intended  for  use  in  the manufacture  of  excisable  goods  and,  therefore, credit  was  not  admissible  under  CCR  ab  initio.  Ac- cordingly,  a  show  cause  notice  dated  02-06-2008 was  issued  to  the  appellant  proposing  to  recover the  credit  taken  along  with  interest  thereon  under the provisions of Rule 14 of the CCR read with Sec- tion  11A(1)  and  section  11AB  of  the  Central  Excise Act,  1944.  It  was  also  proposed  to  impose  penalty on  the  appellant  under  Rule  15  of  the  said  Rules read  with  section  11AC  of  the  said  Central  Excise Act.  The  said  notice  was  adjudicated  and  duty  de- mand was confirmed by denying the Central Excise credit  of  Rs.  1,61,04,675/-  and  interest  on  the  said credit wrongly taken was also confirmed. A penalty of equivalent amount was also imposed on the ap- pellant  under  Rule  15  of  Cenvat  Credit  Rules,  2004 read  with  section  11AC  of  the  said  Act.  In  addition, a  fine  of  Rs.  1  crore  was  imposed  on  the  goods i.e.,  base  oil  on  the  grounds  that  the  same  was liable  to  confiscation  and  hence,  fine  is  imposable u/s.  34  of  the  Central  Excise  Act,  1944.

The Learned Counsel for the appellant submitted that inasmuch as the appellant had reversed the credit taken at the time of clearance of the base   oil to M/s. VCL and Ultraplus Lube Pvt. Ltd., the question  of  reversal  of  credit  once  again  does  not arise and, therefore, the demand is not sustainable. It  was  further  pointed  out  that  the  appellant  had reflected  the  taking  of  the  Cenvat  Credit  on  base oil  received  from  VCL  in  their  monthly  ER-1  returns and,  therefore,  the  department  was  aware  of  the fact of taking of Cenvat credit by the appellant and hence  no  suppression  of  facts  on  the  part  of  the appellant could be alleged. It is also argued that the said  credit  was  available  in  the  books  of  accounts of  the  appellant  during  the  entire  period  and  the appellant  had  never  utilised  the  credit.  Therefore, the question of liability to pay any interest thereon would  not  arise  at  all.  Reliance  was  placed  on  the decisions  of  the  Hon’ble  Karnataka  High  Court  in the  case  of  CCE  &  S.T.  vs.  Bill  Forge  Pvt.  Ltd.  (2012) 26  STR  204  (KAR);  CCE  vs.  Gokaldas  Images  (P)  Ltd. (2012)  28  STR  214  (KAR);  &  CCE  vs.  Pearl  Insulation Ltd.  (2012)  27  STR  337  (KAR.)  and  the  decisions  of the  Hon’ble  High  Court  of  Allahabad  in  the  case of  CC  &  Central  Excise,  Meerut  vs.  Rana  Sugar  Ltd. (2010) 253 ELT 366 (ALL). The Learned Counsel has further contended that Rule 14 of the Cenvat Credit Rules,  2004,  was  amended  vide  a  Notification  No. 18/2012-C.E.  (N.T.),  dated  17-03-2012  WHEReby  the phrase  “Cenvat  credit  has  been  taken  or  utilised wrongly”  was  substituted  by  the  words  “Cenvat credit  has  been  taken  and  utilized  wrongly”.  Since the  words  have  been  substituted,  the  substitution will have retrospective effect and, therefore, unless the  appellant  utilises  the  credit,  the  question  of recovery of Cenvat credit or interest thereon would not  arise.  Reliance  was  placed  on  the  decisions  of Supreme Court in Indian Tobacco Association (2005) 187 ELT 162  (SC) and W.P.I.L. Ltd. vs. CCE  (2005)  181 ELT  359  (SC)  in  support  of  this  proposition.
 
The  Honorable  Tribunal  held  as  under:  Para  5.2
The  next  issue  for  consideration  is  whether  the appellant  is  liable  to  pay  any  interest  on  the  credit taken.  During  the  period  involved,  Rule  14  of  the Cenvat Credit Rules, 2004 provided for the recovery of  interest  on  the  Cenvat  Credit  taken  or  utilised wrongly under the provisions of the said Rule read with  section  11AB  of  the  Central  Excise  Act,  1944. The issue also came up for consideration before the Hon’ble  Apex  Court  in  the  case  of  Union  of  India vs.  Ind  –  Swift  Laboratories  Ltd.  (2011)  265  ELT  3 (SC)  (2012)  25  STR  184  (SC).  The  question  before the  Honorable  Apex  Court  was  “when  interest  on irregular credit arises, is it from the date of availing of  such  credit  or  from  the  date  of  utilisation?”  The Hon’ble Apex Court held that Rule 14 of the Cenvat Credit  Rules,  2004  specifically  provides  for  interest on  the  Cenvat  Credit  taken  or  utilised  wrongly  or erroneously refunded. Therefore, interest on irregu- lar  credit  arises  from  the  date  of  taking  of  such credit.  Accordingly  it  was  held  that  if  the  Cenvat Credit  taken  is  irregularly,  though  not  utilised,  the liability  to  pay  interest  would  arise  from  the  date of  taking  of  the  credit  till  the  date  of  reversal  of the  credit.  In  view  of  the  above  decision  by  the Hon’ble Apex Court, the ratio of which is applicable to  the  present  case,  it  becomes  evident  that  the appellant  is  liable  to  discharge  interest  liability  on the  Cenvat  Credit  wrongly  taken  from  the  date  of taking  of  the  Cenvat credit  till  the  date  of  reversal. The  reliance  placed  by  the  appellant  on  the  deci- sion  of  the  Hon’ble  Karnataka  High  Court  in  the case  of  Bill  Forge  Pvt.  Ltd.  (supra)  and  the  other decisions  will  not  apply  to  the  facts  of  the  present case.  In  the  case  of  Bill  Forge  Pvt.  Ltd.  (supra)  the appellant  therein  took  the  credit  and  also  reversed the  credit  within  the  same  month,  i.e.,  before  any liability  to  pay  any  duty  arose.  It  was  in  that  con- text  the  Hon’ble  High  Court  held  that  if  a  credit has  been  taken  but  reversed  before  any  liability to  pay  duty  arose  then  no  interest  liability  would accrue.  Those  are  not  the  facts  obtaining  in  the present  case.  It  is  not  the  case  of  the  appellant that  between  the  date  of  taking  the  credit  and the date of reversal when the base oil was cleared, liability  to  pay  duty  did  not  arise  at  all.  In  fact  the clearance has been spread over several months and years.  Therefore,  the  facts  of  the  case  before  us are  clearly  distinguishable  from  the  facts  involved in  Bill  Forge  Pvt.  Ltd.  cited  (supra)  and  hence  ratio of  the  said  decision  would  not  apply.  Since  Pearl Insulation Ltd. (supra) and Gokaldas Images (P) Ltd. (supra)  also  follow  the  ratio  of  the  Bill  Forge  Pvt. Ltd  they  would  also  not  apply  to  the  facts  of  the present  case.  As  regards  the  reliance  placed  in  the case  of  Rana  Sugar  Ltd.  (supra),  it  is  true  that  the Hon’ble  Allahabad  High  Court  had  held  that  if  the reversal  of  credit  has  been  done  before  its  utilisa- tion, demand of interest would not arise. However, the said order was passed much before the decision in Ind-Swift Laboratories Ltd. (supra) by the Hon’ble Apex  Court  was  pronounced.  Therefore,  the  ratio of  Ind-Swift  Laboratories  Ltd.  would  prevail  over all  the  other  decisions  of  various  Courts.

Para  5

As regard the argument advanced by the appellant that  since  the  expression  “Cenvat  Credit  taken  or utilised  wrongly”  had  been  substituted  effective from  17-03-2012  WITH  the  words  “Cenvat  Credit taken  and  utilised  wrongly”,  the  same  would  have retrospective  effect  and,  therefore,  inasmuch  as the  appellant  has  not  utilised  the  credit  there  will not  be  any  liability  to  interest,  this  argument  is misplaced.  Rule  14  of  the  the  Cenvat  Credit  Rules, 2004 was amended by a Notification No. 18/2012-C.E. (N.T.),  dated  17-O3-2012  and  amendment  effected in  Rule  14  of  the  Cenvat  Credit  Rules,  2004  read follows:-

“In Rule 14 of the said Rules, with effect from the 17th  day  of  March,  2012,-

a) For the words “taken or utilised wrongly”, the words “taken and utilised wrongly” shall be substituted;

This  amendment  rule  makes  it  absolute  clear  that the  amendment  is  with  effect  from  17-O3-2012  (in- advertently  mentioned  as  17-03-2004  in  the  ruling) and  not  before.  In  view  of  the  express  provisions in  the  Amendment  Rules,  the  argument  of  the appellant  that  amendment  being  in  the  nature  of substitution would have retrospective effect cannot be  accepted.  It  is  a  trite  law  that  every  statutory provision  is  prospective  only  unless  it  is  explicitly provided  that  it  is  retrospective  in  nature  and  the legislature  provides  for  such  retrospective  operation. In the present case, no such retrospective view has  been  provided  by  the  legislature  in  respect  of Notification  18/2012  –C.E.  (N.T.),  dated  17-03-2012 and, therefore, the argument of the Counsel in this regard  and  the  decisions  relied  upon  in  support  of the  same  cannot  be  accepted.

It appears that, the factual position that appellants claimed credit to which they were not  entitled  at all, could have had a bearing on the conclusion arrived at by the Tribunal.

Conclusion

The Honorable Supreme Court in the Ind – Swift case has unsettled the judicially settled principle under the MODVAT (relevant for CENVAT Credit) that no interest is payable in cases where MODVAT Credit is wrongly taken but not utilised. Possibly, the specific circumstances of the case involving evasion of duty, had a bearing on the conclusion arrived at by the Apex Court.

It would appear that,  it  was  correctly  observed  by the Honorable Punjab & Haryana High Court in Ind – Swift case that, interest is compensatory in character and is imposed on nonpayment/delayed payable. No liability of payment of any excise duty arises when the CENVAT Credit is availed. The li- ability to pay duty arises only at the time of utilisa- tion. Even if the CENVAT Credit is wrongly taken, that does not lead to levy of interest as liability of payment of excise duty does not arise with such availment of the CENVAT Credit by an assessee. Availment and utilisation of credit cannot be placed at equal footing for the purpose of charging inter- est. Availment of credit is only a book entry and does not result in any gain for the tax payer. The  use of the credit results into benefit and  that  is the time which is relevant for charging interest.

With  due  respect,  the  judgment  of  the  Honorable Supreme  Court  in  the  Ind  –  Swift  case  which  has generated  extensive  judicial  controversy,  needs  a serious reconsideration more particularly to advance the  cause  of  the  CENVAT  Credit  Scheme  which  is essentially  a  beneficial  piece  of  legislation.  Pending judicial resolvement of the controversy, Government could  consider  a  clarificatory  amendment  to  the effect  that  the  amendment  in  Rule  14  of  CCR  vide Notification  No  18/  2012  –  CE  (NT)  dated  17-03-2012 would  have  retrospective  operation.

A. P. (DIR Series) Circular No. 123 dated 16th April, 2014

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Press Note No. 1 (2011 series) D/O IPP dated 20th May, 2011

Notification No. FEMA. 298 /2014-RB dated 13th March, 2014 c.f. G.S.R. No.190(E) dated 19th March, 2014

Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP)

 This
circular permits Foreign Direct Investment (FDI) in Limited Liability
Partnerships (LLP) that are formed and registered under the Limited
Liability Partnership Act, 2008.

The details scheme, procedure and forms to be used for the same are annexed to this Circular.

Highlights
of the scheme – called Foreign Direct Investment (FDI-LLP) in Limited
Liability Partnerships (LLPs) formed and registered under the Limited
Liability Partnership Act, 2008 – are as under: –

1. Eligible Investors

A
person resident outside India or an entity incorporated outside India
shall be eligible investor for the purpose of FDI in LLP. However, the
following persons shall not be eligible to invest in LLP: –

(i) A citizen/entity of Pakistan and Bangladesh or

(ii) A SEBI registered Foreign Institutional Investor (FII) or

(iii) A SEBI registered Foreign Venture Capital Investor (FVCI) or

(iv) A SEBI registered Qualified Foreign Investor (QFI) or

(v)
A Foreign Portfolio Investor registered in accordance with Securities
and Exchange Board of India (Foreign Portfolio Investors) Regulations,
2014 (RFPI).

2. Eligibility of LLP for accepting foreign Investment

(i)
An LLP, existing or new, operating in sectors / activities where 100%
FDI is allowed under the automatic route of FDI Scheme is eligible to
receive FDI.

(ii) An LLP engaged in the following sectors / activities is not eligible to accept FDI: –

a)
Sectors eligible to accept 100% FDI under automatic route but are
subject to FDI-linked performance related conditions (for example
minimum capitalisation norms applicable to ‘Non-Banking Finance
Companies’ or ‘Development of Townships, Housing, Built-up
infrastructure and Construction-development projects’, etc.); or

b)
Sectors eligible to accept less than 100% FDI under automatic route; or
c) Sectors eligible to accept FDI under Government Approval route; or

d) Agricultural/plantation activity and print media; or

e)
Sectors not eligible to accept FDI i.e. any sector which is prohibited
under the extant FDI policy as well as sectors / activities prohibited
in terms of Regulation 4(b) to Notification No. FEMA 1 / 2000-RB dated
3rd May 2000.

3. Eligible investment

Contribution
to the capital of a LLP would be an eligible investment under the
Scheme. Note: Investment by way of ‘profit share’ will fall under the
category of reinvestment of earnings

4. Entry Route

Any
FDI in a LLP will require prior Government/ FIPB approval. Any form of
foreign investment in an LLP, direct or indirect (regardless of nature
of ‘ownership’ or ‘control’ of an Indian Company) will require
Government/FIPB approval.

5. Pricing

FDI in an
LLP either by way of capital contribution or by way of
acquisition/transfer of ‘profit shares’, will have to be more than or
equal to the fair price as worked out with any valuation norm which is
internationally accepted/adopted as per market practice (hereinafter
referred to as “fair price of capital contribution/profit share of an
LLP”) and a valuation certificate to that effect shall be issued by a
Chartered Accountant or by a practicing Cost Accountant or by an
approved valuer from the panel maintained by the Central Government.

In
case of transfer of capital contribution/profit share from a resident
to a non-resident, the transfer will have to be for a consideration
equal to or more than the fair price of capital contribution/profit
share of an LLP. Further, in case of transfer of capital
contribution/profit share from a non-resident to a resident, the
transfer will have to be for a consideration which is less than or equal
to the fair price of the capital contribution/profit share of an LLP.

6. Mode of payment for an eligible investor

Payment
by an eligible investor towards capital contribution/profit share of
LLP will be allowed only by way of cash consideration to be received: –

i) By way of inward remittance through normal banking channels; or

ii) By debit to NRE/FCNR(B) account of the person concerned.

7. Reporting

(i)
LLP must report to the Regional Office concerned of RBI, through its
bank, at the earliest but not later than 30 days from the date of
receipt of the amount of consideration:

(a) Details of the
receipt of the amount of consideration for capital contribution and
profit shares in Form FOREIGN DIRECT INVESTMENT – LLP (I) together with a
copy/ies of the FIRC/s evidencing the receipt of the remittance
(b) KYC report on the non-resident investor
(c) Valuation certificate (as per paragraph 5 above) as regards pricing.

The Regional Office concerned, will allot a Unique Identification Number (UIN) for the amount reported.

(ii)
The bank in India, receiving the remittance must obtain a KYC report in
respect of the foreign investor from the overseas bank remitting the
amount.

(iii) Disinvestment/transfer of capital contribution or
profit share between a resident and a non-resident (or vice versa) must
be reported within 60 days from the date of receipt of funds in Form
FOREIGN DIRECT INVESTMENT – LLP (II).

8. Downstream investment

a)
An Indian company, having foreign investment (direct or indirect,
irrespective of percentage of such foreign investment), will be
permitted to make downstream investment in an LLP only if both, the
company as well as the LLP, are operating in sectors where 100% FDI is
allowed under the automatic route and there are no FDI-linked
performance related conditions. Onus will be on the LLP accepting
investment from the Indian Company registered under the provisions of
the Companies Act, as applicable, to ensure compliance with downstream
investment requirement as stated above.

b) An LLP with FDI under this scheme will not be eligible to make any downstream investments in any entity in India.

9. Other Conditions

(i)
In case, an LLP with FDI, has a body corporate as a designated partner
or nominates an individual to act as a designated partner in accordance
with the provisions of section 7 of the Limited Liability Partnership
Act, 2008, such a body corporate must be a company registered in India
under the provisions of the Companies Act, as applicable and not any
other body, such as an LLP or a Trust. For such LLP, the designated
partner “resident in India”, as defined under the ‘Explanation’ to
Section 7(1) of the Limited Liability Partnership Act, 2008, will also
have to satisfy the definition of “person resident in India”, as
prescribed u/s. 2(v)(i) of the Foreign Exchange Management Act, 1999.

(ii)
The designated partners will be responsible for compliance with all the
above conditions and also liable for all penalties imposed on the LLP
for their contravention, if any.

(iii) Conversion of a company
with FDI, into an LLP, will be allowed only if the above stipulations
(except the stipulation as regards mode of payment) are met and with the
prior approval of FIPB / Government.

(iv) LLP cannot avail External Commercial Borrowings (ECB).

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A. P. (DIR Series) Circular No. 122 dated 10th April, 2014

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External Commercial Borrowings (ECB) Policy — Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue till 30th June, 2014: –

The all-in-cost ceiling will include arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.

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Interpretation of Provisions of section 10(2A) in cases where income of the firm is exempt -Circular No. 8 dated 31st March 2014 [F.No. 173/99/2013-ITA]

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CBDT has clarified that ‘total income’ of the firm for s/s. (2A) of section 10 of the Act, includes income which is exempt or deductible under various provisions of the Act. The income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Accordingly, the entire profit credited to the partners’ accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act.

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Certification of e-forms under the Companies Act, 1956 by the practising professionals.

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The Ministry of Corporate Affairs has entrusted practising professionals, viz., members of the ICAI, ICSI and ICWAI, with the responsibility of ensuring integrity of documents filed by them in electronic mode. These professionals will now be responsible for submitting/certifying documents (to be signed digitally by them) and system will accept most of these documents online without approval by the Registrar of Companies or other officers of the Ministry of Corporate Affairs. To ensure the data integrity, there will be checking of such submissions. In case of any fraudulent filing, action can be taken against the company, their officers in default and professionals involved in filing. For complete text of the Circular No. 14/2011 dated 8th April 2011 visit:

http://www.mca.gov.in/Ministry/pdf/Circular_14-2011 _12apr2011.pdf

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Provisions regarding Stamp Duty.

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The Ministry of Corporate Affairs has informed that with effect from 1st May 2011, the provisions regarding stamp duty payment on Form No. 1, Memorandum of Association, Articles of Association, Form No. 5 and Form No. 44 electronically, at the time of their e-filing through MCA portal in addition to the already existing list of States and Union Territories published on the MCA portal, will also be mandatory for the State of Jammu and Kashmir, with effect from 1st May, 2011. Please refer Notifications Number GSR 642(E) and SO 2276(E), dated 7-9-2009 and SO 3314(E), dated 1-5-2010 issued by the Ministry for further details.
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Director’s Relatives (Office or Place of Profit) Amendment Rules, 2011.

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The Companies Act, 1956 requires a company to obtain the Central Government’s approval for appointing a director’s relative to an office or place of profit, if the monthly remuneration for such office or place of profit exceeds the prescribed limit. This limit has now been raised from Rs.50,000 per month to Rs.2,50,000 per month.

The notification has also amended Rule 7 of Director’s Relative (Office or Place of Profit) Rules, 2011 and redefined the constitution of Selection Committee for the purpose of appointment of a director to the office or place of profit. Under the amended Rule the Selection Committee shall comprise of:

(1) For listed public companies — independent directors shall constitute the majority and committee ought to have an expert in the respective field from outside the company.

(2) For unlisted public companies — independent directors are not necessary but an expert from outside the company should be part of the committee.

(3) For private limited companies — independent directors and outside experts are not required to be part of the committee.

Thus, even a private company is required to constitute a Selection Committee for appointment of director to an office or place of profit.

For complete text of the Notification visit:

http://www.mca.gov.in/Ministry/notification/pdf/ Notification2_31mar2011.pdf

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Amendment to Companies (Particulars of Employees) Rules, 1975 — Increase in the limits.

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Section 217 of the Companies Act, 1956 requires certain particulars of employees to be disclosed in the Board’s report, who draw remuneration in excess of the prescribed limits. Vide this amendment; these limits are increased from Rs.24 lakh per annum and Rs.2 lakh per month to Rs.60 lakh per annum and Rs.5 lakh per month, respectively.

For complete text of the Notification visit

http://www.mca.gov.in/Ministry/notification/pdf/ Notification_31mar2011.pdf

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Exposure Draft on XBRL taxonomy for Commercial and Industrial (C&I) entities.

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Ministry of Corporate Affairs has released Exposure Draft of XBRL taxonomy for Commercial and Industrial (C&I) entities for filing their balance sheet and profit and loss account. The draft taxonomy can be downloaded from the following link:

h t t p : / / w w w . m c a . g o v . i n / M i n i s t r y / p d f / MCA_C&I_15apr2011.zip

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XBRL filing of balance sheet and profit and loss account

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The Ministry of Corporate Affairs by Circular No. 9/2011 dated 31st March 2011has mandated certain companies to file their balance sheets and profit and loss account for the year 2010-11 and onwards using XBRL taxonomy. In the phase I following companies are covered:

(i) All companies listed in India and their subsidiaries, including overseas subsidiaries.

(ii) All companies having a paid-up capital of Rs. 5 crore and above or a turnover of Rs.100 crore and above.

The financial statements required to be filed in XBRL format will be based on the taxonomy on XBRL developed for the existing Schedule VI and non-converged accounting standards notified under The Companies (Accounting Standards) Rules, 2006. For complete text of the circular visit:

http://www.mca.gov.in/Ministry/pdf/xbrl_31mar2011. pdf

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Applicability date of Revised Schedule VI.

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The revised Schedule is available on the Ministry of Corporate Affair’s website. The Ministry of Corporate Affairs has also placed on its website a new notification to be published in the official gazette. This Notification amends the first Notification and clarifies that the revised Schedule VI will come into force for the balance sheet and profit and loss account to be prepared for the financial year commencing on or after 1st April 2011. For complete text of the Notification visit

http://www.mca.gov.in/Ministry/notification/pdf/ Notification_28mar2011.pdf

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Companies (Central Government’s) General Rules and Forms (Amendment) Rules, 2011 — Amendment in Form 61.

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The Central Government has vide Notification no. GSR 259(E) [F. No. 1/15/2008-C.L.-V], dated 26-3-2011 amended Form 61 used for filing an application with the Registrar of Companies.

For the complete text of the Circular visit:

http://www.mca.gov.in/Ministry/notification/pdf/ Notification_26mar2011.pdf

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Implementation of enhanced regulatory framework on annual statutory filings.

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Companies that have not filed their statutory annual filings for both form 20B and 23AC/23ACA since 2006 i.e., 2006-2007, 2007-2008 and 2008- 2009 (i.e., have not done any of the six required filings) will not be allowed to file any other eform with the Ministry, unless and until all such pending documents are filed. The status of such companies would be changed to ‘Dormant’. Each such company having the status as ‘Dormant’ will have to file an application for normalising in e-form-61 and once e-form 61 is approved by respective Registrar of Company, The Company will be given a stipulated period of 21 days for filing all the due balance sheets and annual returns from the date of approval of form 61. If all the due documents are not filed within this period, the company’s status will again be reverted to ‘Dormant’ and will have to follow the process of filing form 61 once again.
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PAN mandatory for allotment of DIN and existing DIN holders to furnish their PAN.

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The Ministry of Corporate Affairs vide its general Circular No. 11/2011 dated 7th April 2011 has made the PAN mandatory for issue of Director Identification Numbers and also directed that all DIN holders who have not furnished their PAN at the time of obtaining DIN should furnish their PAN by filing DIN 4 e-form by 31st May 2011.

For complete text of the Notification visit: http://www.mca.gov.in/Ministry/pdf/Circular_11-2011 _7apr2011.pdf

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Transportation of goods from outside India to destination outside India exempted — Notification No. 08/2011, dated 1-3-2011.

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By this Notification, services of transportation of goods by air or road or rail provided to person located in India have been exempted when goods are transported from a place outside India to a final destination outside India.

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Insurance under Rashtriya Swasthya Bima Yojna exempted — Notification No. 07/2011, dated 1-3-2011.

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By this Notification, insurer of general insurance service has been exempted for providing insurance service under Rashtriya Swasthya Bima Yojna.

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Works Contract services for Rajiv Awass Yojna and JNURM — Notification No. 06/2011, dated 1-3-2011.

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By this Notification works contract services rendered for construction of residential complexes under Rajiv Awass Yojna and JNURM have been exempted.

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NBFCs not to be partners in partnership firms

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RBI has noticed that some NBFCs have made large investments in the capital to partnership firms. In view of the risks involved in NBFCs associating themselves with partnership firms, RBI has now decided to prohibit all NBFCs from contributing capital to any partnership firm or to be a partner in partnership firms. In cases of existing partnerships, NBFCs may seek early retirement.

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IFRS developments.

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The IFRS Foundation has published a set of 12 illustrative examples in XBRL for the IFRS Taxonomy, 2011. The examples are intended to help preparers of financial statements to understand how to apply the taxonomy to create instance documents and entity- specific extensions using both block tagging and detailed tagging, and also XBRL and Inline XBRL.

Visit the IASB website for a list of the illustrative examples and the IFRS Taxonomy 2011 guide.

The IFRS Foundation has announced that it will publish supplementary tags for the IFRS Taxonomy that reflect disclosures that are commonly reported by entities in their IFRS financial statements.

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Clarification regarding easy-exit schemes.

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The Ministry of Corporate Affairs has notified the simplified procedure for dealing with the applications received under Easy-Exit Scheme for striking off the name of a company u/s. 560 of The Companies Act, 1956 vide its general Circular No. 12/2011, dated 7th April 2011.

For complete text of the Notification visit:

http://www.mca.gov.in/Ministry/pdf/Circular_12- 2011_7apr2011.pdf

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Readers View

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Sir,

It is always a pleasure reading BCAJ which is full of new views and findings.

In the April issue I read the decision in the case of Frontier Offshore on page 35 of the Journal. The conclusion drawn is that withholding tax as per section 44BB does not lead to any violation of section 40(a)(i) of the Income-tax Act. Reading of the judgment leads to opposite view, what I feel.

It is requested to please look into it and give feedback as to the correct finding. Please take this in a positive manner with no intention to counter the view of the Journal.

— Japan Yagnik Chartered Accountant

Authors’ response
The decision of Frontier Offshore which is digested in April 2011 issue (ITA Appeal No. 200/ Mds/2009) at page 35 has concluded that provisions of section 40(a)(i) are not applicable when the payer has deducted tax at source after taking into account presumptive computation provisions of section 44BB.

It is true that at para 7, the ITAT has rejected the contention of the taxpayer that section 40(a)(i) is not applicable to the cases of short deduction and are restricted only to the cases of absolute failure. Please note that this was only the alternative argument of the taxpayer. The ITAT has accepted the primary argument of the taxpayer to the effect that section 40(a)(i) is not applicable to the cases where TDS has been deducted after taking into account presumptive tax provision.

Also, as is clarified in the gist appearing in April 2011 issue, the earlier decision of the Madras Tribunal in the case of the same taxpayer was decided against and after elaborate discussion, the ITAT has explained as to why after the SC decision in GE India’s case, the earlier decision was no longer a good law. The ITAT has gone to the extent of observing that perpetuating error is not a heroic deed, but to correct the mistake at the right opportunity is wisdom.

Trust we have been able to satisfactorily explain the concern of the reader.

— Geeta Jani, Dhishat Mehta Chartered Accountant

Sir,

Re : Income-tax Refunds — Need to revisit TDS Threshold Limits

This is with the reference to media reports to the effect that the Income-tax Department has granted tax refunds of Rs.78,000 crores to about 85 lakh assessees during the year 2010-11 and that during the first half of April, 2011, the IT Department refunded Rs.6,183 crores to 8,23,101 assessees and all the remaining refunds shall be settled during the remainder part of April, 2011. The CBDT Chairman has stated that the IT Refunds in 2010- 11 are about 70% higher than Rs.50,000 crores made in the previous year and that despite making such huge refunds, the direct tax collection will be in the range of Rs.4.5 lakh crores. The Tax Department needs to be sincerely complimented for expeditiously making such huge refunds which constitute about 20% of net collection and making life easier for the taxpayers.

To reduce such huge workload, the Tax Department needs to analyse what is causing such huge tax refunds; causing huge blockage of capital. Is it on account of excess advance tax paid or excess tax deducted at source? Or is it due to refund of tax pursuant to Appellate proceedings?

My own guess is that vast majority of such huge refunds is due to excess TDS deducted due to very low threshold limits prescribed under various TDS provisions. Now due to operation of section 206AA, most taxpayers/income-earners have obtained PAN. Therefore, there is an urgent need to revisit various TDS threshold limits and increase them substantially so that claims of refunds can go down significantly. The Department also needs to study and adopt Withholding Tax (TDS) practices followed in advanced western countries. Further, the Department need to liberalise self-declaration provisions as it is very difficult, time-consuming, inefficient and costly affair to obtain a Nil or Low TDS Certificate from the Tax Department u/s.197 of the Act.

— Tarun Singhal Chartered Accountant

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A.P. (DIR Series) Circular No. 52, dated 6-4-2011 — A.P. (FL/RL Series) Circular No. 14 — Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT) Standards — Cross Border Inward Remittance under Money Transfer Service Scheme.

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This Circular advices banks to consider the information in respect to implementation of action plan by jurisdictions listed in the Statement issued on 22nd October, 2010 by FATF in respect of Cross Border Inward Remittance under Money Transfer Service Scheme while dealing with them.

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FCRA Act 2010 comes into force

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The Foreign Contribution (Regulation ) Act 2010 has come into force with effect from 1st May 2011, The Foreign Contribution (Regulation ) Rules 2011 have also been notified. For full text of the Act and Rules please visit the website of the Ministry of home affairs http://mha.nic.in/

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A.P. (DIR Series) Circular No. 53, dated 7-4-2011 — Overseas forex trading through electronic/internet trading portals.

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This Circular reiterates that remittances under the Liberalised Remittance Scheme are allowed only in respect of permissible capital or current account transactions or a combination of both. All other transactions, which are otherwise not permissible under FEMA, 1999, including the transactions in the nature of remittance for margins or margin calls to overseas exchanges/overseas counterparty, are not allowed under the Scheme.

This Circular advices banks to exercise due caution and be extra vigilant in respect of remittances under scheme so as to avoid payments towards margin money for online foreign exchange trading transactions as these derivative transactions can only be undertaken by persons resident in India based on the presence of an underlying price risk exposure.

Further, any person resident in India collecting and effecting/remitting such payments directly/indirectly outside India would make himself/herself liable to be proceeded against with for contravention of FEMA, 1999 besides being liable for violation of regulations relating to Know Your Customer (KYC) norms/Anti Money Laundering (AML) standards.

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A.P. (DIR Series) Circular No. 51, dated 6-4-2011 — A.P. (FL/RL Series) Circular No. 13 — Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT) Standards — Money-changing activities.

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This Circular advices banks to consider the information in respect to implementation of action plan by jurisdictions listed in the Statement issued on 22nd October, 2010 by FATF in respect of Money changing activities while dealing with them.

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A.P. (DIR Series) Circular No. 50, dated 6-4-2011 — A.P. (FL/RL Series) Circular No. 12 — Know Your Customer (KYC) norms/ Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 — Cross-Border Inward Remittance under Money Transfer Service Scheme.

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The Financial Action Task Force (FATF) has issued a statement dividing the strategic AML/CFT deficient jurisdictions into two groups as under:

(a) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/FT) risks emanating from the jurisdiction: Iran

(b) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Democratic People’s Republic of Korea (DPRK).

This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.

This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.

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A.P. (DIR Series) Circular No. 49, dated 6-4-2011 — A.P. (FL/RL Series) Circular No. 11 — Know Your Customer (KYC) norms/ Anti-Money Laundering (AML) standards/ Combating the Financing of Terrorism (CFT)/Obligation of Authorised Persons under Prevention of Money Laundering Act, (PMLA), 2002, as amended by Prevention of Money Laundering (Amendment) Act, 2009 — Money-changing activities.

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The Financial Action Task Force (FATF) has issued a statement dividing the strategic AML/CFT deficient jurisdictions into two groups as under:

(a) Jurisdictions subject to FATF call on its members and other jurisdictions to apply countermeasures to protect the international financial system from the ongoing and substantial money laundering and terrorist financing (ML/ FT) risks emanating from the jurisdiction: Iran

(b) Jurisdictions with strategic AML/CFT deficiencies that have not committed to an action plan developed with the FATF to address key deficiencies as of October 2010. The FATF calls on its members to consider the risks arising from the deficiencies associated with each jurisdiction: Democratic People’s Republic of Korea (DPRK).

This Circular advices banks to take into account risks arising from the deficiencies in AML/CFT regime of these countries, while entering into business relationships and transactions with persons (including legal persons and other financial institutions) from or in these countries/jurisdictions.

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A.P. (DIR Series) Circular No. 48, dated 5-4-2011 — Acquisition of credit/debit card transactions in India by overseas banks — payment for airline tickets.

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Foreign airline companies are permitted to repatriate the surplus arising from sale of air tickets through their agents in India only after payment of the local expenses and applicable taxes in India. However, in some cases where the payment for the tickets are made by the residents using credit/ debit card, card companies have been providing arrangements to the foreign airlines operating in India to select the country and currency of their choice, in respect of transactions arising from the sale of the air tickets in India in Indian Rupees (INR).

This Circular clarifies that this practice adopted by foreign airlines is not in conformity with the provisions of the Foreign Exchange Management Act, 1999 and foreign airlines are advised to immediately discontinue the same.

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Government of India, Ministry of Commerce & Industry Department of Industrial Policy & Promotion (FC Section) — F. No. 5(1)/2011-FC, dated 31-3-2011 — Circular 1 of 2011 — Consolidated FDI Policy.

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Circular 1 of 2011 is the third edition of the Consolidated FDI Policy. This Circular will take effect from 1st April, 2011. The following major changes have been incorporated in the latest consolidation:

(i) Pricing of convertible instruments:

Instead of specifying the price of convertible instruments upfront, companies will now have the option of prescribing a conversion formula, subject to FEMA/SEBI guidelines on pricing.

(ii) Inclusion of fresh items for issue of shares against non-cash considerations:

The existing policy provides for conversion of only ECB/lump-sum fee/Royalty into equity. This Circular now permits issue of equity, under the Government Route (Approval Route), in the following cases, subject to specific conditions:

(a) Import of capital goods/machinery/equipment (including second-hand machinery)

(b) Pre-operative/pre-incorporation expenses (including payments of rent, etc.)

(iii) Removal of the condition of prior approval in case of existing joint ventures/technical collaborations in the ‘same field’:

With a view to attract fresh investment and technology inflows into the country and to also reduce the levels of Government intervention in the commercial sphere the Government has decided to abolish this condition of obtaining prior approval in case of existing joint ventures/technical collaborations in the same field.

(iv) Guidelines relating to down-stream investments:

The guidelines have been comprehensively simplified and rationalised. Companies will now been classified into only two categories — ‘companies owned or controlled by foreign investors’ and ‘companies owned and controlled by Indian residents’. The earlier categorisation of ‘investing companies’, ‘operating companies’ and ‘investingcum- operating companies’ has been done away with.

(v) Development of seeds:

In the agriculture sector, FDI will now be permitted in the development and production of seeds and planting material, without the stipulation of having to do so under ‘controlled conditions’.

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A.P. (DIR Series) Circular No. 47, dated 31-2-2011 — Export of goods and software — Realisation and repatriation of export proceeds — Liberalisation.

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Generally, export proceeds in respect of export of goods and software (except in cases of exports from units in SEZ or exports to exporters’ own warehouses outside India) are required to be realised and repatriated within six months from the date of export. However, this period of six months was enhanced to twelve months in case of exports up to 31st March, 2011.

This Circular has relaxed the six months’ rule for a further period up to 30th September, 2011, subject to review. Hence, export proceeds in respect of export of goods and software (except in cases of exports from units in SEZ or exports to exporters’ own warehouses outside India) up to 30th September, 2011 can be realised and repatriated within twelve months from the date of export.

However, there is no change in the provisions in regard to period of realisation and repatriation to India of the full export value of goods or software exported by a unit situated in a Special Economic Zone (SEZ) as well as exports made to exporters’ own warehouses outside India.

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Interbank foreign currency transaction exempted — Notification No. 27/2011, dated 31-3-2011.

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By this Notification taxable services provided in relation to interbank transactions of purchase and sale of foreign currency have been exempted.

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Units located in SEZs to get benefit — Notification No. 17/2011, dated 1-3-2011.

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Central Government has notified simplified measures for the benefit of units located in SEZs to enable them to obtain tax-free receipt of services to be consumed within the Zone and to get refunds through simplified procedures, subject to the fulfilment of the conditions specified in the said Notification.

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25% abatement for transportation of coastal goods — Notification No. 16/2011, dated 1-3-2011.

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By this Notification, an abatement of 25% of the goods amount charged has been provided from the taxable value of service of transportation of costal goods, goods through National Gateway and transportation through inland water.

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Interest on delayed payment of service tax hiked to 18%. — Notification No. 14/2011, dated 1-3-2011.

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The interest rate on delayed payment of service tax has been increased from 13% to 18% p.a.

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Notification No. 10/2011 & 11/2011, dated 1-3-2011.

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By this Notification services provided in relation to execution of works contract have been exempted when such services are provided within a port/ other port/airport.

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Notification No. 09/2011, dated 1-3-2011.

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By this Notification, taxable service of transportation of goods by air has been exempted to the extent of air freight included in the custom value of goods.

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IS IT FAIR TO EXTEND PRESUMPTIVE TAXATION TO ALL BUSINESSES ?

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In a developing country like India, even after sixty years of independence a majority of the population still lives below poverty line. In their day-to-day life, they have to struggle for subsistence. Besides leading an impoverished life, a large number of people are illiterate. Till date, many of them cannot even write their own name. In this situation, the various constitutionally valid laws are nothing but “kale akshar bhains barabar” and cannot be comprehended by the people. In spite of this, it is binding on them to follow such unknown statutes. Any contravention, whether intentional or not, attracts harsh penalties.

Considering this situation, the law of the land is sought to be kept simplified to a certain extent. Every law provides some relief to the illiterate and poor class of entrepreneurs, helping them to abide by the law without being subjected to its complexity.

In the Income-tax Act, 1961, there are sections such as section 44AD/AF/AE/B/BB, etc. which are commonly known as Presumptive Tax Provisions. They mainly cover a certain class of entrepreneurs such as contractors in civil construction, small retailers, transporters, etc. The main intention of these provisions is to tax businesses on a certain percentage of their turnover or receipts. This percentage specified is normally an industrywise approved profitability norm. The relief provided by these sections is in the form of non-maintenance of books of accounts and no further verifications or questioning through cumbersome scrutiny procedures. In short, the taxpayers enjoy’s his peace of mind. However, a provision of compulsory Tax Audit u/s 44AB needs to be complied with, if the profit declared by such specified business organisation is below the prescribed percentage. This provision is aimed at preventing misuse of the relief provided by the Act. In my sixteen years of practice, I have seen many genuine cases where the actual profit earned is below the specified percentage, but due to the threat of harassment through scrutiny procedures, businessmen have adopted the prescribed percentage and have declared higher profits and paid tax on the unreal income. I have also come across a few cases wherein the lack of awareness of law has led to non-conduct of audit and consequently payment of penalty due to noncompliance.

A similar situation may be faced by many in the near future, due to modification in the sections relating to presumptive tax i.e., sections 44AD/AE etc. becoming effective from A.Y. 2011-12. Due to the amendments, section 44AD is now applicable not only to contractors in civil construction businesses but also to all ‘eligible’ business organisations. The definition of ‘eligible business’ as given in the section includes all business organisations run by individuals, HUFs and firms. Therefore, these modifications have a very widespread impact. Further, it is also rather unfair that the rate of 8% net profit has been prescribed across the board, irrespective of the nature of assessess. A majority of such businessman would be small retail traders. For them the rate hitherto was only 5%. The net profit is now suddenly perceived to be 8%! Further, it might so happen that cost of compliance may even exceed the tax liability and on the top of it, the fear of scrutiny!

The positive side is that all small businessmen having a turnover or gross receipts below Rs.60 lakh can seek shelter u/s. 44AD and after declaring 8% profit, can get rid of complicated accounting and audit requirements and threatening scrutiny proceedings. However, on the flipside, due to the effect of the modified section 44AB, all such eligible businesses declaring a profit below 8% will have to maintain their books of account and get them duly audited, besides filing their return of income. Earlier a small organisation having turnover below Rs.40 lakh and not belonging to a specified class under presumptive tax sections, was completely out of the purview of section 44AB and the audit of such organisations was not mandatory under the provisions of the Act.

To make the law fair — percentage of profit should be trade/industry or businesswise based on survey of reasonable sample of the business, rather than ad hoc percentage of 8%. However, if 8% is based on survey carried on by the CBDT, then in the interest of fairness and transparency, the same needs to be disclosed.

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Organiser of business exhibition exempted for organising exhibition abroad — Notification No. 05/2011, dated 1-3-2011.

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By this Notification, business exhibition services provided by an organiser of business exhibition for holding a business exhibition outside India has been exempted from whole of the service tax.

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Air travel service tax enhanced for domestic and international passengers — Notification No. 04/2011, dated 1-3-2011.

Service tax rules amended — Notification No. 03/2011, dated 1-3-2011.

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Service Tax (Amendment) Rules, 2011 notified by the Central Government effective from 1-4-2011 provide that:

1. Applicable rate of service tax should be the rate applicable at the time when the services are deemed to have been provided.

2. Service tax shall be payable upon deemed provision of services.

3.
When an invoice has been issued or a payment is received for a service
which is not subsequently provided, the service provider can take credit
of service tax paid earlier, provided the amount has been refunded to
the payer.

4. Maximum amount admissible for adjustment of excess
service tax under Rule 6(4B)(iii) has been increased from Rs.1 lac to
Rs.2 lac.

5. Self-assessed amount of service tax, if not paid,
shall be recovered along with interest as per the provisions of section
87 of the Finance Act, 1994.

6. Composition rate applicable in
relation to purchase or sale of foreign currency including money
changing has been reduced from 0.25% to 0.10%.

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Service tax Valuation Rules amended — Notification 02/2011, dated 1-3-2011.

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By this Notification Service tax (Determination of Value) Rules, 2006 have been amended to prescribe in detail determination of value of services in relation to money-changing activity.

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Erection, Commissioning & Construction Works Contract — CENVAT credit restricted to 40% when tax paid on the full value — Notification No. 01/2011, dated 1-3-2011.

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By this Notification Works Contract (Composition Scheme for payment of Service Tax Rules, 2007) have been amended to provide that the CENVAT credit on taxable services of erection, commissioning and installation, commercial or industrial construction and construction of commercial complex shall be available only to the extent of 40% of the service tax paid when such tax has been paid on full value of the service after availing CENVAT credit on inputs.

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Adjustment of Refund of F.Y 2010-11 to F.Y 2011-12 up to Rs.1 lakh — Trade Circular 6T of 2011, dated 15-4-2011.

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By this Circular a dealer has been allowed to carry forward refund of F.Y 2010-11 to F.Y 2011-12 up to maximum of Rs.1 lakh. The dealer who has already filed the claim of refund can withdraw his claim by making application to the concerned refund audit officer and then he can adjust his refund claim against liability for the F.Y 2011-12.

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Grant of Refunds against Bank Guarantee — Trade Circular 5T of 2011, dated 11-4-2011.

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Part B of the Trade Circular No. 22T of 2010 is related to granting of refunds against bank guarantee subject to instructions. Now the instructions contained in the said Circular stand modified by this Circular. Accordingly, now refund against bank guarantee shall be granted any time for any period even after the due date of filing of audit form 704 is over. The condition of refund audit of previous period and major discrepancies will not be applicable in the bank guarantee cases. After granting refund against bank guarantee, if refund audit officer notices that the dealer is avoiding/delaying the process of refund audit, then the concerned joint commissioner shall encash the bank guarantee submitted by the dealer immediately.

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VALUATION OF CUSTOMER-RELATED INTANGIBLE ASSETS

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This article is in continuation to the earlier article on ‘Valuation of Intangible Assets’ published in the January 2011 issue of the Journal. In the January 2011 article we discussed about the five categories under which generally accepted intangible assets fall and got a brief background on the various methodologies that are often used to value these intangible assets. In this article, we will discuss exhaustively the customer-related category of intangible assets. I have selected this category to start with, because the results of various surveys (whether formally published or otherwise) carried out globally, show that customer-related intangible assets are the most often recognised intangible assets which get reported, by way of a purchase price allocation process and one of the primary value drivers for an acquisition.
The article is divided as follows:

Identification of customer-related intangible
assets

  •     Examples
  •     Definition
  •     Basis of identification
  •     Additional highlights

Valuation of customer-related intangible
assets

Comparison with Ind-AS

Conclusion

Identification:
Examples

FASB ASC 805 under US GAAP and IFRS-3 (January 2008) under IFRS, give the following examples of customer-related intangible assets:

Before we start, it is imperative to know that selfgenerated intangibles (including goodwill) are not allowed to be recognised under any accounting guidance. The identification and the valuation of these intangibles would arise only in the case of an acquisition, resulting in a business combination where the acquirer would be required to allocate the value paid for the target to, inter alia, intangible assets by way of a purchase price allocation process. Hence, in the discussion below we would constantly talk about an acquirer-target relationship.

Definitions:
Customer contracts and the related customer relationships:

Standard: When an entity establishes relationships with its customers through contracts, customer relationships arise from these contractual rights. Customer contracts refer to signed contracts as at the date of the valuation.

Customer contracts are signed contracts by the target as at the valuation date. On account of the acquisition, the acquirer will get the benefit of these contracts and hence it is an intangible for the acquirer. Related to these contracts would be their associated relationships and the acquirer will also get the benefit of these contractual relationships. ?

Non-contractual customer relationships:

Standard: A customer relationship acquired in a business combination that does not arise from a contract may nevertheless be identifiable because the relationship is separable.

There would be few instances in practical life where relationships are contractual. Most of the times relationships are non-contractual and though the benefits are not guaranteed, a trend can be observed wherein the same customers continue to give business repeatedly. This recall value is what is measured and termed as no contractual customer relationships.

Customer lists:
Standard: A customer list consists of information about customers, such as their names and contact information. A customer list also may be in the form of a database that includes other information about the customers, such as their order histories and demographic information. Databases are collections of information, often stored in electronic form. A database that includes original works of authorship may be entitled to copyright protection.

Customer lists (all type of information) depending on the industry can open more avenues for business by adding new customers and hence would add value to the acquirer.

Order or production backlog:
Standard: An order or a production backlog arises from contracts such as purchase or sales orders and therefore is considered a contractual right.

Order or production backlog refers to the unexecuted orders as at the valuation date. The only difference between customer contracts and order or production backlog is that in customer contracts the work on the contracts has not started, while in order or production backlog, the work on the contracts has not been completed.

Basis of identification:

Additional highlights: Customer contracts and the related customer relationships:
(i) It is an intangible and will meet the contractuallegal criterion even if confidentiality or other contractual terms prohibit the sale or transfer of a contract separately from the acquiree.
(ii) A customer contract and the related customer relationship may represent two distinct intangible assets.
(iii) Both the useful lives and the pattern in which the economic benefits of the two assets are consumed may differ.
(iv) A customer relationship related to the customer contract exists between an entity and its customer if
          (a) the entity has information about the customer and has regular contact with the customer, and
               (b) the customer has the ability to make direct contact with the entity.
(v) Customer relationships related to the customer contracts meet the contractual-legal criterion if an entity has a practice of establishing contracts with its customers, regardless of whether a contract exists at the acquisition date.
(vi) Customer relationships related to the customer contracts also may arise through means other than contracts, such as through regular contact by sales or service representatives. Consequently, if an entity has relationships with its customers through these types of contracts, these customer relationships also arise from contractual rights and therefore meet the contractual-legal criterion.
(vii) Customer contracts can also be a contract-based intangible asset. If the terms of a contract give rise to a liability (for example, if the terms of an operating lease or customer contract are unfavourable relative to market terms), the acquirer recognises it as a liability assumed in the business combination.

Non-contractual customer relationships:
Exchange transactions for the same asset or a similar asset that indicate that other entities have sold or otherwise transferred a particular type of no contractual customer relationship would provide evidence that the no contractual customer relationship is separable. For example, relationships with depositors are frequently exchanged with the related deposits and therefore meet the criteria for recognition as an intangible asset separately from goodwill.

Customer lists:
(i) A customer list generally does not arise from contractual or other legal rights. However, customer lists are frequently leased or exchanged. Therefore, a customer list acquired in a business combination normally meets the separability criterion. For example, customer and subscriber lists are frequently licensed and thus meet the separability criterion.
(ii) Whether customer lists have characteristics different from other customer lists, the fact that customer lists are frequently licensed generally means that the acquired customer lists meet the separability criterion.
(iii) However, a customer list acquired in a business combination would not meet the separability criterion if the terms of confidentiality or other agreements prohibit an entity from selling, leasing, or otherwise exchanging information about its customers.
(iv) A database acqui

LIMITS ON SEBI’S POWERS — another decision of SAT

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There is an impression — little exaggerated of course — that SEBI can punish anyone for any thing it deems wrong and in any manner it deems fit ! This belief seems to have its basis if one considers some of the amendments made and laws introduced over a period of time. This belief is further reinforced by decisions supporting these wide powers of SEBI.

For example, there is a term commonly used in securities laws — ‘person associated with securities markets’ — this term almost gives an omnibus power to cover any person directly or indirectly connected with securities markets. Investors, auditors and even independent directors have been held to be ‘persons associated with securities markets’ and thus action has been taken against them for alleged wrongs. It is important to highlight this since there are many persons such as insiders, acquirers which have been specifically defined in securities laws — who can be acted against only if it is first demonstrated that they do fall within the definition.

This impression is further supported by the areas in which SEBI can issue directions. These terms are also of wide import — for example:

Directions can be issued for purposes such as ‘in the interests of investors’ or ‘orderly development of securities markets’.

A clause in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market), Regulations, 2003 reads that “no person shall directly or indirectly buy, sell or otherwise deal in securities in a fraudulent manner”.

‘Power to issue Directions’ — this term is capable of a fairly wide interpretation.

‘Power to punish’ may mean penalty, suspension or cancellation of registration, debarring a person from dealing in securities for a specified period.

Provision prohibiting indulging in ‘fraudulent or an unfair trade practice in securities’. There are numerous acts/omissions specifically listed which are deemed to be fraudulent or unfair trade practices. It is often found in actual cases that several of these provisions in the law are thrown at the alleged culprit and even the final order usually lists a long list of provisions that are said to have been violated by a single act/omission.

However, a well-settled principle of law is that the crime and punishment both have to be well defined and the person who is supposed to obey the law also has to be specified. This principle is obviously applicable even to securities laws and thus one occasionally sees decisions that strike down an order of SEBI on this ground. The recent decision of the Securities Appellate Tribunal (‘SAT’) in the case of G. M. Bosu & Co. Private Limited v. SEBI and others, (Appeal No. 183 of 2010, dated 15th February 2011) is worth reviewing in this context.

The facts of the case show a long series of steps a defrauded investor had to take to get back her money. Simplifying the facts a little, it appears that an investor was defrauded by a person who sold her shares in the open market by taking her signature on some forms. These signatures were taken on the pretext that they were required incidental to transfer of shares from her deceased husband’s name to her name. Such person, who was an ex-employee of a depository participant, then allegedly sold the shares in the market and thus defrauded the investor. On a police complaint being made, he confessed his guilt and agreed to compensate the investor. However, he died without compensating her. The investor then initiated a long legal battle in which the essential argument was that she should be compensated by the depository. The legal basis for this was a provision in Regulation 32 (though amended later on) of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 which requires that the depository should ensure that payment has been received by the investor before the shares are transferred to a third party.

It is worth mentioning here that the investor had to petition multiple authorities multiple times including finally facing, albeit indirectly, the SAT. Suffice it is to state that SEBI investigated the matter and held the depository participant concerned (DP) (which was the appellant here) responsible for the lapse in non-complying with the said Regulation 32. It ordered the DP to credit the account of the investor with the 100 shares with all benefits accrued on the shares (incidentally, the 100 shares had become 1500 shares by then). This direction was issued by SEBI exercising powers under sections 11 and 11B of the SEBI Act.

The DP went in appeal to the SAT pointing out that SEBI did not have any powers to direct the DP to give such compensation to the investor u/s. 11B of the Act. It pointed out that Regulation 64 of the SEBI Depositories Regulations clearly stated that in case if a depository participant who “contravenes any of the provisions of the Act, the Depositories Act, the bye-laws, agreements and these regulations . . . . shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008”. In other words, it was argued that action could only be taken under the said SEBI (Intermediaries) Regulations, 2008 and resorting to section 11B and requiring payment of compensation by way of credit of the shares to the account of the investor was not in accordance with the law.

The SAT noted:
Firstly, the obligation of complying with Regulation 64 was on the depository and not on the depository participant.

Secondly, even assuming that there was a violation by the DP, the provisions of Regulation 64 and thereby the provisions of the SEBI (Intermediaries) Regulations should have been followed in taking action against the DP. This is what the SAT observed:

“Assuming (though not holding) that there was such a violation, Regulation 64 of the regulations requires that the depository or a participant who contravenes any provision of the regulations “shall be dealt with in the manner provided under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.” The word ‘manner’ means that the procedure laid down in Chapter V of the intermediaries regulations shall have to be followed. Regulations 24 to 30 in that chapter provide the detailed manner/procedure according to which the delinquents are to be dealt with. These provisions envisage a two-stage inquiry before taking any action against the delinquent. A designated authority is required to be appointed which shall issue a show-cause notice to the delinquent and after holding an inquiry, a report shall be submitted. The report will then be considered by the designated member after issuing a notice to the delinquent who will also be furnished with a copy of the report. It is only then that the designated member can take any one or more of the actions referred to in Regulation 27 of the intermediaries regulations keeping in view the facts and circumstances of the case. Admittedly, this procedure has not been followed and neither the appellant nor the depository were dealt with in the manner prescribed in Chapter V of the intermediaries regulations. Instead, directions have been issued u/s. 11B of the Act to compensate respondent 3.”

Finally, the question was whether the powers u/s. 11B were wide enough to order such a compensation being made by the DP. The SAT observed as follows:

“It is true that the powers of the Board u/s. 11B are wide enough to issue directions to any intermediary or person associated with the securities market but such powers are to be exercised only to protect the interests of investors in securities or for orderly development of securities market and to preserve its integrity. These directions cannot be punitive in nature and cannot be issued to pun

PART C: Information on & Arround

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Information on Mr. Sharad Pawar’s traveling on private plane:

Says Mr. Eknath Khadse (BJP leader):

‘Gathering information about the Pawars was a difficult task. However, we used the RTI Act to search the data of air-travel of Mr. Pawar and his family members on Balwa’s air craft’ from the Pune air traffic control. Through RTI application it was gathered that Balwa’s plane was used by Pawar on several occasions and on one trip, besides BCC president Shashank Manohar and his wife, the Balwas accompanied Pawar and his family to Dubai. Khadse has also reportedly dug up facts to prove that Supriya, along with her husband Sadanand and DB Realty, was the promoter of a technology park near Pune set up on an illegally procured land.

Disclosure of personal properties by CIC:

In a major step to introduce greater transparency and accountability, the six Central Information Commissioners now have declared details of their properties on the Commission’s Website.

The Commissioners draw a salary of Rs. 90,000 p.m. Following are the brief summary of declarations made:

S. Mishra : Land, property worth Rs. 1.5cr.
D. Sandhu : Agriculture land worth Rs. 81,000,
2 houses worth Rs. 5.5cr.
S. Singh : house, flat worth Rs. 66.5 lakh.
S. Gandhi : Flat worth Rs. 80,000 (cost at
time of purchase), plus shares,
mutual funds and bank deposits.
A. Dixit : Flat, cottage worth Rs. 51 lakh.
M. L. Sharma : Property worth Rs. 4.50 lakh.

Selection procedure of for appointment of Chief of Trai:.

The selection procedure of the chairman of telecom regulator Trai, including all the details of the selection committee meeting, should be made public, the Central Information Commission (CIC) has held. The panel rejected the plea of the cabinet secretariat that the information was personal in nature and cannot be given u/s. 8(1)(j) of the Right to Information Act, which prohibits disclosure of such details.

“We fail to understand how the desired information could be classified as personal information at all … The information sought in these cases is far from personal. Selection and appointment to certain posts in the government are part of the administrative decision-making process and must be placed in the public domain as soon as possible in order to ensure transparency,” Chief Information Commissioner Satyananda Mishra said. He directed the secretariat to allow the RTI applicant the inspection of the entire file related to the selection of the Trai chairman.

BMC’s functioning :

We all know that it takes months, sometimes years to get projects and files cleared from Brihanmumbai Municipal Corporation (BMC) babus. However, if you have the right connections, then your work could be done in a single day. In 2008 the BMC displayed exemplary promptness and granted permissions in a single day for construction of 13 additional floors on a building in Dadar. Interestingly, all clearances were granted to the builder and the area of a reserved public playground was reduced to make way for the building.

The issue came to light when residents procured documents under the Right to Information (RTI) Act. They learnt how BMC’s Building Proposal Department allowed developers, Finetone Realtors Pvt. Ltd. to construct 13 additional floors on the plush 20-storey Garden Court building in Dadar. Arun Sapkal, a Dadar resident and RTI activist said, “It’s shocking how the BMC first granted permission and later issued stop notice to the builder after the construction was over?” However, developers Ramakant Jadhav of Finetone Realtors Pvt. Ltd. said, “ we have all the necessary permissions in place as per the DCR rules for construction of the building and the playground. We have kept the reservations as allowed by the BMC.”

Information on ITR thru RTI:

Manoj Kumar Saini made an RTI application to get information on income tax-return (ITR) of his father-in-law Mr Munna Lal Saini, CIC Deepak Sandhu ruled:

The I-T returns of individuals do not enjoy ‘absolute ban’ from disclosure CIC has held, while directing the I-T department to provide details of the total income of a person to his son-in-law who is facing a dowry case. We direct the CPIO to provide information pertaining to the taxable income of Munna Lal Saini, father-in-law of the appellant,” Information Commissioner Deepak Sandhu said. The case relates to RTI application filed by Manoj Kumar Saini, who sought to know income of his father-in-law Munna Lal Saini from the I-T as he needed it to buttress his arguments in a dowry case filed against him.

Maharashtra State Information Commission’s Annual Report for the year 2010 is out, just now only in Marathi. Some brief statistics:

RTI applications filed : 5.49 lakh
Appeals received : 19,483
Appeals disposed : 17,266
Complaint received : 4,592
Complaint disposed : 3,911
Public Information Officers penalised : 523
Total penalties : Rs 34.38 lakh
Department action against PIOs : 602

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PART B: The RTI Act , 2005

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From the minutes of the meeting of 22.03.2011 of the central information commission.

PENDENCY

Taking note of the increasing pendency of appeals/ complaints in the Commission over the last few years and realising the need for their expeditious disposal, the Commission hereby resolves that each single bench of the Commission shall take urgent steps to maximise its disposal without comprising the quality thereof, as a general rule, each single bench will endeavour to finally decide about 3200 appeals/complaints per year.

Application of the provisions of the RTI-Act to the entities under the Public Private Partnership (PPP Arrangement)

Chief CIC has exchanged letters with the Deputy Chairman, Planning Commission, India on the subject of PPP Arrangement. Extracts from the same:

Satyananda Mishra, CIC on 04.01.2011 writes:

A PPP entity should be deemed to be a public authority u/s. 2(h) for the purpose of the RTI Act.

All Projects which are handed over to a PPP entity for building, operating or maintaining the land, even if not any other resources, given by the Government, forms a vital component of the project and, to that extent, can be deemed to substantial financing.

However, due to a lack of clarity on this at various levels and, especially since the RTI Act does not expressly refer to such bodies while defining the public authorities, a lot of confusion persists and such entities have, by and large, remained outside the purview of the RTI Act.

This Commission is of the view that time has come to clarify the role and responsibility of the PPP entity for implementing the RTI Act in order to bring in greater transparency in implementation of such projects.

Letter then suggest how the coverage is to be implemented and once carried out, a lot of confusion in this regard will go and the citizens will have access to vital information regarding the projects which affect their lives. Needless to say, this will also greatly improve the accountability of such entities to both the Government and the public at large.

In reply, Montek Singh Ahluwalia vide letter dated 14.03.2011 states:

In the Press Note issued, we recognise that the powers of the Information Commission are laid down in the RTI Act. It is for the Commission to exercise these powers in their best judgment. It may not be appropriate to expand or reduce the jurisdiction of the Information Commissions through a contractual arrangement in the concession agreements. However, we have referred the matter to the Department of Legal Affairs for advice and I will revert to you on receiving their advice.

The Commission discussed above referred letter at its meeting of 22-03-2011 and recorded as under:

The Commission discussed the letter of the Deputy Chairman, Planning Commission on application of RTI Act to the entities under the PPP. The CIC decided to wait for two months for the Planning Commission to send a copy of response of Department of Legal Affairs on this issue as referred to in the letter of the Deputy Chairman dated 14-03-2011.

It is now reported in ET of 26 April that MoF objects to plan Panel’s role in social PPPs and says that they fall in its domain. Matter has been referred to the cabinet secretariat seeking its intervention on the matter.

I hope that PPP arrangements come in the domain of RTI whoever may be in charge of the same at Government level.

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Bombay Public Trusts Act

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Introduction: In the State of Maharashtra, Public
Trusts are governed by the Bombay Public Trusts Act, 1950 (‘the Act’).
Under the Act, the Charity Commissioner is in charge of public trusts.
The State of Gujarat also has a law similar to the Bombay Public Trust
Act.

The Charity Commissioner has powers of supervision,
regulation and control of public trusts. All public trusts must register
under the Act with the Charity Commissioner. It should be remembered
that all public trusts are trusts, but all trusts need not be public
trusts. The Act does not apply to section 25 companies which are created
under the Companies Act, 1956. The Bombay Chartered Accountants’
Society is an instance of a public trust registered under this Act.

Definitions:
A
public trust is defined to mean an express or constructive trust for
either public or charitable purpose or both and includes a temple, a
math, a wakf, church, synagogue, agiary or any other religious or
charitable endowment and a society formed either for religious or
charitable purposes or both and registered under the Societies
Registration Act, 1860.

The word ‘trust’ is not defined under
the Act and hence, one needs to refer to the definition under the Indian
Trusts Act, 1882. Section 3 of the said Act defines a ‘trust’ as an
obligation annexed to the ownership of property and arising out of a
confidence reposed in and accepted by the owner or declared and accepted
by him for the benefit of another or of another and the owner. A public
trust must be for the public at large or some significant portion of
the public. However, the number of beneficiaries must be a fluctuating
body. It is the extensiveness of object which affords some indication of
the public nature of the trust — Prakash Chandra v. Subodh Chandra, AIR
1937 Cal. 67. A trust cannot be held to be for charitable purpose if it
is not for public benefit. Thus, private charitable trusts are not
governed by this Act. The term public purpose is not capable of any
strict definition and depends upon the facts and circumstances of each
case. No rigid rules can be applied to define the same — State of Bombay
v. S. R. Nanji, AIR 1956 SC 294.

The Supreme Court in
Radhakanta Deb v. Commissioner of Hindu Religious Endowments, Orissa,
AIR 1981 SC 798, the Court held that “the cardinal point to be decided
is whether it was the intention of the founder that specified
individuals are to have the right of worship at the shrine, or the
general public or any specified portion thereof.” Thereafter, the Court
observed that the mere fact that members of the public are allowed to
worship by itself would not make an endowment a public, unless it is
proved that the members of the public had a right to worship in the
temple.

The Supreme Court formulated four tests as providing
sufficient guidelines to determine on the facts of each case whether an
endowment is of a private or of a public nature. The four tests are as
follows:

(a) Whether the use of the temple by members of the public is of right;
(b)
Whether the control and management vests either in a large body of
persons or within the members of the public and the founder does not
retain any control over the management;
(c) Whether the dedication
of the properties is made by the founder who retain the control and
management and whether control and management of the temple is also
retained by him; and
(d) Where the evidence shows that the founder
of the endowment did not make any stipulation for offerings or
contributions to be made by the members of the public to the temple,
this would be an important intrinsic circumstance to indicate the
private nature of the endowment.

Charitable purpose is defined u/s. 9 of the Act to include:

(a) relief of poverty or distress
(b) education
(c) medical relief
(d)
provision for facilities for recreation or other leisure-time
occupation (including assistance for such provision), if the facilities
are provided in the interest of social welfare and public benefit, and
(e)
the advancement of any other object of general public utility, but does
not include a purpose which relates exclusively to religious teaching
or worship.

Hence, a trust for both religious and charitable
purposes is feasible under the Bombay Public Trust Act, although the
same is not recognised u/s. 11 of the Income-tax Act (if created after
1-4-1961).

The term ‘public’ does not mean the humanity as a
whole, but some indefinite class of persons, a crosssection of the
community — CIT v. Radhaswami Satsang Sabha, 25 ITR 472 (All). Charity
need not benefit the entire mankind but should at least benefit an
ascertainable section of the community — Hazarat Pirmahomed Sahah Sahib
Roza Committee, 63 ITR 490 (SC). The trustees can decide on such
charitable purpose as they deem fit — Smith v. Massey, (1960) ILR 30
Bom. 500. A trust does not become invalid if the discretion of selecting
the charitable purpose is left to the trustees and they are free to
apply the fund in such manner and at such time and to such charities as
they deem fit — Sardar Bahadur Indra Singh Trust, AIR 1956 Cal. 164.

Registration:
Section 18 of the Act and the Bombay Public Trust Rules lay down the procedure for registration of a trust as follows:

(a) Apply to the Deputy Charity Commissioner of the region in Schedule II within three months of creation of the trust.

(b)
The application must contain the names and details of the trustees, the
trust, list of movable and immovable properties along with their
approximate market values, etc. A copy of the trust deed should also be
annexed. A memorandum must also be sent, which must contain the
prescribed particulars relating to the immovable property of the trust.
Schedule IIA to the Rules contains the format for the same. Section 22C
of the Act also provides for particulars of the memorandum.

On
receipt of the application, the Deputy Commissioner would make an
inquiry u/s.19 for ascertaining whether there exists a public trust and
whether the trust falls within its jurisdiction. The principles of
natural justice must be followed in this inquiry process. On completion
of the inquiry, the Deputy Commissioner shall record his findings with
reasons as to the matters inquired by him and may make an order for the
payment of the registration fee. The Charity Commissioner shall maintain
a Register containing all details of the trust.

Investment of trust money:
The
funds of the trust which cannot be deployed for the purposes of the
trust shall be deposited either with a bank or invested in designated
public securities. Public securities means those issued by the
Central/State Government/Railways/Local Authorities, etc.

The
money may also be invested in the first mortgage of immovable property
if the property is not leasehold for a term of years, i.e., the lease
must be indefinite, and secondly, the value of the property must exceed
the mortgage money by one-half times. Thus, if the value of the property
is Rs.1.50 crores, the investment permissible in the first mortgage is
Rs.1 crore.

Purchase of an immovable property as an investment
of trust funds would also require the permission of the Charity
Commissioner. If the property is purchased without its permission, then
the trustees would become liable for penalty for contravention of the
Act. However, the transaction is not void ab initio. This is contrary to
the provisions for sale of an immovable property. Any sale transaction
without the Commissioner’s permission is void ab initio.

Trustees
cannot borrow money for the purpose of or on behalf of

The basics of cloud computing Part 2

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About this article:
The previous write-up on this topic was intended to be an eye-opener on this subject. This one briefly discusses certain important aspects about cloud computing. This would include key terminology and the some offerings.

Background:
Cloud computing, as explained in the previous issue, is a model for enabling convenient, ondemand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. By providing on demand access to a shared pool of computing resources in a selfservice, dynamically scaled and metered manner, cloud computing offers compelling advantages in speed, agility and efficiency.

Moving on, one needs to appreciate that, currently, cloud computing is at an early stage of its life-cycle, and cloud computing as we know it, is the evolution and convergence of several trends. In order to benefit from the fast evolving model, one needs to understand certain important aspects and key terminology being used in the context of cloud computing.

Commonly used models of cloud computing:
The first in the order of things is for the readers to understand the different (common) cloud computing models available in the market. The models currently in vogue are:

  • Private clouds
  • Public clouds
  • Community clouds
  • Hybrid clouds

Private clouds:
These refer to clouds for exclusive use by a single organisation. Such clouds are typically controlled, managed and hosted in private data centers. However, this not a hard and fast rule, there are exceptions wherein the private cloud is for the exclusive use by one organisation, but the hosting and operation of the private clouds is outsourced to a third party service provider.

Public clouds:
These refer to clouds which are leased out for use by multiple organisations (tenants) on a shared basis. These clouds are hosted and managed by a third party service provider. These are fairly common and serve small and medium enterprises. Examples would be Microsoft 365, Google docs.

Community clouds:
These refer to clouds for use by a group of related organisations who wish to make use of a common cloud computing environment. For example, a community might consist of the different branches of the military, all the universities in a given region, or all the suppliers to a large manufacturer. To cite an example: Large Hadron Collider1. (Look this up on the Internet, you may find the facts and dynamics hard to believe.)

Hybrid clouds:
These refer to situations when a single organisation adopts both private and public clouds for a single application, in order to take advantage of the benefits of both. For example, in a ‘cloudbursting’ scenario, an organisation might run the steady-state workload of an application on a private cloud, but when a spike in workload occurs, such as at the end of the financial quarter or during the holiday season, they can burst out to use computing capacity from a public cloud, then return those resources to the public pool when they are no longer needed. (Somebody please wake up the Tax Department, please use this on due dates.)

Of the above, private clouds and public clouds are the most commonly seen and implemented.

Advantages:
While the advantages such as efficiency, availability, scalability and fast deployment are common to both public as well as private clouds, there are certain advantages which would be unique either to public clouds or to private clouds. Some of these are: Some benefits are unique to public cloud computing:

  • Low upfront costs — Public clouds are faster and cheaper to get started, hence providing the users with the advantage of a low-cost barrier to entry. There is no need to procure, instal and configure hardware.
  • Economies of scale — Large public clouds enjoy economies of scale in terms of equipment purchasing power and management efficiencies, and some may pass a portion of the savings onto customers.
  • Simpler to manage — Public clouds do not require IT to manage and administer, update, patch, etc. Users rely on the public cloud service provider instead of the IT department.
  • Operating expense — Public clouds are paid out of the operating expense budget, often times by the users’ line of business, not the IT department. Capital expense is avoided, which can be an advantage in some organisations.


Some benefits are unique to private cloud computing:

  • Greater control of security, compliance and quality of service — Private clouds enable IT to maintain control of security (prevent data loss, protect privacy), compliance (data handling policies, data retention, audit, regulations governing data location), and quality of service (since private clouds can optimise networks in ways that public clouds do not allow).
  • Easier integration — Applications running in private clouds are easier to integrate with other in-house applications, such as identity management systems.
  • Lower total costs — Private clouds may be cheaper over the long term compared to public clouds, since it is essentially owning versus renting. According to several analyses, the breakeven period is between two and three years.
  • Capital expense and operating expense — Private clouds are funded by a combination of capital expense (with depreciation) and operating expense.

Summarising:
To recap, cloud computing is characterised by real, new capabilities such as self-service, auto-scaling and chargeback, but is also based on many established technologies such as grid computing, virtualisation, SOA shared services and large-scale, systems management automation. The top two benefits of cloud computing are speed and cost. Through self-service access to an available pool of computing resources, users can be up and running in minutes instead of weeks or months. Making adjustments to computing capacity is also fast, thanks to elastically scalable grid architecture. And because cloud computing is pay-per-use, operates at high scale and is highly automated, the cost and efficiency of cloud computing is very compelling as well.

In the next write-up:
While cloud computing offers compelling benefits in terms of speed and cost, clouds also present serious concerns around security, compliance, quality of service and fit. There are a number of issues and concerns that are holding some organisations back from rushing to the cloud. The top concern far and away is security. While one can debate the relative security of public clouds versus in-house data centers, the bottom-line is that many organisations are not comfortable entrusting certain sensitive data to public clouds where they do not have full visibility and full control. So some particularly sensitive applications will remain in-house while others may take advantage of public clouds. Another concern is quality of service, since clouds may not be able to fully guarantee service level agreement in terms of performance and availability. A third area of concern is fit, the ability to integrate with in-house systems and adapt SaaS applications to the organisation’s business processes. Organisations are likely adopt a mix of public and private clouds. Some applications will be appropriate for public clouds, while others will say in private clouds, and some will not use either.

Until the next write-up . . . . Cheers!!!!!!

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Carve-outs Under IND-AS

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With its press release dated 25th February 2011, the Ministry of Corporate Affairs (MCA) notified 35 Indian Accounting Standards converged with IFRS (Ind-AS), thereby eliminating the speculation on the contents of the final standards. However, the press release does not contain the date of implementation of the converged standards. The MCA has clarified that the date of implementation shall be notified at a later date after various issues, including tax-related ones, are resolved.

The final standards notified by the MCA are substantially similar to the current IFRS standards. However, there are certain changes made to the Ind-AS standards as part of the convergence (rather than adoption) process to suit more appropriately to the Indian environment. These changes can be classified into the following categories:

  • Mandatory differences as compared to IFRS
  • Removal of accounting policy choices available under IFRS
  • Additional accounting policy options provided, which are not in compliance with IFRS requirements
  • Certain IFRS guidance to be adopted with separate (deferred) implementation dates.

This article attempts to explain the first category of carve-outs i.e., mandatory differences with IFRS and their impact on the financial statements. We will cover the other categories of carve-outs in our subsequent articles.

Foreign currency convertible bonds (FCCB):

Position under IFRS:
FCCB involve an exchange of a fixed number of shares for a fixed consideration that is denominated in foreign currency. Since the cash flows of the issuer entity in its own functional currency (i.e., in rupees) is variable due to changes in exchange rates, FCCB do not meet the definition of an equity instrument under IFRS. Thus, under IFRS, FCCB are classified as hybrid instruments and are initially split between the conversion option (embedded derivative) and the loan liability.

Conversion option: The conversion option is treated like a derivative and is initially recorded at its fair value. Like all derivatives, the conversion option is subsequently marked-to-market (MTM) at every reporting date and the impact is recognised in the income statement.

Loan liability: The loan liability is initially recorded as the difference between the proceeds and the amount allocated to the conversion option. Interest is thereafter recorded based on imputed interest rates. Further, the loan is adjusted for exchange rate movements that are recognised in the income statement.

Position under Ind-AS:
The Ind-AS has modified the definition of financial liabilities under Ind-AS 32 (vis-à-vis IAS 32) to exclude from its definition, the option to convert the foreign currency denominated borrowings into a fixed number of shares at a fixed exercise price (in any currency). Thus, these instruments will be split initially into the loan liability and the conversion option (as discussed above), but the conversion option will be recognised as equity (as against a derivative under IFRS) and therefore will not remeasured subsequently i.e., no subsequent MTM.

Key implications of the carve-out:
The key implication of this is that the conversion option is not subsequently MTM under Ind-AS, while such MTM is required under IFRS.

Under IFRS, the changes in the fair value of the conversion option may have a significant impact and result in volatility in profits. Further, the impact on the profits for the year is inversely related to the movement in the underlying share price; i.e., if the fair value of the underlying shares rises, MTM of the conversion option would lead to losses to be recognised in the income statement and vice-versa.

Under Ind-AS, since the conversion option is recognised as equity and is not remeasured subsequently, the carve-out eliminates the volatility in profits on account of the changes in the underlying share prices of the company.

Let us understand the impact of the carve-out with the help of an example:

On 1st April 2012, Company A (INR functional currency) issued 10,000 convertible bonds of USD 100 each with a coupon rate of 4% p.a. (interest payable annually in arrears). The total proceeds collected aggregated to USD 1 million. Each USD 100 bond is convertible, at the holder’s discretion, at any time prior to maturity on 31st March 2017, into 1,000 ordinary shares of Rs.10 each. For simplicity, transaction costs and deferred taxes are ignored. The following information on the exchange rate (spot) and fair value of conversion option (option) may be relevant:

Under IFRS, proceeds collected would be required to be split into loan liability and the conversion option. The total proceeds from the issue of USD 1 million aggregates to Rs.45 million based on a conversion rate of USD 1 = Rs.45. On initial recognition, the conversion option would be recognised at its fair value (i.e., Rs.4.5 million or 0.1 million USD) and the remaining proceeds (i.e., Rs.40.5 million or 0.9 million USD) would be recognised as loan liability.

The Company shall compute an effective interest rate based on the loan principal received (i.e., 0.9 million USD), loan principal on maturity (USD 1 million) and payments to be made for interest costs @ 4% p.a. on the loan principal of USD 1 million. The effective interest rate in this case works out to 6.4% p.a. The interest cost p.a. shall be computed based on outstanding loan principal (in foreign currency) and the effective interest rate of 6.4% p.a. converted at average exchange rates during the year. Further, the loan liability shall be translated at exchange rate as at the reporting date, with the exchange differences recognised in the income statement.

The conversion option on initial recognition aggregated to Rs.4.5 million, while the fair value of the conversion option as at the end of the year aggregates to Rs.9.2 million i.e., an increase by Rs.4.7 million. IFRS requires such a change in the fair value of conversion option to be recognised in the income statement.

Let us consider the movements in the carrying values of the conversion option and the loan liability:

Under IFRS

There are three costs recognised in the income statement i.e., interest cost on the loan, the exchange differences on the loan and the MTM gains/losses on the conversion option.

Under Ind-AS, the accounting for the loan liability is same as under IFRS. However, the conversion option is to be recognised as equity. As stated above, for simplicity we have ignored the transaction costs and deferred taxes. On initial recognition, the fair value of the conversion option (i.e., Rs.4.5 million) shall be recognised as equity. As at the end of the first year i.e., 31st March 2013, there is no further adjustment required on account of the fair value movements of the conversion option.

The costs to the company on account of FCCB under Ind-AS will be the interest cost and exchange gains/losses on the loan components of the instrument, with the conversion option not being remeasured for changes in its fair value.

Under Ind-AS

Agreements for sale of real estate (IFRIC 15):
Position under IFRS:

IFRIC 15 focusses on the accounting for revenue recognition by entities that undertake the construction of real estate. IFRIC 15 provides guidance on determining whether revenue from the construction of real estate should be accounted for in accordance with IAS 11 (Construction contract) or IAS 18 (Sale of goods), and the timing of revenue recognition.

IFRIC 15 clarifies that IAS 11 is applied to agreements for the construction of real estate that meet the definitio

Asian Paints (India) Ltd. (31-3-2010)

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From Notes to Accounts:

20. Exceptional items:

(a) Exceptional item of current year includes Rs.5.77 crores being the write-back of provision for diminution in the value of investments in the Company’s wholly-owned subsidiary Asian Paints (International) Limited, Mauritius in consequent to the buyback of 41,00,000 shares at US$ 1 per share by Asian Paints (International) Limited.

(b) Exceptional item of current year includes Rs.19.69 crores being the reversal of provision made towards diminution in the value of investments in the Company’s wholly-owned subsidiary Asian Paints (International) Limited. Mauritius, based on management’s assessment of the fair value of its investments.

(c) Exceptional item of previous year consists of provision of Rs.5.90 crores towards diminution in the value of the Company’s long-term investment in its subsidiary Asian Paints (Bangladesh) Ltd. made through its whollyowned subsidiary Asian Paints (International) Ltd. based on the management’s assessment of the fair value of its investment. Deferred tax asset on the above provision was not recognised.

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Tata Communications Ltd. (31-3-2010)

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From Notes to Accounts:

4. In terms of the agreements entered into between Tata Teleservices Ltd. (‘TTSL’), Tata Sons Ltd. (‘TSL’) and NTT DoCoMo, Inc. of Japan (Strategic Partners-SP), TSL gave an option to the Company to sell 36,542,378 equity shares in TTSL to the SP, as part of a secondary sale of 253,163,941 equity shares effected along with a primary issue of 843,879,801 shares by TTSL to the SP. Accordingly, the Company realised Rs.424.22 crores on sale of these shares resulting in a profit of Rs.346.65 crores which has been reflected as an exceptional item in the profit and loss account for the current year.

11. On 27th August, 2008, the Arbitration Tribunal (the ‘Tribunal’) of the International Chamber of Commerce, Hague handed down a final award in the arbitration proceedings brought by Reliance Globalcom Limited (‘Reliance’), formerly known as ‘FLAG Telecom’, against the Company relating to the Flag Europe Asia Cable System. The Tribunal directed the Company to pay Rs.95.60 crores (US$ 21.45 million) (2008: Rs. NIL) as final settlement against US$ 385 million claimed by Reliance. The amount of Rs.95.60 cores has been charged to profit and loss account and has been disclosed as an exception item.

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Ramco Industries Ltd. (31-3-2010)

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From Notes to Accounts:

Consequent to the decision to exit Plastic Storage Tanks business, the difference between estimated resale value of assets of this division an value reflected in the books has been accounted towards impairment loss in terms of AS-28.

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MARICO Ltd. (31-3-2010) (Consolidated Financial Statements)

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From Notes to Accounts:

(13) (a) The exceptional items stated in the Profit and Loss account are as under:

(b) During the year, upon completion of necessary compliances under FEMA regulations, the Company divested its stake in Sundari LLC (Sundari) on 8th June, 2009. Sundari ceased to be subsidiary of the Company from the said date. Accordingly, the financial statements of Sundari have been consolidated with that of Marico Limited for the period from 1st April, 2009 to 8th June, 2009. The net effect of the divestment of Rs.4.05 crores is charged to the Profit and Loss account and reflected as ‘Exceptional item’ (detailed hereunder):

(c) Kaya Ltd., a wholly-owned subsidiary of the Company, had launched the Kaya Life prototype to offer customers holistic weight management solutions and had opened five ‘Kaya Life’ centres in Mumbai and Kaya Middle East FZE, a step-down subsidiary of the Company had also opened one centre in the Middle East during the past three years. While clients had been experiencing effective results on both weight loss and inch loss, the prototype had less than expected progress in building a sustainable business model. Hence, the Management took a strategic decision of closing down the centres in March, 2010. Consequently, the Group has made an aggregate provision of Rs.5.74 crore towards impairment of assets of Rs.2.91 crore and  other related estimated liabilities of Rs.2.83 crore towards employees’ termination, lease termination costs, customer refunds and stock written down relating to these centres for the year ended 31st March, 2010. (Refer note 23 below)

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Ambuja Cements Ltd. (31-12-2010)

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From Notes to Accounts:

During the current year, the Company has estimated provision for slow and non-moving spares based on age of the inventory. Accordingly, the Company has recognised a provision of Rs.61.03 crores as at 31st December, 2010. The provision based on such parameters applied to spares inventory at the beginning of the year amounting to Rs.46.10 crores has been disclosed as an exceptional item in the profit and loss account.

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Registration — Family settlement — Document reciting past events need not be registered — Registration Act, section 17(1) (b), 49.

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[ Ram Singh v. Smt. Kesar Kanwar & Ors., AIR 2011 Rajasthan 24]

The petitioner-plaintiff was not allowed to exhibit two documents in a suit, namely, family settlement and a map annexed thereto on the ground that the same were not registered and duly stamped. The petitioner contented that it was not required for a settlement to be registered with the Office of the Registrar as these documents were simply a recitation of past events.

The Court relying on the decision of Roshan Singh v. Zile Singh, AIR 1988 SC 881, held that while an instrument of partition which operates or is intended to operate as a declared volition constituting or severing ownership and causes a change of legal relation to the property divided amongst the parties to it, requires registration u/s. 17(1)(b) of the Act, a writing which merely recites that there has in time past been a partition, is not a declaration of will, but a mere statement of fact, and it does not require registration. The essence of the matter is whether the deed is a part of the partition transaction or contains merely in incidental recital of a previously completed transaction. The use of the past tense does not necessarily indicate that it is merely a recital of a past transaction. It is equally well settled that a mere list of properties allotted at a partition is not an instrument of partition and does not require registration. Section 17(1)(b) lays down that a document for which registration is compulsory should by its own force, operate or purport to operate to create or declare some right in immovable property. Therefore, a mere recital of what has already taken place cannot be held to declare any right and there would be no necessity of registering such a document.

Two propositions therefore flow : Firstly, a partition may be effected orally; but if it is subsequently reduced into a form of a document and that document purports by itself to effect a division and embodies all the terms of bargain, it will be necessary to register it. If it be not registered, section 49 of the Act will prevent its being admitted in evidence. Secondly, evidence of the factum of partition will not be admissible by reason of section 91 of the Evidence Act, 1872. Partition lists which are mere records of a previously completed partition between the parties, will be admitted in evidence even though they are unregistered to prove the fact of partition.

In view of the aforesaid, the Court allowed the writ petition.

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Muslim Law — Properties purchased by female exclusively belongs to her and can be divided only between her children — No concept of jointness of nucleus.

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[ Mukhtar Ahmad and Anr. v. Mahmudi Khatoon & Anr., AIR 2011 Jharkhand 28]

The appellant and respondents (1-6) are brothers and sisters and are governed by Hanife School of Muslim Law. The other respondents are sons and daughters of second wife and other relatives. The suit was filed by one of the sisters against the brother and other sisters to get partition with respect to certain properties.

The properties in dispute were recorded in the name of mother Bibi Jainab (first wife). The father of the appellants and defendants had executed one of the properties to his wife in lieu of dawar debt. The Trial Court held that the plaintiff was entitled to get partition. The appeal was filed contending that the Trial Court has wrongly decided the issue considering the principles of Hindu law, where a property is not the absolute property of a female, if the source, from which the property has been purchased, is proved to be of the joint family or by the husband, then it will not be considered to the property of the female. But in the Muslim law, all the properties in the name of muslim lady belong to her, irrespective of source of money, from which it was purchased. The plaintiff is the full-blood sister of the defendants, thus, the plaintiff and the defendants are the legal heirs and successors of their deceased father, Md. Yakub and deceased mother, Jainab Khatoon. The partition suit was filed for preparing of separate ‘takhta’ for the plaintiff after granting a decree of 1/12th share in the properties of her father, Md. Yakub and her mother, Jainab.

The defendant alleged that no property is joint as claimed by the plaintiff. They also claimed that after the death of their parents, the parties have amicably settled their properties and the defendant and the plaintiff was allotted specific share.

The Court referred to certain salient features of Muslim law of succession which distinguish it from modern Hindu law of inheritance, the Muslim law of succession is basically different from the parallel indigenous systems of India. The doctrine of janmswatvavada (right by birth), which constitutes the foundation of the Mitakshara law of succession, is wholly unknown to Muslim law. The law of inheritance in Islam is relatively close to the classical Dayabhaga law, though it differs also from that on several fundamental points. The modern Hindu law of succession as laid down in the Hindu Succession Act, 1956 is, however, much different from both the aforesaid classical systems; it has a remarkable proximity, in certain respects, to the Muslim law of inheritance.

Whatever property one inherits (whether from his ancestors or from others) is, at Muslim law, one’s absolute property — whether that person is a man or a woman. In Muslim law, so long as a person is alive, he or she is the absolute owner of his or her property; nobody else (including a son) has any right, whatsoever, in it. It is only when the owner dies and never before that the legal rights of the heirs accrue. There is, therefore, no question of a would-be heir dealing in any way with his future right to inherit.

The Indian legal concepts of ‘joint’ or ‘undivided’ family, ‘coparcenary’, karta, ‘survivorship’, and ‘partition’, etc., have no place in the law of Islam. A father and his son living together do not constitute a ‘joint family’; the father is the master of his property. The same is the position of brothers or others living together.

Unlike the classical Indian law, female sex is no bar to inherit property. No woman is excluded from inheritance only on the basis of sex. Women have, like men, right to inherit property independently, not merely to receive maintenance or hold property ‘in lieu of maintenance’. Moreover, every woman who inherits some property is, like a man, its absolute owner; there is no concept of either streedhan or a woman’s ‘limited estate’ reverting to others upon her death. The same scheme of succession applies whether the deceased was male or a female.

Since all properties in the name of a female belongs to her exclusively and there is no concept of jointness of nucleus or any concept that the property is purchased from joint nucleus of the head of the joint family, hence, all the properties which are exclusively purchased by sale deed by Bibi Jainab in her name can be divided only between her children. Thus, the plaintiff would be granted 1/10th share in the property belonging to Bibi Jainab. A property which was belonging to the father will be divided amongst all the 17 parties in the ratio of 1/17th each and a separate takhta would be carved out.

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Anyone willing to bat for the poor?

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This week is a good time to discuss who deserves goodies from the government. Here are three candidates. The first is Members of Parliament (MPs), who have been given a 150% hike in their budgets under the MP local area development (MPLAD) scheme. Each MP can now spend Rs.5 crore every year, up from Rs.2 crore till now, and Rs.1 crore when MPLAD was introduced 17 years ago. Inflation neutralisation would have taken that figure to about Rs.3 crore, so the extra Rs.2 crore per MP per year (Rs.1,600 crore annually for about 800 MPs) is a bonus. If you want to know how this money is used, read the report of the Comptroller and Auditor General. Among other things, it points out that MPs can and do select those who get contracts under the scheme. Interestingly, Nitish Kumar has scrapped the Bihar variant of the scheme for Members of Legislative Assembly (MLAs); he has also announced a doubling of the pay and perquisites for MLAs. If the two announcements are connected, you can draw your own conclusions about whether kickbacks flourish in the name of local area development.

The second candidate for government largesse is the International Cricket Council (ICC), presided over by Sharad Pawar. The government has just given the ICC’s World Cup tax-free status. The reports say this means a tax saving for ICC of Rs.45 crore, though the figures of revenue (Rs.1,476 crore) and expenditure (Rs.571 crore) suggest a much larger giveaway. It is easy to see why the government has played ball; Mr. Pawar is the leader of a coalition partner, and agriculture minister. Oddly, the sports minister argued against the freebie. So did a note put up by the finance ministry, though the finance minister seems to have batted for the ICC. As happens all too often, the Prime Minister has chosen the path of least resistance.

Now the history of the ICC is that, once cricket became a big-money game some years ago, this London- based body decided that it needed tax shelters. It created a subsidiary for its business operations and housed it in Monaco. But running between London and Monaco was inconvenient, so the ICC told the British treasury that it would re-locate entirely to London if the government offered tax-free status. When the response was a polite ‘No’, the ICC moved to Dubai. Penny-pinching London could learn a thing or two from the generosity that New Delhi shows to the really deserving.

But the most deserving of all is Vijay Mallya, owner of yachts, private jets, vintage cars, a cricket team, an island in the Mediterranean, and homes on every continent, and also two-thirds owner of Kingfisher Airlines. Kingfisher has been so run that it has been losing money, and borrowing up to its gills. The lenders (13 banks led by the government-owned State Bank of India) have now agreed to convert some of the loans into equity — at a share price of Rs.64.48, when the going market rate was Rs.40. That means a loss straightaway of nearly 40% of the loan value — and there are further loans outstanding. Could the lenders have flexed their muscles, since the airline is in no shape to repay loans? Yes. Could they have threatened to buy out the promoters’ 66% shareholding at the going value of Rs.740 crore, and put in new management? Almost certainly, yes. So if Mr. Mallya still has majority control of the airline, it tells you the scale of the government banks’ largesse.

(Source: Weekend Ruminations by T. N. Ninan in Business Standard, dated 2-4-2011)

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Purge civil aviation of corruption

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The rot in the civil aviation industry runs deeper than was thought earlier. As investigations proceed into the fake pilot scam, it is fast becoming clear that the issue isn’t limited to a handful of pilots. An elaborate nexus exists between pilots, touts, flying schools and officials of the Directorate General of Civil Aviation (DGCA). The recent arrest of DGCA officer Pradeep Kumar lends credence to this nexus. Kumar was instrumental in processing the applications of pilots who had forged the result cards of their qualifying exam. It has also been discovered that flying schools themselves were on the take, fudging logbooks to escalate the number of flying hours of pilots. As the DGCA scrutinises 4,500 airline pilot licences, it is anybody’s guess how many unqualified pilots continue to fly commercial aircraft.

Opening up the aviation sector made air travel an affordable reality for the Indian middle class. However, oversight of this sector is poor. Each day the safety of thousands of passengers hangs in the balance. If sons and daughters of DGCA officials are able to obtain licences despite dubious flying records, it opens the door to large-scale fraud. Apart from an internal purge of the DGCA itself, it is imperative to undertake a thorough audit of the 40 flying schools in the country. A public DGCA database for result cards of candidates is a good idea. That corruption hasn’t even spared a sensitive industry like aviation, jeopardising the lives of thousands, is a grave concern. Now that the rot lies exposed, civil aviation minister Vayalar Ravi must undertake thorough and rapid action to cleanse the system and bring back credibility to civil aviation.

(Source: The Times of India, dated 29-3-2011)

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Tragic state of our Universities — University of Pune’s Institutes run sans approved teachers

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The University of Pune (UoP) said it will stop 48 colleges affiliated to it to conduct first-year admissions for 2011-12 after the administration came in for intense grilling from senate members over 125 affiliated colleges functioning without a single approved teacher. Worse, 24 of these colleges do not have approved principals either.

A Supreme Court order had asked colleges to have full-time approved principals and teachers in place or face punitive action like a ban on admissions to first year of courses in the 2011- 12 session. Seventy-seven of the 125 colleges have secured court relief against possible action. The university will stop admissions in the 48 other colleges.

At the meeting, senate members raised questions on how exams for students from these colleges were conducted, who assessed their papers and what action the varsity was taking to ban first-year admissions in the 48 colleges.

They also demanded a panel to probe how the local inquiry committees recommended continuation of affiliation for the 125 colleges. Director of UoP’s board of college and university development W. N. Gade and controller of exams S. M. Ahire could not placate the senate, which wanted to know if answer papers were assessed at the colleges lacking approved staff.

Ironically, the university was recently accorded the highest ‘A’ grade by the National Assessment and Accreditation Council. The university’s approval of teaching staff makes students of affiliated colleges eligible for exams. Without approved teachers/principals, a college cannot be an exam centre. Students then take their exams in the nearest college with approved staff. If the college is unable to accommodate more students, it assigns two approved teachers to the college to be ‘custodians’ of the varsity’s exam material, including answer papers.

The norms are ambiguous on who should assess answer papers of colleges lacking approved teachers.

(Source: The Times of India, dated 28-3-2011)

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Shunglu Committee Report reveals scale of waste — Don’t bury it

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Winning the bid to host a major international sporting event is a welcome occasion in most parts of the world. But if many Indian citizens receive such news with trepidation, the Shunglu committee’s investigation of the Delhi Commonwealth Games explains why. Contractors made Rs.254 crore in ‘undue gains’ and Rs.900 crore were lost through mismanagement if not outright corruption. What should have been the harbinger for urban renewal became a developmental fiasco. Ready a year before the Olympics, London’s Velodrome shows how things should’ve been done during Delhi’s Commonwealth Games, where preparations continued even as athletes arrived. Finding it difficult to dismiss the public perception that there was ‘method in the madness’, the report alleges that the tendering processes and long delays arose from a nexus between authorities and contractors. The report’s stinging critique of public bodies — such as the DDA, MCD and PWD — extends to naming individual bureaucrats and public figures including Delhi chief minister Sheila Dikshit and lieutenant-governor Tejendra Khanna.

(Source: The Times of India, dated 28-3-2011)

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Welfare law delusion — After passing legislation the Court has to prod the executive at every step for years to enforce them

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Whenever a socio-legal problem flares up, one can bet on two things to happen. Bollywood will make a film on it; and law-makers will pass legislation to solve it. Both will soon fade from public memory. There are several social welfare laws that are passed and forgotten. Two of them are meant to protect unorganised construction workers.

The construction industry is said to be the second largest one after agriculture. It is labour-intensive, employing 20 million and it is estimated that every Rs.1 crore invested on construction project generates employment of 22,000 unskilled man-days and 23,000 skilled or semi-skilled man-days. Recognising its importance, Parliament passed the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 and the Building and Other Construction Workers’ Welfare Cess Act, 1996.

The government stated in the preamble that construction works are characterised by their inherent risk to the life and limb of workers. The work is also characterised by its casual nature, temporary relationship between employer and employee, uncertain working hours, lack of basic amenities and inadequacy of welfare facilities. Although the provisions of various labour laws like the Minimum Wages Act, Contract Labour (Regulation & Abolition) Act and Inter-State Migrant Workmen (Regulation of Employment & Conditions of Services) Act are applicable to building workers, there was no comprehensive central legislation for this category of workers. The two enactments were aimed to improve matters.

After nearly 15 years, the central and state governments have done little to implement these laws. Ten years after the laws came into force, a public interest petition was moved in the Supreme Court pointing out the non-implementation of the provisions of the Acts (National Campaign for Central Legislation on Construction Labour v. Union of India). The Court passed several orders over the years asking state governments to implement the main provisions of the law. There was little response. Last week, the Court took a tough stand and summoned five top labour officers in the country to be present in the Chief Justice’s Court and explain the lapse.

The dubious honour goes to the Union Labour Secretary, the Director General of Inspection, Government of India, and Labour Secretaries of Nagaland, Meghalaya and Lakshdweep.

The Court stated that many among the 36 states and Union territories have not taken even the initial steps. They have not appointed ‘Registration Officers’ before whom the employers of workers have to register their establishments. They have also ignored their obligation to constitute state welfare boards.

(Source : Extracts from M. J. Antony’s article in Business Standard, dated 23-3-2011)

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Anna Hazare’s movement combines new and old ideals

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The Jan Lokpal movement based in Delhi’s Jantar Mantar, spreading across India through fasts, marches and vigils, reflects a serious face-off, between the middle class and India’s political class. As the tussle over the Bill’s provisions continues, the depths of the popular groundswell of disgust with corruption become evident, disaffection strong enough to bring together diverse groups.

While the movement’s leader, Anna Hazare, is a Gandhian, adopting the Mahatma’s method of fasting, many joining him are not satyagrahis shaped by austerity. Several are middle-class Indians, moulded by professionalism, progress and consumption. Many are youth in university or jobs, shaken by what they see, stirred into joining an elderly leader who refers to another leader’s practices, which for many have passed into the realm of cliche. The agitation is strong enough, however, to override these divisions. Corruption, exemplified by a terrible year of scams, is the oil fuelling such coalescing.

However, there’s more. The Indian middle class is not only demanding accountability but dignity in citizenship. This notion has been catalysed by recent cases like Rizwanur Rehman’s and Ruchika Girhotra’s, where regular middle-class lives were crushed by a brutal nexus of political and financial clout. The booing away from Jantar Mantar of Om Prakash Chautala, one of the political shields around Ruchika’s tormentor, police officer S. P. S. Rathore, reflected public anger with precisely this sort of nexus. This reflects growth in ideas about citizenship. Previously, notions of citizenship were limited to a small, well-educated elite. Today, this circle has perforce widened. Media and travel have changed the way people think. Indians are increasingly aware of countries where bribery isn’t normal, where murders get punished even when committed by the powerful. It’s become apparent that globalisation is not just about mobile phones and malls, but lawful, equal societies, an ideal many are now demanding.

The media is their ally. Starting with the Jessica Lal case in 1999, the media began acting as mirror and motor to civil society agitation, transmitting information about unpunished crimes, locations to gather at and modes of protest, like candlelight vigils, email and text campaigns. The Internet also sees massive following for Hazare’s movement. All this gives lie to the notion of middle-class Indians being ‘apathetic’ to politics. Where once frustration existed without cohesiveness, today there are effective means to channel feelings, forums to gather at, ways to debate and discuss. Several ‘ideas of India’ are emerging. Many Indians feel a deeper connection to their country. In that sense, Anna has won the war even as the battle persists.

(Source: The Times of India, dated 8-4-2011)

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Lost in Mumbai? Google Transit to the rescue

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Search giants Google have launched a nifty tool to help commuters and tourists navigate across Mumbai. The service uses Google maps to help travellers choose from public transportation options available from any location to any other place in the buslting metropolis.

Users need to visit www.google.com/transit and key in the start and endpoints of their proposed journey. Google then uses algorithms to churn out the best possible routes. The application, which is available in desktop and mobile versions, utilises a database of BEST bus routes as well as the railway routes and schedules on the Western, Central and Harbour lines.

However, this is not the first application that encourages people to use public transport. The BEST runs its own application on www.bestundertaking.com.

(Source: The Times of India, dated 8-4-2011)

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Lokpal Bill — Probity: Different yardsticks

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Lokpal Bill (Govt. version):

1. The Lokpal will have jurisdiction only over the Prime Minister, ministers and MPs

2. The Lokpal will not have suo motu power to initiate inquiry or even receive complaints of corruption directly from the public. The complaints will be forwarded to it by the presiding officer of either House of Parliament

3. It is purely an advisory body and can therefore only give recommendations of the Prime Minister on complaints against ministers and to the presiding officer of either House on complaints against the Prime Minister and MPs

4. Since it has no police powers, the Lokpal cannot register an FIR on any complaint. It can only conduct a preliminary enquiry

5. Anybody found to have lodged a false complaint will be punished summarily by the Lokpal with imprisonment ranging from one year to three years

6. The Lokpal will consist of three members, all of them will be retired judges

7. The committee to select Lokpal members will consist entirely of political dignitaries and its composition is loaded in favour of the ruling party

8. If a complaint against the Prime Minister relates to subjects like security, defence and foreign affairs, the Lokpal is barred from probing those allegations

9. Though a time limit of six months to one year has been prescribed for the Lokpal to conduct its probe, there is no limit for completion of trial, if any

10. Nothing has been provided in law to recover ill-gotten wealth. After serving his sentence, a corrupt person can come out of jail and use that money.

Jan Lokpal Bill (Civil society version):

1. The Lokpal will have jurisdiction over politicians, bureaucrats and judges. The CVC and the entire vigilance machinery of the Centre will be merged into the Lokpal

2. The Lokpal cannot only initiate action on its own, but it can also entertain complaints directly from the public. It will not need reference or permission from any authority

3. After completing its investigation against public servants, the Lokpal can initiate prosecution, order disciplinary proceedings or both

4. With the corruption branch of the CBI merged into it, the Lokpal will be able to register FIRs, conduct investigations under the Criminal Procedure Code and launch prosecution

5. The Lokayukta can only impose financial penalties for complaints found to be false

6. The Lokpal will consist of 10 members and one chairperson, out of which only four are required to have legal background without necessarily having any judicial experience

7. The selection committee will be broad-based as it includes members from judicial background, Chief Election Commissioner, Comptroller and Auditor General, retired Army Generals and outgoing members of the Lokpal

8. There is no such bar on the Lokpal’s powers

9. The Lokpal will have to complete its investigation within one year and the subsequent trail will have to over in another year

10. Loss caused to government due to corruption will be recovered from all those proved guilty. (Source: The Times of India, dated 8-4-2011)

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Sport and nation — Given the market for cricket, why tax breaks and cash awards?

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The Indian cricket team deserves all the accolades, the love and affection, the wild enthusiasm and all the money it made for winning the World Cup for the country. This was a historic and well-deserved victory for, clearly, one of the world’s best cricket teams today.

The players, their coaches and selectors have all been adequately rewarded not just in kind, but also in cash. In any case, India’s cricket players are the richest among the country’s sportspersons, given the money in the sport, the sponsorships and the advertisement budgets. The glistening diamonds worn by the wives of Indian cricketers, and their fancy cars, tell a tale of adequate recompense. So why did the taxpayer have to shell out more cash, in the form of cash awards from state governments and a tax break from the central government? There are games sportspersons play to win and there are games they play to make money. The Indian Premier League is a money-making enterprise. But a World Cup match is about winning for the country. It is the kind of achievement that finds recompense in the form of a Padma Shri or a Padma Bhushan award.

But tax breaks and cash awards from the government are an unnecessary indulgence. Gujarat’s Chief Minister Narendra Modi has resisted the cash award idea; instead, he has so far restricted himself to giving the Eklavya award. Some of India’s world-class sportspersons deserve financial support given the lack of adequate investment and the absence of a mass market in their respective sports. Cricket is certainly not one of them. The market is doing a good job, and the government, too, has done a good, indeed an excellent, job in ensuring security and safety of the players and the huge audience. Having done the job it must, and that too well, the government need not have tried to ingratiate itself with the players with more cash!

(Source: Business Standard, dated 5-4-2011)

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Legal representative — Not legally wedded wife — Right to apply for compensation — Civil Procedure Code, section 2(11).

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[ Heeralal Giri v. Ramratan & Ors., AIR 2011 Chhattisgarh 22]

Seema Bai (since deceased), was dashed by the driver of Marshal Jeep by driving the said vehicle rashly and negligently, due to which she succumbed to the injuries sustained in the said accident.

The Tribunal on a close scrutiny of the evidence led, material placed and submissions made, held that deceased Seema Bai was not legally wedded wife of the appellant; the appellant not being legal representative of the deceased; nor was the appellant dependent upon her, is not entitled to file claim petition u/s. 166 of the Motor Vehicles Act, and dismissed the claim petition. The appeal was filed by the appellant claiming compensation for the death of deceased Seema Bai.

The Court observed that the fact that deceased Seema Bai was not legally married wife of the appellant is not in dispute. Admittedly, one Kaushalya Bai is the legally wedded wife residing with the appellant. It was also not in dispute that the appellant was not dependant upon the deceased.

As per section 5(i) of Hindu Marriage Act, 1955, a marriage may be solemnised between any two Hindus if neither party has a spouse living at the time of marriage.

U/s. 166 of the MV Act, an application for compensation arising out of an accident of the nature specified in Ss.(i) of section 165 may be made where death has resulted from the accident, by all or any of the legal representative of the deceased.

According to section 2(11) of the Code of Civil Procedure, ‘legal representative’ means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased and where a party sues or is sued in a representative character the person on whom the estate devolves on the death of the party so suing or sued. Almost in similar terms is the definition of legal representative under the Arbitration and Conciliation Act, 1996, i.e., u/s. 2(1)(g). The term legal representative has not been defined in the Motor Vehicles Act.

The word ‘legal representative’ occurring in section 166 of the MV Act, has the same meaning as defined u/s. 2(11) of the Code of Civil Procedure. Now if the same definition of legal representative is applied to the facts and circumstances of the present case, it was crystal clear that the appellant, admittedly was not dependent upon the deceased, is neither a person who in law represents the estate of deceased Seema Bai, nor is a successor in interest of the deceased. Therefore, if the definition of legal representative as provided u/s. 2(11) of the Code of Civil Procedure is taken in its widest amplitude even then the appellant cannot be termed as a legal representative of the deceased entitled to file claim petition before the Tribunal under the MV Act and thus, the order of the Tribunal was upheld.

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Evidence — Tape-recorded conversation — Admissible in evidence.

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[Havovi Kersi Sethna v. Kersi Gustad Sethna, 2011 Vol. 113(1) Bom. L.R. 0479]

Parties are wife and husband. The petition for divorce between the parties and other ancillary reliefs was pending trial. The wife, who is the petitioner, is under cross-examination. The husband relies upon certain handwritten diaries of the wife as well as a compact disk (CD) on which conversation between the wife and the husband has been recorded by the husband on certain dates. The husband has produced the transcript of the said conversation. The wife admits the handwriting in her diaries. The parties are at dispute with regard to the taped conversation on the CD. It is contended on behalf of the wife that the taped conversation cannot be relied upon as a document. It is also contended by the wife that the affidavit of documents was not filed and the instrument on which the initial conversation was recorded is not produced. The wife has neither admitted nor denied the conversation. The husband seeks to use it in her cross-examination.

The Court referred to the elementary principle of recording evidence which must be first considered. Evidence consists of examination-in-chief and cross-examination. A party is required to offer for inspection and produce the documents relied upon by him in support of his case. This is required in his examination-in-chief. This contains the oral and documentary evidence.

The Court further observed that the accuracy of the tape-recorded conversation is of utmost importance since the document, which is a CD having tape-recorded conversation, is liable to erasure or mutilation. Thus it would be for the defendant to show that it was the original recording. This could be done by producing the initial record or the original electronic record. This original electronic record, which is primary evidence, is the instrument on which the original conversation is recorded. The defendant has not produced that evidence. The defendant has not shown the mechanical/ electronic process by which the CD was obtained. The defendant has relied upon the CD per se. That, being a copy, is secondary evidence. At the stage at which the CD is sought to be produced (that is in the cross-examination of the plaintiff), the defendant is permitted not to produce the original electronic record. The copy of such record, being the CD, can itself be used for confrontation in the cross-examination. Much will depend upon the answers in the cross-examination by the plaintiff. If however, the defendant desires to set up a specific case, for which the evidence is contained in the CD, he would be required to satisfy the test of accuracy by producing the original electronic record.

It must be mentioned that evidence is to be considered from three aspects; admissibility of evidence, recording of evidence and appreciation of evidence. It is settled law that tape-recorded conversation is admissible in evidence. What must be of importance is how the tape-recorded conversation is to be recorded as evidence and appreciated thereafter. Recording can be in the cross-examination of the other side and/or in the evidence of the recorder himself. The appreciation of evidence would require consideration of the aforesaid three requirements; identification, relevancy and accuracy. It is left to the defendant to pass those tests. If the tests are not passed, the tape-recorded conversation would be of no use in effect ultimately.

The requirement of sealing the recorded conversation would not be applicable in this case. That requirement is of essence in a criminal case where during investigation the conversation of a party is recorded by the investigating officer. He would certainly be required to seal the tape-recorded conversation and keep it in a safe custody so as to play before the Court at the time of the trial. It has nevertheless to be shown to be accurate and untampered with.

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Adoption — Validity — Will proved by examination of attesting witness and scribe of Will — Hindu Adoption and Maintenance Act, section 6 and section 16, Succession Act section 63.

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[ Saroja v. Santhilkumar & Ors., AIR 2011 SC 642]

It was the case of the plaintiffs that plaintiff No. 2 who was the daughter of late Arumugha Mudaliar and plaintiff No. 1 was the son of plaintiff No. 2, i.e., grandson of late Arumugha Mudaliar. Arumugha Mudaliar had three children, namely, Mangalam, Saraswathi and Jayasubramanian. Jayasubramanian, the only son had expired in 1982. As the son of late Arumugha Mudaliar had expired, he had adopted Santhilkumar, his grand-son, the son of his daughter Saraswathi and plaintiff No. 1, by executing an adoption deed after doing necessary rituals required to be performed under Hindu Law. Late Arumugha Mudaliar had thereafter executed a registered Will whereby the properties referred along with other properties had been bequeathed and properties referred to in the schedule attached to the plaint had been disposed of in favour of his daughter Saraswathi and his grandson Santhilkumar, i.e., the plaintiffs.

As the defendants i.e., the present appellant and respondent Nos. 3 and 4 were interfering with or were likely to interfere with the possession of the properties referred to, a suit was filed by Saraswathi and her son Santhilkumar who was minor at the relevant time. The said suit was dismissed for the reason that the Trial Court did not believe that Santhilkumar was properly adopted by late Arumugha Mudaliar and the properties which had been bequeathed in the will were ancestral properties and, therefore, late Arumugha Mudaliar did not have absolute right to dispose of the same.

On appeal the Court observed that so far as the adoption of Santhilkumar was concerned, the said adoption had been duly established before the Trial Court. Late Arumugha Mudaliar had followed the rituals required as per the provision of Hindu Law while adopting Santhilkumar as his son. There was sufficient evidence before the Trial Court to establish that Santhilkumar had been validly adopted by late Arumugha Mudaliar. Shri Kandasamy , a witness, had been examined in detail, who had placed on record photographs taken at the time of the ceremony. The said witness had given details about the rituals performed and the persons who were present at the time of the adoption ceremony and the deed of adoption had also been registered. The aforestated facts leave no doubt in mind that the adoption was valid. Even the photographs and negatives of the photographs which had been taken at the time of adoption are forming part of the record. In such a set of circumstances, there was no reason to disbelieve the adoption. Therefore, it was held that Santhilkumar was the legally adopted son of late Arumugha Mudaliar.

So far as execution of the Will was concerned, the said Will had been duly registered. For the purpose of proving the Will, one of the attesting witnesses of the Will, namely, Umar Datta had been examined. In his deposition, he had stated that he was present when the said Will was being written by Kalyanasundaram. The scribe of the Will had also been examined. Thus the Will was proved. The decree of the Trial Court was set aside.

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GAPS in GAAP — AS-16 Borrowing costs

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The definition of borrowing costs under AS-16 is an inclusive definition and not an exclusive definition. However, they must meet the basic criterion in the standard, i.e., that they are costs that are directly attributable to the acquisition, construction or production of a qualifying asset. As per AS-16 borrowing costs may include:
(a) interest and commitment charges on bank borrowings and other short-term and long-term borrowings;

(b) amortisation of discounts or premiums relating to borrowings;

(c) amortisation of ancillary costs incurred in connection with the arrangement of borrowings;

(d) finance charges in respect of assets acquired under finance leases or under other similar arrangements; and because the definition of borrowing costs is an inclusive one, numerous interpretative issues arise. For example, would borrowing costs include hedging costs ? Let me explain my point with the help of a simple example using a commonly encountered floating to fixed interest rate swap (IRS).

Example:

Floating to fixed IRS

Company X is constructing a factory and expects it to take 18 months to complete. To finance the construction, on 1st January 2011 the entity takes an eighteen-month, Rs.10,000,000 variable-rated term loan due on 30th June 2012. Interest payment dates and interest rate reset dates occur on 1st January and 1st July until maturity. The principal is due at maturity. Also on 1st January 2011, the entity enters into an eighteen-month IRS with a notional amount of Rs.10,000,000 from which it will receive periodic payments at the floating rate and make periodic payments at a fixed rate of 10% per annum, with settlement and rate reset dates every 30th June and 31st December. The fair value of the swap is zero at inception. During the eighteen-month period, floating interest rates are as follows:

Under the IRS, Company X receives interest at the market floating rate as above and pays at 10% on the nominal amount of Rs.10,000,000 throughout the period.

At 31st December 2011 the swap has a fair value of Rs.40,000, reflecting the fact that it is now in the money as Company X is expected to receive a net cash inflow of this amount in the period until the instrument is terminated. There are no further changes in interest rates prior to the maturity of the swap. The fair value of the swap declines to zero at 30th June 2012. In this example for sake of simplicity we assume hedge is 100% effective, issue costs are nil and exclude the effect of discounting.

The cash flows incurred by the entity on its borrowing and IRS are as follows:

There are a number of different ways in which Company X could theoretically calculate the borrowing costs eligible for capitalisation, including the following:
(i) The IRS meets the conditions for, and Company X applies, hedge accounting. The finance costs eligible for capitalisation as borrowing costs will be Rs.1,000,000 in the year to 31st December 2011 and Rs.500,000 in the period ended 30th June 2012.
(ii) Company X applies hedge accounting, but chooses to ignore it for the purposes of treating them as borrowing costs. Thus it capitalises Rs.925,000 in the year to 31st December 2011 and Rs.540,000 in the period ended 30th June 2012.
(iii) Company X does not apply hedge accounting. Therefore, it will reflect the fair value of the swap in income in the year ended 31st December 2011, reducing the net finance costs by Rs.40,000 to Rs.960,000 and increasing the finance costs by an equivalent amount in 2012 to Rs.540,000.
(iv) Company X does not apply hedge accounting. However, it considers that it is inappropriate to reflect the fair value of the swap in borrowing costs eligible for capitalisation, so it capitalises costs based on the net cash cost on an accruals accounting basis. In this case this will give the same result as in (i) above.
(v) Company X does not apply hedge accounting and considers only the costs incurred on the borrowing, not the IRS, as eligible for capitalisation. The borrowing costs eligible for capitalisation would be Rs.925,000 in 2011 and Rs.540,000 in 2012.

All the above views have their own arguments for and against, although the preparer will need to consider what method is more appropriate in the circumstances. For example, the following points may be considered by the preparer:
1. The decision to hedge interest cost results in the fixation of interest cost at a fixed level and are directly attributable to the construction of the factory. Therefore, method (ii) may not carry much support.

2. To use method (iv) it is necessary to demonstrate that the derivative financial instrument is directly attributable to the construction of a qualifying asset. In making this assessment it is clearly necessary to consider the term of the derivative and this method may not be practicable if the derivative has a different term to the underlying directly attributable borrowing.

3. In this example, method (v) appears to be inconsistent with the underlying principles of AS-16 — which is that the costs eligible for capitalisation are those costs that could have been avoided if the expenditure on the qualifying asset had not been made — and is not therefore appropriate. However, it may not be possible to demonstrate that specific derivative financial instruments are directly attributable to particular qualifying assets, rather than being used by the entity to manage its interest rate exposure on a more general basis. In such a case, method (v) may be an acceptable treatment. Method (iii) may not be appropriate in any case. Whatever policy is chosen by the entity, it needs to be consistently applied in similar situations.

The bigger issue is: in the era of accounting standards — is this diversity warranted and/or desirable?

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DDIT v. Dharti Dredging & Infrastructure Ltd. 9 Taxman.com 327 (Hyd. ITAT) Article 5 of India-Netherlands DTAA; Sections 9, 195 of Income-tax Act A.Ys.: 2000-07 and 2007-08 Dated: 17-9-2010

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Hiring of dredger owned by Netherlands company for work in India under control and supervision of Indian company does not constitute PE in India.

Facts:
The assessee was an Indian company (‘IndCo’) engaged in the business of marine dredging and port construction. IndCo was awarded contract for dredging of Inner Harbour Channel. For executing the contract, IndCo hired a dipper dredger from a Netherlands company (‘DutchCo’). As per the agreement between IndCo and DutchCo, the dipper dredger was provided to IndCo with two charter coordinators and two operators. During the course of survey by Tax Authority it was found that IndCo had made certain payments to DutchCo for usage of dredger. It had not deducted tax from these payments. Hence, the AO held that the dredger constituted PE and permanent base of business of DutchCo in India. Therefore, the AO passed order u/s. 201 of Income-tax Act levying tax and interest.

Before the Tribunal, IndCo contended that:

  • merely because it hired the dredger together with coordinators and operators, it does not mean that the contract was carried out by DutchCo;
  • equipment hired from a foreign company cannot be construed as place of business of foreign company and to constitute permanent base of foreign company in India, the foreign company must have PE to control its business activities in India;
  • IndCo paid salary, lodging, board, etc. of crew and DutchCo had not incurred any expenditure for the crew which stayed in India for operating the dredger;
  • the crew was to work under the directions and instructions of IndCo;
  • IndCo executed the work on its own utilising the dredger and no part of the work was done by DutchCo.
  • DutchCo had nothing to do with execution of the dredging contract; and
  • therefore, dredger cannot be said to constitute PE of DutchCo in India.

The Tax Authority contended that:

  • the dredger belonging to DutchCo stayed in Indian territory for sufficiently long period;
  • the dredger had living space for stay of crew; it had advanced instruments like computer and communication equipments, which met the essential requirements of office/work place;
  • the dredger remained in a particular location; and

hence, DutchCo had a permanent place of business in India and the dredger should be considered as PE of DutchCo.

Held:
As regards PE under Article 5(1):

  • Payments made by IndCo to DutchCo were hire charges.
  • Hiring of dredger for operations under direction, control and supervision of IndCo cannot be construed as PE of foreign company in India.
  • Provision of living space and presence of communication and other equipments, for effective usage at sea cannot be construed as PE.

As regards Article 5(3):

Installation of structure used for more than 183 days would constitute PE if the foreign company was carrying out the contract in India. Since IndCo was carrying out the contract and dredger was used by IndCo and not DutchCo, DutchCo cannot be said to have installed equipment or structure for exploration in India.

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ADIT v. M. Fabrikant & Sons Limited Article 5, 7 of India-USA DTAA; Section 9(1)(i) of Income-tax Act A.Ys.: 1999-2000 to 2002-03 and 2003-04 Dated: 28-1-2011

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On facts, LO purchasing diamonds for export to HO does not constitute PE under India-USA DTAA and it was covered under explaination 1(b) to section 9(1) (i) of Income-tax Act.

Facts:
The assessee was a company based in the USA (‘USCo’). USCo was engaged in the business of sale of diamonds and diamond jewellery. After obtaining approval of RBI, USCo established a Liaison Office (‘LO’) in India for purchase of diamonds for exports to its Head Office (‘HO’). During the course of survey by the tax authority, the following was noted as business model of USCo and its LO in India:

  • Upon receipt of information from HO, LO gets the right quality, size and carats from the supplier.
  • The prices are then negotiated, by LO with the supplier, in order to obtain best prices, as per HO’s requirement.
  • Unassorted diamonds are received; the parcels are assorted with the help of assorters.
  • For getting the right selection and chalking out rejections, the assortment, verification and selection of packets is done by various other employees of LO.
  • Once right selection of diamonds are obtained, packed and sealed, they are dispatched to the customs office.
  • LO has dedicated employee who takes care that the sealed packets are cleared through the approver and examiner at the customs.
  • The supplier prepares the invoice which is directly honoured by HO.

It was also noted that USCo had 76% shareholding in another Indian company and that company purchased rough diamonds, got them processed from others and sold the finished diamonds in open market. About 25% of the total purchases of LO were from this company.

Based on the above activity conducted by LO, the tax authority held that LO constituted PE in India of USCo and computed its income @5% of the value of diamonds imported through LO.

USCo contended that as per clause (b) of Explanation 1 to section 9(1)(i), no income could be deemed to accrue or arise in India through or from operations which were confined to the purchase of goods in India for purposes of export. Reliance, in this regard was placed on Circular Nos. 23, dated 23-7-1969 and 163, dated 29-5-1975.

In appeal, CIT held that LO was not involved in manufacture or production and was not selling diamonds. Also, under India-USA DTAA, LO, which was engaged in the purchasing of goods or merchandise, or for collecting information for the HO, could not be considered as PE in India.

Held:

  • The activity profile of LO, namely assorting, quality checking and price negotiation, under instructions and specifications of HO are a part of the purchasing of diamonds for export from India. Such process did not result or bring any physical and qualitative change in the diamonds purchased.
  • Selection of right goods and negotiation of prices are an essential part of the purchasing activity.
  • The case is squarely covered by Explana-tion (1)(b) to section 9(1)(i) of the Income-tax Act. Further, having regard to Circular No. 23 and Circular No. 163 of the CBDT, no income could accrue or arise in India to USCo by virtue of purchase of goods made for purposes of export.

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VNU International B V AAR No. 871 of 2010 Article 13(5) of India-Netherlands DTAA; Sections 139, 195 of Income-tax Act Dated: 28-3-2011

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On facts, capital gains arising from transfer of 50% shares of Indian company held by Netherlands company are not chargeable in India in terms of Article 13(5) of India-Netherlands DTAA. Hence, the transfer would not attract transfer pricing provisions and the purchaser would not be liable to withhold tax. However, the seller would be required to file return of income in India.

Facts:
The applicant was a company incorporated in, and a tax resident of Netherlands (‘DutchCo’). DutchCo was subsidiary of another Netherlands company. DutchCo held entire capital of an Indian company (‘IndCo1’). IndCo1 entered into a scheme of arrangement with another Indian company (‘IndCo2’) for demerger of one of the divisions of IndCo1 into IndCo2. Subsequently, DutchCo transferred 50% of the shares in IndCo2 to a Switzerland company resulting in substantial capital gains for DutchCo.

DutchCo sought ruling of AAR on the following questions:

  • Whether capital gains earned by DutchCo were liable to tax in India under Income-tax Act and India-Netherlands DTAA?
  • Whether the transfer would attract transfer pricing provisions under Income-tax Act?
  • Whether the purchaser of the shares would be liable to withhold tax u/s. 195 of Incometax Act?
  • If capital gains are not taxable in India, whether DutchCo is required to file return of income u/s. 139 of Income-tax Act?

Held:

  • In terms of Article 13(5) of India-Netherlands DTAA, capital gains would be taxable only in Netherlands and not in India.
  • Since capital gains are not taxable in India, the transfer would not attract transfer pricing provisions under the Income-tax Act.
  • The purchaser of the shares would not be liable to withhold tax u/s. 195 of the Incometax Act.
  • Under the Income-tax Act, every company is required to file return of its income or loss and a foreign company is also included within the definition of ‘company’. While casting an obligation to file return of income, the Legislature has omitted expression ‘exceeded the maximum amount which is not chargeable to income tax’. In terms of section 5, DutchCo is liable to pay tax in India — though, due to treaty applicability, no tax is actually paid in India, but is only paid in the Netherlands. Once power to tax a particular income exists, it is difficult to claim that there is no obligation to file return of income. The Income-tax Act has specifically provided for exemption from filing of return of income where it is not necessary for non-resident to file return of income. Such exemption is not provided in this case. Hence, DutchCo would be required to file income of return. The AAR also observed:

Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a wide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income-tax Department.

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Improving service delivery time of approval of company’s registration and critical services (Registration in 24 hours)

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The Ministry has given highest priority for the approval of the following e-forms: Form Nos. 1, 1A, 18, 32, 37, 39, 44 and 68 which are connected with incorporation services.

Now all Registrars of Companies have to first approve the above critical services before attending any other forms. The Ministry would also ensure that all other critical e-forms are also processed within the service delivery parameters as given in the citizen charter.

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Companies (Director Identification Number) Amendment Rules, 2011.

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The Ministry of Corporate Affairs has with effect from 27th March 2011 simplified the procedure for issue of DIN. By this amendment now no physical documents are required to be sent. In the revised procedure the DIN 1 form has to be submitted electronically along with the scanned documents duly verified by a practising professional. Where the form is digitally singed by a practising Chartered Accountant, Company Secretary or Cost accountant, the number will be immediately given online. In other cases the application will be examined by the Central Government and disposed of in two to three days.

Similarly, the DIN 4 is also to be filed electronically.

Refer F. No. 02/01/2011-CL V dated 26th March 2011 and Circular No. 11/2011 dated 7th April 2011.

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Prosecution of Directors.

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The Ministry of Corporate Affairs has issued a General Circular No. 2/13/2003/CL-V regarding the prosecution of independent directors of listed companies, nominee directors of the Central Govt. or of the public financial institutions. The circular states that the Registrar of Companies should take extra care in examining the cases where above directors are identified as officer in default.

Such directors should not be held liable for any act of omission or commission by the company or by any officers of the company which constitute a breach or violation of any provision of the Companies Act, 1956, and which occurred without their knowledge and without their consent or connivance or where they have acted diligently in the Board process. The Board process includes meeting of any committee of the Board and any information which the director was authorised to receive as a director of the Board as per the decision of the Board.

The Circular also specifies compliances to be verified by the Registrar of Companies before taking penal action against directors.

Also the list of persons who can be treated as Officers in default has been listed for prosecution u/s.209(5), 209(6), 211 and 212 is given.

For the complete text of the Circular visit

http://www.mca.gov.in/Ministry/pdf/Circular_08-2011 _25mar2011.pdf

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Delegation u/s. 637 of the Companies Act by the Central Government of its powers and functions under Act — Powers and functions delegated to Registrars of Companies for specified provisions of the Act — Supersession of Notification G.S.R. No. 506(E), dated 24-6-1985.

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The Central Government vide Notification [F.No. 5/07/2011-Cl-V], dated 17-3-2011 has delegated to the Registrars of Companies, the powers and functions of the Central Government under the following provisions of the Companies Act, namely:

  • Section 21 pertaining to Change of Name of Company.
  • Section 25 pertaining to Power to dispense with ‘Limited’ in name of Charitable or Other Company.
  • Proviso to Ss.(1) of section 31 pertaining to change in the articles having effect of converting a public company into a private company.
  • Ss.(1D) of section 108 relating to extension of period within which instrument of transfer is to be submitted to the company.
  • Section 572 relating to change of name of a company seeking registration under Part IX of the Companies Act.

Powers and functions delegated to the Regional Directors for specified provisions of the Act — Supersession of Notification G.S.R. No. 288(E), dated 31-5-1991.

The Central Government vide Notification dated 17-3-2011, F. No. 5/07/2011-CL-V has delegated to the Regional Directors at Mumbai, Kolkata, Chennai, Noida and Ahmedabad, the powers and functions of the Central Government under the following provisions of the said Act, namely:

  • Section 22 relating to rectification of name of the company.
  • Ss.(3), (4), (7) and clause (a) of Ss.(8) of section 224 relating to the appointment, remuneration and removal of auditors in certain cases.
  • Proviso to section 297(1) Proviso relating to approval of the Central Government for contracts by a company with certain parties where paid up share capital of the company is not less than Rs. one crore.
  • Section 394A pertaining to notice to be given of for applications u/s. 391 for compromise or arrangements with creditors and members and section 394 for reconstruction and amalgamation of companies.
  • Section 400 relating to notice to be given of applications under sections 397 and 398 for relief in cases of oppressions and mismanagement.
  • Second proviso to Ss.(5) of section 439 and Ss.(6) of the said section relating to applications for winding up.
  • Clause (a) of Ss.(1) of section 496 and Clause (a) of Ss.(1) of section 508 relating extension of time for calling general meeting of company and of the creditors of the company by the liquidator at end of each year.
  • Ss.(1) of section 551 relating to exemption from filing information as to pending liquidations.
  • Clause (b) of Ss.(7) of section 555 and the proviso to clause (a) of Ss.(9) of the said section relating to certain powers regarding unpaid dividends and undistributed assets to be paid into the Companies liquidation Account and claims in respect thereof.
  • Provisos to Ss.(1) of section 610 relating to inspection, production and evidence of documents delivered to the Registrar with prospectus; and
  • Section 627 relating to production and inspection of books where offences suspected.
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EXEMPTION U/S.54F IN CASES WHERE SECTION 50C APPLICABLE

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Issue for consideration:
Section 50C provides for substituting the full value of consideration with the value adopted or assessed by the stamp valuation authorities, in computing the capital gains arising on transfer of land or building or both. Where the value of the property assessed or adopted for stamp duty purposes is higher than the sale consideration as specified in the transfer documents, then such higher value is deemed to be the full value of consideration for the purposes of computation of capital gains u/s.48, by virtue of the provisions of section 50C.

Capital gains on sale of an asset other than a residential house, in the hands of an individual or a Hindu Undivided Family, is eligible for an exemption u/s.54F on purchase or construction of a residential house within the specified period, subject to fulfilment of other conditions. The assessee enjoys a complete exemption from tax where the cost of the new asset is equal or more than the net consideration of the asset transferred and he will get a pro-rated exemption where the cost of the new asset is less than the net consideration.

A question has arisen, in the above facts, as to how such exemption u/s.54F is to be computed in a case where the provisions of section 50C apply. Should one take the sale consideration recorded in the documents of transfer, or should one take the stamp duty value as per section 50C, is an issue which is calling our attention.

To illustrate, if a plot of land is sold for Rs.50 lakhs with its stamp duty valuation being Rs.75 lakhs, and if the cost of the new residential house is Rs.50 lakhs, would the entire capital gains be exempt from tax u/s.54F or would only two-thirds of the capital gains be exempt from tax under this section?

While the Lucknow and the Bangalore Benches of the Tribunal have taken a view that for the purposes of computation of exemption u/s.54F, the stamp duty value being the deemed full value of consideration as per section 50C is to be considered, the Jaipur Bench of the Tribunal has held that it is the actual sale consideration recorded in the document of transfer which is to be considered and not the stamp duty value.

Mohd. Shoib’s case:
The issue first came up before the Lucknow Bench of the Tribunal in the case of Mohd. Shoib v. Dy. CIT, 1 ITR (Trib.) 452.

In this case, the assessee sold 7 plots of land, which had been subdivided from a larger plot of land, for a total consideration of Rs.1.47 crore. In respect of 4 plots of land sold for Rs.83 lakh, the consideration was lower than the valuation adopted by the stamp duty valuation authorities, such valuation being Rs.1,00,61,773. The assessee had purchased a residential house out of a part of the total sale consideration, and claimed exemption u/s.54F which was calculated with reference to the consideration recorded in the documents of transfer by ignoring the difference of Rs.17,61,773 between the stamp duty value and the recorded consideration.

The Assessing Officer enhanced the returned capital gains by Rs.17,61,773, by invoking the provisions of section 50C. In appeal before the Commissioner (Appeals), the assessee challenged the applicability of the provisions of section 50C, which was rejected by the Commissioner (Appeals).

In further appeal to the Tribunal, besides challenging the applicability of section 50C, the assessee claimed that once the assessee had reinvested the net consideration in purchasing the new residential house as per section 54F, then no capital gains would remain to be computed for taxation and therefore provisions of section 50C could not be invoked. It was argued that once the exemption was claimed u/s.54F, there was no occasion to charge capital gains and therefore provisions of section 45 could not be invoked as no capital gains could be computed. Reliance was placed on the use of the words ‘save as otherwise provided in section 54, 54B, . .’ in section 45 for the argument that once the charging section failed, substitution of the sale consideration by the stamp duty valuation would not arise. It was further argued that investment in new asset could be made only of real sale consideration, and not of the notional sale consideration. Once there was no real sale consideration, there could not be any capital gains on notional sale consideration.

On behalf of the Department, it was argued that neither section 45 nor section 50C would fail if the assessee had made investment in exempted assets as per section 54, 54F, etc. According to the Department, section 54F only provided the method of computation of capital gains and did not provide exemption from the charging section 45. It was submitted that if an assessee did not invest the full consideration into a new asset, then he would be required to compute the capital gains in the manner laid down in sections 48 by applying the provisions of section 50C, and the exemption from capital gains was available only to the extent of investment made by the assessee in the new asset. Where a part investment was made in the new asset, then capital gains would be charged with respect to the sale consideration not invested. It was argued that the provisions of section 54, 54F, etc. followed the charging section 45, and that the charging section 45 did not follow the exemption provisions. It was submitted that merely because the assessee did not get an opportunity to invest the difference between the notional sale consideration as per section 50C and sale consideration shown by the assessee, the charging of capital gains on the basis of notional sale consideration as per section 50C could not be waived. According to the Department, there were many provisions where a notional income is taxed without giving any occasion to the assessee to make investment out of such notional income and claim deductions under Chapter VIA, etc. It was thus claimed that the charging section could not be made otiose merely because the assessee did not get an opportunity to claim deduction or make investments for claiming deduction in respect of additional income assessed.

While upholding the applicability of section 50C to the facts of the case, the Tribunal observed that section 45 provided a general rule that profits or gains arising from the transfer of a capital asset would be chargeable to income-tax under the head capital gains, except as provided in section 54, 54F, etc. According to the Tribunal while charging capital gains on profits and gains arising from the transfer of a capital asset, one had to see and take into account section 54F, and to the extent provided in section 54F and other similar sections, capital gains would not be chargeable. The moment there was a profit or gain on transfer of a capital asset, capital gains would be chargeable within the meaning of section 45, except and to the extent it was saved by section 54F and like sections.

Analysing the provisions of section 54F, the Tribunal noted that it was not the case that merely because provisions of section 54F were applicable to an assessee, that the entire capital gains would be saved and that no capital gains be chargeable. Saving u/s.54F depended upon investment in new asset of net consideration received by the assessee on sale of old asset. The quantum of net consideration was the result of transfer of the old asset, charge of the capital gain was only on the old asset, and investment in new asset did not and could not nullify or take away the case from the charging section 45. According to the Tribunal, first it was section 45 which came into operation, then it was section 48 which provided computation of capital gains, and thereafter it was section 54F which saved the capital gains to the extent of investment in the new asset.

The Tribunal observed that once section 45 came into operation as a result of transfer of capita

Capital or revenue receipt — Non-competition fee is a capital receipt — Not exigible to tax prior to amendment of Finance Act, 2002.

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[Gufic Chem P. Ltd. v. CIT, (2011) 332 ITR 602 (SC)]

During the A.Y. 1997-98 the assessee received Rs.50,00,000 from Ranbaxy as non-competition fee. The said amount was paid by Ranbaxy under an agreement dated 31st March, 1997. The assessee was a part of the Guffic group. The assessee had agreed to transfer its trade marks to Ranbaxy and in consideration of such transfer the assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it on the terms and conditions appearing in the agreement. The assessee was carrying on the business of manufacturing, selling and distribution of pharmaceutical and medical preparations including products mentioned in the list in schedule A to the agreement. The agreement defined the period, i.e., a period of 20 years commencing from the date of the agreement. The agreement defined the territory as territory of India and rest of the world. In short, the agreement contained prohibitory/ restrictive covenant in consideration of which a non-competition fee of Rs.50 lakh was received by the assessee from Ranbaxy. The agreement further showed that the payment made to the assessee was in consideration of the restrictive covenant undertaken by the assessee for a loss of source of income.

On perusal of the said agreement, the Commissioner of Income-tax (Appeals) while overruling the decision of the Assessing Officer observed that the Assessing Officer had not disputed the fact that Rs.50 lakh received by the assessee from Ranbaxy was towards non-competition fee; that under the said agreement the assessee agreed not to manufacture, itself or through its associate, any of the products enlisted in the schedule to the agreement for 20 years within India and the rest of the world; that the assessee and Ranbaxy were both engaged in the business of pharmaceuticals and to ward off competition in manufacture of certain drugs, Ranbaxy had entered into an agreement with the assessee restricting the assessee from manufacturing the drugs mentioned in the schedule and consequently the Commissioner of Income-tax (Appeals) held that the said sum of Rs.50 lakh received by the assessee from Ranbaxy was a capital receipt not taxable under the Income-tax Act, 1961 during the relevant assessment year. This decision was affirmed by the Tribunal. However, the High Court reversed the decision of the Tribunal by placing reliance on the judgment of the Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. v. CIT, (1964) 53 ITR 283. Against the said decision of the High Court the assessee went to the Supreme Court by way of petition for special leave to appeal.

The Supreme Court held that the position in law was clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt, whereas the compensation attributable to a negative covenant is a capital receipt. The above dichotomy is clearly spelt out in the judgment of this Court in Gillanders’ case (supra).

The Supreme Court observed that this dichotomy had not been appreciated by the High Court in its impugned judgment. The High Court misinterpreted the judgment of this Court in Gillanders’ case (supra). In the present case, the Department had not impugned the genuineness of the transaction. In the present case, the High Court had erred in interfering with the concurrent finding of the fact recorded by the Commissioner of Incometax (Appeals) and the Tribunal. According to the Supreme Court one more aspect needed to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt prior to the A.Y. 2003-04. It is only vide the Finance Act, 2002 with effect from 1st April, 2003 that the said capital receipt was made taxable [see section 28(va)]. The Finance Act, 2002 itself indicated that during the relevant assessment year compensation received by the assessee under non-compensation agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1st April, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-compensation agreement was in the nature of a capital receipt and not a revenue receipt. The said section 28(va) was amendatory and not clarificatory.

For the above reasons, the Supreme Court set aside the impugned judgment of the Karnataka High Court dated 29th October, 2009, and restored the order of the Tribunal. Consequently, the civil appeal filed by the assessee was allowed with no order as to the costs.

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DEDUCTIBILITY OF FEES PAID FOR CAPITAL EXPANSION TO BE USED FOR WORKING CAPITAL PURPOSES — AN ANALYSIS, Part I

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Background :
The Supreme Court in Punjab Industrial Development Corporation Ltd v. CIT, (1997) 225 ITR 792 held that the amount paid to the Registrar of Companies as filing fee for enhancement of capital constitutes capital expenditure. Relying on this decision, the Supreme Court in Brooke Bond India Ltd. v. CIT, (1997) 225 ITR 798 held that expenditure incurred in connection with issuing shares for increasing capital by a company is capital expenditure. Since then one is a witness to these two decisions being mechanically applied by tax authorities as a ground for disallowing any and every expenditure associated with share capital. These include expenses not only directly related but also incidentally connected to capital expansion. The question for consideration is whether any and every expenditure relatable to capital expansion is capital expenditure? Whether the above-mentioned decisions of the Supreme Court are all-pervasive? To put it differently, could there be occasions when these Supreme Court decisions become distinguishable? This write-up discusses one such occasion — in two parts. The first part outlines the law applicable for allowing any expenditure as business expenditure under the head income from business or profession. The second part would cover why the ratio of above-mentioned decisions of the Supreme Court cannot be regarded as all-pervasive as also other connected matters.

Assumed facts:
ABC Limited is a public company (hereinafter referred to as ‘ABCL’ for brevity) engaged in the business of manufacture and sale of pharmaceuticals products. ABCL has presence in various countries across the globe. The success of the business of ABCL is dependent upon marketing of its products. During financial year 2010-11, ABCL undertook certain strategic initiatives (including organisational restructuring) to re-align its business activities for entering into European, African and Asia-pacific countries. The objective was to capture trading opportunities available in such countries. ABCL was thus in need of funds for various business purposes viz., working capital for carrying out business, funds for securing distribution rights, licences, brands.

In view of the above, ABCL engaged the services of a commercial bank (say, XY bank) which assisted it in raising funds through foreign investors. With assistance from XY bank, ABCL managed to raise funds by issuing preference shares to three foreign investors. The funds raised by ABCL were utilised for the above purposes. In consideration of all the services provided, ABCL paid a consolidated fee to XY bank. The question for consideration is whether fees or any portion thereof paid to XY bank would be deductible as business expenditure under the provisions of the Income-tax Act, 1961 (‘Act’ for short hereinafter).

Applicable law — Introduction:
Chapter IV-D contains provisions relating to computation of ‘Profits and gains from business or profession’. Section 28 is the charging section. Section 29 enjoins that profits and gains referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D. Sections 30 to 36 and 38 outline the law relating to specific deductions. Section 37 deals with expenditure which is general in nature and not covered within sections 30 to 36.

The payment by XY bank would not qualify for deduction under sections 30 to 36. Even section 35D would not have relevance. This is for the reason that the section would apply when expenses are incurred under specified heads prior to incorporation or after incorporation in connection with the extension of the industrial undertaking. The expenses under consideration are not pre-incorporation expenses. No extension of any existing undertaking is involved. Section 35D therefore would not be relevant. The deductibility of the said expenditure under section 37(1) of the Act remains for consideration.

Deductibility under section 37(1):
Section 37(1) of the Act enables a general or residual deduction while computing profits and gains of business or profession. Section 37(1) reads as under: “(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.

(Explanation — For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.)

In order to be eligible for an allowance under section 37, the following conditions should be cumulatively satisfied:
(i) The impugned payment must constitute an expenditure;
(ii) The expenditure must not be governed by the provisions of sections 30 to 36;
(iii) The expenditure must not be personal in nature;
(iv) The expenditure must have been laid out or expended wholly and exclusively for the purposes of the business of the assessee; and
(v) The expenditure must not be capital in nature.

(i) The payment must constitute an expenditure:
The first and foremost requirement of section 37 is that there should be an expenditure. The term expenditure is not defined in the Act. The Supreme Court in Indian Molasses Company (P) Ltd. v. CIT, (1959) 37 ITR 66 (SC) defined it in the following manner:
“ ‘Expenditure’ is equal to ‘expense’ and ‘expense’ is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another’s expense. But the idea of ‘spending’ in the sense of ‘paying out or away’ money is the primary meaning and it is with that meaning that we are concerned. ‘Expenditure’ is thus what is ‘paid out or away’ and is something which is gone irretrievably.”

A definition to a similar effect is found in section 2(h) of the Expenditure Act, 1957. This definition reads as : “Expenditure : Any sum of money or money’s worth spent or disbursed or for the spending or disbursing of which a liability has been incurred by an assessee. The term includes any amount which, under the provision of the Expenditure Act is required to be included in the taxable expenditure.”

In CIT v. Nainital Bank Ltd., (1966) 62 ITR 638, the Supreme Court held : “In its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’, i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’ : it is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, there is expenditure.”

Expenditure for the purposes of section 37 includes amounts which the assessee has actually expended or which the assessee has provided for or laid out in respect of an accrued liability. In the case under discussion, ABCL has paid fees to XY bank as consideration for services. The amount paid to XY bank constitutes ‘expenditure’ for the purpose of section 37(1) of the Act.

(ii) The expenditure must not be governed by the provisions of sections 30 to 36:
As already stated, the payment under discussion viz., fees paid to XY bank is not covered by any of the provisions of sections 30 to 36 of the Act. The payment would also not qualify for deduction under section 35D as the same has not been incurred prior to incorporation of business of ABCL or in connection with extension of the undertaking or setting up a new u

FINANCE ACT, 2011

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1. Background:

1.1 The Finance Minister, Shri Pranab Mukherjee, presented the third Budget of UPA-II Government in the Parliament on 28-2-2011. The Finance Act, 2011, has now been passed by both Houses of the Parliament on 24-3-2011, without any discussion. It has received the assent of the President on 8-4- 2011. There are only 35 sections in the Finance Act amending some of the provisions of the Income tax and Wealth tax Act. This year’s amendments in our Direct Tax Laws are very few, probably because the Direct Taxes Code Bill, 2010 (DTC), introduced in the Parliament is under discussion and will replace the existing Income tax Act and Wealth tax Act hopefully from 1-4-2012.

1.2 Part ‘B’ of the Budget Speech deals with proposals relating the Direct Taxes, Excise Duty, Customs Duty and Service tax. In para 139 and 140 of his Budget Speech the Finance Minister has stated as under:

“139. In the formulation of these (tax) proposals, my priorities are directed towards making taxes moderate, payments simple for taxpayers and collection of taxes easy for the tax collector.”

“140. As Government’s policy on direct taxes has been outlined in the DTC which is before the Parliament, I have limited my proposals to initiatives that require urgent attention.”

After presenting his budget proposals, he has concluded his speech as under:

“197. As an emerging economy, with a voice on the global stage, India stands at the threshold of a decade which presents immense possibilities. We must not let the recent strains and tensions hold us back from converting these possibilities into realities. With oneness of heart, let us all build an India, which in not too distant a future, will enter the comity of developed nations.”

1.3 The various important amendments made in the Income tax Act and Wealth tax Act can be briefly stated as under:

(i) Slabs for tax payable by Individuals/HUF/ AoP/ BoI have been revised and the tax burden on these assessees have been reduced to some extent.

(ii) MAT on Corporate Bodies has been marginally raised and surcharge on income of companies is reduced.

(iii) Alternate Minimum Tax (AMT) will be levied on Limited Liability Partnership (LLP).

(iv) Certain exemption and deduction provisions have been relaxed.

(v) Provisions relating to taxation of international transactions have been made more strict.

(vi) Scope of cases which can be referred to the Settlement Commission has been widened.

(vii) Some procedural changes have been made.

1.4 In this article some of the important amendments made in rates of taxes and in some of the provisions of the Income tax and Wealth tax Acts have been discussed.

2. Rates of taxes, surcharge and education cess:

2.1 Rates of Income tax:

(i) For Individuals, HUF, AoP, BoI and Artificial Juridical Persons the threshold limit of basic exemption has been revised upwards for A.Y. 2012-13. Age limit for resident senior citizens has been lowered to 60 years from the present limit of 65 years. Further, a new category of ‘VERY SENIOR CITIZEN’ who is a resident and 80 years and above has been created. The revised tax rates for A.Y. 2012-13 as compared to A.Y. 2011-12 are as under:

(a) Rates in A.Y. 2011-12
(Accounting Year ending 31-3-2011):

Note: There is no surcharge but Education cess at 3% (2 + 1) of tax is payable.
(b) Rates in A.Y. 2012-13 (Accounting Year ending 31-3-2012):

Note: No surcharge is payable but Education cess @ 3% (2 +1) of tax is payable.
(ii) The impact of these changes can be noticed from the following charts.

(a) Tax payable in A.Y. 2011-12 (Accounting Year ending 31-3-2011):

The above tax is to be increased by 3% of tax for Education cess.

(b) Tax payable in A.Y. 2012-13 (Accounting Year ending 31-3-2012):

The above tax is to be increased by 3% of tax for Education cess.

(iii) Other assessees: There are no changes in the rates of taxes so far as other assessees are concerned. Therefore, they will have to pay taxes in A.Y. 2012-13 at the same rates as applicable in A.Y. 2011-12.

(iv) Rate of tax u/s.115JB (MAT): The rate of tax on book profits u/s.115JB i.e., MAT has been increased from 18% in A.Y. 2011-12 to 18.5% in A.Y. 2012-13. This is to be increased by surcharge of 5% of tax if the Book Profit is more than Rs.1 cr. Education cess at 3% of tax is also payable.

(v) Rate of tax on dividends from foreign companies:
A new section 115BBD is inserted for A.Y. 2012- 13. This section provides for concessional rate of tax payable by an Indian company on dividend received by it from any Foreign company in which the Indian company holds 26% or more of the equity capital. The rate of tax on such dividend income will be 15% plus applicable surcharge and education cess. This concessional rate of tax on foreign dividend income is applicable only for one year i.e., dividend received during the year ending 31-3-2012 (A.Y. 2012-13). It is also provided in this section that no expenditure shall be allowed against this dividend income. Therefore, an Indian company which controls a Foreign company by holding 26% or more of equity capital in such a company can consider repatriation of profits accumulated in the foreign company to avail of this concessional rate of tax during the current year before 31-3-2012.

(vi) Rate of Alternate Minimum Tax on LLP (AMT):
Limited Liability Partnership (LLP) will now have to pay Alternative Minimum Tax (AMT) at the rate of 18.5% on its gross total income as computed under new section 115JC. No surcharge is payable, but education cess is payable @ 3% of tax. This is discussed in para 8 below.

2.2 Surcharge on Income tax:
(i) No surcharge is payable by non-corporate assessees i.e., Individuals, HUF, Juridical person, AoP, BoI, Firm, LLP, Co-operative Society and Local Authority. In the case of a company, if the total income is more than Rs.1 cr. the surcharge on tax payable in A.Y. 2011-12 is 7.5%. This is now reduced to 5% for A.Y. 2012-13. Similarly, rate of surcharge on tax payable by a company u/s.115JB (MAT) is also reduced to 5% for A.Y. 2012-13 if the Book Profits amount is more than Rs.1 cr. So far as Dividend Distribution and Income Distribution Tax payable u/s.115O and u/s.115R by companies and Mutual Funds is concerned the rate of surcharge on tax is reduced from 7.5% to 5% w.e.f. 1-4-2011.

(ii) In the case of a Foreign company the rate of surcharge on tax is also reduced from 2.5% to 2% w.e.f. A.Y. 2012-13 if the taxable income of such a company is more than Rs.1 cr. Similarly, for deduction of tax at source u/s.195 from the income of a foreign company the Income tax has to be increased by surcharge at the rate of 2% (instead of 2.5%) w.e.f. 1-4-2011 if the income from which tax is deducted at source is more than Rs.1 cr.

(iii) It may be noted that no surcharge on tax is required to be charged on tax deducted at source from payments to resident assessees.

2.3 Education cess:
As in earlier years, Education cess of 3% (including 1% for higher education cess) of Income tax and Surcharge (if applicable) is payable by all assessees (Residents and Non-residents). No Education cess is to be deducted or collected from TDS or TCS from payments to all resident assessees, including companies. However, if the tax is deducted from payments made to (a) Foreign companies, (b) Non- Residents or (c) on Salary payments, Education cess at 3% of tax and surcharge (if applicable) is to be applied.

2.4 TDS on interest:
New s

(2011) 21 STR 546 (Tri.-Chennai) — CCEx., Madurai v. Tata Coffee Ltd.

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Service tax paid on transport of empty containers from yard to factory for stuffing export goods is eligible for refund.

Facts:
The question to be considered was whether service tax paid on goods transported from factory to port of export is alone eligible for refund or the same also extends to service tax paid on transport of empty containers from yard to factory for stuffing export goods.

Held:
The Notification granting refund contains ‘in relation to transport of export goods’ phrase, which is wide enough to cover service tax paid on transport of empty containers from yard to factory for stuffing export goods.

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Income: Salary: Accrual: A.Y. 2005-06: Salary earned by non-resident for services performed on board a ship: Does not accrue in India: Not taxable in India.

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[DIT v. Prahlad Vijendra Rao, 239 CTR 107 (Kar.)]

The assessee is a non-resident individual. For the A.Y. 2005-06, the Assessing Officer added an amount of Rs.10,00,131, treating the same as income deemed to have been received in India as per section 5(2) (b) of the Income-tax Act, 1961. The said amount is the salary earned by the assessee for services performed on board a ship outside the shores of India. The Commissioner (Appeals) and the Tribunal deleted the addition.

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

“(i) The Revenue does not dispute that the assessee had worked on board a ship and during the relevant period the assessee had stayed outside India for a period of 225 days and the salary that was earned by him was on account of the work discharged by him on board during the said period which is outside the shores of India.

(ii) The criteria of applying the definition of section 5(2)(b) would be such income which is earned in India for the services rendered in India and not otherwise. U/s. 15 even on accrual basis salary income is taxable i.e., it becomes taxable by implication. However, if services are rendered outside India such income would not be taxable in India.

(iii) The number of days worked by the assessee outside India as extracted in the assessment order when taken into consideration it would emerge that assessee was working outside India for a period of 225 days and the income in question earned by assessee has not accrued in India and is not deemed to have accrued in India.”

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Export profits: Deduction u/s.80HHC of Incometax Act: A.Y. 1992-93: Interest income assessed as business income: Such income could not be excluded from business profit while calculating deduction u/s.80HHC.

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[Sociedade de Fomento Industrial Ltd., 9 Taxman.com 113 (Bom.)]

For the A.Y. 1992-93, the assessee-company had declared the interest income as business income. The Assessing Officer assessed the interest income as income from other sources. Accordingly, he excluded the interest income from the business profit while calculating deduction u/s.80HHC of the Income-tax Act, 1961. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

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

(i) The Commissioner (Appeals) had held that though the main object of the assesseecompany was to extract iron ore and export the same, yet it was not barred from carrying on activity like the instant one, i.e., business of placing various deposits and earning interest from the same. The activity carried on could be definitely held as business activity and, hence, any income earned therefrom was to be taxed as business income only.

(ii) That showed that the authorities below, on the basis of the evidence on record, had held that the activity carried out by the assessee was a part of its business activity. That conclusion of the fact could not be interfered with by the Court in an appeal u/s.260A.

(iii) In any event, the Revenue had failed to advance any submission to the effect that the said findings of the fact were contrary to the evidence on record or that the same were in any way perverse.

(iv) In the instant case, the authorities below had held that the income from the interest received by the assessee was a part of the business profit and, as such, in view of the judgment in the case of Alfa Laval India Ltd. v. Dy. CIT, (2003) 133 Taxman 740 (Bom.) the same could not be excluded from the business profit while calculating the deduction u/s.80HHC.

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Export profit: Deduction u/s.80HHC of Income-tax Act: A.Ys. 1995-96, 1997-98, 1998-99 and 2000-01: Exclusion of mineral oil: Calcined petroleum coke derived from crude petroleum is not mineral oil: Assessee is entitled to deduction.

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[Goa Carbon Ltd. v. CIT, 332 ITR 209 (Bom.); 239 CTR 354 (Bom.)

The assessee was engaged in manufacture and export of calcined petroleum coke. For the relevant years the assessee’s claim for deduction u/s.80HHC of the Income-tax Act was allowed by the Assessing Officer. However, the Commissioner withdrew the allowance by exercising the powers u/s.263 of the Act. The Tribunal upheld the decision of the Commissioner holding that the calcined petroleum coke was a form of mineral oil and in view of Ss.2(b) of section 80HHC, the provision for deduction u/s.80HHC(1) was not applicable to the calcined petroleum coke manufactured by the assessee.

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

“(i) The expression ‘mineral oil’ is not defined in the Act. The expression ‘minerals’ is used primarily for substances found on the earth or below the land and does not denote a product manufactured from the minerals found on the land or below the land. The word ‘oil’ ordinarily means a substance which is in liquid form and does not include a rock or solid substance or crystallised substance. For a substance to be regarded as mineral oil, it must ordinarily be a substance in liquid form and derived or extracted from the earth or land, from the surface of the earth or from below the earth.

(ii) Although calcined petroleum coke is a product which is derived from crude oil, no trader in the market would call the calcined petroleum coke a crude oil or a mineral oil. In common parlance, nobody would mistake calcined petroleum coke for a crude oil. Though the initial raw material used for manufacture of the calcined petroleum coke is petroleum crude oil extracted from the earth, the product which is manufactured is an entirely different product commercially known and regarded as different from petroleum crude and which is different from that derived by mere distillation of the petroleum crude which is a mineral oil. Calcined petroleum coke cannot be regarded as a mineral only because the original raw material is mineral oil.

(iii) The calcined petroleum coke was not a mineral oil within the meaning of section 80HHC.”

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Export profit: Company: MAT: Section 80HHC and section 115JB of Income-tax Act: When income of company is assessed u/s.115JB, assessee is entitled to deduction u/s.80HHC computed in accordance with Ss.(3) and (3A) of section 80HHC: Restriction contained in section 80AB or section 80B(5) cannot be applied and carried forward business loss or depreciation cannot be first set off leaving gross total income nil.

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[CIT v. Kerala Chemicals & Proteins Ltd., 239 CTR 24 (Ker.) (FB)]

Dealing with the scope of computation of amount deductible u/s.80HHC of the Income-tax Act, 1961, while assessing the income of a company u/s.115JB, the Full Bench of the Kerala High Court has held as under:

“(i) The short question arising for consideration is whether the assessees, whose gross total income after setting of business and depreciation carried forward from previous years is nil, are entitled to deduction u/s.80HHC in the computation of book profits u/s.115JB(2) (iv) of the Act?

(ii) After hearing both the sides and after going through the decisions, particularly that of the Supreme Court [Ajanta Pharma v. CIT; 327 ITR 305 (SC)], we feel that the assessees are entitled to deduction u/s.80HHC computed in accordance with Ss.(3) and (3A) of section 80HHC of the Act because it is expressly so provided under clause (iv) of section 115JB(2) of the Act.

(iii) All what the Supreme Court has held is that the ceiling contained in section 80HHC(1B) is not applicable for the purposes of granting deduction under clause (iv) above in the computation of book profits. However, there is nothing to indicate in the Supreme Court decision that eligible deduction of export profit under clause (iv) above in the computation of book profit can be computed in any other manner other than what is provided in Ss.(3) and (3A) of section 80HHC of the Act. What is clearly stated in clause (iv) is that deduction of export profit in the computation of book profit is the same ‘amount of profit eligible for deduction u/s.80HHC’ computed under clause (a) or clause (b) or clause (c) of Ss.(3) or Ss.(3A) of the said section.

(iv) So much so, computation of export profits has to be done only in accordance with the method provided u/s.80HHC, which is in fact done in the computation of the business profit if the assessment was on the total income computed under the other provisions of the Act. MAT assessment is only an alternative scheme of assessment and what is clear from clause (iv) above is that even in the alternative scheme of assessment u/s.115JB, the assessee is entitled to deduction of export profit u/s.80HHC. In other words, export profits eligible for deduction u/s.80HHC is allowable under both the schemes of assessment. So much so, the assessees are certainly entitled to deduction u/s.80HHC, but it is only by following the method provided under Ss.(3) and (3A) of section 80HHC.

(v) However, by virtue of the above-referred decision of the Supreme Court, we feel the restriction contained in section 80AB or section 80B(5) could not be applied inasmuch as carry forward of business loss or depreciation should not be first set off leaving gross total income nil, which disentitles the assessees for deduction under other provisions of Chapter VIA-C which includes section 80HHC also.

(vi) But the assessees’ contention that export profit has to be computed with reference to the P&L a/c prepared under the Companies Act is equally unacceptable, because there is no such provision in section 80HHC to determine export profit with reference to P&L a/c maintained under the Companies Act.”

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Depreciation: Intangible asset: Goodwill: Section 32(1)(ii) of Income-tax Act: A.Y. 2004-05: Purchase of hospital as going concern along with goodwill: Assessee entitled to depreciation on value of goodwill.

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[B. Ravindran Pillai v. CIT, 332 ITR 531 (Ker.)]

The assessee purchased a hospital as a going concern. The value of the goodwill which included the name of the hospital and its logo and trade mark was Rs.2 crores. For the A.Y. 2004-05, the assessee claimed depreciation on the goodwill. The Assessing Officer and the Tribunal disallowed the claim. On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“(i) Without resorting to the residuary entry the assessee was entitled to claim depreciation on the name, trade mark and logo under the specific head provided u/s.32(1)

(ii) which covers trade marks and franchise. (ii) Admittedly the hospital was run in the same building, in the same town, in the same name for several years prior to the purchase by the assessee. By transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was retention of continued trust of the patients who were patients of the previous owners.

(iii) When the goodwill paid was for ensuring retention and continued business in the hospital, it was for acquiring a business and commercial rights and it was comparable with trade mark, franchise, copyright, etc., referred to in the first part of clause (ii) of section 32(1) and so much so, goodwill was covered by the above provision of the Act entitling the assessee for depreciation.”

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Business expenditure: Disallowance u/s.40(a) (ia): Section 194C and section 194-I, read with section 40(a)(ia), of Income-tax Act: TDS u/s.194-I: A.Y. 2005-06: Assessee had paid hire charges for having hired millers and rollers, for purpose of carrying out road contract work: Section 194C and section 194-I not applicable: Disallowance of hire charges u/s.40(a)(ia) not justified.

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[CIT v. D. Rathinam, 197 Taxman 486 (Mad.)]

During the relevant assessment year, the assessee had paid hire charges for having hired millers and rollers for the purpose of carrying out road contract work. According to the Revenue, since the hire charges in respect of both, the millers and rollers, hired by the assessee contained a portion of labour charges incurred by the respective owners of the concerned vehicles/machineries towards operation of the respective vehicles/ machineries, it was a composite contract of hiring of vehicles/ machineries along with labour and, consequently, the provisions of section 194C would be applicable. On that basis, the Assessing Officer took the view that out of the total hire charges if 10 per cent was treated as charges paid towards labour element involved and the TDS not having been deducted, as required u/s.40(a)(ia), the whole of the sum was to be disallowed. The Tribunal found that the amount paid by the assessee was only by way of hire charges for the millers and rollers taken on hire and, therefore, the relevant TDS provision applicable had to be only of section 194-I and not 194C and since section 194-I providing for TDS even in respect of machinery/equipment was brought into the Statute Book with effect from 1-6-2007, the assessee had not committed any violation of section 40(a)( ia) during the relevant assessment year, i.e., 2005-06, and accordingly deleted the addition.

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

“(i) Hiring of the millers and rollers as a machinery/ equipment was apparently needed for the purpose of carrying out the contract of laying of the road. Both the equipments, viz., millers and rollers, had to be necessarily operated by the owner of the respective machineries/equipments. Therefore, that, by itself, could not be a ground to state that it was a composite contract for supply of labour in the course of hiring of machineries/ equipments. Inasmuch as the millers and rollers had to be necessarily operated and maintained by the respective owners, the engagement of the service of any person for operating those machineries/equipments was purely an incidental one.

(ii) In fact, there was no material evidence or statement of any one to say in definite terms that the supply of such millers and rollers was along with its respective operators. Therefore, in the absence of any such acceptable material, the conclusion of the Assessing Officer in treating the hiring of millers and rollers as one falling under the category of a sub-contract for provision of labour or the conclusion of the Commissioner (Appeals) and holding that at least 10 per cent of the total payment would have been incurred by way of labour chargers by the respective owners, could not be accepted.

(iii) Viewed in that respect, the conclusion of the Tribunal, in having held that the relevant section, which would be applicable to the case on hand in relation to the sum incurred by the assessee by way of hire charges would be section 194-I, was unassailable. Therefore, when indisputably section 194-I came to provide for making the TDS in respect of machinery/equipments only with effect from 1-6-2007 and the relevant assessment year was 2005-06, there was no scope at all to find fault with the assessee for any violation of section 40(a)(ia).”

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Appeal to High Court: Section 260A of Income-tax Act: A.Y. 1997-98: Power of High Court: Court has power to consider new question of law not formulated at the time of admission of the appeal.

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[Helios and Metheson Information Technology Ltd. v. ACIT, 332 ITR 403 (Mad.)]

The assessee had filed an appeal before the High Court u/s.260A of the Income-tax Act. When the appeal was taken up for the final hearing, the assessee sought consideration of an additional question whether reopening of the assessment was maintainable. The Madras High Court allowed the assessee’s request and held as under:

(i) The issue of notice u/s.148 in the case of the assessee was dealt with by the Tribunal in extenso. The issue relating to the validity of reassessment was contested by the parties before the Tribunal.

(ii) Therefore, merely because the question of reassessment was not specifically formulated as a substantial question of law while entertaining the appeal, it could not be held that the question should not be allowed to be agitated by formulating a substantial question of law.

(iii) The assessee was justified to seek for framing the issue of notice as one of the substantial questions of law to be considered.

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Nobly Untruthful

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Two days back, a TV channel telecast an interview with Julian Assange the Editor-in-Chief and public face of Wikileaks. Julian Assange started hacking computers at the age of 16 under a pseudo-name Mendax meaning `nobly untruthful’. Wikileaks has released cables and tapes contents of which have embarrassed many a government. In the course of his interview he made many points. Some of those that were very relevant in the Indian context are:

• Political and corporate institutions actively try to suppress information from the public. They try to suppress because they believe that if the public knows it will try to change and reform these institutions.

• We have to first understand how our institutions behave before we can come up with programmes to reform them.

• If you want the Indian government to really address corruption then it must become the central issue of the nation.

• Wherever there’s a disclosure, there is a counter smear campaign which is directly proportionate to how impactful is the material in the disclosure.

• Governments, corporations are not scared of Wikileaks having the information, but they are scared of public knowledge.

• Governments have to be pushed and pushed until they see that there is an advantage in giving a proper response.

In India, we have seen the truth in these statements all along and more so in the recent times. Whenever there is a big scam the first reaction of the government is to deny it. Then start a systemic attempt to distract the attention from the central issue. It is surprising that when questioned the spokespersons of the ruling party take pride in talking about the so-called actions that the government has taken against the persons involved. But what is the reality? Has the government taken action on its own? Or is it only under substantial pressure from the public or directive from the judiciary that some action has been taken? Has the action been swift and effective?

Last month, Anna Hazare the RTI activist went on a fast demanding speedy enactment of a comprehensive law like Jan Lokpal Bill to tackle the menace of corruption. The fast motivated a very large number of persons to support the cause. While that was noteworthy, the reaction of the government at every stage left a lot to be desired. Actions of Anna Hazare were referred as blackmail. Initially, the government refused to involve representatives of Civil Society in drafting of Lokpal Bill. Mr. Kapil Sibal stated that to involve the public in preparing the draft of the Lokpal Bill would be undermining the democracy and its institutions. It’s only under public pressure that the government agreed to public participation in drafting the Bill.

But let us not forget this is only the beginning. There are many hurdles at every stage. This was evident by the smear campaign against some of the prominent members of the committee constituted for drafting the Bill.

While one needs to be hopeful, a certain amount of cynicism is also justified. A strong Lokpal is only one of the instruments to move towards corruption free India. It is not an end in itself; it is not a magic wand. The draft presented by the Civil Society also needs to be critically examined. The institution of Lokpal, while having enough powers, must be accountable. Otherwise a well intended legislation will become a tool for harassment.

Julian Assange also mentioned that there are more Indian deposits in Swiss banks than any other nationality. There is no reason to disbelieve him on this. Even on this front the government seems to be doing precious little. The public perception, rather conviction, is that the government is dragging its feet because those who have money stashed it in Swiss bank accounts include big names from amongst politicians and other powerful personalities. While our government is reluctant to act, US and German governments have taken effective and unusual steps to bring back the money and bring offenders to book.

It is ironical that while Prime Minister Manmohan Singh himself is considered as an honest person, the present government presided over by him is regarded as the most corrupt government that independent India has had. But can the Prime Minister avoid the responsibility for what is happening? Is he `Nobly Untruthful’ in the wrong way? It will be a sad day if a person of his eminence has to retire with a tarnished image. On the other hand if the Prime Minister takes firm, swift and effective steps against the guilty in various scams and in the process has to leave the prime ministership, the nation will remember him with gratitude for a long time. Will he show that courage and conviction?

Sanjeev Pandit
Editor

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NAMASKAR TO A BRAVE YOUNG GIRL

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Year 2004. A young graduate daughter of a village farmer aged around 22 years comes to Ahmedabad. She wants to be an IAS Officer. Passing the U.P.S.C. exam requires a lot of knowledge. She takes up further study in Journalism to acquire more general knowledge. She learns real life.

She gets a grant to study the tribals working in sugar mills. She goes to a village 20 km from Surat for a first-hand study of the tribal workers. (Do we, urbanites know what real India is? Let us see.)

The villagers do not allow the tribals to live in or near the village. The tribals stay in semi-arid areas away from civilisation. With considerable difficulties in searching and after walking for 4 km, she comes near a settlement. She wants to talk to the workers. But the tribals have a fear and suspicion of the non-tribals. The fear is built over past thousands of years. No tribal is ready to talk with her. Is their fear justified? Let us see.

While the young lady is in the settlement, there is a commotion. A young man — all covered with blood and bruises, carrying a two-year old child in his hands comes to the settlement. He is a tribal. He and his wife worked in a sugar mill as temporary workers. In the evening while they were returning home, some upper-caste goons came on two motor cycles. They beat up the husband mercilessly, threw the child in a cactus fence and kidnapped the wife and went away.

Our young lady enquires : “Why don’t you file a police complaint?” The tribals look at her with contempt and say — “Even the police will beat us.” This is the current state of India, current Gujarat. Now we know.

She returns to Ahmedabad and continues her study in Journalism. She visits a library and falls in love with a young boy.

She gets an internship assignment at a reputed news paper. She writes investigative stories for the paper. She is praised by the editor. Next day the story does not appear in the press because . . . . . someone paid the price (for not printing the news) to the editor.

The young lady, Mittal Patel scraps the idea of being an IAS officer, forgets journalism and decides single-handedly it necessary to fight for the cause of the oppressed nomads. One is reminded of the famous lines from Shri Rabindranath Tagore

spfu Å¡ lpL kzÎpu Lp¡B _p Aph¡, sp¡ A¡¼gp¡ Å_¡ f¡

Our great modern India which is growing rapidly, badly treats 50% of the population — women. If any one has doubts let me remind that recently (March-April, 2011) two chartered accountant ladies have committed suicides due to atrocities of their own families.

Then there are scheduled tribes, scheduled castes and nomads. I do not know the percentage. But may be 45% of the people. Total 72.5% people (50% women and 22.5% underprivileged men) are exposed to the exploitation by the upper-caste men. (These percentages are generalisations. They do not apply to many families. At the same time, outside Mumbai, they do apply to many people.)

The young lady — Mittal (Now Mrs. Patel) has now established Vicharata Samuday Samarthan Manch (Nomadic People’s Support Organisation) (VSSM). She is now working for the most under privileged people of India. Most of the nomadic people have no homes. Hence no ration cards, no election cards, no BPL (Below Poverty Line) cards. They live away from the upper-caste and somehow survive.

They have survived from times, even before Ramayan.

Since they have no voter cards, politicians are not interested in them. Government welfare schemes do not reach them.

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Digest of Recent Important Foreign Decisions on Cross- Border Taxation – part one

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1. Australia: Taxation in Australia of non-resident investment manager of acting for non-resident shareholders:

Federal Court holds non-resident manager of portfolio of Australian shares for non-resident companies liable to tax in Australia:

The Federal Court on 8th September 2010 handed down a decision in Leighton v. FCT, (2010) FCA 1086 that dealt with taxation in Australia of a non-resident manager who was managing a portfolio of Australian shares for two non-resident companies.

Briefly, Mr. Leighton was, during the relevant period, a resident of Monaco and was not a resident of Australia. He was engaged by two companies, who were not tax resident in Australia and were incorporated in the British Virgin Islands and the Bahamas, to manage a portfolio of Australian shares for them and to provide other services incidental to the management services. Mr. Leighton opened a bank account in Australia and engaged a number of Australian brokers and an Australian custodian. The trading instructions were given by Mr. Leighton, on behalf of the two companies, from Monaco. The trading activities generated taxable income during the relevant period.

Non-residents are subject to tax in Australia only on income sourced in Australia. The judgment does not discuss whether the relevant income has a source in Australia and, presumably, assumes that it does.

After considering the facts, the judgment concludes that Mr. Leighton, in acting as a manager, was, during the relevant period, a trustee of a trust for the non-resident companies as beneficiaries. As such, he is liable for tax for the taxable profits under former section 98(3) of the Income Tax Assessment Act, 1936.

2. France: Foreign Tax Credit:

Limitation or denial of FTC following repo transactions on shares — Administrative Supreme Court opinion:

The Administrative Supreme Court has recently disclosed in its annual report an opinion rendered on 31 March 2009 (No. 382545), in answer to a prejudicial question from the French Tax Authorities (FTA). It dealt with the treatment of foreign-sourced dividends, where the distribution is made in between a sale-repurchase transaction on shares (i.e., dividend stripping). The FTA asked the Court to clarify the legal basis on which, for corporate income tax purposes, the use by resident companies of FTC attached to such dividend coupons could be denied or limited. Key elements of the opinion are summarised below.

(a) Clarification on the limitation applicable to the use of foreign tax credits (FTC), the so-called ‘règle du butoir’. Under Art. 220 of the General Tax Code, the use of a FTC by a resident company is limited to the ‘amount of French corporate income tax assessed on the corresponding income’, i.e., the FTC may only be deducted from that portion of French tax which corresponds to the income sourced in that particular foreign country. No provision, however, specifies whether the foreignsource income, used for the computation of the above-mentioned limitation, should be assessed on a net or gross basis.

In respect of foreign-source dividends, the Court’s opinion is that the income should be assessed on a net basis. This rule covers only expenses that (i) are directly related to the foreign-source income, and (ii) do not increase the value of any asset of the resident company. As a result, foreign withholding taxes and collection expenses directly related to the dividend coupon are deductible. Conversely, loan interest related to the purchase of the foreign shares are not. As a result, such expense will not reduce the portion of ‘corresponding income’ which limits the resident company’s entitlement to FTC.

In addition, the Court rejected the FTA’s position that the capital loss incurred on the resale of the shares should be deducted from any related dividend derived in between the purchase-resale transactions. Such capital losses are not expenses directly related to the foreign-sourced income (i.e., the dividend coupon).

(b) Clarification on the application of the ‘beneficial ownership’ clause. The Court opined that the beneficial ownership clause under a tax treaty (i) enables the FTA to deny the application of the reduced withholding tax rates on outbound payments under certain conditions (see TNS:2007-01-30:FR-1), but (ii) does not allow the FTA to deny (or limit) the use of FTC attached to foreign-sourced dividend coupons. Only the domestic general anti-avoidance rule (GAAR) set forth by Art. L 64 of the Tax Procedure Code (abus de droit) may authorise, where the related buy-sell transaction is ‘artificial’ and/or ‘seek to benefit from a literal application of legal provisions or decisions in contradiction with the objective set forth by the author of such provisions’, such a denial.

Note: Recently, the Administrative Supreme Court rejected the application of the GAAR to tax motivated buy-sell transactions on shares, insofar as the dividend accrues to a taxpayer who actually bears the risk attached to the status of a shareholder (see Administrative Supreme Court, 7 September 2009, No. 305586 and No. 305596, Axa and Sté Henri Golfard, respectively).

3. Belgium: Fixed base under Article 14:

Treaty between Belgium and Luxembourg — Court of Appeal Ghent decides Belgian-rented dwelling of Luxembourg resident self-employed business trainer constitutes fixed base:

On 20th October 2009, the Court of Appeal Ghent decided a case (recently published) X. v. Tax Administration concerning whether a rented dwelling in Belgium of a Luxembourg resident self-employed business trainer constitutes a fixed base under Art. 14(1) of the Belgium-Luxembourg tax treaty on income and capital of 17 September 1970 (the ‘Treaty’). Details of the case are summarised below.

(a) Facts:

The taxpayer was a resident of Luxembourg, who carried out activities as a self-employed business trainer in Belgium, where he visited Belgian companies. He stayed in a rented dwelling in Brugge, which he used as his contact address. The Belgian Tax Administration regarded the dwelling as a fixed base, but the taxpayer took the opposite view.

(b) Legal background:

Art. 14(1) of the Treaty provides that income derived by a resident of one of the contracting states in respect of professional services or other independent activities of a similar character shall be taxable only in that state, unless he has a fixed base regularly available to him in the other state for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other state, but only so much of it as is attributable to that fixed base.

(c) Decision:

The Court followed the view of the Belgian Tax Administration.

The Court observed that the term ‘fixed base’ is neither defined in the Treaty, nor under Belgian domestic law. In addition, the Court considered that the term cannot be interpreted by means of the Commentary to Art. 7 (business profits) of the OECD Model Convention, because under the Treaty more detailed requirements apply for the existence of a permanent establishment than for a fixed base. Therefore, the term ‘fixed base’ has a wider scope.

The Court based its decision that the rented dwelling constitutes a fixed base on the presumption that the taxpayer does a substantial part of his study and preparation work in that dwelling. In this context, the Court held as decisive that the taxpayer has no other place to do his preparatory work and he used the dwelling as his contract address for his clients; moreover:

— the taxpayer receives specialist journals and documentation at, and had purchased office equipment for, that dwelling;

— the Belgian address was stated on his invoices, as a result of which the Court presumed that the administrative formalities wer

(2011) 38 VST 124 (Mad.) Sunder India Limited and others v. Commissioner of Commercial Tax, Ezhilagam, Chennai and others.

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Sales Tax — Interpretation of taxing statutes — Entries in Schedule — Clarification of Commissioner cannot have retrospective effect — Ambiguity in view of Department as to rate of tax applicable — Interpretation favouring dealer to be adopted.

Facts :
The petitioners were dealers in paper-based decorative laminated sheets, made of paper, and treated the same as ‘paper-based product’. The Commissioner of Commercial Taxes issued a clarification dated 17th August 2005, that the products were ‘decorative laminates’ and taxable @ 16%. According to the petitioners the rate of tax applicable on such goods was 10%, thus they sought for review of aforesaid clarification. On review, the Commissioner issued a clarification dated 23rd March 2006 and stated that the paper based laminated decorative sheets are taxable @ 10%. The said clarification was issued after taking note of an earlier order of Tamil Nadu Taxation Special Tribunal. However, later on based upon the Supreme Court’s decision in a matter under Central Excise, wherein the impugned product was held as falling under a different tariff entry than that of paper-based product, the Commissioner again issued a clarification, on 30th May 2008, that the impugned product is correctly liable to tax @ 16%. Thus, tax was sought to be levied at such rate for past periods and notices were issued to reopen the completed assessments also. On writ petitions;

Held :
(1) That the Tamil Nadu Taxation Special Tribunal delivered its decision on 12th April, 1996, which was based upon expert opinion received from the Joint Director of Industries regarding nature of product. The finding was accepted by the Department. The entry contained in the Schedule has not undergone any change. Thus, the Circular issued by the Commissioner, relying on the interpretation given by the Supreme Court in respect to Central Excise Tariff, could not be sustained. The Department was not justified in relying on the Circular for reopening assessments.

(2) That the clarification issued by the Commissioner could not be applied retrospectively.

(3) That since the Department was not firm in its view with regard to the percentage of tax, the benefit of doubt should be extended to the dealers.

(4) That the contention of the Department, that the writ petitions challenging the notices to reopen the assessments were premature in nature, could not be sustained. Similarly, the revised orders passed were also bad in law.

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