11. India Luxembourg Social Security Agreement signed : Press
Release dated 30-9-2009.
India Luxembourg Social Security Agreement signed : Press Release dated 30-9-2009.
Month: November
Part D : Good Governance
Jean Dreze & Amartya Sen in their book “An Uncertain Glory – India and Its Contradictions” write: The issue of accountability relates closely to that of corruption, which has received a great deal of attention recently in Indian political debates. In the absence of good systems of accountability, there may not only be serious neglects of duties, but much temptation for officials to deliver at high ‘prices’ what they are actually supposed to deliver freely, as part of their job. This ‘reward’, aside from being an example of corruption based on official privilege, can also deflect a facility from those for whom it was meant to others who have means and willingness to buy favours. Corruption has become such an endemic feature of Indian administration and commercial life that in some part of the country nothing moves in the intended direction unless the palm of the deliverer is greased.
PART B: RTI Act, 2005 – The Use of Right to Information Laws in India:
A Rapid Study based on the Annual Reports of Information Commissions (2011-12) has been made by Commonwealth Human Rights Initiative (CHRI), New Delhi. Research and Report compiled by Venkatesh Nayak, Amrita Paul & Seema Chaudhary, General Editor is Maja Daruwala.
It is released in October’ 2013. Executive Summary thereof is being produced in parts in this and further next few issues:
I. Availability of the Annual Reports of Information Commissions on Websites Main findings of the study:
• Although in our previous study we had found the Mizoram State Information Commission defaulting over public disclosure of its Annual Reports, it has now uploaded all Annual Reports up to the year 2011-12. Seven State Information Commissions identified in our study last year, namely, those in Gujarat, Madhya Pradesh, Manipur, Sikkim, Tamil Nadu, Tripura and Uttar Pradesh continue to be defaulters in terms of displaying their Annual Reports on their websites. These websites do not contain even a link for ‘Annual Reports’.
• Only Maharashtra State Information Commission has uploaded on its website, its latest Annual Report due, for the calendar year 2012. No other Information Commission has uploaded its latest Annual Report due, for either the calendar year (January – December 2012) or the financial year (April 2012 – March 2013).
• The Central Information Commission and 9 Information Commissions in the States of Andhra Pradesh, Bihar, Chhattisgarh, Jammu and Kashmir (J&K), Karnataka, Meghalaya, Mizoram, Nagaland and Rajasthan have uploaded their Annual Reports for all the years up to 2011-12. Others have displayed Annual Reports for one year or more but not for the period 2011-13.
• With the exception of the Central Information Commission and the State Information Commissions of Bihar, Chhattisgarh, Maharashtra and Rajasthan, all other Information Commissions have published their Annual Reports in English only. Recommendations:
• Publishing Annual Reports in a timely manner at least within six months of the ending of the reporting year must become a priority with all Information Commissions.
• Information Commissions will be able to compile their Annual Reports in a timely manner only if they receive statistical data from all public authorities under their jurisdiction. According to Section 25 (2) of the Central RTI Act and Section 22(2) of the J&K RTI Act, the duty of ensuring reporting of RTI returns from all public authorities lies squarely on the concerned Ministries. Unless they apply pressure on public authorities under their jurisdiction they will not fall in line to submit RTI returns in a timely manner. They must insist filing of RTI returns at least every quarter. The nodal department charged with ensuring the implementation of the RTI law under each appropriate Government, must send frequent reminders to the other Ministries and Department to do their mandated job.
• Even if the RTI returns are not forthcoming from the ministries/departments, Information Commissions have the statutory duty to publish a report of their own activities at least and submit it to the respective Legislatures in order to account for spending the taxpayers’ money. This would provide them the opportunity to publicly name and shame the defaulting public authorities and compel compliance with the reporting requirement under the respective RTI laws.
• At the very minimum, all Annual Reports must be drafted in the official languages used by the appropriate Governments.
Writ – Non-entertainment of petitions under writ jurisdiction by the High Court when an efficacious alternative remedy is available is a rule of self-imposed limitation. It is essentially a rule of policy, convenience and discretion rather than a rule of law.
The assessee, a Sikkim based non-Sikkimese filed his first return of income for the assessment year 1997-98. Upon assessment, it was discovered that the he had a net profit of Rs. 5,73,832/- during the assessment year 1996-97 relevant to the previous year 1995-96. Since no return was filed for the assessment year 1996-97 despite capitalising the aforesaid profit, proceedings u/s. 147 of the Act were initiated against him for the said assessment year. Accordingly, on 26th May, 1998, the notice was issued u/s. 148 of the Act. Further, the Revenue found out that as on 31st March, 1996, the assessee had brought forward closing capital of Rs. 1,73,90,397/- including that aforesaid net profit during the assessment year 1996-97. The same remained unexplained as the return of income for the assessment year 1995-96 was also not furnished by the assessee. Hence, another notice u/s. 148 was issued to the assessee for the assessment for the assessment year 1995-96, dated 30th March, 2000. The assessee did not comply with the aforesaid notices u/s. 148 of the Act and thus, a letter dated 19th January, 2001, came to be issued to the assessee as a reminder to file his returns to income for the assessment years clearly mentioning that failure to do so would lead to an ex parte assessment u/s. 144 of the Act. Thereafter, upon filing of written submissions by the assessee, notice u/s. 142(1) of the Act dated 25th June, 2001, was issued for the assessment year 1995-96 along with final show cause fixing compliance for hearing dated 9th July, 2001. The assessee sought an adjournment which was not granted and the assessments were completed ex parte u/s. 144 of the Act raising a tax demand of Rs. 2,45,87,625/- and Rs. 6,32,972/- for the assessment year 1995-96 and 1996-97, respectively by order dated 9th July, 2001 and 28th March, 2001, respectively. Further, penalty proceedings u/s. 271(1)(c) of the Act were also initiated for both assessment years.
The assessee approached the writ court challenging the aforesaid notices issued u/s. 148, dated 26th May, 1998 and 30th March, 2000 and the subsequent assessment orders dated 9th July, 2001 and 28th March, 2001. The issue raised before the writ court was whether the income of the non-Sikkimese residing in Sikkim was taxable u/s. of the Act. The said question was referred to a Committee for its consideration and the writ petition was disposed of as withdrawn with the direction to maintain status quo in the matter till the declaration of final decision by the Committee, by order dated July 21, 2005. In the meanwhile, section 10(26AAA) of the Act was inserted by section 4 of the Finance Act, 2008, whereby certain income accruing or arising to a Sikkimese individual was exempted from tax. Thereafter the Central Board of Direct Taxes (for short “the Board”) issued Instruction No.8, dated 26th July, 2008 in respect of tax liability of the income accruing or arising to a non- Sikkimese individual residing in Sikkim. In the light of the aforesaid amendment and instruction, the writ court by order dated 15th July, 2009, reiterated.
Section 17 incentive bonus received by LIC Development Officer to be treated as salary and no expenses deductible.
The appellant, T.K. Ginarajan, Development Officer in the LIC, claimed deduction of 40 % of the incentive bonus paid to him in the return of income-tax for the various years prior to 1st April, 1989, on the ground that he had incurred expenditure to the extent of 40 % of the incentive bonus for canvassing business.
The claim for exclusion of 40 % of the incentive bonus towards the expenditure was declined by the Income-tax Officer. The Commissioner of Income-tax (Appeals) dismissed the appeal. However, the Incometax Appellate Tribunal held in favour of the assessee. But the High Court was in favour of the Revenue.
The Supreme Court noted that LIC of India had requested the Central Board of Direct Taxes (hereinafter referred to as “the CBDT”) for a clarification on deduction explaining that the Development Officer had actually incurred some expenditure in the performance of their duty, to the tune of at least 40 % of the incentive bonus paid to them. However, the CBDT affirmed that the incentive bonus paid by the LIC to the Development Officers formed part of their income towards salary. To quote :
“ Such portion of the incentive bonus which is actually spent by the Development Officer for duties of office can still be exempted from tax if the LIC makes the payment against the expenses incurred by the Development Officer by way of reimbursement of expenses. In that case, such reimbursement will not form a part of the salary of the Development Officer and only the incentive bonus will appear in their salary certificate. LIC has not certified that a part of the incentive bonus is against the expenses incurred by the Development Officers by way of reimbursement of expenses. If such a part is certified and that part of the salary and that part of the incentive bonus which is not certified will appear in the salary certificate. Hence, no deduction is contemplated from the incentive bonus, which finds a place in the salary certificates…”
The Supreme Court further noted that, however, with effect from 1st April, 1989, the LIC itself issued a clarification to the effect that the Development Officers would be entitled to claim reimbursement to the extent of 30 % of the incentive bonus granted to them.
The Supreme Court observed that thus, the dispute was confined only to the period prior to 1st April, 1989, and, thereafter, the Development Officers were entitled to the reimbursement of actual expenses incurred by them, to the extent of 30 %. In other words, after 1st April, 1989, only that part of the incentive bonus after reimbursing the expenses to the extent of 30 % would appear in the salary certificate. What is the fate of the incentive bonus to the Development Officers in LIC prior to 1st April, 1989, for the purpose of income tax was therefore the question to be considered in this case.
The Supreme Court held that compartmentalisation of income under various heads and computation of the taxable portion strictly in accordance with the formula of deductions, rebates and allowances are to be done only as per the scheme provided under the Act. The appellant being a salaried person, the incentive bonus received by him prior to 1st April, 1989, had to be treated as salary and he was entitled only for the permissible deductions u/s. 16 of the Act. The expenses incurred in the performance of duty as Development Officer for generating the business so as to make him eligible for the incentive bonus was not a permissible deduction and, hence, the same was eligible to tax. According to the Supreme Court, there was no merit in the appeal of the Appellant. The appeal was accordingly dismissed.
Acquisition of New Asset by Assessee for Capital Gains Exemption
Issue for Consideration
Sections 54, 54B,54EC, 54F, 54GA and 54GB of the Income Tax Act, 1961 provide for exemption of capital gains on an acquisition by an assessee, of a specified asset (purchase, construction, etc.) within the specified time period, subject to fulfilment of various other conditions. Section 54 exempts along term capital gains arising on transfer of a residential house and section 54F grants exemption to long term capital gains arising on transfer of any other capital asset. Section 54B provides for exemption for long term capital gains on transfer of a land used by for agricultural purposes. Similar provisions are contained in other sections for grant of exemption for capital gains on reinvestment by the assessee within the specified period, in specified assets.
All these sections require acquisition by the assessee. Section 54 reads – “the assessee has within a period of ………………purchased, or has ………..constructed a residential house”. The other sections use similar language. In view of the stipulation in the above mentioned provisions, that require the acquisition by an assessee, aquestion has arisen before the courts as to whether the acquisition (purchase, construction, etc.) by the assessee necessarily means that the new asset must be acquired in the name of the assesseeor that it would be sufficient where the funds belonging to the assessee are used for acquiring the specified asset to enable an assessee to claim the exemption from tax.
The courts do not find any difficulty in upholding the claim of the assessee for exemption in cases where the acquisition of the new asset is in the joint names of the assessee and another person, as in the courts opinion such acquisition in joint names would not hamper the claim for exemption, so long as the funds for acquisition of the new house have come from the assessee. The conflict of the judicial view however, has been in respect of acquisition of a new asset in the name of a family member, without the name of the assessee being included, though with the funds from the assessee. While the Madras, Andhra Pradesh and Delhi High Courts have taken the view that even in such a case, the assessee is entitled to the benefit of the exemption, the Punjab & Haryana, Bombay and Delhi High Courts have taken a contrary view.
Prakash’s case
The issue came up before the Nagpur bench of the Bombay High Court in the case of Prakash vs. ITO 312 ITR 40 in the context of section 54F. In that case,the assessee, an elderly person, sold certain plots of land, and acquired a plot of land in the name of his adopted son and constructed a residential building thereon by submitting plans for construction in the name of his son. He did not file his return of income voluntarily, but did so after receipt of a notice u/s. 139(2) from the Assessing Officer. The assessee besides claiming that the plots sold were agricultural land, which was not a capital asset, and that there was therefore no capital gains, also claimed an exemption u/s. 54F in respect of the purchase of a plot of land and the construction of the residential building thereon. It was claimed that the investment in the new asset was made in the son’s name, in view of the advanced age of the assessee.
The Assessing Officer rejected both the contentions of the assessee and subjected the capital gains to tax. He denied the claim for exemption on the ground that the reinvestment was in the son’s name. The Commissioner (Appeals) held that the transfer was of the agricultural land which was not a capital asset, and accordingly no taxable capital gains arose. The Tribunal held that the asset transferred was a capital asset and subject to eligibility of the assessee for an exemption u/s. 54F, a taxable capital gains arose. It however, remanded the matter back to the Commissioner (Appeals) to examine the assessee’s claim for exemption u/s. 54F.
On remand, the Commissioner (Appeals) held that section 54F contemplates only investment in a residentialproperty by the assessee; it was enough if the sale proceeds were invested in the construction of aresidential house. It was further held by the Commissioner (Appeals) that it was not necessary that the newly constructed house should be in the name of the assessee, and that an adopted son had the samerights as a natural son. The Commissioner (Appeals) allowed the appeal of the assessee granting relief u/s. 54F. The Tribunal quashed the order of the Commissioner (Appeals), denting the benefit of the exemption.
On appeal by the assessee, the Bombay High Court examined the provisions of section 54F and the definition of the term “assessee” contained in section 2(7). It noted that as per the scheme of section 54F, the assessee, who is the owner of the original asset, needs to, purchase or construct a residential house within the specified period. It noted that the concepts of “assessee”, “own”, “owner”, “ownership”, “co-owner”, “owner of house property”, and “ownership of property” contained in various sections were very much interlinked and connected for granting the benefits under the Income Tax Act. Referring to the Supreme Court decisions in the cases of Podar Cement (P) Ltd. 226 ITR 625 and Mysore Minerals Ltd 239 ITR 775, it expressed the view that an assessee must have valid title legally conveyed to him after complying with the requirements of law or should at least be entitled to receive income from the property in his own right and have control and domain over the property for legal purposes, while basically excluding a third person of any right over the said property. It was of the view that the object being to give a benefit to the assessee, it meant that the assessee must comply with the conditions strictly in all respects.
The Bombay High Court expressed the view that right from the sale of the original asset till the purchase and/ or construction of the new asset, the ownership and domain over the new asset was a must. According to the High Court, the new property must be owned by the assessee, or he should have legal title over the same. Though others might use and occupy the property along with the assessee, the ownership of the residential house should be of the assessee.
The Bombay High Court noted that by constructing the house in the name of his son, the assessee effectively transferred the new property to his son, who became the owner thereof, in spite of the prohibition on transfer of the new house for a period of 3 years from the date of transfer of the original asset. The High Court noted that the assessee had no domain and/or right on the property, which disentitled him to the claim for exemption, since there was non-compliance of the conditions as per the scheme of section 54F.
The Bombay High Court noted the decision of the Andhra Pradesh High Court cited before it in the case of Late Mir Gulam Ali Khan 228 ITR 165, where the court had taken the view that the term “assessee” must be given a wide and liberal interpretation, and that where the legal heirs had completed the purchase of the new house after the death of the assessee, the assessee was entitled to the benefit of the exemption. The Bombay High Court however expressed its disinclination to accept the liberal view given to the word “assessee” in Late Mir Gulam Ali Khan’s case, stating that the facts before it were different, since in the case before them, it was the son (who was not the assessee) who had purchased and constructed the new property. It also noted that the assessee had admitted that the son was the beneficial owner of the property.
The Bombay High Court therefore held that the as-sessee was not entitled to the benefit of exemption u/s. 54F.
A similar view has been taken in the context of sec-tion 54B by the Punjab & Haryana High Court in the case of Jai Narayan vs. ITO 306 ITR 335 , where the new land was purchased in the names of the son and the grandson of the assessee, by the Rajasthan High Court in the case of Kalya v CIT 251 CTR 174, where the new land was purchased in the names of the son and the daughter-in-law, and in the context of section 54F, by the Delhi High Court, in the case of Vipin Malik (HUF) vs. CIT 330 ITR 309, where the new house was purchased in the names of the karta and his mother.
Kamal Wahal’s case
The issue came up recently before the Delhi High Court in the case of CIT vs. Kamal Wahal 351 ITR 4.
In this case, the assessee, a retired employee, sold his share in an inherited property, and invested a part of the sale proceeds in purchase of a residential house in the name of his wife. He claimed exemption u/s. 54F for the investment in the residential house.
The assessing officer denied the benefit of the exemption, on the ground that the investment should have been made in the assessee’s name, and not in the name of his wife. The Commissioner(Appeals) allowed the assessee’s appeal, following the decisions of the Madras High Court in the case of CIT vs. V Natarajan 287 ITR 271 and of the Andhra Pradesh High Court in the case of Mir Gulam Ali Khan vs. CIT 165 ITR 228.The tribunal dismissed the appeal of the revenue, following the judgments of the Madras and Andhra Pradesh High Courts, and also of the Karnataka High Court in the case of DIT vs. Jennifer Bhide 349 ITR 80, where the property was purchased in the joint names of the assessee and her spouse. While noting the decision of the Bombay High Court in the case of Prakash(supra), the tribunal took the view that where a statutory provision was capable of more than one view, the view favouring the taxpayer should be preferred.
The Delhi High Court approved the decision of the tribunal, noting that besides the decisions referred to by the tribunal, the Delhi High Court itself in the case of CIT vs. Ravinder Kumar Arora 342 ITR 38 had also taken a similar view in the context of section 54F involving purchase of a new property in the joint names of the assessee and his spouse. The Delhi High Court also noted the decision of the Punjab and Haryana High Court in the case of CIT vs. Gurnam Singh 327 ITR 278, where a similar view had been taken in the context of section 54B involving purchase of the new land in the joint names of the assessee and his bachelor son.
According to the Delhi High Court, the predominant judicial view was that, for the purposes of section 54F, the new residential house need not be purchased by the assessee in his own name nor was it necessary that it should be purchased exclusively in his name. It noted that in the case before it, the property was not purchased in the name of a stranger, somebody unconnected with the assessee, but in the name of his wife, and that there was no dispute that the entire investment had come out of sale proceeds and that there was no contribution from the assessee’s wife.
Having regard to the rule of purposive construction and the object of section 54F, the Delhi High Court held that the assessee was entitled to the benefit of exemption u/s. 54F.
Observations
The Andhra Pradesh High Court, in Mir Gulam Ali’s case reiterated the acknowledged position in law, while deciding in favour of the assessee’s claim for exemption, that the exemption provisions should be liberally construed. None of the sections, under scanner, expressly require purchase or construction in the name of the assessee himself and a concerted effort is requfcired by the courts to read that requirement in the law so as to deny the benefit of exemption to the assessee. It is this highly debatable position, perhaps,that has led the courts to favour the assesses including the courts, which originally had taken a stand against the claim for exemption, but had later on, in other cases favoured the claim for exemption from tax. Further, the intention behind sections 54 and 54F and other provisions similarly placed is to encourage reinvestment in residential houses, which purpose is achieved by permitting reinvestment in the name of a close relative.
It is quite common to purchase properties in joint names of husband and wife, or jointly with close relatives and importantly there is no prohibition in law against it. In such an event, if the funds flow from the assessee, it is clear that the assessee cannot be denied the benefit of the exemption. Given this, should it make a difference if the assessee does not include his own name because of the circumstances of his old age or for convenience of simpler succession?
It may be noted that almost all the decisions favouring the assessee have been cases where the property has been purchased in the name of the spouse of the as-sessee and where funds have flown from the assessee. In all such cases, in any case, clubbing provisions would operate and the property would be regarded for both income tax and wealth tax purposes as the property of the assessee. The natural corollary is that the benefit of the exemption should also be given in such cases.
On the other hand, the decisions which have gone against the assessee have been cases where the prop-erty was purchased in the name of a son, daughter-in-law or grandson. In the case of a major son or grandson, clubbing provisions do not apply, and hence perhaps the adverse view was taken by the courts, though not highlighted in so many words .
The decisions involving section 54B which have gone against the assesseehave also been partly decided on account of the fact that section 54B requires use of the new land for agricultural purposes by the assessee unlike section 54F that merely requires acquisition of a residential house, and does not require the assessee to reside therein.
Mir Gulam Ali Khan’s case again was a case where the assessee initiated the process of purchase of the property, but passed away before he could complete the purchase, and the purchase was then completed by his legal heirs. Therefore, the subsequent purchase by the legal heirs was part of the same chain of events of sale of the old property and purchase of the new property initiated by the assessee himself.
Of course, one would need to take into account the provisions of the Benami Transactions (Prohibition) Act, 1988 in such a case. That Act excludes transac-tions entered into in the name of a wife or unmarried daughter. The Benami Transactions (Prohibition) Bill, 2011, seeks to exclude transactions in the name of spouse, brother or sister or any lineal ascendant or descendant. The law, therefore, seems to recognise that properties of a person can be purchased in the names of certain close relatives. Given this legal background, can the intention be to deny the benefit of an exemption, the conditions of which are otherwise fulfilled, on the mere ground that the property is pur-chased in the name of one such close relative?
In view of the fact that the issue involves interpretation of tax exemption provisions and that the said provisions do not in any case require that the investment has necessarily to be made in the name of the assessee, leading to a possibility of a debate, the better view seems to be that purchase of a property in the name of a spouse or close relative should qualify for the benefit of the exemption u/s. 54, 54B or 54F, as long as the funds belonging to the assessee are used and the assessee retains domain over the property. However, given the fact that while planning one’s affairs one should not plan in a manner so as to attract unnecessary litigation, it is advisable to purchase the property in the joint names of the assessee and such close relative, rather than in the name of the close relative alone.
I High Court – 2013 (31) STR 515 (Mad) Chitra Builders P. Ltd. vs. Addl. Commr. Of C., C. E. & S. T., Coimbatore
Recovery during search cannot be held valid in absence of a proper assessment order and due procedures established under service tax laws.
Facts:
The Revenue conducted search and collected a sum of Rs. 2 Crore from the petitioner. The petitioner contested that since they were not registered with the department and were not carrying out any activities within their jurisdiction, the search and collection of Rs. 2 Crore was arbitrary and illegal and thus they were entitled for the refund of amount paid.
The respondents argued that the petitioners collected Rs. 17 Crore which was further claimed as CENVAT by the service recipients and that the amount so paid voluntarily should not be returned and should be adjusted against service tax liability to mitigate the offence committed u/s. 73(3) of the Finance Act, 1994.
Held:
Directing the respondents to return the amount paid, the Hon. High Court held that the collection of Rs. 2 crore during the search was not valid in the eyes of law. Although the collection was voluntary, the respondents did not prove that the petitioners were liable to pay service tax and that the tax cannot be collected without appropriate assessment order and without following the procedures established by the Law.
Appeal to High Court: Section 260Aa: Territorial jurisdiction: Order of Tribunal passed within the jurisdiction: Appeal lies to that High Court:
CIT vs. Shree Ganapathi Rolling Mills P. Ltd.; 356 ITR 586 (Gauhati):
Revenue preferred appeals against the orders of the Gauhati Bench of the Tribunal before the Gauhati High Court. The issue in those cases was covered in favour of the assessee by the judgment of the Gauhati High Court in CIT vs. Meghalaya Steels Ltd.; (2013) 356 ITR 235 (Gauhati). The learned Solicitor General appearing on behalf of the Revenue contended that the orders, which were impugned before the learned Tribunal, were orders passed by the Assessing Officer in the State of Meghalaya and, hence, this court does not have the territorial jurisdiction to decide the appeals.
The Gauhati High Court dismissed the appeals filed by the Revenue following its decision in the case of Meghalaya Steel Ltd. and held as under:“
i) U/s. 20 of the Code of Civil Procedure, 1908, suits are to be instituted, where the defendents reside or where a cause of action, wholly or in part, arises. An appeal is nothing but an extension of a suit. Hence, a place where the cause of action, wholly or in part arises, is the legal venue for institution of an appeal under the Income-tax Act, 1961.
ii) The orders challenged in this set of appeals had been passed within the local limits of the territorial jurisdiction of the court and, hence, the court had the jurisdiction to try the appeals.”
Time for a system overhaul?
“Americans are fed up of Washington”says President Obama, a sentiment strikingly similar that of the Indian people in regard to New Delhi. In two of the world’s largest democracies citizens are distraught, with the way their countries are being run.
More than 6 decades ago we began our tryst with destiny. Our rulers left us the legacy of the four pillars on which our democracy was to be built, the legislature, the executive, the judiciary and the media. In 66 years, a number of ills, corruption being the most significant one, have led to a virtually complete decay of these four pillars.
The leaders that we elected were expected to govern the country with the aid of tried and tested institutions like the CBI and the CAG with the CVC ensuring that the functioning of the government was above board. These institutions have been misused and maligned. The perception is that the premier investigating agency functions as an arm of the government, ministers discredit and question the CAG and the appointment of the CVC is under a cloud.
People look at the judiciary as their saviour. I do not believe that courts can substitute either the elected legislature or the bureaucracy. To illustrate, in a recent phenomenon in a public interest litigation filed for the non-grant of tax deducted at source to tax payers the Delhi High Court gave directions and the CBDT issued circulars. Despite this, has the situation on the ground materially changed? The answer is an emphatic no.
What then is the problem, people who man the system or the system itself? I think it is both. On account of the fact that those at the helm of affairs suffer from a lack of vision, they tend to gloss over the root of the problem and take short term measures. For those few who have the foresight and do take decisions in the long-term interest of the people, the bureaucracy mired in red tape does not let them function.
Our country is facing problems of great proportions. There cannot be any immediate solutions. What is required is a surgery, however painful it may be. Let us take the problem of affordable housing in the city of Mumbai and consequential proliferation of slums. Merely shifting cut-off dates for free housing for slum dwellers from 1995 to 2000 or the next date is a cruel joke both on slum dwellers and tax payers.. One needs to have three pronged strategy with a long-term perspective to tackle this problem. Firstly, MHADA, the authority that is vested with the responsibility to construct affordable houses needs to construct quality homes with the needs of those for whom they are meant in mind. Secondly, tenancy laws need to be restructured and administered in a manner so that dilapidated structures get rebuilt and finally, one needs to ensure that the fruits of development are equitably distributed all over the country so that forced migration gradually reduces and ultimately stops. The need is to address the cause and not the effect.
To conclude, it is necessary that the systems that have failed us need to change. Electoral reform is probably the right point to begin. The process will be long drawn and may cause substantial turbulence. The youth of our country dream of India as a land of opportunity. I see hope in the youth of this country. They are desperate for a change and they have the energy to carry out movements which will be a catalyst for change. Those who are the leaders of these movements need to focus on certain priorities, rather than spread themselves thin. In the hands of these young people lies the future of incredible India!
Income from offshore supply of equipment not taxable in India if property in equipment passes outside India.
DDIT
(2008) 113 ITD 113 (Del.)
S. 5, S. 9, S. 90, Income-tax Act, Articles 5, 7, India-Korea
DTAA
A.Y. : 2002-2003. Dated : 8-8-2008
Issue :
Income from offshore supply of equipment not taxable in India
if property in equipment passes outside India.
Facts :
The assessee was a Korean Company (‘KorCo’). KorCo had set up
a project office in India after obtaining approval of RBI. In 2001, it was
awarded two contracts by PGCIL. One contract was for onshore execution of fibre
optic cabling system package project (‘onshore contract’). The other contract
was for offshore supply and offshore services (‘offshore contract’). KorCo
rendered the services under the onshore contract through its project office, for
which it maintained separate books of account since the project office
constituted a PE in India under Article 5 of DTAA. Income attributable to
onshore contract was offered for tax. However, income attributable to offshore
contract was not offered for tax on the ground that as property in equipment was
transferred outside India, sale transaction of offshore supply of equipment had
also taken place outside India. KorCo supported its contention with the
following facts :
(i) The bill of lading in respect of equipment sold was
issued in Korea in favour of the PGCIL (buyer) and the notified party was also
PGCIL;
(ii) The bill of entry clearly showed that the importer was
PGCIL and the goods were directly transported to the site of PGCIL and not to
that of KorCo;
(iii) As per terms of the contract, PGCIL was co-insured
under the insurance policies;
(iv) In terms of the contract, the ownership of equipment
and materials supplied from outside India was transferred to PGCIL in the
country of origin, i.e., in Korea.
The AO did not accept KorCo’s contention and held that income
from offshore contract was taxable in India. He determined 10% of the contract
value as the income chargeable to tax in India.
In appeal, CIT(A) after considering particular article of
both the contracts, held that: the two contracts were dependent on each other
and one cannot be completed without completing the other; KorCo’s responsibility
does not end merely upon delivery of equipment, but it continues till the
successful completion of the project as otherwise both contracts could be
cancelled; thus, there is interrelation and interdependence of both contracts
and it was a composite contract; it was a colourable device adopted by KorCo;
and hence, the income was taxable in India in terms of S. 9(1)(i) as well as
under Article 7 of DTAA.
Held :
The Tribunal observed and held on the various aspects as
follows :
(i) U/s.90(2) of Income-tax Act, KorCo is entitled to more
beneficial of the treatments under DTAA or under Income-tax Act. However, this
question would arise only if provisions of Income-tax Act are applicable. If
they are not, question of applicability of DTAA would not arise. As held by
the Supreme Court in Union of India v. Azadi Bachao Andolan, (2003) 263
ITR 706 (SC), no provision of DTAA can possibly fasten a tax liability where
the tax liability is not imposed by the Income-tax Act.
(ii) While considering almost identical facts and
circumstances and even where there was a single agreement for both supply and
erection of equipment, the Supreme Court [in Ishikawajima-Harima Heavy
Industries Ltd. v. DIT, (2007) 288 ITR 408 (SC)] had held that income from
offshore supply of material/equipment did not arise in India and was not
taxable in India. It was not open to the Revenue to contend that this decision
was not applicable to the facts of the case.
(iii) Under the Sale of Goods Act, 1930, the property in
goods passes to the buyer as per the intention of the parties, which is
gathered from the facts and circumstances. The offshore contract specifically
provided that property would pass to PGCIL when KorCo loaded the goods and
handed over the documents (including bill of lading) to the nominated bank.
The payment was also received outside India. Thus, the property in goods was
transferred outside India. Merely because certain terms intended to protect a
buyer’s interest are included, it cannot be construed that the property in
goods had not passed or that it had passed conditionally.
(iv) Since delivery of goods, documents and receipts of
substantial part of sale consideration had taken place outside India, the sale
took place outside India and such income would not be taxed under Indian law.
The income from offshore contract was not taxable in India.
Payment for outright sale of drawings and designs is not royalty either u/s.9(1)(vi) or under Article 12(3) of DTAA
2 Parsons Brinckerhoff India (P) Ltd. v. ADIT
(2008) 118 TTJ 214 (Del.)
S. 9(1)(vi), S. 195, Income-tax Act; Article 12,
India-Thailand DTAA
Dated : 4-7-2008
Issue :
Payment for outright sale of drawings and designs is not
royalty either u/s.9(1)(vi) or under Article 12(3) of DTAA.
Facts :
The assessee was an Indian company. It was engaged in the
business of rendering engineering, consultancy services and was awarded a
contract by a consortium for rendering such services for a tollway project.
Inter alia, the scope of work required preparation of design and drawings by
the assessee. The assessee entered into a contract, titled as service agreement,
with a Thailand company (‘ThaiCo’) for : supply of detailed design services,
including preparation and submission of fully dimensional general arrangement
drawings, segment casting data, etc.; calculations, drawings and reports,
rectification to design errors, etc.; site visits by ThaiCo as may be necessary;
design review for about 13 items; supply of detailed design; and production of
final design drawings. As per the contract, ThaiCo was to carry out the work
from its office in Thailand and for actual execution, its personnel may be
required to make short visits to the site. In particular, the contract
stipulated observance of confidentiality and non-disclosure of the assessee’s
trade secrets/confidential information as well as not using these either for its
own purpose or for benefit of any third person. It was further stipulated that
upon termination of the contract, ThaiCo shall surrender all the documents and
information relating to the assessee which may be in its possession. The
assessee was required to remit the contract consideration to ThaiCo in Thailand.
The assessee applied to the AO u/s.195(2) of Income-tax Act
requesting the AO to pass an order authorising remittance of the consideration
without deduction of tax. The assessee submitted that : the payment was in the
nature of business income and as ThaiCo did not have PE in India, it was not
taxable in India; the payment did not represent Fees for Technical Services (‘FTS’)
as there was no specific article dealing with FTS; and the payment could not be
construed as ‘other income’ under Article 22 of DTAA. The AO held that the
payment was for use of design/model/plan developed by ThaiCo and also that it
represented consideration for information concerning industrial, commercial or
scientific experience, and concluded that it was ‘royalty’ under Article 12 of
DTAA. In appeal, CIT(A) agreed with the conclusion of the AO.
Held :
The Tribunal observed that :
- Though the contract was titled as service agreement, actually it was agreement
for supply of the package of designs and drawings that would enable the
assessee to effectively render engineering consultancy services under its
contract with the consortium.
- The site visits of ThaiCo’s personnel seemed to be only to explain the
drawings and designs to the assessee and they were similar to the visit of a
machine supplier’s personnel to supervise the installation of machinery.
- Decisions in Pro-Quip Corporation v. CIT, (2002) 255 ITR 354 (AAR),
CIT v. Davy Ashmore India Ltd., (1991) 190 ITR 626 (Cal.), CIT v.
Klayman Porcelains Ltd., (1998) 229 ITR 735 (AP) and CIT v. Neyveli
Lignite Corporation Ltd., (2000) 243 ITR 459 (Mad.) have brought out the
distinction between outright sale of the property and transfer of
right to use the property while retaining the ownership right. In case of
outright sale, the consideration would be business profits and in case of
transfer of right to use, it would be royalty.
- There are a number of words used in Explanation 2(i) to S. 9(1)(vi)(b) and
Article 12(3) of DTAA and all these words signify a form or a kind of
intellectual property. The words ‘model’ or ‘design’ should be understood in
this context. Having regard to the rules of interpretation, it would not be
proper to hold that these two words should be understood in a different sense.
Therefore, these two words cannot refer to drawings and designs which are sold
outright without the seller retaining any proprietary right.
The Tribunal, accordingly, held that :
- an outright sale of drawings and designs cannot fall under the definition of
‘royalty’ in Explanation 2 to S. 9(1)(vi).
- As outright sale of drawings and designs is not ‘royalty’, ThaiCo is not
chargeable to tax in India u/s.9(1)(vi).
- Since no liability had arisen on the non-resident under the domestic law, it
is not legally necessary or permissible to examine DTAA.
- The payment would not be covered under Article 22 of DTAA, since the income is
business profits which are expressly dealt with in Article 7.
- The payment is not chargeable to tax in India.
(i) Remuneration for processing of seismic data outside India is not taxable in India since not royalty and no PE. (ii) Fees for training for use of software pertaining to exploration/extraction of mineral oil is taxable u/s.44BB.
ACIT v.
Paradigm Geophysical Pty Ltd. (2008) 117 TTJ 812 (Del.)
S. 9(1)(vii), S. 44BB, S. 90, Income-tax Act; Articles 7, 12,
13, India-Australia DTAA
A.Y. : 2003-2004. Dated : 27-6-2008
Issues :
(i) Remuneration for processing of seismic data outside
India is not taxable in India since not royalty and no PE.
(ii) Fees for training for use of software pertaining to
exploration/extraction of mineral oil is taxable u/s.44BB.
Facts :
(i) The assessee was an Australian company (‘AusCo’). AusCo
entered into contract with RIL for processing of certain seismic data. The
seismic data was to be collected by RIL. Under the contract, AusCo was to :
collect the original data tapes from RIL at Mumbai; process these tapes at only
one processing centre in Australia; return the original data tapes together with
the processed data tapes to RIL at Mumbai; provide all committed equipments and
personnel for the processing at the processing centre; ensure not to divert the
committed resources to any other jobs without prior written approval of RIL;
provide licence for the use of certain software for limited period; and complete
timely execution and delivery of data.
While furnishing its return, AusCo offered the receipts for
assessment u/s.44BB, in terms of which 10% of the receipts would be deemed to be
profits and gains of business of rendering services in connection with the
prospecting for or the extraction of mineral oil. However, during the course of
assessment proceeding, it took the position that it had no PE in India under
Article V and hence, in terms of Article VII, the receipts were not taxable in
India. While not disputing that processing was carried out in Australia, the AO
held that the basic ingredient was the situs at which the processed data was to
be utilised (which was India) and accordingly, assessed the receipts u/s.44BB.
In appeal before CIT(A), CIT(A) accepted AusCo’s contention
that AusCo did not have PE in India and hence, receipts were not to be taxed in
India.
Before the Tribunal, the Revenue contended that the software
was a copyright and hence, consideration for the use of the software was a
royalty in terms of Clause (a) of Article XII(3) (Royalties) of DTAA. Further,
in terms of Clause (d) of Article XII(3), rendering of any technical service
which is ancillary or subsidiary to the application of software was also royalty
and thus both these clauses were applicable. Therefore, the receipts cannot be
assessed as business profits under Article VII(1) of DTAA. Consequently, the
Revenue also contended that presumptive taxation u/s.44BB was not applicable if
the receipt being royalty was covered by provisions of S. 115A.
AusCo contended that it did not ‘make available’ [as
clarified in Raymond Ltd. v. DCIT, (2003) 86 ITD 791 (Mum.)] any
technical knowledge, experience, etc. to RIL. Factually, processed seismic data
provided by AusCo cannot be used by RIL in future for any project undertaken in
another area, such processed data cannot be construed to be ‘development and
transfer of a technical plan or design’ and hence, it was not ‘made available’
by AusCo to RIL. Consequently, receipt cannot be treated as royalty under
Article XII(3) and one would need to look at Article VII and not domestic law.
Once in Article VII, since there is no PE, receipt cannot be taxed in India
[relying on DCIT v. Boston Consulting Group Pte. Ltd., 93 TTJ (Mumbai)
293].
(ii) AusCo had also entered in to a separate contract for
training employees of RIL to use software which was used exclusively by oil and
gas industry worldwide for exploration/extraction of mineral oil. The training
was to be provided at RIL’s office in India as may be decided by RIL.
While furnishing its return, AusCo declared that receipts
from RIL under training contract were subject to taxation under Article XIII
(Alienation of property) of DTAA. However, during the course of assessment
proceeding, it resiled from its stand and offered the receipts for assessment
u/s.44BB, in terms of which 10% of the receipts would be deemed to be profits
and gains of business of rendering services in connection with the prospecting
for or the extraction of mineral oil. AusCo contended that its case was covered
by CBDT’s Instruction No. 1862, dated 22nd October 1990, which explains the
expressions ‘mining project’ and ‘like project’ in connection with Explanation 2
to S. 9(1)(vii).
The AO rejected AusCo’s contention and assessed the receipts
under Article XIII (Alienation of property) of DTAA.
In appeal before CIT(A), CIT(A) accepted AusCo’s contention
and directed the AO to assess the income u/s.44BB.
Held :
(i) The Tribunal observed and held that :
- S. 44BB applies to provision of services and facilities in connection with the prospecting for or extraction of mineral oils in India and unlike Explanation 2 to S. 9(1)(vii)(b), of Income-tax Act, in S. 44BB the word ‘services’ is not qualified. It cannot be disputed that the services rendered by AusCo to RIL were consultancy or technical services in terms of Explanation 2 to S. 9(1)(vii)(b). However, since S. 44BB did not qualify the word ‘services’, consideration for any services rendered by a non-resident company in connection with prospecting or extraction of mineral oil will fall within S. 44BB.
- The question to be examined was whether AusCo ‘made available’ any technical knowledge, experience, etc. to RIL. Factually, processed seismic data provided by AusCo cannot be used by RIL in future for any project undertaken in another area, such processed data cannot be construed to be ‘development and transfer of a technical plan or design’ and hence, it was not ‘made available’ by AusCo to RIL. Consequently, Article XII(3)(g) of DTAA would not ‘apply.
- As per Article VII(7), if business profits include items of income for which specific provisions are made in any other Article of DTAA, then those provisions should apply to those items. However, if any of such specific provisions are not applicable to a particular item of income, such item would be subject to Article VII. AusCo’s receipts from RIL did not represent consideration for any technical services which could bring it within Article XII(3)(g). Hence, it would be business profits subject to Article VII and since AusCo did not have a PE in India, such business profits cannot be taxed in India.
(ii) The Tribunal observed that AusCo was required to impart training to employees of RIL in various aspects pertaining to exploration/ extraction of mineral oil and that the controversy is whether S. 9(1)(vii)(b) or S. 44BB should be applied. Noting the difference between the two provisions, as brought out by Delhi Tribunal in Hotel Scopevista Ltd. v. ACIT, (ITA No. 124 to 126/Del./2006), the Tribunal held that S. 44BB would be more appropriate since AusCo was rendering services to RIL in connection with prospecting for or extraction or production of mineral oil. The Tribunal also derived support for its view from CBDT’s instruction No. 1862 dated 22nd October 1990.
2013 (31) STR 747 (Tribunal – Delhi) – Shiv Narayan Bansal vs. CCE, Indore
Whether contract for manufacturing on job work covered under ‘Manpower Supply Service’? Held, No.
Facts: The Appellant entered into an agreement for engaging 3 persons to carry out manufacturing on job work basis. The respondent argued that the object of the agreement was to provide skilled labourers for carrying out the activity and statutory liability under labour laws was of the Appellant and hence such act comes under the purview of manpower supply.
Held: Observing the agreement, the Hon. Tribunal allowed the appeal holding that the persons employed remained under the control of job worker and not of the service receiver and that there was no objective to provide supply of manpower, without carrying out manufacturing activity. 2013-TIOL-1441-CESTAT-DEL Commissioner of Service Tax, Delhi vs. Pentagon Financial Consultants Pvt. Ltd. Where even a part amount of interest was not paid before the issue of Show Cause Notice, penalty u/s. 76 upheld.
Facts: The Assessee short-paid Rs. 2,36,479/- for which the department issued a Show Cause Notice dated 04-03-2008 along with interest and equal penalty and confirmed the demand thereon. The assessee appealed to the Commissioner (Appeals) and contended that since the whole amount of service tax was paid on 23-04-2007, much before the issue of Show Cause Notice, no penalty u/s. 76 ought to have been levied which the Commissioner (Appeals) ordered in favour. The department, being aggrieved by the order contended that for the waiver of entire penalty, the assessee should have paid the entire service tax along with entire interest. In the instant case, the assessee failed to deposit part amount of interest of Rs. 771/- before the issue of Show Cause Notice and deposited the same on 04-04-2008. Thus, no waiver of penalty should have been allowed.
Held: The Hon. Tribunal observed that full payment of interest was an integral part for waiver of penalty which the assessee did not fulfil. Further, perusing the provisions of section 73 and CBEC Circular No. 137/167/2006-CX4 dated 03-10-2007, the Tribunal set aside the order of the Commissioner (Appeals) and held that the benefit of exemption of penalty could not be given.
2013 (31) STR 730 Tribunal – Delhi Comm. of ST vs. Lufthansa Technik Service India P. Ltd
Whether operating lease was covered under the category of “Banking & Financial Services”, prior to 01-06-2007 and chargeable to service tax? Held, No.
Facts:
The assessee engaged in providing aircraft parts/ equipments to various airlines on lease for a fixed period against monthly lease charges entered into agreements which did not provide any option to own or entitlement to own the aircraft parts at the end of leasing period. The department, considering it as financial lease demanded tax under “Banking & Financial Services” and contended that prior to 01-06-2007 there was no provision that financial lease must have a clause giving option to the lessee to own the asset at the end of lease period and that the amendment made w.e.f. 01/06/2007 was retrospective in nature.
The assessee contended that there was no service tax on operating lease for the period prior to 01- 06-2007 as after 01-06-2007, an explanation was inserted in the definition of “Banking & Financial service” whereby an operating lease was included along with financial lease in the purview of the definition of B & F services.
Held:
Observing that the leasing agreements did not contain any provision entitling the customer to own the goods leased or an option to own the goods leased, the Hon. Tribunal relying on Association of Leasing and Financial Services Companies vs. UOI 2010-TIOL-87-SC-ST-CB held that when the lease agreements were not financial lease agreements, the same would not be exigible to service tax under the Finance Act prior to 01-06-2007.
2013 (31) STR 578 (Tri.-Del) R. F. Properties & Trading Ltd. vs. Commissioner of C. Ex., Jaipur
Prior to introduction of explanation with respect to levy of service tax on builders, the services provided in relation to commercial or industrial construction services provided by a builder were in nature of self-service not leviable to service tax.
Facts: The appellants received application money/advances from prospective buyers of space/shop/ office in a commercial complex to be constructed by them which the department contended to tax under the category of “commercial and industrial construction services”.
The department concluded that although the title to property in space/shop/office had not been passed to the prospective buyers, since advances were received and the appellants were constructing the complex, they were liable to pay service tax.
Held:
Relying on the decision of the Hon. High Court in Maharashtra Chamber of Housing Industry vs. UOI 2012 (25) STR 205 (Bom) and Hon. Tribunal in C.C.E., Chandigarh vs. Skynets Builders, Developers, Colonizer 2012 (27) STR 388 (Tri.-Del), wherein it was observed that the explanation introduced to section 65(105)(zzq) of the Finance Act, 1994 with effect from 01-07-2010 was to expand the scope of levy and therefore, prior to its introduction, a mere agreement to sell would not create any interest in the property in favour of the prospective buyer and the title of property was with the builder which constituted self-service. Since the issue was prior to the introduction of explanation, no services were provided to another person and thus, not liable to service tax.
2013 (31) STR 563 (Tri.-Del) Commissioner of C. Ex., Indore vs. International Logistics
Expenses incurred to provide services shall form 24 25 72 Bombay Chartered Acountant Journal, november 2013 BCAJ INDIRECT TAXES 208 (2013) 45-B BCAJ part of assessable value if such expenses are inseparable and are integrally connected with the performance of taxable services. Mere filing of Balance Sheets and returns does not amount to disclosure of facts yet, if the issue was debatable, penalty should not be levied.
Facts:
The respondents engaged in providing clearing and forwarding services, claimed certain reimbursement of expenses which were rejected by the revenue. The respondents contended that even if the case is adjudicated in favour of department, the respondents be allowed CENVAT credit of service tax paid on procurement of such services and since the respondents had filed Balance Sheets and returns, there was no suppression of facts by the respondents. Further, since the law was in a debatable stage levy of penalty was not justified.
Relying on Larger Bench’s decision in case of Sri Bhagavathy Traders 2011 (24) STR 209 (Tri.-LB), the revenue contested that the expenses, which are essentially required and are integrally connected to the services, cannot be excluded while determining value of taxable services.
Held:
The Hon. Tribunal, partly allowing the appeal, held that expenses incurred to provide services shall form part of assessable value if such expenses were inseparable and integrally connected with the performance of taxable services and thus tax was required to be paid on the same. However, CENVAT credit would be allowed subject to verification of records and evidences presented by the assessee. Mere filing of Balance Sheets and Returns would not amount to disclosure of facts. However, since the issue was litigative as the same travelled till Larger Bench to attain finality, penalty would not be levied.
[2013] 36 taxmann.com 57 (Madras) Mediaone Global Entertainment Ltd. vs. Chief Commissioner of Central Excise, Chennai
Validity of Circular No.148/17/2011 vis-à-vis concept of new entity in revenue sharing arrangement, violation of section 37B of Central Excise Act, – Scope of section 66D(j) and Exemption Notification.
Facts:
The petitioner challenged the validity of Circular No.148/17/2011–ST dated 13-12-2011 on the following issues:
• It seeks to create a new entity and has made the transaction between the new entity, theatre owner, distributor or producer liable to service tax. The Finance Act does not contemplate any such joint venture and the circular attempts to create an artificial person, when the nature of arrangement between a distributor and an exhibitor is on a principal-to-principal basis wherein revenue sharing arrangement exists.
• The circular directs and binds the assessing authority in effect to hold all transactions in which there is revenue sharing to be a joint venture liable to service tax.
• In the light of section 66D(j) and Notification No.25.2012-ST dated 20-06-2012, Circular No.148/17/2011-ST alone becomes otiose and liable to be quashed.
Held:
• The Circular contemplated a situation where an exhibitor not only provided theatre to distributor (in his capacity as owner), but also provided other services for the purpose of exhibiting film by entering into revenue sharing agreements. In such arrangements, there was a possibility of the existence of new entity. Once the conclusion was arrived that there was a new entity, it was to be seen independently as to whether such services rendered by the new entity would fall within any of the entries for levy of service tax.
• Considering the second contention as baseless, the High Court observed that the arrangements referred to in the impugned circular can at best be taken as an illustration and cannot be termed as an exhaustive or a comprehensive list of arrangements. Further, the circular itself clearly spells out that the nature of transaction is a question of fact, which the exhibitor/ distributor/producer has to place before the department and such arrangement was to be examined on its merits. The circular does not restrict the powers of the officials to decide a particular dispute in a particular manner and the impugned circular is not violative of section 37B.
• As regards the third contention, the High Court held that, by a combined reading of section 66D(j), Notification Nos.25/2012-ST dated 20- 06-2012 and 03/2013-ST dated 01-03-2013, it was clear that what is exempted is only an admission to entertainment events or access to amusement facilities or exhibition of cinema in a theatre. The variant modes of transaction between the distributor/sub-distributors of films and exhibitors of movie and the revenue sharing arrangement between them are neither in the “Negative List Services” nor exempted.
[2013] 37 taxmann.com 226 (Madras) CCE, Chennai-II vs. Electro Steel Castings Ltd.
Where service tax was paid for one period under protest, any amount paid for later period on identical issue was deemed “under protest” and limitation period was held inapplicable.
Facts:
The department disputed assessee’s valuation method and passed an adjudication order confirming the demand. The assessee filed a protest letter under Rule 233B during the course of adjudication. Preferring an appeal before the Commissioner (Appeals), the matter was decided in assessee’s favour.
During the pendency of Appellate proceedings, the assessee paid the duty for subsequent period based on the valuation method adopted by the 21 adjudicating authority for the period under dispute. Later, the assessee applied for refund covering period under dispute as well as subsequent period which was rejected by the department on the ground of limitation. Relying on Mafatlal Industries Ltd. vs. Union of India 1997 (89) ELT 247 (SC), the assessee appealed against the order rejecting refund and was decided in its favour.
Held:
Dismissing the department’s appeal and relying on the Hon. Supreme Court’s decision in Mafatlal Industries (supra), the Hon. High Court observed that the payment made when the assessee was challenging the earlier levy of duty was deemed to be made under protest and not otherwise and that no limitation period was applicable to the payment made under protest.
[2013] 37 taxmann.com 41 (Jharkhand) Akshay Steel Works (P.) Ltd vs. Union of India.
CENVAT credit can be used for pre-deposit of duties demanded under Adjudication Order appealed against.
Facts:
The Commissioner (Appeals) rejected the Appellant’s Appeal on the ground that it failed to deposit the amount as required under the provisions of the Central Excise Act.
The Appellant contended that since it reversed the appropriate amount from unutilised CENVAT credit and gave this information along with the copy of Form-RG 23A Part II to Commissioner Appeals, it has complied with the conditions of pre-deposit.
Held:
Analysing Rule 3 of the CENVAT Credit Rules, 2004 (CCR), the Hon. High Court held that since the law allows the assessee to take the benefit of the credit under any category as mentioned under Sub-Rule(1) of Rule 3 of the CCR and that it does not prohibit the assessee to adjust the said credit against its liability created by an order which was sought to be challenged in appeal requiring the deposit of the amount u/s. 35F of the Central Excise Act, the petition was allowed.
2013-TIOL-741-HC-ALL-ST M/s. K Anand Caterers vs. Union of India
Whether recovery proceedings be initiated where the assessee has applied under the Voluntary Compliance Encouragement Scheme, 2013 (VCES)? Held, No.
Facts:
The department conducted a search in the applicant’s premise on 31-05-2013 and detected payment of Rs. 60 lakh against service tax dues and thus issued a notice for recovery dated 07-06-2013. The applicant did not deny the liability but applied under VCES on 20-06-2013. The department contended that it was within its rights to initiate recovery proceedings and to issue a notice for the same and further stated that unless the application was found to be valid the petitioner was not entitled to any relief against the said dues. Held: Observing that the applicant had fulfilled the conditions as prescribed for application under VCES, the Hon. High Court held that unless the application was considered and decided by the Competent Authority, no recovery proceedings would be allowed to continue. They further stated that if the recovery was allowed to proceed, the object behind VCES would be defeated.
2013 (31) STR 642 (Rajasthan) – CIT (TDS), Jaipur vs. Rajasthan Urban Infrastructure
Whether TDS is to be deducted u/s. 194J of the Income Tax Act on service tax applicable on fees to be paid to consultants? Held, No.
Facts:
The Appellant preferred an appeal against the order of ITAT confirming first appellate authority’s order which held that TDS u/s. 194J of the Income Tax Act, 1961 (I T Act) would not be applicable on service tax component paid separately in respect of professional fees. They further argued that the ITAT had illegally relied on the CBDT Circular dated 28-04-2008 while deciding the present appeal.
Held:
Referring to section 194J of the I. T. Act and the Circular dated 28-04-2008, the Hon. High Court held that section 194J of the I. T. Act used the words “Any sum paid” which related to the fees for professional or technical fees and would not include the service tax which was to be paid separately. As per the terms of the agreement, service tax was to be paid separately and was not included in the fees payable. Since the ITAT and lower authority had considered the wordings of section 194J of the I. T. Act while deciding the appeal, even if the Circular dated 28-04-2008 was held to be not applicable in the present case, then also the order passed was in accordance with the law and needed no intervention. Further, since no substantial question of law was involved, the appeal was dismissed.
2013 (31) STR 535 (Guj) Commissioner of Service Tax vs. Manan Motors Pvt. Ltd. If service tax with interest is paid in full before issuance of SCN, penalty cannot be levied : CBEC Circular dated 03-10-2007.
Facts:
The assessee discharged its service tax liability along with full interest before the issue of SCN. The department issued a Show Cause Notice and passed an order confirming tax along with interest and penalty u/s. 76 and 78 of the Finance Act, 1994.
The department argued that since the assessee paid service tax and interest, the penalty was also quantifiable and that it should have deposited 25% penalty within 30 days of the issue of SCN.
Held:
Ordering levy of penalty of not more than 25% (Note: appears contradictory to the circular dated 03-10-2007), the Hon. High Court relying on Circular No.137/167/2006-CX dated 03-10-2007 and referring to section 73(1A) held that since the service tax and interest was deposited before issuance of SCN and at that time, neither any penalty was levied nor quantum of penalty was fixed, the respondents were not required to deposit penalty amount.
A. P. (DIR Series) Circular No. 58 dated 30th September, 2013
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 31st March, 2014: –
|
Sr. No. |
Average |
All-in-cost |
|
1 |
Three |
350 |
|
2 |
More |
500 |
Lecture Meeting and Other Programs
LECTURE MEETING:
Important Provisions under the Companies Act, 2013, 9th October 2013
BCAS had organised a lecture meeting by Mr. P. R. Ramesh, Chartered Accountant with an objective to make members aware about the important amendments and the important provisions of the new Companies Act, 2013. The speaker spoke about important topics like Accounts, Audit and related party transactions etc. He spoke about how the new Act was a game changer for the profession and the businesses. He also spelt out several unclear provisions, such as consolidated financial statements, commencement / applicability of various provisions, definition of share capital and reserves, definition of control for a holding company, amongst others, where the provisions were ambiguous. The speaker also answered the queries raised by the participants.
Nearly 400 participants attended the meeting. The video recording of the lecture meeting is available on BCAS Web TV to the subscribers.
OTHER PROGRAMS:
Music Clinic – Swar Se Ishwar Tak, 18th October 2013
HR Committee and Membership & PR Committee of BCAS had jointly organised the Music Clinic highlighting the use of music for destressing and healing our lives. The Clinic was run by Dr. Rahul Joshi, MD – Homeopathic Medicine, who took the participants through a musical tour for 3 hours involving the audience at regular intervals. The program focused on healing of chakras in the human body by giving them affirmations and positive music to motivate and enhance the wellbeing of the entire body. More than 150 participants benefited from this innovative program organised by BCAS.
RTI Anniversary, 12th October 2013
BCAS Foundation, in collaboration with Public Concern for Governance Trust & Indian Merchant Chambers, had organised the celebration of RTI Anniversary. The State Chief Information Commissioner Mr. Ratnakar Gaikwad was the Chief Guest on the occasion. Padma Shri Nana Chudasama, Padma Shri Julio Ribeiro and Shri Narayan Varma graced the occasion as the guides on the subject for RTI.
More than 200 participants participated in this celebration arranged by BCAS Foundation including a High tea.
Treaty won’t shield FIIs from General Anti-Avoidance Regulations
Foreign institutional investors (FIIs) that benefit from tax treaties, including the contentious India- Mauritius tax treaty, will fall under the ambit of General Anti-Avoidance Regulations (GAAR). On the other hand, the rules, notified by the Central Board of Direct Taxes (CBDT) have spared the participatory notes (P-Notes), through which many foreign investors invest in India. The new rules come into effect from the financial year 2015-16.
The rules also notify that GAAR shall not apply where the tax benefit arising to all parties to an arrangement (any investment transaction or even business transactions like lease) does not exceed Rs 3 crore in a financial year. Grandfathering or protection of past transactions from the application of GAAR is also provided by the rules. Only FIIs that have not taken the benefit of any tax treaty entered into by India and who have invested in listed or unlisted securities with the prior permission of the relevant authorities – Sebi or other regulatory guidelines – shall not be covered by GAAR.
The GAAR rules provide amnesty only for FIIs not claiming treaty benefits. This is practically meaningless as it would not settle any controversy around the India-Mauritius tax treaty. The rules clarify that foreign investors investing in an FII via an offshore derivate investment shall not be covered by GAAR. This is a welcome step. However, as regards FIIs, in order to provide certainty all FIIs, including those seeking tax treaty benefits, should have been excluded from GAAR.
Under the provisions of the Income Tax Act, GAAR applies to an impermissible avoidance arrangement. If the main purpose of an arrangement is to obtain a tax benefit and it also satisfies certain other tests, such as the transaction lacks commercial substance, it is regarded as an impermissible avoidance arrangement. The tax benefits or benefits arising out of tax treaties applicable to such transactions can be denied by the tax authorities. As the tax implications of a transaction falling within the GAAR ambit are onerous, the rules may unsettle the FII community. For instance, if the arrangement of investing into India via a favourable country is treated as a transaction where the main aim was to obtain a tax benefit and if the transaction was considered as lacking commercial substance, or was treated as resulting in abuse of the Income tax Act provisions, the tax treaty benefits could be denied. Tax officials, speaking on condition of anonymity, said that genuine investors are unlikely to come within the GAAR ambit and there is no cause for panic.
Under the India-Mauritius tax treaty, sale of investments in India by a resident of Mauritius can be subject to tax only in Mauritius, which does not levy any capital gains tax. India does not tax long-term capital gains arising on sale of listed securities (which are held for more than a year). However, short-term capital gains, where shares are held for less than a year, are taxed. Sale of unlisted securities is also subject to tax.
Allow FDI into online retail
There is muddled thinking and myopia on foreign direct investment (FDI) in retail e-commerce. It makes no sense to allow FDI in retailing of the standard brick-and-mortar variety and disallow FDI in online retail — thankfully, 100% FDI is permitted in business-to-business (B2B) e-commerce.
The plain fact is that retailers now value both internet-enabled and offline, across-the-counter sales, and the policy moves lately to enable FDI in retail would be incomplete sans clearcut liberalisation and opening up in online retail. Assorted domestic ventures in online retail starve for capital and the best way to attract both capital for these ventures and foreign exchange for the larger economy is to remove the restriction on FDI in online retail.
The policy change to allow FDI in retail e-commerce would boost investments, rev up stable capital inflows, modernise the entire retail sector here and, in the process, bring in new expertise, knowhow and shore up hiring and employment in myriad related ways. Note that it is now standard practice for online retailers to have offline presence too, including in prime footfall areas, for seamless brandbuilding.
One Should Never Waste A Good Crisis
Talk about India’s glorious long-term future is, these days, as commonplace as India’s glorious past long ago. And as trite. That is one reason why the ET Awards jury’s discussion of India’s future prospects last week struck a refreshing note. Jury members saw not just the glass spilling over in the future but also filling up fast in the current year. Tafe chairman and CEO Mallika Srinivasan is very clued into agriculture, as you would expect a manufacturer of heavy-duty tractors to be, and points out that the extra-bountiful south-western monsoon would drive up economic growth this fiscal, both by pushing up farm output and by generating rural demand for a variety of industrial produce.
ICICI Bank chairman K V Kamath concurs, and expects accelerated project clearance by the government finally bringing some life to the comatose infrastructure sector. HDFC Bank managing director Aditya Puri sees the current gloom as being overdone. While he is in favour of taking measures to counter what he called dumping of artificially cheap manufactured goods in India by China, Deutsche Bank co-CEO Anshu Jain defended the benefits of free trade.
We endorse his call for using the crisis on the external front and slowdown in economic growth to concentrate on fixing long-term structural problems. But we also see that this calls for bipartisan cooperation, whether to introduce a goods and services tax or scrap the law that institutionalises middleman control over marketing agricultural produce, a major source of food inflation.
Unilever COO Harish Manwani was in a good position to underline global faith in the Indian economy, in the wake of his company’s INR300-billion open offer to increase its stake in the Indian subsidiary. Sequoia Capital MD Shailendra Singh attested to continuing vigour in startups and entrepreneurship. His optimism on technology absorption was not just echoed by Unique Identity Authority chairman Nandan Nilekani but amplified by him to posit digital inclusion leading to a quantum leap in productivity and growth. We agree, emphatically. (Source: The Economic Times dated 24-09-2013)
The irony of India story
Whenever I meet investors around the world, the most pressing question is: what happened to India? It was supposed to prove to the world that even a noisy, chaotic and populous democracy could deliver high growth. It was seen as the answer to China and its authoritarian economic model. Given all the hope and hype, it’s not surprising that there is now so much disappointment with India
Today, however, most investors refuse to acknowledge India as a competitor to China. Any comparison is rubbished because we are seen as being incapable of execution.
To many investors, India does not seem to have a long-term strategic game plan, and the lurch towards populism is scary. Everyone is convinced that this is a largely self-inflicted problem. The great demographic dividend is seen by most as an upcoming demographic disaster, given India’s inability to provide skills training to its people or to create jobs.
I try to think what the root cause of our travails is. I know we will point to policy paralysis, the global slowdown, lack of political will and interest in reforms, judicial activism and so on. These are serious problems, but the source of our travails goes back even further – when India was included in the BRIC group.
The inclusion of India in the BRIC group, as well as the surge in global capital flows and attention that this brought, lulled the country’s policy makers into complacency. We started believing that we were the next big thing, and that we had a god-given right to grow at eight or nine per cent for decades. We ignored the lessons of economic history, which clearly show that few countries have actually been able to deliver this type of sustained high growth. We seemed to believe that even with no effort we were destined to join this select club.
However, a great deal of effort was required to sustain this growth – serious reform, institutional adaptation, and the willingness to take some tough decisions, which could have caused short-term pain. It is here that we have been found lacking. As we began to believe in our growth acceleration and in its permanence, we started putting in place spending programmes to utilise this revenue windfall – not once questioning what would happen if growth slowed. Many economies get stuck in the so-called middleincome trap, wherein institutional weaknesses prevent the realisation of an economy’s full growth potential, which normally happens at a much higher level of income per capita (typically above INR432,871-8,000 a year). India seems to have stalled at far lower levels of economic development. This is largely due to complacency and an unwillingness to make structural improvements to our economy. I think the current growth slowdown, although harmful in terms of economic hardship, has at least shaken our policy makers out of their complacency. No longer does anyone believe that we will grow at eight or nine per cent, irrespective of policy action. Everyone acknowledges that we don’t have all the answers and that there are lessons to be learnt from other economies. Therein lies an opportunity for India. Just when most people have given up on us and on our ability to make the economic course correction required to regain a strong growth trajectory, the odds of us making the necessary changes have never been higher. Irrespective of which government comes to power in 2014, I am confident that the changes required for us to regain our growth trajectory will be implemented. Ironically, belief in India’s long-term growth outlook has never been weaker, but the chances that we will take the necessary steps to deliver that growth have never been stronger. (Source: Extracts from an Article by Mr. Ajay Shah in the Economic Times dated 10.10.2013)
Self brand positioning
Despite the common misperception that all introverts are shy, and vice versa, they’re two very different phenomena. (One expert defines shyness as “the fear of negative judgement”, while introversion is “a preference for quiet, minimally stimulating environments”.)
It’s true that many of the best ways to establish your brand in the professional world are still weighted toward extroverts: taking leadership positions in professional associations, starting your own conference or networking group, or — indeed — embracing public speaking… First, social media may actually be an area where introverts, who thrive on quiet contemplation, have an advantage.
With a blog — one of the best techniques for demonstrating thought leadership — you can take your time, formulate your thoughts and engage in dialogue with others. Next, with a little strategy and effort, you can become a connector one person at a time… Simply placing diplomas or awards on your office walls can help reinforce your expertise.
In popular imagination, personal branding is often equated with high-octane, flesh-pressing showmanship. But there are other, sometimes better, ways to define yourself and your reputation. Taking the time to reflect and be thoughtful about how you’d like to be seen and living that out through your writing, interpersonal relationships and decor is a powerful way to ensure you are seen as the leader you are.
From “Personal Branding for Introverts”.
(Source: Extracts from “Personal Branding for Introverts” by Dorie Clark : The Economic Times dated 25-09-2013).
A Parliament of crooks could reward dishonesty and punish the lawful.
Is the Indian polity becoming a Parliament of fouls? According to a TOI report, the figures for serious criminal charges are between 20 and 200 times higher among members of Parliament than among the general population at large.
What is it about Indian politics that makes it so conducive to criminal activity? Is it that it is largely the criminally inclined who are drawn to politics in India? Or is it that the country’s system of politics has become so tainted with illegality that even decent individuals soon find themselves corrupted?
Whatever the reason, India’s Parliament has increasingly come to resemble the local chapter of Mafia Inc. Those who backed the ordinance which sought to overturn the Supreme Court ruling that legislators sentenced for crimes carrying a sentence of two years or more in prison would lose their elected seats may have had a point. If all legislators so sentenced – a la Lalu Prasad – were to lose their seats, Parliament might well find itself so depopulated as to confront the country with a deficiency of democracy.
Pursuing this line of argument it could be reasoned that in order to safeguard our increasingly criminalised democracy, instead of making convicted legislators give up their seats, measures must be taken to ensure that sentenced MPs retain their seats, come what may. In order to do this, it would be necessary to override the SC ruling via a constitutional amendment requiring a two-third majority vote in Parliament.
Towards this laudable end, all political parties must in future field candidates with suitably impressive criminal credentials, and see to it that they get elected, by hook or by crook, quite literally. If voters in a particular constituency are so disobliging as to reject all the candidates because of their criminal records, a re-election fielding the same set of candidates should be held and a satisfactory result obtained by the tried-and-tested expedient of booth-capturing.
Eventually we would get a Parliament composed wholly of criminal elements. Such a Parliament could devise appropriate legislation to solve, once and for all, the vexatious problem of the criminalisation of politics. It would do this by using its supreme legislative authority to decriminalise not politics – not just an impossible task, but also an undesirable one, given the circumstances – but to decriminalise crime itself.
If crime, of all variety, were to be legitimised by parliamentary diktat, not just politics but all of society would at one stroke be made totally, 100% crime-free. Thanks to its uniquely innovative Parliament, India would be the first country in the world to achieve this distinction.
Henceforth, state awards and honours would be bestowed on thugs, goons and scamsters who showed the most enterprise and ingenuity in their chosen field of activity. By the same token, those displaying the reprehensible and anti-social traits of honesty and uprightness would be suitably punished for their errant ways. 8 Outlawry would be the order of the day, and dishonesty would not only be the best policy but the only policy. A Parliament full of MPs – Mafia Politicos – would ensure this. Criminals of India unite, you have nothing to lose but your crimes.
(Source: Column “Second Opinion” by Mr. Jug Suraiya in the Times of India dated 16-10-2013.)
Attrition: The ticking time bomb in industry
Attrition is a complex, cultural and leadership challenge with no easy answers. What is the impact of high attrition? It erodes consumer loyalty, hurting brand reputation. High attrition creates a vacuum at middle-management, which should handle execution.
Attrition creates a middle management that’s tasted neither success nor failure. Weak middle management delivers faulty, corner-cutting processes. It forces senior management to work a level lower, forsaking the bigger picture. A weak middle management means poor mentorship of entry-level managers, hurting long-term leadership development.
Why do we see high attrition? The first is economic; new industries open up when GDP grows faster than 5%. Talent in established industries is raided to staff newer industries. FMCG is the talent bank in India, funding telecom, retail, health and entertainment industries.
The next reason is “hurried aspiration.” Everyone is in a hurry to be a young vice-president or a CEO, to own the latest car and television or to take that exotic holiday. This forces people to take risks with their loans, and anyone with an EMI payment greater than 25% of his takehome salary is constantly in the job market, to reduce that to below 10%. Hurried aspiration is fuelled by average headhunters who create insecurity and peer pressure by transacting CVs between managers and firms. Performance evaluation is loose and incomplete, based more on potential and less on merit.
What do Indians value at work? The top five factors are: job security, career advancement, base pay and title, learning and development, and the reputation of the organisation. A company must grow. If it doesn’t, people leave. Learning and development is the Achilles’ heel in India. Companies do not invest much in training and developing talent: this is the first reason quoted by exiting employees. The cost of training and development is minuscule, but it is the first item cut in tough times. On-the-job learning from leaders is something young people value. Leaders in India must coach young employees; this will lead to higher engagement, better performance and lower attrition.
Culturally, we need to change. We should value contracts, which we don’t do today. Our contracts are social in nature and less legal or economic. Employees will need a moral compass of right and wrong: joining competition, refusing to join a new firm at the last minute, burning bridges and so on.
Companies will need to be flexible, using innovative policies for women, building alumni networks and designing customised career paths. Firms must differentiate on merit early to keep top talent. They should build a stronger middle-management pool by rewarding those who stay. Senior leaders must engage, coach and grow talent. Firms should start learn-and earn internships.
(Source: Extracts from an Article by Mr. Shiv Shivakumar in The Economic Times dated 23-09-2013).
On Delay and Dither
Strategic decisiveness is one of the most vital success attributes for leaders in every position and every industry, but few leaders understand where it comes from or how to find more of it. It is not surprising that picking one strategic direction and then decisively pursuing that direction are hallmarks of good leadership… The big mystery is why these obviously important skills are still rare enough to distinguish excellent leaders from average managers.
Psychologist Georges Potworowski at the University of Michigan found that certain personality traits —such as emotional stability, self-efficacy, social boldness and locus of control — predict why some people are naturally more decisive than others.
When faced with two equally attractive strategic options, timid, less emotionally stable leaders who fear upsetting anyone will let the debate drag on for weeks or months before selecting a compromised Frankenstein solution that both sides can merely tolerate.
More decisively-gifted managers make it clear from the beginning that they will carefully consider both sides of the argument, but will choose what they judge to be best for their team. They make the decision early on, and move quickly to enlist both sides in executing their decision. Some members of the team are not thrilled with the choice but are quietly pleased to finally have some clarity of direction… All of us have the potential to be decisive or indecisive.
(Source: Extracts from “Just Make a Decision Already” by Nick Tasler : The Economic Times dated 10-10-2013).
From anxiety to complacency in six weeks?
Hardly six weeks ago a sense of grim crisis pervaded India’s economic policy-making circles and much of the public at large. The underlying causes are well known: the post-2011 collapse of growth and investor confidence, major problems in the infrastructure and energy sectors, persistently high inflation, shrinking job opportunities, and large fiscal and external account deficits. The alarm bell that had most strongly signalled (and reflected) the onset of economic crisis was the plummeting value of the rupee, which had dropped from 53-54 to the US dollar in May to nearly 69 by end-August. The rupee’s free fall had occurred despite a wide range of measures to reduce gold imports, restrict external payments and drastically tighten monetary policy.
As the currency and financial markets recovered, the sense of crisis and urgency dissipated swiftly. By early October senior government officials were reportedly exuding confidence. Let us consider the realism of these official macroeconomic expectations.
A significant question is: how much has this decline in gold imports through official channels been substituted by an increase in smuggled gold? Another major imponderable is the impact of the ongoing US government shutdown and possible failure to raise the debt ceiling. On the one hand, such uncertainties are likely to prolong current levels of QE and, thus, ease the financing of India’s current account deficit. On the other, a significant setback to US and global economic activity could damp exports of goods and services and reignite global financial turmoil. It is impossible to assess the net effects on India’s external accounts at this stage.
The government’s expectation of 5.5 per cent growth this year looks decidedly optimistic. Aside from a good, monsoon-propelled performance in agriculture (which accounts for only 15 per cent of India’s GDP) and a modest recent uptick in some core sectors (from depressed levels) and some exports, it is hard to locate signs of a significant resurgence in economic activity.
The most implausible element in the finance ministry’s present confident/complacent macro expectations pertains to the fiscal deficit target of 4.8 per cent of GDP. In sum, the fiscal deficit could be overshot by a significant margin by the time the fiscal year ends. In the first five months of 2013-14, the Centre’s fiscal deficit ratio has been running at a whopping 8.7 per cent of GDP. Bringing it down to 4.8 per cent in the remaining seven months looks impossibly difficult, without recourse to seriously creative accounting ploys.
In any case, it is worth pointing out that a deficit that stays high through most of the year imposes the associated costs of higher inflation, higher interest rates, more crowding out of private investment and greater pressure on the current account deficit during the period, even if “miraculously” corrected in the final months. It is also worth emphasising that if the months unfold without any serious policies to correct the deficit, there is a growing risk of negative external perceptions (including a possible credit rating downgrade), which could have serious adverse consequences for external financing of the current account deficit and for currency markets.
In other words, India’s macroeconomic condition remains quite shaky and certainly does not warrant an iota of complacency. This is doubly true if one considers the available patchy data on employment trends, which point to miserable job prospects for the country’s burgeoning youth population.
(Source: Extracts from an Article by Mr. Shankar Acharya in the Business Standard dated 09.10.2013)
Managing humanely
In the half century since Peter Drucker coined the term “knowledge workers”, these employees have become not just an important part of the workforce but the dominant part. The two critical drivers of productivity in any production process are the way the work is structured and the company’s ability to capture the lessons of experience. These drivers are, of course, interdependent: how you structure the work influences your ability to learn from it. In decision factories, a mismatch between the reality of work and the way it is structured leads directly to inefficiencies in allocating knowledge work. Knowledge work actually comes primarily in the form of projects, not routine daily tasks… Knowledge workers experience big swings between peaks and valleys of decision-making intensity. That VP of marketing will be busy during the launch of an important product or when a competitive threat arises — and really, really busy if the two overlap. Between these spells, however, she will have few or even no decisions to make, and she may have little to do but catch up on emails… All managers in all areas tend to staff for what they perceive as the peak demand for knowledge work in their area of responsibility.
This institutionalises a significant level of excess capacity spread in small increments throughout decision factories. That is why decision factory productivity is a persistent modern challenge.
(Source: Extracts from “Rethinking the Decision Factory” by Roger Martin : The Economic Times dated 24-09-2013).
Government for governors – We are on our way to creating Djilas’ New Class
Abraham Lincoln, in his Gettysburg address, talked beguilingly of “government of the people, for the people, by the people”. We could describe the system that we have developed as government of the governors, for the governors, and by the governors. Exhibit 1 in support is the Cabinet’s decision to issue an ordinance that will protect Lalu Prasad from losing his seat in the Lok Sabha, should a court find him guilty of corruption in the fodder scam case. A Bill that would protect everyone in Mr Prasad’s shoes has already been moved in Parliament, and got pushed to committee because no one was sure it would stand being tested in court. Still, with the Bill before Parliament, there was only one reason for an ordinance – to protect someone who did not have time on his side, namely Mr Prasad. That smells very much like government for the governors.
Exhibit 2 is the decision to allow designated members of three all-India services (including the Indian Administrative Service and the Indian Police Service) to go overseas for medical treatment, accompanied by a family member, at government cost. Why the police, and not the armed forces, one could ask. After all, soldiers face enemy bullets. And why an IAS officer who may be in the department of mines, and not India’s most important space or nuclear scientist? What’s different about the IAS and IPS? There’s only one answer: they are the guys who move the files and get them approved. Poor generals and scientists have no say in the matter. Once again, government of, for and by the governors.
What is particularly galling is that the same officers responsible for failing to provide a proper public health system have managed their own escape from the mess they have created. First they gave themselves access to private hospitals, and now it is hospitals in other countries. What about people waiting for a bed in government hospitals? Well, tough luck, you don’t belong to the IAS, so you can’t go at taxpayer’s expense to Sloan-Kettering.
Then consider the Member of Parliament Local Area Development Scheme (MPLADS), allowed to members of Parliament for spending on local area development. First, this violates the principle of separation of powers – elected representatives legislate, debate and ask questions; the executive that answers to these elected representatives proposes and implements spending programmes. Second, it started as Rs. 1 crore per constituency each year, then grew to Rs. 2 crore and Rs. 5 crore – for each of nearly 800 MPs every year, which means Rs. 20,000 crore every five years. It is an open secret that the scheme is open to misuse, but who is to bell the cat?
Exhibit 4 is the latest announcement on a pay commission for eight million central government employees and pensioners. Everyone knows that, at the lower levels of government, pay packages are well above what the market pays. These are not people who should get another pay hike, especially when the fiscal deficit is too large. On the other hand, there is a case for paying more at senior levels, because private sector salaries are way ahead and the gap needs to be narrowed. But for that you don’t need a pay commission. Remember that Rajiv Gandhi simply ordered a special allowance for officers on the top rung, because they had not got a pay hike in 30 years. But the government takes care of its own, and also wants votes; so we have a pay commission.
One could add other examples; eg, politicians already spend large sums on airports that only they use. So why not go all the way to creating Milovan Djilas’ New Class, and have exclusive dachas, special lanes for their cars … the works?
A. P. (DIR Series) Circular No. 62 dated 10th October, 2013
Notification No.FEMA.288/2013-RB dated 26th September, 2013
Closing of Old Outstanding Bills: Export-Follow-up –XOS Statements
This circular, as a onetime measure, permits banks to close the following old export bills:
1. Upto INR6,183,871 and outstanding beyond 15 years as on 31st December, 2012.
2. Upto INR3,091,936 and outstanding for more than 5 years as on 31st December, 2012, where customers not traceable – subject to proof of nontraceability from the competent authority and under bank’s internal board’s approved policy. Banks have to submit a report of the export bills so closed, to the Regional Office of RBI in the format Annexed to this circular.
This facility can be availed by an exporter:
1. Against whom there is no pending civil suit/ criminal suit;
2. Who has not come to the adverse notice of the Directorate of Enforcement (DoE)/Central Bureau of Investigation (CBI)/Directorate of Revenue Intelligence (DRI)/any such other law enforcement agency;
3. Who has no externalisation problems with the export recipient country.
A. P. (DIR Series) Circular No. 61 dated 10th October, 2013
Overseas Foreign Currency Borrowings by Authorised Dealer Banks
Presently, banks can borrow funds from their Head Office, overseas branches and correspondents and also avail overdraft in the nostro accounts up to a limit of 100% of their unimpaired Tier I capital as at the close of the previous quarter or INR618 million (or its equivalent), whichever is higher (excluding borrowings for financing of export credit in foreign currency and capital instruments).
This circular, in addition to the above lenders, permits banks to borrow from any other entity as permitted by RBI up to hundred per cent of its unimpaired Tier I capital or INR618 million, whichever is higher, subject to such conditions as may be
A. P. (DIR Series) Circular No. 60 dated 1st October, 2013
Export Outstanding Statement (XOS) – Online Bank wide Submission
Presently, banks are required to furnish a consolidated statement in Form XOS giving details of all export bills outstanding beyond six months from the date of export on a half yearly basis as at the end of June and December every year to the concerned Regional Office of RBI.
This circular states that with effect from the half year ending December 2013, XOS has to be submitted online and Bank-wide with RBI, instead of the present system of branch-wise submission through the respective Regional Offices of RBI. For this purpose Banks have to designate a Nodal Branch which will submit the XOS data online for the Bank as a whole to RBI.
A. P. (DIR Series) Circular No. 59 dated 30th September, 2013
External Commercial Borrowings (ECB) Policy – Refinancing/Rescheduling of ECB
Presently, borrowers could refinance under the Approval Route, upto 30th September, 2013, an existing ECB by raising fresh ECB at a higher all-in-cost /reschedule an existing ECB at a higher all-in-cost. However, the enhanced all-in-cost must not exceed the current all-in-cost ceiling.
This circular states that: –
a. With effect from 1st October, 2013, borrowers cannot refinance an existing ECB by raising fresh ECB at a higher all-in-cost/reschedule an existing ECB.
b. Borrowers can refinance their existing ECB by raising fresh ECB at lower all-in-cost, provided that the outstanding maturity of the original ECB is either maintained or extended, either under the automatic route and approval route as the case may be.
A. P. (DIR Series) Circular No. 57 dated 30th September, 2013
External Commercial Borrowings (ECB) Policy – ECB proceeds for acquisition of shares under the Government’s disinvestment programme of PSUs – Clarification
This circular clarifies that ECB can be availed of for multiple rounds of disinvestment of PSU shares under the Government disinvestment programme.
A. P. (DIR Series) Circular No. 54 dated 25th September, 2013
Overseas Foreign Currency Borrowings by Authorised Dealer Banks – Enhancement of limit
This circular has modified the minimum maturity period for all fresh foreign currency borrowings by Authorized Dealers as under: –
1. Borrowings made on or before November 30, 2013 for the purpose of availing of the Swap facility from RBI – the minimum maturity period has been reduced from 3 years to 1 year.
2. Borrowings made after 30th November, 2013: –
a. Up to 50% of their unimpaired Tier I capital – the minimum maturity period can be 1 year.
b. Beyond 50% of their unimpaired Tier I capital – the minimum maturity period has to be 3 years.
A. P. (DIR Series) Circular No. 53 dated 24th September, 2013
Trade Credits for Import into India
Presently, companies in the infrastructure sector can, subject to certain terms and conditions, avail trade credit not exceeding INR1,237 million up to a maximum period of 5 years (from the date of shipment). However, the trade credit so availed must abinitio be contracted for a period not less than 15 months and should not be in the nature of shortterm roll overs.
This circular permits all companies in all sectors to avail trade credit not exceeding INR1,237 million up to a maximum period of 5 years for import of capital goods as classified by Director General of Foreign Trade (DGFT). Further the abinitio period of contract for availing the trade credit has been reduced from 15 months to 6 months. However, banks cannot issue Letters of Credit/Guarantees/Letter of Undertaking /Letter of Comfort in favour of overseas supplier, bank and financial institution for the extended period beyond three years.
S. 37(1) — Amount spent on the prizes given under the lottery system allowed as business expenditure
11 Eyetech Industries v.
ACIT
ITAT ‘G’ Bench, Mumbai
Before J. Sudhakar Reddy (AM) and
P. Madhavi Devi (JM)
ITA No. 1799/Mum./2005
A.Y. : 2001-02. Decided on : 31-7-2008
Counsel for assessee/revenue : N. R. Agarwal/
B. K. Singh
S. 37(1) of the Income-tax Act, 1961 — Business expenditure
— Amount spent on the prizes given under the lottery system allowed as
business expenditure.
Per P. Madhavi Devi :
Facts :
The assessee was trading in eye-testing equipments. During
the year under appeal it had claimed Rs.7.68 lacs as expenditure incurred
towards sales promotion campaign. The same was explained thus: The assessee
conducted lottery at the exhibition centre from 11-3-2000 to 15-1-2001. As per
the scheme, the purchaser of the assessee’s products during the defined period
was entitled to a lottery ticket. At the annual optical fair, a lucky draw was
announced in which three lucky winners were given the prizes. According to the
AO, this was a lottery business not related to the business of the assessee.
Hence, he disallowed the expenditure claimed. On appeal, the CIT(A) confirmed
the addition.
Held :
The Tribunal agreed with the assessee that the expenditure
was to attract customers and to encourage them to purchase the assessee’s
products. It disagreed with the AO who held such activity of the assessee as
in the nature of gambling. Accordingly, the expense claimed was allowed by the
Tribunal.
à
The flat in question was exclusively used for the purpose of the business of
the assessee. It was used for accommodating the business executives of various
suppliers, who visited the assessee’s shop for business purpose. Apart from
that, some senior staff of the assess was also residing in the flat;
à
No rent was paid by the assessee for the use of the flat;
à
The assessee had substantial amount of interest-free funds during both the
years under appeal;
à
The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.
In view of the above, the Tribunal upheld the order of the
CIT(A).
(iii) In the case of SCM Creation, which was the intervener
in the case of Rogini Garments before the Special Bench of Chennai Tribunal,
the Madras High Court relying on its own decision in the case of V.
Chinnapandi, had allowed the appeal filed by the assessee;
(iv) The Bombay High Court in the case of Nima Specific
Family Trust, which decision was again based on the decision of the M. P. High
Court in the case of J. P. Tobacco Products Pvt. Ltd., had held that both the
Sections were independent and hence, deduction could be claimed on the gross
total income, subject to ceiling of 100%.
Cases referred to :
1. Ifunik Pharma Ltd. (ITA No. 4389/M/02);
2. CIT v. V. Chinnapandi, (2006) 282 ITR 389 (Mad.);
3. J. P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR
123 (M.P.);
4. SCM Creation (Tax case Appeal No. 310 & 311 of 2008 —
Madras High Court);
5. Nima Specific Family Trust, 248 ITR 291 (Bom.)
6. ACIT v. Rogini Garments, (2007) 108 ITD 49 (SB)
(Chennai)
Whether stock exchange membership card acquired after 1-4-1998 represents a commercial right/intangible asset and qualifies for depreciation u/s.32 — Held, Yes.
10 K. Damani Securities Pvt. Ltd.
v. ITO
ITAT ‘C’ Bench, Mumbai
Before G. E. Veerabhadrappa (VP) and
G. C. Gupta (JM)
ITA No. 2568/M/04
A.Y. : 2001-02. Decided on : 22-10-2007
Counsel for assessee/revenue : Hiro Rai/
B. K. Singh
Whether stock exchange membership card acquired after
1-4-1998 represents a commercial right/intangible asset and therefore
qualifies for depreciation u/s.32 of the Income-tax Act, 1961 — Held, Yes.
The assessee claimed depreciation on membership card of
Bombay Stock Exchange, acquired after 1-4-1998. The Assessing Officer did not
allow the claim of the assessee. The CIT(A) upheld the action of the Assessing
Officer. The assessee preferred an appeal to the Tribunal. In the appeal to
the Tribunal the contention of the assessee was that membership card of Bombay
Stock Exchange represents a commercial right/intangible asset and therefore
qualifies for depreciation u/s.32 of the Act. Reliance in this connection was
placed on the decision of the Division Bench in the case of Techno Shares &
Stocks Ltd. (ITA Nos. 778, 779 and 1951/Mum./2004 decided on 4-1-2006). On the
other hand the Departmental Representative pointed out that subsequent to the
decision in the case of Techno Shares & Stocks Ltd., the Tribunal, in another
case, has set aside the issue to the file of the Assessing Officer with a
direction to allow depreciation only after he finds that there is a diminution
in the value of the asset as a result of use.
Held :
The principle that the acquisition of Bombay Stock Exchange
Card after 1-4-1998 results in acquisition of a commercial asset in the form
of an intangible asset and therefore is entitled for depreciation in the light
of the amended provisions has been accepted by both the decisions. The
Tribunal in the light of the contention of the AR that S. 32 which grants
depreciation on various conditions itself does not spell out such diminution
to be the condition for allowance of depreciation and also having regard to
the ratio of Techno Shares & Stocks Ltd. decided the issue in favour of the
assessee. The Tribunal also stated that the decision rendered in the other
case where the matter has been restored to the Assessing Officer must be taken
to have been decided on the facts that existed in that case.
- The flat in question was exclusively used for the purpose of the business of
the assessee. It was used for accommodating the business executives of various
suppliers, who visited the assessee’s shop for business purpose. Apart from
that, some senior staff of the assess was also residing in the flat;
- No rent was paid by the assessee for the use of the flat;
- The assessee had substantial amount of interest-free funds during both the
years under appeal;
- The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.
In view of the above, the Tribunal upheld the order of the
CIT(A).
(iii) In the case of SCM Creation, which was the intervener
in the case of Rogini Garments before the Special Bench of Chennai Tribunal,
the Madras High Court relying on its own decision in the case of V.
Chinnapandi, had allowed the appeal filed by the assessee;
(iv) The Bombay High Court in the case of Nima Specific
Family Trust, which decision was again based on the decision of the M. P. High
Court in the case of J. P. Tobacco Products Pvt. Ltd., had held that both the
Sections were independent and hence, deduction could be claimed on the gross
total income, subject to ceiling of 100%.
S. 37(1) — No interest held to be allowable where firm had advanced Interest free loan to a relative of a partner for purchase of a flat.
9 DCIT v. Parthas Power House
ITAT Cochin Bench
Before N. Barathwaja Sankar (AM) and N. Vijayakumaran (JM)
ITA No. 50 & 51/Coch./2007
A.Ys. : 2003-04 & 2004-05. Decided on : 12-6-2008
Counsel for revenue/assessee : T. R. Indira/
R. Srinivasan
S. 37(1) of the Income-tax Act, 1961 — Business expenditure —
Interest-free loan to a relative of a partner for purchase of a flat — The flat
used for the purpose of the business of the assessee — Whether AO justified in
disallowing interest paid by the assessee — Held, No.
Per N. Barathwaja Sankar :
Facts :
One of the issues before the Tribunal was regarding the
allowability of interest paid by the assessee. During the years under appeal,
the assessee had paid the sum of Rs.25.23 lacs to a builder towards the cost of
a flat purchased by the wife of the partner. In addition the assessee had also
paid interest of Rs.15.53 lacs on behalf of the said person to HDFC for the loan
received by her for the said flat. According to the AO, the assessee to the
extent of the said advances had diverted its fund for non-business purpose.
Therefore, he disallowed interest amount equal to the sum computed @ 14% of the
said advance. On appeal, the CIT(A) deleted the additions made by the AO.
Held :
The Tribunal noted the following facts considered by the
CIT(A) :
à
The flat in question was exclusively used for the purpose of the business of
the assessee. It was used for accommodating the business executives of various
suppliers, who visited the assessee’s shop for business purpose. Apart from
that, some senior staff of the assess was also residing in the flat;
à
No rent was paid by the assessee for the use of the flat;
à
The assessee had substantial amount of interest-free funds during both the
years under appeal;
à
The AO was unable to pinpoint as to which part of the interest-bearing funds
had been diverted.
In view of the above, the Tribunal upheld the order of the
CIT(A).
(iii) In the case of SCM Creation, which was the intervener
in the case of Rogini Garments before the Special Bench of Chennai Tribunal,
the Madras High Court relying on its own decision in the case of V.
Chinnapandi, had allowed the appeal filed by the assessee;
(iv) The Bombay High Court in the case of Nima Specific
Family Trust, which decision was again based on the decision of the M. P. High
Court in the case of J. P. Tobacco Products Pvt. Ltd., had held that both the
Sections were independent and hence, deduction could be claimed on the gross
total income, subject to ceiling of 100%.
Cases referred to :
1. Ifunik Pharma Ltd. (ITA No. 4389/M/02);
2. CIT v. V. Chinnapandi, (2006) 282 ITR 389 (Mad.);
3. J. P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR
123 (M.P.);
4. SCM Creation (Tax case Appeal No. 310 & 311 of 2008 —
Madras High Court);
5. Nima Specific Family Trust, 248 ITR 291 (Bom.)
6. ACIT v. Rogini Garments, (2007) 108 ITD 49 (SB)
(Chennai)
Maharashtra Apartment Ownership Act
Introduction
The Maharashtra Apartment Ownership Act, 1970 (“the MAOA”) has been enacted to provide for the ownership of an individual apartment in a building and to make such apartment heritable and transferrable property. In the State of Maharashtra, three entities are possible for an association of the unit/flat owners in a building – a cooperative society, a company or a condominium. While the Maharashtra Flat Ownership Act deals with flats in a co-operative society or a company, the MAOA deals with apartments in a condominium, also popularly known as condos. The fundamental difference between the two is that while in the case of MOFA, the title to the land and building vests in the society/company and in the case of MAOA, all the apartment owners have a common undivided interest in the land and building.
Currently, several new projects in and around Mumbai have preferred a condominium structure since it does not involve the hassles associated with a society. Even across India condos are popular. In fact, in several places across India, one finds very few societies. Several Southern States have a practice where the builder conveys interest in land and apartment separately to the buyer. This is done under a condominium structure.
The MAOA applies only to property, the sole owner or all the owners of which submit the same to the provisions of the Act by duly executing and registering a Declaration in the prescribed format. However, no property shall be submitted to the provisions of MAOA, unless it is used for residence, office, practice of any profession or for carrying on any occupation, trade or business or for any other type of independent use. Section 10 of the MOFA expressly provides that it does not apply to property in which the apartment takers propose to submit the apartments to the MAOA. In such cases, a co-operative society or a company cannot be formed.
The owner of the land may submit such land to the provisions of MAOA with a condition that he shall grant a lease of such land to the apartment owners.
Important Definitions
The MAOA lays down certain important definitions.
Apartment
Apartment has been defined to mean a part of the property intended for any type of independent use, including one or more rooms or enclosed spaces located on one or more floors in a building, intended to be used for residence, office, profession, business, other type of independent use, etc., and with a direct exit to a public street, road or highway or to a common area leading to such street, road or highway.
Building has been defined to mean a building containing 5 or more apartments, or 2 or more buildings, each containing 2 or more apartments, with a total of 5 or more apartments for all such buildings, and comprising a part of the property.
Apartment Owner
An apartment owner has been defined to mean the person owning an apartment and an undivided interest in the common areas and facilities. This is one of the important features of a condo that the owner has an undivided interest in the common areas and the facilities. Common areas have been defined to mean:
(a) the land on which the building is located;
(b) the foundations, columns, girders, beams, support, main walls, roofs, halls, corridors, lobbies, stairs, stairways, fire-escapes and entrances and exits of the building;
(c) the basements, cellars, yards, gardens, parking areas and storage spaces ;
(d) the premises for the lodging of janitors or persons employed for the management of the property;
(e) installations of central services, such as power, light, gas, hot and cold water, heating, refrigeration, air conditioning and incinerating;
(f) the elevators, tanks, pumps, motors, fans, compressors, ducts and in general all apparatus and installations existing for common use;
(g) such community and commercial facilities as may be provided for in the Declaration; and
(h) all other parts of the property necessary or convenient to its existence, maintenance and safety, or normally in common use; Thus, the apartment owners are the legal and beneficial owners of their individual flats under the MAOA whilst under a society structure, the flat owners only own shares of the society which entitle them to occupancy rights over the flat.
Thus, the flat is legally owned by the society but beneficially occupied by the flat owner. Although in essence the effect is the same, in Law, there is a difference between the two structures.
Association of Apartment Owners
This is an association of the owners of all the apartments acting as a group in accordance with the bye-laws and Declaration. At least 5 apartments are required to form an association as compared to 10 members to form a society under MOFA.
The Declaration must be in Form A and shall be signed by the apartment owner in the presence of a Magistrate and shall be filed with the Registrar of Co-operative Societies within 30 days from the date of its execution.
The Declaration must contain various clauses, including the following important ones:
(a) Description of the common areas and facilities;
(b) Description of the limited common areas and facilities, if any, stating to which apartments their use is reserved;
(c) Value of the property and of each apartment, and the percentage of undivided interest in the common areas and facilities appertaining to each apartment and its owner for all purposes, including voting; and a statement that the apartment and such percentage of undivided interest are not encumbered in any manner whatsoever on the date of the Declaration;
(d) Statement of the purposes for which the building and each of the apartment are intended and restricted as to use;
(e) Provision as to the percentage of votes by the apartment owners which shall be determinative of whether to rebuild, repair, restore or sell the property in the event of damage or distinction of all or part of the property.
A copy of this Declaration needs to be fled with the Registrar of Co-operative Societies. The association would elect from among the apartment owners a Board of Managers. Subject to the bye-laws of the association, the Board may engage the services of a Secretary, a Manager or Managing Agent.
One difference between this association and a society is that usually the bye-laws of the association do not provide that a transfer of an apartment requires its permission. The bye-laws of a society require its prior permission before any transfer. This coupled with the transfer fees/donations, has been the subject-matter of perennial disputes in the case of cooperative societies. Hence, an association scores over a society in this respect.
Apartment Ownership
Each apartment owner is entitled to the exclusive ownership and possession of his Apartment. Each apartment owner shall execute a Deed of Apartment in relation to his apartment. Deeds of apartments shall include the followings particulars namely:-
(a) Description of the land, including the libber, page and date of executing the Declaration, the date and serial number of its registration and the date and other reference, if any, of its filing with the Registrar of Cooperative Societies.
(b) The apartment number of the apartment.
(c) Use for which the apartment is intended and restrictions on its use, if any.
(d) The percentage of undivided interest appertaining to the apartment in the common areas and facilities. A copy of every Deed of Apartment shall be filed with the Registrar of Co-operative Societies.
The first as well as subsequent transfers of apartments by owners must be by way of a Deed of Apartment only.
Common Areas and Facilities
Each apartment owner is entitled to an undivided interest in the common areas and facilities in the percentage expressed in the declaration. Such percentage shall be computed by taking as a basis the value of the apartment in relation to the value of the property; and such percentage shall reflect the limited common areas and facilities. This is one of the main distinguishing feature of a condominium as compared to a society. In a society, it is the society which has undivided interest over the common areas. The flat occupants only have a right to use them whereas under a condo structure, they have an undivided right over these areas.
The interest of each owner in the common areas and facilities is undivided and no one can claim a partition or division of the same.
However, each apartment and its percentage of un-divided interest in the common areas and facilities appurtenant to such apartment shall be deemed to be separate property for the purpose of assessment to property tax. Neither the building, the property nor any of the common areas and facilities shall be deemed to be separate property for the purposes of the levy of such property tax.
Common Profits and Expenses
The common profits of the property after meeting the common expenses must be distributed among the apartment owners according to their percentage undivided interest in the common area and facilities. Common expenses has been defined to mean:
(a) all sums lawfully assessed against the apartment owners by the Association of Apartment Owners;
(b) expenses of administration, maintenance, repair or replacement of the common areas and facilities ;
(c) expenses agreed upon as common expenses by the Association of Apartment Owners ;
(d) expenses declared as common expenses by the provision of the MAOA, or by the Declaration or the bye–laws.
Encumberances against Apartments
After recording the Declaration, no encumbrance can arise or be effective against the property. During such period encumbrances may be created only against each apartment and the percentage of undivided interest in the common areas and facilities appurtenant to such apartment. However, no apartment and percentage of undivided interest shall be partitioned or sub-divided in interest.
Even if some labour has been performed or material furnished that shall not be the basis for a charge or any encumbrance under the provisions of the Transfer of Property Act, 1882, against the apartment of any other property or any other apartment owner not expressly consenting to or requesting the same, except that such express consent shall be deemed to be given by the owner of any apartment in the case of emergency repairs.
In the event of a charge or any encumbrance against two or more apartments becoming effective, the apartment owners of the separate apartments may remove their apartments and the percentage of undivided interest in the common areas and facilities appurtenant to each apartments from the charge or encumbrance by payment of the fractional or proportional amounts attributable to each of the apartments affected. Such individual payment shall be computed by reference to the percentages appearing in the Declaration.
Damage/Destruction of Property
If within 60 days of the date of damage or destruction to all or part of the property, it is not determined by the Association of Apartment Owners to repair, reconstruct or rebuild, then:
(a) the property shall be deemed to be owned in common by the apartment owners;
(b) the undivided interest in the property owned in common which shall appertain to each apartment owner shall be the percentage of the undivided interest previously owned by such owner in the common areas and facilities;
(c) any encumbrances affecting any of the apartments shall be deemed to be transferred in accordance with the existing priority to the percentage of the undivided interest of the apartment owner in the property;
(d) the property shall be subject to an action for partition at the suit of any apartment owner, in which event the net proceeds of sale together with the net proceeds of the insurance on the property, if any, shall be considered as one fund and shall be divided among all the apartment owners in percentage after first paying out, all the respective shares of the apartment owners to the extent sufficient for the purpose and all charges on the undivided interest in the property owned by each apartment owner.
Conclusion
The MAOA is a noble concept since more and more flat owners are feeling that the co-operative society is actually a noncooperative entity. The time has come for an increasing number of buildings to consider the MAOA as a worthy alternative to the MOFA.
Will – Registration – Effect: Registration Act section 41(2)(a)
Snehlata Bhandari (Smt.) vs. State of UttarakhandAIR 2013 Uttarakhand 94
Appellant No. 1 is the widow of Pradeep Singh Bhandari and appellant No. 2 is the son of Pradeep Singh Bhandari. Pradeep Singh Bhandari was the son of G.S. Bhandari. G.S. Bhandari predeceased his wife Smt. Durga Devi Bhandari. After the death of Smt. Durga Devi Bhandari, respondent No.3, the daughter of G.S. Bhandari, purported to present a Will, allegedly executed by Smt. Durga Devi Bhandari, for registration before respondent No. 2, Sub-Registrar (Second), Haldwani. Respondent No. 2 has registered the said Will. Challenging the said registration, a writ petition was filed. In that, amongst others, it was contended that, in terms of the provisions of section 169 of The Uttar Pradesh Zamindari Abolition and Land Reforms Act, 1950, the subject Will was required to be registered by the Testator herself.
The question, whether, by the Will, bhumidhari right has been transferred or not, has not yet arisen. The same will arise only when, on the strength of the Will, the alleged beneficiary thereunder will seek a direction for transfer of the bhumidhari right of the Testator in her favour. The court has not gone into the question at this stage, that whether, by reason of Section 1 69 of The Uttar Pradesh Zamindari Abolition and Land Reforms Act, 1950, read with section 17(1)(f) of the Registration Act, 1908, it was a requirement for the Testator herself to register the Will or not, inasmuch as, by and under the purported Will, the Testator purportedly devised also those properties, which cannot be called bhumidhari rights. Inasmuch as the Will cannot be truncated into two or scissored, one in respect of the bhumidhari rights and the other in respect of the other rights, the court dealt only with question as to whether the Registrar, in the matter of registering the Will in question, acted in excess of his authority
Under Clause (a) of s/s. (2) of section 41 of The Registration Act, 1908, the Registrar had the obligation of satisfying that the Will, or the instrument purporting to be Will, was executed by the testator. If the Registrar was satisfied about the execution of the purported Will by the testator, he certainly could register the Will. The satisfaction of the Registrar that the Will was executed by the testator is no certificate that the same was executed in fact by the testator. At the same time, registration of a Will does not give more authenticity to the Will. An unregistered Will or a registered Will has no difference. A Will come into force only when the same is accepted by a competent court to be a Will executed by the testator, who is supposed to have executed the same.
Stamp – Improperly stamped document – Evidentiary Value: Stamp Act, 1899 section 35
Mahant Krishna Giri Chela Mahant Vikam Giri vs. Deepa Devi (Smt.) w/o Govind Singh AIR 2013 Uttarakhand 93
Before the trial Court the plaintiff filed paper no. 92-C under Order 13, Rule 3 C.P.C. with a prayer that the alleged agreement for sale filed by the defendant in suit is neither properly stamped nor is it a registered document therefore, the document cannot be admitted in evidence. The application was opposed by the defendant. The learned trial Court did not find favour with the plaintiff-petitioner and dismissed the application 92-C by order dated 22-10-2012, which was assailed by the plaintiff before the District Judge in revision.
The learned revisional Court also did not find favour with the plaintiff and dismissed the revision. Learned counsel for the petitioner has contended that the alleged document (paper no. 30-A), which was filed by the defendant before the trial Court is neither duly stamped nor the same is a registered document, therefore, such a document would not be admissible for collateral purpose. In support of his argument, learned counsel has placed reliance upon the case of Avinash Kumar Chauhan vs. Vijay Krishna Mishra [AIR, 2009, Supreme Court, 1489. In the case at hand, the alleged document (paper no. 030-A) is undisputedly not properly stamped. Moreover, since the learned trial Court in the impugned order has held that the document can be read in evidence for collateral purpose even without properly stamped, the Court was of the view that the approach of the learned trial Court is not proper and this finding is clearly perverse.
The impugned orders passed by the Civil Judge (Senior Division) as well as the order passed by the revisional Court are liable to be set aside in view of the Apex Court verdict in the case of Avinash Kumar Chauhan (supra) and it is held that if the document is under-stamped that cannot be read in evidence for collateral purpose.
Gift Deed – Registration – Mohammedan Law: Registration Act 1964, section 17: Transfer of Property Act 1882, section 129.
Asgar Ali vs. Tahir Ali AIR 2013 MP 151
A petition was filed challenging the order dated 17-11-2012, whereby the application of the defendant preferred u/s. 17 of the Registration Act was allowed by the lower court.
The petitioner/plaintiff instituted a suit for eviction. During pendency of the suit, the respondents/ defendants preferred an application before the trial Court stating that the gift deed in question dated 01-04-1970 is inadmissible in evidence for want of its registration u/s. 17 of the Registration Act.
In turn, petitioner/plaintiff submitted a reply to the defendant’s application denying the averments and pleaded that the gift of immovable property under the Muslim Law requires no registration. The essential requirements of oral gifts are present in the gift in question and therefore, the said application needs to be rejected.
The trial Court after hearing both the parties, allowed the said application and opined that the will dated 01-04-1970 cannot be taken into evidence in absence of its registration u/s. 17(1) of the Registration Act.
The Hon’ble Court dealt with certain important facets which were considered and decided by the Supreme Court in Hafeeza Bibi & Ors vs. Shaikh Farid (dead) by LRs AIR 2011 SC 1695. In no uncertain terms, it has made it clear that in the Mohammedan Law, for the purpose of determining gift or Hiba, three essential ingredients must be there. These are — (i) declaration of the gift by the donor, (ii) acceptance of the gift by the donee, and (iii) delivery of possession. The aforesaid three ingredients are present in the said document. The donor has given a specific declaration regarding gift, it is accepted by the donee and the possession is handed over to the donee. Now the basic question is whether in such situation the document/instrument was required to be registered under the provisions of Registration Act and whether in absence thereof it cannot be taken into account for any purpose including for the purpose of evidence. In para 29 of the judgment in Hafeeza Bibi (supra) the Apex Court opined that “the distinction that if a written deed of gift recites the factum of prior gift then such deed is not required to be registered but when the writing is contemporaneous with the making of the gift, it must be registered, is inappropriate and does not seem to us to be in conformity with the rule of gifts in Mohammedan Law.”
The entire edifice of the argument of the respondents is based on the aforesaid distinction in para 34 of the judgment of Hafeeza Bibi (supra) the Apex Court, in the facts and circumstances of the case, examined and found that the aforesaid three ingredients of declaration, acceptance and delivery are available. Then it is opined that Nasib Ali (decided by Calcutta High Court) is the correct authority. In addition, in para 31 it is mentioned that section 129 of Transfer of Property Act preserves the rule of Mohammedan Law and excludes the applicability of section 123 of T.P. Act to a gift of an immoveable property by a Mohammedan. The Supreme Court approved the statement of law reproduced in the said judgment from Mulla, Principles of Mohammedan Law (19th Edition), page 120. In other words, it is held that it is not the requirement that in all cases where the gift deed is contemporaneous to the making of the gift then such deed must be registered u/s.s 17 of the Registration Act. It is held that each case depends on its own facts. The aforesaid reasoning adopted by the court below shows that the interference is made solely on the ground that by way of will in question, the conditions of gift are written for the first time and the said will does not contain any recital or mention of earlier oral Hiba. At the cost of repetition, it is apt to mention that in Hafeeza Bibi (supra), the Apex Court has made it clear that in all cases where the gift deed is contemporaneous to the making of the gift then such gift must be registered u/s. 17 of the Registration Act, is not a rule of thumb. Each case needs to be considered on its own facts. In the light of the judgment in Hafeeza Bibi (supra), the view of court below runs contrary to the legal position settled in Hafeeza Bibi (supra). It is also relevant to note that the Apex Court by following the judgment in Nasib Ali (supra) allowed the appeal and set aside the judgment of High Court.
Consequently, the impugned order cannot be permitted to stand.
Bar Rooms-Library– Facilitates to Advocates – Advocates are officers of court – Duty of State Government to pay electricity bills of Bar rooms. [Constitution of India; Advocates Act, section 7(b)].
Vinod Kumar Bhardwaj vs. State of M.P. AIR 2013 M.P. 145
A Public Interest Litigation has been filed by a Senior Advocate in representative capacity for issuance of a direction to the State to the effect that the electricity charges of electricity consumed in the Bar Association Rooms or Rooms provided by the Court to the members of the Bar Association be paid by the State Government.
The petitioner has pleaded that he is a senior Advocate practising in the District Court and High Court since a long time. More than one bar rooms have been provided by the Courts for the purpose of sitting of bar members during Court’s hours. The advocates used to sit in the bar rooms, they consult with their clients in the bar rooms and they also used to read and prepare their briefs in the bar room when they were not required to appear before the Court. It is further submitted that it is a part and parcel of the process of administration of justice and the Government has the responsibility to bear expenses for the administration of justice. However, the electricity charges of the electricity consumed in the bar room have been paid by the Bar Association and it has to be paid by the Government. It is further submitted that the Hon’ble Supreme Court is paying all the electricity charges of Bar Association Rooms. Even the Supreme Court is providing other facilities also. In other states like Rajasthan, the Government used to pay electricity charges of electricity consumed in the bar rooms. It is further pleaded that for the purpose of effective administration of justice, the Government has to provide expenditure for well equipped Bar Rooms including Library and electricity charges.
For centuries, it is a well-settled principle of law that the advocates are officers of the Court. The Dr. K. Shivaram Ajay R. Singh Advocates Allied laws Hon’ble Supreme Court in Lalit Mohan Das vs. The Advocate General, Orissa and another, AIR 1957 SC 250 has held as under:
“A member of the Bar undoubtedly owes a duty to his client and must place before the Court all that can fairly and reasonably be submitted on behalf of his client. He may even submit that a particular order is not correct and may ask for a review of that order. At the same time, a member of the Bar is an officer of the Court an owes a duty to the Court in which he is appearing. He must uphold the dignity and decorum of the Court and must not do anything to bring the Court itself into disrepute.”
The Hon’ble Court also to referred the Judgement of Apex Court in the case of Supreme Court of Bar Association and others vs. B.D. Kaushik,: (2011) 13 SCC 774 and held that it was a well-settled principle of law that the profession of an advocate is not merely a profession. The Advocates are officers of the Court, and they have their duty towards their clients and also towards the Court and an efficient and intelligent bar is necessary for the effective administration of justice. If the bar does not have proper facilities in the Court premises, then the administration of justice would be affected. It is obligatory on the part of the Government to bear electricity expenses of fans, tube-lights and bulbs and also of coolers during the summer season in the Bar Rooms of High Court, District Courts and Tehsil Courts officially provided by the Courts.
Is It Fair to Compel an Auditor of a Co-operative Society to File an FIR?
Introduction:
All readers will unanimously agree that the duties and responsibilities of audit profession have grown multifold in recent years. While ‘independence’ of an auditor has always remained a myth, – the obligations are literally endless! We have yet to familiarise ourselves with the additional burdens imposed by the new Companies Act. In the meanwhile, the new Maharashtra Co-operative Societies Act (2013) has added one more illogical provision. Now, it expressly requires an auditor to file a First Information Report (FIR) to the Police Authorities. A question naturally arises as to whether it is fair!
Statutory Provisions: In the Amended Act, in section 81, s/s. (5B), the following provisos have been added:-
‘Provided that, where the auditor has come to a conclusion in his audit report that any person is guilty of any offence relating to the accounts or any other offences, he shall file a specific report to the Registrar with a period of fifteen days from the date of submission of his audit report. The auditor concerned shall, after obtaining written permission of the Registrar, file a First Information Report of the offence. The auditor, who fails to file First Information Report, shall be liable for disqualification and his name shall be liable to be removed from the panel of auditors and he shall also be liable to any other action as the Registrar may think fit:
Provided further that, when it is brought to the notice of the Registrar that, the auditor has failed to initiate action as specified above, the Registrar shall cause a First Information Report to be filed by a person authorised by him in that behalf: Provided also that, on conclusion of his audit, if the auditor finds that there are apparent instances of financial irregularities resulting into losses to the society caused by any member of the committee or officers of the society or by any other person, then he shall prepare a Special Report and submit the same to the Registrar alongwith his audit report. Failure to file such Special Report, would amount to negligence in the duties of the auditor and he shall be liable for disqualification for appointment as an auditor or any other action, as the Registrar may think fit.”
Comment:
The scope of the Provision is too wide. What exactly is meant by the term ‘offence relating to accounts’ or ‘any other offences?
The word ‘offence’ is not defined in the Act. Even misbehaviour is an offence; smoking at a public place also is an offence!
As far as I know, initially, it was intended to cover only the frauds.
However, if in a co-operative bank, there is an internal fraud of a petty amount, it is detected and money is recovered, concerned staff is dismissed or punitive action taken, whether still an FIR is to be filed? What if the management is justifiably not willing to do so? Ultimately, it affects the goodwill of the Bank.
There could be internal ‘offences’ where a customer or outside party is not affected. Then what is the propriety of filing an FIR? What purpose will it serve? On the contrary, it may hamper the image of an organisation.
The most unfair part is – why compel an auditor to file an FIR?
The above provision is irrational and needs to be reconsidered on the following grounds: (the following points are narrated by the committee of co-operative societies – Maharashtra (committee of WIRC of ICAI) Role of Auditor is different from that of the investigator. His responsibility is to express an opinion on the financial statements prepared by the management and produced before the auditors
• He is only expected to express an opinion whether financial statements exhibit true & fair view of the state of affairs as on the balance sheet date as well as profit or loss for the period under audit.
• The auditor has to report the fraud, if any detected during the course of audit, to the management or regulators. It is the duty of the management or the regulators to take appropriate action thereon.
• Under none of the Acts where audit is statutorily prescribed, the auditors are required to file FIR after coming across any fraud during the course of audit.
• As the Chartered Accountant’s role is limited to expression of an opinion on the state of affairs, wherever such fraud cases are noticed actions in regard to the same are to be taken by the concerned regulators like Registrar of Companies, SEBI, RBI, Commissioner of sales tax etc.
• Even in case of findings by C & AG or audits conducted by Chartered Accountants u/s 619 of the Companies Act, 1956 for C & AG such actions are taken by the concerned department.
Another lacuna in the amendment Act is, it has been provided that auditor should file a specific report with the registrar within a period of 15 days of submission of report. The auditor concerned shall after obtaining written permission from the Registrar, file an FIR of the offence. Here it is pertinent to note that there is no time limit specified for the Registrar to give the permission in writing.
The auditor who fails to submit the special report to the Registrar or file an FIR shall be liable for disqualification and his name shall be removed from the panel and he shall also be liable for any action as the Registrar may think fit.
Suggestions: A suitable amendment should be made or clarification be issued relieving the auditors from this obligation of filing an FIR.
Poitu Varein, Khuda Hafiz, Alvida, Aavjo, Adios, Mr. Auditor – An Auditor’s Anguish
The new Companies Act and the draft rules are heavily skewed against the auditor. The restriction on the number of audits an auditor can do in the existing Companies Act is 20 public companies. Though the restriction has been retained at 20, the limit under the new Act will also include private companies. No major country or professional body imposes such a restriction, and this is perhaps very unique to India. It is also unique within India, since similar restrictions do not exist in the legal, medical and many other professions. Imposing an unreasonable restriction on doing business perhaps may not be constitutionally valid. Restricting the number of audits would also have a negative effect on audit quality, since typically none of the audit firms will be able to invest in talents and technology, critical for a good audit.
Under the new Act rotation of auditors will be mandatory for all companies, other than a one man company and a small company. Conceded that rotation brings about independence of auditors, but it also increases audit cost, burden for companies and in the initial years of the incumbent auditor, increases the risk of non-detection of frauds and errors. Therefore in balance the rotation requirements should not be extended to companies other than listed companies, as public interest in non-listed companies is minimal.
An auditor cannot be appointed as auditor of a company if he or his relative holds investment in a company exceeding Rs. 1 lakh. Relatives have been defined in the rules and include a long list which includes brothers and sisters. In today’s world, it would be difficult to know in which companies the brother or sister has invested in; leave aside telling them not to invest in those companies. A disgruntled brother or sister of the auditor may actually invest in various companies, rendering the auditor jobless. Therefore. the term relative needs to be redefined to include only spouse and children and other people who are financially dependent on the auditor.
The rules also prohibit the auditor from having any business relationship with the company, even if those are at arm’s length. Thus, an auditor of a telecom operator cannot use the network facility of the operator, even if the pricing is the same as any other customer. Needless to say, any transaction carried out on arms length basis must be permitted, as otherwise, it will pose serious practical problems for not only the auditors but also the companies they audit.
The reporting requirements for the auditor have been made very onerous. He is supposed to be a super human who will not only detect and report to the Central Government all frauds that have been committed against a company but also frauds that are in the process of being committed. He is also required to second guess management’s business decision and propriety of transactions. All this will require him to step into management’s shoes, which is completely against the requirement of auditing standards. Besides, if the auditor is good at doing business, why have entrepreneurs; maybe, auditors should run businesses. Given the onerous nature of the auditing profession under the new Act, this may actually be a good idea!
Interestingly, the auditor is also required to report on foreseeable losses on derivative contracts. One can understand mark to market losses, but it is difficult to understand foreseeable losses. Never mind, an auditor is not only supposed to be a super human but also one with extra sensory powers. If only the auditor knew what foreseeable losses and profits are on derivative contracts, why would he choose to be an auditor, why not a derivative trader?
After all this, if the auditor is found to be lacking in his super human and extra sensory skills, there is a lot of stringent punishment waiting for him. There could be class action suit, long years of imprisonment and debarment of the audit firm for a period of 10 years. Even if the professional misconduct was attributed to a single partner, an entire firm comprising of several thousand people, could be in trouble.
Which parent would like his children to join a profession with so many imperilments? The provisions of the Act seem to be a knee jerk reaction to the Satyam fraud and in the long run will destroy the audit profession and audit quality and will be actually counter-intuitive to the very reason why these laws were framed. One can relate this experience to an attempt at VCR repair.
One day I tore into my VCR with the intention of freeing a jammed tape. I took the VCR apart, but failed to free the jammed tape. Then, when I tried to put the VCR back together, I failed again. The tape was still jammed, and now the VCR was in pieces. If I had counted the cost before looking for a screwdriver, I would have taken the VCR to a repair shop rather than destroying it. When will we learn that, “The Road to Hell is paved with Good Intentions!”
Section A: Illustration of an audit report giving ‘Disclaimer of Opinion’
Gujarat NRE Coking Coke Ltd (Australian Subsidiary of Gujarat NRE Coke Ltd, India) (31-3-2013)
From Summary of Accounting Policies
From Summary of Accounting Policies
Going Concern
As at the reporting date the Consolidated Entity had a net loss for the period of INR4,744 million (March 2012: Net Profit of INR605 million). Included in the loss are impairment charges of INR5,189 million (refer note below on critical accounting estimate and judgment for further breakdown). The Net cash from operation for the year was INR2,405 million (March 2012 INR4,289 million). The Consolidated Entity has a net current asset deficiency of INR25,266 million (March 2012: INR5,040 million), which includes the current portion of borrowings of INR5,021 million (March 2012: INR2,267 million) and the balance INR14,362 million (March 2012: Nil) have be reclassified as Current liabilities in accordance with AASB101 on account of breach of financial covenants.
The Directors believe this in itself is not a cause of concern considering the nature of business where there are no raw materials, WIP or finished goods until such time as they are mined. Further-more once the coal is mined it is transported to nearby port for export, as such inventory holding is expected to be low. In addition to the above the current liabilities includes installments of loan payable in next 12 months and the creditors mainly comprises of capex creditors as the company continues to be in brown field expansion.
The following events in the current financial year have led to the current performance:
• Significant changes with the adverse effect on the entity have taken place during the period (i.e. a considerable decline in the prices of coking coal)
• Delays in production at both the mines
• Reduced production on account of delay in approvals
• Due to above reasons there was cash flow restraints with payment terms being of certain creditors being extended against normal terms of payment.
Notwithstanding the loss for the year and the Consolidated Entity’s deficiency in net current assets, the financial report has been prepared on the going concern basis.
The directors consider the entity to be a going concern on the basis of the following:
• An anticipated increase in production levels to around 2.3 million tonnes for the coming financial year based on detailed mine plans;
• NRE Wongawilli colliery has all the necessary approvals in place to continue mining upto 2015-2016, the company is in the process of lodging further applications to extend this for another 5-15 years.
• NRE No.1 currently has approval to extract coal from LW 5 upto September 2013 and anticipates receiving long-term approval to extract coal in December 2013.
• The necessary approvals, as described above, for Wongawilli and NRE 1 will be obtained to continue production through the 2014 FY and beyond;
• Increased revenue due to both mines being in production and the anticipated future profit-able position.
• The Company has agreed a term sheet for the introduction approximately A$66 million in new capital to the Company through a placement at 20 cents per share to Jindal Steel & Power Group (“Jindal”) subject to shareholders’ approval. As part of placement Jindal will receive 328.5 million ne shares as well as around 328.5 million unlisted transferable options which shall be exercisable for nil consideration within a period of 5 years from the date of issue of the option. In addition, the Company will make an offer to shareholders not associated with Jindal and Gujarat on a pro-rata basis one new share for every four shares held on the record date plus one attaching unlisted transferable option for every one share subscribed. The ordinary shares will be issued at the price of 20 cents per new shares and each option shall be exercisable for nil consideration within a period of 5 years from the date of issue of the option, subject to shareholders’ approval.
• Suppliers will be brought back into their credit terms and the Consolidated Entity will have ongoing support from its suppliers and creditors;
• The Company is also in an advance discussion with its existing bankers for further borrowing the $200 million:
o $140 million of the same shall held the Company in freeing up the funds utilized for capex incurred (from its own sources) in FY13 and H1FY14 which is proposed to be utilized to prepay the scheduled princi-pal repayments falling due in FY14 & FY15 under the Axis Bank syndicated facilities. The Company has received sanction for $66 million from some of the lenders; and
o $60 million would be used to part-financing the capex for Project in H1FY14 and meet-ing expenses in relation to this facility. The Company has received sanction for $10 mil-lion from one of the banks.
Sanctions from the remaining banks are expected to be in place in the next few weeks.
• The entity has prepared cash flow forecasts covering a period of more than 12 months from the date of approval of these financial statements. These indicate that the entity will meet its liabilities as they fall due.
• The entity continues to develop the two mines to secure production into the future.
In order to complete these projects the entity will have to continue to be able to sources funding by way of debt or equity. The di-rects are in the process of exploring funding opportunities and are confident of being able to secure sufficient funds to complete both mines.
Based on the above, the Directors consider the entity to be a going concern and able to meet its debts and obligations as they fall due.
Notwithstanding the above, if one or more of the planned measures doe not eventuate or are not resolved in the Entity’s favour, then in the opinion of the Directors, there will be significant uncertainty regarding the ability of the Entity to continue as a going concern and pay its debts and obligations as and when they become due and payable.
If the Entity is unable to continue as a going concern, it may be required to realise its assets and extinguish its liabilities other than in the normal course of business at amounts different from those states in the financial report.
No adjustments have been made to the financial report relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Entity not continue as a going concern.
Trade and Other Receivables
Trade receivables are recognised at original invoice amounts less an allowance and impairment for uncollectible amounts. Collectability of trade receivables is assessed on an ongoing basis. Debts which are known to be uncollectible are written off. An allowance is made for doubtful debts where there is objective evidence (such as significant financial difficulties on the part of the counterparty of default or significant delay in payment) that the group will not be able to collect all amounts due according the original terms.
Impairment of Assets
At each reporting date, the Group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to profit or loss.
The Details of impairments that have been recog-nised during the financial year is as under:
1.Impairment of Land & Building in Gujarat NRE
Properties Pty Ltd. $5.50 million
2. Impairment of Investments $11.58 million
3. Impairment of Cethana $5.25 million
4. Impairment of Mining Assets $61.46 million
Impairment of Mining Assets – $61.46 Million
The Company undertook review of the carrying value of its assets to assess for impairment, if any, as there were the following indicators:
• the carrying amount of the net assets of the entity is more than its market capitalisation
• significant changes with an adverse effect on the entity have taken place during the period (i.e. a considerable decline in the prices of coking coal)
• Delays in production due to outstanding ap-provals
• Cash flow restraints.
The Company accordingly appointed Geos Mining (Geos) to carry out an independent valuation of the assets. Geos provided the valuation of the assets in the range of $398 million to $995 million with preferred value being $810 million. The preferred value was not considered appropriate due to the following factors:
1. The mine plan of the Company has been made by its executives who have a considerable experience of coal mining in the region and the mine plans have been duly assessed an independent technical review undertaken independently by Runge Pincock Minarco (Minarco). However the preferred value arrived by Geos was based on, amongst other assumption, on achieving 95% of the optimal Bulli mine plan.
2. Also Geos have considered the recommendation of Edwards Global Services as the High case for coking coal prices. There are coking coal price forecasts which were higher than those of Edwards. It was believed that the coking coal prices recommended by Edwards Global Services are in between the range of forecast and closer to higher long term prices forecast in the market and it was considered appropriate to adopt these prices for the valuation exercise.
The Company’s business operation i.e. coal mining, coal preparation and export of coal from two coal mines has been assessed as a single cash generating unit (CGU) considering the following justifications:
a) Mines are located in the same regional area.
b) Both the mines have only one product line, coal.
c) The performance of the cash inflow of one mine gets directly affected by the performance of the other mine.
d) The revenue from each mine is not independent of each other.
e) The management monitors the operations collectively and that the revenue from one mine is directly affected by the quantity exported by other mine.
Based on the assessment undertaken by the Company the preferred valuation of the CGU based on value in use has been arrived at $995 million considering the undernoted assumptions:
a) The company has done a valuation using a discount rate of 8.5% (based on WACC).
b) Long Term coking coal price of $197.
c) Long Term US$: AUS$ long-term exchange rate of 0.85.
d) Life of each mine should have in excess of 25 years.
e) The permitted rates of extraction will be up to 3.2 Mtpa for both mines, in line with current plans.
The Carrying value of the mining assets of the Company is $1,056.46 million & based on the above factors and assessments undertaken by the Company, the preferred valuation of the assets (CGU) has been arrived at $995 million, and an impairment of $61.46 million has been recognized in the books.
Impairment of Property Held in Gujarat NRE Properties Pty Ltd – $5.50 million
The Company owns a property located at Cliff Road, Wollongong, the carrying value of which was $9.25 million as at 31st March 2013. An independent valuation of said property was carried out and the property was valued at $3.75 million resulting in an impairment of $5.50 million. This impairment was on account of general downtrend in the real-estate market.
Impairment of Investment: – $11.58 million
The Company made investments in mutual funds anticipating better returns. However, the value of those investments have significantly diminished due to economic and financial crisis and impaired accordingly.
Impairment of Cethana Project: – $5.25 million
As a result of limited expenditure being incurred on the tenements over the past two years, the Board considered it was prudent to obtain a valuation of the Cethana project tenements. The Cethana project was valued using two approaches: attributable value of exploration expenditure and comparable market valuations, these resulted in a preferred valuation of $1.20 million for 100% of the project. Our share in JV, being 30% of the Cethana project has thereby been reduced to $0.36 million from a carrying value of $5.61 million. An impairment of $5.25 million has been recognised in profit and loss.
From Independent Auditor’s Report (dated 15th August 2013)
Basis for Disclaimer of Opinion
We have been unable to obtain sufficient appropriate audit evidence on the books and records and the basis of accounting of the consolidated entity. Specifically, we have been unable to satisfy ourselves on the following areas:
i. Valuation and impairment of assets – the consolidated entity obtained an independent valuation of its mining assets and mining licences. The independent valuation was based on certain assumptions which may no longer be valid. The directors have not obtained an updated independent valuation to determine the extent of the impairment to the carrying value of the mining assets and mining leases. We have been unable to obtain supporting evidence, based on updated assumptions, which would provide sufficient appropriate audit evidence as to the carrying value of the mining assets and mining leases.
ii. Going concern – the financial report has been prepared on a going concern basis, however the directors have not provided an update of their assessment of the consolidated entity’s ability to pay their debts as and when they fall due. The consolidated entity has reported a loss before income tax of $112,182,825 (including an impairment charge of $83,792,190) for the year ended 31st March 2013 and a working capital deficiency of $407,998,443. At the year end, the consolidated entity is in breach of loan covenants, has significant creditors in arrears and has been unable to provide evidence to support the full amount of the replacement loan facility which is required to pay existing facilities. As discussed in Note 1(c), the consolidated entity is in the process of renegotiating financing and has announced a share placement to the market, subject to shareholder approval, for additional equity funding.
We have been unable to obtain alternative evidence which would provide sufficient appropriate audit evidence as to whether the consolidated entity may be able to obtain such financing, and hence remove significant doubt of its ability to continue as a going concern for a period of 12 months from the date of this auditor’s report.
iii. Deferred Tax Assets – included in non-current assets are Deferred Tax Assets of $87,302,944. In accordance with AASB112 “Income Taxes”, the recognition of deferred tax assets when an entity has incurred tax losses requires convincing other evidence that sufficient taxable profit will be available against which the unutilised tax losses can be utilised by the Group. The directors have not provided sufficient appropriate audit evidence of the Group’s ability to recover these losses.
iv. Recoverability of Trade Receivable – included in Trade Receivables is an amount of $27,795,628 due from the consolidated entity’s ultimate parent company. We were unable to obtain sufficient appropriate audit evidence to determine the recoverability of this receivable. Consequently, we were unable to determine whether any adjustment to this receivable was necessary.
v. Completeness of Contingent Liabilities and Sub-sequent Events disclosures – we were unable to obtain sufficient appropriate audit evidence to determine the completeness of the contingent liabilities and subsequent events disclosures. Consequently, we were unable to determine whether any additional disclosures are required to the relevant notes.
vi. To the date of the directors approving the financial statements, we were not provided with sufficient appropriate audit evidence, or time, to finalise our procedures pertaining to various disclosures and transactions contained within the financial report. This constitutes a limitation of scope.
As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of the elements making up the consolidated statement of financial position, consolidated statement of profit and loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows, and related notes and disclosures thereto.
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraphs, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial report.
From Independent Auditors’ Report on Consolidated Financial Statements of Holding Company, Gujarat NRE Coke Ltd, India (dated 30th May 2013)
Other Matter
We have relied on the unaudited financial statements of all the Australian subsidiaries as referred in not no. 31 of the Consolidated Financial Statement, whose financial statements reflect total assets of Rs. 8.532.55 Crore as at 31st March, 2013 and total revenue of Rs. 1,394.86 Crore and net Cash outflows of Rs. 5.61 Crore for the year ended 31st March, 2013. These unaudited financial statements has been approved by the Management Committee of the respective subsidiaries and have been furnished to us by the management, and our report in so far as it relates to the amounts included in respect of these subsidiaries are based solely on such Management approved financial statements.
SA 560 (Revised) – Subsequent Events – Hindsight Better Than Foresight?
It is often said that hindsight provides new eyes. Reality looks much more obvious in hindsight than in foresight.
Events that occur post balance sheet date can provide hindsight on the conditions that existed as on the date of the financial statements. SA 560 (Revised) provides guiding principles to auditors in evaluating events that occur post the balance sheet date and the auditors’ responsibilities for facts which become known to the auditor post issuance of his report. The emphasis here is on ‘facts that become known to the auditor’ which would imply that the scope of subsequent events review transcends well beyond enquiries of management by the auditors. In the Indian context, we have observed how external investigations into the affairs of the auditee enterprises have lead auditors to withdraw their audit opinions (on account of newer facts becoming known which have resulted in the audit opinion being rendered inappropriate).
SA 560 (Revised) has been aligned with International Standards on Auditing (ISA) 560 on ‘Subsequent Events’. SA 560 (Revised) requires auditors to evaluate facts that become known to the auditor after the date of issuance of the auditor’s report, where such facts have a bearing on the financial statements covered by the audit report issued.
SA 560 (Revised) requires auditors to consider the following time periods over which facts need to be evaluated:
• from the date of the audit report but before the date when financial statements are issued
• after the date when financial statements are issued
Per SA 560 (Revised), the term ‘date when financial statements are issued’ is defined to be the date when financial statements are made available to third parties.
Financial statements may be impacted by events that occur after the date of the financial statements. Such events can be broadly classified into two categories:
(a) Those that provide evidence of conditions that existed at the date of the financial statements; and
(b) Those that provide evidence of conditions that arose after the date of the financial statements.
Adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. The date of the audit report informs the reader that the auditor has considered the effect of all subsequent events and transactions which he became aware of and that occurred up to that date.
Let us understand the applicability of SA 560 (Revised) by considering an elementary case study involving an event that has occurred between the date of the financial statements and the date of the auditor’s report and the underlying responsibility of management and the auditors’ to respond to this event.
Case Study 1
XYZ Limited (‘the Company’) has a legal proceeding pending against it in a Court of Law for breach of a contract. As at the balance sheet date, 31st March 20XX, the Company represented to its auditors that it had not breached the contract and provided a legal opinion supporting its position as the most likely outcome. No provision towards damages for breach of contract was recognised in the draft financial statements for the year ended 31st March 20XX. A week prior to the board meeting (scheduled to be held on 1st June 20XX to approve the accounts for the year ended 31sts March 20XX), the Court delivered an adverse ruling and held the Company liable for damages of Rs. 10 crore. The Company does not have recourse to appeal before a higher judiciary.
In the given case, in light of the judgment which was delivered subsequent to the balance sheet date, management should adjust the financial statements by accounting for provision for damages of Rs 10 crores because the judgment provides sufficient evidence that an obligation existed at the balance sheet date. The auditor on his part would need to take cognisance of the adverse ruling and perform audit procedures to obtain sufficient appropriate audit evidence for provision of damages. These procedures would include:
• obtaining from the Company’s legal counsel, the updated status of pending litigation or the Court ruling,
• reading minutes of board meetings, if any,
• verifying that provision for damages made in the accounts is adequate,
• inquiry of management and, where appropriate, those charged with governance as to whether any other subsequent events have occurred which might require disclosure in or adjustment to the financial statements and
• obtaining written representation from management that subsequent events have been appropriately adjusted/disclosed.
Review of subsequent events essentially involves making enquiries of management about developments occurring post the balance sheet date such as those relating to recoverability of assets, measurement of estimates, updates in the litigation status, onerous commitments etc. More importantly, where events occurring post the balance sheet date cast a doubt on the ability of the enterprise to continue as a going concern, the auditor would need to weigh the appropriateness of the basis of accounting, i.e., whether the accounts should be prepared on a going concern basis or on liquidation basis.
It needs to be noted that the auditor has no obligation to perform any audit procedures regarding the financial statements after the date of the auditor’s report.
A. Auditors’ responsibilities for facts that he becomes aware of before the financial statements are issued
There could arise a situation where after the date of the auditor’s report but before the date the financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor as on the date of the audit report, the same would have caused the auditor to amend the audit report. In such a case, the auditor would need to make enquiries of the management or those charged with governance and determine whether the financial statements need amendment and, if so inquire how management intends to address the matter in the financial statements.
In a situation where management amends the financial statements, the auditor would need to perform necessary audit procedures and provide a new audit report dated no earlier than date of approval of amended financial statements.
In certain circumstances, management may not be restricted from amending the financial statements only to incorporate the effect of the subsequent events and such amended financial statements may be permitted to be approved by the approving authority to the extent of the amendment. In such cases, the auditor is permitted to restrict audit procedures to that amendment and amend the audit report by dual dating it for the specific subsequent event or provide new or amended report including an emphasis of matter (EOM) or other matter paragraph clearly conveying that the auditor’s procedures are restricted solely to the amendment of the financial statements as described in the relevant note to the financial statements.
Where amendment of financial statements is considered necessary and management refuses to do so, the auditor would need to issue a modified opinion, if the audit report is yet to be provided to the entity.
If the audit report has been provided to the entity, the auditor would need to notify management not to issue the financial statements and the auditor’s report thereon. If the financial statements are nevertheless issued by the entity, the auditor would need to take appropriate action to prevent reliance on the auditor’s report as released by the entity.
B. Auditors’ responsibilities for facts that he becomes aware of after the financial statements are issued
The auditor has no obligation to perform any audit procedures after the financial statements have been issued. Where a fact becomes known to the auditor that, had it been known to the auditor as on the date of the audit report, the same would have caused the auditor to amend the audit report, the auditor would need to perform the same procedures as explained in paragraph
(A) above. In addition, the auditor would need to review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor’s report thereon is informed of the situation.
Case Study 2
The Board of Directors of ABC Limited (ABC) approved an equity dividend of Rs. 6 per share on the paid up equity capital of 1,000,000 equity shares of Rs. 10 each at the board meeting held on 28th May 20XX. The Company recorded proposed dividend of Rs. 6,000,000 which was subject to approval by the shareholders at the annual general meeting scheduled on 5th September 20XX. The audit opinion was signed by the auditors on 28th May 20XX. On the date of the AGM, the Board of Directors convened a board meeting to recommend an enhanced dividend of Rs. 9,000,000 (as against Rs. 6,000,000 which was recommended on 28th May 20XX). The shareholders approved the enhanced dividend of Rs. 9,000,000 in the AGM held on the same date. What would be the course of action in this case?
Consistent with the requirement of Accounting Standard 4 – Contingencies and Events Occurring after the Balance Sheet date, the recording of proposed divided at the time of approval of accounts by the board of directors of ABC was appropriate. As a usual practice, the dividend recommended by the board gets approved by the shareholders. However, in the instant case, the dividend proposed by the Board was enhanced by the Board subsequent to the approval of the accounts on 28th May 20XX. The enhanced dividend was approved by the shareholders. It is entirely within the competence of the Board of Directors to amend the accounts and resubmit them to the statutory auditors for report before the accounts are placed before the annual general meeting. Consequently, management could amend the accounts for the year ended 31st March 20XX to account for the enhanced proposed dividend (as well as dividend tax thereon). In such a case, the auditors would need to perform procedures to verify the increase and its corresponding effects on the result for the period and the net reserves. A detailed note in the financial statements explaining the facts of the case would need to be inserted. The auditor may amend the original report to include an additional date to inform users that the auditors’ procedures on subsequent events are restricted solely to the amendment of the financial statements to the extent these relate to proposed dividend (more simply known as dual dating). Alternatively, the auditor may provide a new or amended report that includes a statement in an Emphasis of Matter paragraph (EOM) or Other Matter paragraph clearly mentioning that the auditors’ procedures on subsequent events are restricted solely to the amendment of the financial statements in relation to reversal of proposed dividend.
Revision to the financial statements – a recent example
The original accounts of Essar Oil Limited (‘EOL’) for the year ended 31st March 2012 which were revised post issuance is a pertinent example of subsequent events resulting in amendment to the financial statements after these were issued. In January 2012, the Hon’ble Supreme Court of India ruled against EOL’s claim of eligibility for sales tax incentives for the financial years 2008-09 to 2010-11. The Company sought approval from the Ministry of Corporate Affairs (MCA) to reopen its books of account for the financial years 2008-09 to 2010-11 for the limited purpose of reflecting true and fair view of the sales tax incentives/ liabilities, etc. for the individual accounting years commencing 2008-09 and ending 2011-12. The MCA approval was received during the financial year 2012 -13. The original financial statements for the year ended 31st March 2012 which were approved by the board of directors and the auditors on 12th May 2012 were revised post receipt of MCA approval and approved by the shareholders in November 2012.
In the Indian context, there have also been cases where auditors have in accordance with SA 560 (Revised) informed management of the auditee enterprises that the audit reports issued should not be relied upon in view of purported crisis relating to the auditee’s business operations reported in public domain. Further, in a case where management admits to falsification of the accounts, the auditors would need to inform management as well as regulatory authorities that their opinion on the financial statements would be rendered inaccurate and unreliable.
Concluding remarks
If recent developments in India Inc. were to be diagnosed, withdrawal of audit opinions have had ramifications on reliability of financial information presented of the auditee enterprise, market capitalisation and more importantly maintenance of public trust and confidence.
With the changes in corporate regulation on the horizon and the availability of easy access to information and technology, auditors have the wherewithal to seek facts about the enterprises which they audit from sources other than the auditee. SA 560 (Revised) makes it incumbent upon auditors to assess whether based on the facts known, they have reasons to believe that the audit report which they have issued stands compromised. The standard also provides direction to auditors where management refuses to take cognisance of subsequent events that have an impact on the financial statements issued. The revised standard is in a way a welcome step in safeguarding interests of stakeholders.
GAP in GAAP— Deferred Tax Liability (DTL) on Special Reserves
Under section 36 (1)(viii) of the Income-tax Act, certain specified entities such as a banking company or a housing finance corporation carrying on the business of providing long term finance for industrial or agricultural development or development of infrastructure or housing in India are allowed a special deduction. The deduction shall not exceed 20% of the profits, computed under the head “Profits and gains of business or profession”. For claiming the deduction, an equivalent amount is transferred from the profits to special reserves. Where the aggregate of the amounts carried to such reserve account exceeds twice the amount of the paid up share capital and of the general reserves of the entity, no allowance will be available in respect of such excess.
Any amount subsequently withdrawn from the special reserves (mentioned above) created to claim deduction u/s. 36(1)(viii), shall be deemed to be the profits and gains of business or profession and chargeable to income-tax as the income of the previous year in which such amount is withdrawn.
The accounting debate is whether DTL needs to be created in respect of the special reserves created u/s. 36(1)(viii). This question has been asked frequently to the Expert Advisory Committee and the Institute of Chartered Accountants of India.
It may be noted that under AS 22 Accounting for Taxes on Income, “Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.”
The Expert Advisory Committee (EAC) has always held the view that creation of a special reserve creates difference between accounting income and taxable income in the period in which special reserve is created. Further, this difference is capable of reversal in the period in which the special reserve is utilised or withdrawn, since the amount utilised/ withdrawn would be treated as taxable income in that year under the Income-tax Act. In support of its position, the EAC states in its opinion that deferred taxes are measured either under full provision method or partial provision method. Under the full provision method, deferred taxes are recognised and measured for all timing differences without considering assumptions regarding future probability, future capital expenditure, etc, with the exception of applying the prudence principles for recognising deferred tax assets. Under the partial provision method, the tax effect of timing differences which will not reverse for some considerable period ahead are excluded. However, this involves considerable subjective judgment and therefore AS-22, has been worded based on the full provision method. In other words, the EAC feels that DTL should be created on the special reserves, as deferred taxes are required for all timing differences (subject to application of prudence in case of deferred tax assets) which are capable of reversal. Whether those timing differences actually reverse or not in the subsequent periods is not relevant for this assessment.
Most of the querists believe that creation of DTL on special reserves will not reflect a true and fair picture of the entity’s financial statements, as experience over many years is clearly indicative that the special reserves have not been utilised by most entities as there was no need and in view of the tax impact. In other words, the querists believe that creation of DTL on special reserves is merely a theoretical construct, and distorts the true and fair picture of the entity’s financial statements by putting in the financial statements a fictitious liability.
This is an impasse between the preparers of financial statements and the ICAI/regulators that has carried on for several years. The author has a different take on the subject, which is to look at the requirements of Ind-AS/IFRS on this issue, since those are the applicable standards in the near future. This may probably end the impasse.
First let’s look at Para 52A and 52B of Ind-AS. 52A:
In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity. In some other jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity.
In these circumstances, current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits.
52B: In the circumstances described in paragraph 52A, the income tax consequences of dividends are recognised when a liability to pay the dividend is recognised. The income tax consequences of dividends are more directly linked to past transactions or events than to distributions to owners.
Example illustrating paragraphs 52A and 52B
The following example deals with the measurement of current and deferred tax assets and liabilities for an entity in a jurisdiction where income taxes are payable at a higher rate on undistributed profits (50%) with an amount being refundable when profits are distributed. The tax rate on distributed profits is 35%. At the end of the reporting period, 31st December 20X1, the entity does not recognise a liability for dividends proposed or declared after the reporting period. As a result, no dividends are recognised in the year 20X1. Taxable income for 20X1 is Rs. 100,000. The net taxable temporary difference for the year 20X1 is Rs. 40,000.
The entity recognises a current tax liability and a current income tax expense of Rs. 50,000. No asset is recognised for the amount potentially recoverable as a result of future dividends. The entity also recognises a deferred tax liability and deferred tax expense of Rs. 20,000 (Rs. 40,000 at 50%) representing the income taxes that the entity will pay when it recovers or settles the carrying amounts of its assets and liabilities based on the tax rate applicable to undistributed profits.
Subsequently, on 15th March 20X2 the entity recognises dividends of Rs. 10,000 from previous operating profits as a liability. On 15th March 20X2, the entity recognises the recovery of income taxes of Rs. 1,500 (15% of the dividends recognised as a liability) as a current tax asset and as a reduction of current income tax expense for 20X2.
Let’s convert the above example to the tax regime prevailing in India, where a company pays higher tax rate on distributed profits. The company has a 31st March year end. Assume that the tax rate for distributed profits is higher than that for undistributed profits; say 40% and 30% respectively. A dividend of Rs. 500 was declared in April 20X4, payable in May 20X4. Under Ind-AS, no liability will be recognised for the dividend at 31st March 20X4. The PBT is Rs. 3,000. The tax rate applicable to undistributed profits should be applied, because the tax rate for distributed profit is used only where the obligation to pay dividends has been recognised. So the current income tax expense for year end 31st March 20X4 is Rs. 900 (3,000 x 30%). For year 20X4- 20X5, a liability of Rs. 500 will be recognized for dividends payable. An additional tax liability of Rs. 50 (500 x 10%) is also recognised as a current tax liability.
The above examples are equally applicable in the case of distribution of special reserves created u/s. 36(1)(viii). In simple words, current tax liability is recognised for special reserves when they are distributed/ withdrawn, and no DTL is recognised when the special reserve is created.
In light of the above requirements of Ind -AS, the author believes that the issue of creating DTL on special reserves under AS-22 may be kept at abeyance. Rather the focus should be on understanding the right interpretation under Ind-AS 12. Even under Indian GAAP, the author believes that no DTL should be created on special reserves, in as much, no tax liability is provided under existing Indian GAAP, on general reserves or profit and loss surplus, that are subsequently distributed and on which dividend distribution tax is paid.
[2013] 37 taxmann.com 343 (Mumbai-Trib.) United Helicharters Pvt. Ltd. vs. ACIT A.Ys.: 2006-07 & 2007-08 Dated: 14th August 2013
Article 12, Indo U.S. DTAA, section 9-Training to pilots does not make available technical knowledge – Payment for training not taxable in India.
Facts:
The taxpayer was engaged in the business of charter hire of helicopters. During the year under consideration, a US company provided training to pilots and other staff of the taxpayer in consideration of which the taxpayer made payments to a US company.
The taxpayer contended that the receipt of the US Company were business profits, which, in absence of PE of US company in India, were not chargeable to tax in India. However, the AO treated the payments as FTS in terms of Explanation 2 to section 9(1)(vii) of the Act and hence, chargeable to tax.
The issue before the Tribunal was, whether expenditure on training of pilots was in the nature of FTS under Article 12(4) of India-USA DTAA?
Held:
In terms of Article 12(4)(b) of India-USA DTAA, to constitute FTS the services should have ‘made available’ technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design.
The training given to the pilots and other staff was as per the requirement of the regulator and was necessary for eligibility of the pilots and other staff working in aviation industry. Such training does not fall under the term ‘make available’ under India-USA DTAA. Since the training expenses were not taxable in India in hands of non-resident company, the taxpayer was not required to deduct tax at source while making payment.
The ITAT ruled that such training does not make available technical skills etc. without considering education institution exclusion.
[2013] 37 taxmann.com 296 (Mumbai-Trib.) ITO vs. Satish Beharilal Raheja A.Y.2004-05, Dated: 12th August 2013
Article 13, India-Switzerland DTAA. Units of MF not deemed to be shares of companies even though MF may invest in shares – Gain on units not chargeable to tax in India.
Facts:
The taxpayer was a citizen of Switzerland. He had also submitted tax residence certificate issued by Swiss authorities. During the relevant assessment year, the taxpayer was a non-resident in terms of the Act and had received long-term and short-term capital gain from sale of mutual fund units.
The AO noted that the taxpayer had basically invested in Indian capital market and in Indian shares through selective investment routes known as mutual funds; the capital gain was basically attributable to gain in shares of companies in which mutual funds had made investments; therefore, effectively the gain was from alienation of shares of companies resident in India; and accordingly, treated the capital gain from sale of mutual fund units as that arising from sale of shares and held it to be taxable in India in terms of Article 13(5)(b) of India-Switzerland DTAA.
The taxpayer contended that the capital gain had arisen from sale of mutual fund units and that the Act has made clear distinction between shares issued by Indian companies and units issued by mutual funds and has also treated them differently. Accordingly, Article 13(6), and not Article 13(5), was applicable.
Held:
In the absence of any specific provision under the Act to deem the unit of MF as shares, it could not be considered as shares of companies and, therefore, the provisions of Article 13(5)(b) cannot be applied in case of units. As such, provisions of Article 13(6) are applicable as per which the capital gain on sale of units cannot be taxed in India.
[2013] 37 taxmann.com 337 (AAR) Eruditus Education (P.) Ltd., In re Dated:20th September 2013
Section 9, Article 12, 5 of India Singapore DTAA. Provision of high quality education FTS – However exemption under Article 12 available to Singapore educational institution – on facts no PE and sum not chargeable to tax in India.
Facts:
The applicant was an Indian company in the business of providing high quality executive education programs. The applicant entered into agreement with a Singapore company (“SingCo”), which was in the business of providing management education programmes globally. As per the Agreement, SingCo was to conduct teaching intervention at SingCo’s global campuses in Singapore/France/ India and through telepresence in Singapore,while the applicant was to assist in marketing, organising, managing and facilitating. The programme was to be for 11 months and teaching intervention by SingCo was to be for 30 days comprising in-class teaching at Singapore and at French campuses of SingCo (16 days), in-class teaching by SingCo faculty in India (6 days) and teaching through tele-presence in Singapore (8 days). The applicant was to compensate SingCo for the cost and other incidental expenses.
Held:
(i) The services to be rendered by SingCo involved expertise in, or possession of, special technical skill or knowledge. Hence, the payment will be FTS, both under the Act and under India- Singapore DTAA. However, since there is no dispute that SingCo is an educational institution, the payment will be covered by the exclusion in Article 12(5)(c) of India-Singapore DTAA.
(ii) On facts, SingCo will not have PE in India under Article 5(1) or 5(8) of India-Singapore DTAA.
(iii) Accordingly the amount is not chargeable to tax in India.
Profession Tax – uploading of PAN/TAN etc. Trade Circular No. 6T of 2013 dated 01-10-2013
All the PTRC and PTEC holders are requested to fill the details in “Profession Tax Information Form” and upload the form on website www.mahavat.gov. in . Detailed procedure is explained in the circular.
Procedure for cross check of transactions of the sellers who have filed incomplete Annexure J1 for the FY 2009-10 and 2010-11
Internal Circular No.9A of 2013 dated 19-08-2013
Commissioner has given instructions regarding cross check of transactions who have filed incomplete Annexure J1 for FY 2009-10 & 2010-11.
Commissioner has given instructions regarding cross check of transactions who have filed incomplete Annexure J1 for FY 2009-10 & 2010-11.
(2013) 90 DTR 197 (Chennai) Madras Motor Sports Club vs. DIT (Exemptions) A.Y.: 2009-10 Dated: 21-12-2012
S/s. 2(15) & 12AA – Registration of a charitable trust cannot be cancelled only on the ground that its aggregate receipts of the nature mentioned in the first proviso to section 2(15) exceeded threshold limits provided in second proviso to section 2(15).
Facts:
The assessee, a motor sports club, registered as a society, was also having registration under erstwhile section 12A(a). The objectives of the assessee, inter alia, were to promote sports of motor car and motorcycle and conduct motor races competitions, etc. As per DIT (Exemptions), though the objects and activities were covered under the category of “advancement of general public utility” coming within the ambit of section 2(15), assessee’s receipts were in the nature of business receipts and were more than Rs. 10 lakh (this limit is now raised to Rs. 25 lakh w.e.f. 01-04-2012). Therefore, the objects and activities of the assessee could no more be considered as charitable in nature as per the first and second provisos to section 2(15). In this view of the matter, he cancelled registration granted to the assessee u/s. 12A(a).
Held:
A harmonious reading of both the provisos to section 2(15) will only mean that in the years in which the receipts of nature mentioned in first proviso exceeded Rs. 10 lakh, the assessee will not be eligible for exemption u/ss 11 and 12. It will not mean that an otherwise charitable object of general public utility will become a non-charitable one merely because its aggregate receipts of the nature mentioned in the first proviso to section 2(15) exceeded Rs. 10 lakh. Therefore, registration granted to the assessee u/s. 12A(a) cannot be cancelled only on that ground. If in the very next year, assessee’s receipts are less than Rs. 10 lakhs, then it will have to be granted the exemption available u/ss. 11 and 12, if other conditions are satisfied. In other words, nature of objects of the assessee cannot fluctuate in tandem with the quantum of receipts mentioned in the first proviso.
(2013) 90 DTR 350 (Mum) ACIT vs. Jaimal K. Shah A.Y.: 2007-08 Dated: 30-05-2012
Section 2(29A) – Capital gains on subsequent sale of flats received by the land owner from the developer under a development agreement needs to be computed separately for transfer of land and suprestructure.
Facts:
The assessee, owner of land since 1962, entered into an agreement with a developer in 2001. Under the agreement, while transferring interest in the land to the extent of 45 % for a consideration of Rs. 61 lakh, assessee retained the balance 55 % of land together with right to corresponding built up area thereon. As regards transfer of 45 % of land, assessee paid capital gains tax in A.Y.: 2002-03. Assessee was handed over possession of the built up area vide occupation certificate dated 24-2-2005. During A.Y.: 2007-08, assessee sold two flats and returned capital gains on sale of flats as long-term capital gains on the plea that it was under the right created under agreement of 2001 that assessee acquired and sold the flats. The Assessing Officer did not accept the computation of capital gain made by the assessee taking gain as long term capital gain. The Assessing Officer observed that the assessee had taken possession of the flats as per full occupation certificate dated 24-02-2005 and therefore, assessee was holding the said flats from the said date and since flats were sold in A.Y.: 2007- 08, the period of holding was less than three years and therefore capital gain had to be treated as short term capital gain.
Held:
Right to claim the flat as per agreement in the year 2001 was an asset but the assessee had not sold the right to acquire the flats. The assessee had sold the flats of which he was owner. The right to acquire the flats, no longer subsisted once the assessee acquired the flats and took possession of the same on 24-02- 2005. The right to acquire the flats and ownership of the flats are two different assets. The capital gain had therefore to be computed in respect of sale of flats and not in respect of right to acquire the flats.
However the assessee alongwith flats had also sold his right in the land which was an independent asset and which was being held by him since 1962 as an owner. Therefore sale consideration also included price paid in respect of right in the land in addition to price for superstructure. It would be reasonable to adopt a profit margin of 25% on the cost of construction of the flats to arrive at the sale consideration pertaining to the superstructure. The balance sale consideration of the flats will be appropriated towards the sale price for the transfer of right in the land.
Thus, the capital gain in respect of transfer of right of assessee in the land has to be computed separately as long term capital gains and gain in respect of sale of superstructure has to be treated as short term capital gain.
(2013) 90 DTR 289 (Bang)(SB) Biocon Ltd. vs. DCIT A.Ys.: 2003-04 to 2007-08. Dated: 16-07-2013
Facts:
The assessee-company floated an ESOP scheme, under which it granted option of shares with face value of Rs. 10 at the same rate by claiming that the market price of such shares was Rs. 919, thereby claiming the total discount per option at Rs. 909. The difference between the alleged market price and the exercise price, at Rs. 909 per option was claimed as compensation to the employees to be spread over the vesting period of four years on the strength of the SEBI Guidelines and accounting principles. The assessee claimed that the employee stock option compensation expense was deductible u/s. 37(1).
The revenue did not accept the assessee’s contention of the supremacy of the accounting principles and SEBI Guidelines for the purposes of computation of total income on ground that it was a short capital receipt and a contingent liability. The revenue also canvassed a view that expenditure denotes “paying out or away” and unless the money goes out from the assessee, there can be no expenditure so as to qualify for deduction u/s. 37.
A Special Bench was constituted by the Division bench to decide whether discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head profits and gains of business.
Held:
The Special Bench analysed this issue by sub-dividing it into three questions , viz.,
I. Whether any deduction of such discount is allowable?
When a company undertakes to issue shares to its employees at a discount on a future date, the primary object of this exercise is not to raise share capital, but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the revenue that by issuing shares to employees at a discount, the company got a lower capital receipt, is bereft of any force.
From the stand point of the company, the options under ESOP vest with the employees at the rate of 25 % only on putting in service for one year by the employees. Once the service is rendered for one year, it becomes obligatory on the part of the company to honour its commitment of allowing the vesting of 25 % of the option. The mere fact that the quantification is not precisely possible at the time of incurring the liability would not make an ascertained liability a contingent. It is, therefore, held that the discount in relation to options vesting during the year cannot be regarded as a contingent liability.
When the definition of the word “paid” u/s. 43(2) is read in juxtaposition to section 37(1), the position which emerges is that it is not only paying of expenditure, but also incurring of the expenditure which entails deduction u/s. 37(1) subject to the fulfillment of other conditions. Thus discount on shares under the ESOP is an allowable deduction.
II. If deductible, then when and how much?
Mere granting of option does neither entitle the employee to exercise such option nor allow the company to claim deduction for the discounted premium. It is during the vesting period that the company incurs obligation to issue discounted shares at the time of exercise of option. Thus the event of granting options does not cast any liability on the company. On the other end is the date of exercising the options. Though the employees become entitled to exercise the option at such stage but the fact is that it is simply a result of vesting of options with them over the vesting period on the rendition of services to the company. In the same manner, though the company becomes liable to issue shares at the time of the exercise of option, but it is in lieu of the liability which it incurred over the vesting period by obtaining their services. Thus, the liability is neither incurred at the stage of the grant of options nor when such options are exercised.
The company incurs liability to issue shares at the discount only during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period.
III. Subsequent adjustment to discount
The company incurs a definite liability during the vesting period, but its proper quantification is not possible at that stage as the actual amount of employees cost to the company, can be finally determined at the time of the exercise of option or when the options remain unvested or lapse at the end of the exercise period. It is at this later stage that the provisional amount of discount on ESOP, initially quantified on the basis of market price at the time of grant of options, needs to be suitably adjusted with the actual amount of discount.
As regards the adjustment of discount when the options remain unvested or lapse at the end of the exercise period, it is but natural that there is no employee cost to that extent and hence there can be no deduction of discount qua such part of unvested or lapsing options. But, as the amount was claimed as deduction by the company, such discount needs to be reversed and taken as income.
In the second situation in which the options are exercised by the employees after putting in service during the vesting period, the actual amount of remuneration to the employees would be only the amount of actual discount at the time of exercise of option. After certain changes to the relevant provisions in this regard , the position which now stands is that the discount on ESOP is taxable as perquisite u/s. 17(2)(vi). The position has been clarified beyond doubt by the legislature that the ESOP discount, which is nothing but the reward for services, is a taxable perquisite to the employee at the time of exercise of option, and its valuation is to be done by considering the fair market value of the shares on the date on which the option is exercised. Thus, it is palpable that since the remuneration to the employees under the ESOP is the amount of discount with respect to the market price of shares at the time of exercise of option, the employees cost in the hands of the company should also be with respect to the same base.
The amount of discount at the stage of granting of options with respect to the market price of shares at the time of grant of options is always a tentative employee cost because of the impossibility in correctly visualising the likely market price of shares at the time of exercise of option by the employees, which, in turn, would reflect the correct employees cost. Since the definite liability is incurred during the vesting period, it has to be quantified on some logical basis. It is this market price at the time of the grant of options which is considered for working out the amount of discount during the vesting period. But, since actual amount of employee cost can be precisely determined only at the time of the exercise of option by the employees, the provisional amount of discount availed as deduction during the vesting period needs to be adjusted in the light of the actual discount on the basis of the market price of the shares at the time of exercise of options.
2013-TIOL-831-ITAT-MUM Administrator of Estate of late Mr. E F Dinsha vs. ITO ITA No. 3019/Mum/2008 Assessment Year: 2005-06. Date of Order: 14-08-2013
Section 50C – Section 50C cannot be applied to sale agreements entered into before the introduction of the said provisions i.e. before 01-04-2003 specially when delay in execution and registration of conveyance is sufficiently explained and there is no allegation of suppression of actual consideration.
Facts:
The assessee, an administrator to the Estate of Late Mr. E. F. Dinshaw held landed properties and other tenanted properties with EF Dinshaw Trust & EF Dinshaw Charities jointly. During the previous year relevant to the assessment year 2005-06, two properties of the estate whose stamp duty value was Rs. 5,95,78,500 were sold for Rs. 42,55,045 and profit arising from the sale was computed by considering the consideration as per sale deed to be full value of consideration. The profit so computed was declared under the head `long term capital gain’. The assessee had not disputed the stamp duty value adopted by the stamp valuation authorities.
In the course of assessment proceedings, the assessee was asked to explain the vast difference between the sale consideration and the stamp duty value of the properties sold. The assessee explained that the properties were agreed to be sold in the year 1997 and 1999 and the completion of sale was delayed due to delay in obtaining the requisite permissions from the Charity Commissioner and RBI and under UL(C&R) Act. The difference in value had arisen because of a long time gap between the date when the properties were agreed to be sold and the date of actual sale. The explanation offered by the assessee was substantiated with requisite evidence in the form of correspondence, permissions, etc. The AO worked out the profit by considering the stamp duty value to be consideration and following the past practice assessed the income under the head `profits and gains of business or profession’.
Aggrieved, the assessee preferred an appeal to CIT(A) who held that profit on sale was to be charged to tax under the head `Capital Gains’ and section 50C applied to the transaction under consideration. He rejected the contention that the agreement was entered into before the date of section 50C becoming effective. He held that section 50C applied to transactions after 01-04-2003.
Aggrieved, the assessee preferred an appeal to the Tribunal where it was contended that in the facts and circumstances involved in the case of the assessee, provisions of section 50C have to be read with reference to the date of agreement instead of date of transfer and accordingly the value of the properties made for the purpose of stamp duty as on date of agreement should be taken and not as on the date of execution of conveyance deed.
Held:
The Tribunal noted that (i) for a property agreed to be sold to Avadh Narayan Singh & Ors on 12-03-1999 for Rs. 25 lakh the entire consideration was received upto 03-05-1999 and assessee had moved an application to the Charity Commissioner for sale on 05-04-1999; and (ii) the delay in executing the final conveyance of the property was because of delay in getting the required clearances from the concerned authorities, which was beyond the control of the assessee. It also noted that in respect of the other property the agreement was executed on 07-02- 1997 and the consideration of Rs 10 lakhs was partly received by the assessee on the date of agreement itself. The Tribunal mentioned that the delay in execution of conveyance was satisfactorily explained with reference to sequence of events that occurred with the supporting evidence which was beyond the control of the assessee.
The Tribunal noted that in the case of M. Siva Parvathi & Ors vs. ITO (37 DTR 124)(Vishakapatnam)(ITAT) similar issue arose. In the said case both the parties confirmed having entered into a sale agreement in August 2001 and the vendors had received part payment of total consideration in August 2001 itself. The delay in registering the sale deed was on account of the fact that vendors were under an obligation to obtain urban land clearance permission and were also under an obligation to settle certain disputes and the explanation offered by the assessee was supported by documentary evidence. There was no material brought on record by revenue to show that there was any suppression of actual sale consideration. In these facts, the Tribunal held that the provisions of section 50C could not be applied to the sale agreement as the section was not available in the statute at the time when the transaction was initially entered into. The Tribunal held that the final registration of the sale agreement was only in fulfillment of the contractual obligation and the provisions, which did not apply at the time of entering into the transaction initially could not be applied at the time the transaction was completed. It held that section 50C cannot be applied to sales agreement entered into before the introduction of the said section especially when delay in registration of sale deed was sufficiently explained and there was no suppression of actual consideration.
Following the above mentioned decision, the Tribunal held that section 50C cannot be applied to the sale agreement entered into before the introduction of the said section especially when delay in registration of sale deed was sufficiently explained and there was no suppression of actual consideration. The addition made by the AO and confirmed by CIT(A) was deleted. The appeal filed by the assessee was allowed.
2013-TIOL-827-ITAT-PUNE GKN Sinter Metal Pvt. Ltd. vs. ACIT ITA No. 3465/M/2010 Assessment Years: 2003-04. Date of Order: 06-05-2013
Section 37 – Payment of pre-closure charges, though not a contractual obligation, to the Bank, in respect of debentures issued are expenses incurred by the assessee for the purpose of business and are allowable. By incurring pre-closure charges the assessee is relieved of further financial obligation.
Facts :
The assessee with an objective to raise funds for general corporate purposes issued unsecured, redeemable, non-convertible debentures to Mahindra & Mahindra Ltd on private placement basis. The principal terms and conditions of the placement specified only the Tenor/Maturity & Coupon Rate. There was no mention for payment of any pre-closure charges. Mahindra & Mahindra Ltd. sold these debentures to Deutsche Bank. Pending utilisation of funds, the proceeds of debenture issue were deposited in short term deposit with Standard Chartered Bank. Upon realising that the company is paying heavy interest on debentures for a period of 3 years, the debentures were cancelled and money paid back to Deutsche Bank. However, in the process, the Company had to pay pre-payment charges of Rs. 43,34,000.
The Assessing Officer (AO) held that the expenditure was not contractual but voluntary since there was no provision in the terms of issue of debentures for payment of pre-closure charges. He held the payment to be discretionary decision by the assessee who was not under any legal compulsion to make the payment. He disallowed the pre-payment charges.
Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO by relying on the decision of the Punjab & Haryana High Court in the case of Associated Hotels of India Ltd. vs. CIT (231 ITR 134)(P & H). Aggrieved, the assessee preferred an appeal to the Tribunal.
Held:
The Tribunal noted that there was no dispute about genuineness of the expenditure. The only dispute was as regards its allowability. The Tribunal did not find any merit in the contentions on behalf of the revenue that there was no contractual obligation to pay the amount under consideration. Also, that the assessee had not incurred the expenditure for raising the money but had incurred it to return the money already raised and that issue of debentures is not the business of the assessee. The Tribunal found merit in the contention of the assessee that the assessee had to incur the expenditure to relieve it from further financial burden and this was a commercial decision.
The Tribunal held that the decision relied upon by the CIT(A) was not applicable to the facts of the present case. In that case the debentures were redeemed before maturity by paying bonus and fresh debentures were issued before maturity. In the instant case, the assessee has not issued fresh debentures after prepayment of the debentures.
The Tribunal held that the sum of Rs. 43,34,000 incurred by the assessee towards prepayment charges in respect of debentures issued to be an expenditure incurred for the purpose of business and therefore allowable.
This ground was decided in favour of the assessee.
PART A: CIC Decision
The Appellant, Shri Shashikant Barve, through his RTI application dated 25.06.2012 sought certain information ( e.g. number and names of study circles in WIRC where the bank account of the study circle is being operated during 2012; payment made by the study circles operating in Pune to any branch of ICAI for holding any joint programmes during the period 01.01.2011 to 31.12.2011; names of currently elected CAs members on WIRC Managing Committee Mumbai or Council at New Delhi; study circle wise data in respect of their members and so on.) in respect of study circles operating in Western India Regional Council (WIRC) of the Institute of Chartered Accountants of India.
The CPIO vide her letter dated 21.08.2012, while inter-alia informing the Appellant that the relationship between ICAI and CPE study circles is only for limited purpose of recognising the CPE hours, denied the information on the ground that the same was not maintained by them.
During the hearing, the Respondents stated that the study circles are voluntary organisations which have been formed for the purpose of carrying out professional learning activities. According to them, the role of ICAI is only for recognising the study activities of these study circles and there is no financial support or funding made by ICAI to these study circles. They, therefore, expressed their inability to provide the information to the Appellant as the same is not held by them.
The Appellant, on the other hand, argued that the study circles are nothing but an “extended arm” of the ICAI and that ICAI has full control over them. He, in support, refered to the “Norms for CPE Study Circles” issued by ICAI, copy of which the Respondents has produced before the Commission.
A perusal of the norms issued by ICAI in respect of CPE study circles shows that ICAI does have supervisory control over these study circles. Para of these norms deals with accounts related matters and include provisions like every CPE study circle shall submit an annual statement of receipt and payment, income and expenditure and balance sheet to the Regional Council; Convenors of CPE study circles are authorised to collect a reasonable amount per member as annual membership fee to defray the cost of holding learning activities and other incidental charges; the responsibility for ensuring financial propriety in the financial management of the study circle for production of proper audited accounts, whenever required by the supervising branch/Regional council shall be that of the Convenor and Deputy Convenor etc.
On consideration of the arguments put forth by both the parties and perusal of the records, the Commission is of the view that the information sought by the Appellant here can be accessed by the Respondent from the CPE study circles (through its Convenor or Deputy Convenor) under section 2(f) of the RTI Act, which includes in the definition of information:
“….information relating to any private body which can be accessed by a public authority under any other law for the time being in force.” “In view of the above, the CPIO is hereby directed to obtain the information in question from the respective CPE study circles, operating in Western India Regional Council (WIRC) of the ICAI, and provide the same to the Appellant within 4 weeks of receipt of this order”.
2013-TIOL-800-ITAT-MUM ITO (TDS) vs. Jet Airways (india) Ltd. ITA No. 7439, 7440 and 7441/Mum/2010 Assessment Years: 2009-10, 2007-08 and 2008-09. Date of Order: 17-07-2013
S/s. 194H, 195(3) and Rule 29B(5) – Section 194H does not apply to amounts retained by bank while making payments to assessee for tickets booked through credit card. Amounts retained by the bank are fees and not commission. Certificates issued u/s. 195(3) are effective for the concerned financial year i.e. from the first day of the financial year and not with effect from the date of issuance thereof.
Facts I:
On 05-01-2009, there was a survey action u/s. 133A of the Act on the assessee. The assessee engaged in the business of aviation i.e. transportation of passengers and goods by air, received payments from banks for tickets booked through credit cards. The assessee received from the banks only the net amounts after retention of service charges. The Assessing Officer (AO) noted that the amounts retained by the banks for the assessment years 2007-08, 2008-09 and 2009-10 was Rs. 1,21,61,091; Rs. 4,23,31,210; and Rs. 18,24,57,871 respectively. The AO rejected the contention of the assessee that the amounts retained by the banks are in the nature of discounting charges in consideration of the immediate payment made by the banks to the assessee. He held that these amounts constituted commission u/s. 194H and since the assessee had not deducted tax on these amounts he held the assessee to be an assessee-in-default and directed the assessee to pay the amount of TDS along with interest u/s. 201(1A) of the Act.
Aggrieved, the assessee preferred an appeal to the CIT(A) who decided the issue in favor of the assessee.
Aggrieved, the revenue preferred an appeal to the Tribunal.
Facts II:
Two banks viz. American Express Bank Ltd. and Citibank NA had obtained from the AO a certificate u/s. 195(3) for receiving payments without deduction of tax at source. The certificate mentioned that it was applicable for the financial year. However, the AO held that the certificate would apply only from the date of its issuance though the specified period mentioned in the certificate is the financial year.
The CIT(A) held that the AO is not justified in applying the certificate from the date of its issuance and bringing to tax the amount retained by the bank to tax for the concerned month by applying the provisions of section 194H of the Act. Aggrieved, the revenue preferred an appeal to the Tribunal.
Held I:
The Tribunal agreed with the contention on behalf of the assessee that the issue is square covered in favor of the assessee by the decision of the Jaipur Bench of the Tribunal in the case of M/s. Gems Paradise vs. ACIT (ITA No. 746/Jp/2011)(AY 2008-09)(order dated 02-12-2012) which was followed by the same bench of the Jaipur Tribunal in Shri Bhandari Jewellers vs. ACIT (ITA No. 746/Jp/2011)(AY 2008-09)(order dated 02- 12-2012). It also observed that similar issue was also considered by the Bangalore Bench of the Tribunal in the case of Tata Teleservices Ltd. vs. DCIT (140 ITD 451)(Bang) which has been decided by following the decision of the Hyderabad Bench of the Tribunal in the case of DCIT vs. Vah Magna Retail (P) Ltd. (ITA No. 905/Hyd/2011)(AY 2007-08)(order dated 10-04-2012) where it has been held that payments made to the banks on account of utilisation of credit card facilities would amount to bank charges and not commission within the meaning of section 194H of the Act.
Following the ratio laid down by these decisions, the Tribunal held that section 194H is not applicable to amounts retained by the bank out of payments made by it to the assessee for tickets booked by credit card.
Held II:
The Tribunal observed that the assessee had filed copies of certificates issued by AO u/s. 195(3)( dated 27-04-2006, 30-03-2007, 31-03-2008 and 31-03-2008 which were addressed to Citibank NA for financial year 2006-07 to 2008-09 respectively. It noted that the said certificates specifically mention that the said bank is authorised to receive the payments, interest without deduction of income-tax u/s. 195(1) in the respective financial years. The Tribunal considered Rule 29B(5) of the Rules and held that the certificates issued u/s. 195(3) of the Act are applicable for the concerned financial years and will not be effective only from the date of issuance thereof. The Tribunal upheld the order of CIT(A) for all the three assessment years.
The appeals filed by the department were dismissed.
‘SALE PRICE/TURNOVER’ FOR LEVY OF CST
Introduction :
Once the transaction is held to be a sale, the next question which arises is the quantum on which such tax is leviable. This is referred to as ‘sale price’ in relation to individual transaction and ‘turnover’ in relation to aggregate of transactions during a particular period. There may be a number of different elements which require consideration while determining sale price/turnover.
Definitions :
Under the CST Act, 1956, the above terms are defined as discussed below :
“(h) ‘sale price’ means the amount payable to a dealer as consideration for the sale of any goods, less than any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged;
Provided that in the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause.”
“(j) ‘turnover’ used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-state trade or commerce made during any prescribed period and determined in accordance with the provisions of this Act and the rules made thereunder.”
From the definition of sale price, it appears that though all amounts charged to the buyer till delivery is given are to be considered as sale price, the amount charged separately for freight is not to be included in the sale price.
Interpretation of above definitions :
However, interpretation of the above definitions have attracted lengthy litigations. There are a number of judgments interpreting the above terms.
Recently, the Supreme Court had an occasion to deal with the above aspect. The Supreme Court has delivered judgment in case of India Meters Ltd. v. State of Tamil Nadu (34 VST 273).
In this case, the facts were that the appellant, M/s. Indian Meters Ltd. (referred to as dealer) sold meters manufactured by it to its customers within and outside Tamil Nadu. The dealer had charged applicable tax i.e., Tamil Nadu Sales Tax or Central Sales Tax on the price charged by it. The dealer had also collected separately amounts from the buyers towards freight charges, by raising debit notes. The dealer had not paid tax on the above amounts. The Sales Tax Authorities held that these amounts are also part of sale price and accordingly levied tax on the same under the respective Acts.
Though, the Tamil Nadu Sales Tax Appellate Tribunal held in favour of dealer, the High Court held that the said amounts are part of sale price and turnover and therefore correctly held as liable to tax.
The matter came before the Supreme Court. The Supreme Court examined the facts. It was found that the clause in the sale contract provided that the transfer of title to the goods was to take place only on delivery of goods at customer’s place and the customer’s obligation to pay would arise only after the delivery had been so effected. Simultaneously it was also found that there was a clause in the contract dealing with the price. It was provided that the price was payable per unit, ex-factory delivery. The Clause further provided that sales tax and excise duty will be payable only on ex-factory price.
Based on the above terms and conditions, it was argued by the dealer that since the prices are ex-factory and freight is charged separately, the said freight was not chargeable to tax. Various judgments were cited before the Supreme Court.
Supreme Court’s ruling :
The Supreme Court has confirmed the view of the High Court.
The Supreme Court observed that in the present case, the obligation to pay the freight was clearly on the dealer, as no sale could have taken place unless the goods were delivered at the premises of the buyer. It was further observed that for giving such delivery incurring cost of freight was required on part of the dealer. The Supreme Court held that though the contract mentioned the price as ex-factory price, the delivery was not at the factory gate. Therefore, the specification of what the price would be at the factory gate cannot have any impact on the place of delivery, held the Supreme Court. The Supreme Court also observed that had the delivery been completed at the factory gate, then the expenses incurred thereafter by way of freight could have been categorised as post-sale expenses and could not have been taxable. Thus, ultimately the Supreme Court confirmed the levy. The Supreme Court reproduced legal position in the following manner.
“In Paprika Ltd. v. Board of Trade, (1944) 1 ALL ER 372, the Court observed as under :
“Whenever a sale attracts purchase tax, that tax presumably affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even the price is expressed as ‘X’ plus purchase tax.”
In this case, the learned judge also quoted with approval what Goddard, L.J., said in Love v. Norman Wright (Builders) Ltd., (1944) 1 All ER 618:
“Where an article is taxed, whether by pur-chase tax, customs duty or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consider-ation though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up or whether the seller has included tax or not” and summed up the position in the following words:
“So far as the purchaser is concerned, he pays for the goods that the seller demands, namely, the price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.”
The Supreme Court further referred to settled position as under:
“This Court had an occasion to deal with identical issues in the case of Hindustan Sugar Mills (1978) 4 SCC 271. P. N. Bhagwati J. (as His Lordship then was), clearly held that by reason of the provisions of the Control Order which governed the transactions of sale of cement entered into by the assessee with the purchasers in both the appeals before us, the amount of freight formed part of the ‘sale price’.
In this judgement, the Court comprehensively explained the entire principle of law by giving an example in para 8 of the judgment which reads as under:
“8. Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily, it is not shown as a separate item in the bill, but it is included in the price charged by him. The ‘sale price’ in such a case could be the entire price inclusive of excise duty, because that would be the consideration payable by the purchaser for the sale of the goods. True, the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to reimburse him in respect of the excise duty already paid by him on the manufacture of the goods. But, even so, it would be part of the ‘sale price’, because it forms a component of the consideration pay-able by the purchaser to the dealer. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability, statutory or otherwise, under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. In either case, it would be part of the ‘sale price’. So also, the amount of sales tax payable by a dealer, whether included in the price or added to it as a separate item, as is usually the case, forms part of the ‘sale price’. It is payable by the purchaser to the dealer as part of the consideration for the sale of the goods and hence falls within the first part of the definition?….”
Ratio of Supreme Court judgement:
The ratio of the judgement is required to be seen carefully. Even if the freight is collected separately, if the delivery is at the door of the customer, then in spite of the above exclusion of freight from the definition of sale price, it will be includible in the sale price and taxable.
The further ratio which comes out is that if it is established that the delivery is given at the seller’s place and the freight charges are incurred thereafter, then the said collection can be considered as post-sale collection. It will also be considered as reimbursement of expenditure made on behalf of the buyer. In such circumstances, it will not be taxable.
We hope the above judgement will settle the controversy for all time to come and the dealers can determine the taxation of freight accordingly.
New VAT Audit Form-704
S. 61 of The Maharashtra Value Added Tax Act, 2002 (MVAT Act) requires certain dealers to get their books of account audited and submit Audit Report so obtained from the Auditor i.e. either from a practising chartered accountant or a practising cost accountant. This report is required to be submitted within 10 months from the end of the financial year. Non-filing or late filing of Audit Report may attract penalty at the rate of 0.1% of the turnover of sales. The prescribed form of Audit Report (i.e. Form 704) has been replaced recently vide notification dated 26-8-2009 issued under Rule 17A(2) of MVAT Rules, 2005. The revised form of audit report is applicable for financial years commencing on or after 1st April 2008. Thus, from 26th August 2009 onwards, the VAT Audit Reports for F.Y. 2008-09 have to be given in this amended Form 704 only. Further, the Commissioner of Sales Tax, vide Notification dated 1st October 2009, has notified electronic format of Form 704 to facilitate the dealer to file the Audit Report electronically. From 1st October 2009 onwards all such dealers shall file the Audit Report in electronic format only.
Some of the important distinguishing features of this new form may be noted as under :
1. Emphasis shifted from returns to tax liability.
In the earlier report the main thrust was to certify the correctness and completeness of the returns filed by the dealer. In the new Form, the thrust is on certification of tax liability of the dealer based on his books and records.
2. In the earlier report for almost each column and row, remarks from the Auditor were asked for. This was creating confusion and every Auditor followed different way of giving such remarks. Some of the publications even gave suggested remarks for each such column. The new Audit Form is designed in such a way that all remarks will get reported at one or two specified places only viz. para-3 or para-5 of Part-1. This will be helpful to the Auditor as well as the user.
3. Most important distinguishing feature is that this new Audit Report is to be filed electronically. The earlier Report was to be filed physically. The Commissioner of Sales Tax has issued Circular bearing No. 27T of 2009 dated 1-10-2009 by which the procedure for e-filing of this Report has been clarified. Though, Auditor will give his Report to the dealer, the dealer will upload the same. Therefore, the Auditor may be required to give Report in Electronic Format along with physical copy to facilitate the dealer to file new Report Form. After uploading the Report the dealer is also required to submit ‘statement of submission’, as explained in the above Circular.
4. The new VAT Audit Form has three parts. Part-1 is about certification, whereas Part-2 is about general information of the dealer and Part-3 is about calculation of tax liability.
In Part-1, at the beginning, there are certain instructions to be followed by the auditor. There are about 19 instructions. The rule making authority has given weightage to these instructions, in as much as in the Certification Part the Auditor has to certify that he has read and understood the instructions and followed the same while preparing the Report. Thus, the Auditor is expected to follow the instructions and in any case, if not in position to follow the same, he will be required to report in para-3 of Part-1.
5. As stated above, Part-1 is about certification. Para-2(B) of Part-1 starts as under :
“Subject to *my/our remarks about non-compliance, short comings and deficiencies in the returns filed and tax liability computed and presented in respective schedules and Para-4 of this Part, I/We certify that,. . . . .”
Thus, an impression arises that this is not a Report as such but certification. Report is generally an opinion based on the overall verification of the records, certification means certifying correctness of the facts so certified. For example, if a ‘debtors list’ is certified as per any records, then such certification is expected to be correct as per actual amounts, leaving no difference even of Rupee or Paisa. Therefore, an issue may arise whether the VAT Auditor is giving certification, so that the amounts/tax liability mentioned in the Audit Report are verified fully in all its respects, including 100% accuracy of various claims. In certification in para-2(B), there are certain items, mentioning that the Auditor has fully verified the facts stated therein. For example, in clause (i) the Auditor certifies that ‘all such declarations and certificates are produced before me. I have verified the same and they are in conformity with the provisions related thereto’.
Due to these kind of certification, question arises whether the Auditor is supposed to check each and every declaration form (like ‘C’ form), physically and that also with correctness of the details mentioned therein. There are certain more items of similar nature. Therefore, it is necessary to understand the scope of VAT Audit.
To our understanding, though above is the mode of reporting, Audit Report is still an expression of opinion only and it is not a certification as understood in that manner. This aspect is clear from the overall reading of the Form, particularly from the reading of the responsibility statement after para-1C in Part-1. The said statement is as under :
“Maintenance of books of accounts, sales tax related records and preparation of financial statements are the responsibilities of the entity’s management. Our responsibility is to express an opinion on their sales tax related records based on our audit. We have conducted our audit in accordance with the standard auditing principles generally accepted in India. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the sales tax related records and financial statements are free from material mis-statement(s). The audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates by management as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.”
Based on above responsibility statement, it can be said that the report is in the form of opinion and not a certificate as such. Therefore, the Auditor can give the specified certificates in para-2(B) of Part-1, based on his satisfaction from the verification, which may include test verification of the relevant records. However, it is expected that the Auditor will maintain his working papers meticulously.
In Part-1 of new Form 704, the VAT Auditor has also to give a summary of total tax liability in a tabular format. Unlike the old Form, in new Form the Auditor is not to give any recommendation for revising the returns, etc. He has to only report about additional liability or refunds etc. The dealer will take his own decision to revise the returns accordingly or not. [There is amendment in S. 20(4) of MVAT Act, 2002 which is about revised returns. S. 20(4)(b) is about revising the returns pursuant to Audit Report. From reading of said section, it transpires that the dealer will be required to revise each individual return, as per the changes required in the same. In relation to old Form, the then Commissioner of Sales Tax had issued Circular 26T of 2006 dated 18-9-2006 by which the dealer was able to revise only last return, to take care of all the changes during the audit period. Thus, the responsibility of the dealer has increased.]
In Part-2, general information is called for. As compared to old Form, certain new requirements have been added. Like details about filing of returns and payment under Profession Tax Act/Luxury Tax Act etc. Though, strictly speaking, in the VAT Audit Report, details about other enactments can not be asked for, but, it appears that since the other enactments are also administered by the sales tax department, these details are asked for. The other distinguishing feature in Part-2 is that the Activity Code is also required to be reported. These Activity Codes are made available on government website and the Auditor, after selecting applicable codes has to give bifurcation of turnover qua such codes.
Part-3 is about computation of liability. It has six schedules and eleven Annexures. Schedules I to V are for reporting transactions under MVAT Act, 2002, whereas Schedule-VI is about reporting trans-actions under CST Act, 1956. As clarified in the Instructions, the Schedules are as per return format. Under MVAT Act, 2002, there are different type of returns viz. From Nos. 231, 232, 233, 234 & 235. Schedule-I relates to Form No. 231 and so on. It is also possible that more then one Schedule may apply, depending upon the type of returns applicable to the said dealer.
In addition to the Schedules, there are also Annexures from ‘A’ to ‘K’. These are supplementary to Schedules. In the Electronic Format, if the information is first filled up in the Annexures, related fields in the Schedules and Tables will be auto calculated. Though, there can be various minute details about each item of the Schedules/Annexure, for sake of brevity, the same are not discussed here. However, some of the additional items in this new Form, as compared to old Form, can be mentioned as under:
i) List of new suppliers on the purchase of which set off is claimed. (Annexure ‘G’. However, this Annexure is dropped in E-template).
ii) List of TIN wise suppliers showing total purchases and taxes. (Annexure ‘J’).
iii) List of TIN wise purchasers showing total sales and taxes. (Annexure ‘J’). At present, there is no requirement for noting the TIN of the purchasers and hence, probably the dealer may not have these details available. Depending upon the availability of such information and verification thereof to his satisfaction, the Auditor may have to give suitable disclosures.
iv) List of credit notes, party wise, showing amounts and taxes. (Annexure ‘J’).
v) List of debit notes, party wise, showing amounts and taxes. (Annexure ‘J’).
vi) Ratio analysis. (Annexure ‘F).
vii) Bank statement examination, for certification as per para-2(B)(m) of Part-I.
viii) Stock records requirement for reporting at – various places.
ix) Reconciliation with Excise/Custom records. (Instruction-19).
x) Interest working as per (Annexure ‘A’ & ‘B’).
The new Audit Form-704 is more elaborate. It also requires more details than the old one. In the first year, it seems, it may be little difficult for some of the dealers to generate certain information required to be furnished in some of the annexures and in certain cases it may involve additional work. However/ in subsequent years, one may have to take care to get their accounting software suitably amended and also the procedure for maintaining primary records so as to generate the required information in the manner so required. It appears that in long run, the new Form will be much more dealer friendly.
S/s. 32, – Depreciation is allowable on paintings which form part of furniture and fixture.
Section 40(a)(ia) is not applicable to a case where tax has been deducted u/s. 194C instead of u/s. 194I or u/s. 194J.
Facts I:
The assessee was in the business of production and distribution of advertising films. It also provided other assistance like making available locations, equipments, models and crew to the foreign as well as domestic companies. The assessee claimed depreciation on certain paintings purchased by it on the ground that these are utilised in the said preparation/advertising films, etc.
The AO was of the view that the presence of paintings is immaterial for the conduct of business. He, accordingly, disallowed depreciation claimed by the assessee on paintings. Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.
Held I:
The Tribunal agreed with the contentions made by the assessee viz. that hiring of the painting for original shoots was unaffordable. Considering the nature of the assessee’s business, they have purchased and utilised the paintings which were either hung in the office or given to the producer for the original shoots, or used in various settings. Therefore, the paintings were also part of furniture. The Tribunal relied on the decision of Chennai Bench of ITAT in the case of Tribunal news Burnside Investments & Holdings Ltd. vs. DCIT (61 ITD 601) where it was held as under
“From the dictionary meaning of the word `furniture’ it is clear that all articles of convenience or decoration used for the purpose of furnishing a place of business or an office are articles of furniture. In the instant case, there was no dispute that these paintings were used as decorations in the office and the office was used for the purpose of business. Therefore, these paintings constitute interior decoration to give a good look to the place of business. Therefore, the assessee was entitled to depreciation on these paintings.”
Following the ratio of the above mentioned decision, the Tribunal decided the issue in favour of the assessee. This ground of appeal was allowed.
Facts II:
In the course of assessment proceedings the Assessing Officer (AO) noticed that the assessee had in respect of certain items of expenditure deducted tax u/s. 194C whereas the applicable provision, according to the AO, was section 194I or section 194J. The AO held that the assessee has short deducted tax. The AO relying on the decisions in the case of CIT vs. Prasar Bharti (292 ITR 580)(Del) and Chambers of Commerce of Income-tax Consultant vs. CBDT 75 Taxman 669 (Bom) and All Gujarat Federation vs. CBDT (214 ITR 2) disallowed the expenditure on which there was short deduction. Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal where interalia relying on the ratio of Calcutta High Court decision in the case of CIT vs S. K. Tekriwal (2012-TIOL-1057-HC-KOL-IT) it was contended that provisions of section 40(a)(ia) can be only invoked if there is no deduction of tax but not in a case where there was short deduction.
Held II: Section 40(a)(ia) can be invoked only when tax has not been deducted or has not been paid as per the provisions. Since the assessee had deducted tax u/s. 194C instead of section 194I or section 194J, the Tribunal held that it is not a case of non-deduction of tax. The Tribunal held that when tax was deducted by the assessee, even under bonafide impression under wrong provisions of TDS, provisions of section 40(a) (ia) cannot be invoked. It observed that this principle is being uniformly followed by various co-ordinate Benches and has approval of Calcutta High Court in the case of CIT vs. S. K. Tekriwal (supra). Therefore, disallowance u/s. 40(a)(ia) cannot be upheld. It was also observed that the revenue had not taken any steps u/s. 201 wherein the issue whether the deduction has to be made u/s. 194I or 194J or 194C can be considered /examined. This ground was decided in favour of the assessee.
Internal Circular No.1A OF 2013 dated 11-01- 2013
By this Circular, the Commissioner has given instructions to all the departmental officers regarding procedure for cross check for 2008-09 period.
Clarification on service tax on restaurant services – Circular No. 173/8/2013-ST dtd. 7th October 2013
Vide this Circular, the CBEC has provided clarifications on various doubts and questions raised pertaining to Restaurant Services as amended w.e.f. 01-04-2013.
With reference to a complex where air -onditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, it is clarified that services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year attracts service tax. In a complex, if there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non-centrally air- heated restaurant will not be liable to service tax. In such cases, service provided in the non air-conditioned /non-centrally air-heated restaurant will be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.
With reference to a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, it is clarified that services provided by specified (i.e. only which are covered as taxable) restaurant in other areas of the hotel are liable to service tax.
With reference to whether service tax is leviable on goods sold on MRP basis across the counter as part of the bill/invoice, it is clarified that if goods are sold on MRP basis (fixed under the Legal Metrology Act), they have to be excluded from total amount for the determination of value of service portion.
Clarification regarding service tax on educational services
Circular No. 172/7/2013-ST Dtd. 19th September 2013
Tax Research Unit of CBEC has issued clarification circular in respect of taxability of services provided to educational institutions. The Circular is broadly based on the clause (I) of section 66D of the Finance Act and the Mega Exemption Notification No.25/2012-ST dated 20th June, 2012. Circular notes that there are many services provided to an educational institution which are described as auxiliary education services and they have been defined in the exemption itself. It is clarified that such services provided to an educational institution are exempt from service tax. For example, if a school or a college hires a bus from a transport operator in order to ferry students to and from school or college, the transport services provided by the transport operator to the school are exempt by virtue of the specific notification. Similarly, services in relation to hostels, house–keeping, security services, canteen etc shall be exempt from levy of service tax.
Temporary exemption to some services in Uttarakhand
Ad-hoc Exemption Order No. 1/1/2013 dtd. 17th September, 2013
Exemption for Uttarakhand Viewing recent natural calamities occurred in the State of Uttarakhand, the Central Govt. vide this Exemption Order has exempted the taxable services namely (a) Renting of a rooms in a hotel, inn, guest house, club, camp site or other commercial place meant for residential or lodging purposes ; and (b) Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess from the whole of the Service Tax leviable thereon during the period from 17th September, 2013 to 31st March, 2014.
[2013] 37 taxmann.com 26 (Mumbai – CESTAT) YG1 Industries (India) (P.) Ltd. vs. Commissioner of Central Excise, Mumbai-III
Whether CENVAT credit can be availed on service tax paid on input services exempted from service tax? Held, Yes.
Facts:
The Appellant manufactured drills/tools and claimed CENVAT credit on job-work charges for grooving on which the service provider charged service tax which was eligible for exemption under Notification No.8/2005-ST dated 01-03-2005. The department denied the credit on the ground that the service provider should not have charged service tax and consequently the Appellant was not eligible for any credit
Held:
The Hon. Tribunal held that, whether the service provider was entitled for exemption and not required to pay duty at all, cannot be a consideration for the jurisdictional officers at the end of service receiver. Once service tax was paid and service used in or in relation to the manufacture of the final products, the Appellant was rightly entitled to avail CENVAT credit.
[2013] 37 taxmann.com 355 [New Delhi- CESTAT] Ajai Kumar Agnihotri vs. Commissioner of Central Excise, Kanpur
There is no fundamental distinction between hiring of a cab and renting of a cab for the levy of service tax.
Facts:
Facts:
The Appellant provided motor cabs/maxi cabs (with drivers) to GAIL on monthly basis and entered into an agreement of monthly rates for specified vehicles subject to specified usage in kilometres on 24 hours basis, additional amount for excess usage, separate charges for night halts etc. Other expenses towards fuel, salary of drivers and maintenance of vehicles were the responsibility of service provider.
The department contended that the Appellant provided rent-a-cab service and demanded service tax on the same. The Appellant contended that the said activity amounted to merely “hiring of motor” vehicle and there was no ‘renting’ involved since the recipient of service had no domain or control over the vehicle and the vehicle was placed at his disposal only for temporary usage, for the duration, either in point of time or in point of distance. It was also contended that, the domain of vehicle was always with the operator i.e. Appellant who also bears the expenses and maintenance charges.
Held:
Relying upon the decision of the Hon. High Court in CCE vs. Kuldeep Singh Gill [2010] 27 STT 224, the Hon. Tribunal decided in favour of the revenue by holding that there was no fundamental normative distinction between “hiring of cab” and “renting of cab” and that the Appellant provided rent-cabservices to GAIL leviable to service tax.
2013-TIOL-1394-CESTAT-DEL M/s ITC limited vs. Commissioner of Service Tax, Delhi.
Where the Show Cause Notices were issued on the basis of an unreasoned prima facie assumption, they were held invalid and thus, also the adjudicating orders based on such notices.
Facts:
The department issued two Show Cause Notices for the period April 2008 to March 2011. The department just reproduced the provisions of section 65(19) relating to definition of “Business Auxiliary Services” and demanded tax along with interest and penalty without stating any reasons and on a prima facie assumption.
The appellant, apart from impeaching the adjudication order on merits, urged a preliminary ground of challenge that the Show Cause Notices were incoherent and since it did not spell out what relevant ingredients of the relevant statutory provision applied to the service so provided to warrant attribution of the liability, the initial step for initiation of proceedings leading to adjudication failed for violation of due process and transgression of principles of natural justice. Reliance was placed on United Telecom Ltd. vs. CST, Hyderabad 2011 (22) STR 571 (Tri.-Bang), Kaur & Singh vs. CCE 1997 (4) ELT 289 (SC) and M L Capoor & Others AIR 1974 SC 87 (para 10).
Held:
On analysis of the Show Cause Notices issued by the department, the Hon. Tribunal observed that since the said notices were issued on the basis of unspecified reasons and a prima facie assumption that the assessee was assessable to levy of service tax for providing Business Auxiliary Services and that mere extraction of the entire provisions of section 65(19) of the Act did not fulfill the requirement, they were invalid and that the infirmity was incurable. The Hon. Tribunal, further, quashed the adjudication orders being the consequence of the invalid Show Cause Notices and granted liberty to the revenue to act in accordance with law.
2013-TIOL-1369-CESTAT-DEL TSC Travel Services Pvt. Ltd. vs. Commissioner of Central Excise, Ludhiana.
Whether the margin on airline tickets sold to the passengers can be considered as commission and thus liable to service tax under Business Auxiliary Service? Held, No.
Facts: The appellant purchased tickets directly from airlines and sold the same for a margin to its passengers which the department adjudicated as indirect commission and confirmed tax with interest and penalties under the category of “Business Auxiliary Service”.
Held: Considering a prima facie view that the activity of the appellant was nothing but trading activity, the Hon. Tribunal granted full waiver of pre-deposit.
Whether Assessee is Entitled to Interest on Delayed Payment of Interest on Refund? – Section 244A – Part I
Article 265 of the Constitution provides that no tax shall be levied or collected except by the authority of law. The Article provides that not only levy but also the collection of a tax by the Government must be under the authority of law. In pursuance of such law, the refund claims are regulated under the provisions of Chapter XIX of the Income-tax Act, 1961 (the Act). Section 237 effectively provides for refund of excess tax paid by the assessee. This is a general provision for claim of refund. A provision is also made in section 240 which effectively provides for refund of any amount that becomes due to the assessee as a result of any order passed in appeal or other proceedings under the Act. This is a special provision dealing with refund which imposes an obligation on the Assessing Officer (AO) to refund such amount for which the assessee is not required to make any claim. All the above provisions relating to payment of interest on refund provide for payment of simple interest at the specified rate and for the period specified therein. Section 241 authorising the AO to withheld refund in certain cases has been omitted from 1st June, 2001. Section 245 provides for adjustment of the amount of refund or part thereof against any sum remaining payable under the Act after giving an intimation in writing to the assessee for the proposal of such adjustment.
The Act also provided for payment of interest on refund due to the assessee under various provisions such as section 214 (excess payment of advance tax), section 243 (interest on delayed refunds), section 244 (interest on refund where no claim is needed) etc. Section becomes due to the assessee in pursuance of an order referred to in section 240. Certain amendments were made from time to time in these provisions with which we are not concerned in this write-up and hence the same are not referred to. Only relevant broad provisions dealing with interest on refunds are noted for this purpose. These provisions relating to interest on refunds are applicable in respect of assessment year 1988-89 and earlier years (old provisions of interest).
The interest u/s. 214 was payable on the excess payment of advance tax for the period from the first day of the assessment year upto the date of regular assessment. The regular assessment is defined in section 2(40) to mean the assessment made in section 143(3) or section 144. In this context, the issue had come up before the Apex Court in the case of Modi Industries Ltd. [216 ITR 759] to decide the meaning of the expression ‘regular assessment’ as High Courts had taken different views on the same. In a detailed judgment analysing various relevant provisions providing for interest on refund, and the views expressed by various High courts in that respect, the Apex Court approved the view expressed by certain High courts such as Bombay, Allahabad, Andhra Pradesh etc. which effectively held that the expression ‘regular assessment’ in section 214 means the original assessment. In the process of deciding the above issue and the impact of the provisions of section 214 as well as section 244 dealing with interest to be granted on refund, the Court also expressed the view that there is no right to get interest on refund except as provided by the statute. The Court also stated that interpretation of section 214 or any other section of the Act should not be made on the assumption that interest has to be paid whenever an amount which has been retained by the Revenue in exercise of the statutory power becomes refundable as a result of any subsequent proceeding.
Accordingly, the interest on excess payment of advance tax u/s. 214 is not payable from the date of payment of tax but from the first day of relevant assessment year nor it is payable till the date of refund but it is payable upto the date of ‘regular assessment’. Interest u/s. 243 or section 244(1) was payable upto the date of refund but only in cases where the refund was not made within the stipulated period. Interest u/s. 244 (1A) was payable in cases where the amount paid by the assessee is found in excess of his liability as result of appeal or other proceedings under the Act and such interest was payable on the excess amount from the date of payment of such amount to the date of the grant of refund. The Court also held that for the purpose of section 244(1A), the amount of advance payment of tax and the amount of tax deducted at source (TDS) must be treated as payment of income-tax pursuant to an order of assessment on and from the date when these amounts were set off against the tax demand raised in the assessment order, in other words the date of the assessment order. The Court also dealt with the other aspects of granting interest on refund with which we are not concerned in this write-up.
From the assessment year 1989-90, the provisions for interest on refund are made in section 244AA. This section effectively provides for payment of interest on any amount of refund that becomes due to the assessee under the Act to be calculated in the manner provided therein which effectively provides for payment of interest upto the date on which the refund is granted.
All the provisions relating to interest provide for the simple interest on refund amount at the specified rate which has undergone change from time to time.
In practice, in many cases, the payment of refund gets delayed for one or the other reasons and the refunds are made to the assessee without payment of interest on such delayed payment of refunds and in such cases, the payment of such interest gets delayed and the period of such delayed payment of interest sometime runs into years. In such cases, the issue has come up in the past as to whether the assessee can claim interest on such delayed payment of interest or any compensation for unjustified delay in payment of such interest.
The issue referred to in para above has been considered by the Courts in the past with different set of facts but with a common factor of inordinate delay in payment of interest that becomes due to the assessee under the provisions of the Act. In large number of cases, the Courts had found their way to compensate the assessee for the unjustified delay in payment of interest. It seems that Courts have attempted to decide such cases bearing in mind the principle of equity and fairness. In fact, the Gauhati High Court in the case of Jwala Prasad Sikaria [175 ITR 535] has gone to the extent of clearly stating that the assessee is entitled to payment of such interest due to delay even if there is no statutory provision in this regard.
1.4.1 In this context, the judgment of the Gujarat High Court in the case of D. J. Works [195 ITR 227] is worth noting. In this case, while giving effect to the appellate orders for the assessment years 1983-84 to 1985-86, the refunds were granted without interest to the assessee on different dates. The assessee had filed writ petition before the Gujarat High Court for non-payment of interest and pending this petition, the interest for all the three years was paid with some difference in the amount which is not relevant for the issue under consideration. The assessee had contended before the Court that the AO illegally withheld the payment of interest and since the retention or withholding of interest was without the authority of law, the Revenue is liable to pay interest on the amounts of interest wrongfully withheld. The Revenue had contended that there is no provision in the Act for payment of interest on interest. On these facts, the Court took the view that section 214(1) itself recognises in principle the liability of the Government to pay interest on excess tax paid by the assessee. The Court noted that the legislature itself has considered it fair and reasonable to avoid interest on excess tax paid by the assessee and retained by the Government. According to the Court, the same principle should be extended to the payment of interest, which has been wrongfully withheld by the AO or the Government. It is the duty of the AO to pay interest while granting refund of excess amount paid by the assessee. If the excess tax paid cannot be retained without payment of interest, so also the interest which is payable thereon cannot be retained without payment of interest. Though there is no specific provision for payment of interest on such interest, on general principle, the Government is liable to pay interest which had been due to the assessee u/s. 244(1) at the same rate at which the refund amount carries the interest. It seems that this judgment of the Gujarat High Court was followed by the Tribunal in the case of Narendra Doshi and this decision was affirmed by the M.P. High Court (Indore Bench). The question raised before the M.P. High Court was `Whether Appellate Tribunal was justified in law in directing to allow interest on interest, when the law points for grant of simple interest only?’ This was answered in affirmative and in favour of the assessee. This judgment of the M. P. High Court (dated 3rd May, 1999 in ITR No. 5 of 1996) has been affirmed by the Apex Court [254 ITR 606] stating that the said judgment of the Gujarat High Court had been followed by the same High Court in the case of Chimanlal S. Patel [210 ITR 419] and both these decisions held that “the Revenue is liable to pay interest on the amount of interest which it should have paid to the assessee but has unjustifiably failed to do so.” Having noted these facts, the Apex Court held that “The Revenue has not challenged the correctness of the two decisions of the Gujarat High Court. They must, therefore, be bound by the principle laid down therein. Following that principle, the question has, as we find, been rightly answered in the affirmative and in favour of the assessee.” Based on this, the appeal of the Revenue against the judgment of the M. P. High Court was dismissed. As such, the judgments of the Gujarat High Court in this respect were impliedly approved.
1.4.2 The issue referred to in para 1.3 also came up before the Apex Court in the case of Sandvik Asia Ltd. [280 ITR 643] in which the Court dealt with the issue in detail and in a reasoned order, decided the issue in favour of the assessee. In this case, the Court also took the view that even assuming that there is no provision in the Act for payment of compensation, the compensation for delay is required to be paid in view of the decision of this Court viz, Narendra Doshi (supra). The similar view also emerges from the observation of the Apex Court in the case of H.E.G Ltd. [324 ITR 331].The High Courts and the Tribunal have followed these judgments in many cases and the position on this regard was largely getting settled.
1.5 In the last year, the division bench of the Apex Court in the case of Gujarat Flouro Chemicals [252 CTR 237] doubted the correctness of the judgment of the Apex Court in the case of Sandvik Asia Ltd. (supra). Accordingly, the Court recommended that the issue should be referred to a larger bench. Recently, the Apex Court in the case of Gujarat Flouro Chemicals Ltd., has, in principle, decided the issue referred to it and considering its impact, it is thought fit to consider the same in this column.
Sandvik Asia Ltd. vs. CIT – 280 ITR 643 (SC)
2.1 In the above case, the relevant facts were : the assessee was entitled to certain refunds for the assessment years 1977-78, 1978-79, 1981-82 and 1982-83. After receiving the refund, the issue for non/ short grant of interest remained for which the assessee had filed a revision petition u/s. 264 before the Commissioner of Income-tax (CIT) on 27th February, 1987 which was rejected by order dated 28th February, 1990. Against this order, it appears that the assessee had moved the Apex Court and common order dated 30th April, 1997 was passed by the Apex Court under which the matter was remanded to the CIT for considering the claim of interest in accordance with the principle laid down by the Apex Court in the case of Modi Industries Ltd. (supra). Under these circumstances, the interest u/s. 214/ 244 was determined by the Revenue at Rs. 40,84,906 vide order dated 27th March, 1998 which appears to have been paid. In this case, there was a delay in payment of interest for various periods ranging from 12 to 17 years.
2.1.1 As a result of the above, the assessee filed a revision petition dated 3rd July, 1998 before the CIT asking for interest on delayed payment of interest upto the date of payment thereof which was rejected against which he assessee had filed writ petitions before the Bombay High Court on 7th June, 2001 without any success. On these facts, the issue referred to in para 1.3 above came up for consideration before the Apex Court at the instance of the assessee.
2.2 For dealing with the appeals of the assessee, the Court noted that substantial and important questions of law of great general public importance as well as under the Act pertaining to those four assessment years have been raised. The Court then stated that [Page No. 646] :
“ The main issue raised in these appeals is whether an assessee is entitled to be compensated by the Income-tax Department for the delay in paying to the assessee amounts admittedly due to it? ”
2.3 On behalf of the assessee, it was, interalia, contended that the High Court ought to have held that the assessee is entitled to compensation by way of interest for the delay in payment of amounts lawfully due to it and which were withheld wrongly and contrary to the law for an inordinately long period. The interest u/s. 214/ 244 is also a refund as contemplated in section 240 and hence, the Revenue is liable to pay interest u/s. 244 in respect of delay in payment of such interest. The High Court has failed to appreciate that during this period, the Department has enjoyed the benefit of the funds while the assessee was deprived of the same. It was further contended that the High Court erred in the purporting to distinguish/explain the decision of the Apex Court in the case of Narendra Doshi (supra) based on various decisions which were neither cited in the course of hearing nor were put to the counsel appearing and as such, the assessee had no opportunity to deal with the same. It was also contended that the High Court’s decision was erroneous as it rejected assesses claim on the sole ground that as the ‘amount due’ to the assessee was of interest, no compensation could be paid to it even when gross delay in payment was admittedly made by the Revenue contrary to the law. The case of the assessee is covered by section 240 which refers to `any amount’ which becomes due to the assessee which should include interest payable under the Act. It was further contended that in the case of Narendra Doshi (supra), the Court had set out two issues before itself, viz., whether when Revenue had not challenged the correctness of the Gujarat High Court decisions it was bound by the principle laid down therein and whether the Gujarat High Court had rightly laid down the principle that assessee would be entitled to interest on interest. The Apex Court had decided both the issues in favour of the assessee. The Bombay High Court erred in distinguishing this decision based on various decisions which were never cited during the course of hearing and which were never put to the counsel appearing for the assessee.
2.4 On behalf of the Revenue, it was, interalia, contended that none of the provisions of the law contained in the Act provided for payment of interest on interest and certainly not section 244(1). In the matter of interpretation of taxing statute, there is no scope for considerations of equity or intendment and what is expected is strict interpretation. When the statute does not permit grant of interest, it would be inappropriate to grant interest in exercise of writ jurisdiction. Strongly relying on the judgment of the Apex Court in the case of Modi Industries Ltd. (supra), it was further contended that in that case the Court clarified two factors, namely, the amount on which the interest is to be granted and the time period for which it is to be granted u/s. 214/section 244. This decision does not refer to interest on interest. Considering the overall facts and in particular, the fact that the Apex Court in its earlier order passed on 30th April 1997 directed the Revenue to decide the revision petition in accordance with the law laid down by the Apex Court in the case of Modi Industries Ltd. (supra), the Revenue had not wrongfully withheld the assessee’s money without any authority of law. It was also contended that the interest payable on the refund amount u/s. 244 is a simple interest and neither compounded interest nor interest on interest is payable. It was also contended that in the case of Modi Industries Ltd. (supra), the scope of section 214 of the Act was discussed and it was held that there is no right to get interest on refund except as provided by the statute and as such, the Bombay High Court was justified in rejecting the alternative claim of the assessee on this basis.
2.5 After considering the contentions raised by both the sides, the Court noted the relevant provisions of the Act and observed as under [Page 658] :
“ We have given our anxious and thoughtful consideration to the elaborate submissions made by counsel appearing on either side. In our opinion, the High court has failed to notice that in view of the express provisions of the Act an assessee is entitled to compensation by way of interest for the delay in the payment of amounts lawfully due to the appellant which were withheld wrongly and contrary to the law by the Department for an inordinate long period of upto 17 years. “
2.6 The Court then noted the judgment of the Gujarat High Court in the case of D. J. Works (supra) referred to in para 1.4.1 above and noted the fact of the view taken therein. The Court then also noted the judgment of the M. P. High Court in the case of Narendra Doshi and the question referred to before the High Court in that case and the fact that the said judgment of the M. P. High Court is affirmed by the Apex Court. The Court also noted the relevant observations from the Apex Court referred to in para 1.4.1 in that regard. The Court then stated that in the case of Narendra Doshi (supra) the Apex Court has held as under [Page No. 660]:
“The Revenue has not challenged the correctness of the two decisions of the Gujarat High Court. They must, therefore, be bound by the principle laid down therein. Following that principle, the question has, as we find, been rightly answered (by the Madhya Pradesh High Court) in the affirmative and in favour of the assessee.
The civil appeal is dismissed. No order as to costs.”
2.7 Dealing with the contention of the Revenue that section 244 provides for a simple interest and there is no provision in the Act for payment of interest on interest, the Court stated as under [Pages 663/ 664]:
“This contention, in our opinion, has no merit. Learned counsel for the assessee cited the decision Jwala Prasad Sikaria [1989] 175 ITR 535 (Gauhati) in support of his contention wherein the Gauhati High Court held that a citizen is entitled to payment of interest due to delay even if there is no statutory provision in this regard.
……… The High Court held that where an assessment is made under the Act of 1922 after the commencement of the 1961 Act and refund is granted to the assessee, interest is payable on such refund. The High Court has further held (head-note):
“The interest would, however, be deemed to have accrued after expiry of three months from the end of the month in which refund had become payable. The rate applicable would be that applicable to grant of refund under the Act of 1961 at the relevant time.”
The above decision was cited before the Bombay High Court. The High Court very conveniently omitted to consider the decision holding that the decision in Jwala Prasad Sikaria vs. CIT [1989] 175 ITR 535 (Gauhati) was in the peculiar facts of the case.”
2.8 The Court then dealt with the contentions of the Revenue that the High Court was right in law in rejecting the assesse’s claim on the sole ground that as the ‘amount due’ was of interest, no compensation could be made even when gross delay in payment was admittedly made by the Revenue. In this respect, the Court referred to the judgment of the Madras High Court in the case of Needle Industries Pvt. Ltd. [233 ITR 370] in which the Court held that the expression “amount” in section 244(1A) of the Act would include the amount of interest levied and paid u/s. 139(8) and 215 of the Act and collected in pursuance of an order of assessment which was refunded. For this, the Madras High Court agreed with the view taken by the M. P. High Court in the case of Sardar Balwant Singh Gujaral [86 CTR 64] wherein also the Court held that liability to pay interest is on the amount of refund due and the assessee would be entitled to interest on the amount of refund due which includes interest paid u/s. 139(8) and 215 of the Act.
2.9: The Court then further took the view that assuming there is no provision in the Act for payment of compensation, compensation for delay is required to be paid in view of the decision of this Court in the case of Narendra Doshi referred to in para 1.4.1 above. In this regard, the Court further stated as under [Page 669] :
“………This is clearly a decision of this court on the merits of the matter, albeit proceeding on the assumption that there was no provision in the Act granting interest on unpaid interest, in favour of the appellant’s contentions.
In the impugned order, the Bombay High Court has held that the Madhya Pradesh High Court was not on the point of payment of interest on interest, a view which is ex facie erroneous and clearly impossible to sustain as a plain reading of the question before the Madhya Pradesh High Court will show.”
2.10: Referring to the contentions of the Revenue that the delay in the present case was justified, the Court observed as under [Page 670] :
“ In our view, there is no question of the delay being “justifiable” as is argued and in any event if the Revenue takes an erroneous view of the law, that cannot mean that the withholding of monies is “justifiable” or “not wrongful”. There is no exception to the principle laid down for an allegedly “justifiable” withholding, and even if there was, 17 (or 12) years delay has not been and cannot in the circumstances be justified.”
2.11: Dealing with the issue as to whether the Act provides for payment of compensation for delayed payments of amounts due to an as-sessee in a case where these amounts include interest, the Court took the view as follows [Page 671] :
“In our view, the Act recognises the principle that a person should only be taxed in accordance with law and hence where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without author-ity of law the Revenue must compensate the assessee.”
2.11.1: The Court also did not agree with the view of the Bombay High Court that the word “refund” must mean an amount previously paid by an assessee and does not relate to an amount payable by the Revenue by way of interest on such sums. The Court also dealt with the phrase ‘any amount becoming due to an assessee’ used in section 240 of the Act and stated that section 240 provides for refund by the Revenue on appeal etc. and accordingly deals with all subsequent stages of proceedings and therefore, this phrase is used. Referring to the judgment of the Delhi High Court in the case of Good Year India Ltd., [249 ITR 527], the Court stated that in this case the Delhi High Court has held that this phrase would include interest and hence the assessee was entitled to further interest on interest wrongfully withheld. The Delhi High Court also referred to the judgment of the Gujarat High Court in the case of D. J. Works (supra) and read it as taking the same view. Similar view is also taken by the Madras High Court in the case of Needle Industries Pvt. Ltd. ( supra) as well as by the Kerala High Court in the case of Ambat Echukutty Menon [173 ITR 581]. The Court then held as under [Page 672] :
“In our opinion, the appellant is entitled to interest u/s. 244 and/ or section 244A of the Act in accordance with the terms and provisions of the said sections. The interest previously granted to it has been computed upto March 27, 1981 and March 31, 1986 (under different sections of the Act) and its present claim is for compensation for periods of delay after these dates.”
2.11.2 The Court then further stated as under [Page 673] :
“In the present appeal, the respondents have argued that the compensation claimed by the appellant is for delay by the Revenue in paying of interest, and this does fall within the meaning of refund as set out in section 237 of the Act. The relevant provision is section 240 of the Act which clearly lays down that what is relevant is whether any amount has become due to an assessee, and further the phrase any amount will also encompass interest. This view has been accepted by various High Courts such as the Delhi, Madras, Kerala High Court, etc.”
2.12 Considering the observations in the case of Modi Industries Ltd. (supra) that there is no right to receive interest except as provided by the statute on which the Bombay High Court had relied to decide the issue against the assessee, the Court stated as under [Page 672] :
“…… The decision in Modi Industries Ltd.’s case [1995] 216 ITR 759 (SC), has no bearing whatsoever on the issue in hand as the issue in that case was the correct meaning of the phrase “regular assessment” and as a consequence under which provision an assessee was entitled to interest for the period up to the date of regular assessment and thereafter. The matter of what was due to it in terms of the decision in Modi Industries Ltd.’s case [1995] 216 ITR 759 (SC) is over, concluded, no longer in dispute and was agreed/ accepted on March 27, 1998 when the second respondent gave effect to the previous order of this court dated April 30, 1997. The working of the respondents itself conclusively shows, further the interest received is admittedly in accordance with the Act. The decision in Modi Industries Ltd.’s case [1995] 216 ITR 759(SC), in our view, has no bearing whatsoever on the matter in hand. The main issue now is whether an assessee is entitled to be compensated by the Revenue for the delay in paying to the assessee’s amounts admittedly due to it?”
2.13: The Court then also dealt with the issue as to whether on general principles the assessee ought to have been compensated for the inordinate delay in receiving monies properly due to it. In this context, the Court also referred to Circular dated 2nd January, 2002 issued by the Central Excise Department on the subject of refund of deposits and noted that the Revenue has decided to view cases of the delay beyond the period of three months in the cases referred to therein adversely and decided to initiate appropriate disciplinary ac-tion against the concerned defaulting officer. The Board has also decided to implement the order passed by the Tribunal for payment of interest and the interest payable shall be paid forthwith.
2.13.1: Referring to the facts of the case of the assessee the Court observed as under [Page 676] :
“Interest on refund was granted to the appellant after a substantial lapse of time and hence it should be entitled to compensation for this period of delay. The High court has failed to appreciate that while charging interest from the assesses, the Department first adjusts the amount paid towards interest so that the principal amount of tax payable remains outstanding and they are entitled to charge interest till the entire outstanding is paid. But when it comes to granting of interest on refund of taxes, the refunds are first adjusted towards the taxes and then the balance towards interest. Hence as per the stand that the Department takes they are liable to pay interest only up to the date of refund of tax while they take the benefit of the assesses funds by delaying the payment of interest on refunds without incurring any further liability to pay interest. This stand taken by the respondents is discriminatory in nature and thereby causing great prejudice to lakhs and lakhs of assesses. A very large number of assessees are adversely affected inasmuch as the Income-tax Department can now simply refuse to pay to the assesses amounts of interest lawfully and admittedly due to them as has happened in the instant case. …………. Such actions and consequences, in our opinion, seriously affect the administration of justice and the rule of law.”
2.13.2: The Court then referred to the dictionary meaning of the word ‘compensation’. The Court then stated as under [Page 677] :
“ There cannot be any doubt that the award of interest on the refunded amount is as per the statute provisions of law as it then stood and on the peculiar facts and circumstances of each case. When a specific provision has been made under the statute, such provision has to govern the field. Therefore, the court has to take all relevant factors into consid-eration while awarding the rate of interest on the compensation.”
2.14: Considering a manner in which the mat-ter was handled by the Department, the Court found it necessary to send the copy of the judgment to the Finance Minister for taking appropriate action against the erring officers and in this context to the Court stated as under [Page 677] :
“ This is a fit and proper case in which action should be initiated against all the officers concerned who were all in charge of this case at the appropriate and relevant point of time and because of whose inaction the appellant was made to suffer both financially and mentally, even though the amount was liable to be refunded in the year 1986 and even prior thereto. A copy of this judgment will be forwarded to the hon’ble Minister for Finance for his perusal and further appropriate action against the erring officials on whose lethargic and adamant attitude the Department has to suffer financially.”
Apart from issuing general instruction (No.2, dated 28th March 2007) for granting interest alongwith refund , it is not known wheter any serious action is taken by the Government on the above recommendation of the Court.
2.15: Finally, the Court decided the appeals in favour of the assessee and reversed the judgment of the Bombay High Court and held as under [Page 678] :
“ The assessment years in question in the four appeals are the assessment years 1977-78, 1978-79, 1981-82 and 1982-83. Already the matter was pending for more than two decades. We, therefore, direct the respondents herein to pay the interest on Rs. 40,84,906 (rounded off to Rs. 40,84,900) simple interest at 9 % per annum from March 31, 1986 to March 27, 1998 within one month from today failing which the Department shall pay the penal interest at 15 % per annum for the above said period. “
2.16: From the above judgment, it would appear that the Court has taken a view that the expression ‘amount’ appearing in setion 244(1A) refers not only to the tax but also to the interest and it cannot be limited to the tax paid in pursuance of the assessment order. As such, in view of the express provisions of the Act, an assessee is entitled to compensation by way of interest for delay in the payment of amounts lawfully due to the assessee which are withheld wrongfully and contrary to law. Even assuming that there is no provision for payment for compensation, compensation for delay is required to be paid as the Act itself recognizes the principle that the Revenue is liable to pay interest when excess tax was retained and the same principle should be extended to cases where interest was retained. The Court has also explained that Narendra Doshi’s case (supra) was clearly a decision on the merit though it proceeded on the assumption that there was no provision in the Act granting interest on unpaid interest.
[ To be Concluded]
Works Contracts vis-à-vis Builders and Developers
Introduction
A very interesting issue was under litigation in relation to scope of ‘Works Contract’. The background of the works contract taxation is the landmark judgment of Hon’ble Supreme Court in case of Gannon Dunkerly & Co. (9 STC 353)(SC). While examining the scope of ‘sale’ for levy of sales tax, the Hon’ble Supreme Court held that the word ‘sale’ has to be interpreted in a limited sense. In fact, the Hon’ble Supreme Court held that ‘sale’ will have following meaning.
“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”
From the above passage, it is clear that to be a ‘sale’, the following criteria should be fulfilled:
(i) There should be two parties to contract i.e. seller and purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e., transfer of ownership from seller to purchaser.
Therefore, if the transaction was composite i.e. it also had labour as well as service element in it, it was held that it was not covered within the sales tax laws.
46th Amendment to the Constitution of India
To bring the ‘works contract’ transactions within the purview of sales tax levy, the Constitution of India was amended vide 46th amendment to the Constitution, in the year 1983. Along with other transactions, the ‘works contract’ transactions were also ‘deemed to be a sale’ for the purpose of levy of sales tax. The said purpose was achieved by inserting clause (29A) in Article 366 of the Constitution of India.
The relevant part is reproduced herein below for ready reference:
(29A) “tax on the sale or purchase of goods” includes–
(a) ……
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) to (f) …… and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;”
Scope of the Supreme Court judgment
Wherever composite transactions were involving goods and services, they were deemed to be covered within the scope of above constitutional amendment and were considered to be taxable under sales tax laws. In other words, there was no controversy about such coverage.
However, the issue arose in relation to sale of under construction premises like sale of premises by builders and developers. Normally, the builders and developers come up with their own projects and enter into agreement with prospective buyers for sale of premises like flats and offices etc. The intention of the builder and prospective buyer is to give/get possession of immovable property like a ready flat. It was believed that such contracts are not works contracts.
The first controversy arose before Supreme Court in case of K. Raheja Construction (141 STC 298)(SC). In this case there was tri-party agreement where landlord as owner of land, K. Raheja as developer and prospective buyer were parties. The agreement was entered into when the construction was in progress.
The value of the land and construction was shown separately. The argument of the dealer i.e. K. Raheja was that the agreement is for sale of immovable property as premises and not for carrying out any ‘works contract’. However, the Supreme Court rejected the argument holding that the agreement is ‘works contract’.
Maharashtra Chamber of Housing Industry judgment
After above judgment in K. Raheja, MVAT Act, 2002, was amended on 20-06-2006, whereby definition of ‘works contract’ was provided in the Act. In view of this provision, the Commissioner of Sales Tax, Maharashtra State issued a circular fastening liability on builders. The amendment and the circular were challenged before the Hon’ble Bombay High Court based on sample agreement under Maharashtra Ownership Flat Act (MOFA). The main plea before the Hon’ble High Court was that the State cannot consider the agreement involving third element i.e. land, as works contract.
The Hon’ble Bombay High Court delivered a judgment as reported in (51 VST 168), wherein rejecting arguments of the builders and developers, the agreements under MOFA were considered to be works contract transactions and the levy of tax on such transactions was held to be constitutionally valid.
Judgment of Larger Bench of Supreme Court in Larsen & Toubro Limited and another vs. State of Karnataka and another & Others.
The K. Raheja judgment came to be analysed by the Hon’ble Supreme Court in case of Larsen & Toubro Limited and another vs. State of Karnataka and another (17 VST 460)(SC), Hon’ble Division Bench did not concur with the judgment in K. Raheja and referred the matter to Larger Bench. The Hon’ble Larger Bench has resolved the above controversy vide recent judgment in Larsen & Toubro Limited vs. State of Karnataka, Civil Appeal No. 8672 of 2013 dated 26.9.2013. Alongwith the above, Larger Bench also considered judgment of MCHI (51 VST 168), as it was also before Supreme Court out of an SLP filed by MCHI.
Out come of Larger Bench Judgment
The Hon’ble Supreme Court has analysed the arguments of both the sides. The main argument of the developers was that the contract involving two elements only i.e. goods and services, can be considered as ‘works contract’ under above article 366 (29A)(b). However, the Hon’ble Supreme Court has held that there is no such limitation and a contract involving a third element like land can also be considered as a works contract.
A further argument that was advanced was that there is transfer of immovable property and not transfer of movable goods. In this respect also, the Hon’ble Supreme Court rejected the argument observing that even if the goods used get transformed into immovable property and such immovable property get transferred to the buyer, still it will be taxable ‘works contract’ for sales tax purposes. However, the Hon’ble Supreme Court observed that while taxing value of goods in the contract, no portion relating to immovable property should get taxed.
The Hon’ble Supreme Court has also observed that the contract will commence from the stage when the agreement is entered into with the prospective buyer. In other words, the work completed prior to such agreement will not be taxable.
It is also held that if the sale is of completed premises then it will not be covered by the sales tax laws.
In relation to MVAT Act, 2002, the Hon’ble Supreme Court has observed that rule 58(1A) of the MVAT Rules, 2005 should be relooked at by the government and the effect should be clarified by the government. It is also observed that double taxation should be avoided.
Conclusion
The above judgment will have far reaching effect. It has expanded the scope of ‘works contract’ transactions which can be subjected to sales tax. The Bombay High Court judgment in case of MCHI was relating to agreement under MOFA, whereas the observations of the Supreme Court suggest that other contracts though not falling within the ambit of MOFA can also be covered under the works contract category.
In relation to MVAT Act, 2002 the Hon’ble Supreme Court has directed clarification of rule 58(1A), and has also directed to ensure that there is no double taxation. Under the above circumstances, the builders and developers in Maharashtra should wait till such clarification is given by the government, as for proper discharge of liability such clarification is absolutely essential.
Services by Directors
Services by Directors
‘Service’ means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include –
(a) an activity which constitutes merely, –
i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
ii) Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or
iii) A transaction in money or actionable claim;
(b) A provision of service by an employee to the employer in the course of or in relation to his employment;
(c) Fees taken in any Court or Tribunal established under any law for the time being in force.
Explanation 1 – for the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to, –
(A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or
(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. ……………
Services provided by Director to a Company – Taxability under Reverse Charge
Services provided by Director to a Company – Taxability under Reverse Charge
• Vide Notification No.45/2012–ST dated 07-08- 2012, an amendment is made in the notification No.30/2012–ST dated 20-06-2012 by including the services provided or agreed to be provided by a director of a company to the said company, as a service taxable under reverse charge mechanism. Further, the extent of service tax payable on the same by the service provider and the service recipient is also stipulated as under:-
• Vide Notification No.46/2012–ST dated 07-08- 2012 the Rule 2(1)(d) of the Service Tax Rules, 1994, (ST Rules) which defines “person liable for paying service tax” is amended to insert a new item (EE) after item E as under : – “(EE) in relation to service provided or agreed to be provided by a director of a company to the said company, the recipient of such service”.
Payments to Directors – Service tax implications
i) Remuneration to Executive Directors
Sections 198 and 309 of the Companies Act, 1956 (“CA 56”) supplemented by Schedule XII, deal with remuneration of directors (including managing director and whole-time director) of a public company or a private company which is a subsidiary of a public company.
Section 309 of CA 56 lays down the ceilings on the remuneration payable to managing and whole-time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other.
The term ‘remuneration” is inclusively defined in the Explanation appended to section 198 of CA 56. This definition is relevant for the purposes of all the provisions of CA 56 which deals with director’s remuneration. The definition of ‘remuneration’, indicates that any payment by whatever name called and whether in cash, kind or money’s worth, or by way of perquisite, amenity or benefit, or by discharging an obligation amounts to ‘remuneration’, and such payment would attract the provisions of CA 56 regarding remuneration to directors
Section 309(2) of CA 56 contemplates payment to a director of remuneration by way of a fee for attending meetings of the board of directors or committees constituted by the board.
In case of managing director and whole time director, the payment of sitting fees forms part of managerial remuneration and if amounts are payable in accordance with Schedule XIII, no such sitting fees is payable to them; Department letter No. 3/1/90 CL – V, dated 18/07/1990, makes it very clear that, sitting fee may be paid only to a director who is not a whole time director or a managing director.
(ii) Remuneration to Non-Executive Directors
According to section 309 of CA 56, a public company can pay its non-executive director (meaning a director who is not a managing or a whole time director) remuneration in the form of fees for attending board meetings at the rate prescribed under CA 56, which are to be excluded for the purpose of the percentage limits on directors’ remuneration as specified in section 198 and 309 of CA 56.
In addition to sitting fees, a company’s nonexecutive director can be paid commission on net profits for a financial year. The total remuneration to all directors (executive and non–executive) excluding the fees for attending meetings, should not exceed the percentage limits laid down in section 198.
Section 309(4) permits payment of remuneration to the non–executive directors in two alternative ways:
• by way of monthly, quarterly or annual payment; or
• by way of commission.
(iii) Whether all Directors are employees of a Company
In terms of the provisions of CA 56 Act managing and whole time directors are executive directors and those who are not managing and whole time directors are non – executive directors. They are called “managerial personnel” and their appointment and remuneration are governed by the provisions of CA 56. Even when an executive director is designated as “executive chairman” or “executive vice chairman” or any other designation, such executive director is either a managing director or a whole–time director under CA 56 depending upon the nature and extent of powers of management because CA 56 does not recognise any other designation although it does not prohibit it. Therefore, a company has to treat its executive director either as managing director or whole–time director but both are equal so far as the provisions of the CA 56 regarding appointment and remuneration are concerned, all the provisions equally apply to both.
An important issue for consideration is, whether employer–employee relationship exists between the company and the executive directors.
It is a well–settled principle in company law that a director of a company as such is not a servant of the company and that the fees he receives are in recognition of services, but the same does not prevent a director or a managing director from, entering into a contractual relationship with the company, so that, quite apart from his office of director he becomes entitled to remuneration as an employee of the company. Further that relationship may be created either by a service agreement or by the articles themselves. [Refer CIT vs. Armstrong Smith (1946) 14 ITR 606 (Bom); (1946) 16 Comp as 172 (Bom)]
However, a managing director has a dual capacity. He may both be a director as well as an employee. It is, therefore, evident that, in his capacity as a managing director, he may be regarded as having not only the capacity as persona of a director but also the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. Where he is so employed, the relationship between him as the managing director and the company may be similar to a person who is employed as a servant or as an agent, for the term ‘employee’ can cover any of these relationships. The nature of his employment may be determined by the Articles of Association of the company and/or the agreement, if any, under which a contractual relationship between the director and the company has been brought about, under which the director is constituted as an employee of the company. The control which the company exercises over the managing director need not necessarily be one which tells him what to do from day-to-day. That would be too narrow a view of the test to determine the character of the employment. Nor does supervision imply that it should be a continuous exercise of the power to oversee or supervise the work to be done. The control and supervision is exercised and is exercisable in terms of the Articles of Association by the board of directors and the company in its general meeting.
It has been held in an English case that as directors they are not employees, but it cannot be doubted that a managing director may for many purposes properly be regarded as an employee. [Refer Boulting vs. Association of Cinematograph, Television and Allied Technicians (1963) 33 Comp. Cases 475 (CA)]
In one case, the question was whether the managing director was ‘employed’ by the company in any capacity. The managing director had claimed that he was not employed by the company, but that his position was an office or function of a director, i.e. he was an ordinary director entrusted with some special powers. However, this argument was rejected, and it was held that the proposition that a director can be regarded as having not only the persona of director but also the persona of employee was plain from the case of Beeton and Co. In re [1913] 2 Ch 279. Lord Normand summarised the position as follows :
“In my opinion, therefore, the managing direc-tor has two functions and two capacities. Qua managing director he is a party to a contract with the company, and this contract is a contract of employment; more specifically I am of opinion that it is a contract of service and not a contract for services. There is nothing anomalous in this; indeed it is a common place of law that the same individual may have two or more capacities, each including special rights and duties in relation to the same thing or matter or in relation to the same persons.”
Useful reference can also be made to Fowler vs. Commercial Timber Co. Ltd. [1930] 2 KBI (CA)
There are several cases under the Income Tax Act which dealt with this issue and the consensus appears to be that regardless of whether there is an agreement of service between the assessee company and the managing director the relationship between the company and the managing director is that of employer and employee. In some cases a provision or a term as to the removal or termination of the managing director has been considered to be one of the factors determining the relationship of employer and employee. [Refer Travancore Chemical Manufacturing Co (1982) 133 ITR 818 (KER) affirmed by SC – (1982) 137 ITR (St) 13]
The various provisions of CA 56 Act relating to managing director also indicate that a managing director has a role of an employee. For instance, the use of the term ‘agreement’ (section 2(26); use of the term “appoint or employ” (sections 316, 317); the expression “occupying the position of a managing director by whatever name called” (section 2(26); use of the expressions “appointment or employment” (section 267), the various kinds of remuneration enumerated in Schedule XIII, etc., go to indicate that a managing director is a director in the garb of an employee. Moreover, the Schedule also allows certain perquisites to the managing director and some of them (e.g. LTC) are to be given “in accordance with the rules of the company”. Section 17(2) of the Income Tax Act defines the term ‘perquisite’ the purport of which is that it is an amenity or a benefit granted by an employer to an employee. In fact, clause (iii)(a) of the said section specifically covers as perquisite the value of any benefit or amenity granted or provided free of cost or at concessional rate by a company to an employee who is a director thereof.
The nature of extent of control which is requisite to establish the relationship of employer and employee must necessarily vary from business to business and is by its very nature incapable for precise definition. It is not neces-sary for holding that a person is an employee, that the employer should be proved to have exercised control over his work. The test of control is not one of universal application and that there are many contracts in which the master could not control the manner in which the work was done.
There may be a formal contract between a managing director and the company evidencing the contractual relationship between the two. However, in the absence of a formal agreement the relationship may be established by an implied contract. Where a managing director is appointed, and acts as such, in accordance with the company’s articles, and no separate formal contract is entered into, the existence of an implied contract may be inferred, although the articles do not constitute a contract between the company and the managing director qua managing director.
Summation
In light of discussion above, it would reasonably appear that, a managing director is an employee of the company. This principle equally applies to any whole–time director or any other director (by whatever name called) who has executive powers relating to the management of the affairs of a company and responsibility to look after the day-to-day affairs of the company (fully or partly) under a service contract which is either express or implied and evidenced by the board/shareholders resolution appointing him and additionally, a formal agreement between him and the company.
Taxability of Services provided by Directors
According to one school of thinking, since a company is a legal entity, it has no option but to operate through the medium of directors. Therefore, services provided by directors to a company (excepting those on a contractual or professional basis), are essentially in a fiduciary capacity. Hence, such services would not fall within the ambit of ‘service’ as defined u/s. 65B(44) of the Act so as to be liable to service tax. However, this is a very extreme view, which is likely to be disputed by the service tax authorities.
Subject to such extreme view, it would reasonably appear that, with effect from 01-07-2012 services provided by directors to companies would be taxable except in the following cases:
• Services provided by a director to a company in the course of or in relation to his employment as discussed in detail above.
• Services provided by a director in a non– taxable territory to a company located in a non–taxable territory.
• Services provided by a director to a company without consideration (for example in case of nominee directors where no sitting fee is paid).
• According to Point of Taxation Rules, 2011, the point of taxation of services provided by a director to a company, would be either the time when invoice is issued for service provided or to be provided. If invoice is not issued within 30 days, point of taxation will be the date of completion of service. For sitting fees, date of completion of services, would generally be the date of meeting or the time when the payment/advance is received to the extent of such payment.
• In case of reverse charge payments, point of taxation is reckoned from the date of payment by the company to the director.
Subject to the above discussion, the taxability for the period 01-07-2012 to 06 -08 -2012 (the period till amendment was brought in vide Notifications 45/2012 and 46/2012 provided above) and 07-08-2012 onwards and taxability of reimbursements is discussed hereafter.
Taxability of services provided by directors during the period 01-07-2012 to 06-08-2012.
Liability at the end of Directors
• During this period, the director’s services were not covered under reverse charge, the directors would be liable to pay service tax and also comply with the requirements under the service tax law. The said position is confirmed by draft CBEC Circular F.No.354/127/2012–TRU dated 27-07-2012, which states that when a director receives payment in his personal ca-pacity, the same is liable to be taxed in the hands of the director. However, the concerned director would be entitled to the threshold exemption of Rs. 10 lakh, subject to compliance of stipulated conditions.
• However, in the following cases, service tax would not be payable by the directors:
As per draft CBEC circular dated 27-07-2012, a director may also be appointed to represent an entity including Government who has either invested in the company or is otherwise authorized to nominate a director. Where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be provided by such entity and not by the individual director. Accordingly, in such cases, the service tax would be payable not by the director but by such entity appoint-ing the director. Nevertheless, in the case of Government nominee directors where the fee is charged by the Government appointing the director and is paid to the Government, the services may be deemed to be provided by the Government and may be liable to be taxed under the exclusion sub-(iv) of clause (a) of section 66D of the Act viz. support services by Government to a business entity. Such services are liable to be taxed on reverse charge basis from 01-07-2012 and therefore, tax is to be paid by the service recipient i.e. the company. Secondly, if the director is located in a non-taxable territory i.e. the State of Jammu & Kashmir or outside India, then service tax is not payable by such director. In this case, if the company is located in a taxable territory, the transaction would be covered under reverse charge from 01-07-2012 and tax is payable by the company.
Implications at the end of Company receiving the service
• No service tax would be payable in respect of fees paid to directors located in taxable territory. However, in case of any payment towards taxable service to a director, located outside India or in the State of Jammu and Kashmir or in case of payment to Government against consideration of Government nominee director as discussed above, the company receiving the service is required to pay service tax under reverse charge as per Rule 2(1)(d) of ST Rules read with Notification No. 30/2012–ST dated 20-06-2012. Further, in case of reverse charge the threshold exemption of Rs. 10 lakh is not applicable.
• Vide Circular No.24/2012, dated 09-08-2012 of Ministry of Corporate Affairs, Government of India, it is clarified that any increase in remuneration of non–whole time director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government u/s. 309 and 310 of the CA 56 even if it exceeds the limit of 1% or 3% of the profit [u/s. 309(4)] of the company, as the case may be in the financial year 2012-13.
Taxability of services provided by directors from 07-08-2012 onwards
Implications at the end of directors
For the period 07-08-2012 onwards, since the services by directors are covered under reverse charge, the directors are not liable to pay service tax. Even the entities receiving fee in respect of directors nominated by them are not required to pay service tax on the same.
Implications at the end of the Company receiving the service
The companies other than those located in a non taxable territory, would be required to pay service tax under reverse charge basis in respect of taxable services received from the directors for a consideration, irrespective of fact whether they are located within or outside the taxable territory or are nominee directors of Government/ other entitles. Further, as discussed earlier, the threshold exemption of Rs. 10 lakh is not applicable when the liability is fastened under reverse charge mechanism.
Further as stated above, the Circular No.24/2012-ST of the Ministry of Corporate Affairs is equally relevant here as well.
Taxability of reimbursements/out of pocket expenses
From 19- 04-2006, stringent provisions were introduced under the service tax law in regard to taxability of reimbursements. The Constitutional Validity of Rule 5 of the said Valuation Rules has been challenged before the Delhi High Court in International Consult & Tech (P) Ltd vs. UOI (2009) 19 STT 320 (DELHI), in particular on the ground being ultra vires the provisions of section 66 and 67 of the Act. The Delhi High Court has recently ruled in 2012 TIOL 66 DEL HC that Rule 5(1) of Valuation Rules is ultra vires of sections 66 & 67 of the Act. Implications of the said ruling in particular the continued relevance of principles laid down in Larger Bench ruling in Shri Bhagawathy Traders vs. CCE, Cochin 2011 (24) STR 290 (Tri.-LB) is discussed in detail in the January, 2013 issue of BCAJ. Hence the same are not repeated here.
Subject to the above, the following needs to be noted in particular, while determining taxability of expenses reimbursed to directors since the liability vests in the company under reverse charge:
• According to Rule 5(1) of Valuation Rules, where any expenditure or costs are incurred by the service provider in the course of providing any taxable services, all such expenditure or costs shall be treated as consideration for the taxable services provided or to be provided and shall be included in the ‘value’ for purpose of charging of service tax on the said services. Expenditure or costs incurred by a service provider as “pure agent” of the recipient of service shall be excluded from the value of taxable service if all the conditions specified in Rule 5(2) of valuation Rules are satisfied.
• For the purpose of Rule 5(2) of Valuation Rules, a pure agent is defined to mean a person who receives only the actual amount incurred to procure such goods or services.
• According to the department clarification dated 19-04-2006, “value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenditure or costs incurred by the service provider in the course of providing a taxable service forms integral part of the taxable value and are includible in the value. It is not relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client”.
ITO vs. Roche Goplani ITAT “G” Bench, Mumbai Before Rajendra Singh (A. M.) and Amit Shukla (J. M.) ITA No. 7737 / Mum / 2011 Asst. Year : 2008-09. Decided on 24-05-2013 Counsel for Assessee / Revenue: D. K. Sinha / Dr. P. Daniel
Explanation 5 to section 271(1)(c) – undisclosed income declared in return filed u/s. 139(4) and assessed as such entitled to immunity from penalty.
Facts:
In the order passed u/s 143(3) r.w. section 153A, the AO accepted the income of Rs. 1.31 crore retuned by the assessee. Thereafter, he initiated the penalty proceedings u/s. 271(1)(c) for the reasons that the assessee declared the additional income as a result of the search operation carried out by the department and secondly, the return of income was filed after the due date of filing of return. The assessee explained that the income was offered voluntarily which was on estimate basis and the same had been accepted in the assessment order as such. Therefore, the provisions of section 271(1) (c) was not applicable. However, the AO rejected the explanation offered and imposed a penalty of Rs. 42.41 lakh. Before the CIT(A) the assessee submitted that in view of clause (b) of Explanation 5A to section 271(1)(c), penalty cannot be levied as the assessee filed the return of income on the due date which can also be inferred as return of income filed u/s. 139(4). The CIT(A) however, didn’t accept the assessee’s explanation on Explanation 5A but deleted the penalty on the ground that the income which was offered was only on estimate basis, therefore, the additional income offered to tax can neither be held as concealed income or furnishing of inaccurate particulars of income.
Before the tribunal, the revenue submitted that it was not a case of estimate made by the AO in the regular assessment proceedings but it is a case of search and seizure, wherein the assessee has himself declared additional income in the statement recorded u/s. 132(4). Even if such surrender was based on estimate, then also it represents undisclosed income. Thus, the penalty cannot be deleted on the ground that it was based on the estimated income. Further it was submitted that as per the language of the Explanation 5A to section 271(1)(c), if any undisclosed income is found which is not shown in the return of income either prior to the date of search or before the due date of filing of return, penalty was levieable.
Held:
According to the tribunal, Explanation 5A to section 271(1)(c) provides that if during the course of search, the assessee is found to be the owner of any asset or income which has not been shown in the return of income which has been furnished before the date of search and the “due date” for filing the return of income has expired, the assessee is deemed to have concealed the particulars of his income or furnish inaccurate particulars of income and liable for penalty u/s. 271(1)(c). In other words, if the income is offered in the return which is filed by the “due date”, no penalty can be imposed.
The tribunal then examined whether the “due date” in Explanation 5A encompasses a belated return filed u/s. 139(4). It observed that the “due date” can be very well inferred as due date of filing of return of income u/s. 139(4) because wherever the legislature has provided the consequences of filing of the return of income u/s. 139(4), then the same has also been specifically provided. E.g., section 139(3) which denies the benefit of carry forward of losses u/s. 72 to 74A if the return of income is not filed within the time limit provided u/s. 139(1). In the absence of such a restriction, the limitation of time of “due date” cannot be strictly reckoned with section 139(1). Even a belated return filed u/s. 139(4) will be entitled to the benefit of immunity from penalty. For the said proposition the tribunal also relied on the decisions of the Gauhati high court in the case of Rajesh Kumar Jalan (286 ITR 276), the Punjab & Haryana high court in the cases of Jagriti Aggarwal (339 ITR 610) & of CIT vs. Jagtar Singh Chawla. In view of the above, the tribunal held that the assessee gets immunity under clause (b) of Explanation 5A to section 271(1) (c) because the assessee has filed return of income within due date.
Section 199 – Assessee entitled to TDS credit based on the evidences even if the same is not shown in Form 26AS
Section 199 – Assessee entitled to TDS credit based on the evidences even if the same is not shown in Form 26AS
Facts:
In the original return filed the assessee claimed TDS of Rs. 165.21 crore. In the revised return, the assessee made further claim of TDS of Rs. 1.43 crore. Thereafter, during the course of the assessment proceedings, it claimed further sum of TDS of Rs. 3.57 crore by its letter dated 28-12-2010. The AO, however, gave credit of TDS only to the extent of Rs. 11.9 crore, the amount as appearing in Form 26AS. On appeal, the CIT(A) directed the AO to give credit of TDS as per original challans available and/ or the details available in the computer system of the department.
The assessee had also claimed petitioned that it is entitled to interest on excess amount of TDS and in case the interest is not granted by due date, it was entitled to interest on delayed payment of interest.
Held:
The tribunal referred to the Bombay high court decision in the case of Yashpal Sawhney vs. ACIT (293 ITR 539) where it was held that even if the deductor had not issued a TDS certificate, the claim of the assessee has to be considered on the basis of the evidence produced for deduction of tax at source. Further, the tribunal noted that the Delhi High Court has also in Court On Its Own Motion vs. CIT 352 ITR 273 directed the department to ensure that credit is given to the assessee even where the deductor had failed to upload the correct details in Form 26AS, on the basis of evidence produced before the department. Therefore, the tribunal allowed the appeal of the assessee on this point and held that the department is required to give credit for TDS once valid TDS certificate had been produced or even where the deductor had not issued TDS certificates on the basis of evidence produced by assessee regarding deduction of tax at source and on the basis of indemnity bond.
As regards the claim for interest on delayed payment of interest, the tribunal relying on the decision of the Supreme court in the case of Sandvik Asia Ltd. vs. CIT (280 ITR 643) held in favour of the assessee.
A. P. (DIR Series) Circular No. 50 dated 20th September, 2013
Opening of Trading Office/Non-Trading Office/ Branch Office/Representative Office abroad
Presently, banks are required to submit, on halfyearly basis, a statement in Form ORA with the Regional Offices of RBI containing particulars of approvals granted for opening of Trading Office/ Non-Trading Office/Branch Office/Representative Office overseas.
This circular has done away with the requirement of filing Form ORA with the Regional Offices of RBI. However, Banks are required to maintain records of approvals granted by them for opening of Trading Office/Non-Trading Office/Branch Office/Representative Office overseas.
Capital gain: Rate of tax: Section 112: A. Y. 2010-11: Non-residents are eligible for the benefit of 10% tax rate on long term capital gains under proviso to section 112(1): AAR should avoid giving conflicting rulings:
Cairn UK Holdings Ltd. vs. DIT (Del); W. P. (Civil) No. 6752/2012 dated 07-10-2013:
The petitioner, a non-resident company, had transferred certain equity shares of a company CIL in the relevant year resulting in a long-term capital gain of INR532,84,251 after applying the benefit under the first proviso to section 48 of the Income-tax Act, 1961. The petitioner made an application to AAR for an advance ruling on the following question.
“Whether on the stated facts and in law, the tax payable on long term capital gains arisen to petitioner assessee on sale of equity shares of CIL will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act?”
AAR accepted the plea and contention of the Revenue and held that the proviso to section 112(1) was not applicable and therefore, the petitioner cannot avail the lower rate of tax at 10% on capital gains. The reason and ratio applied was that for the proviso to section 112(1) to apply, second proviso to section 48 should be also applicable and as second proviso to section 48 was excluded and was not applicable to the petitioner, benefit of lower rate of tax at 10% was not available.
The petitioner assessee filed a writ petition before the Delhi High Court and challenged the order of the AAR. The petitioner submitted that they are covered by the proviso to section 112(1) as they are not taking benefit of indexation under the second proviso to section 48. The assets sold by them were shares listed on the Bombay Stock Exchange and National Stock Exchange. This satisfies the statutory requirement of assets to be listed securities. The proviso nowhere stipulates that if an assessee takes benefit of first proviso to section 48, the proviso to section 112(1) is not applicable. Neither does the language postulates that the assessee must be entitled to benefit of the second proviso to section 48 and only when the said proviso is applicable but not applied, that an assessee can get benefit under proviso to section 112(1) of the Act. It was further submitted that the view of the petitioner was accepted by the AAR on 01-10-2007 in Timken France SAS, In Re, reported in (2007) 294 ITR 513 (AAR), and was repeatedly followed in the subsequent decisions and even in one decision after the present impugned decision.
The Delhi High Court allowed the writ petition and held as under:“
i) It is not possible to decipher the exact legislative purpose behind the proviso to section 112(1) in a categorical and unambiguous manner. However, if one squarely focuses on the words used in the proviso and interpret them without extracting or subtracting any phrase or word, a non-resident assessee is entitled to benefit of the said provision.
ii) The proviso to section 112(1) does not state that an assessee, who avails benefits of the first proviso to section 48, is not entitled to lower rate of tax at 10%. The said benefit cannot be denied because the second proviso to section 48 is not applicable. In case the legislature wanted to deny the said benefit where the assessee had taken the benefit of the first proviso to section48, it was easy and this would have been specifically stipulated. The fact that by this interpretation, a non-resident becomes entitled to double deductions by way of computation of gains in foreign currency under the first proviso to section 48 and the benefit of lower rate of tax under the proviso to section 112(1) is no reason to interpret the proviso differently.
iii) Further, as the AAR had taken a view in Timken France SAS which was followed in several cases over several years, it ought not to have taken a opposite view and brought about uncertainty in understanding the effect of the proviso to section 112(1). There should be consistency and uniformity in interpretation of provisos as uncertainties can disable and harm governance of tax laws. The AAR should follow its earlier view, unless there are strong grounds and reasons to take a contrary view.”
Relief for Shareholders Agreements – SEBI Notifies Long-overdue Relaxations
SEBI finally resolves an age-old self-created problem SEBI has finally set at rest, substantially though not fully, a controversy that affected for decades some core issues in Shareholders Agreements and related agreements/structures. An age old provision in the form of a circular existed that was meant to prevent certain ills but ended up affecting innumerable agreements between two or more groups of shareholders and others. A brief introduction of the issue is first necessary to understand what the problem was and what SEBI has now provided.
What was the problem?
Take an example of a situation where such a provision created hurdles. When two or more groups get together in a company, to control and run it together, it is common and even inevitable that they will agree that one group will not exit without the other having a say. Thus, if Group A wants to sell its shares, Group B would want certain safeguards/rights. It would require Group A to give what is known was Right of First Refusal. This means that if Group A is getting an offer to acquire its shares at say, Rs. X per share, then Group B would have right to buy the shares at the same price. In other words, it has a right of pre-emption. Of course, Group B could choose not to buy and let the shares be sold to the offering party. At times, they may agree that on completion of certain conditions, one group (or a third party, say an executive) would have a right to acquire a certain number of shares. One could go on with more such examples but, in essence, rights are given over to one person to acquire another person’s shares in the future. Similar rights could be given to a person to sell its shares.
The law makers had a certain concern on an entirely unrelated issue. Considering the evils of unregulated trading in shares (including what is known as dabba trading in common parlance) it was decided that trading in securities otherwise than on regulated and recognized stock exchanges should not be permitted. Thus, trading – or even contracting to buy/sell – securities except on a recognised stock exchange was made null and void. Thus, such a contract was not enforceable. The only real exception (apart from certain territorial exceptions) to was “spot transactions”. This covered a contract of purchase and sale of securities where the delivery/payment was spot – which was effectively defined to be that the delivery of shares and payment was to be made within one day of the contract.
The law as so framed ensured that forward/futures/ options trading in securities could not be carried out without being regulated. However, a simple transaction of private sale and purchase of shares and other securities on ready payment/delivery basis was exempted.
The wording of this law, however, had a peculiar consequence. It meant that no contract of sale/ purchase of securities could be entered into unless it fell into the very narrow exempted category. For most practical purposes, one could not enter into a valid agreement to buy/sell shares in the future. Or enter into an agreement where involving postponement of the payment of consideration and/or delivery of the securities beyond one day. As joint ventures, private equity, co-promoted companies, etc. became increasingly common, this became a serious concern. Parties entering into such agreements could not bind each other with such basic commercial safeguards. This was despite the fact that almost all of such agreements could not even remotely affect public interest, being entered into by informed parties on a negotiated basis without any intention of trading.
In practice, this problem was dealt with parties by often being in denial or half-baked structuring or even sheer ignorance. Some legal counsels even opined that, structured in a particular way, the notification did not apply to private agreements. The reality, however, was that even in the most optimistic scenario, often, there was concern that, if put to test, many of such clauses in agreements may not be held valid. Thus, what was referred to euphemistically as a “calculated risk” was taken. The fact that Supreme Court, other courts and SEBI held many of such agreements to be unenforceable worsened matters (the various decisions and their legal basis can be subject for a separate detailed article).
The matter became more complicated when this issue spilled over to other laws including laws regulating foreign exchange.
SEBI’s recent circular gives relief – with some conditions
Finally, on 3rd October 2013, SEBI issued a circular withdrawing the earlier notification and allowing parties to enter into agreements for purchase/sale of shares, though with certain conditions which are fairly reasonable. Let us consider which of such contracts are exempted and under what conditions.
The first two exemptions are as expected and continuing ones. “Spot Delivery Contracts” are exempted. Purchase or sale of securities/derivatives on stock exchanges in accordance with law and bye-laws, etc. of such exchanges are also exempted.
Next exempted category is “contracts for preemption including right of first refusal, or tag-along or drag- along rights contained in shareholders agreements or articles of association of companies or other body corporate”. Thus, all contracts of pre-emption are exempted, including the specified ones such as right of first refusal, etc. These may be contained in the agreements between shareholders and/or incorporated in the articles of association of the company.
Then come certain “options” in agreements between shareholders (or contained in the articles of association). Such options provide a right to one person to buy or sell shares. On exercise of such options, the actual purchase/sale of shares is effected. Such agreements are also exempted, subject, however, to certain conditions. Firstly, the securities underlying such options should have been held continuously for at least one year by the selling party. This is effectively a lock-in period. Secondly, the price/consideration for such purchase/sale of shares should be in compliance with prevailing laws. Finally, the contract, i.e., the purchase/sale is settled by actual delivery of the underlying securities.
The circular makes it clear that the contracts will continue to have to adhere to FEMA and Regulations/Rules issued thereunder. FEMA has other policy considerations and hence such agreements particularly with parties across the border would require such compliance.
Will the relaxations apply to existing agreements?
An interesting provision is made for agreements for purchase/sale of shares existing on the date of this circular. It is clarified that this circular shall neither affect nor validate agreements existing immediately prior to the date of the circular. In other words, all such existing agreements shall continue to be subject to the earlier law. Only those contracts having such clauses and which are entered into on or after the date of this circular would benefit from the relaxations made in it, subject of course complying with the conditions stated therein.
There have been views expressed that parties could merely re-execute such contracts as of a date after the date of such circular. This sounds like a fairly simple solution to the thousands of agreements existing as on such date, though one wonders whether it is simplistic too. The practical hurdle is whether all the parties concerned would readily agree to re-execute such past agreements. In practice, often relations may have soured between the parties who may want to re-negotiate certain terms of the agreement if it has to be re-executed. Obviously, though the party entitled to the rights may be keen, the party who is subject to the obligations may not readily agree. Then there is a commercial reality that was often observed in practice. Many parties entered into some version of such agreements knowing quite well that they are likely to be unenforceable. Hence, they considered the likelihood of being required to act upon it fairly remote and considered that if at all such transactions were to be executed, the parties could consider the offered terms and generally the reality at that time. The party entitled to the rights too may not have really believed that it would actually get them. Clearly, these parties never intended such agreements to have unqualified binding force and they may not agree to re-execute them to give them such force. Thus, the parties would want to re-negotiate the contract instead of merely printing out a copy and re-executing the same today.
Applicability to other laws for certain contracts
The circular also clarifies that as far as government securities, gold related securities, money market securities, contracts in currency derivatives, interest rate derivatives and ready forward contracts in debt securities entered into on the stock exchange are concerned, they shall be in accordance with various specified laws such as securities laws, banking laws, FEMA, etc.
Anomalous provision in Companies Act, 2013
In this context, it is necessary to discuss a strange provision in the recently notified Companies Act, 2013. Section 194, which incidentally has been notified as to have come into effect, prohibits certain contracts by directors/key managerial persons of companies. The specified contracts are rights (or a right exercisable at option of such person) to call for delivery or make delivery of a specified quantity of shares/debentures, at a specified price and within a specified time. It appears that the intention is to prohibit contracts of futures/options. While this is consistent with the existing provisions under the SEBI Regulations relating to prohibition of insider trading, this provision is too widely worded. The SEBI Regulations are intended to prohibit directors/officers/designated employees from entering into derivatives transactions of their companies. However, the scope of section 194 is very broad. It is a blanket ban on all agreements giving any right or option to acquire/sell shares. Further, the section applies to all companies – listed, unlisted or even private. It does not even give exemption to employees’ stock options. Thus, despite the relaxation by the circular, this ill-advised provision in the Act can present problems. On the other hand, it applies only to directors/key managerial persons and not others including other promoters or promoter companies.
Curiously, the Explanation to this section seems to modify its scope. Firstly, it states that it would apply to those shares/debentures where the concerned person is a whole -time director and not merely a director. Secondly, the shares/debentures may be of the employer company or its holding company or its subsidiary. Even more curiously, the initial part of the section refers also to “associate” companies. Further, the ban in the section is on “buying” such rights and one thus wonders whether such rights granted to employees or otherwise forming part of contracts are also covered. The section is an example of bad drafting. To summarise, however, this provision will create hurdles in case of whole-time directors/key management persons in entering into agreements to buy/sell shares in the future or acquire options for such buy/sell of shares.
To conclude, SEBI has finally provided relaxation to genuine contracts between parties that faced the possibility of being treated as impermissible under SEBI regulations though they did not affect public interest.
Search and seizure: Block assessment: Section 158BC; Block period 01-04-1986 to 26-06- 1996: Undisclosed income to be determined on basis of evidence found during search: Cannot be computed on the basis of best judgment:
CIT vs. Dr. Ratan Kumar Singh; 357 ITR 35 (All)
The assessee was a practicing medical doctor having different sources of income such as income from agricultural activities, medical profession and pathology. On 25-09-1996, a search u/s. 132 at the residential premises of the assessee was simultaneously conducted with a survey u/s. 133A at his business premises where an x-ray clinic and blood bank were located. During the survey a register marked pertaining to the blood bank was found and seized. Another register pertaining to x-ray was also seized. No search was conducted at the business premises of the assessee from where these registers were impounded. The assessing Officer made an assessment u/s. 158BC of the Act, of the assessee’s undisclosed income for the block period making additions pertaining to the blood bank and x-ray. The Tribunal deleted the addition.
On appeal, by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under:
i) Undisclosed income of the block period has to be determined on the basis of evidence found as a result of search or requisition of books of account or other documents and such other materials or information as are available with the Assessing Officer and relatable to such evidence with certain other conditions. It is not open to the Assessing Officer to compute the income on the basis of best judgment.
ii) A search was conducted at the residential premises of the assessee and survey was conducted at the business premises. During the search, no cash, bullion, jewellery or any material was found, which could be considered as undisclosed income.
iii) The additions were made on estimate basis after seizing the register from the business premises of the assessee. The Tribunal was justified in deleting the addition.”
Salary: Perquisite: Sections 15 and 17(2): A. Y. 1994-95: Assesee R but NOR: Employer to bear the tax on salary: Assessee paid tax of Rs. 50 lakh: Got reimbursement from employer of Rs. 35 lakh: Salary received by the assessee to be enhanced by Rs. 35 lakh only and balance Rs. 15 lakh paid by assessee not to be enhanced:
CIT vs. Jaydev H. Raja; 261 CTR 408 (Bom):
The assesee a resident but not ordinarily resident individual was an employee of Coca Cola Inc. USA having salary income. Under the tax equalisation policy framed by the company, the assessee’s tax liability arising out of his foreign assignment was to be borne by the company. In the relevant year, the assessee had received salary of Rs. 77 lakh and the tax payable thereon was Rs. 35 lakh which was reimbursed by the employer. The assessee returned the total income of Rs. 1.12 crore ( 77 + 35 lakh) and paid tax thereon of Rs. 50 lakh. The Assessing Officer made an addition of Rs. 15 lakh treating the same as the amount reimbursable by the employer. The Tribunal allowed the assessee’s appeal and held that though the assesee had paid the tax amounting to Rs. 50 lakh, the assessee was entitled to reimbursement of tax amounting to Rs. 35 lakh only from the employer and the balance Rs. 15 lakh was borne out of the salary income received by the assessee in India.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“Only the actual reimbursement of tax by the employer could be included in the salary of the employee and not the tax paid by employee from his salary income for the purposes of grossing up u/s. 195A.”
Revision: Scope: Section 263: A. Y. 2006-07: CIT feeling inquiry inadequate: CIT must make enquiry and show that assessment order was erroneous: CIT has no power to remand and direct AO to conduct enquiry:
DIT vs. Jyoti Foundation: 357 ITR 388 (Del):
For the A. Y. 2006-07, the assessment was completed u/s. 143(3) r/w. section 147, making enquiry as regards the consideration on sale of the four plots. Subsequently, exercising powers u/s. 263 of the Act, the Commissioner held that the enquiry made by the Assessing Officer was inadequate and therefore directed the Assessing Officer to make fresh enquiry and pass a fresh order of assessment. The Tribunal cancelled the order of the Commissioner passed u/s. 263.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “
i) Revisionary power u/s. 263, is conferred by the Act on the Commissioner/Director of Income-tax when an order passed by the lower authority is erroneous and prejudicial to the interest of the Revenue, but orders which are passed after inquiry/ investigation on the question/issue are not per se or normally treated as erroneous and prejudicial to the interest of Revenue because the revisionary authority feels and opines that further inquiry/investigation was required or deeper or further scrutiny should be undertaken.
ii) In cases where there is inadequate enquiry but not lack of enquiry, the Commissioner must record a finding that the order/inquiry made is erroneous. This can happen if an enquiry and verification is conducted by the Commissioner and he is able to establish and show the error or mistake made by the Assessing Officer, making the order unsustainable in law. An order of remit cannot be passed by the Commissioner to ask the Assessing Officer to decide whether the order was erroneous.
iii) Inquiries were certainly conducted by the Assessing Officer. It was not a case of no inquiry. The order u/s. 263 itself recorded that the Director felt that the inquiries were not sufficient and further inquiries and details should have been called for. The inquiry should have been conducted by the Director himself to record the finding that the assessment order was erroneous. He should not have set aside the order and directed the Assessing Officer to conduct the inquiry. iv) We do not think any substantial question of law arises for consideration. The appeal is dismissed.”
Rectification: Interest: Sections 154 and 244A: A. Y. 2002-03: While giving effect to order of CIT(A) the assessee was allowed refund with interest u/s. 244A: Rectification u/s. 154 to withdraw interest is not sustainable: Question whether there was delay and to whom the delay was attributable is a debatable question of fact:
CIT Vs. Nathpa Jhakri Joint Venture; 261 CTR 110 (Bom):
In the assessment order giving effect to the order of the CIT(A), the Assessing Officer allowed refund and also interest u/s. 244A of the Income-tax Act, 1961. Subsequently, the Assessing Officer passed a rectification order withdrawing the interest allowed u/s. 244A of the Act. The Tribunal allowed the assessee’s appeal and cancelled the rectification order.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“Whether or not, there was a delay in the proceedings and to whom is such delay attributable is a question of fact, requiring investigation and therefore interest granted u/s. 244A could not be withdraw by rectification u/s. 154.”
Penalty: Sections 139A and 272B: A. Y. 2003- 04: Quoting PAN in TDS certificates: Failure: Where assessee-deductor did not mention PAN of deductees on TDS certificates issued by it, as same was not provided by deductees within time prescribed, there was reasonable cause for non-compliance of section 139A(5A), and, therefore, penalty u/s. 272B could not be imposed:
CIT vs. Gail (India) Ltd.; [2013] 36 taxmann.com 336 (All)
The assessee, a public sector undertaking, had deducted income tax at source as per the provisions of sections 194C and 194J on all the payments made to contractors/professionals during the financial year 2002-03. The tax so deducted was also deposited by it in the government treasury in time. The annual return of TDS as per the provisions of section 203 was also filed in the prescribed ‘Form 26C’ and TDS certificates were issued to contractors/professionals. However, penalty at the rate of Rs. 10,000 for each 350 defaults committed by the respondent-assessee was imposed by the revenue on the ground that the respondent-assessee has not mentioned PAN in Form 16A issued to 350 contractors. The assessee’s contention that there was reasonable cause for not mentioning the PAN in Form 16A since the deductee had not provided the PAN was rejected and penalty was imposed. The Tribunal deleted the penalty, holding that there was reasonable cause for default.
On appeal by the Revenue, the Allahabad High Court upheld the decision of the Tribunal and held as under “
i) A perusal of section 139A(5A) shows that it puts an obligation on the person receiving any sum or income or amount from which tax has been deducted under the provisions of Chapter XVII (which include sections 194C and 194J) to intimate his permanent account number to the person responsible for deducting such tax under the Chapter. In the present case, it is clear that it was statutory obligation of the contractors, who received certain amounts from the respondent-assessee, from which tax was deducted under the provision of Chapter XVII-B, to intimate their permanent account number to the respondent-assessee.
ii) It is the specific stand of the assessee that certain contractors had not intimated their permanent account number, and for that reason it could not be mentioned in Form 16A issued to such contractors. Section 139A(5B) makes it obligatory for every person deducting tax under Chapter XVII-B to quote the permanent account number of the person to whom such sum or income or amount has been paid by him. Thus, reading both the provisions together, namely, sections 139A(5A) and section 139A(5B), it appears that the deductor may be at fault under section 139A(5B) if he does not quote the permanent account number of the persons to whom the amount has been paid, despite the intimation of permanent account number by such person to the deductor u/s. 139A(5A) of the Act. There is nothing on record to show that the contractors to whom certain amounts were paid by the respondentassessee, had intimated their permanent account number to the respondent-assessee as required u/s. 139A(5A). In the circumstances, therefore, the assessee successfully explained the reasonable cause to satisfy the provisions of section 273B.
iii) Considering the provisions of section 272B, 273B and sections 139A(5A) and 139A (5B), a bare reading of the provision itself makes it clear that the penalty u/s. 272B would not ordinarily be imposed, unless the assessee had either acted deliberately in defiance of law or was guilty of conduct which is contumacious, dishonest or acted in conscious disregard to its obligation. The penalty u/s. 272B cannot be imposed merely because it is lawful to do so. It can be imposed for failure to perform statutory obligation. The imposition of penalty for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially, after considering the explanation of reasonable clause submitted by the assessee and on a consideration of all the relevant circumstances.
iv) On the findings recorded by the Tribunal that there was no revenue loss and mere technical breach, it clearly satisfies the test of reasonable cause u/s. 273B. In the present case the levy of penalty u/s. 272B by the assessing authority was fully unjustified.”
Income from industrial undertaking: Deduction u/s. 80-IB and 80-IC: A. Ys. 2004-05 and 2006-07: Transport subsidy, power subsidy, interest subsidy and insurance subsidy resulting in increase of profits of the undertaking: Such increased profit is income derived from the industrial undertaking and is eligible for deduction u/s. 80-IB/80-IC of the Act:
CIT vs. Meghalaya Steels Ltd.; 356 ITR 235 (Gau): 261 CTR 17 (Gau):
The assessee’s industrial unit was eligible for deduction u/s. 80-IB/80-IC of the Income-tax Act, 1961. For the relevant years, the Assessing Officer disallowed the claim for deduction in respect of the profit relating to the transport subsidy, power subsidy, interest subsidy and insurance subsidy. The Tribunal held that the subsidies in question would go on to reduce the corresponding expenses incurred and the resultant profit would be the profits and gains of the business of the industrial undertaking, that all these subsidies are interlinked, interlaced and having a direct nexus with the manufacturing activities of the assessee which are inseparable from the expenditure incurred by the assessee on account of transportation of purchase as well as sales, power, interest, insurance cover of the business of the assessee and, therefore, there is a direct nexus between the subsidy received by the asessee’s industrial undertaking and the resulting profits and gains thereof and the assessee is eligible for deduction u/s. 80-IB/80-IC of the Act.
On appeal by the Revenue, the Gauhati High Court upheld the decision of the Tribunal and held as under: “
i) Transport subsidy, power subsidy, interest subsidy and insurance subsidy received under various Government Schemes go to reduce the cost of gains derived by it and there is direct and first degree nexus between the industrial activities of the assessee on one hand, and the subsidies received by it on the other.
ii) The profits and gains earned on the strength of such subsidies are profits and gains derived by, the industrial undertaking and are deductible under the provisions of section 80—IB or section 80-IC as the case may be.”
S. 80HHC and S. 80IA — Deduction allowed u/s.80IA need not be reduced from the profits of the business in computing deduction u/s.80HHC
8 J. B. Chemicals & Pharmaceuticals Ltd.
v. ACIT
ITAT ‘B’ Bench, Mumbai
Before S. V. Malhotra (AM) and
R. S. Padvekar (JM)
ITA No. 6044/Mum./2002
A.Y. : 1999-2000. Decided on : 30-7-2008
Counsel for assessee/revenue : D. R. Rayani/
Mohit Jain
S. 80HHC and S. 80IA of the Income-tax Act, 1961 — Whether
deduction allowed u/s.80IA is to be reduced from the profits of the business in
computing deduction u/s.80HHC — Held, No.
Per S. V. Malhotra :
Facts :
The issue before the Tribunal was whether the deduction
u/s.80HHC(1) and S. 80IA can be independently allowed subject to the overall
ceiling of 100% of profit of the undertaking. According to the AO, in view of
Ss.(9) of S. 80IA, when the assessee had claimed deduction u/s.80IA, then the
deduction u/s.80HHC was not allowable in respect of that portion of income on
which deduction u/s.80IA had been claimed. In the case of the assessee, since
the business profit after reducing eligible profit u/s.80IA worked out negative,
he disallowed the deduction u/s.80HHC.
On appeal, the CIT(A) directed the AO to independently
compute the deduction u/s.80IA and u/s.80 HHC and restrict the profits and gains
to be excluded from business profit for the purpose of S. 80 HHC only to the
extent of amount allowed as deduction u/s.80IA.
Held :
The Tribunal took note of the following and allowed the
appeal filed by the assessee :
(i) In the assessee’s own case for the A.Y. 1999-2000, the
Tribunal relying on the decision of the Mumbai Tribunal in the case of Ifunik
Pharma Ltd. had rejected the appeal filed by the Revenue and the appeal filed
by the assessee was allowed.
(ii) In the case of V. Chinnapandi, the Madras High Court,
relying on the decision of the M. P. High Court in the case of J. P. Tobacco
Products Pvt. Ltd. (SLP filed against which by the Revenue was dismissed by
the Apex Court), had taken the view that both the Sections were independent,
and hence, the deductions could be claimed u/s.80HHC as well u/s.80I on the
gross total income;
(iii) In the case of SCM Creation, which was the intervener
in the case of Rogini Garments before the Special Bench of Chennai Tribunal,
the Madras High Court relying on its own decision in the case of V.
Chinnapandi, had allowed the appeal filed by the assessee;
(iv) The Bombay High Court in the case of Nima Specific
Family Trust, which decision was again based on the decision of the M. P. High
Court in the case of J. P. Tobacco Products Pvt. Ltd., had held that both the
Sections were independent and hence, deduction could be claimed on the gross
total income, subject to ceiling of 100%.
Cases referred to :
1. Ifunik Pharma Ltd. (ITA No. 4389/M/02);
2. CIT v. V. Chinnapandi, (2006) 282 ITR 389 (Mad.);
3. J. P. Tobacco Products Pvt. Ltd. v. CIT, 229 ITR
123 (M.P.);
4. SCM Creation (Tax case Appeal No. 310 & 311 of 2008 —
Madras High Court);
5. Nima Specific Family Trust, 248 ITR 291 (Bom.)
6. ACIT v. Rogini Garments, (2007) 108 ITD 49 (SB)
(Chennai)
S. 158BE — Limitation period cannot get extended by issuing prohibitory order u/s.132(3).
7 Nandlal M. Gandhi v. ACIT
ITAT ‘E’ Bench, Mumbai
Before G. D. Agrawal (VP)
as Third Member
IT(SS)A No. 11 (Mum.) of 2000
A.Ys. : 1-4-1987 to 28-7-1997. Decided on : 16-6-2008.
Counsel for assessee/revenue : K. Shivaram & Ajay Singh/Rajiv
Nabar
S. 158BE of the Act, 1961 — Time limit for completion of
block assessment — On the day of search (i) panchnama prepared with the remark
that ‘search temporarily concluded for the day to be commenced subsequently’;
and (ii) prohibitory order u/s.132(3) issued — After a period, prohibitory order
revoked and panchnama prepared with the remark ‘search is finally concluded’ —
Whether the period of limitation is to be computed from the date search was
originally initiated or from the later date of panchnama — Held that the period
of limitation is to be computed from the former date.
Facts :
The search u/s.132 was carried out on 28-7-1997 and continued
till 29-7-1997. During the search certain incriminating materials which,
inter alia, included jewellery and shares were found. The search party
prepared an inventory in respect of the material found and a panchnama was
drawn. As per the panchnama, only books of accounts and certain documents were
seized and no seizure was effected in respect of other materials found,
including those of jewellery and shares. In the panchnama it was stated that
search was temporarily concluded for the day to be commenced subsequently.
However, on the same day i.e., 29-7-1997, a prohibitory order was issued
u/s.132(3) in respect of jewellery and shares, which was subsequently revoked on
1-8-1997 and 8-9-1997 in respect of jewellery and shares, respectively. On
8-9-1997, another panchnama was prepared, wherein it was stated that ‘search is
finally concluded’, and no other comments/remarks were recorded therein. During
the period 29-7-1997 to 8-9-1997, certain statements were recorded by the I.T.
authorities.
In response to notice u/s.158BC, the assessee filed his block
return of income declaring undisclosed income of Rs.16.35 lacs which was
assessed by the AO in his order dated 30-9-1999 at Rs.55.69 lacs. Being
aggrieved the assessee challenged the order passed by the AO, on the grounds,
amongst others, that u/s.158BE, the order passed by the AO was beyond the
stipulated period of 2 years from the end of the month in which the warrant of
authorisation of search was executed. However, the CIT(A) did not agree with the
contention of the assessee and upheld the addition made by the AO.
The assessee appealed before the Tribunal. There was a
difference of opinion between the two members, in relation to the assessee’s
ground relating to time limit prescribed u/s.158BE for completion of block
assessment u/s.158BC. Therefore, the matter was referred u/s.255(4) to the Third
Member.
Before the Third Member, the Revenue contended that the
second panchnama drawn on 8-9-1997 was in continuation of the first panchnama
dated 29-7-1997 and therefore, it should be taken that the first panchnama dated
29-7-1997 was finally concluded on 8-9-1997. According to it, the search had
been completed on the date when the prohibitory order u/s.132(3) was revoked,
which in this case was 8-9-1997. It was further submitted that between the
period of first panchnama dated 29-7-1997 and second panchnama dated 8-9-1997,
statements u/s. 132(4)/131 on five different occasions were recorded and after
considering the statements recorded, the authorised officer considered it
appropriate to lift the prohibitory order. Therefore, it was contended that the
search got concluded on 8-9-1997 when finally the prohibitory order u/s.132(3)
was revoked.
Held :
The Tribunal noted that the Department was seeking extension
of time limit for framing the assessment on the strength of prohibitory order
issued u/s.132(3) on 29-7-1997, which was finally revoked on 8-9-1997 and the
panchnama was prepared stating that the search was finally concluded.
A Parable of Life
Mankind’s journey of life is variously described as a journey of life and greed. In this journey, he forgets the true purpose of his life and gets stuck in the material world.
Here is a parable taken from the Jain literature which best describes the journey. The words/phrases in parenthesis endeavour to give an interpretation which one can relate to in his spiritual quest. This interpretation is said to be provided by Haribhadra Maharaj, a Jain monk from the 7th century.
A man (Soul), seeking fortunes (Salvation) was passing through a thick jungle (Cycle of rebirths). Suddenly, a wild elephant (Death) with upraised trunk charged him fiercely. He tried to run fast, but his path was blocked by an evil demon (Old Age). The only escape route now was to climb the huge, tall, banyan tree (Path to salvation). He ran and reached the tree but could not decide if he had the will and power to climb the mighty tree. Right below the mighty tree was a deep well (Human Life), all covered with grass and reeds. “This well (Human Life) would save me”, he thought, and jumped in it.
As he was falling through the grass and the reeds, he looked below and was terrified. Right below him lay many terrible snakes (Passions which impede human judgment) enraged and hissing fearsomely. To make matters worse, deep down below was a black and mighty python (Hell) with angry red eyes. Afraid, he held on to a clump of reeds hanging from the top and clung on to it. He thought, “My life will only last as long as these reeds hold fast” and he looked up.
There he saw two large mice (The day and night – the passages of time), one white and one black, their sharp teeth ever-gnawing at the roots of the reed-clump. Up above, the wild elephant (Death) was charging, repeatedly, at the banyan tree (Path to salvation). This disturbed the beehive hanging from a branch right above him. The angry bees ( Diseases of Life) swarmed down on him and his whole body was stung. Just then, as he was looking up and cursing himself for not climbing the tree, a drop of honey (trivial pleasures) fell on his face and somehow reached his lips.
That was a moment of sweetness. He looked up again, forgot all the dangers around him and just craved and waited for more drops of honey to come down his way. In his excited craving for yet more drops of honey, he lost awareness of the reality – the python (Hell), the snakes (Passions), the mice (the day and night the passages of time), the elephant (Death), or the bees (Diseases of Life).
It is for each one of us to understand and appreciate the parable in its true spirit as we journey through life.
(Acknowledgements: Jainism and the New Spirituality by Vastupal Parikh)
Business expenditure: Disallowance u/s. 40(a)(ia): A. Y. 2007-08: Amendment by Finance Act, 2010 permitting TDS payment till due date for filing return of income is retrospective:
CIT vs. Rajinder Kumar (Del); ITA No. 65 of 2013 dated 01-07-2013, 06-09-2013:
For the A. Y. 2007-08, the Assessing Officer found that TDS on the expenses of Rs. 78,51,800/- paid in the month of March 2007 was deposited in April 2007. The Assessee contended that the said expenditure should be allowed since the TDS has been deposited within the due date. The Assessing Officer disallowed the said amount of Rs. 78,51,800/- relying on the provisions of section 40(a)(ia) of the Income-tax Act, 1961 on the ground that TDS has been deposited after March 2007. The Tribunal allowed the assessee’s claim relying on the decision of the Calcutta High Court in the case of CIT vs. Vergin Creations, ITA No. 302/11, G.A. No. 3200/11 dated 23/11/2011, wherein it has been held that the proviso to section 40(a)(ia) of the Act, amended by the Finance Act, 2010 has retrospective effect. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under: “i) The intention behind section 40(a)(ia) is to ensure that TDS is deducted and paid. The object of introduction of section 40(a)(ia) is to ensure that TDS provisions are scrupulously implemented without default in order to augment recoveries. It is not to penalise an assesee when payment has been made within the time stated.
ii) Failure to deduct TDS or deposit TDS results in loss of revenue and may deprive the Government of the tax due and payable. The provision should be interpreted in a fair, just and equitable manner. It should not be interpreted in a manner which results in injustice and creates tax liabilities when TDS has been deposited/paid and the Respondent who is following cash system of accountancy has made actual payment to the third party for services rendered.
iii) Also, section 40(a)(ia), prior to the insertion of the proviso by the Finance Act, 2010, was not free from interpretative difficulties and problems. The amended provisions are clear and free from any ambiguity and doubt and help curtail litigation. The amended provision clearly support the view that the expression “said due date” used in clause A of proviso to the unamended section refers to the time specified in section 139(1) of the Act. The amended section 40(a)(ia) expands and further liberalises the statutes when stipulates that deductions made in the first eleven months of the previous year but paid before the due date for filing of the return, will constitute sufficient compliance.
Appeal to High Court – Fresh material produced before the Supreme Court – The Supreme Court remanded the matter to the High Court to consider the said material as it was of relevance.
In an appeal against the judgement and order passed by the High Court of Punjab and Haryana at Chandigarh, the Supreme Court while issuing notice to the respondent, by its order dated 3rd February, 2012 had passed the following order:
“Issue notice as to why the matter should not be sent back to the High Court as, today, learned counsel for the petitioner has placed before us a number of documents which earlier were not placed before the High Court.”
At the time of admission, the Supreme Court was of the opinion, the documents, which the appellants had filed before it were of some relevance and those documents should be looked into by the High Court before it comes to a conclusion whether the appeal requires to be allowed or to be rejected.
Taking that view of the matter, the Supreme Court set aside the order passed by the High Court and remanded the matter back to the High Court for fresh disposal after accepting the documents that were/ may be filed by the appellants, keeping all the contentions of both the parties open.
Safe Harbour Provisions in Indian Transfer Pricing Regime
Recently, CBDT has notified the much awaited “Safe Harbour Rules”, which at present are applicable to certain select International Transactions. Rules 10TA to 10TG and Form no. 3CEFA have been notified and the same have come into force from the date of their publication in the Official Gazette i.e. 18th September, 2013. These Rules aim at reducing litigation in the arena of Transfer Pricing. This article analyses various provisions, their impact and potential issues that may arise there from.
Introduction
The genesis of “Safe Harbour Rules” (SHR) in India is found in the Finance (No. 2) Act, 2009 whereby the Government of India empowered CBDT to formulate safe harbour rules vide insertion of section 92CB. The Memorandum explaining provisions of the Finance Bill mentioned the objective for introduction of SHR is to reduce litigation. A safe harbour has been defined to mean circumstances in which the Income-tax authorities shall accept the transfer price declared by the assessee.
The United Nation’s Practical Manual on Transfer Pricing for Developing Nations released in the year 2013 defines Safe harbour rules as follows: “Safe harbour rules are rules whereby if a taxpayer’s reported profits are below a threshold amount, be it as a percentage or in absolute terms, a simpler mechanism to establish tax obligations can be relied upon by a taxpayer as an alternative to a more complex and burdensome rule, such as applying the transfer pricing methodologies”.
OECD Transfer Pricing Guidelines defines a safe harbour as “a provision that applies to a defined category of the taxpayers or transactions and that relieves eligible taxpayers from certain obligations otherwise imposed by a country’s general transfer pricing rules.”
Globally, SHR aim at reducing litigation and compliance cost, providing certainty, reduction in documentation etc. It would be pertinent to note that Indian SHR does not give any relief from maintenance of rigorous documentation to justify arm’s length pricing.
Let us proceed to analyse some of the salient features of the Indian SHR.
Applicability of SHR
Selection of Option (Rule 10TE)
Safe Harbour provisions are applicable in respect of select international transactions (Refer Table below) in respect of those assesses who specifically opts for the same by filing a declaration in Form 3CEFA. The validly exercised option shall continue to remain in force for the period specified in Form 3CEFA or a period of five years, whichever is less. An Assessee has an option to opt out of the safe harbour provisions for any assessment year by fur-nishing a declaration to the Assessing Office (AO) to that effect.
SHR applicability is subject to filing the return of income of the relevant Assessment Year (AY) in time as well as furnishing every year a statement to the AO, before furnishing the return of income of that year, providing details of eligible transactions, their quantum and profit margins or the rate of interest or commission.
Transactions with Tax Havens (Rule 10TF)
Benefit of safe harbour rules is not available in respect of transactions entered into with an associ-ated enterprise located in any country or territory notified u/s. 94A or in a no tax or low tax country or territory. To illustrate, an Indian company who has given a loan to its wholly owned subsidiary in one of the free trade zones of UAE, cannot opt for the safe harbour provisions.
Select International Transactions and Safe Harbour Limits
Other Important Features
Eligible Assessee
Rule 10TB defines “Eligible Assessee” to mean a person who has exercised a valid option for application of safe harbour rules in accordance with the procedure laid down in Rule 10E [refer paragraph on Selection of Option (Rule 10TE) supra] and is engaged in eligible international transactions (as mentioned in the Table herein above).
Significance of “Insignificant Risk”
Rule 10TB further provides that in case of assessees who are engaged in software development, ITES, KPO or contract R&D services in software or generic pharmaceutical drug sectors, they must be working with “insignificant risk” profile. Insignificant risk of the assessee is broadly classified as circumstances wherein foreign principal takes all major risks relating to capital and funds, performs most of the economically significant functions, conceptualises and designs the product, controls and supervises the assessee and owns legal, economic and commercial rights in the intangible generated or outcome of the services. (Refer Clauses 2 & 3 of the Rule 10TB)
Mutual Agreement Procedure
Rule 10TG provides that where the transfer price is accepted by the income tax authorities u/s. 92CB, the assessee shall not be entitled to invoke mutual agreement procedure under a DTAA or specified territory outside India as referred to in sections 90 or 90A.
Operating Expenses
Rule 10TA (j) defines “Operating Expense” as mentioned below:
“Operating Expense” means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including depreciation and amortization expenses relating to the assets used by the assessee, but not including the following, namely:-
(i) interest expense;
(ii) provision for unascertained liabilities;
(iii) pre-operating expenses;
(iv) loss arising on account of foreign currency fluctuations;
(v) extra-ordinary expenses;
(vi) loss on transfer of assets or investments;
(vii) expense on account of income-tax; and
(viii) other expenses not relating to normal operations of the assessee;
Rule 10TA (k) defines “ Operating Revenue” as mentioned below:
“Operating Revenue” means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations but not including the following, namely:-
(i) interest income;
(ii) income arising on account of foreign currency fluctuations;
(iii) income on transfer of assets or investments;
(iv) refunds relating to income-tax;
(v) provisions written back;
(vi) extraordinary incomes; and
(vii) other incomes not relating to normal operations of the assessee;
From the above definition, one can draw the conclusion that while doing benchmarking analysis (even otherwise than for safe harbour), one may adjust expenses and income on above lines such that revenue and expenses of other companies/entities become comparable by removing abnormality. For the purpose of safe harbour we need to consider depreciation and amortisation expenses, however for doing a normal TP analysis one may compare profits before depreciation and amortisation if there is a significant difference in assets employed of comparable companies.
Some issues/important points to be noted
Safe harbour provisions as notified now do leave some gaps or issues unanswered. Some of these issues which come to our mind are as follows:
(i) Documentation
Clause (5) of Rule 10TD provides that the provisions of section 92D (pertaining to maintenance of documentation) in respect of international transaction shall apply irrespective of the fact that the assessee exercises his option for safe harbour in respect of such transaction. There is no respite from maintaining documentation even if one opts for safe harbour provisions.
(ii) No Comparability Adjustment
Clause (4) of Rule 10TD provides that once the assessee opts for safe harbour provi-sions, he is not eligible for comparability adjustment and allowance under the second proviso to s/s. 92C which provides for al-lowance/variation of 3 % between the arm’s length price determined under the Income-tax Act, 1961 and the price at which the international transactions have actually been undertaken. This provision is appropriate in that if additional allowance/adjustment of 3 % is allowed to the safe harbour margin then it will dilute the acceptable profit margin to that extent.
However, the difficulty may arise when the foreign country does not accept the safe harbour margin of an Indian entity and disallows excess compensation/expenses (which may be required to fall within Indian SHR). In this situation, if Indian entity has opted for safe harbour benefit, then it cannot invoke Mutual Agreement Procedure also and it will have to live with some double taxation.
(iii)No Threshold-Safe Harbour
Unlike Domestic Transfer Pricing, there is no threshold for application of transfer pricing in respect of international transactions.
Global Trends
Developments at OECD
OECD has revised its stand on safe harbour pro-visions in the recently amended guidelines on Transfer Pricing. Earlier OECD members did not favour safe harbour rules as they challenge the fundamental concept of arm’s length principle. However, as number of countries have adopted safe harbour rules especially for smaller taxpayers and/or less complex transactions, even OECD recognized the need and importance of these rules.
The revised Section “E” on Safe Harbours in Chapter IV of the OECD Transfer Pricing Guidelines (issued on 16th May 2013) discusses some potential advantages and disadvantages of safe harbour provisions as follows:
Advantages of Safe Harbours:
(i) They may simplify compliance and reduce compliance costs for eligible taxpayers;
(ii) They provide certainty about the acceptance of the transactions with limited or no scrutiny;
(iii) They allow tax administrations to allocate their administrative resources efficiently.
Disadvantages of Safe Harbours:
(i) They deviate from arm’s length principle;
(ii) They may increase the risk of double taxation especially when adopted unilaterally;
(iii) They may provide an opportunity for tax planning;
(iv) They may result in issues of equity and uniformity as taxpayers are allowed to adopt differential pricing for similar transactions in similar set of circumstances.
In light of the above analysis, the OECD Guidelines recommends bilateral or multilateral safe harbours and for that purpose it provides a sample MOU.
The United Nation’s Practical Manual on Transfer Pricing for Developing Nations released in 2013
Though apparently United Nations has not taken any stand in favour or against safe harbour rules, it recognises advantages and limitations of these provisions. Chapter 3 of the Manual contains discussion on Safe Harbour Rules. It states that Safe harbour rules can be an attractive option for developing countries, mainly because they can provide predictability and ease of administration of the transfer pricing regime by a simplified method of establishing taxable profit.
Korean Experience on Safe Harbour1
Before joining the OECD, the Republic of Korea’s national tax authority, the National Tax Service (NTS), employed a so-called “standard offer-commission rate” for import and export business taxation. Under this scheme, the NTS used a standard offer commission rate based on a survey on actual commission rates. This was available as a last resort under its ruling only in cases where other methods for identifying the arm’s length rate were inapplicable in determining commission rates received from a foreign party. The NTS finally repealed this ruling as it considered the ruling to be contrary to the arm’s length principle.
Summation/Way Forward
Unilateral safe harbour provisions may result in some double taxation as tax treaties by and large provide relief from double taxation only in cases where income is taxed in accordance with provisions of the relevant tax treaty. Since safe harbour provisions are in the domestic tax law, relief may not be available under a tax treaty. Therefore, to avoid potential double taxation, the recent amendment to the OECD Transfer Pricing Guidelines advocates bilateral or multilateral safe harbour agreements. In fact bilateral or multilateral safe harbour agreements could be quite useful also in case of Cost Contribution or Cost Sharing Arrangements among Associated Enterprises of Multinational Enterprises situated in various jurisdictions.
Despite limitations, safe harbour provisions provide much needed certainty and will reduces litigation and compliance cost for small taxpayers. Some companies may like to bear the brunt of some additional tax as an additional cost of capturing a developing market.
Even if one feels that the prescribed margins provided in the Indian Safe Harbour provisions are higher, they may found to be acceptable considering the cost of litigation in terms of time, energy and money. Secondly, as it is a voluntary provision, if the assessee strongly feels that it can justify lower margin, it can opt out of the safe harbour provisions. There is an option to hop on and hop off from the safe harbour provisions which provides great flexibility to taxpayers. The only point of concern is that opting for safe harbour provisions should not become precedence in the year of opting out of it.
All in all, safe harbour provisions can land companies in the safe territory in a blissful state free of litigation if these provisions are administered in a fair, equitable and judicious manner.
1The United Nation’s Practical Manual on Transfer Pricing for Developing Nations released in 2013
2A maquiladora or maquila is the Mexican name for manufacturing operations in a free trade zone (FTZ), where factories import material and equipment on a duty-free and tariff-free basis for assembly, processing, or manufacturing and then export the assembled, processed and/or manufactured products, sometimes back to the raw materials’ country of origin.
Capital gain: Exemption u/s.10(38): A. Y. 2006-07: Assessee company and other group companies held 98.73% shares in BFSL which owned a land: They sold those shares to DLFCDL for a consideration of Rs. 89,28,36,500/- and claimed exemption u/s. 10(38): AO denied exemption holding that it is a sale of land: Denial of exemption not proper:
Bhoruka Engineering Industries Ltd. vs. Dy. CIT; 261 CTR 287 (Karn):
The assessee company and other group companies were holding 98.73% of the shares in BSFL which owned a land. They sold those shares to DLFCDL for a consideration of Rs. 89,28,36,500/- and claimed exemption u/s10(38) of the Income-tax Act, 1961. The Assessing Officer held that land was transferred to DLFCDL by way of said circuitous transaction, and the shareholders being owners of the land to the extent of their shareholdings in the company, the gains arising to the assessee are chargeable to tax as short term capital gain on sale of land. Accordingly, he disallowed the claim for exemption u/s. 10(38) of the Act. The Tribunal allowed the assessee’s claim for exemption.
On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under: “
i) The assessee and other group concerns holding 98.3% shares of BSFL having sold their entire shareholding in that company to another company for valuable consideration after complying with the legal requirements, the transaction cannot be said to be a colorable device to avoid payment of tax on the basis that the effect of the transfer of shares is transfer of immovable property belonging to BFSL in favour of the purchaser of the share.
ii) The assessee having fulfilled all the conditions stipulated u/s. 10(38), the benefit of tax exemption cannot be denied merely because in case a registered sale deed had been executed by BFSL selling the land in favour of the purchaser, tax would have been paid on the capital gain.”
Prosecution under Central Excise Laws
Prosecution is one of the means of enforcing law.
1.1 The dictionary meaning of the word ‘prosecution’ is
‘prosecuting of someone in respect of a criminal charge’. The word is an
extension of ‘prosecute’ which itself means instituting legal proceedings.
1.2 S. 9 of the Central Excise Act, 1944 hereinafter
referred to as ‘the act’ contains provisions regarding penalties and offences.
This Section provides for imprisonment of 6 months to 7 years
and fine in cases where revenue involved in an offence is more than Rs.1 lac and
in other cases 3 years imprisonment and/or fine. For the second and subsequent
offence the imprisonment may extend to seven years and fine. Offences u/s.9
however are non-cognizable, as defined in Code of Criminal Procedure, 1973 by
virtue of S. 9A(1) of the Act. However, S. 9A(1) of the Act provides that for
adequate reasons, which are to be recorded in judgment, imprisonment can be for
less than 6 months. Very specifically the following are not adequate
reasons :
- first-time conviction
- levy of penalty paid or confiscation of goods
- any other action taken or proceedings initiated under the Act
- accused is not the principal offender
- the age of the accused.
2.1
Offences entailing prosecution :
- Evasion of duty.
- Removal of excisable goods in contravention of any of the provisions of the
Act or rules made thereunder.
- Possession of in transporting, depositing, keeping, concealing, selling or
purchasing, or in any other manner dealing with excisable goods which he knows
or has reason to believe are liable to confiscation.
- Contravention of any of the provisions of this Act or the rules made
thereunder in relation to credit of any duty allowed to be utilised towards
payment of excise duty on final products.
- Failure to supply any information required by the Excise rules.
- Supplying false information.
- An attempt to commit, or abet commission of any of the above offences.
2.2 It is because of the possession of excisable goods that
transporters, warehouse keepers and purchasers also are caught in the Excise
net. Similarly next time when the Department asks for information and an
assessee either does not furnish it or furnishes false information we know the
force behind it.
2.3 It is important to note that even an attempt to commit an
offence is enough to entail prosecution and fine.
Who can be prosecuted — S. 9AA of the 1944 Act :
3.1 S. 9AA provides that every person who, at
the time the offence was in charge of the company, and/or was responsible for
the conduct of the business, as well as the company shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished. The
phrase ‘every person’ can lead to the highest officer viz. : managing
director, whole-time director and the person authorised to sign the excise
documents.
3.2 S. 9AA(2) provides that if the offence is committed and
it is proved that the offence has been committed with the consent or connivance
of, or is attributable to, any neglect on the part of any director, manager,
secretary or other officer of the company, then such person shall also be deemed
to be guilty of that offence and shall be liable to be proceeded against and
punished accordingly.
3.3 However, if a person proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent the commission of an offence, then such person will not be liable for
prosecution.
3.4 Persons involved in the removal of excisable goods.
3.5 Persons in possession of excisable goods.
Guidelines for launching prosecution :
4.1 The Central Board of Excise & Customs (CBEC) has issued
guidelines and procedures vide Circular Nos. 15/90-CX.6, dated 9-8-1990;
208/31/97-CX, dated 4-4-1994, 35/35/94-CX, dated 29-4-1994, 30/30/94-CX, dated
4-4-1994 and 208/21/2007-CX, dated 15-6-2007.
4.2 These instructions are as follows:
1. Prosecution should be launched with the final approval of the Chief Commissioner or Director General of Central Excise Intelligence in specified cases after the case has been carefully examined by the Commissioner in the light of the guidelines.
2. Prosecution should not be launched in case default is of technical nature or where the additional claim of duty is based totally on a difference of interpretation of law.
3. Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual was guilty, had knowledge of the offence, or had intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt.
4. In case of public limited companies, prosecution should not be launched indiscriminately against all directors of the company, but it should be restricted to only against directors like the managing director, director-in-charge of marketing and sales, director (finance) and other executives who are incharge of day-to-day operations of the factory.
5. For the purpose of initiating proceedings, the Commissioners should go through the case file and satisfy themselves that action is taken only against those directors/partners/executives/officials where reasonable evidence exists of their involvement in duty evasion. For example, nominee directors of financial institutions, who are not concerned with day-to-day management should not be prosecuted unless there exists definite evidence to the contrary.
6. A monetary limit of Rs.25,OO,OOOis prescribed for initiation of prosecution. However, if evidence to show exists that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.
7. Persons liable to prosecution should not normally be arrested unless their immediate arrest is necessary. Arrest should be made with the approval of the Assistant Commissioner or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Commissioner, who will consider whether there is a fit case for prosecution.
8. Decision on prosecution should be taken immediately on completion of the adjudication proceedings. Prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.
9. Prosecution should not be kept in abeyance on the ground that the party has gone in appeal! revision.
10. It is necessary to reiterate that in order to avoid delays, the Commissioner should indicate at the time of passing the adjudication order itself whether he considers the case to be fit for prosecution so that it could be further processed for being sent to the Chief Commissioner for sanction.
Procedure for prosecution:
1. In all such cases where the Commissioner of Central Excise incharge of judicial work is satisfied that prosecution should be launched, an investigation report should be carefully prepared and signed by an Asstt. Commissioner endorsed by the Commissioner and forwarded to the Chief Commissioner for decision within one month of the adjudication of the case. Report should be in the prescribed format.
2. A criminal complaint in a Court of Law should be filed only after the sanction of the jurisdictional Chief Commissioner or Director General of Central Excise Intelligence in specified cases has been obtained.
3. Prosecution, once launched, should be vigorously followed. The officer incharge of judicial work should monitor cases of prosecution at monthly intervals and take corrective action wherever necessary to ensure that progress of the prosecution is satisfactory.
4. In large cities, where a number of Central Excise divisions are located, all prosecution cases could be centralised in one office, so that it will be easier for the officers to deal with the cases.
5. In order that the prosecution may have a deterrent effect, conviction should be secured with utmost speed. Hence, regular monitoring of the progress of prosecution case is mandated.
6. As a matter of practice, whenever in a case approval of the Chief Commissioner is sought for launching prosecution, the concerned officer should immediately take charge of all documents, statements and other exhibits that would be required to be produced before a Court. The list of exhibits, etc. should be finalised in consultation with the Public Prosecutor at the time of drafting of the complaint. It should be ensured that all exhibits are kept in safe custody.
7. It is apparent that generally in cases of sizable evasion, persons convicted under the Act suffer very light penalties which is contrary to the spirit of the Act, as well as the purpose of launching prosecution. The Board, therefore, desires that the Commissioners of Central Excise responsible for the conduct of prosecution, should study the judgments of the Courts and where it is found that the accused persons have been let off with light punishment, the question of filing appeal should be examined with reference to the evidence on record within the stipulated time. This is equally applicable to cases where the Court orders acquittal without recording sufficient reasons in the judgment despite existence of adequate evidence which was provided to the Court.
8. S. 9B of the Act grants power to publish the name and place of business of person, etc. convicted by a Court of Law. The power is being exercised very sparingly by the Courts. The Board desires that in all cases of conviction, the Department should make a prayer to the Court to invoke this Section. The Board vide Circular No. 849/7/2007-CX, dated 19-4-2007 has issued guidelines in this regard.
9. For launching prosecution where there is only one Adjudicating officer for a number of factories located under different Commissionerates, procedure prescribed in the Board’s instruction No. 35/35/94-CX, dated 29-4-1994 also needs to be followed.
Either before or after the institution of prosecution, any offence under this Chapter can be compounded by the Chief Commissioner on payment of demanded sum and compounding fees. The Board has issued detailed instructions regarding compounding of offences. Procedures and guidelines for withdrawal of prosecution have also been prescribed by the Board.
Judicial decisions:
Having considered the law and the guidelines, let us consider some of the decisions of the Supreme Court and High Courts on prosecution:
1. I. T.e. Limited v. Collector of Central Excise, Delhi 1996 (84) ELT 404 SC:
Penalty:
Majority order of the CEGAT holding that penalty is imposable for each transaction with reference to each gate pass and clearances under Rule 9(2) of Central Excise Rules – Supreme Court found no ground to interfere with the said majority opinion – Appeal to Supreme Court dismissed – S. 35L of the Act.
Prosecution:
Difference of opinion amongst Members of the Tribunal on the question of quantum of penalty – Consequent upon imposition of penalty, no prosecution should be launched against the assessee – S. 9 of the Act.
2. Collector of Central Excise, Hyderabad v. Electrolytic Foils Ltd., 1997 (91) ELT 543 sc:
Appeal for prosecution dismissed when respondents cannot be served notice since the unit was completely closed down and even land on which unit stood had been sold – S. 35L of the Act.
Order:
The service on the respondent has not been possible because the unit has closed down and the information supplied by the Deputy Commissioner (Legal) is that even land on which the unit stood has since been sold to M/s. Nagarjuna Palma (India) Ltd. which is constructing its own factory on the land purchased by it. It is, therefore, obvious that the respondent unit has completely closed down and even the parcel of land owned by it has been dis-posed of and, therefore, we see no reason in permitting the appellant to pursue this appeal. We dispose of the appeal since the respondent cannot be served.
3. Santram Paper Mills v. Collector of Central Excise, Ahmedabad 1997 (96) ELT 19 SC:
Prosecution:
Tribunal deciding against assessee – Effect – Prosecution in a Criminal Court is to be determined on its own merits and according to law, uninhibited by the findings of the Tribunal – S. 9, S. 33 and S. 35D of the Act.
4. Parsin Chemicals Ltd. v. Asstt. Commissioner, 2003 (154) ELT A176 SC:
Prosecution:
Whether to be quashed if launched by authority contrary to Circulars issued by Board ? (2) – Contravention and evasion of duty spread over two years – Whether Board Circular No. 15/90-CX. 6, dated 9-8-1990is applicable? – (3) Whether Board’s Circular No. 208/31/97-CX. 6, dated 12-12-1997 is perspective in nature?
The Supreme Court granted leave in petition for special leave to appeal filed by Parsin Chemicals Ltd. Against order of the Andhra Pradesh High Court 2002 (146) ELT 39 (A.P.). While granting leave, the Supreme Court passed the following order:
Leave granted. Stay to continue.
The Andhra Pradesh High Court had held that:
- as per the guidelines in Board’s Circular No. 15/ 90-CX. 6, dated 9-8-1990 , prosecution should be considered irrespective of the monetary limit when the contravention and evasion of excise duty is not in relation to any particular incident, but spread over two years.
- the prosecution is not to be quashed even if launched by an authority contrary to Circulars issued by the Board, as it is for the Court to decide as to whether there is any contravention.
- Board Circular letter ENo. 208/31/37-CX. 6, dated 12-12-1997 for enhancing the monetary limit for prosecution to Rs.25 lakh is prospective in nature and is applicable in cases where contravention and evasion is subsequent to 12-12-1997.
5. P. Krishnamurthi v. Assistant Collector of c. Ex., IDO, Shivakasi 1978 ( 2) ELT (J 628) Mad. :
Prosecution:
A minor cannot be prosecuted for offences merely on the ground that he is a partner of a firm which is being prosecuted for violation of Central Excise Law, because he cannot look after the affairs of the factory.
6. Kedar Nath Goenka v. Superintendent of Central Excise, 1978 (2) ELT (J 538) Cal. :
Prosecution:
It is clear from the words ‘whoever commits’ in S. 9(1) that a person is made personally liable for an offence committed under the Central Excises Act and the liability cannot be extended to any other person merely by virtue of an office or position he holds in a company or firm, unless it is specifically averred in the complaint that he is guilty of an act of commission or omission which amounts to an offence punishable under the Act.
7. Union of India v. [asbhai and another, (8) ELT902 M.P. :
Summary trial for offence:
If the offence committed was punishable with imprisonment for a term exceeding two years such as in Central Excise Act, the trial Magistrate was not competent to try an accused summarily u/s. 461 of the Code of Criminal Procedure and if so tried, the trial is absolutely void. [para 9]
Scope of S. 9 of the Act, and S. 260 and S. 461 of Criminal Procedure Code.
8. Union of India v. Ram Narayan Sahu, 1986 (25) ELT 148 Cal. :
Prosecution:
Acquittal invalid when complaint filed u/s.9(1)(d) (ii) of the Act treated as summons case instead of warrant case – Warrant case envisages sentence for more than two years, while S. 9(1)(d)(ii) prescribes three years imprisonment – Hence complaint u/s.9 is a complaint case – Case remanded to the Trial Court for retrial treating the case as warrant case – S. 2(w) and S. 256 of the Code of Criminal Proce-dure.
Distinction between a warrant case and a summons case
Warrant case means a case relating to an offence punishable with imprisonment for a term exceeding two years, while summons case is one which is not a warrant case. In determining the nature of the case, the Court will have to be guided by the consideration of the maximum punishment liable to be imposed on the accused according to the disclosures made in the petition of complaint. The advantage of following this procedure is that treating the case as a warrant case, the Magistrate trying the case will be competent to impose the minimum punishment, while the disadvantage of treating the case as a summons case he would not be in a position to impose the maximum punishment prescribed for the gravity of the offence, if the offence so demands. [para 5]
Prosecution:
An order of acquittal passed in a summons case u/s.256 of the Code of Criminal Procedure is not treatable as an order of discharge u/ s.249 of the Code of Criminal Procedure.
The difficulty in construing the order of acquittal u/ s.256 as an order of discharge u/ s.249 of the Code is that a fresh complaint for the same offence filed .hereafter is barred u/ s:468 of the Code. [para 5]
The Trial Magistrate is directed to treat the case as a warrant case and try it according to the procedure prescribed therefor by the Code. [AIR 1938 Cal. 205; AIR 1909 Pat. 105 relied upon], [para 5]
9. Sharadchandra Shripad Marathe v. Gurushant Gangadhar Kamble, 1986 (25) ELT 915 (Bombay) :
Prosecution of a new employee:
Complaint regarding conspiracy to evade excise duty – Process issued by the Trial Court quashable when petitioner joined service a few days before the excise raid – Inherent powers exercisable, if the process of Trial Court results in abuse of the process and gross injustice to the petitioner – Asking the petitioner to approach the Trial Court for discharge in the face of the admitted position is not worth-while – S. 482 of the Code of Criminal Procedure read with Article 226 of the Constitution of India.
Prosecution of New Director:
Accused Director joining company only a few days before raid and not a participant in conspiracy to evade taxes – Inherent powers of the High Court invokable where allowance of prosecution would amount to abuse of process of Court and gross injustice to the accused – Process issued quashable – S. 9(1)(d) of the Act, read with S. 120B of the Indian Penal Code, – S. 482 of the Code of Criminal Procedure, and Article 227 of the Constitution of India.
Vicarious liability :
Deeming provision for vicarious liability of Directors for acts committed by the Company is inapplicable against Directors not holding office prior to introduction of provision from 27-12-1985 – S. 9AA of the Act.
10. Mulki Suryanarayanrao Rau and Anoher v. Gurushant Gangadhar Kamble and Others, 1987 (30) ELT 712 (Born.) :
Prosecution: Evasion of duty :
S. 9 of the Act and S. 120B of the Indian Penal Code – Conspiracyto evade payment of duty – If on proper evidence, the Court is satisfied that certain persons did conspire to commit the offence of tax evasion, the company as well as the persons who committed or conspired to commit such offence are punishable with imprisonment and fine. – Persons will include all those who aided and abetted the commission of an offence, whether inside or outside the company.
Prosecution:
Criminal conspiracy – Conspiracy is a matter of inference deducible from some criminal acts of the parties accused, done in pursuance of an apparent criminal purpose and to carry it into execution.
When conspiracy continued even after the retirement of accused Nos. 8, 9 and 10, it could be inferred that the tax evasion must be with complete knowledge of all the conspirators including those who retired.
Defence:
Merely because Secretary of the company was working under superior direction is no defence for criminal acts – therefore, he cannot be absolved from liability of tax evasion.
Proceedings Character:
The grant of Central Excise licence would partake the character of adjudication proceedings and not the character of criminal proceedings.
Prosecution:
Initiation of criminal process by Magistrate against accused not quashable when there is sufficient material to show that the said accused were in league with the company in the matter of evasion of duty.
Criminal conspiracy:
Agreement of two or more persons to do an illegal act is a positive fact which could be proved by direct or circumstantial evidence.
Criminal conspiracy to evade payment of duty – Modus operandi of levying a surcharge over the price of goods for freight, insurance and handling charges whether came up before the Board of Directors or not is a matter of evidence and prosecution cannot shut up from leading such evidence – S. 9 of the Act, 1944 and S. 120B of the Indian Penal Code.
Criminal conspiracy to evade payment of duty – Evidence of documents as defence not necessary to prove the innocence at this stage of initiation of proceedings – Only prima facie evidence is required to be considered for the allegations made in the complaint.
Vicarious liability :
Penalty – Firm – Directors of a firm – Penalty irnposable on the Directors for their individual acts and not on the principle of vicarious liability.
11. Brahm Vasudeva and Others v. K. L. Bajaj, Assistant Collector, Central Excise Division, Jalandhar, 1988 (33) ELT 20 (P&H) :
Complaint without disclosing the manner in which the petitioners were concerned with the commission of offence or manufacture of goods – Complaint not maintainable – S. 9 of the Act, 1944.
12. G. P. Goenka v. Asstt. Collector of Central Excise, 1988 (37) ELT 167 (A.P.) :
For launching criminal prosecution proceeding against a company. The accused company must be represented by some person who is in charge of overall affairs of company – S. 9AA of the Act, 1944. (A.P.)
13. K. K. Girdhar v. M. S. Kathuria, 1988 (37) ELT 353 (Delhi) :
Personal presence of accused – Offence u/ s. 9(1)(a) of the Act, 1944 – Granting of remand to custody at the instance of police, personal presence of the accused is not required before the Magistrate – though, as a matter of caution, personal presence of the accused is desirable, so that the accused may move an application for his release on bail- S. 344 of the Criminal Procedure Code.
14. Hrushikesh Panda v. Union of India, 1992 (61) ELT 591 (Orissa):
Prosecution:
Clearance of goods by firm without excise gate passes and recovering duty from consignees but not crediting it to Excise Department – Managing Director liable under Rule 225 of Central Excise Rules, 1944 for non-payment of duty – Conviction and sentencing of petitioner u/s.9(1)(b) and (bb) of the Act, valid.
15. Utkal Fero Alloys Ltd. v. State of Orissa, 1992 (61) ELT 600 (Orissa) :
Prosecution:
Detailed reasons not required to be given at the stage of cognizance of offence as there exists a prima facie- case against the accused – Order of the Magistrate valid S. 9(1), (b), (bb) of the Act read with Rules 9(1), 53, 173B, 173C, 173F, 173G of Central Excise Rules, and S. 204 of Code of Criminal Procedure, 1973.
16. Toesta Electronics v. Asstt. Collector of Central Excise, Bangalore, 1995 (75) ELT 456 (Kar.) :
Prosecution:
There is no statutory requirement for sanction of any prescribed authority for prosecuting a person u/s.9 of the Act read with Rule 207 of Central Excise Rules, Prosecution – Compounding of offence – Natural justice – Provisions of Rule 210A of Central Excise Rules, applicable to offences punishable u/s.9 of Central Excises and Salt Act, – But there being no need for any sanction of any authority for launching prosecution u/s.9. The question of issue of notice making an offer to the accused for compounding the offence at the stage of sanction for prosecution does not arise.
Prosecution against companies and firms (apart from their officers concerned) maintainable, there being no obligatory sentence of imprisonment in all cases u/s.9 of the Act. A specific averment as to the involvement of directors, managers, partners, etc. in the complaint is not mandatory – It is sufficient if papers enclosed with the complaint indicate their involvement prima facie – S. 9 of the Act.
Goods manufactured and cleared without obtaining licence – Exemption from payment of excise duty to excisable goods does not dispense with requirement of obtaining licence – Prosecution against petitioner for not having obtained licence, proper – S. 6 of the Act read with Rule 174 and Rule 9(1)(b) of Central Excise Rules.
17. Vasu Chemicals v. Assistant Commissioner of Central Excise, Madurai 2001 (134) ELT 24 (Mad.) :
Prosecution:
Criminal proceedings not to be stayed till disposal of appeal against order of confiscation, because confiscation proceedings having nothing to do with criminal prosecution – S. 482 of the Code of Criminal Procedure.
18. H. S. Ranka v. P. K. Mehra, Asstt. Collector, Dept. of Central Excise, [aipur 2002 (150) ELT 1413 (Raj.) :
Prosecution:
Order of Collector against accused of non-accountal of goods in RG-1 register set aside by Tribunal on basis of some correspondence without recording any evidence – Prosecution launched not on basis of that order, but on physical verification of excisable goods – Held : criminal proceedings could not be quashed on basis of decision of the Tribunal finding in favour of accused, though Criminal Court may take that into account – S. 9 of Act. However, judgments in rem of Civil Court have binding effect on Criminal Court – S. 41 of Evidence Act,1872. [para 10]
Prosecution:
Offence by company – No allegation made in complaint or evidence brought on record that the chairman of the company was personally guilty of any omission or commission of a punishable offence – Petition for prosecution u/ s.482 of Code of Criminal Procedure set aside – S. 9 of the Act. [paras 11, 12]
19. Rajni v. Union of India, 2003 (156) ELT 28 All. :
Prosecution:
Arrest of person under the Act has to be made only when there is a prima facie case against the accused and that too by following the due process of law except in cases prescribed u/s.13 – Authorities working under a special act such as Central Excise Act, cannot override the provisions of the Code of Criminal Procedure as regards the arrest or filing of the complaint – S. 9AA, S. 13 and S. 19 – On completion of the enquiry the authorities have power to file a complaint and pray before the Court for action in accordance with law. [paras 24 and 25]
20. Kamaiaka Minerals & Mfg. Co. Ltd. v. Asstt. CC & CE., Davangere, 2005 (184) ELT 356 Kar. :
Complaint filed against company and Managing Director and Director of company for having committed an offence punishable u/s.9(1)(i) of Central Excise Act, – No allegation was made that accused were in charge of company or responsible for conduct of business of the company at the time of commission of offence – Complaint also did not disclose essential ingredients of the offence – Held: proceedings cannot be launched against company u/s.9(1)(i) of the Act – read with S. 482 of Code of Criminal Procedure. [paras 9, 10]
21. Inder Setia v. Central Excise Department, Noida, 2008 (224) ELT 385 All. :
Bail :
Arrest made for offence punishable u/s.9 and u/s. 9AA of Central Excise Act, read with Indian Penal Code – Power of arrest u/s.13 is confined to offences prescribed in Central Excise Act, – Offences u/ s.420, u/ s.467, u/ s.468 and u/ s.471 IPC were added for which Central Excise officers have no power to arrest – Arresting without any notice and without summoning, held power u/s.13 was exercised arbitrarily. Dispute as to who is responsible for payment of excise duty, can be settled only by the proper forum and the High Court abstained from recording any finding thereon – S. 9A makes offences non-cognizable and S. 9A(2) makes offences compoundable either before or after the institution of prosecution – In spite of existence of such provision, without ascertaining facts, S. 13 was resorted to for arresting the applicant – As there was no charge of tampering of evidence or charge of absconding – The applicant was released on bail.
I would conclude by stating:
1. To avoid harassment and eliminating chances of prosecution of Directors the Board of Directors of a company should delegate, authorise and make responsible a person for each unit registered under the Central Excise Act, 1944 and at regular intervals take a compliance report from such person. It would be advisable also to have the compliance reports audited by internal auditors and or secretary of the company.
2. The challenge in this ever-changing environment of increasing litigation where at times the individuals concerned take the safer course of initiating prosecution proceedings is to ensure awareness of and compliance with the relevant laws, rules and regulations to avoid even the remote chance of prosecution. Let us always be aware of the fact that prosecution impacts both business and reputation.